AI Boosts South Korea’s Economy, But Geopolitical Tensions Loom

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South Korea stands out as one of the few economies experiencing a productivity increase due to artificial intelligence, although analysts from Bank of America caution that escalating tensions between the U.S. and China regarding semiconductor issues could hinder its growth.

The semiconductor sector plays a crucial role for South Korea, representing 17% of its exports. According to a report from Bank of America Global Research, the nation is reaping significant benefits from the AI surge, with exports rising over 50% year-on-year. Analysts believe that South Korea’s substantial investments in AI research and development, coupled with an increasing number of AI-related patents, will bolster its leadership in the adoption of artificial intelligence in the future.

However, the report warns that potential geopolitical conflicts could impact the semiconductor supply chain, particularly as tensions grow between the U.S. and China. Despite efforts to diversify chip exports away from China, the report indicates that over 30% of South Korea’s chip exports in 2023 were still directed to China and Hong Kong, with approximately the same amount headed to the U.S.

Bank of America analysts noted that if geopolitical tensions worsen and the U.S. enforces further trade restrictions on advanced or AI-related chips exported to China, it could significantly damage Korea’s memory semiconductor exports.

Additionally, South Korean chip manufacturers rely on China for essential components and equipment for chip production. Disruptions in this supply chain due to rising tensions would complicate efforts for South Korean companies to acquire necessary tools for semiconductor fabrication.

Reports suggest that the U.S. has urged South Korea to limit exports to China involving manufacturing equipment and technology for memory chips and advanced logic chips, specifically those more advanced than 14 nanometers and DRAM memory chips beyond 18 nanometers. South Korean officials are reportedly contemplating the U.S. request due to potential consequences for major firms like Samsung and SK Hynix, which have operations in China, its largest trade partner.

In related developments, the Biden administration is reportedly evaluating 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 rule prevents exporting any product to any country if it involves a specific percentage of U.S. intellectual property.

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