South Korea’s AI Surge: Opportunity or Geopolitical Gamble?

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South Korea is experiencing a notable boost in productivity due to artificial intelligence, according to analysts at Bank of America. However, they warn that rising tensions between the U.S. and China concerning semiconductor technology may pose risks to the country’s growth.

South Korea’s semiconductor sector constitutes 17% of its exports and has significantly benefited from the AI boom, with exports increasing by more than 50% year-over-year. The analysts predict that South Korea’s substantial investment in AI research and development, coupled with a surge in AI-related patents, will enhance the nation’s position in AI adoption in the future.

Nonetheless, potential geopolitical conflicts could impact the semiconductor supply chain, especially amid escalating U.S.-China tensions. Despite South Korea’s efforts to diversify chip exports away from China, over 30% of its chip exports in 2023 were still directed towards China and Hong Kong, with a similar proportion going to the U.S.

Bank of America analysts cautioned that if geopolitical tensions worsen and the U.S. imposes further trade restrictions on advanced and AI-related chip exports to China, it could severely affect South Korea’s memory chip exports.

Moreover, South Korean chip manufacturers rely on China for certain components and equipment necessary for chip production. Disruptions in this supply chain could hinder the ability of South Korean companies to obtain essential production tools.

The U.S. has reportedly requested that South Korea limit exports of equipment and technology used for producing memory chips and advanced logic chips, particularly those more advanced than 14-nanometers and DRAM memory chips exceeding 18-nanometers. South Korean officials are considering this request while evaluating the potential impact on leading firms like Samsung and SK Hynix, which have significant operations in China, its largest trading partner.

In a related matter, the Biden administration is contemplating the implementation of an export control mechanism 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 goods manufactured with a specific percentage of U.S. intellectual property to any country.

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