China Threatens Japan with Economic Retaliation If It Continues to Restrict the Sale of Chipmaking Tools

• Following the US's orders, Japan is restricting the sale of advanced chips and chip-making tools to China.
• However, China has threatened economic retaliation if this continues.
• Toyota is worried that China might cut Japan's access to minerals that are essential for the automotive industry.

Tension between China and Japan is on the rise once again after China threatened Japan with economic retaliation if the latter continued to hinder sales and servicing of chip-making equipment to Chinese firms.

The message has been convened by senior Chinese officials to their counterparts in Japan in recent meetings. China believes that disagreements between two countries should not affect global supply chains or economic relationships.

It is already struggling with the aftermath of the US restricting its access to advanced technology, especially in the field of AI.

• Japan has already blocked the sale of 23 types of semiconductor manufacturing equipment to China.
• Apparently, the US is also planning to restrict the sale of high-bandwidth memory chips (an important AI component) and other chip-making tools to Chinese companies.

The last thing China needs right now is for Japan to follow suit.

Is There Any Real Threat for Japan?

Yes, there is. Just as China needs Japan to access chip-making equipment, Japan needs China for its automotive industry.

Toyota, which is one of the most important companies in Japan, has expressed concern over Beijing's threat. It said that Beijing might react to Japan's restrictions by cutting off its access to minerals that are essential for automobile production.

But what can it do? It's the US that has been pressuring Japan to put more restrictions on companies like Tokyo Electron Ltd. from selling advanced chip-making equipment to China.

Reacting to China's threats, a US official said that it is confident that they can assuage Tokyo's concerns and reach an agreement with Japan by the end of this year."

If sources are to be believed, the US might be planning a much more aggressive move by implementing the foreign direct product rule, or FDPR. According to this rule, Washington gets a say over the sale of a product anywhere in the world as long as it uses even a tiny bit of US technology.

The only thing impacting whatever deal the US plans to cut with Japan is the upcoming US elections and the planned resignation of Japanese Prime Minister Fumio Kishida. Once this is settled, the deal will be finalized.

US officials are also confident that Kishida's resignation will not impact the US-Japan deal in any way.

The reason why the US is so desperately trying to limit China's access to modern chipmaking tools is because it's worried about the growing prowess of China's military. The last thing it wants is for China to have access to all the latest technologies and use them to modernize its army further.

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