U.S. restrictions on Shenzhen-based telecom giant Huawei threatens to snuff out a nascent recovery in semiconductor demand, a key driver of economic growth in technology powerhouses including South Korea.

China dominates purchases from Asian semiconductor exporters and bought 51 percent of their exports in 2017, according to analysis by Citigroup Inc. economists Jin-Wook Kim and Johanna Chua.

The Chinese mainland and Hong Kong took 69 percent of South Korea’s chip shipments, 56 percent of Taiwan’s, 51 percent of Vietnam’s, 43 percent of Japan’s and 39 percent of Malaysia’s exports, according to the Citi note.

Citi’s Asia Semiconductor Leading Index “significantly stalled” in May having shown signs of recovery since January and could worsen from here if trade tensions deepen.

“In our view, China’s restocking efforts for electronic goods will likely weaken and be delayed if the tensions and the ban stay longer, which likely will hurt overall demand,” they wrote.

Evidence of weaker demand was on display Tuesday. South Korean exports during the first 20 days of the month fell 11.7 percent from a year earlier, pointing to a sixth-straight full-month drop, driven by tumbling prices of semiconductors and falling exports to China, the country’s biggest export market.

Semiconductor shipments, which account for about a fifth of South Korea’s exports, fell 33 percent, while total exports to China dropped 16 percent.

“As trade wars hurt demand in the United States and China, Asian electronics manufacturers will feel considerable pain, in our view,” said Ma Tieying, an economist at DBS Group.

If China buys more South Korean chips instead of U.S. ones, then it could offset some of the negative effects in Asia, Citi noted.

The International Monetary Fund has estimated that the Asia Pacific region is the biggest driver of world economic growth.

“It seems that the trade war is increasingly showing signs of becoming a tech war,” said Seema Shah, senior global investment strategist at Principal Global Investors. “The further this trend develops, the bigger the collateral damage will be — particularly in Asia and the United States, but the ripple effect will be significant across the globe.”

While regional growth in Asia will still benefit from Chinese stimulus over coming months, the spillover may not be as robust as some expected, according to Andrew Tilton, chief Asia Pacific economist at Goldman Sachs Group.

(SD-Agencies)