Trade Laws May Backfire on U.S. Firms
To members of Congress who are seeking to protect American manufacturers from what they regard as unfair competition from abroad, the massive trade law they enacted last year stands as a monument of hard-nosed realism.
But to a wide range of U.S. businesses that stand to suffer from its implementation, the act is only another sorry example of the law of unintended consequences.
A case in point: the heightened threat of 100% tariffs against an array of 54 Japanese imports in retaliation for Japan’s failure to open its market in mobile radio and cellular telephone services and equipment to U.S. manufacturers.
Motorola, the lone U.S. manufacturer that was significantly damaged by Japan’s closed telecommunications markets, prevailed upon the office of U.S. Trade Representative Carla A. Hills to retaliate under the terms of the 1988 trade act, which increased the likelihood that such tariffs would be imposed when circumstances warranted.
What Will Be Hit?
Hills’ office has listed 54 Japanese products, ranging from high-tech computer equipment to cosmetics, that are under consideration for retaliatory tariffs. Its job now is to determine which products should be hit.
To users of each of those 54 products, the answer is clear: Not the ones we need. They argue that the tariffs would block their ability to buy the low-cost, high-quality parts that enable them to compete in international markets--against, primarily, the Japanese.
“We applaud the proposed action, but . . . ,” said Robert N. Noyce, chief executive of Sematech, the new consortium of American semiconductor and computer companies that has joined to compete with Japan in the production of high-end microprocessors, semiconductors and other computer components.
It was a big “but.” Sematech, which has sought government financing and partial shielding from antitrust laws, is far from averse to the idea of managed trade, if that would help it compete with Japan. But in Sematech’s view, punitive tariffs that could block the import of high-tech Japanese equipment needed to produce even higher-tech semiconductors and computers would be counterproductive.
“The suggested sanctions against the Japanese will, in fact, harm the U.S. semiconductor industry by forcing American companies to pay tariff-inflated prices for certain semiconductor equipment,” Noyce told the trade representative’s office at a May 24 hearing.
“Since the Japanese have targeted that industry segment and have achieved dominating technological superiority in certain segments, the proposed tariffs would serve only to provide Japanese semiconductor suppliers with a competitive advantage,” Noyce said.
He concluded: “We have to be careful of the unintended actions of such well-deserved and well-intentioned sanctions.”
Sematech’s predicament is an inevitable price of retaliation, said Lionel Olmer, a former Commerce Department trade official who has been doing battle with the Japanese for years.
“What always happens in these cases is that the same companies that are lobbying the U.S. government to be tough are also trying to make sure the retaliation doesn’t jeopardize any of their suppliers or business interests,” Olmer said in an interview. “But it’s impossible not to jeopardize somebody’s interest. There’s no question about the law of unintended circumstances.”
“You can’t avoid goring someone’s ox,” added Kenneth S. Flamm, a specialist in trade and high-technology industries at the Brookings Institution. “It’s a pit full of snakes we’ve descended into, and it’s not clear who’ll get bitten and who will survive.”
In the case of the tariffs in retaliation for Japan’s closed mobile radio and cellular telephone markets, the lobbying is going on mostly in public. It was concentrated in the May 24 hearing at the Office of the U.S. Trade Representative.
Another company testifying that day was Amdahl, one of the few remaining players in the competition with Japan to score first with the next generation of supercomputers.
Amdahl explained that its bread-and-butter product, the commercial Amdahl model 5590 mainframe computer, depends on Japanese suppliers for about half of its components. With the 100% tariffs proposed in the telecommunications case, Amdahl “will have no choice but to pay a penalty projected to be in the range of $40 million to $50 million annually,” said Joseph Zemke, company spokesman, at the hearing.
That figure, Zemke said, amounts to about 25% of Amdahl’s annual $200-million budget for research and development--the very lifeblood of its effort to develop a better supercomputer.
“A critical requirement for success in the highly competitive global data-processing marketplace is the unyielding need to constantly incorporate the finest technologies available worldwide,” Zemke said.
Markets Are Interdependent
“To remain competitive in this marketplace, no company can permit either local or national borders to limit its technology sources. On the other hand, no one country or company enjoys a monopoly on these items for very long.
“Therefore, the entire industry--including companies like IBM, Cray and Amdahl--have found it necessary to incorporate varying percentages of foreign-made components and sub-assemblies in their products in order to successfully compete within the U.S. and overseas.”
Accordingly, Zemke said, “retaliation as currently proposed could make Amdahl less competitive in the very market the U.S. seeks to open through this proceeding--Japan.”
The ironies abound. The telecommunications case is based primarily on a complaint by Motorola, a leading U.S. semiconductor and electronics manufacturer that has been told by Japan it may not operate cellular telephone services in the Tokyo area.
But two leading opponents of the retaliation that Motorola’s complaint has set in motion are two other major U.S. providers of cellular telephone and mobile radio services: Bell Atlantic and General Electric.
Subsidiaries Also Hurt
Subsidiaries of both companies explained at the May 24 hearing that the process of opening Japan’s markets for the convenience of Motorola also would cut off Japan as a key supplier of equipment for the goods and services they provide in the domestic market.
“The U.S. cellular telephone industry depends heavily upon a ready supply of reasonably priced cellular products from Japan,” Bell Atlantic said.
GE said that, if its mobile division is forced to pay tariff-inflated prices for the mobile radio equipment that sustains its cellular telephone production, “our position in the marketplace will be untenable.”
American subsidiaries of Japanese firms also stand to be harmed. Japanese electronics companies have made major investments in the United States, and American subsidiaries of the Japanese-controlled international giants Mitsubishi and Fujitsu were among the companies that testified against retaliation.
Indeed, Fujitsu has established a firm foothold as a minority owner of Amdahl, two of whose directors are top executives of the Japanese firm. To Flamm of Brookings, such interrelationships make unintended consequences almost inevitable when the government pursues a policy of managed trade.
“The interdependence of the two markets--the United States and Japan--has never been more obvious than in the computer-semiconductor field,” Flamm said. “But the American computer manufacturers, who know they need Japanese components to help them maintain their competitive edge over the Japanese, are not very happy about it. They don’t like being dependent on Japan for this technology.”
By the same token, however, the Japanese depend on the Americans as the main market for the semiconductors they produce.
It is not quite inevitable that the U.S. trade representative’s office will order retaliatory tariffs in the case of Japan’s mobile radio and cellular telephone markets. The office has quietly informed the Japanese that they can escape retaliation if they can negotiate a satisfactory market-opening arrangement with Motorola by July 10.
Olmer would be surprised if the Japanese Ministry of Posts and Telcommunications, legendary for its inward-looking indifference to Japan’s wider global trade interests, reverses course and strikes a deal.
Referring to the section of the 1988 trade law that mandates retaliation for alleged unfair trading practices, Olmer said: “The problem is, once Section 301 becomes a body in motion, it’s almost impossible to stop.”
But it is probable that many of the products listed as eligible for retaliation, many of them goods totally unrelated to cellular phones or two-way radios, will be dropped from the final list.
At present, for instance, certain Japanese cosmetics are on the list. Estee Lauder Inc., a major U.S. cosmetics firm, objected.
Lauder has established a 10% market share in the Japanese cosmetics market, and it warns that tariffs against Japan’s comparatively minor penetration of the U.S. market would only invite damaging retaliation.
Harris/3M Documents Products Inc., which provides office copying services at the middle and lower range of the U.S. commercial market, offered yet another kind of argument.
A proposed punitive tariff on Japanese photocopying equipment, it said, would damage its own business by raising costs. But it would do nothing to protect U.S. photocopier manufacturers, which have virtually abandoned the low end of the market to the Japanese.
