Japan’s Sanction on China Semiconductor Industry
Image courtesy of Robin Sommar via Unsplash
The United States and Japan are widely recognized as two of the world's most significant economies. According to the latest ranking by the International Monetary Fund, they are both highly developed countries with among the highest GDPs globally. Both their cooperation and conflict on trade issues have important implications for the global economy. More recently, the U.S. and Japan have been making significant progress in cooperation in a number of key areas regarding the exports of semiconductors to China. But before recounting this cooperative relationship, it is necessary to sort out their trade conflict over semiconductors.
After World War II, Japan relied on the Yoshida Doctrine, allowing the country to be dependent on the United States for national defense. Because of this policy, Japan spent the least money on the military at the time and instead focused on vigorously developing its economy. With the continued support and investment of the United States, especially stimulated by the Korean War and the Vietnam War, Japan quickly grew into a major world economy.
However, the relationship between the two countries began to sour in the 1980s because of a trade dispute between the United States and Japan. At that time, the United States started to strongly criticize Japan's trade policies, calling them an unfair treatment of American businesses and put heavy tariffs on Japan’s cars and semiconductors. In order to protect its own interests, Japan imposed high tariffs on U.S. goods and implemented many hidden barriers to restrict the sales of U.S. wines, beef, and other goods. The U.S. government had filed several trade disputes in WTO over its trade relationship with Japan, but even today, some of these complaints have not been effectively resolved.
The most famous trade frictions were the Japan-U.S. Semiconductor friction from the latter half of the 1980s to the first half of the 1990s. The semiconductor is an important material for manufacturing electronic products. In the second half of the 1980s, Japanese semiconductor manufacturers swept the global market, with a more than 50 percent share. This poses a significant challenge to the electronic technology industry in the United States. Later in 1985, the U.S. Semiconductor Industry Association sued Japan under Section 301 of the U.S. Trade Act, which was in retaliation for unfair trade practices.
The following year in 1986, the two sides signed the Japan-U.S. Semiconductor Agreement, which allowed for the monitoring of Japanese export prices in the U.S., which gave Japanese semiconductor companies a disadvantage abroad. The U.S. continued to demand that Japan open its market for semiconductors and curb exports to the U.S. As a result, Japanese companies gradually lost competitiveness. The share of Japanese companies in the global semiconductors market fell to 6 percent. Because of the U.S. pressure and the wrong economic course of Japanese bureaucrats, Japan later suffered a serious recession.
However, the strength of Japanese semiconductors did not disappear completely after the trade war. Japanese semiconductor production equipment accounted for 35 percent of the world's production, and semiconductor raw materials accounted for 50 percent of the world's production in 2020. This is all despite Japan’s semiconductor products only making up 6 percent of total global sales. Relying on the advantages of the supply chain, Japan still maintains an important position in the global semiconductor industry.
While the U.S. and Japan have remained highly competitive in the economic and technological fields, in recent years, they have also become concerned about the rise of China in these fields. The U.S. and Japan have embarked on a joint initiative to counter the Chinese economic threat, marking a new part of their history and overcoming significant past barriers.
The U.S. and Japan have become increasingly close in their partnership in the semiconductor sector. Both countries are global leaders in this industry and share common interests. Recently, the U.S. and Japan have begun working together in the semiconductor sector to sanction China and curb its rise in this area by proposing U.S.-Dutch-Japanese Semiconductor Export Controls Deal. The U.S. and Japan plan to take a number of restrictive measures against Chinese semiconductor companies to prevent them from getting access to key technologies and equipment.
On October 7, 2022, the U.S. government first introduced the Export Administration Regulation, banning the exports of chips from a number of Chinese companies. The Biden administration had proposed the Chip 4 Alliance, meaning that the three important sources of chips in East Asia and the United States would cooperate in imposing a strategic chip embargo on China. However, this Chip 4 proposal was only on paper as Japan did not previously have a system of export controls specifically targeting specific companies. On January 29, 2023, the New York Times was the first to reveal that Japan's Netherlands had reached an agreement with the United States to work together to ban the export of some of its most sophisticated equipment to China.
However, it is worth noting there are limitations to Japan’s sanctions on China’s semiconductor industry. Firstly, the process of Japan's trade regulations may not be resolved quickly. Japan's export controls are based on foreign exchange laws. According to the law, Japan can only control the export of consumer products diverted to weapons and military use. In order to export specified items and technologies, permission from the Minister of Economy, Trade and Industry is required. If the existing laws do not permit the implementation of new restrictions, then it may be necessary to consider revising the laws. Second, if Japan introduces new restrictions, China is likely to take countermeasures. In response to the U.S. measures, China filed a lawsuit with the World Trade Organization (WTO) on December 15, 2022, arguing that U.S. export restrictions to China around sophisticated semiconductors are improper. Third, it remains questionable whether a simple ban alone can make the ban on China effective. In the case of the ban currently placed on China by the U.S., although China is unable to obtain them from formal channels, it still has access to some chips by manipulating the complex international trade.
Most importantly, the market size of semiconductor equipment in mainland China is thought to be $22 billion in 2022, accounting for 22 percent of the whole. Japan's semiconductor exports to China account for a significant portion of its total export trade. The semiconductor export ban on China will likely hurt Japan's own companies. This will not only bring unemployment but also stifle domestic enterprises' innovation and manufacturing capacity. Japan and the United States, former rivals in the semiconductor competition, are preparing to join forces to confront new challenges.
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