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Coping with Technological Change: U.S. Problems and Prospects RAYMOND VERNON The consequences of technological change on economic activity are extraordinanly diverse, and any effort to single out a"dominant" con- sequence Hat will overwhelm all He others is certain to fail. But to Blinds seriously about public policy responses requires making guesses about He nature of future problems, distinguishing He exceptional from He com- monplace, and differentiating the dominant from He trivial. This chapter will begin, therefore, by examining a set of broad generalizations about He economic consequences of technological change over the last four or five decades, generalizations that reach beyond He available facts in some respects to create a basis for policymaking. BASIC SHIFTS One development Hat deeply concerns policymakers is an apparent secular decline in He relative world position of U.S. Industry, a decline that is usually attributed to a fall in U.S. industrial competitiveness in world markets. The idea of a decline In He '~compebtiveness" of any given sector in a national economy is not easy to define and document. It is not yet clear whether or not we understand He nature of the structural changes Hat have been going on in He U.S. economy during He past 20 years or sod Consider, for instance, the changing role of manufacturing in He U.S. economy. Some data point to the conclusion that He manufacturing sector of the U.S. economy has declined in relation to the U.S. economy as a 160

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COPING wITn TECHNOLOGICAL CH,nGE 161 whole. For example, some shnakage in Me relative share of the U.S. labor force devoted to manufactunug occulted dig the late 1970s and ~ the l980s.2 Over We longer term, Me contnbuton of the manufac~ng sector to the country's GNP, when measured in current doBars, fell from 28 percent In 1960 to 21 percent In 1983. But dunug the same penod, the manufacturing sector's con~ibudon, when measured in constant dollars, hovered around 23 percent without a clear trend (Economic Report of the President, -1985, p. 244~. Data Mat purport to measure national output in "constant pnces" over a penod as long as two decades are Inescapably vulnerable. Yet, those data suggest Mat Me apparent relative decline in manufacturing was due to a relative fall in the prices of manufactures rather than to a fall in real output. If Mat suggestion were based on more robust figures, it would put a wholly different complexion on Me seemung decline in U.S. manufacturing over Me past two decades. Those who believe Mat U.S. industry is losing in compenoveness also point to a decline In Me importance of U.S. merchandise exports relative to Me exports of all developed economies, a mend Mat has included such important sectors as chemicals, machinery, and automobiles (Lipsey, 1984, p. 70; United Nations, 1983, pp. 1046, 1048~. Are these developments consistent with Me idea of a decline in Me competitiveness of U.S. man- ufactures? Since 1945 the number of producers and consumers on die world scene has undergone an extraordinary increase. Outstanding among dais new contingent of producers and consumers have been the Japanese people and Me populations of the venous newly industrialized countries-notably, Korea, Taiwan, Hong Kong, Mexico, Brazil, and even India. And soon China will be joining the list. The emergence of these new producers and consumers in world markets has depended on various factors, including some extraordinary improve- ments in the technology of transportation and communication improve- ments that have greatly reduced the costs to these late-indusmalizing countries of assimilating information from foreign countries and of moving goods and people across great distances. Once He information barrier was overcome, the comparative advantage of these countries shifted in favor of manufacturing activities, a shift that in the first instance was based largely on their wage structure in industr,. The same technological changes in communication and transportation have contributed to the spread of U.S.-based multinational enterprises over He past four decades. Technological advances have reduced the cost of search for new locations on die part of multinational enterpnses. And as multinational enterprises have gained experience at such locations, their responses to subsequent opportunities have been quicker and more assured.

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162 RAYMOND VERNOW To be sure, some multinational enterprises have drawn back from venous foreign locations In recent years, reacting to political Treats or poor profits or both.3 But, over the long run, U.S.-based enterprises have been drawing on foreign facilities with increasing alacrity as Weir experience with such facilities has broadened and deepened. For instance, a systematic study of Me behavior of 57 mamlfacturing enterprises in the period from 1945 to 1975 dramatically illustrates We ratcheting effect of past experience on the disposition of those enterprises to set up additional facilities in foreign countries. In We decade after World War it, U.S.-based multinational enterprises Tat were entering on the manufacture of a new product typically allowed a considerable number of years to pass before setting up a man- ufactunng facility for We new product in a foreign location. By the 1970s, however, Tat lag was typically much shorter; and the greater We foreign experience of We firm, We more dramatic We shortening of tile lag (Vernon and Davidson, 1979, pp. 37-62~. The reactions of multinational enterprises to We revolutionary unprove- ments in communication in recent decades have taken over forms as well. Such improvements have allowed enterprises to manage their venous subsidiaries as related units in a unified system rawer Tan as isolated free- standing ~nvesunents. And We unitary approach has encouraged some multinational enterpnses to plan Weir financing, production, and marketing activities on a global scale, Hereby increasing the complementanties and interconnections among We venous affiliates that made up the enterprise (Casson and Norman, 1983, p. 63; Porter, 1985, pp. 410414; Teece, 1983). The impact of technology on We location of economic activity, however, has not been confined to multinational enterprises. With a relative decline in the costs of communication, We costs of transfem~g technology between independent parities can be presumed to have gone doum, whereas We speed of such transfer has probably increased substantially. That devel- opment has been particularly important because of a concurrent devel- opment during these same decades namely, an increase in tile number of sources from which the technology required in any given product line could be drawn. Various studies demonstrate that as industries have ma- tured, the number of firms engaged in He industry has tended to grow, as has He number of suppliers of equipment to such indus~ies.4 As a consequence, newcomers aspiring to enter the industry He in a position to shop around among a larger number of finns Hat might be able to provide He necessary technology. The increase in the number of firms engaged in these technological transfers, whether as donors or recipients, has also been due in part to He efforts of various governments to support national champions finns that

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COPl~G WITlI TECHNOLOGICAL CHANGE 163 could represent their counties as en~ant-s in some given product line. In Me industrialized countries of Europe and in Japan, these national cham- pions have typically been found in the technologically advanced sectors, such as biotechnology industries, computers, or commercial aircraft. In We newly industrializing counties, such as Brazil or Korea, governmental support has been Frown to the more mature industries, such as chemicals and metal fabncadng. To launch this new generation of national champions has not always been easy; when governments have been successful, Heir success has usually been attributable to various policies, including a willingness to invest heavily in education and in Me assimilation of foreign technologies. hn many cases, the ability of the national champions to compete in tech- nolog~cally sophisticated lines of manufacture has also been helped by the Import protection Weir governments provided in weir home markets, as well as by Me selective provision of venous means of support.5 Many observers in the United States attribute the relative decline of U.S. industry during the past few decades to the unwillingness or inability of Me United States to engage In policies of a similar kind (Diebold, 1983, pp. 644-654; Lodge, 1984, pp. 3-31; Magaziner and Reich, 1982, p. 326; Thurow, 1980, pp. 191-214~. In reply, foreign commentators have con- tended that Me R&D programs of Me United States have been so large as to dwarf the support provided by over coun~ies.6 Others have noted Mat Me U.S. government has made extensive use of import restrictions during Me past decade or so, matching or exceeding Me import restrictions of the Europeans and Japan.7 It may be Mat Me largest part of Me new competition faced in recent decades by Me United States was almost inescapable. A necessary con- didon contributing to Mat development was the technological improve- ments in ~n~ic~on and transportation, a force that dramatically reduced the costs to foreigners of acquiring technical skills and technological in- fonnation. With these new opportunities universally available, some coun- ~ies, such as Japan, Korea, and Brazil, exploited the new situation more effectively Man others. But a substantial global rise in competition, es- peciaDy in Me more mature product lines, could not have been avoided. To be sure, Me entry of a wave of new industrial producers many of Hem protected In Heir home markets and bolstered by subsidy created significant problems. In some industries, He more efficient production facilities of the newcomers made existing facilities in the United States redundant; this was a major factor in Japan's early reentry into He world steel market, for instance, as well as He later entry of the newly indus- malizing countries not only in He steel market but also in many lighter product lines. Because many of the industries that were involved were

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164 RAYAlOND VERNON highly capital-intensive and characterized by substantial economies of scale, Me appearance of the new entrants commonly produced a state of overcapacity, as in the case of steel, basic chemicals, and petroleum refining. Some observers have attributed the relative decline In We share of U.S. manufacturing industnes to over factors as well. None of these, in my option, is as important as He decline In Be costs of acqu~g technology and Be concurrent starting up of industrialization programs in so many countries. One common contention, for instance, is Mat Be capabilities and attitudes of U.S. managers have changed In recent years, reducing Be capacity of U.S. firms to produce competitive products. Managenal attitudes and over culture factors are no doubt relevant In a diagnosis of national business behavior; obviously, the values of British or Gennan or Nigenan businessmen have something to do with them performance. But one should recall that throughout most of die 1950s and 1960s, observers were typically extolling Be special virtues of American entrepreneurship, including its attention to profit and its swift responses to changes in He environment. Ten years later, some of these same characteristics were being condemned, charged win bringing about a decline in U.S. business (Abernathy and Hayes, 1980; Thurow, 1980, pp. 3-251. This rapid shift in perception raises questions about its credibility. Moreover, He global position of U.S.-based multinational enterpnses, including their foreign affiliates, offers a different impression of U.S. managerial performance than does tile output data for the United States alone; if He global exports of U.S.-based enterprises are taken as a guide, no competitive slippage occurred between 1966 and 1977 (Lipsey and Kravis, 1985~. The apparent ability of these multinational networks to cling to their share of world export markets casts added doubt on He hypothesis Hat a deterioration In the quality of management explains He shrinkage in the U.S. position. A more serious contention wide respect to the role of U.S. management in He asserted decline of U.S. industry is He view Hat U.S. management practices epitomized by He Ford assembly line and ~ne-and-monon studies of the 1920s-have become obsolete, outdistanced by the more flexible management techniques of other counties, notably Japan (Reich, 1983, chaptered. Undoubtedly, certain factors in the Japanese environment have contributed to strikingly high levels of productivity In some sectors of that economy (Brooks, 1985; Roy, 19821. Ibe problem, however, is one of diagnosis. What is He critical vanable? Is it the high levels of literacy of Japanese workers; He lifetime employment practices of He large firms; He recruitment and promotion practices relating to managers; the extensive use of subcontractors to provide flexibility; the financial

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COPING WITH TECHNOLOGICAL CHANGE 165 linkages of the big firms to private banks and public credit interrnedianes; or some combination of the above? The basis for assessing the relative importance of these various factors is very slim. Besides, the competitive pressures coming from counuies such as Korea or Brazil, where managerial practices differ from those of Japan, also have to be explained. Accord- ingly, the part played by managerial practices on the relative decline of U.S. industry continues to be uncertain. Another explanation that some analysts favor for the relative decline in U.S. industry is Me effect of an overvalued dollar. This condition has plagued U.S. exporters since the early l980s and has contributed to a significant increase in U.S. imports.9 But the allegations of a U.S. decline in competitiveness long antedate the recent penod of marked overvaluation of the dollar; We long-tenn fall in Me U.S. share of world merchandise exports, moving from 16.5 percent in 1955 to 12.2 percent in 1975, was already being observed and commented upon In the 1960s (Lipsey, 1984, p. 701. No doubt the overvaluation of Me dollar in recent years has added to Me difficulties of U.S. manufacturers. But it would be prudent for policymakers to assume Mat Me overvaluation simply aggravated ~ ten- dency Mat had deeper causes and longer antecedents. In considenng what policy responses might be desirable for the future, one cannot escape the need for projections. For instance, it seems plausible to assume that Me rapid rate of industrial change will continue, requiring a continuous change in product lines. To be sure, some factors may slow Me rate a little. For one Ming, the initial surge of investment in Japan and Me developing counties after World War II was fueled by policies of import substitution; and that factor is likely to play a lesser role in the future as Me limits of import substitution are approached. In addihon, Japan's entry into new product lines now requires her producers to take a much greater share of the risks and burdens of innovation, rather than depending primarily on absorbing and improving on existing technologies. The newly industrializing countries also face new financial constraints that may slow the rate of change; international lenders have grown much more cautious and governments much more chastened in planning for additions to industrial capacity. Nonetheless, Me U.S. economy must count on continued rapid industrial change. Despite the widespread current sentiment in Me United States for protection against imports, the probability that U.S. government policies can effectively slow such change appears to be fairly low. Win multi- national enterprises in the United States accounting for two-thirds or more of U.S. industrial output, most U.S. producers will be ceaselessly looking for opportunities to reduce their costs; and as Be history of electronics, automobiles, and steel graphically suggest, an important aspect of the

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166 RAYMOND VERNON adjusunents to competition Mat such multinational enterprises watt un- dertalce is to create offshore sources for some part of their output. Are U.S. import resmcdons likely to arrest this trend? Any U.S. decision to resmin such acquires would have to overcome We opposition of a considerable sector of U. S. industry and could be unplement~ only with draconian measures of restriction. It is inconceivable, for instance, that U.S. policy would include prohibitions on U.S. firms from creating sum sidianes abroad to serve their markets in Gird countries. (Indeed, under present circumstances, it is hard to conceive of any market economy effectively imposing such a prohibition on its enteIpnses for very long, unless die enterprises are owned by the state.) Assuming Hat the conditions of rapid change continue, ~en, what problems are foreseen, and what policies seem indicated? TlIE PROBLEM REDEFINED Many economists have been skeptical that the apparent decline In the relative position of U.S. manufacturing poses any serious problem In public policy. They are quick to point out ~at, when a county loses markets to foreign competitors, those very losses initiate a series of internal and external adjustments Cat eventually make up Be losses at levels of output that maximize national welfare. This demonstration, however, typically sets off a reaction of the deepest truss on on the pan of politicians, newspapermen, and over ordinary mortals, and a reaction of Me deepest annoyance on the part of other members of Me economics fraternity, because of venous cnt~ca1 and unanswered questions: Are the economic costs associated with the consequent adjustments being distributed to venous groups in Me economy on a pattern Mat is politically tolerable? Is Me new production mix conducive to the continued future grown of Me economy? Is the new production mix adequate for national defense requirements? . . The Distribution of Costs The problems and opportunities created by Be increasing openness of Be U.S. economy have fallen unevenly among the venous U.S. industnes. In other counties, such a disparate distribution might not have been so disturbing. In Japan, for instance, Be remnants of the old zaibatsu or- ganizations have created interest groups or conglomerates who character- istically embrace bow rising and declining industnes. Besides, operating according to a pervasive sense of "fair shares," Japanese policyrnakers

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COPING WITH TEClINOLOGICAL CHANGE 167 have tended to limit the size of the adjustment burden that is placed on any group or industry (Vogel, 1979, pp. 117-1241. III Europe, an official readiness to provide ad hoc support to faltering industries and laggard regions creates the appearance- and perhaps even the reality- of lesser risk for ~ndustnalists and their workers. Among U.S. industries, some of Pose beleaguered by foreign com- petition have had the prescience and the resources sufficient to escape from their U.S. locations and to set up producing facilities in lower-cost locations overseas; but others have failed to take such steps. According to venous analyses, certain U.S. industries have been especially vulnerable to foreign competition because Hey have been paying wages in Me United States wed above He levels that seemed indicated on the basis of Weir productivity relative to over U.S. industries; In Hat category notably were automobiles and steel.~ A second group of affected ~ndus~ies were those Hat had been insulated from ~nternabonal competition by the frictional costs of distance, costs that had previously restrained producers from acquiring the necessary technical capabilities and from learning about foreign market opportunities; illustrative of such products were venous consumer soft goods and electronic items. Some U.S. industries, however, have benefited from the shrinkage in the frictional costs of distance. One such industry has been the mass merchandisers of consumer products. Win great rapidity, distributors such as Sears used He changed situation to search out low-cost foreign sources of consumer products, such as small black-and-white TV sets, for im- portation into the United States. In addition to the mass merchandisers, Be U.S. industries Hat have derived advantages from He increased open- ness of the U. S . economy have been notably He exporters of capital goods, intermediate materials, services, and management skills. There are nu- merous indications Hat these offsets have been very large, indications reflected in the expanding importance of He export of technical services from the United States and of He flow of interest, dividends, and royalty income to the United States.l} But the U.S. industries Hat have profited from those expanded sales have not been He same as those affected by the increased competition Tom abroad. At least as unporta;nt as the distribution of costs and benefits among U.S. industries, however, has been He distribution of costs and benefits among classes in the United States. Some U.S. residents see themselves as helped by He mend toward open markets because Hey can offer their services or their capital globally, thereby broadening their opportunities and Heir income. Over U.S. residents see themselves as hurt by the trend, in relative if not in absolute terms, because their jobs are displaced by increased foreign exports.

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168 A:: at: RAYMOND VERNON To be sure, some of We displacements forced on U.S. residents may have contributed so much to U.S. welfare as a whole as to justify Me inequality in the burdens of adjustment. For instance, workers in industries in which relative wage levels have not reflected relative productivity, such as those in automobiles and steel, have In effect been extracting a rent from the rest of the U.S. economy. The reduction of Mat rent can be seen as a welcome contribution to the counters aggregate welfare, including the welfare of low-income groups. Moreover, increased ~nternai~onal com- petition has probably helped low-income gTOUpS in the United States dis- proporaonately in Me effects of such competition on the prices of clothing, household appliances, food, and other staples. Yet the polarization issue still remains: The increasing openness of U.S. markets appears to reduce the going wage for factory labor as well as Me ability of their unions to bargain. Meanwhile, the growth of the U.S. position in the export of capital, services, management, and high-tech products provides Me most obvious income benefits for relatively high-income groups. The Requirements for Future Growth As suggested earlier, economists are likely to take somewhat different approaches from politicians in identifying the future problems of the United States. Economists tend to look on the U.S. economy as endowed with a given bundle of resources and to ask whether Me U.S. economy, given its potential, is maximizing its opportunities for grown. Politicians, on the over hand, usually make no explicit assumptions about the U.S. potential and tend to ask if the U.S. economy is keeping up with the grown of over countries, notably Japan. In political terms, it does little good to compare the U.S. economy's perfo~ance win some full-em- ployment potential or to observe Mat its slippage In position for the most part involves relative reductions in income, not absolute declines. hn pol- icymakers' eyes, Me objective is not only one of equilibrium but also of a grown rate Mat matches the rates of over industnalized countries. U.S. policies in the field of technology are bound to reflect that preoccupation. With the prospects for future growth in mind, policymakers frequently express the concern Mat Me U.S. economy will be turned into a "service economy," a phrase that conjures up a picture of an endless succession of ski resorts and hamburger stands. As noted earlier, Me manufachlring component of Me U.S. economy has been shrinking by some measures, holding its own by others. In any case, it is not at all clear that a shin toward a service economy would prejudice U.S. prospects for growdl. A great deal depends on the nature of the services. Some services allow an economy to capture large rents, such as brain surgery and Disney World's

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COPING WITH TECHNOLOGICAL ClIANGE 169 EPCOT Center. And other services, such as research in biotechnology, are building blocks for future growth. Nonetheless, some analysts argue that He service industnes, especially when separated geographically from manufacturing activities, are in general a poor vehicle for capturing rents or ensuring future grow. Questions of this sort take us into uncharted waters, in which none of the diverse viewpoints is likely to represent more than an infold guess. Yet policymakers find ~emseIves obliged to shape Weir policies on Be best evidence available, even if the evidence is flimsy. Requirements for Defense Nai~ons are doomed to prepare for Me wrong war. No nation was much prepared for the trench warfare of World War I, the war of movement of World War lI, or the jungle warfare of the Vietnam era; and none is likely to be much prepared for the next. One factor in preparedness is We altogether underst=dable desire for a minimax strategy. Of We various hypothetical possibilities, the assumption Hat the next war will be much like the last, however implausible that may be, still ranks very high. Hence He idea that a county will need, for example, a national steel industry, a national aluminum industry, and a national petroleum industry for defense purposes is bound to be an unshakeable element in national defense plan- ning. If Were were any significant probability of a prolonged conventional war on a large scale, the case for maintaining a large core of such industries might be reasonably strong. But conventional warfare on He Korean or Vietnamese scale, extensive as these were, poses almost no problem for the U.S. mobilization base, past or prospective. And if nuclear warfare is contemplated, He maintenance of a core of industries is almost irrelevant to the actual conduct of He war. On security grounds, therefore, He case for maintaining the usual core of basic industries is not obvious. The case for maintaining a large core of "defense" industries would be particularly weak if the policy were to interfere with another security objective of obvious importance, namely, that of maintaining a flexible work force, capable of technical improvisation and adaptation on a large scale. That need was evident even in the conventional warfare of World War it, when the Gennan and Japanese economies managed to support a large-scale war effort for a sustained period despite He extensive damage done to their relatively slim industrial base (Schultze, 1973, p. 526; Ver- non, 1955, pp. 77-~. In a world in which nuclear warfare cannot be excluded as a possibility, the capacity for adaptation and flexibility should be a paramount security objective.

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170 RAYMOND VERNON Here age, more research is needed. But one must be realistic about the extent to which any research on this point can influence policy. What- ever Be outcome of such research, it seems inevitable that He political process of He Unwed States and of other countries will Qume policy- makers to cover altogether implausible contingencies, such as He possi- bility that World War ~ win be repeated. The Limits of Policy Upon identifying the main issues, one is propelled to a basic conclusion: Given the nature of the issues, better data and closer analysis are unlikely to have more Man a marginal effect on He behavior of the U.S. government and over governments. The problems are too large and too conjectural, and He domestic and international mechanisms for action too feeble to generate more Han marginal impact. Yet as one sifts Trough the issues raised in this summary, there are three areas in which some marginal influence is possible and desirable. One such issue is how the United States can enrich and enlarge factors of production Blat are likely to operate on U.S. soil, especially the quality of its labor and management. A second issue, intimately related to the first, is how a tendency (or the appearance of a tendency) toward economic polarization within the U.S. economy an apparent consequence of the economy's increased openness- can be arrested and reversed. A third issue, inseparable from the first two, is how Hose objectives can be achieved without beggaring other countries and Bus setting in train a process that in He end would bring down the U.S. economy as well. ENHANCING THE FAVORS OF PRODU=ION The Educational Challenge As nearly as any analyst can tell, the ability of the U.S. economy to maintain a high living standard relative to over countries will depend on its being able to develop a literate and flexible labor force: literate so that it can perform complex and demanding tasks; flexible so Hat it can take on new tasks as products and processes continue to change. There is noting new in Hat generalization. Historians usually explain the spectacular rise Of Germany and Japan as well as He relative decline of the United Kingdom in pen by reference to their respective systems of education (Lances, 1969, pp. 340-347~. And if that factor was important in He environments of 50 or 100 years ago, it is many times more important today. Historically, the United States has provided its nationals with extensive

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180 RAYMOND VERNON trade. To be sure, most governments are prepared to exploit every loophole created by the copious exceptions in the General Agreement on Tanffs and Trade (GATT) and are sometimes prepared to disregard Me agreement altogether (Patterson, 1983). In this respect, however, the behavior of other governments is not readily distinguishable from that of We United States, which has frequently enacted legislation in flat violation of the GATI`'s provisions (Grey, 1983~. The gap between conventional U.S. opinion about the behavior of foreign governments and cold reality is strikingly illustrated by the case of Japan. With regard to the GArr's formal requirements, that county today is probably as much in compliance as the United States (Saxonhouse, 19831. The principal difficulties that the United States now encounters in U.S.-Japanese bilateral Bade relationships are of a kind that the GAh's provisions do not and perhaps cannot-address: the yen-dollar exchange rate, the tight vertical structure of domestic Japanese industry, the attitudes of Japanese consumers, and so on (Bergsten and Cline, 1985, pp. 21- 105~. To deal with issues of that kind, we must begin thinking of new forms of international regimes and international agreements far more am- bitious than Hose represented by the GATE. Practically all multilateral agreements are also bedevilled by the problem of the free nder. With more than 160 sovereign states of various sizes and interests engaged in international trade, countries that will hope to profit from open markets without opening their own are bound to appear in considerable number. That was true in 1948 when the GAIT was created, and it remains true today. In 194S, however, the U.S. government believed that its interests were being served If some of these governments could be persuaded to give lip service to their adherence to a GAIT regime, even if their role of free rider was legitimated in the process. Accordingly, the developing counties that joined the GATT were in effect exempted from any significant obligation under the GAlT,s rules while being entitled to the rights of a GATE member. Today, however, the United States no longer regards that lopsided situation as being in its interest, especially as it applies to such rapidly developing countries as Brazil and Korea. From the U.S. viewpoint, the remaining alternative to unilateral re- s~ictions on trade is the increased use of persuasion or threat: persuasion aimed at convincing a group of like-minded countries that it is in their common interest to devise new mles of the game that are responsive to the demands for a `'level playing field," or threats aimed at increasing He inhibitions of the free riders. The use of persuasion will not be easy For instance, it should not be supposed that the advanced industrialized coun- ~ies are in a mood for joining the United States in measures for the

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COPING WITH TEClINOLOGICAL ClIANGE 181 liberalization of trade. In recent years, indeed, the European Economic Com~nun~ty has been pursuing its own program of trade-res~ictir~g mea- sures, a program Hat more Man matches the U.S. measures ~ its restric- dveness. The challenge is to turn this trend around, lest the remnants of Be existing trade regime disappear. Constructive and Destructive Agreements For several years, in fact, die U.S. government has been moving toward a set of arrangements that have pointed away from Me principles of non- discrim~nation and universality. Some of these arrangements have been constn~c~ve and benign, In the sense that they have probably unproved the position of He United States without damaging the position of other countries. Others have been grossly destructive by these standards. Head- ~ng the list of destructive measures are the so-called voluntary export agreements (VEAs) or orderly marketing agreements (OMAs), which at present protect a considerable part of U.S. industry. The essential element of these agreements is that the U.S. government coerces an exporting country into restraining its exports of a given product to He United States. The U.S. government's objectives In having the exporter impose He desired restrictions rather than imposing U.S. import restrictions are reasonably clear: The U.S. government escapes some of He onus of imposing a restriction on Imports, especially if He conditions are such that an import resmction would be in violation of existing U.S. law or in violation of ~nternabonal trade agreements, notably the GATT. The U.S. government can "target" specific threatening exporters lamer Han ah exporters of a given product, thereby discriminating in a way that would violate the GATE if incorporated In an import restriction; and the U.S. executive branch can buy off congressional opposition without faking on a legislative smuggle. This practice has its obvious drawbacks. It allows He U.S. government to pretend Hat He resmciion is not of its doing, thereby reducing He government's ability to extract programs of adjustment from He U.S. industries that are protected. It encourages corruption and evasion In He trade practices of foreign exporters, who commonly transship their goods through other counmes as a way of entering U.S. markets. And it makes a mockery of the rules on international trade agreements. Worse still, it leads to a gross distortion of such agreements as the U.S. gove~nent and others seek to legitimate their practices by obtaining nominal absolution In the GATT. The headlong movement office U.S. executive branch toward He expanded use of He coercive bilateral approach, incorporated in those VEAs and OMAs, could eventually destroy what is left of the tattered

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182 RAYMOND VE~OlV rules of the GArr, before any successor regime can be devised. Finally, We VEAs and OMAs, to the extent that Hey are effective, have He unfortunate consequence of placing monopoly rents in He hands of He exporters, rents paid by He consumers in He United States. The "vol- untary" restriction of Japanese car exporters from 1982 to 1984, for in- stance, was a bonanza for Japan's car exporters, increasing Heir margins of profit and Heir financial resources weld beyond the levels Hey would Otherwise have achieved and encouraging the accelerated upgrading of Japanese automobiles for sale In U.S. markets (Gomez-Ibanez et al., 1983~. Although the VEAs and the OMAs have been des~uc~ve to ~ntemabonal trade, it should not be assumed that aB trade agreements Hat are less Han universal in scope are necessarily destructive. Economists have long rec- ogn~zed Hat In some circumstances, trade agreements Hat are discrimi- nato~y in their application may actually foster trade and may contribute to He welfare of nonparticipating countries as weD as of those that par- ncipate (Lipsey, 1960~. The European Economic Community and the European Free Trade Area, for instance, were sanctioned by GAIT mem- bers on that assumption; and although He Commun~ty's policies are fun- damentally at variance with He nondisc~nat~on principles of the GATE, one can make a case that the Community's operations contributed on balance both to international made and to global welfare. The U.S. government also has negotiated a series of less-than-universal agreements Hat presumptively have had benign rawer than malign effects on ~e, including notably a series of codes Hat were negotiated under the aegis of the GAG In 1979. More Can a half dozen codes were initialed at He time, covering subjects such as He sale of commercial aircraft, practices in government procurement, and the use of certain types of subsidies that affect intemational traded These codes have been open- ended in the sense Hat any member of the GATE has been free to subscribe, accepting the obligations and procuring the rights provided in He code. But the codes are discriminatory to He sense that GATI members choosing not to subscribe are likely to be denied He benefits under He code.21 Ultimately, the signatories have proved to be pnmanly the advanced industrialized counties. Although the GATT codes have been feeble instruments in the first years of their existence, they represent one of the few approaches that offer fresh promise of He development of a benign trade policy. To be sure, they are discriminatory in Heir application; but any country can cure He discrimination by ratifying the code. Accordingly, such agreements do not turn away once and for all from the principle of an open world mading system, a fact Hat has made it possible for the GAG structure to tolerate and even to foster such agreements.

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COPING WITH TECHNOLOGICAL CHANGE 183 The disposition of the United States to pursue ~ade-liberal~z~ng measures where it can, without being blocked any longer by Me principle of uni- versality, is evident from a number of its other ~tiai~ves In recent years, such as its bilateral discussions win Japan aimed at added liberal~zabon of We conditions of government procurement, its proposal for a free-trade area win Israel, its Interest In pursuing a selective free-trade arrangement win Canada, and so on (Bi~zi, 19851.22 Its eclecticism In Bade matters now begins to approximate that of the European Economic Community, which has never been restrained by Me principle of universality, as well as Be approach of Japan, which also includes numerous departures from that principle. The approach, to be sure, courts some acute dangers. The line between trade-creating and ~ade-destroy~ng agreements can be exceedingly fuzzy. Agreements that are ostensibly available for signature by any country can be constructed In ways that shut many countries out. But it is difficult to envisage any universal agreements on Be GATT pattern Mat offer much hope of arresting the trend to protectionism. Instead of addressing the relatively simple question of Be level of a tariff rate or Be existence of a requirement for an unpon license, future agreements must take up such complex and subtle questions as the international effect of a domestic subsidy, or the ~ntemational impact of a regulation ostensibly applied for reasons of safety or environmental control or the support of a lagging region. These are subjects In which facts are hard to come by, consequences are complex, and domestic politics play a dominant role. Such factors may explain In part why the existing GATE codes have proved so feeble. The machinery required for any degree of effectiveness In agreements that deal with complex nontanff trade bamers is more nearly approximated by the institutions of the European Community, with its elaborate provisions for fact-finding and adjudication. So far, the minds of U.S. policymakers are far from considering any such ambitious pos- sibilides. Instead, weir next efforts are being directed at extending the GArr to the liberalization of services and of foreign direct investment, programs Mat seem even less appropriate to the GAIT structure Han dealing win Be new wave of made restrictions. We have scarcely begun, therefore, to fashion international institutions that can cope with the new problems in the field of international made. U.S. poLmcs AND U.S. GOVERNANCE Before any constructive action can be envisaged among governments for deeding with Be problems of adjustment and accommodation to tech- nological change, the U.S. government itself must be prepared to sponsor

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184 RAYMOND VE~ON He requisite international action. The conventional wisdom of We moment, supported by He results of Gallup pods and He introduction of protectionist bins in He Congress, is Hat such sponsorship is almost out of He question. My own analysis, however, indicates that the U.S. position is far less determined than conventional wisdom would suggest. It has been repeatedly observed blat U.S. policy is based on He outcome of smuggles among interest groups rawer Han on He rational conclusions of thoughtful! referees. On Hat basis, one could easily conclude that He U.S. political process was as likely to produce a decision in favor of promoting open international markets as at any time in modern history. To be sure, a surge of imports has added to the acute difficulties of many domestic industries. But U.S. industry as a whole- including some of the leading fimns In the industries threatened by exports has never been more involved in world markets; the dominance of muldnadonal ente~pnses in He U.S. economy has no historical parallel. The stake of the large U.S. banks in maintaining open markets is also vital, especially if Hey are to hope eventually to collect some of their large foreign loans. And He capacity of labor unions to support a protectionist policy, while she strong, is diluted by three factors: the decline in labor union enrollment; Be growth in the relative importance of nonmanufacturing workers in He labor union movement;23 and the decline in He level of unemployment. If sheer interest- group calculations were determining the direction of U.S. trade policy, therefore, one might reasonably expect a different atmosphere than the one that now prevails. One key reason for Be striking protectionist sentiment in Congress and the public press is that a coalition of protectionist interests In the United States has succeeded in a strategy Hat Hey have pursued persistently over the past 35 years. The strategy has been fund~nentally to ensure Ache problems associated with increased international trade are always addressed on a case-by-case basis rawer Can systemically. That result has been achieved by a succession of statutory measures Cat have given aggrieved domestic industries increasing powers to initiate individual proposals for trade restnctions. As long as such issues arise case by case, the atmosphere surrounding discussions of trade policy is bound to be protectionist, and He costs of imposing import restrictions on the economy at large~osts such as the impact on consumers and He risk of retaliation-are likely to play a secondary role in He decision-making process. From time to time during He past 50 years, despite the strategy of the protectionist alliance, the U.S. government has moved dramatically in He direction of liberalizing its trade regime. In each instance, Hat decision has been taken in a context in which He decision makers were in a position to weigh not only the benefits but also the costs associated wad higher

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COPING WITH TECHNOLOGICAL CHANGE 185 import restrictions. Such moves occurred with the adoption of Me Trade Agreements Act of 1934, the Trade Act of 194S, the Trade Expansion Act of 1962, the Trade Act of 1974, and the 1979 Trade Act. In each of these instances, costs and benefits of the trade regime were framed and presented as a single package. Those same acts, however, camed We seeds of the eventual undermining of the trade policy they supported, as a series of technical amendments made it increasingly easy for special Interests to raise their trade problems on a case-by-case basis. Und} those procedures have been curbed, U.S. policies win be acutely vulnerable to the Initiatives of such special interests. Nevertheless, the bold moves by U.S. government toward trade lib- eralization- moves taken in each instance with Me acquiescence of the Congress underline a fundamental point with regard to congressional behavior. Conventional wisdom usually takes it for granted Mat the Con- gress will be protectionist, on the easy assumption that congressmen are doomed to bow to the interests that have been mobilized In their districts. But the record itself, as one or two studies indicate, is much more complex (Ahearn and Reifman, 19&~; Pastor, 1980, pp. 186-199~. Confronted with major choices Mat coupled Me benefits with the costs, congressmen have been prepared to resist Me pressures of specialized interests in their dis- mcts. In Weir handling of individual cases, administrators continue to be vulnerable to the tactical power and tactical skills of the interests. Ac- cordingly, those who are skilled in broken field running through Me sprawl- ~ng governmental apparatus can often avoid the full exercise of tile system of checks and balances to achieve weir desired results in individual cases. The challenge Is to find ways of restraining those possibilities so that the larger interests of the United States can play an appropriate role in the development of trade policy. Because U.S. inshtunons and processes are so vulnerable to special interests in the handling of individual cases, some analysts have resisted Me idea of having the U.S. government pursue selective policies of industry targeting such as has been seen In Japan, France, and Korea. The fear is Mat Me U.S. process would produce results that were unrelated to any rational analysis of Me individual cases. On the record, that is not an unreasonable concern. Yet, the swiftly changing character of the economy In which we live implies that with increasing frequency, individual en- terprises may encounter t~sit~onal problems that threaten their very ex- istence. In theory, such problems may be solved in various ways, including merger and acquisition. But Me experience of the U.S. government in helping Lockheed and Chrysler bridge their transitional difficulties a decade ago suggests Mat a role for government is not to be excluded. Accordingly, the U.S. government may have to build new capabilities into its system

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186 RAYMOND VERNON of governance Rat allow it to deal rationally win cntical individual cases as they emerge. Developing Hat capability is perhaps tile most difficult of the various challenges discussed In this chapter. ACKNOWLEDGMENTS I am grateful for He cndcal comments provided by Harvey Brooks, Roger Porter, Robert Reich, and Deli Rodrilc, and forge research support of Debora Spar. NOTES 1. An excellent summary of He arguments on both sides of Be issue is found in Norton, 1986. Underlying studies particularly words consuldng are President's Commission on Industrial Competitiveness, 1985, and Lawrence, 1984. 2. Between 1975 and 1983, the absolute size of the work force in U.S. manufactunug actually expanded by 15 million jobs, but its size relative to the total work force slipped to 18.0 percent from 20.9 percent (U.S. Bureau of the Census, 1985, p. 390). 3. From 1980 to 1984, foreign direct investment as reported by U.S.-based firms has been virtually unchanged. See Economic Report of the President, 1985, p. 349, and Survey Of Current Business, January 1986, p. 24. But that is probably the net result of a reduction ~ liquid assets and ~ increase in fixed assets abroad, as well as the revaluations of foreign assets related to an appreciating U.S. dollar. 4. A classic study of this phenomenon, covering the chemicals industry, is Stobaugh, 1968. For more general data, see Vemon, 1977, pp. 2~81. 5. On Japan, see Vogel, 1979, p. 72. On other countnes, see Pinder, 1982a; a comparative analysis of national policies in different industries appears in various chapters in Finder, 1982b. 6. U.S. government expenditures in 1983 were well above the national R&D expenditures from all sources in Japan, France, Germany, or the United Kingdom; see National Science Board, 1985, p. 187. 7. As of 1981 the proportion of the national maillot for manufactured imports affected by major nontariff bamers was higher in the United States than in six other industrial countnes, including Japan. See Cline, 1984, p. 60. 8. A characteristic evaluation of this sort was that of Jean-Jacques Servan-Schreiber, 1968, p. 67. 9. Ibe growth in the relative importance of merchandise imports in the United States is reflected in the increase in the ratio of nonagricultural nonpetroleum merchandise unpegs to value added by the U.S. manufactunog and =g sectors. That ratio rose from about 15 percent in the mid-1970s to about 23 percent ~ Be early 1980s. From venous issues of Survey of Current Business and Economic Report of the President, 1985, p. 244. 10. On steel, see Walters, 1983, pp. 484~86. On automobiles, see Cohen, 1983, p. 555. 11. Flows to Be United States from abroad from royalties and fees, other private services, direct investments, and other private receipts rose from 1.3 percent of U.S. GNP in 1965 to 2.6 percent in 1984, reflecting a growth rate substantially higher than Be

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COPING W1TlI TECHNOLOGICAL CHAlIG; 187 grown rate of total U.S. exports and of U.S. GNP. See Survey of Current Business, June 1985, pp. 4~41. 12. Stephen S. Cohen and John Zysman argue this position eloquently in the manuscript of their forthcoming book: Ma~wfacn~nng Maners: The Myth of the Post-lndusmial Society, New York: Basic Books. 13. Me principal provision is Section 7 of We Clayton Act. See Sheave, 1978, pp. 38- 41. 14. Between 1970 and 1984, the book value of all foreign direct investment in the United States rose from $13.3 billion to $159.6 billion. Me manufactunag component in 1984 amounted to $50.7 billion. From various issues of Me Survey of Current Business. . The joint-venture mend is described in Ohmae, 1985; and Mowery and Rosenberg, 1985. 16. The subject is explored in Crandall, 1981, especially pages 129-140. 17. Hard data on this subject are not easily available. One study, reflecting conditions in the latter 1970s, concludes that in the United States, business executives received compensation that was about 15 tunes Mat of an auto worker, whereas the comparable figure in Japan was 9 times, and in Sweden (after truces) only a little over 2 times; the figures appear in an unpublished manuscript by Sidney Verba and Gary Orren, which in turn relies on various surveys by others to generate the comparison. 18. For an insightful summary of U.S. trade practices, see Grey, 1983. 19. For congressional reactions, see Abeam and Reifm=, 1984. 20. For illuminating discussions of the place of these codes, see Jackson, 1983; and Hufbauer, 1983. 21. The issue of nonsignatory rights has actually been in dispute in the GAIT, with an ambiguous outcome; but the exclusionary intent in dig the codes was reasonably clear. See Ta~ullo, 1984. 22. Me significance of these departures from longstanding U.S. policy is emphasized in Samolis, 1984. 23. Although U.S. total manufactunug employment in 1983 was practically the same as in 1971, the number of union members in manufacturing declined by about 500,000, and the relative importance of the total union membership represented by manufactunug unions fell to 11.4 percent from 15.8 percent (U.S. Bureau of the Census, 1985, p. 423; Economic Report Tithe President, 1985, p. 275.) REFERENCES Abernathy, W., and R. H. Hayes. 1980. Managing our way to economic decline. Harvard Business Review (July-August):67-77. Aheam, R. J., and A. Reifman. 1984. Trade policymaking in the Congress. Pp. 36~6 in RecentIssues and Initiatives in U.S. Trade Policy, R. E. Baldwin, ed. Cambridge, Mass.: National Bureau of Economic Research. Aho, M. C., and T. O. Bayard. 1980. American trade adjustment assistance after five years. The World Economy 3(November):359-376. Bergsten, C. F., and W. R. Caine. 1985. The United States-Japan Economic Problem. Washington, D.C.: lustitute for International Economics. Bilzi, C. 1985. Recent United States trade arrangements: Implications for the most-favored nation principle and United Stams trade policy. Law and Policy in Intern ationa1 Business 1:209-236.

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188 RAYMOND VERNON Bozeman, B., and A. Link. 1985. Public support for private R&D: The case of He research tax credit. Journal of Policy Analysis and Management 4(3):376. Brooks, H. 1985. Technology as a factor in U.S. competitiveness. Pp. 328-356 in U.S. Competitiveness in the World Economy, G. C. Lodge and B. R. Scott, eds. Boston: Harvard Business School Press. Brooks, H. 1986. National science policy and technological Ovation. Pp. 119-167 ~ The Positive Sum Strategy: Harnessing Technology for Economic Grown, R. Landau and N. Rosenberg, eds. Washington, D.C.: National Academy Press. Casson, M., and G. Norman. 1983. Pricing and sourcing strategies in a multinational oligopoly. In We Grown of International Business, M. Casson, ed. London: George Allen and Unwin. Cline, W. R. 1984. Exports of Manufactures from Developing Countnes. Washington, D.C.: Brooldugs Institution. Cohen, R. B. 1983. The prospects for made and protectionism in the auto industry. In Trade Policy in He 1980s, W. R. Cline, ed. Cambridge, Mass.: MU Press. Crandall, R. W. 1981. Ibe U.S. Steel Industry in Recurrent Crisis. Washington, D.C.: Brookings Institution. Denison, E. F. 1979. Accounting for Slower Economic Grown. Washington, D.C.: Brook- ings Institution. Diebold, J. 1983. The inflation technology industries: A case study of high technology trade. In Trade Policy in He 1980s, W. R. Cline, ed. Cambridge, Mass.: MIT Press. Economic Report of the President. 1985. Washington, D.C:.: U.S. Government Printing Office. Freeman, C. 1982. The Economics of Industrial Innovation, 2nd ed. Cambridge, Mass.: MIT Press. Gomez-Ibanez, J. A., R. A. Leone, and S. A. O'Connell. 1983. Restraining auto imports: Does anyone win? Journal of Policy Analysis and Management 2(2):196 219. Grey, R. de C. 1983. A note on U.S. trade. Pp. 243-257 in Trade Policy in the 1980s, W. R. Cline, ed. Carnbndge, Mass.: MIT Press. Hexner, E. 1946. International Cartels. Chapel Hill: University of Norm Carolina P=ss. Hutbauer, G. C. 1983. Subsidy issues after the Tokyo round. Pp. 327-361 in Trade Policy in the 1980s, W. R. Cline, ed. Cambridge, Mass.: MIT Press. Jackson, J. H. 1983. GATE machunery and the Tokyo round agreements. Pp. 159-187 in Trade Policy in the 1980s, W. R. Cline, ed. Cambridge, Mass.: MIT Press. Landes, D. 1969. The Unbound Prometheus. London: Cambridge University Press. Lawrence, R. Z. 1984. Can America Compete? Washington, D.C.: Brookings Institution. Lipsey, R. E. 1960. The theory of customs union. Economic Joumal 70:49~513. Lipsey, R. E. 1984. Recent Trends in U.S. Trade and Investment. Report No. 565. Cambridge, Mass.: National Bureau of Economic Research. Lipsey, R. E., and I. B. Kravis. 1985. The competitive position of U.S. manufacturing Is. Banco Nazionale de Lavoro Quarterly Review (June):127-154. Lodge, G. 1984. The American Disease. New York: Alfred A. Knopi. Magaziner, I. C., and R. B. Reich. 1982. Minding Amenca's Business. New York: Harcourt Brace Jovanovich. Mansfield, E. 1968. The Economics of Technological Change. New York: W. W. Norton. Mowery, D., and N. Rosenberg. 1985. Commercial aircraft: Cooperation and competition between He U.S. and Japan. California Management Review (Summer3:7~92. National Science Board. 1985. Science Indicators 1985. Washington, D.C.: National Sci- ence Board. Nelson, R., ed. 1982. Government and Technical Progress. New York: Pergamon Press.

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COPING WITH T~CHNOLOGIC~ CHUGS 189 Norton, R. D. 1986. Industrial policy and American renewal. Journal of Economic Literature 24(1): 12-17. Ohmae, K. 1985. Tnad Power: The Coming Shape of Global Competition. New York: Free Press. Pastor, R. A. 1980. Congress and Me Politics of U.S. Foreign Economic Policy 1929- 1976. Berkeley: University of Califomia Press. Patterson, G. 1983. The European Community as a threat to the system. Pp. 223-241 in Trade Policy in Me 1980s, W. R. Cline, ed. Cambridge, Mass.: MIT Press. Pavitt, K. 1971. We Conditions for Success in Technological Innovation. Pans: Organi- zation for Economic Cooperation and Development. Pinder, J. 1982a. Causes and kinds of industrial policy. Pp. 44 51 in National Industrial Strategies and the World Economy, J. Pinder, ed. Totowa, N.J.: Allanheld, Osmun and Company. Pinder, J., ed. 1982b. National Industrial Strategies and the World Economy. Totowa, N.J.: Allanheld, Osmun and Company. Porter, M. 1985. Competitive America. New Yorlc: Free Press. President's Commission on Industrial Competitiveness. 1985. Global Compeui~on, The New Realty: The Report of the President's Commission on Indusmal Competitiveness, Vols. 1 and 2. Washington, D.C.: U.S. Gove~n~nent Printing Office. Reich, R. 1983. The Next American Frontier. New York: Penguin Books. Richardson, J. D. 1983. Worker adjusunent to U.S. international trade: Programs and prospects. Pp. 393417 in Trade Policy in the 1980s, W. R. Cline, ed. Cambndge, Mass.: MIT Press. Roy, A. D. 1982. Labor productivity in 1980: An international companson. National Institute Economic Review 101(August):2~37. Samolis, F. B. 1984. SOS for the CBI: Lessons from Be Caribbean basin initiative. Pp. 137-142 in Managing Trade Relations ~ the 1980s. Totowa, N.J.: Rowman and Allan- held. Saxonhouse, G. 1983. The micro- and macroeconomics of foreign sales to Japan. Pp. 259- 263 in Trade Policy in Be 1980s, W. R. Cline, ed. Cambndge, Mass.: MIT Press. Schultze, C. L. 1973. Ike economic conquest of national security policy. Foreign Affairs (April):526. Servan-Schreiber, J-J. 1968. The American Challenge. New York: Athenewn. Shennan, R. 1978. Antitrust Policies and Issues. Reading, Mass.: Addison-Wesley. Stobaugh, R. B. 1968. The product-life cycle, U.S. exports and international investment. D.B.A. thesis. Harvard Business School. Tarullo, D. K. 1984. The MTN subsidies code: Agreement without consensus. Pp. 63-99 in Emerging Standards of International Trade and Investment, S. J. Rubin and G. C. Hufbauer, eds. Totowa, N.J.: Rowman and Allanheld. Teece, D. J. 1983. Technological and organization factors in the theory of the multinational enterprise. Pp. 54 62 in The Grown of International Business, M. Casson, ed. London: George Allen and Unwin. Thurow, L. 1980. The Zero-Sum Society. New York: Basic Books. U.S. Bureau of the Census. 1985. Statistical Abstract of the United States: 1985. 105th edinon. Washington, D.C.: U.S. Government Printing Office. United Nations. 1983. Yearbook of International Trade Statistics. New Yodc: United- Na- tions. Verba, S., and G. Often. 1985. Equality in America. Cambridge, Mass.: Harvard University Press. Vernon, R. 1955. Foreign trade and national defense. Foreign Affairs (October):77-88.

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190 RAlYMOND VERNON Vernon, R. 1977. Storm Over He Mulimationals. Cambridge, Mass.: Harvard University Press. Vemon, R., and W. H. Davidson. 1979. Foreign Production of Technology-Intensive Products by U.S.-Based Multinational Enterprises. Report to the National Sasoce Foun- dlation, No. PB80 148638, January. Washington, D.C.: National Science T;oundlation. Vogel, E. 1979. Japan as No. 1: Lessons for Amenca. Cambridge, Mass.: Harvard Uni- versity Press. Walters, I. 1983. Structural adjustment and bade policy in the intemational steel mdusay. In Trade Policy in the 1980s, W. R. Cline, ed. (~mbndge, Mass.: MIT Press.