South Korea’s AI Boom at Risk: Geopolitical Tensions Loom

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South Korea is among the few economies worldwide experiencing a productivity gain from artificial intelligence, although rising U.S.-China tensions regarding semiconductor exports could pose a challenge to its growth, according to analysts from Bank of America.

The semiconductor sector constitutes 17% of South Korea’s exports, with the country significantly benefiting from the AI boom—exports of semiconductors have surged more than 50% year-over-year, as highlighted in a report by Bank of America Global Research. Analysts predict that South Korea’s substantial investment in AI research and development, along with a growing number of AI-related patents, will enhance its position in AI adoption.

However, the report cautioned that potential geopolitical tensions could impact the semiconductor supply chain. The escalating conflict between the U.S. and China is of particular concern, as over 30% of South Korea’s semiconductor exports in 2023 were directed to China and Hong Kong, while exports to the U.S. were approximately equal.

Bank of America analysts warned that should U.S.-China tensions intensify and the U.S. impose further trade restrictions on advanced semiconductor exports to China, it could severely affect South Korea’s memory chip exports.

Additionally, South Korean semiconductor manufacturers rely on China for certain components and equipment needed in chip production. Disruptions due to geopolitical tensions could complicate access to these essential tools.

The U.S. has reportedly requested that South Korea limit exports to China of technology and equipment used to produce advanced memory chips and logic chips, specifically those with technology beyond 14-nanometer for logic chips and 18-nanometer for DRAM. South Korean officials are contemplating this request due to potential repercussions for major domestic firms like Samsung and SK Hynix, which operate extensively in China, their largest trading partner.

Meanwhile, the Biden administration is reportedly considering an export control initiative known as the foreign direct product rule, which would impact allies supplying chipmaking tools to China. This rule would prevent the export of any goods manufactured using a specific percentage of U.S. intellectual property to any country.

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