South Korea is experiencing increased productivity from artificial intelligence (AI), making it one of the few economies reaping such benefits. However, analysts from Bank of America warn that rising tensions between the U.S. and China over semiconductor supply chains may pose challenges to this growth.
According to a report from Bank of America Global Research, the semiconductor sector represents 17% of South Korea’s exports. The country has emerged as a significant beneficiary of the AI boom, with exports rising more than 50% year-over-year. Analysts expect that South Korea’s substantial investment in AI research and development, along with a growing portfolio of AI-related patents, will further consolidate its leadership in AI adoption.
Despite these advancements, analysts caution that geopolitical tensions could disrupt the semiconductor supply chain, particularly due to escalating conflicts between the U.S. and China. While South Korea has made efforts to diversify its chip exports away from China, the report indicates that over 30% of its chip exports still went to China and Hong Kong in 2023, with exports to the U.S. being roughly equivalent.
Bank of America analysts highlighted that if geopolitical tensions worsen and the U.S. enacts further trade restrictions on the export of advanced or AI-related chips to China, it could severely impact South Korea’s memory semiconductor exports.
Moreover, South Korean chip manufacturers rely on China for several components and equipment necessary for chip production. Disruption in the supply chain due to geopolitical strife could hamper these companies’ ability to procure essential manufacturing tools.
The U.S. has reportedly asked South Korea to limit exports to China regarding equipment and technology essential for memory and advanced logic chip production, particularly for logic chips exceeding 14-nanometers and DRAM memory chips beyond 18-nanometers. South Korean officials are in the process of evaluating this request due to potential repercussions for major companies such as Samsung and SK Hynix, both of which operate within China, South Korea’s largest trading partner.
In addition, the Biden administration is deliberating the implementation of an export control measure known as the foreign direct product rule. This rule would restrict the export of any goods produced using a specified percentage of U.S. intellectual property components to any country, targeting allies that continue to sell chipmaking tools and equipment to China.