Senior Chinese officials have repeatedly outlined that position in recent meetings with their Japanese counterparts, according to people familiar with the matter. One specific fear in Japan, Toyota Motor Corp. privately told officials in Tokyo, is that Beijing could react to new semiconductor controls by cutting Japan’s access to critical minerals that are essential for automotive production, the people said, declining to be named discussing private affairs. 

Toyota is among the most important companies in Japan and is deeply involved in the country’s chip policy, partly reflected by the fact that it has invested in a new chip campus being built by Taiwan Semiconductor Manufacturing Co. in Kumamoto, according to one of the people. That makes its concerns a major consideration for Japanese officials, in addition to those of Tokyo Electron Ltd., the semiconductor gear-maker that would be principally affected by any new Japanese export controls. 

The U.S. has been pressuring Japan to impose additional restrictions on the ability of firms including Tokyo Electron to sell advanced chipmaking tools to China, as part of a long-running campaign to curtail China’s semiconductor progress. As part of those talks, senior U.S. officials have been working with their Japanese counterparts on a strategy to ensure adequate supplies of critical minerals, some of the people said, especially since China imposed restrictions on the exports of gallium, germanium and graphite last year.

The concern about Toyota has some historical precedent. In 2010, China temporarily suspended exports of rare earths to Japan after a clash in waters of the East China Sea claimed by both sides. The move shook Japan’s electronics sector and threatened to choke off global supplies of high-power magnets produced in Japan employing rare earths from China. Tokyo has since worked with mixed success to reduce its reliance on Chinese rare earth imports.

Shares of Japan’s chip-related companies fell after Bloomberg’s report of the China-Japan clash. Tokyo Electron shares fell as much as 1.9%, while Lasertec Corp. and Disco Corp. dropped as much as 2.8% and 3.3% respectively.

The Biden administration is confident that they can assuage Tokyo’s concerns and reach an agreement with Japan by the end of this year, some of the people said. 

But there are more aggressive options: Behind the scenes, the U.S. has been wielding a power known as the foreign direct product rule, or FDPR. The rule allows Washington to control sales of products made anywhere in the world, provided they use even the smallest amount of American technology. 

In the current talks, American officials so far have refrained from invoking that authority against Japan and other key allies, which see the rule as a draconian step. A senior administration official said the U.S. would prefer to reach a diplomatic solution but would not rule out the use of FDPR.

The timing of any deal is complicated by the U.S. presidential election in November and the planned resignation of Japanese Prime Minister Fumio Kishida this month. But Kishida stepping down should not impact the negotiations for further curbs, the senior administration official said, because Tokyo has built consensus for the policy across its government.

Japan’s Ministry of Economy, Trade and Industry didn’t have immediate comment when contacted by Bloomberg News. Tokyo Electron declined to comment. A Toyota spokesperson said the automaker is constantly considering optimal procurement strategies, not limited to mineral resources, to meet the needs of its customers. 

The Commerce Department’s Bureau of Industry and Security, which is in charge of export controls, declined to comment. 

The Chinese Foreign Ministry said in a statement that it opposes efforts by any individual nation to politicize normal trade and lure other countries to join any technology blockade against China. 

The U.S. first unveiled sweeping chip export controls in October 2022—focused on both equipment and cutting-edge processors—and Japan and the Netherlands later followed suit with their own, less restrictive measures. Washington has since then been trying to convince allies to fully align with the original U.S. controls, particularly by limiting Dutch supplier ASML Holding NV and Tokyo Electron’s ability to repair restricted machines that are already in China — something U.S. firms are barred from doing. The Hague is planning to impose some servicing restrictions, Bloomberg News has reported.

Now, the U.S. is eyeing more American curbs on high-bandwidth memory chips—an essential AI component—and additional chipmaking tools, as well as measures targeting specific Chinese companies. That’s triggered a second, parallel set of negotiations with officials in Japan and the Netherlands, as Washington pressures both governments to match the potential new U.S. measures, which currently have a carveout for allies. The Biden administration is under pressure from U.S. industry—and some lawmakers in its own party—to secure an agreement with key allies before moving ahead with its own measures. 

“We are deeply concerned about the harm being done to U.S. companies and U.S. leadership in semiconductor innovation by unilateral export controls with questionable national security benefits,” wrote Representative Zoe Lofgren and Senator Alex Padilla, both California Democrats, in an August 13 letter to senior Commerce Department officials. They are “even more troubled” by the possibility of another round of unilateral controls in the near term, they wrote. 

ASML and Tokyo Electron have both posted large sales increases in China since the U.S. imposed its rules. U.S. firms including Applied Materials Inc., Lam Research Corp., and KLA Corp. have also continued to sell large amounts of gear to China, as businesses there stockpile less-advanced equipment in an effort to get ahead of potential new U.S. restrictions. A senior Biden administration official downplayed the impact of stockpiling, saying it only pertains to less advanced machinery and that Beijing’s ability to innovate has been severely hampered by a lack of access to cutting-edge tools.

“I think this points to new restrictions from the U.S. shortly,” said Andrew Jackson, head of Japan equity strategy at Ortus Advisors Pte., referring to the Japan-China standoff. “I am telling my clients to keep shorting names with high China sales weightings.”

The lawmakers urged the administration to use “all forms of leverage available” to secure allies’s cooperation. If necessary, they said, they would support tariffs on chipmaking tools from allied countries that directly compete with U.S. firms for market share. U.S. firms, similarly frustrated, had earlier suggested signaling to allies that their companies could face additional export licensing requirements if they continue to service customers in China that American firms are barred from working with.