AI Boom Meets Geopolitical Challenges: South Korea’s Semiconductor Dilemma

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South Korea is one of the few economies worldwide experiencing a productivity increase attributed to artificial intelligence, but rising tensions between the U.S. and China regarding semiconductor technology may pose challenges to this growth, according to analysts at Bank of America.

The semiconductor sector represents 17% of South Korea’s exports, and the nation has benefitted significantly from the AI boom, with its exports rising by over 50% year-over-year. Analysts believe that South Korea’s substantial investment in AI research and development, along with an increasing number of AI-related patents, will strengthen its position in the adoption of AI technologies.

However, potential geopolitical tensions may impact the semiconductor supply chain, particularly the escalating friction between the U.S. and China, which could hinder AI advancement in South Korea. Although South Korea has shifted some of its chip exports away from China to other regions, China and Hong Kong accounted for over 30% of its semiconductor exports in 2023, with exports to the U.S. making up a similar proportion.

Bank of America analysts warned that if geopolitical tensions intensify and the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, it could critically harm Korea’s memory semiconductor exports.

Additionally, South Korean chip manufacturers rely on China for essential parts and equipment used in chip production. Any disruptions to this supply chain could complicate the ability of South Korean companies to obtain the necessary tools for semiconductor manufacturing.

Reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology used for producing memory chips and advanced logic chips, particularly those exceeding 14-nanometers in logic chip technology and 18-nanometers in DRAM memory chips. South Korean officials are reportedly considering this request due to potential impacts on major South Korean companies like Samsung and SK Hynix, which have significant operations in China, its largest trading partner.

Additionally, the Biden administration is said to be contemplating the implementation of an export control mechanism known as the foreign direct product rule against allies that continue to supply chipmaking tools and equipment to China. This rule would prevent the export of any goods to any nation if they are manufactured using a specified percentage of U.S. intellectual property.

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