China has issued a stark warning to Japan, threatening severe economic retaliation if Tokyo imposes further restrictions on the sales and servicing of chipmaking equipment to Chinese firms. This development complicates the U.S.-led efforts to cut China, the world’s second-largest economy, off from accessing advanced technology.
According to sources familiar with the matter, senior Chinese officials have reiterated this position in recent meetings with their Japanese counterparts. The potential backlash from China has raised concerns within Japan, particularly among major corporations like Toyota Motor Corp. The company has privately expressed fears to officials in Tokyo that Beijing could retaliate against new semiconductor controls by cutting off Japan’s access to critical minerals essential for automotive production. Toyota’s concerns carry significant weight, as the company plays a crucial role in Japan’s economy and is deeply involved in the country’s chip policy. The automaker has also invested in a new chip facility being built by Taiwan Semiconductor Manufacturing Co. in Kumamoto, further tying its fate to the semiconductor industry.
Tokyo Electron Ltd., Japan’s leading semiconductor equipment maker, would be most directly affected by any new export controls. The United States has been pushing Japan to impose additional restrictions on firms like Tokyo Electron to prevent the sale of advanced chipmaking tools to China. This pressure is part of a broader campaign to curtail China’s progress in the semiconductor field. As part of these negotiations, U.S. officials have been collaborating with their Japanese counterparts to ensure stable supplies of critical minerals. This effort is particularly important given China’s previous restrictions on exports of gallium, germanium, and graphite, which have impacted global supply chains.
Historical context and current concerns
Japan’s concerns are not without historical context. In 2010, following a territorial dispute in the East China Sea, China temporarily halted exports of rare earth elements to Japan. This move had significant repercussions for Japan’s electronics industry and underscored the strategic leverage that China could wield through its control over critical raw materials. Since then, Japan has made efforts, with varying degrees of success, to diversify its sources of rare earths and reduce dependence on China.
The impact of the current tensions is already being felt in financial markets. Shares of Japan’s chip-related companies fell following reports of the potential economic clash between China and Japan. Tokyo Electron’s shares dropped as much as 1.9%, while Lasertec Corp. and Disco Corp. experienced declines of 2.8% and 3.3%, respectively.
Diverging views on Japan’s strategy
Not everyone in Japan agrees with aligning closely with U.S. geopolitical strategies. Some experts, like Akira Minamikawa, an analyst with the research firm Omdia, argue that Japan should determine its own export control policies based on its national interests. “Japan shouldn’t tighten its export control just because the U.S. is making such a request,” Minamikawa said. “Japan should have its own philosophy, decide what’s best for the country, and stand firm.”
Despite these internal debates, the Biden administration remains optimistic about reaching an agreement with Japan by the end of the year. However, there are more forceful strategies on the table. The U.S. has the option to invoke the foreign direct product rule (FDPR), which allows Washington to control the sales of products made anywhere in the world if they incorporate even minimal American technology. Although American officials have so far refrained from using this authority against Japan and other key allies, they have not ruled it out as a last resort.
Potential impact of political changes
The timing of any deal is further complicated by political changes in both countries. The U.S. presidential election in November and the impending resignation of Japanese Prime Minister Fumio Kishida this month add layers of uncertainty. However, U.S. officials believe that Kishida’s departure will not significantly impact the ongoing negotiations, given that Japan has built a broad consensus for the policy across its government.
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Reactions from industry and government
Japan’s Ministry of Economy, Trade and Industry has yet to comment on the situation. Meanwhile, Tokyo Electron and Toyota have declined to provide specifics on their strategies. A Toyota spokesperson indicated that the automaker is continually evaluating optimal procurement strategies to meet customer needs, not limited to mineral resources.
The Chinese Foreign Ministry issued a statement opposing any nation’s efforts to politicize normal trade relations and pressure other countries to join a technology blockade against China. The U.S. initially introduced comprehensive chip export controls in October 2022, targeting both equipment and advanced processors. Japan and the Netherlands later implemented similar, though less restrictive, measures.
Outlook and future measures
The Biden administration is under increasing pressure from both the U.S. industry and some lawmakers to secure an agreement with key allies before imposing further restrictions. Representative Zoe Lofgren and Senator Alex Padilla, both California Democrats, have expressed concern over unilateral export controls, calling for a more coordinated approach with allies.
As the U.S. considers imposing new curbs on high-bandwidth memory chips and additional chipmaking tools, negotiations with Japan and the Netherlands are intensifying. Washington aims to align its allies with the potential new measures, which currently provide exemptions for friendly nations. The outcome of these negotiations will be crucial in shaping the future of global semiconductor supply chains and technology access.
Industry analysts, like Andrew Jackson of Ortus Advisors Pte., anticipate new U.S. restrictions in response to the Japan-China standoff and advise investors to exercise caution regarding companies with significant sales exposure to China. The geopolitical tug-of-war over semiconductors is set to continue, with both economic and strategic implications for all parties involved.
