High-tech tensions in the Japan-U.S. relationship
Two allies' diverging ideas of Chinese business opportunities spell trouble
Cutting-edge technology is increasingly central to the Japan-U.S. alliance.
That’s only logical given the centrality of that tech to 21st-century geopolitical competition and the leading role that the two countries play in developing and producing it. While the alliance has arguably never been stronger and the two governments are working together to coordinate policies in this sector, some warning lights are warming up.
Japan-U.S. cooperation on high-tech is a given. The allies are two of the top three global investors in science and technology research, and hold similar positions for most other indicators of technological prowess. (China is the other member of the top three.) They occupy critical nodes — bottlenecks, really — in global supply chains for key technologies, providing outsize influence over their production and, ultimately, access to them.
At last summer’s inaugural Economic Policy Consultative Committee, the two governments underscored their intention “to collaborate in promoting and protecting critical and emerging technologies … so as to support technological competitiveness and resilience.” A key part of that is enhanced “cooperation on more effective and agile export controls on critical and emerging technologies.”
That mindset is also evident in the Quadrilateral Security Dialogue. The declaration from the first leaders summit in September 2021 announced that they had “established cooperation on critical and emerging technologies, to ensure the way in which technology is designed, developed, governed, and used is shaped by our shared values and respect for universal human rights.” Similar pronouncements pop up in other bilateral discussions. In short, efforts to lead in the development of these technologies and restrict access to them are ubiquitous.
These initiatives rest on a sturdy foundation. Tokyo and Washington have built an impressive record of success; they have worked closely on strategic trade controls for over two decades. But as alliance managers in both capitals recognize the importance of continued cooperation, other factors — more traditional business considerations — tug at alliance cohesion.
The most basic is a seeming divergence in views toward China in the two countries’ business communities. Over the last two decades, corporate America has soured on China. Once a reliable voice for engagement, the U.S. business lobby has become disillusioned by the uneven playing field in China, the advantages afforded domestic companies by the Beijing government and the frequent forced transfer of technology to competitors that is eroding — in some cases has eroded — their competitiveness. There is limited opposition to — and in many cases support for — U.S. government efforts to limit business with China.
In contrast, corporate Japan remains in thrall to the Chinese market. Japan-China bilateral trade reached $391.4 billion in 2021, a 10-year high, and more than 30,000 Japanese companies do business in China. While U.S. and European firms report shrinking confidence in the Chinese market, their Japanese counterparts remain confident. Writing in The Japan Times recently, Kazuaki Nagata highlighted a 2021 Japan External Trade Organization survey in which just 3.8% of Japanese firms with significant business in China said that they were planning to shrink operations or withdraw from the country in the next one or two years, the lowest figure since 2010.
That divergence manifests in reluctance in Tokyo to follow the U.S. hard line against China. So even as Japan argues that China is a threat to regional stability, it has gone slow when it comes to imposing trade and investment controls that target China.
This hesitance was evident in Japan’s unwillingness to join U.S. efforts to restrict China’s access to advanced semiconductors, the equipment to make them and related products and services, regulations unilaterally promulgated by the Biden administration last month. The U.S. acted on its own after months of talks with allied governments (in Japan and Europe) whose firms, along with the Americans, dominate global markets for chip-making equipment. Reportedly, those governments are happy to have Washington take the heat for the moves, sparing them China’s anger.
The U.S. has not given up and pressure continues to get them to join the effort. As Commerce Secretary Gina Raimondo explained, “We are ahead of (China). We need to stay ahead of them. And we need to deny them this technology that they need to advance their military.” Her subsequent comment that “I think you will see Japan and Netherlands follow our lead,” was interpreted as both a prediction and a warning that those governments need to get in line.
Failure to join the effort fuels tension not only because it denies the U.S. the coalition needed to slow China’s progress but also because of concern that U.S. companies are losing market share to allied competitors. Lam Research, a U.S. chip-making manufacturer, predicted losses of between $2 billion and $2.5 billion in 2023 because of the new regulations, with “significantly lower” sales in China. Applied Materials, another U.S. chip-making equipment company, forecast lost sales of between $250 million and $550 million.
Japanese companies fear an even greater hit if they join. Chip-making equipment is now Japan’s second largest export sector, with total exports reaching roughly ¥3 trillion in the first nine months of the year, a nearly 30% increase over the same period last year. Nearly a third — ¥970 billion — goes to China and would be threatened by a similar embargo.
U.S. officials indicate that more export restrictions are coming. The initial rules addressed chips for supercomputing; those for artificial intelligence, biotech and quantum computing are expected. Expect friction to climb.
A second source of tech tension in Japan-U.S. relations stems from U.S. legislation that will extend $50 billion in tax credits for purchases of domestically manufactured electric vehicles. While foreign manufacturers can qualify for the rebates, Asian makers tend to import more EV components from outside the U.S. so fewer of their models qualify.
Japan has warned that the move, part of the Inflation Reduction Act to help build resilient supply chains and domestic manufacturing jobs, could deter Japanese investment in the United States. The Japanese government also called the measures incompatible with the strategy to build supply chains with allies and like-minded countries.
Tokyo, with counterparts in Seoul and other European capitals, also charges that the incentives violate international law. European officials are reportedly discussing action at the World Trade Organization or in the trans-Atlantic Trade and Technology Council created last year to forge a united front on these issues.
U.S. officials have acknowledged the problem and “are committed to working with our partners to better understand their concerns and keep open channels of engagement on these issues.” This is likely to mean bargaining over European Union measures to reduce greenhouse gasses, such as the Carbon Border Adjustment Mechanism, which imposes a tax on imported goods based on the amount of greenhouse gas produced during manufacturing, a burden that U.S. businesses see as no less unfair.
A final source of tension is the prospect of the Japanese government using technology spending as a way of boosting its defense budget. Tokyo reportedly plans to call R&D funds for advanced technologies such as AI “spending related to national security,” even if done by the ministries of education and communications.
This is one of several accounting adjustments that will allow Japan to claim that it is increasing defense spending to 2% of gross domestic product, a goal to be reached in several years. (The other changes are less of a stretch.) While increased R&D spending is welcome, the gimmickry undercuts the message, one more opportunity for high-tech to roil the alliance.
Brad Glosserman
is deputy director of and visiting professor at the Center for
Rule-Making Strategies at Tama University as well as senior adviser
(nonresident) at Pacific Forum. He is the author of “Peak Japan: The End
of Great Ambitions” (Georgetown University Press, 2019).