The Positive Sum Strategy: Harnessing Technology for Economic Growth (1986)

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Dangers In U.S. Efforts to Promote International Competitiveness GEORGE C. EADS The realization that the United States has lost interrzational com- pet~tiveness irz a number of important industries indeed provides an opportunity for us to rethink our policies toward innovation. But irz carrying out this assessment, we must understand that what we are really questioning is the ability of our system of government to deal with a totally different set of issues, issues that it may not be equipped to handle. In his chapter in this volume, Harvey Brooks divides postwar U.S. science policy into three phases. The fist, covering the period 1945 to 196S, was driven by cold war fears and marked a steady increase in financial support for research and development. The second, from 1965 to 1977, was char- actenzed by a rise to prominence of social prionnes, suspicion of techno- logical change, and leveling off and even decline in support for innovation. The Gird and current period, which dates from 1977, marks a new resurgence, this time driven by concerns about industrial competitiveness. The chapter by Milton Katz describes a shift in legal thought that roughly paralleled He shift in financial support noted by Brooks. Katz argues that, certainly during the immediate post-World War II period and possibly even up to He rn~d-1960s, the relative emphasis in He legal system was on creating conditions favorable to growth and innovation. After ~at, He emphasis shifted to equity and the protection of nghts. But at the end of his chapter, Katz indicates that he sees He first signs of a shift in relative emphasis back toward He promotion of grown and innovation, and he applauds that shift. Bow authors Gus characterize this country as being in the early stages of an important new transition—a transition leading to a renewal of our ability to compete internationally. While I would like to Wink Hat this is true, I am 527

528 GEORGE C. EADS more pessimistic. In explaining the reasons for my pessimism, I will draw on the discussions in this volume by Paul A. David, Daniel I. Okimoto, and N. Bruce Hannay especially Hannay. BACKGROUND OF U.S. COMPETITIVE DECLINE I find a statement by Milton Katz particularly interesting: it is his assertion that what set us up for the initial shift in legal thinking that he describes the shift from an emphasis on promotion of growth and innovation to an emphasis on equity and rights was the overwhelmingly dominant position of the United States as it emerged from World War Il. We were the tech- nological leader, the model that other nations seeking to rebuild their econ- omies sought to emulate. Our system produced unparalleled increases in living standards for our population. The economic pie from which our in- dividual slices were all cut grew enormously. And one of the principal factors fueling this growth was innovation. However, the very success of this period laid the groundwork for its undoing. The fact of sustained economic grown fueled by innovation created the belief that this system was somehow self-sustaining. And the increased level of wealth it generated created the perception that we had "enough" and could turn our attention to other matters specifically, to seeing to it that this "enough" was distributed more equitably. What the new emphasis on innovation and competitiveness reflects is He realization that the postwar engine of American economic growth was not self-sustaining and that our failure, especially during the 1960s and 1970s, to pay attention to its foundations has gotten us into real trouble. While we put our primary emphasis on equity and fairness, other nations—Japan is the best-known example have been stressing growth. In the process, some of our most important industries have become hopelessly uncompetitive. Others, though still strong, show signs of following in their footsteps. In order to understand how American industry became uncompetitive, we must be willing to study the evolution of individual industnes. Such studies also provide important clues as to how industries react as the signs mount that they are becoming uncompetitive. Both sorts of understanding are vital to the design of intelligent policies to reverse our decline. It is in this context that the series of studies by He National Academy of Engineering (NAE) He studies summarized by Hannay in his chapter- are so important. ~ To be sure, the individual sedges add importantly to our knowledge of the problems of He specific industries Hey cover. But as a See note 4 in "Technology and Trade: A Study of U.S. Competitiveness in Seven industries, by N. Bruce Hannay (in this vol ~me) for list of the individual studies. ..

DANGERS IN U.S. EFFORTS TO PROMOTE COMP=~IVENESS 529 group these studies provide important clues to how industries become un- competitive and how they react, both positively and negatively, to this de- velopment. Hannay's chapter, in providing, brief accounts of the individual industries and what was found concerning them, constitutes a good guide book to the NAE effort. But because of space limitations, it inevitably oversimplifies both the individual studies and the nature of any cross-cutting conclusions, and so I recommend examination in some depth of the individual studies themselves. Upon such examination (see also Okimoto's discussion of the Japanese challenge), it becomes clear that it has been the challenge from Japan that has focused attention on the competitiveness problem of most, if not all, of the indusmes covered by these studies. Okimoto's chapter provides a useful antidote to some of He more extreme claims that I have heard about what the Japanese really have done and how they have done it. The individual NAE studies also reflect the need stated by David for giving increased attention to the process of diffusion in the study of technological change and its impact on productivity, though Hannay does not capture this element fully in his brief summary and synthesis. In reading various reports on the recent performance of major U.S. industries, especially their accounts of the sources of the remarkable Japanese productivity improvements, one quickly sees Hat He productivity improvements derive primarily not from an emphasis on major innovations and big breakthroughs but from patient, across-~e-board efforts to improve production processes and to develop moderately innovative products that meet genuine consumer needs. That is to say, the Japanese practiced good engineering in its most basic sense. Indeed, He most interesting question in regard to Japan—one Hat Okimoto does not claim to be able to answer—is whether Japan, having excelled at moderate innovation and diffusion, is now equipped to play a leading role in He process of invention and radical innovation. For if a rediscovery of the importance of patient, moderate innovation and steady diffusion will represent for U.S. industry not a new departure but merely a return to earlier successfully applied principles, the need to take an important role in He generation of fundamental scientific knowledge will represent a major change for Japan. I have advocated that people who want to understand how U.S. industry got into its current sorry shape closely examine available studies. But I must provide a warning to all who might be tempted to heed my advice such reports, which document in detail He decline of competitiveness of major U.S. industries, make depressing, reading. For dopey demonstrate, as Paul David no doubt would forecast, that there are likely to be no quick, easy, or painless solutions- if solutions can in fact be found to He problems

530 GEORGE C. EADS facing some of our industries. The various studies describing the erosion of competitiveness in the U.S. steel industry show that it took our industry 20 years of hard work to turn an overwhelming competitive advantage one that allowed us to compete successfully in the face of a 10-to-1 wage dif- ferent~al favoring the Japanese" into massive uncompetitiveness uncom- petitiveness that prevents us from competing successfully against a 2-to-1 Japanese advantage in labor costs. Our competitive decline in automobiles may have taken even longer; it took the shift in demand caused by the second oil shock to bring it into sharp focus. IMPLICATIONS OF LIKELY U.S. RESPONSES What do the NAE studies tell us about this country's likely response to the realization that many of its industries have become uncompetitive? Brooks's vision is an optimistic one—a vision of renewed innovation and productivity. But as I have already indicated, my reading of these venous studies suggests a very different possible outcome. For the reaction I see in industry after industry most clearly in steel, machine tools, and textiles and apparel, but also in automobiles and, most regrettably, even in electronics- is for in- dustries to resort to political strategies both to deny Me need to change and to undercut the pressures stimulating it. Why this response? Here I must return again to Katz's discussion. If we were propelled into our shift in legal emphasis from promotion of grown and innovation to the promotion of equity and fairness by our perception of overwhelming strength and success in the immediate postwar penod, we seem to be propelled into our current reassessment of that position by a perception of overwhelming weakness, failure, and unfairness in having to make the sort of changes that we now face. Moreover, the legal environment Mat Katz describes, an environment that stresses equity and fairness, still predominates and, as I will argue below, Is likely to continue. Such a legal environment, coupled with our sense of weakness, failure, and unfairness, lays the groundwork not for the sort of quiet determination to bring about Me sort of industrial renewal that I hear Brooks describing, but a xenophobic response in which we focus our energies on halting what we perceive to be the source of the unfairness. Consider the seemingly reasonable claim that our antitrust laws should be modified to "recognize the realities of international competition." I am not certain of precisely what that means. But most businessmen I tank to translate the phrase as requiring that actual and potential foreign competitors be treated 2I recommend Donald F. Barnett and Louis Schorsch. Steel: Upheaval In a Basic Industry (Cam- bridge, Mass.: Ballinger, 1983), as the most complete and thorough.

DANGERS IN U.S. EFFORTS TO PROMOTE COMPETITIVENESS 531 as domestic competitors when determining the lawfulness of proposed do- mestic mergers. In a world in which U.S. firms increasingly compete on an international basis, the clearing away of an anachronism for that is what many consider our domestically oriented antitrust enforcement to represent would seem to be just the sort of shift in legal structures that one favoring an increased emphasis on innovation and competitiveness would advocate. Indeed, Katz refers approvingly to such a change. But it is not that simple, especially when one considers how such a change might interact with other of our laws in particular, with our statutes governing the regulation of trade. There was a time during America's Great Depression when the antitrust laws attempted to limit the ability of domestic firms to reduce prices. A f~n's cutting its prices to a level above its costs but below a competitor's costs was considered to constitute "pnce discrimination" and to represent "predatory pncing." The antitrust laws were also invoked to slow the spread of merchandising innovations, such as chain stores. Why was this? Because during that period, competition—competition from almost any source—was considered "unfair" and even dangerous to our weakened economic system. Fortunately, such concepts went out of favor in antitrust enforcement decades ago. Anyone seeking to bring such a case today would be laughed out of court. Why the change in antitrust doctrine? Better understanding of the under- lying economic concepts may have had something to do with it. But I believe that the greater cause was realization that competition even competition that eliminated some competitors was a vital, positive force in our econ- omy. We began to focus more on presenting the necessary conditions for We workings of competition than on preserving each and every individual competitor. But while these highly desirable developments in antitn~st were occurring, developments in trade law and its administration were moving in the opposite direction. Largely due to the growing perception of competitive weakness on the part of many U.S. industries and their determination to fight what they believe are its unjust causes, definitions of "dumping" and "predation" have been made stronger, so that the test for them resembles the tests applied by the domestic antitrust laws to "price discrimination" and "predation'' 30 yews ago. Indeed, it is no longer even necessary for a domestic industry to prove that a foreign industry is doing anything "unfair" lower than merely exporting goods to the United States) in order to obtain relief. Under various "escape clause" procedures, all that must be shown is that imports are entering the county in a volume sufficient to depress domestic profits and displace domestic workers. Were such a standard to be carried over to do- mestic antitrust policy, a firm like Hewlett-Packard could be successfully sued by Texas Instruments merely for cutting its price sufficiently to win

532 GEORGE C. ENDS sales away from the latter, even though Hewlett-Packard's prices remained at all times above its costs. Given the opposing trends in antitrust and trade law I have described, the following scenario is entirely plausible. Two or more domestic firms in an industry that is highly concentrated nationally but much less concentrated worldwide merge. (In the extreme case, all domestic firms in an industry might be pitted to combine.) Assume then that the resulting combination attempts to take advantage of any resulting increase in market power by raising its prices sharply. Given the worldwide nature of competition in this industry, one would expect imports to increase sharply, undercutting this price increase. So far so good. However, this domestic combination would have the option of invoking the trade laws to prevent the exercise of the very competitive influence that had been used to justify the merger in the first place. Indeed, under some proposals being discussed, the domestic industry's case against the foreign competition could even be filed preemptively. That is, the demonstration that foreign imports might enter in response to higher domestic prices would be sufficient to establish the case for erecting barners to those imports. This is hardly the way to encourage the renewal of domestic competitive- ness! However, those who advocate modifying the antitrust laws to "reflect the realities of international competition" seldom, if ever, also advocate harmonizing concepts of what is "fair competition" in a manner that would treat imports and domestic goods similarly. Yet we need to see that, just as our protectionist version of antitrust could be safely discarded indeed, it absolutely needed to be eliminated to enable the American economy to grow and prosper so our increasingly protectionist attitudes toward trade need to be discarded. But given our current perceptions about our industrial weak- ness and the sources of it perceptions that are as out of tune with reality as were our fears of "excessive competition" during the Depression I am afraid that this will not happen. Katz claims to be able to see a shift in our legal system away from an emphasis on equity and fairness and toward an emphasis on promoting growth and innovation. But he was careful to label that shift a relative one. He seemed to believe and I certainly believe that our political and legal system will always be slanted quite sharply in the direction of promoting equity and fairness. (And that can mean equity protection—for import- impacted industry and fairness—again, protection—for its workers.) Indeed, we need to understand that such a bias is deliberately built into our system of government. Katz refers to this fact when he observes Hat the flood of litigation we all bemoan is the price we pay for our unwillingness as a nation to turn the solution of complex issues of government over to a professional bureaucracy. In a recent book, Harvard Business School Pro- fessor Joseph Bower has reflected a similar sentiment in a chapter titled

DANGERS IN U.S. EFFORTS TO PROMOTE COMPETITIVENESS 533 provocatively "The United States Isn't a Company, It's Not Even Japan."3 Bower usefully reminds us of the deep historic roots of our "amateur gov- ernment," which is staffed primarily by lawyers. In breaking free from England, we were in large part breaking free from a highly professional government bureaucracy whose task was seen to be promoting industrial competitiveness the competitiveness of British industry at the colonies' expense. We set up a government specifically designed not to promote ef- ficiency but to prevent the arbitrary exercise of power by ~ovemment off~- cials, elected and unelected. Our primary mechanism for doing this was to erect a system of checks and balances, based largely on a powerful system of courts. Thus, even if Me relative emphasis of our legal system shifts, we need to keep in mind that our political process has embedded in it a strong bias against the encouragement of economic growth and in favor of Me promotion of equity and fairness. Business may complain about this bias when it favors environmentalists and those who fight technological progress, but business is quick to take advantage of it when it can be used to protect them against foreign competition. Indeed, the most difficult dilemma posed by our growing realization of Me consequences of our loss of international competitiveness is how we forge a set of policies to make the situation better without running grave risks of actually making it worse. Those like Paul David or John Young (in this volume) who call for a rationalization of our current patchwork of policies affecting industry through governmental reorganization and the creation of some sort of industrial oversight function fail to understand Me likely con- sequences of Weir proposals. In my view, they are either calling for a greater emphasis on fairness and equity at the expense of competitiveness—for that is what our current system of government is almost certain to deliver or they are calling, for ~ fundamental overhaul of this system, one that would go well beyond the sort of minor organizational tinkering they appear to be advocating. Our realization that we have lost competitiveness in a number of important industries provides an opportunity to rethink our policies toward innovation. For we will not reverse this trend if we do not find ways of promoting innovation and technical progress. But in carrying out this reassessment, we must undersold that what we are really questioning is the ability of the system of government that has served us well for 200 years to deal with a totally different set of issues—issues that it may not be well equipped to handle. Joseph L. Bower, The Two Faces of Management (Boston: Houghton Mifflin, 1983).