Managing Our High-Tech Trade

The world has gotten away from us. While we continue to debate the relative merits of free trade and protection, an increasing share of our trade is managed by the policies of our trading partners. At most, one-half of world trade is now covered by the General Agreement on Trade and Tariffs; the rest is affected by national policies that conflict with one another and with the basic GATT principles of multilateralism and non-discrimination. For many products, the choice is no longer between free trade and protection, but rather between managing our own trade and allowing it to be managed by others.

Nowhere is this choice more important than in our high-technology industries. High-technology products--those embodying high levels of spending on research and development--account for a significant and growing share of U.S. trade: about 38% of non-agricultural merchandise exports and 25% of non-petroleum merchandise imports in 1988. But the U.S. trade position in most high-technology products declined sharply during the 1980s. Overall, we now run a trade deficit in such products.

Should this trade deficit be any more worrisome than those for other products, such as apparel, steel or autos? The answer is yes, for two reasons. First, high-technology industries have greater growth potential, higher productivity growth, higher export-to-sales ratios and pay higher returns to workers and investors than most other industries. Second, these industries finance the commercial research and development activities on which continued technological breakthroughs depend. For these two reasons, our future living standards depend on the health of our high-technology producers.

The link between today’s high-technology production and tomorrow’s living standards has not escaped our trading partners. Foreign governments are pursuing a variety of policies to create competitive advantages for their high-technology producers. The most common forms of direct government support include subsidies for investment or research, restrictions on access to the domestic market by similar goods from foreign producers, restrictions on foreign direct investment, and procurement and regulatory policies that favor domestic producers.

In high-technology industries, production costs fall and product quality increases as output expands. Consequently, even short-term promotional or protectionist policies can confer long-term cost and technological advantages.

Competitive Disadvantage

Barriers to foreign markets can be particularly damaging to American companies. In industries in which the U.S. market is open while large foreign markets are closed, foreign firms may be able to achieve more efficient scale and learning advantages, resulting in a declining share of the U.S. market for domestic producers. And as their profits are squeezed, American companies are forced to cut back on research and development spending, quickly losing competitive position in the race for next-generation technologies. Even the option of investing abroad to gain access to foreign markets is often precluded or delayed by foreign restrictions.

Not surprisingly, a growing number of high-technology producers have become more aggressive in seeking the relief afforded by the nation’s trade laws. The number of anti-dumping and countervailing-duty actions brought by U.S. companies skyrocketed in the 1980s. Increasingly, the alternative to a strategic national policy for managing trade in high-technology industries is not free trade but a “privatized trade policy,” resulting from the legal initiatives of American companies. Because privatized trade policy tends to be protectionist--relief comes in the form of restricting imports and increasing their price--it may serve the short-run interests of American producers at the cost of the nation’s long-run interests.

How should America manage its high-technology trade? First, we should continue our support for the Uruguay Round of GATT talks to extend GATT’s coverage and improve its functioning. The treatment of intellectual property under GATT is an especially important issue for high-technology industries.

Second, we must strengthen bilateral negotiations to improve market access, especially in Japan, where structural impediments to U.S. producers remain strong. Europe, however, should not be overlooked. In preparation for a unified European market by 1992, the European Community has already taken actions that discriminate against American producers that fail to locate the technologically significant parts of their production within the community.

Monitoring Needed

Third, we should work with Europe and Japan to develop agreements specifying rules of behavior for governments and firms in high-technology industries. At the government level, there should be greater uniformity in what is and what is not acceptable practice, especially in relation to anti-dumping procedures and restrictions on foreign direct investment. And at the company level, there should be greater consistency in national antitrust regulations.

To guarantee that new agreements on rules of behavior are honored, multilateral institutions to monitor their enforcement should be established. Ideally, such institutions should have the power to issue binding judgments in the event of national disputes.

Finally, in the absence of such agreements or as a tactical move to press for their introduction, managed trade agreements specifying trade outcomes may be required. For example, if common antitrust rules regulating firms’ behavior cannot be enforced, then an agreement specifying outcomes consistent with the enforcement of such rules may be a useful substitute. This is the approach underlying the U.S.-Japan semiconductor trade agreement, which sets a target of a 20% import share for the Japanese market by 1991.

An outcome approach may be essential if persistent barriers to critical foreign markets remain a serious threat to the competitive strength of domestic producers. And such an approach may be especially attractive if the only practical alternative is unilateral protection with the likelihood of foreign retaliation.

Can the United States pursue a strategically motivated trade policy on many fronts at once? As currently organized, the U.S. government has little capacity to establish sectorial priorities for high-technology industries and trade. Another column would be required to suggest institutional changes that might improve the government’s capacity for strategic decision making. But two things are clear.

First: The resources that the government devotes to trade policy are appallingly small. If the United States is to have a credible activist trade policy, it must enlarge its financial commitment to the development of such a policy.

Second: Sterile, ideologically determined debates about free trade versus protection should be superseded by common-sense evaluations of the role of managed trade arrangements in high-technology industries. The old shibboleths are no longer relevant. We cannot afford to ignore the new realities of the world economy.