South Korea’s AI Boom in Jeopardy: Geopolitical Tensions Loom

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South Korea is among the few economies worldwide experiencing an increase in productivity due to artificial intelligence, although analysts from Bank of America warn that escalating U.S.-China tensions over semiconductor technology could hinder this growth.

The semiconductor sector constitutes 17% of South Korea’s exports, with the nation significantly benefiting from the AI surge, evidenced by a more than 50% year-over-year rise in exports, as highlighted in a report by Bank of America Global Research. Analysts project that South Korea’s substantial investment in AI research and development, along with a growing portfolio of AI-related patents, will strengthen its AI adoption in the long run.

However, the analysts cautioned that geopolitical tensions might disrupt the semiconductor supply chain, particularly amid increasing strains between the U.S. and China, which poses a risk to AI progress in South Korea. While the country has made efforts to diversify chip exports beyond China, over 30% of its semiconductor exports were still destined for China and Hong Kong in 2023, with exports to the U.S. at similar levels.

The Bank of America analysts indicated that any escalation of geopolitical conflicts, particularly if the U.S. were to implement further trade restrictions on advanced or AI-related chip exports to China, could significantly impact South Korea’s memory semiconductor exports.

Furthermore, South Korean chip producers rely on China for various components and equipment necessary for chip manufacturing. Disruptions in this supply chain could complicate the acquisition of essential tools needed for chip production.

Reports suggest that the U.S. has requested South Korea to limit exports to China of certain equipment and technologies used in manufacturing memory chips and advanced logic chips, particularly those more advanced than 14-nanometer and DRAM memory chips exceeding 18-nanometer. South Korean officials are reportedly considering this request, mindful of the potential consequences for major domestic companies like Samsung and SK Hynix, which maintain operations in China, its largest trading partner.

Additionally, the Biden administration is reportedly contemplating employing an export control mechanism known as the foreign direct product rule against allies that continue supplying China with chipmaking tools and equipment. This rule would prohibit the export of goods to any country if they incorporate a significant percentage of U.S. intellectual property in their production.

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