AI-Driven Growth at Risk: South Korea’s Semiconductor Dilemma

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South Korea is experiencing an increase in productivity due to artificial intelligence, but Bank of America analysts warn that rising tensions between the U.S. and China concerning semiconductor chips could hinder its growth.

According to a report from Bank of America Global Research, the semiconductor industry constitutes 17% of South Korea’s exports, and the nation has benefited significantly from the AI boom, with exports rising over 50% year-over-year. Analysts predict that ongoing investments in AI research and the rising number of AI-related patents will enhance South Korea’s standing in AI adoption in the long term.

However, the report also highlights that geopolitical tensions may negatively impact the semiconductor supply chain, particularly the escalating conflict between the U.S. and China, which poses a threat to South Korea’s AI growth. Despite diversifying chip exports to other regions, over 30% of South Korea’s chip exports in 2023 were to China and Hong Kong, with similar figures for the U.S.

Bank of America analysts stated that any escalation of geopolitical tensions, particularly if the U.S. imposes further trade restrictions on advanced or AI-related chip exports to China, could severely damage South Korea’s memory semiconductor exports.

Moreover, South Korean chip manufacturers rely on China for certain chipmaking components and equipment. Disruptions in the supply chain due to heightened tensions could complicate efforts for South Korean firms to acquire the necessary tools for chip production.

The U.S. has reportedly asked South Korea to limit exports of chip-making equipment and technologies to China, specifically for memory chips and advanced logic chips that exceed certain specifications. South Korean officials are considering this request, mindful of its potential impact on major firms like Samsung and SK Hynix, which have significant operations in China, its primary trading partner.

Additionally, the Biden administration is contemplating the implementation of an export control known as the foreign direct product rule, which would restrict the sale of goods to any country if they are produced using a specified percentage of U.S. intellectual property.

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