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

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Bank of America analysts have noted that South Korea is among the few economies benefiting from a surge in productivity driven by artificial intelligence (AI), although tensions between the U.S. and China regarding semiconductor policy could hinder this growth.

According to a report by Bank of America Global Research, the semiconductor sector makes up 17% of South Korea’s exports, and the nation has seen a remarkable increase in exports, which rose over 50% year-over-year, positioning it as the biggest beneficiary of the AI boom. Analysts believe that South Korea’s significant investments in AI research and development, alongside an increasing number of AI-related patents, will bolster its leadership in AI implementation in the long run.

Nevertheless, analysts have raised concerns that rising geopolitical tensions, particularly between the U.S. and China, could negatively impact the semiconductor supply chain and, consequently, AI development in South Korea. Despite efforts to diversify chip exports away from China, more than 30% of South Korea’s chip exports in 2023 were directed to China and Hong Kong, with exports to the U.S. being roughly equivalent.

If U.S.-China tensions intensify and the U.S. enacts more stringent trade restrictions on advanced chips, especially those related to AI, it could severely affect South Korea’s memory semiconductor exports. Additionally, South Korean chipmakers rely on China for essential chipmaking components and equipment, making any supply chain disruptions particularly challenging.

Reports indicate that the U.S. has urged South Korea to limit exports to China of technologies and equipment necessary for manufacturing memory and advanced logic chips. South Korean officials are reportedly deliberating over this request, considering the potential impact on key players such as Samsung and SK Hynix, both of which have significant operations in China.

Furthermore, the Biden administration is contemplating the implementation of an export control known as the foreign direct product rule, which would restrict the export of goods to any nation if those goods are produced using a specified proportion of U.S. intellectual property.

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