South Korea’s AI Boom at Risk: Is Geopolitics the Next Obstacle?

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South Korea is among the few economies globally experiencing a productivity increase attributed to artificial intelligence, but analysts at Bank of America caution that escalating U.S.-China tensions regarding semiconductor technology could hinder its growth.

The semiconductor sector plays a crucial role in South Korea’s economy, accounting for 17% of its exports. According to a report by Bank of America Global Research, the country has emerged as the largest benefactor of the AI surge, with exports rising over 50% year-over-year. Analysts project that South Korea’s significant investments in AI research and development, along with an uptick in AI-related patents, will bolster its position in AI utilization over the long term.

Despite these positive indicators, the report highlights that geopolitical strains may disrupt the semiconductor supply chain—particularly the heightened friction between the U.S. and China, which poses a threat to South Korea’s AI growth. Although South Korea has expanded its chip exports beyond China to other regions, in 2023, over 30% of its chip exports still went to China and Hong Kong, with similar figures for exports to the U.S.

Bank of America analysts warn that if geopolitical tensions escalate and the U.S. enacts further trade restrictions on exports of advanced or AI-related chips to China, it could considerably impact South Korea’s memory chip exports.

Furthermore, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. If tensions lead to supply chain disruptions, it would complicate access to essential tools for South Korean companies.

Reports indicate that the U.S. has requested South Korea to limit exports of equipment and technology used for producing memory chips and advanced logic chips—specifically those more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly contemplating this request due to potential repercussions for major firms like Samsung and SK Hynix, which have operations in China, its largest trading partner.

In addition, the Biden administration is said to be exploring the use of an export control mechanism known as the foreign direct product rule against allies that continue providing chipmaking tools and equipment to China. This rule prohibits the export of goods to any nation if they incorporate a certain percentage of U.S. intellectual property.

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