China has stated to Japan that it is ready to take restrictive retaliatory measures if Tokyo continues to reduce the scope of sales and service of equipment necessary for the production of chips.
In this case, Beijing has actually demonstrated its intent to defend the right to expand and develop technological potential against the background of stricter export controls from other capitals. Currently, Washington is at the forefront of a kind of restrictive policy towards China. The corresponding action strategy applies to the formation of a state of affairs in the advanced technology industry that will significantly weaken Beijing’s development opportunities. Policymakers in Washington say that the tightening of export controls regarding the supply of cut-edge chips and equipment for the production of microcircuits of the corresponding category to the Asian country is due to the desire to ensure a high level of national security in the United States since China can use advanced semiconductor solutions to strengthen its military potential. Beijing, on the other hand, perceives restrictive measures as purely politically motivated actions that contradict the paradigm of free international trade and violate the principles of open cooperation between countries.
If Japan refrains from scaling up restrictive practices in the context of domestic technology sector export activities, this will mean, in a certain sense, a factor inhibiting the efforts of the United States to tighten the norms for the supply of advanced products to China. At the same time, it is worth noting that the probability that Tokyo will make a decision beneficial to Beijing is not the maximum. However, it is also not worth excluding the refusal to scale the mentioned restrictive practice.
Washington continues to make efforts to deprive Beijing of access to advanced technologies and consistently states its intentions to expand the appropriate action strategy.
The media, citing senior Chinese officials who spoke to reporters on condition of anonymity, report that the position regarding readiness to implement retaliatory restrictive measures has been repeatedly declared during meetings between representatives of Beijing and Tokyo.
It is known that concerns are currently circulating among Japanese politicians about China’s possible reaction to the continued reduction in the scale and supply capabilities of advanced technological products. The corresponding sentiments, which are spreading in Tokyo in the so-called behind-the-scenes format, are related to the fact that Beijing may potentially decide to restrict Japan’s access to the most important minerals necessary for the production of cars. This information was reported by the media with reference to insiders among employees of Toyota Motor Corp. So far, Tokyo’s position on the perception of the likely consequences of potential retaliatory measures by Beijing has not been declared at the official level and does not even appear in the form of hints.
One of the media interlocutors noted that Toyota is currently one of the most important companies in Japan. Also, in the relevant context, it was separately noted that the firm is actively involved in shaping Tokyo’s policy in the chip manufacturing area. Moreover, Toyota has invested in a project to build a new chip campus in Kumamoto. Taiwan Semiconductor Manufacturing Co. (TSMC) is engaged in the implementation of this project. Against the background of the mentioned facts, Toyota’s concerns about potentially limiting access to essential minerals needed for car production are an important factor for Tokyo as a political center in making decisions on the concept of interaction with other countries in the context of technological cooperation. It is worth noting that other Japanese companies are also assessing Beijing’s possible reaction to the tightening of the circumstances of Japan’s export interaction with China through the prism of a pessimistic attitude. Tokyo Electron Ltd., a manufacturer of semiconductor equipment, fears that the potential deterioration of relations between the two Asian countries within the framework of the practice of technological collaboration will have a negative impact on its condition and capabilities.
At the same time, according to media reports, the United States is currently putting pressure on Japan to limit the ability of local companies to sell advanced chip-producing tools to China. The potential adoption of such a decision and its subsequent implementation will mean, including for Tokyo Electron, the loss of a very important market, which will eventually become an impact factor on the dynamic of earnings.
Washington intends to continue a large-scale campaign to limit Beijing’s development opportunities in the semiconductor industry. It is worth noting that at present, the chip production area is gradually becoming what, within the framework of the symbolic manner of formulating semantic constructions, can be called a battlefield, which has, among other things, a geopolitical component. Nowadays, microcircuits are strategic products. In a sense, chips have become what can be called the new oil for the global economy. Microcircuits are used to process and comprehend huge amounts of data that are of critical importance in the context of the specifics of the information age, which largely determines the content of the current stage in the history of human civilization as an economic system, social environment, and political space. Chips can perform many functions. For example, these products are necessary for training and ensuring the process of subsequent functioning of artificial intelligence systems. AI has significant potential and over time can become an alternative form of mind that exists in the environment of the virtual dimension of reality and surpasses the capabilities of human consciousness in terms of understanding and analyzing facts, phenomena, and processes observed, arising, and disappearing within the boundaries of matter of the global being. Artificial intelligence is also likely to become a catalyst for the accelerating and transformation of processes in many spheres of activity, including in industry. Against this background, it is logical that a kind of battle for chip production is gradually beginning between the countries. Microcircuits, as a kind of functional basis for almost all new-generation technological products, have such importance for the economy that it is very difficult to underestimate. Moreover, for the state as a political system, the scale of access to chips and tools for the manufacturing of corresponding products is gradually becoming a factor determining its stability and position in the space of international relations. The microcircuit is gradually becoming a critically important component of the economy. At the same time, the condition of the economic system is a factor of significant impact on the state of affairs in the social environment. It is highly likely that the current increase in tension in the geopolitical space will be realized, including in the chip manufacturing industry.
Washington has already restricted Beijing’s access to advanced microcircuits and equipment necessary for the making of corresponding products. Some experts suggest that appropriate measures will become a stimulating factor for the development of the Chinese microcircuits industry. It is worth noting that Beijing has already demonstrated certain successes in the relevant area of activity. For example, last year Huawei presented the Mate 60 Pro smartphone with a new Kirin 9000s chip developed by the Chinese Semiconductor Manufacturing International Corporation (SMIC). In this case, 7-nanometer technology was used. For policymakers in Washington, the mentioned smartphone from Huawei has become what can be called unpleasant news. They suggested that tightened export controls would deprive Beijing of the possibility of such technological advances. At that time, US Commerce Secretary Gina Raimondo said that the United States had no evidence that Huawei and other Chinese companies could launch mass production of advanced smartphone chips. At the same time, Burn J. Lin, former vice president of TSMC, is convinced that Washington will not be able to limit the progress of firms from an Asian country in the area of making microcircuits. In this context, he stated that Huawei and SMIC can use their old equipment to produce more complex silicon, which traditionally needs more modern machinery.
At the same time, the results of special studies indicate that so far China’s capabilities in making advanced chips are limited relative to the newest technological solutions of the appropriate orientation. Currently, Beijing is five years behind the world leaders in the production area of high-end logic microcircuits. Also, China has not yet made progress in developing chip manufacturing equipment. The results of the mentioned study, conducted by the Information Technology and Innovation Foundation (ITIF), were published in August. TSMC, currently the world’s largest contract chip manufacturer, presented a 3-nanometer process technology in 2022. At the same time, SMIC is still testing the 5-nanometer process technology. China may make more progress over time, but so far lagging behind the world leaders in the area of chip production is an objective reality for Beijing.
The media, citing insiders, report that senior United States officials are interacting with their Japanese counterparts as part of the formation of a strategy aimed at implementing decisions on the shaping of a strategy to ensure sufficient supplies of essential minerals. The corresponding need became more urgent after Beijing decided to take retaliatory measures last year in response to stricter export controls by Washington and some of its allies. In this case, it means limiting the external supply of germanium, gallium, and graphite.
It is worth noting that Toyota’s above-mentioned concerns are based not only on the potential negative scenario of the future but also on the experience of the past. In 2010, Beijing decided to suspend exports of rare earth elements to Japan amid a clash in the waters of the East China Sea, where the territorial dispute between Beijing and Tokyo intensified. For the Japanese electronics sector, the specified solution has become what can be called a stress factor. Beijing’s measures also generated a threat to stop the global supply of powerful magnets produced in Japan using rare earth elements from China. Since then, Tokyo has been trying to take measures to decrease the risk of such situations happening again. With varying success, Japan is striving to reduce its dependence on imports of rare earth elements from China.
After the dissemination of information about the difficult situation in relations between Tokyo and Beijing in the context of trade and cooperation in the technology sector, negative tendencies were recorded in the markets. The value of shares of Japanese companies specializing in the implementation of chip manufacturing activities turned out to be on a downward trajectory. Securities of Tokyo Electron fell by 1.9%. The value of Lasertec Corp. shares and Disco Corp. equities decreased by 2.8% and 3.3%, respectively.
There is a circulating opinion in Japan that the local government should not act within the framework of the paradigm of relations with China, which reflects the concept of the current geopolitical strategy of the United States. In this case, restrictions on Beijing are implied. Akira Minamikawa, an analyst with the research firm Omdia, says that Japan should not decide to tighten export controls just because the relevant request was received from Washington. According to the expert, Tokyo should have its own philosophy, stand firm, and act within the framework of a strategy that is most in line with national interests.
The media, citing some insiders, report that the administration of United States President Joe Biden is confident that it will be able to assuage Japan’s concerns about a possible Chinese response to the tightening of export policy. Washington also expects that by the end of the current year, it will be able to reach an agreement with Tokyo on limiting the supply of high-tech products.
It is also worth noting that the United States has more effective tools to impact export schemes than the practice of arrangements with allies. For example, as part of a kind of behind-the-scenes approach, Washington may use the foreign direct product rule or FDPR. Under this mechanism, the United States can control sales of goods manufactured in any region of the world if the relevant products have at least minimally applied US technologies. So far, Washington has refrained from using this export monitor tool in the context of interaction with Tokyo. The media, citing insiders, report that US officials do not mention applying FDPR during communication with their Japanese counterparts. It is worth noting that many of Washington’s allies assess this export control mechanism as excessive.
Also, the media, referring to a senior official of the administration of the President of the United States, reports that the US is aimed at achieving a diplomatic solution to the issue of limiting the supply of advanced technological products from Japan to China. At the same time, this insider, who spoke to reporters on condition of anonymity, said that Washington does not exclude the use of FDPR.
It is worth noting that reaching an agreement between the United States and Japan is complicated by political circumstances. In this case, one of the impacting factors is the US presidential elections scheduled for November. Also in the relevant context, the resignation of Japanese Prime Minister Fumio Kishida, planned for the current month, should be mentioned. According to media reports, referring to the insiders, the specified factor is not critical or particularly sensitive, since the administration of the President of the United States managed to reach a preliminary consensus on export policy with the government of an Asian country.
Japan’s Ministry of Economy, Trade and Industry did not provide any media comments on the mentioned information. Tokyo Electron also chose in favor of the tactic of silence. At the same time, Toyota’s spokesperson stated that this company is constantly considering optimal procurement strategies, not limited to mineral resources, to meet the needs of its customers.
The US Commerce Department’s Bureau of Industry and Security, which carries out export controls, also declined to comment to the media.
The Chinese Foreign Ministry stated that it is against attempts by any individual country to politicize normal trade and involve other states in any technological blockade of Beijing.
In October 2022, Washington decided on the first strict measures to control the export of chips. Appropriate measures were applied both to advanced processors and to the equipment necessary for manufacturing the corresponding products. Over time, Japan and the Netherlands joined this restrictive policy. It is worth noting that the measures taken by Amsterdam and Tokyo are less stringent compared to the approach being implemented by Washington. Since then, the United States has been trying to convince allies to expand restrictive policies. In this context, efforts are primarily aimed at reducing the ability of the Dutch company ASML Holding NV and Tokyo Electron to repair certain equipment that has already been exported to China. It is worth noting that US firms can no longer carry out relevant activities. According to media reports, ASML intends to impose some restrictions on equipment servicing in China.
Currently, according to journalists, Washington is considering the possibility of deciding on additional measures to limit the supply of high-bandwidth memory chips. In this case, it means exporting to China. High-bandwidth memory chips are an important component of artificial intelligence systems. Also, according to media reports, Washington intends to add additional tools for the manufacturing of microcircuits to the list of products prohibited for export to an Asian country. Moreover, journalists claim that the United States has intentions to take restrictive measures against specific Chinese companies. According to preliminary information, Washington is negotiating with Tokyo and Amsterdam on the issue of involving Japan and the Netherlands in the practice of tightening export controls. The United States is striving to ensure that the strategies of its allies’ interaction with China are unified with an appropriate US approach.
The media reports that the Joe Biden administration is currently under pressure from the domestic industry and some policymakers who are members of the Democratic Party in the context of planning to expand restrictive export policies. In this context, the mentioned participants in the supply debate insist that Washington must first reach an agreement on coordination with its allies and only after that decide on new standards for the shipments of technological products to China.
Representative Zoe Lofgren and Senator Alex Padilla, both California Democrats, in an August letter to senior Commerce Department officials, expressed their concern about the damage being done to US companies and the country’s leadership in the area of semiconductor innovation because of unilateral export controls with dubious national security benefits. Separately, they noted even greater concern about the likely next round of unilateral control in the near term.
ASML and Tokyo Electron have significantly increased sales in China after the United States imposed export controls. It is worth noting that some US companies, including Applied Materials Inc., Lam Research Corp., and KLA Corp., also continue to sell machinery on a large scale in the Asian country. The relevant activity is related to the fact that currently in China, the local business stockpiles less advanced equipment as part of efforts to avoid the consequences of potential new restrictions from the United States.
A senior official of the Joe Biden administration, speaking to media representatives on condition of anonymity, said that inventories of machinery as a factor affecting the prospects for Beijing’s technological development are not significant. In this context, it was noted that China’s purchase of less-advanced equipment does not negate the fact that the Asian country is limited in its ability to innovate due to a lack of access to cutting-edge production tools.
Andrew Jackson, head of Japan equity strategy at Ortus Advisors Pte., suggests that shortly the United States will impose new restrictive measures on the supply of advanced chips and gear for making appropriate microcircuits to China.
There is currently a kind of consensus among US policymakers that the Joe Biden administration should use all available forms of leverage so that, as part of the expansion of restrictive measures regarding the export of technological products to China, there is support from allies. In their opinion, if necessary, tariffs should be imposed on chip manufacturing tools from allied countries that compete directly with US companies for market share. It is worth noting that in the United States, local firms have repeatedly offered to tell allies that their manufacturers may face additional export licensing requirements if their practice of serving Chinese customers with which US brands are prohibited from cooperating continues.
South Korea’s trade minister, Cheong Inkyo, said that Washington needs to be offered incentives and more flexibility as part of solving the mentioned task. According to him, such an approach could be an incentive for allies to cooperate with the United States in the area of control over the supplies of chips in China. Cheong Inkyo says that there should be certain benefits for companies trying to faithfully comply with Washington’s requirements. According to him, an appropriate approach will facilitate the perception of United States policy.
