South Korea is experiencing a significant boost in productivity from artificial intelligence, positioning it as one of the few economies benefiting from this technological advancement. However, analysts from Bank of America caution that rising U.S.-China tensions over semiconductor technology could pose risks to this growth.
According to a Bank of America Global Research report, the semiconductor sector accounts for 17% of South Korea’s exports, which have surged over 50% year-over-year due to the AI boom. The report highlights that South Korea’s substantial investments in AI research and development, along with an increasing number of AI-related patents, are likely to strengthen its role in AI implementation in the long run.
Despite these positive trends, potential geopolitical conflicts could disrupt the semiconductor supply chain. The report notes that while South Korea has diversified its chip exports beyond China, over 30% of its chip exports in 2023 originated from China and Hong Kong. Exports to the U.S. were roughly equal.
Bank of America analysts warn that if U.S.-China tensions escalate and the U.S. imposes further trade restrictions on advanced or AI-associated chip exports to China, it could severely impact South Korea’s memory semiconductor exports. Additionally, South Korean chip manufacturers rely on China for several components and equipment essential for chip production. Any disruption in the supply chain resulting from heightened tensions could complicate access to necessary production tools for these firms.
Furthermore, U.S. authorities have reportedly requested that South Korea limit its exports to China of technology and equipment used for producing memory and advanced logic chips, particularly those exceeding 14-nanometer technology and DRAM chips beyond 18-nanometer. South Korean officials are considering this request, aware of its implications for major firms like Samsung and SK Hynix, which have significant operations in China.
In addition, the Biden administration is contemplating the use of an export control mechanism known as the foreign direct product rule against allies that continue to sell chipmaking tools and equipment to China. This rule would prohibit the export of goods made with a certain percentage of U.S. intellectual property to any country.