May 27th 2026|SEOUL, TAIPEI and TOKYO|10 min read
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The numbers look staggeringly good. Taiwan, a rich economy that in a good year might be expected to expand by 3-4%, is growing at 14%. That is thanks to an explosion in exports, which, even after adjusting for inflation, rose by over 40% last year. In a similar vein, operating profits at South Korea’s biggest firms ballooned by 159% over the past year, thanks chiefly to its mighty exporters. Even usually sluggish Japan is seeing record corporate profits. Since the covid-19 pandemic its exports have grown four times faster than its economy. On the face of things, north-east Asia is in the midst of an export-led bonanza.
That is only half the story, though. North-east Asia’s export industries increasingly operate on two tracks. On one track, the boom in artificial intelligence is driving high-tech exports, by the all-conquering chipmakers of South Korea and Taiwan, and by Japanese makers of equipment and materials used in chipmaking. On the second track, the rest of industry is clapped out. If you exclude semiconductors and AI servers, Taiwanese exports have actually fallen by 40% since 2022. In South Korea, non-AI exports have stagnated and Japan’s industry is in decline. In areas such as cars and chemicals, China is lapping the trio.
China once absorbed north-east Asian capital and intermediate goods, which its factories assembled into finished products. It is now a direct rival. South Korea’s exports overlap most with China’s in products in which China’s market share is growing fastest, calculates Adam Wolfe of Absolute Strategy Research, a consultancy. Japan is the third-closest (after Vietnam, which is gaining ground on China in some lower-tech industries).
In all three countries the balance of trade in goods with China has deteriorated since 2022. Taiwan’s long-running surplus with the mainland flipped into a deficit this year. In February Japan’s monthly deficit hit a record ¥1.1trn ($6.9bn, equivalent to around 2% of GDP). South Korea had been running a growing deficit with China for years, though in the past few months its unstoppable chip exports have lifted it into surplus again.
Unglamorous industries across north-east Asia are under crushing pressure. Taiwanese machinery-makers are furloughing workers. Chinese carmakers are supplanting Japanese ones in their own backyard. South Korean battery firms, outclassed by China’s CATL, are running factories at half their capacity. In chemicals—a hallmark of industrial modernity in South Korea since the 1970s and in Japan since the first world war—a glut of Chinese capacity has lowered prices and led the output of Japan’s chemical companies to contract by a quarter since 2019 and that of South Korea’s by a fifth since 2022.
Chart: The Economist
The result is that north-east Asian manufacturing is getting narrower. Chips and other gear related to AI make up over 40% of South Korean exports, more than double their share just two years ago. In Taiwan it is 80% of exports, compared with about half before the pandemic. After accounting for firms not neatly captured as AI-linked in official statistics, like Japan’s Advantest (which makes chip-testing gear) and Taiwan’s Foxconn (which produces data-centre servers, among other electronics), The Economist finds that all 15% of the region’s rise in industrial output since 2019 is thanks to AI (see chart 1). In Japan, South Korea and Taiwan output at factories unrelated to AI has shrunk in recent years.
North-east Asia’s reliance on AI is likely to become more pronounced, both because of intensifying competition from China in lower-tech industries, and because of industrial policies at home. South Korea plans to spend $530bn to support chipmakers over the next two decades. It wants Samsung Electronics and SK Hynix, local champions that dominate memory chips globally, to branch out into other semiconductors. A Taiwanese law from 2023 gives local chip giants a tax break that lets them as much as halve their bills for gear, research and development. Takaichi Sanae, Japan’s prime minister, wants to boost the manufacture of 61 “strategic” goods, including chips. The Ministry of Economy, Trade and Industry (METI), which guided development through much of the 20th century, is mighty again—and splurging $16bn on Rapidus, a moon-shot project to make cutting-edge chips.
Specialising in more sophisticated manufactures is only natural. Economies that become rich typically see low-end sectors shrink as they reorient towards consumption and a residual slice of world-class tech. For Japan, South Korea and Taiwan, however, there are two reasons for worry. The first is their growing reliance on exports for growth. Since 2019 the ratio of exports to GDP has risen by an average of nine percentage points across the three countries. It has hit 73% in Taiwan and 46% in South Korea. In the two countries, AI-related tech exports provided around three-quarters of overall growth in 2025, estimates Goldman Sachs, a bank. In less export-reliant Japan, the ratio has grown steadily since its bubble burst in the late 1980s, to a record 22% in 2024.
The second cause for concern is the small number of countries to which north-east Asia sells its wares. The region’s exports are 73% more concentrated than the rich-world average, according to an index produced by UNCTAD, a UN agency, that accounts for the range of goods and the number of customers (see chart 2). Taiwan is the biggest outlier: two-thirds of its chip-heavy foreign sales go to America and China. But South Korea and Japan stand out, too. And concentration has risen in all three in the past decade.
Chart: The Economist
Although each country has its particulars, all of north-east Asia is buffeted on the one side by fierce industrial competition from China and on the other by tariffs and arm-twisting from America. This is a source of anguish. Headlines in Seoul fret that South Korea’s exporters will soon fall behind China—or already have. In Taipei politicians bicker about the pledge America has extracted from Taiwanese chipmakers, to invest $250bn in chip factories in America, which critics say will hollow out the industry and turn Taiwan into a feidao (“waste island”). An official in Tokyo laments that “We’ve lost autonomy.”
To make matters worse, domestic demand in the region is too weak to offer a buffer against an increasingly hostile outside world. Despite their wealth, north-east Asian households consume far less of what their economies produce than is typical in rich places. In Japan private consumption is 53% of output; in South Korea and Taiwan it is closer to 40% than to the rich-country average of 60%.
This is all the more striking given the region’s ageing populations, which should push up the ratio of consumption to GDP. After all, pensioners have stopped producing but still consume. The higher share of consumption in Japan is better explained by protracted weakness in the rest of the economy than by consumer strength. After decades of deflating wages private consumption accounted for a tiny 3% of Japan’s (sluggish) growth over the past decade, notes Richard Katz of Japan Economy Watch, a newsletter (58% came from ballooning government spending).
North-east Asia consumes so little because of decades-old policies designed to promote manufacturing for export. As its economies took off, production overshadowed consumption. Besides showering favoured firms and workers with subsidies, governments channelled capital to big exporters by pushing household savings into financial systems controlled by the state.
Illustration: Álvaro Bernis
This approach had an internal logic, says Dani Rodrik of Harvard University. Although consumers enjoyed a relatively smaller portion of output, rapid expansion meant that consumption was still growing in absolute terms. The bias towards exports was meant to be temporary, however. “The closer you get to the technological frontier, the harder it is to eke out more productivity gains,” Mr Rodrik observes. Once that frontier is reached it makes sense to reduce the emphasis on production and to stop repressing consumption.
North-east Asia’s governments haven’t done this. One reason is the clout of export-oriented corporate titans. The value generated by TSMC, the Taiwanese chip-manufacturing juggernaut, accounts for 9% of GDP and its market capitalisation for 40% or so of Taiwan’s stockmarket. Samsung Electronics and SK Hynix, each now worth over $1trn, are parts of South Korea’s influential family-run conglomerates. Japanese exporters are METI’s darlings.
Even though some of these behemoths are among the world’s most competitive firms, they hoard talent and capital. Regulation also favours workers in the vanguard of industrialisation, who receive benefits that employees of small businesses do not, creating what Arvid Lukauskas and Yumiko Shimabukuro of Columbia University call a “labour aristocracy”. Meanwhile, unproductive small businesses, which account for 60% of employment in South Korea, 70% in Japan and 80% in Taiwan, create a larger labour underclass without the means to spend.
The region’s labour markets are warped in other unhelpful ways. Lifetime employment with generous wages and benefits remains standard for the labour aristocrats; everyone else earns peanuts. Samsung workers have just secured another plum pay deal. Irregular workers make half of what regular workers do in South Korea; in Japan it is 40% less. Many big employers retain large irregular workforces that can be slashed in a downturn, without imperilling the core of lifelong staff. So irregular employment (including part-time work) has grown to over a third of the workforce in Japan, up from a sixth in the 1980s. Temporary employment in South Korea, at over a quarter of the total, is the highest in the OECD club of mostly rich countries.
In Taiwan, workers in the electronics industry, which employs a tenth of the workforce, enjoy a 70% wage premium over the national average. Because everyone else subsists on meagre pay, that average (adjusted for living costs) is roughly the same as in Spain, whose (similarly adjusted) GDP per person is a third lower. Taiwan’s numerous university graduates—more than 80% of 25- to 34-year-olds have degrees—face higher unemployment rates than peers with vocational degrees. Youth unemployment, at 12%, is over three times the national average. Perhaps 500,000 Taiwanese leave the country every year in search of better prospects abroad.
Another restraint on consumption is stingy welfare states. Taiwan and South Korea spend 5% and 4% of output, respectively, on pensions, half the OECD average. Japan’s pension system is more generous. Yet in both Japan and South Korea, the size of pension payments is tied to the nature of past employment. Those outside the lucky salaried elite receive much less.
One result is that Japan and South Korea have high relative poverty rates among the elderly, of 20% and 40% respectively, compared with 14% in the oECD as a whole. In Taiwan, which does not publish official figures, academics put it at around 30%. Half of Taiwan’s elderly households fall into its lowest income quintile. Other forms of state support are paltry, too. Japan, South Korea and Taiwan spend on average just 2% of GDP on social assisitance such as tax credits for low earners and retraining schemes.
Governments have started to take notice. In Japan the lifetime employment system has become somewhat less rigid, leading to a 60% surge in the number of workers quitting their jobs for higher pay or better conditions. This year South Korea will enact several reforms to pensions, including raising contribution rates for the first time since 1998. But the impact of such measures has been muted. Complaints about “K-shaped” economies, where the rich get richer and the poor struggle, are widespread in north-east Asia.
At best, then, the region’s prosperity is only narrowly shared. At worst, its reliance on AI-related exports is a recession waiting to happen. Even the AI bonanza will slow eventually and the chip industry is notoriously prone to booms and busts. Rather than using the good times to diversify, north-east Asia is instead making an all-in bet: on exports to provide growth, on the semiconductor industry to provide the exports, and on America and China to buy them. It is a risky trifecta. ■
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This article appeared in the Finance & economics section of the print edition under the headline “Boom and bust”
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