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Linking Trade and Technology Policies: An International Comparison of the Policies of Industrialized Nations
Managing Trade Conflict in High-Technology Industries
LAURA D'ANDREA TYSON
Trade among nations is traditionally attributed to underlying differences in their resource endowments. Australia exports wool because its climate and terrain are well suited to sheep grazing. Japan is a net exporter of manufactured goods and a net importer of natural resources because of its relative abundance of capital and skilled industrial labor and its relative scarcity of raw materials.
Inherited national differences in resource endowments explain some world trade patterns but not others. Trade among the advanced industrial countries in manufactured goods, which accounts for a large and growing fraction of total world trade, is a glaring exception.1 Intraindustry trade among these countries in automobiles, computers, sophisticated telecommunications products, and a wide range of other manufactured products cannot be attributed to national differences in availabilities of land, labor, and capital.
Even a more finely grained analysis that distinguishes between different kinds of land, labor, and capital fails to do the trick. What is striking about the advanced industrial countries is their broad similarity in endowments of the kinds of resources required for competitive strength in the production of manufactured goods, not their differences.
If national differences in resource endowments, broadly defined, do not explain intraindustry trade in manufactured goods among the developed countries, what does? At first blush, the reasons for trade in products in which countries have no underlying comparative resource advantage are not
Parts of this paper are excerpted by permission from: Laura D'Andrea Tyson. 1992. Who's Bashing Whom: Trade Conflict in High-Technology Industries. Washington, D.C.: Institute for International Economics. All rights reserved.
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Linking Trade and Technology Policies: An International Comparison of the Policies of Industrialized Nations
Managing Trade Conflict in High-Technology Industries
LAURA D'ANDREA TYSON
Trade among nations is traditionally attributed to underlying differences in their resource endowments. Australia exports wool because its climate and terrain are well suited to sheep grazing. Japan is a net exporter of manufactured goods and a net importer of natural resources because of its relative abundance of capital and skilled industrial labor and its relative scarcity of raw materials.
Inherited national differences in resource endowments explain some world trade patterns but not others. Trade among the advanced industrial countries in manufactured goods, which accounts for a large and growing fraction of total world trade, is a glaring exception.1 Intraindustry trade among these countries in automobiles, computers, sophisticated telecommunications products, and a wide range of other manufactured products cannot be attributed to national differences in availabilities of land, labor, and capital.
Even a more finely grained analysis that distinguishes between different kinds of land, labor, and capital fails to do the trick. What is striking about the advanced industrial countries is their broad similarity in endowments of the kinds of resources required for competitive strength in the production of manufactured goods, not their differences.
If national differences in resource endowments, broadly defined, do not explain intraindustry trade in manufactured goods among the developed countries, what does? At first blush, the reasons for trade in products in which countries have no underlying comparative resource advantage are not
Parts of this paper are excerpted by permission from: Laura D'Andrea Tyson. 1992. Who's Bashing Whom: Trade Conflict in High-Technology Industries. Washington, D.C.: Institute for International Economics. All rights reserved.
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Linking Trade and Technology Policies: An International Comparison of the Policies of Industrialized Nations
particularly hard to find. They lie in the advantages of large-scale production—economies of scale, learning, and scope—which lead to an essentially random division of labor in which first-movers in a particular product gain cost advantages over new entrants. They lie in differences in national patterns of demand and subtle product differentiation to meet the desires of different national markets. And they lie in national differences in technological capabilities.
But what determines the kinds of technological capabilities a country fosters, the kinds of demand patterns it develops, or whether its firms are first-movers in scale-intensive industries? Such country-based sources of competitive advantage have something important in common—they are created, not inherited. They can be attributed, at least in part, to salient differences in how national economies are organized and in the economic objectives they pursue.2
As intraindustry trade and competition among the developed countries have intensified, the role of such differences in shaping competitive outcomes has drawn increasing attention. Competition among American, European, and Japanese companies has spilled over into competition among the American, European, and Japanese models of capitalism.3 And trade conflicts, once narrowly focused on allowable national border policies, have spilled over into conflicts about allowable national differences in areas that have traditionally been the domain of domestic policy choice.
Nowhere are systemic competition and friction among the developed countries more heated than in high-technology industries.4 Such industries are disproportionately concentrated in the developed countries. In 1987, 82 percent of the world's R&D expenditures and 69 percent of the world's R&D personnel were located in five industrial countries—the United States, Japan, France, the United Kingdom, and West Germany. With the addition of five smaller European countries, the shares rise to 91 percent and 84 percent, respectively (Dunning, 1990).
In the 20 years between 1966 and 1986, technology-intensive goods (as measured by the Organization for Economic Cooperation and Development [OECD]) climbed from 14 percent to 22 percent of world manufactured exports (Ostry, 1990a). In 1987, about 42 percent of America's manufactured exports, more than one-third of Japan's manufactured exports, and about one-fifth of Europe's manufactured exports were high-technology products (National Science Board, 1989, Table 7-11, p. 377).
As a result of growing trade and investment, the share of domestic suppliers in the home markets for high-technology products has declined in the United States and even more dramatically throughout Europe. In the United States, products from Japan have accounted for the biggest increase in import penetration. Only in Japan has the import penetration share remained unchanged over the past two decades, with domestic suppliers still account-
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Linking Trade and Technology Policies: An International Comparison of the Policies of Industrialized Nations
ing for about 94 percent of the Japanese market for high-technology products in 1985. The comparable domestic supplier shares for the United States, France, and West Germany for that year were, respectively, 84 percent, 60 percent and 43 percent (National Science Board, 1989, Table 7-5, p. 374).
Between 1970 and 1989, there were significant changes in the competitive positions of the United States, the European countries, and Japan in high-technology trade (see Tables 1, 2, and 3). The share of Japanese producers in world exports of science-based industries more than doubled from about 8 percent to about 17 percent while the share of American producers declined from about 29 percent to about 20 percent during this period.5 The erosion of the U.S. share was greatest in electronics, as a consequence of the rapid and strong rise first of Japan and more recently of the East Asian newly industrialized countries (NICs) (see Table 4).
The European Community's share in world exports of science-based sectors also declined from about 45 percent in 1970 to about 37 percent in 1987. The overall European decline reflects a decline in the shares of all of the individual countries in the Community. Like the American decline, the European decline was largely the result of a significant deterioration of the European position in the electronics sector of the science-based group.
Technology-intensive industries have been a source of recurrent trade friction between the United States and its trading partners. Trade in these industries has never really been free in the classical sense. Rather it has been manipulated by a myriad of formal and informal policies. Governments have intervened in these industries—often with a forceful visible hand rather than a velvet touch—because they are perceived to have both military and economic significance. Most of America's high-tech success stories—for example, in semiconductors, computers, and aerospace—have their beginnings in America's endless quest to develop more reliable and sophisticated military equipment.
Japan, the East Asian NICs, and the European countries, in contrast, have emphasized the commercial significance of a high-technology production base. The governments of these nations have accorded high-tech industries special promotional or protectionist treatment in the anticipation of several kinds of economic benefits, including more productive and higher paying jobs, greater exports, and the development of an indigenous technological infrastructure with spillover benefits for other industries.
Despite a general liberalization trend around the world, national governments have not foresworn measures to support their high-technology producers. The visible hand present at their conception is still present long after many of them have reached maturity. While government intervention
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Linking Trade and Technology Policies: An International Comparison of the Policies of Industrialized Nations
TABLE 1 Shares of Selected Countries and Areas in World Trade in Science-Based Sectors* (Percentage shares in values)
1970
1973
1976
1979
1982
1985
1987
1989
1970–89
United States
29.25
25.39
24.41
22.46
25.17
23.87
19.86
20.24
-9.01
Japan
7.81
9.07
9.61
10.37
11.6
14.75
16.16
16.52
8.71
EEC (12)
45.01
47.24
46.78
46.42
42.03
38.06
39.02
37.07
-7.94
Germany, Federal Republic
15.85
17.33
16.19
15.37
13.83
12.04
13.13
11.84
-4.01
France
6.81
7.31
8.61
8.67
7.76
6.73
7.01
6.67
-0.14
United Kingdom
9.87
9.48
8.74
9.72
8.93
8.09
7.23
7.11
-2.76
Italy
4.61
4.07
4.05
3.81
3.69
3.55
3.55
3.4
-1.21
Non-OECD Countries
3.29
4.91
7.26
9.52
11.35
13.35
15.43
16.25
12.96
NICs in Asia
1.04
2.32
3.75
4.76
5.42
7.61
9.29
9.76
8.72
* Ratio of national exports to world exports (percentage).
SOURCE: SIE-World Trade data base.
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TABLE 2 Exports of High-Tech Products, by Selected Countries: 1970-86
All Countries
France
West Germany
Japan
United Kingdom
United States
Other
Europe
Exports
Billions of Dollars
1970
31.841
2.241
5.127
3.84
3.054
9.02
8.589
17.792
1975
77.942
6.467
12.723
9.487
7.759
20.282
20.864
46.183
1980
185.957
14.425
29.046
31.338
20.168
44.869
46.129
105.414
1982
192.464
15.102
29.612
35.798
18.037
50.234
43.681
101.225
1984
221.521
15.41
28.585
54.1
18.432
56.54
48.454
104.272
1985
237.575
16.556
31.466
55.531
21.333
59.243
53.446
115.981
1986
289.481
20.36
41.937
69.105
25.304
63.483
69.292
149.672
All Countries
France
West Germany
Japan
United Kingdom
United States
Other
Europe
Percentage shares
Share of total high-tech exports
1970
100
7
16
12
10
28
27
56
1975
100
8
16
13
10
26
27
59
1980
100
8
16
17
11
24
25
57
1982
100
8
15
19
9
26
23
53
1984
100
7
13
24
8
26
22
47
1985
100
7
13
23
9
25
22
49
1986
100
7
14
24
9
22
24
52
* Includes, in addition to those shown here, Australia, Austria, Belgium, Canada, Denmark, Greece, Iceland, Ireland, Italy, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, Yugoslavia.
NOTE: Uses the Organization for Economic Cooperation and Development definition of high-intensity technology products.
SOURCE: National Science Board. Science and Engineering Indicators, 1989.
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TABLE 3 Trade Balance of Selected Areas and Countries in Science-Based Sectors*
1970
1973
1976
1979
1982
1985
1987
1989
1970-1989
United States
18.87
13.79
13.85
10.99
10.91
3.62
1.38
1.45
-17.42
Japan
3.28
4.74
6.19
7.02
8.05
10.99
12.61
12.5
9.22
EEC (12)
5.38
5.05
8.16
5.48
4.96
2.59
0.26
-1.73
-7.11
Germany, Federal Republic
7.82
8.65
7.22
5.01
4.15
3.11
3.53
2.18
-5.64
France
-0.66
-0.67
1.01
1.01
0.81
0.86
0.15
0.21
0.87
United Kingdom
4.03
2.66
2.75
1.83
1.71
0.46
-0.21
-0.51
-4.54
Italy
0.06
-0.68
-0.07
-0.42
-0.32
-0.61
-1.15
-1.04
-1.1
NICs in Asia
-2.14
-2.32
-1.47
-2.02
-1.51
0.08
0.45
-0.91
1.23
* Standardized trade balances expressed as percentage of total world trade in science-based sectors. (For methods see Guerrieri, in this volume, note 5.)
SOURCE: SIE-World Trade data base
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Linking Trade and Technology Policies: An International Comparison of the Policies of Industrialized Nations
TABLE 4 Shares of Selected Countries and Areas in World Trade in High R&D-Intensive Electronic Sectors* (Percentage shares in values)
1970–1973**
1973–1976
1976–1979
1979–1982
1982–1985
1985–1988
1989
1970–1989
United States
28.48
26.42
24.27
26.05
27.13
21.49
19.51
-13.12
Japan
9.43
10.77
13.06
14.21
17.44
20.22
21.47
13.68
EEC (12)
44.97
42.59
39.89
36.14
30.72
31.30
28.98
-14.62
Germany, Federal Republic
15.03
14.37
12.43
10.43
8.24
8.09
7.09
-6.48
France
7.76
7.48
7.34
6.41
4.96
4.94
4.14
-3.37
United Kingdom
8.02
7.55
7.31
7.18
6.69
7.05
7.08
-0.79
Italy
5.37
4.18
3.91
3.80
3.06
3.21
3.17
-3.06
Non-OECD Countries
5.52
9.19
12.51
14.66
17.13
19.79
23.24
19.31
NICs in Asia
3.36
6.33
8.43
9.20
11.20
13.95
16.21
14.12
* This product group includes data processing equipment, electronic components, and telecommunications equipment.
** Average value in each subperiod.
SOURCE: SIE-World Trade data base.
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has been widely discredited in many sectors, there is no presumption that the visible hand of policy will lead to lower economic welfare than the invisible hand of the market in high-technology industries. Indeed, the presumption if anything runs the other way. Increasing returns, substantial learning curve economies, linkage externalities, and technological spillovers are not the stuff of perfect competition and market optimality. As the so-called ''strategic'' trade literature has demonstrated, policies to protect or promote a national high-technology production base can be welfare-improving under these conditions.6
In most countries—including the United States with increasing frequency—the goal of trade policy in high-technology industries is not simply to improve the trade balance, or to improve the terms of trade, or to aid the adjustment of declining industries through temporary protection, or to open foreign markets for their own sake, or to make the world trading system more efficient. Rather the goal is to use trade policy, along with other policy instruments, to secure a national share of world production and the associated spillover benefits of high-technology industries.
The simultaneous pursuit of this goal among the developed countries has been the source of a growing trade conflict. It is easy to see how this goal can be "zero-sum" in nature—more of industry A located in Europe may mean less of industry A located in the United States or Japan. In addition, it is easy to imagine how the policies used in pursuit of this goal—policies such as preferential procurement, aggressive R&D subsidies targeted at commercial technologies but limited to domestic producers, and local content restrictions that require high-technology investment to serve the national market—can be beggar-thy-neighbor or mercantilistic in character. Indeed, some emerging policies that attempt to restrict foreign access to the research activities or results of nationally sponsored R&D programs are nothing short of a kind of technological mercantilism.7
Ironically, growing economic nationalism or regionalism in high-technology industries is at odds with the increasing globalization of high-technology companies. The international diffusion of product and process technologies means that these companies can now parcel out separate activities or components on a truly international basis. As a consequence, the competition among the developed countries for high-technology production is becoming more a competition for the activities of high-technology companies regardless of ownership and less a competition among national champions. What matters more and more is not the nationality of a producer or a product, which is increasingly difficult to identify, but its territoriality—where it is produced, not by whom. This trend is most pronounced in Europe, where policies to promote national or regional high-tech champions in electronics have been complemented by policies to attract "high-quality" foreign direct investment by American and Japanese firms.
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TRADE BARRIERS, STRUCTURAL IMPEDIMENTS, AND STRUCTURAL DIFFERENCES AS SOURCES OF TRADE CONFLICT IN HIGH-TECHNOLOGY INDUSTRIES
Trade friction among the developed countries in technology-intensive industries takes many forms, including conflicts over such issues as market access, dumping, rules of origin, import quotas, government procurement, industrial subsidies and targeting, standards and testing, and patent protection. Some of these conflicts involve the traditional subject matter of trade disputes—border and nonborder policies that by intent or design discriminate between domestic and foreign products, domestic and foreign producers, or foreign products imported from abroad and foreign products produced locally. For want of a better term, such policies will be called trade barriers throughout this discussion. Trade barriers include tariffs, import quotas, dumping laws, rules of origin, preferential procurement policies, subsidies and other forms of industrial targeting. Trade barriers, broadly defined in this way, are important sources of trade friction because they are actively used to build national or regional production bases in high-technology industries.
Other trade conflicts emanate from structural differences among nations in a wide variety of policies and institutions that affect the terms of international competition. At issue in such conflicts are a potpourri of things such as standards and testing, intellectual property protection, health and safety regulations, competition policy, the organization and support of R&D, corporate financial structures and the rights of shareholders, and the nature of business-government relations.
Structural differences in such areas, while not designed to advantage one set of national producers over another, may nevertheless have that effect. Perhaps because of this, such differences have come to be called "structural impediments" to trade—a terminology used by the OECD and by the United States in its recent bilateral negotiations with Japan.
Broad structural differences influence the terms of international competition in global high-technology industries in two ways. First, these differences affect the accessibility of different national markets to foreign competitors. Language is the most obvious example of a structural difference influencing market access. National differences in the extent and organization of regulatory institutions, in antitrust laws and their enforcement, in patent procedures—even national differences in land use policies—may have large but unintended effects on the ability of foreign firms to break into a particular national market. Such differences can act as very real "structural impediments" to foreign market access even though they are not explicitly designed for that purpose.
Second, other kinds of structural differences create different incentive
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environments and behavioral tendencies for different national firms. National differences in antitrust policies, in the organization of science and technology, in the protection of intellectual property rights, and in the financial system are salient examples.
For example, the long-term vision of Japanese companies is partly an outgrowth of the financial environment in which they operate. The seeming inability of American firms to cooperate with one another in a variety of ways is encouraged—indeed, in some instances, even required—by the antitrust environment in which they function. The relatively open and rapid flow of technological information in the United States is encouraged by the high job turnover of scientific and engineering manpower and by the concentration of the nation's basic research in academic institutions. In Japan, lifetime employment and the concentration of basic research in proprietary laboratories has the opposite effect.8
TRADE BARRIERS, STRUCTURAL DIFFERENCES, AND NEW MULTILATERAL RULES FOR TECHNOLOGY TRADE: A LONG-TERM AGENDA
Traditionally, the United States has followed a rules-based approach in its multilateral and bilateral trade negotiations. Even the aggressive unilateralism of the United States in the 1980s usually targeted rules, not outcomes. The nature of trade friction in high-technology industries suggests several conclusions about the rules-based approach.
First, and most obvious, to be effective in reducing trade friction, multilateral rules must be quite precise about the behavior in question. Weak and vague rules are a prime cause of trade disputes that undermine multilateralism.
For example, the 1979 government procurement code attached to the General Agreement on Tariffs and Trade (GATT) had huge loopholes in product coverage and in the specification of bidding procedures. Only about half of worldwide government purchases were open to competitive bidding after the code was negotiated (Jerome, 1990). The remaining purchases were either single-tendered contracts or contracts falling below the code's threshold magnitude. Not surprisingly, the code did not prevent friction between the United States and Japan on "competitive procurement arrangements" in telecommunications equipment and supercomputers, nor did the code preclude the exclusion of telecommunications equipment from national treatment in the 1992 rules proposed by the European Community.
The 1979 Aircraft Code was powerless to prevent substantial European subsidies to Airbus or to head off U.S.-Europe friction in the commercial aircraft industry. And the 1979 GATT Antidumping Code allowed large country differences in what determined dumping, the process by which a
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dumping decision was realized, and the remedies agreed upon by the alleged dumper and the aggrieved party. Not surprisingly, national antidumping rules became a major route for high-tech trade friction in the 1980s.
Greater precision in rules, although a necessary condition for reducing trade friction, is not enough. Agreements work only when they are monitored, when there is a forum for negotiating disputes among the affected actors, and when there are credible enforcement mechanisms that include credible sanctions for rule violations. The only way to reduce overt nontariff trade barriers is to write explicit rules stating what can and cannot be done, and the only way to be sure that one's trading partners are giving reciprocity—that is, are complying with the rules—is to have an effective, enforceable means of adjudicating claims. At this point and for the foreseeable future, even assuming a successful resolution of the Uruguay Round, GATT will have neither all of the rules nor the necessary means of adjudication (Hudec, 1990).
Moreover, even precise and enforceable rules about overt trade barriers are not sufficient. Rules are also required to reduce impediments to trade caused by structural differences among nations. These differences make a rules-based approach to liberalizing trade a much more complex task, involving multilateral negotiations about business and government practices that, although motivated by domestic economic and political considerations, have unintended but nonetheless wide-reaching effects on trade. Thus, the market-oriented, sector-specific (MOSS) talks between the United States and Japan in the mid-1980s involved negotiations about such nontariff impediments to trade as national testing and certification requirements for telecommunications equipment and Japan's National Health Insurance Reimbursement system, while the Structural Impediments Initiative (SII) talks involved such domestic policy issues as land use, infrastructure spending, and retail distribution systems in Japan and education policy and creditcard use in the United States. The broader the range of policy areas included in trade negotiations, the larger the community of policymakers and interests involved, and the more difficult it is to reach consensus.
In an increasingly interdependent world, significant differences in almost any national policy area can affect trade and hence become the topic of trade negotiations. One of the challenges confronting a rules-based approach is to determine which national policy differences are the appropriate focus of multilateral rules to govern the international trading system and which are not. The answer lies in determining which policy differences are likely to have the biggest effects on competition and hence are most likely to be recurrent sources of friction.
For technology-intensive industries, new international rules are most important in several areas, including government procurement practices, intellectual property protection, antidumping procedures, industrial targeting
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below a constructed measure of production costs.24 A dumping determination now often means nothing more than that foreign firms are found to be selling below some artificially defined and constructed measure of full average costs adjusted by an arbitrary 8 percent profit markup.25
If a dumping determination has been made, U.S. law calls for a further demonstration of either threatened or actual injury to U.S. companies. Because there are no formal criteria by which threatened or actual injury is assessed, this condition can be met easily, especially if the political and overall trade atmosphere is right. Finally, if injury is established, the law calls for the automatic imposition of dumping duties in the amount of the difference between the dumped price and the FMV. The only way to stop this process is for the dumping suit to be dropped—as it was in the semiconductor case—in preference for another remedy.
At no point in the application of the nation's dumping laws is it necessary to document the structure of the industry in question, the market power of the dumper, the predatory intent or effect of the dumping, or the trade barriers, structural impediments, or other foreign government subventions that might underlie it. In short, there is absolutely nothing in the existing procedures to determine whether dumping is an "unfair" or "predatory" business practice or whether it is supported by the "unfair'' behavior of foreign governments. Demonstration of the defensible rationale for national dumping laws under GATT—to deter predatory behavior by foreign firms—is lacking in these procedures. Thus, it is not surprising that they can be used to block "fair'' competition by lower-cost, more efficient foreign producers, resulting in a less competitive industry over time.
At a minimum, U.S. dumping laws should be changed to incorporate stricter guidelines on the definition and measurement of the costs and prices used to determine whether dumping has occurred. These changes should be along the lines suggested earlier in the discussion on new international guidelines for dumping—actual prices rather than constructed prices should be used whenever possible, prices and costs should be assessed at different scales of production and in different locations around the world, and the profit markup should be adjusted to different home and industry market conditions. In addition, the law should be changed to incorporate some mechanism for evaluating the market conditions, business practices, trade barriers, and structural impediments affecting competition in the industry in question. Such an evaluation is essential to determining whether dumping is predatory in intent or effect and whether it is supported by foreign government action. It is also essential to determining the appropriate remedy.
Dumping that is injurious, or threatens to be injurious, but is not predatory and not supported by unfair foreign trading practices should be addressed by recourse to the nation's other trade laws. For example, if
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dumping is supported by foreign subsidies, the appropriate remedy is the countervailing duty (CVD) or countervailing subsidy (CVS) approach discussed below. If dumping is judged to be competitive behavior that is not predatory in intent and there are no foreign subsidies involved, then the appropriate remedy is Section 201—the safeguards section of the U.S. trade law, which is designed to provide import relief, regardless of the underlying case of import damage.
Finally, dumping that occurs under imperfectly competitive market conditions with predatory behavior by foreign companies is likely to require a different remedy than the imposition of dumping margins. At the very least, the remedy should not take the form of some kind of negotiated agreement that encourages or compels foreign firms with substantial market power to raise their prices.
At the same time that the nation's dumping laws are tightened along these lines, their enforcement should also be strengthened. As things now work, dumping duties may deter dumping in the future, but they do not undo the effects of dumping in the past. To address this shortcoming, the laws should be revised to include the possibility that all duties, fines, and other revenues generated by a successful antidumping suit be disbursed to the injured domestic industry. In addition, the laws should be modified to allow for the imposition of penalties or damages on foreign firms found guilty of dumping under certain circumstances, such as those in which predatory intent or explicit foreign targeting policies are involved. Finally, the laws should be revised to allow for early monitoring of foreign costs and prices in industries in which there is a strong presumption of predatory capability, based on global industry structure or foreign government policies. An early warning procedure could be a useful deterrent to predatory or preemptive behavior by foreign producers.
Adjusting the nation's dumping laws along the lines suggested here does not mean gutting them. Rather, it means designing them to be used more effectively for their appropriate objective—to deter predatory or anticompetitive behavior by foreign firms and governments. When such behavior is not at issue, but when foreign competition is nonetheless injuring or threatening to injure American companies, the safeguards or CVD clauses of the nation's trade laws, not the dumping laws, are the appropriate remedy.
Countervailing Duties
In accordance with GATT regulations, U.S. trade law allows for the imposition of countervailing duties to offset the injurious effects of foreign subsidies on domestic producers. Under GATT Article VI, injurious subsidization is a form of market distortion recognized as an unfair trade practice. During the first half of the 1980s, there was a rapid expansion in the
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number of countervailing duty actions brought by U.S. companies against unfair competition (Destler, 1991).
The first-best solution to the problem of trade distortions caused by foreign subsidies would be new international agreements to restrict them. The United States has sought this first-best solution in international negotiations by pushing for stricter multilateral regulations on allowable subsidies—both their kinds and their amounts. The U.S. approach rests on the presumption that it can come to an agreement with its trading partners about allowable subsidies.26 But this outcome, while laudatory in intent, has proven difficult to realize.
Subsidies reflect fundamental philosophical differences among nations regarding the appropriate role of the government in the economy. In the case of technology-intensive industries, where theory suggests that government intervention may be welfare-increasing, these philosophical differences are even greater than they are in the area of agriculture, where the struggle to negotiate multilateral limits on allowable subsidies has been a long and bitter one.
The imposition of CVDs is the second-best approach currently provided by U.S. trade law for dealing with the distortions caused by foreign subsidies. But there are problems with this second-best approach. Under most market demand conditions, the imposition of a CVD on an imported good raises its domestic price and prevents American consumers from enjoying the short-term benefits of foreign subsidies. Moreover, if such a good is available for purchase elsewhere in the world, a CVD may make the United States a "high-price" island for the good in question, driving consumers to third-country markets. When the good is a productive input and the consumers in question are themselves producers, this can mean driving production to third-country markets as well.
The CVD approach may also not be the best approach for offsetting the injurious effects of foreign subsidies on domestic producers over the long run. In principle, these effects are offset by the duty, which hurts the foreign producers, and by the higher domestic prices of the good in question, which helps the domestic producers. But this approach, even when the demand conditions in the prevailing market cause the full burden of the duty to be borne by the foreign suppliers, does not offset the benefits of sales by subsidized foreign firms in third-country markets. In industries with large economies of scale and learning curve economies, these effects can be substantial and decisive.
Nor does the CVD approach address the effects of foreign subsidies on business expectations and strategies. As the literature on strategic trade theory demonstrates, a credible commitment by a foreign government to target an industry can have profound effects on the strategies of both domestic and foreign firms. U.S. firms competing in an industry that is
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targeted and subsidized by a foreign government may be able to obtain partial relief in the short run by resorting to the nation's CVD law. But the way the law works, such an approach usually involves a delay, the process of initiating legal action is costly, and the outcome is uncertain.
The uncertainty is even greater when foreign government support is of a kind not easily measured. It is one thing to try to quantify the duty required to offset a specific financial subsidy, but quite another to quantify the duty required to offset other kinds of targeting policies, like protection of the home market or lax antitrust enforcement. And finally there is the uncertainty resulting from circumvention by various means, including shipping intermediate rather than final products into the United States, performing the last manufacturing stage in a third country, or altering the product.
For all of these reasons, a CVD remedy is unlikely to offset the influence of a credible foreign targeting program on the strategies of domestic and foreign companies. In the absence of a similar commitment to the industry by the U.S. government, the result of such a program is likely to make the foreign firms pursue more aggressive strategies than their domestic competitors. The CVD option may moderate, but it is unlikely to eliminate, these effects on strategic behavior and competitive outcomes.
An alternative to the CVD approach is the countervailing subsidy approach—an approach that addresses the deleterious price effects, third-country effects, and strategic effects of the CVD approach. If U.S. policy is predicated on the view that an industry targeted and subsidized by its trading partners is important to the health of the U.S. economy—a view that is defensible in many technology-intensive industries—then a CVS approach may be a defensible and sensible second-best solution.
Section 301 and Super 301
Section 301 and "Super 301" are the major channels within U.S. trade law for addressing foreign trading practices that impede access to foreign markets. Section 301, which was introduced in the 1974 Trade Act, deals with disputes over particular goods, while "Super 301," which was introduced in the 1988 Trade Bill, deals with disputes between individual countries on a broad range of unfair trading practices.27 The 301 approach has been critized both at home and abroad for its ''aggressive unilateralism." In a 301 action, the U.S. government determines what is "fair" and what is not, bypassing GATT at will, and often threatens to retaliate against foreign partners who do not commit to change their ways. As a result, 301 actions can violate three basic GATT principles: reciprocity, because the United States can demand a reduction of a foreign trade barrier without offering a reduction in one of its own; nondiscrimination, because the United States
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can block or threaten to block imports from a single country; and transparency, because a trade dispute can be settled by some kind of nontariff intervention in trade flows. In addition, the unilateral imposition of retaliatory tariffs or other measures when 301 negotiations fail is a clear violation of GATT's nondiscrimination principle.
Critics of 301 unilateralism also argue that trade concessions granted to the United States under the gun of compulsory negotiations can create negative spillover effects on third parties. So far, however, the United States has been careful to use both 301 and Super 301 to negotiate for nondiscriminatory, most-favored-nation concessions in which benefits are accorded to all suppliers, not just U.S. suppliers. Critics further maintain that U.S. unilateralism will poison the atmosphere for further progress on strengthening the GATT regime. It is equally likely, however, that U.S. unilateralism may help overcome some of the negotiating inertia currently blocking needed reforms.28
But the main defense of the 301 approach is that it is essential as an interim measure—the alternative is not a world of free trade unimpeded by overt trade barriers and structural impediments, but a world in which such barriers and impediments can damage national economic interests, especially in imperfectly competitive technology-intensive industries. In such a world, the real policy alternatives are to accept the damage; to try to offset it by subsidy or protection at home; or to negotiate for the removal of the barriers or impediments that cause the damage. The 301 approach chooses the third and most sensible option.
A growing body of evidence, including my case studies of U.S.-Japan trade negotiations in cellular telephones, supercomputers, and semiconductors, indicates that this approach can reduce foreign market barriers and increase market opportunities for American companies.29 Neither the intent nor the outcome of 301/Super 301 actions in these three cases was protectionist. A similar conclusion applies to recent agreements between the United States and Japan to improve access for American suppliers in Japan's computer and auto-parts markets.
But while bilateral, sector-specific agreements can eventually improve market access, they should not be oversold. The 301 negotiations leading to such agreements are usually long and tortuous, and the results are usually small. The issue of delays reveals a fundamental limitation of this approach—slow resolution of trade policy disputes can be potentially disastrous to American firms or industries, as the 15-year dispute between the United States and Japan on access to the Japanese semiconductor market demonstrates. Even when the companies involved can withstand the delay, as Motorola could in the cellular telephone industry, they pay a heavy price in terms of forgone revenues. Smaller, less prosperous companies may simply write off the prospects of breaking into a sheltered foreign market
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altogether or may find themselves driven out of business by foreign competitors based in such markets.
Some of the delays in American trade policy have been "internal," reflecting the failure of American policymakers to react to foreign barriers, in part because to do so might threaten broader geopolitical interests and in part because the damaging effects of such barriers were simply discounted. As long as American policymakers believed that it did not matter whether the United States had its own DRAM capabilities, it was difficult to mount a credible response to Japanese policies.
Even with a quick-response approach, such as Super 301, however, American producers can rarely expect a resolution to a trade policy complaint in less than one year, and implementation of a resulting trade agreement can take considerably longer. These unavoidable delays mean that in technology-intensive industries, where one year can destroy a technological advantage, trade policy cannot be an effective substitute for a domestic policy response. If the health of American producers is jeopardized by foreign trading practices, the American government should have the capacity and the will to introduce interim domestic assistance measures while it continues to negotiate with the trading partners.
CONCLUSIONS
As economies become more interdependent and as companies become more global, the world trading system requires new rules and new enforcement mechanisms. GATT may not be dead, as some have argued, but it is certainly in need of a major overhaul. Rules about traditional border policies like tariffs and quotas are no longer enough. Deep interdependence requires deep integration—the harmonization of significant structural differences among nations and the development of comprehensive rules in a variety of "nonborder" policy areas, both backed by multilateral institutions of dispute settlement and enforcement. The blueprint for Europe 1992 provides a model of what will ultimately be required at the international level.
The vision of deep integration should inform U.S. trade policy negotiations at the multilateral level. The goal of U.S. trade policy should remain more and freer trade, safeguarded by new international rules. In pursuing this goal, however, U.S. policymakers must be mindful of the fact that the process of developing such rules will be a slow one.
In the interim period, the United States will continue to face the challenge of preventing further erosion in its relative economic position. To meet this challenge, U.S. policymakers must recognize that trade barriers and structural impediments in foreign markets are harmful to national economic welfare in a variety of ways—they worsen the nation's terms of trade; impose unnecessary adjustment costs on American communities,
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workers, and companies; eviscerate America's strategic industries; and breed costly protectionist responses. Given the prevalence of such barriers and impediments, free trade in high-technology products is a largely meaningless option. For such products, the real policy choice is not between free trade and protection but between appropriate combinations of liberalization and government intervention that improve national economic welfare in the short run and sustain a more open international trading system in the long run. This real policy agenda requires using the nation's trade laws as they were designed to be used, to offset the negative effects of market distortions abroad.
Even at their best, however, the nation's trade laws cannot substitute for domestic policy initiatives. Ultimately, the fate of America's high-technology industries depends on the choices that Americans make about their macroeconomic policy, about their research and development policy, about their education policy, and about their commitment of today's resources to tomorrow's economic well-being.
NOTES
1.
Trade in manufactured products accounts for some 85 percent of total world trade in goods, and most of world trade in manufactured products consists of two-way exchanges of fairly similar goods at the sectoral level.
2.
For a recent popular discussion of how differences in the organization of national economics affect their competitive position in international trade see Porter (1990).
3.
The same conclusion is reached in Ostry (1990a, b).
4.
Any identification of "technology-intensive" or "high-technology" industries is necessarily somewhat arbitrary. In this paper, high-technology products are identified by their R&D intensity, as measured by their R&D spending relative to output and sales indicators, and by the share of scientific and engineering employment in their total employment. This general approach is the one used by both the OECD and the U.S. Department of Commerce to identify and measure trade in ''high-technology" products.
The OECD "high-technology" category includes the following sectors with their respective international standard industrial classification codes: drugs and medicine (ISIC 3522); office machinery and computers (ISIC 3825); electrical machinery (ISIC 383 less 3832); electronic components (ISIC 3832); aerospace (ISIC 3845); and scientific instruments (ISIC 385). The DOC "high-technology" category includes the following sectors with their respective SIC codes: guided missiles and spacecraft (SIC 376); communication equipment and electronic components (SIC 365-367); aircraft and parts (SIC 372) office; computing and accounting machines (SIC 367); ordnance and accessories (SIC 348); drugs and medicines (SIC 283); industrial inorganic chemicals (SIC 281); professional and scientific instruments (SIC 38 excluding 3825); engines, turbines, and parts (SIC 351); and plastic materials, synthetic resins, rubber and fibers (SIC 292). OECD data for the United States represented 96 percent and 100 percent of DOC data for the United States in 1980 and 1986, respectively. National Science Board, Science and Engineering Indicators, 1989 (Washington, D.C.: Government Printing Office, 1989).
5.
Science-based industries include industries such as fine chemicals, electronic components, telecommunications equipment, computers, and aerospace, which have high levels of
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R&D and which provide capital or intermediate inputs to other industries. This classification is less inclusive than the OECD or DOC classifications of "high-technology" industries. The overall trends in the United States, European, and Japanese positions are similar for both the narrower science-based industry classification and for these broader classifications. For more detail see Tables 1, 2, and 3. The data on the performance of the science-based industries is taken from Guerrieri in this volume.
6.
The literature on the new trade theory is large and growing. Several excellent papers are included in Krugman (1986). For a recent summary of the major conclusions of the theory, see Krugman (1987). For a complete technical treatment of the theory, see Helpman and Krugman (1985).
For one of the earlier theoretical pieces that focused on high-technology industries, see Brander and Spencer (1985). Although the literature on strategic trade theory is full of theoretical demonstrations that promotional or protectionist policies can improve economic welfare at home or reduce it abroad, whether such policies work in practice is another matter. The theoretical assumptions behind these demonstrations are usually very restrictive. And the weight of the available evidence, albeit flawed by overly simple models and inadequate data, suggests that such polices often reduce national welfare. See Richardson (1985).
7.
The expulsion of Fujitsu-owned ICL from JESSI, Europe's biggest semiconductor research project, funded in part by a number of European governments, comes to mind. See also Mowery (1990).
8.
As Porter and others have observed, there are still striking similarities in the capabilities and strategies of individual firms with the same national origin. Many multinational high-tech firms are global in perspective, but they are still significantly national in terms of the behaviors they adopt. Japanese firms do tend to behave differently from American firms in a variety of ways, as do German and French firms. See Porter (1990).
9.
For a discussion of the European Community proposal, see The Financial Times, August 3, 1990, p. 16.
10.
The following discussion of intellectual property protection draws heavily on Schott (1990) and Maskus (1990).
11.
The problems of Section 337 of U.S. trade law in GATT reflect a panel ruling that the application of the law conflicted with the principle of national treatment. This ruling reflected the panel's belief that the nation's laws on intellectual property rights were not applied with the same force against domestic companies as they were against foreign companies. The main source of the disparity in national treatment is that the application of Section 337 does not involve the same process of time-consuming patent litigation required to enforce the application of intellectual property rights against a domestic company.
12.
According to GATT law, dumping occurs when a good is sold abroad for a lower price than the seller charges for the same good in his home market. The home market price is usually taken to be the "normal value" or FMV. In two circumstances, however, GATT law allows for the construction of an FMV: if there are insufficient sales on the domestic market of the exporter or "whenever there is reasonable ground for believing or suspecting that the price at which a product is actually sold for consumption in the home country is less than the cost of production." The dangers inherent in the vagueness of the second condition are obvious.
13.
Under current practice, both the United States and the European Community tend to employ a full average cost standard--dumping is interpreted to occur when price falls below average cost, broadly defined to include both variable and fixed costs, and a profit margin judged high enough to attract investment capital.
14.
The concept of using costs measured at different points in the production cycle or different moments of time is behind the idea of "life-cycle costs and pricing" suggested by interested business groups to the American trade negotiators for the Uruguay Round discus-
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sions. Such a concept, while sensible in intent, is problematic in implementation. It is difficult to come up with measures of life-cycle costs and prices with even the most sophisticated techniques.
15.
Some of the procedures used in the application of dumping laws in other nations are even less transparent and more subject to abuse.
16.
These objectives are especially important for American export interests. Currently, European and American companies are the most frequent targets of antidumping suits. U.S.-based exporters face less transparent systems abroad than foreign producers face in the United States.
17.
To deter repeated dumping by particular producers in a single or related product lines, anticircumvention rules may have to be combined with rules for special penalties for demonstrated recurrent "dumpers." This is the approach suggested by the United States and Europe in the Uruguay Round discussions.
18.
Note that the Cortland draft for discussion of subsidies in the Uruguay Round argues that subsidies for the purpose of regional development, precompetitive research and development (R&D), environmental protection, or worker adjustment assistance not be actionable, provided the subsidy is granted for a strictly defined period, not exceeding a specified number of years, and is digressive within this period, provided notification of granting the allowable subsidy is made in advance, and provided no code signatory can demonstrate adverse effects.
19.
According to what appears to be the current working definition in U.S. policy circles, R&D is precompetitive when the results of research can be published and used without restriction.
20.
For a fascinating discussion of the many factors that influence the attractiveness of a nation for foreign direct investment, see Dunning et al. (1990).
21.
For a more complete discussion of the kinds of international rules that may be needed in the area of foreign direct investment, see Bergsten and Graham (1991).
22.
As Sylvia Ostry has argued, some national differences cannot and probably should not be harmonized as an act of policy. Instead, such differences should be allowed to converge slowly as the result of competition among producers through trade and cross-border investment. The main challenge is to harmonize differences that impede such competition and therefore impede a healthy competition between different forms of economic organization.
23.
For evidence, see Masserlin (1990).
24.
For example, according to the U.S. Department of Commerce, approximately two-thirds of antidumping investigations processed in 1987 involved selling below actual or constructed measures of production costs. The cost approach has been used extensively in high-tech products.
25.
At least, however, the Commerce Department approach places the evidentiary burden on the petitioners who must be able to demonstrate below-cost sales by providing cost-of-production information and home-market sales data.
26.
When international agreements identify certain subsidies as "green-light" or allowable subsidies, the importing country cannot impose a CVD. So to the extent that the United States realizes its objective of limiting certain kinds of subsidies in the Uruguay Round, it correspondingly limits the application of its own CVD law.
27.
Super 301 was a temporary measure built into the 1988 trade legislation. It has now expired, but many members of Congress are currently working to extend it. For some critical assessments of both Section 301 and Super 301, see Bhagwati and Patrick (1990).
28.
In fact, as Robert Hudec has argued, it is conceivable that U.S. unilateralism may overcome the negotiating inertia currently blocking reforms of the GATT dispute-
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settlement mechanism—in his words, the U.S. breach of GATT law may actually result in an improvement of this law in the long run. See Hudec (1990).
29.
My case studies are contained in Tyson (1992). For an evaluation of the recent 301 actions and their effects, see Bayard and Elliott (1992).
References
Baynard, T. O., and K. A. Elliott. 1992. Aggressive unilateralism and section 301: Market opening or market closing? Unpublished Working Paper, Institute for International Economics.
Bergsten, F., and E. H. Graham. 1991. Global corporations and national governments: Are changes needed in the international economics and political order in light of the globalization of business? Unpublished Working Paper, Institute for International Economics.
Bhagwati J., and H. Patrick, eds. 1990. Aggressive Unilateralism. Ann Arbor, Mich.: University of Michigan Press.
Brander J., and B. Spencer. 1985. Export subsidies and international market share rivalry. Journal of International Economics 18(February):83-100.
Destler, I. M. 1991. U.S. Trade Policy Making in the Eighties. In The Politics and Economics of the Eighties, A. Alessena and G. Carliner, eds. Cambridge, Mass.: National Bureau of Economic Research.
Dunning, J. H. 1990. Multinational enterprises and the globalization of innovatory activities. Discussion Paper in International Investment and Business Studies B, III. 143, Department of Economics, University of Reading.
Dunning, J. H., B. Kogut, and M. Bloomstrom. 1990. Globalization of Firms and the Competitiveness of Nations. Lund, Sweden: Institute of Economic Research, Lund University.
Helpman, E., and P. R. Krugman. Market Structure and Foreign Trade: Increasing Returns, Imperfect Competition, and the International Economy. Boston, Mass.: MIT Press.
Hudec, R. E. 1990. Dispute settlement. In Completing the Uruguay Round: A Results Oriented Approach to the GATT Trade Negotiations, J. Schott, ed. Washington, D.C.: Institute for International Economics.
Jerome, R. W., ed. 1990. Issues in the Uruguay Round: U.S. Trade Law Changes: Risks and Benefits. Washington, D.C.: Economics Strategy Institute.
Krugman, P. R., ed. 1986. Strategic Policy and the New International Economics. Boston, Mass.: MIT Press.
Krugman, P. R. 1987. Is free trade passe? Journal of Economic Perspectives 1(Fall):131-144.
Maskus, K. 1990. Intellectual property. In Completing the Uruguay Round: A Results Oriented Approach to the GATT Trade Negotiations, J. Schott, ed. Washington, D.C.: Institute for International Economics.
Masserlin, P. 1990. Anti-dumping. In Completing the Uruguay Round: A Results Oriented Approach to the GATT Trade Negotiations, J. Schott, ed. Washington, D.C.: Institute for International Economics.
Mowery, D. C. 1990. New developments in U.S. technology and trade policies: Declining hegemon, wounded giant, or ambivalent Gulliver? Working Paper 90-91, Consortium on Competitiveness and Cooperation, Center for Research in Management, University of California, Berkeley, April 1990.
National Science Board. 1989. Science and Engineering Indicators, 1989. Washington, D.C.: Government Printing Office.
Organization for Economic Cooperation and Development. 1989. Predatory Pricing. Paris, France: OECD.
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Ostry S. 1990a. Beyond the border--The new international policy arena. Paper prepared for the OECD Forum for the Future, Paris, France, October 1990.
Ostry S. 1990b. Governments and Corporations in a Shrinking World. New York, N.Y.: Council on Foreign Relations.
Porter, M. 1990. The Competitive Advantage of Nations. New York, N.Y.: The Free Press.
Richardson, J. D. 1989. Empirical research on trade liberalization with imperfect competition. OECD Economic Studies 12(Spring):8-44.
Schott, J. J. 1990. The Uruguay Round: What Can Be Achieved. In Completing the Uruguay Round: A Results Oriented Approach to the GATT Trade Negotiations, J. Schott, ed. Washington, D.C.: Institute for International Economics.
Tyson, L. D. 1992. Who's Bashing Whom: Trade Conflict in High-Technology Industries. Washington, D.C.: Institute for International Economics.
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