South Korea’s AI Boom at Risk Amid U.S.-China Chip Tensions

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South Korea stands out as one of the few economies experiencing a surge in productivity due to artificial intelligence (AI), although rising U.S.-China tensions regarding semiconductor chips may pose risks to its growth, according to analysts at Bank of America.

The semiconductor sector plays a crucial role in South Korea’s economy, contributing 17% of its exports. A report from Bank of America Global Research highlights that the nation has emerged as a major beneficiary of the AI revolution, with exports increasing by over 50% year-on-year. Analysts believe that South Korea’s substantial investments in AI research and development, along with an increasing number of AI-related patents, will strengthen its position in AI adoption moving forward.

However, the report warns that geopolitical tensions could impact the semiconductor supply chain. In particular, the analysts noted that the ongoing conflict between the U.S. and China poses significant challenges for AI development in South Korea. Despite efforts to diversify its chip exports beyond China, over 30% of South Korea’s chip exports in 2023 were directed to China and Hong Kong, with roughly the same amount going to the U.S.

Bank of America analysts cautioned that an escalation in geopolitical tensions, especially should the U.S. implement further trade restrictions on the export of advanced or AI-related chips to China, could have severe repercussions for South Korea’s memory semiconductor exports.

Additionally, South Korean chip manufacturers rely on China for certain components and equipment essential for chip production. Disruption in supply chains due to rising tensions could hinder these companies’ access to necessary tools for manufacturing chips.

Reports indicate that the U.S. has requested South Korea to limit its exports of equipment and technology used in the production of memory chips and advanced logic chips to China, specifically focusing on chips exceeding 14-nanometer technology and DRAM memory chips above 18-nanometers. South Korean officials are reportedly assessing this request, considering potential implications for major firms like Samsung and SK Hynix, which have significant operations in China, the country’s largest trading partner.

In parallel, the Biden administration is said to be contemplating the use of an export control measure known as the foreign direct product rule on allied nations that persist in supplying chip-making tools and equipment to China. This rule would restrict the export of any good manufactured with a specific percentage of U.S. intellectual property components to any country.

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