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

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South Korea is one of the few economies globally experiencing a productivity increase due to artificial intelligence, although escalating U.S.-China tensions over semiconductor chips may threaten its growth, according to analysts at Bank of America.

The semiconductor sector represents 17% of South Korea’s total exports, with a recent Bank of America Global Research report indicating that the country has been the largest beneficiary of the AI surge, witnessing a year-over-year increase in exports exceeding 50%. Analysts anticipate that South Korea’s substantial investment in AI research and development, along with a rising number of AI-related patents, will further enhance its standing in AI integration.

Nonetheless, the analysts cautioned that “potential geopolitical tensions could impact the semiconductor supply chain,” particularly due to the increasing friction between the U.S. and China, which may impede AI growth in South Korea. Although South Korea has managed to diversify its chip exports away from China to other regions, China and Hong Kong accounted for over 30% of its chip exports in 2023, with exports to the U.S. being around the same figure.

The analysts from Bank of America noted that if geopolitical tensions intensify and the U.S. enforces further trade restrictions on exports of advanced or AI-related chips to China, it could severely affect memory semiconductor exports from Korea.

Moreover, South Korean semiconductor manufacturers rely on China for certain components and equipment essential for chip production. Any disruption in relations could complicate the procurement process for these necessary tools.

Reports suggest that the U.S. has asked South Korea to limit the export of equipment and technology used for manufacturing memory and advanced logic chips—specifically, logic chips more advanced than 14 nanometers and DRAM memory chips beyond 18 nanometers. South Korean authorities are reportedly considering this request, taking into account its potential impact on large domestic companies such as Samsung and SK Hynix, which operate in China, South Korea’s top trading partner.

In the meantime, the Biden administration is reportedly contemplating the implementation of an export control rule known as the foreign direct product rule against allies that continue to supply chipmaking tools and equipment to China. This rule would prohibit the export of any goods manufactured with a specific percentage of U.S. intellectual property to any country.

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