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Introduction This consensus statement has two themes: The requirement that the United States maintain strong domestic capacity for technological innovationr-to benefit its domestic economy, its national security, and its competition for global markets in technological products and services. The need to reduce trade frictions that trouble economic and political relations among the major indus- trialized allies--principally, Canada, the Federal Republic of Germany, France, Japan, the United Kingdom, and the United States. The leading industrial nations believe that their future economic growth depends on their abilities to create advanced technologies and to sell the resultant products and processes in a global market. Consequently, international trade in advanced technology is a high priority. International competition has led to concern within the United States about our capacity to create advanced technologies and to develop them into commercially suc- cessful products in international and U.S. markets. Competition also has led to frictions among countries because of their differing national practices in sup- porting development and international trade. Frictions among the industrialized allies may be inevitable now that many nations can adopt or innovate frontier technologies and can manufacture and market advanced technology products. Realistically, the United States cannot expect to maintain the overwhelming market share in advanced technologies that it had during much of the postwar period. The United States, however, must 14

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15 preserve a strong capacity for technological innovation that is vital to the entire American economy and to its growth. The United States must adopt measures designed to preserve this vital aspect of the American economy within a healthy international trading system. Trade frictions among the allies have developed in part because of the measures that different countries use to promote their advanced technologies. There are charges that some countries use "nontariff n barriers and other market distorting practices to exclude the products of other countries from their home markets, charges of ~dumping" (selling below cost) advanced technology products in order to gain rapidly a substantial share of a foreign market, charges that foreign companies are capable of underbidding American manufacturers through major subsidization by their governments, and charges that governments use so-called side inducements to cap- ture sales in third-country markets. These perceptions, whatever their validity, weaken the bonds among the industrialized allies and may threaten the economic and military strength of all countries of the alliance. Government and industry are partners in many coun- tries, each with a role in developing globally competi- tive advanced technologies. In the United States, the private sector traditionally has carried the responsibil- ity for trade development. One result is that many American companies perceive an international system in which they are competing not against individual foreign companies acting alone, but rather against foreign companies and company groups operating in concert with their governments. While differences in governmental and industrial rela- tions among various countries are to be expected, there is a marked Difference between the American style and that of other countries. That difference leads to the prevalent American perception that the forms of guidance and direct support that other governments offer specific industries is "unfair, n in the sense of distorting the free market and making it difficult for American com- panies to compete on equal terms. Ill feelings are exacerbated by the depressed economic environment. The U.S. economic picture currently includes unemployment that exceeds 10 percent, a recorded rate of utilization of our industrial capacity of only 70 percent, depressed corporate profits, and widespread business bankruptcies. Comparable conditions prevail in other industrialized countries. Industrial production in France, Germany, and

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16 the United Kingdom declined in 1982. The unemployment rates in Canada and the United Kingdom are over 12 percent and are projected to exceed 13 percent in 1983. In Japan, export market demand declined substantially in 1982, and only a modest growth in export volumes is predicted for 1983.~ As a result of these unfavorable economic con- ditions, orders for new production are depressed, and competition--including competition from imports--is exceptionally stiff. The U.S. trade position has been made more vulnerable by the very strong dollar relative to other currencies, as well as by the 1982 high U.S. interest rates. In our approach to advanced technology competition in international trade, we have tried to see beyond this current economic trauma. Certainly much of the distress that American firms now feel arises from these general economic conditions. But we believe that some of the problems the country faces in advanced technology go deeper than these adverse economic conditions and need to be addressed directly. As stated above, each country creates different pol- icies and stratagems to enhance the global competitive- ness of its advanced technology industries. Advanced technology sectors are important to the United States and other industrialized countries because their future eco- nomic growth depends in large part on the disssemination of advanced technology throughout their economies. In addition, advanced technology industries contribute sig- nificantly to productivity growth and product innovation. In the United States, ten industries2 that in 1980 accounted for only 5 percent of U.S. employment and 13 percent of the value of manufacturing product shipments were responsible for more than 60 percent of total private industrial R&D spending. These industries employed more than 25 percent of the nation's scientists and engineers. In addition, these ten industries had a $31 billion fav- orable balance of trade. During the 1970s, labor produc- tivity in these industries grew more than six times as fast as in the business sector as a whole. Growth in advanced technology industries benefits the entire economy because it results in rapid employment growth in other industries. B Measures of shares of world exports for products and services embodying advanced technology indicate a deter- ioration in the U.S. competitive position. Between 1962 and 1980, the U.S. share of the industrialized countries' exports of advanced technology products declined from 30

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17 to 24 percent. During the same period, Japan tripled its industrial country export market share, while West Ger- many's and France's shares increased slightly.. Underlying these trends in the aggregate are significant changes in individual technologies. In electronics, particularly semiconductors, Japan has made dramatic inroads into the U.S. market;5 in aircraft, the European consortium, Airbus Industrie, has captured a substantial share of the commercial jetliner market in which U.S. firms held a 97 percent share in 1976.6 These changes stem from many elements that have affected international trade at different periods--for example, the postwar renaissance of European science, technology, and industry; long-term structural changes; and the well-planned effort by the Japanese to raise the technological intensity of their economy. Other factors contributing to a diminishing of U.S. global market shares include the extraordinarily high value of the dollar relative to other countries in 1980 and other years. There is some evidence, for example, that the pattern of trade tensions between Japan and the United States has tracked exchange rate developments. 7 In 1970-71, 1976-77, and again in 1981, a strong dollar against the yen produced large favorable trade surpluses for Japan. In the first two instances, subsequent appreciation of the yen against the dollar reduced the imbalance after a couple of years. In recent months, there has been some strengthening of the yen, but it is too soon to know if it has gone far enough, or how much of the current Japanese surplus will be eliminated, or how any improve- ment will be distributed across industries. This setting of intensifying competition, rising fric- tions among allies, and, for the moment, a bleak economic outlook frames this consensus statement by the Panel on Advanced Technology Competition and the Industrialized Allies. The panel discusses the extensive contributions of advanced technology to U.S. economic welfare and military security; the importance of maintaining a strong national capacity for technological innovation, including a vig- orous international trade position; and the domestic and international measures required for this effort. It describes the many variables affecting the nation's advanced technology enterprise, including U.S. government and private sector policies and practices, as well as the actions of major trading partners. Finally, the panel discusses how various national practices may be evaluated

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18 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. The panel recognizes that the United States has many domestic and foreign policy objectives in addition to the requirements for national strength in technological inno- vation and trade competitiveness and that these, at times, may take precedence with regard to allocation of resources and policymaking. It concludes, however, 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. NOTES 1 ~ . . . _ _ -urgan~sat~on tor Economic Co-operation and Development, OECD Economic Outlook, No. 32 (Paris: OECD, 1982), pp. 12, 15, 35. 2 Electrical equipment and components; aircraft and parts; computers and office equipment; optical and medical instruments; drugs and medicines; industrial chemicals; agricultural chemicals; professional and scientific instruments; engines and turbines; and plastic and synthetic materials. "An Assessment of U.S. Competitiveness in High-Technology Industries, n a study prepared for the Cabinet Council on Commerce and Trade, revised draft, October 1982, p. 4. Statistical evidence on U.S. competitiveness in advanced technology relies on the isolation of technology-intensive industries, defined as industries that have either high it&D-to-sales ratios or industries with a high proportion of scientists and engineers in their work force. Such evidence is useful, but it must be used with caution for several reasons: The match between technologies and industries is l not perfect. Large parts of an apparently advanced technology industry may involve routine production of traditional products; on the other hand, seemingly n low-technology industries have components that are at the forefront of technical advance. The classification of technologies as advanced ought to be, in principle, a dynamic one since it laraelv depends on how new the technology is. _ _ ~ _ _ _ ~ ~ ~ Today's advanced c~c~lnol~gy Becomes tomorrow s traditional method; on the other hand, an industry that is low-tech now may become a technological leader in the future. Statistical compari-

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19 son based on a fixed list of technology-intensive industries are, therefore, potentially misleading. All available statistical evidence focuses exclusively on manufacturing. Yet, service exports should in many cases be regarded as technology- intensive. This applies both to financial services and to the overseas earnings of multinational firms, much of which can be viewed as a return to technology. Ibid., pp. 4-5, 29. 4Ibid., p. 10. 5For a discussion of the nature of Japan's competi- tive challenge in semiconductors, see Semiconductor Industry Association, The International Microelectronics Challenge: The American Response by the Industry, the Universities, and the Government (Cupertino, Calif.: SIA, 1981) r ppe 33~35 e 6 Airbus Industrie orders represented 3 percent of the total market for commercial aircraft in 1976 and 32 percent in 1980. Aerospace Industries Association of America, Inc., The Challenge of Foreign Competition to the U.S. Jet Transport Manufacturing Industry, an ad hoc study project of the Civil Aviation Advisory Group, Aerospace Technical Council (Washington, D.C.: Aerospace Research Center, 1982), p. 41. 7C. Fred Bergsten, "What to do About the U.S.-Japan Economic Conflict?n, Foreign Affairs, Summer 1982, pp. 1065-1067.