Competing Economies: America, Europe,

and the Pacific Rim

October 1991

OTA-ITE-498

NTIS order #PB92-115757
Recommended Citation:

U.S. Congress, Office of Technology Assessment, Competing Economies: America, Europe,

and the Pacific Rim, OTA-ITE-498 (Washington, DC: U.S. Government Printing Office,

October 1991).

For sale by the U.S. Government Printing office

Superintcndent of Documents, Mail Stop: SSOP, Washington, DC 20402-9328

ISBN 0-16 -035933- 3

ii
In Appreciation

H. JOHN HEINZ III

1938 to 1991

The staff of the assessment on Technology, Innovation, and U.S. Trade dedicates this report to

Senator John Heinz. Committed to solving the problems of American manufacturing and workers,

Senator Heinz contributed to the legislative process an enthusiasm for new ideas and optimism that

solutions could be found. He was a requestor of this study and one of the first in Congress to grapple

with competitiveness issues. His sense of humor delighted those privileged to work with him, his

sense of seriousness made him a strong champion of American manufacturing.

. . .

Ill
Foreword

Despite macroeconomic adjustments and a lot of discussion, U.S. manufacturing is still

in trouble. A test of national competitiveness is whether standards of living improve while

world market share holds steady or increases. The United States is failing on both counts. Over

the past two decades, the U.S. share of world imports has increased, its share of world exports

has decreased, and imports have captured an increasing share of the U.S. market. At the same

time, real incomes of the large majority of all Americans have declined.

Studies of specific industries also support the claim that American manufacturing is not

keeping up with the competition, the Japanese in particular. While U.S. auto manufacturers

have improved in productivity and quality, the Japanese still make more reliable vehicles at

lower costs. Japanese computer manufacturers have made rapid progress: even in supercomputers, one of the most advanced sectors, three Japanese firms are now threatening to overtake

the U.S. leaders.

Like Japan, Korea and Taiwan have mostly succeeded in promoting development of their

economies in general and several advanced industries in particular. We can learn several

lessons from these examples. First, the successful governments are partners with the private

sector in developing particularly risky technologies and industries. Second, they combine

many different policies—including, when necessary, limitations ‘on foreign companies’

competition in the domestic market. Third, they patiently persevere with development

strategies, often for decades. Finally, they preserve important market disciplines, making sure

that domestic companies competed with their most proficient rivals.

This report examines how the economic environment of the United States can be made

more conducive to improving manufacturing performance. It considers how Federal

institutions, in cooperation with industry, can develop competitiveness strategies for

high-tech, fast growing industries; and how trade, financial, and technology policies could be

combined into a strategic competitiveness policy.

This is the final report in a series of three in OTA’s assessment of Technology,

Innovation, and U.S. Trade. The first two reports, Paying the Bill: Manufacturing and

America’s Trade Deficit and Making Things Better: Competing in Manufacturing, concluded

that there are many signs of weakness in American manufacturing technology and identified

policy options to improve the ability of American manufacturers to develop and diffuse

technology.

u JOHN H. GIBBONS

Director
Advisory Panel—Technology, Innovation and U.S. Trade

Peter J. Sharfman, Chairman

Director of Policy Analysis

The MITRE Corp.

Alice Amsden

New School for Social Research

Economics Department

Marietta L. Baba

Professor of Anthropology and Acting Chair

Wayne State University

Wolfgang Demisch

Managing Director, Director of Research

UBS Securities

Jean-Jacques Duby

Group Director, Science and Technology

IBM - Europe

Paris LaDefense, France

Mark Eaton

Director, International and Associated Programs

Microelectronics & Computer Technology Corp.

John T. Eby

Executive Director, Corporate Strategy

Ford Motor Co.

Larry French

Consultant

Glen S. Fukushima

Director, Public Policy and Business Development

AT&T Japan Ltd.

Tokyo, Japan

Edward Graham

Research Fellow

Institute for International Economics

Joseph A. Greenwald

Attorney/Consultant

Howard Greis

President

Kinefac Corp.

Peter Hall

Professor of Government

Harvard University

F. William Hawley

Director, Governmental Relations for

International Affairs

Citicorp

Sanford Kane

President and CEO

PCO, Inc.

Robert Kuttner

Economics Correspondent

The New Republic

Alek A. Mikolajczak

Vice President, Technology and New Business

Rohr Industries

Susan Pharr

Professor of Government and Director,

U.S.-Japan Relations Program

Harvard University

Margaret Sharp

Senior Research Fellow

Science Policy Research Unit

University of Sussex

East Sussex, England

Laura Tyson

Professor of Economics

University of California, Berkeley

John D. Warner

Vice President, Engineering

Boeing Commercial Airplane Group

Stephen Woolcock.

Fellow

Royal Institute for International Affairs

London, England

NOTE:

vi

OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the advisory panel members.

The panel does not, however, necessarily approve, disapprove, or endorse this report. OTA assumes full responsibility for the

report and the accuracy of its contents.
OTA Project Staff—Competing Economies: America, Europe,

and the Pacific Rim

Lionel S. Johns, Assistant Director, OTA

Energy, Materials, and International Security Division

Audrey B. Buyrn, Program Manager

Industry, Technology, and Employment Program

Julie FOX Gorte, Project Director

Katherine Gillman, Deputy Project Director

Robert Weissler, Senior Analyst

John Alic George Eberstadt Robin Gaster

Jeffrey B. Lewis Sebastian Remoy Robert Wade

Elizabeth Sheley, Editor

Administrative Staff

Carol A. Guntow, Office Administrator

Christopher N. Chuy, Office Administrator

Diane D. White, Administrative Secretary

Publishing Staff

Katie Boss, Publishing Officer

Cheryl Davis Dorinda Edmondson Denise Felix Steve Kettler2

Chip Moore Christine Onrubia Susan Zimmerman

Contractors

Marie Anchordoguy

BSI Consulting, Inc.

Stephan Haggard

Keith Hayward

Hugo Letiche

Takashi Mashiko

Todd Watkins

James Womack and Daniel Jones

IUntil June 1990.

Wntil September 1991.

vii
Page

Chapter 1. Summary and Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 2. Policy Issues and Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 3. American Firms, Foreign Firms: Contributions to the Nation . . . . . . . . . . . . . . . . . . .

Chapter 4. U.S. Trade Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 5. EC-92: Trade and Industry Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 6. Japanese Industrial Policy: The Postwar Record and the Case of Supercomputers . . .

Chapter 7. The New Competitors: Industrial Strategies of Korea and Taiwan . . . . . . . . . . . . . .

Chapter 8. Government Support of the Large Commercial Aircraft Industries of Japan,

Europe, and the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3

41

85

117

191

239

295

341

365

. . . WI
Chapter 1

Summary and Findings
. .

CONTENTS

THE COMPETITIVENESS PROBLEM . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . The Role of Competition: Are Free Markets Always Best? . . . .

Industrial Targeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Import Dependence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . SUMMARY OF POLICY ISSUES AND OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Institutions for a Strategic Competitiveness Policy . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . A Technology-Friendly Environment . . . . . . . . . . . . . . . . . . . . . . . . .

Trade Policy Options . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

GOVERNMENT-INDUSTRY PARTNERSHIPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Risk Sharing in Technology Development . . . . . . . . . . .

Financial Risk-Sharing

. . . . . . . . . . . . . . . . . . . . . . . . . . .. . . .

. . . . . . . . . . . . . . . . . . . . . . .

Government Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AMERICAN FIRMS, FOREIGN FIRMS, AND AMERICAN INTERESTS . . . . . . . . . . . . . . . .

U.S. TRADE POLICY ...,.,.....,,.,..

EUROPE AND THE SINGLE MARKET” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . JAPAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INDUSTRIAL POLICIES IN TAIWAN AND KOREA ● . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . .

GOVERNMENT SUPPORT OF LARGE COMMERCIAL AIRCRAFT . . . . . . . . . . . .

Figures

Figure

1-1. U.S. Imports as a Percent of GNP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-2. Merchandise Trade Balance, Percent of GNP

● . . . . . . . . . . . . . . . . . . . . . . . . . 1-3. Hourly Wages, Manufacturing: 1982-84 dollars

1-4. Weekly Wages, Manufacturing: 1982-84 dollars . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . 1-5. Weekly Wages and Salaries of Full-Time Employees, 1969-90, 1982-84

1-6. Japanese Share of World Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .,.,*,.*. 1-7. Imports as a Percent of GNP, Japan

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-8. Trade Balances as a Percent of GNP, Japan ... ... ... .*. +., ,**. ..+ O****

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

dollars

. . . . . . .

. . . . . . .

. . . . . . .

.+

. .

. .

.,

. .

. .

.*

. .

Page

. . 3

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. . 9

. . 11

. . 13

. . 15

. . 16

. . 20

. . 23

. . 23

., 25

. . 25

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. . 31

● * 33

. . 34

Page

. 4

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. 4

. 5

. 5

. 6

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Table .

Table

Page 1-1. U.S. Share of World Imports and Exports

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Chapter 1

Summary and Findings

THE COMPETITIVENESS

PROBLEM

U.S. manufacturing is falling behind the competition. The standard of comparison is Japan; if

Japanese companies were not such successful competitors in many important industries, America’s

competitiveness problem would be far smaller.

Eventually, other East Asian nations like Korea and

Taiwan probably will rival Japan as top international

competitors, and the European Community is trying

to improve its own competitiveness. But for now, it

is Japanese industry that poses the most formidable

challenge. ‘

What is the evidence that American manufacturing has lost competitiveness? There is no widely

accepted single measure of competitiveness. Analysts use many proxies: international trade balances,

comparative international figures on productivity or

standards of living, manufacturing’s share of gross

national product (GNP), and comparative studies of

the performance of individual industries are common ones. However, examining U.S. performance

piecemeal in a few of these areas does not give a

consistent picture. So, despite growing acceptance

of the notion that U.S. manufacturing is in competitive trouble, the debate persists.

A logical way to sort out the usefulness of these

measures is to begin with a definition of competitiveness. One that stands out as being most useful is

defined in the 1985 report of the President’s

Commission on Industrial Competitiveness:

Competitiveness is the degree to which a nation

can, under free and fair market conditions, produce

goods and services that meet the test of international

markets while simultaneously maintaining or expanding the real incomes of its citizens.

There are two pertinent criteria here: meeting the test

of international markets, and maintaining or expanding real incomes. Free and fair market conditions is

a qualifier. We shall consider these items one by one.

The most obvious way to interpret “meeting the

test of international markets” is in terms of world

market share. There is no direct, single measure of

U.S. manufactured goods as a share of global

manufacturing output, but if we combine data on

U.S. shares of world imports and exports with

figures on the proportion of U.S.-made goods in

domestic consumption, the picture that emerges is

unequivocal: the United States has lost world market

share in merchandise.l The U.S. share of world

merchandise imports has climbed from less than 15

percent in 1968 to over 17 percent in 1988; its share

of world merchandise exports has fallen from nearly

16 percent to less than 13 percent over the same

period (table 1-1).2 At the same time, imports

captured an increasing share of the U.S. domestic

market, going from about 3 percent of GNP in 1960

to over 9 percent in 1989 (figures 1-1 and 1-2).

To be sure, it was natural and expected for the

United States to lose market share as the world’s

developing and war-tom economies improved their

performance. Sinking market share alone is not

proof of failing competitiveness. Had Americans

become better off in the process of producing a

smaller share of world output and domestic consumption, competitiveness would not be the issue it

is now.

If American manufacturing had stayed robustly

competitive, we would expect to see the living

standards of manufacturing workers increase. Instead, they have plummeted. Real hourly wages of

manufacturing production workers peaked in 1978

at almost $9.50 per hour;3 by 1990, they had sunk to

almost $8.00, below the 1964 level (figure 1-3). Real

weekly wages of manufacturing workers also

Table 1-1—U.S. Share of World Imports and Exports

Percent Percent

Year of imports of exports

1970 . . . . . . . . . . . . . . . . . . . . 12.9 13.8

1973 . . . . . . . . . . . . . . . . . . . . . 12.4 12.4

1975 . . . . . . .. .0...... . . . . 11.7 12.7

1977 . . . . . . . . . . . . . . . . . . . . 13.6 10.8

1978 . . . . . . . . . . . . . . . . . . . . 13.8 11.1

1979 . . . . . . . . . . . . . . . . . . . . 13.1 11.1

1980 . . . . . . . . . . . . . . . . . . . . 12.5 11.1

1981 . . . . . . . . . . . . . . . . . . . . 13.4 11.9

1982 . . . . . . . . . . . . . . . . . . . . 13.4 11.6

1983 . . . . . . . . . . . . . . . . . . . . 14.4 11.1

1984 . . . . . . . . . . . . . . . . . . . . 17.2 11.5

1985 . . . . . . . . . . . . . . . . . . . . 17.9 11.1

1986 . . . . . . . . . . . . . . . . . . . . 17.5 10.3

SOURCE: United Nations, Department of International and Social Affairs,

1985/86 Statistical Yearbook, 35th Issue (New York, NY: United

Nations, 1988).

-3–
4 ● Competing Economies: America, Europe, and the Pacific Rim

Figure I-l —U.S. Imports as a Percent of GNP

Percent

0 “ ~

- 2

-

-

4

6

b

- 8

I

1 1 , I I 1 1 I 1 1 I 1 , 1 1 1 1 1

- 1 0

I I 1 1 1 1 1 1 1 1 1

1

19601963196619691972 19751978198119841987 1990

SOURCE: Economic Reporf of the President, (Washington, DC: U.S.

Government Printing Office, February 1990), table C-1; and

U.S. Department of Commerce, Bureau of Economic Analysis,

“international Transactions,” Survey of Current Business, June

1991.

Figure 1-2—Merchandise Trade Balance,

Percent of GNP

Percent 9.

I

-1 1

I

- 3

-

1 1 1 I 1 1 1 c

w

- 4

[ 1 1 1 1 1 I I 1 1 I

\

1960 1964 1968 1972 1976 1980 1984 1988

SOURCE: Economic Report of the President (Washington, DC: U.S.

Government Printing Office, February 1990), table C-1; and

U.S. Department of Commerce, Bureau of Economic Analysis,

“International Transactions,” Survey of Current Business, June

1991.

peaked in the late 1970s, but have since fallen to

levels of the late sixties (figure 1-4).4 Looking more

broadly at the workforce does not improve the

picture. Real hourly and real weekly wages of all

production and nonsupervisory workers--over 74

million people by the end of 1989, or 63 percent of

the employed civilian workforce-have been sinking too. After peaking in 1972, real hourly wages

dropped back to where they were in the mid-sixties,

and real weekly wages declined much further. A still

broader measure of living standards is wages and

Figure 1-3-Hourly Wages, Manufacturing:

1982-84 dollars

Hourly wage . -

$ 1O

$9. 5

$ 9

$8. 5

I

$ 8

I I 1 1 1 1 I 1 I 1 1 I I I 1 1 1 1 1 I I I 1 I 1

1 1 1

1

‘1964 66 68 70 72 74 76 78 80 82 84 86 88 90

SOURCE: U.S. Department of Labor Statistics, Employment and Earnings,

various issues.

salaries of all full-time workers (73 percent of the

workforce). Here, too, are losses: real weekly wages

were about $330 in 1969, and below $320 in 1990,

and have been falling since 1987 (figure 1-5). In

sum, the living standards of the large majority of all

Americans have dropped.

So U.S. manufacturing fails the test of improving

competitiveness on” two counts: decisively on meeting the test of international markets, and substantially on increasing standards of living. Have these

happened under conditions of free and fair markets?

Here, the evidence is not conclusive. While markets

have grown more free over the postwar period in

terms of the general level of tariffs and quotas, many

analysts would argue that nontariff barriers have

proliferated. Whether the overall effect is one of ,

increasing market openness, at least for a majority of

our largest trading partners, is unproven.

There is another way of looking at this issue. The

only explanation of U.S. losses of world market

share in merchandise and losses of real income for

the majority of Americans other than a drop in

competitiveness would be a substantial, progressive

closure of international markets. Furthermore, we

would also have to make a case that abroad array of

American industries needed access to other big

markets (Canada, Japan, and Europe) in order to

maintain competitiveness. While there are some

products for which increasing returns to scale make

efficient-sized enterprises too large for all but global

markets, for example, large commercial aircraft and

supercomputers, it is hard to argue that the U.S.
Chapter 1--Summary and Findings ● 5

Figure 1-4—Weekly Wages, Manufacturing:

1982-84 dollars

$380 -

$360 -

1

$340 -

[

! 1 1 1 1 1 ( 1 1 ! I 1 1 1 1 I I I I I 1 1 1 ,

$320 I 1 I

196466 68 70 72 74 76 78 80 82 84 86 88 90

SOURCE: U.S. Department of Labor Statistics, Employment and Earnings,

various issues.

Figure 1-5-Weekly Wages and Salaries of Full-Time

Employees, 1969-90, 1982-84 dollars

$380 

$300 

1969 1972 1975 1978 1981 1984 1987 1990

SOURCE: U.S. Department of Labor Statistics, Employment and Earnings,

various issues.

market is too small to support competitive industries

in most of manufacturing. In view of what is known

about decreasing formal trade barriers, the burden of

proof is on anyone who would argue that market

closure accounts for the drops in American world

market share and standards of living since the 1970s.

This does not mean that every American industry

is uncompetitive or is growing less competitive. In

fact, competitiveness is best understood at the level

of industries and even companies. What these

figures tell us is that, at least in the most important

sectors, U.S. companies are not holding their own

against foreign competition. In particular, American

industries are beleaguered by Japanese competitors.

Japan’s record over the postwar period is in many

ways a mirror image of America’s. Japan’s share of

world exports increased 3 percent per year between

1968 and 1988, while its share of world imports

increased 0.8 percent annually (figure 1-6). Japanese

companies also held their own in their home market

(figures 1-7 and 1-8).

At the same time, Japan has been able to sustain

brisk growth in living standards compared with the

rest of the developed world. Real gross domestic

product (GDP) per capita rose an average of 6

percent per year between 1950 and 1989, faster than

in any other developed nation (the United States

averaged only 1.9 percent per year, and Western

European countries between 2 and 3.5 percent). To

be more accurate, Japan in the 1950s may have fit

more into the category of developing than developed

nation, and therefore had more potential for very

rapid growth. But even after this development

period, Japan’s growth in real GDP per capita was

higher than that of any other developed nation

between 1979 and 1989 as well, averaging 3.5

percent per year, about double the rate of most

European countries and the United States.s Real

earnings per employee in manufacturing increased

3.6 percent per year, on average, between 1968 and

1985, and gross national income per capita went

from 55 percent of U.S. levels in 1968 to 88 percent

two decades later.6 While citizens in the United

States still earn more and live better than citizens of

Japan, most Americans are not becoming better off,

and most Japanese are.

The complication in comparing the records of the

two countries comes in the caveat “free and fair

market conditions. ” Japan’s market was anything

but open in the early postwar decades. Due to a

combination of business practices and government

policies, it is still one of the world’s most difficult

markets to penetrate. Under these conditions, it is

not surprising that Japan’s companies did well in

their domestic market, or conversely, that manufactured imports did so poorly. But while this lack of

permeability kept Japan’s people from consuming as

much or living as well as they would have with the

same income in the United States, it is also true that

Japanese companies in many industries did meet the

test of international competition in the more open
6 ● Competing Economies: America, Europe, and the Pacific Rim

Figure 1-8-Japanese Share of World Trade

12%

1 o% -

8% -

*

6%?

4% -

2% -

o% I I I I I 1 I I I I I I I I I I I I I

1968 1972 1976 1980 1984 1988

+ % of world exports +- % of world imports

SOURCE: Economic Report of the President, (Washington, DC: U.S. Government Printing Office, February 1990),

table C-1; and U.S. Department of Commerce, Bureau of E&momic Analysis, “International Transactions,”

Survey of Current Businessp June 1991.

Figure l-7—imports as a Percent of GNP, Japan

1.2%

1.0% “

-

[

0.8% -

0.6% - 1

0.4% -

o% 

19601963196619691972 19751978 1981 19841987

SOURCE: Organization for Economic Cooperation and Development,

Department of Economics and Statistics, National Accounts,

various issues.

markets of the United States, Canada, and Western

Europe.

In fact, there are other conditions that affect

competitive performance. Currency value is an

important one. In the early 1980s, the high value of

the dollar was widely held to be primarily responsible for the nation’s plunge into deep trade deficits,

Figure 1-8—Trade Balance as a

Percent of GNP, Japan

0.4%

0.3% -

A

0.2% I

0.1% -

o%

-O.l%[

-0.2% -

[ 1 i [ 1 t I 1 1 1 1 1 1 1 I I 1 1 1 I 1 1 I 1

-0.3% I

t 1 1 1 1 I

1960 1965 1970 1975 1980 1985

SOURCE: Organization for Economic Cooperation and Development,

Department of Economics and Statistics, NationalAccounts,

various issues.

and conversely, the falling dollar in the late 1980s

for the improvement in the trade accounts. But over

the long run, adding currency value into the picture

simply accentuates the difference in competitive

performance of American and Japanese manufacturers; American manufactured goods have lost world

market share in spite of the fact that the dollar has

been on a long-term decline against a trade-weighted
Chapter 1--Summary and Findings ● 7

average of foreign currencies. Japan’s manufacturers have increased their market shares even with a

rising yen.

American manufacturers are aware of their competitiveness problems; many have made commendable efforts to improve their performance. But particularly in sectors that contribute heavily to employment, trade, knowledge, and income, there is still a

gulf between Japanese and American company

performance. In many cases, the gap is widening,

driven by the fact that Japanese companies, flush

with the profits of their market success, are investing

more heavily in technological improvement and

global expansion. If there are no major changes in

government policies of developed nations, we expect

U.S. manufacturing competitiveness to continue to

sink, compared with Japan. There will be more

emerging technologies in which the dominant power

is Japan, not the United States, and established

industries will remain behind the Japanese world

leaders. This situation also faces producers in

Western Europe, who are likewise behind the

Japanese (and in some cases American) manufacturers in a variety of important sectors. The difference

between the United States and Europe, at this point,

is that European governments are taking an active

role in trying to bolster their competitiveness, while

the U.S. Government takes the position that the best

aid to competitiveness is a free market.

The Role of Competition: Are Free Markets

Always Best?

Market freedom is a relative thing. By the

standards of economics, there is no free market in the

world today, and there never was. There are, on the

other hand, quite a number of economies whose

markets are thought of as free because large segments of the economy are shaped at least as much by

market forces as by policy and regulation. The

United States likes to think of itself as one of the

most free markets, and it probably is. That, plus the

fact that the United States has been the dominant

economic power of the world throughout the postwar period, is often taken as proof that the market is

superior to government planning as the way to

economic prosperity. The recent events in Eastern

Europe, with the demonstrated failure of heavy state

planning, are regarded as additional conflation.

In fact, both government and the market are, in the

words of one eminent economist, instruments of

social policy.7 They are different ways of arranging

the activities of production and distribution in the

economy; neither is clearly superior to the other. We

do not really know what the economy would look

like if markets were not limited and constrained in

countless ways by government regulation, but one

hypothesis is this:

The only industry that knows no bounds or rules

is the illicit drug trade, where the market process

resembles what Thomas Hobbes called the ‘‘Warre

of Each Against. ” He described life under those

conditions as “Nasty, Brutish and Short. ”8

The miserable record of the command and control

economies of Eastern Europe, compared with the

record of the U.S. and Western European economies,

does not imply wholesale superiority of market

forces under all conditions. Most of the restraints the

U.S. and other governments impose on markets exist

because the market serves some interests (e.g.,

long-term values of society or provision of social

goods like scientific knowledge, clean air, and safety)

very poorly. If we examine the difference between

the performance of Japan and the United States, it is

appropriate to suspect that more competition is not

always better.

The government of Japan has never been as sold

on the tenets of neoclassical economics as the

government of the United States. Japan and the fast

developing East Asian economies of South Korea

and Taiwan have restrained and shaped competition

at various points in modern history and have

benefited as a result.9 One of the most visible forms

of restraint on free markets is the market protection

that all three countries have used extensively to

nurture infant industries and, in a few cases, to

permit orderly rationalization of mature ones.10

Japan employs government intervention to harness,

channel, or restrain the forces of competition.

During the 1960s, the government coped with what

it called ‘‘excessive competition” by organizing

antirecession cartels and vigorous export campaigns, erecting barriers to foreign direct investment, and structuring the financial system to favor

industrial investments (especially in targeted industries) over consumption. 11 These measures were

aimed at both restraining competition from more

advanced foreign firms and restricting the cutthroat

investment and price competition among Japanese

firms.12 Starting in the 1980s, the government still

reined in competitive forces, but with different
8 ● Competing Economies: America, Europe, and the Pacific Rim

measures (e.g., voluntary restraints on exports and

bargains to increase foreign fins’ access to the

Japanese market) and for a different purpose: to

soften foreign, often U. S., complaints of unfair

competition. Although the forms and aims are new,

the effect is still an interference with the workings of

the market.

The Japanese Government has never trusted the

market to achieve, by itself, large-scale investments

for basic research in high technology, or to overcome the disadvantages of being behind.13 In this,

Japan is hardly alone. Few developing nations trust

market signals alone to generate the investments and

provide the resources necessary to improve industrial development and living standards. Korea and

Taiwan, too, have altered market signals and outcomes significantly. Both share a commitment to

long-term planning, industrial targeting, or strategic

visions—forcing their firms to compete on world

markets and nurturing them at home. Taiwan, while

more open to foreign trade than Korea, and with less

interventionist industrial policies, has relied more on

public enterprises. Korea has been more protected

from foreign competition, with the protection tied to

export expansion. Both countries depend on government policies to promote an indigenous technology

base. (See ch. 7 for discussion of the industrial

policies of Korea and Taiwan.)

Japan, Korea, and Taiwan all developed exceptionally fast, with industrial policies that signifi

cantly altered, but did not destroy, market signals.

Protection of the domestic market and direct funding

of R&D were forms of intervention, as were policies

to steer low-cost capital, preferential access to

foreign exchange, assistance in negotiations with

foreign companies for access to technologies, and

support of domestic technology development and

implementation through a variety of fiscal incentives. At the same time, these governments were

careful to maintain incentives that forced domestic

firms to compete with the dominant foreigners, often

in third markets or in the home markets of the foreign

competitors. Market competition, in short, was

viewed as having a proper place; it was superior to

government planning in providing incentives to

improve productivity and quality and reduce costs.

But unbridled competition was not, and still is not,

regarded as always yielding the best possible outcome for the nation.

The prevailing ideology in the United States is

very different. We have accepted that market competition will not secure the outcome we want in some

areas. For example, market incentives do not provide

sufficient incentives to invest in as much R&D as

would be optimal for the nation, nor do they provide

incentives to preserve such public goods as clean air

and water. But the United States views anything less

than free trade as dangerous interference. This is

consistent with the ideology of the great European

powers when they were the highest value, lowest

cost, most advanced producers of their day; it is

nothing new for the prevailing economic view to

coincide with commercial interests. 14 But the fit

between the two, never perfect, is growing more

uncomfortable as U.S. industries watch foreign

competitors, usually Japanese, attain technological

dominance in many important industries. More U.S.

industries are finding themselves in the position of

having to catch up, while learning that intelligent

responses to market signals are insufficient to close

the gap between them and the market leaders.

A case in point is capital cost. Throughout most of

the postwar period, as a result of government control

of financial markets, Japanese and German companies have enjoyed much lower capital costs for plant

and equipment acquisition and R&D than American

fins. As a result, they have invested more in R&D,

plants, and equipment, and been more patient in

recouping those investments. The responses have

been especially strong in industries that demand

high investments in R&D and capital equipment. In

Japan, special tax measures, such as accelerated

depreciation, have sweetened the investment incentives in particular industries chosen by the government as strategic. As a result of these and other

measures, Japanese firms invested more in technology development and adoption than American firms

and have advanced faster and gained greater market

shares. 15

What the Japanese Government, and more recently the Korean and Taiwanese Governments, has

done is to use a combination of market signals and

government planning to speed economic development and growth. At times, the interventions have

backfired, but overall, the policies of the Japanese,

Korean, and Taiwanese Governments have been

essential to fast development. They are not the only

contributors, as shown by the failure of similar

government policies to lift dozens of other less
Chapter 1--Summary and Findings ● 9

developed countries out of poverty. What sets these

East Asian nations apart?

Some of the answer, of course, is that they have

relied heavily on market forces to shape the behavior

and strategy of businesses. Many developing and

some developed nations have erred in the direction

of overprotection, and protected sectors have failed

to become competitive with world leaders. The

successes of the East Asian nations lie in their

combination of import substitution and market

protection with export promotion, which allowed

domestic industries some potential for output

growth and access to needed equipment and components while forcing them to compete with the best

performers in the world.l6 The governments were

able to force or influence firms to conform with

public policies through a variety of disciplinary

measures. Firms that failed to improve export

performance, for example, might have trouble getting the necessary permission and foreign exchange

to import needed equipment.

Another part of the explanation is that the

companies crafted intelligent, patient strategies for

developing, producing, and marketing their products. Some of this strategic genius is attributable to

government policies and some to good business

strategies, but another part is sheer diligence; East

Asian companies are famous for scouting and

adopting the best of the strategies of other successful

companies and countries. Policies and cultures that

emphasized very high product quality and universal

education also helped, as did ethics that valued hard

work. Industrial policies were not the whole answer,

but the path of development would have been slower

and rockier without them.

Industrial Targeting

To Americans, industrial targeting is one of the

most controversial aspects of industrial policy. The

idea that some industries contribute more to national

well-being and knowledge than others is not particularly contentious. It is other things in targeting that

we fear. One is that government will not be rational

in its choice of industries to support and that the

process will end up being hijacked by special

interests. Another objection is that the market is

better suited than government to choose the industries that make disproportionately large contributions to national welfare.

Most developed nations and many developing

ones do not share that faith in the market. The

Japanese Government considers certain industries

crucial to its economic health. Immediately after the

war, policymakers felt that Japan should be strong in

manufacturing iron and steel, ships, machinery,

heavy electrical equipment, and chemicals. Later,

the automobile, petrochemical, nuclear power, computer and semiconductor, and aircraft industries

were added to the list.17 Though less so than in the

1950s and 1960s, Japan continues to provide particular benefits to targeted industries and the users of

their outputs.18 Korea and Taiwan, too, selected

industries for special support. In the 1950s, Korean

industrial policy focused on import substitution in

light manufacturing. In the late 1960s, emphasis

shifted to steel and nonferrous metals, chemicals and

petrochemicals, machinery, automobiles, and shipbuilding. Still later came emphasis on semiconductors, computers, and consumer electronics. The

pattern in Taiwan was similar, emphasizing light

manufacturing and import substitution in the first

two postwar decades, shifting to heavy industries in

the 1960s and later into more technology-intensive

sectors. The tools and methods were different, but

the selection of industries was similar.

Industrial targeting is not limited to developing

countries. Most of the nations of the European

Community (EC) have long had policies of supporting European producers of motor vehicles, telecommunications equipment, semiconductors, consumer

electronics, and aircraft. While now discouraging

support for national champions by individual countries, the EC’s plans for the single market in 1992

and the Framework Program and EUREKA19 are

aimed at developing technological and productive

prowess in many of the same sectors. Electronics

and telecommunications sectors receive greatest

emphasis and heaviest support in European R&D

programs, while EC trade policies are being structured to cushion the European automakers’ encounters with Japanese producers.

Even in the United States, which has mostly

rejected the use of policies designed specifically to

improve civilian industrial competitiveness,20 there

are a few examples of industrial support for nonmilitary purposes. One of the most prominent is the

National Aeronautics and Space Administration

(NASA), which has, as part of its mission, the

responsibility of improving aircraft technology .21

NASA’s Aeronautics Program budget in 1991 was
10 ● Competing Economies: America, Europe, and the Pacific Rim

almost $920 million; 22 in 1992, the budget is

expected to exceed $1 billion.23 Though this is partly

intended to support military technologies, NASA

officials state that 90 percent of the technology

developed is common to both military and civilian

needs.

That industrial targeting exists is not a question.

But can the U.S. Government select the right

industries for support? To detractors, the idea of

“picking winners “ is dangerous because it opens

the possibility that any industry could be selected if

it had a powerful enough lobby. Another potential

drawback is the argument raised by many economists, that industrial supports could skew investment incentives and create excess capacity, and thus

increase vulnerability to business cycles in targeted

industries. This, in turn, could make additional

protective measures necessary-beginning a cycle

of ever-widening support, at increasing cost to

taxpayers and diminishing benefit to consumers.

These are real problems and should be taken

seriously, but they are not the inevitable outcome of

any exercise in supporting the competitiveness of

critical industries. Japan, Korea, and Taiwan have

had some problems resulting from their support of

targeted industries, but their overaIl economic performance-and, with few exceptions, the performance of the targeted sectors—has been better than

that of the United States. Some argue that the success

of these economies, and of targeted industries, is

more coincidental with industrial policy than causally related. But after weighing the evidence, OTA

concludes that the industrial policies of these East

Asian countries is crucial in their economic performance.

Japanese industrial policy aimed at changing

Japan’s industrial structure from one characterized

by labor-intensive industries immediately after the

war to one dominated by capital-intensive industries

in the 1950s and 1960s, and from that to one led by

knowledge-intensive industries from the 1970s to

the present. At each stage of policy formulation,

industries selected for special support were those

that made disproportionately large contributions to

national well-being.24 They had high growth prospects, higher wages, and the possibility of higher

profits, with more positive spillovers to other sectors

in terms of contributions to technology and knowledge. In some cases, the spillovers were downstream: microelectronics and computers add to the

technology intensity and productivity of industries

that employ them. In the case of automobiles,

primarily a consumer product, the contributions to

other industries came primarily upstream, in the

machinery industry.

The idea that certain sectors can be identified as

incubators of larger economic change is gaining

currency in the United States as well. An economy

with strength in these industries will have higher

wages, faster growth, and better developed processes of generating, diffusing, and using new technology than economies that do not. It is no coincidence that many of these industries-e. g., semiconductors, computers, telecommunications equipment,

aircraft and spacecraft, and advanced materialsalso present formidable barriers to entry. Capital

requirements for efficient production are often quite

high, and the requisite knowledge of science,

technology, and production is even more forbidding.

If government can help potential entrants overcome

entry barriers, the whole economy can be put on a

path of faster growth and higher incomes.

With most of the governments of large developed

economies providing some kind of support for

critical industries, the market signals American

firms get for these same industries often point in the

opposite direction--down. In many critical, hightechnology sectors, American firms are facing competitors whose business risks are shared by their

governments (and thereby, the taxpayers of their

home nations). Faced with the necessity of assuming

most of the risks and costs of entering or even

maintaining operations under such conditions, some

eventually abandon operations, as have many American manufacturers of memory chips.

Can the U.S. Government afford to be indifferent

to the mix of industrial goods produced here? It

would be dangerous, and in many ways unprecedented, to adopt this course. While we have let a few

industries, such as consumer electronics, wither in

the face of superior foreign competition, the government has stepped in many times to support industries

that served various economic needs, including

employment (the Chrysler bailout), technology development (aircraft in the 1920s and 1930s), and

national/economic security (semiconductors). This

is not meant to imply that every effort to develop or

support an industry has been successful; every

country that has tried industrial support has made

some errors. In many developing nations, the whole

enterprise of supporting industrial development has
Chapter l-Summary and Findings ● 11

been disastrous; government planning cannot replace the market and the forces of competition. But

the signals the market sends to American firms in the

majority of high-technology, economically critical

industries are not promising if we want those

industries to thrive financially and technologically.

It is equally dangerous to trust ad hoc, often

crisis-motivated, efforts to intervene in industrial

structure and performance and expect the results to

make consistently positive contributions to economic well-being.

Import Dependence

One of the biggest problems in sorting out how to

treat critical industries in public policy is choosing

among them. All nations do not have to, and indeed,

cannot, be competitive in all high-technology industries or critical sectors, if only because some, such as

aircraft, will not support more than a few competitors without massive government assistance. Moreover, there are many sectors regarded as critical, and

self-sufficiency in all of them may be beyond the

means of any single nation, or it might spread

available resources for support too thinly to have an

impact. Finally, and most importantly, selfsufficiency by-passes the benefits of specialization

and trade.

It should do a nation no harm to import certain

critical products and export others. This is how

Germany manages, and the Germans have the

highest standards of living and most competitive

manufacturing in Europe. Manufactured imports

accounted for 14.4 percent of German GDP in 1987,

and for nearly 45 percent of German manufacturing

GDP. In the United States, manufactured imports

were 7.3 percent of GDP and 37.8 percent of

manufacturing GDP; corresponding figures for Japan

(which is an outlier among both industrialized and

industrializing nations) are 2.4 and 8.3 percent.25

This kind of evidence often leads some to

question why the United States should care about

depending on foreign manufacturers, even for key

inputs. In fact, competitiveness might be improved

as a result; computer manufacturers could be more

competitive if they have access to low-cost foreign

semiconductors than if they have to pay higher

prices for domestically made ones. Certainly, after

the 1986 Semiconductor Trade Agreement (STA)

with Japan resulted in (though did not necessarily

cause) high prices for 256K DRAMs, American

computer makers suffered declines in profitability,

and Japanese computer makers improved market

positions and profits.26 In fact, the fallout of the STA

is often used to support the argument that trade

protection hurts more than it helps. Whether that is

true, even in the one case of the STA, is disputed.

The STA was signed after several years of

mounting disputes with Japan over the fairness of

their trade in semiconductors.27 American producers

alleged that Japanese semiconductors were dumped,

both in the United States and in third country

markets, and that American semiconductor chips

were unfairly excluded from Japanese markets.

After formal investigation, the International Trade

Administration found that dumping charges were

substantiated. The STA stipulated that both practices (dumping and exclusion) should stop.28 American officials apparently hoped for substantial cutbacks in Japanese production as a means to raise

prices of Japanese semiconductors, thus ending the

dumping. Shortly after the STA was signed, MITI

(the Japanese Ministry of International Trade and

Industry) took to issuing “forecasts” of chip production that were widely interpreted, here and in

Japan, as administrative guidance to cut production.

The companies, however, were initially unresponsive, and the U.S. Government announced sanctions

in early 1987.

Others dispute that the STA caused Japanese

producers to raise prices.29 According to the counter

argument, joint action by Japanese producers was

underway for at least a year before the STA was

concluded, and had begun before the STA was even

a topic of discussion. The collapse of DRAM prices

in 1984-85 that precipitated the withdrawal of many

non-Japanese producers from the market also cost

Japanese producers billions of dollars. By late 1985,

the market was dominated by Japanese producers.

Newspaper accounts about Japanese companies

taking joint action to raise DRAM prices began to

appear in 1985, as did rumors of meetings of

Japanese producers aimed at addressing “the price

disaster. ” These stories and rumors are made more

believable by the many instances of coordinated

Japanese industry/government management of prices

and production that occurred in other industries

(e.g., iron and steel) in the past.

Both sides of the story agree on one point: that

MITI’s forecasts and guideposts are used as targets

for production and/or prices. The difference arises
12 ● Competing Economies: Arnerica, Europe, and the Pacific Rim

over whether the production cutbacks and price

increases, which both sides agree were deliberate,

were a result of the STA. Without a formal

investigation, the dispute will likely remain unresolved.

Whether or not U.S. sanctions were an important

cause, the fact remains that by early 1988 prices of

Japanese DRAM chips rose, and production fell, a

sharp break with past price behavior. While MITI

denies any official guidance, its continued quarterly

forecasts and their pinpoint accuracy strongly suggest to some analysts that MITI was controlling

production and, possibly more significantly, investment in new facilities. Ordinarily, sustained high

profits brought on by elevated prices would be

expected to generate a wave of investment in new

capacity, which, as of mid-1989, had not materialized, in contrast to the past and contrary to what

analysts expected.

Some of the restraint in investment in new

capacity was attributed to quiet guidance by MITI,

and some to a new ‘‘spirit of cooperation’ among

the Japanese DRAM manufacturers. Both can be

attributed in part to fears of reigniting trade disputes

with the United States, but there was something else

at work, too. The Japanese producers, probably with

MITI’s encouragement, had begun to act like a

cartel, controlling output and prices and reaping

higher profits as a result. While that was a predictable outcome of the U.S.-initiated STA and accompanying sanctions, it is one of the more ominous

developments on the trade scene, and it symbolizes

one of the things most feared about dependence on

foreign suppliers. When suppliers act collusively to

manipulate production and prices, everyone else is

stuck paying higher prices. If the products of the

cartels are inputs to key industries, whole economies

can suffer. No nation is more aware of this than

Japan, which suffered a severe economic downturn

after the first oil shock in 1974.

But how much real danger is there? Cartels that

can effectively manipulate supplies and prices

globally are not very common. It is tempting to think

that if we don’t meddle with free trade we won’t

have a problem. But this is probably wishful

thinking. Japan maintains several legal cartels, and

while the number is diminishing the practice is

familiar. Moreover, the historical links between the

semiconductor companies and the Japanese Government mean that under ordinary circumstances they

share a degree of knowledge of each other’s plans

and behavior that would be considered extraordinary, probably collusive, in the United States. Even

without the prodding of the STA, it is conceivable

that Japanese companies might have begun to

exercise restraint over production and prices. Two

pieces of evidence support the notion that these

producers were amenable to such restraints. One is

the fact that similar price rises did not occur in

EPROMs (erasable programmable read-only memories), another semiconductor product covered in the

STA. Unlike the situation in DRAMs, production of

EPROMs was not dominated by a few Japanese

companies. Another is the difference in the degree of

compliance with STA in two areas: dumping and

foreign companies’ share of the Japanese market.

Cutbacks in production resulted in price increases

that eliminated dumping in fairly short order, while

the share of foreign semiconductors in Japan’s

market has increased much more slowly than

originally called for.30 It took much less time and

effort to arrange production cutbacks, which resulted in higher profits for Japanese companies, than

increased market share for foreign companies, which

gave Japanese companies no particular benefits.

Another problem created by dependence on one or

a few suppliers for critical components is access to

the latest technologies. Again, under the conditions

of competition envisioned in economics, a supplier

of critical components would be foolish to deny the

most advanced products to any customer, since a

competitor is always ready to do it. For example, the

world’s industrial producers of textiles depend on

machinery from a handful of suppliers in a few

countries-Germany, Switzerland, Japan, Italy, and

Sweden account for most of it. Yet textile manufacturers are routinely able to get the most advanced

equipment from any supplier; textile makers in the

countries that manufacture textile production equipment have no particular advantage. The story is

different in electronics.

American and European systems makers, or

policymakers speaking on their behalf, are concerned that it may be difficult to get the most

advanced production equipment or chips from Japanese vendors. In most cases, those Japanese vendors

are also systems makers, or else they have close ties

through the keiretsu31 system with a Japanese

systems maker. It is a logical, and probably not

uncommon, business practice to reserve access to

the latest technologies to users within the develop-
Chapter I-Summary and Findings ● 13

ing firm or to special customers. According to

anecdotes, when IBM and Perkin-Elmer had a

special relationship, IBM got first access to new

machinery developed by Perkin-Elmer. While no

blame attaches to Japanese companies that give

themselves or their closest customers first crack at

new generations of technology, the competitive

advantage it confers on Japanese firms can be

significant in the fast-moving electronics industry.

Dependence on imports, particularly when those

imports come from only a few suppliers, and

particularly when those suppliers are also competitors, can create vulnerabilities that nations sometimes choose to avoid. Four European countries, for

example, continue to provide financial support to

Airbus in part because they do not wish to depend on

two American companies, Boeing and McDonnell

Douglas, for all large commercial jet transports.

While Airbus is a financial drain on its government

sponsors, it has forced the American producers to

compete on price to a greater extent. Probably the

foremost example of unwillingness to rely on

foreign suppliers is Japan, which has a long tradition

of limiting dependence on imports to a practical

minimum.32 While Japan is criticized for its peculiarly strong aversion to imports, and is slowly

changing, many of Japan’s premier industries probably would not have developed, or would have

developed far more slowly, had it permitted much

greater imports and investment when Japanese

industries were catching up. Now, with an increasing

number of American industries in the position of

latecomer, the vulnerabilities created by import

dependence have assumed more importance.

SUMMARY OF POLICY ISSUES

AND OPTIONS

The idea that troubled American manufacturing

industries could use help from their government is

gaining acceptance. Although the form such aid

should take is not a settled question, the areas of

agreement are widening. Agreement embraces more

than the traditional areas for government action:

macroeconomic policies that create stability and

lower the Federal deficit, and human resource

policies that produce the well-educated and welltrained workforce that American industry needs.

Beyond this, a consensus is forming for more

focused government policies to help industry develop and adopt technologies that can boost the

competitiveness of U.S. manufacturing. Among

these are policies to diffuse technologies throughout

manufacturing, as with, for example, governmentfunded technology extension services.

The area of agreement is expanding to include

R&D partnerships between government and industry to develop high-risk technologies of generic

commercial interest. Congress created a small program of this sort in 1988, the Advanced Technology

Program in the Department of Commerce, and first

funded it in 1990. The Program has now gained the

backing of the Bush administration. More generally,

the President’s 1992 Budget endorsed government

support for “generic or enabling technologies at the

pre-competitive stage of R&D.” It said: “The

Administration believes that appropriate Federal

investments in applied civilian R&D can result in

high payoff to the economy. . .“33

Helpful as all these policies can be in restoring

U.S. competitiveness, in some critical cases they are

not enough. Certain industries characterized by

expanding markets, good jobs, increasing returns to

scale, and technological spillovers to other industries are so essential to the Nation’s economic

growth that standards of living will suffer without

them. Computers and electronic components are the

clearest example. Important parts of these U.S.

industries are in trouble, and it is doubtful that they

can regain their competitive edge without much

more substantial technology assistance than that

provided by Sematech. Japanese firms are so large,

so adept, and so dominant that, without trade

technology, manpower, and other policy help from

the U.S. Government, the U.S. electronics industry

probably will continue to decline in comparison. The

help from the STA was on an ad hoc basis that did

not signal to the industry any sustained government

commitment to the industry, and therefore it did

little to encourage investment in technological

improvement.

While there may be times when trade policy is a

necessary complement to other policies to improve

competitiveness, it is emphatically not a stand-alone

fix. By itself, trade policy will do little to restore

competitiveness and can have deleterious effects on

downstream producers and consumers. It is much

more likely that policies to encourage technology

development and diffusion will be helpful, even

without relief from foreign competition, than that

trade policy alone will improve competitiveness.
14 ● Competing Economies: America, Europe, and the Pacific Rim

An approach that combines trade policy with

technology assistance, and sometimes financial

assistance as well, in support of critical commercial

industries could be proactive and planned to avoid

pitfalls. Any trade protection involved could be

framed in a frank and self-respecting way as

guarding important American national interests,

rather than based on findings of unfair trade by

others (as is now the case with most U.S. trade

protection). This would skirt three problems that

bedevil current U.S. trade policy. First, it is difficult

and time-consuming to make charges of unfair trade

stick. Second, unfair trade is often only a minor

reason for a U.S. industry’s decline, secondary to the

ability of foreign firms (often aided by industrial

policies) to lower production costs, acquire new

technologies, and make genuinely superior products

at a good price. Finally, whatever the mix of causes,

the moralizing tone in our present trade policy is an

irritant to our trading partners, and sometimes makes

it harder to find reasonable solutions to trade

disputes.

The difficulties of creating a coherent government

strategy for supporting critical commercial industries should not be underrated. There is merit in the

argument that our form of government is open to

capture by special interests, so that the chances of

getting rational, disinterested government decisions

on industry support are slim. Experience suggests,

however, that a contrary argument also has merit.

The United States does employ some trade protection and does sometimes subsidize certain economic

sectors (e.g., farm price supports). These departures

from our free trade and free market philosophy are

often politically motivated. It is possible that a

coherent strategy to select a few industries for their

contribution to the national good and support them

with a tailored mix of technology, financial, and

trade assistance would result in more rational

exceptions to a general rule of free trade.

A related problem is that the U.S. Government

does not have the experience or institutional capacity to operate a strategic industry and trade policy.

Ideally, we would need an institution capable of

identifying critical industries, analyzing their needs,

and planning measures to fit the needs while taking

care to keep the government support modest, make

industry a full partner, and foster competition among

firms within the critical industries. A tall order, and

one that could only be filled over time. The rule

would be to start small, gradually building expertise

and a spirit of mutual trust with industry.

Another condition for a strategy in support of

critical commercial industries is commitment from

both Congress and the Administration, backed by

wholehearted support from the American people.

Congress has taken the lead in recent years toward

giving some support to critical industries (e.g., in

creating and funding Sematech and the Advanced

Technology Program). The Administration also now

supports a government role in developing generic

technologies of commercial interest. It is hard to

imagine, however, that Congress could unilaterally

create broader industry and trade policies in support

of critical industries and the institutions to carry

them out. For the policies to work, both branches of

government must be committed to them, and that

commitment must rest on the understanding and

support of the American people. There would have

to be widespread comprehension that U.S. economic

security is at risk, agreement that governmentindustry partnerships for improved competitiveness

can pay off, and acceptance that short-term costs are

worth paying in return for long-term gains in

restoring excellence to U.S. manufacturing.

While the obstacles to crafting an effective

strategy to support competitiveness are great, so are

the payoffs. Improved competitiveness can come

only from improvements in productivity and technology; these, in turn, can support higher standards

of living for most Americans. This not only gives

individuals more choices and comfort in their own

lives, it also increases U.S. resources to do things

that only rich nations are equipped to do: fight

poverty and illness here and abroad, protect environmental amenities, expand the frontiers of science.

The policy issues and options discussed below

include:

building new institutions to plan and implement a government strategy in support of

critical commercial industries,

fostering a supportive environment for technology development and adoption,

altering trade policies so they are more effective and more attuned to competitiveness needs,

and

forming government-industry partnerships for

technology development and low-cost production.
Chapter 1--Summary and Findings ● 15

Institutions for a Strategic

Competitiveness Policy

Actions and Policy Tools

A necessary first task for a government agency or

commission given responsibility for industry and

trade strategies is to identify the critical commercial

industries that will be the focus of policy attention.

This selection does not mean that other industry will

be ignored; an economic and policy environment

that supports industrial advance across the board is

also necessary. But the concept of a critical industries policy is that some industries contribute more

to continued technological advances and rising

prosperity than others.

Most advanced countries do lend policy support

to certain industries, and the criteria for selection are

generally the same; they favor industries that are

knowledge intensive (with a high proportion of

technical workers and high R&D), that have good

prospects for growing markets, and that are built on

versatile core technologies with spillovers to other

industries. Another principle arguing for government involvement is high barriers to entry arising

from exceptional capital costs, large economies of

scale, and a steep learning curve, so that late entrants

are at a great disadvantage. These principles usually

lead to selection of much the same industries,

including electronic components, computers and

software, communication equipment, precision machining equipment, advanced materials, robotics,

biotechnology, and aerospace.

Governmental and private bodies in several countries have made lists of emerging technologies,

around which new critical industries (or advanced

versions of existing industries) might coalesce.

These lists too have many similarities-including

the assessment that the United States will lag behind

its major competitors, especially Japan, if current

trends continue.34

The specific policy tools available to the agency

cover trade, technology, and financial areas, and are

discussed below. Its overall responsibility would be

coherence and coordination. It could be given the

duty not only to develop critical industry strategies

but also to champion them throughout government,

reminding and urging other agencies to give critical

industries priority in their decisionmaking. Congress might wish to emphasize this function by

requiring Federal agencies to prepare a “competitiveness impact evaluation” before taking major

actions affecting critical industries. The extra paperwork involved could be well worth its cost if it

served as a constant reminder of the potential impact

of government policies on industrial competitiveness.

Finally, interaction with industry is a must. A

government agency with strategic trade and industry

responsibilities should have some independent knowledge and goals, but it must also work in alliance with

industry-which would be expected not only to help

shape the strategic plans, but also to put up at least

half the funds in any venture where the government

provides financial backing.

Alternative Institutions

Institutions that might develop and implement

government policies to support critical commercial

industries could take several forms. A certain

amount of restructuring and reorganizing of current

Federal functions would help. But it takes a lead

agency to plan and carry out a coherent strategy in

which high reward industries are selected for particular attention and in which elements of technology,

trade, and financial policies are combined as needed.

Industry-specific advisory committees, established

by Congress, might be one way to begin. There is a

precedent for this. In the 1988 trade act, Congress

created the National Advisory Committee on Semiconductors (NACS), made up of industry and

Federal Government leaders, to devise a strategy for

strengthening the U.S. semiconductor industry. The

Committee has issued two interim reports and will

publish a final one by the end of 1991, laying out a

comprehensive strategy. This is just a frost step,

however. No agency has responsibility for coordinating and carrying out the NACS-recommended

strategy, and there is certainly no guarantee that it

will do more than gather dust.

An existing agency with the potential for combining strategy development with action is the Competitiveness Policy Council, created by Congress in

1988 and launched in 1991.35 With members appointed both by the President and by leaders from

both parties and both Houses of Congress, the

Council is structured to take a bipartisan approach

that could be effective. However, it would need

broader powers and a longer life than it has now. Its

present duties are only to develop recommendations

for greater competitiveness, and unless continued by
16 ● Competing Economies: America, Europe, and the Pacific Rim

Congress, it will go out of existence in 1992. It might

be turned into a commission, given at least a 5-year

life, and directed explicitly to identify critical

commercial industries and strategies to support

them. It would also have to be given some power to

implement the strategies if it is to have a real impact.

Another possibility is to lodge the responsibility

for industrial strategies and trade policy in a small

office in the executive branch, possibly in the

Executive Office of the President. That location

would be a good position from which to remind and

encourage other agencies to consider effects on

competitiveness in all their major decisions. This

could only work, however, if the office is seen as

truly competent and well-informed, with close

interaction with industry and a staff of exceptional

people. And it could have little effect on other

government agencies unless it had strong Presidential backing. Major government reorganization is not

required, but it could help. If Congress wishes to

adopt a more proactive approach to trade and

competitiveness issues, a reorganization could produce more focused policymaking and more direct

lines of authority. In trade matters, for example, the

U.S. Trade Representative (USTR) is charged with

coordinating all relevant government agencies to

formulate trade policy, and then with negotiating

from that position. However, the USTR’s own staff

is thin and lacks continuity; it can do little more than

concentrate on current issues. Yet responsibility for

a durable, strategic approach to trade policies that

guard basic American interests is lodged there.

Much the same is true of policies that influence

industrial competitiveness. The absence of a strong

voice in government for international competitiveness just about guarantees that other objectives (e.g.,

foreign policy, national security) will win in a

dispute.

Several bills in Congress have proposed a reorganization to focus Federal trade and competitiveness policy functions. Some would establish a

Department of International Trade and Industry,

assuming many of the functions of the Department

of Commerce and the USTR.36 Some concentrate on

trade; they would set up a department that consolidates USTR and the trade policy units from several

departments and would establish a Cabinet committee to coordinate international economic policy.

Others focus on technology and industry. There have

been several bills to create a Department of Industry

and Technology, expanding the Commerce Department’s export promotion authority and creating a

Civilian Technology Agency (CTA);37 some of

these bills would also create an independent U.S.

Trade Administration, consolidating the USTR and

the Commerce Department’s trade agencies.

Whatever bureaucratic arrangement is chosen

matters less than the substance of the strategic

policies and the commitment of both the Admin“ “stration and Congress. No arrangement will solve all

coordination problems; there are always competing

government objectives related to trade and industrial

competitiveness. And no arrangement will create a

U.S. equivalent of Japan’s powerhouse Ministry of

International Trade and Industry. What it could do is

make possible a modest start in pulling together

policy strands that would promote critical industries

and our national economic welfare.

A Technology-Friendly Environment

Some of the most important options to help

critical commercial industries perform better could

also improve the competitiveness of all American

industry, across the board. These are options to

create a hospitable environment for the development

and adoption of new technologies generally, throughout manufacturing, and they merit close consideration whether or not more targeted efforts are

undertaken to nurture particular industries. OTA’s

earlier report, Making Things Better: Competing in

Manufacturing, considered in detail options to help

manufacturers improve their performance through

better use of technology. Defined broadly, technology includes not only new products and advanced

production machinery, but also efficient organization of work and effective use of people.

Industry and government both have parts to play

in building a better technology base for U.S.

manufacturing. The report defined four areas in

which government could usefully contribute:

●

●

●

●

Improving the financial environment for

U.S. fins, which means taking action to

reduce capital costs and relieve other pressures

to show high profits every quarter.

Upgrading the education and training of the

managers, engineers, technicians, and workers

needed in manufacturing.

Diffusing technologies throughout the manufacturing sector.

Forming a strategic technology policy to

promote the development of new technologies
Chapter I-Summary and Findings ● 17

with commercial promise through collaborative ventures with industry.

Options in the first three categories outlined

above would benefit all U.S. manufacturing with no

distinctions among industries. The fourth is for a

more targeted effort, and is discussed in a later

section. Most of the options summarized in this

section are analyzed in greater detail in two recent

OTA reports, Making Things Better and Worker

Training, as well as in chapter 2 of this report.

The Financial Environment

The U.S. financial environment is not hospitable

to long-term investment in new technologies and

production equipment. High capital costs favor

taking short-term profits rather than investing for the

longer run, as do pressures from the stock market.

Capital costs are affected by several factors, including interest rates, the economic depreciation of

investment and its tax treatment, and other fiscal

incentives for investment. Recent studies that take

all these factors into account provide solid evidence

that U.S. capital costs have been substantially higher

than those of Japan and Germany for more than a

decade, through 1988.38 Moreover, the terms on

which capital is made available are more favorable

to long-term investment in both Japan and Germany.

An example is the stable shareholding system in

Japan, in which the majority of shares in large

corporations are held by either companies in the

same group or by stable shareholders, and these

companies do not trade their shares.

In the United States, government policy has

contributed damagingly to high capital costs. The

main culprit at present is the huge, accumulating

Federal budget deficit, which puts upward pressure

on interest rates. Also, the U.S. tax system has many

fewer incentives for productivity-enhancing investment in manufacturing than those of our competitors, especially Japan. The dilemma is that some

specific fiscal measures that might help firms

modernize and invest in new technologies would

also tend to worsen the budget deficit, because they

would lower revenues, at least in the short run. The

budget agreement of 1990 forbids this unless there

is a compensating rise in tax revenues or decline in

spending elsewhere in the same segment of the

budget (nondefense domestic programs). If Congress wishes to lower capital costs through tax

breaks, it will need to find something else to cut, or

get agreement to raise taxes in compensation.

Ultimately, economic growth based on better competitive performance could ease budget problems,

but in the short run there will be a price to pay.

Another choice is to increase savings, and thus

ease pressure on interest rates. Options include a

national savings campaign, with appeals to patriotism plus attractive interest rates for regular payroll

savers, or perhaps a consumption tax designed to

escape the severe regressive effects of a flat tax.

Another option is further restrictions on deductions

for home mortgages.

Tax breaks to industry, such as accelerated

depreciation for investment in new equipment or a

tax credit for R&D, have shown positive effects in

the past, though the exact size is debatable. Also,

they are expensive--especially accelerated depreciation, which can cost the U.S. Treasury tens of

billions per year; whatever they cost would have to

be made up elsewhere.

Incentives to hold investments longer might

relieve some of the pressure to focus on short-term

profits. One option would be a capital gains tax that

favors long-term gains and penalizes short-term

turnover. It would be most effective if applied to

pensions and other funds that are now tax-free, since

these funds hold one-third of all stocks and probably

account for half of transactions on the stock market.

Human Resources

Success in manufacturing depends on having

well-trained people, comfortable with the demands

of advanced technology, at every level from the

manager’s office to the shop floor. The failures of

our public schools in turning out well-educated

young people with good work habits is well-known.

Unfortunately, training of adult workers in the

United States is deficient compared with that in

several other countries, in particular Japan and

Germany.

The quickest payoff may be in improved training

of the active workforce, since improvements in

schooling take many years to show up on the job. An

aggressive, far-reaching option, which guarantees

more training without any direct cost to the government, is a payroll-based training levy. Employers

would have a choice of spending a certain amount on

training their workers or paying the same amount

into a national training fund. Several foreign countries, including France, Germany, Ireland, and the

Republic of Korea, use the system. Government
18 ● Competing Economies: America, Europe, and the Pacific Rim

might also offer technical assistance on training

needs and best practice training methods to trade

associations, labor-management groups, or industrial consortia. Restoration and improvement of

formal apprenticeships is another option for government-industry partnership. And the Federal vocational education program has many useful features,

including school-to-work programs, but they lack

adequate funding.

Training linked with technology assistance is

effective, and a few States provide it. However,

technology extension services are scarce and spotty

in the United States, and the link with training is

scarcer still. The National Institute of Standards and

Technology (NIST) is in charge of the Federal

Government’s modest technology extension effort;

it could add a training component. The Federal

Government could also take a more active hand in

testing and evaluating computer-aided training technologies, including adapting and transferring instructional technologies developed for the armed

forces.

Because education and training of engineers is a

central competitiveness issue, the Federal Government could also be more active in this regard. While

the supply of engineers seems adequate now, it could

dry up in future years as the proportion of white

males in the work force declines; white males

predominate in engineering. This is essentially a

problem to be solved in public school education;

attitudes to math and science are formed early.

Meanwhile Federal grants to women and minorities

to encourage science and engineering careers seem

to get results, and deserve support. Retraining of

midcareer engineers is another way to enlarge the

supply over the next few years, especially at a time

when engineers are losing jobs in defense industries.

Technology Diffusion

U.S. institutions for diffusing new technologies

throughout manufacturing are thin. Even large firms

with the resources to develop or acquire the technologies they need often neglect to take what they could

from outside the firm. Many of our 350,000 small

and medium-sized manufacturing firms are worse

off, with only scant exposure to new technologies.

Technology extension services funded by government could improve the manufacturing of small and

medium-sized firms, but so far it is more potential

than actuality. Defining industrial extension as

one-on-one technical advice given to individual

fins, 16 States had such programs in early 1991,

and another 7 had technology demonstration or

assistance centers. Spending by the 23 States for 27

centers amounted to about $50 million. A small

Federal program was established under NIST administration in 1988; it now includes five centers,

with one more planned, each with Federal funding of

about $1.5 million per year and an equal amount

from State, local, and private sources. For perspective, compare these scattered programs with technology extension in Japan. Besides the nationwide

system of 185 technology extension centers, funded

at about $500 million, half from the national

government and half from the prefectures, many

Japanese cities, wards, and other localities support

industrial halls that offer similar services. These

include regular workshops on common manufacturing problems, use of specialized equipment at low

fees, demonstrations of new technologies, plant

visits by field agents, and referral to expert consultants for advice on special problems.

If Congress wished to support a wider network of

technology extension centers, it might set a minimum goal of 120 centers, serving about 24,000 small

and medium-sized firms per year and costing about

$120 to $480 million a year, depending on the level

and quality of service. Some of the funds could come

from State or private sources, though it may be

unrealistic to demand that these sources take overall

the funding within a few years (as the law provides

in the case of the NIST centers). A program of this

size might soon prove insufficient. It would serve

about the same percentage of small and mediumsized manufacturers (7 percent) as is served by

Georgia Tech’s well-regarded industrial extension

service for firms in the State of Georgia. That service

does not advertise for fear of being swamped with

requests.

Another promising option with at least two major

advantages is a system that would allow manufacturers to lease modern production equipment, or buy it

on the installment plan, at subsidized rates. The

system would encourage firms to use up-to-date

equipment, such as computer numerically controlled

(CNC) machine tools. If the system bought U.S.-

made equipment, it would also benefit U.S. builders

of the machinery by offering a stable assured market

for part of their output. An equipment leasing system

for CNC machine tools, for example, could start with

modest government finding-probably about $3
Chapter I-Summary and Findings ● 19

million per year.39 It could be open only to small

firms, or open to all with lower rates for small firms.

An option with somewhat similar effects is special

tax incentives for investments in advanced manufacturing. This is one of the many inducements to

modernize that the Japanese Government offers to

businesses, especially small ones.

Commercialization of technology from Federal

laboratories is a goal that Congress has actively

pursued for more than a decade through laws and

oversight. There has been progress, but the goal is far

from fully realized. On the industry side, many firms

fail to pursue energetically what they could get from

the Federal labs. On the government side, the two

main obstacles are too little money and too much red

tape. With other missions taking priority, lab funding of technology transfer has been scanty. Bureaucratic hoops in the parent agency, especially delays

for legal review, have many times stalled technology

licensing and the conclusion of cooperative agreements between the labs and private industry.

Since Congress passed its latest (1989) law

promoting technology transfer, approval of industrygovernment cost-shared cooperative R&D agreements has speeded up (it now often takes less than

the 90 days allowed under the new law), and such

projects are becoming more accepted. The Department of Energy (DOE) has moved to grant some of

its big multiprogram National Laboratories the

freedom to conclude most such agreements with

industry with only a limited wait for agency review.

A high level DOE group, the Technology Transfer

Project, is working on easing licensing as well as

cooperative R&D agreements. Problems remain,

however. An umbrella agreement for an Advanced

Manufacturing Initiative, negotiated between the

National Center for Manufacturing Sciences (representing over 100 companies) and DOE (covering

several of the national labs) was not formally

launched until July 1991, nearly a year after its

announcement. Moreover, funding to promote commercialization is still limited.

Congress might wish to earmark some of the labs’

R&D appropriation for commercialization efforts,

perhaps mandating that a few percent of the budget

be set aside for the purpose. Also, continued

congressional oversight seems to be necessary for

getting over bureaucratic roadblocks.

Improved protection of intellectual property and

modest changes in antitrust law might bolster the

competitive position of some U.S. manufacturing

industries. Better patent protection could start at

home with speedier enforcement-patent cases that

go to trial usually take 21⁄2 years. Congress might

consider designating special patent judges with the

technical knowledge to move cases through faster

(similar in principle to the tax courts). In foreign

markets, the Japanese system has been a special

problem. It is slower than the U.S. system in issuing

and enforcing patents, and it strongly favors licensing of patents, which U.S. companies often do not

wish to do. While the U.S. Government negotiates

with Japan on these problems, Congress might

establish a program in the Patent Office to provide

U.S. firms with information on the Japanese system.

Antitrust law and enforcement have been greatly

relaxed in the past decade. Changes have been made

to allow cooperative endeavors that could improve

U.S. competitiveness; perhaps some further moves

in that direction could be considered. For example,

Congress might allow the Justice Department to

certify in advance that joint projects do not violate

the law, or to establish ‘safe harbor’ market shares,

so that shares below a certain percentage would not

be in violation. Probably most important, Congress

could recognize that joint ventures or mergers

between U.S. firms are sometimes necessary to fend

off foreign competition, and could instruct the courts

to listen seriously to such arguments. Congress

might also instruct the Justice Department and the

courts to weigh carefully the long-term competitive

effects of a foreign fro’s taking over a U.S. firm.

Finally, information and exhortation to American

manufacturers on how to make things better, given

under U.S. Government auspices, have proven

surprisingly effective. In 3 years, starting in 1988,

the Commerce Department has given the Malcolm

Baldrige National Quality Award to nine companies

meeting the award’s high standards. In that time, 203

companies applied for a possible 18 awards (2 each

in 3 categories for each year). The award costs the

taxpayers next to nothing. But it has become an

excellent means of technology diffusion in several

ways. Just filling out the application is instructive.

Then, all applicants, win or lose, receive reports

from examiners outlining their strong and weak

points. Finally, the winners are obliged to share the

details of what they did to win. Company representatives give hundreds of speeches a year and hold

briefing sessions for executives of other companies,

including their competitors. One manager who
20 . Competing Economies: America, Europe, and the Pacific Rim

attended came away amazed at the level of detail—

‘‘everything but the financial data. ’

Trade Policy Options

Promotion of liberal trade (often termed “free

trade”) has been the policy of the United States

since World War II. For two or three decades, this

policy served national interests well enough. In the

postwar world, the United States was far enough

ahead of most other countries that America prospered even when trade was more liberal for imports

into the United States than for U.S. exports to some

other countries.

Today, with several key U.S. industries fallen to

second rank, free trade is not necessarily to the

country’s advantage, certainly not one-way free

trade. Many U.S. industries are struggling to meet

foreign competitors equipped with plentiful supplies

of patient capital and cutting-edge technology. The

outlook is particularly bleak for small or startup

firms trying to break into markets dominated by

powerful multinationals. Today, most of the highreward industries-characterized by high knowledge intensity, particularly large economies of scale,

positive spillovers to other industries, and well-paid

jobs—are tough to survive in without government

help. Indeed, except for the United States, most

developed nations have some kind of government

program to promote the competitiveness of hightechnology industries.

Why has the United States been so vulnerable to

these foreign programs? Industry is partly to blame.

Many U.S. managers have stuck far too long with

outmoded technologies and management styles. But

government is also to blame. Unlike its ablest

competitors, the U.S. Government has not pursued

domestic programs to develop its own important

industries. The only way that the U.S. Government

has responded to tough foreign competition is as a

trade issue: it has attempted to open foreign markets,

and it has at times levied extra import duties

intended to compensate precisely for foreign subsidies and dumping. However, important foreign

market barriers have often taken many years to

remove. Similarly, U.S. law regarding subsidies and

dumping has done at best a slow, incomplete job of

compensating for advantages that foreign industrial

policies confer, and the extra duties levied at the

border are inherently inadequate to compensate for

another country’s domestic policies.

Rather than reacting to foreign governments’

initiatives, always at least one step behind, it would

be easier and more effective to improve U.S.

competitiveness using domestic programs. Measures might include R&D incentives, tax breaks to

encourage R&D and capital investment, increased

commitment to technology diffusion, and support

for education and training. Trade measures-trying

to open foreign markets, and protecting the U.S.

market--could be used when necessary, but in a

subordinate role. Moreover, these trade measures

could be used more strategically. Efforts to open

markets could focus on areas of the greatest strategic

importance; and protection could be based not on

legalistic criteria, but on the industry’s need and

place in the economy.

Some say that government cannot and should not

pick industries to promote, and that attempted

government assistance to particular industries is

likely to make them less rather than more competitive. However, there is general agreement on many

of the technologies (e.g., electronic components and

information technologies) that are key drivers of

industrial performance, and it is not hard to identify

industries that use those technologies. And while

government intervention has sometimes been counterproductive, the experience of several governments provides guideposts for what approaches

work best. For example, industry should take the

lead in proposing joint government-industry R&D

programs and should shoulder much of the cost;

policies should conform with market forces as much

as possible; U.S. industry must compete with the

best in the world; and industry must work to improve

its competitiveness and outgrow the need for assistance.

Responses to Foreign Market Barriers

Foreign market barriers often hurt U.S. industries.

While GATT has reduced quotas (quantitative

restrictions on imports) and tariffs (taxes on imports,

also called duties), there are many other barriers to

imports. These include burdensome customs procedures; discrimination in standards, regulations, and

government procurement; and private agreements,

tolerated or encouraged by the government, that tend

to exclude foreign products.

Normally, the U.S. response, if any, is to negotiate

to eliminate barriers, with negotiations led by the

Office of the United States Trade Representative

(USTR). The United States is hindered by lean
Chapter I-Summary and Findings ● 21

USTR staffing, frequent turnover of senior government officials, and the representation of foreign

interests by former key government officials. To

address these problems, Congress might wish to

increase USTR staffing, create more high-level

career positions at the USTR and other government

agencies, and prohibit senior trade officials from

representing foreign interests for several years after

they leave government service.

Other reasons why foreign markets can take many

years to open are harder to address. Barriers take

time to identify; other countries can stall negotiations; countries hedge on promises to remove

barriers; and when one barrier is removed, another

can take its place. And some barriers are ingrained

in a country’s business practices and domestic

policy, making their removal difficult even if the

foreign government is willing.

The United States has only limited leverage to

induce foreign countries to remove barriers. GATT

dispute resolution procedures, while recently improved, are still slow and uncertain. Continuing U.S.

efforts in the Uruguay Round to improve these

procedures might be productive. Congress might

also wish to consider the ambitious task of creating

a new multilateral trading system, with a much

stronger commitment to and enforcement of free

trade. Such a system would require a great deal of

planning and commitment, and probably would have

to be limited to a very small group of like-minded

nations in the beginning.

The United States can also threaten to retaliate

with barriers of its own to imports from the country

in question. Under Section 301 and related sections

of the Trade Act of 1974, as amended, 40 the USTR

can investigate foreign trade barriers, negotiate for

their removal, and if necessary retaliate. However,

even the investigation phase angers trading partners;

and retaliation would most often violate GATT,

could provoke counter-retaliation or GATT challenges, would not solve the problems of the U.S.

industry facing the market barriers, and could cause

problems for downstream U.S. industries. Therefore, Section 301 is not a very serviceable tool.

Limited U.S. leverage makes negotiations often

slow and ineffective. Barriers that cause particular

damage-e. g., Japanese barriers to the sale of

semiconductors and supercomputers-often persist

for years. While market opening is a worthwhile

long-term goal, attempts to remove specific barriers

often provide little or no relief in the interim, during

which time the affected U.S. industry can suffer

serious and irreversible damage.

U.S. policy toward market barriers could be

reoriented to emphasize domestic measures to maintain competitiveness rather than negotiations to

remove barriers. Normally domestic measures, such

as R&D support and tax breaks, could keep an

industry competitive even in the face of trade

barriers. While opening foreign markets could still

be pursued as a long term goal, there would be no

urgency requiring measures that would anger trading

partners. It would also make sense to allocate the

government’s limited negotiating resources according to an industry’s strategic importance.

In exceptional cases, domestic measures might

not be enough. This might be the case with

semiconductors; limited access to Japan’s market,

the largest and most discriminating in the world, can

be an important handicap to U.S. fins. In the rare

case of an important U.S. industry facing substantial

harm from foreign market barriers that domestic

measures cannot alleviate, the national interest

might be served by pulling out all the stops to

remove the barrier: quick, aggressive negotiations

led by high-ranking officials, perhaps with cabinetlevel or even Presidential involvement, followed if

necessary by the threat of substantial retaliation,

carried out if necessary.

Use of Protection

U.S. industries normally receive protection against

imports only when they are dumped or subsidized.

In this case, an extra duty can be assessed in an

amount that in theory precisely counteracts the

trade-distorting subsidy or dumping. However, U.S.

law and practice regarding subsidies and dumping

by and large fails to compensate for the advantages

foreign governments create for their fins. The

reasons include delay, difficulty in proving subsidies or dumping, the law’s ignoring or devaluing

certain subsidies, difficulty in proving the required

injury, and the high expense of legal proceedings. A

further problem is that the effects of government

assistance can increase over time, rather than dissipating as the law assumes. To some extent, the law’s

limited effectiveness stems from adherence to GATT’

requirements.

A more effective approach would be to assist

industries beleaguered by imports primarily by
22 . Competing Economies: America, Europe, and the Pacific Rim

domestic measures to promote competitiveness

through cost control, productivity enhancement, and

quality improvement. Where domestic measures

alone might not suffice, protection could also be

used, lasting only as long as strictly necessary.

Criteria for awarding protection would include the

industry’s need, its merit (including whether the

industry was making reasonable efforts on its own

and showed promise of effectively competing on its

own), and the importance of the industry in the U.S.

economy.

Protection roughly along these lines already exists

under Section 201 and the following sections of the

Trade Act of 1974, as amended, which is patterned

after GATT’s so-called “escape clause” (GATT

Article XIX). Section 201 permits the President to

grant import relief for up to 8 years when the

International Trade Commission (ITC) finds that

increased imports ‘cause or threaten serious injury’

to an existing U.S. industry .41 However, Section 201

has rarely been used in recent years, and as currently

written and interpreted is not very serviceable. The

injury requirement usually will not be met before

serious damage is done, and meeting it is especially

hard for high technology industries with rapidly

growing markets. While Section 201 could be

amended to cover these situations, there is some

question as to whether that would be consistent with

GATT.

Congress could empower the President to grant

protection apart from Section 201. Under GATT

Article XXVIII, the United States could negotiate

with other countries to accept higher U.S. tariffs on

certain goods in exchange for reduced U.S. tariffs on

other goods. While reduced tariffs on the other

goods could adversely affect other U.S. industries,

the government could possibly mitigate such effects

with tax breaks or other programs. Also, continued

protection ideally would depend on sufficient effort

from industry to improve its competitiveness. If

other countries would not agree on compensation, in

rare cases as a last resort the United States might

impose protection anyway and risk a GATT challenge. To some other nations, that might be interpreted as a signal that the United States was

abandoning its commitment to GATT and free trade.

While this is a risk, it might be preferable to the

alternative of losing critical industries altogether.

Promoting Exports

Nearly all industrialized nations promote exports.

Exporting is difficult, requiring firms to overcome

differences of language, geography, and custom.

Governments help firms to learn about markets, to

identify potential customers and distributors, and to

comply with administrative requirements. Such

assistance seems particularly needed in the United

States, whose firms must export more manufactured

goods than before. However, the United States

spends far less promoting manufactured exports than

many of its important trading partners. In the late

1980s, low funding even led to situations such as

commercial officers in U.S. embassies not having

funds to return phone calls from U.S. firms. While

budgets have improved somewhat in the last few

years, Congress might wish to consider funding

more on a par with that of other countries. Congress

might wish to make a policy statement that export

promotion should be a priority not only for commercial officers abroad but for the whole diplomatic

staff. Cabinet-level involvement in promotion activities, such as Commerce Secretary Mossbacher’s

presence in Tokyo in April 1991 to kickoff the Japan

Corporate Program, could also be encouraged.

Nearly all industrialized nations also assist firms

with export financing. In the United States, applications for financing assistance for manufactured

exports must be justified on a case-by-case basis; the

need for justification increases delay and the burden

on the exporter. Congress might consider adopting

the approach used by Japan and many European

countries, which determine in broad policy terms

what exports to assist and then assist all creditworthy

exports within the guidelines. Many other countries

condition some of their foreign aid on purchases of

capital goods, construction services, and the like

from the donor country. While the United States also

ties some aid to purchases, U.S. nondefense aid

focuses on agriculture, nutrition, health, and education, rather than large capital projects. U.S. effort to

improve international agreements limiting the use of

tied aid is worth continuing. However, it is uncertain

how successful that effort will be. Congress could

expand the so-called War Chest for matching foreign

tied aid offers to more effectively discourage foreign

tied aid. The War Chest was funded at $150 million

in grants for fiscal year 1991, though as of July 1991

only $58 million had been used. Some other

countries spend many hundred million dollars annually.
Chapter I-Summary and Findings ● 23

Congress could expand the Trade and Development Program (TDP), funded at $35 million for

fiscal year 1991. TDP helps to pay for feasibility

studies or other plannining assistance performed by

U.S. firms for capital projects in developing and

middle-income countries. U.S. participation in the

planning phase has often helped U.S. firms win

contracts for the actual project. So far, $161 million

in program funds have led to documented U.S. sales

totaling $3.2 billion, with an estimated $18 billion

more sales expected as projects mature.42 In expanding TDP or otherwise increasing the emphasis on

capital projects, care should be taken to avoid

adverse environmental and social effects, which in

the 1970s turned the United States away from such

projects.

As well as promoting exports, the U.S. Government at times impedes export of high-technology

goods and data by its system of export controls.

Export of dual-use items—those with both military

and civilian use-is regulated by the Export Administration Act of 1979, as amended;43 this requires

firms to obtain a license to export certain items for

certain destinations. In 1990, perhaps $90 billion

worth of U.S. exports of manufactured goods

required a license.

There is a genuine need for some control over

exports to guard advanced technologies and products that could be used in weapons against the

United States. Yet export controls have also proved

an unnecessary hindrance to some manufactured

exports, at times merely shifting the business from

U.S. to foreign firms. For example, until mid-1990

U.S. export controls limited exports of personal

computers based on Intel’s 80386 processor, although they were easily available from foreign

sources. While U.S. export controls are being

reformed, the process is incomplete. Reform could

be facilitated, as could ongoing administration of

export controls, by a competitiveness policy agency.

Such an agency could identify exports with strategic

economic importance and help to expedite their

approval when possible. While an Administration

sympathetic to competitiveness concerns is essential

for fully effective reform, Congress could take

measures on its own to further decrease unnecessary

burden on commercial competitiveness. These measures include better funding and staffing of the office

that determines when foreign availability makes

U.S. controls ineffective, encouraging more political

appointees with technical backgrounds, encouraging

more use of automatic indexing to track technological change (subject to yearly review), and court

enforcement of congressionally mandated deadlines. Congress could take measures to stop abuse of

the State Department’s Munitions List, which is

supposed to contain only items with purely military

use but has been used to control some dual-use

items.

An emerging area of concern is the use of

so-called “foreign policy” controls, which are

largely untouched by the recent reforms. Congress

might wish to extend the recent reforms to foreign

policy controls where feasible. For example, if the

purpose of a foreign policy control is to guard

technology for making chemical weapons, Congress

could require that items not be controlled without

multilateral agreement to control them, and that

controls be removed if they are ineffective because

of foreign availability.

GOVERNMENT-INDUSTRY

PARTNERSHIPS

In addition to trade policy, a comprehensive

strategy for greater competitiveness includes promotion of technology development and diffusion,

risk-sharing between government and industry, and

a generally supportive environment for adoption of

new technologies.

Risk Sharing in Technology Development

The least intrusive and least expensive of several

risk-sharing options is an R&D partnership for

developing new technologies of commercial interest.44 The main reason for government to support

such ventures is that potential benefits to society are

great but the likely payoff to individual firms is too

small or the possibility of failure too great to make

it worth their taking the risk. In the U.S. financial

environment, with its high costs and emphasis on

short-term profit, government contributions to risky

ventures are especially significant.

The Federal Government has in the past given

some technology assistance for commercial purposes, but not on a coherent, strategic basis. By far

the largest existing Federal program for precommercial technology development is NASA’s aeronautical R&D program (amounting to over $900 million

per year, including expenses for wages and salaries,

R&D, and facility construction), which supports

military and commercial technologies. The 5-year
24 ● Competing Economies: America, Europe, and the Pacific Rim

Sematech program, to help the semiconductor industry develop a manufacturing process technologies

for memory chips, is large ($ 100 million per year for

5 years in government funds and a matching sum

from industry) and was created ad hoc in response to

strong industry pressure and the argument that a

competitive U.S. semiconductor industry is essential

to national defense.

A small beginning for a more general R&D

partnership is the Advanced Technology Program

(ATP), operated by NIST in the Department of

Commerce. ATP was established in the 1988 trade

act, which authorized the Program to assist businesses in doing research in precompetitive, generic

technologies. In fiscal year 1990, Congress provided

ATP’s first tiding, $10 million, and raised funding

to $36 million in fiscal year 1991.

ATP might in time become a full-fledged civilian

technology agency (CTA), although it was not

created with that specific mission. Bills to establish

more formally an Advanced CTA in a new Department of Industry and Technology, which would

replace the Department of Commerce, were introduced in the I00th and 101st Congresses.45 These

bills defined the agency’s mission as contributing to

U.S. competitiveness by supporting long-term, highrisk projects that are likely to yield important

benefits to the Nation but lack adequate private

support. A bill that passed the Senate in 1989 would

have given the ATP a similar mission, and authorized funding up to $100 million per year.46

Any CTA would have to start small, as ATP has,

and grow only with experience. A mature agency

might have a research budget of $300 to $600

million per year. This very rough estimate is based

on the list of about 100 technologies developed by

the private-sector Council on Competitiveness,47

each of which might merit government participatory

grants of about $1 to $2 million per year, with

enough redundancy that two or three grants might be

made in each field.

Collaboration with industry in choosing technologies for support would be essential. If private

companies are not interested enough in the technology to put up at least half the money and do much of

the work, then the chances for commercial success

are probably remote. Joint finding helps the government resist special interests or political pressure in

choosing technologies for support. At the same time,

a CTA would need a set of guiding principles-e. g.,

it should look for technologies that are knowledgeintensive and have wide applications in many

products and industries.

NASA’s experience underscores the importance

of collaboration with industry, if the goal is competitive success. Most of NASA’s R&D is for military

as well as commercial applications, and much is

basic research that is quite freely available to the

world and has little or no near term application to

commercial production. NASA’s greatest contributions to competitiveness are in two areas: its

facilities, such as wind tunnels and its Numerical

Aerodynamic Simulator, which are solely or preferentially available to U.S. companies; and R&D

projects in which U.S. companies are close collaborators.

So far, the U.S. Government’s offers of collaborative R&D projects have been snapped up by private

companies. The Advanced Technology Project’s

frost batch of l-year cooperative grants, amounting

to $9 million, attracted 249 applicants requesting a

total of $150 million. Eleven projects, half of them

joint ventures or consortia, were chosen; they

initiated R&D projects that are expected to cost $100

million (including private funds) over 5 years.

The total dollar amounts in the government’s few

cooperative R&D programs are tiny compared to the

$100 billion per year that U.S. companies spend for

R&D. It is remarkable that such small programs

have drawn so large a response, including proposals

from such industrial giants as Du Pent, AT&T Bell

Laboratories, and IBM.

If Congress wishes to continue the expansion of

cooperative R&D programs, with the ultimate goal

of having an agency of similar size and importance

as the Defense Advanced Research Projects Agency

(DARPA), it may opt for another modest rise in the

ATP budget for fiscal year 1992. It might also

consider putting into law a more formal statement of

goals for the Program.

Congress has already responded in an innovative

way to the question of how to handle participation by

foreign-owned firms in cooperative R&D projects.

In appropriating funds for the ATP for fiscal year

1991, it set standards that apply to U.S.-owned as

well as foreign fins, thus bypassing ownership as

the central criterion for participation. The Secretary

of Commerce is authorized to decide on a fro’s

eligibility based on its contributions to high-value-
Chapter I-Summary and Findings ● 25

added manufacturing production and manufacturing

employment within the United States. Further conditions apply to foreign firms, based on equal treatment for U.S. firms in the foreign fins’ home

country. These provisions provide guidance but give

the Secretary of Commerce great latitude. Congress

may wish to exercise substantial oversight for a time

on how these provisions are carried out, and to

extend these eligibility criteria for at least a few

years to permit evaluation of their merit.

Financial Risk-Sharing

Strategic technology policy goes only so far. It is

up to industry to make the much larger investments

in product design, manufacturing equipment and

tooling, worker training, and acquisition of knowhow by managers and production engineers needed

for commercial production. It is normal and expected for private industry to make these investments and take the risks. Sometimes, however, in

some critical sectors, private investment is inadequate from the standpoint of social benefits. U.S.

investment in production equipment is meager

compared to Japan ’s. Japanese investment in machinery and equipment, as a share of GNP, has been

twice the U.S. rate since the mid-1970s, and the

discrepancy has recently widened. The discrepancy

is especially damaging in critical commercial industries, such as semiconductors, that require continuing large investments for new generations of products every 3 years or so.

Government policies to share financial risks with

industry can take the explicit form of loans or loan

guarantees on advantageous terms, or they can take

the form of tax breaks, which are implicit expenditures. Both put burdens on the Federal budget, and

Congress cannot opt for either without compensation tax rises or spending cuts. Macroeconomic

policies that help to lower capital costs and provide

stability are probably the most important help

government can provide to encourage greater investment in technology development and deployment by

U.S. manufacturing companies. Specific options for

financial risk-sharing are worth considering, however.

Of the two forms of risk-sharing, tax breaks are

more within U.S. tradition and experience. In the

past, U.S. companies have received accelerated

depreciation and tax credits for capital investments.

Although certain activities (e.g., real estate) have

been singled out for special treatment, Congress has

not in the past designed tax incentives to improve the

competitiveness of particular industries. Across-theboard tax breaks for capital investment would cost

the U.S. Treasury tens of billions per year, while

loosening the rules for selected industries would cost

less. The National Advisory Committee on Semiconductors, for example, estimated that allowing

3-year rather than 5-year depreciation for new

investments in semiconductor manufacturing equipment would cost the U.S. Treasury $180 million per

year in lost revenues, and would prompt $450

million in added capital investments by the industry.48

If Congress wishes to target tax breaks to critical

commercial industries, the best way is to make these

tax measures part of a comprehensive strategy that

includes such things as technology support and trade

policy. This presupposes the existence of an institution able to form such a policy.

Direct financial aid to commercial industries is

mostly foreign to U.S. experience; the one previous

effort, with the Reconstruction Finance Corporation

after World War II, was not targeted to critical

industries, and is generally considered an expensive

failure. If Congress wishes to consider direct aid in

exceptional cases, it may wish to start at a very

modest scale.

Government Purchases

Government purchases have been an important

factor in the birth and growth of several industries,

including aircraft engines, semiconductors, and

computers; the big buyer in each case was the

Department of Defense (DoD). Today, defense

purchases are not a very promising source of

financial support for critical commercial industries.

Technological spillovers from military to commercial products are probably declining (though the

evidence on this is mixed). More important, laws

and regulations governing DoD purchases are so

restrictive and cost-inflating that it is increasingly

difficult to combine military and civilian production

and to take advantage of whatever spillovers may

exist. Post-Cold War declines in defense spending

have removed some of the potential support.

Federal, State, and local government spending for

nondefense goods amounted to about $97 billion,

$10 billion of it Federal, in 1990. Although the total

is modest as a share of the GNP for goods (about 5

292-889 0 - 91 - 2 QL:3
26 ● competing Economies: America, Europe, and the Pacific Rim

percent), certain kinds of government purchases can

be significant. For example, Federal purchases

greatly aided the supercomputer industry’s development. This role—being an assured customer for a

startup product—is especially significant. Suppose

the Postal Service (a quasi-public agency) decided

that electric vehicles could help reduce pollution,

and that their limited range and need for frequent

recharging would not handicap mail runs. A substantial order might give a real boost to a U.S. producer

of electric vehicles, providing it with a head start

over foreign competitors. Preference for U.S. firms

would be consistent with the GATT Procurement

Code, which does not yet cover the Postal Service.

Internationally, procurement tells a familiar story:

the U.S. market is more open than those of many

major trading partners; many major trading partners

use procurement as a strategic tool to develop

important industries, while the Federal Government

generally does not do so intentionally. Congress

might wish to reorient U.S. policy to be more

proactive: as well as negotiating to make procurement markets more open, the United States could

take stock of opportunities to use its own procurement strategically, such as the Postal Service example. There are likely many such opportunities that

are not yet prohibited by international agreements.

Using procurement strategically would help U.S.

competitiveness pending further market-opening

agreements and would give the United States more

leverage in negotiations. Awareness of strategic

opportunities would make the United States a more

informed negotiator. For example, if Postal Service

procurement of electric cars were deemed a strategic

opportunity, the United States might not agree to

subject the Postal Service to the GATT Procurement

Code unless other countries give up equivalent

opportunities.

AMERICAN FIRMS, FOREIGN

FIRMS, AND AMERICAN

INTERESTS

Government involvement in efforts to boost

civilian industrial competitiveness invariably raises

the issue of who is eligible to participate. Three

decades ago, there were only a handful of true

multinationals. Today there are hundreds of firms

that have a substantial interest and presence in more

than one nation. The stock of direct investment

abroad, on the part of firms from all nations, has

increased over 10 percent per year since 1960, and

by 1988, stood at over $1.1 trillion.49 Direct

investment abroad is increasing much faster than

world merchandise trade or world economic output.

All developed nations must make decisions about

how to treat foreign firms, and increasingly, those

decisions center on foreign firms’ eligibility to

participate in government-sponsored projects to

improve industrial competitiveness.

Foreign direct investment in the United States

(FDIUS) is also on the increase-in fact, FDIUS is

increasing faster than the world average. Between

1967 and 1988, the stock of FDIUS increased from

$9.9 to $328.9 billion, or over 18 percent per annum.

The world stock of direct investment abroad increased from $105.5 billion to $1.2 trillion over the

same period, or 12.4 percent annually. The gross

product of foreign affiliates in the United States

accounted for 3.4 percent of GNP in 1987, nearly

double their 1.8 percent in 1977. The presence of

foreign direct investors is especially prominent in

manufacturing. In 1987, U.S. manufacturing affiliates of foreign parents accounted for 12.2 percent of

the assets of all American manufacturing, compared

with 8.9 percent of the total net worth of all

nonfinancial corporations. So while foreign companies are relatively small players in the U.S. economy, they control or influence a significant chunk of

manufacturing.

The U.S. Government funds relatively fewer

industrial-competitiveness programs that could admit

foreign firms than governments in other developed

nations, especially in Europe and Japan. Nevertheless, we are in the thick of the debate; foreign

companies have asked for access to Sematech and

the Advanced Technology Program of the Department of Commerce. How we end up dealing with

foreign firms or their American affiliates depends

greatly on how they behave. American firms too are

held up to scrutiny in terms of their contributions to

national well-being in the debate, often in caricature;

some believe that the typical American firm does

little manufacturing or R&D in the United States.

When we examine the contributions American firms

make to the U.S. economy and living standards and

compare it with foreign fins, the caricatures fall

apart.

The U.S.-based parent companies of American

multinationals act, on the whole, like American

companies: their U.S. operations accounted for 78
Chapter 1--Summary and Findings ● 27

percent of the companies’ total assets, 70 percent of

their sales, and 74 percent of their employment in

1988, slightly more on all three counts than in

1977.50 Contrary to the popular stereotype, there is

a slight tendency for U.S. multinationals to do more

of their business in the United States than formerly.

American multinationals also keep good jobs and

develop technology at home: the vast majority of

their R&D is done here,51 compensation per U.S.

employee is 39 percent higher than compensation

per employee in offshore affiliates, and assets per

U.S. employee are 30 percent higher than assets per

employee in offshore affiliates.

U.S. affiliates of foreign multinationals behave

much like American firms in America, although

there are some key differences. Affiliates do not

differ significantly from American companies in

terms of compensation per employee and investment

in plant and equipment as a percent of sales.52 They

treat their employees similarly during economic

downturns, being about as likely to lay off workers

as American companies. U.S. affiliates of foreign

multinationals are, on the other hand, less likely to

do R&D in the United States than American

companies; the R&D intensity (spending on R&D as

a percent of sales) of U.S. manufacturing affiliates

was about half that of American manufacturers. This

is consistent with common behavior by multinationals (including American multinationals), most of

whom do the bulk of their R&D at home. Aggregate

data on the hours and quality of training given in

U.S. affiliate companies are not available. We do

know that workers and managers in Japanese motor

vehicle transplants receive substantially more training than workers and managers in American companies’ auto plants. overall, however, we would

expect to find little overall difference in the amount

or quality of training given to workers in U.S.

affiliate companies, compared with workers in

American companies.

There are two sources of real difference between

the behavior of affiliates and the behavior of

American fins. Foreign affiliates are far more

likely to import than American-owned companies,

and affiliates of Japanese parents more so than

affiliates of European or Canadian parents. The

merchandise trade deficit associated with affiliates

of foreign parents is substantial; in 1988, it was $90

billion, three-fourths as large as the entire U.S.

merchandise trade deficit.53 It is a mistake, however,

to hold foreign companies primarily responsible for

America’s poor trade performance. In large part, we

are responsible for that: our anemic savings rate does

not generate enough capital to cover our investments; our appetite for consumption is greater than

our production; foreign goods are often better and/or

cheaper than domestically made ones. The fast

increases in foreign direct investment, and the

associated trade deficit, are mainly results of these

underlying weaknesses, not the causes. In other

words, if we somehow prohibited American affiliates from importing, or forced them to export more

(like some developing countries do), and changed

nothing else, we would expect the dollar to fall to

compensate.

Japanese direct investors also behave very differently in many respects than other foreign investors

or American fins. Their propensity to import is

higher; in 1988, affiliates of Japanese companies’

imports totaled $75.9 billion, 51 percent of total

imports of affiliates. Japanese affiliates’ share of

U.S. sales was only 26 percent of the sales of all

affiliates. Moreover, Japanese affiliates imported

almost exclusively from Japan; 93 percent of their

imports came from Japan. Other foreign affiliates

import from home, but to a much smaller extent;

European affiliates got 70 percent of their imports

from Europe (although the attachment of affiliates of

any nation to imports from that particular nation is

less strong) and 73 percent of Canadian affiliates’

imports were from Canada.

Japanese direct investment appears to be far more

oriented to selling Japanese products abroad than the

investment of European nations or Canada. This

shows up not just in the propensity of Japanese

affiliate companies to import from Japan, but in the

profile of investment; Japanese firms are more likely

than European firms to invest in wholesaling affiliates, particularly in motor vehicles, and their primary activity is to sell Japanese products. Possibly

as a result, Japanese parents are more likely to

maintain tight control over their affiliates than are

European parents. American affiliates of Japanese

electronics companies mostly employ Japanese managers, while American electronics affiliates in Japan

mostly employ Japanese managers. This pattern of

affiliates of Japanese companies having Japanese

CEOs holds true in other countries as well as in the

United States.

Is there a reason to be especially concerned

about--or even wary of—Japanese investment?
28 ● Competing Economies: America, Europe, and the Pacific Rim

There are concerns that Japanese investment in

high-tech firms may simply be a vehicle for fast

transfer of technology to Japan, and possibly the

eventual benefits (manufacturing, employment, value

added) that flow from innovation. But Japanese

direct investment has had many positive effects as

well. Japanese direct investment in automobile

manufacture has raised the standards of quality

among American auto parts manufacturers that have

sold to Japanese transplants. The transplants have

also been largely responsible for demonstrating how

efficient, high quality Japanese auto assembly works

and, to some extent, transferring knowledge of how

to manage such enterprises. Japanese transplants in

autos have admirable records of training employees

and managers. Given our inclination to consume and

unwillingness to save, increased foreign investment

was inevitable. It is little wonder that it should come

from Japan, whose companies are richer and more

competitive than any others. As to differences in

Japanese affiliates’ behavior and investment patterns, it is possible (though by no means universally

accepted) that these stem more from the inexperience of Japanese firms in investing abroad and

managing affiliates than from peculiarities of Japanese business practice, and that in time their

behavior will come to resemble that of other

multinationals. On the other hand, it is also possible

that there are certain kinds of Japanese investment or

business practice that will not contribute to American well-being. Careful monitoring over the next

few years will be needed in order to determine how

to treat Japanese affiliates.

In the meantime, we are still faced with the choice

of including or excluding U.S. affiliates from

government programs like the Advanced Technology Program. Private research consortia also receive

inquiries from foreign firms and their U.S. affiliates.

While such private organizations often restrict

membership based on a fro’s nationality, government programs (except those whose mission is

national defense) often cannot. Nominally, all nations that belong to the Organization for Economic

Cooperation and Development (OECD) subscribe to

the principle of national treatment, which stipulates

that foreign firms should be treated exactly the same

as domestic firms.54 In practice, most nations of the

OECD base decisions on participation in governmentsponsored competitiveness programs on other criteria. One is mirror reciprocity, meaning that affiliates of foreign firms are given the same treatment in

the host country that the host country’s firms are

given in the foreign affiliates’ countries. Another is

performance standards. In Europe and the United

States, affiliates or subsidiaries of foreign parents

must meet certain standards, for example, establishing manufacturing and R&D facilities in the country,

or adding a certain percentage of value domestically,

to be considered for participation. As of mid-1991,

both reciprocity and performance standards govern

participation in the Department of Commerce’s

Advanced Technology Program. The EC uses similar criteria, with respect to American firms at least,

to govern participation in the Framework Program.

(See ch. 5 for further discussion of the EC’s

Framework Program.)

The issue of how affiliates of foreign firms are

treated in the United States is assuming greater

importance as a competitiveness question, but at the

moment it is of less concern than what we do to

improve the competitiveness of American fins.

There is increasing agreement (far from unanimous)

among analysts that there are many things the

government could do to assist U.S. firms to become

more competitive, including many of the options

noted above, in the summary of policy options.

U.S. TRADE POLICY

Since World War II, the United States’ overriding

objective in trade policy has been to promote free

trade throughout the world, using the GATT system

and, to a lesser extent, bilateral negotiations. The

GATT system has reduced quantitative barriers to

trade (quotas and tariffs), and as a result is often

given credit for the increase in world trade.

For most of the postwar period, U.S. firms

prospered under this regime. To be sure, some

industries had problems, even in the 1960s when

most U.S. industry was at the technological forefront

of global competition. The textile and apparel

industries, for instance, relied heavily on unskilled

and semiskilled labor, and as a result faced competitive pressure from low-wage countries quite early;

treaties limiting textile imports were signed in the

1950s. Television manufacturers came under pressure from imports in the 1960s, as a result of both

high production costs and, toward the end of the

decade, superior technologies (solid state circuitry)

in Japanese products. Until the early 1980s, the

industries that had competitive trouble were regarded as outliers, which the United States could
Chapter l-Summary and Findings ● 29

probably afford to lose as it shifted into hightechnology sectors. But in the 1980s these trade

troubles spread. The indisputable fact emerged that

American technology development and diffusion

was deficient in even the most high-technology

industries.

Now, it is difficult to find an American industry

that is in no competitive trouble at all, and there are

a few where only fast and drastic action can preserve

domestic manufacturing. Moreover, American firms

are significantly behind in an increasing number of

emerging technologies and industries. Trade increasingly exposes U.S. companies to competition

from foreigners with superior technologies, deeper

pockets, better trained workers, and governments

determined to provide their indigenous firms with

advantages.

Some of these advantages are nationwide-e. g.,

frost-rate education, encouragement of household

savings, and tax breaks for R&D and capital

investment. Some governments, notably in Japan,

Korea, and Taiwan, have also targeted for support

specific industries, such as semiconductors and

computers, that seem to contribute disproportionately to a nation’s wealth and economic development. Developing such industries is often a race in

which the firms or nations that get ahead will likely

stay ahead for some time. A company with technical

advantages or greater market share can reap economies of scale or learning, which will let it capture

additional market share or finance more R&D than

its competitors, enabling it to pull still further ahead.

Governments have targeted critical industries

with both domestic policies and home market

protection. Domestic policies include R&D support,

special tax breaks, preferential financing, and tolerance or encouragement of cartel pricing in specific

industries. R&D programs can give firms a technical

advantage over competitors abroad or at home.

Special tax breaks or other financial support can help

domestic companies pay for their investments or

charge lower prices.

Trade protection has rarely if ever been successful

when used alone, but in combination with domestic

policies it can be a powerful tool. A protected home

market can enable domestic firms to catch up with

more advanced foreign companies without having to

compete with them for domestic customers. Profits

in a protected home market can bankroll forays into

export markets at low prices, R&D, and investment

in worker training and equipment. In the short term,

foreign producers could probably meet these low

prices; but in the long term, foreign firms not

similarly supported can lose market share and the

revenues to fund new investments. Of course,

protection can easily go astray, leading to an

industry ill-suited to international competition, but

when managed properly it can aid a nation’s

economic development.

Other countries’ domestic programs and market

protection have often delivered a one-two punch to

U.S. industries. For the most part, the U.S. Government does not have comparable proactive programs

to promote its own industries. U.S. trade policy plays

out by noticing some of the advantages foreign firms

enjoy, and then trying after-the-fact to eliminate or

offset them, usually after substantial delay and often

incompletely. Important foreign market barriers

often persist for years, despite U.S. attempts to

eliminate them. While some advantages enjoyed by

foreign firms are recognized by U.S. dumping and

subsidies law, various problems prevent or limit

redress even in deserving cases. These problems

include the expense required to prepare a petition

and fight a legal case, the time it takes to conduct

investigations, ways by which foreign firms circumvent duty orders, the interpretation of the injury

requirement so as to inhibit timely relief, and the

law’s failure to recognize the impact of many

subsidies.

U.S. policy thus puts important industries at risk.

No matter how hard U.S. firms work, under current

conditions they might not be able to compete with

foreign industries backed by their governments.

Other aspects of U.S. policy are also ineffective in

promoting the competitiveness of U.S. industry.

While many foreign governments’ procurement

policies are attuned to fostering national industries,

U.S. procurement policy is not. The Commerce

Department’s export promotion programs, while

useful, are small and ineffective compared with

programs in other countries. Export financing by the

Export-Import Bank of the United States is sometimes less attractive than that offered by other

countries’ export financing agencies. Finally, U.S.

national security export controls unduly hinder

high-technology exports; while many controls truly

are necessary for national security, some are not.
.30 ● Competing Economies: America, Europe, and the Pacific Rim

EUROPE AND THE SINGLE

MARKET

The United States is not alone in facing questions

of what to do about lagging industries and technologies. The nations of the European Community,

individually and together, have a long record of

attempts to use industrial policy, and with few real

successes in past attempts, are launching a new

initiative. Known as the Single Market, or, after the

proposed date of its inception, Europe 1992, the

initiative is really a wide variety of new policies and

agreements broadly aimed at increasing European

unity, improving technology, and increasing competitiveness.

Unity has been an elusive goal for Europe. The

first step was taken with the Treaty of Rome in 1957,

but progress toward true harmony was slow and

painful. In 1985, the Commission of the European

Communities (CEC) proposed a set of some 300

specific policy actions that would be needed to

eliminate barriers to movement of goods, services,

people, and capital throughout the 12 nations of the

EC.55 For several reasons, one of the most important

being determination to escape the economic stagnation that had bedeviled Europe for more than a

decade, the CEC adopted the 1985 White Paper, and

progress toward implementing the 300 specific

resolutions began. Even though progress was immediate and rapid, the history of past disappointments

led many American analysts to discount it for

several years. Now, however, it is obvious that the

EC will have some kind of single market in place at

least by the end of 1992, although there will likely

be some unfinished items still on the agenda.

Significant changes in European economic activity

are very possible. How significant? And what does

it mean for the United States?

Nearly everyone expects that removing sources of

commercial friction among the 12 EC nations—

impediments to movement of goods, people, services, and capital-will mean faster growth in the

GNP of the European Community. The range of

estimates of the increase in growth is wide. The

closest thing to an official estimate of the EC is a

report done in 1988 (known as the Cecchini report),

which estimated gains at 4.3 to 6.4 percent of GDP

accruing over a 6-year period, or up to 1 percent

additional growth in GDP each year. Another 2.5

percent (over the 6 years) is possible if appropriate

accompanying macroeconomic policies are added,

according to this estimate. The Cecchini report has

been hailed as an impressive technical work, but its

growth estimates are also regarded as optimistic.56

In contrast, the gains in GDP from the elimination of

tariffs on industrial products among Common Market countries in 1968 were on the order of 1 percent,

total.57

What this means for the United States, in the short

or long run, is murky. Additional growth, even if it

were substantially below the levels estimated by the

Cecchini report, would ordinarily mean increased

opportunities for U.S. firms to sell goods to and

produce goods in Europe. The former (increased

exports) would further the national interests of the

United States directly; the latter only indirectly, to

the extent of contributing a bit to the prosperity of

firms headquartered here. But the Cecchini report

also makes it clear that some of the added growth in

Europe is expected to come at the expense of imports

from outside the EC; the Cecchini growth forecasts

assume a reduction of imports from outside the EC

by 7.9 to 10.2 percent.58 Whether there will be

growth in Europe due to factors not anticipated by

the Cecchini team, and whether these increase the

possibilities for U.S. exports, is simply not clear.

Most of the fears that EC 1992 would be a “Fortress

Europe” have been put to rest, but there are a few

signs of increasing protectionism in Europe.

Two areas where Europe has taken specific steps

that limit imports are in automobile trade and

semiconductors. The former is not expected to have

any significant negative impact on American exports; most U.S. autos sold in Europe are manufactured there already. The story is different for

Japanese producers. The other area, semiconductors,

could be more problematic for the United States. A

change in the rule of origin for semiconductors59 and

a stiff existing tariff on imported semiconductors

favor producing in Europe to exporting. This may

not have a detrimental effect on companies that

already own wafer fabrication plants there, or on the

large, rich Japanese producers, but smaller American producers without existing plants in Europe are

faced with the painful choice of losing European

markets or making expensive investments there.

Certainly, the change in the rule of origin makes it

more difficult for the United States to export

semiconductors to Europe.
Chapter l-Summary and Findings ● 31

There are also developments, such as the liberalization of European government procurement, that

could open new markets to non-EC firms, although

it is not likely that this will mean much in the way

of increased exports. Most of the explicit liberalization of trade is intra-EC. In the short run, then, we

would expect few major changes in U.S .-EC trade as

a result of the single market.

But what about the long run? One of the aims of

EC 1992 is to make European firms more competitive with American and Japanese fins. The single

market may contribute somewhat to that by enabling

European firms to achieve new economies of scale

in a market that will have about the same GNP as the

United States. Another contribution could come

from the Framework Program and EUREKA. These

two programs, the first an EC program and the

second a program with 19 members (all the EC

countries are members, as is the EC itself), fund

R&D intended to improve civilian industrial competitiveness on an impressive scale, by U.S. standards. The third Framework Program (1990-94) is

funded at ECU 5.7 billion, and EUREKA projects

announced between 1985 and 1990 came to ECU 7.4

billion. At a rough estimate, public funding of

European cooperative research in both the Framework and EUREKA programs comes to about $2

billion per year.60

The largest parts of the Framework Program,

ESPRIT and RACE, are aimed at microelectronics,

computer, and telecommunications technologies

(including services and software as well as hardware). BRITE is a large program that funds R&D in

products and processes to improve basic manufacturing. Other programs address technology development in many areas: medicine and health, energy,

advanced materials, biotechnology, agriculture, and

road transport efficiency and safety.

Both the Framework Program and EUREKA

projects encourage cross-border collaboration to

promote unity and exchange of scientific and

technological information in Europe, and the resulting enthusiasm for cross-border collaboration is due,

in no small part, to this encouragement. Whether this

increased international exchange and collaboration,

or the money spent on developing new technologies,

will contribute significantly to European competitiveness is questionable. It is probably too soon to

judge most of the programs, but those that have been

going for awhile, and several past efforts at crossborder collaboration in technology, have produced

few unambiguously successful results.

JAPAN

Japan is the economic phoenix of the postwar

period. Throughout the nearly five decades following the war, its growth of GNP and productivity have

consistently been higher than in the rest of the

developed world. That it should be so was by no

means obvious in the frost decade after the end of the

war. Japan was desperately poor, short of most raw

materials, and faced labor strife. Now, one of the

biggest problems Japanese bureaucrats face is how

to contain the robust productive power of its premier

corporations enough to avoid exacerbating trade

disputes.

The Japanese Government has long used industrial policy to push its economy toward more

high-value-added, knowledge-intensive industries

that use more highly skilled labor and fewer natural

resources. The primary tools are financial aid,

government sponsorship of price, investment, and

R&D cartels, and protection of the domestic market.

These policies were instrumental in improving

competitiveness in industries like steel, motor vehicles, semiconductors, and computers.

A few caveats are in order. The impression is often

given that Japanese policies alone are responsible

for Japan’s economic success, and that the record of

success is unblemished. In fact, Japan’s policies

were creative and innovative but they would have

been much less effective in a society with less well

educated people that placed lower value on hard

work and ceaseless pursuit of improvement. Japan’s

culture, with its emphasis on achieving consensus,

and on the performance and interests of groups

rather than individuals, played a role, although the

prominence given to cultural explanations of Japan’s

success in the popular literature is often overdone.

There are also several examples of failure in

Japanese industrial policies. For instance, the longterm goal of promoting an indigenous large civilian

air transport industry has remained elusive, and

MITI’s expectations have been scaled back considerably.

There is widespread disagreement, at least among

American analysts, about the overall effect of

Japanese industrial policy on Japan’s national income and standards of living. Japanese consumers

have long been able to live less well than American
32 . Competing Economies: America, Europe, and the Pacific Rim

consumers on an equivalent amount of income, in

part because of policies that sheltered many industries from foreign competition. Some of those

policies, in turn, were made to foster industrial

development; the inference that Japanese consumers

pay for Japan’s industrial policies is quite correct.

But the tradeoff is not just between Japanese

industry and consumers; it is also a sacrifice of

short-run gratification in favor of enhanced prospects for long-run growth. Even as Japanese standards of living and wages approach those of the

richest nations, there are few signs of impending

stagnation, and it is likely that faster growth of

Japanese living standards will continue, surpassing

ours.

That does not mean that Japanese policy remains

the same as always. The hand of the government in

directing industrial development is considerably less

heavy than it was during the high-growth period

(which ended in 1974, with the first oil shock).

Japan’s government has liberalized financial markets and consumer credit, reduced formal, quantitative import barriers, liberalized foreign investment,

and reduced the number of cartels. Some have

interpreted this as proof that Japan’s economy is a

modem, capitalist, free-market one along the lines of

America, Canada, Germany, or Great Britain. Yet

Japan’s trade patterns remain peculiar by the standards of other developed countries; manufactured

imports are quite low, and a strong preference

remains for adding as much value as possible in

Japan. Japanese direct investment abroad is more

oriented to exports than the direct investment of

other developed nations, and it is an outlier among

developed nations in that foreign direct investment

plays a much smaller role in its own economy. Many

in America and Japan argue that all this is simply

because foreign exporters or investors are not

diligent enough; their products are inferior or their

knowledge of Japanese business practice is weak.

Some of that is true, but it is not the whole story.

Japan’s Government is still actively involved in

creating an advantageous environment for Japanese

business. The computer industry was targeted for

development nearly three decades ago, and within

the past 5 years has come of age; many Japanese

computers from mainframes to laptops are now as

good as or better than American models. That payoff

is the result of three decades of company diligence

and experimentation, combined with tax incentives

(general and specific), R&D funding in strategic

areas, subsidized leasing, and market protection.61

Policies changed over time, in response to different

industry needs, and even now, with competitive and

technological advantage increasingly weighted on

the side of the Japanese computer makers, policies

to support specific segments continue. One such area

is supercomputers, where Japanese Government

support has continued through the 1980s and into the

1990s. Some support comes in the form of funding

for research consortia. From 1981 to 1989, the

Japanese Government spent 18.2 billion yen (about

$121 million) on the High Speed Computing System

for Scientific and Technological Uses Project, aimed

at producing a machine with a speed of 10 Gigaflops.

NTT, the Japanese telephone company, also supports supercomputer technology development in its

own supercomputer project, and several public and

private projects are exploring parallel and massively

parallel processing.

Another important element of the strategy is

procurement. Until very recently, American supercomputers were superior to Japanese supercomputers, yet while U.S. machines only were bought and

installed in America and Europe, they were a small

share of Japanese purchases. In 1987, for example,

Cray and Control Data, American supercomputer

makers, accounted for 73 percent of installed supercomputers in the world; Japanese companies for 27

percent, which consisted entirely of sales within

Japan. Moreover, the Japanese companies Fujitsu,

NEC, and Hitachi accounted for 87 percent of all

Japanese installations, and Cray for only 13 percent.

In part, that could be attributed to the Japanese

preference for buying goods from and doing business with other members of keiretsu, but American

supercomputers had a far more difficult time in the

Japanese public sector than in the private sector. A

few Japanese private companies bought Cray machines because they were better and faster, and

buying an inferior Japanese machine would have

been a real handicap; in the public sector, however,

procurement was almost exclusively of Japanese

machines. The Japanese Government apparently

was determined to provide Japanese companies with

a secure market while they worked hard to catchup

to or surpass Cray’s technology.

There are many who regard such practices as

unfair or underhanded. In fact, they are logical,

reasonable things for governments to do; Japan is

hardly alone among industrialized countries in using

the power of public procurement to foster domestic
Chapter 1--Summary and Findings ● 33

business and competitiveness. The story is not told

for the purpose of castigating Japanese policy, but to

illustrate that policies designed to create competitive

advantages for Japanese firms (and compensate for

the advantages of foreign fins) are not relegated to

Japanese history. MITI, and other Japanese Government agencies that are genkyoku (sections of the

bureaucracy with primary responsibility for developing and supervising policies for an industry), may

have less ability to manipulate industries and the

economy than they once had, but they still wield

considerable power.

Is Japan at a crossroads? Legions of writers have

said so; one of the most popular themes of current

writing on competitiveness is how much and how

fast Japan is changing. In a sense, Japan has never

stopped changing; policies that supported a particular industry or activity were shifting in the 1950s and

1960s as well as the 1980s. But the implicit corollary

to the ‘‘Japan is changing”- genre is also that it is

becoming more like us in ways that will make its

industrial performance more like ours. At best, this

is unproven; more likely it is a delusion. Japan’s

government and private sector are still working,

independently and together, to improve the competitive performance and market share of Japanese

companies in a wide range of industries. They will

probably succeed.

INDUSTRIAL POLICIES IN

TAIWAN AND KOREA

Like Japan, Korea and Taiwan have used industrial policies to encourage the development of

high-technology, high-wage industries. They, too,

have been successful. Their successes indicate that

industrial policies can contribute to industrial competitiveness under differing circumstances--in other

words, that Japan’s industrial policies were not mere

adjuncts to a culture that provides hothouse conditions for business.

The Republic of Korea and the Republic of China

(referred to throughout this chapter as Korea and

Taiwan) have advanced remarkably fast, in comparison to developed and developing nations, and

especially compared to what most observers expected. In 1965, Taiwan was the world’s 28th largest

exporter of manufactured goods; in 1986, it was

10th. Korea moved up from 33rd to 13th. In 1989,

Taiwan and Korea were, respectively, the fourth and

fifth largest suppliers of manufactured goods to the

U.S. market. Both nations are still poor compared

with the developed world—their combined GDP is

1.5 percent of the free world’s GDP—but they have

done remarkably well nonetheless at moving from

manufacture of light industrial products requiring

large contributions from low-wage labor to compete,

to high-technology industries like computers and

semiconductors. Taiwan is the world’s 10th largest

producer of machine tools, with particular strength

in low-end numerically controlled machines; Korea

is the first developing country since Japan to make

a strong debut in world automobile manufacture.

Korean and Taiwanese industrial policies share

many similarities, but there are important differences as well. They are similar in that they rely on

long-term planning--overall visions of the directions of economic growth and development—and

use industrial targeting in addition to broader

measures to encourage industrial activity generally.

They educate their people superbly and share a

cultural commitment to hard work. Finally, they

both forced their companies to compete with the

most proficient of world competitors, using competition abroad to provide the impetus for cost

reduction and productivity improvement, while

shielding them from competition at home. In Korea

in particular, the protected home market was also

used to make firms compete more effectively; the

ability of firms to import needed inputs and machinery depended on their export performance.

The differences are also interesting. The Taiwanese market has long been more open than

Korea’s and the industrial structure much less

concentrated. Taiwanese firms have performed well

across a broader range of industries than Korean

fins, reflecting the choice of market niches that rely

on standardized technologies that can be purchased

and used effectively by small fins. Korea has

organized production into large, conglomerate firms

that have very few competitors at home and have

performed well in many sectors where the economies of scale that large firms can gain are advantages, such as motor vehicles, consumer electronics,

semiconductors.

Both countries have had setbacks. Some attempts

to develop industries or rationalize production

failed, as was the case in Japan. But Japan’s success

has also made the world a more difficult place for

Taiwan and Korea; developed countries, afraid of

what could happen to their own industries if
34 ● Competing Economies: America, Europe, and the Pacific Rim

“another Japan” appeared, have been much less

tolerant of Korean and Taiwanese policies like

controlling currency values, protecting their own

markets, and loose protection of intellectual property than was true for Japan. Both countries have, in

response to increasing pressure from the United

States and other trading partners, liberalized controls

over their markets and currencies, and permitted

more imports. Their own success has made it more

difficult for them to pursue the policies responsible

for success. Whether they can continue to develop,

and raise their living standards above levels that are

still only at the high end of poverty by the standards

of developed nations, will probably depend as much

on the performance of American and European

economies as on their own. If America and the EC

are successful in getting their own manufacturing

back on track, by whatever standards they adopt, the

world will be a more amenable place for developing

countries, including Korea and Taiwan. If, on the

other hand, American and European manufacturing

continue to lose competitiveness, and only Japan

gains, things could be different. Japan’s role in

promoting world development is now larger than

America’s, but would Japan be able to compensate

for the retaliatory and self-protective policies likely

to grow if American and European industries

continue to lose competitiveness? It is possible, but

perhaps unlikely; Japan, too, is concerned about the

economic success of her neighbors, and continues to

pursue industrial policies of her own in response to

the challenge of these newly industrializing countries.

GOVERNMENT SUPPORT OF

LARGE COMMERCIAL AIRCRAFT

More than most other civilian industries, the large

commercial aircraft industry owes its existence to

government policies in whatever countries it exists.

The U.S. aircraft industry62 is the largest in the

world, and is the largest single trade-surplus category in America’s international accounts; in 1990,

the United States ran a $13 billion surplus in

commercial transport aircraft and parts.63 This was

not always so. For a few years in the early part of this

century, European producers were more advanced

technologically; without substantial support from

the government, the U.S. aircraft industry might not

have gotten off the ground. Today, government

support is second to corporate strategy as a determinant of the strength of the industry in the United

States, and it is an extremely important contributor

to the European aircraft consortium, Airbus Industrie. Although support for aircraft is regarded by

some as one of the more prominent failures of

Japanese industrial policy, the Japanese are hardly

out of the race yet, and government supports are an

important reason. Government is a major player, but

its role varies widely in America, Europe, and Japan.

In the United States, most of the government

support for the aircraft industry has been indirect, a

byproduct of defense programs. Though their contributions have decreased considerably, military R&D

and contracts for production of military aircraft are

the largest government contributions to aircraft

industry competitiveness. To be sure, civilian industrial breakthroughs have also given DoD programs

many boosts as well; the contributions of military

and civilian developments to modern jet engines, for

example, are tough to disentangle. Also, military

business does not always follow the business cycle,

giving aircraft and engine companies some ability to

maintain expensive R&D programs and staffs

through economic downturns to which this industry

like so many other durable goods industries, is

particularly vulnerable in recessions. On the other

hand, on the occasions when government spending

on defense aircraft and NASA programs declines

during an economic recession, the damage to the

industry is substantial.

The U.S. Government also has contributed to the

civilian aircraft industry through nonmilitary programs. NASA is spending $800 million in fiscal year

1991 on R&D that can contribute to the civilian

aircraft industry. Still, there are problems; NASA’s

programs are not designed to contribute most

effectively to competitiveness, but instead serve a

range of other purposes—understanding of basic

scientific principles of aerodynamics and materials,

and the like. As a result, the programs make a smaller

contribution to competitiveness than they could,

dollar for dollar, if they were designed to improve

competitiveness. Finally, military programs have

become much more burdensome, and less of a

contribution to civilian industrial needs, in the last

decade. Intricate and intrusive DoD procurement

rules, and changes in the funding of R&D, have

shifted more of the burden of developing technologies for civilian aircraft to the companies’ own

coffers, and diminish the usefulness of military

contracts. 64 At the same time, military purchases are

declining sharply.
Chapter 1--Summary and Findings ● 35

Whether government policies designed to serve

other purposes could have similar beneficial effects

on other industries is quite doubtful, and reliance on

serendipitous externalities is not likely to be the

salvation of American manufacturing. The aircraft

industry is a special case in several ways. Its

formidable development and R&D costs, capital

intensity, strong scale economies, and heavy reliance on accumulated experience of integrating

production of millions of components make it

different from most other industries. Electronics

industries share some of these attributes (high

development and R&D costs, capital intensity, and

in some sectors, scale economies that also make it

hard for more than a very few producers to make a

profit), but differs in other respects (the half-life of

commercial technology is generally far shorter in

electronics than in aircraft, for example). Several

decades ago, the government employed policies

similar to ones that it uses now in the aircraft

industry to jump-start a U.S. semiconductor industry, and with similar results for U.S. competitiveness.

The governments of some European countries and

Japan are less willing than the U.S. Government to

leave competitive outcomes to chance in the aircraft

industry. France, Germany, Great Britain, and Spain

have contributed billions of dollars over more than

two decades to Airbus Industrie, a consortium of

four companies (Aerospatiale, Deutsche Airbus,

British Aerospace, and CASA), to enable them to

produce large commercial air transports that would

compete directly with the products of Boeing and

McDonnell Douglas. Support for Airbus is hard to

pin down, since the company itself keeps no records

on the amounts contributed by the governments, but

the low-cost loans given to the consortium members

over the years have enabled the companies to

overcome the substantial barriers posed by high

development and capital equipment costs and long,

uncertain payback periods. While the investments

made in Airbus have, according to the best estimates, not been repaid and may never be fully

recompensed, there are benefits: increased competition, which forced Boeing and McDonnell Douglas

to lower prices; the direct benefits of high-wage jobs

and increased exports; and, indirect benefits consisting primarily of spinoffs of technology. Considering

these benefits, so far the four European governments

seem to believe the investment in Airbus is worth

what it costs. Whether such a belief would stand up

to the rigors of a standard economic benefit-cost

analysis is much less certain.

Japan’s Government has supported its aircraft

industry for more than three decades. The industry

was targeted for special support and development in

MITI’s planning documents since the 1970s, yet

Japan has never achieved MITI’s original goal for

the industry: to become an independent producer of

large commercial jet transports. For this reason, the

aircraft industry is often used as an example of a

failure of Japanese industrial policy, and occasionally as an example of the eventual fate of all attempts

at industrial policy. Closer examination reveals that

neither the policies nor the industry are such failures

as some of the more deprecatory analyses indicate.

In 1989, Japanese companies produced commercial

aircraft-related products worth $1.2 billion,65 and

exported half of it. Japanese companies have become major partners in new jet engine production,

and continue to progress in other segments of the

business. Their accomplishments owe much to

Japanese industrial policies; the fact that the aircraft

industry has not moved ahead as much or as fast as

many other targeted industries is not an indictment

of those policies. Instead, the aircraft industry

illustrates the limitations of industrial policy in the

face of formidable obstacles, including Japan’s

unique constitutional limitations over much of the

postwar period on the production or development of

military aircraft.

1 We cannot be more precise than merchandise trade; figures for

U.S. share of world manufactured exports and imports are not available.

However, the majority of merchandise trade is in manufactured

products.

2 The World Bank World Tables: 1989-90 Edition (Baltimore,

MD: The Johns Hopkins University Press, 1990).

3 1982-84 dollars.

4 Real weekly wages have not fallen as much as real hourly wages,

because hours worked per week have increased.

5 U. S. Department of Labor, Bureau of Labor Statistics, “Comparative Real Gross Domestic Product, Real GDP Per Capita, and Real GDP

Per Employed Person, Fourteen Countries, 1950-1989,” unpublished

data, p. 8.

6 The World Bank, World Tables, op. cit., pp. 8-9 and pp. 328-329.

Figures are in 1980 U.S. dollar terms.

7 Robert Heilbroner, “A’ Tune-Up For the Market,” The New York

Times Magazine, Sept. 24, 1989, p. 61.

8 Ibid., p. 75.

9 This is OTA’s conclusion based on studies of Korean, Taiwanese, and Japanese industrial policies of the postwar period (see chs.

6 and 7). Many analysts disagree that these nations’ industrial policies

were either effective or significantly responsible for their economic

success. On the anti-industrial policy side, see, e.g., Gary Saxonhouse,

“What Is All This About ‘Industrial Targeting’ in Japan?” The World

Economy, vol. 6, No. 3, 1987, pp. 253-273; Philip Tresize, “Industrial
36 ● Competing Economies: America, Europe, and the Pacific Rim

Policy Is Not the Major Reason for Japan’s Success,” The Brookings

Review 2, spring 1983, pp. 13-18; Richard Samuels, The Business of the

Japanese State: Energy Markets in Comparative and Historical

Perspective (Ithaca, NY: Cornell University Press, 1987). Among those

who think that Japan’s industrial policy had an important effect on its

growth see Ira Magaziner and Thomas Hout Japanese Industrial Policy

(London: Policy Studies Institute, 1980); Chalmers Johnson MITI and

the Japanese Miracle: The Growth of Industrial Policy, 1925-1975

(Stanford, CA: Stanford University Press, 1982); John Zysman

Governments, Markets, and Growth: Financial Systems and the Politics

of Industrial Change (Ithaca, NY: Cornell University Press, 1983); M.

Aoki, Information, Incentives, and Bargaining in the Japanese Economy

(Cambridge: Cambridge University Press 1988); R. Lawless and T.

Shaheen “Airplanes and Airports: The Subtle Skill of Japanese

Protectionism” SAIS Review, fall 1987, pp. 101-120; K. Yamamura,

“Caveat Emptor: The Industrial Policy of Japan” in P. Krugman

Strategic Trade Policy and the New International Economics (Cambridge, MA: The MIT Press, 1986).

10 For instance, Japan recently signed a voluntary restraint

agreement (VRA) with Korea, under which Korean exporters of apparel

agreed to restrain their exports to Japan. See "Japan South Korea Work

Out Knotty Knitwear Dispute,” Japan Economic Journal, Feb. 11,

1988.

11 Daniel I. Okimoto, Between MITI and the Market: Japanese

Industrial Policy for High Technology (Stanford, CA: Stanford University Press, 1989), p. 47.

12 Ibid., pp. 38-48.

13 Ibid., p. 49.

14 Guy Routh, The Origin of Economic Ideas, 2nd ed. (Dobbs

Ferry, NY: Sheridan House, 1989), passim.

15 For a more complete discussion of the role of capital costs on

industrial performance, see ch. 2 of this report and U.S. Office of

Technology Assessment, Making Things Better: Competing in Manufacturing, OTA-ITE-443 (Washington, DC: U.S. Government Printing

Office, February 1990), ch. 4 passim.

16 An eloquent explanation of how these strategies worked is in

Robert Wade, Governing the Market: Economic Theory and the Role of

Government in East Asian Industrialization (Princeton NJ: Princeton

University Press, 1990).

17 Ryutaro Komiya, Masahiro Okuno, and Kotaro Suzumura

Industrial Policy of Japan (Tokyo: Academic Press, 1988), p. 7.

18 See ch. 6 for more discussion of Japanese industrial policies.

19 The Framework Program is a set of EC-funded R&D programs.

EUREKA is a publicly coordinated and supported R&D effort of 19

European countries, including the 12 members of the EC. See ch. 5 for

discussion of the single market the Framework Program, and EUREKA.

20 Except where noted, this is the definition of industrial policy

used in this study.

21 See ch. 8 and vol. II for additional discussion of the aircraft

manufacturing industry in the United States, Europe, and Japan.

22 Including salaries of employees, R&D, and construction of

facilities.

23 Unpublished budget figures, NASA.

24 Marie Anchordoguy, “The Nature and Effectiveness of Japan’s

postwar Industrial Policy,’ ‘ contractor report for the Office of Technology Assessment February 1990.

25 The World Bank World Tables (Washington DC: The World

Bank 1989).

26 Kenneth Flamm, “Policy and Politics in the Intcrnational

Semiconductor Industry,” Paper Presented to the SEMI ISS Seminar,

Newport Beach, CA, Jan. 16, 1989.

27 Material about the STA in this paragraph is drawn from Flamm,

ibid.

28 This refers to both the formal STA and the side letter that

specified that foreign shares of Japan’s semiconductor market should

grow.

29 The following account is drawn from Thomas Howell, Brent

Bartlett, and Warren Davis, Semiconductors and Government Industrial

Policy in the 1990s (Washington, DC: Dewey Ballantine, draft in

progress), pp. 126-139.

30 There is some conflict on this point. MITI maintains that the

foreign share is over 17 percent, while the U.S. Government and industry

estimate the foreign share to be between 13 and 14 percent. The

difference is that MITI counts (while U.S. Government and industry do

not): 1) captive sales-i.e., in-house sales of a chip of a type that is not

offered for sale to outsiders and 2) private label sales of a chip made by

a Japanese firm with a U.S. firm’s label.

31 Keiretsu are groups of Japanese companies that do much of their

business within the group and hold significant amounts of each other’s

stock, See ch. 6 for additional discussion.

32 Edward J. Lincoln, Japan’s Unequal Trade (Washington, DC:

The Brookings Institution, 1990), pp. 62-67.

33 Budget of the United States: Fiscal Year1992, Part Two, p. 47.

34 U.S. Department of Commerce, Technology Administration

Emerging Technologies: A Survey of Technical and Economic Opportunities (Washington DC: 1990); and Council on Competitiveness,

Gaining New Ground (Washington, DC: 1991)

35 Not to be confused with two other groups with similar names:

the non-statutory Council on Competitiveness in the office of Vice

President Quayle, which is concerned with the effects of Federal

regulation and a private Council on Competitiveness, composed of chief

executive offices from industry, academia, and labor.

36 These bills include S. 121, as reported by the Senate Committee

on Governmental Affairs in the 98th Congress; S. 1365 in the 99th

Congress; H.R. 1338 and H.R. 2135 in the 100th Congress; and H.R.

1274 in the 101st Congress.

37 S. 1978 in the 101st Congress; S. 1233, as reported by the Senate

Committee on Governmental Affairs in the 1OOth Congress.

38 Robert N. McCauley and Steven A. Zimmer, “Explaining

International Differences in Capital Costs,” Federal Reserve Bank of

New York Quarterly Review, summer 1989, pp. 7-28. See also OTA,

Making Things Better, op. cit., ch. 3.

39 OTA, Making Things Better, op. cit., p. 58.

40 19 U.S.C. 2411-2420.

41 19 U.S.C. 2251-2254.

42 U.S. Trade and Development Program, 1990 Annual Report,

pp. 27,29,55-61.

43 50 U.S.C. App. 2401-2420. This Act’s authorization lapsed as

of Oct. 1, 1990, but President Bush continued its provisions in force by

invoking the International Emergency Economic Powers Act 50 U.S.C.

1702. See Executive Order 12730-Continuation of Export Control

Regulations, Sept. 30, 1990.

44 This option is termed strategic technology policy and described

in detail in OTA Making Things Better, op. cit., pp. 71-88.

45 S. 1233 in the 100th Congress; H.R. 3838 and S. 1978 in the

10lst Congress.

46 S. 1191 in the 10lst Congress.

47 Council on Competitiveness, Gaining New Ground, op. cit.

48 National Advisory Committee on Semiconductors, Toward a

National Semiconductor Strategy, Second Annual Report (Arlington,

VA: 1991), p. 15.

49 John W. Rutter, “Direct Investment Update: Trends in International Direct Investment” U.S. Department of Commerce, International

Trade dministration September 1989. The stock of investment given A

here is the position of foreign direct investors, or the value of the foreign
Chapter 1Summary and Findings ● 37

investors’ equity in and loans to offshore affiliates. For the United States,

a foreign direct investor is one that owns or controls at least 10 percent

of a company’s voting stock (or an equivalent amount in an unincorporated enterprise).

50 1988 is the latest year for which data are available.

51 The latest figures are, unfortunately, for 1982; that year, foreign

affiliates of U.S. parent companies accounted for less than 9 percent of

the companies’ total R&D.

52 In the late 1970s, manufacturing affiliates of foreign parents had

much higher investment in plant and equipment as a percent of sales,

than U.S. manufacturers; by the early 1980s, most of the difference had

disappeared. U.S. affiliates of foreign multinationals also pay slightly

higher compensation than American companies on average, but that is

due to relatively heavy concentration of investment in high-wage

industries, like banking, and not to higher wages in comparable

establishments.

53 In the past, the trade surplus generated by U.S. direct investment

abroad was also substantial, but it has dwindled. In 1988, U.S. parent

companies were associated with a merchandise trade surplus of only

about $8 billion.

54 It is important to remember what makes a firm “foreign.”

Obviously, any wholly owned subsidiary of a foreign firm qualifies. In

the United States, a firm is counted as an affiliate of a foreign parent if

one foreign parent company controls 10 percent or more of its voting

stock, or an equivalent stake in an unincorporated enterprise.

55 The 12 members are Belgium, Denmark France, Germany,

Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain,

and the United Kingdom.

56 See, for example, Merton J. Peck, “Industrial Organization and

the Gains from Europe 1992,” Vittorio Grilli, “Financial Markets and

1992,” Richard N. Cooper, “Europe Without Borders,” and Rudiger

Dombusch, “Europe 1992: Macroeconomic Implications, ” all in

William C. Brainard and George L. Perry (eds.), Brookings Papers on

Economic Activity 2 (Washington, DC: The Brookings Institution,

1989), pp. 277-381 passim. Peck for example, says, “It is important to

emphasize this overoptimism, given the significance of the report both

as a work of economic advocacy and as an impressive scientific study.”

Peck p. 278.

57 Peck, ibid., p. 277.

58 Dombusch, op. cit., p. 353.

59 While it is not a statutory requirement, most nations distinguish

foreign from domestic goods by a rule of origin that states that the good

comes from the nation where the last substantial transformation is made.

The EC used this rule for semiconductors for many years, but recently

changed it to state that semiconductors originated where the most

substantial transformation which the EC defines as diffusion, is made.

60 The ECU 5.7 billion for the Framework Program is all public

money; it is generally matched by the projects’ participants, except for

certain nonprofit organizations such as universities, which can receive

up to 100 percent of project costs from the European Community.

EUREKA is primarily funded by the private sector; less than 10 percent

of its funding is public money according to the U.S. International Trade

Commission. A rough calculation assuming that 10 percent of

EUREKA costs are public and that both programs spend about the same

amount of money each year, yields annual public funding of cooperative

research amounting to ECU 1.6 billion, or about $1.9 billion. Source of

funding numbers is U.S. International Trade Commission, 1992: The

Effects of Greater Economic Integration Within the European Community on the United States: Second Followup Report, USITC Pub. No

332-267 (Washington, DC: September 1990), pp. 16-6 and 16-10.

61 See, for example, Marie Anchordoguy, “Japanese Policies for

the Supercomputer Industry,” contract report for the Office of

Technology Assessment, February 1991; Marie Anchordoguy, Computers, inc.: Japan’s Challenge to IBM) (Cambridge, MA: Council on East

Asian Studies, Harvard University, 1989); and Kenneth Flamm,

Targeting the Computer: Government Support and International

Competition (Washington DC: The Brookings Institution, 1987).

62 Throughout this assessment, the large commercial aircraft

industry will be referred to as the aircraft industry. Only when specified

does the term refer to all segments, including military aircraft.

63 This is unusually high; in 1990, a strike at British Aerospace

delayed deliveries of some Airbus aircraft purchased by U.S. airlines.

Aerospace Industries Association, "1990 Year-End Review and Forecast—

An Analysis,” addendum to Aerospace Facts and Figures 90-91

(Washington, DC: 1990).

64 This should not be read as an unqualifled indictment of military

procurement and R&D contracts. The changes over the past decade were

made for understandable reasons--i.e., avoiding fraud and reducing

costs-and this study did not look into how the changes have performed

in doing what they were designed to do. For further information on that

topic, see U.S. Congress, Office of Technology Assessment, Holding

The Edge: Maintaining the Defense Technology Base, OTA-ISC-420

(Washington DC: U.S. Government Printing Office, April 1989).

65 The conversion rate is Y130 to $1.
Chapter 2

Policy Issues and Options
CONTENTS

Page

A TECHNOLOGY-FRIENDLY ENVIRONMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

The Financial Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Human Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Technology Diffusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

TRADE POLICY TOOLS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Responses to Foreign Market Barriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Use of Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . 55

Domestic Content Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ,. . . . . . . . . . . . . . . . . 57

Export Promotion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . ....*.,? . . . . . . . . . 58

Export Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59

GOVERNMENT-INDUSTRY PARTNERSHIPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Strategic Technology Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62

Financial Risk-Sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .*....., ....*, 65

Government Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . ● ....., 69

INSTITUTIONS FOR A STRATEGIC COMPETITIVENESS POLICY . . . . . . . . . . . . . . 71

Selecting Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . .,*..... 73

What Kind of Support? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

Institutional Alternatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Boxes

Box

2-A.

2-B.

2-C.

Page

The Baldrige National Quality Award . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 51

The Advanced Technology Program’s F irst Round . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

National Advisory Committee on Semiconductors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Table

Table Page

2-l. Comparison of National Critical Technologies with Department of Cornmerce

Emerging Technologies and Department of Defense Critical Technologies . . . . . . . . 75
Chapter 2

Policy Issues and Options

The U.S. approach to promoting particular industries has been mostly not to do it. Our underlying

belief is that the national economic interest is best

served by free and fair competition in the marketplace, at home and abroad. Whatever industry and

trade profile results from this competition is in the

national interest, and government interference is

justified only when the competition is unfair or when

national security is at stake. In practice, the government has intervened from time to time to support or

protect certain industries. But this has been mostly

ad hoc—a response to political pressures, not part of

a strategy to build up competitive industries in areas

of special importance.

Does this approach still make sense in a world

where governments in most advanced industrial

nations, including those of our most able competitors, are cooperating with private business to promote critically important industries? This study has

concluded that, on the whole, free trade and vigorous

competition are worthy, indeed essential goals, that

must be steadily pursued. It has also found evidence

from Japan, Korea, and Taiwan that selective,

flexible government support of particular industries

can pay off in rapid advances in technological

achievement, export success, and national income.

The European Community, preparing for the Single

Market in 1992, is developing its own versions of

support for critical industries within the Community. The core issue in this chapter is whether the

United States, with its particular traditions and form

of government, can combine selective promotion of

strategic industries with a firm overall commitment

to competition and free trade, and if so, what

institutions and policy tools would be needed.

It can be argued that the U.S. form of government

is open at so many places to capture by special

interests that the chances of rational government

decisions on aid to selected industries are slim. The

good that government-industry cooperation might

do in strategic fields (e.g., electronics) where we

have lost competitive advantage could dissipate in

expensive, useless handouts to industries whose

main claim to special treatment is political clout.

This argument, however, can be stood on its head.

Despite our free trade philosophy and commitment

to open markets, the United States does make

exceptions; it does grant some trade protection, and

does sometimes subsidize favored economic sectors

(e.g., price supports for farm products). Nearly

always, these exceptions are motivated by politics.

It is possible that a coherent strategy that first selects

industries for support based on their contribution to

the national good and then applies a judicious mix of

supportive measures, including trade protection if

needed, would result in more rational exceptions to

a general regime of free trade.

Trade protection is only one part of the mix in a

policy to promote strategic industries and is not by

any means the dominant one. Trade protection on its

own is unlikely to improve competitiveness, and in

fact can have the opposite effect. If the only

government action taken is to shield companies from

competition, they often do not (except where there

is still vigorous domestic competition) have the

proper incentives to invest in technology development and diffusion, worker training, plant modernization, and other things that improve competitiveness. Another essential part of the mix is government

partnership with industry in technology development, especially of high-risk technologies where the

potential benefits to society are great but the

prospect of returns to individual firms is too small or

remote to justify a big investment. Still another part

encompasses measures that spread the financial

risks of adopting advanced product and process

technologies to government as well as industry; such

measures include indirect means, such as tax breaks

that favor technology adoption.

Beyond these industry-specific strategies we broader

government policies that shape the overall environment for all U.S. industries and affect their competitiveness. Taxes, spending, and the Federal budget

deficit directly influence the cost of capital to firms.

They wield indirect but powerful effects on our

ability to compete through their influence on the

growth and stability of the domestic economy and

the international value of the dollar. Equally critical

to industry’s performance is the education of the

Nation’s children (a government responsibility) and

the reeducation and training of adult workers (a

responsibility shared by government and industry).

Important as these policies are, this report cannot do

-41–
42 ● Competing Economies: America, Europe, and the Pacific Rim

full justice to them all. Options to improve the

financial environment for industry; to upgrade the

training and education of managers, engineers, and

workers; and to diffuse advanced and best practice

technologies throughout industry are summarized

here but have been covered in greater depth in earlier

OTA reports.l This chapter gives more detailed

consideration to strategies that select and combine

trade, technology, and fiscal or financial policies to

improve the competitiveness of particular U.S.

manufacturing industries. The focus is on manufacturing, not only because it dominates international

trade, but also because it pays for most privately

funded R&D and provides well-paid jobs, not only

in manufacturing but also in related service sectors.

The first question to ask is whether there is any

need for exceptions to the Nation’s free trade and

free market policies. The answer starts with the

strong evidence, in this report, other recent OTA

reports, and elsewhere, that U.S. manufacturing is in

trouble. 2 Moreover, certain industries that most

people regard as essential to the further technological advance of the American economy and to rising

standards of living are in trouble. This is true, for

example, in parts of the semiconductor and computer industries. On the other hand, the United States

is not in the position Japan was 40 years ago, when

that nation was behind in nearly all advanced

technologies and manufacturing industries and was

prepared to make sacrifices for many years to catch

up. Our troubles are not those of a poor or

war-ravaged country but of a rich country that has

lost its edge.

All this suggests that it may make sense to offer

government help to particular industries. The U.S.

Government has made several starts in that direction

through technology policy, most notably in the

Sematech project, where the government has gone

halves with industry to develop better manufacturing

processes for dynamic random access memory

(DRAM) semiconductor chips, at a cost to the

government of $500 million over 5 years. Yet in

some critical cases, and major parts of the microelectronics complex may be among them, technology

assistance is not enough. U.S. electronics companies

lost their lead to Japanese competitors partly because of the Japanese fins’ manufacturing excellence, but also partly because of support from the

Japanese Government’s trade, technology, and financial policies. Government support helped to

create the large, rich, integrated Japanese electronics

firms of the 1990s, whose deep pockets and command of certain critical technologies keep them a

pace ahead of much of the U.S. industry. There is

good reason to believe that the U.S. semiconductor

industry will continue to lose ground without some

trade policy help from the U.S. Government. And

indeed, it has already received some trade relief as

part of a broader arrangement with Japan, but while

U.S. firms have gained a few percentage points’

market share in Japan, mostly the results have been

disappointing. 3 Nevertheless, the trade agreement

and Sematech were unusual, perhaps unique, attempts by the U.S. Government to strengthen a

domestic industry of strategic importance.

An advantage to the strategic approach to trade

policy is that it could be proactive and planned to

avoid pitfalls. And it could be based on a frank

appraisal of the needs and interests of the United

States without casting blame on other nations. In

most cases, U.S. trade policy actions are based on

findings that foreign firms are competing in ways

labeled unfair: that they are dumping in the United

States (selling below cost or below the prices they

charge in protected markets at home), or that they are

taking subsidies from their governments and thus

undersell U.S. fins. There often is truth in these

charges. But often the whole truth is more complex,

including both genuine superiority in quality and

price of the foreign goods and industrial policies of

foreign governments that help their firms lower

production costs and acquire new technology. Dumping or subsidies may be only a part, sometimes a

minor part, of the problem. To require all U.S. trade

policy actions to be based on findings of unfair trade

is an irritant to amity among otherwise friendly

nations and is particularly galling to our trading

partners when it brands their governments’ industry

policies as “unfair.” Imposing limited, conditional,

and temporary trade restrictions as part of an overall

U.S. strategy to strengthen vital domestic industries

is less abrasive and, under certain limited conditions,

is legal under current international agreements and

U.S. trade law.

If the U.S. Government should opt to develop a

strategic competitiveness policy, two essential conditions would have to be met. The first is an

institutional capacity to plan and carry out the

policy. At present the United States lacks this

capacity. Responsibility is diffuse in the executive

branch even for carrying out our present policy of

urging free trade and threatening sanctions for unfair
Chapter 2-Policy Issues and Options ● 43

practices. Judging by experience in the Pacific Rim

and Europe, it is more effective to place the principal

control over selective support for strategic industries

in the hands of one or two strong agencies than to

scatter it among many. Given enough interest in

Congress and backing by the public, it is possible to

create anew Federal agency with powers that did not

exist before; witness the creation of the Environmental Protection Agency in 1970. Although an

agency with power and prestige equal to that of

Japan’s MITI is highly improbable-and perhaps

undesirable--in the American setting, it might

nevertheless be possible to create an agency with the

lead in competitiveness policy, a seat at the table in

Cabinet meetings, and the ear of the President.

An alternative to creating a new lead agency is to

use existing institutions, but assign them a much

clearer mission of promoting the competitiveness of

American industry. U.S. trade law already allows

some leeway in pursuing this aim. What would be

needed among the Federal agencies involved in

trade, technology, and financial policy is a stronger

understanding of which industries are critical to

national economic security, better analysis of their

competitive situation, closer relations with industry,

and coordination of policy to support them.

This brings us to the second condition. Any strategic

competitiveness policy, whether directed by a lead

agency or coordinated among several lesser ones,

needs wholehearted support from both Congress and

the Administration. Congress can move independently in the direction of support for strategic

industries. It has done so repeatedly in the past few

years; for example, by creating the Sematech project

via appropriations for the Defense Advanced Research Projects Agency (DARPA); by awarding

DARPA funds to advance other technologies of

commercial as well as military interest (e.g., flat

panel displays for computers); and by setting up a

purely commercial Advanced Technology program

in the National Institute of Standards and Technology (NIST), under which government can take part

with industry in R&D consortia. Recently, the Bush

administration has moved toward supporting a

government role in developing generic technologies

that could have commercial application. If Congress

were so inclined, it might by resolution declare its

intent to adopt policies in support of selected

industries. It is harder to conceive that Congress

could unilaterally create both the capacity and the

will within the government to carry out competitiveness policies.

Backing for such policies by both branches of

government must rest on the understanding and

support of the American people. There would have

to be widespread comprehension that our national

economic security is at some risk, agreement that

government support for critical industries could be

fruitful, and acceptance that government collaboration with industry to regain excellent performance in

manufacturing is not cost-free. Trade protection

always costs consumers. Programs for partnership

between government and industry to develop new

technologies or share the financial risks of adopting

them cost the taxpayer something. More basically,

massive Federal budget deficits, combined with our

low personal savings rate, exert a steady upward

pressure on interest rates that hikes the cost of capital

for all U.S. industries. And the budget deficit cannot

be greatly reduced without the pain of higher taxes,

cuts in favorite government programs, or both.

One explanation for the success of the Japanese

government-industry partnership is the existence of

a “high-growth consensus” among consumers,

workers, and taxpayers as well as government and

business leaders, and a willingness to make sacrifices for that purpose.4 Sacrifices of current income

allowed long-term investments in technology, capital equipment, and human resources, which in turn

helped to produce the large steady rises in income

that Japanese citizens have enjoyed for more than 40

years. The same kind of consensus in the United

States is a condition for the adoption of new

government policies to restore our national competitive performance. And the same kind of future

rewards-faster economic growth, increasing incomes for most citizens, healthy growth of well-paid

jobs--could be expected for American citizens.

The following sections consider, first, options to

foster a supportive environment for technology

development and adoption. Next are options to carry

out a comprehensive competitiveness policy in two

areas: trade policy attuned to competitiveness needs

and government-industry partnerships. Many of

these options could be considered on their own

merits, whether or not a more comprehensive policy

is adopted. Last, there are options for new or altered

institutions that would be needed to plan and

implement a strategic competitiveness policy.
44 ● Competing Economies: America, Europe, and the Pacific Rim

A TECHNOLOGY-FRIENDLY

ENVIRONMENT

OTA’s earlier report, Making Things Better:

Competing in Manufacturing, found that U.S. manufacturers have lost out in one industry after another

to competitors who are able to make things better—

to produce quality products at lower cost. And the

key to this better performance is technology. Defined broadly, technology includes not only new

products and advanced production machinery but

also efficient organization of work and effective use

of people.

Industry and government both have roles in

building a better technology base for U.S. manufacturing. The report delineated four areas in which

government could contribute:

Improving the financial environment for

U.S. firms, by taking action to reduce capital

costs and relieve other pressures in the financial

markets to show high profits every quarter.

Focus on short-term profits at the expense of

longer term investments in advanced equipment and new technologies has hobbled U.S.

competitiveness.

Upgrading education and training of the

managers, engineers, technicians and workers

needed in manufacturing. U.S. manufacturing

suffers not only from the well-known defects in

American public education but also from failures by managers to train workers and organize

work to make best use of workers’ abilities.

Beyond improving public education, government can also help in the training of workers

and managers and the education of manufacturing engineers.

Diffusing technologies throughout the manufacturing sector. Many companies, especially

small ones, are slow to take advantage of

modern production equipment and manufacturing processes. Government technology extension services in several States and foreign

countries have shown they help manufacturers

select and learn to use up-to-date technologies.

Other devices for technology diffusion might

include a government-subsidized equipment

leasing system, or easier access to technologies

developed in government labs.

Forming a strategic technology policy to

promote the development of new technologies

with commercial promise through collaborative ventures with industry.

Several of the options outlined above would

benefit all American manufacturing, with no distinctions in kind. A hospitable environment for the

generation and adoption of new technologies throughout manufacturing is needed regardless of more

targeted efforts to nurture particular technologies or

industries. The option for a strategic technology

policy is one of those more targeted efforts, and is

discussed in a later section. The discussion immediately below covers the more general options to lift

the performance of U.S. manufacturing as a wholes

The Financial Environment

America’s financial climate is not hospitable to

long-term investments in new technology and production equipment. High U.S. capital costs favor

short-term profits over long-term investments, as do

pressures from the stock market. Recent studies

provide solid evidence that U.S. capital costs have

been substantially higher than those of Japan and

Germany for more than a decade, through 1988.6

Capital costs are influenced by interest rates, the

economic depreciation of investment and its tax

treatment, and other fiscal incentives for investment.

In the United States, government policy has contributed to high interest rates, particularly in recent

years. The combination of high Federal budget

deficits and low personal and business savings rates

has kept a relentless upward pressure on interest

rates. Congress and the Administration agreed on

some genuine budget discipline in late 1990, but the

1991 deficit was still projected to climb to an

all-time high (declines over the next 4 years were

also projected).

The dilemma is that some specific fiscal measures

that might help firms to modernize and invest in new

technologies would also tend to worsen the budget

deficit, because they involve raising tax expenditures or lowering revenues. The budget agreement of

1990 forbids this, unless there is a compensating rise

in tax revenues or decline in spending elsewhere in

the same part of the budget (domestic non-defense

programs).7 The serious efforts in the budget agreement to curb the deficit make sense from the

standpoint of improving competitiveness since,

otherwise, additional measures to reduce capital

costs would probably have no more than a marginal

effect. If Congress wishes to lower capital costs
Chapter 2-Policy Issues and Options ● 45

through tax breaks, the difficulty will be to find

something else to cut in the nondefense budget, or

get agreement to raise other taxes in compensation.

Eventually, economic growth based on stronger

competitive performance could help to ease the

budget problems, but in the short run there would be

a price to pay.

Increased savings could help to ease the upward

pressure on interest rates and thus lower capital

costs. A combination of carrots, sticks, and appeals

to patriotism might induce greater savings. Congress

could consider inaugurating a national savings

campaign that rewards regular savings. For carrots,

one option would be to offer government bonds at an

attractive, guaranteed interest rate to people who

sign up for a regular program, such as a payroll

savings plan. Another option might be a tax reduction on the interest income from payroll savings.

The sticks would be policies to discourage consumption. One option is a consumption tax, crafted

to escape the severe regressive effects of a flat tax

either by taxing necessities lightly (or not at all) and

luxury items heavily, or by granting substantial

exemptions. A consumption tax might serve the dual

purpose of encouraging savings while raising tax

revenues. Another option would be to limit tax

deductions for interest on home mortgages more

strictly than the law already does. Although home

equity is a form of savings for householders, these

savings are tied up and unavailable for capital

investments in manufacturing industries.

Tax breaks could help to lower the cost of capital

to industry even if interest rates remain high.

Congress could consider several options for tax

inducements for technology development and capital investment. The United States has a long, but

inconsistent, history of offering investment tax

credits and accelerated depreciation to promote

capital investment. There is evidence that these

measures do have positive effects, though the

magnitude is a matter of debate. They would

undoubtedly be expensive; they cost tens of billions

of dollars a year in lost tax revenues when they were

in force.8 The tax credit for R&D is far less

expensive (amounting to hundreds of millions in

forgone revenue per year) but it also has less effect

on competitiveness; while it rewards technology

development, it has little effect on the actual

adoption of new technologies in manufacturing

practice. As with the investment tax credit, it is hard

to pin down how much extra R&D is due to the tax

credit. Yet despite the uncertain payoffs, the arguments in favor of both kinds of programs are

substantial enough that they deserve a careful

hearing. It is worth repeating that under the current

budget agreement (lasting through fiscal year 1994)

such measures cannot be adopted unless the revenue

losses they entail can be made up in some other way.

Incentives to hold investments longer might

take some of the pressure off managers to focus on

short-term profits. One option would be to create a

capital gains tax that favors long-term gains and

penalizes short-term turnover of holdings. A variable rate scheme might be adopted, with a high tax

rate (say, 50 percent) for gains on assets held less

than 1 year, and the rate declining through several

steps to a low level (perhaps 10 or 15 percent) after

5 or 6 years. The measure would be most effective

if its application were extended to pension and other

funds that are now tax-free, since these funds hold

one-third of the stock and probably account more

than half of the transactions on the capital markets.

Stability in the economic and political environment is a great asset to business, and has been well

provided in Japan and Germany, much more so than

in the United States. Germany has successfully

concentrated on keeping prices and exchange rates

stable. In Japan, business has benefited not only

from long-sustained economic growth and low

inflation but also from policymakers’ sensitivity to

the effects on business of macroeconomic changes.

For example, in the mid-1980s when the yen

suddenly rose greatly against other currencies, the

Japanese Government made low-interest loans easily available to firms (especially small ones) so they

could ride out the period of adjustment. American

manufacturers penalized by the very high value of

the dollar in the early 1980s got no such help.

Human Resources

Success in manufacturing depends on having

well-trained people, comfortable with the demands

of advanced technology, at every level from the

manager’s office to the shop floor. In frost class

competitive industries, production workers must

sharpen reading and math skills, take more responsibility, cooperate more closely with others, and

understand their own roles in the entire production

system. In other words, more is being demanded of

workers. At the same time, the typical American
46 ● Competing Economies: America, Europe, and the Pacific Rim

education leaves many young people ill-prepared for

work, and training of the people already in the work

force is equally deficient. Our major trade competitors (i.e., Japan and Germany) offer more and better

training, both to young people preparing for work

life and to active workers. The situation in the United

States is likely to get worse before it gets better.

About half the new entrants to the U.S. work force

up to the year 2000 will be members of minority

groups, and two out of five minority children grow

up in poverty. Poor children drop out of school

disproportionately and many never learn the skills

they need for productive work.

A great deal of public policy attention is being

given to the critical need for improved public

schooling. But even if help arrived tomorrow, it

would be many years before the results showed up

in the work place. Meanwhile, another approach is

government-industry programs to offer better training to those already in the work force. This would

include not only financial commitments from both

government and industry but also a management

style that gives workers a real stake in the enterprise

and real responsibilities for quality and efficiency,

and organizes work to take advantage of workers’

training and abilities. Some of the options for

training active members of the work force are as

follows: 9

Government encouragement to industry to

train workers encompasses several possibilities.

The most aggressive and far-reaching of these

options, which guarantees more training without any

direct cost to the government, is a payroll-based

training levy. Employers would have a choice

between spending a certain amount on training their

workers (say 1 percent of their payroll) or paying the

same amount into a national training fund. Several

foreign countries (including France, Germany, Ireland, and South Korea) use the system, and four

States in the United States (California, Delaware,

Rhode Island, and Alaska) raise training funds

through a small payroll-based levy. A less pervasive

option is government technical assistance to help

trade associations or joint labor-management groups

identify industry-wide training needs and acquaint

their members with training materials and best

practice approaches. U.S. trade associations are far

less active in training than their European counterparts, yet it is a low-cost way of wholesaling training

information to individual firms. Cost-sharing by

governments could get the activity started. A similar

option is for the government to offer small grants to

help firms set up training consortia. Small companies could share the costs of instruction and facilities, and large ones could use consortia to help their

supplier networks develop common training appreaches. 10

Training delivered to individual workers includes several existing government-funded programs that need either revitalizing or more financial

support to fulfill their promise. Apprenticeship can

also bean excellent way for workers to get real skills

training with recognized credentials. The American

apprenticeship system once served industry and a

small segment of the work force well, but fell into

decline in the 1980s with cuts in funding and staff for

the Labor Department’s Bureau of Apprenticeship

and Training, and shrunken support from industry.

The Federal vocational education program has many

excellent features including school-to-work programs, cooperative business-labor-education training programs for active employees, and some

support for apprenticeships. The problem is finding

enough money to support these programs in a

meaningful way. For example, a demonstration

workplace literacy program has generated keen

interest with hundreds of application, far more than

the program could accommodate.

Training linked with technology assistance is

an effective combination. Many U.S. manufacturing

fins, especially small ones, have trouble adopting

new technologies. One source of the trouble is

inadequate training. The United States is far behind

many other countries in helping individual firms

learn about and use new technologies, but some

States and a small Federal program are making

efforts in this direction (as discussed more fully

below). The best of these programs integrate training

into their industrial extension efforts. The National

Institute of Standards and Technology (NIST) in the

Commerce Department is the agency mainly responsible for the Federal Government’s modest efforts in

technology diffusion. It could link training with

technology in its own programs and those of other

Federal agencies, and could also serve as an

information clearinghouse for State agencies trying

to do the same thing.

Improving the quality of worker training is, in

part, a Federal responsibility. The military is the

largest training institution in the United States.

Besides using conventional classroom and on-the-
Chapter 2-Policy Issues and Options ● 47

job training, the armed forces have developed

instructional technologies that might be adapted and

transferred to civilian use. Although the law calls on

the Department of Education to take on this task, no

funds have been provided for it. The Department and

other Federal agencies might also take a more active

hand in testing and evaluating workplace training,

with particular attention to computer-aided training

technologies.

Education and training of engineers is a central

issue for competitiveness. Although there seem to be

plenty of engineers now (the United States has about

as many engineers per thousand workers as Germany and Japan), the supply could dwindle a few

years hence because of the demographic facts. The

group most inclined to enter engineering, white

males, is shrinking“ gas a proportion of children in the

educational pipeline. In the long run, an adequate

supply of engineers depends on our success in giving

all our children a good education, including better

math and science education starting in the early

grades. Meanwhile, Federal scholarships and grants

that encourage minorities and women to take up

science and engineering careers seem to be getting

results and deserve support. Retraining of midcareer engineers is another way to enlarge the supply

over the next few years, especially as many engineers are losing jobs in defense industries, with the

cutback in military spending. With government

support, retraining courses might be targeted to fit

the needs of commercial manufacturing.

Problems of manufacturing are generally neglected in university engineering departments. The

elitism of U.S. engineers and their remoteness from

the shop floor are weaknesses of American manufacturing. While this is primarily an issue for managers,

government might support education and research in

manufacturing engineering. One option might be to

create a Manufacturing Sciences Directorate in the

National Science Foundation.

Technology Diffusion

U.S. institutions for diffusing new technologies

throughout manufacturing are thin. Even large firms

with sufficient resources often neglect to take what

they could from outside the firm. Many of our

355,000 small and medium-sized manufacturing

firms are worse off, with only scant and spotty

exposure to new technologies. While some small

fins, such as Silicon Valley startups, are at the

technological forefront, a great many others find the

effort to keep informed beyond their means. The part

played in U.S. competitiveness by these bread-andbutter small manufacturing firms can be critical.

Large auto companies, for example, must depend on

their myriad suppliers to deliver well-made parts and

components on time.

Both public and private means of diffusing

technology are weak in the United States. It is

uncommon for large U.S. manufacturers to lend

technical assistance to their suppliers, something

that is everyday practice in Japan. And there is little

in this country to compare with the network of free,

public technology extension services for small and

medium-sized manufacturers that blankets Japan.

Nor do we have anything like the apprenticeship

system that trains more than half the young people

in Germany and Sweden and produces a high level

of skills in the work forcr--a key factor in diffusing

new technologies throughout manufacturing in those

countries.

Throughout the past decade, Congress has taken

actions aimed at transferring advanced technologies

from lab to factory, bringing small and mediumsized firms up to date in best practice manufacturing

technologies, and removing legal barriers that might

interfere with technology advance in manufacturing.

Some of these actions are well along. Others have

just begun.

Congress may wish to strengthen and expand

some of the more promising existing programs and

consider adding others. No one program, by itself, is

likely to improve U.S. manufacturing performance

dramatically or rapidly. Some may fail. But given

time to prove themselves, several of these measures

in combination could pay off in real contributions to

competitiveness. 11

Technology extension has the potential to improve the manufacturing performance of small and

medium-sized American fins. Defining industrial

extension as one-on-one technical advice given to

individual fins, 16 States had real extension

programs (including field agents) in early 1991, and

another 7 had technology demonstration or assistance centers. At a rough guess, total spending for 27

extension or demonstration programs in 23 States

amounted to about $50 million. Most of these

programs are new, although a handful, such as

Georgia Tech’s Industrial Extension Service, have

years of solid experience. Federal industrial exten-
48 ● Competing Economies: America, Europe, and the Pacific Rim

sion is still smaller and newer. A program of

Manufacturing Technology Centers was established

in the 1988 Trade Act, and by 1991 included five

centers, with another planned for 1992. Fiscal year

1991 funding was about $12 million, with nearly $14

million proposed for 1992. The Centers are required

to get matching funds from the States or private

sources and, by law, cannot receive Federal funds for

more than 6 years. Because many States were in

financial distress in 1991, interest in supporting new

Centers had declined somewhat.12

For perspective, compare these few and scattered

programs with those in Japan. Besides the nationwide system of 185 technology extension centers,

funded at about $500 million (half from the national

government and half from prefectures), many Japanese cities, wards, and other localities support

industrial halls that offer similar services. In addition

to individual technical advice from field agents,

these services include regular workshops on common manufacturing problems, use of specialized or

costly equipment at low fees, demonstrations of new

technologies, and referrals to expert consultants for

advice on difficult problems.

There is room for expansion of both State and

Federal technology extension services in the United

States. States, being closer to clients, may be more

in touch with local needs. On the other hand, various

kinds of manufacture tend to be regionally concentrated, and Federal agencies can more easily span

State lines. Moreover, while some States do an

excellent job of delivering services, some are less

adept. A Federal effort could help to set an acceptable, consistent quality of service.

Supposing Congress wished to support a wider

network of technology extension centers, it might set

a rninimum goal of providing services in some 120

centers to 24,000 small and medium-sized firms

nationwide per year-i. e., about 7 percent of the

nation’s 355,000 manufacturing firms with fewer

than 500 employees. This would cost about $120 to

$480 million per year, depending on the level of

service. Some of the funds could come from State or

private sources, though it may be unrealistic to

demand that these sources take over all the funding

within a few years (as Federal law now provides in

the case of the Manufacturing Technology Centers).

A program of this size is modest and might be

overwhelmed with requests for assistance once the

centers gained a good reputation. The State of

Georgia’s highly regarded industrial extension service, run by Georgia-Tech, serves a similar proportion

of its manufacturers; it does not advertise for fear of

being swamped with requests. It is worth noting that

the U.S. Agricultural Extension Service is funded at

$1.2 billion per year (with about $370 million, or 30

percent, coming from the Federal Government), and

has 9,650 county agents, 4,650 scientific and technical staff, and offices in nearly every county in 50

States. Agriculture accounts for 2 percent of the U.S.

gross national product, manufacturing 19 percent.

Government financial aid tied to improvements in technology can be an effective means for

modernizing manufacturing. It has not been much

employed in the United States (except to induce

investments in pollution control equipment), but has

been widely and ingeniously used in Japan. One

option with at least two distinct advantages is a

system that would allow manufacturers to lease

modern production equipment, or buy it on the

installment plan, at subsidized rates. This scheme

would not only encourage manufacturers to use

up-to-date equipment, such as computer numerically

controlled (CNC) machine tools; if the system

bought U.S.-made equipment it could also benefit

U.S. builders of the machinery by offering a stable,

assured market for part of their output. An equipment leasing system for CNC machine tools, for

example, could start with modest government funding, probably about $3 million per year.13 It might be

open only to small manufacturing fins, or could be

open to all, with lower rates for small fins.

It is also possible to make government-backed

financing to small manufacturing firms conditional

on a technical assessment. However, that presupposes a nationwide, readily available industrial

extension service, which does not yet exist in this

country. Moreover; Federal programs of financial

support for small business are not large enough to

reach many fins. All the programs combined

(including loans, loan guarantees, and investments

in development corporations) amount to about $3.5

to $4 billion per year for every kind of small

business, not just manufacturing fins. In Japan, the

required technical assessment is common practice,

and there it does matter. Although exact comparisons are not possible, we do know that Japanese

loans and loan guarantees to small firms are at least

20 times greater than similar U.S. financial aid, and

the level of subsidy is higher (some government

loans for modernizing equipment are interest-free).
Chapter 2--Policy Issues and Options ● 49

As of 1988, nearly 11 percent of all outstanding

loans to Japanese small businesses for plant and

equipment investment were from government financial institutions, a big enough chunk to make

required technical assessments significant.14

Another option is tax incentives for investments

in advanced manufacturing equipment. This is

another of the many inducements the Japanese

Government offers to businesses, especially small

ones, to modernize. For example, Japanese tax law

was changed in 1984 to allow very rapid depreciation by small firms of high-technology (“mechatronic”) equipment, including CNC machine tools.

This set off a flurry of buying known as the

“NC-ization period.”

Commercialization of technology from Federal

laboratories is a goal that Congress has pursued for

more than a decade through laws and oversight.

There has been progress, especially in the last year,

but the goal is not yet fully realized. The U.S.

Government spends about $23 billion per year for

R&D in Federal laboratories; only a minor portion of

this is of commercial interest. Much of the labs’

R&D is for advanced development of weapons, and

a large share is for basic research quite far from the

commercial arena. However, some lab results have

proven useful to civilian industry, and companies

have benefited from using specialized lab facilities

(e.g., the Synchrotrons Light Source at Brookhaven

National Laboratory and the Combustion Research

Facility of Sandia National Laboratories). Two

principal ways of bridging the gap between lab

research and commercial manufacturing are: 1)

granting firms some exclusive rights to inventions

from the labs, so it is worthwhile to invest in

commercializing the technologies; and, 2) creating

cooperative R&D projects, in which industry puts up

half the money and is involved in the planning from

the beginning.

Two obstacles on the government side have been

too little money and too much red tape. With other

missions taking priority, lab funding of technology

transfer has been scanty. Bureaucratic hoops in the

parent agency, especially delays for legal review,

have often stalled technology licensing and the

conclusion of cooperative agreements between the

labs and private industry for many months, sometimes a year.15

Congress has taken steps to cut the red tape and

provide more funding for technology transfer from

the labs. Since the passage of the National Competitiveness and Technology Transfer Act of 1989,

technology commercialization has received more

attention at the Department of Energy (DOE) and its

labs. The high-level Technology Transfer Project

Group has focused on streamlinin “ “ g approvals for

both licensing and cooperative R&D. Moreover,

DOE has extended to some labs more control over

patents and data rights from lab research, permitting

a faster track to licensing technologies with commercial appeal.l6 For its part, industry has become

more aggressive at seeking out lab technology .17

The heightened “attention to commercialization

has yielded some results. Cooperative R&D has

increased.18 But despite the progress, funding is still

limited. DOE’s Defense Programs devoted only $20

million, or 0.7 percent of its $3 billion fiscal year

1991 R&D budget for technology transfer. Sandia

National Laboratories’ direct spending on technology transfer does not exceed 0.5 percent, or $5

million, of its $1 billion budget, and many other labs

have earmarked less or nothing at a11.19 Congress

might consider designating some of the labs’ R&D

appropriation for promoting commercialization, perhaps mandating that a few percent of the budget be

set aside for the purpose. Activities would include

identification and marketing of promising technologies, patenting when appropriate, and participating

in cooperative R&D projects. Bills being drafted for

the 102d Congress would increase the labs’ role in

promoting technology commercialization.20

In addition, Congress could take action to remove

some remaining barriers to commercialization. For

example, the law might be changed so that software

created by government employees can be copyrighted, which would sometimes make its commercialization more feasible.21 At some point, however,

major responsibility for energetic technology transfer must fall to the labs, their parent agencies

(especially DOE and the Department of Defense),

and private companies.

Japanese technology is another lode that U.S.

companies could mine if they begin to pursue new

technologies from outside sources more aggressively. There are difficulties-the most obvious

being the language barrier-in getting access to

Japanese technologies. Also, most Japanese technology is developed by private industry and thus is less

accessible to outsiders than technical knowledge
50 . Competing Economies: America, Europe, and the Pacific Rim

that is freely available at universities and public

institutions.

A few universities have fellowship programs that

send American scientists and engineers to Japanese

companies and research institutions on long-term

projects, and the National Science Foundation (NSF)

has recently established similar programs, largely

funded by grants from the Japanese Government.

The NSF-Japan programs are not yet fully subscribed, but are likely to attract more applicants as

they become better known (typical of university

programs). Congress may wish to monitor the

progress of the NSF programs, possibly adding

funding if they become oversubscribed. Another

option would be to establish a congressional U. S.-

Japanese Fellowship Program, taking advantage of

the visibility and prestige conferred by the sponsorship of Congress (perhaps especially in Japanese

eyes). In addition, Congress might wish to encourage sabbaticals in Japan for researchers working in

Federal labs. A longer term, more fundamental

option is to promote Japanese language instruction

both in the public schools and in universities,

especially for scientists and engineers.

Improved protection of intellectual property

and modest changes in antitrust law might bolster

the competitive position of some U.S. manufacturing industries. Better intellectual property protection

could start at home with speedier enforcement.

Patent cases that go to trial take an average of 21/2

years before a decision. Congress might help by

designating special patent judges with the technical

experience to move cases through expeditiously

(similar in principle to the tax courts). As for foreign

markets, the Japanese patent system is a particular

problem. It is slower than the U.S. system in issuing

and enforcing patents, and it strongly favors licensing of patents, which U.S. companies do not always

wish to do. The U.S. Government is negotiating with

the Japanese on these and other problems. In

addition, Congress may wish to establish a program

in the Patent Office or elsewhere in the Commerce

Department to provide information to U.S. companies about the Japanese patent system, which most

firms do not understand.

Antitrust law and enforcement have been relaxed

in the past decade, but some cooperative endeavors

that could help U.S. firms may be dampened by fear

of antitrust action. Changes in antitrust law and

enforcement should be approached with caution; the

laws have served the country well for many years in

maintaining g competition. However, the laws’ complexity and vagueness, together with stiff penalties,

may discourage some useful cooperation. Congress

amended the law in 198422 to make joint R&D

easier, chiefly by reducing the maximum penalty

from treble damages to single damages for publicly

registered projects. Other options might include

extending the 1984 Act to cover joint manufacturing

(as proposed by the Administration in the 102d

Congress), and case-by-case review and advance

certification by the Justice Department that particular joint projects do not violate the law. Another

possibility is to establish safe harbor market shares,

so that cooperating firms with combined market

shares below a certain percentage would not be in

violation.

Perhaps most important, Congress could instruct

the Justice Department and the courts to evaluate

possible mergers and joint ventures in light of a key

fact of modern international competition: that foreign firms with low U.S. market share may rapidly

increase that share and even become dominant, if

they possess strategic technology, large world market share, sufficient financing, or other advantages.

If this fact is accepted, then under standard antitrust

analysis mergers or joint ventures between U.S.

firms should sometimes be permitted to avoid

eventual dominance by a foreign firm. Similarly,

some buyouts of U.S. firms by a foreign firm would

sometimes be stopped, in order to avoid eventual

dominance by the foreign firm. These arguments

have often been met with skepticism; Congress

could urge that they be taken seriously.

Information and exhortation to American manufacturers on how to make things better, given under

U.S. Government auspices, might not seem a very

promising strategy. But a Department of Commerce

program (the Malcolm Baldrige National Quality

Award) does that very thing, and has proven

astonishingly effective in just 3 years. It costs the

taxpayers almost nothing. Even the administrative

expenses are covered by private contributions and

applications fees from companies vying for the

award.

The award was created by Congress in 1987. It is

given to companies or organizations that have

“substantially benefited the economic and social

well-being of the United States through improvements in the quality of their goods or services from
Chapter 2--Policy Issues and Options . 51

Box 2-A—The Baldrige National Quality Award

The manager of the Baldrige Award, the National Institute of Standards and Technology (NIST) of the U.S.

Department of Commerce, sets out seven major criteria that contestants must address in their applications for the

award. NIST’s Application Guidelines list the maximum points applicants can win in each of the categories, adding

to a total potential score of 1,000 points.l

Leadership: The senior executives’ success in creating and sustaining a quality culture. 100 points.

Information and Analysis: The effectiveness of the company’s collection and analysis of information for

quality improvement and planning. 70 points.

Planning: The effectiveness of integration of quality requirements into the company’s business plans. 60

points.

Human Resource Utilization: The success of the company’s efforts to utilize the full potential of the work

force for quality. 150 points.

Quality Assurance: The effectiveness of the company’s systems for assuring quality control of all operations.

140 points.

Quality Assurance Results: The company’s results in quality achievement and quality improvement,

demonstrated through quantitative measures. 180 points.

Customer Satisfaction: The effectiveness of the company’s systems to determine customer requirements and

demonstrated success in meeting them. 300 points.

Every year, six awards may be given, two each in three categories, Manufacturing, Service, and Small

Business. Awards need not be given if no one qualifies. The winners are shown in the table below.

Winners of the Baldrige Award

Manufacturing Service Small business

1988 Motorola, Inc. Globe Metallurgical

Commercial Nuclear Fuel Division, Westinghouse Electric Corp.

1989 Milliken & Co.

Xerox Corp., Business Products & Systems

1990 Cadillac Motor Car Division Federal Express Wallace Co., Inc.

IBM Rochester

Iu.s. Dep~@ of Cor.m.neme, National Institute of Standards and lkchnology, Malcolm Baldrige National Quality Award, P~P~et

(Ga.ithersburg, MD: NIS~ 1991).

effective practice of quality management. ”23 Six to comment, and how it follows up with customers

awards may be presented each yeat--two each for

manufacturing, services, and small business-but

none need be given if no one qualifies. In the first 3

years of the program (1988-90), there were 203

applications and 9 awards given, 6 to manufacturing

companies, 2 to small business, and 1 to a service

company (see box 2-A).

The award has been an excellent means of

technology diffusion. Just filling out an application,

following NIST’s 42-page booklet of Application

Guidelines, can be an eye-opener. For example, the

company must satisfactorily relate how it gives

customers easy access to assistance or opportunities

to see if they are satisfied with products and services.

These are just 2 of 33 detailed areas that companies

must cover in their applications (50 pages for small

companies, 75 pages for large ones). According to

Jerry Junkins, CEO of Texas Instruments, “If you

measure your-self against the criteria laid out by the

Baldrige award, you have a blueprint for a better

company. 24 All applicants, win or lose, receive

reports from examiners outlining their good and bad

points, and this is enough to improve some companies’ quality efforts. Some companies do not enter

but use the Baldrige criteria as a company standard.

One winner, Motorola, demanded that 3,600 of its
52 . Competing Economies: America, Europe, and the Pacific Rim

larger suppliers prepare to compete or face being

dropped. 25

Winners must share with others details of what

they did to win the award; company representatives

give hundreds of speeches a year and hold large

briefing sessions for executives of other companies,

including their competitors. One manager who

attended a winner’s presentation came away amazed

at the level of detail, which he described as

“everything but the financial data. ” After hearing

the presentation, he reckoned that his own company,

considered a leader in its high-technology field,

would not be able to qualify for the award for at least

6 years.

Despite a few criticisms of the Baldrige award

(e.g., some consultants consider the criteria are too

directive), its good effects appear to far outweigh

any adverse ones. In the general area of quality

standards, however, there may be room for further

government action. Suppliers trying to meet formal

quality requirements for large customer fins, particularly the Big Three auto assemblers, are frustrated by slightly varying requirements and separate

certification. If Ford’s Q-1 and GM’s Mark of

Excellence certifications were made consistent and

interchangeable, suppliers believe they would benefit. Through oversight, Congress might encourage

NIST to look into the question and work out a

constructive solution.

TRADE POLICY TOOLS

Since World War II, U.S. policy has promoted

free trade by keeping its own market generally open

and urging other countries to do the same. For two

or three decades this policy served U.S. interests

well enough. U.S. manufacturing technology was so

far ahead of most other countries, and the U.S.

market so much larger than others, that manufacturers flourished even in cases where the free trade was

mostly one way—free for U.S. imports but quite

encumbered for exports. At the same time, opening

American markets to foreign goods served the U.S.

policy of promoting economic development in

poorer countries and cementing loyalty among Cold

War allies.

Today, free trade is not invariably to the United

States’ advantage. Advanced countries have rebuilt

their war-damaged economies, several poorer countries have begun to industrialize, and the United

States is no longer predominant. In some industries

and technologies it has fallen to second place. This

is a particular concern in key high-reward industries

such as electronics, including parts of the semiconductor and computer industries. These are industries

that can help make a country rich, because markets

are rapidly expanding, producers can capture substantial economies of scale and learning, and the

industry has technology spillover benefits for the

rest of the economy.

Most of the United States’ decline was selfinflicted. The U.S. Government has never formed

the partnerships with industry that helped its best

competitors advance. Many of its industries have

stuck with outmoded management and technologies

while others passed them by. Part of the trouble,

however, was that foreign market barriers and export

drives deprived key U.S. industries of needed

revenues and experience, sapping their strength and

even undermining their existence. The neardestruction of the U.S. consumer electronics industry was caused partly by closed foreign markets

combined with dumping (selling at prices below fair

value) of foreign goods in the U.S. market.

U.S. trade law and policy are supposed to prevent

events like these. If foreign markets are closed to

U.S. goods, the U.S. Government tries to get the

barriers removed. If imports are subsidized by

foreign governments, or if foreign subsidies or

market barriers result in dumping, the U.S. Government can in some circumstances levy a duty on the

imports intended to compensate for the foreign

advantage. However, foreign market barriers may

take years to remove. U.S. law regarding subsidies

and dumping has been at best slow and incomplete

in compensating for the advantages foreign firms

receive from their governments. Moreover, tariffs

are inherently inadequate to compensate for another

country’s domestic policies; when foreign governments help to give their industries a competitive

edge, it takes more than trade policy for U.S.

industries to catch up.

U.S. trade policy could more effectively promote

U.S. competitiveness if it were part of an overall

strategy. A redirected trade policy might have three

operating principles. First, when a critical industry

is in trouble, the primary government response

would be a domestic one. Measures might include

R&D support, tax breaks and incentives for R&D &

capital investment, support for technology diffusion,

and support for education and training. Trade
Chapter 2--Policy Issues and Options ● 53

measures-trying to open foreign markets, and

protecting the U.S. market--could be used when

necessary, but in a subordinate role. Second, efforts

to open markets would focus on areas of the greatest

strategic importance. Third, when opting to use

protection, the basis would not be legalistic criteria,

but rather the industry’s need and place in the

economy.

The important industries are not difficult to

identify. Several government and private reports in

the United States, Japan, and Europe have listed

high-priority technologies that drive competitive

industrial performance, and their lists are similar.

They include electronic components, information

technologies, materials and associated processing,

manufacturing process technologies, and propulsion

and powertrain technologies.26 Ideally, the important industries would be identified by an institution

responsible for a comprehensive government approach to trade and competitiveness policy. Otherwise, individual government agencies involved could

draw up their own lists.

This leaves the question of how to fashion

assistance to threatened U.S. industries. There is the

danger that government assistance will be squandered on industries unable to compete, or that

assistance will remove industries’ incentive to

improve their competitiveness. However, other countries’ experiences provide significant guideposts—

showing, for example, that industry should take the

lead in proposing joint government-industry R&D

programs and shoulder much of the cost; that

policies should conform with market forces as much

as possible; that U.S. industry must compete with the

best in the world; and that industry must make its

own efforts to improve its competitiveness and

outgrow the need for assistance. Ideally, a government institution with overall responsibility for trade

and competitiveness would coordinate strategic

assistance. But in the absence of such an institution,

individual agencies could act on their own according

to these principles. For example, the Department of

Energy, in its pilot program for cost-shared R&Din

high-temperature superconductivity, participates only

in projects that industry proposes and for which

industry pays about half the cost.27

Finally, these options come with an important

caveat. This report is addressed to Congress, and

presents options that Congress may wish to adopt.

Yet there is little that Congress can do on its own. It

can state goals, allocate resources, and give guidelines, but strategic policies to improve U.S. competitiveness policies require initiative and judgment by

the executive branch. The sympathies and energy of

the executive branch are needed to get the job done.

Responses to Foreign Market Barriers

Foreign market barriers can hurt U.S. industries.28

While GATT has reduced quotas (quantitative

restrictions on imports) and tariffs (taxes on imports,

also called duties), there are many other barriers to

imports. These include burdensome customs procedures; preferential government procurement; discriminatory standards and regulations; and companies’ agreements or practices, sometimes tolerated

or encouraged by the government, not to buy foreign

products.

Normally, the U.S. response, if any, is to negotiate

to eliminate barriers. The Office of the United States

Trade Representative (USTR) leads the negotiations, with assistance from other agencies. The

USTR’s lean staff can negotiate only a limited

number of cases, and may be so overburdened as to

affect the quality of negotiations. And the fast

turnover of many senior (political level) negotiators

and policymakers has sometimes hindered the United

States from pressing its position consistently over

the years. High ranking government officials have

frequently left government to represent foreign

manufacturers or their U.S. importers, giving those

interests both access to top government decisionmakers and the savvy to exploit any weaknesses on

the U.S. side.

Congress could address these problems in various

ways. It could expand the USTR staff, enabling it to

take on a wider range of foreign market barriers and

match other nations, Japan in particular, in preparation and negotiating strength. Congress could also

reduce the number of political appointments and add

more high-level career civil service slots dealing

with trade policy to the USTR, the Commerce

Department, and other agencies; making long-term

service more attractive would improve institutional

memory and facilitate the steady pursuit of goals

over the years. Finally, Congress could prohibit

senior trade officials from representing foreign

interests for several years after they leave government service.

Other reasons why foreign markets can take many

years to open are harder to address. Barriers take
54 . Competing Economies: America, Europe, and the Pacific Rim

time to identify; other countries can stall negotiations; countries hedge on promises to remove

barriers; and when one barrier is removed, another

can take its place. Japanese trade barriers especially

are often like an onion, with layer after layer to peel

away. And some hindrances are ingrained in a

country’s social norms and domestic policy, making

their removal difficult even if the foreign government is willing.

Success often depends on the leverage the United

States has over other countries. The two major

sources of leverage are limited. First, when the

country and subject matter are covered by GATT,

the United States can invoke GATT dispute resolution procedures. This process is slow and uncertain,

since the other country can veto decisions adverse to

its interests. Recent developments in the GATT

Uruguay Round have improved the process; further

improvements may yield a more reliable means for

eliminating market barriers.

Another approach would be to create a new,

multilateral trading system, consisting of only those

countries that are truly willing to abide by the

dictates of free and open trade, and to negotiate

bilateral deals with nations outside the system.29

This kind of trade management far exceeds anything

we have done in the postwar period, and creating it

would require much time and patience. The new

trade regime probably would need a strong enforcement mechanism, perhaps along the lines of the

International Trade Organization (ITO), which was

originally proposed in the late 1940s but was

blocked by the United States and therefore never

formed. 30 Congress might wish to forma task force

to investigate what such a revised system could

entail.

The second source of leverage is to threaten

retaliation under Section 301 and related sections of

the Trade Act of 1974, as amended,31 which allow

the United States to impose punitive barriers to

imports from another country in retaliation for that

country’s “unfair” trade practices. However, the

U.S. Government is often reluctant to retaliate under

Section 301. The retaliation could violate GATT so

publicly as to make the United States vulnerable to

criticism (including formal complaint and investigation under GATT rules) or further retaliation.

Punitive barriers on imports would not solve the

U.S. industry’s problem and could create problems

for downstream industries in the United States. And

even the start of a Section 301 investigation angers

foreign countries, for whom Section 301 is a symbol

that the United States considers its national laws

superior to GATT’s international law.32

Because of these problems, negotiations to open

foreign markets are in many cases slow and ineffective. Barriers that cause particular damage--such as

Japanese barriers to the sale of semiconductors and

supercomputers (chs. 4 and 6)--often persist the

longest. While market opening is a worthwhile

long-term goal, it often provides little or no relief in

the short term, during which time the affected U.S.

industry can suffer serious damage.

Accordingly, it might make sense to change the

U.S. response to foreign market barriers. The

response could be primarily domestic programs to

aid the affected industry. Often these programs

would be enough. The U.S. market, still the world’s

largest for many products, can often support the

industry. In such cases, the United States could still

negotiate to open foreign markets, but in a low-key

manner, to encourage change without angering the

countries involved. It would also make sense to

allocate the government’s limited resources according to an industry’s strategic importance.

However, domestic programs might not always be

enough. This might be the case with semiconductors. Even though the U.S. Government is

contributing $500 million in R&D assistance to the

industry over 5 years through Sematech, that is

insufficient to arrest the U.S. industry’s competitive

decline vis-à-vis Japan. The semiconductor industry

is particularly dependent on economies of scale and

learning, and without access to the Japanese market—

the largest and most discriminating in the world—

the U.S. semiconductor industry will likely keep

slipping.

In such a situation-a key industry in danger if a

foreign market remains closed—the United States

could consider an aggressive program to open the

foreign market, if necessary by a prompt threat of

retaliation under Section 301. These cases could

merit cabinet level or even Presidential involvement.

Semiconductors apparently is a case in which

aggressive action was deferred for too long. Despite

negotiations begun in 1972, Japan’s semiconductor

market remained largely closed to U.S. products.33

The United States commenced a Section 301 investigation only in 1985, leading to an agreement in 1986

that was broken by Japan, followed by U.S. retalia-
Chapter 2-Policy Issues and Options ● 55

tion in 1987, and finally, starting in 1989, a modest

increase in U.S. firms’ share of the Japanese market.

While it might occasionally make sense for the

United States to pull out all the stops in trying to

open a foreign market, such cases must be chosen

carefully. As discussed above and in chapter 4, the

threat of retaliation-and execution of this threat—

is likely to anger foreign countries and could have

other serious adverse consequences. It is thus

important to rank foreign market barriers, identifying those industries that are most important and in

which barriers have a pronounced effect that domestic programs cannot alleviate. In general, the USTR

has not made strategic priorities. For example, in the

early 1980s, the U.S. Government successfully

pressured Japan to buy a certain amount of U.S.-

caught fish, but would not do the same with

semiconductors. 34 This lack of strategic planning

was evident and surprising to Japan. Clyde Prestowitz, a key Japan negotiator in the Commerce

Department for most of the 1980s, recalls: “Once an

official of the [Japan] Economic Planning Agency

asked how we created our agendas. His agency, he

said, had carefully studied the competitiveness of

various U.S. industries, and in his opinion there were

much better issues for the U.S. to pursue than the

ones on its list. ”35

Use of Protection

U.S. industries normally receive trade protection

only when imports are dumped or subsidized.36 In

this case, an extra duty can be assessed in an amount

that in theory will precisely counteract the subsidy

or dumping. In principle, this extra duty does not

distort trade from what would occur with free trade

and a free market, but rather corrects a distortion

already present. The goal is to put U.S. industry back

on an equal footing. Such extra duties are in

principle consistent with GATT.

However, the U.S. law and practice regarding

subsidies and dumping by and large fail to compensate for the advantages foreign governments create

for their firms. Reasons for this include delay,

difficulty in proving subsidies or dumping, the law’s

ignoring or devaluing certain subsidies, difficulty in

proving the required injury, and the high expense of

legal proceedings. A further problem is that the

effects of government assistance can increase over

time rather than dissipate as the law assumes. To

some extent, the law’s limited effectiveness stems

from adherence to GATT requirements.

These U.S. laws, however imperfect, are now

often the only line of defense for key industries

facing stiff foreign competition; it could be harmful

to weaken them further as many GATT members are

seeking to do in the Uruguay Round. However,

strengthening these laws might lead to a flood of

cases, anger trading partners, provoke legal challenges under GATT, and result in imposing extra

duties that might not be in the country’s best interest.

The debate between those who would strengthen

and those who would weaken the subsidy and

dumping laws might be resolved by shifting the

policy focus of import protection. First, for beleaguered U.S. industries, the primary response would

be domestic programs to help the industry compete

or rationalize. (To rationalize means to shrink, but in

a planned fashion that also seeks to improve

technology in potentially competitive subsectors.)

This could include R&D support, tax breaks, and

other measures designed either to help an industry

regain technical parity with foreign competitors or to

ameliorate the shock of downsizing.

Where domestic measures alone might not suffice, protection could be used, lasting only as long as

strictly necessary. Criteria for awarding protection

would include the industry’s need, its merit (including whether the industry was making reasonable

efforts on its own and showed promise of effectively

competing on its own), and the importance of the

industry in the U.S. economy. While the presence of

subsidies or dumping might be relevant to the

decision to grant relief from imports-for example,

to show that an industry is being beaten only because

of the intervention of foreign governments—

subsidies or dumping would be among many factors

to consider. Likely adverse effects on downstream

industries would also be considered, though the

government could take measures to ameliorate them

(e.g., special tax breaks).

The protection component of such a reoriented

policy in principle could be consistent with GATT.

Such an approach could build on Section 201 and the

following sections of the Trade Act of 1974, as

amended, under which the government can impose

temporary relief (up to 8 years) when increased

imports “cause or threaten serious injury” to an

existing U.S. industry .37 Section 201 follows GATT’s

so-called ‘‘escape clause, ’ which permits import
56 ● Competing Economies: America, Europe, and the Pacific Rim

barriers in this situation but requires the payment of

compensation (normally reduced tariffs on other

items) to affected countries (see ch. 4). Under

Section 201, the U.S. International Trade Commission (ITC) determines whether the injury requirement is satisfied and, if so, recommends relief. The

final decision on relief is up to the President, who has

great flexibility in choosing the nature of relief.

Forms of relief include quotas, higher tariff rates,

and negotiations with foreign governments “to

address the underlying cause of the increase in

imports or to otherwise alleviate the injury. ”38 The

President must consider the efforts that the domestic

industry is making on its own to improve its

performance; every 2 years thereafter, while the

protection lasts, ITC must report to the President on

industry’s continuing efforts to improve, and the

President may modify or terminate relief if he finds

those efforts insufficient.

However, as currently administered, Section 201

would have limited usefulness as a vehicle for

strategic use of protection. The serious injury

requirement is hard to satisfy, and partly for that

reason Section 201 has been little used in recent

years. 39 The law contains the requirement, not

specified by GATT, that the increased imports be at

least as great a cause of injury as any other cause.40

The injury requirement is not often satisfied before

serious damage is done. While the threat of serious

injury is in principle enough to satisfy the statute, the

threatened injury must be imminent, and a sufficient

threat is rarely found. Also, following the language

of GATT’s escape clause, Section 201 by its terms

can be used to protect industries already producing

goods, not those still forming.41

Congress could make Section 201 more serviceable by eliminating the requirement that the increased imports be at least as great a cause of injury

as any other cause. Congress could also specify that

the injury test can be satisfied even when an industry

is doing well, if the imports have impeded the

industry’s development or import and industry

trends point to eventual foreign dominance. Such a

provision might be consistent with GATT, although

other countries could argue otherwise.42

GATT’s escape clause requires that the increased

imports and consequent injury be due to “unforeseen developments. ’ ’43 Section 201 does not. However, if the United States attempted to use Section

201 to protect a new (infant) industry struggling to

compete against a well-established foreign industry,

foreign countries could complain that imports and

the consequent injury to U.S. companies were hardly

‘‘unforeseen. Uruguay Round negotiations might

eliminate this requirement, which has rarely been

used or invoked.

All told, Section 201 is far from an ideal tool for

providing GATT-compatible protection. However,

Congress could empower the President to grant

protection apart from Section 201. Ideally, a government agency responsible for coordinating competitiveness strategies would recommended protection

when needed. Instead of justifying protection under

GATT’s escape clause, the United States could

justify it under GATT Article XXVIII. Under that

Article, the United States could negotiate compensation, typically in the form of reduced tariffs on

certain other products, in exchange for which other

countries would accept increased U.S. tariffs on the

products at issue. The President could be empowered to offer such compensation, as recommended

by an agency with overall competitiveness responsibility. While compensation could adversely affect

other U.S. industries, the government might, in some

cases, be able to mitigate these effects with tax

breaks or other programs that the same agency could

recommend and the President could be empowered

to grant, subject to a congressional override.44

If negotiations failed and other GATT-consistent

means of protection could not be found, as a last

resort the United States might impose protection

anyway. Other countries have at times protected

industries they consider crucial, regardless of GATT.

Such a course might provoke a GATT dispute, and

could possibly lead to a ruling requiring the United

States to pay compensation. 45 This approach would

not necessarily signal U.S. abandonment of its

loyalty to GATT and the free trade ideals it

represents. Rather, it would mean that the United

States, like other countries, can depart from free

trade ideals when necessary.

Under both Section 201 and this new approach, it

would be desirable to condition protection on a

performance requirement or showing of progress by

the industry receiving protection (which has happened to some extent under Section 201). Openended trade protection with no strings attached has

been a recipe for third-rate performance for industries in many countries (e.g., the national champion

computer firms in Europe-see ch. 5). On the other
Chapter 2-Policy Issues and Options ● 57

hand, the discipline Korea imposed on its developing industries+. g., requiring companies to succeed

in exporting finished goods as a condition for

permission to import production equipment, parts

and materials-was an ingredient in the success of

its export-led development, The specific policy tools

Korea used are no model for the highly developed

and much freer U.S. economy, but some kind of

standard or gauge of serious effort on the part of the

industry and progress toward competitive performance could be employed.

Domestic Content Requirements

The issue of domestic content is sure to come up

if the United States protects industries against fair

but damaging imports. One way of getting around

protective tariffs and quotas is to build an assembly

plant in the protected country; Japanese automobile

production began in North America in large part to

avoid current and prospective protection. The fact

that foreign direct investment has grown faster than

trade in the past couple of decades reflects, in part,

companies’ desires to avoid or avert national protection.

While foreign investment is often welcomed and

occasionally sought, some nations have not been

content to let foreign companies substitute domestically assembled merchandise for imported goods,

because often the domestic assembly adds only a

small proportion of value to what is basically an

imported good. The United States has done little

other than jawbone to increase the domestic content

of foreign companies producing here, but many

European nations and the European Community

have moved more decisively. For example, the

British Government eagerly pursued Japanese automobile investment but included the proviso that 60

percent of the content of the autos must be European

at the time of startup and 80 percent within a few

years. Such high levels of local content require that

the body, the major mechanical components, and

either the engine or the transmission be fully

manufactured in Europe (see ch. 5); the current level

is much greater than the local content of cars made

by any Japanese transplant in North America, even

after years of operation. Domestic content requirements are also prominent in Europe for electronics

products, including office equipment, consumer

electronics items, and semiconductors. Government

procurement in most EC member nations strongly

favors domestically made goods. Moreover, for

29 Z-Q89 O - 91 +3 QL;3

nearly a decade, the EC has pursued vigorous

antidumping measures against Japanese and other

Asian firms selling electronics goods in Europe; the

penalties can be lifted if the firms include substantial

amounts of European-made parts and materials in

their products, and many firms have relocated

production to Europe in response.

Domestic content regulations, like tariffs and

quotas, can benefit a nation. Almost certainly, they

mean more jobs in the protected industry than

otherwise, at least in the short run. But, like other

forms of protection, they nearly always mean some

short-term sacrifice by consumers in the form of

higher prices. Whether national productivity or

competitiveness improve with domestic content

requirements is uncertain and may depend on

whether they coincide with or are tied to measures to

improve the competitiveness of the domestic firms

or industries.

Experience with domestic content requirements

in industrialized countries is recent and limited.

There is some evidence that Japanese auto assembly

transplants in North America have helped to improve the quality and productivity of U.S. suppliers;

the more recent Japanese transplants in Europe are

expected to do the same for European suppliers.

Also, in North America the demonstration effect of

the Japanese assemblers spurred the Big Three

domestic automakers to improve their own and their

suppliers’ quality and productivity. It is not yet clear

that requiring high domestic content of Japanese

producers in electronics products will help the

European electronics industry. It maybe improving

the performance of some European suppliers, but if

so that improvement has not yet spilled over into

greater competitiveness of the European systems

manufacturers who make computers, other office

machines, and consumer electronics items; all these

European companies are in trouble. It is also unclear

to what degree good performance by Japaneseowned firms will contribute to an elevated level of

technology and higher standards of living in the host

country. It may be that the leading edge of innovation will remain in the home country of the foreign

investor, but that the host country could still benefit

from demonstration and direct teaching of superior

manufacturing practice.

European policies reflect

uncertainties about benefits

investment. The EC seems

the ambiguities and

from foreign direct

to have adopted a
58 . Competing Economies: America, Europe, and the Pacific Rim

principle of tolerating or encouraging foreign investment in some critical sectors if the foreign firm

agrees to a high level of local content. Yet there are

contradictions. The recent EC agreement with the

Japanese Government on automobiles would allow

only a gradual increase in the Japanese share of the

EC market, both transplant production and imports,

despite the high domestic content levels that the

transplants have already agreed to and are trying to

achieve (see ch. 6).46 Overall, it seems that the EC

Commission and the member governments are still

trying to decide whether foreign direct investment is

a net benefit.

Japan, on the other hand, has an unambiguous

stand. Japan has often barred or severely constrained

foreign direct investment, even when it was far

behind other advanced industrial nations and trying

to catch up. Even today, Japan remains one of the

most difficult of industrialized nations in which to

open a branch, partly because of the expense but also

because of the red tape involved.

Export Promotion

Export promotion—helping firms take advanages of opportunities to sell abroad—is another

policy tool that could help U.S. manufacturing

competitiveness. To export, companies must pass

many hurdles: analyzing foreign markets; identifying and contacting potential customers; learning

foreign ways of doing business; creating new labels

or otherwise adapting the product for foreign use;

getting financing; and arranging for shipping, insurance, and customs clearance, to name a few. Even

when a U.S. firm has a good, well-priced product, it

can easily miss an export sale.

Government programs can provide information

and contacts. They can inform U.S. firms about

markets, potential customers, foreign regulations

and procedures, shipping, and so on; they can inform

foreign firms about U.S. firms and products; and

they can arrange trade shows, interviews, and other

contacts between U.S. and foreign fins. For manufactured goods, this assistance at the Federal level is

provided primarily by the U.S. Foreign and Commercial Service (USFCS) of the Department of

Commerce. (The Department of Agriculture provides export services for agricultural products.)

Government programs can also assist with export

financing. Often credit terms play an important part

in export sales, especially to developing countries.

Government help in providing easier credit terms

can take the forms of:

1.

2.

3.

The

insuring the exporter against the customer’s

default, if the exporter allows the customer

deferred payment;

guaranteeing a bank against the customer’s

default, if the bank lends the customer money

for the purchase; and,

lending money itself, either directly to the

customer or indirectly through a bank.

Export-Import Bank of the United States

(Eximbank), an independent agency of the U.S.

Government, provides this kind of assistance.

In both information and financing, U.S. export

promotion programs are weaker than those of our

major competitors, primarily because much less is

spent on them (ch. 4). The difference is due in part

to limits on spending by the U.S. Government, after

years of enormous budget deficits. It also stems from

a fundamental uncertainty among U.S. policymakers

as to whether export promotion is something the

government should be doing.

If Congress and the Administration decide that

export promotion is a legitimate government function, there are straightforward ways to make it more

effective. Congress could increase funding for USFCS

to pay for additional commercial officers posted

abroad. These are the people who gather information

about foreign market opportunities and help U.S.

firms find foreign contacts. The summer 1991 level

of about 200 foreign commercial officers,47 while up

somewhat from about 150 in 1980 and 1988,48 is still

low. For example,” as of August 1990, there were

only 15 commercial officers in Japan, plus 44

Japanese nationals assisting with export promotion,

while 83 professional employees of the Japanese

Government, all Japanese citizens, were working in

the United States to promote exports.49 Congress

might wish to ask the Commerce Department

whether other funding increases could provide

improvements in service. In the late 1980s, budgets

were very tight; sometimes USFCS officers even

lacked funds to return phone calls to the United

States. While funding has improved somewhat,

given this history and the low level of spending

compared to important trading partners, it is likely

that additional funding could have a healthy payoff.

The level of service depends on attitude as well as

money. Congress might wish to make a policy
Chapter 2-Policy Issues and Options . 59

statement that export promotion should be a priority

not only for commercial officers abroad but for the

whole diplomatic staff. Cabinet-level involvement

in promotion activities, such as Commerce Secretary

Mossbacher’s presence in Tokyo in April 1991 to

kickoff the Japan Corporate Program (ch. 4), could

provide a boost.

Export promotion efforts could have a more

strategic focus. While USFCS emphasizes industry

sectors whose fundamental competitiveness suggests substantial export potential, it does not consider which industries are strategic to overall U.S.

competitiveness. While Eximbank reports to Congress on the amount of financing meeting certain

strategic priorities (such as industries with high

value added, or industries that particularly benefit

downstream industries), it is not clear how much

Eximbank takes them into account in its decisions.

Ideally, an agency with overall competitiveness

responsibility would coordinate strategic priorities.

Strategic priorities for Eximbank could also help

to solve the problem of excessive paperwork.

Financing assistance by Eximbank must be justified

on a case-by-case basis. Congress might consider

adopting the approach used by Japan and many

European countries, which determine in broad

policy terms what exports to assist, and then assist

all creditworthy exports within the guidelines.

U.S. manufacturers are at a disadvantage, compared with foreign competitors, because of tied aid.

This is a scheme by which a country gives foreign

aid on condition that the recipient use the money to

buy products from the donor. The United States ties

some of its aid, but U.S. nondefense aid focuses on

agriculture, health, nutrition, and education. American farmers may reap large benefits, but manufacturers seldom do. Other countries concentrate aid much

more on heavy construction projects, such as power

generation and transportation, so that their tied aid

involves manufactured goods, especially capital

equipment.

Tied aid is often combined with export financing

in a package of so-called ‘‘mixed credits. ” For

example, the exporting country might offer to pay

outright 40 percent of the cost of a power plant, and

finance the other 60 percent, provided that national

companies of the exporting country get the contracts

for construction and equipment sales.

The U.S. effort to strengthen international agreements aimed at limiting tied aid are worth continuing. However, it is uncertain how successful that

effort will be. Congress could expand the so-called

War Chest for matching foreign tied aid offers to

make it more effective in discouraging foreign tied

aid. The War Chest was funded at $150 million in

grants for FY 1991, which would result in about

$500 million in loans, though as of July 1991 only

$58 million in grants had been used, resulting in

$131 million in loans. In contrast, Japan, France, and

Germany use tied aid to make loans of billions of

dollars per year.

Congress could also expand the Trade and Development Program (TDP), funded at $31 million for

FY 1990 and $35 million for FY 1991. TDP helps to

pay for feasibility studies or other planning assistance performed by. U.S. firms for capital projects.

Participation in the planning phase has often helped

U.S. firms win contracts for the actual project. So

far, $161 million in program funds have led to

documented U.S. sales totaling $3.2 billion, with an

estimated $18 billion more sales expected as projects mature.50 In expanding TDP or otherwise

increasing the emphasis on capital projects,51 care

should be taken to avoid adverse environmental and

social effects, which in the 1970s turned the United

States away from such projects.

Export Controls

The export of dual-use items, those having both

military and civilian use, is regulated by the Export

Administration Act of 1979, as amended (EAA)~2

which requires U.S. firms to get a license to export

certain items to certain destinations. The intent is to

deny strategically important goods and technology

to potential military adversaries. In 1990, perhaps

$90 billion worth of U.S. exports of manufactured

goods required a license, or about 28 percent of the

$316 billion in manufactured exports (see ch. 4).

It is generally agreed that some export controls on

dual-use items are needed. However, there is an

emerging consensus that export controls have unduly hindered U.S. high-technology firms in competition with foreign manufacturers. For example, U.S.

controls limited exports of personal computers

based on Intel’s 80386 processor chip until mid1990. Yet the same computers were widely available

from foreign fins. The controls merely diverted

business to foreign fins.
60 ● Competing Economies: America, Europe, and the Pacific Rim

The U.S. export control regime has been considerably liberalized in the last few years. The political

changes in Eastern Europe and the Soviet Union

reduced those countries’ military threat, lessening

the need for controls, and in fact making desirable

the export of technology to help those nations

become open, economically viable societies. This

changing political climate intensified the dissatisfaction of many allies with the United States’ stricter

position on export controls; allies brought pressure

for change in the international export control regime.

Finally, concern has increased over the continuing

decline of U.S. manufacturing competitiveness,

prompting closer scrutiny of whether the security

benefits of particular controls are worth the competitiveness costs.

Reform has focused on East-West controls, traditionally the most common type, which are meant to

deny militarily strategic technology to former Communist countries (see ch. 4 and box 4-C). Controls on

many items have been removed or reduced, tracking

a major reduction of controls at the international

level, in CoCom (Coordinating Committee for

Multilateral Export Controls, a group of nations

cooperating in export controls). In principle, controls should be eliminated if they are not also

imposed by other CoCom members, or if the item is

available from unrestricted sources. In addition,

delays in processing export license applications

have been shortened.

However, the reform is incomplete. The reason is

the tug of war that exists-and to some degree must

exist-between two important governmental goals:

military security, whose champion is the Department of Defense; and improved competitiveness,

championed by the Department of Commerce.

Although the competitiveness interest has received

increasing support from the President and his closest

associates, it still has not achieved equal consideration with military concerns. Congress cannot change

this on its own: where possible damage to military

security is at stake, the executive branch must

exercise wide discretion.

If Congress were to create a new agency charged

with promoting industrial competitiveness, many

aspects of the export control function might reside

there. It could coordinate export controls as the

Commerce Department does now, but with a greater

ability to serve the national interest. Other functions

might include:

evaluating the economic importance of different industries and the importance of exports to

a given industry;

expediting control reforms and license approvals in key industries;

coordinating export policy with other policies

(e.g., offering some compensating benefit to

the affected industry when cumbersome export

controls were deemed appropriate); and

achieving enough prestige that its views on

export control policy would carry equal weight

to DoD’s, within the Administration.

Without such an agency, and lacking a commitment in the Administration to advance commercial

competitiveness, there are still measures that Congress could take if it wished to give competitiveness

a higher priority in export control policy. However,

the EAA is already a very complicated statute, and

even some analysts sympathetic to competitiveness

concerns believe that it contains excessive micromanagement. On the other hand, the statute leaves

the the Administration an out to do what it believes

is truly necessary in most cases. Where the statute

leaves no flexibility, sometimes the Administration

has disobeyed it. This occurred with the 1988

provision eliminating reexport controls on U.S.

goods and technology that are incorporated abroad

into finished products, provided the controlled U.S.

content is at most 25 percent of the product’s total

value. 53 The Bureau of Export Administration (BXA)

considered that provision dangerous; for example, it

would remove controls from avionics equipment

incorporated abroad into airplanes. BXA implemented this clause only incompletely and almost a

year late (ch. 4).

Congress could strengthen the role of the Commerce Department vis-à-vis the Defense Department

and other agencies. Congress moved in this direction

in the Export Enhancement Act of 1988 (1988

Act), 54 for example, by limiting to 40 days the time

during which the Defense Department can block a

license approval recommended by the Secretary of

Commerce. 55 Further amendments in this direction

are under consideration in S. 320, already passed by

the Senate.56 For example, S. 320 would give the

Commerce Department permanent representation at

CoCom and direct the State Department to forward

to CoCom within 7 days certain Commerce Department actions requiring CoCom approval.57
Chapter 2-Policy Issues and Options . 61

The Commerce Department has sometimes been

bypassed when dual-use items have been put on the

State Department’s Munitions List, which is in

principle limited to items with only military use.

Items on the Munitions List face a stricter control

regime, without the safeguards to protect commercial competitiveness that apply to dual-use items.

Therefore, placing dual-use items on the Munitions

List can reverse recent reforms and impede pending

ones. Congress could discourage this practice by, for

example, giving the Secretary of Commerce the

right to force a quick Presidential decision regarding

whether an item also has nonmilitary use. Congress

could also issue a strong policy statement that the

Munitions List is not to contain dual-use items.

Congress might enact additional provisions to

address problems identified in chapter 4. For example, Congress could impose stricter time limits for

processing license applications, especially those

requiring interagency review; mandate prompt continuing review of the Control List (list of controlled

items); encourage license-free trade within CoCom

countries; encourage use of industry advisory committees; and encourage the use of indexing, by which

technical thresholds of what is controlled would be

automatically adjusted over time unless the need to

forego the adjustment were specifically justified.

The 1988 Act and S. 320 address these concerns.

Other provisions in S. 320 also address competitiveness concerns. This bill contains policy statements favoring approval of exports designated for

reformed Eastern European countries, or needed to

aid Soviet and Eastern European economic development. Another policy statement favors temporary

exports for trade shows. However, these are by

necessity only guidelines, leaving final discretion

with the Administration. S. 320 provides for court

review to force compliance with mandated deadlines, which have often been missed.58 The EAA

already provides for court suits to enforce statutory

license processing deadlines;59 this provision could

be extended to cover other deadlines, such as for

review of the Control List and for decontrol of items

not multilaterally controlled. The review would be

purely procedural; courts would not second-guess

the substance of any decisions.60

There are swifter, more severe ways of enforcing

deadlines. One approach is to make a missed

deadline act as an acquiescence by the Administration. The 1988 Act did this for determinations of

foreign availability requested by firms; if BXA

missed the deadline, foreign availability would be

assumed and the item decontrolled.61 This provision

was effective in speeding up those determinations.

However, BXA reports that the provision strained its

resources, and took effort away from other investigations of foreign availability that, while not requested, were perhaps more important to industry as

a whole. BXA also states that that provision has the

potential to force U.S. decontrol before it is authorized by CoCom, thereby undercutting the multilateral export control system that the United States is

trying to strengthen. Another option is to make

decontrol self-executing-that is, when decontrol is

mandated by law (e.g., on items not controlled by

other nations) the decontrol would take effect even

if BXA has not published implementing regulations.

Congress considered such a provision in 1990.62

However, the absence of regulations could cause

confusion, resulting in exports detrimental to national security.

One practical, nontechnical way to facilitate

timely adjustment of controls would be to increase

the staffing in the Commerce Department’s Office of

Foreign Availability (OFA). OFA determines when

foreign availability of items makes U.S. controls

ineffective. These determinations are crucial to

minimizing the drag on competitiveness, and they

require difficult fact gathering and complex technical analysis. OFA now has about two dozen people.

Another option would be to encourage political

appointees with technical background. Technically

knowledgeable senior BXA staff might be better

able to argue their positions with other agencies.

Finally, there is an emerging problem of “NorthSouth” or “foreign policy” controls, issued under

Section 6 of the EAA (see box 4-C). (The term

“North-South” is a convenient shorthand to distinguish the orientation of these controls from that of

East-West controls. However, the use of this term is

not meant to imply that all or most developing

countries give cause for concern.) Some foreign

policy controls aim to prevent proliferation of

weapons of mass destruction, including missiles and

chemical and biological weapons. 63 Other foreign

policy controls, such as sanctions against countries

that abuse human rights, are meant instead to make

a political statement. Still other controls, such as

sanctions against nations that use terrorism, appear

to do both.
62 . Competing Economies: America, Europe, and the Pacific Rim

The Gulf War heightened concern over proliferation, and prompted the Administration’s Enhanced

Proliferation Control Initiative (EPCI). Although

this concern is justified, the Administration’s use of

foreign policy controls takes little account of competitiveness concerns. The Administration must report

and just@ foreign policy controls annually to

Congress, but the safeguards against unnecessary

interference with commercial exports (e.g., the

prohibition on controlling items with foreign availability and the prohibition on unilateral controls) do

not apply to foreign policy controls. Thus, changes

already adopted for export controls related to

East-West national security matters (under Section

5) do not extend to controls directed to foreign

policy purposes (Section 6). This made it possible

for the Administration to impose unilateral controls

in March 1991 on certain chemicals and manufacturing equipment that could be used to make chemical

weapons. In August 1991 the Administration issued

regulations that could be interpreted to require

virtually all firms exporting any items to any

countries to set up a monitoring and control system

to guard against diversion of any products to

chemical or biological weapons plants (ch. 4).

If Congress believes that competitiveness concerns should, when possible, apply in the same way

to foreign policy controls, a first step might be to

separate foreign policy controls with military objectives from those with political objectives. To achieve

political objectives, unilateral controls or controls

on items available elsewhere could be appropriate

and effective. Congress could include a strongly

worded statement of policy that export controls for

political reasons should be issued only after careful

consideration of the effect on commercial exports.

Congress might put foreign policy controls with

military objectives under more or less the same

discipline as national security controls. This is not a

simple matter. It would not make sense, for example,

to simply state that proliferation controls will

henceforth be treated under Section 5 rather than

Section 6, because controls under Section 5 are

meant to keep items from former Communist bloc

nations, and the law is written so as to coordinate

controls through CoCom. However, control of the

technologies for nuclear weapons, missiles, chemical weapons, and biological weapons is broader than

an East-West issue. The Soviet Union and the

People’s Republic of China possess much of the

important technology, and must join in controls for

them to be effective. Similarly, to deny conventional

weapons to countries sponsoring terrorism would

also require the cooperation of the Soviet Union and

China. Therefore, Congress might wish to treat

foreign policy controls with the objective of denying

military technology in a separate section of the law,

which imposes discipline regarding, e.g., foreign

availability, but recognizes their special international position.

GOVERNMENT-INDUSTRY

PARTNERSHIPS

One thing that stands out in the story of nations

that successfully use trade policy to promote the

development of particular industries is that trade

policy alone is not enough. Even when used

aggressively, it is combined with promotion of

technology development and diffusion, with risksharing between government and industry, and with

support for adoption of new technologies and

industrial success.

Strategic Technology Policy

The least intrusive and least expensive of several

possible risk-sharing options between government

and industry is what OTA has described as strategic

technology policy, an R&D partnership for developing new technologies of commercial interest.64 The

potential benefits to society of such ventures are

great, but the likely payoff to individual firms is too

small to make it worth their taking all the risk.

Therefore, the argument for industry/government

risk-sharing takes on special force.

Traditionally, U.S. policy has been to limit R&D

support to basic science or else to the government’s

own needs—primarily, military security. There are

notable exceptions: agriculture and civilian aircraft

manufacture have had longtime steady support for

technology development, based on a frank recognition that they were important to the nation’s

economic welfare. With the dawning awareness that

U.S. industries really are in competitive trouble, a

consensus seems to be growing for a Federal role in

commercially promising R&D.

Congress took a first step in the 1988 Trade Act,

which launched a small program for R&D partnerships, the Advanced Technology Program (ATP)

located in the Commerce Department’s National

Institute for Standards and Technology (NIST). The

Program’s purpose is to help U.S. business rapidly
Chapter 2-Policy Issues and Options ● 63

commercialize new scientific discoveries and apply

research results toward refining manufacturing technology. Through the ATP, NIST can assist private

R&D ventures with technical advice or can actually

participate in them: it can provide start-up funding;

put up a minority share of the cost; or lend

equipment, facilities, and people. Congress has

consistently taken the lead with ATP, providing its

first funding of $10 million in fiscal year 1990 and

raising the ante to $36 million in fiscal year 1991.

The Administration, for its part, has moved

toward support of cooperative R&D for commercial

ventures. The President’s 1992 Budget proposal

said: “The Administration believes that appropriate

Federal investments in applied civilian R&D can

result in high payoff to the economy . . .“65 The

Budget document went on to say that the principal

strategy for Federal applied civilian R&D is to

support agency mission requirements. But some of

this R&D has broad applications in the private

sector. In such cases, the government would support

‘‘generic or enabling technologies at the precompetitive stage of R&D. ’ These terms were defined as

follows:

generic or enabling technologies have the

potential to be applied to a broad range of

products or processes across many fins;

precompetitive R&D is the stage of the R&D

process where the results can be shared widely

within and between industrial sectors, without

reducing the incentive for individual firms to

develop and market commercial products and

processes based on the results.

The intention of such definitions is to avoid

favoring particular firms or industries, putting government money into technologies with broad applications across firms and sectors. This principle ties

in with the idea that technologies with many

spillovers and applications are of most potential

benefit to society. It is not always possible, however,

to distinguish so neatly between technologies and

industries. For example, flat panel displays are a

generic technology, having myriad applications

from home television sets to engineering work

stations to airplane cockpits. But government support for developing the technology benefits the

electronics industries and firms that produce it.

Congress has already indicated its interest in an

industry-government partnership for applied commercial technology development that is not necessarily dependent on fallout from other government

missions. If this program is to take a proactive,

coherent approach, rather than responding to crisis

calls from industries under competitive siege or to a

wave of enthusiasm for the latest technology, it

would need an agency in charge and a set of guiding

principles. These issues are discussed briefly below.66

A Civilian Technology Agency (CTA) would be

needed to guide government-industry cooperative

R&D whether or not the idea of broader, integrated

competitiveness policies in support of selected

critical industries wins acceptance.

NIST’s ATP might in time become a fill-fledged

CTA, although it was not created with that explicit

mission. Bills to establish more formally an Advanced Civilian Technology Agency in a new

Department of Industry and Technology (which

would replace the Department of Commerce) were

introduced in the 100th and 101st Congresses.67

These proposals defined the agency’s mission as

contributing to U.S. competitiveness by supporting

long-term, high-risk projects likely to yield important benefits to the Nation but that lack adequate

private support. A bill that passed the Senate in 1989

would have given the ATP a similar mission and

authorized substantially increased funding, up to

$100 million per year.

Any CTA would have to start small, as the ATP

has, and need never grow very large. A possible

model is the Defense Advanced Research Projects

Agency (DARPA), a small free-wheeling Department of Defense (DoD) agency supporting risky

long-term R&D that often has commercial as well as

military value. DARPA has 150 employees, about

half of them scientific and technical, and some $1.5

billion a year for its research projects. Its relatively

small size is one factor in a nonbureaucratic culture

that gives staff members a great deal of freedom to

exercise their own good judgment. At the same time,

a research budget of $1 to $2 billion a year seems

large enough to attract a critical mass of competent

staff and fund a healthy portfolio of technologies.

Where in the Federal bureaucracy a CTA is placed

may not matter too much. The prestigious National

Science Foundation is an independent agency.

DARPA is smaller than NSF and is a tiny part of the

huge, hierarchical Department of Defense, but it too

has won renown for its competence and dedication.

If the small, experimental ATP develops into a

mature CTA, the question may answer itself, since
64 . Competing Economies: America, Europe, and the Pacific Rim

the Program is already started life in the Department

of Commerce.

Like DARPA, a CTA might attract excellent staff

by combining freedom from bureaucratic rules with

great responsibility and the opportunity to serve

one’s country. Unlike DARPA, a CTA would not

serve a defined mission and customer—the military.

Instead, technologies supported by a CTA would

have to prove their worth in the market. Even

allowing for inevitable failures-and an agency

charged with supporting high-risk technologies would

not be worth its salt if it had no failures along with

its successes—it is much tougher to choose technologies that can make it commercially than ones with

some credible military use.

Collaboration with industry is essential in

choosing technologies for support. If private companies are not interested enough to take some of the

risk and do some of the work, then the chances of

commercial success are probably remote. Joint

funding helps the government escape pressure from

special interests in selecting technologies for support, and enlists market forces in picking the best

prospects.

At the same time, a CTA would need a set of

guiding principles to delineate broad areas appropriate for government-industry collaboration. One

obvious principle is preference for technologies with

wide applications in many products and industries.

Another is knowledge-intensiveness, which means

not only technologies important to industries that are

clearly knowledge-intensive in themselves (e.g.,

computers) but also projects that could deepen the

knowledge-intensiveness of traditional industries

(e.g., precision machining). Another principle is

potentially large markets.

The importance of collaboration with industry in

selecting commercially interesting projects is underscored by NASA’s (National Aeronautics and Space

Administration) experiences over the years. NASA’s

annual spending for aeronautical R&D amounts to

about $800 million, and probably 90 percent of that

is, or could be, relevant to the commercial aircraft

industry, as well as to the military. This is a huge

amount for the United States. Of course the military

connection is a leading reason for this level of

spending; even so, the research is available to

commercial producers. Yet it would be mistake to

think that most of NASA’s R&D, or even the major

share, gives U.S. aircraft manufacturers a competitive advantage. Some of it is basic research, not

applicable to commercial production except possibly in the very long term. Much of the advanced

technology development is quite freely available to

the world, and some has been used first by Airbus in

Europe, not by U.S. producers (see ch. 8).

NASA’s greatest contributions to competitiveness of American producers are in two areas: its

facilities (e.g., wind tunnels and the Numerical

Aerodynamic Simulator, a supercomputer complex), which are either preferentially or solely

available to U.S. companies; and technology development projects in which the U.S. companies were

close collaborators (as in the E3 program for aircraft

jet engines, described in vol. 2, to improve fuel

efficiency and reduce emissions and noise). Coordination between new government regulations and

collaborative technology development projects to

help comply with the regulations can give an extra

boost to competitiveness; this was the case with

Federal regulations to reduce aircraft noise.

There are at least two pluses to industry involvement in NASA’s technology development projects.

First, the projects are more likely to reflect genuine

commercial concerns and possibilities; and second,

the company engineers gain an intimate knowledge

of the new technologies that outsiders cannot

acquire simply by reading published research reports.

These advantages are just as valid outside NASA

and the commercial aircraft industry. The few

government-industry technology partnerships that

already exist for manufacturing industries (apart

from aircraft) follow the pattern of at least 50-

percent funding by industry. Sematech, the largest of

these ventures, gets $100 million per year both from

the U.S. Government and from a consortium of

industry members. The ATP follows a similar rule,

with more than half the cost of cooperative projects

paid by sponsoring firms. Although Sematech has its

own facilities, the ATP-funded R&D takes place in

members’ labs. There are opportunities to do more

cooperative work in Federal” labs, especially in the

Department of Energy’s well-equipped multiprogram national labs. However, judging by NASA’s

experience, these ventures will be of more use to

companies if they involve participation by the firms’

own researchers, not just a financial contribution.

So far, the U.S. Government’s offers of collaborative R&D projects have been snapped up by private
Chapter 2-Policy Issues and Options ● 65

companies. Sematech was, in fact, proposed by the

semiconductor industry, which lobbied hard for it.

Three small pilot projects ($5 to $6 million per year

total) in the national labs for commercializing

high-temperature superconductivity had more willing partners from industry than the labs could fund,

and the same was true of DARPA’s $30 million

project for cooperative R&D on high resolution

display technologies. ATP’s first batch of grants for

cooperative projects amounted to about $9 million,

initiating R&D programs that are expected to cost

$100 million (including private funds) over 5 years.

The 11 winning grants were selected from 249

proposals requesting a total of $150 million (box 2-B

provides details).

Added together, the dollar amounts in these few

cooperative programs are minute in a Federal budget

of more than $1 trillion. They are tiny compared to

the more than $90 billion per year that U.S.

manufacturers spend for R&D. It is noteworthy,

however, that such very modest programs have

drawn responses from so many companies, large and

small. Among ATP’s first 11 grantees were industry

giants such as Du Pent, AT&T Bell Laboratories,

and two prominent industry consortia, the Microelectronics and Computer Technology Corp. and the

National Center for Manufacturing Sciences. Although these companies and consortia have big

R&D budgets of their own, each one funds a great

many projects, and there are always promising but

risky ones that do not make the corporate cut.

However, such projects may look more attractive

with cooperative funding, including government

money. Furthermore, the government backing may

lend a certain prestige to the undertaking. Or

companies may fear missing out if their competition

joins in and they do not.

So far, Congress has taken a gradual approach to

expanding government partnerships with industry

on commercially relevant R&D. This approach

makes sense, considering that the U.S. Government

has little experience with industrial partnerships;

that the government’s institutional ability to manage

R&D partnerships is at an early stage; and that

relations between government and industry in this

country have traditionally been adversarial. If Congress wishes to continue this measured expansion,

with the ultimate goal of having an agency about

equal in size and importance to DARPA or the

National Science Foundation, it may opt for a

modestly increasing ATP budget for several years. It

might also wish to consider writing into law a more

formal statement of goals for the agency.

Participation by foreign firms in cooperative

R&D programs that receive government funding is

a new and somewhat unsettled question. Part of the

problem is in defining just what a foreign firm is (see

ch. 3). In appropriating funds for the ATP for fiscal

year 1991, Congress took on the problem in an

innovative way. It set standards that apply to

U.S.-owned as well as foreign-owned firms, thus

bypassing ownership as the central criterion for

deciding whether a firm can participate in ATP

projecta.68 The Secretary of Commerce is authorized

to decide whether firms are eligible, using the

standards to determine that their participation would

be “in the economic interest of the United States.”

The standards applying to all firms call for

investments within the United States in research,

development, and manufacturing, including the

manufacture of major components or subassemblies

(thus insisting that investments go beyond assembly

plants that add little value or knowledge-intensiveness); a significant contribution to employment in

the United States; and agreement to promote U.S.

manufacture of products resulting from ATPassisted technology projects. Further conditions

apply to foreign-owned fins: they may participate

if the Secretary finds that their home country offers

U.S.-owned firms comparable opportunities to take

part in joint ventures for technology development,

allows U.S. companies to invest on equal terms with

other countries, and affords adequate protection of

the intellectual property rights of U.S. companies.69

These provisions offer guidance but also give

great latitude to the Secretary of Commerce in

determining the eligibility of firms, both foreign and

domestic, for ATP projects. Congress may wish to

exercise substantial oversight for a time on how

these novel provisions are carried out.

Financial Risk-Sharing

A strategic technology policy, worthwhile as it

may be, goes only so far. Government partnership in

technology development stops short of commercialization. After that, it is up to industry to make the

much larger investments in the product design,

manufacturing equipment and tooling, worker training, and acquisition of know-how by managers and

production engineers that are necessary for the

commercial manufacture of new or improved prod-
66 ● Competing Economies: America, Europe, and the Pacific Rim

Box 2-B—The Advanced Technology Program’s First Round

The U.S. Department of Commerce announced in March 1991 the first awards under the innovative Advanced

Technology Program (ATP). The ATP was created by Congress in 1988 to help American business turn research

results into new commercial products and improved manufacturing technologies. It established a governmentindustry partnership, in which the ATP could lend technical assistance, equipment, and people to cooperative

research projects and could contribute a minority share of the funding.

Awards of about $9 million went to 11 grantees and were first installments in R&D programs expected to cost

$100 million over 5 years (with more than half the money coming from private industry).l The 11 winners were

chosen from 249 proposals requesting $150 million in first year grants, Several hundred volunteer reviewers from

both government and industry helped to make the choices. Of the 11 grants went 5 to joint ventures or consortia-an

indication, according to Commerce Department officials, that the program is fostering a greater spirit of cooperation

among highly individualistic companies for precompetitive R&D.2 The program encourages joint efforts and

rewards them with grant money that covers some indirect as well as direct costs.

Most of the technologies were related to microelectronics and computers, including optical recording and

computer hardware. Others were in the fields of high-temperature superconductivity, machine tool control, and

novel laser designs. The grantees, their projects, and the grants they requested, are described below. 3

Printed Wiring Board Interconnect Systems

National Center for Manufacturing Sciences, Inc. (NCMS)

Printed wiring boards are ubiquitous in electronic products, from radios to computers. The U.S. share of a $25

billion world market has dropped from 42 to 29 percent in 3 years. Current technology is approaching fundamental

limits in the materials and processes now used. Four members of the NCMS consortium, AT&T, Texas Instruments,

Digital Equipment Corp. and Hamilton Standard Interconnect will work with Sandia National Laboratories to

develop new materials, better processes, and improved technical understanding.

First year request: $2,370,000; total 5-year request: $13,783,000; matching funds: $14,674,000

Volume Holographic Mass Storage Subsystem

Microelectronics & Computer Technology Corp. (MCC)

MCC proposes to build on a basic concept it has already demonstrated for a radically new form of dense,

ultra-fast computer memory storage, potentially replacing slow disk drives and magnetic tape (about 100,000 times

slower than the typical microprocessor). The new system would respond in microseconds, and would store data as

holographic images in photorefractive crystals.

First year request: $823,000; total 5-year request: $10,331,000; matching funds: $12,700,000

Advanced Manufacturing Technology for Low Cost Flat Panel Displays

Advanced Display Manufacturers of America Research Consortium

Advances are needed in testing and repair equipment, as well as in interconnection and packaging technologies,

to successfully commercialize high-quality, low-cost flat panel displays. Three relatively small companies will lead

a consortium in a linked series of research programs; they are Optical Imaging Systems (Troy, NY), Photonics

Imaging (Norwood, OH), and Planar Systems, Inc. (Beaverton, OR). Seven other companies are participating.

First year request: $1,251,000; total 5-year request; $7,305,000; matching funds: $7,604,000

Short Wavelength Sources for Optical Recording

National Storage Industry Consortium

Data storage devices are a $50 billion-per-year industry; two-thirds of the market is now controlled by U.S.

firms, one-third by Japanese. The most promising technology in the field is optical recording, as used in compact

disks. The program would develop an integrated short wave length laser source, with solid state components, for

read/write heads of fast, small, rugged optical memory devices. Members of the consortium, which is not yet fully

1~ ~ome ~5e5, pm of tie Cornpuy contribution is in kind (e.g., labomtory equipment), so that tie gov~entgr~tr~est~ maY be

larger that the cash outlay proposed by the company.

2~~AdvaWd ~~oIo= BOP CIWS Another Hurdle,” New Technology Week, Mu. 11, 1991.

3~e des~ptio~ ~e men ~m UOS. Department of Commerce, office of the SeCretary, Comerce News, press rekase dated Mar, 5,

1991 and “First Winners in the Advanced Technology Program,” New Technology Week, Mar. 11, 1991.
Chapter 2--Policy Issues and Options ● 67

formed, include Applied Magnetics, Bernoulli Optical Systems, Eastman Kodak IBM, Maxoptix Corp., and the

University of Arizona. An initial grant of $50,000 is contingent on further development of the joint venture.

First year request: $50,000; total 5-plus years request: $5,421,000; matching funds: $9,200,000

Fabrication and Testing of Precision Optics for Soft X-Ray Projection Lithography

AT&T Bell Laboratories

X-ray lithography is a key technology for new generations of dense microelectronic circuits. This program will

attack a key problem limiting projection X-ray lithography: the manufacture, testing, and assembly of relatively

large scale X-ray mirrors. It will develop technology to test, fabricate, assemble and align aspherical X-ray mirrors.

Three-quarters of the grant will go to small business subcontractors.

First year request: $955,000; total 5-plus years request: $2,000,000; matching funds: $3,525,000

Solid State Laser Technology for Point Source X-Ray Lithography

Hampshire Instruments, Inc. and McDonnell Douglas Electronic Systems Co.

These small companies will lead a joint venture to exploit recent advances in laser materials for use in low cost,

high-performance X-ray lithography.

First year (total) request: $1,090,000; matching funds: $1,094,000

Nonvolatile Magnetoresistive Semiconductor Technology

Nonvolatile Electronics, Inc.

Computer memory is volatile--the data vanish when the power is shut off. This program aims to develop a

fast, dense, nonvolatile memory, basing the technology on a magnetoresistive memory (MRAM) patented by

Honeywell and intended for space and avionics applications. The company has licensed the technology for

nonaerospace applications, and means to develop it as a competitor to conventional dynamic random access memory

(DRAM) semiconductors.

First year request: $599,000; total 3-year request: $1,738,000; matching funds: $869,000

New User-Interface for Computers Based on On-Line Recognition of Natural Handwriting

Communication Intelligence Corp. (CIC)

CIC plans a robust natural handwriting recognition system that does not require “training” the computer to

recognize each individual’s handwriting (a key limitation of most current systems). Cursive handwriting input for

computers could be a revolutionary advance, especially for notebook and laptop machines.

First year request: $671,000; total 2-year request: $1,264,000; matching funds: $912,000

Advanced Thallium Superconductor Technology

E.I. du Pent de Nemours & Co.

The proposal is to develop thin-film fabrication techniques for a new, proprietary high-temperature

superconductor invented by Du Pent. Project includes developing fabrication techniques and creating representative

superconducting electronic devices to demonstrate feasibility.

First year request: $370,000; total 3-year request: $1,590,000; matching funds: $784,000

Tunable Deep UV and VUV Solid State Laser Source

Light Age, Inc.

The company will apply recent developments in laser technology to produce high-average power ultraviolet

lasers that are cheaper, safer, more reliable and easier to use than current products. Potential applications are in

medical and scientific instruments and materials processing. It could be particularly significant in photolithography

for the semiconductor industry, challenging the dominant Japanese suppliers of semiconductor production equipment.

First year request: $627,000; total 1.5-year request: $701,000; matching funds: $254,000

Advanced Compensation Techniques for Enhancing Machine Tool Accuracy

Saginaw Machine Systems, Inc.

The program seeks a general, economic solution to the problem of correcting for errors in machining caused

by thermal expansion and contraction of the machine tool; thermal errors contribute to about half of the errors in

machining. Working with the University of Michigan, Saginaw will develop a mathematical model of thermal errors

and a sensor and computer control system that can help machine tool builders greatly improve the accuracy of their

machines at reasonable cost.

First year request: $266,000; total 2-year request: $540,000; matching funds: $168,000
68 ● Competing Economies: America, Europe, and the Pacific Rim

ucts or the adoption of new manufacturing process

technology. It is normal and expected for private

industry to make these investments, take the risks

and then, if all goes well, reap the rewards.

Sometimes, however, in some critical sectors,

private investment is inadequate from the standpoint

of social benefits. Take semiconductors. One important reason why U.S. companies have lost out to

Japanese firms over the last decade is that Japanese

rates of investment were higher. From 1982 until

1991, Japanese producers invested a larger share of

their sales of integrated circuits in plants and

equipment than did U.S. producers, and since 1984

have out invested their U.S. rivals in absolute

amounts .70 This pattern holds true in all industries

throughout both economies; Japanese investment in

machinery and equipment as a share of gross

domestic product has consistently run at double the

U.S. rate since the mid- 1970s, and in the late 1980s

the discrepancy widened. This bodes ill for U.S.

competitiveness generally, but in the technologydependent semiconductor industry, where new generations of products are introduced every 3 years or

so, the disadvantage can be crippling.

The relatively meager U.S. investments in new

production equipment reflect high capital costs and

a financial environment that discourages or fails to

support long-term investment (see the summary

discussion in ch. 1 and more detailed discussion in

OTA’s 1990 report, Making Things Better). Macroeconomic policies that lower interest rates and

provide stability are probably the most important

things government can do to encourage greater

investment in technology development and deployment by U.S. manufacturing companies. There are

other options as well, however.

Besides the generally unsupportive financial environment in the United States, American semiconductor companies have the added handicap of facing

Japanese competitors that are much larger; are

vertically integrated, from semiconductor chips

through computers; make a much greater variety of

end products (VCRs and compact disk players as

well as computers); and have ample retained earnings for new investments. Yet formidable as they are

today, Japanese companies were not always preeminent. In the 1970s, they had a catch-up job to do

that was greater than the one facing U.S. companies

today. They did it not only by hard work and

effective management but also with government

policies that gave them protected domestic markets,

tight controls over foreign investment, guaranteed

sales to important government customers, governmentindustry R&D partnerships, and a variety of measures assuring plenty of low-cost capital at a time

when companies’ financial resources were much

more limited (see ch. 6).

Government policies to share financial risks with

industry can take the form of subsidies or loans on

advantageous terms, or they can take the more

indirect form of tax breaks (i.e., tax expenditures).

Both put burdens on government resources and,

under the Federal budget agreement adopted in

1990, Congress cannot opt for either without compensating tax rises or spending cuts in other domestic programs.

Of the two forms of financial risk-sharing, tax

expenditures are more within U.S. traditions and

experience. U.S. companies in the past have received accelerated depreciation and tax credits for

capital investments, and they currently get a tax

credit for R&D (although Congress has not made

this a permanent feature of the tax system but instead

has renewed it from year to year). Although certain

kinds of investment (e.g., real estate) have been

singled out for specially favored tax treatment,

Congress has not in the past designed these tax

incentives to improve the competitiveness of particular industries.71 If Congress wishes to target tax

breaks to selected industries because of their importance to the U.S. economy, the best way to do it is

make the tax measures part of a comprehensive

strategy that also includes such things as R&D

partnerships and trade policy.

Many governments have supported selected industries with more direct financial aid, in addition to

tax incentives. Japan, for example, offers companies

hojokin (success dependent loans) for risky enterprises in selected industries; payments can wait for

a positive cash flow. Thus companies are insulated

against catastrophic losses. European governments

have done much the same for Airbus. The U.S.

Government, by contrast, has had little experience in

giving direct financial aid to selected industries for

strategic competitive purposes. There have been

some well-publicized government bailouts of failing

individual companies, notably Lockheed and Chrysler. The Synfuels program of the late 1970s did have

the purpose of energy independence; that program is

generally considered a failure. The broadest U.S.
Chapter 2-Policy Issues and Options . 69

experience with direct loans to industry (leaving

aside special loan programs for small business) was

the Reconstruction Finance Corp. (RFC) in the post

World War II years.72 RFC was created in 1932 to

shore up banks in the credit deflation of the Great

Depression, and it went on to procurement of

strategic materials for national defense during the

war. The postwar RFC had no such clearly defined

purpose. In practice, it spent most of its very ample

resources (close to $1 billion per year in 1946-47,

translated into 1990 dollars) in bailing out large,

prominent but floundering companies, such as the

Kaiser-Fraser automobile company. The one RFC

project that seemed to have any focus other than

keeping a big firm afloat was a series of nine loans

to the Lustron Corp., which boasted a new technology—manufactured steel-frame houses. The project

failed, and accounted for RFC’s biggest loss.

RFC’s failure in the postwar years was surely due

in large part to its lack of any strategic purpose or

guidance. However, its failure also suggests some

dangers inherent in government’s giving large sums

of money to companies that cannot get funding from

private sources. This cautionary lesson has been

learned so well that now even suggestions for direct

financial aid from government to industry are few

and far between. In its 1989 report to the President

and Congress, the National Committee on Semiconductors (NACS) did propose an attenuated form of

government loan guarantees to U.S. companies

trying tore-enter the advanced consumer electronic

business. 73 The idea was that the semiconductor

industry is handicapped by the lack of a U.S.

consumer electronics sector, considering the remarkable convergence of technologies in consumer

electronics and other electronics goods (e.g., computers). NACS proposed a private corporation, to be

backed by “pledges of support’ from Federal, State

and local governments, that would provide low-cost

patient capital to startup consumer electronics companies with U.S. ownership. The suggestion was not

repeated in the second NACS report in 1991. Some

committee members privately offered the explanation that members could not agree on technical

details for the proposed corporation, and said that the

committee may take up the issue again in its third

and final report.

The likelihood of a revived consumer electronics

sector in the United States under U.S. ownership is

virtually nil without infant industry assistance from

the government; this might include trade protection

and technology partnership as well as financial aid.

However, whether such a revival is necessary or

important to the U.S. economy is no simple question. It includes the issue of whether foreign-owned

companies producing in the United States (Sony,

Philips North America, Thomson) might provide the

same benefits. Moreover, reviving a consumer

electronics industry is a big, expensive job, and

could be quite a burden to the taxpayers even if

government took only a minor share of the risk. If

Congress does wish to consider direct financial aid

to this or other selected industries, it may want to

start with a program of very modest scale and

increase it slowly. Having a large pot of money

available for such ventures invites imprudence, even

for an experienced institution. And the United States

does not now have an institution with the experience

or capacity to fit financial aid into a coordinated

strategic competitiveness policy.

Government Purchases

Government procurement was a vital factor in the

birth and early growth of several important U.S.

industries: semiconductors, computers, aircraft, and

aircraft engines. As might be inspected, the big

buyer in each case was the Department of Defense

(DoD). For semiconductors, for example, the amounts

DoD spent in the early years were tiny compared to

the sums spent today, yet the DoD then was the

launch customer for a product and technology in its

infancy, and bought nearly 100 percent of the

industry’s output. Today, the Federal Government

might still be a valuable first customer for untested

products that combine public benefits with the

potential for competitive success. It might also be an

important customer for existing products important

to U.S. competitiveness.

However, the opportunities are somewhat limited.

Ninety percent of Federal purchases of goods are for

defense and DoD does buy large amounts of certain

important products. The share of aircraft and aircraft

engine production for defense is about 43 percent;

for radio and TV communications equipment, 36

percent; and for electronic components, 23 percent.

But much of this equipment is so highly specialized

for military use that technological spillovers to the

commercial side are limited; in fact, because of long

lead times for developing weapons, some commercial technologies are far ahead of military applications. Technological spillovers from the military

appear to be diminishing, although the evidence is
70 ● Competing Economies: America, Europe, and the Pacific Rim

mixed. What is certain is that restrictive laws and

DoD regulations have made it increasingly difficult

for companies to take advantage of whatever technological synergies may exist.

Nondefense purchases comprise less than 10

percent of the total Federal purchases of goods, only

$10.3 billion in 1990 out of $107 billion total. The

United States has no national telecommunications

service, no national railway, no national airline, no

national health service, and no national university

system. In both Japan and Europe, government

bodies of these kinds have been important buyers of

such products as semiconductors, computers, telecommunications equipment, aircraft, rolling stock,

and medical equipment, and have used their purchases to support domestic industries.

The Federal Government’s track record in improving manufacturing competitiveness, whether as

a launch customer for new products or an important

customer for established products, is weak. This is

partly because competitiveness is not a goal of U.S.

procurement policy. Preferences for U.S. goods are

not motivated by strategic economic considerations;

any benefit to commercial manufacturing competitiveness is usually just a happy coincidence. In contrast,

the United States’ most important trading partners

do use procurement to promote certain manufacturing industries.

Key U.S. trading partners have much less open

procurement than does the U.S. Government. The

United States has been trying to make foreign

procurement markets more accessible. First, the

United States is negotiating to expand the scope of

the GATT Procurement Code. Under the Code, the

United States and the other signatories, which

include the United States’ major trading partners,

grant reciprocal access to each others’ procurement

markets for covered purchases. However, the Code

currently covers only a modest amount of those

purchases. 74 Second, the United States has begun

renegotiating several of the 19 Memoranda of

Understanding (MOUs) with allies regarding defense procurement. These MOUs have substantially

opened the U.S. defense procurement market but

have not had the same effect on allies’ defense

procurement markets. Third, the United States has

negotiated under Title VII of the Omnibus Trade and

Competitiveness Act of 1988.75 Under Title VII, the

U.S. Trade Representative is to identify cases of

procurement discrimination, including important

cases not yet covered by the GATT Procurement

Code, and to negotiate improved market access. If

negotiations are unsuccessful, the United States can

retaliate by discriminating in its own procurement

against goods from the country in question (see ch.

4).

The U.S. Government might try other tactics to

improve access to foreign procurement markets. If

some Code signatories appear more willing than

other to open their procurement markets, the United

States might then consider creating a kind of Gold

Club Membership GATT Code with countries that

agree to abide by very strict rules and enforcement

procedures. Members would have broad reciprocal

access to cosignatories’ public contracts. There

could even be a Gold Club Federal Contracts Journal

in which participants advertise their procurements

no later than they are announced elsewhere.

However, based on experience with other types of

market barriers, a strategy based primarily on

opening foreign procurement is likely to bring

disappointing results. If closed foreign procurement

is hurting important U.S. industries, the United

States could also use domestic measures, such as

R&D support and tax breaks, to promote the

industries in question.

In addition, the United States could use its own

procurement strategically to develop important technologies and industries. Some measures could be

taken consistent with U.S. obligations under the

Current GATT Procurement Code and MOUs. For

example, current U.S. law restricts defense purchases of supercomputers to U.S. machines. This has

been an important help to the U.S. supercomputer

industry, and a change in that policy would increase

the already substantial risk that the United States

will lose dominance to Japan (see ch. 6).

As another example, the GATT Procurement

Code does not now cover the U.S. Postal Service.

The Postal Service would be an ideal launch

customer to develop an electric vehicle industry,

since the limitations of electric vehicles under

current technology-short range and need for frequent recharging-would not be a problem for the

vehicles used to deliver local mail. Procurement of

U.S.-made electric vehicles by the Postal Service

could provide the United States a sharp advantage in

a new industry for which the United States, Europe,

and Japan are all competing to develop the technology. If the United States considered an electric
Chapter 2--Policy Issues and Options . 71

vehicle industry worth promoting, it might want to

keep the Postal Service outside the Procurement

Code until the industry was well on its way. Of

course, the United States might still decide to subject

the Postal Service to Procurement Code discipline in

exchange for concessions by other countries. The

important thing is that such opportunities not be

bargained away thoughtlessly.

It is not clear how many such opportunities exist.

Much Federal procurement is subject to neither the

GATT Procurement Code or the defense MOUs.

Even the best estimates are rough. In 1990, Federal

procurement of goods and services amounted to

$229.6 billion, of which $181.5 billion was for

defense.76 Of the $48.1 billion in nondefense spending, perhaps roughly $4.6 billion was covered by the

Procurement Code,77 leaving $43.5 billion uncovered. Of the defense procurement, probably at most

$109.2 billion was covered by MOUs and/or the

Procurement Code,78 leaving at least $72.3 billion

uncovered. While some of these uncovered amounts

are for services (beyond the scope of this report),

probably at least $5.7 billion in uncovered nondefense procurement is for goods,79 as might be a

substantial portion (perhaps $30 billion or more) of

the uncovered defense procurement.80 Probably only

a small part of the uncovered procurement could be

of strategic importance. However, Congress might

wish to mandate that these strategic opportunities be

assessed.

Even when purchases are covered by the GATT

Procurement Code or other international agreement,

the U.S. Government could help industry without

breaking international rules. This code does not

cover R&D contracts, so the government could

award such contracts to U.S. firms to enhance their

position to bid on covered purchases. For example,

if the Postal Service were to be covered by the

Procurement Code, it could still award R&D contracts relating to electric cars to U.S. firms before

soliciting bids for a fleet.

There might also be a competitiveness bonus in

standards development. The GATT Procurement

Code permits countries to require national standards

in government contracts; companies at the forefront

in developing both standards and corresponding

products would have a head start in winning the

contracts. R&D funding can be applied to develop

national standards that are then included in product

specifications, as with the Research and Development in Advanced Communications in Europe

Program (RACE) of the European Community (see

ch. 5).

In addition, all government contract specifications might be shaped to conform as closely as

possible to commercial products made by U.S.

industry, or to planned commercial products. For

example, the specifications on a purchase of electric

cars by the Postal Service might be written to make

production of those vehicles a stepping stone toward

U.S. fins’ planned commercial production.81 Such

a purchase might also be timed to fit the product

cycle of U.S. fins.

With direction from Congress and the President,

each agency could seek out opportunities such as

these where Federal procurement and associated

R&D spending can help competitiveness. However,

if one agency had overall responsibility for competitiveness, it might work with other agencies to find

and coordinate such opportunities. That agency

could do the same with State and local governments,

advising them on how working their procurements

could help U.S. competitiveness. While some State

and local governments have some preferences for

U.S. goods, they are not coordinated into any

national policy or strategy. The agency could act as

a clearinghouse to help State and local governments

find U.S. suppliers.

State and local procurement could be a powerful

tool for competitiveness. One reason is size. In 1990,

State and local government spending on goods was

$87 billion, compared with the Federal Government’s spending of $107 billion (all but $10 billion

for defense). For certain items, State and local

purchases are a significant part of the market. For

example, in 1990 States and localities spent an

estimated $8 billion on cars and trucks,82 amounting

to 6 percent of U.S. motor vehicle sales that year.

Also, State and local governments are not now

governed by the GATT Procurement Code.83 Thus,

State and local governments have more freedom

than the Federal Government to grant preferences

for U.S. firms.

INSTITUTIONS FOR A STRATEGIC

COMPETITIVENESS POLICY

In each of the policy areas discussed above, the

Federal Government could take many constructive

actions. Government efforts to encourage invest-
72 ● Competing Economies: America, Europe, and the Pacific Rim

ment and savings, enhance human resources, encourage commercial technology development and

adoption, and take a more proactive stance in trade

policy could help many industries become more

competitive. Yet a host of individual actions,

undertaken piecemeal, do not add up to a coherent

strategy. At present, the Federal Government does

not have an institutional structure capable of a

strategic, integrated approach to competitiveness

and trade policy.

As part of a more proactive approach, the Federal

Government might choose to focus various government policies on assistance to critical commercial

industries. One element in this strategy is development of criteria that would keep the list of eligible

industries short and highly focused. Those on the

short list might qualify for priority technology or

financial assistance offered by Federal agencies or

possibly for special consideration in U.S. trade

policy.

If Congress wishes to proceed with this kind of

initiative, stronger institutional capacity in the

Federal Government would be needed to provide the

careful analysis of trade and competitiveness issues

that would lead to rational choice of strategies and

industries. At the very least, the Government would

need the analytic capability to identify candidate

industries, to develop action-oriented strategies

tailored to specific industries, and to delineate

specific government actions, programs and policies.

The strategy would need to be industry led, with

eligible industries extensively involved in shaping

feasible approaches and selecting candidate industries, and in making substantial investments in

whatever government-industry partnerships are undertaken. Government decisionmakers would need

to make sure that the choices are consistent with the

overall goals of the program and criteria for selection.

A coordinated strategy to support critical industries might not get much attention if it were assigned

to an existing line agency already saddled with

numerous trade and industry responsibilities. Thus,

Congress might establish a new organization in the

executive branch to develop strategic competitiveness policies. The office could be small, since its role

would be largely analytical and catalytic. But it

would have to be well and prominently positioned

(e.g., in the Executive Office of the President) to

effectively leverage or influence actions of key trade

and commerce agencies, and it would need Administration support to have clout.

A strategic competitiveness policy will accomplish little unless it prompts action on the part of the

many Federal agencies with responsibilities in such

diverse areas as foreign trade, research and development, antitrust, and taxation. Recognition is growing

among Federal agencies that there are many links

between policies affecting domestic industry and

foreign trade. However, the two are seldom carried

out in concert.

Thus, a strategic competitiveness policy would

require a coordinated response by Federal agencies.

A certain amount of restructuring and reorganizing

of current Federal functions could help. For many

years, Congress has been debating whether to

rearrange the wide array of Federal trade and

commercial programs into new departments or

agencies. A purpose underlying most of the proposed reorganizations is to create a more coherent

organizational structure for U.S. Government decisions on international trade. If Congress does

establish such a department, strategic competitiveness policy could be one of its responsibilities.

At the end of this section, two organizational

options are discussed in greater detail, in light of the

criteria and objectives discussed immediately below.

The two options are not exclusive of each other. The

more modest option, establishing a ‘‘critical commercial industries office’ in the executive branch to

formulate and coordinate implementation of strategy in support of critical industries, could well be

part of a more far reaching departmental and trade

agency reorganization that has as one its goals

furthering strategic competitiveness policy. Congress might also use advisory committees as a first

step in identifying industries and recommending

actions for subsequent adoption by the executive

branch or Congress. For example, the newly

launched Competitiveness Policy Council might

undertake this function,84 while the National Advisory Committee on Semiconductors (see box 2-C)

could serve as a model for developing strategies for

specific industry sectors. Although advisory committees can be useful in identifying problems and

needs, only agencies and departments have the

authority to implement policies or coordinate Federal responses. Hence, legislation or additional

executive action would still be required.
Chapter 2--Policy Issues and Options . 73

Box 2-C-National Advisory Committee on Semiconductors

The National Advisory Committee on Semiconductors (NACS) is an example of a joint effort by industry and

government to address the problems of a specific industry sector--in this case the troubled American semiconductor

industry. Congress established the committee in the 1988 Omnibus Trade and Competitiveness Act, calling on

NACS to “devise and promulgate a national semiconductor strategy.” Its final report, scheduled for late 1991, is

expected to lay out an overall strategy, including possible trade policy approaches. In the meantime, NACS has

issued two interim reports outlining the problems of the American semiconductor industry and making specific

recommendations for action by Congress and the administration.

The committee is structured to assure extensive interaction between industry and government in developing

the strategy. NACS is technically an independent advisory body in the executive branch. Eight prominent industry

executives serve on the committee (the president of AT&T Bell Labs serves as chairman), as do five high-ranking

government officials with key responsibilities for research and development or technology policy.l (The agencies

include Defense, Commerce, the Energy Department, the National Science Foundation and the Office of Science

and Technology Policy (OSTP).) A Defense Advanced Research Projects Agency official saves as Executive

Director, under agreement with OSTP. The committee, which meets every other month, also has setup several

working groups to address specific issues. The working groups typically include some committee members and

outside experts.

NACS’s first two reports, issued in late 1989 and early 1991, recommended several government actions as

initial steps toward achieving a national strategy. Some of the recommendations were quite general, such as

improving the education and training system, and creating a favorable business environment for all industries.

Others were specific to the semiconductor industry, emphasizing, for example, research and development actions

Federal agencies could take to further semiconductor technology.

It is probably premature to talk about NACS’s overall impact on executive branch policy, Congress, or the

industry itself, since it has yet to issue its strategy. Because Federal officials serve on NACS, its suggestions may

have influenced some agency R&D actions. It also has helped elevate visibility of semiconductor issues in the

Administration. (Committee members met with President Bush’s chief of staff, John Sununu, as well as Office of

Management and Budget Director Richard Darman and Michael Boskin, who chairs the President’s Council of

Economic Advisors.) NACS's interim reports have also helped define the terms of the debate about semiconductor

problem areas.

INonf~~ COmmiti rn~bra are appointed by the lhsiden~ through the Office of Science imd ‘lkdmoIos’Y Poliq. n~w s~tes

thatfourof thenonfederalmembers were to be selected from the semiconductor industry; the other four weretobe eminent in technology, defense

and economic development.

A proactive strategy does not mean that govern- reason for protection is simply that an industry has

ment would produce a blue print or plan for industry. the political leverage to gain it.

Instead, the critical industries organization could

champion competitiveness, and other domestic policies. It could encourage agencies to give priority for

some forms of government assistance (e.g., technology help) to critical industries. It could also encourage agencies to take competitiveness concerns into

account when making regulatory decisions that

affect a critical industry.

Selecting Industries

There are many reasons why governments adopt

protective stances toward specific industries, ranging from national defense, to economic security, to

a desire to mitigate the impact of import competition

on communities, firms, and workers. Often, the

Implicit in the concept of strategic competitiveness policy is the idea that certain critical industries

are important for national economic security. Doubtless, the most promising candidates would come

from manufacturing industries in the technological

forefront for developing new products and processes. Such industries have a high proportion of

technology-oriented workers and spend proportionately more on R&D. Examples include computers

and software, electronic components, communication equipment, advanced materials, precision machining equipment, robotics, biotechnology, and

aerospace.

Some critical industries would coalesce around

new technologies that could in time provide dispro-
74 . Competing Economies: America, Europe, and the Pacific Rim

portionate returns to the firms or countries with the

largest market share. There is not much disagreement about what technologies are critical to national

economic prosperity and national security. Lists

developed by several U.S. Government and business

organizations in 1990-91 are remarkably similar

(table 2-1).85 And the conclusion is widely shared

that U.S. industry’s position in these technologies

has weakened significantly in the past 10 years, and

continues to weaken.

The benefits from commercializing these technologies could be large, as suggested by Department of

Commerce’s 1990 estimate that 13 emerging technologies might yield $356 billion in annual product

sales in the U.S. market alone by the year 2000. Yet

if current trends continue, the United States would

lag Japan in most of these technologies and the

European Communities in several.86

The element of criticality suggests not only

technology intensity but also the potential to provide

good new jobs and make large contributions to the

economy. Thus, a critical industry might be an

emerging or developing high-technology industry

with large potential markets. Or a critical industry

might produce technology or services that enable

other industries to make dramatic advances in

productivity and quality. The classic examples are

machine tools and semiconductors. A rationale for a

Federal role in developing a U.S. high-definition

television (HDTV) industry is that it could drive

technologies critical for other parts of the electronics

industry. Consumer demand for HDTV could be

sizable. This is one of several emerging industries in

which Japan is ahead.

It is important to recognize that not every industry

with a claim to leading edge technologies, growing

markets, good jobs, and technology spillovers could

be selected for support. Public and private resources,

energy, and talents are limited. The judgment of

industry leaders and their willingness to put up their

own money in cooperative ventures are an invaluable guide to the selection of promising industries.

This implies the necessity to develop new relationships of trust and shared visions of truly national

interest between government and industry.

What Kind of Support?

The range of policy tools that might be used to

support a strategic competitiveness policy includes

those discussed in previous sections, such as technology partnerships, financial incentives, and trade

policy. Some of the relevant programs already exist,

or at least are on the books. To round out the array

of policy tools, Congress could authorize some new

ones. Options for expanding the list of these

programs are touched on only briefly here, as they

were discussed in more detail earlier in the chapter.

As noted above, financing long-term investment

has been a particular problem for American industry,

reflecting the high costs of capital and pressures to

realize short-term profits. Federal policy affecting

investment might be tailored to meet specific needs

of a designated critical industry. For example,

across-the-board loosening of depreciation rules for

all American industry would be very expensive, but

there might be merit to loosening the rules for

specific critical industries. The public costs might

still be considerable but the stimulus would at least

be focused on the specific needs of industries found

critical to the national interest. The National Advisory Committee on Semiconductors, for example,

estimates that changing current depreciation rules

for new investments in semiconductor manufacturing equipment from 5 to 3 years would cost the U.S.

Treasury $180 million in lost tax receipts, but could

prompt $450 million in capital investment each year

by this industry .87

Almost by definition, technological advance will

be a key factor in the competitiveness of critical

industries. The creation of a CTA along the lines

discussed earlier, or a major expansion of NIST’s

ATP, could help. While a coherent policy in support

of commercially important technologies does not yet

exist in this country, the Federal Government does

take part in technology development that is useful to

some commercial industries, notably NASA’s aeronautics R&D program and the Sematech project.

Generally, however, such support has not been part

of a systematic effort to further U.S. competitiveness. Sematech, for example, was created ad hoc, in

response to strong industry pressure and the argument that a competitive U.S. semiconductor industry

is essential to national defense.

As an organizing concept, promotion of critical

industries could give direction to future government

support of commercial technology. Whatever the

institution, adequate funding will be critical. ATP is

a tiny program in a diverse agency. The overall NIST

budget is the same in real terms today as it was two

decades ago. Even if NIST's budget doubles in the
Chapter 2-Policy Issues and Options ● 75

Table 2-l—Comparison of National Critical Technologies with Department of Commerce Emerging Technologies

and Department of Defense Critical Technologies

National critical

technologies

Materials

● Materials synthesis and processing

● Electronic and photonic materials

● Ceramics

● Composites

● High-performance metals and alloys

Manufacturing

● Flexible computer integrated manufacturing

● Intelligent processing equipment

● Micro- and nanofabrication

● Systems management technologies

Information and Communications

●

●

●

●

●

●

●

Software

Microelectronics and optoelectronics

High-performance computing and networking

High-definition imaging and displays

Sensors and signal processing

Data storage and peripherals

Computer simulation and modeling

Biotechnology and Life Sciences

● Applied molecular biology

• Medical technology

Aeronautics and Surface Transportation

● Aeronautics

● Surface transportation technologies

Energy and Environment

● Energy technologies

● Pollution minimization, remediation,

and waste management

Commercial emerging

technologies

● Advanced materials

● Advanced semimconductor devices

. Superconductors

● Advanced materials

● Flexible computer integrated manufacturing

● Artificial intelligence

●

●

●

●

●

●

●

●

High-performance computing

Advanced semiconductor devises

Optoelectronics

High-performance computing

Digital imaging

Sensor technology

High-density data storage

High performance computing

. Biotechnology

● Medical devises and diagnostics

Defense critical

technologies

● Composite materials

● Semimconductor materials and microelectronic circuits

● Composite materials

● Machine intelligence and robotics

●

●

●

●

●

●

●

●

●

●

●

●

●

Software producibility

Semiconductor materials and microelectronic circuits

Photonics

Parallei computer architectures

Data fusion

Data fusion

Signal processing

Passive sensors

Sensitive radars

Machine intelligence and robotics

Photonics

Simulation and modellng

Computational fluid dynamics

● Biotechnology materials and processes

● Air-breathing propulsion

● No National Critical Technoiogies counterpart: High energy density materials,

Hypervelocity projectiles, Pulsed

power, signature control, Weapon system environment

SOURCE: U.S. Department of Commerce, Emerging 7bchnologies:A Survey of 7bchnica/and Economic Opportunities, Spring 1990; and U.S. Department

of Defense: Critica/ T4whno/ogies P/an, 15 March, 1990; as cited in The National Critical Technologies Panel, Report of the Nationa/ Critica/

TAno/ogies Pane/ (Washington, DC: U.S. Government Printing Office, March 1991), table 2.

next 5 years, as President Bush has proposed, ATP year (see earlier discussion), though it would take

may not get much of the increase. At its present size time for the agency to develop the staff and

($36 million in fiscal year 1991), ATP is only a experience to manage a program of that size.

beginning. It is not yet adequate for a governmentindustry technology partnership that is big and broad If Congress wishes to authorize a critical indusenough to make a difference to the whole economy. tries program, it could also take action to give

Whether seen as an outgrowth or eventual replace- critical industries special priority in other areas of

ment for ATP, a CTA might well begin small. But a government decision making. For example, in the

mature program of technology support would proba- antitrust area, firms in a critical industry might be

bly need to be budgeted at $1 billion to $2 billion per extended the same kind of protection for joint
76 . Competing Economies: America, Europe, and the Pacific Rim

manufacturing or joint production activities that are

now given to cooperative R&D activities under the

National Cooperative Research and Development

Act of 1984. (Special action for critical industries

would not be needed if Congress decides to amend

the 1984 law along these lines for all industries.

Several bills to accomplish this have been proposed

in recent Congresses, including S.479 as introduced

in the 102d Congress.)

In the same vein, Congress could require Federal

agencies to prepare “competitiveness impact evaluations” before promulgating policies likely to have

a major adverse impact on the international competitiveness of a designated critical industry. By

focusing only on critical industries, the sea of

paperwork that might be created by broader impact

statement requirements might be avoided.

As noted, strategic competitiveness policy would

allow occasional departures from the prevailing free

trade philosophy. Such departures would not be

frequent, but the ability to take the initiative in

matters of trade policy would be a necessary part of

the overall strategy. Once critical industries are

identified, a special interagency group could be set

up to consider trade policy actions that would

promote the competitiveness of the industry; the

critical industries organization would be responsible

for coordinating trade policies with other strategies

in support of the selected industries. As mentioned

earlier, trade negotiators could be directed to give

critical commercial industries top priority in dealings with other countries on fair trade and market

access issues. The presence of a competitiveness

champion within U.S. Government would strengthen

the hand of U.S. negotiators in such dealings.

The most important job for a government body

responsible for support of critical commercial industries would be to tie together the policy strands in a

reasonably coherent whole. Of course, no government agency can ever establish a neat, wholly

coherent policy on any broad national issue, whether

it be fiscal policy, health, education, environment, or

competitiveness. There will always be some messiness, conflicts and overlap between agencies, struggles between special interests and the national

interest, compromise and disarray. Because the U.S.

Government and the American people have relatively little experience in government-industry partnerships, it would be overoptimistic to expect the

creation of a coherent strategic competitiveness

policy to be easy or rapid, even assuming a

consensus in support of such a strategy. A modest

start and evolutionary growth is a more reasonable

expectation. But the aim of coherence would nevertheless have to be steadily pursued. Otherwise, it is

too easy to be sidetracked into spreading available

resources too thinly, or hijacked into serving special

interests.

Institutional Alternatives

Institutional arrangements for developing and

implementing a critical commercial industries approach could take many forms. Two possibilities are

discussed below.

A Critical Industries Office

A small office in the executive branch with an

elite staff could serve as the lead agency in

developing and implementing strategic competitiveness policy. The office might be placed in a

department, or, in a willing Administration, the

Executive Office of the President. In either case,

championing critical industry strategies and serving

as a catalyst for action by Federal agencies could be

part of the office’s mandate.

Proposals in recent Congresses to create an office

of competitive analysis might be a starting point. As

proposed in H.R. 1274, a trade reorganization

proposal introduced but not acted on in the 101st

Congress, the office would report each year on the

competitive prospects of American industries, and

could empanel temporary industry councils to advise on needed changes in Federal policy with

respect to specific industries. Even if Congress

stopped short of trade reorganization, it could direct

the Administration to create a critical industries

office within an existing department. The Department of Commerce, which now administers several

trade and technology programs, might be a logical

place.

Locating the office in the Executive Office of the

President would be a good option in an Administraion that is supportive of the critical industries

approach. The Executive Office can bring high

visibility and government-wide perspective to issues. However, such a location is likely to be

ineffective in an Administration hostile to the

concept.

While private industry input would be indispensable, a critical industries office would need a strong
Chapter 2-Policy Issues and Options ● 77

staff. First, the process of identifying critical industries would demand highly competent personnel. An

even more demanding task for the staff would be to

encourage Federal actions and policies that make a

real difference in the competitiveness of critical

industries. If Congress were to direct the Administration to set up such an office, it might consider

exempting the office from the normal civil service

guidelines on hiring and dismissal of employees. To

assure fresh thinking, Congress could direct that no

more than half of the initial staff could be drawn

from existing agency personnel. Congress might

also make sure that the agency had the resources to

actively recruit from industry, universities, and

research institutions.

Government Reorganization and Strategic

Industry and Trade Policy

A major change in current government organization for trade and competitiveness policy is not a

prerequisite for a critical industries approach. However, the way the government organizes its functions

does affect policy outcomes, and competitiveness

policy is no exception. If Congress wishes to

promote a more proactive approach to trade and

competitiveness issues, then reorganization could

produce a more focused policymaking apparatus and

more direct lines of authority for carrying out the

policy.

The current structure for trade decisionmaking

within the Federal Government is diffuse, with

dozens of agencies having roles to play and a

bewildering array of interagency task forces playing

coordination functions. No fewer than 10 departments, 2 independent agencies, and 4 executive

office agencies take part in trade policy formulation,

and the actions of many other agencies and departments can affect international trade. The Commerce,

State, Treasury, and Agriculture Departments all

powerfully influence trade policy, as do some

independent agencies (the International Trade Commission). The U.S. Trade Representative (USTR)

has statutory responsibility for trade policy coordination and negotiation, but (as noted) its staff is

stretched thin by the issues of the day (e.g., securing

a Uruguay Round agreement, launching negotiations for a Mexican Free Trade Agreement).

Responsibility for other government functions

affecting the competitiveness of American industry

is similarly diffuse. Dozens of agencies have regulatory responsibilities that, in large and small ways,

can influence industrial competitiveness. Several

agencies-commerce, Defense, Energy, the National Science Foundation-have R&D responsibilities relevant to industry. Efforts to coordinate

functions among agencies is predictably sporadic;

the White House Office of Science and Technology

Policy (OSTP) in the Bush Administration, for

example, has breathed life into interagency coordinating committees that a few years earlier had been

all but abandoned.

Sprawling, decentralized policy structures may

have adequately served the overall strategic interests

of the United States throughout most of the post

World War II period. Yet the absence of a powerful

voice within government for the international competitiveness of American industry almost assures

that other objectives (e.g., foreign policy, national

security) begin with the stronger hand when disputes

arise, whatever the substance of the matter. Moreover, the lack of central focus and direction, far from

underpinningg the U.S. Government commitment to

free trade, has resulted in trade policy with quite a

few contradictions and apparent exceptions.

Some in Congress have proposed government

reorganization as a means to improve the focus and

effectiveness of Federal trade and commercial policy functions. Some bills would establish a new

Department of International Trade and Industry,

assuming many functions now carried out by the

Office of the USTR, the Commerce Department, and

some export financing agencies.88 Other proposals

have called for a Department of International Trade

and Investment or Department of International

Commercial Policy, consolidating USTR and the

trade policy units of several existing Departments

into one agency, and establishing a cabinet committee to coordinate international economic policy .89

Another set of proposals have called for creation

of a Department of Industry and Technology,

building on existing Commerce Department authority for export promotion and creating a Civilian

Technology Agency. 90 Some proposals to set up an

industry and technology department would also

create an independent U.S. Trade Administration,

comprised of the Office of the USTR and Commerce

Department agencies responsible for trade administration and international economic policy .91 (The

USTR would continue to serve as a cabinet rank

official).
78 ● Competing Economies: America, Europe, and the Pacific Rim

In the end, the specific bureaucratic arrangements

outlined in these proposals are less important than

the substantive goals they try to achieve. Nor should

any of these arrangements be expected to eliminate

coordination problems. As a practical matter, not all

the Federal agency functions related to competitiveness could ever be consolidated into one department.

Many key financial, trade, and technology policy

functions would continue to be carried out elsewhere. Moreover, executive office coordination of

these functions would still be needed. It is hard to

conceive, however, that a coherent competitiveness

policy can succeed without a strong agency heading

up the effort.

1 Two earlier reports in OTA’s assessment of Technology,

Innovation and U.S. Trade consider many of these issues in detail.

Paying the Bill: Manufacturing and Americans Trade Deficit, OTA-ITE390 (Springfield, VA: National Technical Information Service, 1988)

discusses the place of manufacturing in international trade and the U.S.

economy. Making Things Better: Competing in Manufmturing, OIYdlT!-

443 (Washington DC: U.S. Government Printing Office, February

1990) considers how technology can improve U.S. manufacturing

competitiveness, including four possible areas for government action:

the financial environment, human resources, diffusion of technology,

and strategic technology policy. Other recent, closely related OTA

reports are Worher Training: Competing in the New International

Economy, OTA-ITE-457 (Washington, DC: U.S. Government Printing

Office, September 1990) and Commercializing High Temperature

Superconductivity, OTA-ITE-388 (Washington DC: U.S. Government

Printing Office, August 1988).

2 U.S. Congress, Office of Technology Assessment Paying the

Bill, op. cit., passim, and Making Things Better, ibid., passim; MIT

Commission on Productivity, Made in America: Regaining the Productive Edge (Cambridge, MA: The MIT Press, 1989) passim.

3 The agreement was the 1986 U.S.-Japan Semiconductor trade

agreement, renewed with substantial modifications in 1991. U.S.

producers’ access to the Japanese market (which was informally part of

the agreement) has been lower than U.S. companies and negotiators

deem acceptable, although U.S. companies’ Japanese market shares did

improve after the agreement took effect. While there is dispute about

whether the agreement caused higher prices for memory chips, the price

hikes that followed the STA also hurt the computer industry. For further

explanation of this agreement, see ch. 4.

4 Chalmers Johnson MITI and the Japanese Miracle: The Growth

of Industrial Policy, 1925-1975 (Stanford, CA: Stanford University

Press, 1982).

5 The discussion below is based on options detailed in Making

Things Better, op. cit., ch. 2, and Worker Training, op. cit., ch. 2.

6 From 1977 to 1988, the U.S. cost of capital for investments in

machinery and equipment with a physical life of 20 years averaged 3.4

percentage points higher than similar costs in Japan and 4.9 percentage

points higher for investments in a factory with a physical life of 40 years.

(Robert N. McCauley and Steven A. Zimmer, ‘Explaining International

Differences in Capital Costs, ” Federal Reserve Bank of New York

Quarterly Review, summer 1989, pp. 7-28.) Although some international differences in capital costs are due to risks related to currency

fluctuations, sustained differences of the magnitudes shown by McCauley and Zimmer are unlikely under free market conditions. Despite

liberalization in the 1980s, the Japanese financial market is not yet as

open as that in the United States. Also, tax incentives and exemptions are

widely used in Japan to lower capital costs and promote investment,

often in specific industries or technologies. Furthermore, the Japanese

system of stable and mutual shareholding means that only a small

portion of companies’ shares are traded on financial markets, thus

relieving pressure on management to show short-term profits. See

Making Things Better, op. cit., ch. 3, for a discussion of the costs of

capital and conditions of availability in Japan and the United States.

7 The 1990 budget agreement between Congress and the Administration, which partitions spending into defense, domestic nondefense, and

foreign nondefense categories, lasts through three fiscal years, from

1991 through 1993. Afterwards, the three categories may again be

merged so that it would be possible, say, to pay for tax expenditures in

the non-defense part of the budget with spending cuts in defense.

8 The Joint Committee on Taxation estimated the cost in lost

revenues of the investment tax credit at $13 billion to $37 billion per year

in the 1980s, and $8 billion to $64 billion per year for the Accelerated

Cost Recovery System. Both programs were ended in the tax reform law

of 1986, in favor of an overall reduction in the corporate tax rate

(although certain classes of assets are still granted fast depreciation).

9 These policy options for training of active workers are drawn

from the OTA report Worker Training, op. cit., ch. 2.

10 A bill to setup such a program, Section 404 of S. 2114, was

introduced in the 101st Congress.

11 For a detailed discussion of these options, see Making Things

Better, op. cit., pp. 53-71. Descriptive and analytic material on

technology diffusion in the United States and other countries is in

chapters 6 and 7 of that report.

12 Fewer States applied for the Centers opening in 1991 than for

those beginning 2 years earlier (20 proposals compared with 36).

“Commerce Selects Two Manufacturing Centers,” New Technology

Week, Mar. 11, 1991. A smattering of other Federal programs offer some

technology extension services. The largest of these is Trade Adjustment

Assistance for firms, which has been funded at about $9 million per year

in recent years.

13 Making Things Better, op. cit., p. 58.

14 This is direct government loans only and does not count loan

guarantees, which are about twice as great. In 1987, direct loans to small

and medium enterprises from the three main government financing

institutions amounted to Y3.8 trillion ($30 billion at Y125 to the dollar);

loans guaranteed by the 52 nationwide credit associations amounted to

Y7.8 trillion ($62 billion). D. H. Whittaker, “New Technology

Acquisition in Small Japanese Enterprises: Government Assistance and

Private Initiative,” contract report to the Office of Technology

Assessment, May 1989.

15 See Making Things Better, op. cit., pp. 192-194.

16 On Mar. 1, 1991, DOE signed an agreement with Martin

Marietta Energy Systems, which runs Oak Ridge National Laboratory,

for a class waiver on inventions proposed by Martin Marietta for

commercialization (subject to national security exceptions). Class

waivers had previously been granted only to non-profit operators of

DOE’s national labs; this was the first such agreement with a for-profit

operator. Paul Kemezis, “Oak Ridge Lab Receives Approval to Sign

Deals With U.S. Industry, ” New Technology Week, Mar. 11, 1991.

17 For example, the National Center for Manufacturing Sciences

organizes shopping trips to the labs on behalf of its over 100 industry

members, seeking to pair lab expertise with industry needs. This

complements a longer established effort from the labs’ side, the Federal

Laboratory Consortium, which operates a small core staff and 300

volunteers from the labs to match inquiries from firms with the

appropriate lab researcher.

18 See McGraw-Hill’s Tech Transfer Report, February 1991, for

several recent examples.

19 Ibid.

20 Bill Loveless & David Kramer, “Expanded Missions Eyed for

DOE’s National Labs,’ McGraw-Hill’s Tech Transfer Report, February

1991, p. 13.
Chapter 2--Policy Issues and Options ● 79

21 Software written in contractor-operated Federal labs can be

copyrighted and then licensed to firms. An exclusive license is

sometimes a necessary incentive for a firm to commercialize the

software. However, software written in government-operated labs is

written by government employees and cannot now be copyrighted,

making it difficult or impossible to grant firms exclusive rights.

22 The National Cooperative Research Act of 1984 lessened the

legal risks of joint R&D. See P.L. 98-462, 15 U.S.C. 43014305.

23 Malcolm Baldrige National QuaIity Improvement Act of 1987,

Public Law 100-107, Sec. 3.

24 Jeremy Main “How to Win the Baldrige Award, ” Fortune,

Apr. 23, 1990, p. 101.

25 Ibid.

26 These categories are drawn from the report of a private group,

the Council on Competitiveness; see Gaining New Ground: Technology

Priorities for Americans Future (Washington, DC: The Council, 1991).

The government reports include U.S. Department of Commerce,

Technology Administration, Emerging Technologies: A Survey of

Technical and Economic Opportunities (Washington, DC: Department

of Commerce, 1990); U.S. Department of Defense, Critical Technologies Plan, report for the Committees on Armed Services, U.S. Congress,

AD-A234-900 (May 1, 1991); Government of Japan, Ministry of

International Trade and Industry, Trade and Future Tusks in Industrial

Technology (Sangyo Gijutsu no Doko to Kadai) (Tokyo: 1988);

Commission of the European Community, First Report on the State of

Science and Technology in Europe (Brussels: 1988).

27 The program began in October 1988. U.S. Congress, Office of

Technology Assessment, Making Things Better, op. cit., p. 188, box 7-B.

28 Foreign market barriers, their effect on U.S. industry, and the

U.S. response are discussed in more detail in ch. 4. In addition, barriers

imposed by the EC, Japam Korea and Taiwan are discussed in chs. 5-7.

29 Clyde V. Prestowitz, Jr., Alan Tonelsom and Robert W. Jerome,

“The Last Gasp of GATTism, ’ Harvard Business Review, March-April

1991, p. 137.

30 See box 4-A. In the GATT Uruguay Round, Canada and the EC

have proposed transforming GATT into an ITO; consideration of this

proposal has been deferred until after the Round is completed.

31 19 U.S.C. 2411-2420.

32 This is the pot calling the kettle black. Many countries consider

their laws superior to GATT when they deem it necessary.

33 This case is discussed in detail inch. 4.

34 Clyde V. Prestowitz, Jr., Trading Places: How We Allowed

Japan To Take The Lead (New York NY: Basic Books, 1988), pp. 283,

50-52.

35 Ibid., pp. 276-277.

36 Protection can be granted in certain other cases-for example,

under Section 201, as described below. Protection has also at times been

instituted by means of bilateral agreements limiting the quantity of

imports of certain products from particular countries. Examples are

textiles, machine tools, and automobiles. Except for textiles, in which

the bilateral agreements come under an overall arrangement sanctioned

by GATT these bilateral agreements at least arguably violate GATT

Protection against imports is discussed in detail in ch. 4.

37 19 U.S.C. 2251-2254.

38 19 U.S.C. 2253(a)(3).

39 From 1980 through 1990, U.S. industry petitioned for relief

under Section 201 20 times. The required injury was found in seven

cases (though in two only for some of the products at issue), and the U.S.

industry received some protection in five (see table 4-8).

40 19 U.S.C. 2252(b)(l)(B).

41 GATT’s escape clause (Article XIX) requires injury “to

domestic producers . . . of like or directly competitive products, ’ and

U.S. law tracks this language (19 U.S.C. 2251). In contrast, GATT’s

provisions regarding subsidies and dumping (Article VI) permit a

showing that the dumping or subsidization “retard[s] materially the

establishment of a domestic industry,” and U.S. law follows that

language (19 U.S.C. 1671(a)(2), 1673(2)).

42 The language of GATT’s escape clause is general, requiring

only that the increased imports “cause or threaten serious injury to

domestic producers. . . of like or directly competitive products. ’ There

has been little interpretation of this language by GATT dispute

resolution panels. Negotiations underway in the Uruguay Round could

clarify the escape clause’s scope. The United States seeks to restrict

rather than expand this scope.

43 GATT Article XIX, par. l(a).

44 At times protection could also be justified under GATT’s

national security exception (Article XXXVIII). This could be the case,

for example, with protection of the domestic semiconductor industry,

which furnishes the U.S. military with essential components of weapons.

However, the United States and other countries have been cautious about

using that exception for fear of setting precedents that would make it into

an all-purpose tool to justify a great deal of protection.

45 In the time it takes to reach this point the U.S. industry’s

condition might improve enough so that it could get along without

protection.

46 The terms of the EC proposal to the Japanese on automobiles

had not been made public at this writing; this description is based on

information from trade sources.

47 U.S. Commerce Department International Trade Adrministration, Office of Management personal communication, Aug. 2, 1991.

48 U.S. General Accounting Office, Export Promotion: Problems

in Commerce’s Programs, NSIAD-89-44 (Gaithersburg, MD: U.S.

General Accounting Office, 1989), p. 17.

49 The Japanese effort included 3 officers at the Japanese embassy

and 78 employees of the Japan External Trade Organization (JETRO),

an agency of MITI. Those figures are from Akemi Yoshida, Attaché in

Management and Coordination, Japanese Embassy, Washington DC,

Aug. 21, 1991; and Hiro Sate, Director of Research JETRO (New York

Office), Aug. 21, 1991. The figures for U.S. staffing in Japan are from

an interview with Ed Stumpf, Director, East Asia and Pacific, USFCS,

Aug. 21, 1991.

50 United States Trade and Development Program, 1990 Annual

Report, pp. 27, 29, 55-61.

51 H.R. 2508 and S. 1435, in conferences of August 1991, would

do both.

52 50 U.S.C. App. 2401-2420. This Act’s authorization lapsed as

of Oct. 1, 1990, but President Bush continued its provisions in force by

invoking the International Emergency Economic Powers Act 50 U.S.C.

1702. See executive order 12730-Continuation of Export Control

Regulations, Sept. 30, 1990.

53 Public Law 100-418, sec. 2414, codified at 50 U.S.C. App.

2504(a)(5).

54 Title II of the Omnibus Trade and Competitiveness Act of 1988,

Public Law 100-418.

55 50 U.S.C. App. 2409(g).

56 S. 320 passed the Senate on Feb. 20, 1991, and was referred

jointly to the House Committee on Foreign Affairs and the House

Committee on the Judiciary on Feb. 26, 1991. This bill resembles the

conference version of H.R. 101-4653 and S. 101-2927, as passed by the

House and Senate in 1990, but omits certain provisions that President

Bush found objectionable in vetoing that bill. See President George

Bush, Memorandum of Disapproval for the Omnibus Export Amendments Act of 1990, Nov. 16, 1990.

57 S. 320, Sec. 117.

58 A 1990 conference report on this same provision commented
80 ● Competing Economies: America, Europe, and the Pacific Rim

that “[s]ome provisions of the 1988 amendment to the EAA were not

implemented or were implemented far beyond statutory deadlines. ”

H. Rept, 101-944, p. 75.

59 50 U.S.C. App. 2409(j).

60 S. 320, Sec. 124.

61 50 U.S.C. App. 2402(f)(3)(B).

62 This was proposed in H.R. 4653, Sec. 120, but deleted in

conference. See House Conference Report 101-944 (on H. 4653), p. 75.

63 Dual-use nuclear technology comes primarily under another

statute, Section 309(c) of the Nuclear Non-Proliferation Act of 1978,

codified at 42 U.S.C. 2139a(b). See Section 17(d) of the EAA, at 50

U.S.C. App. 2416(d).

64 See Making Things Better, op. cit., especially pp. 71-89.

65 Budget of the United States Government: Fiscal Year 1992, part

two, p. 47.

66 For more detailed discussion see Making Things Better, op. cit.,

pp. 71-79.

67 One of the bills, S. 1233 in the 100th Cong., was reported out

of the Senate Committee on Governmental Affairs, attached to the 1988

trade act, but was then dropped. Two similar bills, H.R. 3838 and S. 1978

were introduced in the 10lst Cong.

68 U.S.-owned companies are defined as those that have majority

ownership or control by citizens of the United States.

69 U.S. Congress, House of Representatives, Conference Report

[to accompany H.R. 5021] making appropriations for the Departments

of Commerce, Justice and State, the Judiciary, and related agencies for

the fiscal year ending Sept. 30, 1991, and for other purposes, report

101-909, Oct. 20, 1990, pp. 25-26.

70 These comparisons are for merchant producers, who sell

semiconductors on the open market. Companies that produce only for

their own use (captive production) are excluded; IBM the world’s

biggest producer, is in this category and therefore excluded. All major

Japanese producers are included.

71 In practice, capital-intensive and R&D-intensive industries tend

to get more benefits than others from the tax incentives.

72 A succinct description and evaluation of the postwar RFC is in

Arthur T. Denzau and Clifford M. Hardin, “A National Development

Bank: Ghost of the RFC Past,” formal publication number 62, Center

for the Study of American Business, June 1984.

73 A Strategic Indusrtry at Risk, a report to the President and the

Congress from the National Advisory Committee on Semiconductors

(Washington DC: The Committee, 1989), p. 20. See also Making Things

Better, op. cit., pp. 80-89.

74 Recent data have been classified by the U.S. Government.

Estimates based on detailed data are publicly available only for 1981, the

Code’s first year of operation. In that year, the Code was estimated to

have covered only $18 billion in U.S. procurement and $4.2 billion in all

foreign procurement combined. (For comparison in 1985 U.S. procurement, and procurement by all other Code signatories, each totaled in the

range of $200 billion.) The amount of actual trade under the Code in

1981 appeared to be much smaller+ 3.3 billion for U.S. imports and

$270 million in U.S. exports. And the amount of this trade that would

not have occurred without the Code appeared to be at most $210 million

for U.S. imports and perhaps substantially less than $270 million for

U.S. exports. (See ch. 4.)

75 Public Law 100-418, Title VII.

76 U.S. Department of Commerce, Bureau of Economic Analysis.

BEA breaks this down as follows: defense goods, $96.7 billion defense

services, $84.8 billion nondefense goods, $10.3 billion nondefense

services, $37.8 billion. (Procurement of services does not include

compensation paid to employees.)

77 To get this result, proportion estimates that area few years old

are applied to the 1990 figures. Based on testimony in 1989, the Code

covers about 10 percent of total Federal procurement. W. Douglas

Newkirk, Assistant U.S. Trade Representative for GATT Affairs, Office

of the United States Trade Representative, testimony at hearings before

the House Committee on Government Operations, Subcommittee on

Legislation and National Security, Sept. 27, 1989, p. 6 (p. 56 of hearing

print). Based on GAO testimony in 1989, describing procurement during

1985 through 1987, Code-covered procurement is split roughly 80

percent for DoD and 20 percent for other agencies. Adam Cowled, Senior

Evaluator, U.S. General Accounting Office, personal communication,

July 24, 1990, interpreting U.S. Congress, House Committee on

Government Operations, International Procurement and Waivers of the

Buy America Act: U.S. Business at a Disadvantage, H. Rept. 101-989,

Nov. 29, 1990, p. 7 fn. 6, and Allan I. Mendelowitz Director, Trade,

Energy and Financial Issues, United States General Accounting Office,

testimony at hearings before the House Subcommittee on Legislation

and National Security, Sept. 27, 1989, p. 30 of Committee print. Thus,

in 1990 about 8 percent of $229.6 billion, or $18.4 billion, is

Code-covered defense procurement, while about 2 percent of $229.6

billion, or $4.6 billion, is Code-covered nondefense procurement.

78 Probably roughly 50 percent of defense procurement, or $90.8

billion, is covered by MOUs (ch. 4). Perhaps about $18,4 billion of

defense spending is covered under the Procurement Code (see previous

footnote). Assuming that there is no overlap between Code and MOU

coverage (which yields the highest possible figure), the combined

coverage is $90.8 billion plus $18.4 billion, or $109.2 billion.

79 The Procurement Code covers only goods and services “incidental” to the purchase of goods. Even if all $4,6 billion of the

Code-covered nondefense procurement is for goods, that still leaves $5.7

billion in non-Code-covered nondefense procurement, since the total

nondefense procurement of goods is $10.3 billion (see first footnote in

this paragraph).

80 Defense procurement for 1990 consisted of $96.7 billion for

goods and $84.8 billion for services (see first footnote in this paragraph).

While the $18.4 billion of Code-covered defense procurement is likely

almost all goods (see previous footnote), it is hard to tell how the $90.8

of MOU-covered procurement is divided between goods and services. If

it were divided proportionately to the total spent on defense goods versus

services, $48.4 billion would be for goods. This yields a total of at most

(assuming no overlap between Code and MOU coverage) $18.4 billion

@IS $48.4 billion or $66.8 billion in defense goods covered by the Code

or MOUs, leaving at least $29.9 billion of uncovered defense goods.

81 Other countries could argue that such actions violate the GATT

Procurement Code, Article IV, which states that “[technical specifications. . shall not be prepared, adopted or applied with a view to creating

obstacles to international trade nor have the effect of creating

unnecessary obstacles to international trade.” However, the point is

debatable, especially if the specifications are shaped merely to be

convenient for U.S. firms rather than to deliberately be inconvenient for

foreign firms.

82 This estimate is based on Commerce Department data for State

and local purchases of durable goods in 1990 ($33 billion) and the

percentage of such purchases going for motor vehicles in 1982 (24

percent at that time-no more recent figure is available).

83 However, the EC has taken the position that if the Procurement

Code’s coverage is expanded State and local government procurements

in the United States should be covered.

84 The Competitiveness Policy Council (CPC) was established by

the 1988 trade act (Public Law 100-418) but did not get underway until

early 1991. Its members are appointed by the President and by Senate

and House leaders from both parties; it is to report annually to the

President and Congress. It should not be confused with the nonstatutory

Council on Competitiveness in the office of Vice President Quayle,

which evaluates the impact of Federal regulation on competitiveness, or

the private Council on Competitiveness. Congress will need to act if the

CPC is to continue; the Bush Admini “ ‘stration’s proposed budget says that

the Council will complete its work in 1991 and disband in 1992, with

Vice President Quayle’s competitiveness council assuming responsibil-
Chapter 2-Policy Issues and Options . 81

ity for regulatory and “other” competitiveness issues. To date, the Vice

President’s council has not shown evidence of a willingness to address

the broad range of issues assigned to the CPC.

85 Also broadly similar are lists of critical technologies developed

by the Japanese Ministry of International Trade and Industry and the

Commission of the European Community.

86 Technology Administration “ “, U.S. Department of Commerce,

Emerging Technologies: A Survey of Technical and Economic Opportunities (Washington DC: U.S. Department of Commerce, spring 1990).

87 NationaI Advisory Committee on Semiconductors, Toward A

National Semiconductor Strategy, 2d annual report, N.A.C.S., Arlington, VA, February,1991, p. 15.

88 Bills to establish a Department of International Trade and

Industry include, among others, S.121 as reported by the Senate

Committee on Governmental Affairs in the 98th Cong.; S. 1365 as

introduced in the 99th Cong.; H.R. 1338 and H.R. 2135 as introduced in

the 100th Cong., and H.R. 1274 as introduced in the 101st Cong.

89 For an analysis of this approach see Stephen D. Cohen The

Making of United States International Economic Policy: Principles,

Problems and Proposals for Reform (New York NY: Praeger, 1988),

pp. 248-271

90 See S.1978, the proposed Trade and Technology Promotion Act

of 1989, as introduced in the 101st Cong. and S.1233, the proposed

Economic Competitiveness, International Trade and Technology Development Act of 1987, as reported by the Senate Committee on

Governmental Affairs on June 23, 1987. (Senate Report 100-82)

91 S.1233 (100th Cong.) as reported by the Senate Committee on

Governmental Affairs on June 23, 1987. See S. Rept. 100-82 for

discussion.
Chapter 3

American Firms, Foreign Firms:

Contributions to the Nation
CONTENTS

Page

SUMMARY AND FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

THE BASICS: WHO INVESTS WHERE AND IN WHAT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

U.S. Multinationals’ Activities at Home and Abroad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

FDI in the United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

FDI AND U.S. MANUFACTURING COMPETITIVENESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

Contributions to Knowledge and Technology . . . . . . . . . . . . . . . . . . . . . . . . . . +...,..., . . . . . . . . 95

Japanese FDI: A Special Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97

EMPLOYMENT AND EMPLOYEE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

PROFITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

INTERNATIONAL TRADE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

NATIONAL INTERESTS, BUSINESS INTERESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

The Policy Environment: How America Treats FDI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

Figures

Figure Page

3-1. Foreign Direct Investment in the United States: Sales of Manufacturing Affiliates . . . . . . . 88

3-2. Foreign Direct Investment, 1977-88: Assets of Major Investors . . . . . . . . . . . . . . . . . . . . . . . . 89

3-3. Foreign Direct Investment Position in the United States, 1990 . . . . . . . . . . . . . . . . . . . . . . . . . 89

3-4. Automobile Assembly Plant Defect% 1988-89.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

3-5. Automobile Assembly Productivity, 1988.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

3-6. R&D Intensity, U.S. Manufacturers and U.S. Affiliates of Foreign Manufacturing

Firms . . . . . . . +.....,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

3-7. R&D/Manufacturing Employee FDIUS and U.S, Manufacturers . . . . . . . . . . . . . . . . . . . . . . . 97

3-8. Spending for New Plant and Equipment, Foreign Manufacturing Affiiliates and

U.S. Manufacturers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97

3-9. Investment in Plant, Property and Equipment as a Percent of Sales of Manufacturing

Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

3-10. Employment in U.S. Affiliates, 1977-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

3-11. Earnings and Reinvested Earnings: Foreign Direct Investors in the United States . . . . . . . . 104

3-12. Earnings and Reinvested Earnings: Japanese Direct Investors in the United States . . . . . . . 105

3-13. Earnings and Reinvested Earnings: European Direct Investors in the United States . . . . . . . 105

3-14. Earnings and Reinvested Earnings: U.S. Direct Investment Abroad . . . . . . . . . . . . . . . . . . . . . 106

3-15. Merchandise Trade, FDIUS Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

Tables

Table Page

3-1. Foreign Direct Investment in the United States: Manufacturing Sales, 1977 and 1988 . . . . . 91

3-2. Foreign Direct Investment in the United States: Assets of Manufacturing Affiliates,

1977 and 1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

3-3. European Direct Investment in the United States Manufacturing Sales, 1977 and 1988 . . . . 92

3-4. Japanese Direct Investment in the United States: Manufacturing Sales, 1977 and 1988.... 92

3-5. Canadian Direct Investment in the United States: Manufacturing Sales, 1977and1988 . . . . 93

3-6. Manufacturing Research and Development Intensity: Foreign Direct Investors and

U.S. Firms, 1977-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

3-7. Training Hours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. . .. ... ..+. . . . . . . . 103
Chapter 3

American Firms, Foreign Firms: Contributions to the Nation

SUMMARY AND FINDINGS

Both American and foreign companies are becoming more international, investing in a variety of

activities outside their home counties. This is

especially true of foreign companies, whose investment abroad rose at a much faster rate than that of

U.S. firms in the 1980s—with a substantial share

being made in the United States.l

At the same time, most advanced nations are

undertaking programs to promote competitiveness.

Combined with the trend toward more international

investment by private companies, this puts pressure

on political systems to decide how or whether

multinational firms can participate in competitiveness programs. Nominally, the OECD2 nations

subscribe to the principle of national treatment,

which means no discrimination against or in favor of

any firm based on the nationality of its owners.

Exceptions are routinely made for national security

reasons to assure that nations retain sovereignty and

the ability to command military production in times

of national emergency. However, the distinctions

between national security and economic competitiveness are becoming blurred, as military needs

increasingly depend on industries whose primary

business is in the civilian sector. Especially in

advanced nations, decisionmakers are increasingly

confronted with uncomfortable decisions on how to

treat foreign firms and their affiliates. Less developed nations have long wrestled with policies

towards foreign multinationals, but the issue was

secondary for advanced nations until the last couple

of decades.

The United States is a newcomer to this realm of

political decisionmaking, as it is facing rapidly

rising foreign assets and control for the first time in

its modem history. European nations have long had

higher participation by multinationals but have not

yet determined how to treat foreign affiliates,

especially now that Japanese multinationals, with

deep pockets, advanced technologies, and outstanding records of successful market penetration, are on

the European scene. Japan, the outlier among

industrialized countries in the degree to which

multinationals are not participants in its economy, is

being pressured by many other nations to open its

markets to both imports and investment.

There is some agreement among policy analysts

that whatever principles govern the treatment of

foreign affiliates (vis-à-vis their participation in

programs to promote economic competitiveness),

they should not be based narrowly on ownership.

There is disagreement on what other principles

should apply. One point of view is that national

treatment should be the only principle, and that the

standards for handling international investment

should be the same as those that govern international

trade in the GATT---i.e., openness and nondiscrimination based on nationality. Foreign affiliates, it is

argued, behave very much like domestic fins, with

only minor exceptions. Therefore, political intervention that treats foreign affiliates differently from

domestic firms introduces distortions that decrease

economic well-being for everyone.

Another view is that reciprocity should be the

governing principle. Reciprocity means that affiliates of foreign firms are given the same treatment in

the host country as the host country’s firms are given

in the nation they call headquarters. Reciprocity is

already applied in a few instances in the United

States, for example, in mineral leasing on public

lands.

A current, controversial approach focuses on

performance standards. Both in Europe and the

United States, there is serious talk of establishing

standards that any firm must meet to qualify for

government-funded or government-sponsored programs. Standards generally have to do with how

much production, R&D, employment, and value

added firms do in the host country, compared with

domestic fins.

Existing data give limited insight into how

foreign affiliates behave in the United States.

Foreign direct investment (FDI) in the United States

is on the rise, especially in manufacturing, where

foreign affiliates now account for over 10 percent of

the sales of all U.S. manufacturing. These affiliates

contribute in various ways to the U.S. economy and,

although there are some distinctions between their

behavior and that of U.S.-owned fins, they are

similar in some important ways.

–85–
84 ● Competing Economies: America, Europe, and the Pacific Rim

Foreign manufacturing affiliates are generally the

equals if not the superiors of U.S. manufacturing

firms in yearly investments in new plant and

equipment. They do considerably less R&D, as a

percentage of sales, than U.S. manufacturing fins.

These two measures are the most direct aggregated

data we have on how foreign affiliates contribute to

U.S. technology, knowledge, and productivity. They

are not adequate to make complete judgments of

those contributions and will not resolve the ongoing

debate over whether foreign affiliates contribute to

U.S. technology on balance or make net transfers of

technology and other economic benefits mostly to

their home countries.

In terms of employment practices, foreign affiliates are hard to distinguish from domestic companies. ” In manufacturing, they pay about the same

compensation as domestic firms, and more than

American firms overall, but this is due more to their

disproportionate investment in high-wage service

industries than to any propensity to pay more than

comparable American establishments. Foreign affiliates are neither more nor less reliable employers

than U.S. companies; affiliates are about as likely to

lay off workers during economic downturns as U.S.

companies. 3 Their qualitative contributions to the

competence and knowledge of American employees

is based on anecdotal evidence. Some foreign firms

have made special contributions to American managers’ and workers’ knowledge and skills, as, for

example, the New United Motor Manufacturing, Inc.

(NUMMI) joint venture with Toyota did for General

Motors’ managers, engineers, and shop-floor workers. In other cases, foreign control seems to have

made little difference in the behavior or attitudes of

managers or workers; and in a few cases, foreign

control has been a source of strife.

The most noticeable difference between foreign

affiliates and U.S. firms is in their propensity to

import. Firms invest abroad mainly to sell abroad; to

differing degrees, that means selling products made

at home. The overall trade deficit associated with

foreign affiliates is sizable--a merchandise trade

deficit in 1988 of $90 billion, compared with an

overall U.S. merchandise trade deficit of $120

billion. Affiliates of U.S. firms in other countries

have in the past generated substantial trade surpluses

for the United States, but those surpluses are

declining. In 1988, trade between U.S. parent

companies and their foreign affiliates produced a

merchandise trade surplus of about $8 billion.

Japanese affiliates have by far the greatest propensity to import of any foreign affiliates, and most of

what they import is made in Japan. European

investors import more, per dollar of sales, than

American firms or Canadian affiliates, and most of

what they import is from other countries in Europe;

their inclination to import from all of Europe is not

as great as that of Japanese affiliates to import from

Japan.

It is simplistic, however, to hold imports by

foreign direct investors responsible for the high U.S.

trade deficits. The fundamental causes of our poor

trade performance are the Nation’s anemic savings

rate and declining overall competitiveness of its

manufacturers, based on the ability to make highquality products at reasonable costs.4 Economic

theory also argues that imports in any particular

sector do not affect the overall trade balance, but

rather exert their effect on the value of the dollar.

Macroeconomic factors-specifically, domestic savings (including government surpluses or deficits)

and domestic investment-are considered the determining factors in the overall size and direction of the

current account trade balance. If foreign investors’

imports persistently outweigh exports, and this

makes for a greater U.S. trade deficit, then presumably the dollar will fall, which tends to promote U.S.

exports and balance the current account.5 This

process is costly. A persistently weak dollar can

enfeeble the U.S. economy and lower the standard of

living.

The furor over foreign direct investment (FDI)

seems ironic to some, who point out that much of it

is a natural response to nations’ discriminatory trade

policies. Firms invest abroad for many reasons; one

is to continue to sell products abroad when exporting

becomes difficult. Trade policy actions that limit

Japanese exports are primary motivations for the

heavy Japanese investments in the United States and

Europe over the past decade or so. When the

Japanese Government wished to protect Japanese

firms from foreign competition in the postwar

decades, it was obliged to limit both imports and

direct investment (see ch. 6).

Another complication is the growth in international strategic alliances of all types, only some of

which can be classed as direct investment. Crosslicensing agreements, some joint ventures, and small

equity investments do not show up in statistics on

direct investment, but they do affect things that
Chapter 3--American Firms, Foreign Firms: Contributions to the Nation ● 87

governments care about deeply. A current debate

focuses on participation of foreign companies (or

their offshore affiliates) in government-funded R&D

consortia. Even when foreign firms or their affiliates

are excluded, the web of technology development

agreements between U.S. companies and foreign

companies makes it likely that at least some of the

knowledge generated in such programs will go

abroad. It has never been possible for governments

to control international dissemination of technology,

even before firms had extensive international operations. However, with the proliferation of international activity of all types, the speed of technology

diffusion is lessening and the control governments

have over it are diminishing.

In the United States and Europe,6 the debate over

how to treat foreign affiliates focuses heavily on

Japanese affiliates. Japanese companies are the most

feared, because they have reputations for manufacturing excellence and voracious appetites for technology, and also because they are perceived to

behave in more nationalistic ways than firms from

North America or Europe. Some anecdotal evidence

bears out this perception. Besides differences in

patterns and magnitude of trade, Japanese investors

are more likely than other foreign investors to retain

control of the operations by hiring Japanese, rather

than host country, managers; more likely to equip

their factories with Japanese machinery; and more

likely to refer significant decisions to Japanese

headquarters. These things are changing. Japanese

firms in a recent MITI survey plan to give greater

control and discretionary power to their foreign

affiliates in the next 5 years, but the majority will

still maintain control at home. The effect of Japanese

management practices on the host country-good or

bad—is not yet known. Nevertheless, differences in

the behavior of Japanese investors, along with their

formidable records in international competition, will

continue to make Japanese direct investment a

highly charged political focus.

INTRODUCTION

The interests of nations and firms are sometimes

similar, sometimes not. Some of the things firms

want-a stable business environment, productive

workers, healthy profits and growth-are also attractive to governments, which is why so many governments try to improve the climate for private enterprise within their borders. But not all businesses are

equally attractive to governments, and some of the

things businesses want may go counter to some

government interests. Nations and firms often have

different stakes in the international transfer of

weapons, particularly advanced weapons and the

high-technology equipment needed to make them.

Some enterprises contribute disproportionately to

pollution and other public safety hazards; some

consume large quantities of scarce natural resources.

Thus, while governments at many levels may be

assiduous in attracting firms from outside the

country or region to locate there, they may also

regulate the activities of firms in ways that discourage investment.

The fit between corporate interests and governments’ objectives is growing more important to the

United States. With many State and local governments actively courting foreign investment, and

foreign firms and their attendant lobbies becoming

more prominent players in American public policy,

the Federal Government is more and more often

forced to deal with issues of foreign ownership and

control. The issue comes up in various ways. There

is increasing concern over foreign investment in real

estate and its effect on local real estate prices,

especially with respect to Japan, and particularly in

areas such as Los Angeles and Hawaii.7 In the late

1970s and early 1980s, for example, Middle Eastern

investment caused concern, and Japanese investment in American banking and finance is a current

issue. National security is also a concern; in 1988

Congress authorized the President to suspend or

prohibit any foreign acquisition of an American firm

that is deemed to threaten defense production or the

ability of domestic industries to meet national

defense requirements.8 There is a burgeoning debate

on the effect of FDI on American manufacturing

competitiveness. While all of these issues are

important, only the latter is of concern in this study.

Before going on, however, we note that different

issues may call for different definitions of what FDI

is, and how concerned we are over regulating it; we

will address only one of the issues in this chapter,

and the discussion does not apply to all other

foreign-investment issues.

Finally, we should consider whether multinational firms that are nominally American are so

globalized that their interests and the Nation’s

interests are not likely to have much in common.

This is the “Who Is Us?” question. Robert Reich,

who framed the question in these terms, contrasted

two hypothetical companies: one with headquarters
88 . Competing Economies: America, Europe, and the Pacific Rim

in the United States but with much of its R&D and

most of its sales, assets, complex manufacturing, and

jobs in foreign countries; the other, headquarters

abroad but with much of its technology development

and most of its jobs in the United States.9

The question of what foreign direct investors

contribute to U.S. technology, competitiveness, and

jobs is complex, and the major subject of this

chapter. Whether the typical U.S. multinational fits

the hypothetical picture of a stateless, thoroughly

globalized company is easier to answer. There may

be a few such companies, and there maybe more in

the future, but for now that is a false picture.

U.S.-based multinationals do most of their business

in the United States, and most of their jobs and

technology development are here. Overall, they are

identifiably American companies, and their competitive performance is linked to that of the Nation.

THE BASICS: WHO INVESTS WHERE

AND IN WHAT

U.S. Multinationals’ Activities at Home

and Abroad

In 1988 (the latest year for which data are

available), U.S. multinational companies had 78

percent of their total assets, 70 percent of their sales,

and 74 percent of their employment in the United

States. 10 All these percentages were higher than in

1977 (the first year in this data series). There was no

consistent trend in the 1980s toward more footloose

operations by U.S. multinationals, slightly to the

contrary in fact. Although direct investment abroad

by U.S. multinationals increased during those years,

so did their investments at home.

The data also indicate that U.S. multinationals are

keeping good jobs and technology development at

home. In 1988, compensation per employee in

affiliated companies abroad was about 72 percent of

that for employees of the parent company in the

United States. Assets per employee in the affiliates

were 77 percent of the figure for parent companies,

which implies that the more productive jobs resided

in the United States.ll The same applies to R&D.

The latest government figures for the location of

R&D spending by U.S. multinationals date from

1982.12 At that time, spending for R&D by foreign

affiliates was under 9 percent of the total for parents

and affiliates; this compared with affiliates’ share of

total sales, which in 1982 was 33 percent. R&D as

Figure 3-1—Foreign Direct Investment in the

United States: Sales of Manufacturing Affiliates

Billions of dollars 300 1

250 -

200 -

<

150 -

100 -

50 b

T T ,

1977 78 79 80 81 82 83 84 85 86 87 88

— Total FDIU S

— Europ e

- Japan

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis,

Foreign Direct Investment in the United States: Operations of

U.S. Affiliates, 1977-80, 1985, table E-5, and subsequent

series.

a percent of sales was nearly three times higher

among U.S. parent manufacturing companies than

among manufacturing affiliates abroad (3.33 percent

v. 1.15 percent).

Some U.S. multinationals have important R&D

facilities in other countries. For example, American

automobile companies develop and sell unique

products in Europe. It was two scientists in IBM’s

Zurich research laboratory who discovered hightemperature superconductivity in 1986; even so,

IBM does 80 percent of its R&Din the United States,

about 12 percent in Europe, and 8 percent in Asia.13

The overall picture may change. The European

Community (EC) proposes to allow companies that

have filly integrated operations, that include R&D,

manufacturing, and sales within Europe, to participate in EC-funded R&D programs. This may have

the effect of shifting more of U.S. multinationals’

R&D, or more of their high value-added jobs, to

Europe. As of now, however, much the greater part

of these activities take place in the United States.

FDI in the United States

Direct investment in the United States rose from

16 percent of total world direct investment in 1980

to 25 percent in 1987, while the shares of Europe,

Canada, Australia, and South Africa decreased.14 In

1990, foreign fins’ total direct investments in the

United States amounted to $404 billion, compared

with direct investments of $421 billion by U.S.

multinationals in foreign countries. The gross prod-
Chapter 3--American Firms, Foreign Firms: Contributions to the Nation ● 89

Figure 3-2—Foreign Direct Investment, 1977-88: Assets of Major Investors

Billions of dollars

300

2 5 0

2 0 0

150

I

1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988

J

Franc e m Germany ~ Netherlands

= U.K. = Japan ~ Canada

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, Foreign Direct Investment in the United

States: Operations of U.S. Affiliates, 1977-80, 1985, table B-7, and subsequent series.

uct of foreign affiliates in the United States accounted for 3.4 percent of GNP in 1987, up from 1.8

percent in 1977.15

The rapidly increasing Japanese direct investment

in manufacturing plants within the United States has

made most of the news. There are three common

measures of the importance of direct investment:

sales, assets, and position.l6 Japanese affiliates’

share of the sales of all foreign manufacturing

affiliates in the United States rose from 4 percent in

1977 to 9 percent in 1988 (figure 3-l). The Japanese

share of the total sales of all foreign affiliates was 26

percent, the same at the beginning and the end of the

period. But their investments in manufacturing

during the period show up in their share of affiliates’

assets, which rose from 12 to 24 percent of the total.

By the late 1980s, the assets of U.S. affiliates of

Japanese direct investors stood at $275 billion,

surpassing all the rest, including the United Kingdom, historically the largest foreign direct investor

in the United States (figure 3-2). The total value of

assets of U.K. affiliates stood at $194 billion in

1988. 17 However, the United Kingdom was still by

far the leader in direct investment position, with

investments valued at $108 billion by the end of

1990 (figure 3-3). Japan was second, having passed

the Netherlands in 1988; its direct investment

Figure 3-3-Foreign Direct Investment Position

in the United States, 1990

Billions of dollars

140

120

100

80

60

40

20

0

108.1

83.5

64.3

27.7 27.8

Canada France Germany Japan Netherlands U.K.

w

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis,

Russell B. Scholl, ‘The International Investment Position of the

United States in 1990,” Survey of Current Business, vol. 71, No.

6, June 1991, table 7, p. 32.

position in the United States amounted to $70 billion

in 1989.

Foreign firms’ participation in U.S. manufacturing is greater than their overall participation in other

sectors of the economy. Foreign affiliates accounted

for 12.2 percent of the assets of U.S. manufacturing

in 1987, compared with 8.9 percent of the total net

worth of all nonfinancial corporations.18 Manufac292-889 0 - 91 - 4 QL:3
90 . Competing Economies: America, Europe, and the Pacific Rim

turing jobs were still more skewed to foreign

affiliates, which accounted for 9.0 percent of U.S.

manufacturing employment in 1988 but only 3.4

percent of all U.S. civilian employment.19

The picture is different for Japanese direct investment. About 15 percent of the sales of Japanese

affiliates in the United States is in manufacturing,

compared to 38 percent of the sales of European

affiliates. 20 Over 60 percent of Japanese investors’

sales comes from wholesaling affiliates,21 a far

higher percentage than for any other major direct

investor. This implies that the Japanese interest in

the American market is primarily in selling goods

made in Japan. Of course, a main reason for any firm,

from any nation, to invest in a foreign country is to

sell more goods in that market. However, the heavy

emphasis by Japanese investors on wholesaling

suggests that Japanese fins, compared with those of

other nations, are more interested in exporting and

less interested in producing goods in the country

where the goods are sold.

Trade figures for affiliates support this observation. Japanese affiliates’ imports were significantly

higher than those of European or Canadian affiliates

throughout the period for which we have data

(1977-88). In 1988, imports of Japanese affiliates in

the United States were $75.9 billion, accounting for

51 percent of the imports of all affiliates of foreign

investors, and the Japanese affiliates’ imports amounted

to 34 percent of their sales, compared to 12 percent

for European affiliates.22 Moreover, a detailed survey in 1987 showed that 93 percent of the imports of

Japanese affiliates were from Japan. To be sure, all

affiliates import mostly from the home country (or

in the case of Europe, the home region); 70 percent

of the imports of European affiliates were from

Europe, and 73 percent of the imports of Canadian

affiliates were from Canada.23 But the Japanese

affiliates have by far the highest ratio of homecountry imports of all, as well as the highest imports

relative to sales.

Direct investment in U.S. manufacturing between

1977 and 1988 shows annual increases of 16 percent

in sales and almost 19 percent in assets (tables 3-1

and 3-2). The most rapid growth in manufacturing

sales by foreign affiliates was in transportation

equipment, where affiliates’ sales increased at the

rapid clip of 46.5 percent per year. Most of this was

just where one would expect: in sales of motor

vehicles from Japanese affiliates. If sales of motor

vehicles from wholesaling affiliates are added in, the

influence of Japanese affiliates is even more apparent. In 1988, the combined total of wholesale and

manufacturing sales of motor vehicles, by all foreign

affiliates, amounted to $80.9 billion. Two-thirds of

this ($52.9 billion) was from Japanese affiliates, and

most of it ($44.3 billion) was sales from wholesaling, not manufacturing, establishments.24

Other industries with substantial manufacturing

sales by foreign affiliates include chemicals and

machinery (including electronic equipment); European affiliates are preeminent in both of these major

sectors (table 3-3). About 29 percent of the sales of

European affiliates is in chemicals and allied products, with Germany the leading foreign affiliate in

the sector and the United Kingdom not far behind.

Several European countries have large sales in

machinery, a category that includes machine tools

and various types of production equipment used in

nearly every other industry as well as semiconductors, computers, and consumer electronic goods. The

United Kingdom is a leader in nonelectrical machinery, while France, Germany, and the Netherlands all

have important affiliates in the United States making

electronic products (Thomson, Siemens, and

Philips, respectively) .25 Although there are also

Japanese affiliates making or assembling electronic

products in this country, most of America’s huge

purchases of Japanese electronic goods, from semiconductors to compact disk players, are imports.

Japanese manufacturing affiliates’ sales are concentrated in primary and fabricated metals (steel),

electrical and electronic equipment, and transportation equipment (table 3-4).

Canada and the United States have long had

substantial investment in each other’s markets as a

result of shared language, proximity, and similar

culture and business environments. Canadian direct

investment in the United States is heaviest in

chemicals, 26 followed by primary metals and electrical and electronic equipment (table 3-5).

FDI AND U.S. MANUFACTURING

COMPETITIVENESS

The relationship between FDI and U.S. manufacturing competitiveness is anything but straightforward. In some cases, foreign investment seems to

have stimulated American manufacturers to improve
Chapter 3--American Firms, Foreign Firms: Contributions to the Nation . 91

Table 3-l—Foreign Direct Investment in the United States:

Manufacturing Sales, 1977 and 1988

Annual average

Sales Sales growth rate

1977 1988 1977-88

Industry ($ millions) ($ millions) (percent)

Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $50,489 $258,511 16.0%

Food and kindred products . . . . . . . . . . . . . . . . . . . . . 6,983 32,995 15.2

Chemicals and allied products . . . . . . . . . . . . . . . . . . 16,303 63,245 13.1

Primary and fabricated metals . . . . . . . . . . . . . . . . . . 6,881 32,806 15.3

Primary metal industries . . . . . . . . . . . . . . . . . . . . . . 5,545 20,476 12.6

Fabricated metal products . . . . . . . . . . . . . . . . . . . . 1,336 12,330 22.4

Machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,838 45,933 15.0

Machinery, excluding electrical . . . . . . . . . . . . . . . 4,512 17,905 13.3

Electrical and electronic equipment. . . . . . . . . . . 5,326 28,029 16.3

Other manufacturing:

Textiles and apparel . . . . . . . . . . . . . . . . . . . . . . . . . 1,072 3,746 12.0

Paper and allied products . . . . . . . . . . . . . . . . . . . . 1,803 8,033 14.5

Printing and publishing . . . . . . . . . . . . . . . . . . . . . . . 1,741 12,386 19.5

Rubber and plastics products . . . . . . . . . . . . . . . . 916 11,295 25.7

Stone, clay and glass products . . . . . . . . . . . . . . . 2,022 12,363 17.9

Transportation equipment . . . . . . . . . . . . . . . . . . . . 279 18,649 46.5

NOTE: Individual industries do not add to total manufacturing.

SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis, Foreign Direct Investment in the United

States: Operations of U.S. Affiliates, 1977-80, 1985, table E-5, and Foreign Direct lnvestment i n the United

States, Operations of U.S. Affiliates of Foreign Companies, Preliminary 1988 Estimates, 1990, table E-7.

Table 3-2—Foreign Direct Investment in United States:

Assets of Manufacturing Affiliates, 1977 and 1988

Assets

1977

Industry ($ millions)

Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $41,759

Food and kindred products . . . . . . . . . . . . . . . . . . . . . 4,373

Chemicals and allied products . . . . . . . . . . . . . . . . . . 15,258

Primary and fabricated metals . . . . . . . . . . . . . . . . . . 5,931

Primary metal industries . . . . . . . . . . . . . . . . . . . . . . 4,670

Fabricated metal products . . . . . . . . . . . . . . . . . . . . 1,261

Machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,508

Machinery, excluding electrical . . . . . . . . . . . . . . . 3,754

Electrical and electronic equipment . . . . . . . . . . . 3,754

Other manufacturing

Textiles and apparel . . . . . . . . . . . . . . . . . . . . . . . . . 726

Paper and allied products . . . . . . . . . . . . . . . . . . . . 1,416

Printing and publishing . . . . . . . . . . . . . . . . . . . . . . . 1,361

Rubber and plastics products . . . . . . . . . . . . . . . . 606

Stone, clay and glass products . . . . . . . . . . . . . . . 1,736

Transportation equipment . . . . . . . . . . . . . . . . . . . . 587

Annual average

Assets growth rate

1988 1977-88

($ millions) (percent)

$281,316

30,317

80,911

34,018

17,495

16,523

45,857

20,507

25,351

18.9%

19.2

16.4

17.2

12.8

26.4

17.9

16.7

19.0

4,132 17.1

7,015 15.7

15,075 24.4

10,164 29.2

21,113 25.5

. . 9.666 29.0

NOTE: Individual industries do not add to total manufacturing.

SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis, Foreign Direct Investment in the United

States: Operations of U. S. Affiliates, 1977-80, 1985, tabie B-7, and Foreign Direct lnvestment in the United

States, Operations of U.S. Affiliates of Foreign Companies, 1988, 1990, table B-5.

.

their competitive performance. An example comes from 1981 to 1985, and probably also to neutralize

from motor vehicles. the effects of other forms of protection that might be

imposed in the future. Honda was the pioneer.27

Japanese automakers began assembling motor With several years of experience making motorvehicles in the United States in the 1980s, partly to cycles in the United States, it built the first Japanesebypass the voluntary restraint agreement that limited owned assembly plant in Marysville, Ohio, and

Japanese motor vehicle exports to the United States began producing cars there in 1982. Honda’s entry
92 ● Competing Economies: America, Europe, and the Pacific Rim

Table 3-3-European Direct Investment in the United States:

Manufacturing Sales, 1977 and 1988

Sales Sales Percent of

1977 1988 total

Industry ($ millions) ($ millions) in 1988

Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $36,754 $166,608

Food and kindred products . . . . . . . . . . . . . . . . . . . . . 4,594 25,547 15.3%

Chemicals and allied products . . . . . . . . . . . . . . . . . . 15,330 47,421 ,28.5

Primary and fabricated metals . . . . . . . . . . . . . . . . . . 3,694 14,148 8.5

Primary metal industries . . . . . . . . . . . . . . . . . . . . . . 2,886 6,187 3.7

Fabricated metal products . . . . . . . . . . . . . . . . . . . . 808 7,961 4.8

Machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,701 28,385 17,0

Machinery, excluding electrical . . . . . . . . . . . . . . . 3,006 11,839 7.1

Electrical and electronic eqp. . . . . . . . . . . . . . . . . . 3,695 17,546 10.5

Other manufacturing

Textiles and apparel . . . . . . . . . . . . . . . . . . . . . . . . . 780 2,303 1.4

Paper and allied products . . . . . . . . . . . . . . . . . . . . NAa

5,156 3.1

Printing and publishing . . . . . . . . . . . . . . . . . . . . . . . 481 6,552 3.9

Rubber and plastics products . . . . . . . . . . . . . . . . 772 5,112 3.1

Stone, clay and glass products . . . . . . . . . . . . . . . 1,878 9,964 6.0

Transportation equipment. . . . . . . . . . . . . . . . . . . . NA 8,923 5.4

aData suppressed to avoid disclosure of information for individual companies.

NOTE: Individual industries do not add to total manufacturing.

SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis, foreign Direct Investment in the United

States: Operations of U.S. Affiliates, 1977-80,1985, table E-5, and Foreign Direct lnvestment in the United

States, Operations of U.S. Affiliates of Foreign Companies, 1988, table E-8.

Table 3-4-Japanese Direct Investment in the United States:

Manufacturing Sales, 1977 and 1988

Percent of

Sales Sales total

Industry 1977 1988 in 1988

Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,255 $33,180

Food and kindred products . . . . . . . . . . . . . . . . . . . . . 275 1,055 3.2%

Chemicals and allied products . . . . . . . . . . . . . . . . . . 121 2,060 6.2

Primary and fabricated metals . . . . . . . . . . . . . . . . . . 654 5,390 16.2

Primary metal industries . . . . . . . . . . . . . . . . . . . . . . NAa

3,716 11.2

Fabricated metal products . . . . . . . . . . . . . . . . . . . . NA 1,675 5.0

Machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 497 8,992 27.1

Machinery, excluding electrical . . . . . . . . . . . . . . . 317 3,276 9.9

Electrical and electronic equipment . . . . . . . . . . . 180 5,716 17.2

Other manufacturing

Textiles and apparel . . . . . . . . . . . . . . . . . . . . . . . . . 67 346 1.0

Paper and allied products . . . . . . . . . . . . . . . . . . . . NA 635 1.9

Printing and publishing . . . . . . . . . . . . . . . . . . . . . . . NA 1,094 3.3

Rubber and plastics products . . . . . . . . . . . . . . . . 17 2,842 8.6

Stone, clay and glass products . . . . . . . . . . . . . . . NA 1,043 3.1

Transportation equipment. . . . . . . . . . . . . . . . . . . . NA 8,584 25.9

aData suppressed to avoid disclosure of information about particular companies.

NOTE: Individual industries do not add to total manufacturing.

SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis, Foreign Direct Investment in the United

States: Operations of U. S. Affiliates, 1977-80, 1985, table E-5, and Foreign Direct lnvestment in the United

States, Operations of U.S. Affiliates of Foreign Companies, 1988, 1990, table E-8.

into U.S. motor vehicle production was followed by In the 1970s and early 1980s, the prevailing view

Nissan, Mazda, Subaru-Isuzu, Toyota, and Mitsu- among American automakers and their “suppliers

bishi (in a joint venture with Chrysler), By 1991, the was that the Japanese advantage in the American

Japanese transplants (including the joint ventures) market stemmed mainly from low labor costs. It took

are expected to be able to produce nearly 3 million firsthand demonstrations of Japanese manufacturing

vehicles in North America.28 prowess in America to convince them that the real
Chapter 3--American Firms, Foreign Firms: Contributions to the Nation . 93

Table 3-5-Canadian Direct Investment in the United States:

Manufacturing Sales, 1977 and 1988

Sales Sales Percent of

1977 1988 total

Industry ($ millions) ($ millions) in 1988

Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,650 $38,307

Food and kindred products . . . . . . . . . . . . . . . . . . . . . 1,972 3,740 9.80/o

Chemicals and allied products . . . . . . . . . . . . . . . . . . 649 11,902 31.1

Primary and fabricated metals . . . . . . . . . . . . . . . . . . 2,068 5,842 15.3

Primary metal industries . . . . . . . . . . . . . . . . . . . . . . 1,747 4,644 12.1

Fabricated metal products . . . . . . . . . . . . . . . . . . . . 321 1,198 3.1

Machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,108 5,248 13.7

Machinery, exe. electrical . . . . . . . . . . . . . . . . . . . . 1,489 1,343 3.5

Electrical and electronic equipment. . . . . . . . . . . 1,619 3,905 10.2

Other manufacturing

Textiles and apparel . . . . . . . . . . . . . . . . . . . . . . . . . NAa

668 1.7

Paper and allied products . . . . . . . . . . . . . . . . . . . . NA 1,990 5.2

Printing and publishing . . . . . . . . . . . . . . . . . . . . . . . 1,171 3,463 9.0

Rubber and plastics products . . . . . . . . . . . . . . . . 125 2,024b

5.3

Stone, clay and glass products . . . . . . . . . . . . . . . 815 690 1.8

Transportation equipment . . . . . . . . . . . . . . . . . . . . NA 490 1.3

aData supressed to avoid disclosure of information for individual companies.

b

lncludes only information for plastics; data for rubber products was suppressed to avoid disclosure of information for

an individual company.

NOTE: Individual industries do not add to total manufacturing.

SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis, Foreign Direct Invesfrnenf in the United

Sfates:Operations of U.S. Affiliates, 1977-80,1985, table E-5, and Foreign Direct lnvestment in the United

states, Operations of U.S. Affiliates of Foreign Companies, 1988, 1990, table E-8.

advantage of the Japanese manufacturers was their

rigorous and ceaseless attention to quality and

efficiency in manufacturing. The Japanese transplants have the best quality record (in terms of

defects per 100 vehicles) and average productivity

(in hours per auto) of any plants in North America,

and the ‘worst’ Japanese transplants have about the

same productivity as the average for U.S. plants in

North America (figures 3-4 and 3-5).29

For American auto parts makers, the lesson was

more than just a demonstration. The exacting

standards of quality, price, and delivery time that the

Japanese auto assemblers held suppliers to in Japan

were, according to the Japanese fins, beyond what

most American auto parts and components makers

were accustomed to providing to Detroit. In addition, business practices of the American and Japanese auto assemblers were quite different: Japanese

assemblers had (and have) many fewer suppliers

than the American assemblers, and those suppliers

are expected to deliver whole assemblies instead of

individual parts. Japanese assemblers also expected

collaboration in initial design and quick turnaround

on design changes, which required in-house engineering ability that American components makers

were unaccustomed to providing and often did not

have. 30 Few were able to establish relations with

Japanese assemblers in North America. By 1987,

researchers from the MIT International Motor Vehicle Program estimated that the local parts content of

the Japanese assemblers in North America was only

30 percent; this was forecast to increase to 50 percent

by 1990.31

American suppliers who were able to negotiate

arrangements with Japanese transplants report difficulties in establishing the relationship, but those

who succeeded also made positive changes. These

include improving product quality and inventory

management, increasing productivity, and expanding engineering, design, and R&D.32 Many of the

same kinds of changes are increasingly required by

Ford, General Motors, and Chrysler in their own

attempts to compete with Japanese imports and

transplants.

FDI can also enhance technology development.

For example, American manufacturers have benefited from the patient capital or technology-oriented

strategies of their foreign investors. When the West

German chemical firm Hoechst purchased Celanese

Corp., Hoechst’s objective was to find a technologyintensive strategy for competing in the U.S. market.33 Rather than expand its own U.S. operation,

Hoechst purchased Celanese, an existing American

chemical company with well-recognized products,

competent R&D, and established customer relation-
94 ● Competing Economies: America, Europe, and the Pacific Rim

Figure 3-4-Automobile Assembly Plant Defects,

1988-89

Hours/vehicle

100

8 0

60

4 0

20

0

50.9 49.0

Figure 3-5—Automobile Assembly Productivity, 1988

Hours/vehicle

30r

25

20

1 16.8

78.5

15

10

5

n I

Japan/Japan Japan/U.S. U.S./U.S.

Japan/Japan = Japanese-owned Plants located in Japan

Japan/U.S. = Japanese-owned plants and joint ventures in the United States

U.S./U.S. = U.S.-owned plants in the United States

SOURCE: John F. Krafcik, “Training and the Automobile Industry: international Comparisons,” contractor report prepared for the Office of

Technology Assessment, February 1990, pp. 8-9.

ships. Despite initial difficulties in reconciling the

corporate R&D cultures of the two firms, Celanese’s

R&D spending increased by 10 percent annually

after the acquisition. Moreover, Hoechst was more

willing to engage in long-term research than

Celanese’s management had been, and less reluctant

to make major commitments to projects with uncertain and distant payoff.

While there are many examples of foreign investment that seem beneficial or at worst neutral in their

impact on manufacturing competitiveness, there are

worries as well. Most of the worry centers on Japan

and several high-technology industrial sectors. In its

simplest form, the fear is that Japanese investors,

with their appetite for new technology, their deep

pockets, and their perceived preferences for doing

business with other Japanese companies, invest in

American high-technology companies in order to

gain access to new technologies, but that most of the

benefits of such investment (jobs, economic growth,

contributions to the national stock of technology)

will end up in Japan. Another worry is that, since

Japanese corporations investing abroad have commonly been followed by their Japanese suppliers,

American businesses that could benefit from relationships with Japanese multinationals might be

crowded out.

Such accusations surfaced recently, when two

former executives of Ardent Computer sued Kubota

20.5

25.0

“

—

Japan/Japan Japan/U.S. U.S.U.S.

Japan/Japan = Japanese-owned plants located in Japan

Japan/U.S. = Japanese-owned plants and joint ventures in the United States

U.S./U.S. = U.S.-owned plants in the United States

SOURCE: John F. Krafcik, “Training and the Automobile industry: international Comparisons,” contractor report prepared for the Office of

Technology Assessment, February 1990, pp. 8-9.

Ltd., a Japanese tractor company that had acquired

a stake in Ardent in 1986. The two executives allege

that Kubota forced Ardent to merge with Stellar

Computer, and conspired to transfer the technology

of the merged company (Stardent) to a Kubota

subsidiary, Kubota Computers America.34 Kubota

denies the claims, saying instead that the U.S.

executives were failed managers who demanded

money and sued after they were denied payment.

Fear of Japanese dominance also colored American reaction to the investment by some of Japan’s

big electronics companies in R&D centers in the

United States.35 The companies are staffing these

centers by hiring leading American computer scientists from American universities and corporate labs,

with offers of high salaries, excellent equipment, and

plenty of R&D money. Often, R&D investments

within this country are used as a measure of the

positive value of FDI. But some analysts see the

hiring of America’s best computer brains by powerful Japanese companies as threatening one of the

last, best competitive advantages of U.S. computer

companies-basic research in computer science.

These cases are part of the fear that some people

have about Japanese firms. The danger, according to

those who suspect Japanese investors of playing by

nationalistic rules, is that American companies will

end up depending on Japanese companies almost
Chapter 3--American Firms, Foreign Firms: Contributions to the Nation . 95

exclusively for key components and equipment,36

and even that the next big creative advances in

technology may be locked up in patents held by

Japanese companies. This dependence, they fear,

will be the downfall of the American companies.

What does this have to do with FDI? According to

this analysis, Japanese investment is simply another

way (along with exports) for Japanese companies to

dominate their industries. Such fears are made more

plausible by the fact that most Japanese businesses

large enough to deal internationally operate in

keiretsu, or groups that hold each other’s stock and

give preference to other group members in procuring

supplies and services in ways that tend to exclude

outsiders.

Fear of Japanese dominance may be rooted in

xenophobia, jealousy, experience, common sense, or

some combination of all of these. Many people

familiar with Japanese business practices regard

Japanese investors as more likely than Europeans or

Canadians to direct the benefits of their investments

in America to Japan. Evidence on either side of this

debate is sparse. What little there is does suggest that

there are good reasons to keep an eye on foreign

investment in general, and Japanese investment in

particular, and monitor the effects on American

competitiveness.

What should we keep track of? More and more,

developed nations are grappling with these issues,

particularly as the strains on the postwar trade

regime intensify. Most focus on the readily available

measures of fins’ behavior—R&D, employment,

worker compensation, value added, and the like. A

common problem is that many of these measures

gauge inputs, rather than the outputs that nations are

interested in. It is easy to argue about the effects of

FDI without proper measures of what foreign

investors contribute to the nation’s stock of knowledge and overall well-being, since many of the

arguments on all sides depend on unsatisfactory

measures and anecdotes.

In the United States, the reevaluation of policies

toward international investment is a result of the

tremendous growth in FDI during the past two

decades.37 In large part, the European Community

seems committed to making the benefits of 1992

reforms open to anyone, but there are some important questions and exceptions. In a few critical

industries, principally microelectronics and motor

vehicles, it appears that firms wishing to sell their

products in Europe under the same conditions as

European firms will need to make substantial

portions of the products in Europe. As this report is

written, for example, European negotiators are

discussing domestic content regulations ranging up

to 85 percent on motor vehicles, and a transition

period of 5 years, starting in 1993, during which

Japanese automakers agree to limit exports to the

European Community countries.38 In electronics,

the European Community has decided that the most

significant part of semiconductor manufacture, diffusion in wafer fabrication, must be done in Europe

for semiconductors to count as of local origin (and

thus not be subject to the EC’s 15 percent tariff).

Some expect this decision to result in a boom in

wafer fabrication in Europe, primarily on the part of

American and Japanese companies.39

Clearly, one thing the European Community is

interested in is jobs—hence the emphasis on local

content in big-ticket trade items like semiconductors

and automobiles, which account for a large share of

Europe’s imports. There is more to it than jobs

though. Countries are concerned about the extent to

which foreign investors are players in the political

process, add to a nation’s stock of knowledge and

technology, contribute to imports and exports, pay

taxes, and enhance human resource development.

All of these are things that can be expected to

contribute to a nation’s well-being, and to the

competitiveness of its fins.

Contributions to Knowledge and Technology

Firms add to nations’ technical and scientific

knowledge in many ways, most of which are

difficult to measure. One measure that is available is

the amount spent on R&D.40 R&D spending is often

used as a proxy for all contributions foreign firms

with domestic operations make to the nation’s

technical knowledge. Spending on plant and equipment and reinvestment of earnings in domestic

operations are also sometimes used to indicate levels

of contributions to technology. It is important to

keep in mind, however, that such figures are only

proxies and may obscure the complexities of what

goes on in the real world.

The R&D Measure

R&D spending is usually measured as a percentage of net sales, known as R&D intensity. Figure 3-6

and table 3-6 show that the manufacturing affiliates

of foreign direct investors lag behind U.S. manufac-
96 ● Competing Economies: America, Europe, and the Pacific Rim

Figure 3-6-R&D Intensity, U.S. Manufacturers and

U.S. Affiliates of Foreign Manufacturing Firms

4 Percent

c

3 -

1

2

-

[

1 -

0 I 1 1 1 1 1 I 1 , I

1977 78 79 80 81 82 83 84 85 86 87 88

~ U.S. manufacturing ~ Total FDIUS

SOURCE: Economic Report of the President, 1990 (Washington, DC: U.S.

Government Printing Office, February 1990), table C-90; National Science Foundation, Division of Science Resources,

unpublished data; and U.S. Department of Commerce, Bureau

of Economic Analysis, Foreign Direct Investment in the United

States: Operations of U.S. Affiliates, 1977-80, 1985, table H-3,

and subsequent series.

turers in R&D intensity .41 This means that domestic

firms perform a greater share of their R&D here than

foreign firms operating here do, which is just what

might be expected. As noted, U.S. multinational

fins’ R&D intensity is much higher in the United

States than it is in their various foreign outposts.

Data showing R&D of foreign affiliates by

country and industry exist for only one year, 1987.

In that year, R&D (by manufacturing fins) as a

percent of manufacturing sales of European affiliates was 2.3 percent, close to the average for all

foreign affiliates. However, the R&D intensity for

Japanese manufacturing affiliates was much below

average, 1.1 percent.42 It is likely that Japanese

manufacturing multinationals, like U.S. multinationals, were doing most of their R&D at home.

There is good reason for R&D intensity to be

higher in the home country of multinational companies than in their foreign affiliates. R&D comprises

a variety of activities, some of which are not

particular to specific markets. For example, much

basic and applied research done by firms is not

dependent on the eccentricities of different markets,

and can probably be done most efficiently at a

central R&D facility. Development and design

work, on the other hand, might need to be apportioned to each of a company’s major markets in order

to be tailored to the tastes and specifications of local

Table 3-6-Manufacturing Research and Development

Intensity: Foreign Direct Investors and U.S. Firms,

1977-88 (In percent)

Total U.S.

manufacturers Company funded All FDIUSa

Year (in percent) (in percent) (in percent)

1977 . . . . . . . . . . 2.2%

1978 . . . . . . . . . . 2.1

1979 . . . . . . . . . . 2.1

1980 . . . . . . . . . . 2.2

1981 . . . . . . . . . . 2.3

1982 . . . . . . . . . . 2.7

1983 . . . . . . . . . . 2.9

1984 . . . . . . . . . . 3.0

1985 . . . . . . . . . . 3.3

1986 . . . . . . . . . . 3.6

1987 . . . . . . . . . . 3.6

1988 . . . . . . . . . . 3.5

NA

NA

1.470

1.5

1.6

1.9

2.0

2.1

2.3

2.5

2.4

2.2

1.570

1.5

1.3

1.9

1.9

2.2

2.2

2.3

2.4

2.5

2.5

2.4

aManufacturing R&D as a percent of sales by manufacturing affiliate.

NOTE: Total R&D intensity includes ail funding for industrial R&D supplied

by companies, the Federal Government and other sources; whereas

company-funded R&D includes all funded industrial R&D work

performed within company facilities from all sources except the

Federal Government.

SOURCES: U.S. Department of Commerce, Bureau of Economic Analysis,

Foreign Direct Investment in the United States: Operations of

U.S. Affiliates, 1977-80, 1985, table H-3, and subsequent

series; and National Science Foundation, Division of Science

Resources Studies, unpublished data.

consumers. For example, all the major Japanese auto

companies do design work (mainly styling) in the

United States.

Another way of gauging R&D contributions is in

terms of spending per employee.43 By this measure,

foreign direct investors appear quite similar to U.S.

firms (figure 3-7). There are complications in

comparing R&D figures across nations, since the

U.S. Government and foreign governments contribute different amounts for different purposes (e.g.,

defense v. civilian) to industrial R&D. All in all,

however, there appears to be rough parity in R&D

spending per employee between U.S. firms and

foreign direct investors. Why should this be so,

when R&D intensity is substantially higher for

American fins? Interpretation is rather risky, since

detailed knowledge of the underlying factors is

lacking. However, it seems likely that affiliates or

subsidiaries of foreign fins, no matter how firmly

entrenched in countries outside of headquarters, are

not as fully integrated to include all line and staff

functions of the company as is headquarters. The

affiliates may have a full production and sales staff,

but are less likely to include functions such as

accounting, finance, strategy, and planning in the

foreign location.
Chapter 3--American Firms, Foreign Firms: Contributions to the Nation . 97

Figure 3-7-R&D/Manufacturing Employee FDIUS

and U.S. Manufacturers

Thousands of dollars

5

c

4

-

3

-

2

-

?6

1

1 1 1

1977 78 79 80 81 82 83 84 85 86 87 88

1 1 ` I 1 1 1 I

~ U.S. manufacturing ~ Foreign mfg. affiliates

SOURCE: U.S. Department of Labor, Bureau of Labor Statistics, “Employment and Earnings, November 1988,” table B-1; National

Science Foundation, Division of Science Resources, unpublished data; and U.S. Department of Commerce, Bureau of

Economic Analysis, Foreign Direct Investment in the United

States: Operations of U.S. Affiliates, 1977-80, 1905, tables F-1

and H-3, and subsequent series.

Investment in Plant and Equipment

Besides R&D, another possible measure of a

firm’s contribution to the nation’s technological

proficiency is its investment in plant and equipment.

While plant and equipment are not all there is to

technology, they do embody and contribute to

technology. Advanced equipment and welldesigned plants, together with well-trained workers,

can make a significant contribution to productivity

and product quality. Investment in plant and equipment may make a less direct or certain contribution

to technology than R&D. Investment in R&D is

sometimes embodied in products or patents that can

be widely diffused, while investments in plant and

equipment may raise the productivity of only a few

plants, and the lessons learned from such investments are difficult to transfer. Nonetheless, modern

plant and equipment and intelligent use of workers

and machinery do improve productivity and familiarity with modern methods of production: therefore

plant and equipment investment is commonly associated with improved productivity and advancing

technology.

For the period 1977-88, foreign manufacturing

affiliates have been at least the equal of U.S.

manufacturing firms in their yearly spending for new

plant and equipment (figure 3-8). They far surpassed

the American firms in the late 1970s and early

Figure3-8-Swndin~ for New Plant and Equipment,

Foreign-Manufacturing Affiliates and

U.S. Manufacturers

Percent of manufacturing sales

10 ~

8 1A

nl 1 I 1 1 1 1 I 1 1 1

1977 78 79 80 81 82 83 84 85 86 87 88

~ U.S. firms ~ Foreign affiliates

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis,

Foreign Direct Investment in the United States: Operations of

U.S. Affiliates, 1977-80, 1985,. tables D-29 and E-1, and

subsequent series; Economic Report of the Presidentr 1990

(Washington, DC: U.S. Government Printing Office, February

1990), table C-90; and U.S. Department of Commerce, Bureau

of the Census, “Plant and Equipment Expenditures and Plans,”

Unit@ States Department of Commerce News, Sept. 13,1990,

table 4.

1980s, fell behind for a few years in the mid-1980s, ‘

and more recently pulled ahead.

Figures are available for 3 years (1980, 1987, and

1988) on property, plant, and equipment investment

as a percentage of sales for manufacturing affiliates

by country of the parent company.44 These data

show that the Japanese far outstripped their European counterparts, and foreign manufacturing affiliates in general, in such investments per dollar of

sales (figure 3-9). One likely reason is the Japanese

propensity to invest directly in new plants rather

than to acquire or buy a share in existing ones, as the

European investors are more prone to do.45 Another

is that the concentration of investment in capitalintensive industries--disproportionate investments

in motor vehicles and electronics-means higher

investment/sales ratios.

Japanese FDI: A Special Case

Japanese direct investment in the United States

differs from that of other countries in more than one

way. As noted, the very high proportion of sales

from wholesale affiliates suggests that a dominant

interest in Japanese investment is to sell goods made

in Japan. This accords with the responses of firms

surveyed by MITI in a recent survey.46 Over 80

percent of respondents indicated that their motive
98 ● Competing Economies: America, Europe, and the Pacific Rim

Figure 3-9—investment in Plant, Property and

Equipment as a Percent of Sales of

Manufacturing Affiliates

Percent

14

12

10

8

6

4

2

0

1980 1987 1988

= All foreign affiliates = European affiliates

m Japanese affiliates

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis,

Foreign Direct Investment in the United States, 1980, October

1983, tables D-9 and E-1, and subsequent series.

for investing offshore was to increase sales in local

markets. This motive ranked highest on the list of all

reasons in all markets.47 Other motives also strongly

suggest that the main reason for investing was to

increase sales; nearly 50 percent of respondents said

they invested in the United States because of U.S.

trade regulations (implying that they were substituting local production for exports); about 25 percent

invested in the United States “to obtain a good

partner in the local market.’ ’48

Another main interest (greater than that evident in

other countries’ investments) seems to be gaining

49 For example, access to advanced technologies.

contrary to the general Japanese characteristic of

majority ownership in foreign affiliates, minority

Japanese investments in small American hightechnology firms almost doubled from 1988 to 1989,

rising from $176 million to $320 million. This can

be seen as an effort by Japanese companies to gain

access to U.S. technology and diversify into new

businesses. It does not necessarily imply that Japanese firms are somehow siphoning technology from

the United States, for the U.S. firms get something

in return. Many find that FDI is a good entree to

foreign markets, and a large Japanese partner may

have distribution channels that small firms could not

duplicate. 50

The advantages of a tie-up between a small

American company and a big Japanese firm maybe

illustrated by two recent agreements signed between

Nicolet Instruments Corp. and Matsushita Communication Industrial Co. Ltd. The agreements grant

Matsushita the right to sell a line of Nicolet’s

oscilloscopes in Japan under Matsushita’s name

(something Matsushita doubtless has an advantage

in doing), and provide for cooperation and exchange

of technical information between the two companies

in the development of electronic measurement

products. According to the CEO of Nicolet, the

alliance greatly enhances Nicolet’s market penetration for its new oscilloscope in Japan, while the

technical exchanges between the two companies

will allow them to develop a new line of instruments

to be marketed worldwide.51 While the agreement

between Nicolet and Matsushita may or may not

involve direct investment, the mechanics are familiar; many Japanese investments in American hightechnology companies involve similar arrangements.52

Moreover, the different interests of the Japanese

investors may prove a boon to American hightechnology companies as well. According to one

source, Japanese firms are interested in one thing:

long-term gain, which translates to a strong interest

in R&D. Typically, Japanese middle managers have

the authority to commit significant funds to R&D or

joint development programs. U.S. investors in hightechnology firms-venture capitalists-want to cash

in their gains in a relatively short time (in 7 or fewer

years), a constraint the Japanese investors to not

impose.53

While many American companies find alliances

with (and investment from) Japanese companies

beneficial, there is still worry about the long-term

consequences. For -example, many observers worry

that, in alliances with large Japanese fins, small

American companies may end up losing control of

their technologies and products. Another concern is

that Japanese investment in high-technology electronics firms and their suppliers will result in U.S.

semiconductor and systems makers being overly

dependent on Japanese firms for critical components. That dependence, in turn, could be used as a

competitive or political weapon.

For example, the recent decision of the Administration to allow the Japanese company Nippon Sanso

to purchase the American firm Semi-Gas Systems, a

supplier of high-quality gas equipment to semiconductor makers (and a participant in Sematech), could

make the U.S. semiconductor industry vulnerable in

several ways. The purchase will mean that Japanese

companies will control over 40 percent of the world
Chapter 3--American Firms, Foreign Firms: Contributions to the Nation ● 99

market and nearly half the U.S. market for high54 It fight, for instance, mean quality gas equipment.

that Nippon Sanso could cut off supplies to Sematech or its member companies in response to trade

policy decisions like the 1989 naming of Japan as an

unfair trader under the Super 301 section of U.S.

trade law. Or the pressure could be more in the realm

of business operations than politics: Nippon Sanso

could selectively favor its Japanese customers with

new products, low prices, and quick deliveries.55

Allegations of such discriminatory practices on the

part of Japanese companies have surfaced in the

past, but are difficult to pin down.56

The situation in semiconductor manufacturing

equipment as a whole is not so stark as that in

high-quality gas equipment. According to the International Trade Administration of the Department of

Commerce, Japanese fins’ investments accounted

for 10 percent of the market in 1983, and had

increased to 15 percent in 1988. VLSI Research

estimated that the share would reach 26 percent in

1993. 57 These investments are a significant but not

yet overwhelming share of the U.S. market, but

combined with imports of semiconductor manufacturing equipment from Japan, they contribute to

fears of Japanese dominance.

Whether allegations of discriminatory practices

are true or not, dependency is always worrisome,

particularly in technologies or industries considered

critical to a nation’s well-being. This category

includes products for maintainingg national security

and agricultural commodities in most advanced

nations. Increasingly, dependence on foreign companies or countries for high-technology products has

become a source of anxiety. The problem becomes

acute when foreign competitors control the most

advanced equipment, materials, and supplies needed

to produce something as vital as semiconductor

chips, especially when, as in the case of Japanese

electronics companies, a few large firms are in a

position to wield oligopolistic market power. Because of the particular nature of Japanese business,

many fear that this control could be more costly than

possible temporary disruptions in supplies or control

of prices, in the end costing the United States the

ability to produce advanced components and products at any price.

There is also fear that Japanese investment could

mean increased economic and political influence

over American business and government. This

concern is typical of nearly every country facing

heavy FDI. Developing nations have long maintained strict controls over foreign fins, and sometimes nationalized them, to avoid foreign economic

dominance or excessive interference in domestic

affairs. In this respect too, however, many nations

worry that Japanese corporate investment is somehow different from investment by firms of other

nationalities.

Another worry is that Japanese investment is

shaped by the aims and goals of headquarters and is

therefore unresponsive to local concerns. Even in

developed nations, Japanese firms are unwilling to

relinquish headquarters control of local operations.

A symptom of this is the sparse representation of

native managers in Japanese affiliates abroad. A

recent report from the American Electronics Association showed that, while 71 percent of American

electronics firms in Japan have Japanese CEOs, only

2 percent of Japanese electronics firms in the United

States have American CEOS.

58 Another report is that

Japanese companies in America have difficulty

recruiting qualified American management, because

many U.S. executives believe that Japanese companies will keep non-Japanese staff out of important

decisions, 59 or force them to check with the Japanese

headquarters for all decisions of consequence.

This phenomenon is not limited to the United

States. A study of 62 multinational companies doing

business in Australia (42 American or European and

20 Japanese) showed the same pattern.60 Most

American or European operations in Australia were

managed by Australians, but only one of the

Japanese operations was wholly Australian-run, and

even when Australian managers were used, their

discretionary power was curtailed by Japanese

advisors. 61 Some Americans working for Japanese

companies complain that they have few opportunities for advancement, and fear that Japanese companies are more likely than companies of other

nationalities to keep high-paying jobs at home.62

These complaints are consistent with the responses of Japanese companies to a recent MITI

survey of their international operations. As of 1989,

over 93 percent of the respondents managed their

international operations from Japan, either by letting

each functional division (e.g., marketing, manufacturing, or administration) manage both domestic and

international business, or through an international

business division that controls all overseas activi-
100 . Competing Economies: America, Europe, and the Pacific Rim

ties.63 Less than 6 percent of respondents have

established a supervising corporation overseas to

control manufacturing and sales in local markets,

and less than 2 percent have overseas managing and

supervising corporations that control all activities in

local markets. Five years ago, however, less than 3

percent controlled any offshore operations from the

local market. Nearly a third of respondents claimed

that they would establish overseas managing and

supervising corporations to control some or all of

local operations by the mid- 1990s.

Another hallmark of Japanese investment abroad

is its pattern of purchasing capital equipment from

the home country. The study of multinational

companies doing business in Australia reported that

the American and European companies’ equipment

showed no national purchasing pattern; their equipment was made in America, Japan, and several

European countries. Japanese companies, on the

other hand, bought the overwhelming preponderance of their equipment from Japan. The study’s

author said:

When an American or European company buys

machinery to set up a plant, they take competitive

bids. But the Japanese go directly to Japan.64

Finally, for all industrialized countries, there is a

fundamental asymmetry between Japanese investment abroad and foreign investment in Japan. The

United States is just waking up to a reality that some

nations in the industrialized world has long faced—

the presence of strong foreign commercial interests

in the domestic market-and is reacting to it in what

is probably typical fashion. Some people welcome

the foreign investors, and see the increase in FDI as

a response to market forces that will benefit U.S.

consumers. Some react with heightened concern,

even xenophobia, and regard any foreign influence

as potentially suspicious. Opinions come in every

shade between these two extremes.

If Americans just awakening to these issues, Japan

still slumbers. It is still the exception among

industrial nations in the degree to which foreign

investors are constrained from participating in its

economy. While Japanese investors have aggressively stepped up investment in America, and

recently in Europe, investment in Japan is still

restricted. In 1985, assets of Japanese affiliates in the

United States and those of U.S. affiliates in Japan

were equal, both standing at $64 billion. In the next

3 years, assets of Japanese affiliates in this country

multiplied more than fourfold, rising to $275 billion,

while U.S. affiliates’ assets in Japan rose only to

$129 billion. Leaving aside financial institutions,

assets of Japanese affiliates in the United States rose

106 percent while U.S. affiliates’ assets in Japan

grew 70 percent. American companies investing in

Japan, particularly in preceding decades, were often

obliged to license technologies, take a Japanese firm

as a partner, or promise to limit market shares in

return for permission to invest there; Japanese

companies, in contrast, have been relatively free to

invest in America, though the ambient political

atmosphere surrounding their recent investments

influenced their decisions.

The asymmetry is not just bilateral. In 1986, FDI

in manufacturing accounted for 10 percent of U.S.

sales, 7 percent of employment, and 9 percent of

assets in the manufacturing sector. Corresponding

figures for major European economies are: for

France, 27 percent of sales and 21 percent of

employment; for Germany, 18 percent of sales, 13

percent of employment, and 17 percent of assets; and

for the United Kingdom, 20 percent of sales, 14

percent of employment, and 14 percent of assets. In

Japan, in stark contrast, FDI in manufacturing

accounted for 1 percent of sales, employment, and

assets. 65 Between 1960 and 1987, direct investment

in Japan increased from 0.6 percent of the world total

to 0.8 percent. During the same period, inward

investment in the United States increased from 9.4

percent of all inward investment in the world to 25.2

percent, and Europe’s share increased from 29.8 to

37.6 percent.66 While the United States and Europe

debate the merits of foreign investment and how it

contributes to national well-being, the Japanese

seem to have made a clear choice: domestic firms are

preferred to foreign firms in Japan.

It is hard to say whether differences in Japanese

investment behavior at home and abroad are a

problem. Japanese firms are quite effective at selling

in the markets they invest in. They are more likely

than other foreign firms to build new plants and

retain greater control over their affiliates (although

their investment position is lower overall than those

of European or Canadian investors), which could

work to either the benefit or the detriment of the

nation (or be neutral). For example, if Japanese

affiliates invest heavily in training, R&D, and

capital equipment, as Japanese parent firms generally do, then America may stand to gain more from

Japanese investment than from investments by firms
Chapter 3--American Firms, Foreign Firms: Contributions to the Nation . 101

of other nationalities. In at least one industry, motor

vehicles, Japanese affiliates have a good record of

investment in training (see the discussion below),

and the few figures available on the point indicate

that their manufacturing affiliates invest more in

plant and equipment, per dollar of sales, than foreign

affiliates generally. R&D data by country of affiliate

are even less adequate, but the scanty available

figures suggest that Japanese affiliates’ R&D intensity is low. European firms fall closer to the average

in all areas, but this is partly because European

investment is so large that it has a greater effect on

the average. In 1988, assets of European affiliates

were 48 percent of the assets of all affiliates of

foreign firms in the United States, while Japanese

affiliates accounted for less than 24 percent. In

manufacturing, where most of the R&D spending

and capital investments take place, European affiliates had 63 percent of assets, and Japanese affiliates

10 percent.

Japanese documents acknowledge that the international operations of Japanese companies have

been mostly aimed at exporting, but there are

indications that new strategies are emerging. As

noted, MITI’s survey showed that many more firms

are planning to transfer significant control to foreign

affiliates. Perhaps more significantly, increasing

numbers of Japanese firms are also planning to

spread R&D to offshore locations. At the time of the

survey, 55 percent of respondents had R&D overseas

only to provide technical support for sales and

post-sale service; another 33 percent maintained

foreign R&D bases to support local manufacturing.

Another 10.5 percent maintained local R&D to

design products specifically for local markets, while

less than 2 percent maintained foreign R&D that was

not directly in support of local market needs.67 By

the mid-1990s, however, 11.6 percent of the respondents planned to have foreign R&D aimed at

general, rather than strictly local, corporate objectives. In addition, MITI’s white paper maintains that

Japanese corporations are in the first stage of global

investment, and as investments mature, the expectation is that Japan’s trade surplus will diminish. Such

plans, if implemented, will make Japanese investment both more acceptable and more beneficial to

host nations. Some American observers also expect

Japan’s trade surplus to dwindle as planned foreign

investments are made. One member of MIT’s

International Motor Vehicle Program maintains that

exports of Japanese automobiles will eventually be

replaced largely by production in overseas markets,

partly because Japanese firms are becoming more

confident about their ability to manage overseas

facilities and partly because overseas markets will

be increasingly unwilling to sustain large auto trade

deficits with Japan.68

A caution is in order, however. The plans of

Japanese corporations are in line with the demands

of foreign markets and governments, but it is not

clear how much responsibility or R&D will be

transferred offshore without such pressure, or whether

plans to replace Japanese exports with offshore

production will materialize absent the increasing

trade friction of recent years: Selling abroad is not,

of course, the only reason for international investment, and many Japanese firms will invest abroad

even without pressure from foreign governments.

But if there is a lessening of trade tensions (at this

point, that does not appear likely) there may also be

less change in the behavior or Japan’s offshore

affiliates than the MITI survey suggests. Finally, it

is always well to bear in mind that plans and

expectations are often different from reality; unforeseen circumstances could well cause the respondents

to MITI’s survey to change their plans.

Perhaps the best way of viewing the issue right

now is summed up in a quote:

The fears of some Americans, that the Japanese

industrial presence in the United States is a mixed

blessing, are not irrational. Japanese firms are not

simply responding to trade friction by building an

industrial presence in the U. S., but are pursuing a

long-term strategy of creating an infrastructure

which will enable them to sustain their market share

above present levels, insulated from currency fluctuations and the vagaries of protectionist sentiment. 69

EMPLOYMENT AND EMPLOYEE

COMPENSATION

If it comes to a choice, most nations prefer foreign

investment to imports, because foreign investment

provides jobs, while the connection of imports with

jobs is indirect at best. For example, one of the

interests of the European Community, France and

Italy in particular, in easing the adjustment to more

open trade in motor vehicles is the employment they

stand to lose if cars exported from Japan are allowed

free access. The insistence of some in the EC on high

levels of domestic content for foreign cars built in

member countries. is additional evidence of the
102 ● Competing Economies: America, Europe, and the Pacific Rim

concern for domestic workers and jobs. The effect of

this demand will be either that of guaranteeing a

market to domestic firms, or of ensuring that

domestic workers get some of the benefit of foreign

firms’ sales in the consuming country.

Affiliates of foreign parents accounted for 1.7

million manufacturing employees in the United

States in 1988; this was 8.9 percent of all U.S.

manufacturing employment, up from 3.5 percent in

1977. While foreign corporations are, therefore, a

growing force in U.S. manufacturing employment

(figure 3-10), they are not necessarily creating jobs

at the same rate that their employment has grown.

Not all the jobs held by workers in companies called

affiliates of foreign companies are jobs that the

foreign company created through investment.

DuPont is a good case in point; it is a foreign affiliate

because a Canadian family owns 23 percent of the

stock, yet it is difficult to believe that even 23

percent of DuPont’s workers in the United States

owe their jobs to the Canadian investment.

On the other hand, the greenfield auto plants of the

major Japanese auto companies, such as Nissan,

Honda, Mazda, probably do represent net additions

of jobs that would not exist otherwise. How many of

the jobs these greenfield investments added is

unknown; we do not know whether, in the absence

of Japanese investment, other domestic producers

would have made more cars, or if imports would

have increased,70 or what tradeoffs between production and price would have been made. Even in the

case of these wholly new investments, the number of

jobs involved almost certainly exceeds the upper

bound of what could reasonably be called job

creation resulting from FDI.71

Although FDI does not create as many jobs as

there are employees in affiliated establishments, it

does affect employment in qualitative as well as

quantitative ways. Where the foreign investor’s

influence is significant, and therefore results in

different training or a different business culture and

management style, there are effects. Whether they

are positive or negative is another matter.

Training has been most carefully studied in

Japanese-owned automobile assembly plants in the

United States. They have a distinct edge over

U.S.-owned assembly plants in the training they

provide their employees—not only shop-floor production workers, but also supervisors and manufacturing engineers (table 3-7). For newly hired producFigure 3-10-Employment in U.S. Affiliates, 1977-88

Employees (millions)

4 I

3

2 / ‘

0 ~ ~

1977 78 79 80 81 82 83 84 85 86 87 88

+ Total ~ Manufacturing

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis,

Foreign Direct Investment in the United States: Operations of

U.S. Affiliates, 1977-80,1985, table F-4, and subsequent series.

tion workers, the difference is enormous (279 hours

v. 46 hours), but there are substantial differences in

every category. Note, too, that training for most

categories of employees is still greater in Japaneseowned plants in Japan than in the Japanese transplants in America.

In some cases, Americans working for foreignowned companies speak glowingly about the lessons

they have learned from their foreign parents. Managers at New United Motor Manufacturing Inc.

(NUMMI), a joint venture of General Motors and

Toyota, attribute much of the turnaround in the

plant’s performance to their newly learned Japanese

way of doing business. NUMMI operates from a

plant in Fremont, California. The plant was formerly

owned and run by General Motors and was often

described as one of GM’s worst plants. In 1982, it

was shut down, presumably for good. It reopened

2 years later as NUMMI, with a crew of senior

managers from Toyota and. a work force largely

drawn from former UAW employees of the Fremont

plant (80 percent of the workforce of NUMMI

worked for GM Fremont). By 1986, when NUMMI

was running at full capacity, its quality record

matched that of Toyota’s Takaoka assembly plant in

Japan, while its productivity record was somewhat

worse (19 assembly hours per car, compared with 16

at Takaoka). Its parts inventory averaged 2 days,

compared with Takaoka’s 2 hours, but this was still

substantially better than GM’s Framingham plant,72

where inventory averaged 2 weeks. GM says it is

busy trying to pass the lessons it learned at NUMMI
Chapter 3--American Firms, Foreign Firms: Contributions to the Nation ● 103

Table 3-7—Training Hours

Japan/Japan Japan/U.S. U.S./U.S

Production workers:

New hiresa . . . . . . . . . . . . . . . . 315.5 279.3 45.7

Experienced workers . . . . . . 87.0 53.3 28.8

Supervisors:

New hires . . . . . . . . . . . . . . . . . 160.0 260.0 166.7

Experienced workers . . . . . . 109.2 80.0 60.4

Manufacturing engineers:

New hires . . . . . . . . . . . . . . . . . 864.0 466.7 155.0

Experienced workers . . . . . . 156.7 100.0 72.3

aNewly hired empioyees, first 6 months on the job.

SOURCE: John F. Krafcik, “Training and the Auto Industry: International

Companies,” contractor report prepared for the Office of

Technology Assessment, February 1990.

on to managers at its other plants, though this has

proved difficult, for it changes the job of every

worker and manager at GM.73

Even at NUMMI, the employment effects are not

uniformly positive. There have been complaints

about the pace of work and lack of seniority benefits

in work assignments,74 although no real strife has

erupted. Also, it is not clear how much or how fast

GM is able to transfer the knowledge the workers

and managers of NUMMI have obtained from their

experience with Toyota. Nevertheless, the venture’s

experiences have the potential of changing for the

better the way some managers and workers think and

work. So, too, do the other Japanese transplants.

Other experiences are more problematic. In 1984,

the Japanese firm NKK bought half of National

Intergroup, Inc., making National Steel Corp. a

Japanese affiliate. The Japanese chairman arrived in

1986, and the company’s productivity has improved

16 percent since 1984-85, but it still remains one of

the least profitable in the steel industry. Despite a

$200 million annual capital improvement program,

the company needs repairs for its blast furnaces,

while unscheduled maintenance problems abound.

The union there has one of the industry’s most

generous contracts, including a job security provision that restricts layoffs, but labor relations have

been rocky, and the local unions have fought

“efficiency-boosting job flexibility.”75 Whatever

lessons Japanese managers have to teach have been

hard to pass on at National Steel.

Finally, as noted above, Japanese firms may be

less inclined to assign discretionary responsibility to

American managers than other investors; certainly,

they are less likely to hire American managers in

America than U.S. firms are to hire Japanese

managers in Japan.

Can American workers and managers learn more

from foreign direct investors than they already have?

Probably, but there are limits. In some cases, the

foreign parent is more a financial than a managerial

presence, and many foreign affiliates are run the

same as, or only slightly different from, American

companies. In other cases, foreign companies may

not have much to teach. In 1988, European affiliates

had nearly 3 billion dollars’ worth of investment in

motor vehicles and equipment in North America, but

the quality and productivity records of the European

auto manufacturers are worse than those of the Big

Three American companies. 76 Unlike the Japanese

case, there are few lessons to be learned from

European auto production management.

In terms of compensation and layoffs, foreign

affiliates behave more or less like American companies. During the 1982 recession, U.S. manufacturing

employment dropped 7 percent from the previous

year’s employment, while sales dropped 5 percent.

Foreign manufacturing affiliates’ employment

dropped 4 percent, although sales increased 1.5

percent. Foreign affiliates’ manufacturing employment also dropped in 1985, as did U.S. manufacturing employment generally. While American firms

have reputations abroad as fickle employers (it has

sometimes been hard for them to recruit good

employees in Japan because of their reputations as

unstable employers during downturns), many foreign affiliates behave in similar ways when they do

business in the United States. For example, in 1985,

when the semiconductor industry worldwide went

into a steep slump; at least two Japanese affiliates

producing chips in U.S. plants (NEC and Toshiba

Semiconductor) laid off workers in much the same

way as their American counterparts in Silicon

Valley .77 NEC official Koichi Shimbo told the San

Jose Mercury News: ‘‘When we are in the U. S., we

do like the Americans. ”78

In terms of compensation, foreign affiliates and

American firms are very little different. While

foreign affiliates pay higher compensation per employee overall than U.S. fins, this is due to the

relatively heavy concentration of affiliates in highwage industries like banking. Within manufacturing, foreign affiliates and American firms pay nearly

the same compensation to workers.79 This is not

surprising; if foreign firms failed to pay as much as
104 . Competing Economies: America, Europe, and the Pacific Rim

Figure 3-n-Earnings and Reinvested Earnings: Foreign Direct Investors

in the United States

Billions of dollars

14 I

A AAA

-4 ‘

I 1 I 1 1 I I I I I 1

1977 78 79 80 81 82 83 84 85 86 87 88 89

++ Total earnings ++- Mfg. earnings

+ Reinvested earnings * Mfg. reinvestment

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “Foreign Direct Investment in the United

States,” Survey of Current Business, various August and October issues covering the years 1977 through

1989, table 4.

U.S. firms, they would have difficulty attracting

workers. 80

PROFITS

The way a multinational uses its profits also is an

indicator of its commitment to foreign markets. In

the 1960s, when American multinationals were

investing heavily in Europe, concerns were raised

about whether profits were reinvested or repatriated.

Now, with FDI rising rapidly in the United States,

we have come full circle, and Americans are

wondering whether foreign companies use the profits made in the United States to benefit U.S. citizens,

or instead send most of them back to the home

country.

According to Bureau of Economic Analysis

(BEA) data, reinvestment depends heavily on earnings. The amount reinvested, particularly by manufacturing affiliates, bears a very close relationship to

earnings, for all foreign direct investors in general,

and for European and Japanese investors in particular (figures 3-11, 3-12, and 3-13). The difference

between earnings and reinvested earnings is distributed earnings, which are quite small for Japanese

manufacturing affiliates and a bit larger for European affiliates. This fits with the well-known fact

that Japanese manufacturing firms generally pay out

very small dividends, compared with European or

American manufacturers.

If we look more broadly at all FDI (not just in

manufacturing), distributed earnings are increasing,

although the relationship with earnings is still

strong. This is particularly striking for Japanese

investment, whose distributed earnings increased

modestly between 1982 and 1984, and then rapidly

after 1984 (figure 3-12). The increase occurred in

wholesale trade and a category called “other,”

which includes retail trade, banking, finance, insurance, and real estate. In 1989,95 percent of Japanese

affiliates’ distributed earnings came from these

wholesale trade and the group labeled “other,’ and

in 1990, 96 percent. European affiliates’ distributed

earnings originated differently; they came mainly

from petroleum, “other,” and manufacturing, with

very little from wholesaling. In 1988, manufacturing

accounted for the largest reported share, 32 percent.

European affiliates’ distributed earnings in 1988 and

1989 were reported in neither petroleum nor ‘other’

separately, to avoid disclosure of data of individual

companies. In 1988, the two sectors combined

accounted for 58 percent of all distributed earnings,

and in 1989, 68 percent.
Chapter 3--American Firms, Foreign Firms: Contributions to the Nation . 105

Figure 3-12—Earnings and Reinvested Earnings: Japanese Direct Investors — —

in the United States- -

Billions of dollars

2.0 ,

1.5 -

1.0 -

0.5 -

0.- -

*

n

-0.5 -

-1.0 1 I I 1 I I I I I I I

1977 78 79 80 81 82 83 84 85 86 87 88 89

+ Earnings ~ Reinvested earnings

+ Mfg. earnings - Mfg. reinvestmen t

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “Foreign Direct Investment in the United

States,” Survey of Current Business, various August and October issues covering the years 1977 through

1989, table 4.

Figure 3-13—Earnings and Reinvested Earnings: European Direct Investors

in the United States

Billions of dollars

10

8

6

4

2

0

- 2

1977 78 79 80 81 82 83 84 85 86 87 88 89

+ Earnings +- Reinvested earnings

-++ Mfg. earnings + Mfg. reinvestment

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, ’’Foreign Direct Investment in the United

States,” Survey of Current Business, various August and October issues covering the years 1977 through

1989, table 4.
106 . Competing Economies: America, Europe, and the Pacific Rim

Figure 3-14—Earnings and Reinvested Earnings: U.S. Direct Investment Abroad

Billions of dollars

7 0

6 0

-

5 0

-

4 0 “

30, +

A“ v

2 0

-

1 0

>

0

I

1980 81 82 83 84 85 86 87 88 89

+ Earnings ++ Reinvested earnings

+ Mfg. earnings + Mfg. reinvestment

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, “U.S. Direct Investment Abroad,” Survey of

Current Business, various August and October issues covering the years 1977 through 1989, table 20.

One noteworthy feature of the data, going back to

1977, is that earnings of manufacturing affiliates are

often small or negative. For Japanese affiliates they

are hardly ever positive; since 1980, Japanese

manufacturing affiliates’ earnings have been positive only once, in 1987, European manufacturing

affiliates’ earnings dipped into the red only once, in

1982, a recession year. This observation raises

several questions about how earnings are viewed.

One possibility is that foreign investors in manufacturing, and Japanese investors in particular, are here

mainly to gain market share, not profit, and can

afford to sustain many years of financial losses.

Eventually, of course, the firms must expect to profit

from the increase in market share, but perhaps not

yet; substantial Japanese direct investment in manufacturing is fairly recent. Another possibility is that

foreign affiliates’ earnings are calculated with an eye

to where the parent company would most like to pay

corporate taxes and get tax breaks. Suggestions that

affiliates in the United States are charged higher-thanmarket prices for both goods imported from the

parent organization or for intangibles (e.g., R&D)

come up from time to time, but so far are unresolved.

It is possible that earnings of foreign affiliates are

understated because parent firms prefer to deal with

corporate taxes at home rather than in the United

States.

Whatever the resolution, Japanese affiliates in

America are acting differently in making or reporting earnings and in reinvestment. American multinationals’ earnings and reinvested earnings in their

overseas affiliates, overall and in manufacturing,

have been positive throughout the 1980s (figure

3-14). This may reflect the fact that, compared with

Japanese firms, American firms are under heavier

pressure to make and distribute earnings, or it may

have to do with differences in corporate tax rates and

incentives here and abroad.

INTERNATIONAL TRADE

Foreign affiliates have a higher propensity to

import than American firms, and the overall trade

deficit associated with the operations of affiliates is

substantial (figure 3-15). In 1988, the deficit in

merchandise trade associated with U.S. affiliates of

foreign investors (about $90 billion) was 75 percent

of the total U.S. merchandise trade deficit ($120

billion). Between 1977 and 1988, U.S. affiliates of

foreign firms increased their merchandise imports

11.3 percent annually, from less than $46 billion to

nearly $150 billion, while their merchandise exports

increased from $21 billion to $52 billion, 8.6 percent

per year. The affiliates’ trade deficit accordingly

increased from $21 billion in 1977, when the United

States had an overall merchandise trade deficit of
Chapter 3--American Firms, Foreign Firms: Contributions to the Nation ● 107

Figure 3-15-Merchandise Trade, FDIUS Affiliates

Billions of dollars

o

3

- 2 0

-40

-60

-80

-100

w

a

I I I I I I I I I I

‘1977 78 79 80 81 82 83 84 85 86 87 88

~ Total * Japa n ~ Europe

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, Foreign Direct Investment in the United

States: Operations of U.S. Affiliates, 1977-80, 1985, table H-3, and subsequent series.

$27 billion, to nearly $90 billion in 1988. In 1977,

European affiliates accounted for 42 percent of the

trade deficit associated with FDI, but their share

dropped to 32 percent by 1988, while Japanese

affiliates’ share increased from 28 percent of the

total deficit to 57 percent (figure 3-15).81

The nature of affiliates’ imports varies by country.

In 1988, Japanese affiliates imported mostly through

their wholesale trade establishments in the United

States; 93 percent of their imports came to wholesalers and only about 7 percent to manufacturers.

Forty-four percent of the merchandise imports of all

Japanese affiliates were motor vehicles shipped to

affiliated Japanese wholesalers ($33.4 billion of a

total of $75.9 billion). Motor vehicle imports to

wholesalers dwarfed the next largest category of

Japanese affiliates’ imports, $12.8 billion in imports

to electrical goods wholesalers. All this supports the

point made earlier, that the preponderance of Japanese FDI operations in the United States is related to

selling goods made in Japan, and this shows up in

trade figures as much as in sales.

While Japanese affiliates account for a substantial

trade deficit in motor vehicles, there is a noteworthy

countertrend. Honda, the first Japanese automaker to

set up U.S. manufacturing operations, now exports

cars from the United States—in fact, it expects to

export 70,000 cars from the United States this year.

If it does, its exports will exceed auto exports by the

Big Three U.S. automakers to all nations except

Canada (which has a longstanding free trade agreement with the United States in motor vehicles) .82

The U.S. content of Honda’s motor vehicles was

low, only 25 percent, when the company began

operations here in 1982, but Honda claims it will

have 75 percent North American content in its U.S.

and Canadian operations by 1992.83 So while the

balance of bilateral motor vehicle trade between the

United States and Japan is still heavily tipped in

favor of a Japanese surplus, the irony is that Japanese

direct investment in the United States may end up

contributing disproportionately to U.S. motor vehicle exports, too.

European affiliates’ imports in 1988 also came

mostly through wholesalers, but to a much smaller

extent than Japan’s: 54 percent of European affiliates’ imports were done by wholesalers. Manufacturing affiliates accounted for 34 percent of all

European affiliates’ merchandise imports. Like the

Japanese, European affiliates’ largest single category of imports was motor vehicles imported by

wholesalers, but autos were a much smaller proportion of their total merchandise imports, only 25

percent. The second largest category was imports by
108 ● Competing Economies: America, Europe, and the Pacific Rim

manufacturers of electric and electronic equipment

(6.6 percent of total merchandise imports).

Altogether, foreign affiliates accounted for imports of motor vehicles and parts totaling $50.7

billion in 1988 (including imports by manufacturers

and wholesalers), and a motor vehicle trade deficit of

$46.1 billion.84 This compares with a total U.S. trade

deficit in motor vehicles of $49.2 billion in the same

year. Manufacturing affiliates accounted for $21

billion in merchandise exports, and $29.3 billion in

imports; wholesale trade affiliates accounted for a

total of $35 billion in exports and $109.6 billion in

imports. Clearly, the FDI deficit in auto imports by

manufacturing affiliates is small compared to auto

imports by wholesalers.

Firms wishing to sell in Japan cannot do it so

easily by establishing a wholesaling affiliate in that

country, nor would many small U.S. firms have the

resources to do so even if there were no institutional

barriers against it. Many of the small American

high-technology firms that have formed alliances

with foreign partners cite as one of the benefits their

increased access to the Japanese market (see the

Nicolet example above). Sometimes the arrangements are more complicated: the Japanese tractor

maker, Kubota, bought a stake in the American

company Cummins Engine to take advantage of

Cummins’ extensive European network, in preparation for European market integration in 1992.85

Although FDI is associated with a large negative

effect on the U.S. trade balance, it is misleading to

think of FDI as the cause of our trade deficit. The

fundamental causes are our puny national savings

rate (greatly exacerbated by the Federal budget

deficit), and the failure of U.S. manufacturing to

keep up technologically with increasingly able

competitors, principally Japanese.86 According to

economic theory, a nation’s current account trade

balance (which includes trade in services, transfer

payments from governments, and income from

property abroad, as well as trade in goods) is

determined by the national rates of savings and

investment; over time, the current account trade

deficit (or surplus) is equal to the difference between

domestic investment and domestic saving. If foreign

investors’ imports are persistently larger than their

exports, this would tend to widen the U.S. current

account trade deficit, but then the value of the dollar

would presumably drop, making U.S. exports cheaper

and returning the trade deficit to the level determined by the relation between domestic savings and

domestic investment. In such circumstances, weakening of the dollar might be postponed if foreigners

invested enough of their savings in the United States

to sustain a widening current accounts trade deficit;

this is what happened during the early 1980s. Later

in the decade, the dollar declined and the merchandise trade deficit and current account deficit narrowed. However, this process is costly. A lower

dollar raises the price of imported goods, and in the

long run, reliance on a cheap dollar to right the trade

balance tends to undermine the U.S. standard of

living.87 The most constructive way to get rid of the

U.S. trade deficit is to produce goods that the world

will buy because they are well-made and of good

value.

NATIONAL INTERESTS,

BUSINESS INTERESTS

What do nations want from firms, and what do

firms do? Nations want things that make citizens

better off: well-paid jobs, additions to knowledge

and productivity, exports, investment. In some

ways, foreign fins’ affiliates in the United States

measure up well on many counts, compared with

firms whose headquarters are in the United States,

and less so on others. Foreign affiliates and U.S.

firms are similar in their compensation of workers.

Foreign affiliates do less R&D here per dollar of

sales than do American firms, and they have a much

greater propensity to import. In the latter regard,

Japanese affiliates are noteworthy for their heavy

importing, almost all of it from Japan. Some

affiliates have made valuable contributions to workers’ skills and to managers’ competence, through

training and object lessons; others operate in very

much the same way as U.S. fins. They are about as

reliable, in terms of job security, as American fins.

All of this, of course, is on average. Japanese firms

are particularly oriented to selling here; European

fins’ investments apparently represent a more

diverse set of goals.

What all this means is that most of the differences

in behavior between American and foreign firms are

not very striking. Decisions about who ought to be

allowed access to programs designed to improve

competitiveness and living standards for Americans

would therefore be more discriminating if they were

made on the basis of individual fins’ behavior and

performance, rather than strictly on nationality.
Chapter 3--American Firms, Foreign Firms: Contributions to the Nation . 109

This begs the question of political influence,

deliberately. Whether foreign firms or interests have

undue influence in national, state or local politics, or

whether their influence is exerted in ways that will

harm American competitiveness and living standards or aid it, is beyond the scope of this report.

Political and national security concerns are relevant

to the debate over access to publicly funded programs to enhance competitiveness, and they ought to

be; their absence is not a dismissal.

The Policy Environment:

How America Treats FDI

The above sections suggest that there are many

dimensions of foreign investment to consider if the

U.S. Government wants to adopt performance criteria for deciding how to treat affiliates of foreign

firms. The discussion so far has focused on what

measures might be appropriate if the decision were

about whether affiliates were permitted to participate in government-funded programs to promote

industrial competitiveness. So far, the Federal Government has not dealt with this issue systematically.

It has come up a couple of times, but not specifically

as a competitiveness issue. For example, a few

European firms want to participate in Sematech, just

as a few American firms want to participate (and as

IBM has been allowed on a limited basis) in the

European semiconductor manufacturing and development consortium, JESSI.88 The decision in the

United States has been to limit participation to

American firms whose headquarters are in the

United States and without a controlling foreign

ownership position. Part of the rationale for the

decision may have been national security. If that is

so, then the position of the United States is either

changing or is inconsistent with its stated principles

and goals.

The official position of the U.S. Government on

direct investment, both U.S. direct investment abroad

and FDI in the United States, is that firms investing

offshore should be treated no differently from

domestic fins. This so called “national treatment”

standard is the mirror of the official U.S. position

toward international trade in the GATT, but the legal

principles and policies are not so well defined in the

investment arena as they are in trade.89 In a few

sectors, this principle of neutrality is abridged by one

of reciprocity, which stipulates that American firms

must be treated abroad as foreign firms wish to be

treated here.90 The United States, like most nations,

makes a number of exceptions to these standards.

The most prominent is for national security.

Exceptions to national treatment for national

security reasons are made for two reasons: political

sovereignty and military capability. Many nations

have discriminated against foreign firms to keep

them from gaining too great an influence over the

nation’s economy or political decisionmaking. The

standard for what constitutes “too great’ an influence is soft, and often handled case by case. Nations

also seek to assure that the capacity to produce

military goods and services will be at the government’s disposal when needed, and that there will be

no unauthorized transfers of sensitive technologies

or products.91 These concerns are recognized by

most nations as legitimate, and international agreements covering direct investment permit nations to

make exceptions for national security purposes.92

The ability of the government to make exceptions

to the national treatment standard for national

security purposes was recently strengthened, at least

in theory, in the Omnibus Trade and Competitiveness Act of 1988, which added section 721, often

called the Exon-Florio amendment, to the Defense

Production Act. This provision allows the government to block foreign mergers, acquisitions, or

takeovers of U.S. firms if there is a threat to national

security .93 Implementation of the provision is done

by the Committee on Foreign Investment in the

United States (CFIUS), whose members come from

various Federal departments and agencies.94 So far,

CFIUS has not ventured beyond a fairly narrow

interpretation of national security. Critics argue that

it should interpret national security more broadly to

encompass strategic areas of the civilian economy,

in the same way that Sematech received DoD

funding on grounds that the ability to produce

high-performance electronics products for national

security depends on a competitive civilian industry.

A crucial test of CFIUS’s willingness to interpret

national security more broadly was its recent decision to permit a Japanese company to acquire

Semi-Gas Systems Inc., the leading U.S. producer of

high-purity gas systems for semiconductor manufacture. The President, acting on CFIUS recommendation, decided that the purchase of Semi-Gas by

Nippon Sanso would not threaten national security,

and the Justice Department decided the sale would

not violate antitrust laws. Semi-Gas and Nippon

Sanso are first and second in world sales of
110 . Competing Economies: America, Europe, and the Pacific Rim

semiconductor gas equipment, with Semi-Gas having 21.5 percent of the world market and Nippon

Sanso 17 percent. After the acquisition, Nippon

Sanso will control nearly 40 percent, far ahead of the

next competitor, Air Products, which has 14 percent

of world sales.9s

Although CFIUS has not yet broadened the

definition of national security to include competitiveness of dual-use industries, the distinction between what is done for national security purposes

and what is done to promote civilian industrial

competitiveness is blurred. In some critical industries, such as electronics and telecommunications,

the demarcation between the defense industrial base

and overall U.S. industry is blurred; DoD must rely

on technologies, people, and productive capacity

that serve both civilian and military markets. If the

Nation’s electronics sector’s competitiveness declines, so too might DoD’s ability to be able to fulfil

the military’s production needs for either defense

preparedness or for times of national emergency or

war.

Moreover, the Nation’s economic performance is

at least equal in importance to military security, and

policymakers are searching for ways in which the

U.S. Government and industry can collaborate to

strengthen America’s competitive position.96 However, the U.S. Government, particularly the last two

Administrations, has steadfastly maintained positions in favor of free markets and against national

intervention to promote economic competitiveness.

This has led, some argue, to a tendency to find

national security rationales for programs designed to

promote economic competitiveness, including exceptions to national treatment standards for foreign

firms investing in the U.S. market. The United States

probably cannot continue to invoke national security

for all programs to promote civilian industrial

competitiveness. The United States is behind on too

many fronts, and in too many high-visibility industries, not to confront the issue of economic competitiveness, and the government’s proper role relative

to it, for its own sake.

Anew government program with the unambiguous

purpose of improving commercial technology is the

Advanced Technology Program in the U.S. Department of Commerce. The law states that the program’s mission is to improve “the competitive

position of the United States and its business” and

to “help United States businesses create and develop generic technologies with commercial potential. ’ ’97 The Program may help joint R&D ventures

with technical advice or may take part in the

ventures, providing start-up funding or a minority

share of the cost. Created in 1988, the Program got

its frost funding ($10 million) in fiscal year 1990; the

next year Congress upped the amount to $36 million

and at the same time defined conditions under which

foreign firms may participate in fiscal year 1991.

The approach is to apply performance standards to

both foreign affiliates wishing to participate and

U.S.-owned companies. The performance standards

stipulate that participating companies shall have

investments in U.S. R&D and manufacturing (not

limited to ‘‘screwdriver’ assembly of imported

components); a significant employment base; agreements to promote U.S. manufacture arising from any

technologies developed in such ventures and to

procure materials and components from the United

States or Canada. The Secretary of Commerce is

given the authority to find companies eligible for

participation, using the performance standards as

evidence that participation would be “in the economic interest of the United States. ’ In addition,

reciprocity provisions apply to foreign participants.

They may take part if the Secretary finds that their

home country offers U.S.-owned companies comparable opportunities to participate in joint ventures,

allows U.S. companies to invest on equal terms with

other countries, and affords adequate protection of

the intellectual property rights of U.S. companies.98

For participation in government-sponsored programs such as the Advanced Technology Program,

performance standards can be applied as a kind of

screen, or they can be used on a case-by-case basis.

While most observers seem to prefer performance

requirements to discrimination based solely on

ownership,99 performance requirements are controversial, too. Graham and Krugman argue that

performance requirements can introduce economic

distortions, just as-trade protection can, that could

reduce economic well-being’ and serve as a vehicle

for political tampering.

The use of performance standards to govern

foreign affiliates’ participation in Federal programs,

and other policy options, are discussed in chapter 2.

While considerable information is available about

the behavior and performance of foreign affiliates in

the U.S. market, the kind of information that would

allow an executive agency like CFIUS to discrimi-
Chapter 3--American Firms, Foreign Firms: Contributions to the Nation . 111

nate between investments that are likely to contribute to U.S. competitiveness and those that could

endanger it is not always available, and some that is

available is not used in today’s permissive climate.

The issue is very likely to heat up, however, in which

case there will be increasing interest in how foreign

affiliates contribute to the U.S. economy and technology. The data that exist tell us much, but they can

also mask significant differences in contributions at

the firm, industry, and country levels. Some of the

most pressing questions, for example, about the flow

of technology and value added when Japanese

investors acquire control of high-technology American fins, cannot be fairly addressed with the data

we have from government sources, and may require

additional investigation. The behavior of foreign

affiliates in general, and Japanese affiliates in

particular, is similar enough to U.S. firms in many

ways that it is not a simple thing to decide to exclude

them on the basis of ownership alone. Neither is their

behavior so similar to that of U.S. firms that national

treatment standards are a matter of no consequence.

1 John W. Rutter, “Direct Investment Update: Trends in International Direct Investment” U.S. Department of Commerce, International

Trade Adminstration staff report, September 1989. A U.S. affiliate of

a foreign direct investor is defined as one in which an investor from

another country owns or controls at least 10 percent of a domestic

company’s voting stock (or equivalent amount in an unincorporated

enterprise). Definitions are given in U.S. Department of Commerce,

Bureau of Economic Analysis, Foreign Direct Investment in the United

States: 1987 Benchmark Survey, Final Results (Washington DC: U.S.

Government Printing Office, 1990).

2 OECD is the Organization for Economic Cooperation and

Development. Its members include Austria, Belgium, Canada Denmark France, GermanY, Greece, Iceland, Ireland, Italy, Luxembourg,

the Netherlands, Norway, Portugal, Spain, Sweden Switzerland,

Turkey, the United Kingdom, and the United States.

3 This refers to the behavior of U.S. affiliates only; Japanese and

many European countries have laws and traditions that make them much

less prone to lay off workers at home.

4 For discussion of these conclusions, see U.S. Congress, Office of

Technology Assessment, Paying the Bill: Manufacturing and America’s

Trade Deficit, OTA-ITE-390 (Washington DC: U.S. Government

Printing Office, June 1988) and Mah”ng Things Better: Competing in

Manufacturing, OTA-ITE443 (Washington DC: U.S. Government

Printing Office, February 1990).

5 The dollar may not fall if, as in the early 1980s, interest rates are

high enough and confidence in the U.S. economy great enough that

foreign investment is sufficient to offset the deficit in merchandise trade

and support the dollar at a high level—temporarily, at least.

6 Discussion of how the European Community treats foreign

investors is in ch. 5.

7 Edward M. Graham and Paul R. Krugman, Foreign Direct

Investment in the United States (Washington DC: Institute for

International Economics, 1989), pp. 21-24.

8 Public Law 100418, 100th Cong., Title V, part II, sec. 5021,

which amended the Defense Production Act of 1950, adding sec. 721.

9 Robert B. Reich “Who Is Us?” Harvard Business Review,

January-February 1990.

10 Raymond J. Mataloni, Jr., “U.S. Multinational Companies:

Operations in 1988,” Survey of Current Business, June 1990, pp. 31-44.

11 These measures of the characteristics of jobs in U.S. parent

companies versus those in their foreign affiliates were put forth by Laura

Tyson in her paper, “Us, Them, and Competitiveness,” The American

Prospect, winter 1990-91. Tyson points out that even in developed

countries, jobs in foreign affiliates are not the equal of those in the parent

companies, although the discrepancies are not so great. Compensation

per employee in developed country affiliates is 90 percent of that in

parent companies, and assets per employee, 87 percent.

The comparative data are from Mataloni, ibid.

12 U.S. Department of Commerce, Bureau of Economic Analysis,

U.S. Direct Investment Abroad: 1982 Benchmark Survey Data (Alexandria, VA: National Technical Information Service, 1985), tables III.D.1,

111.H.1, and III.Q.1. The data on R&D spending are for majority-owned

affiliates and parent companies of U.S. multinationals; other data are for

“non-bank affiliates,” which include foreign companies in which a U.S.

investor directly owns or controls at least 10 percent of the voting stock

(or an equivalent portion in unincorporated enterprises).

13 OTA interview with Jean-Jacques Duby, Group Director,

Science and Technology, IBM Europe, Paris, Oct. 8, 1990.

14 Rutter, op. cit.

15 Jeffrey H. Lowe, “Gross Product of U.S. Affiiates of Foreign

Companies, 1977-87,” Survey of Current Business, June 1990, pp.

45-53; and Russell B. Scholl, “The International Investment Position of

the United States in 1990,” Survey of Current Business, June 1991, pp.

29, 32. Historical series understate the value of U.S. direct investment

abroad, and in comparison overstate the value of foreign direct

investment in the United States, as the value of both is measured in book

value. This valuation does not capture all the appreciation of investments, and the older an investment, the more likely it is to be

undervalued in the official figures. Since for many decades the United

States invested more abroad than foreign companies and governments

invested here, comparisons of foreign direct investment with U.S. direct

investment abroad can be somewhat misleading. However, there are

significant inaccuracies in attempting to measure the true value of

investments as well. Historical costs are used throughout this report.

16 The investment “position” of a foreign direct investor means

its total equity in and net outstanding loans to, its U.S. affiliates. In

contrast, the “assets” of an affiliate are equal to the equity of all owners,

domestic and foreign, in the affiliate, less all liabilities of the affiliate.

“Sales” is, as implied, the sales made by the affiliate in the United

States.

17 U.S. Department of Commerce, Bureau of Economic Analysis,

Foreign Direct Investment in the United States: Operations of U.S.

Affiliates of Foreign Companies, Preliminary 1988 Estimates (Washington, DC: U.S. Government Printing Office, 1990), table A-2.

18 Graham and Krugman, op. cit., p. 13.

19 U.S. Department of Commerce, Bureau of Economic Affairs,

Foreign Direct Investment in the United States, Preliminary 1988

Estimates. op. cit., table A-1, and “The U.S. National Income and

Product Accounts, Revised Estimates,” Survey of Current Business,

July 1989, table 6.6B.

20 U.S. Department of Commerce, Bureau of Economic Analysis,

Foreign Direct Investment in the United States, Preliminary 1988

Estimates, op. cit., table E-8.

21 Wholesaling affiliates handle inventories of manufactured

products and their sales and distribution to retailers.

22 U.S. Department of Commerce, Bureau of Economic Analysis,

Foreign Direct Investment in the United States, Preliminary 1988

Estimates, op. cit., tables G-6 and A-2.

23 U.S. Department of Commerce, Bureau of Economic Analysis,

Foreign Direct Investment in the United States, 1987 Benchmark Survey,
112 ● Competing Economies: America, Europe, and the Pacific Rim

Final Results (Washington, DC: U.S. Government Printing Office,

August 1990), p. 148.

24 U.S. Department of Commerce, Bureau of Economic Analysis,

Foreign Direct Investment in the United States, Preliminary 1988

Estimates (1990) op. cit., table E-8.

25 Most of these European affiliates were purchased, not built from

scratch (e.g., Thomson Consumer Electronics consists of the old RCA

consumer products group, which General Electric bought and then sold

‘ to Thomson SA.

26 This figure is a good illustration of the caution with which data

on foreign direct investment should be treated. It is not so difficult for

Americans with any knowledge of business to name a few European

chemical companies, but most of us would have trouble “ thinking of a big

Canadian company. Who are the big Canadian chemical companies

investing in America? In this case, one is DuPont, the picture of an

American company. A Canadian family, the Bronfman family, owns 23

percent of DuPont’s stock, however, making it a foreign affiliate.

Source: Michael Hodges, ‘‘The Japanese Industrial Presence in America: Same Bed, Different Dreams,” Millenium, winter 1989, p. 362.

27 For good reason. Honda was considered somewhat of an

outsider in Japan, both by other companies and by the Ministry of

International Trade and Industry (MITI); its share of the Japanese market

was relatively small, while in the United States, Honda cars were

becoming the most popular imports. Honda is also very dependent on

exports, and was therefore more vulnerable to protectionist moves in

other countries. Exports account for 70 percent of Honda’s Japanese

production. James P. Womack, Daniel T. Jones, and Daniel Roos, The

Machine That Changed the World (New York NY: Rawson Associates,

1990), pp. 215-216.

28 James P. Womack and Daniel Roos, ‘‘Case Study: The

Automotive Industry,” contract report for the Office of Technology

Assessment, May 13, 1988. The 3 million figure also includes estimated

production of 220,000 vehicles in a Suzuki-GM plant in Ontario.

29 John F. Krafcik and John Paul MacDuffie, “Explaining High

Performan ce Manufacturing: The International Automotive Assembly

Plant Study,” paper prepared for the International Motor Vehicles

Program International Policy FOrum May 1989.

30 U.S. General Accounting Office, Foreign Investment: Growing

Japanese Presence in the U.S. Auto Industry, GAO/NSIAD-88-111,

March 1988, p. 33. This is not true of all U.S. parts makers; some are

large, integrated companies like Rockwell and TRW, which have

experienced engineering staffs. However, the American industry is more

characterized than the Japanese or European industries by small firms

with little or no ability to contribute to design and manufacturing

engineering,

31 General Accounting Office, op. cit., p. 29. Another reason for

sourcing major subassemblies like engines and transmissions from

abroad is economies of scale, as noted in the GAO report. Because of the

level of investment in assembly needed to support a facility for making

engines, it maybe more cost effective to increase engine production in

existing overseas facilities than to create new capacity to support new

assembly transplants.

32 General Accounting Office, op. cit., p. 11.

33 All material about Hoechst’s purchase of Celanese is from

Robert R. Miller, “The Impact of Merger and Acquisition Activity on

Research and Development in U.S.-Based Companies,” contract report

to the Office of Technology Assessment November 1989.

34 See, for example, Stephen Kreider Yoder, “Kubota Is Sued by

Founders of U.S. Firm,” Asian Wall Street Journal Weekly, July 16,

1990, p. 9; Christopher J. Chipello and Jacob M. Schlesinger, “Tractor

Maker Kubota Is Plowing Funds Into U.S. High-Tech Firms,” Asian

Wall Street Journal Weekly, July 23, 1990, p. 6.

35 Gina Kolata, “Japanese Labs in U.S. Luring America’s

Computer Experts,” The New York Times, Nov. 11, 1990, p. 1.

36 Kenneth Flamm argues that a small group of Japanese suppliers

of dynamic random access memory (DRAM) semiconductors had

enough market power in the late 1980s to limit chip production raise

prices in the world market and collect extraordinary profits, rather than

aggressively compete with each other on price. (It should be noted that,

according to some analysts, this behavior was, in effect, sanctioned by

the U.S.-Japan Semiconductor Trade Agreement of 1986. Others believe

that the trade agreement had little to do with the movements of DRAM

prices.) At the same time, the integrated Japanese electronics companies

used their chips (for which their cost was much lower than the world

price) in their own computers, and began to compete very successfully

for the first time in the U.S. personal computer market. See Kenneth

Flamm, “Semiconductors,” in Gary Clyde Hufbauer (cd.) Europe

1992: An American Perspective (Washington DC: The Brookings

Institution 1990), pp. 248-260.

37 The modem debate began in the late 1970s, when some

proposed that the United States require a certain percentage of domestic

content in cars assembled here.

38 Jean-Christophe de Gouville, “European Carmakers GetReady

To Battle the Japanese,” Japan Econonic Journal, July 28, 1990, p. 16.

39 Electronic Engineering Times, “Europeans May Miss Own Fab

Boom” July 16, 1990.

40 Other measures might include the patenting and licensing

activity, and citations to technical articles. Data for these measures are

not available for foreign firms investing in the United States.

41 It is possible that virtually all R&D done by foreign affiliates in

the United States is done for, if not by, manufacturing affiliates.

However, R&D intensity of U.S. firms is usually presented in terms of

manufacturing R&D as a percent of manufacturing sales, so the data for

foreign affiliates are presented here in the same way, for consistency.

42 R&D intensity may have been unusually low for Japanese

manufacturing affiliates in 1987; all R&D spending, taken as a percent

of sales of Japanese manufacturing affiliates, was unusually low that

year-1.3 percent, compared to figures as high as 2 percent in other

years. However, all R&D spending as a percent of manufacturing sales

was consistently lower for Japanese affiliates than for European

affiliates throughout the period 1977-88 (data for manufacturing R&D,

by country, are available only for 1987).

43 Graham and Krugman, op. cit., pp. 58-62.

44 Data for investments in new plant and equipment are not

available by country and by industry, so the more comprehensive figure

for capital investments-property, plant and equipment-is used. No

comparable figure for U.S. manufacturing firms is readily available.

45 Japanese investment in transportation equipment, almost all in

greenfield motor vehicle plants, increased fivefold from 1985 to 1988,

rising from $715 million (7 percent of all Japanese manufacturing assets

in the United States) to $3.5 billion (12 percent) in the 3 years. Source:

U.S. Department of Commerce, Bureau of Economic Analysis, Foreign

Direct Investment in the United States, op. cit., 1985, table B-7 and 1988,

table B-5.

46 Tsusho-sangyosho (MITI), Tsusho Hakusho (Commerce White

Paper) Heisei 2 nen (1990), 7 gatsu, p. 192.

47 The overseas markets were the United States, the EC, the newly

industrializing economies (NIEs), and ASEAN nations. The percentage

of respondents citing increased local sales as the main reason for

investing exceeded 80 percent in all except the NIEs, where the

percentage was between 70 and 75 percent.

48 Tsusho-sangyosho, op. cit., p. 192.

49 This is inferred from the pattern of investment in the United

States, rather than from Japanese literature. According to a recent MITI

survey of international investors, collecting technology and market

information ranked eighth (out of nine) on the list of reasons for

investing in the United States, cited by only about 12 percent of

respondents. The same motive ranked eighth out of 10 on the list of

reasons for investing in the EC (cited by about 18 percent of

respondents); ninth of 9 on the list for the ASEAN nations (cited by less
Chapter 3--American Firms, Foreign Firms: Contributions to the Nation . 113

than 10 percent of respondents); and did not figure in investments in

NIEs.

50 “Japanese Investments in Small U.S. High-tech Companies

Grow,” R&.D Magazine, September 1990, p. 18.

51 “Nicolet Signs With Matsushita,” Electronic Engineering

Times, Sept. 24, 1990, p. 2.

52 For example, in a recent article the president of Meitec America,

George Leslie, says, “. . .Japanese firms are ideal candidates for

strategic partnerships. In fact forging a strategic alliance with a Japanese

firm not only can provide an additional source of funding but also can

pave the way to Japanese market entry. . .“ See George Leslie, “Getting

a Read on Strategic Alliances, ’ Electronic Engineering Times, Sept. 3,

1990, p. 35.

53 Ibid.

54 Letter from Senators Jeff Bingaman and Lloyd Bentsen to

James F. Rill, Assistant Attorney General, Antitrust Division, U.S.

Department of Justice, Sept. 27, 1990. See also Sheridan Tatsuno, “U.S.

Threatened by Rash of High-Tech Buyouts,” New Technology Week,

Monday, Aug. 6, 1990, p. 7.

55 For a short description of these arguments, see Tatsuno, ibid.

56 U.S. semiconductor manufacturers allege that seven types of

semiconductor equipment became available to them 2 to 3 years after

delivery to semiconductor firms in Japan. Bingaman and Bentsen, op.

cit. In another example, the Manufacturers’ Alliance for Productivity

and Innovation states in 1990 that intra-keiretsu purchasing patterns

allowed Japanese investors sufficient market power to avoid competition

from U.S. companies. Source: Phyllis A. Genther and Donald H. Dalton,~

Japanese Direct Investment in U.S. Manufacturing, International Trade

Administration (Washington, DC: U.S. Department of Commerce, June

1990), p. 9.

57 Ibid., p. 17.

58 “U.S. Electronics Strengthens Foothold in Japan,” New

Technology Week, Monday, Jan. 8, 1990.

59 “Shadow of Suspicion,” Far Eastern Economic Review, July

26, 1990.

60 Quoted study was done by Mordechai Kreinin of Michigan

State University, and written up in The World Economy, a British

Journal.

61 Urban C. Lehner and Alan Murray, “Japanese Buying Binge

Stokes U.S. Insecurity,” Asian Wall Street Journal Weekly, June 25,

1990, p. 12.

62 Ibid.

63 Tsusho-sangyosho, op. cit., p. 189.

64 Lehner and Murray, op. cit.

65 Graham and Krugman, op. cit., p. 25.

66 Rutter, op. cit., p. 15.

67 Tsusho-sangyosho, op. cit., p. 188.

68 James Womack, Massachusetts Institute of Technology, personal communication with OTA staff.

69 Hodges, op. cit., p. 361.

70 Throughout the 1980s, Japanese exports of automobiles to the

United States have been constrained by a formal VRA and, after its

expiration in 1985, an informal pledge. These agreements made it very

difficult for Japanese producers to increase exports, and encouraged

them to invest in North American production facilities to increase sales.

71 Supposing, for example, that production from the greenfield

plants of foreign direct investors substitutes entirely for imports, rather

than for output of a domestically owned and located firm. There are

always some domestic jobs (e.g., in transportation, warehousing, and

sales) associated with imports, so that not all the new jobs involved in

making, storing, transporting, and selling the goods from the greenfield

plant are net additions to the jobs that would have been associated with

imports.

72 Framingham is described as the worst American-owned auto

plant. Womack et al., op. cit., p. 85.

73 Womack et al., op. cit., pp. 82-84.

74 See, for example, Mike Parker and Jane Slaughter, “Management by Stress,” Technology Review, October 1988, pp. 36-44.

75 Clare Ansberry, “New Japanese Chief Seeks Turnarmmd at

National Steel,” Asian Wall Street Journal Weekly, Aug. 6, 1990, p. 23.

76 The high quality attained by the luxury auto manufacturers of

Europe is not associated with high productivity and cost control. The

mass production auto manufacturers of Europe have no better quality

records and substantially worse productivity records than the American

Big Three. John F. Krafcik and John Paul MacDuffie, “Explaining High

Performance Manufacturing: The International Automotive Assembly

Plant Study,” paper prepared for the International Motor Vehicles

Program International Policy Forum May 1989.

77 David Sheridan, “Worker Displacement in the California

High-Tech Industry,” contractor report to the Office of Technology

Assessment May 1986.

78 Dedra Hauser, “Overseas Employees Favored in Cutbacks,”

San Jose Mercury News, Oct. 29, 1985, pp. B9-B1O, cited in Sheridan,

op. cit.

79 Graham and Krugman, op. cit., pp. 56-57.

80 They are sometimes able to pay a great deal more, however.

That would be unlikely in the United States, which generally has higher

wages than other countries, but in developing nations, employees of

foreign affiliates are sometimes the best-paid workers around.

81 U.S. Department of Commerce, Bureau of Economic Analysis,

Foreign Direct Investment in the United States: Operations of U.S.

Affiliates of Foreign Companies, various years.

82 John M. Kline, “Trade Competitiveness and Corporate Nationality,” Columbia Journal of World Business, fall 1989, p. 29.

83 Womack et al., op. cit., p. 217. Domestic content claims,

according to these authors, are “notoriously unreliable,” but they judge

Honda’s claim is “not far off the mark.”

84 U.S. Department of Commerce, Bureau of Economic Analysis,

Foreign Direct Investment in the United States: Operations of U.S.

Affiliates of Foreign Companies, Preliminary 1988 Estimates (Washington DC: August 1990), tables G-3 and G-6.

85 Christopher J. Chipello, “Tractor Maker Kubota Is Plowing

Funds Into U.S. High-Tech Firms,” Asian Wall Street Journal, July 23,

1990, p. 6.

86 Evidence and arguments for this conclusion are detailed in U.S.

Congress, Office of Technology Assessment Paying the Bill: Manufacturing and America’s Trade Deficit, OTA-ITE-390 (Springtleld, VA:

National Technical Information Service, June 1988).

87 A falling currency dimini shes standards of living by making

imports more expensive. In addition, unless all our international debts

are denominated in dollars, it also obliges us to work harder to pay our

debts to foreign creditors; a falling or volatile currency will also make

it harder to obtain dollar-denominated loans.

88 JESSI stands for the Joint European Submicron Silicon

Initiative. Ch. 5 has a more extensive discussion of JESSI.

89 Kline, op. cit., p. 30.

90 Graham and Krugman point out that foreign or foreigncontrolled companies cannot acquire gas pipeline rights-of-way or

certain mineral leases on Federal land if the investor’s home country

denies such rights to American firms. Graham and Krugman, op. cit., p.

96.

91 Kline, op. cit., p. 27.

92 These exceptions do not necessarily limit defense production

solely to domestic firms, however, as the large international trade in
114 ● Competing Economies: America, Europe, and the Pacific Rim

military equipment attests. For example, the Department of Defense’s

“buy American” procurement regulations require not that the companies doing its production be American owned or controlled, but that the

products involved must have at least a 50 percent U.S. content. The

Department of Commerce’s trade fairs permit any firm with 51 percent

U.S. content in its products assembled or produced abroad to participate,

and the U.S. Export-Import Bank will make loans or loan guarantees to

anyone whose products have at least a 50 percent U.S. content. Source:

Kline, op. cit., pp. 26-27.

93 The Defense Production Act lapsed, temporarily at least, when

in the closing hours of the 101st Congress, in October 1990, the Senate

failed to adopt the conference report re-authorizing the act, and did not

agree to concurrent resolutions passed by the House extending the act.

94 CFIUS members include representatives of the Departments of

Commerce, Defense, Justice, and State; the Office of Management and

Budget the U.S. Trade Representative, and the Council of Economic

Advisers.

95 Bingaman and Bentsen, op. cit. Information in the letter was

based on Dataquest, Inc. figures.

96 For a discussion of options that might be adopted to strengthen

such government-industry collaboration, see U.S. Congress, Office of

Technology Assessment, Making Things Better, op. cit.

97 Omnibus Trade and Competitiveness Act of 1988, Public Law

100-418, Sec. 5131.

98 U.S. Congress, House of Representatives, Conference Report

101-909 to Accompany HR. 5021, Making Appropriations for the

Departments of Commerce, Justice and State, the Judiciary and Related

Agencies for the Fiscal Year Ending Sept. 30, 1991, and for Other

Purposes, Oct. 20, 1990.

99 See, for example, Kline, op. cit., p. 30.
Chapter 4

U.S. Trade Policy
CONTENTS

Page

INTRODUCTION AND SUMMARY . . . . . . . . . . . 117

THE UNDERPINNINGS OF TRADE POLICY . . 118

The Rationale for Free or Liberal Trade . . . . . . . . 119

Refinements and New Trade Theory . . . . . . . . . . . 119

Public Policy and Trade Theory . . . . . . . . . . . . . . . 121

THE U.S., TRADE POLICY APPARATUS . . . . . . 124

FOREIGN MARKET BARRIERS . . . . . . . . . . . . . . 125

Negotiating To Reduce Barriers . . . . . . . . . . . . . . . 127

Dispute Resolution Under GATT . . . . . . . . . . . . . 129

Section 301 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130

Japan’s Barriers ● . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136

New Approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137

SUBSIDIES AND DUMPING . . . . . . . . . . . . . . . . . . 138

Subsidies and Dumping: What They Are,

Why They Matter . . . . . . . . . . . . . . . . . . . . . . . . . 138

Countervailing Duty and Antidumping Cases . . . 139

The Effectiveness of U.S. Countervailing Duty

and Antidumping Law . . . . . . . . . . . . . . . . . . . . . 143

How Hard Are the Problems to Fix? . . . . . . . . . . . 153

OTHER MEASURES AGAINST IMPORTS . . . . . 155

GOVERNMENT PROCUREMENT . . . . . . . . . . . . . 157

What the U.S. Public Sector Purchases . . . . . . . . . 157

The U.S. Legal Regime.. . . . . . . . . . . . . . . . . . . . . 159

The Effect of U.S. Procurement Law and

Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160

Forcing Open Foreign Markets . . . . . . . . . . . . . . . . 162

EXPORT PROMOTION . . . . . . . . . . . . . . . . . . . . . . . 163

EXPORT CONTROLS . . . . . . . . . . . . . . . . . . . . . . . . . 168

Reducing East-West Controls’ Dragon

Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . 170

Licensing Procedures . . . . . . . . . . . . . . . . . . . . . . . . 172

Boxes

Box Page

4-A. GAIT and the Uruguary Round . . . . . . . . . . . . 128

4-B. An Unfiled Dumping Case . . . . . . . . . . . . . . . . . 146

4-C. East-West and North-South Controls; Cocom

and Other Multilateral Export Control

Forums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

Figures

Figure Page

4-1. Import Penetration of the Japanese

Semiconductor Market . . . . . . . . . . . . . . . . . . . . . 130

4-2. GATT Dispute Resolution Proceedings,

1947-86 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

4-3. U.S. Trade Deficit With Japan and the World,

1983-1990 ..*..., . . . . . . . . . . . . . . . . .,.**.,. . 136

4-4. New Countervailing Duty Cases Completed,

January 1987 Through June 1990 . . . . . . . . . . . . 140

4-5. New Antidumping Cases Completed, January

1987 Through June 1990 .. ., .. .+. . . . . . . . . . . 141

4-6. Decisions in U.S. Countervailing Duty Cases

Completed January 1987 Through

June 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144

4-7.Decisions in U.S. Antidumping Cases

Complete& January 1987 Through

June 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

4-8. Government Purchases of All Goods and

Durable Goods, 1990 . . . . . . . . . . . . . . . . . . . . . . 158

4-9. Defense Purchases of Durable Goods, 1990,

$83.6 Billion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158

Tables

Table Page

4-1. Some International Trade Functions of Some

Key Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

4-2. Summary of Some U.S. Laws Regarding

International Trade . . . . . . . . . . . . . . . . . . . . . . . 126

4-3. Selected Section 301 Cases . . . . . . . . . . . . . . . . 132

4-4. New Countervailing Duty Cases Completed

January l, 1987 Through June 30, 1990.... . 141

4-5. New Antidumping Cases Completed

Jan. l, 1987 Through June 30, 1990 . . . . . . . . 142

4-6. Outstanding Measures Against Subsidies

as of June 30,1990 . . . . . . . . . . . . . . . . . . . . . . . 143

4-7. Outstanding Antidumping Measures

as of June 30,1990 . . . . . . . . . . . . . . . . . . . . . . . 143

4-8. Section 201 Cases .. .. .. .. .. .., ... ..+..... 156

4-9. Purchases of Goods by the U.S. Public

Sector in 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . 157

4-10. Spending for Export Promotion in 1987..... 164
Chapter 4

U.S. Trade Policy

INTRODUCTION AND SUMMARY

Many of the United States’ key trading partners,

including the European Community (EC), Japan,

Korea, and Taiwan, employ diverse tools to enhance

manufacturing competitiveness. Tools like R&D

support, infant industry protection, and favorable

financing have been used to craft comprehensive

trade and industry polices. On the whole, these

policies have benefited Japan, Korea, and Taiwan,

while posing a competitive challenge to the United

States and the EC.

The United States by and large has not imitated

the proactive trade and industry policies of its

trading partners. U.S. philosophy has been that

manufacturing firms should make it on their own in

the free market, with minimal help or interference

from government. If this country were to modify its

philosophy and seek ways in which government

could enhance manufacturing competitiveness, two

sets of policy tools could be used. The first set

concerns the domestic economy. It includes improving education and training; using tax and fiscal

policies to encourage long-term investment; costsharing commercially oriented R&D with industry;

and promoting diffusion of best practice technology,

especially to small and medium-sized manufacturers. Application could be uniform or selective--e.g.,

R&D support for certain technologies or industries.

Many of these policies were discussed in Making

Things Better1 (also see ch. 2).

The second group of policies, examined in this

chapter, deal primarily with international trade. U.S.

trade policy since World War II has normally sought

no advantage for U.S. businesses beyond what they

would obtain in a fully open world market. Rather,

policy for the most part has tried to reduce,

eliminate, or counteract foreign trade practices that

distort the free market. The goal has been to ensure

that U.S. companies can compete on an equal

footing with foreign firms-or, as is sometimes said,

to “level the playing field.” However, despite

substantial progress in reducing quantitative restrictions on trade, this goal has not been fully met.

Barriers against U.S. exports may persist for several

years before the United States can get them removed. When foreign countries’ domestic policies

confer advantages on their firms that result in

dumped or subsidized U.S. imports, the United

States can levy additional duties, called countervailing or antidumping duties, against the imports.

These additional duties are intended to eliminate any

foreign advantage; however, most often they do not.

The failure of U.S. trade policy to meet its

objectives is not so much a result of particular

measures taken; the problem is that trade policy has

been assigned a role that it cannot reasonably be

expected to fulfill. To understand this point, it is

necessary to look more closely at what other

countries do. Some target their market barriers and

domestic policies to promote specific industries,

such as semiconductors and computers, that contribute disproportionately to a nation’s wealth and

economic development, and on which U.S. manufacturing competitiveness depends. Some industries

yield a high reward because they have increasing

returns to scale and learning and spillover benefits to

other industries. Developing such industries is often

a race in which whoever gets ahead will likely stay

ahead. A company with technical advantages or

higher market share can reap greater economies of

scale or learning, which will help it capture more

market share and finance more R&D than its

competitors, so that it can pull still further ahead.

After World War II, the United States was the

world leader in high-reward industries, and in a free

and undistorted world market would likely have

remained so. However, several other countries

assisted their domestic firms, in part by protecting

their home markets with tariffs, quotas, and other

barriers. A protected home market can increase the

domestic industry’s market share and development

while decreasing opportunities for foreign competitors. Home market protection can further enable the

domestic industry to charge cartel prices, thus

earning above-normal profits that can boost R&D

programs. Profits in a protected home market can

bankroll forays into export markets at low prices. Of

course, home market protection can easily go astray,

leading to an industry ill-suited for international

competition; when managed properly in combination with other policies, however, it can aid a

nation’s economic development.

–117–
118 ● Competing Economies: America, Europe, and the Pacific Rim

In cases where home market protection has been

successful, it has been as part of a more comprehensive strategy that included many domestic programs.

This includes both society-wide programs-e. g.,

first-rate education, encouragement of household

savings, and tax breaks for R&D and capital investment—and industry-specific programs, such as R&D

projects, special tax breaks, preferential financing,

and tolerance of cartel pricing in specific industries.

By these means, some foreign governments have

promoted selected industries to the point where they

can earn large profits on their own, without need of

government assistance (though assistance often

continues).

Other countries’ domestic programs and market

protection have sometimes damaged U.S. industries.

For the most part, U.S. trade policy plays out by

noticing some of the advantages foreign firms enjoy,

and then trying after-the-fact to eliminate or offset

them, usually after substantial delay and often

incompletely.

Export policy focuses on foreign market barriers.

Where foreign markets are closed to U.S. goods, the

U.S. Government can try to get the barriers removed.

However, not all barriers can be addressed, and

many important ones have taken years to eliminate.

Removal of specific barriers is an ineffective solution at best. It takes time and effort to identify

barriers; there are so many that some will be missed.

And once a barrier is identified, it takes time to

negotiate its removal, if it can be removed at all.

Import policy focuses on levying duties to counteract foreign subsidies and dumping. However, the

law’s approach of precisely compensating for observed subsidies and dumping has limited effectiveness. Identification and quantification of subsidies

and dumping is a slow and laborious process. Once

duties are in place, dumped or subsidized goods can

come into the United States from a new country,

requiring another investigation before duties can be

assessed on the new goods. The formula to determine a duty that precisely neutralizes the foreign

advantage does not fit the reality of modern industrial competition. Probably no formula could.

Other aspects of U.S. trade policy are also less

advantageous for U.S. companies than foreign

counterparts’ policies. While many foreign governments’ procurement policies are attuned to fostering

national industries, U.S. procurement policy is not.

The Commerce Department’s export promotion

programs, while useful, are overshadowed in funding and effectiveness by similar programs in other

countries. Export financing by the Export-Import

Bank of the United States is sometimes less attractive than that offered by other countries’ export

financing agencies. Finally, U.S. export controls for

reasons of national security unduly hinder hightechnology exports; while many controls are necessary for national security, some are not.

THE UNDERPINNINGS OF

TRADE POLICY

The conviction that free trade promotes social

well-being is a cherished principle of economics

and, not coincidentally, of postwar shapers of

America’s trade policy. The arguments for free trade

are powerful, and the prosperity that coincided with

the GATT regime, which opened more nations to

trade than at any other time in modern history, is

usually regarded as convincing evidence of free

trade’s benefits.

Yet challenges to the free-trade regime continue

and are gaining force. There is growing sentiment,

especially among business managers, that domestic

firms are unable to compete on an equal footing with

foreign firms because of the support and protection

foreign producers receive from their governments.

Such sentiment is found not only in America but in

Western Europe as well. According to one analysis,

the quest of American industries for relief from

import competition through special trade protection

is driven partly by recent developments such as the

overvalued dollar and high unemployment of the

early 1980s.2 In addition to temporary situations that

make it difficult to export or compete with imports,

companies in the United States and Europe are

simply up against some very well-financed and

technically sophisticated competitors from Japan

and East Asia, many of which have government

backing in various forms. The fear of loss of

dominance--or even dissolution-is driving interest in various types of trade relief, ranging from

outright protection to calls for different forms of

managed trade.

Is it time for a new guiding philosophy of trade?

Few argue for widespread protection, but there is

deep division between those who maintain that free

trade invariably yields the greatest benefits and

those who believe the time has come for some degree

of managed trade. (Whether ‘‘some degree’ of
Chapter 4--U.S. Trade Policy ● 119

managed trade is a realistic possibility is also in

dispute. Critics see any management as the first step

on the path to widespread protection.)

Both free trade and managed trade have potential

benefits and drawbacks. Even the option of a middle

course, with modification of free trade that doesn’t

fit the nebulous term “managed trade,” would

require a leap of faith, since evidence supporting any

view of the philosophy of trade is equivocal. It

should be stressed, as it often is not, that this is just

as true of free trade as it is of other courses labeled

industry policy, managed trade, and protectionism.

The Rationale for Free or Liberal Trade

Free trade is attractive for several reasons. One of

the most powerful arguments in its favor is that a

period of increasing prosperity has coincided with—

proponents would say it has been caused by—

international market opening. Many analyses attribute the twentyfold increase in trade in manufactured

goods and the sevenfold increase in manufactured

output to the accomplishments of the GATT.3

The theoretical rationale for free trade is based on

comparative advantage. Different products require

differing amounts of labor, capital, or other resources to produce. Nations are endowed with these

resources in different proportions. This combination

of differences gives nations specific advantages in

producing specific products. Nations like Canada

and the United States, generously endowed with

softwood forests, have advantages in producing

construction lumber, plywood, and linerboard, for

example. If nations specialize in producing what

they make best, and there is free trade, everyone is

better off than if every nation tries to produce the mix

of goods it consumes by itself. This straightforward

result only applies under certain conditions. These

include perfect, or nearly perfect, competition, and

no messy complications like barriers to entry (which

make it difficult for new companies to enter a

market), economies of scale or learnin g effects

(which lower the costs of production as the volume

of production or experience increase), and externalities (costs that producers do not take responsibility

for, or benefits that are not available to them as

profits).

One of the earliest and simplest theories developed to explain why nations trade and the consequences thereof was developed by Eli Heckscher

and Bertil Ohlin. The Heckscher-Ohlin theory conceived of a simplified world with two so-called

factors of production (labor and capital), two products whose production requires these factors in

different proportions, and two countries with differing abundance of labor and capital. The capital-rich

country would have an advantage producing the

capital-intensive good, and the country in which

labor was plentiful would have an advantage in

producing the labor-intensive good. Although in

theory it is unlikely that either country would

specialize in producing one good to the exclusion of

the other,4 the Heckscher-Ohlin model showed that

if each exported what it was best suited to produce,

the welfare of consumers in both countries would be

greater than if there were no trade.

In this view, tariffs, once viewed as the classic

interference with free trade, are a net loss. While

producers of the protected good in the home country

may benefit from a tariff and the home country gets

some revenue from it, the loss to consumers more

than offsets these benefits.s Similarly, quotas can

have negative results, as can the host of nontariff

barriers that curtail free trade.

This is the standard beginner’s guide to the

economics of international trade. Like all models, it

is built on a number of assumptions, all of which

diverge from reality. The important question is how

great a divergence exists between these assumptions

and the real world. In some cases, the divergence is

minor, and the result, free trade maximizing

everyone’s welfare, is still valid. In other cases, the

divergence is significant.

Refinements and New Trade Theory

Dividing factors of production into just two or

three groups is oversimplified. After work in the

1950s by Wassily Leontief showed that the United

States, thought to be a relatively capital-rich nation,

was exporting goods that were more labor-intensive

than those it was importing, a refinement was

developed. That is, labor could be segregated by

skill intensity, and the U.S. advantage was in

producing goods and services especially intensive of

skilled labor.

Another oversimplification lay in using factor

proportions as the only explanation of comparative

advantage. Other factors can give a country an

advantage in producing and exporting. Linder6

postulated that the size and character of the home

market was an important determinant of what a
120 ● Competing Economies: America, Europe, and the Pacific Rim

country exported; after a product was developed for

the domestic market, exports would begin when the

domestic market was too saturated or too competitive to offer sufficient expansion or profit opportunities. Vernon and Wells explained trade flows

through the product life cycle. The life cycle

explanation argued that products would be developed and manufactured for the domestic market and

later sold abroad. For the United States, products

would be developed with labor-saving characteristics attractive to a relatively affluent customer. As

other countries raised their standards of living, their

markets would become ripe for American exports, at

least until manufacturers in the foreign country

learned how to make the product. Over time, as the

technology matured and stabilized, countries with

lower production costs (one example is lower labor

costs) could master production, and the affluent

country would lose its advantage and begin to import

the product.

Even with these refinements, trade theory was still

far from reflecting real-world conditions. By the

early 1980s, dissatisfaction with the theoretical basis

of America’s trade policy was evident even within

the economics profession.7 Outside the profession,

those concerned about the adequacy of the free-trade

prescription and its theoretical basis became better

informed and louder. The rise of Japan as an

industrial power fueled the debate, for it was

manifestly not a free trader, at least during the first

three decades after the war, yet its industries were

becoming more competitive and its standards of

living higher. While economists may never reach a

verdict on whether and how Japan’s trade policies

and its economic prosperity are causally linked,

Japan made everybody think more deeply about

trade and trade theory.

Developments in trade theory in the late 1970s

and 1980s, often termed the new trade theory, have

been summed up by saying “. . .conventional trade

theory views world trade as taking place entirely in

goods like wheat; new trade theory sees it as being

largely in goods like aircraft.’ In other words, new

trade theory permits different outcomes and policy

prescriptions for different kinds of goods. So what

makes aircraft different from wheat, beyond the

obvious physical and utilitarian characteristics?

One of the most obvious differences is in the scale

of production. While wheat farming is no longer just

a matter of small family farms, there are thousands

of wheat farmers, and none is large enough to exert

much effect on the market. Aircraft, on the other

hand, are produced by a handful of companies. There

are two producers of large (100+ passenger seat)

commercial aircraft in America and another in

Europe, and three engine makers for large commercial jets.9 There is a broad consensus that the world

could not support additional entrants at the level of

engine or aircraft assembler. There are more firms at

the subassembly levels, but many expect those

numbers to shrink. Increasing returns to scale

accounts for this imposing structural difference

between the two industries. What this means is that

compared with wheat farming, making aircraft

requires a huge initial investment (typically $3 to $5

billion to design, develop, and certify a new model),

but once it is made, producing one more airplane is

relatively inexpensive ($50 to $150 million) .10

There are also increasing returns to scale, up to a

point, in wheat farming. In all industries there is a

range of increasing returns, and a point where any

additional input (e.g., land, labor, capital, or knowledge, singly or in combination) begins to make the

production enterprise less efficient. That point,

where diminishing returns are gained as the scale of

enterprise increases, is reached fairly quickly in

wheat farming, so that the most economical scale of

enterprise is small enough to allow many thousands

of producers. Large commercial aircraft production

is at the other end of the scale; increasing returns are

still available to Boeing Commercial Aircraft Group,

whose customer base is 60 percent of the world

market and has been higher. While neither industry

is typical, the patterns of world trade suggest that a

greater amount of trade is in goods, like aircraft, that

have increasing returns to scale over a wide range of

production. If government assistance helps firms

pull ahead of foreign competitors, scale economies

can help keep them there.

Another quality that sets aircraft apart from

commodities like wheat is knowledge intensity. All

products require some knowledge, at least for

efficient high-quality production. But the knowledge embodied in a 747 is far greater than the

knowledge embodied in a ton of wheat, and it is

much more difficult to master the technology of

designing and making an airplane than the techniques for growing wheat. The product cycle approach to explaining trade flows recognized the

importance of technology, but it assumed a relatively fixed cycle in which technology is eventually
Chapter 4--U.S. Trade Policy . 121

diffused from the country of origin to producers in

countries with other advantages, such as labor costs.

For sophisticated and expensive technology such as

in airplanes, diffusion could be slow, difficult, and

expensive.

Externalities complicate classic models of trade,

too. Also called spillover effects, externalities are

benefits or costs of a business or industry that are not

captured or borne by the companies involved.

Environmental pollution is a classic example of a

negative externality; in most circumstances the

generators of pollution have not had to bear the total

damage or the entire burden of cleanup. One of the

most frequently cited positive externalities is R&D.

R&D done by one firm or industry often generates

knowledge that other firms or industries can use

without paying for it. Positive externalities translate

into spillover effects that can benefit the society as

a whole. Policies that foster growth of industries

with positive externalities can create comparative

advantage and produce higher growth in standards of

living.

New trade theory combines the ideas of increasing

returns to scale and technological advantage, creating a virtuous circle. In industries with these

increasing returns, a company with superior technology or greater market share can reap greater economies of scale or learning, which will help it capture

additional market share and finance more R&D than

its competitors, enabling it to pull still further ahead.

In this way, a firm that starts out ahead can keep

increasing its advantage, at least until other entrants

that are well-funded and patient enough to weather

long periods of loss and learning can make inroads

as, for example, Airbus and the Japanese semiconductor producers have done.

Public Policy and Trade Theory

In industries with increasing returns to scale,

significant positive externalities, and high knowledge intensity, there can be a sound economic case

for departures from free trade, or protection.ll

Economic models have postulated that it can benefit

a nation’s balance of trade and standard of living to

protect certain kinds of industries under certain

circumstances, such as infant industry protection.12

More cautious analysts suggest that policies to

strengthen the research base (e.g., R&D tax credits)

and encourage pooling of resources (e.g., policies to

permit or encourage strategic alliances) would be

useful, but that protection or subsidies would lead to

a neighbor-beggaring world of retaliation.13 This

prescription may be more appropriate for technological leaders than for those facing dominant foreign

competition. R&D incentives and encouragement

for firms to pool resources may suffice to maintain

competitiveness in a country with a well-developed

technological base. However, without protection

some domestic industries could face crushing competition from foreign firms whose technological

superiority (perhaps attained through subsidies and

protection by their own government) makes their

production costs much lower.

It is hard to prescribe policy for trade in the real

world. Ever since World War II, the United States

has maintained a strong interest and belief in free

trade. As the principal architect and (until recently,

perhaps) greatest proponent of the General Agreement on Tariffs and Trade (GATT), the United

States regards itself as the world’s standard bearer

for open markets and reasonable, unrestrained competition. While its market is still one of the world’s

most open, the United States’ image as a staunch free

trader is fading; as its industries become less

competitive, the United States protects them more.

The United States is only one culprit in what many

regard as a watershed—some might even say a

crisis-for GATT and the principle of free trade.

Preeg cautions that “[t]he GATT multilateral system is. . .at the greatest risk of being overtaken by

events. 14

What events? One is an increasing tendency for

nations to negotiate quotas bilaterally or among

trading blocs or customs unions. GATT has recorded

over 200 quota arrangements that restrict industrialized countries’ imports in products such as textiles

and apparel, steel, motor vehicles, semiconductors,

machine tools, footwear, and consumer electronics.15 These arrangements include the proliferation

of voluntary restraint agreements (VRAs) that restrict trade between two nations. An example is the

VRA between Japan and the United States in which

Japan agreed to limit its exports of motor vehicles to

the United States, from 1.76 million units in 1981 to

1.94 million units in 1985.16 Another kind of

restriction is represented by the Multifiber Arrangement (MFA), by which signatories agree to quotas

on trade in textile and apparel products. Different

countries and regions set their own quotas, which

limit how fast imports in covered areas can grow.17

Although done under GATT auspices and legal by

292-889 0 - 91 - 5 QL:3
122 ● Competing Economies: America, Europe, and the Pacific Rim

GATT standards, the MFA represents an accommodation of GATT principles to reality rather than a

change in GATT philosophy.

Another possible threat to the GATT is regionalism. The GATT stresses nondiscrimination

—treating all trading partners the same and providing to all signatories most-favored-nation (MFN)

status.18 This principle may be eroding as more

nations with geographic or other ties negotiate

special trading arrangements. The recent U.S. Free

Trade Agreements with Canada and Israel, and

Europe’s Single Market Act are recent examples;

more are possible, including a North American free

trade agreement (FTA) and one between Australia

and New Zealand. Not all these regional arrangements are inconsistent with the spirit of GATT: the

U.S.-Canada FTA and the contemplated AustraliaNew Zealand FTA are viewed as building blocks for

broader trade liberalization.19 The European Community is a bit more of a puzzle. While many expect

unification to open the market, the murky signs now

available indicate that EC policies are more likely to

open opportunities for investment in Europe than for

exports to it. For some products, especially motor

vehicles, the effect is to restrict trade with Japan.

Finally, some analysts see industrial policies as

challenges to flee trade. Nations use a variety of

methods to support and nurture firms that are

regarded as essential to national well-being. Nearly

all use some means to assure domestic production of

armaments and other goods vital to national security,

and many promote the growth and development of

economically strategic industries. The policies can

range from outright protection for infant industries

to policies whose protectionist intent is far more

subtle and often unclear. For example, the laws and

practices governing distribution of goods from

wholesalers to retailers in Japan are often viewed as

an effective form of protection against imports, as

are public procurement of telecommunications equipment and services in Europe and Japan and U.S.

national security requirements stipulating that some

goods be purchased from domestic suppliers. Whether

such policies are actually intended to protect domestic industries and companies is a topic for endless

disagreement. But in fact, industrial policies often

discourage imports, because nations often implement industrial policy to help their own industries

catch up to the world’s leaders. Even policies

designed to accelerate development in new technologies, such as high-definition television (HDTV),

often have overtly protectionist overtones. The fact

that the United States and the EC, both behind Japan

in developing HDTV systems, are debating adoption

of non-Japanese HDTV standards is an indication.20

In short, no nation has an unblemished record of

playing strictly by free trade rules. To the extent that

the free-trade analyses of the gains from trade and

penalties of protection are correct, increasing protectionism is a problem. There is a large class of

goods-commodities or other unspecialized products

-contributing about the average to value added,

productivity, or knowledge, with relatively stable

and widely available production technologies. This

class probably includes most agricultural products

and industrial goods such as toys, apparel and

textiles, many chemicals, lumber and plywood,

footwear, iron and steel, and a lot of industrial

machinery. It is unlikely that significant sustained

trade protection in these industries would benefit

more than a narrow segment of society. This does

not mean there is never a case for protection in such

industries. Many nations—in fact, most industrialized nations—protect their steel, apparel, textile, and

lumber industries; protection of agriculture borders

on legendary.

Nations protect agriculture in part because of a

deeply rooted conviction that it is unwise to depend

on other nations for food, at least for the primary

dietary staples. While most nations want to maintain

friendly, or at least civil, relations with most others,

none wants to be a hostage to the whims of another

government in order to feed its citizens. This threat

is remote, for little other than open aggression is

likely to cause other nations to cut off food exports

en masse (as most of the world has done recently to

Iraq). But while a rational analysis might show that

the vulnerability created by depending on imports

for the bulk of one’s food is not great, the penalty in

the event of a worst-case incident is heavy; the

popular consciousness often equates it with a loss of

sovereignty.

One reason to protect mature industries such as

steel and textiles is to ease adjustment. The traditional economic model says little about mobility of

labor and capital, assuming that if an industry

shrinks because its advantage declines then its

workers and capital will migrate to industries with

more advantage. Full employment is assumed, and

the pain of the migration is mentioned only in
Chapter 4--U.S. Trade Policy . 123

passing, if at all. Adjustment rarely works this way,

even when unemployment is low.

Several things complicate the neat economic

model. Both labor and capital may be less mobile

than we would wish. Displaced workers, particularly

the unskilled and semiskilled, typically undergo

long periods of unemployment before finding new

jobs, and most take a cut in pay and benefits when

they do find new employment. According to the

latest information from the Bureau of Labor Statistics, over half (55 percent) of workers displaced from

Ml-time jobs had lower incomes when they were

reemployed, most because their wages were lower in

new full-time employment and some because their

21 Moreover, displacement new jobs were part-time.

and reemployment often involves loss of important

benefits; Podgursky and Swaim report that 29.4

percent of all reemployed blue-collar workers and

20.8 percent of reemployed white-collar workers

had group health insurance in their old jobs but not

in their new ones.22 In the worst cases, dislocation

has wider effects; downturns in industries have

resulted in long-lasting economic disability for

communities or regions. West Virginia’s economy

never recovered from the downturn in the coal

industry in the 1950s, despite attempts to mitigate its

poverty and unemployment.

Capital is not easily or painlessly mobile either.

While it is not difficult to move money around, by

shifting investments in a portfolio, for example,

capital equipment may be specialized, and loss of

competitiveness in an industry may result in scrapping of plant and equipment before their useful lives

expire, or before they are fully depreciated. This

kind of loss hardly compares to the trauma faced by

workers and families confronting plant shutdowns or

job losses, but it is a loss nonetheless.

If the adjustment period is long enough, and

everyone accepts the need for industry downsizing,

much of the pain of adjustment can be mitigated or

avoided. But if it is rapid, resulting in the loss of

significant capacity in only a few years, there can be

considerable upheaval for workers, families, businesses, and communities. Moreover, during contraction, it is often difficult to distinguish competitive

subsectors from candidates for dissolution. For

example, while we think of the apparel and textile

industries as sectors in which America has no

particular advantage, parts of both industries are still

competitive. Industrial and household textiles do not

face the same competitive pressure from imports as

apparel textiles, and many of these companies can

continue in business profitably. But many of the

firms are integrated, producing both. If part of a

company’s business faces collapse, it becomes

difficult for the other part to obtain the capital,

workers, and other resources.

While the beneficiaries of such protection are

invariably many fewer than the number of people

who pay, costs are limited if the protection is also

limited in time and scope. Like the rationale for free

trade, this often looks better on paper than in real

life. In fact, governments seldom cut the lifeline that

protection provides. Protection has continued for

decades in textiles and apparel; there are few signs

that the United States is prepared to end it, or that the

industry could avoid further dislocations if all

protection ended.

Political considerations aside, there is widespread

agreement that industries that do not contribute

disproportionately to the national storehouse of

knowledge and productivity and that do not have

increasing returns to scale over a wide range should

receive little if any protection. There is less agreement at the other end of the industrial spectrum, but

a fair economic and a powerful political case can be

made for including trade policy in the toolkit of

measures to promote industrial development. Such

protection has been used in countries that wished to

jump-start their economic development. Japan and

Korea, for example, have protected many developing industries and compiled a successful record in

developing industrial competitiveness and technical

competence in the rarefied atmosphere of domestic

protection. 23 In the United States, however, consideration of infant-industry protection has been halfhearted at best, partly because of a strong conviction

of the merits of free trade, and partly because

high-reward industries developed and flourished

here before anywhere else. The situation is different

now.

The United States retains great technological

strengths, but U.S. manufacturing in general and

many high-tech industries in particular are moving

ahead less rapidly and surely than many of their best

competitors, including Japanese and some European

companies. In microelectronics, Japanese manufacturers dominate world markets and technology

development in many products, starting with DRAM

chips in the early 1980s. Japanese manufacturers
124 . Competing Economies: America, Europe, and the Pacific Rim

have challenged the American lead in computers

throughout the market, from laptop PCs to supercomputers, and few believe that they have reached

their limit. After having pioneered scientific work in

superconductivity (a technology that could contribute to many industrial products but is still mostly in

the research stage), Americans and Europeans have

watched Japanese companies take solid steps to

incorporating superconducting materials in commercial products. And in high-resolution television,

American companies have been mostly spectators in

a game that involves European companies and

governments struggling to catchup to the Japanese.

Never before in modern history has the country been

behind in developing high-technology industries, or

more uncertain of its own ability to compete without

greater government involvement.

Those who see a place for infant-industry protection believe it should be limited. A recurring

allegation is that countries continue infant industry

protection long past the point of true vulnerability,

which hurts not only foreign competitors but also

domestic consumers and downstream industries. In

principle, infant industry protection puts an industry

on its feet, at which point it should fend for itself.

That point is undefined, however, and we know from

experience that life support systems are easier to

start than to stop. Another problem, in the United

States, at least, is that there is no political institution

capable of or charged with identifying high-reward

industries that need protection to start. Congress

lacks the time and depth of knowledge to make such

choices, and few trust existing public-sector institutions to choose wisely. If the United States does

depart from its traditional policy to open trade in all

circumstances, and pursues policies that proactively

support U.S. industrial competitiveness, the country

will likely need new government institutions and

new relationships between government and the

private sector (see ch. 2 for further discussion of this

point).

THE U.S. TRADE

POLICY APPARATUS

No one government agency has overall responsibility for U.S. trade policy. Table 4-1 lists the major

players. International negotiations on trade issues

are led by the Office of the United States Trade

Representative (USTR), located within the Executive Office of the President. The USTR’s main

mission is to achieve greater access to foreign

markets for U.S. goods, services, and investment. In

setting negotiating priorities, the USTR consults

with other agencies, Congress, and business. The

USTR negotiates bilateral and multilateral treaties

and investigates alleged foreign market barriers

under Section 301 (and related sections) of the Trade

Act of 1974, as amended.24

The Commerce Department investigates allegations that imported goods are dumped or subsidized;

conducts export promotion programs; and, with

input from other agencies, interprets and enforces

the export control laws. It studies competitive

developments in U.S. and foreign industries. and

advises the USTR and other agencies on the

environment that U.S. industries need to stay competitive.

The International Trade Commission (ITC) studies the health of U.S. industries and the effect of

imports on them. The ITC evaluates the injury (or

threat of injury) to U.S. industries that petition for

protection from dumped or subsidized imports, or

from imports under Section 201 (and related sections) of the Trade Act of 1974, as amended.25

The Defense, Energy, State, and other departments advise the USTR, the Commerce Department,

and other agencies about how trade policy could

affect their interests. These departments assist the

Commerce Department in interpreting and enforcing

export controls, and the State Department leads

negotiations regarding export controls. The Defense

Department makes agreements with other countries

regarding defense trade. The Export-Import Bank of

the United States (Eximbank) helps companies get

export financing.

The Agriculture Department supports agricultural

trade (including export promotion and export financing), administers price support programs, studies the

business condition of U.S. agriculture, and acts as

agriculture’s advocate within the government.

U.S. firms and industries can seek help from the

government under various trade laws. Table 4-2

summarizes some of these laws, showing when they

can apply, what agencies are involved, what relief

can be obtained, and the usual costs to use the laws.

The first law, Section 301, is concerned primarily

with exports. Under Section 301, firms can complain

about any ‘‘act, policy, or practice’ by a foreign

country that ‘‘is unreasonable or discriminatory and
Chapter 4--U.S. Trade Policy . 125

Table 4-l-Some International Trade Functions of Some Key Agencies

Agency Function

Office of the United States Trade

Representative (USTR), in the

Executive Office of the President

Department of Commerce

U.S. International Trade Commission

(ITC)

Department of Defense

Department of State

Department of Energy

Export-Import Bank of the United

States (Eximbank)

Department of Agriculture

Conducts most international negotiations, with assistance

from other agencies (negotiations usually are aimed at

increasing access to foreign markets).

Investigates allegations of unfair foreign trade practices (most

often foreign trade barriers) under Section 301.

Investigates allegations of subsidies and dumping.

Conducts export promotion programs.

Has lead role in specifying and enforcing export controls.

Studies and advises on competitiveness of particular industries.

Determines whether U.S. industries are injured as required for

relief under the laws regarding subsidies and dumping and

under Section 201.

Studies and advises on the competitiveness and health of

particular U.S. industries, including the effect of imports.

Assists Department of Commerce in specifying and enforcing

export controls.

Makes agreements with other countries regarding defense

trade.

Assists Department of Commerce in specifying and enforcing

export controls; leads international negotiations regarding

export controls.

Assists Department of Commerce in specifying and enforcing

export controls.

Helps firms to obtain financing for exports.

Conducts export promotion programs for agriculture.

Leads many international negotiations regarding trade in

agriculture.

Collects and disseminates agricultural trade data.

Helps business to obtain financing for agricultural exports.

Administers price support programs for agriculture.

SOURCE: Office of Technology Assessment, 1991.

burdens or restricts United States commerce. ”26

Usually the complaint concerns a foreign market

barrier. Under Section 301, the U.S. Government

can negotiate with the country concerned to remove

the barrier. If the negotiations are unsuccessful, the

United States can retaliate by imposing its own

barriers against goods or services from that country.

The other trade laws listed in table 4-2 concern

imports. Two of these laws focus on subsidized and

dumped imports. Subsidized imports are those for

which the foreign producer or exporter receives a

subsidy from its government. Dumped imports are

those sold for less than ‘‘fair value. ” U.S. firms can

complain to the Commerce Department and the ITC

about subsidized or dumped imports. If the Commerce Department finds subsidies or dumping, and

if the ITC finds that the subsidized or dumped

imports have caused or threatened material injury to

the U.S. industry, additional duties (called countervailing or antidumping duties, respectively) normally will be levied on the imports.

Finally, under Section 201 a U.S. industry can

petition for relief from any increased imports that

cause or threaten serious harm. The ITC determines

whether the injury requirement is satisfied and, if so,

recommends relief. However, the President ultimately decides what, if any, relief to grant.

FOREIGN MARKET BARRIERS

A major goal of U.S. trade policy is to reduce or

eliminate obstacles to the sale of U.S. goods in

foreign markets. However, despite U.S. efforts many

barriers exist. While the United States itself limits

some imports, the country is still one of the world’s

most open markets, and on the whole U.S. exports
Table 4-2-Summary of Some U.S. Laws Regarding International Trade

Sections of Title 19 Agencies Action Nature of Approximate cost to

Name of law U.S. Code responsible complained about relief granted petitioner in 1988a

Section 301b2411-2420 USTR investigates and de- . . . . . . . . . . . . . -- . —- - -_ -- . - -

termines any retaliation

subject to presidential

direction.

Countervailing

Duty Law

303, 1671 -1671h, Department of Commerce

675-1677k determines subsidies.

ITC determines injury.

Antidumping Law 1673-1677k Department of Commerce

determines dumping.

ITC determines injury.

Section 201b 2251-2254 ITC determines injury and

recommends relief.

President determines

relief.

Violations of a trade agreement, or other unreasonable foreign trade practices that restrain U.S.

commerce (usually some

form of foreign market

barrier).

Foreign subsidies on imported goods, injuring

or threatening to injure

a U.S. industry.

Dumping of foreign goods

in the U.S. market, injuring or threatening to

injure a U.S. industry.

Increased imports that

cause or threaten serious injury to a U.S.

industry.

Negotiations to get foreign

practice stopped,

backed by threat of

retaliation.

$54,700-$305,400

Countervailing duties equal

to the computed

subsidy.

Antidumping duties equal

to the amount by which

the goods are dumped.

Protection in almost any

form, and/or adjustment assistance.

$138,100-$399,400 for initial investigation and ruling.

$68,300-$106,700 for first court

appeal (to Court of international Trade), if taken.

$35,000-$50,000 for second court

appeal (to Court of Appeals for

the Federal Circuit), if taken.

$43,900-$147,200 for each subsequent annual administrative

review, if held.

$151,000-$553,300 for initial investigation and ruling.

$50,000-$83,000 for first court appeal (to Court of International

Trade), if taken.

$30,000-$37,500 for second court

appeal (to Court of Appeals for

the Federal Circuit), if taken.

$42,000-$168,900 for each subsequent annual administrative

review, if held.

$202,000-$566,000

a~e ~mt ~~timat= are taken from a 1988 SUwey by the Genera] A~ufiing offi~ of ~ trade lawyers. (JrS. ~ngre~,General A~u~ingoffi~, /~t~a~o~ Tfi: ~(./f$U/fofT~~e Re/?7deS

by Srna//Business, NSIAD-69-69BR (Gaithersburg, MD: U.S. General Accounting Office, Dec. 1, 1968), pp. 6,6-11, 13,23. Each attorney was asked to give a lower and upper bound for the cost

of each type of case. Each minimum value shown inthetable is the average of the minimum values given byeaoh attorney; similarty, each maximum value in the table is the average of the attorneys’

individual maximums. When an attorney in a particular instance gave an indeterminate lower or upper bound, that attorney was not included in the average. “Because most indeterminate values

tended to be large values for the upper bound, [the] average cost ranges tend to understate the actual oosts of pursuing the remedy.” Ibid., p. 6. These cost estimates do not indude employee time

devoted to the case. GAO noted (pp. 23-24) that its cost estimates were comparable to rough estimates by Professor John Jackson in “Perspectives on the Jurisprudence of International Trade:

Costs and Benefits of Legal Procedures in the United States,” University of Michigan Law Review, April-May 1984, pp. 1570-1587.

bof the Tr~e Act of 1974, pubii~ L- 93+18, as Amended.

SOURCE: Office of Technology Assessment, 1991, and references cited.
Chapter 4--U.S. Trade Policy ● 127

face more obstacles than U.S. imports. As well as

immediately worsening the U.S. balance of trade,

foreign market protection can help foreign industries

pull permanently ahead of their U.S. counterparts,

often in high-reward sectors such as semiconductors

and computers. Such barriers put the United States

at risk of losing industries important for its wellbeing.

Negotiating To Reduce Barriers

Traditionally, the most important obstacles to

international trade have been quotas (limits imposed

by a country on how much or how many of a product

may be imported into that country) and tariffs (taxes

on imports levied by the importing country). In

general, GATT has prohibited quotas for 40 years,27

though there are some important exceptions.28

Tariffs have been greatly reduced through a series of

GATT negotiating rounds, with substantial leadership from the United States (see box 4-A). The

United States has pursued lowering of tariffs by

other means, such as the 1989 U.S.-Canada Free

Trade Agreement, which, among other things, will

gradually eliminate tariffs between these two countries.

As quotas have been largely eliminated and tariffs

greatly reduced, other barriers have assumed more

importance. These include burdensome and slow

customs procedures, limitations on the activities of

foreign-owned fins, discriminatory regulations,

government procurement practices that favor domestic firms, and the inclination not to buy foreign

products. These barriers can be overt or hidden, and

can result from government action, private action, or

a combination of the two. Collectively, these obstacles are sometimes called nontariff barriers.29

Nontariff barriers are often tightly bound up with

domestic policies and are therefore harder to remove

than tariffs or quotas. Despite its success in reducing

tariffs and removing quotas, GATT has had more

difficulty in reducing nontariff barriers. Accordingly, the United States has looked beyond GATT to

eliminate these impediments.

Each year the United States conducts many

bilateral negotiations to eliminate particular nontariff barriers.30 The USTR sets negotiating priorities

primarily based on cases’ political importance, as

communicated by industry, Congress, the press, and

other executive departments. The USTR’s negotiating priorities generally have not been based on an

assessment of which industries have the most

strategic importance for the nation.

These bilateral negotiations have often succeeded

in reducing or eliminating market barriers. However,

often many years elapse without results. One example concerns how Taiwan assessed the value of

imports for the purpose of levying percentage rate

tariffs. Taiwan determined the value of imported

goods by administrative rulings rather than by using

the invoice price. By its nature, this approach

tempted government officials to set values high. In

1979, Taiwan, in an agreement with the United

States, obliged itself to switch over to valuing goods

based on the invoice price by January 1, 1986.

However, by August 1, 1986, Taiwan had not done

so .

31

Another example involves semiconductors. Despite several agreements by Japan to remove market

barriers to semiconductor imports, the U.S. producers’ share of the Japanese market stayed at about 10

percent from 1973 to 1988.32 This happened even

though U.S. chips were competitive (especially

during the first half of the period), as shown by the

large market shares U.S. companies had in the rest

of the world.33 In September 1986, to settle a Section

301 case brought by the Semiconductor Industry

Association, Japan promised to make certain efforts

to increase market access. The Japanese Government professed that it “strongly support[ed]” expanded trade, stated that Japanese firms anticipated

‘‘substantially increased’ purchases of foreign semiconductors, and agreed that ‘the expected improvement in access should be gradual and steady’ over

the agreement’s 5-year term.34 During the negotiations, the United States argued that if Japan’s market

were truly open, non-Japanese firms would capture

at least 20 percent of it. In a confidential side letter

to the U.S. negotiators, the Japanese Government

stated that it ‘‘understood, welcomed, and would

make every effort to assist” reaching the goal o f

20-percent import penetration by August 1991,

when the agreement expired.35

However, in the months after the agreement,

despite a falling dollar, U.S. sales rose little. On

March 31, 1987, the U.S. Government found Japan’s

efforts to increase market access “inadequate,” 3 6

and on April 17 President Reagan levied punitive

tariffs on certain personal computers and power

hand tools from Japan.37 In response, MITI encouraged Japanese firms to purchase more U.S. semicon-
128 ● Competing Economies: America, Europe, and the Pacific Rim

Box 4-A-GATT and the Uruguay Round1

GATT (the General Agreement on Thrills and Trade) is both an international agreement and an international

organization. Its origin traces to the 1944 Bretton Woods Conference, which launched the World Bank

(International Bank for Reconstruction and Development) and the International Monetary Fund. While the

conferees did not consider trade issues as such, they went on record as recognizing the need for a third international

organization to deal with trade. A charter for such an organization, called the International Trade Organization

(IT0), was drafted and refined, under U.N. auspices, starting in 1946, culminating in the Havana Charter in 1948.

However, the U.S. Congress would not ratify the Havana Charter; as the United States was then the world’s

preeminent economic power, other countries declined to form an ITO without the United States.

However, the President could ratify on his own, within a previous delegation of authority by Congress, a

watered down agreement called the General Agreement on Tariffs and Trade (GATT. The difference was that

GATT on its surface was just an agreement; it did not explicitly call for the creation of an international organization.

For example, GATT’s language does not provide for a general assembly or standing committees, but merely refers

to the “contracting parties” acting in concert. Originally intended as a temporary measure until the United States

endorsed an ITO, GAIT has provided the legal framework for trade among nations for over 40 years. In fact, the

member countries did form an organization to carry out GATT’s business. However, GATT has the flavor of a loose,

hastily arranged outfit, reminiscent of the Articles of Confederation that preceded the U.S. Constitution. A key

weakness is GATT's set of procedures for resolving disputes under its provisions, in which any country can, in

effect, veto any ruling against it.

GAIT’s primary mission has been reduction of trade barriers. With some exceptions, GATT immediately

prohibited quotas.2 From 1947 to 1979, GATT reduced tariffs in negotiating rounds through which countries would

negotiate reciprocal lowering of tariffs. Each country, in return for concessions by others, would bind its tariffs for

specified goods at certain rates. Each tariff concession granted to one country had to be granted to all member

countries. Tariffs were greatly reduced by this process, leaving in 1979 an average tariff of only 4.7 percent for

nonprimary products (products other than ores, timber, and the like) imported into industrial countries. 3

l~s ~x tiws h~vilyfrom Jolm H. Jacb& The World Truding System: Luw and Policy of InternationaZRe2ations (Cardnhlge, MA:

MIT Press, 1989), pp. 27-57.

%A’IT Articles XI-XIV, XIX-XXI.

3Johu H. Jaclcso~ op. cit., p. 53.

ductors and to develop long-term relationships with one in 1976. The Japanese Government did not

U.S. suppliers similar to those with Japanese suppliers. As a result, U.S. market share rose from 10.2

percent in 1988 to 11.0 percent in 1989 and 12.3

percent in 1990 (figure 4-1).38 The total imports’

market share was larger, 11.9 percent in 1989 and

13.2 percent in 1990.39 The first quarter of 1991

shows no further increase.40 This was still far behind

the progress envisioned by the U.S. negotiators in

the 1986 agreement: steady growth to 20 percent by

August 1991. A new agreement, in effect from

August 1991, has set a target of 20 percent by the end

of 1992.41

Supercomputers provide yet another example.

Since 1976, the Japanese Government heavily favored Japanese firms in its purchases of supercomputers, buying almost no U.S. machines even though

they were generally superior.42 Cray Research, Inc.,

the first firm to sell supercomputers, sold the first

purchase supercomputers until 1983, when Japanese

supercomputers were first available. Negotiations

began in 1985; in August 1987 Japan agreed to make

its procurement process more open to foreign firms,

through, for example, improved announcement of

43 However, the Japanese upcoming procurements.

Government continued to favor Japanese firms and

bought very few U.S. machines. The government did

this through a variety of means, such as a method of

evaluating performance structured to favor Japanese

machines,44 In June 1989, the USTR lauched a

Section 301 investigation, with the threat of retaliation if the Japanese Government’s practice did not

change. In June 1990, a second agreement was

reached addressing performance measures and several other procurement issues.45 This agreement may

have come too late to be of much help to the U.S.

supercomputer industry (see ch. 6).
Chapter 4--U.S. Trade Policy . 129

In recent years GATT has focused on nontariff barriers, which have become more important as quotas have

been eliminated and tariffs lowered To some extent, GATT addressed nontariff barriers from the beginning. For

example, GATT’s “national treatment” provision requires that a country’s internal taxes and regulatory

requirements not discriminate on the basis of whether a good is domestically produced or imported.4 This provision

prohibits explicit discrimination against imports, but leaves open the crafting of laws and regulations that more

subtly discourage imports. Optional supplementary agreements called GATT Codes further address nontariff

barriers. A Code is effective only between two members who have both signed it. The United States and its major

trading partners have signed several important Codes, including those on subsidies, dumping, and government

procurement.

While GATT and its Codes have eliminated some nontariff barriers, they have not succeded to the same extent

as the effort to reduce quotas and tariffs. Nontariff barriers have been an important focus of the latest GATT

negotiating round, the Uruguay Round, which began in 1986 and was scheduled for completion in 1990, but has

been extended through 1992. Canada and the EC have proposed replacing GATT with an ITO, but that proposal

will be considered only after the Uruguay Round is completed.

The United States’ priorities in the Uruguay Round negotiations have included:

1. extension of GATT to require countries to afford certain minimum levels of protection for intellectual

property (patents, copyrights, and the like);

2. extension of GATT to cover investment;

3. extension of GATT to cover services;

4. a stronger dispute settlement mechanism;

5. a stronger legal regime to minimize subsidies and dumping;

6. tighter limits on exceptions to GATT's requirements granted to developing countries; and

7. strengthening of GATT's coverage of trade in agricultural products.

This last item, dealing with agriculture, is the top priority of many developing nations; progress on that item is a

prerequisite for their consideration of other items.

4GATT Article III.

There are many reasons why it can take a long panel of experts hears the case. If the panel finds a

time to open a foreign market. First, a particular

barrier must be identified and verified, and negotiations begun. Even these first steps are sigificant

hurdles, given the prevalence of protection and the

lean staffing of the USTR’s office. Foreign countries

can prolong negotiations, demand long transition

periods to phase out barriers, and drag their feet on

promised changes. Also, when one trade barrier is

removed, another might take its place. Ultimately,

success in opening foreign markets depends not only

on the U.S. Government’s diligence but also on its

leverage with foreign countries. The United States

has two main sources of leverage: dispute resolution

under GATT46 and the threat of retaliation under

Section 301. Neither is very effective in promptly

opening foreign markets.

Dispute Resolution Under GATT

Under GATT dispute resolution procedures, an

aggrieved country must first try bilateral consultations; 47 if these are unsuccessful, an international

violation and the GATT Council formally adopts

that decision, the offending country must either stop

the practice or offer compensation (typically a

lessening of barriers on other products); if it does

neither, the GATT Council can authorize the aggrieved country to retaliate by erecting protection of

equivalent importance against the offending country.48

This route has been well traveled. According to

one tabulation, from 1947 to 1986, 233 cases came

before GATT.49 Most of these cases involved

industrialized countries (figure 4-2). The United

States brought 77 of these cases, with 37 directed at

agriculture and 11 at manufactured goods .50

It was often difficult and time-consuming to get

and enforce GATT rulings, with the process typically taking a few years and some cases never being

resolved.51 In the Uruguay Round, the United States

has already achieved some success in reducing the

time involved. An interim agreement, effective May

1989, made it possible to hear a dispute and get a
130 . Competing Economies: America, Europe, and the Pacific Rim

Figure 4-1—import Penetration of the Japanese

Semiconductor Market

15

10

5

1982 1983 1984 1985 1986 1987 1988 1989 199 0

= United States m Other countries

SOURCE: Telefaxed data from the Semiconductor Industry Association,

May 29, 1991.

decision in about 10 months from the time consultations are requested. However, any country can still

block the GATT Council from adopting an adverse

decision as an official ruling; the defendant thus has

veto power over the tribunal. And even if the GATT

Council adopts the decision, a party found in

violation can refuse to change or pay compensation,

and can even veto any proposed retaliation by the

injured country. While the pressure of international

opinion can induce a country to accept GATT

rulings, it still might stall for months or years.

The United States has done its share of resisting

GATT rulings, but nonetheless favors putting dispute settlement on a stronger institutional footing, so

that all countries would be bound alike. However, it

could well be many years before GATT dispute

resolutions procedures provide for speedy, effective

removal of market barriers. As long as these

procedures are unreliable and while GATT’s jurisdiction omits items of concern to the United States,

such as services and intellectual property, there will

be need for an alternative source of leverage, the

threat of retaliation under Section 301.

Section 301

Section 301 (and related sections) of the Trade

Act of 1974, as amended,52 can address any “act,

policy, or practice” by a foreign country that “is

unreasonable or discriminatory and burdens or

restricts United States commerce. ’ ’53 In 1988, Congress clarified that Section 301 covers at least some

government tolerance of private action, specifically

“the toleration by a foreign government of systematic anticompetitive activities by private firms or

among private firms in the foreign country that have

the effect of restricting . . . access of United States

goods to purchasing by such firms” for reasons

other than commercial considerations such as product quality, cost, and service.54

Section 301 empowers the USTR to investigate

allegations of such foreign practices. If they are

found, the USTR will frost negotiate to stop them. If

initial negotiations fail, Section 301 requires that

GATT’s dispute resolution process be invoked

where applicable.55 As a last resort, if all other

measures fail, the USTR may retaliate. Retaliation

might consist of increased tariffs or restrictions on

specified goods imported from the offending country, whether or not the goods are related to the

foreign practice.56

From Section 301’s enactment in 1974 through

1990, 83 Section 301 cases were initiated. Of these,

35 focused purely on raw and processed agricultural

products; 37 in whole or in part on manufactured

goods (excluding processed agricultural products

and including cases concerning intellectual property); 10 on services; and 1 on investment.57

Section 301 has been an important trade tool. Its

use has prompted specific reforms by other countries; more generally, the threat of Section 301

retaliation for areas not covered by GATT, such as

intellectual property and services, has made other

nations more receptive to expanding GATT’s coverage to those areas.58

However, Section 301 generally has not achieved

prompt removal of market barriers to manufactured

goods. Table 4-3 lists all Section 301 cases that

started in 1985 or later, concerned manufactured

goods (excluding food, beverages, and tobacco),59

and contained a finding by the USTR that there was

a foreign market barrier that needed fixing.60 Most

of these cases have taken many years from the first

notice of the problem to achievement of effective

relief.

Part of this delay comes from the time limits of the

formal Section 301 case. The USTR has 1 year to

investigate the alleged practice and negotiate for its

elimination (up to 18 months if needed to accommodate a GATT dispute resolution procedure61) and 7

months before deciding on and applying sanctions.62

The USTR often takes the full time allotted, and
Chapter 4--U.S. Trade Policy ● 131

Figure 4-2-GAIT Dispute Resolution Proceedings, 1947-86

Country type:

Developed

Advanced developing

Less developed

Nonmarket economies

Major filers:

United States

EC

1 1 1 1 1 1 , 1 I 1 1

200 150 100 50 0 50 100 150 20 0

Number of cases

m Filed against _ Filed by

SOURCE: John Jackson, The World Trading System: Law and Polbvof/ntemationa/ Economic Re/atkms Cambridae.

MA: MIT Press, 1989), p. 99. - -

foreign countries seldom make concessions unless

under an imminent deadline with the threat of

retaliation.

Overall, however, the longest delays are in

initiating an action. Most cases start with a petition

from industry for relief.a3 It can be years before a

U.S. firm or industry association is convinced that

attempts to sell in a particular country are failing not

because of cost or quality, but because of market

barriers. Even then, a firm or industry association

might balk at preparing a petition, given the expense

(table 4-2), delay, and uncertain results. The USTR

has initiated cases on its own, especially in recent

years,64 but those actions mostly involved longstanding problems that attracted considerable congressional attention. For example, under the socalled Super 301 provision, the Administration was

directed to identify the highest priority offending

countries and initiate Section 301 cases on their most

important practices.65 Cases 74 and 75 in table 4-3,

dealing with the Japanese Government’s procurement of satellites and supercomputers respectively,

stemmed from this process.

Delay can occur after a case is supposedly over.

Case No. 52 in table 4-3 concerned Korea’s intellectual property protection. Although Korea passed

. . “,

remedial legislation in 1987, many problems remained into 1989.

These long delays arise because the United States

is reluctant to retaliate or even start a Section 301

case. Retaliation, unless it ultimately induces the

foreign country to change its practice, rarely solves

the problems of the complaining U.S. industry.66

Retaliatory restrictions on the import of goods from

another country would in most cases violate GATT,

and the open nature of Section 301 proceedings

would instantly expose this violation to the world.a7

And while use of Section 301 does not violate GATT

until retaliation occurs, starting an investigation

does anger other countries, which perceive Section

301 as an assertion that U.S. law takes precedence

over GATT. Such criticism might be somewhat

hypocritical: if the target country maintains market

barriers, overt or hidden, that could violate at least

the spirit of GATT. However, this criticism is a

political force to be reckoned with.

Retaliation against a foreign trade barrier would

itself be a trade barrier, and could provoke counterretaliation with still more market closures. For this

reason sanctions, even as retaliation, are philosophically repugnant to the USTR and the Administration,

for whom free trade is a paramount goal. On a
Table 4-3-Selected Section 301 Cases

Date of Effective date

Case petition or and nature Subsequent Wait for

No. Country Subject Prior history self-initiation of relief history relief

48 Japan Semiconductors: issues

including access to Japanese market.

● 49 Brazil Policies toward the informatics industry (computer and computerrelated products), includding import restrictions and

inadequate intellectual

property protection.

Many sets of negotiations on market access

since about 1972; U.S.

firms’ market share

stayed roughly constant

at only 10 percent (far

below what U.S. firms

would have achieved in

an open market) despite

several ostensible liberalizing moves by the

Japanese Government.

Negotiations since 1984.

June 14, 1985 July 31, 1986: Japan

signed an agreement expressing the expectation

of gradual, steady im

provement in access; in

a secret side letter, Japan

acknowledged the U.S.

goal that import penetration of Japanese market

would rise over 5 years

to 20 percent.

(Apr. 17, 1987: United

States retaliated for

Japan’s failure to improve market access, by

increasing duties on certain computers and

power hand tools from

Japan.) Serious Japanese Government effort

to improve access commenced in 1989, leading to first substantial

increase in import share

of Japanese market, which

was 13 percent in 1990

(improved from 10 percent, but much lower

than expected from

agreement).

New agreement signed

June 4, 1991, effective

Aug. 1,1991, with target

of 20-percent import

penetration by the end

of 1992.

Sept. 16, 1985 Oct. 6, 1986: Brazil un- substantial import

dertook administrative re- restrictions continued

forms designed to re- into at least Februduce import restrictions. ary 1991.

1987: Brazil passed

remedial copyright

legislation to protect

computer software.

Negotiations still ongoing

About 18 years for

some improvement

in market share;

goal of much greater

market share not

achieved after about

19 years.

About 2 years to start

removing import restrictions, with substantial restrictions

lasting at Ieast 6-7

years; about 3 years

to fix intellectual

property protection.

as of February 1991. -
Table 4-3-Selected Section 301 Cases-Continued

Date of Effective date

Case petition or and nature Subsequent Wait for

No. Country Subject Prior history self-initiation of relief history relief

● 52 Korea Inadequate protection of

intellectual property

rights, including patent

protection and copyright

protection for software.

● 56 Taiwan Customs valuation system.

61 Brazil Lack of patent protection for pharmaceuticals.

Extensive bilateral negotiations starting in March

1983 (patent) and in 1984

(copyright).

In 1979 Taiwan agreed

that by Jan. 1, 1986, it

would value imports, for

customs purposes, based

on the invoice price,

rather than determining

the value by administrative rules. By Aug. 1,

1986, Taiwan still had

not switched over.

Negotiations since 1985.

68 Argentina Pharmaceuticals: inade- Negotiations since 1985.

quate patent protection,

and discriminatory registration requirements.

NOV. 4, 1985 July 1, 1987: Korea Many problems repassed remedial patent mained into 1989.

and copyright

legislation.

Aug. 1, 1986 Oct. 1, 1986: Taiwan

changed its customs

valuation system to use

invoice prices.

June 11, 1987 (Oct. 20, 1988: United

States retaliated by increasing duties on some

imports from Brazil.)

June 26, 1990: Brazil’s

President announced

that he would propose

remedial legislation to

Brazil’s legislature by

Mar. 20, 1991.

(July 2, 1990: United

States removed its retaliatory duties.)

Remedial legislation not

passed as of spring, 1991.

Aug. 10, 1988 Fall of 1989: Argentina No remedial legislaagreed to introduce re- tion enacted as of

medial legislation by fall Mar. 5, 1991.

of 1991. The petitioner

then withdrew its petition.

About 3-4 years to

start improving intellectual property protection; many problems remained for

about 5-6 years.

About 7 years.

At least about 6

years.

At least about 6

years.
Table 4-3-Selected Section 301 Cases-Continued

Date of Effective date

Case petition or and nature Subsequent Wait for

No. Country Subject Prior history self-initiation of relief history relief

70 EC Export restrictions on cop

per scrap, which allegedly depressed the price

of scrap within the EC

and raised it elsewhere,

thereby giving an advantage to EC brass fabricators.

Overall import licensing

scheme, including prohib

ited items, quotas, and

lack of transparency.

● 74 Japan Discriminatory government procurement of

satellites.

*73 Brazil

● 75 Japan Discriminatory government procurement of

supercomputers.

Negotiations since 1984

or earlier.

In 1983, Japan published

its “Long Range Vision

on Space Development,”

in which Japan banned

all public and private purchases of foreign satellites. The U.S. Government immediately initiated negotiations. Japan

agreed to remove the

ban on private purchases

but held fast to its ban

on public purchases.

Discriminatory behavior

since 1976, when U.S.

machines were first available. Negotiations since

1985, including an agreement signed in 1987,

which proved to be ineffective.

. . . ---- —-

NOV. 14, 1988 EC agreed to remove

export restrictions for at

least 1990.

June 16, 1989 May 14, 1990: import

regulation thoroughly

changed, removing objectionable features.

June 16, 1989 June 15, 1990: Japan

signed an agreement for

open procurement practices, except for R&D

satellites.

June 16, 1989 Mar. 22, 1990: Japan

signed an agreement for

open and fair procurement practices.

As of May 1991, it

was too early to tell if

this agreement would

stop Japan’s discrimination in procurement.

1 year, 2 months

About 6 years

About 7 years

At least about 5 years

since negotiations

commenced; at least

about 14 years since

Japanese discrimination began.
Table 4-3-Selected Section 301 Cases-Continued

Date of Effective date

Case petition or and nature Subsequent Wait for

No. Country Subject Prior history self-initiation of relief history relief

79 Norway Discriminatory govern- July 11, 1989 Apr. 26, 1990: Norway 9 months

ment procurement of took measures designed

electronic toil collection to ensure fair considerequipment. ation of the petitioner in

future procurements.

* Denotes cases initiated without a petition (self-initiated by USTR).

NOTE: The prior and subsequent histories given for cases were found from readily available sources. Further research might reveal in some cases that the problem started earlier or lasted later.

If so, the waiting times for relief in those cases would be longer than those stated.

SOURCE: This table relies almost entirely on published USTR sources: Office of the United States Trade Representative, “Section 301 Table of Cases,” computer printout dated Jan. 17,1991, and

Federal Register notices cited therein; Office of the United States Trade Representative, National Trade Estimate Reporf on Foreign Barriers, annual reports for 19851987, 1989-1991;

Office of the United States Trade Representative, “Report to Congress on Section 301 Developments Required by Section 309(a) (3)of the Trade Act of 1974, ’’semiannual reports covering

January 1989throughJune 1990; Office of the United States Trade Respresentative, “United States, Japan Conclude SemiconductorAgreement,” press release, No. 91-21, June 4,1891

(for Case No. 46); Donald Phillips, Assistant United States Trade Representative, testimony at hearings before the House Committee on Energy and Commerce, Subcommittee on

Commerce, Consumer Protection and Competitiveness, May9, 1990, Serial No. 101-149, pp. 6-11 (for Case No. 48). Other sources were relied on for particular cases: discussion in this

Chapter, and also Clyde V. Prestowitz, Jr., Tradjng P/aces; How WeA//owedJqoan To T*e The Lead(New York, NY: Basic Books, 1988), p. 62 (Case No. 46, prior history); USTR Official,

personal communication, Feb. 27,1991 (Case No. 49, subsequent history into 1991); USTR Official, personal communication, Mar. 5,1991 (Case No. 61, subsequent history); USTR

Official, personal communication, Mar. 5,1991 (Case No.68, events after initiation of investigation); chapter6 of this report (Case No. 75, showing that Japan’s discriminatory procurement

ofsupercomputers started in 1976); Jonathan Streeter, Supermmputer Industry Analyst, International Trade Administration, U.S. Department of Commerce, personal communication,

May 21,1991 (Case No. 75, subsequent history).
136 ● Competing Economies: America, Europe, and the Pacific Rim

pragmatic level, sanctions could hurt downstream

users of the affected products. For example, when

Japan violated the 1986 semiconductor agreement

and USTR drew up a proposed list of Japanese

products on which to increase tariffs in retaliation,

many U.S. firms that purchased items on the

proposed list testified and lobbied against the

action.68 Sanctions can also hurt U.S. firms with

operations or joint venture partners

concerned.

Japan’s Barriers

With the limited effectiveness of

in the country

GATT dispute

resolution procedures and Section 301, foreign

market barriers often persist for years. This is

especially true with Japan. In 1990, the United States

had a $42 billion bilateral trade deficit with Japan,

accounting for about 40 percent of the United States

total trade deficit (figure 4-3). This deficit has many

causes, including often superior Japanese products,

U.S. dissavings and high Japanese savings, and

inadequate efforts by some U.S. firms to sell to

Japan. However, one important cause is a rich

network of market barriers, including official government action and regulation, unofficial advice

from government to industry, government toleration

or encouragement of anticompetitive activity, and a

business culture in which Japanese companies

maintain long-term relationships and prefer to deal

with other Japanese businesses-.@ -

Figure 4-3-U.S. Trade Deficit With Japan

and the World, 1983-1990

Billions of 1990 dollars

$200 “

I I

“5° mltl ----l

$100

$50

$0 1983 1984 1985 1986 1987 1988 1989 1990

m Deficit with Japan m Deficit with the

rest of the world

NOTE: Amounts were converted to 1990 dollars using GNP deflators from

the Department of Commerce, Bureau of Economic Analysis.

SOURCE: International Monetary Fund, DirwtionofTra&Statisti@, 1990,

pp. 402-403, and U.S. Department of Commerce, Bureau of

Economic Analysis, Survey of Current Business, vol. 71, No. 5,

May 1991, pp. S-16, S-17.

Some have likened Japan’s trade obstacles to an

onion: when one layer is peeled away, another is

waiting below. This happened with semiconductors

and supercomputers, as discussed above. It occurred

from 1980 to 1983, when U.S. producers of aluminum bats tried to have their bats certified for use in

Japan by the government-run children’s baseball

league. First certification was flatly denied, even

though that went against an agreement signed by

Japan in 1979 as part of GATT’s Tokyo Round.

Then certification was offered but conditioned on

meeting discriminatory standards requiring an alloy

seldom used in the United States and abase plug not

used in U.S.-made bats. Then the standards were

changed, but U.S. factories, because they were

outside Japan, could not be qualified as meeting the

standards, so that each lot of bats would have to be

opened and inspected individually. Finally the

inspection issue was resolved, but Japanese distributors refused to carry U.S.-made bats, effectively

shutting U.S. producers out of the market. Each step

required high-level U.S. Government involvement.70

As another example, in 1989 a well-known

American manufacturer approached the USTR with

a fully documented problem. Two Japanese trade

journals would not run its ads because of pressure

from the firm’s Japanese competitors. Glen Fukushima of the USTR staff raised this case informally with a contact in MITI, and the problem was

quickly resolved. Mr. Fukushima commented that,

While the outcome of this case is positive, it is

troubling to realize that it required the intervention

of USTR and MI’TI, potential congressional involvement, and 1 year of frustrated effort for a major,

well-established, and well-endowed American company even to place an ad in two Japanese trade

journals-several stages removed from actually

making a sale to Japanese users.71

The difficult task of opening Japanese markets is

made worse by the scant U.S. Government resources

devoted to the problem. The equivalent of only about

15 full time staff at the USTR’s office work on trade

with Japan.72 While USTR is assisted by other

agencies, U.S. negotiating teams have often been far

smaller and less well prepared than Japanese teams .73

The U.S. agencies have faster staff turnover than

their Japanese counterparts, especially at the most

senior (political) levels. This has caused the United

States to repeat mistakes and has made interagency

coordination more difficult.74
Chapter 4--U.S. Trade Policy ● 137

New Approaches

Difficulties in removing Japanese trade protection

have led the U.S. Government to consider alternative

approaches. In 1986, the United States tried a new

approach, putting forward its expectation that the

foreign share of Japan’s semiconductor market

would rise to 20 percent over 5 years. Rather than

trying to identify every market barrier, a seemingly

hopeless task, the United States in effect asked Japan

to identify and remove barriers on its own as needed

to reach the target import level. While the 20-percent

goal has not been achieved, the 1986 U.S.-Japan

semiconductor agreement, together with retaliation

for Japan’s breach of it, did improve U.S. market

share after more than a decade of failed attempts.

This results-oriented approach was endorsed in

February 1989 by the top-level industry advisory

group to the USTR,75 but apparently has not been

used in other cases.

Another approach has been to try to remove many

trade barriers at once in a given sector. This

approach was used in five sectors—telecommunications, electronics, forest products, medical equipment and pharmaceuticals, and autos and auto parts

—in the Market-Oriented Sector-Selective (MOSS)

talks, begun in 1984. Overall, the talks focused

high-level attention on certain market obstacles,

reduced them, and opened communication channels

to resolve follow-up disputes. The talks seem to have

helped U.S. firms increase their exports to Japan,

though many companies reported continuing problems. The most substantial increases in exports

occurred in telecommunications and in medical

equipment and pharmaceuticals, for reasons including easily identifiable barriers that the Japanese

Government could readily fix; strong U.S. presence

already in Japan poised to take advantage of market

liberalization; some industry support within Japan

for market liberalization; and negotiators’ ability

and teamwork. Subsequent monitoring by the U.S.

Government was crucial to translating the agreements into tangible trade gains. 76 For example,

because of the MOSS talks Japan made it easier to

certify U.S.-made cellular telephones for use in

Japan, but follow-up U.S. Government intervention

was necessary to get permission for Motorola to

serve the Tokyo cellular market.77

Yet another approach considers the whole economy. The Structural Impediments Initiative (SII),

launched by President Bush and Prime Minister Uno

in July 1989, sought “to identify and solve structural

problems in both countries that stand as impediments to trade and to balance of payments adjustment. ’7 8 In a June 1990 joint report, each side

resolved to modify economic practices responsible

for much of the bilateral trade imbalance. Japan

pledged to decrease its trade surplus, for example, by

increasing spending on public works projects, liberalizing restrictions on large retail stores, and enforcing its antimonopoly laws. The United States stated

that to decrease its trade deficit it would, among

other things, encourage more consumer savings;

reduce the budget deficit; support commercially

relevant R&D; reform various areas of Federal or

State regulation, such as antitrust, product liability,

and export controls; improve export promotion

efforts; and improve education and work force

training. 79 The countries agreed to seven follow-up

meetings in the next 3 years, at the level of deputy

or assistant cabinet officer and vice or deputy

minister, to review progress, discuss problems, and

produce annual joint reports.80

The U.S. commitments stopped far short of the

fundamental and wide-reaching changes necessary

to reverse the competitive decline. In May 1991, the

Administration noted that Japan had made “welcome progress in a number of areas” during the SII

agreement’s frost year, though ‘‘additional progress

in all areas is necessary in order to contribute further

to the goals of opening markets, reducing trade and

current account imbalances, and improving the

quality of life in Japan.”81 Most observers outside

the U.S. Government are less optimistic. Some

commentators believe that the SII talks will not

substantially open Japanese markets, and that the

only approach that will work is to demand specific

market shares, as was done for semiconductors.82

The U.S. Government has also used a systematic

approach to deal with the EC’s evolving trade and

industry policies. An interagency task force, led by

USTR, was formed in early 1988 to study EC-92 and

help avoid a “Fortress Europe” with strong trade

barriers to outsiders. The task force has 12 working

groups on specific issues, such as technical standards, quantitative restrictions, investment, and rules

of origin. 83 It has established U.S. Government

positions, developed relationships with EC officials,

and negotiated to influence EC legislation before it

is agreed to at the EC level. The task force has

influenced EC policies in areas including standards-
138 ● Competing Economies: America, Europe, and the Pacific Rim

setting procedures, reciprocity provisions, and rules

of origin.

SUBSIDIES AND DUMPING

Subsidies and Dumping: What They Are,

Why They Matter

Governments can by domestic policies give their

national industries advantages in international competition. Occasionally governments have made outright payments to firms; more commonly, benefits

take a less direct form, such as R&D support, tax

breaks, loans on preferential terms, and provision of

raw materials at below-market prices. Recognizing

that such benefits can adversely affect industries in

other countries, GATT sometimes permits those

countries as a countermeasure to levy extra import

duties called countervailing duties. Countervailing

duties are allowed only if the benefits constitute a

“subsidy” under the law. GATT does not directly

define subsidies; U.S. law defines a subsidy as ‘‘any

bounty or grant” paid ‘‘upon the manufacture or

production or export of any article or merchandisc.” ~

Subsidies are of two types: export and domestic.

Export subsidies apply only when goods are exported. For example, in 1985 New Zealand paid its

producers of carbon steel wire rod 10.5 percent of the

value of the exported product.85 Other examples

include preferential loans to finance exports and a

reduction in corporate income tax conditioned on

export performance. GATT largely prohibits export

subsidies. 86

Domestic subsidies are those paid whether or not

goods are exported. Benefits might be in proportion

to the firm’s total production--e.g., the provision of

a raw material at a below-market price. Or benefits

might be given to the company with no clear relation

to a particular product; this could occur, for example,

with R&D support or preferential loans for capital

investment. Under U.S. law, domestic subsidies

must be limited to ‘‘a specific enterprise or industry,

or group of enterprises or industries. ’ ’87 Broader

benefits enjoyed by companies in other countries,

such as abetter educated work force or easier access

to long-term financing for all manufacturers, do not

count as subsidies.

As acknowledged by the GATT Subsidies Code,

domestic subsidies “are widely used as important

instruments for the promotion of social and economic objectives. ’ ’88 Accordingly, GATT does not

prohibit domestic subsidies. However, the GATT

Subsidies Code considers that domestic subsidies,

by giving one nation’s businesses an advantage in

international competition, ‘‘may cause or threaten to

cause injury to a domestic industry” in another

nation. 89 In such circumstances, GATT permits the

second nation to levy a countervailing duty. It is

imposed in addition to any other duties normally

collected and must be no more than the value of the

subsidy. For example, if a foreign nation provided

coal at below-market prices to steel companies,

saving $10 per ton of steel produced, then the

maximurn countervailing duty allowed would be

$10 per ton.

It is not always possible to levy countervailing

duties to fully capture and neutralize the benefits

foreign companies receive from their governments.

GATT permits an alternative countermeasure: antidumping duties, which can be imposed only when a

foreign frm is “dumping.” Dumping is the selling

of goods in an export market at less than a

benchmark ‘fair value.’ The benchmark is the price

in the home market ‘‘in the ordinary course of

trade."90 If no such home market price exists

because, for example, there are no home market

sales or the home market sales are not made in arm’s

length deals91, then the benchmark can be either the

price in the ordinary course of trade in a third

country, or a price constructed from “the cost of

production. . . plus a reasonable addition for selling

cost and profit."92

Although GATT appears to relegate costs to a

subordinate role, as an option only when home

market price cannot be used, the United States and

other major users of antidumping duties interpret

these provisions as giving costs a primary role.

These countries provide that sustained home market

sales at a price below the cost of production

(excluding profit) will not be deemed to be in the

ordinary course of trade and should be disregarded

in determiningg the home market price. Therefore,

any home market price actually used will normally

be at least the cost of production excluding profit;

sales below this level will be considered dumping. If

all of the home market sales for a sustained period

are below the cost of production excluding profit,

then there will be no home market price in the

ordinary course of trade, so that the benchmark used

will be a constructed price consisting of costs

including profit.93
Chapter 4--U.S. Trade Policy ● 139

GATT states that dumping “is to be condemned

if it causes or threatens material injury to an

established industry,” or “materially retards the

establishment of a domestic industry,” in the

importing country.% GATT does not prohibit dumping in these circumstances. Rather, as with domestic

subsidies, it allows the importing country to levy an

antidumping duty, which must not be more than the

amount necessary to bring the price up to the

benchmark value. This amount is called the “dumping margin.” Antidumping duties, like countervailing duties, are in addition to any other duties

normally collected.

Sustained dumping by foreign producers is often

a sign that those producers enjoy an advantage in

international competition due to either government

policies or societal features such as industry structure and habitual business practices, which themselves may result in part from government policies.

This is true for both price-price dumping (selling in

an export market for less than at home or in another

export market) and price-cost dumping (selling in an

export market for less than costs). With price-price

dumping, the foreign producer can use its sales in the

high-priced market (usually the home market) to

subsidize its sales in the low-priced export market.

The price difference is often due to protection in the

high-priced market.95 While one way to end the

foreign fins’ advantage might be to remove the

foreign market barriers, in practice that can be

difficult.96 Sometimes the foreign producers’ home

government tolerates or even encourages cartel

pricing; this elevates the home market price beyond

what it would be with protection alone and increases

the profits from home market sales that are available

to subsidize low-priced exports.

Price-cost dumping indicates that the foreign

supplier has a special advantage. Sustained sales

below cost are normally possible only if the sales are

somehow subsidized. In some cases, countervailing

duty law could be used instead of antidumping law.

Countervailing duty law could address subsidies

provided by the government, and even those provided by related firms (e.g., in a Korean chaebol or

Japanese keiretsu).sT But a fro’s cross-subsidy

between product lines would not come under countervailing duty law, so that only antidumping law

could provide relief.

Sustained sales below cost could be part of a

long-term plan to gain experience and market share

in a high-reward industry, which could lead to high

future profits that might more than pay back the loan

with interest.98 In this case, the sales need not be

subsidized, they need only be financed. For example, in the mid-to-late 1980s, capital for industrial

growth was available to Japanese firms on better

terms and with less pressure for short-term profits

than in the United States. This included funding

from the government, banks, and related firms.99

Japanese dumping of DRAMs in the mid- 1980s can

be viewed in this light; U.S. firms did not have the

financial backing to undergo the massive losses that

the larger Japanese firms swallowed, so most U.S.

DRAM producers exited the field. Japanese firms

emerged as the dominant producers.

When used in high-reward industries, both priceprice and price-cost dumping can enable producers

to achieve economies of scale and learning. Both

types of dumping can help utilize excess capacity in

industries experiencing slack demand. For example,

during the late 1970s and the early 1980s, there was

a worldwide excess steelmaking capacity. Steel

firms in the EC, Japan, and many other countries had

substantial market protection at home while they

dumped in the more open U.S. market.l00 Since their

facilities would otherwise stand idle, foreign firms

could cut their losses by selling in the U.S. market

for more than their variable costs, even if that was

less than they charged at home, and less than their

fully allocated costs.101

In the United States, it has often been said that

subsidies and dumping are unfair. This label irritates

foreign firms and countries accused of these practices, who often do not consider that they have done

anything unfair. Rather than debating whether these

practices are unfair, it is more helpful to recognize

that government action, societal structure, or a

combination of the two can give foreign firms a

special advantage against which U.S. companies

often cannot compete unaided. Countervailing and

antidumping duties should be seen ‘‘not as a

response to so-called unfairness, but rather as an

‘interface’ or buffer mechanism to ameliorate difficulties . . . caused by interdependence among different economic systems. "102

Countervailing Duty and Antidumping Cases

The United States and other countries have laws

to provide for investigations of subsidies and dumping and assessment of countervailing and antidump-
140 . Competing Economies: America, Europe, and the Pacific Rim

ing duties.103 Figures 4-4 and 4-5 show the countries

most active in these proceedings, based on new

investigations completed from January 1987

through June 1990. During this period the United

States was the leading user of countervailing duty

proceedings; Latin America, the Pacific Rim, and

the EC were leading targets. The United States,

Australia, Canada, and the EC most often used

antidumping proceedings, while the Pacific Rim

(especially Japan and Korea), the EC, nonmarket

economies, Central and South America, and the

United States were the primary targets. Antidumping cases were far more common than countervailing

duty cases. Tables 4-4 and 4-5 detail who brought

cases against whom and how many resulted in some

final government action.104 Tables 4-6 and 4-7 list

how many final actions by each country were

outstanding as of June 30, 1990.105

From these figures and tables it appears that in

recent years the United States has been by far the

biggest user of both countervailing and antidumping

duties. This does not necessarily mean, however,

that the United States is more aggressive in their use.

The United States has a large, relatively open market

that attracts imports. Countries with more market

barriers have less need to impose countervailing and

antidumping duties. The United States’ principal

trading partners use subsidies more often,106 so the

United States has more occasion to levy countervailing duties. As for antidumping cases, the United

States has not always been out in front. In the 1980s,

Australia brought 30 percent of all reported cases;

the United States brought 28 percent, Canada 20

percent, and the EC 19 percent.107

GATT allows countervailing and antidumping

duties only if “the effect of the dumping or

subsidization . . . is such as to cause or threaten

material injury to an established domestic industry,

or is such as to retard materially the establishment of

a domestic industry. " 108 This condition is called the

injury test or requirement. Under U.S. law, the injury

or threat of injury must be caused by the dumped or

subsidized “imports’ rather than by the ‘‘dumping

or subsidization” itself. 109 U.S. law imposes the

injury test in every antidumping case; for countervailing duty cases, however, the injury requirement

applies only to countries that have signed the GATT

Subsidies Code (this includes the United States’

major trading partners), have ‘‘assumed obligations

with respect to the United States which are substantially equivalent to obligations” under the GATT

Subsidies Code, or are otherwise entitled by international agreement to application of the injury test.110

The Department of Commerce determines whether

goods are subsidized or dumped and by what

Figure 4-4-New Countervailing Duty Cases Completed, January 1987

Through June 1990

United States

Australia

New Zealand

Canada

Other Western Europe

South Korea

Other

EC

Other Pacific Rim

Latin America

1

1

7

2

2

7 -

1 2 -

1 4 -

 19 -

50 40 30 20 10 0 10 20 30 40 50

= Initiated against m Initiated by

SOURCE: Semiannual filings by signatories of the GAIT Subsidies Code to the Committee of Signatories, provided

by the U.S. Department of Commerce, International Trade Administration.
Chapter 4--U.S. Trade Policy ● 141

Figure 4-5-New Antidumping Cases Completed, January 1987 Through June 1990

United States

Australia

Canada

Mexico

New Zealand

Other Western Europe

Other

South Korea

Central & South America

EC

Japan

Other Pacific Rim

Nonmarket economies

1-..

3 3

1

137

2 83

13 57

7

13 ■

3 6

7 4 3 8

52 _

5 0 -

5 5 -

200 150 100 50 0 50 100 150 20 0

= Initiated against m Initiated by

SOURCE: Semiannual filings by signatories of the GAIT Antidumping Code to the Committee on Anti-Dumping

Practices, provided by the U.S. Department of Commerce, International Trade Administration.

Table 4-4-New Countervailing Duty Cases Completed January 1,1987 Through June 30, 1990

Cases filed against:

Other Other

United New Western South Pacific Latin

States Australia Zealand Canada Europe Korea Other EC Rim America Total

Cases filed by:

United States

Final action . . . . . . . . . . . . . . . . . .

No final action . . . . . . . . . . . . . . . .

Australia

Final action . . . . . . . . . . . . . . . . . .

No final action . . . . . . . . . . . . . . . .

New Zealand

Final action . . . . . . . . . . . . . . . . . .

No final action . . . . . . . . . . . . . . . .

Canada

Final action . . . . . . . . . . . . . . . . . .

No final action . . . . . . . . . . . . . . . .

Total

Final action . . . . . . . . . . . . . . . . . .

No final action . . . . . . . . . . . . . . . .

1

0

1

0

1

0

1

0

1 1 2

0 0 0

3 1 1 3 4

3 1 1 3 2

0 1

1 1

0

2

3 1 1 3 6

4 1 1 4 6

8 9

5 3

0 0

1 3

1

3

8 10

6 9

30

18

2

6

1

3

3

4

36

29

SOURCE: Semiannual reports submitted by signatories of the GATT Subsidies Code to the Commitee of Signatories, provided by the U.S. Department of

Commerce, International Trade Administration.

Additional explanation is given in the accompanying text.

amount, and the ITC determines whether the injury grounds for believing that subsidies or dumping

test is satisfied. While the government can start an have occurred and that the injury requirement is

investigation on its own, that very rarely happens; satisfied. The petition must identify any known

usually an investigation begins only when industry foreign manufacturers and exporters, as well as U.S.

petitions the government and sets out sufficient importers, wholesalers, and retailers of the foreign
142 ● Competing Economies: America, Europe, and the Pacific Rim

ma cum

co. OJo ma No I-I%

C9

No 70 0)0

mm l-o

l-ml

-0

C4ml

Oln 0. T-O

l - o l - o

l-ml

0.

No

WC-9

0.

Com

.

.

. .

.

.

.

. .

. .

s
Chapter 4--U.S. Trade Policy • 143

Table 4-6--Outstanding Measures Against Subsidies

as of June 30, 1990

Negotiated quantity

restraint or

Country Duties other agreement Total

United States . . . . . . . . . 73 13 86

Canada . . . . . . . . . . . . . . NAa NAa

9

Australia . . . . . . . . . . . . . . NAa NAa

1

aNA - Not available. Canada and Australia did not describe the nature of

their outstanding orders.

NOTE: All other signatories reported no outstanding orders.

SOURCE: Semiannual reports submitted by signatories of the GAIT

Subsidies Code to the Committee of Signatories, provided by

the U.S. Department of Commerce, International Trade Administration.

Table 4-7-Outstanding Antidumping Measures

as of June 30, 1990

Price

Country Duties undertakings Total

United States . . . . . . . . . . . . . . . 192 6 198

ECa

. . . . . . . . . . . . . . . . . . . . . . . . . 82 53 135

Canada . . . . . . . . . . . . . . . . . . . . . 69 12 81

Australia . . . . . . . . . . . . . . . . . . . . 12 0 12

New Zealand . . . . . . . . . . . . . . . N A

b N A

b

11

aData for the EC is as of Feb. 1, 1990. The EC filed no Semiannual report

for the first half of 1990;that would normally imply that no additional action

had been taken.

bNA = Not applicable. New Zealand did not describe the nature of its

outstanding orders.

NOTE: All other signatories reported no outstanding orders.

SOURCE: Semiannual reports submitted by the signatories of the GAIT

Antidumping Code to the Committee on Anti-Dumping Practices.

goods. Those respondents are invited to participate

in the investigation, along with the government of

the foreign country involved.

Figures 4-6 and 4-7 show the progress of antidumping and countervailing duty cases through the

Commerce Department and the ITC, along with the

number of cases that have progressed through each

stage for all cases completed between January 1987

and June 1990. The figures show that cases with the

injury requirement progress through three stages. At

each stage, the case can end with no relief; only if all

three stages are passed is relief granted. First, the

ITC makes a preliminary determination of whether

there is reason to believe that the injury requirement

could be satisfied. Second, the Commerce Department determines whether the imports at issue are

subsidized or dumped, and if so by how much. Third,

the ITC makes its final determination of whether the

injury test is satisfied.

If subsidies or dumping are found, and if any

applicable injury test is passed, the government

issues an order, enforced by the Customs Service,

assessing countervailing or antidumping duties in an

amount equal to the subsidy value or dumping

margin. In dumping cases, each subsequent shipment is assessed an antidumping duty based on how

much that particular shipment is priced below the

benchmark “fair value. ” Thus, foreign exporters

can avoid paying any duty by raising prices up to the

fair value, which they often do. In both subsidy and

dumping cases, annual reviews are conducted on

request to determine whether the amount of subsidy

or the “fair value,” respectively, has changed. If so,

the duties already paid for that year are adjusted; the

exporter then pays any additional amount due or is

refunded any overpayment. The U.S. Government

sometimes accepts an agreement by the foreign

government or exporters to eliminate the subsidy or

limit the quantity of exports to the United States, in

lieu of a countervailing duty.111 Or, instead of

levying an antidumping duty, the United States

might accept an agreement by the foreign exporters

to raise prices.112

The Effectiveness of U.S. Countervailing

Duty and Antidumping Law

Countervailing duty and antidumping laws have

helped somewhat to protect U.S. industries from

advantaged foreign competition. However, the effect of these laws is limited. The reasons come in two

clusters. First, the imposition of countervailing and

antidumping duties is slow and uncertain. Second,

even if they were promptly applied, countervailing

and antidumping duties would often be inadequate

to neutralize the advantage of foreign companies.

Delay and Uncertainty in Imposing Duties

The government normally will start an investigation only when an affected U.S. business files a

petition. This takes considerable time and effort. The

firm must suspect that subsidies or dumping are at

work; it could take months or even years to piece

together why certain sales were lost and conclude

that there is more than just ordinary stiff competition. For example, a company might suspect dumping only after it is forced to make a series of painful

price cuts in response to foreign competition. The

company must be aware that a legal remedy exists;

some fins, especially smaller ones, do not know

that. Plus there is a certain inertia to overcome. The

Torrington Co. waited until March 1988 to file

petitions regarding dumping of ball bearings from
144 ● Competing Economies: America, Europe, and the Pacific Rim

Figure 4-6-Decisions in U.S. Countervailing Duty Cases Completed,

January 1987 Through June 19901

Total cases filed

3 9

I I

I 23 case s

16 cases

not subject to

injury test

*

ITC: is injury or threat no

. Case ends:

reasonably possible? no cases no relief

I

1 1 I ,

■

I yes 23 case s

Department of Commerce: no * Case ends:

are there subsidies’? 9 cases no relief I I I J

I I

I

yes I 20 cases

10 cases

not subject to

injury test

yes *

ITC: does injury or threat ‘

0

* Case ends:

of injury exist’? 5 cases ro relief

2 partial 2 -

yes 13 cases

2 partial 2

I

Receive relief from subsidies

23 cases and 2 partial

NOTES: 1. This table does not include 7 cases that were “terminated” before a final determination was made and 5

cases for which insufficient data was provided.

2. In these cases, injury was found for some of the products at issue but not for others.

SOURCE: Unpublished data, U.S. International Trade Commission.

several countries, even though dumping and injury

were apparent by early 1987.113 When asked about

the delay, a Torrington official stated: “Most

businessmen worry about the day-to-day order book.

To start a trade action, you must sit back. ’’114

To file a petition, a firm must present sufficient

evidence of both injury and subsidies or dumping.

Regarding subsidies, the petitioner must identify

particular subsidy programs before the government

will investigate them, but it can be difficult for U.S.

firms to learn about these programs. With dumping,

the petitioner must first get evidence of the prices at

which the imported goods are sold in the United

States. These prices would often be known only by

the foreign producer and the domestic purchaser;

those parties would not want to help the petitioner

because any antidumping duties would be assessed

against their goods. The petitioner then would have

to document the foreign manufacturer’s home market price or costs of production. This too can be

difficult, especially if the petitioner has no presence

in that country. Evidence concerning injury can be

elusive, because at issue is the state of the whole

domestic industry, not just the fro(s) filing the

petition. The other companies in the domestic

industry might not wish to give petitioners the

information they need; for example, they might be

unwilling to share sensitive business information, or

they might be foreign-owned, with loyalties to the

respondents’ Camp.11s

Even if a firm comes up with the necessary

information, other factors could dissuade it from

preparing a petition and fighting the case. The frost

is expense, which typically ranges in the hundreds of

thousands of dollars for the initial case (table 4-2),

not counting employee time. Additional expense is

incurred for court appeals, which are frequently

taken, and for subsequent annual reviews, which are

frequently conducted. Some recent cases have been

quite expensive. For example, in 1989 Bethlehem

Steel filed both an antidumping and a countervailing

duty petition against steel rails from Canada, which

resulted in substantial duties.116 To win the case at

the Commerce Department and ITC, and to defend

the victory on appeal, took over $1 million.117 When

cases are filed against more than one country, the

expense increases. The ball bearings cases filed by

the Torrington Co. in 1988 included nine countries,
Chapter 4--U.S. Trade Policy ● 145

Figure 4-7—Decisions in U.S. Antidumping Cases Completed, January 1987 Through

June 1990i

Total cases filed

109

1

109 cases

ITC: is injury or threat

reasonably possible?

■

-

M

+

Yes 92 cases

Department of Commerce:

is there dumping? -

m

1

yes 85 cases 1 partial2

1 partial 2

ITC does injury of threat

of injury exist? *

=

1

yes 50 cases 16 partial3

16 partial3

Receive relief from dumping

50 cases and 16 partial

NOTES: 1. This table does not include 10 cases that were “terminated” (9 cases) or “suspended” (1 case) before a

final determination was made.

2. In this case, dumping was found for some of the products at issue but not for others.

3. In these cases, injury was found for some of the products at issue but not for others.

SOURCE: Unpublished data, international Trade Commission.

at an estimated cost of $4 to $5 million.118 The high

costs can discourage firms, especially smaller ones,

from filing petitions.119 In estimating the expense, a

firm must consider the many reasons why it could

lose the case and that even a successful case might

not provide effective relief. The expense, uncertainty, and difficulties of gathering information

dissuaded U.S. manufacturers of rock crushing

machines from filing a case in the late 198% (box

4-b).

In response to the high legal and other fees as

reported by the General Accounting Office (table

4-2), Congress in 1988 stepped up the role of the

ITC’s Trade Remedy Assistance Office (TRAO).120

TRAO can help small businesses represent themselves. TRAO gives behind-the-scenes technical and

legal advice, including explaining the law and

procedures, identifying relevant precedents, consulting on strategy, and reviewing draft petitions and

briefs prepared by the firm. Since the 1988 legislation, TRAO has helped several companies file and

pursue dumping cases. While companies have been

pleased with the assistance, there are some inherent

limitations to how much TRAO can help. Petitioners

representing themselves have no access to confilential business information submitted by other parties;

the ITC makes this information available only to

outside counsel and consultants. This information is

central to many cases, and lack of access puts a party

at a tremendous disadvantage in formulating strategy and framing legal arguments. Further, even with

TRAO’s help, it requires immense effort for a firm

to represent itself.

Businesses can be discouraged from filing petitions because they fear retaliation-by the accused

firm or a related one that might be the prospective

petitioner’s supplier or customer for some products,

or by the foreign government. For example, it is

widely believed that the U.S. commercial airframe

manufacturers, Boeing and McDonnell Douglas, for

many years did not file a countervailing duty case

against large subsidies received by the members of

the Airbus consortium from the governments of

Britain, Germany, and France, for fear that those

governments would direct their national airlines to

buy fewer U.S. airplanes. As another example, in the

spring of 1991, a survey by the U.S. and Japanese

Governments found that auto parts were priced 108
146 ● Competing Economies: America, Europe, and the Pacific Rim

Box 4-B—An Unfiled Dumping Casel

The U.S. rock crushing machinery industry is composed of about nine companies with total annual sales of

about $175 million (including new units and spare parts). These machines are used in many public works and

construction projects. The steady decline in infrastructure spending over the 1980s greatly reduced the demand for

crushing equipment; 1989 sales were half those of 1979. The situation was made worse by sales lost to low-priced

imports from Japan, Korea, and Taiwan that appeared in the early 1980s. After 1985, as the dollar was devalued

the U.S. firms expected some relief, yet the imports’ dollar price did not rise. Manufacturers lost sales in both 1987

and 1988 of some 20 to 30 machines out of 200 or 300 total sales in the United States; the west coast firms were

hardest hit. Though the U.S. producers might well have been able to win a dumping case against the imports, they

never filed one. The industry’s attempts, and the problems it faced, show how hard it can be to use antidumping

law, especially for small businesses.

One west coast producer, referred to here as Firm A, organized an ad hoc committee of manufacturers and acted

as the spokesman to the government. The commerce Department’s International Trade Administration (ITA) gave

Firm A the legal definition of dumping. Since they were unable to determine the Japanese firms’ home market

prices, the U.S. manufacturers would have to show dumping on the basis that the Japanese machines in the U.S.

market were priced below the cost of production. This required an analysis of the costs of production facing the

Japanese companies. The major costs of making rock crushing machines are materials and labor. Because the

overwhelming material input is steel, which as a commodity would normally cost about the same anywhere in the

developed world, Firm A believed that the material costs of U.S. and Japanese machines might be equal. Using thiS

assumption, and knowing that the Japanese producers also had shipping and duty costs, Firm A was fairly sure that

Japanese labor and other costs could not be low enough for the price of the imported machines to be above cost.

However, the foregoing analysis was not sufficiently rigorous to get ITA to initiate an antidumping case. The

U.S. manufacturers understood this, but did not know how to proceed. ITA had sent some questionnaires whose

answers would supply the necessary information, but those forms were imposing and Firm A thought they would

be very difficult to complete. An analysis along the

lines given below might have been sufficient to induce

ITA to initiate a case. The analysis below, summarized

in table B-12, is for one representative Japanese model

and its counterpart produced by Firm A. The analysis

would have to have been performed for all import

models at issue.

List Price:

List prices were readily available from promotional

literature. List prices represent the maximum possible

retail price, and most machines are sold below list.

Unconfirmed reports of Japanese machines being sold

at substantial discounts, some as high as 40 percent,

were not uncommon. For the calculation, the list price

was used initially, with discounts considered afterward.

Dealer Markup:

It was assumed that retailers of imported crushing

machinery receive the same percentage markup as

retailers of U.S. made machinery. U.S. machinery

producers believed that the markups were similar,

though they could not prove it.

Duties and Shipping Costs:

Table B-l—Estimated Cost Breakdown of Rock

Crushing Machinery, Jaw Crusher Type

Japanese

U.S. firm firm

List price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,600 1,000

Less dealer mark-up . . . . . . . . . . . . . . . . -320 -200

Wholesale price (to producer) . . . . . . . . . . 1,280 800

Less duties . . . . . . . . . . . . . . . . . . . . . . . . . O -24

Less shipping costs . . . . . . . . . . . . . . . . . 0 -54

Factory price . . . . . . . . . . . . . . . . . . . . . . . . . 1,280 722

Costs: Material . . . . . . . . . . . . . . . . . . . . . . . 377 377

Direct labor . . . . . . . . . . . . . . . . . . . 194 136

Variable overhead . . . . . . . . . . . . . 349 209

Fixed overhead . . . . . . . . . . . . . . . . 147 74

Total costs . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,067 796

Profit (negative number for loss) . . . . . . . 213 -74

(Factory price minus total costs)

Dumping margin . . . . . . . . . . . . . . . . . . . . . . 9.3%

(Loss divided by wholesale price)

NOTE: The figures given do not represent dollars. They are given in an

undisclosed unit of currency, to protect proprietary business

information. The table contains slight rounding errors.

SOURCE: Office of Technology Assessment, 1991.

Data on shipping and duty charges were readily available and required no estimation.

ITMS bX is b~ed on interviews with firm exeeutivea, the trade lawyer consulted by the f-, and a former Department of Commerw

ofticial.

2~e fi~es in @ble B-1 do not represent dollars. The eurreney unit used is not disclosed, in order to prOteCt prOpfiem hs*s

information.
Chapter 4--U.S. Trade Policy ● 147

Factory Price:

Factory price is the amount the producer receives, not counting any duties and shipping costs. To prove dumping

based on below-cost sales, factory price must be less than the costs of production.

Material Costs:

The major material input was carbon steel. According to U.S. manufacturers, all other materials costs were

insignificant. Carbon steel is a commodity good traded worldwide. Steel prices faced by Japanese competitors might

then be assumed to be equal to those faced by U.S. firms. As the comparable machines weigh the same amount,

it was assumed that the same amount of steel is used. Thus, material costs were assumed to be equal.

Direct Labor Costs:

Japanese labor costs had to be estimated. The Department of Labor does make international comparisons of wage

rates, but not for specific industries. The rock crusher workers in the United States were paid more than the average

industrial wage, but because no data is available on rock crusher workers in Japan, as a conservative assumption

the average industrial wage in Japan was used. The labor cost estimate also assumed that Japanese labor was 10

percent more productive; that is, if it took 100 hours to build a U.S. machine, it took 90 hours to build a Japanese

machine.

Variable Overhead and Indirect Labor Costs:

The estimates of Japanese variable overhead costs (e.g., energy consumption, worker benefits, and workmans’

compensation) were more difficult to make than estimates of wages. Without access to hard data, variable overhead

costs incurred per hour of direct labor in Japan were conservatively assumed to be two-thirds as much as the variable

overhead costs incurred per hour of direct labor in the United States. (The figure in the table also reflects the

assumption given above that Japanese labor was 10 percent more productive.)

Fixed Overhead:

Data on fixed overhead costs in Japan are not available. For the U.S. machine, fixed overhead was about 16 percent

of the total of the other costs (material, direct labor, variable overhead). Without direct data, fixed overhead for the

Japanese machine might conservatively be assumed to be about 10 percent of the total of the other costs.

As table B-1 shows, under these assumptions Japanese firms were dumping. Even with sales at list price, the

dumping margin (the cost minus price, divided by price) was 9.3 percent. Moreover, both domestic and foreign rock

crushers were rarely sold at list price. One reported Japanese sale was at 40 percent off list. If the wholesale price

was similarly reduced by 40 percent, then, using the same cost assumptions, that sale would have a dumping margin

of 89 percent.

To win a dumping case, the U.S. manufacturers would also have to prove injury. Under the law, a sizable

number of sales lost to dumped goods can constitute injury if those sales were lost on the basis of price. In both 1987

and 1988, an estimated 20 to 30 imported crushers were sold in the United States, all in the west coast region,

competing primarily with Firm A and one other firm. All evidence available to Firm A from its customers indicated

that price was, in fact, the overriding factor. Comments such as, “we liked the way you [the domestic producers]

do business but, their price was just too low” were typical. These lost sales probably constituted roughly 10 percent

of the U.S. market for new machinery. Lost sales of this magnitude, if they could be proved, would stand a good

chance of satisfying the injury requirement.

However, the U.S. producers did not perform the above analysis, for they did not know how. Instead, they

consulted an experienced trade lawyer. The lawyer explained that, while a dumping case had a fair chance of success,

it would cost about $1 million. While this was a substantial amount to an industry with an annual profit only in the

range of $5 to $10 million, especially since the chance of winning the case was far from certain, for the industry

as a whole it probably would have been manageable. However, because the imports competed only in the west coast

market, many of the companies whose sales were concentrated elsewhere did not feel injured enough to justify a

large expense. The two firms bearing the brunt of the injury did not feel able to bear the bulk of the case’s cost.

In principle, the firms could have filed a petition on their own, and if the Commerce Department accepted the

petition then the Commerce Department and the International Trade Commission would investigate dumping and

injury respectively, whether or not the U.S. producers hired a lawyer. However, this arrangement would have

required considerable employee time to develop the petition. Moreover, the lack of an attorney would pose two

serious practical problems. First, a petition would need to contain companies’ confidential business information

Continued on next page
148 . Competing Economies: America, Europe, and the Pacific Rim

Box 4-B—An Unfiled Dumping Casel Continued

regarding sales, prices, customers, profits, and so on. They could not share this information with each other. An

outside attorney could take all pertinent information from the firms in confidence, combine it as needed in the

petition, and designate certain information in the petition as confidential. Without an outside attorney, the firms were

stuck As the case developed, the other side (foreign manufacturers and importers) would submit confidential

business information of its own as key elements of its case. While an outside attorney for the U.S. producers could

have access to such information, the companies themselves could not. Thus, if they argued the case without an

outside attorney, the U.S. firms would have no way of refuting key arguments of the other side, since they could

not know what those arguments were.3

The Department of Commerce could initiate an investigation on its own on behalf of the U.S. industry.

However, the Department of Commerce has done so only once in hundreds of cases. While the Department may

have considered doing so in this case, it ultimately decided not to. The producers were forced to ride out the dumping

without remedy. In this case, riding it out seems to have worked. The continued low value of the dollar and increased

labor costs in Japan and other Asian countries have combined to push the price of imports up. Additionally, the

continued decline in U.S. demand may have dissuaded foreign firms from buying a large market share through

dumping. Domestic producers say the Japanese are still selling in the United States, but not with the same “sell at

any price” fervor.

This case highlights some problems faced by small firms in trying to attain relief from dumping. The problems

included difficulty in getting needed data on foreign firms’ costs and prices, difficulty in collecting industry-wide

data, difficulty in justifying the payment of legal fees (especially since success was uncertain), and a general lack

of familiarity with the law.

g~e~ Woulclbe given noncontidentid summaries of the confidential information, but those summaries would usually omit important

details.

percent higher in Japan than in the United States. will the duties collected be based on verified

The Commerce Department’s Auto Parts Advisory

Committee, a group of 35 industry representatives,

advised that the Commerce Department initiate a

dumping case on its own. The Committee explained

that industry would be reluctant to file antidumping

petitions, partly because of the need to preserve

business relationships with Japanese firms.121 Filing

petitions can also anger U.S. customers who stand to

be deprived of cheap imported goods.

After a petition is filed, a case takes time to yield

results. Provisional duties are not imposed until the

ITC first finds reason to believe the injury testis met

and the Department of Commerce makes a preliminary finding of dumping or subsidies. This usually

takes over 5 months for dumping cases and almost

3 months for subsidy cases.122 The duties ordinarily

apply only to goods that clear customs after the

preliminary determinations are made and published,

though in rare cases the Commerce Department will

seek to collect duties retroactively for up to 90

days. 123 The Commerce Department’s preliminary

determin ation is often based on unverified statements by the foreign manufacturers. Only after a

final determination, usually another 21/2 months,

information. l24 Even these relatively modest delays

could be important for products with short life

cycles. Moreover, these delays must be added to the

time it takes for a business to suspect subsidies or

dumping and to prepare a petition.

Additional delay can occur if further proceedings,

and perhaps court appeals, are necessary to get

duties assessed. One example is that after a countervailing duty order is in place, subsidy levels can be

increased; it will take at least a year or two before the

Commerce Department determines the new subsidy

level in an annual review.In while increased duties

will be assessed retroactively, the underresponse to

the subsidy in the interim could allow the foreign

producer to capture market share.

An extreme example of delay pending review is

the case of portable electric typewriters from Japan.

In May 1980, Smith Corona Corp. obtained an

antidumping order against these products.126 Within

2 years after this order, Japanese firms started

exporting portable typewriters that included memory. In January 1987, the Commerce Department

ruled that the typewriters with memory did not come

under the scope of the 1980 antidumping order.127
Chapter 4--U.S. Trade Policy ● 149

Three court appeals later, in September 1990, the

U.S. Court of Appeals for the Federal Circuit ruled

that these typewriters did come under the 1980

order, and ordered the collection of antidumping

duties. 128 However, antidumping duties could no

longer be collected on typewriters imported in the

intervening 8 or 9 years.

129 Delays of several years

can also occur because of ineffective enforcement;

sometimes the duties are never collected.130

Effective relief is sometimes held up because one

case after another must be filed. Each countervailing

duty or antidumping case must name a specific

product or group of products already entering the

United States from a specific country of origin.

However, after a case is won and countervailing or

antidumping duties stem the flow of goods from the

country named, the flow of dumped or subsidized

goods can start up again from other countries. The

Torrington Co. claims that this happened in the late

1980s with ball bearings, when several multinational firms switched production to facilities in other

countries. 131 If foreign producers can easily switch

production capacity among different final products,

a producer might export one product until a countervailing duty or antidumping order issues, and then

switch to another product. This occurred with steel

in the 1980s.132 After hundreds of cases were filed

starting in 1982, in September 1984 President

Reagan announced that countervailing duty and

antidumping cases had been ‘‘slow, cumbersome

and incomplete in remedying [the U.S. steel industry’s] injuries. ’’133

Antidumping and countervailing duty orders are

simple to circumvent for goods whose final stage

assembly is easily moved across national borders.

Such a move can put the goods out of the reach of a

previous order;134 thus, a new pattern of subsidized

or dumped imports could go unimpeded until a new

case was filed and a new order obtained. In 1988,

Congress added so-called ‘anticircumvention’ provisions so that the initial order can sometimes cover

the new import patterns. However, these provisions

apply only in very limited circumstances and will

likely have little effect.135 It might not be possible to

strengthen these provisions while staying consistent

with GATT as it now stands.136 In the Uruguay

Round, the United States and the EC have proposed

that GATT should explicitly permit certain anticircumvention measures, to deal not only with cases of

relocated final assembly but also with relocated

parts production, as occurred with ball bearings.

Another possible impediment to relief, in the case

of subsidies, is the specificity test. As discussed, a

government program is counted as a subsidy only if

it in fact selectively benefits a specific firm or

industry, or group of firms or industries; programs

granting equal benefit to a broad range of firms and

industries are not counted. Foreign countries can

phrase their laws so as to paint benefits as widely

available, even when in practice they are not. Former

U.S. Government officials representing foreign firms

in trade cases could coach foreign governments on

how to do this. When foreign laws appear to grant

benefits to a wide range of fins, often as a practical

matter the difficult task of proving that the benefits

are indeed selective falls on petitioners.

In other ways as well, the Commerce Department

at times does not recognize certain subsidies. For

example, the Commerce Department does not count

R&D subsidies if the results are made public, but

making the results public does not negate the

benefits to the firm of being among the first to know

and the most familiar with the new discoveries. As

another example, if a foreign government disguises

a long-term loan as a series of short-term loans, the

Commerce Department often will count it as shortterm; this can decrease the computed subsidy if, as

is most often the case, the market interest rate for

long-term loans exceeds the market rate for shortterm loans.

Another important limitation on the effectiveness

of countervailing duty and antidumping law is the

injury test. U.S. law, implementing GATT’s requirement, provides that antidumping and countervailing

duties cannot be levied unless ‘by reason of imports

of [dumped or subsidized] merchandise or by reason

of sales (or the likelihood of sales of that merchandise)” either an “industry in the United States” is

“materially injured” or “threatened with material

injury,” or “the establishment of an industry in the

United States is materially retarded.” Congress has

further defined ‘material injury’ as ‘harm which is

not inconsequential, immaterial, or unimportant,”

and has specified certain factors to be considered,

such as the volume and trend of imports, whether the

imports depress or suppress prices, and sales, profits,

and capacity utilization in the affected industry.137 It

is up to the ITC, which determines injury in U.S.

cases, to evaluate and weigh the factors. The ITC has

considerable discretion and the courts seldom overturn its decisions.
150 . Competing Economies: America, Europe, and the Pacific Rim

As shown in figure 4-7, the injury test is the

primary reason why petitioners lose antidumping

cases. Well under one-tenth of the cases (6 cases,

plus 1 partial case, out of 109) are lost because no

dumping is found. In contrast, one-third of the cases

(37 out of 109) are completely lost because no injury

is found, and about half of the cases (53 out of 109)

are lost completely or in part because no injury is

found. Figure 4-6 shows that, while a factor, the

injury test in countervailing duty cases is less

important. Of 39 cases, 23 were subject to the injury

test. Of those, 5 whole cases and 2 partial cases were

lost because of the injury test.

The injury test adds expense. The legal fees and

other expenses needed to prove injury are often

greater than those needed to prove subsidies or

dumping. Sometimes they are quite large. For

example, in 1988 and 1989 The Torrington Co. spent

a quarter of a million dollars on economic consultants merely to criticize and comment on an economic model proposed by Commission staff to

analyze the injury. Torrington believed its opposition spent an equivalent sum.138 While much of this

expense is unavoidable due to the complex, technical subject matter, the ITC’s approach to injury

determinations does add to it. The ITC determines

each case on its own facts, without articulating or

following rules of general applicability. One such

rule could be that a drop in profit of a certain

percentage of sales, if linked to the imports, normally establishes the requisite injury. Without ‘safe

harbor’ rules such as this, petitioners are compelled

to develop the facts and argue the law for all possible

factors that the ITC might consider—profits, sales,

capacity utilization, and so on. The ITC’s case-bycase approach also makes case outcomes less

predictable, which can discourage petitioners from

filing complaints.

The injury test poses a particular problem for

firms seeking relief in good economic times, at the

beginning of a product cycle, or before much

damage has been done. As the ITC has interpreted

the test in some recent cases, industries that appear

fairly healthy in an absolute sense and whose health

has not recently declined will likely fail the injury

test, even if they would have done far better if not for

the subsidized or dumped imports. This happened in

a case decided in January 1989 concerning digital

readout (DRO) systems from Japan. The Commerce

Department had found large dumping margins on

DRO systems, ranging from 39 to 55 percent. 139

DRO systems consist of two components: a transducer,

which measures the position of equipment such as

metalworking machine tools during operation, and a

console, which displays the resultt in digital form. In

determining injury, the International Trade Commission considered console production and transducer

production to be two separate industries, and made

a separate determination for each industry.

Four Commissioners, a majority of the sixmember International Trade Commission, ruled that

the required injury was not present for either industry. The Commissioners never considered whether

the dumped imports made the industries less successful than they otherwise would have been.l40

Two Commissioners dissented. They pointed to

strong economic evidence, supplemented by an

admission by one of the major Japanese manufacturers, that the Japanese firms had maintained their

141 They also noted market share only by dumping.

strong evidence that the dumped imports had substantially lowered the price for DRO systems in the

U.S. market.142 These two Commissioners believed

that injury should be considered primarily in’ terms

of the effect of the dumping, rather than the general

health of the industry. The majority approach can

make it hard for U.S. firms to win dumping cases

early in a product cycle (when markets are growing)

or before significant damage has been done. This can

put companies in a dilemma: file a case early and

risk that not enough injury will be found; or file later,

when the damage is substantial and hard to reverse .

143

The DRO systems case shows another hurdle in

the application of the injury test. In assessing the

health of the domestic industry, the Commission

considered export sales together with domestic

sales. Under this approach, even if subsidies or

dumping severely hurts the domestic industry in its

home market (the only market that U.S. countervailing or antidumping duties can address), no relief will

be obtained if the U.S. industry’s export sales of

consoles are strong enough to make the overall

industry healthy. In the DRO case, export sales were

apparently much more profitable than domestic

sales, which appeared to be made at a 1OSS.

l44

The injury test permits the respondents to claim

that the domestic industry’s troubles came not

because it was undersold but for other reasons.

When credible alternative reasons are offered, often

as a practical matter the burden of proof shifts to the
Chapter 4--U.S. Trade Policy . 151

petitioners to show that the low-priced imports were

responsible for at least some of the material injury.

This issue arose in a case brought in 1990 by

National Label Co., a firm in Lafayette Hill, Pennsylvania. 145

National Label made pressure-sensitive polyvinyl

chloride covers for alkaline and some other batteries.

These covers used a new technology that expands

battery life.l% National Label had been making the

battery covers under a 1986 patent and trade secrets

license from Zweckform, a German firm, which

gave National Label the exclusive right to exploit the

technology in North America. Relations between the

two firms soured, however, and in December 1988

Zweckform told National Label it was terminating

the license, and (according to National Label) began

approaching potential U.S. customers. National

Label asserted that Zweckform did not have the right

to terminate its exclusive license and sued Zweckform in Federal court to stop it from selling in the

U.S. market.147 In January 1990, National Label also

filed an antidumping petition, alleging that Zweckform was dumping battery covers in the U.S. market

with the intent to drive National Label out of the

business.

National Label maintained that it had been injured

in at least two ways: first, that it had lowered its

prices to keep from losing sales to its principal

customer, Eveready; and second, that it had lost a

sale to a prospective new customer, Mutec, a

potentially powerful new entrant into the battery

market backed by Matsushita and Kodak. Regarding

its Eveready account, National Label submitted

sworn statements by its president that in March

1989, Zweckform representatives visited Eveready’s

office in Chicago and an Eveready official present at

that meeting told him later that Zweckform had

solicited to sell Eveready battery covers for the U.S.

market. In April 1989, according to the statement,

Zweckform gave him a choice between selling his

battery cover business to Zweckform or being driven

out of the business through deliberate below-cost

pricing by Zweckform in the U.S. market.148 However, Zweckform disputed the facts of the case,

claimin g that the March 1989 meeting in Chicago

was to discuss the European market only, and that

Zweckform had never approached Eveready regarding the U.S. market.149 Apparently Eveready told the

Commission that Zweckform’s version of the facts

was correct. The Commission agreed with Zweckform and found that Zweckform had not offered to

sell to Eveready, and therefore could not be held

responsible for National Label lowering its prices to

Eveready. 150

Regarding the prospective Mutec account, Zweckform said that it won the sale to Mutec because

National Label’s samples did not meet Mutec’s

specifications, rather than because National Label

charged more. Mutec gave testimony agreeing with

Zweckform. National Label disputed this point,

arguing that Mutec’s rejection of the samples was a

sham. National Label argued that Mutec’s parent

Matsushita had found National Label’s samples

acceptable; Eveready and other firms found National

Label’s cover acceptable; the rejection of National

Label’s samples came after Mutec had already

chosen Zweckform as a supplier, with the antidumping case started or anticipated, and it was then in

Mutec’s interest to claim that National Label’s

samples were unsatisfactory; and problems found in

samples can often be fixed, but here there was no

chance to do so because thanks to Zweckform’s low

price, Mutec had decided to purchase from Zweckform before it ever tested National Label’s samples. 151 The commission agreed with Zweckform

and found that Zweckform’s low price was not what

had caused National Label to lose the sale to

Mutec .

152

OTA does not know whose version in this case is

correct. The ITC’s decision was based on confidential information not available to OTA. But this case

does illustrate some difficulties facing a petitioner.

In both cases of alleged injury, key testimony as to

the real cause of National Label’s injury came from

Zweckform’s customer (Mutec) or potential customer (Eveready)--parties predisposed to take

Zweckform’s side. The details of the tests performed

by Mutec on National Label’s samples were considered Mutec’s confidential business information.

While National Label’s outside counsel could see

this information, National Label’s president, who

was a technical expert, could not. 153 Nationa l

Label’s president believed that this handicapped his

ability to challenge the rejection.l54

Offsetting Foreign Advantages

Even if antidumping and countervailing duties

were applied reliably and immediately to subsidized

and dumped imports, this often would not offset the

advantages of foreign firms. Some practices and

effects slip through the cracks; they cannot be

addressed as either subsidies or dumping. Some-
152 ● Competing Economies: America, Europe, and the Pacific Rim

times the foreign practice can be stopped by

negotiation (perhaps using Section 301 or GATT

dispute resolution procedures), though such negotiations, like negotiations to remove market barriers,

are likely to be slow and difficult.

Countervailing and antidumping duties affect

only sales in the U.S. market. Subsidies can give

foreign firms an advantage in their home and third

country markets, and dumping can mean an advantage for foreign firms in third country markets. Such

subsidies have been addressed in several Section

301 cases (most involved agricultural products), and

third country dumping of memory chips by Japan

was addressed in the simultaneous settlement of a

Section 301 case and three antidumping cases.

Realizing that its firms needed relief from third

country dumping, the United States negotiated a

special commitment by Japan not to dump in the

United States or in third countries.155

Another practice that can fall through the cracks

is sales in the U.S. market at very low profit

margins-high enough to sustain foreign manufacturers, but low enough to squeeze U.S. manufacturers. If the same price were charged at home, such

sales would not constitute dumping. Lower profit

margins might be more acceptable in another

country in which conditions for raising capital are

different. Or the foreign firm might be crosssubsidizing its low-priced exports to the United

States with profits from other product lines, as

Japanese supercomputer manufacturers have begun

doing.156 That cross-subsidization could not be

countervailed.

Perhaps the most profound Iimitation is that

subsidies are quantified in a manner that systematically understates their true value. To calculate the

countervailing duty, the Commerce Department frost

puts a monetary value, called the subsidy value, on

the benefit conferred. For example, the subsidy

value of a low interest loan would typically be the

interest saved by the company compared to the

interest that it would have had to pay on a

commercial loan. Next, the Commerce Department

allocates the subsidy value over time. For example,

the subsidy value of a low-interest loan could be

allocated over the life of the loan. Then, for each

period used for calculating countervailing duties, the

countervailing duty rate for imports is that part of the

subsidy value allocated to that period, divided by the

value of the goods produced (or sold) during the

same period with the help of the subsidy. For several

reasons, a countervailing duty computed in this

manner often does not compensate for the advantage

received by a foreign producer.

Sometimes the subsidy is essential in order for the

foreign producer to export in the first place. Often

government financing makes it possible to get

crucial bank loans, without which the business

might never get off the ground. In the 1960s and

1970s, the Japanese Government subsidized its

computer industry by means of low-interest loans

from the Japan Development Bank (JDB) to the

Japan Electric Computer Co. (JECC), a joint venture

of the Japanese computer manufacturers. JECC’s

function was to finance computer sales; JECC

bought computers for cash from the manufacturers

and leased them to users. The loans from JDB made

it possible for JECC to acquire additional commercial loans. Without JECC’s help, most of the

Japanese manufacturers probably would not have

been able to borrow money to finance sales of

computers. These manufacturers would then have

been restricted to customers who could pay cash, and

as a result Japan’s computer industry would have

developed more slowly.157

But if U.S. manufacturers had filed a countervailing duty case, what would the countervailing duty

have been? As calculated by one scholar, the subsidy

implicit in the JDB loans from 1961 to 1969 was 2

billion yen, while the Japanese computer fins’ sales

during those years were about 230 billion yen.158

Therefore the subsidy, and the countervailing duty,

would have been computed as less than 1 percent of

the value of the goods sold.

A similar mismatch between the countervailing

duty computed and the advantage conferred on the

foreign firm can occur with government support of

R&D. An example is MITI’s VLSI project in the late

1970s, which concerned techniques for making

denser semiconductor chips. This project was important in helping the Japanese semiconductor and

computer industries catch up with their U.S. counterparts,159 and was important to the development of

Japan’s supercomputer industry.160 But if U.S. firms

were to petition for relief in 1991, what countervailing duties might be imposed? The VLSI project is

relevant to producing a wide range of electronics

products; those of the participating firms will

probably total well over $40 billion in 1991.161 In
Chapter 4--U.S. Trade Policy . 153

comparison, the $150 million contributed to the

VLSI project by MITI, of which little if any would

be allocated to 1991, would yield a minuscule

countervailing duty, far less than 1 percent of sales.

Why does the countervailing duty calculation fail

to capture the full worth of the R&D? Perhaps the

most important reason is that the approach to

calculating countervailing duties assumes incorrectly that benefits are static. Under the law,

subsidies are used once, and then their effect is gone;

the only issue is how to divide up the benefit over

time and products. In fact, under the law an R&D

project in the late 1970s, such as the VLSI project,

would be considered irrelevant to sales in the 1990s;

the project’s payback period would be considered

over and its effects dissipated. In reality, however,

subsidies can create new opportunities and help a

business seize an advantage years later; the effect

can grow, rather than diminish, with time. In high

reward industries this is particularly likely.162 The

effects of Japan’s VLSI project probably increase

with each passing year. The same can be true, for

example, with low interest loans. Under the law,

preferential financing to Japanese computer companies in the 1960s is probably irrelevant to sales of

supercomputers and other computers in the 1990s;

but in fact, the effect of those loans is strongly felt

in 1991 (see ch. 6).

Under the law, it is not possible to capture the

benefit that such government action confers on

industries. Legalities aside, this task is very difficult.

The foreign industrial policies discussed in this

report are replete with actions intended to benefit

national industries. To track the effects of all actions

that helped a particular industry is a hopeless task.

How Hard Are the Problems to Fix?

The ineffective response of countervailing duty

and antidumping law is not easy to fix. First, the law

is inherently reactive. Duties are imposed in response to specific observed foreign practices; therefore, some delay occurs before the duties are

imposed. In this way the approach of U.S. trade law

differs fundamentally from one in which the U.S.

Government would proactively seek to create advantages for its national industries, as other governments do.

However, there are ways to improve the effectiveness of countervailing and antidumping duty law.

For example, the injury test could be attuned to be

more receptive to companies still doing fairly well,

before serious damage is done; the Commerce

Department could be directed to suspend closing out

of customs entries as soon as a case is started, and,

once imposed, to collect duties retroactively as far as

possible; and the Commerce Department could be

more aggressive in finding and evaluating subsidies.

These changes might be challenged as inconsistent

with GAIT’s requirements. For example, an attempt

to change the evaluation of subsidies to more

completely capture the subsidy’s full effect could

run afoul of GATT’s requirement that countervailing duties not exceed “the estimated bounty or

subsidy determined to have been granted.’’163 Precisely what GATT allows is not always clear;

ambiguities can be resolved only by a GATT ruling

on a dispute between two countries, or by amendments to clarify the rules. Some countries have

maintained that current U.S. practices violate GATT—

e.g., the use of a minimum of 10 percent general

administrative overhead and 8 percent profit when

constructing a product’s fair value based on foreign

manufacturers’ costs,164 and the practice of assuming until proven otherwise that petitions are supported by the majority of the domestic industry. This

latter practice has already been found to violate the

GAT Antidumping Code.165

The United States has been negotiating in the

Uruguay Round to allow countervailing and antidumping cases to be more effective. Along with the

EC, it has pressed to provide clear authority for

certain expanded anticircumvention measures, The

United States has also pressed to prohibit domestic

subsidies in certain cases, just like export subsidies

are now prohibited. However, the United States

faces an uphill battle in GATT, with few allies and

with many nations pushing to weaken countervailing duty and antidumptig law.

Several practical concerns counsel caution in

trying to enhance the laws’ effectiveness. Imposing

countervailing and antidumping duties entails substantial administrative costs, starting with an expensive investigation. Further, the computations used to

determine subsidies and dumping rely on imprecise

data that may contain a fair amount of estimation. At

times, duties will be levied when there really were no

subsidies or dumping. The stronger the laws, the

more often such mistakes will occur, throwing up

misguided barriers to imports.

292-889 0 - 91 - 6 QL:3
154 . Competing Economies: America, Europe, and the Pacific Rim

This problem is magnified because countervailing

duty and antidumping petitions can be filed to harass

one’s competitors. While cases cost petitioners, they

also cost the respondents. In fact, the burden on

respondent firms can be greater, because the Commerce Department and the ITC, in developing the

facts of the case, often scrutinize these fins’

business records. Just the threat of countervailing or

antidumping duties creates uncertainty that can

impede imports. And if, perhaps because of the

proceedings’ inherent imprecision, very small countervailing or antidumping duties are imposed, there

is the threat that in subsequent annual reviews these

duties will be retroactively increased.

In the case of antidumping law, the imprecision is

not just in evaluating data, but also in how dumping

is defined. The problem is that what is defined as

dumping does not always justify a response. While

dumping is often a sign that the foreign firm has a

special advantage, this is not always the case.

Dumping is sometimes a short-term ploy to get new

customers; U.S. firms can often meet this type of

competition on their own. As calculated, dumping

could be found when a foreign firm prices identically

at home and in the United States, if the prices in both

markets fluctuate together. Or dumping could be

found simply because of exchange rate fluctuations. 166 But if the definition of dumping excluded

these transient effects, the law would also miss, at

least for a while, situations that do require a

government response. Another problem with dumping calculations concerns how to compare U.S. and

home market selling prices. A fair comparison

requires that differences in selling costs in the two

markets be taken into account to net back to

ex-factory prices for sale to each market; but when

the foreign exporter sells through a U.S. subsidiary

it seems impossible to write rules that will always

fairly compare the two selling costs. It is not always

possible to separate cases that warrant antidumping

duties from those that do not.

Even when foreign firms enjoy a special advantage, countervailing or antidumping duties might not

be helpful. The U.S. industry might be well able to

take care of itself, while important downstream

industries could benefit from the cheap imports. For

certain industries, the U.S. economy might be best

served by the downsizing or eliminating the industry

in question, with resources put to better use elsewhere. As useful as countervailing and antidumping

duties are in some cases-and foreign firms and

countries often target high-reward industries where

the U.S. industry appears vulnerable-in other

cases, they are not.

Yet another consideration is that foreign countries

can use these duties against U.S. exports. These

countries include traditional users of countervailing

and antidumping law such as the EC and Australia

and newer users such as Mexico. Imprecision in

computing dumping and subsidies, and the broad

reach of the “dumping” label to include some

conduct not warranting a response, can comeback to

bite U.S. exporters. In some cases the United States

has subsidized its industries, usually in an incidental

rather than planned way. For example, governmentsupported R&D for military aircraft has helped the

U.S. commercial aircraft industry (see ch. 8).167

Another example is the government’s support of half

a billion dollars over 5 years for Sematech, an R&D

consortium concerned with semiconductor manufacturing. If the United States decides to increase

support for its industries, they could become more

vulnerable to trade remedies in other countries.

Where subsidy and dumping laws are ineffective,

Section 301 might apply. In 1988, Congress specified that Section 301 applies to foreign “export

targeting,” defined as “any government plan or

scheme consisting of a combination of coordinated

actions . . . bestowed on a specific enterprise,

industry, or group thereof,” with the effect of

enhancing export competitiveness.168 Section 301

would thus seem to cover a variety of foreign policy

tools inadequately covered by U.S. antidumping and

countervailing duty law, such as R&D programs and

preferential financing. As of August 1991, no

Section 301 case had been brought based on this

provision, and such use of Section 301 would pose

problems. There would be the same problems of

delay, angering foreign countries, and soon as when

Section 301 is invoked to eliminate foreign market

barriers. Other countries are particularly averse to

being told how to run their domestic economies. And

Section 301 cannot reach back in time: a policy

discontinued years or even decades ago, such as

market protection or R&D support, can be the cause

of an export surge today.
Chapter 4--U.S. Trade Policy . 155

OTHER MEASURES AGAINST

IMPORTS

Restrictions on particular imports can play a role

in strategies for both mature industries facing

difficult adjustments and for sunrise industries that

promise fast growth. The appropriateness of protection depends on a host of factors and does not hinge

on the presence of any individual foreign practice

such as subsidies or dumping.

To justify such protection countries sometimes

invoke GATT’s Article XIX, the so-called ‘‘escape

clause ‘‘169 The escape clause addresses situations in ●

which, because of a combination of “unforeseen

developments’ and the country’s GATT obligations, a product is imported in such “increased

quantities” as to “cause or threaten serious injury”

to a nation’s domestic producers. Under these

circumstances, a country may temporarily suspend

performance of its GATT obligations “to the extent

and for such time as may be necessary to prevent or

remedy such injury. ‘‘170The nation may raise tariffs,

or impose quotas or nontariff barriers, but must

compensate the countries whose exports have been

blocked. If agreement can be reached, the compensation can consist of concessions (e.g., reduced tariffs)

on other items; if no agreement is reached, an

affected country may impose ‘substantially equivalent” barriers on imports from the nation using the

escape clause. 171 Typically, the affected country

would raise tariffs on products of its choosing.

U.S. law implements the escape clause in Section

201 and the following sections of the Trade Act of

1974, as amended. 172 While GAPP requires only

that the increased imports ‘cause or threaten serious

injury,” U.S. law specifies that the increased imports be at least as great as any other cause of

injury. 173 The U .S. statute, reflecting GATT, requires that an existing industry be injured; the injury

test cannot be met by showing that the imports are

preventing the establishment of an industry.174 In

these ways and perhaps others, the injury test under

Section 201 is more stringent than the injury test in

subsidy and dumping cases. To assess injury, U.S.

law specifies factors such as idling of facilities,

profit levels, and unemployment levels.175

The ITC determines injury under Section 201. A

petition from industry or organized labor normally

triggers an ITC investigation,176 and the ITC typically takes 4 months to decide whether the injury

requirement is satisfied.177 If the injury requirement

is not satisfied, the case ends with no governmental

action; if the requirement is satisfied, then the ITC

decides whether to recommend protection. The

protection can be tariffs and/or quotas, lasting up to

8 years.178 The ITC can recommend that the

President negotiate with other countries to address

the underlying cause of the increased imports or

ameliorate their effect (as by restraining other

countries’ exports), or take any other action authorized under law.179 The ITC usually submits its

recommendations to the President 6 months after the

petition was filed.180 The President then has 2

months to decide what trade relief, if any, to grant.181

The President is supposed to weigh the social

benefits and costs, and consider “efforts being made

by the domestic industry to adjust to the import

competition’ and the “position of the domestic

industry in the United States economy.’’182 The

President has great flexibility in selecting the form

of relief; he may choose one or more measures,

including tariffs, quotas, auctioning off quotas to

foreign producers, assistance to the domestic industry, negotiation of agreements with foreign countries, and “any other action which may be taken by

the President under authority of law.’’183 Relief can

last up to 8 years.184 While relief is in effect, the ITC

reports to the President every 2 years on industry’s

progress in adjusting to import competition. The

President can then reduce, modify, or terminate the

relief based on changed economic circumstances or

his determination that the industry “has not made

adequate efforts. ’ ’185

Table 4-8 summarizes the use of Section 201

during 1975-1990. Of 62 cases, the ITC found injury

in 33, and in 30 recommended protection. The

President granted protection in 14 of the cases.

Overall, a petitioner’s chance of obtaining some

protection was about 23 percent. Further, the President frequently reduced the level of protection

recommended. 186

Use of Section 201 tapered off considerably after

the 1970s. The change probably occurred in part

because the Trade Act of 1979 made it easier to win

dumping and countervailing duty cases, so that those

cases were often a more attractive route to relief.187
156 . Competing Economies: America, Europe, and the Pacific Rim

Table 4-8-Section 201 Cases

Cases filed ITC President

during years ITC found recommended granted

Years shown injury protection’ protection

1975-90 . . . . 62 33C

3 0

d

1 4

e

1980-90 . . . . 20 7

f

7

g 5

h

1986-90 . . . . 2 0 0 0

a

lncludes all caes in which the majority of the Commissioners voting on the

remedy to be used recommended some form of protection, plus the one

case (filed in 1977) where half of these Commissioners so voted.

bProtection consisted of one or more of the following: increased tariffs

(used 7 times), quotas (used 3 times), tariff rate quotas (increased tariffs

charged only on imports above quotas, used once), negotiated agreements to limit foreign countries’ exports (used 4 times), and price supports

(used once).

c

lncludes 6 cases in which injury was found only with respect to Some of the

products at issue; includes 4 cases in which the ITC’s vote on injury was

evenly divided.

d

lncludes 6 cases in which injury was found only with respect to some of the

products at issue; includes 2 cases in which the ITC’s vote on injury was

evenly divided.

eAll were cases in which a dear majority found injury and the ITC

recommended protection. Includes 4 cases in which injury was found only

with respect to some of the products at issue.

f

lncludes 2 cases in which injury was found only with respect to some of the

products at issue.

g

Includes 2CaSeS in which injury was found only with respect to some of the

products at issue.

h

lncludes 2 cases in which injury was found only with respect to some of the

products at issue.

SOURCE: U.S. General Accounting Office, International Trade: Activity

Under Section 201 of the Trade Act of 197.4 NSIAD-87-96FS

(Gaithersburg, MD: U.S. General Accounting Office, Mar. 30,

1987), pp. 6-9; U.S. International Trade Commission Annual

Reports, 1987-1990.

In addition, the ITC found the injury test not

satisfied in a highly visible case filed in 1980

concerning automobiles. To many, this seemed an

ideal case for relief if ever there was one: an

unexpected rise in oil prices suddenly made large

U.S. cam an unattractive purchase compared to

smaller Japanese cars. The ITC’s negative decision

in that case conveyed the message that the injury test

under Section 201 would be very hard to meet.

Although Congress in 1988 changed the statute in a

way that likely would have changed the result in the

autos case,188 there has not been a resurgence of

interest in Section 201; in fact, only one case has

been filed since.

Section 201 can be a useful trade tool. It operates

within the GATT framework and therefore tends to

be accepted by other countries. It has two advantages

over countervailing duty and antidumping proceedings: it does not require the proof of subsidies or

dumping; and it does not irritate foreign firms or

countries by calling them unfair.

Section 201 has significant limitations that restrict its usefulness, especially for high-reward

industries. It applies only to an already existing

“domestic industry” that is “producing an article”

that competes with the imported goods.189 It thus

cannot be used to promote the formation of a new

industry. 190

The industry must be seriously injured or threatened in an absolute sense; it is not enough that the

industry would have done much better without the

increased imports.191 The Commission will find that

a threat of serious injury exists only if ‘‘serious

injury, although not yet existing, is clearly imminent

if import trends continued unabated.’’192 These

requirements make it hard to get relief at the

beginning of a product cycle, when markets are

growing rapidly.

Section 201 has not often been invoked on behalf

of high-reward industries. One prominent highreward sector, electronics, is represented by only

two cases—television receivers, filed in 1976, and

CB radio transceivers, filed in 1977. The television

case concerned a U.S. industry in decline, and the

CB radio case concerned a potential growth industry

that, according to the ITC, was in deep trouble

because of the Federal Communications Commission’s decision to expand the citizens band from 23

to 40 channels.193 Section 201 has not been invoked

for supercomputers, mainframe computers, workstations, personal computers, or semiconductors, where

Japanese companies are a strong competitive threat

to a U.S. industry.

Even for mature industries, the injury requirement

can make it difficult to get relief before much

damage has been done. For example, in July 1984

the ITC found no threat of serious injury to the

nonrubber footwear industry even though imports

had increased in volume from51 percent of domestic

consumption in 1979 to 65 percent in 1983.194 The

ITC reasoned in part that imports were predominantly at the low end and domestic production was

predominantly at the high end, so that “rather than

displacing domestic nonrubber footwear production,

imports have served to complement it.’’195 In value

terms, the imports had increased only from 36

percent of domestic consumption in 1979 to 44

percent of domestic consumption in 1983.196 As the

ITC spoke, however, the situation was changing.

The industry filed another petition for relief, and in

July 1985, one year after its first ruling, the ITC

found a threat of serious injury. Import volume had

risen to71 percent of domestic consumption in 1984,

and 77 percent in the first quarter of 1985. The
Chapter 4--U.S. Trade Policy ● 157

imports had moved upscale; their value was 54

percent of domestic consumption in 1984 and 62

percent in the first quarter of 1985.197

Even if the legal hurdles are passed, relief still

depends on the President. Recent Administrations

have been averse to granting import relief in Section

201 cases. This results from a free trade orientation

and the obligation under GATT to pay compensation.

GOVERNMENT PROCUREMENT

In market economies, governments seldom own

industries, and must procure goods and services

from private enterprises in order to function. Government procurement contracts cover everything

from pencil sharpeners to cleaning services to

supercomputers. If procurement is open and competitive, governments take bids and choose the suppliers that fulfill their needs at the cheapest prices.

Often this does not happen.

Some foreign governments use public procurement to develop or maintain key industries and

technologies. For example, the Japanese Government has procured Japanese supercomputers instead

of faster U.S. machines to help develop its domestic

industry (see ch. 6).

The United States seldom uses procurement as a

tool to promote industries or technologies. Its basic

policy is to conserve tax dollars and be fair to all U.S.

suppliers by buying at arm’s length. Accordingly,

procurement law has elaborate procedures to ensure

that the process is transparent, meaning that firms

have adequate notice and opportunity to bid and that

the selection is made according to criteria announced when bids are solicited. U.S. law allows

disappointed bidders to protest; if the required

procedures were not followed, a resolicitation could

be required.

Another policy uses government purchases to

protect domestic jobs and promote various social

goals. This policy is reflected in laws giving

preferences to goods manufactured in the United

States—including “Buy American” laws and preferences for businesses that are small, minorityowned, or in depressed areas. National security

concerns can limit purchases to U.S. goods. These

laws are not meant to help commercial competitiveness, although they occasionally do--e.g., the requirement that DoD buy only domestically made

supercomputers. But often these preferences do not

apply, so that suppliers of foreign goods can

compete on an equal footing.

Many foreign procurement markets are not so

open. Standard practice in many other countries is to

grant notice of procurements to, and fairly consider

bids from, certain domestic firms. This imbalance of

access was perpetuated by international agreements.

These agreements include bilateral memoranda of

understanding (MOUs) dealing with defense procurements and the GATT Procurement Code. The

United States is negotiating to improve access to

foreign procurements, but the negotiations are difficult and even modest improvements are not assured.

The imbalance of access and the fact that foreign

governments often use procurement as a strategic

tool to enhance competitiveness while the United

States seldom does mean that U.S. and foreign

procurement policies together have a negative effect

on U.S. competitiveness.

What the U.S. Public Sector Purchases

In 1990, the U.S. public sector purchased about 9

percent of the goods produced in the United States

(see table 4-9). Half of these purchases were for

defense needs.198 The defense share of public

purchases of durable goods was greater: 68 percent

(see figure 4-8). Durable goods include computers,

semiconductors, and many other important high

technology products.

The effect of defense procurement on competitiveness is not clear. A large portion of defense

purchases have no commercial use: military ships,

missiles, military communications and electronic

Table 4-9-Purchases of Goods by the U.S. Public

sector in 1990 (in billions of dollars)

Percent of

GNP for good8

Durable Nondurable Total ($2,144bn)

Federal defensea . . . . 83.6 13.1 96.7 4.5

Federal nondefense . . 5.7 4.6 10.3 0.5

State and local . . . . . . 33.0 53.9 86.9 4.1

Total ............. 122.3 71.6 193.9 9.Ob

aThis spending is almost all by the Department of Defense. A small amount,

probably under 1 percent, is by the Department of Energy and NASA for

defense-related work.

bFigures do not add up because of rounding.

SOURCE: Department of Commerce, Bureau of Economic Analysis,

Government Division, computer printouts, Feb. 28, 1991, and

Economic Report of the President, 1991, table B-6.
158 . Competing Economies: America, Europe, and the Pacific Rim

Figure 4-8-Government Purchases of All Goods and Durable Goods, 1990

All goods Durable goods

$193.9 billion $122.3 billion

Federal defense

billion

%

Federal nondefense

$10.3 billion

5%

State and local

$86.9 billion

45%

Federal nondefense

$5.7 billion

5%

ederal defense

$83.6 billion

68%

State and local

$33 billion

27%

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, unpublished data.

equipment, and combat vehicles (see figure 4-9).

The largest portion (31 percent in 1990) is for

aircraft. Although defense purchases of military

aircraft have long generated spillover benefits to the

civilian aircraft industry, these benefits are dwindling (see ch. 8, and vol. 2).

Defense procurement includes some items with

commercial use, such as general purpose computers

and automobiles, but their procurement represents

only a tiny fraction of the U.S. market for the

products. For example, defense purchases of general

purpose computers in 1990 were worth $1.56

billion, 199 less than 1 percent of the estimated total

U.S. market sales of $176 billion.200 Defense purchases of noncombat motor vehicles in 1990 were

worth $984 million,201 less than 1 percent of the

estimated $139 billion in shipments of motor

vehicles and car bodies made in the United States.202

These relatively small quantities limit the power of

defense procurement to affect commercial industries.

On the other hand, defense needs for certain niche

products have sometimes provided crucial early

demand. Since its first sale in 1976, the U.S.

supercomputer industry has benefited greatly from

defense-related purchases by the Departments of

Defense and Energy. For many years they were the

major customers, and if not for early defense

purchases and software generated in national laboratories, Cray Research Co., since 1976 the world’s

leading supplier of supercomputers, might not be in

the supercomputer business today.

Figure 4-9-Defense Purchases of Durable Goods,

1990, $83.6 Billion

Mi

Spa

Oth

L Aircraft 31%

, General purose

d

computers %2

Stock funds 7%

Weapons 1%

Y

~

\ Military C&E 7%

 Non-combat vehicles 1%

Ships 12% Combat vehicles 3%

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis,

unpublished data.

Federal nondefense procurements, while more

oriented toward commercial products, are relatively

small. In contrast to many other developed countries, the United States runs no national health

service, no national railway, no national airline, no

national telecommunications system, and no national university system. Therefore its public sector

does not provide as large a market for medical

equipment, rolling stock, aircraft, telecommunications equipment, computers, etc. For example, U.S.

Government purchases of telecommunications equipment accounted for 17 percent of the domestic

market in 1989.203 In contrast, up to 1988 roughly 90

percent of the equipment sold in the European

Community was reportedly delivered to government

entities. 204

State and local governments together are more

important than the Federal Government as public
Chapter 4--U.S. Trade Policy ● 159

purchasers of nondefense goods in the United States.

As shown in table 4-9, they purchased goods worth

$87 billion ($33 billion for durables) in 1990. This

was 4.1 percent of the U.S. GNP for goods. Indeed,

State and local governments are significant purchasers of certain products. In 1982 (the latest year for

which figures are available), about 24 percent of

State and local government purchases of durable

goods were for motor vehicles. The same proportion

spent on vehicles in 1990 equates to about $7.9

billion in current dollars.205 This is about 6 percent

of the $139 billion in 1990 shipments of motor

vehicles and car bodies made in the United States.

The U.S. Legal Regime

Buy American and Other National Preferences

The Buy American Act was passed in 1933 as "

. . .an unabashed protective measure, providing a

barrier against goods of foreign origin in the area of

Federal Government purchasing.”206 This was one

of many laws introduced during the depression years

to use procurement to promote employment and

other socioeconomic goals.207 The law has been

amended several times and interpreted by regulations.

The Buy American regime applies to goods to be

used within the United States. In general, domestic

goods will be favored unless they are priced more

than 6 percent higher than foreign goods;208 if the

U.S. bidder is a small business or in a labor surplus

area, the preference increases to 12 percent.209 If a

product is manufactured in the United States, and if

the cost of domestic components going into the

product is over half the total component costs, then

it is domestic; otherwise, it is foreign.210 This

preference does not always apply. Two major

exceptions arise under the GATT Procurement Code

and bilateral defense MOUs, discussed below. Other

exceptions stem from the GATT Civil Aircraft Code

and the U. S-Canada and U.S.-Israel Free Trade

Agreements. 211

The Department of Defense (DoD) procures under

a slightly different set of rules. Products from

countries that do not have special agreements with

the United States can be subject to a 50 percent price

preference. DoD must disadvantage foreign bids

either by adding 50 percent to the value exclusive of

duties, or by adding 6 percent inclusive of duties,

whichever is greater. The 6 percent preference

increases to 12 percent in competition with domestic

bids from small businesses, or in areas of labor

surplus. After this adjustment, the lowest bid wins.212

Many “Little Buy American” acts grant additional preferences to particular products such as

machine tools and ball bearings. Some of these

preferences are absolute, forbidding the purchase of

foreign products no matter what they cost. Aside

from Buy American, there are some absolute preferences for products of U.S. businesses that are small,

minority-owned, or located in disadvantaged areas;

in fiscal year 1990, 19.9 billion dollars’ worth of

contracts for goods and services were made under

these preferences, out of total Federal contract

actions worth $191 billion.213

Defense Procurement and Memoranda

of Understanding

The United States has negotiated defense MOUs

with most major trading partners, though not Japan,

Korea, or Taiwan. About half of defense procurement is open to MOU partners on an equal basis.214

Under the MOUs, the United States waives the

general Buy American preference,215 through not

some of the specific Buy American preferences.216

The MOUs do not affect small business, minority

business, and labor surplus area preferences; they do

not apply when a U.S. or Canadian source is required

to preserve the defense industrial base; and they do

not apply to classified military procurements that

require a U.S. source for security reasons.

The GATT Procurement Code and the

Trade Agreements Act

The GATT Procurement Code217 and the Trade

Agreements Act of 1979 eliminate the general and

some specific Buy American preferences.218 The

Code requires signatories to give each other’s goods

national treatment, treating the foreign goods the

same as domestic goods. The Code currently applies

only to goods; it does not cover purchases by State

and local governments, or military weapons or other

goods necessary to maintain national security.219

Further, the Code covers only purchases worth at

least 130,000 Special Drawing Rights (SDRs), equal

to about $180,000 in January 1981.220 Finally, the

Code applies only to agencies specifically listed in

a country-by-country Annex; some countries have

specified other exemptions. For many countries,

including the EC and the United States, agencies

dealing with telecommunications, transport, energy,

and water are not covered. Also, the United States
160 ● Competing Economies: America, Europe, and the Pacific Rim

has exempted from Code coverage purchases reserved for small or minority businesses.

The GATT Procurement Code is implemented in

U.S. law by the Trade Agreements Act of 1979.221

The Code Annex lists most agencies of the U.S.

Government. Some exceptions are the Department

of Energy, the Department of Transportation, the

Bureau of Reclamations at the Department of the

Interior, the Army Corps of Engineers within DoD,

and, for some products, DoD. The Act grants

national treatment not only to Code co-signatories,

but also to countries with whom the United States

has equivalent bilateral treaties, and to many developing countries on a nonreciprocal basis.222

State and Local Procurement

Like the Federal Government, all the States have

adopted the rule of competitive procurement. According to a 1987 survey, 27 States have no Buy

American laws on their books; 223 the other States

have some Buy American laws, though sometimes

they are not implemented. For example, in 1968 a

California appellate court found California’s Buy

American law to violate the U.S. Constitution;224 the

law has since been inoperative. Kansas law permits

the State government to reject foreign bids, but this

is not done.225 States may offer preferences to small

business, minority businesses, and in-State suppliers.226 Some local governments have preferences of

their own.

The Effect of U.S. Procurement Law

and Policy

U.S. procurement law and policy in international

negotiations have been of limited value in advancing

U.S. competitiveness. This is because the United

States does not use procurement strategically, and

procurements are on balance more open than foreign

procurement markets.

Buy American Preferences

Buy American preferences can raise the prices the

government pays for goods. It is not clear whether

Buy American’s benefits outweigh this and other

possible costs. The 6 percent Buy American preference is intended to promote employment, but it

applies with no consideration of whether additional

jobs are needed.227 Specific Buy American preferences, usually the result of heavy lobbying from

industry associations or regional interests, have

supported many industries: food, clothing, coal,

paper, valves and piping, machine tools, aircraft

ejection seats, supercomputers, etc. This targeting is

not based on competitiveness strategy. It carries the

danger that the protected industry will grow complacent and uncompetitive. The Buy American laws are

complex, highly technical, and difficult for bidders

and agencies alike to understand and apply.228 They

add complexity, cost, and delay to an already

burdened Federal procurement process.229

Occasionally, defense procurement aids competitiveness in dual-use industries. For example, the

1987 Defense Appropriations Act stipulated “that

none of the funds in this Act maybe used to purchase

any supercomputer which is not manufactured in the

United States. ’’230 This restriction has probably

helped the U.S. supercomputer industry, not only by

assuring revenues but also by promoting the development of software for domestic machines. However, on the whole special Buy American preferences might do less good than harm (higher prices

paid, inefficiencies perpetuated, and administrative

burden).

While reliable data are not available,231 the effect

of the general Buy American preference is likely to

be modest, since defense MOUs and the GATT

Procurement Code override the preference when

they apply and the civilian preference is only 6

(sometimes 12) percent for nondefense goods.

Buy American preferences are a lightning rod for

foreign criticism as a symbol of U.S. protectionism.232 Perhaps Buy American’s best use is as a

bargaining chip to open up foreign markets. Negotiations to expand the scope of the GATT Procurement Code have tended in that direction.

Unequal Access

The defense MOUs, first negotiated in the late

1970s, have perpetuated the imbalance in access to

government procurements. These MOUs probably

cover about half of DoD procurement. Since defense

accounts for about 90 percent of government procurements of goods (table 4-9), and 80 percent of

Federal procurement generally (including goods and

services), 233 these MOUs open a substantial part of

U.S. Government procurement to foreign competition.234

These MOUs did not open foreign government

procurement to U.S. competition in the same way.

To begin with, defense spending is less important in

other countries. While defense procurement of
Chapter 4--U.S. Trade Policy . 161

goods and services is 80 percent of government

procurement in the United States, it is only an

estimated 25 to 50 percent of the procurement of its

allies.235

In addition, the defense MOUs were intended as

defense cooperation agreements, and were not designed to open foreign procurement markets to U.S.

goods. The primary goal was to secure the goodwill

and cooperation of military allies. It was expected

that the MOUs would reduce the U.S. surplus in

defense trade, which they did.236 While 17 of the 19

MOUs in principle were supposed to grant reciprocal national treatment,237 they required national

treatment only to the extent consistent with the other

.238 this huge loop- country’s laws and regulations,

hole allowed buy-national preferences to remain.

These MOUs did not require foreign defense procurement to be transparent; in large measure it is not.

Foreign procurements are often not well publicized.

Also, the foreign governments’ selection criteria are

often less open and predictable, with U.S. bids not

guaranteed full consideration. This uncertainty sometimes deters U.S. firms from preparing bids. And

foreign governments have often required U.S. prime

contractors to use local subcontractors, which can

hurt U.S. small businesses that cannot easily export

on their own.239

Reliable data on how much procurement these

MOUs cover in the United States and elsewhere, and

how much trade results in both directions, is not

available. 240 However, the lesser importance of

defense procurement in foreign countries and the

lack of true reciprocity suggest that the MOUs have

cost U.S. firms home market share without opening

export markets enough to compensate. This imbalance prompted a debate within DoD in the late 1980s

about whether the MOUs are to the United States’

.

24l advantage, it also aroused congressional concern.242 In 1989, the Administration began renegotiating the MOUs to achieve better access by U.S.

firms to foreign defense markets. As of April 1991,

MOUs had been renegotiated with France, Italy, and

The Netherlands. The new terms require some

procedural fairness but still do not require waivers of

buy-national preferences.243

The GATT Procurement Code might have reduced the imbalance in access to government

procurements. In addition to requiring national

treatment, the Code requires covered purchases to be

transparent. Upcoming procurements are to be

announced in advance, giving firms at least 30 days

to bid, and evaluation is limited to criteria specified

in advance. The Code’s provisions, originally written in 1979 and amended in 1986, were modeled

after U.S. practice.

Recent data on procurement and trade under the

Code are not publicly available because the Administration has classified it.244 Detailed data are

available only for 1981, the first year during which

the Code was applied. The Administration had

predicted that the Code would open $20 to $25

billion annually in foreign procurements to U.S.

competition on an equal basis. However, for 1981,

the General Accounting Office found that the Code

covered a total of only $4.2 billion of purchases by

all foreign signatories. In contrast, $18 billion of

U.S. procurement was covered under the Code.245

Thus, roughly 80 percent of the trade opportunities

mandated by the Code were in the U.S. market, and

only 20 percent in foreign markets. This roughly

80/20 ratio persisted through 1987.246 This ratio

contrasts sharply with the ratio of the United States’

total procurement to foreign signatories’ combined

total procurement, which is at most about 50/50.247

While it may seem that the United States gave up

more than it got with the Procurement Code, the

matter is not that simple. Many of the purchases

covered by the Code would have been open to

foreign competition anyway. Close to 90 percent of

U.S. purchases covered by the Code have been for

defense,248 and a substantial portion of those have

been covered under MOUs. Where MOUs do not

apply, if not for the Procurement Code the Buy

American regime would most often govern procurement, but even under Buy American foreign goods

are sometimes purchased. Thus, it is possible that the

new opportunities for U.S. exports under the Code

were the same or even greater than the new

opportunities for foreign countries’ exports to the

U.S. market; there is no way to tell with the available

data.

Another way of assessing the effect of the Code is

to look at actual purchases made under it. While the

Code does not guarantee any sales, which depend on

competitive bids, the level of sales is one indication

of how effectively the Code has opened a given

market. In 1981, $3.3 billion of foreign goods were

purchased by the U.S. Government under the Code,

but of that over $3 billion was for fuel and related

products that were sold by longstanding arrange-
162 . Competing Economies: America, Europe, and the Pacific Rim

ments predating the Code.249 Only about $270

million of nonfuel-related foreign goods were purchased, or about 1.5 percent of covered purchases.

Much of that might have occurred anyway under

defense MOUs. For trade in the other direction,

while recognizing that data were unreliable, GAO

estimated that only about $210 million of U.S. goods

were sold in 1981 to foreign governments under the

Code (none of it fuel-related), or about 5 percent of

the covered purchases.250 In sum, the trade volumes

were low, and it is not clear whether the Code

contributed more to U.S. exports or imports. Startup

problems might have depressed the trade in 1981.251

Amendments effective in 1988 might have increased

trade volumes in both directions.

One persistent problem is that a large part of

civilian procurement in the EC and other countries

is made by agencies not covered under the Procurement Code, including those responsible for telecommunications, transport, energy, and water. In these

sectors, which probably account for 25 to 50 percent

of the EC procurement market,252 the EC member

governments favored domestic over U.S. suppliers.

For example, in the last 30 years, there have been

virtually no sales to the European Community of

American electric utility equipment such as boilers

and turbine generators,253 even though General

Electric and Westinghouse were the top two world

suppliers as a percent of world sales between 1955

and 1984.254 The only sales have been to countries

with no production facilities of their own. EC

members have favored national producers of telecommunications equipment. For example, in 1987,

France, Germany, Italy, the United Kingdom, and

Belgium on average satisfied 73 percent of their

demand for digital switching equipment from domestic producers, despite substantially higher costs.255

In the United States these sectors are largely open.

Many U.S. utilities and telecommunications companies are privately owned and procure openly and

competitively as a matter of course. Governmentowned utilities have also purchased substantial

shares of equipment from foreign sources. For

example, from 1977 to 1981 the largest Federal

purchasers of heavy electrical equipment collectively spent about 26 percent of their money

abroad.256

The United States has been negotiating to bring

government entities buying equipment in these

sectors within the GATT Procurement Code.257 The

EC contends that if publicly held utilities in these

sectors are to be covered by the Code, then privately

held utilities should in many cases be subject to

similar procurement requirements. The EC’s position is that if: 1) there are substantial barriers to entry

in the industry; and, 2) there is substantial government influence over the utility (e.g., as regulation of

the utility’s operation), then there is insufficient

assurance that the utility would, on its own, procure

as a private firm does, on the basis of quality, cost,

service, etc. (Both British Telecom and the Bell

operating Companies in the United States, for

example, would meet these two conditions.) The EC

internally is following its own precepts: effective

January 1, 1993, it will regulate procurement by

privately owned utilities to prevent favoring domestic goods over the goods of other EC members.258

The United States opposes this change, arguing that

such utilities would, on their own, procure on the

basis of cost, quality, etc., because that would

maximize their profit, and that regulating such

utilities would saddle them with a needless administrative burden. As of June 1991, the resolution of this

issue was unclear.

The EC also wishes to include procurements by

State and local governments in the new Code.

However, there is some question as to the extent of

the U.S. Government’s legal power over State

procurement. So far, the Office of the United States

Trade Representative (USTR) has made inquiries as

to whether States might be willing to make a

voluntary commitment to follow the Code. These

commitments could then be incorporated into Federal law.259 Also under negotiation is the coverage of

services and rules to ensure that a fair hearing is

given to unsuccessful bidders who complain that the

required procedures were not followed.

Forcing Open Foreign Markets

Whether or not the GATT Procurement Code

applies in a given case, the United States considers

closed foreign procurement markets, like other trade

barriers, unjustified. Under the Buy American Act of

1988, also known as Title VII of the Omnibus Trade

and Competitiveness Act of 1988,260 the USTR

annually lists countries that discriminate in their

procurement against U.S. products. The list is to

include not only violations of the Procurement Code,

but also any ‘‘significant and persistent” patterns of
Chapter 4--U.S. Trade Policy ● 163

discrimination, causing “identifiable harm” to U.S.

businesses, by countries ‘‘whose products or services are acquired in significant amounts’ by the U.S.

Government. 261 When a country is listed, the USTR

is to negotiate to have the practice changed; if the

country does not stop, the President can retaliate by

discriminating against that country in U.S. Government procurement.262

In its first report, in April 1990, the USTR

described “substantial procurement problems” in

several countries with markets “of particular significance,’ and noted special concern over ‘‘access to

the heavy electric equipment and telecommunications sectors” (currently excluded from the Procurement Code) in the EC, Germany, France, and Italy.

However the USTR determined that no countries

met the criteria of the statute.263 It is difficult to

understand how the examples the USTR noted for

special concern fail to meet criteria for listing under

Title VII. The discrimination appears to be significant and persistent, and cause considerable harm to

U.S. fins; the noted countries’ products and services are purchased by the U.S. Government in

significant amounts. In its second report, in April

1991, the USTR listed just one country, Norway, for

violating its Code obligations in its procurement of

an electronic toll collection system.264 The USTR

decided again, however, not to list the EC, Germany,

France, and Italy for their non-Code-covered discrimination in the procurement of heavy electrical

equipment and telecommunications equipment, even

though this discrimination ‘remain[ed] of particular

concern.

Why has the Administration not used Title VII

more? Partly because threatening countries with

sanctions during the Procurement Code negotiations, especially for actions not inconsistent with the

current Code, could antagonize them and set back

the negotiations. In April 1990, the Administration

believed that keeping Congress informed and promising to evaluate the progress of the negotiations in

the next annual review would facilitate the negotiations in progress while keeping in reserve a prod for

recalcitrant countries.265 In April 1991, the Administration reported that progress had been made in the

past year in negotiations to end the cited discrimination by expanding the Code’s scope and that it would

continue to monitor developments.

EXPORT PROMOTION

Exporting is difficult. To export, a firm must:

evaluate foreign markets;

learn how business is done abroad;

identify, contact, evaluate, and select potential

customers, agents, distributors, and/or partners;

learn about foreign customers’ special needs

and perhaps modify the product;

prepare special labeling for each market and

possibly special packaging as well;

conduct an advertising campaign abroad (unless that is done by a local agent); and

arrange for shipping, insurance, and customs

clearance.

exporter must also follow any regulatory

requirements of the target country, and is sometimes

disadvantaged by foreign tariffs or nontariff barriers.

Frequently, special export financing must be obtained. And these efforts require the exporter to

overcome separations due to geography, language,

and culture.

The U.S. Government assists exporters in these

efforts. The Department of Agriculture provides a

full range of services for agricultural exports. But

exporters of manufactured goods must go to more

than one agency to get a full range of services. The

Export-Import Bank of the United States (Eximbank) assists with export financing, and many other

services are provided by the Commerce Department’s International Trade Administration (ITA).

The activities of these and other agencies are

coordinated by the Trade Promotion Coordinating

Committee, chaired by the Secretary of Commerce. 266

Within ITA, the U.S. and Foreign Commercial

Service (USFCs) is primarily responsible for gathering information on export markets and making it

available to business. In summer 1991, USFCS had

about 200 commercial officers and 490 foreign

national employees providing export counseling in

U.S. embassies abroad and a total staff of about 300

in field offices in the United States.267 USFCS

emphasizes industry sectors with substantial export

potential. Otherwise, USFCS does not target any

particular sector for strategic or other reasons. Also

within ITA, Trade Development (TD) analyzes

trends by industry sector and works with industry

associations to promote exports, and International

Economic Policy (IEP) monitors foreign trade prac-
164 ● Competing Economies: America, Europe, and the Pacific Rim

in fiscal year 1991.272 But a policy of recovering

costs horn firms using USFCS services has had

some perverse effects. In the 1980s, USFCS published Basic Guide to Exporting, a step-by-step

introductory manual on how to export. While the

guide cost only $8.50 per copy, the need to collect

this amount made it harder for businesses to get the

book; USFCS field offices could not sell it because

the revenue belonged to the Government Printing

Office. The need to recover publication costs similarly crippled ITA’s Associate Office Program,

under which local business organizations help promote ITA products, services, and activities.273

USFCS recent problems have not stopped with

money matters. In January 1989, the General Accounting Office reported other weaknesses, includting a mismanaged trade show program and an

inefficient information management system.274 Starting in July 1989, USFCS, with a new Director

General, undertook an extensive long-term strategic

review of its operations. Partly through surveys,

interviews, and discussion groups, USFCS sought to

determine anew what business’ most important

needs were, how USFCS could be most helpful, and

what tasks were better left to other organizations.275

Instead of trying to be all things to all people,

USFCS decided to focus on the needs of the

infrequent exporter-one that exported more than

once per year but less than once per week. USFCS

concluded that firms exporting less needed basic

information that could be disseminated most efficiently by organizations such as State governments,

tices and proposes strategies for opening foreign

markets.268

The United States spends proportionately much

less on export promotion than do many other

countries. An unreleased 1988 report by the Department of Commerce269 compared export promotion

programs in eight nations: Belgium, Canada, France,

Germany, Italy, Sweden, the United Kingdom, and

the United States. The report shows that in 1987 all

of the other nations spent between 2 and 25 times as

great a fraction of GNP on export promotion as the

United States (table 4-10). The United States ranked

sixth in export promotion spending in proportion to

total exports. As well as spending relatively less

overall, the United States allocates funds lopsidedly

for agricultural rather than industrial exports compared to other countries. The United States only

spends one-eleventh as much on industrial exports

as on agricultural exports, per dollar of each type of

export. In contrast, France spends 29 times as much

on industrial exports, the United Kingdom 5 times,

Belgium 1.6 times, and Italy one-ftith as much.

The USFCS budget was particularly tight in the

late 1980s, when the budget for foreign operations

was not adjusted to compensate for the dollar’s

declining purchasing power abroad.270 Foreign posts

had no money for market research contracts and

often had inadequate libraries. Sometimes foreign

service officers did not even have funds to return

phone calls from firms in the United States.271 The

USFCS budget has recently improved somewhat,

from $75 million in fiscal year 1987 to $108 million

Table 4-10-Spending for Export Promotion in 1987

United United

Belgium Canada France Germany Italy Sweden Kingdom States

Central government

spending . . . . . . . . . . . . . . . . . . . .

Total spendinga . . . . . . . . . . . . . . . .

On agricultural exports . . . . . . .

On industrial exports . . . . . . . . .

Totai spending per $1,000 of

ali exports . . . . . . . . . . . . . . . . . . .

Of agricultural exports . . . . . . . .

Of industrial exports . . . . . . . . . .

Totai spending per

$1,000 GNb 

. . . . . . . . . . . . . . . .

$1,000 Centrai Government

spending . . . . . . . . . . . . . . . . . .

Capita . . . . . . . . . . . . . . . . . . . . . . .

$61.5m

$102.lm

$5.lm

$97.Om

$209.3m

$219.3m

$30.7m

$188.6m

$10.Om

$72.4m

$2.2m

$70.2m

$190.9m

$194.lm

$2.7m

$191.4m

$261.6m

$294.Om

$173.Om

$121.Om

$45.8m

$62.9m

$4.5m

$58.4m

$484.3m

$546.8m

$43.7m

$503.1 m

$330.lm

$340.7m

$2.5m

$338.2m

$0.71

$0.46

$0.74

$6.00

NA

NA

$2.18

$0.09

$2.61

$0.35

NA

NA

$2.00

$9.30

$1.78

$1.65

NA

NA

$1.45

$0.29

$1.53

$1.16

$5.95

$0.54

$0.40 $1.48 $0.47 $0.11 $0.29 $0.46 $0.43 $0.06

$1.07

$6.35

$6.02

$21.44

$1.95

$6.19

$0.68

$1.67

$0.64

$3.74

$1.33

$8.72

$0.98

$3.42

$0.29

$1.20

m-million

aTotal spending comprises not just central government spending, but spending from local governments, quasi-government agencies, and cooperating

nongovernment agencies.

bGross Domestic product (GDP) is used instead of Gross National Product (GNP) for Canada and ltaly.

SOURCE: Unreleased Department of Commerce Report, Export Prornotion Activities of Major Competitor Nations, May 1988.
Chapter 4--U.S. Trade Policy ● 165

industry associations, and chambers of commerce.

USFCS considered that very experienced exporters

could, for the most part, fend for themselves,

although they needed help in removing foreign

market barriers.

USFCS found that industry’s top two priority

needs were for timely, product-specific information,

and for assistance in locating and dealing with

overseas agents, distributors, and end users. Accordingly, it has switched the focus of its information

gathering from general information about sectors to

specific information about particular products, and

has worked harder to help industry with foreign

contacts. An example of the latter is the “Matchmaker’ program, by which U.S. exporters travel

abroad and interview about 10 interested local firms

per day. Another example, a joint effort among

USFCS, TD, and IEP, is the 5-year Japan Corporate

Program, for which the Commerce Department

selected 18 firms (out of about 130 applicants) that

showed exceptional promise for being able to export

to Japan. The companies, selected in late 1990,

committed to:

visit Japan four times per year (at least twice per

year by the firm’s President or CEO);

print labeling and promotional material in

Japanese;

participate in at least one trade show each year;

modify products as needed for the Japanese

market; and

arrange for after-sale service and maintenance.

Commerce Department in return is providing

marketing data and promotional support, which

included the participation of Commerce Secretary

Mosbacher in kicking off the program in Tokyo in

April 1991.

USFCS has increased both its counseling regarding options and sources for financing exports, and

assistance in complying with export control regulations. USFCS is also trying to improve information

flow among its headquarters, domestic field officers,

and overseas posts, though this effort depends

largely on an automated information system whose

target completion date is September 30, 1993.

The Commerce Department does not provide

export financing. Often credit terms are an important

part of competitiveness in export sales, especially to

developing countries. All major economic powers

have some governmental export credit agency (ECA)

that helps to finance exports.276 In the United States,

this function is carried out primarily by the Eximbank, an independent agency of the U.S. Government, and (for agricultural products) the Commodity

Credit Corporation, a corporation owned by the U.S.

Government and run by the Department of Agriculture. 277

Eximbank can fill in after private sector financing

leaves off, so as to provide, when possible, export

financing comparable to that available for exports

from other countries. While U.S. commercial banks

are often reluctant to provide export financing

services because they are unfamiliar with the risks in

the destination country, Eximbank’s specialized

knowledge of these risks enables it to provide such

services. The need for Exirnbank is greater now that

U.S. commercial banks, burned by bad foreign debts

in the 1980s, are more cautious about foreign loans.

Even when banks are willing to provide services,

their interest rates and other fees may be higher than

the fees for government-backed export financing

abroad. Eximbank’s activities have cost money; at

the end of fiscal year 1990, Eximbank had an

accumulated deficit of $6.5 billion, financed by

borrowing from the government.278

If an exporter grants a foreign customer time to

pay, Eximbank may provide insurance against the

risk of nonpayment. Similarly, if a U.S. or foreign

bank lends money to the customer, Eximbank can

provide the bank with a guarantee against default on

the loan. Insurance and guarantees help guard

against both normal commercial risk of nonpayment

(bankruptcy of buyer, change in market demand for

buyer’s product, etc.) and political risks (war,

expropriation, asset freezes, etc.). Eximbank guarantees can be crucial to obtaining private sector loans,

and can help firms get these loans on better terms.

Eximbank can lend money itself, though it normally

does so only to match particular loans offered by

foreign ECAS.

279 These loans may be direct to the

customer, or indirect by rediscounting bank loans

(lending to a bank money that the bank in turn lends

at higher interest to the customer). Eximbank also

makes short-term working capital loans to exporters.

Eximbank’s total outstanding commitments, including loans, guarantees, and insurance, cannot

exceed $40 billion, though the first $25 billion of

insurance and guarantees are counted only at a

quarter of their value so that a total of $58.75 billion

is possible. As of September 30, 1990, actual out-
166 ● Competing Economies: America, Europe, and the Pacific Rim

standing commitments were $13.3 billion in loans

and $16.7 billion in insurance and guarantees, for a

total of $30 billion. There are also ceilings set each

year on new commitments. For fiscal year 1990, the

ceiling was $612 million for loans and $10.2 billion

for guarantees and insurance. The actual commitments made were $612 million in loans (the full

amount authorized) and $8.2 billion in guarantees

and insurance. These amounts are modest compared

to the total U.S. exports in calendar year 1990 of

about $390 billion in goods and $133 billion in

services. Agricultural exports receive proportionately much more government financing. The Commodity Credit Corporation made commitments of

$911 million in loans and $4.5 billion in guarantees

in fiscal year 1990,280 compared with about $40

billion in agricultural exports in fiscal year 1990.281

Congress apparently envisioned that Eximbank’s

financing be focused on strategically selected industries. In 1983, Congress amended the Export-Import

Bank Act of 1945 to require that Eximbank provide

in an annual report “a detailed description of all

actions which have been taken . . . or . . . will be

taken” to:

●

●

●

“maintain the competitive position of key

linkage industries” [this refers primarily to

industries that benefit downstream industries];

“support industries which are engaged in the

export of high value added products”;

“support industries which axe engaged in the

development of new capital goods technology”; and

“preserve and create high skilled jobs in the

United States economy.”282

However, it is not clear to what extent Eximbank’s

activities have been strategically focused.283 Further, Eximbank’s effectiveness is limited in two

ways.

First, Eximbank grants creditona‘‘needs’ basis,

while European and Japanese ECAs grant credit on

an ‘‘entitlement’ basis. European and Japanese

governments “make broad, long-term determinations about” which exports to assist and by what

means, “and then provide . . . sufficient resources

and administrative freedom” to assist exports in all

credit worthy cases within the guidelines.284 However, in the United States, “increasing budget

discipline and a strong free trade, antigovernment

interventionist philosophy have combined” to require that applicants demonstrate on a case-by-case

basis that they need the financing to close the deal.285

The case-by-case approach increases paperwork,

which along with the uncertainty regarding approval

can discourage would-be applicants.

Eximbank’s effectiveness has also been limited in

matching the very favorable terms of some foreign

loans. The United States and its major trading

partners have subscribed to an Arrangement on

Guidelines for Officially Supported Export Credits.

The Arrangement limits the attractiveness of ECA

financing by specifying interest rate floors, minimum up-front cash payments, and maximum payback periods.286 The Arrangement has largely prevented U.S. firms from being disadvantaged by

superior financing by foreign ECAs. However, the

Arrangement has a big loophole that lets countries

combine export loans or guarantees with grants of

aid for development. The combination of export

financing with aid is called mixed credits or tied aid

(since the aid is tied to the purchases from the donor

country).

It is difficult to assess the impact of tied aid on

U.S. manufacturing competitiveness. An Eximbank

study asked firms in five capital goods industries

(telecommunications equipment, computers, electric power generating machinery, rail transportation

products, and earth moving equipment) to estimate

sales to developing countries that were lost because

of foreign tied aid. The firms estimated that for the

years 1985 through 1988, an average of between

$400 and $800 million per year of sales were lost in

all sectors combined. These lost sales were at least

10 percent of the combined markets of all developing countries in 8 out of 12 subsectors, and were at

least 30 percent in 4 of these subsectors. However,

the lost sales represented at least 10 percent of the

U.S. industry’s total output in only 4 subsectors287

and in no cases represented at least 30 percent.

These figures do not tell the whole story. Lost

initial sales can mean lost follow-on sales, especially

when compatibility is a concern. The survey responses indicated that foreign tied aid had overall

decreased exports by at least 10 percent in 7 out of

12 subsectors.288 This result is open to question. To

balance its case studies, Eximbank performed a

macroeconomic analysis of the impact of tied aid.

The analysis failed to confirm this significant

negative impact.289

The United States ties a large part of foreign aid

to purchases. However, since 1974, U.S. aid has
Chapter 4--U.S. Trade Policy ● 167

focused on agriculture, nutrition, health, and education, rather than the large capital projects favored by

some major donor countries. From 1984 through

1987, U.S. bilateral development assistance was

$15.2 billion, amounting to 34.8 percent of the aid

given by the seven largest donors; but the figure

drops to $1.1 billion, or 5.3 percent of the sevencountry total, when only extractive industries, power,

transport, telecommunications, and other capital

goods are counted.290 Thus, tied aid programs in

other donor countries offer more opportunity to

manufacturing industries. This is no accident. Most

other aid donors use tied aid to promote particular

industries, while the United States, except for

agriculture, does not.291

Japan in particular uses foreign aid to promote

selected industries. Japan grants about as much

nonmilitary foreign aid as the United States.292

However, 44 percent of Japanese aid goes to

economic infrastructure, compared to only 4 percent

of U.S. aid.293 Most of Japan’s aid (about 60 percent

in 1987) is in the form of subsidized loans, so a given

amount of aid (subsidy) results in a greater amount

of purchases; most U.S. aid (probably around 75

percent in 1987) is provided as grants.294 Japan

focuses its aid on Asian countries, which represent

one-third of Japan’s trade with developing countries

and whose relatively advanced economies have

great potential to buy capital goods and services. The

United States, on the other hand, gives the bulk of its

aid to Central America and the Middle East, which

represent less than a tenth of U.S. trade with

developing countries.295

Japanese Government and business practices can

magnify the competitiveness effect of aid, even if the

aid in principle is not tied. Unlike the United States,

Japan awards aid primarily based on proposals

received. The requirements for proposals are so

complex that often foreign governments need help

from Japanese fins, which steer proposals in the

direction of providing follow-on work for themselves or affiliated companies. Japan sometimes ties

only the design and planning phase of a project. The

use of a Japanese company for that phase makes use

of Japanese sources for follow-on construction quite

likely.296

To minimize the adverse competitive impact from

other countries’ use of tied aid, the United States has

attempted to close or reduce the loophole that

permits aid to be mixed with export credits. Effective July 1988, the Arrangement was amended, at

U.S. urging, so that mixed credits must have at least

a 35 percent grant component (50 percent in the case

of aid to the least developed countries). The intent

was to make mixed credits so expensive that their

use would decline; however, this did not occur in

1989 and 1990.297 The United States has continued

attempts to limit the use of tied aid. It is negotiating

for further amendments to the Arrangement, notably

one to prohibit mixed credits when a project is

commercially viable without a grant element. It has

also gotten an informal agreement to avoid using

mixed credits in Eastern Europe; as of July 1991, this

agreement was working.298

To strengthen its negotiating position, the United

States has matched or even overmatched some

foreign mixed credit offers, to show foreign countries that they have nothing to gain by offering mixed

credits. These offers have used Eximbank’s war

chest of grant money, which can be combined with

loan funds. In fiscal year 1990, $53.8 million in war

chest grant funds were used,299 supplemented by $30

million in grant funds from the Agency for International Development (AID), resulting in $228 million

in concessionary loans. For fiscal year 1991, Eximbank had used war chest grant funds of $58.1 million

by July, yielding concessionary loans of $130.8

million, though Eximbank reported that it might by

the end of fiscal year 1991 use the entire $150

million in grants available, for a total of about $500

million in loans.300 While sales have been won in

this manner, the war chest sums are much smaller

than those available for tied aid programs in several

other countries, notably Japan, France, and Germany, whose annual loans with tied aid are measured in billions of dollars.301

The U.S. Trade and Development Program (TDP)

also offers tied aid. TDP started within AID but was

spun off as an independent agency in 1981. This

program funds feasibility studies and other project

planning services by U.S. firms in developing and

middle-income countries. It resembles Japan’s tied

aid funding for planning and design. TDP provides

project planning funding only for projects that are

priorities of the host country and present a good

opportunity for sales of U.S. goods and services.302

TDP’s budget, initially only a few million dollars,

has grown in recent years. In fiscal year 1990 the

$32.2 million in funds included $29.9 million for

program activities and $2.3 million for administrative expenses.303 Of program funds obligated in
168 . Competing Economies: America, Europe, and the Pacific Rim

fiscal year 1990, 36 percent were for infrastructure,

17 percent for energy, 15 percent for manufacturing

and processing, and 15 percent for communications

and computer technology. In contrast to most other

U.S. aid, the fast-growing Asian region received the

most funding, 33 percent in fiscal year 1990.304

TDP’s fiscal year 1991 budget is $35 million.

TDP reports that “[e]very major donor nation

offers grants for feasibility studies, ’ and the host

country almost always

. . . has the option of obtaining a grant from another

donor government. Typically, these grants are made

to promote procurement from the donor nation,

thereby virtually locking U.S. firms out of major

projects at the implementation stage.305

Thus, the competition to determine who performs

the feasibility study is sometimes decisive in the

competition for exports. As an independent agency

since 1981, TDP spent $161.6 million through fiscal

year 1990 in program funds.306 As of December

1990, the associated projects had given rise to

documented U.S. sales of $3.2 billion ($2.4 billion

to Asia). The sales yield to date is thus 20 times the

program funds spent. The annual sales have increased rapidly in recent years, and TDP estimated

that activities already funded by December 1990

will provide an additional $18 billion of exports as

projects mature.

EXPORT CONTROLS

Some items, such as computers, have both commercial and military use. The United States controls

export of such dual-use items under the Export

Administration Act of 1979 (EAA), as amended.307

The Act is administered by the Commerce Department’s Bureau of Export Administration (BXA), in

cooperation with the Defense, State, and Energy

Departments, and several other Federal departments

and agencies. The Control List specifies dual-use

items subject to control. This list includes physical

products, software, technical data, and knowhow.308 A license from BXA is necessary to export

these items to some foreign countries. The license

may be conditioned on assurances that the item will

be used for civilian purposes; in some cases, BXA

insists on the right of inspections or other constraints

to guard against diversion to military use. BXA does

not know precisely how much export trade is

licensed, but $90 billion seems a fair estimate for

1990. 309 This is about 28 percent of the $316

billion310 in total U.S. exports of manufactured

goods in 1990. This percentage declined from an

estimated 40 percent or more in 1985311 and is

expected to decline further in 1991.

The purpose of most controls on dual-use exports

is to deny militarily strategic technology to potential

adversaries. This control, however, comes at a price:

requiring a license can hinder commercial exports.

Moreover, export controls affect primarily hightechnology industries on which U.S. manufacturing

competitiveness especially depends. Some export

controls on dual-use items are necessary, and some

resulting drag on competitiveness is inevitable.

However, there is an emerging consensus that export

controls have unduly hindered competitiveness.

The export control regime came under intense

scrutiny with the publication in 1987 of a report by

the National Academy of Sciences.312 This scrutiny

intensified for three reasons. First, political reform

swept the nations of Eastern Europe and the Soviet

Union. This reduced the military threat from these

countries, lessening the need for controls. These

nations need technology to hasten their transformation into open, economically viable societies. Sophisticated computers are needed, for example, to

run a modem banking system, and fiber optics are

crucial for a modem telecommunications network. If

export controls prevent the transfer of such technology to these nations, they could increase the risk

these nations pose.313

Second, the changing political climate intensified

allies’ dissatisfaction with the United States’ hard

line position. This led to speculation that CoCom

(Coordinating Committee for Multilateral Export

Controls), the multilateral forum in which the United

States and its allies coordinate export controls (see

box 4-C), might break apart. To avert a crisis, in June

1990 the United States agreed to a great loosening of

controls. Third, concern has increased over the

continuing decline in U.S. manufacturing competitiveness, prompting closer scrutiny of whether the

security benefits of particular controls are worth the

competitiveness costs.

Most observers agree that too many items were

controlled under the EAA. Some items were not

decontrolled even when advancing technology eliminated their strategic value. Some other controlled

items, while still strategic, were available from

unrestricted sources in third countries; the controls
Chapter 4--U.S. Trade Policy . 169

Box 4-C—East-West and North-South Controls; Cocom and Other Multilateral

Export Control Forums

Traditionally, most U.S. export controls on dual-use items (items with both military and commercial use)

aimed to keep militarily strategic technology from Communist countries. These controls are issued as “national

security” controls under Section 5 of the Export Administration Act of 1979, as amended (EAA).1 They are

sometimes referred to as “East-West” controls. East-West controls affect more than just exports to Communist or

formerly Communist countries; approximately 85 percent of the individual license applications processed in 1990

were for exports to the “free world’ (not Communist or formerly Communist countries). 2 While individual license

applications for exports to the free world are almost always granted, 3 the approvals sometimes contain conditions

designed to prevent possible diversion to Communist countries.

Inmost cases, the United States’ militarily strategic technology is shared by other countries; to prevent transfer

of such technology, cooperation from other countries is necessary. Internationally, East-West export controls have

been coordinated by the Coordinating Committee for Multilateral Export Controls (CoCom), an informal, nontreaty

organization with 17 member countries. CoCom consists of the NATO members except Iceland, plus Japan and

Australia. 4 CoCom controls those dual-use items on its “Core List,” a scaled down version of its old “Industrial

List.” Traditionally, the United States has been the most zealous CoCo member. While many CoCo members

generally control items only to the extent required by CoCom, the United States controls many items to a greater

extent. Lately, the difference between the United States and other members has narrowed.

Another group of U.S. export controls is issued under Section 6 of the EAA. These “North-South’ or foreign

policy controls aim to prevent proliferation of weapons of mass destruction, including missiles and chemical and

biological weapons, to countries that do not have them, especially those countries prone to support terrorism or other

reckless use.6 Such controls are not aimed at the Communist or formerly Communist nations as a whole or the Soviet

Union in particular, indeed, the Soviet Union and the People’s Republic of China possess great capability in these

areas. Missile and chemical weapons technology are controlled in multilateral groups other than CoCom, but these

groups have limited effectiveness because they do not include the Soviet Union. No international group controls

biological weapons.7 Foreign policy controls under Section 6 of the EAA can be imposed for other reasons as well,

such as to sanction nations for human rights abuses. In that case the control is intended as a political statement, rather

than to deny particular technology or products. In some cases-such as sanctions against nations that support

terrorism the control has a mixture of military and political goals.8

%0 U.S.C. app. ~.

2~~~1w of Li~ns@ Statistics: CY 1990,” n.d. (prepared by BIK*U of ~rt~“ “stration (BXA), U.S. Commerce Department).

This pementage is by number of applications, not dollar value. The figure includes all individual license applications, not just those required by

East-West controls.

3h fW~ Y= 1990,94.2 percent of such applications were approved. BXA 1990 Annual Repo~ ch. 2 (ti press). ~S figure is H

on counting the People’s Republic of China as a k world natiorE otherwise the approval rate would probably be slightly higher.) Only about

0.3 percent were denie~ the rest were “returned without action” because of insufllcient information or at the applicant’s request.

4~e complete membership list is Australi& BelgiW GIM@ Demark e~y, France, Greece, Italy, Jap~ Luxembourg, the

Netherlands, Norway, Portugal, Spa@ ‘Ihrkey, the United Kingdo~ and the United States.

5~e tem ‘tNofi+ou~~~ & a ~nvenient ~oti to fidicate tit tie ori~@on of ~~e controls is fi~tfiOIIl ht Of ~t-w~t

controls. It should not be taken to imply that all or most developing countries give cause for concern.

650 U-S*C. app. ~5. Nu~l~ W=wm ~ con~oll~ by ~o~~ s~tute, f$~tion 309(c.) of tie NUCIW Non-Proliferation Act of 1978,

codifkd at 42 U.S.C. 2139a(b). See Section 17(d) of the EAA at 50 U.S.C. App. 2416(d).

7M~ti~te~ cwr~tion of Nofi+ou~ con~~ is discus~ in p~el on tie fiture ~si~ @ Implementation of U.S. National

Security Export Controls, Committee on Science, Engineering, and Public Policy, National Academy of Sciences, National Academy of

Engineering, Institute of Medicine, Finding Common Ground: U.S. Eqort Controls in a Changed Global Environment (Washington DC:

National Academy Press, 1991), pp. 83-85.

8Expofi con~o~ on d~.u~ item cm bbe imposed under Section 7 of the EAA during a Amtage of domestic SUPPIY.

did not deny technology to the target country but license was submitted and approved. In practice,

simply diverted business to foreign suppliers. - however, the time and trouble involved discouraged

some firms from applying. And even if permission

In principle, controlled items could still be to export were ultimately granted, the delay could

exported, provided that an application for an export cost the sale. Such delays have been used as a selling
170 ● Competing Economies: America, Europe, and the Pacific Rim

point by competing foreign manufacturers who

suffered no such hindrances. In addition, export

controls occasionally stopped U.S. firms from providing repairs and spare parts to items already in the

field; this made U.S. suppliers appear especially

unreliable. Another thorn in the side of foreign

customers was reexport controls. If controlled U.S.

technology or components were incorporated abroad

into finished goods, sometimes permission from the

U.S. Government was necessary to export those

goods to a third country. As a result, many foreign

manufacturers avoided using technology and components that originated in the United States. Some

U.S. allies resented this extension of U.S. law onto

their soil.314

In recent years this situation has improved.

Reform has focused on East-West controls, traditionally the most common type, that are designed to

keep technology from former Communist bloc315

countries (see box 4-C). Reform has proceeded on

three interdependent tracks: multilateral negotiations, legislation by Congress, and domestic action

by the Administration. In CoCom, the United States

has agreed to lessen controls, and other countries

therefore appear more willing to maintain not only

common rules but a uniform standard of enforcement; this should reduce the advantages to foreign

firms resulting from less restrictive control regimes.

The Export Enhancement Act of 1988 (1988 Act)316

amended the Export Administration Act of 1979 to

prod the Administration to remove unnecessary

controls and streamline the license application

process. Further legislation in this direction is under

consideration.317 The Administration has been reducing U.S. controls to track reductions in CoCom’s

controls, and over time (sometimes more time than

Congress allowed) has been implementing changes

mandated in the 1988 Act.

Despite the reforms, export controls remain a live

issue. In two sectors, computers and communications, many within industry view the Core List

reductions as insufficient. Nor is it clear that

procedures and attitudes have changed enough to

avoid licensing delays, permit timely decontrols in

the future, and facilitate increased governmentindustry cooperation. While reform proceeds on

East-West controls, broad use of North-South controls could reverse some of the progress made.

North-South controls are implemented for two

purposes: to prevent proliferation of weapons of

mass destruction; or to further other foreign policy

goals, such as to show disapproval of a country’s

human rights abuses or support of terrorism (see box

4-C). The recent Gulf War has increased proliferation concerns, sparking the Administration’s Enhanced Proliferation Control Initiative. North-South

controls are largely unaffected by the recent reforms,

and could lead to substantial disruption of legitimate

commercial sales.

Reducing East-West Controls' Drag

on Competitiveness

What Is Controlled

The United States controls exports of dual-use

items bound for either former Communist bloc

countries or other countries where risk of diversion

to former Communist bloc countries is substantial.

This second case has greater commercial impact; in

1990, 85 percent of all license applications were for

exports to the free world (not former Communist

bloc countries).318 In fiscal year 1989, computers

accounted for 42 percent of the dollar value of all

license applications; other electronic equipment and

aircraft also accounted for large dollar values.319

These East-West controls are based largely on

CoCom’s Core List, which replaced the old Industrial List effective September 1, 1991. The Core List

includes items in nine categories: advanced materials; material processing; electronics; computers;

telecommunications and information security; sensors and lasers; navigation and avionics; marine;

and, propulsion.320 CoCom controls exports at three

levels, depending on the item and the proposed

destination. At the highest or “general exception”

level, unanimous approval by CoCom members is

necessary. At the next level, “favorable consideration,” there is a presumption of approval; the export

may be made if no CoCom member objects within

30 days of submission to CoCom. At the lowest

level, “national discretion” (also called “administrative exception”), a member nation may approve

the export on its own, but CoCom must be notified

after the fact.

In May 1990, following a study of export controls,

the Bush Administration found that the Industrial

List contained “items not strategically critical to

U.S. interests. "

321 In a June 1990 CoCom meeting,

the United States, responding to pressure from its

allies, proposed to scrap the Industrial List and build

from scratch a new, much shorter “Core List”

containing only truly strategic technologies.322 As
Chapter 4--U.S. Trade Policy ● 171

an interim measure, the Industrial List was trimmed

in summer of 1990, especially in the computers,

telecommunications, and machine tools sectors; a

revised Core List was agreed upon on May 24, 1991,

to take effect September 1, 1991. Controls were

lifted on many important items, including satellite

ground stations for television, weather, and civil

communication. Machine tools were decontrolled to

up to accuracies far greater than before.323 Many

personal computers based on Intel’s 80386 processor chip, which were available throughout the world,

were no longer subject to controls as of July 1990,3X

and some more advanced versions based on Intel’s

80486 chip, also available from unrestricted sources,

were decontrolled in May 1991.

The significance of the reduced Core List is not

only that fewer items are controlled, but also that

U.S. and foreign controls will more closely resemble

one another. It is widely believed that in the late

1980s many other CoCom members were chafing

under controls retained only at the United States’

insistence, and were sometimes enforcing controls

loosely. With the U.S. agreement to eliminate or

reduce most of the controls, other members appear

headed toward more uniform enforcement. CoCom

members have agreed on standards for an effective

export control regime, and as of June 1991 BXA

anticipated that these standards would be in force in

all member countries by the end of 1991.325

Uniform enforcement standards would mean that

the United States could trust the export controls of

other CoCom members. Current East-West controls

require licenses for some items even when shipped

to CoCo destinations. The United States imposes

these licenses because it does not fully trust its allies

to prevent reexport in violation of CoCom rules.

Those few cases in which BXA requires licenses for

intra-CoCom trade tend to be cutting edge items,

such as the latest computer models, which can be

important for winning new customers. For years

industry has wanted BXA to eliminate the license

requirement for intra-CoCom trade. In the 1988 Act,

Congress mandated that the Commerce Department

annually take stock of which other countries have

fully satisfactory export control systems, and eliminate license requirements (under the East-West

controls) for exports to these countries.326 The

Administration has not yet found that any countries

meet the requirements. In November 1989, President

Bush promised to remove intra-CoCom East-West

license requirements by June 1991; 327 the target date

for the new enforcement standards has since been

revised to the end of 1991.328

Previously, U.S. East-West export controls covered many items not controlled by CoCom, thus

putting U.S. producers at a disadvantage relative to

producers in many countries that rarely controlled

such items.329 The 1988 Act provided that, with

certain exceptions, East-West controls must not be

imposed unilaterally for over 6 months. This provision led to decontrol and reduced control of many

items in February 1989, 6 months after the 1988

Amendments became law.330 This should lead to

greater parity between U.S. and foreign export

controls.

The 1988 Act tightened provisions that items

must be decontrolled to particular destination countries when they are in fact available to those

countries in sufficient quality and quantity to render

U.S. controls ineffective.331 The 1988 Act requires

the Commerce Department to rule on alleged cases

of foreign availability within 4 months and to

publish its determination within 1 more month; if

CoCom permission is necessary to export the item,

8 months are allowed for the ruling instead of 4.332

Under this provision, BXA completed 17 such

assessments by May 15, 1991, and found foreign

availability in 12 cases. In eight of those cases the

item was decontrolled; in one case the item remained

controlled based on by the President’s finding that

decontrol would be detrimental to national security,

and the decision was pending in three cases.333

Another development is the effort to induce

nations outside of CoCom to institute similar export

controls. This will enhance the effectiveness of U.S.

and CoCom controls, put U.S. exports more on a par

with exports from the other countries, and permit

trade with those countries under lessened controls.

CoCom has approached countries for this purpose,

including those of Eastern Europe. The United

States has for years conducted bilateral negotiations

to encourage other countries to control exports,

resulting in more liberal treatment of exports to

Austria, Finland, Ireland, Singapore, Sweden, Switzerland, and South Korea. Other nations, such as

Taiwan, have not yet been responsive.334

A further reform is the reduction of reexport

controls. The 1988 Act removed East-West controls

for the reexport of items to a destination within

CoCom or with similar safeguards. The Act lifted all

East-West controls for the reexport of U.S. goods
172 . Competing Economies: America, Europe, and the Pacific Rim

and technology incorporated abroad into foreign

products, provided that either the controlled U.S.

content comprises at most 25 percent of the product’s total value, or CoCom controls the parts at only

the national discretion level.335 The Commerce

Department implemented these changes in July and

October of 1989, well after the November 1988

deadline given by Congress.336 Moreover, BXA did

not completely implement this provision because it

believed that it would endanger national security, for

example, by decontrolling sensitive avionics. BXA

changed the 25 percent threshold to 10 percent for

reexport to certain countries, including Iran and

Libya, and did not modify an existing rule that

controlled reexport of U.S. technology incorporated

abroad into finished products regardless of the

percentage value the technology represented.

As a result of these and other reductions in

East-West export controls, the amount of licensed

trade has been decreasing. The number of applications received for individual licenses dropped from

98,000 in fiscal year 1988 to 85,000 in fiscal year

1989,65,000 in fiscal year 1990, and an annual rate

of about 40,000 for the first 6 months of fiscal year

1991.337 The value of individual license applications

processed dropped from $132 billion in 1989 to $73

billion in 1990, and the value of applications

approved dropped from $123 billion in 1989 to $63

billion in 1990.338 The new Core List and other

recent or pending changes will further decrease the

amount of licensed trade.

Licensing Procedures

In the mid- and late 1980s, acquisition of export

licenses took much time and effort. For the first

quarter of 1986, the Commerce Department reported

an average processing time of 27 days, with some

applications taking several months and a few even

taking years.339 However, a survey of U.S. industry

reported an average of 54 days; the difference in the

averages is that industry counted time spent preparing applications, time after the applications were

sent but before the Commerce Department logged

them in, and time after approvals were sent but

before they were received.340 The view from European firms that needed U.S. approval for purchases

or reexports was particularly negative. European

industry representatives reported “widespread disgust” with this system, citing: “lost applications;

. . . technically incompetent questions; and delays

caused by the use of surface mail. ’’341 License

turnaround times in other CoCom countries were

“generally much shorter.”342

When the Commerce Department wanted to

approve a license but DoD did not, the interagency

dispute resolution process was cumbersome.343 Both

the time required and the nature of the process

discouraged industry. The regulations were complex

and difficult to fathom; firms seldom got advance

indications from the government of the likelihood of

approval and the likely delay; and companies were

sometimes kept in the dark about concerns delaying

license approval, making them unable to help

resolve the problem.344 In one instance, it took a U.S.

company almost 3 years to get a license to sell a

$450,000 nuclear magnetic resonance (NMR) spectrometer to a medical research unit in Eastern

Europe; in the interim a German firm sold several

similar systems to Communist bloc customers.345

The U.S. practice contrasted with that of Japan,

where “company representatives work[ed] closely

with their government counterparts’ and ‘‘ [a]s a

result, export license applications [were] rarely

submitted if they [were] not virtually certain to be

approved."346 Similar government-industry consultation occurred in some other CoCom countries.347

Industry was not told of likely U.S. or CoCom

decisions to reduce or eliminate certain controls;

advance warning could have allowed a head stint in

exploring new export markets. Other CoCom members kept their industries much better informed.348

This picture has changed. Average processing

times for individual licenses, as reported by the

Commerce Department, have decreased from 23

days in fiscal year 1986 to 16 days in fiscal year

1990.349 This decrease is significant because during

this period, with the decontrol of lower levels of

technology, the applications’ complexity and sensitivity increased. Applications for exports to CoCom

members take the least time-an average of 3 days

in calendar year 1990. Much delay comes from the

need for the Department of Commerce to refer

applications to other agencies and/or CoCom. In

calendar year 1990, applications not requiring referral took an average of 7 days for processing; those

requiring referral averaged 67 days.350

BXA has made the application process more

user-friendly. BXA opened branch offices, gave

many seminars to industry, and now provides

extensive counseling to exporters. Urgent applications get special handling, sometimes gaining ap-
Chapter 4--U.S. Trade Policy ● 173

proval in a few hours. A computerized tracking

system permits instant determination of an application’s status, and BXA’s automated phone-in system

gives status updates 24 hours per day, including

authorization to ship if the license was approved

with no restrictions. Exporters may submit applications by computer (accounting for 29 percent of the

applications filed in fiscal year 1990); approvals for

those applications are returned electronically.351

BXA consults with applicants if problems arise in

interagency review and tries to work out a solution

acceptable to all parties.352

Remaining Concerns

Some concerns remain despite recent progress.

One issue is whether there is sufficient political will

to overcome bureaucratic gridlock. Traditionally,

the Defense Technology Security Administration

(DTSA), the part of DoD with primary responsibility

for export controls, has been hostile to liberalization.

This is to be expected up to a point, since DoD’s

mission is military security rather than economic

competitiveness. However, there is a consensus that

in the mid- and late 1980s the DTSA went too far; it

did not take seriously the need to avoid unnecessary

drag on competitiveness and often blocked clearly

justified liberalization. DTSA stalled for almost a

year a 1988 Commerce Department recommendation to decontrol personal computers compatible

with IBM’s AT models that were based on Intel’s

80286 processor. These machines, at the time

midrange PCs, were available from many producers

in seven non-CoCom nations (including Korea and

Taiwan, which produced over 1 million units in

1988) and were in wide civilian use in Soviet bloc

countries. 353

A combination of circumstances overcame DTSA’s

resistance in 1990, when President Bush personally

backed a drastic reduction in controls. However,

many in industry worry that DTSA can impede the

actual implementation of promised reforms. This

may have happened already. The new Core List, and

the U.S. proposals for it, were supposed to be written

‘‘from scratch”354 with each item specifically justified. However, when it came time to draft the U.S.

proposals in meetings of BXA’s Technical Advisory

Committees (TACs), industry representatives report

that some DTSA representatives refused to do so and

instead sought only to trim existing lists.355

With the 1988 Act, Congress strengthened the

Commerce Department vis-à-vis the Defense Department. DoD can no longer delay license approvals indefinitely. When the Secretary of Commerce

decides to approve a license, the Secretary of

Defense has 20 days to object, and the license may

be granted unless the President intervenes in another

20 days.356 However, interagency coordination below

the cabinet level could still be cumbersome, taking

over 100 days.357 CoCom approval might require

additional time. The detailed procedures are not

publicly known because an Executive Order setting

them out is classified.

Another possible problem in implementing reform is that dual-use items removed from the

Control List might be added to the Munitions List,

which is supposed to govern only purely military

items. The control regime for items on the Munitions

List is much stricter, without the EAA’s competitiveness safeguards. While President Bush promised

to remove all overlap between the lists “unless

significant U.S. national security interests would be

jeopardized, "

358 here is some danger that the

Munitions List will be used to maintain or institute

controls over dual-use items that could not be

justified under the EAA.

Another concern is the new Core List. In two

important sectors, computers and telecommunications, industry is not completely satisfied. In 1990,

the computer sector accounted for 41 percent of the

value of all individual license applications.359 Modern telecommunications systems for the Soviet

Union and Eastern Europe will cost many billions of

dollars. Hungary plans to spend $6.3 billion over 10

years, Czechoslovakia $3 billion through 1995, and

Germany $4 billion on East German upgrades in

1991 alone.360 The Core List controls computers that

these nations need for economic development. In

one broad performance range, the United States

wanted to control the computers, but most allies did

not. As a compromise, the Core List controls them

at the national discretion level. Most other CoCom

members will probably permit those computers to be

exported with either no prior application or a very

quick one; some in industry worry that they will

suffer the disadvantage of long licensing delays.

Current Administration policy is to process applications for items at the national discretion level within

15 days, without DoD review.36l However, even if

BXA keeps to 15 days, that delay, coupled with the

need to apply in the first place and the lack of

certainty that the application will be approved, could

cost some sales.
174 ● Competing Economies: America, Europe, and the Pacific Rim

The Core List controls telecommunications equipment these nations need. This includes fiber optic

cable for state-of-the-art telecommunications systems, which the Core List controls at the general

exceptions level. The United States pushed for that

result, but many other members were quite unhappy

and will seek substantial loosening of controls in

1992. Poland, Czechoslovakia, and Hungary receive

favorable consideration. As long as controls affect

all suppliers equally, U.S. companies will suffer no

competitive disadvantage. But it is possible that

foreign governments will try harder than the United

States to obtain CoCom approval on behalf of their

fins.

There is concern as to whether an effective

mechanism exists for updating controls. Today’s

current list of controls can become tomorrow’s

obsolete list. More timely review will be easier

because the U.S. list now has fewer items; it is now

within the bounds of CoCom’s Core List, which is

much smaller than the old Industrial List. U.S.

reviews will better track CoCom routine reviews,

which will occur every 3 years instead of every 4

years as in the past.362 Also, industry can now better

funnel information about advancing technology to

the government through the TACs.

But list review requires considerable effort and

expertise. The basis for decontrol is often a determination that an item is available in sufficient quantity

and quality from unrestricted sources.363 A delay in

this determination results in an ineffective control

that hinders U.S. exports while foreign manufacturers get the business. These determinations, performed by BXA’s Office of Foreign Availability

(OFA), require investigating the sources, quality,

and quantities of foreign goods; such information

can be hard to find. Further, the technologies involved are specialized and complex. OFA’s staff of

about 25364-out of about 530 BXA employees365—

seems too small for such an important and difficult

job. The salary levels authorized for OFA--GS-13

(starting salary about $44,000 as of Jan. 1, 1991) for

most working engineers366-make it difficult to

keep top-notch people. In addition, these politically

charged determinations are sometimes opposed by

other agencies at high levels. One example is the

case of AT personal computers already mentioned;

another is semiconductor wire bonders. The Commerce Department found foreign availability of wire

bonders and recommended decontrol, which was

approved by the President in 1987, but was blocked

into 1990 by interagency dissension.367 In 1991, a

National Academy of Sciences panel found that

BXA’s procedure of finding foreign availability

“has proven largely ineffective,” and has been

“costly and contentious and has rarely resulted in

timely decontrol.’ ‘3@

A complementary approach to avoiding outdated

controls is indexing. For example, if a particular

control applies to all computers above a certain

processing speed, there might be a presumption,

based on projected industry trends, that each year the

processing speed threshold be increased by 10

percent. Each subsequent year, those opposing the

adjustment would have to justify their position. As

another example, there could be a presumption that

personal computers (or some other type of equipment) would be decontrolled (or controlled at a

lower level) after the model in question has been

sold commercially for a certain number of years.

Again, those who opposed a particular decontrol

would have to justify their position. While Congress

has encouraged indexing,369 so far the Administration has rarely used it.

Some in industry are concerned that the government does not welcome its participation and cooperation in administering export controls. In 1991 a

National Academy of Sciences panel recommended

increased cooperation.370 BXA did involve industry

TACs in drafting and negotiating the Core List. The

TACs advised on appropriate technical thresholds

for control; industry representatives occasionally

spotted foreign proposals that were apparently

crafted to decontrol items made by foreign firms

while leaving controlled similar items made by U.S.

fins. It remains to be seen how BXA and industry

will build on this experience. According to some

analysts, BXA and industry have been in a vicious

circle: BXA not taking the TACs seriously, and

industry not devoting sufficient resources to them.

One industry observer commented that because the

industry representatives are busy corporate officers

who barely have time to fly to Washington for a

one-day meeting, the TACs can work well only if the

Commerce Department does considerable preparatory and follow-up work: preparing memoranda

setting out issues to be discussed; writing draft

position papers based on the discussion at meetings;

gathering facts; and soon. This observer commented

that the National Academy of Sciences proceeds in

this manner with its panels of experts, but the
Chapter 4--U.S. Trade Policy ● 175

Commerce Department lacks the resources to do

this. 371

Industry representatives have had complaints

about the use of TACs. For example, a representative

of one high-technology firm with experience on

several TACs stated that some parts of TAC

meetings are needlessly classified, preventing the

representatives from reporting back to industry. 372

An experienced representative on the TAC for

automated manufacturing stated that DTSA representatives often will not give reasons for their

positions, even in a classified session, so that

industry cannot address DTSA’s concerns.373 Some

felt that the government used TACs to legitimate its

policies: it would pose a limited set of choices, none

of which appealed to industry; the industry representatives would make their choice; and then the

government would claim that industry had approved

that choice.

Controls for Reasons of Foreign Policy

While much progress has been made in reducing

the drag from East-West export controls on commercial exports, that progress could be reversed by the

use of North-South or “foreign policy’ controls.

Some foreign policy controls are aimed at preventing proliferation of weapons of mass destruction,

missiles to carry them, and chemical and biological

weapons. Other foreign policy controls, such as

those in reaction to human rights abuses, and those

against Libya, Syria, and Iran, are intended primarily

to make a political statement rather than deny

military technology. 374

As explained in box 4-C, Section 5 of the EAA

governs East-West controls, while Section 6 governs

foreign policy controls. Section 6 controls must be

justified annually, but they are not subject to the

Section 5 safeguards against unnecessary interference with legitimate commercial exports. The Section 5 prohibitions against unilateral controls and

against controlling items shown to have foreign

availability do not apply to controls under Section

6.375 ThuS, section 6 can provide an end run around

the restrictions in Section 5. For example, in March

1991, BXA imposed unilateral controls for chemicals and chemical manufacturing equipment that

could be used to make chemical weapons.376 A s

another example, in June 1991, BXA removed

Section 5 controls on certain equipment used to

manufacture prepregs (fibers embedded in resin

used to make, for example, tennis racquets and

aircraft structural components), because of foreign

availability. However, the equipment remained subject to foreign policy controls.377

In August 1991, BXA issued regulations under

Section 6 that prohibit all exports that the exporter

knows will be used to make chemical or biological

weapons. 378 This rule might be interpreted by BXA

and the courts to imply a duty on the exporter’s part

to make a reasonable inquiry as to where the exports

will be used; if the exports are used in making the

prohibited weapons, and the exporter could have

discovered that in advance with reasonable inquiry,

then the exporter might be deemed in violation of the

act and suffer stiff penalties. To be safe, any firm that

exports virtually any goods or technology to any

country might need to set up a monitoring and

control system with careful communication between

headquarters and marketing. 379 BXA can inform

exporters that exports to a particular consignee

require a license because of risk of diversion to a

prohibited weapons plant. This gives BXA broad

power to prohibit exports of any items to particular

destinations. This regulation controls exports unilaterally, with no consideration of whether items have

strategic importance and whether they are available

from non-U.S. sources.

These rules have been fashioned within the rubric

of the Administration’s Enhanced Proliferation Controls Initiative (EPCI), announced December 13,

1990 .

380 Heightened concern for proliferation is

natural in the wake of the Gulf War and revelations

about prior exports to Iraq. However, industry is

concerned that the Administration is starting an

open-ended export control campaign without serious consideration of the effect on commercial trade.

1 U.S. Congress, Office of Technology Assessment, Making

Things Better: Competing in Manufacturing, OTA-lTE-443 (Washington DC: U.S. Government Printing Office, February 1990), passim.

Making Things Better did not consider domestic policies that affect

competitiveness incidental to their main purpose--for example, environmental regulation regulation of workers’ health and safety, and

product liability.

2 Gary Clyde Hufbauer, Diane T. Berliner, and Kimberly Arm

Elliott, Trade Protection in the United States: 31 Case Stud-es

(Washington, DC: Institute for International Economics, 1986). This

report uses the term “special trade protection” to mean protection under

Section 201 and related sections of the Trade Act of 1974, as amended.

This protection is based on GATT’s so-called “escape clause,” which

permits countries to protect industries seriously injured by foreign

competition even in the absence of any unfair trade practice.

3 Labor-Industry Coalition for International Trade, “The Uruguay

Round: Will It Be a Good Deal for U.S. Manufacturing?” June 1990, p.

.1.

4 Complete specialization was considered unlikely because of the
176 ● Competing Economies: America, Europe, and the Pacific Rim

diminishing marginal productivity of factors of production. This means

that, after the point where inputs are combined optimally, any input (in

this case, capital and labor) contributes in diminishing quantities to

productivity the more of that input is used.

5 For a more detailed but still simple, explanation of how this

works, see David B. Yoffie, International Trade and Competition:

Cases and Notes in Strategy and Management (New York NY:

McGraw-Hill Publishing Co., 1990), pp. 4-8.

6 The contributions of Linder, Vemon, and Wells are discussed in

Yoffie, ibid.

7 Yoffie, op. cit., p. 13.

8 Paul R. Krugman, Rethinking International Trade (Cambridge,

MA: The MIT Press, 1990), p. 1.

9 The two commercial aircraft makers in America are Boeing and

McDonnell Douglas; the European manufacturer is Airbus, a consortium

with four member companies. The engine makers are Rolls Royce of

England, and GE and Pratt& Whitney of the United States. In addition,

SNECMA of France, MTU of Germany, and Mitsubishi Heavy

Industries, Kawasaki Heavy Industries, and Ishikawajima-Harima

Heavy Industries of Japan make major subassemblies of engines. See ch.

8 for a description of the world’s large commercial jet aircraft industry.

10 W. Brian Arthur, “Positive Feedbacks in the Economy,”

Scientific American, February 1990, p. 93. Approximate dollar figures

are OTA estimates for 1991.

11 Krugman, op. cit., p. 164.

12 Infant industry protection is defined as the protection of a

fledgling group of producers from incursions of foreign firms that

dominate production and have superior technology in industries with

high knowledge intensity, significant positive externalities or increasing

returns.

13 Arthur, op. cit., p. 98.

14 Ernest H. Preeg, The American Challenge in World Trade: U.S.

Interests in the GATT Multilateral Trading System (Washington, DC:

The Center for Strategic and International Studies, 1989), p. 4.

15 Ibid., p. 23.

16 Hufbauer et al., op. cit., pp. 250-251. These limits were

exceeded every year of the VRA, rising from actual Japanese imports of

1.78 million units in 1981 to 2.31 million units in 1985.

17 Occasionally limitations on imports are more stringent. In 1981,

at the beginning of the negotiation of the third phase of MFA, the

European Economic Community cut back the volume of imports from

so-called dominant MFA suppliers (Hong Kong, Macao, Korea, and

Taiwan) by nearly 7 percent. Thomas R. Howell and William A.

Noellert The EEC and the Third Multifiber Arrangement: A Study

Prepared for the Fiber, Fabric and Apparel Coalition for Trade

(FFACT) (Washington, DC: Dewey, Ballantine, Bushby, Palmer &

Wood, 1986), p. 7.

18 This means that all GATT signatories are to be given the same

favorable terms of trade as those given to the nation with the best terms,

or the most-favored nation.

19 Preeg, op. cit., p. 31.

20 Some experts in both the United States and the EC argue

convincingly that these countries are considering standards other than

those used by Japanese producers is for technical rather than nationalistic

reasons; but among policymakers, the concern is at least as much for

national competitiveness as for technical superiority.

21 U.S. Department of Labor, Bureau of Labor Statistics, “BLS

Reports on Worker Displacement” News Release, Dec. 9, 1988.

22 Michael Podgursky and Paul Swain, “Labor Market Adjustment and Job Displacement: Evidence from the January, 1984 Displaced

Worker Survey,” Final Report, Bureau of International Labor Affairs,

U.S. Department of Labor, January, 1986.

23 See chs. 6 and 7, on the industrial policies of Japan Korea, and

Taiwan, for further discussion.

24 19 U.S.C. 2411-2420.

25 19 U.S.C. 2251-2254.

26 19 U.S.C. 2411(b); see also 19 U.S.C. 2411(a)(l).

27 GATT Article 12, paragraph 1.

28 GATT allows agricultural quotas in many cases; it also allows

quotas by countries with dangerously low foreign currency reserves and

for reasons of national defense. GATT Article XI, paragraph 2; Articles

XII, XXI. Quotas are also permitted under GAIT’s so-called “escape

clause” (Article XIX, though in this case the issuing country is obliged

to pay compensation. Under GATT's Multifiber Arrangement, many

bilateral agreements limit trade in textiles. Finally, sometimes two

countries reach an understanding to limit bilateral trade in specified

products, even though this understanding is arguably prohibited under

GATT.

29 This term, as used here and often elsewhere, refers to barriers

that are not tariffs and also are not quotas. Also, as used here, the term

refers to both public (government-imposed) and private barriers; some

use the term to mean only public barriers.

One type of barrier is the failure of foreign counties to protect

intellectual property (by means of patent rights, copyrights, trademark

rights, trade secret rights, etc.). If a foreign government protects

intellectual property, U.S. inventors, authors, etc. will in many cases

have the exclusive right to make and sell particular goods in that country.

If a foreign government protects intellectual property poorly or not at all,

U.S. inventors and authors can lose sales to foreign imitators. Therefore,

the lack of protection can be considered a trade barrier, since it hinders

sales of U.S. goods abroad. This trade barrier was discussed in U.S.

Congress, Office of Technology Assessment Making Things Better, op.

cit., pp. 69-71, 211-219. The justifications for protecting intellectual

property are discussed in that report and in U.S. Congress, Office of

Technology Assessment Intellectual Property Rights in an Age of

Electronics and Information, OTA-CIT-302 (Springfield, VA: National

Technical Information Service, 1986).

30 See, for example, Office of the United States Trade Representative, 1991 National Trade Estimate Report on Foreign Trade Barriers

(Washington DC: U.S. Government Printing Office, Mar. 29, 1991);

Office of the United States Trade Representative, “Report to Congress

on Section 301 Developments Required by Section 309(a)(3) of the

Trade Act of 1974 (January-June 1990),” n.d. (one of a series of

semiannual reports).

31 President Ronald Reagan memorandum of Aug. 1, 1986,

“Determination Under Section 301 of the Trade Act of 1974,” 51

Federal Register 28219 (Aug. 6, 1986).

32 Semiconductor Industry Association “Four Years of Experience Under the U.S.-Japan Semiconductor Agreement: ‘A Deal Is a

Deal,’ “ Fourth Annual Report to the president November 1990, pp.

35-38; Clyde V. Prestowitz, Jr., Trading Places: How We Allowed Japan

To Take The Lead (New York, NY: Basic Books, 1988), pp. 62-63;

Donald Phillips, Assistant United States Trade Representative, testimony at hearings before the House Committee on Energy and

Commerce, Subcommittee on Commerce, Consumer Protection and

Competitiveness, May 9, 1990, Serial No. 101-149, pp. 8-9; Semiconductor Industry Association, “World Market Sales and Shares for

1982- 1990,” n.d.

33 U.S. firms’ market shares generally declined over the years. As

late as 1985, U.S. firms still held 86 percent of the U.S. market, 54

percent of the European market, and 40 percent of the rest of the world

market outside of Japan. Semiconductor Industry Association “World

Market Sales and Shares for 1982- 1990,” n.d.

34 The text of the agreement is contained in an exchange of letters

on Sept. 2, 1986, between Japan’s Ambassador Matsunaga and USTR

Clayton Yeutter.

35 Prestowitz, Jr., op. cit., pp. 65. (The quoted language is a

paraphrase by Prestowitz of the letter’s contents.)
Chapter 4--U.S. Trade Policy . 177

36 52 Federal Register 10275, (Mar.31, 1987).

37 52 Federal Register 13412, (Apr. 17, 1987). Some other

punitive tariffs were levied at the same time in retaliation for Japan’s

failure to stop dumping; in the September 1986 agreement, Japan’s

Government had also promised to stop its firms from dumping in the

U.S. and third country markets.

38 Semiconductor Industry Association, “World Market Sales and

Shares for 1982-1990,” op. cit.

39 Ibid. The USTR gives slightly different figures for the share of

imports from countries other than the United States. See Office of the

United States Trade Representative, “United States, Japan Conclude

Semiconductor Agreement,” press release dated June 4, 1991, ref. No.

91-21, attachment entitled “Background Statistics on Semiconductor

Sales to the Japanese Market.”

40 Jacob M. Schlesinger, ‘‘Foreign-Chip Shine in Japan is Below

Goal,” The Wall Street Journal, June 17, 1991.

41 Office of the United States Trade Representative, “United

States, Japan Conclude Semiconductor Agreement,” press release &ted

June 4, 1991, ref. No. 91-21.

MITI claimed that the imports’ market share had in fact risen to about

17percent in the first quarter of 1990 and 19 percent in the fourth quarter.

MITI used a different measure of market share than the U.S. Government

and industry, based on its surveys to 60 Japanese firms. The U.S.

approach is based on statistics collected by the World Semiconductor

Trade Statistics (WSTS) Program. The two measures differed in three

ways. First, MITTs survey included only about 75 percent of the

industry, while WSTS statistics were more comprehensive. Also, MITI

counted, but the U.S. approach excluded, 1) captive sales-that is,

in-house sales of a chip of a type that is not offered for sale to outsiders,

and 2) private label sales-that is, sales of a chip made by a Japanese

firm with a U.S. fro’s label. The U.S. industry maintains that the

Japanese industry agreed in 1986 to use the U.S. approach. In the new

agreement, MITI agreed to drop using its survey and accept the use of

WSTS statistics; the two countries still disagree on the other two

differences in measuring approach. Under this new framework MITI

claims that import penetration reached about 16 percent in 1990,

compared with the U.S. figure of about 13 percent. Sources that discuss

the measurement issue include Semiconductor Industry Association,

Four Years of Experience, op. cit., Appendix 8; Jacob Schlesinger, op.

cit.; “U.S. and Japan Sign Semiconductor Pact; Targeting 20 Percent

Share, Design-Ins,” Regulation, Economics and Law, June 5, 1991

(Bureau of National Affairs, Inc., Washington DC), p. A-15 (substantially the same article is in BNA’s International Trade Reporter, June 5,

1991); Tsuyoshi Sunohara “Chip Pact Dispute Shifts to Market Share

Calculation,” Japan Economic Journal, July 14, 1990, p. 1.

42 Ch.6; U.S. Congress, General Accounting Office, U.S.-Japan

Trade: Evaluation of the Market-Oriented, Sector-Selective Talks,

NSIAD-88-205 (Gaithersburg, MD: U.S. General Accounting Office,

July 18, 1988), p. 45; Cray Research, Inc., The Japanese Public Sector:

Problems and Prospects for U.S. Supercomputer Vendors (May 1990),

pp. 3-1 through 3-23,4-1 through 4-8,5-1 through 5-3.

43 Chapter 6; U.S. Congress, General Accounting Office, ibid., pp.

45-46; Cray Research Inc., ibid., p. 4-10.

44 Chapter 6; Office of the United States Trade Representative,

“Report to Congress on Section 301 Developments Required by Section

309(a)(3) of the Trade Act of 1974 (January-June 1990),” n.d., pp. 5-6;

Cray Research Inc., ibid., pp. 4-11 through 4-18.

45 Office of the United States Trade Representative, ibid., pp. 5-7.

46 This course of action is available only if the subject in question

is covered by GATT. For example, while the United States is seeking in

the Uruguay Round to have GATT require certain levels of intellectual

property protection GATT does not now have any such requirement.

47 See GATT Article XXII; Article XXIII, paragraph 1.

48 This procedure is based on GATT Article XXIII, paragraph 2.

49 John Jackson, The World Trading System: Law and Policy of

International Economic Relations (Cambridge, MA: MA: Press, 1989),

pp. 98-100. A small number of these cases were brought under GATT’s

supplementary Codes, some of which provide similar dispute resolution

procedures.

50 Ibid., p. 100. Of there remaining cases, 4 specifically concerned

primary products (from mines, forests, and the like), while 25 had less

specific product focus (such as a complaint about a country’s import

licensing scheme in general). 48 case were brought against the United

States: 15 concerning manufactured goods, 17 concerning agriculture, 2

concerning primary products, and 14 without specific product focus.

51 Ibid., pp. 98-100.

52 19 U.S.C. 2411-2420.

53 19 U.S.C. 2411(b); see also 19 U.S.C. 2411(a)(l).

54 Omnibus Trade and Competitiveness Act of 1988, Public Law

100418, Sec. 1301, enacting new provision at 19 U.S.C. 24ll(d)(3)(B)(i)(III).

55 See 19 U.S.C. 2413(a).

56 19 U.S.C. 2411(c)(1),(3).

57 Office of the United States Trade Representative, “Section 301

Table of Cases,” computer printout dated Jan. 17, 1991. This

classification involved some judgment calls, so other analyses may give

different figures.

58 As a quid pro quo for GATT coverage and effective GATT

dispute resolution mechanisms, the United States would consider

forgoing unilateral retaliation under Section 301.

59 Some of the cases dealt only in part with manufactured goods.

Those cases are included in the table, but only those aspects of the case

concerning manufactured goods are reported.

60 Normally these findings were made in the context of the Section

301 case. In Case No. 68, dealing with Argentina’s patent protection for

pharmaceuticals, the petition was withdrawn before such findings were

made, but the USTR’s annual reports, National Trade Estimate Report

on Foreign Barriers, identified Argentina’s inadequate patent protection

for pharmaceuticals as a foreign market barrier. In Case No. 70, dealing

with the EC’s export restrictions on copper scrap, there were no

published findings, but the U.S. Government took the case to GATT to

get the foreign practice stopped.

61 Up to 1988, whenever a GATT dispute resolution mechanism

was applicable, Section 301 had an open-ended time limit allowing as

much time as needed for the GATT process to conclude. Under that

regime, Section 301 cases during 1980-1985 covered by GATT dragged

on an average of almost 4 years, compared to about 1 year for other

Section 301 cases. U.S. Congress, General Accounting 0ffice, International Trade: Combating Unfair Trade Practices, NSIAD-87-1OO

(Gaithersburg, MD: U.S. General Accounting Cffice, Mar. 17, 1987),

pp. 18-19. In 1988, Congress imposed an 18-month limit to avoid such

long delays.

62 19 U.S.C. 2A14(a)(l),(2) (investigation, negotiation, and determination of sanctions), 2415(a) (application of sanctions). In certain

circumstances these deadlines are shortened. For example, 3 to 6 months

less time is allowed for cases involving intellectual property. 19 U.S.C.

2414(a)(3).

63 After receiving a petition, the USTR has 45 days in which to

decide whether to start an investigation. 19 U.S.C. 2412(a)(2).

64 Nine out of 15 cases initiated in 1988 through 1990 were started

without an industry petition. Office of the United States Trade

Representative, “Section 301 Table of Cases,” op. cit.

65 Omnibus Trade and Competitiveness Act of 1988, Public Law

100-418, section 1301, adding a new Section 310 to the Trade Act of

1974, codified at 19 U.S.C. 2420.

66 The retaliation itself could be of some help if it limits imports

of products made by the complaining U.S. industry, or downstream

products.
178 . Competing Economies: America, Europe, and the Pacific Rim

67 U.S. retaliation under Section 301 has twice provoked a GAIT

complaint by other countries, though no GATT panel has yet ruled on

the issue.

68 Prestowitz, Jr., op. cit., pp. 67-68.

69 See, for example, ch. 6; Bela Balassa and Marcus Noland, Japan

in the World Economy (Washington DC: Institute for International

Economics, 1988), chapter 3; Advisory Committee [to the USTR] for

Trade Policy and Negotiations, Analysis of the U.S.-Japan Trade

Problem (February 1989), ch. 5; Prestowitz, Jr,, ibid., especially pp.

78-81,94-99,281-283.

These market barriers occur in the context of Japan’s overall trade and

industry policy, which is described in ch. 6. Other reasons for the

bilateral trade deficit-including Japan’s better financing for long-term

investment, better education better diffusion of technology to small

business, and more aggressive support for commercially oriented R&D

projects--are discussed in U.S. Congress, Office of Technology

Assessment Making Things Better, op. cit.

70 Prestowitz, Jr., ibid., pp. 96-99.

71 “Back to Business,” Business Tokyo, July 1990, p. 40.

72 Sam Besachio, Director, Financial Management, Office of the

U.S. Trade Representative, personal communication% Aug. 7, 1991. The

USTR office has 160 full-time equivalent positions authorized, but only

151 filled. The USTR estimates that roughly 10 percent of its staff effort

concerns Japan. Probably at most half of this effort concerns manufactured goods.

73 Prestowitz, Jr., op. cit., pp. 276-277.

74 Ibid., pp. 257-260.

75 Report of the Advisory Committee for Trade Policy and

Negotiations, op. cit., pp. xvi-xvii.

76 U.S. Congress, General Accounting Office, U.S.-Japan Trade,

op. cit. passim.

77 Ibid., pp. 20-21; Ryuji Katayama et al., “Motorola’s on the

Line: Will Japan Pick Up?” Business Tokyo, vol. 4, September 1990, pp.

39-40.

78 Joint Report of the U.S.-Japan Working Group on the Structural

Impedimenta Initiative, June 28, 1990, Introduction, second paragraph.

79 Ibid., passim.

80 Ibid., Introduction.

81 First Annual Report of the U.S.-Japan Working Group on the

Structural Impediments Initiative, May 22, 1991, comments of the U.S.

Delegation, pp. 1-2.

82 Rudiger Dombusch, “The SII Talks Are a Joke,” The

International Economy, vol. 4, February/March 1990, pp. 47-90.

83 U.S. Government Task Force on the EC Internal Market,

through Office of the U.S. Trade Representative, EC 1992: An

Assessment of Economic Policy issues Raised by the European

Community’s Single Market Program (Washington DC: U.S. Government Printing Office, May 1990), pp. 31-33; Youri Devuyst, “The

United States and Europe 1992,” World Competition; Law and

Economics Review, vol. 13, No. 1, Sept. 1989, pp. 30-31.

84 19 U.S.C. 1677(5)(A), 1303(a)(l).

85 Final Affirmative Countervailing Duty Determination and

Countervailing Duty Order; Carbon Steel Wire Rod From New Zealand,

51 Federal Register 7972 (Mar. 7, 1986). The payment was in the form

of a tax credit; if the credit exceeded the amount of tax due, the difference

was paid to the firm.

86 GATT Article XVI; GATT Subsidies Code, Article 9. (GATT

Codes are explained in box 4-A.)

87 19 U.S.C. 1677(5).

88 GATT Subsidies Code, Article 11, paragraph 1.

89 Ibid, paragraph 2. Accordingly, the Code’s signatories have

agreed to “seek to avoid causing such effects through the use of

subsidies. ’

90 GATT Article VI, paragraph 1.

91 See GATT Antidumping Code, Article 2, paragraph.

92 GATT Article VI, paragraph 1. Under U.S. law, foreign

producers are assumed to have a minimum of 10 percent administrative

overhead and 8 percent profit. 19 U.S.C. 1677b(e)(l)(B).

93 Mark Koulen, “Some Problems of Interpretation and Implementation of the GATT Antidumping Code,” in John Jackson and

Edwin Vermulst (eds.), Antidumping Law and Practice: A Comparative

Study (Ann Arbor, MI; University of Michigan Press, 1989), pp.

367-369.

94 GATT Article VI

95 A price difference between the two markets that is greater than

shipping costs from the low-priced market to the high-priced one is not

sustainable absent market barriers. If such a difference existed and no

market barriers were present, third parties would buy the good in the

low-priced market and resell in the high-priced market, hinging down

the price there.

96 The protection could be due to a variety of factors, including

explicit government regulation informal administrative guidance given

to firms, and firms’ own habits of doing business.

97 The law actually covers subsidies from private as well as

government sources. See 19 U.S.C. 1303(a)(l).

98 For this plan to succeed, it is not necessary for the firm to drive

its competitors out of business (which would constitute predatory

pricing); it can be sufficient to capture substantial additional market

share.

One special case of this approach is life cycle pricing, or charging a

constant price throughout a product’s whole life cycle so as to yield a

normal profit over the cycle as a whole. This typically involves

below-cost pricing at the start of the cycle, when the manufacturing costs

are highest.

99 U.S. Congress, Office of Technology Assessment, Making

Things Better, op. cit., ch. 3.

100 Thomas R. Howell et al., Steel and the State: Government

Intervention and Steel’s Structural Crisis (Boulder, CO: Westview

Press, 1988), pp. 6,4145,94-98,207-215, 254-256,301-302,332-334,

347-349, 360-361 .

101 If fixed costs are particularly high the incentive to dump may

be particularly strong. This might be the case, for example, in Germany

and Japan where employees are not as readily laid off during slack times

as in the United States.

102 Jackson, op. cit., p. 244 (emphasis in original).

103 The U.S. law is found at 19 U.S.C. 1303, 1671 -1677k.

104 The final action is normally an order to impose antidumping

or countervailing duties; but sometimes the additional duties are not

imposed in exchange for an agreement by foreign exporters to raise

prices or discontinue receiving subsidies, or an agreement by the foreign

government to discontinue subsidies or limit quantities exported.

105 These figures and tables are based on semiannual filings that

signatories to the GATT Subsidies Code and the GATT Antidumping

Code are required to file. It is possible that other countries also instituted

cases during this period. Also, the signatories are required to include

only cases against other signatories, and some countries’ filings omit

cases against non-signatories. For additional analysis of global usage of

autidumping cases, see U.S. Congress, General Accounting Office,

International Trade: Use of the GATT Antidumping Code, NSIAD/90-

238FS (Gaithersburg, MD: U.S. General Accounting Office, July 25,

1990).

106 See for example Robert Ford and Wim Suyker, “Industrial

Subsidies in the OECD Economies” (January 1990), table 2 (covering

years 1970-88), paper No. 74 in OECD Department of Economics and

Statistics Working Papers; Gary C. Hufbauer and Joanna Shelton Erb,
Chapter U.S. Trade Policy ● 1 7 9

Subsidies in International Trade (Washington DC: Institute for

International Economics, 1984, distributed by MIT Press, Cambridge,

MA), p. 3 (covering years 1952-80).

107 U.S. Congress, General Accounting Office, International

Trade: Use of the GAIT Antidumping Code, op. cit., p, 4.

108 GATT Article VI, paragraph.

109 19 U.S.C. 1671d(b)(l), 1673d(b)(l). This difference in

wording can be important. Suppose that dumped or subsidized goods

caused material injury to U.S. firma but would have caused substantially

the same injury if they had been sold in the U.S. market without

dumping. Them at least arguably, the “dumped goods” did cause injury

but the “dumping” did not.

110 See 19 U.S.C. 1303(a),(b), 1671(a),(b). In some cases, U.S.

law denies the injury test to some GATT signatories that have not signed

the GATT Subsidies Code. This provision of U.S. law was enacted

before the GATT agreement, and is allowed under a GATT grandfather

clause found in GATT’s Protocol of Provisional Application paragraph

(l), item (b).

111 See 19 U.S.C. 1671c(b),(c).

112 See 19 U.S.C. 1673c(b),(c).

113 In early 1987 Torrington faced stiff price competition for every

major account. The competition came from foreign firms that were

slashing prices despite exchange rate shifts that should have made

foreign goods much more expensive. To meet price competition, the firm

took substantial losses. David Gridley, Industry Marketing Manager,

The Torrington Company, personal communication, Aug. 6, 1991. The

Commerce Department found large dumping margins. 54 Federal

Register 20900-20910 (May 15, 1989).

114 Gridley, ibid.

115 In some cases, petitioners could purchase the required data.

Some economic consulting firms specialize in collecting and analyzing

data for subsidies and dumping cases.

116 United States International Trade Commission, New Steel

Rails From Canada: Determination of the Commission in Investigation

Nos. 701-TA-297 (Final) and 731-TA-422 (Final), USITC Pub. No.

2217, September 1989.

117 William Hoppe, General Manager, Industry Affairs, Bethlehem Steel Corp., personal communication, Aug. 29, 1991.

118 Gridley, op. cit.

119 See U.S. Congress, General Accounting Office, op. cit., pp.

13-15.

120 Public Law 100-418, Sec. 1614, amending 19 U.S.C. 1339.

121 Bureau of National Affairs, “Auto Parts Industry Panel

Requests Section 301 Probe of Japanese Imports,” International Trade

Reporter, vol. 8, No. 26, June 26, 1991, pp. 978-979.

122 The statutory time limits for the Commerce Department’s

preliminary determination are 160 days after the filing of the petition for

dumping cases and 85 days for subsidy cases. 19 U.S.C. 1673b(b)(l)(A)

(dumping), 1671b(b)(l)(A) (subsidies). The Commerce Department

usually takes all or virtually all of the time allowed.

123 19 U.S.C. 1671 b(d),(e), 1673b(d),(e).

124 The statute provides another 75 days for the final determination and another 7 days to publish an order reflecting the new subsidy

value or dumping margin. 19 U.S.C. 1671d(a), 1671e(a) (subsidies),

1673d(a), 1673e(a) (dumping). While the difference between the

preliminary duty and the final duty is refunded on importations during

the interim if the new duty is lower, the difference is not collected if the

new duty is higher. 19 U.S.C. 1671f(a) (subsidies), 1673f(a) (dumping).

125 In the 1980s, petitioners often had to wait several years for

annual reviews.

126 45 Federal Register 30,618 (May 9, 1980).

127 52 Federal Register 1504 (Jan. 14, 1987). This annual review,

which covered imports during the period May 1981 through April 1982,

was several years late. Such delays in annual reviews were common in

the 1980s, but recently the Commerce Department has worked to reduce

the backlogs.

128 Smith Corona Corp. v. United States, 915 F.2d 683 (Fed. Cir.

1990). The court’s opinion summarizes the history of the case.

129 The customs entries for the intervening imports had been

“liquidated,” meaning that it was no longer possible to collect

antidumping duties retroactively. The Court of Appeals for the Federal

Circuit pointed out that in February 1989, the Court of International

Trade, a lower reviewing court, should have ordered liquidation

suspended; had it done so, antidumping duties could have been collected

retroactively to that date.

130 Statement of Senator Carl Levin before the Senate Committee

on Governmental Affairs, Subcommittee on Oversight of Government

Management, on Oversight and Enforcement of Antidumping and

Countervailing Duties, June 13, 1991.

131 See "Request for Antidumping Monitoring Program Covering

Certain Ball Bearings and Parts Thereof,” submitted to the U.S.

Commerce Department International Trade Adminis ‘ ‘ tration,on Apr. 20,

1990, by Stewart and Stewart, Washington, DC, on behalf of the

Torrington Co. In 1989, Torrington had obtained antidumping orders on

ball bearings from nine countries. Torrington requested that the

Commerce Department monitor imports from 14 countries not included

in the 1989 orders to determine if those imports were also dumped. when

the Commerce Department denied this request, Torrington filed

antidumping petitions for the 14 countries. Torrington never got the

chance to prove dumping, because the ITC found at a preliminary stage

that there was “no reasonable indication” that the imports complained

of had caused or threatened material injury to the U.S. industry. U.S.

International Trade Commission, Ball Bearings, Mounted or Unmounted, and Parts Thereof from Argentina, Austria, Brazil, Canada

Hong Kong, Hungary, Mexico, The People’s Republic of China, Poland,

The Republic of Korea, Spain, Taiwan, Turkey and Yugoslavia, USITC

Pub. 2374, April 1991. (One Commissioner dissented.) Torrington has

appealed this ruling, and maintains that the U.S. industry is worse off

than in 1989 when the ITC did find injury. Gridley, op. cit. The 1989

antidumping orders are found at 54 Federal Register 20900-20910 (May

15, 1989).

132 Howell et al., op. cit., pp. 526-534.

133 “President’s Steel Decision,” pp. 1-2, attached to Office of the

United States Trade Representative, “Brock Announces President’s

Steel Decision,” Sept. 18, 1984 (press release). As requested, Congress

then empowered the President to negotiate bilateral agreements to limit

other countries’ total steel exports to the United States.

134 A previous order concerning only the imported finished

product would not apply if the parts are imported instead (although

sometimes cases initially cover both a product and its components); a

previous order concerning only imported parts would not apply if the

finished product is imported instead; and an order applying to a product

assembled in one foreign country would not apply to the end product

assembled in another foreign country.

135 These provisions are found in Public Law 100-418, Sec. 1321,

codified at 19 U.S.C. 1677j. As of June 1991, the Commerce Department

had twice ruled on whether these provisions applied and both times

decided that they did not. 56 Federal Register 9667 (Mar. 7, 1991), 55

Federal Register 52066 (Dec. 19, 1990) (color picture tubes from

Canada, Japan, Korea, and Singapore); 55 Federal Register 6028 (Feb.

21, 1990), 54 Federal Register 50,260 (Dec. 5, 1989) (fork-lift trucks

from Japan). The anticircumvention provisions apply only if the

difference in value between the components and the end product is

“small.” In both cases, the Commerce Department found this require

ment not satisfied; in the fork lifts case, the value added in the final

assembly, including profit, was approximately 25 to 40 percent. Another

limitation is that the provisions do not appear to apply when parts from

one foreign country are initially assembled in another foreign country,
180 . Competing Economies: America, Europe, and the Pacific Rim

as often happens today in the Pacific Rim.

The anticircumvention provisions also address cases, such as Smith

Corona’s electric typewriters case, in which merchandise subject to an

order is slightly altered or is replaced with a later-developed product. In

such cases, the previsions might be more effective.

136 A March 1990 GATT panel decision found the EC’s

anticircumvention provisions to violate GATT. “EEC Regulation on

Imports of Parts and Components: Report by the panel,” GATT Dec.

L/6657, Mar. 22, 1990. While not directly relevant to the U.S.

provisions, that decision does indicate that GATT will seriously

scrutinize anticircumvention provisions if the matter arises.

137 19 U.S.C. 1671(a)(2), 1673(2), 1677(7).

138 Gridley, op. cit.

139 “Final Determination of Sales at LesS Than Fair Value: Digital

Readout Systems and Subassemblies Thereof From Japan,” 53 Federal

Register 47,844,47,847 (Nov. 22, 1988).

140 United States International Trade Commission, Digital

Readout Systems and Subassemblies Thereof From Japan: Determination of the Commission in Investigation No. 731-TA-390 (Final), Jan.

1989 (USITC Publication 2150), pp. 16-22. The Commis sioners noted

various indicators of health for the two industries. Sales in both

industries had declined from 1985 to 1986, but rose in 1986, 1987, and

the first three quarters of 1988. During this period, pre-tax profits as a

percentage of net sales in the console industry rose steadily from 2.6

percent to 9.2 percent; in the transducer industry, pre-tax profits were

14.0 percent in 1985, fell to 10.3 percent in 1986, rose to 13.5 percent

in 1987, and rose an amount not publicly disclosed in the first 3 quarters

of 1988 as compared with the first 3 quarters of 1987. Other indicators

of health considered by the Commissioners included production volume,

capacity utilization, inventory levels, number of employees and hours

worked, and investment in R&D.

141 Ibid., pp. 42-53, 125-126.

142 Ibid., pp. 42-53, 126-136.

143 By statute, the injury requirement is satisfied if the ITC finds

that the U.S. industry is threatened with material injury, even if the U.S.

industry is not yet materially injured. However, “actual injury” must be

“imminent,” and a finding of a threat of material injury “may not be

made on the basis of mere conjecture or supposition. ” 19 U.S.C.

1677(7)(F)(2). Thus, projecting current trends to a conclusion of future

long-term injury to the U.S. industry will not normally justify finding a

threat of material injury.

144 Ibid., p. 32.

145 U.S. International Trade Commission Pressure-Sensitive

PVC Battery Covers from West Germany, Investigation No. 731-TA-452

(Preliminary), USITC Pub. No. 2265 (March 1990).

146 Ibid., pp. A-2, A-6, A-7.

147 Ibid., pp. 17-18.

148 Ibid., pp. A-38, A-39; Post-Conference Brief of the Petitioner,

National Label Co., in the matter of Pressure-Sensitive PVC Battery

Covers from West Germany, Investigation No. 731-452 (Preliminary),

Feb. 13, 1990, pp. 17-21.

149 U.S. International Trade Commission op. cit., pp. A-39, A-40.

150 U.S. International Trade Commission op. cit., p. 20. Eveready’s

statements were confidential and not revealed by the ITC. The ITC found

that “Zweck form did not bid on any Eveready purchases” at the

meeting, and “the discussions between the two parties (had not] reached

the point where they were in sufficient detail and scope to provide an

indication of price suppression.” National Label argued that, even if

Zweckform had not solicited Eveready’s business, Zweckform’s

dumped sales to other firms in the U.S. market made National Label

reasonably fear that Zweckform would seek Eveready’s U.S. business.

Post-Conference Brief of Petitioner, National Label Co., op. cit., pp.

38-41. Therefore, according to National Label, Zweckform’s dumping

had in fact caused National Label to suffer injury by lowering its prices

to Eveready. The Commission did not address this argument.

151 Post-Conference Brief of the Petitioner, National Label Co.,

op. cit., pp. 63-66; U.S. International Trade Commission op. cit., p.

A-46.

152 U.S. International Trade Commission, op. cit., pp. 20-21.

153 The Commission’s general practice is to permit outside

attorneys and consultants to see other parties’ confidential business

information, but not to permit the parties’ own personnel to see such

information, for fear the information would be used improperly to gain

business advantage.

154 James Shacklett, president, National Label Co., personal

communication, Oct. 11, 1990.

155 The text of the agreement is contained in an exchange of letters

on Sept. 2, 1986, between Japan’s Ambassador Matsunaga and USTR

Clayton Yeutter. An account of the U.S. negotiating strategy is given in

Prestowitz, Jr., op. cit., p. 62.

When a foreign country sends dumped or subsidized merchandise to

a third country, the United States could ask the third country to conduct

its own countervailing duty or antidumping investigation and under

GATT Article VI paragraph 6(b) relief could be granted if the dumping

or subsidies injured the U.S. industry. Under U.S. law, firms may

petition the USTR to make such a request to foreign governments. 19

U.S.C. 1677k (added in 1988, Public Law 100-418, Sec. 1317).

However, this has never been tried, and there is no guarantee that the

third country would honor such a request.

156 See ch. 6. Cray Research, the principal U.S. supercomputer

manufacturer, lacks the size and product diversity to similarly crosssubsidize.

157 Marie Anchordoguy, Computers Inc: Japan’s Challenge to

IBM(Cambridge, MA: Harvard University Press, 1989), pp. 72-75.

158 Ibid., pp. 68,69 (table 3, total of gross sales minus trade-ins),

228-230 (app. C).

159 Ibid., pp. 141-147.

160 See ch. 6.

161 These firms are Fujitsu, Hitachi, Mitsubishi, Toshiba, and

NEC. Anchordoguy, op. cit., p. 143. The 1989 computer, electronic

devices, and consumer electronics revenues of Fujitsu, Hitachi, and NEC

alone were $13.7 billion, $14.6 billion, and $15.0 billion for the

respective fins, totaling $43.3 billion. See tables 6-1 and 6-3.

162 Subsidies law was designed on the premise that subsidies

distort trade but do not change the underlying comparative advantage,

so that discontinued subsidies have no more effect. This assumption has

become increasingly mistaken. In the modem world, comparative

advantage is often purchased by governments; for example, government

money bought the United Kingdom a modem steel industry that could

sell steel competitively in the world. Howell et al., op. cit., pp. 171-173.

163 GATT Article VI, paragraph 3.

164 Section 19 U.S.C. 1677b(e). Other countries have argued that

these floors are not proper and disadvantage fins, for example, in

countries such as Japan where profit margins are often lower than 8

percent.

165 In July 1990, a panel of the GATT Committee on Antidumping

Practices ruled that the Antidumping Code requires the investigating

government to verify that an antidumping petition is supported by a

majority of the domestic industry, and that the U.S. Commerce

Department had not done so in an antidumping case involving stainless

steel pipes and tubes from Sweden. As countries have often done with

adverse GATT rulings during the Uruguay Round, the United States has

said that it will bring its behavior in line with GATT norms, but only

after the Uruguay Round is completed, when it is clear what the new

norms will be.

166 These and other problems are discusscd in N. David Palmeter,

“The Capture of Antidumping Law, ” Yale Journal of International

Law, vol. 14, No. 1, pp. 182-198 (reviewing Jagdish Bhagwati,
Chapter 4--U.S. Trade Policy ● 181

Protectionism (Cambridge, MA: The MIT Press, 1988)).

167 In light of this, the EC accuses the United States of a double

standard in complaining about government subsidies to the members of

Airbus Industrie, a European consortium challenging U.S. dominance.

168 Omnibus Trade and Competitiveness Act of 1988, Public Law

100418, section 1301, enacting new provisions at 19 U.S.C.2411(d)(3)(B)(ii),

2411(d)(3)(E). This use of Section 301 is not completely new. While

Section 301 has most often addressed foreign countries’ barriers to sales

of U.S. goods in their markets, is has sometimes included foreign

subsidies as they affect sales of U.S. goods in third country markets;

those subsidies could fit the definition of export targeting.

169 Normally, GATT prohibits protection with the exception that

tariffs maybe imposed as agreed upon in negotiating rounds. Aside from

the escape clause, GATT permits additional protection in certain other

contexts, such as national defense, agriculture in some cases (this

exception was made at the United States’ insistence), to meet a balance

of payments crisis, and in response to subsidies and dumping. Protection

is also allowed when compensation is negotiated under Article XXVIII

(ch. 2).

170 GATT Article XIX.

171 Ibid.

172 19 U.S.C. 2251-2254.

173 19 U.S.C. 2252(b)(l)(B).

174 See 19 U.S.C. 2252(b)(l)(A).

175 19 U.S.C. 2252(c).

176 A petition may be filed “by any entity, including a trade

association firm, certified or recognized union, or group of workers,

which is representative of an industry.” 19 U.S.C. 2252(a)(l). The great

majority of investigations are triggered in this manner. An investigation

can also be triggered by the President, the USTR, the House Ways and

Means Committee, the Senate Finance Committee, or the ITC itself. 19

U.S.C. 2252(b)(l)(A).

177 19 U.S.C. 2252(b)(2).

178 19 U.S.C. 2252(e). The ITC can recommend protection

adjustment assistance, or both. Adjustment assistance consists of: 1)

payments, retraining, and/or job placement services for workers, and/or

2) financial help and/or technical assistance to firms. Even if adjustment

assistance is recommended by the ITC and the recommendation is

approved by the President, the petitioners must still apply for it to the

Departments of Commerce and/or Labor. Generally, Section 201

petitioners desire import relief rather than adjustment assistance, for

which they could apply independently without going through a Section

201 proceeding.

Recommendations for relief are made only by those Commissioners

who voted to find injury.

If the vote on injury was tied, those Commissioners finding injury

recommend relief; the President then has the choice of treating the

Commission’s vote as a vote to find no injury or a vote to find injury.

19 U.S.C. 1330(d)(l).

179 19 U.S.C. 2252(e).

180 19 U.S.C. 2252(f).

181 19 U.S.C. 2253(a)(4).

182 19 U.S.C. 2253(a).

183 19 U.S.C. 2253(a)(3). Congress can in principle override the

President’s decision and reinstate the relief recommended by the ITC,

but never has done so. See 19 U.S.C. 2253(c).

184 19 U.S.C. 2253(e).

185 19 U.S.C. 2254(b).

186 U.S. General Accounting Office, International Trade: Activity

Under Section 201 of the Trade Act of 1974, NSIAD-87-96FS

(Gaithersburg, MD: U.S. General Accounting Office, Mar. 30, 1987),

pp. 3, 6-9. This report lists all Section 201 cases brought during these

years, except for cases TA-201-61 and ‘IA-201-62, which both ended

with a finding of no injury as shown in the ITC Annual Reports for 1988

and 1990. Some form of protection was granted by the President in eases

No. (201 -TA-) 5, 16, 18, 19,29,35,36,37,39,43, 47,48,51, and 56.

In cases 29, 37, 39,47, and 56 the protection was by its terms less than

that recommended (for example, lower tariffs, or shorter duration of the

same tariffs). While the President sometimes granted a different type of

relief that is not directly comparable with the protection recommended

the President never granted protection that was by its terms greater than

the relief recommended.

187 Section 201 has a higher standard of injury, and in that regard

Section 201 relief is harder to get. However, before 1980, antidumping

and countervailing duty cases had no time limits and no court review,

and the Treasury Department, which handled those cases then, often put

cases on indefinite hold. Section 201, in contrast, promised a decision

within well under a year, and the required public hearing could help

muster political support for relief.

188 The ITC found that the auto industry, while substantially

injured by increasing imports, was injured more by a general economic

recession in the country, and was thus ineligible for relief. U.S.

International Trade Commission, Certain Motor Vehicles and Certain

Chassis and Bodies Therefor: Report to the President on Investigation

TA-201-44 under Section 201 of the Trade Act of 1974, USITC

Publication 1110, December 1980, pp. 21, 67, 134, 173 (3-2 vote). In

1988, Congress specified that the ITC “may not aggregate the causes of

declining demand associated with a recession or economic downturn in

the United States economy into a single cause of serious injury or threat

of injury.” 19 U.S.C. 2252(c)(2)(A).

189 19 U.S.C. 2251.

190 In theory, the government could encourage a new industry to

form by other means, such as R&D support, low-interest loans, and the

promise of protection in the future if needed. When the new industry

started to sell products, it would then exist and could be protected under

Section 201. However, to use Section 201 in this way could violate

GATT. GATT’s escape clause requires that the injury be due to

unforeseen increased imports. If the dominant foreign suppliers were

already established when the U.S. industry started to form, it could be

bard to argue that any increased imports were unforeseen. While U.S.

law does not require that the increase in imports be unforeseen, an

application of Section 201 to imports that were anticipated could

provoke a GATT challenge, (However, the GATT provision requiring

an unforeseen increase has fallen into disuse and might be eliminated in

the Uruguay Round.)

191 The statute speaks in absolute, rather than relative, terms,

directing Commissioners to consider, among other economic factors,

“the significant idling of productive facilities in the domestic industry,”

“the inability of a significant number of firms to carry out domestic

production operations at a reasonable level of profit,” and “significant

unemployment or underemployment within the domestic industry.” 19

U.S.C. 2252(c). See, for example, U.S. International Trade Commission

Nonrubber Footwear: Report to the President on Investigation No.

TA-201-50 Under Section 201 of the Trade Act of 1974, USITC

Publication No. 1545 (July 1984), pp. 11-19 (views of Chairwoman

Stern, Vice Chairman Liebeler, and Commissioner Rohr).

192 U.S. International Trade Commission, ibid., p. 19 (views of

Chairwoman Stem, Vice Chairman Liebeler, and Commissioner Rohr)

(quoting legislative history).

193 See U.S. International Trade Commission Television Receivers, Color and Monochrome, Assembled or Not Assembled, Finished or

Not Finished, and Subassemblies Thereof, Report to the President on

Investigation TA-201-19, USITC Pub. 808, March 1977, pp. 13-16; U.S.

International Trade Commission, Citizens Band (CB) Receivers, Report

to the President on Investigation TA-201-29, USITC Pub. 862, February

1978, pp. 7, 28. These cases are also discussed in Morris Morkre and

David Tarr, The Effects of Restrictions on United States Imports: Five

Case Studies and Theory, Staff Report of the Bureau of Economics to the

Federal Trade Commission June 1980, chs. 4, 5.
182 ● Competing Economies: America, Europe, and the Pacific Rim

194 U.S. International Trade Commission, Nonrubber Footwear,

No. TA-201-50, op. cit., pp. 9-10,23.

195 Ibid., p. 22.

196 Ibid., pp. 9-10.

197 U.S. International Trade Commission, Nonrubber Footwear,

No. 221-201-55, op. cit., pp. 11-12 (views of chairwoman stern).

198 As used in this discussion of what the U.S. public sector

purchases, ‘defense” purchases mean purchases classified as defense in

Congressional budget authorizations. To a first approximation this

includes all of the Defense Department (except the civilian side of the

Army Corps of Engineers), plus defense programs of the Department of

Energy and NASA.

199 Department of Commerce, Bureau of Economic Analysis,

Government Division Table PMB-llB, “National Defense Purchases

by Subcategory in Constant Dollars,’ Computer generated on Feb. 28,

1991.

200 Computer and Business Equipment Manufacturers Association.

201 Department of Commerce, Table PMB-llB, op. cit.

202 U.S. Department of Commerce, International Trade Administration, 1991 U.S. Industrial Outlook, S/NO03-009-00586-8 (Washington, DC: U.S. Government Printing Office, January, 1991), pp. 37-2.

203 Eric Nelson, Director, Market Research, North American

Telecommunications Association, personal Communication Apr. 1,

1990.

204 Public purchasing reportedly accounts for 90 percent of the

output of telecommunications equipment, measuring equipment, and

electro-medical equipment. Commission of the European Communities

(CEC), Communication from the Commission on a Community Regime

for Procurement in the Excluded Sectors: Water, Energy, Transport and

Telecommunications, COM (88) 376 (Brussels, Belgium: CEC, Oct. 11,

1988), table 4, telefaxed from Anna Snow, Delegation of the CEC,

Washington, DC, May 29, 1991.

205 U.S. Department of Commerce, Bureau of Economic Analysis, Government Transactions Methodology Papers: U.S. National

Income and Product Accounts, BEA-MP-5 (Washington DC: U.S.

Government Printing Office, November 1988), table III-6.

206 Robert LaucL, Library of Congress, Congressional Research

Service, American Law Division, “The Buy American Act: Legislative

History and ‘Differential’ Favoring Domestic Products,’ Oct. 25, 1975,

p. 2. For a recent description of Buy American legislation, see Robert

Lauck, Library of Congress, Congressional Research Service, American

Law Division, “Buy American Legislation,” Mar. 28, 1990.

207 Other laws include the Davis-Bacon Act, the Walsh-Healy

Act, and the Miller Act. See Commission on Government procurement,

Report of the Commission on Government Procurement, Stock No.

5255-00002 (Washington, DC: U.S .Government Printing Office,

December 1972), vol. 1, app. G, p. 167.

208 Inclusive of duty.

209 48 C.F.R. 25.105.

210 48 C.F.R. 25.101 (definition of “domestic end product”).

Costs other than components, such as direct labor and overhead for final

assembly, are not counted at all for this test. Also, the test considers only

major components-’ ’those articles, materials, and supplies incorporated directly into” the final product. Ibid. (definition of “components”) (emphasis added). Thus, the origin of subcomponents, which are

first incorporated into major components, is not considered.

211 48 C.F.R. 25.104,.105.

212 48 C.F.R. 225.105.

213 U.S. General Services Admini “ “stration, Federal Procurement

Data Center, Federal Procurement Report, Fiscal Year 1990 through

Fourth Quarter (Washington, DC: U.S. General Services Adminis “ “ tration), pp. 74-75.

Additional detail on some of these preferences is given in U.S.

Department of Defense, A Report to the United States Congress by the

Secretary of Defense, The Impact of Buy American Restrictions

Affecting Defense Procurement (Department of Defense, July 1989),

app. E, p. 13; Section 8(a) of the Small Business Act of 1953, as

amended, 15 U.S.C. 637(a); and 48 CFR 13.105, 13.106 (Oct 1, 1990).

214 Alfred Volkman, Director, Foreign Contracting, 0ffice of

Deputy Assistant Secretary of Defense (Procurement), testimony at

hearings before the House Committee on Government Operations,

Subcommittee on Legislation and National Security, Sept. 27,1989, pp.

64, 72; see also ibid., p. 266. In this testimony, DoD said merely that

“less than half” of defense procurement is opened under the MOUs.

However, a DoD official clarified that the estimate was close to 50

percent. Personal communication July 19, 1991.

215 Joseph Kelly, Director, Security and International Relations

Issues, U.S. General Accounting Office, testimony at hearings before the

House Armed Services Committee, Subcommittee on Investigations,

Apr. 30, 1991, p. 4.

216 For example, the United States does not waive restrictions on

defense purchases of foreign machine tools. U.S. Congress, General

Accounting Office, Defense Procurement: DoD Purchases of Foreign

Made Machine TOOlS, GAO/NSIAD-91-70 (Gaithersburg, MD: U.S.

General Accounting Office, February 1991), p. 22. Restrictions on

defense purchases of supercomputers also are not waived.

217 The GATT Procurement Code took effect Jan. 1, 1981. It is

described in U.S. Department of Commerce, International Trade

Administration, Office of Policy, Government Procurement (July 1981)

(prepared by Nancy E. Morgan) (vol. 2 of a series entitled The Tokyo

Round Trade Agreements), which also gives the annexes specifying the

Code’s scope of application to particular countries.

218 Public Law 96-39.

219 The test here is the nature of the good rather than which agency

buys it.

220 An SDR is a currency unit consisting of a basket of currencies

from nations that are members of the SDR Department of the

International Monetary Fund (IMF). It is also the unit of account for the

IMF. In January 1991, one SDR was worth about $1.40. Periodically the

USTR publishes an updated dollar equivalent for 130,000 SDRs, to be

used in assessing the Act’s applicability to purchases by the U.S.

Government.

221 Public Law 96-39. The Presidential authority to waive Buy

American and other preferences comes from Section 301 of the Act,

codified at 19 U.S.C. 2511.

222 These provisions are found in 19 U.S.C. 2511-2512 and 48

CFR 25.40.406. Generally, for purchases covered by the Trade

Agreements Act, bids from non-covered countries will not be considered

at all. 19 U.S.C. 2512; 48 CFR 25.402(c). Also, under the Trade

Agreements Act a good’s origin is determined by where it underwent its

last substantial transformation instead of by the fifty-percent-ofcomponents rule under Buy American. 48 CFR 25.401 (definition of

“designated country end product”).

223 Robin Zee, Purchasing Preference Practices: A 50 State

Overview, Document No. C-130 (Lexington, KY: National Association

of State Purchasing Officials (NASPO) and The Council of State

Governments, 1989), pp. 22-24.

224 Bethlehem Steel Cop. v. Board of Commissioners of the Dept.

of Water and Power of the City of Los Angeles, 276 Cal. App. 2d 211,

224,80 Cal. Rptr. 800,802 (1%9).

225 Zee, op. cit.

226 Ibid., pp. 8-10.

227 The preference of 12 percent for goods produced in labor

surplus areas raises prices paid by the government, but may save the

country money by helping to reduce the costs of unemployment.

Preferences for small and minority business raise prices paid by the
Chapter 4--U.S. Trade Policy ● 183

government but they serve definite social goals.

228 For example, bidders and agencies sometimes mistakenly

count the cost of domestic labor for final assembly, plus associated

overhead and general administrative expense, as part of the cost of

domestic components. U.S. Congress, General Accounting Office,

Report to the Secretary of the Interior, Bureau of Reclamation:

Misapplication of the Buy American Act, GAO/NSIAD-90-32 (Washington DC: U.S. General Accounting Office, November 1989); U.S.

Congress, General Accounting Office, Defense Procurement.’ DOD

Purchases of Foreign Made Machine Tools, GAO/NSIAD-91-70

(Gaithersburg, MD: U.S. General Accounting Office, February 1991),

pp. 25-27.

229 See, for example, U.S. Department of Defense, Office of the

Secretary of Defense, The Impact of Buy American Restrictions

Affecting Defense Procurement (U.S. Department of Defense, July

1989), p. 35.

230 Public Law 100-202 (FY-1988 Department of Defense Appropriations Act), Sec. 8112. This prohibition could be waived if the

Secretary of Defense certified to Congress that a foreign acquisition is

required for national security. This provision is still in effect. Public Law

101-511, Sec. 8034.

231 U.S. Congress, House Committee on Government Operations,

International Procurement and Waivers of the Buy American Act: U.S.

Business at a Disadvantage, House Report No. 101-989, Nov. 29, 1990,

p. 22.

232 Preferences for small business, minority-owned business, and

businesses in labor surplus areas have not drawn as much criticism,

probably because such programs and the underlying social goals are

shared by some other nations.

233 U.S. Congress, Committee on Government Operations, op.

cit., p. 7.

234 At times foreign firms were treated even better than U.S. firms

when bidding for defense contracts, because foreign firms’ costs were

subject to less stringent audits. Ibid., pp. 13-17.

235 Allan I. Mendelowitz, Director, Trade, Energy and Financial

Issues, United States General Accounting Office, testimony at hearings

before the House Committee on Government Operations, Subcommittee

on Legislation and National Security, Sept. 27, 1989, p. 30; and answers

by the Defense Department’s Office of Foreign Contracting to questions

from the Subcommittee, same hearings, pp. 266-267. The Defense

Department cautioned against comparisons of such data because of

differing national organization and procurement systems.

Defense spending is also higher as a proportion of GDP in the United

States than for U.S. allies. For example, despite roughly equal GDP, the

market for defense procurement in the EC is only 40 percent of that in

the United States. U.S. Congress, Office of Technology Assessment,

Arming our Allies: Cooperation and Competition in Defense Technology, OTA-ISC-449 (Washington DC: U.S. Government Printing

office, May 1990), pp. 47-50.

236 U.S. Congress, General Accounting Office, European Initiatives: Implications for U.S. Defense Trade and Cooperation, NSIAD-91-

167 (Gaithersburg, MD: U.S. General Accounting Office, Apr. 4, 1991),

pp. 36, 39-42.

237 The 19 are Australia (nonreciprocal), Belgium, Canada

(nonreciprocal), Denmark,Egypt, Germany, France, Greece, Israel,

Italy, Luxembourg, Netherlands, Norway, Portugal, Spain Sweden,

Switzerland, Turkey, United Kingdom.

238 U.S. Congress, General Accounting Office, European Initiatives, op. cit., p. 37.

239 Matthew B. Coffey, President, National Tooling and Machining Association, testimony at hearings before the House Committee on

Government Operations, Subcommittee on Legislation and National

Security, Sept. 27, 1989, pp. 3840.

240 U.S. Congress, House Committee on Government Operations,

op. cit., p. 21, citing U.S. Congress, General Accounting Office,

Industrial Base: Adequacy of Information on the U.S. Defense Industrial

Base, NSIAD-91-167 (Gaithersburg, MD: U.S. General Accounting

Office, November 1989). The Defense Department estimated that the

ratio of defense exports to MOU partners to imports from those partners

dropped from almost 8:1 in the late 1970s and early 1980s to about 2:1

in 1987; in 1987, exports were estimated at 8 billion, imports at 4 billion.

These estimates are based on unverified procurement data collected by

DoD and foreign defense ministries. For that reason, and because of

specific problems with the data which GAO has identified, GAO

considers these estimates unreliable. Testimony at hearings before the

House Committee on Government Operations, Subcommittee on

Legislation and National Security, Sept. 27, 1989, p. 266 (written

answers to questions included in the hearing record); U.S. Congress,

General Accounting Office, European Initiatives, op. cit., pp. 39-43,

61-62.

241 U.S. Congress, General Accounting Office, European Initiatives, op. cit., pp. 43-44.

242 House Committee on Government Operations, op. cit., pp.

11-13, 17-21.

243 U.S. Congress, General Accounting Office, European Initiatives, op. cit., p. 44.

244 The House Committee on Government Operations reported

that the Admini “ “stration had classified U.S. data derived from publicly

available information and had classified data from other Code

signatories after they declared the data no longer restricted. U.S.

Congress, House Committee on Government Operations, op. cit., pp.

20-21.

245 U.S. Congress, U.S. General Accounting Office, The International Agreement on Government Procurement: An Assessment of its

Commercial Value and U.S. Government Implementation, NSIAD-84-

117 (1984), pp. 11-17. As used in this chapter, Code-covered procurement means procurement that under the Code must be both transparent

and nondiscriminatory.

246 Allan I. Mendelowitz, Director, Trade, Energy and Financial

Issues, United States General Accounting Office, testimony at hearings

before the House Subcommittee on Legislation and National Security,

Sept. 27, 1989, pp. 13-14. (This testimony gave a brief, qualitative

unclassified summary of the classified data.)

247 In 1985, the total central government procurement expenditures (including goods and services) of all other Code signatories

combined was at least roughly equal to that of the United States. Ibid.,

p. 24.

248 W. Douglas Newkirk Assistant U.S. Trade Representative for

GATT Affairs, testimony at hearings before the House Committee on

Government Operations, Subcommittee on Legislation and National

Security, Sept. 27, 1989, p. 50; U.S. Congress, General Accounting

Office, The International Agreement on Government Procurement, op.

cit., p. 16. Probably almost half of defense procurement is now covered

under MOUs. By 1981, 11 out of 19 countries had already signed MOUs.

249 However, the Code might have made it easier in the long term

for foreign suppliers to form and maintain such relationships with the

U.S. Government, thus increasing U.S. imports over the years.

250 U.S. Congress, U.S. General Accounting Office, The lnternational Agreement on Government Procurement, op. cit., pp. 15-17.

251 Ibid, pp. 13-17.

252 For the 25 percent estimate, see U.S.International Trade

Commission, The Effects of Greater Economic Integration Within the

European Community on the United States, USITC Publication 2204

(Washington, DC: USITC, July 1989), p. 4-14 [one page]. Some sources

cite estimates as high as 50 percent, such as Aviva Freudmann, “EC

Takes Giant Step to Open Public Procurement Markets,” Atlantic Trade

Report, vol. 2, No. 5, Mar. 1, 1990, p. 1.

253 Statement of Bernard H. Falk, president National Electrical

Manufacturers Association, on the Annual Report on Foreign Discrimination Against Procurement of U.S. Goods and Services, before the
184 ● Competing Economies: America, Europe, and the Pacific Rim

House Committee on Government Operations, Subcommittee on

Legislation and National Security, U.S. House of Representatives, May

1, 1990, p. 2.

254 Steve Thomas and Francis McGowan, The World Market for

Heavy Electrical Equipment (Surrey, UK: Nuclear Engineering International Special Publications, 1990).

255 In 1987, digital switching systems in the EC reportedly cost

between $225 and $500 per line, compared to an estimated price of

around $150 that would have resulted from competitive procurement.

(’The price in the United States was around $100.) Paolo Cecchini with

Michel Catinat and Alexis Jacquemin, The European Challenge, 1992:

The Benefits of the Single Market (Aldershot, UK: Gower Publishing

Co., 1988), p. 22.

256 U.S. Congress, General Accounting 0ffice, International

Restraints to Competitiveness of the U.S. Heavy Electrical Equipment

Industry, NSIAD-83-51 (Gaithersburg, MD: U.S. General Accounting

Office, Sept. 14, 1983), p. 14. These agencies were the Army Corps of

Engineers; Tennessee Valley Authority; Western Area, Southwestern,

and Bonneville Power Admini “ “strations; and Bureau of Reclamation.

257 Negotiations to amend GATT’s Procurement Code have been

going on in parallel with the Uruguay Round negotiations to amend the

basic GATT agreement.

258 See U.S. International Trade Commission The Effects of

Greater Economic Integration Within the European Community on the

United States: Third Followup Report, USITC Publication 2368

(Washington, DC: USITC, March 1991), p. 6-4; U.S. International Trade

Commission, The Effects of Greater Economic Integration Within the

European Community on the United States, USITC Publication 2204

(Washington, DC: USITC, July 1989), p. 4-15.

259 Beverly Vaughan, Director of International Government

Procurement Policy, Office of the United States Trade Representative,

personal communication Mar., 25, 1991.

260 Public Law 100-418, Title VII.

261 Public Law 100-418, Sec. 7003, codified at 19 U.S.C. 2515

(see especially paragraph d(2)).

262 19 U.S.C. 2515(d),(f). For practices covered by the Procurement Code, the Code’s dispute resolution procedures are to be tried for

a year before the United States retaliates.

263 Office of the United States Trade Representative, Information

on Certain Foreign Government Procurement Markets (Washington

DC: Office of the USTR, Apr. 27, 1990).

264 Office of the United States Trade Representative, Title VII

Report (Washington, DC: Office of the U.S. Trade Representative, Apr.

26, 1991).

265 Congress passed Title VII in the belief that a strategy of

toughness, not patience, was more likely to open the foreign markets.

This fundamental dispute--Congress advocating toughness on international trade issues while the Adminis “ “ tration prefers patience-has long

been a theme of U.S. trade policy.

266 The agencies represented are the Departments of Commerce,

Agriculture, State, Treasury, Defense, Labor, Transportation, and

Energy; the Office of Management and Budget; the Office of the U.S.

Trade Representative; the Council of Economic Advisers; the Environmental Protection Agency, the Small Business Administration; the

Agency for International Development the Export-Import Bank of the

United States; the Overseas Private Investment Corporation; the U.S.

Trade and Development Program, and the U.S. Information Agency.

U.S. Department of Commerce, ‘‘Export Programs: A Business

Directory of U.S. Government Resources,” May 1991.

267 U.S. Commerce Department International Trade Admim“ “stration, Office of Financial Management, personal communication, Aug. 2,

1991.

268 Negotiations with foreign governments are led by the Office

of the U.S. Trade Representative (USTR), which is within the Executive

Office of the President.

269 Export Promotion Activities of Major Competitor Nations,

May 1988. While the report was not released by the Commerce

Department, it was provided under the Freedom of Information Act to

the authors of Government Export Promotional Programs in Nine

Countries: The Cornell University/XPORT Report on Government

Export Promotion Programs and Policies in Canada, the United

Kingdom, France, West Germany, Japan, Taiwan, Singapore, South

Korea, and Brazil (Ithaca, NY: Cornell University, Johnson Graduate

School of Management 1989); see page 7 of that report. The figures in

the text and table 4-10 are drawn from table A on page 5 of that report,

and app. I on page 54.

270 U.S. Congress, General Accounting Office, Export Promotion: Problems in Commerce’s Programs, NSIAD-89-44 (Gaithersburg,

MD: U.S. General Accounting Office, Jan. 26, 1989), pp. 16-17.

271 Ibid., p. 18. Similarly, Trade Development usually lacked

funds to print attractive, professional-looking brochures to advertise

trade shows. Ibid., p. 41.

272 U.S. Commerce Department, International Trade Adminis “ “ tration, office of Financial Management, personal communication July 30

and Aug. 2, 1991. The combined budget for USFCS, TD and IEP

increased from $146 million in fiscal year 1987 to $170 million in fiscal

year 1991. The fiscal year 1987 figures are funds actually spent.

273 The program depended on ITA providing free publications.

This stopped in 1981, causing program participation to wane. These two

examples are taken from Ronnie L. Goldberg, BSI Consulting, Inc.,

“Federal programs for the Promotion of Manufactured Exports,”

contractor report prepared for the Office of Technology Assessment,

June 1987, ch. 2, pp. 6-7.

274 U.S. Congress, General Accounting Office, Export Promotion, op. cit., passim.

275 Information about the USFCS’ strategic review is taken from

U.S. Department of Commerce, U.S. Foreign and Commercial Service,

“Strategic and Technical Reviews Working Paper Export Assistance

Needs: Working Group Recommendations SR 90-7,” Mar. 1990; and

interviews with USFCS staff.

276 See Organisation for Economic Co-operation and Develop

ment, The Export Credit Financing Systems in OECD Member

Countries (Paris, France: OECD, 1990, 4th cd.).

277 Ibid., ch. 23.

278 Eximbank 1990 Annual Report, p. 27; Organisation for

Economic Cooperation and Development, op. cit., p. 229. Eximbank

was capitalized in 1945 with $1 billion from the U.S. Treasury. James

Jackson, Library of Congress, Congressional Research Service, Economics Division, “Export-Import Bank Financial Issues,” IB88013,

July 27, 1989, p. 2.

279 The Arrangement on Guidelines for Officially Supported

Export Credits requires countries to announce contemplated export

loans, to permit other countries to match the terms. The Arrangement is

signed by 23 countries, including the major economic powers. The text

of the Arrangement is found in Organisation for Economic Cooperation

and Development op. cit., ch. 25. Notification is treated in sections

14-17.

280 Chief Accountant, Commodity Credit Corporation, U.S.

Department of Agriculture, personal communication, July 22, 1991.

281 This figure of $40 billion does not include some products

eligible for financing assistance, such as wood products, seafood, and

leather.

282 Public Law 91-181, amending Section 9 of the Export-Import

Bank Act of 1945, codified at 12 U.S.C. 635g(d). The amendment also

directed Eximbank to report on activities “to enhance the opportunity

for growth and expansion of small businesses and entrepreneurial

enterprises. ”

283 Eximbank’s 1990 Annual Report(p. 14) merely lists the dollar
Chapter 4-U.S. Trade Policy . 185

value of products exported with Eximbank’s help that 1) meet the

descriptions in the text (key linkage industry, high value added, etc.), or

2) are “related” to products meeting the descriptions in the text. This

information by itself does not show how strategic concerns influence

Eximbrmk’s decisions, or what particular measures Eximbank has taken

to meet the goals listed in the text.

284 Export-hnport Bank of the United States, Report to the U.S.

Congress on Export Credit Competition and the Export-Import Bank of

the United States for the Period Jan. 1, 1989 through Dec. 31, 1989

(August 1990), p. 4.

285 Ibid.

286 Organisation for Economic Cooperation and Development

op. cit., ch. 25.

287 These were satellite earth stations, turbines, locomotives, and

rail signaling equipment.

~ ExPort-~Port Bank of the United States, Report to the U.S.

Congress on Tied Aid Credit Practices, Apr. 20, 1989, ch. IV. The

subseetors were central office switching equipmen~ satellite earth

stations, radio communications, boilers, turbines, rail signaling equipment, and earth moving equipment. Earth moving equipment was not

divided into subsectors, so it counts both as a sector and a subsector.

289 Ibid., ch. III.

290 Export-Import Bank of the United States, Report to the U.S.

Congress on TiedAid Credit Practices, op. cit., pp. 6, 14-15. The other

major donors are Canam France, Germany, Italy, Japm and the United

Kingdom.

291 Ibid., p. 16.

292 In 1988 Japan granted $9.1 billion, the United States $9.8

billion. Japan’s Sk has been growing relative to the United States.

U.S. Congress, General Accounting Office, Economk Assistance:

Integration of Japanese Aid and Trade Policies, NSIAD-90-149

(Gaithersburg, MD: U.S. General Accounting OffIce, May 24, 1990), p.

6.

293 Ibid., p. 15.

294 Ibid., pp. 6-7,

295 Ibid., pp. 14-15; Export-Import Bank of the United States,

Report to the U.S. Congress on Tied Aid Credit Practices, op. cit., p. 8.

296 U.S. Congress, Generrd Accounting OffIce, Economic Assistance, op. cit., pp. 11-13.

297 Export-Import Bank of the United States, ‘‘Report to the

Congress under Section 15(g) of the Export-Import Bank Act of 1945,

As Amended,” p. 1, attached to letters horn John Macomber, President

and “ Chanman, l@ort-Import Bank of the United States, to the President

of the Senate and the Speaker of the House, Dec. 3, 1990.

298 Export-Import Bank of the United States, ‘‘Report to the

Congress under Section 15(g) of the Export-Import Bank Act of 1945,

As Amended” pp. 2-3, attached to letters from John MaComber,

President and ChairmarL Export-Import Bank of the United States, to the

President of the Senate and the Speaker of the House, July 8, 1991.

299 These $53.8 million counted against @baok’s ceiling on

direct loans of $612 million for fwcal year 1990.

300 Export-Import Bank of the United States, “Report to the

Congress under Section 15(g) of the Export-Import Bank Act of 1945,

As Amended,” pp. 2-3, Attachment 2 (this report was attached to letters

from John Macomber, President and ~Export-Import Bank of

the United States, to the President of the Semte and the Speaker of the

House, hdy 8, 1991).

301 Export-Import Bank of the United States, Report to the U.S.

Congress on Tied Aid Credit Practices, op. cit., ch. 11 U.S. Congress,

General Accounting Office, Econow”c Assistance: Integration of

Japanese Aid and Trade Policies, op. cit., p. 6.

302 United States Trade and Development Program Annual

Report, 1990, pp. 6-7.

303 Ibid., p. 35.

304 Ibid., pp. 19,21,

305 Ibid., p. 3.

306 Jomthan Raymon@ Director, Congressional Affairs, U.S.

Trade and Development progr~ personal communicatio~ Aug. 2,

1991. TDP’s total budge~ which includes administrative expenses, has

run 5 to 10 percent higher.

307 150 U.S.C. App. 2401-2420. This Act’s authorization lapsed

as of Oct. 1, 1990, but President Bush continued its provisions in force

by invoking the International Emergency Economic Powen Ac4 50

U.S.C. 1702. See Executive Order 12730, “Continuation of Export

Control Regulations,” Sept. 30, 1990.

The export of purely military items is controlled by other statutes.

308 The Control List is found at 15 CFR 799 (Jan. 1, 1991).

Additional controls on software, technical daa and know-how are

specif3ed in a separate list found at 15 CFR 779. These lists are found

within the Export Administration Regulations, 15 CFR, ch. VII,

subchapter c.

309 According to BXA statistics, in 1990 BXA granted approvals

to individual license applications for $63 billion worth of goods.

However, this figure represents the amounts of goods authorized for

shipment; not all amounts authorized were necessarily shipped.

Also, this figure does not include five types of special licenses

covering many shipments at once. The most important of these is the

distribution license, which enables exporters to ship a defiied product

line for up to two years. BXA’S fiscal year 1990 annual report (ch. 2, in

press) gives an “informal estimate” of $17.9 billion for products

shipped in fiscal year 1990 under distribution licenses. Acknowledgeable

BXA official guessed that goods shipped during calendar year 1990

under all special licenses perhaps totaled between $30 billion and $40

billion. Personal communication Apr. 25, 1991.

Given this uncertain information a fair estimate for calendar yea

1990 might be $55 billion for goods shipped uncles individual licenses

and $35 billion for goods shipped under special licenses. The total then

would be $90 billion for goods shipped under license in 1990.

310 U.S. Commerce Departrnen~ International Trade A&mm“ “stratioq Oftlce of Trade and Investment Analysis, personal communication

Aug. 2, 1991.

311 NAS Z (complete citation given in the next footnote), pp.

116-117.

312 Panel on the Impact of National Security Controls on

International Technology Transfer, Committee on Science, Engineering,

and Public Policy, National Academy of Sciences, National Academy of

Engineering, Institute of Medicine, Balancing the National Znterest:

U.S. National Security Export Controls and Global Econonu”c Competition (Washington DC: National Academy Press, 1987). In 1991 the

National Academy of Sciences published a second report. Panel on the

Future Design and Implementation of U.S. National Security Export

Controls, Committee on Science, Engineering, and Public Policy,

National Academy of Sciences, National Academy of Engineering,

Institute of Medicine, Finding Common Ground: U.S. Export Controls

in a Changed Global Environment (Washingto~ DC: National Academy Press, 1991 ). These reports are sometimes caUed the Allen Schmitt

Reports, respectively, after panel chairmen Lew Allen and Roland

Schmitt. These reports will be referred to here as NAS Z and NAS H.

313 This calculus of the costs and benefits of export controls will

no doubt be affected by the attempted coup in the Soviet Uniom and that

Union’s partial disintegratio~ in August 1991. As this report goes to

press, it is unclear where these events will lead; they have the potential

to both increase the urgency of technology transfer to promote social

change and increase the risk of military conftict.

314 NAS 1, op. cit., pp. 187, 191; NASH, op. cit., pp. 100-101.

While some allies also imposed some reexport controls, they were less

intrusive.

315 This term is an imprecise shorthand. The countries at issue

292-889 0 - 91 - 7 QL: 3
186 ● Competing Economies: America, Europe, and the Pacific Rim

include former members of the defunct Warsaw Treaty OrganizatiorL the

People’s Republic of China, North Kor~ and Vietnam, among others.

Within these countries, CoCorn for years has distinguished China as

requiring less control than the Soviet Uniorq and recently CoCorn has

moved to reduce controls to Eastern European countries whose new

governments represent a lesser strategic tbrea~ provided that those

countries institute export control systems of their own to keep

technology from the Soviet Union and other, unreformed bloc members.

So far, Czechoslovakia, Hungary, and Poland have qualified for this

special treatment.

316 Title II of the Omnibus Trade and Competitiveness Act of

1988, Public hiW 100-418.

317 S. 320. This bill passed the Semte on Feb. 20, 1991, and was

referred jointly to the House Committee on Foreign Affairs and the

House Committee on the Judiciary on Feb. 26, 1991. This bill resembles

the conference vmsion of H.R. 101-4653 and S. 101-2927, as passed by

the House and Semte in 1990, but omits certain provisions that President

Bush found objectiomble in vetoing that bill. See President George

Busk Memorandum of Disapproval for the Omnibus Export Amendments Act of 1990, Nov. 16, 1990.

318 “Offkeof Licensing Statistics: CY 1990,” n.d. (preparedly

Bureau of Export AdmmI “ “stratiou U.S. Commerce Department). This

percentage is by number of applications, not dollar value. (This figure

includes all individual license applications, not just those required by

East-West controls.)

319 lkstimony of Dennis E. Kloske, Undersecretary for Export

Administration, U.S. Department of Commerce, at hearings before the

House Committee on Banking, Housing, and Urban Affairs, subcommittee on International Finance and Monetary Policy, Mar. 7 ad 28, 1990,

Serial No. 101-1030, p. 19. (The figures include all individual license

applications, not just those required by East-West controls.)

320 CoCorn Document CL (90) 42 (listing categories adopted on

May 22, 1991 Preparatory Meeting).

321 Glennon HarrisorL Library of Congress, Congressional Research Semice, The Bush Administrafi”on’s New Approach to Export

Controls and CoCom, 9@316E, June 26, 1990, p. 4.

322 Ibid., pp. 4-5.

323 Senate Committee on Banking, Housing, and Urban Affairs,

Export Administration Act Amendments of 1990, Report to Accompany

S. 2927, House Report No. 101-399, pp. 41-43.

324 Ibid., p. 41.

325 William Clements, Director, 0fi3ce of’lkchnology and Policy

Analysis, Bureau of Export Administration U.S. Department of

Commerce, personal communicatio~ June 4, 1991.

326 Public Law 100-418, sec. 2415, codifkd at 50 U.S.C. App.

2404(B)(2).

327 President George Bush, Memorandum of Disapproval for the

Omnibus Export Amendments Act of 1990, Nov. 16, 1990.

328 There is some question as to whether the economically less

advantaged CoCorn members can implement a snftlciently reliable

system of controls. J.fnot, a two-tiered CoCorn system could be required,

with countries in the fm~ more reliable, tier still controlling exports to

countries in the second tier. The EC, for which trade barriers between its

member states are anathema, is helping less advanced nations to

establish reliable control systems so as to avoid the need for a two-tiered

CoCorn.

329 The Allen Panel studied the export control systems of Canada,

France, Jap~ the United Kingdom, and Germany and concluded that

“[w]ith limited exceptions, none of the[se] countries imposed controls

that extend beyond the CoCorn lists.” NAS 1, op. cit., p. 99.

330 Thestatutoryprovision is found at50U.S.C. App. 2404(c)(6).

The 6-month period may be extended 6 months at a time based on a

finding that the item is not sufficiently available from other countries to

render the U.S. control ineffective; the control may also be extended by

at most 12 months to conduct negotiations to bring the item under

multilateral control. An order removing East-West controls on many

items 6 months after the Act is found at 54 FederaZRegister 8281 (Feb.

28, 1989).

331 50 U.S.C. App. 2404(f). The President could maintain the

controls for at most an additional 18 months if he deemed it necessary

for mtional security, provided that he negotiated with other countries to

remove the foreign availability.

332 Public Law 100-418, sec. 2418, codifkd at 50 U.S.C. App.

2404(f).

333 BXA, Of.tlce of Foreign Availability, “Completed Assessments (Based on claims under Trade Act-As of May 15, 1991).”

Sixteen of the assessments were requested by interested firms; one was

requested by a ‘Ikchnicxd Advisory Committee.

334 BXA 1989 Annual Reports, pp. 29-31, 34; William Clements,

Director, Office of lkchnology and Policy Analysis, BXA, personal

Communication Aug. 9, 1991. South Korea achieved this status only in

December 1990; it and Singapore enjoy only the f~st of severrd levels

of liberal treatment. Indus@ would like to see the level increased and

to see other Southeast Asian mtions brought in.

335 Public Law 100-418, section 2414, cdfkd at50 U.S.C. App.

2404(a)(4),(5).

336 BXA 1989 Annual Repoz p. 26. Congress had instructed that

these changes be implemented within 90 days of the Ac~ or by Nov. 21,

1988.

337 BXAAnnualReports: 1990, ch.2(inpress); 1989, p.22; 1988,

p. 22. The 1991 figure is from William Clements, Director, Ofllce of

lkchnology and Policy Analysis, Bureau of Export Adrnuu“ “stratiou U.S.

Department of Commerce, personal communicatio~ June 4, 1991.

338 The 1989 figures are fromNASZZ, pp. 80, 82; the 1990 figures

are from “Office of Export Licensing Statistics: CY 1990,” n.d.

(prepared by BXA).

339

341

342

343

345

346

347

348

NAS 1, op. cit., p. 114.

Ibid., p. 113.

Ibid., p. 191.

Ibid., p. 113.

NAS II, op. cit., pp. 98-99.

NASl, op. cit., pp. 114-115.

Ibid., p. 114, footnote.

Ibid., p. 214.

Ibid., p. 114.

U.S. Comzress. General Accounting OffIce, Export Controls:

Advising U.S. Busi~ess of Policy Changes, NSIAD-90-201 (Gaithersburg, MD: U.S. General Accounting Office, May 18, 1990), pp. 4-9.

349 BXA Annual Reports: 1990, ch. 2 (in press); 1989, p. 16.

350 “Offke of Export Licensing Statistics: CY 1990,” n.d.

(Jl~piUed by BXA).

351 BXA 1990 Annual Repo@ ch. 2 (in PIIXS).

352 William Clements, Director, Ofilce oflkchnology and Policy

Analysis, personal communicatio~ Aug. 22, 1991.

353 Alan Macmillan and Michael Andrews, BXA, ~lce of

Foreign Availability, “Foreign Availability Assessment: ATCompatible Microcomputers” (December 1988); “AT Assessment

Chronology,” n.d. (prepared by BXA).

354 U.S. Department of State, ‘‘CoCom High Level Meeting: Fact

Sheets,” reprinted in Senate Report No. 101-399, p. 40.

355 Charlie Carter, Vice President for lkchnology, National

Machine Tool Builders Association and industry member of the TAC for

automated manufacturing, personal communication, Apr. 10, 1991;

Representative of a high technology firm with representatives on several

TACS, personal communicatio~ Apr. 11, 1991.
Chapter -.S. Trade Policy ● 187

356 50 U.S.C. App. 2409@.

357 “Fact Sheet on Export Control Procedures,” White House

Press Release, Dec. 13, 1990.

358 President George Bush, Memorandum of Disapproval for the

Omnibus Export Amendments Act of 1990, Nov. 16, 1990.

359 William Clements, Director, Offlceoflkchnology and Policy

Analysis, BXA, personal communication, Aug. 9, 1991.

360 Ibid.

361 William Clements, Director, Gfilce oflbchnology and Policy

Analysis, BXA, personal communication, June 4, 1991.

362 To decontrol an item controlled by CoCorn, CoCorn’s

permission is required. CoCorn routinely reviews one-third of its list

each year; to get CoCorn to consider an item out-of-turn is possible, but

requires special effort.

363 The only other basis for decontrol would be that an item is no

longer strategic. Often foreign availability occurs before strategic value

is lost.

364 Steven Goldman, Director, Offke of Foreign Availability,

personal communicatio~ June 26, 1991.

365 This figure is for FY 1989. BXA 1989 Annual Report, p. 1.

366 Steven Goldman, op. cit.

367 NASII, p. 98.

368 Ibid., p. 96.

369 50 U.S.C. App. 2504(g)(l).

370 NASIZ, pp. 194-195.

371 Personal communication Aug. 27, 1991.

372 Personal communicatio~ Apr. 11, 1991.

373 Personal commu.uicatio~ Apr. 10, 1991.

374 See U.S. Department of Commerce, Bureau of Export

Administration, Office of ‘lkchnology and Policy Analysis, 1990 AnnuaZ

Foreign Policy Report to the Congress (Jan. 21, 1990-Jan. 20, 1991),

February 1990, chs. I-III.

375 Under Section6 the President is supposed to consider foreign

availability and the positions taken by other countries, and the impact of

these factors on the controls’ likely effectiveness, However, how these

factors are weighed is up to the President’s discretion. See 50 U.S.C.

App. 2405(b),(h).

In additioq for many years the interagency review of license

applications have km different for the two types of controls. However,

in December 1990 the President direeted that the procedures in place for

Section 5 controls also be used for Section 6. “Fact Sheet on Export

Control Procedures,” White House Press Release, Dec. 13, 1990.

376 56 Federal Register 10,756, 10,760 (Mar. 13, 1991).

377 56 Federal Register 25053 (June 3, 1991). BXA originally

found foreign availability on Sept. 25, 1989. See also “Semiannual

Report to Congres+Report on the Operations of the Office of Foreign

Availability: Apr. 1, 1990-Sept. 30, 1990,” p. 12.

378 56 Federal Register 40494-40502 (Aug. 15, 1991). The

regulation will later be extended to cover use in making missiles.

379 Clements, personal communication Aug. 27, 1991, op. cit.

What duty of inquiry f- will have is unclear. However, Mr. Clements

has strongly urged exporters to ask their lawyers what their legal

exposure might be and what precautions they should take.

380 See “Fact Sheet on Enhanced Proliferation Control Initiative,” issued by the White House Dec. 13, 1990, reprinted in Bureau of

National Affairs, International Trade Reporter, Dec. 19, 1990, p. 1933.
Chapter 5

EC-92: Trade and

Industry Policy
CONTENTS

Page

THE EUROPEAN SINGLE MARKET. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193

EC-92 AND U.S. BUSINESS: ECONOMIC GROWTH AND TRADE POLICY . . . . . . . . . . . . . 195

EconomicGrowthDuetoE~-92 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196

Opportunities for U.S. Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196

Opportunities for U.S.-Owned Companies in Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202

EC Technology Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209

Framework Program.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210

EUREK A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ., . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211

Emphasis on Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215

EC-92: COMPETITION POLICY AND EFFICIENT FIRMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226

European Antitrust Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226

Subsidies and Nationalized Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228

Box

Box Page

5-A. The Politics and Institutions in the European Community . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194

Figures

Figure Page

5-1. U.S. and EC Tariff Duties for Selected Commodities, 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198

5-2. Automotive Market Shares in Western Europe in 1989.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202

5-3. Scientists and Engineers per 10,000 Labor Force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210

5-4. U.S. Patents by Nationality of Inventor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211

5-5.JESSI Program: Functional overview and Structure of the European Microelectrionic

Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215

5-6. ESPRIT’ I Funding Allocated by Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221

5-7. Size of Partners in RACE Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221

5-8. Europe’s Trade Deficit in Electronics in 1987 . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . 225

5-9. Total Merger Activity, All National, Community, and International Mergers by

Combined Takeover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227

Tables

Talbe Page

5-1. Macroeconomic Consequences of EC Market Integration for the Community, 1992-98 . . . 196

5-2. U.S. Balance of Trade With the EC,1985 and 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197

5-3. Direct Investment Outflows From Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203

5-4. Japanese Production Capacity in Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203

5-5. Motor Vehicle Production in the EC,1973-1989.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206

5-6. Japanese Share of the European Car Market, 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206

5-7. Funding and Duration of the Framework Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212

5-8. Glossary and Description of the Framework Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213

5-9. Funding of EUREKA Projects, by Area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214

5-10. EUREKA Projects: Number of projects by Funding Category . . . . . . . . . . . . . . . . . . . . . . . . . 214

5-11. Industrially Significant ESPRIT I Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225

5-12. Shares of Manufacturing Industry Held by Large Firms in Japan, the United States,

and the EC, l986 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +.. 227

5-13. State Aids in the EC, 1981-86 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229
Chapter 5

EC-92: Trade and Industry Policy

The European Community (EC) is entering a new

stage in its efforts toward greater unity. Most

European history for the past thousand years centered on states establishing, defending, and expanding national borders. Now the power of these states

will be altered in fundamental ways. This stems from

the commitment to make the EC into a single market

by the end of 1992 (EC-92).

The goal of completing the internal market was

first adopted in the Treaty of Rome, which established the European Economic Community in 1957.

However, progress was slow until, in 1985, the

Commission of the EC1 proposed a long stride

forward, in the form of a White Paper that listed 300

specific policy actions, with the goal of removing

barriers to the free movement of goods, services,

people, and capital throughout the EC.

While EC-92 will not be completed by the end of

1992, the reforms already introduced and the growing commitments of governments, industry, and the

public mean that this process is not reversible. Just

what that means is debatable. According to some

observers, businesses will become more efficient

when the barriers to trade and cross-border operations fade and competition increases. The more

optimistic forecasts estimate that growth rates could

increase by 50 percent or more, while reducing

inflation and unemployment. Although the size of

the growth spurt is subject to debate, it is likely that

the economies of the EC will get at least a temporary

shot in the arm from the single market.

If EC countries are to open their markets fully to

each other, it will be difficult for the individual

nations to continue to create special advantages for

their own firms. But that is precisely the aim of most

existing national industrial policies in Europe. Thus,

EC-92 could lead to either the elimination of some

kinds of national industrial policies, or their control

and supervision by the Commission. Some policies,

such as the control of credit favored in France until

the mid- 1980s, could be swept away entirely, in this

case by the removal of barriers blocking the flow of

capital across borders. Other policies, such as

controls over large mergers, will be transferred to the

Commission. Many, such as subsidies policy, will

remain in the hands of the member states but under

the Commission’s supervision.

Not all the important differences among member

nations have been ironed out. Subsidies are at the

heart of a significant remaining dispute. Some

member nations, led by Britain, oppose government

intervention to save EC-owned firms threatened by

Japanese or U.S. competition. Others, with France in

the lead, are determined to keep alive European

companies-often their own national companies—

in key industries such as electronics and motor

vehicles.

Although some national industrial policies will

likely be constrained under EC-92, the forces that

generated them remain strong. Government intervention in cases of market failure is widely accepted

in Europe. Hence, the EC is under pressure to

develop an industrial policy of its own, one that does

not favor industry in one EC country over that in

another but seeks to improve the competitiveness of

European industry.

In principle, the EC is committed to free trade. In

practice, that is only partly true. While some early

fears of Fortress Europe were exaggerated, the EC

governments do use trade policy to protect European

industry. Some defensive policies are longstanding

(auto quotas dating back to the 1950s); some are new

(rules of origin for semiconductors that favor manufacture within Europe); and some are now pursued

more aggressively (antidumping).

Whatever the sources, current policy is not set in

stone. EC officials seem to have considerable

latitude in their interpretation of trade policy. And

the outcome of the GATT2 Uruguay Round, expected to conclude in 1993, may change existing

policies considerably; for example, the EC has put

its discriminatory public procurement policies on

the table. Overall, however, EC trade policy does

have significant protectionist components, e.g., high

tariffs, quotas, aggressive use of antidumping laws,

discriminatory public procurement policies, protective rules of origin.

EC trade policy is less multilateral than it appears.

It is aimed more at Japan and other Asian countries

than at the United States. Key trade policies—

–191–
192 ● Competing Economies: America, Europe, and the Pacific Rim

notably antidumpting--have been used to dampen

Japanese competition in strategic sectors, such as

consumer electronics. This country-specific selectivity reappears in reciprocity clauses that extend

specific benefits to trading partners only when

reciprocal access is available.

EC efforts to protect European industries have

encouraged importers to become local manufacturers through foreign direct investment,3 and there has

recently been a large influx, especially from Japan.

U.S. firms have had a major manufacturing presence

in Europe for decades, and many (e.g., IBM, Ford)

are now regarded as European in many respects.

Other U.S. companies, however, are developing or

improving their presence in Europe, not only to take

advantage of the EC single market but also to expand

sales into Eastern Europe. This strategy could prove

tough for smaller companies.

This accelerated foreign direct investment offers

a new set of challenges to the EC. For example,

while the EC has used trade policy to protect its

semiconductor producers, and through technology

policy has spent billions of dollars trying to accomplish the same end, a strong Japanese manufacturing

presence in the EC challenges both. The Commission has responded by moving toward policies that

encourage specfiic kinds of investment likely to

bring high wage jobs, technology transfer, work for

European suppliers, and development in depressed

areas.

The EC also seeks to improve the competitiveness

of existing European firms through other policies.

One method is technology policy aimed at supporting generic research through R&D consortia; another is support for large multinational projects like

Airbus; and a third is competition policy (analogous

to U.S. antitrust policy), which will discourage

subsidies and state ownership. Other policies may

exert indirect effects. For example, regional policy

is aimed not only at redressing the inequalities of

income and wealth within the EC, but also at helping

failing industries and underdeveloped regions to

adjust.

It is too early to assess the results of many of these

policies on European competitiveness. The consequences of encouraging local production, especially

in high-technology industries, remain unclear. Technology policy has been expensive and the payoffs for

competitiveness remain indistinct at best, although

it may have encouraged the development of an

integrated European economy. Cross-border mergers that result in the formation of giant firms may

improve competitiveness in some industries but not

others. Progress toward deregulation of national

public procurement markets could encourage EC

firms to become more competitive, as could efforts

to control national subsidies and limit their duration.

Trade between the EC and the United States is no

small affair. Taken together, the 12 nations of the EC

are the largest market for U.S. exports; in aggregate

they are the biggest U.S. trading partner. Individually, 4 members of the EC (Germany, the United

Kingdom, France, and Italy) are among the top 10 in

volume of total trade with the United States. In 1990,

the United States ran a small merchandise trade

surplus with the European Community, although the

range of variation with individual countries was

wide; Germany’s $8 billion trade surplus with the

United States in 1989 was fourth highest among all

U.S. trading partners, and Italy’s $4.7 billion was

eighth. Europe is also the location of the bulk of U.S.

foreign direct investment.

The effects of EC-92 policies on trade between the

EC and the United States and on U.S.-owned

companies are not entirely clear either, but are not

likely to be large. The most direct effects of EC-92

on the United States will come through trade policy,

public procurement policy, and new mechanisms for

setting technical standards. EC trade policy differentiates between goods produced within the EC and

those imported into it, disc ruminating against the

latter. The new EC public procurement policy does

the same, providing large benefits for goods where

at least half the content is added in the EC. And as

Europe develops new procedures for setting ECwide standards to replace existing national standards, U.S. firms have worried both that they will be

frozen out of the process and that EC firms will use

the standards to keep out foreign-made goods.4

These policies will have different effects on U.S.

exporters and U.S. firms that manufacture in Europe.

Many of the policies that accompany EC-92, e.g.,

tariffs, quotas, antidumping enforcement, rules of

origin, and public procurement, will encourage

exporting firms to relocate production to the EC.

Firms that do not relocate could face significant

trade barriers, more so in important sectors such as

computers, semiconductors and telecommunications

equipment. Exporters should benefit somewhat from

the macroeconomic effects of EC-92, for growth
Chapter 5--EC-92: Trade and Industry Policy ● 193

brings increased demand that should expand U.S.

exports. It is likely that any resulting boost to exports

will be modest. It is too early for a conclusive

judgment on U.S.-EC trade, especially as the EC has

indicated that it will negotiate over many protectionist policies.

U.S. manufacturers in the EC should encounter

expanded opportunities as national barriers and

preferences are removed. Conversely, they may also

face stiller competition from other foreign competitors into Europe (mostly Japanese firms), or from

European firms themselves.

Besides its effects on U.S. exports and U. S.-

owned firms operating in Europe, EC-92 is interesting as a source of policy ideas and options for the

United States. In many ways, EC-92 is responding to

a set of issues this country is also grappling with in

the face of formidable international competition.

Europe’s solutions may not be those we would

choose, but it is a very large working laboratory for

policy experiments. As its efforts take effect over the

next few years, they will bear close scrutiny as to

their possible relevance to the United States.

THE EUROPEAN

SINGLE MARKET

The push to create a unified market in Europe

began in 1957 with trade policy and the slow

reduction of tariff barriers among members, which

reached zero in 1968. Nonetheless, barriers remained. Even the process of crossing the border was

inordinately complex and time-consuming, sometimes taking days for commercial vehicles.5

In 1985, the Commission of the European Communities (CEC) introduced a package of radical

reforms in a White Paper.6 This ambitious program

aimed to remove barriers blocking the free flow of

people, goods, services, and capital among EC

countries. The package boiled down to 287 specific

actions, each of which had to be negotiated in detail

with the 12 member governments, affected interest

groups, the European Parliament, and even third

parties like the United States. This would have been

impossible without a key institutional change, the

Single European Act (SEA), which allows most

agreements to be pushed through by modified

majority vote among the member countries; a single

country can no longer block adoption. These changes

take place in the institutional and political context

described in box 5-A.

Progress in removing barriers among EC nations

is substantial but incomplete. The process of approving and implementing measures is complex and

time-cons uming. Most measures have been agreed

on in principle, but as of mid-1991, only about

one-third had been finalized, and only a handful

have been adopted as law throughout the Community. Serious obstacles remain, such as harmonization of monetary policy. Yet there is little doubt that

the process is irreversible. Member states have made

too many crucial commitments and central reforms

have already been implemented.

For goods, the hundreds of documents needed to

cross borders have been reduced to one, and the

Commission aims to remove all border formalities in

the next few years. Quantitative restrictions are

formally illegal among members, and the EC is

working to resolve some signicant exceptions (e.g.,

autos). 7 Taxes are being reformed so that indirect

taxes do not discriminate against imported items.8

The free flow of goods can still be restricted on

health and safety grounds, but the European Court is

interpreting this loophole very narrowly.

For capital, three directives remove national

controls on deals in stock and mutual shares:

1.

2.

3.

long-term commercial credits and securities

not traded on exchanges;

admission of securities to capital markets; and

investments in short-term securities, current

and deposit accounts, and loans.

Once the three directives are fully irnplemented,9

there will be no barriers to the free movement of

capital within the EC.

Services have always been tightly regulated in

Europe; even the right to establish a business has

been limited. That will now change, as companies

operating in any EC country will have increasing

access to services markets in all the other EC

countries. Banks, for example, will operate under the

key principles of the single banking license, mutual

recognition, and home country control. These will

create a single market for banking services, regulated by the authorities of the bank’s home country.

This also sets off a race toward deregulation, as

banks will tend to setup shop in the country with the

least restrictive regulatory regime.10
194 ● Competing Economies: America, Europe, and the Pacific Rim

L

Box 5-A—The Politics and Institutions in the European Community1

Institutions-There are four institutional power centers in the EC: the Council of Ministers, the Commission

of the European Communities (Commission), the European Parliament, and the European Court of Justice

(European Court).

The Council of Ministers represents national political power within the EC and is the strongest of the four centers.

European Council meetings,2 are attended by heads of government for the 12 countries. More specialized topics are

discussed by Councils of particular ministries-e. g., the EC’s Science and Technology Framework Program is

considered by Ministers of Science, Technology, or Research. The Foreign Ministers’ Council is the most important

of the specialized Councils.

Until 1985, legislation considered by the Council of Ministers had to be passed unanimously, so that even the

smallest state held an absolute veto over the affairs of the EC. In 1985, the EC passed the Single European Act

(SEA), which applied majority voting to all decisions affecting the implementation of the single internal market,

except fiscal decisions and those relating to the free movement of people and workers’ rights. The decisions needed

to implement the single market will be taken largely by qualified majority voting.3 The Council is chaired by the

President of the EC, an office that rotates biannually among the member states, in alphabetical order.

The Commission is the executive branch of the EC and has the sole right to make proposals to the Council of

Ministers. Under its current President, Jacques Delors of France, the Commission has been a dynamic force pushing

member states to give up sovereignty on the way to the single market, and then economic and even political union.

The Commission is divided into 24 Directorates General (DGs), the equivalent of Ministries. Each is led by a

Commissioner, of which there are 17 (the President included), one nominated by each small member state and two

by each large one.4 There are powerful tensions between DGs and Commissioners who strongly support free market

ITMS ~t~ is &am from VSMUS (JE!C documents and Alberta Sbragi~ “The European Community and rnstitutiomd Development:

Politics, Money, and Law,” Brookings Institution forthcoming.

2Some~w called EC summit meetings.

3Votes in the Comcil are weighted roughly by population: the United Kingdom, France, Germany, and Italy hold 10 votes eack SP@I

8; Belgium, Greece, the Netherlands, and Portugal 5 each Denmark snd Ireland 3; and Luxembourg 2. Proposals pass underqualified majority

voting when they receive at least 54 out of the 76 total votes. Hence a blocking veto requires at least two major countries plus one medium sized

one. Britain has been the country most consistently opposed to decisions but overruled under the SEA.

4~ m~~r states with tWO CO missioners are France, Gc rmany, Italy, Spa@ and the United Kingdom.

Article 48 of the Treaty gives workers the right to to its free market principles, allowed the Japanese

move freely within the EC to take up offers of electronics giant Fujitsu to buy the premier British

employment. 11 This right has been expanded so that

workers can now also seek work and bring family

and some dependents.12 There are still difficulties,

such as the mutual recognition of professional

qualifications, but EC citizens are now in essence

free to work anywhere in the EC. Going further,

France, Germany, the Benelux countries, and Italy

have recently signed the Schengen agreement,

which will eliminate all border checks on people.

Spain and Portugal also intend to participate.

Other aspects of EC policy are not as settled.

Disagreements remain, especially over the issue of

subsidies and trade protection for firms whose

ultimate owners are mainly European. This rift

among member countries was highlighted in disputes over how to treat companies in the electronics

sector. Britain’s conservative government, sticking

computer firm, ICL, in 1990. At the opposite pole,

the French Government announced in April 1991

that it would provide $1.5 billion in subsidies to its

two state-owned electronics companies-the computer manufacturer Groupe Bull SA and the defense

and consumer electronics group Thomson SA, both

of which experienced large losses in 1990. The

justification, given by French Minister of Industry

Roger Fauroux, was that “the future competitiveness of entire sectors of European industry” depended on the survival of European electronics

firms.13 The EC Commission, which has supervisory

power over industry subsidies, was reported to be

divided over whether to approve the French subsidy.

It would be a mistake to view the progress toward

EC-92 as a flood propelling all before it in one

direction. In tone and even intent, various EC
Chapter 54X-92: Trade and Industry Policy . 195

principles (notably Leon Brittan of the United Kingdom) and those who support a more interventionist industrial

policy (notably Pandolfi of Italy and Delors).

Until recently, the Parliament has been relatively weak essentially a talking shop. Direct elections

strengthened the Parliament; its role was also enhanced by the SEA. It can now delay but not block proposals. The

powers of the Parliament will be extended.

The European Court acts somewhat like the U.S. Supreme Court. The Commission occasionally uses the Court

to define its own rights and to interpret the key legal statutes of the EC. The Treaty of Rome and subsequent

amendments, notably the SEA, provide the written constitution on which the Court bases its decisions. The Court

may become increasingly important, as the EC seems to be moving away from a governmental system based on

administrative discretion toward a more rule-driven model of government.

Politics-Industrial policy in Europe has attracted political backing from three key points on the political

spectrum. While the left has abandoned a fully socialist economy in favor of a mixed model after World War II,

it seeks to mitigate market outcomes and prevent market failures. The mix varies, as do the mechanisms chosen. 5

Christian Democratic parties have developed corporatist ideas based on notions of reciprocal rights and

obligations between the state and the major social groups. These parties usually have tight relations with major

producer groups-both employers and unions-and see negotiation with these groups as the basis for economic and

industrial policies.

Nationalist tendencies springing from the right also support industrial policies. Gaullism stresses the importance

of strategic industries and national independence, for national security reasons. That implies national control of the

technology base. Together, these three philosophies have given industrial policy the respectability that it lacks in

the United States.

Still, industrial policy is not universally viewed in Europe as either successful or appropriate. The tide of political

opinion in Europe turned against it following the election of Margaret Thatcher as British Prime Minister in 1979. 6

Thatcherites view industrial policies as expensive, inefficient, and corrupt. They replaced nationalization with

privatization. EC-92 itself in many respects rejects traditional European industrial policy; it is committed to make

markets work and reduce the role of the government in the economy.

sFOr a good ex~ple of moderate left ~“ gin the post-War period, see Anthony Crosland, The Future of Socialism (Westpo~ CT:

Greenwood Press, 1977).

6Even in Sweda, tie s~i~ Dernomatic party has reeently been forced into a mainstream agenda influenced by ~tcherism.

directives are at loggerheads with others, reflecting and standards give EC-made goods an advanthe differing views of the members on how close

government-industry cooperation ought to be. Even

where several policies converge toward one result,

they are not entirely consistent and probably were

not designed to be so. Rather, they evolved in that

direction.

EC-92 AND U.S. BUSINESS:

ECONOMIC GROWTH AND

TRADE POLICY

tage over U.S. exports; and

. a longer term competitiveness effect, in which

EC support of technology advances and collaboration among European firms might improve

their performance compared with U.S. fins.

Nearly everyone expects a boost in economic

growth from EC-92. The questions are how great it

will be and whether it will outweigh any losses U.S.

firms may suffer. EC-92 policies will affect U.S.

exports and sales by U.S. firms located in Europe

EC-92 will affect U.S. companies in three ways: differently. The distinction is important from the

standpoint of U.S. national interests. Success in

. a growth effect, in which an expanded EC exports tends to strengthen the national economy

market will offer greater sales opportunities to and raise standards of living. Success by U.S.-owned

●

both European and American fins; firms operating in foreign countries is not so closely

a near-term protectionist effect, as some EC tied to the Nation’s interests, though it may be

policies governing trade, public procurement, indirectly supportive if profits from the foreign
196 ● Competing Economies: America, Europe, and the Pacific Rim

Table 5-l—Macroeconomic Consequences of EC Market Integration

for the Community, 1992-98

Trade Public Financial supply Total

barriers procurement services effects value

Change (percent)

GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.4 0.5 1.5 2.1 4.5

Consumer prices . . . . . . . . . . . . . . . . . . –1.0 -1.4 –1 .4 –2.3 -6.1

SOURCE: Paolo Cecchini, Michel Catinat, and Alexis Jacquemin, The European Cha//enge: 1992: The Benefits ofa

Sing/e Market (Aldershot, U.K.: Gower Press, 1989). Paolo Cecchini was Chairman of the Cost of

Non-Europe Steering Committee, and Special Advisor to the Commission of the European Communities.

ventures come back to enrich American citizens or

enhance domestic investment.

Economic Growth Due to EC-92

EC-92 is still in early stages of implementation, so

its effects on growth are not yet discernible. However, most analysts expect EC-92 to increase the

EC’s productivity by removing intra-European trade

barriers, encouraging restructuring, promoting competition, and boosting investment. All this is expected to result in faster economic growth.

The original estimates on the medium-term (1992-

98) growth effects of EC-92 were produced by Paolo

Cecchini for the Commission. Relying extensively

on macroeconomic analysis, Cecchini used OECD

and EC economic models to produce a set of

estimates for the medium-term impact of EC-92 on

the European economy over 6 years, as described in

table 5-1.

This estimate from the Commission strongly

influenced European policymakers. It suggested that

there was a specific policy route available that would

increase the rate of economic growth by around 50

percent every year for 6 years, with further effects

later on (the Cecchini estimate of 4.5 percent extra

growth over 6 years is the average of a range of

estimates, from 3.2 to 5.7 percent). According to the

report, still more growth might result with changes

in macroeconomic policy, such as increased public

investment and reduced income taxes. In that case,

gross domestic product (GDP) gains might be as

high as 7 percent over the 6 years, and employment

gains could rise from about 1.8 million new jobs to

5 million, at the cost of a smaller reduction in

consumer prices (4.5 instead of 6.1 percent).

The Cecchini report has not been accepted unchallenged. While Richard Baldwin sees dynamic gains

from EC-92 that dwarf the estimates made by

Cecchini,14 most other American (and several European) economists regard the Cecchini estimates as

optimistic. Merton Peck, for example, concludes

that 1.5 to 2.5 percent additional growth in GDP is

a more justified figure, although he concedes that his

estimate is itself only a guess based on previous

experience of GDP gains with removal of trade

barriers, and that his work excludes the dynamic

gains stressed by Baldwin.15

Keynes long ago pointed out that a primary

determinant of economic activity was the “animal

spirits” of entrepreneurs, and EC-92 already has

been a shot of adrenalin for Europe. “Europhoria”

may be no more appropriate than ‘Europessimism,’

but it does have the benefit of making the business

community more optimistic and more likely to

invest, hence improving chances for the economy to

grow faster. How much faster is, for now, an

unanswerable question.

Opportunities for U.S. Exports

If EC-92 is successful in making European firms

more competitive, both imports and exports would

be likely to increase. This growth in trade, added to

the growth of the EC market, could help U.S.

exports, assuming they are able to take advantage of

the growth.

An obstacle to increased U.S. exports could lie in

the EC’s trade and procurement policies. Since most

European countries already have some protectionist

trade and procurement policies, only EC policies

that move in the direction of greater protection will

make it harder for U.S. exporters to sell in Europe.

But the early fears that EC-92, while dissolving trade

barriers within the Community, would erect a

Fortress Europe against outsiders have abated. An

overall move toward more protectionism against

non-EC traders now appears unlikely. However,

there are important exceptions affecting specific

industries. One of these is the electronics complex,

including computers, semiconductors, and telecom-
Chapter 5--EC-92: Trade and Industry Policy . 197

munications equipment. This is the largest and most

important category of U.S. exports to the EC.

Table 5-2 shows exports and trade balances for the

industries accounting for most U.S. manufacturing

exports to the EC in 1989 (the last full year for which

detailed trade figures are available). It seems that

changes in trade and procurement policy will make

little difference to two of the three industries that are

our biggest exporters to Europe--chemicals and

aircraft. The electronics situation is murkier. Without question, EC trade, procurement, and technology

policies are all targeted toward helping European

firms compete more vigorously in the computer,

semiconductor, and telecommunications industries.

Although this effort is unlikely to cripple U.S.

exports, it could dampen them.

U.S.-EC trade in chemicals is large and two-way;

the $9.9 billion in U.S. exports to the EC was almost

matched by U.S. imports from the EC. This reflects

the fact that both the United States and the EC are

home to strong, competitive chemicals industries

(though EC companies are larger and have a bigger

share of world sales16). There are no new departures

in EC-92 trade or procurement policy likely to

hinder expanded U.S. chemicals exports to the EC as

that market grows. The new, more unified system of

standards and testing could make it easier for U.S.

firms to export to the EC, because their products will

have to pass only 1 set of tests and requirements, not

12; however, it is unclear whether U.S. exports could

be tested in the United States or would have to be

tested in Europe (see the discussion of standards

below). Firms just beginning to export to the EC may

find it more difficult, because competition within the

EC market will be keen.17

The U.S. aircraft industry is not only a big

exporter but also a big generator of trade surpluses

for the United States, in both EC and world trade. It

is getting increasingly tough competition from

Airbus, however. The large, sustained subsidies to

Airbus from European governments are no small

part of its success (see ch. 8), but those subsidies

have nothing to do with new policies under EC-92.

Table 5-2—U.S. Balance of Trade With the EC, 1985 and 1989

1985’ 1989

(billion dollars) (billion dollars) Share of

Us. Us. Us. Us. U.S. exports

Product category exports imports Balance exports imports Balance (in percent)

Total trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$49.0 $67.8 - --- ---- ---- - .- — .-.

Manufactures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36.8

Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9

Basic manufactures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5

Paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3

Textiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.4

Iron and steel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.2

Nonferrous metals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3

Metal manufactures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.6

Machinery and transport equipment . . . . . . . . . . . . . . 20.6

Computers and office machines . . . . . . . . . . . . . . . . . . . . . 6.5

Electric machinery and parts . . . . . . . . . . . . . . . . . . . . . . . . 2.7

Power generating machinery . . . . . . . . . . . . . . . . . . . . . . . . 2.4

Non-consumer telecom equipment . . . . . . . . . . . . . . . . . . 0.9

Aircraft and parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4

Construction and supplies purpose machinery . . . . . . . 1.7

Agriculture machinery and tractors . . . . . . . . . . . . . . . . . . 0.2

Machine tools and metalworking . . . . . . . . . . . . . . . . . . . . 0.3

General industrial machinery . . . . . . . . . . . . . . . . . . . . . . . . 1.4

Motor vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1

Auto parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5

Miscellaneous manufactures . . . . . . . . . . . . . . . . . . . . . 4.6

Science and control instruments . . . . . . . . . . . . . . . . . . . . 2,2

Photography, optical, and time equipment . . . . . . . . . . . 0.6

Clothing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1

Footwear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.0

Toys and games . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1

56. 8

6.2

10.8

0.6

1.4

3.0

1.3

1.2

27.1

1.8

2.6

3.2

0.3

2.0

2.7

0.9

0.8

2.7

7.9

1.5

9.7

1.1

0.9

1.8

1.1

0.3

$-18.8

-20.0

-0.3

–8.3

-0.3

–1.0

-2.8

-1.0

–0.6

–6.5

4.7

0.1

-0.8

0.6

1.4

–1.0

-0.7

-0.5

-1.3

-7.8

-1.0

–5.1

1.1

–0.3

-1.7

-1.1

-0.2

$86.6

71.7

9.9

5.4

0.7

1.0

0.4

0.7

1.0

42.7

11.2

5.5

5.4

1.7

9.4

2.6

0.6

0.7

2.9

1.0

1.0

11.0

4.1

1.4

0.3

0.1

0.4

$85.1

75.5

9.1

13.4

0.8

1.7

3.1

1.3

1.7

36.2

2.7

4.3

4.6

0.6

3.5

4.8

0.9

1.1

4.5

6.7

2.5

13.2

2.0

1.4

1.7

1.3

0.4

$ 1.5

-3.8

0.8

-8.0

-0.1

-0.7

–2.7

-0.6

--0.7

6.5

8.5

1.2

0.8

1.1

5.9

–2.2

-0.3

-0.4

–1 .6

-5.7

1.5

–2.2

2.1

0.0

–1.4

-1. 2

0.0

24%

26

27

19

16

25

12

15

21

27

44

21

37

23

39

23

25

26

22

10

8

31

36

40

14

24

25

a

1985 data includes Spain and Portugal.

SOURCE: National Association of Manufacturers, from Department of Commerce data.
198 ● Competing Economies: America, Europe, and the Pacific Rim

None of the EC-92 trade and public procurement

policies should change the prospects for sales of

U.S. aircraft in Europe very much; developments in

the competition among Airbus, Boeing, and McDonnell Douglas are likely to affect U.S.-EC trade in

aircraft much more than EC-1992 (see ch. 8).18

EC Trade and Public Procurement Policies

New EC-92 trade and procurement policies do

affect U.S. electronics exports directly. Europe is the

leading destination for computer and electronics

exports from the United States, and an important

market for these industries. As shown in table 5-2,

computers and office machines alone accounted for

$11.2 billion of U.S. exports to the EC in 1989,

generating an $8.5 billion surplus for the United

States. Electrical machinery and parts-mostly

semiconductors-added another $5.5 billion in exports and nonconsumer telecommunications equipment $1.7 billion; together, these two sectors generated a $2.3 billion trade surplus.

As shown in figure 5-1, EC tariffs on computers

and telecommunications equipment are the same as

or a little lower than U.S. tariffs on the same

items—around 5 to 8 percent. The largest tariff in the

group is on semiconductors, at 14 percent; the

United States has had no tariff on semiconductors

since the early 1980s. The EC semiconductor tariff

has not stopped U.S. exports. In fact, the Commission can waive the tariff when a certain chip is

needed by an EC producer and is not made there or

is in short supply. According to one estimate, about

20 to 30 percent of semiconductor imports faced no

tariff in 1988.19

What is new is the EC’s rule of origin for semiconductors, introduced in February 1989. Under this

rule, the country of origin is defined not by the

testing and assembly of chips, as had been the case,

but by the location of wafer fabrication (where the

diffusion process occurs) .20 Wafer fabrication is the

most important and technically demanding part of

semiconductor manufacture. The final step, testing

and assembly, adds only 10 to 15 percent of the

chip’s total value; wafer fabrication constitutes

about 60 percent.21 Semiconductors that do not

qualify as EC-made (i.e., are not fabricated in

Europe) face the 14-percent tariff. But more important is the combination of the semiconductor rule of

origin with strong preferences for EC-made goods in

public procurements and the settlement of antidumping actions.

EC directives allow public purchasers in four

sectors—water, energy, transport, and telecommunications-to reject bids that have less than half

EC content by value. (These sectors are excluded

from GATT rules that govern public procurement,

Figure 5-I —U.S. and EC Tariff Duties for Selected Commodities, 1990

Passenger cars

Heavy trucks

VCRs

TVs

Telephone sets

Switching equipment

Parts: sets/switches

Computers

Computer monitors

Semiconductors

Photocopiers

Photocopier parts

14

14

0 5 10 15 20 25

= U.S. = E C

NOTE: Japan had no tariffs for these products.

SOURCE: Office Of Technology Assessment, 1991, derived from published tariff schedules for the United States, EC,

and Japan.
Chapter 5--EC-92: Trade and Industry Policy . 199

and therefore are designated the excluded sectors.)

Even if the purchasers choose to consider non-EC

bids, they are required to give a 3-percent price

advantage to goods and services of EC origin. The

four sectors account for at least one-quarter of all

public procurement in the EC22 (some estimates are

as high as one-half23) and for many high-technology

purchases. Public procurement, as defined by the

EC, covers not only governments but also firms that

benefit from exclusive geographical rights or barriers to entry in their industry and businesses that

governments control through the granting of licenses. This means, for instance, that British Telecom, a private firm licensed by the British Government, follows the public procurement rules. The

U.S. International Trade Commission reckons that

public sector purchases account for as much as 90

percent of U.S. companies’ telecommunications

equipment sales in the EC, and up to one-third of EC

sales by computer companies.24 Semiconductors are

essential components of the computers and telecommunications equipment covered by the public procurement rules.

On the other hand, U.S. exporters could benefit

from some changes in public procurement under

EC-92, especially as they apply to purchases outside

the excluded sectors. The new rules require greater

openness and less discrimination in public purchases. Assuming tough enforcement, this could

break the hold that many national companies now

enjoy as favored suppliers-an important EC goal,

for favoritism is costly. One of the main sources of

the economic growth and reduced prices expected in

EC-92 is lowered costs arising from competition in

public procurement. The Commission has a measure

of control over the national governments in this

regard. Public purchasers must disclose annual

projected procurement figures and report on contracts awarded in the past year.25 So far, however, the

Commission’s enforcement powers are weak. For

example, when the Danish Government specified

that only Danish labor and materials could be used

in building a bridge, the EC stopped short of taking

court action to halt the project and reopen bids.

Instead, it agreed to an out-of-court settlement in

which Denmark promised to change its ways in the

future and allow the excluded bidders on the bridge

project to sue for compensation. Nevertheless, even

this much is progress.

The excluded sectors also fall under new nondiscrimination rules, but with more exceptions and

looser criteria for openness. The preference for EC

suppliers in these sectors remains one of the biggest

worries for U.S. exporters facing EC-92. GE, for

example, noted that it was hard to justify spending

upwards of $200,000 on bids to provide power plant

equipment when the bids need not even be considered. Other U.S. firms have made the same point,

emphasizing that the EC rules differ from the U.S.

Government’s Buy American preferences, which

give U.S.-based bids a price advantage of 6 percent

(12 percent for small businesses), but then require

that all bids be considered on an equal basis. The

uncertainty under the EC rules may be enough to

deter bids from any company that cannot confidently

claim 50-percent EC content.

Some U.S. producers of semiconductors are

fearful that the restrictions on public sector purchases could spill over into the private sector (or

public purchases outside the excluded sector). A

firm selling computers, say, in more than one market

might not want to make different product lines for

each, and so would have reason to buy chips from

EC sources to help satisfy the 50-percent requirement. Thus the public procurement rule could set the

standard for the whole market.

These fears may be exaggerated. U.S. firms have

done quite well exporting semiconductors, computers, and telecommunication equipment to the EC,

despite the European tradition of making public

purchases from national champion firms.26 U.S.

exporters stand to benefit from the new rules for

greater openness to all bidders. Furthermore, there is

a possibility that even in the excluded sectors, U.S.

exports may eventually win the same treatment as

EC goods. In the Uruguay Round of GATT negotiations, the EC has shown interest in an expanded

GATT Government Procurement Code, which would

extend to signatories equal treatment in all public

procurement (except defense). Meanwhile, however, the combination of new rules of origin and

discriminatory public procurement is pushing foreign firms to manufacture in Europe rather than

export to Europe goods formerly made at home.

While that may be good news for U.S. multinationals, it could be bad news for exporters, especially

small ones without the scale of operations to justify

locating in Europe.

Another EC trade policy that affects U.S. exports,

especially in electronics, is its recent aggressive

pursuit of antidumping actions. From 1985 through
200 . Competing Economies: America, Europe, and the Pacific Rim

1990, the EC initiated 209 antidumping actions,

concluded 190, imposed penalties in 67, and made

agreements to remedy the injury to EC producers in

51, often by shifting high-value-added production to

the EC.27 The most significant actions were against

Japanese, other Asian, and Eastern European companies; hardly any were directed against U.S.

firms. 28 But aggressive antidumping actions and

penalties add much weight to the factors that

encourage foreign firms to locate and manufacture in

Europe, and that has consequences for U.S. exports.

The EC has often settled cases against Japanese

producers with agreements that, in the future, the

goods in question can avoid antidumping penalties

(i.e., additional duties) by including at least

40 percent non-Japanese content. This doesn’t necessarily mean EC content, according to the Commission. However, there are reports that some manufacturers of machines using semiconductors assume

that it does mean EC content, or at least it might, and

to be on the safe side they design in EC-made chips

rather than U.S.-made chips.29

In the well-known Ricoh case, the EC did go after

photocopiers made in the United States. In November 1988, Ricoh copiers, made in Japan, were found

to be dumped. The EC assessed 20-percent antidumping duties (the regular EC duty is 7.2 percent).

Three months later, the Commission charged that

Ricoh had increased production in California, where

it was simply an assembly operation, and that the

real manufacture was occurring in Japan. Therefore,

the EC ruled, the California-assembled copiers

should face the same duty as if they were allJapanese. Moreover, an EC rule adopted in July

1989 extended new rules of origin to copiers. It

stated that the country of origin would be determined

by where “technically sophisticated components,

such as the various printed circuit boards, lenses,

various motors and high-voltage generators” were

manufactured. 30 Nowhere is it explicitly stated that

these high-technology components would have to be

made in the EC in order for a photocopier to escape

penalties in an antidumping case, or perhaps to be

considered for public procurement. But again, that

may well be the practical effect.

EC Standards, Testing, and Certification

A central part of EC-92 is the creation of a unified

standards and testing system in Europe. This means

that goods that pass muster in 1 of the 12 member

nations should be accepted in all of them. PanEuropean acceptability should be a boon for European as well as foreign firms, since it relieves them

of the need to meet varying standards in different

countries. For many U.S. companies that positive

effect will outweigh any negative ones.

Still, there are worries about negative effects. One

has to do with the content of the standards and

another with the means of testing them. Initially,

U.S. companies were concerned that the new EC

standards were being written behind closed doors,

and that they might be designed so restrictively as to

handicap all but European firms. This fear has

receded somewhat as EC standards-making bodies

have allowed U.S. companies a more substantial

voice in the process, for example, by letting them

comment on proposed standards at an early stage,

before it is too late to make any difference. Concern

about the content of the standards has not vanished,

however. U.S. firms find that they must push their

own interests quite aggressively in the standardsetting process. Even for large, well-organized

companies this requires a great deal of vigilance, and

for smaller ones it maybe impossible. For many U.S.

exporting firms, however, the biggest remaining

worry is not so much the content of the EC standards

as how their products will be tested to make sure

they conform to the standards.

A new testing system is part of EC’s new unified

approach to standards. Before EC-92, all 12 nations

had to agree before any European standard could be

adopted. The process was glacially slow and produced standards that were sometimes immediately

obsolete. EC-92’s new approach is based on a

two-pronged strategy. First, the EC has taken direct

jurisdiction over ‘‘regulated products’ that involve

health and safety risks to consumers and the

environment. The Commission writes broad essential requirements for these products into directives,31

which then become EC law. Nonregulated products

will follow national standards, but with the crucial

proviso of mutual recognition; that is, any good that

can be legally sold, manufactured, and marketed in

one member nation should be equally salable in

another.32

For regulated products, manufacturers can meet

the essential requirements by submitting their products to testing by an independent laboratory, which

is itself licensed as a ‘‘notfiled body” by a member

government. 33 Another route to meeting the requirements is known as self-certification. The EC’s
Chapter 5--EC-92: Trade and Industry Policy ● 201

standard-setting bodies, CEN, CENELEC, and ETSI,34

are writing detailed standards that will meet the

requirements for regulated products. Manufacturers

may choose to follow these detailed standards. This

involves testing their products themselves for the

various characteristics required (or getting an outside lab to do so), following approved quality

assurance methods, and keeping documentation;

they can then put the official CE stamp of approval

on their own products. Self-certification is something of an honor system. It can be challenged by

rival producers, in which case the self-certifying

company would have to show proof of its claims.

And the EC may decide to limit self-certification to

products in which environmental and safety risks are

not great.

There are advantages to the other route for

approval of regulated products—submission to testing-since it allows innovative departures from the

detailed standards set by CEN, CENELEC, and

ETSI so long as the EC’s broad essential requirements are met. However, the problem for U.S. firms

(as for other non-EC companies) is to get their

products tested in their home territory. Considering

that parts and components, as well as final products,

may require testing, shipping these overseas could

be totally impractical, especially for small companies. U.S. industries and government agencies are

pushing the EC to license U.S. test laboratories as

notified bodies, or else allow EC notified bodies to

subcontract testing to U.S. labs.35 Such devices have

precedents. For example, Canada accredits U.S. labs

that have passed the inspection of a Canadian

official.

As of mid-1991, the EC had initially refused to

accredit U.S. labs and was taking a narrow view of

possible subcontracting; for example, it appeared

that quality assurance audits could not be conducted

by outsiders. Possibly, testing may be done in

affiliated labs that EC notified bodies set up in the

United States. There is already a move in this

direction, and while it might solve manufacturers’

testing problems, it could also put some U.S. labs out

of business.36 Mutual international recognition of

standards is also possible, but here there are difficulties, too. The EC will deal only with a national

authority, and the U.S. system is highly decentralized. Standards for various products are set by

hundreds of public and private bodies at the National, State, and sometimes regional levels. Testing

and certification matters were far from settled in

1991; all were under negotiation.

Discussions were held in June 1991 between U.S.

Secretary of Commerce Robert Mosbacher and EC

Commission Vice-President Martin Bangemann.

These yielded promising prospects for conformity

assessment facilities in the United States to receive

EC notified body status, allowing them to carry out

“the full range of required conformity assessment

procedures under the EC directives.’ This would be

conditional on the successful conclusion of a mutual

recognition agreement allowing, in return, EC bodies to have full participation in U.S. conformity

assessment systems.37 The Commission, however,

has not yet received a mandate from the Council to

negotiate such agreements, and it is still not clear

what the terms of such an agreement would be,

except that third country governments would have to

ensure the technical competence of the facilities

concerned. Both sides also renewed their commitments to the promotion of international standards.

Standards for nonregulated products are relatively

unaffected by EC-92. Although the EC standardssetting bodies are working on harmonizing detailed

standards for these products too, that is a long-range

task. Meanwhile, the mutual recognition rule still

applies to these products, as it has since 1979; no EC

member nation can exclude a product that meets

another member’s standards, solely on the grounds

of having a different standard.

Finally, if the EC gains wide adoption of its

standards throughout the world, U.S. exports could

lose some luster. The EC has already announced its

intention to give Eastern Europe a special place at

the standards-setting table, and to give technical

assistance on standards to non-European countries

in the Mediterranean, South America, India, and

Southeast Asia.38 Some of the EC’s draft policies on

standards go further in this direction. For example,

some standards include patented technologies. Standard-setting bodies in most countries, including the

United States, require that the owner of the patent

must license it, on fair and equal terms, to anyone

wishing to produce to the standard and sell in that

country’s market. However, one draft EC policy

would require the patent holder to license it equitably only to EC producers, or to producers in

countries that adopt the EC standards.39 This would

not only exclude firms in the United States and Japan

from the required licensing and equitable treatment
202 ● Competing Economies: America, Europe, and the Pacific Rim

(since these countries are not necessarily going to

adopt the EC standards for their own markets), but

would be an incentive for other countries to sign on

to the EC standards.

Quite possibly, this last draft policy will not be

adopted. Certainly, U.S. exporting firms oppose it.

It does illustrate the fact that American and other

foreign firms must carefully watch out for their

interests in the standard-setting process and express

their concerns forcefully. overall, it appears that

U.S. exporters will gain from the unified EC-92

standards and testing regime, and the problems it

raises can be manageable, though not without effort.

Opportunities for U.S.-Owned Companies

in Europe

EC-92 could confer some special benefits on

American-owned companies already established in

Europe, at least in the short run. Ford opened its frost

auto plant in Europe 80 years ago, and both Ford and

General Motors have been operating as European

firms for decades. They have plants in several

European countries, along with widespread sales

and service networks, and they are leading sellers in

European markets (figure 5-2). IBM dominates the

European computer market. Other U.S. firms have

longstanding alliances with European firms, e.g., GE

Aircraft Engines with the French firm SNECMA.

Many of the U.S.-based multinationals have strong

ties with local suppliers, and some have world-class

R&D labs in their host countries (e.g., hightemperature superconductivity was discovered in

IBM’s R&D facility in Berne, Switzerland). Such

companies will have no trouble qualifying their

products as EC-made goods, and thus will escape

tariffs and quotas. Many EC-92 reforms are specifically designed to disrupt cozy relationships between

national governments and national champion fins;

in some areas of public procurement, U.S. multinationals will be able to compete on a more equal

footing with EC-owned companies.

The advantage some U.S. firm have in already

being there will not last forever. Japanese firms are

latecomers as foreign direct investors in Europe (as

they are in the United States), but that is changing

fast (table 5-3). In 1989, for example, there was just

1 Japanese-owned semiconductor wafer fabrication

plant in Europe (there were 12 U.S.-owned),40 but at

least 3 more were under construction in 1991.41

Three Japanese auto plants in EC countries were

Figure 5-2—Automotive Market Shares in Western

Europe in 1989 (bn=billion)

Fiat

$1.99bn 15%

GM

- -- ——. - $1.39bn 11%

SOURCE: Kevin Done, “W Europe Car Sales Continue Rising: Volkswagen Group Keeps Place at Top of League,” )%wmial 7imes,

Jan. 22, 1990, p. 3.

turning out 295,000 cars per year in 1990, but 6 new

Japanese plants will be up and running by 1994,

producing 934,000 units a year (table 5-4). Tariffs,

quotas, anti-dumping actions, and public procurement policies are driving Japanese firms to establish

branches in Europe, with the prospect of a growing

market under EC-92 as the reward.

Foreign Direct Investment in Electronics

in the EC

EC policies that favor goods made in Europe are

most prominent in the electronics sector, covering

everything from semiconductors to computer printers to compact disk players. Many of these policies

are longstanding, predating the passage of the Single

European Act of 1985 and the decision to push

forward with EC-92; some are national policies of

member states. Notably, European computer firms

have long enjoyed favored status in government

purchases; public sector purchases make up about 15

percent of the European computer market, and most

of that goes to each nation’s own champion firms.

Groupe Bull in France and Siemens-Nixdorf in

Germany each make about one-third of their domestic sales to their own governments.42 The stateowned Bull has received about 7 billion francs (more

than $1 billion) in subsidies since 1983,43 and the

French Government proposed to give it still more in

1991.44

The EC is committed to ending member states’

support for national champion companies, a support

that never achieved its purpose. The heavily subsi-
Chapter 5--EC-92: Trade and Industry Policy ● 203

Table 5-3--Direct Investment Outflows From Japan

Total Europe North America

(billion dollars) , (percent of total) (percent of total)

1980 . . . . . . . . . . . . . . . . . . . . $4.7 12.3% 34.O%

1985 . . . . . . . . . . . . . . . . . . . . 12.2 15.8 45.0

1986 . . . . . . . . . . . . . . . . . . . . 22.3 11.5 46.8

1987 . . . . . . . . . . . . . . . . . . . . 33.4 19.7 46.0

1988 . . . . . . . . . . . . . . . . . . . . 47.0 19.4 47.5

1989 . . . . . . . . . . . . . . . . . . . . 67.5 21.9 50.2

NOTE: Fiscal year from April to March.

SOURCE: Organization for Economic Cooperation and Development (OECD), OECD Economic Surveys 1989/1990:

Japan (Paris, France: 1990), table 14, p. 52.

Table 5-4-Japanese Production Capacity in Europea

(000s of units)

1990 1994

Toyota

Burnaston, U.K. . . . . . . . . . . . . . . . . . . . . . . . . O

Lisbon, Portugal . . . . . . . . . . . . . . . . . . . . . . . O

Honda

Swindon, U.K. . . . . . . . . . . . . . . . . . . . . . . . . . o

Nissan

Washington, U. K. . . . . . . . . . . . . . . . . . . . . . . 200

Barcelona, Spain . . . . . . . . . . . . . . . . . . . . . . O

Mitsubishi b

Boom, Netherlands . . . . . . . . . . . . . . . . . . . . O

Suzuki

Linares, Spain . . . . . . . . . . . . . . . . . . . . . . . . . 50

Esztergom, Hungary . . . . . . . . . . . . . . . . . . . O

IBC (Isuzu-GM)

Luton, U. K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295

200

15

200

200

74

100

50

50

45

934

aThe capacity figures given are incremental capacity beyond that currently

existing. The Barcelona, Linares, Boom, and Lutton plants are facilities

already being operated on a smaller scale by European or American

companies. They will continue to produce European designs exclusively

for their European or American joint-venture partners while adding the

capacity shown in the table to produce Japanese designs to be sold by

both partners.

bNo final announcement of Mitsubishi’s plans has been made. Negotiations

are understood to be held up over the Dutch Government’s asking price

for its ownership stake in Volvo’s Dutch subsidiary. Mitsubishi would take

this stake to form a joint venture with Volvo to produce and market a

Mitsubishi designed car.

SOURCE: James P. Womack and Daniel T. Jones, “European Automotive

Policy: Past, Present, and Future,” contractor report prepared

for the Office of Technology Assessment, July 5, 1991.

dized national computer companies have not done

well in world markets.45 Nor have European semiconductor producers achieved international success,

despite trade protection and government assistance.

Their share of the world market declined from about

25 percent in the early 1970s to around 10 to 12

percent in the late 1980s, and today their chips are

sold largely in Europe. The weakness of the European computer industry has meant limited demand

for high-performance, leading-edge integrated circuits.46 In the electronic sector overall, the EC’s

trade deficit was about $35 billion in 1990.47

While disavowing support for national champions, the EC nevertheless has policies that strongly

favor EC-made electronics goods. The hefty EC

tariff of 14 percent applies not only to semiconductors (see figure 5-1) but to several consumer

electronics items (e.g., color TVs). And protection

has increased in the 1980s. The EC tariff was raised

from 9.5 to 19.5 percent for compact disk players in

1983, and from 8 to 14 percent for VCRs in 1985. As

discussed above, public procurement in the excluded

sectors under EC-92 will give European goods

strong advantages. Perhaps most forceful of all has

been the EC’s aggressive pursuit of antidumping

actions in the electronics sector.48 As we shall see,

all these EC policies favoring locally made electronics goods have powerfully encouraged foreign firms

to locate more of their production in Europe.

Several EC antidumping actions in recent years

have been directed against the Japanese and other

East Asian electronics producers. Of 149 actions

initiated in the 4 years 1987 to 1990, 16 were against

Japan, 18 against Korea, 6 against Hong Kong, and

6 against Taiwan.49 Most of these actions concerned

electronics products, including both office equipment and consumer products: typewriters, photocopiers, computer printers, video cassette recorders

and tapes, audio cassettes and tapes, compact disk

players, and small color TVs.50 There were 63

antidumping actions against China (16), Turkey

(14), Yugoslavia (11), and other Eastern European

countries (22 in all), but these mostly involved

low-technology products such as building materials,

textiles, and apparel. Only three actions were taken

against U.S. firms (two in 1987, one in 1990).51

During the 1980s, European electronics firms

protested strongly against what they saw as aggressive Japanese pricing. Many Japanese companies

employ product cycle pricing, in which early models

of a product are priced as high as the current cost of
204 ● Competing Economies: America, Europe, and the Pacific Rim

producing them would warrant but lower in relation

to the average production cost over the expected

product cycle-which would include the period after

economies of scale and learning have been achieved.

Japanese firms are also known for their commitment

to building market share over short term profittaking. These strategies led to accusations that

Japanese firms were dumping, for which there are

remedies under GATT if it causes injury to the

recipient country’s industry.

The EC tightened its antidumping enforcement so

aggressively as to be accused in some quarters of

protectionism. The EC has interpreted its antidumping regulation so as to make the finding of dumping

and the proof of injury to EC producers much more

likely, and the size of the injury greater.52 EC

mechanisms for determinimg the dumping margin

tend to exaggerate the “fair” value of a product;53

higher “fair” prices help to ensure both that

dumping is found and that the margin between the

“fair’ and dumped price is large. The EC also tends

to assume that there is a causal link between

dumping and injury to home producers, rather than

having to prove the link; for example, even low

market shares captured by imports have been used as

evidence of injury. 54 Other practices also put exportiers accused of dumping at a disadvantage. The

Commission itself verifies complaints; limits access

to the case file; holds informal hearings in accordance with Continental law practice, which allows ex

parte communications and does not require a written

record; and grants no automatic right of review.

Most important, the EC does not set antidumping

duties individually for each importer. Rather, one

rate is imposed on all imports from the country as a

whole, affecting dumped and non-dumped imports

alike. In principle, importers can get their own

antidumping duties reduced or eliminated by showing that they did not dump or dumped by a lesser

amount, but the procedures to do this are slow,

uncertain, and burdensome.55

The EC forgoes duties in some cases in return for

undertakings by foreign exporters to charge higher

prices. This was the case in the EC semiconductor

agreements with Japanese producers in 1989 (for

DRAMs) and 1990 (for Erasable Programmable

Read-Only Memories, or EPROMs). Like the U. S.-

Japan semiconductor agreement of 1986, these

agreements set price floors, with the goal of encouraging European producers to invest in production

facilities without fear of cutthroat below-cost competition from the Japanese.56

Foreign exporters on whom antidumping duties

have been imposed have also avoided paying these

duties by shifting the last part of their production

offshore, usually to the EC. An order directed to

imports of finished goods from the exporter’s home

country would then no longer apply. Very often,

only the final assembly was shifted. The EC

responded with an anticircumvention, or ‘‘screwdriver assembly,’ rule. Under this rule, the Commission has the authority to levy the same duty as before

on the finished goods if the parts and materials used

come at least 60 percent (in total value) from the

country or countries subject to the previous order. To

avoid this provision, firms have decided to use over

40 percent EC-origin parts and materials, even

though, according to the letter of the EC rule, those

components and materials could be produced in

third countries.57 Japan, the target of many important

EC antidumping actions, took the EC rule as it

applied to Japanese plants in Europe to GATT,

where it was found by a GATT panel to be illegal.58

The EC did not abjure its anticircumvention rule, but

after the GATT ruling in March 1990, antidumping

actions came to a temporary standstill; however, a

new action on components of disposable lighters is

reported to be under way.

The antidumping rules, the new rule of origin for

semiconductors, and the preference for EC-made

goods in public procurement all add up to powerful

incentives for foreign electronics firms to locate

production facilities in the EC, which they did. By

1988, Japanese manufacturers of photocopiers, electronic typewriters, and printers had 10 subsidiaries

in Britain, 6 in Germany, and 4 in France.59 But these

did not suffice. They were labeled screwdriver

plants. To comply with the EC’s anticircumvention

rule the companies then had to scramble to find

European parts suppliers-not always with great

success since the components sector, especially in

the United Kingdom, was weak. According to a

Japanese source, “Japanese manufacturers looking

to procure parts locally had to start by training and

helping parts makers themselves.”60

Similarly, when Japanese companies started making audio cassettes in Europe, they were hit with an

antidumping action that imposed duties on the

magnetic film going into the cassettes. The Japanese

response was to shift production of the film into the
Chapter 5--EC-92: Trade and Industry Policy .205

EC.61 As for semiconductors, the indispensable

electronic guts of all these products, the EC’s 1989

rule of origin is forcing still more inward investment.

Fujitsu, Mitsubishi Electric, Hitachi, and Sony have

started to build or have announced plans for new

wafer fabrication plants (fabs) in Europe; NEC is

already there.62

It is putting it too strongly to say that the EC now

has a coherent, unambiguous policy of forcing

inward investment, even in the electronics sector,

where the forces are most powerful. For example,

when Fujitsu bought out the British computer

company ICL in 1990, the company was promptly

expelled from the industry’s most influential lobbying group and was partially excluded from JESSI,

the semiconductor research consortium heavily supported by the EC. This suggests that it could take

more than local investment for a Japanese company

to be treated like a European company. All the same,

many EC leaders are strongly and explicitly committed to encouraging inward investment in forms that

promise to create well-paid knowledge-intensive

jobs and to transfer valuable technology to local

supply fins.

For U.S.-owned companies already well established in Europe,63 the new Japanese presence could

mean greatly intensified competition in the European market. For U.S. companies that export to

Europe but have no wafer fab there, the rule of origin

for semiconductors could cause problems, especially for smaller companies that can hardly afford

the $200 to $300 million investment in a European

plant. Intel (not a small company but not a giant

either) was one of those faced with the alternative of

laying out hundreds of millions for an EC plant or

losing EC sales. At congressional hearings in early

1989, an Intel representative protested against the

EC’s “domestic content policy,” saying that it

forced U.S. companies to transfer jobs, technology,

and investments to Europe regardless of competitive

considerations. 64 In October 1989, however, Intel

announced a decision to build a $425 million wafer

fab in Ireland, with substantial investment aids (i.e.,

subsidies) from the Irish Government.

Foreign Direct Investment in Autos in the EC

If there is some ambiguity in the EC’s policy of

encouraging foreign inward investment in electronics, there is more in motor vehicles. Longstanding

quotas and informal arrangements that restricted

Japanese auto imports, combined with newer local

content requirements, spurred Japanese investment

in auto plants in the EC in the late 1980s. However,

in April 1991, the European Commission proposed

a scheme that, reportedly, would allow only a small

increase in the Japanese share of the EC market

through 1998, Counting imports and transplant

production as the Japanese share. At the end of July

1991, the Japanese Government reached an agreement with the CEC on auto exports and possibly

production in the EC through the end of 1999.

Although all the details were unclear as of August

1991, the pact apparently caps the Japanese producers’ shares of the overall market at 16 percent

(about half imports and half domestic production) by

the end of 1999.65 Though this is a higher share than

they now hold, the agreement apparently permits no

growth (or a slight decline) in Japanese exports,

compared to 1990, with little additional production

in Europe above that already announced and under

construction.

Until quite recently, many policymakers in Europe considered their motor vehicle industry to be a

competitive success. European automotive trade

showed a positive balance through 1989, and for a

remarkable 6-year period, from 1984 through 1989,

European motor vehicle sales were extraordinarily

robust, far higher than analysts had forecast (table

5-5). This prosperous period followed one of stagnation, in which the number of car companies shrank

and employment greatly declined, but the result was

a high level of capacity utilization and profits for

every surviving company.66

This seeming strength was deceptive. First, national auto champions have been protected and

encouraged through a panoply of industrial policy

measures in European countries throughout this

century. Quotas have quite effectively controlled

Japanese imports into the major auto-producing

countries, as is evident by comparing their imports

with those of European countries with no domestically owned motor industry (table 5-6). Italy and

Japan agreed in the 1950s on a limit of 2,000

imported Japanese cars annually, and the limit stood

until the July agreement, which will permit Japan to

export 138,000 cars to Italy by the end of 1999.

France imposed a 3-percent market share limitation

in 1977; Britain and Japan reached an informal

agreement in 1975 limiting Japanese imports to 11

percent of the U.K. market. Germany has no formal

agreements with Japan on market share limitations.

However, in 1981, when the U.S. voluntary restraint
206 . Competing Economies: America, Europe, and the Pacific Rim

Table 5-5-Motor Vehicle Production in the EC, 1973-1989 (millions of units)

Year FRG U.K. Spain Italy France Belgium Holland Total

1973 ...............3,949

1978 ...............4,186

1981 ...............3,89 7

1982 ...............4,062

1983 ...............4,154

1984 ........,......4,045

1985 .. .............4,445

1986 .. .............4,578

1987 .. .............4,634

1988 .. .............4,625

1989 .. .............4,852

2,164 822

1,607 1,144

1,184 987

1,156 1,070

1,289 1,288

1,134 1,309

1,311 1,418

1,203 1,307

1,389 1,704

1,545 1,866

1,626 2,046

1,958

1,656

1,434

1,453

1,575

1,601

1,573

1,913

1,913

2,111

2,221

3,569

3,508

3,019

3,149

3,336

3,062

3,016

3,195

3,493

3,678

3,920

299

303

237

278

285

249

267

295

352

398

389

107

85

101

109

122

129

128

142

152

149

149’

12,868

12,489

10,859

11,277

12,049

11,529

12,158

12,633

13,637

14,372

15.203

aEstimated

NOTE: Spanish production is included aithough Spainwas not amember ofthe ECuntil 1985.

Because the European motor vehicle production system is highly integrated but as yet has no integrated

production totals available, it isnecessaryto estimate production forthewholeof the EC by totaling production

country bycountry. This method may Ieadtosome double counting, in particular of French and German vehicles

assembled in Belgium and French vehicles assembled in Spain.

SOURCE: Forallcountries except Holland: Automotive News, Market Data Book, 1990 edition, p. 3. For Holland: Motor

Vehicle Manufacturers Association of the United States, Wodd Vehic/e Datq various years.

Table 5-6-Japanese Share of the European

Car Market, 1989 (in percent)

Finland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Ireland... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Norway . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Denmark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Austria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Greece . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sweden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Belgium and Luxembourg . . . . . . . . . . . . . . . . . . . . . . . . . .

West Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Portugal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

39.6%.

39.4

37.8

31.8

30.3

29.9

29.4

25.9

24.7

19.2

14.8

11.3

6.1

2.9

1.6

1.1

NOTE: Sweden is an exception in having a large domestically owned motor

industry and a high level of Japanese imports. However, the

Japanese imports are almost entirely in the smaller size classes

where no Swedish products are offered. For comparison puposes,

the Japanese share of the U.S. car market was 27.4 percent in

1989.

SOURCE: Financial Times, Feb. 5, 1990. For the United States, Earl

Kreher, Motor Vehicle Manufacturers Association, personal

communication, Aug. 7, 1991.

agreement covering imports of Japanese autos was

announced, it was widely reported that the Japanese

Government gave these assurances to the German

Government: exports would not be diverted to

Germany, and Japanese companies would not increase their sales in the German market by more than

10 percent per year (about 1 percentage point of

market share).67

While the high level of trade protection and its

long duration might not be proof of fundamental

weakness in European auto manufacture, there is

more direct evidence. The first independent global

survey of auto company performance in plants, R&D

operations, and supply chain management indicates

that European companies, both the mass producers

(Volkswagen, Fiat, Renault, and PSA) and the

high-priced specialists (Mercedes, BMW, Volvo,

Jaguar, and Rover), lag behind Japanese and even

U.S. performance significantly.68 They score worse

in productivity, product quality,@ and responsiveness to changing demand.

Finally, by the end of 1990, the European market

had run out of steam; sales were falling in all markets

but Germany. Exports to the United States had

already dropped with the decline of the dollar, and

firms with the heaviest dependence on the U.S.

market (Jaguar, Saab, and Volvo) had been forced to

find buyers or joint venture partners. At the same

time, Japanese firms were making major investments in new production capacity within Europe,

gearing up to produce 935,000 units per year by

1994 and as much as 1.2 million units in 1998. Thus

it began to occur to European policymakers that the

European motor industry might face in the 1990s

what the Americans faced in the 1980s—a catastrophic loss of market share at the hands of the

Japanese. This prospect is probably much exaggerated because of the protective measures the EC has

taken for its auto companies. Even so, European auto

producers face an unaccustomed challenge, as do the

well-entrenched U.S. auto makers in Europe.

The frost mitigating factor is the extension of

quotas on Japanese imports, under the aegis of the
Chapter 5--EC-92: Trade and Industry Policy ● 207

EC. Originally, the EC Commission intended to

remove all member states’ quotas, beginning in

January 1991 and completing the process by January

1993.70 But this idea was conceived when the

European auto boom was at its height. As the

industry’s sales weakened, leaders of the German

industry abandoned the free-trade camp they had

traditionally occupied, joining the French and Italians to urge Europe-wide share limits on Japanese

imports along with a transition period for dropping

individual country restrictions.

Terms of the agreement made with the Japanese

by the EC in April 1991 were not all public, but trade

sources reported that they would allow Japanese

companies to increase their sales of passenger cars

in the EC—including both imports and transplant

production-horn about 1.2 million in 1990 to 2.3

million in 1999, or from about 10 percent to

somewhere around 16 percent of the EC market.71

EC estimates of additional production from the

Japanese transplants by 1998 range from 900,000 to

1.4 million cars per year, which implies that virtually

all of the growth in Japanese car sales would come

from transplants, and that imports would stay flat.

Also, these numbers imply sizable growth in the EC

market-over 2.5 percent per year.72 The EC scheme

also states that the very restrictive formal national

quotas on Japanese imports in France, Italy, Spain,

and Portugal will be abolished at the end of 1992, but

that the Japanese will “voluntarily” limit imports

into those markets under EC and Japanese supervision, to account for “unexpected circumstances

[that] might arise after January 1, 1993.’ After 1998,

the EC market would be open to the Japanese,

according to the proposal.

There are still parts of the agreement that are not

entirely transparent. In particular, it is unclear how

long the Japanese will be willing to abide by

informal limitations on transplant production in the

EC. “We can’t accept this,” said Moriharu

Shizume, Paris representative of the Japan Automobile Manufacturers Association. ‘‘They set up local

content rules-60 percent, 70 percent, then 80

percent. Now that we’ve got almost 80 percent, they

still don’t accept it. ’ ’73

Domestic content requirements for Japanese cars

were set first in Britain, which was in the vanguard

for Japanese auto transplants in Europe. In negotiating terms with the Japanese companies, the British

Government demanded high levels of European

content, both as a condition for investment aids

provided by the national and local governments and

in order not to count the transplant vehicles against

Britain’s 11 percent quota on Japanese imports.74

The result was a commitment for 60 percent

European content in the initial production runs at the

three largest Japanese transplants (Nissan, Toyota,

and Honda, all in the United Kingdom). What is

more, these facilities are committed to 80-percent

European content by 2 to 3 years after startup, a level

not currently contemplated by any North American

transplant even after several years of production.75

This level of local content requires that the body,

most major mechanical components, and either the

engine or the transmission be fully manufactured in

Europe.

The local content requirements have probably

slowed the rate of Japanese assembly plant investment in Europe. Also, under EC urging, the British

have ceased offering investment aids to the transplants, and that, too, may have slowed the rate. This

does not mean that the Japanese have no further

designs on producing in Europe.

Another important but often overlooked reason

for slow growth, both of Japanese imports into

Europe and of Japanese transplant production, is the

European distribution system for motor vehicles. It

differs greatly from the U.S. system. The United

States has always been a large market without

internal barriers where similar vehicles are sold for

the same price in every region. Moreover, since the

late 1940s, U.S. antitrust laws have forbidden

assembler firms from requiring that their dealers sell

only one brand from a single site.

By contrast, EC rules allow the established

European auto assemblers to limit the freedom of the

dealer and the customer, to their own distinct

advantage. The assemblers are able to sell the same

car for vastly different amounts in different countries, both in Europe and elsewhere. Their usual

approach is to price very low in their own home

market to establish a volume base and keep others

(e.g., Japanese imports) out, and to sell at much

higher prices in other markets. At the same time,

European (and Europe-based American) assemblers

forbid their dealers to “dual,” that is, to take on

Japanese brands at established dealerships. It was

precisely the aggressive use of dualing that allowed

the Europeans (in the late 1950s) and then the

Japanese (in the early 1970s) to rapidly build
208 . Competing Economies: America, Europe, and the Pacific Rim

distribution networks in the United States with

practically no investment.

For all these reasons—an EC-wide quota at least

for Japanese imports (and possibly an unwritten

agreement governing transplant production as well),

high local content requirements for transplant vehicles, and the existing distribution system-a surge in

Japanese share of the European auto market is not

likely over the next few years. The current EC rules

allowing selective pricing and exclusive selling

come up for renewal in 1995, and the result may well

be rules more like those in the United States. Even

so, EC-wide quotas and local content requirements

would continue to provide very substantial protection for European producers. The gradual relinquishment of voluntary national quotas could cause

problems for the French, Italian, and Spanish

industries, but the Japanese firms have practically no

distribution and service networks in any of these

countries and cannot build them overnight.

The likely prospect is for only a gradual increase

in competitive pressure on European automakers

from Japanese imports and Japanese transplants

combined.76 That goes for U.S.-owned auto firms in

Europe as well. Whatever pressure they feel will not

compare to the hammer blows suffered by the Big

Three in the United States in the 1980s. In just the

5 years from 1985 to 1990, cars made by Japanese

companies (imports and transplants) rose from 22 to

33.5 percent of a shrinkin“ g U.S. market (overall

sales declined from 11.0 million to 9.3 million

units); in the same 5 years, the market share of Big

Three cars sank from 72 to 59 percent.

There may even be an opportunity for some

modest increase in U.S. auto exports to Europe in the

1990s, in all likelihood coming from the Japanese

transplants in this country, not the U.S. Big Three.77

Later in the decade, this eastward flow across the

Atlantic might be balanced by exports to the United

States and Canada from Japanese transplants in

Europe. Each Japanese company might decide to

produce certain kinds of vehicles at only one site in

its global production system, in Europe or North

America, for high-volume sales in the region of

production and for exports in lower volumes to fill

market niches in other regions.78

A final note: The pressure of Japanese competition, mitigated though it may be, has finally made

bedfellows of European auto producers and the

American-owned firms in Europe. For 80 years,

since Ford established an assembly plant in Britain

in 1911, American companies have been treated as

outsiders by the Europeans. For example, the organization formed in the 1970s to promote the interests

of European motor vehicle fins, the Committee

of Common Market Motor Vehicle Constructors

(CCMC), resisted all efforts of the Americans to

join. However, in the debate about how to deal with

the Japanese in 1992, tensions in the CCMC became

so great that 11 of the 12 members resigned in

December 1990. Left behind was Jacques Calvet,

PSA chairman, who was intransigent in demanding

curbs on Japanese imports and transplant production. A new organization is being formed that will

include the Europeans and the Americans, but will

exclude the Japanese.

Thus the course of events has strengthened the

perception that the two American firms, with their

top-to-bottom production systems spread across the

continent, are now European, after 80 years on

probation. It seems most unlikely that the EC will

apply anything like the import or investment barriers

on these fins, or their U.S. parents, that are

contemplated for Japanese firms, even if the European market should prove disappointingly flat.

EC-92 and the United States: Conclusions

If EC-92 does substantially increase the growth of

the Community’s GNP, as many Europeans believe

it will, that should also increase demand for the

products of U.S. companies. As internal trade

barriers are cleared away, U.S. firms should find it

easier to sell and distribute their products to customers throughout the EC. Market growth could help

some American exporters to Europe, especially in

industries whose base of operations already is

global, such as the chemical industry. On the other

hand, some of the EC’s most effective protection is

focused on computers and electronics, the biggest

and arguably most important of U.S. exports to

Europe.

Even if demand for U.S. products does grow, EC

trade and public procurement policies in some

sectors will encourage U.S. firms to supply the

demand from a production base in Europe. No one

policy alone might force a U.S. firm to manufacture

in Europe. But companies will judge their effects in

the context of other factors: the new opportunities to

be found in both Eastern and Western Europe; the

shift of competitors, especially the Japanese, into

Europe; advantages for manufacturers in getting
Chapter 5--EC-92: Trade and Industry Policy .209

closer to suppliers and customers in a bigger, richer,

more unified market; and uncertainties about more

forceful protection in the future. These factors,

combined with steady pressures of protectionism,

especially in electronics, seem to be encouraging a

wave of foreign direct investment, which implies

some shift in the manufacturing base into the EC.

Thus from the U.S. perspective, the message of

EC-92 is mixed for exports to the EC but more

positive for those planning or able to produce there.

For businesses that would profit from locating

production in Europe, not all are equally well-placed

to make the shift. EC-92 could create problems for

small U.S. exporting firms, although there has been

no flood of complaints so far, according to the Small

Business Administration.79 It might also have ill

effects on small firms that are not now exporters. As

some large U.S. firms shift production into the EC,

they may not make an effort to bring their traditional

suppliers with them, and many of the suppliers are

themselves simply too small to follow.

EC Technology Policy

European firms face a difficult time competitively. In several industries, years of protection and

government support have sapped firms’ competitiveness. Now those firms are newly vulnerable, as

the national policies that formerly pampered and

protected them give way to EC policies that forbid

subsidizing one member nation’s firms at the

expense of another’s. Another form of competitive

pressure is the trend in EC policies to treat foreignowned firms operating in Europe much like locally

owned fins. As we have seen, the trend is by no

means complete or universal (witness the continued

EC favoritism toward European auto companies),

but it is strong enough that many foreign fins,

especially the Japanese, are shifting production into

the EC to evade trade restrictions.

A particular worry is the new challenge from

Japan, a more serious matter than the longstanding

American dominance of European computer and

semiconductor markets. Europeans viewed with

alarm Japanese companies’ incursions into U.S.

markets where, in some industries, they wiped out

the domestic competitors altogether. Europe was the

next target. This new competitive pressure on

European firms, and the increased intensity of

international competition generally, especially in

high-technology fields, spurred the Community to

develop policies meant to improve the competitive

performance of EC-owned firms.

First, the EC is vigorously attacking the entrenched structure of European industry through a

reinvigorated competition policy (more on this

below). Second, it is trying to develop mechanisms

to close what it sees as a crucial technology gap

between Europe and both the United States and

Japan. The new technology policy is an ambitious

attempt to use R&D consortia, partly funded by the

EC, as a means of reaching the technical frontier in

some strategic sectors, notably information technology, telecommunications, and energy. Another major

goal is to create a supranational, European orientation among EC fins.

Technology is key to improved competitiveness,

in everything from product innovation and design to

manufacturing quality and efficiency. Even before

the 1980s, European efforts to improve technology

were afoot. In 1979, the EC Commissioner for

Industry, Etienne Davignon, created a task force to

study the long-term needs of the telematics sector

(telecommunications and information technologies)

and to draft a strategy for the EC as a whole to

revitalize high-technology electronics industries.80

Eventually, this effort spawned two new European

technology development and implementation programs, ESPRIT (the European Strategic Programme

for Research and Development in Information Technology), begun in 1984, and a few years later, RACE

(Research in Advanced Communications for Europe). By the end of the decade, several other EC

R&D programs, brought together under an umbrella

called the Framework Program, had begun: BRITE,

or Basic Research in Industrial Technologies for

Europe; EURAM (European Research in Advanced

Materials), which was merged with BRITE in its

second phase; several biotechnology programs; and

a host of small programs aimed at promoting

research and development, science, and cooperation

across the borders of the EC nations. In addition, 19

countries (the 12 of the EC plus Austria, Finland,

Iceland, Norway, Sweden, Switzerland, and Turkey)

participate in a project called EUREKA (European

Research Coordination Agency).

The total effort represented by the Framework

Program and EUREKA is prodigious. The Third

Framework Program (1990-94) is funded at ECU 5.7

billion, and EUREKA projects announced between

1985 and 1990 came to ECU 7.4 billion. As the
210 . Competing Economies: America, Europe, and the Pacific Rim

Second and Third Framework Programs overlap,

exact annual finding is hard to estimate, but at a

rough estimate, public funding of European cooperative research in both the Framework and EUREKA

programs comes to about ECU 1.6 billion ($1.9

billion) per year.81

There is a new spirit of optimism in Europe now,

and the technology programs begun in the 1980s are

apart of it. But will the programs have a real effect

in changing the European technological landscape?

This is not answerable now, because many of the

initiatives launched in the 1980s are too new to

evaluate fairly; the oldest have been going less than

a decade. Many of Japan’s more impressive technical accomplishments, such as the birth and development of microelectronics manufacturing, required

far more than a decade to yield conclusive results

(though when Japan began its industrial targeting

and technology initiatives it was technically much

further behind than Europe). But there is enough

information to make tentative conclusions about the

likely performance of Europe’s new technology

efforts. So far, the programs have achieved some

things-a greater degree of transborder and multiinstitutional cooperation, a greater sharing of technical and scientific information, and generally positive

reviews on the part of participants about the contribution to technology-but they have not yet made

much difference in competitiveness.

Framework Program

The broad purpose of the Framework Program is

to improve living standards, which in turn means

boosting European industrial competitiveness and

technology .82 It was apparent to European companies and governments in the 1980s that many of the

more important technological developments of the

past decades had skipped Europe. Several indicators

show Europe’s failure to keep up. A 1988 EC study

disclosed that Europe was the world leader in only

2 of 37 technologies identified as economically

important. (The same study concluded that 31 were

dominated by the United States and 9 by Japan.)83

Europe was also behind the United States and Japan

in the concentration of R&D workers in the labor

force (figure 5-3), and Japanese inventors streaked

past Europeans in obtaining U.S. patents (figure

5-4). Moreover, the areas in which Japanese and

European patents were granted tell the story of

European decline in electronics, communications,

and information technology in particular. The Japanese patents were heavily concentrated in electronics, while Germany’s were mostly in chemicals and

materials, and France’s were a diverse list, promiFigure 5-3-Scientists and Engineers per 10,000 Labor Force

Per 10,000 workers

8 0

70

60

50

40

30

20

10 -

0

I I I I I 1 I I I I I I I I 1 I I I I 1

1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985

~ Franc e + W. German y + Japa n

+ U.K. + U.S.A.

SOURCE: National Science Board, Nationa/ Science and Errgineeting Indicators, NSB 69-1 (Washington, DC: U.S.

Government Printing Office, 1989), p. 262.
Chapter 5-EC-92: Trade and Industry Policy .211

Figure 5-4-U.S. Patents by Nationality of Inventor

Thousands

6 0

5 0

4 0

3 0

2 0

10

I ,,. *

A A

A &-

h

. u% cm v-s 94

-f I

0 I I

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988

+ France - West German y ++ Japan

~ U.K. ~ U.S.A.

SOURCE: National Science Board, Nationa/ Science and Engineering Indicators, NSB 89-1 (Washington, DC: U.S.

Government Printing Office, 1989), p. 365.

nently including nuclear energy and industrial machinery. 84

The Framework Program was set up to overcome

the European weaknesses. European industry remains strong in some high-technology fields—

chemistry, certain energy technologies, and aeronautics—but is weaker in electronics and most

information technologies (hardware and software),

motor vehicles, and biotechnology. The biggest

program, ESPRIT, tackles information technologies. RACE aims at improvement in telecommunications hardware and service and manufacturing

technologies. BRITE/EURAM’s research includes,

in descending order of funding: new materials;

reliability, wear, and deterioration; CAD/CAM and

mathematical modeling; new production technologies for textile products; new testing methods; laser

and joining technologies; membranes; and new

testing methods.85

High-technology sectors are a particular focus,

probably for the same reason that they are a focus of

industrial policy elsewhere: they are viewed as

making disproportionate contributions to wellbeing. They are knowledge intensive, often have

application in many other sectors, and contribute

disproportionately to value added. In some cases,

such as telecommunications, they are also a key part

of the infrastructure of developed nations. The lion’s

share of the ECU 5.7 billion in funding for the

Framework program goes for projects designed to

improve European competitiveness in hightechnology industries and services.86 The combined

finding for medicine and health, information and

communication technologies, biotechnology, and

nuclear fusion is ECU 2.7 billion, more than half the

total. 87 ESPRIT II (European Strategic Programme

for Research and development in Information Technologies), the biggest program, is funded at ECU 1.6

billion from 1988 through 1992. Tables 5-7 and 5-8

show the funding, purpose, and duration of the

individual programs within Framework.88

Another characteristic of the Framework Program

is that it is designed to do precompetitive research.

The definition of precompetitive is comfortably

loose (the CEC defines it as being at a stage prior to

industrial development) yet it still exerts a real effect

on projects, making officials wary of approving

those that seem too close to the market. Further, all

Framework projects are collaborative, not just among

companies but across national borders. Only projects that have participants from more than one

country can be considered.

EUREKA

EUREKA, the European Research Cooperation

Agency, was begun in 1985 at the initiative of
212 . Competing Economies: America, Europe, and the Pacific Rim

Table 5-7—Funding and Duration of the Framework Program

Funding

Main area Program (million ECU) Duration

Quality of Life

Information and Communication

Technologies

Industrial Technologies and

Advanced Materials

Biotechnology

Energy

Science and Technology for

Development

Marine Technologies

Improvement of European Science/

Technology Cooperation

Medicine-Health

Human Genome Analysis

STEP/EPOCH

ESPRIT

RACE

DRIVE

DELTA

AIM

EURET

II

BRITE

BRITE/EURAM

Raw materials

B.C.R.

Biotechnology (revision)

BRIDGE

ECLAIR

FLAIR

Agriculture

Radioactive waste

Decommissioning

TELEMAN

Fusion

JOULE

S.T.D.

MAST

FAR

SCIENCE

SPES

Large-scale facilities

MONITOR

DOSES

EUROTRA

VALUE

65

15

115

1,600

550

60

20

20

25

60

499.5

45

59.2

20

100

80

25

55

79.6

31.5

19

551

122

80

50

30

167

6

30

22

4

7

38

1987-91

1989-91

1989-92

1987-92

1987-92

1988-91

1988-90

1988-90

1990-94

1988-89

1989-92

1990-92

1988-92

1988-89

1990-94

1988-93

1989-93

1989-93

1990-94

1989-93

1989-93

1988-92

1989-92

1987-92

1989-92

1988-92

1988-92

1989-92

1989-92

1989-93

1989-92

1989-90

1989-93

SOURCE: Commission of the European Communities, EC Research Funding: A Guide for Applicants (Brussels,

Belgium: January 1990), p. 117.

France and West Germany. Although it is not an EC

project, the EC countries and the CEC itself are

members, along with the European Free Trade

Association (EFTA) nations and Turkey. Its aims are

similar to those of the Framework Program-to

promote cross-border collaboration in research and

technology and to improve competitiveness. As a

result, there is overlap between EUREKA projects

and parts of the Framework Program in scope and

funding. However, the programs do differ, principally in sources of funding. For EUREKA projects,

funding is mostly private. National governments

(and the EC) can fix their own contributions at any

level they desire up to 35 percent of total project

costs, so public funding is generally low compared

with the Framework Program. According to one

source, of the ECU 7.4 billion allocated to 388

EUREKA projects between November 1985 and

June 1990, less than 10 percent was public funding.89

EUREKA does not limit projects to precompetitive R&D. EUREKA projects can be closer to the

market than projects done under the Framework

Program, although not as close as some participants

might wish. While some EUREKA projects involve

basic research, most are on topics of immediate

commercial interest.90 Large companies involved in

both Framework projects and EUREKA sometimes

prefer EUREKA as a result.
Chapter S-EC-92: Trade and Industry Policy ● 213

Table 5-8-Glossary and Description of the Framework Program

1. Quality of Life

Medicine/health: Coordinates and improves efficiency of medical

and health research

Genome analysis: Studies use and improvement of biotechnology

in the study of the human genome

Radiation protection: Improves knowledge of human exposure to

radiation and effects of radiation on humans and their

environment

STEP/EPOCH( “ Science and Technology for Environmental Protection

European Programme On Climatology and natural Hazards):

Provides scientific and technical support for environmental

policies of the EC

ESPRIT ii (European Strategic Programme for Research and

development in information Technologies): Develops basic

technologies for European information technology industries

RACE (Research and development in Advanced Communications technologies for Europe): Contributes to introduction of

Integrated Broadband Communication taking into account

Integrated Services Digital Network

DRIVE (Dedicated Road infrastructure for Vehicle safety in

Europe): Develops information technologies to improve road

transportation efficiency and safety

DELTA (Development of European Learning through Technological Advance): Applies advanced information technology to

education and develops tools to support (long) distance

learning

AIM (Advanced Informatics in Medicine): Develops information

technologies for improving health care services at reasonable

cost

EURET (REcherche clans le Transport en Europe, or Research on

Transportation in Europe): Develops a Community transport

system to respond to increases in demand for all types of

transport necessitated by the single market

2. Industrial Technologies and Advanced Materials

BRITE/EURAM (Basic Research in industrial Technology for

Europe, and European Research in Advanced Materials):

intended to strengthen the competitiveness of European

manufacturing industry (including particularly small and mediumsized enterprises) in world markets

Raw materials (Raw materials and recycling): Enhances the

competitiveness of the Community’s industries involved with

raw materials and recycling

B.C.R. (Bureau Communautaire de Reference): improves the

reliability of chemical analysis and physical measurements to

achieve agreement among member states

3. Biotechnology

BRIDGE (Biotechnology Research for innovation, Development

and Growth in Europe): Promotes cross-border research to

speed up the production of biological data, materials and

processes needed for the optimal use of natural organisms

ECLAIR (European Collaborative Linkage of Agriculture and

industry through Research): Promotes application of new

developments in life sciences and biotechnology to products

for industrial agricultural use

FLAIR (Food Linked Agro-industrial Research programmed): Contributes to the competitiveness, safety, and quality of Europe’s

food industry

Agriculture (Competitiveness of agriculture and management of

agricultural resources): Helps farmers adapt to situations created by overproduction and restrictive price and market policies

4. Energy

Radioactive waste (Management and storage of radioactive

waste): Perfects and demonstrates a system for managing

and sorting radioactive waste

Decommissioning (Decommissioning of nuclear installations):

Develops a system to manage decommissioned nuclear

installations and radioactive wastes

TELEMAN (TELEMANipulation dan les environments nucleaires

dangereux et perturbes; or Remote handling in hazardous or

disordered nuclear environments): Develops advanced remote operated equipment for the nuclear industry, and a

scientific and technological basis for remote operating

systems

Fusion (Controlled nuclear fusion): Establishes physical and

technological basis necessary for planning of NET (Next

European Torus)

JOULE (Non-nuclear energies and rational use of energy):

Develops energy technologies that take account of new and

renewable energy sources and increases security of supply of

energy

5. S.T.D. (Science and Technology for Development): Promotes

scientific cooperation between the EC and developing countries

6. Marine Technologies

MAST (MArine Science and Technology): improves knowledge of

the marine environment and promotes new expiration technologies

FAR (Fisheries and Aquaculture Research): Promotes rational

and scientific research on resources; develops aquaculture

7. /improvement of European Science/’Technology

Cooperation

SCIENCE (Stimulation des Cooperation internationales et des

Echanges Necessaires aux Chercheurs en Europe; Scientific

and Technical Cooperation): improves general quality of

scientific R&D, promotes training through research; enhances

mobility of researchers

SPES (Stimulation Programme for Economic Sciences): Establishes cooperation and interchange between European economists

Large-scale facilities (Large -scale scientific facilities and installations): Optimizes use of large-scale scientific facilities and

installations

MONITOR (Strategic analysis, forecasting and evacuation): identifies new directions and priorities for Community research and

technological development policy; improves evacuation of

R&D program

DOSES (Development Of Statistical Expert Systems): Promotes

use of advanced statistical techniques; in particular, application of expert systems

EUROTRA (Programme EUROpean de TRAduction automatique

de conception avancee; machine transition): Develops a

machine transition system capable of dealing with all official

EC languages

VALUE (Valorization and Utilisation for Europe; Dissemination of

results): Promotes dissemination and utilization of the results

of scientific and technical research, with special consideration

of the needs of small and medium sized enterprises

SOURCE: Commission of the European Communities, EC Research Funding: A Guide for Ap@cants, op. cit., p. 117.

—
214 ● Competing Economies: America, Europe, and the Pacific Rim

EUREKA is like Framework in putting special

emphasis on high-technology areas. Its heaviest

funding goes to robotics and production automation,

closely followed by information technology and

communications. Other fields with strong support

are medical and biotechnology, transport, new

materials, lasers, energy, and the environment (see

tables 5-9 and 5-10).91

One of the most important EUREKA projects is

JESSI, the Joint European Submicron Silicon Initiative. Begun as a l-year feasibility study in December

1986 and going through another 18 months of

project definition and participant acceptance, the

project started work in mid-1989 toward its goal: to

produce static and dynamic random access memories (SRAMS and DRAMs) and logic chips using 0.3

micron feature sizes by 1995.92 Major cooperators in

JESSI include Philips and Siemens, who had a

relationship as a result of their Megabit (Mega)

project, an earlier effort aimed at producing 4-

megabit DRAMs (Siemens) and l-megabit SRAMS

Table 5-9-Funding of EUREKA Projects, by Area

Total cost, Number

Project area (million ECU) of projects

Energy Technology . . . . . . . . . . . . . . . . . . . . . 494 11

Biotechnology and Medical Technology . . 434 41

Communication Technology . . . . . . . . . . . . . 809 15

Information Technology . . . . . . . . . . . . . . . . . 820 35

Transport Technology . . . . . . . . . . . . . . . . . . 559 18

New Materials . . . . . . . . . . . . . . . . . . . . . . . . . . 136 17

Robotics and Production Automation . . . . . 269 11

Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . 523 11

SOURCE: EUREKA Secretariat, EUREKA: Tbgether for the future (Brussels, Belgium: 1989), passim.

(Philips). The Mega project, begun in 1983-84, was

supported by the German and Dutch Governments to

the tune of DM 320 million and DM 160 million,

respectively; Siemens paid DM 1.4 billion and

Philips DM 1.5 billion for production facilities. In

the end, Siemens acquired production technology

and know-how to make 4M DRAMs, and had an

operation actually making IM DRAMs in Regensberg, West Germany. The Mega project and

other development work at Siemens no doubt

contributed to this success, but so did Siemens’

licensing of Toshiba’s IM miniaturization technology in 1985.93

However the success of the Mega project maybe

judged, European microelectronics companies were

still behind the world leaders at its conclusion and

were facing escalating competitive pressure, particularly from the Japanese, whose market share in

Europe was increasing steadily. Philips and Siemens

together initiated the first discussions of JESSI,

which other companies later joined. By 1988, a

JESSI planning group included 29 companies and

institutes from six countries. They put together a

multiyear ECU 3.8 billion research effort with four

subprograms: technologies for chip production,

chipmaking equipment and materials, applications

of microelectronics, and basic research (figure 5-5).

The overall objective is “to secure the availability of

world-competitive microelectronics for the European industry.”94 Recently, however, Philips withdrew from its leadership of the SRAM project of

JESSI, probably reflecting a severe downturn in

Philips’ financial performance and large cutbacks in

operations generally. Philips will probably abandon

Table 5-10-EUREKA Projects: Number of Projects by Funding Category

Project cost

(million ECU) BIO COM EN V ENE INF MAT ROB IA S TRA Total

<5 . . . . . . . . . . . . . 23 4 2 5 19 11 15 2 9 90

>5<10 . . . . . . . . . 3 1 1 2 6 2 11 0 3 29

>10 <20 . . . . . . . 9 3 2 0 4 3 9 4 1 35

>20 <40 . . . . . . . 3 2 3 1 2 0 8 2 1 22

>40 . . . . . . . . . . . . 3 5 3 3 4 1 6 3 4 32

Total . . . . . . . . 413 15 11 17 35 17 49 11 18 208

KEY: BIO = Biotechnology and Medical Technology

COM - Communication Technology

ENE - Energy Technology

ENV - Environment

INF - Information Technology

MAT - Materials Technology

ROB - Robotics and Production Automation

LAS. Laser Technology

TRA - Transport Technology

SOURCE: EUREKA Secretariat, EUREKA: Together for the Future (Brussels, Belgium: 1989), p. 15. The total number

of projects represented here is current as of June 1989.
Chapter 5--EC-92: Trade and Industry Policy .215

Figure 5-5-JESSI Program: Functional Overview and Structure of the European

Microelectronic Program

Europrojects

Application

I

CAD tools and environment

4

I Process development I

DRAM/ V R AM SRAM EPROM Logic

Technology

I Manufacturing science I

4

Selected strategic areas

Equipment and

materials

k

Mate- Litho

rials

SOURCE: JESSI Planning Group.

Non- Back Clean

Iitho end room

Design

methodology

Modeling

and

simulation

Advanced

processing

steps

Process

integration

Basic

and

long-term

research

1

the memory business altogether. While this is not by products before their foreign competitors. This may

itself a crippling blow to JESSI, the fact that other

participants are also in trouble is not a good omen for

JESSI’s eventual outcome.

JESSI is very much a commercial undertaking. It

is principally a EUREKA project but has some

funding from ESPRIT as well. ESPRIT funding goes

into the basic research subprogram, which accounts

for only 14 percent of JESSI cost and 22 percent of

the manpower. Nevertheless, the contribution to

JESSI accounts for 30 percent of the funding in

ESPRIT’s microelectronics program; some expect

the overlap between the ESPRIT microelectronics

program and JESSI to be nearly complete within a

few years.

Some of the impetus for the Mega project, JESSI,

and Framework’s ESPRIT programs probably arose

from European concern that competing with Japan in

electronics would be a different ballgame from

competing with U.S. companies. According to one

analysis:

Because Japanese chip producers were part of

larger systems houses, foreign competitors began to

suspect that systems divisions of the same Japanese

companies were getting access to leading edge

have been perfectly natural . . . but it put foreign

systems houses at a competitive disadvantage in

getting timely access to the new parts. The resurgence of European support for semiconductors in the

mid-1980s, in frameworks like the Mega project and

the ESPRIT program, in some measure reflected

these mounting concerns. . . . Back in the late 1970s,

reliance by European systems houses on U.S.

semiconductor companies for supplies of advanced

chips, though far from welcome, did not pose a

strategic problem for European industry. The U.S.

merchant chip manufacturers were not, for the most

part, vertically integrated into downstream systems.

All competitors enjoyed roughly equal access to

state-of-the-art components.95

Emphasis on Cooperation

Cooperation across institutions and borders, and

among customers, competitors, and suppliers, is

valued by Europeans both as a means to improved

competitiveness and as a contributor to European

political and economic integration. Different kinds

of cooperation serve different purposes. Cooperation

across borders is a frequently mentioned goal, based

on the underlying assumption that Europe’s competitive problems stemmed in large part from both

fragmentation of markets, which deprived compa-
216 . Competing Economies: America, Europe, and the Pacific Rim

nies and industries of economies of scale and scope,

and fragmented research efforts, which resulted in

overlapping but underfunded research and development projects.

Claire Shearman points to European market

fragmentation as an important cause of Europe’s

weakness in electronics and information technology,

and observes that the effect may have been aggravated by the protection of most national markets,

which led European companies to focus more on

domestic than on international markets.96 Undoubtedly, the ability to achieve economies of scale is

important in some parts of the electronics industry.

The cost of investment in new plant and equipment;

the difficulties and costs of acquiring engineering,

design, and production expertise; and the efficient

scale of operation are all quite high compared with

most other industries. For example, a new wafer

fabrication plant and its equipment can require an

investment of half a billion dollars.

However, with a few important exceptions, such

as electronics products, telecommunications equipment and service, and large jet aircraft, limitations

imposed by markets the size of most EC members

are probably minor. For example, it is unlikely that

national markets in Europe were too small to have

allowed producers of textiles, many types of machinery, paper, and some chemicals and pharmaceuticals to produce at an efficient scale. Moreover,

while the European market was far from unified and

cross-border movement of goods was not without

trouble, 60 percent of European trade in the late

1980s was with other European countries, indicating

that European companies were already focused on

European, rather than strictly national, markets.97

In telecommunications, the fragmentation was

real, but not strictly a function of market size.

Telecommunications services in EC nations are

provided by governments, through ministries of

posts, telegraph, and telephone (PTTs); usually

equipment is procured from one or two companies,

frequently national champions. Because PITs retained monopolies over provision of services and

tight control over procurement of equipment, different countries introduced new technologies (hardware and services) at different rates. The rates were

mostly slower than in the United States, where

because of deregulation private companies could

offer many new services to American consumers.98

In addition, there was no coordination of the

different national services, making equipment and

software incompatible from one country to the next.

This made international telephone service inconvenient at best. According to one account,

To establish a private line between Italy and the

Netherlands in the early 1980s, a user had to deal

with every PIT in between, frequently making it a

nightmare to trace and correct breakdowns. . . .

Tariff differentials were striking. A 500-kilometer

leased line could cost ECU 840 per month in Britain,

and ECU 2,230 per month in France. European

businesses reported tremendous difficulties in establishing reliable, modern, efficient telecommunications

links across Europe.99

Fragmentation of research and development efforts, public and private, is also seen as a handicap.

According to the CEC, the fact that each of the large

members and several smaller ones had mounted their

own research efforts in high-technology sectors

resulted in many small research efforts, most with

inadequate resources. Coordination among them

was inadequate, information was diffused poorly,

and there was duplication of effort.100

In response to the problems they see as arising

from fragmentation, EC policymakers encourage

cooperation of all kinds. This includes cooperation

across borders, between customers and suppliers,

between industry and academia, between large and

small companies, and among competitors.

Cooperation Across Borders

International collaboration is not strictly a European development. For the past decade or so,

multinational firms have expanded their cooperative

relationships with firms in other countries through a

variety of arrangements: joint ventures, licensing,

marketing agreements and exchanges, direct and

indirect investments, mergers and acquisitions, and

R&D collaborations.101 In many high-technology

sectors, the firm that can best integrate its technical

expertise with that of other firms is better equipped

than one that relies more on in-house developments.

Japanese fins, in particular, have shown how much

can be accomplished by integrating technological

developments from around the globe with their own

strengths in manufacturing and design and close

collaborations with customers and suppliers in

Japan.

The multinational enterprises responsible for the

swell of technical collaborative arrangements around
Chapter 5--EC-92: Trade and Industry Policy ● 217

the world are mostly Japanese, European, or American. The EC, in promoting international collaboration in technology, encouraged a trend that already

had a head of steam, but there is little doubt that the

encouragement was real; many of the resulting

collaborations would not have happened without the

Framework program as an enticement. For example,

a senior manager in Plessey Research ventured the

opinion that Plessey and Thomson, as competitors in

gallium arsenide research, would ordinarily not

work together, but they are doing so on an ESPRIT

project (Advanced GaInAs-based Devices for High

Speed Integrated Circuits)l02 because “you have to

collaborate in order to get funding. ’’103

Even where the programs do not stimulate wholly

new alliances, they strengthen existing ones. An

evaluation of BRITE found that it was an ‘excellent

catalyst’ of transborder collaboration. Although

three-quarters of the bilateral relationships formed in

the program already existed, BRITE strengthened

the relationships, according to the evaluators, and

helped turn bilateral relationships into multilateral

ones .

l04 The assessment was not all favorable;

evaluators found that BRITE was not particularly

effective at helping potential participants in isolated

places find partners.

Preexisting relationships may be the norm in other

parts of the Framework Program besides BRITE.

One executive of Siemens, the largest single recipient of ESPRIT funds, states that the company wants

to work only with partners it has worked with

previously, and does not use the Framework Program as a dating service. Bad experiences with

strangers account for this policy.105

Evidence from several quarters indicates that both

Framework and EUREKA have succeeded in engendering cross-border collaboration. European evaluators seem confident that the Framework Program has

done so. EUREKA has linked more than 800

organizations in more than 200 projects. The CEC

notes that the Framework Program has many more

applicant consortia than the available funds can

support .

l06 Part of this success is due to the

Framework Program’s requirement that funded projects must have participation from different countries. 107 Part is undoubtedly driven by the new

optimism for market integration in Europe and the

stimulation of European technology and science

initiatives generally. The threat from a strong

outsider (in this case, Japanese and American

technology companies) may also have played a role,

especially in industries where the time and money

needed for a critical mass of R&D are difficult for

companies to bear individually.

Customer-Supplier Cooperation

The success of Japanese firms is due in part to

their development of links upstream to suppliers and

downstream to customers. These links allow the

joint development of technologies, standards, and

quality controls. The days when arm’s-length relationships with customers and suppliers were regarded as the best business practice are ending,

especially when development costs of new products

and techniques are high.

Development of large jet aircraft is an example.

The cost of developing the Boeing 777 is likely to be

in the neighborhood of $5 billion, not counting the

engine, and Pratt & Whitney estimates the cost of

developing a new high-thrust engine at $2 billion

(see ch. 8). High development costs are nothing new

in this industry; in the late 1970s, the cost of

launching the 757 and 767 exceeded the net worth of

the Boeing Co., and the development cost of the

DC-10 was over three ties the capitalized value of

the Douglas Co. Still, aircraft development costs are

rising exponentially, with the result that all the major

aircraft manufacturers are asking first-tier contractors to shoulder more of the development costs.

Cooperation is also becoming more important in

electronics. Producers of computers, telecommunications equipment, and consumer electronics can no

longer rely on off-the-shelf commodity chips as the

primary building blocks of new products. Integrated

circuits are now much more often application

specific, and even entire systems can be integrated

onto a single chip. This means that systems makers

must transfer design information, including proprietary design information, to semiconductor producers, who could at least in theory convey that

information to the competitors of the systems

producers. 108

These technical changes make vertical integration—production of components as well as final

products within a single fro-an increasingly

attractive strategy, and reliance on a vertically

integrated competitor for semiconductors an increasingly risky one. 109 All the big Japanese systems

companies are vertically integrated. Few American

or European systems makers are, and even those that

292-889 0 - 91 - 8 QL:3
218 ● Competing Economies: America, Europe, and the Pacific Rim

are still have to depend on outside suppliers for key

components. During the 1980s, the outsiders in

question were more and more often Japanese, for the

vertically integrated, well funded, and technologically proficient Japanese firms had seized the

competitive high ground in semiconductors and

were steadily capturing world market share. Systems

companies in America and Europe became uneasy

about relying on their powerful competitors for

components. This unease spawned efforts to improve coordination between semiconductor equipment producers and semiconductor makers, and

between semiconductor producers and systems makers, in both the United States and Europe. Cooperation between customers and suppliers in electronics

became a survival tactic. In its evaluation of

ESPRIT, the CEC made this point emphatically:

The belief that all the industries which are

becoming dependent on embedded microelectronics

can develop competitively by purchasing standard

components from remote and competing nations is

fallacious. Close working relationships between

major semiconductor users and suppliers are essential.110

The idea of fostering vertical linkages is not

confined to high-technology industries. There are

advantages to coordination and cooperation even in

less technology intensive industries such as textiles

and apparel. For example, increasing coordination

all the way along the chain from apparel design

through fiber and textile production, sewing, wholesaling, and retailing is the objective of the Quick

Response program of leaders in the U.S. fiber,

textile, and apparel industries.

The sparse information available on the subject

suggests that the Framework Program has had some

effect in generating links between customers and

suppliers. Many of the BRITE projects involved

small and medium-sized firms making capital goods

(e.g., machinery and equipment) for industrial customers; here, the diffusion of technology that BRITE

achieved was in the interest of all participants.lll As

the evaluation of the BRITE program stated:

Projects which unite customers and suppliers are

usually successful because there is a community of

interests. 112

JESSI explicitly emphasizes customer/supplier

links. Like Sematech, JESSI recognizes the advantage of Japanese vertical integration, and one goal is

to help overcome this advantage by forging stronger

bonds between customers and suppliers. Its planning

report states:

What is lacking-above all-in Europe is the

spirit of togetherness which is typical for Japan

Incorporated. Japanese companies compete strongly

amongst each other, but not before having shared in

the effort to conquer a new market for Japan. Many

semiconductor manufacturers, especially in [the] far

east, are integrated into vertically structured system

houses. Therefore, careful attention must be paid to

defining user/producer interfaces in order to guarantee protection of the users’ know-how.llq

User/supplier links are less prominently stated in

RACE documents, but the goal is there nonetheless.

Closer relations among industrial suppliers of equipment and telecommunications service providers (the

PTTs) is one of the aims of RACE, where such

linkage is regarded as necessary to accomplish

RACE’s other goals of making Integrated Broadband Communications and other innovative services

available across Europe and setting common standards for European telecommunications services.114

There is evidence that such linkages may be

happening. RACE mostly aims to provide services,

but participation is heavily tilted toward telecommunications equipment manufacturers. With 395 participations in RACE, equipment makers have a

larger share of total participations than any other

group. It can be inferred from this heavy participation, plus the positive evaluations of RACE by

participants, that both suppliers (the equipment

manufacturers) and users (the PTTs) find it beneficial to work together in RACE projects.115

There are a few hints that achieving cooperative

relationships between users and suppliers could be

improved. The CEC’s evaluation of ESPRIT acknowledged that more inputs from major software

system suppliers would be valuable in the Software

Technology part of ESPRIT.. The program has made

technical progress in software technology, but is not

yet exploited commercially, and the time when all

commercial programmers use standard techniques,

and all universities teach them, is still far off.116 The

ESPRIT evaluators made similar comments on the

Computer Integrated Manufacturing (CIM) projects.

Computer integrated manufacturing requires an

understanding not only of electronic equipment, but

also of mechanical equipment; the evaluators noted

that the absence of so-called mechatronic projects in

ESPRIT, which united mechanical and electronic

skills, was regrettable. The recommendation was to
Chapter 5--EC-92: Trade and Industry Policy .219

pay more attention to user attitudes and understanding, which, more than a shortage of technology,

delay wider adoption of CIM in Europe.117

Cooperation Between Competitors

This is one of the most difficult of all forms of

cooperation. Competition and cooperation are not

mutually exclusive, but neither are they broadly

compatible. Competition, and the benefits that it

brings to companies and economies, often falls apart

if cooperation extends to collusion. In Japan, industrial interests and bureaucrats usually manage to

balance promotion of competition-assuring that no

one firm attains too great a market share within

Japan-with encouragement of cooperative arrangements in R&D (and in some circumstances, production).118 But even in Japan, with its long tradition of

industrial cooperation and a deeply rooted perception of the need for national cohesion, cooperative

research is difficult to manage. It took several years

of “administrative massaging” by the director of

Japan’s VLSI (Very Large Scale Integration) Project

to overcome the suspicion and fears of the participants from five companies and MITI’s Electrotechnical Laboratories before real research couldbegin.119

In Europe and America, where cooperation without

collusion is less well established, the problem is

greater.

Evaluators of the BRITE program are unequivocal on this point.

Projects which bring together competitors are

unlikely to succeed. The Commission. . . hoped that

cooperation in research might lead to such links. But

these industrialists are often engaged in stern competition and their research forms the core of their

business. When they do join together for research, it

is usually for research that is on the periphery of their

true concerns and therefore of doubtful industrial

value; otherwise, disagreement soon arises. European culture is not the same as Japanese culture, and

the only way any cooperation of this sort can succeed

is if it is imposed at the highest level in the company.

In reality, a number of projects in this category have

patently failed, and the Commission must stop

them. IN

The evaluators of ESPRIT came to a somewhat

different conclusion. They note that early work plans

for ESPRIT, though put together substantially by the

“Big Twelve” European information technology

companies, 121 “did not address the core business

needs of the principal protagonists and concentrated

on activities where competitors could actually agree

to collaborate in a ‘precompetitive’ way.’’122 Unlike

the BRITE evaluators, however, the ESPRIT review

board did not regard this as reason for stopping

projects; rather, the problem was treated as minor.

Cooperation Between Academia and Industry

European universities have long been viewed as

aloof from the concerns of industry, compared with

those in the United States and Japan.123 One goal of

the Framework Program is to reinforce a growing

trend toward stronger relationships between academia and industry. ESPRIT and BRITE, for example,

have specifically encouraged university and industrial researchers to unite in certain research projects.124 In ESPRIT, 75 percent of the collaborations

include firms and academic research units. 125

Although the overall impression is that industryacademic cooperation is good for both and should be

encouraged, there are a few caveats. These partnerships will help bring academic research out of the

ivory tower and into the real world. But the CEC

warns that universities should not let industry’s

R&D funding lure them into abandoning inquiries of

a fundamental or scientific nature and concentrating

too heavily on short-term problems of companies.

While noting that some shift of emphasis was

exactly what was needed, the CEC is concerned that

the pendulum could swing too far. University

participants in BRITE had the same concern; several

academics indicated to the BRITE evaluation review

team that the industrial participants’ emphasis on

empiricism was excessive and could undermine the

value of the results.126 Further, exclusive relationships with industry could restrict the availability of

research reports from universities, a problem already

emerging in the United States.127

These caveats are relatively minor. Most collaborative projects involving academia are viewed by

ESPRIT participants as working either adequately

(45 percent of respondents) or well (over 20

percent). 128 In BRITE, three-quarters of the contractors viewed collaboration between industries and

universities as enhancing the projects’ chances of

success. 129 However, this kind of cooperation is not

sufficient to promote competitiveness in Europe

without managerial know-how and skilled people to

exploit market opportunities.
220 ● Competing Economies: America, Europe, and the Pacific Rim

Precompetitive Projects

As noted, the Community is trying to find a way

to balance competition and cooperation and obtain

the best from both. One way to strike a compromise

is to limit projects to precompetitive R&D. According to the CEC, this means limiting projects to “a

stage prior to industrial development, or not yet

‘market ready. ’ This is to ensure that EC research

does not lead to any distortion of competition, which

would be in breach of the EC Treaty regulations. 130

This is not a precise definition. There is some

understandable puzzlement over what is precompetitive, and some frustration with precompetitiveness

as a requirement for acceptance. The BRITE evaluation team said it best:

The panel remains puzzled by the incorporation

of the concept of pre-competitivity in a research

programme whose primary goal is to enhance the

competitiveness of European industry. This is a

major contradiction that the Commission cannot

escape. Some excellent projects were not funded

because they were considered too ‘competitive” by

the selection team. Concern about the idea of

pre-competitivity has also had the effect of pushing

some projects upstream so that their industrial

interest diminished. The panel fully realizes that

there were good legal reasons for this criterion to be

written into BRITE. But the law should be the

servant of the Community, not its master.131

This concern is echoed by some participants. For

example, one member of the Industrial Research and

Development Advisory Committee (IRDAC) to the

EC expressed frustration that no one knows what

‘‘precompetitive’ means, and stated that efforts to

keep JESSI precompetitive were making it uncompetitive.132 A participant in JESSI from Siemens

disagrees with the perception of JESSI as precompetitive, and believes that the consortium is successfully

developing complex integrated circuits that can be

integrated into systems; ESPRIT, according to this

researcher, had failed in this respect.133 Another

observer notes a strong conflict between precompetitive research and the process of developing a specific

product.134 The limitations imposed by the requirement that the research be precompetitive tend to

show up often in comparisons of ESPRIT and

EUREKA, which is not required to be as far from the

market as the Framework Program.

The EC will probably continue to stress precompetitivity, partly because the law constrains it to, and

partly because many people still think that it is an

appropriate guiding principle.135 But certain adjustments can be made. In the second phase of ESPRIT,

work continues to be precompetitive but more

emphasis is placed on projects of clear benefit to

industry. Among the goals of ESPRIT II are

providing a sustainable capability to design and

produce application-specific intergrated circuits (ASICs),

developing technologies needed for next-generation

information processing systems, and enhancing the

ability of European industry to integrate nextgeneration processing into complete application

systems.136

Small Business

The Framework Program emphasizes participation by small business. In Europe, as in Japan and the

United States, most R&D is carried out by large

organizations, with a few notable exceptions such as

Silicon Valley microelectronics startup firms. Small

businesses often lack staff and money to keep

abreast of technological change and are often left

behind as technology advances. To compensate,

many developed nations have various types of

extension and training services for small businesses;

Japan’s is particularly well funded and extensive.137

The EC’s emphasis on including small and

medium-sized enterprises (SMEs)138 in the Framework Program is intended to improve their technological competence and ability to innovate. Both are

important goals, though the former is explicit and the

latter most often implied.

Some programs are naturals for SMEs, and others

are not. ESPRIT, whose designers were the Big

Twelve European information technology companies, is not. Much of the R&D for information

technology (IT) involves too great expense for most

small firms to handle. While there is a natural place

for small, specialized firms in supplying the large IT

companies with specialty materials and chemicals,

production equipment, and other niche products,

even these are difficult markets to enter because of

high capital requirements and the increasing domination of Japanese fins, many of which are

conglomerates and operate on a global scale. Even

so, ESPRIT evaluators feel that the program has

been successful in attracting and funding projects for

SMEs. The Big Twelve participated in 70 percent of

the ESPRIT projects and received 50 percent of the

funding; SMEs participated in 65 percent of the

projects and received 14 percent of the funding
Chapter 5--EC-92: Trade and Industry Policy .221

(figure 5-6). SMEs’ share of the program has

increased and that of the Big Twelve has fallen.139

RACE is another project that does not invite easy

participation by SMEs. RACE’s design, like

ESPRIT’s, relies heavily on large organizations-in

this case, the large PTTs that provide telecommunications service in EC countries, and telematics

equipment producers. RACE evaluations are nearly

mute on the topic of SME participation. The

management audit of RACE in 1989 discloses that

just over two-fifths of RACE partners were SMEs,

but there is no mention of their share of funding

(figure 5-7).140 By size class, the largest number of

participants had more than 5,000 employees.

BRITE, on the other hand, was built for small

enterprises; not entirely, to be sure, but substantial

participation of SMEs was intended and desired in

BRITE in a way that was never true of ESPRIT and

RACE. The exact share of SMEs in BRITE funding

is unknown; the evaluation team found that the

reported figure of 31 percent is misleading because

some of the companies placed in the category of

SME are part of larger enterprises.141 But it is also

very likely true that a larger share of BRITE’s

funding goes to SMEs than is the case for RACE or

ESPRIT

The CEC seems generally satisfied that it is

meeting its goals in attracting and funding proposals

horn SMEs, at least in

Figure 5-6-ESPRIT I

SMEs

14%

the big Framework programs.

Funding Allocated by Sector

The Twelve

50%

SOURCE: Commission of the European Communities, Communication

from the Commission to the Council and the Parliament

Concerning the Pedonnance and Results of the Programme

ES,”RIT, SEC(89) 1348 final (Brussels, Belgium: Sept. 7, 1989),

p. 12.

Figure 5-7-Size of Partners in RACE Program

Number of companies

120 I 110

100

t

8 0

t

k

60 55

4 0

20

n

25

46 45

22

“ Les s 51-100 101-500 5ol - 1,001- More than

than 50 1,000 5,00 0 5,000

Number of employees

SOURCE: Commission of the European Communities, RACE ‘W, (Brussels, Belgium: 1990), p. 93.

Whether or how much SME participation is contributing to the overall aims of Framework is less clear.

Large organizations do the bulk of R&D for a good

reason: R&D is generally an expensive proposition,

requiring specialized equipment and people, a longer

term outlook, and stable financing; many small

enterprises are unable to mount such efforts and

most do not need to. There is merit in small

organizations’ having the technological expertise to

keep up with the larger organizations that they

supply, and in that sense bringing them into R&D

consortia is helpful. But the most pressing technological issue for SMEs is usually not how to do more

R&D, but how to apply what is known, as the BRITE

evaluators said:

The challenge facing traditional S.M.E.’s—like

many other firms-is not in fact the need to adopt

new technology, but rather to integrate into their

production methods technologies that already exist

on the market. Such an objective, which is crucial to

the future of European industry, does not fall within

the scope of BRITE . . . [T]he Commission should

discuss the possibility of launching a much larger

and more ambitious programme than the current

SPRINT142 programme, with suitable procedures for

promoting the dissemination of technologies within

the industrial fabric, and in particular for small and

medium-sized firms.143

Another salient finding of the BRITE evaluators

is that SMEs benefit from contacts with larger

organizations (companies and universities), in part

because those larger organizations have easier access to information and can make it available to
222 ● Competing Economies: America, Europe, and the Pacific Rim

smaller companies. Whether large firms benefit in

equal measure from their participation in consortia

with small ones is less clear (see the section on

Sleeping Partners).

International Participation in the

Framework Program

 The Framework Program was designed to improve the competitiveness of European firms vis-àvis American and Japanese firms. Naturally, this

makes U.S. and Japanese efforts to join Framework

Program consortia a thorny issue.

Up to now, American firms that want to participate have been given access, but not always as much

as they would like. For example, IBM was allowed

to participate in JESSI, which receives some funds

from ESPRIT, but is not permitted to take part in

working groups or committees that make management decisions about projects. RACE, on the other

hand, has allowed IBM to function as a prime

contractor, and EUREKA projects let IBM participate as the only computer company in a given

consortium. In contrast, ESPRIT projects require

IBM to have a European computer company as a

watchdog. 144 Although participation by IBM is

becoming more accepted, this does not end all the

problems, either for IBM or for Europe. IBM would

like unconstrained access, especially since it has

substantial manufacturing and R&D in Europe (IBM

conducts 12 percent of its R&Din Europe, 8 percent

in Japan, and the rest in the United States). One

reason for IBM’s restricted access to JESSI and the

Framework Program is that European companies do

not have equal access to Sematech, which Europeans

view as a comparable program.

More to the point, Europeans are still uneasy

about access of foreign companies. While a few

American companies besides IBM (and many companies from EFTA countries) have been able to

participate in Framework and EUREKA projects,

the question of who should get in is unsettled and

controversial. An official of the Dutch consumer

electronics firm, Philips, maintains that while the

frost goal of the Framework Program is the integration of Europe, the second goal (especially of the

telematics programs) is to break the domination of

AT&T and IBM.145 This statement is no doubt an

exaggeration, but if there is any truth in it, uneasiness about even limited participation on the part of

IBM and AT&T could be expected. Nevertheless, it

could be self-defeating to exclude IBM from projects such as JESSI, which is supposed to foster

tighter links between supplier and customer fins.

As one IBM official put it: “We have to be in JESSI;

all the key players--our suppliers and users—are

there. IBM is the largest buyer and supplier of chips

in Europe.” The same goes for IBM’s participation

in RACE, Prometheus (a EUREKA project that links

modern information and automotive technologies to

improve transportation efficiency and safety), and

other projects: 3 years ago, IBM was involved in

only 3 projects; now it is in 20.146

Still more problematic is the question of Japanese

participation, for Japanese firms are a greater

competitive threat than most American firms, especially in information technology. Two things concern Europeans facing dependency on Japanese

suppliers. For one, the big Japanese firms not only

supply components, they also compete directly with

systems integrators. Depending on a competitor for

key supplies is risky at best. In addition, many fear

that the Japanese firms will act nationalistically, or

in keeping with long-established intercompany ties,

serving the needs of their Japanese customers before

foreign customers. Until 1990, the issue of Japanese

participation in the Framework Program was avoidable. Then Fujitsu, a longstanding supplier of products (both components and systems) to the British

computer firm ICL, bought 80 percent of ICL. ICL

was one of the original Big Twelve information

technology companies in Europe and a participant in

many ESPRIT projects. Although ICL met and still

meets the EC’s criteria for participation in the

Framework Program-an integrated presence in

Europe, including R&D, sales, and manufacturing147

—the prospect of one of the Japanese giants having

immediate access to and decisionmaking power in

ESPRIT’ projects is forcing a reevaluation. As of

spring 1991, ICL had been removed from the

working committee that manages JESSI and was

invited out of three of five projects.

So far, beyond the Fujitsu-ICL imbroglio, Japanese firms have not participated in Framework

projects. Whether this is because they have been

uninterested, reached a polite understanding that

they were unwelcome, or been formally deterred, is

unknown. l48 But the participation of Japanese companies is likely to be a bigger issue in the future, for

they are beginning to knock on the Commission’s

door, as one participant put it, to ask for admission

to the programs.149
Chapter MC-92: Trade and Industry Policy .223

Sleeping Partners

The Framework Program is required to contribute

to the nations that fund it, though not in exact

proportion to the funding. The contributions from

the large economies--Germany, France, Great Britain, and Italy-are much greater than those of the

smaller countries, particularly ones like Portugal and

Greece that lack well-developed high-technology

sectors. While every project need not scrupulously

include participation from every member nation, and

participation does not have to match exactly relative

funding levels, there is some pressure to include

participants from tie smaller and weaker economies.

Sometimes this is a minor problem. A few

representatives from strong system companies mention that a drawback of Framework projects is that

they were pressed to include unwanted organizations that contribute little to the project; these are

variously termed sleeping partners or alibi partners.

In response to questionnaires, participants in BRITE,

RACE, and ESPRIT have all indicated that they are

generally satisfied with the alliances formed within

the programs, but not universally. Some of the

disenchantment is undoubtedly due to the necessary

coupling of strong and weak enterprises; this factor

is also sometimes viewed as a weakness in the

American high-technology consortium, Microelectronics and Computer Consortium. However, the

inconvenience may be balanced, in part, by the

benefits gained by weaker enterprises and nations. 150

Performance of Framework and

EUREKA Programs

Europeans are excited about the Framework

Program and EUREKA. Most are happy with the

significant increase in transborder cooperation, new

linkages forged between companies and academic

institutions, and alliances between small and large

enterprises. The programs have also contributed to

standard-setting in Europe. They claim to be eliminating wasteful duplication within national programs, as well as fragmented and unconnected

national programs themselves. And they have produced some commercially exploitable results.

What the technology programs have not yet done

is make much of a dent in the basic problem:

Europe’s slipping competitiveness in high technology. It may be too soon for the programs to have

made such a difference; the oldest of the programs

have been in operation for less than a decade.

Moreover, Framework and EUREKA are only part

of Europe’s new economy, and many of the more

sweeping changes planned for the single market

have not yet been implemented.

Accomplishments—In some ways, the programs

have much to show for the short time they have been

in operation, most notably an increase in cooperation. International cooperative agreements were on

the upswing before Framework and EUREKA got

into gear, but observers inside and outside Europe

agree that the programs have increased European

firms’ and research organizations’ knowledge of

each other, helped to arrange collaborations that

would have been difficult before, and set the stage

for future alliances. They have helped producers and

users to hook up, and sometimes have become

indispensable for that purpose. There is still room for

improvement; RACE and ESPRIT have been criticized for not including enough user input, and

concentrating too much on the agenda of the Big

Twelve. But for the most part, policymakers, participants, and Europe in general seem pleased with the

progress in linking up users and suppliers.

An often-cited contribution of the technology

programs is in standard-setting. The programs help

in two ways: greater communication among companies working in the same business helps to build

consensus on harmonizing varying standards; and

the cooperation of the 12 nations helps to make

Europe more of a force in world standard-setting.

All EUREKA communications projects at least

touch on aspects of standardization, and five aim

directly at developing standards, including, for

example, a project to develop high-definition television production and broadcasting standards and

equipment for producing and receiving next -

generation television broadcasts.151 RACE is particularly interested in developing standards for integrated broadband communications (IBC) across the

EC by 1995, which in turn will require common

standards for telecommunications equipment and

service. These and other such projects may lead to

EC-wide standards and possibly to worldwide standards. That is both a significant accomplishment of

European technology programs and a source of

international friction. Foreign companies fear that

by being excluded or accorded second-class status

(e.g., being left out of the critical process of making

decisions) in technology programs they will be at a
224 . Competing Economies: America, Europe, and the Pacific Rim

competitive disadvantage with regard to standards,

for it is unlikely that their own product standards

would be considered for the European Community .

152

The Framework Program has also helped to solve

one of Europe’s particular problems: knitting together 12 separate, sovereign nations. The EC does

not intend to become one unified economy and

political entity-a United States of Europe-but one

major aim of unification is to reduce the fragmentation and division that characterize the 12 members

now. The Framework program, along with the 279

directives of the Single Market Act, will help to

lower technical barriers among these nations, and to

reduce the fragmentation caused by the traditions of

different European institutions. If the evaluations of

Framework programs are any indication,153 Europeans are confident that the Framework programs

have, in the words of the ESPRIT evaluators,

“influenced several thousand of scientists and

engineers in information technology fields to think

European and to do so in a positive way. ’’154

Another contribution of the programs is helping to

avoid duplication of effort. This is a benefit claimed

for most R&D consortia, but in Europe’s case may

be well-founded because of prior national support

for duplicative efforts. Several participants mentioned the efficiencies of learning from others.

Officials of Siemens, speaking of the company’s

participation in the Eurolaser project, indicated that

one of the benefits was the ability to go to the labs

of another company and possibly do investigations

there. This, according to Siemens, helps a company

to do its technical work more economically.155

Duplication, or redundancy, is another issue that

cannot be neatly resolved. The benefits of avoiding

wasteful duplication are obvious, but there is also a

danger of eliminating all overlap. Von Hipple points

out that the best climate for innovation is one in

which many organizations are involved in independent efforts to solve the same problem. There is

perhaps a danger that too much cooperation could

focus innovation efforts too narrowly. However, that

danger probably is minuscule for Europe now,

especially in view of the fact that some EUREKA

projects are similar to but independent of EC

programs. 156

Competitiveness-The Framework program and

EUREKA have not yet made a big difference in the

competitiveness of European industry. Whether they

are on track to do so is an open question.

EC evaluations tend to avoid the issue of competitiveness. This is understandable; it is difficult to

measure. More importantly, the EC seems determined to give the programs plenty of time to

work—a necessary part of competitiveness programs, particularly in programs designed to catch up

with the leaders. Still, some attempts have been

made to assess the programs in terms of market

outcomes.

A few ESPRIT projects have already yielded

commercial results, or are on the verge of doing so.

For example, ASM Lithography B.V., a Dutch

company, has the lead role in an ESPRIT project to

develop a deep ultraviolet wafer stepper for semiconductor production. It recently announced that its

deep UV stepper was being tested in several

locations throughout the world. The stepper is

capable of etching lines less than 0.3 microns wide,

and if the tests go as expected the company stands to

gain significant market share. The Japanese companies Canon and Nikon already have deep W wafer

steppers, but at the end of 1990 they were not yet

available outside Japan.157

Another ESPRIT project that helped produce a

commercial product was the Supernode project.158 It

ran 3 years, and produced a modular, reconfigurable

computer than can link a few to many processors

together. Since the end of Supemode in 1988, both

Telemat of France and Parsys of the United Kingdom have made and marketed Supernode computers,

and by April of 1990 they had sold more than 200 of

the machines.159

Stories of commercial exploitation of products

resulting from Framework or EUREKA projects are

beginning to appear, but are not yet plentiful.

Participants in the first phase of ESPRIT reported

that 143 of the 227 projects resulted in “industrially

significant” results (table 5-11), but only about 12

percent of the projects of ESPRIT I resulted in a

commercial product by the time of the evaluation.

Concern is surfacing over the issue; a recent news

item reported that several influential officials of the

CEC criticized ESPRIT for producing little commercially useful technology, and were concerned that

European electronics companies were still overly

dependent on EC subsidies and trade protection.160
Chapter 5--EC-92: Trade and Industry Policy .225

Table 5-1 l—industrially Significant ESPRIT I Results

Contributed directly to products and services available

on the market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Contributed directly to products and services developed

for the market but not yet commercially available .......44

Used outside the ESPRIT project, either within the

company concerned or in another company . . . . . . . . . . . . 44

Contributed to standardization, either adopted as

an international standard or being elaborated by

an international standards organization . . . . . . . . . . . . . . . . 28

SOURCE: J.F. Blackburn, London Representative of the Commerce

Department for Industrial Assessment in Computer Sciences

and Telecommunications, “Overview of European Strategic

Technology in Computers, Telecommunications, and Electronics,” ESN Information Bulletin, ESNIB 90-40, p. 12.

Results of BRITE are more promising. Fifty-nine

percent of BRITE participants reported that they

expected commercial benefits from their projects

within 5 years. The evaluation team regarded this

expectation as somewhat optimistic, but found it

encouraging. 161

JESSI got off to a slow start-according to one

participant, work only began in 1990 after an

18-month startup phase 162 --and Philips recently

announced it was pulling out of the JESSI SRAM

development project. Another indication of trouble

is that funding from the national governments has

not materialized, and the EC is far behind schedule

in its funding. However, several of the project’s

participants, as well as the ESPRIT evaluation team,

indicated that its strategic direction is sound. Another comment on its significance is the news that

JESSI and Sematech just initiated their first cooperative venture (others are expected).163

Overall, the assessment of commercial output

from the Framework Program and EUREKA projects is mixed. Even if they come up with commercial

products or services, that is not the same as

competitive success, which means raising market

share while maintaining or increasing standards of

living. That, in turn, means helping to eliminate

Europe’s trade deficit in high-technology products.

On these points, the evidence is clearer. So far, the

projects have not made much difference. For example, in 1975, the EC had a trade surplus in

information technology products, but by the beginning of ESPRIT I, it was becoming steadily more

dependent on imports. The trade deficit in IT

products reached $5 billion by 1980, and increased

to nearly $22 billion by 1987 (figure 5-8). The

largest deficits were in such products as integrated

circuits, consumer electronics, and computers. That

year, the EC accounted for 28 percent of world

consumption of computer systems but supplied only

13 percent, and consumed 17 percent of the world’s

microelectronics while producing 11 percent. The

Commission praised European computer companies

for giving good service and keeping upmarket share,

but also noted that some “European vendors have

kept their turnover up by adopting the role of system

integrator or product distributor which results in a

reduction in value added. ’ ‘

l @

For example,

Siemens’ supercomputers are made for it by Fujitsu

and its laptops are made by Matsushita.

Another problem is getting off the dole. It is hard

to call a company or an industry truly successful if

it needs continuing subsidies or protection to survive. One reason why Japanese electronics companies are judged successful is that they continue to

flourish while formal and informal trade protection

is disappearing (albeit slowly and sometimes grudgingly). Few European companies have managed this.

The Airbus consortium, for example, is widely cited

in Europe as a successful venture, yet it has received

over $5 billion in success-dependent loans, which

have yet to be repaid, and continues to receive

substantial development loans from the governments of Germany, France, England, and Spain.

Another example is a company called ES2 (European Silicon Structures). In 1985, the company was

formed as a joint venture of major electronics firms

from nine European countries to produce ASICs. In

Figure 5-8—Europe’s Trade Deficit in Electronics

in 1987 (21.9bn)

Professional electronics

measurements

Instrumentation

Medical electronics

Telecommunications

Passive components

Software

Office systems

Industrial automation

Active components

Consumer electronics

Computers

-14- 12-10-8 -6 -4 -2 0 2 4

_ $ billions

SOURCE: Information from the Commission of the European Communities, Communication From the Commission to the Council and

fhe Parliament Concerning the Performance and Results of the

Programrne ESPR/T, SEC(89) 1348 final (Brussels, Belgium:

Sept. 7, 1969), p. 6, who cite EIC as their source.
226 ● Competing Economies: America, Europe, and the Pacific Rim

1989, it posted revenues of $19.3 million, 45 percent

higher than in the previous year. No other company

of the same size participated in so many European

technology programs; it was a player in ESPRIT and

JESSI. A success? The company had not yet

managed to break even, much less turn a profit, by

the end of 1989, and its revenues were considerably

below the prediction of its founders, who announced

in 1985 that its sales would break $100 million in 5

years. 165

Even the evaluations, which are generally positive

in tone and outlook, sound a few warnings. For

example, ESPRIT evaluators noted that too much of

the technological advance was in niche areas with

limited market potential; that work in the software

technology portion of the program had produced

valuable inhouse developments but had yet to result

in commercial exploitation; and the work in the

office systems portion of the program were disappointing overall. The major success of the program

was the increase in trans-European cooperation

made possible by EC funding, but even that was

judged possibly not robust enough to survive

substantial funding reduction.166

European policymakers and many experts point

out that it is too soon to bring the jury back on

Framework and EUREKA, and they are right. The

programs have achieved some notable results, and it

is laudable that those in charge have resisted the

temptation to make snap judgments. But at this point

they have little to teach others about new ways to

improve competitiveness.

EC-92: COMPETITION POLICY

AND EFFICIENT FIRMS

EC-92’s removal of trade, financial, and technology barriers within Europe will create big enough

markets to satisfy the needs of any European

industry that may have been handicapped by a

national market too small to allow economies of

scale. The Commission wants to encourage the

formation of firms large enough to take advantage of

the bigger market, but at the same time to foster

competition. EC competition policy has two distinct

aims. One, similar to the U.S. antitrust tradition, is

oriented toward the regulation of restrictive practices and cartels in the private sector. The other is

aimed at removing member countries’ favoritism

toward their national companies in a wide range of

industries and sectors, including telecommunications, passenger air transportation, energy, autos,

chemicals, and an array of service industries. The

goal of these policies is to help create stronger, more

competitive, possibly pan-European firms.

European Antitrust Policies

Competition policy governs mergers, acquisitions, and formal linkages such as joint ventures

(merger policy) and corporate practices that limit

competition in a market (restrictive practices). Until

recently, antitrust policies in the EC have been run

at the national level. In general, European countries

are less sympathetic to antitrust actions than the

United States. Some, like France and Germany,

evaluate mergers and restrictive practices case by

case, and allow firms a great deal of market power

when they believe that consumers or the national

interest gain thereby. France and Italy have also used

antitrust law to favor national champions involved in

mergers and takeovers. Britain, while in principle

opposing restrictive practices by companies, is more

relaxed in practice than the United States. Britain,

France, and Germany all use balance of benefits

arguments to determine whether business arrangements are appropriate, and their responses to unacceptable practices rarely involve structural change in

the market.

In 1990, the EC took control of very large mergers

in Europe. EC policy will probably remove the

controls imposed by national governments, keep a

close eye on firms’ restrictive practices that tight

distort competition among European countries, and

at the same time encourage the creation of larger

firms, including cross-border mergers. 167 Many EC

officials believe that European firms in many

industries are simply too small to compete effectively, and that a new single market can offer

economies of scale that larger companies can

exploit. However, some voices in the EC have

warned against a simple view that bigger is better. In

particular, Sir Leon Brittan, the EC Commissioner

for competition policy, has argued that she alone

does not create world beaters, and that the EC needs

more competition in home markets.168 As table 5-12

shows, European manufacturing firms are somewhat

smaller than U.S. firms. They are closer in size to

Japanese firms, but this maybe deceptive since most

leading Japanese manufacturing companies belong

to industry groups (keiretsu) that in effect expand

their size.
Chapter 5--EC-92: Trade and Industry Policy .227

Table 5-12-Shares of Manufacturing Industry

Held by Large Firms in Japan, the United States,

and the EC, 1986

Share of largest firms in

total sales of industry

Largest 5 10 20 40

(percent)

EC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.8 10.8 16.9 23.0

United States . . . . . . . . . . . . . . . . . . . . . . 13.5 19.6 26.5 34.6

Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.0 12.6 17.5 23.7

SOURCE: EC Commission, “Horizontal Mergers and Competition Policy in

the EC,” European Economy, No. 40, May 1989, table 5-1.

The EC’s mergers directive (put in effect Sept. 21,

1990) layers an EC merger-control office on top of

the national offices, to deal with mega-mergers with

a substantial European dimension. The EC office

now has the power to veto all mergers, and those

joint ventures in which one company is established

in the EC, with worldwide revenues of at least ECU

5 billion and EC revenues of at least ECU250

million. 169 (However, the directive allows national

merger authorities to intervene when they believe

that a “legitimate interest” is at stake. 170 ) The

Commission can compel firms to disclose intentions, as well as block mergers and fine violators.171

It also has extraterritorial powers over mergers

between two foreign-based firms doing business in

the EC: competition rules govern all business

arrangements that operate witiin the EC, even firms

that have no registered home office there.

In principle, the EC will approve business arrangements (including both mergers and interfirm

links) when they do not impede competition within

the Community. The directive offers a safe haven for

mergers that will not result in one firm controlling 25

percent or more of a relevant market; there are also

block exemptions, covering certain classes of business activity; and firms can seek a letter of comfort

from the EC giving tentative approval to a proposed

arrangement in advance. All restrictive practices are

illegal unless they in some way benefit the interests

of the Community.

The directive allows the Commission to take into

account social and economic factors when considering mergers.

172 It is not yet clear exactly how the

Commission will interpret this mandate, but an

indication comes from the Commission’s decision

not to intervene in the merger between Siemens and

Nixdorf, on the grounds that competition from other

EC and non-EC firms will provide effective competition despite the increase in concentration. 173 A n

approach consistent with this decision was earlier

outlined in a paper by three senior officials in

DG-11. 174 The authors analyzed mergers against two

kinds of measures:

1.

2.

the danger of reduced competition, in which

the key variables are the degree of market

power concentration, the speed with which

demand is growing (making entry more or less

attractive), and the extent of import penetration; and

the potential for efficiency gains, focusing on

the technology content of the industry and the

existence of economies of scale.

These criteria suggest how the Commission may try

to mesh the aims of encouraging mergers into larger

firms with traditional antitrust policy.

Such an EC policy would bless and possibly

accelerate a process already under way. Merger

activity in the EC has taken off as firms jockey for

position in the new single market (figure 5-9). The

number of significant deals more than tripled

between 1982 and 1987,175 and by 1989 cross-border

mergers rose to 1,267 deals with an estimated value

of ECU60 billion.176 Some national policies have

also changed. French restrictions on foreign ownership appeared to be declining, as France was the

second largest target country in late 1989 and the

largest in the first quarter of 1990.177 The Commission has specifically encouraged much of this

activity, as the assertion of market forces over

government regulation.178

Figure 5-9-Total Merger Activity, All National,

Community, and International Mergers by

Combined Takeover

Number of mergers

500 [ 1

400

}

1987 1988 1989

= >1,000 MECU = >2,000 MECU

m >5,000 MECU = >10,000 MECU

SOURCE: EC Competition Reports [July].
228 ● Competing Economies: America, Europe, and the Pacific Rim

Though it seems to be accepted wisdom among

some in the EC that bigger firms mean better

competitive performance in general, that belief is

open to question. In some industries, to be sure, large

size seems a distinct advantage. For example, the

competitiveness of Japan’s giant electronics firms is

often given as a leading reason for their great success

in the 1980s. But in other industries, the advantages

of very large size are not so overwhelming. A

famous misstep of Japan’s illustrious MITI was its

abortive attempt in the 1960s to reduce the auto

industry to three firms, under the conviction that the

industry could not support any more. The industry

resisted, MITI abandoned the attempt, and there are

still 11 Japanese auto producers, most of them doing

very well. Likewise, MITI tried to rationalize the

machine tool industry, and got no further. Today,

Japanese machine tool builders, which are still very

numerous, lead the world. Obviously, many factors

contribute to success in manufacturing and in some

industries size is one of them, but even in those, it

may be quite far down the list in importance.

Subsidies and Nationalized Companies

Peter Sutherland, the former Commissioner in

charge of competition, put the Commission’s position on favoritism to national companies in these

terms:

If you remove national trade barriers, and if you

also leave the capacity of governments to interfere

with trade by supporting unfairly one industry

against another, to allow companies to carve up

markets and fix distribution, you would have the

same effect of destroying 1992 as if the barriers were

left untouched.179

The question is not only one of fairness and removal

of intra-EC barriers. Protection and pampering can

also sap firms’ competitiveness.

Subsidies for both national champions and lame

ducks are a prominent feature of the economic

landscape in Europe. Moreover, nationalized industries have always had special relations with governments and their treasuries. Both are under challenge

from the EC.

Subsidies--Subsidies have long been a central

component of European industrial policies.180 E C

member states provide much greater industrial

subsidies (known as “state aids”) than either Japan

or the United States. In the EC, state aids average

around 3 percent of GDP, compared to 1 percent in

Japan and 0.5 percent in the United States.181 Table

5-13 shows the major subsidies provided by the

largest EC member states.

There are many different, sometimes subtle, ways

in which governments can help out industries.

Simple cash grants are one possibility. Tax relief can

be specially tailored. Debt can be written off.

Different countries tend to provide subsidies in

different ways: Germany uses tax concessions (58

percent of total aid); France provides 26 percent

through equity and less than 20 percent through tax

concessions; France and the Netherlands provide

subsidized energy. Most national subsidies are

sector-specific, with relatively little being spent on

either R&D or support for small and medium-sized

enterprises (5 and 2.6 percent respectively of national subsidies for the period 1981-86). 182 Stee l

subsidies, for example, amount, on average, to more

than 50 percent of the sector’s value added in

Ireland, Italy, France, and Britain, while annual coal

subsidies are about ECU44,000 per job in France,

and more than ECU26,000 in Germany.183 Ther e

have also been heavy subsidies for sunrise industries

such as Airbus and microelectronics.

In the early 1980s, there was some falloff in

European subsidies; state aid to manufacturing

declined in real terms in 6 of 10 EC counties

between 1981 and 1985.184 The practice is far from

vanishing, however. EC member states must notify

the Commission of all proposed state aid, and

notifications jumped from 162 in 1984 to 376 in

1988.

185 With the EC, subsidy patterns diverged

during the 1980s, declining in Britain with the

election and long duration of Mrs. Thatcher’s

conservative government, remaining stable in

France, increasing slightly in Germany, and rising

greatly in Italy. As of 1986, Italy was offering eight

times as much state aid in absolute terms as Britain.

Within several member nations, subsidies have

become hotly fought political issues, especially in

the case of declining industries. The huge British

coal strike of the mid-1980s was precisely about

state subsidies for pits that lost money, while strikes

and violence met French attempts to cut subsidies

for steel and coal. There has also been some dawning

realization that, even in sunrise industries, pumping

money into national champions might not work.

With EC-92, problems with national subsidies

multiply. They distort trade among EC countries, in

effect working to export unemployment (which is
Chapter 5-EC-92: Trade and Industry Policy .229

Table 5-13-State Aids in the EC, 1981-86

Overall state aid Italy Germany France U.K.

Total billion ECU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Percent GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Per employee, ECU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Percent public expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . .

Aids to manufacturing

Percent gross value added . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Per employee, ECU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Excluding steel and ship-building

Percent gross value added . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Per employee, ECU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Aid to steel and ship-building

Steel, percent value added . . . . . . . . . . . . . . . . . . . . . . . . . . .

Ships, percent value added . . . . . . . . . . . . . . . . . . . . . . . . . . .

Forms of aid, percent of total

Grants/direct transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Equity participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Soft loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Aid by sector and function, percent of total

General, industry and services . . . . . . . . . . . . . . . . . . . . . . . .

Sector-specific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Regional aids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

of which, EC-approved . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Agriculture, fishing, transport, coal, EC-approved. . . . . . .

27.7

5.7

1,357.0

15.0

16.7

6,226.0

15.8

5,951.0

71.4

34.2

79.0

18.0

3.0

0.0

32.0

16.0

21.0

5.0

30.0

19.1

2.5

761.0

10.0

3.0

982.0

2.9

940.0

8.6

12.3

95.0

0.0

0.0

5.0

13.0

5.0

18.0

18.0

64.0

16.7 9.4

2.7 1.8

792.0 396.0

11.0 5.0

4.9 3.8

1,649.0 971.0

58.3 57.6

56.6 21.6

24.0 71.0

26.0 18.0

45.0 8.0

5.0 1.0

20.0 16.0

20.0 17.0

15.0 13.0

0.0 11.0

-. . . . . 56.0 44.0

SOURCE: Based on Commission of the European Communities, First Survey of State Aids in Member Counfries

(Brussels, Belgium: 1989).

contrary to the Treaty). And in practice the subsidies

can simply cancel each other out, creating distortions between subsidized and nonsubsidized industries without offsetting increases in economic activity .

186

The fairness doctrine makes subsidies a priority

target for EC action. The Treaty empowers the

commission to act against subsidies without the

need for approval by the Council of Ministers, and

Commission decisions are subject to review only by

the European Court of Justice.187 New subsidies

must be reported to the Commission for prior

approval, and the Commission is empowered to

demand changes in existing aid schemes and to force

companies to repay aid that it deems unacceptable .

188

None of this means that European subsidies are at

an end. The EC’s own policies accept subsidies for

important trans-Europe projects (e.g., Airbus), regional development, economic stabilization, and

‘‘such other categories of aid as may be specified by

decision of Council acting by a qualified majority on

a proposal from the Commission. ’ ’189 These exceptions add up to very large loopholes.

It is not yet clear how vigorously the Commission

will act to end national subsidies. Enforcement so far

has not been strong and countries are still approving

various kinds of subsidy; France, for example,

recently announced a large new program to build a

high-speed train system, which it wishes to subsidize. 190 However, EC action against subsidies has

picked up somewhat in recent years. The Commission has acted in two celebrated cases. Renault was

forced to return some FF6 billion in subsidies to the

French Government and to cut production of cars by

15 percent and trucks by 30 percent. 191 And in

Britain, the Thatcher Government was forced to

revoke about half the subsidies given to British

Aerospace when it bought the failing Rover auto

company.

192 On the other hand, the Commission has

approved subsidies for some R&D projects that are

or might become quite close to the market, such as

Dutch support for high definition television (HDTV).193

Also, European subsidies are quite a different matter

from national ones; they are much more likely to get

EC approval. Nor have the large and long-continued

subsidies from the four national governments supporting Airbus excited any opposition from the

Commission.
230 ● Competing Economies: America, Europe, and the Pacific Rim

So long as subsidized private companies have to

face real competition (as Airbus does from two U.S.

firms, Boeing primarily and McDonnell Douglas

secondarily) and the subsidies are intelligently

applied, state aid may boost a company’s competitiveness. (See ch. 8 for an analysis of Airbus

subsidies.) However, the lengthy history of European subsidies to national champions, together with

protection from outside competitors, strongly suggests that this combination does not work. EC efforts

to control national subsidies and limit their duration

holds some promise for making European companies tougher competitors in the long run.

State Ownership--Public ownership of manufacturing firms in Europe dates back to the 1930s.

Countries first nationalized natural monopolies like

electricity or gas. Later, some firms were nationalized because they were seen as strategic, e.g., steel,

coal, shipbuilding, and electronics. The British and

French both favored this approach. But governments

have also nationalized failing firms that they could

not politically allow to collapse. Industries that

dominate a geographical region have been prime

candidates (e.g., French steel).194 The state sector is

so large in some countries (still, even after a decade

of privatization) that any significant improvement in

the performance of the sector will have an effect on

national competitiveness as a whole.

State ownership in Europe has created few

internationally successful fins. It usually implied a

domestic monopoly, as state ownership is hard to

justify where there are other private domestic

companies in the same sector (although there were

exceptions like British Airways). Monopoly status

and access to the national treasury tended to promote

inefficiency.

The conservative governments that came to power

in European countries in the past decade or so

privatized dozens of companies. But there are limits.

Thatcherite ideas about privatizing the British National Health Service have come to nothing. The

French Government seems determined to maintain

ownership over a number of important manufacturing firms,195 although state-owned firms like Pechiney and Rhone-Poulenc have had such serious

capital needs that partial privatizations have since

become quite common.

196 Were a deep recession to

occur, some form of lemon socialism could return.

While the Treaty specifically states that the EC

must be neutral between public and private ownership, state aid for government-owned companies is

now under attack as it can give these companies an

unfair advantage over private sector competitors.197

The EC is digging into the behavior of state-owned

firms to root out “unfair” practices. For example,

the EC’s telecommunications directive ends national PTT monopolies over end-user telecommunications equipment, provides for above-board, nondiscrimin atory treatment (transparency) in procurement, and requires that PTTs separate their regulatory and commercial roles. This should loosen tight

national government control over telecommunications, which has been used to favor domestic

suppliers.

The Commission is trying to establish the principle that state-owned companies should behave as

commercial companies normally do, by investing on

the basis of risks and probable returns and purchasing on the basis of cost and quality. Yet much of the

point of state ownership in Europe is to encourage

behavior that is not commercial, keeping certain

plants open and operating in some ways as a public

service. Government subsidies are required to make

that possible. The Commission is now seriously

questioning some subsidies to nationally owned

companies (e.g., the subsidy France proposed for

Groupe Bull for 1991).

Perhaps the logic of liberalization and equal

treatment under the Treaty means fundamental

changes in the long run for public sector companies;

it is even possible their raison d’etre will disappear.

That time has not yet come. Meanwhile, European

state-owned firms have some advantages in that they

are subsidized, but the disadvantages of insulation

from genuine competition in the commercial world

is a handicap of considerably greater weight.

1 The Commission is the executive arm and civil service of the

European Community.

2 General Agreement on Tariffs and Trade.

3 Not necessarily in the EC. The EC and the European Free Trade

Association (EFTA) countries have a free trade arrangement under

which tariffs are set at zero and there are no quotas. EFTA’s members

are Austria Finland, Iceland, Liechtenstein, Norway, Sweden, and

Switzerland.

4 The problem of standards seems to have been reduced over the

past 2 years, although it remains high among the concerns of U.S.

manufacturers.

5 Paulo Cecchini, with Michel Catinat and Alexis Jacquemin, The

European Challenge: 1992: The Benefits of a Single Market (Aldershot,

UK: Wildwood House Press, 1988), p. 27.

6 Commission of the European Communities, Completing the

Internal Market: White Paperj70m the Com”ssion to the European

Councii, COM (85) 310 final (Brussels, Belgium: 1985).
Chapter S+?C-92: Tra& and Industry Policy ● 231

7 Article 30pmhibits “quantitative restrictions on imports and all

measures having equivalent effects.”

8 In Denmark for example, there are luxury taxes on autos that

range from 100 percent of the value upwards.

9 France, Italy, and the other Mediterranean countries have been

given a transition period for implementatioxq although all will have to

comply before 1993.

10 Stephen Woolcoclq Michael Hodges, and Kristin Schreiber,

Britain, Germany, and 1992, the Limits of Deregulation (New Yo&

NY: The Royal Institute of International Affairs/l%e Council on Foreign

Relations, 1991), ch. 6.

11 See also Commission Regulation @EC) 1612/68 Article 1.

12 For at least for 3 months, citizens may reside in another EC

country while looking for work.

13 William Drozd~ “As Europe ’92 Nears, Rift on Aid

Widens,” The Washington Post, Apr. 21, 1991, p. H1. At the same time,

however, another Japanese electronics gian~ NEC, was reported to be

angling for a 5 or 10 percent share of Groupe Bull, and the French

Government was considering the proposal. Fujitsu began its buyout of

ICL with a similar minority share. Alan Cane, William Dawkins, and

Stefan Wagstyl, “NEC in Talks on Groupe Bull Stake,” Financial

Times, Apr. 24, 1991, p. 1.

14 Richard Bald~ ‘‘The Growth Effects of 1992,” Economic

Policy, October 1989, pp. 248-281. Baldwin estimates that EC-92 might

add between 0.2 and 0.9 percentage points to the EC’s long-term growth

rate, rather than simply conferring a one-time rise.

15 Merton J. Peclq “Industrial Organization and the Gain from

Europe 1992,” in William C. Brainard and George L. Perry (eds.),

Brookz”ngs Papers on Econom”c Activity 2 (Washington, DC: The

Brookings Institution 1989).

16 Six of the world’s top 10 chemical companies (ranked by

chemical sales) are EC fins, 1 is Swiss, and 3 are American. Chemical

sales by EC fms in 1989 were $312 billio~ and by U.S. firms, $274

billion. U.S. International Trade Commissio~ The Eflects of Greater

Econonu”c Integration Within the European Community on the United

States: Second Follow-Up Report, US ITC Publication 2318 (Washingto% DC: September, 1990), pp. 22-23 ff.

17 Ibid., pp. 22-27.

18 Therearesomecomplicatingfactors; forexample, deregulatio~

which EC-92 favors, could create tough price competition among

European airlines and cause them to postpone purchases of new aircraft

(which occurred with deregulation in the United States).

19 KennethF1- “Semiconductors,” in Gary C. Hufbauer(ed.)

Europe 1992: An American Perspective (Washingto~ DC: The Brookings Institution 1990), p. 244,

20 Commission Regulation (EEC) 288/89, February 1989.

21 Michael Borrus, director, Berkeley Roundtable on International

Economics, personal communication.

22 U.S. International Trade Commis siom The Effects of Greater

Econom”c Integration Within the European Community on the United

States, US ITC Publication 2204 (Washingto~ DC: The Commission

Jtiy 1989), pp. 4-14.

23 Aviva FriedmarL ‘‘EC Takes Giant Step to Open Public

Procurement Markets,” Atlantic Trade Reporter, Mar. 1, 1990, p. 1.

24 Ibid., pp. 4-7. These estimates apply to all U.S. fm, whether

exporters or located in the EC.

25 U.S. International Trade Commission, op. cit. (July 1989), pp.

4-12; CEC, Public Procurement and Constructio+Toward an Integrated Market, CB-PP-88-002-EN-C (Luxembourg: Office for 0t31cial

Publications of the European Communities, 1989), p. 15.

26 A major thrust of EC-92 is to open up these public purchases to

all EC fins, not just national champions.

27 EC C.ommis sio% Eighth Annual Report on the Commun ity’s

Anti-Dumping and Anti-Subsidy Activities (Brussels: The Commission

1989), ‘Ihble 1; EC Commissiow Ninth Annual Report on the

Community’s AntLDumping and Anti-Subsidy Activities (Brussels: The

Commissiou 1990), lhble 1.

28 Of149actions initiated inthe4yeam 1987-90, 46wereagainst

Jap~ Kor~ Hong Kong, and Taiwu 3 were against the United Statea.

(Ibid., annexes.)

29 Statement of Michael C. Maibach to Subcommittee of the

House Committee on Foreign Mfairs, Mar. 23, 1989, cited in U.S.

International Trade Commissioq 1992: The Effects of Greahm Jhnomic Lntegrationwithin the European Community on the United States:

First Follow-up Report (Washington DC: March 1990), pp. 14-18, and

Michael C. Maibach personal communication. See also Kenneth

Flamm, op. cit., p. 276, footnote 77.

30 coremission Regulation (EEC) 2071/89 of July 11, 1989.

31 For example, the essential requirements contained in the ‘l’by

Safety Directive state that toys “must not jeopardize the safety or health

of the user, they must not strangle or suffocate childreu they must not

be highly “inflammable, they may not contain excessive quantities of

dangerous chemicals or radioactive elements, they must be properly

insulated against electric shock and they should ensure sufficient

hygiene and cleanliness to prevent conlamination, infectiorL and

sickness. ” Diane Good, “The Implications of 1992 for U.S. Manufacturers: Products (product Standards and Product Liability) and Environmental Law,” International Quarterly, vol. 2, July 1990, p. 109.

32 This principle comes from the historic Cassis de Dijon case

decided by the European Court of Justice in 1979; the decision stated that

French cassis could not be barred from sale in West Germany merely

because it was manufactured to non-German specifications. CEC,

Europe Without Frontierdompleting the Internal Market, Periodical

3/1988 (Luxembourg: Office for Ofilcial Publications of the European

Communities, 1988).

33 Under EN 45000 standards for lab practices conforming to

international standards (which the United States accepts).

34 The European Committee for Standardization (cEN), the

European Committee for Electrotechnical Standardization (CENELEc),

and the European lklecommunications Standards Institute (ETSI). CEN

and CENELEC are private umbrella orgiUlhtiO13S, comprising standards org “ amzations of the various members. ETSI membership is made

up of manufacturers, administrators, and users.

35 U.S. International Trade Commission, op. cit. (September

IM), pp. 4-21 to 4-14; U.S. International Trade commissio% 1992:

The Effects of Greater Economic Integration within the European

Community on the United States: Third Follow-up Report (Washingto~

DC: March 1991), pp. 4-11 to 4-14.

36 Ibid.

37 EC ~lce of Press and Public Affairs, “U.S.-EC Joint

Communique Resulting from their Meeting on Standards and Conformity Assessmen6 June 21, 1991.” No. 20/91, June 24, 1991.

38 U.S. International Trade Commissio~ op. cit. (March 1991),

citing EC Commissio~ Green Paper on the Development of European

Standardization: Action for Faster Technological Integration in Europe, COM (90) 456 fti, Oct. 8, 1990, pp. 31, 33.

39 This was a draft policy in ETSI, governing telecommunications

standards, in the spring of 1991.

40 Flamm, op. cit., p. 268, table 5-4.

41 By Fujitsu, Mitsubishi, and Hitachi. “The Last Hurrah for

European High ‘l&h?” Business Week, Apr. 29, 1991, p. 44.

42 “Spare the Rod and Spoil the Child,” The Economist, Apr. 20,

1991.

43 Ibid.

44 See Drozdialq op. cit.
232 ● Competing Economies: America, Europe, and the Paci@c Rim

45 For example, the EC trade deficit with the United States in

computers and office machines was $8.5 billion in 1989 (table 5-2). For

a concise history and analysis of government support of the computer

industry in the United States, Europe, and Japw see Kenneth Flarnm,

Targeting the Computer: Government Support and International

Competition (Washingto~ DC: The Brookings hstitutioq 1987). Trade

protection and government procurement were even more prominent in

Japan tban in Europe for three decades, beginning in the 1960s, but the

Japanese were far more insistent on maintaining competition among

domestic fm; see ch. 6.

46 Flamm, “Semiconductors,” op. cit., p. 232.

47 “National Champions Become Laggards,” Financial Times,

Apr. 29, 1991.

48 This does not exhaust the list of actions taken against forei~

especially Japanese, electronics producers. France (acting for itself, not

the EC) imposed the ingenious requirement in 1982 that all imported

VCRs should go through customs at a small, lightly staffed offke in

Poitiers, located in the middle of the country; this tactic made processing

quite time-consuming. EC-wide import restrictions were adopted in

1983, when the Japanese Government promised voluntary export

restraints on VCRs for 3 years.

49 Commission of the European Communities, Eighth Annual

Report andi’!linth Annual Report, op. cit. (1990 and 1991), table Annex

F and G, respectively.

50 Organized EC action against Japanese producers of office

equipment began in 1984, when the Commuoity set up a committee to

investigate electronic typewriters; committees for photocopiers and

printers followed in 1985 and 1987. Dumping levies were fixed for

typewriters in 1985, for copiers in 1987 and for printers in 1988. The

Long-llxm Credit Bank of Jap% Ltd., 1992 and Euro-Japanese

Econonu”c Relations (Tokyo: The Bank, 1990), pp. 7-10.

51 Ibid. and Commission of the European Communities, Eighth

Annual Report and Ninth Annual Report, op. cit., several annexes.

52 Thispattemis described inIvo WnBael, “EECAnti-Dumping

Law and Procedure Revisited,” Journal of World Trade, April 1990, pp.

5-1o.

53 Thedumpingmarginis thedifferencebetweenthe pncecharged

by the importer and some “fair” price, either that charged by the

importer in some other market or a price calculated by trade authorities.

The margin can be exaggerated in several ways, including the attribution

of artificially high selling, administratio~ and general expenses to

“normal” imports, and the addition of an unrealistic profit margin.

54 Wn Bael, op. cit.; also, Brian Hindley, “Dumping and the Far

East Trade of the European Community,” World Economy, vol. 11, No.

4,1988, pp. 445 ff.; Christopher Norall, ‘ ‘New Trends in Anti-Dumping

Practice in Brussels,” World Economy, vol. 9, No. 1, 1986, pp. 97 H.

55 Jean-FrancoisBellis, “TheEC Antidumping Syste@” inJohn

Jackson and Edwin Vermulst (eds.), Antidumping L.uw and Practice: A

Comparative Study (AmI Arbor, Ml: University of Michigan Press,

1989), pp. 60-61,63-64.

56 Fkunm, op. cit., p. 279.

57 The basic EC antidumping provisions are in Regulation

2423/88.

58 The ruling was on narrow grounds, holding that antidumping

duties levied on parts and materials at the point of sale within Europe

amounted to an internal tax, not a duty, and therefore violated GA~’s

national treatment provisions. GATT Document L/6657, Mar. 22, 1990.

59 Long-T&rn Credit Bank, op. cit.

60 Ibid., p. 9.

61 The Econow”st, Jan. 14, 1990. “Thrn of the Screw,” The

Economist, vol. 318, No. 7690, Jan. 19, 1991.

62 “Four Manufacturers Stmti.ng Pattern Printing Line in 1992,”

Nikkei Microdevices, July 1990, pp. 44-54. Translated inJPRS Report:

Science and Technology Japan, “Rush to Secure EC Marke4° Mar. 8,

1991.

63 Analog Devices, AT&~ Digital Equipment, Hughes, IBu

II’&T, IX Imgic, Motoro4 and lkxas Instruments all had wafer

fabrication plants inEC countries in 1989. - op. cit. (1990), p. 268.

64 Maibach op. cit. (1989).

65 See “Statement by Mr. Nakao, Minister of International Trade

and Industry,” mimeo, Tokyo, July 31, 1991; “Statement by Mr.

Andriessen,” Vice-President of the CEC, rnimeo, Brussels, July 31,

1991; and Martin DuBois and Mark M. Nelso~ “Tokyo, EC Reach

Agreement on Sales of Japanese Cars,” The Asian Wall Street Journal

Weekly, Aug. 5, 1991, p. 8.

66 Muchofthematerird inthesectiononthe auto industry is drown

directly from James P. Womack and Daniel T, Jones, “EuropeaII

Automotive Policy: Past presen~ and Future,” contractor report to the

Oftlce of lkchnology Assessment, Februmy 1991. Additional sources

include Alastair Smith and Anthony J. Venables, “Automobiles,” in

Hufbauer, op. cit.; the Commis sion of the Europem Community, A

Single Community Motor Vehicle Market, December 1989; U.S.

International Trade Commissiom op. cit. (July 1989 and July 1990);

James P. Womaclq Daniel T. Jones, and Daniel Roos, The Machine that

Changed the World (New York NY: Rawson Associates/Mac_

1990); OTA interviews with representatives of the motor vehicle

industry in the United States and Europe.

67 According to Womac~ Jones, and Roos, the “. . . %ee trade’

countries, led by Germany and Swedeq have periodically indicated that

their continued support of an open market for Japanese cars is predicated

on ‘appropriate’ behavior by the Japanese f-, meaning inpractim that

their market share should only grow very slowly and without serious

threat to the home country producers.” Ibid., p. 288.

68 Womac~ Jones, and Roos, op. cit.

69 Defiied as the number of manufacturing defects in cars

reaching customers, not as durability or luxury.

70 U. S. International Trade Commissio~ op. cit., March 1990, pp.

11-15.

71 DuBois and Nelso~ op. cit.

72 EC sales of Japanese cars were about 12 million in 1990. The

EC-Japan agreement is based on estimated sales in 1999 of 15.1 million

units, meaning growth of nearly 2.6 percent per year. Japanese sales of

2.4 million in 1999 would amount to 16 percent of that market.

73 Richard JOhUSOW “EC Limit on Japanese Transplants,”

Automotive News, May 6, 1991; and DuBois and Nelso~ op. cit.

74 The official explanation given for the British local content

requirements was that other European nations with Japanese quotas

(notably Italy and France) would count British assembled vehicles

against their own Japanese import quotas unless the vehicles had a high

level of European content. Another likely motive was to protect British

components manufacturers. Womack and Jones, op. cit. (1991).

75 The figure for local content in Japanese cars made in America

is uncertain but k probably about 50 percent, according to James P.

Womac~ automotive industry consultant and former research direetor

of MIT’s International Motor Vehicles Program.

76 These figures include passenger cars only, not trucks. Japanese

light trucks were also gaining in U.S. market share until 1987, when the

U.S. tariff on light trucks was hiked to 25 percent (passenger cars carry

a 2.5 percent tariff). Data provided by James P. Womac~ based on

Ward’s Automotive Reports, various issues.

77 Honda has already announced plans to export about 6,000

Accord station wagons from Ohio to Europe. “U.S. Honda To Ship

Wagons to JaparL” The New York Times, Jan. 8, 1991, p. D4.

78 Womack and Jones, op. cit., p. 34.

79 Deborah SmitlL International Trade Officer (EC), !%nrdl Business A&rums “ “ tratiou personal communication Jan. 13, 1990.
Chapter 5-EC-92: Trade and Industry Policy ● 233

80 Wayne Sandholtz, “New Europe, New Telecommunications,”

paper presented at the annual meeting of the American Political Science

Association, San Francisco, CA, Aug. 3@Sept. 2, 1990.

81 An ECU, European Currency Unit is now worth about $1.18.

The ECU 5.7 billion for I%arnework programs is all public money; it is

generally matched by the projects’ participants, except for certain

nonprofit organizations such as universities, which can receive up to 100

percent of project costs from the European Community. EUREKA is

Primarily funded by the private secto~ less than 10 percent of its funding

is public money. A rough calculatio~ assuming that 10 percent of

EUREKA costs are public and that both programs spend about the same

amount of money each year, yields annual public funding of cooperative

research amounting to ECU 1.6 billio~ or about $1.9 billion. Source of

funding numbcm is U.S. International Trade Commission, 1992: The

Eflects of Greater Econondc Integration Within the European Commu-

?u”ty on the United States: SecondFollowup Report, US ITC Publication

No 332-267 (Washingto~ DC: U.S. International Trade Commissio~

September 1990) pp. 16-6 and 16-10.

82 For example, the Commission states “. . the ~uropean]

Community’s influence has grown to such an extent that it affects ahnost

all areas of business and society, so that it is now obliged to grappze with

the problems of secun”ng and maintaining our living conditions. Viewed

against this background, science and research have taken on a key role

which the Community cannot ignore. . . . The main aim is to maintain

the international competitiveness of European industry in high technology sectors, in the face of competition in global markets, above all from

the USA and Japan” (emphasis added). See Commission on the

European Communities, EC Research Funding: A Guide for Applicants

(Brussels, Belgium: 1990), p. 3.

83 Office for OfiIcial Publications of the European Communities,

Research and Technological Development Policy, Luxembourg, 1988,

p. 8. Some technologies are dominated by two countries together, which

accounts for the figures adding to more than the total. This was cited in

U.S. International Trade Commissio~ op. cit. (September 1990), pp.

16-23.

84 Japanese patents were most likely to be granted (in descending

order of importance) in photocopying, dynamic information storage or

retrieval, dynamic magnetic information storage or retrieval, photography, radiation imagery chemistry, recorders, typewriting machines,

static information storage and retrieval, pictorial communication and

television, and motor vehicles. Germany’s patents were mainly in

chemistry, materials, and printing; they included fertilizers, organic

compounds of different types, ammunition and explosives, solid

material comminution or disintegratio~ plastic article or earthenware

shaping or treating, synthetic resins or natural rubbers, and, ftiy,

brakes. France’s list is more diverse: induced nuclear reactions, systems,

and elements; clutches and power-stop control; ammunition and

explosives; pulse or digital communications; rotary kinetic fluid motors

or pumps; brakes; pipe joints or couplings; organic compounds;

aeronautics; and electricity, electrical systems, and devices. National

Science Foundation Science andEngineenng Indicators-1989 (Washington DC: U.S.Government Printing OfIlce, 1989), pp. 358-360.

85 Commis sion of the European Communities, Evaluation of the

First BRITE Programme [1985-1988], EUR 11782 EN (Brussels,

Belgium: July 1988), p. 15.

86 With the ECU worth about $1.18, Framework funding was

worth about $6.7 billion over the period 1987-91.

87 This does not count projects like DRIVE (Dedicated Road

Ir.dkistructure for Vehicle Safety in Europe) and BRITE/EURAM

(MUTE is Basic Research in Industrial lkchnologies for Europe, and

EURAM is European Research in Advanced Materials), which fund

several high-technology projects. It also does not count projects aimed

mostly at improving science or learning.

88 Thbles 5-2 and 5-8 show the breakdown of funding and project

descriptions of the Second Framework progr~ scheduled to last from

1987 to 1991. Some of the preexisting projects from the fwst Framework

earriedover, and the Third Framework Program, approved in April 1990

and lasting through 1994, overlaps the second program. The third

program was approved while the second was still in effect because rapid

changes in technology necessitated an increase in funding (I3CU 400

million) and a shift of priorities. The tables show programs of the Second

Framework program rather than the third because more detail on

individual projects is available for the second program. The third

program has three areas of emphasis (which encompass the eight of the

second program) and reallocation of l%nds to emphasize new areas such

as microelectronics and networks connecting information systems.

Source: U.S. International Trade Commission op. cit., pp. 16-18.

89 U.S. International Trade Comrnissio~ 1992: The Eflects of

Greater Economic Integration Within the European Communi~ on the

United States: Second Followup Report, USITC Publication 2318

(Washington DC: U.S. GOV emment Printing Oftlce, September 1990),

pp. 16-10.

90 Commission of the European Communities, EC Research

Funding, op. cit., p. 20.

91 EUREKA Sccretaria~ EUREKA: Together for the Future

(Brussels, Belgium: EUREKA Secretariat, 1989), passim.

92 J.F. Blackb~ “OverviewofEuropeanlkdmologyinComputers, IMecommunications, and Electronics,” ESN Information Bulletin,

ESNIB 90-04, 1990, p. 24.

93 Siemens’ decision to license Toshiba’s technology initially

concemedboth Philips and the German Government. Philips would have

prefemd developing the technology in Europe even if that meant

delaying a successful completion of the project, while the West German

technology minister was reportedly so angry with Siemens that he

considered withdrawing government backing of the Mega project.

Robert S. Williams, “JESSI,” Harvard Business School Case 9-389-

135, Rev. May 9, 1989.

94 Planungsgruppe JESSI, “JESSI Program: An Initiative of

European Institutions and Companies, Results of the Planning Phase,”

Ztzehoe, Feb. 1, 1989.

95 H-, “Semiconductors,” op. cit., pp. 247, 262. The Mega

project was a cooperative project of Philips and Siemens, along with the

governments of the Netherlands and West Germany, to improve

semiconductor manufacturing technology. The Mega project aimed at

developing technologies to manufacture 4-megabit D RAMs (Siemens)

and l-megabit SIMMS (Philips). Flamm’s statement also accords with

the experience of Siemens A.G. An executive of the company stated that

Europe must be competitive in wafer steppers and lithography technology, which he regarded as strategic technologies, because the Japanese

do not sell the latest technology or the fwst machines to Europeans.

Harhvig Bierhenke, Corporate Research and Development Siemens

A.G., interview with OTA staff, Oct. 10, 1990.

96 Claire She~ “Science and 7kchnology in Europe,”

mimeo, pp. 3-21.

97 OECD figures quoted in The Economist, “European Community: A Power in Its Own Righg” July 7, 1990, p. 6.

98 Wayne Sandholtz, “New Europe, New 7Mecommunications,”

paper prepared for the Annual Meeting of the American Political Science

Association, San Francisco, CA, Aug. 30-Sept. 2, 1990.

99 Ibid., p. 12.

100 Commission of the European Communities, Research and

Technological Development for Europe (Brussels, Belgium: December

1987), p. 3.

101 See, for example, Sylvia Ostry, “BeyondtheBordec The New

International Policy Are~’ paper presented at the OECD Forum for the

Future, Paris, France, Oct. 30, 1990, and She~ op. cit., p. 5-1.

102 GaUium-Indium-Amenide, project 2035.

103 Interview with Fred A. Meyers, Senior Manager, GaAs IC

Research Department, Plessey Research Carswell Ltd., with Todd

Watkins, Harvard University: interview no. 4, pp. 34.
234 . Competing Economies: America, Europe, and the Pacific Rim

104 “III-Evaluation of the BRITE Programmed,” mimeo, p. 17.

105 Jens Moritz, Corpmte R&D, Joint R&D-Projects and Research Funding, Siemens A.G., interview with OTA staff, Oct. 10, 1990.

106 Commis sion of the European Communities, First Report on

the State of Science and Technology in Europe, mimeo, no date.

107 Commission of the European Communities, EC Research

Funding, op. cit., p. 40. There are 10 criteria for selection of Framework

projects listed in this document one is “cross-border character.” The

others are compliance with the aims of the pro- scientillc and

technical quality and originality, innovative potential, industrial relevance and influence on competitiveness, feasibility of implementatio~

scientific qualifications of the applican~ pre-competitive character,

amount of EC funding, and composition of the partnemhip.

108 According to H- “[A]s entire proprietary designs for

electronic systems are transferred onto a single chip, retaining control

over that design becomes increasingly intertwined with finding chip

suppliers who will not appropriate key elements and use them to

manufacture competitive product of their own. Access to a state-of-theart chip supply, which combines leading-edge manufacturing technology with reasonable security for key elements of proprietary systems

designs, has become a strategic issue throughout the global electronics

industry. ” Flamm, “Semiconductors,” op. cit., p. 229.

109 Ibid., pp. 228-229.

110 Commis sion of the European Communities, ‘‘Communication

From the Commission to the Council and the Parliament Concerning a

Review lb Assess the Performan ce and Results of the Programme

ESPRIT,” Brussels, Belgium, Sept. 7, 1989 (rnimeo), p. 13.

111 Ibid., p. 22.

112 III-Evaluation of The BRITE Programme, op. cit., p. 17.

113 JESSI Progmm, An Initiative of European Institutions and

Companies: Results of the Plarming Phase,” Itzehoe, Feb. 1,1989, p. 22.

114 Commission of the European Communities, RACE ’90:

Research and Development in Advanced Communications Technologies

in Europe, op. cit., p. 1.

115 Commission on the European Communities, Programme

Management Audit of RACE, DRIVE, DEUA, and AIM: Report of an

External Audit Team (Brussels, Belgium: October 1989). On page A3-2,

the team reports that ‘RACE participants are mostly conteng their main

concerns are the monthly reporting and the concertation meetings.’

Results of this audit should be used very cautiously, however, because

it is based on a survey whose response rate was low. The audit team sent

out 1,650 questionnaires to participants in WMIE, DRIVE, DEETA, and

AIM and based its assessment of the management of these programs on

348 returned qUCStiO nnaires-a 21-percent response rate. The management audit document does not say what procedures were used to obtain

responses, or if they were all entirely voluntary. If the latter, then it is

possible that these response were atypical.

116 Comrnissionofthe EuropeanCommunities, “Commtication

from the Commissio~” op. cit., p. 14+

117 Ibid., p. 16.

118 See, for example, Martin“ Frans~ The Market and Beyond:

Cooperation and Competition in Information Technology Development

in the Japanese System (Cambridge, U.K.: Cambridge University Press,

1990).

119 Daniel I. Okimoto, Between MITI and the Market: Japanese

Industrial Policy for High Technology (Stanford, CA: Stanford University Press, 1989), p. 71.

120 111-Evaluationof the BRITE Programme, op. cit., pp. 21-22.

121 AEG, Bull, CGE, GEC, ICL, Nixdorf, Olivetti, Philips,

Plessey, Siemens, STET, Thomson.

122 Commis sion of the European Communities, ‘‘Communication

horn the Commissio~” op. cit., p. 11.

123 Many European writers view U.S. universities as making

material contributions to the nation’s technology base, as well as to basic

science; and they view Japanese universities as effective tmining

grounds for professionals.

124 Commission of the European Communities, First Report on

the State of Science and Technology in Europe (Brussels, Belgium:

mimeo, no date), pp. 92-93.

125 Mary ~SZkitWiCZ, ‘‘Research Collaboration in the European

Community: The Ussons for the United States,” mimeo, April 1990.

126 Commis sion of the European Communities, Evahuztion of the

First BRITE Programme, op. cit., p. 25.

127 Commission of the European Communities, First Report, op.

cit., pp. 91,93.

128 Commission of the European Communities, “Communication

from the Commis sio~” op. cit., p. 20.

129 Commission of the European Communities, Evahurtion of the

First BRITE Programme, op. cit., p. 25.

130 Commission on the European Communities, EC Research

Funding, op. cit., p. 25.

131 Commis sion of European Communities, Evaluation of the

First BRIT.E Programme, op. cit., p. 12.

132 Harry Beckers, Shell, Group Reseamh Coordinator, and

chairmaq IRDAC, interview with OTA staff, Oct. 2, 1990.

133 Hartwig Bierhenke, Corporate Research and Development

Siemens AG, interview with OTA staff, Oct. 10, 1990. There may not

be as much of an inconsistency in the perceptions of Bierhenke and

Becker as it appears. JESSI is a EUREKA projec~ and EUREKA is not

an EC program and therefore not constrained by precompetitivity.

However, through ESPRIT, the EC is putting money into JESSI; 30

percent of the funding of the microelectronics portion of JESSI comes

ffom ESPRIT The applications people in JESSI are not very satistkd

with ESPRIT so while the overlap between the two programs is

growing, so is the tension. See Henk G. Bodden&J~ ManagingDirector,

Philips International B.V., interview with OTA staff, Oct. 12, 1990.

134 J.J. Kapte~ Former President, Oce, and member of the

EUREKA advisory board to the Minister of Economic Affairs of the

Netherlands, interview with lbdd Watkins, Harvard University, summer

1990.

135 Forexarnple, Jens Moritz of Siemensbelieves thatFramework

projects should go no closer to the market than they are. Jens Moritz,

Corporate R&D, Siemens AG, interview with OTA staff, Oct. 10, 1990.

136 J.F. Blackb~ “Overview of European lkchnology in

Computers, ‘lHecornmunications, and Electronics,” ESN Znfonnation

Bulletin, April 1990, p. 12.

137 U.S. Congress, Ofilce of lkchnology Assessment Making

Things Better: Competing in Manufacturing, OTA-ITE-443 (.-washingto~ DC: U.S. Government Printing 0fi3ce, February 1990), pp.

161-167.

138 An SMEis anenterprise thatemploys 5000rfewerpeople, has

an annual net turnover of less than ECU 38 millio~ and has not more

than a third of its ownership held by a parent organization or a fmcial

institution. CEC, EC Research Funding, op. cit., p. 14.

139 Commis sion of the European Communities, “Communication

From the Commissioq” op. cit., p. 12. The report also notes that the

share of the Big ‘llvelve dropped when Spain and Portugal joined the

community.

140 Commission of the European Communities, Research and

Development in Advance Communications Technologies in Europe:

RACE ’90 (Brussels, Belgium: March 1990), p. 93.

141 Commis sion of the European Communities, Evahartion of the

First BRIIE Programme, op. cit., pp. 22-23.

142 SPRINT is the Strategic Progr amme for Innovation and
Chapter UC-92: Trade and Industry Policy .235

‘Rdmology Transfer. Its funding in the Second Framework Program

was ECU 90 millio~ and its mission is to promote the dissemination of

innovation and new technology. Commission of the European Communities, EC Research Funding, op. cit., p. 138.

143 Ibid., p. 24.

144 Jean-Jaques Duby, Group Director, Science andlkchnology,

IBM Europe; interviews with OTA staff, Oct. 8, 1990.

145 W.A. I.edeboer, European Affairs Coordination Manager,

Corporate Product Development Coordination Philips, interview with

OTA staff, Oct. 12, 1990.

146 Jean-Jaques Duby, interviews with OTA staff, Oct. 8, 1990

and NOV. 2, 1990.

147 One participant from a prominent American company with

substantial presence in Europe added another caveat to these-a low

proffle.

148 One source states that Japanese f- have been rigorously

excluded. See Charles Smith and ‘Rmy Major, ‘‘The Stakes Rise,’ Far

Eastern Econondc Review, Aug. 12, 1990, pp. 46-47.

149 Jean-Jacques Duby, intemiew with OTA staff, Nov. 2, 1990.

150 Mary ‘I@lciewicz, op. cit., p. 16.

151 Other projects related to standards include an effort to setup

a network of public and private research centers across Europe using

open systems intercomection (0S1, which is not based on the

characteristics of the products of a single manufacturer) as a basis for

communication and a project that studies the feasibility of digital audio

broadcasting. EUREKA: Together for the Future, 1989 Progress Repo~

p. 8.

152 See the discussion of standards earlier in this chapter.

153 It is worth bearing in mind that existing evaluations are not

robust. Both the RACE and BRITE evaluations are based on limited

sampling. The evaluation for WCE, DRIVE, DELTA, and AIM

programs together was based on results of 348 questionnaires returned

by participants, out of a total of about 1,650 sen~ for a 21-percent

response rate. BRITE was evaluated on the basis of 177 questionnaires

out of 450 sent, 9 plenary meetings, and over 100 interviews with senior

officials of national ministries, industrial managers, leaders of projects

not selected for inclusion in BRITE, and academics. Among some of the

statistical problems of the BRITE survey are the following: the criteria

for selecting interviewees were not explicitly identifkd; the mail survey

had no way to know which of the 174 projects were represented in the

survey response; there was no analysis of nonresponse bias; the

attributes of the sample were not compamd with those of the populatio~

and industrial organizations were underrepresented and academic and

research institutions overrepresented. The ESPRIT evaluation was based

on 949 questionnairee responses and meetings that included input from

210 participant organizations-a significantly higher number than

R4CE or BRITE, but there is no indication in the evaluation document

of what the response rate was. This caveat is in no way intended to

question the sincerity of the evaluators or of the EC in conducting the

evaluations, but without more attention to the design of the evaluation

surveys it is hard to know what biases are included in the survey. OTA

staff noticed that with the partial exception of the BRIT’E evaluatio~ all

the evaluations mentioned above are more positive in tone and contain

fewer criticisms of the programs than did staff interviews with

representatives of companies and organizations participating in them.

OTA interviews have no statistical validity; but there was no attempt to

select interviewees based on their opinions of Framework projects.

154 Commission of the European Communities, “Communication

ffom the Commissio~” op. cit., p. 20.

155 Outfried Voigt, Executive Director, and Wolfram IU@

Siemens AG, Power Generation Group, interview with Todd Watkins,

Harvard BuSh3SS School.

156 She~ op. cit., p. 9-6.

157 Roger WoolnouglL “Breakthrough in Esprit’s Deep UV

Project,” Electronic Engineering Times, Dec. 3, 1990, p. 24.

158 Project P 1085, “Development and Application of Inw Cost

High Performance Multiprocessor Machine.”

159 Blackbmq op. cit., p. 13.

160 Guy de Jonquieres, “ESPRIT, JESSI Come Under AttaclG”

New Technology Week, Nov. 5, 1990.

161 Commis sion of the European Communities, “Evaluation of

the First BIUTE Prograrnme,” op. cit.

162 Boddendijlq op. cit.

163 ‘‘JESSI, Sematech Forge First Lin&” Electronz”c Engineen”ng

Times, Dec. 3, 1990, p. 2. This fwst project is an assessment of how

European and American integrated circuit manufacturing stacks up

against world standards; the two projects are expected to sign a

cooperative agreement on development of semiconductor production

equipment in the near future.

164 Commis sion of the European Communities, “Communication

from the Commission” op. cit., pp. 7-9.

165 Roger Woolnoug~ “ES2: Still a Unique ASIC Player,”

Electronic Engineering Times, Sept. 10, 1990.

166 Commission of the European Communities, “Communication

From the Commissio~” op. cit., pp. 14, 15,21,31.

167 For some insight on the direction EC competition policy may

take, see Alexis Jaqu~ Pierre Buigues, and Fabienne Ilzkovits,

“Horizontal Mergers and Competition Policy in the European Community,” European Economy, No. 40, May 1989.

168 Sir Leon Brit@ “1992: Priorities in Competition Policy,”

European Access, Apr. 2, 1989, p. 20.

169 In principle all proposed ties between competitors must be

reported to the EC, including joint ventures and strategic alliances. In

practice, the Coremission cannot possibly handle that much information

and will probably limit its demands.

170 See WoodPulp case, December 1988, described in Douglas E.

Rosenthal, “Competition Policy,” GSIY Clyde Hufbauer, op. cit.,

p. 325.

171 Guy de Jonquieres, “EC To Exert New Powers,” Financial

Times, Oct. 18, 1990.

172 Ibid.

173 Reported inEurope 1992 Law andStrategy, vol.1, No. 6, June

1990, p. 7.

174 Jaquemin et al., op. cit.

175 Ibid., p. 42,

176 Translink International, European DeaZReview, Fourth Quarter, 1989, p. 5.

177 Purchases in France were 6.3 billion pounds, compared to6.1

billion pounds in the more traditionally liberal United Kingdom.

178 CEC, quoted in Michael R.Calabrese, “Merger Law Develops,” Europe 1992: Law and Strategy, vol.1, No.6, June 1990, p. 3.

179 Quoted in Nicholas Colchesterand David Buchan, Europower

@mdon: Economist Books, Random House, 1990), pp. 145-146.

180 RobertFord and Wim Suyker, “Industrial Subsidies inOECD

IZconomies,’ OECD department of Economics and Statistics, Working

Paper No. 74. OECD Paris, Jamuuy 1990; CEC, First and Second.

Brussels, 1989 and 1990.

181 The ECarguesthatmost U.S. support for industry is concealed

within the defense budget, making the comparison unequal.

182 Commis sion of the European Communities, First Report on

State Aids, Luxembourg, 1989.

183 Commission of the European Communities, Survey, op. cit.,

p. 17.

184 EC, Subsidies, op. cit., table IVA, p. 14.
236 ● Competing Economies: America, Europe, and the Pacific Rim

185 NiallO’Neill, J.M. Dkliex&Assoeiates, “StateAids: TheLast

Frontier?” 1992: The External Impact of European Utij?cation, vol. 2,

No. 10, Aug. 10, 1990 p. 9.

186 Commission of the European Communities, Survey, op. cit.,

p. 2.

187 Artickx 92-94.

188 For a concise description, see David A. Deaco% “Current

State Aid Policy in the EC and the Implication of 1992,” in Ronald

Gerritse (cd.), Producer Subsidies (fxmdon: Pinter, 1990).

189 Treaty of Rome, Article 93 (3)d.

190 France plans to spend about $33.5 billion on 2,175 miles of

high speed network. Atlantic Trade Reporter, June 21, 1990, p. 7. As

noted earlier, France has also proposed large new subsidies for its

state-owned computer company, Groupe Bull.

191 “France, EC Reach Compromise on Renault Subsidies,”

1992: The External Zmpact of European Unij$cation, vol. 2, No. 5, June

1, 1990, p. 2; Europe 1992 Law and Strategy, vol. 1, No. 6, June 1990,

p. 5. The CEC compromised flom its original position which demanded

FF12 billio~ but France also promised to provide no further subsidies

in 1990, and to implement its promise to remove Renault’s regie

(state-owned) status, which effectively protected it from takeover.

192 Colchester and BuchaIL op. cit., p. 151.

193 The Dutch suppo~ ECU23.6 million for Philips, was speciilcally approved under this exception. Europe 1992: Law and Strategy,

vol. 1, No. 6, June 1990, p. 5.

194 Politically, the pressure to mtionalize came in Britain mainly

horn the Labour Party and trade unions. In France, it came partly as

workers coerced the government through crippling strikes and violence.

In Italy, there was pressure from trade unions and the Communist Parly

(as in France), but the dominant Christian Democratic Party also

benefited from the enormous possibilities for political patronage that

nationalization offered. Even Germany has a surprisingly large nationalized sector. By the time nationalization peaked, governments owned

large manufacturing concerns in every major European country.

195 Mitterrand formalized this approach in his 1988 election

manifesto, calling for a policy stance of neither more nationalization nor

more privatization.

196 George Grahanq “Companies Learn to Live Within Bounds,”

Financial ~-mes, Sept. 6, 1990. From September 1988 to September

1990, public sector f- had received FF183.4 billion in fresh capital:

FF13.8 billion in cash from the state, FF21.1 billion in state write-offs,

FF34.4 billion from the fmcial markets, and FF85.7 billion from

reinvested profits.

197 Sir hon Brim the EC Commissioner for Competition

Policy, argues that state-owned f- should be funded on commercial

terms, not dipping into government coffers through soft loans or

subsidies. See “State Aid Policy and the Publicly Owned Companies:

Are There Limits to What The State Can Do?” address to the Conseil

de la Concurrence, Mar. 9, 199Q “Developments in EC policy towards

public companies,” address to the Confindustria Conference, Sept. 22,

1990.
Chapter 6

Japanese Industrial Policy:

The Postwar Record and

the Case of Supercomputers
CONTENTS

Page

ECONOMIC TRADITIONS AND INDUSTRIAL POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239

OVERVIEW OF TOOLS AND TARGETED SECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241

Institutions of Industrial Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241

Industrial Policy and Steel Industry Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244

Industrial Policy and Motor Vehicle Industry Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246

Color Televisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248

Semiconductors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249

SUCCESSES AND FAILURES OF INDUSTRIAL POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250

INDUSTRIAL POLICY FOR THE 1990s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252

SUPERCOMPUTER INDUSTRY DEVELOPMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253

Supercomputer Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254

Potential Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255

Comparisons of U.S. and Japanese Supercomputers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256

HISTORICAL BACKGROUND: THE EFFECT OF PAST TARGETING OF THE

MAINFRAME COMPUTER AND SEMICONDUCTOR INDUSTRIES . . . . . . . . . . . . . . . . . . 260

TARGETING SUPERCOMPUTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264

The High Speed Computing System for Scientific and Technological Uses . . . . . . . . . . . . . . . . . 265

Other Government-Sponsored Projects Related to Supercomputer Technologies . . . . . . . . . . . . 268

PROCUREMENT OF SUPERCOMPUTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270

Private Sector Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270

Public Sector Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272

OTHER FACTORS CONTRIBUTING TO JAPAN’S SUCCESS IN NURTURING A

DOMESTIC SUPERCOMPUTER INDUSTRY.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278

Industry and Corporate Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278

Japan’s Industrial Enterprise Groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279

UNITED STATES POLICIES TOWARD THE SUPERCOMPUTER INDUSTRY . . . . . . . . . . . 279

Appendix 6-A. Government Financial Assistance to the Computer Industry and Its Size

Relative to Private Sector Investment 1961-89. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289

Figures

Figure Page

6-1. Actual v. Peak Supercomputer Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258

6-2. Performance/Price Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259

6-3. Schedule of Research and Development for High Speed Computing System for Scientific

and Technological Uses Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265

6-4. organization of the Supercomputer Project, 1981-89. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266

Tables

Table Page

6-1. Comparison of Cray Research, Fujitsu, Hitachi, and NEC Revenues, R&D Expenditures,

and Profits, 1981, 1982, 1988, 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254

6-2. Cray Researches Revenues, R&D Expenditures, and Profits . . . . . . . . . . . . . . . . . . . . . . . . . . . 255

6-3. Divisions of U.S. and Japanese Supercomputers Firms, 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . 255

6-4. Value of Worldwide Supercomputer Shipments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256

6-5. Number of New Installations in Japanese Supercomputer Market . . . . . . . . . . . . . . . . . . . . . . 257

6-6. Japanese Procurement of Supercomputers, 1980-90 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260

6-7. Government Subsidies for Computer-Related Government-SponsoredR&D Projects . . . . . 263

6-8. U.S. and Japanese Supercomputer Companies’ Share of the World Market . . . . . . . . . . . . . . 270

6-9. U.S. and Japanese Supercomputer Companies’ Share of the European Market, 1989 . . . . . 270

6-10. U.S. and Japanese Supercomputer Companies’ Share of the Japanese Market, Installed Base . . 271

6-11. Purchases by Firms with Keiretsu Ties to Japanese Supercomputer Makers, 1980-90.......271

6-12. List Purchase and Rental Prices of Japanese Supercomputers . . . . . . . . . . . . . . . . . . . . . . . . . . 276
Chapter 6

Japanese Industrial Policy:

The Postwar Record and the Case of Supercomputers

Japan is the world’s most successful practitioner

of industrial policy. Japan’s industrial policies are

largely, though not solely, responsible for its economic recovery from World War II and its increasing

preeminence in high-technology industries. Other

factors influencing these successes are intelligent

corporate strategies, an emphasis on saving and

investment rather than consumption, and social

ethics that place premium value on hard work and

good education.

The Japanese Government has used industrial

policies throughout the postwar period-and indeed

did so for decades before the war-to guide the

economy in the direction of higher value added and

greater knowledge intensity, and away from heavy

reliance on unskilled labor and natural resources.l

While there is no consensus on the impact of

Japanese industrial policy on national income,

research suggests that by reducing the costs and risks

for domestic firms to invest in a given industry, and

by helping firms to advance technologically, industrial policies and targeting have contributed to

Japan’s international competitiveness in many industries, including steel, motor vehicles, semiconductors, and computers. Considering the impact that

competitive companies in these industries have on

other industries both upstream and downstream, the

effect is profound.

American analysts are divided in their assessments of Japanese industrial policy. All acknowledge that the Japanese bureaucracy has tried to

create competitive advantages both in specific

industries and for business in general. There is less

agreement about the results. It is rare in economics

or political science to encounter a bona fide control

group; lacking one, it is difficult to know what

would have happened in a particular nation if some

historical circumstance had been different. We

cannot be certain what Japan’s economic development would have been without industrial policy; this

leaves ample room for disagreement. At one end of

the spectrum are analysts who view industrial policy

as the major explanation of Japan’s success. Analysts at the other end hold the view that Japan’s

industrial policies have had a marginal impact at

best. OTA’s conclusion is that industrial policy has

been a key ingredient, along with several other

attributes of Japanese society, policy, and business

tradition. 2

The debate over the effectiveness of Japan’s

industrial policies has been fierce for reasons other

than the wide latitude for interpretation of historical

events. Accepting that Japan’s approach has been

successful is close to admitting that perhaps our own

policies and ideology might need rethinking, a

difficult and painful process for any nation. But the

admission of Japan’s success does not mean a

makeover of America in Japan’s image. Other

nations can learn from Japan’s success, as Japan did

from nations more advanced; most of the world’s

developed nations or regions are in the process of

strengthening their commitments to industrial policies, in part because of Japan’s economic performance. This does not mean that other nations or

regions are blindly copying Japanese policies of the

past or present.

As most Western writers on the subject have

noted, Japan is changing, and has been throughout

the postwar period. The speed and character of the

changes in Japan are another part of the vigorous

debate over Japanese policy. Some argue that Japan

is becoming more like the West, in terms of both

economic performance and government policy. In

some ways, it is; yet the Japanese industrial policy

tradition and bureaucracy are still powerful, and

continue to operate in very different ways than the

United States. Moreover, Japan’s Government and

economic system continue to support development

of industries and products at the high-technology

frontier, although the intervention is less heavy

handed than it was a couple of decades ago.

ECONOMIC TRADITIONS AND

INDUSTRIAL POLICY

From very early in its history, the Japanese

Government took the initiative in industrialization

and economic development. Threatened by foreign

powers and lagging behind economically and technologically, the Meiji Government, together with

the top merchant families, took the lead in the 1870s

–239–
240 . Competing Economies: America, Europe, and the Pacific Rim

in establishing and promoting Japan’s basic infrastructure and industries.3 By the turn of the century,

the policies devised by the Meiji Government to

promote industrial development were paying off:

iron and steel production doubled between 1875 and

1895, machinery production rose sevenfold, and

textile production increased eightfold. Japan was

developing military power as well, and was strong

enough to renegotiate a few treaties that had rankled

for some time.4

Successful experience with a strong bureaucracy

and close relations between business and government gives modem Japan a view of competition and

the appropriate role of the state that is quite different

from the laissez-faire traditions of the United States

or Great Britain. Active government intervention in

the economy is considered natural and indispensible

in the Japanese bureaucracies, and unfettered price

and investment competition is viewed with reservation, at best. Many of the practices of business and

government that are considered perfectly normal

means of promoting industrial health and development in Japan are considered unfair in America.

According to one analyst:

The American criticism of Japan. . . stem[s] from

the conviction that in many cases market outcomes

are shaped by Japanese business practices considered unfair-predatory pricing, patent infringement,

industrial espionage, and explicit or implicit protection of Japanese markets from import competition

. . . the basis on which the problem must rest [is that]

Japanese success in blocking imports into their own

country or in penetrating U.S. markets comes, at

least in part, from anticompetitive behavior rather

than from competitive ability.5

Scholars differ not only on whether Japanese

industrial policy has succeeded but also on the

criteria they use to measure success. Some studies

focus on the contribution of industrial policies

(including targeting) to the development of the

targeted industry,6 others on consumer welfare or

national return on investment,7 and still others on

how policies affect both specific industries and the

nation’s long-term technological trajectory.8

Analysts at one end of the spectrum believe that

Japan’s active state bureaucracy, close governmentbusiness relationships, the stable political rule of the

Liberal Democratic Party, the weak Diet (legislature), and strong industrial policy are key ingredients

of Japan’s success. According to this school, Japan

is a mercantilist country that focuses primarily on

national economic goals and self-sufficiency. With

the decline of U.S. hegemony, analysts of this stripe

are particularly concerned about what they see as

Japan’s hesitation to take on a fair share of the

economic and political burden of supporting the

world economic order. They argue that Japan is

benefiting tremendously from the open trading

system, exploiting the openness of other nations.

They acknowledge that fierce market competition

has been another key ingredient of Japan’s success,

but suggest that market forces have been shaped by

state industrial and trade policies and other institutional guidelines in ways that often benefit Japanese

businesses at the expense of both foreign businesses

and Japanese consumers. They identify institutions

like MITI (the Ministry of International Trade and

Industry), the keiretsu, the government’s Japan

Development Bank, and the quasi-governmental

telecommunications giant, NIT, as hindering foreign access to the Japanese market. While they

acknowledge that MITI’s power has waned in

recent years and that Japan’s economy is more open

now than it was a decade ago, they believe that MITI

still plays an important role in nurturing industries

and technologies, and that Japan’s market is still

more closed to imports than those of most other

developed nations.

There are a variety of views within this school of

thought. Some see the bureaucracy as having been

the most important actor guiding development, some

see big business as having the upper hand in the

government-business relationship, and some believe

that no one group in the ruling elite is really in

charge.9

At the other end of the spectrum are those who see

Japan’s industrial policy as having had, at best, a

marginal effect on Japan’s success. These analysts

argue that high rates of savings and investment

operating in a free market, a good educational

system, and willingness to quickly adopt foreign

technologies are the key sources of Japan’s success.

This group sees Japan as being very similar to the

United States and Western capitalist democracies in

having policies that both support the free trade

regime and focus on maximizing consumer welfare.

Some argue that Japan has developed in spite of

industrial policy, others that industrial policy has

only compensated for Japan’s underdeveloped stock

and venture capital markets and small supply of

scientists, and still others that industrial policy has
Chapter 6--Japanese Industrial Policy: The Postwar Record and the Case of Supercomputers ● 241

helped at the margin in some industries.10 Overall,

they believe that the role of Japan’s industrial policy

has been greatly exaggerated and point out that some

targeted industries, such as petrochemicals, have not

been successful, while many competitive industries,

such as consumer electronics, have not been actively

targeted. Proponents of this view argued for a long

time that the U.S. trade deficit with Japan had little

to do with Japan’s industrial and trade policies and

was instead primarily the result of an overvalued

dollar. The failure of the sharp plunge of the dollar

since 1985 to correct the U.S.-Japan trade imbalance

has led several of these analysts to change their

views. 11

In addition to the stubborn trade deficit with

Japan, another development is reconciling some of

the differences between the views described above.

In the past decade or so, a group of economists often

referred to as ‘‘the new international economists,”

using accepted economic methods, have given new

life to an old idea: that there are industries that add

more to national income and well-being than others,

and that governments can raise national income by

promoting such industries. These sectors are characterized by significant barriers to entry (in terms of

both knowledge and resources), increasing returns to

scale, a steep learning curve, high value added, and

significant positive spillovers to other sectors of the

economy. Some of these analysts suggest that the

Japanese Government, by using strategic industrial

and trade policies, has been able to increase national

income in some cases by targeting such sectors.12

As new evidence becomes available, it seems

increasingly clear that Japan’s industrial policy has

contributed significantly to the development of

several specific industries, and has created a climate

conducive to development in many more; its role has

been particularly significant in high-risk, high-cost,

and innovative industries.

OVERVIEW OF TOOLS AND

TARGETED SECTORS

There have been four main periods of industrial

policy since World War II. The earliest, 1945 to

1952, included the creation or rebuilding of many of

the industrial-policy institutions to help Japan’s

economy get back on its feet. From the mid- 1950s to

the mid-1960s, the government began to allocate

scarce funds to specific industries, including steel,

automobiles, and electronics. The following decade

was the peak of Japan’s so-called high-growth

period, and represented to many Japan’s last chance

to gain a foothold in high-technology industries

before the inevitable pressure to open up its markets

began. Government still wielded powerful tools,

though with less heavy handed policies than in the

1950s.

The current period began in the mid-1970s,

following the first energy shock. Starting in the early

1970s, the state, besieged by the oil crisis and

various pollution and quality-of-life problems, began

to shift its support away from energy-intensive

industries, such as steel, towards more knowledgeintensive, high value-added industries, such as

computers, semiconductors, and biotechnology. In

this period, and particularly in the 1980s, many

Japanese companies became very strong, and thus

less dependent on government for protection and

subsidies. In response to increased trade friction,

industrial and trade policies became less visible and

formal, and tariffs and quotas were eliminated or

substantially reduced. At the end of the decade, legal

hindrances to foreign investment were removed as

well. Despite this liberalization, Japan’s market

remains one of the most difficult to enter, especially

among advanced capitalist countries; most of the

current barriers are business practices and institutions, many of which evolved to serve other purposes as well as protection.

Institutions of Industrial Policy

The Japanese bureaucracy, fortified by new tools

instituted during the Occupation, used industrial

policy to try to change Japan’s industrial structure

from labor-intensive industries during and before the

war to capital-intensive industries in the two decades

following the war, and to knowledge-intensive

industries beginning in the 1970s. In the first few

years following the war, Japanese and Occupation

leaders set up many of the institutions and laws that

would provide a foundation for postwar industrial

policy. MITI, the central and most powerful of those

institutions, was created in 1949 (before that, it was

the Ministry of Commerce and Industry, or MCI). In

1950, the Japan Export Bank (later called the

Export-Import Bank) was established to promote

exports by providing financing. The government’s

Japan Development Bank (JDB) was established in

1951 to help supply low interest loans to designated

industries for investment in plant and equipment.

JDB went on to be an important bellwether for
242 ● Competing Economies: America, Europe, and the Pacific Rim

commercial bank lending, as well as being a lender

itself. 13

Several laws, such as the Foreign Exchange

Control Law of 1933, the Foreign Exchange and

Foreign Trade Control Law of 1949, and the Foreign

Investment Law of 1950, gave the Japanese Government control over the flow of foreign exchange,

investment, and goods. Though necessary in the

early years to deal with balance-of-payment problems, these laws also provided the government with

an effective tool with which to protect Japanese

industries from foreign competition. MITI’s control

over the foreign exchange budget “played a large

role in protecting and fostering domestic industry, ”

states Professor Nakamura Takafusa of Tokyo

University .14

Numerous studies show how these laws prohibited or controlled the entry of foreign products and

investment and promoted production-oriented rather

than consumer products-oriented industries.15 For

example, the threat to fledgling Japanese producers

from foreign firms that wished to sell cars or invest

in automobile production in Japan was substantial in

the early 1950s. The Japanese Government remembered that, in the 1930s, vehicles manufactured in

Japan by General Motors and Ford came to dominate

the market, inhibiting the development of Japanese

auto companies. By 1934, vehicles made in Japan by

American companies held almost 90 percent of the

Japanese market, and the large volume of imported

parts threatened to leave Japan with a chronic trade

deficit.16 So, when several European and one American automobile firm began to explore possibilities

for building assembly plants in Japan in the early

1950s, MITI took several steps. One was to issue its

“Basic Policy for the Introduction of Foreign

Investment into Japan’s Passenger Car Industry,”

supplementing the Foreign Exchange Law, which

stated that repatriation of earnings from foreign

investment in marketing facilities was not guaranteed, and earnings repatriation from production

facilities would be guaranteed only if those facilities

“contributed significantly to the development of

domestic industry.”17 In effect, this gave MITI the

authority to determine on a case-by-case basis whose

earnings could be repatriated, and effectively barred

marketing. Moreover, MITI stated that foreign firms

would be allowed to enter the Japanese market only

through technical tie-ups with domestic fins. It

announced four provisions for inclusion in the

contracts:

1.

2.

3.

4.

small European cars were more suitable than

large American cars;

the use of foreign currency allocated for cars

should be used for importing parts instead, and

MITI could only allocate enough for production of 1,200 cars per company;

the Japanese company should try to obtain the

right to sell the cars in Southeast Asia; and

domestically made parts should eventually

substitute for imported parts.

Using these tough criteria, MITI rejected all but 4 of

11 proposed tie-ups.18

Access to foreign technology was preferred over

both foreign direct investment and imports. Foreign

technology was seen as an important source of

profit, and access to it was tilted mostly towards

basic industries.19 The automobile case was perhaps

the most notable exception; and even there, one of

the primary reasons for promoting automobile production was to support the metalworking and

machinery industries that auto production demanded.

MITI (which was MCI before 1949, but which is

referred to as MITI throughout this report, for

convenience) emphasized that automobile production was closely connected with parts and machinery

industries and established an automobile section in

January 1946.20 Later, in the 1950s, MITI used the

same argument more strongly, again in support of its

then uncompetitive automobile industry, promoting

passenger car development as “the pinnacle of the

modem machinery industry in our country where

there is no aircraft industry.”21 Making cars would

raise technology and quality in both machinery and

steel industries, as well as create markets.

Though originally enacted to deal with immediate

postwar problems, the laws controlling foreign

investment and foreign exchange were retained far

longer than the Occupation forces intended; in many

cases, they were not revised until the late 1970s and

1980s, and many of the revisions were cosmetic. On

the other hand, the antitrust law was weakened 1

year after the Occupation ended; this enabled the

government to restrict competition and promote

economies of scale, authorized anti-recession and

rationalization cartels, sanctioned retail price maintenance, and relaxed restrictions on cooperative

arrangements such as cross-shareholding, interlocking directorates, and mergers. In the late 1950s and

1960s, the Japanese Government exempted from the
Chapter 6--Japanese Industrial Policy: The Postwar Record and the Case of Supercomputers ● 243

law certain sectors such as the machinery and

electronics industries.22

The weakening of the antitrust laws was also a

part of the government’s strategy to encourage the

rebuilding of the industrial groups after the Occupation. Industrial groups, or keiretsu, were also a

prominent part of the Japanese economic scene

before the war, but in somewhat different forms; the

pre-war zaibatsu were family controlled enterprises,

in many cases of quite grand proportions. While the

Japanese authorities initially cooperated with the

Occupation forces in dismantling the zaibatsu after

the war, they had little commitment to a less

concentrated economic structure overall.23 The reemergence of these groups as looser, bank-centered

alliances had two benefits: the government could

more easily influence the behavior of firms through

centralized control over funds and banking, and the

close relations of buyers and suppliers (including

cross-shareholding) within groups helped keep imports and foreign investment down. The cohesiveness of the industrial groups became even more

important in the late 1950s and early 1960s, when

foreign pressure to liberalize Japan’s market stepped

up. Japan also joined the Organization for Economic

Cooperation and Development (OECD) and in 1964

agreed to accept the obligations of a developed

country under Article 11 in the General Agreement

on Tariffs and Trade (GATT), which meant working

to eliminate quantitative restrictions on trade.24

Another institutional innovation that provided

key financial support for industrial policies is the

Fiscal Investment and Loan Program (FILP), a huge

discretionary “second budget” separate from the

general account budget.25 First established in 1953

when the Ministry of Finance (MOF) pooled the

postal savings accounts, national pensions, and

various other accounts, this budget is made annually

by MITI and MOF bureaucrats with little input from

elected officials and other constituents. It is enormous;

it has been from one-third to one-half the size of the

General Account Budget and has ranged from a low

of 3.3 percent of GNP in 1956 to a high of 6.3 percent

in 1972.26 In 1990, the FILP was in the neighborhood of 34.6 trillion yen, or about $250 billion (at an

exchange rate of Y135 per dollar) .27 The postal

savings system, which contributes nearly a quarter

of the money in the total FILP budget, has deposits

of over V134 trillion (about $1 trillion), making it the

largest financial institution in the world.28 The

system was able to attract savings from citizens by

allowing a lower tax rate on interest to depositors

and allowing the post offices to offer higher interest

rates than banks, although these ‘‘higher” rates are

still low by American standards. In 1988, they

increased to what was then a high of 1.68 percent,

and recently went up to 3.48 percent.29 By paying

low interest rates to depositors, the FILP system has

been able to subsidize producers with low interest

loans. 30

FILP money goes directly to finance government

policies; it is still an important instrument of MITI

influence. 31 In the 1950s especially, FILP was

indispensable for implementing government policies; in the early part of that decade, it accounted for

nearly 30 percent of the capital available to industry.

In the 1980s, in contrast, FILP’s contribution fell to

less than 10 percent. Japan’s companies now have

many sources of capital and far less need for publicly

funded capital investments or indicative loans to

encourage private sector lending.32

Targeting was also supported indirectly by a

broader financial system that favors producers over

consumers. Indeed, by not allowing instruments of

consumer credit to develop until recently, Japan has

made it imperative that its citizens save a large part

of their income for any major expenditures. The lack

of adequate provisions for retirement also made

saving for old age a must. By limiting the development of viable alternatives to savings deposits and

limiting interest rates on those deposits, the government gave citizens little choice but to put their

savings in bank or post office accounts at very low

interest rates, while Japanese financial institutions

were able to invest those savings abroad at interest

rates often exceeding 10 percent.

MITI thus controlled a large source of money that

was unaffected by political maneuvering or lobbying, foreign exchange and investment, and trade.

Also in the toolkit of policies to promote industrial

development were policies to gain cheap access to

foreign technology, tax measures to encourage

specific types of investment, the ability to organize

cartels, and a limited ability to affect industrial

concentration (the number and size of firms in an

industry). Through a process of constant consensus

building with industry representatives, MITI bureaucrats could bring many specific measures into

play as needed for the industries it wished to

promote, as illustrated by the case studies below.
244 ● Competing Economies: America, Europe, and the Pacific Rim

Industrial Policy and

Steel Industry Development

The steel industry is a key example of Japan

building up a competitive industry in an area in

which it clearly had no comparative advantage. The

steel industry was badly damaged during the war,

leaving only about 25 to 30 percent of plant capacity

functional as late as 1949.33 Japanese producers also

had tremendous cost disadvantages, largely due to

the high price of imported raw materials and poor

labor productivity resulting from inefficient equipment.34 To help the industry become competitive,

the government protected it from foreign competition, gave it financial aid for investment in new

technologies and improved plants, created various

mechanisms to manage domestic price and investment competition, and encouraged mergers to help

the firms gain greater economies of scale.

Initially the steel industry was protected by high

tariffs. Japan imported very little steel during the

1950s, even though domestic steel cost more than

U.S. steel. Except during the 1957 recession, steel

imports never exceeded 2.7 percent of internal

demand. 35 Imports of raw materials and equipment

necessary to produce steel were generally exempt

from import duties.

Financial assistance in the form of grants, low

interest loans, and tax breaks were given to the

industry, especially in the 1950s and early 1960s.

Much of the aid came from Japanese coffers, but in

the 1957 to 1958 recession, MITI arranged for the

World Bank to funnel loans to the steel industry

through the Japan Development Bank. The JDB

guaranteed the loans and also got the World Bank to

loosen its regulations on the percent of equity and

liquidity required for a firm receiving World Bank

loans. 36 As in other industries, financial aid had

strings attached: it went only to the firms MITI felt

were strongest and most capable of using the money

effectively, and it was given for investment in

specific types of equipment, especially to larger,

modern factories using efficient technologies.

MITI’s control over access to foreign exchange

enabled it to play a key role in the introduction and

diffusion of basic oxygen furnace (BOF) technolofg.37 In 1955, two Japanese steel makers asked to

license BOF technology from an Austrian firm.

Mill, concerned that competition between the two

for technology would result in a higher price,

selected one to be the general licensee and required

that it give the other steel makers equal access to the

technology as sublicensees.38 This kept the Austrian

patent holder from playing the Japanese companies

off against each other to get a higher license fee, a

strategy MITI would use again in gaining access to

foreign technology, notably in semiconductors and

computers. A complex agreement was worked out

by which all firms using the BOF technology

contributed to the $1.2 million license fee. AS a

result, the technology was cheap: during the 14-year

period of the license, it cost Japanese steel makers

0.36 cents per ton, compared with the 15 to 25 cents

per ton that North American firms paid in royalties.39

In addition, MITI’s action helped diffuse the technology quickly. 40 The competition, then, quickly

shifted from who could gain access to the technology to who could apply it rapidly and efficiently.

MITI did not pick BOF technology as a winner; the

two firms discovered it themselves. But by making

it available at a reasonable rate and on terms that

promoted rapid diffusion, MITI helped upgrade

Japan’s steel industry faster and more cheaply than

market forces would likely have done.

MITI also helped stabilize prices, production, and

investment through cartels. A major problem in

capital-intensive, high-freed-cost industries like steel,

which make relatively undifferentiated producer

goods, is that their boom-bust cycle can often lead to

severe investment and price competition. During

boom times, the firms expand capacity to cut costs

through economies of scale; during recessions they

cut prices to minimize losses inherent in businesses

that have high freed costs. 41 Many studies have

concluded that these investment and price cartels

helped provide the industry with stability of supply

and prices, especially during recessions.42 Japan’s

companies were particularly vulnerable to economic

downturns because of lifetime employment, high

debt-to-equity ratios, and especially intense domestic competition. Because of these, it was much

harder for Japan’s companies than for their foreign

competitors to lay off workers, cut back on production and investment, and operate at low capacity

utilization. While these rigidities are partially offset

by other institutions such as widespread use of

temporary workers, subcontracting, close relationships with banks, deep pockets and ready availability of capital, recessions still pose a special problem.43 Of course, this also means that part of the

problem of over-investment and excessive price
Chapter 6--Japanese Industrial Policy: The Postwar Record and the Case of Supercomputers .245

competition is a result of government industrial

policy; some studies argue that MITI’s cartels, by

sharply reducing risks, encouraged firms to overinvest in plant and equipment, which in turn exacerbated the problems of recession vulnerability.44

While Japan’s steel makers have had excess capacity

problems, particularly right after the first oil shock

in 1974, their capacity utilization has almost always

been higher than that of their U.S. and European

counterparts, 45 perhaps enabled by the very fast

growth of the Japanese economy, the emphasis on

exports, or both. And Japan’s big integrated mills

did contribute to Japan’s becoming the world’s

lowest cost producer of steel.

MITI’s original plan for the steel industry encouraged cooperation in order to stabilize investment,

prices, and output. Later, it encouraged mergers to

increase the size of firms, hoping to strengthen the

steel companies to compete with foreign firms.46 In

the 1960s, as Japan was beginning to liberalize its

markets to conform with GATT and OECD requirements, MITI pushed for mergers in many industries

to strengthen them and thus prevent U.S. firms from

dominating Japanese producers.47 Yawata and Fuji

Steel, Japan’s two largest steel fins, were one

firm--a nationalized steel company-until it was

broken up and privatized by the U.S. Occupation.

With MITI pressure and financial assistance, the two

companies merged to form New Japan Steel in

March 1970, creating the world’s largest steel

maker. MITI’s goals were to create a dominant firm

that could provide stable leadership in price, technology, and production volume, and to decrease

costs. 48 The merger attained these goals, and the

higher steel prices that Japanese scholars feared

would result never materialized. Imai Kenichi, a

scholar who was particularly concerned that the new

company’s size and domination of the market would

have a negative impact on market performance,

admits that:

within only 2 years after the merger, the Nippon

(Japan) Steel Corp. developed its international

competitiveness beyond a necessary level to the

point where Japanese-U.S. relations maybe brought

to another crisis similar to that which developed over

textiles. ..49

In short, the merger was so successful it caused trade

friction.

Other policies promoted development of the steel

industry. Special depreciation allowances promote

investment in rationalization (a term that covers

many things having to do with achieving the proper

size of industry and enterprises, including downsizing to eliminate excess capacity, advancement of

technology, improvement of quality, reduction of

costs, and improvement of efficiency), acquisition of

experimental equipment, and exports. During the

1950s, the steel and automobile industries received

exceptionally large benefits from special depreciation schemes, and between 1962 and 1973, the steel

industry ratio of special depreciation allowances to

total depreciation was, at 15 percent, almost twice

the industry average of 8 Percent.so By another

estimate, a revision of the depreciation schedule in

1961 reduced the statutory life (depreciation period)

of industrial equipment by 20 percent; another

revision 3 years later reduced it an additional 15

Percent.51

Early in the 1950s, the steel industry was also an

object of special attention from the Japan Development Bank. JDB provided up to 15 percent of the

funds to implement MITI’s first rationalization plan

for the industry from1951 to 1953.52 Until the late

1960s, the iron and steel industries were protected

from imports by measures equivalent to a 30-percent

tariff. By 1973, the effective rate of protection had

fallen to 17 percent, but it shot backup to over 50

percent in 1975 (Japan’s severe post-oil-shock

recession), and fell again to below 20 percent by

1978.53 The steel industry got approval to import

needed industrial equipment without paying the

tariff on it. Finally, the industry was encouraged to

export through the use of a tax deduction in the early

years; this provision disappeared in 1963.

Without industrial policy it is extremely unlikely

that such a competitive industry would have emerged

so rapidly after the devastation of the war. While

Japan’s steel industry has had some problems—

especially excess capacity after the oil shock in the

mid-1970s--it has been able to scale back its

operations and shift into specialty steel. Some

scholars nonetheless argue that steel may be “the

success that never was” because it had a relatively

low return on investment compared with other

industries in Japan;54 they assert that the resources

poured into the steel industry could have been

allocated more efficiently in other industries to gain

a higher return. Targeting steel, they maintain,

“probably reduced Japanese national income.”55
246 ● Competing Economies: America, Europe, and the Pacific Rim

Japan’s steel industry did have a relatively low

return on investment. But this was not the concern of

the Japanese Government, nor the firms or their

shareholders. Their goal was to gain greater world

market share and to provide the foundation for

industries that use steel, such as automobiles,

machine tools, and shipbuilding. Low return on

investment in an industry that provides key inputs

into other industries does not necessarily lead to a

net loss for the economy.

Indeed, evaluating the effectiveness of industrial

policy on the basis of return on investment often

leads to the conclusion that Japan is largely a failure.

Many of Japan’s top firms today have returns on

investment that are unacceptable by U.S. standards,

made possible by, for example, cross-shareholding

and stable shareholding, low capital costs, and a

general preference for increasing market share over

increasing share prices.56 But while many Japanese

firms and industries may be inefficient by U.S.

financial standards, they are effective in consistently

winning market share in many key industries. Also,

the low returns on steel may well have been

compensated by higher returns in industries that use

steel, including automobiles and machinery. Steel

had other benefits for Japan; by 1960 it was the

country’s largest earner of precious foreign exchange. 57 More generally, it provided the industrial

infrastructure necessary for an advanced, industrialized nation, including a large pool of skilled workers

with high-paying jobs.

Industrial Policy and Motor Vehicle

Industry Development

Policies towards nurturin“ g an internationally competitive automobile industry followed a pattern

similar to those of the steel industry: heavy protection and subsidization, incentives for investment in

technology, and increased concentration in the

industry.

Efforts to support Japan’s fledgling auto industry

began before the war.58 Early car producers were

true entrepreneurs, but without support they might

well have withered on the vine. The Japanese

military became interested in motor vehicles as early

as 1906; by 1918 the government had passed the

Military Vehicle Subsidy Law to provide manufacturing, maintenance, and purchasing subsidies to

producers and buyers of qualifiedd vehicles (buses

and trucks). To qualied for the subsidies, a producer

had to show that over half the capital and voting

rights of the company were held by Japanese

nationals, and most parts had to be made in Japan.

This was an important stimulus to the domestic

industry, but not enough to protect it. Ford and

General Motors, watching their sales take off after

the Great Kanto Earthquake of 1923 damaged all of

Japan’s domestic auto producers, rushed to set up

their own offices in 1924 and 1925, and quickly

came to dominate the market. It became apparent to

the government that imports and foreign direct

investment could cripple the technologically backward domestic industry, which could in turn contribute a chronic deficit to the trade accounts and be a

drain on Japan’s scarce foreign exchange. The

Automobile Manufacturing Enterprise Law of 1936,

through various regulations, forced Ford and GM to

terminate their successful operations in Japan and

enabled Toyota and Nissan to use the U.S. companies’ dealer networks to build their own distribution

systems. This law also gave the army control over

policies affecting the automobile industry, and

turned domestic producers’ attention almost exclusively to making trucks and buses.

After a few chaotic postwar years during which

Japanese automobile producers had trouble getting

permission from the Occupation forces to produce

cars or obtain the raw materials and parts needed to

do so, responsibility for promoting the auto industry

was transferred to MITI. The Ministry pushed

automobile industry targeting because, it argued, the

auto industry would provide the source of demand

needed for Japan to modernize related industries,

including machinery.59 This decision was controversial—the governor of the Bank of Japan, for

example, initially argued that:

. . . since Japan should develop its foreign trade on

the basis of the international division of labor, efforts

to develop the auto industry will be futile. . . As we

can get inexpensive motor vehicles of excellent

quality from the United States, why don’t we rely

upon them?60

MITI prevailed.

The first 5-year plan for promotion of the auto

industry came from MITI in 1948, and it featured the

use of imported technology and financial assistance

provided by the Reconstruction Finance Bank to

help obtain capital, raw materials, electricity, and

labor. The Asian market was the main export target,

and controls on prices and distribution were put in
Chapter 4-Japanese Industrial Policy: The Postwar Record and the Case of Supercomputers .247

place for an interim period, to be lifted when

appropriate. 61 Recession caused by economic policies known as the Dodge Line (after Joseph Dodge,

the Detroit banker who drafted and implemented

Japan’s deflationary program) forced abandonment

of the plan and threw the automobile companies into

chaos. Nissan laid off over 1,800 employees in

October 1949 and cut wages 10 percent, Diesel

Motors abolished its agreement with its union and

laid off nearly a quarter of its workers, and Toyota

almost collapsed (although its founder refused to lay

off anyone and was eventually forced out of the

company as layoffs were implemented). Rescue

came in the form of the Korean War. Japan, as the

best source of emergency supplies, received many

orders for special procurements by the U.S.-led U.N.

forces, enough to end the recession and save the

struggling automobile industry.62

The hiatus in government promotion of the

automobile industry brought by the Dodge Line was

brief. After the recovery, many new policies were

implemented to support the industry. They included

an ambitious road construction program; protection

from imports and direct investment; imports of

foreign technology under favorable terms; and direct

financial assistance.63 Protection consisted of high

tariffs (35 to 40 percent on cars until 1969, falling to

zero by 1978), commodity taxes that favored domestic automobiles, foreign exchange allocation that

restricted imports, and foreign exchange controls on

direct investment. Excise taxes that favored small

cars over large, luxury vehicles effectively kept out

American cars, but after a surge in imported small

cars from Europe, additional measures were implemented. Among them were allocation of foreign

exchange to buy European cars only for taxi

companies and the media, and prohibition of resale

for 3 years.64

Other measures were similar to those used in

steel: low interest government loans, subsidies,

special depreciation allowances, exemption of necessary equipment from import duties, and approval

of foreign exchange essential for foreign technology

imports. 65 In 1956, the Law on Temporary Measures

for Promoting the Machinery Industries added auto

parts and automobiles, and research suggests that

this promotion was particularly effective.66 For

example, financial aid along with efforts to encourage standardization and increase concentration of

the auto parts industry contributed to a 56-percent

cut in the cost of producing a passenger car between

1961 and 1965.67

Even with all these supports and the outstanding

performance of the Japanese motor vehicle producers, the auto industry is frequently pointed to as a

failure of Japan’s industrial policy because of

MITI’s repeated failures to consolidate the industry

into one or two firms or groups. In 1955, for

example, MITI tried to promote production of an

exportable subcompact by a single company, an idea

the firms rejected strongly. In 1961, MITI tried to

consolidate the industry into three groups to develop

three types of cars. This plan was rejected, too. Had

it been adopted, it would by widespread agreement

have damaged the industry’s long-term competitiveness. It is important to realize, however, that what

would clearly have been a mistake did not, in fact,

occur. Indeed, there have been very few large

blunders of industrial policy, such as would have

occurred if MITI had succeeded in merging the auto

companies, because there is a system of checks and

balances among the firms and government officials;

policies are made through a process of negotiation

and compromise, and in cases where the firms

believe that a government policy goes sharply. .

against their long-term interest, they reject it. The

auto case is not the sole example of MITI unsuccessfully attempting to merge firms; in the late 1960s and

early 1970s the ministry also tried to get the six

major computer firms to merge into two or three

companies, and the firms refused. A compromise

was reached whereby the six firms formed three

different groups for cooperative research and development. Despite this failed MITI attempt to consolidate the computer industry, even the most skeptical

analysts acknowledge that industrial policy contributed to the development of the computer industry.68

Protection from imports and foreign investment,

along with financial assistance, help in importing

needed inputs, and special access to foreign technology were necessary though not sufficient conditions

for Japan to develop comparative and competitive

advantage in the automobile industry. The government did not create the automobile industry in Japan,

nor did it create other successful industries such as

electronics. Clearly, the companies’ willingness to

invest in new technologies, their persistence in

finding new and better ways to use technologies,

their continual improvement, and intelligent strategies for penetrating foreign markets played a vital

role, as did Japan’s well-educated and disciplined
248 . Competing Economies: America, Europe, and the Pacific Rim

workers and overall financial policies that encouraged savings and discouraged consumption.

Color Televisions

Many proponents of the market explanation of

Japan’s economic development point to consumer

electronics as an industry that succeeded without

government promotion. In fact, they argue that the

industry boomed in spite of a blunder by MITI: that

of delaying Sony’s acquisition of transistor technology by restricting Sony’s use of foreign exchange.69

In 1953, MITI refused Sony permission to acquire

transistor technology from the United States because

MITI did not want to use scarce foreign exchange for

the technology; it also felt that a small, recent

start-up such as Sony would not be able to use a

brand new technology successfully .70 While the

frequently cited American account of this refusa171

says that MITI delayed Sony’s access for 3 years,

Akio Morita of Sony says it took 6 months to

persuade MITI to give them the needed foreign

exchange. 72 Nonetheless, this mistake stands out as

one of MITI’s more serious errors.

The argument that the industry succeeded without

government help is less powerful when the evidence

is analyzed. The producers of televisions did not

enjoy the number of tailor-made policies and degree

of support given to targeted industries like automobiles, steel, semiconductors, and computers. But the

television industry, like many others in Japan,

benefited from government policies that lowered

capital costs, protected against imports and foreign

investment, promoted exports, and tolerated behavior that, in the United States, would have run afoul

of antitrust laws.73 MITI’s policies made it possible

for the color television industry to keep prices high

at home and low abroad—in fact, Japanese producers were found guilty of dumping in the U.S. and

European markets. For over a decade, Japanese

makers sold televisions in the United States for

about one-third to one-half the price of the same sets

in Japan; this export price was also below cost.74

High prices at home could only work under certain

conditions: that is, if all major manufacturers agreed

not to undercut one another’s prices (collusive

behavior, by U.S. standards), and if the market were

effectively closed to imports. Both occurred. To fix

export and domestic prices, the managers of the

major manufacturers met regularly in groups such as

the Okura Group and the Palace Group, named after

the hotels in which the meetings took place.75 And

in the first half of the 1960s, the tariff on television

imports was 40 percent.76

While Japanese firms needed to charge low prices

to win U.S. market share, they avoided undue price

competition with each other. Domestic firms set

minimum export prices,77 which MITI monitored.

Another safeguard was the so-called “five company

rule,’ which required that each Japanese exporter

specify five U.S. dealers as its only and exclusive

customers. This kept large U.S. retailers such as

Sears from playing the Japanese suppliers against

each other to lower prices. An export association

managed the formal registration of these buyersupplier relationships; firms reported to that association each specific shipment of color televisions to

the United -States, stating the buyers and suppliers

involved, and the type, quantity, and price of the

televisions. 78

When the United States started to complain about

this dumping in the late 1960s, Japanese consumers

became aware of the discrepancy and boycotted

Japanese televisions. MITI immediately gave guidance to the industry to reduce domestic prices, and

the firm complied, though export prices were still

much lower.79 The secret meetings among the firms

and control of distributors were allowed to continue.80

Japanese firms raised prices in the United States

in 1974 in response to growing allegations of

dumping and antitrust violations. This price change

reduced but did not eliminate the gap between high

domestic and lower export prices. Moreover, Japanese television manufacturers reportedly began to

give kickbacks to U.S. retailers, making the actual

prices much lower than those reported in accounting

records, customs forms, and invoices.81

Collusion and dumping were not the only reasons

for the success of the Japanese television makers.

Japanese manufacturers worked hard to reduce their

costs by introducing new technologies; in particular,

they converted their TV production to solid-state

integrated circuits early on. Japanese televisions

gained a reputation for reliability in America, and

made it possible for televisions to be repaired by

large retail establishments rather than repair shops.

As in every other successful Japanese industry,

success came from a combination of intelligent

company strategy and diligence, good workers, and

government policies. None of these factors alone

would have resulted in the same record of success.
Chapter 6--Japanese Industrial Policy: The Postwar Record and the Case of Supercomputers ● 249

Semiconductors

While there is a range of views about how

important industrial and trade policies have been to

some industries (consumer electronics particularly),

there is much less skepticism when it comes to the

semiconductor industry, and still less for the computer industry. There is no question that in a free

market, U.S. companies would have dominated the

Japanese semiconductor industry. Texas Instruments (TI) applied for 14 patents in Japan in 1960

and for permission to establish a wholly owned

subsidiary there in 1964. These applications threatened to disrupt the development of a domestic

semiconductor industry, an area that business and

government leaders had decided was strategic to

Japan’s long-term economic growth. By refusing to

act on either application, the bureaucracy allowed

the Japanese companies to copy TI’s technology for

years without paying for it.82 TI did finally win

approval of some of its patents in 1977, and

combined the others into one application, pursuing

them until it was granted its final patent in October

1989.83 This was an exceptional case, even by

Japanese standards, where it commonly takes 6 to 7

years to process a patent application (compared with

18 months in the United States).

TI threatened that any Japanese exports using its

technology would be met with an immediate lawsuit

based on TI’s patents in the destination country, and

this began to pose a problem for Japanese consumer

electronics makers in the late 1960s.84 Something

needed to be done to appease TI. MITI had to agree

with TI’s request for a wholly owned subsidiary

because it needed [a license under] TI’s patents [to

export],” explained a former MITI official closely

involved in the negotiations.85 But granting TI

permission to operate a wholly owned subsidiary in

Japan also posed serious problems.

Fairchild and Motorola both had wholly owned

subsidiaries in Okinawa. The Japanese Government

was then negotiating with the U.S. Government for

the return of Okinawa. Had TI been allowed to open

a subsidiary in Japan proper, it would have been

difficult to keep Motorola and Fairchild from

retaining theirs in Okinawa when that island came

back into the Japanese fold. To avoid the precedent,

MITI pressured TI to make a nominal joint venture

with Sony ‘‘on paper, ’ one that would last only 3

years, after which Sony would sell its shares to TI.86

MITI’s strategy worked. When the United States

returned Okinawa to Japan, the Okinawan subsidiaries of Fairchild and Motorola were forced to enter

50-50 joint ventures with Japanese partners.87 In

addition, it was difficult for these American companies to form ventures with any of Japan’s major

electronics companies, because MITI favored pure

blooded (junketsu) Japanese firms over mixed breed

(konketsu) joint ventures.88 MITI ultimately found

them relatively small, inexperienced partners.89

Japanese firms only began to produce sophisticated chips in the 1960s; in 1966, a couple of years

after beginning production, Japanese firms were

selling one type of IC (integrated circuit) for over

Y1,000, some three times the price of a similar one

sold in the United States. The higher Japanese costs

reflected lower yields, which were about 10 percent

in the mid-1960s, compared with 25 percent in the

United States on average.90 As late as 1972, the

semiconductor divisions of all the major Japanese

producers were in the red;91 in 1971, Japanese

makers had to sell at more than 20 percent below

cost to compete with U.S. manufacturers.92

Protection is only part of the story. Government

financial assistance, such as low interest loans,

accelerated depreciation, and other measures that

lowered capital costs, enabled Japanese companies

to continue investing heavily despite years of large

losses. Another major theme of the Japanese approach to a home grown semiconductor industry was

technology development and acquisition. U.S. firms

that wanted to make joint ventures in Japan were

obliged to transfer technologies as part of the deal.93

The government also sponsored several cooperative

R&D projects that helped domestic firms gain the

technological expertise necessary to compete with

U.S. companies over the long term. To help the six

major companies get an early jump on integrated

circuit R&D, MITI organized a 2-year cooperative

R&D project from 1964 to 1966. Tarui Yasuo, a

member of MITI’s Electrotechnical Lab who participated in this project and later led MITI’s well-known

VLSI project (1976-1979), said that a major goal of

the government was to “reduce duplication of

effort” by dividing up the labor; another purpose

was “frankly to avoid patents that cover procedures

developed in the U. S.A.’ ’94 Government-sponsored

programs continue through the present.

Some of the most famous projects were the VLSI

project, which accelerated the rate at which Japanese

292-889 0 - 91 - 9 QL:3
250 . Competing Economies: America, Europe, and the Pacific Rim

producers caught up with American memory technology; a software and peripheral development

program from 1979 to 1983; the optoelectronic IC

(OEIC) project lasting from 1981 to 1986; and a

project in the mid-1980s to develop super-highspeed device technologies.95 By the mid- 1980s, the

Japanese companies had come to dominate several

semiconductor markets, had made inroads into all of

them, and were poised to advance in almost every

area of computer technology.

SUCCESSES AND FAILURES OF

INDUSTRIAL POLICY

So far, this chapter has focused on successes of

Japanese industrial policy. It probably bears repeating at this point that a number of the cases that some

observers regard as failures-such as MITI’s failure

to reduce the number of firms in the automobile

industry-ended up as very successful industries.

There is a big difference between mistakes, or

unsuitable proposals, and failures of industrial

policy. Not every proposal MITI advances is a

winner, but even so, its interventions have helped

targeted industries and Japanese industry on the

whole become more competitive. MITI and other

ministries reduce the likelihood of mistakes by

extensive consultation with the private sector.

A few targeted industries have not improved their

competitiveness. Industrial policies towards petrochemicals, oil, and coal are often pointed to as

failures. 96 For example, the petrochemical industry,

completely dependent on imported oil, was left with

huge excess capacity when the oil shock hit Japan in

the early 1970s. It had to be scaled back dramatically

in a process that was costly to the government and

the firms. The huge subsidies that have supported

Japan’s uncompetitive agricultural sector are also

sometimes identified as industrial-policy failures.

Overall, the fact that the Japanese Government

spends more on declining industries than on ascending ones is also cited as proof that industrial policy

is a waste of government resources.

It is important, however, to evaluate the success of

policies based on their goals. Japan has never

entertained the idea of developing an internationally

competitive energy sector, which would obviously

be impossible given the nation’s lack of energy

resources; policies toward oil and coal have been

aimed at providing Japan with a stable and predictable energy supply and at keeping as much domestic

control over energy as possible. Such a policy makes

sense considering Japan’s vulnerability to disruptions in energy supply and price; it took fully 5 years

for Japanese manufacturing production to exceed

1973 levels after the oil-shock-induced recession of

1974-75.97 Similarly, Japan has never aspired to

having an internationally competitive agricultural

sector; rather, the industry has been protected and

subsidized for political and social reasons—

primarily to assure farming communities’ strong

support for the pro-business Liberal Democratic

Party.

To a skeptic, the heavy support for Japanese

agriculture is proof of the proposition that government intervention in the economy is prone to

become the servant of political power and special

interests. Yet most nations do not wish to depend on

imports for food, particularly for dietary staples. As

a result, all developed nations support their agricultural sectors (some more than others). In Japan, it is

not easy to find other industries as heavily subsidized as agriculture with as little economic payoff;

for the most part, the separation between Japan’s

legislature (Diet) and bureaucracy hinders special

interests from getting MITI support unless there is

good economic sense behind their appeals.

For MITI to spend more on declining than on

sunrise industries is not unreasonable. Supporting

so-called ‘structurally depressed’ industries, which

are not expected to recover from recessions or

exceed past output records, is an inherently expensive activity. Industrial adjustment-contracting the

size of an industry and shifting workers, managers,

and capital from one industry to another-is difficult, time-consuming, and expensive in any Country.

Countries differ in the extent to which those costs are

borne by workers and owners of enterprises, as

opposed to the public sector. Japan’s government

takes more responsibility for adjustment, and bears

more of the cost, than do most developed nations.

One reason is the value Japan places on employment

security. Culturally and economically, Japan depends on steady employment; the option of laying

off workers without making some provision for their

future employment is abhorrent to the Japanese

Government and employers alike. While not all

Japanese employees are covered by so-called lifetime employment, most Japanese employers are

reluctant to lay people off. It is even more important

in Japan than in the United States that downsizing be

orderly. As a result, the government has frequently
Chapter 6--Japanese Industrial Policy: The Postwar Record and the Case of Supercomputers ● 251

organized cartels among producers to promote

steady contraction and paid for some of the worker

adjustment costs. While the money the government

spends on declining industries does not contribute to

increasing the competitiveness of a sunrise sector (a

goal that some American analysts think is the only

supportable objective of government targeting), it is

not wasted. It contributes to a stable business

environment, prevents cutthroat competition and

large-scale, chaotic layoffs, and helps keep Japan’s

unemployment rate extraordinarily low.

A few efforts have disappointed MITI’s expectations. Promotion of software development in the

1970s and 1980s has not been very effective;

projects were scattered and inadequately funded and

money was generally given to software houses to

develop products approved by the Information

Promotion Agency (IPA), a MlTI-related association, rather than responding to the software needs of

the users. By neglecting to tie its aid to the market,

the government ended up with mostly unused

software.

An even clearer example of disappointed expectations is the aircraft industry. Commercial aircraft

was targeted in MITI’s visions for the 1970s and

1980s, yet Japanese industry has never become a

successful assembler of large commercial aircraft, as

MITI hoped. But even here, calling MITI’s policies

a failure is inaccurate. With MITI support, Japan’s

aircraft industry has become a major supplier of

parts, generating $1.2 billion worth of commercial

aircraft products in 1989; over half were exported.

Japanese companies had a 15-percent share in

developing Boeing’s 767, making most of the

fuselage and underwing fairing; they have taken a

20-percent workshare as a risk-sharing partner in the

development of the new 777 (see ch. 8, or volume 2).

Moreover, Japan’s aircraft industry faced unusually

formidable obstacles to development; for example,

after World War II the country was barred from

aviation-related activities while the rest of the world

moved into the jet age.

While there have been failures as well as successes in Japan’s efforts to promote certain industries, Japan has a good batting average in targeting

industries for international competitiveness. Several

factors distinguish the Japanese experience from

those of less successful nations. Most critical

perhaps is that on the whole, policies have been

structured to preserve the forces of competition.

While that may sound strange to say about a nation

that protected its developing industries as assiduously as Japan did, still the government almost

always promoted several firms in an industry. R&D

projects usually had two or more companies work

together on a topic, each of which could bring the

new technology to the market. Moreover, firms were

strongly encouraged to export-often to America,

where they had to compete with then-dominant

fins. In a few instances, MITI has given a company

a monopoly position in an industry or an R&D

project; generally these have been failures.98 In

Europe, attempts to nurture domestic computer

industries by promoting national champions also

failed, in part due to their lack of domestic competition (see ch. 5). The lesson from Japan is that if a

state protects the domestic market from foreign

competition, it is imperative to at least keep domestic competition intact. Another lesson is that firms

must compete somewhere (in Japan’s case, in export

markets) with the best producers.

Business input into the policymaking process has

contributed to the success of Japan’s industrial

policies. Government officials consult closely and

extensively with industry. This consultation is

necessary because industry representatives know

more about their products, technologies, and business environment than bureaucrats do, and often can

tell better what will or will not work. Business

functions as a check on government policies, and, in

turn, the state counterbalances business demands.

For example, the automobile industry resisted MITI’s

plans to merge the firms, which likely would have

hurt the industry; but MITI did increase specialization in the industry. The private sector’s role in

policymaking increases business’ commitment to

make the policies succeed.

Another’ attribute of Japan’s industrial policy

structure is stability. A stable institution, partially

insulated from day-to-day interest group demands, is

essential for consistent, long-term guidance. Even

when an administration changes, Japanese companies can be assured that MITI’s basic policies will

not, and that there will not be a sudden turnover of

ministry officials. The relative impartiality and lack

of corruption of MITI officials is also critical:

industrial policy can only work in an environment of

trust in which high-quality career bureaucrats work

in the national interest.
252 ● Competing Economies: America, Europe, and the Pacific Rim

Tying government aid to performance and requiring firms to Commit“ some of their own funds to R&D

projects have helped to increase the success of

Japanese policies. Japan’s market is another factor;

the domestic market is relatively large, enabling

domestic firm to gain economies of scale at home

before entering foreign markets. Of course, having

access to the world’s biggest market-the United

States-was also key.

The importance of the comprehensive approach to

nurturing an industry cannot be overstated. MITI has

promoted not just products, but the entire industries,

including the needed parts and infrastructure. For

example, Japanese policy frost encouraged development of semiconductors and computer parts, then the

hardware of small computers, large computers, and

finally software and supercomputers.

As stated before, all of Japan’s targeting policies

were boosted to a large degree by economy-wide

policies and cultural factors. Without government’s

provision for a large pool of savings-and many

other measures designed to transfer capital from

consumers to producers—Japan would not have

been able to finance its targeting policies. Japan’s

industrial policies and targeting have cost consumers a great deal in terms of current consumption

(while the resulting increases in productivity allow

them to improve their living standards in the long

run), and the contribution of this deferred gratification on the part of millions of ordinary Japanese

citizens should not be underestimated. A first-rate

education system, and a culture that reinforces even

for small children the importance of educational

performance, is another factor. A long history of

adopting and modifying for Japanese use successful

policies and practices (including technology) from

other countries was helpful, as was sheer diligence.

It is worth remembering that in most cases where an

infant, technologically backward industry was protected in Japan, that industry was working toward

world leadership in technology application and

development. Most of them got there.

INDUSTRIAL POLICY FOR

THE 1990s

Japan’s star is on the rise. Its people are growing

richer faster than any others among the developed

countries; its fins-at least, its international firms—

are cash-rich and outstripping their American and

European competitors in advancing and applying

technology. In foreign policy, Japan is, with caution,

taking a more independent path. In business, Japanese firms are increasingly independent of their

government and their banks. Some have suggested

that MITI’s power and Japan’s industrial policy are

artifacts of the past.

But a look at MITI policy today indicates that

while targeting policies are less important than they

once were, the role of MITI and its sister ministries

is far from marginal. Indeed, while Japanese companies have money, they may still need encouragement

to invest much in technologies that are unlikely to

bring about a profit for a decade or more; competing

firms also need more encouragement to cooperate

with one another than in the past, when cooperation

was considered necessary for survival. In many

industries, a Japanese fro’s fiercest competition

comes from other Japanese firms. Finally, Japan’s

era of cheap capital may be over; in the past year,

Japanese interest rates and capital costs have increased rapidly as the bubble burst in the Nikkei

stock market.99 For these reasons, MITI’s role in

providing seed money and in coordinating cooperative R&D remains important.

MITI is funding more R&D directly, in absolute

amounts, than previously. This may seem ironic

considering the wealth of many Japanese firms, but

they have also moved from being technological

followers to positions of leadership, which means

the payoffs of R&D are less certain. For example,

one new large-scale MITI project focuses on developing micromachines that combine sensing devices

with microprocessors and motors (a technology that

originated in the United States) for uses such as

surgery without incisions and inspection of cooling

pipes in nuclear plants (see app. 6-A).100 MITI will

plow some $200 million into this 10-year project

beginnin g in autumn of 1991. Another project

focuses on electronic lasers. Eight companies—

Mitsubishi Electric, Toshiba, Hitachi, NEC, Sumitomo

Denki Kogyo, Kobe Steel, Kansai Electric Power,

and Nisshin Electric-have created a cooperative

R&D association for the project. Each firm will put

in 4 percent of the Y10 billion ($78 million) project,

and government will provide the remaining 68

Percent. l0l The aim is to catchup with the United

States in an area that Japan sees as important for

applications such as medical equipment, space

communications, energy transmission, semiconductors, uranium enrichment, and nuclear fusion.102
Chapter 6-Japanese Industrial Policy: The Postwar Record and the Case of Supercomputers .253

As the content of these two projects suggests,

MITI is increasingly supporting basic technologies

that, while not close to the market, will have a broad

impact on many areas. This strategy makes it easier

for competing firms to cooperate and minimizes

foreign criticism. Other targeted technologies include new materials, biotechnology, superconductivity,

hypersonic flight, high-definition television, biocomputers, parallel processing, and optoelectronics.

Japan’s long history of outright trade protection

and the fact that her market is still especially difficult

to penetrate, in combination with the spectacular

successes of many Japanese industries in international competition, have led to increasingly sharp

trade conflicts with major trading partners. If the

conflicts were only with the United States, it might

be possible to attribute them to jealousy. But trade

friction is growing rougher with Europe, too, and

there are reports of growing wariness toward Japanese investment and imports in Australia. MITI has

assumed much of the responsibility for oiling these

troubled waters, helping to ease trade fiction

through negotiations and encouragement of Japanese firms to use foreign products.103 For example,

MITI loans companies roughly $1 billion to promote

aircraft imports. To escape being even larger targets

for those who urge retaliatory protection or reciprocity, Japanese firms might need some powerful

agency to mediate, intervene, and palliate.

A nation with little or no formal trade protection

and a huge market should not need such an agency;

Japan’s market should be a magnet for foreign goods

and companies, as is America’s. But MITI’s role as

ombudsman for the interests of foreign governments

and enterprises arises from the Japanese Government’s still-powerful ability to govern the activities

of foreign firms (be they investors or traders) in

Japan. Government procurement practices, customs

clearances, inspection standards, approvals on foreign investment, antimonopoly law enforcement,

and administrative guidance on issues such as price

and production cartels are done largely at government’s direction, rather than according to strict legal

criteria. There are few clear rules for foreign firms to

follow and there are few open, transparent systems

for dispute resolution. This discretionary system

enables the Japanese Government to use relatively

subtle, informal tactics that, according to the weight

of anecdotes of those who do business there, still can

impede (or assist) the efforts of foreign firms in the

Japanese market.

SUPERCOMPUTER INDUSTRY

DEVELOPMENT

A supercomputer is a general purpose computer

that is faster than commercial competitors and that

has sufficient central memory to compute problem

sets of general scientific interest.104 A supercomputer can do in 1 minute what it takes a mainframe

computer 3 hours to do, a workstation 15 hours and

a personal computer 96 hours.105 These very fast

machines enable researchers to analyze a wide range

of physical phenomena. They are used, for example,

to predict and analyze weather, to design airplanes

and automobiles to reduce air turbulence, to discover

pharmaceutical compounds with desired effects, and

to design semiconductor chips.

A healthy supercomputer industry is considered

important because it is a technology driver. ‘‘Supercomputers are the testing ground for Japanese logic

and memory chips and new types of technology

[which can then also be used in mainframes and

other products],” explains Raul Mendez, a U.S.

supercomputer expert, who after working at the U.S.

Office of Naval Research in Tokyo is now the

Director of the Institute of Supercomputing Research in that city.106 Sekimoto Tadahiro, President

of NEC, one of Japan’s major supercomputer

companies, agrees: ‘‘Japanese supercomputer makers can use their technological improvements [related to supercomputers] in their mainframe computers; in that sense we are in a more advantageous

position than the U.S. firms that specialize in

supercomputers." 107 Uenohara Michiyuki, executive adviser to NEC and formerly the VP in charge

of NEC’s research division, explains: “The reason

Japanese companies are going into the supercomputer business is for the same reason that auto

companies get into race cars; even though it’s a

small market, it drives the technology. "108IBM,

which had not been a supercomputer producer since

1970, reentered the field in 1985 with a vector

version of the IBM 3090 that performed in the

supercomputer class at the low end;109 moreover,

IBM is providing financial support to Supercomputing Systems, Inc. (SSI), a new company that

expects to produce a new supercomputer in the early

1990s. This suggests that IBM came to the same

conclusions about the importance of supercomputer

technology as the Japanese companies.
254 ● Competing Economies: America, Europe, and the Pacific Rim

Supercomputers are important tools for other

industries. Increasingly, designs of automobiles and

aircraft, pharmaceutical products, and new materials

all rely on supercomputers. For example, supercomputers allow simulation of automobile crashes,

which in turn can reduce time and expense involved

in developing new products. Proposed designs can

be tested by computer, without the need to build a

model. The computer simulation gives much more

precise results than some actual experiments, such as

slow-motion blow-up movies of critical parts. Real

test crashes can be reduced in number and designed

precisely to confirm that a design will work.

Similarly, NASA uses a supercomputer to simulate

airflow inside aircraft engines, allowing designers to

observe things that could not be seen directly in a

wind tunnel. To have the benefits of supercomputers

in applications, however, it may not be necessary to

have a domestic industry.

There are two major types of supercomputers:

traditional supercomputers and massively parallel

processing supercomputers. Traditional supercomputers—with one or a small number of processors

(currently up to eight)--are the major focus of this

study. (A processor, sometimes called a central

processing unit or CPU, is the heart of a computer.

A processor manipulates data. Other parts of a

computer are memory, which stores data, and

input-output devices, which transfer data between

the computer and the outside world.) Massively

parallel processing machines, which have from

about 64 to thousands of processors, may be the

trend for supercomputing in the next century; their

prospects will be discussed as well.110

Supercomputer Companies

There are four major companies in the world

supercomputer industry today: Cray Research of the

United States, and Fujitsu, Hitachi, and NEC of

Japan. Two other companies are also working to

bring out their first supercomputers, Cray Computer

and SSI (Supercomputer Systems, Inc.). Cray Computer, Seymour Cray’s firm that broke off from Cray

Research in 1989, has just sold and (as of mid-1991)

plans to deliver the first unit of its new supercomputer, the Cray-3, to the Lawrence Livermore

National Laboratory before the end of 1991. SSI, a

firm started by Stephen Chen after he left Cray

Research in 1987, is backed by IBM. Chen’s new

supercomputer, a 48 to 64 processor machine, is not

expected until 1992 or 1993. ETA, a subsidiary of

Table 6-l-Comparison of Cray Research, Fujitsu, Hitachi, and NEC Revenues,

R&D Expenditures, and Profits, 1981,1982, 1988, 1989

Revenue R&D expenditures R&D as percent Profit as percent

($ millions) ($ millions) of revenue of revenue

1981

Cray . . . . . . . . . . . . . . . . . .

Fujitsu . . . . . . . . . . . . . . . .

Hitachi . . . . . . . . . . . . . . . .

NEC . . . . . . . . . . . . . . . . . .

1982

Cray . . . . . . . . . . . . . . . . . .

Fujitsu . . . . . . . . . . . . . . . .

Hitachi . . . . . . . . . . . . . . . .

NEC . . . . . . . . . . . . . . . . . .

1988

Cray . . . . . . . . . . . . . . . . . .

Fujitsu . . . . . . . . . . . . . . . .

Hitachi . . . . . . . . . . . . . . . .

NEC . . . . . . . . . . . . . . . . . .

1989

Cray . . . . . . . . . . . . . . . . . .

Fujitsu . . . . . . . . . . . . . . . .

Hitachi . . . . . . . . . . . . . . . .

NEC . . . . . . . . . . . . . . . . . .

101.6

2,529

8,465

3,882

141.2

2,918

9,308

4,583

756.3

15,420

24,862

19,554

784.7

16,351

27,117

21,235

17.0

141

NA

214.4

29.5

185

NA

221

117.8

1,826

1,542

1,561

143.4

2,102

1,838

1,780

16.8

5.6

NA

5.5

20.9

6.3

NA

4.8

15.6

11.8

6.2

8.0

18.3

12.9

6.8

8.4

17.9

3.4

3.5

2.4

13.5

3.8

3.7

2.5

20.7

2.7

3.6

2.4

11.3

3.4

3.7

3.0

NA-not available.

NOTE: Japanese yen converted at 230/$ in 1981 and 1982, 130/$ in 1988 and 1989. The Japanese year ends on Mar.

31. Thus Japanese data are for years ending Mar. 31, 1982, 1983, 1989, 1980.

SOURCE: Company financial reports.
Chapter 6--Japanese Industrial Policy: The Postwar Record and the Case of Supercomputers ● 255

Table 6-2-Cray Research’s Revenues, R&D Expenditures, and Profits

R&D Profit as

Revenues expenditures R&D as percent percent

Year ($ millions) ($ millions) of revenues of revenues

1977 . . . . . . . . . . . . . . . . . . . . . . . . . . 11.39 1.90 16.7 17.8

1978 . . . . . . . . . . . . . . . . . . . . . . . . . . 17.18 2.53 14.7 20.4

1979 . . . . . . . . . . . . . . . . . . . . . . . . . . 42.72 6.42 15.0 18.3

1980 . . . . . . . . . . . . . . . . . . . . . . . . . . 60.75 9.55 15.7 17.9

1981 . . . . . . . . . . . . . . . . . . . . . . . . . . 101.64 17.04 16.8 17.9

1982 . . . . . . . . . . . . . . . . . . . . . . . . . . 141.15 29.51 20.9 13.5

1983 . . . . . . . . . . . . . . . . . . . . . . . . . . 169.69 25.54 15.1 15.4

1984 . . . . . . . . . . . . . . . . . . . . . . . . . . 228.75 37.54 16.4 19.8

1985 . . . . . . . . . . . . . . . . . . . . . . . . . . . 380.16 49.17 12.9 19.9

1986 . . . . . . . . . . . . . . . . . . . . . . . . . . 596.69 87.68 14.7 20.9

1987 . . . . . . . . . . . . . . . . . . . . . . . . . . 687.34 108.83 15.8 21.4

1988 . . . . . . . . . . . . . . . . . . . . . . . . . . 756.31 117.76 15.6 20.7

1989 . . . . . . . . . . . . . . . . . . . . . . . . . . 784.70 143.35 18.3 11.3

SOURCE: Cray Research annual financial reports.

Table 6-3-Divisions of U.S. and Japanese Supercomputers Firms, 1989

(by percent of sales)

Heavy

Telecom- Electronic Consumer electric

Computers munications devices electronics equipment Other

Cray Research . . . . 100 — — — — —

Fujitsu . . . . . . . . . . . . 70.5 16.3 13.2 — — —

NEC . . . . . . . . . . . . . . 47.0 29.4 20.1 3.5 — —

Hitachia . . . . . . . . . . . 30.0 5.0 10.2 13.7 21.4 19.7

aHitachi data give totals for computers, telecommunications, and electronic”~ devices only. The percent are

estimated based on other sales data.

SOURCES: Company financial reports. Japanese figures are as of Mar.31,1990.

Control Data Corp. (CDC), was a major player until

it withdrew from the market in 1989.

The sales, R&D, and profit data of the four major

firms are given in tables 6-1 and 6-2. It is hard to

make direct comparisons between Cray Research

and the Japanese firms because Cray makes one

product line-super-computers-whereas the Japanese firms are both vertically integrated and diversified into various related electronics industries (table

6-3). What is clear from the numbers is that Cray

Research is very small compared with its chief

competitors: in 1989 its sales were 4.8 percent those

of Fujitsu, 2.9 percent those of Hitachi, and 3.7

percent those of NEC. Cray spends a much higher

percentage of revenues on R&D than its Japanese

counterparts, 18 percent in 1989 compared to 7 to 13

percent for the Japanese makers.111 The data also

show that healthy Japanese companies have profit

rates (profits as a percentage of revenues) of only

some 2 to 4 percent per year, a level that would put

a U.S. firm in serious trouble; Cray’s profit as a

percent of revenues has ranged from a high of 20.7

percent in 1988 to 11.3 percent in 1989 (table 6-2).

Potential Market

The world supercomputer market is over $1.1

billion today. Its annual growth rates in the 1980s

ranged from a high of 84.3 percent in 1981 to a low

of 4.5 percent in 1989, with an average of 30 percent

(table 6-4). The Japanese market has been growing

much faster although it has slowed suddenly in the

past year: the growth in the number of supercomputers sold has ranged from a high of 145.5 percent in

1986 to a negative growth rate in 1990 of about -47

percent (table 6-5). One reason for the sharp decline

in 1990 is that higher prices charged to the Japanese

Government (resulting from the 1990 U.S.-Japan

supercomputer agreement, which limits Japanese

companies’ discounts) have not been matched by

equally high government budgets, inevitably leading to fewer procurements. Public and private sector

purchases of upgraded models have also declined

because users are waiting for new, more sophisticated models expected out in 1991.

The drive for ever faster computers pushes the

technology in two directions: making faster proces-
256 ● Competing Economies: America, Europe, and the Pacific Rim

Table 6-4-Value of Worldwide Supercomputer

Shipments

Annual

Shipments growth rate

Year ($ millions) (in percent)

1980 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

1981 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164

1982 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211

1983 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245

1984 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308

1985 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 479

1986 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 651

1987 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 880

1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,034

1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,081

1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,164

NA

84.3%

28.7

16.1

25.7

55.5

35.9

35.2

17.5

4.5

7.7

SOURCE: Gartner Group, lncv High Performance Computing andCommunications:lnvestmentinAmerican Competitiveness,Mar .15,

1991, p.73.

sors (a processor is the part of the computer that does

arithmetic calculations), and using many processors

at once. The latter is becoming more important.

Traditional supercomputers rely heavily on having

fast processors, but manufacturers have been increasing the number of processors to gain extra

speed. Cray Research’s top-of-the-line machine

today has 8 processors; both Cray Research and Cray

Computer have announced that they are developing

16-processor machines that they expect to debut in

the next few years. Cray Research, along with other

companies, is working on machines with 64 processors. The world market for traditional supercomputers is expected to continue healthy growth for the

rest of the 1990s, but some analysts expect massively parallel machines to begin taking some of the

market from traditional supercomputers.

In the future, the greatest speeds will be achieved

by having a large number of processors, even if each

processor is only moderately fast. The market for

massively parallel supercomputers, which have

from 64 processors to many thousand, could prove

to be much greater than for traditional supercomputers in the future. To use so many processors to

advantage, it is necessary to divide the problem into

many independent parts that individual central

processing units (CPUs) can work on in parallel. It

is difficult to write software to break down problems

in this way and even harder to write the software so

that all of the CPUs are able to communicate with

one another. “There are daunting software problems

in massively parallel processing machines, ” explained an expert at Lawrence Livermore National

Laboratory. 112 Even if writing software were simpler, there is still a much larger existing stock of

software for traditional supercomputers; it will take

some time before a comparable library is available

for massively parallel machines. The software that

has been written was designed to handle special

problems, such as pattern recognition. Writing

software to make a massively parallel machine into

a general purpose machine is much harder.

Scientists and supercomputer users give varying

predictions of the future market for massively

parallel processing computers, ranging from pessimistic predictions that such machines will never be

general purpose machines to optimistic views that

they will became more important than traditional

supercomputers within the next 5 to 10 years.113

Several companies-including Thinking Machines,

Alliant, Intel, BBN, Ncube, MasPar, and Cray—are

betting on the latter. Most supercomputer experts

and supercomputer users agree that the software

problem may take a decade to solve, and some

analysts see the massively parallel machines as

remaining niche machines for the foreseeable future. 114

Comparisons of U.S. and Japanese

Supercomputers

Japanese manufacturers have faster components,

which, all other things equal, would mean faster

machines. However, Cray appears to have three

compensating advantages. First, Cray excels in

packaging and connectors, which also affect machine speed. Second, Cray’s processors appear to

have a “more balanced” design, meaning that its

different elements work together more smoothly,

with fewer bottlenecks.115(A bottleneck could

occur, for example, if the processor’s arithmetic

unit-that part of the processor that actually adds,

multiplies, etc.—has to stand idle waiting for data to

be fetched from memory.) Third, some of Cray’s

supercomputers gain speed by using more than one

processor; no Japanese machines with more than one

processor have yet been sold. While using more than

one processor is an advantage, it is often tricky to

keep all processors busy at once, just as it is tricky

to keep different parts of one processor busy at once.

Cray’s multiprocessor machines tend to work best

when doing many problems at once, so that each

processor can be assigned its own problem to work

on by itself; this reduces the need for inter-processor

coordination. Thus, these machines perform better in

timesharing systems, running many applications at
Chapter 6--Japanese Industrial Policy: The Postwar Record and the Case of Supercomputers ● 257

Table 6-5--Number of New Installations in Japanese Supercomputer Market

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Total (number of

supercomputers) . . . . . 2

Annual growth rate . . . . . —

Sales to public sector:

Total . . . . . . . . . . . . . . . . 0

By foreign firms . . . . . . —

By Japanese firms . . . —

Percent of public

procurement of

foreign machines . . . . . —

Sales to private sector: 2

Total . . . . . . . . . . . . . . . .

By foreign firms . . . . . . 2

By Japanese firms . . . 0

Percent of private

sector procurement

of foreign machines . . 100%

Foreign share of all

new procurements . . . 100%

Japanese share of all

new procurements . . . O%

o

.

—

—

—

—

—

—

—

o—

—

—

—

—

—

—

—

—

—

—

4

400%

2

0

2

0%

2

0

2

0%

0%

100%

6 11 27

50% 83.3’%. 145.5%

4 4 12

1 0 0

3 4 ‘ 12

25% 0% 0%

2 7 15

0 1 2

2 6 13

0% 14.3% 13.3%

16.7% 9.1% 7.4%

83.3% 90.9% 92.6%

36

33.3%

11

0

11

O%

25

2

23

8.O%

5.6%

94.4540

37

2.8%

8

2

6

25%

29

6

23

20.7%

21.670

78.4%

32

13.5%

4

1

3

25%

28

8

20

28.6%

28.1%

71.9%

17

46.9%

6

1

5

16.7%

11

2

9

18.2%

17.6%

82.4%

NA=Not applicable.

SOURCE: NIkkel Uotcha, IBM-Ban, Apr. 30, 1990, pp. 21-24.

once, than when dedicated to solve one very large

problem.

As these last two factors suggest, measuring a

supercomputer’s speed is not a cut-and-dried affair.

Each machine has what is called a theoretical or peak

speed-the speed at which the hardware in principle

can do raw calculations. However, on real problems

the speed is usually much less—typically between

one-half and one-tenth of the peak speed. How much

less depends on the hardware design (issues of

balance within a processor and coordination among

processors), the software (which might be more or

less clever at breaking up the problem to keep the

whole machine busy at once), and the particular

problem (which may, for example, require a great

deal of multiplication and division but relatively

little fetching and storing of data to and from

memory, or vice versa).

One way of comparing the performance of different supercomputers is by benchmarking-running

certain problems on each, and comparing the speeds.

While benchmarking results depend on which problems are chosen and what software is used, all

comparative analyses of supercomputers use benchmark tests as at least one important indicator of

performance. Benchmark tests have been done on

U.S. and Japanese supercomputers by various universities and labs. Cray Research reported as of May,

1990, that its machines always came out on top

(figure 6-1).116

In the next generation, however, the gap will

narrow; if current rates of progress do not change,

Japanese makers will exceed Cray in the peak speeds

of multiprocessor machines and likely the actual

performance of hardware in the next decade. Japanese supercomputers are rapidly catching up in

speed. In recent tests run by Jack J. Dongarra, a

computer scientist at the Oak Ridge National Laboratory and a specialist on supercomputer speeds, the

one processor SX-3 ran nearly three times as fast as

a single processor Cray Y-MP, though not quite as

fast as the eight processor Y-MP.117 Hideo Yoshihara, a former Boeing specialist in the use of

supercomputers for computational fluid dynamics,

estimates that the four processor NEC SX-3, which

is expected out in late 1991, will have an actual

speed of some 7 gigaflops, higher than current Cray

machines (1.5 gigaflops), and that the Cray Research

C-90 (which will be released as the Y-MP16), also

expected in late 1991, will have a similar speed-7

to 8 gigaflops. Cray disputes this, predicting that its

C-90 will be considerably faster than NEC’s fourprocessor SX-3. Yoshihara estimates that Cray

Computer’s Cray-3 will have an actual speed of 7 to

8 gigflops,118 and another estimate agrees119 that all

three new machines will have similar speeds.120

Fujitsu is said to be working on an eight CPU
258 ● Competing Economies: America, Europe, and the Pacific Rim

Figure 6-l—Actual v. Peak Supercomputer Performance (megaflops)

6,848? 6,848?

6228? 16,000 16,000

[ Estimated Benchmark

2,130

5,500

1,292 I I

1007 2;667 928

486 502 1,951 396 623 5,000

129 131 116 940 1,300 1,700 183 3,000

235 630 500

l,n,

333

1 1 I I 1 P/Al 1 1 I 1

11 1 1

‘ Cray “Hitachi” Fuiitsu Cray NEC Cray-2 Fuiitsu Cray Cray Hitachi Fuiitsu NEC NEC Cray Cray-3

X-MP S-810/20 VP-200 X-MP SX-2A - VP-400E Y-MP Y-MP S-820/80 VP-_2600 SX-3 SX-3 Y-MP16 -

(4) (4) (8) (4) (16) (16)

1

1983 I1984 1985 I

1987 1988 I1989 1990 1991 ? 1 I I

NOTES: Bars show actual or estimated performance on Navier/Stokes benchmark. Numbers show actual or estimated benchmark performance (top) and peak

performance (bottom). All systems have only one processor, except where a different number is indicated in parentheses.

SOURCE: Gartner Group, Inc., High Performance Compti”ng and Communications: Investment in American Competitiveness, report prepared for U.S.

Department of Energy and lms Alarms National Laboratory, Mar. 15, 1991, p. 205.

machine, 121 and to have a four CPU machine likely

to be introduced in 1992, but no estimates have been

made of their speeds.

In short, while Japanese supercomputers currently

in use are slower than their U.S. counterparts, and

their actual speeds have been substantially slower

than their advertised peak speeds, they are still fast

and closing the gap. In price/performance ratio,

Japanese supercomputers are less competitive than

Crays even when the Japanese machines are discounted by 50 percent, according to data from Cray

(figure 6-2). According to a different source (and

using peak rather than actual performance data)

Japanese machines do better in price/performance,

and will maintain this edge over traditional U.S.

supercomputers, though the United States could beat

Japan with massively parallel supercomputers.122 In

reliability, Japanese machines excel; Japanese machines have been running at more than 5,000 hours

mean time between failures (MTBF), compared with

Cray’s record of less than 1,000 for the Cray X-MP

series. While the Y-MP machines are much better in

MTBF than the X-MPs, they are not as good as the

Japanese machines.123

While Japanese manufacturers are closing the gap

with Cray in speed and are ahead in reliability, they

still suffer from a relative lack of applications

software. When NEC announced the SX-3, in April

1989, with the claim that it was the world’s fastest

supercomputer:

. . . people in America were amazed, but Japanese

users were not nearly as impressed; they understand

that even if it is potentially very fast, it is worthless

unless NEC provides [applications] software to use

that Speed.124

Indeed, NEC has only sold seven supercomputers in

Japan to firms outside of the government and its own

industrial group (table 6-6).

In massively parallel machines, the United States

holds the clear lead. There are no commercialized

massively parallel processing machines in Japan.

Matsushita, together with Kyoto University, has

been developing a parallel processing minisupercomputer, the Adena 256. This machine has 256

processors and a speed of 1.6 gigaflops, and will sell

for about Y150 million ($1.15 million). They are

also working on a 25-gigaflop machine that they
Chapter 6-Japanese Industrial Policy: The Postwar Record and the Case of Supercomputers ● 259

Y-MP 8/8

Y-MP 4/4

Y-MP 2/2

X-MP EA/1 se

Y-MP2/1

S820/20

SX-JA

SX-1 EA

S820/40

S820/60

SX-l A

SX-2A

S820/80

VP-30E

VP-50E

VP-1OOE

VP-200E

VP-400E

Y-MP 818

Y-MP 4/4

Y-MP 2/2

X-MP EA/1 se

S820/20

Y-MP2/l

SX-JA

SX-1 EA

S820/40

S820/60

SX-l A

SX-2A

S820/80

VP-30E

VP-50E

VP-1OOE

VP-200E

VP-400E

Figure 6-2—Performance/Price Data

Performance/price ratio

L

I

/// A

I

I E=

E=

1 I I I 1

I

o 2 4 6 8 10

50% discount on

Japanese supercomputers

1 1 1 I I

I

12 14 16 18 20

Number of floating point operations per dollar

(45-month lease)

Performance/price ratio

I

I

f=

~ 1, t I I I I I I I I

{

o 2 4 6 8 10 12 14 16 18 20

Number of floating point operations per dollar

(45-month lease)

NOTE: Performance/Price ratio is calculated from published list prices on all supercomputers shown as of Sept. 30, 1989. A 45-month lease is assumed. It

is also assumed that the code run on the computer is 70 to 80 percent vectorized.

SOURCE: Cray Research, Inc.
260 ● Competing Economies: America, Europe, and the Pacific Rim

Table 6-6-Japanese Procurement of Supercomputers, 1980-90

Number of machines

Purchase by a Purchases by

Purchase by firm in another Purchases Purchases private companies

Total Procurement for own group supercomputer by the by private

Company

unaffiliated with

procurement internal use company maker’s group government universities the three groups

Fujitsu . . . . . . . . . . . . 85 9 10 5 26 14 21

Hitachi . . . . . . . . . . . . 35 12 3 0 11 1 8

NEC . . . . . . . . . . . . . . 24 3 5 1 9 3 3

Cray Research . . . . 26 — — 8 4 1 13

CDC . . . . . . . . . . . . . . 2 — — — 1 1 —

SOURCES: Nikkm” Uotcha, IBM-Ban, Apr. 30, 1990, pp. 21-24; Kigyo Keiretsu Soran, 1991.

hope to finish by 1992 and a 100-gigaflop machine

by 1995-96.125 U.S. and Japanese scientists do not

see these efforts as a real threat to U.S. dominance

in this area in the near future, but the Japanese are

beginning to invest heavily in this technology.126

HISTORICAL BACKGROUND: THE

EFFECT OF PAST TARGETING OF

THE MAINFRAME COMPUTER AND

SEMICONDUCTOR INDUSTRIES

Japan’s three supercomputer firms-Fujitsu,

Hitachi, and NEC--are also its major producers of

mainframe computers, and three of its major producers of semiconductor devices. These firms’ experience with computers and semiconductors was crucial in preparing them to make supercomputers.

Their rise in the supercomputer industry today

depended on previous Japanese Government policies that helped these companies acquire the necessary technological knowledge and skills.

In the late 1950s, Japanese Government officials

and businessmen decided to nurture a domestic

computer industry. Their main concern at the time

was not whether computers alone would become a

profitable business, although they hoped it would be.

Instead, the primary interest was in the positive

contributions of computers to other industries, such

as telecommunications, automation, and aerospace,

and to the economy’s overall productivity. “It was

clear to both the government and the telecommunications and heavy electric equipment makers that to

survive they had to go into computers,” explained

Yoshioka Tadashi, who was a MITI official closely

involved in nurturing computers in the 1950s and

1960s and more recently the Director and adviser of

the Japan Electronics Industry Development Association (JEIDA). 127 The first step, in 1957, was to pass

the Extraordinary Measures Law for Promotion of

the Electronics Industry, targeting electronics in

general and computers in particular. This law and its

later extensions provided various subsidies and tax

benefits for the industry; it also exempted the

industry from antitrust law and encouraged firms to

cooperate on price, production, investment, and

R&D to gain the economies of scale necessary to

compete with IBM. Japan did not want to depend on

foreign firms for something as critical as computers .

128

There were four key types of policies that the

Japanese Government used to nurture a competitive

computer industry: protection, a computer rental

company, substantial financial aid, and governmentsponsored R&D projects. In the 1960s and early

1970s protection was heavy against both imports

and foreign investment. While IBM had a sales

office in Japan since 1925, MITI repeatedly rejected

IBM’s efforts to transfer the technology and capital

necessary to produce in Japan.129 In the late 1950s,

according to a former MITI official, IBM started

warning the Japanese electronics firms and the

government about their infringement of IBM’s

patents. 130 MITI realized that the industry would not

be able to get off the ground without licenses under

IBM’s basic patents 131 and thus negotiated with

IBM. IBM agreed to license its basic patents in

exchange for permission to set up a wholly owned

subsidiary to produce computers in Japan. 132 B y

negotiating with IBM on the behalf of the firms,

MITI was able to get licenses at lower rates than if

IBM had been permitted to negotiate with each firm

alone. MITI also controlled which models IBM

could produce and sell in Japan, quantities of each

model, and how much and which specific parts IBM

could import for its production. 133 It also decided

how much IBM had to export134 (indeed, IBM was

one of Japan’s largest earners of foreign exchange at

the time) and limited the profit IBM’s Japanese
Chapter &Japanese Industrial Policy: The Postwar Record and the Case of Supercomputers .261

subsidiary could repatriate to its parent company.135

Finally, it delayed the start of IBM’s production by

2 years after the agreement had been made.136

Even with all MITI’s controls, IBM was lucky. By

reestablishing itself in Japan in 1949 (after receiving

back its assets that had been confiscated during the

war), IBM Japan avoided being forced by the

Foreign Investment Law of 1950 to make a joint 137 When Sperry Rand venture with a Japanese firm.

(UNIVAC computers) wanted to sell computers in

Japan in the late 1950s, MITI used this law to require

it to make a joint venture with Japanese companies

and to give the Japanese partners a majority of the

with majority Japanese ownership.

shares; MITI felt it could more easily control a firm 138 When Sperry

Rand decided in the early 1960s that it wanted to

produce computers in Japan, MITI insisted that it

make another joint venture, this time with Oki

Electric, to create Oki UNIVAC; Oki was required

to hold 51 percent of the shares. Similarly, MITI

allowed Hewlett Packard into Japan only on the

condition that it make a joint venture with Yokogawa

Electric, with the latter holding 51 percent of the

shares.139

In addition to controlling the actions of U.S.

manufacturers, the state also had a ‘‘Buy Japan’

policy. In the 1960s and early 1970s the government

procured some 25 percent of all Japanese computers;

in the last half of the 1970s and early 1980s, this

increased by up to 5 percentage points.l40 In both

1984 and 1989,90 percent of the computers used by

the government were Japanese machines while only

59 percent of the machines used by the private sector

were domestic.141 “Protectionism was one of the

most important policies [to promote the computer

industry]. The government created the computer

market, first by making government labs buy domestic machines, then having national universities

purchase them,’ explained Takeuchi Hiroshi, Managing Director of the Long Term Credit Bank of

Japan. 142

While not a formal government policy, the

tendency of Japanese firms to purchase computers

made by their group (keiretsu) computer company

also serves to protect the market; in 1968, for

example, about half the computers being used by

firms in the major industrial groups were machines

made by their own group’s computer firm.143 As of

the late 1980s, 45.7 percent of the Sumitomo group

machines were of NEC origin and 54.3 percent of

foreign origin (the Sumitomo group did not use

machines of other Japanese computer makers); 70.6

percent of machines being used by Daiichi-Kangyo

group companies were of their group members

Fujitsu and Hitachi, 28 percent were of foreign

origin, and a mere 1.4 percent were machines of

other Japanese makers.144 This pattern, with Japanese firms in each group buying computers either

from their own group or from foreign fins, suggests

that the fins’ in-group purchases are made at least

partly because of group loyalty rather than the

machines’ worth. This loyalty handicaps foreign

firms operating in Japan. The foreign share of the

Japanese installed computer base plunged from 93

percent in 1958 to 48 percent by 1965 and 42.5

percent by 1969.145 In 1989, the foreign share stood

at about 37 Percent.146

While early protection gave the computer firms a

safe harbor within which to develop, it was clear that

the government would ultimately have to open up its

markets; the firms had to become competitive in

order to survive over the long term. A major problem

they faced was that of renting their machines. Most

Japanese computer users did not have the huge

amounts of money needed to purchase computers;

rapid technological advances deterred those that did

from purchasing machines that would inevitably

become obsolete within a year or two. IBM was

renting its machines, so domestic companies needed

to be able to rent to compete. But domestic firms did

not have the funds necessary to finance a rental

system, nor were banks willing to lend them the

money.147 To enable the firms to offer rentals, MITI

helped them establish the Japan Electronic Computer Co. (JECC), a joint venture among the major

computer makers, in 1961. JECC’s role was to

finance the rental of mainframe computers; by the

1980s it would also become the major renter of

supercomputers. Between 1961 and 1989, the government channeled over $6 billion in loans into

JECC to help the company buy computers from

member firms and rent them to users for low

monthly fees.148

When a user wanted to rent a computer, it notified

JECC, and JECC purchased it from the maker and

rented it to the user. The effect of purchasing the

machines was to give the makers their return on

investment up front-similar in effect to an interest

free loan.149 Since the firms themselves put capital

into JECC,150 to some extent the firms were lending

money to themselves. However, between 1961 and
262 . Competing Economies: America, Europe, and the Pacific Rim

1989 JECC also received low interest loans from the

Japan Development Bank with an implicit subsidy

value of $461 million.151 ‘‘JECC had a very big

effect in reducing our need for capital; if there had

not been a JECC in the 1960s and 1970s, we

[Fujitsu] could not have expanded our scale of

production; in that sense JECC played a very big

role,’ explained Tajiri Yasushi, a manager at

Fujitsu.152

By enabling Japanese computer companies to rent

their machines at low monthly fees, JECC stimulated both the supply and demand for domestic

computers.

153 JECC also managed a price cartel for

the industry and did not allow any discounting. By

limiting price competition, JECC assured firms that

profits would not evaporate in cutthroat price wars

and shifted the competition to cost, technology, and

quality.

JECC and domestic protection severely limited

foreign computer fins’ market share in the Japanese market, but they were not enough to improve

Japanese electronics companies’ competitiveness to

match that of IBM or Cray Research. In the early

1970s, the Japanese computer makers’ scale of

production was, on any given model, 1 to 2 percent

that of IBM154 and the technology was far inferior.

They needed financial help. One estimate is that

government financial assistance-subsidies, loans,

and tax benefits—to the industry amounted to some

$14.3 billion from 1961 to 1989. 155 According to

this estimate, in the 1960s, government aid was

some 188 percent of what the firms themselves were

investing in R&D and plant and equipment; from

1970 to 1975, it was 168 percent; from 1975 to 1981,

92 percent, and from 1982 to 1989,26 percent. As a

percent of sales, government aid was 53 percent

from 1961 to 1969; 40 percent from 1970 to 1975;

14 percent from 1976 to 1981 and 5 percent from

1982 to 1989.156 OTA has reestimated the total

government financial assistance as $12.6 billion (see

app. 6-A). Under OTA’s reestimated, government aid

as a percentage of investment in these four time

periods, from earliest to latest, was 87, 148, 84, and

23 percent; as a fraction of sales it was 24, 35, 13,

and 4 percent respectively.

This does not include the tremendous benefit the

firms received from the Japan Telegraph and Telephone Co. (NIT’), which was a government-owned

company until April 1, 1985, when the Ministry of

Finance started to sell some of its shares to the public

(the government intends to keep one-third of NTT’s

shares permanently, and the company remains under

the supervision of the Ministry of Post and Telecommunications). NTT has long been referred to as the

doru bako (dollar box) helping the computer companies by purchasing their products (according to

some, at artificially high prices).157 Tajiri Yasushi,

a manager in Fujitsu’s marketing department, stated

in 1987 that:

NIT has probably been the greatest help to

Fujitsu’s business. Because of the profitability of

doing business with NIT, it was more important

[than MITI] for private industry. Our business with

NTT has always been based on NTT purchasing the

product, and we have always made a profit on

business with NTT.158

Indeed, Fujitsu, NEC, and Hitachi got the bulk of

NTT’s computer procurement, which totaled some

$13.3 billion from 1965 to 1975159 and $13.6 billion

from 1980 to 1986.160

The government also used cooperative R&D

projects to nurture a competitive computer industry.

These were aimed at helping the firms reduce their

technological gap with U.S. computer companies by

reducing duplicative research and accelerating technological advances. Numerous projects were undertaken from the early 1960s through the 1980s and

early 1990s (table 6-7). Several have been particularly important in enabling Japanese firma to develop the technologies and skills necessary to

produce supercomputers in the 1980s. Early projects, such as the 1966 Super High-Performance

Computer Project, helped the firms gain a foothold

in the supercomputer industry both in design and in

integrated circuits.

The “New Series” Project, from 1972 to 1976,

was critical in getting Fujitsu and Hitachi to

standardize their architectures and go the IBM

compatible route.161 Standardizing their architectures meant that with minor modifications, software

created for a Fujitsu machine could also run on a

Hitachi and vice versa, and that the two machines

could be used with each other. This assured potential

users that if one of the two companies withdrew from

the computer business, machines and software

purchased from the defunct supplier could be kept

and used with machines and software from the

remaining firm.

162 Possibly, these decisions also

helped Japanese companies to compensate for weakness in software development and small libraries of
Chapter 6--Japanese Industrial Policy: The Postwar Record and the Case of Supercomputers ● 263

Table 6-7-Government Subsidies for Computer-Related Government-Sponsored

R&D Projects

Yen Dollars

Project Year in billions in millions

FONTAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............ 1962-65

Very High-Performance Computer Systems . . . . . . . . . . . . . . . . . . . 1966-71

DIPS-I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............. 1968-71

Pattern Information Processing Systems (PIPS) ............... 1971-80

New Series Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1972-76

Software Module Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1973-75

DIPS-II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1973-75

NTTs VLSI Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1975-77

MITI’s VLSI Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1976-79

Software Production Technology Development ................ 1976-81

Basic Technology for Next Generation Computer Systems

(Fourth Generation Computer Systems) . . . . . . . . . . . . . . . . . . . . 1979-83

Optical Measurement and Control Systems (Optoelectronics

Application Systems) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1979-85

Basic Industrial Technology for the Next Generation ........... 1981-90

Very High-Speed Scientific Computing Systems

(Supercomputers) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1981-89

Fifth Generation Computer Systems (FGCS) .................. 1982-91

Software Industrialized Generator and Aids (SIGMA) . . . . . . . . . . . 1985-89

Interoperable Database Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1985-92

Y 0.35

12.0

30.0

22.0

70.3

3.0

5.0

20.0

30.0

6.5

$ 0.972

33.33

83.33

66.67

235.50

9.09

15.15

100.00

150.00

32.5

21.15

18.0

50.0

18.2

50.0

12.5

20.0

105.75

90.00

333.33

121.33

333.33

96.2

153.8

NOTE: There have been sharp exchange rate changes since the late 1970s. Thus, exchange rates used vary sharply

depending on the project’s date.

SOURCE: Marie Anchorodoguy, Cornputem /nc..’ Japan’s Challenge to IBM, pp. 225-244; JECC Kompyufa Noto,

various issues.

software (an area of strength for IBM). At any rate,

Fujitsu and Hitachi cooperated just long enough to

“unravel the secrets” of the architecture of IBM

computers.

163 In explaining to his employees Fujitsu’s

decision to cooperate with Hitachi in this project,

Kiyomiya Hire, Fujitsu’s Vice President, said:

Frankly speaking, if we do not do this, we cannot

confront our American competitors. If Japanese

makers in the domestic market did not cooperate and

only competed, before we knew it, we would be

taken over by the American firms; there is a danger

that every maker would be dealt a fatal blow. On the

other hand, if we only cooperate and do not compete

at all, we will all slide into stagnant waters, which

also would be bad. The British and French computer

industries are examples of this. Thus, using cooperative relations during the early stages of development

as a base, we will then compete on commercializing

the product; as a whole, we must oppose the threat

posed by foreign capital. Thus we will cooperate on

R&D, but in sales and production we will compete

fiercely as we have in the past. . . . Finally, I would

like to add that in the background of this move is the

earnest guidance of MITI and the deep understanding of NTT. In regards to the big problems created by

the decision to liberalize the computer industry in

three years, both NTT and MITI have been serious

and forward-looking in considering what form our

computer industry should take in order to oppose the

giant power of American capital.164

The architecture of the M-series computers Fujitsu

and Hitachi developed during this project is the basis

of their mainframe and supercomputer architecture

today; Fujitsu’s M-380 mainframe and Hitachi’s

M-280H mainframe were used as the starting point

for the development of their Fujitsu VP series of

supercomputers and Hitachi S-81O supercomputers

respectively. 165 When Fujitsu Chairman, Kobayashi

Taiyu, was asked how the Japanese were able to

survive during this volatile period in the early 1970s

even though RCA and GE withdrew from the

computer industry at this time, he replied:

“[B]ecause MITI started providing research grants

and made different companies get together for

cooperative development of new machines; for the

first time, Japanese makers were ready for battle. " 166

NIT’s and MITI’s VLSI (very large scale integrated circuit) projects, from 1975 to 1977 and 1976

to 1980 respectively, were also key in helping the

Japanese companies catch up in device technology.

This was a necessary step to their becoming competitive in supercomputers today. NTT provided Y20

billion ($100 million) to work with Fujitsu, Hitachi,

and NEC on 64K RAMs (random access memories

with 64 kilobits, or 64 thousand bits, of memory),

something immediately commercializable.167 While

the NTT project formally lasted only 3 years, NTT,
264 ● Competing Economies: America, Europe, and the Pacific Rim

which does no production of its own, continued to

work closely with these firms on advanced chips

after the project ended. These efforts led to many

advances in developing 64K RAMs in the last half

of the 1970s168 and a 256K RAM in early 1980.

“NTT played a great role in the development of

VLSI technology,” according to Sakai Yoshio,

senior researcher at Hitachi’s Central Research

Laboratory. 169

MITI’s VLSI project targeted the development of

the production equipment necessary for very large

scale integration. Denser packing of integrated

circuits, which increases speed and decreases cost,

would be key to advances in electronics in general

and computers in particular. The problem was how

to develop equipment to draw narrower lines on

wafers and thereby squeeze more circuits onto a

wafer. To study these topics, MITI divided up the

five firms involved in the project—Fujitsu, Hitachi,

Mitsubishi, NEC, and Toshiba—into three groups

and had them take seven different approaches to the

same problem. The rationale was that there are

always failures in R&D; if several firms approach a

problem differently and agree to share their results,

the time and money it takes to develop a successful

technology can be cut substantially. The 4 year

project cost Y72 billion ($360 million), of which Y30

billion was funded by the government.170 “The

timing of the project was critical,” explained

Shimizu Sakae, Senior Managing Director of Toshiba,

“there was no electron beam [for drawing very fine

lines] and we needed a breakthrough to get ahead.

The firms did not have any of the equipment for

producing VLSIs, such as the electron beam or

testing equipment. ’’171 The firms would not have

done research on such advanced chips at that time if

not for the project.172 Indeed, the project was too

risky for firms to do without the government sharing

costs and risks. As one maker put it:

Because of the limited resources of a private firm,

we domestic makers cannot allow a failure; we

cannot deny that this [participation in MITI’s VLSI

project] was taking a big hedge against risk.173

Without MITI’s VLSI Project, explained Matsukara

Yasuo, General Manager of NEC’s VLSI development division, each company would have had to

spend five times as much on R&D to develop

electron-beam technology.174

Several specialists point to the VLSI project

results as being a critical ingredient in Japan’s ability

to enter the supercomputer market in the early

1980s. 175 Indeed, the speed of Japan’s supercomputers today is largely the result of very advanced

semiconductors. While Japanese companies’ private

efforts account for most of the advances in devices

used in supercomputers, the VLSI project did allow

them to get a foothold in this field at a critical time.

Japanese policies supporting the development of

the computer and semiconductor industries were

characterized by flexibility-making fast responses

to new developments and supporting the firms that

seemed strongest at various points in time-and

strategic use of market signals to provide firms

incentives to improve technology. For example,

JECC only bought domestic computers that users

specifically asked to rent. There was a direct tie to

the market; if no one asked to rent a particular

computer, JECC did not buy it. Those firms with the

best machines got the most orders from customers

and thus the most benefit from JECC. By managing

prices, JECC helped the firms avoid destructive

competition, but prices were set at levels competitive with IBM. Price cooperation pressured the firms

to compete on other dimensions key to developing

competitiveness-like cost, quality, and technology. R&D subsidies were important but the firms

often had to match R&D grants and always had to

contribute their engineers. This assured some degree

of commitment from the companies, as well as direct

transfer of technologies to the private sector. And

subsidized R&D was tied to performance. If a

company did not commercialize the results of a

project, or in general became uncompetitive, it could

expect to be left out of the next project. This

happened to Oki Electric-it was left out of the

VLSI project due to its failure to commercialize the

results of the research it did in MITI’s earlier ‘New

Series” project.176 Finally, cooperation on R&D a

step before the commercialization stage helped the

firms but still left substantial room for competition,

which provided incentives for rapid development

and manufacturing efficiency.

TARGETING SUPERCOMPUTERS

As the earlier analysis of U.S. and Japanese

supercomputers suggests, Japanese companies have

almost caught up with (and maybe poised to move

ahead of) their U.S. competitor (Cray Research) in

the hardware for traditional supercomputers, though

they lag in software (especially applications software) and in developing massively parallel process-
Chapter 6-Japanese Industrial Policy: The Postwar Record and the Case of Supercomputers .265

ing machines. Government policies have been an

important ingredient enabling them to rapidly close

the technological gap with American companies.

The High Speed Computing System for

Scientific and Technological Uses

The major R&D effort targeting supercomputers

was the High Speed Computing System for Scientific and Technological Uses Project, 1981 to

1989. 177 It was clear to MITI and the computer

companies that both high speed devices (components) and architectures (overall designs) that permitted many calculations to be done in parallel

would be necessary to make better computers, and

that these computers would have important applications.

For nuclear fusion, nuclear power, energy exploration, weather and earthquake forecasting, and

defense-areas related to national security-it is

necessary to have a high speed computer [such as

that to be developed in this project],

according to a MITI statement on the project.178

MITI also knew that the R&D needed to make better

computers would be useful in other industries as

well:

Completing the High Speed Computer System for

Scientific and Technological Uses will have broad

spillovers sharply raising the scientific and technological level of every industry. . . thereby contributing to our aim of establishing our nation as a leader

in technology.179

The primary goal of the project was to help the firms

acquire the technological building blocks for making their own supercomputers, but the formal goal

was to develop a prototype,.180 in order to get money

from the Ministry of Finance for projects, MITI

needs to be able to show them something specific at

the end.181 The project was fully funded by the

government; the initial budget was Y23 billion but in

the end the government spent only Y18.2 billion

($121.33 men).182 It called for development of a

10-gigaflops parallel processing supercomputer, a

speed that at that time seemed like a dream.183 The

six major vertically integrated computer/semiconductor companies-Hitachi, Fujitsu, NEC, Mitsubishi, Oki, and Toshiba-participated in the project

(figures 6-3 and 6-4). Matsushita and Sony wanted

to join the project but were not allowed in.184

The project focused on high-speed devices and

parrallel architectures. The research on high-speed

devices was divided up among the six participating

firms: NEC, Toshiba, Hitachi, and Mitsubishi researched gallium arsenide chips; 185 Fujitsu, Hitachi,

and NEC, Josephson junctions; and Fujitsu and Oki,

HEMT (high electronic mobility transistor) deFigure 6-3-Schedule of Research and Development for High Speed Computing

System for Scientific and Technological Uses Project

Fiscal year

R & D

areas

(1)

High-speed

logic and

memory devices

(2)

Parallel

architecture

and software

(3)

Integrated

system

1982 1983 1984 1985 1986 1987 1988

J J device

HEMT device

GaAs FET device I I Refinement I I

/

Architecture

I

D

Basic Software

research 1

Y v

4

Integrated

system

I

1989

1.

Evaluation

I

SOURCE: MITI.
266 ● Competing Economies: America, Europe, and the Pacific Rim

Figure 6-4-Organization of the Supercomputer Project, 1981-89

● MITI Sponsors Industrial Technology

● Agency for Industrial Promotion Agency

Science and Technology I

. National R&D Program

v

MITI consignment

payments (Itakuhi)

+

Association for the

Development of High-Speed

Scientific Computers 4

(formed December 1981)

‘es””~ Fiizi== systems incorporating arrays

L.Produce processors with Combine a large number speeds in the 40-100

MFLOPS range of 4-M FLOPS elements to

reach 1 GFLOPS

rl Josephson

Junction

Devices

t

. NEC

● Fujitsu

● Hitachi

I I

SOURCE: Dataquest, Inc.

I

Sale of

patents

n

High

Electron

Mobility

Transistor

(HEMT)

● Fujitsu

● Old

n

Gallium

Arsenide

(GaAs)

Field-Effect

Transistors

(FETS) and

Memory

devices

vices.186 Both U.S. and Japanese researchers agree

that this project helped the Japanese firms gain

proficiency in these technologies.187

The research on parallel processing was divided

into three subgroups: the high-speed parallel subproject; the sigma-1 dataflow subproject; and the satellite image processing subproject. The high-speed

parallel subproject was the most important. Aimed

at quickly developing a four CPU machine, the

subproject combined into one machine four of

Fujitsu’s already successful single processor ma-

● Hitachi • Fujitsu ● Toshiba

● Mitsubishi ● Hitachi ● Mitsubishi

Electric ● NEC Electric

. Old

chines,188 which had an architecture based on that

developed in an earlier MITT project.189 Fujitsu

focused on developing the software needed to get the

four processors to operate in parallel. The prototype

high-speed parallel system ran at over 10 gigaflops.

The system was designed to accommodate up to 16

processors, but because of budget constraints only 4

were used.190

The second architectural subproject--Sigma-1

Dataflow subproject—focused on developing a

machine with 128 processors, a precursor to one
Chapter 6-Japanese Industrial Policy: The Postwar Record and the Case of Supercomputers ● 267

with 1,024 processors.191 Dataflow machines were

tried in the United States and were not very

successful; thus most U.S. scientists do not expect

this subproject to have a big impact on Japanese

supercomputers.

192 The subpl-eject also had software

problems, according to a U.S. researcher who visited

the ETL (MITI’s Electrotechnical Laboratory) in

both 1989 and 1990 and saw little progress made on

the software necessary to run the machine.193

Nonetheless, the research group’s successful completion of a 128-processor machine adds to the

participants’ understanding of massively parallel

architectures.

The third subproject was the satellite image data

processing system,

194 mother way of exploring

parallel architectures; this system can be used for

data processing of images and visualization. Three

types of architecture were explored: Toshiba focused on a high-speed three-dimensional display

processor using 16 very fast VLSI processors;

Mitsubishi worked on a simpler machine aimed at

processing image data obtained from satellites; and

Oki worked on a two-dimensional display using 8

processors for use in global data processing networks. 195 These results will help these firms make

parallel processing machines for voice and pattern

recognition and visualization, areas considered increasingly important in the 1990s.

As early as the mid-1980s, people from the firms

involved said that the project was helping them

significantly; 196 but the big results of the project

have yet to be incorporated into the firms’ machines.

The final prototype, completed in early 1990,

demonstrates how the main technologies developed

in the project work together, primarily the device

technologies and the results of the high speed

parallel subproject.197 It is not, however, a prototype

of a machine that could be directly commercialized.

While Fujitsu was the main contractor for the

prototype of a 10-gigaflop machine, doing the

computing system and integration of all the parts,

Hitachi did the operating system, and NEC the

high-speed, large-capacity storage system.198 Many

concrete results were achieved: in the final prototype, gallium arsenide devices were used, though not

as extensively as initially envisioned; Josephson

junction devices were not used at all in the final

prototype, although the project advances in Josephson junctions put Japan in the lead in this area,

which is considered to have good prospects in the

late 1990s and after.199 Fujitsu used these results to

develop a recently announced hybrid Josephson

junction-VLSI device, which it plans to use in its

next generation supercomputers, scheduled for the

mid-1990s. 200 All in all, some 602 patents resulted

from the project.201 Licenses are available to all

participating companies for a nominal fee and other

companies for a higher though still reasonable fee.

Another contribution of the project was that it got

Japanese computer makers to focus on supercomputers. The companies were not initially interested in

the project because they thought there was not a

large enough market for supercomputers.202 ‘When

the project was started, there were few supercomputers in use worldwide, so we thought there was not

enough demand. I do not think that one company

would have made such a big effort in supercomputers [as the project has], ” explained Oketani Kisaburo, section chief of Fujitsu’s Market Planning

Departrnent. 203 When asked why Fujitsu does not

refuse to join MITI projects it is not interested in,

Tajiri Yasushi of Fujitsu explained: ‘ ‘If we ever said,

‘forget about Fujitsu [for a given project] and do it

with someone else, ’ we would never be invited to

join a government project again,’‘204 a consequence

Fujitsu was not willing to accept.

The government offered to fund the entire project

and the firms went along. Supercomputer development might have happened eventually, but the

project started things moving sooner, and, through

cooperation, probably got the job done faster and

more efficiently than if any one firm had worked on

its own. “The Japanese industry and R&D institutes

are very cooperative and often go on ‘division-oflabor’ arrangements. This gives us a considerable

edge over IBM, which has to do everything on its

own, ’ ‘ stated Fujitsu Chairman Kobayashi Taiyu.205

The companies supplemented the project with

their own research. A Japanese expert closely

involved in the project said the three Japanese

supercomputer makers are each spending three to

four times the project budget on supercomputer

research themselves,206 suggesting spending of some

$360 to 490 million investment by each of the three

fins. This investment, along with the $121.33

million provided by this government project, pays

part of the development of new generation supercomputers. Cray forecast that it would spend $100

million in development costs for its C-90 machine

due out in late 1991.207 Cray’s spending should not

be compared directly with the Japanese companies’
268 ● Competing Economies: America, Europe, and the Pacific Rim

spending during the High Speed Computing System

project, for that project spans more than one

generation of product development; moreover, it is

not clear how many years Cray’s $100 million

expenditure on the C-90 covers. Nevertheless, the

very rough comparison is instructive. The Japanese

firms can outgun Cray in R&D, in part because of

help from their government.

NTT has its own supercomputer project, which

involves Fujitsu, NEC, and Hitachi.208 In early 1985,

the NTT lab successfully developed a 1K lead-based

Josephson memory chip, which ranks as one of the

fastest in the world, and also a pace-setting 4K

gallium arsenide memory.209 Unfortunately, it is

impossible to get any further information on NTT’s

supercomputer project.

Other Government-Sponsored Projects

Related to Supercomputer Technologies

Several other projects have contributed to Japan’s

ability to produce parallel processing machines.

Indeed, there are over 70 projects exploring parallel

and massively parallel processing in Japan’s public

and private sectors; about 25 percent focus on high

speed supercomputing, 25 percent on artificial

intelligence, and the remaining 50 percent on areas

such as image processing, computer graphics, computer aided design (CAD), and databases.210

.

The largest is the Fifth Generation Computer

Project, 1981 to 1991, a Y100 billion project, which

the government is supporting with Y50 billion

($333.33 million). This project focused on developing parallel processing for artificial intelligence (as

opposed to numerical computing applications). The

goal was for a machine able to infer knowledge

based on data stored in its memory, for example, a

computer able to write its own software for new

applications and able to process and understand a

variety of symbols, including kanji (the Chinese

characters that are part of the Japanese written

language) and photographs. The initial expectation

was that the fifth generation machine would be able

to “reason” at an elementary level, and thus help

managers, doctors, and others who analyze problems

through complex sequences of inferences.

Eight companies (Fujitsu, Hitachi, NEC, Mitsubishi, Toshiba, Oki, Matsushita, and Sharp), along

with NTT, have sent engineers to ICOT (Institute for

New Generation Computer Technology), a central

laboratory established in 1982 to conduct the research. (NTT also has its own fifth generation

computer project, which it invited NEC, Hitachi, and

Fujitsu to join. 211) At ICOT, researchers from the

different companies work side by side, something

unusual in MITI projects. ICOT also distributes

work among five other laboratories.

The Fifth Generation Project worked on both

software and hardware. The Japanese companies

originally did not want to join the cooperative effort

because they believed that the goals were far too

vague; they were particularly concerned that the

project did not target an IBM-compatible machine.212 But the government agreed to put up

money to get the project started, and the firms went

along and ultimately matched the government funding.

It is too early to assess the project’s impact. It is

generally believed that the project fell far short of its

ambitious goal of creating a prototype ‘‘thinking

machine.” Some U.S. scientists in particular criticize the project’s focus on logic programming and

the fact that it has not produced any fundamental

advances. 213 Even SO, the project probably is not a

dead loss. Speaking of one of the project’s interim

results-Mitsubishi’s uniprocessor and 16-processor parallel inference machines, which were demonstrated at Argonne National Lab in Illinois-an

Argonne scientist said:

They are learning a lot about parallel processing.

By working in this project, the companies have

gotten their brightest people exposed to many issues

in parallel processing and to the international scientific community. Now that the project is ending,

these people will go back to their firms with this

knowledge. The project has not been a total success

but I expect a favorable long-term effect.214

Computer makers expect some spin-offs from technology researched in the project, according to

Shimizu Sakae, Toshiba’s Senior Managing Director; 215 some spin-offs have already been commercialized.

The project has played a role in pushing the

industry to explore new technologies, especially

non-IBM compatible machines. The industry was

rattled in mid-1982 when IBM cooperated with the

FBI in a sting to catch Hitachi and Mitsubishi

stealing IBM’s technological secrets. The Japanese

firms have been forced to make licensing agreements with IBM involving large sums. Hitachi, for

instance, reportedly paid IBM Y1O billion ($45.45
Chapter &Japanese Industrial Policy: The Postwar Record and the Case of Supercomputers ● 269

million) for the cost of a lawsuit and for past use of

software similar to IBM’s, and in the mid to late

1980s was paying some Y8 to Y12 billion ($60-90

million) a year for its use; IBM also received the

right to inspect new Hitachi machines to confirm

that Hitachi is keeping the agreement.216 Japanese

companies felt that, to survive over the long term,

they would have to develop their own operating

system standard. “We have to make a complete

break from the IBM standard in order to survive,”

said Yamamoto Kinko, the Managing Director of the

Japan Information Processing Development Center

(JIPDEC). 217 “We’ve got to find another standard,”

agrees Tomioka Susumu, manager of Fujitsu’s

software division.218 If Japanese companies do

develop their own standard, and it is widely accepted, this could have serious consequences for

IBM, as well as other U.S. systems and component

producers.

Finally, the technologies investigated in the

project will help Japanese companies to move

towards massively parallel machines. In the interim

stage of the Fifth Generation Project, Mitsubishi

completed a prototype of a 64-processor parallel

inference machine. The project is concluding with

three prototypes: a full version 1000 VLSI processing unit made by Fujitsu, one with about 256

processors made by Mitsubishi, and a smaller

version made by a third company. 219 It is too early

to know how good these machines will be; but even

though they are unlikely to be commercial successes, the firms and their researchers will have

gained experience.

As a successor to the Fifth Generation Project,

MITI is exploring a New Information Processing

Technology Project (NIPT). This so-called “Sixth

Generation Computer Project” is expected to focus

on basic principles of massively parallel processing,

three dimensional information, and visual and auditory recognition, aimed at developing a reliable

computer with a million or more processors.220 The

project will continue the Fifth Generation project’s

focus on a” “thinking” computer, one that performs

tasks such as pattern recognition and intuitive

information processing better than conventional

computers. The goal is to be able to deal with

ambiguous or incomplete information.221 Though in

July 1991 the project was still in the planning stage

and had not yet been given the official go-ahead, it

was expected to be approved, to be of the same scale

as the Fifth Generation Project, and to follow an

organizational structure such as that used by ICOT.222

Two U.S. computer scientists familiar with this

proposal argue that while there will be difficult

problems in designing and building the proposed

sixth-generation computer, it will likely serve as a

magnet attracting Japan’s top research minds.223 The

project would require a major software effort and

further R&D on massively parallel processing architectures, areas where Japanese companies lag American companies.

Finally, there have been a few government projects to help Japanese companies develop software

for supercomputers, another area of comparative

weakness. One small national project run by the

Fluid Dynamics Analysis System Research Association aims to develop fluid dynamics software for

supercomputers. Started in March 1988, five companies, seven major users, and one software house are

participating in this 4-year project; members include

Asahi Kasei, Takenaka Komuten, Tokyo Electric

Power, Toshiba, NICK, NEC, Hitachi, Fujitsu, Matsushita Denko, Marubeni, and Mitsubishi Heavy

Industries. Some experts see the involvement of

users in software R&D projects as a promising

approach to ensure that the project will be commercially useful. The group has received Y1 billion

($7.7 million) from the government for the 4-year

period from March 1988 to March 1992.2X Member

companies are charged Y60 million each, and

supporting members (which they hope to increase to

some 200-300 fins) Y4.8 million.225 Another smallscale software project that will have an impact on

supercomputers is MITI’s New Software Structuring Project, which aims to make it easier to maintain

large software systems such as online systems for

banks, companies, and government agencies. This

project is expected to begin in 1991 with actual

research starting in 1992; it will last 8 years and will

be funded at about Y5 billion (about $35 million).226

The Japanese Government is playing a critical

role in providing the seed money and the coordination necessary to get Japan’s government labs, major

companies, and universities to cooperate in developing very future-oriented supercomputer technologies, work that they would not be doing otherwise.

When asked in the late 1980s whether government

projects such as the Fifth Generation and supercomputer projects have any significance given that

Japanese firms have become very strong in their own

right, Kuwahara Yutaka, head of R&D Administra-
270 . Competing Economies: America, Europe, and the Pacific Rim

Table 6-8—U.S. and Japanese Supercomputer Companies’ Share of the World Market

Market share in percent

(number of installations)

Company 1980 1985 1986 1987 1988 1989

Cray . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90% 56% 60.7% 67% 64% 53.1%

(148) (219)

Fujitsu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 00/0

I

 15.5% 1770 12% 21 .6%

(38) (89)

NEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0% 24% 2.5°10 6% 4% 6.3%

(6) (26)

Hitachi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . O%

I

4.5% 4% 4% 7.8%

(11) (32)

CDC/ETA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10% 20% 16.8% 6% 16% 11.2%

(41) (46)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100% 100% 100% 100%

(244) (340) (412)

SOURCES: Kompyutopia December 1989,p. 76; Nikkei Sangyo Shh??6un,Apr. 19, 1989, p.3; bsArrge/es Tines,

Sept. 4, 1987; High Performance Computing and Communications: Investment in American Competitiveness, Gartner G~oup, Inc., p. 69.

tion at Hitachi’s Central Research Laboratory,

replied:

Government projects are significant because there

are many things for us to challenge in the future,

many of which can be better done in a government

project than a private one. . . .When profit decreases. . due to the recession, the increasingly

higher yen, and trade friction, we, in our [corporate]

lab, are pressured to cut costs and to be more

product-oriented. It is very difficult to propose a

future-oriented technology because we will be asked,

‘Is it necessary? How profitable will the results be?’

So we believe that national projects are very very

important when they are future-oriented-when they

focus on very risky R&D that is very difficult for the

private sector to challenge alone.227

JECC also provides implicit subsidies to Japanese

supercomputer makers. A third of Fujitsu’s supercomputers are rented through JECC, and “A substantial amount of our supercomputer business

comes from JECC," stated Watanabe Tadashi of

NEC.228

PROCUREMENT OF

SUPERCOMPUTERS

A major aspect of targeting supercomputers has

been the procurement of domestic machines by the

government and the private sector. While companies

in the United States and Europe bought American

machines (which, until recently, performed much

better and still have more software than Japanese

machines), the Japanese Government and private

sector bought Japanese machines (tables 6-8 through

6-10).

Table 6-9-U.S. and Japanese Supercomputer

Companies’ Share of the European Market, 1989

Market share in percent

(number of installations)

Cray . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84%

(73)

Fujitsu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9%

(8)

CDC/ETA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6%

( 5 )

NEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1)

Hitachi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . O%

(o)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100%

(87)

SOURCE: Cray Research.

Private Sector Procurement

Analysis of private sector procurement of supercomputers in Japan shows that a significant amount

are purchases of a group member’s machine. Of 12

machines owned by Fujitsu group companies, 10 are

Fujitsus and 2 are foreign machines; of 11 machines

owned by NEC group companies, 5 are NECs, 3 are

Fujitsus, and 3 are foreign machines; and of 9

machines owned by Hitachi group companies, 3 are

Hitachis, 3 are machines of other Japanese supercomputer makers, and 3 are foreign machines (table

6-11). (These figures do not include machines used

internally by Fujitsu, Hitachi, and NEC.)

Keiretsu feelings are strong, and firms only go

against them when they feel their survival is at stake.

“We would like ideally to purchase the supercomputer of the maker in our group, but if we try to save

the face of each firm in our group, we’d be defeated
Chapter 6--Japanese Industrial Policy: The Postwar Record and the Case of Supercomputers ● 271

Table 6-10-U.S. and Japanese Supercomputer Companies’ Share of the

Japanese Market, Installed Base

Market share in percent

(number of installations)

Company 1987 1988 1989 1990 (3/90)

Cray . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.O% 11 .5% 10.1% 15.6%

( 7 ) (13) (14) (23)

Fujitsu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54.O% 49.6% 49.O%

(30) (61) (69) (72)

NEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.0% 15.9’YO 16.6Y0 14.3%

(7) (18) (23)

Hitachi

(21)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.5% 17.770 23.0% 19.7%

(lo) (20) (32) (29)

CDC/ETA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 0.9% 0.7% 1 .4%

(1) (1)

Total

(2)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 110.O’% 100.0% 100.O%

(54) (113) (139) (147)

SOURCES: Dempa Shimbun, Apr. 9, 1987, p. 1; Nikkei Uotcha BM-Ban, Apr. 30, 1990, p. 22; and Advanced

Computing in Japan, Japan Ttinology Evaluation Center, October 1990, p. 140.

Table 6-n—Purchases by Firms with Keiretsu Ties to Japanese Supercomputer

Makers, 1980-90

Number of machines

Total Purchases Purchases

purchases by Purchases from from other of foreign

Company group group members affiliated makers Japanese makers supercomputers

Fujitsu’s group . . . . . . . . 12 10 0 2

Hitachi’s group . . . . . . . . 9 3 3 3

NEC’S group . . . . . . . . . . 11 5 3 3

Total . . . . . . . . . . . . . . 32 18 6 8

SOURCE: Nikkei Uotcha, IBM-Ban, Apr. 30, 1990, pp. 21-24; Kigyo Keiretsu Soran, 1991.

in the severe competition we face, and we cannot

afford to do that,” explained one auto maker.229

Many argue that supercomputers are driving the

competition in automobile design today; for example, Toyota’s purchase of a Cray after it learned that

Nissan had made many key product development

advances using a Cray supports this notion. Toyota

had been using a Fujitsu, and the switch only serves

to underline the superiority of Cray machines and

their software (at that time) for auto industry

applications.230

Mazda, which is heavily indebted to the Sumitomo

group for bailing it out when it was threatened with

bankruptcy, solved its obligation by a compromise;

it bought an NEC machine to save face with the

Sumitomo group and a Cray for its applications

software. 231 Sumitomo Chemical did not make such

a compromise; it completely went against NEC (its

group computer maker) when, in September 1989, it

bought a Cray because of Cray’s better software.232

Nissan, which has a long relationship with

Hitachi, bought two Cray supercomputers. But

Nissan’s first purchase of a Cray in 1986 only came

after U.S. pressure. According to some reports,

Nissan engineers leaked to the U.S. Embassy in

Tokyo and to Cray’s office there that they wanted a

Cray but that top company executives had decided to

purchase a Hitachi due to their “relationship.” The

leak had its intended effect; the United States Trade

Representative (USTR) and Department of Commerce officials discussed the issue with MITI, which

in turn pressured Nissan to purchase a Cray.233 Since

then, Nissan officials have frequently stated that

Cray’s simulations software and its UNIX-based

operating system are the deciding factors in its

purchase of Cray machines.234 “For our needs, Cray

performed the best,” explained a Nissan manager.235

Automobile companies are the clearest example

of a Japanese industry in which all the major actors

have Cray machines. Of Cray’s 26 Japanese installations, 10 are in the auto industry, which purchased

the Cray machines primarily for their performance,

especially the crash simulations applications software. Of less significance, Japanese auto companies
272 . Competing Economies: America, Europe, and the Pacific Rim

are aware that purchasing foreign machines helps to

balance their huge exports of autos to the United

States, potentially reducing trade friction.236

While Cray has been able to attract some customers from the groups of Japan’s supercomputer

makers, its biggest Japanese market is firms that are

not part of the groups to which NEC, Fujitsu, and

Hitachi belong. Of all supercomputer purchases in

Japan, 26 percent (46 of 172) have been by private

companies unaffiliated with the groups of Japan’s

three supercomputer makers; 50 percent of the

purchases of Cray machines were by such companies (13 of 26), compared to 25 percent for Fujitsu

(21 of 85),23 percent for Hitachi (8 of 35), and 13

percent for NEC (3 of 24) (table 6-6). Toshiba is one

such example. In 1989 it bought a Cray Y-MP8/4128

for its applications software and the fact that it

worked on UNIX, which was compatible with

Toshiba’s engineering work stations.237 That many

such companies have purchased Cray machines

supports the notion that Cray is very competitive.

The fact that Japanese firms are vertically integrated and can use their own supercomputers in their

semiconductor divisions also explains a chunk of

private sector procurement. Of Hitachi’s total sales

of 35 supercomputers, 12 are used internally; of

NEC’s 24 supercomputers, 3 are used internally; of

Fujitsu’s 85 supercomputers, 9 are used internally

(table 6-6). Finally, strong societal pressure to buy

Japanese probably also tilts the market in domestic

firms’ favor.

It is very difficult to estimate how many foreign

supercomputers would have been purchased in an

open market. There are two issues: quality and price.

On quality, most U.S. observers would say that at

least through 1989 U.S. machines were superior. A

more conservative approach is to say that, on the

basis of quality alone, U.S. firms would have won all

sales to the private sector through 1986, all sales to

Japanese auto manufacturers through 1989, and the

three additional keiretsu-related sales during 1987-

1989. This amounts to 20 supercomputers. The U.S.

machines would have cost substantially more, and it

is impossible to know how many Japanese users

would have paid to obtain a better foreign machine

if the market had been fully open. However, on the

somewhat tenuous assumption that the customers

would have been willing and able to pay higher

prices for foreign machines, Cray and ETA would

have sold 20 more supercomputers. If three later

upgrades of those machines are counted, the total

lost sales amount to 23 machines.238

Public Sector Procurement

While Cray and CDC have faced keiretsu ties in

their efforts to sell to Japan’s private sector, public

sector sales have been even harder to win. Of 51

government procurements of supercomputers, 5

have been of foreign machines (see tables 6-5 and

6-6).239 This record ultimately led to two agreements

between the United States and Japan over supercomputer procurement, one in 1987 and another in 1990.

The Japanese Government did not purchase any

supercomputers until 1983, the year Japanese firms

introduced their first models; the Cray-1 had been

out since 1976 and Japan’s private sector had

purchased two foreign machines as early as 1980

(table 6-5). When Japan’s public sector did start

buying supercomputers, the U.S. Government and

supercomputer makers realized that the public procurement process was not transparent-U.S. firms

were never notified when a procurement would

occur-and the Japanese firms gave deep discounts,

which the U.S. Government and supercomputer

makers maintained were some 80 to 90 percent off

list prices.

The Japanese Government budget is a primary

cause of the heavy discounts on supercomputers sold

in public sector markets; the Ministry of Finance

does not give the Ministry of Education a large

enough budget to allow the public universities and

laboratories to purchase supercomputers at or near

list prices. A high level Ministry of Education

official says that the Ministry has a responsibility to

use taxpayer money with as much care as possible

and thus to have universities purchase supercomputers as cheaply as Possible.240 These discounts have

the effect of decreasing net government aid to the

supercomputer makers, though in ways that help

them win sales in important markets.

Indeed, discounting to universities can make good

business sense. IBM long ago began giving universities big discounts on its mainframes, and university

users often develop software, which increases the

demand for a machine. Also, when students accustomed to using a certain machine graduate and enter

a company, they tend to want to continue with the

same type of machine. A discount sale can also help

to secure future business. Once a computer maker

installs its machine, it has a very high probability of
Chapter &Japanese Industrial Policy: The Postwar Record and the Case of Supercomputers ● 273

continued sales (though if the customer is a university, probably at discounts) in the future because of

compatibility.

Small public sector budgets encourage Japanese

makers to offer heavy discounts to universities and

government laboratories or forego the business

altogether. Discounts of 80 percent or more are

considered natural. ‘It’s not that we like to give such

discounts. If only the government would give

[public institutions] a sufficient budget, then this

would not have to happen, ’ explained one mid-level

Fujitsu manager. 241 But the benefits to Japanese

makers still outweigh the costs: “When they use our

new machine, it helps us improve upon the product

in the future,” explained a Hitachi manager; “When

a university uses our machine. . . it improves our

image,’ adds an NEC manager; ‘‘We want to give

assistance to Japan’s researchers; not just in supercomputers, but in other products too; it [the heavy

discounting of supercomputers] is the price of that

business,’ explains a Fujitsu manager.242 Discounts

also oblige university professors, who are closely

involved in recommending their top graduates to

recruiting firms, to give their best graduates to firms

giving big discounts.243 Aware of their weakness in

software, firms see universities as helping them

improve their software.244 ‘‘Actually it would be

fine to give it to them for free, but that becomes a gift

and causes tax problems; that’s why we take the

approach of just giving them a big discount,”

explained a manager of a Japanese supercomputer

firm.245

By late 1985 and early 1986, the United States

started to express more forcefully its dissatisfaction

with the lack of transparency and the lack of public

procurement of foreign supercomputers. By 1986,

the Japanese Government had purchased 22 supercomputers, only 1 of which was foreign, even though

U.S. machines were far superior at the time. In

response to U.S. complaints, Prime Minister Nakasone Yasuhiro assured the United States that NTT

would buy another Cray supercomputer to improve

the trade balance.246 (The Ministry of Finance

owned 100 percent of NTT’s stock until April 1985;

MOF has since sold some of its NIT shares but the

company is still mostly government-owned.) According to Japanese documents, Nakasone’s decision to have NTT buy another foreign supercomputer came at a time when NTT was at pains to

increase purchases from the United States. Soon

after, NTT President Shinto made a deal with the

head of the Recruit Corp., a Japanese real estate/jobreferral firm, to have Recruit repurchase the supercomputer NTT planned to buy from Cray.247

By late 1986, it was clear that no big changes in

public procurement were forthcoming; discounting

of up to 80 to 90 percent off list prices continued.

After various negotiations among the USTR, Commerce Department, and State Department, the Administration decided to conduct an inquiry into

Japanese procurement under section 305 of the 1974

Trade Act and to negotiate with Japan in the

framework of the MOSS (Market-Oriented, Sector

Selective) talks. From the beginning the U.S.

Government made it clear that it wanted an open

market, not a few token procurements.

Negotiations did not get off to a good start. In

early 1987, talks with MITI vice-minister Kuroda

Makoto were abruptly adjourned after a lunch

meeting in which Kuroda allegedly stated that the

United States would have to nationalize Cray or

merge it with larger U.S. firms in order for it to

survive in today’s world of large vertically integrated fins, and that no matter how much the

United States tried, it would not be able to sell

supercomputers in Japan.248 A month later, on

March 26, 1987, the Washington Post printed a copy

of a U.S. Embassy cable regarding this alleged

Kuroda statement, which Kuroda immediately denied.249 Whether or not Kuroda really said this, the

sentiment is echoed in Japanese language documents that talk of Cray’s dependence on Japan for

memory chips and suggest that Cray will be

overwhelmed by Japanese competition in the next

few years.250

Japan responded immediately to the publication

of the alleged Kuroda statement by announcing that

NTT would purchase another Cray supercomputer.

NTT, which was mostly government-owned, was

reported to have said that the government pressured

it to make this purchase to ease U.S.-Japan trade

friction. 251 This supercomputer, like the one NTT

had purchased in 1986, was resold to Recruit.252 The

two Crays that NIT purchased and sold to Recruit

were token purchases; they did not signal a move

towards more open public markets.253 Ministry of

Posts and Telecommunications (MPT) Minister

Nakayama reportedly explained in a Diet committee

that NTT’s purchase and resale of a Cray to Recruit

‘‘was at a time when, as a policy to help U.S.-Japan
274 . Competing Economies: America, Europe, and the Pacific Rim

trade friction, we were searching for someplace [that

would take the supercomputer off our hands].’’254

At the same time as this NTT announcement, the

Japanese Government was hurrying to get approval

of an emergency budget to provide bigger budgets

for the universities.255 Even before the alleged

Kuroda statement hit the newspapers, Japanese

Government officials knew the United States was

upset not just over supercomputers but also about

semiconductors-semiconductor trade friction would

lead President Reagan to impose tariffs on some

Japanese personal computers, power hand tools, and

televisions in April 1987. In March 1987, MITI

Minister Tamura told Prime Minister Nakasone that

if Japan bought a couple of the Cray-2s, it would be

very useful in alleviating trade friction.256 A former

U.S. Government official closely involved in negotiations on both semiconductors and supercomputers

said that he received several calls from Japanese

officials asking him if the United States would back

off retaliation over semiconductor trade if Japan

bought more supercomputers.257

In October 1987, after the emergency budget was

approved, MITI’s Agency of Industrial Science and

Technology (AIST) and the Tokyo Institute of

Technology (TIT), a public institution, announced

that they would each buy an American supercomputer. The Japanese Government decided to have

them purchase one Cray Research machine and one

ETA, the latter because they felt CDC, the parent of

ETA, might complain if only Cray machines were

purchased. 258 The bidding was formally open but

there was no chance for Japanese companies to win

these bids because the emergency budget had been

approved to alleviate U.S.-Japan trade friction.259 A

MITI official acknowledged that TIT’s directed

purchase of an ETA machine was contradictory to

the principle of open competition that the U.S.-Japan

agreement was to provide.260

With these two purchases the Japanese Government felt it had fulfilled its promise to procure

supercomputers. 261 U.S. officials, however, saw two

token purchases rather than a free competitive bid

process. CDC’s late delivery of its supercomputer,

along with the machine’s failure to operate at the

speed promised, hurt the U.S. case.262 ‘ ‘The Americans never looked so foolish,’ said one Japanese

expert.263 To this day TIT researchers vent their

frustration at this CDC machine; CDC’s withdrawal

from the supercomputer business in 1989 only

exacerbated their problem.

TIT researchers’ complaints were not the only

ones. Researchers in Japanese public sector labs

voiced concern that purchasing more expensive

foreign supercomputers would cut sharply into the

rest of their research budget.264 There was also

concern about foreign supercomputers’ compatibility with existing mainframes and peripherals, especially since Japanese supercomputer firms also made

mainframes and peripherals while Cray Research

did not.265

A formal agreement between the two countries

was finalized in summer 1987 requiring that government institutions give full public notice of their

intentions to procure a machine. The agreement did

not deal with discounting; U.S. Government officials involved in the negotiations say that the U.S.

administration believed that by charging discounted

prices, the Japanese firms would only be hurting

themselves. The United States also knew that it

would be difficult to criticize Japanese supercomputer makers for discounting when IBM was actively discounting its mainframes for Japanese

universities. There was also concern that European

countries would object if the United States tried to

limit discounting on sales to third countries.

The agreement was not effective. Since Japan’s

market was now formally open and U.S. makers

were notified when public procurements would be

made, they had to make bids (a costly process) or

else look like they were not trying. But these bids

were useless because the Japanese makers were still

using very heavy discounts, selection did not have to

be based on actual performance, and the Japanese

universities preferred Japanese machines because of

longstanding ties with companies.

The 1987 agreement did accomplish one thing: it

hushed U.S. criticism for a time.266 This allowed

Japanese supercomputer companies additional time

to improve their competitiveness. Other than the two

emergency budget procurements completed before

the agreement, there were no more purchases of U.S.

machines until the start of new negotiations on

supercomputer procurement in 1989.

The first public sector procurement after the 1987

agreement-Tohoku University’s Large-Scale Corm

puting Center’s decision to purchase a supercomputer—is a good example of how the heavy discounts
Chapter 4-Japanese Industrial Policy: The Postwar Record and the Case of Supercomputers .275

work. The bid was for a machine to replace the

Center’s NEC SX-1 model, so it was expected that

NEC would win the bid; Cray nonetheless made a

bid since the market was now officially open. NEC

bid the SX-2 and Cray the Y-MP-832. The first bid

was made in June 1988, with NEC offering a

monthly price of Y48 million against Cray’s bid of

Y74.739 million. NEC appeared to have an unbeatable advantage, but instead of awarding NEC the

contract, the university asked for a second round of

bids trying to get a better discount. NEC cut its bid

to Y40.1 million and Cray cut its slightly to Y74.73

million. When the university asked for a third round,

Cray dropped out. The university did not give NEC

the contract until the eighth round of bids. The final

price was V14.6 million, a 70-percent cut from

NEC’s original bid and a 90-percent discount from

the original list price.267 The person in charge of the

university’s procurement said “to have to rebid is

natural not just for computers; even making eight

bids is not necessarily too many.”268 These low

prices are possible for Japanese companies because

of government aid to the industry and because the

firms can funnel mainframe and semiconductor

profits to support their supercomputer business. But

to Cray, these are “market-shattering” prices,

explained Jonathan Streeter of the Department of

Commerce. 269 In numerous interviews with Japanese Government officials and industry people, all

agreed that Japan’s supercomputer makers are losing

money on their supercomputers but that they are

going for long-term market share rather than immediate profits. ‘‘We don’t need to make a profit on our

line of supercomputers,’ admits Watanabe Tadashi,

the major architect of NEC supercomputers; “whatever is spun off from our supercomputer R&D helps

in other information-technology fields. ’ ’270

The Tohoku University case is not an exception.

In 1988, Hitachi won a bid to Hokkaido University’s

Large-Scale Computing Center but only after five

rebids, for a monthly rental price of Y15.75 million;

the list price was Y89 million a month; including the

peripherals and application software, the discount

was between 80 and 90 percent.271 A similar case

was the Japan Railways Technical Research Institute (RTRI) purchase of an NEC supercomputer in

1988. Cray was interested in the procurement but

‘‘withdrew when RTRI demanded an 80 percent

discount,” explained Yoshikazu Hori, President of

Cray Research’s subsidiary in Japan.272

By early 1989 the United States, realizing that the

agreement was not having its intended effect, started

to consider targeting supercomputers under Super

301 of the 1988 Omnibus Trade and Competitiveness Act. This Act required the USTR to identify the

highest priority offenders among countries that

unfairly restrict the sales of U.S. goods and services,

to investigate the practices involved, and to negotiate to eliminate the market barriers. If the barriers

were not removed, sanctions could be applied (see

ch. 4).

Trade friction between the United States and

Japan worsened when in April 1989 NEC announced

that Japan’s frost 4 CPU machine, the SX-3, would

be coming out soon. That machine had a theoretical

peak speed of 22 gigaflops, far faster than any

other.273 Soon thereafter, CDC withdrew from the

supercomputer business, and the United States’

competitive position deteriorated. MITI reportedly

scolded NEC, saying “Why are you irritating the

United States by announcing a new advanced series

of supercomputers] at a time when they are thinking

about invoking Super 301 against Japan?’ ’274 NEC

then announced that it had decided to increase its use

of U.S.-made semiconductors in its SX-3 series of

supercomputers to help alleviate U.S.-Japan fiction

over supercomputers.275 It didn’t work.

In late May 1989, the U.S. Government listed

Japan under Super 301; in June it started investigating Japanese practices regarding supercomputers,

wood products, and satellites. In this second set of

supercomputer negotiations, the United States made

it clear that it wanted to deal with the heavy

discounting of supercomputers. Right after the U.S.

announcement, MITI reportedly advised computer

makers to keep their supercomputer discounts under

50 percent, although bigger discounts on mainframes were okay.276

The first Japanese public sector supercomputer

procurement after these negotiations began (but

before they were concluded) was the purchase of a

Fujitsu machine by the National Astronomical

Laboratory to replace its existing Fujitsu. The only

bidder was Fujitsu, which offered a 60-percent

discount off the list price for a system of 134

machines, including 3 mainframes, engineering

workstations, and other equipment. Fujitsu was

careful, however, to keep the discount on the

supercomputer within the 50-percent limit and to

give the entire product a 60-percent discount by
276 . Competing Economies: America, Europe, and the Pacific Rim

discounting the mainframe parts of the system more

heavily .

277

Soon after, in early December 1989, Fujitsu won

a bid for the Japan Atomic Energy Research Institute

with a 25-percent discount off list price, a level that

the government suggested would allow the firms to

escape U.S. displeasure.278 But this and subsequent

“smaller” discounts were the result of Japanese

companies cutting their list prices in order to make

their discounts appear smaller (table 6-12). For

example, in October 1989 NEC dropped the list

price of its new SX-3 series machines by 35

.279 

percent, Fujitsu and Hitachi had already lowered

their list prices by 20 to 35 Percent.280 When Fujitsu

won the Japan Atomic Energy Research Institute

procurement after lowering its list prices to give a

lower discount, MITI Minister Matsunaga said that

“Fujitsu’s drop in list price is the result of the

operation of competitive market forces.” 28l Thi s

25-percent discount was a 53-percent discount over

the previous list price: the two Fujitsu VP26OO-10

supercomputers purchased had an original list price

of Y80 million a month each, but had been dropped

to Y50 million a month; the final bid was Y37.389

million a month.282 The United States complained

that dropping the list prices just made it look like a

smaller discount and was in no way a solution to the

problem, 283 but no further changes have been made.

Before the 1990 agreement was finalized, Tohoku

University decided to buy a Cray machine for its

Fluid Dynamics Research Lab. Formally, this was a

first installation for the lab, but the researchers had

been using the university Computing Center’s NEC

machine, so everyone expected NEC to win the bid.

But NEC suddenly withdrew, citing government

pressure aimed at easing U.S.-Japan trade problems .

284

This strategy worked. A draft of the agreement

was finalized in late March, and the U.S. administration did not target Japan for a second year under

Super 301. The agreement was formally signed on

June 15, 1990, a day before USTR would have been

required to make a recommendation regarding

sanctions.

There was a consensus among the Japanese

ministries to do the agreement to protect the U. S.-

Japan relationship. SII [the Structural Impediments

Initiative Talks] did not go well. Trade figures were

bad. It was crisis management. The United States

threatened retaliation under Super 301; without that

threat, many ministries would not have gone along,

explained an official of the Ministry of Foreign

Affairs involved in the negotiations.285

The primary difference between the 1987 and

1990 agreements is that the latter requires real

performance criteria, not just theoretical peak performance data, to be used and that discounts be

Table 6-12-List Purchase and Rental Prices of Japanese Supercomputers

Old monthly Old monthly Date of

rental price rental price Percent of price

Vendor Model (yen) (yen) reduction reduction

Fujitsu . . . . . . . . . . . VP-200E

-2100/10

-2100/20

-2200/10

-2200/20

-2400/10

-2400/20

-2600/10

-2600/20

Hitachi . . . . . . . . . . . S-820/20

-820/40

-820/60

-820/80

NEC . . . . . . . . . . . . . SX-3/11

-3/12

-3/14

-3/22

-3/24

-3/42

-3/44

Y56.oM

38.0

59.0

50.0

77.0

64.0

91.0

80.0

170.0

Y38.0M

50.0

62.0

89.0

Y52.OM

64.0

77.0

96.0

112.0

140.0

170.0

Y45.00M

24.95

39.05

32.80

50.60

40.00

57.80

50.00

67.80

Y27.60M

35.60

44.70

66.40

Y34.00M

42.00

50.00

62.00

73.00

91.00

111.00

19.6%

34.3

33.8

34.4

34.3

37.5

36.5

37.5

36.6

27.4

28.8

27.9

25.4

34.6

34.4

35.4

35.4

34.8

35.0

34.7

May 1989

Dec. 1989

Dec. 1989

Dec. 1989

Dec. 1989

Dec. 1989

Dec. 1989

Dec. 1989

Dec. 1989

Oct. 1989

Oct. 1989

Oct. 1989

Oct. 1989

Oct. 1989

Oct. 1989

Oct. 1989

Oct. 1989

Oct. 1989

Oct. 1989

Oct. 1989

SOURCE: Nikkei Computer, Mar. 26, 1990, p. 97.
Chapter 6--Japanese Industrial Policy: The Postwar Record and the Case of Supercomputers ● 277

limited. In this regard, the agreement is an improvement. But virtually everyone agrees that the second

agreement, like the first, is deeply flawed. First, the

agreement may very well strengthen the Japanese

supercomputer makers. MITI and the firms are

happy with the agreement because it is better for the

firms not to have to discount their machines so

much. “Because discounts are only 20 to 30 percent

now, the firms make more money, ’ stated a

Ministry of Foreign Affairs official closely involved

in the negotiations.286 Before the agreement was

signed, a spokesman for a maker said, ‘‘there would

be nothing better for us than to be able to sell our

supercomputers at list price.”287

Another problem with the agreement concerns

reciprocity. As a strictly legal matter, reciprocity is

not an issue. The agreement was intended to remedy

Japan’s violation of the GATT Procurement Code;

Japan has not complained of any U.S. violation, so

there is no need for the United States to change its

procurement practices. While the United States has

refused to buy Japanese supercomputers for defense

purposes (e.g., for defense research at the national

laboratories and in defense applications at NASA

facilities), that does not violate the Code, which

exempts defense purchases.

However, most U.S. Government supercomputer

procurement is for defense purposes, and Japan

could ask on grounds of fairness that the United

States open that market for Japanese machines.

Watanabe Tadashi, the chief architect of NEC’s

supercomputers, says, “The U.S. Government hasn’t

bought a single Japanese supercomputer; now you

tell me who’s being unfair.”288 Fujitsu chairman

Yamamoto Takuma agrees that the United States is

unfair in calling on the Japanese Government to buy

U.S. supercomputers when the U.S. Government

does not buy Japanese machines: “We do not intend

to crush them under our feet; nothing can be gained

by doing that. That is why Fujitsu has always tied up

with a ~. S.] partner, and we will continue this

strategy in the future.”289

The Japanese not only see the lack of reciprocity

as a problem, they also see the United States as

having a double standard on discounts. Japan argues

that the United States is complainingg about Japanese

dumping of supercomputers because Cray Research,

a relatively small one-product company, cannot

afford to sell its machines at such low prices.290

Even if the agreement were perfect, however, it

would be hard to overcome the effects of past

preferential procurements. Public institutions with

Japanese supercomputers in place would normally

wish to replace their machines with an upgraded

model from the same maker. “The most significant

part of the agreement is for frost installations.

Japanese first-time buyers will be able to choose the

best company,’ explained Jonathan Streeter of the

U.S. Department of Commerce.291

The agreement’s usefulness to U.S. manufacturers is also limited by university budgets; with higher

prices, probably fewer machines will be bought.

Total budgets for universities rise at only 10 percent

a year (or less); thus, sharp increases in expenditures

on supercomputers would require cutting another

part of the budget. The fact that six public sector

labs, four of which are universities, have delayed

supercomputer procurements originally planned for

1990292 suggests that the kind of government

funding the U.S. Government and Cray Research are

hoping for will not be forthcoming in the near future.

Indeed, Japanese public procurement has plunged

from 12 and 11 machines in 1986 and 1987,

respectively, to 8,4, and 6 in 1988, 1989, and 1990.

The Japanese and U.S. Governments are publicly

calling the 1990 agreement a success. ‘‘The Tohoku

University procurement is the first application of the

1990 agreement. It is an example of the success of 

the talks. Cray’s success is not artificial, rather

Cray’s machine fits the needs of Tohoku University,” stated Kawamura Yasuhisa, a Ministry of

Foreign Affairs official involved in the negotiations. 293 A few days after Tohoku University decided on a Cray, Kyoto University decided on a

Fujitsu for a replacement machine of the same brand.

“After the 1987 agreement there were no Cray

purchases in the public market, and after the 1990

agreement there have been two purchases, one of

which was a Cray. Cray has a 50-percent market

share of purchases made after the agreement,’

explained this same official.294

It has cost Cray Research a total of $158.1 million

to develop the Cray-1, Cray-2, and Cray X-MP and

Y-MP models; the company estimates that the C90

machine currently being developed will cost $100

million.295 Had Japan’s market been open, Cray

might have afforded more R&D. As discussed, it

seems reasonable to assume that the 20 Japanese

machines sold to the private sector were inferior to
278 . Competing Economies: America, Europe, and the Pacific Rim

available U.S. machines. This is also true for the 21

Japanese machines sold to the public sector through

1986. Thus, had supercomputers been selected on

quality alone, the U.S. firms would have made 41

additional sales. But price is also a factor. The U.S.

machines would have been much more expensive to

public sector customers. Again, assuming the customers would have paid the higher prices, Cray and

ETA would have sold 41 more machines. With

subsequent upgrades, the total would be 56. Based

on historical market share,296 about 52 of these sales

would have gone to Cray, the remainder to ETA.

Cray’s X-MP series available at the time was priced

between $7 and $20 million, with the higher priced

models selling the most. If the 56 machines cost an

average of $13 million each (a conservative estimate), this would have meant $676 million in

revenue for Cray. Cray invests about 15 percent of

revenues in R&D each year, so this would have

meant $100 million in extra R&D, which could have

helped fund a whole new generation of supercomputers.297

OTHER FACTORS

CONTRIBUTING TO JAPAN’S

SUCCESS IN NURTURING A

DOMESTIC SUPERCOMPUTER

INDUSTRY

Industry and Corporate Structure

Japan’s targeting and procurement policies

helped Hitachi, Fujitsu, and NEC to build their

supercomputer business, but the policies were not

solely responsible for the companies’ successes. In

part, their success is related to the ways in which

Japanese corporations are organized and run.298

Japan also created apolitical and economic environment that fostered corporate arrangements giving

Japanese companies advantages in international

competition. The state’s encouragement of interfirm

cooperation on dimensions such as price, production, and R&D; government encouragement of the

reemergence of industrial groups after World War II;

and its centralized control over financial capital have

led to the emergence of large, vertically integrated

firms making supercomputers. All of them are

miembers of Japan’s large industrial groups.299

In targeting specific industries, the Japanese

Government has usually given priority to such fins.

In mainframe computers and in telecommunications, MITI and NTT have consistently favored

Fujitsu, Hitachi, and NEC. “MITI promotes the

larger, more stable, more promising fins, ” stated

Takashi Harumi, Director of International Research

Exchange at MITI.300

Vertical integration gives Japanese firms making

supercomputers several advantages. It allows them

to cross-subsidize among divisions, using profits

from healthy divisions to fund new areas such as

supercomputers, and to keep divisions such as

semiconductors alive despite their sharp boom-bust

cycles. Second, it provides them with a relatively

stable internal market, which affords greater ability

to experiment with high speed integrated circuits

that they can use in-house. Third, it provides an

assured supply of components. For example, in 1988

and 1989, when semiconductor prices increased

rapidly, U.S. computer and systems makers were

scrambling to obtain enough memory chips that only

Japanese firms produce in volume; Japanese makers

were not similarly vulnerable. Finally, making

production equipment in-house allows the Japanese

firms to tailor-make production processes for their

specific products, giving them a competitive edge.301

Japan’s institutional environment encourages Japanese managers to view industries as belonging to an

interdependent chain with valuable skill and knowledge spillovers for one another. Unlike their U.S.

counterparts, Japanese companies do not necessarily

stop making a product or bail out of a given industry

solely because it does not provide as high a profit as

investment of those same resources in another

industry would. DRAMS are an example. Japanese

companies regard the skills involved in producing

DRAMS as important for other electronics components and systems; even if DRAMS are not in

themselves highly profitable, they make a critical

contribution to the bottom line in other ways that are

less visible, though no less important. “The U.S. is

going backwards in developing the components

needed to make supercomputers. We want to make

money and there is not a lot of money in those

components, says Sidney Fernbach, a U.S. supercomputer expert.302

The view of many Japanese businesses of the

interdependence of the different electronics industries is reflected in a statement by Ota Hideo of

Mitsubishi: “We are not thinking of loss or profit

just for computers, but for the whole company. And

we use computers in all our businesses. When we
Chapter 6-Japanese Industrial Policy: The Postwar Record and the Case of Supercomputers ● 279

cannot follow computer technology, we will be in

trouble all over. ’’303

There are heavy costs associated with this vertical

integration and diversification; these high costs are

part of the reason why several U.S. electronics firms

that were vertically integrated and diversified in the

1960s and 1970s, such as Motorola, General Electric, and RCA, narrowed their focus to a few

divisions and products. But Japanese firms are better

able to bear these costs because of an environment

that encourages long-term investment.

Japanese Industrial Enterprise Groups

Deep pockets are also the result of other institutional arrangements that help buffer Japanese firms

making supercomputers from international competition and short-term market fluctuations. In particular, the fact that Fujitsu, NEC, and Hitachi are all

members of or allied with keiretsu is an advantage.

The U.S. Occupation had partially dismantled these

groups, but by the late 1950s, the groups were

rebuilding with government encouragement. A key

motivation of both the firms and the government was

that the groups would help keep out foreign products

and investments at a time when Japan was under

increasing pressure to liberalize its markets.

There are several advantages to membership in a

keiretsu. These groups hold shares in other companies that are group members and agree not to sell

them. This practice is known as mutual shareholding. In addition, large Japanese firms have stable

shareholders, non-group firms who hold a company’s stock and do not trade it. This combination of

stable and mutual shareholding means that about 60

to 80 percent of member fins’ stocks are never

traded. 304 Thus managers do not have to worry about

takeovers or short-term fluctuations in their stock

prices; they have more latitude than U.S. managers

to focus on long-term goals.

Second, these groups provide their members with

somewhat of an assured market. This is particularly

important when a fro’s products are not yet

competitive. As mentioned earlier, as of 1968 about

half of the mainframe computers being used by firms

in the industrial groups were made by their keiretsu

computer firm.305 Among firms with keiretsu ties to

supercomputer makers, 56 percent of purchases (18

of 32, see table 6-11) were from the affiliate. Many

argue that these groups are the most potent force

protecting the Japanese market today. Their control

over a significant share of Japanese business306

raises barriers to entry-in many cases bars entry—

to foreign firm in many major industries.

Third, these groups are centered around main

banks, which helps group members get relatively

easy access to capital; until recently, that also meant

low-cost capital. Banks help out member companies

during hard times.307 The close ties between Japanese companies and their main banks are less

important today, when so many Japanese companies

are enjoying unprecedented success and market

power, but it was very important in the 1960s and

1970s and is still important for firms involved in

risky ventures such as supercomputers.

UNITED STATES POLICIES

TOWARD THE SUPERCOMPUTER

INDUSTRY

Consistent with their concern for the decline in

U.S. competitiveness in supercomputers, most computer scientists and industry people, and many

policymakers believe that the U.S. Government

should support the industry more thoroughly. The

U.S. Government had and still has an important role

in the development and competitiveness of the

supercomputer industry in America, though that role

is far smaller than that of the Japanese government

past and present. The primary forms of support the

U.S. Government offers are procurement and the

contributions of national laboratories and NASA in

developing software. Procurement, in particular, is

likely to diminish in value. While defense-related

supercomputer purchases have been and will probably remain closed to foreign firms, other Federal

procurements are open to foreign competition. As of

mid-1991 Japanese supercomputer makers had not

won any sales. However, as the Japanese firms catch

up in performance and software, they are more likely

to do SO.

The U.S. Government funnels some $500 million

into advanced computing each year through the

National Science Foundation (NSF), NASA, the

Department of Defense, and the Department of

Energy. 308 But there is growing agreement among

supercomputer experts that it is not doing enough.

‘‘It could be too late unless we act and act forcefully;

our infrastructure is going fast and the rest will go

down with it,” argued one supercomputer analyst.309
280 ● Competing Economies: America, Europe, and the Pacific Rim

One proposal for increased government support is

the Federal High Performance Computing Program,

presented to Congress in 1989, which called for an

additional $1.917 billion in U.S. Government financing of research related to advanced computing

technologies over a 5-year period.310 The program

has four parts. The first, high-performance computing systems, would provide Federal support for basic

research in high-performance computer technology

(including massively parallel systems) and its transfer to industry; in addition, this part of the program

calls for the Department of Energy, NASA, and the

Defense Advanced Research Projects Agency (DARPA),

to continue to acquire the first production models of

new high-performance computers. The second part,

advanced software technology and algorithms, would

encourage joint research (government, industry, and

university) to improve the basic tools, languages,

algorithms and associated theory for solving very

complex, large-scale problems in science and technology, or the so-called Grand Challenges. The

Office of Science and Technology Policy (OSTP)

listed the following as examples of Grand Challenges:

prediction of weather, climate, and global

change;

challenges in materials science (including semiconductor materials);

semiconductor design;

superconductivity;

structural biology, including the structure and

function of biologically important molecules;

design of drugs;

human genome mapping;

quantum chromodynamics;

astronomy, including manipulation of data

gathered by Very Large Array or Very Long

Baseline Array radiotelescopes;

challenges in transportation, including modeling of airflows around aircraft, inside engines,

and around ship hulls;

reduction of vehicle signatures for low detection military vehicles;

vehicle dynamics;

nuclear fusion;

efficiency of combustion systems;

enhanced oil and gas recovery;

computational ocean sciences, including development of a global ocean prediction model

incorporating temperature, chemical composi-

●

●

●

The

tion, circulation and coupling to the atmosphere;

speech as a communications interface with

computers;

machine vision; and

undersea surveillance for anti-submarine warfare.

third part of the High Performance Computing

Program is the national research and education

network, providing distributed computing that links

the governmental research, industry, and higher

education communities. The network, using fiberoptic trunks now being installed by communications carriers, will incorporate new switching systems and network protocols to support interactive

graphics, nationwide data files, and high-definition

displays. The fourth part is for basic research and

human resources, supporting basic research in computer science and improved computational science

education in universities.311 For fiscal year 1991, the

program received $489 million and was carried out

by eight agencies,312 with 71 percent coming from

DARPA and NSF. In fiscal year 1992, the proposed

budget is $638 million, with 69 percent from

DARPA and NSF.313

Many computer scientists, industry executives,

independent analysts, and policymakers argue that

the U.S. Government needs to support more than this

project if it is to stem the erosion of U.S. competitiveness in supercomputers and other hightechnology areas, and that the focus needs to be on

supporting commercial applications. Only in this

way, they suggest, can supercomputer companies

compete with Japanese companies and avoid dependence on Japanese suppliers in the long term. In

the past several years, some U.S. high-technology

companies have reported delays of supplies of either

components or machinery from their Japanese sources.

Complaints have become so numerous that the

General Accounting Office has recently started

exploring them.314 While these U.S. companies tend

to believe that delaying or withholding parts is

unfair, it makes good sense for a company to supply

itself and its related companies first, then its best

domestic customers, and finally its overseas ones; it

is neither unwise nor unfair to delay delivery of

strategic components or machinery to competitors.

Because Crays are widely regarded in the United

States as superior, and have a much larger library of

software, there have been few procurements of
Chapter 6-Japanese Industrial Policy: The Postwar Record and the Case of Supercomputers ● 281

Japanese machines in the private sector; Fujitsu has

sold two machines to the U.S. subsidiary of France’s

Schlumberger, but other than that the only procurement of a Japanese supercomputer was that of an

NEC machine by the Houston Area Research Center

in 1986, a center closely connected to NEC’s U.S.

supercomputer subsidiary, HNSX. More Japanese

machines will undoubtedly sell in the private sector,

for they are getting faster and already are very

reliable. The financial resources of the Japanese

companies leave little doubt as to their staying

power in the industry; there is more doubt among

U.S. supercomputer experts as to Cray’s ability to

stand up to this kind of competition in the long run

(it should be noted that officials of Cray do not

regard their company as endangered). As a result,

public procurement in the United States is still an

important issue.

Most experts agree that the U.S. Government’s

supercomputer procurement has been a key factor

encouraging the growth of the supercomputer industry here, and the government remains a key customer. In the beginning, only U.S. companies made

supercomputers, and developments in highperformance computing were tied to the needs of

researchers in government labs. Most government

purchases are still by institutions that use the

machines for military purposes at least part of the

time (national laboratories and NASA, for example),

and it is consistent with the GATT Procurement

Code for any Government to maintain an absolute

preference for domestic goods in such purchases. In

addition, many scientists in institutions that use the

supercomputers feel that their support is necessary

to keep Cray Research alive; although many would

prefer that there were additional U.S. competitors,

they do not want the field narrowed only to Japanese

companies.

This opinion is not universally shared. Some U.S.

supercomputer specialists argue that the U.S. Governrnent should not protect U.S. supercomputer

makers; rather it should protect the right of researchers to have access to the latest and most technologically sophisticated research tools.315 ‘User access to

supercomputers is more important than the supercomputer industry itself; it is more important that

U.S. petroleum, aerospace, and automobile firms

have access to the best tools [supercomputers] than

that Cray Research continues to exist.’’316 Larry

Smarr, director of the National Center for Supercomputing Applications, adds that using national security considerations as a reason for barring Japanese

competitors is contradictory and self-defeating.

“Just count the number of Crays and IBM vector

machines the Japanese manufacturers can study in

Japan compared to the number of their supercomputers that we have access to in the United States. If the

Japanese firms are truly our competitors, it would

benefit us greatly to know everything we can about

their design capabilities. The oldest rule in the book

is to ‘Know your enemy. ’ ‘’317 Whether reliance 

solely on Japanese companies would eventually cost

U.S. supercomputer users their ability to get first

crack at the fastest, newest machines is a matter of

disagreement among specialists.

Export control policy is another issue. Getting a

license for exports of high-performance computers

is often time consuming and difficult, and that can

put Japanese companies at an advantage in selling in

foreign markets. For small (relative to Hitachi,

Fujitsu, and NEC) U.S. companies like Cray Research, streamlinin “ “ g the export licensing process as

much as possible, consistent with national security,

would be a big help. Since the first installation is

particularly important in the case of selling supercomputers, speed in making changes to export

control policy is also important to Cray. Thirdcountry markets are growing fast and if U.S. makers

miss out on these markets today, it could diminish

their income stream far into the future.

1 This chapter is drawn extensively from two contractor reports: Marie Anchordoguy, “The Nature and Effectiveness of Japan’s Postwar

Industrial Policy,” contractor report for the Office of llxhnology Assessment, February 1991; and Marie Anchordoguy, “Japanese

Policies for the Supercomputer Industry,” contractor report for the

Office of llxhnology Assessment, February 1991.

2 These include hardwor~goodand universal educatio~f~cial

policies tbat embled Japanese firms to invest heavily and patiently in

technology acquisition development and diffusiom and vigorous, if not

free and ope~ competition.

3 The top me~hant f-es were later to become the zaibatsu,

some of which persist today in the form of keir-etsu, or industrial groups.

4 ‘Ibssa Morns-Suzu@ A History of Japanese Economt”c Thought

(lmdon: Nissan Institute for Japanese Studies, 1989), p. 62.

5 Edward J. LincolrL Japan’s Unequal Trade (Washingto~ DC:

The Brookings Institutiorq 1990), pp. 5-6.

6 See for example, Marie Anchordoguy, Computers Inc: Japan’s

Challenge to EM (Cambridge, MA: Harvard University Press, 1989);

and Phyllis A. Genther, “A History of Japan’s Government-Business

Relationship: The Passenger Car Industry,” Michigan Papers in

Japanese Studies No. 20 (Ann lwbor, MI: Center for Japanese Studies,

University of Michigtuq 1990).

7 See, for example, Paul R. Km= “’lhrgeted Industrial

Policies: Theory and Evidence,’ The New Protectionist Threat to World

We~are, Dominick Salvatore (cd.) (New York, NY: North Holland

Press, 1987), pp. 266-296.

292-889 0 - 91 - 10 QL:3
282 . Competing Economies: America, Europe, and the Pacific Rim

8 See, for example, Giovanni Dosi, Laura D’Andrea ~som and

John Zysman+ “Trade, Technologies, and Development: A Framework

for Discussing JapU” Politics and Productivity: How Japan’s

Development Strategy Works, Chalmers Johnson, Laura D’Andrea

~SO~ and John Zysman (eds.) (Cambridge, MA: Ballinger, 1989), pp.

3-38.

9 A representative sampling of these three views is the following

three sources: Chalmers Johnsoq MITI and the Japanese Miracle

(Stanford, CA: Stanford University Press, 1987); Richard Samuels, The

Bw”ness of the Japanese State (ltbacq NY: Cornell University Press,

1987); and Karel Van Wolfereu The Enigma of Japanese Power (New

Yor& NY: Alfred Knopf, 1989).

10 See, for example, Charles Schultz, “Industrial Policy: A

Dissen~” The Brookings Review, fall 1983, and “Industrial Policy: A

Solution in Search of a Probl~” California Management Review,

summer 1983; Komiya Ryutam and Kazutomo Irie, “The U.S.-Japan

Trade Problan: An Economic Analysis from a Japanese Viewpoin4°

Japan’ sEconon”c Structure: Should it Change?, Kozo Yamam ura (cd.)

(Seattle, WA: Society for Japanese Studies, 1990) pp. 65-104; Gary

Saxonhouse, “Why Japan is Wirmin g,’ Is~es in Science and Technology, spring 1986, pp. 72-80; and Hugh Patrick “Japanese High

‘lkchnology Industrial Policy in Comparative Contex4° Japan’s High

Technology Industries, Hugh Patrick (cd.) (Seattle, WA: University of Washington Press, 1986), pp. 3-33.

11 See, for example, Robert Z. Lawrence, “Imports in Japan:

Closed Markets or Minds?,” Brookings Papers on Econondc Activity,

No. 2,1987, pp. 5 17-548; RudigerDombuscb “Give Japana Target and

Say ‘Import! ’,” The New York Times, Sept. 24, 1989; “Misguided

Efforts Won’t Open Japan’s Marke6° The Japan Economic Journal,

Dee. 16, 1989, p. 9; and Mordechai E. K-rein@ “How Closed is Japan’s

Market? Additional Evidence,” The World Economy, vol. 11, no. 4,

December 1988, pp. 529-542.

12 See Paul R. Krugman, “Introduction: New Thinkhg About

Trade Policy,” and James A. Brander, “Rationales for Strategic Trade

and Industrial Policy,” Paul R. Krugman (cd.), Strategic Trade Policy

and the New International Economics (Cambridge, MA: The MIT Press,

1986), pp. 1-46.

13 Robert J. Ballon and Iwao ‘Rnn@ The Financial Behaw”or of

Japanese Corporations (Tokyo: Kodansha I.nternatio@ 1988), p. 37.

14 Nakamura ~ The Postwar Japanese Economy, Its

Development and Structure, Jacqueline Kamins@“ translator (Tokyo:

lbkyo University Press, 1981), p. 44.

15 See, for example, Johusom op. cit.; and Anchordoguy, Computers Inc.: Japan’s Challenge to IBM, op. cit.

16 Genther, op. cit., p. 23.

17 Genther, op. cit., p. 80.

18 Genther, op. cit., pp. 81-82.

19 Merton J. Peck and Shuji llunw “lkchnology,” in Asia’s

New Giant, Hugh Patrick and Henry Rosovslg (eds.) (Washington DC:

The Brookings Institution 1976), p. 152.

20 Genther, op. cit., p. 47.

21 Genther, op. cit., p. 70.

22 This was done in the Extraordinary Measures Laws for the

Promotion of the Machinery and Electronics Industries of 1956 and 1957

and their subsequent extensions.

23 JohnsoL op. cit., p, 174.

24 Japan also accepted obligations under Article 14 of G~,

which specified no subsidies of exports. See Johnsou op. cit., p. 263.

25 Johnso~ op. cit., p. 210.

26 Johnso~ op. cit., p. 211.

27 Nomura Research Institute, NIR Review, February 1991. The

1990 figure was a projection the 1989 figure was 32.3 trillion yen.

28 “Postal Savings Deposits Set Monthly Record,” The Japan

Times, Jan. 10,1990, p. 9; and Ministry of Finance, The Budget in Bri#,

1988, Budget Bureaq 1989, p. 66.

29 Marcus W. Brauchli, “BanksFeudwithP ostal Service inJapan

over Citicorp Proposal,” The Wall Street Journal, Sept. 22, 1988, p. 35;

and personal communication Marie Anchordoguy with local post office

in JaparL January 1991.

30 Koichi Hamada and Akiyoshi Horiucl@ “The Political Economy of the Financial hlarke~’ in Kozo Yamamura and Yasukichi

Yasuba (eds.), The PoliticalEconomy ofJapan, Volume 1: The Domestic

Transformation (Stanford, CA: Stanford Univemity Press, 1987), pp.

223-260.

31 Daniel I. Okimoto, Between MIT’I and the Market: Japanese

Indusm”al Policy for High Technology (Stanforq CA: Stanford University Press, 1989), p. 150.

32 Ibid., p. 77.

33 Leonard Lynq How Japan Innovates: A Comparison with the

U.S. in the Case of Oxygen Steehnaking (Boulder, CO: Westiew Press,

1982), p. 145.

34 Ibid., pp. 4546.

35 Yamawaki Hideki, “’lkkko Gyo,” (The Steel Industry), in

Nihon no Sangyo Seisaku, Komiya Ryutaro, Okuno Masatatsu and

Suzumura Kotaro (eds.) (Tokyo: lbkyo University Press, 1984), pp.

258,263.

36 Nihon Kaihatsu Ginko25Nenshi (llventy-five YearHistory of

the Japan Development Bank) (’Iokyo: Japan Development B* 1976),

p. 537.

37 BOF technology was pioneered in Austria in the early 1950s,

and in the succeeding thee decades came to account for the majority of

the world’s mass-produced carbon steel. Its advantages over the open

hearth technology that preceded it were that it offered economies of scale

in integrated steel mills, had lower energy costs, took much less time to

heat the iroq and was generally more cost-effective. See Luc Kiers, The

American Steel Industry: Problems, Challenges, Perspectives (Boulder,

CO: Westview Press, 1980), pp. 19-20 and Bela Gold, Gerhard

Rosegger and Myles G. Boyw Jr., Evaluating Technological Innovations (bdngtou MA: Lexington Books, 1980), pp. 120121.

38 LymL op. cit., p. 83.

39 LymL op. cit., pp. 84-85.

40 Peck and l%rn~ Op. cit., pp. 556-558.

41 In such industries, fii lose less money by cutting prices than

by idling mills, since fixed costs accrue whether or not production

occurs.

42 See, for example, Patricia A. O’Briem “Coordinating Market

Forces: The Anatomy of Investment Decisions in the Japanese Steel

Industry, 1945 -1975,” dissertation from the Harvard Business School

1986, p. 268.

43 Okimoto, op. cit., p. 37.

44 See, for example, Okimoto, op. cit., pp. 38-48; Imai Kenic@

“Iron and Steel: Industrial Organization” in Japanese Econonu”c

Studies (White Plains, NY: International Arts and Sciences Press, Inc.,

winter 1974-75); and Yamawaki, Op. Cit.

45 Walter Adams, “The Steel Industry,” in The Structure of

American Industry, Walter Mama (cd.) (lNew York NY: MacmW“an

Publishing Company, 1977, fti edition), p. 117; and Tekko Jukyo no

Ugoh” (Trends in the Supply of and Demand for Steel) (T@o: Kozai

Kurabu) quarterly repom various issues.

46 Yamaw@ Op. cit., p. 281.

47 Tsuruta lbshimasa , Sengo Nihon no Sangyo Seisaku &dustrial

Policy in Post-War Japan) (Tbkyo: Nihon Keizai Sbimbunsk 1982), p.

49.

48 ‘l’he Long lkrm Credit Bank of Jap~ Shuyo Sangyo Sengo 25
Chapter 4-Japanese Industrial Policy: The Postwar Record and the Case of Supercomputers ● 283

Nenshi (Twenty-five Year History of Major Industries in the Postwar

Period) (’1’bkyo: Kurihara Shigeo, 1972), pp. 361-364.

49 Imai, op. cit., pp. 52-53.

50 Seiritsu OguraandNaoyu.ki Yoshino, “The’llu System and the

Fiscal Investment and tian progrm” in Ryutaro Korniy% ~“o

okuno, and Kotaro Suzurnura (eds.), Industrial Policy of Japan (Tbkyo:

Academic Press, Inc, 1988), pp. 127-132.

51 Yamawaki, op. cit., p. 286.

52 Yamawaki, op. cit., p. 136.

53 Motoshige Itoh and Kazuham Kiyono, “Foreign Trade and

Direct Investment” in Komiya et al. (c&.), op. cit., p. 161.

54 Paul R. KrugmaIL “Targeted Industrial Policies: Theory and

Evidence,’ op. cit., pp. 283-288.

55 Ibid., p. 289.

56 Hitachi, Fujitsu and NEC are among the world’s most

successful and competitive corporations, yet they have profits as a

percent of sales in the 2-4 percent range.

57 Kiyoshi Kawahito, The Japanese Steel Industry (New York

NY: Praeger Publishers, 1972), p. 48.

58 The foUowing summary of prewar motor vehicle industrial

promotion is drawn from Genther, op. cit., pp. 15-39 passim.

59 Hiroya Ueno and Hiromichi Muto, “Japan’s Automobile

Industry,” in Japanese Economic Studies (White Plains, NY: International Arts and Sciences Press, Inc., fall 1974), pp. 12-13.

60 See ibid., p. 12; and C.S. Chang, The Japanese Auto Industry

and the U.S. Market (New Yorlq NY: Praeger Publishers, 1981), p. 47.

61 Oenther, op. cit., pp. 52-55.

62 Genther, op. cit., pp. 55-64.

63 Hiromichi Muto, “The Automotive Industry,” in Komiy~ et.

al. (eds.) op. cit., pp. 310-313.

64 Muto, op. cit., p. 313.

65 Muto, op. cit., pp. 314-315.

66 See, for example, Eugene KaplaIL Japan: The GovernmentBu”ness Relationship (Washington DC: U.S.Govemment Printing

Office, 1972); Tenkati” no Jidbsha Sangyo (liming Point in the Auto

Industry), MITI Kikai Joho Sangyo@oku Jidoshaka (cd.) (lbkyo:

Nikkan Kogyo Shimbunsha, 1976), pp. 89-91; Nihon no Jidosha Kogyo

(Japan’s Auto Industry), MITI Jukogyokyolm Jidoshaka (ext.) (l@o:

MIT’I Ken@ukai, 1959), pp. 46-62; Ueno and Himmic~ op. cit., pp.

3-9Q 11.iromic~ “Jidosha” (Autos), in Nihon no Sangyo Seisaku, op.

cit.

67 Nihon Choki Shinyo Ginko Sangyo Kmkyukai, Shin Jidai ni

Chosen suru Nihon no Sangyo (Japan’s Industries Challenging the New

Era) (TOkyO: hhiLdChi Shimbundq 1968), p. 48.

68 Saxonhouse, op. cit., pp. 72-80.

69 Philip H. Tresize and Yukio Suzuki, “Politics, Governmen4

and Economic Growth in Japu” inAsz”a’sNew Giant, Hugh Patrick and

Henry Rosovs~ (da.) (Washington, DC: The Brookings InstitutiorL

1976), pp. 798-799.

70 Akio Morita, Made in Japan (New York NY: E.P. Duttom

1986), pp. 65-66.

71 Tresize and S- op. cit.

72 Mori@ op. cit., pp. 65-66.

73 This overview of the color television case draws heavily on

Kozo Yamam ura and Jau Mndenberg, “Japan’s Rapid-Growth Policy

on Trial: The ‘Rdevision Case, ” in Gary Saxonhouse and Kozo

Yamamura (eds.), Z.uw and Trade Issues of the Japanese Economy

(Seattle, WA: University of Washington Press, 1986), pp. 238-283.

74 Yamamura and ~denberg, op. ck, pp. 256-257.

75 Komiya Ryutaro, Takeuchi Hiroshi, and Kitahara Masao,

“Kaden Denki” (The Consumer Electric Goods Industry) in Nihon no

Sangyo Soshiki Ron vol. I, Kumagai Hisao (cd.) (Tokyo: Chuo Koron

S@ 1973), p. 28.

76 Komiyaetal. (eds.), Zndustrz”aZPolicy ofJapan, op. cit., p. 162.

77 Denshi Kogyo Nenkan, 1973, p. 752.

78 Yamam ura and Jhndenburg, op. cit., p. 259.

79 Toyokeizai, Jan. 23, 1971, p. 12; Komiya et al., “Kaden

DerQ” op. cit., pp. 66-67.

80 Yamamura and Mmdenberg, op. cit., p. 257.

81 Yarnamura and Wndenberg, op. cit., p. 261; Toyokeizui, Jan.

26, 1980, p. 84; Time, June 13, 1977, p. 63.

82 Asahi Shimbun, Apr. 27, 1%7, p. 7; and Toyokeizai, July 27,

1%8, pp. 42-43.

83 Andy Zipser, Stephen Kreider Yoder, and Jacob M. Schlesinger, “’IkxasInstruments Obtains Japan Patent for Its Chips,” Asian Wall

Street Journal Weekly, Nov. 27, 1989, p. 5.

84 Toyokeizai, July 27, 1968, p. 43; and Asahi Shimbun, Apr. 27,

1%7, p. 7.

85 Interview with former MITI official Tokyo, Apr. 11, 1989.

86 Interview with former MITI oflicial involved in the negotiations, Apr. 11, 1989.

87 Toyokeizai, Feb. 26, 1972, p. 8Q and June 10, 1972, p. 81.

88 Toyokeizai, June 10, 1972, p. 81.

89 For Motoroh the partner was Alps Electric, a parts maker; for

Fairchild, the partner was TDK (Tokyo Denki Kagaku), a maker of tapes

and parts. Source: Toyokeizai, June 10, 1972, p. 81.

90 Toyokeizai, Oct. 22, 1966, p. 26.

91 Toyokeizai, June 10, 1972, p. 81.

92 Nihon Keizai Shimbun, Sept. 26, 1971.

93 MIT Commission on Industrial I%oductivity, “The U.S.

Semiconductor, Computcz, and Copier Industries,” in Workz”ng Papers

of the MIT Commission on Indusm”al Productivity, Volume 2 (Cambridge, MA: The MIT Press, 1989), p. 14.

94 ‘lhrui Yasuo, “Japan Seeks Its Own Route to Improve IC

‘IkcImiques,” Electronics, Dec. 13, 1965, pp. 90-91.

95 MiChiyUki tknoharaj ‘hkUO Sugano, John G. Linvillj and

Franklin B. Weinsteiq “Background” in Daniel I. Okimoto, Takuo

Sugano, and Frarddin B. Weinstein (eds.), Competitive Edge: The

Senu”conductorIndustry in the U.S. and Japan (Staufort CA: Stanford

University Press, 1984), pp. 20-21.

% Edward J. LincohL Japan’s Industrial Policies (Washington

DC: Japan Economic Institute of America, 1984), p. 35.

97 Saiyama llkum, “A Radical Interpretation of Postwar Economic Policies,” in lkssa Morris-Suzuki and Saiyama ‘fhkuro (eds.),

Japanese Capitalism Since 1945 (Armonk, NY: M.E. Sharpe, Inc.,

1989), p. 49.

98 Anchordoguy, Contputers Inc.: Japan’s Challenge to ZBM, op.

cit., pp. 49-53, 125-132.

99 “Firms Curb Spending as Cost of Capital Climbs,” Japan

Economic Journal, Mar. 2, 1991.

100 Leslie Heti “Big Hopes for Tiny Machines,” The &M

Angeles Times, Jan. 6, 1991, p. 1.

101 Nihon Keizai Shimbun, Jan. 12, 1991, p. 10.

102 Ibid.

103 Forexample, MITI’sreportontrade andindustrypolicy forthe

1990s states, ‘There will be demands on Japan to continuously strive for

high levels of freedom and fairness.. . Japan’s efforts to attain these

ideals within its own borders are becoming extremely important for the

continuation and improvement of the reliability of the international free

trade system.” See MITI, “90 Nendai no Tsusho Sangyo Seisaku no
284 ● Competing Economies: America, Europe, and the Pacific Rim

Arikata,” (International Trade and Industrial Policy in the 1990s), July

5, 1990.

104 KennethW. Neves, “Superc.omputers: The Next Generatio@”

Scientific Information Bulletin, U.S. OffIce of Naval Research Far East

vol. 14, no.4, 1989, p. 77.

105 Business Week, Apr. 30, 1990, p. 83.

106 Interview with Marie Anchordoguy, Sept. 19, 1990.

107 Nihon Keizai Shimbun, Apr. 23, 1989, p. 4.

108 Interview, December 1990.

109 Kenneth Flarnm, Creating the Computer: Government, Zndustry and High l?lwhnology (Washingto~ DC: The Brookings Institution

1988), p. 103.

110 Minisupercomputers refer to machines with roughly l/10th to

1/2 the performance of a supercomputer at roughly l/10th the price; they

are not a focus of this study.

111 In pq that is because the R&D intensity (R&D expenditures

as a percent of sales) is higher in the computer business than in any other.

The Japanese companies may spend the same percentage (or even more)

on R&D ifordy computer R&D and computer sales figwes are counted.

112 Interview, Dec. 12, 1990.

113 Interviews of supercomputer specialists, one who recently

retired from Boeing,. Nov. 19, 1990; one who works at the U.S. C)fIlce

of Naval Research Sept. 27, 199Q one at Lawrence Livermore National

Laboratory, Dec. 12, 1990; and one at a U.S. aerospace company, Dec.

12, 1990.

114 Interview of several supercomputer specialists, one formerly

of Boeing, Nov. 19, 1990; one at Lawrence Livermore Lab, Dec. 12,

1990. Also James Browne, professor of computer science and physics at

the University of lxts at Aus~ cited in “Parallel Processing

Compukm Attract Crowd of Investors Despite Limited Uses,” John R.

Wilke, The Wall Street Journal, Oct. 5, 1990, pp. Bl, B4.

115 Interview of supercomputer specialists: one formerly of

Boeing, Nov. 19, 199@ three other scientists currently at or recently

Etired from U.S. National Labs, Nov. 30, 1990.

116 Supercomputer speeds are measured in megaflops and gigaflops, which are one million and one billion floating-point operations

per second, respectively. A floating-point operation is one additiom

subtractio~ multiplicatio~ or division of two numbers, where the

numbers can have fi-actional components and can have as many digits as

the computer memory accommodates. Cray’s most sophisticated Y-MP

machines come out on top of all Japanese supercomputers on the market

(not including the one processor SX-3 of NBC, of which three have been

shipped), in: 1) ONR Benchmark-LANS3D and ONR BenchmarkLANS3D-UP, Kozo Fujii and Yoshiaki ‘lhmur~ ‘ ‘Capability of Current

Supercomputers for Computational Fluid Dynamics,’ Institute of Space

and Astromutical Science, Kanagaw~ Japaq U.S. OftIce of Naval

Research, Bulletin no.1, Feb. 14, 1989; 2) Perfect Benchmarks done in

December 1989 by the Center for Supercomputing Research and

Development at the University of Illinois; 3) LINPACK Using all

Fortran 100X 100 MFLOPS Benchmark Jack J. Dongmr~ “Performance of Wrious Computers Using Standard Linear Equations Software,” Oct. 12, 1989, Computer Science Department University of

lkrmessee, and ‘lkchnical Memo No. 23, Argonne National Laboratory,

Feb. 9, 1990. See Cray Research Inc., “The Japanese Public Sector:

Problems and Prospects for U.S. SuperComputer Vendors,” May 1990,

ch. 3.

117 David E. Sanger, “A Tough Sell for ‘Made in Jap~’ “ The

New York Times, Nov. 30, 1990, pp. Cl, C16.

118 Hideo Yoshihara, “Perfo rmance of Japanese Supercomputers

vis-a-vis Cray Computers,” Scienttj?c Information Bulletin, U.S.

Department of Navy, Offke of Naval Research, Far East, vol. 15, no. 3,

July to September, 1990.

119 Ibid.

120 Gartner Group, Inc., High Pe#onnance Computing and

Communications: Investment in American Competitiveness, report

prepared for the U.S. Department of Energy and Los Alamos National

Library, Mar. 15, 1991, pp. 89,205.

121 Nikkei Uotcha, IBM-Ban, May 1, 1989, p. 19.

122 Gartner Oroup, Inc., op. cit., pp. 210-211.

123 Gartner Group, Inc., op. cit., p. 210. Cray Research says its

machines now average 2,000 to 3,000 hours MTBF. Interview of

Suzanne Tichenor and David Frasch of Cmy Research by OTA staff,

May 1, 1991.

124 Kawabata Naohisa, Kompyuta Gyokai ga Abunai (The Computer Industry is in Danger) (Tokyo: Eiru Publishers, 1990), p. 122.

125 Nihon Keizai Shimbun, Aug. 29, 1990, p. 1.

126 David Kahanerand H.T. Kung, “Aspects of Parallel Computing Reswch in Japan-Hitachi, Matsushita, and Japan Electronics

Show 1990,” a report of the U.S. Ofilce of Naval Research Far East

Nov. 6, 1990, Intemiew of Hideo Aiso, Dean and Professor, Faculty of

Environmental Information, Keio University, who heads both the ftith

generation and supercomputer projects, Sept. 25, 1990.

127 Interview, Nov. 27, 1987.

128 Interviews of ‘Ihkeuchi H.iroshi, Managing Director of the

Imng ‘km Credit Bank of Japaq Dec. 8, 1987; of TMa Iwao, head of

NTI”s Communications and Information Processing Laboratory in

Yokosuka, Dec. 5, 1987; and of Okazaki Kotaro, a Director and section

chief of the Operations Departznen~ the Industrial Bank of Japan (IBJ),

Dec. 4, 1987.

129 See discussion of the history of IBM’s activities in Japan in

Anchordoguy, ComputersInc.:Japan’s Challenge tolBM, op. cit., p. 23.

130 Interview of Yoshioka Tadashi, a former MITI oftlcial

involved in the promotion of the industry in the late 1950s through early

1970s and later the director of the Japan Electronics Industry Development Association (JEIDA), Nov. 27, 1987.

131 Kompyutopia, December 1973, p. 23.

132 Ibid., p. 24; “JECC Monogatari,” segment 4, in Kokusan

Denshikeisankz” Nyusu, no. 120, Jan. 1, 1980, p. 6.

133 Ekonomisuto Editorial Board (cd.), Sengo ~angyo Shi e no

Shogen (Interviews towards a history of postwar industry) ~kyo:

h@hiChi Shimbuns@ 1977), vol. 1, pp.142-143.

134 Kompyutopia, October 1974, pp. 29-30.

135 Despite regulations restricting large transfem of foreign

exchange, MITI allowed IBM Japan to repatriate 10 percent of sales as

royalty in exchange for know-how and patents traoferredfrom the parent

firm to the subsidiary. Kokusan Denshikeisanki Nyusu, “JECC Monogatari,” segment 5, no. 121, Feb. 1, 1980, p. 3.

136 Uozumi Toru, Kompyuta Senso (The Computer War) (lbkyo:

Aoya Shoteq 1979), p. 57.

137 Denshi Kogyo Nenkan, 1976, p. 683.

138 Uozumi, op. cit., pp. 78-79. Toshiba and Daiichi Bussan

(today’s Mitsui Bussan) made the joint venture that is today’s Nihon

UNIVAC.

139 Uozumi, op. cit., pp. 78-79.

140 Anchordoguy, ComputersZnc.:Japan’ sChallenge tolBM, op.

cit., pp.168-170.

141 “Foreign Computer Manufacturer Participation in the Japanese Government Sector,” IDC Jap% Ltd., prepared for the Amexican

Electronics Association and the American Chamber of Commerce in

Japaq March 1990.

142 Interview, Dec. 8, 1987.

143 “Nihon IBM”, in Dokusen Bunseki Kenkyukai (cd.), Nihon

no Dokusen Kigyo (Japan’s Monopolistic Enterprises) (’1’bkyo: Shin

Nihon Shuppansha, 1971), vol. 5, p. 275.
Chapter &Japanese Industrial Policy: The Postwar Record and the Case of Supercomputers .285

144 Imai KenicM “Japanese Business Groups and the Structural

Impediments Initiative,” Japan’s Econonu”c Structure: Should It

Change? Kozo Yamamura (cd.) (Seattle, WA: Society for Japanese

Studies, 1990), p. 191. Fujitsu is the primary computer company in the

Daiichi-Kangyo group but Hitachi has relations with this group as well

as with the Sanwa and Fuyo groups. Data are not available on the percent

of Daiichi Kangyo group machines that are Fujitsu or Hitachi; the only

data is on the percent of both firms’ machines-70 percent.

145 JECC Kompyuta Noto (JECC Computer Notes), 1979, pp.

10-11.

146 Share of installed base, Kompyutopia, October 1989, p. 13.

Foreign companies’ market share in tams of sales was 25 percent as of

1988. Kompyutopia, April 1990, p. 63.

147 Interviews of Tajiri Yasushi, Deputy SectionChief, Marketing

Departmen~ Computer Systems, International Operations, Fujitsu Inc.,

Dec. 1, 1987; lhkeuchi Hiro~ Managing Director of the Long lkrm

Credit Baukof Jap~ Dec. 8, 1987; Inaba Masahixo, Assistant Manager,

Business Coordination Department of the I.ndustzial Bank of Jap~ Dec.

4, 1987; and Ishiguro Ryuji, Director of the Japan Development Bank’s

Center for Research in Plant and li?quipmen~ Nov. 12, 1984.

148 JECC IO Nenshi (’Ikn Year History of JECC) (Tokyo: JECC,

1973), pp. 50-51; JECC Kompyuta Noto, annual. For a detailed analysis

of JECC see Chapter 3 of Anchordoguy, Computers Znc.: Japan’s

Challenge to ZlM4, op. cit., pp. 59-91; Anchordoguy, “Report on

Japanese Policies for the SuperComputer Industry,” op. cit., Appendix

1.

149 Aftera 15 month period, theusercould return the computer at

no penalty and the maker had to repurchase it from J13CC at the

remaining book vrdue. This up-tint cash was thus in part returned to

JE!CC when a machine was returned to the maker. This forced the firms

to make better machines in order to encourage users to keep them longer

and thereby increase the benefit of the up-front cash.

150 Anchordoguy, Computers, Znc., op. cit., p. 61.

151 Append% total of entries in line 10 under “subsidies.” The

subsidy computed is the difference betsveen the interest JECC paid on

JDB loans and the interest it would have had to pay if it had borrowed

money from commercial banks at prevailing interest rates. The

calculation horn 1961 to 1981 is shown in Anchordoguy, Computers

Znc.: Japan’s Challenge to LBM, op. cit., pp. 228-230 (Appendix C).

152 Interview, Dec. 1, 1987.

153 Denshi Kogyo Nenkan, 1970-71, p. 180; JECC Kompyuta

Noto, 1979, pp. 10-11.

154 Denshi Kogyo Nenkan, 1974, p. 419.

155 Anchordoguy, “Japanese Policies for the Supercomputer

Industry,” op. cit., Appendix 1.

156 Sales &ta are from JECC Kompyuta Noto, 1979, pp. 1011;

Kompyutopia, January 1981, 1983, and other January issues; Fujitsu no

Gaikyo, 1987, p. 18, and Ministry of Finauce annual customs statistics

for data on exports, Sales in the period from 1961-1%9 were Y367.67

billiorq Y1,550.50 billion for 1970-1975; Y5,441.12 billion for 1976

1981; and Y26.76 trillion for 1982-1989. This estimate of government

aid as a percentage of sales is conservative in that sales &ta for

1982-1986 come in the form of domestic sales and exports, but export

data also include exports of foreign companies, espwially IBM Japan.

157 Dokusen Bunseki Kenkyukai (cd.), “Nihon Denshin Denwa

Kosha” (NIT’), in Nihon no Kokigyo (Tokyo: Shin Nihon Shuppans@

1973), pp. 134-135; also discussions with Professor Uekusa Masu of

l’b~o University and Professor Nanbu Tsuruhiko of Gakushuin

University.

158 Interview with Tajiri Yasusm Deputy S@.ion Chief of the

Marketing Department Computer Systems, International Operations,

~kyO, Dec. 1, 1987.

159 Nihon Denshin Denwa Kosha 25 Nenshi Iinkai (cd.), Nihon

Denshin Denwa Kosha 25 Nenshi (Twenty-five year history of NIT),

vol. 3, p. 249.

160 Y2,980.1 billion at Y220 to the dollar. Total government

procurement (including NIT’) of telecom products during this period

was about $17 billion (V3,728.7 billion at Y220 to the dollar). Data for

1980-1984 from Denshi Kogyo Nenkun (E!Iectronics industry yearbook)

(Tokyo: Dempa Shimb~ 1986), p. 449; data for 1985-6 from Fu~itsu

no Gai@o (Fujitsu’s outlook) (To@o: Fujitsu, Ltd., 1987), p. 11.

161 Shimoda Hirotsugu, IBM to no 10 Nen Senso (The l(kyear

Waz with IBM) (Kyoto: PHP Kenkyujo, 1984), p.158; interviews of

Yamamoto Kinko, Managing Director of the Japan Information

Processing Development Center (JIPDEC), Feb. 28, 1986; and Kuwahara Yuti@ head of the R&D AdmmI “ “stration Ofllce, Hitachi’s

Central Research Lalwratory, Dec. 9, 1987.

162 Interview withHitachi’s Kuwaha.raYutaka. The timing of the

New Series Project was of particular importance: IBM had introduced

a far more advanced series of computers, the 370 series; the United

States was pressuring Japan to liberalize its computer markec and two

sharp devaluations of the dollar were rapidly eroding the competitivness of Japanese products. lb help the f- respond to IBM’s new series

of computers, the project gave subsidies to Fujitsu and Hitachi to

develop large-scale computers, NEC and ‘Ibshiba to develop mediumscale machines, and Mitsubishi and Oki, small computers. No single

Japanese firm had the resources to develop a full line to compete with

IBM’s, series which ranged ffom small to Iargescale machines; the idea

was that through the project the industry as a whole could respond as

rapidly as possible.

163 Kenneth _ Targeting the Computer (Washington DC:

The Brookings Institution 1987), p. 134.

164 Letter in Fujitsu Nyusu, Fujitsu’s internal magazine, November 1971, reprinted inl%jitsu Shashi, vol. 2, pp. 134-136.

165 Raul Mendez, “Japanese Supercomputers,” in Vector Register (’Iokyo: The Institute for Supercomputing Research), vol. 3, no. 1,

October 1989, p. 4; Dempa Shimbun, July 1, 1987, p. 1, and Sept. 8,

1986, p. 4.

166 Interview in Bungeishunju, September 1982, p. 101.

167 Toyokeizai, July 5, 1975, p. 72.

168 JECCKompyuta Noto, 1979, p. 232 and 1981, p.283; Denshi,

vol. 19, no. 1, p. 9, January 1979, and vol. 18, no. 5, p. 37, May 1978.

169 Interview, Dec. 9, 1987.

170 Denshi(Electronics) (lMcyo: Nihon Denshi Kikai Kogyokai),

Jtdy 1976, pp. 9, 14.

171 Interview, Feb. 3, 1986.

172 Shimura Yukio, IC Sangyo Daisenso (The IC Industry’s Big

War) (lbkyo: Daiyamondo@ 1979), p. 3..

173 Uozurni, op. cit., p. 156.

174 The Econonu”st, Apr. 5, 1980, p. 75.

175 See, forexample, Raul MendeL “JapaneseSupercomputers,”

op. cit., p. 4.

176 Uozumi, op. cit., pp. 128-129, 169-170; Interview of Koezuka

Masahim, Deputy Director of MITI’s Electronics Policy Divisio@ May

26, 1984; interview of Yoshioka ‘I&la@ former MITI official, Nov. 27,

1987. Oki ultimately got access to the patenta of the VLSI project

(though not the know-how) through ~ to whom it had close ties on

telecommunications equipment.

177 This project was part of a series of projects done under the

umbrella ‘‘Large Scale Project” of MITI’s AgeQcy for Industrial

Science and lkchnology. The umbrella project has funded reseamh on

various topics including computers, pollution problems, and energy.

178 JECC Nyusu, Feb. 1, 1981, p. 1.

179 SaisentanGijutsu noDoko (Trends inLeading-Edge’Ikchnologies), MITI’s Gyosei Shiryo Chosakai, 1983, p. 748.

180 Interviews of Nishikawa l?+izo, Deputy Director, Industrial
286 ● Competing Economies: America, Europe, and the Pacific Rim

Electronics Division, Machinery and Information Industries Bureau,

MITI, and Furutani ‘Pakesti Deputy Director, Electronics Policy

Divisiou Machinery and Information Industries Bureau, MH’1, both on

Sept. 25, 1990.

181 Xnter{iew of top Japanese computer scientist who is closely

involved with several government-sponsored R&D projects, Sept. 25,

1990.

182 Kagaku Gijutsuyo Kosoku Keisan Shisutemu no Kenkyu

Kaihatsu ni kan suru Hyoka Hokokusho (The Evaluation Report of the

Research and Development Done in the High Speed System for

Scienttilc and lkchnological Uses), MIIT’s Sangyo Gijutsu Shing&ai;

Ogata Gijutsu Kaihatsubu Hyoka Bunkakai; and the Kosoku Keisan

System I-Iyoka Koiinkai, August 1990, p. 8. (calculated at Y150 to the

dollar).

183 Denshi Kogyo Geppo vol. 24, no. 9, pp. 42-47. JECC

Kompyuta ZVoto, 1982, pp. 196-199.

184 Interview of Hideo Aiso, head of the projec~ Sept. 25, 1990.

185 NEC and Toshiba did research on gallium arsenide memory

devices, Hitachi and Mitsubishi on gallium arsenide logic devices.

186 Electronics, Jan. 13, 1982, p. 71. Most of the research done in

this project was done separately by the firms; there was no common lab

except for the dataflow machine that MITI’s Electroteclmic.al Laboratory (ETL) led. To make the parts compatible, the f- cooperated.

187 Koichiro Tarnura, “General Remarks on the Achievements of

the National R&D Program, High Speed Computing System for

Scient.Mc and lkchnological Uses,” Vector Register (Tokyo: Institute

for Supercomputing Research), vol. 3, no. 4, fall 1990, pp. 5-6; Kahaner

and Kung, op. cit.

188 The processor used was the one from Fujitsu’s VP-2600

machine. David Kahaner, “Japanese Government Science Structure and

Computer Related Projects,” a Report of the U.S. Office of Naval

Research, Far East, July 30, 19W, JECC Nyusu, Aug. 1, 1990, p. 5, no.

247. Also in Nikkei Sangyo Shimbun, Mar. 30, 1989, p. 1; Interview of

a U.S. scientist who works at the ClffIce of Naval RescarclL Far East

Sept. 27, 1990; Interview of Nishikawa Taizo, Deputy Director,

Industrial Electronics Divisio~ Machinery and Information Industries

Bureau, MITI, Sept. 25, 1990.

189 Fujitsu’ sM-380mainframe and Hitachi’s M-280Hmainfmme

were used as the starting point for the development of their Fujitsu VP

series of supercomputers and Hitachi S-810 supercomputers respectively; this architecture was originally developed during MtTI’s “New

Series Project” from 1972-1976. Raul MendeL “Japanese Supercomputers,” Vector Register, vol. 3, no. 1, October 1989, p. 4; Dempa

Shimbun, July 1, 1987, p. 1 and Sept. 8, 1986, p. 4.

190 JECCNyusu, Aug. 1, 1990, p. 5, no. 247.

191 JECCNyusu, Aug. 1, 1990, no. 247, p. 4-5. This is now being

followed up with the ‘‘EM-4” project to improve the Sigma-1 machine,

u it bto a 1,024 processor machine. The idea is to improve u~xl

the Sigma-1 machine by simplifying its architecture, putting several

processing elements onto a single chip with a simplitled network

structure. ~ahaner, Report of the U.S. Office of Naval Research Far

Eas4 July 2, IW, Nihon Keizai Shimbun, July 16, 1988, p. 11.].

192 Kahaner and Kung, op. cit.

193 Olaf LubeclG a resea.mher in the Computer Reserach and

Applications Division of I-m Alamos National Laboratory. Olaf

Lubeck’s notes in a report from the U.S. Ofilce of Naval Research Far

Eas4 Tokyo Oftlce entitled ‘‘ETL Dataflow Project’ written up by Dr.

David Kahaner, July 2, 1990.

194 JECC Nyusu, Aug. 1, 1990, p. 5, no. 247.

195 Interview of Hideo Aiso, head of the project, Sept. 25, 1990;

JECC Nyusu, Aug. 1, 1990, no. 247, p. 5; Koichiro lhnmr~ “General

Remarks on the Achievements of the National R&D progr~ ‘High

Speed Computing System for Scientilc and ‘lkchnological Uses,’ “

Vector Register, fall 1990, pp. 7-8.

196 Interviews of Kitagawa Noriyoshi of NIX’s !lccmnd LSI

Divisio~ Feb. 3, 1986; and discussion with Hiyaguri ‘Ibshio, Director

and General Manager of Fujitsu’s Computer Group after he gave a talk

on Fujitsu’s Supercomputer efforts at the To@o Foreign Correspondent’s press Club, Dec. 4, 1985; Yamam oto Kinko, Managing Director

of JIPDEC, Dec. 3, 1987; Denshi Kogyo Nenkan, 1986, p. 186.

197 Koichiro’llu.n~ aMITI’s ETL scientis4 “GeneralRemarks

on the Achievements of the National R&D Program: High Speed

Computing System for ScientMc and lkchnological Uses,” Vector

Register, vol. 3, no. 4, fall 1990, p. 8.

198 Interview of Hideo Aiso, head of the projec~ Sept. 25, 199Q

also, David Kahaner, “Japanese Government Science Structure and

Computer Related Projects,” Report of U.S. Oflice of Naval Research

Far Eas~ July 30, 1990. According to an interview with Yoshio

Shimamoto, a retired scientist at Brookhaven National Laboratory,

Hitachi only did the progmmming @pge, while Fujitsu wrote the

operating system.

199 JECC Nyusu, Aug. 1, 1990, p. 5, no. 247; Koichim llm~

“General Remarks on the Achievements of the NationaI R&D ProgranL

‘High Speed Computing System for Scientific and ‘Ikdmologictd

Uses,’ “ Vector Register, fall 1990, pp. 3-8.

200 Nihon Keizai Shimbun, Feb. 3, 1991, evening editio~ p. 1.

201 Kagaku Gijutsuyo Kosoku Keisan Shisutemu no Kenkyu

Kaihatsu ni kan suru Hyoku Hokokusho (The Evaluation Report of the

Research and Development done in the High Speed System for Scientii3c

and lkchnological Uses), MITT’s Sangyo Gijutsu Shingikai; Ogata

Gijutsu Kaihatsubu Hyoka Bunkah.; and the Kosoku Keisan System

Hyoka Koiinkai, August 1990, op. cit., p. 15.

202 Interview of Fuchi ~o, project director of the 5th

generation projec~ who is also familiar with the supercomputer projec~

Aug. 2, 1985, and Yamamoto Kinko, Managing Director of JIPDEC,

Dec. 3, 1987.

203 Interiew of Oketani Kisaburo of Fujitsu, Dec. 1, 1987.

204 Interview of Oketani Kisaburo of Fujitsu, Dec. 1, 1987.

205 The Oriental Economist, January 1980, p. 29.

206 Interview, Sept. 25, 1990.

207 The Japanese Public Sector: Problems and Prospects for U.S.

Supercomputer Vendors, Cray Research Inc., May 1990, pp. 2-3.

208 Interview with Yamarn oto Kinko, Managing Director of

JIPDEC, Feb. 28, 1986; Electronics, Feb. 25, 1985, p. 31.

209 Electronics, Sept. 2, 1985, p. 11 and Feb. 25, 1985, p. 31.

210 Kurita Shohei, 90 Nenaizi no Kompyuta Uoozu (Computer

Wars of the 1990s) (Tokyo: Nikkan Kogyo Shimb- 1988), p. 221.

211 Interview of Yamarnoto Kinko, Managing Director of

JIPDEC, Feb. 28, 1986. Unfortunately, it is impossible to get additional

information about this project.

212 Interview of Fuchi Kazuhu.0, director of the ftith generation

computer projec~ Aug. 2, 1985, and Yamamoto Kinko,

Director of JIPDEC, Dec. 3, 1987.

213 JT.ECH Report on Advanced Computing in Japan, Japan

lkchnology Evaluation Center (McLeiq VA: Science Applications

International Corp., Dewmber 1987).

214 Interview, Dec. 5, 1990.

215 Interview of Shimizu Sakae, Toshiba Senior MaMging

Director, Feb. 3, 1986.

216

217

218

219

220

221

Shimoda Hirotsugu, IBM to no 10 Nen Sense, pp. 60-61.

Interview, Feb. 28, 1986.

Electronics Week, June 10, 1985, p. 30.

Interview of Hideo Aiso, head of the project Sept. 25, 1990.

Kahaner and Kung, op. cit.

Kahaner and Kung, op. cit.; and Report of the Research
Chapter tLJapanese Industrial Policy: The Postwar Record and the Case of Supercomputers . 287

Comnu”ttee on the New Information Processing Technology, Abstract

April 1990, MCTI’s Machinery and Information Industries Bureau,

Industrial Electronics Division.

222 Kahaner and Kung, op. cit.

223 Kahaner and Kung, op. cit.

224 Dempa Shimbun, Apr. 22, 1989, p. 5; JECC Nyusu, July 1,

1989, p. 7, no. 234.

225

226

227

228

229

230

231

232

233

JECC Nyusu, July 1, 1989, p. 7, no. 234.

Kabaner, op. cit.

Interview, Dec. 9, 1987.

Business Tokyo, May 1990, p. 8.

Kawabata Naohisaj Kompyuta Gyokai gaAbunai, p. 120.

“Supercomputer Bou6° Business Tokyo, April 1990, p. 33.

Kawaba@ op. cit., p. 121.

Kawaba@ op. cit., pp. 120-121.

Interviews of former Cray employees involve& U.S. Embassy

officials, and former USTR offlc~, Septe-mber and October 1990. U.S.

government and Cray employees also eonfiied that there have been

other cases in which university professors, especially those that have

used Cray machines while working in the United States, have called

Cray Research or the Embassy or botlL with the idea of getting the

United States to put pressure on Japan to give them a large enough

budget for a Cray.

234 Kawabata, op. cit., p. 121; Nikkei Sangyo Shimbun, Dec. 21,

1988, p. 8 and May 1, 1989, p. 12.

235 Cited in “SupercomputerB ou6” Business Tokyo, April 1990,

p. 33.

236 Nikkei Sangyo Shimbun, Dec. 21, 1988, p. 8.; Nihon Keizai

Shimbun, Apr. 21, 1988.

237 Dempa Shimbun, Sept. 26, 1989.

238 These include keiretsu-related purchases, auto fm’ purchases of domestic machines despite Cray’s clear superiority in this ara

and all purchases of domestic machines by private institutiona up

through 1986. (Eight are automobile companies: Nissan Diese4 1987,

?muki, 1986, 1989, 1989; Maz@ 1987 and 1989; TOyOt& 1985 and

1988. The reruining 12 of the 20 initial purchases are by Tokai

University, 1986 and 1989; Matsushi@ 1985 and 1987; Fuji Electric,

1985; Sony, 1985 and 1988; Ishikawaj@ Kawasaki Steel, Sharp,

ShimizW Mitsubishi, Olympus, Recruit andchiyoda Manufacturing, all

1986. The three upgrades are those of Tokai University, Mataushi@ and

Sony.)

239 T’hkexcludes thetwopurchases of Craymachinesby NTTthat

were immediately sold to Recruit Co.

240 Nihon Keizai Shimbun, Dec. 4,1989, p. 5.

241 Kawabata, op. cit., p. 115.

242 Nikkei Sangyo Shimbun, Aug. 24, 1988, p. 1.

243 Nikkei Sangyo Shimbun, May 16, 1989, p. 1.

244 Asahi Shimbun, Apr. 29, 1987.

245 Utsumi Ichiro, San Nen go no Kompyuta Gyokai, Gekihen no

Seiryoku Chizu (The Computer Industry in Three Years, A Map of the

Rapidly Changing [Corporate] Strength) (Tokyo: Besto Bukku, 1989),

p. 24.

246 Nihon Keizai Shimbun, Mar. 11, 1989, p. 31.

247 Kompyutopia, January 1989, pp .12-19. Thia Cray was

transferred to Recruit in December, 1986. Nihon Keizai Shimbun, Mar.

6, 1989, p. 1.

“Supercomputez Bou4° Business Tokyo, April 1990, p. 34.

Interview of a former USTR oflkial, Sept. 18, 1990.

249 Nihon Keizai Shimbun, Mar. 27, 1987, p. 3.

250 For example, it is discussed in: Kawabata Naohiq Kompyuta

Gyokai ga Abunai, pp. 123-128; Asahi Shimbun, Apr. 29, 1987; Nikkei

Sangyo Shimbun, Sept. 8, 1989, p. 8; interview of a General Manager of

Fujitsu’s Marketing Department Jan. 11, 1991.

251 Nihon Keizai Shimbun, Mar. 27, 1987, p. 3.

252 Nihon Keizai Shimbun, Mar. 2, 1989, p. 31. It was sold to

Recruit in December, 1987. Recruit paid a 5 percent premium on both

of these machines over what NTT had paid Cray, according to Nihon

Keizai Shimbun, Nov. 2, 1988, p. 19.

253 Nihon Keizai Shimbun, Nov. 2, 1988, p. 19.

254 Ibid.

255 An emergency budget was necessmy because the fiscal 1987

budget had already been set. Nihon Keizai Shimbun, Mar. 29, 1987,

p. 1.

256 Ibid.

257 Interview, Sept. 18, 1990.

258 Utsumi Ichiro, San Nen go no Kompyuta Gyokai, Gekihen no

Seiryoku Chizu, pp. 20-21.

259 Nikkei Computer, Mar. 26,1990, p. 98; NihonKeizai Shimbun,

Mar. 8, 1988, p. 13.

260 Nikkei Sangyo Shimbun, Oct. 20, 1987, p. 3.

261 Utsumi, op. cit., p. 21.

262 NikkeiSangyoShimbun, Apr.27, 1988, p.7andDec.21, 1988,

p. 8; Nikkei Computer, Mar. 26, 1990, pp. 98-99.

263 Citedin “SupercomputerB ouC” Business To@o, April 1990,

p. 30.

264 Nikkei Sangyo Shimbun, Apr. 15, 1987, p. 24. For example,

complaints wexe made that while a domestic system could be gotten for

about Y3 billion a U.S. system, including peripherals, etc., would cost

some Y5-6 billion.

265 Nikkei Sangyo Shimbun, Apr. 15, 1987, p. 24.

266 Nikkei Sangyo Shimbun, Apr. 27, 1988, p. 7. Interview of a

U.S. Department of Commeme offieim Oct. 22, 1990.

267

268

269

270

p. 34.

271

272

273

Utsumi, op. cit., pp. 26-27.

Nikkei Computer, Mar. 26, 1990, p. 96.

Jnterview, Oct. 22, 1990.

Cited in “Supercomputer Bou$” Business Tokyo, April 1990,

Nikkei Computer, Mar. 26, 1990, p. 96.

Business Tokyo, “Supereomputer Bc.ut,” April 1990, p. 30.

This announcement was quite premature. NJ3C still baa not

shipped any 4 processor SX-3 maclii.nea. -

274 Nihon Keizai Shimbun, Apr. 23, 1989, p. 4. Also in Nikkei

Sangyo Shhnbun, Apr. 19, 1989, p. 3.

275 Nihon Keizai Shintbun, Apr. 28, 1989, p. 11.

276 Asahi Shimbun, June 2, 1989 and July 9, 1989; Nikkei

Computer, Mar. 26, 1990, p. 98.

277

p. 98.

278

279

280

281

282

283

p. 11.

AsahiShimbun, June 2, 1989. Nikkei Computer, Mar. 26,1990,

Nihon Keizai Shimbun, Dec. 14, 1989, p. 1.

Nihon Keizai Shimbun, (let. 21, 1989, p. 8.

Nikkei Uotcha, IBM-Ban, Oct. 2, 1989, p. 3.

Dempa Shimbun, Dec. 6, 1989, p. 2.

Nikkei Uotcha, IBM-Ban, Feb. 5, 1990, p. 4.

Asahi Shimbun, Dec. 5, 1989, p. 1.

Nihon Keizai Shimbun, Feb. 3, 1990, p. 1, and July 24, 1990,
288 ● Competing Economies: America, Europe, and the Paci@c Rim

285 Intervkw of Ministry of Foreign At%lirs OfflCkd, Sept. 18,

1990.

286 Interview of Ministry of Foreign Affairs official, Sept. 18,

1990. This same sentiment was strongly expressed in an article on

supercomputers and the agreement in one of Japan’s major computer

industry magazines, Nikkei Computer, Mar. 26, 1990, p. 97.

287 Utsumi, op. cit., p. 37.

288 Citedin “SupercomputmBout’ ’BusinessTokyo, April 1990,

p. 32.

289 In an article Fujitsu Chakmrm Yamamoto lhkuma wrote for

Nikkei Computer, Jan. 1, 1990, p. 103.

290 Utsumi, op. cit., p. 39.

291 Interview, Oct. 22, 1990.

292 Nikkei Computer, Mar. 26, p. 99. The six labs are: the ‘Ibhoku,

Nagoya, and Kyushu University Large Scale Computer Labs; the Osaka

University Laser Fusion Research Lab, the Fusion Science Lab, and the

Meteorological Research Institute.

293 Interview, Sept. 18, 1990.

294 Interview, Sept. 18, 1990.

295 TheJapanese Public Sector: Problems andProspectsfor U.S.

Supercomputer Vendors, Cray Researcb Inc., May 1990, pp. 2-3.

2% This estimate does not include all supercomputerpurchases in

Jap~ but all those that were made while the performance of Cray

machines was unquestionably superior. The private sector companies

include keiretsu-related purchases, auto f-’ purchases of domestic

machines despite Cray’s clear superiority in this ar% and all purchases

of domestic machines by private institutions up through 1986. (Nissan

Diesel, 1987, Suzuki, 1986, 1989, 1989; -1987 and 1989; Tokai

University, 1986; Matsushi@ 1985; Toyota, 1985 and 1988; Fuji

Electric, 1985; Sony, 1985; Ishi.kawajimq Kawasaki Stee~ Sharp,

Shim.@ Mitsubishi Olympus, all 1986; Recruit, 1986, tiyOdi3

Manufacturing, 1986.)

Thegovernmentprocurements are the 21 domestic machines procured

up through 1986, after which the Japanese makers started to come out

with better, though still not technologically competitive, machines.

297 In current dollars, the estimate would be even higher.

298 For more detail on some of these issues, especially Japan’s

way of fmcing long-term investments and links between fms and

industries, see M&”ng Things Better, Competing in Manufacturing,

CMice of Technology Assessmen6 Congress of the United States

(w_ow DC: U.S. Government printing tilce, 1990.)

299 The most comprehensive and insightful work on the institutions of Japanese capitalism is Johnson’s MZTZ and The Japanese

Mirac2e, op. cit. The information in this section draws in part on

Anchordoguy, “A Challenge to Free Trade? Japanese Industrial

‘llrgeting in the Computer and Semiconductor Industries,” Japan’s

Econom”c Structure: Shouki it Change?, Kozo Yamam ura (cd.) (Seattle,

WA: Society for Japanese Studies, 1990), pp. 301-332.

300 Interview, Apr. 7, 1989.

301 The importance of industry and corporate structure is discussed in Charles Ferguso~ “Sources and Implications of Strategic

Decline: The Case of JapaneseAmericanC ompetition in Microelectronics,” working paper, m June 30, 1987. Also see David J. ‘Ikece,

“Capturing Wlue from lkchnological Innovation: Integratio~ Strategic Partnering, and Licensing Decisions,” in Bruce R. Guile and Harvey

Brooks (da.) Technology and Global Indus~: Companies and Nations

in the World Economy, National Academy of Engineering Series on

‘lkchnology and Social Priorities (Washington DC: National Academy

Ress, 1987), pp. 65-95.

302 Interview, Nov. 30, 1990.

303 Electronics, Mar. 27, 1980, p. 122.

304 Michael Gerlac@ “Keiretsu Organiza tion in the Japanese

Economy: Analysis and Trade Implications,” in Politics and Productivity, Johusoq et al. (eds.), op. cit., p. 158.

305 “Nihon IBM” (JaparI IBM), Dokusen Bunseki Kenlqukai

(ed.)Nihon no Dokusen Kigyo (’Ibkyo: Shin Nihon Shuppansm 1971),

vol. 5, p. 275.

306 As of 1984, Japan’s six major industrial groups earned some

18 percent of the total net profits of all Japanese business, had nearly 17

percent of total sales, held over 14 percent of paid-up capital, and

employed almost 5 percent of Japan’s labor force. -e Wassmann

and Kom Yamamura, “Do Japanese Firms Behave Differently? The

Effects of Keiretsu in the United States,” in Kozo Yamarnura (cd.)

Japanese Investment in the United States: Should We Be Concerned?

(Seattle, WA: Society for Japanese Studies, 1989), pp. 121-122.] These

six groups are the blue chips of Japanese industry today. Though the 182

companies that make up the core of the 6 groups account for only about

10 percent of the companies on the Tokyo Stock Exchange, more than

half of Japan’s largest 100 companies are group members and virtually

all Japan’s top city banks, trust banks, insurance companies, and

electronics conglomerates including all the supercomputer makers, are

group members.

307 GerlaclL “Keiretsu Organization in the Japanese Economy:

Analysis and Trade Implications, “ in Politics and Productivity, Johnson

et al. (eds.), op. cit., pp. 141-174. It should be noted that this help during

hard times is frequently unpleasan~ banks often send bank oflicers to

troubled companies, replacing company mauagers.

308 A Research and Development Strategy for High Performance

Computing, Executive Office of the President, Office of Science and

~h.uology policy, NOV. 20, 1987, p. 26.

DARPA backing in several projects helped Intel recently come out

with a custom-designed supercomputer-the Delta System-which is

based on an array of 528 Intel i860 microprocessors. A consortium of 14

U.S. research institutions, led by the California Institute of ‘lkchnology,

recently announced a planned pudmse of a Delta System. Intel has

announced that the machine would have peak perfo rmance of 32

gigaflops, but this has not yet been tested. [John Markoff, “Consortium

to Buy Intel Computer,” The New York Times, November 13, 1990,

p.Cl.] For an overview of U.S. policies towards supercomputers see

Supercomputers: Government Plans and Policies, Background Paper,

Office of ‘Ikchnology Assessment, U.S. Congress, March 1986.

309 Interview, Oct. 22, 1990.

310 The Federal High Pe#ormance Computing Program, Executive Office of the President, Office of Science and lkchnology Policy,

Sept. 8, 1989, p. 46. Sidney Fernbach “A U.S. High-Pcxformance

computing Program,” The International Journal of Supercomputer

Applications, vol. 4, no. 1, spring 1990, p. 3.

311 Thisdescription of the HighPerformance Computing Program

is taken from Executive ~lce of the President, OffIce of Science and

lkchnology Policy, The Federal High Pe~ormance Computing Program, op. cit., passim.

312 DARPA the NationaJ Science Foundation Department of

Energy, NASA the Department of Health and Human Services

(National Library of Medicine), EI?~ NISZ and the National Oceanic

and Atmospheric Administration.

313 CMlce of Management and Budget, Budget of the United

States Government, Fiscal Year 1992 (Washir@o% DC: U.S. GPO,

1991), Part Two, pp. 4849.

314 Electronic Engineering Times, Jan. 21, 1991, p. 2.

315 Ruder FiruL “The Influence of U.S. Prestige on Japanese

Supercomputer Makers, “ Perspective, Japan Deslq vol. 1, no. 3, August

1989, p. 2.

316 Interview of a supervomputer specialist at the San Diego

SuperComputer Center, Nov. 30, 1990.

317 Fti op. cit., pp. 2-3.
Chapter 6--Japanese Industrial Policy: The Postwar Record and the Case of Supercomputers .289

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Appendix 6-A--Government Financial Assistance to the Computer Industry and Its Size Relative to Private Sector Investment, 1961-89

(billions of yen, millions of dollars)-Continued

1961-69 1970-75 1976-81 1982-89

$1=360 Yen $1=330 Yen $1=200 Yen $1=160 Yen

Yen Dollars Yen Dollars Yen Dollars Yen Dollars

IV. Private sector investment in computer-related R&D

and plant and equipment

1. Computer industry investment in plant and equipment

(private sector) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41.78 116.06 129.40 392.12 153.60 768.00 1,338.80 8,340.00

2. Computer industry investment in R&D (private sector) . . . . . . 62.10 172.50 238.50 722.73 663.10 3,315.50 3,756.15f 23,480.00

Total private sector investment: . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103.90 288.60 367.90 1,114.85 816.70 4,083.50 5,089.95 31,820.00

V. Subsidies and tax benefits as percent of investment

(in percent) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37.8% 55.O% 24.2?! 8.2%

V1. Subsidies, tax benefits, and loans as percent of investment

(in percent) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86.6% 147.8% 83.5% 23.O%

fData for 1989 not yet available. Estimated at 25% growth based on previous years’ growth rates.

SOURCE: JECCKompyuta Noto, DenshiKogyo Nenkan;Kompy.da Hakusho; various issues of the monthly magazine Kompyutopia:Zeisei Chosa KaI: Zen Shityo Shu, andZeisa”Chosa KaiKankei

Shiryo Shu; Internal JDB and MITI downents without titles; Nihon Kaihatsu Ginko no Genkyo; JECC 10 Nensht JECC annual financial reports; Shuyo Sangyo no Setsubi ToshiKeikakq

Sorifu Tokeikyoku, Kagaku Gijutsu Kenkyu Chosa Hokoku; Denshi Kogyo 30 Nenshi, p. 82; Waga Kuni Denshikeisankt” Sangyo nohfonti” TM to Sono Tdsaku, 1970, p. 72.

This table is taken from Appendix 1 of the contractor document prepared by Marie Anchordoguy, “Japanese Policies for the Supercomputer Industry,” February 1991, pp. 117-122

(Appendix 1) (OTA Contract No. N3-4955), modified as described below.

Subsidy No. 10 and loan No. 1 in the table give the subsidy value and loan value, respectively, of low-interest loans given by the Japan Development Bank (JDB), an agency of the

Japanese Government, to the Japan Electronic Computer Co. (JECC). JECC is a nonprofit joint venture of six (originally seven) Japanese computer firms; the Japanese Government

has no equity in JECC. See Marie Anchordoguy, Cornputers Inc.:Japan’s Challenge to I/BM(Cambridge MA: Harvard University Press, 1989), p. 61.

Professor Anchordoguy’s original calculations also included subsidy and loan values based on up-front payments by JECC to computer firms for machines that JECC rented out to

users. Anchordoguy calculated that this program constituted a subsidy in the following amounts: 1961-1969, 8.10 billion yen, 22.50 million dollars; 1970-1975,6.22 billion yen, 18.85

million dollars; 1976-1981, 6,51 billion yen, 32.55 million dollars; 1982-1989, 8.6 billion yen, 53.75 million dollars. Anchordoguy also calculated that this program constituted a loan in

the following amounts: 1961-1969, 97.01 billion yen, 269.47 million dollars; 1970-1975, 69.30 billion yen, 210.00 million dollars; 1976-1981, 72.60 billion yen, 363.00 million dollars;

1982-1989, 122.13 billion yen, 763.31 million dollars. For these calculations, she noted that “JECC data on computer trade-ins is not available from 1984-1989; it was estimated at 42

percent of annual JECC purchases as the average in the seventies and early eighties was 42 percent. This trade-in data is used to calculate benefits from the JECC system.” The logic

behind the calculations is explained in more detail in chapter 3 of her book (cited above).

OTA does not believe that these up-front payments represent a loan and subsidy beyond the loan and subsidy already conferred by the JDB loan to JECC, and eliminated these

values from the table. The only way money flowed into or out of the Japanese treasury was through loans from JDB (the governnmnt) to JECC (the pr!vate sector).

The elimination of JECC up-front payments to firms makes a difference in the total loan, tax benefit, and subsidy values, especially in the late 1960s, but the conclusion is still the

same. The value of government assistance to computer firms was and is substantial.
Chapter 7

The New Competitors: Industrial

Strategies of Korea and Taiwan
CONTENTS

Page

INTRODUCTION AND SUMMARY . ..*..,....,.,..,*.*****...*..............+.* 295

The Role of Industrial Policies: The Debate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295

Summary of Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296

KOREA AND TAIWAN: INTERNATIONAL COMPETITIVE POSITION AND

TRADING PATTERNS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297

THE ROLE OF GOVERNMENT POLICY: KOREA . .,**..*........*.*....*....,.. 307

Exchange Rate and Trade Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307

Development Financing and Foreign Direct Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . 310

Tecnology Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311

Case Study: Automobiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314

Case Study: Semiconductors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 316

THE ROLE OF GOVERNMENT POLICY: TAIWAN ● ...........,.*..**.*.*....*. . 321

Exchange Rate and Trade Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 322

Development Financing and Foreign Direct Investmemt . . . . . . . . . * * ., . . . * * .*...,... 323

Technology Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324

Case Study: Automobiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327

case study: semiconductors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329

KOREA AND TAIWAN: SIMILARITIES AND DIFFERENCES ................... 332

Figure s

Figure Page

7-1. Per Capita Gross Domestic Product in Korea 1960-88 . . . . . . . . . . . . . . . . . . . . . . . . . 297

7-2. Korean Exports and Imports as Percent of GNP, 1960-90 . . . . ● . . ● . . . . ● .,........ 297

7*3. Taiwanese Exports and_ as Percent of GNP, 1960-89 . . . . . . . . . . . . . . . . . . . . 297

7-4. Major Korean Trading Partners, 1970-89 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305

7.5. Major Taiwanese Trading Partners, 1970-89 . ...............*.....,.****,.****, 306

745. Korean Automobile Production . ..*.................*....,.*..,*.**,.*.*.*** . 314

7-7. Korean Computer Industry Exports and Production by Product . . . . . . . . . . . . . . . . . . 319

Tables

Table Page

7-1. Korea and Taiwan:Basic Economic Indicators, 1956-88 ......., *.., ● ,... ● . . . ● 2 9 6

7-2. Korea and Taiwan: Changes in Industrial Structure, 1970-1988 . . . . . . . . . . . ,..., 298

7-3, Korea:Revealed Comparative Advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299

7-4 Taiwan:Revealed Comparative Advantage. i ● ● .+, ● ● ● ● ● * ● ● ● ● ● ● ● ● ● . ● . . ● ● . . ● . * . . . 301

7-5. Country Destination of Korean Exports, 1970-89 Major Tradong Partners ....... 303

7-6. Country Source of Korean Imports, l970-89 Major Trading Partners. ● ● ● . . . . ● . ,. 303

7-7. Country Destination of Taiwanese Exports, 1970-89 Major Trading Partners ..,. 304

7-8. Country Source of Taiwanese Imports, 197(3-89 Major Trading Partners . . . . . . . . 304

7-9. Shares of U.S. Majority-owned Foreign Affiliates in Total Exports? Of

Manufactures, Selected Countries, 1977 and 1983 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307

7-10. Korea: Major Govrnment Research Institutes in 1985 . . . . . . . . . . . . . . . . . . . . . . . . . 313

7-11. Taiwan: Major Government Research Institues in 1990 . . . ● . ● . . . . . ● . . . . . . . ● , ● . 324

7-12. Taiwan Auto Industry External Sources of Capital and Technology ............ 329
Chapter 7

The New Competitors: Industrial Strategies of

Korea and Taiwan

INTRODUCTION AND SUMMARY

Ten years ago, the debates about competitiveness,

industrial and trade policy, and America’s role in the

Pacific Basin centered almost exclusively on Japan.

In the last decade, other East Asian countries have

also increased their exports of manufactured goods.

Most prominent are the so-called ‘newly industrializing countries’ or NICs: the Republic of Korea, the

Republic of China, Hong Kong, and Singapore.

From 1980 to 1988, the four NICs increased their

share of U.S. manufactured imports from 13 to 18

Percent. 1

This chapter is about the two larger East Asian

NICs, the Republic of Korea and the Republic of

China (hereafter Korea and Taiwan). In less than 30

years they have risen far up the competitive hierarchy of nations, becoming much more important

world traders overall and contending in several

capital- and technology-intensive industries. Taiwan

became the world’s 10th biggest exporter of manufactures in 1986, up from 28th in 1965. Korea was

13th, up from 33rd. As suppliers of manufactured

goods to the U.S. market, they ranked 4th and 5th in

1989, up from 21st and 40th, respectively, in 1962.2

Korea and Taiwan remain relatively poor. Korea’s

per-capita income is comparable to Portugal’s, and

Taiwan has only recently crossed the World Bank’s

threshold for high-income countries.3 Their overall

role in the world economy must also be kept in

perspective. Their combined gross domestic product

(GDP) accounts for only 1.5 percent of world GDP,

excluding the socialist countries, compared to Japan’s

10.3 percent; their share of manufactured exports

accounts for 4.9 percent of world manufactured

exports, compared to Japan’s 14.9 percent and 11.9

percent for the United States.4

Nonetheless, the ability of both Korea and Taiwan

to move from the export of light, labor-intensive

manufactures to competitive strength in higher

technology industries remains impressive. For example, Korea is now the third largest producer of

large capacity (VLSI) memory chips, after Japan and

the United States. Taiwan is not far behind the world

leaders in some kinds of semiconductor design, and

has recently opened a state-of-the-art semiconductor

fabrication facility for customized (ASIC) chips.

Both have established important export niches in

computers, peripherals, and add-ens.

Several other capital- or technology-intensive

industries in both countries are competitive, including specialty steel and petrochemicals. Taiwan is the

I0th largest machine tool producer in the world, with

particular strength in numerically controlled machine tools at the lower precision end of the range.

Korea may become the first new producer since the

Japanese to break into the oligopolistic world car

industry. Firms from both countries are entering

alliances with multinationals from North America,

Japan, and Europe to develop products for both

world and Asian markets.

The Role of Industrial Policies: The Debate

Much of the literature about the economic prosperity of the East Asian NICs falls into one of several

schools of thought. One argues that the main

contributions of government in Japan, Korea, and

Taiwan were to manage price incentives, particularly through the exchange rate and trade policy, to

provide infrastructure and a favorable environment

for investment, and to maintain macroeconomic

stability. Writers in this school may grant that

governments intervened to promote industrial development in Korea and Taiwan, but say these actions

were hardly more responsible for the successes than

the rooster is responsible for the dawn. They note

that intervention in Korea and Taiwan was less

pervasive than in most other developing countries,

yet the outcomes were better.5

The second school sees government actions as

more influential. In the strongest version, the state is

the primary cause of rapid growth.6 An alternative

line of “ thinking focuses on the role of government in

overcoming the problems of technology acquisition

and adaptation.7 Another argues that specific industrial policies can help gain entry into oligopolistic

markets with high entry barriers, imperfect competition, and high returns.8

A more political view examines the way particular institutional arrangements affect the efficacy of

–295–
296 . Competing Economies: America, Europe, and the Pacific Rim

any state intervention. For example, some argue that

public and private information-sharing in “policy

networks” account for the high quality of government actions in Japan; these arguments apply to

Korea and Taiwan as well.9 Others concentrate on

the political conditions that made for flexible

markets in the NICs, such as weak labor movements

and leftist parties, and strong, authoritarian leaderships.10

Summary of Findings

Korean and Taiwanese policies for industrial

promotion did influence market incentives and

market outcomes in a growth-promoting direction. If

the measures these countries took were not always

efficient in a purely economic sense, they were

highly effective in promoting private sector growth.

True, their effectiveness depends on price incentives

and an ample supply of well-educated workers and

energetic entrepreneurs. But these policies and

conditions are a matter of industrial policy and

government intervention.

The industrial and trade policies of Korea and

Taiwan are similar in many respects. Both share a

commitment to long-term planning, constructing

broad visions of the direction that economic growth

ought to take and the specific industries to be

encouraged. Both have tied themselves closely to

world markets, forcing their firms to compete in the

world arena while nurturing them at home.

But, there are significant differences in the

policies of the two countries. For example, in

Taiwan the economy has been more open than in

Korea, industrial policy has been less directive and

interventionist, and the industrial structure less

concentrated; at the same time, there is a greater

reliance on public enterprises. These differences

show that there is more than one viable approach to

industrial promotion and more than one set of

conditions under which it can work.

Until recently, Korea had a relatively protected

home market. But protection aimed at assisting

protected industries to become internationally competitive. Protection against selected imports was

often coupled with offsetting incentives for export

sale. For example, exporters could get permission

and needed foreign exchange to import needed

inputs (raw materials, components, and machinery),

as could domestic suppliers who provided intermediate inputs to exporters. In the mid-1960s the export

drive became a top priority, second only to national

defense, with the President himself leading monthly

government/industry Export Promotion Meetings.

Korean policy forced firms to set their competitive

sights to the world standard, but provided a domestic

safe haven from the world’s premier companies.

Table 7-l—Korea and Taiwan: Basic Economic Indicators, 1956-88 (annual averages)

1956-60 1961-65 1966-70 1971-75 1976-80 1981-85 1986-88

Real GDPa growth

Korea . . . . . . . . . . . . . . . . . . . . 3.3 6.5 12.7 9.0 7.6 7.6 10.5

Taiwan . . . . . . . . . . . . . . . . . . . 6.7 10.1 10.0 7.8 10.7 6.7 10.3

Export growth

Korea . . . . . . . . . . . . . . . . . . . . 12.9 39.6 32.0 32.5 15.3 12.6 18.0

Taiwan . . . . . . . . . . . . . . . . . . . 27.9 25.8 27.2 29.2 29.3 11.6 12.6

Import growth

Korea . . . . . . . . . . . . . . . . . . . . 1.4 6.3 33.8 10.8 14.9 9.2 12.5

Taiwan . . . . . . . . . . . . . . . . . . . 23.7 16.2 22.7 33.8 25.9 2.7 21.2

Investment/GDP

Korea . . . . . . . . . . . . . . . . . . . . 10.5 13.1 23.4 23.1 28.7 28.4 28.2

Taiwan . . . . . . . . . . . . . . . . . . . 14.2 15,2 24.9 30.1 30.8 23.8 20.4

Exports/GDP

Korea . . . . . . . . . . . . . . . . . . . . 7.4 6.0 10.4 23.8 39.3 39.9 40.3

Taiwan . . . . . . . . . . . . . . . . . . . 10.2 16.9 25.0 41.7 50.9 53.9 59.0

lmports/GDP

Korea . . . . . . . . . . . . . . . . . . . . 11.7 13.0 25.6 34.8 48.6 41.3 32.7

Taiwan . . . . . . . . . . . . . . . . . . . 16.6 20.1 26.1 41.1 48.2 45.6 42.3

aGDP.gross domestic product

SOURCES: Taiwan Statistical Data Book; Directorate-General of Budget, Statistics and Accounting, Quarterly

National Economic Trends; National Bureau of Statistics, Economic Planning Board, Korea Statistical

Yearbook; Peter Petri, “Korea’s Export Niche,” llkvfdDeve/oprnent, vol. 16, No. 1, 1988, p. 48.
Chapter 7—The New Competitors: Industrial Strategies of Korea and Taiwan ● 297

Figure 7-l—Per Capita Gross Domestic Product in

Korea, 1960-88

Current U.S. dollars (thousands)

4 ~

Year

SOURCE: World Bank, Wodd Tables, 1989-90 (Washington, DC: Workf

Bank, 1980) and International Monetary Fund, /nternafiona/

t%anaal Statistics, various issues.

In the 1980s both countries liberalized their

economies, moving away from directive industrial

policies. This meant not an abandonment of industrial policy, but rather closer consultation and

linkages with the private sector, support for private

sector initiatives, and greater emphasis on economywide policies such as manpower, infrastructure,

and R&D. Technology policies became particularly

important in the 1980s, as both countries sought to

develop an indigenous technological base.

KOREA AND TAIWAN:

INTERNATIONAL COMPETITIVE

POSITION AND TRADING

PATTERNS

Korea and Taiwan have maintained high growth

rates since their transition to an outward-oriented

strategy in the early 1960s (table 7-1 and figure 7-l).

This performance has been led both by high rates of

export growth, particularly in the 1960s and 1970s,

and by high rates of import growth (figures 7-2 and

7-3). The openness of the economy—i.e., its exposure to international trade--can be measured by the

ratio of exports and imports to gross domestic

product (GDP). Both Korea and Taiwan have

become more open in this sense, even if their trade

policies have not always been fully liberal. Both

countries have had high levels of domestic investment, though Taiwan’s flagged somewhat in the

1980s.

Figure 7-2—Korean Exports and Imports

as Percent of GNP, 1960-90

50% [ I

40% -

30% -

20% -

‘:~

19606264 666870 7274 767880828486889 0

— Exports/GN P ~ imports/GNP

SOURCE: World Bank, Wotid Tables, 1989-90 (Washington, DC: World

Bank), July 1991; and International Monetary Fund, /nternationalFinancial Statistics, (Washington, DC: International Monetary Fund, July 1991).

Figure 7-3—Taiwanese Exports and Imports as

Percent of GDP, 1960-89

60% -

I

50% -

40%

30%

20%

10%

~1

Y I

o% , 1 I 1 1 1 1 1 I ( I 1 1 1 1 1 1 1 I 1 1 1 1 1 1 1 1 i I

196062 64 66 68 70 72 74 76 78 80 82 84 86 88

~ Imports / GDP ~ Exports / GDP

SOURCE: Republic of China, Council for Planning and Development,

Taiwan Statistical Data Book, Taipei, Ta”hvan 1989.

Rapid growth accompanies impressive structural

change (table 7-2). Taiwan had 30 percent of GDP

in manufacturing by 1970; Korea took another

decade to reach that level. Agriculture remained

larger in Korea than in Taiwan, despite a plunge in

agriculture’s share of output over the 1970s and

1980s. Table 7-2 shows that finance, insurance, real

estate and business services were more developed in

Taiwan until 1980, when Korea’s service sector took

off.

An analysis of the export performance of the two

countries falls under two topics: the product compo-
298 ● Competing Economies: America, Europe, and the Pacific Rim

Table 7-2—Korea and Taiwan: Changes in Industrial Structure, 1970-1988 (percentages of output by sector/GDP)

1970 1975 1980 1985 1988

Korea Taiwan Korea Taiwan Korea Taiwan Korea Taiwan Korea Taiwan

Gross domestic product . . . . . . . . . . . . 100.0 -

- 

- -

-- 

- -

-- 

-

-- “ --- ‘ -- 

- --- “ -

-- “ ---

Agriculture, forestry, fishing . . . . . . . . . 26.8

Mining and quarrying . . . . . . . . . . . . . . . 1.5

Manufacturing . . . . . . . . . . . . . . . . . . . . . 20.8

Electricity, gas, water . . . . . . . . . . . . . . . 1.6

Construction . . . . . . . . . . . . . . . . . . . . . . 5.5

Wholesale and retail trade,

restaurants, and hotels . . . . . . . . . . . 18.2

Transport, storage, and

communication . . . . . . . . . . . . . . . . . . 6.8

Finance, insurance, real estate,

business services . . . . . . . . . . . . . . . 3.0

Community, personal, and social

services . . . . . . . . . . . . . . . . . . . . . . . . 7.5

Producers of government services . . 5.0

Producers of private non-profit

institutions serving households .,. 3.1

Domestic services of households . . .

Less imputed bank service charge . .

Plus import duties . . . . . . . . . . . . . . . . . .

SOURCES: Directorate-General of Budget, Accounting and Statistics, Republic of China; Quarterly National Economic Trends, Taiwan Area, Republic of

China; Bank of Korea, Economic Statistics Yearbook.

100.0 100.0

15.5 24.9

1.3 1.5

29.2 26.5

2.4 1.3

3.9 5.1

14.5 19.4

6.0 6.2

9.8 3.4

3.0 6.9

11.5 4.0

0.3 3.3

0.3

2.2

4.6

100.0 100.0

12.7 16.3

1.2 1.4

30.9 29.6

2.6 2.3

5.3 9.4

13.2 18.0

6.0 6.3

10.5 4.8

3.9 8.1

10.5 4.9

0.3 4.1

0.3

3.0

5.7

100.0

7.7

36.0

2.5

6.3

13.1

6.0

12.7

4.0

9.7

0.2

0.4

4.8

5.2

100.0

12.8

30.3

2.8

7.7

12.2

7.6

11.8

4.1

7.2

2.5

2.8

2.7

100.0

5.8

0.6

37.6

4.0

4.1

13.8

6.4

13.8

4.7

10.3

0.2

0.6

5.1

3.3

100.0

10.8

0.7

31.6

2.8

8.1

12.3

7.3

13.2

4

7

2.5

3

2.6

100.0

5.0

37.8

3.2

4.3

14.3

6.2

15.7

4.8

9.6

0.3

0.5

5.4

3.4

sition of exports, and the market or geographic

composition of exports. To analyze the product

composition of exports, we have calculated measures of “revealed comparative advantage” (RCA)

for all export product groups from 1980 through

1986, the last year when data was available. The

RCA index shows each country’s share of world

exports in a given product relative to that country’s

share of world exports of all manufactured products

(making the denominator constant in all calculations). If this ratio is less than 1, the country’s share

in the product is less than the country’s share of

world trade. On the other hand, if the country has an

RCA higher than 1 in a given product category, it

reflects a larger market share than would be predicted on the basis of aggregate exports alone. The

RCA index is a rough gauge of competitiveness; the

higher the index, the larger the country’s share in

those markets.

Tables 7-3 and 7-4 divide the exports of the two

countries into six groupings, first, on the basis of

whether the RCA for the product is extremely high

(over 4), high (1 to 4) or low (below 1); and, second,

on the basis of whether it has risen or fallen between

1980 and 1986. We have also examined the technology intensity of these sectors, using a measure

constructed on the basis of applied R&D expenditure. Though the data on R&D expenditure is dated

and does not cover all sectors, it does provide

indications. We have divided the products into those

with high (***), intermediate (**), and low technology intensity (*).ll

The tables show two other figures relevant to

assessing the performance of Korea and Taiwan in

the U.S. market. The first is aggregate exports in

dollars. The second is an index, similar to the RCA,

that measures the extent to which exports are

concentrated on the U.S. market. A ranking of 1

indicates that the share of exports to the United

States in the given product is equal to the share of

exports to the United States in the country’s total

exports. A number higher than 1 indicates that Korea

and Taiwan export a larger share of that product to

the United States than they do of total exports,

reflecting a dependence on the U.S. market and/or a

competitive advantage vis-à-vis the United States.

The products with high and rising RCAs represent

leading export sectors. What is surprising is the

diversity of sectors represented. Korea has developed strong international competitiveness in the

capital-intensive shipbuilding industry, a target of

industrial policy in the late 1970s. Korea also shows

strength in a range of consumer electronics products

that are technology intensive, excelling in the more

standardized segments. Yet Korea has also increased

competitiveness in toys, games, and sporting goods,

a low technology, tight-manufacturing sector that is

typically labor-intensive.
Chapter 7—The New Competitors: Industrial Strategies of Korea and Taiwan ● 299

Table 7-3-Korea: Revealed Comparative Advantage (1986 exports; other figures are ratios)

Technology Exports to U.S. Concentration

SITC Code and Product RCA ratio intensity (nearest $million) in U.S.b

Rising RCA ratios

Extremely high RCAs (extremely competitive relative

to other exports)

7528: Offline data processing equipment . . . . . . . . . . . . . . . . . . . . . . . . .

793: Ships and boats . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

894: Toys, games, and sporting goods . . . . . . . . . . . . . . . . . . . . . . . . .

762: Radios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

037: Preserved fish and shellfish . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

High RCAs (advantaged relative to other exports)

898: Musical instruments, recorded discs and tapes . . . . . . . . . . . . .

763: Sound recorders, VCRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

775: Household electric appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7643: TV, radio transmittal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7641 : Telephones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

764: Telecommunications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7781 : Batteries, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Low RCAs (disadvantaged relative to other exports)

75:

655:

781 :

334:

792:

582:

056:

785:

.744:

821 :

881:

611 :

74:

68:

7783:

784:

Office machinery, automatic data processing equipment

(includes digital computers) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Knitted fabric . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Passenger oars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Refined petroleum products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Aircraft and parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Plastics, condensed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Vegetables, preserved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Motorcycles and bicycles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Mechanical handling equipment and parts . . . . . . . . . . . . . . . . . .

Furniture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Photo equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Leather . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

General industrial machinery and parts . . . . . . . . . . . . . . . . . . . .

Nonferrous metals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Auto electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Motor vehiclw parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Falling RCA ratios

Extremely high RCAs (extremely competitive relative

to other exports)

831: Travel and hand bags . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

85: Footwear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

653: Woven synthetic fabric . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

761 : Televisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

786: Trailers and containers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

696: Cutlery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

84: Wearing apparel and accessories . . . . . . . . . . . . . . . . . . . . . . . . . .

034: Fish, fresh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6 9 3 Wire products, nonelectric . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

697: Household appliances of base metal . . . . . . . . . . . . . . . . . . . . . . .

7642: Microphones, loudspeakers, amplifiers . . . . . . . . . . . . . . . . . . . . .

High RCAs (advantaged relative to other exports)

625: Rubber tires and tubes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

776: Transistors, valves, diodes, cathode tubes, semiconductors . . .

76: Telecommunications and sound recording and

reproducing equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

661: Cement, lime, building products . . . . . . . . . . . . . . . . . . . . . . . . . . .

036: Shellfish. fresh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

24.5

7.4

6.3

6.0

4.0

3.9

3.3

3.1

2.1

2.1

1.7

1.3

0.9

0.8

0.8

0.7

0.6

0.6

0.6

0.6

0.5

0.5

0.5

0.3

0.3

0.2

0.2

0.2

12.3

9.3

8.4

7.5

6.2

5.9

5.4

4.7

4.3

4.3

4.0

3.5

3.5

3.3

3.2

3.0

● ☛☛

● ☛

N A

c

● **

NA

NA

- *

● **

● **

● W

● * *

● *

● * *

●

+ + *

NA

● * *

● * *

NA

● * *

NA

NA

NA

NA

●

*

● *

● *

NA

NA

●

● * *

NA

● *

NA

NA

●

NA

● **

NA

NA

* *

●

NA

NA

6

684

214

41

241

358

339

44

NA

12

515

4

799

38

15

NA

11

16

57

54

18

2

182

14

9

56

331

1,489

197

442

NA

66

2,529

73

73

95

45

186

647

1,580

12

24

NA

NA

NA

0.8

0.4

1.0

1.2

1.5

1.3

NA

1.7

0.9

1.3

NA

1.5

0.2

NA

NA

NA

NA

1.4

1.2

NA

NA

1.5

NA

8.2

1.1

1.3

1.8

0.3

1.4

NA

1.1

1.2

0.4

1.2

1.0

2.3

0.9

1.0

1.3

NA

NA

aTechnology intensity is reported according to figures derived by C. Michael Aho and Howard F. Rosen, 1980, “Trends in TII-inteneive Trade,” U.S.

Department of Labor, Bureau of International Labor Affairs, Ec@nomic D&cueeion paper #9, pp. 4952. The number of aeterbks (from 1 to 3) corresponds

to low, intermediate, and high levels of technology Mrwity. See text, foo?note 11.

bncentration tise~r-stheetiti ofex~mtimtti intheUnitedStatee relative totheworldmarket. Theeeratios have beencalcufated ingoneraf

only for producte where U.S. 13SS imports exceed $35 million. Figur- above one(10) indicate a m~tti of e-~ th ~~~ stat= r~ti~ to

the world market; thoee below one indicate greater export concentration elsewhere reJative to that in the U.S. market.

WA-not appticabte

Continued on next page
300 ● Competing Economies: America, Europe, and the Pacific Rim

Table 7-3-Korea: Revealed Comparative Advantage (1986 exports; other figures are ratios)-Continued

Technology Exports to U.S. Concentration

SITC Code and Product RCA ratio intensity (nearest $million) in U.S.b

651,652,

654,657: Various textiles . . . . . . . . . 2.9 to 2.1 ●

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 <1

672: iron and steeL primary forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

666: Pottery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

694: Nails, screws, bolts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

673: iron and steeL bars, rods, and shapes . . . . . . . . . . . . . . . . . . . . . .

771 : Electric power machinery. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7782: Electric lamps, bulbs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

674: Iron and steel plates and sheets . . . . . . . . . . . . . . . . . . . . . . . . . . .

884: Optical goods . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

678: iron and steel tubes and pipe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

885: Watches and clocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

773: Electricity distribution equipment . . . . . . . . . . . . . . . . . . . . . . . . . . .

897: Jewelry, articles of precious metal . . . . . . . . . . . . . . . . . . . . . . . . .

893: Plastic articles, misc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Low RCAs (disadvantaged relative to other exports)

791 : Railway vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

778: Electrical machinery, misc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

699: Base metal manufactures, misc. . . . . . . . . . . . . . . . . . . . . . . . . . .

7512: Calculating and accounting machines . . . . . . . . . . . . . . . . . . . . .

635: Wood manufactures, misc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

634: Veneers, plywood . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

663: Mineral manufactures, misc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

759: Parts and accessories for 752 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

812: Plumbing, heating, and lighting equipment . . . . . . . . . . . . . . . . .

751 : Office machines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

695: Hand and machine tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

64: Paper products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

772: Switchgear, circuits, and parts . . . . . . . . . . . . . . . . . . . . . . . . . . . .

058: Fruit, preserved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

71: Power generating machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

87: Scientific and controlling instruments . . . . . . . . . . . . . . . . . . . . . .

724: Textile and leather machines and parts . . . . . . . . . . . . . . . . . . . .

73: Metal working machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

721 : Agricultural machinery and parts. . . . . . . . . . . . . . . . . . . . . . . . . .

2.9

2.5

2.5

2.4

2.0

2.0

1.8

1.8

1.6

1.5

1.2

1.2

1.0

0.9

0.8

0.8

0.8

0.7

0.7

0.6

0.5

0.5

0.4

0.4

0.4

0.4

0.3

0.3

0.3

0.2

0.15

0.05

●

●

●

● ☛☛

● ☛

●

NA

NA

● **

● ☛☛

NA

● *

● ☛

☛☛

● ☛

☛☛☛

NA

NA*

***

● ☛

● ☛☛

● ☛

NA

● **

NA

● **

● ☛☛

● ☛

●

● ☛

9

56

111

39

29

46

262

59

197

56

45

92

100

2

164

101

44

9

6

8

106

19

46

24

32

73

7

27

56

6

17

2

NA

1.5

1.9

0.2

NA

1.9

1.1

1,4

1.4

0.7

0.9

1.5

1.3

NA

1.6

1.5

5.4

NA

NA

NA

1.2

NA

2.2

NA

0.4

1,7

NA

0.3

1.0

NA

NA

NA

SOURCES: United Nations, International Trade Statistics Yearbook; National Bureau of Statistics, Economic Planning Board, Korea Statistical Yearbook.

Taiwan shows a contrasting pattern. First, the

range of products in which the country improved its

competitiveness in the 1980s is greater, though with

a lower average dollar value of exports in each

category. This pattern reflects a‘ ‘niche’ strategy of

specialization in products that are less technologyand capital-intensive than those in which Korea has

excelled. For example, Taiwan improved its competitiveness in a number of apparel segments, while

moving into standardized electronics products such

as calculators and telephones that can be produced

by small firms.

The third cluster, sectors with low but rising

RCAs, represent those in which Korea and Taiwan

are developing comparative advantage. In Korea,

this list includes office machinery, computers,

automobiles, and refined petroleum products, capitalintensive sectors targeted by the government in the

last 15 years. Taiwan is competitive in steel, a sector

dominated by a state-owned enterprise. Both countries show low but rising competitiveness in general

industrial machinery.

The change out of light, labor-intensive manufactures is apparent in the next cluster of industries:

sectors in which competitiveness was strong in the

past, but is falling now. In Korea, decline in the

competitiveness of steel and textile and apparel

segments are noteworthy. Taiwan declined in some

textile and apparel sectors, with a greater concentration of losses in light electronics, for which assembly operations were important for the country’s

development. The sources of this decline include

rising labor costs, technological changes, and improvements in productivity that have moved production back to the advanced industrial states.

The final cell represents those sectors in which

Korea and Taiwan are primarily importers rather
Chapter 7—The New Competitors: Industrial Strategies of Korea and Taiwan ● 301

Table 7-4-Taiwan: Revealed Comparative Advantage (1986 exports; other figures are ratios)

Technology Exports to U.S. Concentration

SITC Code and Product RCA ratio intensity (nearest $million) in U.S.b

Rising RCA ratios

Extremely high RCAs (extremely competitive relative

to other exports)

894: Toys, games, and sporting goods . . . . . . . . . . . . . . . . . . . . . . . . .

655: Knitted fabric: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

785: Motor- and bicycles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

697: Household appliances of base metal . . . . . . . . . . . . . . . . . . . . . . .

7512: Calculating and accounting machines . . . . . . . . . . . . . . . . . . . . .

846: Undergarments, knit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

821 : Furniture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

694: Nails, screws, bolts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

847: Textile and clothing accessories . . . . . . . . . . . . . . . . . . . . . . . . . .

7642: Microphones, loud-speakers, amplifiers . . . . . . . . . . . . . . . . . . .

812: Plumbing, heating, and lighting equipment . . . . . . . . . . . . . . . . .

036: Shellfish, fresh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

N A c

●

1,384

5

244

286

82

386

990

207

48

133

292

87

1.1

NA

0.7

1.2

1.1

1.6

1.6

1.5

0.5

1.5

1.8

0.3

14.5

12.9

8.4

7.4

5.2

5.2

5.0

4.8

4.7

4.5

4.5

4.2

● ☛

● ☛

● ☛☛

NA

NA

● *

NA

● **

● ☛

NA

High RCAs (advantaged relative to other exports)

7641 :

657:

771:

884:

7522:

695:

844:

775:

651 :

661 :

699:

7643:

663:

881 :

693:

786:

75:

. ,

Tleephones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Special yarns and textile fabric . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Electric power machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Optical goods . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Digital computers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Hand and machine tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Undergarments, nonknit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Household electric appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Textile yarn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cement, lime, building products . . . . . . . . . . . . . . . . . . . . . . . . . . .

Base metal manufactures, misc. . . . . . . . . . . . . . . . . . . . . . . . . . .

TV and radio transmission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Mineral manufactures, misc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Photo equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Wire products and grills nonelectric . . . . . . . . . . . . . . . . . . . . . . .

Trailers and containers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Office machinery and automatic data processing

equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Jewelry, articles of precious metal . . . . . . . . . . . . . . . . . . . . . . . . .

Switchgear, circuits, and parts . . . . . . . . . . . . . . . . . . . . . . . . . . . .

leather . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.7

3.5

3.5

3.4

3.4

3.3

3.2

3.0

2.9

2.7

2.6

2.3

2.3

2.2

2.1

1.9

● ☛☛ NA

66

158

123

NA

220

226

213

11

10

405

49

9

108

11

NA

NA

0.4

1.0

1.2

NA

1.1

2.4

0.7

NA

NA

1.4

0.9

NA

1.1

NA

NA

*

● ☛☛

NA

● **

● ☛

NA

● **

●

●

● ☛

● ☛☛

●

NA

●

● *

1.9

1.3

1.2

1.1

● ☛☛ 1,233

121

201

6

1.1

1.4

1.0

NA

897:

772:

611 :

NA

● **

NA

Low RCAs (disadvantaged relative to other exports)

673: Iron and steel bars, rods, and shapes . . . . . . . . . . . . . . . . . . . . . .

784: Motor vehicle parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

74: General industrial machinery and parts . . . . . . . . . . . . . . . . . . . .

334: Refined petroleum products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

721 : Agricultural machinery and parts . . . . . . . . . . . . . . . . . . . . . . . . . .

674: Iron and steel plates, and sheets . . . . . . . . . . . . . . . . . . . . . . . . . .

87: Scientific and controlling instruments . . . . . . . . . . . . . . . . . . . . . .

68: Non-ferrous metals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

781 : Passenger cars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

792: Aircraft and parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Falling RCA Ratios

Extreme/y High RCAs (extremely competitive relative

to other exports)

831 : Travel and hand bags . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8942: Toys and games . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

85: Footwear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

635: Wood manufactures, misc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -

aTe~nOlogy intensity is ~ewfl~ ~-~ing t. figures derived by c. M~hael Aho and HoWa~ F. Rosen, 19~, “Trends in TAnology-intensive Trade,” U.S.

Department of Labor, Bureau of International Labor Affairs, Economic Discussion Paper #9, pp. 49-52. The number of asterisks (from 1 to 3) corresponds

to low, intermediate, and high levels of technology intensity. See text, footnote 11.

bConWntration ratios expr=stheextentof exwrtmwentration in the United States relative tothewodd ma~et. These ratios have been calculated in general

only for products where U.S. 19S6 imports exceed $35 million. Figures above one (1.0) indicate a concentration of exports in the United States relative to

the world market; those below one indicate greater export concentration elsewhere relative to that in the U.S. market.

cNA=not applicable

0.9

0.5

0.5

0.4

0.4

0.4

0.3

0,2

0.01

0.002

●

57

205

598

13

10

23

111

28

2

4

0.5

0.8

2.2

NA

NA

0.4

1.5

0.4

NA

NA

NA

●

NA

● *

●

● ☛☛

☛

● ☛☛

● ☛☛

17.0 NA 523 1.1

12.4 NA 787 1.1

12.2 NA 2,101 1.4

8.5 NA 292 1.2

Continued on next page
302 . Competing Economies: America, Europe, and the Pacific Rim

Table 7-4-Taiwan: Revealed Comparative Advantage (1966 exports; other figures are ratios)--Continued

Technology Exports to U.S. Concentration

SITC Code and Product RCA ratio intensitya

(nearest $million) in U.S.b

845: Other outerwear, knit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.8

762: Radios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.7

893: Plastic articles, misc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4

761 : Televisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2

056: Vegetables, preserved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3

666: Pottery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.0

842: Men’s outerwear, nonknit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8

High RCAs (advantaged relative to other exports)

653:

696:

84:

634:

034:

037:

76:

652:

764

7782:

776:

724:

773:

778:

058:

625:

685:

751 :

73:

Woven Synthetic fabric - -

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.0

cutlery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.9

Waring apparel and accessories . . . . . . . . . . . . . . . . . . . . . . . . . . 3.8

veneers, plywood- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7

Fish, fresh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4

Preserved fish and shellfish . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3

Telecommunications and sound recording and

reproducing equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0

Woven cotton fabric . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.8

Telecommunications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5

Electric lamps, bulbs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.9

Transistors, valves, diodes, cathodb tubes,

semiconductors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8

Textile and leather machines and parts . . . . . . . . . . . . . . . . . . . . 1.5

Electricity distribution equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4

Electrical machinery, Misc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3

Fruit, preserved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2

Rubber tires and tubes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2

Watches and clocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2

Office machines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2

Metal working machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1

Low RCAs (disadvantaged relative other exports)

898: Musical instruments, recorded discs and tapes . . . . . . . . . . . . .

7781 : Batteries, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

783: ships and boats . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7783: Auto electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

759: Parts and accessories for 752 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

654: other woven textile fabric . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

678: iron and steel tubes, and pipe . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

763: Sound recorders, VCRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

744: and parts . . . . . . . . . . . . . . . . . .

71: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

64: Paper products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7518: Photocopy and thermocopy maOhbes . . . . . . . . . . . . . . . . . . . . .

0.9

0.8

0.7

0.7

0.7

0.6

0.6

0.5

0.4

0.3

0.3

0.07

NA 765 1.0

● ** 264 0.6

● *

699 1.1

W* 445 1.2

NA 97 0.7

●

238 2.3

NA 0.8

●

37 0.1

● *

83 1.6

NA 2,586 1.2

NA 139 0.9

NA 88 0.4

NA 83 0.8

● ☛☛ 1,895 1.2

●

104 0.9

● M 991 1.5

● *

53 1.4

● ☛☛

● ☛

***

● ☛

NA

NA

● 9 9

● ☛☛

●

NA

● *

● ☛

NA

●

●

● ☛☛

●

NA

● **

318

74

307

367

13

94

64

99

154

116

12

137

9

420

9

89

186

59

64

59

12

0.7

0.5

3.6

1.6

NA

1.0

0.7

1.2

0.9

1.6

1.1

1.4

1.6

2.9

NA

1.3

3.1

1.3

0.5

0.7

2.7

SOURCES: United Nations, Mamationai Trade Statkfica Yearbook,- Statistics of lr~ _of m.

than exporters. In line with~ their poorh resource The pace of industria l adjustment out of declinin g

endowments, these sectors include a number of raw sectors has been gradual; rising and falling sectors

materials-based products, particularly petrochemi- coexist over long periods Of time. In a number of

cals, and, in Taiwan, a range of capital goods product categories RCA’s remain high While declining. Both countries continue to be competitive in

Both countries have developed and maintained

competitivess in a diverse array of products

ranging from technologically simple to complex.

Korea shows a greater concentration in products

with higher capital and technology intensity and

greater scale economies, while Taiwan Shows greater

product diversity. Korea’s industrial policy has led

to a handful of the largest firms dominating exports.

Taiwan has, on average, smaller firms.

traditional export products, such as footwear, even

though comparative advantage is ending. This reflects their initial strong market positions in these

sectors, and the ability of their firms to enhance

productivity, increase investment, and adapt technoIogically to help offset increasing labor and other

costs.

With technology transfer from industrialized nations to the NICs and the accumulation of physical
Chapter 7—The New Competitors: Industrial Strategies of Korea and Taiwan .303

and human capital, the skill- and capital-intensity of 7-8 detail their exports and imports by major

NIC exports has increased. This places competitive markets; figures 7-4 and 7-5summarize the informapressure on the advanced industrial states. On the tion graphically.

other hand, the NICs remain importers of a range of

capital-, skill-, and technology-intensive goods. In the 1960s, Korea and Taiwan relied heavily on

This suggests the likelihood of extensive two-way the U.S. market as the key to their export-oriented

trade in highly differentiated products, a pattern that growth strategy. Following the first and second oil

has characterized economic relations between Eu- shocks, however, Korea aggressively diversified its

rope and the United States.12 exports. Korean construction firms pushed into the

lucrative Middle East market, and exports of conAnother area of concern is the geographic concen- struction materials followed. Europe’s share doutration of the two countries’ exports. Tables 7-5 to bled between 1970 and 1975.

Table 7-5-Country Destination of Korean Exports, 1970-89 Major Trading Partners (US$ million)

1970 1975 1980 1985 1989

Asia:

Australia . . . . . . . . . . . . . . . . . . . . .

Hong Kong . . . . . . . . . . . . . . . . . .

Japan . . . . . . . . . . . . . . . . . . . . . . .

Singapore . . . . . . . . . . . . . . . . . . .

Taiwan . . . . . . . . . . . . . . . . . . . . . .

Europe:

France . . . . . . . . . . . . . . . . . . . . . .

Germany . . . . . . . . . . . . . . . . . . . .

Netherlands . . . . . . . . . . . . . . . . . .

United Kingdom . . . . . . . . . . . . . .

Middle East:

Kuwait . . . . . . . . . . . . . . . . . . . . . . .

Saudi Arabia . . . . . . . . . . . . . . . .

North America:

Canada . . . . . . . . . . . . . . . . . . . . .

United States . . . . . . . . . . . . . . . .

World; country

exports as

share of world exports

2.9

27.5

234.3

11.0

7.2

1.5

27.3

13.5

13.0

1.5

0.1

19.5

395.1

835.1

—— -- #.- .-, -- -.. -- --- 33.9%

004%

3.3%

28.1%

1 .3%

0.9%

6.6%

0.2%

3.3%

1.6%

1.6%

0.2%

0.2%

0.01%

49.7%

2.3%

47.370

90.3%

63.0

181.9

1,292.9

58.2

62.8

40.0

312.2

128.9

161.7

33.9

91.1

197.3

1,536.2

5,081.0

32.7%

1 .2%

3.6%

25.5%

1 .2%

1 .2%

12.7%

0.8%

6.1% 

2.5%

3.2%

2.5%

0.7%

1.8%

34.1%

3.9%

30.2%

81.9%

230.4

823.3

3,039.4

266.3

216.3

291.2

875.5

349.5

572.5

249.1

946.1

343.4

4,606.6

17,504.9

26.1%

1 .3%

4.7%

17,4%

1.570

1 .2%

11.9Y0

1 .7%

5.O%

2.0%

3.3%

6.8%

1.470

5.4%

28.3%

2.O%

26.3%

73.2%

368.8

1,565.5

4,543.4

490.1

196.1

315.8

979.3

345.4

913.4

205.6

968.7

1,228.7

10,754.1

30,283.1

23.7 %

1 .2%

5.2%

15.O%

1.6?40

0.7%

8.4%

1.0%

3.2%

1.1% 

3.0%

3.9%

0.7%

3.2%

39.6%

4.1%

35.5940

75.5%

1,004.9

3,374.6

13,456.8

1,532.4

1,308.2

894.0

2,137.2

755.8

1,861.3

210.1

814.8

1,882.3

20,639.0

62,377.1

33.2%

1.6%

5.4%

21.6%

2.5%

2.1%

9.1%

1 .4%

3.4%

1.2%

3.0%

1.6%

0.3%

1.370

36.1%

3.O%

33.1%

80.0%

SOURCES: Bank of Korea, Economic Statistics Yearbook; Bank of Korea, Monthly Economic Statist.ks.

Table 7-6-Country Source of Korean Imports, 1970-89 Major Trading Partners (US$ million)

1970 1975 1980 1985 1989

Asia:

Australia . . . . . . . . . . . . . . . . . . . . . 13.7

Hong Kong . . . . . . . . . . . . . . . . . . 19.7

indonesia . . . . . . . . . . . . . . . . . . . . 19.8

Japan . . . . . . . . . . . . . . . . . . . . . . . 809.2

Malaysia . . . . . . . . . . . . . . . . . . . . . 57.7

Singapore . . . . . . . . . . . . . . . . . . . 13.5

Taiwan . . . . . . . . . . . . . . . . . . . . . . 34.0

Europe:

France . . . . . . . . . . . . . . . . . . . . . . 52.2

Germany . . . . . . . . . . . . . . . . . . . . 67.2

United Kingdom . . . . . . . . . . . . . . 32.7

Middle East:

Kuwait . . . . . . . . . . . . . . . . . . . . . . . 30.6

Saudi Arabia . . . . . . . . . . . . . . . . 84.6

North America:

Canada . . . . . . . . . . . . . . . . . . . . . 23.1

United States . . . . . . . . . . . . . . . . 584.7

World; country 1,983.9

exports as

share of total exports

48.8%

0.7%

1 .O%

1 .0%

40.8%

2.9%

0.7%

1.770

7.7%

2.6%

3.4%

1.6%

5.8%

1 .5%

4.3%

30.6%

1 .2%

29.5%

92.9%

204.7

19.7

146.8

2,433.6

122.7

13.7

161.9

137.3

192.6

123.0

553.4

605.3

150.1

1,881.1

7,274.3

42.7%

2.8%

0.3%

2.0%

33.5%

1 .7%

2.2%

2.2%

6.2%

1 .9%

2.6%

1.770

15.9%

7.6%

8.3%

27.9%

2.I%

25.9%

92.7%

680.0

98.2

484.5

5,857.8

471.6

161.2

313.3

190.8

636.6

303.6

1,753.2

3,288.4

378.4

4,890.2

22,291.7

36.2%

3.1%

0.4%

2.2%

26.3%

2.1%

0.7%

1 .4%

5.1%

0.9%

2.9%

1 .4%

22.6%

7.9%

14.8%

23.6%

1 .7%

21 .9%

87.5%

1,116.1

492.5

668.6

7,560.4

1,234.3

267.7

333.4

442.3

978.6

565.8

523.2

639.7

630.2

6,489.3

31,135.7

37.5%

3.6%

1.6%

2.1 %

24.3%

4.0%

0.9%

1 .1%

6.4%

1 .4%

3.1%

1.8%

3.7%

1 .7%

2.1%

22.9%

2.O%

20.8%

70.5%

2,243.0

581.7

1,135.2

17,448.6

1,503.4

640.8

1,328.4

879.1

2,623.5

923.4

381.7

1,041.8

1,680.1

15,910.7

61,464.7

40.5%

3.6%

0.9%

1.8%

28.4%

2.4%

1 .0%

2.2%

7.2%

1 .4%

4.3%

1.570

2.3%

0.6%

1.770

28.6%

2.7%

25.9%

78.6%

SOURCES: Bank of Korea, Economic Statistics Yearbook Bank of Kore~ Monthly Economic Statistics.
304 . Competing Economies: America, Europe, and the Pacific Rim

Table 7-7-Country Destination of Taiwanese Exports, 1970-89 Major Trading Partners (US$ million)

1970 1975 1980 1985 1989

Asia:

Australia . . . . . . . . . . . . . . . . . . . . . 20.4

Hong Kong . . . . . . . . . . . . . . . . . . 135.8

Japan . . . . . . . . . . . . . . . . . . . . . . . 215.6

Korea . . . . . . . . . . . . . . . . . . . . . . . 27.8

Singapore . . . . . . . . . . . . . . . . . . . 35.9

Thailand . . . . . . . . . . . . . . . . . . . . . 25.1

Europe:

France . . . . . . . . . . . . . . . . . . . . . . 3.1

Germany . . . . . . . . . . . . . . . . . . . . 71.0

United Kingdom . . . . . . . . . . . . . . 14.2

North America:

Canada . . . . . . . . . . . . . . . . . . . . . 50.8

United States . . . . . . . . . . . . . . . . 564.1

World;country 1,481.4

exports as

share of total exports

31.1%

1.4%

9.2%

14.6%

1.9%

2.4%

1.7%

6.0%

0.2%

4.8%

1.O%

41.5%

3.4%

38.1%

78.6%

125.5

363.0

694.2

119.5

140.7

67.8

37.5

316.2

137.8

181.6

1,822.7

5,308.7

28.5%

2.4%

6.8%

13.1%

2.3%

2.7%

1.3%

9.3%

0.7%

6.O%

2.6%

37.8%

3.4%

34.3%

75.5%

539.3

1,550.6

2,173.4

266.5

545.1

176.2

265.6

1,075.8

471.6

459.7

6,760.3

19,810.6

26.5%

2.7%

7.8%

11.0%

1.4%

2.8%

0.9%

9.2%.

1.3%

5.4%

2.4%

36.5%

2.3%

34.1%

72.1%

747.3

2,539.7

3,460.9

253.8

885.1

236.2

227.6

805.4

650.0

944.8

14,773.3

30,725.6

26.4%

2.4%

8.3%

11.3%

0.8%

2.9%

0.8%

5.5%

0.7%

2.6%

2.1%

51.2%

3.1%

48.1%

83.1%

1,531.9

7,013.9

9,058.0

1,131.3

1,970.0

1,103.2

1,084.9

2,558.2

2,095.8

1,755.8

23,943.4

66,102.4

33.0%

2.3%

10.6%

13.7%

1.7%

3.O%

1.7%

8.7%

1.6%

3.9%

3.2%

38.9%

2.7%

36.25

80.6%

SOURCE: Council for Ecxmomic Planning and Developmen~Taiwan Statistical Data Sook.

Table 7-8-Country Source of Taiwanese Imports, 1970-89 Major Trading Partners (US $ million)

1970 1975 1980 1985 1989

Asia:

Australia . . . . . . . . . . . . . . . . . . . . . 47.9

Hong Kong . . . . . . . . . . . . . . . . . . 27.2

Japan . . . . . . . . . . . . . . . . . . . . . . . 652.7

Korea . . . . . . . . . . . . . . . . . . . . . . . 15.1

Singapore . . . . . . . . . . . . . . . . . . . 5.3

Europe:

Germany . . . . . . . . . . . . . . . . . . . . 61.9

United Kingdom . . . . . . . . . . . . . . 25.9

Middle East:

Saudi Arabia . . . . . . . . . . . . . . . . 2.7

North America:

Canada . . . . . . . . . . . . . . . . . . . . . 17.0

United States . . . . . . . . . . . . . . . . 363.8

World; country 1,523.9

exports as

share of total exports

49.1%

3.1 %

1.8%

42.8%

1 .0%

0.4%

5.8%

4.1 %

1.7%

0.2%

0.2%

25.0%

1 .1%

23.9%

80.0%

159.5

74.7

1,812.2

59.2

35.7

371.4

127.4

228.3

48.0

1,652.1

5,951.6

36.O%

2.7%

1 .3%

30.5%

1 .O%

0.6%

8.4%

6.20/o

2.1%

3.8%

3.8%

28.6%

0.8%

27.8%

76.8%

512.2

249.9

5,353.2

208.5

221.7

722.2

288.6

1,418.9

248.9

4,673.4

19,733.1

33.2%

2.6%

1 .3%

27.1%

1 .1%

1 .1%

5.1%

3.7%

1 .5%

7.2%

7.2%

24.9%

1.370

23.7%

70.4%

800.6

319.6

5,548.8

186.6

275.8

846.1

262.4

1,361.0

368.9

4,746.2

20,102.0

35.5%

4.0%

1.6%

27.6%

0.9%

1.4%

5.5%

4.2%

1.3%

6.8%

6.8%

25.5%

1.8%

23.6%

73.2%

1.627.8

2,222.7

16,016.6

1,239.0

884.7

2,592.5

926.5

1,378.7

997.9

11,984.1

52,215.3

42.1%

3.1%

4.3%

30.7%

2.4%

1 .7%

6.7%

5.O%

1.8%

2.6%

2.6%

24.9%

1 .9%

23.O%

76.4%

SOURCE: Monthly Statistic of Imports, Republic of China.

In the 1980s, the dependence on the U.S. market

fluctuated with economic conditions and exchange

rates. The U.S. share of Korea’s exports rose after

the 1982 recession, and jumped dramatically, from

35 to 40 percent, after the sharp real depreciation of

the Korean won in 1985-1986. Thereafter, however,

the U.S. share declined as the won rose, and has not

approached its 1970 level. Korea’s strategy of

diversification holds true at the product level as well,

though footwear and automobiles still show a

marked concentration on the American market.

In Taiwan, dependence on the American market

also increased over the early 1980s, but the level was

much higher, approaching 50 percent in 1985 before

falling to around 40 percent in 1989, roughly the

same as in 1970. Imports show a similar story, with

Korea diversifying away from the United States and

Taiwan’s share of imports staying constant over

time.

The data suggest a somewhat contradictory picture with regard to interdependence within East

Asia. The NICs increased their trade with one

another, though from a low base that reflects their

competition in some product lines. Hong Kong’s

share in Taiwan’s trade grew sharply over the late

1980s; an unknown portion of this trade is with the

People’s Republic of China. Both Korea and Taiwan

increased their exports to Japan in the late 1980s,

Korea more than Taiwan. Both countries have

historically run deficits with Japan, their main

source of imports. But Japan’s share has fallen

sharply since the peak in 1986 as a result of
Chapter 7—The New Competitors: Industrial Strategies of Korea and Taiwan .305

Figure 7-4-Major Korean Trading Partners, 1970-89

Major Korean Trading Partners, 1970

Australia

Asian NICs

Japan

Taiwan

Europe

Middle East

Canada

United States

(US$ billions)

t I ! I 1 1 I 1

- 1 -0.8 -0.6-0.4 -0.2 0 0.2 0.4 0.6

Imports Exports

Major Korean Trading Partners, 1985

(US$ billions)

Australia -

Asian NICs -

Japan -

Taiwan -

Europe -

Middle East -

Canada

United States

1 I I

-10 -5 0 5 10 15

Imports Exports

Major Korean Trading Partners, 1980

Australia

Asian NICs

Japan

Taiwan

Europe

Middle East

Canada

United States

(US$ billions)

4ZZ2

t 1 1 1 1 1 ,

-8 -6 -4 -2 0 2 4 6

Imports Exports

Major Korean Trading Partners, 1989

(US$ billions)

Australia -

Asian NICs -

Japan -

Taiwan -

Europe -

Middle East -

Canada

United States -

r I

-20 -10 0 10 20 30

Imports Exports

NOTE: Europe includes Germany, France, United Kingdom, and the Netherlands. Asian NICs indude Singapore, Malaysia, Thailand, and Hong Kong. Midd!e

East includes Saudi Arabia and Kuwait.

SOURCE: Bank of Korea, Economic Statistics Yearbook; Bank of Korea, Monthly Economic Statistics.

exchange rate movements. Korea has been more region, however. Analysis of such investments goes

successful in diversifying while Taiwan’s trading beyond the scope of this chapter, but it is important

patterns with Japan show greater constancy. to note how they complicate the picture. First, some

The aggregate figures for Korea’s and Taiwan’s share of exports from Taiwan and Korea is coming

from American and Japanese subsidiaries, usually as trade with Asia in the last two decades do not show

any striking shift in shares going to or from Asia as intrafirm trade. Table 7-9 suggests that American

firms have played a relatively small and declining a whole. This suggests that while there are changes

in the NICs’ trading patterns within Asia, there is no role in the exports of the two larger NICs. Japanese

long-term movement toward greater reliance on foreign direct investment, by contrast, increased

Asian markets or the creation of an intra-Asian dramatically in the mid-1980s following the appretrading bloc centered on Japan. ciation of the yen. Total foreign direct investment in

1986 through 1988 was equal to the cumulative

This picture does not take into account the value of Japanese foreign investment from 1951

growing networks of foreign investment in the through 1985. 13
306 ● Competing Economies: America, Europe, and the Pacific Rim

Figure 7-5-Major Taiwanese Trading Partners, 1970-89

Australia

Asian NICs

Japan

Korea

Europe

Middle East

Canada

United States

Major Taiwanese Partners, 1970

(US$ billions)

, 1 1

I 1 I 1

-0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8

Imports Exports

Major Taiwanese Partners, 1985

(US$ billions)

Australia -

Asian NICs -

Japan -

Korea -

Europe -

Middle East -

Canada

United States - 1 1 I ,

-10 -5 0 5 10 15 20

Imports Exports

Australia

Asian NICs

Japan

Korea

Europe

Middle East

Canada

United States

Major Taiwanese Partners, 1980

(US$ billions)

-6 -4 -2 0 2 4 6 8

Imports Exports

Major Taiwanese Partners, 1989

(US$ billions)

Australia

Asian NICs

Japan

Korea

Europe

Middle East

Canada

United States

-20 -10 0 10 20 30

Imports Exports

NOTE: Europe includes Germany, France, United Kingdom, and the Netherlands. Asian NICs include Singapore, Malaysia, Thailand, and Hong Kong. Middle

East indudes Saudi Arabia and Kuwait.

SOURCE: Republic of China, Monthly Statistics of Imports; Council for Economic Planning and Development, Taiwan Statistical Data Book.

Data comparable to that cited for the United States east Asia. Taiwanese firms have been particularly

are not available on the trade behavior of Japanese aggressive; for example, in 1986, they made three

affiliates, but information is available on the pattern investments in Thailand with a total value of $5.8

of sales of all Japanese affiliates in the four East million and no investments in Malaysia. In 1989,

Asian NICs. Fifty-six percent of affiliates’ sales of Taiwanese firms initiated 214 investments valued at

manufactures were to the local market, 15.1 percent $871 million in Thailand and 187 investments

were to Japan, 11.2 percent were to the rest of Asia, valued at $785 million in Malaysia.14

and 9.3 percent were to the United States, with the Again, data are not available on the trade behavior remainder split between Europe and other areas.

This suggests that the primary purpose of Japanese of Korean and Taiwanese firms and their affiliates in

foreign investment in these counties is to sell in the Southeast Asia, but it is likely that some of it is

local markets. export-oriented. Overseas investment is often made

in order to circumvent quantitative restrictions on

Another complication concerns outward invest- exports, and to compensate for rising labor costs that

ment from Korea and Taiwan, particularly to South- reduces the profitability of traditional exports.
Chapter 7—The New Competitors: Industrial Strategies of Korea and Taiwan .307

Table 7-9-Shares of U.S. Majority-Owned Foreign

Affiliates in Total Exports of Manufactures, Selected

Countries, 1977 and 1983 (percentages)

Host country 1977 1983

Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 1.3

Taiwan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 3.9

Hong Kong . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1 5.6

Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18.7 17.4

SOURCE: M. Blomstrom, 1. Kravis, and R. Li~ey, “Multinational Firms’ and

Manufactured Reports from Developing Countries,” NBER

Mbrking Paper Series No. 2493, National Bureau of Economic

Research, 19SS.

THE ROLE OF GOVERNMENT

POLICY: KOREA

Korea’s industrial strategy has moved through

several stages. From the end of the Korean War to

the early 1960s, the government emphasized reconstruction. Any industrial strategy was based on

import substitution in light manufacturing industries. This effort involved extensive and frequently

corrupt government intervention through import

controls, multiple exchange rates, sale of stateowned enterprises, and influence over the allocation

of crucial U.S. aid. Nonetheless, this was a time of

rapid growth for Korean manufacturing.

Following a military coup in 1961, the government began a series of dramatic economic reforms

that emphasized export expansion. It collapsed the

multiple exchange rates into a single rate, devalued

the won, and liberalized imports for exporters. The

government provided additional subsidies through

the financial and tax systems, while guiding investment in priority import-substituting industries, in

some cases through state-owned enterprises (as in

the steel industry).

Beginningin the late 1960s and accelerating after

1973, the government emphasized the development

of heavy industry, including steel and nonferrous

metals, chemicals and petrochemicals, machinery,

automobiles, and shipbuilding. Exports were

stressed as the ultimate criterion of success in these

new industries, but greater weight was placed on

import substitution. During this phase, the government expanded its role in the allocation of resources

and in using financial, tax, and trade instruments.

The government sought to guarantee that no company dominated any product market; key industries

such as automobiles, shipbuilding, computers, and

semiconductors typically had four or five main

producers who competed intensely. The effect of

this new heavy industry push was to encourage

concentration of the industrial structure. Very large

business groups, called chaebol, had priority access

to credit and market opportunities, and gradually

came to dominate the market.

In the early 1980s, the direction of policy changed

again, due to inflation, the increased sophistication

of the economy, crises generated by declining

industries, and direct pressure from the United States

to liberalize the economy. Critical to the change was

the perception among influential technocrats that the

government’s extensive intervention in support of

heavy industrialization had been mistaken, resulting

in misallocation of resources and structural problems.

The new framework emphasized economywide

measures, with the aim of reducing the government’s role and making markets function more

effectively. Between 1980 and 1983, banks were

denationalized and targeted loans were cut back.

Tariffs and quantitative restrictions, once formidable impediments to imports, have diminished since

1984. Anew Industrial Development Law, approved

by the National Assembly at the end of 1985, focuses

on improving industrial technology and productivity

and building up Korea’s innovation capacity. However, as a World Bank report notes:

The legislation provides policymakers with a

great deal of latitude with respect to policy implementation. . . . Thus, the degree of real intervention

will be determined in pragmatic fashion as circumstances warrant.15

As this review suggests, the importance of different industrial policies has varied over time, with a

period of extensive government intervention in the

1950s, followed by liberalization and more selective

intervention in the 1960s. Government direction

increased again during the heavy industry drive in

the late 1970s. The more recent period has been one

of more substantial liberalization. A stronger sense

of these trends can be gotten by reviewing three

major areas of policy: exchange rate, trade, and

foreign investment policies; the role of the government in the provision of finance; and policies toward

technology and R&D.

Exchange Rate and Trade Policies

When comparing the export perforrnance of

Korea with that of other developing countries, there

is widespread agreement that exchange rate policy
308 ● Competing Economies: America, Europe, and the Pacific Rim

played a key role. A substantial devaluation was a

key component in the transition to export-led growth

in 1964-1965. Exchange rate policy thereafter was

realistic, until an increase in domestic inflation led

to overvaluation during the late 1970s. Following

devaluation in 1980, the government returned to a

stable, competitive exchange rate policy that pegged

the won to a weighted average of currencies. When

the dollar was rising strongly, the won depreciated

relative to the dollar, as such a formula might

suggest. After 1985, however, Korea experienced a

period of significant real depreciation of the currency, even while the dollar was falling.l6 This

change was largely responsible for the emergence of

large bilateral surpluses between Korea and the

United States in the late 1980s. Beginning in 1987,

under pressure from the United States and the

International Monetary Fund (IMF), Korea began to

boost the value of its currency, a factor in the

reversal of Korea’s trade surpluses beginning in the

second half of 1989 (by 1990, Korea had current

account and merchandise trade deficits).

Korea’s industrialization strategy has used both

export incentives and import restrictions as policy

instruments. The trade regime has been outwardlooking on the export side and restrictive on the

import side. Import restrictions have been aimed at

directing the use of scarce foreign exchange and

allowing infant industries to become internationally

competitive. Although Korea ran a balance of trade

deficit every year during the post war era up to

1986, 17 government controlled imports, giving approvals when a national interest test was met.18

Korea’s lack of raw materials and the limited

supply capacity of its domestic capital goods industries have constrained its industrial growth. Government policies emphasized export promotion in order

to provide the money for the imports of raw

materials and capital goods needed for faster growth.

Further, the government’s import restrictions favored domestic industries that could convert imports

into exports, so as to permit still more imports of

industrial inputs. Consumer goods were targeted for

import controls and high tariffs. This allowed

producers to charge higher prices on the domestic

market and thereby absorb thinner export profit

margins. This constituted an implicit consumption

tax to promote exports, and accounts for periodic

charges of dumping against Korean firms. In short,

up to the balance of payments surpluses in 1986,

Korea exported in order to import, and vice versa.

Exports were a way to use unskilled labor in

sophisticated industries.19

How protected has the Korean economy been?

The economy received substantial protection over

the 1960s, 1970s, and early 1980s, with protection

falling markedly since then. Estimates of protection

are subject to many errors, and the fact that different

studies use different operational measures makes for

difficulties in comparing results. The few studies

available for Korea yield a sizable range of answers

even for the same year. Moreover, the Korean trade

system is complex; trade has been restricted in part

through administrative and regulatory provisions

that are neither transparent nor easily measured.

Studies suggest that patterns of protection followed the broad contours of industrial policy.20 In

1968, the rate of effective protection for the economy as a whole was in the range of 9 to 21 percent,

with the low estimate resulting from procedures that

may bias the result downwards.21 Transport, consumer durables, and machinery industries received

rates of over 50 percent. Effective protection increased during the heavy industry drive of the 1970s,

to the range of 24 to 34 percent by 1978. For

manufacturing alone, one estimate gives an average

of 49 percent.22 Petrochemicals, steel, machinery,

and shipbuilding received above average protection.

Effective protection increased through 1982. One

estimate gives a rate of 38 percent,23 another study

by the Asian Development Bank shows an overall

tariff average of 33 percent for “the early 1980s.”24

Although studies of effective protection rates are

unavailable for the period since 1982, the liberalizing trend can be discerned in the ratio of import

items that are classed as “automatically approved”

(AA), as distinct from “restricted” or “prohibited.”

In 1981,75 percent of items were classtified as AA,

accounting for 65 percent of imports by value. By

1984,85 percent of items, accounting for 72 percent

of imports by value, were so classified. By 1986, the

ratio had increased to 92 percent of items; the

proportion by value probably exceeds 80 percent.

The liberalization of quantitative restrictions in

the 1980s accompanied a phased reduction in legal

tariffs, to an average of 20 percent for manufactured

goods and 29 percent for agricultural goods (on an

items basis) by 1986. By 1989, the average (nontradeweighted) tariff rate came down to 13 percent, and

was projected to fall further, to about 8 percent by

1993, comparable to average tariffs in Europe and
Chapter 7—The New Competitors: Industrial Strategies of Korea and Taiwan ● 309

the United States.25 Tariffs remain high on many

kinds of agricultural produce.

It is difficult to draw conclusions about import

liberalization. For example, until recently classification of an import as AA was a necessary but

incomplete condition for unimpeded importation.

The government could impose short-term penalty

tariffs if items on the AA list were judged to harm

important domestic industries. This system was

dismantled only in the last 2 years. A recent World

Bank report estimated that in 1986 as many as 25

percent of the AA import items were “potentially

covered by one special law or another’ that allowed

ministries to regulate imports.26 The report goes on

to say that: “It is not known, of course, to what

extent these administrative procedures lowered imports, e.g., when the relevant industry association or

other body denied the importation of a commodity

on the AA list. ’ ’27 On the other hand, the fact that an

item is classified as “restricted” does not mean that

it will be difficult to import.

Historically, the government has controlled foreign exchange in Korea. Earners of foreign exchange

have been required to transfer it to one of several

designated agencies, which in turn transfer it to the

central bank. Private companies or citizens may

retain only a small amount. The government formulates an annual Foreign Exchange Demand and

Supply Plan. Little is known about how the plan is

compiled or how conflicting demands on foreign

exchange are reconciled. It is clear, though, that the

Plan has binding force. Data on projected and actual

foreign exchange spending show a close correlation

year after year. Banks must limit the issue of foreign

exchange for any import, even an AA import, when

foreign exchange use runs beyond the limits of the

Plan.28 In effect, then, there have been two distinct

hurdles in the import process: one to get the import

license, the other to get the necessary foreign

exchange. Despite a substantial import liberalization, scheduled to allow domestic industries time to

adjust, a variety of administrative procedures still

grant room for Korean officials to restrict imports.

Although until recently Korea had a relatively

protectionist trade regime, several features differentiated it from the protective trade regimes of other

developing countries. First, it was coupled with a

realistic exchange rate policy so that biases in trade

policy were not compounded by overvaluation.

Then, protection was subordinate to a wider industrial strategy aimed at assisting protected industries

to become internationally competitive.

Protection against selected imports dovetails with

offsetting incentives for export sale. A crucial

component of the transition to export-led growth in

the mid-1960s was that all imports used as inputs

into exports would be exempt from quantitative

import restrictions. Raw material imports used for

exports were also exempt from tariffs.29 Capital

goods used for export production were exempt from

tariffs until the early 1970s. These became subject to

tariffs as the government sought to deepen (diversify) the industrial structure into these products.

Exports have also been exempt from indirect taxes

such as harbor charges.

Duty free import of inputs for use in exports was

available to ‘indirect exporters,’ domestically based

suppliers that provided intermediate inputs to export

producers or finished goods to a trading company

that then exported them. Additional incentives came

through import-export links, by means of which

permission to import (and therefore the ability to

reap high profits on the protected domestic market),

was given to those with good export performance.

The import of some very popular products was

linked to export performance in closely related

fields. Import rights for TV receivers, for example,

were granted only to exporters of radios and

electronic equipment. This not only gave a direct

incentive to producers of electronic equipment to

export, it also allowed them to protect their domestic

market share by pricing imported items in a way that

did not threaten their own production.30

Free-trade export-processing zones were key in

attracting export-oriented foreign direct investment

(FDI). The first free trade zone opened in 1971, with

another eight added by 1985. But the zones have

accounted for only around 10 percent of total FDI.

They have probably been less important than the 218

“bonded’ manufacturing plants (as of 1981), which

can import without paying any duty but must export

all their production.

Import liberalization for exporters conforms roughly

to the market-oriented picture of Korea’s growth.

Other measures do not. Korea began giving concessional credit to exporters in the 1950s, enhancing the

degree of concession and the ease of access to the

credit after the transition to an export-oriented

strategy in the mid- 1960s. Through the 1970s,

automatic access to short-term export financing was
310 ● Competing Economies: America, Europe, and the Pacific Rim

available to exporters at 6 to 12 percentage points

below the commercial bank loan rate, constituting a

large subsidy .31 Such loans ended in 1980. Mediumand long-term loans for investment in export production were also automatically available at concessional rates until 1980. Postshipment financing,

export credit insurance, and export finance guarantees still exist.

The early incentives to export did not involve

industrial targeting; companies profited from the

incentives regardless of the product they exported.

Export incentives became more targeted in the late

1970s with the heavy and chemical industry drive.

Until 1973, tax incentives included a 50-percent

reduction on business income tax on profits derived

from exports. Subsequently, special depreciation

allowances for capital equipment used in export

production have been used instead. Various studies

report that these direct export incentives have been

reduced since the early 1970s, especially during the

1980s. In the early 1970s, the effective subsidy rate

for exports averaged about 20 percent of the value of

exports. It fell to about half that level by the end of

the 1970s, and has declined further since.32

Overseas information and marketing services

have helped expand Korean exports. Since 1962,

the Korea Trade Promotion Corp. (KOTRA) has

served as a nonprofit trade promotion arm of the

Korean Government.33 It was formed after careful

study of JETRO, its Japanese counterpart, which

provides much technical assistance in the early

years. KOTRA maintains 77 offices around the

world that provide information about Korean exporters and importers, the items they buy and sell, and

the services they need and provide in foreign

investment and construction work. It also arranges

trade fairs and is a point of first call for foreign

buyers. About 70 percent of its budget comes from

government grants. Another organization with overlapping functions is the Korea Traders Association

(KTA), a nonprofit private organization that includes all licensed exporters and importers as its

members. There are also 30 or more industry-based

exporters’ associations.

To complement the work of KOTRA, the government launched a scheme to build up Korean general

trading companies along the lines of their Japanese

counterparts. Beginning in the early 1970s, those

trading companies that met the stringent performance and size criteria for “general trading companies” received special privileges in terms of access

to credit, retention of foreign exchange, and other

assistance. They held the same leadership role on the

trade side as the big conglomerates (chaebol) held in

the heavy industry drive of the 1970s. By 1982, the

10 licensed general trading companies accounted for

almost half of Korea’s exports.34

From the mid-1960s onwards, the government

elevated the export drive to the nation’s number two

priority, second only to national defense.

Led by the president, and supported by the top

economic ministers and the heads of the biggest

firms, much of the country was wrapped in the fervor

and enthusiasm surrounding the drive to develop

through trade.35

The priority of exports was determined through a

system of export targets and high-level export

meetings. These helped to unify the array of export

incentives and catalyze the reciprocal relationship

between government and business. From 1965 on,

upwards of 100 senior political leaders, bureaucrats,

and business people met each month to discuss the

export drive. The meetings were chaired by the

President himself as a symbol of the government’s

commitment to exporting.

In addition, prizes were awarded once a year on

Export Day. The prizes conveyed not just prestige,

but also economic rewards, such as easier bank

credit for nonexport projects.36 In 1980, Export Day

was renamed Trade Day, and prizes awarded for

good performance in both exporting and importing.37

Development Financing and Foreign

Direct Investment

Financial policy was an important component of

export-promotion efforts. The Korean Government

has used its control over the financial system for

broader industrial policy purposes, however, discouraging business speculation and encouraging

investment in ‘‘strategic” industries.38

Until the early 1980s, the government owned the

commercial banks. The Ministry of Finance controlled the total supply of funds and interest rates

through its agent, the central bank. The commercial

banks allocated private funds under the guidance of

the Ministry of Finance. The Minister of Finance,

and sometimes even the President himself, appointed the chairman of each bank. Interest rates
Chapter 7—The New Competitors: Industrial Strategies of Korea and Taiwan ● 311

were low for priority uses, including investment in

government-designated industries and export finance. Subsidized loans, called “policy loans,”

constituted about half of total bank loans over the

1970s and carried nominal interest rates of around 10

to 15 percent; given inflation, real interest rates were

close to or less than zero. Ordinary bank loans, on the

other hand, carried nominal rates of 18 to 22 percent.

These rates for ordinary loans were much less than

rates on the unregulated and semi-legal curb market,

which typically ranged from 30 to 40 percent a year

or even higher. Estimates of the size of the curb

market vary widely, from 10 to 40 percent of the

financial sector.39 Since denationalization, the volume of confessional lending has been greatly

reduced, but remains important for a narrower set of

strategic industries, including segments of electronics and computers.

Firms depended heavily on bank loans for their

investments. Corporate debt/equity ratios over the

1970s were on the order of 310 to 380 percent, as

compared to 50 to 90 percent in the United States

and the United Kingdom.40 This gave the government substantial leverage over individual companies. Not only could the government tempt them to

enter priority fields by offering low cost or easily

available credit; it could also cut off credit. This

threat was serious, given the cost of alternative curb

market credit and firms’ inability to borrow internationally without government approval.

The government’s direct influence over bank

portfolios declined with the denationalization of the

banks in the 1980s. The government maintains a role

in financing its industrial policy objectives, however, through the Korea Development Bank and

other schemes. The Korean Technology Advancement Corp. has served as a source of investment

capital for the development of new products and

processes generated by the Korean Advanced Institute of Science and Technology and other government research labs. The government also provides

venture capital through the Korean Technology

Development Corp., which makes funds available to

the private sector for investment in specific R&D,

technology acquisition, and other precommercial

investment projects.

With domestic savings covering only 70 to 90

percent of domestic investment, Korea has depended

on sizable inflows of foreign capital. This has taken

the form of foreign borrowing, while foreign direct

investment (FDI) has been kept low. As a proportion

of total foreign loans and investment, total FDI flows

amounted to only 3.2 percent in 1980. FDI flows

have also been low as a proportion of gross fixed

investment, lower than in Taiwan and much lower

than in Indonesia, Malaysia, Singapore, the Philippines, and Thailand.41 This reliance on foreign

capital provided the government with an important

tool Of industrial policy.

In 1983, however, the government revised the

Foreign Capital Inducement Law to attract more

FDI. 42 It anticipated that more FDI would bring

more foreign technology. The new law is designed

to reduce the number of restrictions on foreign

investment, to accelerate the approval process, and

to strengthen patent and copyright laws. Following

these changes, the share of FDI in total capital

inflows rose to 13.8 percent by 1988.43 Meanwhile,

the need for foreign borrowing declined as Korea

moved from being a capital importing country to a

capital exporter.

Technology Policies

Korea’s technology policies fall into two stages of

development. The frost stage covers the period from

the mid-1960s to about 1980; the second stage

covers the 1980s. The primary thrust of the frost

stage was to obtain foreign technology and to master

its use, while the secondary thrust was to develop

Korea’s own R&D capacity. In the second stage, the

priorities were reversed.

The Korean Government paid careful attention to

the way foreign technology was obtained. It discouraged FDI while encouraging licensing both as a

more effective means of transfer and as involving

less dilution of national control of production. The

government screened licenses. It established advisory committees with representatives from industry,

universities, and state laboratories, and it bargained

with technology suppliers as a sole buyer, obtaining

better deals than the firms could have negotiating on

their own.

Almost 80 percent of licensing agreements are

with Japanese or American firms. From 1962 to

1985, Japan was the source of 55 percent of the

agreements, the United States, 23 percent. But the

United States received a much larger share of total

royalty payments, 42 percent against Japan’s 30

percent, reflecting Korea’s purchase of more sophis-
312 . Competing Economies: America, Europe, and the Pacific Rim

ticated and larger scale technology from the United

States.44

Licensing agreements and FDI became more

important in the 1980s as the government liberalized

both. Efforts were made to tighten intellectual

property protection, largely in response to persistent

external pressure. The laws on patents and copyrights were comprehensively revised in 1987, and

Korea has signed most international intellectual

property rights treaties in recent years. This effort to

liberalize transfers and tighten protection probably

contributed to the increase in licensing agreements

from 1982 to 1985. Most U.S. Government and

business concerns with the laws themselves have

been resolved, and the emphasis is now on enforcement, which many U.S. companies, especially in

pharmaceuticals, claim is lax.45

During the first phase of technology policy, the

development of Korea’s own R&D capacity was a

secondary goal. Nonetheless, early on the government began a long-term effort to increase Korea’s

R&D capacity. In 1966, the government created a

major public industrial R&D laboratory, the Korea

Institute for Science and Technology (KIST), followed by the Ministry of Science and Technology

(MOST) in 1967.

As Korea moved closer to the technological

frontier, it reversed earlier priorities by emphasizing

the generation of new technological capabilities. In

this second stage of technology policy, begun in the

1980s, the government intensified efforts to build a

“national innovation system. ” A much higher

proportion of R&D was carried out in private firms

or consortia; government research organizations

focused on generic technologies and/or on providing

a bridge between university research labs and

businesses. Previous restrictions governing technology transfer from abroad, such as limits on royalties,

were liberalized.

Korea’s centralized system for planning and

implementing R&D policies is similar to those of

Japan, Taiwan, France, and Germany, as opposed to

the United States and the United Kingdom. The

centralized system permits a clear-cut and long-term

strategy for the development and commercialization

of specific technologies and products. The system is

dominated by MOST, which orchestrates a series of

planning exercises with participation from other

ministries and representatives of industries and

research institutions. Science and technology plans

are drawn up annually, with 5-year plans as well. In

1969 and 1986, 15-year plans attempted to determine key technologies over the long term and

identify the potential for strengthening Korea’s

capability in them. The 1986 plan, published under

the title “The Long Term Technology Forecast for

the Year 2000,” resulted from 2 years of discussion

among some 500 experts in 8 subgroups.46

An important component of the institutional

arrangements governing technology are nine government research institutes covering, among other

fields, basic science, electronics, energy, and machinery (table 7-10). Over the 1980s, as private

companies began to establish their own R&D labs,

the national labs moved away from applied research

and commercialization toward more basic technologies, often in collaboration with private firms.

The year 1980 marked the beginning of National

Technology Promotion Conferences, held quarterly

and presided over by the President. The conference

brings together cabinet ministers, officials, representatives of industry, and members of research institutes, perhaps 250 in all.47 This discussion forum

represents a continuation of the approach applied

earlier to exports through the Export Promotion

Meetings, which were replaced by the National

Technology Promotion Conference, indicating a

shift in policy emphasis.48

Based on information and opinion expressed

through these networks and fora, the “Year 2000”

study set 25 activities as priority areas, within which

projects should be chosen by government and

business. Some of the 25 were leading sectors, while

others were selected because they support the

growth of leading sectors. The frost set includes

computers, software, semiconductors, telecommunications, bioengineering, and fine chemistry; the

second set includes design engineering, spare parts

and materials, machine automation, and standards

and measurements.

To implement such plans, the government has

used a variety of policies, including manpower

development, financial and tax incentives, and

technology transfer. The government has sponsored

a huge expansion of science and engineering places

in schools and colleges. Enrollments in third-level

engineering and science courses increased from

303,202 in 1980 to 494,925 in 1986, or 1.6 times.49

Several hundred students in public research institutes, mainly in the Korean Advanced Institute of
Chapter 7—The New Competitors: Industrial Strategies of Korea and Taiwan ● 313

Table 7-10-Korea: Major Government Research Institutes in 1985n

Expenditure

Name Research fields ($millions) Staff

Korea Advanced Institute of Science & Multidisciplinary $102 1,628

Technology (KAIST)

Electronics and Telecommunications Semiconductors computers, $40 1,210

Research Institute (ETRI) telecommunications

Korea Advanced Energy Research Atomic energy $31 934

Institute (KAERI)

Korea Institute of Machinery and Machinery, metals, shipbuilding $21 745

Metals (KIMM)

aMilitary labs are excluded.

NOTE: In 1968, KAIST had 1,429 people, of whom 293 had Ph.D.s and 636 had MA.s; KETRI had 1,258 people, of

whom 47 had Ph.D.s and 840 had M.A.s.

SOURCE: Ministry of Science and Technology, Introduction to Science and Technology, Repub/ic of Korea (Seoul:

Ministry of Science and Technology, 1966); Yong-chan Park, ‘The National System of Innovation in Korea,

With an Introduction to the Semiconductor Industry” (University of Sussex, MSC thesis, 1987).

Science and Technology, have scholarships provided by private companies. These students normally move to the R&D laboratories of their

sponsoring firms on graduation, providing the basis

for continuing dialogue between researchers of

private firms and the public institutions.

The government also sponsors an overseas study

program, mostly for post-doctoral students. Between

1981 and 1985, 2,222 scientists and engineers were

dispatched to the United States, Japan, and Europe

for further study or work experience; the rate of

dispatches scheduled to increase.50Another program

creates a network among Korean scientists and

engineers working abroad. Until recently the phenomenon of foreign-educated Koreans remaining

abroad was seen as a “brain drain, ” with negative

consequences for Korea’s development. Now it is

seen as constituting a “brain bank” of high-level

human capital. Korean companies and government

research organizations can target individuals with

needed skills, either inducing them to return to

Korea or leaving them in situ to do work of interest

to those companies or organizations.

.

Further, the government has undertaken more

targeted financial policy actions, providing direct

support for R&D in the fields of electronics,

mechanical engineering, chemistry, energy, and

bioengineering. In 1986, 660 projects received direct

support amounting to $56 million, with another $21

million in cofinancing from private fins. Several

earmarked funds make loans for electronics, machinery, and textiles to support R&D investments

totalling $100 million between 1981 and 1985.

More important is the “policy” loan window, or

subsidized credit facility, of the commercial banks,

described earlier. The Korea Industrial Bank and the

Korean Bank for Small and Medium Enterprises

channel money specifically for start-ups and for

investment in R&D facilities, $130 million in 1985.

Another mechanism is venture capital. By 1986, the

government had sponsored four venture capital

fins, with public or mixed public/private ownership.51

Through the 1970s and more intensively since the

tax reform of 1981, the government has used tax

credits and deductions to stimulate R&D. Some of

the more important include:52

1.

2.

3.

Tax deductions for technology development

and manpower development; 10 percent of

cost can be deducted from income tax.

Funds earmarked for R&D can be set aside in

a reserve and deducted from taxable income,

up to 1 percent of turnover or 20 percent of

income. In high-technology industries, these

ceilings are 1.5 percent of turnover or 30

percent of income.

Tax deduction or accelerated depreciation on

investment cost of commercialization, either

6 percent of investment cost or 50 percent

depreciation in frost year; or for locally made

equipment, 10 percent of investment cost.

R&D expenditures increased rapidly, at an average annual rate of over 40 percent between 1980 and

1985 (in current won), rising from 0.58 percent of

gross national product (GNP) in 1980 to 1.59 percent

in 1985. A quarter of the total went to electronics in

1985. Two-thirds was spent by private industry,

292-889 0 - 91 - 11 QL:3
314 ● Competing Economies: America, Europe, and the Pacific Rim

one-quarter by government research institutes, and

the remainder by universities.53 The number of

researchers also increased from 4.8 full-time equivalents per 10,000 population in 1980 to 9.1 in 1984.

Again, a quarter of the total worked in electronics.

The build-up of private R&D has taken the form

of business-level R&D labs and research associations among companies. The number of private

R&D institutes rose from 37 in 1980 to 183 in 1985,

nearly a fivefold increase. Of the private institutes,

27 percent were in electronics and 21 percent in

machinery. The 183 institutes employed a total of

9,226 staff, of which 3,864 were in electronics. Their

combined R&D expenditure came to $658 million in

1985. Four private “super institutes” spent more

than $40 million each.54 Following the Japanese

model, the government also sponsored research

associations among private firms. In 1985, 23 such

associations were in operation, involving 286 firms.

Seventy percent of the associations were in electronics alone. Most of the associations comprised a few

large firms and many small and medium-sized

firms. 55

The government has also looked at the restructuring of industries in which Korea has acquired a

leading international position but which now face

decline. In textiles and clothing, a leading export

industry, the government is helping to improve

production technologies and assisting firms to move

upmarket by emphasizing product design and quality. The Textile Modernization Fund, established in

1981 to provide loans for modernizing textile

factories, had, by mid-1985, capital of approximately $30 million. The government has also

supported R&D in textiles through the Korea

Advanced Institute for Science and Technology

(KANT), contributions to the Korea Federation of

Textile Industries (KOFOTI), and tax exemptions

for companies.56

Case Study: Automobiles

A greater sense of the interplay between government policy and industrial development is apparent

through the detailed study of two industries: automobiles and semiconductors. The automobile industry is a highly concentrated, oligopolistic industry

dominated by a handful of globally integrated firms.

The industry is both capital- and technology-intensive, with important scale economies.

Figure 7-6-Korean Automobile Production

Number of vehicles (thousands)

1,200

1,000 -

800 -

600 -

400 -

200 -~

1 1 1 I 1

l978 79 80 81 82 83 84 85 86 87 88 89

Year

— Productio n

— Export s

* Domestic sales

SOURCE: Automotive News Market Data Book (Detroit, Ml: Automotive News, 1990).

The Korean automobile industry consists of 6

vehicle manufacturers and about 600 parts and

components manufacturers. In 1988, it produced 1.1

million units, of which 577,000 (52 percent) were

exported. 57 The automobile industry illustrates the

successful use of joint ventures and licensing

agreements with foreign corporations to produce for

international markets, while building on such arrangements to produce an increasingly indigenous

product. This process was assisted by government

policy, which designated the industry as a “strategic

export industry” and provided assistance, including

export incentives, access to credit facilities, and

protection of the domestic market.

However, the Korean auto industry still faces

difficulties. Labor demands have increased costs,

and provisional figures indicate that only 31 percent

of the 1.13 million autos produced in 1989 were

exported58 (See figure 7-6). Some of this 40-percent

decline from the previous year was due to sluggish

American demand, and was offset by surging

domestic demand and government prohibition of

Japanese imports.59 There are also structural problems, such as continuing dependence on foreign

technology, the likely focus of future policy initiatives toward the industry.

In 1962, a public enterprise established the first

Korean auto assembly plant in cooperation with

Nissan. When the plant went into production, the

government instituted tight import controls on

finished vehicles, duty-free import of components,

and tax exemptions for the producer. In 1965, the

government transferred the assembler to a private
Chapter 7—The New Competitors: Industrial Strategies of Korea and Taiwan ● 315

firm and approved a new technology agreement with

Toyota. The government set a target of 50 percent

domestic content in 5 years, rigorously enforced

through control of access to foreign exchange. With

heavy protection plus domestic content requirements in place, and with domestic components

production growing fast, three more private firms

were allowed to enter between 1965 and 1969 to

fight for a market of less than 20,000 units a year.

The Heavy and Chemical Industry Plan of 1973

identified autos as a priority industry. In 1974, an

industry-specific plan for automobiles was published covering the next 10 years. The objectives

were to achieve a 90 percent domestic content for

small passenger cars by the end of the 1970s and to

turn the industry into a major exporter by the early

1980s. 60 The government stipulated the three primary producers, all chaebol, the minimum size of

each producer, and the maximum size of car engines.

It also required approval of all plans and precluded

companies from changing their model within a set

time.

Later requirements had the three producers set

export targets for different markets, frost in Southeast Asia, then Latin America and the Middle East,

peripheral Europe, Canada, and finally the United

States. Companies were encouraged to set the export

prices low, receiving various forms of compensation. The Hyundai Pony cost $3,700 to produce in

1979, sold domestically for $5,000, and sold abroad

(free on board) at $2,200.61 Firms received heavy

export subsidies, particularly through access to

credit, and were allowed to import a limited number

of top-of-the-range models in kit form for lucrative

domestic elite sale. The number of these imports was

tied to export performance. Under these circumstances, the Korean producers invested heavily in

anticipation of the export drive.62

In 1974, the government launched a complementary promotion plan for the parts and components

industry. The plan required the three primary producers to meet a domestic content schedule and

cooperate in the production of standardized parts and

components. It further empowered the Ministry of

Trade and Industry to select certain items and their

assigned producers for special promotion, with a

complete import ban once the item met the government’s price and quality standards.

In 1980, following the second oil crisis and the

rapid deterioration of domestic and world economic

conditions, Chun Doo Hwan’s government undertook a comprehensive rationalization of heavy and

chemical industry sectors, including autos. The new

regime decided that there was to be only one main

auto producer, forcing one of the three ‘‘majors’ to

leave the business, a decision not reversed until

1984, It informed the other two that their rivalry in

cars and power equipment was counterproductive,

and asked them to concentrate on one line of

business each. The Hyundai group got cars. The

government reduced the automobile excise tax to

stimulate domestic demand, halved the export targets, and greatly increased the volume of concessional credit. The investment drive resumed in 1982

as the economy recovered, with Hyundai Motor’s

debt to equity ratio soaring to 5:1. By 1986, the

Hyundai Excel had become the best-selling new car

import in U.S. history, following its earlier success

in Canada. In 1988, Hyundai produced 650,000 cars,

of which 63 percent were exported.

In 1987, Kia and Daewoo were allowed to reenter

the passenger car business.63 They will soon be

joined by Ssang Yong Motors, a subsidiary of the

Ssangyong chaebol. 64 Unlike Hyundai, which sells

under its own name, Kia and Daewoo both sell their

autos through foreign companies: Kia makes the

Festiva for Ford Motors, and Daewoo the Lemans

model for Pontiac. Similarly, Ssang Yong plans to

transfer its present expertise in truck and jeep

assembly to auto exports through a tie-up with

Volvo. 65

The automobile industry illustrates the range and

multiplicity of arrangements between Korean and

foreign producers. Hyundai is 10-percent owned by

Mitsubishi and remains dependent on the Japanese

company for its engines and designs. Its first export

success, the Pony, was planned in Italy by a former

designer for British Leyland. The Excel is a nearclone of the Mitsubishi Mirage, with Mitsubishimade engine and transmission. Daewoo is in a 50-50

joint venture with General Motors to make a

‘‘world-class’ subcompact car. Kia Motors, after a

period of assembling Fiats and Peugeots in the late

1970s, has turned to Mazda of Japan for technical

guidance and through Mazda (which is 24-percent

Ford-owned) to Ford Motors for overseas sales

networks and brand recognition. Mazda has a

minority equity stake in Kia, and has supplied Kia

with designs for two mid-sized cars. However,

Mazda has grown reluctant to transfer key compo-
316 ● Competing Economies: America, Europe, and the Pacific Rim

nent designs or grant the right to sell in Europe to its

own future competitor.66

Korean automakers are reaching the limits of

these partnerships. Foreign automakers are more

reluctant to part with proprietary technology simply

for a fee, and, for their part, hope to gain entry to the

Korean market through their local partners. Consequently, the Koreans are turning to in-house R&D

with the goal of bringing a wholly Korean-made car

to market within the next few years. The Ministry of

Trade and Industry estimates auto industry investment for 1990 alone to exceed $1.7 billion. Hyundai

has announced plans to invest over $2.5 billion

through 1992.67 Because government plans call for

doubling plant capacity by 1995,& however, the

percentage of new investment funds going toward

R&D is not clear. Kia is planning to market a

sub-compact model for 1992 with an engine designed in-house. Hyundai has similar plans, but has

conceded that its engine designs cannot match the

performance of the Mitsubishi engines. Government

policy towards auto production should therefore

reduce the development costs of new, indigenous

products through publicly funded or collaborative

research programs and continued concessional credit.

Socializing the cost of investment will not spare

Korea’s automakers from labor demands. Following

the announcement of a liberalization of politics in

1987, Korea’s auto exporters have experienced

production slow-downs and higher wage settlements. Relatively smooth labor relations at Kia

show in productivity statistics: its employees produced 17.4 automobiles per person in 1989, a steady

growth from 13.1 per person in 1983. But while

Hyundai’s productivity reached a peak of 21.8 units

per person in 1987, the number fell to 19.8 in 1988

and 16.7 in 1989. Daewoo marked the lowest

productivity with 10.0 units per person in 1989.69

Ssang Yong has avoided most of these difficulties by

offering competitive wage settlements (a 20-percent

increase in 1988) and by being located away from

the others’ labor disputes. 70 Those disputes resulted

in industry average wage increases of 21.8 percent in

1988 and 23.3 percent in 1989. Increases in 1990 are

more moderate: 10 percent for Hyundai, 7 percent

for Daewoo, and 7.3 percent for Kia.71 Government

plans to foster improved labor-management relations may include avoiding discussion above the

company level, while resisting any attempts at

cross-company organization.

Despite the booming domestic demand for autos,

the Korean auto market is still highly protected. In

response to intense U.S. pressure for general trade

liberalization, the government announced an auto

liberalization schedule in 1985, which permitted

small car imports to begin in 1988 for the first time

in over 25 years, but with a duty of 200 percent, to

be lowered to 100 percent after 2 years. Japanese

compact models remain the most heavily restricted.

Imports of cars above 2,000 cc were liberalized in

mid-1987, but by year end only 44 had been

imported. In 1988, 396 foreign cars were imported,

and 501 were sold in the first half of 1989.72 These

figures differ sharply from those of Taiwan, where

automobile imports account for nearly 40 percent of

domestic sales in a market less than half the size of

Korea’s. Korean dealers claim that bureaucratic

delays and tariffs are not the primary deterrent to

increased imports. Instead, they blame the National

Tax Administration, whose investigations of foreign

car buyers’ finances have heightened social pressure

not to flaunt wealth.73 In any case, the government’s

ability to restrict imports despite the trend toward

liberalization is obvious.

The government’s ability to limit entry of new

producers at home, and thereby protect economies of

scale, is a key reason for the success of the Korean

automobile industry in world export markets. This

was a crucial component of the 1974 auto plan, and

even when some opening of the market occurred in

the 1980s, there was an effort to limit the number of

entrants. Because companies in Korea must seek

government approval for technology imports from

foreign companies, they can be easily barred from

technology-intensive sectors like automobile manufacture. 74 Samsung has tried to line up with Chrysler,

but the government refused to allow Samsung to

start an export-oriented car plant. More recently, the

Ministry of Trade and Industry rejected a plan by

Samsung to join with Nissan Diesel to produce large

trucks, a possible prelude to Samsung’s expansion

into auto exports.

75 The Taiwanese Government was

much less successful in restricting entry, and partly

as a result the industry remains undeveloped there.

Case Study: Semiconductors

While Korea’s electronics production is geared

largely to exports, the domestic market also has

expanded as per capita incomes have risen. In 1988,

approximately 60 percent of electronics production

was exported, 40 percent sold domestically.76
Chapter 7—The New Competitors: Industrial Strategies of Korea and Taiwan .317

Growth accompanied a shift toward production and

export of more sophisticated industrial electronics,

with a declining share of output in consumer

electronics.

Semiconductors are an important input to consumer and industrial electronics products; an indigenous technological capability is crucial in the ability

to compete in linked industries such as computers

and telecommunications. Semiconductor production

or “fabrication” is capital-intensive, and some

market segments also have large economies of scale.

This is especially true in memory chips. Ability to

innovate in the fabrication of chips at the rapidly

moving technological frontier demands a high level

of technological competence and large R&D expenditures. Production of more specialized custom

or semi-customized chips demands ongoing design

capabilities. Until recently, only firms in the United

States, Japan, and Europe have had these capabilities.

Government policy toward the semiconductor

industry in Korea moved through three main stages.77

In the late 1960s, government policy encouraged

foreign direct investment in semiconductors and

standardized consumer electronics, despite an otherwise restrictive posture toward foreign direct investment. In the 1970s, the government attempted to

lead the development of an indigenous semiconductor industry. This effort, not altogether successful,

resulted in the establishment of an infrastructural

base that would help Korea acquire its own R&D

capabilities. But business interest was slight; the

industry did not move much beyond the assembly

stage.

In the 1980s, a number of the largest Korean firms

became interested in acquiring semiconductor capabilities, particularly in the production of dynamic

random access memories (DRAMs), the staple

commodity of the semiconductor industry. At this

point, government policy shifted to support the

initiatives of these large national champions.

In the mid-1960s, the government encouraged

foreign direct investment in semiconductors, mostly

from U.S. companies such as Fairchild and Motorola. The aim was to increase Korea’s exports rather

than gain technology for Korean fins; there were no

explicit government plans to develop the semiconductor industry. Some technology diffusion occurred, and two Korean firms subcontracted assembly of semiconductors. But the potential for technology transfer was limited because foreign firms

located only labor-intensive assembly in Korea;

moreover, there was little domestic demand for

semiconductors.

In 1969, the government promulgated an Electronic Industry Promotion Law, designating the

industry as a strategic export industry eligible for

supports and incentives.78 An ‘Eight Year Electronics Industry Development Plan” identified three

main policy actions to achieve the goal of an

indigenous semiconductor capability. The first was

to create mission-oriented research institutes, both

public and private. The second was to expand

advanced training capacity in electronics. The third

was to encourage technology imports via licensing

and consultants, to guarantee greater technology

transfer than had occurred through foreign direct

investment.

With the launch of the Heavy and Chemical

Industry drive (which included the electronics sector), the new public Korea Institute of Electronics

Technology (KIET) became the vanguard of these

efforts.79 Established in 1976, its charter gave it

responsibility for planning and coordinating semiconductor R&D; importing, assimilating, and disseminating foreign technologies; providing technical assistance to Korean fins; and undertaking

market research. KIET consulted closely with private fins. Three working groups--covering equipment, the work program, and the training program—

each included representatives from industry, the

government, and KIET.

Each of KIET’s three divisions-semiconductor

design, processes, and systems—were headed by a

Korean with academic training and industry experience in the United States. In addition, a project

development division kept abreast of marketing

opportunities and foreign technologies. Monitoring

foreign technologies was also central to the work of

KIET’s liaison office in California’s Silicon Wiley.

Established in 1978, the liaison office helped KIET

obtain equipment and technology licenses, build

contacts with U.S. semiconductor firms, and create

a network among Korean researchers working in

U.S. semiconductor companies. Through the network, KIET was able to help Korean firms identify

particular individuals with skills or access, and

either enlist their help while remaining in situ or

repatriate them to work in Korea. KIET mounted

training programs for Korean companies and admin-
318 ● Competing Economies: America, Europe, and the Pacific Rim

istered a program to send Korean engineers and

scientists abroad for experience in research institutes

or companies. KIET took part in all technology

transfer negotiations between Korean and foreign

firms; in these negotiations, its Silicon Valley

outpost and its project development division were

especially important.

KIET opened Korea’s first pilot wafer fabrication

facility in a 1978 joint venture with a leading U.S.

semiconductor firm, VLSI Technology. A year later

it began building Korea’s first full-scale commercial

wafer fabrication facility to produce 16K DRAMs.

But most of the semiconductor industry in Korea

was still concentrated at the assembly, packaging

and testing stages, with little development of the

more demanding segments of the industry. The few

local firms that established fabrication facilities

were dedicated to semiconductors at the commodity

end of the market, mainly for use in consumer

electronics. These companies were too small to

undertake the huge investments needed to make

standardized large-capacity chips, and lacked the

design capability to produce customized chips.

Meanwhile, however, Korea’s largest consumer

electronics firms became interested in advanced

semiconductor production because of their big

in-house demand for semiconductors and a sense of

vulnerability to manipulation by foreign semiconductor suppliers, particularly the Japanese. Between

1980 and 1990, five companies achieved the capability to fabricate state-of-the-art semiconductor

devices, and three--samsung Electronics, Hyundai

Electronic Industries, and Goldstar Electron-were

involved in DRAM production. All three had links

to large groups with substantial financial power, and

were the national champions in the more sophisticated segments of the semiconductor industry in the

1980s.

The question was how to overcome the massive

entry barriers to the more technology intensive

segments of the market. The 1981 Basic Plan for

Promotion of the Electronics Industry covered the

period 1982-1986; in 1983, the Ministry of Commerce and Industry issued a report calling for

accelerated development of semiconductors.80 Despite the general move away from targeted policies,

this plan included a wide range of fiscal and

financial investment incentives for the main semiconductor firms.81 The plan established an Electronics Support Fund, financed by public and private

sector contributions to lend at preferential rates to

firms engaged in priority activities. One of these was

the establishment of R&D subsidiaries abroad.

Infant-industry protection was also used. In 1984,

the import of 185 electrical and electronics products

was restricted, accounting for 37 percent of all

electronic product categories. While direct financial

subsidies and import protection were phased out

over the decades, these measures still lowered the

cost of entry into an extremely risky field.

The government also sought to restructure the

industry using government procurement. A goal of

the plan was to integrate upstream and downstream

segments, maximizing economies of scale and

technological spillovers. This was a conscious

imitation of Japan, where semiconductor companies

were divisions of larger electronics companies,

which were, in turn, parts of conglomerates.

An important step was to use the government’s

tight control of telecommunications to aid the big

Korean firms’ entry into advanced semiconductors;

indeed, the Korean Telecommunication Authority

was one of the sponsors of large-scale integration in

the early to mid- 1980s. The restructured telecommunications industry forced out some firms, with others

assigned government-selected monopoly segments.

Meanwhile, the government announced a multibillion dollar expansion and modernization of the

country’s telecommunications infrastructure, most

of which would be guaranteed to the semiconductor

champions. The three industry leaders entered joint

ventures with multinational firms (ITT, AT&T,

Northern Telecom), offering lucrative and risk-free

telecommunications business in return for the transfer of specified telecommunications and semiconductor technology.

Computer policy also affected the development of

semiconductors. The government first relied on

obligatory public procurement of Korean-made

machines. Then, in line with the Computer Industry

Promotion Master Plan of 1984, it intensified the

role of the national research labs, especially the

Electronics and Telecommunications Research Institute (ETRI), in the acquisition of computer

technology. It also imposed, until 1988, a complete

ban on imports of microcomputers and gave software firms low interest loans for up to 90 percent of

their R&D spending. The public sector expanded its

use of microcomputers, and in 1986, the government

announced domestic content guidelines for all mi-
Chapter 7—The New Competitors: Industrial Strategies of Korea and Taiwan .319

crocomputers and peripherals, whether they were

sold to the government or not.82 Figure 7-7 summarizes the growth of the Korean computer production

and exports.

It appears, though, that the driving force in

Korea’s push into semiconductors was industry.

Firms drew on both government support and their

own substantial financial capabilities to jump directly into the high-volume memory market. In

1983, Samsung, the early leader in the field,

acquired DRAM production technology from Micron Co. of the United States.83 The company went

from greenfield sites to operating plants for 64K

DRAM chips in only 8 months in 1984, half the time

it took in the United States and two-thirds of the time

in Japan.84

This strategy had substantial risks, however, since

commodity memory chips are subject to notorious

price fluctuations; just as Samsung entered the 64K

DRAM market, prices fell dramatically and the

company was forced to absorb large losses. Nonetheless, because of its size and diversified structure,

the company persevered, moving quickly from 64K

DRAMs to 256K DRAMs to the mass manufacturing of the 1M DRAM by the late 1980s. The

company introduced engineering samples of 4 megabit DRAMs in late 1988, only 6 to 9 months behind

the Japanese leaders.85

The investment needed for this achievement, and

the attendant risk, show in the high debt/equity ratio

of the firm that manages Samsung Group’s semiconductor interests: nearly 7 to 1 in mid-1987. Since

much of the debt was in the form of bank loans, and

since the government still influenced the banking

system after denationalization, this figure suggests

government support for Samsung’s strategy. The

financing terms were generous, and Samsung crosssubsidized from other profitable parts of the group.

In 1985, Samsung Semiconductor contributed 2.5

percent to the group’s sales and made one-third of

the group’s investment.86 Samsung’s in-house R&D

institute had more than 600 researchers and a budget

of over $40 million in 1986. Its Silicon Wiley

outpost had a staff of 213 employees.

The strategies of the other two major producers

differed from Samsung in their precise product mix.

Nonetheless, the three companies’ strategies had

several factors in common:

●

●

●

secure technology through licensing or jointventure arrangements;

make massive investments in commodity chip

production; and

establish an American presence in Silicon

Valley both for the acquisition of technology

and to facilitate marketing.

Figure 7-7—Korean Computer Industry Exports and Production by Product

1985

I f I I 600 500 400 300 200 100 0 100 200 300 400 500 60 0

Exports (US $ millions) Production (US $ millions)

m Mini computers U Micro computers

m PC s m Peripherals

SOURCE: Stephan Haggard, David Lane, Robert Wade; and Robert Neff and Laoemi Nakarmi, “In Korea, All Circuits

are Go,” Business Week, No. 3168, July 9, 1990, pp. 69, 71.
320 ● Competing Economies: America, Europe, and the Pacific Rim

Hyundai got its initial production technology from

Vitalec, an American firm. In early 1983, Hyundai

announced an ambitious development plan that

included a $450 million, 5-year investment program

and the establishment of a subsidiary in Silicon

Valley capitalized at $5 million. In 1985, the firm

began making 256K DRAMs, bypassing production

of 64K DRAMs altogether.87

Goldstar had a longer-established presence in

electronics and technology agreements with Western Electric and Honeywell. Goldstar devoted more

attention to diversifying its production among a

number of semiconductor devices. Nonetheless, it

also tried to jump ahead of Samsung by securing

technology for the 256K DRAM from AT&T and in

1989 concluded a highly publicized deal with

Hitachi that gave it the technology for the 1M

DRAM.88

The scale of South Korean investment in semiconductors was huge. The national champions

committed more than $1.2 billion to semiconductors

for 1983 to 1986, five times more than the combined

investment of Taiwan’s four major semiconductor

projects for 1984 to 1987-1988.

As business took the lead, the role of government

policy changed. KIET, having pioneered mediumscale semiconductor technology, found that by 1984

the chaebol had superior fabrication facilities and

were rapidly expanding their in-house R&D capacity. Rather than attempt to guide the entry into

successive stages of DRAM fabrication, KIET left

this to the fins. It sold most of its fabrication

facilities to one of the chaebol, changed its name to

the Electronics and Telecommunications Research

Institute (ETRI), and initiated parallel basic research

efforts in semiconductors, computers, and telecommunications. This is not to say that ETRI, as the

national R&D laboratory, has been eclipsed. Its staff

numbered 1,200 in 1985, with a budget of over $40

million.89

By the time the 64K DRAMs were produced, the

product cycle had already passed the phase of high

scarcity. World demand for semiconductors

slumped; aggressive pricing by the Japanese lowered the price still further. From 1985 to 1987,

Korea’s VLSI facilities operated at only 30 percent

of capacity or less much of the time, with the price

well below cost of production. Yet the government

did not pour in fresh money. It was reluctant to

commit itself to assisting another high-risk, capitalintensive industry in difficulty, having just finished

the restructuring of the heavy and chemical industries in the 1970s. The popular impression that

Korean firms have made it to the world semiconductor frontier without government help probably is due

to this refusal to help the troubled fins, combined

with anxiety to conceal government help for fear of

retaliation from the United States and Japan on

grounds of “unfair competition.”

By 1986, the government decided to get more

involved again. As Korea’s capacity to innovate in

the production of standard chips became manifest, it

became increasingly difficult for companies to

access foreign technologies. The government was

concerned about the royalties that Korean firms were

paying. Moreover, the government was planning a

national computer network costing several hundreds

of millions, for which most contracts would be

steered to Korean companies. Joint development of

advanced chips would be a giant step in that

direction, especially because large-capacity memory

chips are considered the ‘‘technology driver” for

several kinds of advanced semiconductors integral

to such a system.

In conjunction with ETRI, the government coordinated the leading firms to form a Japanese-style

R&D consortium to develop the 4 megabit memory

chip. A board of ETRI-sponsored experts allocated

money from a joint government-business research

fund to support projects proposed by research teams

from member firms. Those teams whose engineering

samples met govemment-specified standards had to

repay much less on government loans than those

whose samples failed. This performance-based cooperation resulted in increased R&D competition

among member firms. By 1990, 18 collaborative

research projects were underway through the consortium arrangement, with total R&D expenses

estimated at $250 million.90

When world prices of memory chips started to rise

in 1988, the conglomerates, which had been prepared to wait until the 1990s, began to earn big

profits on semiconductors. By 1990, Korea was the

world’s third largest fabricator of DRAMs after ‘

Japan and the United States.

Several conclusions can be drawn from this

analysis of the development of the Korean semiconductor industry. Direct government efforts to lead

the industry in the absence of strong private sector

interest do not appear to have been effective in the
Chapter 7—The New Competitors: Industrial Strategies of Korea and Taiwan ● 321

short run, but they probably did have long-term

effects.

The industry took off with the entry of the large

chaebol. A variety of market forces made such a

move imperative, including their own internal demand for chips. Their entry had extensive government backing and followed closely a new government plan that included both direct financial support

and fiscal incentives to investment in R&D and

training. The growth of the chaebol was partly an

outgrowth of government policy during the heavy

and chemical industry drive of the 1970s, when the

electronics sector was targeted for support. The three

technological leaders in the 1980s benefited from

the incentive policies of the 1970s, and through their

entry into consumer and industrial electronics developed their appetite for in-house production of chips.

Korea’s industrial strategy and structure in semiconductors has some limitations. While the chaebol

have made large investments in the production of

commodity chips, policy has neglected the development of the small and medium-sized firms that

played an important role in technological innovation

in the United States and Taiwan. Moreover, by

concentrating on standardized chip production, the

Korean industry is vulnerable to price fluctuations

and low profitability, though it is perhaps better able

to withstand them, compared with most semiconductor firms in the United States, due to the

integration of the largest Korean producers. We

return to some of these issues when discussing

Taiwan’s strategy toward the industry.

THE ROLE OF GOVERNMENT

POLICY: TAIWAN

Taiwan’s industrial strategy has moved through

stages similar to Korea’s.9l From 1945 until the late

1950s, the emphasis was on import substitution to

develop light manufacturing industries. Around

1960, some of the import-substitution controls were

dismantled, and export promotion measures intensified, resulting in a rapid expansion of manufactured

exports. In the early 1970s, the government intensified efforts to upgrade the industrial sector and

develop heavy industries, and in the 1980s, the

emphasis shifted to technological improvement.

Despite these similarities, there are important

differences between the two countries in both

industrial strategy and structure. First, Taiwan’s

state-owned enterprises spearheaded the move into

heavy industries such as steel, cement, aluminum,

and petrochemicals. Averaged over the 1970s,

public enterprise’s share of industrial production

was 22.5 percent, and 30 to 35 percent of gross fixed

capital formation was undertaken by public enterprises. 92 (By 1988, public enterprise’s share of

industrial production had fallen to 18.1 percent.)

These figures put Taiwan in the top decile of

noncommunist countries in terms of the size of their

state-owned enterprise sector. This is an interesting

paradox, given that Taiwan is generally viewed as

having a market-oriented economy. The Kuomintang (KNIT), arriving at the end of World War II,

brought with them a strong socialist element that

pervaded the Taiwanese Government for many

years. The more numerous native Taiwanese are

responsible for much of the country’s recent business growth. The two factions have not always seen

eye-to-eye.

A second difference is that the government has not

explicitly promoted the concentration of the industrial structure as a component of its development

strategy. Small and medium-sized firms have played

a much greater role in Taiwan than in Korea. For

example, in 1981 Korea had 10 firms listed in

Fortune’s 500 biggest industrial firms outside the

United States, while Taiwan had only 2. Hyundai,

Korea’s largest private business group, had annual

sales of $8 billion in 1983 and employed 137,000

people; Formosa Plastics Group, Taiwan’s biggest

private group, had annual sales of $1.6 billion and

31,200 employees.93

The small size of Taiwan’s firms should not be

exaggerated; over time, industrial concentration has

increased. Almost half of manufacturing production

in 1971 and 1981 came from firma with more than

500 employees, and firms with less than 20 employees accounted for only 12 percent of manufactured

output in 1971 and 9 percent in 1981.94 Nonetheless,

there is a notable difference in industrial structure

between the two counties that had important

implications for business strategy. Small firms are

more likely to seek out quick-entry niches in export

markets rather than attempt to produce standardized,

high-volume items with high scale economies.

The role of foreign capital was also different in

Korea and Taiwan. Taiwan has been more open to

foreign direct investment than Korea. Foreign direct

investment has played a larger role in both capital
322 ● Competing Economies: America, Europe, and the Pacific Rim

formation and investment, and has been an explicit

component of the country’s technology strategy .95

Meanwhile, savings in Taiwan have consistently

outstripped investment.

A final difference has to do with the range of

instruments of industrial policy. Taiwan has had a

more market-oriented strategy than Korea, with the

government playing a less directive role in the

economy. For example, protection has been lower

and targeted credit policies have played a smaller

role in Taiwan than in Korea. The government has

devoted more attention to the provision of infrastructure and to arms-length incentives, such as

fiscal incentives, that are less discretionary.

The government recently gave up some of the

more direct techniques it employed in the past. The

country is going through a period of substantial

economic liberalization. Nonetheless, the government has by no means relinquished its role in

guiding the evolution of the industrial structure

through supportive policies, and in the 1980s

accelerated its interest in enhancing the country’s

indigenous technological capabilities.

Exchange Rate and Trade Policies

Trade has played an even larger role in Taiwan’s

economy than in Korea’s. Imports plus exports have

been over half of GNP since 1970, and over 80

percent of GNP since 1976. Moreover, Taiwan has

run balance of payments surpluses in every year

since 1970, with only three exceptions—1974, 1975,

and 1980-when imports surged in connection with

the two oil shocks. Taiwan now has the second

largest foreign exchange reserves in the world after

Japan, and by far the biggest per capita.

These surpluses are largely attributable to exchange rate policy. The unification and devaluation

of the exchange rate in the late 1950s was a key

component of the country’s export-oriented growth

strategy. Unlike Korea, where macroeconomic policy has undergone several inflationary cycles, fiscal

and monetary policy in Taiwan has been extremely

conservative, allowing the government to hold to a

fixed exchange rate policy. Because of its export

success, and perhaps because of political pressure

from the large export sector, the government was

reluctant to allow the exchange rate to appreciate in

the first half of the 1980s. Another reason for the

country’s pursuit of surpluses is more political. The

government is preoccupied with Taiwan’s vulnerability to pressure from mainland China, and considers large foreign exchange reserves a hedge against

disruption of the island’s normal trade flows.

The Central Bank intervened continually by

buying foreign exchange, thus keeping the New

Taiwan dollar ($NT) undervalued. In 1986, however, the government recognized the problems

associated with the strong $NT, including inflationary pressures at home, and has slowly allowed the

currency to appreciate. In 1989, the country undertook a major liberalization of its foreign exchange

market, including floating the New Taiwan dollar.

These actions reduced the bilateral surplus with the

United States.

While less protectionist than Korea, the government has restricted imports. One reason was that

tariff charges remained the single most important

item of government revenue until the early 1980s.

Ministry of Finance officials, worried about revenue, have resisted lowering tariffs. Even in the

mid-1980s, customs duty accounted for 17 percent

of tax revenue, second only to income tax at 19

percent. 96 Yet industrial policy was a motivation for

protection as well, suggested by the fact that these

restrictions were maintained even as foreign exchange reserves ballooned in the early 1980s. Legal

tariffs, which averaged over 60 percent in 1969,

remained as high as 30 percent in 1986, with large

differentials across sectors.97

Total tariff revenue as a percent of total imports,

however, was only 9 percent in 1984, the difference

being accounted for by exemptions on imports used

as inputs to exports. This drawback system was one

of the most power-lid export incentives at the

government’s disposal. Exporters enjoyed a freetrade regime; nonexporters, including consumers,

paid higher prices for restrictive trade policies.

In terms of quantitative restrictions on imports, 80

percent of items on the import schedule had no

restrictions as of 1984, which appeared to reflect a

fairly liberal regime. However, the 20 percent of

items with restrictions accounted for over half of

Taiwan’s imports that year. Twenty-nine percent by

value had to be approved by a domestic agent,

whether the producer of a domestic substitute (e.g.,

steel, cement), or from a government bureau, such as

the Industrial Development Bureau of the Ministry

of Economic Affairs. Another 21 percent were

limited by who could import them; some could be

imported only by publicly owned trading compa-
Chapter 7—The New Competitors: Industrial Strategies of Korea and Taiwan ● 323

nies, others only by the end-user. Only 4 percent

were limited by origin in 1984; origin restrictions,

especially from Japan and Korea, were much more

important in the past.98

Since the mid- 1980s, however, a dramatic liberalization of imports has occurred, matching an earlier

run-down of export promotion assistance. The

average tariff in 1986 was 28.2 percent. In August

1987, tariffs were lowered on several thousand

items, reducing the average tariff level to just over

20 percent. The level dropped further in 1988 to 13

percent and in 1989 to 10.3 percent, with a target for

1992 of of only 7 percent, equivalent to or even lower

than in the advanced industrial states.99 Protection of

agricultural goods remains high; indeed, if it were

not for higher agricultural tariffs, Taiwan’s trade

regime would approach complete free trade. Tariffs

on agricultural products in 1989 were 24.2 percent,

scheduled to decline to 20 percent by 1992. As in

Korea, liberalization of agricultural imports has

been a heated political issue.

Taiwan also revamped its system of nontariff

controls. By March 1989, 98 percent of all product

categories were freely importable, with restrictions

remaining on articles related to national security and

health. While tariffs have come down and quantitative restrictions have been reduced, the dutydrawback scheme, which allowed exporters to

import inputs for export products at duty-free prices,

is being dismantled. Other restrictive measures, such

as harbor fees, have been dropped as well.

Development Financing and Foreign

Direct Investment

Until the second half of the 1980s, Taiwan had an

even higher investment ratio than Korea. Gross

investment averaged 28.4 percent of GNP between

1965 and 1980, compared with Korea’s 26.5 percent.

And in contrast to Korea, Taiwan’s investment has

been financed with domestic savings. Between 1965

and 1980, the share of domestic savings in GNP was

28.7 percent, slightly more than the share of

investment. Over the 1980s, the gap between domestic savings and investment widened; Taiwan became

a net creditor.

The government controls Taiwan’s formal financial markets. But whereas Korea denationalized the

commercial banks between 1980 and 1983, they

remain largely government-owned in Taiwan.l00

The government closely regulates lending and

borrowing, and appoints senior staff. The banks, in

turn, have historically dominated the financial system, with nonbank financial institutions accounting

for only 5 percent of the assets of Taiwan’s major

financial institutions in 1980.101 The curb market has

supplied some 30 percent of the total volume of

loans processed through the financial system over

the 1970s, at rates 50 to 100 percent higher than bank

loan rates.102 Taiwan’s firms depend on credit more

than equity for financing. The ratio of corporate

sector debt to equity was between 160 to 180 percent

between 1971 and 1980, less than Korea’s but in the

same order of magnitude.

With companies dependent on bank loans and

government controlling the banks, the government

coordinated industrial investment by means of credit

allocation. In the 1960s, the Ministry of Finance

gave each bank lists of 6 to 12 industries for priority

attention. During the 1970s, the banks themselves

participated in drawing up the lists. The banks have

taken pride in achieving compliance with the lists.103

Nevertheless, the government has relied on discretionary credit allocation less than the Korean

Government, the difference perhaps reflecting Taiwan’s greater use of public enterprises. Since the

mid-1970s, government direction of commercial

banks’ credit allocation has declined. The government instead has relied more heavily on special

industrial policy banks, notably the Bank of Communications.

The Bank of Communications was the lead bank

for infrastructure financing until 1979, when it was

designated a development bank. Its functions were

to extend confessional loans and credit guarantees to

capital-intensive industries, take equity positions in

new firms in high-technology industries, and advise

customers on how to improve management and

innovation. Following a 1982 ruling, 40 percent of

new deposits in the postal savings scheme are to be

redeposited with the Bank of Communications, thus

opening a major new source of funds.

Foreign direct investment accounted for only 8

percent of total investment in manufacturing during

the 1970s. In electronics and machinery during the

1970s, foreign direct investment accounted for

roughly 50 percent and 25 percent of investment,

respectively. But over the 1970s and 1980s, the

Taiwanese Government imposed export requirements and/or domestic content requirements on

most foreign investors. Local content requirements
324 ● Competing Economies: America, Europe, and the Pacific Rim

have helped build linkages between foreign owned

and domestically’ owned plants, and have aided

technology transfer as Taiwanese employees of

foreign firms move to locally owned firms or start

their own companies.

As for outward investment, prior to the mid-1980s

the government carefully screened such investment

for its consistency with national development objectives. Since the mid-1980s, however, under the

pressure of huge foreign exchange reserves and

rising domestic wages, restraints have been cut

sharply. Outflow has begun to cheaper labor sites,

such as Thailand and the Chinese mainland, while

outflow to North America continues.l04

Technology Policies

The Government of Taiwan has taken a direct

responsibility for accelerating technology development and application in industry.105 Instead of one

preeminent coordinator, such as Korea’s MOST, this

function is dispersed among artly competing agencies in Taiwan. This may reflect the problems posed

to technology policy by the country’s decentralized

industrial structure and the preponderance of small

firms in the economy.

The nearest counterpart to Korea’s MOST is the

National Science Council, which reports directly to

the cabinet (Executive Yuan) but does not have

ministerial status. It publishes a series of National

Science and Technology Development Plans. Its

tasks include guiding, coordinating, and evaluating

all government R&D efforts, including specific

research projects and manpower development. Inside the government, the National Science Council

is not preeminent in matters of science and technology, however; several other organizations vie for

influence over science and technology policy, including the Council for Economic Planning and

Development, the Industrial Development Bureau of

the Ministry of Economic Affairs, and the Industrial

Technology Research Institute (ITRI). Established

in 1973, ITRI is divided into six institutes, one each

for electronics, machinery, chemical engineering,

energy and mining, industrial materials, and standards and measurement. By 1990, ITRI had a budget

of $270 million and a staff of over 5,000. ITRI is

concerned only with civilian technologies; another

agency with a much bigger staff covers military

technologies. (See also table 7-11 summarizing the

four largest Taiwanese Government research institutes.)

The single most influential body on technology

policy as a whole is probably the Science and

Technology Advisory Group (STAG). With only a

small administrative budget, it was until recently

headed by K. T. Li, a man of immense personal

influence resulting from several decades of experience in government. As Minister Without Portfolio

with special responsibility for science and technology, he created STAG in 1979 to coordinate the

various science and technology initiatives undertaken by these other organizations. 106 Backed by a

small secretariat, he worked with a council of about

10 foreign advisors, all of them experts in some area

of science and technology and all experienced in

business or administration. Almost all were American citizens. STAG assesses the relevance of world

technology developments for Taiwan and evaluates

proposals for technology initiatives from Taiwan.

Table 7-n-Taiwan: Major Government Research Institutes in 1990a

Expenditure

Name Research fields ($millions) Staff

Industrial Technology Research Institute Electronics, machinery, $270 5,087

Chemical engineering, standards & measures, industrial

materials, energy & mining,

Institute for Information Industry Software technology, products, $50 730

marketing, training

Development Center for Biotechnology Biotechnology, applied ohem- $25 328

istry, biochemistry, immunology

Food Industry Research and Food technology, products, $12 302

Development Institute processing equipment, training

aSee table 10 for Korean Major Government Research Institutes.

SOURCE: Coordination Council for North American Affairs, Office in U. S.A., Science Division, Republic of China,

personal communication, Aug. 12, 1991.
Chapter 7—The New Competitors: Industrial Strategies of Korea and Taiwan ● 325

Taiwan lacks an equivalent of Korea’s high-level

National Technology Promotion Conference. Korea’s

“Long Term Technology Forecast for the Year

2000” (1986) resulted from 2 years of discussions

among some 500 experts in 8 working groups.

Taiwan’s National Science and Technology Development Plan for 1986 to 1995 was preceded by week

long conferences in 1982 and 1986, and was

attended by some 400 participants, of whom only

about 15 percent were from private firms. Moreover,

they came as individuals rather than as representatives of industrial associations.

The government has long emphasized education.

Universal primary enrollment (98 percent) was

achieved in 1970 and secondary enrollment reached

80 percent of the age group in 1980. The enrollment

ratio is much lower at the tertiary level, only 14

percent for men and 12 percent for women in

1985.107 Above the junior high school level, institutions are divided into those that are academically or

vocationally oriented. Since the mid-1960s a dramatic change in enrollments has occurred in favor of

the vocational. Forty percent of secondary school

enrollments were vocational in 1963, 66 in 1980,

and 69 in 1986. This preponderance in favor of

vocationally oriented institutions is exceptional

compared to most other countries. At the tertiary

level, 55 percent of students are in vocationally

oriented colleges, 45 percent in academic universities. 108

Taiwan’s junior colleges (ages 18 to 20 or 21)

have graduated over 20,000 engineering students a

year through the 1980s, while its universities have

graduated over 10,000 bachelor-level engineers a

year. The figure for bachelor-level engineers is 70

percent more than the corresponding per capita

figure for the United States, and is close to Korea’s

(per capita).109 The presence of a large stock of

engineers has been important for allowing national

control over decisions about foreign technologies

and for mastering the use of those technologies.

Great care is taken to ensure the practical orientation

of engineering training, especially from the vocational schools, and each school has arrangements

with local firms to take students as part-time workers

throughout the school year.

These shifts in enrollments reflect demand, the

fact that engineers are paid on average 20 percent

more than arts graduates of the same age, and the fact

that an engineering qualification is a fast track to

management positions. 110 However, these changes

also reflect direct controls. From 1966 onwards, a

series of Manpower Development Plans have guided

Taiwan’s education expansion, and the results have

corresponded closely to targets in terms of expansion of different subjects, the balance between

public and private schooling, and overall rates of

expansion.

Some targets went strongly against social demand. For example, the government lowered the

allowable rate of expansion of places in tertiary

institutions from 5 percent in the Fourth Manpower

Development Plan (1972-1976) to 3 percent in the

Fifth (1977-198 1). The slowdown was effected both

by spending controls and by reducing the pass rate

in the national tertiary level entrance examination.

Intended to avoid unemployment among the highly

educated, the result has been to exacerbate shortages

of scientific and engineering manpower. The constraint on the expansion of academic secondary

schools and universities also runs against social

demand, because academic secondary schools are

the principal route to universities and university

degrees (including engineering) that yield higher

rates of return and prestige.

In 1975, there were 2,301 students studying

abroad, most under government auspices. By 1986,

this number had risen to 7,016, over 90 percent of

whom were in the United States. But a majority of

students who study abroad do not return to Taiwan.

Of the one in five of Taiwan’s graduates in

engineering, science, medicine and agriculture who

go abroad for further study, only about 20 percent

returned during 1976 to 1986. In 1983, the government launched a program to encourage students and

others with technical skills to return. The program

included keeping in touch with thousands of potential recruits. Many returnees work initially at ITRI.

The National Science Council also administers a

program to bring Taiwanese and other Chinese

engineers and scientists in the West to Taiwan for

short assignments. Some 3,200 people came under

this program between 1970 and 1980.

The government has also developed a series of

targeted incentives, including special funds to lend

either for technologically advanced machinery or

R&D activities. The most important of these is the

Strategic Industry Fund. Established in 1982, it had

a capitalization of $500 million by 1983 and could

be used for:
326 ● Competing Economies: America, Europe, and the Pacific Rim

1.

2.

3.

Purchase of domestically produced machinery,

with an interest rate 2 points less than the

average of the minimum and maximum longterm rates for commercial bank loans (this

average was 10 percent in 1983).

Purchase of new machinery, from any source,

by producers of specified products within the

“strategic’ industries of machinery, automobile parts, electrical machinery, and electronics and information. The list of eligible products contains 135 items. The interest rate is two

points less than the minimum of the long-term

rates.

Special cases to be decided by the planning

agency, especially for the introduction of

labor-saving equipment in any sector. Again,

loans are at preferential rates. The existence of

special cases indicates that the government

retains significant discretion to decide what is

strategic.

The pay-back period is a maximum of 8 years,

with a 2-year grace period. The collateral is the value

of the machinery itself. Compared with the normal

terms of Taiwan banks, loans from the Strategic

Industry Fund are highly confessional. Other specialpurpose funds include the Sine-American Fund for

Economic and Social Development, established in

1965, and The Development Fund; both are available for discretionary channeling of funds into

targeted sectors.

The Statute for Encouragement of Investment,

first promulgated in 1960 and revised many times

since, gives tax incentives for technological upgrading and R&D activities. It combines two approaches

to industrial promotion. One is to make the incentives available to many industries but stipulate

stringent performance criteria so that only a few

firms in each industry will be eligible. The other

approach is to target the incentives on a narrow range

of ‘‘strategic’ industries, and make them easily

available to firms within these industries. The

compromise in Taiwan is to have a broad range of

industries eligible, with a high proportion of items

eligible from the strategic industries of machinery

and electronics and information, and relatively few

items eligible from such well-established industries

as textiles.

The incentives include the tax holiday, accelerated depreciation, investment tax credit, duty-free

import of capital goods, and reduced business tax

rate. Several other schemes bolster these incentives.

R&D spending is encouraged by a 20-percent tax

credit for firms with yearly R&D spending above

their maximum in the previous 5 years, provided this

brings their spending above a certain minimum.

Businesses in specified high-technology industries

can defer income taxes and face a maximum income

tax rate of 20 percent of annual taxable income,

provided they also meet the R&D minimum. These

same firms can retain profits of up to two times their

paid-in capital; they are eligible for up to 50-percent

government grants for R&D expenditures, and also

for government purchase of equity.

Companies in machinery and electronics and

information are eligible for government cost sharing

of up to 50 percent for putting in approved manufacturing or financial systems, and, since 1984, for

loans at almost 3 percentage points less than the

average of the minimum and maximum long-term

rates. To encourage technology transfer from abroad,

the government allows technical know-how or

patent rights to be supplied as part of an equity share

(up to 25 percent), and exempts foreign enterprises

from taxes on income gained through furnishing

approved patents.

A particularly innovative scheme for promoting

local R&D was the development of the Hsinchu

Science-based Industry Park in 1980. Modeled on

the Stanford Science Park, it attracts foreign and

domestic high technology firms, mostly in informatics, precision instruments, new materials, and

biotechnology. The object is to lift some of the risks

faced by participating firms, and thereby induce

enough companies to locate there to generate

positive spillovers (“externalities”) among them.

Investors are allowed 5 years of tax holiday within

the first 9 years, a 22-percent ceiling on corporate

income tax, below-market land rents, exemptions for

various import and export fees, and low-cost loans

and government equity of up to 49 percent of total

investment. The companies also benefit from close

proximity to the ITRI institutes. One hundred firms

are now operating in the Park, near its capacity.

Other technology upgrading programs include:

●

●

●

●

an industrial extension service;

intensive quality control efforts;

the fostering of venture capital firms; and

initial steps to increase the protection accorded

to intellectual property rights.lll
Chapter 7—The New Competitors: Industrial Strategies of Korea and Taiwan ● 327

There is talk of making Taiwan the Switzerland of

Asia, with high-quality products from relatively

small-scale firms.

What are the effects of this system of technology

policy? Compared to their Korean counterparts,

Taiwan’s public research and service organizations

are less closely connected to private firms, which

have not made nearly as large an investment in their

own R&D facilities. Critics often say that the public

labs have been unsuccessful in developing new

products, which is attributed to their poor communications with private firms and problems of the

incentives in public sector research. But public labs

carry out a major training function and encourage

their younger staff to spin off their own companies

to commercialize new products. This has been a

major incentive for luring back Taiwanese professionals living abroad. A Taiwanese researcher at

IBM, for example, may be offered the position as

chief of a research team at one of the public labs,

with more responsibility and command over budget

than at IBM, plus the prospect of developing his own

company to bring to market the products developed

in the lab. The popular charge of poor communications between labs and firms presumably relates to

well-established companies, rather than these

spinoffs. However, this incentive mechanism disrupts the work in publicly funded technology

programs when key staff leave.

Indicators of R&D inputs must be used cautiously, for different countries use different definitions. By official figures, Taiwan spent 1.06 percent

of GNP on nonmilitary R&D in 1985, less than

Korea’s 1.59 percent. About half of Taiwan’s

spending is classed as coming from the public sector,

but when government grants to certain nonprofit

organizations are included, the figure rises to 60

percent. Private domestic and foreign firms account

for the rest. This is perhaps three times more than the

public sector’s share in Korea, attributable to the

presence of larger firms in Korea. In terms of

numbers of researchers per 10,000 people, on ahead

count rather than full-time equivalency basis, Taiwan has about 14, compared with Korea’s 11.

Case Study: Automobiles

Taiwan’s automobile industry is far from breaking into the world market.112 Like Korea, Taiwan

designated the automobile industry as a strategic

sector, But in 1988, in contrast to Korea’s output of

over 1 million units, Taiwan produced only 275,725

motor vehicles. 113 A case study of the industry

therefore illuminates differences between Korean

and Taiwanese industrial policies and structures.

The Taiwanese Government was more reluctant to

push into heavy, capital-intensive sectors and support the development of large national champions.

This reticence was partly the result of the inability of

the Taiwanese Government to restrict the entrance of

new producers, policy incoherence derived from

bureaucratic wrangling, and more fragmented businessgovernment relations than in Korea.

In the absence of larger firms capable of achieving

the required scale economies and with a smaller

domestic market, the prospects for automobile

exports appeared dim. Taiwan thus turned to stateowned enterprise to promote auto exports. When this

effort failed, they sought an industrial strategy that

relied on trade liberalization, encouragement of

foreign direct investment, and the development of an

export-oriented parts industry. This strategy appears

to be yielding better results.

At the end of the 1960s, the automotive industries

of Taiwan and Korea looked much alike. Starting in

1958 with an assembly plant in cooperation with

Nissan (the joint venture partner in Korea’s first

plant 4 years later), by the late 1960s Taiwan had

four assemblers struggling for a share of less than

20,000 units a year. Each had Japanese participation.

Industry complaints about the inadequacy of Japanese technology transfer were never quite taken to

heart, however, and government promotional measures were limited to domestic content requirements

and import controls.114 Over the 1970s, Taiwan’s

auto policy drifted. The state’s organizational and

financial capabilities were heavily committed to

other projects aimed at boosting the competitiveness

of existing export sectors. The 1974 oil crisis made

matters worse by dampening expectations about the

industry.

The government split on policy for the automobile

industry. Some officials saw it as a future major

exporter, some accorded it a central role in Taiwan’s

defense strategy, others doubted that domestic

demand could ever be sufficient—given a population half the size of Korea’s—to provide the base for

an export drive. The latter group thought the

emphasis should be on development of an automobile parts industry, which might later support

internationally competitive assemblers.
328 . Competing Economies: America, Europe, and the Pacific Rim

Another reason for policy drift was that domestic

car prices above international levels did not harm the

economy’s overall international competitiveness as

high prices on intermediate goods would have. This

predisposed the government to the development of

intermediate inputs. As a result of these drifting

policies, auto production became less efficient. The

government did nothing to stop new entrants, and in

1979 the six assemblers each produced an average of

only 18,000 compacts, sedans, and light trucks. The

resulting rattletraps were sold on the domestic

market only.

In 1978, spurred by news of Korea’s big push into

automobiles, the government announced a proposal

to encourage the establishment of a large-scale

automobile plant with an annual capacity of 200,000

compact cars, mainly for export. The strategy was to

induce a foreign car maker of world standing to enter

a joint venture with a domestic enterprise, and

thereby obtain technology not only for assembling

but also for upgrading the capability of the auto

components suppliers. Only Toyota and Nissan

submitted investment applications.

To underscore that the Big Auto Plant was aimed

at the world rather than the local market, the

Ministry of Economic Affairs stipulated that the

foreign joint venture partner could not hold more

than 45 percent of the equity and would have to

export 50 percent of production. Several months

later, after receiving the Japanese applications, the

government stated its intention to retain control over

the enterprise by announcing that the state-owned

China Steel Corp., rather than any existing automaker, would be the foreign partner’s working

counterpart. China Steel’s chairman, Zha o

Yaodong, was appointed head of a “Big Auto Plant

preparatory committee,” and Taiwan’s automotive

industry association played no role in the formulation of policy. Seven domestic private ths, none in

automobiles, split a 30-percent equity share in the

venture. Other local firms would subcontract to the

plant.

In 1982, Toyota was chosen as joint-venture

partner. In July 1983, however, disagreements emerged

between Toyota and the Ministry of Economic

Affairs (MEA). The government now insisted on a

90-percent local content, and substantial transfer of

production technology, despite Toyota’s protestations that these should be goals rather than fixed

targets. It planned to prevent Toyota from taking

profits from the venture if it failed to meet a strict

timetable for achieving these conditions. Toyota

argued that the conditions would be impossible to

meet.

A 1984 cabinet reshuffling brought to the fore

officials who had been wary of the Big Auto Plant

plan. Zhao Yaodong was removed as Minister of

Economic Affairs. The new government favored the

development of Taiwan’s auto parts industry into an

integrated production system. K. H. Yu, a powerful

man with easy access to the president, was inclined

to retain domestic industry protection and provide

greater support for private domestic and foreign

firms. The new Minister of Economic Affairs first

announced that the joint venture would remain

contingent on Toyota’s compliance with the conditions already laid down, but then the government

signaled that should the joint venture fail, Taiwan

would proceed with an alternate plan to develop the

parts industry. In September 1984, when no convergence between Toyota and the MEA was evident,

the Toyota-China Steel joint venture was canceled.

Other Japanese automakers showed an interest in

Taiwan. Glad to seize at a second chance, the Taiwan

Government acted to restructure the domestic industry. Chastened by the Big Auto Plant failure, the new

Automobile Industry Development Plan of 1985

reversed several basic policies. It proposed to lower

tariffs and domestic content requirements on finished cars, limiting import bans to small Japanese

cars and quotas to Korean cars. The new plan

removed the 45-percent foreign equity ceiling,

allowing 100-percent foreign ownership in exportonly car and components production. It imposed

export ratios and technology transfer requirements

case by case. To ease pressure from Washington

over Taiwan’s perennial trade surplus with the

United States, the plan also included gradual tariff

reductions from 65 to 30 percent and the market’s

opening to all car imports by 1993.115 Hence, the

government gave up its earlier emphasis on domestic content and national control in order to maximize

an export orientation. While it favored a consolidation of the industry by means of mergers or exits, it

did not try to force this consolidation.

The domestic assemblers began to show signs of

life. They planned export-oriented expansion, established a joint design engineering center to develop

the island’s first domestically designed model, and,

in the case of a joint venture with Ford, announced
Chapter 7—The New Competitors: Industrial Strategies of Korea and Taiwan ● 329

that the Taiwan subsidiary would be integrated into

its global supply network. The firms chose to

strengthen their links with Japanese companies and

explore new relationships with other foreign producers (table 7-12). Honda, Nissan, Mitsubishi, and

Toyota now have large equity stakes in Taiwanese

companies. All plan to make Taiwan a major site for

parts and components in the 1990s. Toyota and

Nissan may export compact models, partly in hope

that Taiwan will provide a fast track into the China

market.

Foreign automakers also see a new market in

Taiwan. Rising consumer income and the appreciation of the New Taiwan dollar since 1985 has

spurred domestic demand for foreign automobiles.

Growth in demand has aided domestic car makers

too, but they face difficulties given the high scale

economies required to be profitable and the currency

appreciation. Foreign-made car sales rose to 136,000

in 1988 (38 percent of the market) from 33,000 (13

percent) in 1986. In May 1989, imports passed local

car sales for the first time.116 With 9 car companies

and their foreign tie-ups saturating a market of 20

million people, a major shake-out should occur in

the next several years.

This case illustrates some of the difficulties in

devising and applying industrial policy. Protection

alone did not foster the development of a competitive industry, and in fact encouraged a proliferation

of inefficient entrants. The state-led joint venture

with a foreign producer also failed, but the reasons

appear to have been political as well as economic;

this strategy attempted to bypass domestic automakers altogether. The current strategy centers on

the use of market liberalization to force a restructuring of the industry through foreign participation,

with the expectation that the parts industry will

provide a number of niches independent of final

assembly. Two things should be noted about this

strategy, however. First, no less than the state-led

strategy, it rests on independence from domestic

producers. Second, it is likely to result in an industry

restructuring that could probably demand further

government intervention.

Case Study: Semiconductors

Electronics became Taiwan’s biggest export category in 1983, surpassing textiles and apparel. In

1988, it accounted for 21.5 percent of exports.117 The

industry is dominated by foreign fins, mostly from

Table 7-1 2—Taiwan Auto Industry External Sources of

Capital and Technology

Taiwan automaker Foreign tie-ups Nature of linkage

China Auto Corp . . .Citroen

Mitsubishi

Ford Liu Ho . . . . . . .Ford

Mazda

Kuo Zui . . . . . . . . . . .Hino

Toyota

Prince Motor . . . . . . .Suzuki

San Yang . . . . . . . . .Honda

San Fu . . . . . . . . . . . .Fuji Heavy

Industry (Subaru)a

Renault

Ta Ching . . . . . . . . . .Fuji Heavy

Industry (Subaru)a

Nissan

Yu Tian . . . . . . . . . . .Daihatsu

Peugeot

Yue Loong . . . . . . . .Nissan

Technology

Technology

70% equity-ownership

Technology

Technology

22% equity-ownership

Technology

13.5%equity-ownership

Technology

Technology

Technology

Technology

Technology

25%. equity

Technology

aln late IggCI, Nissan acquired a substantial share of Subaru from Fuji

Heavy Industries.

SOURCE: Jonathan Moore, “TrafficJam,” FarEastern Economic Review,

June 21,1990, pp. 76-78; Walter Arnold, “Bureaucratic Politics,

State Capacity, and Taiwan’s Automobile Industrial Policy,”

Modem China, vol. 15, No. 2, April 1989, p. 209.

the United States, which account for more than

two-thirds of production. About two-thirds of total

production is exported, primarily to the United

States. Over a quarter of electronics imports come

from the United States, and over half come from

Japan. 118 In consumer electronics, Taiwan’s domestically owned firms adopted the strategy of moving

into the price-sensitive low end of the consumer

market left behind as the Japanese moved into more

highly differentiated consumer and industrial electronics. In component production, Taiwan specialized in production of standardized components and

the assembly of semiconductors. Firms began to

differentiate their products and attempted to enter

the more advanced end of the consumer, industrial,

and component markets.

However, the small Taiwanese firms have been

handicapped in reaping economies of scale. The

contrast is with the Korean chaebol, whose size and

diversity gives them advantages in input purchase,

international marketing, and the ability to crosssubsidize. Therefore, in Taiwan, the role of the

government has been more important in building up

technological mastery of microelectronics. And

whereas the chaebol moved into large volume
330 ● Competing Economies: America, Europe, and the Pacific Rim

production of standardized chips, Taiwan concentrated on small runs of specialized chips.

The original stage of Taiwan’s involvement in

semiconductors was based on offshore assembly

operations; if anything, Taiwan was even more

liberal in encouraging the entry of these fins. Yet

this strategy was initially motivated by interest in

exporting rather than in developing an indigenous

electronics base. The foreign firms constituted a

relatively insulated enclave, with many initially

located in export-processing zones.

In 1974, Taiwanese Government officials made

serious plans to acquire semiconductor design and

production capability.119 They established the publicly owned Electronic Research and Service Organization (ERSO), under the Industrial Technology

Research Institute (ITRI). ERSO was, first, to verify

the possibility of “leapfrogging” directly into

integrated circuit production, bypassing transistor

fabrication, and, second, to be a catalyst in securing

private sector interest. ERSO would then recruit a

foreign partner to setup a demonstration plant, with

the aim of transferring the technology to a domestic

private firm and commercializing it. In 1976, ERSO

opened the country’s first model shop for wafer

fabrication, and a year later it signed a technology

transfer agreement with RCA in integrated circuit

design. By the second half of 1978, ERSO was in

production, with competitive costs and accelerating

sales.

The aim of this venture was not simply production, however, but the development of an indigenous

semiconductor industry through internal technology

transfer, i.e., from ERSO to a local company.

Finding no companies to take over the entire

operation, in 1979 the government established a

joint venture with a group of firms called United

Microelectronics Corporation (UMC). UMC was a

subsidiary of ERSO, with a 45-percent equity share

split among five private local fins. Drawing on

RCA ties and ERSO manpower and technical

expertise, UMC built a state-of-the-art production

facility in 1982 to fabricate customized chips. UMC

made agreements with three Silicon Valley design

firms owned by Chinese-Americans, which opened

branches in the Hsinchu Science Park. These joint

ventures soon produced advanced chip designs.

ERSO also introduced critical technologies, such

as mass production capabilities. ERSO established a

Common Design Service Center, which spread

design technology to the private sector and provide

consulting and training in computers and design

tools. A number of design houses profited from the

effective subsidy in ERSO’s generous Iicensing

agreements.

By the late 1970s, government officials envisaged

an integrated information industry linking semiconductors, computers, computer software, and telecommunications. An information industry task force,

headed by two senior cabinet ministers, was responsible directly to the Premier himself, thus indicating

the high priority attached to the industry. The

Information Industry Development Plan for 1980 to

1989 spelled out a comprehensive approach to

promoting the information industry.

Industry leadership came from public research

organizations and their public enterprise offshoots.

ERSO was responsible for guiding the development

of new core technologies and products, and for

training microelectronics engineers, some of whom

would then move to private industry. After demonstrating the capacity for integrated circuit (IC)

production, ERSO emphasized capacity in applicationspecific integrated circuits (ASICs). Design strength

in custom-tailored chips was essential, ERSO argued, both to provide a source of innovation across

the information industry, from data processing to

consumer electronics to telecommunications, and

also to differentiate Taiwan from Korea, which was

then competing against U.S. and Japanese firms in

high-volume memory chips. As the private sector

developed a commercial interest in semiconductors,

ERSO altered its role, focusing greater attention on

basic research. In 1989, it established a laboratory

for developing technology to produce submicron

line widths on chips; in 1990, it split its operations

into two parts, one devoted to further semiconductor

research, the other emphasizing systems technol- —.

ogy.120

By 1986, however, Taiwanese firms still lacked

the capacity to make VLSI chips in commercial

quantities. Fearing that the time for collecting high

returns on advanced chip designs would soon run

out, UMC and its partners sold the designs to one

Korean and two Japanese companies. This dismayed

senior government policymakers, concerned that the

lack of a domestic integrated circuit industry could

hamper their efforts in linked industries. The government thus redoubled its efforts to find a multina-
Chapter 7—The New Competitors: Industrial Strategies of Korea and Taiwan ● 331

tional company able to fabricate VLSI chips in

Taiwan.

Philips, a Dutch company with many longestablished factories in Taiwan, agreed to start a

foundry in late 1986.121 The project was a joint

venture of the government (48.3 percent), Philips

(27.5 percent), and several domestic private firms.

The government contributed almost half the $153

million startup cost. The new company, Taiwan

Semiconductor Manufacturing Corp., makes chips

to order rather than designing and marketing its own,

reducing the risk that it will steal proprietary

knowledge.

The company claimed that its technology as of

mid-1988 was only 9 months behind that of the

major U.S. firms like Texas Instruments and Intel,

whom it includes among its nine big U.S. customers.

By mid-1988, it was making 10,000 6-inch wafers a

month. U.S. industry analysts consider it state-of-theart, and its cost per wafer is estimated to be below

that of the best U.S. merchant facilities. A second

$220 million plant was scheduled for completion in

1991, with a capacity of 30,000 6-inch wafers a

month and capable of 1 micron line widths.

But government leadership was not the whole

story. In 1988, the country saw the emergence of the

frost chip makers not funded by the government:

Hualon, Winbond, and Advanced Microelectronic.122

Hualon and Winbond invested $360 million to build

two state-of-the-art fabrication facilities for DRAMs

and ASICs. Market imperatives drove the larger

Taiwanese end-users to form alliances in order to

guarantee needed output. In 1989, Texas Instruments announced a $250 million joint venture to

make advanced semiconductors, providing its partner, the Taiwanese computer company Acer, with an

assured supply of chips. During the 1988 shortage of

one megabit memory chips, Acer was unable to meet

demand for its computers because of the scarcity of

chips, while several of its competitors were less

affected because they made their own chips. The

new plant came on stream in mid-1991, and makes

4 megabit DRAMs.123

In addition to the chip foundries and the Texas

Instruments-Acer joint venture, Taiwan’s smaller

semiconductor firms design and produce large

quantities of “yeoman” chips, of good quality, low

price, and fast delivery, for consumer electronics

products. The island has the biggest pool of chip

design talent in Asia outside of Japan. Many of the

design houses are staffed by ERSO-trained engineers.

The proliferation of smaller firms is visible in

related segments of the electronics industry, including personal computers, peripherals and add-ens,

accounting for nearly 7 percent of Taiwan’s exports

in 1987, up from near zero in 1980.124 125 Taiwan has

over 100 computer manufacturers, compared to

fewer than 60 in Korea. They do everything from

clone-making to add-on graphics and communication cards, Chinese-character computer systems,

software packages, and the development of systems

integration through multi-user workstations. The

imitation lag between introduction of a new personal

computer product in the United States and the launch

of a machine with similar functions by Taiwan’s

computer makers is down to 6 to 9 months,

sometimes less.126

Acer, the leading firm, had 4,800 employees as of

1987, 15 percent of them in R&D. In that year it

spent $10 million, 3 percent of revenue, on R&D.127

It ships just over 3 percent of the world’s IBMcompatible personal computers, while its share of

the more powerful machines based on Intel’s 386

microprocessor is around 6 percent.128 Its clone of

IBM’s PS/2 30 model appeared in mid-1988, followed in early 1989 with two more products based

on models at the PS/2 range but with superior

performance characteristics. For the latter especially, a reputation for product reliability is crucial

for market success, because a malfunction in one

unit can put a whole network of users out of action.

Acer and Mitac, Taiwan’s second main firm, took a

license under IBM’s personal computer patents on a

running royalties basis. IBM also obtained a substantial up-front fee plus the right to license Acer and

Mitac patents on the same basis.

ERSO continues to take a leading role in computers. For example, it has provided the domestic

makers with an IBM compatible basic input-output

system to strengthen their hand in warding off IBM

lawsuits. Over the first half of the 1980s, it dedicated

major research projects to some 20 information

products, including a microcomputer local area

network system, a dot-matrix printer, and a 32-bit

microprocessor. With the Industrial Development

Bureau, it identifies firms to commercialize the

products once it has mastered the technology. In

1987, ERSO had a staff of 1,700 and a budget of just

under $100 million.129
332 ● Competing Economies: America, Europe, and the Pacific Rim

In the software industry the state has a large

presence through both ERSO and the publicly

owned Information Industry Institute (III). The III

has evolved into a profit-making public enterprise,

taking up nearly every major software project in the

public sector instead of channeling demand to the

private sector. Its competence is signaled by agreements with top U.S. computer firms to help commercialize in-house products for the Asian market. Two

examples are a Chinese input-output system developed by III and licensed to IBM, and a joint venture

with Hewlett Packard to develop software for the

Asian market.130 Much of the other commercialization sponsored by the institute has been undertaken

by its own subsidiary.

In contrast to the automobile sector, Taiwan has

a successful industrial policy in semiconductors and

electronics that exploits its strength in low-cost

engineering capabilities.131 Initially, the government led production, and used its facilities to train

personnel and transfer technology. ERSO then

entered into joint ventures with local and foreign

partners to develop key segments of the industry,

still using it facilities for internal technology transfer

with the goal of close integration among the

different industry components. More recently, ERSO

has concentrated its efforts in new products and

more basic research. The policy aim was to move the

industry towards higher technology products and to

reduce dependence on foreign sources for key

components and raw materials.

KOREA AND TAIWAN:

SIMILARITIES AND

DIFFERENCES

Many of the similarities between Korean and

Taiwanese industrial policies are striking, but the

differences are also significant, showing that there is

more than one viable approach to industrial promotion.

Korean and Taiwanese Government leaders share

a presumption that the state should promote industrial development and national prosperity. Both

countries have been committed to the development

of a strong private sector and have used an array of

policy tools, including protection and financial

incentives, to promote that goal.

Both countries issue detailed plans and quantitative targets for investment and output for particular

industries. Yet this East Asian planning style has

tied itself closely to world markets; in this, it is

fundamentally different from the import-substituting strategy pursued by most Latin American

countries and India, or the centralized planning of

the Eastern European countries. The two countries’

emphasis on exports forces firms to operate in

environments outside government control, and acts

as a check on policy.

Korea and Taiwan see no inconsistency in making

a commitment both to markets and to State assistance to industry. The State helps companies become

more competitive internationally, not only by infrastructure investment and macroeconomic stability,

but also by intervention at sectoral and even firm

levels. One of the driving themes of this intervention

has been to reduce the vulnerability of their industrial sectors to cut-offs from foreign, especially

Japanese, suppliers. Recent efforts in semiconductors were motivated partly by this concern, as were

earlier investments in industries such as steel and

petrochemicals.

Finally, both governments share a commitment to

long-term planning. This planning does not mean

detailed quantitative targets for investment and

output for particular industries. Rather, it means

broad visions of the directions that economic growth

ought to take and the specific industries that ought

to be encouraged. It is striking that the current

successes in semiconductors and computers, for

example, are the fruits of government promotional

programs begun in the early to mid- 1970s.

Korea and Taiwan are also distinct from each

other in important ways. The Korean Government

encouraged the growth of large private business .

groups to spearhead Korean industrialization. Particularly in the late 1970s, during the heavy and

chemical industry push, it guided their investments

by means of subsidized credit through the stateowned banking system, controlling their access to

foreign exchange, protecting the domestic market,

and offering investment tax incentives. This system

was cemented by a strong government ‘ ‘persuasion” and durable social ties between business and

government leaders. As the business groups have

become more central in the economy, the government has constructed elaborate consultative mechanisms through which policy formation occurs.

Korea discouraged direct foreign investment except in electronics. Most technology came through
Chapter 7—The New Competitors: Industrial Strategies of Korea and Taiwan ● 333

either licensing or more informal means of transfer—

e.g., returning students. Public R&D organizations

contributed to the build-up of an indigenous R&D

capability, but over the 1980s private fins, encouraged by the government, established their own R&D

facilities.

This pattern of industrial policy accounts for both

strengths and weaknesses of Korea’s industrial

development strategy. The development of large

national champions has made the country particularly strong in the development of large-scale and

capital-intensive production; this is reflected in the

country’s success in autos and DRAMs. Korea’s

weaknesses have been in flexibility and design. The

policy challenge for the future, therefore, will lie in

building a more flexible industrial structure, probably through the promotion of small and mediumsized firms.

The Taiwanese Government, on the other hand,

has not encouraged the growth of large business

groups. It has relied on public enterprises, often

allied with multinational companies, to undertake

big pushes into new fields. The efficiency of these

investments is due to the unique nature of the

political system; in contrast to other developing

countries, state-owned enterprises have not enjoyed

easy or unlimited access to public finance. As the

semiconductor case shows, public enterprises

change the distribution of profit opportunities in the

downstream sectors and induce new patterns of

investment. Taiwan also relies on public R&D

organizations, partly because of the inability of

small firms to sustain their own R&D.

Consultative mechanisms of the Korean type are

lacking, however. Relations between the government and private firms are characterized by distance

and even a certain degree of mutual suspicion,

perhaps reflecting the ethnic split between mainlanders, who until recently have dominated top positions in the ruling KMT, and native Taiwanese. This

distance was visible in the failed effort to center an

auto strategy on a state-owned enterprise and the

subsequent government liberalization of the domestic market; the contrast with Korea in this regard is

striking.

The government has made it easy to start a

business or enter a new industry and has been more

welcoming of direct foreign investment than Korea.

Foreign investment is, however, under export and/or

domestic content requirements to check its domination of the domestic market and increase its links to

domestic industries. Arms-length incentives and the

ease of doing business have encouraged a dynamic

small and medium-sized industry sector, not only in

light, labor-intensive manufacturing, but also in

dynamic, high-technology segments; this can be

seen in the semiconductor case.

This combination of strategy and structure explains Taiwan’s pattern of competitiveness. Less

able to rely on direct government support and

protection than Korean fins, and unable to finance

operations of similar scale, Taiwanese firms are

more likely to adopt a niche strategy, relying on

indigenous design capability and flexibility to enter

more specialized product lines. This shows in both

the development of the custom and semi-custom end

of the semiconductor market and in the rapid

development of the automobile parts industry.

The differences in strategy between Korea and

Taiwan also reflect the difference in industry structure. A strategy of targeting resources at a few large

firms could be viable, although we have seen that

this strategy also had some important costs. With

Taiwan’s many small and medium-sized firms, its

strategy of creating opportunities for downstream

entry through publicly owned upstream industries

seems appropriate.

Differences in industry structure were partly the

result of government policy. Taiwan’s political

leaders and senior officials were steeped in an

official ideology that had strong socialist components. The native Taiwanese, who had been ruled by

the Japanese for 50 years up to 1945, were in a four

to one majority and played a large role in the

development of the private sector; they regarded the

KMT Government as something of an alien force.

Hence both sides, government and business, tended

to view each other with suspicion. In Korea, by

contrast, technocrats and political leaders shared a

strong nationalism. Indeed, the sense of wounded

pride induced by Korea’s 45 years of Japanese rule

in a previously unified kingdom with unchanged

boundaries for 1,000 years helped to foster the

notion of the South Korean people as a single team

against the rest of the world. The perception of an

underlying fusion of interests helped sustain a

relatively well-developed policy network between

the economic bureaucracy and private companies.

Through these relations of reciprocity, the business

groups emerged as Korea’s national champions.
334 ● Competing Economies: America, Europe, and the Pacific Rim

Korea’s strategy is much closer to the Japanese

than is the Taiwanese. Korea’s chaebol were built

with the Japanese keiretsu as the prototype, although

the chaebol were barred from owning banks. Korea’s

industrial structure resembles Japan’s more than

does Taiwan’s. The government’s instruments of

industrial steerage were similar too, particularly the

use of selective credit, protection, foreign direct

investment controls, and export promotion. But

Japan relied on public ownership less than Korea.

Industrial policy in the two countries now faces

two major challenges. The first is political liberalization. In the past, strategy in both countries has been

formulated with little input from interest groups

other than business, and in Taiwan, even business

input was limited. Democratization will now open

up new channels for a host of other actors, including

labor and the legislature. This will put new pressure

on the coherence of industrial policy initiatives.

The second challenge is economic liberalization.

In response to past failures, external pressures, and

the need to be closely integrated with rapidly

changing technology markets, both countries have

begun to open their markets to foreign competition

and reduced the government’s directive role. As we

have argued, however, this is not likely to mean a

repositioning of the government’s role rather than its

demise, with greater attention focused on technology policy and collaborative ventures with the

private sector.

1 U.S. Department of Commerce, International Trade Adrnuus “ “ tratioIL Office of Trade and Investment Analysis, U.S. Foreign Trade

Highlights, July 1989, table V1OB, pp. 126-128.

2 World Br@ World Development Report 1988 (New York, NY:

Oxford University Press, 1988); Council for Economic Planning and

Developmen~ Taiwan Statistical Data Book 1987 (Taipei Taiwan:

Executive Yuaq 1987); United Nations Statistical Offlce, Department

of Economic Affairs, Commodity Trade Statistics (New York, NY:

United Nations, 1987); U.S. Department of Commerce, International

Trade Administration ibid.

3 See World Bardq World Development Report 1990 (New Yorlq

NY: Oxford University Press, 1990), table 1, pp. 178-179.

4 Figures are for 1986, from World Banlq WorZd Development

Report 1988 (New York NY: Oxford University Press, 1988); Council

for Economicalarming and Developmen~ op. cit. Japan’s share of world

gross domestic product (GDP) is for 1985, horn The World in Figures

(&mdon: Hodder and Stoughton, 1987).

5 See, for example, Anne Krueger, The Development of the

Foreign Sector and Aid (Cambridge, MA: Harvard University Press,

1979) and the contributions to WorMDeve/opment vol. 16, No. 1, 1988,

a special issue on Korea.

6 See Alice Amsde~ Asia’s Next Giant (New Yorlq NY:

Cambridge University Press, 1989).

7 The most coherent statements of the case for selective industrial

policies are Howard Pack and Larry E. Westphal, “Industrial Strategy

and lkehnological Change: Theory vs. Reality,” Journal of DeveZopmentEconomics vol. 22, 1986, pp. 87-128; Larry Westph@ “Industrial

Policy in an Export-Propelled Economy: hssons from South Korea’s

Experience,” Journal of Econom”c Perspectives vol. 4, No. 3, summer

1990, pp. 41-59.

8 See Paul Krugmaq “Targeted Industrial Policies: Theory and

Evidence,’ in Industrial Change and Public Policy (Kansas City:

Federal Reserve Bank of Kansas City, 1983).

9 Forareviewofthe debate onJapaneseindustrial policy, see Greg

Noble, “The Japanese Industrial Policy Debate,” in Stephan Haggard

and Chung-inMooq Pacific Dynandcs: The International Politics of

Zndustna2 Change (Boulder, CO: Westview Press, 1989).

10 See Stephan Haggard, Pathways from the Periphery: The

Politics of Growth in the Newly Industn”alizing Counm”es (Ithaca, NY:

Cornell University Press, 1990).

11 lkchnology intensity is based on the ratio of applied R&D

expenditures as a share of shipments, as calculated by C. Michael Aho

and Howard F. Rosen using data from the mid 1970s. This ratio ranged

ffom 0.22 for special textile fabrics and related products to 13.4 for

telecommunications apparatus, with an average of 2.19. We divided the

industries into three categories. High-technology products are those that

are above the sample average. Intermediate-technology products have

ratios from 1 to 2; low-technology products have ratios below 1. For a

full discussion of the methodology, see Aho and Rose% Department of

Labor, Bureau of International Labor Affairs, Trends in TechnologyIntensive Trade, Economic Discussion Paper 9, October 1980.

12 See H. Doq B. H. Gunasekeq “Intraindustry Speeializationin

Production and Trade in Newly Industrializing Countries: A Conceptual

Framework and Some Empirical Evidence from East Asi&” World

Development vol. 17, no. 8, 1989, pp. 1279-1287.

13 ShujimUra@ “The Rapid Globrdisation of Japanese Firms in

the 1980s: An Analysis of Activities of Japanese Firms in Asia,” paper

prepared for OECD Meeting of Experts on Globalisation and Regionalisation of the World Economy, June 20-21, 1990. The following data on

the export behavior of Japanese fiis is also from Urata.

14 Jonathan Moore, “The Upstart Taipam,” Far Eastern Econonu”c ReviewVol. 148, No. 16, Apr. 19, 1990, p. 84.

15 Danny Leipziger, Korea: Managing the Industrial Transition,

vol. 1 (Washington DC: World BanlG 1986), p. 106.

16 l%emajor study of Korca’srecent exchange rate policy is Bela

Balassa and John Williamson Adjusting to Success: Balance of

Payments Policy in the East Asian NICS, 2d ed. (Washington DC:

Institute for International Economics, April 1990).

17 Bank of Korq “Balance of Payments, Foreign Trade and

Foreign Exchange,” Ecorwnu”c Statistics Yearbook 1987 (Seoul, Korea:

Bank of Kore& 1987); and Bank of Korea, “Summary of ExpOltS and

Imports,” Econow”c Statitistics Yearbook 1982 (See@ Korea: Bank of

Kore% 1982).

18 Leipziger, op. cit., vol. 1, op. cit.

19 Richard Luedde-Neura@Import Controls andExport On”ented

Development: A Reassessment of the South Korean Case (Boulder, CO:

Westview Press, 1986).

20 The following data is reported in “Trade Liberalization”

chapter three in Leipziger, op. cit., vol. 1. See also LueddeNeurati

ibid.; Robert Wade, “The Rise of East Asian Trading Nations-How

They Managed Their Trade” (mhneo, World Bank Trade Policy

Divisiow Country Economics Department, 1988); and Robert Wade,

Governing the Market: Econonu”c Theo~ and the Role of Government

in EastAsianlndusm”aZization(Lmvrenceville, NJ: Princeton University

Press, 1990).

21 The low e&iruate comes from Larry Westphal and K. S. K@

“Industrial Policy and Developmen~” World Bank Staff Working

Paper No. 263 (Washington DC: World Bank, 1977). The high estimate

comes from K. S. K@ “Long-term Variation of Nominal and Effective
Chapter 7—The New Competitors: Industrial Strategies of Korea and Taiwan .335

Rates of Protection” (Seoul: Korea Development Institute, 1982). On

the question of possible calculation.al bias, see Robert Wade, Governing

the Market, ibid., Chapter lkn.

22 Young Soogil, “Trade Policy Reform in Korea: Background

and Prospect,” mimeo (Seoul Korea Development Institute, 1984).

23 Young Soogil and Yoo Jungho, “The Basic Role of Industrial

Policy and a Reform Proposal for the Protection Regime in Korea,”

(Seoul: Korea Development Institute, 1982).

24 See Balassa and WiWarnsoU op. cit., p. 46.

25 Office of the United States Trade Representative, National

Trade Estimate Report on Foreign Trade Barriers (Washington DC:

Office of the U. S.TR., 1989), p. 115; and ibid., 1986, p. 165.

26 Leipziger, op. cit., vol. 1, p. 65.

27 Ibid., p. 65.

28 See Luedde-Neura@ op. cit.

29 Since 1975 the tariff has had to be paid and then claimed back

against evidence of quantities used for exports.

30 See Luedde-Neurath, and Yung Whee Rhee, ‘A Framework for

Export Policy and A&mm“ “stration: The East Asian Experience,” World

Bank Industry and Finance Series No. 10 (Washington DC: World

BardG no date).

31 Leroy Jones and 11 SaKong, Government, Business, and

Entrepreneurship in Econonu”cDevelopment: The Korean Case (Cambridge, MA: Harvard University Press for Harvard University Council on

East Asian Studies, 1980); David C. Cole and Yung CM Parlq

FinancialDevelopment in Korea, 1945-1978 (Cambridge, MA: Harvard

University Press for Hruvard University Council on East Asian Studies,

1983).

32 Leipziger, vol. 1, p. 75.

33 Robert Wade, “The Rise of East Asian Trading Nations,” op.

cit.

34 Yung Whee Rhee, Bruce Ross-Larsou and Garry Pursell,

Korea’s Competitive Edge: Managing the Entry into World Markets

(Baltimore, MD: Johns Hopkins University Press for the World Bar.dq

1984), table B-8.

35 Ibid., p. 16.

36 Jones and SaKong, op. cit.; R. Wade, Irrigation and Agricultuu;18PfZiiies in South Korea (Boulder, CO: Westview Press, 1982), pp.

9.

37 Phone interview with Hee-Boum Lee, Korean Science Attache,

Aug. 2, 1989.

38 Jones and SaKong, op. cit.

39 Tibor Scitovskygivesthehighestimate in’’ EconomicDevelopment in Taiwan and Soutb Korea,” Food Research Institute Studies vol.

19, No. 3,1985, p. 253; Korea Exchange Bar& MonthZy Review vol. 16,

No. 7, July 1982, gives “miscellaneous” loans (which include curb

market loans) as 17 percent in 1979, 23 percent in 1980, and 8 percent

in 1981. See also Cole and Park op. cit., chapter 4; and Robert Wade,

“East Asian Financial Systems as a Challenge to Economics: Issons

from TaiwQ” California Management Review, vol. 27, No. 4, summer

1985, pp. 106-127.

40 Scitovs@, ibid. The Korean figure is probably biased upwards

by inflation and by certain features of the rules of accounting for

depreciation. One estimate of the “real” Korean figure puts it at more

like 160 to 180. See World B@ Korea’s Development in a Global

Context (Washington, DC: World Banlq 1984), p. 238, note 8.

41 Thomas G. Parry, “The Role of Foreign Capital in East Asian

Industridizatio~ Growth and Development” in Helen Hughes (cd.),

Achieving Industn”alization in East Asia (New Yorlq NY: Cambridge

University Press, 1988). Parry shows that capital flow information is

statistically we~ with different statistical organizations such as the

OECD and the IMF giving very different figures for the same vmiable.

42 Luedde-Neura@ op. cit.

43 Korean Embassy, Financial Attache, from Ministry of Finance

announcement.

44 Ministry of Science and ‘Ikchnology, Annual Statistics on

Science and Technology, Republic of Korea (Seoul: Ministry of Science

and ~hnology, 1986).

45 R.M. Gadbow and T Richards (eds.), ZntellectuaZ Property

Rights: Global Consensus, Global Competition (Boulder, CO:

Westview Press, 1988), p. 298; Far Eastern Economic Review, “Patent

drugs abuse,“FarEasternEconom”cR eview, vol. 140, No. 25, June 30,

1988, pp. 48-49. The U.S. Trade Representative announced the

formation of a task force to look into Korea’s patent syste~ explaining,

“I am concerned that there is a lack of patent enforcement in Korea,”

International Trade Reporter, June 15, 1988, p. 883.

46 Ministry of Science and lkchnology, ‘Umg-term Science and

lkchnology Forecast for the Year 2000,’ in Korean (Seoul: Ministry of

Science and ‘Ikchuology, 1986).

47 Yong-chanPark, “TheNationalSystem of Innovation inKo~

with an Introduction to the Semiconductor Industry,” (University of

SusseL MSC thesis, 1987).

48 Phone interview with Hee-Boum Lee, Science Attache Korean

Embassy, interview with OTA staff, Aug. 2, 1989.

49 UNESCO, Statistical Yearbook (Paris: 1988), pp. 3-325. See

also Ministry of Educatio~ Statistical Yearbook of Education (Seoul:

1985).

50 Ministry of Science and lkchnology, Introduction to Science

and Technology (Seoul: 1986).

51 Yung-chan Park op. cit.

52 Ministry of Science and lkchnology, Annual Statistics on

Science and Technology, op. cit.

53 Ministry of Science and ‘lkchnology, Introduction to Science

and Technology, op. cit.

54 Ibid.

55 Korea Industrial Research Institute, Industrz”al Technology

White Paper, 1986, in Korew cited in Yong-chan Park, “The National

System of hmovatio~” op. cit.

56 Leipziger, op. cit., vol. 2, pp. 33-36.

57 beByung-Jong, “HomewardBound,’ ’BusinessKorea,F ebrumy 1989, p. 34.

58 Mark Clifford, “The Engine Is Straining,” Far Eastern

Econom”c Review, Jan. 18, 1990, p. 35.

59 Ibid., p. 36.

60 Nam Choong Woo, director of the Korean Ministry of Trade

and Industry’s transportation-machine~ division claimed that though

the official rate is 90 percent localization, the real rate is closer to 50

percent. The gap is ascribed to skew in the measurement of localization

success. Mark Clifford, “The Engine Is Straining,” op. cit., p. 38.

61 Chll Yun-han, “Authoritarian Regimes Under Stress: The

Political Economy of Adjustment in the East Asian NICS,’ (University

of Minnesota, PhD. thesis, 1987), p. 205.

62 Automotive News, Feb. 22, 1988.

63 Mark Clifford, “Local Anesthetic,” Far Eastern Economic

Review, vol. 45, No, 33, Aug. 17, 1989, p. 63.

64 “Ssang Yong Motors Takes on (Korea’s) Big Three,” Business

Asia, Sept. 18, 1989, p. 308.

65 Ibid., p. 309.

66 Sohn Jie-Ae, ‘TxXting It All Ride on the Automobile,”

Business Korea, July 1990, pp. 25-27; Clifford, “The Engine Is

Straining,” op. cit., p. 36.

67 Clifford, “The Engine Is Strain@,” op. cit., p. 35.
336 . Competing Economies: America, Europe, and the Pacific Rim

68 Clifford, “The Engine Is Strain@,” op. cit.

69 Sohn Jie-Ae, op. cit., p. 28.

70 “SsangYong Motors Takes On (Korea’s) Big Three,” op. cit.,

p. 309.

71 Sohu Jie-Ae, op. cit., p. 28.

72 Clifford, “JmcalAnesthetic,” op. cit., p. 63.

73 Ron McMil@ “Still Stuck in Neutral.. .,” Asian Business,

July 1988, pp. 59-60.

74 Therefore, it is not clear tbat the plan was not rejected simply

to preserve the economic rents gained by KAMA members from

restricted entry. Grego~ Noble (in a 1988 Harvard dissertation

“Between Competition and Cooperation: Collective Action in the

Industrial Policy of Japan and Taiwu”) has shown how dominant

producers in Japan’s steel minimdl industry were able to persuade

government to shutdown (unsuccessfully, as it turned out) “maverick”

mills.

75 “South Korea Rejects Samsung‘s Plan To Make Large Trucks

with Nisssuq” Asian Wall Street Journal, Aug. 17-18, 1990, p. 3.

76 Electronics Industries Association of Korea, Electronic Zndustry of Korea 1989, table 2B.

77 For an overview of the industry, see Byung-Moon Byun and

Byung-Hun A@ “Growth of the Korean Semiconductor Industry and

Its Competitive Strategy in the World Marke4° Technovation September 1989, pp. 635-656; Yong-chan Park op. cit.

78 See bipziger, op. cit., vol. 2; and Selected Topics and Case

Studies (Washington, DC: The World Br@ 1987), pp. 202 ff.

79 Chu Yun-@ op. cit.

80 Anthony Rowley, “The Birth of a Multi-Natio@” Far

Eastern Econom”c Rew”ew, vol. 120, No. 14, Apr. 7, 1983, p. 56.

81 Fordetailsofthis arrangement seekipziger,op .cit.,vol. 2, pp.

203-204.

82 Chu, op. cit.

83 Fora corporate profile, see Electronic Business June 25, 1990,

pp. 34-38.

84 Andrew Tanzer, “Korea Chips Away,” Forbes, vol. 135, Feb.

25, 1985, p. 44.

85 Electronics Weekly, “Korea Hot on Tails of haders in Chip

Race”, June 1, 1988, p. 3.

86 Samsung Semiconductor and lklecommunicatiom Retrospect

for thetist i%n Years of SamSung Semiconductors and Telecommunication, in Koreaq 1987.

87 Electronic Business Feb. 6, 1990, pp. 25-32.

88 Forcorporatepro fdes, seeFar Eastern Economa”cReview, Nov.

19,1987, pp. 80-82; Electronic Bu.n”ness Aug. 20,1990, pp. 67-9. On the

tie-up with Hitachi, see “Thanks for the Memories,” Far Eastern

Economic Review, vol. 145 No. 34, Aug. 24, 1989, pp. 50-51.

89 Ministry of Science and lkchnology, Annual Statistics on

Science and Technology, 1986.

90 Byun and A@ op. cit., p. 647.

91 For overviews of Taiwan’s industrial policy, see Robert Wade,

Governing the Market, op. cit.; Thomas Gold, The Taiwan Miracle

(Armonk, NY: M.E. Sharpe, 1987); Walter Galensou ed. Econonu”c

Growth and Structural Change in Taiwan (Ithaca, NY: Cornell

University Press, 1979).

92 Council for Economic Planning and Development, Taiwan

Statistical Data Book 1988 (’lhipei, ‘Ihiwan: Executive Yuaq 1988).

93 R. Myers, 1986, “The economic development of the Republic

of China on TaiwatL 1965-1981”, in L. Lau, op. cit.

94 Directorate-GeneraJ of Budge4 Accounting and Statistics

(DGBAS), Republic of U Fourth and Sixth Censuses of Commerce

and Industry.

95 Chi Schive, The Foreign Factor: The Multinational Corporation’s Contribution to the Economic Modernization of the Republic of

China (Stadord, CA: Hoovtx Institution Press, 1990).

96 Taiwan StatisticalData Book1986, op. cit., table 8-6. ‘lbtaltax

revenue includes revenue from the wine and tobacco monopoly.

97 ‘l@ C. H. and Wang, W. ‘E, “Trade Liberahza“ tion in the

Republic of China on lltiwan, and the Economic Effects of ‘lMiff

Reductions”, paper to the Joint Conference on the Industrial Policies of

the ROC and the RO~ (Seoul: Korea Development Institute, 1988).

98 S. C. Tsiang and Wen Lang Cheq “Developments towards

Trade Libemlization in TaiwarL” paper to the 1984 Joint Conference on

the Industrial Policies of the ROC and the ROK (’Ih@i: Chung-hua

Institute for Economic Research 1985).

99 Board of Foreign Trade, “Tariff Reduction of the Republic of

China on ‘lMwan”, (Taipei: Ministry of Economic Affairs, 1988);

Balassa and WilIiamsorL Mjusting to Success, op. cit., p. 83.

100 Of the 15 commercial banks, 4 are private. But the biggest

(International Commercial Bank of China) is only nominally private,

having beenprivatized in the wake of UN derecognitionto allow ‘lhiwan

to have a bank with overseas branches while avoiding the diplomatic

problems of govemment-owned banks. The other tbree private banks are

tiny.

101 Ching-ing Hou Liang and Michael T. Skully, “Financial

Institutions and Markets in ‘Ihiwan,” in Michael T. Skully, cd.,

Financial Institutions and Markets in the Far East (New Yorlq NY: St.

Martin’s Press, 1982), p. 174.

102 Sam P. S. Ho, “Small-scale Enterprises in Korea and

ThiwarL” World Bank Staff Working Paper #384, (Wwd@torL DC:

World B@ 1980). The image of a sdeet market is misleading, for most

curb market credit takes the form of supplier’s credits from big f- to

small fhms.

103 NicholasRiegg, “TheRole of Fiscal and Monetary Policies in

lhiwan’s Economic Development” PhD thesis, University of Connecticut 1978; also ‘lMwan’s Bank of Communications, AnnuaZ Report,

various years. Riegg, citing a Bank of Thiwan source, says tbat “up to

75 percent of loans flowed to the targeted industries” (1978:95). The

Bank of Communications reporta comment proudly on the bank’s

success in f~cing its designated target industries. The 1973 repofi to

take just one example, gives figures to show that over haJf of the bank’s

total loans went to its six target industries.

104 In 1988, for example, Formosa Plastics undertook a $150

million expansion at one of its four U.S. petrochemical plants.

105 Itbegantodo soquiteearly. In 1959, atatimewhen76percent

of Taiwan’s exports were still agricultural or processed agricultural

products (mostly rice and sugar), the government promulgated the

“National Guidelines for Long Range Scientific Development” and

formed the “Council on Long Range Scientific Development”, since

renamed the National Science Council.

106 Phone interview with George Li~ North American Coordination Council Science Attache, June 30, 1989.

107 Jennie Hay Woo, “Education and Industrial Growth in

‘lhiwan: A Case of PlSnning,” Harvard Institute of International

Development EEF?A Discussion Paper #18, 1988.

108 Specifically, theproportion of tertiary students in engineering

expanded from 24.6 percent in 1955-56 to 30.3 percent in 1975-76 to

32.8 percent in 1985-86. Natural sciences and medicine rose from 10.1

percent in 1955-56 to 14.6 percent in 1985-86. So as of 1985-86, a little

less than half of Thiwan’s tertiary students were studying engineering,

natural sciences or medicine. Hurnam“ties and fine arts fell from 15.8

percent in 1955-56 to 9.1 percent in 1985-86. Law fe13 from 6.8 percent

to 1.2 percent.

109 Ministry of Science and llxhnology, Science and Technology

Annual, 1984, p. 227.
Chapter 7—The New Competitors: Industrial Strategies of Korea and Taiwan ● 337

110 National Youtb Commis sion positioq cited in Woo, “Education and Industrial Growth in ‘11.tiwm” op. cit., table 8.

111 ‘lMwan has a reputation as a producer of pirated products.

_ the 1980s, however, the government committed itaelfto incr~

the level of intellectual property protection. Since 1985, the government

has overhauled its intellectual property laws, creating strong domestic

pressure for retrenchment. Partly as a consequence, implementation of

the new laws has been lax, and pirating activity continues. There is,

however, a trend towards tighter enforcement. R.M. Gadbaw and T.

Richards (eds.), 1988, Intellectual Property Rights: Global Consensus,

Global Conflict? (Boulder, CO: Westview Press), ch. 10.

112 For an overview, see Walter Arnold, “Bureaucratic Politics,

State Capacity, and Taiwan’s Automobile Industrial Policy,” Modern

China vol. 15, No. 2, April 1989, pp. 178-214, from which this section

draws extensively.

113 Council for Economic Planning and Development, Taiwan

Statistical Data Book 1989 (Taipei, Taiwan: Executive Yum 1989), p.

94.

114 A 1971 report on the state of the industry characterized

technology transferred from several Japanese companies and General

Motors as “inadequate,” aud proposed a more purposeful importsubstitution role for policy. The government’s response was a higher

auto import tariff and a superficial package of fiscal measures aimed at

stimulating domestic demand. Walter Arnold, “Bureaucratic Politics,

State Capacity, and Taiwan’s Automobile Industrial Policy,” Modern

China vol. 15, No., April 1989, pp. 185-186.

115 “Taiwan’s Auto Industry Faces Hard Times Amid Booming

Sales,” Business Asia, Jan. 30, 1989, p. 35.

116 “Foreign Automakers Capitalize on Taiwan’s Relaxed Import

Code,” Business Asia, Sept. 11, 1989, p. 300.

117 Ministry of Economic Affairs, Taiwan Board of Foreign

Trade, Foreign Trade Development of the Republic of China, 1989, p.

2.

118 “Country report: lliwu” AEU: Journal of the Asia Electronics Union, April and May 1986.

119 Foranoverviewof tbeindustry, see Se-HwaWw “TheCourse

of Taiwan’s Integrated Circuit Industry Development” paper presented

at the conference on lhiwan Enterprises in Global Pempective,

Columbia University, New Yorlq NY, Sept. 15, 1990.

120 Far Eastern Econonu”c Retiew Aug. 2, 1990, p. 54.

121 Electronic Business, Jan. 15, 1988, pp. 85-7.

122 Electronic Business, Sept. 4, 1989, p. 79.

123 Bob Johnstone, “Chipping In: ‘lhiwan Computer Firm in

Tie-up witb US Chipmaker,” Far Eastern Econonu”c Review, May 25,

1989, p. 82. No information is given on help tbat Acer may have gotten

horn the ‘Ihiwan Government.

124 Electronics Research and Service Organization% “ROC and

ROK Comparative Development of the Information Industry” (Taipei,

‘Ihiwan: Electronics Research and Service Organization 1987).

125 Note that these exports are quite import intensive; imports of

inputs for personal computer components account for as much as half of

the value of component exports. Chi Schive, forthcoming, “The next

stage of industrkdization in lhiwan and Ko~” in G. Gereftl and D.

W= Manufactured Miracles: Patterns of Indu.rtn”alization in Lutin

America and East Asia (Lawrenceville, NJ: Princeton University Press).

126 K. T Li, “lkchnology Development and Cooperation among

NICS in the Western Paci.tic,” industry of Free China, vol. 68, No. 3,

September 1987, pp. 1-12.

127 IBM official, personal communication, July 1989.

128 Johnstone, “Chipping m“ op. cit., p. 82.

129 Science and lkchnolo~ Advisory Group, personal communication. Eighteen percent of the staff were engaged in administrative

support.

130 ChuYun-han, “AuthontarianRegimesu nderStress,” op. cit.,

p. 2,27.

131 In addition to the efforts of the public research and service

organiza tions described above, other forms of state assistance are

available to makers of electronics products. Tax incentives, loans on

concessionary terms, and other privileges have been targeted on

electronics; protection, however, has not.
Chapter 8

Government Support of the

Large Commercial Aircraft

Industries of Japan, Europe,

and the United States
CONTENTS

Page

RISK AND THE ROLE OF GOVERNMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 342

UNITED STATES ... *.*. ... *.. ... ... ... ..*. ..*. ... ... *.*. *.*. .*** *. * * * 4 ...***... 344

Motives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .344

Military-Commercial Synergies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345

Government Funding for Civil Aeronautical R&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 346

Direct Financial Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348

promotion of a Domestic Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348

Export Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .348

JAPAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349

Motives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .349

Direct Financial Supports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349

Military-Commercial Synergies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351

Other Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351

EUROPE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .352

Motives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .352

Direct Financial Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353

Government Influence Over Airline Procurement Decisions . . . . . . . . . . . . . . . . . . . . . . 355

Government Promotion of Cooperation and Consolidation . . . . . . . . . . . . . . . . . . . . . . . . 356

Military-Commercial Synergies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357

Government Funding for Civil Aeronautical R&D . ..*.....**.....,,***....****.. 358

Export Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .358

CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 358

Box

Box Page

8-A. Airbus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .353

Figures —

Figure Page

8-1. Cumulative Cash Flow for an Aircraft Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344

8-2. NASA Aeronautics Funding, 1959-91 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347

8-3. World Market Share, 1970-92 Large Commercial Transport Airplane

by Value of Deliveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352

8-4. Aircraft Inventories by Nationality of Airlines and Aircraft Manufacture, 1989 . . . 356

Table

Tables

8-1. Benefits to Commercial Aircraft and Component Manufacturers of Various

Types of Government Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8-2. Aircraft Development Costs ... ... ... ... ... $.. *.*. *.. e.. **. ..*. *.. .. .+.$..+**..

8-3. Launch Aid for Airbus Members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8-4. Government Ownership of Major European Airlines . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

342

343

355

356

8-5. Sales, 1989 . . . . . . . . . . . . . . . . . . . . . . . 357
Chapter 8

Government Support of the Large Commercial Aircraft

Industries of Japan, Europe, and the United Statesl

The commercial aircraft industry2 is often characterized by superlatives. It has the largest trade

surplus of any U.S. industry. There are fewer large

firms dominating the world market than in perhaps

any other industry. It is marked by larger economies

of scale than most other industries. In every country

that has a domestic commercial aircraft assembler,

the hand of government is prominent in the industry’s behavior and performance. Because of the

industry’s distinctive characteristics, it pays to be

cautious in drawing broader lessons about the

efficacy of government involvement in the industry’s competitiveness.

Even with an appropriate dose of caution, however, some conclusions about the nature. of government/business relationships in the commercial aircraft industry sound familiar. The United States has

influenced the commercial aircraft industry primarily through spinoffs from other programs, rather than

directly or with the intent of improving competitiveness. Four European nations (France, Germany,

Great Britain, and Spain) have played a much more

decisive role in boosting the competitiveness of their

aircraft consortium, Airbus Industrie. The amount

and kind of support extended to Airbus from these

governments has been far more effective in improving its competitiveness than the military spinoffs and

basic research programs of NASA in the United

States. While Japanese industrial policy has failed to

produce a domestic assembler of large commercial

aircraft, Japan, like Europe, has expended a great

deal of money and effort aimed directly at improving

competitiveness in the aircraft industry. Japanese

firms have become world-class subsystems makers.

In short, both Japan and Europe have directly aimed

public policies and supports at competitiveness, and

have gotten results. In comparison, American companies have gotten much less consistent or effective

boosts from policies that were directed toward other

goals.

Several advanced countries and even some developing nations have decided that the capacity to build

commercial aircraft is important to their national

self-interest. The preamble to the General Agreement on Tariffs and Trade (GATT) Agreement on

Trade in Civil Aircraft acknowledges this, stating

that countries have made that pact recognizing that

the aircraft sector is viewed as a particularly

important component of economic and industrial

policy. 3 The principal reasons are the industry’s

links to national security, the generation of technologies that may spill over to other industries, the

contributions of aircraft exports to a positive balance

of payments, the creation of well paying jobs, and

national pride.

Government supports for the commercial aircraft

industry have taken various forms:4 synergies between military and commercial work, funding of

civil R&D, direct financial supports for specific

commercial projects, encouragement of the growth

of domestic demand and efforts to steer it toward

domestic suppliers, export assistance, and efforts to

organize industry so it is well suited to international

competition. The most important effects in the

United States have come from the National Aeronautics and Space Administration (NASA) and

Department of Defense (DoD) programs. While

promoting competitiveness has been a goal of

NASA’s aeronautics program, other benefits include

the side effects of actions taken for reasons unrelated

to competitiveness. As a result, the benefits have

consistently been smaller than if promotion of

international competitiveness had been a major

policy objective. In particular, the indirect benefits

U.S. companies received from DoD programs were

substantial in the past, but have declined as military

and civil technologies have diverged and the air

transport industry has matured. In contrast, the direct

financial supports used heavily in Europe and Japan

have been provided specifically for the purpose of

improving competitiveness. While they have been

costly, they have also been effective and appear

likely to continue.

Table 8-1 assesses the relative importance of each

of the major types of support to the success of

commercial aircraft manufacturers in Europe, Japan,

and the United States.

–341–
342 ● Competing Economies: America, Europe, and the Pacific Rim

Table 8-l—Benefits to Commercial Aircraft and Component Manufacturers of

Various Types of Government Actionsa

Us. Japan Europe

Direct financial aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . small (4) large (=) very large (=)

Military R&D plus procurements . . . . . . . . . . . . . . . . . . . medium (4) small (T) medium (~)

Civil R&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . medium (=) small (=) small (=)

Control of domestic demand . . . . . . . . . . . . . . . . . . . . . . . none (=) small (=) medium (~)

Export assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . small (=) none (=) small (=)

Organizing the industry . . . . . . . . . . . . . . . . . . . . . . . . . . . .none (=) small (=) medium (=)

Legend: (f’) - increasing in importance

(=) = remaining at about the same level of importance

(J.) - decreasing in importance

a~ista~emmparest otal benefits, noteff iciency. That fact that two categories getthesarne rating does not mean that

thecostsof providing those supports are necessarily equal. Also, some types of government actions affect some parts

of the industry more than others-e. g., military/civil synergies are greater for engine makers than airframes.

This table represents a rough average for the whole industry.

SOURCE: Office of Technology Assessment, 1991.

RISK AND THE ROLE OF

GOVERNMENTS

The principal way these supports benefit manufacturers is by reducing risk. Risk in the commercial

aircraft business is higher than in most others. Both

technological and market uncertainties are great, and

the costs of launching a new model are enormous.

This combination of uncertainties and high costs

adds up to big risks. Bringing out a new airplane can

mean betting the company-and more than one

company has lost the bet. Government support can

reduce these risks to a point where the relation

between risks and expected rewards is favorable and

a company can proceed to launch a new model or

adopt a new technology.5

The use of state-of-the-art systems in each new

generation of aircraft confronts manufacturers with

significant technological risks. A project may be

years and billions of dollars into its development

before a technical obstacle is discovered that delays

or stops the effort. Rolls Royce’s effort to make

all-composite fan blades for the Lockheed L-1011

engine failed, causing delay in the plane’s introduction and ultimately the bankruptcy of both companies. Boeing’s 747 got heavier and heavier throughout the development process, requiring more and

more powerful engines and driving up costs. Pan

Am, the 747’s launch customer, Pratt & Whitney,

the engine makers, and Boeing were all nearly

bankrupted by the effort. Even when technological

uncertainty does not threaten the launch of a model,

it affects the manufacturer’s decision about whether

to adopt advanced subsystems and components. The

opportunity to develop and prove advanced technology at the expense of the government, in either

military or civil R&D projects, can help give

companies enough confidence in the cost and

performance of the new systems to just@ incorporating them into products.

More than technological failure, failure in the

market has been the source of disasters in the aircraft

business. As a rule, an aircraft manufacturer needs to

sell at least 500 units of a model for it to break even.

Of the 26 basic airplane types introduced worldwide

since the beginning of the jet age, only 6 have sold

as many as 500 (another 4 are likely to do so before

their production runs end). Seven sold less than 120

copies. Only four or five have been profitable.6 A

report by First Boston Corp. concludes that in 1984,

the jet transport aircraft programs then launched had

accumulated total losses of $40 billion on total sales

of $180 billion (in 1984 dollars). “The essential

message [of these figures] is that economic failure is

the norm in the civil aircraft business. ’

Considering this record, no one in this business

commits to building anew design before assembling

a number of launch customers.8 These early orders

not only assure the manufacturer that it will sell at

least that many units, they are needed to convince the

manufacturer’s financial backers that the model has

sufficient appeal to airlines to justify committing

funds. Government influence over airlines’ choice of

which aircraft to buy when a launch is pending can

directly affect the manufacturer’s decision, as can

large government orders of military aircraft that are

similar or identical to commercial models. Governments naturally favor domestic suppliers for their

military needs, but in the commercial business,

airlines’ purchase decisions frequently turn on
Chapter Government Support of the Large Commercial Aircraft Industries of Japan, Europe, & the United States ● 343

narrow differences in performance and price among

competing airplanes. A nudge from the airline’s

government--e.g., to choose a domestic company or

one that buys some parts or subsystems from

domestic companies--can be decisive.

In addition to technological and market uncertainties, financial risks are also high. Aircraft development costs have risen dramatically since the early

days of air transport, as table 8-2 shows.

The $1.2 billion development costs of the 747,

spent between December 1965 and January 1969,

were over 3 times the $372 million capitalization of

the Boeing company. The $1.1 billion cost of

developing the DC-10 was over 3 times greater than

the $364 million capitalization of the Douglas

company. 9 The combined launch costs of Boeing’s

757 and 767 in the late 1970s again exceeded the net

worth of the company. 10 Coupled with these tall

investment requirements are long lead times before

the project reaches positive cash flow, and an even

longer wait before the break-even point. Typically,

it takes 4 to 5 years to develop, test, and certify a new

aircraft, 2 years longer for the engines, and as much

as 10 years from then to recover the initial investment—if that point is ever reached.ll Figure 8-1

shows the cash flow of a typical aircraft program.

Unless they have government support, manufacturers finance these costs from four sources:

1.

2.

3.

4.

retained earnings,

issues of debt and equity,

progress payments from customers, and

cost-sharing with subcontractors and partners.

These sources may not be sufficient to enable a

manufacturer to launch a new model, and in some

instances, only if governments are willing to directly

assume much of the financial risk can the project

proceed. Governments can offer loan guarantees or

credits with payback contingent on success; or they

may pay outright some costs of developing new

projects, either by providing funds at preferential

rates or by contracting for development work.

Although government assistance to the large

commercial aircraft industry is undeniably important overall, the effects of individual government

supports vary greatly. Government support for R&D

may not advance a company’s technological development. On the one hand, it may stimulate a

company to increase its own funding for R&D, or it

may supplement the fro’s own R&D program.

Alternatively, it may supplant R&D the company

would have done anyway. Financial assistance with

the launch of new designs may enable firms to

proceed with models that otherwise would never

have made it past paper studies, but it may also

remove market disciplines and encourage a firm to

proceed without frost establishing that sufficient

demand exists, leading to costly market failures.

Government-provided financing to ease companies’

cash flows during production may enable firms to

increase production rates and improve market share,

but it may diminish pressures for the firm to institute

needed cost-controlling measures. The effectiveness

of government support depends not only on the

degree to which it is offered but also on the type

given and the way in which it is delivered.

The following sections describe government policies related to the aircraft industries of the United

States, Japan, and Europe, focusing on the motives,

content, and results of government interactions with

the industry.

Table 8-2—Aircraft Development Costs

Development

Development Development cost per seat

Entered cost in dollars cost in 1991 dollars in 1991 dollars

Aircraft service (millions) (millions) (millions)

DC-3 . . . . . . . . . . . . . . . . . . . . 1936 $0.3 3 0.1

DC-6 . . . . . . . . . . . . . . . . . . . . 1947 14 90 1.7

DC-8 . . . . . . . . . . . . . . . . . . . . 1959 112 600 3.75

747 . . . . . . . . . . . . . . . . . . . . . 1970 1,200 3,300 7.3

777 . . . . . . . . . . . . . . . . . . . . . 1995’ 5,000’ 4,300” 14.0’

● Estimate.

SOURCE: U.S. Department of Defense, National Aeronautics and Space Administration, and Department of

Transportation, F?&/l Contributions to Aviation Progress (RADCAP) (Springfield, VA: National Technical

Information Service, August, 1972), VOL 11, app. 9, p. 21.1991 values are computed using aerospace

industry price deflators for 19S5-19S9 and GNP deflators and estimates for other years.
344 ● Competing Economies: America, Europe, and the Pacific Rim

Constant

dollars

(billions)

Cumulative

gain

Figure 8-l—Cumulative Cash Flow for an Aircraft Project

Cumulative

loss

Assume:

4 - - ● 700 units delivered over about 10 years

● medium-size, medium-range aircraft

3 - - ● typical U.S. costs

2 --

● interest included (4 percent)

/ }

Gain

1 --

0

-1 - - L

Break even

-2 - -

-3 - -

L Peak investment

-6

-7

T / -

Deliveries start

4-

I I 1 I I I 1 I I i

0 2 4 6

SOURCE: Boeing Commercial Airplane Co.

UNITED STATES

Motives

The U.S. Government today avoids helping any

particular industry compete in world markets. However, the government does have policies related to

national defense and trade, and takes actions that

affect transportation and technology. The U.S.

commercial aircraft industry has benefited from

measures taken in these areas.

The greatest benefits for U.S. commercial aircraft

manufacturers have been side effects of the government’s commitment to building and maintaining a

strong defense industrial and technology base. The

use of advanced technology in national defense has

generated both financial and technological benefits

for companies that produce commercial as well as

military aircraft. Several factors make the commercial aircraft industry of special interest to defense

policymakers. Technological advances made for

commercial aircraft show up in military hardware

and concurrent production of commercial aircraft

8 10 12 14 16 18 20

Year from go-ahead

reduces military aircraft costs. The supplier base and

work force skills needed for rapid military buildups

are maintained by civil aircraft production, and the

design teams needed for military projects are kept

together by commercial work during periods of

weak military demand.12 These benefits are likely to

become even more important in the future as defense

spending is scaled back and military hardware

comes to rely more heavily on dual-use technologies.13

Support for civil aeronautical R&D is strong in

the United States, compared with that for most other

areas of the civilian economy .14 The traditional

rationale for government support of NASA technology programs is that the resulting R&D compensates

for the tendency of private firms to do less than the

socially optimal levels of R&D because they are

unable to capture fully the returns of their investments. This is the standard economic justification

for civil technology policies in general.15 Although

NASA’s official mission does not go father towards

helping U.S. aircraft manufacturers compete, this
Chapter 8--Government Support o f the Large Commercial Aircraft Industries of Japan, Europe, & the United States ● 345

alone does provide some competitiveness benefits to

Us. firms.

The belief that air travel is important for U.S.

transportation needs has led to measures such as

airline regulation, subsidies for air mail, Federal and

local subsidies for airports, safety monitoring, and

the management of the air traffic environment.

Though most of these measures were aimed primarily at air transportation, they fostered the early

growth of a strong domestic market for commercial

aircraft, which in turn benefited U.S. producers.l6

As for trade policy, U.S. commitment to free trade

served the country’s aircraft manufacturers well for

many years after World War II. During the war, the

United States had become the world’s greatest

producer of aircraft and it emerged at war’s end with

the industry intact; this helped establish the industry’s dominance. With the strong domestic market

and continuing military-civil connections giving

U.S. producers significant advantages, a liberal trade

environment favored the American industry. The

government also used its influence to discourage

foreign support for competitors (though with limited

success), maintained a tariff of 5 percent or more on

aircraft imports until 1980, and provided export

assistance to U.S. producers to compensate for

perceived unfair practices. In the 1980s, while U.S.

trade deficits reached record levels, commercial

aircraft exports rose. Indeed, aircraft is the United

States’ largest exporting industry. The U.S. trade

surplus in transport aircraft (not counting spare

parts) from 1985 to 1989 (the latest year for which

firm figures are available) was $35 billion. Although

sales of commercial transport aircraft represented

less than 0.3 percent of U.S. gross national product

(GNP) in 1989, they accounted for nearly 3.4percent

of the dollar value of U.S. merchandise exports.17

Among this list of U.S. Government actions and

policies, only NASA’s support for civil aeronautical

R&D constitutes a deliberate effort to help the

competitiveness of commercial aircraft builders.

Benefits the industry has received in other areas,

especially from the synergies between military and

civil aircraft work, have been the results of government actions taken with goals other than competitiveness in mind.

Military-Commercial Synergies

The U.S. Government policy that has most

affected the competitiveness of the commercial

292-889 0 - 91 - 12 QL:3

aircraft industry is procurement of military aircraft

and funding of the related R&D. Most important

among the effects of military work are technological

synergies. In a few cases, whole systems developed

for the military have been spun off to commercial

applications, reducing development costs and risks

to the commercial users. In others, large military

orders for products or technologies designed for

commercial uses (or those closely related) have

boosted production runs, and therefore lowered

costs by allowing companies to achieve economies

of scale, learn the production process, and share

overhead costs. Military development programs

have assumed the risks of proving advanced technologies, giving commercial users the confidence to

adopt them. Often, the benefits accrue not so much

to aircraft assemblers, but at the subsystem level, in

materials, or in manufacturing process technology.

Though synergies appear to be declining, the boost

the industry was given in the past when military and

civil technology were more similar accounts for a

portion of the success of the industry today.

Examples of these synergies are numerous. Boeing’s civil 707 and the military KC-135 tanker were

both developed from a common prototype and

shared 20 percent of the tooling, reducing costs to

both commercial and government customers. The

prototype itself drew heavily on advances made in

the B-47 and B-52 bomber programs, including the

flexible swept wing and the podded engine. The core

of General Electric’s largest commercial engine was

originally developed for the C-5 military transport,

and the core of the company’s medium-sized commercial engine came from the B-1 bomber. At the

GE Aircraft Engines plant in Evendale, Ohio,

commercial and military engines move through

many of the same production stations. Both sides of

the business share a common management structure,

common ordering and inventory, common manufacturing processes, and common R&D facilities. Only

finance and marketing are separated. McDonnell

Douglas sold 60 of its commercial DC-1OS to the Air

Force for use as air refueling tankers, thus increasing

the total profits of the program and helping to keep

production going until the company was ready to

commit to the derivative MD-11. The development

of lightweight composite materials is being led by

the military; commercial users have been unwilling

to adopt the materials until they have acquired

sufficient service experience that their safety is

assured. Military users are providing that experi-
346 ● Competing Economies: America, Europe, and the Pacific Rim

ence. Though much of the development cost of the

ring laser gyroscope for inertial reference systems

was borne by companies, military funding at key

moments in the development process, together with

the promise of a combined military and civil market,

spurred the private investment. Pratt & Whitney’s

F-1 17 engine for the Air Force C-17 cargo plane was

adapted from the commercial P&W 2037 engine and

bought ‘‘off the shelf’ by the military, thereby

increasing production runs, spreading development

and overhead costs, and decreasing costs to both

military and commercial users.

Military projects help train aeronautical engineers. The original 747 design team consisted of

engineers who had been trained and familiarized

with the tasks involved in designing wide-bodies

during the C-5A military transport competition.18

One McDonnell Douglas official suggested that

even if the C-17 program were canceled, it would

still have had the beneficial effect of training 2,000

engineers the company could then employ on

commercial work.

Until the last decade, military work was profitable. This, combined with the often alternating cycles

of the commercial and military sides of the business,

generated some financial benefits for companies

involved in both commercial and military work.19

For example, according to a leading aircraft industry

analyst, Boeing’s commercial activities lost money

during the first 20 years of jet production; the

company was carried during that period by steady

profits in its military business, especially the B-52

and Minuteman missile.20 In 1967, despite an order

backlog of $2.3 billion in commercial aircraft, the

commercial Douglas Co. was forced to merge with

the primarily military McDonnell Aircraft Corp.21

The cash infusion from McDonnell not only saved

Douglas from bankruptcy but enabled the company

to bring out the DC-10 (introduced in 1971).

However, the defense connection has not been an

unqua.idled boon. Defense and commercial technologies have been gradually diverging since the

beginning of the jet age, so opportunities for the

commercial side to benefit from military developments are shrinkin“ g. Commercial requirements are

driving high reliability, low fuel consumption, and

low noise technologies, while defense needs are

pushing low radar detection, high speeds, and high

maneuverability. Some synergies remain, but they

are smaller than they once were.

Other aspects of the defense business are negative

as well. Military projects can divert limited resources (e.g., highly specialized aeronautical engineers) away from commercial projects. Export

controls limit international markets, military requirements may entrench processes and mentalities

ill-suited to commercial competition, and efforts to

standardize military hardware with allies may have

transferred commercially relevant technology to

competitors. Classification of defense systems often

makes advances in military technology unavailable

to commercial divisions even within the same

company, and much of the DoD aircraft development and procurement budget is spent with firms

that have no significant commercial activity. In the

late 1980s and early 1990s, defense aircraft work in

the United States has become less profitable than it

once was, creating a burden on profitable commercial operations.

DoD’s procurement regulations often create de

facto requirements for firms to separate their military and commercial development and production,

reducing the potential benefits of simultaneous

involvement in both sides of the business.22 The

costs generated by DoD’s close oversight or detailed

specification of hardware and production processes

cause some companies to separate military and

commercial production that they might have combined if DoD provided for more latitude.23 Even

when companies still find it beneficial to combine

military and commercial production, the benefits are

less than if DoD procurement regulations and

contract specifications allowed more flexibility.24

Burdensome military requirements are unlikely to

leave commercial producers less competitive than if

the companies had no military business at all, but

they do interfere with the ability of firms to take

maximum advantage of available synergies.

The defense business has generated benefits for

and imposed extra costs on firms also involved in

commercial work. These benefits have been far less

than they could have been if promoting commercial

competitiveness were a major policy goal.

Government Funding for Civil

Aeronautical R&D

In addition to the often indirect and generally

unintended benefits to commercial manufacturers of

military aircraft, the U.S. Government has directly

funded R&D for civil applications through the
Chapter 8-Government Support of the Large Commercial Aircraft lndustries of Japan,Europe, & the United States ● 347

aeronautics program at NASA and its predecessor,

the National Advisory Committee on Aeronautics

(NACA). Figure 8-2 shows the funding history for

NASA’s aeronautics program. Their research projects have produced many advances that improved

the performance and safety of aircraft. However, the

gains for the competitiveness of U.S. aircraft manufacturers have been less clear.

One undisputed benefit has been the research and

test facilities NASA provides. Since companies are

relieved of the need to maintain redundant facilities

of their own, the NASA facilities reduce costs for

individual firms and improve the efficiency of the

industry as a whole. Most used by companies are the

wind tunnels. According to NASA officials, every

commercial aircraft built in the United States has

been tested in NASA wind tunnels. Computers,

simulators, aircraft for flight testing, and other

specialized equipment are also used by industry,

sometimes quite heavily. Aircraft companies account for 15 to 20 percent of the use of the Numerical

Aerodynamic Simulation computers, the world’s

most advanced facility for computational fluid

dynamics (CFD). In 1984, the replacement value of

all of NASA’s aeronautics facilities was estimated at

$10 billion.25

.

NASA’s aeronautics R&D program also benefits

U.S. aircraft producers, though it does not always

bestow a competitive advantage. The program helps

U.S. aircraft manufactures develop and adopt new

technologies by conducting research inhouse and

then transferring the results to companies and by

contracting with companies to perform specific

research tasks, usually in cooperation with inhouse

NASA research. Further, NASA researchers act as a

free consulting service for industry engineers having

technical problems. The availability of technologies

developed and tested at NASA’s expense and risk

helps aircraft manufacturers incorporate new capabilities into their products at diminished cost or risk,

just as military developments do.

Sometimes, these technological advances result

in gains in competitiveness for the firms that use

them. Examples include NASA’s work in CFD,

which helped Boeing find positions to locate the

nacelles on the wings of the 737, 757, and 767 to

minimize drag. NASA’s energy efficiency projects

of the late 1970s and 1980s helped U.S. engine

makers decrease fuel consumption of their engines,

increasing their appeal to airlines looking for ways

Figure 8-2—NASA Aeronautics Funding, 1959-91

1991 US$ millions

1,000[ 1

1959 1963 1967 1971 1975 1979 1983 1987 1991

- R& D = Staff and overhead

m Facilities

SOURCE: NASA.

to cut operating costs. NASA’s noise reduction

projects helped U.S. engine makers build quieter

engines, which resulted in significant competitive

advantages when Congress passed noise limitations

in 1968 and tightened them in 1974.

However, NASA’s technology advances can provide U.S. firms with a competitive advantage only if

they are able to apply the technology before their

foreign competitors. The record has been mixed.

Cases in which foreign competitors have applied

NASA research first are numerous. Winglets made

their first commercial appearance on Airbus planes.

The supercritical wing was frost employed on the

Airbus A320.26 In Japan, the Shin-Meiwa Co.,

which builds some composite parts for Boeing,

claims to have learned much of its carbon fiber

technology from NASA publications. NASA advances in engine technology will be applied by

Société Nationale d’Étude et de Construction de

Moteurs d’Aviation (SNECMA), the French aircraft

engine company, in its high-pressure compressor for

the GE-90.27 Advances made in short take-off and

landing (STOL) technology have been used more by

the Canadian company DeHavilland (to the degree

that they have been used at all) in its Dash-7 aircraft

than by U.S. firms.28 Safety-related research, such as

that on the prevention of icing, transfers quickly-as

indeed it should.

NASA publishes nearly all of its research in open

literature. Even when U.S. companies do get access

to NASA technology first, they may transfer this

technology overseas in technology licensing ar-
348 . Competing Economies: America, Europe, and the Pacific Rim

rangements and through joint ventures. Foreign

governments’ support of their own aircraft industries

in ways that reduce the risks of adopting new

technologies is a major reason for foreign firms

taking advantage of NASA-generated advances

sooner than U.S. firms do.

U.S. firms do have some advantages in getting to

NASA R&D first. Most importantly, they often

participate in the research projects, gaining valuable

“hands-on” experience. NASA also tries to limit

the distribution of the most valuable results, though

with limited success.

It is likely that the competitiveness benefits to

U.S. firms equal only a portion of the cost of

NASA’s aeronautical R&D program. While the

facilities and some portion of NASA’s aeronautics

R&D budget may be viewed as a support to the

industry, to view the whole budget as such is an

overestimate of those effects.29

Direct Financial Assistance

Though synergies between military and civil

work and NASA’s aeronautics R&D program are the

main sources of U.S. Government benefits to

commercial producers, other government actions

have also helped. On three occasions, the U.S.

Government has provided direct financial supports

to the industry. In the late 1960s, poor sales and costs

overruns of the L-1011 drove Lockheed to the brink

of bankruptcy. In 1971, the Nixon administration

approved a loan guarantee of $250 million, which

saved the company but failed to prevent it from

exiting the commercial business within a decade. In

any case, the government’s main purpose was to

save a defense contractor, not a commercial aircraft

producer. 30 Commercial interests were more directly

involved in the case of the Douglas Aircraft Co.

When the company approached bankruptcy in 1967,

the government eased its merger with the McDonnell Aircraft Co. by providing a loan guarantee of

$75 million, helping to save its commercial aircraft

business.31 Here, the government’s interest was

more in the realm of the domestic economy-jobs

and community economic base-than in international competitiveness. In neither situation was

the guarantee called upon. In the third case, the U.S.

Government spent roughly $1 billion between 1961

and 1971 on the development of a supersonic

transport (SST) to rival the Concorde. The program

was canceled long before an aircraft flew but did

generate some technology that appeared in later

subsonic aircraft.

The Lockheed and Douglas loan guarantees and

the SST program are the most significant direct

financial assistance the U.S. commercial aircraft

industry has received from the U.S. Government, yet

they pale in comparison to the funding available in

other countries. Further, these interventions were

infrequent and ad hoc, not part of a coherent strategy

to support the commercial aircraft manufacturing

industry.

Promotion of a Domestic Market

The government has helped U.S. aircraft manufacturers indirectly through its efforts to promote the

growth of domestic air travel. The size and strength

of the American market is a major reason for the

success of U.S. commercial aircraft manufacturers.

The earliest commercial use of air transport was in

carrying the mail. Deliberate government subsidies

enabled carriers to use larger, faster planes better

suited to carrying passengers as well.32 In 1938, the

Civil Aviation Administration (CAA) was set up

within the Department of Commerce to provide

“direct subsidies to promote passenger travel, economic regulation of the airlines, air traffic control,

and safety. ’ In 1948, the CAA was divided into the

Civil Aeronautics Board (CAB), with responsibility

to regulate routes and fares, and the Federal Aviation

Administration (FAA) to oversee safety and the

air-traffic environment.33 Safety standards, efficient

management of the airspace, and technical support

for the construction of airports provided by the FAA

all helped to make air travel a safe and desirable

means of transport. Regulation, which ended in

1978, enabled airlines to pass on the costs of more

expensive, more advanced aircraft to the traveling

public,34 so airlines were quick to replace old aircraft

and to introduce technological innovations.35

Though these benefits have largely disappeared in

the last decade, historically they were very important

to the industry.

Export Assistance

Finally, the U.S. Government has helped aircraft

manufacturers export by providing credit on favorable terms through the Export Import Bank (Eximbank). Over the decade from 1967 to 1977, the

Eximbank provided $5.77 billion in loans covering

the export sales of 1,185 commercial jets worth

$12.8 billion.36 In the early 1970s, when the aircraft
Chapter 8--Government Support of the Large Commercial Aircraft Industries of Japan, Europe, & the United States ● 349

market was so weak that U.S. aircraft manufacturers

faced serious threats to their survival, the Eximbank

became so heavily involved in financing aircraft

exports that it acquired the nickname “Boeing’s

bank.” However, two developments have greatly

undermined the importance of export financing.

First, an agreement among the major aircraft exporters called the Large Aircraft Sector Understanding

(LASU), concluded under the auspices of the

Organization for Economic Cooperation and Development (OECD), established a minimum rate governments could offer. Second, in the mid- 1980s, the

financial markets realized that aircraft retain their

value well and can be held as collateral against the

loans used to buy them. Bank rates for aircraft

purchase loans consequently dropped very close to

rates available with government guarantees, greatly

diminishing the role of export financing.37 Boeing

officials state the Eximbank now finances only five

to seven sales of Boeing planes annually, or about 2

percent of the company’s sales.

JAPAN

Motives

In contrast to the United States, the explicit goal

of the Japanese Government in its support for

commercial aircraft manufacturers was and still is

promoting the industry’s development. Japanese

Government support for this industry is properly

seen as another step up the technological ladder in a

long succession of targeted industries.

After the U.S. occupation of Japan ended, most of

the companies that had built military aircraft during

WWII returned to the business. Their first significant work came from the overhaul of U.S. military

aircraft used in the Korean War, followed by

licensed production of U.S. military designs. In the

1960s, a project to build a twin-engine turbo-prop

gave companies their first experience designing

commercial transports and their first taste of the

business. Following the costly failure of this domestic venture, airframe work shifted to subcontracting

for Boeing and engine work focused on the multinational V2500. Military work dominates the industry

today, though the proportion of commercial work is

increasing rapidly. The total civil production remains less than 5 percent of that of the United States.

The legal foundation for Japanese Government

support of the industry was laid with the passage of

the Aircraft Industry Manufacturing Law in July,

1952, barely 2 months after the end of the occupation

made aviation activities possible. The First Aircraft

Industry Promotion Law of 1954 led to heavy

subsidization of the industry in the 1960s. Aircraft

were first designated a “targeted industry” by

Japan’s Ministry of International Trade and Industry

(MITI) in its “vision” for the 1970s, and then again

in the document for the 1980s.38 (The 1990s vision

did not name any specific industries.)

As in the United States, military work has helped

Japanese companies’ efforts to become major commercial suppliers, though relatively small government orders, use of licensed designs (rather than

domestically developed ones), and restrictions on

exports of military goods have limited the spillover

benefits. Although Japanese planners may use military aircraft production to help develop their commercial aircraft industry, the overall benefits from

the military connection is less than in the United

States.

Promoting economic growth has been and remains the prime motivation for Japanese Government support of industry, and the nation’s GNP is

now the fastest growing among advanced nations.

Partly as a result, Japanese firms now face an acute

labor shortage. The need for growth to increase

employment is not great. Instead, Japanese planners

see the commercial aircraft industry as an opportunity to learn advanced new technologies that may

spill over into other sectors, moving firms into more

knowledge intensive and higher added-value work.39

Planners see aircraft production as an area in which

recently industrialized countries are unlikely to

threaten more technologically advanced nations as

they have in industries like steel and ship building.

Japanese companies produced Y159 billion worth

($1.2 billion at 135 yen to the dollar) of commercial

aircraft-related goods and services in 1989.40

Though government supports have greatly helped

Japanese companies achieve such successes as they

have, these supports have not been sufficient to fully

overcome the obstacles the industry faced in the

post-WWII period.

Direct Financial Supports

Early Japanese Government efforts to promote the

development of a domestic commercial aircraft

industry involved heavy government funding in the

hope of rapidly catching up with the West. However,

after the failure of its first effort and the high costs

292-889 0 - 91 - 13 QL:3
350 ● Competing Economies: America, Europe, and the Pacific Rim

it entailed, the government switched to a more

gradual approach. In the projects of the 1960s, most

of the risk was borne by the government. Now much

more of the risk is borne by companies, though the

government funds involved are still substantial. The

Japanese Government appears to have accepted that

catch-up will be a decades-long process.

Government support remains very in important to

the Japanese industry. Japan’s post-war hiatus in

aircraft manufacture, its history of licensed production of military aircraft, and limited defense budgets

have left Japanese aircraft companies in a weak

position from which to compete in international

markets. Because commercial aircraft manufacturers in Europe, the United States, and other countries

have received many benefits from their governments, the prices of aircraft made in those countries

do not reflect their full cost. Without government

support, Japanese aircraft manufacturers would have

to be far more efficient producers and have better

products to offer than their foreign competitors in

order to make a profit. They have not yet achieved

that.41 Each of the major Japanese aircraft companies has suffered several costly failures in commercial aircraft ventures, and they are reluctant to repeat

the experience. Japan’s major aircraft manufacturers

are all large, highly diversified companies, and

senior management is reluctant to divert too much of

their technical talent to the aircraft business.

The Japanese Government has offered aircraft

firms direct financial supports in various forms.

Though funds involved have been far less than those

provided in Europe, they have been large in relation

to the size of the industry in Japan. Initially, Japan’s

Ministry of International Trade and Industry (MITI)

used equity participation and guarantees against

losses incurred during the production phase of a

project. For the YS-11 airplane, a 64-passenger,

twin-engine turbo-prop of the 1960s, MITI provided

54 percent of the initial capitalization and guaranteed the participating firms against production phase

losses. 42 By the time production was canceled in

1973, only 182 YS-lls had been sold, two-thirds of

those to domestic customers, and the project had

accrued debts of Y28 billion ($207 million), four

times its initial capitalization of Y7.8 billion.43 Most

of these debts were never repaid and were quietly

forgiven by the government when the management

organization was dissolved in 1986.44

Later, MITI used hojokin--loans offered directly

from the Ministry, to be repaid only if the project is

successful. The hojokin were offered only for

expenses incurred during the product development

phase, not during production.45 In 1977, Japan’s

three largest aircraft manufacturers formed a consortium to make 15 percent of Boeing’s 767 (first

delivered in 1982).* The Japanese partners’ total

costs came to Y29 billion during the official

development phase, 1978 through 1983, MITIdirected funding covered Y14.7 billion. In addition,

companies spent on their own an estimated VY20

billion on production facilities and tooling, for a

total investment of about Y49 billion before revenues started flowing. The Japanese companies lost

money on the venture for several years because of

the fall of the dollar and because production was

low. However, the terms of the development loans

were favorable to the companies; MITI slowed the

loans’ early repayment because the program was so

costly to the Japanese producers.

In 1986, MITI introduced a new system whereby

loans for up to 50 percent of the product development costs of aircraft projects are made available by

the government-owned Japan Development Bank

(JDB). MITI pays the interest on these JDB loans

with further loans from a new government-funded

organization called the International Aircraft Development Fund (IADF). Companies begin repaying

the IADF loans only when the project reaches the

break-even point, so the JDB and IADF loans

combined provide firms with nearly interest-free

financing. Though companies are officially required

to fully repay the loans’ principal, if projects funded

through this system ran into severe difficulty it is

likely MITI would ease repayment requirements.47

The result is a system of launch aid similar to that

used in Europe. Japanese companies’ 20-percent

participation in Boeing’s 777, launched in late 1990,

will probably cost $1.2 to $1.3 billion. Of this, $700

million is development expense, half of which is

eligible for MITI support (the remaining costs are for

facilities, tooling, and operating expenses, which

MITI does not cover) .48 JDB has committed to

supplying Y17.4 billion ($129 million) for the 777

for 1991, and MITI has requested Y798 million ($6

million) in IADF funds that “will be applied as a

subsidy for 50 percent of the especially high-risk

development costs and for the interest on the JDB

loan.’ ’49
Chapter 8--Government Support of the Large Commercial Aircraft Industries of Japan, Europe, & the United States .351

While the Japanese Government is gradually

reducing its share of the costs and risks of commercial aircraft projects, direct financial supports continue to benefit Japanese fins. MITI supports

enable companies to make much larger investments

in commercial aircraft projects than they would

otherwise, thereby speeding the development of the

industry.

Military-Commercial Synergies

Japanese aircraft companies have achieved synergies between their military and commercial businesses in many of the same ways U.S. firms have.

The total benefits, however, are much lower than in

the United States because Japanese procurement

budgets are far smaller and the R&D budgets smaller

still. Japan’s defense budget has hovered around 1

percent of the country’s GNP for four decades.50 In

1988, Japan spent Y3.7 trillion ($27.4 billion) on its

military. Military aircraft procurements have ranged

between 7 and 12 percent of the total defense budget

(Y381 billion in 1988) for the last two decades.51 In

comparison, the U.S. defense budget for 1988 was

$290.4 billion, $28.2 billion of which was for

aircraft procurement.52 The contrast is even greater

for R&D. In fiscal year 1991, U.S. Department of

Defense R&D was $37.8 billion and about 15

percent of the $285.6 billion defense budget,53 while

Japan’s military R&D spending was only Y114

billion ($844 million) and 3 percent of the defense

budget (the highest percentage it has ever been) .54

Synergies between military and civil work are

reduced by Japan’s propensity to license U.S.

designs, rather than developing them domestically.

This has denied Japanese firms the opportunity to

develop valuable design and development skills. In

fiscal year 1991, Japan paid the United States $816

million in royalties for these licenses, roughly the

equivalent of the entire Japanese military R&D

budget.55

On the positive side is the flexibility the Japanese

Defense Agency allows its contractors, enabling

Japanese aircraft manufacturers to realize some

synergies much more easily than U.S. producers. For

example, the JDA allows contractors to retain any

intellectual property rights generated in development projects, enabling firms to use research results

in commercial products at their discretion. Further,

the JDA deliberately seeks out technologies with

dual-use potential, increasing chances for synergies.56

Other Mechanisms

Japan has a civil aeronautical R&D program

similar to NASA’s, which generates some competitive benefits for Japanese firms. The mission and

activities of the National Aerospace Laboratories

(NAL) are much like NASA’s; however funding is

less than one-tenth as much. In translating its

technical advances into competitive benefits for

Japanese fins, NAL suffers from some of the same

difficulties NASA faces. The technology development programs run by MITI's Agency of Industrial

Science and Technology have been more important

than NAL’s efforts. The FJR-710 engine program,

which was almost entirely funded by MITI through

its Agency of Industrial Science and Technology

(AIST) for a total of Y19.8 billion ($147 million)

between 1971 and 1981, formed the basis for Japan’s

current 23-percent share of the V2500 engine

program. 57 Officials at Ishikawajima Harima Heavy

Industries state that without strong government

support, they would never have attempted such a

technologically risky venture. Currently, AIST is

funding a research project in hypersonic propulsion

systems, aimed at putting Japanese manufacturers in

a position to participate in building a high-speed

commercial transport that may be built early in the

next century.

The Japanese Government has aided its aircraft

manufacturers in two other significant ways. First,

by creating a preference among domestic airlines for

aircraft that have large portions built in Japan, the

Japanese Government encourages foreign manufacturers to increase the amount of work they subcontract in Japan. A combination of close relationships

between government officials and senior airline

executives and roughly $1 billion in preferential

interest rate loans that MITI can offer for aircraft

imports gives the government great influence.58 This

is not to say that the government makes overt

demands of foreign manufacturers. Rather, foreign

companies are aware of these interactions and take

into account that substantial subcontracting in Japan

may help them sell to Japanese airlines.

Second, the Japanese Government has helped

Japanese firms to pool their resources in consortia,

decreasing the risk any one firm faces and increasing

their bargaining power with potential partners. The
352 . Competing Economies: America, Europe, and the Pacific Rim

main purpose of the First Aircraft Industry Promotion Law of 1954 was to create cartels within the

industry. 59 That law and its successors not only offer

inducements for cooperation among fins; they

require Japanese companies to obtain formal MITI

approval before entering the aircraft business.60

Consortia in the aircraft industry are remarkable

because unlike those in other Japanese industries,

which handle R&D only up to the precompetitive

stage, these extend into the production stage.61 All of

Japan’s major international projects-the 767, the

V2500, and the 777—have been handled through

such consortia.

EUROPE62

Motives

In contrast to the predominantly indirect benefits

U.S. commercial aircraft manufacturers have received from the U.S. Government, European firms

have benefited from government policies aimed

directly at promoting their competitiveness. Several

motives lie behind this direct support. European

planners value aircraft manufacture explicitly for the

employment it creates. An Airbus official explained

that the main reason the collaboration works is that

by creating jobs in an export industry, Airbus

enables the member countries to capture jobs from

other parts of the world. (Figure 8-3 shows the

historical and expected growth in Airbus’ share of

the world market. For a brief description of the

history and current structure of Airbus, see box 8-A.)

The member governments are less concerned about

global economic efficiency and rules of comparative

advantage than with meeting immediate domestic

needs. With government commitment to full employment, policymakers view the thousands of jobs

Airbus creates in England, France, Germany, and

other European countries as well worth the costs of

the supports provided.63

Another reason European governments support

the industry is concern that without support for their

domestic manufacturers, European airlines will be

forced to rely solely on two U.S. suppliers. By

supporting a challenger, European governments

force U.S. manufacturers to keep their prices low. As

a result, some portion of every dollar European

governments spend supporting Airbus is returned to

their economies in lower airplane costs. Baldwin and

Krugman examined the competition between the

Airbus A300 and the rival Boeing 767 and conFigure 8-3-World Market Share, 1970-92

Large Commercial Transport Airplane

by Value of Deliveries

Percent

100

80

60

40

20-

0 . , t I 1 i 1 1 1 1 1 1 1 [ 1 f 1 < 1 { > I 1

1970 1973 1976 1979 1982 1985 1988 1991

m Boeing = McDonnell Douglas

= Lockheed m Airbus

SOURCE: Boeing, WoridJetAirplane Inventory, “19S9 and Bear Stearns,”

Aerospace /ndusfry Ffewiew, May 9, 1991.

eluded that European consumers do benefit, but by

less than what they estimate European taxpayers

paid for those benefits. “Overall it seems that the

A300 project constituted a beggar-thy-neighbor and

beggar-thyself policy for Europe.”64

National prestige plays a big role. Though the

influence of pride is difficult to trace, aircraft

projects have broad popular support, making them

an easy cause for politicians to endorse.65 Europeans

are proud of a long history of achievement in

aeronautics, including the first supersonic transport,

the first jet transport, the first jet engine, and even

claims of the frost powered flight. Airbus Industrie

(AI) executives describe an “Airbus reflex” in the

French Government. Airbus does not even have to

go to government offices to solicit help; the venture

is so highly regarded that the relevant ministries

come to Airbus on their own and ask, ‘‘How can we

help?”

Just as in the United States, national defense

policies aimed at maintainingg autonomous and

technologically advanced military production capabilities have greatly increased the ability of firms to

design, develop, and build large commercial transports. In addition, regulation and state ownership of

airlines, put in place to meet air transport policy

goals, provide European aircraft manufacturers with

reliable domestic customers. Support for aircraft

manufacture is justified on trade grounds as substituting domestic goods for imports and boosting

exports. Planners perceive the products as driving
Chapter 8--Govermnent Support of the Large Commercial Aircraft Industries of Japan, Europe, & the United States ● 353

Box 8-A—Airbus

Airbus discussions began in 1966. In 1%7, the French, British, and German Governments agreed on a joint

venture in which Britain and France would each hold shares of 37.5 percent, and Germany would hold 25 percent.

France agreed to allow Britain’s Rolls Royce the lead in the engine development with a 75 percent share of the new

RB207, with France and Germany each getting 12.5 percent. The French, in return, would be for final assembly and

design leadership. In 1%9, the British withdrew from the project due to a combination of rising costs, lack of airline

interest, BAC’s reluctance to concede design leadership to the French, and Roll Royce’s desire to build the RB-211

engine for the L-101 1. France and Germany then took over co-leadership of the venture, securing financial

assistance from Spain and the Netherlands. Britain’s Hawker-Siddeley remained as a subcontractor responsible for

the design and production of the wing. In 1979, Britain rejoined Airbus and the consortium decided to pursue a

strategy of offering a “family” of aircraft, committing to the long-range A300-600 and the small A310. The A300

was introduced in 1974, the A310 in 1983, the A300-600 in 1985, and the A320 in 1988. The long-range A340 and

large A330 are scheduled for first flights in 1992 and 1993 respectively, followed by the derivative A321.

Airbus Industrie (AI) is now a consortium of Aerospatiale (37.9 percent), Deutsche Airbus (37.9 percent),

British Aerospace (20 percent), and CASA of Spain (4.2 percent), constituted under French law as a Groupment

d’Interet Economique (GIE)-a structure originally designed to let small French vineyards operate on a cooperative

basis. Airbus acts only as the organizational focus of the partnership. As a GIE, it is unable to retain any earnings,

and it is neither required to report financial results nor liable to pay taxes on its profits.1 Every 15 days, AI distributes

any funds on hand to its members or calls on them for more funds if needed. The members are fully and separately

liable for all Al activities, effectively giving AI a credit standing equivalent to the sum of the credit worthiness of

all its members. AI’s only functions are product planning, sales and marketing, some customer support, and

management of the partnership.

AI owns no production facilities. All of the design, development, and production work is done by the members

under contract to AI. The division of workshare among the partners roughly corresponds to the size of the partners’

membership share, with the allocation of each portion decided in negotiation. This system puts the members in the

strange position of being both the owners and the subcontractors. AI negotiates the contracts for each partner’s share

separately. The other partners do not know the terms of these contracts, and AI itself knows nothing about what the

individual members’ costs are, only what the “transfer prices” are. This system has been the cause of frustration

in the United States and Europe; it is impossible to tell whether the whole of Airbus is operating profitably, for not

even AI knows. Losses or profits incurred by AI are virtually meaningless. Members maybe making profits as

subcontractors while losing money as owners, or the reverse maybe true. (Members do not disclose Airbus-related

profits or losses in their individual financial reports.)

Government influence has been pervasive throughout Airbus’ history. AI itself receives no financial support

from governments. All of the disbursement and repayment of launch aid and other supports is handled among the

members and their governments. Officially, the members do not know the terms of the support the others receive.

Nevertheless, the member governments do coordinate with each other regarding the support they will give each

project, and approval from an oversight committee of government officials, the Executive Agency, is required for

the launch of a new model. Government-to-government negotiations were even more important than those between

the companies themselves during the founding days of Airbus. Government policymakers even intruded into the

design process (though this has diminished since). Government decisions were at the heart of the withdrawal and

later reentry of the British, as well as the ability of the French and Germans to carry on without them.

IBritiShAerOSpaCe P&[iCLim’@ Company ~er of Ordinary Share, May 1, 1985, p. 20, @ cited ill Gelhl.lwJRes-h ~swktes, oP.

cit., p. 1-2.

technological advance and moving jobs to higher support has taken the form of government contracts

added-value and more knowledge-intensive areas. for-the development of commercial models (in

Direct Financial Support

effect, grants), loans and loan guarantees on favorable terms covering both development and producDirect financial supports have been the principal tion costs, guarantees against losses caused by

mechanisms used by European governments to exchange rate changes, equity infusions, tax breaks,

assist their commercial aircraft manufacturers. This debt forgiveness, and bail outs. Without these
354 . Competing Economies: America, Europe, and the Pacific Rim

supports, it is likely that no European firms would be

in the large commercial aircraft manufacturing

business.

Beyond simply enabling companies to operate at

a loss, government financing has several benefits

over commercially available financing. Governments, unlike commercial lenders, will finance

specific projects. This enables manufacturers to

move quickly to fill market openings with new

models even when the cash flow from previous

models is insufficient to convince banks to lend.

This may give the manufacturers ahead start on their

competitors, and because of the steep learning curve

of this industry, a head start is an important

advantage. Ideally, by getting into the new market

first, the firm will be able to deter the entry of any

competitor and so be able to establish a monopoly

position.

66 Also, since government funding is usually provided during the development phase and

paid back as a levy on sales, the government assumes

much of the risk if sales are poor. This encourages

companies to shift as many costs as possible to the

development phase. For example, adopting advanced manufacturing methods and higher levels of

automation in the production process may increase

development costs but decrease production costs.

Similarly, use of more advanced product technologies may increase development costs but reduce

operating costs to airlines. Since the government

bears the risk for the development expenses, companies are encouraged to make the most advanced

aircraft in the most advanced way possible.

Before Airbus, British, French, and German jet

transport manufacturers had launched 8 different

models of jet transport of which only 2 sold more

than 200 (total sales of 239 and 279),2 sold between

100 and 200 (total sales of 112 and 117), and the

other 4 were catastrophic failures (total sales of 14,

11, 54, and 10).67 Judging by the experiences of

Douglas (driven to bankruptcy even while its planes

were selling well), Lockheed (driven to bankruptcy

by the L-1011, which ultimately sold 249 units), and

Convair (driven from the commercial aircraft business by the 880/990, which sold 102 units), any one

of these European ventures should have forced its

manufacturers into bankruptcy, or at least from the

commercial aircraft business. However, not one of

the firms responsible for any of these aircraft has left

the field, though some have been consolidated.

The ability of these firms to launch further aircraft

models after their failures with previous designs is

directly attributable to government intervention.

From 1945 to 1974, the British Government spent

£1,504 million at 1974 prices ($9.3 billion inflated

to 1991 values) in launch aid for civil projects,

including the Concorde, and were repaid less than

£150 million ($929 million inflated to 1991 values)

of that. The total cost of jet transport programs to the

British Government rises to several times that

amount if the cost of bailouts is included. From 1962

to 1977, the French Government spent an average of

$829 million (at 1991 values) per year on civil

projects, during that period repayments averaged

only about $23 million per year.68 Costs to the

German Government were lower, as they had no part

in the Concorde project, but Germany had other

costly failures. Not only has government funding

made European prime assemblers more competitive

in international markets, at the supplier level it has

made companies more desirable partners for U.S.

firms looking to share the burdens of launching

expensive, risky projects. Government support of

the European partners made European participation

in ventures like the CFM-56 and V2500 much more

appealing for U.S. firms.

Because of Airbus, direct financial supports have

come more into the international limelight, including a formal GATT complaint from the United States

in early 1991. Most of the support the British,

French, and German (and Spanish) Governments

have provided to their aircraft manufacturers has

been in the form of launch aid,69 although the British

Government has been more hesitant in this regard

than the French and German Governments.70 As of

the end of 1989, the governments of France,

England, and Germany had disbursed a total of $5.4

billion to the Airbus member companies in launch

aid. Of this, roughly $500 million had been repaid.71

Repayment of the remainder has been either forgiven or deferred, or was never intended. An

additional $2.3 billion had been pledged for the

A330/A340, and the German Government had

committed a further $3 billion as part of the

Daimler-MBB merger.72 This government financing

represents almost 75 percent of the development

funds required for the Airbus models developed to

date. As table 8-3 shows, as of the end of 1990, the

$5.6 billion would have been $10.7 billion if the

governments had charged firms the cost of the funds

at rates the government themselves have to pay for
Chapter 8--Government Support of the Large Commercial Aircraft Industries of Japan, Europe, & the United States ● 355

Table 8-3-Launch Aid for Airbus Membersa (In $ billions)

A300 & A31O A320 A330 & A340

France U.K. FRG France U.K. FRG France U.K. FRG

Commitments . . . . . . . . . . . . . . . . . . . . . . 1.2 0.1 3.0 0.7 0.4 0.9 0.8 0.7 1.6

Disbursements . . . . . . . . . . . . . . . . . . . . 1.1 0.1 1.5 0.7 0.4 1.0 0.3 0.3 0.3

Value at governrnentb . . . . . . . . . . . . . . 3.3 0.3 3.1 1.2 0.6 1.1 0.3 0.4 0.3

Value at corporationc . . . . . . . . . . . . . . 7.5 0.3 5.7 1.8 0.7 1.2 0.4 0.4 0.3

Program totalsd Country totals

A300 & 310 A320 A330 & 340 France U.K. FRG All Airbus

Commitments . . . . . . . . . . . . . . . . . . . . . . 4.3 2.0 3.2 2.7 1.2 5.5 9.5

Disbursements . . . . . . . . . . . . . . . . . . . . 2.7 2.1 0.8 2.1 0.8 2.8 5.6

Value at government . . . . . . . . . . . . . . . 6.7 2.6 1.1 4.8 1.3 4.7 10.7

Value at corporation . . . . . . . . . . . . . . . 13.3 3.7 1.0 9.6 1.3 7.1 18.0

a~hese figures represent all launch aid and include funds alloted to non-Airbus aircraft projects such as the French ATR 42 and 72. Officials in France,

Germany, and England state that the numbers are accurate. Neither firms nor governments in Europe disclose public supports at a level more detailed than

those used here, so it is impossible to tell by how much the table overestimates the Airbus aid. Since Airbus is by far the largest aircraft venture currently

receiving public financing in Europe, it is likely these figures overestimate the total Airbus launch aid by only a little.

~alue of the disbursed funds as of Dec. 31, 1988, including interest accrued assuming government rates (lO-year T-bills). The effects of staggered

disbursements and loan repayments during the course of the programs have been factored in, and end-of-1988 currency exchange rates used.

~alue of the disbursed funds as of Dec. 31,1988, including interest accrued assuming corporate prime rates. The effects of staggered disbursements and

loan repayments during the course of the programs have been factored in, and end-of-1988 currency exchange rates used.

dThe development costs of Airbus’ most recent launch, a stretched version of the A320 designated the A321, are being financed without government

assistance. The A321 was financed on commercial terms with a line of credit from the Euro Investment Bank. The financing was not project based but rather

based on Al’s credit standing as backed by the liability of the members under the GIE structure. The A321 thus represents not only the first time a new or

derivative Airbus model was launched without government aid, it is also the first time that Al and not the members arranged the financing.

SOURCE: U.S. Department of Commerce, unpublished data collected from pubticly available data.

borrowed money, and $18.0 billion if the firms had

had to pay a corporate prime rate.

In addition to launch aid, the German Government

(though not the French or British Governments) has

provided its commercial aircraft manufacturers with

loans to cover losses incurred during the production

phase of Airbus projects. In 1988, the German

Government paid off the outstanding productionphase debt its aircraft manufacturer had accumulated

in the A300/310 projects so that no more interest

charges would accumulate. Accumulated capital and

interest had reached $1.05 billion.73 Further, the

German Government agreed in 1988 to guarantee

against losses caused by the exchange rate falling

below 1.8 DM to the dollar. Analysts estimate the

government’s maximum liability for the guarantees

through 1996 is $1.3 billion and for the period from

1997 to 2000 is $863 million.74 With exchange rates

at levels (as low as the 1.5 DM to the dollar since the

guarantee began, around 1.7 in mid-1991), the

German Government is likely to have to pay nearly

the full amount of the guarantee. Finally, at various

times all of the Airbus members were government

owned; Aerospatiale and Construziones Aeronautics S.A. (CASA) still are. Some of the equity bought

by the governments constitutes a further subsidy.

Government Influence Over Airline

Procurement Decisions

European governments have also created benefits

for their commercial aircraft producers by influencing the procurement decisions of domestic airlines.

Government ownership of airlines, close relationships between high-level officials and airline executives, and regulatory clout combine to give European

governments sufficient influence to swing airlines’

choice of manufacturers. (Table 8-4 shows government ownership of major European airlines.)

Examples of government intervention in procurement decisions are numerous. The British Government directed British European Airways to buy the

British-made BAC 1-11 and British Overseas Airways to buy the VC-10 in the 1960s and 1970s. All

of British Airways’ current fleet uses Rolls Royce

engines. The French Government pressured French

airlines to buy the French-made Caravelle, and Air

Inter, France’s domestic airline, was the only airline

ever to buy the short-lived Mercure. The French

Government tried to force Air France to buy DC-9s

instead of Boeing’s 737s in order to help negotiations between McDonnell Douglas and Dassault

over the proposed Mercure 200. The French Government succeeded in forcing the airline to buy GE

engines instead of Pratt & Whitney engines for the
356 ● Competing Economies: America, Europe, and the Pacific Rim

Table 8-4--Government Ownership of Major

European Airlines

Airline Country Government ownership

British Airways

Air France

Lufthansa

Iberia

Sabena

KLM

Alitalia

Swiss Air

SAS

Great Britain

France

Germany

Spain

Belgium

Netherlands

Italy

Switzerland

Scandinavian

O% (100% until 1987)

Almost 100% (previously

private UTA bought in

1 990)

52% (72% in 1987)

Almost 100%

Almost 100% (trying to

privatize parts)

34% (declining from over

70% in early 80s)

100%

NA

100% (Sweden, Norway,

and Denmark)

NA-not applicable.

SOURCE: County NatWest Bank.

A31O because of GE’s close ties to the French

engine-maker SNECMA. Overall, the preference of

European airlines for Airbus planes is pronounced,

as figure 8-4 shows. In the categories where U. S.-

made and Airbus aircraft compete directly, both Air

France and Lufthansa have only Airbus planes in

their inventories.75 In fact, the willingness of national airlines to buy Airbus planes was an essential

part of the original agreement by which Airbus was

established. 76

The significance of government-steered procurements has come less from the total volume of these

orders than from their timing. French, British, and

German airlines have provided the key launch

orders, without which few of Europe’s commercial

aircraft programs would ever have proceeded. Without these orders, no Airbus models would likely

have been launched.

The preference the Airbus members have shown

for sourcing domestically has also been effective at

promoting the development of a European supplier

industry and at convincing U.S. manufacturers to

transfer workshare and technology to European

suppliers in return for access to Airbus contracts.

During the selection of engines for the A300, Pratt

& Whitney offered European firms subcontracts, but

GE offered SNECMA and MTU a full partnership,

giving them 16 and 10 percent respectively of the

workshare of GE’s CF-6-50 engine, and a say in the

program’s management. This offer was sufficient to

convince the French and German Governments to

Figure 8-4-Aircraft Inventories by Nationality of

‘Airlines and Aircraft Manufacture, 1989 -

Number of aircraft in inventory

5,000 ~

4,000

3,000

2,000

1,000

nu

[ —

U.S. airlines European airlines

_ U.S. aircraft ~ European aircraft

SOURCE: Boeing, World Jet Airplane Inventory, 1989 year end, 1990.

specify the GE engine for the launch of the A300.

Again, in the A31O engine competition, the GE

partnership with SNECMA convinced the French

Government to override Air France’s preference for

Pratt & Whitney engines.77 This selection led to

GE’s and SNECMA’s 50/50 venture to build the

CFM-56 engine, which is now used on the A320.

Needless to say, Air France has specified the

CFM-56 for all of its A320s.

Government Promotion of Cooperation

and Consolidation

European governments have also tried to improve

the competitiveness of their aircraft manufacturers

by promoting domestic consolidation and intraEuropean cooperation. European planners believe

that to compete internationally in this industry,

bigger companies are better. Domestic competition

is seen as inefficient and has been sacrificed

willingly to form larger firms better able to compete

with American rivals. In England, France, and

Germany, the dozens of aircraft companies that

emerged from WWII were gradually consolidated

into one commercial airframer and one commercial

engine maker in each country. Consolidation at the

supplier level followed. Competition within Europe

has been discouraged in favor of cooperation,

leading to a string of multinational ventures.

The rise of intra-European cooperation is an

extension of the desire to achieve economies of scale

that motivated consolidation within countries. The

Concorde was the frost major collaborative civil
Chapter 8--Government Support of the Large Commercial Aircraft Industries of Japan, Europe, & the United States ● 357

project, followed by the ill-fated VFW-614 project

between MBB and Fokker. Civilian collaboration

really took off, however, with Airbus. Collaboration

in military aircraft ventures is even more common

than in civil projects. The Transall and the Tornado

have been the biggest to date. Currently over 70

percent of Deutsche Aerospace’s turnover is derived

from collaborative projects, a proportion that is

likely to rise to 80 percent by the end of the decade.78

Though it is impossible to know exactly what the

competitive benefits of all this consolidation and

cooperation have been, European policymakers

seem well satisfied by the results.

Military-Commercial Synergies

In addition to all the benefits described above,

European manufacturers have profited from synergies between their military and commercial businesses, from funding of civil aeronautical R&D, and

from export assistance much as U.S. companies

have.

Examples of military/civil synergies in Europe

are numerous. Rolls Royce’s early engines, the

Avon, the Olympus, and the Spey, all began as

military engines. 79 Among Rolls’ current commercial engines, none has a direct lineage in a military

predecessor, but strong military R&D programs and

sales, especially to the Middle East, contributed to

Rolls Royce’s recent recovery in the commercial

engine business. SNECMA has benefited from

combined civil and military sales of the CFM-56 just

as GE has.80 GEC of the United Kindom is

developing a heads-up-display (HUD) combined

with an infrared sensor to create a so-called ‘ ‘synthetic vision system” for use on commercial aircraft.

The needed technologies came out of military

developments for night flying.81 The Transall military transport collaboration between France and

Germany ran from the late 1950s until the early

1970s and provided both specific technical synergies and broader business synergies with the commercial sides of the companies involved.

Some differences between the European and U.S.

defense businesses affect the ability of commercial

aircraft manufacturers to realize benefits from their

military work. On the negative side, European

governments have spent less on military aircraft than

the U.S. Government, and military R&D has been a

lower percentage of procurement, creating fewer

opportunities for spillovers to the commercial side

of the business. Duplication of R&D among various

countries, each wanting to maintain autonomous

defense production capabilities, has led to inefficient

use of total European military R&D funds, resulting

in fewer opportunities for commercial spin-offs than

if the countries’ R&D programs had been coordinated. European governments have spent less on the

development of bombers, tankers, and military

transports, which generate the most benefits for

commercial aircraft.

On the positive side, European military exports

are a greater percentage of total military production,

partly compensating for lower domestic sales. Further, a higher proportion of the funds spent on

military aircraft in Europe go to the same companies

that build commercial planes than in the United

States, which has many dedicated military contractors. As table 8-5 shows, total military production of

all the Airbus members (excluding the rest of

Daimler-Benz) is comparable to that of Boeing and

McDonnell Douglas, and the reliance of these firms

on military sales is higher than Boeing’s, though not

quite as high as McDonnell Douglas’.

European governments have mostly paid to develop military aircraft domestically rather than

licensing from the United States. This practice has

generated more commercially useful design and

development capabilities than licensed production.

The generally close relationships among European

governments and their aircraft manufacturers create

an atmosphere of trust in which companies are given

substantial flexibility in the organization of their

military work, leaving them more free than U.S.

companies to achieve possible commercial-military

synergies.82 Consolidation has left most countries

with only one manufacturer in each product category, which increases the bargaining power companies have in concluding contracts with their governTable 8-5-Revenues From Military Aircraft and

Related Sales, 1989

Military Percent

Company salesa

of total

MBB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 783 47.0

Aerospatiale b

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,335 33.5

British Aerospace . . . . . . . . . . . . . . . . . . . . . . . . 3,470 53.6

All Airbus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,588 46.1

Boeing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,361 23.4

McDonnell Douglas . . . . . . . . . . . . . . . . . . . . . . . 5,919 55.5

a

ln dollars.

bln~~es some nonmilitary government sales.

SOURCE: Company annual reports.
358 . Competing Economies: America, Europe, and the Pacific Rim

ments. This may enable firms to achieve higher

profits on military work, and those funds may then

be used to finance commercial programs.83 Finally,

most of the European companies interviewed for this

study appear to do as well or better than U.S. firms

at combining military and civil overhead functions,

reducing costs.

Government Funding for Civil

Aeronautical R&D

Civil aeronautical R&D in Europe is similar to

that in the United States. The Deutsche Forschungsund Versuchsanstalt für Luft- und Raumfahrt (previously DFVLR, now DLR) in Germany, Britain’s

Royal Aircraft Establishment (RAE) and the Office

National d’Etude et de Recherches Aerospatiale

(ONERA) in France all perform functions similar to

NASA’s aeronautics program.

84 They supply some

of Europe’s largest, most expensive research and test

facilities and conduct research in areas in which

firms would otherwise underinvest. These activities

generate some competitive benefits for European

firms, but the benefits are limited by the same

difficulties NASA faces. Also, their combined

aeronautics budget is smaller than NASA’s, and

redundancy among the three organizations reduces

their effectiveness. The prospects for increased

cooperation are good. While the benefits to European manufacturers of government-funded technology programs are unlikely to equal those for U.S.

manufacturers, at least they are likely to increase

from the level they are at now.

Export Assistance

Finally, European governments have helped their

aircraft manufacturers export. In Europe, as in the

United States, export financing has become much

less important in the last decade than it once was.

However, before the Large Aircraft Sector Understanding (LASU) agreement and the improvement of

commercially available export financing, European

governments helped aggressively. Until the late

1970s, Airbus sold so few planes that each sale was

critically important. One order could represent a

year’s production. These circumstances drove Airbus to offer extreme deals to win orders. Even now,

U.S. companies claim Airbus can offer better deals

than they can because of the government support the

members receive. European governments are also

involved in providing offsets as sales incentives,

whereas the U.S. Government refuses to become

involved in such practices. Desirable landing rights

for purchasing countries’ airlines and development

assistance to poorer countries are the most commonly cited examples.

Overall, Airbus deserves credit for the technical

excellence of its aircraft and its improvements in

production efficiency and product support. However, the importance of direct financial supports,

other direct supports, and indirect benefits such as

civil/military synergies are so great that it is fair to

say that Europe has bought itself an aircraft industry.

CONCLUSIONS

The principal lesson of this study is that, for

governments that believe some industries are more

important to national welfare than others, many tools

are available to speed the development of those

industries. Some of the means of promoting development described here are expensive, and the task of

weighing the cost of acquiring the desired industry

against the benefits derived must be done carefully.

In many cases, government supports have undesired

side effects that undermine the intended positive

effects. However, others cost little and all that is

required of a government is the will to employ them.

Sometimes, actions the government would take

anyway naturally help the competitiveness of a

desired industry, and all that is needed is that the

government not prevent the benefits from accruing.

Without doubt, effectively supporting an industry is

difficult. However, as the world’s aircraft industries

show, it is possible.

1 This report discusses only Englan~ France, Germany, Jap@ and

the United States. Brt@ Cam_@ l.ndonesi~ Swede~ the Netherlands,

Italy, Spa@ and Belgium all support their commercial aimraft

industries, not to mention the Soviet Union and China.

2 In this chapter, the term “commercial aircraft industry” is

applied only to the part of the industry that produces large (over

100-seat) commercird jet aircraft.

3 Someoftheforeign govermmmtactionsdescribedinthis chapter

could be deemed to violate the basic GA~ treaty, one or more of the

GATT codes (including Subsidies, Procurement and Aircraft), and/or

other treaties related to international trade. This chapter does not address

these issues.

4 The government actions included in this discussion are not

intended to be a comprehensive list of all the many government actions

that affect the competitiveness of commercial aircraft manufacture.

Environmental regulatio~ educatio~ labor policies, and mwmeco—

nomic policies, to name just a few, affect firms’ competitiveness. This

study focuses on actions that are most specillc to the aircraft industry.

5 Thelaunchdecisionis ofspecialinterestbecause itis atthispoint

that government intervention can have the greatest impact. Inability to

muster the resources to launch new models will ultimately force a

manufacturer to exit the market. Further, at the time of the launch

decisio% many smaller technical and fwcial decisions are made that
Chapter Government Support of the Large CornmercialAircraft Industries ofJapan, Europe, & the United States .359

will bind the manufacturer for decades.

6 Companies do not provide program-based financial &@ but

most industry analysts agree four programs have passed break-eve~ one

is currently around that poin~ one is getting near, and the rest are not

even close. The figures count derivatives as part of the same program.

Some of the planes have been introduced only recently and may yet be

profitable before their production is terminated.

7 WolfgangDemisch Christopher IXxnk@ and Theresa Concert,

The JetlinerBusiness, First Boston Corp., Oct. 5, 1984, p. 4.

8 Unlike mostproducts, where a belief in the presence of a market

is sullicient to justify a product launck commercial aircraft manufacturers require commitments from the customers before development

begins. As a Boeing ot%cial pointed out, “one of the strangest feahues

of this industry is that the manufacturers don’t launch new products, the

customers do.”

9 Offlceof Science and’Ikchnology Policy, Aeronautical Research

and Technology Policy, Vol. 11: Final Report, November 1982, p. C-49.

10 Irene L. Sinrich “AirbusversusB oeing (A): lbrbukntSkies,”

Harvard Business School case 9-386-193, in David B. Yoffie (cd.),

International Trade and Competition: Cases and Notes in Strategy and

Management (New York NY: McGraw-Hill Publishing Co., 1990),

p. 334.

11 Artemis March “TheUS CommemialAircraftIndustry and Its

Foreign Competitors,” Working Papers of the MIT Commission on

Industrial Productivity, vol. 1 (Cambridge, MA: The MIT Press, 1989),

pp. 11-12.

12 National Resemch Council, The Competitive Status of the U.S.

Civilian Aviation Manufacturing Industry: A Study of the Influences of

Technology in Determining Industrial Competitive Advantage (Wash-

@to@ DC: National Academy Press, 1985), p. 25.

13 OSTP, op. cit., p. 1-11,

14 Among civilian manufacturing industries, the aircraft industry

is by far the greatest bcnetlciary of government technology policy.

Outside manufacturing, agriculture and health are also major beneficiaries of government R&D.

15 OSTP, op. cit.

16 I%om 1928-34 the airline industry was supported by subsidy

payments for carrying the U.S. airmail (e.g., the Kelly Act of 1928 and

the Watres act of 1930). At that time, the aircraft manufacturers and the

airlines that bought their products were parts of the same companies,

embling the parent corporations to channel benefits of the government

subsidies from the air carriers to the manufacturers. In 1934, the subsidy

system was ended, with the airmail contracts put out for bid at much

lower prices. OSTP, op. cit., pp. I-22-23.

17 Calculated from figures presented in Aerospace Industries

Association, Aerospace Facts and Figures, 1990-1991 (Washingto@

DC: 1989), pp. 19, 121, 123, and 127.

18 John Newhouse, The Sporty Game (New York NY: Alfred A.

Knopf, 1982), p. 113.

19 ‘fhefacttha tmilitarywork does not operate on the same cycles

as the rest of the economy has not resulted from a conscious effort of

government planners, but has nonetheless been important when it was

coincidental. Most recently, the slowdown in commercial orders of the

early 1980s coincided with the Reagan defense buildup. However, in the

early 1970s, when down-turns in both sides of the business coincided,

the industry was devastated.

20 Wolfgang Demiscb Managing Director, UBS Securities, personal communicatio~ Sept. 11, 1990.

21 David C. Mowery, Alliance Politics and Economics: Multinational Joint Ventures in Commercial Aircr@ (Cambridge, MA:

Ballinger Publishing Co. 1987) p. 39.

22 DoD’s regulations were adopted in response to a number of

public needs that have often been at odds with the needs of increasing

competitiveness and reducing costs. Among these are control of defense

contractors by the government, maintaining fairness and competition in

contract awards, ensuring against fraud or excessive profits at taxpayer

expense, and protecting the interests of minorities, small business, and

constituent groups. See U.S. Congress, Oflice of lkchnology Assessment Holding the Edge: Maintaining the Defense Technology Base,

O’IA-ISC420 (Washingto~ DC: U.S. Government Printing Office,

April 1989), p. 10.

23 “In order to conduct (the billions in DoD procurement each

year) the government has its own set of procurement rules, the Federal

Acquisition Regulations, or F-s. Defense fm organize themselves

structumlly and especially administratively, to conform to these

regulations, which often in-es costs relative to commercial projects.

Compliance with the FAR is one of the factors that splits U.S. industry

into two sectors.” U.S. Congress, Oftice of lkchnology Assessmen~

Aw.ng Our Allies: Cooperation and Competition in Defense Technology, OTA-ISC449 (Washington DC: U.S. Government Printing

Office, my 1990), p. 81.

24 This report does not analyze Pentagon procurement practices.

Other OTA reports, including HoZding the Edge and Arming Our Allies,

op. cit., provide information on this topic. Briefly, Pentagon rules may

require quality inspections so detailed and so frequent that they interfere

with the ability of fms to produce eftlciently. DoD specifkations may

demand exotic features or extreme performance that radically increase

costs (the last few percent of improved performance often increases the

total cost by a much larger percent). Finally, DoD spectilcations often

detail not only the performance of the finished productj but also the

processes that must be used in its manufacture, preventing the contractor

ilom taking innovative steps to improve quality and reduce costs.

25 NRC, op. cit., pp. 117-118.

26 Though NASA claims credit for the development of the

supercnticd wing, earlier airfoil work that contributed to the inakthrough was conducted in the United Kingdom OSTP, op. cit., pp.

VII-81-82.

27 The technology was transferred by GE as part of the partnership

agreement.

28 John S. Langfor~ TheNASAE~enence inAeronauticalR&D:

Three Case Studies With Analysis, IDA Report R-319 (Alexandri~ VA:

Institute for Defense Analysis, Mamh 1989), p. 79.

29 European observations of NASA’s impact on competitiveness

bear out this point. Anofllcial in the aircraft industry division at Britain’s

Department of Trade and Industry feels that their system of direct

financial supports is a “poorrnan’s support” compared to R&D support.

He thinks that governments (for whom promoting competitiveness is a

priority) get far more bang-for-the-buck from direct subsidies than from

R&D Support.

30 Daniel Todd, Jamie Simpso& and Ronald Humble, Aerospace

and Development: A Survey (Winnipeg, Canada: Department of

Geography of the University of Manitob~ 1985), p. 14.

31 Mowery, Alliance Politics and Econondcs, op. cit., p. 39.

32 Postmaster General Harold Brown exploited his powers to

“develop a small number of financially stxong, transcontinental carriers

who would provide a strong market for larger, more comfortable

passenger transports.” David Mowery and Nathan Rosenberg, “The

Commercial Aircraft Industry,’ in Richard R. Nelson (cd.), Government

and TechnicaZProgress (New Yor~ NY: Pergamon Press, 1982), p. 141.

33 NRC, op. cit., p. 27.

34 Mowery and Rosenberg, op. cit., pp. 141-143.

35 A 1970 study comparing adoption of technical innovations

between California’s nonregulated airlines aud the regulated “trunk”

carriers showed that all but 2 of 40 aircraft types operated between 1946

and 1965 were first introduced by the regulated airlines. W.A. Jordw

Airline Regulation in America (Baltimore, MD: Johns Hopkins University Press, 1970), p. 55.
360 ● Competing Economies: America, Europe, and the Pacific Rim

36 Standard and Poor’s, “Aerospace Basic Analysis,” p. A26 as

cited in Barry Bluestone, Peter Jorchq and Mark Sullivaq Aircrajl

Industry Dynanu”cs: An Analysis of Competition, Capital, and L&w

(BostoU MA: Auburn House Publishing Co., 1981), p. 88.

37 These low bank rates may not persist. If the air travel market

weakens and airlines fmd themselves with a glut of aimraft, the residual

value of used planes may drop dramatically.

38 This document stated: “It seems realistic that the private sector

should bear the ultimate risks involved in an aircraft development

projecc but for the time being, the government will subsidize projects on

the condition that a percentage of the profits be contributed to the

government contingent on success. . . Development of aircraft engineering must be conducted on the initiative and assistance of the

government as it involves highly sophisticated and complex technology.” Ministry of International Trade and Industry, “The Vision of

MITf Policies in the 1980s,” pp. 291-292 as quoted in David C. Mowe~

and Nathan Rosenberg, The Japanese Commercial Aircraji Industry

Since 1945: Government Policy, Technical Development, andhdusm”al

Structure (Stanfor~ CA: The Internationzd Strategic Institute at

Stanfor& 1985), pp. 16-17.

39 Ministry of International Trade and Industry, “The Vision of

MITI Policies in the 1980s,” pp. 291-292 w quoted in Mowery and

Rosenberg, ibid., pp. 16-17.

40 AerospaceJapan Weekly, June 11, 1990, This figure is likely to

increase steadily with the growth of sales of recently introduced

commemial aircraft and engines in which Japanese manufacturers are

major participants. The commercial aircraft industry has failed to live up

to MITI’s early ambitions and has failed to keep pace with the rates of

growth seen in other targeted industries.

41 Some Japaoese manufacturers of components and subsystems,

especially electronics and advanced materials, appear to have become

competitive with their best foreign rivals.

42 David C. Mowery, ‘‘The Japauese Commercial Aircraft Industry: Deja Vu All Over Again?” paper presented at the meetings of the

Internationrd Studies Association, Imndon, Mar. 29-30, 1988, p. 7.

Reports differ on the extent to which the Japanese Government assumed

financial responsibility for the YS-11, though all agree that the

government’s share was substantial. See Richard W. Moxo~ Thomas P.

Roehl, and Frederick TruiK Emerging Sources of Foreign Competition

in the Commercial Aimrajl Manufacturing Industry (WashiugtoU DC:

U.S. Department of Transportatio~ 1985), p. 122; Japan Economic

Institute, “Japanese Industrial Policy with a Twist: Commercial

Aircraf~” report No. 39A (WAd.ngto% DC: 1983), p. 2.

43 MasaoKuno and Paul J. Rub@ “JapaneseAerospa&Aiming

forthe21st Century, ’’Aerospace Japan, November 1984, p. 64. Another

source states debts accumdated as of March 1980 were only Y7.1

billion. Koku Kikai Kogyo Shingikai (The Aerospace Advisory

Committee), Konkai no Kokuki Kogyo Seisaku ni Tsuite: Daini Chukan

Hokoku (Second Prelimimuy Report on the Future of the Aircraft

Industry), Aug. 18, 1980, p. 16, as cited in Richard W. Moxo~ Thomas

P. Roe~ and Frederick Trui~ Emerging Sources of Foreign Competition in the Commercial Aircr@ Manufactun”ng Industry (Washington

DC: U.S. Department of Transportatio& 1985), p. 122.

44 Richard J. Samuels and Benjamin C. Whipple, “Defense

Production and Industrial Development: The Case of Japanese Aircraf~” Chahners Johnsou Laura D’Andrea ‘I)LSOU and John Zysman

(eds.), Politics and Productivity: The Real Story of Why Japan Works,

a reseruvh project of the Berkeley Roundtable on the International

Economy (BRIE) (Cambridge, MA: BaUinger Publishing, 1989), pp.

309-310, note 6.

45 One MITI offkial stated that MITI has also made loans to

aircraft manufacture to pay for tooling and that companies have to

reimburse MJTI for the depreciation.

46 Italy’s mtionrd aircraft manufacturer, Aeritali~ also shared

15 percent of the development and manufacturing work on the 767. The

15 percent refers only to the value of the airframe and drops to about

7 percent of the total cost of producing the plane if components such as

avionics and engines are included. JEI, op. cit., p. 5.

47 This system is also designed to insulate MITI politically by

providing the f-id assistance through intermediate organizations

rather than directly from MITI coffers. Even so, MITI officials worry

that the IADF may create dangers related to the General Agreement on

Tariffs and Trade (GATT) negotiations currently underway between the

United States and Europe, especially if the United States and Europe

come to any substantive agreements over acceptable and unacceptable

practices.

48 Officials of the Japan Aircraft Manufacturing Co., personal

communication July 4, 1990.

49 Umezama Kyoji, “Nichi/Bei Kyodo Jigyo lhisei Naru” @he

Japan-U.S. Cooperative Development Effort Forms), Aerospace Japan,

January 1991, p. 31.

50 If calculated by the NATO standard meth@ which includes

some expenses, excluded in the Japanese accounting metho& such as

pension commitments, the defense budget has ranged between 1.2 and

1.5 percent of Japan’s GNP. Michael W. Chinworth, “Financing Japan’s

Defense Buildup,” working paper of the MIT-Japan pro- December 1989, p. 8.

51 Yasuichi Amo (cd.), “Aerospace Industry in Japaw 1989-

1990” (Tolgo: The Society of Japanese Aerospace Companies, 1989),

pp. 30-31.

52 AIA, 1989-1990, op. cit., p. 21,

53 This does not include R&D conducted at the U.S. Department

of Energy, most of which relates to nuclear weapons.

54 AerospaceJapan Weekly, Mar.25, 1991, p.4. and Budgetofthe

United States Government: Fiscal Year 1992 (Washingto& DC: U.S.

Government Printing Office, 1991), Part I, p. 11, and Part II, p. 183. The

official figures for Japanese military R&D appears to be substantially

understated because some R&D expenses the f- undertake are later

compensated in (and counted as) procurement. However, there is no

doubt that R&D is a much bigger share of the U.S. defense budget than

it is of the Japanese defense budget.

55 “Important Import,” Aviation Week and Space Technology,

Apr. 15, 1991, p. 11.

56 Michael Chinworth explains that “as a matter of policy TRDI

emphasizes udlizing private sector resources to the greatest degree

possible in order to mirhize governm ent expenditures and hasten the

development of new technologies and products.” See Chinworth, op.

cit., p. 37.

57 Ministry of International Trade and Industry, Agency of

Industrial Science and lkchnology, “National Research and Development Program (Large-Scale Project), 1989,” brochure, March 1989,

p. 5.

58 In 1990, MITI had available Y133.5 billion to loan to Japanese

aircraft manufacturers to purchase foreign aimr@ Y72.7 billion from

the JDB and Y61.8 billion from the Japan Export-Lmport Bank.

Aerospace Japan Weekly, Jan. 15, 1990, p. 8.

59 Samuels and Whipple, op. cit.; Johnson et al., op. cit., pp.

289-290.

60 For example, a recent article reports, “MITI does not want

‘Ibyota to enter the military aircraft market for the time being. But it is

positive about lbyota’s entry into the commercial aircraft market.

lbyota itself seems to be well aware of MITT’s intention. Toyota will

concentrate its efforts in the commercial aircraft market for a while. ”

Aerospace Japan Weekly, Aug. 6, 1990, pp. 8-9.

61 Mowery, “The Japanese Commercial Aircraft Industry,” op.

cit., p. 19.

62 This section looks only at the governments and companies of

England, France, and Germany. Within Europe, HollanL Italy, SpaiIL

and Belgium also have substantial capabilities in commercial aircraft

and component production, and the governments in these countries have
Chapter 8-Government Support of the Large CornrnercialAircrajl Industries ofJapan, Europe, & the United States .361

also been active in promoting the growth of their aircraft industries. The

three countries dealt with here were chosen because they account for the

bulk of Europe’s aerospace production (88 percent of the total in 1988)

and because they are the principal manufacturers of planes of the size

dealt with in this study. Policy measures and the motivations behind

them in France, En@u@ and Germany are similar but not identical. This

section will treat the government policies of all three countries together

with differences pointed out as they arise, rather thanpmsenting separate

discussions for each. Commission of the European Communities, “The

European Aerospace Industry, Trading Position and Figures, 1990,”

Directorate-General Internal Market and Industrial Affairs, Brussels,

February 1990, p. 180.

63 Support for the aircraft industry also is a tool of regional

development. Keitb Hayward argues that this was the intent of French

policy makers wha they located substantial subcontracting work for

commercial aircraft in Saint Naziere, then a depressed area of the

country. France’s main aircraft cent=, ‘Rndouse, was a locus of aircraft

construction before WWII, but the decision to concentrate aircraft

production there after the war is also viewed as regional policy.

64 Richard Baldwin and Paul Km- “Industrial Policy and

International Competition in WideBodied Jet Aircraft,” Robert E.

Baldwin (cd.), Trade Policy Issues andEmpiricalAnalysis (Chicago, IL:

The University of Chicago Press, 1988), pp. 68-69. Another study looks

at the cmnpetition between all of Airbua’ and Boeing’s current products

and concludes that an estimated $20 billion in Airbus subsidies buys a

net welfare gain in Europe of $7.7 billion (including the cost of those

subsidies) compared to a hypothetical U.S. monopoly but a net welfare

deficit of $3.7 billion compared to a U.S duopoly. Gemot Klepper,

“Industrial Policy in the Transport Aircraft Industry,” paper presented

at the Center for Economic Policy Research workshop on Strategic

Trade Policy, Cambridge, M& Oct. 13 and 14, 1989, p. 24.

65 A recent EC report on the aviation industry cited this reason

(among others) why the aircraft industry is a valuable asset: “A strong

aeromutics industry should be recognized at the highest levels as an

essential element in the promotion of a European identity . . . ~he

existence of a European aeronautics industry in world markets. . . helps

to spread the economic and cultural influence of Europe.” Euromart

Study Report: Executive Summary, a joint study of the European

Cornmia sion and nine major European aircraft manufacturers, April

1988, p. 33.

66 Boeing accomplished this with the 747; for 20 years no

company has challenged Boeing’s position in this category. The early

Airbua launch of the A320 was a major factor deterring Boeing from

launching a direct competitor. Boeing’s 2-year lead hinging out the 727

before Douglas’ DC-9 was important in the eventual success of the 727,

as was Boeing’s l-year lead bringing out the 707 before the DC-8.

Airbus’ deliveryoftheA3008 years before Boeing’s 767 was a principal

reason Airbus was able to get a foothold in the commercial aircraft

business at all.

67 FokkeroftheNetherlands alsolaunchedajet transpo~ theF-28

(which sold 241 copies and continues to sell as the updated F-1OO) and

had a share of the VFW-614, a 50-seat short range jet that was canceled

before any deliveries were made.

68 Keith Hayward, International Collaboration in Civil Aerospace

(F&v York NY: St Martin“ ‘s Press, 1986), p. 162. Converted using data

ftom IMF, International Financial Statistics Yearbook, 1989 and BEA’s

GNP deflators.

69 Launchaidgenerally covers ordydevelopment costs. Plants and

equipment that might be reused for fhture models are not usually

included in developmen~ but aircraft-specific hardware such as jigs and

tooling usually are. For example, the $725 million British Aerospace got

from the British Government to develop the A330/A340 wing will be

used to fund not only the hardware development but also the flight

testing and the cost of most of the tooling. March, op. cit., p. 18. Since

development costs are the highest-risk portion of the total startup costs,

government assumption of these costs is more valuable than government

assumption of other costs. Nevertheless, launch aid covers only a portion

of the investment needed to begin production of a new model. For

example, the total fwcing needs for Aerospatiale’s portion of the

A330-340, is 7-8 billion French francs ($1.4-1.6 billion). Of this, the

French Govcxnment f~ced 60 percent of the development costa,

amounting to 30-35 percent of the total capital required. The rest was

borrowed. Representatives of Aerospatiale, personal camnunicatiou

Oct. 16, 1990.

70 Withthenationalization of BACand Hawker-Siddeleyin 1977,

the British Government discontinued the practice of providing launch

aid. Equity investment was used instead. However, when the newly

formed BAe was privatized in 1982, it once again became eligible for

launch aid under the provisions of the 1949 Civil Aviation Act. ‘lb give

launch ai~ the government must be convinced that a project would not

go ahead without the government’s suppom that there is a reasonable

chance that the government will recoup its funds, and that the project is

in the national interest. It is worth noting that these criteria are nearly

identical to those the Japanese Government use in deciding whether or

not to provide hojokin. Keith Hayward, Government and Bn”tish Civil

Aerospace (Manchester, U.K.: Manchester University Press, 1983), pp.

196-197 and representatives of the Department of Trade and Industry,

personal communication Oct. 8, 1990.

71 This is the Gelhnan Research associates estimate. Keith

Hayward estimates that roughly $1 billion had been repaid by 1986. The

Economz”st reports that “Every time an Airbus A31O flies off to join an

airline.. .$1OIU is paid back to the governments.” Gellman Research

Associates, “An Economic and Financial Overview of Airbus Industries, ” Sept. 4, 1990, prepared for the I.nternational Trade Adrmms “ “ tratio~

U.S. Department of Commerce, pp. 2-3, Haywar~ 1986, op. cit., p. 52,

and “Dissecting Airbus,” The Econonu”st, Feb. 16, 1991, p. 51.

72 Gellman Research Associates, op. cit., p. 2-2.

73 Keith Hayward, “EuropearI Civil Aerospace,” contractor

report for the OffIce of ‘lkchnology Assessmen4 November 1990, p. 69.

74 Gelhnan Research Associates, op. cit., pp. 2-11.

75 AirFrancehas A300s, A 310s, and A320s, but no 757s or 767s.

Air France does have some 737s and 747s, but Airbus makes no planes

of comparable sizes to compete with these. Air France also has some old

727s, but these were bought before the equivalent Airbus aircraft had

entered production.

76 Hayward, International Collaboration in Civil Aerospace, op.

cit., p. 53.

77 ‘Tb help compensate for the French Government’s pressure on

Air France to buy the GE/SNECMA engines for their A31OS, Pratt

offered the following package: rebuilding the Pratt and Whitney engines

on Air Fmnce’s 747s at a value of $25 rnillio~ setthg up anew engine

maintenance shop at Charles de Gaulle airport, and providing direct

offsets to French subcontractors of 30 percent of the value of the A31O

engines (including those sold to other airlines) including turbine disc

forgings, machine tools, and bearings. It was not enough. “Inside the

Airbus Engine War,” The Economz”st, Oct. 13, 1979, p. 81.

78 Hayward, “European Civil Aerospace,” op. cit., pp. 23-24.

79 The Avon was developed for the Hunter military jet and was

also used in the Wliant bomber. Commercially, the engine was used in

later Comet models and the French Caravelle. The Olympus was

developed for the Vulcan bomber and then was upgraded for supersonic

use and a&pted on parallel tracks for the TSR-2 bomber and the

Concorde (though its adaptation for civil use proved more difficult than

initially expected). The Spey was fwst developed for a number of “

military aircraft, which were canceled in 1957. Rolls privately flnauced

a civil version, which was used in the Triden4 and the original military

vemionwas ultimately used in the British F-4s bought in the early 1960s.

Keith Hayward, letter to OTA staff, Feb. 11, 1990, p. 7.

80 Since the CFM-56 program beg- the U.S. Govemment has

sometimes been a bi~er SNECMA customer than the French Government.

81 “UK’S GEC Develops Airliner HUD,” Flight International,
362 . Competing Economies: America, Europe, and the Pacific Rim

Oct. 31-Nov. 6, 1990, p. 17.

82 In contrast to the United States, where military aimraft

manufacturers often state that DoD procurement rules hinder or prevent

them from achieving synergies between their military and commercial

products, all the European contractors interviewed for this study stated

that they faced no such barriers. The government-owned fm pointed

out that since any increased profits would only return to the government,

the government would be silly to prevent f- from achieving synergies

where possible. This close relationship between government and

industry is more pronounced in Germany snd France than in Britain.

83 For example, the British Ministry of Defense (MoD) has

difllculty exercising cost control over Rolls Royce since there is no

domestic alternative source of supply. Rolls Royce officials state that

MoD has threatened to shift procurement contracts to U.S. suppliers but

hasneveractually done so (though one small service contract was shifted

to a U.S. competitor). Representatives of Rolls Royce, personal

communication Oct. 10, 1990. The inability of the MoD to wield a

credible threat of removing work from Rolls Royce plants may enable

Rolls to generate higher profit margins on MoD contracts than U.S.

companies can. These higher profits iiom military production could be

used to hold down commercial prices or to fund higher levels of R&D.

84 The ME and ONERA are funded from defense budgets while

DLR is funded from civil sources.
Index
Index

Academic research, 50,219,273,274,275

Acer, 331

Advanced Display Manufacturers of America Research Consortium, 66

Advanced Manufacturing Initiative, 19

Advanced Technology Program, 13, 14, 24, 43, 62-63, 66-67,

74-75

foreign interests, 26,28, 110

Advertising, 136, 163

Advisory bodies, 15-16,25,72,73

Agency for International Development, 167

Agricultural Extension Service, 48

Agriculture, 48,58, 124

protectionism, 122,250

Airbus Industrie, 13,34,35,68, 192, 197, 225, 229-230, 341,

352,353,355,356,357, 358

Aircraft industry, 34-35, 120-121, 154,341-358

capital investments, general, 217, 343

cost factors, general, 343,345-346,350

European, 13, 34, 35, 68, 192, 197-198, 202, 217, 225,

229-230,341,352-358

funding, 9-10,23-24,34,35,197-198, 217,343,345-348,350

GATT, 341,354

Germany, 354,355,358

historical perspectives, 345,348-350,353,355, 356

international agreements, 349, 358

Japanese, 35,251,341,349-352

joint ventures, 13, 34, 35,68, 192, 197, 225, 229-230, 341,

347-348,352,353,354, 355,356-357,358

military procurement, 158,159,341,344,345-347, 351,352,

357-358

R&D, 9-10,23-24,34,64,74, 217,279,280,281,341, 342,

343-348,350-358

U.S., 9-10,23-24,34,35,64, 74,120-121,217,230,251, 341,

342,344-349,355-356

see also National Aeronautics and Space Admini “ “stration

Aircraft Industry Manufacturing Law (Japan), 349

Aircraft Industry Promotion Law (Japan), 352

Air France, 356

Aluminum, 136

Antitrust law, 19,50,99,226-230

Europe, 192,209,226-228

foreign direct investment and, 98-99, 109-110

Japanese, 7-8,219,243,248,251, 252,264

see also Business acquisitions and mergers

Apprenticeships, 46,47

Ardent Computer, 94

Argentina, 133

Arrangement on Guidelines for Officially Supported Export

credits, 166

AT&T, 67,73,320

Australia 99, 100, 122,253

Automobile industry, 26,47,57,208

bilateral agreements, 205-207

dumping, 148

electric, 26, 70-71

European, 9,30,57,58,95, 122,202,203,205-208, 242

foreign direct investment, 91-93, 101-103, 107, 108

government procumbent, 26, 70-71, 159

Japanese, 28,57,58,91-93,94,101-103, 107,122,148, 156,

205-208,242,246-248, 250,251,271-272,315-316, 327,

328,329

joint ventures, 86,206,314,327,328

Korean, 314-316,333

Taiwanese, 327-329

U.S., 86, 102-103,242,246,315, 316,328

Awards, medals, and prizes, 19,50-52

Basic Guide to Exporting, 164

Bilateral agreements, 121, 122, 124, 127-128, 137-138

automobiles, 205-207

development assistance, 167

Free Trade Agreements, 122, 124, 127, 159

government procurement, 157, 159, 160-162, 274-275, 276-

277

with Japanese, 205-207, 274-275, 276-277

Boeing, 35, 120,217,230,251,342, 343,345

Brazil, 132, 133, 134

BRITE, 209,217,218,219,220, 221-222,223,225

Bureau of Apprenticeship and Training, 46

Bureau of Economic Analysis, 104

Bureau of Export Admini “ “stration, 60, 168, 171, 172-173, 174,

175

Bush Administration, 13,43,73,75, 137, 170-171

Business acquisitions and mergers, 19,94,98-99, 103,216

European, 191, 192,226-227,354

Japanese, 245

see also Foreign direct investment

Buy American Act, 159, 160, 162

Buy American preferences, 157, 159, 160, 199

Canada

automobiles, exports to, 107

foreign direct investment, 27,89,90,93,95, 100

Free Trade Agreement, 122, 124, 159

Capital investments, 15,10,18-19,20,41,68, 123

aircraft, general, 217, 343

depreciation, 17,25,44,74,245,313

Europe, 193,216

financing, government policies, 8, 17,44-45, 243, 245-246

foreign affiliates in U.S., 86,93-94,97, 100

Japanese, 8, 17,68, 100,243,245-246,252, 279

Korean, 8, 17,68, 100,311,316,317,319, 320

Taiwanese, 325-326,327

see also Taxation, tax incentives

Cartels, 118

Japanese, 12,244-245,250-251,262

Celanese, 94

Chaebol, 310,315,320,321,329-330, 334

Chemicals industry, 197,210,250,315

China, 62,304

China Steel Corp., 328

Chrysler, 316

Civil Aviation Administration, 348

Civilian Technology Agency, proposed, 16,24,63-64,74,75

Commis sion of the European Communities, 30, 58, 191, 192,

193,194-195,196,199, 205,207,217,218,221, 222,224,

225

antitrust, 227-228

national subsidies, 228-230

–365–
366 . Competing Economies: America, Europe, and the Pacific Rim

Cormmis sion on Industrial Competitiveness, 3

Committee on Foreign Investment in the United States, 109-110

Common Market Motor Vehicle Constructors, 208

Communications Intelligence Corp., 67

Communist countries, 170

see also China; Eastern Europe; Soviet Union

Competitiveness Policy Council, 15-16,72

Computer-integrated manufacturing, 219,254,271-272

machine tool industry, 18-19,48,49,67, 150,295

Computers and computer science

ESPRlT (EC), 31,209,215,217,218-219, 220-221,222,224,

226

Europe, general, 198,202-203,208,209, 225

export controls, 23,59, 168, 170, 171, 172-173

funding for technology, 32,65,66,67,254,263, 264,267-270,

277-278,279,280,318-319, 331,332

international cooperation, 217

Japanese, 32,123-124,127-128,152, 157,205,209,251,252,

256-279,280-281

Korean, 318-319

R&D, general, 32, 65, 66, 67, 251, 252-264, 265-270,

277-278,279-281,318-319, 331,332

supercomputers, 26, 32, 64, 70, 128, 131, 134, 157, 158,

253-281

Taiwanese, 331,332

tariffs on, 198

telematics, 209

training assisted by, 18

see also Semiconductors

Concorde, 354,356

Confidentiality, 151

Control Data Corp., 254-255,270,272,274, 275

Coordinating Committee for Multilateral Export Controls, 60,

62, 168,170-174

cost factors

aircraft development, 343, 345-346,350

containment, 22

labor costs, 147,314,315

overhead, 147

see also Dumping

Council of Ministers of the European Communities, 194

Countervailing duties, 118,139-140, 141, 143-146,148-154

defined, 138

Court cases, see Litigation

Cray Research Co.,‘158, 254, 255, 256, 262, 264, 271-272,

273-275,277-278,280-281

Cultural factors, 9

Canada/U.S. relations, 90

European, 219

Japenese, 31,219,250,252,270-272

patriotism 17, 157, 159, 160, 195,333

see also Social factors

Currency, 6-7,41,45,86, 108,118,127, 146,295

European, 355

Japanese, 241,242,246,247,260, 295,304-305

Korean, 307-310,315

Taiwanese, 322,324

Customs procedures, 20, 163

export licenses, 59, 60-61, 168-175

import licenses, 200-202

Daewoo, 315

Defense Advanced Research Projects Agency, 24,43,63,64,65,

279,280

Defense Appropriations Act, 160

Defense Technology Security Admin “ “i tration, 173, 175

Denmark, 199

Department of Agriculture, 58,124,163

Department of Commerce, 16,19,24-25,50,55,58, 59,74,75,

77, 124

dumping and subsidies, 143,144,146,148,149, 150,152,154

export controls, 60-61, 168-175

export promotion, 163-165

R&D funding standards, 65

semiconductors, 73

see also National Institute of Standards and Technology

Department of Defense, 25,34,60,75, 124, 172, 173,341

DARPA, 25,43,63,64,65,279,280

procurement, 69-70,71,109, 158,159,279,345,346

semiconductors, 69, 73

Department of Education, 47

Department of Energy, 19,49,73, 158,280

Department of Industry and Technology, proposed, 24,77

Department of International Commercial Policy, proposed, 77

Department of International Trade and Investment, proposed, 77

Department of Justice, 19,50, 109-110

Department of Labor, 46

Department of State, 23,60, 124

Depreciation, 17,25,44,74,245,313

Developing countries, 9,332, 333

aid, 22, 59, 166-167

currency exchange, 307-308 ‘

export financing assistance by, 58

foreign direct investment in, 85,99,305-306

see also Korea; Taiwan

Domestic content requirements, 57-58, 65,95, 199, 204, 207,

315,323-324

Drug trafficking, 7

Dumping, 20,21,55, 117, 124, 138-140, 141-154

automobiles, 148

defined, 42, 138, 139

Department of Commerce, 143,144,146,148,149, 150,152,

154

electronics, Japanese, 57, 203,248

European antidumping actions, 192, 199-200,203-205

GATT, 138-143, 149, 152, 153,204

International Trade Commission, 143, 144, 145, 148, 149,

150, 154

Japanese, 11-12,57, 139, 146-148, 199,203-205,248

Korean, 308

Eastern Europe, 7,60

EC and, 192,200

exports to, controls on, 168, 173, 174

Economic cycles

industrial targeting, 10

Japan, 10, 12,244,247,250

Korea, 315

oil crises, 241, 245, 250, 315

Economies of scale, 15, 120, 121,204,327,329

Education and training, 9,13,16,17-18,44,4547, 50,137,280

computer assisted, 18

engineers, 18,47,325,346

Japanese, 31,50,240,247-248,252, 273,274,275
Index ● 367

Korean, 312-313,317-318

Taiwanese, 325

see also Job training and aiding; Universities and colleges

E.I. du Pent de Nemours & Co., 67

Electronic Research and Service Organization, 330,331

Electronics and Telecommunications Research Institute, 320

Electronics industry, 35,66,69, 135, 156,279

European, 9, 57, 196-197, 200, 202-205, 208, 216, 224,

225-226,228

French, 194

international cooperation, 217

Japanese, 42,57,74,90, 150,203,228,243,248, 252

Korean, 314, 316-321

Taiwanese, 329-332

textile industry and, 12

U.S., 13,74, 135, 156

see also Computers and computer science; Semiconductors;

Television

Electronics Industry Promotion Law (Korea), 317

Employee benefits, 123

Employment and unemployment

EC, free movement of workers, 194

foreign affiliates in U.S., 27, 86, 87, 88,89-90,95,99-100,

101-104

government procurement, set asides, 159

Japanese, 250-251

labor costs, 147,314,315

labor-management relations, 102, 103,247,316

minorities, 46

trade policy and, 118, 122-123, 157

see also Job training and aiding; Wages and salaries

Energy sources

DOE, 19,49,73, 158,280

European, 199,213

Oil, 241,245, 250, 315

utilities, 162, 199

Engineers and engineering

education, 18,47, 325, 346

salaries, 174

Enhanced Proliferation Control Initiative, 62, 170, 175

Environmental issues, 121

Environmental Protection Agency, 43

ES2, 225

ESPRIT, 31,209,215,217,218-219, 220-221,222,224,226

ETA, 254-255,274,278

EURAM, 209

EUREKA, 9,31,209-210,211-212, 214-215,217,222,223-226

see also specific programs

Europe, see Eastern Europe; Western Europe; specific countries

European Community, 3, 191-230

aircraft industry, 13,34,35,68, 192, 197-198,202,217, 225,

229-230,341,352-358

antidumping actions, 192, 199-200, 203-205

antitrust (competition) policy, 192,209,226-228

automobile industry, 9,30,57,58,95,122,202, 203,205-208,

242

business acquisitions and mergers, 191, 192,226-227,354

computers, 198, 202-203, 208, 209, 225; see also ESPRIT

cultural factors, 219

currency, 355

domestic content standards and, 57,58,95, 199,204,207

Eastern Europe, relations with, 192,200

electronics, general, 9,57, 196-197,200,202-205, 208,216,

224,225-226,228

energy, 199, 213

export promotion and control, 164, 166,205,206, 357,358

exports by EC countries, general, 205, 206, 357

exports to EC countries, general, 193, 196-209

financing assistance, 191, 193

foreign direct investment, 24-25, 26, 30, 88, 90, 92, 95,

104-108,122, 192, 195-196,205-208

GATT, 191, 198-199,204,354

government procurement, 70, 162, 163, 196, 197, 198-199,

222,353,355-356

historical perspectives, 191,193,203-204,205-206, 208,209

industrial targeting, 7, 9, 13, 191, 202-203, 219, 228-230

institutions of, described, 194

Japan and, 191-192, 200, 201-202, 203-208, 209, 210,

216-219,222

licenses and permits, 200-202 2OO-2O2

national aids to competition, 7, 13, 191, 202-203, 219,

228-230,354-355

nationalize industries, 162, 230, 352, 358

politics, 195,215-217,224,228

protectionism, 195, 196-197,203,205-208, 209

R&D funding, 24-25,26,31,88,209-210, 214

Single Market, 30-31,41,95, 122, 191, 193-195,224

telecommunications, 9,209,216,218, 221,223-224, 230

Treaty of Rome, 191, 194,230

trade policy, general, 134, 137-138, 191-192

U.S. vis-á-vis, 192-193, 196-209,210

see also Commission of the European Communities; Framework Program; EUREKA; specific member countries

European Court of Justice, 195,229

European Free Trade Association, 212,222

Executive branch

advisory bodies, 15-16,25,72,73

Bush Administration, 13,43,73,75, 137, 170-171

critical industries office, 76-77

Office of Science and Technology Policy, 73,77,280

Reagan Admini “ stration, 127, 274

trade barrier removal, general, 54, 155

see also U.S. Trade Representative

Export Administration Act, 59, 168-169, 170

Export Enhancement Act, 60,61, 170, 171

Export-Import Bank Act, 166

Export-Import Bank of the United States, 58,59,118,124,163,

165-166, 167,348-349

War Chest, 22,59, 167

Export promotion and controls, 22-23,58-62, 163-175

Asian countries, 9

CoCom, 60,62, 168, 170-174

computers, 23,59, 168, 170, 171, 172-173

Department of Commerce, 60-61, 163-165, 168-175

to Eastern Europe, 168, 173, 174

European, 164, 166,205,206,357,358

Eximbank financial assistance, 22, 58, 59, 118, 124, 163,

165-166, 167

financing, other government assistance, 22,58,59,77, 118,

154, 163, 166,309-310,311,348-349

funding of, 164, 167-168

insurance, 58, 165-166

Japanese, 58,59, 166

Korean, 308,309-310,315,316
368 . Competing Economies: America, Europe, and the Pacific Rim

licenses, 59,60-61, 168-175

loans, 58, 165-166,310,311

military technology, 23,29,60,61-62, 122, 175,281

standards, 170-171

subsidies, 14, 21, 42, 52, 55, 117, 124, 138-154; see also

Countervailing duties; Dumping

Taiwanese, 323

telecommunications, 170, 171, 173-174

U.S., general, 60, 168, 171, 172-173, 174, 175,348-349

Exports

automobiles, to Canada, 107

barriers to foreign markets, general, 4, 5, 20-21, 52, 53-55,

117, 118, 125-138, 155-157

by EC countries, 205,206,357

to EC countries, 193, 196-209

foreign direct investment and, 86, 108,305-306

Korea, 33,297-300,301-305,308, 309-310,316-317

semiconductors, 59, 127-128

Taiwan, 33,297-300,301-305,322, 328,329

in trade theory, 119-120

Federal High Performance Computing program, 280

Financial factors, 16, 17,44-45

European, 191, 193

Eximbank, 22,58,59, 118,124, 163,165-166,167,348-349

exports, general government assistance, 22, 58, 59, 77, 118,

154, 163, 166,309-310,311,348-349

government risk sharing, 23-24, 25, 64, 65, 68-69, 74,

342-344,348,349-351, 353-354

Japanese, general, 243-245, 247-248, 261-262, 265, 279,

289-291

Korean, 309-311,313,314

Taiwan, 322,323

see also Capital investments; Currency; Interest rates; Investments; Loans; Savings

Ford, 246,315,328

Foreign aid, 22

loans, 59, 167

tied aid, 59, 166-168

Trade and Development Program, 23,59, 167-168

Foreign and Commercial Service, 58

Foreign Capital Inducement Law (Korea), 311

Foreign direct investment, general, 85-111

antitrust law, 98-99, 109-110

automobile industry, 91-93, 101-103, 107, 108

Asia and Pacific Rim countries, 8

developing countries, 85,99,305-306

domestic content standards and, 57-58,65,315,323-324

Europe, 24-25, 26, 30, 88,95, 104-108, 122, 192, 195-196,

205-208

exports and, 86, 108, 305-306

historical perspectives, 26,85,88-93,96,100,102, 104,108,

305

by Japan, 32,242,305-306,315-316, 327,328,329

in Japan, 12, 58,86, 100, 108,242, 246,247, 249,260-261

Korea, 305-306,310-311,312, 317,319,320,332-333

reinvestment of profits, 104-106

Taiwan, 305-306,321-322,323-324, 327,328,329,331

by U.S., 87-88, 104

see also Multinational companies

Foreign direct investment in U.S., 26,85-111

by Canada, 27,89,90,93,95, 100

employment and, 27,86,87, 88,89-90,95,99-100, 101-104

European countries, 90,92, 104-108

by Japanese, 86,87,89,90,91-95,97-101, 102-103,104-107,

108, 111

military technology, restrictions, 87, 109-110

politics of, 95,99, 109

R&D, 24-25,26,28,65, 87,88,93-94,95-96,98, 101, 108,

110

reinvestment of profits, 104-106

State and local government promotion of, 87

Foreign exchange, see Currency

Foreign Exchange Control Law (Japan), 242

Foreign Investment Law (Japan), 242,261

Foreign Investment and Loan program, 243

Foreign policy

military export controls, 23,29,60-62, 122, 175,281

technology export controls, 23,29,60,61-62, 122, 175,281

Foreign trade, general

balances of, 4, 11, 108, 121, 136,197,241,308,322, 341

free market approaches, 3,5,7-9,41,42, 118-119, 121

market shares, 3,6, 298

see also Customs procedures; Dumping; Export promotion

and controls; Exports; Imports; International agreements;

Protectionism

Framework Program (EC), 9,28, 31, 209, 210-211, 212, 217,

222,223-226

specific programs, summarized, 213

see also specific programs

France, 194, 197,210-211,212,227, 229,230,352,354,

355-356,358

Free market economies, 3,5,7-9,41,42, 118-119, 121

Europe V. U.S., 7, 191

Japanese, 240

Free Trade Agreements, 122, 124, 127, 159

Fringe benefits, 123

Funding

aircraft industry, 9-10, 23-24, 34, 35, 197-198, 217, 343,

345-348,350

computer technology, 32,65,66,67,254,263, 264,267-270,

277-278,279,280,318-319, 331,332

European R&D, 24-25,26,31,88,209-210, 214

export promotion, 164, 167-168

foreign aid, 22,59, 167-168

R&D, 24,32,34,49,63,64,65, 66,67,95-96,252,254, 263,

264,267-270,277-278, 279,280,298,313,314, 318,320,

325-326,327,346-348

State-level technology extension, 18,46,47-48

trade development, 23, 167-168

Fujitsu, 222,254,270,275-276, 278,279,281

General Accounting Office, 145, 161, 164,281

General Agreement on Tariffs and Trade, 20,21,22,28-29,53,

54,55-56, 118, 121-122,128, 156-157

aircraft, 341, 354

dispute resolution, 129-131

dumping, 138-143, 149, 152, 153,204

escape clause, 155

Europe and, 191, 198-199,204,354

foreign investments, 85

government procurement, 26, 70-71, 157, 159-162, 198-199,

277,281
Index *369

history, 28-29, 128, 129, 131

Japanese and, 243,277

quotas and tariffs, 127, 128

Uruguay Round, 55,56, 128,129, 153, 191, 199

General Electric, 162, 199,263,355-356,357

General Motors, 86, 102-103,246,315

Generic technologies, 63, 110, 192

Georgia, 47-48

Germany, Federal Republic

aircraft, 354, 355, 358; see also Airbus Industrie

apprenticeships, 47

auto industry, 206

balance of trade, 11

capital investments, financing, 8, 17

foreign direct investment, 90

national aids to industry, 228, 354, 355

patents, 210

prices and exchange rates, 45

R&D, 212,214

Government contracts and procurement, 25-26,31, 32, 34, 59,

69-71, 131, 135, 157-163

aircraft industry, 158, 159, 341, 344, 345-347, 351, 352,

355-356,357-358

automobiles, 26,70-71, 159

bilateral agreements, 157, 159, 160-162,274-275,276-277

capital investment financing, general, 8, 17, 44-45, 243,

245-246

DoD, 69-70,71, 109, 158, 159,279,345,346

DOE, 158

employment-related set asides, 159

European, 70,162,163,196,197,198 -199, 222,353,355-356

foreign aid, tied, 59, 166-168

GATT, 26,70-71, 157, 159-162, 198-199,277,281

GNT and, 159

Japanese, 32,70, 131, 134, 157,270,272-278,351

Korean, 318,320

military technology, general, 69-70, 157-160,279,280,281

minority set asides, 157

R&D and, 70,71,324,345,346

small business set asides, 159, 160, 199, 221

standards, 71,85, 109, 195, 199

State and local governments, 71, 158-159, 160, 162

supercomputers, 70, 158,270,272-278

Government role, general, 14,41-43,62-78

advisory bodies, 15-16,25,72,73

aircraft industry, 341-358

education, support for, 17-18, 31, 46-47, 50, 240, 247-248,

252,273,274,275,312-313, 317-318,325

financial risk sharing, 23-24,25,64,65,68-69, 342-344,348,

349-351,353-354

joint ventures with industry, general, 14,24,26,41,42,49,53,

62-67,71-78

laboratories, 19,49,273,279

national aids to competition, 7, 13, 191, 202-203, 219,

228-230

see European Community; Export promotion and control;

Funding; Industrial targeting; Laws; Local government;

Nationalized industries; State government; Taxation;

specific departments, agencies, and programs

Gross domestic product

European, 196

foreign trade indicators and, 11

German, 11

Japanese, 5,68,295

Korea and Taiwan, 295,297

Gross national product

European, 31, 164,208

export promotion and, 164

foreign direct investment and, 26

foreign trade indicators and, 4,6

government procurement and, 159

Japanese, 243,349

Korean, 313

Taiwanese, 322,323

Hampshire Instruments, Inc., 67

High Speed Computing System for Scientific and Technological

Uses Project, 32,265-268

Historical perspectives

aircraft industry, 345, 348-350, 353, 355, 356

currency values, 6, 45

Europe, 191, 193,203-204,205-206, 208,209

Federal aid to industries, direct, 25,69

Federal organization, 77

foreign direct investment, 26, 85, 88-93,96, 100, 102, 104,

108,305

GATT, 28-29, 128, 129, 131

Japanese, competition controls, 7-8,219,240

Japanese, post-War, 5, 10, 31, 32, 33, 123-124, 205-206,

239-252,260-270,279, 349

Japanese, pre-War, 239-240,242,246

Korea, 295-321

supercomputers, 254-255, 260-264

Taiwan, 321-334

U.S. trade policy, 52,54, 117, 119-120, 121, 167-168,345

U.S. trade deficit, 136,241

U.S. wages, 3-4

Hitachi, 254,272,278,279,281, 320

Honda, 329

Human resources, 13, 17-18,45-47

see also Education and training; Job training and aiding

Hyundai, 315,320,321

IBM, 88,222,253,254,260-261, 262,263,268-269,272, 281,

327,331

ICL, 222

Imports, 155-157

domestic content requirements, 57-58, 65, 95, 199, 204,

323-324

import dependence, 11-13

Korea and Taiwan, 300,302,303,304,308, 316

licenses, 200-202

multinational firms, affiliates and, 27,32,86,90,97-98, 101,

106-108

quotas and tariffs,4, 20,30,117,118,121,127, 128,146,193,

198,206-208,243,244, 277,308-309,316,322-323

see also Countervailing duties; Dumping; Protectionism

Income, 3-4

poverty, 46

profits of direct foreign investors, 104-106

see also Wages and salaries

Industrial capacity and utilization, 11-12,245

Industrial Development Law (Korea), 307

Industrial Research and Development Advisory Committee, 220
370 . Competing Economies: America, Europe, and the Pacific Rim

Industrial targeting, 9-11,29,32,53,72-76, 117, 197-198

European, 7, 13, 191,202-203,219,228-230, 341,352-358

French, 194,228,230

Japanese, 9, 10,29,32,53,239,244-252, 264-281,349-352

Korean, 307,314-321,332,333

Taiwanese, 327-332,333

Informatics, see Computers and computer science

Information Promotion Agency, 251

Institute for New Generation Computer Technology, 268

Insurance

employee health, 123

export assistance, 58, 165-166

Intellectual property, 19,50

Korea, 131,312

Taiwan, 326,330

see also Patents

Interest rates, 17,45,68,243,252,262, 310-311,354-355

International agreements

aircraft industry, 349, 358

CoCom, 60,62, 168, 170-174

computers, 217

EFTA, 212,222

foreign aid, 22,59

OECD, 28,85,196,243,349

semiconductors 11, 12

technology, 216-217,222

see also Bilateral agreements; European Community; General

Agreement on Tariffs and Trade

International Aircraft Development Funds, 350

International Monetary Fund, 308

International TradeAdmini “ “ tration, 11,99, 146, 163, 164

International Trade Commission, 56, 124, 155-156

antidumping, 143, 144, 145, 148, 149, 150, 154

antitrust, 226-230

European actions, 199

International Trade Organization, 54, 128

Investments

domestic, 86,326

industrial targeting and, 10

see also Capital investments; Foreign direct investment

Israel, 122, 159

Japan, 3,5-7,31-33,43,239-281

aircraft industry, 35, 251,341, 349-352

automobiles, 28, 57, 58, 91-93, 94, 101-103, 107, 122, 148,

156,205-208,242,246-248, 250,251,271-272,315-316,

327,328,329

bilateral agreements with, 205-207,274-275,276-277

capital investments, financing, 8, 17,68, 100,243, 245-246,

252,279

cartels, 12,244-245,250-251,262

competition controls, 7-8, 219,243, 248,251,252,264

computers, 32, 123-124, 127-128, 152, 157, 205, 209, 251,

252,256-279,280-281

cultural factors, 31,219,250,252, 270-272

currency, 241,242,246,247, 260,295, 304-305

dumping, 11-12,57, 139, 146-148, 199,203-205,248

economic cycles, effect on, 10, 12,244,247,250

educational system, 31,50,240,247-248,252, 273,274,275

electronics general, 42, 57,74, 90, 150, 203, 228, 243, 248,

252

employment issues, 250-251

Europe ViS-á-ViS, 191-192,200,201-202, 203-208,209,210,

216-219,222

export promotion by, 58,59, 166

exports to, promotion of, 165

financial factors, general, 243-245, 247-248, 261-262, 265,

279,289-291

foreign aid, 167

foreign direct investment by, general, 32, 242, 305-306,

315-316,327,328,329

foreign direct investment by, in U.S., 86,87, 89,90,91-95,

97-101, 102-103, 104-107, 108, 111

foreign direct investment in Japan, 12,58,86,100,108,242,

246,247,249,260-261

GATT, 243,277

government procurement, 32, 70, 131, 134, 157, 270,

272-278,351

history, competition controls, 7-8,219,240

history, post-War, 5, 10, 31, 32, 33, 123-124, 205-206,

239-252,260-270,279, 349

history, pre-War, 239-240,242,246

industrial targeting, 9, 10,29,32,53,239,244-252, 264-281,

349-352

keiretsu, 12-13,32,95,226,243, 261,270-271,272,279, 334

Korea and Taiwan, relations with, 304-305, 311, 314-316,

328,329,333

loans, 241-242,243,244,245, 262,279,350

politics, 250,278

price controls, 7, 11-12,45,99,203-204, 240,244-245,262,

264,275-277,278,295

protectionism, general, 13, 54-55, 136-138, 240, 242, 244,

245,247,249,253,260, 261

R&D, general, 8, 123,251,252-264,265-270

savings, 240, 243

semiconductors, 11, 12,25,54-55,68,69,99, 127-128, 132,

136,137,139,152-153, 205,209,218,219,219-250, 252,

263-264,275,278

standards, 247, 269

steel, 103, 244-246

supply industries, 222,242, 247

tax incentives, 8,32,243,244,245,247, 262

technology, diffusion of, general, 18,28,47,48-49,98,244

technology, general, 7,8,98,242,247

telecommunications, 32, 137, 262, 263-264, 268, 273-274,

278

television, 28,248, 122, 124,248

trade balance with U.S., 136

universities, 31, 50, 240, 247-248, 252, 273,274, 275

wages, 5, 32

see also Ministry of International Trade and Industry

Japan Development Bank, 241-242,245,262,350

Japan Electronic Computer Co., 261-262,270

Japan Information Processing Development Center, 269

Japan Telegraph and Telephone Co. (NTT), 262,263-264,268,

273-274,278

JESSI, 214-215,218,220,222, 225,226

Job training and aiding, 17-18,46-47, 137

apprenticeships, 46,47

foreign affiliates, 102, 108

Joint ventures, 330

aircraft industry, 13,34,35,68, 192, 197,225,229-230,341,

347-348,352,353,354, 355,356-357,358

automobile industry, 86, 206, 314, 327, 328
Index • 371

government/industry, 14,24,26,41,42,49,53, 62-67,71-78

legal issues, general, 19

multinational and domestic firms, 86-87, 98, 108, 110, 136,

216,261,315-316,319, 327,328,331

Sematech, 14,24,26,42,54,64-65, 74,99, 109, 154

small businesses, 108

see also Advanced Technology Program

Keiretsu, 12-13,32,95,226,243, 261,270-271,272,279, 334

Kia, 315

Korean, South, 3,8,29,33-34,57, 123,295-321,332-334

automobiles, 314-316, 333

capital investment, 8, 17,68, 100, 311,316, 317,319, 320

chaebol, 310,315, 320,321, 329-330,334

computers, 318-319

currency, 307-310,315

dumping, 308

educational system, 312-313,317-318

electronics, 314, 316-321

export promotion and control, 58, 165-166

financial factors, 309-311,313,314

foreign direct investment, 305-306,310-311, 312,317,319,

320,332-333

government procurement, 318, 320

industrial targeting, 307, 314-321, 332, 333

intellectual property, 131, 133

Japan, relations with, 304-305,311,314-316, 328,329,333

loans, 307,310,311,314

nationalized industries, 318, 321, 334

politics, 295-296,307-321,33 4

prices and price controls, 295,315,319

productivity, 314,315,316

protectionism, 296,308-309,316,334

R&D, 298,312-314,317,318-319, 320,333

semiconductors, 295, 316-321, 333

small business, 314

suppliers, 308, 315

taxes, 313,314,316

technological innovation, general, 297,311-314,332-333

technology transfer and diffusion, 302-303, 311-312, 314,

316,318,319,333

telecommunications, 318,320

wages, 316

Korean Institute of Electronics Technology, 317-318,320

Korean Trade Promotion Corp., 310

Korean Traders Association, 310

Kubota Ltd., 94

Labeling, 163, 165

Labor costs, 147,314,315

Labor-management relations, 102, 103,247,316

Law on Temporary Measures for Promoting the Machinery

Industries (Japan), 247

Laws, specific Federal, 124-125, 126

Buy American Act, 159, 160, 162

Defense Appropriations Act, 160

Export Admlnls “ “ tration Act, 59, 168-169, 170

Export Enhancement Act, 60,61, 170, 171

Export-Import Bank Act, 166

National Cooperative Research and Development Act, 76

Omnibus Trade and Competitiveness Act, 70, 73, 109,

161-162,275

Technology Transfer Act, 49

Trade Act, 21,22,54,62, 124-126, 130-136, 154, 155-156

Trade Agreements Act, 160

Laws, specific foreign

Aircraft Industry Manufacturing Law (Japan), 349

Aircraft Industry Promotion Law (Japan), 352

Electronics Industry Promotion Law (Korea), 317

Foreign Capital Inducement Law (Korea), 311

Foreign Exchange Control Law (Japan), 242

Foreign Investment Law (Japan), 242,261

Industrial Development Law (Korea), 307

Law on Temporary Measures for Promoting the Machinery

Industries (Japan), 247

Single European Act, 193,224

Legal issues

confidentiality, 151

technology transfer, 19

see also Antitrust laws; Intellectual property; Litigation

Licenses and permits

Europe, 200-202

import/export, 59,60-62, 134, 168-175

multinational corporations, 216, 314

of patents, 19,49,50,260, 268-269, 311-312, 316,333,351

Light Age, Inc., 67

Litigation, 140-154, 193, 195

European Court of Justice, 195,229

foreign direct investors, 94,98-99, 109-110

supercomputers, 268-269

Loans

European, 191, 193,354-355

export assistance, 58, 165-166,310,311

foreign aid, 59, 167

government risk-sharing, 68-69, 241-242, 350

interest rates, 17,45, 68, 243, 252, 262, 310-311, 354-355

Japanese, 241-242,243,244,245, 262,279,350

Korean, 307,310,311,314

Taiwanese, 323,325-326

U.S., 58,59, 118, 124, 163,165-166,348

Local government

foreign investment promotion, 87

procurement, 71, 158-159, 160, 162

Lockheed, 342,348,354

Lufthansa, 356

Machine tool industry, 18-19,48,49,67, 150,228,295

Making Things Better: Competing in Manufacturing, 16,17,44,

68, 117

Malcolm Baldrige National Quality Award, 19,50-52

Management and managers, 99-100, 102-103, 108

Materials sciences

European, 209,213,217,218,219, 220,223

superconductors, 53, 124

see also semiconductors

Matsushita Communication Industrial Co. Ltd., 98

Mazda, 315

McDonnell Douglas, 35,217,230,343,354,355

McDonnell Douglas Electronic Systems Co., 67

Mega project, 214,215

Mergers, see Business acquisitions and mergers

Microelectronics & Computer Technology Corp., 66

Middle East, 87

Military technology, 122,279
372 ● Competing Economies: America, Europe, and the Pacific Rim

aircraft, 158, 159,341, 344,345-347, 351, 352, 357-358

commercial synergies, 69-70, 154, 341, 344, 345-346, 351,

352,357-358

export controls, military, 23, 29, 60-62, 168, 172, 173, 175,

323,346

foreign direct investment, restrictions, 87, 109-110

Japanese automobile industry, 246

procurement, 69-70, 157-160,279,280,281

see also Department of Defense

Military training, 46-47

Ministry of International Trade and Industry, 11-12, 16,31,33,

35,43, 127-128, 136, 177, 219, 228, 240-253 (passim),

260-261,263,265-278, 350-352

foreign direct investment, 87,97,99-100, 101,242,243

Minorities

education, 18

employment, 46

governme nt procumbent, set asides, 157

Mitsubishi, 315-316,329

Models, trade, 119, 121, 122-123, 150

Most-favored-nation status, 122

Motor vehicles, see Automobile industry

Multinational companies, 26-27,216

foreign affiliates, import practices, 27,32,86,90,97-98,101,

106-108

foreign affiliates in U.S., 26-28, 106-108

joint ventures involving, 86-87,98, 108, 110, 136,216,261,

315-316,319,327,328, 331

see also Foreign direct investment

Mutec, 151

National Academy of Sciences, 168, 174-175

National Advisory Committee on Semiconductors, 15, 25, 72,

73

National Aeronautics and Space Administration, 9-10, 23-24,

34,64,74,279,280,281, 341,344,345,347-348

National Aerospace Laboratories, 351

National Center for Manufacturing sciences, 19,66

National Committee on Semiconductors, 69

National Cooperative Research and Development Act, 76

National Institute of Standards and Technology, 24, 51, 52,

74-75

see also Advanced Technology Program

National Intergroup, Inc., 103

Nationalism, 199,261

Buy American preferences, 157, 159, 160, 199

domestic content requirements, 57-58,65,95,199,204, 207,

315,323-324

patiotism, 17,157, 159, 160, 195,333

Nationalized industries

European, general, 162,230,352,358

Korean and Taiwan, 318,321,328,330,334

U.S., 70, 162

utilities, 162, 199

National Label Co., 151

National Science Foundation, 47,50,63,73,279,280

National Steel Corp., 103

National Storage Industry Consortium, 66

NEC, 254,255,258,270,272, 273,275,278,279,281

Netherlands, 214,229

New Information Technology Project, 269

New United Motor Manufacturing, Inc., 86, 102-103

New Zealand, 122

Nicolet Instruments Corp, 98

Nippon Sanso, 98-99, 109-110

Nissan, 314,316,327,329

NKK, 103

Nonvolatile Electronics, Inc., 67

Norway, 135

Office of Science and Technology Policy, 73,77,280

Oil shocks, 241,245,250,315

Omnibus Trade and Competitiveness Act, 70,73,109,161-162,

275

Organizational factors, 15-16,71-73,76-78

business consortia, 46,65, 66,87, 192,209,224,225,320,

351-352

chaebol, 310,315, 320,321, 329-330,334

EUREKA, 9,31,211-212,214-215, 217,222,223-226

European, general, 217

government bureaucracy, 240, 241

job training, 46

keiretsu, 12-13,32,95,226,243, 261,270-271,272,279, 334

management and managers, 99-100, 102-103, 108

trade associations, 46

vertical integration, 68,217, 218, 255, 278-279

see also Joint ventures

Organization for Economic Cooperation and Development, 28,

85, 196,243,349

Overhead, 147

Parts, see Suppliers

Patents, 210-211,240,249

licensing, 19,49,50,260,268-269, 311-312,347-348,351

Patriotism, 17, 157, 159, 160, 195,333

Philips, 214-215,331

Planning, economic, 16,4243,44,62-65,71-78

advisory bodies, 15-16,25,72,73

Korea and Taiwan, 8,9,312-313,324,325

Politics, 41,45, 123, 168

European, 195,215-217,224,228

foreign investors, 95,99, 109

Japanese, 250,278

Korea, 295-296,307-321,334

Taiwan, 295-296,322,333,334

Pontiac, 315

Postal Service, 26,70-71,243

Poverty, 46

Pratt & Whitney, 217,344,346,355-356

Prices and price controls, 45, 118,350

Buy American preferences, 157, 159, 160, 199

cartels, 12, 118, 244-245, 250-251,262

customs value, 127

European telecoms, 216

foreign direct investors, 106

Japanese, 7, 11-12,45,99,203-204, 240,244-245,262,264,

275-277,278,295

Korea and Taiwan, 295,315,319,328

subsidies, 14,21,42,52,55, 117, 124, 138-143

supercomputers, 258-259,262,264,275-278

see also Dumping

Procurement

private sector, 270-272,280-281

see also Government contracts and procurement
Index ● 373

Production and productivity, 11-12,22

costs and trade, 120

domestic content requirements and, 57,315

industrial capacity and utilization, 11-12, 245

Korean, 314, 315,316

Profits

dumping and, 152

foreign direct investment, reinvestment, 104-106

Protectionism, 8,21-22,29,55-57, 117-118, 121, 122

agricultural products, 122, 250

developing countries, 9

European, 195, 196-197,203,205-208, 209

industrial targeting and, 10

infant industry, general, 123-124

Japanese, 13,54-55, 136-138,240,242,244, 245,247,249,

253,260,261

Korean, 296,308-309,316,334

steel industry, 122-123

Taiwanese, 296,322-323,328-329, 334

textiles, 122-123

U.S., general, 14,41

Public opinion

Japanese, 43

patriotism, 17,157, 159, 160, 195,333

Quality and quality control, 42

awards, 19, 50-52

see also Standards

RACE, 209,218,221,223

RCA, 263,330

Reagan Admini “ “stration, 127, 274

Recession, see Economic cycles

Reconstruction Finance Corp., 25,69

Regionalism 122, 192

Regulations

antidumping/countervailing charges, 140-154

nontariff barriers, general, 163

see also Licenses and permits; Standards

Research and development

academic, 50,219,273,274, 275

aircraft, 9-10,23-24,34,64,74, 217,279,280,281,341, 342,

343-348,350-358

computers, 32,65, 66, 67, 251, 252-264, 265-270, 277-278,

279-281,318-319,331, 332

consortia, 46, 65, 66, 87, 192, 205, 209, 224, 225, 320,

351-352

DARPA, 25,43,63,64,65,279,280

electronics, general, 66-67

European, 8,24-25,26,31,88, 192,209-226,228

Federal role, U.S., 9-10, 13,20,23-25,53,62-65

foreign direct investors, 24-25, 26, 28, 65, 87, 88, 93-94,

95-96,98, 101, 108, 110

free market economies, 8

funding, 24,32,34,49,63,64,65, 66,67,95-96,252,254,

263,264,267-270,277-278, 279,280,298,313,314, 318,

320,325-326,327,346-348

generic technologies, 63, 110, 192

Germany, 212,214

government procurement, general, 70, 71, 324, 345, 346

Japanese, general, 8, 123,251,252-264,265-270

Korean, 298,312-314,317,318-319, 320,333

NASA, 9-10,23-24,34,64

semiconductors, 14, 24, 26,42, 54,64-65, 74, 99, 109, 154,

205, 209, 214-215, 217-218, 219, 220, 222, 225-226,

317-319,330-332

small businesses, 18-19,47,48, 117, 209, 220-222

standards, 24-25, 26, 65

subsidies and trade, 149, 152-153, 154

Taiwanese, 298,324-327,330-332, 333

as trade externality, 121

U.S., general, 13,14,24,26,28,43,62-63, 66-67,74-75,110,

118

see also Advanced Technology Program; Framework Program; ESPRIT; EUREKA; Technology transfer and

diffusion

Research and Development in Advanced Communications in

Europe Program, 71

Rolls Royce, 342

Saginaw Machine Systems, Inc., 67

Salaries, see Wages and salaries

Samsung, 316

Savings

American, 17,44,45,86, 136, 137

Japanese, 240,243

Korean, 322

Taiwanese, 323

Science and Technology Advisory Group, 324-325

Sematech, 14,24,26,42,54,64-65, 74,99,109, 154

Semiconductor Industry Association, 127

Semiconductors, 11-12,15,25,68,69,249-250

DoD, 69,73

European, 30,95,192,198,199,203, 204,205,209,214-215

218,220,222,225-226

exports, 59, 127-128

Japan, 11, 12,25,54-55,68,69,99, 127-128, 132, 136, 137,

139,152-153,205,209, 218,219,249-250,252, 263-264,

275,278

Korea, 295,316-321,333

National Advisory Committee, 15,25,72,73

patents, 249

R&D, general, 14,24,26,42,54,64-65, 74,99,109,154,205,

209,214-215,217-218, 219,220,222,225-226, 317-319,

330-332

Sematech, 14,24,26,42,54,64-65, 74,99,109, 154

Taiwanese, 329-332

U.S., 69,73,99, 109, 127-128, 152-153, 154

Semiconductor Trade Agreement, 11, 12

Semi-Gas System, 98-99, 109-110

Siemens, 214

Single European Act, 193,224

Small and medium-sized businesses

awards, 51

European actions, 209,220-222,228

foreign trade, assistance, 145, 157

government procurement, set asides, 159, 160, 199,221

joint ventures, foreign partners, 108

Korean, 314

Taiwanese, 321,324,326-327,329-330, 331

technology development and diffusion, 18-19, 47, 48, 117$

209,220-222

Small Business Adminis “ “ tration, 209

Smith Corona Corp., 148-149
374 ● Competing Economies: America, Europe, and the Pacific Rim

SNECMA, 356,357

Social factors, 14, 118, 157,250,325

mergers, 227

see also Cultural factors

Soviet Union, 60,62, 168

Special Drawing Rights, 159

Sperry Rand, 261

SPRINT, 221

Ssang Yong Motors, 315

standards

domestic content requirements, 57-58,65,95,199,204, 207,

315,323-324

European, 57-58,95, 195, 199,200-202,204,207, 223-224

export controls, 170-171

foreign direct investment and, 57-58,65,85,95, 109-111

government procurement, 71, 85, 109, 195, 199

Japanese, 247,269

labeling, 163, 165

R&D funding, government, 24-25,26,65

as trade barriers, general, 20, 136, 137-138, 163

U.S., 348

Standards of living, 3-4,42, 108, 120, 121

European, 210,213

German, 11

Japanese, 32

State government

foreign investment promotion, 87

procurement, 71, 158-159,160, 162

technology extension, 18,46,4748

Steel industry

Japanese, 103,244-246

protectionism, 122-123

Stellar Computer, 94

Stocks and shares, 279

Supercomputers, 26,32,64, 128, 131, 134, 157,253-281

government procurement, 70, 158,270, 272-278

Superconductors, 53, 124

Suppliers, general

education of suppliers by manufacturers, 47

Japanese, 222,242,247

Korean, 308,315

vertical integration, 68, 217, 218, 255, 278-279

Sweden, 47

Taiwan, 3,8,33-34, 127, 133,295-306,321-334

automobiles, 327-329

capital investments, 325-326, 327

computers, 331, 332

currency, 322, 324

exports, 33,297-300,301-305,322, 328,329

financial factors, 322,323

foreign direct investment, 305-306, 321-322, 323-324, 327,

328,329,331

industrial targeting, 327-332, 333

intellectual property, 326, 330

Japan, relations with, 304-305,328,329,333

loans, 323,325-326

nationalized industries, 328, 330, 334

politics, 295-296,322,333,334

prices and price controls, 295,328

protectionism, 296,322-323,328-329, 334

R&D, 298,324-327,330-332, 333

small businesses, 321,324,326-327,329-330, 331

technology diffusion, 302-303,324,330

Taxation, general, 44

European, 193,353

foreign direct investors, 106

Korean, 316

tax incentives, 326

Taxation, incentives, 10, 17, 19,20,25,41,44-45,68

capital gains, 45

depreciation, 17,25,44,74,245,31-3

high-technology investments, 49, 118

Japanese, 8,32,243,244,245,247, 262

Korean, 313,314,316

Taiwanese, 326

Technical assistance

government extension services, 18, 46,4748

to suppliers from manufacturers, 47

training linked with, 18,46

Technological innovation, 8, 14, 16-20,44

European, 195,209-226

export controls to protect, 23, 29,60, 61-62, 122, 175, 281

foreign direct investment, restrictions, 87, 109-110

funding, 32,65,66,67,254,263, 264,267-270,277-278, 279,

280,318-319,331,332

generic technologies, 63, 110, 192

industrial targeting, 9-11

international agreements, 216-217,222

Japanese, 7,8,98,242,247

Korean, 297,311-314,332-333

knowledge intensity, 120-121

Taiwanese, 297,324-327

tax incentives for investment, 49, 118

see also Military technology; Research and development

Technology Transfer Act, 49

Technology transfer and diffusion, 13,14, 18-20,29,44,47-52,

120-121

awards affecting, 19,50-51

education and, 46

generic technologies, 63, 110, 192

industrial targeting and, 10

Japanese, 18,28,47,48-49,98,244

Korean, 302-303,311-312,314, 316,318,319,333

military technology, restrictions, 23,29,60-62,87, 109-110,

168, 172, 173, 175,323,346

patent licensing, 19,49,50,260,268-269, 311-312,316,333,

347-348,351

small and medium-sized businesses, 18-19,47,48, 117,209,

220-222

State-level technology extension, 18,46,4748

supercomputers, 260

Taiwanese, 302-303,324,330

see also Intellectual property

Technology Transfer Project Group, 19,49

Telecommunications, 159

European, 9,209,216,218,221,223-224, 230

export controls, 170, 171, 173-174

international cooperation, 217

Japanese, 32, 137,262,263-264,268, 273-274,278

Korean, 318,320

U.S., 67,70,73,320

Telematics, 209

Television
Index .375

high-definition, 74, 122, 124,229

Japanese, 28, 122, 124,248

Texas Instruments, 249,331

Textiles, 12,216,218,314

protectionism, 122-123

Thatcher, Margaret, 195,228,229

TOkyo Institute of Technology, 274

Torrington Co., 143-145, 150

Toyota, 86,314,328,329

Trade Act, 21,22,54,64, 124-126, 130-136, 154, 155-156

Trade Agreements Act, 160

Trade and Development Program, 23,59, 167-168

Trade associations, 46

Trade Promotion Coordinating Committee, 163

Trade Remedy Assistance Office, 145

Treaty of Rome, 191, 194,230

United Kingdom, 57,90,195,205,207,208, 222,228,229,230,

311,354,355

United States of America, 85-175

aircraft industry, 9-10, 23-24, 34, 35,64, 74, 120, 217, 230,

251,341,342,344-349, 355-356

automobiles, 86, 102-103,242,246,315, 316,328

EC relations with, 192-193, 196-209,210

electronics, general, 13,74, 135, 156

employment, 27,86, 87,88,89-90,95,99-100, 101-104

Europe Vis-à-Vis, 192-193, 196-209,210

export controls, military, 23,29, 60-62, 168, 172, 173, 175,

323,346

Export-Import Bank of the United States, 58, 59, 118, 124,

163, 165-166,348

export promotion and control, general, 60,168, 171,172-173,

174, 175,348-349

foreign direct investment by, 87-88, 104

Free Trade Agreements, 122, 124, 127, 159

government procurement, 25-26, 34, 59, 69-71, 131, 135,

157-163,279,281

historical perspectives, 34,52,54, 117, 119-120, 121, 136,

241, 167-168,345

loans, 58,59, 118, 124, 163, 165-166,348

nationalized industries, 70, 162

protectionism, general, 14,41

R&D, Federal role, U.S., 9-10, 13,20,23-25,53,62-65

R&D, general, 13,14,24,26,28,43,62-63,66-67,74-75, 110,

118

savings, 17,44,45,86, 136, 137

semiconductors, 69,73,99, 109, 127-128, 152-153, 154

standards, 348

telecommunications, 67,70,73,320

trade policy, general, 7, 14,20-23,28-29,52-62, 117-175

wages and salaries, 3-4, 86, 95, 103-104, 108

see also Foreign direct investment in U. S.; specific government departments, agencies, and programs of the Federal

Government

Universities and colleges

academic research, 50,219,273,274, 275

engineers, 18,47,325,346

European, 219

Japanese, 31,50,240,247-248,252, 273,274,275

Korean, 312-313,317-318

Taiwanese, 325

Uruguay Round (GATT, 55,56, 128, 129, 153, 191, 199

U.S. and Foreign Commercial Service, 163, 164-165

U.S. Trade Administration, proposed, 16

U.S. Trade Representative, 16, 20-21, 53, 55, 70, 77, 124,

130-132, 136, 137, 162-163,275,276

Utilities, 162, 199

Vertical integration, 68,217,218,255,278-279

Vitalec, 320

Vocational education, see Job training and aiding

Voluntary restraint agreements, 121

Wages and salaries, 123

Bureau of Export Adminis “ “ tration, 174

foreign affiliates in U. S., 86,95, 103-104, 108

Japanese, 5,32

Korean, 316

U.S., general, 3-4

War Chest, 22,59, 167

Western Europe

aircraft industry, 13,34,35,68, 192, 197-198,202,217,225,

229-230,341,352-358

export promotion and controls, 164, 166, 205,206,357,358

foreign direct investment, 27,87,90,95, 100, 101,104

government procurement, 70

Korea and Taiwan, exports to, 303

national aids to competition, 7, 13, 191

politics, 195,215-217,224,228

telecoms, 9,209,216,218,221,223-224, 230

trade policy, general, 117, 118

see also European Community; specific countries

Westinghouse, 162

Women

education, 18

World Bank, 244,307

Zaibatsu, 243

Zweckform, 151
Other Related OTA Reports

● Making Things Better: Competing in Manufacturing

Free summary available from OTA

OTA-ITE-443, February 1990; 244p.

GPO stock #052-O03-Ol178-6; $11.00 per copy

NTIS order #PB90-205469

● Paying the Bill: Manufacturing and America’s Trade Deficit

OTA-ITE-390, June 1988; 92 p.

NTIS order #PB88-229539

. Trade Adjustment Assistance: New Ideas for an Old Program

OTA-lTE-346, June 1987; 80p.

NTIS order #PB87-203741

NOTE: Reports are available from the U.S. Government Printing Office, Superintendent of Documents, Dept. 33;

Washington, DC 20402-9325, (202) 783-3238; and/or the National Technical Information Service, 5285

Port Royal Road, Springfield, VA 22161-0001, (703) 487-4650.

U.S. GOVERNMENT PRINTING OFFICE : 1991 0 - 292-889 QL:3