South Korea stands out among global economies as it experiences a boost in productivity attributed to artificial intelligence. However, analysts from Bank of America caution that escalating tensions between the U.S. and China over semiconductor trade could pose significant challenges to South Korea’s growth.
The semiconductor sector is crucial for South Korea, representing 17% of the nation’s exports. A recent report from Bank of America Global Research highlights that South Korea has emerged as a key beneficiary of the AI surge, with semiconductor exports rising over 50% year-on-year. Analysts believe that the country’s substantial investments in AI research and development and a growing number of AI-related patents will strengthen its leadership in AI adoption.
Despite these promising trends, analysts express concerns about potential geopolitical challenges impacting the semiconductor supply chain, particularly due to escalating U.S.-China tensions. Although South Korea has been diversifying its chip exports, over 30% of its semiconductor exports were still directed to China and Hong Kong in 2023, with a similar proportion exported to the U.S.
Should geopolitical relations worsen and the U.S. introduce further trade restrictions on the export of advanced or AI-related chips to China, South Korea’s memory semiconductor exports could face substantial setbacks, according to Bank of America analysts.
Furthermore, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Disruptions in these supply chains due to heightened tensions would complicate the ability of South Korean firms to secure the essential tools for manufacturing semiconductors.
Reports indicate that the U.S. has requested South Korea to limit exports to China of specific equipment and technology used in producing memory chips and advanced logic chips, particularly those surpassing 14-nanometer and 18-nanometer technology limits. South Korean officials are reportedly considering this request, aware of the potential impacts on major firms like Samsung and SK Hynix, which have operations in China, South Korea’s largest trading partner.
Additionally, the Biden administration is contemplating the application of an export control mechanism known as the foreign direct product rule against allies that continue supplying chipmaking tools to China. This rule would prohibit the export of any goods to any nation if those goods incorporate a specified percentage of U.S. intellectual property.