AI Boost in South Korea: Opportunity or Geopolitical Gamble?

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South Korea is emerging as one of the few economies globally experiencing a productivity boost from artificial intelligence, although U.S.-China tensions regarding semiconductor supply chains may pose challenges to this growth, according to analysts from Bank of America.

The semiconductor sector represents 17% of South Korea’s exports, and the country has significantly benefited from the AI surge, with exports seeing over 50% growth year-on-year, as noted in a report by Bank of America Global Research. Analysts project that South Korea’s substantial investment in AI research and development, along with an increasing number of AI-related patents, will enhance its ability to adopt AI technologies in the long run.

However, the analysts caution that potential geopolitical tensions, particularly between the U.S. and China, could impact the semiconductor supply chain, thereby affecting the growth of AI in South Korea. In 2023, over 30% of South Korea’s chip exports went to China and Hong Kong, with a similar proportion directed toward the U.S.

The report warns that if geopolitical tensions escalate and the U.S. imposes further trade restrictions on the export of advanced or AI-related chips to China, it could severely affect South Korea’s memory chip exports. Additionally, South Korean semiconductor manufacturers rely on China for various chipmaking components and equipment. Thus, any disruption in supply chains due to increased tensions could hinder these firms’ ability to acquire essential production tools.

Recently, the U.S. has reportedly requested South Korea to limit exports of equipment and technology used in the production of memory and advanced logic chips, specifically those exceeding 14-nanometer technology and DRAM memory chips beyond 18-nanometer. South Korean authorities are reportedly deliberating on the U.S. request while considering the potential impact on major South Korean corporations like Samsung and SK Hynix, which have substantial operations in China, the country’s largest trading partner.

In parallel, the Biden administration is said to be contemplating the implementation of an export control measure called the foreign direct product rule, which would affect allies that continue to provide chipmaking tools and equipment to China. This rule would prevent the export of goods to any country if they are manufactured with a certain level of U.S. intellectual property.

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