U.S. Industrial Competitiveness: A

Comparison of Steel, Electronics, and

Automobiles

July 1981

NTIS order #PB81-235749
Foreword

This assessment

Senate Committee on

builds on past and ongoing work by OTA requested by the

Commerce, Science, and Transportation and several other

congressional committees. OTA’S study of the role of technology in the competitiveness of the American steel industry appeared in June 1980. An assessment

of international competitiveness in electronics is now in progress. The report that

follows draws upon both of those assessments, as well as past work at OTA on the

automobile industry. It compares the international competitiveness of the U.S.

steel, electronics, and automobile industries and evaluates prospects for better

integration of policies affecting industries in the United States.

A variety of factors that influence industrial competitiveness are identified,

and the current status and future prospects of the three industries—all critically

important to the American economy —are evaluated and compared. The report

also reviews past policies toward these industries in the United States, examines

possibilities for industrial policy in the American context, and outlines options for

policymakers.

OTA is grateful for the assistance of the advisory panel for this study, as well

as for that provided by many individuals in the executive and legislative branches

of the Government. OTA assumes full responsibility for the report.

 JOHN H. GIBBONS

Director

I l l
Advisory Panel

Alan K. McAdams, Chairman

Cornell University

Steve Beckman

International Union of Electrical, Radio, &

Machine Workers

Milton Deaner

McLouth Steel Corp.

William E. Dennis

American Iron & Steel Institute

John Holden

Ford Motor Co.

Robert R. Johnson

Burroughs Corp.

Maryann N. Keller

Paine Webber Mitchell Hutchins Inc.

E. Floyd Kvamme

National Semiconductor Corp.

Daniel Luria

United Auto Workers

Thomas P. Rohlen

Stanford East Asian Forum

H. Paul Root

General Motors Corp.

Gary R. Saxonhouse

University of Michigan

Caroline Ware

National Consumers League

NOTE: The advisory panel provided advice and critique throughout the assessment, but does not necessarily approve, disapprove, or endorse the report, for which OTA assumes full responsibility.
Project Staff

Lionel S. Johns, Assistant Director, OTA

Energy, Materials, and International Security Division

Peter Sharfman, Program Manager

International Security and Commerce Program

John Alic, Project Director

Martha Caldwell Ethan Arbisser* Eric Davis* Robert Fisher*

Robert R. Miller* Philip Mundo* Robert Rarog* Sven Steinmo*

Administrative Staff

Helena Hassell Dorothy Richroath Jacqueline Robinson

Contributors

Marjorie Blumenthal, * Transportation Program

Joel Hirschhorn, Materials Program

Larry Jenney, Transportation Program

Philip Robinson, Materials Program

Con tractors

Robert B. Cohen & associates

Lallra D’Andrea Tyson

Weil, Gotshal & Manges

John Zysman

OTA Publishing Staff

John C. Holmes, Publishing Officer

John Bergling Kathie S. Boss Debra M. Datcher Joe Henson

*OTA contract personnel.

v
Contents

Chapter Page

Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viii

1. Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

2. Introduction .,...... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

3. Steel, Electronics, and Automobiles: Industrial Structure . . . . . . . . 31

4. Measures of Competitiveness in the Three Industries . . . . . . . . . . . 49

5. Industry-Specific Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . 69

6. Government Policy Effects on the Three Industries..................109

7, Prospective Competitive Futures, . . . ..., ., . . . . . . . . . . ..., ....127

8. Policies Toward Industry in the United States .. .. .. ... .., ... ..151

Appendixes:

A. Defining International Competitiveness . . . . . . . . . . . . . . . . , . . . . 169

B. The Economics of Industrial Policy . . . . . . . . . . . . . . . . . ., .. ....175

C. The Legal Environment for Industrial Policy. . . . . . . . . . . . . . . . . . 183

D. Foreign Industrial Policies. ., ., . . . . . . . . . . . . . . . . . . . . . . . . . . . 190

Index , , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .203

vi!
Glossary

Bit. A unit of information consisting of a binary

digit that can have one of two values—e,g.,

“O” or “l, ” ‘$ + “ or “ – “. Digital circuits operate by manipulating bits which are represented by voltage levels.

CAFE—Corporate Average Fuel Economy. Fleetweighted miles per gallon ratings for a manufacturer’s automobile production, Standards

through 1985 for all cars sold in the United

States have been set under the Energy Policy

and Conservation Act,

Chip. A small piece of a semiconductor material

such as silicon on which an integrated circuit

has been fabricated.

Competitiveness. The relative ability of firms

located in a particular country to develop,

produce, and market goods or services of a

particular type in competition with firms in

other countries. As used in this report, costs

of production are the most important single

factor in determining competitiveness.

Continuous casting. A process for solidifying steel

or other material in the form of a continuous

strand rather than individual ingots.

Digital. Refers to electronic circuits or devices,

the inputs and outputs of which are nominally

discrete voltage levels. Analog or linear circuits, in contrast, have inputs and outputs

that vary continuously over a range of voltages, Virtually all computers process informat ion in digital form.

Dumping. The sale of exported goods at less than

the price charged by the manufacturer in his

home market, or in some cases at less than

cost. Dumping is restricted under the GATT as

an ‘‘unfair’ trade practice.

DR—direct reduction. A family of processes for

making iron from ore without exceeding the

melting temperature. No blast furnace is

needed.

Emissions. The most important contributors to air

pollution from the crankcase and exhaust of

automobile engines are carbon monoxide, hydrocarbons, and nitrogen oxides, The latter

two can combine to produce photochemical

smog.

EPCA—Energy Policy and Conservation Act.

Passed in 1975, it set fuel economy standards

for automobiles and also contained provisions

for controlling oil prices.

Escape clause. Section 201 of the Trade Act of

1!374, which permits temporary restrictions

on imports, in

tices such as

these imports

industry.

the absence of prohibited pracdumping, if sudden surges of

substantially injure a domestic

Full costs. ‘Fixed plus variable costs. A full cost

pricing strategy aims to cover all costs—those

independent of the volume of production

(fixed), as well as those depending on volume

(variable costs).

GATT-General Agreement on Tariffs and

Trade. An international organization, based

in Geneva, that provides a forum for trade negotiations. Member countries are committed

to reducing the barriers to world trade, and

expanding its volume.

GDP—gross domestic product. The total value of

goods and services produced by an economy

over a given period, usually 1 year.

GNP—gross national product. GDP, plus the income accruing from foreign investment, less

payments made to investors in foreign countries.

Hardware. The physical components of a computer system, such as the processor itself, input/output devices, and storage units,

IC—integrated circuit. An electronic circuit made

by fabricating components such as resistors,

capacitors, and transistors on a single piece

of a semiconductor material, usually silicon.

Integration. See vertical integration.

ITC—International Trade Commission. An independent agency of the U.S. Government which

investigates and rules on trade-related matters, primarily concerned with imports.

Lithography. Processes similar to printing used in

fabricating integrated circuits, Lithography is

used to expose chemical resists as part of the

process of laying out circuit patterns. Light, Xrays, or electron beams can be used. All present commercial processes use light. The

resists are analogous to the light-sensitive

emulsions of photographic film,

Mainframe computer. One that typically costs

over $100,000 and requires trained operators,

special facilities, and permanent installation,

Marginal costs. The incremental costs associated

with an increase in volume of production.

Market promotion policy. A public policy directed

at a specific market—as for labor or capital.

Generally intended to improve the operation

of that market,

Microcomputer. A computer based on a microprocessor and using other integrated circuits

. . Vill
for support functions, or, alternatively, containing all functions on one chip (single chip

microcornputer).

Microprocessor. An integrated circuit that can

serve as the processing unit for a digital computer. Also used to provide particular digital

logic functions as an alternative to customdesigned integrated circuits. Microprocessors

vary in their word lengths—the number of bits

in the words they manipulate-hence, 4-bit, 8-

bit, etc.

Minicomputer. A computer that typically costs

under $100,000 and does not need specially

trained operators or special facilities.

Minimill, A small nonintegrated steel mill, typicalIy scrap-based and using electric furnaces to

produce a limited range of products.

MITI—Ministry of International Trade and Industry, Japan.

MOS—metal oxide semiconductor. Refers to both

transistors and integrated circuits. MOS ICS

are unipolar as opposed to bipolar; they are

denser and dissipate less power than bipolar

ICS, but are usually slower. The most widely

used RAhfl’s and microprocessors are MOS

devices.

MTA—Multilateral Trade Agreement. The MTA

represents the outcome of the most recent

GATT negotiations on reducing trade barriers, known as the Tokyo Round.

Nonintegrated. Steelmaking firms that do not reduce iron from ore, but typically make finished products starting with steel scrap.

OECD—Organization for Economic Cooperation

and Development. An international organization composed of industrial countries. Its aims

are to encourage economic growth and employment and to promote the development of

industrializing countries.

Offshore manufacture. The production of parts

and components, and/or their assembly, in

plants located in foreign countries, followed

by shipment back to the home market or to

third country markets.

OMA—orderly marketing agreement. A negotia ted limit on imports from a particular country, such as currently exists for color televis ion receivers from Taiwan and South Korea.

Peripherals. Computer hardware other than the

processing unit itself. Typical peripherals are

terminals, card readers, and auxiliary storage units.

plug compatible. Computer equipment—both

processors and peripherals—that can be

plugged directly into an IBM system.

Processor. The portion of a computer system that

executes the program.

Productivity. Output per unit of input—used in

this report exclusively to mean labor productivity, the physical quantity or value of goods

produced per unit of labor input. Labor input

is usually measured in worker-hours.

Quality. A statistical measure of the extent to

which devices, products. or systems meet design specifications. For electronic components, quality can be expressed as defect

fraction, For steel or automobiles, quality has

a more complex meaning. For steel it might be

expressed in terms of surface characteristics,

physical properties, or chemical composition.

For automobiles, quality could be measured

by the number of defects present after final

assembl y—e.,g., runs or orange peel in the

paint, loose or missing parts, operating defects, misalined trim.

RAM—random access memory. An integrated

circuit which functions as read/write memory

for a digital processor. Each memory location

can be addressed directly (random access)

and its contents read and/or changed (written).

Reliability. A statistical measure of the extent to

which devices, products, or systems perform

satisfactorily in service—i.e., without failures. Reliability can be measured as mean

time between failures-commonly used for

electronic components such as ICS or systems

such as computers. An essentially equivalent

measure of reliability is the average number

of failures over time or over some other

measure of usage—for automobiles, reliability

might be measured as failures per 10,000

miles. In a complex system such as a computer

or an automobile, failures would often be further classified by type. For example, failures

that prevented operation could be distinguished from those that only impaired operation,

Semiconductor. Electronic devices such as transistors or integrated circuits based on silicon

or other materials that have electrical conductivities intermediate between insulators

such as glass and conductors such as metals

(the term semiconductor also refers to the materials—e.g., silicon—themselves).

Software. Computer program. Can also refer to

other carriers of information such as books,

film, phonograph records,

Solomon Plan. A program for revitalizing the

American steel industry prepared by a commission headed by Anthony Solomon. The commission’s report was issued in 1977.

Spark ignition engine. The conventional type of internal combustion engine used in most automobiles.

Ix
Teletext. A system for sending graphic messages

(pictures and/or text) over hard-wired lines

(telephone or cable) to home television receivers. Similar to videotext, which uses a

broadcast signal.

Tonne. A metric ton, 1,000 kg or 2204.6 lb.

TPM—trigger-price mechanism. Sets a floor price

for steel imports into the United States. The

price is based on the production costs of the

low cost producer (Japan), plus transportation

charges, adjusted for currency fluctuations.

Steel imports entering the United States below

this price automatically “trigger” an accelerated antidumping investigation.

Transistor. An active semiconductor device that

can function, for example, as an amplifier.

Transistors have replaced vacuum tubes in

many applications.

VCR—video-cassette recorder.

Vertical integration. An indication of the extent to

which a given firm produces the materials,

components, or subsystems that are inputs to

its end products. A highly integrated automobile firm might produce its own glass, steel,

spark plugs, radios, An integrated steel firm

begins by making iron from ore, then converts

the iron to steel.

VHSIC—Very High-Speed Integrated Circuit.

Name given to a U.S. Department of Defense

R&D program aimed at military needs for very

large-scale integrated circuits. The designation refers to the high speed required for applications such as signal processing.

Video disk. Refers to systems for playing back

video pictures from information mechanically

encoded on a spinning disk. Analogous to a

phonograph record.

Videotext. A system for broadcasting graphic

messages (pictures and/or text) to home television receivers. Similar to teletext which is

hard-wired.

VLSI—very large-scale integration. Refers to integrated circuits with of the order of 100,000

circuit elements.

VRA—voluntary restraint agreement. A negotiated limit on imports similar to an OMA. VRAS

on steel negotiated by the United States with

the EEC and Japan were in effect from 1969 to

1974, They limited steel imports to specific

tonnages plus 5 percent annual growth,
CHAPTER 1

Summar y
Contents

Principal Findings. . . . . . . . . . . . . . . . . . . . . . . . . . ● . . . . . . ● . . . ● ● . ● ● ● ● ● ●

Competitiveness. .. .. .. .. .. .. . ... ... . ..... ... .. . .. .

Effects of Public Policies on Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Industrial Policy . . . . . . . . . . . . . ........ . . . . . . . . . . . . . . . . . . . . . . . ....

The Steel Industry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........ .

The Electronics Industry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....

The Automobile Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....... .

Policies Toward Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......

3

3

4

7

9

12

14

17
CHAPTER 1

Summary

This study of international competitiveness

compares three U.S. industries—steel, electronics, and automobiles—and also discusses

“industrial policy” and the prospects for better integration of policies affecting industry

in the United States. It does not address specific policy measures for the three industries

in detail.

The report draws heavily on recently completed and ongoing work at OTA: the study of

the steel industry recently published as Technology and Steel Industry Competitiveness; a

complementary effort on international competitiveness in electronics that is still in progress: and several studies related to the automobile industry.

Principal Findings

1.

2.

Competitiveness

The steel, electronics, and automobile industries are all increasingly pressed by

international competition—as are many

other sectors of the American economy.

The United States must accept the reality

of a highly competitive global marketplace— one that this country can no longer

expect to dominate as in the 1950’s. Markets in the United States are the largest in

the world—this is a strength for domestic

industries, but makes an attractive target

for other countries. In semiconductors and

computers, American firms have prospered by treating domestic markets as only

a part of the larger world market—as have

Japan’s automobile and consumer electronics producers. Where a global market

exists, firms operating on a worldwide

basis may have advantages over those that

restrict themselves to a domestic market

even as large as that of the United States.

Public perceptions that U.S. competitiveness has been slipping in manufacturing industries such as steel, electronics, and

automobiles are basically correct. At the

same time, both the magnitude of the problems and their consequences can be overdrawn. On the average, American steelworkers have labor productivity as high as

any in the world; the industry remains

more profitable than its foreign rivals. The

automobile industry has suffered as much

3.

4.

from recession and escalating fuel prices

as from declining competitiveness. The

high-technology sectors of the U.S. electronics industry continue to be world leaders. In absolute terms, much of American

industry remains efficient and innovative,

although in relative terms it may have declined with respect to other countries.

Helping to improve the competitiveness of

American industry —both the ability to export and the ability to compete with imports in U.S. markets—is a feasible objective for Congress. Both causes and effects

of shifts in international competitiveness

are influenced in significant ways by public policies, Among the causes are relative

rates of productivity growth and relative

technological capabilities—which depend

on investment incentives and R&D stimuli,

among other factors, Effects of shifts in

competitiveness include changes in standards of living and in employment levels. In

the past, public policies have seldom directly addressed the sources of competitiveness and economic efficiency. Congress

could decide that the time has come for a

more focused and consistent approach.

While the United States retains technological superiority in many industries, it has

no across-the-board advantage. In some

technologies and in some sectors, U.S.

firms are behind in the installation and use

of available technologies. Where th e

3
4 Ž U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

World Steel Production

1960

5.

6.

1980

1.

Totals: 1960—346.1 million tonnes

1980— 7177 million tonnes

SOURCES 1960– Technology and Steel Industry Competitiveness (Washing.

Ion D C Off Ice of Technology Assessment June 1980} p. 116.

1980– World Crude Steel Output Drops ASM News. February

1981 p 1

United States continues to be technologically preeminent, this superiority remains

a vital competitive tool; but American industry can only stay ahead by continuing to

innovate—in product and process technologies, as well as marketing, sales, and service. This requires continuing investment in

R&D and in new plant and equipment, plus

aggressive, market-oriented commercialization of new technologies.

Long-term decreases in domestic employment opportunities are occurring in mature

industries such as steel, consumer electronics, and automobiles. Maintaining or

enhancing competitiveness generally requires raising productivity. Improvements

in labor productivity in the absence of a

growing market can result in falling employment. In industries facing stagnant or

slowly growing markets, the United States

may have to choose between maintaining

competitiveness at the sacrifice of employment opportunities or maintaining employment at the sacrifice of competitiveness.

A commonplace observation that nevertheless deserves reiteration is that American firms and industries compete among

themselves as well as with foreign concerns. Entirely apart from competition between firms within an industry, different

industries vie for resources such as investment capital—which goes to those sectors

that appear to offer the best returns. Firms

and industries seek from Government policies and regulations (or the absence of policies and regulations) that will give them advantages over their competitors. They also

compete for the best people—on the shop

floor, in the R&D laboratory, and in executive ranks.

Effects of Public Policies on Industry

In the United States, public policies affecting industry are typically formulated, legislated, and implemented on an ad hoc basis.

One result is that they are sometimes contradictory and may lack continuity, Often

the conflicts—e.g., between protecting the
Ch. l—Summary ● 5

Average Annual Rates of Productivity Growth in Manufacturing

(physical output per hour, all employees)

.-

United West United

Time period States Japan France Germany Kingdom .

1950-70 . . . . . . . . . . . 2.40/o 10.1% 5.20/. 5.8% 2.90/.

1970-79 . . 2,3 7.4 5.0 5.3 2.1

SOURCE Output per l-four, Hourly Compensation and Unit Labor Costs in Manufacturing E/even -Countries 19581979 (Wash

I ington D C Bureau of Labor Statistics December 1980)

environment and encouraging energy production—contribute to a lack of national

consensus on priorities. Industry in the

United States is therefore sometimes faced

with rapid shifts in Government policy, In

contrast, industrial policies in other countries often rely rather effectively on consistent sets of signals or projections to

guide and encourage industry. International competitiveness has seldom been

treated as a major policy goal by either

Congress or the executive branch; as a result, inconsistency and lack of continuity

in public policies have sometimes harmed

U.S. competitiveness.

2. The objectives of public policies affecting

U.S. industries are seldom well-integrated

and not always well-defined. Such policies

include regulatory measures directed at all

industry (such as workplace safety and

some environmental standards), regulaReal Gross Domestic Product (GDP) per Employed Person Relative to the United States as 100

100

90 —

.*” +

80 “ ● s ” -

“

0 s

. ● “>

70 —

d . +

t i

” ’

. 4 ”

cJ - J

West Germany /

- united Kingdom

60

b ~

~**” *

g ● ● / “

,- “ <eb

. / .

/ /

● *

0

II ● —o — ●

—/” 7<**”’=’-”:’— ●

. /“ ~ * 4

(n 50

5

/

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2 “

9

./. ● ● ● ● “

n

n 4(I France

30 —

20 —

10 —

n 1 1 I I I 1 u

1950 55 60 65 70 75 1978

Year

SOURCE M E Mogee Technology and Trade Some Indicators of the Sfate of U.S. lndustrial Innovation (Washington D C Subcommittee on Trade Committee on

Ways and Means U S House of Representatives Apr. 21 1980}, p 25 From BLS data
6 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

tions that apply only to specific industrial

sectors (such as automobile fuel economy

standards), tax policies that encourage

particular kinds of investment, emergency

measures such as the Chrysler loan guarantee, and a substantial degree of ‘‘jawboning” (directed at targets as various as

steel prices and Japanese automobile imports). There is little coordination among

such policies. Nor are macroeconomic

policies formulated with much attention to

effects on particular industrial sectors.

Despite the undoubted importance of

public policies in setting the conditions under which firms and industries compete

—both domestically and internationally—

many Government actions have only indirect and secondary effects on competitive behavior. The wide range of performance exhibited over the years by

American firms within a given industrial

4,

sector—e.g., steel or computers—and the

fluctuations from year to year, show that

Government is only one influence among

many in determining competitive position.

A well-developed appreciation for the

often subtle and indirect ways in which

Government influences industry would be

an important step toward a more coherent

industrial policy.

The fragmented industrial policy of the

United States is also a potential strength.

Our pluralistic system, which is responsible for much of the ad hoc character of

U.S. policies toward industry, creates an

environment where flexible and innovative

responses are sometimes possible. Each industry interacts with a variety of public

agencies; there are many avenues for seeking changes in response to new or growing

problems, or to new opportunities. With

policy made throughout the system, interBLS Productivity Indexes (physical output per hour—all employees, 1967= 100)

150

● ’

140 -

130 —

120 —

110 1-

100

Motor vehicles 0 ’

>

0 ’

‘

-

“ 4 .

/ ~. ,

./” / “ \

d. J

/ / ’

.}“

Radio &TV sets /“ % >

4 ,.*

\ ● #l

, . .

\

/ \

● 0* . . ● . . ● ● ● “”

● .“

\& f .“

. -~ .

.“ # /

.

● ✎ ✎ “9 .“ ● 9* ● *

●

I 1 I I I i

L . m 1 1 I I I I I I I I I

1967 68 69 70 71 72 73 74 75 76 77 78 79 1980

Year

SOURCE Productivity Indexes for Selected lndustries (Washington D C Bureau of Labor Statistics)
Ch. l—Summary ● 7

5.

ested parties can generally find a hearing,

and often an advocate. Genuine conflicts of

interest and genuine disagreements about

priorities are illuminated rather than suppressed.

American industry has often responded to

evidence of declines in competitiveness by

arguing that Government has become too

concerned with regulating industry, insufficiently concerned with supporting it.

Many in the business community contend

that they need reductions in effective corporate tax rates (e.g., liberalized depreciation allowances), modifications to environmental and safety regulations, and more

vigorous enforcement of laws governing

5

“unfair” trade practices such as dumping.

Policy changes of these sorts might in some

cases be appropriate, but in the three industries studied would by themselves be insufficient to ensure future U.S. competitiveness.

1.,

Industrial Policy

OTA’S study of competitiveness suggests

that Congress consider developing a more

coherent and explicit policy toward industry. The ad hoc approach to industrial

policy followed in years past may not suffice in the current context. Today the

United States no longer enjoys the overwhelming technological lead or relative

Average U.S. Wage Rates for Production Workers in Constant 1967 Dollars per Hour

SIC categories for computers, semiconductors, and

radio and TV were redefined in 1967, accounting for Steel

the large changes from 1966 to 1967.

.~ ●

/

Motor vehicles /“

\ /

●

/

● — ● ~ *

0

. —

/./ ’

Computers ,, ~~.

~ ● -- “ --” \

?5

\/ *- \ ● H

, . *

● , ● .

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“-. ~ ● 9

. -- ”

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. 0 ● ● ****. ● *.** < ’ .

0 - ”

● * . : 4

● * ● * ● ● ●

All U.S. manufacturers.... Q ● ● ”” ● ● ”””” ● •”

● *

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● *.* Semiconductors ● 0** H- 9 .*

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-.M.=>: Z

● ● ● **9*. 9 ● **

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Radio & TV receivers

+ “ - H -- / /

-k. ”

_ -- - $

).

-- -- - -

H e

------- -

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

1960 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 1980

Year
8 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

2.

3.

4.

economic strength it possessed two or

three decades ago. A climate now exists

within the United States that appears potentially receptive to new policy approaches and to a consciously developed

industrial policy. While genuine cooperation among Government, industry, labor,

and public interest groups is unlikely to

spring up overnight, there is at least

shared concern over U.S. competitiveness.

This growing awareness could facilitate

agreement on the objectives of industrial

policy.

Two prerequisites for a coherent and effective industrial policy are: first, a set of

objectives that can be broadly agreed on

—the development of which is largely a

political task; and second, enhanced analytical capability within Government.

Analysis is needed not only for linking the

overall goals of industrial policy with particular policy instruments—e.g., for determining differential effects of tax measures

on various sectors—but also for evaluating

competitiveness, and for relating sectors to

one another and to the aggregate economy.

Judgments concerning competitiveness and

economic efficiency are complex and demanding. A practical, working knowledge

of each industry, including its technology,

is required.

Although analyses of competitiveness must

begin by examining sectors individually, industrial policy itself need not be sectoral.

To have an industrial policy does not necessarily mean targeting certain industries

for promotion, or subsidizing industries in

decline. Such measures will always be

among the options and alternatives available, but are by no means essential characteristics of industrial policy. There is considerable doubt that such targeting has

worked consistently well in the countries

where it has been tried. (Industrial policy

in Japan, for example, is much more complex than the notion of a target industry

suggests. )

Industrial policy implies some perspective

or framework for formulating and imple5.

menting policy measures. The analysis in

this report suggests a framework that

OTA calls “macroindustrial policy. ” Macroindustrial policy would be based on sector-by-sector analyses of competitiveness,

but rely where possible on market signals

and policies with aggregate objectives in

preference to sectoral measures. The first

choice among tools would be macroeconomic policies. If the analysis indicates

that these would not suffice, then the second choice would be other aggregate measures such as market promotion policies.

(Market promotion policies are intended to

enhance the workings of the market system; examples are job relocation and retraining programs, or science and technology policies, ) If these too seemed insufficient, policies specific to the particular

industry or to individual firms might be

developed.

One aim of macroindustrial policy could

be to preserve the flexibility and adaptability of the American economic system

while creating a stable climate for industrial growth and the enhancement of competitiveness. The following measures are

among those that could improve competitiveness and might play a role in macroindustrial policy:

policies to stimulate innovation, to

strengthen the technology base for commercial (rather than exclusively military) applications, and to promote R&D

(and the diffusion of its results) directed

at commercial products and processes.

policies, including tax and regulatory

measures, to encourage capital formation and investment in new technologies

—both product technologies and new,

more productive manufacturing methods.

support for education and training of the

work force, including retraining of those

displaced by technological change, and

the encouragement of labor mobility. In

general, the United States appears to

have more low-skill manpower and less

high-skill manpower than an industrial
Ch, l—Summary . 9

6.

economy of the 1990’s will require; an

overall upgrading of the work force (engineers and managers as well as production workers) could directly improve productivity y and competitiveness.

economic adjustment policies aimed at

smoothing flows of capital and labor

from declining firms or industries to

those with strong prospects for future

competitiveness, but leaving the market

to identify sectors of growth and decline.

measures designed to encourage competitive U.S. firms to export, together

with policies to promote open world

trade—including fully reciprocal treatment of U.S. industries that export or invest overseas—and protection against

unfair competition in domestic markets.

The increasing concern in the United

States with competitiveness and “reindustrialization” has not yet led to agreement

on how to move toward a consciously formulated industrial policy. To lay groundwork for further development, Congress

might consider steps of the following sorts:

Ž creating a central focus within Congress —such as a caucus, task force, or

●

●

an ad hoc committee on industrial policy—for members and staff with responsibility for policies that affect industry.

encouraging broadly based participation

by consumer and other public interest

groups, and labor, as well as representatives of Government and business, aimed

at clarifying the goals and objectives of

industrial policy and going beyond sectoral concerns,

creating an analytical group with ongoing responsibilities for examining competitiveness and economic performance

and their relationships to productivity;

technology; and regulatory, tax, and

trade policies—as well as the social and

economic impacts of shifts in competitiveness. Such a group might include

projections and forecasting among its

responsibilities, as well as the dissemination of such projections to the private

sector—including analyses of new technological developments and their prospective commercial impacts, both domestic and foreign. It could be located

either in the executive or legislative

branch.

The Steel Industry

The competitiveness of the integrated portion of the American steel industry has declined in part because wages have increased

faster than productivity. Although the labor

productivity of the industry is high compared

to most of the rest of the world—as are profits, on the average— the industry’s plant and

equipment have not been modernized rapidly

enough to give efficiency improvements that

would keep pace with rising wages.

Steelmaking costs vary widely among

American firms, tending to be higher in the

integrated segment of the industry, which

comprises 85 percent of U.S. production.

(Integrated firms are those that start with ore

and market finished steel products. ) Nonintegrated firms often have more modern equipment and lower costs, though producing only

a limited range of products. Shifts in competitiveness will continue to increase the relative

importance of nonintegrated and alloy/specialty steelmaker.

Costs in many portions of the U.S. industry

are now high enough that domestic steelmaker are in a poor position to combat imports,

particularly those “dumped” by foreign producers. Costs are also too high for exports of

most types of steel to be competitive. Since

the late 1960’s, the U.S. Government has

adopted a variety of policies intended to insulate American steel firms from foreign competition—and particularly from “unfair”

trade practices (those prohibited by U.S. law

or international obligations), At best, these
10 Ž U.S. Industrial competitiveness—A Comparison of Steel, Electronics, and Automobiles

600

550

500

450

400

z

-u 350

:CO

:

L

300

ma) a)

$

E 250

E

u

200

150

100

50

0

Employment in the American Steel Industry (annual averages in thousands)

Total employees ‘

Hourly employees

Salaried employees

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

1960 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79

Year

SOURCES Annual .Statistical Report, American Iron and Steel Institute, 1978, 1979

have had limited success; antidumping remedies, in particular, have often been ineffective. Positive measures to aid American steelmaker in modernizing, restructuring, or

otherwise enhancing their competitiveness

have been few in number and of little impact.

Government regulations, such as those

dealing with environmental protection, have

required significant capital expenditures by

the industry. But the money spent in meeting

regulatory standards would have been insufficient to maintain U.S. competitiveness even

if directed entirely at modernization and productivity improvement. At the same time, the

Federal Government has not attempted to offset such investments—as do several other

countries with similar regulations—so that

the industry could otherwise update its plant

and equipment. This is one reason why most

of the productivity growth in the American industry has come piecemeal through improvements to existing facilities. With the exception of minimills and other small producers,

the U.S. industry is often unable to match the

technology installed in foreign mills. To catch
Ch.1—Summary ● 11

up would require capital spending at rates

approximately double those of the past few

years,

There are nonetheless positive signs for

American steelmaker. First, competition is

transforming the U.S. industry, and obsolete,

inefficient mills are being closed, Second,

other countries have now achieved many of

the immediate productivity increases available from new mills and new process technologies; they will have more difficulty making

further gains. Finally, long-term trends in

prices for material inputs used in making iron

and steel should favor the United States.

At the same time, with current and probable prices for steel, and existing process

technologies, new integrated mills based on

existing technologies may no longer be economic in this country, Nor are they likely to be

economic in any industrialized nation with

high labor costs. In the future, developing

countries with low labor costs such as South

Korea are likely to be among the stronger international competitors. During 1980, steel

production decreased in the industrialized

world, while increasing in the developing

world.

Because growth in domestic consumption

will be slow, because large export sales are

unlikely, and because productivity advances

will continue, employment in the American

steel industry is unlikely to recover, If productivity grows more rapidly than the market, which is likely, employment will continue

to decrease. As in other mature industries,

the goal of increased competitiveness may

conflict with the goal of increased employment, It may be impractical to maintain existing employment levels in such industries,

The United States faces a fundamental dilemma in reconciling possible employment decreases in particular industries with the need

to maintain competitiveness and employment

across many industries.
12 Ž. U.S. Industrial Competitiveness—A Comparison of Steel, Electronicsj and Automobiles

The Electronics Industry

U.S. competitiveness varies markedly

across the diverse segments of the electronics

industry; it is greatest in high-technology sectors such as semi-conductors and computers.

Government policies could help maintain the

present advantages.

OTA’S study focused on three sectors of

electronics: consumer electronics (mainly

radios and televisions), semiconductors, and

computers. These sectors differ in their technologies, in their present competitive positions and future prospects, and in the ways in

which public policies have affected them.

Although the U.S. consumer electronics industry has declined in competitiveness, our

semiconductor and computer sectors remain

the strongest in the world.

In international terms, the U.S. consumer

electronics industry is now rather small.

American-owned firms retain the major

share of the domestic color TV market, but

much of their production has been relocated

to foreign countries to reduce costs. Weaker

U.S. manufacturers of TVs and other consumer electronics products have disappeared.

As the competitive positions of U.S. companies have declined, foreign firms—principally Japanese—have located assembly

plants here. Negotiated quotas on imports of

color TVs from Japan, Taiwan, and South

Korea have hastened this trend. While emImport Penetration in Consumer Electronics, 1978

—- —

Imports as % of

Product U.S. consumption

Videotape players /recorders . . . . . . . . . . . . . . 1000/0

Household radios . . . . . . . . . . . . . . . . . . . . . . 100

CB radios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

Black and white TVs . . . . . . . . . . . . . . . . . . . . . 85

Electronic watches . . . . . . . . . . . . . . . . . . . . . . 68

High fidelity and stereo components . . . . . . 64

Phonographs and compact stereo systems . 43

Audio tape recorders. . . . . . . . . . . . . . . . . . . 35

Microwave ovens. . . . . . . . . . . . . . . . . . . . . 25

Color TVs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

SOURCE “The U S Consumer Electronics industry and Foreign Competition,

Executive Summary, ” final report under EDA grant No 0626.

07002.10, Department of Commerce, Economic Development Admin.

istration, May 1980, p 2

ployment has been maintained at levels

higher than would otherwise have been the

case, much of the value-added remains overseas, along with management control and

many professional and skilled jobs.

The future of the U.S. consumer electronics

sector depends on new generations of home

entertainment products. If these products are

designed, developed, and successfully marketed by American firms, and if advantages

in either product or process technologies can

be maintained, the United States could retain

a substantial presence.

As is the case for steel, productivity gains

in consumer electronics—e.g., resulting from

automation —will work against maintaining

employment. Only if new products with large

markets are introduced (which remains a

possibility), or if U.S. firms begin to compete

aggressively and successfully in other parts

of the world (which now seems unlikely), will

it be possible to increase employment in this

sector.

In the semiconductor and computer sectors, markets are growing rapidly; therefore

employment is rising even while productivity

increases. Although American firms retain

more than half of world sales in both semiconductors and computers, there is still cause for

concern. First, the U.S. share of the world

Comparison of the United States and Japan

in Digital Integrated Circuit Technology

Process technologies

Electron-beam lithography . . . . . . . . . . . . . . . . . . . . . . . . . . =

X-ray lithography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . =

Deep ultraviolet lithography ... . . . . . . . . . . . . . . . . . . . –

Resists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . =

Quality control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ?

Silicon materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . =

Automated assembly. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . =

Product technologies

Computer-aided design capability. . . . . . . . . . . . . . . . +

Memory circuit designs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . =

Microprocessor designs . . . . . . . . . . . . . . . . . . . . . . . . . . . . +

+ United States ahead

- United States behind

= Rough parity

~ See text (ch 5)

SOURCE. H C Lln for OTA electronics study
Ch., 7—Summary ● 13

8-bit microprocessor circuit

. . . . .—.———. .—.—— — ..-. —.

Integrated circuit memory chip that can store

Photo credits Intel Corp

more than 32,000 bits of information
14 Ž U.S. Industrial competitivenes-A Comparison of Steel, Electronics, and Automobiles

Figure 12.— Projected Decrease in Cost per Bit

for Random Access Memory Circuits

1.0

0.1

E

z

E

a)

v

G

8

0.01

0.001

1972 1976 1980 1984 1988 1992 1996 2000

Year

SOURCE K D Wise, K Chen, and R E Yokely, Microcomputers A Technology

Forecast 10 the Year 2000 (New York John F Wiley & Sons 1980).

p 57

market is shrinking, more so for semiconductors than computers. Second, Japanese firms

have made startling inroads into U.S. markets

for several high-technology semiconductor

products. Third, other governments are actively supporting and promoting their semiconductor and computer industries.

In both semiconductors and computers, the

technology gap that American firms established in the 1960’s has shrunk; in some cases

it has vanished. The United States must continue to innovate in order to maintain the

technological capabilities on which competitiveness depends. This is vital not only for the

electronics industry, but for the many other

portions of our society and economy that depend in some way on electronics technology

and its applications—ranging from computerized control of steelmaking processes to biomedical implants such as cardiac pacemakers. Supportive Government policies toward

R&D and product development can help maintain a technological lead.

An important advantage of American semiconductor and computer firms is their demonstrated ability to compete on a global scale. In

the 1980’s, the health of these sectors will depend on their ability to generate and attract

capital, on an adequate supply of welltrained engineers and scientists, on success

at R&D and innovation, and on trade policies

that protect American firms from unfair competition at home while seeking fully reciprocal access to foreign markets.

The Automobile Industry

The automobile industry is undergoing

long-term international restructuring; superimposed are a series of difficult short-term

problems for American manufacturers. Public policies toward this industry, as for the

others, could ease the adjustment process.

Automotive technology, like that for steel,

is well-diffused internationally; no one country has a technological advantage. Technical

change in these industries is slow compared

to electronics, major innovations infrequent.

Despite losses during 1980 totaling more

than $4 billion, the American automobile industry is in many respects stronger relative

to the rest of the world than our steel industry. For example, the U.S. automobile industry’s productivity record compares more favorably with that of other countries, as well

as with other domestic industries. But since

1978, decreased total demand for automobiles has combined with a shift in the market

toward small cars to produce sharp declines

in domestic production and employment, The

decrease in demand is associated with a

gradual change from a growth market to one

which is more nearly a replacement market,

and with a recession marked by tight credit.
Ch. l—Summary ● 1 5

Photo credit Ford Motor Co

Robots welding automobile subframes

In marked contrast to previous periods of

decline in total sales, sales of imports from

Japan have continued to increase. Rising

gasoline prices are an important cause of this

shift in consumer demand. Redesign and retooling to produce new generations of small

cars are straining the capital resources of

U.S. automakers. In contrast, their competitors face substantially lower expenditures

because they already build small cars almost

exclusively—a legacy of markets which have

been less affluent and of fuel prices which

have historically been much higher.

For subcompact cars, Japanese firms appear to have production cost advantages over

U.S. automakers that may be 20 percent or

more—largely because of lower labor costs;

this gives them flexibility but is only one

reason for their current success. Using conventional designs, and engineering which is

often clever but generally not particularly innovative, the larger Japanese automobile

manufacturers have learned product differentiation from American firms and applied

the lessons to the small-car segment of the

market—where the product lines of American automakers are thinnest. Furthermore,

they have established an image—largely justified—of high-quality and trouble-free service, which has combined with expanded and

strengthened dealer organizations to give

good resale value as well as wide coverage of

markets.
16 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

Motor Vehicle Production and Sales Figures (thousands of cars and trucks)

— —— —

Sales

Year U.S. production Domestics Imports Total Import penetration

1978 . . . . . . . . .

——

12,875 12,890 2,320 15,210 15.3?40

1979 ........, 11,471 11,132 2,743 13,875 19.8

1980 . . . . . . . . . 8,012 8,581 2,883 11,464 25.1

SOURCE, Tables 5 and 6 in ch. 4.

Projected Sales of Passenger Cars in

Major World Markets

Sales (millions of cars) Growth rate

1978 2000 (% per year)

United States. . . . . . . . ..11.1 12.1 o.4%

West Germany, France,

Italy, United Kingdom. . . 7.4 10.2 1.5

Japan . . . . . , . . . . . . . . . . . 2.9 4.4 2.0

U. S. S. R., East Germany,

Yugoslavia,

Czechoslovakia, Poland . 1.8 4.3 4.0

Rest of world . . . . . . . . . . . 8.0 17.2 3.5

World total . ............31.2 48.2 2.0%

SOURCE the Changing World Automotive Industry Through 2000 (Cambridge,

Mass Arthur D Little, Inc , January 1980).

Japanese automakers are now firmly established in the United States, and will not

yield market share easily. Their competitiveness is demonstrated by recent sales increases in Europe as well as the United

States. Japanese manufacturers are currently attempting to further broaden and

strengthen their product lines to counter the

new small cars American firms are introducing.

U.S. automobile manufacturers have been

more directly affected by public policies than

steel or electronics firms. At the same time,

domestic regulations dealing with exhaust

emissions, safety, and fuel economy also

apply to foreign firms selling in the United

States. The difference is that the Europeans

and Japanese have been building small cars

with good fuel economy for many years.

When the market turned to small cars even

more rapidly than regulations had pushed in

this direction, imports reaped the benefits.

On a world scale, the automobile industry

is going through a period of corporate consolidation but geographic dispersion. Some

observers predict that as few as six translational producers could dominate world auto

markets by the end of the century. Automobiles designed and produced in different

parts of the world are becoming more similar.

This and other forces are leading to the

spread of production to developing countries

with low labor costs and growing markets.

Such changes will affect suppliers to the industry, as well as the automakers themselves.

Sales growth in most parts of the developed

world will be slow compared to the newly industrializing countries. Strength in developing country markets will be one of the factors

determining future competitive success in the

world automobile industry.

As in steel and consumer electronics, some

of the current unemployment in the U.S. automobile industry seems irreversible. The domestic auto market is growing only slowly.

Prospects for large export volumes are slight

because, although some U.S. automakers

have large sales overseas, they serve foreign

markets primarily through local production.

In any case, exports from the United States

are generally not cost competitive after transportation charges. Given slow domestic market growth and productivity that must increase if American automakers are to remain competitive, employment will decrease.

There is little alternative.
Ch l—Summary ● 1 7

Policies Toward Industry

The United States has many policies that

affect industry—ranging from broad, macroeconomic fiscal, monetary, and tax policies to

tightly defined regulations imposed on specific industrial sectors. But it cannot be said

that the United States has a consciously designed or coherent industrial policy. In principle, fragmentation of policy can be a

strength—providing interested parties with

access to the Government at many points and

contributing to flexible responses. But in recent years there have been few signs of this.

The three sectors examined by OTA have

been influenced in different ways and to different degrees by Government actions. They

are similarly dependent on a strong, stable

economy, hence on effective macroeconomic

policy. In the long term, sectoral remedies

are unlikely to function effectively or efficiently in the absence of a healthy, growing

aggregate economy; successful macroeconomic policies make sectoral problems

easier to deal with.

Other policies with aggregate objectives

also have important effects on the competitiveness of American industry. Often these

work indirectly by influencing corporate

strategy and decision-making; in the end, competitiveness depends on the success of many

individual firms, each of which performs differently over time, Tax policies, for example,

are an important part of the supply side

linkage between macroeconomic policies and

particular industrial sectors (and firms). Both

development of new products and investment

in new plant and equipment depend on cash

flow, which is affected by direct taxes on corporate profits, investment tax credits, and

depreciation allowances.

Taxes are but one example among many

of aggregate policies with important and differential sector-specific effects, Government

support for the construction of roads and

highways has had a major, long-term impact

on the American automobile industry, as

have energy policies. In the past, national

defense programs helped shape the U.S. electronics industry. All sectors are dependent on

the quality of the educational system.

Regulatory policies have had significant

impacts on the steel and automobile industries. However, regulation cannot be blamed

for the majority of the problems these industries face. Expenditures for regulatory compliance in the steel industry have been large

in absolute terms—as have expenditures for

diversification out of steelmaking—but still

represent only a small fraction of what would

have been needed to maintain competitiveness. (Steelmaker in Japan have spent more

in meeting environmental regulations than

those in the United States. ) In the automotive

industry, regulatory burdens have often affected imports, particularly from Europe,

more heavily than domestic vehicles because

American firms have been able to spread

development costs over larger production

volumes.

Trade policies have sometimes had unintended negative consequences. For example,

protracted and unresolved dumping proceedings in sectors such as consumer electronics have harmed U.S. competitiveness by

creating a climate of uncertainty and irresolution. The overall thrust of postwar American trade policy has also exposed U.S. industries to more intense competition. At the

same time, the emphasis on opening and expanding international trade, as well as promoting economic development in other countries, has created new opportunities for many

American firms,

Finally, the lack of effective policies for

smoothing economic adjustment has added to
18 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

—

.4

Photo credit National Semiconductor Corp.

Workers in a clean room testing wafers for integrated circuits

the problems of many industries, aggravating

the effects of unemployment and related dislocations.

Does the United States then need a better

industrial policy? Clearly the Government intervenes in many ways in the activities of industry and will continue to do so. This is necessary in a complex industrial society. The

issue is not intervention versus nonintervention. The issue is whether a more coherent

industrial policy will function better than an

ad hoc combination of macroeconomic and industry- or firm-specific measures. The answer is not obvious. The U.S. economy performed well for many years without a consciously developed industrial policy. During

most of those years, the economy was growing rapidly; there was no apparent need for

policies explicitly addressing competitiveness, productivity, or (nonmilitary) technology.
Ch, l—Summary ● 1 9

OTA’S review of these three industries suggests several reasons why a consciously formulated industrial policy might produce better results.

● First, it could give the private sector clear

signals about what the Government will do

in the future—something the existing policy process often fails to accomplish. The

creation of a relatively stable environment

often seems among the most beneficial

characteristics of industrial policies in

other countries.

• A second potential advantage of industrial

policy is simply improved effectiveness. Recent policies toward the consumer electronics and steel industries include several

cases of initiatives that failed to achieve

their purported objectives. Industrial policy could provide better and more consistent means for evaluation and refinement of

policy tools.

● Third, a conscious industrial policy might

reduce the risks of capture by firms or sectors in temporary distress or long-term decline. Industries and their employees seldom approach the Government while their

competitive position is strong, Those firms

and industries that find their position

weakening have strong incentives to seek

Government aid such as subsidies or trade

protection. Furthermore, the greater their

immediate problems, the greater the drive

toward a short-term palliative. Industrial

policy could provide improved mechanisms

for evaluating the problems of distressed

firms and sectors within the overall context of the U.S. economy, considering the

claims of various parties, and responding

to undesirable trends before they reach

crisis proportions.

Thus far, in attempting to deal with sectoral problems within the economy, there has

been little movement toward prospective

rather than reactive policies because the

former have had no real constituency. While

it is easy to show, for example, that trade protection generally has costs that in the aggregate outweigh its benefits, the real issues are

distributional: Who bears the costs and who

receives the benefits? Is it a particular group

of displaced workers? Is it the depressed

local economy of the community where fading

businesses are located? Or is it the nation as

a whole, in which case costs and benefits are

widely but thinly spread? When the costs but

not the benefits of a policy are isolated and

visible, the stage is set for a resolution on

political grounds that may mask the problem

rather than curing it.

The alternative is a more integrated and

consistent industrial policy, But our current

methods of making policy toward industry

have deep historical roots and will not be

quickly transformed. Industrial policy affects

virtually every constituency, interest group,

and public concern in the United States; those

affected will want to be heard. The nature of

the American political system virtually guarantees that policy toward industry will be to

some extent fragmented and contradictory.

This is not a bar to industrial policy, only a

limitation on its form.

A consciously developed industrial policy

does not imply centralized coordination or

planning. Nonetheless, industrial policy

would require relatively broad agreement on

goals and objectives, together with a

strengthened analytical capability within the

Government for designing policy instruments

to match these objectives, as well as for evaluating their effectiveness.

The Government has a variety of institutional mechanisms for formulating macroeconomic policies; by themselves these are insufficient, Industrial policy must be rooted in

concrete, practical knowledge of the workings of industry and the sources of competitiveness. This demands an empirical appreciation of corporate decisionmaking and of

the ways in which Government actions shape

the behavior of firms in the private sector.

Any analysis of competitiveness, as well as

any analysis of the effects of alternative policy measures, must proceed on a sector-bysector basis. This does not mean that policies

based on such an analysis will necessarily or

exclusively focus on particular sectors.
20 ● U.S. lndustrial competitiveness—A Comparison of steel, Electronics, and Automobiles

Among the options will be both sector-specific

and aggregate policy instruments. However,

effective policies targeting particular sectors

cannot be developed in isolation; rather they

should be based on careful evaluation of

costs and benefits throughout the economy.

Sectoral policies of some types may aid a

favored industry but carry high costs elsewhere.

Political and economic issues intersect in

the design of industrial policy, elements of

which will inevitably benefit some sectors at

the expense of others. Distressed industries

have the greatest incentives to exert political

pressure for support and protection; over

time an effective industrial policy must allow

the efficient to thrive, the inefficient to

decline. To do otherwise can be costly indeed;

British taxpayers have recently been subsidizing their steel industry at the rate of $2

million per day,

A suitable framework for industrial policy, one designed to fit the strengths of the

American political and economic system,

might be found in “macroindustrial policy. ”

Macroindustrial policy would begin by providing a structure for integrating the various

elements of public policies toward industry. It

would be based on explicitly formulated objectives embracing economic efficiency and

industrial competitiveness, as well as related

social goals—e.g., employment opportunities.

Competitiveness is important because it affects, among other things, national security

and the standard of living.

The macroindustrial framework would

stress the dependence of individual industrial

sectors on macroeconomic and other aggregate policies, as well as emphasizing linkages among sectors. Macroindustrial policy

might have sectoral components and include

sector-specific policy instruments, but would

prefer aggregate measures and reliance on

market mechanisms where possible.

Elements of macroindustrial policy could

include measures to promote economic adjustment, innovation and the technological

base for manufacturing and service industries, fair trade and competition, manpower

training and mobility, capital formation, and

new productive investment. Policies would

aim to complement the market system, providing a structure for easing adjustment and

spreading the costs of change so that particular groups were not gravely disadvantaged.

In the near term, modified tax policies

designed specifically to stimulate capital investment in U.S. industry could have significant positive effects on U.S. productivity and

competitiveness. So could tax incentives for

R&D and the development and diffusion of

new commercial technologies. Policy measures to improve the environment for industrial innovation are related steps that could

also have immediate effects. In the longer

term, macroindustrial policy might assign a

particularly high priority to the development

of more effective mechanisms for economic

adjustment and to improving the country’s

human resources through support for education and training of the work force at all

levels,

The development of macroindustrial policy

or any other coherent and consciously

evolved industrial policy would be a long-term

undertaking. Congress and the President will

have to decide whether the time has come

when maintaining and enhancing the competitiveness of the U.S. economy requires

such a policy.
CHAPTER 2
Contents

Page

Objectives and Scope .*** ... .*. ... ... ..*. .**. ... **. .*** *.*. **. **** .* *C*." 23

What Is Competitiveness? * .***...*..*.*..*..*****.. ..** *******.******* 25

The Problem as Perceived... ... **** *.. *o.*...***...*.********************* 25

The Role of Government .*. e.. o.. .*. ** .......****.*...**.*.@*..@***.**" 26

,
CHAPTER 2

Introduction

Objectives and Scope

Concern over possible slippage in the competitiveness of U.S. industries mounted during the 1970’s. Apparent symptoms included:

a slowdown in economic growth; lagging

rates of productivity advance; rapid inflation

combined with unemployment; decreasing

technological advantages in a variety of

industries; mounting balance-of-payments

problems, associated particularly with trade

deficits in industrial sectors such as consumer electronics and automobiles; and a relative

decline in U.S. military strength, Although

these symptoms are not all directly related to

industrial competitiveness, they have each

contributed to a feeling current at the beginning of the 1980’s that the United States and

its industries have been reduced to muddling

through, that the Nation is losing its position

of leadership and preeminence in the world

economy,

In fact, the United States has lost much of

its preeminence, not only in specific industries such as steel, but in the relative size of

its economy as a whole. Although the gross

national product of the United States remains

the largest in the world, on a per capita basis

it was only ninth in the Organization for

Economic Cooperation and Development in

1979, a little above that of France, and 17

percent greater than that of Japan. J In particular industries, the United States has often

only slipped in a relative sense; in absolute

terms U.S. firms often remain world leaders.

Despite the concern such symptoms have

raised, it has not been clear what, if anything, the U.S. Government can or should do.

While changes in long-term comparative advantage might be considered inevitable, or at

least beyond the ability of any one government to influence significantly, there are nu-

.

) ~’{)r [] tipitt]l ;][’rwnt, sw the ~usine~~ Wleek issue on ‘The

R[?ir]fil]stritllizt] tlon of America, ’ June 30, 1980.

Stf]tlt(l[(ll At~\tr~lf I ()( thr [ ‘n]fml St(]tct IDcp:]rtmcnl of

(;[)mm(;rfe, Bureau [~f the (:cnsus, 1980], p. 910.

merous cases of apparent failures in public

policy. These range from macroeconomic

problems—difficulty in controlling inflation

—to narrow issues such as the continuing debate over patent policies, unresolved after 30

years. The painfully slow evolution of energy

policy is as good an example as any of the

lack of consensus on complex problems.

Industrial competitiveness is only a subset

of these general issues, but an important subset. Much of the recent discussion of reindustrialization and industrial policy has been

based on a perception of slackening U.S. competitiveness— across the board or in specific

industries such as automobiles, An examination of three industries—steel, electronics,

and automobiles—permits only limited generalization about overall competitiveness, but is

a useful starting point. Every industry is different; aggregate analysis cannot provide explanations for shifts in competitiveness adequate for guiding policy. Sector-specific policies— e.g., automobile fuel economy regulations—always require case-by-case analysis.

Similarly, judgments of the net effects on

competitiveness of policy changes such as tax

cuts must be made on an industry-by-industry

(or perhaps firm-by-firm) basis. Thus, examination and comparison of individual industrial sectors such as the three covered in this

report is a necessary starting point for judgments of U.S. competitiveness and of the effectiveness of Government policies toward

industry.

OTA’S work on the competitive position of

U.S. industry began with a study of the steel

industry, concentrating on the role of technology as a determining factor in competitiveness. 

q A parallel study of international com- ———.—.

‘In a technir:{l sense, the notion of an :~(rl)ss-the-bo;lr[l 1[)ss

in compc t i t i wness is not very mm n i n~ful. The rw sons H re discussd in i}pp. A.

“[’echn IJfog}r [In (i s twl In(fus t r}’ c[)rn]w ti ti \.eness (W’ashin~-

I(m, D, C,: Of fi_re of Twhnolog) Assessment, U.S. (l)ngress, June

1980),

23
24 . U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

petitiveness in the electronics industry is

scheduled for completion in 1981; that workin-progress provides much of the basis for the

portions of this report which deal with electronics (primarily consumer electronics,

semiconductors, and computers). While OTA

has not explicitly studied the competitiveness

of the U.S. automobile industry, several OTA

programs have undertaken a variety of work

in the past which has been brought to bear on

such questions.

Competitiveness is an amorphous concept

(discussed in detail in app. A). Because of

this, a study of competitiveness can easily

spread in a variety of directions to encompass the seemingly endless array of possible

influences —by governments as well as private firms—on competitive position. To keep

this particular study bounded, a number of

constraints were imposed from the beginning.

Beyond the fundamental restriction to only

three industries, these constraints were:

1. To treat the industries primarily in their

domestic context. —A major reason is

that competitive strength in the home

market is a prerequisite for international competitiveness, at least in the absence of significant government subsidies. Furthermore, many of the policy issues relate to domestic employment levels, Nonetheless, competitive success in

some industries depends on marketing

on a world scale; international competitiveness remains the focus of the report.

(Geographic bounds of U.S. industry are

discussed inch. 3.)

Z. To compare the industries using an essentially economic framework.—While

other perspectives can be useful, this

one best unifies a comparison of dissimilar industries. The treatment of the

three industries is comparative at the

expense of detailed individual exploration.

3. To focus on the role of government policies, even though these often have only

secondary influences on competitiveness.—Corporate decisions and strategies normally exert the most immediate

4.

effects on competitive performance.

However, many of these decisions and

strategies are shaped in important ways

by governments. Public policies are, finally, the primary concerns of Congress,

and hence of OTA. The more important

policy influences on the three industries

are discussed, along with the general

framework of industrial policy in the

United States. However, an exhaustive

treatment of Government policies—either past or prospective—is beyond the

scope of this study. Export promotion

policies, for instance, are not examined

in depths

To draw on foreign experience only selectively and narrowly.—Because- the

objective is to provide policy guidance

for the United States, extensive discussions of industrial structure and performance in other countries, as well as

the policies of foreign governments, have

been avoided.b

OTA’S objectives have thus been twofold:

to examine and compare the competitiveness

of the U.S. steel, electronics, and automobile

industries within an economic framework,

and to broadly discuss the policy avenues

available to Government for dealing with

shifts in competitiveness and their consequences. A basic question is: To what extent

have government policies, here and in other

countries, influenced shifts in international

competitiveness? What role does technology

play in such shifts? How have these effects

differed between industries? If public policies in the United States, or those of its trading partners and competitors, place American industry at a disadvantage, what can

and/or should the United States do?

‘In the long term, government export policies probably have

only marginal effects—certainly compared to import policies.

Put simply, uncompetitive industries cannot export profitably.

See C. P, Kindleberger, “Government Policies and Changing

Shares in World Trade, ” Americun Economic Review, vol. 70,

hf~y 1980, p. 293,

“See app. D on foreign industrial policies.
Ch. 2—lntroduction ● 2 5

What Is Competitiveness?

Competitiveness is a term used in different

ways by different people, as discussed at

some length in appendix A. To economists, it

has a precise though abstract meaning, This

meaning, rooted in comparative advantage

and ultimately based on relative costs, is used

in most places in this report. In many cases,

however, the comparative advantage framework, in which low production costs give competitive advantage, is an oversimplification—

e.g., when governments subsidize industry,

Nonetheless, comparative advantage remains

a useful organizing device, one which can

help sort out the likely effects of policy alternatives.

More broadly, competitiveness can refer to

the strength of a particular industry as indicated by its international trade position, In

a still more general way, competitiveness is

sometimes used to convey a sense of economic

health and vitality. This is a vague and imprecise use of the term; within a comparative

advantage framework, individual firms or industries may become noncompetitive, but an

entire country cannot. Given flexible exchange rates, a country can always export;

the particular goods that it can export, and

the prices they bring, depend on the relative

competitive strengths of the various sectors

of its economy. So does its standard of living.

The competitiveness of any one country in

a particular industry such as computers or

steel then hinges on its ability, relative to industries in other countries, to successfully develop, manufacture, and market the products

of that industry. These activities are subject

to a wide variety of influences, some of which

are primarily under the control of individual

firms, some not. One potential source of competitiveness is superior technology —e.g., a

firm or a country might gain competitive advantage if it were able to market a more powerful computer at an attractive price. Otherwise, for commodities and products that are

technologically similar, cost and price are

primary determinants of competitiveness.

Superior manufacturing or process technology—as opposed to product technology—is

one way of achieving low costs. At the same

time, public policies can confound simple

cost/price measures of competitiveness. For

example, governments can subsidize highcost producers, or protect markets with trade

barriers so that domestic producers can

charge higher prices.

In the end, however, it is the capability of

individual firms in development, manufacturing, and marketing (including sales, servicing,

and customer support) which determines a

nation’s competitiveness. The notion of competitiveness remains comparative, and competitiveness a dynamic concept, the indicators of which vary over time,

The Problem as Perceived

A number of generalized symptoms of what

is commonly interpreted as slackening U.S.

competitiveness were listed above—e. g., increasing trade deficits, and slow rates of productivity growth. When individual industries

are examined, the symptoms become more

specific: low profits, plant closings, and

unemployment in steel; import penetration

accompanied by foreign investment in consumer electronics; an increasing presence by

Japanese firms in semiconductor markets; a

narrowing of the technological edge that the

United States has held in computer systems;

falling sales and low profits—or losses—by

U.S. automakers, again accompanied by plant

closings and layoffs,

Products in all three industries have been

targets of foreign competition, past or present, especially from firms based in Japan:
26 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

structural steel, color televisions, random access memory circuits for computers, and subcompact cars. Questions such as the following are asked: Are there generic problems

with U.S. industry? Are the experiences of

the steel, consumer electronics, and automobile industries harbingers of the future for

all manufacturers? Does the United States

need to increase its rate of capital investment

in industry? If so, how should we proceed?

At the same time, the United States has not

been alone in its recent economic difficulties.

The decade of the 1970’s was a difficult one,

In most countries, rates of growth of output, employment, and productivity failed to

achieve the levels of the earlier postwar

period. Policy makers often found themselves

with a poor choice between stagnation and inflation, and at risk of aggravating both.

These macroeconomic difficulties were

compounded by significant structural problems within Western industrial nations and

between them and the rest of the world. Most

important were the problems caused by higher energy prices. Worldwide overcapacity in

a number of important industries—including

steel, shipbuilding, and textiles—also indicated the need for structural adjustment.

That other industrialized countries also

have economic problems does little to alleviate U.S. concerns. For one thing, there is a

perception that this country’s difficulties may

be more serious in the long term than those of

West Germany or Japan. These nations, after

all, still seem to be catching up to the United

States. Some observers claim that declining

competitiveness has already inflicted heavy

costs on American society —e.g.,, the unemployment allegedly caused by rising imports.

Such matters are easily oversimplified. Increases in productivity, which are necessary

for maintaining competitiveness, also reduce

employment opportunities unless markets

grow rapidly. Whatever the cause, dislocations associated with shifts in competitiveness—either within the United States or internationally—are a serious concern, Regional unemployment, as in the industrial portions

of the Midwest, or unemployment among particular segments of the population such as

urban blacks, create particularly knotty

problems.

The Role of Government

Public policies are closely tied to questions

of competitiveness. Government policies affect competitiveness in many ways; the policies of the U.S. Government influence both

American and foreign firms, So do the actions

of foreign governments. Some policies have

direct effects—e.g,, those dealing with international trade, or regulations that increase

costs for domestic industries compared to

competitors overseas. Others are indirect—

i.e., policies dealing with education or manpower.

Macroeconomic policy has a central role.

The health of individual industrial sectors is

closely tied to that of the economy as a whole.

A large share of the slump in sales by U.S.

automobile firms during 1980 can be attributed to recession (see ch. 5), Government policies targeting individual industrial sectors often depend for their effectiveness on a strong

and growing economy, At the very least, designing such policies requires an understanding of the ways in which macroeconomic phenomena affect particular sectors. Rapid economic growth makes structural adjustment

easier and would alleviate symptoms of problems in many industries.

While broad macroeconomic policymaking

has always been seen as a legitimate governmental function in the United States, intervention past this point has been more controversial, though continuously evolving. Today Government loans and loan guarantees
Ch. 2—Introduction ● 2 7

total almost $4OO billion.

7 It is no longer

realistic to say that Government should play

no role at all.

The coincidence of depressed macroeconomic conditions and structural adjustment

problems that developed in the 1970’s has

made economic policymaking more difficult.

There appears to be growing agreement that

the situation in the United States requires

something beyond the Keynesian economic

policies characteristic of the postwar period.

Indeed, many observers blame just these policies for the inflationary tendencies that are

part of the problem. Increasing difficulties in

such politically and economically important

industries as automobiles and steel have

‘1’, R, Cl[]rk, “’The Public and Private Sectors-The C)ld Distinrti[jns Grow Fuzz}, ” Nclti~moi J[)urn(ll, Jan, 19, 1980, p. 99.

onlv [] frartion of the $400 billion total supports investment in

lndust r},

fanned interest in industrial policy and its

relationship to macroeconomic, trade, and

regulatory policies.

Much of the recent discussion of industrial

policy has been concerned with the question

of whether the United States should go

beyond promotional measures directed at

broadly accepted goals—such as support for

science and technology aimed at military

needs or the medical arts—to measures that

support specific industrial sectors such as

steel or electronics. Other governments target industries for development, promote exports, and restrict imports; should the United

States do likewise? Decisions to support particular industries—whether to match the promotional measures adopted by other countries, to maintain employment, or for reasons

of national security—necessarily deprive

other industries, their employees, and localities, Hence the political concerns cannot be

disentangled from the economic.
CHAPTER 3

Steel, Electronics,

and Automobiles:

Industrial Structure
— ——. . . . . . . . .

Contents

Overview . . . . . . . ., . . 0 . . ., . ,0 .,0...., . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Industry Definitions o*o. .e. ***. ***, .*o*. .*, .*. .*** *.. .o. .o*. .**. ... o*.,, .

Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Geography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

TheSteelIndustry ● ***.,., . . . . . . . . . .*,,.*,,* ● *.,***.. ● .*.*.,,* ● *.,..*.* . .

TheElectronicsIndustry. . . . . . . . . ● .*.... ....*.,. ● ...*..* . . . . . . . . .*...*,. ,.

ConsumerElectronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Semiconductors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Computers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The AutomobileIndustry . . . . . . . . . . . . . . .0....0, ,...,... .0....., ,.,,.... .. 6

SummaryandConclusions ● *..*** ..***.*. . . . . . . . . ● *,.**,. .....0.0 .**.*... ●

Table

3 1

3 2

3 2

3 3

34

37

37

38

41

42

46

TableNo. Page

l. WorldMarkets andU.S. Share, 1979. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
CHAPTER 3

Steel, Electronics, and

Automobiles: Industrial Structure

Overview

The many differences exhibited by the

steel, electronics, and automobile industries

illustrate the difficulties of attempting to

generalize about the state of U.S. competitiveness. Together, these three sectors include

much of the Nation’s industrial base, providing employment for a substantial fraction of

the work force. They cover a span of technological levels from low (some steel products,

much of consumer electronics) to high (specialty steels, large-scale integrated circuits,

computers), There are differences in competitiveness among the industries, among firms

within each industry, and even among product lines within individual firms. Furthermore, all three industries are undergoing

structural change.

Integrated steel firms in the United States

are burdened by capital plant that is, on the

average, older than that of most of their foreign competitors. While other countries, particularly Japan and several West European

nations, rapidly expanded and modernized

their steel capacities after the Second World

War, U.S. capacity increased only slowly, Up

to 25 percent of U.S. steel capacity now appears to be obsolete. ’ At the same time, the industry as a whole remains a reasonably efficient producer of steel, probably second in

costs only to Japan—which has more modern,

larger scale plants, as well as lower labor

costs. The nonintegrated segment of the U.S.

industry, in particular, is efficient and growing,

There is now excess capacity in world steel

markets. One result of overcapacity is to create incentives for producers in many countries to cut export prices and “dump” steel

while attempting to maintain domestic price

levels. Dumping and other unfair trade practices have been important concerns of the

American steel industry,

The steel industry is not monolithic, but the

typical disaggregation into integrated producers, nonintegrated firms, and alloy/specialty steelmaker is straightforward compared to the diversity exhibited in electronics. In many respects the three sectors of the

electronics industry covered in this report—

consumer electronics, semiconductors, and

computers —comprise three distinct industries. They exhibit different levels of technology, different levels of competitiveness, and

different Government policy impacts.

Except for consumer electronics, most of

the U.S. electronics industry remains strong;

nonetheless, there is increasing concern because of shrinking U.S. technological advantages and the support other countries are

providing their own industries, The Japanese,

in particular, have targeted electronics as a

cornerstone of future industrial expansion

and are pursuing policies directed at that

goal. Some observers feel that if the United

States does not respond, its remaining competitive advantage may disappear.

During 1980, the automobile industry had

the most visible set of problems, with imports

taking more than 25 percent of the market

and hundreds of thousands of workers unemployed. American automakers are going

through a period of rapidly changing product

mix, which is straining their capital resources. The domestic automobile firms differ markedly in their competitiveness, and in

the resources which they can bring to meet31
32 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

ing future needs—whether demanded by the

market or by Government regulations.

As in the case of steel, the U.S. automobile

market is now a smaller proportion of the

total world market than in the early postwar

period. The share of world auto sales accounted for by firms based in the United

States has dropped from three-quarters in

1950 to less than one-third at present, despite

their extensive foreign operations. But

American firms have been and continue to be

strong in some foreign markets; now they find

themselves using knowledge (and sometimes

profits) gained overseas in their home

market.

In the remaining sections of this chapter,

these industry sectors are described in more

detail, together with aspects of their structure that affect competitiveness (many of

these are amplified in ch. 5). This chapter is

devoted primarily to understanding the diversity of the industries and its consequences.

The approach is comparative, pointing out

both similarities and differences. No attempt

is made at complete descriptions, but factors

that influence competitiveness are emphasized.

Industry Definitions

Products

An indication of market sizes, for the

United States and the world, is given in table

I. The industry subdivisions in the table are

expanded on below.

The disaggregation for steel is that adopted

in the OTA steel study; this divides the industry into producers that are primarily integrated steelmaker, nonintegrated firms, and

manufacturers of alloy/specialty products.

The basic distinctions are as follows. Integrated steelmaker begin with iron ore. They

make iron, convert it to steel, and then to final

products such as sheet, plate, and structural

shapes. Nonintegrated firms typically begin

with steel scrap and produce only a limited

range of final product types—e. g., reinforcing bar. Alloy/specialty products have particular combinations of properties, such as

high strength (aerospace alloy steels), high

hardness and wear resistance (tool steels), or

corrosion resistance (stainless steels); they

typically sell for much higher prices than

plain carbon steels. Most alloy/specialty

firms use scrap as the main input.

Table 1 .–World Markets and U.S. Share, 1979

——

United

States as

United percent

Industry States World of world —

Steel

Total production of raw steel

(millions of tonnes) . . . . . . . 123 748 17%

Integrated producers. . . . . . 108 - na na

Nonintegrateda . . . . . . . . . . 12.2 na na

Alloy/specialtya . . . . . . . . . . . 4.2 na na

Electronics

Total consumption ($ billions) $85.7 $168b 51

Consumer electronics ., . . 11.8 31.8 37

Semiconductors . . . . . . . . . . 5.0 11,5 43

Computers. . . . . . . . . . . . . 22.8 44.6 55

Other electronics. . . 46.1 83.3 55

Motor vehicles

Total production (millions of

units). . . . . . . . 11.5 41.5 28

Passenger cars . . . . . . . . . . . 8.4 30.7 – 27

na = not available aDisaggregated figures are for 1978

bUnited States, Europe, and Japan only

SOURCES Steel—Annua/ .Statistical Report, 1979 (Washington. D C American

Iron and Steel Institute, 1980), pp. 92-93, Technology and Steel Industry Competitiveness (Washington, D C Office of Technology

Assessment, June 1980), p 248

Electronics—” 1981 World Market Forecast, ’ Electronics, Jan 13,

1981, pp. 121-144 (World production figures for electronics are not

available )

Motor vehicles —J. Evers, Motor Vehicle Manufacturers Associa.

tion, personal communication, August 1980
Ch. 3—Steel, Electronics, and Automobiles. Industrial Structure ● 33

The three sectors of the electronics industry covered in this report—consumer electronics, semiconductors, and computers—

contain only a fraction of the 5,000 to 7,000

firms in the U.S. electronics industry; however, they are among the most important. z

Consumer electronics products include

radios, televisions, audio equipment such as

stereo receivers, electronic watches, and

electronic toys and games. Home entertainment products such as TVs and video-cassette recorders receive the most attention in

the following chapters.

Semiconductor devices can be discrete circuit elements such as transistors, or integrated circuits (ICS) containing several tens

of thousands of circuit elements on a single

monolithic “chip’ of silicon a few millimeters

on a side. ICS, and particularly digital ICS,

are the most dynamic portion of the semiconductor industry, both in terms of technological advance and in terms of sales growth, ICS

are used in a wide range of products made by

many industries; an important current application is engine control electronics for automobiles, While the biggest single market for

ICS is the computer industry, semiconductor

technology is important to virtually the entire

breadth of U.S. manufacturing and service industries.

The computer sector spans firms ranging

from those that make mainframe machines

selling for several million dollars to those that

build microcomputers using a single IC chip

as the processor. The computer industry is

important not only in itself, but because of the

rapidly expanding applications of dedicated

computers in other products to make them

“smart.” Manufacturers of peripherals such

as memory and terminals are included within

the computer sector.

(If)mn]llnic’:]ti[)tls 1s the lar~cst of the sectors omitted fr{]m

this report an[i from the full OTA clc(tr[)nics stucfl. It was cx-

{lud~x~ prim:] ril~ to kc[?p [ho t w() s f u(lies more m:~n:i~e:~ hle,

Photo credit: IBM Corp.

This IC—a 64K RAM memory chip—can hold

64,000 bits of information

The automobile industry as a whole embraces large numbers of sales and service

firms, as well as suppliers of component

parts. This report concentrates on manufacturers of passenger cars and light trucks,

many of the latter being used interchangeably with passenger cars. Where the term

“motor vehicles” is used, it refers to both

cars and trucks,

Geography

The geographical boundaries of these industries must be defined before U.S. competitiveness can be assessed. Given the tendency

toward internationalized production, what

are the bounds of American industry and the

limits of Government interest?

Many U.S. industries include firms that

confront their foreign competitors not only

through exports and imports, but also

through manufacture and sales by overseas

subsidiaries, This is common in electronics

and automobiles, though rare for steel, There

are several patterns of investment. In automobiles and computers, foreign subsidiaries
34 Ž U.S. industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

sell mostly in foreign markets, This is also

common in semiconductors; but in addition,

many American semiconductor firms have

overseas manufacturing facilities which reexport to the United States. Offshore assembly is also widespread in consumer electronics.

In one sense, these overseas subsidiaries

are foreign firms, not a part of U.S. industry.

On the other hand, they are often inextricably linked to the domestic operations of the

parent company. Not only may these linkages

be difficult to disentangle, but the subsidiaries may be profitable while the U.S. parent

languishes—giving the parent more freedom

in developing strategies to extricate itself

from competitive difficulty, In 1979, for example, Ford was able to offset losses in the

U.S. market with profits overseas. Further,

one can ask if Japanese-owned TV plants in

the United States—such as Quasar—should

be viewed as domestic producers,

Some decision is needed to define the

boundaries of U.S. industry and hence U.S.

competitiveness. In general, this study has attempted to stay with convention (and convenience) by defining U.S. industries to be those

operating within the geographic confines of

the United States. Thus, in each of the three

industries, U.S. firms are those employing

U.S. workers; Quasar is an American firm, as

is Volkswagen of America. Domestic manufacturing by Ford or IBM receives more attention than their overseas production. At

many points, however, such distinctions

break down, and overseas operations must be

considered.

Major competition in each of these industries has recently come from Japan. This is

not to say that other rivals are insignificant.

Certainly West Germany and France are important factors in steel and automobiles, as

are Korea and Taiwan in consumer electronics and steel, Nor is this meant to imply that

Japan is the primary competitor in all industries. Japanese firms have not been successful in aircraft, and only about a third of U.S.

imports of steel come from Japan, West Germany is a leader in machine tools (along with

Japan), and other Far Eastern nations are major producers of apparel. Although attention

has with reason focused on the Japanese,

Japan does not constitute the rest of the industrial world.

The Steel lndustry3

Steel has a unique combination of low cost

and desirable physical characteristics that

make it virtually the only material suitable

for many applications. Among the most important of these are: automobiles (around 20

percent of domestic steel consumption), machinery and equipment (10 percent), and containers such as cans (7 percent). In addition,

significant amounts of steel are used in construction, appliances, pipe, rail cars and locomotives, wire products, and military equipment, Industrial societies as they are known

today could hardly exist without steel.

Almost all steel products are manufactured to standard specifications, There is lit-

‘Nfost of the information in this section is dr;~wn from the

OTA steel study.

tle difference in the steel produced by various

firms—a given type of sheet, plate, or structural shape will be much the same whether it

comes from the United States or Korea. While

there are specialty products and proprietary

grades—e.g,, various tool-and-die steels—

substantial product differentiation as occurs

in industries such as automobiles is seldom

possible. Competition, therefore, is largely

based on relative prices and customer service, Important elements of the latter are timely and dependable delivery, and technical advice, Such service is important and should not

be minimized; it is not necessarily true that

only prices determine sales. In fact, many

customers maintain familiar and reliable

sources of supply even when lower prices are

available elsewhere.
Ch. 3—Steel, Electronics, and Automobiles: Industrlal Structure ● 35

Photo credit: American Iron and Steel Institute

Slab casting of steel

From the standpoint of industry structure,

steel has experienced a declining level of concentration over the years. U.S. Steel, still the

largest producer, today accounts for barely

more than one-fifth of the domestic industry’s

sales. Market share losses by the traditional

leaders have been taken partly by imports but

partly also by other domestic firms, including

nonintegrated producers and specialty steelmaker. These companies occupy market

niches for which the benefits of large-scale

operation are less important.

Nonintegrated companies now account for

some 15 percent of industry shipments. The

OTA steel study estimates that such companies may account for as much as 25 percent

of domestic production by the end of the decade, provided adequate supplies of scrap and

electricity are available at reasonable costs.

Price is a critical determinant of competitive ability in steel, particularly for sales to

firms which themselves sell in highly competitive markets. Therefore, costs of production

are also crucial. American steelmaker face

both problems and opportunities in their efforts to achieve low costs. On the positive side

is the close proximity of a large and diversified market. On the other hand, this country’s technological advantages in steel have

largely eroded. Technology for making iron

and steel is now well-diffused internationally

and available to all who can pay for it.

As might be expected for a commodity-like

market, the industry engages in comparative-
36 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

ly little R&D. American firms tend to be more

active in introducing product innovations

such as dual-phase or microalloyed steels

than in process innovations. In recent years,

many of the latter have come from foreign

firms. U.S. Steel, for instance, recently concluded an agreement with Sumitomo Metal

Industries, a Japanese steelmaker, to purchase technology for computer-controlled

production equipment.’ The industry also

relies on suppliers of machinery and equipment for many process developments.

The OTA steel study concluded that a number of significant innovations in making iron

and steel might come into general use within

the next 20 years. Moreover, many technologies already available and proven have not

been as widely adopted in the United States

as in some other countries. Not only computerized process control, but also continuous casting and a variety of improvements in basic oxygen steelmaking could

raise yields and productivity, as well as save

energy, if they were more pervasive in the

American industry. Finding the capital required to implement new technologies or to

modernize using existing technologies is a

major hurdle for most portions of the American industry; the OTA steel study estimates

capital needs for modernization and expansion at $3 billion per year (in 1978 dollars)

over the next 10 years, $5.3 billion per year

for total capital requirements,

There are factors beyond technology and

investment capital which are important for

the international production and sale of steel.

Some work to the benefit of the U.S. industry,

others to its detriment, An obvious benefit is

the low value-to-weight ratio of steel, making

it costly to ship, particularly overland; relatively little steel moves more than 300 miles

from a domestic mill or port-of-entry. Imports

must bear significant transportation costs.

On the other hand, the industry’s large

fixed capital requirements encourage “un-

“4J~panese Steel Maker to Computerize Production Lines of

U.S Steel Mill, ” Jupun Heport No. 97, Joint Publications Research Service 75611, May 11.1980, p, 48.

Photo credit American Iron and Steel Institute

Pouring hot metal

fair” pricing practices. Operating a mill

below capacity results in high unit costs.

Often the problem is worse abroad than in

the United States because labor costs may be

more nearly fixed in the short term. This can

arise because of lifetime employment (Japan —although there is flexibility in Japanese

labor costs because of the widespread use of

contract workers and also the large fraction

of wages paid as bonuses) or a social and

political climate—often coupled with strong

unions—that makes layoffs difficult (Europe).

In any case, efforts of foreign firms to operate

close to capacity without cutting prices at

home may lead to dumping of excess production overseas.’ This practice, together with

the industry’s cyclical demand pattern, has

created difficult conditions for American

steel firms, even though their average costs of

‘

) Dumping refers to export sales at prices below those

charged in the home market, or in some cases to sales at prices

below cost.
Ch. 3—Steel, Electronics, and Automobiles: Industrial Structure ● 37

production may be fully competitive, There

have been more dumping cases brought in the

United States in steel than in any other industry. (The industry points out that other

countries shield their steel industries from

foreign competition and need not resort to

antidumping measures. )

Despite intense price competition, the U.S.

steel industry remains more profitable than

other major national steel industries. But

profits have suffered compared to other sectors of the American economy, Returns on

equity for the steel industry in the United

States have been significantly below the

average for all manufacturing in every year

but one since 1958.

Finally, it is noteworthy that the steel industry, in the United States and in other countries, has faced increased costs because of

government regulation, In the United States,

environmental controls and workplace health

and safety standards have raised costs of

production. Ironmaking and steelmaking have

been inherently polluting of both air and

water; when Federal policy began to reflect

environmental concerns, the burden o f

change fell heavily on this industry. The OTA

steel study found that meeting environmental

and workplace standards took about 17 percent of new investment in the industry during

the 1970’s. To the extent that such regulations do not apply abroad, the domestic industry is placed in a less competitive position

by virtue of public policy alone.

The Electronics Industry

As pointed out previously, this study addresses only three sectors of the electronics

industry: consumer electronics, semiconductors, and computers.

Consumer Electronics

Most of the products of this sector—e.g.,

radios, TVs—are sold through wholesale/retail distribution channels, mainly to households. A relatively high proportion of the consumer electronics products marketed in this

country now originate in the Far East, Videocassette recorders (VCRs), for example, including those marketed under American

brand names, are produced almost exclusively in Japan. Color TVs are assembled in the

United States by both American and foreign

firms; regardless of the home of the parent

firm, many of the manufacturing operations

are carried out in regions with low labor

costs, primarily Mexico and the Far East. In

the newest product categories, such as video

disks and home computers, American firms

are mounting strong efforts to maintain leadership. However, it is likely that in the long

run, even if they are successful, the more

labor-intensive production processes will

move overseas,

Continuing competitive strength in consumer electronics depends, much as for steel,

on maintaining low prices in mature products

and staying abreast of technological developments that might have major impacts on the

industry’s future direction. The latter include

the video disks and home computers mentioned above: in the future, such potential

new products as flat screen TVs and integrated home entertainment centers may

become large markets.

The Orderly Marketing Agreements for

color TVs negotiated by the U.S. Government

and beginning in 1977 function as import

quotas. They have protected U.S. labor to

some extent, and have also encouraged Japanese producers to locate plants here. In effect, the weaker U.S. firms that were driven

from the market by import competition have

been replaced by foreign firms manufacturing in the United States. The Japanese are

being followed to the United States by companies based in Taiwan and South Korea.
38 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

Photo credit RCA

Final assembly of color TVs

While the largest U.S. firms have retained

market share, the real questions deal with

future products. Will these be developed and

manufactured by American firms, or will foreign manufacturers capture the market as

they did for VCRs? Will the United States

become simply a site for assembly plants,

with management control and R&D remaining

overseas? Given the low profit margins in this

sector, the high risks, and the past history of

strong import competition in products based

on U.S. technology, the domestic consumer

electronics industry may, like the steel industry, have trouble finding the capital

necessary to compete.

Retail distribution systems, and product

quality and reliability, also affect competitiveness. Consumer electronics products

are sold through a wide variety of retail

outlets. Historically, this meant that manufacturers attempting to establish and maintain recognized brand names paid close attention to distribution. Retailers not only

were responsible for product sales, but also,

and perhaps more importantly, for aftersales

servicing.

This pattern has changed in recent years,

partly as a result of imports, and partly because of improved product quality and reliability. Importers did not have extensive retail

distribution networks. They countered by developing new marketing channels (e. g., discount stores) and— to avoid the need for frequent servicing—by emphasizing reliable,

trouble-free products. As one result, product

quality and reliability have also improved for

domestic products. Higher reliability has

diminished the role once played by retail

servicing, and greatly expanded the number

of possible retail outlets.

Semiconductors

Solid-state TVs are only one of the many

near-revolutionary effects of semiconductor

technology on the rest of the electronics industry. Many electronics products and systems now in widespread use would be quite

impossible without semiconductors. Moreover, semiconductors are also having profound impacts on the products of many industries outside of electronics.

The semiconductor industry includes

scores of firms, many specializing in narrow

market segments; there are thousands of different types of semiconductors capable of

performing many different circuit functions.

Perhaps the most important feature for international competitiveness—impinging on all

other aspects— is the technology itself, and

its rate of change. Future applications of

semiconductors in industries ranging from

communications systems to home appliances

will dwarf present accomplishments, if only

because applications always lag the availability of technology; advances in semiconductor devices could stop now and the stream of

new applications would continue basically

unhindered for several years, Of course new

applications also suggest new needs. The
Ch. 3—Steel, Electronics, and Automobiles: Industrial Structure ● 39

Photo credit Westinghouse

Machine dictation/word processing center

microprocessor is a classic case—a product

rapidly adapted to uses unforeseen by its developers, these new uses in turn spawning

new microprocessor designs. (Microprocessors are ICS containing a complete computer

processing unit on a single chip. )

Another important aspect of the semiconductor industry is the continuing decrease

over time in manufacturing costs for equivalent circuit functions. These cost reductions

have two basic causes. First, the ability to

pack more and more circuit elements onto a

single chip has dramatically reduced the cost

per function—e.g., per logic gate or per bit of

computer memory. As a result, the total cost

of the circuitry for performing a given task

has fallen rapidly. This has been a major

cause of the decreases in the cost of computing power over the past 20 years—by a factor

of more than a hundred since the mid-1950’s. 6

It has also made possible many applications

that previously would have been impossible,

impractical, or simply too expensive.

‘ f I 1,. ( lilS\\ (’II , (’t f} 1,, “‘[1[1S11 I’f>(’tllloli)~\’,“‘ ~;orll~~[l f(’1’, vol. 11,

S(q)l(m)tx’r 197[1, p. 10.

A second reason for cost decreases is the

so-called learning curve phenomenon. The

costs of the chips themselves drop as more of

a given type are made, both from the experience gained in making them and because

higher volumes justify more efficient processing equipment. As a firm’s cumulative production of a given device goes up, the yield—

the percentage of chips that meet specifications—also tends to go up, and costs decline

rapidly.

The promise of cost savings through experience is so well embedded in the industry’s history that prices of new semiconductor devices have frequently been established

with future savings in mind. That is, producers of a new device may set prices below

their current manufacturing costs, confident

that costs will fall as higher volumes are

reached. One of the purposes of such a forward pricing strategy is to increase sales and

achieve high production volumes as quickly

Photo credit National, 

A silicon wafer for making ICS being handled

with a vacuum penciI
40 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

as possible. The advantages accruing to innovators first on the market with new products

explain much of the emphasis the semiconductor industry places on R&D.

In many firms, however, this R&D is confined almost exclusively to process engineering and circuit design. Basic research is limited to a few of the larger manufacturers,

some of which—such as Western Electric

(Bell Laboratories) and IBM–do not sell

semiconductors on the open market, making

them only for internal use.

Possibly because of its history of aggressive pricing combined with heavy R&D costs,

the semiconductor industry has not been notably profitable, particularly in terms of

return on sales. Nor does the dollar volume of

sales keep pace with the level of physical output. As a result, internally generated cash

flows have often been inadequate to finance

the rapid plant expansions needed to serve

growing markets. This problem has lately

been exacerbated because the newest generations of ICS demand a considerably higher

level of capital expenditure for design and

manufacture. Capital requirements per dollar of sales are said to have risen 50 percent

between 1970 and 1980, ’ An upward shift in

capital needs is common as industries mature, but in semiconductors the capital requirements are only partly for new production equipment. Additional funds are needed

because of the higher level of technology itself—particularly the rapidly escalating

costs of circuit design as ICS approach and

exceed 100,000 elements per chip.

There is another feature of the industry

worth exploring briefly, one common to industries early in their evolutionary histories.

Semiconductor firms, especially the larger

ones, are attempting to integrate forward into

final products. Much of the incentive results

from a natural desire to internalize more of

the end-product value-added. Thus, semiconductor firms have, at various times, tried to

J. B. Brinton. . . Chip Makers to Shrug off Recession,’”

E]ectronics, Apr. 10, 1980, p. 42.

integrate forward into consumer products

such as electronic watches and calculators,

and also into computers.

There are strategic reasons for integration

as well. End-product manufacture offers diversification and a measure of protection

against the possibility of customers integrating backwards, In fact, backward integration—i, e., end-product manufacturers making their own semiconductors—has also been

taking place quite rapidly, again primarily for

strategic reasons. Firms whose products

range from electronic toys and games to

mainframe computers, as well as diversified

industrial concerns, have been adding semiconductor capability, both to gain some measure of stability in supply, and to have the

ability to design and produce unique devices

which might be required for their own products but not in large enough quantities to attract merchant firms.

As a result, the structure of the sector is

changing rapidly. Much of the spectacular

success of the semiconductor industry in the

United States has been built on innovative

products and processes coming from independent firms —often small and entrepreneurial—serving the merchant market, This

is just the type of firm that has seemed to be

disappearing. It remains to be seen whether

the structural changes taking place in the

U.S. industry will result in a slackening of the

pace of innovation and in competitiveness.

The major determinants of competitive

ability in semiconductors are the capacity to

innovate, and, as products mature, to manufacture at low cost. Neither of these demands

will change in the foreseeable future, Maintaining competitiveness—interna tionally or

domestically—will continue to require a

much higher proportion of technically skilled

personnel such as engineers than is true for

most other industries, In addition to high-cost

technical professionals, semiconductor firms

need low-cost assembly labor to be competitive. As a result, virtually all the larger firms

have transferred labor-intensive operations

overseas.
Ch. 3—Steel, Electronics, and Automobiles: Industrial Structure ● 4 1

Beyond these two requirements—innovative capability and low-cost manufacture—is

another factor important to competitiveness:

product quality and reliability. In this, semiconductors are more like consumer electronics products than steel. While it is not quite

true that all steel made to the same specification is the same, there are certainly larger

variations in quality and reliability for semiconductors than for many other commoditylike products. Relative levels of quality and

reliability y of Japanese and American ICS have

been hotly debated. This issue, which depends on both process and product technologies—the latter because some ICS can

be designed to tolerate flaws and partial

failures—is discussed in more detail in chapter 5,

Quality and reliability are important because they affect costs to purchasers, Other

cost factors which are important in some industries are only minor concerns for semiconductors. For example, the value-to-weight ratio of semiconductors is among the highest of

all manufactured products, Consequently,

transportation costs are insignificant. Moreover, the industry is environmentally clean so

that, unlike the steel industry, costs of complying with environmental and workplace

standards have not been burdensome.

Computers

While the mainframe and minicomputer

segments of the computer industry seem at

the moment structurally stable, other portions are changing rapidly. Microcomputer

firms—those building machines based on microprocessors-have experienced a shakeout

over the last few years associated with a

transition from a hobbyist market to one

dominated by small business applications. A

number of pioneering microcomputer firms

have disappeared through bankruptcy or acquisition. The peripherals sector—companies

making auxiliary storage, terminals, and

related equipment— is also volatile. Furthermore, software has become an important entrepreneurial area. Even in mainframes, the

incius try structure has not been static, as

plug-compatible manufacturers have entered

the market—and in some cases, left it again.

(Plug-compatible machines are interchangeable with equipment manufactured by IBM.

but typically offer lower prices and/or higher

performance. )

IBM is the largest manufacturer of mainframe computers—with manufacturing and

sales operations around the world, It has a

substantial market share in virtually every

country in which it sells. Along with other

American firms, IBM has dominated large

computers worldwide since the inception of

the industry in the 1950’s, In fact, the computer industries of almost every country

(Japan and Great Britain are the major exceptions) have had at their cores the overseas

subsidiaries of American computer firms.

over the years, the U.S. computer industry

has become the archetype of the high-technology industry for which this country has been

envied.

While some new entrants into the computer industry— namely the manufacturers of

plug-compatible mainframes—have chosen to

compete head-on with IBM, the manufacturers of micros and minis have, in effect, pioneered market niches left vacant by the mainframe companies, Increasingly, minicomputers are providing all the performance needed

for particular applications. With markets for

both plug-compatible and small machines

being aggressively pursued by a varie!y of

firms—including a number of successful

semiconductor manufacturers—the structure of the computer industry will continue to

change.

The market structure for computers remains simple compared with products such

as consumer electronics or automobiles. Most

computer manufacturers sell directly to final

users, generally employing their own sales

forces, Nonetheless, change is taking place

here as well. Smaller computers intended for

use in homes or businesses are now sold at

the retail level. (Home computers can also be

considered part of the consumer electronics

sector. ) Regardless of the type of computer—
42 ● U.S. InduStrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

O *

. * -

8

Photo cred(l IBM Corp

IBM 4341 Computer System

micro, mini, or mainframe— ancillary serv- the costs of such services are included in the

ices such as software development, and main- price of the computer system, making direct

tenance of both hardware and software, are price comparisons between competing prodimportant for market acceptance. Sometimes ucts difficult.

The Automobile Industry

Because of its size alone, the motor vehicle more are employed in sales and service acindustry occupies a unique position in the tivities.*

economy of the United States, and for that Despite its size, the industry is one of the matter the world. The industry is responsible Nation’s (and the world’s) more concen- for the employment of more than 2 million —.

people in this country in manufacturing

‘{’r~~ U.S. Autfmlof]ilc ln{ius(ry, 1980: Report [{) the Presi(ient

fr(m] the Swret(]ry of ‘1’r(lns~~f)rtf](i~~n (Washington, D.c.: I)e- alone, including supplier firms making com- partment of ‘1’r:lll~port[]tion,” I)OT-P-1O-8I-O2, Jiinuar} 1981),

ponent parts and accessories. Several million P. 84.
Ch. 3—Steel, Electronics, and Automobiles: Industrial Structure ● 43

trated. One company, General Motors, manufactures over half of the cars and trucks produced in the United States; virtually all of the

remainder are made by two other firms, Ford

and Chrysler. Although a foreign competitor,

Volkswagen, has recently begun assembly

here, about 30 percent of its value-added is

tied to imports of components from abroad;

when its U.S. assembly plant is operating,

Honda will probably also import major subassemblies such as engines.

Concentration in the automobile industry

on a global basis is nonetheless decreasing,

largely because of the rapid growth of

Japanese automakers. These firms were insignificant in the early postwar period but

have been gaining market share in many

parts of the world. Imports have had the effect of reconcentrating the U.S. market.

Both Japanese and European automakers

tend to have a greater share of their sales in

markets outside their home countries than do

U.S. firms. Whether through subsidiaries or

exports, one-half or more of the sales of most

foreign firms occur outside their domestic

markets. For American automakers, the proportion is generally one-third or less. Therefore U.S. firms have a greater dependence on

home market sales than do foreign manufacturers.

In the United States, most automobiles are

purchased as replacements for vehicles already in the fleet, which now numbers well
44 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

over 100 million. For the typical purchaser,

buying a car is a substantial outlay of funds;

two-thirds buy on credit, Thus, the availability and cost of financing is an important factor

in sales. Furthermore, most buyers can defer

purchase of an automobile, new or used, simply by keeping the old one longer. Therefore,

when economic conditions appear uncertain,

and when interest rates are high, the market

for automobiles is drastically affected, Much

of the precipitous decline in sales of American-made cars during 1980 can be attributed

to such factors. Returns on equity of U.S.

automakers have generally been comparable

to other U.S. manufacturing industries, but

tend to drop more in recession years such as

1974-75 or 1980,

The producers of finished vehicles by no

means constitute the entire industry. Autos

are assembled from components—some made

internally and some purchased from other

firms, While all manufacturers make their

own bodies, and most build the engines and

drivetrains, American Motors buys its transmissions from Borg-Warner and Chrysler

uses Volkswagen engines in some models. On

rare occasions, manufacturers have integrated even further upstream: Ford operates

a steel mill; Chrysler makes glass. For many

other components, U.S. automobile companies rely on some 50,000 supplier firms.

Often the automaker will produce only a certain fraction of its needs for a particular

part, purchasing the rest outside. This “tapered vertical integration” allows the company to achieve scale economies while shifting the risk of variable demand to others. Value-added by the automakers is highest for GM

—around 50 percent —lowest for Chrysler

and AMC—3O percent or less.q

‘R. A, Leone, W. ]. Abernathy, S. P. Bradley, and ]. A.

Hunker, *’Regulation and Techno]ogi(:al Innovation in the Automobile Industry, ” final rep(lrt to 0’I_A, (x)ntract No. 933-3800,0,

hfay 1980, p. 2-55.

Automobile manufacturers sell through extensive networks of independent franchised

dealers. Financially sound and loyal dealers

are of great importance to the automakers,

who also depend on them to provide service

and used car sales.

Market strategies of U.S. auto manufacturers have traditionally stressed upgrading of

models and optional equipment, which offer

opportunities to increase profits. Differentiating basic models through design features,

and standard equipment, along with periodic

styling changes, were cornerstones of industry marketing for decades, Recently, year-toyear styling changes have been deemphasized. Cars now remain in production for 10

years or more with little alteration. In the

1970’s, the variety of products represented in

the marketplace nonetheless increased. Not

only did domestic firms introduce new

models, and imports proliferate, but light

trucks and vans became more important as

passenger vehicles.

Government regulations—concerned with

safety, exhaust emissions, and fuel economy—have increasingly constrained the designs of vehicles sold in the U.S. market. The

pace of technological change has accelerated

in the industry—partly as a result of regulations, partly as a result of the demands of the

marketplace. Automobiles built in the United

States are evolving toward designs more like

those in the rest of the world.

Regulatory uncertainty and demanding

timetables for new standards have created

difficult conditions for all automakers selling

in the United States, Domestic firms have

been affected much more heavily than foreign

producers by regulatory and market demands

for high fuel economy because most imports

have been small cars with good gas mileage.

Large investments are needed for U.S. automakers to redesign and retool their fleets to

meet the new conditions.
Ch. 3—Steel, Electronics, and Automobiles Industrial Structure ● 4 5
46 . U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

Summary and Conclusions

Steel, electronics, and automobiles differ

in technological levels, markets, and industry

structures. The more advanced process technologies in any of the industries can be quite

demanding, and might well be called “high

technology, ” This is as true of computer-controlled rolling mills or integrated manufacturing systems for automatic transmissions as it

is for the wafer fabrication lines used to

make large-scale integrated circuits,

There is more variation in levels of product

technologies. While most steel products are

commodity items—and would be considered

“low technology” compared to, for instance,

aerospac e alloys— electronics virtually

defines the high-technology industry. Nevertheless, product technologies for TVs exhibit

a pattern of relatively routine development

and refinement which is quite different from

the rapid advances characteristic of semiconductors or computers. For many years, technological change in automobiles was similar

to that in TVs-a matter of continued refinement but few major innovations. In many respects, the turn to smaller cars making more

efficient use of both fuel and interior space is

no more than an acceleration of this process

of refinement. At the same time, there is now

much greater technological variety in the

marketplace than in the recent past. Frontwheel drive, electronic engine controls, and

diesel engines are examples. While not

always new, these have certainly increased

the diversity of technologies represented in

the U.S. automobile fleet.

In all three industries, manufacturing costs

are important. But for many electronics products, and for automobiles, product characteristics and consumer appeal—whether embracing real differences in performance (as

indicated by computing power or fuel economy) or relatively superficial variations—are

major determining factors of the competitiveness of individual firms, Such characteristics

include product quality—both the reality and

the perception— as well as design. Thus, the

competitiveness of U.S. firms in all three industries depends on a complex of factors

ranging from technological capability to marketing skills and management.

Structural change is taking place in all

three industries, In steel, integrated firms are

shutting down less efficient mills as nonintegrated firms increase their market share. In

consumer electronics, the changes are directly associated with foreign competition. This

competition came first from imports, then

from foreign firms assembling their products

in the United States, The semiconductor sector is experiencing acquisitions and vertical

integration. Product mixes are changing in

both computers and automobiles.

Structural change has been only one of the

forces creating large capital needs in these

industries, In steel, capital investment is required to meet environmental regulations, as

well as workplace health and safety standards, and to replace outdated plant and

equipment. In semiconductors, expansion of

demand is outstripping the abilities of some

firms to raise funds for R&D and new capital

investment. Automobile companies ar e

spending large sums both to develop new

models and to purchase the plant and equipment to make them. The patterns and outcomes of these changes will have important

effects on the competitive futures of all three

U.S. industries, topics which are addressed in

later chapters.
CHAPTER 4

Measures of Competitiveness

in the Three Industries

J
Contents

Page

Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .*.........*..*.*** . 4 9

International Trade Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Productivity. ...... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Wage Rate Trends..,.0.. ● **...** ...,*.., .,,..... ,.,,..., , , . . . . . . . .,.,0., 5 8

Other Measures of Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Summary and Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

List of Tables

Table No. Page

2. Domestic Sales andImports of TV Receivers ....., . . . . . . . . . . . . . . . . . . . . . . . . . 52

3. Domestic Consumption and Foreign Tradein Semiconductors . . . . . . . . . . . . . . . . . 52

4. Domestic Production and Exports of Electronic Computers, Parts, and Accessories 52

5. U.S. Automobile Production, Total Sales, and Import Sales. . . . . . . . . . . . . . . . . . . . 53

6. U.S. Truck Production ,Total Sales, and Import Sales. . . . . . . . . . . . . . . . . . . . . . . . 53

7. Value-Added per Production-Worker-Hour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

8. Productivity Growth for the United States and Japan, 1970-79 . . . . . . . . . . . . . . . . . 58

9. Average U.S. Wage Rates for ProductionWorkers in Current Dollars per Hour . . . 59

IO. Average Annual Rates of Productivity Growth in Manufacturing. . . . . . . . . . . . . . . 61

ll. R&D Expenditures as a Percentage of Gross Domestic Product . . . . . . . . . . . . . . . . 63

12. Percentage Allocation of Government-FundedR&D by Objectives, 1975.,.. . . . . . 63

List of Figures

Figure No. Page

l. U.S. Consumption and Imports of Steel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

2. U.S. Consumption and Imports ofRadio Receivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

3. Value-Added Productivity of U.S. Industries as Percent

of A1l-Manufacturing Average . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... ... ... . 56

4. BLS Productivity Indexes . ...............................,.00.. . . . . . . . . . 57

5. Average U.S. Wage Rates for Production Workers in

Constant 1967 Dollars per Hour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

6. Real Gross Domestic Product per Employed Person Relative to

the United States as 100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

7. Royalty and License Payments and Receipts of U.S. Firms . . . . . . . . . . . . . . . . . . . . . 64
CHAPTER 4

Measures of Competitiveness

in the Three Industries

Overview

No single indicator suffices for comparisons of competitiveness across industries,

for reasons discussed in appendix A. This

chapter uses a number of indicators to examine the ways in which the American steel,

electronics, and automobile industries differ

in their competitive postures.

These industries compete with each other

as well as with their foreign counterparts.

They compete to generate capital, for the

public policies they find desirable, and in

their productivity improvements—because

firms and industries that increase productivity faster than the national average can improve their competitive position. The following discussion addresses the competitive

ability of each industry primarily in comparison with other domesti c industries

because of the primary role of domestic position as a determining factor in international

competitiveness.

The first of the indicators used—international trade flows as measured by import penetration or exports as a percent of domestic

production—shows that computers are the

most competitive of these sectors, consumer

electronics the least. Steel and automobiles

are also lagging on this measure, while imports of semiconductor products exceeded

exports for the first time in 1978,

Productivity data as indications of competitive ability are less straightforward; but, for

most of these sectors lagging productivity

does not appear to have been a major problem. The computer industry, which is very

strong in terms of exports, shows unusually

high labor productivity—despite a history of

decreasing prices relative to technological

capability. However, the consumer electronics sector, which has suffered severe import penetration, has increased its productivity about as fast as U.S. manufacturing in

the aggregate—hence on this measure shows

no real slackening of competitiveness. The

situation is somewhat similar for steel, although here there is some evidence of lagging

productivity. Automobiles exhibit productivity which is increasing significantly faster

than for U.S. manufacturing as a whole. By

themselves, productivity trends do not explain why the steel and automobile industries

should be suffering on trade measures.

Insight into the problems of the American

steel industry comes from comparing rates of

increase in wages. Wage rate increases have

outstripped productivity advance—in part

because the industry has not modernized its

plant and equipment rapidly enough for increases in productivity to keep up with those

in wages. The automobile industry’s current

difficulties have other sources. Nonprice

factors—such as the turn towards small cars

with good fuel economy—are important

causes of the recent increases in import penetration, Semiconductors and computers continue to look strong on all of the measures examined in this chapter,

The last section examines generalized

indicators of competitive ability, including

trends in R&D spending. Such measures exhibit worrisome trends, but are not by themselves conclusive signs of competitive problems for American industry.

49
50 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

International Trade Data

The trade balance in a particular sector is

one of the fundamental indicators of competitiveness. During the 1970’s, the U.S. share of

world exports of manufactured goods fell

from over 20 percent to about 17 percent. }

However, the U.S. dependence on exports is

not as great as that of many other industrialized nations. Although the ratio of exports to

gross national product (GNP) for the United

States nearly doubled during the 1970’s—

from 4.3 percent in 1970 to 7.5 percent in

1979, this is still less than half the percentage

characteristic of many Western European

countries (though about half of all exports by

‘Internatimd Economic Indicators (Washington, DC.: Department of Commerce, Internation:]l Trade Administration,

September 1980), p. 34.

European Community nations stay within the

Common Market). Contrary to popular belief,

Japan is not unusually dependent on exports;

the ratio of exports to GNP in that country

has remained at about 10 percent in recent

years,

2

Turning to the three U.S. industries, figures 1 and 2, along with tables 2 through 6,

show imports, exports, and production or

sales (consumption). For simplicity, exports of

steel, consumer electronics, and motor vehicles are omitted, as these are much smaller

than imports. Imports of computers are likewise negligible compared to exports, and

have not been included in table 4. (Motor

vehicles exported to or imported from

-Ibid.. p. 36.

Figure 1.— U.S. Consumption and Imports of Steel

1

110,000

1

~ \*” , / ’

4

\

f i O

t !

/ ●/”J- \

100,000

90,000 /

.q.-*..O”%\;\ti(*,*@*”*” I ! #i /

Consumption .Z

” I

●

\ +

80,000

\

d ’

,8* I

\ /

/ 0

70,000 ●

. / ’

/

** / \

*

*

60,000

/

4

8,*

1

1

/‘ Import penetration

50,000

/

J

40,000

/

20,000 -

Imports “

10,000 “

o.

1960 62 64 66 68 70 72 74 76 78 1980

Year

15

10

SOURCE Annual Stat/st/cal Report, American Iron and Steel Institute, various years, steel only
Ch. 4—Measures of Competitiveness in the Three Industries ● 51

Canada have been excluded from the discussions of trade flows throughout this report because all production in Canada is by subsidiaries of U.S. firms and there is extensive

trade both ways between parent firms and

subsidiaries. )

The data show that these industries differ

markedly in the extent to which imports have

penetrated U.S. markets. In steel (figure 1),

imports have taken a significant share of domestic markets for more than 15 years, although the percentage has fluctuated considerably, Substantial amounts of steel also

enter the country embodied in imported cars

and trucks.

Figure 2 and table 2 contain import data

for two important consumer electronics products: radios and TV receivers. Most of the

Figure 2.— U.S. Consumption

radios and black-and-white TVs sold in the

United States are imports; the fraction ran

well over half throughout the past decade.

Color TV imports peaked in 1976, but were

then discouraged by Orderly Marketing

Agreements, negotiated first with Japan in

1977, then with Taiwan and Korea in 1979.

Many components used in color TVs continue

to come from abroad.

The pattern for semiconductors is shown in

table 3, which includes exports as well as imports. Trade in both directions has grown,

while the total market has been expanding

rapidly. A great deal of this trade consists of

interdivisional shipments between the domestic plants and foreign subsidiaries of U.S.

firms. Semifinished devices are sent abroad

for labor-intensive operations such as wireand Imports of Radio Receivers

60 ‘ + 100

Import penetration

/~ 7

~ ~ ~ \ v \

●P* /

/

\/ \ ‘

0

./ ‘ ,

/“’/ “~., consumptio n

6 * “ 80

50 — ‘*, / \

d

/“ ‘*

/ ’ \ % / ‘ \ / “

\

“ \

*4* “ \

, / ’

‘ \ — 70

‘ \ * / ● \ ● \*,.’

40 “

30 — “ 30

— 20

—

10

0 I 1 1 I 1 I I I 1 1 I o

1969 70 71 72 73 74 75 76 77 78 1979

Year

SOURCES
52 . U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

Table 2.—Domestic Sales and Imports of TV Receivers (thousands)

Total TV sales Imports -

Imports as Y. of total sales

Year Black & white Color Black & white Color Black & white Color

1968 . . . . . . . . . . . . . 5,551 6,032 2,043 -

’666 36.80/0 11 .00/0

1970 . . . . . . . . . . . . . 4,546 4,822 3,596 914 79.1 18.9

1972 . . . . . . . . . . . . . . 8,145 8,378 5,056 1,318 62.0 15.7

1974 . . . . . . . . . . . . . . 5,941 7,380 4,659 1,282 78.4 16.3

1975 . . . . . . . . . . . . . . 4,968 6,485 2,975 1,215 59.8 18.7

1976 . . . . . . . . . . 5,196 7,700 4,327 2,834 83.2 36.8

1977 . . . . . . . . . . . . . 5,664 9,107 4,908 2,539 86.6 27.8

1978 ., . . . . . . . . . . . . 6,064 10,236 5,931 2,775 97.8 27.1

1979 . . . . . . . . . . . . . . 6,254 9,846 5,874 1,369 93.9 13.9

;OURCES Electronics Market Data Book 1980 (Washington, D C Electronics Industries Association. 1980) PP 10 and 33; Television Receivers, Color and Monochrome, Assembled or Not Assembled, Finished or Not Finished, and Subassemblies Thereof (Washington. D.C. U.S. International Trade Commission, pub.

Iication 808, March 1977), 1968 approximate

Table 3.— Domestic Consumption and Foreign Trade in Semiconductors (millions of dollars)

.———

Domestic Domestic Exports as % I reports as%

Year shipments Exportsa

Imports a

consumption of production of production

1968 . . . . . . . . . . . . . . $1,41 5 $ 204 —

- $-. -72—–..– ~1, 2 8 3

14% 6%

1970 . . . . . . . . . . . . 1,720 417 157 1,460 24 11

1972 . . . . . . . . . . . . . 1,848 470 330 1,708 25 19

1974 ... . . . . . . 3,646 1,247 961 3,360 34 29

1975 ., . . . . . . . . 3,002 1,053 803 2,752 35 29

1976 ., . . . . . . . . . . 4,310 1,400 1,107 4,019 32 28

1977 . . . . . . . . . . . . . . 4,363 1,497 1,352 4,218 34 32

1978 ... . . . . . . . . . . 5,312 1,528 1,680 5,464 .29 31

1979 . . . . . . . . . . . . 6,852 2,065 2,266 7,053 30 32

at30th exports and Imports Include semiconductors exported for further processing and then relmported Such devices, usually shipped between dlvlstons of the same

company, appear both as exports and as Imports

SOURCES 1968.72—A Report on the Serntcorrductor /ndusfry (Washln@on, D.C Department of Commerce Industry and Trade Admlnlstratlon, September 1979)

1974.79—E/ecfrorr/cs Market Data Book 1980 (Washington, D C : Electronics Industries Assoclatlon, 1980), PP 104 and 113

bonding, then reimported to the United States

(or sold in other markets); of the $1.35 billion

in imports in 1977, $1.12 billion (83 percent)

were intracorporate sales.

U.S. shipments plus exports of computers

are given in table 4. The trade surplus of the

United States in computers is greater than

the deficit for all consumer electronics

(which includes more than just radios and

TVs and was about $3.6 billion in 1979). In

addition to exports from the United States,

American computer manufacturers have

large sales through foreign subsidiaries. Over

two-thirds of all the computers that have

been installed in Europe originated with

American-owned firms. In contrast, virtually

none of the computers in the United States

have been designed and/or built by foreign

firms. As for the steel that enters the United

States incorporated in imports such a s

Table 4.—Domestic Production and Exports

of Electronic Computers, Parts, and Accessories

(millions of dollars)

Exports as %

Year Product ion Exports of production

1970 . . . . . : . . $ 5,671 $1,236 -

21 .8%

1975 . . . . . . . . . 8,443 2,228 26.4

1976 . . . . . . . . . . 10,134 2,588 25.5

1977 . . . . . . . . . 13,398 3,264 24.4

1978 . . . . . . . . 17,100 4,128 24.1

1979 . . . . . . . . . . 20,850 5,250 25.2

SOURCES 1970-77—Sfaf~stlca/ Abstract of the United States, 7979 (Washing.

ton, D C Department of Commerce, Bureau of the Census, 1979), p

868

1978.79— 1980 U S Idustrial Outlook (Washington, D C Depart.

ment of Commerce, Industry and Trade Administration, January

1980), p 252

automobiles, many semiconductors leave the

United States as components of computers

and other electronic systems. Semiconductors also enter this country via imported consumer electronics products.
Ch. 4—Measures of Competitiveness in the Three Industries ● 53

For automobiles (table 5), import penetration was relatively low during the 1960”s, but

during the 1970’s imports increased markedly. In 1980, automobile imports took more

than 25 percent of the market, Imports of

trucks have also increased, as table 6 shows.

Most of these are small pickup trucks made

by Japanese firms.

In isolation, these tables and charts would

indicate that the United States is more competitive in steel than in automobiles, and

more competitive in computers than in consumer electronics. They emphasize that import penetration in the range of 15 percent

for steel is nothing new, However, the use of

highly aggregated figures such as those in the

tables does not give a complete picture. Table

5, for example, does not indicate that almost

all imported cars are compacts or subcompacts, sectors in which imports claim roughly

40 percent of the market—import penetration

in small cars remained above 30 percent

throughout the 1970’s. Total import penetration has gone up largely because the small

car market has become a greater part of the

whole. In fact, imports have captured most o.f

the growth in the U.S. automobile market

since the 1960’s.

“’Current Problems of the U.S. Automobile Industry and Policies to Address Them, ” staff working paper (Washington, D. C.:

Congressional Budget Office, Natural Resources and Commerce Division, July 1980), p. 14.

Table 5.—U.S. Automobile Production, Total Sales, and Import Sales (thousands)

Total new Imports as ‘/0

Year U.S. production car sales Import sales of total sales

1960 . . . . . . . . . . . . 6,703 6,576 499 7.6%

1965 . . . . . . . . . . . . 9,335 9,313 569 6.1

1968 . . . . . . . . . . . . 8,849 9,404 986 10.5

1970 . . . . . . . . . . . . 6,550 8,388 1,231 14.7

1971 . . . . . . . . . . . . 8,558 9,831 1,466 15.1

1972 . . . . . . . . . . . . 8,828 10,488 1,529 14.5

1973. . . . . . . . . . . . 9,667 11,351 1,720 15.2

1974 . . . . . . . . . . . . 7,310 8,701 1,369 15.7

1975 . . . . . . . . . . . . 6,741 8,262 1,501 18.2

1976 . . . . . . . . . . . . 8,538 9,751 1,447 14.8

1977 . . . . . . . . . . . . 9,294 10,826 1,968 18.3

1978 . . . . . . . . . . . . 9,153 10,946 1,946 17.8

1979 . . . . . . . . . . . . 8,418 10,335 2,339 22.6

1980 . . . . . . . . . . . . 6,373 8,977 2,398 26.7

SOURCES: 1980.79-Automotive News 1980 Market Data Book Issue.

1980—Ward’s Automotive Reports Jan 12, 1981

Table 6.—U.S. Truck Production, Total Sales, and Import Sales (thousands)

Total new Imports as %

Year U.S. production truck sales Import sales of total sales

1973 . . . . . . . . . . . . 3,002 3,176 162 5.1940

1974 . . . . . . . . . . . . 2,694 2,884 244 8.5

1975 . . . . . . . . . . . . 2,260 2,330 144 6.2

1976 . . . . . . . . . . . . 2,993 3,280 269 8.2

1977 . . . . . . . . . . . . 3,487 3,807 240 6.3

1978 . . . . . . . . . . . . 3,722 4,264 374 8.8

1979 . . . . . . . . . . . . 3,053 3,540 404 11.4

1980 . . . . . . . . . . . . 1,639 2,487 485 19.5

SOURCES: 1973-79—Petition for Relief Under Section 201 of the Trade Act of 1974 From Import Competition From Imported

Passenger Cars, Light Trucks, Vans, and Utility Vehicles, submitted by the International Union, United Automobile, Aerospace, and Agricultural Implement Workers of America (UAW), before the U.S. International Trade Com- mission, June 12, 1980, p. 196.

1980— Ward’s Automotive Reports, Jan. 12, 1981.
54 . U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

Nor does table 3 indicate some of the more the 16K RAM. This is a random access memoworrisome trends in semiconductor trade. ry circuit used mostly in computers and caDuring 1980, Japanese imports evidently took pable of storing over 16,000 bits of informamore than 40 percent of the market for a par- tion.

ticular state-of-the-art integrated circuit—

Productivity

Another measure of an industry’s ability to

compete internationally is the degree to

which its labor productivity—defined as value-added per worker-hour or physical output

(units, tonnes, ., .) per hour—has kept pace

with other domestic industries. (Capital markets in various countries are now more

strongly linked than in the past; although differences in costs of capital exist, labor costs

and labor productivity are usually more important for competitiveness than capital

costs and capital productivity. ) In general, industries with lower-than-average productivity growth can expect increasing competition

from abroad. Footwear and apparel are examples of American industries with seriously

lagging labor productivity; neither is competitive internationally.

The productivity comparisons in this section are between domestic industries; they do

not juxtapose U.S. and foreign industries. As

explained in appendix A, direct international

comparisons are not meaningful for competitiveness unless related to aggregate productivity changes in the two countries. For example, if aggregate productivity in Japan were to

double compared to the United States, a particular Japanese industry would have to more

than double in productivity to improve its

relative position. This is because the exchange rate should shift—at least in principle—to account for aggregate productivity

differences between the two countries.

The particular measure of productivity

chosen also affects comparisons of competitiveness. Two productivity indexes are used

below: 1) value-added per production-workerhour: and 2) the standard productivity index

of the Bureau of Labor Statistics (BLS), physical output per employee-hour.

No single indicator of productivity is totally

satisfactory. Value-added figures are heavily

influenced by differences in industrial structure and by the extent of competition within

the industry. This is because a firm’s ability

to determine its own prices can affect valueadded. More monopolistic industries would

be expected to exhibit higher value-added,

everything else being equal, Moreover, in

some industries prices may include costs that

are not directly related to manufacturing.

Computer prices often contain implicit

charges for software which is ostensibly

provided free. This inflates the value-added

per worker-hour figure, because software

programmers are not counted as production

workers.

The BLS productivity data, based on physical output per employee-hour, also have limitations, Most important, they are restricted

to labor content; none of the other factors affecting productivity are accounted for. While

the time spent by all employees is included,

not just production workers, the effects of

capital investment—for instance, in new

process technologies—or of rates of capacity

utilization, are hidden. Such factors affect

output per employee-hour in some industries

more than others. In an industry such as

steel, the extent to which plant and equipment operate at full capacity varies from

year to year, productivity being higher at

close to full capacity. Therefore, long-term

trends are more meaningful than year-to-year

variations.

Table 7 gives value-added per productionworker-hour for steel, three sectors of electronics, and motor vehicles. In addition, aggregate data for all U.S. manufacturing are

included. Much of the apparent increases in
Ch. 4—Measures of Competitiveness in the Three Industries ● 55

Table 7.—Value”Added per Production-Worker-Hour (current dollars)

Electronics All U.S.

Year Steel Radio/TV receivers Semiconductors Computers Motor vehicles manufacturing

1960 . . . $ ‘8.2 3 $ 6.40 - $ 8.64 -

na $ 9.57 ‘$ 680

1965 .. . 10,27 7.52 11.48 $15.83’ 12.08’ 8.50

1970 . . 11,37 10.64 16.11 21.18 15,42 11.30

1975 ., ., 20.31 16,02 21.00 32.15 23.36 18.40

1976 . . 21,67 20,84 24.10 42,42 28.30 20.20

1977 ... . 22.49 22.81 27.40 45.20 30.14 21.90

na = not available

aEstimated

SOURCE Census of Manufacturers various editions Data for semiconductors for 197577 Annual Survey of Manufacturers

productivity are simply inflation. Figure 3

shows the productivity in each industry as a

percentage of the all-manufacturing average,

calculated from the data in table 7. The plot

gives direct comparisons between each sector and the rest of American industry. thus

compensating for the effects of inflation.

For steel, figure 3 shows a slow decline in

value-added productivity relative to other industries over the decade of the 1960”s. Absolute productivity remains above the all-manufacturing average, but disregarding fluctuations such as those caused by year-to-year

changes in capacity utilization, a gradual

downward trend is evident, particularly during the latter half of the 1960’s. Relative productivity remained low during the 1970’s, except for 1974 when there was a large price

rise. Imports quadrupled in tonnage during

the 1960’s, and tripled as a percentage of

American steel consumption. This increased

competition, together with Government price

controls (ch. 6), helped keep prices down, decreasing value-added productivity compared

to the rest of U.S. industry.

Relative value-added productivity for the

motor” vehicle industry (figure 3), though falling somewhat in recent years, has remained

consistently farther above the all-manufacturing average than for the steel industry.

There are two primary reasons. First, automakers have been somewhat freer to raise

prices as costs increased. Second, the productivity of the auto industry has also been

increasing rapidly on a physical output basis

(as shown by the BLS productivity data which

follow).

In the three electronics sectors, the value-

-added per worker-hour data present a mixed

picture, The computer industry shows consistently high productivity (figure 3), roughly

twice the all-manufacturing average. This is

especially noteworthy because prices for

computing capability have been falling. One

reason for the high performance on this

measure is the large number of technically

trained personnel in the computer industry.

These employees are not included in the production worker category, thus increasing the

productivity ratio. An additional point is that

computer prices must cover large costs not included as production expenses, notably for

engineering and software. This overhead is a

higher proportion of total costs than for most

other manufacturing industries. Finally, one

company, IBM, has long been dominant, and

the industry pricing structure may be less

competitive than would be true in, say, steel.

The semiconductor sector is similar to the

computer sector in being R&D-intensive,

which again increases productivity on a production-worker-hour basis because the time

spent by engineers and other R&D personnel

is not included. On the other hand, price competition is stronger than in computers, so

much so that many of the labor-intensive portions of semiconductor manufacture have

been transferred abroad. This is one reason

why the productivity figures for semiconductors in table 7 and figure 3 are not particularly high—in general being less than for

automobiles, though greater than for steel.

However, productivity in the semiconductor

industry, as for computers, is notoriously dif -
56 Ž U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

Figure 3.— Value-Added Productivity of U.S. Industries as Percent of All”Manufacturing Average

2101 ! “ %%

I

200 L

190

180

170

160I

/“\.\

Computers ● #

O*\ \

●4 \

\

0 ’

\

‘--- - 4

He

- -

/ ’

● \

\ \

/ “ \ . ●/” w

4 “

Motor vehicl~s 150 -

/

- *

\

, / ”

140 —

\

/“ ;.’-”~ a

*“-’-% **w,/’ ● . . . ●h”/ ” 0 °

130 — #/@ ‘%’ **Oww /

120 —

110 -

stu d

100 --— - — - — - — -—-— - — - — - — - “+-—x— -

I I I I I I I I I I I I I I I I I I I

1960 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 1977

Year

SOURCE Calculated from table 7

ficult to measure in any meaningful way because of the high rate of technical change.

Falling prices for a given functional capabilit y or given level of performance distort value-

-added figures and other cost/price indicators,

In effect, price is not an adequate measure of

the real value of a semiconductor device, because a dollar spent on a semiconductor this

year buys much more than a few years ago.

This is also true for computers and other

products whose performance depends on

semiconductors— in contrast to industries

such as steel or automobiles.

The remaining sector, consumer electronics, is represented in table 7 and figure 3 by

radios and TVs. On a value-added basis, this

sector has approximately kept pace with

other U.S. manufacturing industries. However, the BLS figures discussed below demonstrate that physical productivity has improved markedly for that portion of consumer

electronics manufacturing still conducted in

this country rather than offshore.

Figure 4 provides an alternative picture of

changes in relative productivity—using the

BLS index based on total physical output

(rather than dollar value) per employee-hour.

All employees are counted, not just production workers. Semiconductors and computers

are omitted from this table, because physical
Ch. 4—Measures of Competitiveness in the Three Industries Ž 57

150

14C

: 130

-u

c.—

>

.-

.—>

z

: 12C

&

1 IC

10C

Figure 4. —BLS Productivity Indexes (physical output per hour—all employees, 1967 = 100)

/ ’

Motor vehicles 0 -

b

/

“

+ “ %/,

/ -“ , ● /” / ‘ x

& L 4

/ /

/ \ \

/

Radio &TV sets / /

\

..*

● .*

\

. { 1

. . . ,. ..0. ●

\

/

.**

\

\4 ~ ..”’””

/

,

1967 68 69 70 71 72 73 74 75 76 77 78 79 1980

SOURCE F’roducf{vlty /ndexes for Se/ected /ndus/r~es (Washington, D C Bureau of Labor Statlstlcs)

output has lit tle meaning for industries where

a single chip or a single computer can now do

what 10 did a few years ago.

In figure 4 the motor vehicle industry again

exhibits substantially better than average

productivity growth, while steel lags. The

years 1973 and 1974 demonstrate how capacity utilization affects productivity in steel.

Both were years of relatively high output;

physical productivity was up about 10 percent as a result. In contrast, the high value-

-added productivity for 1974 (figure 3) was

caused primarily by price increases averaging 27 percent (prices have no direct effect on

the BLS index). Productivity increases in

radio and TV have also been well above average. The results on a physical or per-unit

basis (figure 4) are much more impressive

than on a dollar-value basis (table 7 and figure 3) because intense competition has resulted in falling prices.

With the exception of the steel industry,

there is little in the productivity data for these

industries to suggest competitive difficulties

stemming from an inability to keep pace with

other domestic manufacturing sectors.

The next set of data—table 8—compares

productivity trends in the United States and

Japan, In this table, the situation of a particular sector relative to the rest of the domestic industry is the important comparison;

average productivity growth in Japan compared to the United States is less meaningful,

nor can industries in the two countries be

compared on any simple basis (for one example, the sectors are not defined identically).

Aggregate Japanese productivity remains

well below that in the United States; the

greater rate of advance shown in the table is

at least in part attributable to the larger increments available to countries starting at

low absolute levels of productivity. Nonethe-
58 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

Table 8.— Productivity Growth for the

United States and Japan, 1970-79

— —

Productivity increasea

Sector United States Japan

Average for all manufacturing . . 23% 90%

Steel . . . . . . . . . . . . . . . . . . . . . . . 22 82

Motor vehicles . . . . . . . . . . . . . . 36 77

Radio and TV. ... . . . . . . . . . . . . 42 127

aProductivity in physical output per unit time – all employees

SOURCE United States —Productivity Indexes for Selected Industries (Wash.

ington, D C Bureau of Labor Statistics, Dec. 30, 1980)

Japan-Seisansei Tokei (Productivity Statistics) (Tokyo Seisansei

Kenkynjo (Japan Productivity Center)), No 77. April-June 1977, No

88, January-March 1980

less, in particular industries—e.g., steel or

automobiles—labor productivity in Japan

may be close to or greater than in the United

States; direct comparisons are difficult for a

variety of reasons (see ch. 5 on automobiles),

In both countries, productivity in the steel

industry rose at a slightly lower rate than for

manufacturing as a whole. However, Japan’s

productivity in motor vehicles has also fallen

relative to other Japanese industries, while in

the United States automobiles show productivity growth which is considerably greater

Wage

When firms or industries grant wage

creases faster than their productivity

creases, it is sometimes claimed that their

ternational competitiveness must suffer.

than the average. The significance of comparisons of one year to another (1979 to 1970)

should not be exaggerated. In 1979, U.S. productivity dropped for both steel and motor

vehicles compared to the previous year,

largely because of recessionary effects—i.e.,

output. hence capacity utilization, decreased.

In contrast, productivity y in Japan was greater

for both industries in 1979 than in 1978.

Nonetheless, table 8 would indicate, all else

being equal, that automobile manufacturing

in the United States should have enhanced

competitiveness on a cost basis. All else has

evidently not been equal.

Table 8 shows Japan’s apparent improvement in consumer electronics to be very high.

Even though American productivity in this

sector has also increased more rapidly than

the average for all manufacturing, the indicated productivity improvements in the Japanese consumer electronics industry have

been much greater. These data go a long way

towards explaining the strong price competition in consumer electronics over the past

decade.

Rate Trends

inininIn

fact, this is an overstatement, because inflation by itself does not impair competitive

ability if exchange rates are free to adjust.

On the other hand, if a particular industry

agrees to wage increases exceeding not only

its expected productivity improvements but

also the average pay raises in other sectors of

the economy, it does risk its competitive position. This is because the industry’s costs, and

presumably its output prices, would rise more

rapidly than those elsewhere in the economy.

Adjustments in the exchange rate to offset inflation would only partially offset these cost

increases. Assuming that wage rates did not

similarly outstrip productivity increases in

competing industries abroad, the domestic industry could eventually confront more serious price competition both at home and overseas.

This section reviews wage trends in the

three industries. Table 9 gives average wage

data, excluding benefits, in current dollars

for each industry. Better comparisons would

be possible if fringe benefits could be included—particularly as they are much higher

in some industries than in others. However,

data on benefits are not available for all sectors, thus comparisons across sectors could

not be made, Comparing the wage rate increases in table 9 with the BLS productivity

index (productivity on a physical output

basis) from the previous section shows that

the average manufacturing wage in current

dollars has increased at a rate greater than

productivity for the last two decades. From
Ch. 4—Measures of Competitiveness in the Three Industries . 59

Table 9.—Average U.S. Wage Rates for Production Workers in Current Dollars per Hour’

Electronics All U.S.

Year Steel Radio/TV receivers Semiconductors’ Computers Motor vehicles manufacturing

1960 . . . . . $3.08 $2,06 $1.86 $2.60 $2.91 $2.26

1965 . . . . . 3.46 2.30 2.14 3.00 3.45 2.61

1970 ., . . 4.22 3.00 3.07 3.75 4.44 3.35

1975 . , 7.11 4.29 4.35 4.99 6.82 4,83

1976 . . 7.86 4.60 4.64 5.26 7.45 5.22

1977 .. . 8.67 4,93 5.02 5.41 8.22 5.68

1978 . . . . 9,70 5.49 5.44 5.57 8.97 6.17

1979 . . . . 10.77 6.03 5.98 6.13 9.74 6.69

—— —— aDoes not Include benefits which have tended to rise faster than wages

bl 96o and I gfjs, wage rates are for SIC category 365— Radio and Televlslon Recelvlng Equipment, except Communlcat (on Types

c 1960 and 1965 wage rates are for SIC categories 3674 and 3679—Semiconductors and Electronic Components N E C

d 196o and 1965 Wage rates are for SIC category 357—Office, Computing, and AcGountlng Machines

SOURCES A// U.S. manufacturing—employment and Eamjngs 19097979 (Washington, D C Bureau of Labor Stattstlcs June 1980)

E/ectrorrics: 1960.65—Ernp/o yrnent and Earn~rrgs, 19091975 (Washington, D C Bureau of Labor Stat{ stlcs, July 1976), 7970—U S Census of Manufac

turers 1972, T97579-Ernp/oyrnent and Earnings, 19091979 (Washington, D C Bureau of Labor Stat[stlcs June 1980)

Stee/—Annua/ Stat/sl/ca/ Report (Washington, D C American Iron and Steel Institute, June 1979)

Motor vehicles—Ernp/oyrnenf and Earnings 19091979 (Washington, D C Bureau of Labor Stat{ stlcs, June 1980)

1970 to 1979, the average manufacturing

wage doubled (table 9); average productivity

in manufacturing increased only 23 percent

(table 8).

Such behavior is typical of inflationary periods—in fact is one cause of inflation—but it

is not necessarily a sign of declining international competitiveness. Assuming that differences in rates of general price inflation

among the major industrialized countries are

offset by shifts in exchange rates—often

though not always true over long time periods— international competitiveness on a

price basis need not be affected by inflation

in any one country, A lo-percent price increase due to inflation should be balanced by

a decline in the exchange rate, If, however, a

particular industry grants wage increases

which are greater than the inflation rate,

and not counterbalanced by productivity increases, there could be a sharp impact on

competitiveness. The question is: has this

happened in any of these three industries? To

examine this possibility, figure 5 plots wages

converted to constant 1967 dollars.

Figure 5 shows—as did table 9—that both

the steel and the automobile industry have

paid higher wages than the average of all

U.S. manufacturers, Much of this difference

is due to the strong labor unions in these two

industries. The work forces in both the steel

and automobile sectors also tend to be older

and to have achieved more seniority, hence

higher wages, than in many other industries,

The trend in wages over time is more important than comparisons of one industry to

another. For all U.S. manufacturing, constant

dollar wages rose 6.6 percent during the period 1970 to 1979 while the BLS physical output

productivity index rose 23 percent. Thus for

U.S. manufacturing as a whole, productivity

has increased faster than real wages (again

recall that fringe benefits are excluded). For

radio and TV receivers, real wages went up

only 7,4 percent from 1970 to 1979, while productivity rose 42 percent. On this basis, the

radio and TV sector should exhibit improved

competitiveness since its productivity has increased much faster than the average in

manufacturing, and wages at about the same

rate (that its competitiveness has declined instead of improving indicates that other factors have had an overriding influence, as

discussed elsewhere). On the other hand, for

the steel industry, constant dollar wages rose

by 36 percent and productivity by only 22 percent for the 1970-79 period, Thus, the wage

component of production costs for steel rose

considerably faster than productivity for this

period— in marked contrast to U.S. manufacturing in the aggregate. This is one reason for

the deterioration in competitiveness of the

American steel industry. The relatively slow

rise in productivity is associated with an in-
60 ● U.S. Industrial Competitiveness —A Comparison of Steel, Electronics, and Automobiles

5

4

3

2

Figure 5.—Average U.S. Wage Rates for Production Workers in Constant 1967 Dollars per Hour

SIC categories for computers, semiconductors, and

radio and TV were red~fined in 1967, accounting for Steei

the iarge changes from 1966 to 1967.

● - *

/

/

~./ ”

Computers . ~s .

---- -

\

?$

%-* - ~

He “ -

\

. 0 ’ “ % *

● ● ● ● ● * ● - ●

. -- ” ● 0 ● “ “ “ ““*.: *..%”.:*~K: ●

~ ~

. *

Aii U.S.

● ✎ ● OoO* .0

● *

● * ● .*

Radio :TV reoeivers

-~ -

1960 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 1980

Year

SOURCES All U.S. manufacturing-Employment and Earnings, 1909-1979 (Washington, D C Bureau of Labor Statistics, June 1980)

Electronics: 1960.65 -Employment and Earnings, 1909.1975 (Washington, D C Bureau of Labor Statistics, July 1976), 1970—U. S Census of Manufacturers, 1972; 1975 -79—Employment and Earnings, 1909-1979 (Washington, D C Bureau of Labor Statistics, June 1980).

Steel–Annual Statistical Report (Washington, D C American Iron and Steel Institute, June 1979)

Motor vehicles—Employment and Earnings, 1909.1979 (Washington, D.C. Bureau of Labor Statistics, June 1980)

creasingly obsolescent capital plant, among

other factors.

As in steel, auto industry wage levels have

been consistently above the all-industry average (figure 5). There the similarity ends—

mostly because the automobile sector has experienced productivity gains twice those in

steel (figure 4). Thus, the effects of higher

wages have been at least partially counterbalanced by improvements in output per manhour.

Except for consumer electronics, where

real wages grew far slower than productivity, there is little useful data for electronics

—again because rapid technological change

makes labor productivity figures of little

meaning. Those data that are available (e.g.,

value-added per worker-hour) suggest significant productivity gains in recent years compared to the very modest upward movement

in constant-dollar wages (real wages have actually declined in the computer industry).

Finally, the Japanese experience might

again be mentioned. Between 1973 and 1979,

average real wages in Japan increased about

10 percent. During the same period, labor

productivity increased by over 35 percent.

This suggests that in many Japanese industries, productivity has been increasing faster

than wages—with beneficial effects on competitiveness.
Ch, 4—Measures of Competitiveness in the Three Industries ● 61

Other Measures of Competitiveness

The data reviewed in the preceding sections provide a picture of international competitiveness from a comparative advantage

or relative cost standpoint. As discussed in

appendix A, there are other possible indicators of competitiveness, often of rather limited significance. Together these also suggest

a relative decline of U.S. manufacturing industries compared with major international

competitors, Several of these are reviewed

below.”

One of the measures examined in the “Productivity” section was physical output per

employee-hour (the BLS index), International

comparisons based on the growth rate of this

index show that manufacturing productivity

in the United States has grown far less rapidly in the postwar years than in many other industrialized nations—table 10. Note that

although aggregate productivity growth in the

United States has slowed in recent years,

manufacturing productivity increased at

about the same rate during the 1970’s as in

earlier years. Growth rates for all the countries tended to slow over the past decade, one

reason being rapidly rising energy prices,

which have affected Western European nations and Japan more than the United States.

Figure 6 demonstrates the long-term effects of slow productivity growth in the

United States compared to other industrialized countries. Here each nation’s real gross

domestic product (GDP) per employee is compared to the level in the United States, in-

.

‘h4, E. hlogee, Technology and Trude: Some Indicators of the

State of U S. Industrial {rmovation (Washington, D, C.: Subcommittee on Trade, Committee on Ways and Means, U.S. House of

Representatives, Apr. 21, 1980].

dexed as 100 (i.e., GDP per employee as a percentage of the U.S. figure). ~ These percentages are based on output figures originally

expressed in different currencies; when exchange rates shift, and when the shifts are

not directly related to differential inflation

rates, some distortion is likely. Similarly

when monetary systems move from fixed to

flexible exchange rates, there can be shortterm distortions. Thus, the trends over time in

figure 6 are more meaningful than year-toyear variations.

The data in figure 6 show that output per

employee in Japan is still only two-thirds that

in the United States; however, the Japanese

economy has grown at roughly four times the

rate of the U.S. economy since 1950. In contrast, the United Kingdom has grown at almost the same rate as the United States.

France and West Germany have doubled

their outputs compared to the United States

(but recall that it is always easier to catch

up). To the extent that a relative decline in

GDP is a gross measure of loss in competitiveness, the United States is losing with respect to its major competitors. But in comparison with Japan, all countries have been

declining, as also implied by the productivity

figures in table 10. At the same time, the

United States retains its absolute lead among

the countries included in figure 6.

There has also been considerable concern

about the relative state of American technol-

‘GDP consists of total goods and services produced within an

economy. The primary difference between GDP and GNP is

that GNP also includes the net of income of overseas investment overseas brought back to the economy of interest and of

foreign earnings that leave that economy,

Table 10.—Average Annual Rates of Productivity Growth in Manufacturing

(physical output per hour, all employees)

United West United

Time period States Japan France Germany Kingdom

1950-70 . . . . . . . . . . . . . 2.4 %. 10.1 % 5.2% 5.8% —

2,9”10

1970 -79..., . . . . . . 2.3 7.4 5.0 5.3 2.1

——

SOURCE Output per Hour, Hourly Compensation, and Unit Labor Costs In Manufacturing, Eleven Countries 19501979

(Washington, D C Bureau of Labor Statistics, December 1980)
62 . U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

Figure 6.— Real Gross Domestic Product (GDP) per Employed Person Relative to the

United States as 100

II

90 “

80 —

70 —

60 —

50 “

40 —

30 —

20 “

10 —

West Germany

● —* — ●

France

1950 55 60 65 70 75 1978

Year

SOURCE: M. E. Mogee, Technology and Trade Some Indicators of the State of U S Industrial Innovation (Washington, D C Subcommittee on Trade, Committee on

Ways and Means, U S. House of Representatives, Apr. 21, 1980), p 25 From BLS data

ogy. Leaving aside national defense, this appears to have two distinct thrusts. First,

technological advance is one source of product innovations. New and innovative products—resulting in part from R&D—have been

a mainstay in U.S. exports of manufactured

goods as well as in the expansion of American firms abroad. Now some observers see

the Nation’s strength in innovation waning.

Second, new process technology can be an

important means of lowering costs and improving productivity y.

Innovations of the more dramatic type

often lead to rapidly expanding sales, large

profits, and sometimes to entirely new industries. Early innovators have opportunities for

gaining market share and strong competitive

positions. Postwar examples include xerography, the transistor, and Polaroid photography. Process innovations may not attract as

much public attention but can be equally

important— continuous casting of steel, the

float glass process, robots for spray painting

automobiles.

It is difficult to compare the state of

American technology to that of other nations

except on an item-by-item basis. R&D expenditures can be used, but are a measure of the

inputs to activities directed at new products

and processes, not the outputs. In absolute

expenditures on R&D, the United States leads

the Western world by a large margin, as

table 11 illustrates. Not only does this country

spend more in absolute terms on R&D, but the

United States spends more as a percent of

GDP than its major rivals. The United States
Ch. 4—Measures of Competitiveness in the Three Industries Ž 63

Table 11 .—R&D Expenditures (all sources) as a

Percentage of Gross Domestic Product

196 7 1975

United States

Total . . . . . . . . 2.9 % 2.3 “/o

Military. . . . . ... 1,12 0.64

Japan

Total .. . 1.3 1.7

Military, ... . . ... . . ., 0.02 0.01

France

Total . . . . . . . 2.2 1.8

Military. .,,,. , 0.55 0.35

West Germany

Total . . . . . . . . 1.7 2.1

Military . . . . . . . . . . . . . . . . 0.21 0.14

United Kingdom

Total . . . . . . . . . . . . . . . . . . 2.3 2.1

Military. ..., . . . . . . . . . . . . . 0.61 0.62

SOURCE: Technical Change and Economic Policy(Paris Organization for Economic Cooperation and Development, 1980) p 30

does spend less as a percentage of GDP than

in the past, but total R&D expenditures in

constant dollars have not changed much

since 1966.’) Table 11 also shows that U.S. expenditures for military R&D are greater—

both in absolute terms and as a percent of

GDP—than in other countries, Although the

proportion of U.S. R&D effort devoted to defense-related activities has been going down,

it is still large, While some military R&D gives

results useful to commercial industries, not

all military technologies contribute to competitive strength.

Although R&D spending can be disaggregate in various ways, the relative contributions to competitive ability of basic research,

applied research, and development (the latter

receiving by far the largest expenditures)

—

“hlogee, op. cit., p. 8.

cannot be readily disentangled. However,

some observers believe that the United States

is now overemphasizing short-term R&D with

immediate payoffs at the expense of longer

term work aimed at maintaining the science

and technology base.

As table 12 shows, in the United States

only a small proportion of Governmentfunded R&D goes towards the advancement

of knowledge (i. e.. both basic and applied

R&D, but not directed at specific products or

processes). The table indicates that the two

strongest rivals of the United States in hightechnology industries-Japan and West Germany—devote more than half of all government-funded R&D to the advancement of

knowledge, while the U.S. spends less than 5

percent on this category. Of course, Japan in

particular spends little on defense.

In most nations the portion of total R&D

funded by industry which goes toward basic

research runs between 3 and 10 percent, ’

While industries in both Japan and West Germany spend a greater fraction of their own

R&D funds on basic research than in the

United States, the differences are a few

percentage points—not nearly as striking as

the divergence in government funding shown

by table 12.

To summarize:8

1. Total U.S. expenditures on industrial (including military) R&D have been rela-

‘Technoi{~gicai Change and Economic Poficy (Paris: Organization for Economic Cooperation and Development, 1980), p. 36.

“hlogee, op. cit.: also Technf)logic(]l (l[lnge und Economic

Policy. op. Cit.

Table 12.—Percentage Allocation of Government-Funded R&D by Objectives, 1975

— —. ——.—

Advancement Civilian

of knowledge Military in dust rya Otherb .—— -

United States. ... . . . . . . . . 3.90/0 49.8% 21 .30/o 25.0 %

Japan . . . . . . . . . . . . . . . 55.8 2.2 20.0 22.0

France ... . . . . . . . . . . . . . . . 25.3 29.5 25.8 19.4

West Germany. ., . . . . . . . 51,0 11.1 22.3 15.6

United Kingdom. ., . . . . . . . . 21.4 48,9 26.8 2.9

— ~c~~I Ian Industry Inct udes space

blncludes health, agriculture, and environmental Protection

SOURCE Techrrwa/ Change and Economic Po/lcy (Paris Organlzatlon for Economic Cooperation and Development 1980)

p 37
64 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

2.

3.

tively stable in constant dollars for

about 15 years. Private sector funding

has been rising at an average annual

rate of nearly 5 percent, while Federal

Government expenditures have been

falling since the late 1960’s with only a

slight recovery in the past few years.

Total R&D expenditures have been a declining portion of U.S. GDP for 15 years.

Other nations— e.g., West Germany and

These trends do not prove that relative

declines in R&D spending have harmed

U.S. competitiveness. Other countries have

increased their technological capabilities

through a variety of means—only one of

which is R&D (technology transfers—e. g.,

from the United States—are one alternative).

Nonetheless the coincidence of relative declines in funding for R&D and in industrial

competitiveness is disturbing.

Japan—have been increasing R&D expenditures both absolutely and as a per- On the other hand, the United States maincentage of GDP. Japan has recently set a tains a large and growing surplus of earnings

long-term goal of spending 3 percent of from licensing fees and royalties for technolits GDP on R&D. But in absolute terms, ogy. These data are shown in figure 7. Many

R&D expenditures in the United States receipts and expenditures simply represent

remain much greater than in any other transactions with foreign subsidiaries of U.S.

Western country. firms, Moreover, payments are often compenFigure 7.—Royalty and License Payments and Receipts of U.S. Firms

““”” ~

6,000

t

~ 5,000 —

.-o—

z

$2 4,000 — u)

.-Z

a

v

: 3,000 —

VI

z

: 2,000 —

2

1,000 — Payments

“l

1966 68 70 72 74 76 78 80

Year

SOURCE A J DiLuIIo, U S International Transactions, First Quarter 1980,” Survey of Current Business, VOI 60, June 1980, PP 32-33
Ch. 4—Measures of Competitiveness in the Three Industries Ž 65

sation for technology developed in earlier tions in fees and royalties is one of the few

periods. RCA, for example, still receives measures specifically related to outputs

roughly $50 million per year from Japanese rather than inputs of R&D and other activities

firms for color TV technology mostly dating directed a t innovation. No deterioration in

from the 1960’ s.” Still, the balance of transac- this balance is thus far evident. of course, it

is precisely the transfer of U.S. technology to

foreign firms [represented by the receipts in ‘R. A. Joseph. ‘‘ Automation Helps RCA and zenith keep

 Color-TV Leadership in face of lmports, wall, street figure 7) which some observers blame for

Journal. May 5. 1981. p.56. slackening U.S. competitiveness.

Summary and Conclusions

The measures of competitiveness examined in this chapter have been rather general

in nature— e.g., productivity across an entire

industrial sector. Many other factors are also

important for competitive ability—for instance, quality of management or the effects

of public policies. Factors of the latter type,

some of which are covered in later chapters,

often influence measures such as productivity.

Broad economic parameters such as productivity, wage levels, and aggregate R&D

expenditures are certainly important for international competitiveness; more rapid economic growth would help many American industries maintain their competitive positions.

Yet the fates of specific firms and industries

are only loosely related to aggregate economic growth. In the same way, the overall health

of the science and technology enterprise affects the competitiveness of many industries

—often in unanticipated ways. It is difficult

to link events in any one industry to science

and technology in general. Nonetheless, hightechnology industries, notably computers, are

large exporters and have also shown rapid

productivity advance; by any measure the

computer industry appears competitive. The

same is true for semiconductors, although

here exports and imports are nearly in balance. The competitiveness of both sectors has

been helped by wage levels that are low compared to automobiles and steel, However, I he

consumer electronics industry— also characterized by low wages—is, by the indicators of

international trade, the least competitive.

Possible explanations for the difficulties experienced by this sector are examined in

chapter 5.

Import penetration is not a new phenomenon in steel and automobiles, although imports have been steadily increasing, particularly in autos. The present competitive problems in the U.S. automobile industry have

causes which largely evade the measures examined in this chapter.

The steel industry has been harmed by

slow productivity growth and high wage levels; low profits have made it difficult to modernize, although new plant and equipment

could lower costs and improve productivity.

And, despite the relatively slow rate of productivity growth in steel, the U.S. industry is

on average competitive in its absolute labor

productivity with Japan. At comparable rates

of capacity utilization, the Japanese industry

would be superior; but since U.S. steelmaker

have in recent years been operating closer to

full capacity, their absolute productivity has

been comparable to that achieved in Japanese mills, In other sectors, productivity increases compare favorably with the rest of

U.S. manufacturing; lagging productivity

growth cannot explain the apparent slackening of competitiveness in sectors such as consumer electronics or automobiles.
CHAPTER 5

Industry-Specific

Competitiveness
— ——.—

Contents

Page

Overview. ● .**...***. .** *********.* 69

Steel . * . * . . * * *, . * . . * * * . * . . ., * *.......* 70

Prices and Wages . . . . . . . . . . . . . . . . . . . . . . . 70

Dumping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

Exchange Rate Effects. . . . . . . . . . . . . . . . . . . 73

Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

Demand Patterns . . . . . . . . . . . . . . . . . . . . . . . 75

Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Consumer Electronics. . . . . . . . . . . . . . . . . . . . 76

Semiconductors . . . . . . . . . . . . . . . . . . . . . . . . 82

Computers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

Technical Personnel. . . . . . . . . . . . . . . . . . . . . 90

Comparing the Sectors. . . . . . . . . . . . . . . . . . . 91

Automobiles ● . . . . . . ● ....0.. ● . . . . . . . ● .** 92

Imports and the U.S. Industry . . . . . . . . . . . . . 92

Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

Factors in Competitiveness . . . . . . . . . . . . . . . 95

Small Car Strategies of U.S. Firms . . . . . . . . . . 99

Summary and Conclusions. . ..............102

List of Tables

Table No. Page

13. Potential Influences on Industrial

Competitiveness . . . . . . . . . . . . . . . . . . . . . 69

14. Selected Currency Value Changes,

1971-74 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

15. Domestic Steel Shipments and

Employment, 1969 and 1979. . . . . . . . . . . . 75

Table No. Page

16. import Penetration in Consumer

Electronics, 1978 . . . . . . . . . . . . . . . . . . . . 77

17. Areas of Concentration of Japan’s

VLSI Program . . . . . . . . . . . . . . . . . . . . . . . 84

18. Comparison of the United States and

Japan in Digital Integrated Circuit

Technology . . . . . . . . . . . . . . . . . . . . . . . . . 85

19. U.S. Automobile Imports by Country of

Origin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

20. Motor Vehicle Production and Sales

Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

21. Distribution by Size of Sales in the U.S.

Automobile Market . . . . . . . . . . . . . . . . . . . 94

22. Distribution by Size of U.S. Automobile

Production . . . . . . . . . . . . . . . . . . . . . . . . . . 94

23. Numbers of Dealerships by Manufacturer 99

24. Fuel Economies of Domestic and

Imported Automobiles, 1979 . ..........101

List of Figures

Figure No. Page

8. indexes for Steel Mill Product Prices,

9

10

Consumer Prices, and Industrial

Commodity Prices. . . . . . . . . . . . . . . . . . . . 71

Indexes of Input Costs for the American

Steel Industry . . . . . . . . . . . . . . . . . . . . . . . 72

Employment in the American Steel

Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
CHAPTER 5

lndustry-Specific Competitiveness

Overview

Going beyond broad trends in indicators

such as productivity, this chapter examines

influences on competitiveness that are specific to each industry. Although chapter 4

touched on factors such as R&D, these were

treated in a general way. At the level of the

specific industrial sector—even more, the individual firm—competitiveness springs from

a diverse and complex array of influences.

Some of these act directly [e.g., quality and

reliability of products—themselves depending on other, more subtle factors), some indirectly (e.g., quality of the educational system, political and economic stability). A selection of these influences is listed in table 13.

While many are intangible—and few can be

quantified— all are important in determining

the competitiveness of particular firms and

industries. Public policies are woven into

many; however, policy effects are left largely

Table

Factor

1. Characteristics of industry

and market structure.

2 Characteristics of the labor

force.

3. Characteristics of

professional personnel

4. Availability of materials and

components.

5 Supporting Infrastructure

6. The environment for

innovation.

7. Business and economic

conditions.

8 Government Interact Ions

9 International trade relations

13.— Potential Influences on Industrial Competitiveness

Examples

The number of firms, their size and production facilities, and degree of concentration

and integration influence competition. Market structure includes the size, availability,

rate of growth, and degree of saturation of the market,

Both labor costs and availability of skilled workers are important; Government support

for the training and education of the work force can be critical, The nature of laborrnanagement relations, type of unions, and mechanisms for worker participation can

also influence productivity and competitiveness,

Quality of management and technical personnel are significant determinants of competitiveness. Important characteristics include: the attitudes and value structure of management; aggressiveness in developing, marketing and exporting products: and the

degree of interaction and cooperation within the firm among R&D, marketing, product

planning, manufacturing engineering, and quality control personnel.

Assured supplies of the inputs to the manufacturing process (iron ore, petroleum, electronics components) are important for planning and long-term stability. Domestic

availability versus dependence on imports can be important.

The infrastructure includes the vendors, subcontractors, other suppliers, and services

necessary to support complex technologicalIy based industries. Also Included are

basic research organizations and the level of Government support for generic R&D.

Factors that more directly affect the ability to innovate and the rate of technology diffusion Include: the interactions and synergies among firms within an industry (mobility

of personnel. licensing and other Interchanges of technology, openness to inward

transfers of technology and management know-how); and the existence of clusters of

skills as among the semiconductor firms in Silicon Valley.

Included here are Indicators of overall economic performance such as GNP or GDP,

levels of disposable Income, and inflation rates. The nature of capita/ markets (concentration of banking and credit) affect the ability of firms and industries to expand.

Also Important are less tangible factors such as consumer confidence, investment expections, and the general climate of political stability and social welfare,

Government regulations that impinge on factory work, supplies of resources, design and

sale of products, tax policies, Government procurement policies, and antitrust policies

and their interpretations all affect the attitudes and decisions of business. In addition.

more intangible factors which are nevertheless important include the tradition of

cooperation or conflict within and among Government, business, and labor.

Policies enacted by domestic and foreign governments affecting imports and exports

such as taxes on overseas profits, tariffs on imports and reimports after offshore

assembly, export credits and subsidies, exchange rates, policies toward technology

transfer, and nontariff barriers set the environment for international competition. international agreements and organizations often provide the framework for such policies.

69
70 . U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

to chapter 6. In the end, of course, competitiveness rests on the capabilities of individual

firms. Even a cursory review of variations

over the past few years in sales, profits, and

other indicators of success in industries such

as steel or automobiles shows how greatly the

performance of individual companies can

vary.

Each industry and each firm has attributes

that make it unique. Industries and firms develop attitudes, even cultures, which shift

over time. These are the backdrop for the

more concrete and quantifiable indicators of

competitiveness discussed in earlier chapters

and in the sections below. Thus, lagging competitiveness in steel has different causes than

lagging competitiveness in automobiles or

consumer electronics.

Just as the causes of shifts in competitiveness differ, so do the consequences—though

the most prominent in each case is loss of employment opportunities. Some of these losses

are irreversible without large increases in

production— increases that could only come

through exports. If high volumes of exports

are unlikely—as seems the case in industries

such as consumer electronics or steel—the

alternative is retraining and relocation of

workers. In fact, American industries such as

steel, consumer electronics, and automobiles

are experiencing structural unemployment in

its classical sense.

Steel

Prices and Wages

Chapter 4 compared the steel industry with

the electronics and automobile industries, as

well as with U.S. manufacturing in the aggregate. While labor productivity in the steel

industry has improved at approximately the

national average for manufacturing, hourly

wages in real terms have grown much faster

than average. In recent years, the industry

has agreed to wage increases diverging more

sharply from other sectors, even while import

penetration has been rising (figure 5). As

chapter 4 suggested, increased labor costs

should be reflected in price increases for

steel greater than price rises elsewhere in

the economy. Figure 8 indicates that this has

in fact occurred.

The chart compares price behavior in steel

to other parts of the economy. Beginning in

the 1970’s, steel prices rose considerably

faster than the general inflation rate as

measured either by the consumer price index

or the industrial commodity price index. This

is in marked contrast to earlier time periods,

when steel prices rose parallel to overall

price inflation. Moreover, prior to 1970, real

wage increases in the steel industry were

well below the industry’s productivity gains.

Despite the rapid price increases shown in

figure 8, profits for the industry as a whole

have been gradually decreasing; in recent

years the steel industry has been substantially less profitable than other U.S. manufacturing sectors.

In addition to wages, many of the other elements of production costs for steel have also

been increasing, particularly costs of energy.

Figure 9 shows trends for energy and material inputs to ironmaking and steelmaking.

While all the indexes show doubling periods

of 10 years or less, these rapid price rises do

not affect all firms equally. For example,

some integrated firms have their own reserves of coal and iron ore; nonintegrated

steelmaker are more heavily dependent on

prices of scrap and electricity, Nonetheless,

figure 9 demonstrates that price increases

for steel have been caused by rising energy

and materials costs as well as wage rate inflation. Although labor costs, including fringe

benefits, tripled between 1967 and 1978, the

costs of metallurgical coal went up more than

twice as fast.

‘Technology and Stee) industry Competitiveness (Washington, DC.: Office of Technology Assessment, U.S. Congress, June

1980], pp. 120-122. Profitability varies considerably from firm

to firm.
Ch, 5—industry-Specific Competitiveness ● 71

Figure 8.— Indexes for Steel Mill Product Prices, Consumer Prices, and

Industrial Commodity Prices (1967 = 100)

28C

250

200

150

x

2

—c

100

50

0

Industrial commodity prices

Average annual rates of change

Industrial

Stee/ ml// Consumer commodity

products prices prices

1960-65 0.20/0 1 .3°10 0,20/0

1965-70 3.2 4,2 2.7

1970-75 11.5 6.7 9.3

1975-79 9.2 7.8 8.3

1965 66 67 68 69 70 71 72 73 74 75 76 77 78 1979

Year

SOURCE Bureau of Labor Stat[stlcs

In other countries, real wages for steelworkers have also risen faster than productivity. Comparisons of wage and productivity

increases show that the American steel industry has done well compared to Europe.

However, the fraction of steel costs attributable to labor has risen in the United States

compared to Japan because Japanese productivity improvements have offset wage increases. ~

The United States has not exported much

lie~~~~~~ ~~) the President (m Primx (~nt~ (l)st+ in the [Jni~ed

St{lt~\ Steel ]n(iu~tr}r [~$’ashin~t[)n, 1). C.: Cc)unril (m L1’age and

Prire Stahility, October 1977], p, 45.

steel in recent years—in the vicinity of 3 million to 4 million tonnes annually, about half to

Canada and Mexico. Imports from these two

countries have been at about the same level,

indicating that the Canadian and Mexican industries complement this country’s, each supplying certain types of products to particular

regions or sectors. For example, about onequarter of Mexico’s imports from the United

States consist of pipe and other oilfield products, In other parts of the world, U.S. exports

have not been competitive, Some observers

say this is because the industry insists on selling goods abroad at prices covering full costs

rather than marginal costs.
72 . U.S. Industrial competitiveness—A Comparison of Steel, Electronics, and Automobiles

800

700

600

500

400

x

:

—

300

200

100

0

Figure 9.–indexes of Input Costs for the American Steel Industry (1967 = 100)

.

.

.

.

.

.

.

Metallurgical

coal

Steel scrap

/ ’

iron orea

(pellets)

1 1 1 I I I I 1 1 1 I 1 i I

1965 66 67 68 69 70 71 72 73 74 75 76 77 78 79

a

1969 = 100, Year

SOURCE Technology and Steel Industry Competitiveness (Washington, D C Office of Technology Assessment, U S Congress, June 1980) p 122, from BLS and

AISI data

Dumping

Dumping occurs when export prices are

set below home market prices, or in some

cases below costs. Since 1959, the U.S. industry has claimed that foreign steelmaker,

particularly European firms, have been

dumping steel in the United States,

Incentives for dumping are highest when

demand slackens and substantial excess capacity exists. This is because the incremental

costs of producing additional output can be

quite low, particularly if labor costs in the

short run are essentially fixed (see ch. 3).

Under such circumstances, the added costs of

maintaining relatively high production levels

can be small, and sales at any price covering

variable costs become attractive. At the same

time, firms in this situation prefer to sell the

excess output outside their usual markets, so

that price cutting will not affect established

pricing patterns. Circumstances thus combine to encourage dumping in export markets.

Moreover, government-owned steel firms—as

in some countries in Europe—can be supported indefinitely from public funds to maintain employment, even though unprofitable.

Dumping and other unfair trade practices

are restricted under the General Agreement

on Tariffs and Trade. Because low prices are

presumed to benefit consumers, dumped

goods are allowed to enter the United States

unless a domestic industry is injured. If injury
Ch. 5—/ndusfry-Speciflc Competitiveness ● 73

is found by the International Trade Commission, the Department of Commerce (formerly

Treasury) assesses an antidumping duty intended to raise prices to the U.S. market

level.

The steel industry, along with other domestic industries, has maintained that processes

for establishing both dumping and injury are

excessively complex and time consuming, and

that the injury test is overly strict. As a consequence, industry leaders assert, the law is

unworkable and does not effectively protect

them from unfair trade practices by foreign

firms. In 1977, largely in response to such

criticism, the so-called trigger-price mechanism (TPM) for steel was instituted to supplement existing antidumping laws (see ch. 6).

The TPM allows imported steel to enter the

United States as long as prices are a certain

percentage above the costs of the most efficient producer in the world market—then as

now Japan,

Whether U.S. antidumping remedies are

inadequate— in general or just for steel—is

too involved a question to discuss in depth,

but one or two points deserve mention, First,

the evidence compiled for OTA’S steel study

suggests that European mills, but not Japanese, do have higher average costs than

American steelmaker. On the other hand,

European firms historically have cut prices at

home and abroad when they have excess capacity. American producers, in general, have

not decreased prices in such circumstances,

preferring to follow full-cost pricing strategies. As long as there is excess world steel

capacity, producers in a t least some countries will have incentives to dump. However,

if world steel demand grows to meet capacity— as the OTA steel study finds possible{—

then dumping will cease to be a serious threat

to the U.S. industry. The real problem would

then be the lack of cost (and therefore price)

competitiveness with respect to the Japanese

and, potentially, with respect to new mills in

the developing world.

Exchange Rate Effects

The deteriorating competitive position of

the American steel industry in the late 1960’s

improved beginning in 1971 when the dollar

was allowed to float against other currencies.

For some time, the United States had persistent balance-of-payments deficits, in part because the dollar was overvalued with respect

to other currencies. When fixed exchange

rates were replaced by a floating exchange

rate system, the dollar fell against most currencies (table 14), improving the competitive

position of the United States in steel and

other industries. As the accumulated effects

of inflationary imbalances dissipated, the

relative prices of many American products

became more competitive.

Since 1971, exchange rates have been

largely market-determined. Over time, rates

have tended to mirror differences in inflation

among various countries. Although governments sometimes try to influence exchange

rates—because holding them below the market level will make their exports more attractive—such a strategy is difficult to maintain

for long in open currency markets.

Short-term fluctuations in exchange rates

about the long-term equilibrium level can also

influence competitive position. Between the

fall of 1978 and the spring of 1980, the average production costs of Japanese steel, converted to dollars, fell from about 8 percent

above U.S. costs to 23 percent below U.S.

costs as a result of swings in the yen/dollar

Table 14.—Selected Currency Value Changes,

1971-74

Par value— Rate—

August 1971 June 1974

$/currency $/currency Percent

Currency unit unit change

British pound $2.40 $2.36 – 1 8°0

French fran c 0180 0.203 12.9

German mar k 0273 0373 364

Japanese y e n 0.00278 00035 26,6

SOURCE: R H Mason R B. Miller. and D.R. Weigel The Economics of Interna

tional Business {New York: John Wiley & Sons. 1975} p 9 0
74 ● U.S. Industrial Competitiveness —A Comparison of Steelj Electronics, and Automobiles

exchange rate, qSimilar effects occurred in Employment

other industries, with obvious consequences

for the cost/price competitiveness of Japanese

imports in U.S. markets. While the Japanese

Government may have influenced such shifts

in the past, as Japan’s capital market becomes more closely linked to world capital

When competitive advantages shift, employment levels may change. Declining employment in the domestic steel industry has

often been blamed on increased competition

from abroad.

markets—an explicit goal of their govern- As figure 10 shows, total employment in

ment—currency rate pegging will become the American steel industry has fallen more

more difficult. than 20 percent since peaking in 1965. The —. -—..

“~. F. Marcus and K. M. Kirsis, “Tbe Steel Strategist, ” Paine rate of decline has been more than twice as

webber ~lit~hel] Hutchins, Inc., ]une 1980, p. 1. Quoted in u.s.- rapid for hourly workers as for salaried. Two

)opun Trade Report (Washington, D. C.: Subcommittee on

Trade, Committee on Ways and Means, U.S. House of Repre- questions are most important: 1) To what exsentatives, Sept. 5, 1980), p. 10. tent have imports been the cause of employFigure IO.— Employment in the American Steel Industry (annual averages in thousands)

600

550

500

450

400

350

300

250

200

150

100

50

0

.

.

Total employees

Hourly employees

Salaried employees

1 I I I I I 1 I 1 I 1 I i 1 1 1 1 1 1

1960 6 1 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79

Year

SOURCES Annual Statistical Report, American Iron and Steel Institute, 1978, 1979
Ch. 5—industry-Specific Competitiveness ● 75

ment decreases? and 2) What would be the

employment effects of higher domestic production?

Rising imports always decrease job opportunities. However, this is not the only factor

at work. Table 15 gives steel production and

employment for a pair of years a decade

apart. Shipments were higher in 1979, but

total employment fell by more than 100,000

because of increased productivity. Had domestic production replaced some or all of the

imports in either year, employment would

have been higher. But the basic conclusion remains: the most important cause of declining

employment has been rising productivity, not

increased imports.

This conclusion has significant policy implications, For the competitiveness of the

steel industry to improve, its productivity

must continue to increase, thus cutting costs.

However, the inevitable result would be further employment losses unless total production could be substantially increased. At current production levels, the goals of improved

international competitiveness and stable or

rising employment are fundamentally opposed,

The fact that policies intended to maintain

employment often work against increased efficiency is illustrated by the European experience. In Europe, despite subsidies or direct

government ownership, steelmaker have not

in general been able to achieve costs as low

as in the United States or Japan. Moreover,

the least competitive industries appear to be

those where political pressures for maintaining employment have been greatest. For exTable 15.— Domestic Steel Shipments and

Employment, 1969 and 1979

Domestic Tonnes

shipments Total shipped

(thousands employment per I report

Year of tonnes) (thousands) worker penetration

1969 85,165 554 154 14. 2%

1979 90,958 453 201 16. 1%

ample, the British steel industry, largely

owned by the government, lost $1.3 billion in

its latest fiscal year, and is reported to be

planning new layoffs totaling more than

50,000 workers.

5 Enhancing the American

steel industry’s international competitiveness, while certainly desirable, will not have

large positive impacts on employment,

Demand Patterns

The structure of demand for steel is changing in ways that are important to the competitiveness of the industry (ch, 7). Economic

growth is the most important determinant of

worldwide steel demand, but steel use does

not necessarily rise as rapidly as gross national product, For example, steel consumption in the industrialized world is now significantly less than in 1973, At the same time, in

the developing world, increased steel demand

has spurred the expansion of capacity. South

Korea, although still a minor producer on the

world scale, has quadrupled its steel output

in the last 5 years. Mexico and Brazil have

been adding steel capacity much faster than

the industrialized nations. In the future, all

three countries could be efficient producers

and potential competitors in world markets.

Even under the best of circumstances,

therefore, the American steel industry is likely to continue to diminish in importance relative to the rest of the world. It will share this

fate with the steel sectors of virtually all industrialized economies,

The developed countries appear to be in a

much stronger position in alloy/specialty

steels than in carbon steels. In part this is

because the demand mix for steel products

has also been changing in these countries. Demand for alloy and stainless varieties is rising

rapidly. Specialty steel use will continue to

increase—production of synthetic fuels, for

instance, will depend critically on specialty

alloys. Shipments of alloy steels now account

for over 10 percent of U.S. tonnage. There

‘Y. hl, Ibrahim, “British Steel Reports $1.3 Billion Loss,”’

New York Times, July 30, 1980, p. D 1. Some of the loss was due

to a strike: losses the previous year were only $735 million.
76 . U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

has also been a shift towards high-quality

sheet products as opposed to structural steel

in most of the developed world. These

changes partly reflect increases in the production of manufactured goods at the expense of construction, partly changes in applications. For example, increased demand

for fuel-efficient automobiles is affecting the

steel industry. Less steel is being used in each

car due to down-sizing and the substitution of

lighter materials such as aluminum and

plastics. The move to lighter cars is also stimulating demand for high-strength steels,

which are higher valued.

Despite the tradeoff between productivity

and employment, the decline in size of the

U.S. industry relative to the rest of the world,

and continuing pressure by other steel-prpducing nations, there are factors operating to

the advantage of the U.S. industry,

Changes i n demand toward highe r

strength, higher priced steels give the industry an opportunity to advance through

R&D. High-technology products, particularly

alloy/specialty steels, may offer new export

opportunities. Nevertheless, while the U.S. industry is probably on a par with other advanced nations in product technologies, it is

generally somewhat behind Japan and the

best of the European producers in the installation and use of process technologies.G

As the OTA steel study also shows, there

may be significant opportunities for process

innovations in the future—timely adoption of

‘Technology and Steel industry (Competifiveness, op. cit.,

ch. 9.

Photo credit: American Iron and Steel Institute

Electric furnace

which might give the United States important

technological advantages (some process innovations might, however, benefit other nations

more), In any event, modernization and updating of facilities would cost several billion

dollars per year— capital that does not seem

currently available because of the generally

poor profitability of the industry in recent

years.’ Attracting capital is a challenge that

the steel industry shares with electronics,

automobiles, and other sectors of U.S. industry—all of which compete for investment

funds,

‘Ibid., ch. 10,

Electronics

Consumer Electronics

More than any other segment of these

three industries, foreign competition has had

major impacts on consumer electronics. As

noted in chapter 4, large percentages of virtually all consumer electronics products sold

in the United States are manufactured

abroad. Table 16 gives figures for 1978; imports would have taken much more than 18

percent of color television sales for that year

if the Orderly Marketing Agreement (OMA)

with Japan had not caused Japanese firms to

switch to assembly in the United States, Furthermore, table 16 understates the significance of imports because many products assembled in the United States and counted as

domestic production include substantial
. .—-

Ch. 5—Industry-Specific Competitiveness ● 77

Table 16 .—Import Penetration in

Consumer Electronics, 1978

Imports as 0

/0 of

Product U.S. consumption

Videotape players/recorders . . 100%

Household radios ... . . . 100

CB radios ... ., ... ., 90

Black and white TVs ., 85

Electronic watches . . 68

High fidelity and stereo components 64

Phonographs and compact stereo systems 43

Audio tape recorders 35

Microwave ovens ., ., . 25

Color TVs ., . . . . . . 18

SOURCE The U S Consumer Electronics Industry and Foreign Competition.

Executive Summary final report under EDA grant No 062 6

07002 10 Department of Commerce, Economic Development Administration May 1980 p 2

foreign value-added. Not only components

and subassemblies such as circuit boards,

but complete chassis are often imported,

though most picture tubes are still made in

this country.

Because of rising imports, increased productivity, and the movement by U.S. firms

toward overseas production to control costs,

employment in consumer electronics has declined dramatically since the mid-1960’s. The

work force today is barely half the size of 15

years ago, Employment has recently increased slightly, but this has been the result

of OMAS insulating the U.S. TV market.

The Move Overseas.—TV receivers—color and monochrome—account for nearly half

the total market value of consumer electronics products in the United States; this segment typifies the factors affecting the entire

industry.

The first major threat to American manufacturers of TV sets came from Japan, Within

Japan, the Ministry of International Trade

and Industry (MITI) encouraged and helped

to finance the development of transistorized

TV designs during the 1960’s.8 While much of

this work was carried out in the laboratories

of Japanese firms, the basic color TV technology was licensed from U.S. consumer electronics manufacturers.

——

“E. Sugata and T. Namekawa, “Integrated Circuits for Television Receivers, ‘“ IEEE Spectrum, hlay 1969, p. 64.

Phofo credlf RCA

Worker uses an air pressure lift to hoist

a 25-inch picture tube Into a console cabinet

Replacing vacuum tubes with semiconductors complemented the overall strategies of

Japanese manufacturers. These strategies included the development of large export markets, creating economies of scale. The advantages of transistorized chassis designs (which

were developed at the same time in the

United States by Motorola) included:

1. Lower manufacturing costs (though at

first the transistors themselves were

more expensive than the vacuum tubes

they replaced), the benefits tending to be

magnified at higher production levels because assembly could be automated

more readily.

2. A far more reliable product [primarily

because of the intrinsic reliability of

transistors), reducing the servicing re-
78 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

quired. Japanese firms thus did not need

extensive networks of repair facilities in

their export markets.

The initial Japanese penetration into the

United States focused on particular market

niches, notably small-screen sets and private

brands (sets sold under the trade names of

retailers such as Sears), where low price was

critical. Sony, the one exception, chose instead to stress high quality and a prestigious

image. Import penetration was accompanied,

as for steel, by dumping complaints brought

by American firms. The dumping issue is discussed in more detail in chapter 6. While

dumping has been proven under U.S. law, it

has not been an overriding factor in the success of Japanese TVs in the marketplace.

Prior to the rapid sales gains of imported

TV sets, the American market had been dominated by franchised dealers carrying wellknown brand names. However, the Japanese

chose to sell through alternative channels

such as discount outlets where price was important. Here their reliability advantage

came into play, because discount stores rarely offered servicing. The strategy was not

without risk, since reliability problems would

have reinforced the rather skeptical view of

Japanese products then held by many consumers.

As imports found increasing success,

American manufacturers responded to the

competition’s strengths: quality, reliability,

and low production costs. American firms

typically combined rapid adoption of transistorized chassis designs—more rapid than

might otherwise have been planned—with a

search for lower cost production methods.

Given the spectrum of available production

technologies, most U.S. firms chose to lower

their costs by moving some of their manufacturing to foreign countries. Low wages were

the driving force. While tax havens offered

by foreign governments-and U.S. tariff policies that limit duties on reimports after offshore assembly to the value-added overseas

—may have encouraged transfers abroad,

the basic motivation was to reduce labor

costs.

Photo credit RCA

Robot handling TV picture tubes

As if to emphasize that American manufacturers had little choice but to transfer production overseas, the Japanese now find

themselves in a similar competitive bind.

With wages in Japan rising rapidly, Japanese

electronics firms are losing their cost advantages. Faced with increasing competition

from rapidly industrializing nations such as

Taiwan and South Korea, the Japanese are

establishing assembly facilities elsewhere in

the Far East. To some extent, moves to other

countries were stimulated by OMAs, which

at first applied to Japan alone. But even

without OMAs, the transfer of production

would have become necessary. The United

States is not alone in being affected by changing patterns of comparative advantage: Japan

has also been a victim—now in consumer

electronics, earlier in textiles and shipbuilding, soon perhaps in steel.

Japanese TV manufacturers now have

products that rank among the best in features
Ch. 5—industry-Specific Competitiveness ● 79

and performance, as well as reliability and

freedom from service,9 Thus there now seems

rough technological parity, with Japan equivalent to the United States in product technologies, perhaps superior in process technologies, (Some observers claim that the Japanese are ahead in the use of automation, but

little directly comparable data exist,)

Success in the TV market has also given

the Japanese an easier entree into markets

for other electronics products, as well as carryovers into different industries, Consumers

now seem to perceive many Japanese products as good values—well designed and of

high quality for the price—whether electronics, automobiles, cameras, or motorcycles.

Research and Development.—R&D leading

to transistorized chassis designs was an important part of Japanese success in TVs. In

the United States, consumer electronics firms

have not recently seemed vigorous in their

R&D efforts, although firms such as RCA and

General Electric have high overall levels of

technological capability. In any event, there

are signs that consumer electronics R&D has

declined in the face of falling profits, Fewer

than 1 percent of the employees in the U.S.

radio and TV sector, for example, are engaged in R&D. In the electronic components

sector, which includes semiconductors, the

figure is 3 percent, Significantly more R&D

personnel evidently work on consumer products in Japan. In some respects, the American

industry seems caught in a downward spiral

—low profits leading to cuts in R&D, which in

— — — ,’ ‘ 1 (]. [ll(l, ( :t)]t)~ ‘{’\’ S,’ ‘ (l(~fli[]nl[~r fie~)orf~, ]:lnu;)r} 1981, p.

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lif~])f)r(i, \f,ir( t] 1 ‘180, p. 205. f;{;:]tl]rt>s [sll(ll ;IS rcn]{)lf~ I uning)

:) ncj pfj r ft ) r-m: I n ( I ! ( p i c ~1 II r[~ ( h; I r{i ( ~I t!r]s tits ) :1 r~l m [ ls t I \ m;1 t t [;rs

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s(?f~m II) tl,lk’f~ h:l(i t) f:ll[~r rf!lr; lt)lll t}: whilf~ [1, S. pro(iu(ls hi)l’(~

sin(() lmpro~’(; (i, J;i~)iir)[~s[~ firms Il;iv(’ r~rd(~ntli t)(~[:n :it)l[~ to

m:{ I r] t{{ ir) t hoi r (’[IH(I Irl r(’lr, ~ t)i I I 1 \

turn may lead to fewer product innovations

and still poorer performance. The question is:

Can the situation be turned around?

The answer may be no, The United States

is the world’s largest market for video cassette recorder/players, a technology that

originated in this country; but these products,

even when sold under American brand

names, are all made in Japan. The next major

new consumer electronics product will be the

video disk player. Although the technology remains in flux, Japanese firms are working on

all three of the systems being developed.

Given their demonstrated ability to rapidly

bring new products to market in volume and

at low cost, the Japanese may eventually dominate this technology as well. Even if U.S.

video disk technologies such as the RCA system emerge as winners in the marketplace,

production may move overseas—either to

American-owned offshore facilities, or to foreign companies manufacturing under license.

Why are American firms—apparently at

the forefront of electronics technologies—

displaced when products move from R&D to

commercialization, and especially to manufacturing and marketing? One common response centers on production costs, and suggests that the United States simply cannot

match Japan in the manufacture of high-quality products at low cost; it is an old answer

with some new dimensions. At one time, for

many industries, it was claimed that Japan’s

competitiveness was based on cheap labor,

Today this seems less important. Instead,

Japan’s ability to produce at low cost is often

attributed to scale economies and experience

(the learning curve phenomenon), and to advantages gained through horizontal and vertical integration— as well as to abundant supplies of investment capital, The export orientation of Japanese firms, and home markets

that have been protected—more so in the

past than currently—are also factors.

The overall scale of the leading Japanese

consumer electronics firms is considerably

larger than that of their American counterparts because the Japanese market their
80 ● U.S. Industrial Competitiveness —A Comparison of Steel, Electronics, and Automobiles

products worldwide.’” Manufacturers in Japan thus have potential advantages in economies of scale and experience, regardless of

where their production facilities are located,

To raise production volumes to match the Japanese, American firms would have to compete worldwide with the Japanese—and the

Taiwanese and Koreans. At this late date,

that seems unlikely,

The structural characteristics of Japanese

firms may also contribute to their performance. Major consumer electronics manufacturers in Japan also make other electrical and

electronics products. This integration can in

principle yield R&D synergies, as well as

learning economies in component production.

Most Japanese TV-makers produce their own

semiconductors; at least in theory, semiconductor developments can be closely coupled

to the needs of the consumer division. At the

same time, consumer goods provide a readymade market for new semiconductor devices,

removing much of the risk from their development.

Vertical integration linking consumer products and semiconductors also has negative

aspects. The strength of the United States in

semiconductors has often been attributed to

the dynamic, entrepreneurial character of

domestic merchant semiconductor firms. In

the United States, large integrated electronics companies such as RCA and GE have not

been notably successful in semiconductors,

Often, a lack of flexibility is blamed.

Large integrated firms in Japan have developed their own ways of achieving flexibility:

use of supplier firms, affiliates, and subcontractors; extensive training programs for employees; and a wage system in which a substantial fraction of annual pay may come as a

bonus. Combined with employment policies

which give many employees high job security,

Japanese firms can move into new areas without creating anxiety in their work force or

destabilizing existing activities. Further contributing factors are management systems

that diffuse responsibility widely, so that corporate risk-taking need not imply personal

risk-taking; managers do not feel tied to the

income statement for the next quarter.

While vertical integration in any country

carries both advantages and disadvantages,

it does appear that long-term success in the

consumer field will require at least some internal capability in semiconductors. ICs are

now central to the development of new products. Digital audio, digital TV (the Philips

video disk uses digital encoding), electronic

toys and games, calculators, home computers—all depend on semiconductor technology;

11 many of these products are inconceivable without large-scale ICs. (Texas Instruments is an example of a vertically integrated

U.S. firm strong in nontraditional consumer

products while not making Tvs at all,)

The Future. —Consumer electronics manufacture in the United States has declined

markedly; the remaining production is often

little more than final assembly. Firms such as

RCA, with its video disk, and Zenith, which is

entering the home computer market, are certainly not conceding consumer products to

foreign competitors: both have also maintained their historical market shares in color

TVs. Nonetheless, the traditional home entertainment sector of the industry seems less

than dynamic.

When other U.S. firms—mostly semiconductor manufacturers—have attempted to

enter consumer markets, they have not always succeeded. The difficulties encountered

by new entrants with products such as hand

calculators and electronic watches resulted

partly from foreign competition, partly from

lack of experience in consumer markets, In

some cases, products have been designed

with little marketing research—perhaps because the companies involved were accustomed to dealing with technically sophisticated purchasers whose needs they under-

‘Whe U.S. Gmsurner Electronics Indmstry (]nd Foreign CorIpetition, final report under EDA grant No. 06-26-07002-10, Department uf Gmmerce, Economic Development Administra

tion, Nfa}’ 1980. p. 27.

‘[hf. Kikuchi and Y. Kawana, “VLSI in Ccmsumer Electr(mics, ” IEEE Trwnsuctions on Electrfm Devices, vol. ED-26, April

1979, p. 279.
Ch. 5—industry-Specific Competitiveness Ž 81

Photo credit National Semiconduct Corp

Workers in a clean room testing semiconductor wafers

stood. The Japanese have made such mistakes enter markets, such as radios and TVs, alin the past, but are now more careful in their ready served by other companies, but develefforts to anticipate consumer preferences. oped entirely new products. Such patterns

will probably continue because this is where

Were forward integration by U.S. semicon- the greatest opportunities lie. New products

ductor manufacturers to continue—and be offer rapid market growth and the chance to

successful—the structures of both consumer establish a strong position ahead of the comand component markets would change. In the petition. Costs of production are not so imporpast, semiconductor firms seldom tried to tant when a firm can market unique products
82 ● U.S. Industrial Competitiveness— A Comparison of Steel, Electronics, and Automobiles

or otherwise attain a technological advantage.

At the same time, today’s new product is

tomorrow’s mature one, and maturity tends

to bring intensified competition. The U.S.

market remains the largest in the world and

will always be an attractive target; so long as

Japanese consumer electronics firms are safe

from foreign competition in their domestic

markets (and in many other parts of the

world) they will be a formidable presence

here. American semiconductor and computer

firms have demonstrated the advantages—

perhaps now the necessity—of competing on

a world scale, The same may be true in consumer electronics.

Semiconductors

There are really two semiconductor industries—one consisting of firms selling in the

open or merchant market, the other comprised of the semiconductor divisions of integrated companies. The latter may produce

exclusively for internal use (captive production), or sell on the outside as well.

Most of the firms in the merchant market

began as independent, entrepreneurial concerns. Many have since been acquired by

other companies; but the industry is still typified by manufacturers such as Intel (which

remains independent), and Fairchild (now

owned by Schlumberger, a French concern).

Headquarters for most of the merchant firms

are in “Silicon Valley, ” near San Francisco.

The largest of the captive producers are

IBM and Western Electric; each is strong in a

variety of product and process technologies.

Most computer firms design and produce

some of their own semiconductors, often lowvolume custom ICs; many other companies

are also integrating into semiconductors to be

able to supply at least some of their own

needs and to have in-house R&D capability.

Some vertically integrated electronics firms

—e.g., Texas Instruments and Motorola—

also sell large numbers of semiconductors in

the merchant market. Other systems-oriented

firms which make and sometimes sell ICs

include Lockheed, Rockwell, and Westinghouse.

The number and diversity of firms which

design and produce semiconductors attest to

the importance of this technology, A strong

case could be made in favor of semiconductors and their applications as the technologies most vital to a modern industrial economy.

Although captive semiconductor operations are a substantial source of technological strength for the United States, there is little data available for captives that bears directly on competitiveness. Thus, as in chapter

4, much of the attention below focuses on

merchant firms. Nonetheless, captives account for 40 percent of domestic IC production.12

Despite recent large increases in semiconductor imports from Japan and the Far East,

particularly ICs for computer memory such

as the 16K RAM, the indicators examined in

chapter 4 revealed no evidence of competitive

decline by the United States. The 16K RAM is

a high-technology device, demanding state-ofthe-art processing capability, but at the same

time is a standardized, commodity-like product, As mentioned in chapter 4, Japanese

firms evidently have claimed more than 40

percent of the U.S. market for these circuits.

The Japanese achieved this penetration by offering high-quality, competitively priced

parts at a time when U.S. manufacturers

could not meet the demand, The most important reasons for capacity shortfalls by U.S.

firms were a reluctance to add new capacity

in the wake of the 1974-75 recession, and

market demand that was considerabl y

greater than projected.13

While semiconductors continue to epitomize U.S. competitiveness, there is concern

‘G)mpetjtive Factors Influencing World Trude in lntegr(]ted

Circuits, publication No. 1013 (Washington, D. C.: U.S. Inlernatiorml Trade Commission, November 1979), pp. 82, 84. The percentage has been relatively stable over the past few years.

‘ “’Effect of RAM Imports Into U.S. Disputed; Shortages Nfav

Trigger Increases in Prices,”’ Electronics, Nov. 8, 1979, p. 40.
..-—-

Ch. 5—Industry-Specific Competitiveness ● 83

Photo credits Texas Instruments

Scanning electron micrographs of memory cells for

a 64K random access memory (RAM)

for the future of even this sector.’” It is not

based on any perception of imminent distress

in the domestic industry, but rather on the extraordinary efforts by companies and governments elsewhere to match or exceed the

United States. Production of ICs in Japan has

recently grown even faster than in the United

States. Through May 1980, Japanese IC production was up 50 percent over 1979: investments by Japanese semiconductor firms dur-

], ~jrcsscr, }{lgh ‘[’p~ hn~Il~I,q~ fImi jfI]J(IrIP~e ln{iuttr]fll PojIrLI:

A S t r( J t[> x \ f~ ~r [‘ S Pf JIlf ;’m ~Ihr r> (\\’;) sh i I]E t ( )n, 1), C 1.: Sut]t’[ ~mml t tcc on ‘t’r:\{it; . ~~(~mm ] t tce t )n Llravs i~nd hleans, [~,S. I I []us[; of

Rt;[)r[:sf?rllilttk(;s. [)(t, 1, 1 980),

ing the 1980 fiscal year were scheduled to increase their production capacity by a further

60 percent. 1’

Foreign Competitive Efforts.—As a result

of the importance of semiconductors, both

commercially and for national

ernments in virtually all indu

tions have been concerned lest

become a U.S. monopoly.

Such worries have not bee

defense, govstrialized nahe technology

1 entirely unfounded. World semiconductor sales grew 23

percent last year— ICS even faster—and are

expected to increase another 15 percent in

1981, ’t) When technology-intensive products

experience market growth at rates this high,

it is quite possible for some firms—and some

nations—to fall behind and never catch up

(until the technology stabilizes). Many of the

earlier entrants in the U.S. semiconductor

market experienced this fate—including a

number of large and capable firms—and

either accepted a secondary position in the

industry or withdrew from the marketplace.

In 1978, nearly one-half of European semiconductor needs—and well over half in ICs—

were supplied by exports from the United

States or by European subsidiaries of American firms. Many European governments have

been concerned lest they fail to maintain

viable indigenous semiconductor industries; a

number have established government support

programs, as has Japan.’; These programs

have sometimes included protective trade

barriers, as well as government-funded or

subsidized R&D. For example, in Japan, MITI

has sponsored a 4-year cooperative R&D program aimed at very large-scale integrated circuits (VLSI), one of a number of governmentsupported efforts to enhance the technological capability of the Japanese electronics industry.

—.

‘ ‘‘Ilmming S~?nll((J1l[i~]ftor Inclust r]~?s, ‘1’hclr h’uturt~ E\,~nllned,”’ J(I~)(In Rr])f)rt, Joint Pul]l]r:ltions R[’s{’:~r[h Srrvi(e, JI]RS

1, !l:i 14, Sept. 26, 1980, p 41.

‘t 1981 \\’lm]{] hi/I rkct F’orc(’[]st, J~)m;lr(mic,\. J:]n. 13, 19B 1,

pp. 121-144, ‘1’ht? pcr(f?nlci~cs IIr(: for the United St:] tes, }:]pan,

d nd tl’es t crn F,u rtjpc, w h] (h [~ (’roun t for most sales.

‘ ,tf][r[)[Jl[~(tr(~rllcs Into [hf~ [\(J’\ (I,utorl, En~land: Nlarkintosh

Publi( at ions I,to., Scpternb[:r 1‘179~.
84 ● U.S. Industrial Competitiveness —A Comparison of Steel, Electronics, and Automobiles

Japan’s VLSI cooperative program involved five leading electronics companies; the

government-sponsored portion of the effort

ended in the spring of 1980 after expenditures reported at about $250 million—shared

between industry and government. Some of

the MITI funding is supposedly to be repaid in

the event of commercial success; other government funding came in the form of loans. A

follow-on project aimed at the commercialization of the VLSI technology developed has

now begun.18 Scheduled to take 3 years, no direct government funding is involved, although

incentives such as tax writeoffs are being

continued.

Government support programs in other

countries tend to follow similar patterns.

Some emphasize applications of ICs rather

than R&D on the devices themselves or on

processes for making them. Because the

Japanese program appears to have been the

most successful, and because the Japanese

are widely perceived as the only real threat

to U.S. supremacy in semiconductors, U.S.

and Japanese IC technology are compared in

the next section, with particular attention to

the outcomes of the VLSI program. (This subject will be treated in more depth in the forthcoming OTA electronics study. )

U.S. and Japanese Semiconductor Technology. —Both discrete semiconductors and

ICs were invented and commercialized in the

United States. Virtually all major innovations

in semiconductors have originated in this

country. 19 American firms have also dominated worldwide sales, still holding more

than 60 percent of the world market—a classic example of a technology gap creating the

conditions for an internationally competitive

industry, Note that this world leadership by

the U.S. semiconductor industry occurred

while domestic companies competed fiercely

among themselves—a competition that has

1ti’4Seven Private Firms Turn Attention to M?iking VLSI Circuits. ” )qmn Econ(~mic Journol. Aug. 12, 1980, p. 7.

‘‘A Itep~jr/ on the Lr. S. %miconduct[)r lndustr}’ (Washington,

L).(;.: Department of Commerce, Industr}r and Trade Administration, September 1 979), p. 100.

embraced price cutting as well as rivalry in

device designs and process technologies.

Although the United States had at one time

a technological lead in semiconductors over

the rest of the world amounting to several

years—a lead that the United States still

largely possesses over Europe—the Japanese

have managed to close the gap. They are now

in many cases at or near technological parity

with the United States, and their market

power is rapidly increasing. One important

force in Japan’s ability to catch up was the

captive market for semiconductors provided

by her strong consumer electronics industry.

However, the discrete devices and linear ICs

used in consumer products are not as critical

to competitive success in semiconductors as

the digital ICs that go into computers and

other advanced systems. Japan’s VLSI cooperative program was intended to strengthen

her capability in digital ICs, with the goal of

creating a technological base in VLSI adequate to support a globally competitive computer industry.

The VLSI cooperative program concentrated on process technologies, as shown by

table 17, rather than device technologies.

One reason for the Japanese to emphasize

processing may have been to get better cooperation among the participating firms. Although process technology is critical to competitive success in ICs, there is less proprietary knowledge than for product designs.

While it is difficult to locate sufficient information for sound judgments on the technological results of the VLSI program, there

Table 17.—Areas of Concentration of

Japan’s VLSI Program

Process technologies–

Electron-beam and X-ray lithography

Super-clean facilities

Large-diameter perfect crystals

Improved evaluation techniques for crystals

Oxide growth and removal techniques

Device technologies

Logic design

Simulation

Circuit layout

—

SOURCE: VLSI Technology Research Association
Ch. 5—industry-Specific Competitiveness ● 85

seems to be a consensus in the American

technical community that the Japanese have

made substantial progress. Although they

probably did not reach the goals originally

set, the work of the VLSI laboratories in

lithography and lithographic equipment is

particularly well known.

Nor is it clear to what extent the VLSI program itself was responsible for advancing

Japanese capabilities, as compared to the

progress that would have been made anyway.

The five firms involved are leaders in the Japanese industry, with active R&D programs

and excellent capability. Most likely, the

cooperative program did not have extraordinary impact—at least in terms of direct technological payoffs, For one thing, the funding

level—somewhat more than $50 million a

year—was simply not that high (only half of

what some individual companies in the United

States, such as Texas Instruments, spend annually on R&D),

In judging the results of the VLSI program,

one might also question the extent to which

the participating firms would have contributed their best people and best ideas. Japanese firms normally compete strongly with

one another, There is no reason to believe

that they would willingly share knowledge

that might give competitive advantages. Because of the goal-oriented nature of government-industry relations in Japan, the psychological influence of the VLSI program was

perhaps as important as the technical outcomes. That is, by providing a highly visible

unifying locus for Japan’s semiconductor R&D

efforts, the program may have helped stimulate the technological progress of the entire

industry, The anxiety aroused within the

United States by the VLSI program would

have strengthened this effect.

What, then, is the current state of Japanese IC technology relative to the United

States? While not an inclusive listing (e.g., it

refers primarily to digital MOS technologies),

table 18 gives comparisons on several dimensions, based largely on discussions with

American engineers. Comparisons, as in this

table, always come down to matters of judgment, and there are bound to be disagreements; for example, some sources claim that

Japan is ahead in silicon materials—i.e,, the

ability to understand and control the properties of the crystals from which ICs are made.

The breadth of the categories also obscures

important distinctions—for example, U.S.

firms clearly lead in some types of memory

circuits. These caveats do not alter the primary message— that Japan has made considerable progress toward closing the technology gap in ICs.

The United States is ahead of Japan in 2 of

the 10 categories included in table 18, behind

in only l—deep ultraviolet lithography, a

technology American firms have largely

chosen not to pursue. (The quality question is

discussed more fully below.) The majority of

the categories in the table deal with processing. Much of the equipment used to make

semiconductors is designed and built by independent firms— mostly American—selling on

a worldwide basis, Therefore the Japanese

have access to essentially the same process

technology as U.S. semiconductor manufacturers. However there is a good deal of knowledge and experience needed to use the equipment to best advantage; the table refers in

large measure to this sort of capability.

The judgments in the categories for design

of memory circuits (e. g., RAMs) and microprocessors are generalizations concerning

Table 18.—Comparison of the United States and

Japan in Digital Integrated Circuit Technology

..—. -

Process technologies – - ‘

-

.

Electron-beam lithography . . . . . . . . . . . . . . . =

X-ray lithography ... . . . . . . . . . . . . . . . . ., . . . . . =

Deep ultraviolet lithography ., . . . . . . . . . . . . . . –

Resists . . . . . . . . . . . . . . . . . . . . ... . ., =

Quality control . . . . . . . ., . . ., ., . . ?

Silicon materials ... . . . ., . . . . . . . . . . . . . =

Automated assembly, . . . . . . . . . . . . . ... . . =

Product technologies

Computer-aided design capability ., . . ., ., ., . . +

Memory circuit designs. . . . . . . . . . . . . . . . . . . . . . =

Microprocessor designs . . . . . . . . . . . . . . . . ., +

+ United States ahead

United States behin d

= Rough parity

~ See text

SOURCE H C Lin for OTA electronics study
86 ● U.S. Industrial Competitiveness —A Comparison of Steel, Electronics, and Automobiles

relative capability to design and develop new product in which the Japanese have often

circuits, not to manufacture them. Designing proved their strength. At the same time, new

and building memory circuits is demanding; standard memory circuit designs have alnonetheless, these ICs are relatively

ardized, commodity-like devices—the

stand- ways come from U.S. firms. While Japanese

sort of manufacturers have proved they can keep up

Photo credit Intel Corp.

8-bit microprocessor
Ch. 5—Industry-Specific Competitiveness ● 87

in this technology, they have yet to design a

circuit that has become accepted as a

standard,

Microprocessors are more difficult to design than memory. The evolution of memory

circuits is relatively predictable, at least at

present. Microprocessors make greater demands on ingenious design, capacity to innovate, and marketing ability, One of the keys to

designing and marketing a successful microprocessor is anticipating the needs of the

user; programing ease and flexibility of

application —which in turn depend on factors

such as instruction sets, architecture, and

speed—are important attributes. The United

States has always been strong in these areas;

thus, it is no surprise that it leads Japan in

microprocessors, While it would be wrong to

assume that the Japanese cannot innovate in

microprocessors or digital logic, there is little

evidence that they have yet done so.

One other technology in table 18 might be

singled out—computer-aided design (CAD).

Designing ICs becomes much more complex,

time consuming, and expensive as levels of integration go up. CAD can improve design productivity. This technology—which uses computer software developed especially for circuit design applications—is also one in which

the United States is now ahead. CAD will be

extremely important for future competitiveness; the present lead is reassuring but needs

to be maintained,

The question of IC quality and reliability

will be treated at length in the OTA electronics study, but also deserves mention here.

Quality refers to the percentage of ICs which

meet specifications and function properly on

delivery. Reliability refers to frequency of

failure in service or average life before failure. Ample evidence exists that, in the past,

Japanese ICs sold in the merchant market had

higher quality. ’(’ However, the reliability of

U.S. as compared to Japanese ICs is a more

clouded issue. American firms claim that —

I tll’ [11051 (1[’,l[lliitl( [!,1 I,i tlri> 1)[’(:11 [)r(}~(~])l(’(! i)~ ,11) (’X()( 11-

IIV(I of ;II) An][’r(( ,111 firm. 11(IwIII1 t-P;lfk;ir(i. S(x’ R. ( :I)I)I]IIIIL.

‘“ l~IP;In~wI: kl:lk~’ Qll(llll~-[:olllr(ll Plt(h,” f,lo~ (r(ml( ~. Apr. 10,

1‘)80, I). 81. Alst~ ‘‘11[)’s Anderson ( ;;] Ils Qu:II i IV ( ;omp(~l i I Ion ;]

‘f lors(~ R:I( (I. ’ }lfI( lrorlff \ \l(I\ I (1, 1981. p. 128,

their reliability has always been as good as

the Japanese; however, the Hewlett-Packard

data—as well as some but not all of the data

developed for the OTA electronics study—

indicate that Japanese firms may also have

had better reliability (for RAMs). Unfortunately, no information is available concerning

the quality and reliability achieved by largescale captive producers in the United

States—one reason for the question mark in

table 18. Firms making semiconductors for

their own use have high incentives to maximize quality and reliability because the costs

of downstream failures escalate rapidly.

While almost everyone concedes that Japanese quality was at one time better, the U.S.

industry claims now to be matching Japanese

levels of quality, This assertion cannot be

verified; but it does seem that the Japanese

remained slightly ahead into early 1981. The

reasons for the (past) differences are several,

but in the end come down to the strength of

management’s commitment to quality as a

goal of production. Whether improvements in

quality add significantly to net manufacturing costs is an important question but one

that cannot be answered without a great deal

of proprietary data.

The most important facet of the quality

issue for competitiveness in semiconductors

is the parallel with Japanese penetration of

U.S. TV markets. There too, Japanese firms

entered the United States with higher quality

(and higher reliability) products that helped

them gain market share. Although the U.S. TV

manufacturers eventually caught up, the Japanese had already established themselves

—and remain strong competitors. It appears

that the same pattern is being followed in

ICs—at least for memory products. (Japanese

success in automobiles is also linked to quality and perceptions of quality as selling

points. )

Although quality does not appear to have

been a particular goal of the Japanese VLSI

program, several of the technologies listed in

table 17 are important for making ICs to high

standards of quality and reliability, And,

regardless of final judgments on the success

79-491 0 - 91 - 1
88 . U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

of the VLSI program, table 18 indicates that

Japan is at or near technological parity with

the United States in many important aspects

of semiconductor technology. It seems unlikely that Japan will outstrip the United States in

R&D-intensive devices such as microprocessors. However, in the more straightforward

memory circuits— and in productivity and

quality control—the Japanese have already

demonstrated their technological competitiveness. Where success depends heavily on

the ability to mass produce semiconductors to

high standards, Japan will be strong.

In addition to the privately funded followons to the VLSI program mentioned above—

aimed at applications —MITI is sponsoring a

new Japanese cooperative effort in computer

software. Like VLSI technology, software is

critical for competitiveness in computer systems. Japan has been weak in software; this

effort is further evidence of her intent to become a strong global competitor in computers. Japanese firms already have adequate

capability in hardware, as discussed below.

The U.S. Government also funds semiconductor R&D. The Defense Department has recently begun a major effort in VLSI, the Very

High Speed Integrated Circuit (VHSIC) program. VHSIC is to be funded at about $210

million over 6 years; thus, it is comparable in

spending level to Japan’s VLSI effort, The

basic difference is that VHSIC emphasizes

applications to military systems. The Japanese program —as with government support

for semiconductor technology in other nations—is directed at commercial technologies, Some of the VHSIC R&D will yield spinoffs in the commercial portion of the U.S. industry; however, it is too early to judge their

potential significance.

Vertical Integration. —As discussed previously, considerable forward integration has

been taking place in the U.S. semiconductor

industry. While firms such as Texas Instruments and Motorola have always been integrated, other merchant manufacturers are

also moving into end-product markets. At the

same time, other companies have been integrating backwards into semiconductors, usually to be able to supply some fraction of their

own needs. And, in several recent cases,

formerly independent semiconductor firms

have been purchased, sometimes by foreign

concerns. The purchased companies—e. g.,

Mostek, Fairchild, Intersil—are expected to

remain in the merchant market. But the loss

of their independence, in the view of some,

may threaten the spirit of aggressive entrepreneurship and innovation that has characterized the merchant semiconductor sector in

the United States. Although many observers

welcome vertical integration as a positive

competitive response to changing market

conditions—bringing with it infusions of

capital and management experience—to

others it represents a potential loss of the

characteristics that have made the U.S. industry so successful,

There is little question that integration will

continue; it is in the strategic interests of the

managements of firms that are now in the

merchant market, as well as those making

end products. More basic questions deal with

the capabilities of semiconductor firms to

finance further expansion, including forward

integration and entry into new markets.

Capital Supplies. —The semiconductor industry has been growing so rapidly that some

firms have been hard pressed to generate sufficient cash flow to keep up with internal

needs. At the same time, according to many

industry spokesmen, external capital has not

been available or has been too expensive.

In many respects, the capital needs of the

semiconductor sector follow the classical pattern of an industry expanding so fast that it

outstrips its capacity for internal funding.

Cash flow shortfalls are compounded by VLSI

process technologies that are increasingly

capital intensive. The capital needs of the

U.S. semiconductor industry for the decade of

the 1980’s have been estimated at $25 billion

to $35 billion, compared to $4 billion to $5

billion for the 1970’s, 21 This level of funding

“J. F’. Bucy, “Semiconductor Industry Challenges in the Decade Ahe~d, ” IEEE Solid-State Circuits Conference, San F’r~ncisc(], Calif., E’eb. 13-15, 1980.
Ch. 5—industry-Specific Competitiveness Ž 89

may not be available from the capital market

on terms the companies find acceptable, Industry leaders contrast this situation with

that of their Japanese competitors. Not only

does the Japanese Government provide direct

R&D assistance for commercial technologies,

but capital is said to be less costly than for

American electronics firms,22

The same basic argument—that capital

costs in Japan are low compared to the United

States, in part because of policies followed by

the Japanese Government—is made by other

American industries. At its root, the argument rests on the structure and organization

of the Japanese financial system, its impact

on capital formation and, not least, the

capital structure of Japanese firms. 23 Thes e

are complex topics, which are deferred to the

forthcoming OTA electronics study. Here it is

simply suggested that while external sources

of capital—primarily debt—do seem available on more favorable terms, the advantages

of Japanese firms in terms of internally

generated capital may be overstated—except

as a function of their relative size (large firms

have more flexibility in allocating capital internally). For example, the cash flow available to Japanese electronics companies—

basically the sum of net profits and depreciation—appears generally comparable to

American firms. The low profits characteristic of Japanese industry are in many cases

counterbalanced by rapid depreciation, That

the government channels funds—primarily in

the form of bank loans— to support some sectors of Japanese industry is another matter,

While this is certainly an important aspect of

Japanese industrial policy (see app, D), capital allocation by the Government is a mechanism which U.S. industries would presumably

oppose. Likewise, the high debt/equity ratios

still characteristic of Japanese firms—though

use of debt has been gradually decreasing—

~ ‘‘[;,S, and ]ap:inf?sc S[?mic(~l](l~][t(Jr Induslri~s: A Financial

~;f)mpa risf]rl. ” prcp:i reel f~]r the Semir[]r]cfuct(}r Industry AssfJ-

~ia [ion })} fjh;lw F’in.]n{i:i] PI~licL. Jun[~ 9, 1980.

‘Or] th[; fl rst (If t hf;sf>, sf~f: }’, Suzuki, hll)nf~; ~Jn(i }lf~nking in

f;f]n t~mf)f)r(lrk )~l~)(jn (Nf?w I Iaven, C(Jnn,: Y;]lf; Univf;rsitp

Press, 1980). F’[Jr the l:~t tf:r. J[l])(lncsc [l~r[]f~r~l te F-inflr7ce

J 977-j f)~[) (j,on[j[)r]: III tprna ti[)n:]l F3us]nf;ss IJI forma tion In{.,

‘1’hf? Fin:]n(:i:]] ‘Iimf?s I,t(i,, 1977].

would be unacceptable to both managements

and lenders in the United States.

Computers

The international computer industry is similar to the semiconductor industry in several

respects. Both have depended for many years

on technologies developed primarily in the

United States. In both industries, U.S.-based

multinationals operate manufacturing facilities in many parts of the world, although

there is far less reimporting of computers

after foreign assembly than for semiconductors or consumer electronics, Computers, like

semiconductors, have been targeted by foreign governments as sectors in which independent strength (i.e., independent of the

United States) is a matter of national interest.

Although the world computer industry has

historically relied on technology licensed

from the United States, foreign governments

have been uncomfortable with this relationship, Thus, for computers as for semiconductors and steel, there has been considerable

government intervention in other parts of the

world.

Efforts by foreign countries to strengthen

their computer industries have had mixed results, In Europe, despite financial assistance

and government-fostered mergers, American

manufacturers retain about two-thirds of all

sales, U.S. computer technology is more advanced, with European manufacturers often

emulating older American developments.

Even in Japan, which has restricted both imports and direct foreign investment, U.S. computer firms still account for 45 percent of the

market.

24 If there is an industry in which the

United States is internationally competitive

par excellence, it would have to be computers.

Any significant changes in these longstanding patterns of competition are again

likely to emanate from Japan. The Japanese

strategy in computers parallels that used in

consumer electronics and semiconductors (as

-“’(;ompu ters: CaJl the U.S. Rwaplurc Its Japanesf? hlarket, ‘“ Business M’wh, Aug. 25, 1980, p. 72,
90 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

well as automobiles). Japanese firms have

started by building a basic technological capability, largely through licensing arrangements with U.S. firms, They have then proceeded to establish a viable presence in particular market niches, from which more complete market coverage can be attempted. In

computers, countervailing strategies by

American firms have made this more difficult.

To illustrate, Japanese firms (Mitsubishi,

Fujitsu, Hitachi, Toshiba) began by licensing

computer technology from the United States,

as well as from Europe, In 1960, IBM apparently exchanged its patent rights for permission to begin manufacturing computers in

Japan.

25 IBM now accounts for some 30 percent of Japanese computer sales, a low figure

compared to its share in other industrialized

nations—where IBM typically has half the

market—but impressive for Japan. Thus, the

Japanese did not succeed, as they had in consumer electronics, in using entry barriers to

protect their fledgling computer industry

from foreign competition.

Still, the Japanese have managed great

strides since 1970, when they began giving

greater attention to computers. Japanese

hardware now seems to be largely competitive with American, although until recently

their main strength had been in small- and

medium-sized systems. 26 While, in contrast to

the consumer and semiconductor sectors,

Japanese computer firms have yet to establish any real presence in the U.S. market, they

clearly intend to try,

Although Japanese firms have achieved

parity or near parity in hardware, they lag

significantly behind the United States in software. Because software is a major source of

competitive strength in the computer industry, American companies retain an important

advantage. Software, and software support,

along with customer service in a more gener-

“Y. Kimizuka, Densunki Gyokoi (The Computer Industry)

(T{JkV{): KVoikusha, 1977), pp. 98-99.

-(’A. Durniak and C. Cohen, “U.S. Beachhead for Japanese

Computers Is Only the Start, ” E]e(; trwnics, h4ar, 27, 1980,

p. 113.

al way, have always been among the strong

points of the U.S. industry, especially IBM.”

As one might expect, the Japanese were

quick to recognize their weakness in software. It is too early to judge the success of the

MITI-orchestrated software R&D effort. The

plan, which began during 1980, centers

around the cooperative Computer Basic Technology Research Association, which has a 5-

year budget of about $235 million and involves the leading Japanese computer manufacturers. Among the thrusts of the program

are networking and data base management,

as well as operating systems and Japanese

language information processing capability.”

Based on their past success with other technologies, it seems probable that Japanese

computer firms will, one way or another, succeed in largely rectifying their software deficit. Software technology is widespread internationally; just as Japan’s automakers have

begun to hire American and European stylists, so its computer manufacturers could

hire software specialists from other countries

if they have difficulty developing indigenous

capabilities.

Technical Personnel

Before leaving electronics, one other potential constraint on the competitiveness of U.S.

firms should be mentioned—the supply of

technical manpower, particularly electrical

engineers, computer scientists, and technicians. This has perhaps been of most concern

to semiconductor firms, but also applies to

——

~ h~tiny observers have attributed IBNI’s market positinn to

nonhardware factors. See, e.g., B. T, Ratchforcf and G. T. Ford.

“A Study of Prices and Nlarket Shares in the Computer Mainframe Industry, ” ]ourna) of Business, vol. 49, April 1976,

p. 194.

}’4’Electronic Computer Industry, ” )(]p(ln Heport AJ(J. I IS,

Joint Publications Research Service, JPRS 77203, Jan. 19, 1981,

p. 58. Software costs, particularly for applications programing,

are escalating rapidly compared to hardware costs (in all parts

of the world) because the productivity of programmers has not

been increasing, Generation of software is becoming a significant entrepreneurial activity in the United Slates, with many

new en t rants striving to establish themselves in the marketplace. Major innovations in software might tend to unsettle the

industry: on the other hand, new programing languages such as

Pascal, and now Ada, are forces for standardization and slabilitv.
Ch. 5—Industry-Specific Competitiveness ● 91

computers, indeed to all high-technology sectors of the industry.

At present, recent college graduates in

electrical engineering and computer science

are in short supply, The problem is one of absolute numbers; but there are also shortages

of graduates with particular skills—e.g., the

ability to deal with both hardware and software. Demand by employers for new graduates in electronics and computer specialties

is expected to rise by as much as 35 percent

in 1981.29

Part of the reason for the current shortages can be laid to the relatively poor job

market for engineering graduates during the

early to mid-1970’s. The widely publicized

slump discouraged many students from enrolling in technical fields. While enrollments

have now picked up, the cutbacks in engineering school faculties and facilities that accompanied earlier enrollment declines have

not been reversed, in part because engineering enrollments have proven cyclical in the

past. Shortages of faculty and teaching equipment presently exist in many fields of engineering —a situation which, if allowed to persist, could have serious long-term consequences for competitiveness in virtually all

U.S. industries, as well as for nationa l

security.

Japan is now graduating significantly

larger numbers of electrical engineers than

the United States—one-third more for 1977-–

the reverse of the situation at the beginning of

the decade, and a foreboding sign. 30 However,

the United States has large numbers of midcareer engineers, some of whom are underutilized. There appears to be ample scope and

incentive for retraining efforts which would

help meet the needs of U.S. industry while

also improving career prospects for such people. Many of these engineers missed the IC

revolution, and, more importantly, the software revolution. They could benefit greatly

‘~. }I:irnilton, ‘‘ 1981 outlook seen as Bountiful,” E;lfx; tron]cs,

](III. 27, 1981, p. 174,

‘I” “The F:lect rir:]l ~;n~lne[;rlng (;:~p: ‘1’he [Jnitwi St:] tes \’crsus

]:ipan, ”’ The Rown F,’le{,trl~nlrs let tcr, F’eb. 21, 1980, p. 7,

from retraining that emphasized a mix of advanced hardware/software skills.

Comparing the Sectors

Several of the more important similarities

and differences among the three sectors of

electronics that have been examined are

listed below:

1. The United States no longer has an overwhelming technological lead in any of

these sectors, but semiconductor and

computer markets are still rapidly growing and volatile; technological change is

much faster than in consumer electronics. Major innovations in consumer electronics might or might not upset the current competitive situation in that sector.

But the pace of technical change in semiconductors and computers virtually

guarantees future shifts in the competitive positions of some firms—e, g,, those

making products such as microcomputers,

2, In the sectors experiencing rapid growth

and technical change—semiconductors

and computers —U. S. firms remain highly

competitive, Important reasons are their

long-standing strength in innovation and

their skill at adapting to changing conditions. In contrast, American consumer

electronics firms are having difficulty

competing on a cost basis in mature products with Japanese and other Far Eastern producers— a similar problem to

that afflicting the U.S. steel and automobile industries,

3. Again because of the rapid market

growth in semiconductors and computers, employment is rising despite productivity increases. In the mature segments

of consumer electronics markets, such

as TVs, employment has declined—

though it may now have stabilized. New

generations of consumer electronics

products could change this, but no! if

foreign firms take the initiative and become the successful innovators.

4. American semiconductor and computer

~irms are competing aggressively on a
92 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

worldwide basis with all comers. Fur- tively compete inside Japan—which

thermore, major U.S. firms, particularly from time to time may demand the supin computers, have achieved a signifi- port of the U.S. Government-they

cant presence in the domestic Japanese should be able to remain competitive,

market. This may be a necessary ingre- though perhaps not dominating world

client for maintaining global competitive- markets as in the 1960’s.

ness. As long as American firms can acAutomobiles

The motor vehicle (automobile and truck)

industry in the United States entered a deep

recession in sales and employment in 1980,

when domestic automakers lost more than $4

billion. Production of passenger cars has

been falling since 1977, much more steeply in

1980, Sales of domestic cars were lower in

1980 than in any year since 1961. Several

hundred thousand autoworkers found themselves laid off. For trucks, the decline was

even steeper, with production off by 46 percent. Even for subcompacts, domestic capacity utilization fell; the U.S. industry could have

produced as many as 1 million more subcompact and compact cars during 1980. 31 But as

sales of American-made cars dropped, imports from Japan continued to rise (table 19).

While sales of Japanese cars increased

steadily through the 1970’s, imports from

Europe remained more-or-less stable (in the

case of West Germany, they have decreased

considerably—in part because Volkswagen

now assembles cars in the United States). As

“’’The Automobile Crisis and Public Policy: An Interview

With Philip Calciwell, ’” Hurvard E?usiness Review, January/February 1981, p. 73.

table 19 shows, Japan’s proportion of imports

to the United States doubled from 40 percent

in 1973 to 80 percent in 1980.

The past year was exceptional because in

previous depressed markets, sales of both domestic and imported automobiles dropped.

For 1980, total passenger car sales fell 13

percent—but import sales went up by 3 percent, while domestic sales were down by 21

percent (table 5 in ch. 4). Sales of Japanese

imports increased by 8 percent. Even domestic subcompacts experienced 5 percent lower

sales (U.S. full-size cars were down 37 percent). ~z Such a rise in sales of Japanese cars

in the face of recession is striking—and to

some observers prima facie evidence of the

American industry’s loss in competitiveness,

The next section considers this question in

more detail.

Imports and the U.S. Industry

Large declines in output are not unusual in

the motor vehicle industry, which has a long

history of such behavior—associated with

‘Wurd’s Automotive Reports, Jan. 12, 1981.

Table 19.—U.S. Automobile Imports by Country of Origin (thousands)

-—....—— . .

Year United Kingdom West Germany Italy Sweden Japan Other ‘-

——.—— Total

1973 . . . I . . . . 64 677 56 59 625 84 1,566-

1975 ........, 67 370 102 52 696 54 1,341

1977 . . . . . . . . . 56 423 55 39 1,342 23 1,940

1978 . . . . . . . . . 54 376 70 56 1,563 33 2,123

1979 . . . . . . . . . 46 323 72 66 1,617 29 2,156

1980 . . . . . . . . . 32 305 43 70 1,908 40 2,398

NOTE West German figures exclude production by Volkswagen of America Totals may not sum due to rounding Since 1977, most of the Other’” Imports have been

from France 1980 figures are for sales

SOURCES 1973.79—Department of Commerce, Bureau of the Census

1980—Ward’s Automotive Reports, Jan 12, 1981
Ch. 5—industry-Specific Competitiveness ● 93

the business cycle. Furthermore, production

tends to fluctuate more than sales, as dealer

inventories periodically increase and decrease.

Table 20 and the discussion following treat

automobiles and trucks together. The table

shows domestic production, plus sales of both

domestics and imports, for 1978 through

1980. The peak sales year for passenger cars

and trucks together was 1978, slightly above

1973 (1973 was the peak for passenger cars

alone). From 1978 to 1979, total sale s

dropped by 1.4 million (9 percent). Sales of

American-made cars and trucks fell by 1.76

million (14 percent), production by somewhat

less because of inventory buildups. Thus

much of the decrease in production and sales

of domestic vehicles was the result of slackening demand; regardless of imports, sales

and production in 1979 would have dropped.

Much the same was true last year, though

the decline in domestic production and sales

was steeper. For 1980, total sales, including

imports, fell a further 17 percent. However,

sales of American-made cars and trucks fell

by 23 percent (table 20), Again, a slackening

in total demand is responsible for much of the

drop in domestic production and sales.

If import penetration had remained at the

1979 level of 19.8 percent, domestic car and

truck sales during 1980 would still have

reached only 9.2 million—assuming domestics substituted for all the extra imports, This

compares to the actual level of 8.6 million, If

imports displaced a maximum of 600,000

American cars and trucks, then they can account for only one-quarter of the decline in

domestic production and sales.

The 23-percent sales decline for American

cars and trucks in 1980 is large compared to

the decline from 1978 to 1979 but comparable

to that associated with the 1974 recession.

Likewise, sales fell by 21 percent from 1969

to 1970. Thus, the drop in sales of domestic

vehicles during 1980 is not by itself unprecedented, A major difference is that import

sales continued to increase in 1980, while in

the earlier recession of 1974-75 they decreased along with sales of American cars.

As table 5 showed, import sales fell 20 percent between 1973 and 1974,

A primary reason for increases in sales of

imports— even in the face of recession and

overall slackening of demand—is the shift in

the market to small, fuel-efficient cars triggered by rising gasoline prices, as well as

shortages and gas lines during 1979. This is a

change with important implications for the

current and future competitiveness of American firms. Tables 21 and 22 give distributions by size of sales of all passenger cars in

the United States—domestics and imports—

and of production by U.S. firms. The data

show that domestic production (table 22) has

been heavily skewed toward large vehicles

compared to market demand (table 21). In

1980, 45 percent of sales were subcompacts,

but these accounted for less than 30 percent

of U.S. production. Small cars have always

predominated among imports, When this segment of the market became more important

(table 21), foreign producers—particularly

the Japanese, who have done a better job

overall than the Europeans in building strong

dealer networks and meeting the desires of

American consumers—found themselves

with, in effect, a windfall.

The shift of the U.S. automobile market

towards small cars has not been clear-cut

and unambiguous, There was a movement

towards small, high-mileage vehicles as a

Table 20.—Motor Vehicle Production and Sales Figures (thousands of cars and trucks)

—

Sales

Year U.S. production - Domestics ‘

— —

lmports–

‘-Tot al Import penetration

1978 ... 12,875 -

12,890 2,320 15,210 15.3%

1979 . . . . . . ., 11,471 11,132 2,743 13,875 19.8

1980 ..... , 8,012 8,581 2,883 11,464 25.1

SOURCE Tables 5 and 6 in ch. 4
94 Ž U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

Table 21 .—Distribution by Size of Sales in the U.S. Passenger Car Market

(domestics plus imports, percent of total sales)

.—

Year - Subcompact’ Compact Intermediate Full size Luxury ——.

1967 . . . . . . . . . 9.3% 15.7% 23.6% 47.9% ‘3.1 0/0

1970 . . . . . . . . . 17.1 19.8 23.5 36.8 2.9

1973 . . . . . . . . . 26.6 16.8 23.4 29.8 3.9

1974 . . . . . . . . . 26.5 22.7 24.4 22.7 3.7

1975 . . . . . . . . . 30.6 22.9 23.9 17.9 4.7

1976 . . . . . . . . . 24.7 24.1 27.8 18.8 4.7

1977 ....... , 27.1 21.2 26.4 20.4 5.0

1978 ........, 26.4 22.9 26.6 18.4 5.6

1979 . . . . . . . . . 34.7 20.9 23.8 15.1 5.5

1980 ...., . . . . 45.3 18.6 20.5 12.0 3.6

alncludes all Imports

SOURCES Through 1979—Automotwe News 1980 Market Data Book issue, p 16

1980– Ward’s Autornotlve Reports, Jan 12, 1981

Table 22.—Distribution by Size of U.S. Passenger Car Production (percent of total production)

——.

Year Subcompact ‘

- Compac t I ritermed i ate Full size Lux-u ry

1973 ......, . .

1974 . . . . . . . . .

1975 .., . . . . .

1976 . . . . . . . . .

1977. , . . . . . . .

1978 ..., . . . . .

1979 . . . . . . . . .

1980 . . . . . . . . .

10.20/.

15,4

12.7

7.6

7.7

16.4

23.8

28.3

18.8°\0

27.5

30.6

33.6

26.9

24.4

23.4

29.6

28.0°\0

28.4

27.2

30.8

32.0

30.1

25.9

24.0

sF.~O/o

23.6

23.0

22.2

26.5

22.5

20.4

13.3

5.170

5.1

6.6

5.9

7.0

6.5

6.5

4,7

——SOURCES 1973-79—Pet/t/on for Relief Under Section 2~1 of the Trade Act of 1974 From Import Compet/t/on From Imported Passenger Cars, L/ght Trucks, Vans, and

Ut//lfv Vehfc/es submitted by the International Union, United Automobile, Aeros~ace, and Aclncultural lm~lement Workers of America (UAW), before the U S

International Trade Commlsslon, June 12, 1980

1980— Ward’s Automotive Reports, Jan 12, 1981

result of the “energy crisis” of the mid1970’s—when subcompact sales reached 32

percent—then a reversal, as the market for

large cars picked up again. This is evident in

the domestic production figures for subcompacts and full-size cars in table 22, as well as

in the sales figures.

U.S. automakers have made lower profits

on small cars than on large because costs—

both fixed and variable—have not been as

strong a function of size as prices. This situation is changing as new small cars begin to

sell at higher prices than the larger models

they replace. Despite a reluctance to lose

some of the profitability that came with big

cars, the failure of American manufacturers

to move more rapidly and consistently into

small cars was not so much poor judgment as

a reflection of contradictory market signals.

These signals resulted in part from two concurrent Governmental policies-corporate

average fuel economy standards, and continued price controls on oil (as well as low

taxes on gasoline) which in turn held down

gasoline prices (ch. 6). These juxtaposed

policies confused the market and heightened

uncertainty among the automakers. The result in 1980 was a mismatch between domestic production and market demand—which is

now strongly oriented toward small cars, the

Japanese mainstay.

Some American firms have also had difficulty marketing their small cars—particularly those of older design. Ford and Chrysler

had considerable unsold dealer inventory in

subcompacts during 1980.J] High inventories

of small American cars existed despite lower

prices for some U.S. models—a price difference which was even greater when discounts

{ ‘Auttj Situ{] tion: 1980 IWashington+ D.(:,: Subcomrnit tee on

Trnde, Committee on Ways and Means, U.S. House of Representatives, June 6, 1980], pp. 25-26.
Ch. 5—industry-Specific Competitiveness ● 95

for American cars, and surcharges for Japanese imports (occasionally as much as $1,000)

are included. 34 But while sales of domestic

subcompacts actually dropped in 1980, there

have been few signs of slackening demand for

Japanese cars. American manufacturers are

counting on newly designed 1981-model and

later small cars to reverse these trends.

Employment

Production cutbacks such as those that occurred in the U.S. industry in 1980 are

always accompanied by layoffs—the unemployed autoworker is not a new phenomenon.

From the peak production work force in 1973

to the 1974 trough, employment in the auto industry declined by one-third. This is not to

minimize the very real problems created by

unemployment in this industry, accentuated

by the concentration of automobile manufacture in the industrial Midwest. Furthermore,

it is quite possible that the current round of

unemployment is more than a short-term

problem, But from a policy standpoint, this

point is important: Restricting imports of

automobiles (from Japan) might ameliorate

current employment decline, although the extent of this is by no means obvious (it depends

on the number of consumers who would purchase American cars if imports were not

available). Restricting imports will not alter

in any fundamental way the highly cyclical

nature of the industry, nor will it necessarily

blunt the difficult, longer term competitive

problems faced by U.S. automakers and parts

suppliers.

Long-run employment expectations for automobiles are similar to those for the steel industry; the same basic conflict exists between productivity and job opportunities.

Were domestic motor vehicle production to

recover completely, maintaining or improving

U.S. competitiveness would still imply raising

productivity —which reduces employment opportunities. Based even on optimistic assump-

““(:urr(;nl Prf)blcrns of the [1. S, Automobile” Industry nnd P(ll-

](i[x+ to A(id rcss Them, s t off workin~ paper-, ConHrcss]( m:{ 1

Hu(igot of flcc, Nalur:ll Rcst)ur(es and (i)mmcrcc I)ivision, Ju]}

1980, pp. 16-17.

tions for future sales, some analysts believe

auto industry employment could drop permanently by 100,000 or more workers over the

next 10 years—to which job losses in supplier

firms would add. Slower than expected market growth, along with cyclical down-turns,

could raise the figure substantially, Note that

this potential employment loss is comparable

to totai employment in the U.S. consumer

electronics industry.

Factors in Competitiveness

Consumer purchases of Japanese cars are

results of product mix, perceived value in

terms of design features and equipment, styling, perceptions of differences in quality, and

other factors— as well as fuel economy. The

competitive situation in automobiles appears

to be similar in a number of respects to that in

consumer electronics, especially TVs, In both

cases, the Japanese entered the United States

in particular market niches—small screens,

small cars, They established a reputation for

well-designed, high-quality products at reasonable prices. In this, they have succeeded

in ways that European automakers have

seldom managed (Volkswagen is the principal

exception), The Japanese have also established strong dealer networks—an important

source of their ability to steadily increase

sales in the United States.

Much of the product appeal of Japanese

consumer goods in general—whether TVs,

automobiles, motorcycles—does seem to be

nonprice. The Japanese are aggressive marketers—at home, in the United States, and in

other parts of the world. They now hire

stylists from Europe and the United States,

and have rapidly moved from producing cars

that were perceived as overornamented and

underfunctional to being among the leaders

in design.

At the same time, there is nothing new

or unusual about Japanese automobiles—

whether in appearance and packaging, or engineering. Many of the more successful imports are quite conventional, with front

engines and rear-wheel drive, While Japanese firms are now building more front-wheel
96 Ž U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

drive models, they lagged the Europeans

markedly in this trend. However it has not

hurt them in the American market. Toyota did

not have a front-wheel drive car in the United

States until 1980. Datsun entered a few years

earlier, but with a car—the F-10—which was

widely considered a poor design and which

did not sell. The F-10 was quickly replaced by

the 310—a model perceived as considerably

superior. This is a typical example of Japanese response to consumer preferences.

Products that meet with poor response are

dropped, generally to be replaced by better

ones. The Japanese did not quit the American

market when their first offerings proved unappealing to American consumers; they persisted, and steadily improved their sales. This

is the real significance of table 19.

Except for fuel economy, the success of

Japanese imports does not then rest on their

technology. In fact, relative technological

capability—as opposed to engineering design

—does not at present play a major role in the

worldwide automobile market. Both product

and process technologies are well diffused,

with developments such as three-way catalytic converters or robots for automated spotwelding available to all manufacturers. In

this respect, the automobile industry is more

Photo credit Ford Motor Co

Automatic transaxle assembly
Ch. 5—industry-Spec\fic Competitiveness ● 97

like steel than it is electronics. In steel, the

technology is also a universal one, although

there are always pockets of special knowledge. In contrast, for semiconductors and

computers, the United States has maintained

a technological lead in some areas. This gives

U.S. electronics firms competitive advantages

that do not exist in automobiles.

Japanese automakers do appear to have

significantly lower costs of production than

their American counterparts. A cost advantage gives flexibility in developing competitive strategies; for example, quality can be

upgraded through better paint and trim, or

more standard equipment included for the

same price. Most important, lower production costs mean greater margins for cutting

prices when sales are slow, as well as higher

potential profits for reinvestment or attracting outside capital.

The actual magnitude of the Japanese advantage is uncertain. For subcompact cars,

the manufacturing cost differential appears

to be of the order of $1,000. While shipping

may add $500 or more, many Japanese imports would still have lower delivered costs

than cars made here.

Lower manufacturing costs in Japan stem

in part from lower wage rates— especially

among suppliers and subcontractors, but also

in the Japanese automobile firms themselves

—in part from labor productivity that may be

somewhat higher than in the United States,

and perhaps also from economies of scale.

Wage rate differences are probably most important. Other cost elements also vary between the two countries—for example, the

Japanese can take advantage of their cheaper

steel, Moreover, costs depend critically on

production volume—cost curves for automobile manufacture are notoriously steep. The

huge losses sustained by U.S. automakers in

1980 stem in large part from low production

levels.

For such reasons, estimates of cost differentials are complex and should be approached with caution. Even “comparable”

subcompact cars are not the same; costs can

be cut by careful engineering design, as well

as a good working relationship between product engineering and manufacturing functions.

Costs also depend on the extent of vertical integration within a company, which varies

considerably between and within the two

countries, Japanese automakers subcontract

much of their manufacturing; just as for

American Motors and Chrysler, they are generally not highly integrated. In Japan, even

assembly may be subcontracted. 35 Japanese

automakers rely on extensive networks of affiliated firms and suppliers; they also use contract labor within their own plants. The relationships between the manufacturers and

their suppliers are certainly different from

those in the United States; in some cases the

ties may be close enough that the operations

should be considered functionally integrated.

But arms-length relationships such as are

common in the United States also exist in

Japan. Both wage levels and labor productivity are likely to vary among the parent firm,

its subsidiaries and affiliates, and other subcontractors and suppliers. Within a given

firm in either country, there will be differences from plant to plant and car line to car

line.

In the absence of better information, several past estimates of manufacturing cost differentials have assumed that labor content

(essentially productivity) for U.S. and Japanese cars was roughly the same, and that

most of the Japanese cost advantage came

from lower wage rates. On this basis, manufacturing costs in Japan would be $500 to

$1,000 lower than in the United States, 36

““’][]pttn”s Big Autom;ikers E’ar-m Out Lt’ork,’” l~~pcln fie~)~)rt,

J(jlnt Publications I?csearch %;rvi(e 1, 92Y0. Sept. B, 1‘180,

p. 34.

“R. A, Leone, \f’, J. Almrn~] [h~, S, P. Br[idle\. iInd J. A,

Ilunkcr, ‘‘Rc~ul;i tit)n /In(i ‘1’echn[)]ogi( ;)I Inn(NT;i ti[)n in thr .4{] t(}

m(hilf? lndustrv, ” report to 0’1’,4 un{l[?r ((lnt r<)[t N(),

9333800.0, ~la] 1980. pp. 52-53; A. h~~t~,. “Sl:]tcnlent {)f tl][~

Depnrtmenl of (:[mlmerce,’ 11’~)rl~i A u to ‘J’r[I~i[’ (;u rr(~n t ‘J’rcn[i>

urrd Strurtu r(ll Prf)hlcrns, he:~ r]ngs [[1’;]shlngt( )n, 1). (;.. Suh(ommittee on Trade. C[Jmmi t t cc on U’:ivs and hleans, U.LS, [ {(IUSC of

Rcprescntat iv~’s, hl:]r. 7, 18, 1980), p. 232. one An~(:ricijn firm

11{1s estim:l ted Iiit)or pr(][iurtivil~’ 111 !}l[’ ]:lpanese industry to Ix?

10 per(wnt higher than in the United Stat[?s—’4Resp(~rls[~ of

E’(lrd hlotor” Comp{]nt,’” ~t’f)rl~i Auto ‘l-r(l(ic, op. rit., p. 96, ‘1’he

Fcrif:r:41 ‘1’rt~(ic commission” M as uni]hle to verifv ;; prncfu(tivit~
98 Ž U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

More recently, some observers have

claimed that Japanese subcompact cars embody substantially lower labor content, hence

a production cost advantage of $1,200 to

$2,000. 37 Such estimates are based on reports

that Japanese automakers achieve markedly

superior labor productivity and manufacturing efficiency through a variety of production

engineering and quality control techniques.

This seems contrary to the implications of the

patterns of productivity growth in motor vehicles shown in table 8 (ch. 4)—36 percent for

the United States for the period 1970-79, 77

percent for Japan. Mindful that productivity

figures of this sort are not directly comparable, it still appears that the more rapid increase in Japan would, on the average, bring

the absolute labor productivity for automobile manufacture in that country closer to,

but not necessarily ahead of, that in the

United States. Nonetheless, the very high

rates of capacity utilization in Japanese auto

plants over the past 2 years—coupled with

low capacity utilization in the United States—

could result in substantially greater cost advantages for Japanese automakers than

would exist if the two industries were operating at comparable levels.

Although there is currently no real consensus on whether labor productivity in the Japanese automobile industry is significantly different than in the United States, some of the

concerns now emerging are remarkably similar to those expressed earlier for industries

such as steel and consumer electronics.

There too, the apparent competitive advantage of Japanese firms was at first attributed

(( ontlllll(vl /1’011) ~)flg(’ !)7/

;idvii n tage far the Ja pa nese —hl. P, t,ynch, e t a 1., ‘‘Comments of

the Sla ff of the F’ederal Trade Commission Before the Intern~-

tional Trade Commission, Certain hlotor” Vehicles and Certain

Chassis and Bodies ‘1’herefor, ’” Oct, 6, 1980, p. 9 and app. A,

pp. 11 ff.

‘ The Department of Transportation estimate is $1.500 to

$2,000—The US. Au t(]mobil[’ Irr(fustr-}r. 1980: ~e[mrt (O the

Presi(ienf F’r(~m the Secre(ar~’ of Tr’~]rl,s~j(]rt(lti(~rl, publication

No. D(YI’-(3-1O-8 1-2 (Washington, D.(~.: DOT, January 1981), pp.

40-44: Prnfessnr W. J. Abernathy of the Harvartf Business

School now estimates $1,200 10$1 ,800—N. Call, “It’s Later

‘1’h:]n We Think” (interview with Abernathy), Forbes, Feb. 2,

1981, p. 65. Both estimates are based on the same unpublished

report of a ransul t ing firm.

to cheap labor (and often to unfair trade

practices). Later, factors such as productivity, the Japanese work ethic, and the management systems of Japanese firms came to the

fore. These are complex and poorly understood topics— several of which will be explored in more depth in the OTA electronics

study. But questions of manufacturing efficiency and labor productivity—and their

sources—deserve further mention.

Japanese manufacturing industries have in

a number of instances demonstrated productivity levels equal and sometimes superior to

U.S. industries. Japanese firms have also

shown that they can make products of high

quality. Relatively high productivity and relatively high quality characterize Japanese

manufacturers in industries as diverse as

cameras, steel, electronics, and motor vehicles. While some observers stress cultural

factors among the attributes contributing to

the high performance of Japanese corporations in such industries, it is easy to overemphasize their importance. Many aspects of labor relations in Japan—the multitier labor

market, the so-called lifetime employment

system, seniority-based pay scales—are

based on rational organizational principles.)”

Patterns of education and training for employees of large corporations—whether factory workers, technical professionals, or

managers—have their sources in the historical development of the Japanese economy,

particularly the rapid industrialization which

began in the late 19th century.+’

Corporate management in Japan differs in

various ways from that in the United States,

but here too cultural factors are only one

among the many forces that have shaped the

modern Japanese manufacturing organization. To say that Japanese firms achieve high

productivity because their employees work

hard and long, or that they maintain high

‘“H. Shimacfa, The )up(lnese Empl(~yment System (Tokyo: The

Japan Institute of Labor, 1980); R. E. Cole, Work, Mohi]lty, (In[i

Pf]rticipa ti{)n; A Comparative Study of Americ~]n (Ind )(]p[lrrese

industry (Berkeley, Calif.: University uf (kliforni[i Press, 1979).

‘“S. B. Levine and 11. Kawaria, Human Iles[mrces in J(]p(]nese

lndustri[]l Devel~)]~mcnt (Princeton, N. J.: Princetun University

Press, 1980).
Ch. 5—industry-Spec/f\c Competitiveness ● 99

quality because factory personnel are painstaking and diligent, does little to illuminate

sources of competitiveness. After all, most of

the techniques of quality control practiced in

Japanese factories, along with manufacturing

engineering methods of all types, are based

on principles developed in the West, imported

to Japan, and adapted to Japanese organizations, These methods continue to be taught in

American schools of engineering and management, Like product technologies in the

steel and automobile industries, they are part

of a common body of knowledge available to

firms all over the industrialized world.

To leave manufacturing costs and return to

the ingredients of successful automobile marketing in the United States, one of the critical

factors is certainly the dealership system.

When imports—both European and Japanese

—lacked large, aggressive, and loyal dealer

networks, they were not perceived as serious

threats, For many years sales of imports suffered because dealers were few and scattered, spare parts unavailable, service poor,

and resale value low. The primary exception

was Volkswagen, which established a strong

group of dealers during the 1960’s. The major

Japanese importers have now done the same,

as table 23 shows. In many respects, the

establishment of a viable network of dealers

has been at the center of the strategy of Japanese importers. No doubt they learned from

the example of Volkswagen, and the failures

of other European firms to establish themselves in the U.S. market. As the table indicates, over the last 5 years the numbers of

dealers for U.S. cars have declined slightly,

but all the Japanese makes have increased

their representation (many dealers sell both

imports and domestics). While there are still

far fewer dealers for imports, those handling

Japanese cars may be healthier. Dealers for

Honda, Datsun, and Toyota sell more cars on

the average than American car dealers. ’(’

Their current profit margins should also be

high because popular import models have

often been in short supply and selling for premium prices,

Table 23. —Numbers of Dealerships by Manufacturer

Dealerships Percentage

Firm 1975 1980 change 1975-80

General Motors .11,860 - 11,425 – 3. 7%

Ford, 6,773 6.514 - 2 4

Chrysler 5,193 4,419 – 15.0

American Motors 1,862 1,701 – 8 6

Datsun. . . . 940 1,069 + 13.7

Toyota. . 947 1,062 + 12.1

Volkswagen 1,20 1 1.015 - 7 2

Mazd a 375 759 + 102.4

Honda . 409 740 + 80.9

Subaru . 568 738 + 461

Fiat . . . . . . . 691 640 – 7.2

SOURCES: 1975— Ward's 1976 Automotive Yearbook (38th ed. Detroit. Mich.

1976) pp 34 119

1980—Automotive News 1980 Market Data Book issue pp. 48 54

For both years the number of dealers IS that on January 1st

Small Car Strategies of U.S. Firms

In planning their corporate strategies,

domestic automakers did not anticipate that

consumer preferences would shift so rapidly

toward small cars with good fuel economy,

Nor did importers; Japanese firms had large

inventories in the United States prior to the

doubling of gasoline prices during 1979 and

1980, Before this, big cars had been selling

well.

While American automakers have been introducing new-generation subcompacts—

GM’s Chevette in 1976, Chrysler’s Omni/Horizon in 1978—their product lines in small cars

remain thin. Even with the introductions of

the Chrysler K-car and Ford’s Escort/Lynx for

the 1981 model year, the Japanese manufacturers still offer many more small cars and a

broader selection of subcompacts.

Historically, manufacturers outside the

United States have stressed small, inexpensive, and economical vehicles. In both Europe

and Japan, high gasoline prices and a variety

of public policies—e.g., steep taxes on

weight, engine displacement, or horse -

power—have encouraged small size and good

fuel economy. Increasingly, U.S. automakers—who have, after all, been quite successful in many foreign countries—are being

forced away from their traditional product

strategies in their home market, These strategies emphasized comfort and ride, size, du-
100 ● U.S. Industrial Competitiveness —A Comparison of Steel, Electronics, and Automobiles

Photo credit Ford Motor Co

Final assembly area for Ford Escort/Lynx

rability, and at times performance. Optional

equipment, whether functional or cosmetic,

has also been important. Now American manufacturers have to compete in terms of fuel

economy and space utilization here as well as

overseas, The changes, helped along by Government fuel economy standards [ch. 6), have

been sharp. By 1979 the production-weighted

average fuel economy of a new domestic car

had reached 19.2 miles per gallon, compared

to 12.9 miles per gallon in 1974.”

— ——

4“’Innovation and Fuel Economy Among Domestic and Imported Cars, ‘“ World Auto Trwde: Current Trends and StructurU1 Problems, op. cit., p. 24.

Initial efforts to improve fuel economy focused on weight reduction. The average domestic car weighed 4,35o lb in 1975, 3,7oo lb

in 1979. These reductions were accomplished

by “downsizing” and shifting to lighter materials—replacing iron and plain carbon steel

with plastics, aluminum, and high-strength

steel. More front-wheel drive cars are now

appearing. These save weight primarily by

allowing overall vehicle size to be decreased

for given interior dimensions.

During the 1970’s, American firms also

began more actively marketing captive imports— small cars produced by wholly or par-
Ch. 5—industry-Specific Competitiveness ● 101

tially owned foreign firms. As American manufacturers are currently unable to count

vehicles in their corporate average fuel

economy figures unless the value-added in the

United States is greater than 75 percent

(scheduled to be reduced to 50 percent for the

first 150,000 cars by the Automotive Fuel Efficiency Act of 1980), the incentives to sell

captives have not been great.

A side-by-side comparison of U.S. and imported cars by weight class, table 24, reveals

that American automakers are competitive in

fuel economy. However, the table also shows

how slim American product lines are (or were

in 1979) in the lower weight classes and

smaller sizes. While the domestic manufacturers had no models in the lowest weight

class—2,000 lb—there were 10 imports. As it

happens, two-thirds of import sales in 1979

were in the 2,500-lb weight class and below,

against only 7 percent of domestic sales. In

contrast, almost 80 percent of domestic sales

were in the 3,500- to 4,500-lb classes. The

average fuel economy of domestic cars does

exceed that for imports in each category

where comparisons are possible except the

2,50()-lb weight class, where the difference is

small.

It appears that a significant part of the

current difficulties of American firms stems

from the thinness of their product lines in the

small car classes which are becoming more

and more popular (e.g., table 24, also tables

21 and 221. Even for the 1981 model year, the

top 20 cars in EPA mileage rating are foreign

in manufacture and/or design (the VolksTable 24.— Fuel Economies of Domestic and

Imported Automobiles, 1979

Domestic Imported

Weight Number of Average Number of Average

class models mpg models mpg

2,000 lb 0 — 10 32:6

2,500 lb 11 281 34 28.3

3,000 lb 47 224 21.4

3,500 lb 65 197 20 18,5

4,000 lb 56 17.4 9 15.1

SOURCE: World Auto Trade Current Trends and Structural Problems hearings

(Washington D C Subcommittee on Trade Committee on Ways and

Means U S House of Representatives Mar 7 and 18 1980) p 25

Averages are not sales weighted

wagen Rabbit diesel is made here but was developed in Germany). Furthermore, many

consumers, faced with a choice among two or

three variations on a domestic subcompact,

or half-a-dozen Toyota models, might well

find a particular Toyota that was more appealing to them, The product strategies of the

Japanese firms— emphasizing variety, as well

as quality and fuel economy—thus seem to be

working well (many buyers now rate imports

distinctly superior in quality”),

To keep up with the changing market—and

with Government regulations for fuel economy, emissions control, and safety —U.S.

automakers continue to face large capital expenditures. These have been estimated at $70

billion for the period 1979-85 43 —more than

half to be spent in the United States. It seems

likely that even GM will need to borrow—perhaps $5 billion to $10 billion—to accomplish

the redesign and retooling required. Ford has

already borrowed, and has also announced

cutbacks on planned expenditures because of

disappointing cash flow. Chrysler’s precarious financial situation is well known. Foreign

firms do not have to invest at comparable levels because they already produce mostly

small cars.

Assuming investment funds were available, would U.S. firms be able to compete effectively with imports in the compact and

subcompact classes? Past experience indicates that this may not be as easy as some

have assumed. To begin with, the import market share is now 25 percent nationally—and

considerably higher for subcompacts. Import

sales have been at 50 percent in California, a

bellwether automobile market. ” History suggests that market share losses are not easily

reversed in the short run. Furthermore, the

Japanese have clearly established their credibility with the American consumer, They

have reputations for building high-quality

“R, Irvin, “Japan: Quality Cars. ” Autoweek, July 21, 1980,

p. 10.

4’7’he LI. S, Autf)m[jb]le lndustr}, 1980: Report to the Presi~ient

From the Secret[]r\r of Tr(]nsport(]ti(]n, op. cit,, pp. 55-66,

“P. E. Ho]lie, “~’oreign Car Surge in Californi~, ”’ New York

T]mes, Nlar. 26, 1980, p, 111,
102 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

Photo credit Ford Motor Co

Robots welding automobile subframes

cars at reasonable prices—cars that do not

require frequent repairs and that have good

resale value. Their dealer organizations are

strong. Lower manufacturing costs give them

freedom to cut prices to maintain sales.

American automakers have proved that they

can compete in Europe and elsewhere with

small cars; the extent to which overseas experience can be transferred back to the

United States will be an important element in

their long-run competitive prospects.

Summary and Conclusions

The competitive positions of firms in each

of these industries result from complex sets

of factors—some quantifiable, others intangible. Each sector is increasingly challenged by

competitive pressures on a worldwide basis

—a common theme for U.S. industry.

A distinguishing feature of the steel industry is its wage pattern. That pattern shows a

tendency, accelerating in recent years, for

wages to increase faster than the national

average in manufacturing. Wages in foreign

steel industries have also been going up. But

while the American steel industry ha s

achieved productivity gains similar to those

of European steelmaker, productivity increases have been greater in Japan. Most

U.S. firms have been unable to effectively

compete for export sales with the lower

priced (but sometimes higher cost) products
Ch. 5—lndusfry-Specific Competitiveness Ž 103

offered by foreign steelmaker. They have

also been in a poor position to combat imports

and dumping at home,

Although steelmaking costs in Europe are

generally higher than for American firms, the

marginal cost export pricing strategies followed by many European steelmaker lead to

import sales in the United States at dumping

prices. In contrast to the Europeans, Japan’s

steelmaker have a production cost advantage—stemming from factors such as more

modern plant and equipment, lower wages,

exchange rate effects, and a well-developed

raw material supply network, The hard fact

is that the Japanese have become very efficient and aggressive competitors.

Employment in the American steel industry

has declined by more than 20 percent since

1965. However, the major cause of falling employment has not been rising imports, but rising productivity. Moreover, to increase the

competitiveness of the steel industry its productivity will need to be further increased—

for example, by modernizing its plant and

equipment, Employment will thus continue to

decrease unless production expands. Because of slow domestic market growth, the

only way to expand production sufficiently

would be through exports —which is unlikely,

given excess world steel capacity (there may

be promise in exports of alloy/specialty

steels). At current production levels, then,

goals of improved international competitiveness and stable or rising employment in this

industry are fundamentally opposed.

This tradeoff between employment and

productivity is a subset of a larger group of

domestic and international economic problems. Economic growth is the single most important determinant of demand for steel; in a

climate of domestic and international economic slowdown, it is especially difficult for

the U.S. industry to increase its share of a

sluggish world market. With excess capacity

the current norm in industrialized nations,

and increased capacity the trend in newly industrializing countries such as South Korea

and Mexico, the American steel industry is

likely to continue to diminish in importance

relative to the rest of the world.

Among the positive signs is the scope in the

United States for modernization, and for

process R&D aimed at lower costs and higher

productivity (which would however decrease

employment opportunities). Changing demand

patterns—toward higher strength, more expensive steels—also provide opportunity for

the domestic steelmaker. Increasing the

technological content of the industry’s offerings is one way for it to compete against international rivals who can sell standard products more cheaply.

Imports and foreign production have had

greater impacts on consumer electronics

than on any other sector OTA has examined.

Over the last 15 years the size of the work

force has been cut in half and the overall

position of U.S. companies in the domestic

market has declined markedly, The success

of Japanese TV manufacturers in penetrating

particular market niches, and then expanding through emphasis on low-priced, highquality products has been remarkable. Were

it not for OMAs set up to regulate the flow of

imports, the position of American color TV

manufacturers would have eroded even further.

A renewed commitment to R&D in hightechnology consumer products could be one

path to enhanced competitiveness for U.S.

manufacturers, New products that rely on

semiconductor devices may provide opportunities for the stronger U.S. firms in the oldline home entertainment sector, as well as for

new entrants from other parts of the electronics industry. While there are potential

disadvantages as well as advantages to vertical integration, forward integration by

semiconductor firms may be increasingly attractive as the value-added in consumer electronics becomes more heavily concentrated in

integrated circuits.

It is probably not an exaggeration to say

that the semiconductor industry—and particularly, the applications of semiconductor
104 ● U.S. Industrial Competitiveness —A Comparison of Steel, Electronics, and Automobiles

technology—are now the ingredients most

vital for the future of an advanced industrial

economy. From the U.S. perspective, the

semiconductor industry is also notable in

that, while American firms are currently extremely competitive worldwide, there is concern about the future because foreign firms

and governments have set out to systematically advance their technological capabilities, as well as their market positions,

In semiconductors, more than steel and

autos, technology is a primary focus of concern. American companies were responsible

for the initial development of most types of

semiconductor devices, but recently the technology gap between the United States and

Japan has narrowed. Japanese firms are now

at or near parity with the United States in

many areas, helped by R&D support from the

Japanese Government. Although Japanese

companies are unlikely to overtake their U.S.

rivals in ICs such as microprocessors that depend on clever design, the Japanese have

already demonstrated their capabilities in

more straightforward circuits.

While Japan’s cooperative VLSI program

has been important, the major impact of this

government-sponsored effort was perhaps

less a matter of technology than psychology,

By providing a unifying focus for R&D, such

cooperative projects contribute to the technical capability of Japanese firms both directly and indirectly.

A deserved reputation for high quality has

also contributed to the competitiveness of the

Japanese electronics industry. This is an area

where U.S. firms have renewed their efforts;

but the Japanese will undoubtedly also continue to progress.

U.S. semiconductor firms face rapidly escalating capital requirements for R&D and to

meet the growing demand for their products.

Vertical integration will continue in the

United States; it is in the strategic interests of

the managements of firms now in the merchant market, as well as those that make end

products. Mergers and backward or forward

integration can give complementary product

lines, captive markets, synergistic environments for R&D and product development, and

sometimes capital,

In computers, American firms have always

been extremely competitive. Here, as for

semiconductors, the real question is whether

U.S. firms will be able to maintain their positions. Past efforts by foreign firms to compete

directly with IBM and other U.S. computer

manufacturers have seldom had much success. Even in Japan, where measures were

taken to promote domestic firms and discourage imports, U.S. producers still account for

45 percent of the market.

The advantages of U.S. computer manufacturers have come from extensive service and

support capabilities and broad product lines,

as well as their technology, American firms

have dominated hardware as well as software developments, and have also become

skilled at marketing on a world scale, These

determinants of competitive success are unlikely to change, even amidst the market

shifts associated with the increasing relative

importance of minicomputers and microcomputers, and the blurring of boundaries between the computer and the communications

industries. Software will continue to grow in

significance— an area in which the Japanese

industry has been weak, but one which it has

targeted for development.

For automobiles, as for steel, import penetration is nothing new. While the recent

downturn in sales of domestic cars has precedents, given the cyclical behavior characteristic of the industry, the important fact is

that more than 25 percent of the U.S. market

is now taken by imports (and import penetration is even higher in the most popular subcompact class). The Japanese have led this

wave of imports; since 1973 the Japanese

share of all imported cars sold in the United

States has gone from 40 to 80 percent.

While some have argued that imports are

the primary cause of the apparently declining

competitiveness of U.S. automobile firms, it is

difficult to make this case. Although Japan’s

automakers have real advantages in lower
-. ———. .

Ch. 5—industry-Specit\c Competitiveness ● 105

manufacturing costs, some Japanese cars—

like some Japanese TV sets—have the proven

ability to command premium prices in the

American market. Among the reasons for

lower production costs in Japan are the extensive use of affiliated and subsidiary firms

and subcontractors —which may depress

average wages.

A considerable portion of the difficulty experienced in 1980 by U.S. automakers was

the result of economic recession and nonprice

factors, including the sudden shift in consumer demand to small cars— caused by recent jumps in gasoline prices. Still, much of

the sales decline since 1978 can be attributed

to a shrinking market, with perhaps onequarter representing domestic production

displaced by imports. A major part of the

problem has been a mismatch between product design and market demand. The product

lines of the American firms are thin in small

cars, particularly subcompacts-which are

taking a much larger share of the market

than as recently as 1978. Imports offer wider

selections of subcompact models. Moreover,

consumers regard them as high quality, well

designed, and good values. U.S. companies remained in a reactive position in this portion of

the market through 1980, While new 1981

U.S. models may reverse some of the losses of

the last 2 years, Japanese imports are now

well established in the United States; American firms can expect difficulty in regaining

market share.

The costs of the current decline fall heavily

on unemployed American automobile workers. The magnitude cf employment losses, and

the regional concentration of the problem,

suggest a need for public policy measures to

more effectively deal with such dislocations

(ch. 8). Because of the tradeoff between productivity and employment, jobs in the domestic automobile industry will not regain their

former levels even in good sales years.

Despite the differences among these industries, there are common themes. All three,

like their counterparts abroad, are now more

exposed to the rigors of international competition. The U.S. market in these sectors is

also a much smaller fraction of the total

world market than in the 1950’s. American

firms which do not export or manufacture

overseas are bound to shrink in relative importance.

Profits have declined—in some years disappeared—in steel, consumer electronics,

and automobiles. This cuts into the cash flow

available for modernizing and rebuilding

competitiveness. Statements focusing on the

need for capital to foster competitiveness

have come from leaders of all three industries, and from other sectors of the American

economy. If universally true, they would be a

severe indictment of domestic capital markets—usually thought to be the best developed in the world. However, each industry

has different reasons to advance for the

causes of its capital shortfall. In semiconductors, it is primarily rapid growth and the

rising capital-intensity of VLSI. In steel, expenditures are needed to meet environmental

and workplace standards, as well as to replace outmoded plant and equipment. The automobile industry must spend large amounts

on redesign and retooling to produce small,

high-mileage cars, In each instance there

does in fact appear to be a good possibility

that the market will not supply all the funds

that industry desires. This is typically

because expected returns are lower than for

alternative investments.

The problems that have been described

typify the dilemmas which other U.S. manufacturing industries face, or will face in the

not-too-distant future. Perhaps the most important conclusion, illustrated by all three industries, is that the technological advantages

possessed by American firms in the earlier

postwar period have now been significantly

eroded, Even in electronics, where American

companies have been world competitors par

excellence, the U.S. technological lead is in

many cases now marginal.

A second and related theme is the cost of

declining competitiveness. The benefits of international trade and competition are signifi-
106 . U.S. Industrial Competitiveness —A Comparison of Steelj Electronics, and Automobiles fornobi/es

cant—e.g., in bringing new products to con- employment opportunities has its most serisumers, often at lower prices. Increased com- ous impacts on particular regions and groups.

petitiveness and productivity can raise living The inescapable fact is that the structural

standards and slow inflation, But there are changes underway in the United States and

also serious losses. Declining employment op- the world economy entail long-term employportunities in steel and automobiles stem ment declines in traditionally important secmostly from productivity growth, Nonethe- tors of the economy,

less, imports always cost U.S. jobs, The loss in
CHAPTER 6

Government Policy Effects on

the Three Industries
———

Contents

Page

overview .*. .. o*. *.. ,.*. ..o. ,e*. ,*o. ,e**. *oO. .OooO** Oo*o. ..e*oe, ,o, ., . 109

Steel *.*. *9** *.. ***. **. .*** **. **. **.0 e **e*.*****.*.********.**.**.*,,** 110

Wages and Prices ., . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

Trade Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........................111

The Solomon Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......................,.112

Other Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

Electronics ...,.0, ,.,..0.. ● ..0.0., .,.,,,.* so..,,,, ,.,.,.0* ,*.*#... . . . . . . 114

Consumer Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....................114

Semiconductors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

Computers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .. .. .. .. $ ...............117

Automobiles. . . . . . . . ● ****..*. ● **....,* ● .,,...** ..**,**,, . . . . . . . . . . . . . . . . 118

Price and Supply of Gasoline. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .........118

Roads and Highways. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ... ... ....120

Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .........................120

Other Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..122

Summary and Conclusions .**..*. . . . . . . . . . . . . . . . . .,*,..*, ...,0.,. ● ...*.,* . 123
CHAPTER 6

Government Policy Effects on

the Three Industries

Overview

This chapter outlines some of the more important ways that policies pursued by the

U.S. Government have affected the steel, electronics, and automobile industries; chapter 7

will then consider their future prospects

based on a variety of factors, including public

policies.

Despite the many policies that influence

the international competitiveness of American industries—directly, as do U.S. foreign

economic policies, or indirectly, as do tax

policies—competitiveness itself has rarely

been a primary or even a secondary concern

of the Government. And, because most policies are pursued for other reasons, judgments or evaluations of the ways in which

such policies affect competitiveness are seldom straight forward.

Most of the examples given below are

measures with sector-specific impacts. Industry is not only affected by sectoral and

macroeconomic policies, but also by other

Government actions having largely aggregate

objectives—e.g., labor law or support for

education. While policies of these types often

have significant effects on competitiveness—

and a number of policy categories with aggregate goals and outcomes are reviewed in

chapter 8—the present chapter focuses on

measures with sector-specific outcomes.

Trade policies, for example, particularly

those dealing with imports, have been consistent influences on both the steel and the

consumer electronics industries since the late

1960”s. Economic and tax policies are importan t for all industries, but have been particularly so for steelmaking because of its high

capital needs.

In consumer electronics, a notable aspect

of trade policy has been the lack of final

resolution of antidumping proceedings, despite a lapse of more than 10 years since the

first complaints were filed. In contrast, the

semiconductor and computer sectors have

not been strongly affected by trade policies—

nor in recent years by public policies of any

type. At earlier stages in the evolution of

both technologies, however, U.S. defense and

space programs provided important support

—especially Government purchases, but also

R&D funding.

Regulatory policy has been the core of Government involvement in the activities of

automobile manufacturers. Regulations dealing with safety, emissions, and fuel economy

have constrained automobile design-for imports (except for mileage standards) as well

as domestically produced vehicles. But regulations have seldom put the U.S. industry at

any disadvantage-many regulations ar e

more burdensome for imports than for domestic producers. Other public policies affecting

transportation in general—particularly the

construction of roads and highways-have

had deep and long-lasting effects on the automobile industry, as have U.S. energy policies.

Macroeconomic demand management—as

manifested, for example, in interest rateshave also been potent forces on this industry.

Industrial competitiveness ultimately depends on the aggregated performance of

many individual firms. But public policies in

the United States seldom address economic

efficiency and competitiveness directly; intervention in private industry has been considered neither desirable, nor even a wholly

109
170 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

legitimate activity for Government. Neverthe- direct ways, acting in parallel with many

less, the Government plays an important role other factors (see table 13 in ch. 5). Therefore

in determining the conditions and environ- the discussion below is largely descriptive;

ment for the conduct of business—whether only in a few cases do the impacts of Governpurely domestic or involving international ment policies on competitiveness seem clear

trade; public policies often shape corporate and unambiguous.

strategies and decisions in oblique and inSteel

Beyond aggregate policies dealing with

matters such as environmental protection,

two main streams of Government policy have

affected the steel industry in the United

States. These have been, first, Government

involvement in determining prices and wage

levels, and, second, U.S. trade policy, primarily as it has affected imports of steel.

Wages and Prices

Because of the size of the steel industry

and the widespread use of its products elsewhere in the economy, steel prices have a

highly visible ripple-effect, attracting Government pressure to hold down prices in attempts to moderate inflation. Strikes in the

steel industry can likewise disrupt other portions of the economy, leading to efforts by the

Government to avoid or minimize their occurrence and length. President Truman’s attempt to nationalize the industry during the

1952 steel strike is but the best-known example of this involvement, Thus, the Government

has played a role in the determination of both

prices and wages in the steel industry, presumably contributing to the pattern of high

wages discussed in chapter 4.

Government attempts to influence steel

prices have become more common as inflation has worsened. ] Since the 1960’s, “jawboning” has from time to time been aimed at

moderating steel price increases. Wage-price

controls at several points during the 1970’s

.—. .—

1’l’ll[; ll]tiuslr~”s pf)silio]l on su(’h Hlill [(!1’s Is (Iutlinc{i ill Stf’t’l

{If (}1[> ( ;l’(J\\I’l)(lf~\ ‘]’/1(’ ~rrl(’rl(’(ln S((Y’I /fl(i[l\ ( 1’}’ ill (ho f !)t~(h

[~1’;lshi[l~l[l]], 1). ( 1.: Am[!rl(ilrl lr(ln t{n[i S[(;cl I]]sti[ul[;. J:II~u:IrI

\ ()[]()) f)s~)t~(j;i]l} p]), 79-80.

applied to steel prices as for other commodities.

Coincident with Government attempts to

moderate steel price increases have come the

relatively low profit levels characterizing the

industry since the 1960’s—profits substantially below the average for all U.S. manufacturing. Although there were many other factors at work—not the least being import competition—efforts by the Government to hold

down steel prices have depressed profits to

some extent. According to a recent analysis

by the General Accounting Office, informal

jawboning had little real effect, but mandatory price controls—in place from 1971 to

1974—did decrease the profits of steel firms, ’

The steel industry contends that Government attempts to dampen price increases

have cut revenues significantly, decreasing

the capital available for modernizing plant

and equipment —both by reducing internally

generated cash flow and by making steel less

attractive to investors —and contributing to

the industry’s slackening competitiveness. Of

course, if additional capital had been available, it would not all have been invested in

steelmaking; some fraction would have gone

toward diversification. But it is also true that

public policies to stimulate investment in new

process technologies aimed at cutting costs

and improving productivity have been lacking

in the United States—certainly compared to

countries such as Japan.

New S(r(]fegy Hcquirwf for Ai(iing Distressmi Stcrl Intius[rv

(Wtishington, D. C,: Gcner:]l Accounting Office, Jfin 8, 1981),

pp. 6-12 !(1 6-14.

‘It)id., p. 2-16. ‘1’}1[? in(iustr}r spen(is roughly $500 million [IIInu;lll~’ [)1) [iiversi fi(:at iun.
—. ..———

Ch. 6—Governrnent Policy Effects on the Three Industries ● 111

Trade Policy

U.S. trade policies have affected all three

of the industries under consideration, steel

more than any except consumer electronics.

The broad context of postwar American

trade policy is an important backdrop to effects on sectors such as steel.

After World War II, the United States used

its power, then at a peak, to construct the

foundations for an open international economic system. This country’s trade policy

complemented its defense policy by strengthening the economies of America’s allies. During those years, and into the 1960’s, U.S.

industry was preeminent in the world. The

American steel industry, for example, produced more than one-quarter of the world’s

output until 1967,

As U.S. firms became international and

multinational (though not in the steel industry), they generally supported free trade.

While the commitment to open trade was not

unlimited, in general the United States could

afford to use access to the American market

and assistance to foreign producers to

strengthen its allies, But as U.S. firms faced

more intense foreign competition, domestic

industries started to seek protection. In the

steel industry, this began in the late 1960’s—

the first major development being Voluntary

Restraint Agreements [VRAS) negotiated by

the U.S. Government with a number of other

steel-producing nations and becoming effective in 1969.

Major issues in postwar U.S. trade policy

have thus been: 1) the terms of access to the

American market; Z) the effect of foreign

government policies on patterns of international trade; and 3) access for U.S. firms to

foreign markets. These issues have shifted in

importance as the flow of policy control

moved away from Congress toward the executive branch in the early postwar years, then

more recently returned in part to Congress.

In keeping with the broad direction of U.S.

trade policy, the Government has consciously

attempted to avoid the use of antidumping

laws against foreign steel producers, especially European firms. 4 Thus to some extent,

protection for U.S. steelmaker may have

been sacrificed to other interests, particularly the desire to maintain good relations

with our allies in Europe. Another factor has

been fear of retaliation against U.S. exports

or overseas investments. The desire to avoid

dumping proceedings was an important motivation for the VRAS on imports of steel, and

later the trigger-price mechanism (TPM).

The recent history of trade policy in steel

thus begins in 1969 with the VRAs. These consisted of voluntary quotas on imports negotiated by the Department of State with most of

the major steel-exporting nations, the quotas

growing by 5 percent each year. The rationale was a slump in the U.S. industry, supposedly temporary; the VRAs, it was claimed,

would give domestic firms an opportunity to

adjust and restore their competitiveness.

To some extent these quotas—along with

existing tariffs at about 6 percent—did succeed in insulating the U.S. industry; domestic

steel production was as much as 10 percent

above the levels that would have been expected without VRAs, and profits also increased. ’ However, during the 6-year period

when VRAs were in effect (between 1969 and

1974) capital expenditures remained significantly below the level of 1968,(’ although

steelmaker added to their debt in several

years. To some extent, a vicious cycle—poor

profits, low expectations for the future, plus

high costs of meeting environmental regulations and high costs of investment in new production technologies—led the managements

of many steel firms to strategies emphasizing

protection and divestment.

At the same time, the United States continued to have the most profitable major steel
772 ● U.S. lndustrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

industry in the world, But relative to other

U.S. industries its profitability was poor. It

was no surprise to find capital flowing elsewhere.

Thus, VRAs had little apparent effect in

providing “breathing space” for the industry

to revitalize. Instead, the pressures of foreign

competition compounded the other problems

faced by the industry and led to renewed

calls for restrictions on imports, particularly

those “dumped” on the American market. By

late 1977, the industry was in a slump that

caused the closing of 14 major mills at a loss

of over 20,000 jobs. The TPM followed in

1978.

First, however, the administration called

on Anthony Solomon, then Undersecretary of

the Treasury, to formulate a “comprehensive

program” for the steel industry—in large

measure to forestall antidumping suits

against European steelmaker.

The Solomon Plan

The Solomon plan had four general objectives:7

1.

2.

3.

4.

stimulate efficiency;

ease the burden of adjustment for both

industry and labor;

provide incentives for modernization

through tax, investment, and financial

assistance; and

expedite relief from unfair import competition while maintaining the overall

U.S. posture favoring open trade.

Only a portion of the plan was implemented. Most significant was the TPM, which

set reference prices for 32 categories of steel

products, covering 90 percent of imports.

These prices, established by the Department

of Treasury, were to be based on the cost of

production in the most efficient steelmaking

nation, Japan, plus transportation costs, 8-

percent profit, and 10-percent overhead. Imports sold below this price would trigger an

expedited dumping investigation.

A. M. Solomon, “Report to the President: A Comprehensive

Program for the Steel Industry},”’ December 1977.

The TPM evidently suffered from lax enforcement as well as problems in establishing

the reference cost levels, 8 the latter associated particularly with exchange rate fluctuations and variations in capacity utilization.

Trigger pricing was a political compromise

that provided some import relief, while allowing our European allies to export to the

United States at prices below their costs of

production, (Strict enforcement of antidumping laws would have been an effective embargo on much European steel). One effect of the

TPM was, therefore, to allow European exporters to raise prices and cover a larger

fraction of their costs, helping them more

than American firms.’ The TPM may also

have raised the prices Japanese firms could

charge. While increasing revenues for American steelmaker, it increased costs for

American firms that buy steel for use in their

own products.

Although the complete Solomon plan was

not implemented, several other recommendations— including the establishment of a loan

guarantee program— were carried out, The

Economic Development Agency (EDA), part of

the Department of Commerce, was authorized to extend over $550 million in loan guarantees to steel companies. As for other EDA

loans and loan guarantees, maintaining employment was the primary objective. The loan

program was small in terms of the capital

needs of the industry as a whole, which by all

estimates reach several billion dollars per

year; it helped weaker firms and was not oriented toward new technology.”]

The EDA loan guarantee program has had

some success in meeting its limited objectives

of supporting ailing firms and saving jobs. But

trade policy measures such as the TPM and

the earlier VRA’S have shown little evidence

of creating an environment conducive to the

revitalization of the industry. Steelmaker

have been able to protect some profits, but in-
Ch. 6—Government Policy Effects on the Three industries ● 113

centives for using these profits to diversify

out of steelmaking remain strong.

Another recommendation of the Solomon

plan to be adopted was a shortening of depreciation schedules for steelmaking equipment

from 18 to 15 years. While this gave a small

increase in cash flow available for reinvestment, capital cost recovery periods in the

United States remain longer than for many of

our international rivals. 12 The Steel Tripartite

Advisory Committee recommended in the Solomon report also remains in existence. Drawing its membership from industry, labor, and

Government, the tripartite committee helped

to formulate the Carter administration’s steel

policy and has served as a model for similar

committees in other industries—e, g., that

formed during 1980 to consider the problems

of U.S. automobile manufacturers,

Despite the comprehensive program urged

in the Solomon report, the competitive position of the domestic steel industry is no better

today than when the report was issued, As

discussed in chapters 4 and 5, the competitive slide of the integrated portion of

the industry stems in large part from high

wage levels combined with slow’ productivity

growth. Government policies have thus far

done little to attack the underlying problems

of capital investment for modernizationwhich could reduce energy consumption as

well as cutting costs and improving productivity. One reason is that in the United States,

actively strengthening an industry such as

steel has not been widely perceived as a legitimate goal of public policy.

Other Policies

Among the many Government policies with

broad objectives but sector-specific impacts

on the steel industry, the most visible have

been environmental standards and workplace health and safety regulations. During

the 1970’s, meeting Occupational Safety and

Health Administration (OSHA) and Environmental Protection Agency (EPA) regulations

‘‘ l})i(i., p .121.

lt)l[j. ! p. 59.

required capital expenditures by the U.S.

steel industry averaging about $365 mill ion a

year, 17 percent of annual capital investment. 1‘ This is less than industry spending for

nonsteel diversification. (Diversification can

give useful stability to firms in cyclical industries such as steel. )

In other countries, public pressures have

also led to increased capital expenditures for

safety, health, and environmental controls.

From 1971 to 1977, Japanese steel industry

capital costs for environment al compliance

were 65-percent higher than LT

. S, levels, ~ Expenditures by European producers have been

similar in magnitude to those in the United

States, but governments in both Europe and

Japan have often subsidized s~~me of the

costs. Even in the United States, nearly half of

capital expenditures for pollution cent rol

have been financed through industrial (icvclopment bonds—in effect, Govern mwlt-subsidized loans. “I Because Europe;]n steelmaker

have not in any case been cost compet itivc

with U. S, producers- in cent rast to the J apanese—it seems unlikelv that the Amer ic iin

steel industry has been seriously harmed in

any relative sense by differences arnon~ the

industrialized countries in environmental or

workplace regulations,

Energy policies in the United States directly affect the competitiveness of the steel

industry and will be increasingly si~nificant

in the future. Costs of coal ~n~ electricity are

important— coal primarily for integrated

steelmaker, electricity for minimills as well

as integrated producers using electric furnaces.

The effects on the competitiveness of the

steel industry of measures such as those dealing with energy or the environment have

often been viewed by policy makers as incidental. Though the cumulative effect of many

such policies, each of which has only a mar-

‘It)](i., p. 3.)1.

‘‘!\’(’Lt’ s/r”(Jfe~\’ Hr(/lllr(vi for ,’\)(jlIl~ [)/\tz”[’\>(vi S(WI lnou\

tr}, op. []! , pp 2-16 tf) 2-18,

‘1’(’(}11101( ),g}’ (lrl[f S(W1 lrl(iu~tr’}’ (:orrlr)(’fltli ’f’rl[’s\, op. (It ,,

p. 6/3.

‘ lbld.. p. .146.
114 ● U.S. Industrial Competitiveness —A Comparison of Steel, Electronics, and Automobiles

ginal impact (positive or negative), can be ma- industries like steel. This could be a useful

jor, evaluation of net impacts is seldom at- step in deciding what, if any, role the Governtempted. A possible task for industrial policy ment should play in efforts to maintain and

would be to attempt a more encompassing enhance the competitiveness of such inperspective towards the dilemmas faced by dustries.

Electronics

The diversity of products and technologies

in the electronics industry carries over to

policy matters. Different types of policies

have been important to different parts of the

industry. Electronics firms have not always

agreed on which Government policies would

be desirable. For example, in the protracted

controversy over dumping of color TVs and

other alleged unfair trade practices, firms

such as RCA that have extensive international activities and receive licensing revenue

from Japanese producers took a “free trade”

position. Companies with primarily domestic

operations pressed strongly for Government

policies to protect the industry.

In the computer industry, there is likewise

no community of interest between IBM and

many of the smaller firms, particularly those

making plug-compatible equipment of various

types, Several of these firms have brought

suit against IBM alleging unfair competition.

This part of the electronics industry has also

been unsettled by the ongoing attempts of the

Federal Government to resolve the complex

policy issues that are arising as computers

and information technologies overlap the regulated communications industries. In the

semiconductor sector, merchant and captive

manufacturers do not always share common

concerns.

Consumer Electronics

As for the steel industry, Government actions concerning trade have been important

to the U.S. consumer electronics sector,

While most of the attention has focused on

imports, concern has also been expressed

over policies dealing with foreign investment

and offshore assembly, the latter currently

favored by U.S. tariff laws. ” Organized labor,

in particular, has often criticized such tariff

policies —which have helped keep down costs

for U.S. semiconductor firms as well as TV

manufacturers, but are claimed to “export”

jobs. ” Still, treatment of imported consumer

electronics products, particularly color TVs,

has been the core of U.S. policies affecting

this industry.

Dumping complaints—claims that imported TV receivers were being sold at less

than “fair value”-began in 1968, when the

Electronics Industries Association (EIA) alleged massive dumping of Japanese TVS. ’Y

The EIA claimed that Japanese firms were

able to cut prices in the United States by

maintaining artificially high price levels at

‘ SW-S. 806, :MI :ln{l 807.00 t~f the (1. S. t:]riff s(llw{uI[!s provici(;

ff)r dut}-free I re;]lmt:nl of stjm[? m:iteri;]ls :In(i r(mlponenls senl

:~ bro;ld f(] r fu r-i ht; r p r{x’ess i n~ ( )r ;) ssem I)ly [i n(i t h(?n rf; i my)rlfxi. ‘1’h~; duly-free vtilue [If iml)[lrls entered un(ier these

pr[)visll)ns ,givcs ;)n i n(i if:] t if )11 ( ) f t 11 [? [} x I en t () f I ) f fsh( I rc

[I sscm Ii t’. F’or T\7 rwwi vers, t h e d u 1 i’-free p[jr t i i )n I )f i m p( j rts inrreased from 9 per(en t in 1975 I () 17 pcr[en t in 1977. [ Sce Zm

~~orl ‘Z’r(lnff\ in ‘1 ”S[1S llf’n).~ 806.:)[) (~n[l 807.()() (il’:ishinxl(]n, 1). (;.:

Intern:)t iorlal ‘I’r:i(lc {hmlm]ssit)n pub]l(i) tll)n 1029. ]{]nu:]r~

1 ~)~~), p, :]~. ) I )U lv.fr[;[? ([~n 1 (;II 1 t)f s[mi(u m(iu(:lt)r imp[)rl S r{w

from 30 to M) pcr[(mt belwe[?rl 1975 nn(l 1978.

‘f’l~’hether foreign investment dw:reascs domestic job opportunities depends un the assumcxf course of events in the absen<:e of the overseas invest men I—u’hich (:an never be known.

Assuming {h[it the industry woulri decline pre(’ipitously if it did

not move some opera I ions overseas genera 1 I y leads to a prf;-

diction that foreign investment saves domest ir jobs. See, for example The Irnp~JcI ~~f ln[ernflti[)rl(l) Trw(ie un(i lnvcstmcn t on

Em~J[Jyment (Washingt[)n D.(;.: Department of Labor 1978).

IqA countervailin~ duty ct~se w[]s also filed b~ Zenith in 1974,

wh i(:h claimed t h{] t retx] tes of the Japanese commodity tn x un

exported ‘1’VS cunst i t u ted a suhsi(]y. This event ui~)ly went to the

[J. S. Supreme (Y{)urt, where it W:]S (iw:ided ngainst Zenith in

1978. An nntitrus( case filed by Zenith :)nd i)tl(][h(?r plaintiff-

[~]]eging [i conspir{~rl bv J:)pi)n(}s(; firms 10 [iest ro~ the [;, S, (:onsumer ele(tron ifs in(iustry-w’as recently (iismisse(i but will

:] lm [mt (x;rt:] inlv be ;Ippe[l 1 (xi.
Ch. 6—Government Policy Effects on the Three Industries ● 115

home, helped by import barriers. Japanese

firms, while acknowledging higher domestic

prices, contended that the difference was due

to higher taxes and marketing costs. (Spurred

by news reports of the dumping charges, Japanese consumers in fact organized an 8-

month boycott of color TV sales, eventually

forcing prices in Japan down somewhat.)

In the United States, it was not until 1971

that the Treasury Department and the International Trade Commission issued positive

findings of dumping and injury on the EIA

complaints. During 1973 the amounts of the

antidumping duties were determined (for the

period 1970-71 only), But by the end of 1980

only a fraction of the duties assessed had

been collected. Furthermore, no duties for the

period 1973-75 had been collected, and assessments past 1975 had not been completed.

The post-1975 duties alone could total more

than $100 million. 2o

This 12-year history demonstrates the inadequacies of antidumping procedures in a

case where both dumping and injury have

been consistently demonstrated. An industry

legally entitled to protection has not received

it. Nonetheless, the failure of public policy in

this case—partly a reluctance by Government agencies commit ted to free trade to pursue the complaints—may not have had a critical effect on the course of the domestic industry. As discussed in chapter 5, Japanese consumer electronics manufacturers had many

other advantages over American firms: lower

costs, a measure of government R&D support,

and an aggressive determination to penetrate

markets on a worldwide basis, At least some

of these companies would probably have succeeded in the United States without dumping.

A telling point is that Sony, one of the most

successful of the Japanese firms, has never

been implicated in dumping and has been

able to command premium prices in U.S.

markets.

The most disturbing aspect of this history

from a public policy standpoint is the uncertainty that has persisted over the past 12

years. The conflicts within the Government

and between Government and industry—the

lack of final resolution in the antidumping

proceedings— created a climate in which U.S.

consumer electronics firms had to plan for

the future without knowing what the trade

policy environment would be. This uncertainty extended to importers as well. But an important goal for industrial policy should be to

reduce uncertainty, not create it.

During this period of unresolved dumping

proceedings, the U.S. Government also negotiated import quotas on color TVs, first with

Japan, later with Taiwan and South Korea.

An upshot of “escape clause” proceedings

brought before the International Trade Commission in 1976, unfair trade practices were

not at issue.

The Orderly Marketing Agreements

(OMAS) for color TVs were ostensibly intended to give the U.S. consumer electronics

industry a chance to rebuild its competitiveness—in this analogous to VRAS for steel. In

reality, a more important aim of the color TV

restrictions was probably to encourage foreign manufacturers to set up U.S. assembly

operations as an aid to maintaining domestic

employment. This objective was in fact accomplished (ch. 5). Many of the indications of

rebuilding or of sustained competitiveness

that are evident—e.g., RCA’s video disk developments—would probably have taken

place in any event.

The OMAS with Taiwan and South Korea

were recently extended through mid-1982.

Under the new agreements, each country will

be permitted to increase its color TV exports

to the United States—from 526,000 for the

year ending June 30, 1980, to 1 million in

1982. At the same time the OMA with Japan

was allowed to expire because U.S. imports

of Japanese TVs have dropped markedly. As

happened with Japanese producers, the extended OMAS with Taiwan and Korea will

probably encourage firms from these countries to establish manufacturing operations in

the United States. If these OMAS had been
116 Ž U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

allowed to end, imports from Taiwan and

Korea would most likely have jumped.

Semiconductors

There are comparatively few current Government policies with marked sector-specific

effects on the semiconductor industry. While

public comments by industry executives have

sometimes included allegations of unfair

trade practices by the Japanese—e.g., in

connection with rapid import penetration in

16K RAMs—no formal complaints have been

filed. The industry has also claimed that subsidies and supports by the Japanese Government—as exemplified by the VLSI cooperative R&D program described in chapter 5—

constitute unfair competition. 2l The agreement on government procurement reached by

the United States and Japan at the end of

1980—affecting primarily the purchasing

practices of Nippon Telegraph & Telephone

Public Corp.— may help to ease some of the

friction between the two countries over trade

in semiconductors.

In the past, the Government activities with

the greatest impact on the U.S. semiconductor industry were R&D support and procurement associated with military and space systems. Except for the new Very High-Speed

Integrated Circuit (VHSIC) program of the Department of Defense, the major impacts of

such programs have already been felt. Much

the same has been true for the computer sector, where Government-sponsored R&D and

purchases of equipment were important to

the early development of the industry, but

have since faded in significance.

Both the transistor, invented at Bell Laboratories in 1948, and the integrated circuit

(IC), developed by Texas Instruments and

Fairchild Semiconductor in the late 1950’s

and early 1960’s, sprang from company-

)F’tJr a s[]mp]ing of the in[iustrl”s concerns SW?: hl. Hodgsorl

[ml,), An Ami=z’ic(]n Res[)onsc to (hr F’(}reign lndustriu] Ch(]llengr in High ‘1’echnoJf)~\ lndustri[?s, pr(meedings of the Scmicon(iurt[)r Industry Ass(wi{~ t ion (1[)1’ernment Policy Conference, Nl[)nterey, (;~]if,, June 18-19, 1980 (P:I1o Alto, Ca]if.:

W’orden F’raser Publisher, 1980),

funded R&D programs.zz Nonetheless, Government support was crucial to engineering

development— first for transistors, later for

ICS. Market incentives provided by the military, primarily through procurement, were

more important than direct R&D funding. 23

Purchases for the U.S. space program likewise aided the early growth of the industry.

More recently, military and space markets

have declined in size and importance relative

IIN J A~her and L. D, Strom, “The Role of the Department ‘f

. .

Defense in the Development of Integrated Circuits,”’ Institute

for Defense Analyses paper P-1 271, May 1977.

“J, R. Tilton, International Diffusion of Technology: The Cuse

of Semiconductors (Washington, D. C.: The Brookings Institution, 1971), pp. 90-91.

.,

# ,

● ✎

✌✎

●

✎✌ ‘b

. b. ,

. .

.,

.

BPho/o crecflt /f3M Corp

Subnanosecond bipolar VLSI circuit
Ch. 6—Governrnent Policy Effects on the Three Industries ● 717

to commercial sales— this being one of the

reasons for the VHSIC program. Although directed at specialized military applications—

primarily signal processing—and more rapid

use of VLSI in fielded equipment, VHSIC

spending will stimulate the commercial semiconductor industry in a real though limited

way, mostly by accelerating the pace of R&D

in areas such as lithography and computeraided circuit design.

Another important support for the semiconductor industry— this one indirect—has

been education and training of engineers and

scientists, primarily through Governmentsponsored R&D within universities. Less of

this funding is now available than in the

1960’s, a cause for concern to many in the industry because of the current shortage of

technical professionals.

From a Government policy viewpoint, a

noteworthy aspect of the development of the

semiconductor industry is the impetus for the

integrated circuit provided by an Air Force

program aimed at “‘molecular electronics’

during the late 1950’s. Molecular electronics

never came to fruition, but the effort stimulated the invent ion and development of the

IC.

24 If the Air Force program had been directive rather than stimulative—i. e., if Government policy had tried to force the technology

down the path of molecular electronics—IC

development might have been delayed. Instead, military needs stimulated private expenditures leading to the new technology; it

did not come from the Air Force’s own laboratories or from Government-funded R&D.

Computers

The early history of this sector is also

marked by a strong Government presence,

through both R&D support and purchases.’;

Since the 1950's, Government influence has

been more tangential. Trade policies have

had little effect on the development of

computer industry beyond U.S. support

the

for

Lexopen international trade; American computer

firms have generally had price advantages as

well as technical superiority. Under such circumstances, trade barriers have been unimportant except in the case of Japan and to a

lesser extent the United Kingdom,

~ An area where policy may become increasingly significant is computer software. Software is presently almost impossible to protect: programs typically cannot be patented,

and copyrights can be easily circumvented.

More workable protection for proprietary

programs could help safeguard the U.S. lead

in software.

Within the United States, perhaps the most

important Government action in recent years

has been the antitrust suit brought against

IBM in 1969—and still in trial, Some observers have suggested that a Government victory

might harm the international competitiveness

of the U.S. computer industry, given IBM's

worldwide dominance of markets for larger

size computers. In this, as in the antitrust suit

which seeks (among other things) to divest

Bell Laboratories from AT&T, these observers have seen a policy that could run counter

to the interests of U.S. competitiveness: a n -

titrust enforcement has only recently begun

to consider worldwide-as opposed to purely

domestic—market conditions. Others contend that antitrust measures aimed at decreasing industrial concentration will enhance U.S. competitiveness-that the tradiitional reliance of the United States on bala need competition is a key to effectiveness

worldwide as well as in domestic markets.

Governments in the United States and elsewhere have been slow in coming to grips with

the many issues raised by the blurring of

boundaries between the computer and communications industries. With computers talking to one another over telephone lines, widespread networking and distributed processing, and electronic mail, teletext, and videotext on the horizon, it is increasingly difficult

to distinguish data processing from data communications. Because communications, unlike data processing, has been a regulated

industry, government policies are having to
118 • U.S. Industrial Competitiveness —A Comparison 01 Steel, Electronics, and Automobiles

be reconsidered in light of the overlap between these sectors created by technological

change.

This brief review of public policies with

major effects on consumer electronics, semiconductors, and computers—ranging from

trade policies and their administration to

communications regulations-illustrates the

variety and diversity of impacts on this industry. Most of these policies have been developed on a case-by-case basis, and—as was

typical for the steel industry—with aims

other than competitiveness and economic efficiency. The favorable impacts of Government

procurement on the semiconductor industry,

for example, were not a central concern of

policymakers, even though the Department of

Defense recognized the importance of a

healthy electronics industry to U.S. military

strength.

Photo credit Westinghouse

Terminal for an electronic mail system

Automobiles

Current sector-specific policies toward the

automobile industry can be traced back to the

1950’s, when smog in the Los Angeles basin

was attributed in part to automobiles. Government regulations to reduce emissions and

enhance auto safety multiplied during the

1960’s and 1970’s; fuel economy regulations

were instituted in 1975, The automobile industry now finds its products heavily regulated; at the same time, its manufacturing

processes are monitored by EPA and OSHA,

and its sales affected by many policies that

indirectly influence demand for automobiles—energy policies, interest rates, credit

controls.

Today, automakers see themselves as facing two major sets of policy-related problems:

1) absorbing the costs of regulation; and 2)

dealing with Government policies that are

perceived as sometimes ambiguous and conflicting, and that are not always stable over

time (the industry itself contributes to delays

and confusion in automobile regulations, as in

the case of passive restraints). But two past

Government policies have also had deep,

long-term though indirect impacts on the automobile industry. Both encouraged the production of big cars designed with little attention to fuel economy. The first is the series

of decisions that kept the price of gasoline

low in the United States—the second, public

policies supporting a system of roads and

highways unmatched in the rest of the world.

Both were supported for many years by a

broad political consensus.

Price and Supply of Gasoline

The United States has traditionally had low

gasoline taxes and low import charges on

foreign oil. For many years these policies

helped to keep fuel prices low. Even after decontrol, gasoline in the United States still

costs far less than in most other parts of the

world—and the market incentives for consumers to buy small, fuel-efficient automobiles are correspondingly lower. (By 1975, the

domestic automakers had nonetheless taken
—

Ch. 6—Government Policy Effects on the Three Industries ● 119

positions in support of gasoline price decontrol, )

Thus until recently, the cost and availability of fuel was a minor consideration for most

automobile purchasers in the United States.

When this changed suddenly in 1979-80, the

consequences for domestic automakers were

severe. Moreover, if gasoline prices in this

country were to rise to levels comparable to

those in Europe and Japan, consumers would

presumably find the larger domestic cars still

less desirable. While public policies in the

United States as they affect gasoline prices

continue to favor domestic automakers, Government decisions have contributed to the erratic nature of gasoline price rises, as well as

to shortages and gasoline lines, and thus to

the currently depressed market for American

cars. These decisions have come in a highly

politicized environment—one where consensus has been elusive and the terms of the debate have often been outstripped by events.

In the simplest view, policy makers in the

United States have been caught between two

conflicting objectives, The first is a need to

allow fuel prices to increase, encouraging

conservation and reducing U.S. dependence

on foreign oil. The second is a desire to keep

fuel prices low as a brake on inflation and to

minimize the burdens on low-income segments of the population. As one result, rather

than a gradual, predictable rise in gasoline

prices—which would have allowed both automakers and consumers to plan ahead—gasoline prices (and supplies) have moved suddenly and unpredictably, The difficulties that

would in any case have been caused by external disruptions—such as the 1973 Arab oil

embargo and the monopoly control exercised

by the OPEC cartel —have thus been more

acute,

For example, gasoline prices quickly rose

by more than 20 percent in real terms following the 1973 October War and the Arab

oil embargo. Subsequently, the small car

share of the U.S. market

going from 38 percent in

increased sharply—

1972 to 49 percent in

1974 and 53 percent in 1975.2

’

) Import sales

did not rise appreciably; most of the increase

in 1974 was taken by domestic small cars (see

table 5 in ch. 4).

Yet gasoline prices soon stabilized—and

even went down in real terms during the period 1974-78. One reason was the Energy Policy

and Conservation Act (EPCA), which became

law at the end of 1975. The Act did two

things. It established mandatory fuel economy standards for auto fleets. At the same

time, EPCA kept oil prices under strict controls. During this same period, OPEC followed

a policy of moderation in oil pricing and fuel

taxes remained low.

Many consumers refused to accept the reality of the “energy crisis. ” The market share

of small cars fell slightly—from 53 percent in

1975 to 48 percent for 1976 and 1977. More

significantly, capacity utilization for domestic

subcompacts dropped to less than 54 percent

in 1976 and 1977, while plants for intermediate and full-sized cars operated at or near

full capacity. ”

The years 1974 to 1977 thus presented

American manufacturers with a difficult set

of decisions. On the one hand, they could sell

all the large cars they could build—and at

healthy profit margins. But the Corporate

Average Fuel Economy (CAFE) standards

built into EPCA required that they move

toward better fuel consumption, EPCA did not

require that cars be small in size, but downsizing was clearly in order to increase

mileage, In fact, the law favored downsizing

and other means of gaining relatively small

improvements in the mileage of big cars over

building new high-mileage subcompacts. But

it was also obvious that each manufacturer

would eventually need a substantial fraction
120 ● U.S. Industrial Competitiveress—A Comparison of Steel, Electronics, and Automobiles

of subcompacts in order to meet fleet averages for later years,

Nonetheless, in the mid-1970’s small cars

were not selling well and American manufacturers were reluctant to believe that their

customers would want them in large numbers. Moreover, profits on small cars were

low. Thus domestic automakers tended to

hedge their bets. In 1976—the same year it

introduced its new subcompact Chevette—

General Motors announced that it would

downsize its entire fleet by 1985. Ford decided to import the subcompact Fiesta rather

than building it in the United States—which

meant that it could not be counted in the

CAFE figures—and as a result did not have a

competitive domestic subcompact until the

1981 model year. Chrysler introduced its

subcompact Omni/Horizon in 1978 but relied

on outside suppliers for engines, which

limited attainable production levels.

In general, then, American firms were not

well-prepared for the end of consumer ambivalence toward small cars— triggered by

events at the end of 1978 and the beginning of

1979. Large OPEC oil price increases, the Iranian revolution, and the beginning of decontrol of domestic oil prices caused major shifts

in the U.S. automobile market. Gas lines reappeared during the summer of 1979. Prices

at the pump more than doubled over a 2-year

period. As in 1974-75, consumers turned to

small cars—their market share rose from

under 50 percent to nearly 65 percent in

1980. Japanese auto firms had extra production capacity available to meet the new demand, U.S. manufacturers, in contrast, might

have had even fewer small cars on the market in the absence of the CAFE standards in

EPCA.

Roads and Highways

A second major indirect influence on the

U.S. automobile industry—one now less important than in years past—was the extensive development of roads and highways

which culminated in the Interstate Highway

System. And, in contrast to many other countries, public policies in the United States put

railroads and other public transportation at a

relative disadvantage compared to automobiles and trucks.

Federal aid for highway construction dates

from 1917; State highway systems were universal by 1924. Secondary highways and city

streets, in particular, have been heavily

financed from general tax revenues. The development of both inter- and intra-city roads

and highways—together with the long distances between population centers in the

United States, and our energy policies—contributed to the development of the characteristic American automobile: comfortable and

durable but also large. The legacy of the big

American car—which evolved in isolation

from other world markets—has left the indus-

 try for the moment in a rather weak position.

It is easy to lose sight of this history in the

current discussion of fuel economy/emissions/safety regulations. The Government has

for years been making policies that affected

the industry. In the past these policies were

welcomed by all—and often actively supported by the automakers. This is no longer

the case.

Regulation

The three primary categories of product

regulations that affect the automobile industry cover emissions, fuel economy, and safety. ” EPA administers the emissions and fuel

economy standards—which have been largely set by Congress—while the National Highway Traffic Safety Administration (NHTSA)

has responsibility for automobile safety. In

addition to regulation of automobiles as products, manufacturing operations come under

the purview of EPA and OSHA.

Regulation of automobile emissions began

during the early 1960’s in California. The

first Federal standards took effect in 1968,

Originally, only hydrocarbons and carbon

monoxide were controlled. Rather minor en-

-’The Automobile G]lendur: Recent und PentfIng Feder~li Activities Affecting fvf~)tor Vehic]es (Washington, D. C,: United

Stales Regulatory thuncil, Januarv 1981).
—

Ch. 6—Government Policy Effects on the Three Industries . 121

gine modifications— PCV valves, retarded ignition timing, and slightly leaner air-fuel

ratios—were sufficient to meet the early

standards.

Regulations for later years called for further reductions in hydrocarbons and carbon

monoxide, with restrictions on nitrogen oxides taking effect in 1973. Scheduled reductions in all three pollutants were steep and

essentially arbitrary in magnitude. At the

time, the automakers claimed that standards

scheduled for the mid-1970’s would be costly

to meet and perhaps technologically impossible. Today, controversy over the costs and

benefits of emissions standards continues.

Opponents of standards have claimed that increased purchase prices of automobiles and

decreased fuel economy outweigh the benefits of the stringent control levels that the

Clean Air Act and its amendments require,

Beyond costs and technical feasibility, the

timing of emissions standards has been at

issue. Timing is closely tied to technical

feasibility. The manufacturers have claimed

that standards could not be met on schedule,

and perhaps could not be met at all. Widespread driveability problems with cars produced during the mid-1970’s gave evidence of

the technical problems.

Another consequence of emissions standards which rapidly became apparent was the

fuel economy penalty associated with engine

modifications for pollution control. Retarded

spark timing, exhaust gas recirculation, and

thermal reactors all decreased engine efficiency. Catalytic converters allowed some

ground to be regained, but the lead-free

gasoline needed to prevent catalyst poisoning

meant compression ratios had to be lowered,

canceling some of the possible gains. While

the magnitude of the tradeoffs between emissions control and fuel economy may have

been overstated during debates on these regulations, the incompatibilities between the

two goals illustrate the complexities of such

issues.

The staging of fuel economy regulations

was also controversial. While no longer an

issue for automobiles—because the demands

of the marketplace have recently outstripped

CAFE regulations—manufacturers have continued to oppose the mileage standards

scheduled for light trucks. As the question of

possible fuel economy standards for the

post-1985 period comes into focus, there may

again be debate over passenger car mileage

standards and their timing.

Fuel economy regulations and now the

market have forced U.S. automakers to make

large capital investments in new vehicle designs that foreign manufacturers—with their

existing high-mileage fleets—have generally

been able to avoid. But the very fact that the

market is now demanding small, economical

cars demonstrates that the premise behind

the fuel economy standards was sound.

Safety standards have thus far been relatively easy to meet from a technical standpoint—unlike emissions regulations. Nonetheless, they have remained a source of considerable conflict between Government and the

automakers. Of particular concern at present

are passive restraint requirements. U.S. automakers have argued that these give an advantage to the Japanese since small cars do not

have to be equipped with passive restraint

systems until 1984, while large cars must

have the systems by 1982 (delays in these

regulations have recently been proposed as

part of the Reagan administration’s automobile industry aid package).

OSHA standards apply to automakers as to

other manufacturing industries, Examples of

production operations affected include exposure to paint fumes and to lead associated

with soldering body joints. At the same time,

workplace standards also exist in other countries; there is little evidence that OSHA has

placed U.S. automobile manufacturers at a

marked disadvantage,

The total regulatory environment for automobiles in the United States now constrains

vehicle designs in many ways. Regulation

grew rapidly during the 1970’s, with little attention to tradeoffs and side-effects. At present, there are signs that automobile standard-
122 ● U.S. Industrial Competitiveness— A Comparison of Steel, Electronics, and Automobiles

setting is maturing, as both Government and

industry accommodate themselves to political

pressures and technological realities.

Over the past decade, regulations have

clearly had major impacts on the U.S. automobile industry, but—except for fuel economy standards (and manufacturing regulations)—they have affected foreign manufacturers wishing to sell in this country at least

as much. In most cases, American firms have

been at a relative advantage.

The question of the differential impacts of

regulatory standards is nonetheless more

complex than it first appears. Product regulations might seem to treat imports and domestic autos alike; the Government establishes some standard which all manufacturers must meet, In reality, product regulations

can create barriers to the entry of imports or,

alternatively, encourage purchases of foreign

cars, Particular regulations may also burden

(or favor) some domestic manufacturers more

than others, giving those less burdened a

competitive advantage. For example, decisions on particulate and nitrogen oxide standards for diesel engines will affect the competitive position of General Motors and Volkswagen of America compared to other domestic automobile firms because only these two

have so far made substantial commitments to

diesels.

More generally, regulatory compliance requires R&D and testing programs that are not

a function of the number of cars to be produced. Large-volume manufacturers such as

General Motors, Ford, Nissan, and Toyota

can comply with regulations at significantly

lower costs per vehicle than small-scale manufacturers. Thus, regulations often give competitive advantage to big companies. Moreover, European producers, whose home countries have much looser emissions regulations,

must spend significant amounts per vehicle to

bring them into compliance with U.S. standards, Japan, in contrast, has mandated emissions levels comparable to those in the United

States; Japanese cars have not needed significant redesigns to meet American standards.

Some regulations, especially the CAFE rule

which applies to all manufacturers selling in

the United States, have also had significant

secondary effects. The CAFE standard defines any vehicle with more than 75 percent

domestic value-added as American-made,

anything with less as an import. American

manufacturers cannot bring in cars they

build overseas and count them against their

CAFE figures; likewise, Volkswagen is keeping its American-built Rabbit at less than 75-

percent domestic value-added so it can offset

its less fuel-efficient imported models. The

value-added rule was intended to protect

American jobs, but cuts both ways.

While regulations of many types now restrict the freedom of action of automobile

manufacturers, their objectives—as in the

case of safety standards—lie by-and-large

outside the industry itself; just as emissions

regulations are intended to help control air

pollution and its possible harmful effects, so

fuel economy standards were aimed at conserving petroleum and reducing U.S. dependence on oil imports.

Other Policies

Tariffs and local content rules are the most

significant barriers to trade in automobiles.

Foreign governments often use local content

requirements to protect domestic employment .29

Government agencies also influence the activities of the U.S. automobile industry in

other ways, for instance through economic

adjustment policies. Thus—in addition to

EPA, NHTSA, and OSHA—the Departments

of Labor, Justice, and Commerce, the Office

of the U.S. Trade Representative, and the International Trade Commission, among others,

all can affect the competitive position of the

industry. Even the Small Business Administration (SBA) is involved in the industry’s current problems, because many dealerships

qualify as small businesses. During 1980,

“ALI(O Situc]tif)n: 1980, op. cit. pp. 93-103.
Ch. 6—Government Policy Effects on the Three Industries ● 123

SBA guaranteed more than $100 million in

loans to nearly 500 auto dealers. 30

The fragmentation which results from this

plurality of interests and agencies is typical

of public policies affecting industry in the

~D•Œ““I)etrtJit”s Ncw Sales Pitch, ” F3u\]nfJss Llrwh, Sept 22 ,

1980, p, 78,

United States, but has advantages as well as

disadvantages. The absence of coordination

and centralized control in U.S. industrial policy can lead to flexible and adaptive response. Regulatory policies affecting the automobile industry may not always have been

well-coordinated, but they have benefited

consumers and the public at large in many

ways,

Summary and Conclusions

In these three industries, Government policies with major sector-specific impacts have

sometimes exhibited a lack of coherence and

continuity. In steel, a variety of trade measures have provided some insulation from import competition, but seldom actively promoted adjustment to changing conditions in

the world industry, Coupled with these policies have been environmental and other regulatory measures that have demanded significant capital spending—though not at levels

that seriously affected competitiveness.

In consumer electronics, a long-running

string of dumping complaints has never been

satisfactorily resolved. OMAS intended to

protect the domestic industry and maintain

employment have saved some jobs but not

promoted restructuring or other adjustment

except by encouraging foreign investment.

Other portions of the electronics industry

have not recently been strongly influenced by

Government policies, but neither have domestic programs to countervails supports and

subsidies in foreign countries been seriously

cons idered.

The automobile industry has suffered,

along with many other portions of the U.S.

economy, from irresolution and lack of consensus on energy policies, There have also

been conflicts among some regulatory policies, and, again, little recognition of the

structural changes the industry has faced.

In general, public policies to~~’arci these industries have not supported or promoted continued competitiveness ~Ilcl adjustment to

changing economic conditions: such concerns

have seldom been among the goals of policy in

the United States. There has been no re~l

agreement on the appropriate role of Government in either distressed industries or grom’th

industries, except where national security is

directly affected. As industries in other countries increasingly challenge the United States

in both domestic and export markets, public

policies which bear on productive efficiency

and competitiveness are likely to need reexamination.
CHAPTER 7

Prospective Competitive Futures
Contents

Page

Overview .*0. ,.. ***. .o. .*** @*o *0**********.******.@.***.*..*..******** * 127

Economic Growth . o.. . *o. . o*** @so *6**..**.**.***.*.*.*..***. . 128

Steel .**. .*Oo. *.*. *.. * .*..*..*...*.****.***..***.. .** ..****.*.*.*.* 129

Supply and Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

Future Competitiveness. . . . . . . . . . . . . . . . . . ! . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

Electronics ...000. ● .*..*.* ● .*.**** ● **.*..* .....*.O ● ....s.0 ..00.0.. ..0.. 0

SupplyandDemand+ . . . . . .

133

. . . . . . . ...*..*. . . . . . . . . ...**... . ... . . . . . . . . 134

Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......................135

Future Competitiveness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..................137

Automobiles ● ** .,.* .,.....0 ..0..00. ● *...**. ● .*****. ● ******* ● **.  ● ** * * 140

Supply and Demand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....................140

Automotive Technology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .................141

Future Competitiveness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..................143

Summary and Conclusions . . . . . ● ...,.0 .*.*..*. ● *.*.**. ....0.0. ● **O... ..** * 147

List of Tables

Table No. Page

25. Economic Growth Rates, 1950-90 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..........128

26. World Raw Steel Capacity and Demand Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . 129

27. Scenarios for the American Steel Industry . ...............................133

28. US. Markets for Electronics, 1978 and 1987 . . . . . . . . . . . . . . . . . . . . . . .........134

29. Estimated World Semiconductor Production by Geographic Location of Firm

Headquarters . . . . . . . . . . . . . . . . . . . . . . . . . . . + . . . . . . . . . . . . . . . . . ..........135

30.Projected Sales of passenger Cars in Major World Markets. . .................140

List of Figures

Figure No. Page

11. Projected Increase in Density of RandomAccess Memory Circuits . ............136

12. Projected Decrease in Cost per Bit for RandomAccess Memory Circuits. . .......136
CHAPTER 7

Prospective Competitive Futures

Overview

At several points, earlier chapters touched

on the futures of the steel, electronics, and

automobile industries. Here, probable trends

in each sector are examined more directly—

a rather speculative exercise. Although attempts are made to look ahead to the end of

the century, uncertainty quickly mounts past

the next few years.

A major source of uncertainty is the timing

of technological developments, This is particularly true in electronics, where the technology is evolving rapidly. Even in steel, new

process technologies could bring significant

departures from present methods—such as

direct reduction of iron ore, in limited use

already, or plasma arc steelmaking. Although

potential technological changes in the automotive industry may not seem as radical as in

other sectors, newly refined powerplants, increasing use of electronics, and downsizing

and repackaging represent substantial shifts

in automobile design.

The future prospects of these sectors depend heavily on rates of economic growth for

both the United States and the world. In an

unstable international political and economic environment, long-term growth remains

largely unpredictable, though reasonable

bounds can be drawn. For instance, it is unlikely that the industrial nations will soon

regain the growth rates of the 1950’s and

1960’s. At the same time, by the end of the

1980’s, rates of economic growth in the industrialized world seem likely to surpass the depressed rates of the 1970’s. The developing

countries are not expected to do much better

in the current decade than in the 1970’s, although their growth rates should continue to

exceed those of the industrialized nations.

The competitiveness of the American steel

industry during the rest of the century will

depend heavily on the ability of firms to

generate and attract capital for modernization, on continuing shifts of production to new

and efficient nonintegrated mills, and on the

strength of competition from imports. Some of

this import competition will arise from burgeoning steel capacity in the developing

world. Domestic steel demand will rise only

slowly. U.S. capacity will likewise remain

relatively stable—perhaps increasing slowly,

perhaps contracting slightly.

In electronics, as technology continues its

rapid advance, sectors such as semiconductors and computers will remain sources of

U.S. strength. Market growth will be fueled

by a multitude of new applications. Competition on a world basis will intensify, but the

United States should remain the leader in

both technology and production—though its

world market share will probably continue to

decrease somewhat—provided that the industry’s needs for capital, manpower, and

open markets are met. It is also likely that

more labor-intensive operations will continue

to move abroad, where wage rates are lower.

Automobile sales will, as for steel, experience only slow growth in the developed countries because markets are close to saturation.

Growth in demand will be considerably higher in the Third World, particularly in wealthier, rapidly industrializing countries. But

while independent steelmaking firms are

common in developing countries, automobile

manufacture will be dominated by a few

large corporations operating on a translational basis with widespread production facilities. Two of these firms are likely to be

American-owned, Foreign competition in the

,lucrative U.S. market will remain intense. No

doubt imports will have continuing success,

but their penetration in the United States may

recede somewhat from 1980 levels,

127
128 . U.S. Industrial Competitiveness —A Comparison of Steel, Electronics, and Automobiles

Economic Growth

A key determinant of the future prospects

of the American steel, electronics, and automobile industries will be economic growth—

both in the United States and in the rest of the

world. A healthy domestic and international

economy is vital to these, as to other industries, because it makes adjustment to

changing circumstances—e. g., adoption of

new technologies—easier.

Assuming a moderately expanding labor

force, relatively slow increases in Government expenditures, and a gradual decline in

inflation and unemployment rates between

1980 and 1990, the U.S. gross domestic product (GDP) should grow at roughly the same

rate as for the past 30 years: about 3,3 percent per year in real terms (table 25). In the

1970’s the average was somewhat less.

Table 25 indicates that in other industrialized countries, rates of growth are also expected to accelerate. The period from 1950 to

1970 was one in which GDPs in Europe (with

the exception of the United Kingdom) and

Japan grew at rates considerably above that

of the United States. All experienced major

declines in rates of growth during the l970’s.

The continued high growth rates expected for

Japan are noteworthy, although these are

much lower than for the 1950’s and 1960’s.

Slow growth in the industrial countries will

have its effects on developing nations. The

Third World is heavily dependent on industrial countries as markets for exports, Given

favorable international economic conditions,

developing countries should be able to sustain

economic growth rates roughly equal to the 5-

to 6-percent level of the 1970’s (see table 25).

As might be expected, oil-exporting developing countries have excellent prospects for the

coming decade,

The following sections, dealing with the

steel, electronics, and automobile industries

individually, assume moderate economic

growth. If expansion in the U.S. and world

economies is substantially below the forecasts, impacts on the steel and motor vehicle

industries are likely to be severe; these industries are particularly vulnerable to economic downturns. The outlook would be less

clear for electronics, which at times in the

past has seemed almost recession-proof, and

at other times has shared in aggregate downturns.

Table 25.—Economic Growth Rates, 1950-90 (gross domestic product (GDP))

——— —

Average annual rate of growth of GDP in real terms

1950-60 1960-70 1970-77 1978-85P

1985-90 P

—.—

united States . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2% 3.90/0 3.1 % 3.70/0 -

3.0°A

France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8 5.6 4.0

West Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5 4.7 2.6 : . ; ; . :

United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . 2.8 2.8 1.9 2.4 2.9

Japan. . . . . . . . . . . . . . . . . . . ... . . . . . . . . . 8.0 11.1 5.2 5.9 5.0

All industrialized countries. . . . . . . . . . . . . . . . na 5.1 3.1 3.0- 3.7% for the 1980’s

All developing countries . . . . . . . . . . . . . . . . . . na 5.6 5.6 4.8- 6.6% for the 1980’s

P = projected na = not available

SOURCES Historical— Individual countries Statistical Abstract of the United States, 1979

All industrialized countries World Development Report, 1979 and 7980 (Washington, D C The World Bank, 1979, 1980)

Projections–Energy Policies and Programs of IEA Countries, 1979 Review (Pans Organization for Economic Cooperation and Development, 1980), pp 54,

121, 151, 212, and 223, World Development Report, 1979, p 18, and World Development Report, 1980, pp 6, 11, and 99

.
Ch. 7—Prospective Competitive Futures . 129

Steel

The competitiveness of the American steel

industry over the next 20 years will be

shaped by:

1.

2.

3.

4.

5.

In

the adoption of new process technologies, both those already proven and

those still in the developmental stages

(new steel technologies are discussed in

detail in the OTA steel study);

continued restructuring of the domestic

industry, with nonintegrated firms taking a larger share of the market:

structural change in the world steel industry, including the emergence of developing countries as major steel producers and the possibility that overcapacity may persist;

continued reliance by U.S. steelmaker

on domestic market demand as the primary spur to growth; and

public policies, particularly those that

affect the ability of the U.S. industry to

generate and attract capital for modernizing and improving productive efficiency.

addition, developments such as increasing prices for raw materials and energy, and

domestic inflation will be important. Few

large integrated mills are likely to be built in

any of the industrialized nations. Market

growth in the United States will be slow, and

demand met by modernizing existing mills to

increase yield and productivity, by roundout

additions to capacity, and by constructing relatively small nonintegrated mills.

Supply and Demand

Table 26 summarizes forecasts for the

world steel industry. Most estimates indicate

relatively slow growth in total steel capacity

until at least 1985. Projected growth rates for

capacity in the 1980-85 period range from

zero to about 1.3 percent. Higher growth in

capacity is expected for 1985-2000 as the excess of capacity over demand diminishes.

Table 26.—World Raw Steel Capacity and

Demand Estimates (millions of tonnes)

Capacity Demand .

Western Western

Year countries World total countries World total

1980. . . . 555-590 725-840 435-545 -680

1985. . . . 610-660 -820 535-625 760-860

1990. . . . -720 -1,100 700-725 1,000-1,100

2000. . . . -1,100 -1,400 -1,100 1,350-1,550

—

SOURCES Adapted from Technology and Steel Industry Competitiveness

(Washington, D C Office of Technology Assessment, U S Con.

gress, June 1980), p. 146, also, .Steel in the 80s, Organization for

Economic Cooperation and Development Paris Symposium,

February 1980 (Paris Organization for Economic Cooperation and

Development, 1980), pp 90 and 125

The United States is expected to continue

to be a net importer of steel. According to

estimates by the Bureau of Labor Statistics,

imports will grow slightly faster than exports

and the trade deficit in steel may approach

$4 billion (in 1972 dollars) by 1990.

1

Future Competitiveness

A fundamental competitive problem for the

American steel industry is that on average it

is no longer the world’s most efficient producer (and has not been since the 1960’s). A

basic question then is: What are the prospects, with and without new public policies,

for the industry to become competitive in production costs? This is difficult to answer.

First, while the Japanese may now be the

world’s low-cost producers, other nations

could become prime market opponents of

both the United States and Japan in the

future. In fact, the Japanese have already

sensed their longer term vulnerability and

begun to reduce the relative importance of

the steel sector to their economy. Japanese industrial policy is now based on the assumption that the country is becoming relatively

disadvantaged in steel.

‘

-] Ernploymcnt Projections for the 1980’s, 13LS bulletin 2030

(~$’ashington, DC.: Department of Labor Bureau of Labor St;]-

tistics, 1979), pp. 79 and 82.
130 ● U.S. Industrial Competitiveness —A Comparison of Steel, Electronics, and Automobiles

A second factor complicating estimates of

the future competitiveness of the U.S. industry concerns the effects of capital investment. As discussed elsewhere, up to a quarter of U.S. steelmaking capacity is obsolescent. Modernizing this plant’ and equipment would increase yields and productivity,

decrease energy use, hence cut production

costs. All of these are desirable, but new investment cannot guarantee a meaningful increase in U.S. competitiveness in steel. A

variety of other factors—both inside and outside the United States—are also important.

Although the circumstances certainly differ,

the Government of the United Kingdom has invested heavily in steel with no appreciable

impact on the ability of the British industry to

compete.

Competitiveness also depends, for example, on the characteristics of existing and

prospective processing technologies. If steelmaking remains relatively labor-intensive,

nations with low wage rates may be able to

maintain advantages. If new processing technologies depend on natural gas or petroleum,

then countries with abundant supplies of

these fuels would benefit. Continued use of

coal-based processes would work to the advantage of the United States.

The American steel industry clearly must

modernize its plant and equipment by installing technologies that improve yields and productivity and lower costs, just to maintain its

competitive position. Among the technologies

for which U.S. firms lag in installation and

use compared to countries such as Japan are

continuous casting and computerized process

control. z Other important new technologies—

some available now, others prospective—include: refinements to the basic oxygen process involving energy savings, control of alloy

content, desulfurization, and degassing; direct quenching of rolled products; and a variety of other thermomechanical processing

methods, often continuous. Further off are

technologies such as large-scale installations

‘Technology und SteeJ Industry Cornpet]tiveness (Washington, D. C.: Office of Technology Assessment, U.S. Congress, June

1980), ch. 9.

for direct reduction of iron ore, plasma steelmaking, and continuous steelmaking. At least

some of these are likely to be practical realities by the end of the century.

There is another difficult technological

question relating to the future of the steel industry. Efficient scales of operation could

move downward with the advent of new processing technologies. For example, the OTA

steel-study suggests that direct reduction (DR)

processes, apparently already economic in

some parts of the world, may soon be more

cost efficient in the United States as well. The

technical data on DR processes, thus far confined to smaller plants, indicate that scale

economies may be less significant than for

present steelmaking methods. Moreover, DR

appears to be both capital- and labor-saving,

although more intensive in its use of energy.

Such factors could have substantial impacts

on the industry. For example, the potential

cost advantages of large facilities based on

blast furnaces might diminish, creating a

tendency for dispersion of the industry to regional production centers, Internationally,

the DR process would give advantages to

countries with ample supplies of natural gas,

such as Mexico.

What, then, is the outlook for the American

steel industry? Production increases at somewhat more than I percent per year could be

achieved by improvements in yield and productivity stemming from modernization and

replacement of capacity. Little or no new

capacity would be needed under such circumstances, In addition to modernization—which

may be limited by the ability of the industry to

generate and attract capital—a number of

other factors will help maintain U.S. competitiveness:

1. Major competitors such as Japan can

no longer expect large productivity improvements from building new greenfield plants using the latest technology.

Because Japan, like the United States,

will be adding little if any new capacity,

future productivity gains will result from

incremental improvements to existing

mills. The U.S. industry should be able to
Ch. 7—Prospective Competitive futures Ž 131

2.

3.

Photo credit American iron and Steel/ Institute

Continuous casting and rolling of steel

retain parity in absolute labor productivity, provided it can continue to operate

at higher levels of capacity utilization

than Japan.

Long-term price trends for raw materials used in making iron and steel—especially energy— should favor the United

States, Rising transportation costs will

harm the price competitiveness of imports in U.S. markets.

In the United States, obsolete mills with

high production costs are being closed—

a rationalization that was probably inevitable. This will help maintain high

labor productivity.

4. New and efficient nonintegrated mills

are being built in larger numbers.

An important counterweight to optimism is

the possibility of continued excess capacity

on a worldwide basis. Substantial overcapacity would almost inevitably lead to attempts

by foreign producers to dump steel in the

United States.

The American industry has been combating dumping for more than 20 years. As a

cause of lowered domestic prices and profits,

its seriousness remains a matter of debate. { A

recent survey by the General Accounting Office found that—along with price—quality,

plus the availability of some kinds of mill

products, were major factors leading to purchases of imported steel. 4 The large integrated firms, however, claim that dumping is

the single most serious problem facing American steelmaker. If excess world capacitiy

exists, dumping will almost certainly continue

to be a concern—one that may be aggravated

where governments own or control steel industries and face strong pressures to maintain employment.

Recently it appears that industry and Government in the United States have moved

closer to accommodation on the control of

dumping. The latest development-part of

the Carter administration’s steel revitalization program— takes the form of a reconstituted trigger-price mechanism (TPM). TPM,

like other antidumping remedies, is likely to

remain a source of conflict, particularly

when imports expand and the industry believes the trigger price is too low. However,

trigger pricing is more manageable than existing antidumping laws for dealin~ with

widespread and persistent complaints.

Other Government policy initiatives might

also help to improve the outlook for the industry. These could take the form of aggregate policies designed to stimulate business in

R. \4r, Crand,+ll, ‘‘S I[wl In]pl)rls, I)um~JIn,~ (Jr (;{}mpt’t ] liorl, ”

L?(>qUi(ltIon, ]UIJ .4u~ust 1‘180, p. 17.

‘NcIm’ S trf] ~e~i ltrt~ulrwi for .+I(~In q l)i~ frf~t~[~(j S [tlf~l ln(j[l~ (r;

(J$’ashlngt(]n, 1),(;.. (jener:]l A( (xmnlin,~ offlf (>, ],~n. 8, 1081),

pp. 3-:~ to 3-7.
132 . U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

general, or sector-specific programs targeting the steel industry.

Aggregate stimuli are generally intended

to encourage new investment by increasing

rates of return on invested capital. Most such

policies fit into two broad categories: 1)

measures that reduce corporate taxes and so

increase cash flow; and 2) measures that encourage savings, reducing interest rates and

lowering the cost of capital.

Investment incentive schemes would stimulate some investment across the entire steel

sector, but most such proposals would have

differential effects on various subdivisions of

the industry. The large integrated firms have

been steadily increasing their long-term debt,

and in many cases now appear near the limits

of their fundraising abilities in established

capital markets. Decreases in effective corporate tax rates—for example, by accelerated

depreciation schedules, such as the much-discussed 10-5-3 proposal—would increase the

internally generated cash flow available to

such companies (for nonsteel diversification

as well as steelmaking), While the steel industry presently must depreciate its capital

equipment over longer time periods than most

other U.S. industries, many proposed tax

modifications would increase the ability of industries throughout the economy to attract

external capital, Under such conditions, the

relative attractiveness of investment in steel

might not increase,

In general, accelerated depreciation favors larger firms with larger absolute profits.

As a result, such measures might benefit the

major integrated steelmaker more than nonintegrated and specialty producers. To the

extent that investors judge the latter to have

better prospects for high profitability, however, tax changes could help them attract outside investment.

Aggregate (rather than sector-specific)

programs fostering the development of new

technology would probably not have large effects on the steel industry, Steelmaker have

not in the past made heavy investments in

R&D (less than 1 percent of sales, well below

many other U.S. industries),5 presumably believing the returns insufficient. Aggregate

R&D incentives would be likely to have their

greatest impacts on supplier firms. Developments by such firms in process equipment

or controls would be available to both domestic and foreign steelmaker, and therefore

would probably have only marginal net effects on competitiveness. Sector-specific incentives or programs for steel R&D would be

more likely to enhance the long-run competitiveness of the U.S. industry.

For reasons such as those outlined above,

the OTA steel study concluded that without

targeted Government support the industry

might be unable to modernize and build its

competitiveness. Examples of the forms such

assistance might take can be found in the

steel revitalization program announced by

President Carter on September 30, 1980. In

addition to the modified TPM, it included proposals for liberalized depreciation allowances, tax credits for investment, relaxed environmental standards, increased adjustment

assistance, and initiatives to encourage R&D.

Most observers agree that at the core of

the industry’s difficulties are its very large

capital needs for modernization—table 27.

The capital base for the industry is now as

much as 25 percent obsolescent; just to replace the outdated capacity would cost more

than $30 billion,’ The renewal or high-investment scenarios in the table would require

substantial Government assistance, much

greater than the Carter steel plan provided

for. 7 The potential effects of such assistance

on competitiveness can only be judged in the

context of structural changes occurring elsewhere in the world steel industry.

Although the American steel industry is

primarily domestic—with few exports or foreign investments—its future is inextricably

tied to the changing competitive environment

worldwide, At present, Japan is the most effi-

‘)r~echnology und Steel Industry (l~mpeh’tiveness, op. cit., p.

275.

“New Strutegy Required for Aiding Distressed Steel ]ndustry,

op. cit., p. 2-9.

‘Ihid., p, 7-12,
Ch. 7—Prospective Competitive Futures ● 133

Capital

Invest menta

Change I n

capacity

Import

penetration

Table 27.—Scenarios for the

American Steel Industry

Slow decline

Low

Zero or

decrease I

May rise to

30% or more

Scenario

Renewal/high investment

$3 billion (OTA renewal

scenario) to $5 bilIion

(“high Investment”

scenario proposed by

Industry)

Moderate increase (about

1590 per year)

Remains at about 15°/0

a

For modern (zatlon and capaclt y ex pans{on only Does not l~ciude Investment

for rreet) ng Government reg UI a!)onsor for non steel c iversi fir .~t on

SOURCE Techno/ogf and Stee/ /rrdusfry Compeflflveness (Wash lnqton D C

Off Ice of Technology Assessment U S Cong re$s June 19801 ch 2

cient steel-producing nation; European firms

enter the U.S. market when they have excess

capacity. However, developing countries are

becoming significant factors, now accounting

for about 30 percent of U.S. imports. Despite

mill construction costs in industrializing

countries that may be 20- to 30-percent

higher than in the United States,}’ Third

World steel capacity is expected to reach 100

million to 105 million tonnes by 1985, This

would increase their share of free world production to 15 percent, versus 10 percent in

1978. Most of the new capacity will be used

to meet internal needs, but some Third World

steel may find export markets in the United

States and other industrialized nations, including Japan. Countries such as Korea have

already taken over some Japanese export

markets. In virtually all industrializing countries, steel production plays a central role in

development strategies. Symptomatic of the

growing importance of the steel industries of

Predictions about

tronics industry are

nology is evolving so

velopments seem to

the developing world is a recent estimate by

the International Iron and Steel Institute that,

for 1980, steel production in the industrialized countries fell by 8 percent, while rising 4

percent in developing countries. ”

An increasing number of technology transfers and financing consortia are being arranged between developed countries such as

Japan and those which are now industrializing such as Brazil. ‘[’ Over the next 20 ~’ears,

the latest technology and methods could become concentrated in those countries installing new facilities. It is quite possible that

Third World steel industries will develop

along pat terns similar to those found in advanced countries such as the United States: a

small number of firms in na t inns with in te-

.grated steel capacity may produce most of

the raw steel output of the region or group of

countries they serve (just as a rela tivel} small

number of integrated companies supply most

of the U, S. market). In addition, a much larger

number of nonintegra ted companies might

use electric furnaces anch’or finishing equipment to produce or finish the simpler kinds of

steel products. (Over 50 developing countries

have some type of steel industry, but only 19

have integrated steelmaking capacity. )

Such factors need careful analysis before

new public policies are desi~ncd. Increased

investment in the Un i ted States could lower

the average age of plants and raise pr~xiuctivity without substantially enh(~ncing competitiveness— but be necessary just to maintain the present position of the American industry.

“‘L1’{]rlcl ( :ru(~c Stwl Output I)r(tps, ”’ ,ALSI\f I\’(J[f’\ F’[’t)ru<i rk

1981. p. 1.

‘ ‘r(whn[)~(~~; (In(i Stwl In(ius[ri’ (;(ml{)[~fl IIienfJ\i, IIp ( lt , p.

302

Electronics

the future of the elec- predictable paths, surprises can occur. It is

risky because the tech- not only impossible to project trends in elecrapidly. Even where de- tronics technologies very far—particularly

be following stable and for semiconductor devices and their applica-
134 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

tions—it is also difficult to forecast applications in other industries,

Automobiles, for example, are becoming an

important market for integrated circuits

(ICS). Other applications that are providing

(or will provide) large markets include: office

equipment such as word processors, electronic funds transfer systems, electronic mail

as well as telephone and other communications systems, and the continually expanding

market for digital logic and memory in computer systems. Generalities about such applications are easy, But the timing of growth

in markets, their eventual dimensions, and

the sorts of technologies that will prove dominant are more problematical.

Supply and Demand

No long-term projections of worldwide demand for electronics products are available.

Short-run sales forecasts generally predict

growth at better than 10 percent per year for

most segments of the industry. 11

Longer range estimates for the United

States alone have been made. Table 28 is a

forecast, by broad categories, of sales in the

United States of electronics end products for

1987. This table indicates that total sales will

more than double over a 10-year period. Such

predictions are typical of the continued rapid

expansion expected in this industry. The fast-

“P. Evison, Electronics: The Market to IWU (London: The ~’l.

nancial Times Ltd., Business Publishing Division, 1978], p, 5,

Table 28.—U.S. Markets for Electronics, 1978 and

1987 (billions of current dollars)

Sales

1978 1987

Business/office . . . . . . . . . . $ 5 (6%)

Communications . . . . . . . . . 1 3(1 7°/0)

Consumer. . . . 8 ( 10%)

Computers . . . . . . . . . . . . . . 23 (30°/0)

Government/militar y 16 (21 %)

Industrial. . . . . . . . . . . . . . . . 6 (8%)

instruments ... . . . . 6 (8%)

Total . . . . . . . . . . . . . . . $77

$15 (8%)

32(1 7%)

14 (7%)

63 (33%)

34 (13%)

14 (7%)

16 (8%)

$191

SOURCE: H H Jones, ‘Forecast of VHSIC/VLSI Market s,” VHSIC A New Era in

Electronics, San Francisco, Calif , American Institute of Aeronautics

and Astronautics, May 15.16, 1980

est growing segment is expected to be computers—the slowest, sales to Government

and the military. The table also projects that

U.S. consumer electronics markets will expand at lower than average rates, While

table 28 includes only end products, components such as ICs and other semiconductor

devices will grow at least as rapidly as the

average for end products.

Of the three sectors of particular interest

—consumer electronics, semiconductors, and

computers— consumer electronics sales will

also grow the slowest on a world basis—at

least in the developed countries. Markets for

more mature consumer products—e.g., TVs

and home audio equipment—will increase at

relatively moderate rates. 12 Sales of newer

consumer products—video-cassette recorders/players (VCRS), digital clocks and

watches, microwave ovens, video games—

are expected to grow more rapidly. Markets

for many of these products are far from saturated. If prices fall, and particularly if some

rationalization of VCR technology occurs,

consumer demand should be strong.

Semiconductors will show stronger growth

than consumer electronics. Table 29 gives

near-term estimates of world semiconductor

production. In this table, overseas production

by U, S.-owned firms is attributed to the

United States, On this basis, growth in IC production for American-based companies (both

merchant and captive) is expected to average

over 20 percent for the next few years. Slower rates of growth, near 10 percent per year,

are projected for Europe. In Japan, 20-percent growth rates are also anticipated,

Sales of computers and related data processing equipment are also expected to increase at high rates, The most rapid growth

will be in minicomputers, desktop or personal

machines, and small business computers, Office automation and data communications

will expand at comparable rates.

Exports of computers and periphera l

equipment have been projected to increase at

‘Ibid., p, 33.
Ch. 7—Prospective Competitive Futures ● 135

Table 29.—Estimated World Semiconductor Production by Geographic Location

of Firm Headquarters (millions of current dollars)

Production

Headquarters location 1978 1980 1981 1982

United States

Ics

Merchant ., . . . . . . . . . . . . . . . . . . . . . . $3,238 $5,640 $ 7,330 $ 8,790

Captive. . . . . ... . . . . . . . . . . . . . 1,344 2,580 3,400 4,080

Total ICs. . . . . . . . . . . . . . . . ... $4,582 $8,220 $10,730 $12,870

Discrete semiconductors. . . . . . . . . . . . . . . 1,540 2,200 2,530 2,910

Total semiconductors . . . . . ... . . $6,122 $10,420 — —

$13,260 $15,780

Western Europe

Total ICs. ... . . . . . . . . . . . . . . . . . . . . . . . . . $ 453 $ 680 $ 750 $ 830

Discrete semiconductors, . . ... ... . . 960 1,080 1,150 1,220

Total semiconductors . . . . ... . . . . $1,413 $1,760 $ 1,900 $ 2,050

Japan

Total ICs, ... ... ... . ... . . . . . $1,195 $1,850 $ 2,220 $ 2,660

Discrete semiconductors. . . . . . . . . . . . . 1,295 1,570 1,730 1,900

Total semiconductors . . . . . . . . . . . . $2,490 $3,420 $ 3,950 $ 4,560-

Rest of world

Total ICs, . . . . . . . . . . . . . . . . . $ 482 $ 730 $ 940 $ 1,130

Discrete semiconductors. . . . . . . . ... . . 985 1,050 1,090 1,130

Total semiconductors ... . . ... . . $1,467 $1,780 $ 2,030 $ 2,260

Total integrated circuits. . . . . . ... $6,712 $11,480 $14,640 $17,490

Total discrete semiconductors . . . . . . . . 4,780 5,900 .6,500 7,160

Total semiconductors . . . . . . . . . . . ‘

-

$11,492 ‘ –$17,38 0 $21,140 ‘-$24,650

SOURCE Status ’80( Scottsdale, Arlzintegrated Circut Engineering Corp ,1980), p 4

—

Semiconductor wafers being loaded

into diffusion furnace

an annual rate of 6.3 percent, far outstripping the 2.7-percent growth rate for imports. 13 By 1990, the dollar value of computer

exports should be more than 12 times the

value of imports.

The rapid growth and technologica l

change expected throughout much of the electronics industry should make it easier for the

United States to maintain its competitiveness,

These are the conditions under which American firms typically thrive,

Technology

The consumer electronics sector might be

considerably altered by the successful commercialization of new product technologies

such as flat screen TVs, particularly if the innovators are firms outside the mainstream

1‘Flmplfj}men( Pr[)jectifms for the 1980’s, 131,S hulletin 2030

[tt’ashington. DC.: I)cp:+rtmen( of Labor, Fhr(}i)ll of I,i]bor Stiitisti(s, 1 979), pp. 79 Hncl 82,

7’3-14 91 2 - 81 - 10
136 . U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

home entertainment sector. Microcomputers

for home use may also become important consumer products, perhaps evolving along with

VCRs, video toys and games, and TV receivers into integrated home entertainment and

information systems. The timing of such developments is unpredictable.

Progress in major categories of semiconductor devices—such as ICS for computer

memory or microprocessors—seems at present to be following predictable patterns. For

memory circuits, as density increases (fig.

11), costs per bit go down (fig. 12). Figure 11

indicates that the rate of density increase in

dynamic random access memories (RAMs) is

slowing; the 64K RAM is still in infancy and

may not outsell 16K devices until 1983, pro-

.

Figure 11 .—Projected Increase in Density

of Random Access Memory Circuits

10’

10’

104

103

1972 1976 1980 1984 1988 1992 1996 2000

Year

SOURCE K D Wise, K Chen, and R E Yokely Microcomputers: A Technology

Forecast to the Year 2000 (New York John F Wiley & Sons, 1980),

p 57

duction of 64K RAMs having proven more difficult than anticipated. ’4

Microprocessors are likewise continuing

their evolution— from 4 bit to 8 bit to 16 bit.

The market has yet to decide which of the

various 16-bit microprocessor designs will be

the biggest sellers, but 32-bit processors are

already on the horizon. Needless to say, there

is also continuing evolution and innovation in

other types of semiconductor devices, for example, gate arrays for logic, displays, and

solid-state transducers. Among the most important are ICs for interfacing digital circuitry with the analog world—essential for

“J. G. Posa, “Dynamic RAM’s: What to Expect Next, ” Electronics, May 22, 1980, p. 119.

Figure 12.— Projected Decrease in Cost per Bit

for Random Access Memory Circuits

1,0

0.1

0.01

0.001

\

.

.

1972 1976 1980 1984 1988 1992 1996 2000

Year

SOURCE K D Wise, K Chen, and R E Yokely, Microcornpulers A Technology

Forecast to the Year 2000 (New York John F Wiley & Sons. 1980).

p 57
Ch. 7—Prospective Competitive Futures ● 137

many applications o f semiconductor

electronics.

In several respects, computer technology

evolves in parallel with that of semiconductors. This has been true since the late 1950’s,

when discrete transistors were adopted for

second-generation mainframe machines; logic and memory for computers are now firmly

based in IC technology. Innovations such as

Josephson junctions for processing, and optical storage, may find a place in the future;

but in 1981 computer hardware continues to

depend on silicon logic and memory for most

such functions, Much of the other hardware

in computer systems uses quite different

technologies—e. g., disk and tape drives for

mass storage, cathode ray tube display terminals, card readers, printers. But even the

electromechanical input/output devices depend in various ways on semiconductors.

Computer hardware is diversifying in technology and range of capabilities as minicomputers and microcomputers grow in importance. Furthermore, microprocessors are

being used in many new dedicated applications to make other machinery and equipment

‘‘smart ‘—whether automobile engines, telephones, or toys. The bottleneck in many

cases —whether computers for computing or

for dedicated applications-is software .

While hardware costs have been falling, programing costs have not; productivity in software is about the same now as 10 years ago.

Furthermore, good programmers are in short

supply (ch. 5), Thus, the proportion of user

cost accounted for by software has gone up

rapidly. In some cases, software represents

90 percent of the cost to the user. While the

United States leads the world in software as

in hardware, the software bottleneck is a potential constraint on the future growth of

computer sales and on applications of microprocessors and computers.

Future Competitiveness

Chapter 5 examined the present competitive positions of the U.S. consumer electronics, semiconductor. and computer industries.

While the consumer electronics sector did not

appear particularly healthy, both the semiconductor and computer sectors continue to

be vigorous, and very strong internationally.

If past trends continue, the prospects for

the U.S. consumer electronics industry seem

mixed at best. American firms face continued

strong competition from foreign producers on

cost as well as noncost dimensions, particularly in products such as TV receivers.

Imports already constitute 85 percent or

more of U.S. consumption of black and white

TVs, VCRs, household radios, and CB radios

(see table 16 in ch. 5). Although import penetration in color TVs is much lower, this is due

to restrictions imposed by Orderly Marketing

Agreements.

There are two basic questions for future

competitiveness:

1.

2.

To what extent is labor intensity likely to

fall as a result of new technologies. allowing U.S. firms to repatriate offshore

operations?

Will American firms be able to compete

in new generations of consumer electronics products?

The first question depends on both product

and process technologies, Automated manufacturing requires product technologies appropriate to the available process techniques.

For example, vacuum tubes were too fragile

for automatic insertion using methods available for transistors and ICs. In any case,

although labor content for many products will

continue to fall, competition in the consumer

electronics sector is so intense that low

wages in overseas locations will probably

continue to attract much of the value-a(i(ied.

Japanese firms are also moving to other far

Eastern countries with lower wage levels.

The second question deals with the ability

of U.S. firms to compete in emerging consumer electronics products. Just as most U.S. TV

manufacturers lagged the Japanese in adopting sol id-state designs, American firms did

not aggressively develop new ho)me entertainment products during the 1 970’s (except for
138 . U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

electronic toys and games). No American

company makes consumer VCRs. In video disk

players, RCA is making a strong bid, but faces

intense competition from disk systems developed in Europe and Japan.

Outside the traditional home entertainment (radios, TVs) portion of the industry,

U.S. firms have been much more aggressive in

developing new products—e,g., home computers, electronic toys and games. The Japanese

have not yet mounted a challenge to U.S.

microcomputer producers. As the markets for

these products grow, Japanese companies

will probably begin to compete in hardware,

but may have more trouble developing attractive software packages.

U.S. firms do not retain the technological

advantages of 10 years ago in semiconductors or computers. Even so, their positions remain strong. In both industries, the United

States is a leader in innovation and new product development—simply not as far ahead as

in the past. There will be vigorous future competition in both sectors, particularly from

Japanese companies.

As in any industry which is rapidly growing, ample opportunities will exist for both

gains and losses in market share—depending

on factors such as success at R&D and prodPhoto credit IBM Corp.

Experimental Josephson junction logic gate—a candidate

for future computers that could operate many times

faster than those of today

uct development, as well as marketing. Further shakeouts in semiconductors and computers may occur, and more American firms

could be absorbed through mergers or takeovers. In some cases, foreign manufacturers

may establish strong positions, as they have

in consumer electronics. On an overall basis,

however, the United States should remain the

strongest force in the world market for semiconductors and computers. At the same time,

the relative strength of the United States will

probably decline,

To maintain competitiveness in the future,

U.S. firms must have: 1) sufficient capital to

keep pace with rapidly expanding markets; 2)

an adequate supply of technicians, engineers,

and scientists to staff their operations; and 3)

access on fair terms to foreign markets. Not

all manufacturers will fare equally well in

meeting these needs. Profits in the semiconductor industry have sometimes failed to keep

pace with capital needs for expansion, According to several estimates, the U.S. semiconductor industry may have to invest more

than $30 billion during the 1980’s to maintain

its current market position (ch. 5). Not only is

the industry growing, it is becoming more

capital intensive; an IC fabrication facility

cost about $2 million in the late 1960’s—now

the cost is $50 million or more,

Virtually all U.S. electronics firms could

benefit from public policies encouraging increased R&D, and investment in new production facilities. Among the suggestions have

been tax credits for R&D, encouragement of

industry-funded R&D in universities, and cooperative (Government/industry/university)

technology centers, Most costs associated

with R&D—in this or any industry—can now

be deducted in the year incurred: but R&D

typically amounts to only a small fraction

(e.g., 10 to 20 percent) of the expenses associated with commercializing new products or

processes. Thus, tax policies in the United

States are not a particularly strong stimulus

for innovation, ” In foreign countries, incen- ————.

“’~;. A. Barrun, “Micr[}ele(:troni(;s: A Survey,’” The Econ{Jmist, hfar. 1, 1980, p. 4.

I(T. Gallagher, “Tax Policy and Industrial Innovating, ‘“ Congressional Research Service, Jan, 11, 1980.
Ch. 7—Prospective Competitive Futures Ž 139

tives are often more extensive. The Japanese

Government, for instance, gives a tax credit

of 20 percent for increases in R&D spending,

as well as a variety of sector-specific tax

breaks—for example, to firms developing

computer software. Given the importance of

R&D in electronics, there is ample scope in

the United States for new policies to stimulate

developments in both product and process

technologies, and in particular to encourage

the commercialization of R&D.

Accelerated depreciation of manufacturing equipment would not affect semiconductor producers to as great an extent as

firms in many other industries. Equipment

used by semiconductor manufacturers can

already be depreciated rapidly because the

advancing technology makes equipment obsolete in short order. Changes in depreciation

schedules might be more beneficial to consumer electronics firms.

A more generalized policy for encouraging

capital investment, designed to stimulate the

venture capital markets which are important

for many high-technology industries, would

be to allow capital gains tax rollovers; if

funds were reinvested within a specified

period of time, capital gains taxes would be

deferred. There are many other possible

avenues for encouraging new capital investment broadly across American industry. The

effects of such policies vary widely among

sectors —and among firms within a sector,

The costs and benefits of such policies can in

fact only be evaluated on a sector-by-sector

basis.

Public policy could also help to increase

both numbers and quality of technical personnel—a crucial part of the human resource

for the U.S. electronics industry. Examples include R&D support to colleges, universities,

and technical schools that train engineers

and technicians, funding for purchases of

laboratory equipment for use in research or

instruction, and student loan programs.

—.

‘ KIIfJh~j no Kfl]se(su (An Explirotl[)n of the I,aw for the Prom[)t ion of Spcci fir hl;ichinerv and Inform:itit)n Industries]

(rIokvo:” ‘1’susho SanKyo Sho (N1lT1), 1980), p. 78ff.

Not only might the Government act to enhance the attractiveness of investment and to

ensure adequate supplies of trained manpower, but it can also promote free trade and

investment. U.S. firms sometimes assert that

they are denied access to foreign markets,

particularly in Japan. The Japanese market

for electronics products is now more open

than in years past, and impediments to U.S.

firms with operations in Japan less serious,’”

but improvements can still be made. Particularly important for the future is the ability of

U.S. firms to compete on even terms within Japan through direct investment as well as exports,

The Multilateral Trade Agreements

(MTAs), ratified by the United States in 1979,

are a further step toward a more open system

of international trade. Japan and the European Community made important tariff concessions for computers and electronics components, However, the tariff decreases by

themselves are not expected to have major

impacts on U.S. exports, First, the tariff reductions are now scheduled to be staged over

an 8-year period, and so would not be in full

force until the late 1980’s (the staging is still

being negotiated). More important, nontariff

barriers to trade have been the true impediments to U.S. exports of electronics products.

The MTAs include language covering nontariff barriers such as licensing, product

standards, customs valuation, and government procurement. As the dispute between

the United States and Japan over the procurement practices of the Nippon Telegraph and

Telephone Public Corp. indicates, the effectiveness of the accords will depend on how

they are interpreted and enforced. Yet the

combined impact of tariff reductions and new

agreements on nontariff barriers could result

in a significant increase in U.S. access to

foreign markets, If American firms are allowed to compete on an equal footing with

their foreign competitors in all markets, their

—

‘“J. (~resser, High ‘rechn~)l[)g} (ln~i ](l]~[lnrse lnfiustr](]i PfJl~c}:

A Str(]tegl for [1, S, l%]lic}m(]krrs (L$’ashingt[)n. I), C.: Suhrommi t tee on ‘1’rade, (:ommi t tm; on J1’avs and Nlcans, 1]. S. Ilouse of

Representatives, Oct. 1, 1 980), p. 57.
140 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

proven ability to innovate and to develop new towards protectionism by the United States—

products should enable them to maintain a in any industry—could impede the further

strong presence in semiconductors, comput- opening of international markets and harm

ers, and other

electronics. On

high-technology branches of competitive American firms.

the other hand, a movement

Automobiles

World automobile production is dominated

by large firms with headquarters in the

United States, Western Europe, and Japan.

Though production takes place in many other

countries— sometimes under the constraints

of local content rules—it is usually carried

out by foreign subsidiaries of the major U.S.

or European firms; Japanese automakers

have thus far preferred (and mostly been

able) to produce at home and export.

While assembly will probably remain dispersed, automobiles produced by a given firm

in different countries are becoming more

similar. The “world car” will share many

design features wherever built. This will

make international production—for example,

engines in one country, transaxles in anothe r—easier, Government regulations—in the

United States and other countries-will continue to be strong influences on automobile

design and engineering.

Like steel and other mature industries,

automobile markets in the United States are

growing only slowly. Sales will expand more

rapidly in most other parts of the world, particularly in developing countries. In the two

decades prior to 1980, the number of autos in

the U.S. fleet doubled; the number in Western

Europe quadrupled. Over the next two decades, it is the automobile fleets in Eastern

Europe and the Third World that will triple or

quadruple. As in the steel industry, there is

substantial overcapacity at present in the

world automobile industry, Market growth,

even with optimistic assumptions for industrializing countries, is not likely to be rapid

enough to keep all of the world’s auto plants

busy.

Supply and Demand

Projections for long-term expansion in the

U.S. market for automobiles (and light trucks)

generally fall in the range of 0.4 to 2 percent

per year. ’g Growth at the low end of this

range, table 30, would give sales of a little

over 12 million passenger cars in the year

2000.

Table 30 also includes forecasts for other

parts of the world. The growth rate expected

“’U.S. Industriu) Outlook 1980 (Washington, D. C.: Department

of Commerce, 1980), p. 281, estimates 1.5 to 2 percent, Another

recent forecast (U.S. Automobile Industry Trends for the

1980’s, A Delphi Forecast (Chicago,: Arthur Anderson & Co.,

1979)) predicts domestic sales by U.S. automakers to be 11 million to 12 million cars in 1985, rising to 12.5 mi]lion to 13 million

by 1990 (about 2-percent average annual growth), A later panel

(Worldwide Competitiveness of the U.S. Automotive industry

and Its Parts Suppliers, Arthur Anderson & Co., February

1981 ) predicted less than 1 percent annual growth. In addition,

the 1979 Delphi panel predicts that Japanese firms will preduce 225,000 to 300,000 cars in the United States by 1985 and

500,000 to 600,000 by 1990. Thus Japanese production in the

United States might account for close to 3 percent of the 1985

market, 5 percent by 1990. The panel expects Japanese imports

to add another 15 percent—about 1.5 million units—to the

1990 figure.

Table 30.—Projected Sales of Passenger Cars

in Major World Markets

Sales (millions Of cars) Growth rate

1978 2000 (% per year)

United States. . .........11.1 12.1 0.40/0

West Germany, France,

Italy, United Kingdom. . 7.4 10.2 1.5

Japan . . . . . . . . . . . . . . . . . 2.9 4.4 2.0

U. S. S. R., East Germany,

Yugoslavia,

Czechoslovakia, Poland 1.8 4.3 4.0

Rest of world . . . . . . . . . . . 8.0 17.2 3.5

World total . ...........31.2 48.2 2.0070

SOURCE The Changing World Automotive Industry Through 2000 (Cambridge,

Mass Arthur D Little, Inc , January 1980)
— . .

Ch. 7—Prospective Competitive futures • 141

in the United States is the smallest by far—a

factor of 5 below that for the world as a

whole. The consensus on this point seems

clear: market growth in the United States will

be slower than growth in GDP (table 25), as

well as slower than sales growth in other

countries. 20

Along with a market that is more nearly

saturated than many others, rising energy

costs will constrain motor vehicle sales.

Although the United States is highly dependent on cars and trucks for transportation, the

fleet is already very large and many vehicles

are not heavily utilized. Rising fuel costs may

encourage replacement of older, less-efficient automobiles, and developments in specialized vehicles such as very small commuter cars might also help sales. But with

multiple-vehicle ownership already common,

these effects are not likely to be dramatic.

Thus market expansion will remain slow.

The net U.S. trade balance in motor vehicles and parts will almost certainly remain

negative. Although imports of passenger cars

exceeded 25 percent of the U.S. market during 1980, most observers think their share

will decrease somewhat. Estimates for the

1990 period generally show imports in the 15-

to 20-percent range. Given the presently

unsettled state of the market, there is ample

room for uncertainty; import market shares

greater than 20 percent are not impossible.

Table 30 projected sales in the major countries of Western Europe increasing from 7.4

million in 1978 to 10.2 million in 2000, an annual growth rate of about 1.5 percent. Sluggish growth in Europe would be of concern to

Ford and General Motors, which have large

European operations. (Ford, with a manufacturing capacity of 1.8 million units, and General Motors, with 1.6 million, have about 25

percent of total European capacity. )

Annual rates of market growth projected

for Japan are about the same as for Western

s[’t’ ,1 ]5( 1, ],( IIIE ‘]’[’[’HI ~(’I’\/J()( (l\’(’\ ()( fh(’ \\ f)l’1(~ ( ;(I 1’ ][1

(j[i \ t II (I\ [ [’ii r I+ ( ) r xi I II I z, I t I ( III fl )r F:( I )111 )m I ( ( ~ t I( j~)[I r,] t I ( )1) , I [](i I )[?-

v(!lf)pmt’r]t, };(’l)r~l,jr~ 1978), h Ill],]>h,i r, ‘1’}1(’ 1- L1 (Llf (’ ()/ \f’(11’i(i

l\f{ ~lt )r lrlfiu ~ I rk (N(IL\ }’( Irk N I( k~)is I)ul)l ]sh]ll~. 1980j.

Europe—1 to 2 percent (table 30). Much

faster growth is expected for the countries of

Eastern Europe and the Third World. Table

30 shows 4-percent annual growth in Eastern

Europe: by 2000, sales in Eastern Europe may

equal those in Japan.

Forecasts for the developing world vary

widely—from 3.5 percent annual grow th - to

9 percent, ” There will be much variation

from country to country, with demand depending on income levels, fuel costs, and

other factors. The more rapidly industrial izing countries, particularly those where automobile manufacturing facilities are located,

will likely fall at the high end of the growth

range, By 2000, the Third Ikrorld may account

for 30 percent of world auto sales, becoming

the largest of the markets listed in table 30.

Firms that can capitalize on these rapidly expanding markets will emerge at the end of the

century in strong competitive positions.

Automotive Technology

The fundamentals of automotive technology are relatively stable, although engineering designs have been changing-particularly for cars made in the United States. An

automobile is a rather complex system: regulations and consumer demands for greater

gas mileage have forced changes in the way

the individual elements of the system are designed, and also the way they are integrated.

Big gains in fuel economy—while preserving

interior space, reliability and durability, and

flexibility in use—come from modifying the

system at many points. Powerplants are refined, as are transmissions; aerodynamic

drag and rolling resistance are reduced;

weight decreased. Front-wheel drive is now

commonly chosen to give more interior space

for a vehicle of given size and weight—particularly important for small cars—though at

the expense of somewhat greater mechanical

complexity and thus higher manufacturing

costs.

I’rhe Chunglng llror)d Aut(jmf)tl;’e lndL1str\ ‘l-hr~~ugh 2000”

(Cambrlrige, hlass.: Arthur L). Little, Inc., Januar\ 1980]

-L(mg Term Perspect~ves of the \\’~Jrl(f C(]r ln(iu~(rJc~, op. clt.
142 . U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

Technological change through the end of

the century is likely to continue to follow

these patterns. Powerplants and package

sizes will become smaller. Eight-cylinder

engines will be replaced by sixes and fours.

Three-cylinder engines will also appear. The

detail design of spark-ignition engines will be

continually modified and improved to more

nearly optimize fuel economy and emissions.

Diesels will be more widely used, but alternative heat engines are not likely to see

widespread application.

Engine weights for given power output will

continue to be reduced by means of thinner

walled castings, as well as increased use of

aluminum for components, including cylinder

heads and some engine blocks. Plastics and

ceramics may become practical for limited

use in internal engine applications, Efficiency

will be improved by reducing engine friction

and heat rejection to the cooling system.

Compression ratios may increase somewhat

as combustion chamber designs are tailored

to available fuels and electronic control

systems are used to prevent detonation. Integrated engine control systems will be even

more important for regulating parameters

such as fuel-air ratio and spark timing to

maximize fuel economy consistent with permitted emissions levels. Improved transmission designs—perhaps eventually continuously variable transmissions—will further integrate engine and transmission control.

Relatively large increments in driving cycle

fuel economy could result from such systems,

Four-cylinder engines for 1981-model U.S. small cars
Ch. 7—Prospective Competitive Futures ● 143

which would permit engines to operate in the

speed and load ranges where efficiency is

highest,

Turbocharging, though costly, will be used

more widely, particularly on diesel engines—

but continuing applications of diesels to passenger cars may be limited by emissions regulations. The outlook for alternative fuels is

uncertain, and in the United States depends

to a considerable degree on energy policies;

technologies can probably be developed to accommodate whatever fuels—including synthetics—are available.

Prospects for electric vehicles, like alternative heat engines, seem to keep receding

into the future. While a slowly growing presence in the marketplace is possible, significant penetration of electric passenger cars

by the end of the century appears unlikely.

Just as in powertrains, technological

change elsewhere in the vehicle system will

be gradual though cumulatively significant.

Downsizing and weight reduction will continue; more high-strength steel, aluminum,

and perhaps magnesium will help cut weight.

Plastics and composites will appear in

primary structural applications—perhaps

wheels, for example.

Further changes in package designs are

more problematical, The fleets of most U.S.

automakers will be largely front-wheel drive

by the late 1980’s. The market for specialpurpose commuter cars has yet to be tested in

the United States, If very small two-passenger cars should prove popular, Japanese manufacturers—with their experience in halfliter ‘‘microcars’ —may initially have an

edge.

Developments in manufacturing technology

will also be gradual but cumulatively have

major impacts, particularly when associated

with new materials. Innovative manufacturing techniques may speed the use of structural composites. For metals, near-net-shape

processing will continue to be a goal, as will

IIJ. Yamaguchi, ‘L’rhree Semi-Automatics for Light Cars, ’

Aut{~mf~tive Engineering, vol. 88, September 1980, p. 119.

more rapid machining, Pressure for low production costs, along with somewhat longer

time periods between model changes, will

maintain the incentives for large-scale dedicated manufacturing facilities. FIexible automation—e.g., use of robots—will also increase, particularly for arduous and potentially health-threatening tasks such as painting and welding, and for work demanding

precision or high quality.

U.S. manufacturers will participate in developments in motor vehicle technology on a

more-or-less equal footing with automakers in

other parts of the world, As in the past,

unique technology is not likely to play a major

role in the competitiveness of automobile

firms,

Future Competitiveness

Much of the recent public debate over the

problems of the U.S. automobile industry has

centered on the slump in sales by domestic

manufacturers during 1980, and the concurrent rise in imports from Japan, Both the

United Auto Workers and the Ford Motor Co,

asked for import quotas and/or tariff increases, blaming Japanese imports for the

bulk of the difficulties of the domestic

industry.

Trade protection—whether tariffs or quotas or both—would aid the domestic industry

to the extent that imports are a cause of its

current problems. As pointed out in chapter

5, there are a variety of other factors at

work—recession, high interest rates, rising

gasoline prices, and shifting consumer tastes,

But if trade restrictions were imposed, they

would nonetheless tend to increase sales of

domestically produced vehicles, raise profits,

and also raise employment in both the auto

firms and their suppliers.

The rationales for limiting imports of automobiles (and light trucks) are similar to those

used earlier to justify quotas and other measures intended to insulate the steel and consumer electronics industries (ch. 6). Restrictions on imports for a limited period of

time could, in principle, allow domestic firms
144 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

to increase their revenues, hence their ability

to generate investment capital. Investment—

in new products as well as in plant and equipment—could help the industry to revitalize

itself and restore its competitive position. The

U.S. automobile industry does have large capital needs, as discussed below and in chapter

5. A key question for policymakers considering trade restrictions such as quotas or tariffs is: To what extent will limiting imports of

cars and trucks increase the cash flow available to American automakers for reinvestment? The corollary, of comparable importance, is: What would be the costs and benefits to the economy as a whole of such

measures?

Increases in capital available for new

investment would depend essentially on increases in sales of domestic vehicles resulting

from trade protection, and on the price increases that might result because of lessened

competition from imports in the marketplace,

These two factors are of course interrelated;

higher prices would be expected to reduce

sales. Presumably, the increase in sales

volume of domestic cars resulting from import restrictions would be less than the

reduction in imports because some consumers would defer purchases if denied imports.

However, import restrictions could also help

the industry attract external capital by decreasing the risks perceived by lenders, Reductions in unemployment among autoworkers would be a direct benefit to the economy

because payments for unemployment insurance and trade adjustment assistance would

decrease. Many other less direct benefits

could follow—e.g., revival of local economies

in regions heavily dependent on the automobile manufacturers and their suppliers.

The costs to the public at large of import

restrictions—primarily through higher prices

—could also be large, perhaps several billion

dollars.’” Thus, it is not clear that import

restrictions could substantially benefit the

domestic industry without imposing high

costs on consumers. Even if import relief

“’”Summary of FTC staff testimony before the International

Trade Commission, ” Oct. 8, 1980, p. lo.

measures helped solve the near-term difficulties of the U.S. auto industry—e.g., profitability and employment—they might still have

little effect on long-term problems of restructuring, particularly the need for investment

capital to finance redesign and retooling, simply because these capital needs are large

compared to the probable results of import

restrictions.

Expenditures both here and overseas by

U.S. firms for conversion to newly designed

small cars—including costs of engineering

design and development, as well as new plant

and equipment— are estimated at about $7o

billion (in 1980 dollars) during the 1979-85

period (ch. 5), more than double the rates of

capital spending during the 1970’s. Most

spending estimates have been based on

changeovers to product lines that will meet

the Corporate Average Fuel Economy mileage

standards scheduled for these years. If market demand for small, high-mileage cars continues to outrun these standards, or if the

Government calls for large additional improvements in mileage for the post-1985 period, then further rounds of redesign and retooling could be required. This would place

an additional and heavy burden on the U.S.

industry, Not only would automakers face

new outlays, but facilities that are now being

designed and built for downsized cars might

become obsolete well before the investments

had been paid back. Under such circumstances, the financial resources of even the

strongest American manufacturers might

continue to be stretched in comparison to

their overseas competitors, who can undertake more gradual changes in their own car

lines—which in many cases already include

models considerably smaller and more economical than any exported to the United

States (e.g., the Japanese microcars mentioned above).

Should aid for U.S. automakers directed at

such long-term concerns be judged necessary

—whether as a supplement or a substitute

for trade restrictions—this could, as for the

steel industry, take the form of either aggregate or sector-specific policies, Relaxation
Ch. 7—Prospective Competitive Futures ● 145

Photo credit Ford Motor Co

Quailty inspection using body gages supplementing regular assembly line inspection
146 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

of regulatory standards provides an example

of the latter. The more commonly proposed

types of aggregate policies have been those

mentioned earlier in the context of other

industries—measures designed to increase

capital investment across all sectors, such as

accelerated depreciation allowances or lower tax rates.

That aggregate policy changes would help

the U.S. automobile industry raise substantial

amounts of capital is not immediately obvious. Automakers already depreciate special tooling over a 3-year period. Tooling expenditures accounted for nearly 40 percent

of the industry’s total spending on plant, land,

and equipment in 1979. 25 The scope for significant cash flow benefits from measures

such as IO-5-3 depreciation may thus be limited. Of greater importance, most types of tax

incentives are directly beneficial only when a

company is profitable and has paid taxes at

some point during the preceding 3 years. Generalized tax changes would do little to help

firms losing money unless refundable taxes—

in the form of payments for years when losses

occurred—were adopted. Expectations of improved profitability in the future, however,

could help attract outside investment,

If policies intended to apply in the aggregate appear insufficient to meet the needs of

the automobile industry, sector-specific programs could be enacted. Examples include:

tax credits; still faster writeoffs for plant and

equipment, e.g., a l-year depreciation period

for special tooling; loan guarantees; and

relaxed environmental and safety standards

requiring lower levels of investment by domestic manufacturers (but also by manufacturers of imports).

The last two forms of aid have already

been implemented to some extent. Chrysler

currently depends on Federal loan guarantees, and the Reagan administration has

recently proposed a package of relaxed regulatory standards which, it is claimed, would

1“’Current Problems of the U.S. Automobile Industry’ and Policies to Address Them,’” staff working paper (L$’ashington,

D. C.: Congressional Budget office, National Resources and

Commerce Division, JUIV 1980), p. 53.

save domestic firms up to $1.4 billion in

future expenditures.

Greater certainty over future regulations

—including fuel economy standards—could

also help by creating a more stable climate

for investment. Even more important, this

would allow automakers to plan investments

—in both new vehicle designs and new production facilities—with greater assurance

that they would not be outmoded by changing

regulations.

Regardless of its immediate problems, the

U.S. automobile industry appears to have the

capacity to remain internationally competitive. The two largest domestic manufacturers

are strong worldwide and have been for

many years (this is a major difference between the steel and automobile industries).

Their chief international rivals—particularly

in Europe— also have their ups and downs.

Many American small cars are competitive in

price with imports (although the profitability

of small car production in the United States

remains uncertain). U.S. firms are placing

renewed emphasis on reliable, high-quality

products, As the domestic industry begins to

produce a broader range of small, highmileage cars, and as the economy emerges

from recession, the larger American automakers should again become healthy and

competitive.

At the same time, many observers expect a

shakeout in the world auto industry, with less

than 10 firms—perhaps only 6 or 7—dominating global markets by the end of the century, (This is not to say that small manufacturers of high-priced specialty cars could not

continue to prosper. ) If this scenario comes to

pass, two of the firms would probably be General Motors and Ford. The others might be

the larger European firms such as PeugotCitroen, Fiat, Volkswagen, Renault, plus Nissan (Datsun), and Toyota. General Motors appears to have ample resources to adapt as

needed. Ford will have more difficulty, but is

not alone. Some of the European firms—most

notably BL Ltd. (formerly British Leyland),

but also Fiat and Peugot—are in rather pre-
Ch. 7—Prospective Competitive Futures . 147

carious financial straits, and may need continuing assistance from their governments.

As part of this worldwide restructuring,

automobile firms are becoming more closely

tied through joint design and/or production

ventures. The increasing similarity of cars

produced in various parts of the world is part

of this trend. The larger American manufacturers are all linked to foreign automakers—

not only their overseas subsidiaries, but also

through partial interests in Japanese firms

(General Motors-Isuzu, Ford-Toyo Kogyo,

Chrysler-Mitsubishi). Other ties involving

U.S. producers may develop; in the AMCRenault case, the state-owned French partner is now dominant, Worldwide, more than

70 joint ventures currently link automobile

manufacturers.

Motor vehicle production in rapidly industrializing countries such as Spain, Mexico,

Brazil, and Korea—both to serve local needs

and for export— will make the industry increasingly a translational one. 26 Parts manufacture and assembly for the Ford Escort, for

example, is spread over seven countries.

Such changes will also affect supplier

firms—where there will probably be a good

deal of consolidation in the years ahead. To

some extent, manufacturing facilities are

being located in developing countries because

of local content requirements; many countries look to automobile production, along

with steelmaking, as a foundation for industrialization. But low labor costs are also important—just as for TVs or semiconductors.

The ability to adapt to this changing world

structure of production and sales is one of the

keys to prosperity—perhaps survival—for

the major automobile manufacturers of the

United States, Europe, and Japan,

‘S. I,all, “’I’he Internationfi] Aut{)mc]tite Industrk ,]n(i tht~ 1)[’-

vcloping J1’orki, \t’(Jr’l(i r)f’i f’lopmfvlt, vol. 8, 1980, p, 789.

Summary and Conclusions

The electronics and automobile industries

are evolving toward more fully international

operations; the world steel industry is also

becoming more dispersed. Yet the patterns in

each sector differ: as shown in earlier chapters, they are unique in their specifics.

Competition will remain intense in world

steel markets as long as overcapacity exists,

Raw steel capacity is being added by Third

World countries, aided by joint ventures and

technology transfers from steel firms in industrialized nations. While none of the American companies have extensive international

opera tions, they will nevertheless be affected

by these trends, along with steelmaker elsewhere. The impacts will be particularly significant if Third World steelmaker have excess capacity and export to the industrialized

count ries.

Structural change in the U.S. steel industry

is likely to continue, with nonintegra ted firms

taking a more prominent place, and allo]~specialty steels continuing to be a strength. The

competitiveness of large, integrated firms

will depend to a considerable extent on their

ability to generate or attract capital for moderniza tion. New technologies for m:~ k ing iron

and steel will also play a n important role in

shifts in competitiveness over the rest of the

century,

The electronics industry is alread>’ thoroughly international in sectors such as semiconductors and computers, in most parts of

the world dominated by American firms. (~onsumer electronics is also an international industry, but here most of the leading worldscale manufacturers are Japanese, W’hile

semiconductors, computers, ancl other hi~htechnology branches of electronics will (;ontinue their rapid growth, demand in (x)nsumer electronics Will spring from neLIT products

and from the industrializing countries, where

markets are far from sa tur:~t ion. If the U.S.

electronics industry can ~enera te cap i ta 1,
148 . U.S. Industrial Competitiveness —A Comparison of Steel, Electronics, and Automobiles

find qualified personnel, and maintain open

access to foreign markets, it will continue to

be highly competitive in sectors such as semiconductors and computers. Recovery of the

U.S. consumer electronics sector would remain problematical, and appears to depend

on successful commercialization of new products.

In the automobile industry, the era of the

“world car” is beginning. International design efforts are a reality, with Americanmade cars increasingly resembling those developed in Europe and Japan. These changes

are evolutionary; automobile technology is

not likely to change radically through the

1990’s, but continual refinements to existing

design concepts will have dramatic cumulative impacts.

Growth in U.S. automobile sales will be

slow—as in most of the industrialized world.

The fastest expansion, hence the greatest opportunities for multinational automakers, will

be in Eastern Europe and the Third World.

The most successful of the world’s automakers will be those that can maintain their competitiveness in the developed world while also

establishing strong positions in emerging

markets.

Given current trends, there may be a further concentration of the world automobile

industry, with perhaps as few as six or seven

large firms commanding most of the market

by the end of the century. Such a restructuring would be difficult and painful. American

firms will continue to be among the world

leaders, but will not be able to rest unchallenged in their home market. Not only are imports likely to provide continued competition,

but Japanese firms will probably begin assembling cars, as well as light trucks, in the

United States,
CHAPTER 8

Policies Toward Industry

in the United States
Contents

Page

Overview ... .*. **. **. **. .*** *.. ...****.********.***********.."@***""" " 151

Policies Affecting Industry *.***** ******. .**. * * * . * * . * * @ . @ * * . . * * *.* 152

Macroeconomic Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ... ... ...c..~ .~.”~153

Other Policies, Largely Aggregate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..........154

Industrial Policy for the United States .******* ● ******.. ● ,*..***. ● ***9..*. ● . * * 157

Industrial Policy Reconsidered. . . . . . . . . . . . . . . . . . . . . . .0,...... . .............157

The Political Context. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...................158

Prerequisites for IndustrialPolicy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......,..159

Macroindustrial Policy . . . . . . . . . . . . 0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..~160

Moving Toward Industrial Policy . . . . . . . . . . . . . . . . . . . . ? . . . . . . . . . . . . 0.........162

Summary and Conlusions . . . . . . . ..0..0.. .0..0,00 ******O* ● *,..*.. ● O..*.** ● * 165
CHAPTER 8

Policies Toward Industry

in the United States

Overview

Chapter 6 reviewed public policies having

sector-specific effects on the U.S. steel, electronics, and automobile industries, Chapter 7

outlined likely competitive futures for each of

the three industries, A major point of chapter

7 was the increasing intensity of competition

on a world scale in all three industries.

The slackening competitiveness described

in earlier chapters, to which Government

policies have sometimes contributed, suggests that new policy approaches be considered. In the past, the U, S. economy has functioned reasonably well without a consciously

developed industrial policy. Attempting major

changes in the formulation and implementation of policies toward industry will be a difficult but perhaps necessary undertaking.

This chapter sets U.S. competitiveness,

and the public policies which affect it, into

the context of industrial policy. “Industrial

policy, ” as used here, refers to the broad array of Government policies that directly or indirectly affect industry. Included are elements of trade policy, domestic economic policy, regulation, adjustment, and science and

technology policies, The use of the term industrial policy does not necessarily imply

planning, or sectoral intervention in the affairs of particular industries, although such

approaches have been favored in some countries (see app. D).

A distinction between policies having sectoral and aggregate objectives—between

those directed at a single industry and those

directed at a number of sectors or at the entire economy—has been adopted at several

points in this report, and particularly in the

remainder of this chapter. Not only has sectoral targeting been an important component

in a number of foreign industrial policies, but

similar approaches have sometimes been advocated for the United States. Just as there

are many types of policies that have aggregate objectives and cut across sectors, so

there are different sorts of sectoral policies.

For example, some sectors may be selected

for promotion as future growth industries;

alternatively, sectoral measures may be directed at distressed industries—intended to

help rebuild them or to manage decline. Support may be given to industries judged important to national security, or for regional

development. While industrial policy can be

approached from other perspectives, the sectoral/aggregate distinction highlights issues

involving both equity and economic efficiency. These are central to decisions facing policymakers in the United States.

Some degree of government intervention is

inevitable in a complex industrial society. A

distinguishing characteristic of U.S. industrial policy is the ad hoc use of the wide array

of policy tools available (and their varying

success). The result has been industrial policy which is largely de facto in nature, rather

than consciously developed. Many public policies have, in one way or another, affected industry; but they have not been unified by a

coherent set of objectives outlining the desired impacts on particular industrial sectors

or on the economy as a whole.

Is this necessarily the case? If a consensus

existed on the need for a more coherent industrial policy, could it in fact be formulated

and implemented, or are there features of our

political and economic system that present

overriding obstacles? Would an industrial

policy aimed at promoting competitiveness

and related social objectives be effective?

These questions—dealing with political and

151
152 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

economic feasibility—are at the heart of decisions facing Congress. If no effort is made to

develop a more coherent industrial policy,

decisions affecting industry will continue on

a case-by-case basis. With exceptions such as

some macroeconomic policies, most individual policy tools are likely to be limited in

range and impact. The key to an effective industrial policy lies in their cumulative results;

a continuation of past practices will not lead

to significant improvement.

OTA’S study of competitiveness suggests

that Congress consider establishing a more

explicit basis for industrial policy. While an

ad hoc approach worked in the past, this

report suggests that it may not suffice in a

world of intensified competition—one where

the United States no longer enjoys the technological advantages and relative economic

strength that it possessed in the 1950’s and

1960’s. Industrial policy cannot by itself cure

inflation, lagging productivity growth, or

trade imbalances. It could help set these

problems into perspective and provide more

effective measures for attacking them.

Industrial policies in other countries sometimes include measures such as centralized

economic planning that run counter to the

U.S. tradition of flexible and pluralistic decisionmaking. OTA outlines below a “macroindustrial policy” option for the United States

that would provide a framework for the development of a more coherent industrial policy in keeping with American traditions, Such

a policy would include a conscious effort to

build a national consensus on objectives,

based on a strengthened capability for sectoral analyses of problems facing the U.S.

economy. It would rely on market forces and

aggregate policy measures wherever possible—sensitive to the imperfections and failures of the market system, but aiming to improve its workings rather than supplanting it.

Macroindustrial policy would continue to utilize sector- or firm-specific policies, but only

when other policy tools proved inadequate.

Such an approach would change the process by which the U.S. Government influences

international competitiveness. None of the existing repertory of policy tools would be abandoned outright. Nor would radically new

measures be introduced. But the process of

deciding what to do in given circumstances

would change to take a larger view of the

needs of the U.S. economy. The effect would

be to alter the political process by which Congress now legislates in areas such as taxes,

regulation, and trade, OTA is thus suggesting

a broader and longer term perspective on industrial policy than common in many recent

discussions of this topic. The framework discussed below is one in which the major legislative issues affecting competitiveness might

be approached by a Congress that was modifying past political processes. Among the

reasons for doing so is the growing public perception that competitiveness has a constituency far wider than those with jobs or profits immediately at stake.

Policies Affecting Industry

A number of policy tools with largely ag- mobile industries, here the view is broader.

gregate objectives influence industry in the Measures that affect many sectors, such as

United States. The purpose of this section is macroeconomic policies and R&D stimuli, are

to review several types of aggregate meas- emphasized. Macroeconomic and tax poliures that could be incorporated in industrial cies, trade policy, and science and technology

policy. While chapter 6 discussed policies in policy are all nominally discrete categories—

the context of the steel, electronics, and auto- some but not all aspects of which affect in-
—. ——.— . .

Ch. 8—Pollcies Toward Industry in the United States . 153

dustry. A better developed industrial policy

would seek to coordinate and integrate, but

not replace, such policy categories.

Some aggregate policy measures—regulations or taxation—have direct effects on industry. Others operate indirectly: education

and many R&D policies affect all industries.

Even explicitly sector-specific policies often

have secondary and sometimes unexpected

effects. For example, regulations affecting

passenger cars contributed to increase d

sales of light trucks and vans—which were

less tightly regulated—during the 1970's.

Where policies toward industry in the

United States have been ad hoc, nations such

as France have sometimes relied on elaborate

economic plans and targeting of industries

for promotion. In some countries, government

guidance of industry is strengthened by incentives, pressure , or coercion. Industria l

policies in such countries often feature direct

subsidies to specific sectors, In contrast,

sector-specific policies in the United States

have more often been regulatory than promotional. Here, sectoral policies have been developed for agriculture, utilities (and nuclear power generation), communications, and

transportation (railroads, trucking, airlines)

but rarely for manufacturing industries, except those heavily involved in national defense. Subsidies have typically been indirect

and seldom highly visible. Policy makers in the

United States have traditionally claimed—

despite the examples of Lockheed or Chrysler—to prefer aggregate policies, to believe

that decisions at the microlevel of specific industries and individual firms are best determined by the market.

Macroeconomic Policies

Macroeconomic policy is not subsumed by

industrial policy but overlaps and interacts

with it. Fiscal and monetary policies are used

to dampen swings in the business cycle affecting aggregate output, employment, and

prices. Their aims and consequences extend

far beyond any given industrial sector.

The interdependence of individual industrial sectors and the aggregate economy is critical to industrial policy, Economic growth in

the aggregate eases adjustment within and

among sectors. To a considerable extent, the

problems of individual sectors are caused by,

or aggravated by, problems at the macro

level—witness the effects of high interest

rates and recession on the automobile industry.

Strongly influenced in the United States by

Keynesian thinking, both monetary policy

(control of the money supply, as by interest

rates), and fiscal policy (taxation and Government expenditures) have been used in attempts to counter short-term swings in the

economy. Tax policies and Government

spending are linked by the need to raise sufficient revenues to offset expenditures (though

the Federal budget has been running substantial deficits, State and local revenues generally exceed expenditures). In addition, tax

policies have been used as brakes on expansion near cyclical peaks (by raising taxes) or

to stimulate demand when the economy is in

recession (by cutting taxes). The tax system

can also be used as a conscious and direct

tool of industrial policy —e,g., through

changes in corporate tax rates, investment

credits, depreciation allowances, and capital

gains taxes.

Taxes of all types are important to industrial policy because they affect investment

decisions. ’ Some observers take the position

that present U.S. tax policies are biased

against capital investment in industry and stifle the economy by slouing rates of growth of

productivity and output, The argument is that

private returns to capital are distorted by tax

policies that undervalue investment in industry compared to alternatives such as real

estate. A proposed S olutions is to lower

taxes—both corporate taxes and personal

taxes on income from investments in indus-

\f. J, 1l)skIn (l[l(i J, 13 Shoi[)n. “1ss11(’s Irl I}I(J 1,/ \</ 1)01) {If [ ;,l])-

1 t,] i I [](’(]m (; i 11 t ]1(; { ‘ n I t (xi S (() t t’s . ‘ ‘ ,4r]l(Jr-1( (in F’( ~ III( ~rl] I( l{~t If IIt,

Vol. 70, Nl[i\ 1980. p, 164,
154 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

try—to increase rates of return. Reduced

depreciation periods, lower capital gains

taxes, and elimination of “double taxation”

of dividends (taxing dividend income as well

as corporate profits) are among the modifications most commonly suggested,

The distributional impacts of policies to encourage savings and investment make them

the focus of political controversy, When capital gains taxes were reduced in 1978, the telling arguments were those based on capital

availability for industry. Supporters held that

cutting the capital gains tax would encourage

investment in small, innovative, high-technology firms—for which venture capital had virtually disappeared as a result of the 1974-75

recession. There has in fact been a dramatic

resurgence in the availability of venture capital for new corporate startups since 1978.2

Macroeconomic policies of all types can

have significant differential effects on various sectors of the economy—sometimes intentional, sometimes inadvertent. High interest

rates—introduced to achieve aggregate objectives in 1966, in 1970, and most recently in

1979—had greater impacts on housing, construction, and automobile sales than on many

other portions of the economy, The investment tax credit—designed to stimulate aggregate economic growth ]—benefits capital

goods industries because it encourages investment over consumption, Industrial policy

could provide a vehicle for addressing differential impacts of such types in more systematic fashion, and for coupling macroeconomic policies more closely to problems of industrial development.

Macroeconomic policies—though more

closely coordinated than several other categories of policy measures that affect industry—do not spring from a single source, Several groups in the executive branch are involved—including the Treasury Department,

the Council of Economic Advisors. the Office

‘Venture capital availability y will be treated at some Iengt h in

the forthcoming OTA electronics study.

‘J. G. Gravelle and D. W. Kiefer, “The Investment Tax Credit:

An Analytical Overview, ” Collgressional Research Service.

1979.

of Management and Budget, and those in the

Executive Office of the President concerned

with economic policy, The Federal Reserve

Board, an independent body, has the central

role in monetary policy. In Congress, the

House Ways and Means Committee and the

Senate Finance Committee are focal points

for tax measures, but are not alone in their

responsibility y for macroeconomic policymaking. The Joint Economic Committee and

the Joint Committee on Taxation, for example,

have oversight authority in such areas.

Other Policies, Largely Aggregate

Beyond macroeconomic policies, many

other measures —some aggregate, some sector- or firm-specific—affect the viability of individual firms, the competitiveness of industries, the standard of living.

Regulatory policies may have aggregate or

sector-specific objectives. Some are implemented on an aggregate basis but have differential effects—environmental regulations

have sharply contrasting impacts on the steel

and electronics industries. Other regulations

are enacted on a sectoral basis—i e., automobile safety standards.

In recent years, the energy industries—

particularly the petroleum sector—have been

affected by complicated sets of price controls, taxes, and direct regulations, The extension of Federal loan guarantees to Chrysler is a current example of a firm-specific

policy measure. While the United States has

always professed to favor the aggregate approach, political pressures, national security

considerations, and other objectives have

given us many examples of sector- and firmspecific policies,

Trade policies provide other cases of industry-specific effects, Tariff levels, quotas,

and other methods for controlling imports are

instituted essentially on an industry-specific

or product-specific basis—e.g., the triggerprice mechanism for steel and orderly marketing agreements for color television receivers (ch. 6). Export financing programs likewise have clear sector-specific effects—
Ch. 8—Policies Toward Industry in the United States ● 155

recently on the aircraft and construction industries.

In the United States, the multiplicity of

competing agencies and institutions involved

with trade issues— as many as a dozen—

fragments policymaking. Nations with tightly

coordinated central bureaucracies may be

better able to implement consistent trade

policies. Since Federal policy has seldom actively promoted the international competitiveness of U.S. industry, the fragmented

process has not in the past been a major concern. An important question now is whether

international trade policy can be more effectively coordinated and, if so, how can it be

coupled with the domestic side of industrial

policy.

Market promotion policies comprise another category of aggregate measures found in

the United States and in other Western nations. Such policies are designed to facilitate

or improve the workings of the market system. They aim to enhance the performance of

the economy as a whole, generally by working

on individual markets. Examples include:

●

●

o

●

●

labor market policies, such as employment services, job relocation and retraining subsidies, and other incentives

to increase the mobility of labor;

capital market policies, including loan

guarantees;

science and technology policies, such as

R&D incentives;

regional development programs;

antitrust measures.

Such policies are usually intended to counteract what economists term market imperfections—the failure of markets to allocate

resources in ways that society judges desirable, ” For example, local and regional development programs—e g., investment capital

subsidies, tax holidays, job training—may

help to overcome barriers to the mobility of

capital and labor. Antitrust policies are in-

‘\4arket failure HS a r:] tif)n:ilc f[~r policp is dis(usserl in detail

in [ipp. B, The (Jonven t i(jna] terms—mo rket failure t] nd m;i rket

i mperfcc t ion — n re un fort un:] t c her;] use perfe( t m a rkc IS a r-c

:] hs t r[] ( t ions t ha t do not in rw] I i t v c x is t,

tended to combat actual or potential market

distortions resulting from monopoly power or

anticompetitive practices. Market promotion

policies often have sectoral effects, but that

is seldom their primary purpose.

Economic adjustment policies are an important subset of market promotion policies.

Dealing with the consequences of structural

change or shifts in competitiveness, adjustment policies include a variety of measures

intended to help both firms and workers cope

with changing economic conditions. In the

United States, loan guarantee programs have

been used to aid industries and firms, as in

the Chrysler case. Job retraining and other

programs on the Federal level to assist unemployed workers have been more systematic in intent but not notably successful.

Loans and loan guarantee programs have

expanded rapidly in the United States over

the past few years, often on a case-by-case

basis to assist ailing industries or to attract

new investment. Such subsidies typically

have been used, not as conscious efforts to

ease processes of structural change, but to

provide piecemeal, short-run assistance.

Sometimes the aid is defined by the affected

parties, who may be more interested in impeding change than in easing adjustment.

In addition to ad hoc loans and loan guarantees, the Economic Development Administration (EDA) within the Department of Commerce, and the Department of Housing and

Urban Development’s Urban Development

Administration Group, among others, have

administered programs that might be termed

adjustment assistance. Directed at promoting

industrial or economic growth in “de -

pressed” regions, they have been intended to

create and maintain jobs. EDA, for example,

granted more than 200 loans and loan guarantees in 1979, totaling over $600 million,

which are said to have produced 25,000 jobs

and saved 15,000 more, s Trade adjustment

Ec(m(mr]c Detrrl~)pmen t Atinlin]str(][i{)n 1979 Annu(]l Rq)f)r[

[Washington, 1). C,: Department of Commerce, hla~ 9, 1980).

hlore generallv, sw N. A. Noto,” “Industrial POlirw Implicit in

Federal Business [Jredit Pro~rams, Congressional Research

%rvicc Report No. 8 1-12E, Dec. 31, 1980,
156 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

assistance (TAA) approaches the employment

problem from the other side—by giving benefits directly to workers who have lost their

jobs because of imports. Expanded under the

Trade Act of 1974, TAA expenditures for

1980 were about $1.5 billion.b

Although such programs have been ostensibly directed at development and assistance,

they have not been guided by any long-term

perspective. In fact, TAA administrators are

prohibited by law from attempting to anticipate and plan for dislocations in the economy;

they are instead forced into a reactive approach, TAA programs have provided income

maintenance, but not the retraining or relocation of workers necessary for effective adjustment,’ Too often, economic adjustment

assistance in the United States is allocated on

a political and geographic basis, too seldom to

industrial sectors with good prospects for

growth and competitiveness. Such programs

are quite different from the subsidies provided abroad to sectors that are expected to

be mainstays of future economic growth and

competitiveness. Nor has aid to U.S. industry

been used effectively to manage contraction

in declining or distressed sectors.

Another element in the industrial policies

of many countries is the promotion of innovation,” In the United States such policies date

at least from the creation of the Patent

Office.

Some policies for promoting innovation

support the technology and science base underlying industry. Others attempt to increase

possible rewards to innovators (patents, liberal capital gains taxes), or to reduce their

risks (forgivable loans, technical assistance

programs, Government procurement). Many

current suggestions for improving the climate

‘R, A. Hobbie, “Trade Adjustment Assistance for Workers, ”

Congressional Research Service Issue Brief No, IB80082, Nov.

19, 1980, p. 1.

‘G. R. Neuman, ‘*Adjustment Assistance for Trade-Displaced

Workers, ” The New International Economic Order; A U.S. Res~)~)nse, D. B. H. Denoon, e~. (New York, N. Y.: New York University Press, 1 979], p. 109.

‘{Policies ff~r the Stirnu~~]ti(~n of lntiustri(]l Innovation, llols, I

(ln(l 11 (Paris: Organization for Ec>on(jmi(: Cooperation and Development, 1 978).

for innovation in the United States focus on

altering tax policies to increase incentives for

risktaking by private industry.g As with trade

and economic adjustment, there is no real

locus for policies dealing with technology and

innovation. Agencies involved range from the

Office of Science and Technology Policy, the

Departments of Defense, Energy, and Commerce, to the National Science Foundation

and the National Aeronautics and Space Administration.

Government policies in the United States

could be modified in ways that would improve

the climate for innovation—by removing

some of the obstacles and risks, increasing

the potential rewards. While such an effort

might be an important part of industrial

policy, it is also an area where the arguments

for reliance on market forces are strong. Innovation is a risky and uncertain activity,

sometimes resulting from R&D efforts aimed

at entirely different outcomes. Becaus e

chance and uncertainty characterize th e

process, there may be less of a role for planning or direct action by Government, more for

enhancing the environment for innovatio n

through indirect measures.

The United States has had many other policies—both aggregate and industry-specific—

which influence the behavior of industry .

Among those which have not been discussed

here, but which nonetheless have substantial

indirect effects, are defense policies and

education. As pointed out in chapter 4, much

of the R&D performed in the United States is

aimed at national security objectives. This

strengthens U.S. capabilities in many fields of

technology, and sometimes leads to developments that prove commercially significant,

Public education is, over the long run, especially critical because it affects the human resource—the skills and abilities of the people

employed in U.S. industry—productio n

workers, engineers, and managers.

“See, e.g., Stimulating Technologico] Progress, A Stutement

hy the Research and Policy Committee of the Committee for Economic Deve]opmen t, January 1980; and The Zmpoct of T(IX ond

Finunciu] Regulatory Po~icies on In(iustrial Innovation (Washington, D. C.: National Academy of Sciences, 1980).
Ch. 8—Policies Toward Industry in the United States ● 157

Government policies in this country have which policies can be most effective under

seldom been directly concerned with competi- various circumstances. The interplay be -

tiveness and economic efficiency. Such mat- tween economics and politics is in fact at the

ters may now deserve more attention. Politi- heart of the decisions facing the United

cal and economic realities will determine States.

Industrial Policy for the United States

OTA’S study of the steel, electronics, and

automobile industries shows that even the

most vital sectors, such as semiconductors,

now face challenges in adapting to new international realities. Among the changing circumstances are: narrowed technological advantages; the rise of aggressive foreign competition—in overseas markets as well as in

the United States; and efforts by foreign

governments to promote their own industries.

Congress may want to consider new strategies designed to maintain and enhance U.S.

competitiveness and to deal with regional and

employment dislocations.

The basic choice is not between Government policy and no policy—intervention or

nonintervention. An industrial society cannot

function without some government involvement in the affairs of industry. The crucial

questions concern the form and effect of public policies: What sort of industrial policy is

most compatible with the U.S. political and

economic system, most appropriate in the

present context?

Industrial Policy Reconsidered

Different people use the term industrial

policy in different ways. For some, industrial

policy means sectoral policies—such as Japan’s VLSI program—which feature direct

government promotion of targeted industries.

But industrial policies seldom rely on sectoral

measures alone.

The analysis on which industrial policy is

based must nonetheless be carried out on a

sector-by-sector basis—as illustrated by the

earlier chapters of this report—whether policy measures are aimed at promoting competitiveness or at other objectives that depend on economic efficiency.

The policy instruments chosen can b e

sector-specific, aggregate, or a mixture; some

countries emphasize one type more than the

other, A sectoral emphasis typically entails

promotion, subsidy, or protection of selected

industries. An aggregate emphasis focuses on

incentives for innovation, labor and manpower policies, adjustment assistance, and

the traditional spectrum of monetary, fiscal,

and tax policies.

Sectoral policies are often intended to help

countries develop and maintain segments of

their economies that are judged important to

the national interest, such as defense industries or those that export. In some countries, sectoral measures are used in attempts

to speed structural adjustment—e.g., by moving resources from industries in decline to

those with seemingly better long-term prospects. Japan has developed plans to promote

a transition from heavy industries, particularly those that are energy-intensive, t o

knowledge-intensive, high-technology sectors

—an effort to anticipate and adjust to shifts

in comparative advantage.

Sectoral policies are sometimes said to

involve picking “winners” and “losers.” In

principle, winners get government support,

while public policies also help to cushion and

manage decline, In practice, pressures for a

protectionist industrial policy come from

distressed industries trying to reverse their

losses. Picking winners is a difficult task for

governments, picking losers still more so. The

unhappy result in either case can be interference with normal market processes at the

expense of overall economic performance.
158 . U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

In contrast, aggregate policies such a s

market promotion measures aim to enhance

market mechanisms but not to replace market

decisions. It is not an easy task to predict

which industries will rise or decline, nor are

growth and contraction absolute and irre -

versible, Aggregate policies do not depend on

such predictions. They are also more consistent with the principle that government intervention should not overtly discriminat e

among sectors and/or firms. Those who favor

an aggregate approach to industrial policy

say that sectoral policies tend to distort market signals, leading—particularly in the long

term—to misallocation of resources. In addition, market promotion policies, once in place,

may respond more flexibly to changes i n

labor, capital, and product markets than sectoral policies (see app. B on the economics of

industrial policy).

A fundamental task for industrial policymakers, regardless of whether they choose a

sectoral or an aggregate emphasis, is to set

priorities, select policy tools, and evaluate

progress within a consistent framework. In

the United States, consistency and continuity

in approach would distinguish a consciously

developed industrial policy from the ad hoc

approach taken in years past. Industrial policy also requires agreement on objectives,

and mechanisms for coordinating policie s

consistent with political and institutiona l

realities.

The Political Context

In many respects, the de facto industrial

policy of the United States is a consequence

of a political system that fragments power

and presents obstacles to the formulation and

implementation of coherent policies of many

types, A diffused and decentralized policymaking apparatus provides many channels

for interested parties to press their case; it

can give redundancy and flexibility to accommodate uncertainties and complexities. Such

a system may encourage competition of ideas,

ultimately producing a decision that is more

widely accepted than one made by a small

group. But under such conditions, it is easier

to say that the country might need a better

developed industrial policy than to propose

realistic steps for achieving it,

In a pluralistic and decentralized political

system, industrial policy might not always

produce the desired results. Competitiveness

springs from a rich and complex ecolog y

(table 13, ch. 5), in which public policies are

but one element among many. Tampering

with the ingredients that have brought success in the past always carries dangers, One

potential danger is that firms or sectors losing out in the marketplace might dominate the

policy process. Distressed sectors or firms,

and their employees, may be the first to seek

protection or assistance from the Government, while the indirect costs and benefits of

such measures may be so broadly distributed

that other groups do not even recognize that

their interests are at stake, The more successful firms and industries generally prefer

to remain autonomous. Another possible danger is that a more tightly coordinated industrial policy could stultify competition and innovation, ultimately jeopardizing long-term

economic efficiency. The essence of the problem is to find ways of formulating industrial

policy that are more effective than the current ad hoc methods, while preserving flexibility.

Because the decline of firms or industries

may not be permanent, and reversal could appear feasible through industrial policy measures, difficult and painful decisions may need

to be made in a highly politicized atmosphere,

In the last analysis, fears that sectors in temporary or long-term decline may dominate do

not constitute a persuasive case against industrial policy. The possibility of capture by

distressed sectors will always exist—and

may be more likely in the absence of industrial policy. A coherent framework for industrial policy could guide evaluation of the

claims of competing firms and industries,

making it easier to avoid measures that favor

special interests at the expense of long-term

competitiveness and other social goals.
Ch. 8—Policies Toward Industry in the United States Ž 159

Prerequisites for Industrial Policy

If consensus grows on the need for a more

coherent industrial policy, the Government’s

institutional capabilities would need to be developed. Two prerequisites for industrial policy are: 1) mechanisms for reaching agreement on objectives that are acceptable to

Government and various interest groups; and

2) improved analytical capability on the part

of Government agencies concerned with economic efficiency and competitiveness.

Industrial policy requires cooperation and

consensu s—among Government, labor, business, consumer and other interest groups,

and the public at large—sufficient at least for

agreement on basic goals. The traditionally

adversarial relationships among such groups

in the United States form an obstacle to industrial policy—in contrast to countries such

as Japan where cooperation is often viewed

as a key to industrial policymaking. While the

extent of cooperation abroad is sometimes

exaggerated, the differences between the

United States and Japan are nevertheless

striking. The question for U.S. policy makers

is: What sort of agreement on the ends of policy can, as a practical matter, be fashioned

within the context of the American political

and economic system?

Advisory groups such as the Steel Tripartite Committee already have a role in policymaking, primarily at the level of particular industries or sectors. Calls for increased cooperation among Government, business, an d

labor are now common, but neither agreement on broad industrial policy objectives nor

substantial cooperation in implementation

has yet been attained—in part because of the

deeply rooted distinctions between publi c

and private sectors in the United States.

From the beginning, business and industry

in this country were free to pursue entrepreneurial ambitions—in contrast to nations

like France where a strong state bureaucracy

played a central role in industrialization.

Such patterns of extensive government involvement in framing industrial strategies differ markedly from the American case, where

the lack of a feudal past, plus our vast resources, permitted a rapid and independent

flowering of industry.

Following the Depression and World War

II, industrial policy and economic planning

became the norm in many Western nations,

but not the United States. Discussion of an expanded role for Government still arouses distrust and condemnation in this country,

where the adversarial tradition has been

viewed as healthy. Suspicion of Governmentbusiness accommodation is a historical tradition. Even the Department of Commerce has

lacked ties to its nominal constituency-business and industry—comparable in strength to

those characterizing agencies such as the Departments of Labor or Agriculture. New policy initiatives must take these historical patterns into account; to change them Would be a

long-term undertaking.

Labor, consumer, and environmental interests must also be included in formulating

industrial policy. Such groups are justifiably

concerned that the costs of policy and the

burdens of adjustment be equitably distributed. Experience abroad with industrial policy suggests that the participation of labor

and public interest groups is essential for a

well-rounded perspective. There are many

ways in which labor, for example, can contribute to industrial policy and competitiveness—not only by safeguarding the rights of

workers, but also by helping to develop an atmosphere in which the contributions of individual employees to improvements in productivity and product quality are maximized. 10

Participation by such groups is not enough.

To develop more effective policies, the Government would need to strengthen its analytical capacity for evaluating competitiveness,

as well as for choosing policy tools. Especially

if the Government decides to selectively intervene to promote competitiveness, it must have

an independent capability for analyzing alternatives.
160 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

Many parts of the Government—including

the Departments of Commerce, Labor, and

Treasury; the International Trade Commission; the Council of Economic Advisers; and

the Federal Trade Commission—already

study and regulate industry and the economy

as a whole. Numerous other agencies have at

least a limited capability. Improving the ability of public agencies to analyze industrial

competitiveness is nevertheless critical for a

better developed industrial policy, Specifically, Government agencies could cultivate a

greater appreciation of the ways in which industry functions at a practical level—the

level of technology, the shop floor, the R&D

laboratory, the marketplace. Effective industrial policy demands efforts to anticipate future trends based on a concrete and realistic

understanding of the sectors in question—

empiricism rather than abstraction, theorizing, and empty statistics.

In addition to judging the competitiveness

of particular sectors, evaluating the cost

effectiveness of policy alternatives is vital. As

the economic arguments for industrial policy

initiatives outlined in appendix B suggest,

there is no prima facie case for intervention

in a market economy—even a highly imperfect one. The basic tests are: 1) Do the benefits exceed the costs? and: 2) Are the benefits

and the costs distributed with an acceptable

degree of equity? Determining the answers is

inevitably complex and difficult. Witness the

protracted controversies over costs and benefits of various motor vehicle regulations:

passive restraints, 5 mile-per-hour bumpers,

braking distances for tractor-trailer trucks.

These two prerequisites—improved mechanisms for developing consensus among interested parties, and a strengthened capability

for analyzing competitiveness—are essential

to the long-term success of industrial policy.

Macroindustrial Policy

OTA’S analysis of the steel, electronics,

and automobile industries—all three of critically importance to the U.S. economy —suggests that Congress consider the option of a

more coherent industrial policy The problem

is to develop a replacement for the present

patchwork of policies that is compatible with

the American political and economic system.

“Macroindustrial policy” is an approach

which seems feasible in light of this country’s

traditions, as well as the structural features

of our policymaking system. While there are

potential dangers to pursuing a more integrated industrial policy, the advantages appear more compelling. Foreign experience

shows that there are many approaches, a variety of policy tools available. OTA’S examination of the past history and future prospects of the industries covered in this report

reinforces the logic of a macroindustrial policy approach. It is discussed below essentially as an organizing perspective, not a blueprint.

Fundamental to macroindustrial policy is

an emphasis on the links and commonalities

among industrial sectors, and a preference

for economic adjustment through market

mechanisms where possible. To improve the

environment for industrial growth and competitiveness, a macroindustrial approach

would stress aggregate policy measures to

stimulate savings and capital formation, modernization of the capital stock of U.S. industry, investment in new and innovative technologies, and competition by U.S. firms on a

world scale. Upgrading the capabilities of the

labor force could be another central feature

—providing workers with satisfying jobs and

ensuring an adequate supply of employees at

all levels, including management, with skills

suited to a high-technology economy,

Macroindustrial policy would seek to integrate the goals of industrial development

with other social objectives. The need for integration is illustrated by the dilemma created by productivity improvements in slowly

growing industries such as steel. As earlier

chapters show, continued productivity increases are required to maintain competitiveness, but as productivity rises employment opportunities in a particular industry

can decrease. If the economy grows rapidly

enough, jobs may keep pace. But when economic advance slows—as it did during the
Ch. 8—Policies Toward Industry in the United States ● 161

1970’s—productivity growth can lead to

unemployment in some industries. Tradeoffs

of these sorts are examples of problems of industrial change that several European nations have addressed more systematically

than has the United States. The macroindustrial approach would value employment opportunities across the economy as a whole

above maintaining employment in particular

sectors.

An important task of industrial policy is to

determine when different types of policy

measures are appropriate and practical. The

macroindustrial perspective would be based

on sector-by-sector analysis of industry, but

would choose aggregate over sectoral measures where possible. By stressing long-term

and structural issues aimed at creating a

stable climate for industrial growth and development —capital formation, technological

advance, education and training of workers,

the promotion of structural adjustment—

such an approach might avoid capture by

narrow special interests and enlist the support of a broad array of groups.

Macroindustrial policy could incorporate

elements such as the following:

Ž Measures for supporting technology and

science, particularly generic technologies of commercial importance—e.g.,

computer-aided design and manufacturing, tribology (friction, lubrication, and

wear), materials processing, production

engineering—and R&D directed at commercial products and processes.

● Measures for increasing the potential

rewards to innovation, and otherwise indirectly stimulating R&D and the development of new products and processes.

● Policies to encourage and facilitate domestic technology transfer, particularly

the diffusion of technologies to smaller

businesses.

● Policies to increase rates of capital formation in the economy as a whole, along

with measures encouraging investment

in more efficient production facilities

(such as continuous casters for steel)

and new technologies. Both tax and regulatory policies could be directed at

such objectives.

Support for education and training of

the labor force, including retraining of

employees displaced by technological

change, Improvement appears possible

in the preparation of both production

workers, semiskilled and skilled—welders, toolmakers, electronics technicians—and at professional levels. In

particular, the engineering work force

could be substantially upgraded in both

numbers and quality by supportive public policies.

Economic policies designed to ease adjustment to changing circumstances—

e.g., by smoothing flows of capital and

labor from distressed firms or industries, or those with limited future growth

prospects, to sectors that offer rapid

growth and future competitive strength.

A more coherent set of trade policies

that would support exporting by competitive U.S. firms and industries, improve

protection against “unfair’ import competition in the domestic market—as defined by the domestic laws and international obligations of the United States

and its trading partners—and press for

equitable treatment of American firms

that seek to invest and sell overseas.

Such policies would not be inconsistent

with the traditional U.S. posture favoring open world trade, but would be intended to ensure that U.S. industry is not

placed at a disadvantage compared to

foreign rivals.

Economic and industrial projections on a

more detailed analytical basis than is

now common, with particular attention

to technology and to the efforts of foreign countries.

While macroindustrial policy would prefer

measures such as those listed above, other

varieties might also be necessary—for example, to ensure national security. If traditional

macroeconomic policies (monetary, tax)

proved inadequate to address a particular

problem, then other types of aggregate pol-
162 . U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

icies—those cutting across a number of

sectors—could be used: for example, market

promotion policies (e.g., innovation, competition). If these too proved insufficient, then

sector-specific or firm-specific policies could

be employed. But the central feature of the

macroindustrial framework is its preference

for aggregate policies.

Moving Toward Industrial Policy

If Congress decides to work toward a more

coherent and explicit industrial policy, several avenues are open—e.g., building on past

initiatives concerned with exporting or with

innovation. Over the past several years, many

congressional committees and subcommittees

have held hearings on international trade, industrial innovation, export policy, capital formation, and related topics that fit within the

approach OTA has suggested for macroindustrial policy. There has also been considerable interest in trade reorganization. Such

activities could provide a foundation for the

further development of industrial policy.

Questions of productivity, industrial competitiveness, and economic efficiency have

also moved toward the forefront of attention

in the executive branch and the public at

large. Despite widespread interest, there are

still differing interpretations of what industrial policy for the United States means and

differing opinions on whether an integrated

industrial policy would be desirable.

Within Congress, a considerable number of

committees and subcommittees have responsibilities relating to industrial policy, but

there is no one committee in either House

with industrial policy as a primary responsibility. In the Senate, the Finance; Commerce,

Science, and Transportation; Appropriations;

and Budget Committees all have interests in

certain subsets of industrial policy concerns,

but so does the Banking, Housing, and Urban

Affairs Committee—which found itself with

responsibility for the Chrysler loan guarantees—as well as the Foreign Relations; Environment and Public Works; and Labor and

Human Resources Committees. In the House,

the Ways and Means; Banking, Finance, and

Urban Affairs; Appropriations; Energy and

Commerce; and Small Business Committees

all make policies affecting industry, as do the

Education and Labor; Foreign Affairs; and

Science and Technology Committees. The

Joint Economic Committee has oversight jurisdiction but not legislative authority. It might

therefore be appropriate for Congress to consider activities aimed at clarifying the meaning and implications of industrial policy; at

examining institutional capabilities for analyzing the problems of industry and reaching

consensus on objectives; and at fitting ongoing legislative activities into an evolving industrial policy framework or perspective.

Concrete actions Congress might consider in

the near term are outlined below.

One example of response to continuing interest in problems related to competitiveness

and industrial policy has been the formation

of congressional caucuses organized to deal

with policy issues such as exporting and innovation—as well as those focused on particular industries (e. g., the Steel Caucus). Congress might wish to reshape such activities to

explicitly encompass industrial policy. A

more decisive step would be to create a formal task force on industrial policy—or alternatively, an ad hoc committee—to bring

together members and staff from various

committees. Formulation, coordination, and

evaluation of industrial policy measures

might benefit from such mechanisms for

facilitating interactions among the various

committees of the House and Senate that are

responsible for legislation directly affecting

industry. Other useful activities could include

seminars on industrial policy topics such as

those organized during 1980 by the Congressional Reseach Service and the Congressional Clearinghouse on the Future.

Recognition of industrial policy in the executive branch has been reflected in limited

form in proposals for “economic revitalization, ” as well as efforts such as the Domestic

Policy Review on Industrial Innovation carried out by the Carter administration. More

specifically focused on the international

trade competitiveness of U.S. industry were a

pair of executive branch studies mandated by
—

Ch. 8—Policies Toward Industry in the United States • 163

Congress in the Trade Agreements Act of

1979. These studies—on export policy11 

and

on U.S. competitiveness l2—were coordinated

by the Trade Policy Committee. Congress

could choose to request such reviews on a

continuing basis, as it did for the 5 year outlooks on science and technology required by

the National Science and Technology Policy,

organization, and Priorities Act of 1976.

Other opportunities within the executive

branch might be found in a revitalized National Productivity Council. The Council, established by executive order in 1978, was intended to provide a focal point for executive

branch activities related to productivity,

superseding the National Center for Productivity and Quality of Working Life, whose authorization had been allowed to expire. To

date, the Productivity Council has had little

visibility, but it could be strengthened.

Congress might also reinforce efforts to

develop cooperation and consensus on the

objectives of industrial policy beyond the

Government itself. The recent trend toward

advisory committees and commissions such

as the Steel Tripartite Advisory Committee

reflects a desire by both Government and the

private sector to stimulate meaningful dialog.

Congress could seek to broaden such committees to include stronger representation by

labor and particularly by public interest

groups, and also to ensure that such committees reflect the breadth and diversity of in-

, dustry— e.g., that they include representation

from firms that have performed both poorly

and well. Moreover, Congress could encourage such committees and commissions to

move beyond narrow sectoral interests

toward the broader concerns of industrial

policy as a whole.

A further step would be to create a council

or other group to directly address the groundwork for industrial policy. Such a council

could be located within the executive branch

and might have a small staff and an advisory

board of experienced and respected individuals from outside the Government (i. e., from

business, labor, universities, and public interest organizations).

Such efforts would be essentially preparatory, The recent executive branch reviews of

exporting and trade competitiveness remind

us that discussions of industrial policy in the

United States remain unfocused and preliminary. Knowledge and expertise relevant to

analyses of industrial policy and competitiveness are now widely diffused within the Government. The review of competitiveness—

conducted mostly by the Department of

Labor—devotes little attention to technology,

while from the OTA perspective technology is

an essential element in such an examination.

Yet within the Government, technological expertise is concentrated in agencies and laboratories with operational responsibilities

such as the Department of Defense, the National Aeronautics and Space Administration, and the Department of Energy, Such

agencies are not oriented toward industrial

policy.

OTA has emphasized the desirability of improving the analytical capability of the Federal Government as a step towards a more coherent industrial policy precisely because the

capability which Government can now bring

to bear is spread so thinly through the agencies. Another way Congress could begin to

lay groundwork for industrial policy is thus

by improving the institutional infrastructure

for such analyses.

For instance, an analytical group intended

as a locus for industrial policy might be

formed by drawing together skills and expertise from existing agencies and attaching it to

an executive branch program—perhaps to an

upgraded and expanded Bureau of Industrial

Economics in the Department of Commerce

(although much more than economics is

needed—e. g., expertise in technology, as well

as in the analysis of social impacts). Alternatively, a group with ongoing policy responsibilities could be added to an independent agency such as the International Trade
164 . U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

Commission. Another option is for Congress

to strengthen its own capability.

Among the functions of such a group—

whether located in the executive or legislative branch—might be economic and industrial projections. Its other responsibilities could

include: analysis of technological developments in the United States and abroad;

evaluations of the impacts of Government

regulations on competitiveness; and acting as

a central point for digesting and disseminating information on trends in markets, international trade, and technology in forms useful to

business and industry. Because similar work

is sometimes carried out in other Government

agencies— with widely varying effectiveness —as a first step, it might be appropriate

simply to conduct a review of existing

analytical capabilities relevant to competitiveness, economic efficiency, productivity,

and industrial policy. Such a review would

not be another study of competitiveness itself,

but an inventory of capabilities for analyzing

competitiveness.

In all probability, movement toward a more

coherent industrial policy in the United States

will prove slow and incremental. Therefore,

Congress is likely to face important decisions

on policies affecting industry before any

clear framework or perspective for industrial

policy emerges. As as result, it seems appropriate for OTA to suggest, based on the

preceding chapters, those elements of a macroindustrial approach that appear to have

the highest priority—both for improving the

performance of the American economy in the

near term, and from the longer term perspective of maintaining and enhancing U.S.

competitiveness over the 20-year period of

substantial industrial change outlined in

chapter 7.

In the near term, the climate seems favorable for tax policies intended to encourage

capital investment that could improve the

productive efficiency of U.S. industry. OTA’S

study of the steel, electronics, and automobile

industries indicates that such measures could

have positive effects if tax policies are

designed with these objectives in mind. Because U.S. industries compete for investment

funds among themselves and also with nonindustrial sectors of the economy, undifferentiated tax cuts might not lead to increased investments in modernization of equipment,

upgrading of worker skills, or technology

development. Tax policies that are specifically designed to encourage productive investment in industry, and to stimulate R&D and

the development and diffusion of new commercial technologies, are more likely to have

directly beneficial impacts on competitiveness and productivity,

Congress could also give a high priority to

more effective measures for stimulating industrial innovation. A continuing effort in

Congress and the executive branch on several fronts dealing with innovation—e.g,,

cooperative R&D, patent policy, development

of better mechanisms for the diffusion of

technology, evaluation of Government regulations—could be a significant contribution to

the development of industrial policy.

On a longer term basis, OTA’S study indicates that the United States—along with

many other industrialized countries—could

profitably develop more workable and effective mechanisms for economic adjustment.

Adjustment policies—e.g., for increasing the

versatility and mobility of labor, for managing the decline of sectors that have lost competitiveness, for retraining people with obsolescent skills—have not functioned well

here or abroad. Such problems are likely to

intensify in the years ahead—they will certainly not disappear. The disappointing results of programs such as Trade Adjustment

Assistance indicate that economic adjustment may be a policy area that Congress and

the executive branch need to reevaluate,

Education and training of the work force is

essential for both innovation and for effective

economic adjustment. Government policies

and corporate decisions are made by individuals whose attitudes, values, and skills are

shaped in part by their education. Industry

depends on skilled workers, capable engineers, and competent managers to build and

maintain competitive firms and industries.
Ch, 8—Policies Toward Industry in the United States ● 165

Investment in the human resource could be industrial policy oriented toward the longthe most vital single element in a macro- term needs of the U.S. economy.

Summary and Conclusions

This chapter began with a brief review of

policies having largely aggregate objectives.

The dominant tradition in the United States

has been reliance on fiscal, monetary, and

tax policy to promote overall economic welfare and to moderate extremes in the business cycle, While the competitiveness of U.S.

industry is directly related to aggregate economic health, there has seldom been any attempt to couple macroeconomic policies to

policies dealing with individual industries,

nor has competitiveness been a common goal

of public policies,

Other types of aggregate measures have

also had shortcomings. Economic adjustment

policies in the United States have been reactive rather than prospective and supportive.

Trade adjustment assistance functions primarily as unemployment compensation, and

does not confront the real problems of adjustment—mobility, education and training. Science and technology policies have sometimes

overemphasized science at the expense of

technology—a more directly determining factor for international competitiveness. U.S.

trade policy has yet to fully reflect that the

country no longer enjoys technological advantages so large that it can refrain from insisting on fully reciprocal treatment in terms of

both tariff and nontariff barriers.

While the United States was able to operate quite successfully without a consciously

developed industrial policy in the past, circumstances have changed, U.S. firms are

more exposed to foreign competition both

here and overseas. Other countries have rapidly developed their economies and their technological abilities. American firms are no

longer the undisputed world leaders in many

markets that they once dominated. It is not

clear that the United States—faced with declining industries, slow economic growth,

friction with our allies over trade, constraints

on supplies of energy and other resources,

persistent inflation, and structural unemployment—should continue as in the past.

A compelling argument in favor of the industrial policy alternative is that, in its

absence, political pressures may lead to haphazard, counterproductive policies intended

to aid particular industries or firms. Such action tends to interfere with economic growth

and adjustment. A market economy inevitably

produces winners and losers. The winners

generally have few grievances to press

through political channels. The losers are

likely to attempt to use the political process to

reverse their losses. Industrial policy could

provide a consistent framework for evaluating the claims of interested parties, and

for judging the costs and benefits of policy

alternatives,

OTA suggests “macroindustrial policy” as

an approach to the task of developing an integrated perspective on policies toward industry. By emphasizing aggregate and market

promotion measures, macroindustrial policy

would aim at flexible response to changing

conditions, not a rigid “strategy,” Macroindustrial policy would minimize aid to specific industries, rather attempt to ease the

transformation to a high-technology, resource-efficient society, It would place high

priorities on retraining and educating workers with the skills needed for new jobs and on

encouraging labor mobility; on technological

innovation, in manufacturing processes as

well as products and services; on incentives

to improve capital formation, energy efficiency, and productivity; on open trade and competition in domestic markets coupled with

support for American industries seeking to

export. The intent of such a policy would be to

retain and supplement the dynamism, competition, and adaptability that have traditionally characterized the U.S. economy,
Appendixes
APPENDIX A

Defining International Competitiveness

One of the immediate problems in analyzing international competitiveness is that no consensus

exists on its definition. The term ‘‘competitiveness ” is not used consistently in public discussions; in fact, contradictory meanings are sometimes implied within the same article or report.

This appendix attempts to bring order to the subject by explicitly setting forth several of these

definitions.

Some definitions of competitiveness are rooted

in economics and stress production costs and

market prices. In other cases, the definitional origins are technology based, and terms such as

“technology gap”’ are used. For example, if one

nation’s superior technology enables it to manufacture products that are beyond the capabilities

of other nations, the economists’ view of cost competitiveness is irrelevant. The United States possesses such an advantage in some products discussed in this report -e.g,, particular types of

computers or integrated circuits. On the other

hand, there are clear relationships between other

types of technological developments and costbased competitiveness measures. Superior manufacturing or process technology-as opposed to

product technology-is one way to achieve low

Costs,

International competitiveness is fundamentally

related to the global structure of comparative advantage. Countries tend to export goods in which,

for one reason or another, they are advantaged,

and to import other items. The sources of a particular nation’s relative advantages tend to vary

widely, but may include such factors as fertile

agricultural land, abundant labor or capital supplies, large and affluent markets yielding possible

scale economies, and unique technological capabilities. Clearly, with so many possible sources of

advantage, any simple definition of competitiveness is likely to be incomplete, Still, for analysis to

proceed, definitions are required.

The discussion below begins with perhaps the

simplest of definitions, that having to do with relative costs. A country (or industry within a country) is internationally competitive if it can produce an item at lower cost than can others. Clearly. other matters are also important in competitiveness; but even ignoring them, some useful conclusions can be drawn. The discussion continues

by developing alternative definitions and by considering how they relate to the comparative cost

definition, if at all. For example, some observers

claim that for a country to remain internationally

competitive, it must be technologically superior in

the development and production of manufactured

products that can be exported. These products

presumably would be either technically superior

or cheaper than similar i terns made elsewhere.

Such a definition is, therefore, closely related to

those based on comparative costs.

The following sections treat these subjects in

greater detail, with particular attention to the

steel, electronics, and automobile industries.

Economic Framework—Comparative

Advantage as a Descriptive Device

The discipline of economics provides a welldefined, if sometimes oversimplified, view of

international competitiveness, one that flows

directly from the notion of comparative advantage. In a comparative advantage framework,

competitiveness is a matter of relative prices or,

ultimately, costs of production and distribution.

Simply stated, if one firm’s selling price in a particular location is higher than another’s, then the

first firm is not competitive, all else equal, To be

sure, all else may not be equal, However, the benefit of the comparative advantage framework is

that it begins with a definition of competitiveness

that most observers can accept as reasonable. In

addition, using comparative advantage brings to

the fore aspects of competitiveness that might

otherwise be ignored in formulating public

policies.

In a comparative advantage context, international pricing patterns should be closely related

to production, distribution, and selling costs.

These, in turn, are determined by considerations

such as the prices of raw materials, purchased

components, and other factors of production (labor, capital equipment, etc.), together with manufacturing technologies. Note that the available

manufacturing technologies may give firms in

some parts of the world cost advantages over producers elsewhere. For example, if all these

technologies are labor-intensive, then nations

with relatively inexpensive labor would normally

be expected to be low-cost producers, assuming

that the workers possess the necessary skills for

169
170 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

dealing with the technology. Low labor costs have

been one of the factors leading to the strong competitive positions of Asian nations such as Japan

and Taiwan in consumer electronics, where

assembly processes have in the past been quite

labor intensive (although the use of automation is

now increasing),

In the broadest possible sense, therefore, nations tend to export items that best utilize their

available resources, and import other products.

Moreover, with flexible exchange rates, exports

and imports are likely to be nearly equal in monetary terms. ’ Therefore, in a real but limited

sense, exports are required to finance imports.

These simple statements lead to several conclusions that remove much of the confusion from popular discussion of trade issues:

1. It is not possible to “lose competitiveness”

across the board. If a nation trades internationally, at least some of its industries must

be competitive.

2. If a nation’s overall productivity growth,

3

however productivity be defined and measured, is lower than in other countries, this

need not result in a loss of competitiveness

for all industries if the exchange rate is free

to adjust. instead, there will be a relative

decline in real per capita income. To be sure,

the effects may not fall uniformly on all industries. Industries for which productivity

growth is lower than the national average

will likely find themselves growing “less

competitive’ in the comparative advantage

sense, For example, one of the problems of

the U.S. steel industry—as discussed in

chapter 4—has been wages that have risen

more rapidly than output per man-hour. Although average productivity in man-hours

per tonne of steel has increased at a respectable rate, and is still among the highest in the

world, the labor cost content has increased

more rapidly than in other countries, resulting in declining cost competitiveness for the

American steel industry.

Capital investment in a particular industry

aimed, for example, a t improving labor productivity may not make the industry (or firm)

internationally competitive. This is true even

in cases where the productivity gain exceeds

that of foreign competitors, It is possible that

the nation’s overall productivity growth will

exceed that of the industry (firm) in question,

E\rn In t ht~ (;nl It?[i S[,] II’S, }~ hl( h nl}~ht l){; {onsl(i(’rf;(i [{ SPCCI:)I c,is~

for d v:lriot} Ilf redsolls. th[> +urplu+ (In gII()[is ,Ind s(:rvl(ws in 1979 wds

on I } ;I I)(Iu ( 2 pf>r( (II1 t (If I ht) V(I 1 u(: ( )f (I kp(}r Is

4.

5.

If that happens, the international competitive position of the industry (firm) may deteriorate, despite its best efforts at improving

productivity.

When industries lose international competitiveness because of relatively rising prices,

this may be a signal that resources should be

internally reallocated within the country,

unless prospective technological changes

promise to yield productivity improvements

which are greater than expected for the

economy as a whole. Note the emphasis on

the word internal; the productivity improvements may or may not be greater than those

abroad.

If average productivity over all industries increases ‘much faster in one country than in

others, then it is likely that some formerly

competitive industries in that country will

become noncompetitive. This will be true

even if their productivity improves faster

than that of their overseas rivals.

The conclusions above can be extended in a

number of ways. For example, competitiveness on

an industrywide basis has been emphasized. In

some industries, however, certain firms may be

fully competitive in a relative price sense, while

others face difficulties. The American steel industry presents a case in point, the efficiencies of different firms varying considerably. And too, individual firms may be competitive in some product

lines, but not in others, For example, firms such

as RCA and Xerox have dropped out of the computer sector while remaining highly competitive

in other products (in this case, the principal competitors were domestic, not foreign).

The essential point is that—whether speaking

of entire industries, of individual firms, or of product lines within firms—a loss of competitiveness

often provides at least prima facie evidence that

the industry (firm) has not kept pace with other

domestic firms, not to mention industries abroad.

Furthermore, it is by no means obvious that investment in new equipment or new technology

will solve problems of competitiveness. This depends on the nature of the investment or technology, its impact on relative productivity, and the

responses by both domestic and foreign rivals. In

short, evolving patterns of comparative advantage in the world may leave no simple remedies

for shifts in competitiveness.

The discussion above has left aside a number of

other factors that can affect competitiveness,

many of which are discussed elsewhere in this report. From an economic perspective, these addi-
Append/x A—Defining lnternational Competitiveness ● 1 7 1

tional factors may introduce market distortions

that give erroneous price signals in the global

marketplace. For example, governrnents can provide otherwise noncompetitive industries with

direct or indirect subsidies (direct payments.

preferential allocation of credit, tax benefits).

Another example of market (Distortions lies in the

contraclictory effects of past U.S. Government

policy in the areas of automobile fuel economy

and prices for gasoline. By legislating corporate

average fuel economy standards while con trolling

oil prices a t relatively low levels, the Government

created a conflicting set of market signals [ch. 6),

confusing consumers and perturbing corporate

decisions. Dumping-selling exports at prices less

than charged in domestic markets (or, under some

circumstances, at less than cost) -also distorts

prices, Such practices have been frequently alleged in steel and in consumer electronics during

recent y’ears.

When distortions of these types exist, governments can attempt to offset them and improve the

opera t ion of the market —e.g., by assessing antidumping duties intended to restore “normal”

prices. In some cases, however, the market may

be providing price indicators that are accurate

from the standpoint of resource allocations,” but

have political}’ unacceptable consequences. The

political difficulty in decontrolling energy prices

was, of course, responsible for the contraditory

Government policies noted above

Conflicts between economic and political concerns that can be difficult to resolve may arise

when noncompetitive industries appear essential

to national security. This is one of the motives

behind the support which various governments

have, on occasion, provided to all three of the industries considered in this study: the importance

of both the steel and automobile sectors to U.S.

security have recently been vigorously argued. In

still other cases, a reallocation of resourcesaway from noncompetitive industries and toward

competitive ones-might cause massive employment dislocations. While in the long term,

reallocation and restructuring might be desirable

from an economic standpoint, in the short term

the dislocations often appear politically and

socially intolerable. The result may be public

policy measures such as trade barriers that protect declining industries a t the expense of economic efficiency. As discussed elsewhere, it is desirable that policy decisions reflect the real costs

of such alternatives.

Policy problems arising from technological

change can also be difficult to resolve. New produc t and process technologies can affect different

nations in markedly different ways. For example.

the magnitude of the productivity increase that

results from a particular manufacturing method

—perhaps software-prograrnmable industrial

robots-will not be the same for a 11 countries.

This will be true even when the technology is

widely available and all nations have the capacity

to implement i I. Productivity increases will depend on factors such as the extent to which the

new methods are applicable to the mix of products made i n each country, and the wage rates for

the labor displaced. Furthermore, from a public

policy standpoint, new technologies may have

consequences that are difficult to predict. Thus a

policy directed at improving the technology of a

particular U.S. industry-e.g. a Governmentsponsored R&D program—might result in new

products or processes that are better suited to the

economic environments of other countries.

Technology Gaps

A frequently cited source (of U.S. comparative

;]dvant:]ge has been the :]hil i t~ to gcnt?r:] tt? ‘‘ tt?(lhnolog} Raps’ — tcchnolt)gi(:ll le:ids okrer fort;i~n

(:ompe t i to rs, - often sur h H;} ps hi~ ve not t)et?n so

mu(:h i n fu nda men ta 1 kn( )w le(ige (j f t e(: h n(jlo~i

and science as in the :~bil i tl to commer(’ i{] 1 iz,c this

knowledj+e. American exports ( inrlllding ;] SriCU1 ture) have often been rha ra(: terizw~ bv (’(lntinual new product ‘process developments Electronics, particularly semiconductors” :ind com -

puters, provides obvious ck;]mples.

Nlore recentlv, there ha~’e been :isst?rtions thii t

the U.S. lead in te(’hnolog~” }):]s t:ro(icd-in t r[]nsfers of technolog~” ;]ssociii t[:(i wit h [iire(t c~ports,

foreign investment b~’ 11. S. firms, [i n(i 1 i(’ensin,~

agreements w’i th foreign firms. ‘1’ht:re h:]~re lx~[:tl

claims that haltin~ out flt)~~s of t[~chnology” (:(~ul(i

reestablish the U.S. lea(i.

There seems little question th:] t l:iggin~ (ountries can catch up by import in~ terhnolog~.” I {istoric:]ll}’, man~ of Japan’s tec:hl~i~’til a~i~’:]n(cs :~r~(i

commercial successes }1:] ve heerl tlsso( i;] t[xi w i t h

su(:h imports. tri r tua 11}’ ii11 t e( h n( )1( jg i~:s t{)(i:l L’ :1 r(;

rapidly diffused among i n(iustr iii I izt?(i n:] t ions,

partly through li(:ensinx ;]rr:~ngem~;nts. l)llt p:]rt 1~

a 1s o by t he a b i 1 i t i’ [) f fir ms i n t h e : i (ii’;] n ( I [?( i ( T [ )U n -

tries t[) quickl} (iuplic;~te tt?(:hn(jl[)~i(!s (i(?v[?lope(i

c1 sew’here-a rcsul t [ I f the 1{~ r(ge] }’ SC I f-sus t ;I j n i n,q
172 . U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

near-parity in many fields of technology and science that now exists. This observation is not

meant to imply that R&D efforts are futile, only

that the benefits thus gained are likely to be shortlived, and that continuous effort is necessary to

maintain them. It is difficult to safeguard purely

technical advantages for long, unless coupled

with stringent patent protection, closely held

trade secrets, large capital requirements, or

other non technical means of protection.

Alternative Perspectives

on Competitiveness

Although the comparative advantage framework discussed above is commonly used in economics, international competitiveness can be approached in other ways. Some observers, for example, maintain that the United States is declining in industrial competitiveness virtually across

the board—that somehow the economy is losing

its vitality and ability to grow. The notion of an

across-the-board loss in competitiveness is seldom defined with any precision; however, proponents of this view usually seem to refer to relative increases in productivity and level of technology in the United States as compared to other

countries, For example, if the U.S. economy shows

slower gains in labor (or total factor) productivity

over time, this would be taken as evidence of a

decline in competitiveness. Such a decline would

lead to slower growth in per capita real income,

again compared wit h other industrialized nations.

The obvious example of a country losing competitiveness by this criterion is Great Britain.

Such a perspective would typically lead to public policy remedies directed at the more general

dilemma—i.e., to macroeconomic policies—rather than industry-specific measures. From a purely

economic point of view, sector-specific policies

might be more appropriately justified by a dynamic comparative advantage analysis. This implies

directing aid to sectors with strong future prospects rather than to failing industries.

Another alternative viewpoint treats market

share— a common measure of performance for

private corporations- as an indicator of competitiveness for nations. Markets can be defined

globally, nationally, or regionally. In this view, a

decline in market share is tantamount to a loss of

competitiveness,

A major problem with global market share as a

measure of competitiveness is that, for a country

like the United States, losses in world market

share are almost inevitable as other nations progress economically. Starting from a lower postwar base, growth rates in many o t her countries

have been greater than in the United States,

which has been left with a smaller part of the

global economic pie. It is also possible to use

market shares either w i thin the United States

alone or in third countries as indicators of competitiveness. If economic growth rates in other

countries are higher, U.S. firms might find themselves losing share to imports at home and a t the

same time in export markets. Even i f the losses in

market share were restricted either to the domestic market alone or to export markets, a decline

could indicate a deteriorating ability to compete

with overseas producers.

Technological Competitiveness

Rather than adopting economic measures, it is

possible to view competitiveness in terms of an industry’s technological capabilities compared to

its overseas rivals. Technology gaps and their

roles in competitive advantage were mentioned

above, Comparisons might be made either in

terms of an industry’s product offerings or its

manufacturing processes.

In the case of product technologies, useful

measures are difficult to find, For example, a

domestic industry might lead in some products but

not others, the mix shifting continuously over

time. How can competitive decline be assessed in

such circumstances? one can, for example, count

numbers of new products or numbers of patents.

By either measure, the relative position of the

United States has been declining in many industries. Yet counting new products or patents is

known to be a highly imperfect indicator of technological competitiveness.4

In industries that are rapidly evolving technically, such as semiconductors, it is possible to

quantify technology gaps by examining the timing

of new product introductions—e.g., 16-bit microprocessors. Such indicators are inevitably very

narrow, as well as being retrospective rather

than current or prospective, In more mature industries, technology gaps have little meaning. the

introduction of new process technology for making iron or steel does not depend on technological

levels so much as capital for investment, which in

turn depends on expected levels of profitability.

This brings us back, essentially, to comparative

advantage,
Appendix A —Defining International Competltlveness ● 173

Capital goods suppliers—firms that produce

machinery and equipment used in other manufacturing industries, also provide evidence of technological capability. Examples include transfer

lines for making automotive components, or lithographic equipment for fabrica tin,g integrated circuits. The products of such industries can be

viewed both as end produc ts—whose rate of technological innovation might lead or lag that of

other countries-or as process innr)v:~ t ions that

lower costs or improve product quality in the industries that use the equipment. In the la t tcr

case, technol[)g ica 1 differences be t ween na t ions

would appear as relative chan:es in the abilitv of

the customer industries to compete on a cost or

productivity basis, From a poli(;y standpoint, this

can be import:] n t, The Japanese semiconductor indus try develops an(i manufactures a consider-able

fraction of its own processing equipment, while in

this country only a few of the larger vertically integratfxl firms do s0. Thus, improvements in the

rela t ive efficiency of the U.S. sem ioondu(; tor industrv depen(i to a considerable extent (In the

a bi 1 i t i es () f :] d i f feren t, though rel:i t d i II(I us t r Lthe equipment suppliers, Al I hc)u~h I her[? :~r[: close

:i ss oc i [i t ions bet tt’[?cn s[? m i f:ondu [: t () r f i r ms [i I}(I

their suppliers, polic)r me;)sures (Iirect[;d 0111} ;) t

the former might not hav[? the desired rcsu] ts,

Exchange Rates

In re(:ent Lears. exch;in~e ra tcs in th(; in(justrial world have bef?n for the most part free to a(ijust to prevailing markt?t con(ii t ions. Gov[?rnrncnts

d () from time to t i me i n flucnce the prices () f the i r

curr[; nf:if?s, but whol{?sale int[?rvent ion is (ii ffi[; ul t

a n (i e ,x p [? ns i L’ [;. onc f;ons(;[]uenc:e of more flexi})lt?

ex(:}]ange r:] tes is t h;] t dorn[:st ic: in(i~ls t r ies ma LT kx?

pri[ [; [:omp[:t i t iv(; [II on[; t i m[; t)u t not :1 not }Ier solt+-

IV t)t?c;ius[; of [!xftl:)n~f; 1-:1 t[; shifts, Som[; []t)s[:rv-

[?rs bc] i[:~’(! 1}1;1( th[! Amt?ri(::lI] ste[:l in[lustrt

t)[?[:im(; [(Im~)f!l i t ii’(! for :i short p[:rio(l (iurin~ th(’

m i(i( i 1 [? 1‘) 70s [is [] (ons(;q u[:n { (; { )f [i SII 1)s I:) n t i;) I

r(:;l (i j 11s t m[!n t of t h[: (If )11: I r L’ is-:)-v is f ) t }I[?r (LI rr[!m

( i[;s. 11’tl[:ll su(ll [~ff[;( 1+ ;I rf; J)ros[;[} t, M[:{ISII rf~-

n)f![l t of t tl(’ f onl])[: ~ i I i \lf!Ilf;ss of i [1( iivi(i LI; I I in(i{]s-

( ri[;s i n ;l rf; l:i t ik[; ])rif (~ hf:nsfj t)f:( ( )m[)h ;im})iql]()[]s,

Measures of Competitiveness

‘1’}1(? ])r[;r f;(iin,g sf;( t i( )Ijs sllggcst {i Ijun]t)cr ( )[

poss i ))1 f; i n(l i(:i t ( )rs () f ill I f ‘r I i:i t i ( Il);i I ( ( )n)~ )( J t i t i k (’-

1) (:ss :

1. Relati\’e trends in labor productivity. —.4

f;i irl; +impl[! 111[~1 11( )(I for flf)ltlrmi]~inu ,itl il]-

2.

3

4!

5.

.

dustry’s ability to compete is to compare its

labor productivity over time with that of

other domestic manufacturing industries. A

relative decline is evidence of a possible

problem, as appears to be the case in sectors

such as footwear and steel.

Relative wage rate trends.—Industries with

slackening competitiveness often S}1OW’ relatively falling wage levels, agi~ in compared to

other domes tic industries, 1n other cases, rela t ivel y rising w’ages (: a n be a C(IUSC of di fficul t y-e.,g., if unit labor costs increase

faster than in other in(iustries. 1 iigh waRe

rates in the U.S. steel and automobile” industries are one element in their present competitive diffi(:ulties, more impor t[l n t in s t cc]

because labor pr(du(tivit\ in that industry

has not incret~sed as rapi(il\ as in autl)nlobi les,

Relative profitability trends .—Ilerl ining

competitiveness real’ also appca r as 1OIV relaIive profit levels. I{owt)ver, it is often (ii ffiCLII t to appl~ such metisur(?s, part i(:ula rl}’ for

i n(jus t r ics popIil:I t [?(I b} divers i fi [;(i (;onlp:inies where profi t~]t)il it) iind compcti tiven[?ss can v:~ rv dra m;i t i(::i Ilt for di ffcrent

product Iin[?s. In IIddition, profit :lbilitl d;~ta

(:;i n be in f} u[;n(e(i t)~ (ii ffc r(?n (:es in :1 [noun ting convf?n t ions fI nd t;l x pol ir ies. J[i p[l nesf?

firms, for [)k[imple. t[?n(l to report low’f?r profits than Arn[?ri( ;)n firms, p:]rtlv t)[2(’:l LIS[?

hi~h[:r depre(i:~ tion r:] t[?s ;]r[? p[; rmitt[?d.

‘1’h[?JT may :IIs() bf? p(;rrnit t[?(i to takf? :i(iv;int:],ge of t[ix res[?r~(?s not permit lf~(i 11, S .

fir ms.

Import penetration ratios.—’lh[; fr:]{tion of

dom(?st i(: c’[)nsump t ion :] (T(:OII n t(?(i for t)l imports ran rcflc(’t (:lliln~(:s in (:ost-t);ls[;(l {ompet it ive :idv:]nti~~~?-t)ut :ilso shift iIl~ ]);) tterns of (;onsum[)r (Iem:i II(I, t)() I h l]ort; ;i II(I

a I)r( ): I [1. ‘1’11 c 1 a t t e r is () n[; (:I u s[; ( ) f i n [ T r(?; ls e(i

s:] 1(:s 01” for(:i~rl (’:] rs i n t ho [In i t (;[I St:) t (~s.

\l’h Ile iml)ort ~)[;I](}t r:~ 1 ion I’ti t i[)s ,i r-[? goo(i” il]-

(Ii{;i Iors of (:om~)[!l i t ilf;ness, part i[-ul:i rl~ i f

lt][]<~-tf!rm trcn(is (ail t)f; est;it)lishe(i, the~

(‘;111 l)c ( ‘[)n f( )11 n(i[;d l)k ~okernmell t p( )1 i c i [;s

([:,~,, [!.xport s~lt)si[ii[:sl, [:{)r])i)r{it[; str:lt[:~i(s

(for~oin~” (T[?rt:) i]] m:] rkets), :Inft v;iri[)(ls f)l ]](~r

f{l (t ( ]rs.

Process technologies,—in som[l ill(ills [ rl[)s,

sll ~ 1 \ \ i+s st (’~~1. t h(’ f ~_ø•¤^ø•X•' I) ~~ r;] (: 1 ~:r ist it h of Ilt:w (: r

])1’( )(’[?ss tf?( ’11 1)01( )q if ‘~ ;11’(’ Ii f’11 kIlo\\”I1. il’l)(!r(’
174 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

this is the case, the potential impacts on

international competitiveness can be inferred—e.g., by examining the effects of the

prospective technologies on production costs

in various parts of the world.

6, Product technologies.—In industries such as

electronics. comparative costs may be only

part of a more complex competitive situation.

Unique product technologies and technology

gaps have been important to the past

strength of U.S. industries such as electronics and aircraft: informed technical

judgments are needed to evaluate their significance.

There are other possible measures of competitiveness. Some are specific to particular industries, others more general: but competitiveness can be fully understood only on a sectoral

basis. Government policies and regulations affect

some industries more than others. Furthermore,

international competitiveness cannot be analyzed

in isolation from the corporate strategies of individual firms.

Economists have offered a variety of explanations for shifts over time in comparative advantage or in competitive advantage—none very satisfactory, Models based on factor proportions, the

product life cycle, or demand similarity help to

understand some cases but not others. Moreover,

none of the models includes the effects of conscious intervention in economic processes by exogenous agents such as governments.

Still, if policies specific to particular sectors of

the economy, as well as macroeconomic and other

aggregate policies are to be improved, some idea

of their potential effects is required. Assessing

these effects, particularly across industries, requires the use of a comparative advantage framework. In many respects, a dynamic comparative

advantage analysis would be idea 1. Japan longterm economic policies are examples of attempts

to develop strategies within a context of dynamic

comparative advantage, strategies that are anticipatory rather than reactive.
APPENDIX B

The Economics of Industrial Policy

A basic principle underlying public policy in a

market economy is that of market failure, or government by exception; the market mechanism is

preferred to government policy except when it

can be shown to fail. Generally speaking, this

principle is independent of the nature of the market, and holds for concentrated, oligopolistic markets as well as for those which are more competitive. The tests for market failure, and the remedies, will in fact depend on just such characteristics.

Thus, one way to begin a study of industrial

policy is by examining the circumstances under

which markets fail, However, market failure is a

necessary but not sufficient condition for public

policy, Whether government responses are warranted depends on several factors, the most important of which are the social costs of the

failure.

The following sections discuss several categories of market failure, particularly those that

could serve as possible rationales for industrial

policy. The aim is to identify and clarify various

categories of justification for government intervention in industry and to distinguish economic

from political justifications,

Externalities and Market Failure

The benefits or costs to society as a whole associated with private economic activity generally

differ from private benefits or costs. Therefore,

market decisions based on private calculations do

not necessarily yield outcomes that are socially

most desirable. Such externalities often motivate

public policy measures having significant effects

on industry, Regulations aimed at the control of

pollution or at public health and safety are examples. Such measures are discriminatory in the

sense that some industries are affected more than

others. Externalities have also been a rationale

for government funding of R&D because social returns to R&D may exceed private returns.

Analyses based on externalities often point to

the use of nonselective market promotion policies,

such as fiscal incentives, to encourage socially

desirable R&D or to discourage undesirable activities such as environmental pollution. Such measures have aggregate objectives, cutting across industrial sectors rather than being sector-specific.

For example, a fiscal program to stimulate R&D in

the aggregate might include tax credits for R&D

facilities, or accelerated depreciation of capital

investment for facilities and equipment used for

R&D. Similarly, a fiscal program to encourage environmental improvement might include accelerated depreciation for pollution control equipment,

investment tax credits for such equipment, or the

use of a government bond or loan guarantee program to finance a portion of the investment, Market promotion policies of these types would have

industry-specific effects, since some industries

are more highly dependent on R&D or pollute

more than others, but the measures would address themselves to aggregate rather than sectorspecific objectives,

In practice, government policies in response to

externalities have often been sector-specific by

design —in the United States as well as in foreign

countries, Direct government funding of R&D, or

indirect support through procurement programs,

as in the U.S. semiconductor and computer industries (ch, 6) are cases in point. Another is

emissions standards for automobiles. Whether or

not the industry-specific effects of government

programs in response to externalities are consciously intended, policy makers should consider

these effects and their implications. Failure to do

so has been one of the weaknesses of Government

policies toward industry in the United States. The

side-effects of policies directed at externalities

have sometimes conflicted with other policy objectives, For instance, in industries such as steel

or automobiles, regulatory policies have required

substantial capital investments. To some extent,

these have drained funds from alternative investments that might have done more to enhance productivity and competitiveness, Indeed, sideeffects of such types have often served to rally

political support for counteracting industry-specific programs intended to compensate firms or

industries *‘injured” by Government policies.

Public Goods and National Security

Market failure also occurs in the case of “public goods. ” These are goods that private firms do

not produce, or do not produce in adequate quantities, usually because: 1) such goods are “nonrival” so that one person’s use of them does not

diminish someone else’s enjoyment; or 2) they are

‘‘nonexclusive’ so that those who choose not to

79-491 n - 8! - 1 ? 175
176 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

pay cannot be barred from their use. National

security and defense are the categories of public

goods most important to industrial policy. For example, some observers argue that aid to the

American steel industry is necessary because

steel is vital to national security. This kind of

argument, applied in other countries, is one reason for the fact that 45 percent of world steel

capacity (more than 50 percent in Europe) is government-owned. ] Similar arguments are frequently made for public policies to promote semiconductor industries, on the grounds that semiconductors have critical military applications.

That the output of a particular industrial sector

is vital to national security implies that social

benefits exceed private benefits, and that government intervention may be needed to maintain socially desirable levels of production. Nonetheless,

there are at least two steps that are necessary before concluding that government action is necessary. First, it must be demonstrated that in the

absence of government action, domestic production might be inadequate to meet national security

requirements. Studies of steel and semiconductor

industries have been inconclusive on this point. It

also must be demonstrated that in the absence of

sufficient domestic production, secure sources of

imports would not be available. For example,

could the United States rely, if necessary, on imports of steel or semiconductor devices—either

from allies or from neutral nations—at fair

prices? The OTA steel study raises the possibility

that if the domestic industry is allowed to decline,

the United States may someday face unfair prices

for steel imports, perhaps because of foreign

cartels. Even if a steel cartel were judged unlikely

because of the large number of foreign producers,

foreign governments might halt exports to the

United States to safeguard their own supplies

during periods of military emergency and/or tight

supplies. Given the vagaries of international economic and political conditions, and the importance of products such as steel for national defense, a risk-averse strategy might require government policies guaranteeing supplies. Such policies could include stockpiling as well as support

for the domestic industry.

Product Market Imperfections

A third category of market-failure arguments

for government policies is based on imperfections

in markets for the products of industry. Such im-

‘Techndwy ond Steel Industry Compeflt]veness (Washington, DC

Office of ‘1’echnulogy Assessment, U.S. Congress, June 1980], p. 102.

perfections may take several forms—e.g., barriers to entry resulting from scale economies, product differentiation, or advertising. When imperfections of these types exist, markets may not

function in socially optimal fashion. Thus, such

imperfections can become an important rationale

for public policies. They underlie, for example,

antitrust laws in the United States.

Issues such as antitrust arise in debates about

industrial policy because some people argue that

aggressive pursuit of antitrust measures has put

the United States at a disadvantage in international competition. According to this view, antitrust enforcement by the Department of Justice

and the Federal Trade Commission has focused

too narrowly on domestic markets and failed to

acknowledge foreign competition. As a result, it is

claimed, mergers that might enhance U.S. competitiveness have been restricted, innovation

stifled, z and suits brought seeking to break up the

very firms that are mainstays of U.S. competitiveness (the ongoing Government antitrust proceedings against IBM and Western Electric are frequently brought forward as examples). Concerning mergers, chapter 5 points out that vertically

integrated Japanese electronics firms, making

semiconductors for their own use, may be a

source of competitive advantage for that country.

As the capital and R&D costs of semiconductor

production increase, economies of scale are likely

to grow, making vertical integration more desirable. However, in the United States, antitrust

policies could be perceived as blocks to such

strategies,

Capital Market Imperfections

Imperfections in capital markets provide another possible reason for public policy. Such imperfections can take several forms, and often resemble the externality or public goods rationales

discussed above. For example, capital markets

may not supply funds for investments if the expected returns are too far in the future, or if

social returns greatly exceed private returns.

One type of possible capital market imperfection depends simply on the size and apparent stability of the firm seeking funds. Private capital

markets often appear to discriminate between

large and small companies. Investors or lenders

face risk and uncertain returns. Lending to large

firms with established reputations and significant
Appendix B— The Economics of Industrial Policy Ž 177

sources of internal funds gives some assurance of

repayment, even though the project for which the

loan was intended may fail. In contrast, lending to

small firms may carry larger perceived risks of

default—although this may be simply a result of

poor market information about small firms, and

lenders could spread their risks by lending to or

investing in a number of small firms. Capital

market imperfections can also stem from a preference by businesses for reinvestment of internally

generated funds even given outside investment

opportunities offering higher rates of return.

Alleged imperfections in capital markets resulting from better access of larger firms and established industries to external capital, or from

their preferences for the reinvestment of internal

funds, have sometimes led to proposals that government act as an an alternative source of financing, For example, the government might guide

funds from declining industries to higher productivity sectors whose growth appeared to be limited by access to capital or by high risks, perhaps

associated with new technologies,

The issue of risk introduces another type of

possible capital market imperfection—failure to

finance projects judged excessively risky by private lenders. All investments are inherently

uncertain; the greater the uncertainty, the

greater the risk and hence the higher the returns

required by investors. For projects with potentially high but very uncertain returns, the cost of obtaining capital from the private capital market

may be prohibitive.

Discussions of industrial policy sometimes turn

to the possible need for government policies to

guarantee capital availability for high-risk projects in high-technology or new-technology industries, such as semiconductors or alternative

energy conversion systems. Such policies might

include cofinancing or loan guarantees. Alternatively, the government could raise the potential

rewards to investors by lowering the capital gains

tax. Government subsidization of risk might be defended on at least two grounds: 1) that government has a greater ability to bear risk than private investors; and 2 ) that private decisionmakers

may be more averse to risky investments than government decisionmakers.

A final capital market argument for public policy is based on time horizons of private investors.

The OTA steel study, for example, found that new

equity investments have tended to favor quick

payoffs rather than the long-term investments

needed to renew the technological foundation of

the industry, During the past 10 years, the debtequity ratio for the entire steel industry rose from

36 to 42 percent. ’ However, the U.S. industry still

has a debt-equity ratio only half that of the Japanese industry; this is a specific example of the

general argument that low debt-equity ratios in

U.S. industries mean that investments are evaluated primarily according to short-term profitability (debt carries fixed rate-of-return obligations while equity brings with it pressures to compete with the returns available from alternative

investments), Long-term profitability is, however,

more important for continuing international competitiveness. While it is difficult to generalize

about the extent of any short-term bias by managements of American firms—whether because

of stockholder demands or other reasons—there

is a good bit of anecdotal evidence for such behavior, ” Again, the policy prescription might be Government programs such as loan guarantees, support for R&D, and selective tax credits that promote long-term projects judged to be socially

desirable.

This argument for government intervention is

really just the externality or public goods argument in another guise, The underlying rationale is

that private estimates of returns fail to include

socially desirable returns that occur at some future time. For example, socially optimal time horizons may be longer than privately optimal horizons for infrastructure or R&D projects with long

and uncertain gestation periods.

Labor Market Imperfections

and Adjustment Assistance

Imperfections in the functioning of the labor

market frequently serve as the justification for

offsetting government policies. Such imperfections may take several forms, but the result is

always the same. Wages do not adjust to equalize

supply and demand for different types of labor—

perhaps because of labor unions, minimum wage

legislation, barriers to worker relocation created

by skill requirements or geography, and rigid

wage differentials between industries or between

workers with different skills. Lack of portable

pensions is also a bar to mobility. In the presence

of such imperfections, changes in demand for the

products of an industry may lead to production

cutbacks, layoffs, and unemployment, rather than

to an adjustment in wage differentials between industries that would help maintain full employ-
178 . U.S. industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

ment and reallocate labor among different industries. Productivity improvements resulting in decreased employment opportunities can have similar effects, as can international capital flows—

associated, for instance, with the establishment

of overseas assembly plants.

In many countries labor market imperfections

are central to pressures for government intervention in industries affected by import competition,

as well as by technological unemployment or

flights of capital. The latter two have generally

been more important as causes of employment

dislocations in the United States—whether productivity growth, movement of electronics assembly operations to Mexico or the Far East, or of textile plants from New England to the South. In this

country, however, the Government has normally

provided adjustment assistance only when unemployment is associated with import competition,

As an example of the rationale for such assistance, suppose that demand for the output of a domestic industry such as steel declines as a consequence of competition from lower priced imports.

According to economic theory, if wages were free

to fall, they would do so relative to wages in other

industries where demand has not declined, The

relative wage decrease in the import-affected sector should encourage workers to leave that sector

for alternative jobs at higher relative wages elsewhere in the economy. In reality, such behavior

seldom occurs. For example, in the American

steel industry (chs. 4 and 5) wages have not declined despite import competition and falling profits. A strong union has kept wages high; incentives for workers to move to other industries have

been few. Unemployment compensation and other

guaranteed payments also discourage mobility,

In the absence of labor market imperfections,

changes in wage differentials between industries,

and in the aggregate rate of growth of wages, will

guide the movement of workers from declining

sectors to those that are more competitive. Although the distribution of labor would change, full

employment would in principle be maintained.

However, if wages do not adjust, the result will be

aggregate losses in output, aggregate unemployment, and a slowdown in the movement of labor

away from the import-affected industry, Therefore public policies to speed the process of adjustment may be desirable, Such policies might include relocation subsidies to workers and tax

incentives for firms in other industries that hire

the displaced workers.

The argument for government intervention because of labor market imperfections is based on

economic efficiency and is distinct from that for

intervention on equity grounds. Socially optimal

allocation of resources under changing national

and international market conditions may call for

movement of both capital and labor from industries in relative decline to those which are

more profitable. Labor market imperfections may

interfere with this adjustment by distorting the

price, wage, and profitability signals that guide

decisions. Under these circumstances, an efficiency argument can be made for offsetting

government policies. But even in the absence of

such imperfections, public policies may be needed

so that the costs of adjustment do not fall

disproportionately on some individuals while

others reap the benefits.

Again, the example of an import-affected industry such as steel or automobiles can illustrate.

Shifts in international competitiveness may require the movement of labor from such an industry on efficiency grounds, Although this movement yields social benefits, it also has costs.

These costs include the income lost by workers

during the transition to new jobs, and any retraining and relocation costs. In the absence of public

policies, the full adjustment costs are borne by

the displaced workers. This is not necessarily

equitable. Why should employees of firms affected by imports (or technological change or

flights of capital) bear the brunt of the costs,

while others—such as the consumers of cheaper

foreign imports—reap the benefits? The government may well decide that a different distribution

of social costs and benefits is desirable. This was

one motivation for the expanded trade adjustment

assistance program (see ch. 8) created by the

Trade Act of 1974. In many countries income supplements, retraining and relocation grants, and

aid programs for communities are used to reduce

the costs paid by workers and localities when industries decline or employment opportunities are

lost—whether caused by shifts in international

competitiveness, technological change, or other

factors. Such policies may be particularly important for industries where workers are older, unskilled, or otherwise have difficulty finding new

jobs.

Efficiency and equity rationales for trade adjustment assistance are specific applications of

the general principle that the costs of moving

labor and capital so as to produce a net social
Appendix B—The Economics of Industrial Policy ● 179

gain should not fall disproportionately on particular groups. Whether the factors behind resource

relocation are the result of changes in consumer

demand, changes in technology, or changes in

government policy—such as the scaling down of

military installations or the imposition of standards for environmental control or occupational

health and safety—government programs may be

desirable to protect those whose jobs are affected. In the United States, however, such policies have in the past been limited to tradeaffected sectors or to a limited number of programs dealing with regional adjustment—such as

the programs of the Economic Development Administration or the Department of Housing and

Urban Development (ch. 8.)

Equity and efficiency rationales for government intervention are distinct, and may be in conflict. For example, adjustment programs have

sometimes acted to reduce incentives for finding

new jobs and themselves slowed the adjustment

process. Indeed, some observers contend that the

sluggish movement of labor in the United States is

precisely the result of such programs—which is

not an argument against adjustment policies in

principle, but against those that are poorly concieved or otherwise do not function as intended.

To counteract such flaws, adjustment assistance

programs could be designed to increase incentives for adjustment by tying payments to socially

desirable objectives such as retraining or relocation. Finally, one of the most persuasive arguments for adjustment assistance is that, in the

absence o f such programs, individuals who bear

the costs of a socially desirable movement of

resources are likely to use their political and institutional power to impede adjustment, In other

words, i f the equity issue is not confronted by

government policy, the result may be development

of imperfections in capital, labor, and product

markets that hinder rather than facilitate the

movement of resources in response to shifts in

corn pet i t iveness,

Market Imperfections Resulting

From Government Actions

While many failures or imperfections are inherent to markets, another category consists of

those that are themselves consequences of

government policies, be these domestic or foreign

governments, Intervention by the U.S. Government to promote or support industries such as

steel or semiconductors is sometimes urged as a

counter to “unfair” competition resulting from

foreign government policies.

Measures to protect U.S. markets from “unfair” foreign competition have included voluntary

restraint agreements (VRAS) or orderly marketing

agreements (OMAS), trigger pricing, antidumping

surcharges, and other remedies implicit in sections 301 and 337 of the Trade Act of 1974. These

measures have not always been effective (see ch.

6). As one result—here and elsewhere—pressures can mount for alternative policy responses —eog., subsidization of industry by tax

cuts or R&D support to countervails similar programs in other countries. Imperfections created

by foreign industrial policies are becoming a

force for similar policies in the United States. Indeed, this is the point of departure for many discussions of industrial policy. The net result could

be offsetting neomercantilist policies leaving each

country worse off than it would have been if none

had introduced such policies.

It is not obvious that the United States should

respond to market imperfections resulting from

subsidies to industries that compete with American firms, Indeed, some people argue that if

foreign governments are subsidizing exports to

the United States, then they are effectively subsidizing U.S. consumers. According to this view,

the United States benefits from “unfair” competition, and no policy response—protectionist or

otherwise—is needed. Of course the gains to the

United States are not without costs and may be

short-lived. As discussed in the preceding section,

adjustment costs are one consequence. These

costs—for moving capital and labor out of firms,

regions, and industries that cannot compete

against subsidized foreign producers—are often

substantial. This is particularly true if capital and

labor are relatively immobile. Costs of adjustment

must be weighed against the benefits of subsidized imports,

Even if the net benefits outweigh the costs, a

government policy response might still be warranted. At the very least, equity concerns could

justify adjustment assistance. Why should some

domestic interests benefit from the policies of

foreign governments while others suffer? Distribution of costs and benefits should be the outcome of domestic policies rather than actions

taken b~ foreign governments.

Beyond considerations of equity, there may

also be long-run efficiency rationales. Suppose

that in the absence of offsetting domestic policies,

foreign subsidies lead to the decline of domestic
180 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

firms, In the long run, foreign governments might

use the resulting market power to cartelize or monopolize the world market, forcing up the prices

of imports, Such a strategy could only be successful in industries where economies of scale or

other barriers to entry prevented the reappearance of competition. For these and other reasons,

predatory pricing strategies would probably not

succeed. More convincing reasons for domestic

policy responses to foreign subsidies focus on the

loss of initiative that would result if domestic industries were allowed to passively restructure

according to market signals distorted by the

governments of other countries.

In addition to the distorting effects of foreign

government policies, domestic government actions may create a need for compensatory policies. As noted elsewhere, policies aimed at aggregate objectives (for instance, environmental

quality) often work to the disadvantage of particular industries such as steel. Evolving legal

standards for product safety and reliability have

likewise increased risks in some industries—e.g.,

chemicals. Differences in the tax treatment of

various types of capital work to the advantage of

some industries but not others. Interest deductions for mortgage payments in the United States

favor investments in real estate over manufacturing.

Moreover, tax effects combined with rapid inflation have adversely affected investment in industry. Because the capital gains tax falls on

nominal capital gains rather than real gains, investors may face taxes if they sell assets whose

real value has not increased. This tends to encourage the owners of such assets simply to hold

them—the lock-in effect—and works against mobility of capital. Inflation also increases the effective corporate tax rate by reducing the value of

depreciation deductions based on historical costs,

When public policies can be shown to distort

market signals, responses ranging from their

elimination to the introduction of compensating

measures may be justified,

Macroeconomic Rationales for Policy

The final rationale for government intervention

differs from those preceding because it is based

on macroeconomic performance—measured by

parameters such as price stability, aggregate

levels of output and employment, or balance of

payments— rather than conditions in particular

industries or markets. As the market system does

not always realize macroeconomic objectives on

its own, government action may be required to

maintain full employment or counter inflation.

Such reasoning usually points to aggregate rather

than industry-specific or market-specific policies,

although such policies may have sector-specific

effects. For example, government policies dealing

with balance of payments should not be required

if exchange rates can adjust freely to changing

market conditions, However, foreign government

interventions or lags in adjustment may call for

government responses, at least temporarily. Although not industry-specific in intent, such responses would typically be industry-specific in

their results—because industries that export,

those that compete with imports, and those that

produce goods which are not traded at all will be

affected differently.

Costs and Benefits of

Alternative Policies

Public policies affecting industry often carry

the potential for high net costs to society, For instance, using sector-specific policies to attack aggregate problems can be inefficient—as when a

declining industry is subsidized to maintain

employment. Before adopting industrial policy

measures, costs should be estimated both inside

and outside the sectors of immediate interest,

Whether choosing sector-specific policies aimed

at sector-specific problems, market promotion

policies, or other measures with aggregate objectives—costs and benefits of alternatives are important considerations. Even when precis e

evaluation is impossible, enumerating the classes

of benefits and costs—which may be widely

spread through society—can help to frame

judgments.

To illustrate, consider the case of government

intervention in manufacturing industries such as

steel or automobiles. On the benefit side of the

argument, major outputs can be identified that

could decline or be otherwise adversely affected

in the absence of government policy. The list

might include:

1. The benefits of preventing decreases in

domestic output and employment as a consequence of a decline in the particular industry. These losses impose only short-run costs

provided alternative employment can b e

found for the factors of production (labor,

capital) released; in other words, such costs

are adjustment costs. If, however, there are

regional or other barriers to factor mobility,
Appendix B— The Economics of Idustrial Policy ● 181

t o

2.

3.

4.

5.

then these costs may become permanent,

Both short- and long-run costs can in principle be weighted to reflect distributional consequences, such as the social impact of income losses on depressed regions.

Prevention of losses in socially desirable

R&D as a consequence of decline.

Prevention of declines in domestic output

necessary for national defense.

Prevention of loss of competition within domestic markets, including losses associated

with distorted market indicators and inefficient allocation of resources,

Avoiding lost tax revenues, increases in

unemployment compensation, and similar

costs.

On the cost side of the ledger, one would have

identify the various losses that would occur as

a result of government policy. This list might include:

1. Long-run efficiency losses due to misallocation of resources caused by government policy. These losses could include decreased

outputs in other industries—e.g,, if the sector favored by the policy bid resources away

from other industries.

2. Direct costs of the policy, including costs of

institutional machinery for implementing it.

The calculation should consider possible

cuts in other Federal programs, including

distributional consequences,

3. The costs of any behavioral inefficiencies resulting from the policy. For example, government intervention to support a particular industry might create pressures for matching

aid to other industries.

In principle, each of these benefits and costs

should be evaluated based on alternative assumptions for future market trends, with and without

the policy, and with alternative time horizons.

Calculations should be made for a range of policy

alternatives to determine which, if any, might be

preferred,

Although this framework may seem abstract, it

demonstrates that there is no prima facie case for

industrial policy, especially for sector-specific

policies favoring or promoting certain industries.

A judicious evaluation of the many competing objectives and the many competing policy responses

is needed.

The Economics of Protectionism

As discussed in chapter 6, policies intended to

shield domestic industries from foreign competition have seldom been effective in promoting industrial adjustment; even when effective, protectionist measures are usually rather inefficient.

This section briefly reviews the effects of protection-whether by tariff or nontariff barriers.

The most important nontariff barriers are quantitative restrictions on imports such as VRAs or

OMAs.

In the absence of market imperfections, tariffs

generally reduce aggregate economic welfare.

Labor and capital employed in an industry given

tariff protection will gain; but losses to consumers

of the protected commodity will typically be

greater, ’ Furthermore, even when a policy response is necessary, tariffs frequently prove a

second-best measure. Alternative measures can

usually achieve the desired objectives at less cost

to society, particularly objectives involving encouragement of domestic production in a given industry, The reason is straightforward, Tariffs

change prices, and prices affect both production

and consumption. A policy that works directly on

production and leaves consumption unchanged—

such as a tax, subsidy, or credit policy-is more

efficient than a tariff because the tariff also distorts consumption.

Quotas also tend to be second-best policies, and

for the same reason—they affect both production

and consumption, But quotas are often less effective than tariffs, Selective quotas—applying to

certain commodities and/or certain foreign suppliers—are not always successful. If imports of

one kind are restricted by quota, foreign producers may switch to a substitute. If quotas are

applied to imports from one country, other countries may move in. The OMA on imports of color

televisions from Japan encouraged an increase in

imports from Taiwan and Korea, while also encouraging Japanese production in the United

States.

Tariffs are also superior to quotas from a distributional standpoint. Tariffs, like taxes, generate revenue. The funds become available for financing other government policy measures or for

offsetting other taxes.

Protection against imports by means of quotas

or tariffs has been used with some frequency in

recent years. In the case of U.S. industries such

as apparel and footwear—where domestic producers face a cost disadvantage and market im-
182 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

perfections can be ruled out—protection has

been justified as a short-term measure to slow the

pace of decline and hence reduce adjustment

costs. However, temporary protection intended to

ease adjustment may become permanent. Furthermore, protection is a second-best policy compared to adjustment assistance and retraining or

relocation subsidies, which do not unnecessarily

raise prices to consumers,

Another rationale for temporary protection of

mature or declining industries has recently been

developed—an analog to the well-known infantindustry argument, This is the “senescent” industry argument, which holds that domestic producers with old, outmoded product or process

technology should be protected from competition

with foreign producers having more modern technology. Temporary protection, it is argued, will

allow domestic firms to generate profits for modernizing their own processes and/or products.

This rationale is quite different from that used to

justify temporary protection because of rapid and

unexpected change within the economy, The latter case—covered in trade law by “escape

clause” proceedings— is clearly different from

that of industries in slow decline because of longterm shifts in comparative advantage.

There are several possible pitfalls in the senescent industry argument. First, if domestic producers have been unwilling or unable to modernize or keep up with the technology employed by

foreign firms, this suggests that it has been unprofitable for them to do so—e.g,, in the integrated portions of the American steel industry.

Second, though a case might be made that market

failure has caused the decline of domestic firms,

this does not necessarily mean that protection is

an appropriate policy response. Policy should be

guided by benefits and costs expected in the

future, not by the historical causes of decline.

Finally, if a policy to help a senescent industry

does seem warranted, protection would probably

not be the best remedy. Once again, protection is

likely to be second-best, more costly, and less efficient than alternatives such as loan guarantees,

or tax incentives for stimulating new investment.

Furthermore, protection may not in fact promote

modernization. Protection is only indirectly linked

to capital investment, process or product innovation, and other possible strategies for increasing

productivity and restoring competitiveness. While

protection might raise profit levels, the profits

will not necessarily be reinvested in the senescent

industry, There is little evidence that trade protection in the steel or consumer electronics industries (or apparel or textiles) has worked to

restore domestic competitiveness (see ch. 6),
APPENDIX C

The Legal Environment for

Industrial Policy

Legal constraints could preclude or limit the

application of some kinds of policy measures directed at industrial competitiveness and economic efficiency in the United States, The possible

constraints reflect not only constitutional principles, but also the traditional separation of Government and business enterprise in this country

(ch. 8), The separation—more nearly an adversarial than a collaborative relationship—is deeply rooted in basic political attitudes, and has normally been perceived as healthy and desirable: it

finds expression in the U.S. legal system.

The legal environment in the United States thus

seeks, in many instances, to insulate Government

from the private sector, both directly—as through

Federal conflict of interest laws and numerous

disclosure statutes, and indirectly—in antitrust

and trade laws that embody fundamental presumptions against mercantilism and in favor of

vigorous competition, Policy proposals of some

types could raise legal issues because they would

mandate precisely the behavior that the legal system presently attempts to limit or prevent,

Within the framework of the legal system, Government has, nevertheless, been granted increasing leeway to involve itself in the affairs of business and industry. The rapid growth of Federal

regulation in the environmental, safety, health,

and energy areas over the past 15 years is evidence of this trend. Government can certainly intercede in private trade and commerce-and in a

substantial way. The basic question is: Would policy innovations be possible that could function effectively within the context of traditional Government-industry relations in the United States—as

embodied in basic aspects of public law? Or,

would industrial policy require new modes of interaction between the public and private sectors,

and hence changes, perhaps fundamental, in that

law?

A number of aspects of the legal environment

for industrial policy are discussed in a general

way below. The intent is to suggest topics of probable importance, the scope of industrial policy initiatives that have been suggested being too broad

for examination in detail. Among these suggestions have been: tax incentives, including liberalization of business tax deductions and substantial tax cuts for individuals; creation of new Federal agencies: expansion of mechanisms for participation by business and labor in the activities

of Government, including committees and commissions; development of programs for training, retraining, and assisting the mobility of labor; incentives for export-related manufacturing; import

restraints such as surcharges and quotas: and

formalized “economic planning”’ [as in the

Balanced Growth and Economic Planning Act of

1975).

Constitutional Issues

The U.S. Constitution imposes a variety of distinct restrictions on Government actions affecting

private trade and commerce. Policies toward industry must conform with these—generally associated with the “Commerce Clause,’” delegations

of congressional authority, State sovereignty, and

equal opportunity.

Article I, section 8 of the Constitution—which

contains the Commerce Clause—forms the basis

for the Federal Government’s broad powers to

regulate private trade and commerce. The Constitution also ensures that Federal laws will have

precedence over any inconsistent State and local

laws. Over the years, the Supreme Court has continuously expanded the concept of interstate commerce: well-established guidelines now exist. The

most fundamental of these allows Congress to exercise jurisdiction under the Commerce Clause

whenever a commercial activity has a ‘ ‘substantial economic effect” on interstate commerce <

Under this interpretation, even an activity taking

place wholly inside one State may be within the

scope of the Clause, so long as its effects extend to

other States. For example, the Supreme Court has

found the Commerce Clause broad enough to include the extension of Federal wage and hour protection to all workers in firms producing goods for

interstate commerce. ~

To the extent that industrial policies would apply to major economic sectors —those that produce goods or provide services that are integrally

183
184 . U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

part of the flow of interstate and foreign commerce—such policies should not be materially inhibited by the Commerce Clause, Suppliers and

subcontractors to these industries would also be

subject to Federal regulation to the extent that

they form a significant part of chains of production and distribution of products or services that

are part of interstate commerce.

Article I of the Constitution also contains

language that has been interpreted as permitting

Congress to delegate legislative authority—for

example, the day-to-day work of implementing

congressional law, But the permitted delegations

of authority are limited, especially to private parties rather than to Government agencies, Such

restrictions would apply to committees or commissions involved with industrial policy that included

private citizens within their membership, Those

whose business interests could be affected would

find their participation especially circumscribed,

The 10th amendment to the Constitution contains the State sovereignty provisions, which limit

the extent to which the Federal Government can

infringe on activities integral to the sovereignty of

the States—e.g., those essential to State and local

government. To the extent that a court sees industrial policy as a response to a national emergency,

it would be more likely to uphold actions that

might otherwise be seen as infringements on State

autonomy. The courts will typically employ a balancing test: the gravity of national problems

found to exist by Congress will be taken into account as a factor to be weighed, along with the

nature of the State interest at stake, the extent of

the interference with that interest, and the duration of the restraint.

Incorporated into the 5th amendment due process guarantee is the 14th amendment equal protection provision. The protections extend to businesses as well as individuals, and could bar programs that favor one segment of industry over

another without legitimate economic or social

purpose, But before a court overturned Federal

economic legislation on equal protection grounds,

it would have to be persuaded that the legislation

was clearly without justification.

Antitrust Laws

U.S. antitrust laws seek to preserve competitive

markets by broadly proscribing many forms of coordinated or collaborative activities among business enterprises. As such, they embody a fundamental public policy against the rationalization of

trade, as through private “orderly marketing

agreements” or similar arrangements that would

tend to reduce the independent character of decisionmaking by competing firms. Given the substantial and costly risks of antitrust liability (e.g.,

private treble damage actions) it seems clear that

the antitrust laws could represent a substantial

obstacle to at least some forms of possible policy

initiatives seeking increased industry wide collaboration on commercial and trade matters.

In view of the basic free enterprise policies embodied in the antitrust laws, the courts have narrowly construed explicit congressional exemptions from their application, and have sharply

limited the circumstances justifying implied exemptions, Further, even where Government regulation displaces the antitrust laws, the courts

have indicated that agencies can abuse their discretion in failing to consider the impact of regulatory policies on competition.

From the standpoint of industrial policy, the

most important antitrust provision is section 1 of

the Sherman Act, prohibiting any agreement that

is “in restraint of trade among the several States

or with foreign nations,”] This section has been

interpreted to prohibit all manner of agreements

among competitors which fix or stabilize prices,

allocate territories or customers, limit market entry, regulate production, use group boycotts, or

similarly restrict competition among firms at the

same level of trade. Programs involving joint ventures among competing firms, including joint R&D

programs, pooling of technical or marketing information, or standard setting, would thus be subject

to antitrust scrutiny.

The question of antitrust restriction on R&D

has recently arisen in discussions of cooperative

R&D on generic technologies in various industries, including semiconductors. In the 1960’s, the

Department of Justice brought a suit under the

Sherman Act alleging unlawful restraint of competition in technological R&D in the automobile industry, 4 The automakers were accused of conspiring to slow the pace of technological developments aimed at meeting Federal exhaust emissions standards, Thus, joint venture and cooperative R&D programs, as well as pooling of tech-

‘15 (J S.(;. SW. 1 ( 1976), Also relcvuni ure the Shermt]n A(’( pruvrsl(ms, 15 [;. S,(;, Se(i. 2 [ 1976), which pr[)hi hi I the m(mup(]l IZ:I t ion of, ur

a t tempts ur cunsp] rirrles to munup(d ize, ‘ ‘any part of the t r{ide ur (’[]mmerce u mung the severul Stt] tes, or w I th furelgn na t il~ns ,, and se(., 7

of the (;[ay tun A(’t. 15 ~’. S,C, sec, 18 ( 1976], w}] I( h proh]h] ts (wrp(]ra tf?

;Ic’qu isr t Iims of the st(wk (jr assets uf ut her c(werd (.(lrp(]ri~ tluns ‘‘ where

in i] n} line of (ommerre In any section of the ((inn t rv, the effe(t uf su(h

{]cqu isl t lun may he suhstd n t]a 11}~ tu lessen i] n\ ri)mpet i I Iun or tend to

freu te u monopoly.

‘[ ~nl tmi St(] tt~s v. M(~ffjr Vehi(l[~s M{]nuft]( turers A\s(N:I{I fIm of the

[~ S , Inc., 1969‘1’rude Cases 91, par. 72,907 ((; D. (;{II. 1969].
Appendix C— The Legal Environment for Industrial Policy ● 185

nical and marketing information, may continue to

be challenged under antitrust provisions—by the

Government or by private parties, The guidelines

for joint R&D recently issued by the Department

of Justice, discussed below, seem unlikely to have

a dramatic effect on perceptions in this area,

The potential relevance of antitrust considerations for industrial policy was illustrated during

1980 in the context of Government plans to assist

the domestic automobile industry, Secretary of

Transportation Goldschmidt’s task force considered a variety of steps that the Government might

take—including trade, tax, credit, and unemployment assistance policies, One trade policy option

would have been for the administration to urge

voluntary restraints on automobile imports from

Japan. However, this option was judged to run the

risk of antitrust litigation as an informal trade restraint agreement. ’

Antitrust statutes are among the more ambiguous in the United States. The Sherman Act is written in particularly general terms, and must frequently be interpreted by resort to the courts. Litigation is often prolonged and expensive; penalties

can be high, including large sums in civil damages

from private actions. Imprisonment may result

from criminal antitrust actions. Some observers

believe that uncertainties concerning antitrust

enforcement, combined with such large risks, has

a substantial inhibiting effect on the activities of

business and industry. Others believe the activi ties inhibited to be primarily those that are clearly collusive and anticompetitive, and that present

antitrust enforcement practices are necessary

and effective.

Concerns of this type—related particularly to

topics such as joint R&D or joint ventures for foreign trade—have recently received a good deal of

attention. For example, in a message to Congress

on October 31, 1979, President Carter emphasized the importance of stimulating industrial innovation, and acknowledged that antitrust laws

have often been assumed to prohibit all cooperative R&D. He directed the Justice Department to

issue a set of guidelines concerning antitrust implications of cooperative research; these guidelines were published late in 1980, and seem a

useful though limited step in removing ambiguity

from this area of antitrust enforcement. -

.- ‘\lo\ (, tl’()~ll[i (;l~ (, ( Lirtf,r F rf?[, J{< IrI(i, A utt)mo(ltf, ,N’PWS A(w 11 ,

1 YM), p 4

“‘ ln(il]<t r-i,! I Inn IIv,i tlt)n lni t II IIV I,+ R[,m,~ rks Anll~t[]nc ]n~ ,] Progr, im

It I B,I1( I 111 r<! NII 1 r) II( I\,1 t I I III, d nfi ‘‘ lrl(iusl r]iil lnn[t~ d ! ](ln Init]atlvf)s

\!t,>\,I g[~ 1() t I){, (;( )r~~ r(,~~ I r,i nsml t t L ng Pr[]p[wmi I nr t IA t Ives, L1’wkli

( f)mIJll{ffl~~n of [’f f,ilfif,ri fIf Il l),){ um(>n IS [){ I ‘11, 1 q79, pp 2070-2071

An II (r II\ ( (,IJI~lf, ( ‘(lrl~ [jr rirnq lif,~{v]rf h /orn ( L’f,n ture~ [11’i]shir]g(or],

[). ( 1 AIIII trn+t lh~ Islorl, l)(~p,irtmt,nt of Justl[ [I, NIJw~mh{,r 1980]

In fact, much of the lore of antitrust is unpublished—although often enunciated in speeches by

Government officials, copies of which are available from the Justice Department on request,8

Under such conditions, the private sector is likely

to be wary of any participation in industrial policy initiatives which may seem to carry risk of

antitrust actions.

Antitrust enforcement also extends to international trade. For example, the voluntary restraint agreements (VRAS) on imports of steel—

discussed in chapter 6—were challenged under

the Sherman Act by Consumers Union, q As a result of the VRAS, nine Japanese steel companies,

plus British Steel Corp., and a number of Western

European steel firms belonging to the European

Coal and Steel Community, jointly agreed to reduce the amounts of steel they would export to the

United States. Consumers Union charged that the

President and Secretary of State lacked the authority to negotiate these agreements, and also

claimed that, even assuming such authority existed, VRAS were unlawful under section 1 of the

Sherman Act.

As the case progressed in the district court,

Consumers Union withdrew its Sherman Act

claim, leaving a state of uncertainty that still exists surrounding such voluntary private agreements. Basically, the question concerns whether

or not private agreements, negotiated or induced

by the Government but falling short of outright

governmental compulsion, enjoy some degree of

protection from antitrust attack because of the

Government’s involvement. Also note that, although Consumers Union brought suit against the

Government (specifically, the Secretary of State),

private suits might have been filed in addition.

Parties directly affected by the agreements—for

example, purchasers of steel claiming that VRAS

raised steel prices to artificially high levels—

could have brought actions under U.S. antitrust

laws against the foreign steel producers that

were parties to VRAS (although this might have

posed jurisdictional problems).

Trade Law

The executive branch has considerable discretion in negotiating trade agreements. Nonetheless, this discretion is limited in various ways—
186 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

for example, by antitrust laws as indicated in the

previous section. Other restrictions stem from international obligations the United States has

assumed—e.g., under the General Agreement on

Tariffs and Trade (GATT).

U.S. trade law includes a large body of treaties

and executive agreements of both a bilateral and

multilateral nature. Prior to 1947, American

trade agreements were bilateral, However, since

the appearance of GATT in 1947, most trade

agreements entered into by the United States

have been multilateral.’”

The basic purpose of GATT was to create a

freer environment for trade among the member

nations and to discourage attempts by countries

to promote their own industries or to create

relative disadvantages for other nations’ industries. GATT attempted to meet these objectives by developing a framework for eliminating

tariff discrimination among member nations, by

reducing barriers to free trade other than tariffs,

and by moderating tariff levels, GATT provisions

represent important limitations on the kinds of

policies the United States as a member nation may

adopt—whether to promote domestic industries

in foreign trade or to protect domestic industries

against foreign competition.

However, the legal status of GATT in the United

States has been unclear since its signing. GATT

has never been submitted to the Senate for its

“advice and consent” pursuant to article II of the

Constitution. Therefore it has never been ratified

as a treaty. Indeed, language in trade legislation

enacted by Congress in the decade following the

signing of GATT expressly withheld congressional

approval or disapproval. 11

In April of 1979, the President’s Special Trade

Representative initialed the Multilateral Trade

Agreements (MTAs) resulting from the Tokyo

Round negotiations held under GATT. Several

months later, Congress passed the 1979 Trade

Act and officially approved and implemented the

Agreements. Thus, the binding effect on the

United States of at least the MTAs is clear—in the

absence of judicial challenges to the unusual procedure of adopting separate implementing legislation to effectuate trade agreements entered into

by the executive.

Major U.S. trading partners are parties to

GATT and the MTAs. Accordingly, actions by the

United States to assist domestic industries that

are inconsistent with obligations under the

Agreements—or are perceived by other signatories to be inconsistent—may be subject to

diplomatic challenge under GATT. 12 Moreover,

since the trading partners of the United States

have generally similar trade laws, violation of

MTA or GATT provisions by the United States

could provoke retaliation by these countries, including the implementation of both tariff and nontariff measures to restrict U.S. exports.

While the MTAs limit the policies of member

governments that could act as export subsidies,

they do provide leeway in such policies, Governments may promote the health and vigor of their

industries in a general manner, even though such

policies have an indirect impact on foreign trade.

Thus, GATT does not prohibit policies aimed primarily at domestic operations, and should not

pose an obstacle to industrial policies with domestic goals. ’ Nonetheless, the issue of when

domestic subsidies begin to interfere with international trade flows has often been a matter of

contention within GATT, Considerable effort

went into negotiating the subsidy code in the new

Agreements to try to arrive at more workable procedures,

Freedom of Information Act;

Government in the Sunshine Act;

Federal Advisory Committee Act

The Freedom of Information Act (FOIA) lays

down comprehensive requirements for the disclosure of records kept by Government agencies. 14 It

makes disclosure of such information the rule,

and provides the public with powerful procedural

tools for enforcement. Although the FOIA embodies a basic public policy favoring open Government and public disclosure, the Act itself recognizes through a series of exemptions that not all of

the Government business can be conducted in a

fish bowl, Exceptions include national security

matters, law enforcement investigations, and confidential business information, including trade

secrets.

The breadth of FOIA’S applicability suggests

that it could well apply to special Government

()! I l)ursf’, I IIll\l1’<11[1 I \ <1 [)[)11( ,1 I)l(i 1() I I)(I [ ’11) I[li >1< I tt,~ <l I’t, ,! I\l ) , I [)

j~ll( ,! 1)1[1 to t tlt~ ,1[ I IL I t It>\ t)l [ I S ( I,, I(III)U ])(1 It IIt,rs [ II\l\ ,11 I I( III+ I)i I I( Ilt, r

\I XII(I I I lrlt,~ I t I t 11(, j I I A \ m h I( h \ I( )l<! 1(, I Ilt>l r ~ 11)1 I g. t 1{ jr]\ (1 II( it, r t Ill,

~ur[w!nll}l] Is n]{i; Ix, [ 11<] I l(~l]q[>~l t)i t 1][, ( 1rl] I (,({ \t, i {I+

1[1 t Ill’ ( ;Ill(iw I)rnl(il ,IU II Inl[)l])lt, I Ii)t ItIII\ ,In, i l\ ~1~ rt>l [,rr[,(l I() i III IY (, ,1

IIIJ III t)f, r I ) I II] tt, rl), jl +11 /)\llj 10S \\ l’rl’ [ 111) +I(jl 1l’!)( ] ! (11. I ]11 ) I ] ollll>~ ( 1 I

,Iu t I )n)ot)ll(, I n(iu~ t r}

~ ( I s ( : \(>( ~~~ [ 1 070)”
Appendix C— The Legal Environment for Industrial Po/Icy ● 187

boards or corporations established for purposes

of industrial policy. Thus, the scope and legal effect of the so-called “trade secrets” exception to

FOIA are matters of potential importance. For example, some policy measures might call for significant submissions or exchanges of sensitive

t ethnological, commercial, or financial da ta—

e.g., costs of production—the public disclosure of

which could prejudice not only the firms involved,

but also the achievement of the policy goals.

[Financial harm is a basic test applied to FOIA exemptions. ) The key question would appear to be

whether the exceptions, as presently embodied in

the Act, would he viewed by the private sector as

adequate protect ion against the disclosure of confidential information. If not, private firms would

be unlikely to cooperate in the polic}r.

Wh;] t F~IA did for agency records, the Government in the Sunshine Act does for agency

meetings. Enacted in 1976, the statute requires

that “. ., every portion of every meeting of an

agencv shall be open to public observa t ion. )”) The

Chrysler Corporation Loan Guarantee Board,

among o the r Chwe rnmen t hod i es, has comp 1 i ml

wit h the Sunshine Law’. 1’) The Sunsh inc Act does

allow an agency to close its meetings under some

circumstances, including a 11 of the situations

covered by FOIA exempt ions—e. ~., discussions of

financial data, internal personnel rules, private

personal records, and information on financial inst itut ions.

The Federal Advisor} Committee Act applies

FOIA and Sunshine Act principles to advisory

commit tees. I t requires that ‘‘each advisory commit tee meet ing shall be open to the public. I

- I t

also requires that: 1 ) notice of meetings be published in the Federal Register; 2) interested persons be permitted to ‘‘a t tend, appear before, or

file statements subject to reasonable regulations;’ 3) minutes and other records be kept and

be made available to the public.

‘1’he Sunshine Act and the Federal Advisory

Committee Act raise issues similar to those of

FOIA—i.e., the willingness of individuals and

firms in the private sector to participate in policy

initiatives that might involve disclosures of confidential in forma t ion.

Conflict of Interest and

Financial Disclosure

Federal conflict of interest lams and regulations, as well as financial disclosure laws, could

affect the formulation and’or implementation of

policies that depend on recruitment of private

citizens to work for the Government. “1’hesc li~ w’s

and regulations extend to part-time as well as fulltime employment, and also to unpaid consultants.

W’ith some exceptions, they prohibit Government

emplo}ees from having fin:incial interests in

Government activities: restrict the professioniil

ac tivi ties of former Governmcn t emplokre[?s in

terms of who they may represent before th e

Government as ‘‘agen t or [it torne~’”: prohibit

Government employees from reccivin~ compens:]-

tion from nongovernmental sources: tin(i prohibit

Government emplo}rees from representing a client

in a proceeding t () which the L’n i ted S ta tes is a

party or has a direct or substantial interest.

The basic confli(:t of interest rule prohibits execut ive branch emplot’ees from p;] r t i(’ i pa t ing in

proceedings in which they have t] financial intcrest. ‘f! The prohibition in(:ludcs (:onsult:i t ion an(l

advising, as well as decisionma k ing, K’in:]ncia 1 interest is broadly construed to refer to interests of

family and ass(mia tes.

A detailed Executive order has I)een issued implementing the conflict of interest statutes, a n d

two Government agencies-the office of Personnel Llanagernent and the Office of Governrnen t

Ethics—oversee the operation of the statutes. In

addi t ion to these laws and regula t ions, under the

Ethics in Government Act of 1978 many (;a tegories of Government employees must disclose detailed personal financial in form:l t ion.

These lam’s could pose obstacles to the implement t ion of some kinds of policies because individuals in the private sector w’ i th special expertise might either be disqualified outright or might

find the prohibitions and rest ri(; tions onerous and

disruptive of their careers outside Government.

There are also potential conflicts of interest when

Government officials with regulatory responsibilities over industry become members of special

boards, committees, or task forces relating to that

same industry.
188 . U.S. Industrial Competitiveness —A Comparison of Steel, Electronics, and Automobiles

Government Ownership of Patents

and Technology

If an industrial policy initiative were to involve

Government stimulation or funding of R&D and innovation, questions could arise about the interest

of the Government as opposed to the private sector in any resulting inventions or other proprietary technology. Furthermore, legal restrictions

on the utilization of Government-owned technology by private firms might impede the commercial

development of that technology.

A number of complex and conflicting policy

considerations exist in this area. First, when

public funds are used to generate new technology,

it seems clear that such technology should be

utilized for the benefit of the public. Moreover,

where the technology represents a significant advance in the state of the art, and has competitive

significance, it is also clear that affording exclusive use of the technology to one firm might

detract from competition in the industry. This

consideration is particularly important where the

technological development supported by Government would not have been commercially feasible

for any one firm acting alone. On the other hand,

in the absence of exclusive licensing rights, private firms might not commercialize the new

technology.

Current rules governing the licensing of technology generated either by Government employees or through Government funding reflect—but

do not resolve—these competing policy considerations. Thus, there is a strong general presumption

favoring nonexclusive licensing. And, while provision is ostensibly made for exclusive licensing

where necessary to ensure commercial development, the Government in many cases still retains

the right to require sublicensing and otherwise to

assure broad dissemination of the technology in a

manner potentially inconsistent with a grant of

exclusive rights.

At present, different Government agencies—

the Department of Energy, the National Aeronautics and Space Administration, the Department of

Defense, the Environmental Protection Agency—

have different rules governing the ownership and

licensing of rights to inventions or discoveries

they have supported financially. Sometimes these

rules are developed by the agency itself, other

times they are statutory. Thus, the rights of the

Government and of private firms are not set out in

a unified body of law. Each agency operates

under its own distinctions, its own rules or statutes, and its own procedures. This lack of consistency has been widely perceived as undesirable—and a potential inhibition to innovation

and the commercialization of new technologies.

Several bills recently introduced before Congress

have sought to remedy this situation.

Legal Challenges and Judicial Review

New policy initiatives toward industry might involve new statutes, amendment or repeal of existing statutes, promulgation or amendment of executive orders or agency regulations, or combinations of these. Moreover, depending on their substance and reach, implementation might be

assigned to the executive branch, existing executive or independent agencies, Government corporations, new regulatory bodies, or combinations of such entities. In turn, actions taken might

include informal policy statements or guidelines,

rules of general and binding applicability to individuals or businesses, or specific enforcement

actions to restrain conduct inconsistent with

rules and statutes. At almost any step, affected or

aggrieved parties might challenge such policy initiatives in the courts. Measures intended as components of industrial policy could be subject to

delaying actions as well as the threat of being

struck down.

Historically, when Congress has enacted regulations significantly affecting private economic

interests, it has generally provided avenues for

aggrieved persons to seek judicial review. If precedent is a guide, therefore, significant aspects of

new policies would likewise be subjected to

judicial scrutiny. Moreover, even where Congress

does not expressly provide for judicial review of

an agency’s action—and assuming that it does not

by statute expressly preclude judicial review—

such review will generally be available under the

Administrative Procedure Act, ’g which embodies

a strong presumption in favor of judicial review of

agency conduct.

Permeating the body of statutory and decisional law governing the activities of administrative agencies—as well as court review of these

activities—are the often conflicting goals of: I) efficient and effective administration and implementation by Government officials of congressional objectives; and 2) the protection of private

property rights from unjust or excessive governmental interference—e. g., ensuring adherence by
Appendix C—The Legal Environment for Industrial Policy ● 189

the Government to constitutional and statutory

guidelines.

Reflecting the great increase in Government

regulation over the past 15 years, the entire area

of administrative law is currently in a state of

flux. Thus, while judicial challenges to new

policies affecting industry might be frequent, it is

difficult to do more than speculate on outcomes.

However, under ordinary circumstances, the

courts would probably not interfere at the preliminary stages of policy formulation. Once implementation commenced, depending on the interests

affected by the policies in question, judicial

challenges, including preenforcement challenges,

could be expected. Whether preenforcement

challenges would be entertained, and precisely at

what point the courts would find that an agency’s

actions were “ripe” for judicial review, would depend on the availability of other means of judicial

review, and the hardship of pursuing such means.

In any event, it appears likely that at least some

industrial policy initiatives representing substantial change from past practices would be challenged in the courts. At the least, such challenges

might delay the implementation of new policy initiatives.
APPENDIX D

Foreign Industrial Policies

Japan, France, and West Germany have

evolved different approaches to industrial policy

over the postwar period, As with well-developed

industrial policies elsewhere, all three use a mix

of policy instruments—both sectoral policies and

those with aggregate objectives. The French have

relied most heavily on sector-specific measures,

while West Germany has stressed macroeconomic and other broad policies,

In France and Japan, which have stronger centralized bureaucracies, the direct promotion of

particular industries has often been a national

priority. French industrial policy has lately

turned toward greater reliance on market mechanisms, an approach that West Germany has followed for many years. In Germany, the role of

government intervention in the affairs of specific

firms and sectors has been limited compared to

both France and Japan, It is perhaps no coincidence that West Germany, with its federal government system and less centralized policymaking apparatus—in both respects the most like the

United States—has emphasized sectoral measures less than Japan and France.

Any review of foreign industrial policies must

keep in perspective the backdrop of rapid economic growth throughout the industrialized world

that persisted from 1947 to roughly 1970. A ll

three of these countries benefited from conditions

uniquely conducive to economic expansion; under

such circumstances, it is easy but potentially

misleading to give too much credit to industrial

policy. The critical tests for each—as for the

United States—began in the 1970’s. These tests

will continue in the decade ahead, as the world

economy grows only slowly and competition in

many industrial sectors intensifies (ch. 7). Even

for countries that have in the past successfully

promoted industrial development, stronger competition, from more sources, presents difficult

policy problems, In each of these three countries,

industrial policy is being reexamined, and new

approaches are under debate,

The Industrial Policy of Japan

The Role of Government

Few observers would dispute that the Japanese

have successfully promoted the development of

key industries during the postwar period. However, disagreement persists concerning the most

critical factors in shaping industrial policy in Japan—in particular, the importance of the government role, ]

Observers in countries such as the United

States, where Government efforts to directly promote the development of specific industries are

more the exception than the rule, have at times

assumed that the Japanese Government directly

controls and systematically coordinates industrial policy.

While the support and guidance of the Japanese Government have clearly been important for

the formulation and implementation of industrial

policy, other factors have also contributed to the

development of consistent and vigorous policies,

Among these are the dynamism and leadership of

the business community, an educated labor force

incorporated into the industrial system through

enterprise unions, a competent, elite bureaucratic corps, and the unusually long reign of the

governing conservative Liberal Democratic Party.

Furthermore, the political stability and worldwide economic expansion of the postwar period—

lasting until the oil and trade crises of the

1970’s—offered a climate that contributed importantly to Japan’s economic development,

While much has been made of consensus and

cooperation in Japan, there has been a great deal

more conflict of interest and bargaining among

public and private officials than may appear on

the surface. Industrial policymaking in Japan, as

elsewhere, is a process of conflict accommodation. What is striking about the process in Japan is

the effort exerted behind the scenes by business

and government leaders to informally gather information, develop a common perspective, and

thus lay the groundwork for policy before final

decisions are reached. Cooperation and consensus are in no sense automatic, but are carefully

nurtured.

Government Guidance

While Japan’s Government has traditionally

played an important role in stimulating and promoting industrial development, indirect and inS[’(> l’, 1, ll!rIl~J(~l [ (?(I ], f+]l]( ;r]t[ihirl~ In (;(JJ1 f(’m[)or(]rl 1(11)(111 /l fh(I( (I.

N }’ ( :I)rll(,ll [ JIII\ (,r+l I \ [’r(,ss, I(I77 ), for it!] ov[;rv](,w I)f [it’k)<) If’s (III 1111)-

{1 11(, s(, p{ )1 1( \ 11)<1 h I [lx

190
Appendix D—Foreign Industrial Policies ● 191

formal methods of guidance have generally been

preferred to direct Government ownership, subsidies, or regulation.: The part played by government differs from that in other countries less in

the extent of intervention than in the methods

used to guide and support industry. The Ministry

of International Trade and Industry (MITI), which

is directly responsible for industrial policy in

Japan, uses different types of policies for different industries, and at various stages of development. These sector-specific measures are

supplemented by macroeconomic policy and planning carried out by a number of other government

agencies, including the Ministry of Finance, the

Bank of Japan, the Economic Planning Agency.

and the Science and Technology Agency. 3

In the early postwar period, five Japanese industries, including steel, were targeted as essential to a modern industrial economy. Later, attention shifted to the auto and computer industries—

signaled by the development of a plan for controlling foreign investment in the motor vehicle industry in 1952, and the passage of the Electronics Industry Act in 1957. Industrial development plans

and forecasts such as these are periodically reviewed and revised. The foundation of the government official position toward the electronics industry now consists of three major pieces of legislation—the 1957 Act, plus additional laws passed

in 1971 and in 1978.

During the early stages of industrial policy formation, advisory panels—such as MITI’s Electronics Industry Deliberation Council—collect information and build consensus among public and

private officials. In addition to these official advisory groups, business committees and ad hoc political party conferences have often been formed.

Keidanren, the Federation of Economic Organizations, has, for example, been instrumental in developing industrial policy initiatives for the electronics industry through its Committee on Data

Processing. Sanken, the Industrial Problems

Study Committee, was directly involved in advocating increased concentration in the steel industry. The Auto Industry Policy Conference was established by the Liberal Democratic Party in 1966

to deal with the imminent liberalization of trade,

In implementing industrial development plans,

MITI officials have generally relied on “administrative guidance—which often has no specific

statutory basis—to informally direct industries

and firms. 4 Bank of Japan executives similarly apply “window guidance” to the volume and direction of loans made to customers of the city banks. ’

Such guidance has been used to provide incentives for industrial development. to ration credit

to industries and firms judged capable of rapid

growth, to oversee industrial production and capacity expansion, and to encourage mergers.

To cite a few specific examples of incentives

used to stimulate industrial development, the Japanese Government provided the steel industry

with a set of tax and duty exemption measures

during 1951 and 1952. Accelerated depreciation

allowances and tax breaks have been used to promote the development of new technology in the

electronics industry. MITI has also encouraged

mergers: the 1957 Electronics Industry Act authorized the Ministry to guide the formation of

cartels for standardizing design and rationalizing

production in the computer peripherals sector;

loans and tax concessions were used to encourage mergers in steel; a special tax deduction

helped to promote mergers in the auto parts industry.’ In addition, R&D is stimulated through

subsidies and financial incentives. MITI Agency

for Industrial Science and Technology has initiated a number of long-term research projects to

develop technologies such as battery-powered

autos, very large-scale integrated circuits, and

computer software (ch. 5). Government support is

often channeled through institutions such as the

Japan Electronic Computer Corp. or the Information Technology]’ Promotion Agency, which receive

funding from the private sector as well as loan

guarantees from the government or the Japan Development Bank,

Until the early 1970’s, Japan’s trade policies

actively promoted exports, while limiting imports

of manufactures and inflows of foreign exchange.

Quotas, tariffs, and commodity taxes were used to

protect domestic industry. To increase exports,

the Bank of Japan discounted short-term export

bills at less than the market interest rate, and the

Japan Development Bank and the Long-Term
192 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

Credit Bank provided inexpensive long-term credit for export-oriented businesses,H Based on its

authority under the old Foreign Investment Control Law, the Japanese Government restricted the

entry of foreign firms. Though the circumstances

differed, both IBM and Texas Instruments, among

U.S. companies, were permitted to establish

manufacturing operations in Japan only after

agreeing to license patents to Japanese manufacturers.

Such blatantly protectionist policies, though

formerly the norm, were substantially relaxed

during the 1970’s. Tariffs have been reduced to

levels comparable to other industrialized nations,

broad export incentives have been erased, and

import quotas remain on only 27 product areas.

With most trade barriers essentially dismantled,

the primary obstacles remaining to hinder foreign

investment and exports to Japan are less formal—

restrictive interpretation of customs and product

approval procedures, a complex distribution system, and government and business propensity to

“buy Japan. ’”Y

Effectiveness of Japanese Industrial Policy

While Japan’s Government has employed a

variety of methods (many of them informal and

few of them unique) to promote industrial development, it would be a mistake to assume that such

efforts have always succeeded or that they have

been consistently well received by business and

industry. In a number of cases, Japanese firms

have resisted MITI actions aimed at restricting

corporate autonomy: auto parts makers opposed

MITI’s attempts to foster consolidation; during

the mid-1960’s, Sumitomo Steel refused to follow

MITI guidance and limit capacity expansion;

more recently, mainframe computer manufacturers have not cooperated in mergers. There

have also been conflicts with other government

agencies: the Ministry of Finance successfully opposed MITI efforts to establish the Japan Electronic Computer Corp. as partially governmentowned; the Fair Trade Commission was successful in resisting MITI’s push to enact a “special industry development law” in the mid-1960’s, but

failed to block the merger that created New Japan

Steel. ’[) The politically powerful but uncompetitive

“1. (;. Nfagazlner and 1’ \! }[t)ut. )Clp(]ncw Intlustrltll P(dJc\ (Lonfiun

POIIcV Studies institute, 1980], pp 42 and 78.

‘k’ A. L1’f?ll ,ind N C (;ll(k, “Jiip~n-Is II)(: hl,~rket open’? A VI~W (If

the? ]i~ptin(?se hfa rket L)r,~w n F’rl)m U.S. Corporate Experlenct?. ’ L(IW

IIn(i Pf)l]cy in In tern(l ti[m(l] Business. vol i 1, 1979, p 856.

‘ K;] pltlrr, (Ip. {I t . , lncl udes rt)nslcier[lhle dlscussl(}n of f,i I lures I n

government- huslness r(j(lpc?rati(ln: see pp 48-67.

agricultural sector has received extensive government protection and subsidy at a high cost in

economic efficiency. These examples show that

cooperation between government and the private

sector in Japan is not automatic. When it occurs,

cooperation is best viewed as less the product of

direct government control than the outcome of extensive but informal negotiations which result in

policy that industry perceives as beneficial.

The effectiveness of Japanese industrial policy

has not depended on government alone. When

government actions have produced positive results, they have supported and stimulated the independent dynamism of business and industry, Increasing productive efficiency, and intense competition among firms in the domestic market, indicate the vigor and strength of Japanese industry,

which is primarily privately owned and operated.

It is easy but misleading to overemphasize the

contribution of the sector-specific components of

Japan’s industrial policy to her economic success.

Broad-level indicative planning and macroeconomic policy have helped foster a stable economic

climate, one conducive to industrial development.

During the 1970’s, for example, officials in the

Ministry of Finance and the Bank of Japan contributed to industrial growth by placing high

priorities on anti-inflation and exchange rate

policies.

And, while Japan’s past record of industrial development is impressive, a crucial question now is

whether policy makers will be successful in adapting to new international and domestic conditions.

MITI’s current policy planning aims at adjusting

to a period of lower economic growth and constraints on resources. The MITI “vision for the

1980’s” calls for ambitious efforts to revamp

Japanese industry and society toward a knowledge-intensive, high-technology, resource-efficient structure. Technology as the key to economic security is at the center of the MITI strategy, ” In this sense, Japan’s emphasis on the electronics and information industries is based on an

economic perspective more comprehensive than a

simple sectoral policy.

Such a comprehensive plan will not be easy to

implement. Recent experience in Japan shows

that when the economy slows, conflicts of interest

grow among firms and industries, particularly

those in actual or potential decline—such as

steel, aluminum, and shipbuilding—which compete for special assistance. In 1978, the Japanese
Appendix D—Foreign Industrial Policies ● 193

Diet passed a law to assist such “structurally

depressed” industries; but some observers have

questioned the effectiveness of such aid, arguing

that the plan has not succeeded in moving resources out of declining industries.

Another factor creating new difficulties for industrial policy is the internationalization of the

Japanese economy. Industrial promotion policies

cannot be pursued to such extremes that they

jeopardize national security by provoking Japan’s

allies. Moreover, as the number of agencies and

organizations directly concerned with industrial

policy has grown, the process of policy formation

has become more complicated, These factors suggest that real change will be required of public

and private policy makers if Japan is to implement

industrial policy appropriate to a new domestic

and international climate. If the past provides an

indication of the future, the Japanese Government

can be expected to play a significant role in promoting the continued competitiveness of Japanese

industry—but the governmental role will not be

the sole determining factor.

The Industrial Policy of France

The Role of Government

The French have long perceived the interplay

of market forces in the economy to be chaotic and

wasteful if left unregulated by government. Thus

intervention has not been unique to the postwar

period, but accepted as a more-or-less permanent

feature of the French economy. And, to a greater

extent than in many other countries, the French

have used industrial policy to attempt to reach

goals beyond economic development. For example, the policy of “national ‘;hampion” industries

followed during the 1960’s valued national security and prestige above economic efficiency.

Public policies in France have for many years

included both protection and promotion of key

industrial sectors through a wide variety of mechanisms. These mechanisms have embraced financial subsidies of many types, price controls, encouragement of mergers to increase the size and

market power of French-owned corporations, export promotion, and facilitation of inward flows of

technology in industries such as computers, semiconductors, and aerospace.

As is common elsewhere in Europe, there is

considerable government ownership in the

French economy. In fact, the sharp distinction

between public and private sectors characteristic

of countries such as the United States has never

existed in France. Many French banks are publicly owned, and government has a strong voice in

the operations of the nationalized railroads, in

Air France, and in the two major oil companies

—as well as exercising effective control over the

two largest steel producers, (Roughly 70 percent

of steel capacity is essentially nationalized.”)

Other publicly owned firms, such as Renault and

the aircraft manufacturer Aerospatiale, carry on

their activities with little direct government involvement.

The French State is highly centralized, with an

elite bureaucracy that has considerable autonomy in shaping industrial policy. ’ As in Japan,

most of the decisionmakers in both government

and industry are graduates of a few prestigious

schools. However, the extensive process of discussion and consensus building that precedes decisions on industrial policy in Japan is largely

missing in France. Although a variety of government agencies influence policymaking, authority is remarkably concentrated, much of the

actual power residing in government and semipublic financial institutions. Unlike the routine

participation afforded interested parties outside

the bureaucracy in Japan or West Germany,

neither industry nor labor has a visible role in formulating or legitimating French industrial policy—although they can be heard through informal

channels,

Evolution of Industrial Policymaking

in France

Industrial policy in France since 1945 has

passed through a number of stages. The exigencies of postwar redevelopment led at first to reliance on relatively formalized economic planning. But the very speed and success of redevelopment exposed shortcomings in the planning process, which since the early 1960’s has been largely

superseded by a more ad hoc approach,

The Gaullist period of the 1960’s featured a

strategy of national champions—targeted sectors

intended to bring prestige as well as trade competitiveness to French industry. Largely failures

—e.g., the Plan Calcul, the Concorde—the French

have now turned away from highly visible national champions while remaining committed to

sectoral intervention on a case-by-case basis.
194 ● U.S. Industrial Competitiveness —A Comparison of Steel, Electronics, and Automobiles

Since 1978, government pronouncements have

placed more emphasis on market forces rather

than planning and intervention. There has been a

shift away from price controls, as well as attempts to create more competition within the

French economy.

During the 1970’s, export promotion took on a

greater role in industrial policy, largely because

of the need to pay for high-priced imported oil.l4

France’s lack of energy resources also led to a

strong emphasis on nuclear power generation—a

technology where French industry is now among

the world’s leaders.

The net effects of economic planning and industrial policy in postwar France are difficult to

evaluate. The government role became more systemized and more openly acknowledged concurrent with a period of rapid and steady economic

expansion lasting until 1974, Much of this growth

would have occurred irrespective of government

actions, making it difficult to identify either

positive or negative effects of industrial policy,

While the French Government has failed to restore a high rate of real growth since the 1975 recession, this is a problem shared by most of the

rest of the industrialized world. Despite such conspicuous failures as the Concorde—and the difficulties France has recently faced in restructuring her steel industry—many features of postwar

French industrial policy have been emulated in

other European countries and in the Third World.

Economic Planning

Following World War II, France adopted a system of economic planning based on 5-year projections intended to guide industrial development on

a sectoral basis, This system of indicative planning—which entailed a careful laying out of public investment decisions, along with suggested

directions for complementary private investments

—was at first oriented toward the needs of postwar reconstruction. By 1960, indicative planning

as originally conceived had been largely

abandoned—in part a victim of the increasing

complexity of the expanding French economy. The

plan still remains—indeed the VIII plan began in

1981—but is now largely a vehicle for discussion

and information exchange within the bureaucracy and among political interests, a means of

broadening perceptions and suggesting desirable

policy directions. The VII plan (1976-80), for instance, included a detailed outline for strengthening French science and technology. It recommended an increase in employment in the sciences, also proposals for the organization of research, as well as desirable fields of R&D (e. g., information industries, electronic components,

scientific instrumentation).

Despite the comprehensive nature of these 5-

year plans, even during the early postwar period

the power vested in the Planning Commission—a

small bureau attached to the office of the Prime

Minister—was modest. As French industry redeveloped, government influence over the private

sector increasingly gravitated to financial institutions—particularly the Ministry of Economy

and Finance (since 1978 reorganized into two

separate agencies), but also a variety of semipublic lenders such as the Credit National, plus

the banks, both public and private. ”

During the Gaullist period of targeted support

to national champion industries such as computers, these financial institutions played a major

role. Agencies such as the Ministry of Industry

also participate in developing strategies for industrial policy, but the importance of lending institutions in shaping industrial policy is a notable

similarity among Japan, France, and West Germany, In the French case, the government influence over banks and other lenders appears to

be considerably stronger than in West Germany,

and at least comparable to that in Japan,

Banking in France is highly concentrated, facilitating government involvement in credit decisions; three large nationalized banks control

roughly half of all funds on deposit. The Plan

Calcul, for example, intended to build an internationally competitive computer firm, received more

than a billion francs (roughly $200 million) in

equity investments, loans, and researc h

subsidies—in part directly from the government,

in part indirectly through government-influenced

credit decisions, The Plan Calcul also illustrates

the targeted approach to industrial poli cy

adopted in France during the 1960’s. Rather than

systematic economic planning, this approach

relied on sectoral programs that were themselves

comprehensive but not necessarily closely tied to

the remainder of the economy, The Plan Calcul involved the coordination of a variety of governPr[)grf]mme #25, Le !’11 Pl(Jn [If> I){,lreltq)men I [;( IIn(m]lqll{, f’t S()( lfIf

I !)z(j.1{)~() (P:~rlS, 1976), PP. 294-:10 1.

“ ] Z\sman, The St(]te (JS Ec(m{m]lc Plf]ver (Berk(?l<?\, Cai}f IJnlvcrsit~ of (;al]f[)rnl:~ Press, forth((}m]ng),

J. Nfelltz, 4

“I’he French F’int]nr]at S}stcm, klc[ht+ nisms ;ind Proposi-”

t Ions of Reform. ” (h)nferen(w on P(II i t Ica] lk[~n[]nl} of F’riin[t>, Amcrlcan

F:l)t[!rprls[l Insti!ut[>. ~$’~tshingl(]n. 1), (;., hfii} 2!1-.1 1, 1980,
Appendix D—Foreign Industrial Policies ● 195

ment policies, including financial tools, to support

an industry judged important to national interests. Recently, as mentioned above, the French

have attempted to be more flexible and more market-oriented in their sectoral programs.

The Plan Calcul

The Plan Calcul began in 1967 as the result of

an agreement between the French Government

and the Companie Internationale pour l'Informatique (CII). The massive and coordinated effort of

the Plan Calcul was in large measure a reaction to

a pair of events which reinforced the widespread

perception of U.S. dominance of European computer industries.18 The two events were the acquisition of the French computer firm Machines

Bull by General Electric in 1964, and the denial by

the U.S. Government of an export license for the

sale of a Control Data computer to the French

Atomic Energy Commission in 1966. These developments catalyzed the French effort to build a

strong, independent capability in computers,

CII was established by merging the two French

firms with computer hardware capability that remained after the Machines Bull purchase. Implementation of the Plan Calcul depended on broad

participation and cooperation within the French

Government, involving institutions ranging from

the Ministry of Industrial and Scientific Development to the Ministry of Defense. Coordination

of their activities was the responsibility of an ad

hoc body within the office of the Prime Minister,

the Delegation for Information Science.

In 1975, the Plan Calcul was in essence terminated: it had been no more than marginally

successful in its attempt to build a viable computer sector, although maintaining a French presence in the industry. Many reasons have been

suggested for the Plan’s shortcomings, including a

lack of coordination with overall macroeconomic

policy and an overly ambitious strategy of attempting to quickly reach technological parity with the

U.S. computer industry over a broad front, rather

than concentrating on more limited segments of

the market, But its comprehensive outlook was

nonetheless an important development in French

sectoral planning. The Plan Calcul went beyond

the earlier Concorde program-which had been

oriented towards a single development project—

to an industrywide approach, A variety of policy

instruments—including fiscal incentives, man-

,\(l flo[l(ll Sil[,j)l II I ((/1 \( 1(, JI( f, ( I rl(l [’f,{ hrl( ilo Ll\ ,Arl f 1(1111(1 rloll of

[ I )1 (,1 ~ II f \f)(,r )(]]( f, \ ()/ [ I \ ( ,,1 m tlri(i~t>, ~f(l+~ \l,\\\cIc hlist,l IS [rlstl(ult,

, ]f 1 (,( t][ljlll~l ( ,{,llt[,r It )r 1]{111( \ Al l(,rl]<ltl~t,~ 1 ‘)75 J p{) 7E RMff

power training, and market forces—were coordinated in order to support CII and the French computer industry.

In 1976, CII merged with Honeywell-Bull—the

firm that resulted when General Electric, the purchaser of Machines Bull, sold its computer business to Honeywell. This merger—again nurtured

by the government—marked the end of a purely

French mainframe computer firm, but not the end

of sectoral involvement by the government in the

industry; CH/Honeywell-Bull has continued to

benefit from substantial government aid, and the

French bureaucracy retains considerable influence over the firm’s activities.

Policy Instruments

As the Plan Calcul illustrates, the French

Government has used a complex and continually

evolving set of economic incentives to influence

and guide industry. These tools include tax benefits, outright grants, allocation of loans and

credit on preferred terms, government purchases,

and pricing policies, Incentives have been used

selectively to encourage the private sector to

undertake projects and investments that the State

judges desirable.

Although the tools of French economic and industrial policy are similar to those existing in

other market economies—including the United

States—the French system exhibits several noteworthy features. First, while demand targets have

often been formulated, in practice government incentives operate exclusively on the supply side;

manipulation of taxes to influence demand has

been rare. Second, incentives are positive; they

do not constrain firms in the private sector but attempt to guide and encourage them by making certain activities profitable or otherwise attractive.

Finally, despite the deep government involvement

in many industrial sectors, short-term macroeconomic policy has not been well-coordinated

with industrial policy, This appears to have been

a major weakness of the French approach to

policymaking, with its emphasis on sectoral

measures, 

19

Although finance has recently been the central

instrument of French industrial policy, many

other tools have been employed. In the early postwar period, extensive trade barriers protected

French industry and allowed it to redevelop without foreign competition. This had also been a
196 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

prominent feature of French policies before the

war. Tariff walls moved outward following the establishment of the Common Market, but France

continues to restrict imports through nontariff

barriers— imports of Japanese automobiles are a

current example.

Support for R&D has also had a prominent

place in French industrial policy, and remains an

important feature of the planning process. Nuclear power generation and integrated circuits

are among the currently favored targets.20 The

VIII economic plan—beginning in 1981—puts

great emphasis on government support of R&D in

six key sectors: electronics, energy, aerospace,

marine technology, machine tools and manufacturing equipment, and biotechnology, The French

propose to spend $25 billion on the development

of these industries over the 5-year course of the

plan. 2i

Recent Developments

Several of the more recent shifts in French industrial policy are illustrated by government aid

directed at the semiconductor industry. Rather

than supporting a single national champion, Le

Plan Circuits Integres is promoting several independent efforts—typically involving joint ventures with U.S. firms and aimed at transferring integrated circuit technology to the French partners.’ 2 This splitting of the effort among several

nominally competing ventures can be taken to illustrate the greater reliance on market mechanisms to which the French have turned. At the

same time, given the long tradition of government

intervention, and the continued existence of the

apparatus and mechanisms used in the past, the

move toward a market-oriented industrial policy

may prove slow,

Beyond protection and promotion of high-technology growth industries such as semiconductors,

the French Government has continued to intervene in sectors perceived as mature or declining,

As in Japan, shipbuilding and textiles have been

important to the French economy, And again as in

Japan, these sectors have received aid aimed at

managing decline and ameliorating some of its

consequences.

Their steel industries are also important to the

economies of both France and Japan, Steelmaker

I’” AIrns of N~ tI~IIMl Rest?ar[’h Prc]gr(]m for 1980-1990 outlined, ““

\l I,~ f L,II r I )[N, f{t,~)! II f 5’[ If,II~ (, I 1111 I I’I, ( IIIIIIIf JCL ]0111! 1’111)11( ,111011s R(,-

\IJ,Ir( 1] S[, rv]t {, j I]RS 1, t)[l(i 1, \l, ] r ), 1 IIH(), Ill) 1 i-. ?ti

k I)r~?yf,]fk, ‘‘ ~’r,ln{’[~ b~’,ints R]gger P][?rv of pie, ‘“ F;fw trIJrIJ[~, ()(t

2.1, 1980, p 98.

E I)lhl, i rl<i. ‘‘I nt(’1, hlci lr(l f 1(1 rrls ( ;(IIII I rtll 1(; 1 (I[ h. F.k{ h<~rl~{’ 1’1<1 II,

S~!t 1)[’SIXII S~lt)~l{il(lr~. 1;II,( fr( )111( N(’M \ .lprli (i, 19U 1, p 1

in both countries have faced substantial overcapacity, although the Japanese industry is much

more efficient. A task for industrial policy in

France since 1978 has been to encourage and direct contraction in the steel sector. Financial aid

has been provided to ease the burden of indebtedness on the three major steel groups, and policies

have been designed to harmonize and rationalize

production—e.g., by closing down unprofitable

mills. The government intends to phase out more

than 30,000 jobs by 1983, The problems in the

French steel industry have required continuing

State involvement, in part because of the delicate

social and regional problems created by the

restructuring effort— the turn toward market

mechanisms has clearly not precluded government actions in distressed industries.

Effectiveness of French Industrial Policy

A balanced view of French industrial policy

should recognize its positive contributions to national economic development, but that it also has

major weaknesses —and has failed in several ambitious attempts to guide the economy along particular paths. Positive incentives aimed at directing growth on a sectoral basis have often succeeded. But the isolation from market forces created

by government intervention has also, in a number

of instances, resulted in misallocation of capital

and other resources.

Since the mid-1970’s, there has been a marked

shift in rhetoric concerning industrial policy in

France, with government statements now emphasizing a renewed reliance on market forces. Nonetheless, as shown by the strong and continuing

role of the bureaucracy in electronics and steel—

and also in the automobile industry, where the

government engineered a recent merger between

two private firms, Peugeot and Citroen—France

remains a highly interventionist State, one where

industrial policy is centralized to an extent unusual in a nominally free market economy.

Industrial Policy in the

Federal Republic of Germany

Economic and industrial policymaking in West

Germany is less centralized and less coordinated

than in Japan or France. No single agency or institution such as MIT1 exists to develop and implement industrial policy. Industrial policy in West

Germany is more like that in the United States

than that in France, with sectoral intervention

less prevalent.
Appendix D—Foreign Industrial Policies . 197

The West German economy has performed well

in the postwar period, the Federal Republic being

noted for consistent reliance on macroeconomic

policy emphasizing price stability and export-led

growth. A central theme has been the “social

market economy ”’—a preference for relatively

unhindered price adjustments combined with

social programs aimed a t moderating the mor e

undesirable impacts of the free market. The role

of the government has been comparatively limited

—a major contribution has been to provide a

stable and consistent policy environment, and an

undervalued deutsche mark.: t Business-labor consensus and a liberal foreign economic policy

helped to create a climate in which West German

industry prospered. In recent years there has

been increasing debate about the need for sectorspecific measures to promote industrial development and adaptation, but West Germany has thus

far avoided a strongly sectoral approach to industrial policy.

Participation in Policymaking

The West German governing system is comparatively de-centralized. The Laender (State)

governments play important roles in the Federal

structure. Business and labor are relatively wellorganized, and structurally integrated into the

policymaking apparatus. ”

Industry is represented by umbrella organizations such as the Federation of German Industry

(BDI), which plays a significant role in formal and

informal policy discussions with government officials. Trade associations which participate in

the BDI—such as the Association of Electrical

and Electronic Industries—work to promote consensus on industry-specific programs. Labor

unions are likewise involved through industrywide and regional collective bargaining. Systems

of codetermination and plant-level councils give

workers a direct voice in the operations of factories. Labor unions are informally consulted

about measures to promote industry. They also

participate through organizations such as the

Federal Institute of Labor, which develops programs to ease adjustment to change. At one time

the “concerted action”’ system was also an important vehicle for labor participation—a mechanism that could be revived in the future.

Interest groups- from both business and labor—are systematically represented in policymaking, but government institutions are also important. Specialized agencies such as the cartel

office (which has pursued a comparatively moderate antimonopo]y policy) and the Deutsche Bundesbank (the central bank in West Germany,

which operates with considerable autonomy) provide continuity in economic policy. Although Germany’s social welfare programs are the most extensive of the nations discussed in this appendix,

the West German approach to industrial policy

exhibits little direct government intervention compared to France or Japan.

Approaches to Industrial Promotion

Price stability, high employment, and economic

growth are fundamental goals of West German industrial policy< The 1967 Growth and Stability

Law provides for the coordination of public and

private decisions through a system of consultations between government, management, and labor, ’ Finance plans are prepared on a 5-year

basis: the Deutsche Bundesbank has a wide array

of instruments to implement monetary policy.

Though the Bundesbank is theoretically independent, it is bound to support the overall economic

policy of the government, and in practice normally acts in close consultation with public officials.

A number of institutions-the Council of Economic Advisors, the Ministries of Finance and

Economics, the Bundesbank—develop macroeconomic policies affect ing all industries; but the

banks deserve special emphasis. During the high

growth period through the 1960’s, the Bundesbank maintained exchange rates at a level that

undervalued the deutsche mark and promoted exports. More recently, the bank has emphasized

stabilization.

West German banks play an additional role in

industrial policy because they are allowed to hold

stock in corporations, as well as making loans to

them. Because bank loans are important sources

of capital for West German firms, lending policies

can influence business strategies. So while it

would be an exaggeration to suggest that the Bundesbank or the banking community orchestrates

economic and industrial policy in any centralized

fashion, financial institutions do have an important part in West German industrial policy, as

in France and Japan.

[ ~1~ ,IIM5 (In(i lni tf umt~rl t~ ~)f Influf lrl(]l PI)lIf i ( P,] r]~ orqd nlz.d Iltln

ft)r F.({)ntlm]( ( h)opf>rdt]on ,]n(i 1)(’\(~lt]l]rTl( lrlt, 1 (175 ], p 10
198 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

Subsidization of industry in West Germany is

both direct and indirect, but is not used as widely

or heavily as in many other industrialized nations.

The shipbuilding industry has been given export

financing assistance and tax benefits; incentives

are offered to purchasers of domestically built

ships. Germany’s coal industry receives substantial subsidies and tax benefits, and mergers have

also been encouraged.26 Generally speaking, however, manufacturing industries in West Germany

have not depended on government subsidies,

which have been relatively modest in size.

The West German Government also influences

industry through public ownership. The government owns more than 3,000 firms, accounting

for 10 percent of national income, 27 The Federal

and Laender governments together hold 40 percent of the stock of Volkswagen. While Volkswagen has been quite successful, Salzgitter—a

steel company wholly owned by the government—

has suffered the largest losses of any nationalized firm. Generally speaking, publicly owned

firms function much like privately owned companies. There is little direct government involvement in management, nor much special

assistance.

While distressed sectors such as shipbuilding,

coal, and textiles have received considerable government attention, West German industrial policies have also attempted to target growth industries, ’8 In recent years, the promotion of technological innovation, particularly in new and developing industries, has become an important element in industrial policy. Set up in 1972, the Ministry for Research and Technology (BMFT) has developed a wide variety of programs to assist both

large and small firms.

Electronics companies receive R&D assistance

from both the BMFT and the Ministry of Economics. The government has helped large companies such as Siemens develop advanced computer technology, and has begun an R&D support

program for very large-scale integrated circuits.”) — — —

‘(; (if> (hlrmf)}, 4’SutJsl(iy PI)lI{I(IS In Br] t:l)n. k’r:]nrc. and M’rxt (;erman~’. An ov[?rvi[?w, lnfern(l[]f~nt]l ‘1’rn(lf’ fln(~ In(fusfri[ll P[dlcle$. S. J

W’:) rn[?ck[?, cd (New York I {olmes iind Lfoler, 1978), p. 50. In 1 !374 sul>-

sl(iles t{) t hr (x);} ] ] n(i ust rk t{)t,i Imi Dkl 1,721 ml I I I (]n, m[lrc thi) n $500

mill I[m.

~ A L$’lls(]n. ‘‘Nlal(jr Strurturil] I)ifferen[’os of [he h;cl]n{]mles of the

LJ. S., (;erm[]n} iin(i }t]pan An overvit?w, < (;(mgrwsi{)n:]l R(;s[:i~r(h Scrv1111, IJ hra rv of ( h jng rw+s, (Jr t 31, 1979, p 4 7“.

“A Stcinherr, ‘“( ;I?rrni)r) Indust rr~]l an(i ltilx)r P[)l](v {In(i th(? Eur[)-

pctin (l]mmun]ti, ’ il’t~it (;rrrnf]n)r A F;urljpt’[lrl (rn(i (;l~)fNJl Pf)wer, L\r. 1,

Kohl :In(i (;. B{ IWVI, {Yis II,(>xlngtlm, hlass 1). (; flf?i]th, 1980), p. 125.

‘Between 1976 dn(i 1 ’179 ItIt’ g(]v(’rnmrnt r(’p(rrtedl} illl{)(’;lt[?(i $625

m] lll(~n rn mi~ t [’h L ng R&1) ~r<l n ts t{] ( ompi] nlrs [)ro(iu(] ng sm[ill ( ompu tt~r

svst[?ms {Irui pcrlphcrai cqulpmcnl, ‘1’h[? L’I,SI pr(jgram I:]unchwi in 1980

w I I hc furrd(?d hv $,300 m II I ]{]n I n ma t( h ill~ g( )vcrnml?n t g ri)r] ts SW LII

( r{wlm f rv]nr( \ In (IJ fhe 80 \ [ I,U ton, fingl:l n( i: \lH ckl n (I v+h P(it)lI~i] ( Ions,

I.td , Septrmtwr 197[)), pp. 51-2.

While the bulk of the government’s assistance

has gone to large companies,’” in recent years

there has been a growing effort to assist smaller

firms, of which there are more than 1,000 in electronics alone. A variety of methods are being

used; for example, the government helps to support the Venture Financing Co., a corporation established in 1975 to emulate some of the features

of U.S. venture capital markets.

BMFT has also setup a number of pilot projects

to help smaller firms. The VDI Technology Center,

for example, was established in 1976 to help

small companies develop and apply microprocessor technology. The Center now has more than a

hundred projects.

BMFT activities are extensive and diverse, In

addition to its direct sponsorship of programs

such as the VDI Technology Center, BMFT works

indirectly through trade associations. It also provides some of the funding for the Fraunhofer Gesellschaft, a nonprofit society that conducts applied research useful to industry, generally on a

contract basis. Substantial government funding is

channeled to the Gesellschaft, the BMFT providing a core of basic support, as well as contracting

or sharing costs with industry for most projects.

A primary aim is to facilitate the rapid transfer of

new technology to industry, There are 28 individual research institutes in the Fraunhofer Gesellschaft, each with its own facilities and a good

deal of autonomy. The institutes are organized on

a disciplinary basis—e. g., there are separate facilities for solid state electronics and semiconductor processing technology. Each institute has a

board of directors with strong industry representation.

In addition, the West German Ministry of

Economics supports 80 industrial research associations, Emphasizing R&D assistance to smalland medium-sized firms, these are organized

across disciplines to cover the range of technologies important to a particular industry.

Other distinctive features of West German industrial policy have been the use of regional development plans, and a strong focus on labor

issues. A Federal-La ender committee plans re-
Appendix D—Foreign Industrial Policies . 199

gional economic development. Sixty percent of the

land area of the country is now covered by the

program, which has channeled assistance to industries near the East German border and in the

Saarland coal mining region, Businesses in development regions receive incentives such as taxfree grants covering 10 to 25 percent of investment costs, loans on preferred terms, and accelera ted depreciation allowances. Land acquisition assistance is also provided to firms locating

or expanding facilities in designated areas, West

Germany has thus developed a rather systematic

approach to regional development.

The emphasis on labor concerns in West Germany is in marked contrast to countries such as

Japan where enterprise unions are common. In

1974, BLIFT and the Labor and Social Affairs

Ministry set up a joint program of research on

W Orkplace humanization, Stimulated by the

Works Councils Act of 1972, the program reflects

concern about the effects of industrial change on

both skilled and unskilled workers; it aims not

only to protect the health and safety of the labor

force, but also to encourage organizational

changes which workers themselves help to identify and implement. Oriented toward field experiments, a number of projects have focused on

effects of automation and applications of computer technology.

The labor movement is strong in West Germany

compared to Japan or France. Union representation on the supervisory hoards of corporations is

required by law, Whether despite or because of

the participation of labor in business decisionmaking as well as public policy, labor unrest in

West Germany has been remarkably low, Over

the most recent 5-year period for which data is

avail able ( 1974-78), work stoppages in the Federal Republic cost, on the average, 6 working days

per 100 employees per year. ” The corresponding

figures for other countries are: Japan, 13 days:

France, 21 days; and the United States, 48 days.

A final important element of postwar West German industrial policy has been its international

orientation. West Germany has had consistent

trade surpluses, more than half of its exports

going to other nations within the European Community (EC). The Federal Republic also carries on

extensive trade with Eastern European nations.

West Germany has clearly benefited from trade

1{{,~(,( ] r c }i /JJi 1 It(, } liIrII(IrII/r I (I(JII III IIIII h A< I I( III I)rIJq r,]r]]rl]~, {If t t]~,

1 [’[l[,r<l I hl I rlls t r-p for 1 ,it)~ )11 r <i I )( i $(1( 1(1 I \ ff, i ) r+ ,i II( i I Ilt, } ~,[i(,r<l I \l ln]~

I r~ f( jr [{(+1, < I r( II , I r]{I I (,(II IIIII I Iq } I h I( \I I 21 H I 74(,

hrl 1~11~ ( I 1{/ III( J I ( IA(, I I [ ‘~(,fiil I III)( JI \f(I(I<II( s I [ I ( ]Li [ I Nltl( III h,)~,lrl+(,l

I [0111]11 [ Irl[){ir)l’rI J(III(III I t ~ ( (,l]l(,r ~ I ‘I[i(} I [) 1 ()(1

with its neighbors, and has favored EC policies

aimed at reducing obstacles to free trade within

the community. Less progress has been made in

common EC industrial policies. An EC steel policy

has been developed and superimposed on the national policies of the members of the Community,

but the national policies are not always consistent

with those of the EC Steel Directorate. In electronics, there has been no real Community policy.

Some leaders of the West German electronics industry believe that here too a common approach—at least to problems of sudden surges in

imports from abroad—may be necessary in the

years ahead,

New Directions in West German

Industrial Policy

A distinguishing feature of postwar German industrial policy has been its “free market” orientation. combined with extensive social programs

aimed a t easing the impacts of structural change

on various groups, particularly labor, But while

the West German Government has consistently

tried to avoid strong intervention in particular industrial sectors—such as the French or Japanese

emphasis on targeted industries—over the years

sectoral intervention has nonetheless increased.

Since the late 1960’s, a number of sector-specific

programs have evolved, particularly for hightechnology industries. Such policies represent a

conscious attempt to meet foreign competition

through expanded public support for growth industries and new technologies. Thev have been intended 1argely as supplements to macroeconomic

policy.

The BNfFT programs discussed in the previous

section, in particular, have been based on the

proposition that government policies can and

should promote positive structural adjustment. In

some contrast to the industry orientation of the

Ministry of Economics and its associated industrial research associations, BMFT projects emphasize development of new and key technologies

such as semiconductor electronics important

across industries,

Sectoral programs have been the subject of

continuing controversy in the Federal Republic.

Advocates of vigorous structural policy (Strukturpolitik) contend that government Support f o r

highly competitive industries and technologies is

essential if West German industry is to remain

internationally strong and if structural change is

/ (,( Ilrlt ~lf IQL (Illfl \ 1(,(,1 111(111s ( 1 \ ( (lrll[l(’lltl~ {’rl(’~~ l)p t 1 t , t)[) (io-f)5
200 . U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

to be smoothly accommodated domestically.

While they do not call for the introduction of an

elaborate economic planning system on the

French model, advocates of Strukturpolitik believe that government actions are justified to

relieve bottlenecks and distortions in the market.

Opponents worry that government support for

targeted industries and technologies will lead to

controls on investment and ultimately to cartels.37

This dispute has been colored by partisan and bureaucratic politics and is likely to persist in the

years ahead. Fundamentally, the controversy concerns the appropriate role of the West German

Government in industry and the economy—

whether the free market tradition needs modification in a period when technological development

seems essential for maintaining competitiveness.

‘ F’{)r {] dlscussl{]n of the Strukturpcllitik dclbates, s(?(? hi, Kreile, “West

(;ermany ” The 1)~namlrs of ~~pt)nsio[}, ‘ Between power and plen (V

F’t)rf,ign fk~mtml]c P(JII[ J(,S of Adv(]n{d lrl(iu~ tr]ftl St{] (es, P. Katzenstein. t?d. ( hlad is[)n. W’ 1s, Univers i t!, of L\’isr Onsl[l Press, 1 978), pp.

220-22,

Index

a Rgrega Ie p[)lic ies. 158. (Stw f]ftt J Gwernmen 1 p[)l iri[?s. )

Air E’orre mt)lecular elertroni(-s program, 117

:]llo~ specialty steel industr~. 9, 32.75

tilternative fuels. 143

Amerir[~n hlolors, 44, 147

:1 n I idumping policies. (See dumping. )

an Ii I rust pol icie<s, 117, 155, 175, 184-lf35

Approprlalions” (;ommit t[?e. [ 1OUS(?. 162

Appropria IIons (hjmrnit te[?. Sen:] le. 162

A’I’&”I’, 117

{1 U t t)mohl Ie i n(ius I t-v

C( )mp[? t i t ive s I [~ t us, 14-16, 31, 104-105

[;oncen t ril t Ion, 42-43

dem:]nd projerlions,” 140-141

d(]mcstir h(mndaries d[?fined. 33-34

[?mpl(wmen t, 95

futur[? rompet itiveness, 127, 143-148

a nd ,gt~sol i ne pr i(’es, 1 18-120

and h ig hwt~ v r[ms t ruc I i(m, 120

Japanese exp[?ri(?nre, 15-16,95-99

markets, 4.’]-44

pr[durt differ(?nli{] t ion. 44

pr(jductl(m [ind s:]]es d<] t:~. 53, 92-95

prtxiuclivitv, 55.57

pr(xiucts defined, 33

{i nd regula t ion, 44. 120-123

size, 42

sma I 1 ra r s t ra tegies, 99-102

tcrhnolt)giral inn(w[~t]on. 141-143

W“tl~eS, 59, 60

Banking (l]mrnlttee, I louse. 162

B:]nklng (:t)mmi t t[?e. S(?ni] to, 162

Bell l,:~hor;itories,” 40, 116, 117

B1, I.td., 146

Br:lzll. 75, 132

Budgel (~ommi t t[?e. Senate, 162

Bur(?au of Industrial Eron[)mlrs. 163

(~AD ((’omp~lt(:r-:~l[l[?(i design). 87

(Linad[~. 71

(’;~pit:~l mark(?ts. 105

:)nd automt)biif; industr~. 144

;] nd C~ove rn men t p{)] irles, 139, 176-177

:1 nd s tee] i ndus t r}’. 1 1 1-1 12

rapltal plant! 31

capital requirement ts. 46

:] u tomohi le i ndus t rv. 101. 144

Japan (?s[? expf?ricnce. 89

semiconductor” induslr}. 40.88-89, 138

steel industrl’, 132-133

Carler. Jimm\, 132.185

Chri’sler (l)rp.. 43,44, 94, 101.120.146, 147

COmmerre C0mmittef3. House. 162

Commerce (l)mmittee, Senate. 162

Commerce Department, 73, 156, 159, 160

cornpet it iveness

capital markets and. 105

([)nr[?pt (iefln{?ti. 25, 16(L 174

dt!(’llne in, 25-26. 105-106

er(mt~m ir grow t h [1 n(i, 127. 128

findings summtlrlzmi. ,1-4

Indic[] Iors of. 49, 65. 17.3-174

in fluenr(?s t~n. 6!1-70

prfxlu[’tivil}r ;]n(]. 54-58.61

pr[xiurl reli{lhilll~ ,in(t, ,18

s t u(j \ I )I)le[ I i ~’[;s : ] }1[ j S( I )p(”. 2,1-24

1[:(’tlrlologi(:)l” i!llll)\’il( 1011,1 Il(i, tj 1-65

tr:~de Ixll:in[w ,lll(i, 50-54

w :Ig(!s and. 58-60

SW IIIS(I spt?(l f]( il](lusl rl(~s

(’ompu ter in(illst rl

[i n(i :) n I i t rus t p( )1 I ( ‘I(; s. 1 1 7

:) n(i rt m m un lr:l I i( )n r[!,~u I,] t I ( )11s, 1 17-1 18

([)mpet i tiv[: s t{) t us. -11, 8!)-90. 1 ()-l

(Iemil nd pro](;(’t ions, 1 ,1+ 1,15

J,ip:] nese ~?xperlt?n((;, 8W1O

mii rk[?t st rurt urt?, 41-42

pr[du(’tivit}’. 55

pro(iu(ts (iefintxi. :11

tt?c}lrll)logif;il lt?tels. 1.17

t r:)d(? p:~t tt?rns. 52

Sfw (IIw) elert r[)nl(w Indust r~

ronrwl t ra t ion

:i u t{ )mt)hi Ie I ndus t rv. 42-4.1, 146-14 i’

s [eel in(ius I r}’, 35

ronfl ir t of in teres I l:) ws. 187

(h)ngrt?ss. (Set’ (lt]vernmt?nl pt)il(i(’s. ]

r(~nsu mer eltx t r( )n irs i ndus I rv

dem:~nd prtq[?rt ions, 1.34

import p[?net r:itlon, 51, 76-77. 10.]

mt~ rket sh; l re p:i t t[?rns. 37-38, 80-82

overs(:as pr{)(lurt Ion. 77-78

prtxiurtlon rests, 79-80

prlxjuctlviti’. 56.57

pr[xiurts (iefined, .13

rt?se;~ rrh :1 nd d[?velt)pm(?n t, 79, 115-116

and trade pr( ) tert I( m, 1 14-1 16

W:i~tX, 59, 60

SmI (IIS(I t?lect ronirs ln(iusl rt

rt)nsurnpt ion (sales)

au tom[)hile indust r~, 14. 16. 92-95, 140-141

elert t-on]cs industr}, 134-135

steel lndustr~, 1 1, 75-76, 103, 129

copyright pollcv. 117

Corporate Average Fut?l Erontmlv [(; AF’E) st{~nd:~rds. 119, 122

144

rt)sts. (See production rt)sts, )

r[wts and hen(?fi ts ana]}s]s. 180-181

(l)unril of Ilconomir Advisers, 154

Datsun, W, 146

Def(?nsc Departm[?nt. 88.156.163.188

demand. (See ronsumpti(m )

deprerlalion srhedult?s, 113, 132. 139, 146

dumping

203
—

204 . U.S. Industrial Competitiveness —A Comparison of Steel, Electronics, and Automobiles

consumer electronics, 78, 114-115

steel, 9-10, 31, 36-37, 72-73.103

trigger-price mechanism, 73, 112, 131, 179

Economic Development Agency (EDA), 112, 155

economic growth

and competitiveness, 127, 128

and steel consumption, 103

Education and Labor Committee, House, 162

electric vehicles. 143

Electronic Industries Association, 114

electronics industry

competitive status, 12-14, 31, 91-92

domestic boundaries defined, 33-34

future competitiveness, 127, 133-134, 137-140, 147-148

and Government policies, 114

technical personnel shortage, 90-91

See ULSW computer industry: consumer electronics industry:

semiconductor industry

emission standards, 120- I 21

employment

automobile industry, 14, 16, 95

consumer electronics, 77

and productivity, 4, 11, 12, 26, 103

steel industry, 74-75

Energy Department, 156, 163, 188

energy policies

gasoline price controls, 118-119

and steel industry, 113-114

Energy Policy and Conservation Act, 119

Environmental Protection Agency (EPA), 120, 188

environmental regulation

and automobile industry, 120-122

and competitiveness, 17, 154

and steel industry, 10, 37, 113-114

Environment and Public Works Committee, Senate, 162

Europe

automobile industry, 141

See OISO dumping

exchange rate effects. 73-74. 173

Fairchild, 82,88, 116

Federal Advisory Committee Act, 187

Federal Reserve Board, 154

Federal Trade Commission, 160

Fiat, 146

Finance Committee, Senate, 154.162

financial disclosure laws, 187

Ford Motor Co., 43,44,94, 101, 120, 122, 141, 143, 146, 147

Foreign Affairs Committee, House. 162

Foreign Relations Committee, Senate, 162

France

GDP growth, 61

industrial policy. 193-196

Freedom of Information Act (FOIA), 186-187

fuel economy, 99-101.121

Fujitsu, 90

gasoline prices, 118-120

General Agreement on Tariffs and Trade, (GATT), 73, 186

General Electric, 79,80

General Motors, 43,44.101, 120.122, 141.146, 147

Government in the Sunshine Act. 187

Government policies

and automobile industry, 16, 44.94, 101, 118-123. 146

as causing market imperfections. 179-180

and computer industry, 117-118

costs and benefits analysis, 160, 180-181

and electronics industry, 114

French experience. 193-196

industrial policy, 7-8, 151-152, 157-158

Japanese experience, 190-193

legal constraints, 183-189

legitimate function of, 3, 26-27.180

macroindustrial policv, 8-9.20. 160-165

market failure as rationale for. 175-179

overview and evaluation. 3-7, 17-20, 109-110. 123, 152-157,

165

political context underlying, 158

prerequisites for industrial pt)licl. 159-160

research support. 116-117

and steel industry, 9-10, 37. 111-114

west German experience, 196-200

Great Britain, 61.75

gross domestic product (GDP), 61.128

gross national product (GNP). 23

ratio of exports to. 50

highway construction.” 120

Hitachi, 90

Honda. 43.99

IBhl. 40, 41, 82, 90, 114, 117, 176

ICs ( integrated circuits). (SW s~;nli(()[](i~](’l[)r In(iusl ri. )

import penetration

a u tomobile incius t ry, 92-95

consumer electronics, 12.76-79

international Irade fl{)m’s. 49-54

import quotas. 181. (See (Iis{J I rade p[)iiclw+, )

industrial policv. (See G(wernnleo t policies, )

in tegra ted steel indust rv, 9, 32. (SW ~Ils[)s I eel Indus t r!. )

integration. 40, 44.80, 88

Intel, 82

International Iron and Steel lnstitut~?. 133

International Track Commission.” 73, 115, 160, 163-164

Intersil, 88

investment st imula t i{)n. (S(?e ti] x p[)li(’ies. )

Isuzu, 147

Japan

au tomobiie i ndus t rv, 15-16, 57-58, 95-99. 141

computer indust rv. 89-90

consumer electronics lodust rv, 77-80

c?xports GNP ra tie. 50

GDP gr{w [h, 61

industrial policies, 89. 139, 190-193

research and dew?l{)pment, 63.64

steel pr(ducti[)n costs. 73-74, I 03

\~I,SI program, 83-85

wag(? I rends. 60
Index . 205

Joint Committee on Taxation, 154

Joint Economic Committee, 154, 162

Labor and Human Resources Committee, Senate, 162

labor costs, 15.97. (See also production costs.)

Labor Department, 160, 163

labor market imperfections, 177-179

]egal issues, 183-189

]icensing fees, 64-65

]oan guarantees, 26-27, 112, 146, 155

Lockheed, 82

macroeconomic policies, 153-154. (See also Government policies. )

macroindustrial policy. [See Government policies. )

manpower, 90-91, 117, 139

manufacturing costs. (See production costs. )

market

failures, 175-180

Japanese strategies, 95,99

shares, 80-82, 155

structure, 41-42, 44

See also capital markets

Mexico, 71, 75

microcars, 143

microcomputers, 41, 136

microprocessors, 39, 87, 136-137

military research, 63-64, 116-117

minicomputers, 41

minimills, 10

Mitsubishi, 90.1.47

molecular electronics, 117

Nlostek, 88

hfotorola. 77,82,88

Multilateral Trade Agreements (MTAs), 139, 186

National Aeronautics and Space Administration, 156, 163, 188

National Highway Traffic %]fety Administration (NHTSA), 120

National Productivity Council, 163

National Science Foundation, 156

Nippon ‘1’elegraph and Telephone Public Corp., 116, 139

Nissan. 122

nonintf?grated steel industry, 9, 31, 32.35

occupational safety. (See workplace health and safety. )

Office of Management and Budget, 154

Office of Science and Technology Policy, 156

OPEC, 119

Orderly Marketing Agreements, 37, 51, 76.115, 179

overseas production, 77-78

ownership of techn[dogy. 188

patent policy. 117, 188

Peugot-Citr[)en, 146

prices

controls, 110

steel industry, 70-71

product differentiation, 46

a u Iomohi ] e i ndus t r}’, 16, 44, 148

Japanese automobile” industry, 15

steel industry, 34

production costs

automobile industry, 15

Japanese experience, 73-74,79-80,97.103

semiconductor industry, 39

steel industry, 35-37, 73, 129

televisions, 78

productivity y

automobile industry, 14

and competitiveness, 49, 54-58, 61

and employment, 4, 11, 12, 26, 74-75, 103

Japanese experience, 57-58,98

product market imperfections, 176

profitability

semiconductor industry, 40

steel industry, 37

protectionism. (See trade policies. )

public policy. (See Government policies. )

quality, 38,41.79, 87

quotas, 181. (See UISO trade policies. )

radios. (See consumer electronics industry; electronics industry. )

RAM [random amess memory). 54,82, 136

RCA, 65, 79,80, 114, 138, 170

reference prices, 112

regulatory policies. [See environmental re~ulation. )

reliability, 38, 41, 77-79, 87-88

Renault, 146, 147

research and development

and antitrust laws, 176, 184-185

and competitiveness, 61-65, 171-173

consumer ele~lronics, 79, 103

ownership issue, 188

semiconductors, 40

steel industry, 35-36, 103, 132

stimulation of, 138-139, 156, 164

road construction, 120

Rockwell, 82

royalties, 64-65

safety standards, 121. [See OISO workplace health and safety. )

Science and Technology Committee, House, 162

sectoral policies, 157. (See UJSO Government policies. )

semiconductor industry

capital requirements, 40, 88-89

captive production, 82

competitive status, 103-104

cost savings, 39

demand projections. 134

foreign competitive efforts, 82-84

integration, 40, 88

productivity, 55-56

product reliability, 41,87-88

products defined, 33

research and development, 40, 116-117

technological] levels, 38, 84-88, 136

trade pat terns, 51-52, 54

Sec also electronics industry
—

206 ● U.S. Industrial Competitiveness—A Comparison of Steel, Electronics, and Automobiles

Sherman Act, 184-185

Small Business Administration, 122-123

Small Business Committee, House, 162

software, 88, 90, 117, 137

Solomon, Anthony, 112

Solomon Plan, 112-113

Sony, 78, 115

South Korea, 11,51, 75, 115, 133

Steel Caucus, 162

steel industry

capital plant, 31

competitive status, 9-11, 102-103

concentration, 35

demand patterns, 75-76, 129

and dumping, 31, 36-37, 72-73

employment, 74-75

and exchange rate fluctuations, 73-74

future competitiveness, 127, 129-133, 147

import penetration, 51

price behavior, 70-71

price controls, 110

production costs, 35-37

productivity, 55, 57,65

and regulation, 113-114

sectors and products, 32, 34

and technological innovation, 35-36

Third World capacity, 133

trade protection, 111-113

wages, 59, 70, 71

Steel Tripartite Advisory Committee, 113, 159

Sumitomo Metal Industries, 36

supply and demand, (See consumption.)

Taiwan, 51, 115

tariffs, 181. (See U]SO trade policies, )

tax policies

and automobile industry, 144-146

and competitiveness, 17, 153-154, 164

and research stimulation, 138-139

and stee] industry, 113, 132

technical personnel, 90-91, 117, 139

technological innovation. (See research and development. )

technological levels, 46

automobile industry, 96-97, 141-143

electronics industry, 84-88, 135-137

steel industry, 36

televisions. (See consumer electronics industry; electronics industry. )

Texas lnstrumenls, 80, 82,88, 116

Third World. 133, 141

Toshiba, 90

Toyo Kogyo, 147

0

Toyota, 99, 122, 146

trade adjustment assistance (TAA), 155-156, 164

Trade Agreements Act of 1979, 162-163

trade policies

automobile industry, 95, 143-144

and competitiveness, 17, 154-155

electronics industry, 114-116, 139-140

legal constraints, 185-186

protectionism, effects of, 181-182

steel industry, 9-10, 111-113, 131

Trade Policy Committee, 163

Treasury Department, 115, 154, 160

trigger-price mechanism (TPM), 73, 112, 131, 179

truck industry, (See automobile industry. )

Truman, Harry S., 110

turbocharged engines, 143

unemployment. (See employ merit.)

United Auto Workers, 143

Urban Development Administration Group, 155

U.S. Steel. 35, 36

value-added, 44

value-to-weight ratio, 36, 41

VHSIC (very high-speed integrated circuit), 88, 116-117

video cassette recorders, 37, 79

video disk players, 37, 79, 138

VLSI (very large-scale integrated circuit ), 83-85,88

Volkswagen, 43,92, 99, 122, 146

Voluntary Restraint Agreements (VRAS), 111-112, 179, 185

wages

and competitiveness, 49, 58-60

Japanese experience, 60

steel industry, 70, 71, 102-103

Ways and Means Commit tee, House, 154, 162

Western Electric, 40,82, 176

West Germany

GDP growth, 61

industrial policy, 196-200

research and development, 63, 64

Westinghouse, 82

workplace health and safety

and automobile industry, 121

and product ion costs, :37

and steel indusl ry, 113-114

world car, 16, 148

Xerox, 170

Z[?nit h, 80