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IT. Introduction THE CONTEXT FOR THIS REPORT As the next millennium approaches, we are crossing the threshold into a new era of rapid technological change. Whatever prior experience in hu- man history one chooses to look at the introduction of widespread use of the horse, iron, steam generation in the industrial revolution, or the internal combustion engine there has been no period like the present. Biotechnol- ogy is yielding, genetically altered foods, medicines, and animals. Micro- electronics has placed watches on our wrists that contain hundred-year cal- endars and cost less than the price of a hamburger; noninvasive surgery by laser takes place in minutes; phenomenal computing power has been placed in the hands of schoolchildren. Computers and fax machines enable homes to be offices. The communication of information is increasingly possible from any one human to any other, wherever located, with unparalleled ease. The diffusion of many types of information can be, and often will be instantaneous. National governments have a very long history of direct involvement in the development of high technology. Government has been a prominent and, at times, the main driver of technological advance. The technology of jet engines, telecommunications, computing, microelectronics, and in many cases biological advances, each had its roots in a national program. With the end of the Cold War, and the expansion of the market paradigm throughout much of the world economy, leading-edge technological developments in

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2 CONFLICT AND COOPERATION industry have shifted very heavily from public purposes toward satisfying private sector demands for commercial applications. The relative impor- tance of the role of the military as a driver of technology has diminished si;,nificantly, though its needs remain of central policy concern. In the last few decades, as democracy triumphed over communism, various forms of market-driven economies triumphed over those economies that relied on centralized state planning as the primary determinant of investment of human and capital resources. Reinforced by budget restraints, many =,overn- ments are retreating from the scope of their involvement in what have increas- ingly become in many parts of the world~ommercial endeavors. For ex- ample, chanting philosophy and disappointing performance push toward the dissolution of telecommunications monopolies. Heavy subsidization of indus- trial projects is being curbed in many developed countries, and gross distor- tions of the market are on the decline. Trade measures at the border have largely disappeared or are scheduled for sharp reductions. Nevertheless' over the last several decades, intervention by governments in the promotion of technology has increased, accentuating the commercial competition among nations. Prior to this competition for hi:,h-technology production, trade friction had been common in agriculture, textiles, and steel, where heavy employment content gave a political stake to the sector of production. In the recent past and in the near future, technology-based industries are seen as involving the highest stakes in international competi- tion for high-growth industries and the quality employment they provide and promise. Information-based activity is becoming a vastly increased portion of national economies. Change is very radical. Vulnerability to change, seen by some to be increased by the openness of international borders, is becoming a more prominent subject for policy debates, though less frequently for careful analysis. Past experience is not a reliable predictor of the future, but it will inform judgments as policymakers consider the most appropriate international framework of rules and processes under which governments will interact, how they will deal with friction, and how they will consider cooperation in the develop- ment of high-technology goods and services and in the resulting competi- tion and trade. In the last fifteen years, a number of the most contentious commercial disputes among nations have been in high-technology goods. Most prominent were the Airbus dispute between the European Community and the United States and the semiconductor dispute between Japan and the United States. In each case, the government role in high-technology indus- tries was a major source of serious friction. In each case, industrial target- ing by governments attempted to alter commercial competition. There is considerable evidence that this era is not wholly past. Government inter- vention and government toleration of private organization of the market are not likely to disappear. Government intervention by relatively new com

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INTRODUCTION petitors, such as Korea, Taiwan, and China, is changing the global competi- tive environment, as these countries rely on a blend of government invest- ment and private initiative to alter the terms of international competition in their favor. Given the success many of these countries have experienced with effec- tive state intervention, it is unlikely that the intellectual power of the free- market philosophy and the constraints of the purse will prove sufficient to avoid all areas of friction in the future. The efforts of governments to foster their companies' participation in high-technology industries are unlikely to disappear, and the new entrants may well make the competition in some sectors more intense. Governments will remain concerned with the relative standing of their industries because of concerns over economic advance ment and employment. Technology-based industries and national power are closely related. Steel performed this role for nearly a hundred years. In the last decades of the twentieth century, this role is played by information technologies. The absence of government involvement in high-technology development, investment, and trade cannot, therefore, be presumed. It is the purpose of this Report to identify the issues raised by competi- tion in high-technology industries, to cite the underlying economic consid- erations and the facts involved in some prior areas of cooperation and fric- tion, and to begin the process of making recommendations as to an international framework of principles and rules that governments should consider invok- ing to effect cures where problems are likely to persist. The emphasis is on current policies and practices, with reference to prior cases of cooperation and friction. Although there is a growing theoretical basis for governments' concern and for their support of high-technology industries, the analysis here places less emphasis on underlying economic theory and more on the practical steps that policymakers might take to achieve legitimate societal goals while minimizing friction and engaging in cooperation with their ri- vals, partners, and neighbors. There are growing pressures for greater cooperation cost, technique, technology, market access, and shared risk drive cooperation across na- tional borders. Exploiting these opportunities fully will require new norms. Wherever possible, the Report attempts also to assess the positive role of government in the development of high technology and in exploring oppor- tunities for greater cooperation and understanding and for avoiding friction. THE STEERING COMMITTEE'S RECOMMENDATIONS AND FINDINGS The Steering Committee of the Project, coming from many of the major nations involved ir1 both the development of high-technology goods and services and trade in these goods and services, and having widely varying

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4 CONFLICT AND COOPE~TION backgrounds in policy making, industry, research, and academic pursuits, concluded that friction and cooperation in high-technology development and trade will have important consequences for the community of nations, and deserve special attention. Action and inaction by policymakers will have important consequences for our citizens and for the global economy. There will be continuing competition for new technologies and new indus- try. In the appropriate international framework, global benefits can be maximized and friction reduced. The Steering Committee's recommendations and findings pose a chal- lenge to national governments and to persons in industry and academia having an interest in fostering the positive evolution of a multilateral trad- ing system. Specifically, the framework should result in . Markets for high-technology goods that are open and contestable through both trade and investment; Enhanced competition and cooperation across national borders; Government-supported research and development (R&D) for essential government functions that avoids distortion of markets; The formation of national and international consortia to reduce risks and costs associated with new technologies and standards; Increased openness of national programs to qualified foreign entities; Effective protection of international property rights to encourage in novation and commerce; The curbing of injurious subsidization; Elimination of distortions of international investment flows due to restrictions or excessive incentives; Elimination of other distortive government measures, such as tariffs, discriminatory public procurement, offsets, and exclusionary standards and certification requirements; and Prevention of the frustration, through private anticompetitive prac- tices, of efforts to attain the above objectives. . The Steering Committee also called for a series of specific areas for further research to provide a sound basis on which policy could be made. The members of the Steering Committee shared a sense that through the development of technology, the peoples of the world stand on a threshold of unparalleled promise and opportunities. Most gatherings of those interested in technology focus on the challenges and benefits of fostering a particular technology. This project differed in that it directed its attention to attempt- ing to learn from past examples of both international cooperation and fric- tions, and to creating a global public policy environment that will make more likely the realization of benefits from technology through interna- tional cooperation and competition. Alan Wm. Wolff Project Co-Chairman