THE SEMICONDUCTOR INDUSTRY AND FOREIGN COMPETITION
by Eugene Volokh, VESOFT
Published by CATO Institute, POLICY ANLYSIS, #99, Jan 1988.
Perhaps the most disquieting aspect of the troubles presently faced
by America's semiconductor industry is that high technology was the
very area in which the United States was *supposed* to be superior.
When the automobile and steel industries were in deep trouble in the
late 1970s and early 1980s, pundits predicted that the future of
American industry lay in "sunrise industries," high-technology fields
where the cheap labor available to foreign competitors would be more
than compensated for by our Yankee ingenuity.
Unfortunately, it seems we Yankees do not possess a monopoly on
ingenuity, for the Japanese semiconductor industry has proven very
competitive. In one particular area -- the production and sale of
general-purpose memory chips, so-called DRAMs (Dynamic Random Access
Memory) and EPROMs (Erasable Programmable Read Only Memory) -- the
performance of American companies has been disastrous. In 1975, U.S.
merchant producers (companies that make chips to sell to others rather
than just for their own internal use) had 100% of the U.S. DRAM
market. In 1986, they had 5% of that market. [1] When all chips sold
by merchant producers are taken into account, the U.S. producers'
market share declined from 60% in 1975 to less than 50% in 1985, while
the Japanese share rose from 20% to 40% in the same period. [2]
Naturally, such a loss of industrial competitiveness and the
accompanying losses in employment quickly turned the issue from a
private one to a public one. In 1983, the Semiconductor Industry
Association (SIA) published a report that accused the Japanese of a
variety of unfair trade practices [3]. In 1986, the U.S. and Japan
signed the Semiconductor Trade Agreement, under which the Japanese
promised to take steps designed to alleviate the plight of American
chipmakers. In February 1987, the Department of Defense's Defense
Science Board issued its "Report on Defense Semiconductor Dependency,"
which asserted military reasons for protecting and strengthening
America's semiconductor industry; and, finally, in April 1987, in
response to Japanese violations of the 1986 Semiconductor Trade
Agreement, the U.S. government imposed trade sanctions on Japanese
imports; and, currently, the congressional trade bill would authorize
$500 million over the next five years to finance Sematech, a
government-industry research consortium to develop new semiconductor
manufacturing techniques, a proposal advanced by the SIA and then by
the Defense Science Board.
This, of course, is not the first time foreign trade and
protectionism have been discussed in the United States, and will
certainly not be the last. In a democracy, it is inevitable that
whenever one segment of society feels put upon by forces it believes
are outside its control, it will petition the government for help; and
there might well be some cases where a hands-off approach to
international trade is not the best solution. However, before the
United States embarks on a new round of trade protectionism, it should
first investigate where the true interests of the nation as a whole --
not just semiconductor manufacturers -- lie.
Us vs. Them
"We don't want [a U.S. - Japanese trade war] and the Japanese
certainly don't want one," said the late U.S. Secretary of Commerce
Malcolm Baldrige. "Japan sells about $85 billion worth of goods to the
United States in a year, while we sell about $27 billion to the
Japanese. Who has the most to lose?" [4] This presented, of course, a
classic mercantilist question and Baldrige clearly implied that the
party with the most to lose was Japan -- that the U.S. trade deficit
with Japan indicated that Japan was somehow getting the better end of
the deal.
Mercantilism, however, is not a highly regarded economic theory
these days, and has not been for about 200 years. The classical
mercantilists measured a nation's wealth by the amount of gold --
these days, it would be by foreign reserves -- that the nation
possesses; when the United States buys $100 million of goods from
Japan, the U.S. "loses" $100 million and Japan "gains" it -- the U.S.
wealth is decreased and Japan's is increased.
Classical economists, starting with Adam Smith, successfully
challenged mercantilist analysis by pointing out a simple fact: an
informed voluntary trade is, by definition, to the advantage of both
parties involved. This is a cliche, but a cliche is merely an
often-repeated truth, and this truth is worth repeating. The U.S.
doesn't really "lose" $100 million by trading with Japan; it exchanges
$100 million for some amount of goods, an amount that is clearly worth
more (to the American purchasers) than $100 million. Similarly, Japan
does not "gain" $100 million from the trade -- it gains $100 million
minus the value of the goods to itself. Both parties gain, or else
they would not trade. A cash trade "deficit" usually turns out to be a
wealth surplus, since the dollars we give up are more than offset by
the goods we get in return.
On the microeconomic level, when a Japanese chipmaker sells chips
to an American chip user (typically a computer manufacturer), the
American clearly gains by getting a better deal than he otherwise
could; cessation of international trade would certainly hurt the
American computer maker a great deal, since it would drive up its
costs and thus its product prices, and drive down profits. One third
of the total production cost of a microcomputer is in the chips [5].
This is why it is useless to speak of which trading partner has the
most to gain from trade and which has the most to lose. Japan's gains
and the U.S. gains are hard to compare, since they are largely
subjective, reflecting the value that each places on the goods that
were sold; suffice it to say that both sides gain, and gain rather
handsomely indeed.
In fact, it appears that in the short term, chip consumers may gain
more than chip producers. Chip producers -- American as well as
Japanese -- have been having an unprofitable streak recently,
suffering hefty losses while their customers have been raking in the
benefits in low prices. Although this is unlikely to remain a
long-term trend (economics teaches us that people rarely sell things
at a loss for long), these days our cash trade "deficit" in the chip
trade might actually mean a "surplus" in the total amount of wealth
being exchanged. This is important because it is tempting -- and, to
some parties, profitable -- to label the current trade situation as a
case of "Us vs. Them," with "us" being the United States (the good
guys) and "them" being Japan (the bad guys). The trouble with this
idea, though, is that at least some of "us" -- the chip consumers --
benefit as much as "they" do from low Japanese chip prices. The real
losers are American chipmakers, who are seeing themselves being
undercut by Japanese competition. Japanese competition is not "bad for
America"; it is bad for some Americans and good for others.
"Unfair" Competition
Naturally, U.S. chipmakers are not willing to simply complain that
the Japanese outcompete them. The American public has little patience
for companies that are failing just because they cannot do as good a
job as the next guy. In fact, the Semiconductor Industry Association's
1983 report concentrated on several specific allegations of "unfair"
competition:
* Dumping. The Japanese are said to sell their chips at below cost
to the U.S., thus forcing American chip manufacturers to take
similar losses just to say even.
* Government Targeting. The Japanese have the benefit of government
subsidies (from the infamous Ministry of International Trade and
Industry, or MITI) which American chipmakers do not receive, so
the game is not being played on a "level playing field."
* Import Restraints. While the Japanese merrily export chips (and
other things) to the open U.S. market, they stubbornly refuse to
let American exporters return the favor.
The great thing about being in favor of fairness is that it is, by
definition, so hard to oppose. When a presidential candidate campaigns
on a platform of fair trade, how could anybody disagree with him? What
would be the alternative, "unfair trade"?
Still, before launching a crusade for fair international trade, we
must ask ourselves a few key questions:
* Are the trade policies in question really unfair?
* Do these trade policies contribute substantially to the American
producers' woes?
* Even if these trade policies are unfair, could we not profit from
them?
* If we find that we do want to do something about Japanese trade
policies (whether or not they are fair), will our planned actions
actually bring about the desired results?
The answers to these questions are by no means obvious.
Dumping
The dumping issue has surfaced with a vengeance in the
U.S.-Japanese "voluntary" Semiconductor Trade Agreement of August
1986. Prior to the agreement, U.S. authorities had declared the
Japanese guilty of selling chips *below cost*, with the intent of
driving American competitors out of the market and then recouping
their losses using their "unfairly won" market share. In response,
Japan agreed to a "worldwide minimum price for Japanese chips
determined by the U.S. government" [6]. Note the adjective "worldwide"
-- Japanese exports to other countries, such as Europe, South Korea,
etc. would be controlled by this agreement just as surely as exports
to the U.S.
Now, let us defer for a moment the allegation that dumping is
"unfair" -- we will get to it shortly. Is Japan's sale of chips *below
cost* to American firms actually harmful to American interests? The
mercantilist would, of course, say yes. Mercantilists consider any
successful competition by a foreign producer to be harmful. If the
foreign producer happens to be unrestrained by considerations of cost,
that just makes it all the more likely that the producer can compete
successfully.
The trouble with the mercantilist view is that it considers only
the interests of the American chip producer. The American chip
consumer, on the other hand, is more than glad to buy chips for less
than they cost to make. Just as any low-priced competition is bad for
the producer (whether it is "fair" or "unfair"), so it is good for the
consumer. An American computer manufacturer does not really care how
much it costs the Japanese to produce a silicon wafer; he has his own
competitors to worry about, and he will profit from any price decrease
in his product's components, whatever its origin.
Looking at things from a macroeconomic point of view, the situation
looks even better. Suppose that the Japanese are selling the United
States $100 million of chips that cost them $125 million to make.
Presumably, to the American chip consumers, the chips are worth $150
million (or some amount greater than $100 million, or else they would
not be buying them). In terms of net change in wealth -- factoring in
both cash and product value -- Americans gained $50 million and the
Japanese actually *lost* $25 million. Both American gains and Japanese
losses are greater than what they would be if no dumping took place.
Admittedly, this is a crude model, but seemingly the only reasonable
one -- how can the Japanese (or anyone, for that matter) at all profit
from selling a product below cost?
But, the anti-dumping argument goes, the consumer benefits from
foreign dumping are only short-term, to be followed by long-term
disadvantages caused by dumping's destruction of the domestic
competition. Dumping, it is said, is actually "predatory pricing," in
which dumpers sell products at artificially low prices, drive the
competition out of business, and then take advantage of their monopoly
position to recoup their losses by charging exorbitant rates.
Certainly, if this were true, we might well be justified in forgoing
the short-term advantages of dumping in order to avoid the long-term
harm from the imminent monopoly.
But this just is not true. Predatory pricing is a theoretical
bugaboo with no real possibility of practical manifestation. It
requires more than just an establishment of a monopoly (which is
itself a hard proposition, considering the losses a firm has to incur
to get it) -- it requires retention of the monopoly even after prices
are raised.
Once the Japanese manufacturers, at great cost to their
pocketbooks, destroy the American chipmakers and start charging
monopolistic prices, what is to prevent a would-be competitor from
undercutting them? Certainly there are entry costs, but they may be
more easily borne by the would-be competitor than the dumping costs
incurred by the would-be monopolist. Furthermore, there are plenty of
"captive producers" in the domestic market who produce chips but
simply do not choose to sell them to others [7]; if someone tries to
charge monopoly prices, the captive producers can easily jump into the
fray with little start-up costs (Western Electric, for example, tried
to use its "captive" chipmaking ability to sell to the commercial
market in 1983 -- an arguably bad time to do this [8].)
But, finally, let us even assume that not a single chipmaker or
would-be chipmaker remains on American shores. It is a capital error
to assume that the Japanese are somehow a the monolith Japan, Inc.,
able to monopolize anything in every way. Even the Defense Science
Board report, while maintaining that Japanese chipmakers often
cooperate in R&D, acknowledges that "In the application of resulting
technology to products [chips], the [Japanese] companies compete
fiercely" [9]. To really profit from predatory pricing, the fiercely
competing Japanese companies would have to organize a cartel to keep
prices artificially high. But the only people guilty of even
contemplating any sort of semiconductor industry cartel these days are
the American chipmakers and the American government.
If the Japanese are not dumping for predatory pricing's sake, why
are they dumping at all? There must be some reason for anything as
silly as selling something below cost.
There is indeed a reason, and it is hardly as sinister as the
protectionists would have us believe. According to one observer,
"Japanese companies were accused of selling below what the
anti-dumping laws call 'fair market value,'" which is based on
"average rather than marginal costs" [10]. Say that company A spends
$100 million to build a plant and another $100 million on R&D for the
basic chip design. It then produces 50 million chips a year, each
costing $1 to make (raw materials, labor, etc.). What is the cost to
be used for fair market value calculations? If the initial investments
are depreciated over 5 years, it would cost $90 million
((100+100)/5+50) per year to produce 50 million chips, an average cost
of $1.80 each.
Unfortunately, though company A may have definitively calculated
the "fair market value" of a chip at $1.80, it may have a hard time of
getting the market to agree. Prices are, of course, determined not
just by the supply curve but also by the demand curve; if the
customers are not willing to pay more than $1.25 for each chip, the
company will be hard put to make them pay more (unless, of course, it
can get the government to enforce a Semiconductor Trade Agreement).
What is more, there is nothing unfair or unreasonable about selling
each chip for $1.25. The firm still makes a profit of $.25 on each
chip sold, because it only costs me $1 to produce that chip. It may
take more time to recoup the original investment this way, but as long
as the price is higher than the *marginal cost*, it is a sound
business decision to keep selling. (Prices below *average cost* might
call into question the soundness of the original decision to get into
the business in the first place, but it is too late to do anything
about that once the fixed costs have already been paid.)
Other perfectly good reasons can be supplied for selling chips at
below what one might think to be the "cost." Boom-bust conditions,
endemic in the industry drive prices down below average cost [11];
chip obsolescence, which happens every few years, does the same.
Another reason for below-cost sales is to liquidate large surpluses --
products that are already on the shelf and that must be gotten rid of
at any price, even below marginal cost [12].
The bottom line is that "dumping" is just a pejorative name for a
variety of perfectly sound, fair business practices that are actually
beneficial to American consumers.
Japanese Governmental Subsidies
A more serious fairness issue that has been raised by critics is
that the Japanese chip producers supposedly enjoy governmental
subsidies that U.S. chipmakers do not have. Therefore, U.S. chipmakers
cannot possibly compete without matching subsidies of their own,
whether they be direct payments or some sort of artificial price
supports.
One would not want to argue that the Japanese subsidies were a good
thing. In fact, one of the troubles with subsidies is that they tend
to reproduce at an amazing rate, with each nation creating subsidies
to offset other nations' subsidies and each industry demanding
subsidies of its own whenever it is seen that the government is
willing to subsidize some other industry.
However, the questions we must ask are:
(1) What exactly has the scope of Japanese subsidies been?
(2) Are Japanese governmental subsidies really bad for America?
In the recent debate over protectionism and industrial policy, the
name of Japan's Ministry of International Trade and Industry (MITI)
has acquired an almost mythical status. Both industrial policy
advocates and protectionists have sought to explain much of Japan's
economic success as a result of MITI's intervention -- the former to
justify a comparable American industrial policy and the latter to
justify American retaliation in the name of "fairness."
The facts, however, do not justify this point of view. According to
David Henderson, former senior staff economist with the president's
Council of Economic Advisers, "The idea that central planning is
responsible for Japan's success is a myth. MITI has made no
contribution to many of Japan's biggest industrial successes." [13]
In fact, in the late 1970s, only 28% of Japanese R&D expenditures
(including defense) was paid for by the Japanese government; at the
same time, 48% of U.S. R&D was government-funded. [14] In the computer
industry, Japan spent $127 million in the 1976-82 period while the
U.S. spent $279 million in the shorter 1978-82 period. The Japan
Development Bank's low-interest loans to the electronic machinery
industry in 1982 were equivalent to less than 0.5% of the total plant
investment by the industry. [15] The Semiconductor Industry
Association's report indicates that in 1978 (the last year for which
it provides figures), MITI's semiconductor industry subsidies were
$45.7 million -- but equipping a single production facility can cost
up to $75 million. [16]
Note that the Defense Science Board's report recommends that the
Department of Defense (DOD) spend $400 million per year to stimulate
the U.S. semiconductor industry. [17] According to one study, "When
American negotiators complain of the Japanese joint research ventures
in electronics, the Japanese quickly point to the Defense Department's
VHSIC (Very High Speed Integrated Circuit) program. Even the
production equipment developed for this program will not be permitted
to be sold abroad. . . . We claim that the purpose of such defense
programs is not commercial development. Whatever their purposes, our
trade partners retort, these policies have commercial commercial
consequences and must be considered when negotiating." [18] The very
existence of the vast U.S. defense establishment (much bigger than
Japan's) guarantees that much high-technology research would be
subsidized by the DOD. Our slate is hardly clean in the area of
government subsidies, especially when one considers how small MITI's
and the Japan Development Bank's aid to Japan's semiconductor industry
has really been.
In fact, whatever subsidies the Japanese government has provided in
the past have had hardly the effect that the protectionists and the
subsidy enthusiasts claim. It is certainly not clear that the
subsidies actually helped Japan's economy; in fact, the evidence
points to the contrary.
If the Japanese government chooses to give, say, $100 million to
the Japanese semiconductor industry, there is no doubt that the
industry will be helped. By using that $100 million to pay for what
would otherwise be $300 million of semiconductors, the industry can
now profitably sell them for, say, $250 million (while at the same
time, even equally productive American competitors would have to
charge $350 million to make the same profit).
We may concede that American chipmakers will not like this state of
affairs (just as they would not like it if the Japanese managed to
sell chips for $250 million without any government help). However, the
buyers naturally have an entirely different opinion. The $100 million
Japanese government subsidy actually goes directly into the American
chip buyers' pocket! Without the subsidy, the American buyers would
have had to pay $350 million. With the subsidy, they only have to pay
$250 million. The Japanese manufacturers still make the same $50
million profit, with the Japanese taxpayer footing the bill -- and
there are more American companies buying computer chips than making
them.
On a macroeconomic level, the picture with subsidies is the same as
with dumping. Americans acquired $350 million of wealth for $250
million cash; the Japanese acquired $250 million cash but had to give
up goods that cost them $300 million to produce. It appears that the
U.S. is the real beneficiary here, not Japan; in fact, if these are
the real terms of our trade, then the answer to Secretary Baldrige's
question -- "who do you think has the most to lose from a cutoff of
trade?" -- is emphatically the U.S.
Government subsidies are not a good idea, either for the Japanese
or the Americans. Though they do indeed help those being subsidized
(which includes both Japanese producers and American consumers) they
are economically foolish for the subsidizing government and are
cruelly unfair to those trying to compete on their own.
However, in our quest for "fairness" we should neither overestimate
the level of Japan's subsidies (which is relatively small) nor ignore
the money that the U.S. government is pouring into the American
semiconductor industry through lucrative defense contracts (many of
which cannot even be bid on by foreigners). Neither should we ignore
practical political considerations. What subsidies the Japanese
government does provide are -- like all subsidies -- politically
entrenched and thus very difficult to remove. Imagine for a moment
that a foreign competitor demanded that the U.S. government stop
subsidizing its farmers. The U.S. government, American consumers, and
foreign competitors would all benefit from abolition of subsidies, but
the chances of this are slim. In fact, if we impose our own subsidies
to "counteract" Japanese subsidies, we will surely have as hard a time
removing them as we would convincing the Japanese to remove theirs.
Japanese Import Restraints
One other thing that the Japanese have been accused of doing is
shutting their markets to American exporters. To the extent that the
Japanese do this -- and they do -- their protectionism is every bit as
counterproductive as that which is now being proposed for the U.S.
However, the key questions are, first, whether there really are import
restraints in the semiconductor industry, and, second, how large a
role they play in the troubles of U.S. chipmakers.
The Semiconductor Industry Association's 1983 report discusses
alleged Japanese import restraints as well as Japanese government
subsidies. One of its recommendations, in fact, is that
the U.S. government should insist that U.S. semiconductor firms
receive commercial opportunities in Japan that are fully equivalent
to those enjoyed by Japanese firms. . . . U.S. firms must receive
real, not "cosmetic" market access, reflected in significantly
greater participation by U.S. firms in the Japanese market. *This
will require an affirmative action program* to normalize
competition in Japan. The Japanese government should establish
programs to see that this result is achieved. (emphasis added) [19]
However, while the report produces evidence that U.S. semiconductor
firms do not have a large market share in Japan, it offers no evidence
that this is caused by Japanese government restrictions on imports.
Consider the report's limp analysis:
This low share [12% of the market], coupled with Japan's history of
import restrictions, suggests that barriers to sales of foreign
semiconductors remain. [20]
Neither the SIA report nor any subsequent publications have documented
substantive import barriers, i.e. real, government-enforced barriers,
rather than individual preferences (however irrational) on the part of
Japanese consumers. Furthermore, the measures proposed by the report
are futile almost to the point of being dangerous. The "affirmative
action program" recommended by the report -- and then echoed in the
1986 Semiconductor Trade Agreement, which "called for . . . U.S. chip
makers to get more than their current 10% share in the Japanese
market" [21] -- is not something that is easily forced on a sovereign
ally. How exactly do we force Japanese chip purchasers -- not "Japan,"
but private citizens, free to buy what they please -- to buy American
chips simply in order to boost American companies' market share? This
"affirmative action" is one of the most irrational economic policy
proposals imaginable. It requires massive government interference in
corporate purchasing decisions and guarantees sales to firms that have
been unable to earn them; all in all, a very poor incentive system.
In fact, there are a lot of good reasons why in a market free from
government import restraints American producers might fail to make
headway. First, even discounting transportation costs, salesmanship
does not travel well. Obviously, a Japanese salesman will do better at
selling to Japanese just because he knows the market better
(incidentally, the years of American trade superiority have
undoubtedly taught the Japanese salesman to know even the American
market better than Americans know the Japanese). Second, many Japanese
companies consume more of their own chips than do most American
"merchant suppliers." [22] Finally, there is, no doubt, some simple
chauvinism at work. But considering the recent campaign in the United
States to "Buy American" -- a campaign supported by state and federal
legislation, not just private bias -- can we really be outraged? And,
even if we are, what can the Japanese government do about it?
What is more -- and perhaps the most injurious thing to American
pride -- there does not even seem to be a very good reason for the
Japanese government to restrict American DRAM and EPROM imports. The
U.S. government certainly does not restrict American chip sales, and
still the Japanese seem to be able to outcompete American firms in the
U.S. itself. This being the case, it seems pretty obvious why U.S.
chip manufacturers have only a 10% market share in Japan and why it is
quite unlikely that they will ever get anything higher, at least until
they can compete better in their home market. In other words, in those
areas where American chipmakers hurt most -- and where calls for trade
reform are loudest -- opening up the Japanese market (if it is indeed
closed) will help least.
To summarize the issue of Japanese import restrictions:
(1) where they exist, they are undoubtedly bad, and should be
abolished forthwith;
(2) they do not seem to exist in the semiconductor industry;
(3) even if they did, they would not be very relevant as long as
American chipmakers cannot even compete in their home market.
Semiconductors and National Security
The preceding discussion has been strictly concerned with economic
issues, concentrating on the pocketbooks of chip consumers and chip
producers more than anything else. National security, however, is a
horse of a different color. Few would argue that for the sake of lower
chip costs we should endanger American security. If American defense
*requires* American-built chips, there is no doubt that American
industry should be protected at all costs.
In February 1987, the DOD's Defense Science Board released its
ominously titled "Report of the Defense Science Board Task Force on
DEFENSE SEMICONDUCTOR DEPENDENCY" (emphasis theirs). Its conclusions
were "that a direct threat to the technological superiority deemed
essential to U.S. defense systems exists" and that "U.S. defense will
soon *depend on foreign sources* for state-of-the-art technology in
semiconductors," considered by the board to be "an unacceptable
situation" (emphasis in original). [23]
To avoid this "unacceptable situation," the Board recommended a
vast DOD- and industry-funded research program, focusing on the
establishment of a Semiconductor Manufacturing Technology Institute
(costing the taxpayers a projected $1 billion over 5 years) plus
various other spending in universities, the DOD, and industry,
amounting to an extra $160 to $350 million per year). [24]
Conspicuous by its absence from the report was any recommendation
of import restrictions, whether tariffs or anti-dumping agreements.
Although governmental support of Japanese industry, "allegedly
explicit and implicit trade barriers," and dumping were all mentioned
as possible causes of Japanese leadership, they were largely
discounted. According to the report, "changes in these policies by
themselves will not solve the problems that beset the U.S.
semiconductor industry". [25]
The report's refusal to recommend import restrictions, however, is
the only reasonable thing about it. In its main thrust -- that
Japanese leadership in the DRAM and ROM sectors of the semiconductor
industry somehow threatens American national security -- the report is
an utter failure. In fact, none of the 100-odd pages of evidence that
it presents actually support this position.
The key point that the Report seeks to make is not that the U.S.
defense industry uses semiconductors extensively -- in this day and
age of high technology, that much is beyond doubt -- but that
*domestic production is somehow inherently superior to foreign
production in meeting the needs of the defense industry*. In other
words, if we can build our missiles and fighter planes equally well
with Japanese chips as with American chips -- a plausible assumption,
since the laws of physics and electronics work equally well for
Japanese and Americans -- then there is no reason why we should prefer
more expensive American goods to cheaper, more efficient foreign
goods. In fact, the report admits:
Finding 2.6. Acquisition of specific devices or materials for
foreign sources for defense applications is not a critical problem
as long as the U.S. has the knowledge and resources to substitute
domestic sources in a timely fashion should the supply of foreign
products and technology be interrupted. However, this substitution
is possible only if it can in fact be accomplished within the time
available and does not impoverish U.S. capabilities in other
important areas. [26]
Readers will search in vain for any evidence that substitution of
domestic production for interrupted foreign production cannot be
reasonably accomplished; the report certainly produces no such
evidence. In fact, not only are chips a manufactured good (unlike oil
and strategic metals), which can be produced by anybody who has the
knowledge, but there is also plenty of American industrial capacity
(and expertise) that can be easily converted to producing DRAMs and
ROMs.
Remember, the leadership that the Japanese have is mostly in
production of *mass-market general-purpose memory chips*. For economic
purposes, we may draw distinctions between the "merchant" production
that the Japanese have a lead in and the "captive" production by
domestic companies such as AT&T and IBM for internal use; however, the
fundamentals of chip production and design are the same in both cases.
In time of war, AT&T and IBM can certainly be convinced to sell their
chips to others; it is just that in time of peace, they choose not to
for economic reasons.
Not finding any direct evidence that interruption of foreign
supplies will not be easily remediable when it occurs, the report had
to grasp for more tenuous straws such as "technological leadership."
The issue of leadership centers on the premise that if we "lose" DRAM
and ROM manufacturing to the Japanese, we will lose not only that
particular segment, but also many (if not all) other portions of the
electronics industry. Figure 1, taken from the Defense Science Board's
Report, makes this point and relates it to national security.
U.S. military forces depend heavily on technological superiority to
win
Electronics is the technology that can be leveraged most highly
Semiconductors are the key to leadership in electronics
Competitive high-volume production is the key to leadership in
semiconductors
High-volume production is supported by the commercial market
Leadership in commercial volume production is being lost
Semiconductor technology leadership will soon reside abroad
This argument, like all good fallacious arguments, is 90% correct. It
is true that U.S. military forces depend on technological superiority;
it is true that competitive high-volume production is the key to
leadership in merchant DRAM and ROM production; it is true that
merchant DRAM and ROM production leadership is already residing
abroad. What are questionable are two key points: (1) that merchant
DRAM and ROM leadership is equivalent to semiconductor technology
leadership, and, (2) that "semiconductors are the key to leadership in
electronics."
On the surface this seems like a pretty good record (only two
errors out of seven assertions and six implications!). Unfortunately,
these are fatal errors, and betray either a misunderstanding of (or a
desire to mislead about) the way computers and the computer industry
work.
A computer system consists of two distinct parts: the software, he
programs that tell the machine what to do; and the hardware, the
pieces of electronics that actually execute the instructions provided
by the software. It is easy to overemphasize the importance of
hardware, because it is "real" -- it can be seen, touched, weighed and
measured -- whereas software is merely a set of electronic encodings,
bits that are turned on or off. However, software costs have risen
from 20% of the total cost of a computer system in the mid-1960s to
80% of the total system cost by the mid-1980s. When a cruise missile
looks down on a piece of terrain and decides whether or not it should
drop a bomb on it, only a small fraction of the work is done by the
hardware (the cameras, the chips, the detonation devices, etc.). The
majority of the image recognition and analysis is done by the
software.
Hardware itself can be divided into two components: semiconductors
and everything else. This "everything else" includes disks, disk
drives, tape drives, terminals, and printers. While semiconductors can
legitimately be called the "smarts" of hardware, they are by no means
the only component. A personal computer certainly would not do much if
it were made of semiconductors alone.
Finally, semiconductors themselves fall into two categories: memory
chips and logic chips. Memory chips, such as the DRAMs and ROMs, are
the subject of today's protectionism debates. They allow the computer
to store and access data. Of all the functions of the computer, they
implement two: "remember a piece of information" and "recall a piece
of information." Logic chips implement all the other functions of the
computer. The Motorola 68000, the 8080, 6502, Z80, etc. (just to name
a few of the more widely known ones) are all logic chips and can truly
be considered the smarts of the computer, or at least of the hardware
side.
The key factor in logic chips is not cost but design; both the
speed of operation and the ease of programming of the computer are
largely determined by the quality of the logic chip design. To its
credit, the Defense Science Bord's report admits that the U.S. still
has a lead in "design-intensive custom logic and microprocessors,"
[27] though it claims that the U.S. lead is being reduced by Japanese
advances. No evidence for this decline is presented beyond Table 1 of
the report, which merely states that the U.S. has a lead that is
perceived to be declining. [28] Furthermore, the major recommendations
of the report emphasize subsidies of memory chip manufacturing, not
logic chip design.
There is no doubt that all of the above-mentioned components --
software, non-semiconductor hardware, logic chips, and memory chips --
are necessary for any computer system; no computer system will run
without all four ingredients. However, the "leadership" argument
states that memory chips are not just necessary but are vital to
continuing superiority in all (or most) of the other fields.
This is simply wrong. The place of memory chips in the computer
industry is well defined -- they store and retrieve data. The Japanese
may make them cheaper; the trend in today's technology is to make them
more compact; with luck, they can even be made faster (a substantial
consideration for today's computers). They will not, however, be made
smarter; it takes logic chip advances and, especially, software
advances, to add new smarts to computer systems. When the Defense
Science Board's report says that "electronics is the technology that
can be leveraged most highly," [29] the technological advances that
provide the leverage will come mostly from logic chips and software.
Memory chip production has become a manufacturing issue, not a
design issue. As pointed out by one observer, "A company's competitive
position in the production of memory chips depends primarily on its
manufacturing capabilities, whereas its competitive position in logic
chips depends more on its design and engineering skills." [30] Perhaps
in automobile and steel production -- mature industries where the
basic design has been long settled -- manufacturing capability is
indeed the key to leadership; in the computer industry, however, it is
design advances, in fields such as artificial intelligence, software
engineering (to maximize software quality and minimize maintenance
costs), and execution speed (partially a memory speed issue but mostly
a logic chip and especially software issue) that are important.
What we have here is a crude sort of "Not Invented Here" syndrome,
an attitude that "we can only make a good computer if we make every
single one of its components." The Defense Science Board's chapter on
"Effects on Downstream Industries" (where "downstream industries are
those which use thr products of the semiconductor industry,"
presumably including computer makers and defense contractors) puts it
bluntly:
A strong domestic semiconductor industry is a prerequisite to a
strong position in these downstream industries since the ability to
perform competitive services and sell competitive products depends
upon access to the most advanced semiconductor devices. [31]
As any good entrepreneur will tell you, any company that tries to do
everything itself will lose to one that buys its expertise from those
most competent to provide it. IBM bought the operating system for its
wildly successful IBM PC from Microsoft, Inc.; Apple bought the logic
chips for its MacIntosh from Motorola. Neither sacrificed
"technological leadership"; in fact, they enhanced their leadership by
focusing on those areas that they are best at. Economists know this as
Ricardo's "comparative advantage"; businessmen know it as just plain
good business.
Other findings of the report are as suspect as the "interrupted
foreign supply" issue and the "technology leadership" issue. A very
interesting one is Finding 2.7:
Even more critical is the possible movement of electronic device
and system capabilities to overseas locations from which the Soviet
Union can readily access the technology. In that case, the U.S.
could lose the considerable margin of advantage it holds over the
U.S.S.R. in this critical area of technology -- and upon which it
relies to offset quantitative military disadvantages. [32]
In other words, it is not enough that the U.S. produce all of its own
semiconductors -- Japan must not be allowed to produce any. Production
and design capabilities do not "move"; they replicate. Even if the
United States regains a competitive advantage over Japan, Japan will
still have their own, constantly improving, semiconductor industry,
every bit as accessible (or inaccessible) to the Soviet Union as it is
now. The only possible solution to the concern of Finding 2.7 is a
preemptive strike against all foreign producers of semiconductors.
Only by making sure that *nobody* except the United States can make
semiconductors can we prevent the Soviets from stealing the
technology.
Where the findings of the report vary from the implausible and
unproven (that interruption of foreign semiconductor supplies will
damage the U.S. in case of war or mobilization) to the implausible and
vague (that some sort of "leadership" is being lost in the entire
computer industry because of uncompetitiveness in memory chips) to the
irremediable and downright silly (that any foreign production is a
risk to the U.S. because the Soviets might steal it), the report's
recommendations are almost innocuous:
(1) "Support the establishment of a Semiconductor Manufacturing
Technology Institute which would develop, demonstrate, and
advance the technology base." [33] Projected cost: $250 million
from industry, plus $200 million per year over five years from
the DOD. "The principal and most crucial recommendation of the
Task Force is that an Institute be established by a consortium
of U.S. firms ... to jointly advance the state-of-the-art in
generic semiconductor *manufacturing* (emphasis in original)
technology. An appropriate objective would be the development
of the manufacturing technology needed for the 64 megabit
DRAM." [34]
2. "Establish at Eight Universities Centers of Excellence for
Semiconductor Science and Engineering" [35]. Projected cost:
$50 million per year from the DOD.
3. "Increase DOD spending for research and development in
semiconductor materials, devices, and manufacturing
infrastructure." [36] Projected cost: $60 million in the first
year, rising to $250 million in the fourth and final year (paid
by the DOD).
4. "Provide a source of discretionary funds to the DOD's
semiconductor suppliers to underpin a healthy industrial
research and development program." [37] Projected cost: $50
million per year (paid by the DOD).
5. "Establish under the DOD a Government/Industry/University forum
for semiconductors..." [38]. Projected cost: $200 thousand per
year (paid by the DOD).
After all the problems elucidated by the report, the
recommendations seem almost a relief: only $2 billion of taxpayer
money over 5 years -- small change to the DOD, smaller yet to the
federal government.
Ignore for a moment that the ostensible reason for this funding --
the bugaboo of "dependency on foreign supplies" -- appears to be
fictional. It is admitted that one of the reasons that Japan is doing
better than the U.S. in memory chip manufacture is more R&D
expenditure (according to the Report, 13% of profits vs. 10% of
profits in 1970-1985 [39]). So, the report suggests, pump in some R&D
money. Even if the subsidy is not vital for national security, it
might help a slumping industry, and besides, it won't really hurt
anything.
But $2 billion invested in such research is $2 billion not invested
in something else -- perhaps something more profitable for the
investors and for the nation. As one analysis states the problem, "The
government directly funds some 775 research laboratories across the
country, employing some 80,000 people (about one-sixth of the nation's
scientists and engineers) and gobbling up about half of the annual
$123 billion that goes to pure and applied research nationwide. . . .
But the work they do . . . does almost nothing for the country's
broader economic competitiveness. Since the 1950s, only 5% of the
government's 28,000 patented inventions have been licensed for
commercial use." [40]
There are several good reasons for this condition. For one,
government-funded bodies, lacking a profit incentive, are plagued with
vast economic inefficiencies (witness the Pentagon's penchant for $600
toilet seats) and thus provide far less bang for the investment buck.
The government, by monopolizing half the national research budget and
one-sixth of the nation's scientists, is consigning both of these
valuable resources to a much less economically productive life than
they would otherwise lead.
Second, the investment decisions themselves, being made for
fundamentally noneconomic reasons, often ignore economic realities and
subsidize the impractical or unprofitable. The Defense Science Board's
report says that "The principal policy difference [between Japanese
and American subsidies] is . . . that Japan has elected to focus its
subsidies on emerging, leading edge industries, whereas the U.S. has
to a considerable degree elected to subsidize sunset industries." [41]
This praise of MITI's business acumen is largely unwarranted. As
Katsuro Sakoh writes, "it seems clear that most of the funds disbursed
by [Japanese] policy-implementation financing institutions are
allocated by political or social considerations, rather than for
consciously planned targeting of specific manufacturing industries."
[42] In Japan, agriculture, coal mining, and shipbuilding have
received vast government aid; automobiles and consumer electronics
have gotten virtually none. Agriculture is now a massive budget drain,
domestic coal production has decreased from 54 million metric tons in
1962 to 19 million metric tons in 1978, and shipbuilding is operating
at 35% of capacity; automobiles and consumer electronics are, of
course, Japan's great success stories. [43] Even in Japan, the
government-invested dollar (which goes where privately invested
dollars fear to tread) provides an inadequate rate of return.
Finally, note that nobody is better than the government at throwing
good money after bad. What will happen when the $2 billion runs out
five years from now? Will American semiconductor companies be willing
to dig into their own pockets to continue this high level of R&D
investment? Or will they run to the DOD asking for another two or
three billion dollars?
All in all, it seems that the $2 billion that the DOD proposes to
invest would be much better kept in the hands of the private sectors,
which is known for making generally sounder economic decisions than
the government. By taking this $2 billion out of the private sector's
hands, the DOD may actually hurt American technological leadership by
depriving other industries of funds that would have otherwise been
invested in them. Five years from now, those industries will in turn
be hurting, and the Defense Science Board will perhaps recommend
governmental subsidies for them too because for some mysterious reason
these industries were not sufficiently funded in the past.
Americans can sleep secure tonight, knowing that our alleged
"dependency" on Japanese semiconductors is unlikely to lose us World
War III. Semiconductor manufacturers, however, cannot sleep securely,
because they are in a bad spot profit-wise. Their predicament is quite
likely caused by the low levels of R&D expenditure by American
industry, and should perhaps be remedied by higher levels of R&D
expenditure *by American industry*. Why the DOD should get involved in
this is not clear; what is clear is that DOD involvement will not help
the American economy as a whole.
The Economic Costs of Protection
An important question alluded to in the discussion above was this:
even if we decide that something ought to be done about various
Japanese trade practices (fair or unfair), what alternatives do we
have? Can we make sure that our actions do not cause more harm than
good?
One of the points that the above arguments tried to establish is
that dumping and Japanese government subsidies actually have highly
desirable effects for American chip consumers and -- perhaps -- for
America as a whole. On the other hand, there is no doubt that the
effects on American producers are quite damaging, and can lead to a
variety of costs. One could readily claim that, although cheap chips
are good for the U.S., their advantages are more than offset by the
dislocation and suffering caused by declines in native chipmaking
industry. Certainly protection of American workers should also be
given some weight.
Alas, protecting the American worker is easier said than done.
According to a report on trade protection in the United States
published by the Institute for International Economics (IIE), the
costs of saving American jobs by protectionism are literally
staggering. Some 640,000 jobs were preserved in the U.S. textile
industry by protectionist action in the years 1957-86 [44]. Each job
saved was estimated to cost the U.S. consumer from *$22,000* to
*$42,000* [45]. The recent spate of protection of the auto industry
has saved an estimated 55,000 jobs between 1981 and 1985, at a cost of
*$105,000* per job [46]; in carbon steel production, protectionism
saved about 7,000 to 9,000 jobs between 1969 and 1986, of *$240,000*
to *$750,000* per job saved [47]. In fact, the lowest cost per job
saved among the 31 cases studied by the IIE was in the fisheries
industry, where 27,000 jobs were saved at a cost of $21,000 in each.
These numbers may at first seem so high as to be implausible, but
upon reflection they are actually quite logical. Restrictions on cheap
imports coupled with the removal of competitive pressures on domestic
producers will certainly raise prices dramatically. In fact, price
increases are exactly what any producer wants, even if he pretends
that he just wants to save worker's jobs. The only thing that is
surprising is just how much of a price increase is seen for so little
job savings.
Self-defeating side effects are also not uncommon. According to the
IIE study:
An important factor in the difficulties of the textile industry
during the 1950s was the protection benefiting United States cotton
growers. This permitted foreign cotton textile manufacturers to
obtain their raw material at much lower prices than their United
States competitors. [48]
Is it so unlikely that, if American computer-makers are not allowed
to buy cheap foreign chips, they will soon be seeking protection
because foreign computer-makers can successfully undercut them?
The 1986 U.S.-Japanese Semiconductor Trade Agreement
The 1986 Semiconductor Trade Agreement between Japan and the United
States was actually implemented with price increases very much in
mind. A worldwide minimum price for Japanese chips was established,
allegedly to counteract Japanese "dumping" effects. According to the
*Wall Street Journal*, "Assigned prices for 256-kilobit D-rams, for
example, ranged from about $3 to $7.50, compared with a $2.25 average
price before the agreement." [49]. 256-kilobit EPROMs that sold for
$2.53 in Japan cost $3.95 in the U.S. Before the agreement took
effect, it was estimated that it would cost American consumers an
estimated $568 million a year. [50]
By early 1987, it was fairly clear that the Japanese were not
meeting the terms of the agreement. The agreement called for
(1) The Japanese government to prevent Japanese firms from selling
chips either to U.S. companies or to anybody else (besides the
Japanese themselves) at less than "fair market value"; and,
(2) The Japanese government to promote U.S. chip sales to Japan and
ensure that U.S. firms' share of the market rose significantly
above the 10% level; if needed, the Japanese government would
force Japanese companies to curtail their own production.
In April 1987, with neither goal being met, the United States slapped
a 100% punitive tariff on $300 million of Japanese consumer imports
(such as televisions, computers, and power tools). [51]
Now, it is never a good thing when trade agreements -- or any other
kind of international agreement -- are violated, even when they were
bad agreements to start with. Unfortunately, reality makes fools of us
all, and this agreement was made seemingly in ignorance of certain
economic and political realities. As *Fortune* magazine put it, "the
agreement has produced every perverse effect a free-trader could
imagine." [52]
Like any trade restriction, the semiconductor accord begat a
flourishing "gray market." "Chip brokers" smuggled chips out of Japan
to other Asian countries, plugged then into dummy circuit boards
(chips wired into circuit boards are not covered by the agreement),
and sold them to U.S. companies at 20% to 40% below the prices set by
the agreement. "Suitcase brigades" would fly with suitcases full of
chips to the U.S., Hong Kong, South Korea, Taiwan, or Singapore,
relying on the easy portability of the chips (tens of thousands, worth
hundreds of thousands of dollars, could fit into a bag) and lax
customs checking (customs agents being loath to check every business
traveler's suitcase). "'We are not doing it deliberately', contends
Tomihiro Matsumura, a senior vice president of NEC who heads the
corporation's semiconductor group. It happens anyway, he says, because
assigned prices in the U.S. 'go against the fundamental principles of
business.' 'No matter what you do,' he explains, 'what is cheap is
going to flow to where it is expensive.'" [53]
The gray market, which would have arisen anyway because of the
American shortage of cheap chips, was exacerbated by the corresponding
Japanese glut. As U.S. demand for the now-overpriced Japanese chips
fell drastically, the Japanese began to face a vast oversupply.
"'Prices just cratered', says Wilfred Corrigan, the president of LSI
Logic Corp., a Milpitas, California concern that makes chips in the
U.S. and Japan. 'They had to do something with all those chips they
could not sell over here.'" [54]
Needless to say, with the glut caused by the first goal (stopping
"dumping"), the second goal (increasing American market share in
Japan) became virtually impossible to meet. If Americans had a hard
time competing with preaccord prices in Japan, they would have a much
harder time competing with the lower postaccord prices. On the other
hand, Japan's legitimate export business was further hurt by the
extended waiting period that MITI imposed for export licenses in order
to stop the gray marketeers.
Squeezed by these restrictions, Japanese companies pushed even
harder in markets not covered by agreements, and also moved to buy
American companies. This did not sit well with American
protectionists, either; for instance, Fujitsu's planned acquisition of
Fairchild Semiconductor Corp. was vetoed by the Reagan Administration
in March of 1987 for fear of "giving away precious technology" to
foreigners. [55]
In light of all this, it is not surprising that the Japanese -- who
only reluctantly accepted the agreement in the first place -- should
be equally reluctant to fully enforce it. Naturally, while Americans
see the Japanese as the trade villains, the Japanese do not agree.
Japan is beginning to have unemployment woes of its own with some
experts predicting 6% unemployment rates in a country used to rates of
less than 3% [56]. Now their export industries -- financed to a large
extent by high Japanese saving rates, representing the sacrifices of
the Japanese consumer -- are, in Japanese minds, being made to pay for
their own efficiency.
The complaints that the United States makes about Japan can easily
be reversed in the minds of the Japanese. The Americans say that the
Japanese spend "too little" and save "too much" -- but some of former
Prime Minister Nakasone's Japanese critics argue that it is rather the
Americans who save too little and spend too much. [57] Americans
complain about Japanese willingness to take short-term losses in order
to obtain higher market share (which is exactly what the allegations
of "dumping" mean), but Japanese can easily put the blame on the
American companies so obsessed with the bottom-line that they avoid
necessary short-term sacrifices.
Perhaps the worst aspect of the 1986 agreement is that it
essentially requires the Japanese government to exercise dictatorial
powers over its own citizens, a people as enamored of liberty as
Americans are. As one observer has explained the demands placed on the
Japanese government by the agreement,
To increase the U.S. share of the Japanese memory chip market, the
Japanese must somehow compel private Japanese companies to purchase
American products. . . . If it is to prevent dumping in either the
U.S. or other markets by Japanese companies, the Japanese
government must closely monitor exports by its computer firms and
enforce strict price controls. [58]
Note that if the agreement called merely for elimination of overt
import tariffs, the Japanese government could do that by a simple
unilateral action; if the agreement attempted to prevent dumping to
the United States alone, the American government could simply
intervene at the border. Instead, the agreement calls for far broader
restrictions, which require the Japanese government to take steps to
coerce Japanese companies to do what the Americans want. Recall the
vast opposition that America's own "affirmative action" policies and
price controls have met with; imagine what the Japanese must feel when
a *foreign government* tries to require such intrusive controls of
citizens' daily business lives.
The U.S. government essentially strong-armed the Japanese into
setting up a cartel, a cartel which was against the interest of
American consumers, which was not practically enforceable by the
Japanese government, and which, curiously enough, would have been
criminal under U.S. antitrust law if two American producers had tried
it. it is a well-known economic fact that people always break cartel
agreements (witness OPEC) because cheating is so tempting, being to
the benefit of both the cheating producer and the consumer. It should
hardly be surprising, then, that such a misguided trade agreement
would inevitably fail; the laws of economics and politics are not
easily overturned with a stroke of a pen. Rather than using the
agreement's failure as an excuse to exacerbate trade tensions, perhaps
we should instead learn from it the mischief that protectionism can
cause.
Conclusions
Several conclusions may be drawn from the evidence assessed here:
(1) Japanese "dumping" -- a reasonable and proper business practice
labelled "unfair" by rather specious reasoning -- is actually a
boon to American consumers of chips. American chip consumers,
like all consumers, love cheap products and use them to become
more competitive themselves. American chip producers object to
"dumping" for an obvious reason: nobody likes competition,
especially efficient competition.
(2) Japanese government subsidies, while hardly something to be
approved of, have in effect been subsidies to American
consumers just as much as to Japanese producers. Subsidies
always distort the international trade picture, but these
subsidies have not been remarkably large (nor is the American
slate clean here, considering the volume of U.S. high-tech R&D
subsidized by the Defense Department).
(3) Import restrictions against the American chips in question are
largely mythical, hypothesized solely on America's low share of
the Japanese market (a rather arrogant argument, implying that
the Japanese can outcompete Americans only if they have import
restrictions working in their favor). Import restrictions in
other areas are present and should be removed; however, this is
only likely to help those American industries that have proven
able to compete well at home.
(4) Japanese superiority in DRAM and EPROM production hardly
threatens U.S. national security, either directly (by threat of
cut-off of strategically vital supplies) or indirectly (as a
loss of some sort of "industrial leadership"). In fact, the
best way to preserve American leadership in high technology as
a whole is to ensure maximum supplies of the best and cheapest
goods available, regardless of where they come from.
(5) Even if we wanted to protect our market against the Japanese,
it would cost us truly vast amounts of money. Historically,
trade restraints in various industries have cost tens of
thousands of dollars per job saved; these costs, incidentally,
may be a measure of just how much *benefit* American consumers
derive from the absence of these restraints.
(6) It is hardly a surprise that the Japanese violated the
Semiconductor Trade Agreement. Part of the agreement
established a goal -- increased American market presence --
that was made virtually impossible to achieve by the other
part, which drove down Japanese domestic chip prices. Both
aspects (anti-"dumping" and increased American market presence)
called for the Japanese government to impose controls on
private Japanese citizens that few Americans would tolerate
from their own government.
(7) Finally, before we panic about our "loss of technological
leadership," we must not automatically assume that what is good
for the chipmakers is good for the U.S. By modern standards,
DRAMs and EPROMs are remarkably low-tech; in fact, it is their
consumers -- who would be most hurt by increased protectionism
-- that are on the true forefront of technological development.
As usual, good solutions are hard to come by. In the years after
World War II, when all our would-be competitors were lying in ruins,
the United States enjoyed an unprecedented period of superiority in a
vast number of industries. Much as we would like to retain this
superiority, it is easier said than done. Protecting American
industries hurts America as well as foreign competitors; better
solutions need to be found. Perhaps they lie in lower interest rates
or higher savings rates; perhaps we have something to learn from the
Japanese *zaibatsu*s which (in a manner quite offensive to American
antitrust laws) unite many diverse companies in diverse industries
into a stronger, more competitive whole.
What seems clear is that a new round of protectionism and trade
warfare will help no one, neither our competitors nor ourselves.
ABOUT THE AUTHOR
Eugene Volokh is Vice President of Research and Development of
VESOFT, Inc., a software firm specializing in the Hewlett-Packard
large business mini-computer market.
Footnotes
[1] Office of the Under Secretary of Defense for Acquisition, "Report
of the Defense Science Board Task Force on Defense Semiconductor
Dependency," (U.S. Department of Defense, Washington, D.C.,
February 1987), p. 5.
[2] Ibid.
[3] Semiconductor Industry Association, *The Effect of Government
Targeting on World Semiconductor Competition: A Case History of
Japanese Industrial Strategy and Its Costs for Americans*
(Cupertino, Calif.: Semiconductor Industry Association, 1983).
[4] "U.S. Sanctions Saved Computer Chip Firms," *Washington Times*,
April 28, 1987.
[5] Malcolm Gladwell, "The Big Blue Computer Firm Overlooked in the
Trade War," *Insight*, April 27, 1987, p. 42.
[6] Michael Becker, *Semiconductor Protectionism: Goodbye Mr. Chips*,
Citizens for a Sound Economy Issue Allert no. 9 (Washington, D.C.,
August 27, 1986), pp. 3-4.
[7] Malcolm Gladwell, "The Big Blue Computer Firm Overlooked in the
Trade War," *Insight*, April 27, 1987, p. 42.
[8] *Business Week*, May 23, 1986, p. 90.
[9] "Report of the Defense Science Board", p. 6.
[10] Becker, p. 8.
[11] For the boom, see "Raking in the Chips," *Time*, October 22,
1984, p. 74. For the bust, see "Slump Still Plagues U.S.
Semiconductor Market," *Electronics Week*, May 20, 1985, p. 18.
[12] Edward L. Hudgins, "*U.S.-Japan Trade War: The Opening Battle*",
The Heritage Foundation Backgrounder no. 577 (Washington, D.C.,
April 24, 1987), p. 4.
[13] David R. Henderson, "The Myth of MITI," *Fortune*, August 8,
1983, pp. 113-116.
[14] Katsuro Sakoh, "Japanese Economic Success: Industrial Policy or
Free Market?", *Cato Journal* 4, no. 2 (Fall 1984): p. 523. See
also Scott Palmer, "*Panic in Silicon Valley: The Semiconductor
Industry's Cry for Help*," Cato Institute Policy Analysis no. 31
(Washington, D.C., December 21, 1983), p. 17.
[15] Sakoh, p. 535.
[16] Semiconductor Industry Association report; Palmer, p. 7.
[17] "Report of the Defense Science Board," pp. 11-13.
[18] John Zysman and Stephen Cohen, "Double or Nothing: Open Trade and
Competitive Industry," *Foreign Affairs* (Summer 1983, Vol. 61,
no. 5), p. 1131.
[19] Semiconductor Industry Association, *The Effect of Government
Targeting*, p. 6.
[20] Ibid., p. 71.
[21] John Burgess, "Japan Cuts Semiconductor Production," *Washington
Post*, March 24, 1987, p. D1.
[22] Bro Uttal, "How Chipmakers Can Survive," *Fortune*, April 13,
1987, pp. 89-92.
[23] "Report of the Defense Science Board," p. 2.
[24] Ibid., pp. 11-12.
[25] Ibid., p. 6.
[26] Ibid., p. 3.
[27] Ibid., p. 8.
[28] Ibid.
[29] Ibid., p. 26.
[30] Becker, p. 2.
[31] "Report of the Defense Science Board," p. 10.
[32] Ibid., p. 3.
[33] Ibid., p. 11.
[34] Ibid., p. 84.
[35] Ibid., p. 12.
[36] Ibid.
[37] Ibid.
[38] Ibid., p. 13.
[39] Ibid., p. 6.
[40] Malcolm Gladwell, "A National Interest in Global Markets,"
*Insight*, June 29, 1987, pp. 13-14.
[41] "Report of the Defense Science Board," p. 80.
[42] Sakoh, p. 526.
[43] Ibid., pp. 533-535.
[44] Gary Clyde Hufbauer, Diane T. Berliner, and Kimberly Ann Elliott,
*Trade Protection in the United States: 31 Case Studies*
(Washington, D.C.: Institute for International Economics, 1986),
p. 16.
[45] Ibid., p. 14.
[46] Ibid., p. 258.
[47] Ibid., pp. 3-4, 15.
[48] Ibid., p. 118.
[49] Brenton R. Schlender and Stephen Kreider Yoder, "Semiconductor
Accord with Japan fails to Aid U.S. Firms As Intended," *Wall
Street Journal*, February 12, 1987, pp. 1, 10.
[50] Becker, p. 1.
[51] Mark Potts and Caroline E. Mayer, "Some PCs Expected to Disapper
Here," *Washington Post*, April 19, 1987, pp. D1, D10.
[52] Bro Uttal, "How Chipmakers Can Survive," *Fortune*, April 13,
1987, pp. 89-92.
[53] Brenton R. Schlender and Stephen Kreider Yoder, "Semiconductor
Accord with Japan fails to Aid U.S. Firms As Intended," *Wall
Street Journal*, February 12, 1987, pp. 1, 10.
[54] Ibid.
[55] Steve Prokesch, "Stopping the High-Tech Giveaway," *New York
Times*, March 22, 1987, Section 3, p. 1.
[56] "Now Japan Faces Unemployment," *Financial Times*, January 15,
1987.
[57] "'The Real Cause' of the U.S. Trade Deficit," *Tokyo Nihon Keizai
Shimbun*, January 17, 1987.
[58] Hudgins, p. 5.