AI Boom in South Korea: Will Geopolitical Tensions Thwart Growth?

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South Korea is experiencing a notable increase in productivity thanks to artificial intelligence, as highlighted by analysts from Bank of America. However, tensions between the U.S. and China regarding semiconductor technology may pose obstacles to the country’s growth.

The semiconductor sector contributes significantly to South Korea’s economy, representing 17% of its exports. In a recent report, Bank of America Global Research noted that the nation has emerged as a major beneficiary from the AI surge, with exports rising by over 50% year-on-year. Analysts believe that South Korea’s substantial investments in AI research and development, coupled with a rising number of AI-related patents, will enhance its position in AI adoption going forward.

Despite these positive developments, the analysts warned that geopolitical tensions could negatively impact the semiconductor supply chain, particularly the increasing strain between the U.S. and China. Although South Korea has begun diversifying its chip exports to other regions, over 30% of its chip exports in 2023 were still directed to China and Hong Kong, with exports to the U.S. accounting for a similar proportion.

The report emphasizes that if geopolitical conflicts worsen and the U.S. implements further trade restrictions on advanced or AI-related chip exports to China, it could severely affect South Korea’s memory semiconductor exports.

Additionally, South Korean chip manufacturers rely on China for certain components and equipment essential for chip production. Disruptions in the supply chain due to ongoing tensions could complicate the ability of these companies to secure the necessary tools.

Reports indicate that the U.S. has requested that South Korea limit exports to China of equipment and technology used for manufacturing advanced logic chips (specifically those exceeding 14-nanometers) and DRAM memory chips (beyond 18-nanometers). South Korean officials are reportedly considering this request, given the potential impact on major domestic firms like Samsung and SK Hynix, which operate in China, its largest trading partner.

In related developments, the Biden administration is contemplating the implementation of an export control mechanism known as the foreign direct product rule. This rule would target allies that continue to supply chipmaking tools and equipment to China, prohibiting the export of goods made with a certain percentage of U.S. intellectual property.

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