PERSPECTIVE ON TRADE : Let the Chips Fall Where They May : Japan has exceeded the minimum imports called for in a 1991 pact with the United States, so let market forces prevail.

The Clinton administration is trying to renew the 1991 semiconductor agreement with Japan, slated to expire in July, but is running into objections in Tokyo. The agreement specifies that 20% of the Japanese market be set aside for foreign (read American) products. But Japan has been exceeding that quota since 1993, reflecting the natural strength of resurgent American manufacturers in fabricating chips. One is hard put to know any interest anywhere being served by preserving this numerical target, except perhaps Bill Clinton’s chances of winning California votes in 1996.

Time was when America was convinced that the Japanese juggernaut, having overtaken Pittsburgh and Detroit, was on the march against Silicon Valley. Electronic giants of the East made superb memory chips, batch after batch. The Japanese boasted of two sources of their strength: culture and industrial policy. So, while American businessmen studied Zen and Miyamoto Musashi (a medieval swordsman of mythical prowess), American officials studied the Ministry of International Trade and Industry.

In the words of Clyde V. Prestowitz Jr., who spearheaded the movement for industrial export policy at the Commerce Department, “Like disadvantaged U.S. minorities, we wanted an affirmative-action program that would offset the effects of past discrimination by actively working to increase imported chips [into Japan].” The affirmative action resulted in an import quota for Japan, strengthened antidumping measures and attempts to “curb [Japan’s] tendency to invest regardless of profitability.”

Well, antidumping was counterproductive while Japanese D-rams were superior. Obviously, Prestowitz also failed to curb Japan’s investment habits, as witness the case of the “bubble” economy. So U.S. policy came down to imposing import quotas on Japan, beginning with the initial semiconductor agreement of 1986.

But when U.S. Trade Representative Mickey Kantor tried to extend numerical targets from chips to autos last year, Ryutaro Hashimoto, then MITI minister and now the prime minister, said “no”.

All the same, the Clinton administration is trying to save the semiconductor agreement on the assumption that the roaring comeback of the U.S. chip industry is owed at least in part to import quotas, and that, without it, the industry may fall behind Japan again. This is a preposterous proposition.

There is the awkward matter that, as measured by the formulas agreed to by Japan and the United States, foreign chips have gained 27% in market share in the third quarter of 1995. And Japan’s chip import trend is pointing up, not down.

So what do you do with an import quota when it is exceeded? U.S. officials are tempted to ask for a ratcheting up of the quota, but are too embarrassed to. That gives an opening for MITI’s bureaucrats to use 20% as a ceiling, rejecting imports above it. America must choose free trade (taking 27% or whatever the market offers) or content itself with a 20% share in managed trade. That seems to be Japan’s message. And it makes eminent sense.

What Prestowitz thought was Japan’s discrimination was in fact the genuine strength of its chip makers in the 1980s, but that strength has been eroded. The U.S. semiconductor industry, having lost the world top share to Japan in 1986, regained it in 1993. In personal computers, U.S.-made microprocessors take nearly 90% of the market; Japan can offer nothing comparable to Intel’s Pentium. U.S. industry sales are projected to rise to more than $70 billion in 1995, up 27% from 1994. Japan should be asking for affirmative action, though it won’t.

Worldwide, the semiconductor industry has radically changed since 1986. New players from Korea and Taiwan are expanding rapidly, more than doubling their share in Japan alone last year. To hold down the cost of research and development, joint ventures and alliances among the established players in America and Japan have skyrocketed. Taking advantage of the strong yen over the last several years, Japanese manufacturers have also been investing heavily in Southeast Asia and China to create subsidiaries. Global interdependence in research, development and production seems to be driven by the engine of the information revolution, which knows no borders.

The semiconductor agreement has clearly outlived its purpose. Let’s make a clean break with the past by letting the chips fall where they may.