US increases pressure on Japan over selling chip kit to China

When we covered the letter sent by the US select committee on the CCP to US Commerce Secretary Gina Raimondo concerning Huawei’s alleged clandestine chip network we were unaware of another letter sent a day earlier to Japan’s US Ambassador Shigeo Yamada, because there was no press release announcing it.

“We write to seek your urgent action to address the flow of Japanese semiconductor manufacturing equipment (SME) to the People’s Republic of China (PRC),” opens the letter. "The export of Japanese, U.S., and Dutch SME technology to the PRC is significantly contributing to a growing global dependency on the PRC’s semiconductor manufacturing capacity and enabling its industry to manufacture advanced semiconductors.”

We covered the fragility of that position in our previous report and, to their credit, the letter writers move quickly to practical, rather than geopolitical or ideological points. “Suggestions that Japanese, U.S. or Dutch SME manufactures have been hurt by multilateral export controls do not appear to stand up to scrutiny,” they continue, citing increases in their share prices as primary evidence to support that claim. They mention US state subsidy of its chip sector as some kind of mitigating factor too.

Aside from the usual litany of bad faith activities we’re apparently expected to believe are unique to China, the practical reason the letter gives to suppress the country’s chip sector is that it might get too good at it. China is trying to build “the world’s largest semiconductor manufacturing industrial base that could, by some estimates, control around 50% of global foundry capacity for 50 to 180 nanometers within the next decade.”

So we’re talking about technologies that are over 20 years old. You’d think with all the tax-payer money the US is chucking at its own chip sector it might be able to stay competitive in that area. “Equally alarming, much of this foundry capacity is being built by Huawei, with the company keeping its involvement in the projects secret,” continues the letter, somewhat over-egging its point.

It goes on at length about how apocalyptic this scenario is, regularly referring to “problematic SME shipments,” before cutting to the chase. “Congress is prepared to provide bipartisan support to the Administration, including through new statutory authority if needed, to expand the scope of the Foreign Direct Product Rule (FDPR) to ensure that any sophisticated SME machine produced with any U.S. technology in Japan or elsewhere requires a U.S. export license prior to export to the PRC.”

Dress it up in all the flowery diplomatic language you want, that’s still a direct threat. And it could well succeed in forcing Japan to do what it’s told but we suspect that will turn out to be a Pyrrhic victory. Not only is the US expending yet more of its dwindling supply of geopolitical capital in making such demands, it’s actively incentivising the rest of the world to innovate away from American-made SME, lest it also be subject to similar unilateral measures.

In more innocent times, when you sold someone something it became their property, for them to do with as they please. No longer, it seems. The US wants to receive billions of dollars in revenue for selling these bits of kit but still retain the ability to control how they’re used after they’ve been sold. It's almost like its trying to control global SME capacity. In any other context this idea would be dismissed as a sick joke.

America’s options for acting directly against Chinese companies are more varied. Another area of Chinese technological development the US is understandably worried about is drones. Chinese company DJI is the dominant player in that sector and, in a recent blog post, it described a ‘customs-related misunderstanding’ that is obstructing its exports into the US.

“The U.S. Customs and Border Protection (CBP) has cited the Uyghur Forced Labor Prevention Act (UFLPA), as the reason for the current holdups,” explains the blog. “This assertion made against DJI, however, is entirely unfounded and categorically false. There is no reason for CBP to be detaining DJI’s drones.”

Meanwhile Reuters reports DJI is suing the US Defense Department for designating it as a Chinese military company which, in turn, it claims has caused it significant financial harm. We’ll leave readers to speculate for themselves about the provenance of the UFLPA and, for an argument supporting the lawsuit against the Pentagon, we refer you to this opinion piece in Chinese state-controlled publication Global Times. In both cases it seems these US rules can be applied selectively.

We got some feedback on our previous article from a China hawk, stressing how much worse China is than the US when it comes to things like civil liberties, human rights, geopolitical bullying, and manipulating the global trade system to further its own interests. That's probably correct but it doesn’t exonerate the US. ‘If you can’t beat ‘em, join ‘em’ is not a compelling moral argument.

But morality, international law, and hypocrisy aside, our argument continues to be that this is neither a wise nor sustainable strategy from the US. The clear message it’s sending the world is ‘do what we tell you, or else’. America is still powerful enough for that threat to mostly work but it’s too quick to use it. In using force to maintain its global supremacy, the US could ultimately be undermining that bid by incentivising the rest of the world to become more less reliant on American kit.