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Technology Issues in the International Trading System

Sylvia Ostry

University of Toronto

WHY ARE TECHNOLOGY ISSUES IMPORTANT?

During the 1980s a number of disputes centered on trade and investment in technology—and capital-intensive sectors. These include so-called high-technology sectors (such as pharmaceuticals and aircraft), as well as some (such as autos) that are classified as medium-technology sectors because the Organization of Economic Cooperation and Development (OECD) definitions are based on research and development intensity, which reflects only one, albeit important, characteristic of such industries.1 For the sake of convenience, the term high-technology could be applied to both.

There are a number of reasons why technology issues have featured more prominently in the international agenda over the past decade and a half. Perhaps the most fundamental was the emergence by the end of the 1970s of the "convergence club" of the developed countries (i.e., convergence in technological and managerial capabilities, capital intensity, and education levels). This convergence was largely a result of "catch-up." The main driver of catch-up was the diffusion of the advanced technology of the United States, the undisputed postwar leader. (The convergence was greatly facilitated by the reduction of barriers to trade and

1  

OECD classification categories are based on R&D intensities. Other characteristics such as patent activity and scientific and engineering manpower are also relevant, and the OECD provides data on these aspects as well. But no other complex categorization has been developed that would consider input and output measures as well as capital intensity, concentration measures, product and process innovation, specialized suppliers of technology-intensive components, etc. For a sectoral taxonomy that attempts to deal with some of the aspects of Paolo Guerrieri, see Harris and Moore, (eds.) (1992:29-37).



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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings Technology Issues in the International Trading System Sylvia Ostry University of Toronto WHY ARE TECHNOLOGY ISSUES IMPORTANT? During the 1980s a number of disputes centered on trade and investment in technology—and capital-intensive sectors. These include so-called high-technology sectors (such as pharmaceuticals and aircraft), as well as some (such as autos) that are classified as medium-technology sectors because the Organization of Economic Cooperation and Development (OECD) definitions are based on research and development intensity, which reflects only one, albeit important, characteristic of such industries.1 For the sake of convenience, the term high-technology could be applied to both. There are a number of reasons why technology issues have featured more prominently in the international agenda over the past decade and a half. Perhaps the most fundamental was the emergence by the end of the 1970s of the "convergence club" of the developed countries (i.e., convergence in technological and managerial capabilities, capital intensity, and education levels). This convergence was largely a result of "catch-up." The main driver of catch-up was the diffusion of the advanced technology of the United States, the undisputed postwar leader. (The convergence was greatly facilitated by the reduction of barriers to trade and 1   OECD classification categories are based on R&D intensities. Other characteristics such as patent activity and scientific and engineering manpower are also relevant, and the OECD provides data on these aspects as well. But no other complex categorization has been developed that would consider input and output measures as well as capital intensity, concentration measures, product and process innovation, specialized suppliers of technology-intensive components, etc. For a sectoral taxonomy that attempts to deal with some of the aspects of Paolo Guerrieri, see Harris and Moore, (eds.) (1992:29-37).

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings financial flows promoted by the postwar international institutions, as discussed below.) So one source of the technology focus of the 1980s was rising concern in the United States about challenges to American technological preeminence in both medium-technology (capital-intensive sectors such as autos and technology-intensive components and equipment) as well as high-technology sectors. Thus, as can be seen from Table 1, the U.S. postwar dominance in both medium technology as well as high-technology has been increasingly challenged by Japan, and even more so by Europe. Furthermore, as is clear from Table 1, the real impact of the Japanese challenge over the past two decades has been rising import penetration rather than declining export share. But Japan's import shares did not follow this trend. Thus, one consequence of le defi Japanais was a marked increase in international friction that centered on export access rather than import protection in these technology-intensive sectors. But there is more to the story than opening international markets for particular goods. High-technology industries became a domestic concern as well, both in the United States and Europe, in part as a response to what were believed to be successful Japanese industrial policies, especially industrial R&D consortia targeted at advancing new generic technologies. In the 1980s there was a change in the climate of ideas among economists and policymakers that generated a lively (and still ongoing) debate about why high-technology matters and what governments should do about nurturing high-technology industries located in their own countries. Although European technology and industrial policies had started much earlier in member states, in the 1980s there was a new drive at the European Community level. And in the United States, a traditional aversion to such policies gave way to new initiatives by both the Reagan and Bush administrations that have continued in recent years. In both Europe and the United States a major focus has been R&D consortia.2 The rationale for fostering domestic-based high-technology—the change in the climate of ideas—rested on economists' notion of market failure. A firm that performs R&D usually is unable to keep the technology behind its new products and processes completely private, and sooner or later its competitors will be able to draw significantly from the new technology it has created to fashion their own substitutes. If a firm is unable to appropriate fully the returns to its investments, it will tend to underinvest in that activity from a social point of view. Hence government action, for example through patents or by research subsidies, can improve public welfare. Furthermore, in the 1980s it became clear that patents were ineffectual in some leading sectors, such as semiconductors, computers, telecommunications, and aircraft. In these sectors, companies reap return mainly by achieving a head 2   For a full discussion of these developments, see Ostry and Nelson (1994).

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings TABLE 1 Export Shares, Revealed Comparative Advantage, and Import Penetration in the Developed Economies, 1970 and 1990 Country and  Technology Level Export Sharesa RCAb Import Penetrationc 1970 1990 1970 1990 1970 1990 United States High 31.1 26.3 1.54 1.51 4.2 18.4 Medium 21.7 15.4 1.07 0.89 5.6 18.5 Low 13.4 13.3 0.66 0.76 3.8 8.8 Japan High 13.2 21.1 1.20 1.41 5.2 5.4 Medium 8.5 16.9 0.77 1.12 4.5 5.9 Low 13.2 7.1 1.19 0.47 3.0 6.6 Germany High 17.7 16.2 0.93 0.79 14.9 37.0 Medium 23.1 24.7 1.22 1.20 17.2 29.5 Low 15.0 17.9 0.79 0.87 11.1 20.9 France High 7.7 8.7 0.83 0.84 21.6 31.6 Medium 8.5 10.0 0.92 0.97 19.7 34.1 Low 10.7 12.1 1.15 1.18 10.7 21.4 United Kingdom High 10.5 10.2 10.1 1.16 17.4 42.4 Medium 11.9 8.5 1.14 0.96 n.a. 39.4 Low 8.9 8.5 0.85 0.94 12.4 19.8 Italy High 5.5 5.1 0.75 0.59 16.2 22.8 Medium 7.1 7.7 0.97 0.89 23.6 28.9 Low 8.5 12.8 1.16 1.49 11.6 15.7 Canada High 3.9 2.8 0.54 0.55 42.2 63.4 Medium 8.9 5.9 1.22 1.14 42.9 53.3 Low 7.0 6.1 0.96 1.19 12.1 16.8 a Share of OECD exports in each category. b Revealed comparative advantage is calculated as a country's exports in an industry divided by its total exports, normalized by the same ratio for the OECD countries. c Imports divided by total domestic demand j (production plus imports less exports). Source: OECD (1993:87). start on their rivals, which they then exploit by seizing the market and moving rapidly down the learning curve. They fully expect their rivals to pick up and use their invention, but with a lag. That lag has become shorter and shorter in recent years. So the basic argument presented in support of government intervention was to capture, on home territory, the externalities generated by innovation in these high-technology industries, which—another argument in support of inter

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings vention—also generated high-paying jobs. Furthermore, because other countries see these possibilities, and often the world market may be able to sustain only a small number of firms, a country that seizes them first or pursues them most aggressively and sustainedly can reap significant national returns not only in a particular sector but also, more broadly, because of inter-industry spillovers in the case of intermediate products. Of course there were many economists who argued that market failure did not make a case for intervention because government failure (picking winners) was even more likely. The debate continues. But the shift in domestic policy to nurture high-technology sectors and to lessen the speed of diffusion of technology across borders was and is an extremely important element in high-technology friction in both trade and investment. In addition to these two factors—OECD convergence and changes in domestic policies—there were also changes in the patterns of both trade and investment that have heightened the international significance of technology issues. Increasingly, trade among developed economies has involved the exchange of specialized products within the same industry, i.e. intra-rather than inter-industry (see Table 2). Intra-industry trade develops mainly in technology-and capital-intensive sectors and in industries that supply highly sophisticated intermediate goods for these industries. This shows up in the shift of share away from low-technology goods in manufacturing trade among OECD and, increasingly, the dynamic Asian countries. The changing composition of trade among industrialized countries provides a backdrop for the escalation of international rivalry for marketshare to capture economies of scale in these oligopolistic industries. This rivalry is intensified as fixed costs, including up-front R&D, mount and time to market shortens. But, again, this is not the entire story. These developments on the trading front cannot be understood without taking account of equally profound changes in international investment. As mentioned above, much of the trade in high-technology sectors flows within the firm. Although figures are unfortunately scarce, it is estimated that in 1989 nearly 40 percent of U.S. merchandise exports and more than 60 percent of imports were intrafirm transactions. However, these figures do not capture the full impact of multinational enterprises (MNEs) on the global economy. Worldwide sales of foreign affiliates in host countries in 1992 amounted to $5.8 trillion, nearly twice the value of world exports of goods and services, and considerably more than twice their value in 1984 (UNCTAD, 1995) (see Table 3). This remarkable enlargement of the activities of the MNEs reflects the surge in foreign direct investment in the second half of the 1980s (see Table 4). It was the investment surge of the 1980s that spawned the term globalization. Growth of investment from 1985 to 1990 averaged nearly 30 percent per year, four times the rate of world output and three times the rate of trade. Most of it was in capital-and technology-intensive sectors. Technology flows (as captured

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings TABLE 2 Bilateral Intra-Industry Trade Indices,a Total Products,b G-7 Countries Country and Year Japan Germany France U.K. Italy Canada United States 1970 32 44 52 52 34 63 1980 31 48 59 55 42 71 1990 48 64 69 63 56 71 Japan 1970   54 62 45 50 9 1980   69 47 66 41 12 1990   77 31 62 44 9 Germany 1970     72 77 55 16 1980     83 59 54 24 1990     88 76 66 31 France 1970       66 63 19 1980       69 59 30 1990       81 71 39 United Kingdom 1970         64 36 1980         75 39 1990         75 38 Italy 1970           14 1980           22 1990           24 a Definition and measurement: intra-industry trade (IIT) is a measure of two-way trade within the same industrial or product classification. An example of intra-industry trade is when Japan exports laptop computers to the United States while the United States exports mainframe computers to Japan. For a particular product of industry I, ITT is defined as the value of total trade (Xi + Mi) remaining after subtraction of the absolute value of net exports or imports (Xi + Mi). To be able to compare between countries and industries, the measure is expressed as a percentage of each industry's combined exports and imports. A measure of inter-industry trade is then expressed as 100 [(Xi-Mi) / (Xi + Mi)], and the intra-industry trade measure is given by 100 [I-(Xi-Mi) / (Xi + Mi)]. The index varies between 0 and 100. If a country exports and imports roughly equal quantities of a certain product, the IIT index is high. If it is mainly one-way tradej (whether exporting or importing), the IIT index is low. For aggregation purposes, the measure can be summed over many industries. b Figures are calculated from SITC Rev. 2 three-digit product categories and are adjusted for overall trade imbalances. Source: OECD (1992:209).

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings TABLE 3 Modalities of International Transactions, 1994-1993 (billions of dollars) Year Sales of Foreign Affliates Sales Associated with Licensing and Un-affiliated Firms Estimated Intrafirm Exports Exports of Goods and Nonfactor Services Exports of Goods and Nonfactor Services Excluding Estimates of Intra-Firm Exports 1984 2,500 30 770 2,310 1,540 1985 2,500 40 780 2,340 1.560 1986 2,900 50 860 2,580 1,720 1987 3,500 60 1,020 3,050 2,030 1988 4,200 80 1,090 3,270 2,180 1989 4,400 80 1,180 3,540 2,370 1990 5,500 110 1,370 4,110 2,750 1991 4,800 120 1,450 4,350 2,900 1992 5,800 120 1,570 4,720 3,150   Source: UNCTAD (1993). from the very inadequate measure of royalties and fees) also exploded, increasing from an annual growth rate of 0. 1-19 percent between the first and second half of the decade (UNCTAD, 1994). After a slowdown in the early 1990s (because of a recession in the OECD countries), investment flows have started to pick up again, especially in the East Asian dynamic economies. Although part of the ''bulge" of the 1980s was due to one-off factors (e.g., protectionist actions and wide exchange rate swings), the outflows also reflected underlying structural forces, in particular the revolution in information, computer, and communication technologies (ICCT), which is both an enabling factor and a driver, fostering innovation in products and processes and also in organization at the level of the firm and the industry. Thus, the traditional international rivalry among MNEs is greatly intensified by the ongoing technological revolution, as corporations seek to capture economies of scale and scope, customize products to satisfy consumer tastes, generate sophisticated high-quality inter-and intra-corporate networks, and strive to gain access to knowledge, both technological and "tacit," which is accessible only by continuing on-site learning. For the globalizing MNE, preponderantly in high-technology sectors, market entry by means of trade and investment is essential: The two modes are complements rather than alternatives. And market presence is a two-way channel for both technology diffusion and technology access. Impediments to effective access are no longer confined to overt border barriers to trade or explicit restrictions

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings TABLE 4 Inward and Outward Average Annual Foreign Direct Investment for the G-7:1981-1985 and 1986-1990 (millions of U.S. dollars per annum and shares of G-7 total)   1981-1985 1986-1990   Inward Outward Inward Outward Country $ % $ % $ % $ % United States 19,062 74.8 10,927 27.7 51,879 58.9 22,757 16.8 Canada -463 -1.8 3,608 9.1 3,887 4.4 5,421 4.0 Japan 683 2.7 9,430 23.9 2,407 2.7 45,431 33.5 France 1,998 7.8 2,732 6.9 6,451 7.3 11,985 8.8 Germany 808 3.2 3,818 9.7 2,739 3.1 14,424 10.6 United Kingdom 2,375 9.3 7,323 18.6 16,547 18.8 31,413 23.2 G-7 Total 25,484 100.0 39,469 100.0 88,055 100.0 135,545 100.0   Source: UN (1993). that limit foreign investment. Rather, impediments to effective access can often arise from domestic regulatory policies or private sector actions that have an exclusionary effect by accident or design. In summary, a number of fundamental changes in both the international environment and in the tilt of domestic "industrial" policies that emerged in the 1980s generated new types of international friction, much of it centered on technology-intensive sectors. In the following section these issues are presented by a matrix so as to illustrate the cross-cutting dimension of high-technology friction that effectively rules out proposals for an overall, or comprehensive, high-technology international policy. For the most part, the only feasible approach is to devise adaptations to existing rules that are discussed in the section on high-technology policymaking. There is one exception, however, to this adaptive incrementalism, which is the need for new rules for international cooperation in science and technology, which is discussed in the concluding remarks. TECHNOLOGY ISSUES IN INTERNATIONAL POLICY As the review in the preceding discussion suggests, high-technology frictions in international trade and investment arise basically from two main sources: the international spillover from domestic policies designed to enhance the technological capabilities of home-based firms (including policies designed to increase technology inflows and decrease outflows) and from policies targeted at opening foreign markets for their MNEs. On both of these fronts American policy making has played a lead role for reasons mentioned above. But this categorization is too simplified to capture the full range of relevant

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings issues. Thus, for example, antidumping policy concerns private action related to price behavior, yet, as many studies have demonstrated, both dumping and antidumping can be used for purposes of corporate strategy, and this is most likely in high-technology sectors with significant dynamic economies of scale and high fixed costs including heavy up-front R&D expenditure (see Ostry, 1995). Similarly, firms may, under certain circumstances, seek to use private standards as a means of achieving market dominance and, again, when economies of scale are important, this dominance may not be eroded easily. "Strategic dumping" or the capture of private standard setting cannot be regarded as explicit government policy: Indeed it could be regarded as an absence of policy, especially, perhaps, competition policy. Yet the result may be to enhance the monopoly profits of home-based firms as well as home-based technological capabilities. In the case of private strategic R&D alliances, which are now proliferating, the main policy issue, both domestic and international, is market dominance. The above is by way of a warning about the preliminary nature of the matrix that is presented. It is intended to serve primarily as a means of beginning a discussion on a number of complex and interrelated issues, especially relevant to the high-technology sectors, that have been neglected or overlooked both in the Uruguay Round and in the ongoing debate about the post-Uruguay agenda. As the policy matrix below illustrates, some existing trade policy rules in the World Trade Organization (WTO) could be adapted to improve their effective- TABLE 5 Technology Policy Matrix   International Policy Domain High-Technology Policies Trade Investment Competition Enhancing Domestic Technology Capabilities       Subsidies x x   Government procurement x   x Product standards x   x Antidumping x   x Intellectual property x   x Technology flows       inflow incentives   x   outflow disincentives   x   strategic technology alliances   x x Increasing Effective Access and Presence       Structural impediments to trade x   x Structural impediments to investment   x ?

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings ness in high-technology sectors. Suggestions in this respect are presented below. But it is important to note that, in the case of some of these trade policy instruments (and strategic alliances in the investment box), effective adaptation would also involve competition policy. Because no international competition policy regime exists in the WTO, the only feasible option at present would be to promote bilateral or plurilateral cooperative arrangements. Similarly, in the case of investment, apart from the trade-related investment measures (TRIMs) agreement, no comprehensive set of rules is included in the WTO. But because the OECD negotiations are to be concluded in two years, initiating discussions both in the OECD and the WTO would be timely. Finally, the proposals with respect to structural impediments are intended to launch a discussion rather than propose rules because there is little agreement today even about the legitimacy of the concept, let alone its precise dimensions. HIGH-TECHNOLOGY POLICYMAKING Trade Policy Subsidies The Uruguay Round Agreement provides specified exemptions from countervailing duties for basic and applied industrial research. Continuing disputes are likely to arise from definitions of what is "basic" and what is "applied" and therefore what should or should not be "greenlighted." The Agreement provides a mechanism for securing exemption through a review by the Committee on Subsidies and Countervailing Measures after notification. However, a provision also permits a potentially enormous escape hatch by allowing countervailing without prenotification and removal if the subsidy was proved nonactionable ex post, leaving it to other countries to bring action so that subsidizers can buy valuable time (and reduce transparency). Because even scientific and technology experts are unlikely to agree about definitions—for one thing, differences across industries are so great that rules for one may make no sense for others—the WTO committee looks set for a lot of fruitless haggling. This is a field in which the OECD can play a role. More specifically, for over 30 years the OECD Directorate for Science, Technology, and Industry has developed and refined extremely detailed definitions to collect information on the measurement of human and financial resources devoted to R&D. These definitions and this methodology should form the basis for the Committee on Subsidies and Countervailing Measures' reviews, data collection, and the WTO dispute settlement procedure. Indeed, it might be useful to consider an expert advisory group on innovation policy issues, should the need arise (as it is likely to do), in the fractious area of R&D subsidies in future years. Although this proposal may not solve all the difficult and complex definitional issues, it would

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings promote constructive, plurilateral debate and perhaps foster progress on eventual harmonization, while helping to constrain serious and destabilizing friction. Another potentially fractious aspect of the subsidies code concerns the national security exemption. The impact of the end of the Cold War on the extent and nature of defense expenditure will be profound. But only one aspect need concern us here: the likely shift, in the United States in particular, to dual-use R&D programs.3 (This will involve a shift away from basic to applied research, which echoes the shift in the R&D aspect of the new subsidies code as well, which is discussed below.) Because the national security exemption in the subsidies code is not precisely specified, the shift to dual-use R&D programs opens up the specter of a replay—writ large!—of the Airbus dispute as well as tit-for-tat "strategic industry" plays by countries. So what could be done to mitigate this potential but probable friction? It is an irony of history that the OECD, at its inception, was urged to cooperate with the North Atlantic Treaty Organization (NATO) on the relationship between the fields of security and economics. Perhaps the time has come to initiate this process! (see, e.g., Labohm, 1994). One possibility could be a joint OECD-NATO task force of experts in both military and commercial technology to explore the concept of dual use with a view to producing a taxonomy of more precisely specified and graduated exemptions in the WTO subsidies code. Also, the issue of dual use arises in a somewhat different fashion in the investment field. The U.S. Defense Authorization Act of 1993 requires a report by the President to the Congress on the results of each investigation by the Committee on Foreign Investment in the U.S. which includes, among other factors, consideration of "the potential effect of the proposed pending transaction on U.S.'s international technological leadership in areas affecting U.S. national security" (Graham and Krugman, 1995). Government Procurement Government procurement for high-technology products should be tackled by a separate negotiation in the WTO on a conditional most-favored-nation basis. But as the experience of the disputes of the 1980s in this area illustrates, the codes of behavior that would govern the action of government agents for many high-technology products would not be adequate to avert international conflict if acceptable norms of performance are not established. For some of these products, an internationally funded performance center could be established to develop technical standards for performance evaluation. [The experience of the European Union's (EU's) program of prenormative research should provide valuable insight in this respect.] Such a performance approach would not only 3    For a full analysis, see Ham and Mowery (1995).

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings reduce friction but would also significantly reduce the transaction costs of national testing and certification, as well as capture economies of scale in complex areas of assessment. In addition to performance standards, another issue that has emerged from high-technology procurement disputes concerns "bid rigging" or collusive arrangements among domestic suppliers on pricing offers. More transparency in procurement specifications on both performance and price, as well as an agreement to bring bid-rigging (or other pricing behavior such as deep discounting) charges under the new WTO dispute settlement mechanism, which are discussed in more detail below, are also options worth exploring. The government procurement market for high-technology products is enormous. Great benefits, in the form of long and secure time horizons for sale of their products, accrue to firms that need to invest heavily in R&D. So the new code, a major accomplishment of the Uruguay Round, provides a good launching pad for further negotiations. Product Standards The Uruguay Round Agreement on Technical Barriers to Trade shows a marked improvement over the previous Tokyo Round code by covering all signatories, including a strong push for transparency, mutual recognition, and international standards, enjoining countries to participate in international bodies. One issue in private standard setting of particular relevance in the high-technology sector, especially in the fast-changing ICCT, is the capture of private standards by one or a subset of firms. If a proprietary standard becomes a de facto industry standard, enormous market power accrues from network economies of scale and technological tie-ins or, in the case of components, systems economies of scale. This market dominance is not challenged easily because of the costs of conversion known as the "installed base" problem (Sykes, 1995). There is general agreement that "standards capture" is a potential problem, especially in the rapidly changing ICCT area, but there is no agreement among experts on what, if anything, should be done—as the debate over the antitrust actions regarding Microsoft amply demonstrates. Nonetheless, there is a generic issue here that certainly deserves further study and debate, and the OECD is the logical forum to launch such an initiative. In this regard, it is essential to emphasize that this is not only a domestic antitrust issue, but quintessentially an international issue because networks and systems products are globalizing or are global. Antidumping Although, ideally, antidumping rules should be replaced by international competition policy rules on price discrimination and predatory pricing, that is unlikely to happen in the foreseeable future. In the meantime, there is one aspect of dumping that is especially relevant to capital-and technology-intensive sec-

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings tors. A new initiative could be launched in the WTO (perhaps in cooperation with the OECD on analytics) to tackle strategic dumping. Strategic dumping essentially involves subsidizing exports through higher home prices sustained by collusive price behavior and a protected home market. In industries with significant dynamic economies of scale, high fixed costs—for example by coordinated R&D expenditure—would serve to deter entry. Thus the essential dimensions of strategic dumping are the exporting country's trade policy and competition policy. The injury to the importing country's firms involves both restriction of exports and loss of dynamic efficiency gains ("learning by doing") that may be cumulative and dispersed over a wide range of products. The best way of dealing with strategic dumping would be to tackle the root causes of the problem: the exporting country's trade and competition policy. To remove the barriers to access into the exporter's market, the first step would be to agree to a list of industry characteristics; for example, degree of concentration as measured by the exporting firms' share of home market, the exporting firms' share of world market (which would affect alternative third country producers), the extent and nature of barriers to entry of new firms or expansion of existing firms, the degree of import penetration, the prices in the exporting country's home market relative to prices elsewhere, etc. (the basic analysis could be done in the OECD). The purpose of selecting specific industries would be to focus the negotiations on eliminating protection for sectors where strategic behavior is feasible. Clearly, these are high-technology industries, for example, sectors with oligopolistic structures, high entry barriers, significant static and dynamic efficiencies, and dominance in global markets. From this agreed-on industry list one could then assemble a group of products and for these compile a list of specific import barriers. This would then form the basis for a "zero-for-zero" negotiation (i.e., the removal of all border restraints on a reciprocal basis). The negotiations could begin with a small group of countries, including the United States, the EU and Japan, and then they could decide whether the agreement should be conditional or full most favored nation. If conditional, the agreement should be open to all countries willing to accede to the zero tariffs. The removal of trade barriers will not, on its own, remove the threat of strategic dumping, which also requires action on competition policy in the exporting market. Because convergence, or agreeing to new international rules, will be a lengthy process, a strong case could be made that, in the absence of a supranational authority, bilateral agreements might be contemplated to ensure a fair hearing of disputes over enforcement where there is a charge of spillover on the trade front. Intellectual Property Rights The Uruguay Round achieved a major breakthrough in establishing trade rules for the protection of intellectual property rights (IPRs). The trade-related

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings intellectual property rights (TRIPs) agreement, however, provided little by way of harmonization. Now the main conflicts will arise among the developed countries where there is still a significant divergence between the United States on the one hand and the EU and Japan on the other. This divergence is especially clear, and especially contentious in patents, where the U.S. system favors creation of intellectual property over its diffusion and the others tilt in the opposite direction. The compromise negotiated in TRIPs did not resolve the matter.4 Hence, bilateral or plurilateral negotiations to achieve harmonization in selected types of IPRs should be undertaken as a first step before moving to further multilateral negotiations in the WTO. Although a push to harmonization is an important policy issue to mitigate further friction, in a sense it deals only with the status quo. Rapid and ongoing technological change in ICCT and biotechnology are raising a host of new issues that will require major adaptation of the existing IPR architecture. One obvious example concerns copyright protection on the Internet, or more broadly, copyright protection in a world of digital distribution. Although some countries are already grappling with the issue, it is, again, quintessentially a global issue and merits international discussion, to begin in the OECD. In the same vein, patents for satellites or genes can no longer be regarded as national policies. Thus, establishing an international forum for discussion is the only sensible way to go. Perhaps cooperative arrangements between the OECD, the World Intellectual Property Organization (WIPO), and the WTO could be explored. Although new rules will be difficult to achieve, exchange of information and analysis of issues would be a useful first step. Technology Flows Improving the balance of technology flows is, as noted above, a high priority for a growing number of countries. But just as in trade, every country cannot achieve a surplus. Efforts to induce inflows and reduce outflows are bound to lead to disputes and also will reduce global welfare. Two policy initiatives can be launched to mitigate this friction. On the inflow side, a key issue concerns the proliferation of investment incentives, often designed to attract "good" investment involving significant technology transfer. A recent report from the Commission on International Investment and Transnational Corporations (UNCTAD) documents the increase in both the number and range of incentives for MNEs since the mid-1 980s in both developing and OECD countries. The report noted that "an increasing number of countries target 4    The U.S. patent system is based on first-to-invent rather than first-to-file in other OECD countries. The TRIPs agreement involved superimposing on the U.S. system an extension of patent rights to 20 years from filing data (an extension of 2 years for many existing patentholders). There is no discrimination against foreign applicants, but the evidentiary costs of inventorship outside the United States will likely be extremely high.

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings investment activity in industries involving technology and high value added products (such as electronics, robotics, computer software)" (UNCTAD, 1995:8). Because the TRIMs agreement in the Uruguay Round did not cover investment incentives, there is an opportunity for the OECD to tackle the issue in the Multinational Accord on Investment (MAI). In particular, it would be useful to establish a database that covers not only the quantitative aspects but also the nature of the "target objective" so as to have a better grasp of the R&D element. In addition, in the WTO it would be useful to launch discussions to expand the TRIMs to cover mandatory technology transfers, which was dropped from the Uruguay Round negotiations. On the technology outflow side, an increasingly contentious issue concerns participation by foreign subsidiaries in research consortia jointly funded by government and the private sector. In an effort to limit or slow diffusion (and hence capture the benefits for the domestic economy), foreign subsidiaries are treated differently from domestic firms in a number of countries: hence the new term "conditional national treatment." Also, specific reciprocity rather than nondiscrimination may be required as one of the conditions, particularly in the United States.5 To begin discussions on the consortia issue it is essential to secure a better information base. For example, in the EU there are no formal guidelines for participation in projects governed by the Commission Framework Program, and membership is negotiated on a case-by-case basis or through bilateral treaties. But "unofficial" conditions are usually standard and include a number of performance requirements. In the United States the situation is even murkier, with different rather general criteria in different pieces of legislation, mostly focused on aspects of reciprocity. An OECD project to document the rules for foreign participation in consortia should be followed by collecting information on actual foreign participation so we know the numbers as well. But the information base, however useful in defusing the strident charges and countercharges now so prevalent, is clearly not sufficient. The need to reach agreement on common rules would have to confront at least three issues: criteria for participation in consortia, treatment of foreign subsidiaries, and IPRs. The domestic criteria are important for governmental evaluation of the program. Common criteria, if agreed on, would facilitate adoption of national treatment, an essential element in a new MAI. Finally, there should be clear agreedon rules on the treatment of IPRs governing the consortia arrangement. Strategic technology alliances (STAs), a new form of investment, as they are sometimes termed, have exploded in the 1980s and 1990s from near zero in the 1970s, especially in the three most significant current technologies: information, 5    For a useful review of the American position, see Beltz (1995).

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings biotechnology, and new materials (see Figure 1). These alliances take place in a wide variety of organizational modes: equity arrangements such as joint ventures, research corporations and minority investments, contractual joint development agreements, R&D contracts, etc. The basic reason for these alliances is an exchange of complementary assets. The costs of R&D and the widening range of technologies that feed innovation today mean that few firms want to undertake the risk of development alone and thus seek partners to reduce cost and spread risk. Often these partners are competitors in final markets, and so the alliance is risky as well—one reason for a high failure rate reported in a number of case studies. Nonetheless, the trend to strategic alliances shows no sign of abatement and is indeed accelerating. Two issues arise with respect to STAs. Despite the data exhibited, for example, in Figure 1, there are no comprehensive statistics on this new form of investment. Yet if an MAI excludes STAs (and, indeed, other kinds of alliances that are also proliferating), it will exclude a key feature of the new technoglobalism. Although it will be difficult to elicit information on alliances (indeed, if the term "strategic" is accurate, many corporations may not be prepared to reveal much; the data currently available are based on published information), the issue of how statistics bureaus of member OECD countries might tackle the data problem could be launched in the OECD, which has long experience in this field. Second, since STAs are not formal mergers, their treatment under current competition policy is not clear. Yet in both domestic and international terms the issue of contestability should be explored. Is it relevant only to traditional forms of investment or also to new forms, especially those involving key technologies? FIGURE 1 Growth of newly established strategic technology alliances in information technologies, biotechnology, and new materials, 1970-1993. Source: MERIT-CATI (1994).

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings Increasing Effective Access and Presence As border barriers have been reduced, the focus of trade policy has shifted to so-called structural impediments inside the border. This shift was already evident in the Tokyo Round (subsidies, government procurement, technical barriers, etc.) but much more so in the Uruguay Round, where services exemplified this trend in dealing with government regulation designed primarily to achieve specific domestic objectives. In the domains of investment and technology, most impediments are inside the border, arising from government or private actions or from embedded structural characteristics such as the nature of financial markets and corporate governance or the role of universities in the innovation system. Moreover, differences in embedded structural or institutional characteristics of different countries—system differences—can result in marked asymmetries of access by trade or presence by investment (with effects on technology flows) so that the basic General Agreement on Tariffs and Trade (GATT) principle of broad or overall reciprocity cannot easily be attained. This has generated considerable international friction in bilateral disputes, and for this reason, if for no other, it is essential to deal with the notion of structural impediments in multilateral or plurilateral forums. Although these impediments are not specifically a technology issue, some of the most high-profile disputes have been in capital-and technology-intensive sectors such as autos. So what can be done? The first proposal is to try to limit the definition of structural impediments because there is a real danger that it could, especially if unilaterally determined, include ''everything" and strike at the heart of the notion of comparative advantage. Thus, the WTO, perhaps in cooperation with the OECD, should establish a working group to prepare a comprehensive listing of government regulatory practices wherein member countries could consider structural impediments to effective market access. The practice of country notification of trade barriers was well established under the GATT and in the OECD trade committee, so there is precedence for the concept of notification that should now be updated to recognize the move of international negotiations inside the border. However, simply listing barriers would not provide a definition of government-related structural impediments. Rather, the purpose of the exercise would be to initiate discussions on an agreed-on definition of these impediments for multilateral negotiations. Thus, parallel with these efforts, a research project should be undertaken to develop an impediments index in the form of price differentials between domestic prices of traded goods in member countries to assess the openness to market competition or "market contestability." The overall objective of market contestability is an elusive concept, and reaching agreement on definition and measurement will take considerable time and effort (as did, for example, the production of an index of agriculture protection, the Producer Subsidy Equivalent, which helped launch the Uruguay Round negotiations). So although these would not be easy

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings tasks, the alternative approach—unilateral definitions or quantitative targets—represents a threat to the system perhaps serious enough to energize WTO member countries. In addition to government policies and practices, business practices can also impede effective access or presence to some markets. Thus, for example, vertical upstream or downstream long-term agreements may have the unintended effect of impeding imports, whereas bank-centered corporate governance arrangements may, again unintentionally, impede foreign direct investment by means of mergers acquisitions. Although some have argued that these impediments stem from inadequate enforcement of competition policy, that view is not supported by many antitrust experts. In any case, while discussions on harmonizing competition policy have been under way for some years in the OECD and elsewhere, progress has been limited and international agreement will be a long and difficult process even among the OECD countries, let alone the much larger number of WTO members. Furthermore, because neither vertical nor horizontal agreements (except those involving price collusion) are per se offenses in any current competition policy regime, negotiating new international rules for removing private sector structural impediments would require reconciling conflicts between competition policy and trade policy objectives. The new WTO dispute settlement agreement provides an opportunity to begin a discussion of this issue and also to promote more consultation and discussion between competition policy and trade policy authorities in national capitals. The mechanism would be to bring a complaint about structural impediments (in this instance involving private sector practices) under the so-called "non-violation nullification and impairment" provisions of the new Dispute Settlement Understanding (DSU). The GATT language on disputes always contained the phrase "nullification and impairment" in a little-used and rather vague section [Article 23:1 (b)]. The term implied that a member country had an imbalance with another country in overall benefits, not through violation of a specific GATT rule but through "the application by another contracting party of any measure whether or not it conflicts with the provisions of the Agreement." The EU issued a complaint against Japan in 1983 under this broad and vague rubric which, in effect, charged that structural impediments blocked effective market access, but subsequently withdrew the request for a panel. Under the new DSU an additional provision has been added to the so-called nonviolation cases that allows the panel to provide a remedy in cases in which a perfectly legal action nonetheless impairs the "reasonable expectations'' of the overall balance of benefits of a member country. The inclusion of nonviolation cases in the strict new procedures was to replicate the Section 301 concept of "unreasonable" measures that were nonetheless legal under the GATT. To constrain U.S. unilateralism, the Uruguay negotiations brought Section 301 into the WTO, thus providing an opportunity for panel consideration of a "test case." A panel ruling cannot mandate removal of the dis-

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings puted measures but can make a recommendation for ways and means of reaching "a mutually satisfactory adjustment." Under the new WTO provisions it is possible to seek expert advice from "any relevant source" or "request an advisory report—from an expert review group.'' Thus the views of experts in competition policy and industrial organization could be integrated into the process to begin the multilateralization of the definition of structural impediments. In this regard, the 1995 auto dispute between the United States and Japan was a lost opportunity to launch that process. A case concerning exclusive dealerships, for example, could have served two purposes: to establish a foothold in the WTO for consideration of international rules for competition policy and, equally important, to launch a review of such vertical arrangements in national capitals since they exist in a number of OECD countries. It would be useful to launch such a review of domestic policies and their impact on import access in the OECD. On the investment front, although an MAI should seek to cover as full a range as possible of government impediments to effective presence, the main impediment stemming from private action relates to corporate governance, and it is not possible to devise acceptable rules to deal with it. Most experts agree that it is not an issue for competition policy. Issues of greater transparency certainly arise. But, basically, bank-centered governance arrangements (as in Japan and to some degree Germany) are more resistant to mergers and acquisitions than equity-oriented arrangements (as in the Anglo-Saxon countries). There are advantages and disadvantages in each model, but both can be defended as rational attempts to resolve the universal problem of coordination and control. Because the equity markets are in effect markets for corporate control and thus much more transparent and much more accessible by means of mergers and acquisitions, one result is asymmetry. An "ideal" model would include elements of both types and indeed policy proposals to promote convergence have been suggested by both American and Japanese experts, the latter more insistently because of the serious financial crises now evident in Japan Ostry and Nelson, 1994). Furthermore, the Japanese are well aware of the need to encourage more foreign investment and have undertaken a number of policy initiatives by way of greenfield financial and other incentives. Finally, the marked structural differences in innovation systems are also a continuing source of friction. Thus, for example, where most research is carried out in private firms, access is more difficult than situations in which universities play a prominent role, acquisitions of high-technology firms are more feasible, and so on.6 These structural differences will erode over time as a result of deeper integration in the global economy. But they are a given element of diversity among countries and will not be significantly altered by welfare-reducing technonationalist policies. Greater international cooperation in science and technology would be a far better route to follow. 6    For a full exposition, see Nelson (1993).

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings RULES FOR INTERNATIONAL COOPERATION IN SCIENCE AND TECHNOLOGY As noted above, markets produce less R&D than is socially desirable because private firms cannot fully capture the benefits flowing from their expenditure. Furthermore, countries cannot fully capture the benefits from government expenditure on R&D because knowledge flows across borders and other countries can, as it were, enjoy a "free ride." A nonconflictual solution to the free rider problem would be to promote international cooperation in both basic science and precompetitive generic technology. This would increase global welfare and permit private firms in all countries to compete in using the results of the research to improve their own products and processes. In other words, promoting technoglobalism is better than pursuing technonationalism. The free rider problem is the fundamental rationale for promoting international cooperation in science and technology (S&T). But there are also other compelling reasons. First, international cooperation may be a route for offsetting asymmetry of access. In this regard it is noteworthy that Japan has been the initiator of two international projects, one in basic science (the human frontiers science program) and the other in precompetitive research, the intelligent manufacturing system (IMS). Both encountered serious difficulties in the early stages, which points to the need to establish clear, mutually agreed-on rules for international cooperation in S&T, which is discussed further below. But the asymmetry issue might have to be tackled more directly, through some arrangement on "burden sharing," in both monetary and other terms. The second point relates to basic science. Although there is no clear evidence, because of the lack of adequate information, the internationalization of technology and heightened competition in high-technology industries together seem to be eroding the support of basic and long-run research programs, both private and public. Although firms in high-technology industries are, in many cases, being forced to invest even more than they used to in product and process development so as to stay ahead of or up with the pack, companies that used to support significant basic research seem to be withdrawing from that. And governments seem to be shifting the portfolios of research they support toward the areas and types of projects that promise short-run and specific results and away from fundamental research. Although current discussions on government research expenditure in the United States seem to run counter to this trend, it is by no means clear that basic research will be saved from a fiscal pruning of all R&D and, as pointed out, the impact on defense R&D could well involve a shift to the more commercial end of the S&T spectrum. In the American private sector, the trend looks clear. As the title of a recent article on the subject succinctly states "Blue-Sky Research Comes Down to Earth" Business Week, 1995). The OECD should, as soon as possible, produce a study on trends in the

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings composition (i.e., basic and other) of R&D expenditures at the private and government levels. There are, admittedly, difficulties in definitions over time and across countries, so it might be useful if at least some member governments agreed to cooperate in special surveys or studies to supplement the OECD analysis. It is worth emphasizing that this issue is very important because a decline in basic research has serious global implications. The impact will not be immediate, but over the longer run a decline in the generation of the new knowledge, which is essential to cope with pervasive global problems (environment, health, security, and so on) as well as essential to technological progress, will have profound and pervasive consequences. Thus the case for more international cooperation is strong. What is needed are mutually agreed-on, transparent rules to establish a new architecture of international research consortia. As a very important step in this direction, OECD principles for technology cooperation, based on the IMS experience, are now under consideration. These broad principles relate to both government and private sector roles and establish the specifics to be included in private sector agreements (such as, for example, IPRs, consortia structure, standards, etc.). Because the main players in technology consortia are private (although universities and government research institutions will often be involved), the rules are designed on a case-by-case basis through private agreements. This technology model would have to be adapted for basic research consortia for several reasons. Although such consortia will also involve a government-university-private-sector mix, the role of governments and universities will be far greater. Thus the principles relating to government's role would have to be more detailed. Furthermore, the rules or principles for collaboration might well vary by scientific discipline, so that advisory boards of scientists would have to be part of the structure of cooperation. Certainly scientists would also have to be involved in establishing priorities for consortia. Finally, the principle of "burden sharing" should be spelled out since government expenditure is involved. But expenditure is only one aspect of the contribution; the other is scientific input. How this complex issue is to be tackled will affect the sustainability of cooperation; it is necessary to avoid the free rider problem or friction will be serious. Thus it would be useful, before attempting to draft any principles, if the OECD were to establish a working group of both government officials and academic scientists to discuss these (and no doubt many other) issues. Perhaps the OECD Megascience Forum could be considered in this regard. CONCLUSION This paper has illustrated the broad range of technology issues that cut across the domains of trade, investment, competition, innovation, and science policies. An overall, international technology policy is not feasible, unlike, say a trade or investment policy, because the essence of technology is its pervasive impact on

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International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings all social and economic behavior-thus the reason for the approach of adaptive incrementalism both to mitigate friction and to stimulate momentum to greater liberalization and enhanced contestability of national and international markets. The one exception, however, which proves the rule, is the need for far greater cooperation in science and technology itself to enhance global welfare. REFERENCES Beltz, C. A., ed. 1995. The Foreign Investment Debate. Washington, D.C.: American Enterprise Institute. Business Week. 1995. "Blue-Sky Research Comes Down to Earth" July 3, pp. 78-79. Graham, E. M., and P. R. Krugman. 1995. Foreign Direct Investment in the United States. Washington, D.C.: Institute for International Economics. Guerrieri, P. 1992. Technological and trade competition: The changing positions of the United States, Japan and Germany. In Linking Trade and Technology Policies, M.C. Harris and G.E. Moore, eds. Washington, D.C.: National Academy of Engineering. Ham, R. M., and D. C. Mowery. 1995. The U.S. policy response to globalization: Looking for the key under the lamp post. Conference on Governments: Globalization and International Business. Carnegie Bosch Institute, June 15-16, Washington, D.C. Labohm, H. H. J., ed. 1994. Report of the Round Table on the Transatlantic Relationship in the Fields of Security and Economics. The Hague: Netherlands Institute of International Relations. Nelson, R. R., ed. 1993. National Innovation Systems: A Comparative Study. New York: Oxford University Press. OECD (Organization of Economic Development). 1992. Industrial Policy in OECD Countries: Annual Review. Paris: OECD. OECD. 1993. Economic Surveys: United States 1993. Paris: OECD. Ostry, S. 1995. New dimensions of market access: Challenges for the trading system. Pp. 30-31 in New Dimension of Market Access in a Globalizing World Economy. Paris: OECD. Ostry, S., and R. Nelson. 1994. Techno-Nationalism and Techno-Globalism: Conflict and Cooperation. Washington, D.C.: The Brookings Institution. Sykes, A. O. 1995. Product Standards for Internationally Integrated Goods Markets. Washington, D.C.: The Brookings Institution. UN (United Nations). 1993. World Investment Director, Vol. 3: Developed Countries. New York: UN. UNCTAD (Commission on International Investment and Transnational Corporations). 1994. World Investment Report. UNCTAD. 1995. Incentives and Foreign Direct Investments, April 6, Geneva. UNCTAD. 1995. Recent Developments in International Investment and Transnational Corporations?. Trends in Foreign Direct Investment. Geneva.