Chip Industry Joins the Unwise Drift to Managed Trade
Anyone who worries about the future of American industry must reserve a special concern for semiconductor manufacturers--the makers of tiny electronic “chips.” The chip industry has strategic importance in both economic and military terms, and the challenge from Japan must surely give the most ardent free trader pause. But these anxieties cannot obscure the reality of the recent U.S.-Japanese semiconductor agreement. It’s massive protectionism.
Ponder its scope. It attempts to prop up and regulate chip prices not only in the United States and Japan but also in the rest of the world. It tries to force Japan to more than double its imports of American chips by 1991. At best, the agreement will provide temporary relief to a vital industry and defuse political pressures for broader protectionism. At worst, it will create a crude global cartel that, by giving the chip industry a false sense of security, will actually worsen its problems.
No one doubts the distress of the U.S. companies. Computers are big users of chips, and the computer industry’s slump has hurt badly. Intense competition from Japan has worsened matters for U.S. companies. As recently as 1974 eight of the top 10 chip companies in the world were American; in 1985 Japanese firms held five of the top 10 places.
Last year most U.S. semiconductor companies had large losses, and the U.S.-Japan agreement aims to provide some relief. The sales potential in Japan seems huge. In 1985 U.S. companies had about 10% of Japan’s $8-billion chip market. But that market, propelled by Japan’s consumer electronics industry, could reach $20 billion by 1991. Japan seems committed to pressure its chip users to buy 20% of their supplies from U.S. firms. By 1991 that could mean $4 billion in sales, up from 1985’s $800 million.
As for prices, Japanese exporters will submit price and cost information to the Ministry of International Trade and Investment, which would prevent Japanese chips from being “dumped” at unfair prices abroad. The price controls are intended to raise prices above the low levels caused by overcapacity. In turn, high prices would help U.S. companies.
But other industries--steel, autos, textiles--have followed the protectionist path without finding happiness. In steel, protectionism diverted the industry from dealing with its basic problems: poor management and high labor costs. In textiles, imposing import limits on one country encouraged more imports from other countries. Auto companies benefited from Japan’s “voluntary” limits on car exports. But the quotas prompted the Japanese to export bigger, higher-priced models, easing the entry of the South Koreans and the Yugoslavs into the U.S. small-car market.
There are disturbing parallels in semiconductors. If chip prices are unrealistically high in Japan, will production shift elsewhere? Sanyo Electric Co., Japan’s seventh-largest chip maker, plans to move 70% of its chip production overseas by 1990. Even now, South Korean companies are rapidly increasing their chip sales. Some analysts argue that smaller U.S. chip companies need to merge to compete with larger, better-financed Japanese rivals.
The agreement’s most defensible part is Japan’s commitment to buy more U.S. chips. In theory, Japan abandoned formal import restrictions on chips in 1975. But the U.S. market share never rose. How come? The stability buttressed the U.S. claim of discrimination. By contrast, the agreement’s price controls are economically absurd. Preventing “dumping” sounds innocent, but Japan was forced to adopt a U.S. dumping standard that ignores economic reality. It requires producers to set prices high enough to cover all costs, including an 8% profit. Any business would like that guarantee. But in competitive markets no one is assured a profit.
What is truly radical is U.S. insistence that this same unrealistic standard apply to Japanese sales to other countries. In effect, America is promoting worldwide price regulation of chips just as OPEC promotes worldwide price regulation of oil. Even if the effort at price control fails, embracing it undermines U.S. moral authority to resist protectionism elsewhere.
Trade is increasingly “managed” under specific agreements regulating volumes or prices. The theory of managed trade is to balance the demands of domestic industries for stability with the reality that as a nation we cannot forsake international markets. But the gains are mostly illusory. What we call “trade problems” flow from unstable global economic conditions or basic changes in individual industries. More managed trade has neither reduced our trade deficit nor cured the problems of distressed industries like steel and textiles. Without stronger global economic growth, and higher computer sales, the semiconductor industry isn’t going to get better. And if it doesn’t, what has been sold as a “temporary” agreement may become a permanent part of the self-defeating drift toward managed trade.
