South Korea stands out as one of the few economies experiencing a productivity increase due to artificial intelligence, but Bank of America analysts have cautioned that rising U.S.-China tensions regarding semiconductor chips could hinder this growth.
The semiconductor sector represents 17% of South Korea’s exports, and the country has reportedly been the largest benefactor of the AI surge, with exports rising over 50% year-over-year. Analysts at Bank of America Global Research believe that South Korea’s substantial investment in AI research and development, along with a growing number of AI patents, will enhance its AI adoption in the future.
However, they warned that potential geopolitical conflicts could impact the supply chain for semiconductors, specifically citing the escalating tensions between the U.S. and China. Despite South Korea’s efforts to diversify its chip exports beyond China, over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with exports to the U.S. being approximately equal.
Bank of America analysts indicated that if geopolitical tensions worsen and the U.S. enforces additional trade restrictions on the export of advanced or AI-related chips to China, it could severely damage South Korea’s memory semiconductor exports.
Moreover, South Korean chip producers rely on China for various components and equipment necessary for chip production. Any supply chain disruptions resulting from heightened tensions would complicate the procurement of essential tools for these manufacturers.
Reports suggest that the U.S. has requested South Korea to limit exports to China of equipment and technology for making memory chips and advanced logic chips, specifically targeting those more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer technology. South Korean officials are reportedly contemplating this request, considering the potential impact on major companies like Samsung and SK Hynix, both of which have significant operations in China, its largest trading partner.
In a related development, the Biden administration is looking into applying an export control known as the foreign direct product rule to allies that continue to supply chipmaking tools and equipment to China. This rule would prohibit the export of any products to any nation if they are produced using a specified percentage of U.S. intellectual property.