Is Korea becoming too dependent on chips? Moody’s weighs in

South Korea’s broader industrial base may give it a structural edge over Taiwan, but that advantage is increasingly under strain as the economy becomes more reliant on semiconductors, according to an economist at Moody's Analytics.

While Seoul is often compared with Taipei for their similar economic size and heavy dependence on chips, Korea’s more diversified mix — spanning autos, machinery and other traditional industries — has historically provided a buffer against sector-specific shocks. But those same sectors are now facing mounting pressure from US tariffs and intensifying global competition, raising questions about how durable that edge will be.

“Korea’s industrial base is more diverse than Taiwan’s,” said Dave Chia, an economist at Moody’s Analytics. “Alongside a large tech sector, Korea also has a sizeable presence in traditional manufacturing, including autos and machinery, which Taiwan lacks.”

“This diversity is generally considered a strength because it means Korea is not entirely reliant on the tech sector alone, which can see sharp cyclical and structural swings,” he said.

Yet the role of semiconductors in the economy is deepening. Korea’s major chipmakers, including Samsung Electronics and SK hynix, are riding a powerful artificial intelligence-driven memory boom that is reshaping export dynamics.

“First-quarter trade data showed a sharp export rebound driven overwhelmingly by chips,” Chia said. “Semiconductor exports are still largely tariff-exempt, but broader trade uncertainty persists.”

The shift underscores a growing concentration risk. While semiconductors remain a key engine of growth, their rising dominance raises concerns that Korea could become more exposed to sector-specific volatility — the very risk its diversified base was meant to mitigate.

At the same time, traditional industries are losing momentum.

“The concern is that these sectors now face strong headwinds,” Chia said. “US tariffs and tougher global competition have weighed on performance, leaving parts of the nontech manufacturing base under pressure.”

External shocks are likely to amplify those pressures. Chia expects economic growth to slow in the second quarter as geopolitical tensions in the Middle East begin to weigh on exports and domestic demand.

“The conflict will hurt exports by weakening global demand, and it will squeeze household and business spending at home by pushing up energy prices,” he said.

South Korea’s economy expanded 0.5 percent quarter-on-quarter in the first three months of the year, but growth is expected to ease to around 0.3 percent in the second quarter, in seasonally adjusted terms.

The slowdown is likely to be “meaningful but not abrupt,” Chia said, noting that the outlook will depend heavily on how the conflict evolves.

“So long as tensions ease in the coming weeks, the economic and inflationary impact should remain manageable,” he said. “But a prolonged conflict or further escalation would raise the risk of a sharper slowdown.”

Against this backdrop, the Bank of Korea is expected to keep its policy rate on hold at 2.5 percent for an extended period, despite a recent leadership change.

“The central bank will likely maintain a pause given the risk of renewed inflation from higher commodity prices,” Chia said, pointing to additional concerns over currency weakness, elevated household debt and firm housing prices.

He did not rule out the possibility of a policy shift if conditions deteriorate.

“Our baseline assumes no further rate cuts this year unless growth weakens materially,” he said. “If inflation reaccelerates or currency pressures intensify, the BOK could even move toward rate hikes.”