Japan, the US, and the Quest for Secure Supply Chains

The United States and Japan’s high dependence on peer competitors for strategic materials poses a risk to supply chain security amid looming great power competition. The resilience of sensitive supply chains is their common strategic goal, as announced at the Japan-U.S. summit meeting on April 16 by U.S. President Joe. Biden and Japanese Prime Minister Suga Yoshihide. In the joint leader’s statement, they announced that the two countries would cooperate on sensitive supply chains, including semiconductors.

The U.S. and Japan each followed up on the above statement by laying out their respective approaches to supply chain resiliency. On June 4, the Japanese government released its “Strategy for Semiconductors and the Digital Industry.” This strategy focuses on three sectors: semiconductors, digital infrastructure, and the digital industry. In particular, the strategy states that securing semiconductors is an issue directly linked to economic security amid the conflict for technological hegemony between the U.S. and China. To that end, Japan will promote joint development with advanced overseas foundries.

On June 4, the United States also clarified its approach on this issue when the White House released a report on the supply chain review. The review was conducted based on the Executive Order on America’s Supply Chains, which called for an assessment of supply chain vulnerabilities in four areas – semiconductors, high-capacity batteries, critical minerals including rare earth elements, and pharmaceuticals – with policy recommendations to address risks within 100 days. The review calls on Congress to support at least $50 billion in domestic manufacturing and R&D of semiconductors. This recommendation addresses the fact that the U.S. semiconductor market share has dropped from 37 percent to 12 percent in the past 20 years. In addition, the report points out the need to expand multilateral diplomacy to address vulnerabilities in procurement networks to build a resilient supply chain by cooperating with the Quad and G-7. Notably, Japan and the U.S. are the only countries to be part of both those groups.

Even though Japan boasts a high market share in semiconductor manufacturing equipment along with the United States and semiconductor materials such as photoresists and silicon wafers, Japan’s semiconductor industry has also been declining. This is due to various causes, such as the “U.S.-Japan Semiconductor Agreement” in 1986, which limited Japan’s semiconductor exports to the U.S., and the belated shift from vertical integration into the horizontal division of labor. As a result, neighbors such as Taiwan, China, and South Korea have increased their share of semiconductor foundries in recent decades.

Meanwhile, China has been strategically strengthening its semiconductor industry, as laid out through the “Made in China 2025” initiative. Furthermore, Beijing has been adapting cutting-edge technologies for military equipment under its industrial policy of “Military-Civil Fusion.”

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State-of-the-art military technology utilizing semiconductors and rare earth minerals is essential for superiority in new warfighting domains such as space, cyberspace, and the electromagnetic spectrum. In addition, rare earths are also crucial for renewable energy technology, and thus necessary for decarbonization based on the Paris Agreement, which will impact the future economic development of the globe.

Currently, China manufactures about half of the printed circuit boards used in the United States and accounts for about 90 percent of the world’s supply of rare earths. Dependence on China for the supply chain of these critical technologies and strategic materials not only benefits Beijing, while hollowing out the U.S. and Japan’s domestic industries, but also carries risks such as the possible insertion of malware and supply interruptions in emergencies.

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Furthermore, the supply chain risk of strategic materials used in defense equipment seriously impacts national security. If a semiconductor chip used for defense equipment is maliciously programmed, it is at risk of being vulnerable to cyberattacks.

Also, dependence on a single source poses a risk that the supply of strategic materials may be interrupted in emergencies. For example, China targeted Japan with an embargo on rare earth exports in 2010. Afterward, Tokyo reviewed the supply chain and developed alternative technologies. Japan’s experience showed the necessity of diversifying the supply chain with trustworthy allies and partners to secure a stable supply of strategic materials.

Multinational efforts are an integral part of the U.S. and Japanese efforts to ensure their supply chain resiliency. For example, the U.S. government’s support for leading Taiwanese semiconductor manufacturer TSMC opening a factory in Arizona will secure employment and reduce geopolitical risks related to cross-strait relations. Government support will be essential to offset the burden of factory relocation and encourage the onshoring of the supply chain. he semiconductor industry is fiercely competitive in development, and the United States and Japan need to continue to innovate to maintain their superiority by leveraging their existing cooperation with other like-minded partners. The United States and Japan need to cooperate to create a horizontal division of labor with allies and partners that share their values to bear the enormous budget for R&D and capital investment, as well as to mitigate supply chain risk.

Japan-U.S. cooperation in reviewing sensitive supply chains with allies and partners is beneficial to economic security. It is also an opportunity to raise the Japan-U.S. alliance industrial cooperation to the next level.