China Warns Japan Over Semiconductor Export Curbs as US Pressure and Economic Tensions Mount

China has issued strong warnings to Japan against imposing new restrictions on the sale and servicing of chipmaking equipment to Chinese firms, in response to pressure from the United States. The US is seeking to align Japan with its own restrictive measures aimed at curbing China’s semiconductor advancements. Japan is concerned about potential retaliation from China, particularly the possibility that China might cut off access to critical minerals essential for its automotive industry, which could severely impact companies like Toyota. This echoes past instances where China restricted exports of rare earths to Japan during diplomatic tensions.

The US is also considering more stringent restrictions on chipmaking tools and high-bandwidth memory chips, crucial for AI development, as part of its broader strategy to limit China's technological progress. However, the US has so far refrained from using the foreign direct product rule (FDPR) against Japan, a powerful measure that could control sales of products worldwide if they use any American technology. While diplomatic efforts continue, the situation is complicated by upcoming political changes in Japan and the US, with Japan seeking to ensure its supply chain security while managing pressure from both China and the US.

China's heavy reliance on Japan for crucial semiconductor materials and equipment, such as high-end photoresists and wafer processing tools, significantly complicates its stance in the ongoing tech war with the US and Japan. Four Japanese companies—JSR, Tokyo Ohka Kogyo, Shin-Etsu Chemical, and Fujifilm Electronic Materials—dominate the global market for advanced photoresists, holding about 70% of the market share, making China highly dependent on them despite efforts to develop its own production capabilities. Additionally, Japan's Tokyo Electron, Screen Holdings, Nikon, Kokusai, and Lasertec are key suppliers of semiconductor wafer processing equipment to China. Japanese chemical companies, such as ADEKA Corporation, JSR Corporation, and Mitsui Chemicals, are key suppliers of CVD and ALD precursors. These companies produce a range of specialized chemicals used in semiconductor manufacturing, including organometallic precursors, silanes, and other complex compounds essential for deposition processes.

Japan's exports rose 5.4% year-on-year in June, cooling from 13.5% growth in May and underscoring concerns that a slowdown in China may hamper Japan's trade-reliant economy. The trade balance came to a surplus of 224.04 billion yen.

In June 2024, Japan's export growth slowed to 5.4% year-on-year, down from 13.5% in May, raising concerns that a slowdown in China could negatively impact Japan's trade-dependent economy. Despite a weak yen boosting the value of exports, the actual volume of exports declined by 6.2%, highlighting the challenges Japan faces with sluggish external demand. Exports to China, which grew by 7.2%, were primarily driven by chip-making equipment, but this growth was significantly lower than the 17.8% increase seen in May. The trade balance swung to a surplus of 224 billion yen, as imports grew less than expected, marking Japan's first trade surplus in three months. However, analysts express concern over the lack of a strong export growth engine among Japan's trading partners, including the United States, Europe, and China.

This dependency on Japanese technology and materials puts China in a vulnerable position as Japan faces increasing pressure from the US to align with stricter export controls, further raising the stakes in the ongoing geopolitical and economic tensions.

Sources

China Warns Japan of Retaliation for Possible New Chip Curbs - Bloomberg

Japan export growth cools amid worries about China slowdown | Reuters