Semiconductors are back to center stage in the Japan-U.S. alliance

Semiconductors are again a focus of the Japan-U.S. alliance.

Unlike the first time this happened — in the 1980s and ‘90s when the two governments faced similar tension in the relationship — they are now a point of convergence and cooperation for the allies.

Tokyo and Washington are working together, bilaterally and in other forums, to build a stable semiconductor supply chain and ensure their continuing position at the leading edge of this critical technology. This trajectory is not guaranteed to continue, however. Enduring success requires partnership among all four players — governments and industry in both countries — which will ultimately rest on the political relationship and trust that they share.

It is impossible to overestimate the importance of semiconductors to the 21st century. They’re everywhere and in every digital item. For example, the average car has about 1,400 chips and some have as many as 3,000. Over 1 trillion chips are made each year and the market reached $618 billion in 2022.

In the early 1980s, the U.S. had more than half the world market share. By the end of the decade, it had been overtaken by Japan, a shift that infuriated U.S. politicians and industry professionals. That development was either dismissed as the result of unfair business practices or heralded as proof that Japan would soon surpass the U.S. as the world’s leading economy.

Allegations of cheating were settled through a trade deal; the prospect of Japan becoming number one was put to bed by “the lost decade” of the 1990s and the subsequent failure of the economy to find traction.

The U.S. industry has largely recovered; in 2020, U.S.-based companies had a little under half (47.2%) of the global semiconductor market. Japan has struggled. While six of the world’s top 10 chip makers were Japanese in 1989 — its manufacturers had about half the market — by 2023, no Japanese company cracked the top 10 list (when calculated by revenue). In 2022, Japan’s total market share was in the single digits.

Worried about the central position of China in global supply chains, including those for semiconductors, the size of the Indo-Pacific market in global chip production and sales (topping 61%), and the prospect of a crisis that could unravel those production networks, both Japan and the U.S. have been working to create resilience and reshore semiconductor manufacturing.

Each government has offered substantial funds to companies to build or relocate facilities in their country. Washington has committed about $57 billion in subsidies over the next five years. Japan disbursed ¥2 trillion in fiscal 2021 and 2022 to help the semiconductor industry, and allocated ¥1.8 trillion in the fiscal 2023 supplemental budget for the construction and upgrading of production facilities, as well as development of cutting-edge technologies. Tax incentives are also in the works.

In the bad old days, that would have been considered unfair attempts to boost domestic industries and a repudiation of free market principles. Now, the two governments applaud those initiatives and coordinate to get the most bang for their collective buck.

In May 2022, Japan’s minister of economy, trade and industry, Koichi Hagiuda, and U.S. Secretary of Commerce Gina Raimondo agreed to “dramatically speed up” cooperation and focus on development of next-generation semiconductors. In July, the two governments agreed to establish a joint research center for new chips; Japan set up the Leading-Edge Semiconductor Technology Center, a public research organization that was modeled after and was intended to work with the U.S. National Semiconductor Technology Center to that end.

Semiconductors are invariably on the agenda of the Economic Policy Consultative Committee Meeting, the Economic “two-plus-two” meeting. At the most recent sit-down, in November of last year, ministers agreed to “consult closely on global semiconductor supply and demand trends ... and to enhance efforts toward early warning systems to detect disruptions to the supply of semiconductors.” They pledged to continue talking about development of new chips, encourage cooperation on R&D and promote cooperation in talent development.

In the private sector, eight major Japanese companies launched Rapidus in 2022, which is working with IBM to manufacture 2-nanometer chips, the cutting edge of semiconductors and which no other Japanese company is doing, by 2027.

Moreover, in May 2023 the two governments set up the U.S.-Japan University Partnership for Workforce Advancement and Research & Development in Semiconductors (UPWARDS) for the Future. This $60-million initiative seeks to deepen ties between industry and higher education in Japan and the U.S. Eleven institutes of higher education are involved.

Japan and the U.S. are also working together in the Indo-Pacific Economic Framework for Prosperity (IPEF), a 14-country initiative to promote a new regional economic architecture. The first fruits of that effort materialized on Feb. 24, when a supply chain resilience agreement went into effect among Japan, the U.S., Fiji, India and Singapore. It sets up a supply chain crisis-response network to strengthen supply chain resiliency for semiconductors, critical minerals and other “critical sectors,” to be determined by each country. (Other IPEF members will join when they pass domestic enabling legislation.)

Ho-hum, more Japan-U.S. cooperation. Not at all. These are remarkable developments. Tens of billions of dollars of subsidies are involved, an amount of money that would have once unleashed a torrent of complaint and charges at the appropriate international body. Bilateral collaboration on semiconductors, an industry that caused such ructions in the past and is seen as so central to national security — both traditional and in the economic version — speaks to the concern triggered by China and the transformation of bilateral economic relations.

It’s a good foundation. The question is whether it is sturdy enough to withstand the furor that is likely with a different U.S. administration.

Convergence is driven by shared threat perceptions and considerable trust between the two sides. That has largely silenced complaints about how those subsidies support national companies and advantage them over foreign competitors. A colleague noted that while Japan’s 2022 Economic Security Promotion Law provides funds for both reshoring and friendshoring of supply chains, all the monies have gone to reshoring facilities in Japan. The charge against Washington is that the subsidies made available under the CHIPS act go to U.S. companies.

The new spirit of cooperation has quieted, but not muted, charges that competitors rush in to backfill or supply chips when U.S. companies are prevented from doing business with foreign customers. Trust that this will not happen is critical to the success of efforts to prevent technology leakage to countries deemed to be adversaries and the bilateral relationship.

The proposed sale of U.S. Steel to Nippon Steel is the test case for U.S. commitment to partnership with Japan. In recent meetings, Japanese participants from both the political and business communities made clear that it is the measure of U.S. intentions.

I worry — a lot — about whether this partnership survives a new administration in the White House. Former President Donald Trump has expressed opposition to the steel deal, saying he “would block it instantaneously. Absolutely.” His readiness to reject any initiative put forward by a predecessor threatens the IPEF. His “America First” mentality reduces, if not eliminates, wiggle room when it comes to subsidies and could, when coupled with his negotiating style, deal a fatal blow to the entire concept of friendshoring.

The key is figuring out how to insulate this partnership from political winds. Pieces of paper are too easily ripped up or buried in archives. Pouring concrete is probably best. It is a solid demonstration of commitment and would provide tangible benefit to both countries.