Below are the first 10 and last 10 pages of uncorrected machine-read text (when available) of this chapter, followed by the top 30 algorithmically extracted key phrases from the chapter as a whole.
Intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text on the opening pages of each chapter.
Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.
Do not use for reproduction, copying, pasting, or reading; exclusively for search engines.
OCR for page 131
SUPPLEMENTS
Supplements
SUPPLEMENT A.
HIGH-TECHNOLOGY COMPETITION IN SEMICONDUCTORS
131
The history of the semiconductor industry beginning in the late 1970s
illustrates several aspects of international competition in high-technology
industries.339 The stakes of this hi~,h-technology competition were enor-
mous. It is not widely recognized, for example, that the U.S. electronics
industry, including semiconductors, is larger than the U.S. steel, automo-
bile, and aerospace industries, combined. Employment in the semiconduc-
tor industry and related industries is equally significant. U.S. semiconduc-
tor makers employ nearly 240,000 people in the United States alone and
semiconductors are the enabling technology for the nearly $400 billion U.S.
electronics industry, which employs approximately 2.5 million Americans.
In addition, the manufacturing capability of the industries mentioned above
and, therefore, their global competitiveness depend directly on timely ac-
cess to new, electronic manufacturing technologies. Moreover, because the
strategic significance of the industry is widely recognized by policymakers
around the world, "the semiconductor industry has never beer, free of the
visible hand of government intervention."340
A Catch-Up Strategy
From its position as a late industrializer, the Japanese government recog-
nized the strategic importance of semiconductors to its economy, in terms
both of economic growth and national autonomy. In the 1970s Japan made
a systematic effort, under MITI guidance, to promote a domestic semicon-
ductor industry.34i Building upon their experience in consumer electronics,
339 This section draws heavily from the contributions to Committee deliberations of George
M. Scalise, The Nature of High-Technology Competition, 13 December 1996 and William J.
Spencer, Technology (Transfer) at SEMATE:CH. See also the excellent analysis presented by
Nortel's Claudine Simson, Samsung's Y.S. Kim, and Motorola's Owen Williams in the discus-
sion led by BRIE's Michael Borrus to the conference Sources of International Friction and
Cooperation in High-Technology Development and Trade, 30-31 May 1995.
340 Laura Tyson, Who's Bashing Whom? p. 85. For a comprehensive review of the exten-
sive and ubiquitous government programs designed to develop and support the technologies
underpinning the semiconductor industry, see Thomas Howell et al., Creating Advantage,
passzm.
341 See the partial list of joint research and development projects in microelectronics
sponsored by MITI in Laura Tyson, Who's Bashing Whom? p. 96. Many of these programs
continued through the 1980s. In addition to the VSLI manufacturing program, MITI focused
on promising technologies such as optical semiconductors, high-speed computing devices,
OCR for page 132
32
CONFLICT AND COOPERATION
the large Japanese electronics firms invested heavily in the development of
semiconductor technology. By the early 1980s Japanese producers had
become a major force in the market for dynamic random access memories
(DRAMS' 342
Escalating Trade Friction
The vertically integrated structure of Japanese industry provided major
advantages with respect to the capital-ir~tensive investments required for
state-of-the-art semiconductor facilities. In this high-tech competition, the
Japanese companies benefited from their unique system of corporate gover-
nance, which places considerably less emphasis on quarterly or annual prof-
its than does the U.S. system. Moreover, the rich revenue stream derived
from previous success in penetrating the consumer electronics industry per-
mitted cross-product subsidization within companies. At the time, a lower
cost of capital encouraged the major Japanese electronics firms to make
major counter-cyclical investments.
These structural advantages enabled the Japanese industry to undertake a
massive capacity build-up in the early 1980s. The Japanese firms then
accelerated their gains in market share through highly aggressive price cut-
ting. The U.S. industry sustained progressively heavier losses through each
generation of DRAM. By 1984-85 with the introduction of the 256K DRAM,
the market share of the U.S. industry had gone from roughly ninety percent
of the DRAM market in the late 1970s to less than ten percent, with most U.S.
synchrotron lithography, and optoelectronic devices, among others. Japan is not alone in
providing R&D support in this sector. In the United States, the Defense Advanced Research
Projects Agency (DARPA) has extensive technology development programs, though these are
generally small scale and focused on "over-the-horizon" technology development, with an
emphasis on defense requirements.
342 This strategy was not without its costs While direct central government expenditure
was limited, though important, these programs presumably involved costs in terms of foregone
consumer welfare or opportunity costs imposed on other industries, as a 1988 study by Baldwin
and Krugman sought to determine. However, this concern for consumer welfare, however
laudable, reflects values and assumptions characteristic of American-trained economists, which
are not universally shared. See James Fallows, Looking at the Sun, chap. 4, especially pp.
180-190, and the section Producer-Oriented Economies above.
As Laura Tyson notes, "it is important to emphasize that the objective of the Japanese
industrial policy in the semiconductor industry, as in other industries targeted for development,
was not consumer welfare." (Pp. 8~87, italics added.) Tyson also notes that the Baldwin and
Krugman study did conclude that the Japanese policies "succeeded in gaining a share of the
16K DRAM market for Japanese producers, but only at the expense of a net reduction in
Japanese economic welfare." Laura Tyson queries the import of their findings because of their
failure to take into account the possible dynamic effects of a Japanese position in the growing
DRAM market on profits and technological externalities in future generations of semiconduc-
tor products and in systems incorporating semiconductor technology.
OCR for page 133
S UPP LEMENTS
133
firms exiting the DRAM market entirely. A similar though less severe trend
occurred in erasable programmable read-only memories (EPROM). The dras-
tic effects of the Japanese competition led many informed U.S. observers to
question the future viability of the U.S. semiconductor industry.343
The Japanese challenge to the U.S. industry was based on three inter
lock~ng elements. Foremost among these was the quality of Japanese pro-
duction processes and products. The second, which helped drive the first,
was the higher rates of investment made possible by the more integrated,
capital-rich structure of the Japanese companies. A third key advantage
enjoyed by the Japanese industry in comparison with the U.S. industry was
its ability to exclude its global competitors from access to its domestic
market. The formidable barriers to investment and the lack of market ac-
cess for foreign producers of semiconductors provided a crucial benefit in
an otherwise global industry.344 It gave the Japanese industry a sanctuary,
from which they could insulate themselves from competitive counter-
attacks and preserve a financial cushion for future product development.
This enabled Japanese producers, operating from the closed Japanese mar-
ket, to dump product on the global marketplace. Because of the shortness
of the semiconductor product cycles and the speed with which the foreign
markets responded to dumping, the impact of dumping on their U.S. com-
petitors was pronounced.
The U.S. Industry Response
to the'Tapanese Trade Challenge
Leading figures in the U.S. semiconductor industry increasingly recog-
nized the unique features of the Japanese competitive challenge. The com-
bination of a closed Japanese domestic market, the dumping encouraged by
the excess capacity in microelectronics products (encouraged by the capital-
rich Japanese keiretsu), and the prospect of supply dependency for key
components with the accompanying vulnerability to manipulation of price
and availability posed a competitive threat that they were unlikely to sur-
mount independently.
To meet this threat to the future viability of their industry, several U.S.
companies joined in the mid-1980s in filing dumping actions against the
Japanese semiconductor producers with respect to 64K DRAMs and EPROMs.
In 1985 the Department of Commerce self-initiated a case in reaction to
343 Laura Tyson provides an excellent analysis of the competition for dominance in the
semiconductor industry. See Laura Tyson, Who's Bashing Whom? chap. 4, "Managing Trade
and Competition in the Semiconductor Industry," pp. 85-113, as does the recent study by
Kenneth Flamm, Mismanaged Trade? especially chap. 3, 4, and 5.
344 Tyson, p. 87.
OCR for page 134
134
CONFLICT AND COOPERATION
Japanese dumping, of DRAMs of 256K and above. During roughly this
same period, the Semiconductor Industry Association brought an action against
the Japanese semiconductor producers under Section 301 of the Trade Act
of 1974 to address the closed nature of the Japanese semiconductor market.
The dumping cases resulted in findings of substantial dumping and rea-
sonable indications of injury. The remedy from these cases normally would
have been high antidumping duties imposed on the products at issue. How-
ever, the U.S. semiconductor industry viewed such a remedy as both inad-
equate and flawed.
Antidumping duties were considered inadequate because before they could
be imposed, most U.S. producers could no longer justify investing in new
DRAM capacity and were forced to leave the DRAM market. No compen-
sation would be provided to the U.S. industry; the effect of the antidumping
duties would be prospective, that is, only to offset future dumping. And
antidumping duties on a previous- or current-generation product was little
deterrent to the dumping of subsequent products, especially if over-capacity
and low marginal costs added to an incentive to capture market share by
dumping.
Equally important, antidumping duties were a flawed remedy for an in-
dustry such as semiconductors. Given the resulting, rapid decline in U.S.
DRAM production, antidumping duties would impose a burden on the U.S.
customers of the semiconductor industry, either by raising the price of DRAMs
to them or by forcing them to shift to overseas production of their electronic
systems products.
To meet this policy challenge, the American producers adopted a novel
approach, ultimately accepted by the American government.345 This ap-
proach did not seek to protect domestic producers of semiconductors from
global competition nor to insulate the U.S. market from technological ad-
vance, which would ultimately disadvantage their U.S. customers. Rather
than close the U.S. market, the U.S. producers sought to ensure access to
the Japanese market for U.S. and foreign suppliers.
The U.S. approach sought not only to bring an end to dumping and a
return to cost-based competition in the U.S. and other foreign markets, but
also to remedy the problem of effective market access in Japan. Previous
efforts to obtain equivalent access to the Japanese market had proved elu
345 While the Semiconductor Agreement and SEMATECH represent innovations in U.S.
trade and technology policy, the Reagan administration arguably had a much more pragmatic
and innovative approach to economic policy issues than is generally recognized, even when
compared with the announced "results-oriented,' trade policies of the Clinton administration.
See, for example, Alan Tonelson, "Beating Back Predatory Trade," Foreign Affairs, July-
August 1994. Tonelson argues that the efforts to support the semiconductor industry were but
one element of a series of successful policies to rescue and restore beleaguered U.S. industries
such as steel, machine tools, textiles, and automobiles.
OCR for page 135
SUPPLEMENTS
135
sive. No matter how market conditions changed or how well U.S. products
competed elsewhere in the world, the U.S. market share in Japan generally
stayed around 10 percent,346 well under U.S. shares in other markets. Ef-
forts such as the formation In 1982 of an informal group, the U.S.-Japan
working group on high-technology industries, did not prove successful. Al-
though a series of recommendations by the group was adopted in 1983, by
mid-1985 the U.S. share of the Japanese market was lower than it had been
when the recommendations were first adopted.
Recognizing the failure of this consultative approach and of the Japanese
government to fulfill undertakings on market access, the U.S. industry filed
a Section 301 action. Sanctions could be authorized against Japan under a
Section 301 action for failure to live up to its agreements or for engaging in
unjustifiable and restrictive trade practices. For the U.S. industry, however,
the objective was to obtain effective market access, not to penalize the
Japanese.
The Semiconductor Trade Agreement
In 1986, just prior to the conclusion of the various legal proceedings, the
U.S. industry agreed to suspend the dumping cases, and an agreement was
reached on the market access issue. The settlement took the form of a five-
year accord called the Semiconductor Trade Agreement (STA). Impor-
tantly, the Agreement included a side letter in which the Japanese govern-
ment recognized the fact that the U.S. industry expected the foreign share of
their market (not only U.S. producers) to grow and to exceed 20 percent by
the year 1991.347 The Agreement and the policies associated with its imple-
mentation included three principal features:
· Provisions designed to lead to concrete market access for non-Japa-
nese firms,
· A specific target acknowledged as a threshold for foreign market share,
and
.
A mechanism to monitor semiconductor cost so that dumping could be
addressed quickly and effectively with the prospect of sanctions should the
terms of this agreement not be respected.
346 As noted above, given the enol~ous R&D costs associated with the semiconductor
industry and the resulting importance of competing in all markets to recoup these costs, access
to the Japanese market, now the largest in the world, is considered essential for competitive-
ness in this global industry. Council on Competitiveness, Roadmap for Results, p. 55.
347 The existence of the side letter was first revealed with the publication of Clyde Prestowitz,
Trading Places, Basic Books, New York, 1988. For a discussion of the negotiations, see
Kenneth Flamm, Mismanaged Trade? chap. 4. For a discussion of the impact of the side letter
agreement specifying 20 percent as a reasonable expectation for foreign market share by 1991,
see Kenneth Flamm, Mismanaged Trade? pp. 279-293.
OCR for page 136
136
CONFECT AND COOPERATION
An End to Dumping
The metrics of success for the STA were clear-cut: assured access to the
Japanese market for foreign producers and an end to dumping. There would
be no offsetting penalties for dumping and no restricted access to the U.S.
market. Instead, dumping would cease and an effective deterrent mechanism
was devised under which each individual producer would monitor its own cost
data to detect dumping,. For market access, an objective target for a minimum
foreign market share was established at 20 percent of Japan's annual semicon-
ductor consumption. This was a target that focused on access in fact rather
than in theory. Because market perpetration could be measured, it provided a
concrete measure of success. This represented a significant departure from
traditional U.S. process-onented trade policy to a more results-oriented ap-
proach to market access; it also provided discipline.
Through Government Commitments
To be effective, the STA needed government commitment. If there was
to be no U.S. government response to noncompliance-the common percep-
tion in U.S. industry of the U.S. government's behavior with respect to past
trade agreements with Japan there would be little prospect of the STA's
meeting its objectives. After widespread evidence of noncompliance with
the STA became available in late 1986, President Reagan imposed sanctions
in April 1987.348 Following this action dumping in world markets ceased,
and the market share in Japan of U.S. and other foreign producers began to
climb. By 1990 the increased share of the Japanese market made possible
by the agreement translated into additional sales of over $1 billion for
American companies alone.349
And Industry Cooperation
The success of the STA also depended heavily upon industry commit-
ment. The STA not only established a realistic target for market access, but
348 A Council on Competitiveness study concluded that a credible government commitment
to sanctions may be necessary to ensure compliance with trade agreements, especially when
they affect the interests of powerful foreign companies. The report notes that, "in the case of
semiconductors, the U.S. government's commitment to sanctions was not credible until they
were actually applied in 1987. Japanese industry and government were reportedly very sur-
prised by the decision." Council on Competitiveness, Roadmap for Results, p. 56. The report
adds that the U.S. government's commitment to sanctions contributed to the subsequent suc-
cess in winning an extension of the Trade Agreement in 1992 and to the dramatic increase in
the purchase of U.S. semiconductors by Japanese users.
349 Laura Tyson, Who's Bashing Whom? p. 113. These additional sales also meant signifi-
cant increases in R&D, capital investment, and high-wage employment.
OCR for page 137
SUPPLEMENTS
137
was accompanied by major efforts by both U.S. and Japanese industries to
pursue the target. These measures were substantial and far-reaching. They
included major commitments of marketing, activity in Japan by U.S. indus-
try.350 Collaborative efforts were undertaken to understand customer re-
quirements and product capabilities. These were accompanied by competi-
tions at the design-in level. Extensive follow-up and product support were
also made available.
Supportive Policy Developments
A parallel development during this period very much affected the viabil-
ity of the U.S. semiconductor industry: the emphasis on intellectual prop-
erty protection (including, the enactment of a chip protection law in the
United States at the end of 1984 and in Japan beginning in 19861. Intellec-
tual property protection is essential to commercial development in semicon-
ductors and to the large R&D investments necessary to generate new prod-
ncts. The chip protection legislation created a new form of intellectual
property protection for semiconductor products that was readily adopted
internationally. It effectively reaffirmed the importance of general prin-
ciples of trademark law and reduced the risks of piracy in semiconductor
design. In addition, despite considerable controversy within the U.S. gov-
ernment, the decision to establish SEMATECH, a consortium of U.S. semi-
conductor manufacturers, backed by the Department of Defense and a sub-
stantial annual commitment of funds, sent a powerful signal to foreign producers
of semiconductors that the U.S. government was not prepared to see the
U.S. semiconductor industry marginalized. Both these developments in-
creased the confidence of the U.S. industry and the trade policy community
that the cost-based, market access approach of the STA would have an
opportunity to work.
Success of the Trade Agreement
The STA was an unprecedented mechanism to increase competition and
reduce friction in a key high-technology industry. Without this effective
trade defense, combined with the STA's innovative market-opening mea
350 The Council on Competitiveness study emphasized the role of marketing efforts of U.S.
semiconductor producers, noting that "as a signal of their commitment to the Japanese market,
125 U.S. semiconductor companies established a presence in the country, and over the 1986-
1992 period, U.S. firms opened an average of one new facility per month in Japan. In general,
U.S. industry undertook a wide variety of efforts to market its products in Japan and made
great efforts to improve its knowledge of, and exposure to, the Japanese market." Council on
Competitiveness, Roadmap for Results, p. 54.
OCR for page 138
138
CONFLICT AND COOPERATION
sures, the structure and character of the U.S. industry would be very differ-
ent today, and its contribution to the U.S. economy significantly smaller.35i
Indeed, some infold participants believe both that the U.S. industry should
have forged a collective response earlier and that the government, in tum,
should have been more responsive to the needs of this strategic industry.
While the policy process ran its course, the U.S. industry suffered signifi-
cant damage; thousands of jobs and billions of dollars in revenue were lost
before the U.S. responded.352
Although some of the elements of the STA remain controversial, overall
the agreement has been very positive.353 Costly and destructive dumping
has ceased. U.S. producers of DRAMs and EPROMs have survived and
rebounded as world-class competitors. Major new entrants into DRAM
production, notably producers in Korea and, increasingly, Taiwan, have
substantially increased competitive vitality in the world DRAM market.
U.S. and foreign producers have achieved far greater access to the Japanese
market. While this progress remains vulnerable to arbitrary reversal, its
underpinnings are market based. It has provided both major long-term
benefits to global consumers and a competitive environment in which the
U.S. industry could recoverer and prosper.
An Agreement Oriented to High-Technology Competition
In part, the success of the STA can be attributed to its sensitivity to the
peculiar features of high-technology competition. Competition had to be
preserved rather than merely offset by government intervention. By requir-
ing future competition to be cost based, the STA strengthened market com-
petition while minimizing government intervention. However, swift and
35t Ibid., p. 42.
352 Laura Tyson, Who's Bashing Whom? p. 271, and the Council on Competitiveness study
emphasize the special characteristics of high-technology industries and the need for quick
decisionmaking processes in responding to trade problems. The report adds that "the U.S.
semiconductor industry may have been lucky to survive delay. Other technology-intensive
industries may not be." Roadmap for Results, p. 55.
353 Some observers argue that the agreement was a failure, resulting in significantly higher
prices for U.S. consumers of semiconductors and in a windfall gain in profits for Japanese
producers. In this view, the agreement's "bubble profits" for the Japanese producers were
plowed back into R&D investment, having the "perverse result of strengthening the Japanese
companies for future rounds of competition in new products." (Laura Tyson, Who's Bashing
Whom? p. 117.) For a critique of the agreement, see David Mowery and Nathan Rosenberg,
"New Developments in U.S. Technology Policy: Implications of Competitiveness and Interna-
tional Trade Policy." California Management Review, vol. 32, no. I, Fall 1989, pp. 107-124.
For a positive assessment, see Thomas Howell, et al, Creating Advantage, Laura Tyson also
rejects many of these criticisms. See Laura Tyson, Who's Bashing Whom? p. 87 and p. 132
cited below.
OCR for page 139
SUPPLEMENTS
139
predictable government action was a necessary condition of success. The
STA provided it in the form of a mechanism that was capable of detecting
and combating dumping before the targeted firms were effectively removed
as players in global competition. The willingness of the U.S. government to
take action, as noted above, was a crucial condition for success.354
Moreover, the policy approach adopted by the American government had
the considerable advantage of being genuinely international. The STA ac-
complished this by taking a comprehensive approach that addressed, for
example, third-country dumping and sought market access for all non-Japa-
nese firms, not just U.S. firms. Finally, the arrangement had to be based on
market realities. The needs of U.S. and Japanese customers were taken into
account, and genuine industry-to-industry interaction, design-ins and tech-
nology adaptation were undertaken.
This progress was a joint effort. In part, it was facilitated by the ex-
panded commitment of U.S. semiconductor firms In Japan. The number of
technical personnel was significantly increased, and new design centers were
opened at the time of the conclusion of the second Semiconductor Agree-
ment. However, MITI played a determining role, urging Japanese semicon-
ductor producers to increase procurement of foreign components and to
submit reports with purchasing plans for foreign semiconductors as a means
of expanding foreign market share.355
The phenomenal growth of the world market for semiconductors has
probably contributed to the success of the agreement, not least by reducing
the zero-sum nature of its results. This has been especially true in recent
years. For example, the world market for semiconductors in 1993 was on
the order of $77 billion. By 1995, the market had nearly doubled, to $146
billion.356 Aided by this high-~=,rowth environment, progress under the agreement
in terms of foreign share of the Japanese market was significant, rising in 1995
354 Thomas Howell argues that the delay in fulfilling the market access commitment made
in 1986, until the U.S retaliated in April 1987, should not be interpreted as proof that the
Japanese respond only when confronted with sanctions. He suggests that the explanation is
more complicated, noting that Americans tend to see the negotiated solution as final, with
implementation flowing naturally, while Japanese tend to see the negotiated solution as one
more stage in the negotiations, with implementation a subject of further negotiations. Howell
et al., Creating Advantage, p. 89. It might be added that, given the lack of continuity in the
upper levels of the U.S. government, the implementation negotiation is likely to be with a new
American negotiating team, possibly having no prior experience with the subject at hand.
355 Howell et al., Creating Advantage, p. 93, citing Japanese press reports. See also p. 84.
356 Semiconductor Industry Association, World Semiconductor Forecast, San Jose, Calif.,
November 1995. Interestingly, U.S. market share has declined from a peak of 43 percent to 41
percent in 1995. Japanese market share is estimated at 39 percent, with the substantial remain-
der made up by the rest of the world, notably Korean, Taiwanese, and European production of
DRAMs. The DRAM market showed a phenomenal increase' rising from $13 billion in 1993
to $41 billion by 1995. Ibid.
OCR for page 140
140
CONFLICT AND CO OPERA TIOI`J
to a fourth quarter peak of 30 percent, though some of this increase results
from shifts in product mix toward microprocessors, with DRAM-intensive
Japanese consumer electronics production moving off-shore. The benefits of
this increased market share for U.S. producers were significant.357
Some U.S. and foreign producers, and their customers, were disadvan-
taged by price increases and especially by delay in product delivery.358 It is
important to recognize, however, that these trends were under way before
the trade agreement took effect, and reflected the characteristic "market
counter-measures" taken by many Japanese industries in depressed mar-
kets.359 The shortage in supply of DRAMs did prove highly profitable for
Japanese semiconductor producers. From a long-term perspective, how-
ever, U.S. and foreign producers, their equipment suppliers, their employ-
ees, and downstream users of semiconductors were advantaged, while glo-
bal competition in this enabling technology was strengthened.360
Some critics of the Semiconductor Agreement were less concerned with
the agreement's market effects than with a question of principle, on the
357 While the gains for the U.S. economy from the agreement are difficult to calculate with
precision, they are significant. The increased market share translates into R&D and capital
investment expenditures as well as hi=,h-wage employment. At the end of 1990 the SIA
calculated that U.S. firms achieved an incremental $1.16 billion in annual revenues under the
STA (and would presumably have achieved an additional $1.16 billion had the 20 percent
target been reached). A revenue gain of this magnitude ($1.16 billion) permits increased
investment of an estimated $137 million annually in R&D, and of $130 million in annual
capital expenditures, which in turn stimulates the sales of U.S.-based semiconductor equipment
and materials suppliers. Howell et al.' Creating Advantage, p. 89.
358 Howell et. al., Creating Advantage, p. 130. Howell documents cases where European
producers reported that Japanese suppliers withheld critical components and machines for
competitive purposes during this period.
359 Laura Tyson, Who's Bashing Whom? p. 117. Howell et al., Creating Advantage, pp.
11~132. Howell argues that "the evidentiary record shows that joint actions by Japanese
firms were under way in 1985, well before the [Semiconductor] Arrangement existed; the
precipitating event, to the extent one may have been needed to prompt joint market-regulating
actions, appears to have been the elimination of most non-Japanese producers of DRAMs in
mid-1985." Ibid., p. 129. Recent analysis supports this view. Kenneth Flamm notes that
`'Japanese semiconductor analysts in Tokyo stressed both the trend toward more oligopolistic
behavior in the chip industry and the [Japanese] government's role in encouraging it." See
Kenneth Flamm, Mismanaged Trade, p. 206. Flamm also argues that the production cuts and
restraint in investment associated with MITI's implementation of the STA prior to 1988 subse-
quently "played some role" in the increase in chip prices by reducing aggregate world supply.
He adds, however, that "the brakes applied to Japanese supply apparently greatly exceeded the
restraints required" to meet the requirements of the Commerce Department. Ibid., pp. 269-
272.
360 Laura Tyson supports this assessment. She argues that "contrary to popular belief, the
agreement was not ineffective at realizing many of its aims, including, those of stabilizing the
share of U.S. producers in the global DRAM market, reversing the precipitous decline of the
U.S. share in the global market for EPROMs and increasing the share of U.S. producers in the
OCR for page 141
SUPPLEMENTS
141
grounds that governments should not directly influence purchasing deci-
sions of private enterprises. The 20 percent market share target was singled
out as an example of "managed trade.', This criticism, though widespread,
presumed that the rest of Japan's import trade was unrestrained. Industry
experts argued that Japan's high-technology imports were already managed,
either directly by MITI or through informal go~rernment-~ndustry a~Tange-
ments with industrial groups and distributors, or through private anticom-
petitive practices.36i In this view, what was unusual about the Semiconduc-
tor Trade Agreement was not that it included a market share target, but that
its management was both public and jointly administered (i.e., by the Japa-
nese and American governments).
Leaving aside ideological objections, the Semiconductor Agreement has
the not inconsiderable virtue of having accomplished its goals. It offered an
innovative, market-opening solution to a previously intractable competitive
problem for the American industry. The negotiation of the STA and the
commitment of the U.S. government and ultimately the Japanese govern-
ment permitted the removal of a potentially debilitating source of friction
from a key bilateral relationship. Moreover, by providing an effective means
for overcoming, the trade problems that threatened the viability of the U.S.
industry and for restoring cost-based competition, the agreement established
a durable basis for vigorous global competition and allowed the semicon-
ductor industry to continue its phenomenal growth from an increasingly
dispersed production base.
SUPPLEMENT B.
GOVERNMENT SUPPORT FOR TECHNOLOGY
DEVELOPMENT: THE SEMATECH EXPERIMENT362
Overview
The U.S. response to the challenge to its semiconductor industry in the
period 1985-1995 involved three inter-related elements. As noted in the
Japanese market. Nor did the agreement reduce competition across the board, as is widely
believed. Instead the effects on competition also varied by industry segment over time."
Who's Bashing Whom? p. 87 and p. 132.
361 Howell et al., Creating Advantage, pp. 101-103. MITI's subsequent success in setting
minimum pricing standards for Japanese DRAM manufacturers' direct export sales lends sup-
port to this view. See Kenneth Flamm, Mismanaged Trade? p. 243.
362 This section draws heavily from the contributions to Committee deliberations of George
M. Scalise, The Nature of High Technology Competition, and William J. Spencer, SEMA TECH,
passim. See also William J. Spencer and Peter Grindley, "SEMATECH after Five Years:
Hi~,h-Technolo~,y Consortia and U.S. Competitiveness," California Management Review, vol.
35, Summer 1993.
OCR for page 162
162
CONFLICT AND COOPERATION
United States provide a continuous, stable signal, with a widely accepted
commitment to avoid the imposition of arbitrary policy changes such as
encryption or user fees. A stable policy framework is also seen as the basis
for maintaining the current GPS system as a de facto standard. Ultimately,
congressional action may be desirable to secure policy stability, an under-
taking which should prove possible given the history of broad bipartisan
support and common agreement in this area.
The question of standards has enormous stakes, not only in terms of
market investments and product development, but also as the system be-
comes more pervasive, internationally accepted standards become crucial to
a wide range of civil, commercial and military applications involving, issues
such as encryption, safety certification, and international spectrum specifi-
cations. A formal, national policy on GPS, providing a predictable environ-
ment for both public service and private business decisions, is essential.
A Stable Policy Framework for Investment
From 1983, when President Reagan first offered access to GPS, interna-
tional reliance on GPS has expanded exponentially. To meet the concerns
of increasing reliance on GPS, and the resulting need for a clearly articu-
lated and stable policy framework, in March 1996 the Clinton administra-
tion issued a presidential decision directive approving a comprehensive na-
tional policy on the future management and use of the U.S. Global Positioning
System.426 The presidential directive was designed to address the broad
range of military, civil, commercial, and scientific interests, both national
and international, concerned with GPS operations. Its fundamental objec-
tive was to establish a clear, high-level commitment to a stable policy envi-
ronment for the development of international standards facilitating both
private and public sector investments. This policy stability is of special
interest to public authorities which are increasingly dependent on GPS for
the provision of critical public functions.
To this end, the policy guidelines adopted for the operation and manage-
ment of GPS under this directive included decisions to
· provide the GPS Standard Positioning Service for peaceful, civil, com-
mercial, and scientific use on a continuous, worldwide basis;
· make the service available free of direct user fees;
.
discontinue the Selective Availability of GPS signals "within a de-
cade," thereby making available for commercial use the most precise posi-
tioning information, formerly reserved only for military applications;
426 See U.S. Global Positioning System Policy Fact Sheer, The White House, OSTP/NSC
29 March 1996.
OCR for page 163
SUPPLEMENTS
163
· seek the acceptance of the U.S. GPS as a standard for international
use, while ensuring an appropriate balance between international security
interests and the requirements of international, civil, commercial, and scien-
tific users;
· establish a permanent GPS Executive Board chaired by the Depart-
ments of Defense and Transportation, charged with the management of GPS
in consultation with interested parties.
Lessons from GPS
The development of the Global Positioning System captures many of the
special features of high-technology development and competition. As noted,
the industry grew as a result of U.S. defense expenditure on a military
system, although it does not represent the traditional spin-off of defense
technologies, insofar as it is the additional capacity of the defense system
itself which provides the infrastructure for the industry. A separate GPS
satellite signal was made available for commercial use and, as a result,
industry investments in R&D created an array of productivity-enhancing
information products.
The initial government role was critical to the development of both the
technology and the infrastructure. At its origins, the start-up of such a
system was most unlikely, not to say impossible, on the part of purely
private investors, in terms of both the cost and the untried concept. How-
ever, because the government eventually adopted a dual-use approach to the
GPS technology, commercial and non-defense public use of the system has
expanded far beyond the initial military applications. At the same time, the
rapid technical development driven by commercial applications has contrib-
uted to increased technical capability and availability for military systems.
The military-commercial synergies thus obtained illustrate the power of a
dual-use approach to new technologies.
The Growth in Applications
The breadth of benefits made possible by the GPS system were certainly
unforeseen when the initial U.S. investment was made. Applications now
extend to key public infrastructures such as the Global Information Infra-
structure (GII), the Internet, mobile communications and other global wire-
less applications, and transportation. Public safety applications include civil
aviation, disaster management and response, and emergency fire, police,
and medical response. The potential applications for private automobiles,
and the transport industry generally, are immense. The increasingly wide-
spread use of differential GPS for augmenting basic GPS signals, yields
great accuracy, i.e., within centimeters. This capability is translating into
OCR for page 164
164
CONFLICT AND COOPERATION
"an incredible array of applications," such as demonstrating new systems
for landing aircraft in bad weather; robotic plowing, planting, and fertiliz-
ing of fields, with tremendous economies and productivity gains; monitor-
ing train and ship locations and even tracking and contributing to the clean-
up of oil spills; carrying out twenty-four-hour remote-controlled mining
operations; and optimizing the positioning of emergency vehicles to provide
the critical response-time margin that saves lives.427
The Central Role of International Cooperation
For an information industry to continue to grow globally, however, it
requires that national policy evolve into a stable international policy frame-
work. The role of foreign public and private users, and their perceptions
and needs, have to be taken into account in U.S. policymaking. As the
system evolves toward a de facto global information utility, the need to
ensure that the requirements of all stakeholders are accommodated becomes
paramount. By seeking regional agreements with Japan and Europe on
security and economic issues, the adoption of GPS as a global standard for
position location, navigation, and timing can be assured. By pursuing a
cooperative approach, the rapid expansion of the industry may continue to
be unhindered by potentially debilitating conflict over standards or by the
artificial segmentation of global markets.
Finally, notwithstanding these policy challenges, it is important to keep
in mind the unprecedented opportunities offered by the Global Positioning
System. The growth in GPS applications offers major benefits in terms of
consumer welfare, national productivity, and the ability of national, state
and local governments to better perform their missions. The evolution of
this system highlights the unforeseen benefits to be derived from sustained
public investment in new technologies, the benefits of the dual-use ap-
proach for military acquisition, and the central role of international coop-
eration. As information technology becomes increasingly important to in-
ternational security and commerce, the experience of GPS provides ala instructive
model for cooperative efforts to promote commercial competition and col-
lective security.
SUPPLEMENT E.
DISCRIMINATORY PUBLIC PROCUREMENT:
PROSPECTS FOR PROGRESS
ILL 11AVO L "AA - ~1- AO ~ Age, - ~ =~ ~ - .
Federal Funds for Science and Technology p. 49.
Of the many tools governments use to pursue their industrial policy goals,
one of the oldest and most direct is targeted government procurement. To
LA! AAL_AA~ ~^ ~_~^ __.. ~ ~
L/11~ V1 L11~ Vet
427 See Allocating
OCR for page 165
SUPPLEMENTS
165
support noncompetitive domestic companies or to assist in the development
of what are expected to be "sunrise" industries, governments often reserve
attractive contracts for local suppliers. This can be done through explicit
restrictions on who may bid on a contract, or by stated preferences for local
suppliers. More often, the government's policy goes unstated, and the mechanism
through which it supports local companies is shielded by opaque procure-
ment procedures.
The Government Rationale for Discrimination
In recent years, hi=,h-technology industries have been a favorite target of
directed government procurement. An experience in Norway in the late 1980s
offers a particularly clear example of how some governments have sought to
use government procurement to support domestic industry. At that time, the
city of Oslo planned to procure an automated toll collection system. After
following a competitive bidding procedure, the Oslo au~onties decided to
sign a contract with a U.S. supplier whose system was cost-competitive and
based on proven technology. At that point the Norwegian government-
which was providing R&D support to a fledgling Norwegian producer of auto-
mated toll collection systems and was also funding the Oslo toll road project
entered the picture and directed Oslo to buy the Norwegian product. Oslo
resisted and the matter became the focus of intense media attention. In the
process, the Norwegian Minister of Transport stated publicly that if the com-
petition had been between the U.S. film and another foreign firm, the U.S.
firm would have won the contract. However, he continued, in this instance the
Norwegian government was obliged to support its domestic supplier because
the Oslo contract would give the winner a tremendous boost toward winning
similar contracts throughout Europe. It would provide a field test in a Euro-
pean environment, drive down unit costs for the Norwegian producer through
economies of scale, create customer acceptance, and influence the develop-
ment of European standards for toll collection equipment. Ultimately, the
Norwegian firm was awarded the Oslo contract and a subsequent contract in
the city of Trondheim.428
The Power of Government Purchases
The power represented by government purchases is staggering. Accord-
ing to U.S. government estimates, total procurement by central govern
428 Norway is a member of the Government Procurement Agreement (GPA), and the United
States challenged both of these Norwegian procurements in that forum. The U.S. company
received compensation for the costs it incurred in bidding on the Oslo project, but was unable
to overturn the contract awards.
OCR for page 166
66
CONFLICT AND COOPERATION
meets, sub-central governments, and electrical utilities in the European Union
is approximately 5115 billion per year. Central government procurement in
Japan approaches $30 billion. The figures are even more dramatic when the
purchasing activities of state-owned enterprises are taken into account. Ac-
cording to a World Bank study, state-owned enterprises accounted for 10.7
percent of economic activity in developing countries and 4.9 percent of
economic activity in developed countries from 1978 to 1991.429 Govern-
ment procurement policies and decisions are thus one of the most important
potential influences on international trade flows.430
As ~ result, the elimination of restrictive procurement practices is a high
priority in international trade negotiations. The United States has been
especially active. With Japan alone, the United States has negotiated sectoral
procurement agreements covering supercomputers, computers, cellular tele-
phones, medical equipment, and telecommunications equipment. As with
other trade and investment issues~iscussed in the body of this Report-
these bilateral initiatives are designed to address discriminatory practices
for which effective multilateral arrangements are not in place.
The Exclusion of Government Procurement
from Multilateral Disciplines
Although the importance of these purchases was widely recognized, when
the international community adopted the General Agreement on Tariffs and
Trade in 1948, liberalization of government procurement procedures were
not included. In fact, Article III.8 of the GATT specifically excepted public
procurement from the principle of national treatment. This exclusion was a
429 Within these statistics, there is considerable variation among countries. During the
period 1978 to 1991, state-run enterprises accounted for 10.5 percent of economic activity in
France, and 7.1 percent of economic activity in Germany, but only t.2 percent of economic
activity in the United States. Bureaucrats ir: Business, Oxford University Press, New York,
1995, pp. 268-271.
430 It should be noted, however, that the efficacy of using government procurement to
direct business toward domestic high-technology ventures in some sectors is of uncertain
value. In the United States, the federal government has succeeded in developing technologies,
such as space launch vehicles, where: (1) there was a clear government need and (2) the lack of
commercial demand and the high cost of entry made private sector investment uneconomical.
The Norwegian toll road case, in which the government sought to provide critical support to
launch a new technology, illustrates a third category in which some would argue for the
efficacy of government intervention. As a means of supporting new generations of existing
commercial technologies, however, the benefits of selling to the government are far less clear.
In the semiconductor industry, for instance, government specifications tend to lag behind the
state of the art and can impose additional requirements that have no commercial benefit.
Companies that become dependent on government contracts may survive, but they are likely to
see a steady erosion of their competitive position in the far-larger commercial market.
OCR for page 167
SUPPLEMENTS
167
foregone conclusion from as early as 1946 when the GATT Preparatory
Committee recommended In its first session that government procurement
not be covered by the most-favored-nation (MFN) clause. The participating
governments saw their procurement decisions as inherently political and
were unwilling to give up the use of one of their most flexible industrial
policy tools. This outright exclusion of such a large portion of economic
activity was recognized by many as a serious gap in GATT coverage, but
for thirty years the gap remained unfilled.
Only in 1979, with the conclusion of the Government Procurement Agreement
as one of the Tokyo Round codes, did the GATT contracting parties begin
to introduce a measure of discipline and international obligation to govern-
ment procurement practices. For the purchases it covers, the GPA requires
signatories to accord MEN and national treatment to other signatories. It
also mandates certain procurement procedures designed to ensure that its
objectives are not undercut through the introduction of bid requirements or
procedures biased toward a local bidder. The framers of the GPA sought to
create an incentive for additional participation by making the benefits of the
GPA available only to other signatories.
The GPA, however, also has a renumber of serious shortcomings:
~ First, participation in the GPA is voluntary, and the membership
from the beginning did not extend essentially beyond OECD countnes.43~
As a result, the GPA has done nothing to change procurement practices in
the rapidly growing countries which offer great opportunities for increased
exports from the industrial countnes.432 The expectation that additional
countries would join the GPA in order to obtain the benefits of access to
government procurement in the developed world has proven to be unfounded.
Most developing countries simply do not expect that their suppliers would
be net beneficiaries of the agreement, and under those circumstances they
are unwilling to circumscribe their own flexibility in procurement deci-
sions. Limited participation has left procurements in most developing countries
open to arbitrary and nontransparent purchasing procedures. Moreover,
because transparent procedures offer one of the best defenses against cor
431 The following, countries currently apply the GPA: Canada; the European Union (in-
clllding Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxem-
bourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom); Israel; Japan;
Norway; Switzerland; and the United States. Korea will begin to apply the GPA on January 1,
1997. Singapore is in the process of acceding to the agreement.
432 U.S. exports to the ten "Big Emerging Markets" (BEMs) identified by the U.S. Com-
merce Department already exceed U.S. exports to either Japan or the European Union, and by
the year 2000 they are expected to exceed U.S. exports to Japan and the EU combined. None
of these eighteen countries now apply the GPA, and only Korea and Singapore are likely to
begin applying the agreement in the near future.
OCR for page 168
68
CONFLICT AND COOPERATION
rupt behavior in government procurement, failure to sign up more members
to the GPA has meant that one of the great potential values of the GPA has
gone unrealized.
· Second, the GPA disciplines apply only to procuring entities "sched-
uled" by the signatories. Although the United States scheduled most of its
central government procurement in 1979, "entity coverage" by other coun-
tries was more limited, resulting in significant imbalances. For instance,
prior to the Uruguay Round agreement, the European Union and most other
signatories refused to schedule their telecommunications, electrical, trans-
portation, and water utilities. In fact, very few countries scheduled their
state-owned enterprises, whatever their field of business.433 U.S. compa-
nies operating in these sectors thus obtained no new market access under
the GPA. The imbalance was compounded by the fact that shortly after the
GPA went into effect the United States introduced competition including
competition from international suppliers- into its own telecommunications
and electrical utility markets. U.S. dissatisfaction with this imbalance, combined
with European desires to obtain more U.S. coverage of state and local enti-
t~es, resulted in a serious U.S.-EU trade dispute. This dispute led to agree-
ments in 1993 and 1994 to undertake coverage of electrical utilities and
subcentral entities,434 but telecommunications procurement issues were not
resolved, resulting in retaliation by both sides.
· Third, the GPA procedures are difficult to understand. While they
are laudable in their intentions, the excessive detail of the GPA procedures,
particularly by comparison with other elements of the GATT, tends to wrap
the GPA in a cloak of mystery. It is only a select few, the high priests of
the agreement as it were, who understand the commitments and undertake
to interpret them for the rest of the world. Even If they were to feel that
GPA participation were otherwise warranted, this factor deters nonsignatories
433 State trading companies are covered by Article XVII of the GATT, which requires non-
discrimination in their purchasing practices, but exempts purchases that are ultimately intended
for governmental purposes.
434 Coverage of electrical utilities and U.S. subcentral entities was achieved first through a
bilateral agreement, and, after l January 1995, through coverage of most of these entities in the
GPA. The bilateral agreement did not, however, prove satisfactory. For example, ITS. suppli-
ers of heavy electrical equipment claim that they continued to encounter discriminatory pro-
curement procedures and inadequate remedies in the German market. As a result, on 30 April
1996 the U.S. Trade Representative identified Germany (under Title VII of the 1988 Omnibus
Trade and Competitiveness Act) for "a significant and persistent pattern" of discrimination and
failure to adequately implement (its government procurement) obligations." This identifica-
tion of Germany triggered a sixty-day period of consultations including, at this writing, the
possibility of retaliatory action by the U.S. government if the consultations do not prove
successful. Whatever the eventual resolution of this dispute, it highlights both the importance
of high-technology markets to even the most industrialized countries and the persistence of
government procurement of high-technology products as a source of friction within the inter-
national system.
OCR for page 169
SUPPLEMENTS
169
from participation, to the extent their authorities believe they are dependent
on foreign expert interpretations of the agreement and do not wish to make
themselves vulnerable to arcane dispute settlement procedures.
· Fourth, the GPA is based on an all or nothing principle that differs
from the rest of the GATT. If an entity is scheduled and the GPA is
applied for that entity to another GPA signatory, the entity is subject to all
GPA disciplines. If not, it is subject to no disciplines. This all-or-nothing
approach leaves no room for the type of steady improvement in market
access that has been so successful with tariff reductions in the GATT.
Since its adoption, the Government Procurement Agreement has been
modified through almost continuous negotiations, but GPA membership has
expanded only marginally.435 In an attempt to plug procedural holes that
permitted signatories to follow the GPA rules and still steer contracts to
local suppliers, most modifications to the GPA during the 1980s added new
procedural requirements, further complicating the agreement.
Progress in the Uruguay Round
During the Uruguay Round, substantial progress was made on several gov-
ernment procurement fronts.436 For the first time, countries were permitted to
take derogations from their national treatment obligations, thus moving a step
away from the all-or-nothing pnnciple. The GPA was also expanded to cover
the procurement of services (including construction services) and subcentral
entities and public utilities. When combined with additional entity coverage at
the central government level, these changes resulted in a tenfold increase in
the value of procurements covered by GPA procedures.437 Another major
addition to the GPA was a requirement that signatories provide procedures for
bid challenges as well as judicial remedies in disputes over the award of a
contract. The GPA thus serves a valuable purpose. It has shown that govern-
ments can subject themselves to international obligations in the field of gov-
ernment procurement, and it has opened hundreds of billions of dollars of
contracts to international competition.
None of these changes, however, adequately addresses the fundamental
flaws with the GPA as identified above. The prospects for any significant
expansion in membership remain limited;438 entity coverage among existing
435 Most of the growth in GPA membership has occurred through enlargement of the
European Union. Greece, Spain, and Portugal all joined the GPA after joining the KU.
436 Technically, the government procurement negotiations, which were ongoing at the time
the Uruguay Round began, were not part of the Round. In practice, however, revisions to the
GPA made up an important part of the final Uruguay Round package.
437 "Creating open competition in government procurement," WTO InteInet Home Page, 1996.
438 Unlike most of the other Tokyo Round codes, the GPA was not incorporated as an
integral element of the Uruguay Round single act, and membership remains voluntary.
OCR for page 170
70
CONFLICT AND COOPERATION
signatories Is still incomplete; procurement procedures remain unnecessar-
ily intimidating, and the structure of the agreement provides slim hopes for
achieving improvements outside of the existing membership. As a result,
some analysts believe the time has come for a new approach; art approach
that will recognize and lock in the progress made to date by existing GPA
members, demystify the agreement, and encourage a steady process of lib-
eralization rather than expecting new GPA members to leap directly to full
liberalization.439 In doing so, an expanded GPA would expose procurement
practices to public scrutiny, thereby contributing to the worldwide effort to
reduce corruption in government. A broader, more effective agreement
would also offer a means to reduce a major source of friction in high-
technology trade while providing the benefits of transparent competition to
government acquisitions of high-technology products.
A New GPA
A new Government Procurement Agreement would look to the GATT
itself, and in particular the success of the GATT in eliminating quotas and
reducing tariffs, as a model for steady improvements in trade liberaliza-
tion.440 With this model in mind, a reconstituted agreement might embody
the following six elements:
1. Membership: all WTO members would be required to join the GPA.
2. Entity coverage: GPA members would be required to make binding
commitments covering purchases by all of their government entities, includ-
ing all state-owned enterprises. Under a reconstituted GPA, unlike the
existing one, however, these commitments could involve exceptions from
national treatment, such as a specified preference level for domestic suppli-
ers. Existing GPA members should, at a minimum, bind their existing
commitments with respect to other current GPA signatories (including the
439 See the statement by R. Michael Gadbaw in Sources of International Friction and
Cooperation in High-Technology Development and Trade.
440 At the first GATT/ITO Preparatory Committee meeting in London in 1946, the United
States set out five objectives for the new organization, many of which could be applied today
to the GPA. Professor John Jackson describes these objectives as follows: "(1) Existing,
barriers to international trade should be substantially reduced; (2) International trade should be
multilateral rather than bilateral; (3) International trade should be non-discriminatory; (4)
Stabilization policies for industry and a~,riculture...[are] so intimately related to international
trade policies that the two must be consistent and coordinated; and (a) The rules for interna-
tional commerce should be drafted so that they would apply with equal fairness and equal
force to the external trade of all nations regardless of whether their internal economies were
organized upon the basis of individualism, collectivism or some combination of the two."
John H. Jackson, World Trade arid the Law of the GATE, Bobbs-Merrill Company, New York,
p. 54. :
OCR for page 171
SUPPLEMENTS
171
national treatment element inherent in those commitments). Transparency
(item 4 below) and remedy (item 5 below) procedures should apply to all
entities in all WTO members.
3. Liberalization method: GPA members would engage in regular ne-
gotiations to improve their degree of procurement liberalization. In these
negotiations, as in tariff negotiations, countries could trade off reductions in
their discriminatory practices In exchange for similar reductions by others.
4. Procedures: The GPA would be amended to focus on the key com-
mitments necessary to achieve improved procurement opportunities. These
include requirements for: (a) adequate notice; (b) neutral standards (i.e.,
standards should not be set in a way that gives an advantage to any one
bidder); (c) objective and pre-specified bid criteria; (d) public bid opening;
and (e) award of contracts to the lowest compliant bidder or demonstrably
best overall value on the basis of the objective criteria. The essential ele-
ments of these commitments should be distilled and inserted into the GPA
so that the principles are readily apparent and readily applied.
5. Remedies: The current procedures on bid challenge, access to an
ndependent appeal body, and dispute settlement should be retained. In
addition, once the GPA becomes a requirement for all WTO signatories,
cross-retaliation44i should be permitted. In the event that a WTO member
were found by a panel to have violated the GPA but did not implement the
panel ruling, cross-retaliaiion would increase the options for retaliation available
to an aggrieved party. This should provide an improved deterrent to viola-
tions of the agreement.
6. National Treatment/MFN: To accord with the shift from an all-or-
nothing approach to an approach that seeks broad and steady liberalization,
the national treatment requirement of the GPA would have to be eliminated,
although the MEN requirement should be retained as a core principle.
i
Current Prospects
Leading WTO members have begun to consider the need for changes to
the GPA. At the meeting in Kobe, Japan' on 1921 April 1996, the trade
ministers of Japan, Canada, the European Union, and the United States (the
Quad ministers) addressed the need to bring additional members into the
GPA and endorsed an approach other than the all-or-nothing approach to
procurement liberalization. The chairman's statement from that meeting
44} Cross-retaliation would permit retaliation outside of the government procurement area
if a GPA member were to violate its GPA commitments and then [ail to implement a panel
ruling against it. Full cross-retaliation would also permit retaliation in the government pro-
curement area for violations related to other WTO agreements. Currently, the GPA does not
permit cross-retaliation.
OCR for page 172
172
CONFLICT AND COOPERATION
reports, "We agreed to renew our efforts to expand membership in the WTO
Agreement on Government Procurement (GPA) and to improve its disc~-
plines through reducing barriers to government procurement. As a first
step, we agreed to initiate work on an interim arrangement on transparency,
openness and due process in government procurement, which would help to
reduce corruption as an impediment to trade."442
While the Quad ministers did not provide any further detail on what an
interim agreement on transparency, openness, and due process might be, the
market-opening potential of such an agreement is enormous. If an interim
agreement included the procedures described in points (4) and (5) above, it
would offer three principal benefits. First, such an agreement would serve
as a means by which significant numbers of additional countries could sign
on to government procurement disciplines. Second, even without a national
treatment commitment, transparency provisions alone would greatly improve
the environment for foreign companies seeking to do business in signatories
to the interim agreement. Third, as the Quad ministers' statement suggests, a
truly transparent procurement system is incompatible with illicit payments.
For all of these reasons, the transparency initiative represents a welcome step.
In the short term, however, the road to adoption of an interim agreement
with provisions on transparency, openness, and due process is likely to
prove difficult. A recent statement by the ASEAN economic and trade
ministers opposed discussion of corruption issues (including the issue of
transparency in procurement) at the Singapore Ministerial meeting. This is
of particular concern because Singapore, the host of the Ministenal meet-
ing, is an ASEAN member.
The position taken at the meeting of the ASEAN economic and trade
ministers highlights the different perspectives of countries at different lev-
els of development. As described in the first section of the report, it also
illustrates the different policy objectives of competitors for high-technology
industry in the global economy. And at a more fundamental level, it may be
the ASEAN position reflects differing, values and a determination on the
part of newly industrialized countries to assert their independence from
Western precepts.
Responding to this ASEAN challenge will require a clear presentation of
the benefits that can accrue to those countries participating in efforts to
increase transparency. In this regard' the Quad ministers' conclusion that
transparency, broader participation in the Government Procurement Agree-
ment, and improvement of its disciplines is a positive step. For further
progress, it is likely to be necessary to undertake the fundamental reform of
the Government Procurement Agreement outlined above.
442 Chairman's Statement, Kobe Quadrilateral Trade Ministers' Meeting 1921 April 1996,
p. 2.
Representative terms from entire chapter:
semiconductor industry
