Bloomberg News reported on Monday that Japan and the Netherlands have agreed in principle to join the US in tightening controls over the export of advanced chip-making machinery to China.
In response China launched a suit at the World Trade Organization over the US measures. The complaint is unlikely to go anywhere since Washington has blocked appointments to the WTO’s top ruling body on trade disputes.
In October the Biden administration initiated a series of curbs aimed at cutting China off from chip-making technology and advanced chips. The administration attempted to persuade allies, such as the European Union, Japan and South Korea, to join the controls, but all initially declined.
Getting Japan and the Netherlands on board will be celebrated in Washington as Japan’s Tokyo Electron Ltd and Dutch lithography specialist ASML Holding NV are two key players in the chips market. Five companies control the market for chip-making machines — three in the US, one in the Netherlands, and one in Japan. Taiwan has also signaled its chip firms will follow the US rules.
The US had granted one-year waivers to the chip companies, but kept up the pressure with the looming threat of facing some sort of export control. Washington now must convince/coerce South Korea to end their advanced chip business with China. From the Japan Times:
“The memory chip industry could be the most affected in the long-term, with the risk of collateral damage to firms based in US partner countries,” wrote the Rhodium Group, noting that South Korean chipmakers SK Hynix and Samsung, now at the mercy of U.S. licensing decisions, are likely to face “significant costs linked to the restructuring of their supply chains.”
Both companies, along with the Taiwan Semiconductor Manufacturing Company — the world’s largest chipmaker — have obtained a one-year waiver but are under growing pressure to find a solution, with SK Hynix recently announcing that it might be forced to sell its manufacturing operations in China should American export controls intensify.
Japan doesn’t have facilities in China that face such restrictions, nor do they sell advanced chips to China. But Japan’s chip equipment- and material-makers could be hit hard as its global players are concentrated in those areas, and exports of semiconductor manufacturing equipment to China have grown in recent years. From the Japan Times:
“There is still some uncertainty over how the restrictions would work, but if we interpret them straightforwardly, the damage to Japan’s chip industry would be massive,” said Akihiro Morishige, a researcher at the Mitsubishi Research Institute. …
Last year, the value of such exports hit a record ¥3.3 trillion ($23.67 billion at current exchange rates), and China accounted for the largest share, at about 39%. This year, the January-September figure alone has already topped ¥3 trillion.
Should South Korea join the restrictions, its chip industry would be hammered. In addition to Samsung’s NAND plant in Xi’an and SK Hynix’s DRAM plant in Wuxi, South Korea sells 60 percent of its semiconductor products to China. In 2021, that was $523 billion worth of sales, which accounted for nearly 40 percent of South Korea’s semiconductor exports. South Korean chip manufacturers heavily rely on Chinese components and cutting them off from such a valuable market could have dire economic impacts.
There are signs US pressure on South Korea is beginning to work. SK Hynix’s chief marketing officer Kevin Noh said last month that the company might be forced to sell its manufacturing operations in China. From the AP:
“If it becomes a situation where we would have to obtain (U.S.) license on a tool-by-tool basis, that will disrupt the supply of equipment … and we could face difficulties in operating (Chinese) fabrication facilities at a much earlier point than the late 2020s.
If we face problems that make it difficult for us to operate our Chinese fabrication facilities including the Wuxi plant, we are considering various scenarios, including selling those fabrication facilities or their equipment or bringing them to South Korea.”
Beijing has threatened retaliation should South Korea join the US in its economic war efforts. China could hit back by restricting rare earth exports to countries imposing restrictions as most of the world’s rare earth processing takes place in China. Japan, the EU, and the US have been working to establish their own rare earth supplies and processing, but those efforts are still a ways away. As the Japan Times explains:
However, a quick fix is unlikely, particularly given the high level of dependence of some countries, including the U.S., and the limited investments made so far in diversifying the sources.
“At present, there is no ‘going around’ China when talking about commercial scale operations consuming rare earths,” said Daan de Jonge, a consultant at London-based commodity research company CRU.
“China has the most significant share of processing capacity at every step of the rare earths supply chain, so it is likely that the vast majority of rare earth magnets will have gone through China, or at least relied on China at some point,” he added, pointing out that this includes magnets for electric vehicles as much as those used in military and defense applications.
“Even if a non-China mine produces an ore, separates their own NdPr (neodymium and praseodymium), and sells that to a Japanese magnet maker, they will still have to import dysprosium from China for high temperature applications.”
If China wants to play hardball, it would be devastating for Japan. Nikkei Asia reports:
If 80% of Japan’s imports from China — about 1.4 trillion yen ($9.4 billion) worth, including raw materials and parts — were disrupted for two months, Japan would not be able to produce a wide range of products, including home appliances, cars, resins, clothing and food products. About 53 trillion yen ($360 billion) worth of production would disappear, according to estimates by professor Yasuyuki Todo and his colleagues at Waseda University … Product prices would also increase. According to Owls Consulting Group, a Tokyo-based supply chain research firm, if 80 major products, including home appliances and cars, were to stop imports from China and switch to domestic production or procurement from other regions, costs would increase by 13.7 trillion yen annually. That is 70% of the total net income of manufacturing companies listed on the Prime Market of the Tokyo Stock Exchange.
ASML Holdings had sales to customers in China of more than $2.1 billion last year, but the company hasn’t been selling its most advanced machines to China for the past four years due to US pressure. The Dutch government had already restricted advanced equipment that is considered “dual use” with potential military applications. Bloomberg reported that the Netherlands will also restrict exports of its immersion lithography machines, its second-most advanced gear.
China is the Netherlands’ third-largest trade partner after Germany and Belgium, and Fu Liang, an independent tech analyst, told the Global Times:
“As a further ban on its chip-making equipment exports to China would cripple the Netherlands’ semiconductor industry and the interest of ASML, the country has tried its best to withstand pressure from the US.”
The Dutch foreign trade minister had recently been talking tough about not caving to US pressure, telling a Netherlands-based newspaper that, “The Netherlands will not copy the American measures one-to-one, We make our assessment — and we do this in consultation with partner countries.”
French President Emmanuel Macron went to Washington at the end of November, apparently pushing a deal that would see the EU get tougher on China in return for the US backing down on measures in the Inflation Reduction Act (IRA), which provides $369 billion worth of subsidies and tax breaks at a time European industry is being killed by higher energy prices due to the NATO proxy war against Russia in Ukraine.
Ahead of his visit a French diplomat told Reuters the French president will argue the following:
The pitch will be: there’s obviously a Chinese challenge and we can help get others in the EU out of their naivete on this. But you can’t ask us to help on China and do an IRA on us.
Biden admitted that there were “glitches” in the IRA, but the chances of Congress amending the law are next to nothing. Additionally, a recent meeting of the US-EU Trade and Technology Council concluded without any concessions from Washington. Meanwhile, South Korea, also upset with the US over the IRA, is calling for cooperation with the EU against the US subsidy bill.
It’s all a lot of effort from Washington to cut China off from technology it could gain the capabilities to produce in as little as a few years, but the message is being received in Beijing. From the Global Times:
To be honest, Washington does not have a good credibility. We pay more attention to what it does than what it says. Just in the past few days, while Washington announced that it would “continue responsibly managing the competition between the two countries and to explore potential areas of cooperation,” it continued to challenge China’s core interests in areas such as the Taiwan question, supply chain restructuring, military affairs and human rights. The actions to suppress, siege and contain China have never stopped. This makes Washington purely “two-faced.” In the past few years when China-US relations have declined sharply, Washington has been talking about “managing” divergences while constantly creating new differences.
One estimate showed that the countries imposing the chip bans will suffer more than China.