White House Rejects Protection for U.S. Makers of Key Chip Parts : Trade: Japanese firms supply nearly 90% of the chip packaging used by the Pentagon. Some see a threat to national security.
In an important early test of the Clinton Administration’s views on national industrial policy, the White House and Pentagon have quashed a Commerce Department effort to help U.S. makers of semiconductor components compete against powerful Japanese rivals.
The department urged the Administration to endorse a petition by two U.S. firms asserting that Japan’s dominance of the world market for a seemingly arcane product--advanced ceramic packaging for semiconductors--constitutes a national security threat to the United States.
Officials say the proposed ruling would have marked the first time the United States has used trade laws to formally declare that Japan’s influence over any industry endangers U.S. security. If approved, it could have had a significant impact on U.S.-Japan relations.
Commerce Department officials believed they had a good case: Every major high-tech weapons system in the U.S. arsenal relies on the ceramic semiconductor components, and Japanese companies now supply nearly 90% of the components used by the Pentagon. Administration officials acknowledge that the Pentagon is more dependent on Japan for the ceramic components than for any other critical materials used in today’s weapons systems.
But the Commerce Department’s tough recommendations have been quietly shelved, and angry department officials now fear that a White House study of the industry will bury the issue entirely.
The semiconductor case offers a fascinating glimpse at the difficulty of mounting an industrial policy in an increasingly global economy, even for an Administration committed to pursuing a foreign policy that furthers U.S. economic interests around the globe.
Insiders also say the case suggests that industrial policy has yet to become a high priority in the Clinton White House. Economist Laura D’Andrea Tyson, whose hawkish book on industrial policy and subsequent appointment as chairman of the Council of Economic Advisers gave the impression that Clinton would endorse tough action, is said to be in the minority in the White House. Newly-named Defense Secretary Bobby Inman also shares many of her strong views on the need for government to support and encourage a strong technology base, but it remains to be seen how much influence Inman will have on such issues outside of the Pentagon.
“There is very little support for industrial policy in the core group of economic advisers in the White House,” one senior Administration official said.
And, despite Clinton’s stated goal of linking national security and economic security issues, the semiconductor case shows how difficult it is to win the military’s cooperation for such a strategy.
Inman’s background as chairman of a high-tech industry consortium and his outspoken advocacy of government support for leading-edge technological research suggests that he may bring a different perspective to such industrial policy issues than did his predecessor, Les Aspin.
The semiconductor case actually began in 1992 when Coors Electronics, a Tennessee-based subsidiary of Coors Brewing, and Ceramics Process Systems, a Massachusetts-based firm, filed a trade petition with the Bush Administration. They argued that the Pentagon, as well as U.S. computer companies that buy semiconductors for use in their products, were too dependent on one Japanese company, Kyocera, for their supplies of high-tech ceramic semiconductor packages.
Kyocera, industry and government officials say, controls roughly 70% of the world market for the components. Although Kyocera has a plant in San Diego--its Washington lobbyist argues that it should be treated as a U.S. firm--Commerce Department officials say virtually all of its ceramic packaging for semiconductors comes directly from Japan.
Department employees, with the support of Commerce Secretary Ron Brown, recommended that the Administration issue a formal trade ruling declaring Japan’s dominance a threat to national security, and they called on the Pentagon to give U.S. suppliers preferential treatment in contracting for the parts. Since the Pentagon buys so much, that would have given the U.S. producers an important leg up in the U.S. market.
But Administration sources said that senior Pentagon officials pressured the department to back down from issuing a formal ruling. After intense debate between the Commerce and Defense departments, it issued a more modest recommendation, calling for the creation of a new government-supported manufacturing center in San Diego and research operations at the Sandia and Oak Ridge national laboratories.
But even those modest recommendations have been deferred. Instead, a working group run by the National Economic Council has begun to study the domestic industry, and angry Commerce Department officials say they fear the study will ultimately bury the issue.
The Pentagon has apparently opposed actions to help domestic producers because defense officials are happy with their Japanese suppliers and apparently don’t want to have to divert scarce research funds from other areas.
Kenneth Flamm, deputy assistant secretary of defense, stresses that there is plenty of unused factory capacity in the United States, especially at IBM, that could quickly gear up to produce the semiconductor parts in the event of a war or other national emergency. What’s more, the Pentagon hopes to shift to newer technologies in the next few years, a move that would make the Japanese-supplied components obsolete. “We determined that there isn’t a national security threat in this area,” Flamm said.
But experts who support the Commerce Department recommendation say those new technologies be unavailable for years and that in the meantime, the Pentagon, which spends between $100 million and $200 million a year on the components, will have little choice but to rely heavily on Kyocera.
Administration officials insist that just because the White House did not declare a national security threat in the semiconductor case, it is unfair to say Clinton is unwilling to take strong measures to protect U.S. economic interests. White House officials note that the working group is now studying the entire electronics packaging industry and still expects to issue a new set of recommendations early next year.
