South Korea and Taiwan have become the world's ultimate AI trade. Their exports, investments, stock markets and increasingly their economic fortunes hinge on the assumption that the world's appetite for AI infrastructure will keep accelerating.
If that assumption fails, the fallout will reach well beyond Silicon Valley. But the first issue will be the impact on the 74 million people who call Korea and Taiwan home. If AI has a Wile E. Coyote moment in which investors look down, see nothing beneath their portfolios, and sell hard, the Seoul and Taipei markets will likely lead the world in financial carnage.
Korea especially. It has moved fastest and most boldly to mold its economy around AI. Ask Koreans last January what their economy's lifelines were and most would have said cars, ships, smartphones, or K-pop. Today, the universal answer is AI, for better or worse.
Chips now make up 41% of Korean exports, which jumped 83.5% year-over-year in September. Semiconductor shipments surged 263% and computer exports rose 435% on an annual basis. Despite import tariffs, exports of semiconductors to the U.S. climbed 137%. One of Korean President Lee Jae Myung's main pledges before taking office in June 2025 was to double the Korea's blue-chip index, the Kospi, to 5,000. The AI boom delivered on that promise that quickly.
That boom is starting to look fragile, however. An ominous sign came on Tuesday, with Elice's dismal initial public offering in Seoul. Shares in the AI cloud and business software provider plunged 32% on its opening day, showing how much investors doubt the payoff of the vast capital the firm is pouring into the AI buildout.
Elice made its debut on the tech-heavy Kosdaq, but the Kospi is a cautionary tale in its own right. It remains above the 5,000-level Lee promised, and its 31% gain this year is impressive. Yet it is far below its all-time high of 9,385 in June. Few investors had a top-12 economy's stock market trading like a meme stock on their 2026 bingo cards.
This moment carries important warnings for the new Korean economy. The country's nominal gross domestic product surged 26.4%, year-over-year in the second quarter -- the fastest pace in nearly 47 years (recall the late-1970s heyday of the "Asian tigers"). Some key sectors of the economy have seen triple-digit gains, month after month. It is hard to characterize that type of explosive growth as healthy or sustainable for a developed, $2.25 trillion economy.
The scale of AI-driven growth puts the Bank of Korea in a tough position. On Thursday, the central bank left interest rates unchanged at 3%, opting to wait and see the effects of two previous rate hikes this year. But with Korea arguably the most leveraged bet on AI anywhere, the bank's policy parameters might have to shift in real time.
The BOK's policy will have to strike a perfect balance, using the blunt instrument of rates to tame inflation in Korea's "old economy" without killing the golden goose that replaced that old economy growth engines just 12 months ago. Complicating matters, Korea doesn't know when or where exactly an AI reversal could originate, whether from a shock at home or abroad.
Taiwan presents a similar story. When economists warn about the concentration of AI hardware production in major Asian economies, they are really talking about the Taiwan Semiconductor Manufacturing Co.
On paper, TSMC directly drives as much as 15% of Taiwan's roughly $1 trillion in annual economic output. The indirect boost it provides the economy is almost incalculable, but it includes roughly 1,600 domestic suppliers who rely on TSMC.
TSMC also makes up at least 42% of the Taiwan Stock Exchange Weighted Index, and its boom is the main reason the bourse has rallied 62% this year. That leaves the market hypersensitive to any forward guidance from TSMC CEO C.C. Wei and his team. An AI correction could trigger a sharp reversal in Taiwan's blistering 12.9% year-over-year growth rate in the second quarter, which is the fastest since 1987.
History may well smile on Lee and Taiwanese President Lai Ching-te for betting so heavily on AI. Both are holding winning lottery tickets, at least for now. Of course, Samsung, SK Hynix, and TSMC didn't pioneer this revolution, and their spoils owe as much to being in the right place at the right time as to any special foresight.
Still, their two economies now risk entering a tech version of the "resource curse." Oil, diamonds, and other underground riches too often warp incentives, let governments neglect other lucrative industries, and distort economies. AI spoils are propelling Seoul's property values skyward, for example. And worries about AI turbocharging the gap between Korea's haves-and-have-nots has prompted Lee to roll out a $1 trillion-plus plan to spread the benefits to the country's less prosperous regions.
If an AI-stock downturn takes hold beyond the market drop this week, Korea's heavy reliance on AI could pose a threat to the global financial system. At the start of the 1997 Asian financial crisis, Korea's economy was worth roughly $600 billion. It is now 3.7 times that.
Korea and Taiwan's AI bets look brilliant when capital keeps pouring in. But when entire economies are built on a single trade, the difference between a growth miracle and financial pain can be just one earnings disappointment or failed IPO away.
Guest commentaries like this one are written by authors outside the Barron's newsroom. They reflect the perspective and opinions of the authors. Submit feedback and commentary pitches to ideas@barrons.com.
William Pesek is a longtime Asia opinion writer, based in Tokyo. He is a former columnist for Barron's and Bloomberg and the author of Japanization: What the World Can Learn from Japan's Lost Decades.
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