Executive Summary

OVERVIEW

For many years, the U.S.-Japan security alliance has advanced the fundamental interests of both partners and contributed to ensuring peace and stability in the Asia-Pacific region and the world. The alliance played a key role in containing the Soviet Union during the Cold War, and continues to serve the interests of the United States and Japan as we approach the twenty-first century. For the United States, the alliance with Japan helps to prevent the rise of a hegemonic power in Asia, allows for forward deployment in the Pacific, and serves other geostrategic interests. For Japan, the alliance provides a basic security guarantee, substitutes for a more extensive and costly military capability, and facilitates friendly economic and political relations with Asian neighbors.

During the Cold War, technology cooperation played a significant role in the U.S.-Japan alliance. The United States maintained a policy of transferring important military technologies, mainly through licensed production programs, to encourage Japan to increase its own defense capabilities within the framework of the alliance. This arrangement was appropriate for the time and advantageous to both countries. Building on the technological and manufacturing base created through licensed production, Japanese industry is now able to produce the most advanced weapons, and can independently develop less sophisticated systems. Japanese industry has diffused know-how acquired through military programs to gain important footholds in certain high-technology commercial sectors such as aircraft and space, and has developed considerable strengths in a variety of commercial technologies with significant and growing defense applications.

The environment surrounding the U.S.-Japan alliance and defense technology cooperation has changed considerably. Most American and Japanese experts recognize the value of maintaining a strong bilateral alliance, but are unsure about how it will evolve in the future. The fall of the Soviet Union, questions about how China will exercise its growing influence, and security challenges left over from the Cold War, such as the continuing division of the Korean peninsula, combine to form an uncertain security environment in the Asia-Pacific region. Continuing large imbalances in the U.S.-Japan economic relationship and growing industrial rivalry have had a corrosive effect on goodwill between the two countries. The traditional pattern of defense technology cooperation involving a one-way flow of technology from the United States to Japan has been subjected to increasing scrutiny and criticism, but efforts to achieve greater reciprocity have had little impact to date, and at times appear to have resulted in greater stresses in the relationship.

The question of how the United States should manage scientific and technological relations with Japan so that U.S. security interests are protected and advanced in the future is more timely and important than ever. The Committee on Japan of the National Research Council organized the Defense Task Force to examine this question as part of a larger evaluation of U.S.-Japan scientific and technological interaction. In this assessment, the Defense Task Force has



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Maximizing U.S. Interests in Science and Technology Relations with Japan: Report of the Defense Task Force Executive Summary OVERVIEW For many years, the U.S.-Japan security alliance has advanced the fundamental interests of both partners and contributed to ensuring peace and stability in the Asia-Pacific region and the world. The alliance played a key role in containing the Soviet Union during the Cold War, and continues to serve the interests of the United States and Japan as we approach the twenty-first century. For the United States, the alliance with Japan helps to prevent the rise of a hegemonic power in Asia, allows for forward deployment in the Pacific, and serves other geostrategic interests. For Japan, the alliance provides a basic security guarantee, substitutes for a more extensive and costly military capability, and facilitates friendly economic and political relations with Asian neighbors. During the Cold War, technology cooperation played a significant role in the U.S.-Japan alliance. The United States maintained a policy of transferring important military technologies, mainly through licensed production programs, to encourage Japan to increase its own defense capabilities within the framework of the alliance. This arrangement was appropriate for the time and advantageous to both countries. Building on the technological and manufacturing base created through licensed production, Japanese industry is now able to produce the most advanced weapons, and can independently develop less sophisticated systems. Japanese industry has diffused know-how acquired through military programs to gain important footholds in certain high-technology commercial sectors such as aircraft and space, and has developed considerable strengths in a variety of commercial technologies with significant and growing defense applications. The environment surrounding the U.S.-Japan alliance and defense technology cooperation has changed considerably. Most American and Japanese experts recognize the value of maintaining a strong bilateral alliance, but are unsure about how it will evolve in the future. The fall of the Soviet Union, questions about how China will exercise its growing influence, and security challenges left over from the Cold War, such as the continuing division of the Korean peninsula, combine to form an uncertain security environment in the Asia-Pacific region. Continuing large imbalances in the U.S.-Japan economic relationship and growing industrial rivalry have had a corrosive effect on goodwill between the two countries. The traditional pattern of defense technology cooperation involving a one-way flow of technology from the United States to Japan has been subjected to increasing scrutiny and criticism, but efforts to achieve greater reciprocity have had little impact to date, and at times appear to have resulted in greater stresses in the relationship. The question of how the United States should manage scientific and technological relations with Japan so that U.S. security interests are protected and advanced in the future is more timely and important than ever. The Committee on Japan of the National Research Council organized the Defense Task Force to examine this question as part of a larger evaluation of U.S.-Japan scientific and technological interaction. In this assessment, the Defense Task Force has

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Maximizing U.S. Interests in Science and Technology Relations with Japan: Report of the Defense Task Force considered several key issues, such as the outlook for the U.S.-Japan security alliance, including defense postures and capabilities, the technological needs and trajectories of the two countries, the historical experience with various forms of collaboration, and the policy context in the United States and Japan. Through this assessment, the Defense Task Force has developed several broad conclusions and specific policy recommendations that it believes will, if followed, help the two countries build the foundation for a new scientific and technological partnership that delivers clear mutual benefits and strengthens the security alliance, thereby advancing U.S. and Japanese interests in the years to come. MAJOR FINDINGS The central finding of the Defense Task Force is that future U.S.-Japan cooperation in defense and dual-use technology must involve greater reciprocity in technology flows than has been the case in the past. Enhanced reciprocal cooperation will require greatly expanded Japanese technological contributions to meeting U.S. and common security needs. Although the capabilities and fundamental interests of the United States and Japan make such a partnership feasible, significant obstacles remain. Overcoming these obstacles will require redoubled efforts and goodwill on the part of both countries. Why Work Toward Technology Reciprocity? The rationale that justified asymmetrical defense technology relationships no longer applies. During the Cold War, the United States treated defense technology as a commodity in relations with Japan—one-way technology transfers encouraged Japan to increase its defense capabilities and helped achieve other U.S. foreign policy objectives. The Defense Task Force concludes that the international security and economic environment that exists today and is likely to prevail in the foreseeable future no longer justifies this traditional trade off with Japan. The United States has a continuing interest in enhanced Japanese contributions to the security alliance through expanded participation in peacekeeping activities, pursuit of foreign policy initiatives that serve common interests, the acquisition of improved defense capabilities within the framework of the alliance, and increased host-nation support. The United States also continues to have an interest in allowing Japan to purchase major U.S. systems off-the-shelf. However, the time has passed when defense cooperation featuring primarily one-way transfers of technology from the United States to Japan could be justified by U.S. security interests. In order for U.S.-Japan cooperation to advance U.S. interests in the future, it must feature greatly expanded Japanese technological contributions to U.S. and common defense needs. In order for the U.S.-Japan alliance to continue to mature and develop, it must increasingly be characterized by cooperation that involves comparable contributions and mutual opportunities for benefit. Even if U.S. military security interests alone no longer provide a rationale for collaboration involving one-way transfers of technology to Japan, some might argue that such collaboration is worthwhile for other reasons. For example, Japanese licensed production of U.S. systems provides income to U.S. companies and helps amortize U.S. government research and development (R&D) costs, contributing resources that can be reinvested

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Maximizing U.S. Interests in Science and Technology Relations with Japan: Report of the Defense Task Force in next generation technologies. Others would assert that one-way licensing deals are necessary in order to compete with European weapons contractors and indigenous Japanese development programs. Although these considerations have some validity and a defense technology relationship characterized by “technology-for-money” might be favored by some interests in both countries, the Defense Task Force believes that pursuing such an approach could undermine good relations and would not serve the long-term interests of either country. In the long run, the U.S.-Japan alliance will be best served by defense technology collaboration that can stand close scrutiny and attract sustained support from the political leadership and broader publics of both countries. This implies a partnership in which contributions, risks, and opportunities to benefit from cooperation are comparable. For example, Japan has utilized the manufacturing and technology base benefits of licensed production to make important inroads in commercial industries such as aircraft, and has gained opportunities to refine technological capabilities originally developed to serve civilian markets. To build continued support for collaboration involving transfer of U.S. technologies to Japan—which inevitably also involves potential commercial risks for U.S. companies and opportunities for Japanese industry—it will be necessary to show that the United States is gaining similar opportunities to benefit from cooperation. Japan’s technological capabilities can increasingly contribute to U.S. security in the emerging environment. In addition to the above reasons for not maintaining the Cold War status quo in U.S.-Japan defense technology relationships, there is a strong positive case for the United States to pursue collaboration with Japan that features enhanced application of Japanese technologies to U.S. and mutual defense needs. To begin with, even though the United States spends much more than Japan on developing defense-related technologies and systems, and Japanese capabilities in purely defense technology are limited, Japan has developed areas of significant expertise and strength, particularly in subsystems and components. Through a variety of mechanisms such as joint development of new subsystems, the incorporation of Japanese subsystems into U.S. systems procured by Japan (as in Japan’s Aegis program), and joint upgrades of systems deployed by both countries (as is currently under discussion for the F-15), these Japanese strengths can be combined with U.S. technological contributions to deliver better performance and resource savings for both countries. More importantly, Japanese industry is strong in a wide variety of technologies, such as advanced materials and optoelectronics, in which commercial product advances increasingly set the pace and are modified for use in defense systems. Several promising examples of U.S.-Japan cooperation in dual-use technologies and industries have been supported by the U.S. Department of Defense (DoD) and are discussed in this report. New mechanisms for encouraging industry-to-industry collaboration between the two countries could facilitate expanded application of Japanese commercial technologies to U.S. defense needs. Although a perfectly balanced flow of technology in the defense relationship is not a realistic expectation for the foreseeable future, the Defense Task Force believes that more rapid progress toward greater reciprocity is necessary and achievable. Previous Efforts and Initiatives Have Made Little Progress To Date During the past 15 years, a number of efforts and initiatives have been launched to encourage a more balanced flow of technologies through U.S.-Japan defense cooperation, including the

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Maximizing U.S. Interests in Science and Technology Relations with Japan: Report of the Defense Task Force establishment of the U.S.-Japan Systems and Technology Forum, the 1983 Memorandum of Understanding on Japanese defense technology transfers, U.S.-Japan codevelopment of the FS-X fighter, and the Technology-for-Technology (TFT) initiative recently pursued by DoD. The value of greater reciprocity in the defense technology relationship with Japan has been recognized in a variety of official statements and private sector reports. However, the Defense Task Force concludes that efforts to date have not resulted in significant Japanese technological contributions to U.S. national security. Many, if not all, of the obstacles to enhanced reciprocal cooperation outlined in this report have been discussed and documented in previous studies. If past efforts have not resulted in significant progress, why might renewed efforts lead to more favorable results? The Defense Task Force believes that ongoing changes in the environment—such as downward pressure on U.S. and Japanese defense budgets, changing attitudes in Japan toward defense issues, and shifts in U.S. defense planning toward greater utilization of commercial technologies—could lead to greater incentives for cooperation on both sides. Additional efforts by both governments to improve the environment for cooperation can leverage these potentially favorable trends. Overcoming Obstacles Will Require Focused Persistent Efforts The major obstacles analyzed in the report include: Asymmetries in capabilities and institutions for technology and industrial development that lead to U.S.-Japan differences in preferences regarding cooperative mechanisms. These asymmetries include U.S.-Japan disparities in the levels of defense R&D spending and in government-industry relationships and overall approaches toward technology and systems development. These disparities have led to different preferences regarding cooperative mechanisms, with the United States in most cases preferring off-the-shelf sales of U.S. weapons to Japan, and Japan mostly preferring indigenous development. Licensed production has often served as a compromise between these two preferences. Changes in the budget and security environment hold the potential for reducing the impact of these barriers, particularly if new approaches toward applying Japanese commercial technologies to U.S. and mutual defense needs are pursued. However, the current interpretation and implementation of Japanese export control policies have been implicated in cases where Japanese companies have refused to license commercial technologies to U.S. industry, such as the refusal of Mitsubishi Heavy Industries to license technology related to its LE-5 rocket engine to McDonnell Douglas. More recently, the apparent unwillingness of Japanese manufacturers of flat panel displays to work with DoD on its special requirements also raises concerns. Clear Japanese government support for transfers of commercial technology from Japan to the United States could help to facilitate greater industry-to-industry cooperation. Unwillingness of Japanese industry and government to cooperate technologically on reciprocal terms. The Defense Task Force believes that this is a real barrier, but is not intractable, given the proper incentives. Even in some cases where Japanese companies have cited Japan’s arms export control policies as the reason for their unwillingness to cooperate with U.S. industry, it appears that these policies may have been raised only as an excuse, and the fundamental cause of this unwillingness has been a reluctance to license technology at arms length. In some areas of commercial technology, it appears that Japanese companies are becoming more open to reciprocal relationships, an encouraging trend. Consistent determination

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Maximizing U.S. Interests in Science and Technology Relations with Japan: Report of the Defense Task Force on the part of the U.S. government to seek technology reciprocity in the defense relationship will be necessary to overcome this barrier. Positive incentives to encourage U.S.-Japan industry-to-industry cooperation can also contribute. Lack of consistency and coordination in U.S. government approaches. Although the U.S. government has pursued more balanced technology flows in defense technology collaboration with Japan for roughly 15 years, these efforts have often been undermined by a lack of consistency and coordination. In light of the complexity and importance of the security relationship with Japan, the existence of disagreements between various players and a certain amount of infighting is understandable. However, the difficulties experienced in negotiating the codevelopment of the FS-X illustrate that U.S. approaches lacking consistency will increase the potential for putting stress on the overall alliance in the future. If technology reciprocity is not treated as a major focus at the outset of U.S. strategy-building toward specific programs, there is a danger that bilateral negotiations will preserve smooth working relationships but lead to agreements that perpetuate traditional asymmetries and fail the test of public scrutiny, ultimately resulting in increased strains on the relationship. Some have pointed to a lack of interest on the part of U.S. companies in Japanese technologies as a major barrier to cooperation. Although increased sales, rather than technology acquisition, have been the main goal of U.S. defense companies collaborating with Japanese industry, this report documents a number of specific Japanese technologies and broad areas of technical achievement of interest to U.S. industry. The Defense Task Force believes that if barriers to reciprocal cooperation are lowered, this interest will be further activated, resulting in expanded cooperation. Engaging U.S. and Japanese industry in the ongoing effort to build enhanced reciprocal technology cooperation to meet mutual security needs is critically important. In the long term, cooperation must be industry-implemented to a large extent, with effective U.S.-Japan industrial relationships as a prerequisite. However, the effort to lower barriers to cooperation cannot be “industry-led” because of the significant role of both governments as customers for defense technology and overseers of cooperative programs. Effective programs cannot be developed solely on the basis of pursuing the specific technological interests of U.S. companies. Individual companies are able to make their own trade-offs in pursuit of corporate interests. But reciprocity in defense technology cooperation with Japan is in the broader national interest, as outlined above. The keys to achieving it will be consistent U.S. government approaches formulated with the active participation of U.S. industry, and Japanese government and industry willingness to pursue a new structure for partnership and cooperation. DEVELOPING A NEW APPROACH Reducing and Eliminating Barriers to Cooperation DoD should pursue technology reciprocity in the defense relationship with Japan as a major goal. Efforts to increase Japanese technological contributions to U.S. national security should focus on reducing and eliminating the barriers to enhanced reciprocal cooperation discussed in the report.

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Maximizing U.S. Interests in Science and Technology Relations with Japan: Report of the Defense Task Force The U.S. government should seek to reduce or eliminate barriers to technology flow that result from Japanese policies. Japan’s continued adherence to its arms export principles is consistent with U.S. interests. However, specific factors in interpretation and implementation have constituted barriers to greater Japanese technological contributions to U.S. and mutual security needs. The United States should seek from the Japanese government (1) a clarification of the arms export principles and a public statement that export of items embodying substantially commercial technology that undergo minor modifications for defense applications are not restricted and (2) a change to the 1983 exchange of notes stating that Japanese military technologies transferred to the United States are exempt from retransfer restrictions, with changes addressing legitimate Japanese concerns and including provisions for the payment of royalties. DoD should work with the Japanese government and the private sectors of both countries to develop new mechanisms that facilitate technological collaboration between U.S. and Japanese companies to address common defense needs. One promising approach would be a program to fund U.S.-Japan industry R&D on specific enabling technologies—including the adaptation of commercial technologies—targeted at applications in future weapons systems. This jointly funded and managed program could be undertaken as an extension of the Systems and Technology Forum. Integrating Enhanced Technology Cooperation and Alliance Management During the current administration, the U.S. government has pursued several security-related initiatives with Japan, including TFT focused on technology relations, and recent discussions on the working management of security and defense cooperation (known as the Nye or Lord-Nye initiative). The failure of past efforts to achieve greater technology reciprocity highlights the need for persistent, integrated efforts now and in the future. In light of the ongoing uncertainties in the Asia-Pacific security environment and reevaluations of various aspects of security policy in both countries, it is important that the leadership of both countries focus on the long-term effectiveness of the alliance. The Defense Task Force believes that technology cooperation and related considerations need to be integrated into bilateral exchanges that set the overall tone and pattern for the future management and evolution of the alliance. Therefore, the United States and Japan should institutionalize an enhanced comprehensive security dialogue featuring an integrated discussion of the political-military, economic, technological, and other aspects of the relationship. Organizing to Maximize U.S. Interests DoD should ensure a coordinated approach in future collaborative defense programs with Japan. One approach that might be adopted as a minimum is designating a single authority with the responsibility for coordinating strategies toward major systems in which collaboration with Japan is under discussion. In the future, if conditions warrant it, DoD might consider adopting a more formal mechanism such as an International Programs Coordinating Council analogous to the Joint Requirements Oversight Council. In cooperation with the U.S. Department of Commerce and other appropriate agencies, DoD should continue to build capabilities to monitor and manage dependence on foreign sources of

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Maximizing U.S. Interests in Science and Technology Relations with Japan: Report of the Defense Task Force critical technologies, with the goal of ensuring U.S. access. Since dependence on foreign sources of products and technologies for U.S. weapons systems will be a continuing fact of life, ensuring access will remain a challenge, requiring a long-term focus. The correct approach to managing dependence on Japan will depend on the specific case and could involve pursuing understandings with Japanese government and industry, encouraging Japanese companies to build U.S. production facilities, or building a competitive U.S.-owned capability.