Appendix C

U.S. National Security and the Risks of Dependence on Foreign Technologies and High-echnology Products

BACKGROUND

There have been numerous incidents in recent decades that illustrate the potential dangers of foreign technology and component dependence. Governments of technologically advanced nations, including the United States, frequently use technology as a lever with which to influence the policies and actions of other nations. The issue of dependence should be examined in the context of limiting American vulnerability to such manipulation.

Theodore Moran cites several pertinent examples.1 In the 1960s the United States ordered IBM to withhold computer technology from France in order to inhibit that nation from developing an independent nuclear deterrent. Although the United States was ultimately unsuccessful in preventing France from acquiring nuclear weapons, the fundamental implications for French national security of such actions are clear. Twenty years later the Reagan administration ordered U.S. firms to cancel contracts to supply technology for the Soviet natural gas pipeline in Europe. The U.S. action became an extremely contentious issue and was denounced by NATO allies taking part in the project.

For national security purposes, “(1) a foreign source is a source of supply, manufacture or technology outside the United States and Canada; (2) a foreign dependency refers to source of supply for which there is no immediate available alternative in the United States or Canada; and (3) foreign vulnerability, related to foreign dependency, refers to a source of supply whose lack of availability jeopardizes national security by precluding the production, or significantly reducing the capability, of a critical weapons system. ”2

Reliance on foreign suppliers for critical military components and technologies and the related risks have attracted attention and concern in the United States over the past decade.3 As a result of the erosion of indigenous production capability in some key areas and growing technological-industrial capabilities in other countries, U.S. defense industries now utilize

1  

Theodore H. Moran, American Economic Policy and National Security (New York: Council on Foreign Relations, 1993), pp. 44-45.

2  

Martin Libicki, Jack Nunn, and Bill Taylor, U.S. Industrial Base Dependence/Vulnerability: Phase II— Analysis (Washington, D.C.: National Defense University, 1987), as summarized in U.S. Congress, General Accounting Office, Risks of Foreign Dependencies for Military Unique Critical Technologies (Washington, D.C.: U.S. Government Printing Office, 1992), p. 1.

3  

A number of studies and articles on this issue have been conducted in recent years, such as Institute for Defense Analysis, Dependence of U.S. Systems on Foreign Technologies, 1990; The Analytical Science Corporation (TASC), Foreign Vulnerability of Critical Industries, 1990; National Defense University, U.S. Industrial Base Dependence/Vulnerability, 1987; and Theodore Moran, “The Globalization of America’s Defense Industries: Managing the Threat of Foreign Dependence,” International Security, Summer 1990. These reports are summarized in U.S. Congress, General Accounting Office, Assessing the Risk of DOD’s Foreign Dependence (Washington, D.C.: U.S. Government Printing Office, 1994).



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Maximizing U.S. Interests in Science and Technology Relations with Japan: Report of the Defense Task Force Appendix C U.S. National Security and the Risks of Dependence on Foreign Technologies and High-echnology Products BACKGROUND There have been numerous incidents in recent decades that illustrate the potential dangers of foreign technology and component dependence. Governments of technologically advanced nations, including the United States, frequently use technology as a lever with which to influence the policies and actions of other nations. The issue of dependence should be examined in the context of limiting American vulnerability to such manipulation. Theodore Moran cites several pertinent examples.1 In the 1960s the United States ordered IBM to withhold computer technology from France in order to inhibit that nation from developing an independent nuclear deterrent. Although the United States was ultimately unsuccessful in preventing France from acquiring nuclear weapons, the fundamental implications for French national security of such actions are clear. Twenty years later the Reagan administration ordered U.S. firms to cancel contracts to supply technology for the Soviet natural gas pipeline in Europe. The U.S. action became an extremely contentious issue and was denounced by NATO allies taking part in the project. For national security purposes, “(1) a foreign source is a source of supply, manufacture or technology outside the United States and Canada; (2) a foreign dependency refers to source of supply for which there is no immediate available alternative in the United States or Canada; and (3) foreign vulnerability, related to foreign dependency, refers to a source of supply whose lack of availability jeopardizes national security by precluding the production, or significantly reducing the capability, of a critical weapons system. ”2 Reliance on foreign suppliers for critical military components and technologies and the related risks have attracted attention and concern in the United States over the past decade.3 As a result of the erosion of indigenous production capability in some key areas and growing technological-industrial capabilities in other countries, U.S. defense industries now utilize 1   Theodore H. Moran, American Economic Policy and National Security (New York: Council on Foreign Relations, 1993), pp. 44-45. 2   Martin Libicki, Jack Nunn, and Bill Taylor, U.S. Industrial Base Dependence/Vulnerability: Phase II— Analysis (Washington, D.C.: National Defense University, 1987), as summarized in U.S. Congress, General Accounting Office, Risks of Foreign Dependencies for Military Unique Critical Technologies (Washington, D.C.: U.S. Government Printing Office, 1992), p. 1. 3   A number of studies and articles on this issue have been conducted in recent years, such as Institute for Defense Analysis, Dependence of U.S. Systems on Foreign Technologies, 1990; The Analytical Science Corporation (TASC), Foreign Vulnerability of Critical Industries, 1990; National Defense University, U.S. Industrial Base Dependence/Vulnerability, 1987; and Theodore Moran, “The Globalization of America’s Defense Industries: Managing the Threat of Foreign Dependence,” International Security, Summer 1990. These reports are summarized in U.S. Congress, General Accounting Office, Assessing the Risk of DOD’s Foreign Dependence (Washington, D.C.: U.S. Government Printing Office, 1994).

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Maximizing U.S. Interests in Science and Technology Relations with Japan: Report of the Defense Task Force foreign sources for a wide variety of components and production equipment. Japan has been a focus for rising concerns in this area because of its strong technological-industrial capabilities. In particular, Japanese companies dominate several of the most well-known areas of U.S. dependence in dual-use components and equipment. The two most significant U.S. policy initiatives relevant to this discussion have addressed areas of U.S. weakness vis-à-vis Japan, with implications for dependence on Japan or Japanese denial of critical technologies —significant Department of Defense (DoD) financial support for the SEMATECH research and development (RżD) consortium and the National Flat Panel Display Initiative announced in 1994. Japanese and other foreign producers may be able to supply components of better quality or lower cost or may be the only available source of a specific technology. However, foreign sourcing and dependence carry potential national security liabilities. For the purpose of conceptualizing the issues, it is useful to distinguish between the short-run, acute risks of inadequate supplies of components or equipment for surge or mobilization contingencies, as well as the longer-term risks of inadequate access to foreign technologies during the development phase for new systems, and spillover effects that the absence of domestic capabilities might have on upstream and downstream industries. As explained below, dependence in some component and equipment areas carries both short- and long-term risks. SHORT-TERM RISKS In short-term contingencies the key national security imperative for any critical component or piece of equipment is to obtain adequate supplies for peacetime surges in production or general mobilization. The criteria used to evaluate the risk of foreign dependence in manufactured products are similar to those that would apply to strategic commodities or materials. Concretely, concerns about foreign sources revolve around several possible scenarios that would block adequate supply. For example, foreign production sites or transportation channels might be destroyed or disabled by military action, natural disasters, or accidents. Foreign sources might also withhold supply from the United States for political reasons; the government of a foreign production site might be allied with countries hostile to the United States, be threatened by such countries, or may be under the pressure of public opinion to withhold the component or piece of equipment in question. Even if supplies are not withheld, foreign sources could not be compelled and might be reluctant to divert production from other customers to meet increased U.S. military demand during a crisis. Table C-1 shows the most important criteria for evaluating these short-term risks. As is apparent, the risks of dependence increase with the criticality of the component, surge and mobilization production requirements, the concentration of suppliers, and the political relationship of supplier governments with the United States. The overall extent of foreign dependence and foreign sourcing is generally unknown, particularly at the lower tiers of the supplier base.4 The preponderance of publicly available information indicates that foreign dependence, particularly dependence on Japanese sources at the 4   U.S. Congress, General Accounting Office, Significance of DOD’s Foreign Dependence (Washington, D.C.: U.S. Government Printing Office, 1991), p. 1.

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Maximizing U.S. Interests in Science and Technology Relations with Japan: Report of the Defense Task Force TABLE C-1 Factors in Evaluating Short-Term, Production-Related Component/Equipment Dependence Risks   Low Risk High Risk Criticality of system mission Noncritical Critical Mobilization/surge production requirement Low High Number of suppliers Numerous Few/one Proximity of suppliers to each other Dispersed Few/single country Proximity of suppliers to the United States Nearby Distant U.S. political relationship with supplier government Stable ally Unstable SOURCE: Office of Japan Affairs staff. lower tiers, is extensive.5 Manufacture of a number of critical electronics materials, components, and equipment became concentrated in Japan during the 1980s as Japanese industry’s competitiveness in the semiconductor and related industries rapidly advanced. Therefore, it is safe to assume that dependence on Japanese sources in U.S. military production increased as well over that period.6 A good example for evaluating these concerns in the context of Japan is ceramic semiconductor packages.7 Ceramic packages are key components for microelectronics installed in virtually every military system. Not only are they critical, but because they are used in the guidance systems of missiles and other “consumable” systems, increased production for surge or mobilization might represent a significant increment. Although there are several domestic suppliers, imports account for about 90 percent of identifiable defense shipments. 8 A single Japanese company, Kyocera, holds over half the world market, and most other significant players are Japanese, so foreign sources are few and concentrated. Kyocera is the largest domestic merchant supplier but imports critical materials to its U.S. facility.9 Japan is distant, so transporting larger shipments during a crisis might be difficult. Although the U.S.-Japan security 5   For example, U.S. Department of Commerce, Office of Industrial Resource Administration, National Security Assessment of the Domestic and Foreign Subcontractor Base: A Study of Three U.S. Navy Weapon Systems (Washington, D.C.: U.S. Department of Commerce, 1992). 6   In several cases, such as high-quality polysilicon, remaining U.S. manufacturers were acquired by Japanese competitors. See Thomas R. Howell, Brent L. Bartlett, and Warren Davis, Creating Advantage: Semiconductors and Government Industrial Policy in the 1990s, Semiconductor Industry Association and Dewey Ballantine, 1992. 7   U.S. Department of Commerce, Office of Industrial Resource Administration, The Effect of Imports of Ceramic Semiconductor Packages on the National Security: An Investigation Conducted Under Section 232 of the Trade Expansion Act of 1962 (Springfield, Va.: National Technical Information Service, 1993). 8   Ibid., p. ES-5. 9   Ibid., p. VII-2.

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Maximizing U.S. Interests in Science and Technology Relations with Japan: Report of the Defense Task Force alliance might indicate that politics would not be a factor, “Kyocera has at times been reluctant to acknowledge the extent to which its packages are exported for military applications,” owing to the unfavorable image of defense suppliers among many Japanese. 10 The factors listed in Table C-1 are predominantly in the high-risk category in the ceramic package case. DoD has stated “that it is important to maintain a national security capability to produce semiconductor packaging, particularly custom packages and those used in space applications and heavily corrosive environments.”11 U.S. merchant production of ceramic packages has declined in recent years, as several domestic producers have scaled back production or exited the business, and remaining producers have cut back investment and RżD. In early 1993 two of the remaining domestic producers petitioned the Department of Commerce to conduct an investigation under Section 232 of the Trade Expansion Act of 1962, which allows for trade relief to domestic companies if imports are found to threaten national security. Although the U.S. government ruled following the investigation that imported ceramic packages do not represent a threat to national security, the weakness of the domestic production base was recognized, and an action program focusing on technology development and manufacturing was instituted in 1993. The Department of Commerce has committed to monitoring the situation in the event that further actions are needed to maintain domestic production. Even in the ceramic package case, where there is a clear national security imperative to maintain a domestic production and technology base, policy alternatives for managing or reducing this dependence involve difficult trade-offs. Some form of trade relief—such as tariffs on imported packages—would have been the most direct solution. This would encourage investment in production capability and RżD by both U.S. and foreign-controlled producers. But tariffs would raise costs for DoD contractors, and ultimately DoD itself, as well as for U.S. commercial users.12 The imposition of tariffs would therefore be politically difficult, especially in the current context in which the risk of attack and supply disruption has declined in the aftermath of the Cold War. Stockpiling, an alternative used in some cases to manage dependence on critical minerals or other materials, would also be expensive and more complex to administer than tariffs.13 The U.S. action plan represents a reasonable interim course, providing assistance while monitoring the status of the domestic industry. However, even if the domestic industry can achieve a significant and stable market presence, remaining uncertainties make dependence on Japan in this and other areas problematic. First, DoD’s knowledge of dependencies, particularly at lower supplier tiers, does not appear to be adequate for an environment in which the reliance of military systems on commercial technologies will rise. In many of these areas, Japan and perhaps other foreign countries are increasingly strong. During the Section 232 investigation, DoD was not able to identify exact quantitative requirements for ceramic packages during a national security emergency, owing to the rapidly changing security environment. 14 While tracking down, evaluating, and managing every foreign dependency would be cumbersome and expensive, it is 10   Ibid., p. VI-26. 11   Ibid., p. VII-2. 12   Semiconductor makers increasingly use ceramic rather than plastic packaging for the highest-value-added commercial chips. 13   Although, on the assumption that a foreign policy crisis significantly impacting U.S. military demand would take some time to develop, emergency stockpiles could presumably be built up at that time. 14   Ibid., p. ES-7.

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Maximizing U.S. Interests in Science and Technology Relations with Japan: Report of the Defense Task Force important that an ongoing effort be made to keep track of at least the most obvious and important cases, such as ceramic packages, even before domestic producers petition for import protection.15 A second problem revolves around the ambiguous attitude of Japanese companies and the Japanese government toward this issue. Although DoD reportedly has received assurances from Japan that the supply of ceramic packages would not be cut off and that the product is not subject to the three export control principles, one can certainly conceive of circumstances under which increased Japanese supply of packages for U.S. military demand would become politically difficult for Japanese companies. Regardless of whether it is made clear to the Japanese public, it is likely that reluctance on the part of Japanese companies to supply commercial technologies for U.S. military use will affect U.S. perceptions of Japan’s reliability as an ally and U.S. willingness to transfer military technology to Japan. Some might argue that DoD and other government officials should take Japanese and other foreign supplier attitudes into account in determining the appropriate scale of domestic production, the acceptable level of dependence by foreign-controlled domestic producers on critical inputs from abroad (such as “green tape” or the unfired ceramic material that is the basic input in the case of ceramic packages), and the trade policy and other instruments necessary to ensure adequate supply. LONG-TERM RISKS Dependence carries two types of long-term risks. The first is that lack of U.S. capabilities in a given critical technology might delay or inhibit incorporation of that technology into new systems. For a number of reasons, foreign sources may be unwilling or unable to supply the United States with the technologies needed for modernization. Failure to maintain U.S. leadership in key areas therefore threatens to erode the technological superiority that is the basis of U.S. military planning. As the timeframe expands, the difficulty in predicting the risk of dependence increases as certain factors, such as the evolving nature of warfare and the important technologies of the future, become clouded. A second type of long-term risk of dependence involves spillover effects for a broad industry or a key input. Dependence in one area could have impacts in related areas, leading to a more general downgrading of U.S. technical and manufacturing capabilities. These “industrial food chain” effects can work in both directions. Moving down the food chain, for example, when Japanese companies gained leadership in most areas of consumer electronics in the 1970s, it enhanced the ability of these companies to increase their international competitiveness in semiconductors and microelectronics. Moving back up the food chain, Japanese strength in advanced microelectronics contributed to competitive inroads in segments of the computer industry during the 1980s, particularly IBM-compatible mainframes and supercomputers. Table C-2 lists the risk factors for both inhibited or denied technology incorporation, as well as industrial erosion risks. Although technology access relates to specific military needs and industrial erosion is a more diffuse problem, the two risks are interrelated. To return to the above example of the consequences of eroding U.S. capabilities in consumer electronics, Japanese companies such as Sharp nurtured and developed their capabilities in liquid crystal display technologies in the consumer electronics market during the 1970s and early 1980s. DoD’s Flat 15   Much of the analysis in the literature on this subject focuses on frameworks for determining which dependencies represent potential vulnerabilities because of foreign supplier concentration.

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Maximizing U.S. Interests in Science and Technology Relations with Japan: Report of the Defense Task Force Panel Display Initiative has been deemed necessary partly because of concerns about adequate access to this technology for future military systems. Technology Access Indeed, the situation with flat panel displays is a good example of the former, military-system-specific, risk. DoD has stated that reliance on commercial technologies must increase in order to lower acquisition costs and because in such areas as electronics commercial technology is outstripping advances on the military side. Today, several small specialized U.S. vendors supply DoD’s requirements. Although these domestic suppliers are technologically sophisticated, U.S. flat panel display producers are not present in the high-volume markets, such as laptop computers, that are driving manufacturing technology and costs.16 These markets are dominated by Japanese companies. Even in a technology that is driven by commercial developments, at least some military applications are likely to require enhancements or modifications. In the area TABLE C-2 Factors in Evaluating Long-Term Technology and Manufacturing Base Component/Equipment Dependence Risks   Low Risk High Risk Criticality of technology Low High Motivation of suppliers Competes with U.S. user Does not compete Entry barriers Low High Acceptable substitutes Yes No Reliable legal sanctions for anticompetitive behavior Yes No Number of suppliers Numerous Few/one Proximity of suppliers to each other Dispersed Few/single country Supplier dependence on U.S. customers Meaningful interdependence Supplier not dependent Market Commodity Growing rapidly Technological/business spillovers Significant Not significant SOURCE: Office of Japan Affairs staff. 16   Display Technologies Inc. (DTI), a joint venture between IBM and Toshiba, manufactures displays for commercial markets in Japan.

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Maximizing U.S. Interests in Science and Technology Relations with Japan: Report of the Defense Task Force of displays, these might include special sizes or operational tolerances. It may, therefore, not be feasible to buy unmodified commercial displays from foreign vendors. DoD officials have stated that it will be necessary to have advance access to prototypes, assured access to customized products utilizing the latest commercial technology, and the benefit of lowered cost that comes from volume production. DoD’s display initiative has several elements, including core technology funding (which has been ongoing for a number of years), RzD support for companies that commit to build production facilities, aggregation of government procurement demand, and interagency monitoring. The total cost over five years is expected to be $587 million. Some experts have criticized DoD’s approach, saying that the initiative represents a misguided foray into industrial policy that will backfire over the long term.17 These criticisms include the following: that the initiative is expensive and has not been adequately weighed against DoD’s other technological priorities; that the initiative is driven by competitiveness rather than security concerns; that the initiative is risky, since it is still unclear which display technologies will ultimately best meet DoD’s needs; that juxtaposing military and civilian production in the same facilities will make it difficult to meet DoD’s production goals; that as Korean and perhaps other companies enter the market, flat panel displays are likely to become commodities, leading to intense price competition—U.S. entrants would be hard pressed to become profitable competing in commercial markets; that the initiative will cause trade friction—subsidizing RzD for companies that commit to production skirts GATT provisions, and recipients of DoD support will eventually press for trade protection; and that DoD can meet its needs by pressing more forcefully on the Japanese government for access or by cooperating with Korean companies—furthermore, Japanese and Korean companies are likely to invest in U.S. production capability at some point in the near future. Some of these criticisms are more compelling than others. To begin with the less compelling, a large part of the funding represents core technology support. Display technology has been a priority area for DoD RzD support for a number of years, so this aspect of the initiative does not represent a significant expensive shift in priorities. The main increment—the $199 million over five years slated for RzD subsidies to encourage production—works out to $40 million annually. If, as is likely, DoD spends as much or more on other technology programs that are not rigorously prioritized, this objection would apply to other programs as well. 17   These objections are drawn mainly from Claude Barfield, “Flat Panel Displays: A Second Look,” Issues in Science and Technology, Winter 1994-95, pp. 21-25.

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Maximizing U.S. Interests in Science and Technology Relations with Japan: Report of the Defense Task Force Regarding the appropriateness of U.S. government motivations for launching the initiative, it can certainly be argued that competitiveness concerns had much to do with driving the policy. Still, clearly, high-information displays are a critical technology for future military systems.18 As for the criticism that DoD support risks distorting technology development, DoD continues to support a variety of technologies and approaches, so the technological risks should be no greater than they are in any technology support program; DoD funding might lead to significant breakthroughs, but the $40 million per year that focuses on production is probably not large enough to influence anybody’ s technological calculations, particularly since these grants would involve significant cost sharing. Further, although juxtaposing military and civilian production may impede quick realization of production and market share goals, U.S. production that meets DoD’s needs at reasonable costs will need to be established at some point. Finally, regarding the argument that the initiative will cause trade frictions, it is important to note that trade friction in this area existed prior to the DoD initiative. Several small U.S. producers filed and won an antidumping complaint against Japanese manufacturers several years ago, prompting U.S. computer manufacturers to move production of laptop computers out of the United States.19 As long as some U.S. companies remain active in displays, there is a possibility for trade friction. To the extent that U.S. producers are able to compete in commercial markets, there would presumably be less pressure for protection. The three more compelling criticisms revolve around future market entry, the ultimate feasibility of establishing a profitable U.S. production base, and the utility of alternative strategies such as pressing harder on the Japanese government or working with Korean companies. They are somewhat related and revolve around the basic question of whether U.S.-controlled mass production of displays in the United States is a critical enough security need to justify a significant government initiative and whether success is achievable at a reasonable cost. The short answer is that there is insufficient information at this point to answer these questions definitively. However, it is possible to make several salient points in the context of our discussion of dependence. Japanese companies have reportedly indicated that they would not be willing to work with DoD, but even if one or more of the Japanese companies that currently dominate the market were willing to do so, future dependence on Japan for military displays would be problematic, since the risk factors identified in Table C-2 are predominantly on the high end of the scale. For example, current production is concentrated in Japan, particularly for the active matrix liquid crystal displays whose demand is growing fastest. Entry barriers are high—Japanese companies are planning to spend about $2.5 billion on production capacity over the 1994-1996 timeframe 20 (see Table C-3). Except for a few key U.S. strengths, such as glass 18   Kenneth S. Flamm, “Flat-Panel Displays: Catalyzing a U.S. Industry,” Issues in Science and Technology, Fall 1994, pp. 27-32, explains the rationale for the program. Barfield, op. cit., raises a variety of objections. Although Barfield argues that DoD’s estimates of near-term military demand are overstated, and therefore there should be no urgency to launch a major government initiative, he does not contest the fundamental importance of the technology for future defense needs. 19   “In requesting the lifting of the 62.67 percent import duty on active matrix flat panel displays, OIS Optical Imaging System, Inc. and owner Guardian Industries—the only U.S. producer of this type of display—argues that the order has already served our purpose, and there’s really no reason to burden American computer manufacturers. ” See Eduardo Lachica, “Display Antidumping Saga Awaits Clinton Resolution,” The Asian Wall Street Journal, January 25, 1993, p. 4. 20   “TFT-shiki ryosan ni hakusha,” Nihon Keizai Shimbun, June 23, 1994, p. 13.

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Maximizing U.S. Interests in Science and Technology Relations with Japan: Report of the Defense Task Force TABLE C-3 Major Japanese Thin-Film Transistor LCD Makers’ Actual and Planned Capital Investments Company Plant Capital Spending (million dollars) Date Operational Sharp Mie 530 July 1995 DTIa Yasu 300-400 (est.) 1995 NEC Akita 300 October 1994 Hitachi Mobara 300 1994 Fujitsu Yonago 390 March 1994 Hoshiden Kobe 300-400 By 1997 Matsushita Ishikawa 200-300 End of 1995 Mitsubishi Electric and Asahi Glass Advanced Display 130 Summer 1995 a DTI is a joint venture between IBM and Toshiba. NOTE: Currency conversion at ¥100 per dollar. SOURCE: Nihon Keizai Shimbun, June 23, 1994, p. 13. and some of the related microelectronics, U.S. manufacturing infrastructure for displays is weak overall.21 Significant Korean entry and success would alleviate several of the dependence risk factors. The market would be less concentrated. South Korean companies might be more willing to work with DoD, which in turn would likely lead to greater Japanese willingness. Korean firms were able to enter the market for dynamic random-access memory (DRAM) chips, which has significantly alleviated concerns about access to DRAMs by U.S. commercial users. Although Korean companies may ultimately be successful, this is not assured. Active matrix liquid crystal displays share some characteristics with DRAMs, such as the need for large capital investments and the imperative for meticulous efforts to improve manufacturing yields. However, manufacturing technologies are advancing rapidly, and Japanese companies have a significant lead. Several types of workable arrangements for international collaboration to meet DoD needs in flat panel displays are conceivable. DoD or U.S. contractors could work exclusively with South Korean or Japanese suppliers on customized displays for DoD, manufactured in those countries. This arrangement would have the drawback of leaving the United States completely dependent on foreign production and technology. At the very least, displays appear to be critical enough that maintaining U.S. technological capabilities and small-scale production—even without U.S. 21   “It was clear that there exist within Japan the elements of the complete business cycle—display panel material; display production machinery; factories for LCD, EL, plasma and so forth; and an end-use market. Additionally, almost all the peripheral electronic and display-based product electronics are made in Japan. The only exceptions of note are that approximately 70 percent of the basic LC materials are manufactured in Europe, and approximately 90 percent of the a-Si TFT glass substrates and EL glass substrates are manufactured in the United States by Corning. Corning has announced that it will build a glass factory in Japan.” See Lawrence E. Tannas, Jr., William E. Glenn, Thomas Credelle, J. William Doane, Arthur H. Firester, and Malcolm Thompson, JTEC Panel Report on Display Technologies in Japan (Baltimore, Md.: JTEC, 1992), p. 17.

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Maximizing U.S. Interests in Science and Technology Relations with Japan: Report of the Defense Task Force based mass production—is well justified on national security grounds. This state of affairs is similar to the current situation. DoD research funding has maintained fairly strong U.S. RżD capabilities in displays in the absence of a large production base. But if production of displays for DoD were to be entirely contracted out to foreign producers, support for small-scale U.S. production would lose an important rationale, making it more difficult to justify domestic RżD support. Why not just support the RżD activities of Japanese and Korean producers? If complete dependence on foreign display technology is unacceptable from a national security standpoint, mass production in the United States would enhance national security in the long term by lowering the production-related risks outlined above and by providing a larger revenue stream for U.S.-based RżD activities. Such U.S. production facilities could be foreign owned, U.S. owned, or mixed. DoD’s current approach is to support U.S.-owned efforts, although officials have stated that they are willing to support foreign-owned firms that establish U.S. production facilities. This could be attractive, particularly if U.S. companies are involved as partners in joint-venture activities. It can be argued that, as currently constituted, the Flat Panel Display Initiative is a reasonable approach to a serious national security problem under conditions of high uncertainty. It seeks to continue and strengthen support for U.S. technological capabilities in the critical area of displays, while on the margins encourage an expanded domestic production base. Rather than an expensive and risky course, the more likely danger is that an effort of this scale is insufficient to ensure a U.S. mass production presence in commercial markets. It may well be the case that the required investment levels are too great and profit potential too long term for U.S. companies to commit without government intervention—through trade policy or subsidies —on a much larger scale. At some point in the next several years, the United States may face the choice of becoming dependent on foreign sources and technology—as Japanese and Korean producers race ahead of U.S. efforts funded primarily by DoD—or making a significantly larger investment. For now the current approach maintains a technological and business option to develop an industry, and it may succeed in stimulating the desired critical mass of manufacturing capability. It may also increase DoD’s leverage with foreign producers, perhaps stimulating investment in U.S. manufacturing. In addition to continuing in this effort, DoD might actively study and perhaps explore in discussions modalities for tapping foreign capabilities, such as encouraging U.S. joint-venture facilities. A highly visible collaborative effort with Korea, should it be successful, might also stimulate a more forthcoming attitude on the part of Japanese companies. INDUSTRIAL BASE EROSION Dependence on foreign sources raises a more diffuse risk to national security—that capabilities lost in one segment will weaken related sectors, leading eventually to a general downgrading of U.S. technological capabilities in a broad industrial area, or that broad industry weakness will adversely affect specific supplier segments that are critical to national security. According to one formulation, manufacturing and technological capability in high-value-added industries has an intrinsic worth to a dynamic economy that is greater than the value of output at a given point in time. A critical mass of capability built through interaction between suppliers and end users facilitates the development of an institutional and human resource base, which leads to inter- and intraindustry spillovers (sometimes regionally bound) and higher growth rates

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Maximizing U.S. Interests in Science and Technology Relations with Japan: Report of the Defense Task Force for the industry and the entire economy. Some argue that Japanese technology and industrial policies recognize this dynamic better than those of the United States, leading Japan to emphasize indigenization and nurturing of technological capability.22 The trends of the 1970s and 1980s certainly bear out this assertion. For example, loss of U.S. commercial competitiveness in an industry that at first glance appeared to have little security importance, consumer electronics, has indeed contributed to the current lack of a U.S. presence in mass production of flat panel displays. The strength of Japanese companies in DRAMs was leveraged to gain advantages in key areas of semiconductor equipment, such as photolithography. There is some evidence that during the late 1980s individual Japanese companies and production networks utilized practices that are illegal and considered anticompetitive in the U.S. context to pursue their advantage.23 Concerns were raised about Japanese direct investments in U.S. high-technology companies—in some cases the last remaining companies in their segments. It appeared to some that broad dominance in information-related industries was within the reach of the large Japanese electronics companies. The situation looks somewhat different in 1995. Today, it is clear that closed production networks and markets, and the focus on acquisition and improvement of technology at the expense of the creation of new technology have imposed costs on Japan. For example, if the Japanese computer market had been more open in the 1980s, Japanese companies might have recognized the importance of networked personal computers earlier and adjusted their strategies accordingly. Japan’s dominance in DRAMs and huge profits attracted new market competition from Korean firms. As U.S. semiconductor and computer companies focused on higher-value-added products and new technologies, many have been able to grow and even establish strong positions in the Japanese market. However, Japanese companies remain dominant in many areas of the semiconductor and semiconductor equipment industry. If the emerging global competition in high technology is marked by a constant struggle with various companies and national industries enjoying periods of relative ascendancy and decline, another period of Japanese ascendancy is likely or possible.24 What are the lessons that can be drawn from recent years? One possible conclusion is that technology policy measures have contributed to maintaining U.S. capabilities at the margins, but that market forces and the competitive adjustments made by U.S. companies themselves are much more important as contributing factors. For example, because of concerns about the eroding U.S. position in the semiconductor industry, the Semiconductor Manufacturing Technology Consortium (SEMATECH) was formed in 1987. With 14 corporate members, SEMATECH initially received $100 million annually in matching funds from the Advanced Research Projects Agency, primarily to conduct research on advanced 22   Richard J. Samuels, Rich Nation, Strong Army: National Security and the Technological Transformation of Japan (Ithaca, N.Y.: Cornell University Press, 1994). 23   “Officials from several government agencies told us that Japanese companies were engaged in tying practices between 1987 and 1989. One agency official stated that his office brought up the issue of tying 9 to 10 times during consultations with the Japanese government and asked the government to encourage Japanese companies to discontinue these practices. This official confirmed that U.S. companies licensed technology to Japanese companies in order to get memory chips.” See U.S. Congress, General Accounting Office, International Trade—U.S. Business Access to Certain Foreign State-of-the-Art Technology (Washington, D.C.: U.S. Government Printing Office, 1991), pp. 43-44. 24   George Gilboy, “Technology Dependence and Manufacturing Mastery,” briefing paper for the Defense Task Force, February 1995.

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Maximizing U.S. Interests in Science and Technology Relations with Japan: Report of the Defense Task Force manufacturing techniques and semiconductor materials. SEMATECH is given some credit for the resurgence of U.S. semiconductor manufacturers. The program has been so successful that its managers announced in 1994 that they would not seek continued government funding after 1997. The SEMATECH experience has demonstrated that government and industry can work together to preserve critical U.S. industries and prevent foreign technological dependence. However, despite the successful efforts of SEMATECH to work with GCA Corp. to develop an advanced stepper that many experts considered the best in the world, U.S. semiconductor companies, including SEMATECH members, were not willing to commit to purchasing the machines. As a result, GCA Corp. was forced to shut down in 1993. This case illustrates that even when technology policies are effective other policy measures might be necessary to maintain U.S. capabilities. Although the rapid erosion of U.S. capabilities in electronics appears to have halted and may even have been reversed in some areas, the United States remains dependent on Japan for a large range of electronics-related technologies and products. What should the priorities of U.S. policymakers be for the future, particularly during a future period of competitive ascendancy for Japan? Considering the ongoing globalization of technology, declining U.S. defense budgets, and the increasing interdependence of the world ’s economy, it is unreasonable to expect the United States to maintain self-sufficiency in all critical technological areas. The costs of attempting to do so would be staggering. Also, there are advantages to a certain level of interdependence—the United States is able to incorporate advanced foreign technologies into new weapons systems, it may be able to procure components at a lower cost, and it can focus resources on potentially more important priorities. It must therefore be accepted that some degree of foreign dependence will exist. To cope with short-term, production-related risks (illustrated by ceramic packages) and longer-term technology access risks (illustrated by flat panel displays), the key in limiting vulnerability to foreign dependence lies in an assessment of the risk presented by each individual case. Criticality and the potential for loss of access are the primary determinants of that risk. When a significant risk is determined to exist, the U.S. government possesses several policy options to address it, such as stockpiling and ensuring adequate domestic production of critical components and technologies. The Defense Production Act, for example, authorizes the use of financial incentives to expand domestic production for items with limited commercial demand. The Trade Expansion Act allows U.S. firms to petition the government to restrict foreign imports in cases where the loss of domestic production is thought to entail national security risks. The Committee on Foreign Investment in the United States also exists to prevent the loss of such critical capabilities. It appears that the U.S. government has pursued reasonably effective policies related to these straightforward national security risks in recent years, although determining the appropriate course has often been marked by contention. The risk of industrial erosion, although apparently quiescent for the time being, remains a long-term concern. As long as the U.S. economy, technology infrastructure, and production networks remain significantly more open than Japan’s, a potential risk is present. U.S. concerns would be reduced if faced with evidence of greater openness in Japan. In this sense, access to the Japanese market in high-technology products is a significant barometer. The longer-term security risk also represents a short- and long-term competitiveness risk. In the past, DoD has funded RżD initiatives and other measures to build and maintain U.S.

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Maximizing U.S. Interests in Science and Technology Relations with Japan: Report of the Defense Task Force capabilities in specific areas of commercial technology with significant military applications and national security importance, cooperating with other agencies as necessary. Even though efforts to monitor and address these issues are on the rise, managing dependence is an issue that will be with us for the foreseeable future. Japan is likely to continue to be at the center of the dependence issue.