Japanese Chip Policy in an "Economic National Security" Era

ChinaTalk interview with Kazuto Suzuki

Following an exciting trip to Tokyo, Jordan Schneider and I had a great interview with Kazuto Suzuki, Japan’s foremost sanctions expert.

Suzuki-san is a professor at the University of Tokyo. He serves as an advisor to Japan’s Ministry of the Economy, Trade, and Industry (METI) as well as advising Japan’s space program. He served on the UN Security Council's Iran Sanctions Panel, and he also recently established the Institute of Geoeconomics at the International House of Japan. 

The following are some excerpts from our conversation. You can listen or read to the full thing on ChinaTalk! We get into:

• What Japan’s new economic national security law does, and what it means for global semiconductor supply chains

• The state of multilateral export controls

• Nippon steel, the US election, and cooperation between East Asian democracies

• Lessons from examples of economic coercion from the Qing Dynasty to FDR vs imperial Japan all the way up to the Senkaku islands

• Japan’s goals for space commercialization.

Economic National Security

Jordan Schneider: Can you discuss the enthusiasm for economic national security promotion? Are “growing pains” from decoupling unpopular from a political economy perspective?

Kazuto Suzuki: There's no enthusiasm in it. People are simply afraid, and thus we want a precautionary approach. If you chase after the short term benefit, dealing with China may bring you some goodies, but the problem is if you depend heavily on China then you'll be punished. People are trying to find a balance and, as Jake Sullivan said, the approach is to make a small yard with a high fence. That is — make the sensitive part as small as possible, and try to build up protections.

Jordan Schneider: On one hand, it might be politically easier for Japan if the U.S. is strong-arming them, but also you've seen a lot of pushback from the likes of Tokyo Electron and others who are set to lose out on billions of dollars of revenue from the restrictions. How has that tension played out, from your perspective? 

Kazuto Suzuki: The U. S. pressure was a good excuse for the Japanese government to accept export limits on manufacturing equipment for high-end chips. But I believe we are hiding behind the United States too much when we confront China. 

China is using economic coercion anyhow. If it's retaliation or non-retaliation, it doesn't matter, they are just simply using economic coercion as a tool to promote their own policy.

The fear of retaliation is not a major theory in Japan. It's then easier to convince the shareholders to accept export control regulations on the profitable China market. We are not trying to fight against US demand and we can accept new regulations. 

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Failed Export Controls and the Minilateral Future

Arrian Ebrahimi: We had a historical parallel in the development of export controls with the Wassenaar Arrangement, which includes the US, Japan, and notably Russia. 

That regime shaped many of the export control regimes in member countries, but now global leaders say that Wassenaar is obsolete.

What did Wassenaar mean to Japan? How do we move forward with export controls in the world's current geopolitical alignment?

Kazuto Suzuki: Wassenaar has been the centerpiece of Japanese export controls on dual use items. It has been integrated into Japanese law alongside other regimes like those from the NSG (Nuclear Suppliers Group), the Australia Group, and the MTCR (Missile Technology Control Regime). These form the framework for Japanese export control, which aims at preventing the proliferation of the weapons of mass destruction.

On the other hand, the United States has a flexible export control mechanism. you have IPA, you have EAR, you have a whole bunch of executive orders and everything. It's much easier for the US to shift the objective of the export control. The US also has the flexibility in the tariff policy. If the president decides that an item is a matter of national security, you can increase the tariff. 

Steel and aluminum were the items that Trump put tariffs on for national security, which is a policy that Biden continued. These kind of things doesn't exist in Japan. Tariffs are controlled by the WTO.

So when the United States asked Japan to change the export control regulations for chips, that was the first time that we put restrictions on something that was not decided by an international regime. 

In that context, we do also agree that Wassenaar is obsolete.

It's not working. It requires a unanimous decision. As long as you have Russia in it, then, there is no decision at Wassenaar. They can talk shop but no decisions will be made. But we need to have effective export controls. 

In 2019, when the Japan-South Korea relationship was not doing well, Prime Minister Abe wanted to find some ways to send a message to South Korea. They took South Korea off of the white list for export controls and moved them down to the second-tier ranking. That hurt the pride of the South Korean people and was not successful, because it only fueled more anger.

It was a diplomatic failure. That was the first and only time that Japan used export controls in this way. But yes, the future of export controls will be minilateral, not multilateral, frameworks.

The Japan-US-Netherlands trilateral agreement is a start, but it’s not very convincing. 

In order to have a more universal, or let's say, more applicable framework, we need to have something with a size of about 10 to 15 countries working together to prevent disruption of the international order.

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Circumventing sanctions and lessons from history

Arrian Ebrahimi: I’m interested in the different political incentives that impact the chip industries in Japan, South Korea, and Taiwan.

Japan is more of an upstream supplier, focused on equipment and materials, while South Korea and Taiwan are more downstream. That gives them different stakes in the China market. One example of this dynamic – South Korea and Taiwan lobbied for Samsung and TSMC to be exempted from the chip export controls set forth by the US Bureau of Industry and Security. But Japan didn't push back as hard. Do you think we will see more examples of this dynamic?

Kazuto Suzuki: South Korea and Taiwan are more different than you think. South Korea has an integrated device manufacturer (IDM) model. Samsung and SK Hynix are trying to do everything in house, from the upstream to the downstream. Whereas TSMC in Taiwan is a foundry, so they are doing only manufacturing.  

They are both dependent on Japanese material, Japanese equipment, as well as ASML in the Netherlands. 

Korea is facing a very difficult position because the cost of producing the chips within South Korea is getting higher and higher.

TSMC is facing a different problem, which is resources. Taiwan is too small to provide all the electricity, water and manpower. TSMC needs to go beyond Taiwan, and that's one of the reasons why they invested in Kumamoto as a strategic center for production.

The lobbying against BIS was to maintain manufacturing capability within China. That’s why they wanted to have an exemption. It’s not asking for permission to invest more, but rather, permission to maintain current capacity which sooner or later will become obsolete. 

Neither Taiwan nor South Korea is demanding further expansion of production capacity in China. Nobody can make a semiconductor alone. Japan, South Korea, and Taiwan depend on each other. It is wrong to assume that one country can be a winner and the other country to be a loser, or that one country can be powerful and others just subordinate.

It’s not a zero-sum game. It’s plus-sum.

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Jordan Schneider: Speaking of countries depending on each other, Arrian, why don't we get a little riff from your thesis about the Qing dynasty and Japan. 

Arrian Ebrahimi: In the late Qing dynasty there was a heavy reliance on Japanese, German, and American naval technology. The Qing dynasty began a “Self-strengthening Movement” (洋务运动/洋務運動) to try and create their own downstream shipbuilding and gun building manufacturing facilities. But this movement paradoxically created even more reliance on Japanese upstream imports for advanced materials and equipment.

Is history repeating itself? Are efforts to achieve semiconductor independence going to dig the industry further into a hole? 

Kazuto Suzuki: Japan, Taiwan, and South Korea are not in confrontation. We are not trying to use superiority in any spot in the supply chain to put pressure on each other. 

The relationship with China is different. China depends heavily on Western technology, supply, manufacturing, and equipment.

But China is capable of producing legacy chips in massive, massive amounts. They can do it cheaper than any other producer. 

My concern is that China will dominate the legacy chip market and destroy all the existing capabilities of other countries. Japan has companies like Renesas which produce legacy chips. If we don’t find a way to compete with Chinese production, we can't survive. 

Arrian Ebrahimi: From my viewpoint here in China, I feel like many people really do see this as the development of a modern economic weapon.

Scholars in Beijing often look at Western sanctions imposed on Russia after their 2014 invasion of Crimea as a prelude for what may be to come. They look at Russia's internal autarkic reaction to Western sanctions to draw lessons on what China could do to prepare for potential loss of technology 

Do you think there may be a disconnect between Western capitals and Beijing in how they view the through lines of history and the use of sanctions and how Russia compares to past examples? 

Kazuto Suzuki: The sanctions against Russia are a punishment for starting a war. What is happening to China is not a prelude to war, it's simply an attempt to maintain technological superiority. 

The big difference is that there is still a lot of trade going on between Japan and China or the United States and China. If China invades Taiwan, then punitive sanctions will be imposed. But again, sanctions always run two ways. The country imposing the sanctions requires some sort of a national consensus to justify the pain from a loss of imports. 

Look at what happened to Europe– they depended heavily on Russian oil and natural gas. Now they are paying for it. 

Imposing sanctions on China is unthinkable. It would require a lot of economic pain in the United States and in Japan. 

China might feel that they are under pressure, but in the macro scheme, if you look at all the numbers, then China and the United States are still trading heavily. China is still the number one trading partner of Japan. That's not a sanction. There is simply a bar on advanced semiconductors. That's all.

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Don’t forget to visit ChinaTalk for our full chat with Sazuki-san!