This month, the House Select Committee on the Chinese Communist Party penned a letter to Japanese ambassador to the U.S., Shigeo Yamada, imploring Japan to tighten its export controls on semiconductor manufacturing equipment. This request comes on the heels of reports that ongoing negotiations with Japan on strengthening its chip export control regime are facing delays.
Japan occupies 26% of the global semiconductor manufacturing equipment (SME) market as of 2022, and it is the second-largest producer of SME following the U.S. Major Japanese SME companies like Tokyo Electron, Nikon, Canon and Avantest produce equipment that is used to perform highly specialized processes in the chip manufacturing process, such as etching, deposition, photolithography and testing. China is the primary purchaser of Japan’s SME, capturing over 50% of Japan’s exports. Japan’s substantial role in China’s development of semiconductors is a weakness the U.S. is eager to push on.
Japan’s list of controlled items related to semiconductor manufacturing equipment is already similar to that of the U.S. Japan imposed restrictions on 23 types of SME in July 2023, which preempted similar restrictions the U.S. made in October of the same year. In September, Japan added quantum computers and technology needed to manufacture gate-all-around field-effect transistors (GAAFET) to its control list, once again reflecting similar additions made to the U.S. control list just days earlier. So what else is the U.S. looking for that Japan is hesitant to provide?
First, the U.S. might be worried that Japanese chip curbs aren’t doing enough or that Japan is being lax in enforcing its current restrictions. Indeed, Japanese SME companies are performing exceedingly well this year — including in terms of sales to China — despite restrictions. A study done by the Institute of Developing Economies in Japan found that in general, Japanese export restrictions tend not to affect Japan’s exports, while U.S. export restrictions applied to Japan via the Foreign Direct Product Rule do. While this study does not directly prove that Japan is a lax enforcer of export controls, it may suggest that Japan’s controls are less stringent in practice compared to the U.S.
However, American toolmakers are experiencing a similar phenomenon. China accounted for 43% and 42% of Applied Materials and Lam Research’s global sales in the January to March period of this year, respectively. This represents a surge of about 20% for both companies’ China sales. SME might be surging mainly due to a change in China’s behavior, including China’s willingness to buy unrestricted advanced technology; the rapid expansion of China’s semiconductor manufacturing capacity, particularly in mature chips; and China’s eagerness to stockpile tools in preparation for further restrictions.
Reports indicate that the administration of U.S. President Joe Biden is also eager for Japan to limit the servicing of its semiconductor equipment in China, as the provision of spare parts and equipment repairs has proven to be a significant gap in the export control framework the U.S. is trying to build. The U.S. has already successfully convinced the Netherlands to regulate semiconductor equipment servicing.
The U.S. might also want Japan to restrict the export of photoresists to China, which are light-sensitive materials that are used in lithography. Japanese companies dominate the photoresist market, and China still relies on Japan for its supply of this critical semiconductor material.
Compared to what can be gleaned about the Biden administration’s position on export policy, the letter written by the House Select Committee this month indicates a desire for a much tougher approach. Even though it doesn’t outline specific parameters for what Japan should be doing, the letter implies that Japan should restrict the export of equipment that could be used to manufacture so-called “mature chips,” less sophisticated chips in the 50 to 180 nanometer range. While China’s burgeoning ability to flood the U.S. market with mature chips is a concern shared by the Biden administration, current U.S. export controls are explicit about only targeting advanced chips, or chips smaller than 16 to 14 nanometers. The Biden administration is addressing this concern through tariffs.
Japan is worried that additional restrictions will lead China to retaliate by further restricting critical minerals such as gallium and graphite. These minerals are essential for the production of semiconductors and electric vehicles, and China produces the lion’s share of them for Japan. In 2010, China temporarily banned the export of Rare Earth elements to Japan following a fishing dispute, leading global prices of Rare Earths to quadruple. While there is some debate on the extent to which China intentionally restricted Rare Earth exports in response to this incident, analysts note that “Appearing to have weaponized trade may have similar consequences to actually doing it.” As a general matter, Japan’s economy and supply chain is very much enmeshed with China’s, which makes Japan vulnerable to economic coercion. A survey by Nikkei found that nearly 40% of companies in Japan rely on China to supply over 80% of their inputs.
Given this economic vulnerability, Japan appears to be avoiding a combative approach to export controls — if Japan budges on some of the tightening that the U.S. is seeking, it’ll probably be done incrementally and as quietly as possible. In contrast to the U.S. approach, Japan does not single China out, which means that exporting controlled items to any country requires a license. A Japanese industry ministry official told Reuters, “We feel an odd discomfort with how the U.S. is doing this. There’s no need to identify the country, all you need to do is control the item.” When Japan’s quantum and GAAFET controls were implemented in September, there was virtually no media coverage. This stands in stark contrast to the abundant coverage of the American controls released days earlier, despite the fact that the two new sets of controls are very similar.
China is likely also adopting a cautious approach to retaliation. After Japan instituted its first round of SME export restrictions in 2023, China condemned Japan, calling it “an abuse” of trade policy. And in response to the bundle of restrictions released by the U.S., the Netherlands and Japan that year, China implemented some restrictions on its export of gallium and germanium, leading to an immediate spike in the price of these rare elements. Bloomberg reported in early September of this year that in private conversations, China has promised “severe” economic retaliation if Japan further restricts its exports of semiconductor manufacturing equipment. And yet, we have not seen any significant public reaction from China in response to Japan’s new quantum and GAAFET controls.
This is likely due to the fact that China doesn’t know how restrictive the American-led multilateral export regime will become — China’s rapid stockpiling of semiconductor equipment is evidence of this. Since export restrictions are being released incrementally, China has to ensure that its retaliatory measures are not too strong as to ruin its leverage in mitigating future restrictions. China’s use of an export ban on critical minerals as a tool of economic coercion would be potent but ultimately unsustainable.
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