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Executive Summary The health of U.S. advanced technology industries and their international competitive vigor are central issues in current economic and trade policy debates. The United States, like its major industrialized allies, views the ability to generate and use advanced technologies as essential, both to national economic well-being and to military strength. Many governments--most notably Japan and France--have designed comprehensive national policies to help promote successful technology and trade devel- opment in major sectors--telecommunications, biotech- nology, computers, microelectronics, and aerospace, for example. The United States has no such defined indus- trial policy. U.S. policymakers today must respond not only to a growing anxiety that U.S. leadership in advanced tech- nology and trade is in jeopardy, but also to fears of mounting protectionism. Spurred by global economic ills, domestic unemployment, and loss of traditional markets to newly industrialized countries, governments are attracted to economic nationalism and protectionismr-policies that can seriously endanger the international trading system, political alliances, and global technological progress. It is these concerns and the issues surrounding them that are addressed in this consensus statement by the Panel on Advanced Technology Competition and the Industrialized Allies. The panel discusses the nature of advanced technology and its extensive contributions to U.S. economic welfare and military security; the importance of maintaining a strong national capacity for technological innovation, including a vigorous international trade position; and the domestic and international measures required to sustain this effort. 1

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2 The panel describes U.S. government and private sector advanced technology policies and practices, as well as those of its major trading partners. Finally, the panel discusses how various national practices may be evaluated and negotiated among nations in support of a healthy mutual international trading system--and what steps the United States must take to protect its interests should international negotiations fail. While the panel recognizes that contending policy objectives may at times take precedence over the require- ments for national strength in technological innovation and trade competitiveness, it concludes that the U.S. advanced technology enterprise has been undervalued in the past in the national scheme of priorities and must be held as one of the country's most valued objectives. HISTORICAL EVOLUTION The United States' economic and social well-being over the last 100 years has derived substantially from the processes of discovery, invention, and entrepreneurship, which Americans have come to value so highly. The nation's capacity for technological innovation became especially apparent in the 20 years following the Second World War, when the United States was acknowledged worldwide as possessing across-the-board technological superiority. Throughout the postwar decades, however, the major industrialized allies combined their recovery from wartime destruction with a rapid rate of techno- logical progress. The result was a progressive narrowing of American technological leadership. While the United States continued to maintain a higher overall produc- tivity level, Europe and Japan enjoyed far higher rates of productivity growth. Today, the allies vie for positions at economic and technological frontiers that at one time seemed reserved for the United States. In many sectors, other industrialized nations are now the first to expand these frontiers. The United States could not have expected to preserve its vast technological leadership. What it must preserve, however, is a strong capacity for technological innovation that is vital to the future growth of the entire American economy. Domestic weaknesses and damaging practices of other nations can endanger this innovative capacity, the basis for advanced technology development and inter- national trade competitiveness. The United States must

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3 now adopt measures designed to preserve this vital capacity. TECHNOLOGY AND THE NATION ' S ECONOMIC WELL-BEING AND MILITARY SECURITY The national capacity to generate and use advanced tech- nology is fundamental to the economic well-being and military security of the United States. Advanced tech- nologies serve to increase productivity in services, manufacturing, and agriculture. The United States has the potential for a new economic surge fueled by advanced technology--a dramatic increase in the productivity of workers utilizing new information-processing technol- ogies, new materials, and new manufacturing technologies. In addition, the U.S. positive trade balance in technology-intensive products and services contributes to domestic employment and economic health. The nation's innovative capacity is vital to military as well as economic security. A major fraction of defense hardware is procured from technology-intensive companies. Advanced weapons employ frontier electronics gear, and verification methods fundamental to arms control agreements rely on advanced technologies. The interrelationships between the U.S. commercial and military advanced technology systems are complex, but it is clear that military systems rely on a strong civilian industrial base and that many commercial efforts benefit from defense and space research and development expen- ditures and procurement. NATIONAL CAPACITY FOR INNOVATION Our capacity for technological innovation is commonly perceived in terms of industrial sectors--micro- electronics, computers, new materials, robots, tele- communications, aerospace, and, most recently, biotechnology. This list is, in fact, a transitory one--changing over time. A new list may supersede this one in a decade or two. The nation's innovative capacity should not be thought of only in terms of specific products; it should be understood as the continuous capability, widely diffused throughout the economy, to produce and put to use pioneering technological resources.

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4 This national innovative capacity is manifested pri- marily in a system of interrelated activities leading to commercial sales of products, most frequently referred to as the innovation process. This dynamic system not only involves basic research and product development, but also encompasses manufacture, marketing, and distribution. Each part of the process must function effectively to ensure success. MAINTAINING TECHNOLOGICAL STRENGTH The United States' capacity for technological innovation and competitiveness in world markets is an essential national resource, requiring a sophisticated and thorough understanding of the innovation process--what it is, how it works, what influences it, and what is necessary for its strength. Maintaining a world-class research struc- ture is essential in the effort to expand technological frontiers. Research is a vital first requisite, but it is only one part of a complex, interwoven process. Product planning requires knowledge of new technologies in the research phases; development of commercially successful products requires links with marketing assessments; and successful commercialization pays for the next round of technological advance. The innovation process, then, is an interlocking system that must be strong throughout. Its requirements include technologically sophisticated managers, quality research personnel, and a technically competent labor force. The process of innovation also requires a healthy supply of capital--both venture capital for starting up new enterprises and growth capital for established firms. Large-scale economies utilizing world markets are necessary to support succeeding rounds of technological advance. A more elusive but major influence on the innovation process may be the government's role in establishing a climate that fosters entrepreneurial risk-taking. Stable, informed government policies can lessen uncertainty for innovative entrepreneurs. GOVER~!ENT ' S ROLE In the U.S. economy, institutional arrangements to foster advanced technology operate primarily in the private

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sector--in small innovative firms, national and multi- national companies, banking and financial communities, and the research universities. The United States has had no national plan nor even a loose coordinating mechanism linking the efforts of these private actors to federal government actions. The government's primary role in fostering the nation's innovative capacity has been in education and support of basic research. There is, however, a range of government instruments to address broad national objectives that affect various stages of the innovation process, including market development. These instruments--which are come patible with our culture and style (as total government- industry coordination in the manner often attributed to Japan is not)--include tax policies fostering research, development and investment in production facilities, patent laws, regulation and deregulation, antitrust measures, export/import bank loans, and government procurement, among others. Beyond these measures, uncoordinated actions taken by various governmental agencies, designed to serve other purposes, affect the innovation process--unintentionally helping it in some instances, but hindering it in others. The nation's capacity to perform well in advanced technology and trade is, in fact, affected by decisions that are made inde- pendently, inter alla, by the Food and Drug Administra- tion, the Environmental Protection Agency, the antitrust division of the Department of Justice, the Departments of Commerce, State, Agriculture, and Defense, the National Security Assistant, the Special Trade Representative, the President's Science Advisor, the National Aeronautics and Space Administration, the National Science Foundation, and the National Institutes of Health. Yet the heads of these executive branch entities rarely if ever have joined together to consider the totality of their separate actions on the nation's advanced technology capabilities and international competitiveness--either what it is or what it should be. If the United States is to maintain its innovative vitality over time, it is essential that executive and congressional policymakers periodically evaluate both the U.S. comparative international trade position and the health of the nation's innovative capacity. They should do so by means of a broad analysis, conducted at cabinet level, of all the variables impinging on our capacity to innovate--both domestic and foreign. These periodic assessments would require support by a continuing source

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6 of expertise drawn both from within the government and from outside. Reviews should be comprehensive. They should assess: . the impact of U.S. government policies on the nation's innovative capacity and international trade competitiveness; . the nation's standing with regard to research and development, manufacturing, and marketing: . the effectiveness (in comparison with other countries) of U.S. elementary and secondary educational systems, postsecondary institutions, and continuing education programs, especially in maintaining and renewing our technological and scientific manpower and knowledge; the trends in our comparative international trade standing; and the policies of major trading partners and their effects on the United States and the international trading system. The process of periodic evaluation could result in recommendations, at the national level, to coordinate actions across agencies, to rationalize government policies, or to ensure consistency over time in govern- ment practices, as well as recommendations at the trananational level to initiate coordinated negotiations or actions with industrialized trading partners and allies. In addition, the assessment process should stimulate congressional hearings to seek the views of leaders from industry, labor, and other sectors. An opportunity for comprehensive and coherent review of U.S. innovative capacity and international trade competitive- ness by representatives of all sectors contributing to it should help to elevate technological innovation goals in the scheme of national priorities. MANAGEMENT ' S RESPONSIBILITIE S A coordinated decisionmaking process is essential, but the nation's performance in advanced technology develop- ment and trade will be determined in large part by the efforts of individual firms. Successful firms are those whose managers have long-range vision of how technology affects the growth of their business. They understand the state of technology in their industry worldwide; they

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7 respond to the international climate when planning for research, development, manufacturing, and marketing; and they are open to developing new institutional arrange- ments to foster technological growth--such as industry- university research relationships, cooperative research ventures among groups of firms, or consortia to seek information and ideas systematically from abroad. ADVANCED TECHNOLOGY TRADE PRACTICES U.S. firms face a mixed international trading system in which they are operating independently as private entities, yet are frequently competing with foreign firms, singly or in consortia, that either are government entities or have strong government backing. This mixed international trading environment often effectively places an American company in competition against a country. By n targeting" certain advanced technology sectors, a country may provide its firms with a range of support-- from direct and indirect subsidies for research and manufacturing through help in penetrating foreign markets. Such practices are not within the U.S. arsenal of policies. Traditionally, U.S. philosophy has stressed private sector initiatives within a competitive framework. U.S. firms are understandably concerned about the tactics other countries use to develop markets--both at home and abroad. American firms have difficulty pene- trating European and Japanese markets when they are faced with intentional collective actions excluding them. At the same time, too, U.S. businesses must compete with European and Japanese firms for new and potentially lucrative emerging nation markets. Often foreign firms have strong support from their home governments, an advantage U.S. firms do not enjoy to a comparable extent. To lose out in this competition could be extremely damaging, not only for American advanced technology industries, but eventually, because of intersectoral linkages, for other areas of the economy as well. There is considerable dispute among the industrialized allies regarding which trade practices are acceptable and which are not. Actions that are consistent with one nation's traditions and attitudes may be inimical to another. Friction is exacerbated worldwide by current conditions of slow growth, excess capacity, obsolete plants, and lingering inflation. These conditions make politically more difficult and financially more costly

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8 structural adjustments that would shift financial, man- power, and other resources from less to more competitive industries. Many nations are suffering from record unemployment levels that cause significant domestic political problems. U.S. OBJECTIVES U.S. objectives in advanced technology trade must take into account both the needs of our own industries and those of our principal allies. Innovation proceeds most rapidly and efficiently when new products have access to the widest possible markets, thus spreading the costs and risks of innovation over more units and generating the cash flow for follow-on improvements and fresh innovation. The United States should negotiate in international forums to secure the openness of world markets to innova- tive entrepreneurs wherever they may be based and to discourage large-scale distortions of free markets. Such a policy is required, both to preserve the U.S. position as a major source of innovation and to ease growing tensions among the industrialized allies, tensions that threaten not only international economic and political management, but also mutually beneficial cooperation in science and technology. Nowhere is our national welfare more interwoven with that of our allies than in the fields of science cooperation and high-technology trade. The costs and risks of protectionist policies and market fragmentation are probably greater than in almost any other economic field except energy. Paradoxically, the international coordination of trade practices is more backward in advanced technology than in many other fields at a time when both nations and regions within nations are looking more and more to advanced technology as a primary source of economic salvation. NEGOTIATIONS REQUIRED Protectionist pressures are strong in today's very difficult economic times. Furthermore, international negotiations on trading practices are complicated by differing viewpoints among allies on what national practices are acceptable. Attempts to sort practices into acceptable and unacceptable categories have been

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9 only moderately successful, but such attempts should continues Progress may be slow and agreements difficult, but the health of the international trading system is at stake. Negotiations should consider the consequences of actions and place value on maintaining open markets, for they reward innovators by offering innovative products globally. To foster healthy, mutual competition in advanced technology is a primary objective. Negotiations, though protracted, will serve the interests of the United States and her allies better than precipitous actions. Proposals for legislative action to protect advanced technology industries, currently before the Congress, require careful analysis and consideration in light of the findings of this report. Cooperation among industry, government, labor, univer- sities, financial, and other sectors is essential in deal- ing with these exceedingly complex problems in technology and trade. Most difficult will be those circumstances in which U.S. capacities are well nurtured and strong, yet key industries essential to the national welfare-are nonetheless endangered. Vulnerability could develop because of successful aggressive policies of our allies, which individually may or may not be considered as unfair, but which together endanger U.S. major technology indus- tries and fundamental advanced technology capacity deemed essential to economic well-being and military security. Where such broad national resources are in jeopardy, the United States must take action. A first step is to seek to renegotiate multilaterally agreed rules in forums such as the GATT in order to estab- lish clearer guidelines for government actions in high- technology sectors. A basic requirement of such negotia- tions would be that countries, including the United States, be prepared to consider altering traditional practices. When there is a specific threat to U.S. interests from a particular country's government policies, the U.S. government should initiate bilateral consultations within the framework of GATT and other appropriate multilateral institutions. The goal of such negotiations would be to reach agreements on a time scale that would prevent or reverse damage to U.S. capacity for technological innova- tion. If these bilateral consultations are unsuccessful in resolving issues, the U.S. government should utilize formal multilateral dispute settlement procedures to seek a resolution. If those procedures in turn fail or if the

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10 threat of damage is imminent, the United States would be required to take unilateral action to protect the national interest as a step of last resort. C ONCLUSIONS . The United States must act now to preserve its basic capacity to develop and use economically advanced technology. This innovative capacity is essential for the self-renewal and well-being of the economy and the nation's military security. Trade in advanced technology products and services will contribute enormously to our economic health. Advanced technology products and processes not only permeate the economy, increasing productivity, but also form the basis of modern defense hardware. The nation's capacity for technological innovation is vulnerable both from domestic weaknesses and from damaging practices of other nations. Measures designed to maintain this vital aspect of the American economy within a healthy international trading system will include both domestic actions and international negotiations. Effective actions require a sound understanding of the nature of innovative capacity and of the innova- tion process through which it is primarily manifest. Innovative capacity is the capability, widely diffused throughout the economy, to produce continuously forefront technological resources, and to use those resources for the national benefit. The innovation process includes not only basic research and development but also pro- duction, marketing, and distribution in domestic and foreign markets. Each part of the process must be sound for success. Some of the elements that support our nation's innovative capabilities include a strong national research base, technically educated manpower and a technically literate population, capable and farsighted industrial managers, a financial base that provides capital to both new and established firms, and sizable markets. Essen- tial, too, are a national understanding of and attention to advanced technology as a vital contributor to the national welfare. The U.S. government has in effect a range of

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11 policies and practices including tax policies, patent laws, regulation and deregulation, antitrust measures, export/import bank loans, government procurement, and others that, although designed to serve other national objectives, also affect the U.S. technological enterprise and international trade position. These policies and practices and the other domestic and international elements affecting U.S. technology and trade must be well understood by senior policymakers. If viewed in ensemble, existing government instruments may become powerful means to support U.S. technology and trade interests. Responsibility for improving U.S. performance in advanced technology and trade rests to a large degree with the individual firm and its management. Successful managers increasingly will have to be cognizant of fron- tier technologies as they build businesses and compete in an international world. Our major industrialized allies--most notably Japan and France--have designed comprehensive national policies to help ensure successful technology and trade development in major sectors. Thus, individual U.S. firms often find themselves competing internationally, not with firms acting alone, but with countries or with consortia of firms with country backing. There is considerable dispute among industrialized allies regarding which practices are acceptable and which are not. Efforts to evaluate practices are protracted and difficult, but essential. RECOMMENDATIONS Accordingly, the panel recommends the following: Advanced technology development and trade must be considered as among the highest priorities of the nation. These vital interests must be well understood domestically and conveyed to our trading partners. The United States must initiate a two-part strategy: to maintain the nation's capacity for technological innovation and to foster an open healthy international trading system. The federal government should initiate a biennial, cabinet-level review that comprehensively assesses U.S. trade competitiveness and the health of the nation's innovative capacity in both relative and absolute terms. This review should consider the nation's overall perfor-

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12 mance: the private sector activities and the totality of government actions on technology and trade, as well as the effects of other governments' practices. These assess- ments would consider the strength of key technological sectors across all stages of the innovation process-- research, development, manufacture, and distribution. In addition, assessments would evaluate broad elements as they affect innovation, such as the macroeconomic environ- ment, regulatory policy, patent policy, and antitrust policy. Careful attention would be given to maintaining the health and effectiveness of both university- and industry-based research, education, and training. The cabinet-level review should be supported by a continuing mechanism that would draw on expertise both from within the government and from outside. Managers of private firms must be cognizant of technological trends as they make renewed efforts to build businesses and co Mete in an international context. Man- agers should consider new institutional arrangements--the growing, mutually supportive, industry-university research relationships, cooperative research ventures among groups of firms, or consortia to seek information and ideas systematically from abroad. Internationally, the United States should negotiate in existing forums to encourage a healthy mutual trading system. This should include continued efforts to evaluate national trade practices and to agree on criteria for acceptability. An objective must be to encourage open markets and healthy competition. Countries, including the United States, throughout negotiations should be prepared to alter fundamental policies so that each country may maintain advanced tech- nology capacities fundamental to its individual welfare. The United States should review the content and application of its trade laws to ensure that U.S. indus- tries can obtain timely and meaningful trade and/or other relief in the U.S. market when imports from particular countries, based on unreasonable or excessive foreign industrial policies, threaten them. If key technology industries essential to national economic welfare and military security are considered endangered by the actions of another country, even with all necessary domestic efforts to strengthen these sectors, then the United States should negotiate with the other country requesting immediate relief. Negotiations should take place first in existing forums, explaining

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13 our country's vital interest in preserving advanced technology capacity. If such mechanisms prove ineffec- tive or too slow to prevent damage to essential U.S. capabilities, then the United States should negotiate directly with the country in question. If those bilateral negotiations fail or if the threat of damage is imminent, the United States should take immediate unilateral actions as a step of last resort.