Linking Trade and Technology Policies: An International Comparison of the Policies of Industrialized Nations (1992)

GORDON E. MOORE AND MARTHA CALDWELL HARRIS

Traditional approaches to analyzing competition and developing policies appear inadequate to deal with a new context for international competition in which technology is a driving and increasingly global factor. A growing literature documents ways in which high-technology competition differs from traditional models. Today governments of advanced industrial nations are competing to attract high-technology industries, trying to create comparative advantage, in an era in which the economic dimensions of national strength appear more salient than a decade ago. The old policy frameworks appear inadequate to deal with this new reality. Hence the need to reexamine old assumptions, to search for new approaches.

Two sets of issues—the changing nature of global competition and the role of government policies—are central themes around which this volume is organized. The issues can be articulated as questions: How is technology changing the nature of global competition? Can governments devise policies that help to create competitive advantages for national firms?

The chapters that follow address these questions in detail and deserve careful reading. By way of introduction and reflection, this brief chapter highlights some major themes—areas of agreement as well as disagree-

ment—that emerged from the presentation of these papers at a June 1991 symposium at the National Academy of Engineering and from the discussions at the symposium. Summaries of the panel discussions appear in this volume.

The symposium presentations and discussions indicated a broad consensus that global competition is changing. As panel member Sylvia Ostry put it, there is a new innovation paradigm operating; innovation and global market competition today depend less on independent achievement of scientific and technological research breakthroughs and more on continuous improvement in process and product. In Japan this new innovation paradigm is operating especially effectively, and it is changing the nature of global competition.

Understanding the changes in the technological character of global competition provides a basis for assessing the relative trade performance of the United States. While there are many difficulties in interpreting the data on international trade in technologically advanced industries, including effects of exchange rate shifts, one clear change has taken place in the past 10 to 15 years. The United States is no longer the world's dominant economy, but rather first among equals.

Paul Krugman's paper highlights the idea that all industries are not "equal" in terms of their importance to the national economy; the strength of an industry is in its "positive feedback loops" of interaction with the skilled labor and supplier base and with the knowledge base. Such loops are self-reinforcing processes that create and recreate comparative advantage in particular sectors and regions.¹ Japan, in particular, appears to have developed a system that is uniquely successful in exploiting the positive intersectoral linkages of innovation.

Changes in the composition of U.S. production, on the other hand, are particularly worrisome. The United States has been "downscaling" in terms of the technological sophistication of its production mix as compared to other major industrial countries. Paolo Guerrieri, in his paper in this volume, provides a finer-grained picture of the changed nature of international trade by developing an analysis of trends in trade performance of major industrial nations that divides industries into categories according to differences in technological dynamism, user requirements, and scale intensity. This analysis shows a weakening of the scale-intensive and specialized-supplier industries in the composition of U.S. high-technology trade. Meanwhile, Japan's comparative advantage has grown in the specialized-supplier and science-based (high R&D) industries increasingly important in global

trade. It can be argued that these industries provide added benefits throughout the economy through externalities such as their linkages to innovation in other sectors.

Overall, the differences among the major industrial countries in terms of trade specialization have increased rather than decreased during the past two decades. Krugman's analysis shows that U.S. industry has had increasing difficulty translating its advanced research capability into competitive industrial products. In other words, the United States has been less successful than Japan in developing a production base that features specialization in both science-based and production-intensive sectors, with a resultant worsening of its trade position in R&D-intensive industries such as electronics.

The symposium discussions suggested the need to learn more about the causes of these striking differences in national performance. There was strong agreement that a key to understanding differences in national performance may be in understanding differences in national systems. These differences include not only public policies, but also organizational and institutional approaches, attitudes and enduring features of research and market systems. David Mowery, in his paper, outlines unique aspects of the market-driven, U.S. innovation system—deeply embedded structures that have made it difficult for the United States to develop a coherent civilian technology policy that focuses on strengthening specific technologies important to future industrial competition or on enhancing the intersectoral technological and economic linkages. The distinctive U.S. approach features large investments in defense technology, in research and education at U.S. universities, the dynamic role of new start-up companies, and an emphasis on antitrust policy. In contrast to the situation in the United States, some systems, particularly the Japanese managed market model, appear to be more ''innovation friendly'' than others.

While understanding of these factors is at present limited, the effect is to remind us that competition is strongly affected by the market and organizational contexts. Viewed from this perspective, systems are competing for high-technology production, value-added, and the resulting benefits in standards of living. Competition is not just among firms for market share, but their capabilities—and, therefore, their long-term performance—are strongly affected by the research and market systems in which they operate. Differences among the market systems of the industrialized countries have strong implications for the long-term well-being of their societies. Fundamental differences in organization and structure create asymmetries in the ability of countries to have similar access to the technology and markets of others. The traditional international trade rules do not, however, take these differences into account.

Can government policies effectively create competitive advantages for domestic firms? Perhaps. A number of factors influence the ability of companies to compete in the marketplace and government policy is only one of them. Japan's success may have been "overdetermined"—a result of a variety of conductive factors that include government policy along with favorable macroeconomics, microeconomics, and good judgment by business people. Japanese and European participants in the symposium noted, furthermore, that industrial policies in these countries are undergoing substantial change. They cautioned U.S. policymakers against pursuing an elusive (and perhaps somewhat outdated) goal of emulating policies used by other countries in years past, policies that may no longer be appropriate to deal with a new global context. The symposium speakers did not include a recognized true skeptic on industrial policy or a strong advocate of free trade in the most literal sense, but a number of participants in the meeting articulated these perspectives, as the summaries of the panel discussions indicate.

Despite these cautions, some messages come through quite clearly in the papers that follow. One is that high-technology industries are important because they often bring benefits to the larger economy and society that flow from high value-added production. Whether governments are able to encourage the development of domestic economic structures that feature high valued-added industries is an important question because the effect could be to enhance the nation's comparative advantage in global trade competition.

High-technology competition raises new challenges for policymakers. David Yoffie's paper in this volume presents an argument that competition in high technology is different. High R&D content, the importance of intellectual property rights, short product life cycles, steep learning curves, low transportation costs, and high capital mobility are characteristics that, taken together, distinguish high-technology industries in his view. Actions taken today can importantly affect the industries of tomorrow, because of first-mover advantages that permit the company that gets the market first to retain it. Government policymakers who want to improve the competitiveness of domestic high-technology industries must take these distinctive features into account in formulating approaches.

A second theme that came through is that the United States, more than its major trading partners, has attempted (albeit unsuccessfully) to use trade policy as a substitute for civilian technology policy. When product life cycles are only two to three years, trade dispute mechanisms are often too time consuming to take effect before the outcome is decided in the marketplace. David Yoffie's paper points to the U.S.-Japan semiconductor agree-

ment as evidence that trade policy alone cannot solve the problems of U.S. high-technology industries. Although the agreement did buy the U.S. industry some time and improve access to the Japanese market, it could not address the fundamental financial and managerial challenges that the U.S. semiconductor industry must still deal with today.

Given the high stakes and special characteristics of international competition in high-technology industries, a number of participants in the symposium agreed that the lack of a civilian technology policy and attachment to a laissez-faire approach taken by the United States in years past may pose a serious liability in the future. The papers in this volume highlight substantial evidence that Asian and European nations have had much more vigorous civilian technology policies than the United States and that these policies have in many cases been complemented by trade policies. They also suggest that there is little evidence that foreign governments abroad are eschewing such policies. On the contrary, some of them have managed to make the development and commercialization of civilian technology a high-priority national goal.

The papers that follow deal with policy issues for long-term, multilateral attention as well as issues that the United States must deal with "in the meantime." Laura Tyson's paper provides a long list of policy issues that must be addressed to create a multilateral trading regime that takes into account the changing global nature of technology and competition. Government procurement, intellectual property rights, industrial targeting and subsidy practices, foreign direct investment, local content, competition policies, and standards were all mentioned in the symposium discussions. It is difficult to devise precise rules in these areas, however, because policy approaches differ and because laws are interpreted differently by different countries. The absence of a transnational court to deal with competition policy, for example, is a major obstacle to developing and enforcing new rules of the game on a multilateral basis. Efforts to establish new, multilateral rules that address the need for a "balance of benefits" are, in the view of many, a more promising approach than the exclusive pursuit of bilateral, sector-specific policies that can lead to formation of cartels.

While these papers show a general appreciation of the need for a long-term, multilateral approach to developing new trade rules, there is a good deal of disagreement over what to do in the meantime. Panelist Jean-Claude Derian recalled the lessons of the "second battle of Poitiers"—the controversial French decision to slow down a flood of Japanese VCR imports. In cases where a speedy reaction is needed, there may be no practical alternative to bilateral approaches. Laura Tyson's paper provides some suggestions on how to make bilateral approaches more effective; the United States may need to consider modifying antidumping laws to require evidence of predatory intent and enforce these laws more stringently when the evidence is clear.

Whether the United States can effectively use bilateral approaches as a bargaining chip to prod nations toward multilateral reform is an important question. Can Section 301 and Super 301 be used to negotiate nondiscriminatory concessions that benefit all suppliers, not just the United States? Skeptics see these sections of U.S. trade law as protectionism in another guise that will only hasten the unraveling of the multilateral trading system as currently constituted. A productive tension between the multilateral and bilateral trade approaches, between the idealism needed to create new rules of the game for the future and the realism grounded in current unresolved issues in high-technology competition, is clear in the papers, as it was in the symposium discussions.

Although there was a good deal of disagreement about its content and preferred tools for implementation, a strong case emerged for a civilian U.S. technology policy. Civilian technology policy, as the term is used here, is designed to use technology as a tool to stimulate national economic growth and innovation; elements include incentives for technology development, for technology diffusion, for human resource development, and strategic visions of technology and the future of the economy. In view of the evidence from the semiconductor agreement, a direct approach (technology policy) seems more likely to address the real challenges faced by U.S. high-technology industries than exclusive reliance on trade policy. Some of the European participants in the discussions noted that the United States has found it easier to accuse its trading partners of subsidizing their industries than it has to formulate a domestic technology policy. The United States, according to many of the participants, has yet to make a serious attempt at developing a civilian technology policy.

The political dimensions of creating a U.S. technology policy deserve serious attention. While some call for direct government support for key technologies or industries like semiconductors, there are legitimate concerns that need to be addressed. The political process in the United States could result in pork barrel politics that may benefit the most vocal interests but does not improve U.S. competitiveness. Another challenge is to consider the interests of the major technology users, such as the financial services, in formulating policy. Policies aimed at supporting individual industries without regard for their effects on users could distort our innovative and competitive capabilities.

Another issue for U.S. technology policy is the appropriate substantive focus, which also determines priority areas for policy action. Manufacturing in many ways is the central challenge for the United States. Panelist William Spencer argued that manufacturing is the horse and technology policy is the cart. While some may assume that a technology policy will emerge if we simply increase investments in R&D, the problem is not with R&D investment per se in the United States. The fundamental problem in many

companies is the inability of U.S. industry to bridge the gap between the laboratory and the production line. Panelist Hajime Karatsu emphasized the need to use technology as a tool to revitalize key industries like the automobile industry. This means nurturing engineers and thinking about technology as a whole process of producing marketable goods.

A number of panelists pointed to the importance of new U.S. experiments designed to improve manufacturing capabilities. There has long been disagreement about the pros and cons of U.S government support for selected industries. Sematech, a consortium of companies working to improve semiconductor manufacturing technology with U.S. government support, is seen by many as a promising model for cooperative research in the U.S. context. Despite the need for better analysis to provide a foundation for selecting industries for government support, the symposium discussions suggested general agreement that the United States must find ways to encourage investment in design and manufacturing in the United States. They also highlighted the comparative ease with which such decisions have been made and acted upon abroad.

As nations compete for high-technology production and value-added, the United States may need to try new approaches and to learn from ongoing experiments abroad. Panelist Margaret Sharp noted that Europe is following the twin tracks of promoting R&D cooperation through consortia while, at the same time, strengthening policies to stimulate competition. Viewed from this perspective, the significance of ESPRIT is as a European catalyst for collaboration in R&D among competing firms. Europeans speak from experience with a wide array of failed experiments in industrial policy; their stress on competition policy as a necessary counterpoint to technology policy is an important theme. Swimming with the tide of internationalism—not against it—may require significant efforts in both competition policy and R&D collaboration policy.

While the focus of attention in discussions of technology and trade policies is typically government action, new approaches must also be taken by private companies in order to realize a coherent technology policy. Private leaders, in particular, will need to develop new approaches to organization and management. Symposium discussions highlighted the fact that in order to be politically effective, technology policy will have to based on a political coalition that involves both government and the private sector.

In summary, the symposium discussions suggested the importance of maintaining a delicate balance and coordination—between multilateral and bilateral approaches, between technology and trade policies, between government and private sector efforts, between competition and cooperation. Articulating U.S. national economic interest in a context of technological globalization and new forms of competition will require a subtle strategy, not an either/or approach.

A host of suggestions for U.S. policy action emerged from the symposium presentations and discussions. Not surprisingly, there were differences in viewpoint over priorities and preferred approaches. At the same time, there was general agreement around some themes and principles.

In the area of trade policy, there was strong agreement on the need to establish new "rules of the road" in areas such as competition policy, R&D subsidies, government procurement, industrial targeting, local content, intellectual property rights, foreign direct investment, and standards, as outlined in more detail in Laura Tyson's paper. Panelists Fumitake Yoshida and Margaret Sharp also called for reinvigorated efforts at the multinational level to improve the macroeconomic environment, in such areas as integration of financial markets. In view of the asymmetries that exist in research and market systems, David Mowery highlighted the critical importance of expanding reciprocal access to markets and technology as a basis for mutual benefit in a new era of technological competition and globalization.

Despite agreement around these long-term goals, the symposium papers and discussions revealed deep controversy over what to do in the meantime. Laura Tyson's paper makes a case for the judicious use of managed trade (featuring bilateral and sectoral approaches) as a stop-gap measure until a new set of multilateral rules is established. A number of suggestions were made along these lines. Panelist Robert Lawrence called for increased penalties for price-discriminatory dumping, while others called for the use of a countervailing subsidy approach to provide direct benefits to U.S. producers.

While panelist Clyde Prestowitz called on policymakers to accept the reality of managed trade and develop a more effective U.S. approach, others argued on the need to avoid managed trade at all costs because it raises costs and distorts market competition. Regardless of actions taken in the trade arena to open foreign markets to U.S. products, the symposium papers and discussions make clear the need for policies that will increase the attractiveness of the United States as a location for high valued-added production. Doing so will require that the United States develop parallel efforts to build a new multilateral trading regime while at the same putting in place domestic policies that use these same elements to ensure effective adaptation of the U.S. economic structure to a new global context of competition.

In the area of technology policy, the symposium papers and discussions suggested general agreement among participants on the value of policies that feature expanded investments in skilled human capital and those that promote technology diffusion. While time did not permit a full discussion of how to accomplish these goals, panelist Robert Lawrence called for

R&D tax credits and promotion of collaborative R&D in precompetitive research. Other important themes that would need to be addressed by the private sector include David Mowery's call for improved mechanisms to access and use technology developed abroad, calls for improved mechanisms of corporate governance to reward long-term investments, and repeated emphasis on the need to bridge the gap between the laboratory and the production process.

Two subjects of implicit and explicit disagreement emerged in the symposium discussions. One concerns the role of "foreign" participation in U.S. R&D, particularly R&D sponsored with government support. While some called on the United States to avoid restrictions on foreign participation in R&D consortia and U.S. universities, there was also some discussion of cases where limitations may be necessary. For example, restrictions may be justified when a foreign investment or acquisition seems likely to severely limit competition.

Whether the U.S. government should provide strategic and symbolic financial support for critical U.S. industries was another controversial subject. The traditional lines of debate were clear between those advocating the appropriateness of such steps when there is a need to buy time so that the industries can make themselves more competitive and those who believe that such intervention is misguided and ineffectual. There is at least the possibility that the political stalemate of the traditional policy debates can be transcended by a focus on technologies needed for a broad array of industries. Panelist Craig Fields, for example, stressed the importance of information technology infrastructure needed for the twenty-first century as a broad organizing theme for U.S. technology policy.

Approaches to linking the trade and technology policy realms are also a major theme in the papers that follow. Not only is there a need to increase interaction between individuals and organizations with special expertise in the trade and technology policy areas, but there is also a need for improved coordination between agencies like the Office of Science and Technology Policy and the Office of the U.S. Trade Representative that have very different institutional cultures. In practice, building consensus will probably require establishing a stronger analytical capability within the government to assess and link trends in technology and global trade. This may make it possible to establish criteria, based on analysis, for supporting technology development and diffusion in particular areas. Improving coordination is also, fundamentally, a political challenge. John Odell, a member of the steering committee, emphasized the importance of an industry-government coalition to articulate the need for linking trade and technology policies.

These ideas are explored in more detail in the chapters that follow. They include papers presented at the symposium as well as brief summaries of the discussions. Combining these suggestions into a comprehensive approach

that links U.S. trade and technology policies is beyond the scope of this volume, but the papers here provide a starting point for those ready to take on this important challenge.²

The challenge is an urgent one—the nature of competition is changing and there is no guarantee that the United States will remain a frontline player in the first tier of global competitors. More is at stake than the fate of any particular industry. There is a need to consider what kind of economic structure is desirable in terms of creating value-added and economic benefits to the larger society. There is also a need to define actions that will create a conducive environment. We have to think not just about who comes up with new products and technologies and processes, but whether they are being used effectively in commercial products and services. The symposium discussions pointed to new approaches that must be seriously considered if the United States is to adapt successfully to a new global competitive context. This is the message we take away from the rich discussions on "Linking Trade and Technology Policies."