China warns Japan of economic reprisal if potential new chip curbs are imposed – report

China has warned of strict economic reprisal against Japan if the country further curbs sales and servicing of chipmaking tools to Chinese companies, Bloomberg News reported.

Senior Chinese officials have reiterated this stance in recent meetings with their Japanese counterparts, the report added, citing people with knowledge of the matter.

Toyota Motor (TM) (OTCPK:TOYOF) privately told officials in Japan that China could react to new semiconductor curbs by reducing Tokyo’s access to vital minerals which are required for automotive production, the report noted.

Toyota is among the most important companies in Japan and is involved in the country’s chip policy, partly seen by the fact that it has invested in a new chip facility being set up by Taiwan Semiconductor Manufacturing (TSM) in Kumamoto, according to the report.

The company’s concerns makes it a major consideration for Japanese officials, besides those of Tokyo Electron, the semiconductor gear-manufacturer which would be mainly affected by any new Japanese export controls, as per the report.

The U.S. and its allies including the Netherlands, Germany, South Korea and Japan have all been tightening curbs on the Asian country’s access to advanced semiconductor technology. In July 2023, Japan restricted exports of 23 types of equipment, from machines which deposit films on silicon wafers to systems that make microscopic circuits.

In June, the U.S. was urging its allies to curb China’s access to more chipmaking tools.

Some people in Japan have pushed back on the idea that the government should adhere to the U.S.’s latest geopolitical strategy. However, the U.S. government is confident that it can ease Tokyo’s concerns and reach an agreement with Japan by the end of this year, the report noted.

However, in behind the scenes, the U.S. has been using its power under the foreign direct product rule, or FDPR. This rule allows the U.S. to control sales of products produced anywhere in the world, if they use American technology.

In the current discussions, the U.S. officials have ruled out using this power against Japan and other important allies, which see the rule as a draconian step. However, a senior administration official noted that Washington would like to reach a diplomatic solution but would not rule out the use of FDPR, the report added.

Last week, it was reported that Netherlands-based chip equipment maker ASML (ASML) was likely to see further limitations on its China operations as the Dutch government was considering not renewing crucial licenses.

In July, the U.S. government was thinking of imposing the most severe trade curbs available if companies, including ASML, continue to provide China access to advanced semiconductor technology. ASML was also being targeted by the U.S. because it has a monopoly on making some machines which produce the most advanced semiconductors. The Biden administration has been stepping up efforts to curb China’s access to advance semiconductor equipment, which, among other things, is used in making AI products.

The U.S. was also discussing in July whether to further limit China’s access to memory chips used for AI and tools needed to make those processors. South Korean companies Samsung (OTCPK:SSNLF) and SK Hynix are the leading suppliers of high-bandwidth memory, or HBM, chips in the world. American company Micron Technology (MU) is another major supplier.

Chinese tech companies including Baidu (BIDU), Huawei Technologies and startups, were reportedly, storing HBM chips from Samsung expecting new U.S. restrictions on exports of the semiconductors to China,

In October 2023, the U.S. brought in updates to its export restrictions, which further curbed the sale of chips that companies such as Nvidia made for the Chinese market.