China’s dual-use export ban on Japan a decisive escalation

Export restrictions put into place by China on Tuesday on goods bound for Japan could put established trade flows at risk, as the list of dual-use products potentially covered by the ban is wide ranging and diverse.

The move is the latest in a series of escalatory measures following remarks by Prime Minister Sanae Takaichi last year on Taiwan. In response to the comments, in which Takaichi suggested that a military response might be warranted if the island is attacked, China has encouraged its citizens to avoid travel to Japan, and it has halted imports of Japanese seafood.

Its ban on the export to Japan of dual-use items — products that have military and civilian use — is potentially far more damaging than earlier retaliatory measures.

China's dual-use export control list, which was recently updated, features more than 800 items in 10 categories and includes not only key products, components and technologies with obvious military uses and applications — chemicals, minerals, electronics, sensors, navigation systems, software and aerospace technologies — but also a host of routine products that are more closely associated with commercial endeavors and consumer use, including high-speed cameras.

"Exports of all dual-use items to Japanese military end users, for military purposes, or to any other end uses that would help enhance Japan’s military capabilities, are prohibited," China's Ministry of Commerce said in a statement Tuesday.

Japan responded swiftly to the policy shift in China, with the government formally protesting the move and industry promising a quick response.

Chief Cabinet Secretary Minoru Kihara called the measure "absolutely unacceptable," while the Japanese Chamber of Commerce in China said that it would file a petition with the Chinese government if the activities of Japanese companies are hindered.

One of the key items on the list is rare earths.

China has a near monopoly on extracting and refining some of the materials in this category. Takahide Kiuchi, executive economist at Nomura Research Institute, estimates a ¥2.6 trillion ($16 billion) decline in production and economic loss if the restrictions on rare-earth exports alone go on for a full year. This would result in an annual gross domestic product drop of 0.43%, according to his estimates.

Rare earths are used in precision-guided weapons and satellite and stealth technologies, unmanned vehicles and advanced communications systems. They are of strategic importance for the functionality of modern and increasingly interconnected armed forces. They are also used in smartphones, computer hard drives, MRI machines, batteries and electric vehicle motors.

Dual-use export restrictions are not uncommon and have been used by many countries, Japan included, for a variety of reasons. The United States has prohibited China from acquiring advanced semiconductors, chipmaking equipment and specialized alloy. Japan has prohibited the export of certain technologies and advanced materials.

China has repeatedly imposed export controls, including restrictions on the export of rare earths to Japan in 2010 during a territorial dispute over the Senkaku Islands, which China claims.

Most recently, following trade talks with the United States, Beijing suspended a ban on gallium and germanium, which are used in semiconductors, and on antimony and graphite, which are used in munitions and batteries.

Some analysts wonder whether the dual-use export ban will be effective.

Japan has reduced its dependency on Chinese rare earths from over 90% to 60% by diversifying supply, while China risks being subject to retaliatory measures by Japan and being denied access to key materials and technologies it needs.

“If China goes too far, its own companies would take a serious hit,” said Ke Long, an economist at The Tokyo Foundation. “If these measures don’t work as China expects, then it simply has no cards left to play.”

In Tokyo on Wednesday, stocks fell in part on concerns about the dual-use ban announced by China the previous day. The Nikkei 225 stock index fell 1.06%, and companies that might need rare earths for their businesses declined more than the index. Toyota fell 2.74% and Advantest was down 4.41%.

"The risk of a widespread impact on Japan's automobile and electronics industries is expected to manifest should export restrictions, including on rare earths, be imposed," UBS said in a report issued Tuesday.

Uncertainty was also evident in the day following the export restriction announcement. How and to what extent China will implement the dual-use ban is not at all clear, and the range of possibilities go from barely noticeable adjustments in trade flows to factories in Japan shutting down due to the lack of components and materials.

“The Chinese like to use the word ‘pocket’ — something you can put anything into,” The Tokyo Foundation’s Ke said, adding that that's exactly what was done this time.

"It’s created a big pocket. They can put anything into it, the same way they can leave everything out.”