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Policy Issues in Aerospace Offsets: Report of a Workshop (1997)

Chapter: CAN OFFSETS CREATE FOREIGN COMPETITORS?

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Suggested Citation:"CAN OFFSETS CREATE FOREIGN COMPETITORS?." National Research Council. 1997. Policy Issues in Aerospace Offsets: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/5832.
×

Panel 4
Can Offsets Create Foreign Competitors?

Moderator: William Reinsch,

Under Secretary for Export Administration, Department of Commerce

Following his introduction by Dr. Wessner, Secretary Reinsch commented that the Bureau of Export Administration (BXA) has been wrestling with this issue for some time and has recently completed the Commerce Department study directed at answering some of the questions posed by offsets. BXA sympathizes with the dilemma faced by U.S. corporations in seeking to gain the benefits of market access and sales, while risking the creation or strengthening of competitors. He noted that while most companies ask the right questions, and most follow up with solid cost-benefit analysis, the end result is that there are a lot of offsets done, particularly involving technology transfers.

Referencing a BXA report to come out next month, covering 1994-95, and looking only at those offset transactions that involve technology transfer, Reinsch observed that the report found they were valued at $863 million, or 14 percent of total offset transactions during the period.7 That probably underestimates the value because it does not include other categories of offsets in which some technology transfer occurs. About 72 percent of the $863 million involved aerospace, and 56 percent of offsets were of an indirect type. Current information leads to the conclusion that indirect offsets are increasingly the norm, with unfavorable consequences for subcontractors and increased risks for a wide range of companies throughout the U.S. economy. This is a development that will widen the arena of debate about offset trade.

Secretary Reinsch then turned to the first panelist, Dr. Richard Samuels.

Japanese Capabilities and Dynamic Effects

Richard Samuels

Ford International Professor and Head, Department of Political Science, Massachusetts Institute of Technology

Dr. Samuels began by noting that the worst fears of a rapid competitive development of the Japanese aerospace industry during the 1980s have not materialized. Those fears, growing out of the U.S. domestic debate about the future of the U.S.-Japan alliance in the context of the proposed jointly developed FSX fighter aircraft, were fueled earlier by Boeing's plans to jointly develop a 7J7 transport with the Japanese. Despite the decision not to proceed with this program and the lack of any new domestic Japanese commercial aircraft project, Samuels emphasized that there is no reason to suppose the Japanese cannot develop a successful and competitive aerospace industry. By focusing on developing competitive advantage in the key components of this industry, the Japanese are currently positioning themselves in aerospace to ''succeed without really flying."

Pointing out that the aircraft industry was targeted by MITI in the early 1970s for development, he noted that the effort is widely considered a failure. It is still only 1/15 the size of the U.S. industry, with a value of less than 1 percent of U.S. aircraft exports. As a point of comparison, the entire Japanese aerospace production is less than 10 percent of Toyota's total sales. The Japanese industry has built few complete aircraft, and no modern airline currently flies Japanese-built aircraft. Further, Japanese companies neither design nor build jet engines. There is thus a limit to which U.S. airframe manufacturers should be legitimately concerned about the Japanese as direct competitors. In fact, among the U.S. primes, there is no sense of a threat posed to U.S. firms, especially at the level of systems integration.

While recognizing that the Japanese had in fact not entered the aerospace business as systems integrators, Samuels cautioned that the usual "explanations" of this state of affairs do not withstand careful analysis. Samuels then outlined the conventional litany of reasons why the Japanese cannot succeed in the aerospace business, a litany that the Japanese themselves frequently offer to explain their lack of an aerospace presence:

7  

Department of Commerce, Offsets in Defense Trade: A Study Conducted Under Section 309 of the Defense Production Act of 1950, As Amended. Bureau of Export Administration, Washington, D.C., 1997.

Suggested Citation:"CAN OFFSETS CREATE FOREIGN COMPETITORS?." National Research Council. 1997. Policy Issues in Aerospace Offsets: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/5832.
×
  • The Japanese got a late start in world aerospace competition.
  • They are too dependent on military design and production, and prohibit themselves from selling military equipment in world markets.
  • They have too small a domestic airline market to sustain a domestic industry. Thus, they cannot repeat the protected, infant industry strategy that worked for autos and other industries.
  • They lack systems integration and design skills and experience, and cannot provide aftermarket support and service of equipment they produce.
  • Their industrial structure is inappropriate to finance the heavy capitalization needs of a competitive aerospace industry; big conglomerates do not specialize in aerospace production and see the business as a drain on resources and a diversion from other, more profitable, markets.
  • Japanese aversion to high-unit-cost, low-unit-production business (the opposite of semiconductors, for example), makes the high costs of entry into aircraft production difficult for Japanese firms to contemplate.
  • Foreign competitors are too powerful for Japanese firms to compete against.

    Samuels then dissected this conventional wisdom, arguing that under closer examination, none of these obstacles is, in fact, a serious barrier for the Japanese.

  • Late starts can actually be advantageous. It can reduce start-up costs and make clear the best technology path forward, thereby avoiding the technological, production, and marketing mistakes made by early entrants. Late starters can also benefit from opportunities for access to proven technologies via partnerships with established producers.
  • Military production can provide flexibility, stability, experience in design, manufacturing, and servicing. When companies have low barriers between the civil and military sides of their business, as in the case of Japan, plentiful opportunity exists for cross-training, for nurturing key technologies, for sharing of experience, and even for sharing design capabilities and production facilities. Examples include dual-use avionics and composite materials.
  • The argument that a small domestic market is an obstacle is largely irrelevant. The Japanese emphasis on components has led to a competitive position in the fastest-growing share of the global aircraft market—that is, systems integration and components. In fact, Japan's share of exports as a total share of aircraft production rose from 3 percent in the 1970s to 15 percent by the mid-1990s. This was evidence of near-term positioning to become a highly competitive, low-cost, high-quality provider of components, which will account for 30 percent of all aircraft revenues in the next generation. The Japanese are accomplishing this through international collaboration and with U.S. help—a very familiar pattern for Japanese export-led industrial development.
  • The Japanese possess established systems integration and design capabilities, demonstrated across a range of complex manufacturing industries.
  • The Japanese industrial structure for aircraft production is a strength, not a weakness. Manufacturing both turbines and jet engines permits economies of scale and scope within single companies, resulting in—among other things—considerable dual-use potential in aircraft and non-aircraft applications.
  • As to high entry costs, they are less important for growth in the systems integration and components business. Traditional Japanese advantages of very low capital costs and stable supplier relations help greatly where large-scale production and test facility investment is not necessary.
  • Finally, the small number of global competitors can actually facilitate market participation by the Japanese, permitting them to play off the primes against each other in bidding to provide high-quality, lower-cost services and increasingly design capabilities. For a variety of reasons, this strategy has recently proved less rewarding. One complicating element, for example, has been the refusal of Chinese and Korean firms to accept Japanese participation. Though this strategy has not been as successful as Japanese officials expected, Japanese firms are nonetheless far from being a failure in this industry.

The most worrisome aspect of the Japanese industry's growth, Dr. Samuels observed, is that his study of interactions between U.S. and Japanese firms shows that most technology flow is one-way, U.S. to Japan, from both primes and subcontractors. The virtuous cycles are mostly in Japan's favor, while vicious cycles are mostly on the U.S. side. Citing the F-15 case, which is elaborated in Rich Nation, Strong Army, there are 130-odd U.S. firms participating in teaching Japanese firms how to do what they do, that is developing new capabilities and utilizing new technologies.8 This asymmetry in technology flows is something to which we should be paying attention.

8  

Samuels, Richard, Rich Nation, Strong Army: National Security and the Technological Transformation of Japan. Cornell University Press, Ithaca, N.Y., 1994.

Suggested Citation:"CAN OFFSETS CREATE FOREIGN COMPETITORS?." National Research Council. 1997. Policy Issues in Aerospace Offsets: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/5832.
×

The Airbus Experience

Sally Bath

Director, Office of Aerospace, U.S. Department of Commerce

Ms. Bath addressed the issue of the role played by offsets in the emergence of the Airbus Industries consortium. Did the European companies and their governments employ offset requirements—at first for military programs, but later for commercial ones—to gain expertise in building commercial aircraft?

Historically, coproduction and subcomponent work for U.S. firms was used by European governments to offset the costs of acquiring, for military and later for commercial uses, large transport aircraft and other big-ticket items, as well as to regain and enhance national skills in aerospace engineering and production. While recognizing offsets did play a role in the early development of the European aerospace industry, Bath argued they are not the reason that Airbus is a viable competitor with Boeing and McDonnell Douglas in global markets.

In this view, it is important to recognize Airbus for what it is, an innovative international collaboration which maximizes access to available technology and spreads the risk inherent in new product development. Reflecting its success, it has become the model for hopeful new entrants into the aerospace business. For aerospace companies, the rationale for international collaboration includes risk sharing, lower labor costs, access to foreign manufacturing capacity, closer relationships with foreign buyers, and building political relationships with foreign governments to assure access to their markets. Foreign governments look to offsets to increase domestic employment or to build or expand a nascent aerospace industry.

Airbus markets itself as ''a new concept of designing, building, and marketing aircraft to take full advantage of the ingenuity and combined productive capabilities of the European industry." Airbus is perhaps the ultimate model of risk-sharing among not only international business partners but also their respective governments.

As noted, offsets did make a contribution to Airbus. In the post-World War II years the U.S. encouraged offsets with European governments to secure NATO and facilitate the rebuilding of Europe. This led to U.S.-European coproduction programs in the areas of combat and other military aircraft, helicopters, and missile systems beginning in the 1950s. Subcontracting and licensed production agreements were undertaken and subsidiaries of U.S. defense companies established. All this was supported by offset provisions intended to train European engineers and employees in design and production techniques, which facilitated generic technology transfer and helped maintain European infrastructure.

However, factors other than the contributions of military offsets played much more important roles in the success of Airbus. Risk-sharing among the state-owned European companies and their governments offered the advantage of much lower capital costs than was available to privately owned companies. The close relationships with the participating governments have also provided easier access for Airbus products to the largely state-controlled markets for commercial aircraft. The launch aid provided by those governments has made them willing to use their considerable leverage to influence potential buyers, especially in other state-controlled markets. Despite multilateral trade agreements intended to remove the exercise of political influence in marketing campaigns, some buyers actually encourage political inducements from governments as part of the competitive package being considered. U.S. aircraft companies generally have been handicapped due to the long-standing policy of the U.S. government, only recently reversed, not to intervene to influence commercial transactions.

Airbus's use of proven U.S. components in the design of aircraft has been another major factor in its success. Components such as engines, avionics, and auxiliary power units, all obtained from U.S. suppliers, are used extensively. Airbus has also made extensive use of available results of NASA research, often in advance of its use by U.S. firms. For example, fly-by-wire technology developed in the U.S. was first used commercially for secondary controls on the A310 and A300-600, and then for primary controls on the A320.

Another principal factor in Airbus's success was the prior existence of indigenous aircraft industries in each of the countries comprising the consortium: the United Kingdom, France, Germany, the Netherlands, and Spain. Some of these companies had prior experience with transnational partnering, such as deHaviland (U.K.) and Sudaviation (France) on the Caravelle. British Aerospace and Aerospatial, successors to those companies, jointly designed and produced the Concorde on assembly lines in both the United Kingdom and France. Thus there was a collaborative history on which to build, along with an advanced technological base, a skilled workforce, and requisite facilities. What the Airbus partners lacked was sufficient low-cost capital, a stable subcontractor/supplier base, and indigenous markets large enough to support independent primes in each of their countries. To compete successfully with U.S. companies, government help was needed to overcome these large obstacles. Thus design, fabrication, assembly, and component work was spread not only throughout the partners' countries but

Suggested Citation:"CAN OFFSETS CREATE FOREIGN COMPETITORS?." National Research Council. 1997. Policy Issues in Aerospace Offsets: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/5832.
×

included other countries in Europe, as well as some 500 U.S.-based companies. It was truly an international effort. U.S.-companies have recognized this, and it is no surprise that U.S. aircraft programs are becoming increasingly international as well.

Ms. Bath then turned to the lessons learned from the Airbus experience:

  • Mandatory offsets alone do not guarantee success in the commercial transport industry. Some countries with a long history of offset arrangements have not been able to use them to effectively transfer their experience to a commercial transport industry.
  • Attempts to limit mandatory offset programs will not stop the development of new companies and industries, as in South Africa, Russia, and China, which were denied access to Western technology and financial assistance.
  • International collaboration may be the way of the future. Alliances to develop new aircraft and engines will include partners from developing countries together with established manufacturers. Cross-border mergers may become the norm, as pressures increase to have access to stable suppliers and subcontractors.

However, the structure of a global industry is still being shaped. The U.S. industry can be a major force in shaping it, if not constrained artificially by rules and regulations that hinder its participation.

Strategic Alliances in Engine Technologies

Richard Ridge

Manager of Civil and International Programs, General Electric Aircraft Engines

Referring to the issues paper prepared by Kenneth Flamm and the NRC staff (see appendix), Mr. Ridge queried its claim that no institutional mechanism existed within the U.S. government responsible for developing strategy for the aerospace industry. Based on the statements made by the two Commerce Department panelists, Mr. Ridge suggested that such a mechanism might indeed be evolving on a case-by-case basis.

Making reference to strategic vision in industrial and technological development, Ridge recounted how the U.S. Embassy in Tokyo diligently covered Japan's first heavier-than-air craft flight in December, 1909, in which the embassy attaché's cable noted (1) the innovative use of bamboo for the airframe; (2) the on-site assistance provided by a French government representative; and (3) a possible violation of the Wright patent on wing warping. Aside from suggesting some things do not change, the point of the story was that determining "what is strategic" is relatively easy in hindsight, but quite difficult at the initiation of an alliance. Otherwise, the attachè might have focused his attention on the innovations made by the Japanese to the Model T Ford that was used to tow the glider....

Ridge remarked that in the aircraft engine business (military and commercial), there are no "strategic alliances." Even GE's formal alliance with SNECMA of France, dating from 1974 and one of the most enduring in the business, is built around a specific commercial engine designed and built for narrow-bodied aircraft. Other GE relationships with SNECMA have evolved to accommodate shared work on smaller engines, but nothing comparable to the 50/50 joint venture on the CFM56. The alliance has not extended to the military side, or to derivative engine technologies and products for power generation. Ridge observed that almost all business alliances were focused on specific objectives, at specific points in time, and linked to specific opportunities to bring a new product to market. In his view, once the product is on the market, the idea of a strategic vision guiding it takes on life retroactively.

The GE-SNECMA alliance is a revenue-sharing partnership, which is typical of international civil aviation alliances, as was the case with the Concorde consortium. In such a partnership, the participants agree initially to develop different parts of the engine, then work together at the end of the development phase to form the total product. Agreement is reached in the beginning on what percentage of the total value of the product is represented by each partner's contribution and, once the engine is in the marketplace, each participant gets a corresponding portion of the revenue. The issue of whether the revenue is sufficient, for each partner, to cover costs and provide adequate profit is outside the terms of the alliance.

Revenue-sharing partnerships are not necessarily a form of offsets, nor do they flow from military offset programs. For example, there never was substantial U.S. licensed military production in France after World War II. The French developed their civil and military programs fairly independently of the U.S., with assistance from German engineers who were available after the war.

Typically, Ridge noted, GE's revenue-sharing partnerships in the engine business have been with second-tier engine manufacturers, almost exclusively in Europe, who could not otherwise afford to continue participating in the commercial market due to the growing scale and cost of new program development. In addition to SNECMA, principal revenue-sharing partners include Fiat, MTU, and Volvo, which is a good

Suggested Citation:"CAN OFFSETS CREATE FOREIGN COMPETITORS?." National Research Council. 1997. Policy Issues in Aerospace Offsets: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/5832.
×

example of the minor role of offsets. There simply are not enough aircraft sold in Sweden in a decade to build a relationship with Volvo that would justify, or hinge upon, an offset credit for GE. The Scandinavians are not likely to become aerospace powers, and the reason for GE's relationship with Volvo is solely that the latter is very good at what it does. GE's only major non-European revenue-sharing partner is IHI, a recent partner in Japan. But the relationship does not bring offset credits for GE; instead, what GE gets in value is substantially more intimate knowledge of the market and Japanese decisionmakers.

The Special Challenge of China

Greg Mastel

Vice President for Policy Planning and Administration, Economic Strategy Institute

Dr. Mastel, referring to his recent book on China, remarked that the public prefers alarmists or apologists, hence there is a certain lack of excitement about his generally middle-of-the-road assessment of Chinese development and the challenges it poses for the U.S. and the multilateral system. He noted, however, that he had pointed out some areas of concern directly relevant to today's topic that he would address.

China's industrial and economic development strategy, including the use of offsets, is similar to the strategies that have been, and continue to be, pursued by a number of other countries. Moreover, China's aerospace development strategy is not unique within the Chinese development model. The same strategy has been employed in other sectors such as automobiles, electronics, and pharmaceuticals, and follows closely earlier Japanese strategies.

In several ways, however, China is unique, not least because it follows a unique development philosophy. Until very recently, China was an avowed communist society and presently adheres to what its leaders characterize as a socialist market economy which, as the Five Year Plan makes clear, is distinctly different from Western interpretations of a market economy. China does not pursue an economic strategy consistent with Western views of the economy. In addition, China's status vis-à-vis the U.S. is ambiguous and uncertain. The Chinese describe themselves as neither an ally nor an adversary. In five years it could be either, with dramatic effects on U.S. thinking about how to deal with China, both on questions of trade and investment, and on questions of international security.

Mastel emphasized the importance of remembering that China's industrial policy is not market driven. Policy goals, and thus factors driving industrial development in some sectors, are determined not by market economics, but by the leadership's desire for national prestige or the acquisition of strategic technologies. Traditional Western economic objectives such as maximization of profits, or even achieving profits, are at best long-term concerns and of low priority to Chinese decisionmakers. Thus, although lacking an economic rationale for producing autos and airplanes, the Chinese may well forge ahead for other reasons. One principal reason is the traditional Chinese belief that China should not be dependent on foreign sources for anything. In the aerospace sector, as in automobiles, telecommunications, x-ray machines, and satellite launch capabilities, the Chinese are engaging in production because they have determined that it is of critical national importance for them to do so.

Many elements of Chinese industrial policy incorporate or depend upon trade barriers and other trade distorting elements, many of which are illegal under current international agreements. For instance, despite the 1992 agreement with the U.S. on market access, in which China agreed not to employ import substitution requirements, the Chinese government subsequently introduced strategic industrial plans for autos and pharmaceuticals that explicitly included import substitution as a component of the strategy.

Subsidies are another element of Chinese policy. Government subsidies are the rule rather than the exception in a communist economy, and while China has moved a great way toward a market economy in the past decade, large-scale economic subsidization still exists. The state owns about 30 percent of economic enterprises, and state-owned enterprises (SOEs) receive monumental financial transfers to stay in business, often simply to maintain employment. However, subsidies are also used extensively in parallel with industrial policy. Likewise, forced technology transfer, in the form of required offsets, is another explicit, avowed element of Chinese industrial policy in aerospace.

Will the Chinese succeed in the aerospace sector? Success has different definitions. It is unlikely China will be an economically viable producer of airplanes in the foreseeable future, but that will not keep the government from pressing forward. The People's Airplane project has been on the drawing board for at least seven years and China has actively pursued international assistance in jointly developing a 100-seat transport. So there is reason to believe that China will actually build and fly an airplane. Whether it will be economically competitive with Western models—and it probably will not—is not the issue. Among the biggest growth markets for aircraft in the next two decades will be China and India. China controls its own national market and it is not unlikely that a comparatively low-tech-

Suggested Citation:"CAN OFFSETS CREATE FOREIGN COMPETITORS?." National Research Council. 1997. Policy Issues in Aerospace Offsets: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/5832.
×

nology, low-priced airplane could be attractive to India as well. Even if such a plane is not built and sold internationally, the Chinese will still have a near-term competitive effect on the regional market. In this huge growth market, the Chinese government will demand, and almost certainly get, a substantial share of manufacturing business—and consequently develop experience and capabilities—from aircraft producers who wish to sell there. The impact will be felt globally.

Should the U.S. be concerned about these developments? Ideally, the largest labor market in the world, i.e. China, should not be in competition with the largest capital-intensive market in the world, i.e., the U.S. However, the Chinese are not content with that balance, and in coming decades there is a possibility for large market disruptions in sectors such as automobiles, pharmaceuticals, and telecommunications equipment due to the sheer size of the Chinese market, the tight control exerted over that market by the Chinese government, and the determination of the Chinese government to become a technologically advanced industrial power.

In conclusion, Mastel observed that probably not much could be done to slow this scenario at the level of individual companies. Companies wishing to do business in China must comply with Chinese demands. At the level of U.S. government policy, however, there are some options. China's application to the WTO means pressure could be applied on issues like subsidies, market access, and technology transfer to make it more difficult for the Chinese to carry out their industrial policy and thereby slow the development of a Chinese Airbus.

Discussion

Secretary Reinsch observed that time remained for questions to the panel. Posing the first one, he noted that foreign governments generally do what they see as in their best interest, and U.S. companies respond in ways that serve their interest. Against that interaction, is there a U.S. national interest separate from the aggregate corporate interest, and if so, who should be responsible for pursuing and overseeing it?

Dr. Mastel—in the context of the Chinese automobile industry—responded that, while no single company provides much in the way of technology transfer, the collective transfers from many companies, U.S. and European, are likely to result in significant acquisitions by China of Western technology. As a huge buyer, with control of the economy and leverage exercised over individual corporate bidders, the Chinese can pick and choose to fill their technology shopping list.

Mr. Ridge commented that, based on his company's dealings with a number of U.S. agencies, it may not be possible to expect that the U.S. government can develop a strategic vision. Rather, companies must deal with agency-specific concerns and act to address them individually, hoping that a government-wide policy stance can be achieved on a few big and very important issues.

Ms. Bath, noting that aerospace technologies represent a dynamic process, observed that putting many roadblocks in the way of its natural development could also retard U.S. technological development. Too much government activism in the arena of technology transfer, with inevitable agency "plodding" in decision-making, would put stumbling blocks in the way of companies' ability to realize revenue from the investments they have already made in technology.

Dr. Samuels commented that, from the perspective of the Japanese, Secretary Reinsch's question would be curious—it would not arise in Japan. The Japanese have a societal method of arriving at a consensus view of national interest, and it revolves around notions of

  • absorbing technology through interactions with foreigners and foreign technology;
  • moving that technology through the producer system, vertically and horizontally; and,
  • nurturing its acceptance and utilization by companies that otherwise would not or could not do so.

Ambassador Wolff observed that the discussion was troubling with respect to the effectiveness of current international agreements and asked the panelists whether international agreements have actually worked. Principally, what impact have agreements in the aerospace sector had in reducing or eliminating offsets?

Ms. Bath replied that the agreements had created a forum in which discussions could take place. Admittedly, the pace of government support for Airbus did not slow during the '80s, but the 1992 agreement has not been tested yet by the introduction of a new Airbus program. However, the U.K. did moderate the level of their investment in the A320, while the French activity became more transparent and loans were repaid, although Airbus received equity infusions via other means. The equity infusion issue has not been resolved. With the Germans, there has been no change. On the whole, however, the primary argument of the Americans—that Airbus should be privatized—which the U.S. has pushed since the early 1980s, is now beginning to be undertaken. The latest bilateral agreement will be tested in the next few months. One major agreement, the Large Aircraft Sector Understanding on Official Export Credit Financing, did get rid of most distortion in official aircraft financing. The Europeans have applied the principles embodied in the Agreement, al-

Suggested Citation:"CAN OFFSETS CREATE FOREIGN COMPETITORS?." National Research Council. 1997. Policy Issues in Aerospace Offsets: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/5832.
×

though they tend to see such financing as an entitlement to Airbus, while the American government tends to view official financing as a tool of last resort. We are increasingly aware of the real nature of the deficiencies in the agreements, but at least they have created a forum for serious discussions.

Dr. Mastel responded to Wolff's question by saying that if the U.S. insisted on the enforcement of WTO provisions, it might have serious restrictive impacts on China's ability to run an industrial policy. Typically, however, as in the case of Japanese industrial policies, the U.S. government has been reluctant to insist on enforcement.

Dr. Wessner asked Dr. Samuels whether the Japanese and Chinese are indeed misguided in trying to acquire Western technology, or whether we in America do not fully appreciate the rationale for their efforts and their relative success. Addressing Ms. Bath, he asked whether U.S. "government support" in its lengthy history and various forms could not be equated to European "subsidies." Additionally, with regard to the nature of the multilateral agreement and recent European charges, do the trade agencies of the U.S. government fully appreciate the extent of U.S. subsidies to the aerospace industry, through NASA for example? And lastly, he inquired whether it was realistically possible to do anything about government support—in its varied terminologies—since all governments do it. Was it not more effective to seek wider market access with fewer constraints?

Dr. Samuels responded that the Japanese are not misguided in trying to acquire U.S. technology, but neither has the U.S. been misguided in assisting them to acquire it. The U.S. has in fact "indulged" the Japanese in the endeavor, originally to assure the U.S. of access to the "unsinkable aircraft carrier," which was seen as a necessary Cold War trade-off up to the 1980s. This indulgence stopped making as much sense to the U.S. after 1990, but the framework of the security relationship has not changed or been reexamined, so the national security foundation of the technology trade-off is still in place.

Ms. Bath responded by acknowledging the extensive interplay between governments and their aircraft industries and the difficulty of differentiating between direct and indirect measures of support. These issues were recognized in the Tokyo Round Agreement. Ms. Bath explained, however, that direct and indirect support measures are different, and have different objectives—principally it is a question of whether the measures are intended foremost to serve the requirements and stated missions of the government, as in NASA's long-term aeronautics R&D, or to support a commercial product. She suggested that some discussion of the issue is likely to occur in U.S.=European talks over the next few months. She also reminded the audience that the U.S. has successfully pressed for adherence to the aircraft agreements on several occasions.

Dr. Mastel remarked that both sides could achieve their goals because they have different objectives and a narrow economic definition of those objectives which might, in the case of China especially, miss the more important aims of the subsidies that support those objectives. The WTO could constrain Chinese industrial policy through its provisions on market access, subsidies, TRIMS, and the large civil aircraft agreements. The Chinese are successful at winning technology transfers because of the perceived size of their market; hence market access is the key card they play. Smaller markets generally lack the same inducement. Thus, multilateral and bilateral attempts to open market access could reduce the pressures companies feel to trade technology for access. In this view, subsidies are a lesser issue in the overall picture.

Another questioner asked Dr. Samuels whether U.S. political pressures worked to limit the growth of the Japanese aerospace industry, given the pervasive postwar U.S. presence in Japan. Samuels considered that an interesting view and one that is supported in part by the outcome of the FSX program, in which the Americans insisted on a joint development program rather than one carried out wholly by the Japanese. This resulted in large transfers of American technology and know-how, but the Japanese did not develop, as they had initially intended, an independent Japanese fighter program. Arguably, one of the most important benefits for the U.S. government—for which it never claimed credit—was to forestall the indigenous development of Japanese capabilities in aircraft design and development.

Suggested Citation:"CAN OFFSETS CREATE FOREIGN COMPETITORS?." National Research Council. 1997. Policy Issues in Aerospace Offsets: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/5832.
×
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Suggested Citation:"CAN OFFSETS CREATE FOREIGN COMPETITORS?." National Research Council. 1997. Policy Issues in Aerospace Offsets: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/5832.
×
Page 21
Suggested Citation:"CAN OFFSETS CREATE FOREIGN COMPETITORS?." National Research Council. 1997. Policy Issues in Aerospace Offsets: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/5832.
×
Page 22
Suggested Citation:"CAN OFFSETS CREATE FOREIGN COMPETITORS?." National Research Council. 1997. Policy Issues in Aerospace Offsets: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/5832.
×
Page 23
Suggested Citation:"CAN OFFSETS CREATE FOREIGN COMPETITORS?." National Research Council. 1997. Policy Issues in Aerospace Offsets: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/5832.
×
Page 24
Suggested Citation:"CAN OFFSETS CREATE FOREIGN COMPETITORS?." National Research Council. 1997. Policy Issues in Aerospace Offsets: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/5832.
×
Page 25
Suggested Citation:"CAN OFFSETS CREATE FOREIGN COMPETITORS?." National Research Council. 1997. Policy Issues in Aerospace Offsets: Report of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/5832.
×
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Next: DIFFERING IMPACTS OF OFFSETS ON KEY SUPPLIERS AND SUB-TIER PRODUCERS »
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