China has issued a warning of significant economic repercussions against Japan if Tokyo continues to impose restrictions on the sale and servicing of chipmaking equipment to Chinese companies.
This situation complicates the efforts led by the United
States to limit the access of the world's second-largest economy to advanced
technologies. Senior officials from China have consistently communicated this
stance during recent discussions with their Japanese counterparts, as reported
by sources familiar with the situation.
A particular concern for Japan, as conveyed by Toyota Motor
Corp. to officials in Tokyo, is the possibility that Beijing might respond to
new semiconductor regulations by restricting Japan's access to vital minerals
necessary for automotive manufacturing, according to unnamed sources discussing
confidential matters.
Toyota, a key player in Japan's economy and heavily involved
in the nation's chip policy, has invested in a new chip facility being
developed by Taiwan Semiconductor Manufacturing Co. in Kumamoto.
This involvement amplifies its concerns, making them a
significant factor for Japanese officials, alongside those of Tokyo Electron
Ltd., the semiconductor equipment manufacturer that would be most directly
impacted by any new export controls from Japan.
The United States has been urging Japan to implement further
restrictions on companies like Tokyo Electron regarding the sale of advanced
chipmaking equipment to China, as part of a broader initiative to hinder
China's advancements in the semiconductor sector.
In conjunction with these discussions, senior U.S. officials
have been collaborating with their Japanese counterparts to devise a strategy
that ensures a stable supply of critical minerals, particularly in light of
China's recent export restrictions on gallium, germanium, and graphite.
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Concerns regarding Toyota have historical context. In 2010,
China briefly halted rare earth exports to Japan following a maritime dispute
in the East China Sea, an area claimed by both nations. This action
significantly impacted Japan’s electronics industry and posed a risk to the
global supply of high-power magnets, which rely on rare earth materials sourced
from China. Since then, Japan has made efforts, with varying degrees of
success, to lessen its dependence on rare earth imports from China.
Following Bloomberg’s report on the China-Japan incident,
shares of Japanese semiconductor companies experienced declines. Tokyo Electron
saw a drop of up to 1.9%, while Lasertec Corp. and Disco Corp. fell by as much
as 2.8% and 3.3%, respectively.
Some voices in Japan have expressed opposition to the notion
that the Tokyo government should align itself with the latest geopolitical
strategies proposed by Washington.
“Japan should not impose stricter export controls merely at
the behest of the US,” stated Akira Minamikawa, an analyst at the research firm
Omdia. “Japan needs to establish its own principles, determine what is in its
best interest, and maintain its stance.”
The Biden administration is optimistic about alleviating
Tokyo’s concerns and hopes to finalize an agreement with Japan by the end of
the year, according to several sources.
However, there are more assertive measures available: The US
has been utilizing a regulation known as the foreign direct product rule
(FDPR). This rule enables Washington to oversee the sale of products
manufactured globally, as long as they incorporate even a minimal amount of
American technology.
During the ongoing discussions, US officials have so far
chosen not to apply this authority against Japan and other crucial allies, who
view the rule as excessively harsh. A senior administration official indicated
that while the US prefers a diplomatic resolution, it has not dismissed the
potential use of the FDPR.
The complexity of any potential agreement is heightened by
the upcoming US presidential election in November and the anticipated
resignation of Japanese Prime Minister Fumio Kishida this month. However, a
senior administration official indicated that Kishida's departure is unlikely
to affect the ongoing negotiations for additional restrictions, as there is
already a consensus on the policy within the Japanese government.
Japan’s Ministry of Economy, Trade and Industry did not
provide an immediate response when approached by Bloomberg News. Tokyo Electron
also refrained from commenting. A representative from Toyota stated that the
company is continuously evaluating optimal procurement strategies, which extend
beyond mineral resources, to fulfill customer demands.
The Bureau of Industry and Security within the US Commerce
Department, responsible for export controls, chose not to comment.
In a statement, the Chinese Foreign Ministry expressed its
opposition to any nation attempting to politicize standard trade practices or
to persuade other countries to participate in a technology blockade against
China.
The US initially introduced extensive chip export controls
in October 2022, targeting both equipment and advanced processors.
Subsequently, Japan and the Netherlands implemented their own, albeit less
stringent, measures. Since then, Washington has been working to persuade its
allies to fully adopt the original US controls, particularly by restricting
Dutch supplier ASML Holding NV and Tokyo Electron from servicing restricted
machines already in China—an action prohibited for US companies. Reports indicate
that The Hague is set to introduce some servicing limitations.
The United States is considering implementing further
restrictions on high-bandwidth memory chips, which are crucial for artificial
intelligence, along with additional tools for chip manufacturing. This move
also includes measures aimed at specific Chinese companies. As a result, a new
round of discussions has commenced with officials from Japan and the
Netherlands, as Washington urges these nations to align with the anticipated US
actions, which currently exempt allies. The Biden administration faces pressure
from domestic industry stakeholders and some members of Congress to finalize an
agreement with key partners before proceeding with its own initiatives.
In a letter dated August 13 to senior officials at the
Commerce Department, California Democrats Representative Zoe Lofgren and
Senator Alex Padilla expressed significant concern over the detrimental effects
of unilateral export controls on US companies and the nation's semiconductor
innovation leadership, questioning the national security benefits of such
measures. They also voiced heightened apprehension regarding the potential for
additional unilateral controls in the near future.
Both ASML and Tokyo Electron have reported substantial sales
growth in China since the US enacted its regulations. American companies like
Applied Materials Inc., Lam Research Corp., and KLA Corp. have also maintained
significant sales of equipment to China, as businesses there accumulate less
advanced machinery in anticipation of possible new US restrictions. A senior
official from the Biden administration minimized the significance of this
stockpiling, asserting that it pertains only to older technology and that
Beijing's capacity for innovation has been significantly restricted due to
limited access to state-of-the-art tools.
Andrew Jackson, head of Japan equity strategy at Ortus
Advisors Pte., indicated that this situation likely foreshadows new US
restrictions, particularly in light of the tensions between Japan and China. He
advised his clients to continue shorting stocks with substantial exposure to
the Chinese market.
US legislators have called on the administration to utilize
"all available leverage" to ensure the cooperation of allies. They
indicated that they would be open to supporting tariffs on chipmaking equipment
from allied nations that compete directly with American companies for market
share.
Frustrated by the situation, US firms previously proposed
that allies be informed of potential additional export licensing requirements
for companies that continue to serve customers in China, which American firms
are prohibited from engaging with.
South Korea's trade minister, Cheong Inkyo, emphasized that
the US should provide incentives and greater flexibility to foster
collaboration among allies regarding chip controls related to China.
"Incentives should be offered to countries or companies
that are genuinely trying to comply with US regulations," Cheong stated in
his first media interview since assuming office in January. "This approach
would facilitate a smoother acceptance of US policy."