AI Boost or Trade Trouble? South Korea’s Semiconductor Dilemma

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South Korea is experiencing one of the few productivity boosts globally attributed to artificial intelligence, although rising tensions between the United States and China regarding semiconductor chips could pose a threat to its growth, analysts from Bank of America indicate.

According to the Bank of America Global Research report, the semiconductor sector contributes 17% to South Korea’s exports, and the nation has emerged as a significant beneficiary of the AI expansion, with exports increasing by over 50% year-over-year. The analysts predict that South Korea’s substantial investments in AI research and development and a growing number of AI-related patents will further enhance its AI adoption.

However, the report cautions that geopolitical tensions might impact the supply chain of semiconductors, particularly the rising friction between the U.S. and China, which could challenge South Korea’s AI growth. Despite the country diversifying its chip exports away from China, more than 30% of its chip exports still went to China and Hong Kong in 2023, with exports to the U.S. being roughly equal.

Analysts warn that if geopolitical conflicts escalate and the U.S. implements additional trade restrictions on advanced or AI-related chip exports to China, South Korea’s memory semiconductor exports could suffer significantly.

Additionally, South Korean chip manufacturers rely on China for various chipmaking components and equipment. Any disruption in the supply chain due to political tensions could hinder their ability to obtain essential tools for chip production.

Reports suggest that the U.S. has requested South Korea to impose limitations on exports to China concerning equipment and technology critical for manufacturing memory chips and advanced logic chips, specifically those more advanced than 14-nanometers and DRAM chips exceeding 18-nanometers. South Korean officials are reportedly considering this request, mindful of potential impacts on major firms like Samsung and SK Hynix, which have operations in China—its largest trading partner.

Furthermore, the Biden administration is contemplating the use of an export control known as the foreign direct product rule on allies that continue to supply chipmaking tools and equipment to China. This regulation would prevent the export of any goods to any country if they are manufactured using a certain percentage of U.S. intellectual property.

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