New Developments in U.S. Technology Policy: Implications for Competitiveness and International Trade Policy

Schleede Glenn R. , executive associate director of the Office of Management and Budget, commented in 1981 that “By far the most important change [made in science and technology policies by the Reagan Administration] came from this administration's redefinition of the federal role. In the R&D spectrum stretching from the most esoteric basic research out through the actual commercialization of a technology, we have drawn the line for federal intervention and support back much farther toward the basic research end. In the civilian or domestic sector, we do not think the government should be funding demonstration, product development, and commercialization efforts.” Quoted in Barfield C.E. , Science Policy from Ford to Reagan (Washington, D.C.: American Enterprise Institute, 1982), p. 41.

Commenting in 1984 on this development, Nelson noted that science and technology policies in a number of industrial nations increasingly focus on transforming “leading” technologies (those with substantial spillover effects on other industries and technologies) into “strategic” technologies, which convey substantial benefits to the nation advancing them. See Nelson R.R. , High-Technology Policies: A Five-Nation Comparison (Washington, D.C.: American Enterprise Institute, 1984).

Under the terms of the proposed amendments to the Freedom of Information Act (FOIA), requests from foreign nationals for research data or results could be denied on the basis of potential harm to the competitive position of U.S. firms. The explanation accmpanying the proposals noted that “mandatory disclosure of such information under FOIA could encourage U.S. competitors to exploit the U.S. science and technology base rather than making investments in their own research and development infrastructure. Under Title IV, Federal agencies will be required to withhold information of this nature requested under the Freedom of Information Act where disclosure could reasonably be expected to harm the economic competitiveness of the United States.” (Proposed Legislation—Superconductivity Competitiveness Act of 1988, House Document 100–169, February 24, 1988 (USGPO), p. 2).

See The Economist, October 1, 1988, pp. 17–18.

Noyce Robert Dr. , chief executive officer of Sematech, made this position clear in a recent interview: “‘What advantage would NEC [a Japanese electronics firm that has applied for Sematech membership] bring to Sematech?’ I can think of none,’ he said. “He hastened to point out the obvious threat of Japanese participation. ‘If the trade problem were resolved and our technology was not used by foreign countries in a predatory fashion, as with TVs or semiconductors, I'd have no fear of diffusing our knowledge around the world. But now, American knowledge is being used to hurt Americans.”’ (“Robert Noyce: On Sematech, Chips, and Competitiveness,” Challenges (October 1988), p. 7).

Current European opposition to participation by IBM Europe in the Joint European Submicron Silicon Initiative (JESSI), a large research program funded by the Eureka program, apparently is based in part on the restrictions on European participation in the Sematech research consortium that is funded in part by the Defense Department. See Greenhouse S. , “IBM Faces Europe Bar to Chip Role,” New York Times, May 5, 1989, p. C1. Recently, discussions between JESSI and Sematech have raised the possibility of collaboration between these ventures that would exclude Japanese firms (see “Hands Across the Chipmaking Chasm,” Business Week, July 3, 1989, pp. 28–29). The ultimate feasibility or benefit of such a European-American alliance, however, are uncertain.

A recent front-page story in the New York Times discussed the growing concern that “the trends that hamper major commercial enterprises—lagging productivity, competition from imports, foreign ownership of American companies and inadequate long-term research—are damaging producers of weapons. In response, the Pentagon is beginning to argue for broad industrial policies that would benefit high-technology industries as a whole, hoping that the rewards would reach sectors of the economy that directly serve the military.” (p. D22) The story describes a report by the Defense Science Board that recommended the “formation of an ‘Industrial Policy Council’ that would be headed by the President's National Security Advisor and would recommend policies to bolster industries that support the military. At the same time, the report said, the Defense Secretary should be made a permanent member of the Economic Policy Council, the Cabinet's group for making economic policy.” (p. D22). See Cushman J.H. , “Bigger Role Urged for Defense Dept. in Economic Policy,” New York Times, October 19, 1988, pp. A1 and D22.

See Mowery D.C. Rosenberg N. , “The Commercial Aircraft Industry,” and Levin R. , “The Semiconductor Industry,” in Nelson R.R. , ed., Government and Technical Progress: A Cross-Industry Comparison (New York, NY: Pergamon, 1983), as well as Flamm K. , Targeting the Computer (Washington, D.C.: Brookings Institution, 1988).

The recent Congressional criticism of the commercial consequences of U.S.-Japanese collaboration in the development of the FSX fighter aircraft seemingly belies this assessment of military-civilian technology spillovers. Opponents of the FSX agreement, however, appear to have considerably overstated the likely applications of military fighter airframe technologies in large commercial transports. See Mowery D.C. , “The Japanese Commercial Aircraft Industry: Deja Vu All Over Again?” presented at the meetings of the International Studies Association, London, England, March 29, 1989.

See Davis B. , “Pentagon Seeks to Spur U.S. Effort to Develop ‘High-Definition’ TV,” Wall Street Journal, January 4, 1989, p. 29.

Waldman P. , “Sixteen U.S. Companies to Form Groups to Develop Advanced-TV Technology,” Wall Street Journal, January 13, 1988, p. 2. Waldman quoted Pat Hill Hubbard of the American Electronics Association, the trade association that announced formation of a loose consortium of 16 U.S. firms to develop HDTV technology, as stating that “it's too early to tell whether the collective will allow foreign-owned companies [many of which are members of the AEA] to participate in any consortiums that emerge … ‘The main purpose of this is to ensure the U.S. gains and retains HDTV research and development capacity, engineering design capability and product manufacturing expertise.”’ According to a later account of the DARPA research program, “European companies are expressing fears that their American subsidiaries will be shut out of a U.S. government [DARPA] research project on high-definition television.” Wolf J. , “Europeans Fear Obstacles by U.S. on Advanced TV,” Wall Street Journal, May 31, 1989, p. A16.

This article does not pursue the intrinsic merits of either Sematech or the NCMS, although both have some potentially serious problems. As Nelson and others have pointed out, the efforts of other nations, such as France and Great Britain, to merge military and commercial technology development have not been successful in the aircraft and electronics industries, nor has a similar effort in the U.S. nuclear power industry yielded major commercial technological benefits. In addition, the focus of Sematech on high-volume DRAM production technologies rather than custom application-specific chip designs, the consortium's unproven ability to transfer technological developments to member firms, and the political feasibility of using general revenues to subsidize the technological development of a group of U.S. firms at the expense of their nonmember U.S. competitors, all raise questions. The recent Report on the Semiconductor Industry by an interagency federal committee (Washington, D.C.: National Science Foundation, 1987) provides some basis for skepticism about the appropriateness of Sematech to meet current competitive challenges to the U.S. semiconductor industry.

Although U.S. opposition thus far has not eliminated Airbus subsidies, it has reduced them. If the aggressive pursuit of Sematech and similar initiatives were to produce a trans-Atlantic subsidies war, the federal government might find it financially and politically difficult to match other governments' production and development subsidies in the commercial aircraft and other industries. Nor is it likely that U.S. firms in these industries would accept large-scale U.S. government involvement in their operations. Policies that undercut U.S. pressure on Airbus member governments therefore could impose serious costs on the U.S. commercial aircraft and other successful export industries.

According to one account, “‘Sematech is for manufacturing knowledge and expertise,’ said Victor Stan , a spokesman for Texas Instruments in Dallas. He added that the purpose of the agreement with Hitachi was different, because it was a ‘technology development’ program meant to create the most effective designs for the 16-megabit [microprocessor] chip.” Hayes T.C. , “Developing a Computer Chip for the 90's,” New York Times, December 23, 1988, p. C6.

For additional discussion, see Krugman P. , “Technology-Intensive Goods,” in Finger J.M. Olechowski A. , eds., The Uruguay Round: A Handbook (Washington, D.C.: World Bank, 1987); idem, “Is Free Trade Passé?” Economic Perspectives, 1 (1987); and Aho C.M. , “Technology, Structural Change, and Trade,” in Cyert R.M. Mowery D.C. , eds., The Impacts of Technology on Employment and Economic Growth (Cambridge, MA: Ballinger, 1988).

Although efficient capital markets should be capable of providing the support for these industries in their infancy, faith in the perfection of capital markets is not widely shared.

Foreign government research subsidies need not create difficulties comparable to those raised by development or production subsidies. To the extent that U.S. firms and other institutions invest in monitoring of the advances made in foreign research facilities, they are able to reap the benefits of this research without incurring the full costs—monitoring and purchase of licenses for the results of foreign research and development, after all, was a key factor in the development of Japanese commercial technologies. Both the monitoring of offshore research and the conversion of scientific research results into commercial technologies, however, require a robust domestic public and private research system.

Krugman , “Is Free Trade Passé?” op. cit.

See Pollack A.W. , “Chip Makers Will Seek U.S. Aid to Spur Output,” New York Times, September 10, 1988, p. D4. Another account noted that “U.S. computer manufacturers have been seriously affected by high prices and the shortage of supplies of Japanese-made Drams. These problems are, however, ‘nothing compared to the problems they will have in the future if we don't have a plan to free the hostages—our U.S. customers,’ Mr. W.J. Sanders, chairman of Advanced Micro Devices, a Silicon Valley chip maker, told industry analysts recently. “Mr. Sanders's emotive language is a measure of the frustration felt within the U.S. electronics industry. This frustration has led to plans for drastic action, including jointly funded Dram plants.” Kehoe L. , “U.S. Chip Makers Plan to Open Second Front,” Financial Times, September 27, 1988, p. 28. Sanders' firm is one of the participants in U.S. Memories, Inc., a recently announced consortium dedicated to the production of DRAMs. Currently, U.S. Memories expects to obtain financing entirely from private sources.

Allegations of dumping (predatory pricing of exports below average cost), for example, often compare export prices with some constructed average cost of production. Producers of goods characterized by average costs that decline over time, however, may find it profitable to price below average cost in the early generations of a product so as to increase production volume rapidly and reap the cost reductions from learning, thus allowing reductions in price. Alternatively, restrictions on access to the domestic market of a foreign firm or government subsidies to that firm in the early stages of production may enable it to penetrate export markets with low-cost, high-quality products after the cessation of such government assistance. Allegations of unfair trade or subsidies, however, may not be supported by the behavior and costs of the foreign firm by the time the firm has become a successful exporter.

These nontariff barriers to trade are by no means the exclusive province of foreign governments. During the 1980s, the U.S. government imposed nontariff import restrictions in the steel, automobile, machine tool, semiconductor, and other industries. Tyson estimated that 35% of U.S. imports in 1983 were subject to nontariff restrictions, an increase from an estimated 20% in 1980. Tyson L. , “Making Policy for National Competitiveness in a Changing World,” in Furino A. , ed., Cooperation and Competitiveness in the Global Economy (Cambridge, MA: Ballinger Publishers, 1988).

International coordination and harmonization of national macroeconomic policies has progressed considerably, albeit haltingly, in the wake of the Plaza Agreement of 1985. Similar coordination of sectoral policies, however essential, is likely to be far more difficult, since the range of policy instruments is much greater and their effects are more difficult to trace and monitor.

Olechowski A. , “Nontariff Barriers to Trade,” in Finger J.M. Olechowski A. , eds., The Uruguay Round: A Handbook for Negotiators (Washington, DC: World Bank, 1987) estimated that 17–19% of the imports of developed nations (by value) were covered by nontariff barriers. Olechowski also concluded that the use of nontariff barriers increased significantly during 1981–85 (p. 125).

Nontariff trade barriers received considerable attention in the “Tokyo Round” of multilateral trade negotiations that concluded in 1979. Although disciplines covering some of these policies were agreed upon in the Tokyo Round Codes, the coverage and enforcement of the disciplines contained in several of these Codes, such as those covering government procurement and subsidies, has not always been effective. See Winham G. , International Trade and the Tokyo Round Negotiation (Princeton, NJ: Princeton University Press, 1986); Tarullo D.K. , “The MTN Subsidies Code: Agreement without Consensus,” in Rubin S.J. Hufbauer G.C. , eds., Emerging Standards of International Trade and Investment (Totowa, NJ: Rowman and Allanheld, 1984).

The allegation has been made in Prestowitz C. , Trading Places (New York, NY: Basic Books, 1988), and in a number of journalistic descriptions of this Agreement.

Prestowitz (op. cit.) noted that the Semiconductor Agreement “amounted to getting the Japanese government to force its companies to make a profit and even to impose controls to avoid excess production—in short, a government-led cartel. For the free-traders of the United States to be asking Japan to cartelize its industry was the supreme irony. Yet it was logical.” (p. 62).

According to estimates in Pine A. , “Computer Chip Pact Backfires on U.S. Industry,” Los Angeles Times, June 6, 1988, the price of 256K DRAMs has risen within the U.S. from roughly $2.60 at the time the Agreement was signed to more than $3.60 in June 1988. The price of 64K DRAMs rose from $.90 to nearly $1.40 during the same period. Prices in Japan for DRAMs remained constant or declined slightly during this period. A more favorable view of the effects of the Agreement can be found in Yoffie D. , “Chip Shortage: Don't Blame the Pact,” Wall Street Journal, June 21, 1988, p. 36.

Steinmueller W.E. , “International Joint Ventures in the Integrated Circuit Industry,” in Mowery D.C. , International Collaborative Ventures in U.S. Manufacturing (Cambridge, MA: Ballinger, 1988).

For an insightful review of this debate, see Hart J. A. Tyson L. , “Responding to the Challenge of HDTV,” California Management Review (Summer 1989).

Reciprocal access is a concept that is more easily stated than implemented in national R&D systems that differ as sharply as do those of the U.S., where publicly funded research accounts for nearly 50% of all national R&D and where relatively open institutions like universities play a very important role in basic research, and Japan, in which corporate funding of R&D is far more significant. U.S. firms almost certainly would reject a policy that required assurances of equal access to the research facilities of U.S. and Japanese corporations.

The recent proposal by the Massachusetts Institute of Technology to purchase a supercomputer from the U.S.-based joint venture involving Honeywell and Nippon Electric Company of Japan illustrates the use by U.S. government officials of trade policy sanctions as instruments of technology policy (the treatment by U.S. policymakers of the products of this U.S.-based joint venture as Japanese in origin also points out the complexity of determining national origin in a technologically interdependent world). Threatened by the Department of Commerce with an investigation of dumping in supercomputers, MIT elected to postpone the procurement, instead seeking financial support from the National Science Foundation for a supercomputer research center that would involve U.S. firms and U.S.-based technology. MIT Provost John Deutch stated that “it became clear important elements of the federal government would prefer to see MIT acquire a supercomputer based on U.S. technology. Since the federal government would ultimately bear nearly all the costs of the machine through research grants to MIT, the preferences of the U.S. government must be seriously addressed.” “MIT Exploring Linked Supercomputer Center,” News Office, Massachusetts Institute of Technology, November 5, 1987, p. 2; see also Putka G. , “MIT Cancels Supercomputer Plan, Citing U.S. Pressure to Reject Japanese Bids,” Wall Street Journal, November 6, 1987; and Sanger D.E. , “M.I.T., Pressed by U.S., Won't Buy Computer,” New York Times, November 6, 1987.

In addition to the U.S.-Japan Semiconductor Agreement discussed earlier, the informal discouragement by senior officials of the U.S. Commerce and Defense Departments of Fujitsu's proposed acquisition of Fairchild Semiconductor in 1984 also illustrates the growing interdependence of trade and technology policies in this industry. Official opposition to this acquisition was apparently based largely on the perceived need to prevent acquisition of the U.S. firm's technological assets by Japan, rather than opposition to acquisition of the U.S. firm by a foreign firm. At the time of the proposed acquisition, Fairchild Semiconductor was owned by a French firm, Schlumberger.

The Act calls for a series of reports on U.S. firms' access to foreign markets for telecommunications equipment; creates a new provision (Sec. 1315) for dealing with subsidized international consortia, widely viewed as a provision directed at Airbus; and creates new provisions for “fast-track” antidumping investigations in industries (such as microelectronics) with short product life cycles.

A recent survey of R&D executives by Levin et al. (1988) found that “For new processes …, patents were generally rated the least effective of the mechanisms of appropriation: Only 20 percent of the lines of business surveyed rated process patent effectiveness in excess of 4.0 [on a 7-point Likert scale, for which 7 was the highest rating]. Eighty percent scored the effectiveness of lead time and learning curve advantages on new processes in excess of 4.3. Secrecy, though not considered as effective as lead time and learning advantages, was still considered more effective than patents in protecting processes. Patents for products were typically considered more effective than those for processes, and secrecy was considered less effective in protecting products than processes. Generally, lead time, learning curves, and sales or service efforts were regarded as substantially more effective than patents in protecting products. Eighty percent of the sample businesses rated the effectiveness of sales and service efforts above 5.0, but only 20 percent considered product patents this effective.” Levin R.C. Klevorick A.K. Nelson R.R. Winter S.G. , “Appropriating the Returns from Industrial Research and Development,” Brookings Papers on Economic Activity, 1987, 783–820, pp. 794–795.

See Mowery D.C. Rosenberg N. , Technology and the Pursuit of Economic Growth (New York, NY: Cambridge University Press, forthcoming); OECD, Science and Technology Policy Outlook: 1988 (Paris: OECD, 1988); David P. , “Technology Diffusion, Public Policy, and Industrial Competitiveness,” in Rosenberg N. Landau R. , eds., The Positive Sum Strategy (Washington, D.C.: National Academy Press, 1986); Ergas H. , “Does Technology Policy Matter?” in Guile B. Brooks H. , eds., Technology in the Global Economy (Washington, D.C.: National Academy Press, 1987); Mowery D. , “The Diffusion of New Manufacturing Technologies,” in Cyert R.M. Mowery D.C. , eds., The Impact of Technological Change on Employment and Economic Growth (Cambridge, MA: Ballinger, 1988); Peck M.J. Goto A. , “Technology and Economic Growth: The Case of Japan,” Research Policy, 10 (1981): 222–243.

A central motive for many international collaborative ventures is the need to surmount nontariff barriers to market access. In many cases, as was noted earlier, these trade barriers are erected by national governments to retain the benefits of publicly funded commercial technology development programs within their boundaries. See Mowery D.C. , “International Collaborative Ventures in U.S. Manufacturing,” Research Policy (1989); idem, ed., International Collaborative Ventures in U.S. Manufacturing (Cambridge, MA: Ballinger, 1988).

As Nelson (High-Technology Policies: A Five-Nation Comparison) points out, the ability of nations to transform “leading” technologies into “strategic” technologies is declining as a result of these developments.

There now exists a large prescriptive literature on this issue. See Osterman P. , Employment Futures (New York, NY: Oxford University Press, 1988); Cyert R.M. Mowery D.C. , eds., Technology and Employment: Innovation and Growth in the U.S. Economy (Washington, D.C.: National Academy Press, 1987); and the Council on Competitiveness, Picking Up the Pace: Commercial Innovation in the U.S. Economy (Washington, D.C.: Council on Competitiveness, 1988) for recent contributions.

See Hatsopoulos G.N. Krugman P.R. Summers L.H. , “U.S. Competitiveness: Beyond the Trade Deficit,” Science, 241 (1988): 299–307.