National Competitiveness in a Global Economy 9780585149844

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National Competitiveness in a Global Economy

International Political Economy Yearbook Volume 8 William P. Avery and David P. Rapkin, Series Editors Board of Editors Jonathan D. Aronson University of Southern California Richard Ashley Arizona State University Thomas J. Biersteker University of Southern California Volker Bornschier University of Zurich James A. Caporaso University of Washington Christopher Chase-Dunn Johns Hopkins University Peter F. Cowhey University of California, San Diego Robert W. Cox York University Ernst-Otto Czempeil University of Frankfurt Alain de Janvry University of California, Berkeley Judith Goldstein Stanford University Keith Griffin Oxford University W. Ladd Hollist Brigham Young University Hans-Henrik Holm Aarhus University, Denmark Raymond F. Hopkins Swarthmore College

Takashi Inoguchi University of Tokyo Harold K. Jacobson University of Michigan Robert O. Keohane Harvard University Stephen J. Kobrin New York University Stephen D. Krasner Stanford University Robert T. Kudrle University of Minnesota Bruce E. Moon Lehigh University Heraldo Muñoz University of Chile Lynn K. Mytelka Carleton University E. Wayne Nafziger Kansas State University Guillermo O’Donnell University of Notre Dame Dieter Senghaas University of Bremen Susan Strange London School of Economics and Political Science William R. Thompson Indiana University F. LaMond Tullis Brigham Young University Laura D’Andrea Tyson University of California, Berkeley

National Competitiveness in a Global Economy edited by

David P. Rapkin William P. Avery

b o u l d e r l o n d o n

Published in the United States of America in 1995 by Lynne Rienner Publishers, Inc. 1800 30th Street, Boulder, Colorado 80301

and in the United Kingdom by Lynne Rienner Publishers, Inc. 3 Henrietta Street, Covent Garden, London WC2E 8LU

© 1995 by Lynne Rienner Publishers, Inc. All rights reserved

Library of Congress Cataloging-in-Publication Data National competitiveness in a global economy / edited by David P. Rapkin and William P. Avery. p. cm.—(International political economy yearbook ; v. 8) Includes bibliographical references and index. ISBN 1-55587-542-4 1. United States—Foreign economic relations. 2. United States— Commercial policy. 3. Competition—United States. 4. Competition, International. 5. International economic relations. I. Rapkin, David P. II. Avery, William P. III. Series. HF1410.I579 vol. 8 [HF1455] 337.73—dc20 94-43543 CIP

British Cataloguing in Publication Data A Cataloguing in Publication record for this book is available from the British Library.

Printed and bound in the United States of America

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The paper used in this publication meets the requirements of the American National Standard for Permanence of Paper for Printed Library Materials Z39.48–1984.

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Contents List of Contributors Acknowledgments 1

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Competitiveness: Useful Concept, Political Slogan, or Dangerous Obsession? David P. Rapkin and Jonathan R. Strand Does the United States Have an International Competitiveness Problem? Stephen D. Cohen

Sources of Competitive Asymmetries Between the United States and Japan Iwao Nakatani

Ideology and Competitiveness: The Basis for U.S. and Japanese Economic Policies Simon Reich

The Pursuit of Competitiveness in East Asia: Regionalization of Production and Its Consequences Mitchell Bernard and John Ravenhill

The Limits on Hegemonic Predation as a Response to Competitiveness Problems: The United States and Taiwan Cal Clark

Fairness, Efficiency, and Opportunism in U.S. Trade and Investment Policy Robert T. Kudrle

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Alternative Paths to Competitiveness: U.S. Trade Policies in International Air Transport Services and Commercial Class Aircraft Manufacturing Vicki L. Golich Ideas and Foreign Policy: The Emergence of TechnoNationalism in U.S. Policies Toward Japan Masaru Kohno

Cooperating to Compete: The European Experiment Wayne Sandholtz

References Index About the Book and the Editors

179 199 225 243 267 285

The Contributors Mitchell Bernard teaches Japanese politics, comparative politics, and the political economy of East Asia in the Political Science Department at York University. Originally trained and certified as a lawyer, he previously worked on trade and investment issues in Japan and the People’s Republic of China. He is the author of numerous articles and book chapters, and his research interests include structural change in the Japanese political economy, changing forms and ideologies of regionalization in East Asia, and the relationship between changes in production, technology, and social power in the global political economy.

Cal Clark is professor and chair of political science at Auburn University. His primary teaching and research areas include international political economy, East Asian development, comparative public policy, and U.S. competitiveness. He is the author of Taiwan’s Development; coauthor of Women in Taiwan Politics and Flexibility, Foresight, and Fortune in Taiwan’s Development; coeditor of Studies in Dependency Reversal, State and Development, and The Evolving Pacific Basin; and numerous articles in professional journals.

Stephen D. Cohen is professor in the School of International Service at American University. His teaching and research interests include international economic relations, with an emphasis on foreign trade policy and international finance. His recent books are Cowboys and Samurai: Why the U.S. Is Losing the Battle with the Japanese and Why It Matters and The Making of U.S. International Economic Policy: Principles, Problems and Proposals for Reform.

Vicki L. Golich is associate professor of political science at California State University, San Marcos, and faculty associate of the Center for Research in Conflict and Negotiation at the Smeal College of Business Administration, Pennsylvania State University. She has written extensively about commercial aviation as a case study to analyze prevailing theories about international relations; organizational management and strategic alliance among firms; global provision of public goods; and international political economy.

Masaru Kohno is assistant professor in the Department of Political Science vii

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at the University of British Columbia. His work has appeared in Asian Survey, World Politics, Comparative Politics, and the British Journal of Political Science.

Robert T. Kudrle is associate dean for research at the Hubert Humphrey Institute of Public Affairs and director of the Orville and Jane Freeman Center for International Economic Policy. He has served as a consultant and expert witness for the Antitrust Division of the U.S. Department of Justice and as a consultant to the Canadian Department of Consumer and Corporate Affairs, the United Nations Center on Transnational Corporations, the Overseas Private Investment Corporation, the U.S. Agency for International Development, and the Urban Institute. His most recent work has appeared in Public Finance, World Politics, and International Organization.

Iwao Nakatani is professor of economics at Hitotsubashi University, Tokyo, Japan. He has published numerous books and articles, in English as well as Japanese, on Japan’s political economy, corporate organizations, and U.S.Japanese relations.

David P. Rapkin is associate professor of political science at the University of Nebraska–Lincoln and research associate of the New International System Project, University of Tsukuba, Japan. He has served as coeditor of the International Political Economy Yearbook and has published numerous articles and book chapters on political economy topics.

John Ravenhill is associate director of the Research School of Pacific and Asian Studies and senior fellow in the Department of International Relations, the Australian National University. His recent books include Hemmed In: Responses to Africa’s Economic Decline, Economic Relations in the Pacific in the 1990s: Cooperation or Conflict? and Pacific Cooperation: Building Economic and Security Regimes in the Asia-Pacific Region.

Simon Reich is associate professor in the Graduate School of Public and International Affairs at the University of Pittsburgh. He is the author of The Fruits of Fascism: Postwar Prosperity in Historical Perspective and two reports for the U.S. Office of Technology Assessment, and is coauthor of an article in International Organization.

Wayne Sandholtz is assistant professor in the Department of Politics and Society at the University of California–Irvine. He is author of High-Tech Europe: The Politics of International Cooperation and coauthor of The Highest Stakes: The Economic Foundations of the Next Security System.

Jonathan R. Strand is a doctoral student in the Department of Political Science at the University of Nebraska–Lincoln. His research interests include international political economy, Japanese political economy, and comparative telecommunications policy.

Acknowledgments Our thanks go first to the authors, who have exhibited considerable patience in the long gestation of this volume as chapters were revised (and re-revised) and added. We are particularly indebted to those who helped with the review of manuscripts: Evelyn Fink, Chalmers Johnson, Robert Keohane, Stephen Krasner, E. Wesley Peterson, and Raphael Zariski. Our thanks also to the board of editors, especially to those who reviewed manuscripts. The able editorial assistance of Jonathan Strand was instrumental in completing this volume, and we are grateful. Several of the contributors to the volume wish to acknowledge debts incurred during the course of this project: Stephen D. Cohen thanks Stephen Silvia and Michael Hannon for their comments on earlier drafts of his chapter. Simon Reich acknowledges the Sloan Foundation for support of the research on his chapter. Robert T. Kudrle expresses his thanks to Lorraine Eden, E. M. Graham, and Simon Reich for valuable comments, and to Robert Klassen for his research assistance. Masaru Kohno acknowledges the helpful comments of Michael Caldwell, Brian Gaines, Geoffrey Garrett, Judith Goldstein, Stephen Krasner, Gabriella Montinola, Henry Nau, and Daniel Okimoto. Many of the chapters in this volume were originally presented at the twelfth Hendricks Symposium, “American Trade Policy in a Changed World Political Economy,” sponsored by the Department of Political Science, University of Nebraska. The symposium was part of the Nebraska Lectures in American Government and Politics, made possible by the generosity of G. E. Hendricks, an alumnus of the University of Nebraska. Others at the University of Nebraska who provided financial support for the symposium are the Montgomery Lecture Series, the University Research Council, and the College of Arts and Sciences. The editors are deeply grateful to all these individuals and programs for their support of the symposium. With this volume, we end our editorship of the International Political Economy Yearbook. We wish again to express our gratitude to the College of Arts and Sciences of the University of Nebraska for its continued support throughout the course of our editorship. To the new editors, Kurt Burch, Robert Denemark, Kenneth Thomas, and Mary Ann Tetrault, we send our ix

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best wishes. Finally, we express our gratitude to the able production staff at Lynne Rienner Publishers for putting up with us for the past eight years. David P. Rapkin William P. Avery

David P. Rapkin and Jonathan R. Strand

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Competitiveness: Useful Concept, Political Slogan, or Dangerous Obsession? Over the last decade, concerns about international “competitiveness” have become a regular part of the public discourse on U.S. domestic and foreign economic policies. Politicians, corporate leaders, scholars, and business analysts have held hearings, convened conferences and seminars, and published a growing body of books, reports, articles, and op-ed pieces that address competitiveness issues. The messages conveyed through these channels have typically bemoaned the loss of competitiveness, expounded on the societal and governmental shortcomings alleged to have brought it about, and proposed public policies or private strategies to arrest or reverse the adverse trend. Since competitiveness is truly a “motherhood and apple pie” political issue—who could possibly be opposed to improving U.S. competitiveness?—it has become a bipartisan concern, with both Republicans and Democrats couching their respective policy agendas in the rhetoric of competitiveness. In consequence, the term has come to be used so ubiquitously and in such an imprecise manner as to confound whatever descriptive or explanatory value the competitiveness concept may in principle have to offer. Competitiveness exhibits all the features of an “essentially contested concept”: a profusion of meanings, with disagreement over which connotations are correct and over how to weight or combine them; difficulties in applying the concept, particularly in specifying the real world referents that the concept denotes; and differences in how we appraise the concept insofar as conflicting values and divergent preferred outcomes are embedded in its use (Connolly, 1993: chap. 1). If, as Connolly contends, collectively hashing out the meaning of contested concepts is itself a form of politics, then we should be neither surprised nor alarmed by the use of competitiveness as a “political slogan”—a kind of broad rubric under which different state and societal actors (e.g., firms, unions, parties and their candidates, government agencies) attempt to advance their own self-interested agendas. Political sloganeering, while perhaps muddying the definitional waters for those aiming 1

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to make social scientific use of the concept, would seem to be a rather common and ultimately harmless purpose for the term. But Krugman (1994, 1994a: 268–292), in several recent polemical assaults on the concept and its advocates (including President Clinton and several of his senior economic advisers), argues forcefully not only that national competitiveness is a meaningless concept, but also that concerns about competitiveness amount to a “dangerous obsession.” The danger, according to Krugman, lurks in the form of disastrous policy advice that, in the worst case, could lead to a pointless but costly trade war. Krugman’s polemics do have the virtue of framing a number of important issues that have not received adequate attention in the competitiveness debate. We will address some of these in the following sections. The subsequent chapters address others and contribute in various ways to the ongoing debate by imposing much needed order on the sprawling, multifaceted debate itself, by theorizing the sources or ingredients of competitiveness, particularly as manifest in Japan and East Asia; and by exploring some of the observable consequences and corollaries of policymakers’ sustained concerns (obsessions in Krugman’s view) about national competitiveness. Before turning to the individual contributions, this introductory essay first examines the multiple connotations, unclear denotations, and appraisive differences that make competitiveness an essentially contested concept. We then argue that, substantively, competitiveness should be understood as an international political economy concept, rather than a narrowly economic concept, that is closely linked to the notion of relative gains. COMPETITIVENESS AS AN ESSENTIALLY CONTESTED CONCEPT

The most widely accepted definition of competitiveness, first developed by the President’s Commission on Industrial Competitiveness (1985: 1), is stated in succinct, plain language: “A nation’s competitiveness is the degree to which it can, under free and fair market conditions, produce goods and services that meet the tests of international markets while simultaneously expanding the real incomes of its citizens.” The three main elements of the definition are in effect variables: conditions in a country’s export markets, the ability to produce and sell goods and services in those markets, and the real incomes, or standards of living, of its citizens. The first element, the openness and fairness of markets among a country’s trading partners, is an environmental variable that few countries are large or powerful enough to affect directly by means of national policies (other than through lengthy and often tedious multilateral trade negotiations). Most therefore must take this aspect of their international environment as given in the short to medium term.1 The ability to sell goods and ser-

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vices in world markets, the second element of the definition, is the outcome of a complex array of causal forces (or sources of competitiveness). It is here that much of the confusion over different connotations arises: competitiveness operationalized in terms of its sources (e.g., productivity growth, savings and investment rates, R&D efforts, human resource development) is likely to yield a picture quite different from that produced by operational definitions based on attempts to measure outcomes (e.g., trade balances, shares of world trade in manufactures or high-tech goods). Among internal sources of competitiveness, there is wide agreement that the most important is productivity growth, which is viewed as necessary both for the ability to “meet the test of international markets” and for the expansion of real incomes (the third element of the definition of competitiveness). But rather than a straightforward, unproblematic variable that can be inserted readily into measurement models of competitiveness, rates of productivity growth are “very complex syntheses” that are themselves in need of explanation (S. S. Cohen, 1994: 196). Yet another connotational dispute turns on whether the competitiveness of a large economy for which trade is a relatively small component, such as that of the United States,2 reduces to domestic productivity growth. In Krugman’s (1994a: 32) terms, “For an economy with very little international trade, ‘competitiveness’ would turn out to be a funny way of saying ‘productivity’ and would have nothing to do with international competition.” Compare this assertion with the more conventional view, as expressed by Lenz (1987: 33): “Improving a nation’s international competitiveness depends fundamentally on productivity growth rates. That does not mean just increasing productivity; in an integrated world economy, rates of productivity increase must compare favorably with those of major foreign competitors.” This difference spills over into the definitional stipulation that rising standards of living must accompany the ability to meet the test of international markets. A country that preserved its ability to sell goods and services in world markets only by means of reduced wage levels or currency devaluations would not satisfy this requirement, i.e., would not have maintained its competitiveness. For Krugman (1994: 32), since improvements in U.S. living standards are “determined almost entirely by domestic factors, primarily . . . domestic productivity growth . . . not productivity growth relative to other countries,” the link between performance in world markets and living standards is spurious at best. This brief, nonexhaustive survey of the connotations assigned to the competitiveness concept demonstrates the ways in which its meaning is essentially contested. No single connotation provides an adequate definition. Some connotations refer to necessary conditions, others to outcomes. Productivity, the most important component, is itself a highly complex variable that is embedded in a web of causal relations and that can be considered both a necessary condition and an outcome. At the extreme, Krugman (1994:

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30) has argued that the concept has no valid meaning, because “it is simply not the case that the world’s leading nations are to any important degree in economic competition with each other, or that any of their major economic problems can be attributed to failures to compete on world markets.” To examine Krugman’s claims more closely, we turn to the question of denotation: What real world objects does the concept refer to? Do the rules concerning application of the concept enable clear demarcation between those entities (e.g., firms, industries, sectors, cities, countries, regions) to which it applies and those to which it does not? Krugman (1994: 31) contends that competitiveness is a meaningful property of corporations but not of countries because, whereas uncompetitive firms will “cease to exist,” countries “have no well-defined bottom line” and “do not go out of business.” Although this distinction might be sufficient to deflate President Clinton’s rhetorical suggestion that the country is “like a big corporation competing in the global market place” (cited in Krugman, 1994: 29), we will argue in the next section that there is more to the concept of national competitiveness than implied by the analogy to corporations.3 More serious denotational problems arise, we believe, from the processes by which the different steps involved in the production of any given product are increasingly spread over multiple firms, or branches of the same firm, operating in different countries. These transnationalization processes—which may be either global(ization) or regional(ization) in scope—have been spurred by several convergent developments: a relaxed regulatory environment; the increased managerial control enabled by (time- and distance-shrinking) information and communication technologies; a proliferation of organizational innovations—corporate alliances, tie-ups, technology sharing or marketing agreements, etc.—of varying (in)formality and duration; the scale and complexity of developing new technologies; and exchange rate movements and political pressures that, primarily in the case of Japan, have encouraged offshore relocation of production facilities. There are many consequences of these developments, but for the purposes at hand we focus on the increased difficulty of identifying specific firms or products with particular countries, a problem that is well expressed by the title of Robert Reich’s (1990) article, “Who Is Us?” The fundamental implication of Reich’s question is that fewer and fewer issues of trade and investment policy permit appeal to an unequivocal national interest. This is more than simply a matter of frustrated consumers discovering the futility of “buy American” campaigns. More significantly, the phenomena of transnational production confound the measurement and interpretation of international economic flows and national accounts by which national economic performance has traditionally been tallied. Consider the example of Sangshin Electric that Mitchell Bernard and John Ravenhill present in their chapter on the regionalization of production in East Asia. Sangshin is a Korean-Japanese joint venture, headquartered in Korea, man-

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aged by Koreans, but relying on key inputs from Japan to produce electronic components that are then exported to manufacturers in North America, Europe, and elsewhere in Asia, as well as sold to Korean producers of consumer electronics. Sangshin also operates a manufacturing plant in Malaysia, where it relies on Japanese management and procurement from Korea and Japan to produce lower-end electronics for export back to Korea and to other destinations. Suppose, for example, that a U.S. firm purchases components from Sangshin’s Malaysian plant. This transaction would be registered as a Malaysian export to the United States but would hardly be reflective of Malaysian competitiveness vis-à-vis the United States. But which country’s national competitiveness does it reflect? Does the fact that a decade ago the same product likely would have been imported from Japan, or perhaps Korea, mean that the former exporting country is now less competitive? And how would our calculations of U.S. competitiveness be affected if a U.S. firm, operating either at home or abroad, is involved at some point in Sangshin’s production network? These questions do not exhaust the difficulties involved in reckoning national competitiveness in a world economy in which production is increasingly transnationalized. Nor is Sangshin an exceptional example. In fact, for more complex products (e.g., finished rather than intermediate goods or, at the extreme, say a Boeing commercial aircraft), production networks tend to be even more far-flung, involving firms from a wider array of national origins. Although it is possible in principle to sort out questions of national competitiveness in these circumstances, the exercise would involve unraveling at the microlevel networks of firms on virtually a product-byproduct or transaction-by-transaction basis. The value of aggregated measures of national accounts such as trade balances—already quite problematic indicators of national competitiveness, as Stephen D. Cohen’s chapter demonstrates—is certainly diminished further by the transnationalization of production. In sum, even if we were to reach complete intersubjective agreement on the meaning(s) connoted by the competitiveness concept, it suffers from vague denotation. Does competitiveness pertain to firms? Or to transnational networks of firms? Is it useful to speak of competitiveness as a property of nation-states? Or of regions, such as East Asia? And, if transnationalization confounds the measurement of competitiveness, will further transnationalization eventually make the concept an imponderable? The connotational and denotational disputes surveyed so far are compounded by appraisive differences over the practical purposes to which the concept is put. Politicians seeking hard-line trade policies blame Japan or other countries for the loss (or denial) of U.S. competitiveness. Those advocating more extensive government involvement in development of new technologies rationalize their proposals in terms of competitiveness, as do those seeking deregulation and a reduced government role. Labor supporters construe issues such as health insurance, child care, and worker retrain-

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ing as matters crucial to competitiveness, while corporate leaders attempt to justify programs such as “downsizing” and “re-engineering” (euphemisms for layoffs) as necessary for maintaining or regaining competitiveness. We share some of Krugman’s (1994a) exasperation with the concept’s appropriation, by what he terms “policy entrepreneurs,” for use as a kind of political slogan; moreover, it cannot be denied that the concept’s connection to normative purposes makes more difficult the task of assessing its scientific, i.e., descriptive and explanatory, usefulness. From a different perspective, however, it is precisely this normative “contamination” that makes the concept of competitiveness especially interesting. As Connolly (1993: 22) puts it: “The connection within the concept itself of descriptive and normative dimensions helps to explain why such concepts are subject to intense and endless debate.” Though we concede that these appraisive differences, as well as the connotational and denotational problems discussed earlier, may reduce the usefulness of competitiveness as an economic concept, we are not willing to throw the political baby out with the economic bathwater. We now turn to explication of competitiveness as an international political economy concept, with the political connotation added by consideration of relative gains among states. COMPETITIVENESS AS AN INTERNATIONAL POLITICAL ECONOMY CONCEPT

If a strictly economic conception of competitiveness is plagued by the kinds of imprecision we have described, what is gained by reconstruing it in political terms? We are not suggesting that looking at the concept from a political perspective will bring its ambiguous connotations and vague denotations into sharp focus. Rather, we contend that because it is believed to translate into military, political, and knowledge-related capabilities, economic competitiveness is regarded as a determinant of the relative position of nationstates within the international political economy. More specifically, policymakers use some construct of competitiveness, even if termed something else and no matter how crudely measured, to estimate the trajectory of (their own and other) countries as they ascend, decline, or maintain their position in a hierarchically structured international system. And since position within that system is seen as intrinsically related to states’ ability to attain their core goals—security, welfare, preservation of sovereignty—the challenge of somehow assessing competitiveness becomes a necessary, ongoing task and not merely a pedantic exercise. Thinking of competitiveness in terms of relative gains among states helps one understand the emergence of the concept in the United States in the early to mid-1980s and its subsequent popularization. It was during this period that a number of adverse economic trends were widely recognized,

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inter alia, mounting budget and trade deficits, losses of domestic market share to imports in politically sensitive industries such as automobiles, and the rapid transformation of the United States from world’s largest creditor to its largest debtor. Furthermore, the litany of U.S. economic problems seemed to coincide with, and provide a striking contrast to, the success and apparent buoyancy of the Japanese economy. After four unreflective decades at the apex of the international political economy, the developments of the 1980s compelled the U.S. public to begin thinking of their country’s position and trajectory relative to those of other countries. One manifestation of these concerns, drawn from academic work already under way on the rise and decline of hegemonic leadership, was to cast the problem in terms of the United States’ “relative decline.” The language of decline proved to be a politically ineffective way to broach the matter, probably, we think, because “relative decline” (or just plain “decline”) sounds like inexorable macrohistorical forces grinding along beyond human agency or control, i.e., like an intractable problem unlikely to be ameliorated in the foreseeable future. Moreover, any kind of policy proposal or political campaign premised on the idea that the United States has declined is easily criticized as excessively negative and defeatist. The competitiveness rubric, in contrast, seems to reduce the same questions to more manageable and politically palatable proportions. When presented as a lack of competitiveness, however defined, the problem is perceived as one that allows U.S. citizens to roll up their sleeves, take corrective steps, and expect positive results within the short to medium term. It is also highly plausible to hypothesize that the end of the Cold War has increased the perceived importance of relative gains, especially vis-à-vis allies, to U.S. policymakers. So long as security imperatives were dominant, U.S. leaders were willing to discount relative gains by allies. But as the Soviet threat receded, relative gains by Japan or Germany, for example, were no longer discounted so readily. A stronger version of this reasoning holds that gains by allies during the Cold War may well have been tallied as relative gains for the U.S.-led alliance vis-à-vis the Soviet bloc. After the Cold War, however, such aggregated calculations of gains quickly lost relevance. In sum, once it became clear that the U.S. position in the world economy was no longer unassailable, and as security concerns relaxed, relative gains became more salient to the U.S. public and their leaders.4 In this context, competitiveness has served as a kind of umbrella concept within which the following kinds of questions are addressed: “How are we doing as an economy? . . . How are we doing compared to the other guys? And why?” (S. S. Cohen, 1994: 197). As suggested earlier, foreign policy makers regularly seek answers to these kinds of questions because of their perceived importance to states’ capabilities, and thus also to their relative position and trajectory in the international political economy. Although policymakers

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obviously do not have a comprehensive, logically consistent, or well-measured concept of national competitiveness, it nevertheless occupies a critical place in their implicit models of how the world works. To illustrate the relative gains interpretation of competitiveness, as well as the concept’s distinctiveness vis-à-vis productivity, we suggest a brief mental experiment. Suppose that Japan had achieved a much less impressive economic miracle over the post–World War II period, and that by the mid1980s its major productive activities were textiles, light manufactures, and low-end consumer electronics. Suppose also that U.S. and European economic growth and industrial evolution had proceeded exactly according to the historical record. Would the United States in the 1980s have had (or perceived itself to have had) a competitiveness problem? We think not. Western European countries certainly had challenged the United States in various industries and sectors, but they did not seem poised to surpass the United States in any significant dimension of economic vitality or importance (except for aggregated market size). So, absent Japan as economic powerhouse, and with the relative position of the United States in the world economy unchallenged, we think it a reasonable conjecture that the competitiveness debate would not have emerged. Yet, even if there had been no perception of a loss of competitiveness, the United States in the 1980s did not lack for serious economic problems, not least of which were sagging rates of productivity growth. In both the actual and the counterfactual scenarios, the United States’ productivity problem would slow absolute gains in domestic standards of living, quite apart from other countries’ economic performance. But because of the difference in relative gains, the actual scenario’s competitiveness problem likely would not arise in the counterfactual scenario. Krugman (1994: 35) seems to acknowledge the political significance of relative gains and positional goods, as well as their relation to economic capabilities, when he notes that “there is always a rivalry for status and power—countries that grow faster will see their political rank rise. So it is always interesting to compare countries” (emphasis in original). Instead of considering the implications of this observation, or on what basis countries might be compared, Krugman’s next sentence dispenses with the issue by means of false attribution to a straw man: “But asserting that Japanese growth diminishes U.S. status is very different from saying that it reduces the U.S. standard of living—and it is the latter that the rhetoric of competitiveness asserts.” The first objection is that, as we hope the preceding section made clear, there are multiple rhetorics of competitiveness, not one. The second is that Krugman not only collapses these into a single voice, he also attributes to that voice a claim not made by most who use the competitiveness concept. No doubt there are examples, reflecting demagogic excess and/or intellectual error, of politicians or scholars claiming that Japan’s growth is at expense of U.S. welfare. But such a simplistic, zero-sum propo-

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sition does not derive from an interest in competitiveness per se; nor does it characterize accurately or fairly the preponderance of the work on the subject. There are other points at which Krugman, perhaps inadvertently, approaches recognition of the concept of national competitiveness, when, for example, he acknowledges that “the United States has some real problems in international competition” (1994a: 286). How is this statement to be interpreted? Suppose that at a certain point the United States was beset by many more such “real problems”, or fewer, than at an earlier point in time. Would it be reasonable to conclude that the United States had lost (gained) competitiveness? Or suppose that Japan and the United States—or, more accurately, firms headquartered in the two countries—are competing in the same sectors, industries, and product markets and that U.S. firms have far more problems in this international competition than do their Japanese counterparts. Could we infer from these circumstances that Japan enjoyed an edge in (inter)national competitiveness vis-à-vis the United States? Suppose further that by a subsequent point in time the United States had reduced the number and severity of its problems in international competition while Japan’s had increased. Would these developments provide an adequate basis to claim that the United States had gained, and Japan had lost, competitiveness (at least vis-à-vis each other)? The reader will not be surprised to learn that we answer affirmatively for all three of these hypothetical scenarios: (1) one country over time and (2) static and (3) dynamic comparisons of two countries. In each case, the competitiveness concept provides meaningful and useful information about the relative position, and changes therein, of countries in the world economy. Furthermore, and to move the question from the hypothetical to the empirical realm, the static and dynamic scenarios sketched above describe in rough-and-ready fashion recent trends in the competitiveness of the United States and Japan. In the late 1980s and into the early 1990s, Japanese industries seemed virtually invincible, with little prospect of U.S. firms recapturing the various home and third-country markets lost over the previous decade to Japanese competitors. Heavy capital investment and technological development in the latter half of the 1980s seemed to ensure that Japan’s competitive advantages would persist into the indefinite future. Yet a surprisingly rapid and largely unanticipated comeback became evident by late 1993; U.S. firms regained competitiveness across a range of products, including automobiles and other traditional manufacturing industries such as machine tools, but especially in various industries based on information and communications technologies (ICT). To some extent, this turnaround is attributable to the continued weakening of the U.S. dollar against the Japanese yen and to the protracted recession in Japan. But in many of the ICT industries associated with the “information revolution”— including software, microprocessors, telecommunications, multimedia, net-

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working—innovation and creation of new products has enabled firms not only to open wide technological leads over their Japanese counterparts, but also to define new markets and redefine old ones on terms advantageous to U.S. strengths. By early 1994, the Japanese media, business leaders, and government officials were expressing alarm at the perceived loss of competitiveness and suggesting that Japan was becoming a “colony” or “subcontractor” of the United States. To be sure, there is an element of hyperbole in these expressions of alarm, just as the competitive demise and prowess of U.S. and Japanese firms, respectively, were exaggerated just a few short years ago. Japan retains considerable advantages in different kinds of manufacturing, and these and other strengths will no doubt be reasserted. Appreciation of the dollar vis-à-vis the yen could erase in fairly short order some of the gains made by U.S. firms. Nonetheless, it is evident that something else has been going on, that some set of important variables has undergone significant change. We do not know with certainty the variables that constitute this set or how to join them in a system of causal relationships. Indeed, the globalization process discussed earlier is confounding further these already difficult tasks of theorization and measurement. Were it not for the sensitivity to relative gains that infuses a comparative (international) dimension to these issues, we might be willing with Krugman (1994: 32) to consider them coterminous with “domestic productivity growth, period.” Instead, we concur with S. S. Cohen’s (1994: 197) argument that competitiveness provides a better organizing concept for “reconsideration of a broad set of indicators, none of which tells the whole story but that together provide a highly legitimate focus.” Methodologically, this formulation implies that competitiveness is best apprehended as an abstract, unobserved concept that can be represented by a number of measurable variables; however, each of these indicators of competitiveness, if taken singly, provides an incomplete, likely misleading, and thus inadequate summary measure of the larger concept. Competitiveness then is an organizing, or umbrella concept encompassing a wide set of observable indicators. But the arts of conceptualization and operationalization are not sufficiently advanced to enable specification of the weights, functional forms, and time lags that would combine these indicators into a valid and reliable index of countries’ competitiveness. THE CONTRIBUTIONS

In Chapter 2, Stephen D. Cohen provides a useful and much needed survey of the competitiveness debate as it has unfolded in the United States. Cohen contends that many of the participants in this debate have been talking past one another, as evidenced by the diversity of arguments presented, the intru-

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sion of normative biases, and the lack of intersubjective agreement on the definition and measurement of the competitiveness concept. The chapter surveys the major indicators found in the literature, including balance of trade, shares of world markets, productivity growth, research and development (R&D) expenditures, and the costs of capital. Surveying the strengths and weaknesses of each, Cohen demonstrates why no single measure provides a definitive gauge of competitiveness and how each can be manipulated to render either a more or less favorable estimate of competitiveness. The heart of the chapter constructs a continuum of concern along which Cohen locates seven different positions, arrayed according to how serious each assesses the United States’ competitiveness problems to be; he also summarizes each position’s version of the causes of the problem as well as preferred solutions. At one end of the continuum are the “Cassandras,” who aver that a serious competitiveness problem exists and tend to prescribe some form of government action to correct it. At the other extreme are the “Pollyannas,” who deny the existence of a U.S. competitiveness problem and/or the validity of the competitiveness concept. The middle portion of the continuum is occupied by a number of moderate schools of thought, all of which acknowledge a problem but differ in their assessment of causes and in their policy prescriptions. Cohen concludes that whatever one’s estimate of past and present U.S. competitiveness, one’s prognosis should hinge on whether improvements are under way in productivity growth, management strategies, supportive government policies, and the education and skills of the work force. In Chapter 3, Iwao Nakatani argues that fundamental asymmetries between the U.S. and Japanese economies, particularly differences in interfirm relations and in capital markets, enabled Japan to achieve significant competitive advantages in the automobile and semiconductor industries in the 1980s. Japanese firms have emphasized long-term relationships among networks of firms, whereas U.S. firms typically have related to their suppliers on a transitory, arm’s-length basis. Close ties between manufacturers and their suppliers have contributed to the ability of Japanese firms to develop the various “best practice” production techniques associated with the concept of “flexible” manufacturing (e.g., just-in-time delivery/inventory systems, continuous innovation, collaborative R&D, rapid model changes). These process innovations have been translated into quality and cost advantages that U.S. firms, aided by the sharp appreciation of the yen, have only recently been able to offset. Nakatani argues further that the structure of Japanese capital markets has allowed Japanese firms to employ long-term, market share strategies rather than the shorter-term profit orientation more common to their U.S. counterparts. The relevant characteristics of Japanese capital markets are the main bank system and interlocking shareholding among firms in corporate networks. The availability of “patient” capital from firms’ main banks, cou-

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pled with the lack of control on firms by “out-group” shareholders, has meant that Japanese firms have enjoyed assured access to relatively cheap capital for R&D and for capacity expansion, even during economic downturns. These characteristics of Japan’s banking and equity markets, as contrasted with the demand for higher and quicker returns faced by U.S. firms, were instrumental to Japanese firms’ gaining dominance in important segments of the semiconductor industry in the 1980s. The distinctive features of Japanese capitalism have been eroded to some degree by financial liberalization, the collapse of the expansionary “bubble” economy in the early 1990s, and the protracted nature of the subsequent recession. But the significant structural differences that remain between the U.S. and Japanese economies, according to Nakatani, continue to generate economic conflict. This conflict is unlikely to be resolved by manipulating currency rates or by Japan’s acquiescing to demands that it consume more U.S. products. Instead, Nakatani suggests that Japan’s private and public sectors will have to find ways to reduce the exclusivity of corporate networks and to curb the practice of interlocking shareholding. Complementing Nakatani’s focus on the impact of structural asymmetries in automobiles and semiconductors, Simon Reich, in Chapter 4, examines how ideological dissimilarities between the United States and Japan have translated into competitiveness in the same two industries. The crux of the argument involves differences in the propensity of the two governments to intervene with microeconomic policies that discriminate among producers. Reich contends that the institutional capacity and willingness of the Japanese government to implement discriminatory policies derives from the autarky-seeking fascist ideology that prevailed in the 1930s. Though many observers, particularly in the United States, perceive this as a tendency to discriminate in favor of Japanese producers at the expense of foreign competitors, Reich demonstrates that the government’s industrial policies also have regularly discriminated against Japanese sectors, industries, and firms. Although the goal of autarky collapsed with military defeat, the perceived imperative of catching up industrially with the West has persisted as the rationale for externally and internally discriminatory policies aimed at insulating to the extent possible the domestic market from external shocks, achieving economies of scale, and efficiently allocating scarce resources (including technology, access to foreign exchange, and R&D support). Reich’s case studies show how selective intervention has provided to preferred firms cumulative advantages that eventuated in the world-class competitiveness of Japan’s automobile and semiconductor producers. As the internationalization of the Japanese economy proceeds, however, it has become increasingly difficult for the government to sustain both the discriminatory practices and the advantages they conveyed. In contrast, the U.S. ideology of economic liberalism has emphasized

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principles—such as reciprocity, national treatment, fairness, and equal opportunity—that proscribe policy discrimination between domestic and foreign firms or among domestic firms. Because of the U.S. government’s strong preference for market-based resource allocation, its reliance on macroeconomic policy instruments, and a decentralized institutional apparatus, many conclude that the United States lacks an industrial policy. Reich disagrees, arguing that although the trappings of a formal industrial policy are not in evidence, consistent and coherent application of liberal ideology has amounted to a de facto industrial policy. Insofar as the unwillingness to discriminate in favor of domestic firms inadvertently lends advantage to foreign firms (that are simultaneously benefiting from their home government’s discrimination), Reich claims that the U.S. government’s de facto industrial policy at times has had the perverse effect of damaging U.S. firms’ competitiveness. Reich concludes by advocating research strategies that augment attention to institutional structures with explicit consideration of domestic ideologies. In Chapter 5, Mitchell Bernard and John Ravenhill’s examination of the process by which production in East Asia has been regionalized, widens the focus from concern with the competitive challenge posed by Japan. Driving this regionalization process have been increased flows of direct foreign investment, primarily from Japan, but increasingly also from South Korea and Taiwan, to the newly industrialized countries (NICs) of Southeast Asia. Bernard and Ravenhill argue that three interactive factors lie behind these capital flows: changes in relative factor prices, primarily due to the steep appreciation of the yen (as well as Taiwan’s NT dollar and the South Korean won) vis-à-vis the U.S. dollar that was set in motion by the Plaza Agreement in 1985; heightened international economic tensions stemming from U.S. dissatisfaction with its mounting trade deficits, first with Japan and then Korea and Taiwan; and the microelectronics revolution, which has transformed manufacturing processes and improved communications in ways that facilitate the dispersion of production across regionalized production chains. One manifestation of this regionalization process has been the emergence of complex new organizational forms in which firms from different East Asian countries are linked together in complex networks. These networks, though hierarchical in important respects, have proven mutually beneficial to the firms and countries involved; firms from Japan, Korea, and Taiwan are able to maintain production and market share in goods for which domestic production costs had become prohibitive, and host countries benefit not only from capital inflows, but also from technology transfers, upgrading of labor skills, and acquisition of management know-how. Another important consequence of the regionalization of production has been to deepen a triangular pattern of trade in which other Asian countries

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run mounting deficits with Japan (as they import more capital goods and components) and increase their surpluses with the United States (as the latter has absorbed a large share of their export of manufactures). While this pattern has alleviated U.S.-Japanese trade conflict by displacing what previously were Japanese exports to other exporting countries, it has also had the effect of regionalizing economic tensions: U.S. efforts to curb imports and expand its exports have been extended to the NICs; many of the NICs are dissatisfied with the terms of their technological and trading relationships with Japan; and firms/countries from outside East Asia are concerned that they will be excluded from fuller participation in the region’s Japan-centered production networks. Within East Asian countries, the rapid economic growth spurred by the regionalization of production has interacted with pressures for democratization to unleash various destabilizing social forces—labor unrest, challenges to existing patterns of patronage and rentseeking, shifts in dominant sociopolitical coalitions, and other changes in state-society relations. In conclusion, Bernard and Ravenhill argue that as the regionalization of production blurs the meaning of traditional measures of international economic flows, the concept of “national” competitiveness becomes more problematic. How has the United States responded to the East Asian competitive challenge? In Chapter 6, Cal Clark addresses this question by examining the hypothesis of hegemonic predation in the context of the U.S.-Taiwanese economic relationship. The hypothesis is based on the expectation that a declining United States would use its remaining economic power to try to delay or avoid the consequences of diminished competitiveness by coercing its smaller, weaker trading partners into making results-oriented concessions. As Clark points out, because of its economic and political dependence on the United States, Taiwan was particularly vulnerable to U.S. pressure and therefore provides a good case for testing the hypothesis. Parallel growth in U.S. trade deficits and Taiwan’s surpluses, both bilateral and overall, led to a dramatic increase in U.S. pressures on Taiwan for changes in its economic policies. Taiwan’s subsequent concessions included the opening of previously closed markets to U.S. products, repeated tariff cuts, the tightening of intellectual property protection, and, following the Plaza Agreement, appreciation (by means of marketization) of the NT dollar against the U.S. dollar. This recurrent pattern of U.S. pressure and Taiwanese concessions would seem to support the predatory hegemon hypothesis. But Clark demonstrates that trade between the United States and Taiwan changed only marginally—in terms of composition as well as aggregate balances—in response to Taiwan’s policy changes. Moreover, after 1988, U.S. pressures on Taiwan abated significantly, despite the persistence of sizable bilateral imbalances. What accounts for the limited nature of U.S. efforts to act as a predatory hegemon? Why did the United States refrain from a more aggressive pur-

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suit of reciprocity in its relations with Taiwan? Clark employs a neoinstitutionalist approach to explain these limitations, arguing that U.S. national institutions—defined broadly to include ideas as well the formal organizational structures in which they are embedded—are sufficiently free trade–oriented to militate against the overt use of economic power to extract concessions, especially from much weaker allies. In addition to self-limiting liberal ideological convictions concerning what constitutes legitimate economic policy, the U.S. government’s efforts to change its trade relations with Taiwan were limited by institutional factors on the Taiwanese side. Taiwan’s central government institutions were unable to compel the many small businesses that constitute the country’s export sector to change their import and export behavior; some moved their production offshore, others switched product lines, and others transshipped their exports to the United States via mainland China. Another manifestation of U.S. interest in competitiveness has been the growing concern with the (un)fairness of other countries’ trade, investment, and competition policies, as evidenced by calls for reciprocity, for “fair trade” rather than free trade, and legislation requiring the executive branch to identify, negotiate with, and if necessary punish “unfair traders” (viz., the “Super 301” section of the 1988 Trade Act). Robert T. Kudrle, in Chapter 7, explores how competing conceptions of fairness have evolved in the context of antitrust law and practice in the domestic U.S. economy; how these conceptions change when economic interactions with foreigners are considered; and whether direct foreign investment raises different issues than trade. He also surveys convergent and divergent conceptions of fairness across major U.S. trading partners. Kudrle traces how U.S. conceptions of fairness in domestic commerce came to emphasize consumer rather than producer fairness. The former implies that fairness should be gauged in terms of final costs to consumers (a criterion close to the meaning of efficiency), while the latter holds that the government should prevent market outcomes from disadvantaging individual producers (or types of producers) vis-à-vis other producers or consumers. National fairness—which involves trying to balance the gains to U.S. consumers and firms from international economic transactions against those accruing to foreigners—has evolved toward a producer rather than consumer orientation. For example, U.S. antidumping and countervailing duty laws, which are the principal “fairness” laws pertaining to international trade, appear designed and administered exclusively to serve the interests of domestic producers adversely affected by foreign competitors. Consumer interests fall out of consideration. Despite this inconsistency in U.S. practice, Kudrle is optimistic about the prospects for future international harmonization of fairness standards, largely because of the recent convergence of the United States, Canada, and Western Europe around consumer-oriented conceptions of fairness. Producer fairness remains well entrenched in

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Japan’s domestic economy, however, while the low salience of consumer fairness there, and the perception that this translates into national unfairness, continue to provoke U.S. and European complaints. In Chapter 8, Vicki L. Golich examines U.S. efforts to enhance simultaneously the competitiveness of two closely related sectors: airline transportation and commercial aircraft manufacturing. Golich’s analysis reveals the problems and unanticipated outcomes that have resulted from the tension between state sovereignty and an interdependent world economy, the reciprocal interaction between government and corporate choices, and the symbiotic relationship between the two aerospace sectors. By the late 1970s, the economic growth and increasing technological sophistication of other national economies had enabled them to establish a presence and seek further participation in both air transportation and commercial aircraft manufacturing, thus effectively challenging the long-standing dominance of both sectors by U.S. firms. U.S. policymakers chose divergent policies to try to maintain strong competitiveness in the two sectors—decisive steps to liberalize domestic and international air transport markets and, because of its close connection to defense production, continued restriction of market forces in commercial aircraft manufacturing. In the first case, the internationalization of air transport had created, in effect, a single international market rather than a patchwork of linked national markets; this development was increasingly inconsistent with the prevailing principle of national airspace sovereignty. In aircraft manufacturing, the costs of developing and manufacturing new aircraft had grown so large that firms and governments had initiated transnational production strategies in order to pool resources, encourage specialization, increase the size of the assured “home” market, and achieve other economies of scale. These trends toward transnationalization of commercial aircraft manufacturing were resisted for a time by U.S. policymakers, primarily because of the kinds of relative gains concerns raised by national security issues (e.g., fear of dependency on foreign actors for critical components and of security-compromising technology transfers). It is impossible to summarize here all the subtle complexities of Golich’s findings concerning the interaction between public and private and national, international, and transnational, and between the two sectors. We instead highlight one major finding of the chapter that illustrates these complexities: Policies to liberalize air transport negatively affected the competitiveness of commercial aircraft manufacturers. Deregulation thinned the ranks of domestic airlines, resulting in surplus supply of low-priced aircraft and thereby pushing U.S. manufacturers toward greater reliance on foreign sales. Since participation in transnationalized (co)production is a condition often attached to sales, the end result was to undermine the intent of government policies toward the aircraft manufacturing sectors. To the extent that this kind of symbiosis obtains in other pairs of linked service and man-

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ufacturing industries, Golich’s findings provide a cautionary tale for policymakers seeking to improve the competitiveness of “national” industries. As argued above, concerns with competitiveness have increased the salience of relative gains calculations in U.S. foreign policy in recent decades, especially on security-related issues and especially in relation to Japan. The emergence during the 1980s of “techno-nationalism”—the avoidance or minimization, for national security reasons, of technological dependence on other countries—in U.S. policies toward Japan might seem to be simply a manifestation of heightened sensitivity to relative gains. The U.S. government’s steps to block the acquisition by Japanese firms of hightechnology firms in defense-related industries, congressional opposition to selling the Aegis air defense system to Japan, and conflict over codevelopment of the FSX all appear to stem from application of relative gains logic. However, as Masaru Kohno demonstrates in Chapter 9, the relative gains approach (as well as other structurally derived approaches) provides an insufficient account of the development of U.S. techno-nationalism. Though relative gains offers a broad fit, it cannot explain why nationalistic tendencies in some aspects of U.S. policy toward Japan were accompanied by deepened cooperation in others, especially in the area of defense technology. Also, since U.S. relative decline and Japan’s corollary ascent had been under way for some time, why did techno-nationalism become a significant influence on U.S. policy when it did, rather than sooner or later? To address these finer-gauge questions, Kohno employs a dynamic ideational approach that emphasizes the causal effect of ideas, and of institutions as formalized ideas, on policy. Kohno hypothesizes that ideas evolve through three stages: popularization, in which the original inventor of an idea sells it to “political entrepreneurs,” who use it to advance their own interests or policy agenda; internalization of popularized ideas, or norms; and formalization of norms into codified rules and institutions. This framework is then applied to the evolution of techno-nationalism in U.S. policy toward Japan, beginning with the popularization of the idea in 1981 by the representative of a self-interested U.S. firm who was attempting to influence members of Congress to block, on national security grounds, a bid by Fujitsu (a leading Japanese electronics firm) to supply optical fiber for a large-scale AT&T project. Use of the national security rationale to limit acquisitions by Japanese firms became internalized as a norm, according to Kohno, in a series of three incidents in 1983 in which the U.S. Department of Defense forced Kyocera to sell a U.S. subsidiary it had purchased, blocked Nippon Steel’s acquisition of another U.S. firm, and limited Sumitomo Metal’s acquisition of Tube Turns, Inc. to the latter’s nonmilitary divisions. Techno-nationalism was eventually formalized in the Exon-Florio amendment to the 1988 Trade Act, which explicitly gave the president discretionary authority to block mergers, acquisitions, or takeovers of U.S. firms in security-related lines of business by foreign firms. In this fashion,

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Kohno concludes, the idea of techno-nationalism went from idea to internalized norm to codification in U.S. foreign policy making institutions. Lest one think that the competitiveness debate is a uniquely U.S. phenomenon that arose in the 1980s in relation to East Asia, Wayne Sandholtz, in the concluding chapter, reminds us that Western Europe’s competitiveness concerns date back at least to the apprehensions over U.S. industrial dominance in the mid-1960s that became known as the “technology gap” crisis. When the national-level industrial policies formulated to close the technology gap eventually proved ineffectual, Western Europe once again faced competitiveness problems in the 1980s, this time problems competing with the United States and Japan in various high-technology sectors. In order to overcome the constraints posed by the small scale of the individual European national economies (in comparison to the two economic superpowers), European countries have turned to collective, regional-level technology and industrial policies. The Airbus commercial aircraft manufacturing project and the European Space Agency, both regional-level programs that have been in operation for several decades, served as precedents for more recent regional collaboration in electronics and telecommunications, i.e., programs such as ESPRIT, RACE and EUREKA, which were initiated in the 1980s. Also, the extent of regional economic integration that had been accomplished by the 1980s increased the potential payoffs from Europelevel collaboration, thus justifying the subsidies available to firms participating in regional projects. Yet Sandholtz concludes that competitiveness has not been fully redefined as a regional- rather than national-level property. Leaders of national governments still seek to improve the welfare of their workers and firms but to some extent have reconciled themselves to the necessity of regional means toward those ends. Firms, on the other hand, because they increasingly operate in global markets in which North American and East Asian firms enjoy technological advantages, must be involved in alliances with non-European firms. The scope for regional collaboration is therefore doubly bounded—by the inherently nationalistic focus of governments on the one hand, and by the necessarily global focus of firms on the other. Within these bounds, Sandholtz concludes, there is a “limited zone” for Europewide cooperation to improve competitiveness. CONCLUSION

We hope that this introductory chapter and the more substantive chapters that follow persuade that competitiveness is a useful and, for some purposes, necessary concept. Though fraught with the problems of meaning, reference, and values associated with “essentially contested concepts,” there is a class of questions for which some version of competitiveness is indispens-

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able. From the standpoint of neoclassical economics and its emphasis on absolute gains, competitiveness may indeed nearly reduce to productivity growth. An international political economy perspective, however, compels consideration of relative gains across states. In this context, assessing competitiveness—construed as an organizing framework for addressing the questions “How are we doing compared to the other guys? And why?”— becomes a necessary, albeit imprecise, endeavor. The most problematic aspect of this endeavor is the denotational morass created by the processes of transnationalization (or globalization or regionalization). Put simply, answers to the “How are we doing . . . ?” question presuppose that the “Who is us?” question has been answered satisfactorily. And, as we have argued, it is difficult to deny that this latter question is becoming harder rather than easier to address. But whether or not scholars are able to formulate and agree intersubjectively on a more valid, reliable, and operationalizable version of competitiveness, foreign policy makers will continue to assess it by whatever imperfect means are available. In this sense, we contend, the concept cannot be discarded by those interested in the behavior of states and the operation of the international political economy. NOTES

1. The United States, owing to the still considerable weight it is able to bring to bear in bilateral settings, is the glaring exception in both principle and practice. Focus on this aspect of a country’s competitive status is unfortunately susceptible to a kind of scapegoating in which it is all too easy to externalize blame for competitive failings, while avoiding those politically painful measures that would follow from more critical self-scrutiny of internal shortcomings. From an East Asian perspective, this description fits the United States and its resort since the late 1980s to unilateral methods of prying open the markets of countries deemed—according to U.S.-defined and -applied criteria—to be unreasonably closed or unfair. For various perspectives on the infamous “Super 301” provision of U.S. trade law as an instrument of “aggressive unilateralism,” see the selections in Bhagwati and Patrick (1990). 2. For the argument that Krugman’s (1994a, 1994b) narrow reliance on a simple export/GDP test—while ignoring the effects of imports, as well as flows of investment, technology, and human resources—leads to a gross underestimation of the impact of the world economy on that of the United States, see Preeg (1994). 3. We think Krugman is too narrowly focused on a definition of competitiveness that denotes only firms. Though competition among firms is clearly and only “economic,” competition among countries is more complex and multifaceted. Hence, there is no reason to limit our conception of the competitiveness of countries to a simple extension of what is meant by the competitiveness of firms. There are other forms of competition that do not require that “losers” cease to exist (e.g., sports, school admissions, beauty contests) and that are at least partly analogous to aspects of competition among countries. 4. We are not suggesting that relative gains always dominate absolute gains in the calculus of foreign policy makers; rather, we contend merely that policymakers

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cannot afford to ignore relative gains considerations and that these considerations weigh more heavily as a function of hegemonic decline and the end of the Cold War. Snidal (1991) argues that the effect of relative gains in impeding cooperation among states attenuates with n-size but is still present in bilateral situations. This important qualification to the relative gains argument does not diminish its consistency with the interpretation that U.S. relative gains concerns arose primarily in relation to Japan. Mastanduno (1991) reports that in the 1980s, relative gains considerations crept into the U.S. policymaking process on issues of Japan policy (involving aircraft, satellites, and high-definition television) but had uneven impact on policy outcomes.

Stephen D. Cohen

2

Does the United States Have an International Competitiveness Problem? A growing service industry has formed in the United States around the contentious, multidimensional debate on the state of this country’s international competitiveness problem—specifically, whether it truly exists and, if so, its causes, significance, magnitude, costs, and cure. In an increasingly crowded, highly competitive field, countless academics, executive branch officials, congressional committees, think tanks, and advocacy councils have produced a proliferating body of books, reports, monographs, essays, articles, newsletters, and conferences. Each entry offers diagnosis and prescription or some combination thereof, but there are many inconsistencies and little common ground when the literature is considered as a whole. These circumstances make it difficult, if not impossible, for the uninformed observer to attain a clear understanding of the competitiveness issue simply by combining an open mind with a voracious reading appetite. The literature is inadequate in that it fails even to agree on a common methodology for defining and measuring the problem. The proliferation of studies and opinions has produced relatively little that might serve as the basis for consensus on matters of either method or substance; instead, the published works have produced a welter of conflicting assertions. To paraphrase (now Labor Secretary) Robert Reich, speaking before the U.S. Senate Appropriations Committee (1988), the subject of competitiveness in the United States shifted fairly quickly from the status of obscurity to one of contentious ambiguity, with no intervening period of coherence. The central thesis advanced in this chapter is that the abundance of conflicting arguments, along with the lack of rigorous methodological standards to sort them out, have created a situation in which the vast bulk of the literature is so contradictory that it collectively cancels itself out as a contributor of definitive insights or as a major step toward consensus. At best, the literature might be viewed as a metaphor for the unusual complexity and numerous imponderables of the subject. At worst, the widespread failure to acknowledge the difficult necessity of trying to assess, weight, and integrate 21

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the range of operational definitions of competitiveness suggests either inattention to the scientific method or the prevalence of ideological arguments. Indeed, it is fair to characterize the debate among scholars and policymakers as a manifestation of a deeply rooted argument between those with an ambitious agenda for major changes in government policies and corporate practices and those preferring the status quo. While appreciating the complexity of the competitiveness issue, this study is nonetheless critical of the overall body of literature that has been produced. A critique of published efforts since the mid-1980s to assess the extent of the U.S. competitiveness problem risks incorporating the author’s own biases.1 The purpose of this chapter, however, is not to reach conclusions on the substantive nature of the problem, but rather to demonstrate that an unjustifiably wide gap exists between the seemingly endless nuances and complexities involved in assessing competitiveness and the immodest rush to judgment on causes and prescriptions found in much of the literature. Because of this study’s limited scope and length, it will address competitiveness only in the economic sense of the term. Related questions such as decline in the overall U.S. position in the international political economy, the merits of and need for a U.S. industrial policy, and other recommended remedial courses of action are not addressed here. The focus instead is on the more specific question of whether and why the United States is suffering a significant decline in its ability to compete effectively in the industrial sector against its major trading partners. The balance of this chapter first surveys the main operational measures that have been adduced as indicators of U.S. competitiveness. It then turns to discussion of seven different positions arranged along a continuum of concern about the competitiveness issue. ALTERNATIVE MEASURES OF COMPETITIVENESS

Most analysts have accepted the definition of competitiveness offered in the 1985 Report of the President’s Commission on Industrial Competitiveness (1985) as the “industry standard”: “the degree to which a nation can, under free and fair market conditions, produce goods and services that meet the test of international markets while simultaneously maintaining or expanding the real incomes of its citizens.” Beyond this conceptually sound definition, disagreements quickly arise, particularly over how to determine the precise means to measure the degree to which the United States is passing or failing the competitiveness test. In consequence, conflicting technical definitions, ambiguous statistics, and multiple interpretations of data plague measurement of the competitiveness concept. Even if we were certain about how to measure competitiveness, we would still be left with the question of whether the United States has lost a significant measure of it. Unfortunately, few ana-

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lysts seem to acknowledge the methodological and substantive problem posed by Scott (1985: 16): The challenge for the analyst is to fit together the various measurements into a theory that not only gives a sound appraisal of past performance, but also sheds some light on future prospects. . . . Some closing of the gap by other countries was explicitly sought by the United States [after 1945] and is not a sign of loss of competitiveness. At what point, and with what criteria is one to conclude that the closing of the gap has already—or soon will have—gone too far to be consistent with U.S. interests? The answer can only be relative.

Absent satisfactory answers to the question Scott poses, it is not surprising that a wide array of conflicting and overlapping evidence has been assembled by those alleging or denying a serious decline in U.S. competitiveness. For virtually every major quantitative indicator of the state of U.S. competitiveness, there is at least one contradictory interpretation, or at least one competing statistical measure. There is no self-evident, incontrovertible piece of datum that is not discounted or ignored by other participants in the debate. What follows is a critical survey of the principal measures used as barometers of U.S. competitiveness: trade balances, world market shares, productivity growth, research and development (R&D) efforts, and the cost of capital. Trade Balances

Perhaps the most commonly cited quantitative indicator of the U.S. competitiveness problem is its large multilateral trade deficit. This deficit peaked at $152 billion in 1987, then dipped to a still mammoth $67 billion in 1991; by 1993, it was again well above $100 billion, and climbing. The validity of trade deficits as a measure of competitiveness is arguable, however, even assuming acceptance in principle (which is not universal) that a net excess of imports per se is evidence of a significant competitive problem. For example, trade balances are often a simple reflection of business cycles. Given the possibility that inclusion of raw materials such as oil and laborintensive goods such as apparel can distort overall trade figures, some international economists prefer to measure U.S. industrial competitiveness through the more specific, but largely ignored U.S. trade balance in hightechnology goods. By utilizing the high-tech trade balances produced by the Commerce Department’s International Trade Administration, a slightly more positive trade outlook is suggested. If one prefers a significantly more upbeat statistical series also focused on high tech, one could cite the numbers produced elsewhere in the Commerce Department (using different definitions) that show a steadier, larger trade surplus in high-tech goods.2 Some economists have argued that all variations of trade balances should be disregarded as accurate measures of competitiveness on the

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grounds that they do not consider an increasingly critical indicator of the ability of U.S. companies to sell in foreign markets: foreign direct investment. Commerce Department data show sales abroad by foreign subsidiaries of U.S. multinational corporations to be enormous. A total sales figure of $1.2 trillion can be used for the analyst seeking to make the case that things are really better than they appear; alternatively, the more honest and relevant number of $620 billion for subsidiaries’ sales of manufactured goods alone should be cited in an objective analysis of U.S. industrial competitiveness.3 In any event, adding foreign sales of manufactured goods by U.S.-affiliated companies overseas to exports would provide a fuller measure of international competitiveness. Indeed, the combination of these two forms of sales to foreigners would produce a significant surplus in a revised balance of U.S. merchandise transactions with the rest of the world and, in turn, a much rosier measure of U.S. competitiveness (even after adjusting for sales within the U.S. by foreign-controlled companies). Similarly, a study of trade patterns during the 1966–1977 period found that U.S. companies with overseas production experienced an increased market share in world exports of manufactured goods, thereby far outdistancing the declining performance of companies without overseas production (Lipsey, 1985/1986).

Shares of World Markets

Choosing particular base years, or beginning points, is often used to make a data series appear to support one or another argument. By manipulating selection of base years, arguments are easily supported that there is, may be, or is not a clear and present U.S. competitiveness problem. Believers of the existence of a serious problem will measure current U.S. shares of world trade and world GNP against a base year centered in the early 1950s. For example, between 1950 and 1980, the U.S. share of world GNP dropped from 40 percent to 21.5 percent, and its portion of world trade declined from 20 percent to 11 percent (Scott, 1985: 18). In the atypical, immediate post–World War II period, the U.S. share of world manufacturing was close to one-half, a “proportion never before or since attained by a single nation” (Kennedy, 1987a: 29). The validity of utilizing such an artifactual base year to demonstrate a long-term U.S. economic decline is dubious. Adherents of the optimistic view of U.S. competitiveness usually use the 1970s as a base period. This choice is a kind of damage control insofar as there is no way (or no base year) that allows denial of the fact that there was some decline in the United States’ global share of manufactured exports between 1950 and the late 1980s. Optimists with up-to-date statistics can argue that the unusually strong U.S. export growth after 1989 signals a major recovery in competitiveness that stems at least in part from the depreciation in the dollar’s exchange rate. Finally, advocates of the argument that the U.S. competitiveness problem is focused on Japan can point to data

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showing that virtually all of the decline in U.S. shares of world trade in hightech goods between 1970 and 1986 is accounted for by that one country; Western European shares were basically stagnant (National Science Foundation, 1988: 92). Productivity Growth

The ability of a country to raise its standard of living and to increase real wages is closely tied to productivity growth, which thus serves as another barometer of a country’s ability to compete internationally. Indeed, some analysts contend that the competitiveness concept connotes nothing more than productivity increases (e.g., Krugman, 1994a). The United States’ rate of productivity growth has lagged relative to most other industrial countries over the past thirty years, but the bewildering array of different base years and different statistical sources presented in the competitiveness literature gives a highly uneven picture of just how bad and how permanent the United States’ relative productivity performance has actually been. More optimistic economists ignore such numbers entirely and point to the statistical truism that the United States remains the most productive country in the world, measured in terms of either output per capita or output per employed worker (e.g., Balk, 1990: 1). The pessimists seem to ignore the principal rebuttal to this measure: by measuring all economic output, i.e., goods and services, it is biased upward by the relatively efficient U.S. services sector. The total output figure therefore exaggerates the ability of any particular U.S. industrial sector to compete in the internationally traded goods sector. In point of fact, no consistent or definitive data exist to measure comparative national productivity levels in manufacturing as a whole or by particular industry. In contrast to optimistic results suggesting that the United States is still ahead (e.g., Lawrence, 1984: 33), there is the troubling finding that between 1973 and 1985, in thirteen major industries, U.S. productivity growth trailed Japan and Germany in all of the thirteen industries studied. During this period, Japan’s average annual productivity increases in the electrical machinery, transportation equipment, chemicals, and scientific instruments sectors were at least triple U.S. increases (Neef, 1988: Table 6).

Research and Development

Data on outlays for research and development also provide an especially fertile field for ambiguity and disagreement. First, the good news: the United States spends far more on R&D efforts than any other country, outspending (in inflation-adjusted dollars) Japan, Germany, France, and the United Kingdom combined (National Science Foundation, 1990b: 15). In addition, the U.S. ratio of R&D outlays to GNP compares favorably with all other major industrialized countries. Next, the bad news: a closer look at the statistics shows that a disproportionately large percentage of U.S. R&D has

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gone into defense-related efforts that contribute little or nothing to enhancement of commercial competitiveness. The ratio of nondefense R&D to GNP for the United States in 1988 of 2.0 percent compares unfavorably with the 2.9 and 2.6 percent ratios of Japan and Germany, respectively (National Science Foundation, 1990b: 15). On the one hand, in absolute terms, the United States is still spending more on nondefense R&D than either of these countries because of a larger GNP. On the other hand, much of this category of spending in the United States goes into the space, health, and energy sectors, which do not necessarily have a direct effect on competitiveness in internationally traded industrial goods. Finally, there is the ambiguous news. First, no data on expenditures (either absolute amounts or as a percentage of GNP) can provide an accurate measure of the effectiveness of R&D efforts, i.e., the relationship between money spent and results secured. Smaller R&D expenditures in one country conceivably could generate disproportionate success relative to another less “R&D efficient” country. Second, a more precise estimate of the probable contribution of national R&D outlays to competitiveness awaits the collection and dissemination of internationally comparable data measuring R&D outlays for the specific kinds of commercial and manufacturing technology used in the civilian industrial sector. Third, there is the question of what exchange rate to use when converting foreign R&D outlays into dollars. In addition to differences arising from the choice of exchange rate measure (e.g., purchasing power parity exchange rates), occasionally rapid exchange rate movements distort estimates of R&D efforts.

Cost of Capital

The cost of capital is an important indicator of competitiveness because it affects corporate investment and pricing decisions. The lower the borrowing costs, the longer a company can wait to recoup the costs of its capital investments. With quicker amortization of costs, a company can implement a patient, long-term, growth-oriented strategy more easily than a short-term, profit-oriented strategy that seeks to quickly recoup investment costs. It is widely assumed that the lower cost of capital enjoyed until recently by Japanese industrial concerns has been a major source of competitive strength. The problem is that no two studies find the same difference, owing to the inherent difficulties of defining and measuring these costs over time. Hence, the exact magnitude of the relative U.S. disadvantage in this important criterion of competitiveness is unknown (for a survey of these studies, see Ostrom in U.S. Congress, Joint Economic Committee, 1990). It is clear that no measure of competitiveness is adequate by itself. Each is subject to differing interpretations, and we do not know how to weight or combine multiple indicators to form a composite measure. We now look at the competitiveness question from a different perspective—the range of dif-

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ferent positions arrayed according to how each assesses the competitive status of the United States. A CONTINUUM OF POSITIONS ON THE COMPETITIVENESS ISSUE

Methodological problems are also inherent to the task of finding ways to summarize the various viewpoints, or positions, in the competitiveness debate. One method would be to classify the different schools of thought by specific substantive argument, e.g., the competitive implications of the trade deficit or of the shift to services based on information and communication technologies. Given the large number of such arguments, as well as the considerable overlap among them, this approach is not ideal for a short but inclusive survey. Another way to classify the literature would be to slice it into the main levels of economic and policy activity most frequently claimed to be the source or location of competitiveness problems (e.g., macroeconomic, sectoral, microeconomic, the external sector), but this too would likely prove too cumbersome for the task at hand. This critique first differentiates the various schools of thought according to how they assess the big issues, and then focuses on the shades of difference that often prevail among scholars sharing the same general outlook. The simplest, clearest, most complete taxonomy for the distinctive schools of thought appearing in the competitiveness literature is based on a “continuum of concern” about the severity of the situation. What follows is a description of seven principal positions along this continuum, from the most pessimistic to the most optimistic, to those who do not think competitiveness is a meaningful concept. The “Cassandras,” the first of seven principal approaches identified, is probably the most widely subscribed position: a deeply rooted, multifaceted competitiveness problem exists, one posing a clear and present economic danger (though there are differences within this school of thought as to major causes and preferred remedies). A second approach is based on the belief that the decline in U.S. international competitiveness is real, but not global in scope; deterioration in U.S. industrial capabilities is seen as resulting primarily from the extraordinary competitive strength, and occasionally unfair trading tactics, of Japan. A third school of thought argues that while there is currently a problem, it is a macroeconomic problem that can be corrected by means of reduction of the federal budget deficit and sufficient dollar depreciation (although the latter course would seem to be exhausted by mid-1994). The “middle ground” spans two additional schools of thought. The first acknowledges that U.S. industrial competitiveness has been declining, but regards this is as a natural evolutionary trend to which U.S. society needs to

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adapt rather than resist. The other “moderate” school of thought, herein dubbed the “pragmatists,” holds that continuation of certain negative trends eventually would create a serious problem. Improvements and reforms are advisable now in order to ensure that this contingency does not materialize. The “Pollyannas,” the sixth school of thought identified in this study, occupies the more positive, optimistic side of the continuum. Adherents to the variants of this position believe that no significant competitiveness problem exists; perhaps the principal worry here is that any effort to fix what does not need fixing will only damage an acceptable economic status quo. Finally, there are those who argue that competitiveness is not a meaningful operational term, either because of inherent conceptual difficulties or because ongoing changes in the world economic order—from international to transnational—make impossible a definitive judgment on the question of U.S. competitiveness. We now turn to more detailed explication of these different positions. Cassandras

The school of thought that seems to attract the most popular attention puts forth unambiguous statements that the United States has serious and immediate competitiveness problems. The President’s Commission on Industrial Competitiveness (1985: 1, 5) concluded that U.S. “ability to compete in world markets is eroding,” and that there is “compelling evidence of a relative decline in our competitive performance.” Five years later, Congress’s Office of Technology Assessment (1990: 1) opened a report with the somber assessment that “American manufacturing has never been in more trouble than it is now.” A branch of the National Academy of Sciences concluded that “recent economic data and the experiences of specific industries suggest that a strong case can be made that U.S. manufacturers, with the exception of a handful of enlightened companies, are not responding adequately or entirely appropriately to new competitive challenges” (National Research Council, 1986: 22). That “U.S. national competitiveness has been declining for two decades” is a central conclusion of the private, nonpartisan National Planning Association (Morici, 1988: 26). Similarly, pessimistic conclusions have been reached in the academic community: “The United States has a serious international competitive problem and that problem is largely one of competitiveness in manufacturing . . . [which] has indeed performed poorly relative to foreign competition.” It is an “unassailable fact that the position of the United States in the world economy is weakening” (Krugman and Hatsopoulos, 1987: 28, 18). According to the present chair of the Council of Economic Advisers, Laura D. Tyson (1988: 96), while some narrowing of the international competitive gap, thanks to post–World War II reconstruction, was inevitable, “the pace and extent of the catch-up—or to put it differently, the pace and extent of the decline in the U.S. position—were not inevitable.”

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Concerns about the apparent decline in the United States’ technological position and about American illusions that “all is well” inspired the Council on Competitiveness to debunk what it dubbed the “five myths of U.S. leadership in technology”: (1) the United States retains overall technological dominance; (2) U.S. industries are still ahead in leading-edge technologies; (3) foreign competitors cannot innovate on their own and must copy U.S. innovations; (4) the United States has the world’s premier technology infrastructure, as evidenced by the awards and accomplishments of U.S. scientists; and (5) once the U.S. government realizes the severity of the problem, it will initiate post-Sputnik-like corrective action (testimony in U.S. Senate Committee on Commerce, Science, and Transportation, 1989: 144–152). This sampling is indicative of widespread public and private concerns about U.S. competitiveness. The Cassandras can be divided, for present purposes, into those focusing on the causes of the alleged decline in U.S. competitiveness and those more concerned with consequences (though, of course, the two sets of concerns are far from independent). Among those emphasizing causes, some offer long laundry lists of causal factors, while others concentrate on a single, primary cause. Among the most frequently cited factors are sagging productivity; inadequate savings translating into inadequate investment in new plant and equipment; damaging U.S. government policies (e.g., the budget deficit, trade policy, excessive antitrust enforcement); inadequate or misguided R&D expenditures; and infrastructural problems, mainly in education and transportation. The National Association of Manufacturers’ senior vice president offered no fewer than seventeen causal factors of U.S. industrial deterioration, grouped into four categories: business cycle volatility, international competitiveness (including such factors as the dollar’s overvaluation, productivity, and inflation), long-term structural problems, and corporate factors (testimony in U.S. Congress, Joint Economic Committee, 1983: 288). The falling-competitiveness diagnosis of the Berkeley Roundtable on the International Economy (an academic group) focused on five factors: trade balances, market shares, technological capability, productivity growth, and real wage trends (testimony in U.S. Senate, Committee on Governmental Affairs, 1987: 307–327). Others tend to be more select in their specification of causes of declining competitiveness. A frequently mentioned culprit has been shortcomings in the organization and business practices of U.S. firms (see Chapter 3). One highly influential work in this category is Made in America, a report by the interdisciplinary MIT Commission on Industrial Productivity that found weaknesses in the way Americans “cooperate, manage, and organize themselves, as well as the ways they use technology, learn a new job, and interact with government.” In addition, the MIT Commission concluded that the setbacks many firms suffered are not merely random events or part of the normal process by which firms constantly come and go; they are

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symptoms of more systematic and pervasive ills. We believe the situation will not be remedied simply by trying harder to do the same things that have failed to work in the past. The international business environment has changed irrevocably, and the United States must adapt its practices to this new world. (Dertouzos et al., 1989: 8, 42)

Similarly, Cohen and Zysman (1988: 98) contend that the United States’ “basic problem is not our technology or our workers, but how our corporations organize production and use people in the manufacturing process, how they set automation strategies and goals for product innovation. U.S. industry has contributed massively to its own undoing.” The alleged weakness of U.S. industry in commercializing new technology is one of the more specialized causal factors cited. There is a special irony here in that the United States remains strong in basic science but has trailed Japan, at least until the early 1990s, in quickly developing commercial applications for new inventions and technologies. “Considerable evidence suggests that America is failing to commercialize the kinds and quality of technology that the market demands” (Council on Competitiveness, n.d.: 13). Inman (1990) spells out the implications of this failure for the competitiveness of U.S. firms: “In one industry after another, foreign companies have captured market share—or in some cases, entire industries— because they have done a superior job of developing and commercializing new technologies, many of them American in origin.” The second subgroup of Cassandras focuses on the allegedly costly consequences of declining U.S. competitiveness. One important manifestation of the problem involves the ways that U.S. industry has trimmed the costs of declining competitiveness: had it not been for a decline in U.S. real wage rates and an exchange rate–induced reduction in terms of trade, the ability of U.S. firms to sell goods in foreign markets and to fend off foreign-made goods in the domestic market would have been further diminished in the late 1980s and early 1990s. These two declines represent a costly, undesirable combination that inevitably produces a reduction in the country’s living standards. A depreciating exchange rate contributes to a decline in a country’s terms of trade, which can be defined as the ratio between the prices of a country’s total exports to its total imports (or as the quantities of exports needed to pay for a given quantity of imports). Even when petroleum is excluded from consideration, the long-term trend since the early 1970s has been a deterioration in the U.S. terms of trade (Bosworth and Lawrence, 1989). Economic data provide a convincing case that for many years the U.S. industrial sector has utilized a falling exchange rate and falling real wages as ways to minimize, or compensate for, its decline in competitiveness. “To accept a falling dollar as a solution to America’s competitiveness problem is to accept an economy that competes on the basis of low wages and not higher productivity,” and that gradually shifts toward manufacture of labor-

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intensive, low-technology, low-productivity products (Thurow, 1985: 101). Expressed in real terms, current wages at present are lower than, and total compensation barely equal to, comparable levels at their peak in 1973 (R. Reich, 1991b; see also the annual reports of the President’s Council of Economic Advisers; and Business Roundtable, 1987). A further deterioration in the level of real wages is foreseen by those who have calculated that jobs lost in the U.S. manufacturing sector (because of competitiveness problems) pay better on average than the newly generated jobs in the service sector (Tyson, 1988: 102). As Hatsopoulos, Krugman, and Summers (1988: 300) point out: “If the United States had maintained its one-time advantage over Japan in productivity, technology, and product quality, the fall in U.S. relative wages would have given U.S. manufacturers a huge advantage over their Japanese rivals. Obviously, this did not happen.” One industry that has received a lot of attention from those alarmed about U.S. competitiveness problems has been electronics, an enormous, critically important growth industry that encompasses such key products as computers, telecommunications equipment, consumer electronics, and components (principally semiconductors). Its extraordinary importance prompted Craig Fields, formerly director of the Defense Advanced Research Projects Agency, to assert: “If you control microelectronics and computers, you control the world” (quoted in Business Week, July 23, 1990: 31). One U.S. government study concluded that “U.S. leadership in electronics is under serious challenge and may very well be eclipsed.” Unless broad remedial measures are taken, it warned, “the long-term competitiveness of the U.S. electronics industries could be placed at unnecessary risk” (U.S. Department of Commerce, 1990b: x, xii). The competitiveness problems of the U.S. electronics industry, excepting consumer electronics, seem to have been alleviated by late 1993. Prior to this reversal, it was widely thought that electronics might well be part of a larger syndrome in which Japan appeared to be moving into the dominant position in many sectors of high technology (see the following section) . Using a number of criteria of success (including R&D, product introduction, existing level of technology, and product manufacturing/engineering), specialized studies conducted by official agencies in both countries showed that a majority of performance indicators in numerous important emerging technologies had shifted in favor of Japan (see, for example, Japan Society and Council on Competitiveness, 1990: 15; U.S. Department of Commerce, 1990c: 13; and National Science Foundation data cited in S. D. Cohen, 1991: 245). Assessments of Japan’s technological ascendancy, and now of a “comeback” on the part of some U.S. industries, are blurred by the fact that no totally uniform or precise measure of high-tech competitiveness across countries exists. An important offshoot of these warnings of alleged sectoral problems and technological deficiencies is national security–related anxieties in the

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U.S. Department of Defense. The Pentagon has stated that it shares the U.S. public’s concern about the U.S. industrial sector’s “downhill course to second-class status. . . . Many basic industries of importance to defense production have declined. . . . Left unchecked, such erosion could rob the United States of industrial capabilities critical to national security” (U.S. Department of Defense, 1988: l). Another Pentagon report warned that the “continued deterioration of the industrial and technology base diminishes the credibility of our deterrent. It is a national problem” (Defense Science Board, 1988: 2). The potential significance of this linkage of competitiveness to national security is that it takes the issues involved beyond concerns with welfare. Were U.S. security widely seen to be compromised by competitiveness problems, the linkage could be used to justify more drastic corrective measures than the economic situation alone would warrant (see Chapter 9).

Competitiveness as a Problem Only in Relation to Japan

Belief in these sectoral problems and the overall competitive deficiencies of U.S. high-tech industry leads to a second, more specialized school of thought, one that argues that there definitely is a competitiveness problem, but not in relation to all major competitors. Instead, it takes the form of Japan surpassing the United States in one industrial sector after another (at least until quite recently, when Japan’s prolonged recession combined with what seems to be a resurgence of many U.S. industries). By one account, “the United States is being gradually but pervasively eclipsed by Japan . . . [and] the long-term structural patterns of U.S. interaction in finance and high technology imply a future of U.S. decline and dependence on Japan.” A more effective U.S. response to “Japan’s technocratic Prussianism” is urgently needed (Ferguson, 1989: 123, 125). Similarly, the United States “does not appear to have a serious competitive problem with its . . . European rivals.” Japan is a “special case,” a country with the “most aggressive” trading pattern of any major industrial country, a situation reflecting the close relationship of trade policy to that country’s industrial development strategy (Scott, 1985: 69). There is also the fact that Japan, until quite recently, has been investing on a per capita basis almost 2.5 times as much per annum as the United States for new plant and equipment, a trend that suggests a momentum is building further favoring Japan’s relative competitiveness (Courtis, 1990: 19). Suffice it to say, however, that unanimity does not prevail with regard to the Japanese challenge. At one extreme, Scott (1989: 118) has suggested that competing with Japan is like joining a poker game “where the other players cooperate to drive you out.” In contrast, Nye (1988: 118) has likened stiff Japanese competition to a positive-sum game in which the United States benefits by having its industry kept on its toes and its citizens pro-

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vided with desirable products. By 1993, the U.S. public’s anxieties about Japan’s competitive strength had been alleviated, at least temporarily, by awareness of that county’s prolonged economic and political difficulties.

Competitiveness as a Macroeconomic Problem

A third school of thought, one based on qualified pessimism, sees not so much an inability of the U.S. economy to compete internationally, but rather a worrisome structural macroeconomic disequilibrium that effectively perpetuates an excess of imports over exports. With the dollar no longer overvalued as it was throughout the first half of the 1980s, the cause of and cure for the international disequilibrium is easily linked to this internal disequilibrium. All adherents to this school of thought point to the same accounting identity: a shortfall in private and governmental savings (mainly from the federal budget deficit) relative to investment will invariably produce a deficit in the goods and services component of a country’s balance of payments. Simply put, the United States has been consuming more goods than it is producing, thereby making a trade deficit inevitable. The emergence of relatively large federal budget deficits and sluggish rates of savings in the early 1980s led to an ongoing situation that some call the “twin deficits,” others a “consumption binge.” “By cushioning the United States from the consequences of its savings collapse, the willingness of foreigners to finance our trade deficit has created a false sense that the situation is acceptable” (Hatsopoulos, Krugman, and Summers, 1988: 306). A simple, direct way to increase U.S. exports relative to imports is for U.S. citizens to rid themselves of dependence on capital inflows by autonomously increasing their rate of savings (thereby reducing consumption) and/or for the federal government to reduce its budget deficit through some combination of reduced spending and increased revenue. Two Brookings Institution economists downplay entirely the notion that the United States can blame the rest of the world for its economic problems, which “primarily reflect failings in U.S. domestic policies,” specifically the need for increased national savings and productivity growth (Bosworth and Lawrence, 1989: 15).

Declining U.S. Competitiveness as a Natural Development

In the center position along the continuum of concern, between the Cassandras on the one hand, and the Pollyannas on the other, are several moderate positions. The first of these construes declining U.S. competitiveness as a long-term evolutionary trend of the world economy. From this perspective, sustainable U.S. shares of global production and exports of manufactured goods are understandably on lower levels than the artificial highs of the immediate post–World War II period. The transition in the U.S. economy from a manufacturing-oriented to a postindustrial, services-based econ-

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omy leads some to view the natural diffusion of manufacturing capacity as less than alarming. The shift to “third-wave” service activities is seen by some as an entirely healthy, desirable ascent to a higher plane of economic development, one long on knowledge-intensive data analysis and information transmission services and short on traditional, polluting industries. Pessimists deny that this would necessarily be “progress,” asserting instead that “manufacturing matters. The wealth and power of the United States depends upon maintaining mastery and control of production” (Cohen and Zysman, 1987a: 261). John Alic of the Congressional Office of Technology Assessment has argued that “services and manufacturing complement and depend on one another. Loss of the U.S. manufacturing base would harm our industries” (U.S. Congress, House Committee on Science, Space, and Technology, 1987: 19). Other warnings about a further withering of manufacturing include doubts that services exports could ever be sufficient to pay for the $400 billion-plus that the United States spends annually on imported goods. A variant of the evolutionary approach stresses the historical inevitability of relative U.S. competitive decline inasmuch as the rise of U.S. manufacturing earlier in the century was largely a result of the country’s dominant share of the world’s supplies of critical industrial materials and fuels. The conditions that made the United States uniquely suited to industrial success faded as modern exploration and transportation methods evened out the access of other countries to raw materials, and as electronics-based hightech industries, with relatively little absorption of raw materials, became increasingly important (Wright, 1990). The upshot of this argument is that for the United States there is no easy or automatic means of restoring its historically bounded industrial preeminence.

Pragmatists

The “pragmatists” represent another moderate position between the optimists and pessimists. Analysts in this school see some potentially troubling development in the U.S. economy, but they are not yet ready to declare a clear and present danger. Some of the pragmatists acknowledge that there may be a problem, depending on the terms of reference employed. This perspective leads to concern among the pragmatists with the adequacy of current private and public efforts to respond to the competitiveness challenge. For example, Nye (1990: 207) argues: The problem for the [United States] is not so much economic sclerosis or domestic decay but complacency in the face of new external challenges. Even if there has been little decline from the long-run American standards of the past, those standards are not good enough for the future. Current levels of savings, quality of education, and patterns of research, development, and manufacturing will not meet the rising standards of the third industrial revolution, in which knowledge and information play the critical role.

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Another approach within the pragmatists school assumes that relative rates of productivity increases are critical determinants of long-term competitiveness, but concludes only that a problem could develop: The overall conclusion . . . is that there is no basis for either of the extreme interpretations that can be given to postwar developments in productivity growth. On the one side, the data offer no clear basis for a conclusion that the long-run growth rate of productivity in the United States has fallen below its historical level, or that it is about to do so. The available statistics also are not inconsistent with the possibility that the recent superiority in growth rates of other industrialized countries will turn out to have been a temporary affair, representing a period of catch-up during which the others were learning industrial techniques from us. Thus, the longer-run data constitute no grounds for hysteria or recourse to ill-considered measures that are grasped at in a mood of desperation. (Baumol, Blackman, and Wolff, 1989: 6)

In sum, there is no unequivocal optimism to be derived from the assumption that most of the relatively poor U.S. productivity performance beginning in the 1960s probably was due to above-average (and likely unsustainable) improvements in other countries’ productivity growth rather than an absolute decline in U.S. performance. The sobering side of this explanation is that it is not so different from the British experience before World War I, when that country embarked on its long decline (Baumol, Blackman, and Wolff, 1989: 108). Another study concluded that while “the data reviewed in this article do not show that all U.S. industries are flourishing, they also reveal no evidence of profound economic ills” (McUsic, 1987: 15). A variant of the hedged position is to point to the wide margin of error, or room for additional ruin, in the U.S. industrial sector: U.S. policy could continue more or less on its current course for many years without any crisis. The reason is simply that the U.S. economy is so huge, and the sins of economic policy so comparatively venal, that we can afford to be irresponsible for a long time. (Washington Post, Mar 25, 1990: C 1)

After presenting a long list of U.S. internal and external ills, the continuation of which would bring eventual damage to U.S. wealth and strength, another author quickly added that there are no grounds for concluding that the “causes of such trends are irreversible and inevitable” (Kennedy, 1988: 27). Pollyannas

The sixth school of thought flatly denies that the United States has a competitiveness problem of any significance. It advances unabashed optimism about current and future U.S. economic strength as well as incredulity over the “decline-speak” of the Cassandras. The United States’ constant and

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unjustified obsession with decline, says one optimist, reveals a narcissism, a lack of self-knowledge, and “a skewed perspective only marginally related to who we are” (Balk, 1990: 111). A supply-side economist (Roberts, 1989: 30) categorically stated that the United States “has a trade deficit because the Reagan tax-rate reductions made the U.S. a good place to invest money. . . . Today a trade deficit can be a sign of investors’ confidence and serve as a leading success indicator.” Furthermore, some hypothesize that the critical importance of a society’s ability to renew itself means that the United States “is less likely to decline than any other major country. . . . Its engines of renewal are competition, mobility and immigration” (Huntington, 1988/1989: 89). According to D. Allan Bromley, former director of the White House’s Office of Science and Technology, the United States still has “the strongest science and technology base the world has ever seen” (quoted in Council on Competitiveness, 1991: 8). There is no basic disagreement with this assessment in the private sector (see, for example, Dertouzos, Lester, and Solow 1989: 67). In another forum, Bromley argued that the United States has a culture that prizes innovation, a university system superior to all others, an open and hospitable society that attracts the best scientific minds and inventive talents of the world, a business climate that encourages innovative enterprises, and a financial system that provides the opportunity for such new enterprises to grow quickly into major businesses. (U.S. Senate, Committee on Commerce, Science, and Transportation, 1990: 66)

There are numerous macroeconomic analyses that attempt to discredit the claim of widespread economic decay. In a widely quoted article criticizing advocacy of an industrial policy, Schultze (1983: 10) found “no evidence that in periods of reasonably normal prosperity American labor and capital are incapable of making the gradual transitions” from older industries to newer, more technologically advanced ones, as is “always required in a dynamic economy.” What to some appears to be a competitiveness problem is merely the process of adjustment to a new international competitive environment in which the United States now is merely first among equals. A related line of argument claims that the United States “has not lost its comparative advantage in manufacturing as a whole,” but only in labor-intensive and those capital-intensive products manufactured with standardized technologies (such as televisions). In sum, the optimists see a healthy situation in which U.S. comparative advantage is increasing in high-tech and resource-intensive products.

Competitiveness as a Meaningless Concept

A final school of thought contends that the concept of national competitiveness is at best obsolete and meaningless or, in the worst case, dangerous. The

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concept is dismissed as obsolete on the grounds that the identity, planning, ownership, and production facilities of big manufacturing corporations have evolved so far toward a global, and away from a national, orientation. Changes in the contemporary international economy have altered traditional concepts to such an extent that the standards and terminology used in the debate over U.S. national competitiveness no longer have clear meaning. One variant of this argument contends that the concept of U.S. corporate ownership is less relevant than the existence of companies within the United States engaged in research and development, worker training, etc., regardless of the owners’ nationality. “So who is us? The answer is, the American work force, the American people, but not particularly the American corporation,” the end result being that U.S. competitiveness will be at least partially a function of foreign investors favoring the United States (R. Reich, 1990: 54). The gist of recent writings by a noted Japanese management consultant (Ohmae, 1990) suggests that the emergence of the “interlinked” world economy has greatly reduced the significance of traditional national borders, with the result that global competition today is something occurring less between countries than between globalized, “nationalityless” corporations. More recently, Krugman (1994: 30) has forcefully argued that “it is simply not the case that the world’s leading nations are to any important degree in economic competition with one another, or that any of their major economic problems can be attributed to failures to compete in world markets.” Krugman (1994a: 41–44) goes on to contend that the “obsession” with competitiveness poses real dangers insofar as it could lead to serious misallocation of resources, result in protectionism and heighten international trade conflict, and debase the quality of public discourse on economic policy and thus the quality of public policy itself. CONCLUSIONS

Taken as a whole, the collective literature on the existence and severity of the U.S. international competitiveness problem remains far from conclusive—for good reasons and bad. Part of the problem is the inherent complexity and nuances of a multidimensional subject about which honorable people can disagree. Furthermore, a country’s global competitiveness is not static; any analysis thus reflects conditions and trends that may well prove to be fleeting. But another part of the problem is that advocacy and selectively chosen data continue to frame the debate. Regrettably, too many claims on all sides of the argument share the characteristics of overconfidence and underdocumentation. Some of the literature is deliberately brief, designed to develop a single theme rather than to illuminate the entire breadth of the topic. Other works seem to aim to defend ideologies or exist-

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ing institutional agendas rather than to achieve status as solid academic work. It may be that only academic reviewers are favorably disposed to studies that are carefully hedged in their conclusions or suggest that existing data are not adequate to allow definitive conclusions. Moreover, economic theory seldom mixes well with sensitive public policy debates dominated by politicians and business people. Given the sharp contrast between the pessimists and optimists, it is important to avoid thinking that one side of the contentious debate must be correct and the other wrong. In one of the better commentaries on the divergence between doomsday forecasts of the impending erosion of the U.S. industrial base and more optimistic interpretations, it was suggested that both sides are right and both sides are wrong. The [pessimists] are right in asserting that something is amiss with the competitive [performance of U.S. manufacturing], but wrong in believing that this can lead to a collapse of our manufacturing sector. The [optimists] are right in arguing that deindustrialization is not an issue, but wrong in dismissing worries over U.S. manufacturing performance. (Krugman and Hatsopoulis, 1987: 18)

Even if one accepts that there are long-term problems with the competitiveness of U.S. firms, it seems clear that many pessimists have exaggerated the short-term urgency of the problem. Rather as Lenz (1991: 195) suggests, the decline in U.S. competitiveness is analogous to the country suffering from hardening of the arteries rather than a heart attack. By 1993, U.S. firms—especially in information-related fields—seem to have strengthened their competitive position in the world economy. Their apparent turnaround stems largely from the enhanced efforts of these firms, but it is also due to the ongoing appreciation of the Japanese yen vis-à-vis the U.S. dollar. Given the prevalent interpretation of trade (im)balances as indices of national competitiveness, there is a danger that the U.S. government will try to promote further dollar depreciation as a solution to perceived competitiveness problems. This solution is “easy” politically insofar as it poses few serious costs on U.S. constituencies in the short term. But since the accepted definition of competitiveness connotes rising living standards and an upgraded work force, such a course of action would be a classic case of the cure being worse than the disease. Similarly, enhancing U.S. exports by a continued stagnation in the real wages of blue collar workers does not meet the economist’s definition of competitiveness. The single most important question here is whether current data and emerging trends unequivocally suggest that U.S. industry can generate strong, sustained increases in exports of high-tech, high-value-added, highprofit margin goods made by efficient, well-paid workers. The changing arithmetic of the U.S. trade balance is less important than changes in the product composition of imports and exports. The desired changes in product composition should not be the result of the rest of the world coming to fear

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the “deplorable and unfair competition of the underpaid labor of the United States” (Baumol, Blackman, and Wolff, 1989: 7), nor should they be anticipated through wishful thinking that our main foreign competition, Japan, has succumbed to economic malaise. The desirable turnaround in the product composition of U.S. exports should come about because of greater efficiency in the U.S. industrial sector generated by at least four factors: high relative increases in productivity, better management strategies, more supportive government policies, and a better trained and educated work force that will enable U.S. firms to outperform their increasingly skillful competition in Europe and Asia. Probably the single most relevant determinant of whether the United States has a competitiveness problem is the extent to which the observer believes that all or many of these four improvements are currently and sufficiently under way. NOTES

1. For the record, I believe that a moderately severe problem currently exists. 2. The above is derived from a U.S. Census Bureau press release dated March 19, 1990. 3. The source for these data is the U.S. Commerce Department’s Survey of Current Business, June 1990.

Iwao Nakatani

3

Sources of Competitive Asymmetries Between the United States and Japan When the subject of imbalance between the United States and Japan comes up, we usually think of trade or current account imbalances. Unfortunately, the days when this issue could be discussed merely in terms of trade and current account imbalances have gone. This is because there is a larger imbalance—an asymmetry—between the economic systems of the two countries, and we are now able to see clearly the grave implications of that asymmetry. I am not saying that we can ignore trade and current account imbalances. These have great political significance insofar as they provide highly visible indicators for politicians and for groups benefiting from protectionism. It is impossible for the United States to ignore its current account deficit of about $40 billion to $50 billion annually—which refuses to shrink despite the United States’ cheap-dollar policy since 1985—or the enormous accumulation of its external debt. I would like to emphasize, however, that the trade deficit is merely one of many symptoms that have emerged as result of more fundamental asymmetries between the United States and Japan; and we cannot address the underlying issue by focusing only on the superficial problem of bilateral imbalances. I believe that more important issues than trade imbalances are the significant differences in the two countries’ economic structures. One way to illustrate this point is to pose the question of how the Japanese economy has achieved its rapid growth in the postwar era, overtaking the United States and capturing the world market in some of the more important industries such as automobiles, electronics, machine tools, and semiconductors. Because Japan’s huge trade surpluses have been registered primarily in precisely these industries, any answers to this question must focus on how these Japanese industries differ from their U.S. and other international counterparts. Suffice it to say that Japanese industries did not overtake the large lead of their competitors by simply replicating the latter’s structural features. 41

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The main reason that Japan is strong in these industries is closely related to its generation of new economic structures, such as keiretsu and the “main bank” system. Indeed, issues first raised in the Structural Impediments Initiatives talks between the United States and Japan, such as the exclusivity of keiretsu and restrictions on interlocking shareholding, indicate that the economic difficulties facing the two countries are no longer a matter simply of trade imbalance, but rather have developed into a questioning of capitalism as practiced by each. In other words, the key to solving these difficulties lies in analyzing and understanding the implications of the two countries’ asymmetric economic structures. Before going into a detailed analysis of the asymmetric nature of the capitalist systems of the United States and Japan, I would like to point out a fundamentally unstable aspect of Japanese-U.S. relations. It is an undeniable reality that the United States, still a superpower in terms of world security, diplomacy, and politics, but with diminished weight in the world economy, coexists with Japan, which has formidable economic muscle but a puny role in international politics. In the wake of the collapse of the Cold War balance of power, premised on confrontation between the United States and the Soviet Union, one may ask what form the partnership between the United States and Japan, with their asymmetric capitalist systems and divergent world roles, should take. On this point, Pyle (1992: 6) states: One can imagine that sometime in the future a student of history looking back at the 1980s might wonder why the world’s largest debtor nation continued to provide the security for the world’s largest creditor nation. How was it that the U.S. continued by treaty to provide a unilateral security guarantee for the Japanese state while it was running a U.S.$40 billion annual trade deficit with that state? How was it that the U.S. continued to commit more than 45,000 military personnel to the defense of Japan while a majority of Americans regarded Japan’s economic power as a greater threat to it than the power of any other country’s?

The asymmetric nature of the two countries’ economic structures is a factor that will destabilize the bilateral relationship even further. In particular, it seems likely that maintaining the two countries’ economic structures as they are now will result in decisive political friction and confrontation within the next ten years. With this in mind, the most important tasks now facing the United States and Japan are to reconcile their asymmetric capitalist systems and to reduce these destabilizing factors. The organizers of the U.S.-Japanese Structural Impediments Initiatives talks instinctively understood this. However, to ensure the success of future U.S.-Japanese talks, it is necessary to go beyond accusations of the shortcomings of each other’s system. Each side must fully understand the implications of relevant asymmetries and work steadfastly toward a policy of reconciliation.

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THE COMPETITIVE EFFECTS OF CORPORATE NETWORKS AND INSIDE INFORMATION

At the outset, I would like to make some bold distinctions regarding U.S.style and Japanese-style capitalism. I believe that the core idea underlying Japanese-style capitalism is networking, while the essence of Western capitalism, and especially of U.S.-style capitalism, is found in the concept of market as defined by Adam Smith. I am not, of course, saying that markets are irrelevant to the Japanese economy or that most Western companies fail to recognize the importance of corporate networks. Even so, this is a distinction with enough difference to be useful in pinpointing the divergences between the two systems. I would like to examine two characteristics of Japanese-style capitalism: corporate behavior, which attaches overriding importance to long-term business relationships; and the capital market, which keeps at relatively low levels the required rate of return on new investments demanded by investors. I shall begin with the former. After an inspection tour of U.S. and European car plants, an executive with a Japanese car manufacturer commented that the era when Japan stood unrivaled in the industry had arrived. This was not mere boasting. An article in Business Week (October 22, 1990) entitled “New Era for Auto Quality” commented: Uh oh, Detroit, watch out. Once again, something extraordinary is happening in Japan. Just as U.S. car markets are getting their quality up to par, the Japanese are redefining and expanding the term. The new concept is called miryokuteki hinshitsu—making cars more than reliable, that fascinate, bewitch, and delight.

Without going this far, it can be said that the gap between the two countries’ auto industries has been reversed. In the late 1960s, the Japanese did not dream of attaining the heights reached by the U.S. auto industry. The difference between an American car, accelerating easily up the steep streets of San Francisco, and a Japanese car, struggling to maintain speed even with the accelerator pedal pushed to the floor, was one of quality and not of engine capacity. By the early 1990s, the situation had been totally reversed. How is it that the United States and Japan have traded places in many sectors in such a short period? This question is too complex to allow a brief, simple response, but one reason is that the Japanese auto industry has skillfully built up a network of long-term business relationships with interdependent companies, thus creating an elaborate system of intercompany cooperation. Another is that the industry has been successful in gaining access to inside and specific information needed to upgrade the quality of car manufacturing via this network. Some examples follow.

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The Just-in-Time (JIT) Inventory System

The basic idea underlying the JIT inventory system1 is for suppliers to meet the requests of the assembler ordering from them as quickly as possible, even within a matter of hours. The assembler is in turn responding to the daily change of orders from dealers all over the world. The basic point is that, unlike Ford’s Model T, the number of possible variations within one particular model of automobile is something on the order of 200,000 or more, depending on how the combinations of optional parts are counted. Automobile manufacturers today must cope with this new situation in which it is almost impossible to produce standardized cars in advance. Today’s system of production must be able to accommodate requests from the customer as flexibly as possible. The ideal is that each car can be assembled and made to order. According to Asanuma (1991), top Japanese carmakers such as Toyota and Nissan can now accommodate requests for changes in final specifications up to three or four days prior to the actual production dates, while U.S.based companies need substantially longer times for production adjustments. Even when a steel plate is moving along the assembly line and beginning to look like a car, the final specifications of that car remain undetermined.2 It is only at the last possible moment, when the parts have to be fitted together, that the specifications and market destination of the car are finally determined. If the company were to stick to a predetermined production plan, it could end up making cars that are not in demand, resulting in extra inventory costs and lost business opportunities. The failures in economic management of socialist countries are founded in nothing more than putting bureaucratic production plans ahead of demand considerations. So, the final specifications of each car are determined only at the stage when the parts need to be fitted together. These specifications are decided by consulting with dealers throughout the world on the demand situation and making the most urgently required models first. Once determined, specifications are sent by optical cable to hundreds of subsidiary parts manufacturers located near the parent factory. These companies immediately finish their already semiprocessed parts and deliver them continuously, every twenty to thirty minutes, in the required sequence to the point where they are needed on the assembly line. In this fashion, hundreds of parts are delivered right to the spot where they are needed without a moment’s delay, or “just in time.” Consequently, there is little need for piling up inventories adjacent to the assembly line, so Japanese factories are far more streamlined than those of the Big Three U.S. automakers. And, with a single car containing thousands of components, lower inventory costs result in dramatically reduced production costs. Inevitably, however, parts manufacturers are presented with an extremely demanding task. If they deliver parts to the factory before

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they are expected, there is nowhere to store them and the parts have to be sent back; but if delivery is delayed and the assembly line is forced to halt, the company responsible incurs a penalty. Parts makers cooperate with this grueling system because their longterm business future with the assembler is assured, unless their reliability falls to the point where the assembler terminates its relationship with them. Otherwise, the assurance of a continuous relationship is usually considered by both parties to be fairly solid. If contracts were renewable on a yearly basis and there was no guarantee of a long-term relationship, as in business practices characteristic of competitive markets, parts manufacturers would not be so ready to invest the enormous time and money this system requires. The reason the JIT inventory system is less well suited to U.S. manufacturers is that U.S.-style capitalism is deeply rooted in the short-term, market-oriented thinking that firms should buy from whoever is offering the best quality and price on the spot. If a competitor of the company you are doing business with comes up with a better deal in terms of price or quality, you do not hesitate to change partners. Although this practice has played an important role in making the U.S. market open and competitive, it has at the same time proved a barrier to setting up systems—like the JIT inventory system—that depend on close cooperation among companies. Under a marketoriented capitalist system, parts manufacturers naturally ask themselves why they should go the extra mile when there is no guarantee that they will be doing business with the same company the following year. This example shows how the dissimilarity between Japanese-style capitalism, based on close-knit intercompany cooperation, and U.S.-style capitalism, with its emphasis on an open, arm’s-length market, has influenced the two countries’ production systems. It is not coincidental that Japan’s most internationally competitive industries—automobiles, semiconductors, cameras, electronics, and machine tools, for example—are almost without exception those whose competitiveness stems in large part from their closeknit cooperation with subcontracting firms. This can be illustrated by looking at the industry composition of U.S.Japanese trade balance. Over the past few years, Japan’s total trade surplus with the United States has been about equal to or less than the net surplus of transport equipment and machinery. In other words, the gap in competitiveness between the United States and Japan in these two industries is so wide that bilateral trade cannot be brought into balance merely by adjusting trade policies or the exchange rate.3 The United States, on the other hand, is maintaining its competitiveness in industries that depend on the talents of individuals, such as computer software and pharmaceuticals, and in industries using large-scale specialized equipment, such as petrochemicals and space development. Interestingly, intercompany cooperation is not crucial to these industries in the way that it is to the auto or electronics industries. To sum up, the Japanese production

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system offers a decisive advantage in industries such as autos and machinery, in which many companies must work together in a spirit of close coordination and networking. Ricardo’s “law of comparative advantage” still has force here but in practice is no longer restricted to endowment of resources or to a narrowly defined technological gap. Rather, comparative advantage is determined by a country’s whole production system itself.

Differing Approaches to Research and Development

Another aspect of the reversal in competitiveness in the auto industry involves the differing approaches to R&D taken by U.S. and Japanese producers. In short, when developing a new model, Japanese carmakers work in tandem with their major suppliers, while U.S. producers tend to go it alone. Of course, there have always been cases of joint development in the United States, and there is recent evidence that U.S. auto firms have been emulating their Japanese counterparts. Nonetheless, in general it is valid to say that the two countries’ approaches to R&D continue to differ greatly. A car is a complex piece of machinery, requiring the technological input of many industries. When developing a new model it is no easy task for manufacturers to keep abreast of and incorporate the technological innovations constantly being developed in other industries. The simplest way of solving R&D problems—for example, what computer functions will be needed in a car to be marketed in five years’ time, or whether it is possible to develop a new material to replace steel plate—is to work with a computer company or a company developing new materials. In fact, Japanese car manufacturers do work very closely with major parts suppliers to develop new cars. Joint development provides a means of gathering information on technological advances in other industries and using it in the development of new car models. Joint development, a matter of course in Japan, has made little headway in the United States, for two reasons. The first, as with the JIT inventory system, is that joint development on a car to be marketed five years hence is not possible among parties who may not be doing business together even in the following year. A guaranteed long-term business relationship is a prerequisite for long-term joint development. Thus, the open nature of U.S.-style capitalism—“we’ll do business with you any time if the price and quality are right”—is a hindrance to setting up a system of joint development that can gather information on new technologies from a wide range of industries. The second reason involves what might be considered a kind of “insider trading.” Joint development implies the leaking of classified information from one company to another. A genuine case of insider trading would occur if a group of people were to use such information in their dealings on the stock exchange. The United States, unlike Japan, has strong social and legal sanctions against insider trading. U.S. executives have to be extremely cau-

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tious with regard to setting up large-scale joint development projects with independent companies, even when they realize that they stand to lose if they do not. When interviewed in 1988, GM and Ford executives told me again and again that the early involvement of suppliers in R&D projects was crucial to regaining competitiveness. This indicates that they recognized the need for a closer relationship with parts manufacturers, as in Japan. In practice, though, the market-oriented nature of U.S.-style capitalism stands in the way. This left GM and Ford tackling their development projects, which should entail an enormous amount of input from a large number of industries, in-house. It is possible, of course, to procure technological information on the open market. However, this is merely generalized information available to anyone with the means to pay for it. In addition to the market sources U.S. carmakers use, Japanese manufacturers can tap the knowledge available through the intercompany network. And whereas U.S. companies are forced to depend on general information obtained on the open market, Japanese companies can gain access to specific information tailored to a specific purpose. The winners and losers at this game are very clear. The example of the auto industry illustrates the ways in which U.S.style capitalism, with its absolute trust in market forces, is proving less effective at improving production efficiency and keeping up with technological advances. Japanese-style capitalism, which emphasizes flexible corporate networking, is proving more effective in automobile manufacturing, as well as in other industries that need to incorporate technological innovations from a wide array of sources.

Can Japanese-style Corporate Networks Be Generalized?

In describing the Japanese system as more efficient and dynamic, the question arises as to whether it would be possible to generalize its underlying principles and apply them in other countries. Thus far capitalism has evolved predominantly on the U.S. model. The world has revered “openness” and castigated those who violate it. It was this liberal ideology that provided the theoretical basis for rapid economic recovery after World War II. Socialist economies that rejected the benefits of a market economy in favor of a closed, tightly planned economy have since collapsed. The international manifestation of this liberal ideology provided a favorable environment within which Japan recovered from its defeat in World War II and achieved miraculous economic growth. The Japanese have proved that their concept of a corporate network works very well within Japan. But is it possible to make it work in other countries as well? At least two questions arise here. One is whether other countries’ firms can operate as efficiently as their Japanese counterparts using Japanese methods.4 The JIT inventory system requires parts manufac-

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turers to work with robot-like precision. In Japan, if parts makers’ technology is not up to par, engineers from the parent company provide detailed training until their quality meets the required standard. To some extent these dependent companies have to sacrifice a large measure of their independence in exchange for the assurance of a long-term business relationship. Is it possible for other countries to accept this trade-off: independence of entrepreneurial activity in exchange for the security of a long-term business partnership? The second question is whether the world economy would be able to achieve the dynamic growth seen under free market capitalism if a number of countries were suddenly to introduce Japanese-style capitalism. The exclusive nature of the Japanese corporate network in comparison with free market thinking cannot be denied. Business premised on long-term intercompany relationships achieves excellent results in terms of microeconomic performance. But in terms of macroeconomics, it ties up economic assets and fails to achieve the best possible distribution of scarce resources. The only solution to this problem is for companies to form complex networks with other companies outside their original keiretsu. For example, Toyota’s dependent companies could form long-term relationships not only with Nissan and Honda, but with GM and Ford as well. Japan’s automobile producers, under pressure from the U.S. government, have in fact been trying to incorporate foreign suppliers into their subcontracting networks in both Japan and North America. In effect, a large number of companies could compete with each other through having access to the JIT inventory system. This seems to be the only way of satisfying criticism that long-term intercompany relationships are closed or exclusive by nature, but as a consequence the Japanese system would move closer to the market-oriented system of the United States. As explained earlier, one merit of the Japanese system is that it enables Japanese companies to tap into both general information acquired on the open market and specific information acquired via the corporate network. Useful information required for a specific purpose can be obtained easily just because of the close relationships that exist between companies. However, if the system were to become more open, and multiple relationships were formed among a large number of companies, the value of such information would diminish rapidly, for much of its worth lies in its being unknown to other companies. Thus, attempts to generalize the Japanese system are bound to undermine its intrinsic advantages. JAPAN’S CAPITAL MARKETS AND AGGRESSIVE INVESTMENT BY JAPANESE COMPANIES

To a remarkable extent, the ideas expressed so far hold true for another pillar of Japanese-style capitalism, Japan’s capital markets, which are charac-

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terized by interlocking shareholding and the main bank system.5 Without a doubt, until the bursting of the “bubble economy” in the early 1990s, the Japanese capital market provided a very convenient setup for Japanese companies. To see why this was so, let us consider the case of interlocking shareholding by corporate partners. Interlocking shareholding occurs when multiple companies obtain holdings of each other’s shares. Each therefore becomes a major shareholder without an exchange of net capital. For example, if Company A purchases a 1 billion yen share in Company B and Company B buys a 1 billion yen share in Company A, the net capital exchange is zero. However, Company A becomes a shareholder in Company B and vice versa, and if 1 billion yen is a sufficiently large portion of these companies’ capitalization, each becomes a major shareholder in the other. Because this practice is widespread, general shareholders, who do provide net capital, lose influence over the company’s investment decisionmaking.6 While Company A and Company B— respecting each other’s management policies—might not interfere directly in each other’s affairs, general shareholders are unable to reject management policies, even if these policies run counter to their interests. Competition in the semiconductor industry over the past fifteen years has been very intense in the global marketplace. Japanese companies have invested several hundred billion yen annually in this area, in spite of the fact that the rate of return on investment has not been sufficiently high to justify such huge investments. U.S. companies were more or less forced to retreat from worldwide competition in one-megabyte and then four-megabyte chip production because the rate of return on investment in this area fell far below the levels typically required by U.S. shareholders. If one analyzes Business Week’s (July 15, 1991) ranking of the top 1,000 international corporations on a country-by-country basis, the remarkably low rate of profit to sales and low-margins, high-sales orientation of Japanese companies really stands out. Japanese corporations constitute 309 out of the 1,000 (based on share capitalization) and have an average aftertax earnings ratio of no more than 2.4 percent. That compares with the international average of 4.6 percent, and 5.6 percent in the United States, 5.9 percent in Germany, and 7.1 percent in the United Kingdom. In Japan, intraindustry dealings are substantial, and companies have lower ratios of profits to sales than do U.S. and European firms with their high internal production ratios. But even if you take these factors into consideration, the difference between Japan and the rest of the world is too large. The proof is that in terms of return on capital, the performance of Japanese companies is overwhelmingly poor. Japanese industry’s average rate of return on capital is 8.6 percent, compared with the world average of 15.1 percent, the United States’ 19.1 percent, Germany’s 13.7 percent, and the UK’s 20.2 percent (Business Week, July 15, 1991). The reasons for this disparity are complicated but are clearly related to unique characteristics of Japanese capital markets, such as cross sharehold-

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ings and the main bank system. In Japan, corporate investments in other companies effectively block shareholders from exercising any say in the management of the companies they provide with capital. As a result, companies can operate on the basis that shareholders will be unable to demand high profitability from new investments. To put it another way, until quite recently Japanese firms’ cost of capital has been low compared to that of foreign companies.7 In addition, main banks are more concerned with building the volume of business than with stressing profitability when making loans to their clients. This tendency adds to already fierce competition for market share and a preference for increasing volume with little regard for profitability. Because main banks serve a role as monitors of their leading customers, the view that they effectively carry out financial transactions has recently become more widely held among economic analysts.8 But I believe that, in addition, the main bank system has come to exert considerable influence on Japanese companies’ inclination for low-profit high-volume business. To summarize, in the United States general shareholders (including institutional investors) refused to invest huge sums in semiconductors, an industry that does not offer an immediate high return. Japanese investors were happy to do so, even in a climate of excessive investment competition. In other words, the rate of return required by Japanese shareholders of the companies they invest in has been far lower than that required by U.S. shareholders. This attitude has encouraged Japanese companies to invest aggressively, which in turn ensured their success in quickly capturing world markets. Pension funds and other institutional investors in the United States, on the other hand, will not tolerate a decline in their own pension program’s rates of dividend, so they take a negative attitude toward new investments that may lower their short-term profits. U.S. companies fell behind in the race to invest in the semiconductor industry because required rates of return in the U.S. capital market were too high.9 In industries, such as semiconductors, that depend on economies of scale and international competitiveness, the fundamental rules of competition differ greatly depending on whether the country has a Japanese-style capital market that accepts “adversarial” investment practices, or a U.S.style capital market that aims to maintain the competitive profit rate required by general shareholders. The risks that management is prepared to take when shareholders demand a 15 percent return on investment would be very different from the risks taken by management of a company for whom a 4 percent return is acceptable. The amount of capital invested by two such companies will also vary widely. This insight solves the mystery of why Japanese companies were able to invest so aggressively throughout the 1980s, gaining a competitive advantage even in industries long established in other countries. Either way, the result is that the Japanese capital market has functioned

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to protect Japanese companies from the volatility of market pressures. A secondary result, currently a contentious issue, is that Japan’s capital market makes it easy for Japanese companies to acquire U.S. companies but extremely difficult for U.S. companies to purchase Japanese ones, a criticism symbolized by T. Boone Pickens’s unsuccessful attempt to acquire a share in Koito Seisakusho. With the subtle devices of the Japanese capital market in place, mergers and acquisitions (M&A) have not posed serious threats to Japanese executives. The prevailing view is that the United States’ weakness on this point stemmed from excessive M&A activity, the culprit in the decline of U.S. industry. Although the exclusivity of Japan’s capital market raises many questions, the U.S. principle of “market above all” also poses serious problems. This situation can be likened to the corporate network versus shortterm, market-oriented thinking described earlier. CONCLUSION

This chapter has examined two characteristics of Japanese-style capitalism: corporate networks based on long-term relationships and a capital market with a low required rate of return on investments. There are, of course, many other hypotheses that attempt to explain the success of the Japanese economy. For example, Johnson’s (1982) “Japan Inc.” theory emphasizes the role of the Japanese bureaucracy. And the “Three Sacred Treasures” theory (Abegglen, 1958) claims that Japan’s healthy industrial relations—characterized by the lifetime employment system, seniority system, and companybased unionism—can be attributed to the excellent performance of the Japanese firm.10 But these have already been extensively discussed elsewhere. On top of all the factors that have so far been analyzed by many economists, I maintain that the two characteristics of Japanese-style capitalism I have discussed in this chapter have contributed greatly to Japan’s rapid economic recovery after World War II. At the same time, however, the fact that Japanese-style capitalism works well for Japan does not necessarily make it acceptable to the rest of the world. Therefore, what is most important at this stage is to analyze what would happen if it were to be adopted in other parts of the world. For example, it is necessary to consider whether world living standards would rise if other countries were to adopt Japan’s system of corporate networking and interlocking shareholding. Although the Japanese system has apparently succeeded in correcting some of the shortcomings of the marketoriented system in the United States, its implications for the rest of the world, if generalized, are unclear. It is also valid to ask whether the Japanese system is open enough to meet international standards of fair play, regard-

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less of how efficient it is. By world standards, a good system should satisfy the criteria of both efficiency and fairness. It is the responsibility of Japanese government and business to make Japanese-style capitalism less exclusive, without impairing its efficiency or dynamism. But are they up to this task? Japanese companies should at the very least make greater efforts to recruit foreign companies into their corporate networks, for example, or they will never escape the criticism of exclusivity in corporate relationships. Similarly, as long as foreign companies are unable to participate in the JIT network, this system will never meet international criteria for fairness, regardless of its efficiency. The government should also consider adopting certain policies, such as a ten-year moratorium on income tax for foreign companies, or subsidies to Japanese companies that invite foreign companies into their corporate network.11 Also, it would be appropriate to impose restrictions on interlocking shareholding or, at the very least, radically reform voting procedures so that interlocking shareholders would lose their right to vote at meetings of general shareholders.12 As explained earlier, the reason interlocking shareholders should not have voting rights is that they have become major shareholders without a net input of capital. Clearly, the decisive role these major shareholders play at general meetings undermines the rights of general shareholders who do supply net capital and distorts the nature of the company shareholding system itself. As the above analysis has shown, Japanese-style capitalism contains a number of unresolved issues. Without appropriate preventive measures by government and business, the confrontation between Japanese-style capitalism and its U.S. (and European) counterpart could develop into a more destabilizing force in U.S.-Japanese relations in the 1990s than frictions over trade inbalances. NOTES

1. The JIT (or kanban) system is only a part of the entire car manufacturing system. See Monden (1983, 1991), for example, for a comprehensive illustration of the whole system at Toyota. 2. The observations here and below are based on my personal visit to Toyota’s Motomachi plant in Tokyo City, Japan, in 1989. Even though the final specifications of each car produced are predetermined three to four days in advance, as Asanuma (1991) shows, it is apparent that the ordering of production within each day is determined on the spot. This is probably due to the fact that the company wants to adjust the final production schedule according to the urgency of demand and also according to the need to smooth the operation of the assembly line. 3. In spite of the substantial and ongoing adjustment in exchange rates between the U.S. dollar and the yen since 1985, the trade imbalance in these industries has not been reduced significantly. 4. See Imai (1990, 1991) for a more detailed examination of this point.

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5. See Nakatani (1984, 1988) and Sheard (1991a, 1991b) for more formal discussions on the workings of the main bank system and interlocking shareholding. 6. See Nakatani (1988) on this specific point. 7. For an extensive empirical study that shows that this is indeed the case, see McCauley and Zimmer (1989). 8. See Sheard (1991b). 9. My thanks to Professor Masauke Ide of Osaka University’s Department of Economics regarding this important point. According to Professor Ide’s computations, in 1988 the operating profit rate on sales of a major U.S. company was 15.4 percent, while its profit rate after deducting capital tax was 19.1 percent. At around the same time, these figures were only 3.5 percent and 7.9 percent for NRI 350, a listing of major Japanese companies. For a long time, experts have been quietly asking themselves why Japanese companies, which have the competitive strength to capture world markets, have such low profit rates by international standards. The reason is simply that the rate of return required by the Japanese capital market is substantially lower than that required by the U.S. capital market. 10. Other useful theories include Itami (1987), Shimada (1989), and Aoki (1988). 11. MITI has introduced some incentive mechanisms in the form of taxes and subsidies by which foreign companies are encouraged to participate in the so-called design-in process and other corporate networks. At the same time, private companies increasingly are seeking business partners abroad so that they can form a more globalized and open network system. Whether these efforts will bring about satisfactory results in the near future is not clear at this time. 12. This subject has been treated extensively by Nakajima (1990).

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Ideology and Competitiveness: The Basis for U.S. and Japanese Economic Policies As Americans reflect on their huge trade deficit and are increasingly disenchanted with their trading relations with other advanced industrial states, now is an appropriate time to reappraise the question of what fundamental forces drive the U.S. government’s economic policies. Classic scholarly explanations of government policies tend to focus on the institutional aspects of the decisionmaking process, emphasizing either its pluralistic qualities or its operational structure. They stress the incoherent, fragmented nature of the policy formation process, implying that policy is the unintended outcome of a series of individual (and often egoistic) decisions. Proponents of these explanations tend to conclude that there is no industrial policy in the United States in the classic European sense of a series of clearly articulated goals, based on a coherent set of principles, in which a variety of macro- and microlevel instruments comprehensively implement the stated agenda. This conclusion appears reasonable when comparing the U.S. institutional structure with its French or Japanese counterpart, decisionmaking in these latter two examples being more centralized in government departments that have a broader array of policy instruments. Evidence supports the proposition that there is no industrial policy that enhances U.S. competitiveness in a formal, mechanistic sense. This assumes, however, that the components of an institutional structure are the only indicators of a coherent economic policy, that it is the instruments themselves and not the motive for which they might be used that is important. This chapter offers an alternative formulation that extends beyond the formal conception of industrial policy. I argue that while the United States lacks departments with a comparable mandate, and policy instruments with the capabilities of some of its major trading partners, the suggestion that it therefore does not have an industrial policy ignores aspects of a coherent economic policy that it implements with regularity. There is no industrial policy in the conscious, formal formulation; but there is an economic policy 55

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that may amount to a functional, ad hoc industrial policy in the sense that we can identify an active, routine set of state responses toward indigenous industry in recurring contexts. This claim is based on the proposition that advocates of purely institutional or organizational approaches have missed an important dimension of the decisionmaking process. I advocate examining the fundamental ideological principles upon which U.S. economic policy is predicated. I therefore focus on the informal patterns of economic policy—which aggregate into a routinized process of decisionmaking that amounts to a de facto industrial policy—rather than on the more explicit, formal mechanisms characteristic of the type of industrial policy that institutional analysis seeks to identify. In this chapter I attempt to identify some of the major features of this routinized pattern and its application to the manufacturing industry. In brief, I argue that what distinguishes the United States from Japan is the former’s unwillingness to discriminate, in practical terms, between domestic and foreign producers and among domestic firms. In contrast, dating from the 1930s, the Japanese have discarded notions about reciprocity, national treatment, or the concept of equal opportunity in the treatment of both foreign and domestic firms in favor of the discriminatory principle of partisan and selective economic intervention. Although the Japanese state’s institutional capacity to discriminate has weakened in the last two decades, and it hence has had to become more selective in the application of this principle, this ideological distinction has nevertheless had significant implications for the competitiveness of the U.S. and Japanese economies. I argue that what amounts to a U.S. industrial policy effectively decreases U.S. competitiveness—not because, consistent with neoclassical economic argument, government intervention inevitably does so, but because the form of U.S. intervention does so. Both the U.S. and Japanese states intervene; it is the principles upon which intervention is predicated (i.e., discrimination as opposed to nondiscrimination) that is important. I examine this proposition by comparing the two countries’ economic policies in two critical sectors: autos and semiconductors. Many claimants that the United States lacks an industrial policy juxtapose the example of the United States with that of Japan, contrasting U.S. incoherence with Japan’s coherence (whether that Japanese policy originates from a dominant public or private sector). I offer a secondary claim for purposes of comparison: that the United States and Japan both have industrial policies in a broad sense, but that the two countries’ governing principles starkly contrast, resulting in different sectoral policies and market structures. Japan’s industrial policies enhance the competitiveness of its sectors; those of the United States do not. I first outline the basic principles of U.S. and Japanese ideologies, before examining each country’s economic policy in the two sectors, in order to demonstrate how the differing policies, derived from contrasting ideologies, have led to markedly different sectoral

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structures and degrees of competitiveness. My broad argument implies that there is a causal relationship between the nature of state policy, the prosperity of the individual firms in each sector, the sector’s pattern of development and, by extension, the country’s aggregate welfare. More specifically, I suggest that there is a causal link between an advanced industrialized state’s dominant ideological principles and its broad propensity for prosperity in the context of a capitalist system, although the limited contours of the chapter preclude me from developing this claim here as I have done elsewhere (S. Reich, 1990). I begin with a brief discussion of the major alternative approaches employed in the study of U.S. economic policy. I then provide an outline of the influence of domestic ideology on economic policy and how, de facto, it creates an unarticulated industrial policy. The fundamental values inherent in the U.S. ideology are then contrasted with those of Japan’s ideology. A subsequent comparative analysis of the auto and semiconductor industries in the United States and Japan then illustrates how domestic ideologies systematically influence the structure of industry in each country. I conclude with some brief comments about the broader implications of this ideology for U.S. competitiveness. ALTERNATIVE PERSPECTIVES ON U.S. ECONOMIC POLICY

The three major approaches to the study of foreign economic policy stress the influence on economic policymaking of interests, institutions, or ideologies. Interest-based and institutional analysis have proved to be the dominant forms of explanation. Traditionally, the most widely used of the three has been the interest-based approach associated with pluralism. But a new organizational focus, which grew in importance after pluralism lost favor in the 1970s, complemented the subsequent development of state theory and further stressed institutional factors in the study of U.S. foreign economic policy. This institutional approach is defined by Hall (1986a: 19) as follows: The concept of institutions is used here to refer to the formal rules, compliance procedures, and standard operating practices that structure the relationship between individuals in various units of the polity and economy. As such, they have a more formal status than cultural norms but one that does not necessarily derive from legal, as opposed to conventional, standing. Throughout the emphasis is on the relational character of institutions, that is to say, on the way in which they structure the interactions of individuals. In this sense, it is the organizational qualities of institutions that are being emphasized; and the term “organization” will be used here as a virtual synonym for “institution.”

A third, less popular, formulation stresses the role of ideology. Adler (1987: 4–6), for example, advocates an integrative perspective that stresses

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the relationship between the objective and the subjective in a world where ideologies are highly relevant to the policies of decisionmakers. Ideologies are important to Adler because they tell actors their goals, the relative importance of these goals, and how to achieve them. They do not, however, work independently of institutions. On the contrary, ideologies are formative in defining institutional structures, are channeled through those institutions, and are integrated into institutional designs, “thereby becoming preconditions for institutional change, even if the institutions later cease to depend directly on the original constellations or if the constellations continue in new or different institutional designs” (Adler, 1987: 11). In this formulation, ideologies provide preconditions for change that cannot be reduced to material interests and produce unintended consequences when they interact with institutions. Referring to the significance of ideologies, Adler (1987:15) states that once these are created, they may have a life of their own. They may not be visible, but they are intelligible and may have important real consequences. For example, as institutional ideologies become the collective consciousness of a group, they help select the goals and means for social action and may even help reproduce the means. In this case, institutions are but “carriers” for a particular collective understanding that has consequences of its own.

Adler (1987: 20–21, 28, 328) claims that this approach has the advantage of being dynamic, although prediction becomes increasingly difficult because as complexity increases, choices become more difficult to make among a varied range of interpretations of reality. This type of approach has rarely been applied in the study of U.S. economic policy. One notable exception to this generalization is Goldstein (1988, 1993), who focuses on the historical evolution of the ideological bases of the contemporary institutional structure of U.S. protectionism. She points to the values that govern U.S. trade policy—the contradictory belief in “fair trade” but also “free trade”—and suggests that the contradictory policy prescriptions regarding protectionism that the two values now invoke are largely explicable in terms of the continued existence of the institutional structures that developed around the two sets of values at the time of their respective prewar and postwar predominance. As in Adler’s formulation, in Goldstein’s (1988: 186) analysis, ideas interact with institutions to form the definitive influence on trade policy. Krasner (1978: 345) concluded that ideology, in the form of Lockean liberalism, did provide the basis of U.S. foreign policy, but his eventual definitive example that ideology and not interests governed policy (U.S. involvement in the Vietnam War) was distant from the concerns of trade policy considered in this chapter. Apart from Goldstein, few others have directly addressed the issue of the influence of ideology on U.S. economic policy (e.g., Packenham, 1973; Krauss and Reich, 1992).

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IDEOLOGY AND ECONOMIC POLICY IN THE UNITED STATES AND JAPAN

Economic Ideology in the United States

At the heart of U.S. economic policy lies a series of values that can be observed on a routine basis. These values influence state behavior, the organizational structure of industrial sectors, and, eventually, U.S. competitiveness. They are coherent and comprehensive enough to warrant the label of an ideology—“liberal”—and integrate with the institutional context to formulate consistent economic policies. I do not pretend to offer an approach that provides a general description of liberalism, but only conceptualize those of its aspects that pertain to the realm of economic policy. I further recognize that U.S. liberal ideology is not internally consistent but has conflicting and overlapping features that can be identified and explained only by describing its historical evolution. Classical, economistic, Ricardian liberalism focuses on the market as the determinant of behavior. Individuals or firms constitute the consumers whose rights predominate, as reflected in the justifications for antimonopoly legislation, and the state is consigned to a minimal role as upholder of the “rules of the game.” In this world the objective of society is to maximize economic efficiency and hence social welfare: “Thus, property rights are said to be created or abandoned depending on their social utility and especially their contribution to the efficient economic organization of society” (Gilpin, 1981: 74). But the evolution of liberal ideology over the last two centuries has strained its intellectual coherence. Specifically, the role of the state has taken on greater significance. Liberalism no longer reflects the ideal-type inherent in its classic formulation, if it ever did. Contemporary advocates, such as North (1981: 20–32), suggest that even liberalism’s greatest devotees do not pursue policies consistent with pure, open-market principles; they concede that the state’s significance must be fully recognized and theoretically accounted for in the process of defining and protecting property relations, so that a society’s private rate of return approaches its social rate of return. North recognizes that state policies have major economic consequences for individuals, for firms, and for national economies. I do not want to overstate the importance of ideology. But despite having fewer instruments for policy formulation, articulation, and implementation than other states—and therefore it may reasonably be adjudged as having less autonomy—the liberal United States may still retain a degree of policy coherence. This coherence derives from a combination of ideological preferences and institutional constructs and is manifest both in the economic instruments that the liberal state develops and in the type and content of the policies it pursues. As a generalization, even in this limited sense, liberal states like the United States have an ideology that imbues state policy with a coherent stance toward the economy.

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Yet governmental options in a liberal state are constrained and complicated by two sets of factors. The first includes the dominance of liberal assumptions in the United States about state structure, the positive-sum nature of open markets, and the key role of multinational firms in generating and distributing global wealth. Liberal ideology intellectually justifies the free movement of capital and is buttressed by the claim that the postwar global economy has developed into an interdependent system from which it is both practically unfeasible and normatively undesirable to try to extricate a national economy (e.g., Cooper, 1972). The second set relates to the fragmentation of power and decentralization of decisionmaking, a problem that the Clinton administration has encountered in attempting to set up new instruments of policy. Together these practical and conceptual factors are mutually reinforcing as limits to action in the minds of policymakers, generating pragmatic concerns about employment and balance-of-payments figures. Liberal economic theory assumes that short-term economic costs of adjustment such as firm bankruptcies, increased unemployment, or an enlarged balance-of-payments deficit caused by unprotected trade, are tolerable if they are exchanged for greater long-term efficiency. This logic also dictates that foreign firms should be encouraged to invest domestically because doing so provides jobs and stimulates competition for domestic firms, and thus enhances their efficiency. The economic logic of liberalism is to accept short-term adjustment costs (caused by either the free flow of capital or finished products) in order to achieve long-term gains. Yet the liberal state’s institutional form engenders an incentive structure that encourages politicians to seek solutions that avoid short-term costs while effectively ignoring long-term costs and benefits, highlighting the inherent tension that exists between the comprehensive change advocated by liberal economists and the political instability brought by the policies that they advocate. This reflexive, short-term perspective, supplemented by the fragmented nature of the political system, ensures that change is incremental. Economic objectives and the U.S. political process therefore pull in countervailing directions, because even when the dominant liberal economic ideology calls for long-term, market-oriented solutions, the democratic political ideology generally generates a process that demands some form of short-term, circumscribed, authoritative government intervention. Such intervention emphasizes the benefits of job protection and an improved balance of payments but, often predicated on electoral considerations, leads to accusations that politics poisons the economic process. The product of this mix of ideological and institutional, economic, and political factors is complex. Foremost, liberal states do not let markets operate autonomously as the determinant of political behavior. This is because the political costs of extreme, dislocating market forces would be too destabilizing.1 Yet, simultaneously, liberal states can intervene to manipulate market forces in very few ways because ideological and institutional factors

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reciprocally combine to limit their capacity to do so. The principles of a liberal ideology lead to the development of a few, relatively blunt interventionist instruments. One practical effect, for instance, is that the United States lacks the apparatus to reverse a sector’s economic decline and, as a consequence, offers a paucity of examples of effective intervention—reciprocally contributing to a sustained belief in the efficacy of limited intervention. Yet I claim that liberal states do have a regularized response in the context of sectoral decline. First, their familiar response is to reduce the immediate political and economic effects of a loss of competitiveness by pushing the cost of adjustment onto foreign competitors rather than domestic producers. If this “externalized adjustment” strategy fails, the state is then required to decide the basis upon which the burden is to be distributed among domestic actors (Katzenstein, 1984: 59). Perhaps the single most characteristic feature of liberal states is their willingness to ensure the equitable distribution of costs among a sector’s domestic producers. The principle of evenhanded or equitable treatment of firms is a cornerstone of liberalism—commonly termed the “level playing field” approach. These terms are not meant to suggest that the outcomes are equal in terms of rewards. Nondiscrimination refers to the conditions under which firms operate; how they perform under those conditions is predicated on other factors. Indeed, there has been a tremendous disparity in rewards among firms in the sectors subsequently examined in this chapter. But whether firms are foreign or domestically owned, they begin from a position of equality of opportunity and the result is inequitable rewards. The Clinton administration’s refusal to discriminate on the issue of access to public funding for research programs on the basis of nationality serves as an example of this propensity. The state does circumscribe rewards, however, without seeking or achieving their equitable distribution. This is because the liberal state consciously creates carefully defined parameters that provide both “ceilings” and “floors” in the distribution of rewards. Why do they do so? Is it consistent with a liberal ideology when it seems so paradoxical to notions of capitalism? I believe that the explanation has two components—one consistent with an ideology-based explanation, the other reflecting the limits of ideological explanations—that combine to explain why liberal states have ceilings and floors. The first (consistent) ideological component of the explanation for ceilings and floors addresses the issue of why ceilings exist. This answer rests on an inherent paradox within capitalism between the inherent drive for concentration, based on natural market dynamics, and the need for competition to ensure efficiency and conflict rather than inefficiency and oligopoly (or in an extreme form, monopoly). Firms must compete and conflict in the marketplace to ensure that the former conditions (efficiency and conflict) pre-

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dominate over the latter. A ceiling exists in the treatment of firms, through instruments such as antitrust laws, to ensure that “artificial” profits are not generated. But why the floor? Two, reasonably compatible, explanations exist. The first is that contemporary liberalism has largely appropriated the concept of a social welfare function from social democratic theory, albeit it in a diluted and abbreviated form. This social welfare function addresses firms through the notion of “bailout,” sustaining firms to ensure competition and maintaining traditional fulcrum industries in what are considered traditional employment sectors (e.g., Reich and Donahue, 1985: 264–277). Of course, these ideological concerns about providing a floor for unsuccessful firms are powerfully reinforced by the interest-based, electoral concerns of executives and legislatures in liberal democracies. To note the importance of such considerations in the case of the United States is to suggest the obvious. It does not weaken an ideology-based argument but does point to its reasonable parameters, an issue I have addressed in greater depth elsewhere (Krauss and Reich, 1992). Liberal states therefore are evenhanded in the way that they treat firms in terms of the conditions under which they operate. As a result, they are inequitable in the distribution of rewards. But, at the same time, they do circumscribe rewards within broad parameters in order to constrain the strong and compensate the weak. In that sense of the term, the fundamental value of nondiscrimination forms a (if not the) central foundation for U.S. economic policy. It is termed “national treatment.” Its effect, in practice, is often to inhibit U.S. competitiveness and not always to reinforce it, as some proponents dogmatically claim. This nondiscriminatory policy of national treatment with respect to the foreign direct investor extends to unlimited access to markets, information, and financial aid, and is manifestly important in three ways. First, although they regulate against the import of finished products, liberal states do allow all firms who produce within their borders access to domestic markets free of formal and informal barriers. In no way do they favor domestic producers over direct affiliates of foreign firms who site production within their borders (Jones, 1981: 45; Black, n.d.: 6–12). Once a firm makes a decision to locate production locally, it is assured of the same rights and privileges as domestically owned firms. Second, foreign firms generally benefit from the political sensitivity of liberal states to the issue of unemployment. Such states are willing to bail out potentially bankrupt firms, regardless of whether they are foreign or domestically owned.2 Liberal states therefore create a floor for large manufacturing firms, despite their rhetoric about letting the free market pick out winners and losers. In the evolution of what Lowi (1979) refers to as “irresponsible government,” states in liberal regimes are unwilling to pick winners but are nevertheless willing, according to Jones (1981: 49–50), to underwrite “the risk of all those who produce

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within their borders.” Third, liberal states ironically constrain firms from becoming too successful, therefore “creating a ceiling” in two ways: by legislating against monopolies through extensive antitrust legislation and, more specifically, by avoiding favoritism. According to this logic, under these conditions no firm will ever completely dominate the local market. But this antitrust rationale still assumes that the U.S. market is isolated from foreign competition and that monopoly power is easily attainable. In fact, it is almost impossible to create such a monopoly in an age when the U.S. manufacturing sector is open to greater competition than ever before from direct imports or foreign direct investors. Antitrust legislation that constrains the concentrated power of U.S. firms in their own market is just one way in which the liberal state’s emphasis remains on nondiscrimination against foreign firms but not, in practice, against domestic firms. When the concept of national treatment is invoked, domestic firms operate under numerous political and economic constraints that foreign firms avoid because the former do not realistically have the option of exit. Domestic firms are relatively less fluid, despite the fact that they may move capital around, and are therefore discriminated against because they are exclusively, unintentionally burdened with obligations of citizenry; states know that they have few options. Those same states believe that too many demands on foreign firms risk the withdrawal of their investment. The resulting system yields significant problems for liberal economies. Among them is the fact that although the governing philosophy may be nondiscriminatory, the distributive effects of such policies may be quite varied; they generally favor the subsidiaries of foreign firms. Domestic firms are therefore hindered from fulfilling their competitive potential in relation to foreign firms by virtue of government beliefs that are reflected in a nondiscriminatory, but not a noninterventionist, government policy. At the same time, it is not surprising to find that liberal states avoid central planning whenever possible. For central planning to be more than “indicative planning” requires that the threat of coercion is at least implicitly present, but liberal states prefer to encourage behavior through the use of carrots rather than sticks (Middlemass, 1983: 1–2). Indeed, liberal states often refrain from acknowledging their coercive capacities in the realm of economic policy in order to avoid direct confrontation (J. Hayward, 1975: 6). Also, as anticipated, this complex of ideological and institutional structures ensures that liberal states cannot serve the “national interest” in the broader manner defined by dirigiste states, because they cannot control or manipulate either social actors or market forces. At best they can only redistribute the burden of market forces—with important implications for national competitiveness. This analysis therefore concludes that the liberal state’s relationship with the economy has evolved into one wherein the liberal state is coherent

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even if it can exercise only a limited degree of autonomy. Liberal states can formulate policy, even if they are ill equipped to centrally plan an economy’s development or to implement sectoral policies. Furthermore, liberal states have retained a great proportion of their ideology and their institutional base in the twentieth century because they have not encountered the ruptures experienced by other advanced industrial states. Relative political stability, military and Cold War victory, and economic prosperity have all contributed to a sense of continuity and have limited the breadth and scope of ideological and institutional revisions. The result has been that liberal states have evolved in unforeseen ways that are ambivalently both consistent with, and contrary to, the principles of classical liberalism. Yet they remain both ideologically opposed to, and institutionally incapable of, implementing discriminatory economic policies. This point is illustrated by the dominant, egalitarian national treatment principle governing the contemporary U.S. government’s policies toward direct investment by foreigners, buttressed by arguments stressing the moral and economic benefits of interdependence.3 In sum, contemporary liberalism does not stress the importance of government nonintervention—a principle with which it is most closely associated due to its classical economic origins. The liberal state consistently intervenes in its implementation of the principles of noncoercion and nondiscrimination in economic policy, discriminating neither between domestic and foreign firms nor among domestic firms. Ideology and Japanese Economic Policy

In contrast to the United States, where the influence of ideology is largely ignored in the political economy literature, Japan’s ideology has been a source of sustained attention. This is due in part to the formative image of Japan provided by Johnson’s (1982) seminal study, which characterizes Japan as the epitome of the “developmental state”—with its authoritative apparatus and its nationalist underpinnings, and where formal mechanisms are supplemented by informal “administrative guidance” by government bodies like the Ministry of International Trade and Industry (MITI). Such an analytic approach therefore tends to adopt a “statist orientation,” stressing the state’s control over policy tools and the informal influence that it wields (e.g., Pempel, 1978; Kaplan, 1972; Vogel, 1979). It defines the state’s ideology largely in terms of comprehensive policies to achieve rapid postwar economic growth, as captured in Noble’s (1989) description of the developmental school’s claim that the government aided in the rationalization of firms and industries and hastened the structural transformation of the Japanese economy. MITI encouraged companies to move capital and workers out of declining industries such as coal and textiles, and into those with high protection for growth. These included heavy industries such as steel, petrochemicals and autos,

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and later high technology industries including computers, semiconductors and biotechnology.4

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Yet a revisionist literature has subsequently emerged that purports to explain Japan’s postwar economic success by focusing far more on the influence of societal actors—generally Japan’s major corporations—in the process of policy formation. This “market school” stresses the activities of Japanese firms, rather than state policy, as decisive in the aggregate success of the postwar Japanese economy (e.g., Patrick and Rosovsky, 1976; Trezise, 1983; Lincoln, 1984: Saxonhouse, 1986), and argues that Japanese competitiveness is due to a variety of factors, including “the availability of labor and capital, the level of skills and technology, the rates of savings, investment and taxation” (Noble, 1989: 60). Finally, a third position, stressing state-society links in what Samuels (1987) has called a system of “reciprocal consent” (where power is heavily contingent), has emerged (see also Calder, 1988; Okimoto, 1989; Encarnation and Mason 1990). As a result of this debate, there is no consensus about the ideology or structure of power in the Japanese state, unlike in the United States, where such a consensus about these aspects of the state exists. Interestingly, while representatives of each approach debate about the distribution of power between the state and the corporate sector in Japan, and thus about the responsibility and acclaim for Japan’s sustained economic achievements, they do share some important similarities. Most pointedly, they all justify their arguments about the institutional structure of Japan in historical terms—by locating the origins of either the state’s or society’s dominance in institutional structures that have been retained in the postwar period. Advocates of the developmental school point to the formation of the structure of the Japanese state as a “late-developer,” which enjoyed the advantages of backwardness dating from the Meiji Restoration of the 1860s.5 In contrast, proponents of the market school emphasize the laissezfaire tradition established in Japan in the first three decades of the century and later reinforced by the sweeping Occupation-era reforms (e.g., H. Nakamura, 1982; Miyazaki, 1982). Finally, the “reciprocal consent” argument stresses the contingent nature of institutional relationships, emphasizing the historical factors that create conditionality (Samuels, 1987). Implicit in all these approaches is a conception of collective interest. They clearly assume a directive belief system that is fundamentally different from that found in liberal states, one stressing a form of cultural communitarianism that lies at the heart of Japanese development. In Vogel’s (1987: 156–158, 161, 170) historical analysis of the development of ideology in Japan, he suggests that a predominant communitarianism characteristically emphasizes hierarchy, consensus, and obligation in an environment where assertive government behavior is legitimate in the nationalist quest for economic success. Certainly, the developmental, the market, and the rec-

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iprocal consent approaches all assume that the Japanese state defines the world in nationalist terms and discriminates on that basis, whether such policies are initiated by the state or the private sector. For example, all three approaches assume that the Japanese state institutes policies that discriminate against foreign goods and services as a matter of standard practice, e.g., protectionism in the case of trade. What both these approaches do not recognize is a second, more compelling and important dimension of this tendency—that discrimination is an integral feature of the Japanese state that extends beyond the differentiation of domestic and foreign producers to discriminate among domestic producers.6 The Japanese state has been ruthlessly willing to pick winners and losers and to provide neither floors for the unfortunate firms the state rejects nor ceilings for those firms the state favors. Discrimination is therefore a characteristic feature of the Japanese state and cannot simply be defined in nationalist or in xenophobic terms. Those critics who suggest that the Japanese are racially or ethnically motivated in their economic policies are misguided. They make this claim because they see only the domestic/foreign cleavage, not the internal one. They often mistakenly assume that Japanese industry is united and monolithic and miss the state’s attempts to divide among domestic capital and to favor select firms. While evenhandedness is a feature of U.S. liberalism, discrimination is a feature of Japan’s ideology. Krasner (1978: 253, 260, 267) is virtually unique in recognizing this second, important dimension of discrimination. He identifies a network of relationships between the state and select private firms and suggests that it is extremely difficult for outside actors to pierce this network, whether they are Japanese or foreign owned. How did this propensity for discrimination develop? Like the liberal state, the postwar ideology of the Japanese state is the product of a historical, evolutionary process. The Meiji Restoration proved to be the initial important period for the evolution of the Japanese economy, especially the development of the zaibatsu, industrial combines of large firms that are linked to one of the major banks. The relations between government officials and the executives who headed the zaibatsu (the only major economic actors in the absence of foreign investors) were personal and informal in the late nineteenth century, and the state largely avoided any discrimination in its treatment of them. This tendency toward nondiscrimination was extended in the first three decades of the twentieth century with the government’s shift toward more laissez-faire policies comparable to those found in the United States (Johnson, 1982: 33, 85). It was the subsequent two decades of domination by a fascist regime that proved so significant in developing this discriminatory dimension in the Japanese state’s economic policy. While the propensity among Western observers has occasionally been to stereotype the Japanese as having a xenophobic culture dating from their early develop-

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ment, I argue that the propensity toward discrimination does exist, but that it is a product of the Japanese state’s elite ideology, not of Japan’s mass culture; and that the state’s practice of discrimination is not racially motivated but is predicated on a series of beliefs about what is required to build a successful economy. My argument should therefore not be mistaken for a crude view of the Japanese as racially prejudiced, but rather a realization that the Japanese state retains a willingness, albeit a diminishing ability, to discriminate (Johnson, 1982; Stockwin, 1982: Murakami, 1982). I do stress, however, that the discriminatory predilections of the Japanese state in the postwar period stem from the formative fascist period, not the nineteenth century as the developmental school suggests. What were the new characteristics generated by the fascist state? Fascist states have a comprehensive ideology that is specifically nationalistic in tone and substance and that defines the “in-group” of community interests by differentiating it from the “out-group” (Wehler, 1985: 91). Its characteristic goals are antiliberal, antirational, racial, and nationalistic; spiritually it seeks to reify the state in the Hegelian and neo-Rankean traditions and glorifies the concept of the collectivity in a manner misappropriated from democratic theorists. State and the mass-mobilizing party become indistinguishable as the party monopolizes decisionmaking over the means of coercion and incorporates a well-defined elite hierarchy that is permanently institutionalized around the concept of the “leadership principle.” In terms of economic policy, Moore (1966) suggests that fascism and capitalism are complementary rather than mutually exclusive, despite fascism’s anticapitalist rhetoric. In common with Dahrendorf (1979), Moore depicts fascism as one route to economic modernization and industrialization. But contrary to scholars with a Cold War mentality who tried to draw parallels between fascism and communism by focusing on the fact that both are mass participatory regimes (e.g., Friedrich, 1969), Moore (1966: 433– 452) suggests that the two systems substantially differ in two respects: that fascism as a political system can coexist with capitalism as an economic system, and that fascism constitutes a reactionary elite “revolution from above” rather than communism’s peasant “revolution from below.” Although fascism and liberal democracy are both capitalist, the characteristics of their economic policies diverge sharply, with much of this difference stemming from their contrasting view of the relative distribution of power between the private and public sectors. Fascist regimes surmount the tension between a preponderance of private ownership and public control in their policies by emphasizing the political importance of control. They reject liberalism’s emphasis on the importance of retaining private sector ownership and control of the economy, and therefore also liberalism’s assumption that the ownership of private property will translate into economic or political power (Hayes, 1987: xvii). Indeed, Sarti (1971: 79) argues that fascism is unique in that it institutionalizes the relationship between the public and

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private sectors in a mixed economy. Like liberal democracies, fascism is therefore compatible with capitalism, if capitalism is defined as ownership of the means of production rather than the maintenance of autonomous market structures. Fascism and liberalism do not therefore represent choices between “state” and “market,” although liberal states exercise a far lesser degree of constraint on markets within broad parameters. The differences between fascist and liberal states become more stark when one examines the broader issues of relative state coherence and autonomy. The state in liberal regimes has a relatively well-defined capacity for coherent policy formation but little autonomous capacity for implementation. The fascist state, however, exhibits a powerful capacity both for independent, coherent policy planning and for its implementation.7 The relationship between state and economy, and the specific features of fascist economic policies, predictably follow. The fascist state’s economic policies are derived from what Gregor (1979: 203) describes as its corporatist character, where the state attempts to harmonize state, business, and worker organizations. This system emphasizes the importance of productive capital and technical expertise, as distinct from the despised predatory capital and in contrast to liberalism’s emphasis on consumers (Gregor, 1979: 220). Yet these generalizations do not reflect the capacity or willingness of the fascist state to intervene in the workings of the economy. Here the fascist state plays a directive rather than integrative role, as illustrated by the example of fascist Japan. To achieve its immediate goal of restructuring the relationship between private economic and public political power, the Japanese state tried to tame the old zaibatsu, which were the basis of private economic power, and created a series of new, privately owned rivals as instruments for its economic policies. The state’s efforts conclusively shifted economic power from the private to the public sector in Japan (Johnson, 1982: 112–113). Hayes’s (1987: 77) metaphor about fascist Germany’s economy effectively applies to fascist Japan: “The emergent economic system was still capitalism, but only in the same sense that for a professional gambler poker remains poker, even when the house shuffles, deals, determines the ante and the wild cards, and can change them at will, even when there is a ceiling on winnings, which may be spent only as the casino permits and for the most part only on the premises.” Indeed, Hayes’s (1987: 79) description of fascism as “capitalism harnessed to politics” may best reflect the influence of ideology on economic policy. Unlike the liberal state, whose policies are generally confined to the macroeconomic level, the fascist state’s economic policies are predicated on the assumption that it is legitimate for state officials to intervene pervasively at the microlevel in private sector enterprises in all employment, production, marketing, and supply decisions. The state’s great scope, as well as the arbitrary domain of power endowed to it by fascist ideology, accords it the legitimate authority to impose its will with few constitutional constraints;

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potential dissent is stilled by the state’s heightened, demonstrated coercive capacities. The fascist state’s primary economic goal is to achieve autarky, consistent with nationalist principles. This pursuit of self-sufficiency has two effects: Externally, the state implements a set of aggressive foreign policies designed to incorporate more resources into the enlarged nation, often resulting in a strategy of military conquest. Internally, the state imposes adjustment on domestic socioeconomic groups, who are forced to bear the cost for autarkic policies by being deprived of formerly imported products. The fascist state therefore contrasts with the liberal state in that it imports, rather than tries to export, the costs of adjustment—a tendency still evident in postwar Japan.8 Furthermore, in contrast to the liberal state, the fascist state makes no effort to distribute these costs equitably. Moore (1966: 447) suggests that at the heart of fascist ideology there is a violent rejection of humanitarian ideals—most pointedly, a rejection of the notion of potential human equality, as reflected in its racial doctrines. In Japan, as in Germany and Italy, the ideological impulses that dominated state behavior inevitably drove government officials to implement discriminatory policies (Hayes, 1987: xviii). The fascist state’s embrace of the concept of inequality in economic policy is clearly reflected in its discriminatory treatment of firms (Moore, 1966: 452). Discrimination had a powerful impact on the aggregate economic performance and military resources in Japan as the state discriminated in favor of domestic-owned firms by curtailing the economic expansion of foreignowned firms. But the state also discriminated among domestic firms— focusing its attention on potential private sources of power. Decisions about the distribution of productive resources and the allocation of government contracts or funding resources were governed by political considerations and had a powerful influence on the affected sectors’ structure, as well as on each firm’s development and prosperity. Consequently, fascist states developed an unprecedented capacity and willingness to “pick winners and losers.” Much of the conventional wisdom stresses the effectiveness of the dismantling of Japan’s fascist system largely as a result of the policies of the occupying Allied forces. But in this case, two dimensions—one historical and external to Japan, the other cognitive and internal to Japan—invoke skepticism and mitigate against the claim that the Allied attempts at reform were completely successful. Pempel’s (1987: 159, 160) study of U.S. occupational reform policy in Japan, for example, “shows that little direct effort at bureaucratic reform was ever considered by the United States,” largely as a result of “preexisting American conceptions of the political role of bureaucracies and in American practices of bureaucratic-political interaction.” Those limited efforts that did proceed were subsequently subverted by a series of events:

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Even as such reforms were pushed forward an additional complication arose, namely that the American Occupation, initially committed to Japan’s “demilitarization and democratization” in 1945, had by late 1947 begun to shift certain of its overall goals. Numerous critical changes took place in U.S. domestic and foreign policy during that period. The New Deal coalition fell from power in Washington; the State Department came under the control of militant anti-Communists; and the Republicans gained control of Congress following the 1946 elections. Internationally it became clear that China would not be unified under Chiang Kai-shek and hence serve as America’s key military ally in the Far East; Communist control had been consolidated in Eastern Europe; and the Truman Doctrine bespoke a drastic change in relations between the United States and the Soviet Union. (Pempel, 1987: 167)

Hollerman (1979: 719) goes even further in arguing that the U.S. Occupation not only failed to institute reforms, but actually promoted greater bureaucratization in Japan through the imposition of a regime of comprehensive international economic controls. The final blows to these attempted reforms were the exigencies caused by the Korean War. The primary goal then became economic growth rather than economic democracy, accompanied by a reversion toward the type of cartelized organizational structure developed in the immediate prewar, fascist period (this reversion did, however, exclude zaibatsu involvement). One consequence of this reversal was, paradoxically, an accelerated process of industrial concentration and mergers, while the “economic hegemony” of the traditional zaibatsu, initially challenged in the 1930s, was broken. A second consequence was the reestablishment of the policy priorities initially mandated in the fascist period that served Japan’s specific needs—principally of capital accumulation, rationalization, and export growth to achieve economic independence—rather than the largely discredited U.S. ideological principles of economic democracy (Yamamura, 1967: 52–53, 68–69, 85–86, 106, 127, 180). These external developments were complemented by a cognitive, internal dimension concerning the attitude of the Japanese themselves toward the legacy of their indigenous brand of fascism. Unlike their Italian and German counterparts, neither Japan’s state nor its society has ever attached any moral stigma to fascist rule, and thus there was no explicit rejection of all things fascist. Such an attitude facilitated the resurrection of the organizational constructs initiated under fascism when the U.S. attempts at reform were abandoned. Johnson’s (1982) discussion of the evolution of the postfascist Japanese state provides supporting evidence for Pempel’s and Hollerman’s claims that dismantling was ineffective and emphasizes that ideological and institutional continuity stemmed from the 1930s and not before. He suggests that it was during the fascist period that elite bureaucrats extended the scope of their activities into previously uncharted territories and learned how industrial policy worked: From “1935 to 1955 the hard hand of state control rest-

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ed heavily on the Japanese economy. The fact that MITI refers to this period as its ‘golden age’ is understandable, if deeply imprudent” (Johnson 1982: 29). The fact that the postwar purge during the Occupation hardly touched the economic ministries at all meant that these bureaucrats were able to apply these lessons through MITI’s policies to stimulate Japan’s economic growth in the 1950s (Johnson, 1982: 32–33, 40). The emphasis placed on these early experiences by Japan’s leading postwar bureaucrats cannot be overstated in Johnson’s (1982: 33) view. The change in the structure of the Japanese economy was quite dramatic and its legacy outlasted the war and the Occupation. The Ministry of Commerce and Industry (MCI), formed in 1925, became the Ministry of Munitions (MM) in 1942 before reverting to the MCI on the eve of Japan’s surrender (because of its bureaucrats’ fear of prosecution as war criminals). Johnson (1982: 40) concludes that “however one evaluates the decade and a half from 1930 to 1945, Japan’s government was much more bureaucratic and state dominated at the end of this period than it had been at the beginning.” The U.S. decision to rule Japan indirectly, by allowing the postwar Japanese government autonomously to implement policy, proved critical. While other ministries were purged, the economic ministries escaped almost unscathed. The combination of indirect U.S. rule and a continuity in personnel enhanced the MCI’s power during the Occupation period. Indeed, Johnson (1982: 41) suggests that “the occupation years, 1945–1952, witnessed the highest levels of government control over the economy ever encountered in modern Japan before or since, levels that were decidedly higher than the levels attained during the Pacific War.” Many institutional reforms dating from the 1930s, including parliamentary legislation and imperial ordinances, survived the Occupation. Both the military and an elite group known as “reform bureaucrats,” who were located in the Cabinet Research Bureau and were specifically attracted to Germany’s Nazi ideology (particularly its emphasis on building a national defense state, its antiliberalism, nationalism, and statism), proved instrumental in orchestrating these initial changes. They remained part of Japan’s postwar bureaucratic elite’s thinking. In ideological terms, the growth in state control over the economy rested on the increased popularity of the concepts of “industrial rationalization” and “excessive competition.” While the precise meanings of these terms remained obscure, each became synonymous with the notion of enhanced state control. Finally, in institutional terms, the growth of the state’s economic power rested on a series of laws that initially shifted power from the Diet (legislature) to industrial elites and then, when a policy of “self-control” failed to stimulate what the bureaucracy considered to be appropriate economic policies, from the private sector to the state’s executive—a realm increasingly dominated by the military. The first piece of legislation fundamental to these two stages of transformation was the Industries Control Law of April 1931. This law estab-

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lished the existing cartels as self-governing associations, although the MCI could dissolve them. Membership was purportedly voluntary, but the MCI could force nonparticipants to abide by the terms of the cartel. The second was a series of laws in the mid-1930s designed to provide special government funding, tax exemptions, and protective measures for individual industries (including aircraft, machine tools, shipbuilding, light metals, and, most pointedly, automobile production) or energy sources (Johnson, 1982: 108–110, 124–125, 133). The third piece of legislation was the National General Mobilization Law of 1938, which “authorized the complete reorganization of the society along totalitarian lines. . . . The law, in fact, became a carte blanche for the executive branch to do anything that it and its various clients could agree on; its policies extended not just to industry and the economy but also to education, labor, finance, publishing, and virtually all social activities even remotely related to the war effort” (Johnson, 1982: 139). It sought to emulate Hitler’s New Economic Order policies in fixing all prices, wages, rents and economic indices, and thus eliminating the last vestiges of any autonomous market-pricing structure. Many of the crucial aspects of this law were applied in the MCI’s postwar control of the economy and were reflected in the Temporary Materials Supply and Demand Control Law of 1946 and the “foreign currency budgets” of the 1950s and early 1960s. These laws were the main instruments of control during what Johnson (1982: 140, 147) terms the early postwar “high speed growth era.” Johnson (1982: 113–114) notes that the ideas and institutions developed in the 1930s constituted more than a vague heritage for succeeding generations; their survival was ensured by the continuity of personnel: “One of the most startling facts about the history of industrial policy is that the managers of the postwar economic ‘miracle’ were the same people who inaugurated industrial policy in the late 1920’s and administered it during the 1930’s and 1940’s.” Japan therefore “did not experience a radical discontinuity in its civilian bureaucratic and economic elites.” In fact, he points out that all of MITI’s vice ministers during the 1950s entered the bureaucracy between 1929 and 1934, and spent their formative years learning the methods that they applied so effectively in the postwar period (see also Magaziner and Hout, 1980: 35–54; Yamamura, 1967: 52–53, 68–69, 85–86, 106, 127, 180). The overall effect was the creation of a bifurcation among producers that did not simply correspond to whether they were foreign or domestically owned, nor to whether they were big or small; the division was rather among large domestic producers along the criteria outlined in Figure 4.1. The distinctions outlined in Figure 4.1 have been developed elsewhere (S. Reich, 1990: 66), but the framework is applicable here with minimal qualification. It characterizes both the dimensions of the cleavages that originated in the 1930s and their contrasting implications for different sets of statefirm relations. Essentially, the core was composed of two types of firms: those owned by the state and private firms sponsored by the state. Some of

Ideology & Competitiveness Table 4.1

The Core and Periphery of Japanese Industry

Membership Characteristics

Labor Relations

Relationship to state

Relationship to State Goals

Core

Public firms, coopted partners

Formal, hierarchical

Cordial, cooperative

Shared interest

Prospects for Prosperity Extensive

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Periphery

Multinationals, paternal industrialists

Informal, market oriented

Aloof, constrained

Diverse but generally conflictual

Limited

those firms sponsored by the state were often its creations, even if they were not under state ownership. The periphery was composed of a strange pair: foreign direct investors and large privately owned firms (often part of the zaibatsu) that posed a potential threat to the state’s power. These distinctions lasted beyond the end of the fascist regime. This characterization, however, is not intended to suggest that no effective reforms took place during the Occupation or after Japanese leadership resumed control in 1951. New reforms were introduced that entitled Japan to describe itself as a democracy. But a democratic political structure was superimposed on a fascist variant of a capitalist economic structure—it did not replace it. Most important, in terms of my argument, the Japanese government developed and retained a willingness and capacity to intervene in its economy in a discriminatory way, and believed that such intervention was a prerequisite if Japan was to succeed in its program of postwar economic development. Much (although certainly not all) of what has been described as oligopolistic behavior by Japan’s major firms in the postwar period is therefore mistakenly characterized as evenhanded behavior; the true character of this phenomenon can be better described as the state’s zealous efforts to discriminate between domestic and foreign producers, and among domestic producers, not the state acting to maintain an equality of opportunity among cooperative competitors. The Japanese state promotes unequal opportunity structures to ensure that its favored firms are handsomely rewarded. Its capacity to act in opposition to a coordinated private sector may have diminished as some have suggested, but it is still effective in discriminating against a divided private sector. My argument therefore overlaps with aspects of the developmental, market, and reciprocal consent schools but is consistent with none of them (because I do not simply distinguish, as these three approaches do, between whether the public or private sector dominates the policy process). My

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claims are much more contingent. I suggest that the state cooperates with some parts of the private sector and conflicts with others. I also recognize that the state distinguishes not only between Japanese and foreign firms— the only dimension that all schools recognize—but also among Japanese producers. Indeed, the state may favor a firm in one context and not another. Furthermore, I do not claim that the Japanese state always succeeds in effectively discriminating among domestic firms; its success depends on the prevailing circumstances. But it does attempt to form coalitions with the same firms over time and systematically discriminates against peripheral firms. Those peripheral firms that prospered therefore did so despite the structure of the relationship between the Japanese state and its economy, not because of it. The two case studies on Japan that follow illustrate my claims. I chose to examine autos and semiconductors to demonstrate that my claims about the United States’ and Japan’s ideological bifurcation can be applied to both medium- and high-technology sectors over a period of five decades. The auto sector demonstrates the origins of this policy in the 1930s and 1940s and how it transcended the institution of a democratic regime; the semiconductor case shows how that policy has been applied to a crucial sector well after the fascist regime’s demise. Neither case is offered as exhaustive or definitive. I do not intend to make a generalized claim about Japan’s ideology beyond the bounds of my data; but I do argue that this discriminatory component of Japan’s ideology differs from the normal nationalistic, xenophobic conception attributed to it by some Western observers and is endemic to various aspects of its economic policy. THE AUTOMOBILE INDUSTRY

The United States

Until 1973 two factors unique to U.S. markets effectively insulated the country’s automobile industry from foreign competition. First, successive federal governments successfully pursued policies that ensured a cheap, plentiful supply of oil, with the result that U.S. consumers developed a taste for large, fuel-inefficient cars. Europe’s relatively high gas prices dictated that its producers manufacture smaller, more fuel-efficient autos. Two separate, unrelated markets therefore developed, with the European affiliates of U.S. producers such as Ford and General Motors (GM) producing cars quite different from those sold by their parent companies in the United States. Europeans correspondingly found it relatively difficult to sell in the U.S. market because their cars were generally not built to withstand the long distances driven by U.S. motorists. Furthermore, Europeans could not manufacture enough large cars specifically designed for the U.S. market to achieve economies of scale, because their plants were generally built to pro-

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duce varied, specialized models—appealing to the European consumer car culture’s emphasis on individuality in contrast to the prevailing U.S. uniform, mass car culture. European producers therefore consistently failed to provide a competitively priced car that could make a dent in the U.S. market. In the United States, the government’s periodic application of antitrust law effectively created a market dominated by three large firms—GM, Ford, and Chrysler—ensuring that GM did not create a monopoly. Across the Big Three, the prices of similarly sized models were comparable, ensuring price oligopoly, with an emphasis on styling rather than engineering qualities. Production runs involved tremendous sunken capital costs, thus requiring that models be built in huge quantities to ensure profitability. This insulation from foreign competition lasted until the early 1960s, when a sustained effort by Germany’s Volkswagen (VW) began reaping rewards with the growth in popularity of the mass-produced Beetle. VW’s conscious replication of Fordist principles, which was unique among European producers, enabled it to enter the U.S. market on a price-competitive basis. But sales of the Beetle peaked at about 5 percent of the U.S. market, demonstrating the upper limits on sales of this kind of car in the market structure of the 1950s and 1960s (S. Reich, 1990). The really significant structural change in the U.S. automobile market was prompted by a succession of important events in the 1970s. At the beginning of that decade, Japanese companies began large-scale car exports to the United States. Like VW, these Japanese companies mass-marketed a few select models. Their market entry gave consumers more choice among fuel-efficient autos. The initial sales expansion of these Japanese imports was stimulated by the Organization of Petroleum Exporting Countries’ (OPEC) oil boycott in 1973. Sharply increased fuel prices forced U.S. consumers to contemplate fuel efficiency as a criterion for the first time. The resulting shift in consumer preferences led to a surge in the sale of foreign subcompacts in the absence of domestic models to satisfy this new demand. The U.S. producers responded by suggesting that both the increased demand for foreign subcompacts and their own corresponding sales decline were temporary phenomena. They elected to await further developments, confident that consumers would revert to traditional purchasing patterns once cyclical factors lowered the price of oil (Halberstam, 1986). But the second oil shock of 1979 further raised oil prices and consolidated the shift to smaller cars. As a result of the U.S. automakers’ lethargy, the foreign share of the U.S. market grew at a exponential rate. Chrysler was the first victim of this lack of foresight: its domestic market share declined from over 14 to under 9 percent, resulting in bankruptcy and the federal government’s unprecedented (for the auto industry) response. The Carter administration provided aid in the form of $900 million in loan guarantees—behavior consistent with the view that liberal states create floors to bail out losers. Indeed, the Big

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Three auto producers collectively lost $4 billion in 1980 (Economist, February 6, 1988: 69). The U.S. response to these events was to seek a Voluntary Export Restraint agreement (VER) with the Japanese government in 1981. This curious policy goal maintained a superficial guise of nonintervention, because the VER was informally administered unilaterally by the Japanese state. The terms of the agreement reached by the Reagan administration and the Japanese government scaled back imports from the 1979–1980 level of 1.82 million autos (constituting 16.6 percent of total market sales) to a maximum of 1.68 million units, with the Japanese government allocating the quota among its firms (Fujii, 1984: 34). The VER was initially supposed to last only three years, but it was functionally in effect for far longer, modified only by a rise in the import ceiling.9 Interestingly, while the measure was interventionist, it was not discriminatory from the U.S. point of view; it did not discriminate between domestic and foreign firms because the measure also limited the capacity of U.S. firms to import from their offshore production plants in Japan or to take advantage of joint venture agreements. It was the Japanese state that used the measure discriminately—to favor select domestic firms when assigning export quotas (S. Reich, 1991; Summerville, 1988). The first intended effect of the VER was to provide immediate relief from competition for a besieged domestic auto industry threatened by massive unemployment. But the ulterior logic of this measure was to encourage foreign direct investment by Japanese firms, which had consistently resisted doing so despite being encouraged by their own government (Summerville, 1988). To complement the Japanese state’s coercion, Japanese firms were offered enormous incentives by U.S. (subnational) state governments to attract investment and raise employment. First Honda, then Nissan, and subsequently Mazda, Mitsubishi, Toyota, and Subaru (with Isuzu) set up wholly Japanese-owned or joint venture production facilities in the United States. In each case, in practice, “the package that won the last Japanese factory becomes the opening bid for the next plant” (Mason and Howell, 1992: 4–5). In 1982, the state of Ohio provided $2,500 for each job Honda created. By 1989, that figure had grown to over $98,000 in the case of Indiana’s funding for the Subaru-Isuzu plant at Lafayette (Kenny and Florida, 1991: 30). The events that followed the beginning of the process of foreign direct investment illustrate the United States’ nondiscriminatory tendencies. While state governments have competed with each other in offering greater benefits to prospective Japanese investors, the federal government has welcomed such investment as a sign of the shift toward fair trade. The concept of “national treatment” has therefore become a familiar phrase in the decade since the VER was initiated. The five major Japanese firms, with plant assembly capacity in the

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United States in excess of 1 million vehicles a year, face a worsening problem of surplus production for the U.S. market. Aggregate Japanese production, whether imported or built in the United States, now accounts for over 25 percent of market share, though Japanese automobiles are unlikely to ever reach the 40–45 percent share of the U.S. market that was once projected (Economist, October 15, 1988: 8). The renewed recent competitive vigor of U.S. producers, the rise in the value of the yen, and shrinkage in demand may together explain why Japanese firms have not, to date, achieved this proportion of market share. It is nevertheless clear that Japanese producers now, for the first time, have the productive capacity in the United States to take advantage of any surge in demand that develops (or to compensate partially for currency fluctuations). The United States has therefore responded to greater competition in its automobile industry in a way consistent with the expectations of a liberal ideology. Once its insulation was broken down, it initially responded by trying to shift the cost of adjustment to foreign producers. Once that policy was no longer feasible, it sought to generate internal investment by foreigners through a mixture of coercion and incentives. But once those foreigners did invest in the United States, they were (and are) treated equitably and effectively took advantage of the resulting flexibility to position themselves competitively. Japan

In the three decades of auto production prior to the fascist rule of the 1930s, the Japanese government paid little attention to the automotive industry; policy was the exclusive province of the private sector (Genther, 1990; Cusumano, 1989: 16).10 Japanese producers included a variety of small firms that manufactured in numbers too small to employ mass production methods and whose products reflected a low level of technological sophistication. As a result, consumers preferred to purchase U.S. and European imports. Both the military and the MCI tried to encourage the large zaibatsu to develop truck production for military application, but the zaibatsu leaders, recognizing the generally hostile character of the government’s policies, ignored their suggestions despite the incentives offered under the Military Vehicle Subsidy Law of 1918. They claimed that their firms would not be able to compete with U.S. imports. Consequently, Japanese domestic production totaled 884 vehicles between 1914 and 1926, while 15,771 were imported in that period. The military authorities’ efforts did not create a strong domestic industry, merely one dependent on government procurement. In the mid-1920s, Ford and General Motors both set up wholly owned Japanese assembly facilities whose scale truly dwarfed that of domestic producers. By 1934, these two firms accounted for almost 90 percent of Japan’s

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market share, which was sufficient to overwhelm Japan’s three major domestic producers—Tokyo Gas and Electric, Ishikawaji Shipbuilding, and Kaishinsha—all of which concentrated on military production because it gave them a guaranteed market (Genther, 1990). By the early 1930s, every Japanese firm attempting to manufacture cars had either closed down or was on the verge of bankruptcy, supporting Cusumano’s (1989: 2) assessment that despite three decades of limited production, the domestic Japanese auto industry was then “starting from scratch.” By the late 1920s, a period of extended economic recession and worsening balance of payments triggered a popular upsurge in nationalism and increased governmental concern about the effect of imports on Japan’s current account deficit. To this concern was added the renewed awareness of the significance of the industry to Japan’s national defense, given the military’s incursion into Manchuria. The early 1930s therefore marked a watershed in government policies, as the state sought to institute protective measures. In 1931, a government committee on rationalization made the first determined attempt to assist domestic producers by recommending that a tariff on imports be introduced, and the following year tariff rates of 35 percent on engines and 40 percent on parts were imposed. Having restricted market access for direct imports, the state then mandated a series of measures that sought to develop strong domestic producers. Government policy, however, was designed to omit the zaibatsu from this process by sponsoring alternative entrepreneurs (Magaziner and Hout, 1980: 68). The Survey Committee for the Establishment of the Automobile Industry was formed in May 1931, composed of members of government and the business and academic communities. It recommended that domestic firms standardize their production and take responsibility for exclusive production in different market segments. Its members also developed plans for a mass-produced “people’s car” to be named the Isuzu. Mirroring Hitler’s idea of developing the Volkswagen in Germany, it ran into identical problems—the fact that no domestic firm was large enough to produce a competitive, good-quality vehicle, and the fear among private sector producers that such a car would reduce their market share. Despite a series of company mergers, orchestrated by the government to facilitate mass production, these attempts to standardize production through mergers or cooperative ventures had failed by 1934. Still, these measures had a dramatic effect, prompting both reorganization among existing producers and some new entrants into the industry. Particularly notable were a series of mergers that produced cars bearing the Isuzu logo for the first time in 1937 (although the car did not fit the government’s initial intent in terms of either scale of production or price), the incorporation of Nissan in 1933, and the establishment of Toyota as a subsidiary of Toyota Automatic Loom in 1937. Isuzu, Nissan, and Toyota initially developed in a climate in which the government attached new importance to the relationship between the auto industry,

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national defense, and economic welfare. Beginning in the mid-1930s, measures, enthusiastically sponsored by the military and supervised by the MCI, were specifically designed to squeeze out the U.S. subsidiaries. The critical measure in this regard was the Automobile Manufacturing Enterprise Law of May 1936. This law required that firms producing more than 3,000 cars per year be licensed by the state and have majority Japanese ownership. Licensees were given five-year exemptions from income taxes, local and business revenue taxes, and import duties on machinery, equipment, and materials purchased abroad. In addition, licensees were exempted from restrictive aspects of the commercial code relating to the issuance of new stocks and bonds to raise capital. In exchange they had to agree to give the state supervisory rights over their business plans concerning mergers and the production of military vehicles or equipment. These aspects of the law had the intended effect of severely restricting Ford’s and GM’s operations. But three further measures were introduced that were even more explicitly aimed at curtailing the operations of the U.S. subsidiaries. First, Ford’s and GM’s future production was limited to 1934– 1935 levels: 12,360 and 9,470 vehicles, respectively. Second, import duties were increased to 50 percent on finished vehicles and components. Third, Japan’s foreign exchange regulations were revised to make it difficult for the U.S. subsidiaries to pay for the parts they imported. These measures had a major impact on the industry’s future structure, essentially creating a new monopoly for the only three licensed, domestic producers primarily devoted to auto production—Toyota, Nissan and, more marginally, Isuzu. The U.S. subsidiaries responded by attempting to merge with either Nissan or Toyota, but these efforts were thwarted by the government’s and the military’s opposition under the terms of the Exchange Control Law. When Ford tried to build its own production plants, it was initially denied the right to purchase land in Yokohama, and then when it was allowed to purchase land, it was denied a building permit. Additional legislation that followed the 1936 law was designed to handicap further the U.S. subsidiaries and to assist Nissan and Toyota. These measures included the Temporary Measure Law Relating to Exports, Imports and Other Matters of September 9, 1937, which tightened state control of imports, exports, and the consumption, manufacture, and processing of trade-related goods; the already discussed National General Mobilization Law; and the introduction of the Materials Mobilization Plan, which laid out guidelines for the use of materials and in effect prohibited all car production in favor of truck production designed for national security purposes. The cumulative, intended effect of the government’s measures by 1939, according to Magaziner and Hout (1980: 68), was to drive GM and Ford out of Japan. The effect of MCI’s legislation on the relative distribution of market share between the U.S. subsidiaries (prior to their departure) and Japan’s

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two new producers reveals why they left; Nissan and Toyota accounted for as much as 85 percent of auto production from the mid-1930s until the late 1950s, while European and U.S. firms had accounted for 95 percent of production in the decade preceding 1935 (Cusumano, 1989: 7, 17). Given an additional advantage over other domestic firms by a variety of government measures, such as allocation of resources on favorable terms, Toyota and Nissan introduced foreign technology and mass production techniques and quickly surpassed other domestic firms in terms of volume and profits. The effects of this state sponsorship are indicated by their production figures after the introduction of the new restrictive measures. Toyota’s production of four-wheeled vehicles expanded from 20 in 1935 to 16,302 in 1942, and Nissan’s from 940 in 1934 to 19,688 in 1941, combining for a total market share of 75.5 percent between 1935 and 1940, and 84.1 percent between 1940 and 1945 (Genther, 1990: 52). Much of this production was for military procurement, a market that really allowed the state to discriminate. The state’s measures therefore proved extremely effective in creating a discernible core and periphery in the Japanese auto industry. There were two central members of the core—Nissan and Toyota—and one more marginal member in Isuzu, while the periphery was composed of small domestic firms, many of whom were forcibly merged or eliminated because they could not meet the authorities’ requirements or obtain raw materials. As Genther (1990: 59–60) notes, “Government-business interactions geared to protecting the industry increasingly meant protecting the large companies, not all the producers in the industry.” These new, favored heirs to the zaibatsu shared a cooperative relationship with the controlling government authorities. Those same select firms have remained dominant to the present day. Beyond these immediate considerations relating to the auto industry, the 1936 law was important because it provided a licensing system that created the means for the Japanese government to experiment for the first time with various promotional and protectionist measures, such as restrictions on imports, local production, and foreign direct investment, and to encourage firms to acquire foreign technology and to invest in new plant and equipment. Dating from the 1936 law, the state’s measures became increasingly restrictive and supervisory in a process that was sustained through the war and ensuing occupation. In addition to prohibiting most car production, the MCI established price and distribution controls on other forms of motor vehicles in 1939 through the Materials Mobilization Plan, which remained in effect until 1949. In 1941, the MCI set up a control association for the auto industry, the Automobile Manufacturers Industrial Association, to supervise production levels and the distribution of materials, labor, and credit among the firms and their suppliers. This association was structured like a cartel, with the members’ function being to implement state policy

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rather than formulate their own (Cusumano, 1989: 18). The members of this cartel formed the basis of Japan’s postwar truck and passenger car production. Both the government and the firms themselves poured money into new technology, particularly heavy machinery for truck production during the period of the Pacific war between 1941 and 1945. The MCI gave way to the Ministry of Munitions, which controlled the allocation of raw materials and the manufacture and distribution of production. The executives at Nissan and Toyota were very nationalistic and supportive of the war effort, cooperating in the development of new technologies. Genther (1990) suggests that in the decade and a half dating from 1930, both the state and Japan’s leading producers learned some valuable general lessons that they applied in the postwar period. Among these was the belief that without protection the auto industry faced the real risk that the market would be dominated by direct imports or foreign direct investors, either of which would serve to retard severely the development of Japanese producers. Such dependence on foreign production would invariably lead to a chronic trade deficit and a foreign exchange shortage. Accordingly, Ford and GM were specifically refused reentry to the Japanese market after the war. Conversely, this period had demonstrated that a discriminatory cooperative relationship between government and the major producers could have a positive effect on industrial development. Two strong companies emerged out of a multitude of small and extremely weak domestic producers as a result of government policies, providing the foundation for the industry’s postwar growth. Why did the U.S. occupation authorities accept this exclusion of GM and Ford after the war? Two reasons might explain their tolerance. First, the U.S. government initially was more concerned with getting the Japanese economy functioning effectively than with the fate of individual U.S. firms. Second, and subsequently, the fate of U.S. firms in Japan in particular and economic reforms in general proved to be less important to the United States than the exigencies of fighting the Cold War. The need to use Japanese industry to full effect during the Korean War thus took precedence over the consolidation of economic reforms (Yamamura, 1967). Toyota and Nissan had escaped the total destruction suffered by many Japanese producers at the conclusion of the war. Only Toyota’s main plant had been significantly damaged. But the executives of these two firms suffered contrasting fates during the ensuing Occupation, based on the nominal capitalization of their companies. The General Headquarters of the U.S. forces decided that firms with a nominal capitalization of over 100 million yen would be purged. Nissan’s capitalization was just over this level, so it lost all its top executives; Toyota’s was 97 million yen, so it retained its executives. Yet both companies managed to maintain a continuity in their personnel across the prewar, wartime, and postwar periods. In 1965, for

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example, 90 percent of Nissan’s board of directors had joined the company before 1945 (Cusumano, 1989: 57, 74). A new manufacturers’ organization, the Japan Automobile Manufacturers Association, was formed in 1945 and assumed an allocative function for scarce raw materials. Its membership was confined (by decree) to four firms that had provided the vast majority of Japanese military truck and tank production—Toyota, Nissan, Diesel Motors, and Mitsubishi Heavy Industries (which had produced tanks). Accountable to the MCI for their actions, only the first three of these firms could legally resume immediate production of trucks, because the terms of the Automobile Manufacturing Law of 1936 remained in effect until 1946 (Cusumano, 1989: 74). Not only did these firms face the obvious problems associated with scarce resources, the reconstruction of a defeated economy, the threat of foreign competition, and the imposition of allied limitations on their production in the early postwar period. They also faced the prospect of depressed demand as a result of surplus allied inventories being sold off cheaply on the domestic market (Cusumano, 1989: 19). The industry’s leaders felt that they needed government assistance to survive, let alone prosper. They therefore took the initiative in seeking government support by establishing the National Automobile Industry Revival Conference in April 1947. The conference called for a sectoral policy that would give auto production priority by assuring the industry’s leaders of raw material supplies. The reestablished MCI responded with a five-year plan that outlined a set of policies designed to end price controls, achieve import substitution, and embark on an export policy (Genther, 1990: 85–86). The major producers received extensive government loans critical to their survival under the Reconstruction Finance Bill. As Cusumano (1989: 19) states: “Only huge loans from government and private banks kept Nissan, Toyota and Isuzu operating during the late 1940s.” Ignoring compelling arguments from both Bank of Japan and Ministry of Transport officials to neglect these auto firms, first the MCI and then MITI, its successor, introduced measures to promote and protect these select firms in an industry they saw as critically important to the future of the national economy. So, against their best economic judgment, the Bank of Japan, the Japanese Development Bank, and the Industrial Development Bank of Japan funded Nissan, Toyota, and Isuzu to keep them out of bankruptcy. Despite mass dismissals designed to increase productivity, the industry tottered on the brink of elimination until the huge demand created by the Korean War put the major producers on a sounder financial footing by eliminating existing inventories, increasing production, and providing foreign currency (Genther, 1990). It was only MCI’s and MITI’s explicitly discriminatory set of policies that sustained these firms in the first decade after the war. First, MITI resisted pressure from opposition domestic sources both within and outside government who thought that other heavy industries,

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such as shipbuilding or steel, should be favored over automobiles, or that Japan should invest only in light industries. And when MITI officials defended a policy of investing in the automobile industry, they clearly had an inequitable conception of investment. Discrimination therefore existed between and within sectors. Second, MITI promoted the belief that unless the prewar system of tariffs was reintroduced, Japan would again be flooded by imports. Controls on imports were therefore reintroduced in 1954 and central government agencies were advised only to buy domestic passenger cars from select firms. Finally, MITI responded to the biggest threat—the possibility of renewed direct foreign investment—by enlarging the core firms through a deliberate process of having them swallow up many of the smaller, disadvantaged Japanese firms. MITI announced the “Basic Policy for the Introduction of Foreign Investment into Japan’s Passenger Car Industry,” explicitly warning foreign firms that they might not be able to repatriate their earnings and severely limiting the conditions for joint ventures. MITI either rejected outright subsequent applications by firms, such as Rootes and Chrysler, to form joint ventures with small Japanese firms who were themselves seeking to break Nissan’s and Toyota’s dominance, or laid down conditions so constraining that the prospective foreign partner withdrew. As in other aspects, MITI’s administration of the policies governing joint ventures tended to favor the larger core producers over other domestic firms. Genther (1990: 131) notes that “while the government supported the development and protection of the passenger car industry, it did not protect all producers or would-be producers.” By the early 1950s, the institution of a series of government measures had ensured both the industry’s survival and Nissan’s and Toyota’s privileged position as its leading producers. Some measures, such as the limits placed on joint ventures, seemed general in nature although they did, in effect, tend to help the privileged core firms. A 40 percent tariff and the restrictions on foreign capital investment remained in effect, and imports were also constrained by a maze of foreign currency exchange requirements and controlled by the Foreign Investment Law of 1951. Even autos produced in joint ventures would be counted against a firm as foreign imports. But other government measures proved more explicitly selective. MITI was highly discriminating in providing or sponsoring a series of loans, special depreciation measures, exemptions from import duties, authorizations for the import of essential technologies, and subsidies from the Japan Development Bank. The latter even broke with historical precedent by negotiating a loan from the World Bank in 1956 for funds specifically intended for Toyota (Genther, 1990: 138–141). Three trends were well established by the middle of the 1950s. First, the policies that the government had formulated in the 1930s and subsequently implemented had survived the Occupation and would continue to be used effectively in the auto industry. Foreigners were barred, and the position of

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the two national champions, whose rapid emergence had been sponsored by the state in the 1930s, was sustained largely by the government’s continued efforts. New entrants to the industry in the 1950s, such as Honda and Mazda, found their capacity to realize their potential blocked if it was at a potential cost to Nissan and Toyota’s welfare. These late entrants subsequently often responded by ignoring or rejecting government policy where they could, but by 1955 Nissan and Toyota still accounted for 69 percent of Japan’s auto production. It is no coincidence that Honda was the first Japanese car manufacturer to invest in a manufacturing plant in the United States. And old competitors that were closely identified with the traditional zaibatsu, like Mitsubishi, were subject to severe restraints and likewise sought the means to circumvent government policy. At this point it should be recalled that it was Mitsubishi that first challenged the established policy on joint ventures in 1969 by signing, and then announcing to startled MITI officials, a joint production agreement with Chrysler. Mitsubishi’s lead in this regard was followed by Isuzu’s signing of a joint venture agreement with GM, and it was Toyo Kogyo (which later became better known as Mazda) that signed an agreement affiliating with Ford in 1979. All these agreements were concluded in response to MITI’s policies designed to facilitate a process whereby Toyota and Nissan would swallow up these firms. As Encarnation and Mason (1990: 47) characterize these events, it was MITI officials who “unwittingly galvanized their own domestic opposition” into action, revealing in the process the existence of an important core-periphery distinction in the automotive industry. Paradoxically, the second trend established in this period was toward a reduction in the state’s power to achieve its intended goals (S. Reich, 1991). An illustration of this point was the failure of the state’s attempt to resurrect its “people’s car” project in the 1950s. MITI’s attempts to rationalize the industry, through a series of mergers and an explicit division of labor that would have segmented the market in a way that would have benefited Nissan and Toyota at the expense of other producers, proved only partially successful. Unbridled state power was replaced by an emphasis on privatepublic cooperation, but the form and focus of that cooperation reflected trends developed in an earlier era, with the state tending to establish cooperative relationships with core producers and adversarial ones with peripheral producers. As Genther (1990: 242) suggests, there was no uniform response to government programs among producers. Rather, “these programs produced many types of reactions among the producers, depending on their size and on the specific reorganization program.” But while it could no longer impose its will as it saw fit, the Japanese state could still use its discretionary power to the advantage of core producers. This discretionary power was evident in the fight over the allocation of automobile exports to the United States under the terms of the Voluntary

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Export Restraint agreement more than two decades later. Here the new, smaller domestic firms, like Suzuki, lost the most from a government allocation process that severely curtailed their capacity to expand into the U.S. market. Despite their protests, small producers were more heavily discriminated against by government quotas than Toyota and Nissan, which were allocated export quotas of 518,000 and 453,000, respectively.11 How much did MITI’s intervention affect the firms’ welfare? The example demonstrates two contrasting points: MITI’s continued importance as an actor, and the limits of MITI’s power. MITI’s intervention forced all the auto producers to adopt new strategies, either foreign direct investment or tie-ups with U.S. firms. Under specific conditions, then, MITI could still exercise power and thus influence the behavior of firms. Yet the fact that the firms were able to adapt effectively to this new situation and were able to recoup major benefits through increased profits, despite adjustment costs, showed the limits of MITI’s capacity in the 1980s. But it is important to note two further points: First, MITI (consistent with U.S. government demands) was concerned not with limiting profits, but with limiting the number of autos exported. Its agenda was defined and its goal achieved—to replace exports of finished products with foreign direct investment. Second, in the long term, peripheral producers indeed suffered through reduced access to the U.S. market. The deals they arranged to supply U.S. firms were often temporary, providing U.S. firms with small cars while the U.S. producers converted to small car production themselves. Suzuki, for example, bore the long-term cost of this strategy, abandoning small auto production for the U.S. market. The third trend, beginning in the mid-1950s, was toward the industry’s sustained growth and prosperity. Contrary to classic liberal economic theory, as Cusumano (1989: 215) notes, while Toyota and Nissan benefited from government protection, they did not become less competitive. MCI’s, MM’s, and MITI’s efforts over the preceding three decades had consolidated the foundation of an industry in which a couple of producers had been given such great advantages that they were much more likely than their disadvantaged competitors to flourish, given the appropriate global market conditions. And if those conditions did not prevail for an extended period of time, as in the late 1940s, it was apparent that there were no lengths to which the Japanese state would not go to preserve these firms so that they could prosper in the future. The result by the early 1990s was the development of the most efficient and competitive auto industry in the world, comprising a number of producers. The core firms, Nissan and Toyota, had thrived in this discriminatory environment and had been the last to become multinational producers. In contrast, those firms that had survived state discrimination, like Honda, had been the first to become foreign direct investors in order to escape the regulatory hand of the Japanese state. Although the decision to invest in the

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United States generated political debates in Japan about employment levels and the diffusion of investment capital, there is no doubt that the Japanese auto industry has become a symbol of Japan’s industrial prowess. Having first challenged U.S. companies through exports in the 1970s and 1980s, Japanese firms in the 1990s challenge them even more effectively from U.S. manufacturing base. THE SEMICONDUCTOR INDUSTRY

Why choose the semiconductor industry in the United States and Japan as a second paired comparison for this chapter? There are at least three related methodological reasons for this choice. First, the semiconductor industry represents a sector in a different stage of the product cycle from autos. It is a high-technology not a medium-technology sector. If evidence supporting my claims in the semiconductor industry can be adduced, then the possible boundaries of these claims is extended beyond that of labor- and capitalintensive sectors into a knowledge-intensive one. Second, comparing these two sectors addresses the criticism that the argument is a “periodized” one, historically bound to a particular context. After all, critics could reasonably assert that developments in the respective auto industries in Japan and the United States were heavily tied to the industry’s emergence in the pre–World War II period—and therefore that the respective degree of discrimination apparent in state policy was contingent upon this fact. The semiconductor sector emerged after the Occupation and the establishment of the contemporary democratic regime in Japan and therefore provides an important “test” of the argument. If I can identify similar ideological considerations and demonstrate that they generated policy patterns in the Japanese semiconductor industry similar to those found in the Japanese auto industry, this will provide important supporting evidence for my thesis. Finally, examining the semiconductor sector is appropriate because it constitutes a fulcrum sector for economic development in the 1980s and 1990s, as was the auto industry in the 1950s, 1960s, and 1970s. As Fong (1990: 273–274) points out, semiconductors have been described as the “industrial rice” of the 1990s and the “crude oil” of modern industry. Semiconductor devices are utilized as vital components in computers, telecommunications, industrial machinery, military equipment, and consumer electronics. The benefits of semiconductors are gained throughout manufacturing, agriculture, and the service sector. National economic wealth and, particularly in the case of America, national security increasingly rest upon advances in technology with microelectronics at the core.

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In sum, like autos in the earlier period, semiconductor production is relevant to national defense and national prosperity, and the welfare of the industry is regarded as a bellweather for national development in both the United States and Japan.

The United States

Though the initial technological breakthroughs in the automotive industry did not occur in the United States, the commercialized application of the relevant technologies did with the advent of Fordist mass production. In the semiconductor industry the opposite is probably more true: Most of the important initial technological developments were fostered in the United States. Texas Instruments was the first firm to discover how to make transistors out of silicon in 1954, giving it early leadership in development. And within the span of a year dating from 1958, both Texas Instruments and Fairchild independently developed forms of integrated circuitry to link semiconductor chips together without unwieldy wiring. It took until 1961 for the first marketable computer chips to be developed, but they were too expensive for commercial use and their application was confined to providing crucial technology for government programs (Yoffie, 1987: 1). Indeed, Sarabria (1987: 15) suggests that this first, early period of development (from 1955 to 1965) could be characterized as a “demand-pull” phase in which procurement by NASA for its Apollo space program and the Department of Defense for its Minuteman II missile guidance system sustained the fledgling industry. According to Sarabria, there have been two subsequent phases of the U.S. semiconductor industry’s development. The second phase, dating from 1965 to 1972, marked the transition from military to commercial applications as the industry’s main catalyst. Consistent with this view of U.S. technological innovation as the early driving force, Intel then created the first multiprogrammable semiconductor chip (Yoffie, 1987: 2). The third (present) phase of the industry’s global competition dates from 1972. Although military procurement has grown significantly in absolute terms over successive decades, its percentage of market share has drastically shrunk, and by 1987 military procurement accounted for only 10 percent of sales by U.S. semiconductor firms (Sarabria, 1987: 15). Dominance of innovation and sales by U.S. semiconductor firms was successfully challenged by Japanese firms in the 1980s. As late as 1980, U.S. firms were still responsible for 60 percent of global sales, a figure that fell to 43 percent within six years (Yoffie, 1987: 10). According to the logic of classical economics, this decline in competitiveness might suggest a static sector composed of oligopolistic firms that avoided direct competition. But an examination of the structure of the U.S. semiconductor industry

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reveals instead a heterogeneous market structure made up of firms that vary greatly in size, aims, and resources. According to Borrus, Millstein, and Zysman (1982: 3), U.S. producers can be divided into two groups. The first consists of “captive producers,” diversified firms such as IBM and AT&T that produce chips for their own internal use. They suggest that these two firms have historically played a crucial role in the industry’s development because of their broad-based, widely shared research and development work. Second, there are “merchant” firms that, as innovators and diffusers of semiconductor technology, gave the industry its dynamism. These firms, including Fairchild, Texas Instruments, Motorola, and Intel, have traditionally relied on large volume sales to generate profits. Perhaps a third group should be added to this list— the small venture-capital companies that are niche producers in (often custom) markets, including LSI, Logic, and Zilog. Their numbers exploded in the 1980s to over 100 firms (Fong, 1990: 281). While the eight largest U.S. firms had accounted for 91 percent of production in 1965, they accounted for only 67 percent of production by 1972, a pattern of fragmentation that accelerated in the 1980s (Borrus, Millstein, and Zysman, 1982: 25). This developing market structure presented significant problems, both for firms (in terms of maintaining their competitiveness) and for the U.S. government (in formulating potential policies). The U.S. semiconductor industry was faced with the fact that, with ever increasing start-up and development costs, the most dynamic segment of the industry consisted of the small firms that were least able to afford these costs. Yoffie (1987: 6) then estimated that the cost of developing and producing a chip was $150 million—and that the equipment used in building a new plant would be obsolete in two to three years. While “contracting out” production was one solution for these small firms, another was to sell out when they made a technological breakthrough, often to large foreign producers eager to apply the new technology, thus depriving U.S. industry of a competitive advantage and instead making it available to rival foreign producers.12 The U.S. semiconductor sector’s aggregate decline in the 1980s was as unanticipated, steep, and rapid as the auto industry’s had been during the prior decade. The primary challenge again came from Japanese firms. The smaller, venture-capital U.S. firms simply lacked the resources to compete against much larger Japanese competitors. The same is true of the merchant firms, which lacked the access to cheap capital enjoyed by their Japanese rivals (Mattione, 1992). Also, the merchants could not fall back on the government support that had sustained their Japanese counterparts even in the direst years and for the riskiest of ventures. In short, U.S. merchants were much more vulnerable to the debilitating effects of business cycles (Howell, Noellert, MacLaughlin, and Wolff, 1988: 16). MITI’s underwriting of Japanese firms as recently as the late 1980s prompted Business Week (October 1990) to entitle an article “MITI: The Sugar Daddies to End All

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Sugar Daddies.” Even the big U.S. captive producers had problems competing with the Japanese firms, as IBM found when some of these same Japanese firms shifted into computer production and first began to mount an effective challenge to IBM’s global supremacy (Anchordoguy, 1990: 312, 326). U.S. semiconductor firms recorded an aggregate trade surplus of $126 million in 1977 and $600 million in 1980. But by fiscal year 1985/86, U.S. firms collectively lost about $2 billion (Yoffie, 1987). But, as Fong (1990: 282) argues, the heterogeneous structure of the U.S. semiconductor industry created problems for the U.S. government as it contemplated any active form of public policy: the fragmentation, technological dynamism, interfirm rivalry, and diversity of the U.S. semiconductor industry pose unique challenges for the design of public policy. Semiconductor industry analysts have observed that government “policies impact various firms differently” and “firms react differently to the same policy.” What is interesting is that the pattern of response of the United States, i.e., the policies it chose to implement toward the semiconductor sector, was quite similar to its response to the earlier problems of the auto industry. As with autos, in the period of insularity that lasted until the 1980s, the U.S. government’s involvement was largely defense related. Recall that government procurement did play a major role in the industry’s initial development; but this work had little commercial application. Moreover, the merchants developed a hostile relationship with the Pentagon, casting doubt on claims that government policy amounted to any sort of an industrial policy (Fong, 1990: 281–282). The combination of two threats—one of declining economic competitiveness as domestic producers withered, the other to national security because of a growing reliance on foreign producers—finally stimulated a different kind of state action. In a striking change in policy, the U.S. government negotiated a protectionist agreement with the Japanese government in 1986. Here, just as in the auto case, the United States tried to push the cost of adjustment back onto the Japanese. In this case three U.S. producers— Intel, AMD, and National Semiconductors—filed a suit with the International Trade Commission (ITC) against Japanese producers, alleging that they were dumping products on the U.S. market at prices below production costs in order to drive the U.S. firms out of business. Soon after, the U.S. industry’s representative organization, the Semiconductor Industry Association (SIA), filed a Section 301 suit alleging that the Japanese government was denying U.S. firms access to Japan’s markets. Rather than face the suits, the Japanese government preferred to sign an agreement with the U.S. government that set a minimum price for the sale of Japanese semiconductor chips sold outside Japan, and that promised to remove impediments to exports so that U.S. firms could reach 20 percent of the Japanese market, up from the 8 percent figure it then held (though the two governments would later disagree over whether this constituted a guar-

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antee). This amounted to a quota system, not free trade. When the United States decided in 1987 that the Japanese government and its firms were reneging on the terms of the agreement, they responded by unilaterally imposing a 100 percent tariff on Japanese consumer electronics imports (subsequently the level of duty was gradually reduced as the Japanese more consistently abided by the terms of the 1986 agreement). In part, the purpose of the agreement was to help U.S. firms compete with Japanese firms, though, as in autos, some unintended consequences proved to be detrimental to U.S. firms as chip prices dropped in Japan, thereby reducing the benefits derived from new U.S. exports (Sarabria, 1987: 22). As in the case of the auto VER, a second effect of the 1986 agreement was to encourage Japanese firms to shift production to the United States in order to avoid future protectionist measures, e.g., NEC’s decision to build a chip facility in California and Hitachi’s to build one in Texas. Although the 1986 agreement has drawn the most attention, it was not the only type of state policy that has been implemented. A second type was designed to provide funding, primarily through the Very High Speed Integration Circuit program (VHSIC) established in 1979 and sponsored by the Department of Defense. This program was originally supposed to last seven years and receive $339 million in government funding, but it was later extended to ten years and budgeted to $1 billion. The project’s exclusive aim was to develop advanced integrated circuits that could be introduced into military technology, with little effect as an industrial policy program aimed at promoting competitiveness. It did, however, keep a number of firms in the industry in business during the recession of the 1980s. What is interesting is the process by which firms were included, as well as the number of firms included, in the project. My argument would predict that funding would be widely dispersed among domestic producers. This expectation is borne out by the relevant data: of the thirty-two firms that initially bid for contracts, twenty-one firms were eventually included in the project (for details of the program, see Fong, 1990: 278–283; Sarabria, 1987: 17). But the VHSIC project was not the only subsidized government program; others included those sponsored by the National Science Foundation, NASA, the National Institutes of Health, and the Defense Advanced Research Projects Agency (DARPA). Again, what was notable about them was the number and diversity of the recipients; these projects in effect formed a “basement” for many domestic firms. Apart from protection, coerced foreign direct investment, and nondiscriminatory funding, there were two other, more proactive, forms of government intervention in the late 1980s. The first measure was the rare, active involvement of the government in forestalling the Fujitsu purchase of Fairchild in 1987 (see Chapter 9). Although the U.S. government did not actually block the purchase, it let it be known that it was unhappy with the deal and would impede its successful completion. The fact that Fairchild

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was then owned by Schlumberger, a French firm (Fairchild was subsequently purchased by National Semiconductor), provided conclusive evidence to some that the U.S. government was actively, specifically discriminating against Japanese firms. Critics added that the U.S. claim that national security was an issue in this proposed purchase must have been disingenuous because the firm was already under foreign ownership. They felt that this constituted a clear case of “Japan-bashing.” Sarabria’s (1987) account dissents from that critical view and offers a viable explanation that is consistent with my claim about the nondiscriminatory bias of the United States: the sale was blocked because the purchase of Fairchild would have given Fujitsu 50 percent of the global market share of the strategically important Emitter Coupled Logic (ECL) chip. Furthermore, it would have made Fujitsu twice the size of any other Japanese producer in the United States and thereby given it too much market power over the independent U.S. distributors. What emerges from Sarabria’s discussion is support for the claim that the United States’ primary concern was with the issue of concentration and how it would have affected both domestic security and domestic competitiveness. There are two legitimate reasons for state intervention in the United States: national security and antitrust. Sarabria suggests that it was the latter that prompted the U.S. government’s intervention, though it was the former that was mistakenly emphasized in the press. Thus, it is not unreasonable to suggest that the state response that greeted Fujitsu’s attempted purchase of Fairchild was consistent with that General Motors received when it had threatened to create a monopolistic structure in the auto industry in earlier decades. The state agenda in the Fujitsu case was motivated by the principle of antitrust and accordingly was explicitly focused on a nondiscriminatory principle that sought to guarantee fair competition. Finally, the U.S. government was actively involved in generating cooperative behavior among U.S. firms, notably through the formation of Sematech. Sarabria (1987: 23) describes Sematech’s objectives as follows: Sematech would be a catalyst to mobilize the scientific resources of individual companies, universities and national labs. It was based on the understanding that leadership in manufacturing capability depended on the degree to which human skills combined with new production technology. Furthermore, Sematech would encourage the establishment of specific domestic capabilities where none currently existed or remained, such as ceramic chip encapsulation and silicon wafer fabrication.

Sematech was discriminatory in that it did not allow for membership by foreign firms, thus presenting an apparent problem for my explanation that focuses on the nondiscriminatory element of state ideology. Can my explanation therefore be made consistent with the formation of Sematech? Perhaps partially. For while Congress authorized partial funding for

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Sematech amounting to $100 million, with matching funds from industry, it had no influence over Sematech’s objectives or composition (Semiconductor Industry Association, 1988: 35; Sarabria, 1987: 25). It was publicly funded but privately controlled. Membership was voluntary rather than exclusive and there were no significant barriers to entry. Indeed, rather than who was left out, the more interesting issue concerns which computer firms refused to join Sematech, among them Apple and Compaq. They reportedly did not join because they feared reprisals from Japanese producers who could withhold crucial chip supplies (Business Week, October 23, 1989: 107). Furthermore, it should be noted that even though foreign firms have not been included in Sematech, the Japanese acquisition of crucial domestic firms has continued unabated despite its presence. One recent example was the sale of Ross Technology, a noted subsidiary of the Cypress Semiconductor Corporation and maker of the Sparc microprocessors, to Fujitsu (New York Times, May 13, 1993). This pattern suggests that the purpose of Sematech is to secure domestic production rather than to discriminate against foreign producers. To date Sematech has proven ineffectual in achieving even this more limited goal. Some critics contended that sponsorship of a consortium like Sematech constituted an abridgment of antitrust principles and that it was merely a bailout for U.S. firms. To suggest it amounted to a bailout would be consistent with my claims and may indeed have been a partial motive. Yet the government’s overriding concerns are that national security would be threatened and that, absent a coordinated response, the result would be a Japanese monopoly over a variety of chips. In the view of state officials, supporting Sematech constituted a measure justified by the threat of a potential antitrust “evil”—control of a fundamental resource. Furthermore, Sarabria (1987: 25) claims that “the rationale for direct government support for the venture was based on the claims of the industry that it had insufficient funds to invest in a facility of this magnitude, that government was a major consumer of chips, and that a strong industry was a public good.” This nonexhaustive account of the various forms of state intervention in the U.S. semiconductor industry suggests that the liberal state is purposely interventionist in a way inconsistent with those perspectives that characterize the United States’ behavior as being purely ad hoc. The principle that binds this pattern of behavior together is a sustained belief in nondiscrimination. The fear of actual or potential discrimination by Japanese firms is what has driven U.S. policies, while the U.S. government has consistently and strenuously avoided any discriminatory treatment among domestic firms. The effects on U.S. competitiveness resemble the U.S. experiences in the auto industry. While the role of Sematech in the resurrection of the U.S. semiconductor industry is open to debate, it has at least reduced research and

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development costs and has provided the U.S. government with some institutional access for policymaking and implementation. But the voluntary nature of its membership, the lukewarm response of U.S. firms, and the fainthearted support it has received from the United States make it unlikely that it will prove an entirely effective channel for a U.S. response. U.S. innovations are more likely to come from small producers than from Sematech, and those new technological breakthroughs will be acquired by the Japanese through the purchase of the technologies or the companies themselves. In sum, it is difficult to assign much credit to state policies for whatever degree of competitiveness has been regained by the U.S. semiconductor industry.

Japan

There are significant differences between the organizational structure of the Japanese and U.S. semiconductor industries, many of which are the product of contrasting state policies. While the number of U.S. firms has grown and the U.S. sector has become increasingly fragmented and heterogeneous over time, just the opposite is true in Japan, where the foremost propensity has been toward concentration and homogeneity. Five major Japanese firms dominate production: Hitachi, NEC, Fujitsu, Toshiba, and Mitsubishi. A sixth, Oki, has recently tended to focus more on the production of computer peripherals, dating from the end of the 1980s. Unlike the vast majority of their U.S. rivals, these Japanese firms are all “captive users.” They are huge, diversified companies that use most of their chips in products they themselves manufacture; only a relatively small percentage of their production is sold on the open market. Each of these firms has keiretsu ties and thus benefits from the favored relations they enjoy with a main bank (which gives them access to cheap capital) and from the guaranteed market provided by other member firms. This industrial structure therefore provides such Japanese firms with “deep pockets” and relative immunity to the debilitating cyclical effects suffered by U.S. merchant firms. Many scholars, not all readily identified with a statist orientation, have tended to stress the role of state intervention in accounting for the structure and competitiveness of the Japanese semiconductor industry (e.g., Anchordoguy, 1988, 1990; Okimoto, 1984; Johnson, 1986). For example, Borrus, Millstein, and Zysman (1982: 47, 49) claim that the emergence of Japanese competitiveness in world integrated circuit markets, like the more general national goal of creating comparative advantage, rests on a conscious state and industry strategy of controlling access to the domestic Japanese market, structuring the terms of domestic competition, making available stable sources of cheap capital, and using the controlled and structured domestic market as a secure base from which to gain entry and competitiveness in international markets.

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How was this achieved in practice?

Winners were encouraged, losers weeded out. In most sectors, a few large vertically integrated firms emerged and carved up the domestic market as a matter of company strategy and state policy. Markets were rationalized, and in MITI’s words, “intra-industrial specialization” was encouraged as a means of building efficient scale economies in market segments. Capacity expansion was often planned with state help, and official or informal “recession cartels” were organized to manage periods of overcapacity. In these many ways, “disruptive” competition was avoided. Thus vertical integration, rationalization, oligopolization and cartelization [were] an integral part of the sectoral development policy.

How did this behavior relate to the semiconductor industry? Okimoto (1984: 111) is more specific regarding the state’s contribution: “With respect to those areas where the Japanese semiconductor industry needed help most— demand-pull, coordination of technology push, protection against firstcomer dominance, scarce resource mobilization, finance and promotion of key end-user industries like computers—the Japanese government has come through with indispensable assistance.” These observations support two propositions offered by Okimoto (1984: 93, 97): that the development of the semiconductor industry was integrated into the broad framework of a comprehensive industrial program, and that the automobile industry provided the Japanese government with the model for the pattern of state intervention in the semiconductor industry. Also evident is the propensity toward discriminatory treatment by the Japanese state in dealing with semiconductor producers. What distinguishes developments in the semiconductor industry from those in the auto industry are the numbers involved rather than the pattern of development. In the auto industry there were fewer initial producers and hence fewer favored firms (primarily just Nissan and Toyota); in the semiconductor industry there was enough demand to allow the state the latitude to support half a dozen firms out of two dozen potential candidates. The fact that the state curtailed its efforts toward concentration when it reached five firms is indicative that it may have learned something from its prior efforts in the automobile industry about the limits of its own ability to coerce members. Faced with its earlier failure to replace an oligopoly with a duopoly in the auto industry, it settled for an oligopoly in the semiconductor industry. The discussion that follows in support of these assertions outlines the development of the sector. The birth of the industry in Japan dates from the early 1950s, when state bureaucrats initially expressed concern about Japanese reliance on external sources for access to high technology and the potential effect of this reliance on the evolution of Japanese competitiveness in related sectors (Howell et al., 1988: 44–46). Relevant policies were organized through MITI and the Ministry of Posts and Telecommunications (MPT), whose subsidiaries

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included Nippon Telegraph and Telephone (NTT) until 1985 (when it was formally privatized). MITI first organized a research committee to address the question of what could be done to promote the future competitiveness of Japanese computer manufacturers in 1955. Two years later, the Electrical Industries Provisional Development Act was passed to authorize the formation of research cartels that would be exempted from antimonopoly restrictions and that would be given direct subsidies, low-interest loans, tax incentives, and R&D (Anchordoguy, 1990: 304). A new electrical division was established in MITI’s Heavy Industry Bureau, and an Electrics Industry Deliberation Council was created to serve as a bridge between government and industry. NEC began to produce semiconductors in 1963, Hitachi in 1965, and Toshiba in 1966. The policy infrastructure was set up before production capacity was developed, thus indicating that the stimulus for production originated with the state. The period of government policy lasting into the early 1960s was characterized by relatively modest intervention in the form of limited subsidies, several government initiated joint ventures, the introduction of legislation that relaxed the antitrust requirements for the semiconductor industry, and, perhaps most important, the establishment of the Japan Electronic Computer Company (JECC) in 1961. The JECC was “a state-supported leasing company that helped Japanese companies finance the purchase of Japanese computers. By financing computer rentals at low monthly fees and allowing trade-ins after 15 months, JECC stimulated both technical development and demand for domestic computers” (Sarabria, 1987: 10). The JECC provided a valuable means of funding for its member firms, which could rely on full payment at the time of initial delivery. It is important to note exactly who benefited from the formation of the JECC. The state confined membership to a select group of chosen firms. Other prospective applicants and beneficiaries (such as Casio and Sharp) unsuccessfully lobbied MITI to be included in this arrangement. The justification for their exclusion was provided by a MITI official, Harumi Takahashi, who suggested that “MITI promotes the larger, more stable, more promising firms” (cited in Anchordoguy, 1990: 322). Presumably these firms were denied membership because they were judged to be not potentially profitable for this purpose. But Okimoto’s (1984: 133) comments suggest that this decision constitutes part of a regular pattern in which some firms never receive state assistance: Some of Japan’s best-known firms—Sony, Matsushita, Seiko, Casio, Sharp (producers primarily of consumer electronics)—have grown and prospered without being the prime beneficiaries of preferential government treatment—such as participation in national research projects, public procurements, Japan Development Bank loans and other subsidiaries. Such policies have tended to benefit a handful of established firms—NEC, Mitsubishi Electric, Toshiba (highly diversified producers of consumer

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goods and electrical machinery)—with which other electronics firms have been in fierce competition.13

Why are the beneficiaries so favored? According to Johnson (1986: 19), in the cases of NEC, Fujitsu, Oki, and Hitachi, they constitute the “NTT family” of firms from whom NTT bought all its equipment, and with whom “these firms maintain the intimate, personal, technical, research and financial relationship.” Howell et al. (1988: 49) suggest that these personalized relationships explain why these firms have enjoyed so much success in the field of microelectronics: “NTT’s joint development of telecommunications equipment with a ‘family’ of favored Japanese firms (notably NEC, Hitachi, Fujitsu and Oki) has played a central role in the international successes these firms have achieved in microelectronics. NTT develops semiconductor device technology in its laboratories which is transferred to [those] Japanese companies, in some cases reportedly free of charge.” One indication of the importance of the JECC to the favored firms is the fact that fully a third of the supercomputers produced by Fujitsu were rented by the JECC (Anchordoguy, 1990: 318–319, 322). It therefore was not surprising that these firms were chosen for the JECC project, given that this project was so important to the development of semiconductor industry, that NTT was to become a major user of semiconductors, and that these firms had historically been the sole beneficiaries of NTT’s largesse. But it is reasonable to inquire when this close relationship between NTT and these four firms originated. Consistent with the development of a similar set of intimate relations between the state and a favored set of firms in the auto industry, Johnson (1986: 18) reports that this relationship was formed in the early decades of the twentieth century and survived the transition to liberal democracy. Although of continued importance, the JECC constituted but one notable example of sustained state intervention, most of which proved to the advantage of these four firms (plus Mitsubishi and Toshiba). In the 1960s and 1970s, complex regulatory measures were introduced by the state (often at the behest of these firms) that thwarted the attempts of U.S. companies to sell or produce in Japan (Johnson, 1986: 52; Prestowitz, 1988: 34–38; Borrus, Millstein, and Zysman, 1982: 47; Encarnation and Mason, 1990: 44–45). Whether this policy of discrimination against U.S. firms—which were trying either to sell finished chips or to produce in Japan—was initiated by the public or the private sector, the effect was to deprive the U.S. (and world) market leaders of the benefits of direct competition. As Encarnation and Mason (1990: 44–45) point out, the Japanese state aimed to convince U.S. firms that the only way that they would be able to generate profits from the Japanese market was through the licensing of advanced technology to Japanese firms, thereby enabling domestic firms to move rapidly up the learning curve. Where Japanese firms could not effectively duplicate the technology

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they needed through questionable patent infringement, the Japanese government insisted that new U.S. producers in Japan sign joint venture agreements with Japanese firms rather than form wholly owned subsidiaries. What is more interesting for the purposes at hand is the question of which Japanese firms were paired with U.S. firms, through what process they were paired, and why. Experience alerted Japanese firms to the fact that MITI and the MPT would discriminate against the firms created under this joint venture agreement, and so Japanese firms scrambled to avoid being chosen by MITI. Recognizing its leverage, MITI exercised its influence to create a division of labor among the major core producers in terms of production and research. It then discriminated against potential competitors of the favored core of firms by saddling them with membership in these joint ventures, which were then immediately cut off from any access to state resources. MITI therefore paired Texas Instruments with Sony, Alps Electric with Motorola, and TDK with Fairchild, while the favored firms remained free of all such constraints (Anchordoguy, 1990: 309). As a result of this policy, the U.S. firms’ profits from joint ventures were greater than if they had not participated in the Japanese market at all, but they did not approach the levels they had anticipated when the initial agreements were signed. As the 1960s progressed, the state became increasingly active in the protection and advancement of favored firms. So many small firms were eliminated in this period that U.S. analysts would subsequently look at the structure of the industry in the 1980s and assert that an oligopoly then existed. Doing so lent credence to the assertion that the Japanese state treated firms equitably because it generally did not discriminate among these half dozen firms. But making such a claim largely ignored the origins of that industry’s oligopolistic structure (Borrus, Millstein, and Zysman, 1982: 6). In sum, MITI nurtured these select firms, while NTT discretely funneled them aid. For example, Anchordoguy (1990: 304, 312, 313, 315) examines the pattern of state aid in the 1960s and 1970s and concludes that Fujitsu would not have been able to stay in business had it not been for the state’s sponsorship of the company through loans, grants, and favored procurement. Fujitsu’s resulting unfair advantage echoes my earlier comments concerning Toyota and Nissan. Anchordoguy estimates that the state provided $13.3 billion in assorted aid and procurement between 1965 and 1975, and $13.6 billion from 1980 to 1986, to a select group of computer and semiconductor firms. The purpose of this subsidization was to underwrite the high level of risk associated with R&D in the field of semiconductors and with related high-technology products like computers and cellular phones, and to ensure competitive pricing. This strategy was never more clearly illustrated than in the Very Large Scale Integration (VLSI) project, organized and funded by MITI, that ran from 1976 to 1979. MITI used the project as a way to realign the industry, increasing the degree of concentration by selecting its members; Sony and

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Sharp were excluded from the project, as well as Oki, which had hitherto been part of the core of favored firms (Sarabria, 1987: 11). Henceforth, Oki was excluded from these projects and the “big six” became the “big five.” Membership in this research technology project was confined to NEC, Hitachi, Toshiba, Fujitsu, and Mitsubishi. Initial state funding amounted to $150 million in exchange for the reluctant agreement of these firms to cooperate with each other on laboratory research, under the threat of being excluded from the project if they did not (Borrus, Millstein, and Zysman, 1982: 45, 74; Fong, 1990: 291). The VSLI program was supplemented by a series of projects, including the formation of the Institute for the New Generation of Computer Technology, the National High Speed Computer program, the National Software Development program, the New Functional Elements for Semiconductor Devices program, and the Optical Measurement and Control System program (Sarabria, 1987: 14). Along with the heavy funding in capital investment that enabled the major Japanese firms to expand their capabilities in the midst of the recession in the semiconductor industry during the mid-1970s, the technological breakthroughs these projects engendered allowed the five remaining large Japanese producers to gain an extremely competitive position by the beginning of the 1980s. They took advantage of increased global demand to become the world’s largest seller of semiconductors, increasing their share from 33 percent of the market in 1980 to 45 percent in 1986 (Yoffie, 1987: 10). Yet by the middle of the 1980s, MITI was faced with two problems. First, the success of the companies under its sponsorship increased their efforts to achieve greater autonomy from MITI’s guidance. Second, the industry once again was faced with a recession, requiring MITI, MPT, and NTT to subsidize the $2 billion in losses suffered by these firms, largely caused by their strategy of dumping on the U.S. market in order to generate the greater market share deemed necessary to their long-term prosperity (Yoffie, 1987: 7). Ironically, these potentially problematic developments created a situation that eventually favored MITI’s position vis-à-vis the producers because the U.S. government demanded that the Japanese agree to limit exports and adhere to the terms of the 1986 agreement. MITI required some authority over the potentially troublesome firms because it was responsible for the formulation and implementation of that policy. As in the auto industry, administering a quota system—and thus deciding which firms get what percentages of exports—gave MITI tremendous leverage. These developments also stymied the shift toward creation of the kind of transnational Japanese firms that would be consistent with the liberal, U.S. conception of how competitive firms naturally evolve from national to multinational status. At the end of the 1980s, the structural characteristics of the Japanese semiconductor industry resembled an oligopoly comprising five major producers, generally described as “controlled competition.” This static view has

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led many to assume that the treatment of Japanese firms in this sector has been nondiscriminatory. But, as I hope that this section has demonstrated, such an assessment hides important factors involved in the evolution of this structure—primarily the significance of state policy in reducing this number to the “favored five.” They are all competitive; they have proved themselves to be willing to become transnational producers through foreign direct investment, to purchase new technology by acquisition, and to diversify beyond their immediate area of specialization into new computer products and peripherals as well as other information technologies. Furthermore, they have the resources to invest in the R&D so important to competitiveness in high-tech sectors. And like their counterparts in the auto industry, an emphasis on quality and cutting-edge development, coupled with crucial government support, has provided them with the capacity in the 1990s to assail U.S. producers from within their own borders. CONCLUSION

While many scholars have focused on the contrasting structures of Japanese and U.S. industry and analyzed how institutional factors have affected their relative propensity for competitiveness, this chapter differs in its stress on the ideological factors, in their historical context, that influenced state policy in shaping the structure of two industries. I recognize that this is an evolving context and that the particular advantages and constraints conferred are impermanent. To be sure, domestic and international pressures have opened up the Japanese economy to more direct forms of competition over the last few years. But the benefits gained by specific firms from state policies of this type are potentially cumulative and have provided these firms with advantages over their foreign and domestic rivals that have translated into international competitiveness. The fact that Japanese and U.S. firms might be increasingly allowed to compete in the Japanese market should not distract us from the sustained influence of decades of Japanese governmental subsidies and support. Conversely, we should note the tendencies of the United States. If Japan has responded to greater competitiveness by liberalizing trade (though it has some way to go), coupled with sustained discriminatory treatment among its firms, the United States has responded with increased protectionism coupled with sustained evenhanded treatment of its own firms and foreign investors. The lines between protectionism or free trade abroad and discrimination or nondiscrimination at home have become increasingly blurred. Counterintuitively, protectionism abroad is not purely consistent with discrimination at home. Present developments suggest the opposite pattern is more accurate: U.S. protectionism abroad has been coupled with nondiscrimination at home—the former in this case perhaps being a product of the latter. In this

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respect it will be interesting to see what will happen to new Japanese investors in the United States as well as to the new semiconductor investors that are attempting to escape the clutches of MITI’s domestic control.14 The odds are that their presence as local producers will generate further problems for the competitiveness of U.S. firms in the absence of discriminatory government policies. In broader historical terms, the comparative evolution of liberal democracies and postfascist democracies has resulted in contrasting attitudes about economic policies and the contours of institutional structures. The Japanese propensity to define the game as one that involves picking winners and losers through a series of microlevel policies produces a politics of productivity rather than the liberal politics of distribution. Shifting from the fascist state’s autarkic policies to the postfascist state’s mercantilist ones, this chapter suggests that countries like Japan are better placed to generate effective, competitive policies and economies in the present stage of state capitalism than their liberal counterparts. Finally, this chapter shows that an integrative approach that focuses on the relationship between domestic ideologies and the institutional structures they generate might have two virtues. First, it might provide an effective avenue for generating dynamic theory that explains what influences patterns of economic prosperity. And, more specifically, it may reveal something about the likely competitiveness of national economies. NOTES

1. It is explicitly assumed here that an economic system is not conceived of as an autonomous entity as in neoclassical economics. For an application of this perspective, see North and Thomas (1973). Rather, the predominant form of economic exchange in any society is embedded in a system of property rights that are determined by the political system. The nature of class relations and the sustained development of the capitalist system is therefore not assumed to be economically determined, as suggested by the classical Marxist view. Nor are markets considered autonomous, as suggested by the neoclassical economic view. State institutions have the capacity to politically and economically structure (and restructure) both economic classes and political coalitions. In other words, the state is viewed as more than the “executive committee of the bourgeoisie.” 2. Although the relative newness of most foreign direct investment in manufacturing in the United States explains why there are no major examples of the bailout of foreign firms, other liberal countries, with a longer history of foreign direct investment, have responded precisely in this manner. The best example is that of Britain, which has persistently bailed out foreign firms; for details see S. Reich (1990). 3. I have developed this argument more fully and described its implications in the United States context more extensively in Office of Technology Assessment, Multinationals and the National Interest: Playing by Different Rules (Washington, D.C.: U.S. Government Printing Office, 1993), ch. 3.

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4. For excellent summaries of the position of the developmental school, see Noble (1989) and Anchordoguy (1988, 1990). One corporatist variant of this approach, commonly called the “New Japan, Inc. school,” places a far greater emphasis on the influence of societal actors and focuses on the networks of relationships between the state and the business community. It therefore considers this relationship as interactive and responsive and as one in which business is not purely compliant and in which MITI at least partially articulates the interests of business and not just the state. For an example, see Samuels (1987). 5. This generally takes the form of an adaption of Gerschenkron’s (1962) argument. 6. In a confidential interview, U.S. government officials told me that Japanese negotiators boast of their propensity to discriminate among domestic firms, in this case offering a defense of their treatment of foreign goods and investors. 7. As a result, the fascist state represents an extreme form of statism, being closest to the ideal-type of ideological (and possibly irrational) “strong state” identified by Krasner (1988: 53–61) among those states with relatively developed capitalist economies. 8. The Japanese pattern of industrial adjustment initially relied on an infant industry strategy, which artificially inflates prices for consumers but which also builds a domestic industrial base. In recent decades, however, the Japanese state has systematically dismantled its formal barriers while Japan’s producers have faced growing protectionism in Europe and the United States. Instead of responding by reinstating protectionist measures or seeking third markets in a protected trade zone, Japan’s producers have responded by adjusting to the constraints of, for example, the U.S. VER in automobiles and the U.S. VRAs in steel and machine tools, by refining their products and market segments. 9. Note that reduced aggregate demand and increased production capacity in the United States by Japanese transplants largely rendered its effects null and void. 10. Much of the following account has been drawn from Genther’s (1990) excellent study. 11. Smaller automobile producers often turned to further deals with U.S. firms in order to overcome this constraint, as was the case with Suzuki’s deal with GM and Mitsubishi’s arrangements with Chrysler to provide more finished small autos for the U.S. market. 12. My own research, including confidential interviews with a series of small high-tech “start-up” companies in Silicon Valley, supports this contention. For corroboration, see Office of Technology Assessment, Multinationals and the National Interest: Playing by Different Rules (Washington, D.C., 1993: U.S. Government Printing Office), chs. 3, 4. 13. The reason that these firms became consumer electronics companies was presumably because they were squeezed out of semiconductor production. 14. Many Japanese firms, like Honda, that have not been part of the favored core of firms have been the first to set up production facilities in the United States as a way of escaping MITI’s jurisdiction in its application of quota measures (Prestowitz, 1988). For details concerning the Japanese auto industry, see S. Reich (1991).

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The Pursuit of Competitiveness in East Asia: Regionalization of Production and Its Consequences A remarkable transformation has occurred in the division of labor in East Asia in the relatively brief period since the negotiation of the Plaza Agreement.1 Manufacturing has been increasingly transnationalized and regionalized. The evolving division of labor has been driven to a considerable extent by substantial increases in direct foreign investment, first from Japan and subsequently from the Newly Industrialized Countries (NICs), especially Taiwan and Korea, in Southeast Asia and coastal China. This change has brought about the emergence of new organizational forms whereby units of production have become linked in complex networks of interfirm alliances. The regional political economy is now composed of clusters of interrelated manufacturing sectors that are better described as “complexes” than as unconnected “industries.” Production increasingly takes place in hierarchical networks that are built around production and technological innovation concentrated in Japan. But at the same time, these networks offer opportunities for technological and skill enhancement to firms based in other countries that are able to take advantage of the linkages. This chapter considers the implications of this process of regionalization in terms of four dimensions of political economy: production, specifically the issue of competitiveness; the interstate system; state-society relations in the countries of East Asia; and theory. We argue that regionalization should be seen dialectically as a complex process in which the interplay of all of these dimensions is incorporated. The process of regionalization is built upon a technological and organizational hierarchy; nevertheless, the diffusion of complex manufacturing activity has generated rapid rates of economic growth in all participant countries. Regionalization has helped construct and strengthen complex transnational interfirm linkages but at the same time, owing to its hierarchical nature, has resulted in heightened intergovernmental tensions. There is a further dialectic at work in the sociopolitical realm: the regionalization of production both influences and is itself shaped by the social forces generated by rapid economic change. Finally, 103

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changes in the spatial, organizational, technological, and social aspects of production undermine the utility of the conventional state-centric conceptualization of economic integration, regionalization, and employment. Three sets of interactive factors underlay the surge in foreign investment that has provided much of the region’s dynamism. The first factors are those emphasized by mainstream economists—the change in relative factor costs within the region. Land and labor costs alike soared in Japan, Korea, and Taiwan in the mid-1980s. For companies seeking to increase their production of relatively mature products, the costs of undertaking the investment necessary to increase domestic capacity would have far exceeded those of establishing new facilities elsewhere in the region. The problems exporters faced were exacerbated by the realignment of currencies brought about by the Plaza Agreement. The yen was revalued by close to 40 percent in the years from 1985 to 1987; the NT dollar (Taiwan) by 28 percent in the same period; and the Korean won by 17 percent from 1986 to 1988. Currency appreciations of this magnitude were sufficient to overcome inertia and prompt companies to relocate some aspects of their manufacturing in lower-cost countries and to change patterns of trade. Strategies previously pursued, particularly the primary reliance on local production of exports for the U.S. market, were no longer viable. The second group of factors were political. The Plaza Agreement was significant not just in itself but for what it symbolized: the increasing political contentiousness of economic relations between the United States and the countries of Northeast Asia. The original tensions over trade imbalances and market access between Japan and the United States were extended to Korea and Taiwan as the latter quickly exploited the advantages gained in the immediate post-Plaza period by not following Japan in revaluing their currencies against the dollar. A surge in exports from Korea and Taiwan to the United States in 1987 and 1988 caused the Reagan administration and Congress to increase pressure for a reduction in their trade surpluses.2 As had occurred with Japan, Washington used the leverage it gained from being the single most important export market to coerce South Korea and Taiwan to allow their currencies to float upward against the U.S. dollar. Besides the loss of competitiveness arising from currency appreciation, their trade surpluses were squeezed from both directions: the increasing use of voluntary export restraints and other nontariff barriers by the U.S. restricted their access to the U.S. market. Meanwhile, they were pressured to open their domestic markets to U.S. exports. Both Korea and Taiwan were “graduated” from the U.S. Generalized Scheme of Preferences in January 1988. Interstate tensions in turn generated domestic political forces that interacted with and reinforced underlying economic changes. For instance, the Japanese government increasingly pressured corporations to increase both their foreign direct investment and their sourcing from overseas subsidiaries. The third set of factors concerned changes in the production process and

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the advent of the microelectronics revolution. Microelectronic technology does not merely describe a series of clearly identifiable end products. It constitutes a “basic innovation” applicable in almost all aspects of product and process design (Lundvall, 1992). Microelectronics have facilitated flexible production techniques. In turn, these have decreased the significance of economies of scale, thereby opening up markets for a whole range of nonstandardized products. Smaller companies have been able to gain a footing in increasingly regionalized production chains. The other important dimension of the microelectronics revolution was its facilitation of transnational communication—most pertinently in this instance between parent companies and subsidiaries and with other partners within the region. The consequence of these interacting forces was a dramatic surge in foreign investment from Japan, Korea, and Taiwan. Japan’s investment in manufacturing in other Asian countries in the years 1986–1989 exceeded the cumulative total for the 1951–1985 period. Between 1987–1989, Japanese corporations invested over $3 billion in the Asian NICs, of which 27 percent was directed toward the production of electrical machinery, the single largest sector for its investments. A further $3.6 billion was invested in Indonesia, Malaysia, the Philippines, and Thailand (ASEAN4), with electrical machinery again being the most important sector, with one-third of total investments (data in this section are derived from Tho, 1991). These figures give a partial indication of the important shift taking place in the direction of Japanese investment in Asia. In 1988, Japanese investment in ASEAN exceeded that in the Asian NICs for the first time, mainly because most Japanese offshore production of consumer goods for the global market was moved from the NICs to ASEAN. New Japanese investments in Korea and Taiwan focused on production for their domestic markets (Takanori, 1991: 97). The growth in Taiwanese and Korean investment in ASEAN was even more impressive. At the end of 1987, the total stock of Taiwanese investment in manufacturing in ASEAN stood at $78 million. In the following three years, over $850 million was invested. As was true for Japanese investment, electronics was the single largest sector (with 39 percent of the total).3 In 1985, the cumulative investment from Korea in the ASEAN4 amounted to $42 million; in 1989 alone, new investment from Korea amounted to $132 million. As significant as the change in East Asia’s absolute size of investment was its new export orientation and sectoral distribution. Whereas most previous investment from Northeast Asia had been in the extraction and processing of raw materials for use by home country industry, or in import-substituting manufacturing for the local market, the new investment was predominantly directed toward manufacturing for export. In Malaysia in 1988, for instance, 84 percent of the investment projects approved by the government were export oriented.4 A few aggregate figures provide a striking illustration of changing pat-

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terns of investment and trade in East Asia. In the 1980s, the NICs accounted for 37 percent of all FDI approvals in developing Asia. Japan accounted for 27 percent. For some countries, investment from the NICs and Japan was even more important. Of the total proposed investment approved by Thailand in the 1980s, the NICs were the source of 27 percent and Japan 51 percent (World Bank, 1989: Table 3). And the importance of NIC investment increased at the end of the 1980s: of the 432 foreign investment projects in the non-oil and non-gas sectors approved by the Indonesian government during 1990, 58 percent came from South Korea, Taiwan, Hong Kong, and Singapore (Thee, 1991: 56). Inevitably, these changes in investment flows had a significant impact on competitiveness within the region. Any discussion of the impact of the changing division of labor on competitiveness within the region first has to ask: the competitiveness of whom? The relocation of some stages of the production process and/or the transfer of technology from one company and/or location to another company and/or location affects the competitiveness of a variety of actors, but not necessarily in the same direction. Before we proceed further, a definition of competitiveness is required. The competitiveness of firms is simply their ability to produce and sell products at an acceptable level of profitability in international markets. The competitiveness of nations is a much more problematic concept that is often susceptible to fallacies of aggregation. We find the definition put forward by the Berkeley Roundtable on the International Economy to be persuasive: National competitiveness is the ability of a country to produce goods and services that meet the test of international markets while its citizens enjoy a standard of living that is both rising and sustainable (Tyson, 1992: 1). This definition has the merit of pointing to the need to examine how a country’s efforts to compete internationally affect the interests of its citizens, a point to which we will return later in this chapter. There is, of course, no necessary identity between the competitiveness of firms engaged in the regionalization of production and the competitiveness of the economies of their home countries. The literature on transnational corporations has discussed at length the effects of moving production offshore, so there is no need for significant elaboration in this chapter of the issues involved. Much depends upon the counterfactual: What would have happened to the domestic economy and to the skills and living standards of domestic workers if the company had not engaged in foreign direct investment? Would export and possibly domestic markets inevitably have been lost? Would there have been additional domestic investment so that the productivity and skills of domestic workers would have been upgraded—as has been argued would have been the case had U.S. companies not transferred abroad labor-intensive stages of production? Beyond the counterfactual, the effects of the regionalization of production on the home economy will be determined in part by the type of relationship established between the sub-

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sidiaries of the corporation located in its home country and the regional production network. Do other parts of the production network depend on inputs supplied from within the home country? Have the domestic plants of the company been upgraded so that they now produce components and capital goods rather than undertaking the more labor-intensive parts of the production chain (with an expected upgrading of the skills of the domestic labor force)? THE REGIONALIZATION OF PRODUCTION

The process of regionalization of production in East Asia is occurring at a time of rapid, open-ended technological as well as organizational change in the world political economy. The regional patterns of interaction, information exchange, and collaboration are complex. This complexity belies any simple notion of the region’s less developed countries merely replicating the experience of their more developed neighbors (Bernard and Ravenhill, 1995) or of a region characterized by unilateral domination and control. Rather, the regionalization under way is best understood dialectically, at a number of levels. A prominent feature of the East Asian political economy is that, in contrast to North America or Europe, regional integration has been firm or production led, as opposed to being initiated by governments. This process of integration has produced a number of contradictions. Enduring forms of interfirm collaboration are built around a hierarchy of technological capabilities and production practices, but within these hierarchical relationships there exists mutually beneficial exchange. These arrangements both create and foreclose opportunities for the transfer of technology and know-how. They facilitate both direct transfer and user-producer interaction, yet at the same time they encourage entrenched and hierarchical patterns of supply of new technologies—technologies that are not easily replicated. Similarly, intraregional direct investment has led to contrasting patterns—backward linkages with local suppliers on the one hand and, on the other hand, the adoption of highly integrated production systems in which local firms are not likely to participate. Finally, integration resulting from interfirm linkages has created complex forms of interdependence that have given rise to renewed interstate tensions. It would be misleading to think that intraregional production in East Asia commenced with the reaction of Japanese industry to the effects of the Plaza Agreement. Japanese production in Taiwan, Korea, and Manchuria was an integral part of the pre-1945 Japanese empire. In the postwar period, Japanese companies have been collaborating with their counterparts in Taiwan since the late 1950s and in South Korea since the middle of the 1960s in a range of industries, from transport equipment through apparel.5

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There are, however, two qualitative changes in the post-Plaza regional political economy. The first is spatial. The export-oriented manufacturing taking place in countries such as Malaysia and Thailand, or parts of coastal China, has become linked to production in Northeast Asia, so that we may now speak of regionalized manufacturing activity in a number of industries. This activity transcends the sum of transactions between “national” industries, the framework of most economic analysis. Rather, it constitutes a pattern of industrial activity that can be comprehended only by looking at how geographically disparate activity in East Asia is linked together regionally. The second prominent change is the shift from the company to the “network” as the locus of productive and innovative activity. Firms that are linked together and interact in chains of production, exchange, and distribution now constitute the basic organizational “unit.” Firms, or even decentralized divisions within firms, maintain a degree of autonomy in the chain, but all significant activity is in some way coordinated with other organizations in the network.6 This shift has its origins in the vertical interfirm manufacturing and distribution chains, and in the horizontal intermarket industrial groups (keiretsu), that emerged in postwar Japan.7 The diffusion of just-in-time production and value-added networks in Japan have facilitated greater interfirm coordination. This trend toward networks has also been strengthened by the rise of component suppliers as technological innovators in their own right, and by the way microelectronic technologies lend themselves to research and development (R&D ) based on intersectoral collaboration and producer-user interaction (Kodama, 1991: 49–50). The postwar roots of interfirm alliances in East Asia date back to the direct investments in Taiwan by Japanese firms in industries, such as electronics and machinery manufacturing, in the late 1950s. These were aimed at establishing a presence in the local market (Kunimitsu and Sato, 1990). These investments were followed by a series of equity and nonequity alliances between Japanese and local enterprises in response to local ownership and content regulations promulgated by the Taiwanese government (Bernard, 1994). The same pattern was replicated, to a lesser extent, in Korea in the aftermath of the signing of the Japan-Korea normalization treaty of 1965 (Ishida, 1987). The regionalization of manufacturing activity, and of the “architecture of supply” of a range of know-how, components, production equipment, and materials, has resulted in these networks that were once characterized by geographical and cultural propinquity now being extended in ways that link Northeast and Southeast Asia.8 The linkages are largely built around the corporate alliances that already exist, both within Japan and between Japanese and Taiwanese/Korean producers. But alliances should not be seen as being static. While ongoing alliances have been spatially extended to Southeast Asia in the form of links with intrafirm overseas alliances or with the affiliates of related firms, they have the potential to incorporate indigenous com-

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panies or local-foreign joint ventures. This was the case between Japanese and Korean/Taiwanese firms in the 1960s, and is also in evidence in the use of kinship by Taiwanese entrepreneurs to locate suitable partners to establish affiliated companies in Southeast Asia. These regional networks, to the extent that they are built around Japanese innovation and the competitiveness of Japan’s machinery and component manufacturers, are hierarchical. Thus, the supply of key technologies—such as compressors in the manufacture of air conditioners, display technologies used to produce an array of office automation equipment, or derailleurs for bicycles—are controlled overwhelmingly by Japanese companies.9 Similarly, a range of intermediate inputs from computerized sewing equipment to automatic insertion devices must be sourced exclusively or primarily in Japan. Even though companies in Taiwan, Korea, or Hong Kong may be able to produce a range of capital goods for export-oriented production, the latest technology that will facilitate continued export competitiveness continues to come from Japanese suppliers. An important but often overlooked point is that even though many of the products, such as air conditioners, color TVs, and microwave ovens, that are now being produced in the East Asian NICs and in ASEAN countries are regarded as “mature,” their technologies continue to be developed through the incorporation of increasingly sophisticated microelectronic components.10 Given the speed with which knowledge of new products is acquired by consumers in what is literally a global marketplace, successful exporting requires that products embody the very latest options and technologies. These technological improvements result from the application of advanced skills in engineering and materials sciences that often are beyond the capacity of the countries in which the final products are now manufactured. Because the transfer of technology has been an important element in the emerging networks of production, the contradictions inherent in the process of technology transfer are worth considering briefly. Students of technological change have done much in recent years to dispel conventional ideas that technology is a commodity that is universally available, as if it was embodied in a set of blueprints.11 Rather, they have demonstrated that technological knowledge is often specific to individual firms; is dependent on the prior expertise that such firms have built up; often evolves through a process of learning-by-doing; is manifested in particular production processes and organizational structures; and comprises much tacit (that is, uncodifiable) knowledge that is embodied in the personnel employed by a particular company.12 That companies spend a larger percentage of their research and development budgets on the development of products than on research illustrates both the importance of learning-bydoing and the tacitness of technology.13 The mere selling of machinery to another company thus is but one small part of an effective process of technological diffusion. Without continued

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linkages with suppliers, companies may find that their gains from the purchase of machinery are far from optimal. Purchasers may be dependent on the machinery suppliers for inputs, for spare parts, and (because of the tacitness of technology) for the technical expertise necessary to operate the machinery efficiently. Hence, although the process of technology transfer may benefit the recipient firm, it may also impose on it a new set of dependencies. Technical cooperation agreements signed by Japanese companies often reinforce such dependencies by requiring beneficiaries to enter into long-term contracts for the purchase of raw materials or components from the supplier or from another equity-related Japanese firm operating in the recipient economy.14 And as important as such formal agreements is the “locking in” of firms to particular technical standards employed by equipment suppliers. We will argue that the process of technology transfer is often perceived as mutually beneficial by supplier and recipient. But again there are contradictions involved. Suppliers of technology inevitably are concerned lest recipients use such technology to place their own production at a competitive disadvantage. Not surprisingly, Japanese corporations have often been unwilling to transfer their latest technologies to potential rivals in other countries in the region (provoking frequent complaints from firms and governments).15 Furthermore, the tacitness of technology (its embodiment in the skills of company personnel) is a factor that can inhibit the transfer of technology from Japan to other countries in the region. Japanese companies fear that personnel who have received advanced technological training in Japanese subsidiaries in other parts of the region will seek to establish their own companies—with good reason, because this process has been a primary means of technology diffusion, particularly in Taiwan. For Japanese companies, however, with their tradition of lifetime employment, such an exodus of skilled personnel is an unwelcome development to which they are not accustomed.16 Therefore, the network as an organizational form is not merely “transactional” but also implies a degree of ongoing interaction and coordination, as well as a certain amount of information sharing. These networks combine opportunities for learning and skill transfer with hierarchy. For example, Taiwanese machine tool manufacturers rely almost entirely on the Japanese company Fanuc for their supply of control devices, which represent about 40 percent of the cost of their final product. In order to convert to exporting digitalized rather than mechanical machine tools, companies have collaborated with Fanuc to custom design products and have arranged for Fanuc to dispatch technicians to instruct Taiwanese machine toolmakers how best to utilize new equipment.17 This illustrates the way ongoing interfirm alliances can facilitate the transfer of nonembodied technology. Another way that East Asian networks facilitate the transfer of knowhow is through the use by Japanese companies of the attributes of the dif-

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ferent production practices that exist throughout the region. In this sense, we can understand hierarchy not merely in the narrow state-centric terms of a hierarchy of “national levels of development,” but also in terms of the divergent ways production is organized (Bernard, 1994). These differences in organization in turn relate to the configuration of social forces and the specific historical circumstances of each society in the region. Japanese production, which is marked by a high degree of interfirm integration and the application of a myriad of sophisticated “post-Fordist” techniques, is thus linked on the one hand to small-scale, predominantly family-based firms in Taiwan and Hong Kong that can flexibly adjust to changes in global demand, and on the other hand to large-scale vertically integrated conglomerates (chaebol) adept at capital-intensive mass production in Korea, foreign-owned enclave type assembly in Southeast Asia, and state- or township-owned enterprises in China. There is considerable scope for networks of production to provide benefits to all participants. For example, Korea’s chaebol possess sufficient capacity to engage in capital-intensive mass production of standardized high-technology products. There have been two different bases for alliances formed between Japanese companies and the chaebol that provide for technology transfer. The first is for Japanese manufacturers to make use of Korean capacity to manufacture mature standardized products such as microwave ovens, thereby obviating the need for increasing their own capacity in products with limited life spans. In return for producing Japanese brand names on an original equipment manufacture (OEM) basis, Korean companies receive technology and quality control know-how. The second motive for the provision of technology is to lock Korean companies into Japanese standards and specifications and to use the broader production alliance to set global industry standards. An example of this is the recently completed agreement whereby Toshiba, the world’s largest producer of dynamic random access memory chips, will transfer its new “flash memory” technology to Samsung, Korea’s largest semiconductor producer. Toshiba, locked in fierce competition with the U.S. firm Intel, is hoping that this will facilitate its format becoming accepted as the industry standard (Nikkei Shimbun, December 11, 1992: 12). The alliance provides Samsung with favored access to the new technology in Korea and positions it to compete globally. Production networks have become regionalized in two distinct but related ways. One is the loosely coordinated location by Japanese companies of a series of related manufacturing and, more recently, R&D activities throughout East Asia. Webs of Japanese investments offshore that maintain the vertical and horizontal interfirm relations existing in Japan have resulted in integrated parts production and assembly of a range of different products, especially in electronics- and machinery-related sectors, in different countries in the region. These arrangements are based largely on the pro-

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curement of key components and production equipment from Japan (Waga Kuni Kigyo no Kaigai Jigyo Katsudo, 1990: 169). They help create geographic specialization of particular products within the region. For example, large-scale assembly for export of low-end consumer electronics in Malaysia has been accompanied by the setting up of related electronic components and devices production by Japanese parts manufacturers. Production of these components has become regionally concentrated in Malaysia. This production not only supplies Japanese or third-country production in Malaysia itself, but has become the supply base for low-technology components to the Taiwanese and Hong Kong consumer electronics industries as well.18 Similarly, Japanese companies have located regional production of low-end camera and image reproduction equipment in Taiwan, as well as components for computer peripherals and electrical appliances.19 A second form of network linking North and Southeast Asia flows out of the spate of investments by Taiwanese and, to a lesser extent, Korean companies in Southeast Asia and mainland China. This form of network links together firms from more than one country. Taiwanese and Korean firms with ongoing ties to suppliers in Japan or to Japanese firms based in their home countries continue these ties in their offshore operations. Overseas investments are often taken in consultation with these suppliers or with firms for which OEM manufacturing is being carried out. It is thus misleading to characterize these investments solely in state-centric terms, as is done in statistics on direct foreign investment that indicate only a country of origin for a particular investment. In those industries where production involves the use of sophisticated machinery for the manufacture and assembly of large numbers of components and materials, production is transnational in its organization and therefore not easily understood through indicators of “international” transactions. An example helps illustrate this complexity. Sangshin Electric is a medium-size company—with 430 employees and over U.S. $17 million in sales in 1991—that is one of the two main producers in Korea of dipped and film mica capacitors and high-grade L/C filters and delay lines.20 These products are used in video equipment, wireless telephones, and a range of industrial products. Sangshin was set up as a joint venture between Sangshin and Soshin Denki, a Japanese components manufacturer also specializing in capacitors and filters. Soshin Denki has a 35 percent equity share in Sangshin, but the company is Korean in its management. The key inputs for production are procured overwhelmingly from Japan, either through Soshin or through Kanematsu Gosho, Soshin’s trading company. Sangshin’s technicians are also regularly sent to Japan for training, and Soshin dispatches personnel to help solve production problems and train Sangshin’s staff how to utilize new equipment and techniques. Sangshin in 1991 exported 30 percent of its production. The United

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States, followed by the United Kingdom, were its biggest markets. The remainder was sold primarily to the big three domestic electronics companies: Samsung, Gold Star, and Daewoo. Sangshin maintains close affiliations, particularly with Samsung and Goldstar, and has worked with both on quality control in manufacturing. Sangshin is thus linked both to large-scale domestic production and to Japanese components and machinery suppliers. In 1989, Sangshin, after consultation with its main Korean customers, collaborated with Soshin Denki and Kanematsu Gosho to establish a factory in Malaysia. In response to both rising labor and production costs in Korea, and the desire to take advantage of the growing assembly of low-end consumer electronics and telecommunications equipment in Malaysia and Thailand, the factory was to produce low-end filters and capacitors. The management of the venture was predominantly Japanese. This was because the Japanese side was more adept at operating in a cross-cultural work situation. It also facilitated forging links with the large number of Japanese producers that had set up operations in Malaysia since 1987. Because the production was of relatively unsophisticated components, however, some of the applicable machinery and other inputs were procured through Sangshin in Korea, rather than from Japan, as a cost-reducing measure. The production was initially geared primarily toward reexport to Korea, but it also supplied other electronics assembly in Southeast Asia. For example, Sangshin has had an ongoing relationship as a component supplier to Datong, Taiwan’s largest producer of consumer electronics and electrical machinery. Through this relationship it supplies the Thai subsidiary of Decca, Datong’s UK-based affiliate. The above example illustrates the way networks render it difficult to characterize particular economic activity as belonging to a specific nationality or to discuss individual transactions as if they are isolated spot-market events. However, both variants of networks—those of regionally dispersed Japanese affiliates and those that link production units from more than one country—can both create and limit opportunities for local participation. To the extent that foreign direct investments in manufacturing constitute assembly platforms, there are ultimately opportunities for host countries to provide inputs other than cheap labor and subsidized land. Where there is no (or only a limited) indigenous industry antedating foreign investment, as was the case in Southeast Asia, it is likely that assemblers will rely largely on procuring key inputs overseas and on persuading their home-country suppliers and subcontractors to themselves establish local subsidiaries. As surveys of Japanese electronics and machinery companies indicate, local firms can act as suppliers of uncomplicated items (NIES, ASEAN de no Nikkei Kigyo [Seizigyo] no Katsudo Jokyo, 1992). However, when Japanese companies set up tightly integrated production processes elsewhere in East Asia, they make use of just-in-time deliveries, and require ongoing communication, constant exchange of personnel, and high levels of skill and integrated

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organization within all related firms.21 They have therefore often excluded local firms from participation on the grounds that they are unable to meet Japanese expectations of skill and quality standards, and on the assumption that communication between firms will be smoother and devoid of misunderstandings if all participant firms are Japanese. In such circumstances, Japanese production practices do contribute to enhancing the local skill base, but do so in ways that are largely organization specific, with few linkages to local firms. A shortage of technical staff in Japan, in conjunction with the geographic concentration of certain kinds of manufacturing activity in specific parts of East Asia, have given Japanese companies the impetus to draw on the large pool of technicians that has developed, especially in Taiwan, Korea, and Singapore. They have done this by setting up regional centers for research and development outside Japan.22 This R&D trend has been strengthened by the decision of nonregional firms to take advantage of the regional production capabilities in electronics- and telecommunicationsrelated products. Philips, Europe’s largest electronics company, for example, decided in 1988 to establish its worldwide center for design and manufacture of computer visuals in Taiwan (Tian Xia, January 1993: 39). There have been two consequences of this trend. First, indigenous R&D is being set up in ways that reinforce the hierarchical patterns of the region’s political economy; and thus, Taiwan’s future as a center for development of computer visuals is predicated on the links between Taiwan’s monitor makers and the Japanese suppliers of the key display technologies: liquid crystal displays and cathode ray tubes. REGIONALIZATION, COMPETITIVENESS, AND INTERSTATE TENSIONS

The changing division of labor in East Asia has also brought contradictions in the form of increased interstate tensions. While the fluidity of production networks and their variance across sectors makes generalization hazardous, some trends have become well established in the last decade. Industrial upgrading efforts in South Korea and Taiwan and the advent of large-scale exporting of relatively low-technology manufactured goods from Southeast Asia have led to a surge in the export of capital goods and components from Japan. All the states in the region (with the exception of China)23 have experienced growing trade deficits with Japan as their imports of not only Japanese consumer goods but also capital goods and components for local manufacturing rose in the second half of the 1980s (see Table 5.1). Studies of foreign subsidiaries of Japanese corporations have shown that they tend to import a larger percentage of inputs from their home country than do branches of TNCs domiciled elsewhere (Kreinin, 1988). In Asia in

Competitiveness in East Asia Table 5.1

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Japan’s Trade Balance in Manufactures with Region (billion $) China Hong Kong Taiwan Korea Thailand Malaysia Singapore

Source: UN trade tapes.

1985

10.39 5.57 2.67 4.11 1.72 1.85 3.25

1991

.05 13.62 10.79 8.93 6.39 5.59 9.79

the late 1980s, the average reliance on imports from Japan by Japanese affiliates in all manufacturing sectors (including food and fuel products, where there is a high percentage of local procurement) was over 40 percent. Japanese affiliates in machinery manufacturing in Asia sourced close to half of their inputs from Japan. The dependence on Japan for capital equipment is even higher—more than 75 percent for affiliates in ASEAN in the late 1980s.24 As we have detailed elsewhere, while imports of manufactures from Japan have soared, exports of manufactures from other countries in the region to Japan have increased only modestly; the Japanese market remains relatively closed (Bernard and Ravenhill, 1995; Ravenhill, 1993). Instead, these new exports have found markets primarily in North America and, to a lesser extent, in Europe. Not only Korea and Taiwan, but also Malaysia, Thailand, and (especially) China have developed surpluses in trade in manufactured goods with North America—Malaysia and Thailand turned deficits in manufactures trade with the United States into surpluses in the period 1985–1990; in the same years, Singapore more than quadrupled its surplus with the United States. As a consequence, trade tensions have been regionalized. The trade dispute between the United States and Japan was initially widened to include Taiwan and South Korea after these two countries took advantage of the appreciation of the yen against the dollar in the immediate post-Plaza period to increase their exports to the U.S. market (Bernard, 1991; see also Chapter 6 in this volume). This dispute now threatens to engulf the successful exporters of Southeast Asia, as well as China (Stubbs, 1992). Other trade triangles with concomitant interstate tensions are developing as Taiwan increases its exports of components and capital goods to China and Southeast Asia. For the Japanese economy, a trade surplus has been beneficial in that it has facilitated the acquisition of overseas assets by Japanese corporations.

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On the other hand, the sustained trade surpluses that Japan has run with the rest of the region have generated political frictions with the governments of these countries, have provoked retaliation in some parts of the region in the form of prohibitions on the import of certain categories of Japanese products,25 and have provided further ammunition for those who wish to argue that Japan is an unfair trader. The movement of low-end manufacturing offshore provoked fears in Japan that there would be a “hollowing out” of the domestic economy and a loss of production expertise (Yoon, 1990). There is little evidence, looking from the perspective of the domestic economy as a whole, that these fears were justified—as is evident from our earlier discussion of Japan’s burgeoning trade surpluses with the region. For many Japanese corporations, transfer offshore of the manufacture of basic consumer goods has led directly to the sale of machinery and components to subsidiaries or to independent companies in the region. Many corporations have benefited from a process in which production has been upgraded from less sophisticated finished goods to consumer goods incorporating more advanced technologies, and to the manufacture of intermediate goods that often generate economies of scope. As an illustration, consider the Japanese electronics industry. Although the value of exports of consumer electronics in 1990 was approximately one-third less than in 1985 (but still above the 1981 level), growth in the exports of industrial electronic equipment and in electronic components substantially outweighed this loss (see Table 5.2). Particularly noticeable is the rapid growth in the value of components exports—up by more than 60 percent since 1985. Note also that the value of production of consumer electronics for the domestic market (domestic production less exports) in 1990 was nearly 40 percent above the 1985 level. The regionalization of production generally appears to have improved the competitive position of most Japanese corporations and of the Japanese economy in the aggregate. Table 5.2

1981 1985 1990

Japan’s Production and Exports of Electronic Equipment (billion Yen)

Consumer 3,669 4,912 4,436

Domestic Production

Industrial Components Consumer 3,817 7,614 11,335

3,333 6,027 8,150

2,600 3,805 2,618

Exports

Industrial Components 1,344 2,919 3,443

1,728 2,971 4,880

Source: Ministry of Finance data reported in Electronic Industries Association of Japan, Facts and Figures on the Japanese Electronics Industry 91 (Tokyo: Electronic Industries Association of Japan, 1991), pp. 14, 18.

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Generalizations about the impact that the regionalization of production has had on companies from other countries in the region, and on their national economies, are particularly hazardous given the diversity of arrangements, size of firms, and levels of national economic development. Much depends on the terms on which firms have been incorporated into networks—for example, the limitations that they have accepted on the use of technologies transferred. From both a firm-level and a national perspective, there is always a potential danger of becoming excessively dependent on one party for inputs or for access to markets. Perceptions of the benefits and costs of the new linkages may well differ depending on where one sits. State elites will often be more concerned about the possibilities of excessive dependence, or the desirability of competing in prestigious high-end product markets, than will managers of individual firms that see an immediate profit to be made from current relationships. The extent of benefits derived from incorporation into such networks will be determined by the skills of managers and engineers and their ability to exploit the new opportunities available to them, as well as by the size and complexity of a country’s existing industrial base. In China, particularly in the greater Shanghai, Beijing-Tianjin, and Northeast regions, a large industrial base was developed as part of the pre1978 “autocentric” development strategy. Tensions with both the United States and the Soviet Union also helped foster a core of sophisticated, knowledge-based institutions linked to military production. Thus, unlike other countries in the region, China’s recent promotion of export-oriented production is not a process of “industrialization” as much as it is one of “reindustrialization,” wherein existing industrial plant and capacity are upgraded and reoriented. There are numerous points at which Chinese industry can participate in regional production networks (Goodman, 1992). One example is the recent attempt by Toshiba and Sony to build a supply base for electronic components involving both affiliated Japanese companies and Chinese firms in the Hangzhou area of Zhejiang province south of Shanghai (Ekonomisuto, January 26, 1993: 70–74). In Southeast Asia, where backward linkages with local companies remain extremely limited, the potential for technology diffusion is far less than in China or Korea and Taiwan.26 But, looking strictly at possible counterfactuals, the growth of regional production networks has offered companies access to technologies and markets that would probably not otherwise have been available. Production skills have been upgraded throughout the region; Southeast Asian countries have benefited from substantial inflows not only of technology but also of foreign capital. Nonetheless, interstate tensions have arisen from the process of regionalization of production. Throughout the region there has been growing concern about Japanese economic dominance, not just because of disquiet over trade imbalances, but

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also over fears that dependence on Japanese corporations for technology will leave domestic corporations and the national economy as a whole vulnerable to Japanese pressures. These fears have always been particularly acute in South Korea and, increasingly, in Taiwan; in Korea, in particular, perceptions of Japan continue to be shaped by bitter memories of the colonial period. In its recent industrialization, Korea, like Japan itself, has preferred to obtain technology through licensing rather than from foreign direct investment (Mardon, 1990). Although regulations on FDI were liberalized in 1989, corporations and the government remain wary of the dangers of technological dependence on any one source in general, and on Japan in particular. Even those companies in which a Japanese corporation has a significant equity holding (e.g., Hyundai Motors) attempt to ensure that technology is sourced from diverse suppliers (Amsden and Kim, 1989: 586). Taiwan has had a more liberal foreign investment regime than Korea but has also recently shown a growing concern with the dangers of excessive reliance on Japanese technology. For instance, Simon (1992: 134) reports that cost considerations were subordinated to fears of dependence in the Taiwanese government’s choice of U. S. and Western European firms as sources of technology for the petrochemical industry. Unlike Korea and Taiwan, the member states of ASEAN gave the impression in the 1980s that Japanese corporations were their preferred partners (despite anti-Japanese riots in Thailand and Indonesia in the previous decade). The increase in capital outflows from Japan in the mid-1980s coincided with growing disillusionment with the performance of the state sector in Southeast Asia (for the Malaysian experience, see Bowie, 1991), and with pressures from international financial institutions on these countries to adopt more liberal and outward-oriented policies. Japan was viewed as a country to be emulated: Prime Minister Mahathir of Malaysia urged his country to “look East” and to establish a “Malaysia Inc.” modeled on the Japanese developmental state. In some instances, Japanese corporations were given privileged status: Mitsui, for instance, was the only private sector equity participant in the Batam industrial park. But the contradictions in the regionalization of production have come increasingly to the fore. The growth of Japanese investment was always opposed by smaller companies that had not been chosen as partners by the Japanese. And in Malaysia, bumiputera (ethnic Malay) entrepreneurs were more enthusiastic about Japanese investment than were Chinese entrepreneurs. The Mahathir government’s policy was to discourage Japanese companies from entering into corporate alliances with Chinese-dominated firms; in addition, some foreign firms were exempt from rules requiring a specific bumiputera shareholding (Phongpaichit, 1990: 92). Gradually, Southeast Asian governments have become more vocal in their criticism of what they perceive as the reluctance of Japanese corporations to transfer technology,

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to promote backward linkages with local partners, and to train local personnel for management roles. Growing concern throughout the region about the consequences of increased dependence on Japanese corporations may go some way toward alleviating the fears expressed by governments and corporations from outside the region that the growth of production networks may have a negative impact on their economic interests. There are indeed some legitimate grounds for these concerns. In particular, the adoption of Japanese technical standards in various sectors throughout the region does threaten to exclude machinery and component suppliers from other OECD countries. And there is little doubt that the adoption of such standards has been actively promoted not only by Japanese suppliers, but also through the technical assistance provided by the Japanese government in a variety of forms, including feasibility studies for particular industries, help in the establishment of business associations, and the training of engineers and managers in Japan. To suggest, however, that the Japanese government is successfully promoting a contemporary version of an East Asian Co-Prosperity Sphere is to overestimate the ability of the Japanese bureaucracy to undertake a coordinated program of action on the multitude of issues involved in the regionalization of production (Rix, 1993). Japan does indeed provide two-thirds of the foreign aid received by ASEAN countries, some of which has been devoted to building infrastructure in support of the activities of Japanese companies. And it would be naive to argue that what is beneficial for Japanese corporations in Southeast Asia is necessarily also good for those from other countries. But notwithstanding various official “blueprints” for the region,27 the Japanese government has at best played a supportive role in economic developments that have been overwhelmingly driven by the interests of private sector actors. The desire of corporations and governments in the region to diversify their sources of supply provides opportunities for corporations from other OECD countries. There is, in fact, some evidence that, other factors being reasonably equal, U.S. corporations are often preferred as suppliers of technology, both because they are willing to transfer the latest technologies and because they impose far fewer conditions on technology transfers. But other factors are seldom equal. Japanese corporations have a far better reputation than their U.S. counterparts for the reliability of their technology and for their willingness to provide speedy after-sales service. As we argued earlier in the chapter, technology transfer should not be conceived of as merely the sale of a piece of machinery, but rather as a lengthy process of organizational learning by the recipient that necessitates ongoing communication with the technology vendor. Japanese corporations are best placed to play this role because of the extensive networks they have developed throughout the region—facilitated, of course, by their geographical proximity.28 While corporations domiciled outside the region may be excluded from

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some manufacturing networks, they are members of other corporate alliances that link Japanese, Korean, Taiwanese, and U.S. and/or European firms. One of the most notable trends arising out of the regionalization of production in East Asia is the establishment by U.S. and European companies of subsidiaries (initially in Japan, but increasingly in Taiwan) in an effort to take advantage of the new networks. In part, their role is intelligence gathering, but the reasons for their location also include proximity to what has become the world’s leading center for manufacturing and for R&D in a wide range of sectors linked to the manufacture of electronics products. Motorola, for instance, has established a manufacturing branch in Taiwan to exploit the expertise of local firms in manufacturing electronics components. These local firms, in turn, are largely dependent on Japanese technology. Another trend noted earlier in this chapter is for R&D activities to be increasingly concentrated in such relatively lower-cost locations as Taiwan. The concentration of R&D facilities and production plants is testimony to the way in which technological spillovers and other externalities tend to be geographically bounded (Krugman, 1991). Thus, while mobile U.S. or European capital may not be excluded from sharing the benefits from the spillovers generated by the new networks of production, such gains may be largely confined within the economies of the region. Such a conclusion reinforces the argument that what is important from the perspective of U.S. competitiveness is not the nationality of the firms involved but where production is carried out (R. Reich, 1991). The loss of R&D activities to Taiwan might further damage the competitiveness of the U.S. economy through a loss of technological spillovers that would otherwise have benefited firms and regions within the United States. REGIONALIZATION AND CHANGING STATE-SOCIETY RELATIONS

How competitiveness has been interpreted in East Asia has varied across time and space. Its different manifestations have depended on the configuration of dominant social coalitions, the way a particular country has been linked to the global political economy, and the material level of socioeconomic development and technological sophistication. The desire, within these differing contexts, to foster firms capable of participating in production for world markets and enhancing the local pool of skills and know-how has pervaded the region, commencing in Japan in the early 1950s,29 followed by Taiwan in the early 1960s and Korea in the mid-1960s. This narrow set of “economistic” goals, coupled in the latter two cases with anticommunist, national security concerns, has come to represent what can be called a “developmental ideology.”30 The developmental coalitions and the primacy of their social project precluded the emergence of political “space”

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for the realization of other goals, such as increased forms of political participation, minimum employment standards, worker rights, equitable treatment of women, and concern for the environmental consequences of industrial activity. There have been a number of changes both in the structure of Japanese society and in the role of the state that are linked to the regionalization of production. Demographically, Japan has had the lowest birth rates and highest longevity rates in the advanced capitalist world. In 1990, Japan’s birth rate fell to 1.54 percent, while those sixty-five or older came to constitute 16 percent of the total population. Official estimates predict that the elderly will constitute 20 percent by 2110 (Omori, 1993). This has contributed to a growing labor shortage, which has been a key reason behind the decision of Japanese companies to locate R&D activities in neighboring countries in an attempt to incorporate skilled technicians from around the region into their research, development, and production processes.31 State institutions, particularly the Ministry of International Trade and Industry, have actively promoted the relocation of manufacturing to other parts of Asia, both to facilitate industrial restructuring and to alleviate bilateral trade friction. They have also pressured Japanese firms to increase exports to Japan from their overseas affiliates (see Denpa Shinbun, January 23, 1992). In South Korea, the highly concentrated industrial structure built around oligopolistic, diversified chaebol32 operated on the basis of state provision of subsidized credit for targeted industries, control of foreign direct investment, management of trade, and suppression of labor’s ability to organize or articulate demands for higher wages and better working conditions (Amsden, 1989; Rogers, 1990). In Taiwan, the mainlander-Taiwanese cleavage has been the primary factor in bringing about a quite different industrial structure. The state, controlled by the mainlander Guomindang Party, has discouraged large concentrations of private “Taiwanese” economic power by ensuring the prominence of state-owned companies in many capitalintensive industries and by encouraging Japanese and U.S. investment in targeted industries. This fragmented industrial structure has been reinforced by the tendency of employees, where possible, to launch their own businesses and their ability to gain access to the necessary capital through curb-market financing provided by networks of personal relations (guanxi). These trends have resulted in a proliferation of small- and medium-size firms that have linked themselves to production for global markets either directly or through ties with Taiwan’s large business groups (Greenhalgh, 1984; Silin, 1976). Both Korean and Taiwanese firms hold conceptions of competitiveness built around cost minimization and technological learning through copying. These beliefs gave rise to a short-term management ethos centered on mass production on an OEM basis at the low end of product markets, primarily for export to the United States. This short-term horizon and proclivity to copy have remained largely unchanged even as exports have shifted from low- to

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mid-technology products, and as Korean chaebol have shifted part of their production in sectors such as electronics and automobiles from OEM to inhouse brands. This strategy of product upgrading has not brought about corresponding improvements in manufacturing skills, for reasons that differ in Taiwan and Korea. In the case of Korea, authoritarian management traditions and a legacy of conflictual labor relations have continued to inhibit the development of high skill levels in blue-collar workers and the introduction of sustained intrafirm training for them. Despite the rise in labor unrest in the late 1980s, there was no change in management’s attitude toward independent union activity or tolerance of any incursion into its managerial prerogatives (Ogle, 1990; Asia Watch, 1990). Despite the absence of significant upgrading of labor skills, Korean firms still managed to realize record profitability, initially owing to export demand following the appreciation of the Japanese yen and, from 1989 onward, because of the expansion of domestic consumption. Korean firms thus were able to maintain a degree of cost competitiveness and profitability across a range of capital-intensive industries, while maintaining the attitudes and institutions of “cost-minimizing mass production” (Rogers, 1992). In Taiwan, high turnover rates (owing to employees leaving their jobs to start their own businesses), a paucity of intrafirm training schemes, a strong tendency for small and medium-size firms to copy successfully strategies in narrow segments of product markets (so that the range of necessary technical knowledge and skill was limited), and the difficulty that these small firms have in raising capital have all helped to keep down the level of manufacturing skills. In consequence, companies have not been able to make the best use of imported high-technology capital equipment. These trends toward regionalization of production, increased prominence of intraregional production networks, and technological change place new demands on state institutions and the way production is organized. Technological innovation in Japan and large-scale, low-wage assembly in Southeast Asia and coastal China have created pressures for industrial restructuring and the abandonment of many past management practices. Concurrently, interstate tensions and newly emerging social forces in Korea and Taiwan are also placing demands on the state, helping to redefine statesociety relations and the way local economic activity is linked to both the regional and the global political economies. Furthermore, democratization has unleashed social forces that will no longer tolerate many of the negative consequences of past practices. The most obvious example was the surge in union organizing and industrial disputes in Korea from 1987–1989. The Korean Ministry of Labor recorded 900,000 new union members and 7,106 strikes, resulting in 18,597,000 lost working days during this three-year period. The result was a more than doubling of wages in the major export industries: electronics and textiles/appar-

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el.33 Another example can be seen in the prodigious expenditure of public funds for the construction of housing in fulfillment of the election pledges made by then presidential candidate Roh Tae-woo in 1987. This represented a claim on public resources that would not have been made prior to the political opening of 1987. Similarly in Taiwan, recently unleashed social forces have interjected a new range of concerns into what hitherto would have been seen as “technical” bureaucratic decisions. This can be seen in the heated local protests over the ecological consequences of the construction of the island’s fourth nuclear power plant and over government approval of the construction of a naphtha cracking plant by Taiwan’s largest corporation, Formosa Plastics. It is also seen in the protests by landowners in Taipei county against state expropriation of land for new infrastructure projects (Free China Review, November 1992). In addition to the demands on the state from these new social forces, additional pressures from both without and within are helping to redefine the role of state institutions in economic activity. We have already noted the pressures exerted by the Reagan and Bush administrations on both Korea and Taiwan to liberalize their trade and financial markets. A corresponding pressure has emerged domestically from certain business groups that are also seeking “liberalization” of foreign currency regulations to facilitate offshore investments, the reduction of domestic trade restrictions to placate foreign governments (and thereby ensure continued access to overseas markets), and a freeing up of the allocation of credit through the privatization of banks and the liberalization of financial markets. This agenda has been buttressed by the advent of U.S.-trained liberal economists as an influential lobby group promoting free trade and free market policies as the only viable path to industrial restructuring (Amsden, 1992). Conflicting pressures may be forcing a realignment of state-society relations in both countries, but that does not a priori imply imminent convergence of Korean or Taiwanese state institutions with those of an idealized Anglo-U.S. model. The changing role of the state is taking place in the context of an already existing configuration of bureaucratic institutions and an industrial strategy that has given rise to production practices that lack innovative capacity. In this context, regionalization and technological change are altering, but not necessarily reducing, the role of the state. Whereas export promotion schemes and blanket prohibition of imports may be a thing of the past, the state is facilitating the adjustment of the domestic political economy to the changing requirements of regionalized production. For example, states are undertaking massive infrastructure projects to promote greater integration with regional and global structures of production and finance. In Taiwan, the government has embarked on a $303 billion Six-Year National Development Plan to upgrade the island’s infrastructure. Likewise, in Korea, the state has undertaken a $855 million R&D project to construct a

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broadband integrated services digital network that it hopes will form the basis of a new telecommunications infrastructure. The Communications Ministry is coordinating the project, which involves sixteen different firms (Korea News Review, May 15, 1993: 10). In Taiwan, where the technological level of most small and mediumsize companies is low and the orientation is excessively short-term, the state continues to provide assistance in the dissemination of know-how and to carry out research and development projects in important future technologies. Projects are not aimed at achieving technological breakthroughs or at capturing markets for the most advanced products; rather, they are intended to ensure that an adequate knowledge, skill, and infrastructural base exists to allow Taiwanese producers to offer a range of products and services that complement, rather than compete with, innovative transnational companies. For example, the Electronics Research and Service Organization of the Industrial Technology Research Institute (ITRI), a quasi-governmental applied research center, has organized a high-definition television research project to coordinate and develop capabilities in a range of related fields to allow Taiwanese producers to become linked to the HDTV innovation and production expected ultimately to be located in Japan.34 Rather than being “developmental” as in Taiwan and Korea, the interventionist state in Southeast Asia from the 1960s through the early 1980s more closely resembled (and to a considerable extent still resembles) the rent-seeking model beloved by neoclassical economists. With the partial exception of Thailand, which remained a relatively “open” economy throughout the 1960s and 1970s (Phongpaichit, 1980), state apparatuses throughout the region attempted to promote import-substituting industrialization through such means as raising tariff barriers and licensing imports. In all of the countries in the region, state patronage was the key to business success: control of the state or close connections with officeholders were the primary means of securing the licenses that sustained rent-seeking behavior.35 In both Malaysia and Indonesia, state intervention also had a significant ethnic dimension: to promote, respectively, bumiputera and pribumi (i.e., “indigenous” rather than Chinese) interests. The traditional interventionist role of the state came under increasing attack in the second half of the 1980s. International financial institutions (which, unlike in Northeast Asia, are still major sources of finance in ASEAN countries), together with bilateral aid donors, exerted pressure for liberalization of trade and financial regimes, privatization of state-owned enterprises, and the ending of state monopolies (on Indonesia, see Robison, 1993). Liberalization inevitably threatened major dimensions of existing patronage networks (although privatization offered some opportunities to provide further rewards for clients). In two of the rapidly growing states, Malaysia and Indonesia, it also tended to undermine government attempts to promote indigenous enterprise.36 Such efforts came under increasing strain

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with the new influx of foreign investment—for investors from Taiwan, in particular, the local Chinese business community was their “natural” partner,37 and efforts to restrict the activities of local Chinese business concerns endangered foreign investment inflows. And in Malaysia in particular there was increasing concern that the attraction of foreign investment, especially in electronics, and thus the country’s growth prospects, were being damaged by the brain drain of well-qualified Chinese in response to the uncertainty caused by government policies. Chinese business groups have generally been, and have certainly been perceived to be, the primary beneficiaries of the liberalization process. In Malaysia, economic growth has been most rapid in Penang, the only state where the majority of the population is Chinese (Economist, May 22, 1993: 29; on Indonesia see Robison, 1993: 58). Despite the threat that it posed to government patronage networks, liberalization was very much in the ascendancy in Southeast Asia in the early 1990s, as seen, for instance, in the Malaysian government’s decision in 1993 to privatize its largest investment holding company, Hicom. There are, however, increasing signs that the initial euphoria over the high rates of economic growth resulting from the region’s incorporation into export-oriented production networks is beginning to wane. Concern has increasingly been expressed about the limitations of, in Yoshihara’s (1988) terms, a “technology-less” industrialization in which there are few spillovers from transnational companies to local firms. Such concerns have led not only to increasing pressure being exerted on Japanese and other investors to transfer more technology and, in particular, to foster more backward linkages with the local economy, but also have led some technocrats, most recently in Indonesia, to call for a more active role for the state in the planning of industrial development. Unlike the Northeast Asian experience, the state in Southeast Asia (with the exception of Singapore) is currently playing neither the role of gatekeeper toward foreign investment nor such developmental roles as assisting in the diffusion of technology (Doner, 1992b: 416). There is increasing interest in the “Japanese model,” and serious consideration is being given to emulating some of its attributes. These tensions over the role of the state have yet to be resolved. There is no definitive evidence yet of whether elements of the state can successfully take on an industrial policy role, perhaps coexisting with other agencies and policies that protect vested interests—as occurred in Japan. States in Southeast Asia enjoy little autonomy from societal interests. Not only does the history of rent-seeking activities suggest that a developmental role will be difficult,38 but governments are under pressure from the international financial institutions to refrain from playing a more interventionist role. The June 1993 World Bank report on the Indonesian economy, for instance, was critical of what it perceived as state moves toward “picking winners” in high-technology industries. Similarly, we do not know yet whether the ben-

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efits of rapid growth will be sufficiently sustained and widely distributed that ethnic tensions will diminish in Malaysia and Indonesia. Nor is there conclusive evidence as to whether the beneficiaries of liberalization will have the political influence to outweigh the complaints from those who have lost from the weakening of the state’s patronage powers. While some indigenous interests have been harmed by liberalization, others, particularly downstream users of the inputs formally controlled by inefficient state monopolies, have benefited (MacIntyre, 1990). And such impressive rates of economic growth have been achieved that overall standards of living are improving, even while wealth is becoming more concentrated. The state, meanwhile, faces other challenges arising from recent economic success. Not only are there increasing external pressures resulting from the growth of trade surpluses with the United States, but there is also the threat of foreign sanctions if internationally accepted labor standards continue to be violated. Increasingly, such pressures are coming not only from the International Labour Organisation and from Western governments (sometimes stemming primarily from protectionist motivations), but also from some transnational corporations concerned that they may face a consumer backlash if their products are associated with exploitive labor practices. Such international pressures may be more effective than those coming from within. Domestic labor movements remain weak and often subject to government control; the percentage of the population in urban employment is much lower than in Northeast Asia, and in some countries, ethnic divisions complicate attempts to build a unified labor movement. While issues relating to employment and work stratification are intimately connected to shifting state-society relations within particular countries, they also have broader, in this case regional, dimensions. Regionalization carries with it implications for changes in employment patterns by fostering a group of managers and technical experts who are developing a regional orientation. This phenomenon, like the hierarchy of production practices referred to above, challenges notions that the “state” is the only appropriate level at which to conceptualize the notion of the international division of labor (and hence also the notion of core and periphery). Regionalization of both manufacturing and R&D is helping to bring about a hierarchy of work based not on national practices but instead on functional proximity to regionalized production. There is now a cohort of technicians and managers employed in permanent positions whose working conditions and career trajectories are linked to regionalized production networks for global markets. This group can be seen as constituting a “core” of elite workers that stands in contrast to the peripheral work force of nonpermanent employees of large firms, employees of domestically oriented companies, or those workers involved in subnational locally oriented production. They carry the potential to constitute a regional social force with a strong interest in promoting the kind of domestic politics that will further

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enhance regionalization. Their orientations may tend to be less nationalistic than those of the owners or employees of locally oriented firms or of workers associated with blue-collar labor unions, who have tended to see their struggles largely in terms of their opposition to authoritarian regimes. IMPLICATIONS FOR THEORY

The growth of regionalized production networks has been one of the most significant outcomes of the pursuit of competitiveness in East Asia. The dominant metaphor in the discussion of this regionalization of production has been Akamatsu’s (1961) “flying geese” model, in which the later developing countries are portrayed as following a development trajectory similar to that of Japan. As Japan vacates certain production sectors—because of cost considerations, a move to more advanced products, or political pressures (such as demands for voluntary export restraints) from trading partners—other East Asian countries, the argument suggests, will step in to fill the gap. Such trends are heightened, some assert (e.g., Petri, 1993), by the decision of other East Asian countries consciously to emulate Japan in their industrialization efforts. This metaphor, we argue, is misleading on a number of counts (for further discussion see Bernard and Ravenhill, 1995). The regionalization of production has at most brought a partial diffusion of industries and technologies to other states in the region. Rather than complete industrial sectors being transferred to Korea and Taiwan, and more recently to Southeast Asia, some stages of the production process for some commodities have been transferred. There are three notable consequences of this. First, the partial process of diffusion has led to an intraregional hierarchy within each industry in which other producers depend on Japanese corporations for essential technological inputs. Second, contrary to the predictions of the flying geese model, in their domestic production Japanese corporations have rarely vacated entire sectors; rather, they have continued to manufacture high-end products and to develop the increasingly sophisticated technology that is an essential part of most contemporary consumer products. Third, there are few instances in which exports of consumer goods from other countries in the region have displaced domestic production within Japan. Many of the state-based indicators that have conventionally been used to study regional economic integration are increasingly of dubious utility. Data on foreign direct investment, for instance, capture but one (increasingly insignificant) dimension of the links between firms in the region. Similarly, trade data and local content data, if not subjected to critical scrutiny, may be of limited utility as they mask the extent to which, for example, the local content of the production of Japanese subsidiaries is sourced from other locally based Japanese subsidiaries. Furthermore, the readily available

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data do not provide any sense of the extent to which the actors within the regionalized networks of production are increasingly viewing the region as an integrated whole, and planning accordingly. CONCLUSIONS

The changing division of labor in East Asia, encompassing increased industrial integration of Northeast and Southeast Asia and the adoption of new organizational forms of production and innovation, has profoundly affected the competitiveness of firms and national economies in the region. The dialectical processes of the regionalization of production have offered openings for new entrants into networks, but also foreclosed other opportunities; facilitated the flow of technology and know-how while strengthening or creating dependencies; and given rise to new linkages as well as new tensions both between states and within societies. The regionalization of production through hierarchical networks casts doubt on the utility of conventional ways of viewing and measuring transborder economic interactions. Contrary to common practice, the hierarchies should not be seen exclusively in state-centric terms. They are hierarchies of production practices and production relations as much as they are hierarchies of the technological capabilities of production units or countries. A state-centric approach to data on trade and foreign direct investment may similarly give a misleading impression of the “nationality” of products that, in the increasingly regionalized production networks of East Asia, may be composed of inputs from several firms located in different countries. The links between these firms may be captured only in part by data on foreign direct investment flows—other flows, particularly transfers of technology, may be far more important to the regionalization of production. Arguments, based on foreign trade data (for example, Frankel, 1991), that the East Asian region is currently not as integrated as in previous periods miss the importance of the qualitative changes in the nature of regionalization that have occurred in recent years. The regionalization of production that we have analyzed in this chapter is neither zero-sum nor necessarily exclusionary in its outcomes. The move toward manufacturing for export has been the principal factor behind the accelerating rates of economic growth that Southeast Asian countries have experienced since the mid-1980s. But the significant relocation of Japanese (and, increasingly, Taiwanese) consumer goods manufacturing appears not to have borne out the fears frequently voiced in Japan (and more recently in Taiwan) of a “hollowing out” of domestic industry. Rather, as the data on Japanese electronics manufacturing show, the move has been away from manufacturing final products for export to the fabrication of capital goods and components. Changes in the trade balance in manufacturing between

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Southeast Asian countries and Taiwan suggest that a similar process is at work in these relationships. The regionalization of production networks on a hierarchical basis in which there is dependence on Japanese corporations for key technologies may lead toward the exclusion of companies from other regions as Japanese firms are best placed to have their technical standards adopted as the norm for new products. But the fluidity of global alliances is such that there are many access points to these production networks for companies from other regions. This, coupled with the reluctance of state elites in many East Asian countries to tolerate what, from their perspective, appears to be excessive dependence on Japanese industry, illustrates how arguments that “Japan Inc.” is somehow engaged in reconstruction of a Japanese Co-Prosperity Sphere are greatly overstated. NOTES

1. By East Asia, we mean China, Japan, Korea, Taiwan, Hong Kong, and the member states of ASEAN. Our focus in this paper is on the relations among Japan, Korea, Taiwan, China, Thailand, Malaysia, and Indonesia. The Plaza Agreement took its name from the Plaza Hotel, New York City, where a meeting of the Group of Five (France, Germany, Japan, United Kingdom, and United States) agreed in September 1985 on a coordinated strategy to push down the value of the dollar visà-vis the currencies of its major trading partners. For details, see Funabashi (1989). 2. Taiwan’s bilateral trade surplus with the United States peaked in 1987 at US $16.03 billion. Korea’s also peaked in 1987 at $9.5 billion. For Taiwan, see Zhonghua Minguo Caizhengbu Tongji. For Korea, see Bank of Korea, Economic Statistics Yearbook. 3. These figures are those officially recorded for Taiwanese investment. All the evidence points to these being only a small fraction of actual Taiwanese overseas investment. The World Bank notes that Taiwan’s balance-of-payments figures suggest that investments are twenty-five times those actually recorded; data on inflows reported by host countries similarly reveal very large discrepancies. 4. Export-oriented exports are defined as those in which investors planned to export more than 50 percent of their output (Leong, 1990: 53). 5. For a discussion of this process within a broader context, see Bernard (1994). 6. For a discussion of this in the context of Japan’s domestic political economy, see Imai (1992: 218–223). 7. For a general discussion of these networks, see Gerlach (1992). For the specific case of the Japanese auto industry, see Cusumano (1989: ch. 2). 8. “Supply architecture” refers to the manner in which the supply of specific kinds of know-how, components, equipment, and materials is institutionalized in a specific geographical context. For an elaboration, see Borrus and Hart (1992: 1–4). 9. For a discussion of the Taiwanese bicycle industry, which illustrates this trend, see Tian Xia, (September 1991: 46–54). 10. This trend continues a development observed when supposedly technologically “mature” product groups such as automobiles and TVs began to be produced in Japan in the 1960s (Peck and Wilson, 1982: 195–211).

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11. Among the major contributions to the literature on technological change are Nelson and Winter (1982) and Mowery and Rosenberg (1989). 12. This conceptualization of technology has been developed in a series of studies by individuals associated over the years with the Science Policy Research Unit at the University of Sussex, England. For the most comprehensive statement, see Dosi, Pavitt, and Soete (1990). 13. Dosi, Pavitt, and Soete (1990: 81) estimate that 60 percent of companies’ R&D budgets is devoted to product development. 14. For evidence on Taiwan, see Simon (1992: 133). Amsden and Min (1991: 317) suggest that Korea’s relatively inelastic demand for Japanese manufactures can be attributed to “explicit or implicit agreement to buy equipment, parts and components” that is incorporated into technology transfer agreements. 15. A distinction has to be made here between the different types of production networks emerging within the region. Where Japanese companies are linked at “arm’s length” with independent companies in Korea and Taiwan, for example, they will be wary of transferring their latest technology to companies that might become competitors (unless they can be sure that restrictions on the use of such technology will be effective). On the other hand, where Japanese corporations have established their own subsidiaries, and/or are dealing primarily with foreign subsidiaries of other Japanese companies with which they have long-standing ties (as is more common in Southeast Asia), then there may be a greater willingness to transfer the most modern technology, providing that the local labor force is regarded as sufficiently skilled for it to be deployed successfully. 16. Japanese companies operating in other parts of East Asia may be less susceptible to losing key technical personnel than are their counterparts from elsewhere, as working conditions are better than industry norms. Furthermore, much of the know-how is firm specific. 17. Interview with the deputy secretary of the Taiwan Association of Machinery Industries, Taipei, June 1991. On Fanuc more generally, see Ishii (1986: 158–161). 18. Interview with the managing director of Taiwan TDK, Taipei, February 1992. 19. Interview with the general manager of Shinli Corporation, and the managing director of Toshiba Electronics of Taiwan, Taipei, February 1992. On Japanese camera production in Taiwan, see Koike (1991: 139–173). 20. Information concerning Sangshin Electric was obtained from interviews with company staff in Seoul, January 1992, and through company materials. 21. This is the case in both Taiwan and in Southeast Asia. Interview with representatives of Sony Taiwan and the Sharp Corporation, February 1992. 22. Interview with representatives of Sharp Corporation, Osaka, Japan, February 1992. 23. China’s exports of manufactures to Japan grew fivefold in the years 1985– 1991. In the latter year, the value of Chinese imports of Japanese manufactures was one-third less than in 1985, the consequence of restrictive import licensing. The consequence was that bilateral trade in manufactures in 1991 was in balance. China runs a substantial trade surplus in nonmanufactures with Japan. The only other state in the region to enjoy an overall trade surplus with Japan is Indonesia, a result of its oil and natural gas exports. 24. Data from Kaigai Toshi Tokei Soran No. 3, quoted in Urata (1992). Such data are becoming increasingly meaningless as Japanese components manufacturers relocate to other East Asian countries to be close to producers of finished goods. “Local content” may often be purchased from subsidiaries of other Japanese corporations. 25. Korea not only prohibited imports of certain categories of Japanese goods

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but also offered special reduced-rate loans for companies buying production equipment from non-Japanese sources. In June 1993, the Indonesian government announced that it would require Japan to purchase vehicle components from Indonesia of a value equal to those sold to that country (Far Eastern Economic Review, June 10, 1993: 9). 26. Phongpaichit (1990: 52) reports, for instance, that the Singapore branch of AIWA, a 100 percent–owned subsidiary of Sony, sources 75 percent of its components from other Japanese subsidiaries in Singapore and Malaysia, and the remaining high-technology components come either from Japan or from Japanese subsidiaries in Taiwan and Korea. 27. For instance, see the Economic Planning Agency’s 1988 study “Promoting Comprehensive Economic Cooperation in an International Economics Environment Undergoing Upheaval: Towards the Contribution of an Asian Network”; and MITI’s “Project for Comprehensive Cooperation and Asian Industrialization” (also known as the “New Asian Industrial Development Plan”). 28. Amsden and Min (1991) suggest that Korean perceptions that U.S. technology is too advanced have hampered U.S. equipment exports to Korea. 29. State promotion of zaibatsu (large industrial conglomerates) occurred in prewar Japan, of course, but this had more to do with forestalling the incursion of foreign firms into Japan than with fostering internationally competitive export-oriented companies (see Chapter 4). Furthermore, as T. Nakamura (1983) has shown, most Japanese exports in the prewar period were from small-scale firms that did not receive government support. 30. The term “ideology” is used here to describe any theory or worldview that either divorces or abstracts itself from the historically contingent assumptions that gave rise to it. See Cox (1986: 207–210). 31. Interview with representatives of the Electronic Industries Association of Japan, Tokyo, 1992. 32. According to an Office of Bank Supervision and Examination survey submitted to the Korean National Assembly, the 1991 sales of the ten largest chaebol accounted for 74 percent of the nation’s total sales. The combined sales of the five largest conglomerates (Samsung, Hyundai, Lucky-Goldstar, Daewoo, and Hanjin) made up 61.1 percent. Although the accuracy of these figures is questionable, they provide a guide to the dominant position of the chaebol in the Korean economy. 33. Interviews with officials from the Korea Federation of Textile Industries and the Korea Electronic Industries Cooperative, Seoul, January 1992. 34. Interview with a former ITRI official, Taoyuan County, Taiwan, February 1992. 35. “The new Malay business class was in fact a creation of the government. Malay businesspeople were not entrepreneurs who set up new enterprises but clients of politicians who were given business opportunities as rewards for political support” (Crouch, 1993). Laothamatas (1992: 102), while arguing that clientelist ties are less important for business success in Thailand than they once were, acknowledges that they are still “significant.” 36. Privatization was again a partial exception as 30 per cent of the shares in privatized enterprises in Malaysia were reserved for bumiputera interests (Yuen and Woon, 1992: 50). 37. Indeed, there is evidence that some investment in Southeast Asia from Taiwan was in fact a recycling of capital originating in local Chinese business groups. 38. As McVey (1992: 26) notes, “It is still early days for most Southeast Asian politico-bureaucrats turned businessmen, and it is still difficult to see where the line between rent-seeking and real entrepreneurship has been crossed.”

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The Limits on Hegemonic Predation as a Response to Competitiveness Problems: The United States and Taiwan The role of the United States in the world political economy is clearly changing. While there is some controversy over whether its political-military leadership position has eroded (Calleo, 1987; Kennedy, 1987b; Nye, 1990), a decline in the country’s economic position and competitiveness is much easier to chart (Cohen and Zysman, 1987a; Dertouzos, Lester, Solow, 1989; Gilpin, 1987; R. Reich, 1991; Thurow, 1992; Zysman and Tyson, 1983), although some dissents are still being entered (see Nau, 1990; Russett, 1985; Strange, 1987 for several different perspectives). The resulting economic problems within the United States have created a growing challenge to the country’s traditional postwar emphasis on laissez-faire and multilateral trade policies (Destler, 1986; Krugman, 1986; Lawrence and Schultze, 1990; Milner and Yoffie, 1989; Stern, 1987; Yoffie, 1989). Thus, economic pressures have seemingly resulted in more aggressive international economic policies as the United States uses its remaining economic power to export the costs of its declining competitiveness. That is, it has begun to act as a “predatory hegemon”—to use Conybeare’s (1987) concept in a way somewhat modified by Gilpin (1987). Yet this image of an increasingly predatory hegemon is not universally accepted. For example, what strikes Milner (1988) most about recent U.S. trade policy is the extent to which the United States was able to “resist protectionism” in the 1970s and 1980s, in contrast to the policy response to roughly similar economic conditions in the 1920s. Even the 1988 Trade Act, which was initially feared to be a major potential instrument of protectionism, turned out to be fairly consistent with the maintenance of a liberal trade order (Hufbauer, 1990). This line of research, therefore, raises the very different question of why the United States did not respond to its declining competitiveness with the expected increases in aggressive or predatory behavior. 133

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This chapter examines trade relations between the United States and Taiwan (Republic of China or ROC) as a case study to evaluate whether the former has moved toward becoming a more predatory hegemon. Taiwan is a very significant trade partner for the United States and, moreover, one that appears quite vulnerable to U.S. pressure. Thus, any movement toward increased predatory activities in U.S. foreign economic policy should be easy to discern in trade relations with Taiwan. The empirical section of the chapter summarizes the evolution of trade between the United States and Taiwan during the 1980s to test the working hypothesis that increased U.S. predation should have occurred. Surprisingly, perhaps, the findings are largely negative. Trade tensions between the United States and the ROC did escalate in the mid- and late 1980s. Yet, despite the fact that Taiwan made several significant concessions—including a 40 percent appreciation of the New Taiwan (NT) dollar against the U.S. dollar—the overall balance and composition of trade between the two countries changed only marginally. The second part of the essay seeks to sketch an “institutional” explanation for this outcome and to draw implications from this hypothesis for U.S. competitiveness. TRADE RELATIONS BETWEEN THE UNITED STATES AND TAIWAN IN THE 1980s AND EARLY 1990s

A case study of trade relations between the United States and Taiwan during the 1980s should provide a good test of the hypothesis that there are significant limits on the ability of the United States to act as a predatory hegemon. First, Taiwan is a significant U.S. trade partner. Throughout most of the 1980s, for example, it ranked fifth or sixth in total exports to the United States and second (albeit a far distant one behind Japan) in contributing to the trade deficit. Second, Taiwan had been a Cold War ally of the United States for most of the Cold War era, resulting in U.S. willingness to subsidize an anticommunist client, in the form of both direct aid in the 1950s and 1960s and seeming acceptance of Taiwan’s considerable deviations from free trade policies (Chan and Clark, 1992; Chou, 1992; Clough, 1978; Jacoby, 1966). Thus, the United States had good reason to look at the ROC as an early target in any campaign to gain trade concessions from its foreign partners. Furthermore, in several respects the ROC should have been quite vulnerable to any pressure that the United States exerted. Economically, it was highly dependent on the U.S. market because it exported between 20 percent and 25 percent of its GNP to the United States during the 1980s. Politically, its status as an international outcast due to its competition with the PRC made it very dependent upon the continuing informal patronage of the

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United States, as well as excluding it from the protection offered by membership in multilateral organizations such as GATT (Clough, 1978; Hickey, 1988; Lasater, 1984). Thus, on the surface the relationship between the United States and the ROC would seem to constitute a good example of what Hirschman (1980) has called the “influence effect,” in which economic concessions by a large country can create economic dependence on the part of smaller and less developed nations, which can be used for political purposes and, once exclusive economic ties are established, for economic ones as well (e.g., Nazi Germany’s penetration of Eastern Europe in the 1930s). In contrast, however, Taiwan has a long history of managing its dependency on the United States fairly successfully, especially in mitigating U.S. protectionist pressures (Bobrow and Chan, 1987; Chan, 1987; Yoffie, 1983). Through the early 1980s, it was unclear whether this success reflected Taiwan’s own diplomatic talents or continuing U.S. largess to a client state; the ROC’s ability to resist real pressures to redefine its economic relationship with the United States remained in doubt. These circumstances imply that Taiwan should have been a major target of protectionist reaction; and, given its countervailing advantages and disadvantages for responding to such pressure, the Taiwanese case should provide a good bellwether for the prospects of U.S. predation. Over the last four decades, Taiwan has made tremendous strides in economic and social development. For example, its real GNP growth has averaged almost 9 percent a year since 1952 as GNP per capita has multiplied a hundredfold, from about $100 to just over $10,000 at the beginning of 1993. In the process, it was transformed from a poor agricultural economy to a vibrant industrial one with a progressively rising standard of living and a level of income inequality that was low by the standards of even the wealthiest societies.1 Taiwan’s development went through several distinct stages. Initially, a radical land reform program at the beginning of the 1950s stimulated increased agricultural production, freed resources for industrial development, and promoted social equality. In the mid- and late 1950s, this was quickly followed by a period of light industrialization based on import substitution. At the beginning of the 1960s, Taiwan made the critical decision to try to base economic growth on selling light manufactures on world markets. This stimulated a tremendous export surge of double-digit growth almost every year from the mid-1960s to the mid-1970s. Finally, increasing wages and the two oil crises of the 1970s stimulated a new industrial transformation over the last fifteen years toward heavy and high-tech industry (Chan and Clark, 1992; Clark, 1989; Galenson, 1979; Gold, 1986; Haggard, 1990; Ho, 1978; Kuo, 1983; Kuo, Ranis, and Fei, 1981; Li, 1988; Lin, 1973; Myers, 1984; Wade, 1990; Winckler and Greenhalgh, 1988; Wu, 1985). The ROC’s development trajectory made its economy highly dependent

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on world markets, as illustrated by the data in Table 6.1. The export surge of the mid-1960s to the early 1970s clearly stands out, as the real (inflationadjusted) value of exports grew by an average of 20 percent a year. The impact of the two oil crises is also plain. Real exports actually fell by an average of 6 percent in 1974–1975 and grew by only 3 percent in 1980– 1982. Double-digit growth reemerged during the mid-1980s but was far lower than in the 1960s. During the initial export surge, exports as a percentage of GNP quadrupled from about 10 percent in the late 1950s to 40 percent in the early 1970s, and then grew more slowly to just over 50 percent by the mid-1980s. Moreover, the nature of these exports changed dramatically. Industrial goods constituted only about 15 percent of Taiwan’s export mix in the late 1950s but rose to almost 80 percent by 1971 and 90 percent by 1980. The export surge also turned the trade deficits of about $100 million in the 1950s and 1960s to surpluses averaging over $500 million for most of the 1970s, except during the 1974–1975 recession folTable 6.1 Year

1955 1960 1965 1970 1975 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 Jan–May 1992

Taiwan’s Export Performance Exports as % of GNP

6.4 9.5 16.0 26.2 34.4 47.8 47.0 45.8 48.5 52.1 50.2 53.5 53.9 50.5 44.0 41.4 42.4*

Real Export Growth (%) 20.1 –8.0 4.3 36.5 –7.8 5.8 4.0 0.7 14.2 18.9 1.3 18.8 12.6 0.6 –2.2 –0.9 7.5*

Industrial Content of Exports (%) 10.4 32.3 46.0 78.6 83.6 90.8 92.2 92.4 93.1 93.9 93.8 93.5 93.9 94.5 95.4 95.5 —

Trade Balance (mil US$)

–74 –133 –106 –43 –643 +78 +1411 +3316 +4836 +8497 +10624 +15681 +18696 +10994 +14039 +12498 +13318 +4996

*Estimated from 1990 national income data. Sources: Monthly Statistics of Exports and Imports, Taiwan Area, The Republic of China, May 1992 (Taipei: Department of Statistics, Ministry of Finance, 1990), p. 10. Taiwan Statistical Data Book, 1991 (Taipei: Council for Economic Planning and Development, 1991), pp. 26, 208, 213.

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lowing the petroleum price explosion, when deficits of $1 billion per year occurred. The second oil crisis resulted in almost balanced trade in 1980, but Taiwan’s trade surpluses then skyrocketed to $1.4 billion in 1981, $4.8 billion in 1983, and $10.6 billion in 1985 before peaking at $18.7 billion in 1987. This growing surplus, however, was something of a mixed blessing. First, in purely domestic terms, it led to a huge accumulation of money. For example, during the late 1980s and early 1990s, the ROC’s foreign reserves of US $70–75 billion ranked second in the world to Japan’s. This huge “sea of cash” in turn transmitted very worrisome inflationary pressures into the island (as most spectacularly illustrated by rapidly escalating property prices and the “casino” stock market). Second, and more directly relevant for our purposes, Taiwan’s trade success increasingly exacerbated trade relations with its chief partner (and quasi-political patron), the United States. Throughout the 1980s, the U.S. market constituted 85–95 percent of Taiwan’s positive trade balance (see Table 6.3). Moreover, as shown in Table 6.2, Taiwan’s major exports (along with those of the other East Asian capitalist states) captured a very significant share of U.S. import markets—about 10 percent for machinery and electrical products; 15–20 percent for apparel, instruments, rubber and plastic goods, and metal products; and 25–30 percent for footwear and sporting goods. Thus, any effective attack on the U.S. trade deficit would have to target East Asia and Taiwan. In fact, Taiwan was one of the first countries to feel the change in the U.S. trade policy that occurred in the mid-1980s. Before then, most U.S. trade negotiations were directed by an executive branch that was philosophTable 6.2

Taiwan’s Major Exports to the United States, 1987

Apparel Metal products Metal products Machinery Electrical products Footwear Instruments Sporting goods Rubber/plastic

Tariff Code 38 64 65 67 68 70 72 73 77

Value (mil US$) 2,638 720 1,229 2,767 4,239 3,301 1,489 2,133 1,188

Taiwan Import Share (%) 14.7 17.0 24.0 9.4 9.5 24.1 15.0 30.9 18.0

Other East Asia* Import Share (%) 36.7 28.9 22.4 56.4 53.4 29.0 38.1 39.1 27.2

*Japan, Hong Kong, Singapore, and South Korea. Source: Shen-shen Su, “Analysis of the Feasibility of a U.S.-Taiwan Free Trade Agreement.” Unpublished M.A. thesis, University of Wyoming, 1990, p. 19.

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ically committed to free trade and laissez-faire economics and seemed to aim mainly at trying to satisfy politically powerful declining industries (e.g., textiles) with protectionist measures that did the least violence to these principles (Destler, 1986). Under this system, Taiwan proved fairly adept at protecting its interests by such tactics as drawing out negotiations so that trade increases would provide high floors for quotas; gaining loopholes and flexibility (e.g., ambiguous definitions of rubber and nonrubber footwear); creating alliances with other East Asian exporters and with politicians in the United States; and using U.S. protection to goad domestic manufacturers to upgrade their product lines (e.g., from cotton to synthetic textiles). The ROC’s success also derived from the episodic and ad hoc nature of negotiations with the United States, which did not seem to be trying to implement any coherent long-term strategy. Before the mid-1980s, therefore, U.S. protectionism had little discernible adverse impact on Taiwan’s economy (Chan, 1987; Chou, 1992; Yoffie, 1983). Spiraling trade deficits and the almost overnight transformation of the United States from the world’s largest creditor to largest debtor nation in the mid-1980s changed the game of trade negotiations as far as the Reagan administration was concerned (Destler, 1986; Pearson, 1989). Consequently, the goal of the U.S. Trade Representative (USTR) seemingly became to beat back the trade deficit per se, probably both to relieve pressure on the U.S. economy and to divert attention from the widespread assumption that the administration’s own macroeconomic policies (e.g., the budget deficit) were the major source of the problem. Despite this growing “economic nationalism” (Gilpin, 1987), ongoing commitment to the idea of “free trade”—albeit somewhat tempered by “fair trade” concerns (Goldstein, 1988)—set the specific agenda. In particular, U.S. foreign economic policy assumed that the competitiveness of U.S. industry in world markets was being artificially lowered through misaligned exchange rates (e.g., the overvalued dollar) and unfair obstacles to free trade, especially informal “nontariff barriers.” Thus, the USTR focused on market opening measures and currency realignment, both of which are consistent with a liberal trading order. This was combined, though, with “aggressive reciprocity” in targeting specific partners who were viewed as violating fair trade principles. Taiwan could certainly qualify as a target of aggressive reciprocity on several grounds of varying legitimacy. In addition to its considerable contribution to the U.S. trade deficit discussed above, it had retained both tariff and nontariff barriers to imports in a wide array of sectors (e.g., agriculture and electronics products), despite the fact that any justification for “infant industry protection” had long since passed. Furthermore, the NT dollar had changed little in its relationship to the value of the U.S. dollar despite the ROC’s burgeoning trade surpluses during the first half of the 1980s. Finally, Taiwan’s dependence on the U.S. market and on implicit U.S. diplomatic support would seem to have translated into considerable vulnerability to

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U.S. pressures. The U.S. government certainly began putting more pressure on Taiwan in the mid-1980s. The qualitative change in U.S. trade policy toward Taiwan after the emergence of “aggressive reciprocity” is starkly indicated by the data in the following comparisons. Before 1984, the United States had rarely tried to influence Taiwan’s trade policies directly—there had been only four instances of U.S.-initiated trade negotiations and two presentations of lists requesting tariff reductions on U.S. exports. But the incidence of trade conflicts multiplied over the next four years. Sets of trade negotiations began thirty-two times on U.S. initiative; and Taiwan received eight tariff reduction lists, usually with large numbers of items. In addition, the United States made at least twenty-one requests for Taiwan to appreciate the NT dollar, invoked the possibility of Section 301 retaliation ten times, and threatened to remove Taiwan from GSP preference seven times, in contrast to the total absence of these three kinds of aggressive actions before 1984 (see Chou, 1992: 102–103). Clearly, a new day had dawned in the economic relations between the United States and the ROC—one that was, at least superficially, quite consistent with the predatory hegemon in decline thesis. Perhaps the opening salvo in the new type of trade battles was fired in 1983 (before the trade deficit had really become an issue), when the United States began to do more than politely complain about Taiwanese manufacturers counterfeiting the products of U.S. corporations (Taiwan temporarily gained the title of the world’s “pirate capital”). Over the next two years, U.S. concern over and pressure on the bilateral trade imbalance escalated; by 1985 Taiwan began to make major concessions in the hope of placating its patron. For example, substantial tariff cuts became a highly publicized annual event; serious negotiations were begun (and continue to this day) on “intellectual property rights”; Taiwan changed its customs’ valuation system; export performance requirements for foreign investment were dropped; and government procurement missions scurried to the United States with million-dollar contracts, mostly for agricultural and energy goods (Chang, 1984; Chou, 1992; Hsiung, 1986). Almost all of these policy changes followed a common pattern. The United States would initiate a dispute by demanding that Taiwan open its markets by taking some particular action (e.g., cutting tariffs, diminishing regulations on foreign-invested firms, allowing market access for U.S. alcohol and tobacco products). Negotiations would then begin, and subsequently Taiwan would passively make some concessions. The United States, grumbling that the concessions (e.g., a set of tariff reductions) were not really sufficient to solve the problem, would then raise another issue, and the process would begin all over again (Chou, 1992; Ho, 1990). This pattern is quite consistent with the image of a declining hegemon using its power to change the terms of trade in its favor, either to “level the playing field” (the U.S. perspective) or “make the weak pay for its own problems” (the

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Taiwanese perspective). U.S. pressures and Taiwanese concessions reached a peak in 1987–1988, when economic relations with the United States became a significant domestic issue in Taiwan. By this time, the central issue in economic relations between the United States and Taiwan had switched from Taiwan’s tariffs to the value of the NT dollar. The United States pointed out that the value of the NT dollar against the U.S. dollar had remained quite stable during the 1980s, while Taiwan’s trade surplus was exploding; misaligned currency rates were blamed for giving Taiwan’s businesses an unwarranted competitive edge. Thus, there was escalating pressure for Taiwan to appreciate the value of its currency and to let the value of the NT dollar be determined by market forces. Taiwan reluctantly gave in to these pressures: the value of the NT dollar appreciated almost 40 percent between late 1986 and early 1989, and the NT dollar was moved to a floating exchange rate determined by market forces. While the United States continued to carp for some time that the government manipulated the value of the NT dollar, marketization meant that this issue faded away as a source of contention. However, Taiwan business owners, especially those in labor-intensive industries, became increasingly vocal about what the appreciated NT dollar might portend for their competitiveness (Chou, 1992). Several other politically, if not always economically, prominent trade issues also came to the fore during this period. First, in 1987 Taiwan opened its markets to U.S. liquor and tobacco products, thereby loosening what had previously been a state monopoly. This raised a nationalistic outcry in Taiwan. U.S. “imperialism” was denounced, and the government’s concessions were labeled “unequal treaties” harkening back to the Opium War. Second, in late summer 1988, the government reversed itself and allowed the import of “turkey parts,” in large part because of U.S. threats to retaliate against Taiwan’s asparagus. This issue had high domestic visibility because of its role in stimulating a massive demonstration in Taipei earlier in the summer. Finally, Taiwan made important concessions in response to U.S. demands for liberalizing the service sector. This was probably less unpopular domestically because of widespread demand for services and especially for reforming the outmoded financial system (Copper, 1989; Li, 1988; Seymour, 1989). By now, at least from Taiwan’s vantage point, the United States was acting in the manner of a predatory hegemon. A never-ending series of escalating trade disputes was being initiated unilaterally by U.S. pressure. The only real questions in these disputes were how much Taiwan would concede and whether the United States would be satisfied with the concessions. Moreover, the government’s cumulative concessions were seen as beginning to threaten both the island’s niche in the international economic order and the population’s tolerance for an authoritarian regime that was increasingly becoming subject to democratic pressures. In terms of format, the system of

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ad hoc negotiations on single trade issues, which had served Taiwan fairly well in the past, now became a detriment to the ROC because concessions in one set of negotiations were forgotten when the next trade issue arose. On top of all this, some of Taiwan’s “friends” in the U.S. government began exerting pressure for special deals for their own states or industries.2 Given the ROC’s deteriorating position, the predatory hegemon thesis would predict that the United States would continue to tighten the screws. However, most of the period of the Bush administration saw a relaxation, rather than an exacerbation, of trade tensions between the United States and Taiwan. After a final round of tariff cuts in May 1989 and a last surge in the value of the NT dollar in April-May 1989, U.S. leaders indicated that they were pleased with Taiwan’s trade policies. And Taiwan breathed a sigh of relief when it was left off the first Super 301 list of “unfair traders” in the spring of 1990. Subsequently, trade relations between the United States and Taiwan improved markedly. In terms of U.S. policy, the passage of the 1988 Trade Act and the election of George Bush as president, along with minor improvements in the overall trade deficit, dampened protectionist pressures to a significant extent, at least for the short term. In addition, the emphasis of U.S. trade policy turned to relations with Japan and the Uruguay Round of GATT negotiations. In terms of Taiwan’s policies, the significant concessions noted above (especially when contrasted with the behavior of other trade partners such as South Korea and Japan) seemed to satisfy the United States; and both sides came to appreciate the domestic constraints facing the other.3 More recently, frictions in trade relations between the United States and Taiwan increased in 1992–1993 when Taiwan’s legislature was reluctant to pass more stringent laws protecting intellectual property rights (Liu, 1992; S. Yu, 1993). Overall, though, Taiwan was clearly moving toward “internationalizing and liberalizing” its economy—precisely what U.S. “free trade” ideas called for. This cycle of increased trade conflict followed by a substantial waning of antagonism obviously raises the question of what effects U.S. trade policy and negotiations had upon actual economic relations between Taiwan and the United States. Table 6.3 provides an overall summary by presenting the total amounts of bilateral trade and the U.S. share of Taiwan’s exports and imports during the 1980s. These data clearly demonstrate that Taiwan was a major beneficiary of the U.S. recovery and economic expansion that began in 1983: the ROC’s exports to the United States jumped from $9 billion in 1982 to $15 billion in 1984 to $24 billion in 1987. The U.S. share in Taiwan’s exports rose by over ten percentage points, from 37 percent in 1981–1982 to 48 percent in 1985–1986. Just as clearly, increased trade between Taiwan and the United States was almost entirely a one-way street. Taiwan’s imports from the United States rose only gradually from $4.6 billion in 1982 to $5.4 billion in 1986, before jumping a bit to $7.6 billion in 1987, but remaining stagnant at about 22–23 percent of Taiwan’s total

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imports over this period. Consequently, the U.S. bilateral trade deficit, which had quadrupled from $4 to $16 billion, certainly implied that the ROC would be a likely target for “aggressive reciprocity.” In 1988, in contrast, a very significant improvement occurred, at least from the U.S. perspective. Total Taiwanese imports from the United States leaped by almost 75 percent to $13.0 billion, which represented an increase from 22 to 26 percent of Taiwan’s total imports, whereas exports to the United States actually fell slightly, cutting the deficit to $10.4 billion. There were some indications that Taiwan was diversifying its export markets, particularly by increasing its trade with Europe (Kulessa, 1990), thereby relieving export pressure on the United States, whose share of Taiwan’s exports fell from 48 percent in 1984–1986 to 39 percent in 1988 and to 32 percent for 1990 and 28 percent for 1992. The import surge of 1988, however, was short-lived. Total imports from the United States fell slightly in 1989 as that nation resumed its normal 22–23 percent share of Taiwan’s import market. Consequently, Taiwan’s trade surplus with the United States rose to $12 billion in 1989 before dropping back to the $8 billion to $9 billion level in 1990–1992. More detailed data are necessary to evaluate the change (or lack of change) in trade relations between the United States and Taiwan. Table 6.4 shows how Taiwan’s overall import and export structure changed during the 1980s. If the United States was strong enough to act as a predatory hegemon, there might well have been some changes in Taiwan’s export and import mixes, especially during the 1985–1988 period, in areas where the United States concentrated its pressure. Agriculture played a central role in many of the trade issues stressed by the United States; in fact, the United States supplied 80 percent or more of Taiwan’s imports of products such as wheat, corn, tobacco, and soybeans. Yet, despite U.S. pressure, the share of agricultural goods in Taiwan’s total imports was more than cut in half between 1980 and 1990, from 12.7 to 5.5 percent. Food, beverages, and tobacco did rise slightly, from 2.7 to 3.7 percent, but all of this increase occurred before Taiwan’s 1987 concessions on liquor and tobacco. The United States also sells significant amounts of coal and some petroleum products (but not crude) to Taiwan, but the share of minerals in Taiwan’s import mix dropped greatly over the 1980s, largely because of the collapse of the oil and energy markets. While there are numerous anecdotes of Taiwan’s giving in to political pressures to buy raw materials, the aggregate impact of such pressures on Taiwan’s import structure seems negligible. A second U.S. goal was to open Taiwan’s markets, and here there was considerable success, especially in lowered tariffs. As a result, many manufactures, especially electronics goods, began to penetrate Taiwanese markets. For example, the share of machinery, electrical machinery, and transport equipment in Taiwan’s total imports rose from 26.5 percent in 1985 to 33.1 percent in 1988.4 However, the United States did not benefit very much

Hegemonic Predation: The United States & Taiwan Table 6.3

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 Jan-May 1992

143

Taiwan’s Trade with the United States in the 1980s Total ROC Trade with U.S. (billion $)

Exports

Imports

Balance*

9.4

6.3

3.1

6.8 8.2 8.8 11.3 14.9 14.8 19.0 23.7 23.4 24.0 21.7 22.3

4.7 4.8 4.6 4.6 5.0 4.7 5.4 7.6 13.0 12.0 12.6 14.1

2.1 3.4 4.2 6.7 9.8 10.0 13.6 16.0 10.4 12.0 9.1 8.2

U.S. Share of ROC Trade (%) Exports

Imports

28.1

22.5

34.1 36.1 39.4 45.1 48.8 48.1 47.7 44.1 38.7 36.2 32.4 29.3

23.7 22.5 24.1 22.9 23.0 23.6 22.4 21.8 26.2 23.0 23.0 22.5

*Trade balance may not precisely equal the difference between exports and imports due to rounding. Sources: Monthly Statistics of Exports and Imports, Taiwan Area, The Republic of China, May 1992 (Taipei: Ministry of Finance, 1992), pp. 13, 64; Taiwan Statistical Data Book, 1991 (Taipei: Council for Economic Planning and Development, 1991), p. 215.

Table 6.4

Taiwan’s Trade Structure in the 1980s

Agriculture Minerals Food/beverage/tobacco Textiles/leather/wood Nonmetallic minerals Chemicals/pharmaceuticals Basic metals Metal products Machinery Electrical machinery/ appartatus Transport equipment Other

Percent Total Imports*

Percent Total Exports*

1980 1985 1988 1990

1980 1985 1988 1990

9.8 13.9 17.4 14.0 3.7 3.8 5.7 6.7 4.9 6.8 6.6 16.0

18.2 21.0 27.5 26.6 3.2 4.1 4.2 5.1 22.1 22.3 21.3 22.9

12.7 11.1 6.7 5.5 23.4 20.8 7.2 9.0 2.7 4.3 3.6 3.7 3.3 5.1 5.7 6.5 0.5 0.6 0.6 1.0 13.8 14.7 14.6 14.9 12.0 9.2 21.0 11.4 0.7 0.8 0.7 1.1 12.1 8.8 10.0 9.8

2.5 1.7 1.6 0.8 0.1 0.1 0.1 0.1 6.7 4.5 3.9 3.5 31.0 27.6 22.3 20.6 1.9 2.1 2.1 1.7 4.1 4.3 4.0 4.5 2.0 2.5 2.2 2.0 4.4 5.8 5.8 6.0 3.8 4.0 5.3 6.3

*Columns may not sum to precisely 100% because of rounding errors. Source: Taiwan Statistical Data Book, 1991 (Taipei: Council for Economic Planning and Development, 1991), pp. 211–212.

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from the greater openness of Taiwan’s economy. It either did not have a high market share to begin with and/or lost market share during the 1980s in almost all categories of manufactured products. The one notable exception—scrap metal—even provides an ironic symbol of U.S. economic decline. The primary beneficiaries of the more open market were the Japanese, and more recently the Germans, who simply out-competed U.S. corporations. Parenthetically, this picture of U.S. competitiveness is a bit too bleak, since Taiwan still exhibits strong demand for some U.S. manufactures, such as some machine tools, high-speed specialty machinery, precision instruments, and commercial aircraft (Su, 1990). In addition, there is one important U.S. gain over time in sophisticated manufactured products. The U.S. share of the motor vehicle market jumped impressively from just over 10 percent in the late 1980s to 40 percent in the early 1990s, but even this exception suggests that the “rule” of limited U.S. industrial competitiveness holds true. The U.S. share jumped because of limitations that were imposed on Japanese imports; consequently, much of the increase in imports from the United States came from Japanese subsidiaries.5 Still, this does not change the overall conclusion that Taiwan’s decreasing trade barriers have not done much to help the U.S. trade balance. On the export side, Table 6.4 demonstrates that two major categories— light industry (e.g., textiles, leather, wood) and electronics products—constituted half of Taiwan’s trade during the 1980s. During the 1980s, the latter replaced the former as the leading export sector, consistent with the island’s upgrading into high technology. This is probably far from good news to the United States, however, since whatever relaxation of pressure on the U.S. textile industry this implies is more than offset by Taiwan’s growing challenge in electronics and high tech. Moreover, most of Taiwan’s exports to the United States are manufactured products. In textiles, for example, the ROC exports mostly finished apparel, not yarn, fibers, and fabrics. Thus, Taiwan has turned Galtung’s (1971) theory of “vertical trade” on its head, so to speak. Or in Lee Iacocca’s pungent terminology, the United States would seem to be Taiwan’s “colony” in terms of their economic exchanges. In sum, examination of Taiwan’s trade balances, both globally and with the United States, presents a much different picture from that revealed in the discussion of Taiwan’s myriad concessions to U.S. demands and pressure in the late 1980s. While the United States seemingly bludgeoned the ROC into major policy changes, the actual impact on Taiwan’s trade surpluses was significant but far from revolutionary. The actual situation, however, was more complex: while Taiwan retained substantial positive balances of trade with the world and with the United States through the early 1990s, other aspects of the island’s overall trade performance were far less sanguine. In particular, rising real wages and especially the dramatic appreciation of the NT dollar clearly caught up with Taiwan’s export industries in the late 1980s. Real

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(inflation-adjusted) export growth was only 0.6 percent in 1988 and actually fell by an average of 1.5 percent for the next two years, causing the country’s export-to-GNP ratio to fall sharply from 54 to 41.4 percent. This decline in export competitiveness in turn stimulated a massive outflow of capital (equal to total domestic investment for a couple of years in the late 1980s), as many of Taiwan’s small business owners moved their labor-intensive industries offshore, first to Southeast Asia in the mid-1980s and then, increasingly, to the PRC in the late 1980s and early 1990s after a political relaxation of the tensions between Beijing and Taipei made “indirect” trade and investment between the two Cold War enemies possible. The resulting massive flow of Taiwanese investment (estimated at $4 billion to $5 billion at the beginning of 1993) into the mainland, especially southern coastal China, had a profound influence on Taiwan’s overall trade patterns and on its bilateral trade with the United States (Bernard and Ravenhill, 1995; C. Cheng, 1992; Chin, 1991; Clark, 1993; Hickey, 1991; Kristof, 1993; Wei, 1991; Wu, 1991; Yen, 1991; T. Yu, 1991). Because direct trade between Taiwan and China is still prohibited by the ROC, trade between Taiwan and Hong Kong is often used as a surrogate for Taiwan’s trade with China. This commerce has increased dramatically, doubling between 1984 and 1987, and then rising again threefold between 1987 and 1991.6 Several other aspects of Taiwan’s trade with China through Hong Kong are noteworthy. First, Hong Kong/China have now become far from negligible in Taiwan’s foreign markets, accounting for about one-sixth of total exports in 1991. Second, trade is extremely unbalanced, with Taiwan running a large surplus. Third, this surplus has escalated rapidly both in absolute terms and in terms of its impact on Taiwan’s global balance of trade: from about one-fifth of the total surplus during 1984–1987, to onethird in 1988–1989, to an amount equal to almost the entire surplus after 1991 (Taiwan’s trade surplus with the United States is offset by a corresponding deficit with Japan). Taiwan’s economic relationship with China then has become a central feature of its overall political economy. A detailed examination of the commodity composition of Taiwan’s exports to Hong Kong indicates that they are dominated by two types of goods. First, China provides a major market for the cheap consumer goods that are still made in Taiwan. Second, and more important for the long term, are intermediate products and machinery that are almost certainly destined for the factories built by Taiwan business owners (Clark, 1993). The light industry and assembly production from these factories, in turn, have fueled China’s rapidly expanding export sector in the early 1990s. The result has been what Bernard and Ravenhill (1995) call a “trade triangle” in which Taiwan’s surplus with the United States in labor-intensive products is displaced or transshipped though the PRC (see also Wu, 1991). For example, the considerable drop of $16 billion in Taiwan’s and Hong Kong’s combined surplus in trade with the United States

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between 1987 and 1992 was offset by a $15 billion increase in China’s surplus over the same period (Kristof, 1993). How this trade triangle is evaluated, of course, differs radically depending on one’s analytic vantage point. From the perspective of the United States, the gains that appear in its bilateral balance with Taiwan become illusionary as the island’s business owners have found an easy way to circumvent their government’s concessions to U.S. pressure, perhaps suggesting the need for new bilateral approaches. From the perspective of the ROC’s government, however, this appears far from a victory. In fact, Taipei is becoming rather nervous that its enemies in Beijing may manipulate the increased economic dependence of Taiwan on the mainland in the pursuit of their own political purposes (Clark and Chan, 1991; Hickey, 1991; Ho, 1992; Kao, 1991). Thus, the regime would certainly reject any suggestion that it should be held responsible for economic processes that it is trying to limit and slow down. In sum, U.S. trade relations with Taiwan during the 1980s show little evidence of a predatory hegemon. Despite strong incentives to drive a hard bargain with the ROC and the evident leverage to make one stick, the “new protectionism” of the United States has yet to alter bilateral trade relations in a discernible way. In short, “the sound and the fury” of 1987–1988 signified “next to nothing.” Clearly, U.S. pressure before 1988 had little effect in balancing trade. The major changes in 1988 did reflect very significant attempts by Taiwan to move toward balanced trade, although some, such as purchasing gold from the United States, were not received with total alacrity by the latter. When U.S. pressure decreased in 1989–1990, the progress toward reducing the trade deficit slowed appreciably as well. Moreover, the considerable “displacement” of Taiwan’s surplus with the United States that occurred in the early 1990s may well have canceled out the gains that were made in the late 1980s. Still, the situation was probably more than acceptable to both sides. For the United States, the trade deficit was being reduced far faster than the 10 percent a year general standard that had been set. For the ROC, its economy remained strong with growth rates in the 5–7 percent range in the late 1980s and early 1990s. EXPLAINING THE PUZZLE OF LIMITED PREDATION: AN INSTITUTIONAL PERSPECTIVE

The empirical results concerning the course of trade relations between the United States and Taiwan during the 1980s and early 1990s might seem to constitute something of a puzzle. Economic decline in the United States resulted in that country taking a much more aggressive stance toward its trade partners. For a variety of reasons, Taiwan was a valid target for such “aggressive reciprocity” and also seemed quite vulnerable to U.S. pressure.

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Indeed, the United States initiated a series of disputes that generally were settled with increasingly substantive Taiwan concessions. Yet the impact of these policy changes on the actual pattern of trade relations between the United States and the ROC was surprisingly moderate, and close to inconsequential if the ability of Taiwan businesses to transship Taiwan’s trade surplus through the PRC is factored in. The “neoinstitutional” perspective on political economy provides one explanation for this paradox or puzzle. In essence, the neoinstitutional approach presumes that policies and policy outcomes are substantially shaped by a society’s political institutions, defined broadly to include longlasting informal decisionmaking mechanisms, the sociocultural norms from which they are derived, and prevailing ideas about legitimate public policies, as well as the formal government organizations that are conventionally referred to as institutions. In essence, this school believes that the structure of the state mediates pressures from above, which emanate from the international system, and from below, which are exerted by domestic political forces. Thus, domestic institutions can have a strong independent effect on policy. Institutions, moreover, are generally “sticky” in the sense that once established they acquire considerable inertia and are generally subject to change only at times of crisis (Ikenberry, Lake, and Mastanduno, 1988). This line of argument turns our attention to the institutional structures of the United States and Taiwan as possible sources for explaining why trade outcomes diverged so markedly from apparent trade policy. U.S. Institutions

On the U.S. side, a half-century-old series of institutions and policies supporting free trade and multilateralism militated against a radical change of policy toward open predation. From this perspective, the “pro–free trade” institutional changes, beginning in the 1930s as a reaction against the Smoot-Hawley Tariff Act and continuing at least through the 1974 Trade Act, still can be used quite effectively by those “resisting protectionism.” To be sure, Congress became more open to escalating cries for protection; and some changes in the responsibilities of executive agencies supported a more aggressive foreign economic policy (Destler, 1986). Still, the president continued to set the major tone and substance of U.S. trade policy. Even the 1988 Trade Act, which was feared to herald a major step away from longstanding U.S. commitments to liberal trade and which certainly reflected congressional unhappiness with the Reagan administration’s policies, gave the president discretion in pursuing “aggressive reciprocity.” And, passage of the act was followed by Congress’s stepping back from greater involvement in trade policy. Milner (1988) adds to this logic by challenging the conventional wisdom about interest group pressures emanating from “below” the state: that

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most interest groups will back protectionist policies, that economic decline will lead to escalating interest group activity, and that the result will probably be an unavoidable push toward predatory trade policy. Rather, she argues, the tremendous growth in “complex interdependence” in the postwar world (Keohane and Nye, 1977) has resulted in many more individual corporations being internationally involved in trade, investment, and multinational production and sourcing. Since rising protectionism and trade wars would disrupt their operations in incalculable ways, many of these corporations have become advocates of keeping the world economy fairly open. In the process, they have made the domestic equations on trade policy much more complex and evenly balanced than the “relative decline” perspective would expect. Extending this institutional approach, Goldstein (1988) has argued that institutions do not consist solely of formal government structures, but also of prevailing “ideas” about what is legitimate policy (see also Chapter 4 in this volume). As Haggard (1990) argues, “economic ideologies” determine the range of policies that are considered. A consideration of the “ideas” or “economic ideologies” prevalent in debates over trade policy would therefore seem essential. In fact, it is these ideas that seemingly constitute a major constraint on the United States’ using its remaining economic power to become a predatory hegemon. Goldstein (1988) identifies several principal “ideas” about trade, each of which is associated with specific government agencies having different missions and responding to different policy logics. The first and still probably dominant one is a commitment to “free trade.” This reflects the historical “lessons” that protectionism exacerbated the Great Depression and that a liberal trading order stimulated the dynamism of the world economy. The emphasis on free trade also comports well with the pluralist and capitalist traditions of the United States. In the context of free trade, however, using economic power to extract protectionist “rents” is regarded as illegitimate. Thus, advocates warn of the evils of protectionism and blame the burgeoning trade deficits of the 1980s on ill-conceived macroeconomic policies, such as the budget deficit and overvalued dollar (Destler, 1986; Hufbauer, 1990; Nau, 1990; Stern, 1987). The liberalizing institutional reforms of the 1930s following passage of the highly protectionist Smoot-Hawley Tariff Act in 1930 did not totally eradicate the agencies and policies of previous eras (when trade policy was explicitly designed to protect specific industries and raise revenues). Rather than maintaining the idea that protectionism per se is justified, policies deviating from free trade are usually justified by the idea of fair trade, i.e., the United States should retaliate against countries that use unfair practices to put U.S. industries at a disadvantage. The fair trade argument is that since some nations and industries had developed special practices that limit free trade, the United States should deal with them on the basis of “specific rec-

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iprocity,” not the “diffuse reciprocity” of GATT (Krasner, 1987). What constitutes fair trade can obviously be quite ambiguous or controversial and the idea could easily be used to justify predatory behavior. However, in the U.S. case at least, even the fair trade philosophy has worked to dampen policy aggressiveness. By justifying protectionism in terms of fair trade, the United States focused on issues that were generally consistent with a liberal trading order. In terms of other countries’ exports to the United States, this philosophy legitimated retaliation against practices that violate liberal norms (e.g., dumping, export subsidization); and the fair trade standard turned the evaluation of charges of unfair practices into quasi-judicial processes, rather than politically charged pleas for relief from noncompetitive industries. More important, the concern with fair trade allowed the Reagan administration to focus its new trade policy of “aggressive reciprocity” on “market opening measures” in countries that discriminated in various ways against U.S. exports. This again promoted a more open trade system because more open markets in principle benefited all exporters, an outcome that is at least indirectly consistent with GATT multilaterialism. When market-opening pressures worked, the United States was not necessarily the principal beneficiary. For example, while the United States has received most of the credit or blame for “bashing Japan” to open its markets, European competitiveness in key products like automobiles means that the United States has lost market shares in some of the sectors of the Japanese economy that it pried open.

Taiwan’s Institutions

This “institutional perspective” suggests that several important limits on U.S. international economic behavior are imposed by its basic political institutions and ideas about international trade. The nature of Taiwan’s political economy is also important for understanding the actual outcomes in trade relations between the United States and the ROC. The most important characteristic in terms of its implications for relations with the United States is that Taiwan’s export sector has been dominated by small businesses that rely on rapid and flexible reaction to international markets (Chan and Clark, 1992; T. Cheng, 1990, 1993; Hong, 1992; C. Kuo, 1991; Lam 1990, 1992; Lam and Lee, 1992). Three important consequences flow from the nature of Taiwan’s export sector. The first two provide explanations for why U.S. pressure on Taiwan produced limited results. First, Taiwan’s small firms did not become identified with specific products over the long term and hence were perceived by U.S. officials as far less threatening than the large Japanese and Korean corporations. Consequently, there was correspondingly less U.S. pressure directed at the ROC. Second, small Taiwanese businesses were able to escape protectionist responses fairly easily, either by jumping from product

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to product or by moving their production offshore (e.g., the Taiwan-ChinaUnited States “trade triangle” sketched in the previous section). The third result is somewhat more ambiguous. Because relations between small businesses and the government in Taiwan are far from close (Chu, 1989; Lam, 1992), the regime is under no particular pressure to support their interests and, in fact, probably views their lack of capitalization and R&D investment as hindrances to industrial upgrading (Chan and Clark, 1992; T. Cheng, 1993; Hong, 1992). This has countervailing implications for U.S.-Taiwanese trade relations. On the one hand, the government’s inability to enforce agreements contributes to the divergence of trade outcomes from policy intentions. If the government can collect only a fraction of the taxes and license fees that are mandated by domestic law (Lam, 1992), how can the United States reasonably expect it to enforce, say, intellectual property rights? On the other hand, the United States almost certainly has benefited to some extent from Taiwan’s approach to trade issues. Thus, the ROC government may be far from passionately committed in many trade negotiations with the United States, since its ultimate “concessions” at the expense of small businesses were probably not entirely unwelcome for the regime. What these policy changes really did was to create greater incentives for private capital to move from declining to sunrise industries as part of the government’s strategy to upgrade production in line with the country’s changing comparative advantage: One MOEA [Ministry of Economic Affairs] vice minister admitted that, in general, U.S. requests on tariff and nontariff barriers were reasonable. But if this was the case, why didn’t Taiwan initiate reforms on its tariff and nontariff barriers on its own? The vice minister’s reply was that without the requests from other countries, it would have been unnecessary to have initiated such reforms. (Chou, 1992: 117)

Thus, as Ikenberry (1988) has argued about U.S. oil policy, foreign pressure and commitments can legitimize government actions that would be politically unacceptable in terms of just the internal “correlation of forces.” CONCLUSION

The basic argument presented here is that U.S. institutions for conducting foreign economic relations, in particular the dominant ideas concerning the legitimate ends of trade policy, have constrained the United States from using its undoubted political and economic power to act as a “predatory hegemon” in the face of “relative economic decline.” A case study of trade relations between Taiwan and the United States strongly supports this hypothesis. Because of the central “institutional” features that shape trade

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policy and performance in both the United States and Taiwan, the policy of “aggressive reciprocity” during the second half of the 1980s created only a few ripples in the overall flow of trade between the United States and Taiwan. This occurred in essence because U.S. continuing commitment to “free trade” limited that country’s initiatives and made even its “successes” unsuccessful. Thus, Taiwan’s good-faith effort to “internationalize and liberalize” its economy satisfied U.S. demands, benefited Japanese corporations much more than U.S. corporations, and even allowed the government to blame the United States for unpopular steps toward structural transformation of the Taiwanese economy. When the United States did adopt a more “nationalist” policy in trying to directly effect “trade results” rather than the “trade regime,” it was in agriculture, an area fairly peripheral to overall trade relations between the United States and Taiwan. NOTES

1. See Chan and Clark (1992) for a wide variety of annual economic and social indicators. 2. Data derived from author’s interviews with Taiwan trade officials. 3. This point was confirmed in interviews with Taiwan trade officials. 4. The data reported in this and the next paragraph are drawn from Monthly Statistics of Exports and Imports, Taiwan Area, The Republic of China, May 1992 (Taipei: Department of Statistics, Ministry of Finance, 1990), p. 10, and Taiwan Statistical Data Book, 1991 (Taipei: Council for Economic Planning and Development, 1991), pp. 26, 208, 213. 5. Interviews with Taiwanese officials. 6. The data reported in this paragraph are drawn from Monthly Statistics of Exports and Imports, Taiwan Area, Republic of China, May 1992 (Taipei: Ministry of Finance), pp. 13–15.

Robert T. Kudrle

7

Fairness, Efficiency, and Opportunism in U.S. Trade and Investment Policy During the 1980s, greatly increased U.S. demands for international “fairness” may be identified by future historians as an indication of declining U.S. hegemony.1 In prior decades, foreign trade and investment practices deemed inappropriate from the viewpoint of the United States’ national interest (or otherwise dominant special interests) were often overlooked to serve more pressing national goals, especially the maintenance of anticommunist cohesion. By the end of the Carter administration, however, the price in prosperity paid for what some suspected were negligible security gains seemed excessive to many opinion makers. The first well-known manifestation of this new posture were calls for “reciprocity” in trade relations beginning in the early 1980s (Cline, 1982). Later, President Reagan employed typical Democratic rhetoric in his endorsement of “fair trade” rather than “free trade” when supporting the 1988 Trade Act. The act elaborated a scheme for the opening of foreign markets that came to be known as “Super 301.” This chapter aims to clarify some of the discussion surrounding the new emphasis on fairness in U.S. trade and investment policy. First, it explores the notion of fairness in U.S. commercial transactions by looking at the main body of law conditioning interactions between buyers and sellers: the antitrust laws. Next, historic and contemporary differences between domestic and international conceptions of fairness are examined. How does fairness thinking change when foreigners interact with citizens? Third, do any special fairness issues arise when foreign direct investment instead of trade is considered? Finally, does thinking about fairness contribute to our ability to predict the future of international economic cooperation? CONCEPTS OF FAIRNESS

A noteworthy aspect of fairness discussions is the absence of a definition of the term. Perhaps because the word is so familiar and its basic meaning 153

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agreed, the word is freely used without elaboration in discussions of both domestic and foreign policy.2 This is unfortunate because ambiguity abounds, particularly about how the claims of conflicting interests should be reconciled. In this chapter I argue for the usefulness of two major approaches to fairness that have informed the development of U.S. public policy: producer fairness and consumer fairness. Producer fairness stems from the concern that competitive market outcomes will disadvantage some subset of actual or potential sellers to the benefit of other producers or consumers. Consumer fairness means that the extent of a just outcome is indexed by its advantage to the final purchaser. I also consider a third concept of fairness, which remains fraught with both political and conceptual difficulty: national fairness, where gains to U.S. nationals are balanced against gains to persons of other nationalities. One characteristic that might frequently distinguish national fairness from simple national advantage turns on a “golden rule” test: Would the outcome be considered fair if the identity of the affected parties were reversed? Fairness—some notion of equity—must be distinguished from the touchstone of traditional economic analysis: economic efficiency. The efficiency criterion gauges the extent to which any change increases the size of the economic pie, regardless of the attendant distribution of the slices.3 I argue that the dominant national fairness standard has shifted away from a complex mix of producer and consumer fairness to a criterion based almost exclusively on consumer fairness for evaluating purely national outcomes. This development has been driven powerfully by the usual coincidence of consumer fairness with the efficiency standard: an increase in national wealth. Where the two criteria have diverged, however, the concept of consumer fairness continues to dominate national thinking. In international bargaining on trade and investment matters, one finds a bewildering pastiche of all three concepts of fairness along with occasional concerns focused primarily on efficiency. The confusion is compounded by the frequent pursuit of national advantage adorned with implausible fairness claims.4 Overall, U.S. economic policy at home and abroad can be explained largely in terms of the competing and complementary pull of the four criteria of producer fairness, consumer fairness, efficiency, and national advantage. Normative discussions of economic policy frequently conflate all four criteria in a way that generates murkiness in both popular and policymaking discussions alike. FAIRNESS IN DOMESTIC COMMERCE

The literature discussing international differences in thinking about fairness in commercial transactions is woefully underdeveloped. The English com-

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mon law treats various specific commercial practices such as fraud as unfair in the sense of violating accepted moral norms. The route by which these ideas made their way into policies about how markets ought to work in the United States is incompletely documented (but see Letwin 1965; Bernhard, 1967); it is even less well recorded abroad. General attention has been focused in recent years on differences in fairness thinking between the United States and Japan (Benjamin et al., 1991), but even this work builds on a modest empirical foundation. In the nineteenth century in the United States the turmoil accompanying industrialization generated new thinking about fairness. Popular discussion and legislative debate surrounding the passage of the Sherman Act of 1890 suggest a widespread view that monopoly and attempts to achieve it were unfair. The act does not use the word “fair,” but its two most famous sections—outlawing firm collusion and forbidding actions tending to create a monopoly—refer to actions that were widely regarded as “unfair.” One treatise on U.S. policy in this area describes Congress as wanting “to avoid abuses of business power and ensure some semblance of fairness in interactions between big business, small business, and the consumer” (Scherer and Ross, 1990: 2). U.S. economists held varied views of monopoly at the time the Sherman Act was passed (Scherer, 1990). Although many saw possible cost saving advantages in monopoly, a large number attacked monopoly on the same grounds as did the western farmers: the unfairness of monopoly prices that transferred wealth from buyers to sellers. Perhaps most interestingly, virtually no one stressed the inefficiency that resulted from a failure of price to reflect the marginal social cost of resources employed, the modern textbook answer to the question “what’s wrong with monopoly?” In fact, the theory underlying that angle on the problem was poorly developed at the time (Scherer and Ross, 1990: 248–249). Apparently also lacking was any approach to reconciling possible increased efficiency with increased prices, i.e., decreased fairness to consumers.5 Many early economists appear similar to contemporary politicians in their sympathy for suppliers and commercial purchasers disadvantaged by monopoly power, as well as for the final purchasers of the monopolized product; but one finds little systematic discussion of how the welfare of such suppliers should be compared with the welfare of consumers. Cases were usually discussed in which both were disadvantaged by monopoly. The Clayton Act, passed twenty-four years later, identifies alleged monopolycreating practices by individual firms. The language of the act focuses on practices firms employ in dealing with other firms—tying, exclusive dealing, and price discrimination. Only Section 7 on mergers seems to suggest an economic crime in which the proximate victim may be the general public rather than a commercial supplier or customer. Even here, however, concern may have included the welfare of firms not wishing to face competition from the behemoths created by commercial combination. All of the suspect

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practices are to be attacked when they substantially lessen competition or tend to create a monopoly. The Federal Trade Commission Act, passed the same year as the Clayton Act, created an agency intended specifically for antitrust enforcement, and in Section 5 the act outlawed “unfair methods of competition” (Scherer, 1990: 13). The basic U.S. antitrust laws thus declare themselves in favor of competition but were clearly not written to exclude a concern for the welfare of competitors. The latter impulse came powerfully to the fore during the Depression. State “Fair Trade” laws beginning in the 1920s were designed to protect shopkeepers, mainly retail pharmacies, from the onslaught of a development more economically significant than most technical innovations: distribution-efficient mass merchandising through chain stores. Fair Trade laws exempted price restraints between manufacturer and retailer from the strictures of Section 2 of the Sherman Act. The Depression years generated two other major innovations in antitrust: the Robinson-Patman Act, which changed the language of Section 2 of the Clayton Act to make price discounts by manufacturers to large buyers difficult to justify,6 and the Miller-Tydings Act, which gave the Federal Trade Commission something unique to do in the service of “fairness.” It was enjoined to explore “unfair and deceptive” business practices, an argument that was used especially to justify several decades of skeptical inspection of advertising, promotion, and product quality. Not until the 1950s was a body of economic theory developed that comprehensively addressed the specific content of the antitrust laws. Mason (1959) and Bain (1956, 1959), the progenitors of the “Harvard” approach to antitrust, presented the “structural” view of market performance that related a limited set of industry conditions to the probability of beneficial outcomes for society (Kudrle, 1986). This work supported the skepticism with which economists had generally greeted the “competitor friendly” policy innovations of the 1930s. Both Robinson-Patman and Fair Trade were condemned as inimical to the economic welfare of society. Yet the basic thrust of the writing was activist: The government should ensure that structural conditions, particularly concentration and barriers to entry, not be shaped by would-be monopolists to thwart competitive processes. Practically, this implied caution about mergers and skepticism toward “image-building” promotional practices and other barrier-enhancing practices outlined in the Clayton Act. In short, the government should guard against both collusion and exclusion. If the Bain-Mason approach attacked the “competitor protection” strain in antitrust, lawyers and economists identified with the University of Chicago expressed alarm about Harvard’s defense of policy activism. Chicago writings attempted to demolish the case that either concentration or conventionally defined barriers stifled competition. They argued that government intervention, not a relatively unrestricted market, would create an

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inefficient industrial configuration that ill serves the consumer. Influential writings in this tradition include those of the economists Peltzman (1977) and Stigler (1981) and the lawyers Bork (1978) and Posner (1976). Amidst these competing ideas, a political force—business aggrieved by competitive disadvantage—never found a coherent, persuasive, and sustained intellectual voice, despite an especially powerful political counterattack in the 1930s.7 This approach rapidly lost favor with the ascension of both the Harvard and the Chicago approach, and ever fewer influentials declared allegiance to businesses whose costs were higher than those of competitors.8 The concept of fairness as a form of commercial life support for U.S. firms seems to have expired almost entirely by the 1980s.9 In particular, influentials of wide-ranging political persuasions had accepted the longstanding complaint of economists that the attempt to protect capital and labor from adjustment costs by muting output competition exacted an excessive price in consumer welfare and efficiency. Those who had advocated help for producers came to favor some kind of adjustment assistance instead, although no systematic program of this kind has yet been developed in the United States. In antitrust policy, a widespread agreement developed that combined many elements of “Chicago” and “Harvard” thinking. The basic intellectual structure of the Harvard approach continued to underpin the laws, but with a much more permissive notion of thresholds of possible danger (Salop, 1987; White, 1987; Fisher, 1987; Schmalensee, 1987; Davidow, 1990). A higher level of consensus about the appropriate role of antitrust likely prevails today among economists, lawyers, and policymakers in the United States than at any previous time. The arguments of the Chicago school that widespread government intervention could more easily retard than advance the quest for efficiency, particularly by making the realization of scale economies impossible, leavened the Harvard analysis but did not overturn it. Moreover, a revival of the use of antitrust for social or political purposes that might exact a price in efficiency appears highly unlikely in the face of general alarm about U.S. international competitiveness. One dispute relevant to this chapter persists, however: the importance of distributional issues. One of the attractive and convenient features of simple Bain-Mason antitrust thinking—where economies of scale defenses for concentration tended to be viewed with skepticism—was the belief that efficiency–consumer fairness trade-offs are rare. Improving consumer welfare typically turned on avoiding monopoly power. Stiffer competition was expected to lower prices with unchanged or diminished costs, so allocative gains combined with a wealth distribution in favor of purchasers (who were assumed typically to be less well off than firm owners). But what if an increase in market power accompanied efficiency gains? Much economic thinking sees only one goal for public policy toward competition and mar-

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kets: the creation of the largest possible economic pie, with the distribution of market slices to be approved or changed by the political process. Critics of this position respond that no redistribution will take place in response to, say, an airline merger that simultaneously increases the efficiency of airline service production and raises prices. The argument against distributional irrelevance becomes stronger when the winning equity holders are foreign.10 The 1984 Department of Justice Merger Guidelines explicitly allow for potential cost savings as a factor in deciding merger cases but do not go so far as to make efficiency the sole antitrust criterion.11 Antitrust thinking in the United States evolved from the idea of fairness as a balance among interests to one concentrating largely on consumer welfare and, generally but not always, tending toward economically efficient outcomes. Earlier notions of producer fairness, never a dominant force, lost most battles after World War II. The best quality at the lowest possible price became the only defensible criterion of consumer fairness. Consumer fairness thus became powerfully identified with competitive market outcomes that were assured by government prevention of collusive or exclusionary behavior. Tension persists when authorities face the approval of mergers that promise production cost savings while also increasing the likelihood of increased prices resulting from enhanced market power.

A Political Interpretation

Kudrle and Bobrow (1982) outline a simple approach to policy determination that can be used to explain the evolution of antitrust policy. Policy in general is determined by four considerations. Ideological consonance gauges the extent to which a proposed or existing policy conforms to the overall ideological climate of the country at a particular time. Impact transparency deals with the extent to which a policy’s effects can be easily seen and understood by the citizenry. The distribution of perceived costs and benefits examines the problem from the narrowest public choice perspective.12 Institutional and political context essentially sets the stage for a particular policy problem in existing institutions and political forces. Such a setting varies over time in response to interaction with the other three factors. In his respected commentary on U.S. antitrust laws, Neale (1970: 429) has argued that “to say that American public opinion supports the antitrust policy is very much the same thing as to say that it favors a competitive, private enterprise economy.” While this basic ideological commitment has not changed substantially over time, impact transparency has. The development of the logic and evidence of the field of industrial organization within economics, and the rather high degree of judicial discretion in antitrust cases, have propelled public policy faster than might have been the case had policy leadership been exercised more exclusively by elected officials. The cost to consumers of any substantial producer protection element in antitrust

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became more thoroughly documented with each passing year. The configuration of relevant interests—the distribution of perceived costs and benefits—has changed substantially as well. The inability of small business in many areas of commercial life to mount a successful political attack on large and more efficient competitors has led to a decrease in its size, and hence also in its political influence. Organized labor, another important actor, has based its political positions on the rent-yielding13 potential of various kinds of employers and not primarily on a populist vision of the United States. More specifically, employers with market power typically appeared to be the most attractive industrial partners for organized labor, although labor as a political force has in any case grown steadily weaker since the early post–World War II period.14 FAIRNESS AND THE WATER’S EDGE

Policy addressing competition between U.S. and foreign sellers was developed in the late nineteenth and early twentieth centuries. This was the period of political and intellectual ambivalence about the U.S. antitrust laws, and they were not yet sustained by a systematic intellectual defense. The Sherman and Clayton Acts have survived because they declare themselves against conspiracies in restraint of trade, monopoly, and a lessening of competition—goals that have needed no basic modification as they were increasingly renewed as consumer fairness issues. In sharp contrast, the major “fairness” laws controlling foreign trade—those concerning dumping and countervailing duties—emerged as discrete pieces of legislation less explicitly linked to more general goals. They concern losses of sales, profits, and employment from goods that are sold in the United States at prices lower than those in the sellers’ home market (“dumping”) or sold with subsidy from a foreign government. Much attention in recent years has focused on the limitations of these “unfair trade”15 laws. Does supply from foreign competitors legitimate a more complex conception of fairness than is reflected in current antitrust practice?

Antidumping Laws

Gifford (1991) has argued persuasively that the country’s first antidumping law was aimed at predatory pricing exercised for purposes of increasing market power, much as did Section 2 of the Clayton Act. But the original antidumping law of 1916 was supplemented by additional legislation in 1921 that included a broader mandate to protect U.S. industry, a charge that has remained unchanged to the present. In 1985, Susan Liebeler, a member of the International Trade Commission, an agency partly responsible for administering the trade laws, attempted to reconcile the antidumping laws

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with the antitrust laws by advocating action only against those dumpers in a position to practice collusion or exclusion—essentially the current antitrust test. Liebeler (as summarized by Gifford, 1991) considered all the forms of dumping that had been carefully delineated by economists earlier in the century. These included sporadic (one-shot) dumping, intermittent (unpredictably continual) dumping, predatory dumping (prices are lowered to put domestic competitors out of business and are then raised again), and persistent dumping (an eternal bargain). She concluded that only predatory dumping poses a serious threat to national welfare. This position was later rejected by the courts, which declared as a standard “all dumping which produces an injury to [U.S.] industry” (Gifford, 1991: 29). Why is dumping a problem without a domestic policy analogue? Why are the prices of Wyoming firms not patrolled in Montana to see if they differ from prices back in Wyoming? To attempt an answer one must understand that substantially different prices in different markets depend on the inability to perform effective arbitrage—the resale of goods from low-price to high-price markets. Doctors’ services can be sold at different prices to different patients because they cannot be resold. On the other hand, cheap steel from Wyoming will return if for some reason it is sold at a substantially lower price out of state—the illegality of state controls on interstate commerce endorses the material incentives of buyers and (re)sellers. So dumping depends on the dumper’s market not being reinvaded. Second, there is a limited number of rational motives for dumping. In addition to predation to gain market power, firms can engage permanently in third-degree price discrimination (Pigou, 1920: 240–256) made profitable by differing demand elasticities.16 And they can maintain production in the face of unanticipated collapses of home demand by selling abroad at prices above short-run marginal cost but below long-run marginal cost. Finally, where learning effects are important, it may be profitable for a firm to charge below marginal cost while that cost is above its minimum value (Spence, 1981). This would not necessarily result in a lower export market price than the one charged at home, but procedures actually used in administered protection would find dumping. Imagine that steel “dumped” from Wyoming into Montana cannot be reexported. Should Montana complain if, for example, it has a higher demand elasticity and will therefore experience lower purchase prices than Wyoming? According to the logic of a U.S. Senate Report (1974), it apparently should, because the Antidumping Act was “a statute designed to free U.S. imports from unfair [my emphasis] price discrimination practices.” But to a purchaser and to the final consumer as well, “unfair” price discrimination means higher prices; the antidumping statute would ignore purchasers and treat “fairly” only Montana producers of steel. The lack of a domestic analogue to the antidumping laws should not obscure the fact that the basic

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consumer fairness criterion of contemporary antitrust has been stood on its head. The argument just made implicitly assumes that Montana has no “state” interest in having a steel industry that can justify higher-cost steel than obtainable from elsewhere. Most economists would agree that this would be the case for the United States as a whole for most products.17 But are there possible external effects that could overturn that conclusion? Montana may not especially benefit from having a steel industry,18 but if it does have one, a distressed industry will create difficulties for the state as a whole in the form of temporarily unemployed resources, which imply lower general incomes, reduced tax payments, and increased state benefit outlays. Consider a situation in which both Wyoming and Montana are major steel producers with essentially the same costs, but Wyoming maintains an import barrier against steel from Montana and not vice versa. In times of low demand, Wyoming producers may then dump their output out of state, increasing the distress of the Montana industry, which may already be suffering from the same original demand problem. Montana producers may press either for protection against Wyoming’s dumping or for access to Wyoming’s market. If they have the latter, dumping ceases to be a problem of significance, as actual U.S. interstate economic relations attest.19 Countervailing Duty Laws

Similar arguments can be made about subsidized sales from abroad, at which countervailing duties are aimed. Unless such sales are being made with an intent to monopolize or unless they cause negative externalities to the U.S. economy, perhaps by adding to factor unemployment, only special arguments can avoid concluding that the United States as a whole gains from the practice. When foreign governments are successfully pressured by domestic interests to give the United States perpetual bargains, the appropriate response should be slightly incredulous gratitude.20 Nonetheless, U.S. antipathy toward foreign subsidization goes back to Alexander Hamilton, and the first national countervailing duty statute was passed in 1897 (Jackson, 1989: 255). Once again, imagine a parallel case within the United States. Suppose Wyoming gave a large tax break to firms manufacturing a certain product. If these subsidies were to be permanent, producers in Montana—assuming either that the Wyoming firms could not collude or there were low barriers to reentry by Montana (or other states’) firms—might expect little sympathy from local consumers and taxpayers. To be sure, as in the previous case, the Interstate Commerce clause would prevent protective action. But there are subsidies to businesses that affect interstate commerce in virtually all states, and there is little if any pressure put on the federal government to discour-

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age such activity. While such subsidies are too small to greatly affect prices, one could speculate that most citizens of one state would not object to having their consumption subsidized by out-of-state taxpayers.21 Subsidized production in one area that increases the difficulties of a declining industry in another might still provide a source of externality, just as in the previous case. But the absence of import barriers into the home territory of the subsidized industry would leave it vulnerable to retaliation, and such vulnerability might be sufficient to generate restraint.

Why Is Foreign Commerce Different?

What underlies the rather dramatic disjuncture in U.S. fairness thinking between the foreign and domestic arenas? In the purely domestic context, market outcomes prevail in the service of consumer fairness; and producers negatively affected by innovation, by new competition from ascendant regions, or by any other domestic threat receive little support from any level of government. When foreign production is considered, however, the opposite situation prevails: one seems to find a fairness concern only for aggrieved competitors, the domestic antitrust fairness criterion that was seldom used in isolation and that has now largely disappeared. Two factors—which are not independent of each other—appear sufficient as an explanation of the difference: theoretical subtlety and mercantilist rhetoric. Paul Samuelson has described the doctrine of comparative advantage in international trade as the most important nonobvious proposition in social science. It remains so obscure that scores of millions in the United States can be intermittently persuaded that competition from “cheap foreign labor” is “unfair.” Poverty itself can be portrayed as an unfair advantage. Moreover, while policymakers across the political spectrum overwhelmingly embrace the fundamental tenets of free trade, their lack of theoretical understanding—as opposed to mere acceptance—creates considerable latitude for manipulation by special interests. Although no data are known to the author, it is very likely that even among those accepting free trade, “fair” trade arguments make some headway. In purely domestic commerce, all sales go to other Americans. While this has no national interest meaning in most competitive markets, its irrelevance may be counterintuitive. Consider the appeal of the now famous level playing field. The U.S. public wants the highest possible living standards; this implies the most favorable combination of earnings from abroad and payments to foreigners. The producer-focused playing field concept must mean that U.S. firms should not be excluded where they could otherwise sell, and they should not be protected where they would otherwise fail. If other meanings are assigned, the United States as a whole typically loses. Instead, the concept has been used to deny the legitimacy of the very production cost differences that underlie the concept of comparative advantage. Especially per-

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nicious is the apparent implication of the level playing field that many of the costly regulatory measures mandated in the industrialized countries— health, safety, and environmental measures, in particular—create inequities among competitors operating from different national bases. In fact, these considerations legitimately shape comparative advantage just as do differences in the more traditional categories of costs.22 And the manipulation of these concerns for protectionist purposes is conceptually indistinguishable from other protectionist policies. National fairness does not imply identical or even similar regulation abroad; it means merely that regulation is undertaken only for its nominal social purpose.23 An additional factor muddles the ability of the general public and policymakers alike to see the fundamental similarities between foreign and domestic commerce. From at least the nineteenth century, trade negotiations have taken place in an atmosphere of mercantilism that simplistically regards exports as good and imports as bad. The prevailing regime based on the General Agreement on Tariffs and Trade (GATT) emphatically maintains that posture: “concessions” are granted to trading partners in return for “concessions” granted to one’s own state.24 In fact, some mercantilistic posturing does make sense even where negotiators fully accept the contribution made by imports to national welfare. Consider the rank ordering of material welfare-maximizing national preferences. First best for a nation would be lowered trade barriers both at home and abroad.25 Second and third best, depending on production and demand conditions, would be free trade at home and protection abroad or vice versa. Worst would be protection everywhere. Bargaining about protection simultaneously recognizes two truths, one political and the other economic. The political truth is that powerful domestic interests threatened by liberalization need to be counterbalanced by obvious gainers from such liberalization. The economic truth is that the lowering of foreign barriers holds the key to much of the national gain from freer trade. But the rhetoric goes too far. The language of trade bargaining frequently portrays the removal of domestic protection as a necessary evil, and this scarcely contributes to an understanding of the similarity of domestic and foreign trade. Overall, one could interpret the emerging understanding of the benefits of foreign trade as an extension of consumer fairness. Just as U.S. consumers gain from foreign bargains, so too do foreigners gain when the reverse situation holds and U.S. goods are offered at lower cost abroad. In general, the gains to U.S. producers in the latter case are also apparent, while any residual producer fairness policies exercised on behalf of domestic firms abroad harms the United States. Thus, most legitimate claims of unfairness to U.S. producers abroad can typically be identified by the absence of consumer fairness there. But there are limits to this simple rule. For example, assume protection allows a country’s firms to dominate an industry operat-

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ing with economies of scale or cumulative output so that prices are at least as low at home as they would be if the national market were served by foreign producers. If there are worldwide positive profits for the producing firms, then national ownership of such production increases national income by harming foreigners in a way that the “consumer fairness” benchmark in the domestic market misses. New international “golden rules,” i.e., restrictions that the major players would not find offensive if applied to their own behavior, can still avoid conflict.

An Interpretation

A modified public choice analysis of the contrast between purely domestic and domestic versus foreign “fairness” norms may be derived. Ideological consonance differs from domestic policy because of the difficulty of understanding the foreign policy posture appropriate when a domestic commitment to competitive markets may not be matched abroad. And the arguments about just when policies toward foreigners should depart from norms based on purely domestic situations are complex; they contrast sharply with the intuitive notion that the cheapest source of supply should prevail in a closed economy. This lack of impact transparency allows policymakers great latitude when responding to the pressing needs of affected constituents. Moreover, a unified domestic economy has no internal policy analogue to border controls: tariffs, quotas, and administered protection. The lack of impact transparency leads to a further problem with the administered protection laws. The laws make little sense as written; they are much worse as administered. The gathering and assembling of evidence, the substitution of estimates for missing data, and the complete absence of adversary proceedings all contribute to a substantial negative effect on the U.S. economy (Palmeter, 1979). In short, the “unfair trade” laws are themselves glaring examples of unfairness by almost any conventional criteria.26 But all of this is hidden from public view and is largely unknown even to members of Congress. In terms of political coalitions, a fairly protectionist regime of administered protection allows business as a whole to maintain nearly a solid front in favor of freer trade while tolerating support for certain negatively affected industries. At the same time, the growth of vital international trade connections, particularly within multinational enterprises, provides a formidable barrier to substantial backsliding toward protection.27 Moreover, while foreign producer interests do not directly count politically, they frequently have strong allies in import-using industries. No decisive success has yet been achieved in establishing consumer fairness as a norm that should replace the narrow focus of producer fairness in U.S. dealings with the broader world. Yet while the problem of administered protection is very real, it does not create a permanent problem for the

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advance of trade liberalization among the developed countries. The setting for further advance remains generally propitious, if not as immediately promising as in some earlier periods. Successive GATT rounds have lowered average tariff rates to only a few percentage points, despite the existence of additional constraints in many sectors. As the previous analogies with interstate competition illustrated, the ability of goods and services to penetrate freely each other’s territories largely eliminates the problem of dumping. At the same time, an open market invites retaliatory subsidization and hence offers maximum incentive for tacit or explicit mutual restraint.28 The Convergence of U.S. Fairness Thinking with That in Canada and Europe

Both Canada and Europe now view fairness in ways that are unprecedentedly similar to those prevailing in the United States (Davidow, 1990). The Macdonald Commission (Kudrle and Lenway, 1991) effectively marked an important acceptance of increased reliance on consumer fairness as a criterion for Canadian economic policy, a development that the Free Trade Agreement with the United States builds upon and makes difficult to reverse. In Europe, the 1992 Project was propelled from the beginning by business forces eager to create a completely unified market as a base to confront the rest of the world. Most elements of producer fairness have been casualties of this thoroughgoing economic integration, although European Union competition policy retains some prejudice in favor of small and medium-size firms (Fox, 1986). In most of European economic life, however, fairness to producers now means generous adjustment assistance but not the right to avoid adjustment.29 In international commerce, however, Canada and Europe also resemble the United States: they maintain producer-regarding administered protection legislation that considers (and typically ratifies) accusations of dumping and subsidized production from abroad.30 The general argument just outlined is more than merely a plea for more “rationality” in the formulation of administered protection policy and trade policy more generally. It also constitutes a prediction that, as the similarity of benefit from domestic and foreign trade is more widely and completely understood within the major industrial nations, most of their administered protection will be dismantled through mutual bargaining. From a national interest point of view, the major reason for maintaining the policies today is to bargain away barriers in other countries. The national interest requires competition among suppliers both at home and abroad. In the U.S. case, most industries could not be successfully monopolized abroad because entry barriers against U.S. domestic entrants could not be successfully maintained, but possible exceptions demand policy recognition. From this perspective, the increasing convergence of competition policy among the countries of Europe and North America provides much encouragement

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(Davidow, 1990; Rosenthal, 1990). Convergence need not be perfect to provide a high level of confidence that consumer fairness prevails at home. And consumer fairness abroad helps maximize U.S. gains from trade. National opportunism unleavened by any fairness thinking can also be found in U.S. policy toward exports. The Webb-Pomerene Associations for export trade, granted exemption from the Sherman Act in 1918, allowed foreign collusion in export sales under limited circumstances (Bergsten, Horst, and Moran, 1978: 258–259); the Export Trading Act of 1982 provided additional antitrust protection for groups of firms cooperating to sell abroad (Abbott, 1982). Such legislation fails to pass any golden rule—it serves the national interest only by offending U.S. standards of consumer fairness viewed through foreign eyes—and is destined for revision as cooperation increases. INVESTMENT FAIRNESS

Because trade and investment are so closely linked, something must be said about the issues of fairness in direct investment. Interestingly, the issue of producer fairness about incoming foreign direct investment (IFDI) has seldom arisen in the U.S. context, at least in part because the great influx of direct investment into the United States came after the U.S. direct investment “invasion” of most of the rest of the world, accompanied by U.S. insistence on national treatment in nonrestricted sectors. Perhaps as important as the timing of the U.S. experience is the meaning for the national industry of restricting ownership to nationals, unconnected with protecting firm output. By insisting on domestic ownership, a restrictive policy may actually jeopardize the health of the domestically located industry. A foreign takeover means that the acquired assets are worth more to the new owners than to the old ones. Among other considerations, this may well mean that the new owners have brighter prospects for staving off import competition or increasing exports. And most IFDI appears to contribute to consumer fairness by increasing competition within the U.S. market. Similar arguments have become increasingly persuasive in most industrialized countries (Kudrle, 1992). The traditional U.S. position on IFDI holds that the reservation of selected sectors by other countries for national firms is fair, but that it should be limited as much as possible; and, if entry is permitted, foreign and domestic firms should receive the same treatment. In recent years, the United States has gone further and has pressured foreign governments for trade and investment concessions beyond international trade agreements as part of a campaign of “aggressive unilateralism” (Bhagwati and Patrick, 1990). The growing importance of services in the U.S. economy, their frequent dependence for sales abroad on a base of foreign direct investment,

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and the general exclusion of both service and investment issues from the GATT provided part of the grounds for U.S. impatience. Industrial countries continue to differ in their restricted sectors (OECD, 1987), but the overall level of restriction and the percentage differences in restricted sectors as a part of the entire economy is now lower among the richer countries than ever before (Kudrle, 1991, 1992).31 Fairness issues have played only a minor role in U.S. IFDI policy. No important group has taken the view that foreign-owned competitors should be treated differently unless collusive or exclusionary practices also appear imminent. Consumer fairness has prevailed.32 The picture with respect to outgoing direct investment (OFDI) is a bit more complex. In the 1970s, the AFL-CIO pushed for adjustment assistance for workers whose interests were harmed by OFDI as well as those harmed by imports; it was largely frustrated in both attempts. The Burke-Hartke Bill of 1971 tried to reduce the attractiveness of OFDI by eliminating the tax credit for foreign income taxes and by giving the president authority to block new OFDI at his discretion. But an equity distinction between jobs lost through purely domestic dynamics and those lost because of the international economy never gained either persuasive expression or a large political constituency. Moreover, the United States has always defended forgiveness of foreign corporate taxes in reckoning U.S. tax liability as part of a generally accepted international practice to help guide investments to their most efficient use in the world economy.33 In fact, this dedication to efficiency (which, of course, also helped bind the anticommunist economic coalition) has served as a kind of U.S. foreign aid until recent years because the stock of U.S. OFDI has historically been far greater than IFDI. The U.S. position in international forums that special incentives and requirements not be extended to IFDI also represents a policy defended mainly on grounds of international efficiency rather than fairness. The United States stresses the distortions of comparative advantage that such requirements encourage (Graham and Krugman, 1990).34 The overall politics of U.S. direct investment policy has been explored in terms of the modified public choice approach employed here (Kudrle and Bobrow, 1982). Ideological consonance with all of the major goals of U.S. foreign policy was high throughout; costs were largely invisible, while benefits were concentrated among those firms that profited from the ability to function abroad and those workers and communities whose welfare was improved by new foreign-owned operations in the United States. In sharp contrast to trade protection, it was extremely hard to fashion politically promising protection policies against IFDI except on national security grounds (see Chapter 9). To the accusation that jobs were being exported by OFDI, business frequently gave the plausible response that a failure to follow opportunity abroad would simply lead to a shift of global output from U.S. hands. Similar arguments have been telling in Canada and Europe as

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well. Investment cooperation among the industrial countries is high and growing. The constituents of increased comity are also clear: rights of establishment and national treatment. A major missing ingredient has been an appropriate forum for bargaining away remaining restrictions (Kudrle, 1992). UNFAIRNESS AS A PROBLEM IN U.S. ECONOMIC RELATIONS WITH JAPAN

The chapter thus far has stressed the emerging, but far from completely realized, recognition of the propriety of essentially similar notions of fairness in most aspects of foreign and domestic commerce. While only the U.S. history of the shift toward consumer fairness has been traced here in any detail, the impetus in Canada and Europe has been similar. Importantly, the search for consistent and equitable trade and investment policies for non-European firms within the community has provided a set of salient benchmarks against which U.S. economic interests and their political protectors can consider U.S. treatment there. On the other side of the Atlantic, the emerging U.S. dialogue with Canada over a range of policies provides grounds for optimism about the establishment of mutually recognized fairness norms; the area of fundamental disagreement appears modest. Establishment of a similar set of norms with Mexico can now be imagined in a way that it could not have been just a few years ago. The United States faces one major commercial partner with which accommodation to consumer fairness norms continues to appear problematic. Indeed, neither the United States nor the European Community has developed a confident understanding of, or an effective strategy for dealing with, the Japanese economy. The fairness problem with Japan can be explored by considering the assumptions that underlie the GATT. These multilateral negotiations, as explained earlier, have had a distinctively mercantilistic flavor. The expectation of each negotiating partner has been that the market access granted would be matched by roughly equivalent increases in access abroad. When national practices seem to negate in practice what is promised in negotiations, GATT uses the phrase “nullification and impairment.”35 After Japan fully joined the GATT in 1955, that country’s general bargaining posture and concessions in subsequent GATT rounds did not appear particularly unusual, but the increases in trade flows following the reduction in barriers were quite remarkable. Between 1975 and 1986, the import penetration ratio (imports/domestic production + imports - exports) in manufacturing for the United States rose from 7.0 to 13.8; for France from 17.9 to 26.7; and for Germany from 24.3 to 37.2. Most other developed countries also experienced substantial increases. By contrast, the Japanese experience

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paralleled the low and stable ratio of many developing countries; it actually declined from 4.9 to 4.4 percent.36 Although special concern about Japanese trading practices was certainly brought into focus by Japanese success in export markets, these extremely low import figures would have attracted the attention of Europe and the United States in any event, especially as they seemed to reinforce copious anecdotal evidence on trade barriers. Specialists differ about the extent to which such factors as Japan’s geographical location, its industrial structure, and its national tastes can explain the difference between its trade patterns and those of its partners.37 Although formal Japanese barriers diminished over the 1980s, and U.S. exports to Japan finally increased substantially in 1988 and the following years, a poorly understood set of additional informal barriers appear to remain. Many (e.g., Krasner, 1987, Prestowitz, 1988) have argued that a singular combination of informal or unrecorded government direction, social pressure within business circles, and business collusion keeps foreign goods from fully penetrating Japanese markets. Whatever the true causal structure, the conviction that Japan was essentially ignoring consumer fairness at home, and hence also national fairness vis-à-vis its trading partners, had become virtually universal in the United States by the mid-1980s. Americans are surely at least partly right about Japanese protection, but they use the wrong index to measure it. The fundamental macroeconomic relations of the global economy may be even more widely misunderstood than the concept of comparative advantage. The 1988 presidential campaign of Representative Richard Gephardt appeared to have been based on the fallacious assertion that the bilateral Japanese trade surplus with the United States indexed Japanese wrongdoing. The same thinking underlay early versions of the 1988 Trade Act, which aimed to penalize countries running consistently large bilateral trade imbalances with the United States. Economists have frequently challenged those advocating such an approach to consider where they think the United States was supposed to get the excess of what it was demanding over what it produced, the condition endemic to “Reaganomics.”38 If the Japanese engage in activity that prevents U.S. imports, they do indeed lower U.S. welfare and provide grounds for national fairness complaints based on Japanese collusive and exclusionary behavior. Japanese protection lowers U.S. living standards by yielding less favorable overall terms of trade than the United States would otherwise enjoy. By thus violating consumer fairness at home, this Japanese protection almost certainly lowers overall material living standards as well, but this is cold comfort for U.S. exporters and policymakers. The United States pursued an array of initiatives in the 1980s supposedly aimed at increasing the consumer fairness of Japanese import policy, and hence national fairness for the United States. Some Japanese restrictions, notably the use of quotas for agricultural products, were attacked

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through the GATT. Bilaterally, the United States pursued ad hoc market opening sector specific (MOSS) negotiations in 1984–1985 for forest products, telecommunications, medical equipment, and pharmaceuticals (Prestowitz, 1988: 296–297). Disappointment with the results of these approaches, both in the specific sectors and overall, was largely responsible for increased congressional determination to insist on executive action in the 1988 Trade Act. It mandated that nations be identified for retaliatory treatment in a section called “Response to Unfair Trading Practices.” This was the now well-known “Super 301” (so called to distinguish it from somewhat similar “301” sections of previous trade laws of 1974, 1979, and 1984) that soon resulted in what amounted to an indictment of the Japanese. Japan simply refused to be called on the carpet but did agree to at least formally symmetrical discussions, which came to be called the Structural Impediments Initiative (SII). Each country developed a wish list for the other, but the content differed dramatically. Japan’s list included no important accusations against the United States save sloth; essentially, the United States should increase its competitiveness.39 The United States, however, focusing on several major demands, two of which dealt squarely with the pursuit of Japanese consumer (and U.S. national) fairness, insisted that Japan rescind legislation controlling the number and size of large retail outlets, citing evidence that larger outlets sold a higher percentage of imported goods and arguing that an increased role for large stores would both increase the penetration of present U.S. exports to Japan and lower the barriers to entry for new exports. The United States also demanded that Japan more vigorously enforce its antitrust laws, which on paper resemble those of the United States (they were written during the Occupation; see Hadley, 1970). Those laws have a history of lax enforcement by an agency that has typically been no match for governmental and private forces more supportive of exclusion and collusion (First, 1986). U.S. authorities have been particularly concerned with keiretsu, Japanese enterprise groups. Exclusive or preferential trading among firms in the same keiretsu is thought to raise barriers to entry by foreigners—as well as other Japanese (Ito, 1992: 177–208). Without evaluating the precise merits of this part of the U.S. position, the U.S. claim that it aimed at nothing more than facilitation of the openness previously agreed to by Japan is quite strong. But this is not true of a third issue: increased expenditure on infrastructure. Here the United States seemed simply to be using an environment of apparent unfairness to press national advantage. What business is it of the United States whether Japan spends 1 or 10 percent of its GNP on parks, sewers, and transportation?40 Increased spending may make Japan a less formidable international economic foe, but “unfairness” in international commerce is difficult to argue. Increased infrastructure spending might be a good idea, and it could certainly decrease the Japanese current account surplus, but it is not a fairness

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issue and actually constitutes a quite remarkable intrusion of the policy preferences of one sovereign state on the internal policies of another. Such an initiative, in turn, generates reactions of unfairness in Japan. Perhaps the most potentially damaging of all U.S. reactions to Japan’s protection is a “results orientation” (Robinson and Houghton, 1989; Dornbusch, 1989). This posture casts Japan in the role of a totally different economy, an unredeemable “other.” It charts a course of continuous conflict by aiming at arbitrary import targets rather than structural alterations. Consumer fairness is obviously inconsistent with any prescribed level of Japanese imports. In particular, consumer fairness excludes a second guessing of Japanese final consumption expenditures if U.S. firms are given clear opportunities to sell at every level of commerce. Many Japanese do not oppose the substance of most U.S. bilateral demands for openness, although the official Japanese government position is that such measures as Super 301 are inconsistent with the GATT.41 Resistance remains strong largely because of the legacy of a competing producer fairness norm: the protection of entrepreneurs and employees in the small-scale distribution sector that provides a haven for retirees and persons with low skills. This is a politically serious variant of residual producer fairness norms in the United States, Canada, and Europe. But as an attempt to protect input market conditions by rigging the extent of output competition, it collides squarely with the contemporary U.S. concept of consumer fairness, as well as with U.S. national welfare. Both the U.S. Department of Justice and the Federal Trade Commission are devoting considerable resources to an examination of Japanese behavior. In addition to the investigation of possible exclusionary behavior by Japanese auto companies in the United States toward U.S. suppliers, the United States has also successfully prosecuted Japanese firms for bid rigging on a naval base construction project in Japan. This case was significant because of the cooperation of the Japanese Fair Trade Commission. The U.S. SII demand that the Japanese enforce antitrust involves continuous activity; thus, close and continuous cooperation between the competition law enforcement agencies of the two countries might be both substantively and symbolically important.42 Nothing would do more to increase U.S. confidence that the Japanese are embracing consumer fairness norms than to have market investigations in Japan essentially ratified by knowledgeable U.S. observers.43 Closer cooperation would also help the Japanese to understand and perhaps persuade the United States to modify the extraterritorial claims that underpin U.S. antitrust investigations in Japan. As the two leading technological powers, the United States and Japan must develop new golden rules in the future to facilitate further cooperation. For example, the U.S. system of research and development is far more likely than that of the Japanese to spill valuable results abroad, and this may well be giving Japan commercial advantages at the expense of the U.S. tax-

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payer (for a discussion of this problem and some suggested solutions, see Press, 1990). The alternative to cooperation could be a wasteful pursuit of national advantage through parochial industrial and strategic trade policies. Viewed through the U.S. political lenses discussed earlier, much of the “Japan problem” appears somewhat ironic. Terms of trade costs exacted by alleged Japanese protectionism have very low impact transparency and, in fact, have probably cost the United States rather little in terms of sacrificed national income. Yet the coincidence of concern about Japanese trade barriers with the onset of massive federal budget and current account trade deficits in the United States appeared to provide a very clear indication of what the U.S. problem was and who was causing it. Up to a point, the false identification merely increased the credibility of the U.S. government in its legitimate trade demands on the Japanese. But the identification of the size of the trade deficit with the seriousness of Japanese sin almost certainly emboldened U.S. officials to make some demands on the Japanese that unnecessarily aggravated relations.44 Moreover, Japanese trade and investment barriers would lower United States income even if the United States were running a bilateral surplus with Japan. CONCLUSION

This chapter has argued that the conflicting conceptions of commercial fairness that have been contested and largely resolved over many decades in the U.S. internal market remain sources of confusion and concern in U.S. foreign economic policy. The argument has been essentially optimistic, however. Views about the role of domestic competition in Canada and Europe now parallel those in the United States far more closely than was true just a few years ago. This development provides a necessary condition for greater global openness and an increased probability of acceptance of the similarities between domestic and foreign commerce both in the United States and abroad. Much larger elements of producer fairness remain to be overcome in Japan. Until they are, inconsistent concepts of fairness within Japan provide an important ingredient for continuing conflict with the United States and Europe. If the United States seeks to continue leadership of the world economy, it must maintain support for general liberalization of trade and investment, while exercising restraint in both “aggressive unilateralism” and bilateral agreements. Unilateral efforts should aim mainly to pressure countries into the fulfillment of previous promises, while special trade agreements should remain as open as possible to further liberalization. At the same time, two cooperative initiatives could hasten convergence among the industrial nations on concepts of commercial fairness. First, increased cooperation on antitrust, already at a high level, could

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help isolate and perhaps diminish remaining differences in national conceptions of fairness within an integrated economy. For example, the United States may loosen its antitrust laws to allow for more horizontal cooperation beyond R&D among firms in rapidly changing industries, thus bringing its practices more in line with those of Europe and Japan (Jorde and Teece, 1990). Second, each nation could allow consumers, importers, and other affected parties to participate fully in administered protection proceedings. This would be particularly valuable for the United States, which sees its record on trade matters as far less protectionist than it has actually been. These initiatives could be substantially bolstered if consumer groups around the world began to cooperate on a common set of objectives to press upon their national governments. International consumerism is the logical outgrowth of the consumer fairness reasoning presented here, and it may have a significant role in further integrating the world economy. Once trade and investment protectionism has been rejected as an expensive and inequitable means for the achievement of domestic social justice objectives—as it has been to a very large extent in most industrial countries except Japan—the most serious barrier to cooperation disappears. This chapter has traced the development of U.S. notions of fairness in domestic commerce and their uneven application to foreign economic policy. Quite similar notions of commercial fairness have been developing within the domestic markets of most U.S. trading partners; and within Europe at least, the generalization of these notions beyond national borders has made considerable headway. Consumer fairness and its implications for national fairness, as defined by the pertinent nation’s trading partners, lie at the heart of increased integration of the industrial economies. Cooperation within North America and of that region with Europe has not proceeded rapidly, but unprecedentedly little stands in the way of steady development, despite spectacular manifestations of disagreement during the Uruguay Round. Progress remains more problematic with Japan, where issues of national fairness not directly stemming from consumer fairness also loom large. The industrial countries as a group face the challenge of formulating “golden rules” governing the development and deployment of new technologies and the protection of defense industries that are seen to be fair to taxpayers, to national treasuries, and to the stockholders of imperfectly competing firms, as well as to consumers. NOTES

The author thanks Lorraine Eden, E. M. Graham, David Rapkin, and Simon Reich for valuable comments on this chapter, and Robert Klassen for superb research assistance. 1. A quite different but generally consistent discussion of part of this subject appears in Hudec (1992), from which I have benefited greatly. The most com-

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plete general treatment of the politics and institutions of protection is Bhagwati (1988). 2. Indeed, its meaning is apparently thought to be so obvious that it is used to define other terms. Hence, the 1988 Omnibus Trade and Competitiveness Act declares that the policies and practices of other countries are “unreasonable” if they are “unfair or inequitable.” 3. This is simply a potential Pareto improvement, according to the KaldorHicks criterion. For a discussion of this concept, see Weimer and Vining (1992: 263–264). 4. This refers to economic matters considered in isolation. As the beginning of the paper acknowledges, much U.S. international policy since World War II has sacrificed apparent U.S. economic gains for larger ends. 5. Bork’s (1966, 1978) highly influential argument that the Sherman Act was really written to enshrine efficiency as the dominant criterion of antitrust has been persuasively attacked by other scholars (see references in Lande, 1988). Stigler (1982) has argued that U.S. congressional politics of 1890 amounted to little more than an atheoretical attack on big business. 6. Silcox and MacIntyre (1986) argue that the Robinson-Patman Act aimed to reinforce the “vertical” element, in contrast with the “horizontal” element, in what they call “competitive fairness.” They see this as little more than a recognition in antitrust of the frequent distinction in economics between efficiency (which they identify with the lowest possible price for customers) and equity (which they see as the contest between smaller and larger firms, particularly when the latter employ questionable business practices). They seem to argue that Congress wanted to have prices only minimally affected by legislative solicitude for small business, but that attention to the latter was often justified out of fear of long-run monopoly (Silcox and MacIntyre, 1986: 649)—an eventuality not taken seriously by most economists today. Moreover, in economics, equity is considered only with respect to the economic conditions of income receivers, not their specific commercial activities. It is implicitly assumed that the legal framework makes the process, as opposed to the distributional outcome, “fair.” Discussions such as Silcox and MacIntyre, while brilliantly interpreting congressional intent, do not directly face the problem that weak producers can typically be assisted only at the expense of final purchasers. 7. As late as 1944, Judge Learned Hand opined: “It is possible, because of its indirect social and moral effect, to prefer a system of small producers, each depending for his success on his own skill and character, to one in which the great mass of those engaged must accept the direction of the few” (cited in Neale, 1970: 428). In the 1962 Brown Shoe case, the Supreme Court decision noted that “Congress appreciated that occasional higher costs and prices might result from the maintenance of fragmented industries and markets. It resolved those competing considerations in favor of decentralization” (quoted in Scherer and Ross, 1990: 186). 8. In agriculture, one still hears voices (confusedly) defending the “family farm” on social grounds decades after the local druggist and grocer were obliged to face the competitive music. However, agriculture policy is also changing. 9. This is not to argue that the “populist” brand of thinking about antitrust ever completely expired. In recent years, however, it has frequently justified its opposition to bigness not on the basis of protecting the small competitor, but as a means of protecting society from the alleged harm of concentrated political and economic power (Pertchuck and Davidson, 1979). The populist posture toward business power makes little systematic attempt to counter arguments about the efficiency of market outcomes. Instead, it alleges untoward political effects of “excessively” concentrated industrial power. This populist position finds very little support in policymaking circles.

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10. The difference is recognized in the national income accounts; a transfer from U.S. citizens to foreigners lowers gross national product, while a domestic efficiency gain partially at consumers’ expense typically raises it. Opinions differ about whether this is really a distinction with a difference. Why is it significant to the U.S. consumer that a U.S. rather than a Japanese stockholder is gaining from a “maximizing the pie” antitrust policy? (This, frequently rhetorical, question usually ignores different tax yields between the two situations.) 11. Scherer and Ross (1990: 188) have suggested an approach that would allow several years for a merger to demonstrate cost savings where eyebrows might otherwise be raised on market power grounds; presumably prices are also not expected to rise over that period. Inadequate performance would trigger an order for dissolution. 12. For the best early statement of the issues, see Olson (1965). 13. Economic rent is payment to a factor of production in excess of what is needed to bring it to market or to a specific use. 14. Organized labor’s opposition to deregulation reflects this bias, and popular reaction to such apparently self-serving positions may also help explain its decreasing political support from the rest of society. 15. The term is very commonly used. See, for example, Jackson (1989: 217–248). 16. The monopolists’ profit-maximizing price relative to marginal cost rises with decreasing elasticity (demand becoming less sensitive to changes in price). 17. Many analysts would advocate stockpiling as a national security measure, perhaps with the maintenance of a small subsidized steel capacity. 18. Some commentators (Viner, 1923; Gifford, 1991) have expressed concern that “intermittent” dumping by a foreign firm can hurt the economy because it limits the viability of a domestic industry. But market interference to preserve an industry’s existence cannot be justified using ordinary economic analysis unless additional considerations prevail. 19. And so does foreign experience. Antidumping has disappeared as a policy within the European Community, and it has been recently suspended as part of closer economic relations between Australia and New Zealand (Hudec, 1992). 20. Hufbauer and Erb (1984: 8) have suggested that such a simplistic argument ignores that “unbridled and competing national subsidies can undermine world prosperity.” But the increase in global consumer fairness thinking traced later in the paper suggests that substantial and sustained subsidy will become increasingly rare among the industrial countries. Nonetheless, the point cannot be ignored; see the following note. 21. A problem does arise, however, when subsidy (or tax reduction) is used to attract (or retain) industry at another state’s expense with a resulting general erosion of the tax base in both jurisdictions. Some have advocated central restraint on such practices for luring both national and international business. Putting the entire burden of control on individual taxpayers and relatively immobile businesses being unwilling to give tax breaks to mobile industries might not be entirely satisfactory. It should be noted here, however, that the state interest is in fiscal integrity and not producer fairness. 22. There are exceptions if foreign environmental laxness directly affects the legislating country or if there are concerns about conditions in the foreign country independent of the effect on the legislating country’s material consumption (i.e., concern about child labor). 23. This rule is obviously much easier to state than to employ. It remains useful, however. For example, much policy, particularly in the environmental area, fares poorly when analyzed using standard cost-benefit or cost-effectiveness criteria, so one might simply inquire whether the polity in question would be likely to have poli-

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cies of the kind observed (whether “rational” or not) without the impetus of protectionism. My colleague, Professor Daniel Farber, has stressed the usefulness of this approach. 24. For an excellent discussion of how this posture was reflected in the procedures of the Tokyo Round of the 1970s, see Winham (1986). 25. Possible “optimal” domestic protection is ignored here for the sake of simplicity. 26. This appears equally true of the European-administered protection law (Nicolaides, 1991). 27. Because of the conflicting interests in specific markets, of course, the politics frequently gets much sharper. See Destler and Odell (1987). 28. Really knotty problems arise when administered protection operates as a component of what amounts to international market sharing, as in the steel industry. 29. As in the United States, agriculture is viewed as a separate issue, partly for ideological, partly for narrower political reasons. But in both Europe and the United States the difference is fading, in large part because of the relentless recitation of the apparently indefensible income distribution results of traditional policies (because gains from government policies are positively linked to the value of production). 30. As increasingly does Japan. Japanese policy in general is treated later in this chapter. 31. Some asymmetries persist. Countries that perceive their national cultures to be more vulnerable to foreign penetration than others, for example, may insist on the control of foreign investment in those sectors. The Canada-U.S. Free Trade Agreement, for example, allows for continued Canadian protection of the “cultural industries.” 32. A use of IFDI controls to promote national fairness has been proposed by Porter (1990: 670–671). He has suggested that restrictions on IFDI might be employed in retaliation for foreign perfidy in either the trade or investment area. 33. Efficiency is thus assured only if the rest of the price system in each relevant country is operating effectively and corporate income tax rates are the same everywhere. 34. The Clinton campaign of 1992 accused the Bush administration of favoring foreign over domestic investment, which can be interpreted as a defense of the efficiency norm. 35. Sometimes Japan’s liberalizations were offset by deliberate countermeasures. The liberalization of IFDI, for example, was accompanied by increased intercorporate shareholding; such activity seems often to have been encouraged by the Japanese government. 36. An exasperated EC brought a case before the General Agreement on Tariffs and Trade in 1983, claiming that the entire Japanese economic system constituted an effective impediment to the realization of the benefits of freer trade that Japan had promised to the rest of the world. While nothing came of the GATT case, Europe continues to view Japan with at least as much suspicion as the United States does. 37. For a review of the evidence, see Kudrle (1991). 38. Certainly greater U.S. export penetration into Japanese markets could improve the trade balance, but not in the straightforward way popularly imagined. Holding other factors (especially the economic role of third countries) constant, increased Japanese demand for U.S. goods would cause the dollar to appreciate against the yen and induce a compensating increase in Japanese exports to the United States. The simple algebra of Keynesian national income accounting cannot be denied. U.S. demand for goods and services that exceeds domestic production minus exports will be met by goods and services from abroad. Similarly, if the Japanese do

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not absorb at home the full value of their production, those undemanded goods and services will flow abroad as capital exports—or Japanese resources will become unemployed. Most economists see the most plausible route of influence from lowered Japanese import barriers to a decreased trade surplus via decreased Japanese profits resulting from increased competition, and hence a lower fraction of savings out of full employment income. The increased consumption demand then would leave fewer resources for foreign investment. Any impact of sales in Japan on the profitability of U.S. firms could have a parallel impact by bringing private U.S. savings closer to the sum of private investment and the government budget deficit. Most analysts expect very little feedback effect of this kind from an increased Japanese propensity to import U.S. goods; the bilateral trade balance will thus show little improvement just because the Japanese show greater willingness to buy from the United States. 39. The United States was enjoined to reduce the federal deficit, increase savings, encourage a longer view by U.S. business, ease regulation, reduce export controls, increase R&D cooperation, control leveraged buyouts, encourage exports, and increase education and worker training (Truell, 1989: A2). 40. In its broader attack on the shape of the Japanese economy, this part of the SII follows “suggestions” made by the U.S. executive branch in some detail at least as early as 1987 (see Bobrow and Kudrle, 1990: 105). 41. Hudec (1990) has argued for the efficacy of a two-pronged strategy by the United States. Without defending “Super 301,” he has demonstrated logically and with historical argument that a U.S. determination to take unilateral action has served to generate constructive action by the GATT. 42. Iwaki (1992) has stressed the increase in Japanese antitrust activity since the first SII talks, and has also advocated increased cooperation in both trade and competition policies in U.S.-Japanese bilateral relations, as well as in Japan’s relations with Europe. 43. Because so much Japanese commercial life is based on complex personal networks and most actual collusion is therefore likely to be tacit and difficult to detect, benchmarks for investigation might be sought by looking at relative U.S. and Japanese sales in third markets (Krasner, 1987). For the outline of such a proposal, see Kudrle and Bobrow (1982). The United States must also press to make takeovers of Japanese firms easier; this is the most frequent mode of entry for direct investors in most countries. 44. A successful attempt to force Japan to absorb more of its own output during the mid- to late 1980s might have harmed the world economy as a whole. Japan’s exportation of capital helped alleviate a worldwide capital shortage. For a useful discussion, see Brauchli (1990: A2).

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8

Alternative Paths to Competitiveness: U.S. Trade Policies in International Air Transport Services and Commercial Class Aircraft Manufacturing Confronted with an economy weakened by triple deficits, U.S. policymakers have tried to restore competitive advantage to many industry sectors, including commercial aviation.1 Policy selection and implementation have become risky, however, because decisions are influenced by an increasingly complex set of variables and because familiar policies may no longer achieve articulated goals. Since 1945, U.S. airlines and commercial class aircraft manufacturers have dominated their sectors internationally. This dominance can be attributed to a number of both political and economic factors (Golich, 1990; 1991), not least of which was state promotion and protection via a variety of policy tools. As the 1980s dawned, U.S. policymakers instigated dramatic, unprecedented change in one sector, while deciding to stay the course in the other. The pursuit of divergent policies in industry sectors that are so intimately connected—airlines do not fly without aircraft and manufacturers have no customers without airlines—suggests a lack of overall policy coherence. In each case, U.S. state and market actors resisted global trends. Holding overwhelming comparative advantage in air transport and building on the perceived efficiencies of a free market, the United States aggressively initiated plans to liberalize the international market in 1978. These efforts directly challenged the long-standing principle of airspace sovereignty that allowed states to use airlines as tools of political, military, and economic policy, and triggered a series of corporate responses that have significantly changed industry dynamics. Holding less overwhelming, but reasonably secure, advantages in aircraft manufacturing, U.S. policymakers 179

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made no significant changes in policy toward aircraft manufacturers, though dramatic changes in industry dynamics and international structures generated another set of corporate responses with potentially significant consequences. In this chapter I examine U.S. policies toward air transport and aircraft manufacturing in an effort to explain why each policy was selected, how each has affected its respective industry sector, and what the consequences might be for future state-market relations. An analysis of these two strategic industries—one operating in the service sector and the other in a high-technology manufacturing sector—demonstrates how a nationalistic quest for competitive advantage can take precedence over ideological rhetoric or policy consonance and result in ad hoc, often conflicting policies. The analysis also illustrates the reciprocity between state and market activity. In particular, it reveals how variations in market conditions and changes in international structures influence policy choices; how difficult specific market responses to state policies are to predict; and how open markets may decrease the range of sovereign authority available for states to exercise. Two fundamental assumptions inform this inquiry. First, state and corporate decisionmakers are influenced by a complex set of variables, including their perceptions about the position of the state with respect to political power and the firm’s competitive position in the market (Ikenberry, 1986: 64), their ideological biases (see, e.g., Chapman, 1991; S. Reich, 1989; Rorlich, 1987), and their knowledge about—as well as perceived efficacy and feasibility of—the range of policies available (see, e.g., Goldstein, 1988; Haas, 1980; Odell, 1982; Rosenau, 1986). Decisions are made in a dynamic environment where the impact of information, ideology, and ideas is fluid and where perceptions are simultaneously influenced by international- and domestic-level political and economic constraints and opportunities. Second, while the framework of economic activity may be shaped initially by politics (Gilpin, 1975: 21), market players will attempt to advance their interests by creating new or adapting to established market parameters. Corporate decisions about what, where, how, and how much to produce are shaped by politically influenced economic factors, including the degree of openness, the size and location of markets, the participants in the market, and industry dynamics (see, e.g., Krasner, 1976; Strange, 1988). The consequences of these decisions may limit the scope of state policy options even though this outcome was unintended (Aronson, 1977: 18–19). Likewise, government choices, though often directed at achieving policy goals not associated with the corporate world (Bergsten, Horst, and Moran, 1978), can influence industry competitiveness. The exchange of ideas, knowledge, and technological innovation enables state and corporate policymakers to learn, to redefine interests, and to select new or adapt old policies. Of course, learning can be asymmetrical and may not lead to pareto optimal policy

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selection and implementation. Ultimately, no matter what policies are selected, the results of their implementation will reshape the framework of activity to which market players must respond. What follows is a description of how structural changes in the world political economy since World War II have affected air transport and commercial class aircraft manufacturing industry sectors, an analysis of shifts in U.S. trade policies in these sectors, an assessment of policy consequences, and some concluding thoughts about the future challenge for U.S. policymakers. STRUCTURAL CHANGES IN THE INTERNATIONAL POLITICAL ECONOMY

First, power capabilities are more equally, if still asymmetrically, distributed among states. Although the United States may be “the most powerful actor in the world political economy” and have “greater leeway for autonomous action than other countries,” it is no longer the economic hegemon it once was (Keohane, 1984: 26).2 Greater economic parity among advanced industrial states has been accompanied by more effective demands from developing nations for participation in industries that they believe will facilitate economic modernization. The growth of aerospace manufacturing capability in Europe and the newly industrializing countries of Brazil, Israel, and Indonesia, as well as the proliferation of a wide array of transnational production arrangements, reflect this change (Schaufele, 1988). Second, the international financial regime was out of balance throughout the 1980s. International debt became a structural problem that imposed restraints on purchases of foreign goods; in addition, U.S. exporters were hurt by the persistent high value of the dollar. A prolonged recession at the beginning of the decade depressed demand for air travel and thus the market for aircraft. Third, international relations are increasingly affected by the presence of complex interdependence across an increasing number of issue areas. This complicates economic policymaking because it increases the likelihood of reciprocity while expanding the scope of response mechanisms. For example, decisions to protect either aviation sector may trigger a quid pro quo response, but may also elicit an equally effective countervailing policy in a different industry sector altogether (e.g., limits on direct broadcast television or military bases). Complications arise as well because policymakers must adjust to the constraints and opportunities created by this relatively new phenomenon, while also responding to domestic constituencies that may be slow to acknowledge it or fearful of its consequences. Finally, the market is more frequently perceived by corporate executives as international in scope. L. W. Clarkson, vice president of planning

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and international development at Boeing, notes, for example, that “prime manufacturers have a small global customer base. The 25 major air carriers account for more than 70 percent of the world travel market” (Clarkson, 1992: 8).3 Trade in civil aviation goods and services has contributed substantially to the more general trend in the 1980s toward dramatic increases in the volume of international trade and investment flows. Between 1970 and 1990, passenger traffic grew from approximately 225 million revenue passenger miles to 750 million (O’Lone, 1991: 77).4 Over the next several years, air transport traffic is expected to grow by 5 percent, adding some 85 billion revenue passenger miles per year to the system. Air transport generates “about $3 trillion annually, or about 6 percent of the global economic output” (Faberman, 1993). Until recently, the U.S. market consistently enjoyed not only the largest absolute share of international passenger traffic— approximately 40 percent—but also the largest growth rate (Economist, 1992b; Hill, 1993). In 1990, however, U.S. traffic grew by only 3 percent, while Pacific Rim growth reached 24 percent. Through the year 2000, Pacific Rim traffic is expected to increase annually by about 5 percent, intraEurope traffic by nearly 3 percent, and North American traffic by a little over 2 percent (O’Lone, 1991; Mecham, 1993). Those countries where airlines need to replace or expand their fleets to meet increased passenger demand are often able to negotiate for significant participation in aircraft production in exchange for ordering a large number of airplanes. In addition, although cabotage rules5 have protected domestic airlines from foreign competition, the change in traffic trends means that U.S. carriers are now increasingly dependent on international routes to generate profits (Jost, 1990; Fotos, 1991; Mecham, 1993). Aerospace production has grown significantly over the last thirty years as well. In 1960, total U.S. trade in aerospace products reached $2.3 billion; by 1991, it had grown to $30.8 billion, and commercial jet transports accounted for 94 percent of the total shipment value (Aerospace Facts and Figures, 1992). Direct export sales generate substantial revenues and yield lucrative indirect benefits through product support sales and lowered production cost resulting from economies of scale. Maintaining a competitive position in the international market is thus important to the domestic economies of current primary producers. In 1992, U.S. manufacturers accounted for approximately 60 percent of the commercial class aircraft market (Economist, January 9, 1993). While clearly a dominant position, this represents a significant decline from 85 percent after World War II. Until recently, most commercial class aircraft were sold to U.S. airlines; now, approximately two-thirds of the commercial transport market is outside the United States (Napier, 1993a). In 1991, 994 aircraft were delivered to U.S. domestic customers and 1,237 were sold abroad (Aerospace Facts and Figures, 1992).

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The critical nature of international markets to civil aviation has been a motivating factor in the development of increasingly complex trade arrangements, including “direct investment, coproduction and licensing arrangements, and more and more frequently joint ventures and collaborative arrangements in the design, production and marketing of aerospace products and systems” (Aerospace Research Center, 1988: 6). An equally complex array of domestic and transnational arrangements has proliferated in the air transport sector (Golaszewski, 1993; Raphael, 1993). As a result, greater pressure for uniform policies in such areas as aircraft safety and standards certification is likely as corporations seek to achieve the economic efficiencies associated with standardizing production for an expanding global market. In sum, the two civil aviation sectors have been significantly affected by broader changes in the structure of the international political economy. We now turn to how U.S. policies toward air transport and commercial aircraft manufacturing have been altered in response to these structural transformations. LIBERALIZING INTERNATIONAL AIR TRANSPORT

Efforts to liberalize international air transport are an example of a dominant actor seeking to reshape the framework for economic activity in response to structural changes. Prior to 1978, the principle of airspace sovereignty guided all agreements concerning international commercial aviation. Airlines were consciously used by states as “chosen instruments” to execute policies. As early as 1902, at an international conference in Paris, efforts to establish a code of international air law based on Hugo Grotius’s 1604 Freedom of the Seas principle failed. Nine years later, the British Parliament, concerned about the military implications of a freedom of the air principle, passed the British Aerial Navigation Act, which “gave the Home Secretary complete power to regulate the entry of foreign aircraft and to proscribe zones over which foreign aircraft were not allowed to fly” (Jönsson, 1981: 277); continental Europe followed suit. In 1919, delegates from thirty-two European countries drafted the International Convention for the Regulation of Aerial Navigation, the first multilateral treaty concerning air law. Its primary accomplishment was the recognition “that every Power [not just signatories] has complete and exclusive sovereignty over the air space above its territory” (Salacuse, 1980: 813–814).6 At the Chicago Convention in 1944, governments could not agree on how to structure a regime to govern the commercial aspects of international aviation. They did, however, endorse the principle of airspace sovereignty in the charter creating the International Civil Aviation Organization (ICAO); the charter relegated postwar management to bilateral agreements among

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states (Golich, 1989: 22–28; Salacuse, 1980: 826). States assumed unilateral authority over the awarding of routes, landing rights, capacity levels, fare setting, frequencies, gateways, etc. In 1946, the United States and the United Kingdom met in Bermuda to negotiate the first of what was to become a network of over 1,200 Bilateral Air Transport Agreements (BATAs). The principle established in 1910 that states exercise sovereign control over their airspace was reconfirmed in 1911, 1919, 1944, and 1946. Not only did this enable states to use airlines for a variety of policy purposes, it also meant that the economic benefits generated by international air travel were usually divided fairly evenly, since states had significant leverage when negotiating BATAs with foreign carriers (Krasner, 1985). In this context, the 1978 U.S. decision to achieve “virtual deregulation of the North Atlantic air services market by 1982” (Kasper, 1988: 75) represented a dramatic shift in the market parameters of international commercial aviation. This move was part of a deliberate strategy to help U.S. airlines maintain a competitive global position in an industry sector where they held comparative advantage based on huge absolute market share and technological sophistication with respect to providing all aspects of air transport services. U.S. policymakers believed benefits would be allocated according to productivity and efficiency if markets were allowed to determine market shares, and they assumed U.S. airlines would be the winners in such a context. Liberalizing international air transport services involved a three-part strategy. First, the United States economically deregulated domestic airlines to create financially sound and internationally competitive firms. Although the U.S. public was promised more perfect competition fostered by the entry of several new airlines, the result—a relatively small number of large carriers with extensive national and international networks—was both predictable and predicted (Golich, 1990: 156–157).7 The market share of the five largest U.S. airlines grew from 63.5 percent in 1978 to 71.7 percent in 1987 (Kasper, 1988: 37); by 1991, analysts compared only the top three— American, Delta, and United—which currently control over 60 percent of the U.S. market (Golaszewski, 1993). U.S. airlines also increased their penetration of international markets (see Sanchez, 1992: D1). However, not all industry responses were so predictable.8 Despite the dominance of U.S. airlines, their profitability has plummeted dramatically since the late 1970s (see O’Neal et al, 1991; Swierenga, 1990); between 1990 and 1993, the industry lost $7.5 billion (Faberman, 1993). Second, the U.S. negotiated liberal Bilateral Air Transport Agreements with the Netherlands, Belgium, Israel, the United Kingdom, and the Federal Republic of Germany. Coupled with Europe’s efficient surface transportation network, this had the effect of pressuring other countries to follow suit by “threatening to divert a substantial volume of price-sensitive traffic away from restrictive countries and their national flag carriers” (Kasper, 1988: 76). The new BATAs also undermined the International Air Transport

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Association’s (IATA) role as the forum for developing fare structures, which had been institutionalized in the wake of ICAO’s failure to resolve international aviation economic issues. Third, in a more direct attack on the existing regime, the United States initiated a review of IATA’s antitrust immunity and threatened to withdraw from the association.9 This tactic prompted near universal protest, eventually forcing the ICAO Council to pass a 1978 resolution admonishing all contracting parties “to refrain from any unilateral action which would endanger multilateral fares and rate-setting systems” (quoted in Krasner, 1985: 206). As a result, the United States restricted its prohibition on IATA rate setting to North Atlantic routes. The policy of economic deregulation of U.S. civil aviation was consistent with the neoliberal ideology that gained popularity during the 1980s. Basing their views on the assumption that the intrusion of politics into economic decisions handicaps private enterprises to the detriment of the consumer, proponents argued that two goals could be achieved if the market enforced rules of restraint in the private sector. First, government, relieved of regulatory duties, would cost less. Second, private goods and services would cost less once the drive for efficiency was no longer impeded by government intervention. But qualitative differences between domestic and international markets will persist so long as political sovereignty remains a key principle of international relations. In a liberalized international air transport market, firms will lobby for “policy neutrality” with respect to trade and investment (Julius, 1990: 97; Nicolaides, 1989). Policy neutrality strategies may increase economic efficiency and benefit the consumer, but they restrict political autonomy by constraining policymakers’ flexibility to implement a wide range of policies. Indeed, the remaining barriers to liberalizing international air transport services are related to the principle of airspace sovereignty. First, states must economically deregulate their domestic systems, which will probably require the privatization of airlines, most of which are currently stateowned. States are likely to privatize first and deregulate second to avoid the costs of creating market-competitive firms and to avoid also some of the “unpleasant surprises” associated with the U.S. deregulation process. Few governments are likely to “allow airlines to ‘go to the wall,’ should that be the outcome of unrestricted competition” (Marsh, 1982; see also Aviation Week, 1988a; Economist, 1992b). Once privatized, airlines must be profitable, so managements unwilling to leave outcomes entirely to market forces will lobby for corporate needs and thereby place new demands on state policymakers. For example, British advocacy of a liberal international civil aviation regime followed privatization of British Airways, a step that created an actor with substantial market power. Thus, a major change in traditional state-corporate relationships is a likely result of air transport liberalization.

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Second, decentralized (national) authorities governing a unified international market is logistically problematic. At a minimum, a liberal system necessitates multilateral, rather than bilateral, agreements and thus decreases the degree of unilateral state control over aviation (Vickers and Yarrow, 1988: 344). Currently, domestic regulatory systems (which govern customs, taxation, noise, tariffs, maintenance, and ground handling procedures) vary widely and remain, along with restrictions in ancillary domestic markets, popular tools used to try to keep economic benefits within national borders. In addition, a number of government functions necessary to the operation of an air transport market will be relinquished only reluctantly.10 Third, political and legal barriers are tremendous. One problem relates to U.S. claims that international airline services fall under their jurisdiction with respect to antitrust regulations; European governments maintain this is not the case (Ott, 1985: 46–49; Vickers and Yarrow, 1988: 346, 349). The issue of foreign ownership of airlines is equally contentious, especially in the United States where the definition of what constitutes foreign ownership is under review and subject to revision. At present, ownership of common stock (and thus voting rights) is limited to 25 percent. As of early 1991, however, 49 percent ownership of airline equity became permissible so long as U.S. owners retain decisional control; this stipulation was designed to attract badly needed capital for struggling U.S. airlines. In the aftermath of British Airways’ attempt to buy into USAir, a de facto “sliding scale bilateral test” was added: The more liberal the BATA between a foreign airline’s home state and the United States, the more direct investment in U.S. carriers will be allowed (Lloyd, 1993; Misfud, 1993).11 This combination of evolving criteria defining foreign ownership of U.S. airlines, which has proven confusing to virtually everyone, reflects well the tension between markets and states at the international level. Comments by Samuel Skinner, Department of Transportation secretary at the time the “49% Rule” was added, describe the trade-off involved in pursuing a liberal market for the purpose of achieving nationalistic competitive advantage; on the one hand, “consolidation, increased foreign investment and multinational companies were inevitable in the globalization trend now under way in the airline industry”; on the other hand, “we cannot allow foreign carriers to undermine the bilateral negotiating process by purchasing access to the lucrative U.S. market” (quoted in Ott, 1991: 32; see also Gilmartin, 1991: 31). A similarly intense debate swirls around the issue of cabotage. A unified Europe may seek to claim intra–European Community travel as domestic and insist on trading cabotage rights for similar privileges in the United States. In the United States, both government and corporate policymakers are concerned that they will have to negotiate agreements with this European bloc rather than pursue multilateral trade agreements (see, e.g., Hill, 1993; Kolcum, 1985: 146). Despite these difficulties, U.S. tactics have been

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successful in the North Atlantic market. IATA is no longer a governmentprotected cartel and has begun to act like a trade association in a free market environment, providing such services as education, information sharing, and insurance underwriting (Vickers and Yarrow, 1988: 345; Shifrin, 1987: 45). In addition, the United Kingdom and the Netherlands negotiated liberal agreements with other European states. In 1982, nine European countries agreed to make IATA reference fares for North Atlantic routes more flexible in exchange for a U.S. agreement to extend an antitrust waiver for IATA. Despite strong feelings of nationalism, ten years later European Community members agreed to liberalize the internal market for air transport and adopted policies aimed at creating a common political authority and juridical framework—such as that in the United States—covering antitrust matters, competition, and business practices generally. Trends toward the creation of other regional blocs, such as that envisioned by the North American Free Trade Agreement (NAFTA), may follow the EC model. European airlines, in response to the new market rules and evolving structure, are negotiating intra-European joint ventures and other kinds of production arrangements. Air France absorbed its major domestic rivals and is now seeking a stake in Sabena Belgian World Airlines. Likewise, both Germany’s Lufthansa and British Airways’ PLC have acquired most of their respective domestic competitors, and each has proposed a number of alliance arrangements with other European carriers. Alitalia has finalized moderate links with Iberia Air lines. Similarly, U.S. concerns regarding foreign ownership of domestic airlines notwithstanding, several trans-Atlantic arrangements have been consummated and others are being negotiated. KLM has an equity-sharing arrangement with Northwest Airlines; British Airways seeks an equity partner in USAir and has consummated low-level strategic alliances with USAir and United Airlines; DHL Airways, Japan Airlines, and Lufthansa have joined forces in the air cargo sector (Raphael, 1993; Golaszewski, 1993). In sum, since the late 1970s, the United States has been at the vanguard of efforts to deregulate and liberalize domestic and international air travel. Given the strong position of U.S. carriers, the resulting liberalization has altered the framework of competition and brought about changing market structures in international civil aviation. PROTECTING AMERICA’S COMMERCIAL CLASS AIRCRAFT MANUFACTURERS

Aircraft manufacturing has been a protected industry sector largely because of its close relationship to national security. During World War II, changes in technology and public travel preferences broadened the potential strate-

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gic value of commercial air transport to include an economic component. Both military and commercial aviation needed to improve the speed and reliability of transporting people and material; each, therefore, benefited from the same set of advances in aircraft design and production technology. As efficiency and performance were enhanced, the general public became “air-minded,” more frequently choosing air transportation when travel distances exceeded 200 miles (Davies, 1964: 238–240, 271–272). By 1945, commercial aviation’s value to national security, its prestige, and its growing potential for generating revenues and jobs meant that many countries wanted to participate in the industry. States were assured of participation in the service sector of the industry by the institutionalized use of Bilateral Air Transport Agreements and because airlines were often stateowned, “national champion” enterprises (although U.S. airlines have always been privately owned, some, such as Pan American, enjoyed national champion status). Participation in the manufacturing sector was less certain. Initially, aircraft manufacturing was characterized by competition among a large number of privately owned firms.12 Over time, however, the same technological advances that increased the potential rewards of aircraft production had also dramatically increased manufacturers’ costs and risks. Aircraft were more complicated and larger, and lead times between gestation and revenue earning grew significantly longer. But incorporating more sophisticated technology into aircraft did not guarantee product or market success. Research, development, and production (RD&P) costs rose so precipitously that few manufacturers could individually finance a civil aircraft development project. Higher costs meant higher prices, which meant airlines could not easily afford to replace or expand their fleets.13 These new industry dynamics increased the cash flow needs of manufacturers everywhere; each sought larger market shares in order to lower production costs through economies of scale, and eventually to decrease prices to facilitate the sale of even more aircraft. Commercial aircraft manufacturing became a “high-risk game with few winners and many losers” (Bacher, 1984: 8); accurate technical and commercial judgments were absolutely critical since as little as a “six-month delay in introducing a new generation of equipment [could] cost a manufacturer sixty percent or more of the total market” (Bluestone, Jordan, and Sullivan, 1981: 8). Three possible sources of financial support for the industry existed: government treasuries, private assets (either from other corporations or from market investment opportunities), and international collaboration. Although transnational production strategies had been successfully pursued before and during the war, afterwards, depending on the prospective foreign collaborator, this option was either rejected or closely monitored; it was definitely a last choice (K. Hayward, 1986). When pursued, international production strategies were considered only as a means to “the old goal of

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unilateral domination” (Golich, 1991: 126). Private assets had been drained, particularly in Europe, as a result of the war effort. Therefore, government support became a sine qua non of the industry. Intervention policy options included military and commercial procurement, direct and indirect subsidies, protection against imports, and financing exports (Golich, 1989: 47–50; K. Hayward, 1986: 162). Most European governments consciously used a combination of these policies to create national champion aircraft manufacturers. As a result, the number of prime manufacturers of civil aircraft in the United Kingdom, the Netherlands, and France shrank from approximately twenty-two in 1940 to three in 1992 (Golich, 1991). In the United States, although prevailing liberal ideology has made direct government intervention in the economy to assist commercial sectors problematic, the public has accepted the notion of government assistance when presented with a national defense rationale. In the case of commercial class aircraft manufacturing, the national security justification for intervention has included a variety of arguments. When necessary, commercial design and production teams have developed military hardware. Market requirements have triggered technological and product advances relevant to military needs, and vice versa. The civil and military sectors share virtually the same production base, an infrastructure of some 15,000 firms that supply sophisticated components, materials, and equipment (Lopez and Yager, 1987; Neuman, 1984: 175; Clarkson, 1992). Since civil aircraft consistently account for well over half the total aircraft produced during times of peace, U.S. policymakers have believed that manufacturers are critical to providing an essential military industrial base (see discussion in Competitive Status of the U.S. Civil Aviation Manufacturing Industry, 1985: 1–2, 25). The preferred intervention tools are largely indirect, including military procurement; prohibitions against technology transfer; subsidies of military R&D as well as basic research (first through the National Advisory Committee on Aeronautics and subsequently through the National Aeronautics and Space Administration); the use of standards to protect against competitive imports; and the financing of exports. Some argue that the role commercial aerospace plays in maintaining a healthy and diverse domestic economy justifies direct government intervention (see, e.g., Golaszewski, Berardino, Sleman, 1993; Klepper, 1989; Katz and Summers, 1989). A number of recent studies conclude that a state’s competitive position in world trade is a reflection of the conditions of its domestic economy, which is positively affected by industrial innovation. Civil aerospace technologies are vital to industrial innovation, in part because it is a “pioneer” industry where new technology is applied early. Experience and usage over time decreases costs and facilitates diffusion to other industries.14 Tangible economic benefits include employment and export revenues. In 1992, aerospace employment in the United States totaled 1,063,000.

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Although this represents a decline of 20 percent from the peak employment year in 1989, it is still a significant number of highly skilled jobs . Of the total, some 40 percent were skilled production workers, 22 percent were scientists and engineers, 7 percent were technicians, and more than half were involved in the manufacture of aircraft, engines, and parts (Napier, 1993a). Accounting for 6.6 percent of employment in all manufacturing industries and 11.5 percent of employment in durable goods production, this work force can be tapped for various national production needs (Aerospace Facts and Figures, 1992: 140). For example, to develop its 757 and 767 aircraft, Boeing “rented” talent from other domestic companies (Bluestone, Jordan, and Sullivan, 1981: 129). Since the late 1950s, aerospace has been the leading industrial contributor to U.S. export earnings. In 1992, aerospace exports and imports achieved record levels of $44.5 billion and $13.6 billion, respectively. The positive balance of $31 billion was reached on the strength of civil aircraft exports, which were responsible for approximately 80 percent of total aircraft exports (Napier, 1993a: 3). Since 1982, aerospace exports have increased at an average annual rate of $1 billion; estimates indicate that for every $1 billion increase in aircraft exports, “the equivalent of 16,490 direct and indirect full-time job-years per year in the 1982 to 1990 period” were created (National Benefits of Aerospace Exports, 1983). By the late 1960s, however, the costs of aircraft production were so high that the market could no longer support the large numbers of competing corporations. European states and firms responded to this challenge by initiating transnational production strategies, a transition that has been neither smooth nor 100 percent successful (Golich, 1991; K. Hayward, 1983; 1986; Lorell, 1980; Mowery, 1987). Nevertheless, a number of perceived benefits are associated with transnational production. First, such arrangements reduce research, development, and production risks by pooling resources and talent so that no single company or country is forced to bear all the large costs associated with potential failure, and each gains benefits equal to its contribution to the final product. Second, internationalization creates an opportunity for specialization in a product or through product support such as marketing, training, or repair and modification work. Suppliers of specialized goods and services can market to prime manufacturers in different countries and achieve economies of scale associated with increased sales volume. This drives down the cost of aerospace products, directly benefiting aircraft producers and indirectly benefiting airlines and the traveling public. Third, the domestic markets of most states are not large enough to sustain sufficient production runs to support the manufacture of commercial class aircraft. Historically, most aircraft have been sold within domestic markets first, particularly in the initial stages of production when it is imperative to have guaranteed customers. Transnational production increases the size of the potential “home” market.

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Fourth, sales financing support can be obtained from governments of program participants.15 Fifth, transnational production can be an effective way of gaining access to technology. The concern that technology transfer may undermine the competitive position of individual participants is countered by the fear that failure to collaborate may encourage potential foreign partners to form their own production consortia and become successful competitors in the future (Fuqua, 1989). Finally, participants in production alliances may develop new skills in managing transnational projects. Anthony J. Lawler (1985), marketing director for Airbus Industry of North America, argues that Airbus’s success is in part the result of management lessons learned from the Concorde project (see also Gidwitz, 1980; Bracken, 1986; Willy, 1986). As transnational alliances continue to proliferate, these will be increasingly important skills to master. U.S. policymakers resisted globalization trends in the industry for a number of reasons. First, immediately following World War II, no other aircraft manufacturing country came close to achieving the international sales of U.S. producers (Golich, 1991). Second, the industry’s close connection to the defense industry supported the notion that transnational production arrangements might create undesirable dependencies or lead to dangerous technology transfers (see, e.g., Tucker, 1991; Bentley, 1989; Mecham, 1989; Aviation Week, 1988b). U.S. attitudes seemed reminiscent of a realpolitik weltanschauung, where each actor “worries lest it become dependent on others through cooperative endeavors,” and “when faced with the possibility of cooperating for mutual gain, . . . ask[s] how the gain will be divided” (Waltz, 1979: 105–106; see also the discussion in Ilgen, 1985). In fact, U.S. commercial class aircraft manufacturers were negatively affected by a number of domestic policy decisions. Between 1968 and 1971, industry sales to the Department of Defense dropped 24 percent and jet transport sales dropped 68 percent (Aerospace Facts and Figures, 1978: 81). In addition, domestic constituencies successfully demanded the severance of all federal funds for a U.S. supersonic transport, the end to the B-70 manned bomber program, and a dramatic reduction of B-1 bomber development funding. Although defense spending increased during the 1980s, the once tremendous overlap between military and civilian technology has decreased significantly as “research and development has shifted toward technologies with little commercial utility” (Mowery, 1987: 47–48; Ferguson, 1988). Exacerbating the situation, defense procurement has shrunk further in the 1990s. Moreover, airline deregulation has negatively affected U.S. aircraft manufacturers. Initial industry responses16 resulted in a surplus pool of aircraft available at “rock bottom prices” (Kelly et al., 1987: 5; Lopez and Yager, 1987: 5). The 1981–1982 recession depressed airline traffic and thus led to decreased demand for new aircraft. While analysts generally agree that the transition to fewer airlines will not significantly affect the size of the

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airframe market, they believe “each sales campaign [will be] more critical and competitive” (O’Lone, 1991: 81). Finally, U.S. antitrust laws discouraged cooperation among domestic firms but said little about transnational alliances (Lopez and Yager, 1987: 44; K. Hayward, 1986; Mowery, 1987). Eventually, U.S. aerospace firms joined the transnational production bandwagon. As with airlines, transnational production tie-ups range from low-level, non-equity-sharing arrangements (such as long-term subcontracting for components) and licensing to equity-sharing joint ventures (Raphael, 1993). Whereas European firms have been willing to participate in the latter kind of tie-up, U.S. firms have consistently opted for the former. McDonnell Douglas entered its first foreign procurement agreement with its DC9 program in the mid-1960s, signing first with Canada and then with Italy. Currently its transnational production partners include the People’s Republic of China, Taiwan, Poland, Japan, Korea, Spain, Yugoslavia, Italy, Brazil, and India (Shaufele, 1988). In its most far-reaching involvement to date, McDonnell Douglas sought U.S. government approval for Taiwanese investors to buy up to 40 percent of a new corporation consisting of McDonnell Douglas’s commercial transport business. In return, the new corporation would hire and train a work force and build facilities in Taiwan to do detail design, fabrication, and assembly of sections of new aircraft, as well as build a new assembly facility in the United States (McDonnell, 1992: 127). Boeing Commercial Airplane Company initiated a globalization strategy as early as the 1950s with the production of the 707, when Rolls Royce of the United Kingdom furnished engines, and companies from France and Canada supplied other components. Currently its foreign suppliers include corporations from Australia, Belgium, Canada, France, Germany, Greece, Israel, Italy, Japan, the Netherlands, Spain, the United Kingdom, and Yugoslavia (Clarkson, 1992). As recently as 1985, however, one official made it clear that Boeing had “no intention of relinquishing control of the program, [and] . . . will retain at least a 51 percent interest” in transnational production arrangements (Aviation Week, 1985: 212). A few years later it negotiated a 25 percent equity-sharing arrangement with Japan for the production of its next generation aircraft, the first such agreement for Boeing. Most recently it initiated talks with four members of Airbus to study a proposed super jumbo jet capable of carrying 550–800 passengers and flying distances of up to 10,000 miles. While this arrangement would involve equity sharing, “Boeing would expect to get 60 percent of the program, which is proportional to its control of the world aircraft market” (Vartabedian, 1993). U.S. government policy has consisted primarily of indirect government procurement, denial of technology transfers, and urging of decreases in foreign government subsidies. U.S. aerospace firms are sensitive to the global structural changes that are fostering transnational cooperation. While concerned about trading away production and technology secrets, they seek

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coherent and consistent trade and investment policies that include explicit (but bounded) recognition of national security exceptions to a liberal market, along with some kind of transparent mechanism to determine when national security exceptions are warranted. They argue that the U.S. has no coherent policy on international trade and cooperation when it comes to high technology industries such as aerospace, and . . . [has become] . . . an undependable partner and source of products and technology produced by those industries. This . . . provides European nationalists with justification to increase efforts at high technology cooperation that excludes the U.S. and encourages the Japanese to look to Europe for aerospace partners rather than to the U.S. (Fuqua, 1989)

Until a more coherent policy emerges, U.S. firms will respond to international structural changes as adaptively as they can. ASSESSMENT OF U.S. POLICY CHANGES

Civil aviation highlights three critical aspects of state economic policy selection and implementation. First, policies do not always work as planned. U.S. policymakers responded to changing market conditions and international political structures by taking steps to liberalize air transport in a conscious effort to rejuvenate the industry and enhance the domestic economy. Logic suggested that more competitive (and thus more profitable) airlines would need to expand fleets, which would help U.S. aircraft manufacturers maintain their industry dominance and their ability to generate significant revenues for the state and the firm. However, economic deregulation of the airlines triggered a number of unanticipated as well as anticipated corporate responses. A series of “unpleasant surprises” continue to wreak havoc in the industry. The shakeout no longer assumes that dominant U.S. firms will enjoy global reach and contribute such a large positive component to the U.S. balance of payments. Instead, the industry is likely to be more transnational in structure, with revenue distribution diffused among a number of independent partners headquartered around the world. Second, policy consequences affect both the targeted sector and a number of related industries. The circle of affected industries can be surprisingly wide, and consequences for all of them are generally not considered by policymakers. Nor are all industry sectors equally affected. Commercial class aircraft manufacturers were negatively affected by economic deregulation of the airlines. This contributed to the increasing importance of international markets to aircraft manufacturers, which in turn encourages participation in transnational alliances in order to access new or enhanced markets, to reduce cost and risk, and to acquire technology and knowledge. The consequences of this shift may affect policymakers’ perceptions about

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the industry’s overall value. For example, whereas aircraft manufacturers have traditionally played a critical role in the economy as major purchasers of important goods and services, the trend toward pursuing international production strategies may result in U.S. firms supplying components to Airbus, and foreign firms becoming primary sources for U.S. prime manufacturers. Already, Airbus advertises its use of U.S. parts and labor: “Airbus Industrie aircraft operating throughout the world since 1979 represent more than $3 billion worth of components and replacement parts manufactured in the United States. That translates directly into more than 90,000 American jobs” (Airbus of North America, 1988). Finally, policy implementation can establish parameters for future activity—whether state or corporate—that can be difficult and costly (though not impossible) to alter. This may be particularly true of efforts to liberalize markets long characterized by heavy government involvement. For better or worse, liberal markets limit state behavior to performing (ideally) only those functions that facilitate trade but do not generate economic rents for particular private actors. Steps taken to liberalize the air transport market have only scratched the surface. Governments remain in charge of critical infrastructure supports, including the number and capacity of airports, air traffic control systems, and safety certification of aircraft, airlines, and employees. Any one of these functions can be manipulated to determine who will fly which passengers to which destination at what time. As liberalization proceeds, however, airlines will pressure governments to improve market operations by privatizing these operations and implementing more uniform policies to facilitate efficient international operations. State policymakers will have to choose between promoting efficient market actors and retaining traditional political and military policy tools. In the commercial class aircraft manufacturing sector, where technically complex, large-scale, long-lead-time projects enhance the power of knowledge, industry specialists exercise long-lasting influence. Projects that span decades and outlive the careers of many policymakers require a high level of knowledge to form independent judgment, yet tend to affect politically sensitive issues like employment and revenue generation: The tendency is often to rely on the specialist or to postpone any decision which would fundamentally alter the course. . . . [A] major commitment may be incremental, with no obvious point for a single definitive decision. [Policymakers] wake up suddenly to a large, perhaps irrevocable demand for further resources. Responsibility becomes attenuated over the years, and momentum rather than choice determines events. (K. Hayward, 1983: 8–9)

It seems ironic, given the clear connections between the manufacturing and service sectors of civil aviation, that policymakers would attempt to liberalize the market in one sector while still trying to restrict the market in the other, both in the name of improving the status of U.S. competitiveness.

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Many believe that states can create national competitive advantage by virtue of the policies they direct toward their economic enterprises. They contend that as long as some states pursue such an approach to the economy, policymakers should proactively initiate countervailing competition policies in support of key industries such as civil aviation (e.g., Porter, 1990; Golaszewski, 1990; Zysman, 1983). They further assert that adherence to “liberal ideological principles and the economic policies that they generate” can “conflict with the state’s broad goals of economic prosperity and political autonomy” (S. Reich, 1989: 580). Others counter that the economic benefits that can be derived from a liberal international market exceed the potential political or economic costs (e.g., Kasper, 1988; Julius, 1990). They argue that even the strategic trade literature “can be interpreted as strengthening the bias in favor of open trade policies by showing how restrictive the requirements are to justify exceptions” (Julius, 1990: 8–9). They also contend that variations in historical traditions and political cultures will act to sustain the state system. Since the increasing incidence of transnational alliances is a response to fundamental forces in the evolution of both the world economy and aircraft technology, concerns “about the dangers posed by these cooperative ventures for the future competitiveness of the U.S. commercial aircraft industry seem overstated” (Mowery, 1987: 149–151). Efforts to restrict trade and investment, no matter how cleverly hidden or disguised, are likely to invite retaliation, ultimately resulting in harm to the industry. Ideally, the various instruments of U.S. policy toward all aspects of civil aviation would be coordinated, but this is not an easy task.17 Such a step would certainly require a change of approach for U.S. policymakers who traditionally have shied away from such a high level of government involvement in economic decisions. CONCLUSION

If in general the 1980s appeared to be a decade of transition, this was certainly the case in commercial aviation. For the most part, no state was so dominant that it could easily and unilaterally impose its preferred policies on the rest of the world. Corporate decisionmakers came to view the international marketplace less as a set of distinct markets linked by trade, and more like a single unified market with relatively minor regulatory variations. Still, government leaders around the world sought to enhance domestic security, in part by strengthening domestic economies. Despite dramatic changes in the international political economy, the prevailing political and economic principles of sovereignty and property rights have endured. These reinforce policymakers’ perceptions of an anarchic international society, where power and markets are decentralized, where supranational authorities are unable to enforce rules on unwilling sovereign states, and where the ability to exercise sovereignty is related to polit-

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ical, military, and economic autonomy. Policymakers are constantly confronted with the need to strike a balance between exercising sovereignty unilaterally to achieve some national interests and goals and yielding sovereignty to achieve others. If fully implemented, efforts to liberalize international air transport may place international actors on a collision course with the principle of state sovereignty. The tension between unified economic markets and political anarchy has been resolved in the past by creating larger political units to fit the size of the new market. The growing pains in the move toward European unity underscore the difficulty of this occurring on a global scale any time soon. The market imperative appears to be compelling. The 1990s may reveal whether states and corporations will embrace the market, retrench behind more familiar state borders, or find a different way to act in a transformed world political economy. The consequences of policy for shaping the future structure of the international system writ large are potentially dramatic. The ability of the United States to maintain a competitive presence in the world economy depends on both state and corporate policies. Effective policy selection and implementation require understanding of changes in international structures and industry dynamics, as well as accurate estimates of the long-term consequences of policy options. Policymakers in liberal states will always be vulnerable to domestic and international demands and constraints, but they must also be poised to take advantage of changing opportunities. Among the lessons for policymakers suggested by this study is the need to recognize the reciprocity between government and corporate policies and the symbiotic relationship among critical industry sectors. This may require a significant shift in ideas about the arbitrary boundaries that separate states and markets, as well as those separating industry sectors. Few service sector industries exist in isolation from a critical manufacturing sector—for example, airlines and aircraft manufacturers, telecommunications and its necessary hardware, or insurance and the capital goods it insures. Though directly affected by different sets of variables, each is affected by significant changes in its “partner” industry sector as well. The challenge to U.S. policymakers is to select and implement a set of coherent and coordinated policies for a wide array of industry sectors that will enhance their global competitive position without threatening the ability of trading partners to thrive also, and to do so without excessive regulatory interference in either the domestic or international economies. NOTES

1. Commercial aviation encompasses a large number of industry sectors. This study focuses on air transport services provided by regularly scheduled commercial

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airlines and commercial class aircraft manufacturers that build airplanes of greater than 12,500 pound takeoff weight. 2. See also Friedberg (1989) and Krasner (1985). For contradictory conclusions see Strange (1985) and Russett (1985). 3. Primary producers (or prime manufacturers) are responsible for developing and delivering a finished product of their own design, supervising the work of their subcontractors, and integrating the subsystem into the final product. 4. “Revenue passenger miles” refers to the total number of miles flown by paying passengers. 5. “Cabotage” restricts air transport within the boundaries of a country to domestic carriers; this is currently a matter of public law for most states and is embodied in most Bilateral Air Transport Agreements. 6. “Territory” was defined as “including the national territory, both that of the mother country and of the colonies, and the territorial waters adjacent thereto” (Salacuse, 1980: 813–814). 7. Neoclassical economists predicted that an oligopolistic production structure would eventually emerge, but argued that the choice was between imperfect regulation and imperfect competition. Basing their views on the logic that regulation protects producers rather than consumers, deregulation advocates were firmly convinced that the social outcomes of oligopoly would be more desirable than those of imperfect regulation. Furthermore, they argued the theory of contestability—the threat of market entry by a competitor—would maintain the level of competition needed for the consumer to benefit in spite of the presence of a producer oligopoly (see, e.g., Bailey, 1986: 1211; Brenner, 1988: 182–183; Kahn, 1988b: 250; Kasper, 1988: 37; Levine, 1987a: 418; 1987b: 161; Morrison, 1993; and Wilkins, 1984: 420–422). 8. Kahn (1988a: 316–322) identified four “unpleasant surprises of deregulation”: (1) “Turbulence and painfulness of the process” of adjustment, affecting profits, route restructuring, labor, and decreased service to small communities; (2) “reconcentration of the industry”; (3) “intensification of price discrimination and monopolistic exploitation” via predatory pricing policies; and (4) “deterioration of quality of service,” as measured by congestion and delays, loss of amenities and spacious seating, and a possible narrowing of the margin of safety. 9. U.S. carriers’ participation is essential because their financial contributions are substantial and because the U.S. market is so important. 10. In the case of commercial aviation, these functions include air traffic control systems, safety certification, airport maintenance, and other infrastructure needs (see, e.g., Golich, 1989; Jost, 1990: 36–45; Koplin, 1987; Montagnon, 1990). 11. Jim Lloyd, legal counsel for USAir, and Paul Misfud, representing KLM Royal Dutch Airlines, discussed in separate presentations at the Transportation Research Board’s 1993 annual meeting this new set of criteria in light of recent efforts by foreign airlines to buy into U.S. airlines, namely Air Canada and Continental, KLM and Northwest, and British Airways and USAir. 12. At the end of World War II, sixteen firms were building aircraft in the United States, fourteen in the United Kingdom, and five in France (Golich, 1992: 903–906). 13. For a comprehensive overview of the increase in aircraft production costs over the 1936–1991 period, see Shenton (1991). 14. For example, the search for lighter but stronger materials for airframes was driven by the need to cut fuel costs by saving weight. The composite materials discovered are currently used in automobiles, boats, rapid transit vehicles, and a variety of sports equipment. See the discussions in Committee on Technology Issues (1988), Seghers (1989), and Starr (1987).

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15. U.S. manufacturers complain that European government subsidies to Airbus at all levels of research, development, production, marketing, and sales distort trade and give Airbus an unfair advantage in the market. Europeans counter that fungible resources made available to U.S. manufacturers through military procurement procedures exceed the subsidies received by Airbus from all six participant governments. In the Tokyo Round of GATT negotiations, a code of conduct was adopted and a complex formula delineating acceptable financing terms for civil aircraft sales was established. Nevertheless, public subsidies of this industry sector were back on the bargaining table of the Uruguay Round. Once again a complicated agreement was reached, but whether it will eliminate the controversy remains to be seen. 16. First, airlines shifted route structures to a hub-and-spoke network requiring a return to smaller aircraft already in their fleets. Airlines with such planes continued to use them as long as they met noise pollution requirements, fuel prices remained low, and labor costs continued to drop. Whereas aircraft were once assumed to have a twenty-year service life, now they can last up to fifty years with proper maintenance. Second, airlines implemented fare wars to capture new and maintain old markets, resulting in decreased profitability: between 1982 and 1992, U.S. certificated air carriers lost $7.5 billion; 1992 was the worst year in the history of the industry (Faberman, 1993: 2). Third, through strategies of acquisitions and mergers, airlines rationalized production, acquiring aircraft in the process. 17. For example, as long ago as 1957, a State Department official, T. V. Kalijarvi (1957: 36–78), noted an interesting paradox in U.S. foreign economic policy. In an effort to support commercial class aircraft manufacturers, the government helped finance their sales to foreign airlines by offering guaranteed loans or even less-than-prime interest rates through the Export-Import Bank. This also has the effect of hurting U.S. airlines, which do not have similar access to cheap capital, unless they purchase foreign aircraft under the same circumstances. This same paradox remains today (e.g., Mowery 1987: 164–165).

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Ideas and Foreign Policy: The Emergence of Techno-Nationalism in U.S. Policies Toward Japan During the 1980s, the United States and Japan made significant efforts to strengthen their military ties for mutual defense and security. In particular, cooperation in the area of military technology became a major underpinning of the U.S.-Japanese alliance. Since Japan’s landmark 1983 decision to permit the transfer of advanced military technology to the United States, collaboration between the two countries has led to a series of agreements and bilateral projects, including Japan’s export to the United States of the guidance and control sections of KEIKO missiles and the joint development of Japan’s next generation fighter aircraft, the FSX. This cooperative mode of alliance behavior, however, represented only one side of U.S.-Japanese interactions over military technology issues during the 1980s. The other, and no less important, side was that in both the United States and Japan a new form of nationalism gained momentum among industrialists, military strategists, and political leaders who were seeking technological autonomy for national security reasons. This new idea, called techno-nationalism, was manifest in various policy decisions, such as the initial Japanese plan to produce the next generation fighter aircraft, the FSX; congressional opposition to the sale of the Aegis air defense system to Japan; and the Pentagon’s interventions to block Japanese corporate investments in U.S. high-technology industries.1 This chapter focuses on the evolution of U.S. techno-nationalism in recent U.S.-Japanese relations and explores its origins and influences on policy choices. How did the idea of techno-nationalism come into existence? How did it become institutionalized into codified laws and administrative rules? And, how did this idea influence actual U.S. policies toward Japan? U.S. techno-nationalism vis-à-vis Japan deserves systematic scholarly investigation, not only for the immense practical importance of this particu199

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lar bilateral relationship, but also for more general theoretical reasons. Recently many scholars in international relations (and political science in general) have tried to articulate the causal impact of ideas, and of institutions as formalized ideas, on policy choices.2 Discontent with conventional theories that concentrate on the structural characteristics of the international system, these scholars typically argue that ideas, once invented and institutionalized, tend to persist beyond their original purposes and to exert autonomous causal force. Studies based on this ideational approach, however, have thus far been preoccupied with establishing the status of ideas as independent variables and with showing that “ideas matter” beyond other causal factors, especially material interests. As a result, in the majority of these studies, ideas are treated as exogenous and described as performing various important functions. But no systematic attempt has yet been made to understand the dynamic process of how ideas are generated, how they become widely accepted, and how they become influential enough to “matter.” In short, despite some progress in understanding the functional role of ideas, we have yet to establish a theory of ideas themselves.3 This chapter, therefore, is a product both of empirical curiosity related specifically to the U.S.-Japanese alliance and of theoretical concerns related more generally to the ideational approach in foreign policy analysis. Accordingly, the remainder of this chapter is divided into several sections. The first section summarizes recent developments in U.S.-Japanese relations, describing the rise of techno-nationalism alongside unprecedented bilateral cooperation in technology-security issues. The next section highlights the failure of conventional structural theories in international relations to explain such a mixed pattern of alliance behavior. While it is beyond the scope of this chapter to formulate a general theory of ideas, the following section advances an analytical framework composed of a set of hypotheses to investigate the evolutionary process through which ideas are invented, circulated, and institutionalized to influence policy outcomes. Based on this framework, the development of U.S. techno-nationalism vis-à-vis Japan is then examined in some detail. The concluding section summarizes the implications of this study and offers suggestions for future research. TECHNOLOGICAL COOPERATION AND TECHNO-NATIONALISM IN THE U.S.-JAPANESE ALLIANCE DURING THE 1980s

Interactions between the United States and Japan during the 1980s involved a complex mixture of cooperative and nationalistic modes of alliance behavior. With regard to the issue of military technology, bilateral cooperation reached a level unprecedented in the history of U.S.-Japanese security rela-

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tions. It was especially Japan, under the leadership of Prime Minister Yasuhiro Nakasone, that took various new initiatives.4 First, in November 1983, Japan decided to allow exports of its advanced military technology to the United States, as an exception to its long-standing policy of banning the sale of arms.5 The U.S.-Japanese Joint Military Technology Commission was established and, in November 1984, began to review requests for technology transfers from Japan. Based on a “shopping list” submitted by the Pentagon’s advisory team to the commission, the guidance and control technologies of the KEIKO portable surface-to-air missiles became the first, precedent-setting item for transfer in September 1986. In December 1986, the next package deal was concluded: Japan approved the provision of technical assistance by a Japanese shipbuilding firm, Ishikawajima-Harima Inc., to U.S. companies for the construction of naval auxiliary oilers in Pennsylvania and for the overhaul of an aircraft carrier in Philadelphia (Rubinstein 1987). Thus, in the 1980s, for the first time since the alliance had been established in the early 1950s, the flow of military technology became two-way. Second, Japan’s decision to participate in the Reagan administration’s Strategic Defense Initiative (SDI) program formed another important dimension of technology-security policy coordination. Despite a 1969 Diet resolution opposing the militarization of space, the Nakasone government decided in September 1986 to allow the Japanese private sector to become involved in SDI research.6 In November 1988, eight Japanese firms were awarded a one-year contract totaling $3 million for research on a theater missile defense system called Westpac, an Asian–Western Pacific version of the SDI. Initiatives for bilateral cooperation in other space technologies were also undertaken. The two countries exchanged a memorandum of understanding in March 1989 regarding the development of a manned space base to be pursued jointly by the United States, the European Space Agency, Canada, and Japan. Finally, by January 1988, Japan and the United States reached an agreement on a series of joint projects to develop advanced conventional weapons systems. Following the lead established by the October 1987 decision to jointly develop the FSX, the Japanese Defense Agency (JDA) and the U.S. Department of Defense (DOD) chose four new areas of military technology as the foci of joint research: (1) millimeter wave/infrared eye hybrid seekers (designed to improve the accuracy of guided missiles); (2) advanced armordefeating antitank cannon shells; (3) “ducted” rocket engines (designed to increase the speed and payload capacity of missiles); and (4) technology to demagnetize submarines and thus enhance their ability to evade detection. Cooperation between the two countries was no longer limited to the transfer of already developed technologies but began to involve joint development of new technologies for mutual defense.7 These decisions for bilateral cooperation, however, represent only one

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of two trends in Japan’s alliance behavior during the 1980s. While it is undeniable that the Nakasone and subsequent administrations contributed to the strengthening of trans-Pacific security ties, there were also instances in which rising techno-nationalism had a quite different impact on the Japanese defense policymaking process, and on the alliance. Probably the most famous and important case involved the FSX. On the surface, Japan’s decision to produce the FSX jointly with the United States appears to represent a cooperative mode of alliance behavior. However, closer examination of the selection process leading up to the October 1987 decision reveals a different story.8 At the beginning of this process, which started unofficially in the early 1980s, Japanese military strategists, JDA officials, and political leaders within the ruling Liberal Democratic Party had formed a virtually unanimous consensus that the FSX should be produced domestically. Even after this issue became a formal topic of discussion within the Nakasone cabinet in September 1985 in connection with the new midterm defense program (1986–1990 Shin Chuki Boeiryoku Seibi Keikaku), domestic production was still the most favored option. Proponents of the domestic option made two major arguments: (1) the FSX would have to perform a number of specific functions that were strategically unique to the defense of Japan and that ready-made foreign fighters could not perform, and (2) the FSX project offered a crucial opportunity to maintain Japan’s defense industries because it was one of the few projects that required high-level military expertise to pull together diverse technologies into a single weapons system. It was only after the United States applied gradual but effective pressure on Japan that Nakasone finally dropped the idea of domestic production. The final decision to use General Dynamics’ F16 as a base for remodeling represented a compromise between Japan’s preferred domestic option and the original U.S. demand that Japan use off-theshelf U.S. fighters of proven design. The Japanese defense establishment was generally dissatisfied with this “political” solution to the military problem (Ogawa, 1989). There are other cases where rising techno-nationalism has had an impact on Japan’s defense posture. For example, in the wake of the FSX controversy, the Japanese government reportedly decided in April 1989 to develop a new generation surface-to-air missile using its own technology; an official from the Finance Ministry confirmed that 4 billion yen had been earmarked in the fiscal 1989 budget for “study” expenses (Daily Yomiuri, April 21, 1989). In fact, Japan’s “domestication” of the missile defense system had been under way for some time. Since 1980, the JDA and Mitsubishi Heavy Industry, the leading defense contractor in Japan, have been producing ASM-1 air-to-vessel missiles attached to the existing class of Japanese fighter support, the F-1s, with a view to replacing U.S.-made Hawk missiles. The JDA’s Technical Research and Development Institute (TRDI) has also been experimenting with SSM-1B vessel-to-vessel missiles; they are sched-

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uled to be deployed in the 1990s, replacing U.S.-made Harpoons. For air-toair missiles, the JDA decided to replace U.S. Sidewinders with Japanese AAM-3s.9 In pursuing these projects, the Japanese defense establishment has frequently expressed pride and confidence in Japanese technology. Ryozo Tsutsui, head of the research department at TRDI, claimed, “There are some areas [especially in hardware] where Japanese civilian technology has already surpassed American military technology.” And, Yotaro Iida, president of Mitsubishi Heavy Industry, noted that “the level of Japanese technology is approaching that of American. With some more steps, we might be able to catch up with them, but we haven’t really passed them yet. . . . Modesty is important, but [I] wish to pass the U. S. in the 21st century.”10 A mixture of cooperative and nationalistic alliance behavior could also be found in U.S. policy toward Japan during the 1980s. On the one hand, the United States continued to provide access to advanced U.S. technologies essential to the defense of Japan. Most important, Washington encouraged the Japanese to produce advanced military equipment under U.S. license, such as F-15s and Patriot surface-to-air missile systems.11 On the other hand, the United States showed some reluctance to provide Japan with access to other U.S. technologies. For example, in 1988, a group of members of Congress, especially in the House Armed Services Committee, tried to block the sale of the Aegis air defense system to Japan. In the wake of the Toshiba machine case in the previous year—in which a Japanese company was found to have illegally exported to the Soviet Union equipment that could be used to build quieter propellers for submarines—these members argued that the sale would jeopardize U.S. national security. One member was quoted as saying that the U.S. government “is unable to guarantee that the Aegis system would be protected from compromise through espionage once it has left the direct control of the U.S. Navy.”12 It is true that, in this particular case, the opposition to the sale was overcome and the Aegis system was eventually sold to Japan; techno-nationalism did not result in a concrete change in U.S. policy toward Japan. However, there were other areas in which rising U.S. techno-nationalism was manifest in new laws and administrative rules that significantly affected U.S. relations with Japan. For example, in late 1986, the National Aeronautics and Space Administration (NASA) established the so-called nono list of foreign companies that were to be denied access to the information of NASA’s recent scientific and technological achievements. This list included three Japanese firms, as well as a U.S. professor who was allegedly “involved in the technology transfer to Japanese firms.”13 This incident represented an undeniable trend of increasing control over information and technology transfer, a trend also reflected in a series of newly established administrative rules.14 With regard to the transfer of technologies through contracts and other

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forms of business transactions, in 1988, the U.S. Congress passed the ExonFlorio amendment, which was attached to the Omnibus Trade and Competitiveness Act of 1988. This amendment granted the president discretionary authority to block, for national security reasons, mergers, acquisitions, and takeovers that would result in “foreign control of persons employed in interstate commerce.”15 In April 1989, the United States used this new legal framework to block the takeover of General Ceramics Inc. by a Japanese firm called Tokuyama Soda Company. General Ceramics manufactured ceramic beryllium components used in producing nuclear weapons and, on the basis of Exon-Florio, the U.S. government forced the exclusion of controversial military divisions of the firm from the takeover. In sum, interactions between the United States and Japan over technology-security issues during the 1980s reveal a mixed and puzzling pattern. On the one hand, technological cooperation became a major underpinning of the U.S.-Japanese alliance; on the other, a new form of nationalism started to influence some policy outcomes in both Japan and the United States and to strain the alliance. We now turn to the question of whether this pattern can be explained in terms of conventional international relations theories. SHORTCOMINGS OF STRUCTURAL EXPLANATIONS

Theories of international relations that highlight the structural characteristics of the international system are inadequate for understanding the complex nature of U.S.-Japanese interactions in the 1980s. These theories may provide partial accounts for patterns in the relationship, but they are unable to explain why in both countries a nationalistic policy orientation developed alongside unprecedented technological cooperation for mutual defense and security. Liberal versions of structural theories, in particular, seem least able to address this question. Typically, liberal theorists assume a fundamental harmony of interests among interdependent states and advance the normative, as well as analytical, claim that higher levels of interdependence provide incentives for each to reduce protectionist tariffs and other nationalistic barriers against international transactions. Keohane and Nye (1977), for example, argue that the growth of international interdependence promotes mutual economic vulnerability and thus furthers incentives for each state to adopt open liberal policies in order to maximize its own welfare. The evidence from changes in U.S. policy toward Japan, however, clearly contradicts such a claim. It was during the 1980s, for example, when bilateral interdependence became less asymmetrical because of increasing U.S. reliance on inflows of Japanese capital, that the United States became more concerned with incoming Japanese investment in U.S. high-technology industries. The establishment of the Exon-Florio provisions was a clear

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departure from the long-standing U.S. policy of “neutrality with encouragement” toward inward foreign investment (Hodges, 1991). In contrast, during the 1950s and 1960s, when interdependence between the two countries was highly asymmetrical, the U.S. government rarely intervened to prevent the Japanese from obtaining U.S. manufacturing technologies and management skills.16 In fact, U.S. policies toward Japan during those earlier decades were uniformly “generous,” opening U.S. markets to Japanese exports, sometimes even at expense of the interests of U.S. domestic firms and industries (Sato, 1991: 29–30). Thus, the actual pattern of U.S. policy toward Japan has been almost the reverse of what the liberal interdependence school would predict. Realist versions of structural theories appear to offer a more convincing explanation. For example, Gilpin (1981: 134; 1987: 90) and other proponents of “hegemonic stability” theory would argue that the rise of U.S. techno-nationalism is consistent with the shift from a benevolent to a predatory orientation in U.S. foreign policy brought about by the decline in its hegemonic power. According to this theory, hegemonic decline is inevitable because of the “asymmetric growth” between the hegemon, which provides collective goods, and the other free-riding states in the international system. Mastanduno (1991) has applied this logic to explain changes in U.S. policy toward Japan during the 1980s. He begins his essay by citing the result of a famous survey suggesting that the U.S. public is increasingly concerned with the relative position of the United States in its economic relationship with Japan.17 Mastanduno (1991: 81) interprets this evidence as supportive of the realist argument. Early in the post–World War II period, the United States could afford to pursue its own welfare in an absolute sense without much regard to its position relative to other industrial, capitalist countries. But as its economic power declined, “U.S. policy in economic relations with its allies would come to reflect a greater sensitivity to relative gains.” Structural realist explanations, however, are also problematic in several ways. First, neither Gilpin, Mastanduno, nor other structural realists are able to generate expectations of when the declining hegemon would change its policy orientation. If, in fact, the decline of U.S. power brought about U.S. techno-nationalism, why did the change occur in the 1980s and not in the 1970s, when many analysts believe U.S. hegemony underwent serious erosion?18 Second, although realist logic may provide some insights into the changing behavior of the hegemon, it offers very little predictive power with regard to the behavior of the rest of the states in the international system. It is especially unclear what kind of policy changes these states would be expected to make once hegemonic decline is evident.19 Thus, hegemonic stability theory has little to say about the evolution of techno-nationalism in Japan. Third, and most important, structural realism is essentially too macroscopic to predict when and how the declining hegemon will change its for-

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eign policy behavior. If structural changes in the international power distribution increased U.S. predatory tendencies and “relative gain concerns” visà-vis Japan, why did it not change overall U.S. security policy toward Japan? Why was techno-nationalism manifest in only certain areas of U.S. security-technology policy? Mastanduno (1991) recognizes the cross-sectional variation in U.S. policy outcomes in the aircraft, satellite, and highdefinition television industries but observes that relative gains concerns were strongly evident in the policy process in each of the three cases. Mastanduno (1991: 75) acknowledges the limited predictive power of structural factors: “The extent to which relative gains concerns were ultimately translated into policy [was] shaped by domestic factors, in particular ideology and the institutional setting.” In sum, structural theories of international relations, whether liberal or realist, cannot fully explain the pattern of changes in recent U.S.-Japanese interactions at the intersection of the technology and security issue areas. The inadequacies of these conventional theories suggests that we must look for determinants of foreign policies other than such structural characteristics of the international system as the degree of interdependence or the distribution of power. The rise of techno-nationalism in both the United States and Japan seems to indicate that ideas, and institutions as formalized ideas, must be taken into account. TOWARD A THEORY OF IDEATIONAL DYNAMICS

The recent literature on ideas and foreign policy is driven by the basic intuition that ideas have a long-lasting effect on policy choices. Ideational theorists typically argue that, even if ideas may originally be the creation of rational self-interested actors, those ideas, once invented and institutionalized, are likely to outlast these actors and their original purposes. Thus, “ideas as well as interests have causal weight in explanations” (Goldstein and Keohane 1991: 2). Some scholars, such as Katzenstein (1991), depart even further from the basic rationalist epistemology, arguing that ideas and institutions ultimately shape the utility functions of relevant political actors.20 Ideational theorists have already been subjected to criticism. The most formidable problem that has been pointed out is methodological. As Garrett and Weingast (1991: 32–33) put it: The problem . . . is that [there are] numerous alternative explanations for the events in question in which the ideas are ancillary to the explanation of the events, that is, in which the ideas are epiphenomenal and in which other variables—such as material interests—ultimately bear the causal weight.

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This problem has had several different effects on the development of ideational research. It has led some staunch positivists to abandon ideational research all together. Shepsle (1985), for example, claims that ideas are merely “hooks” that competing elites seize to propagate and legitimize their private interests. Other researchers have become preoccupied with establishing the status of ideas as independent explanatory factors. They often use Shepsle’s claim as a kind of null hypothesis in order to show not only that ideas matter but also that ideas have a causal impact beyond interests.21 And precisely because of such preoccupations, ideas have been treated as exogenous in the literature and have been described as performing various important functions, such as stimulating policy innovation in crises (Hall, 1989); forging a new consensus among elites and intellectuals (Ikenberry, 1992); justifying political agendas and activities already in place (Krasner, 1991); and, most generally, selecting a single unique outcome out of multiple equilibria (Garrett and Weingast, 1991). These functional analyses of already existing ideas, however, are problematic because they tend to capture only a static picture, highlighting the causal relationship between the given ideas and policy outcomes at one point in time. If the point of taking ideas seriously lies in our intuition that ideas tend to outlive their inventors and their original purposes, what we need is not a static picture but a dynamic one. That is, what must be theorized about is not the function of ideas but rather the dynamic process with which the ideas themselves evolve over time: how ideas are originally generated, how they become widely accepted among policymakers, and how they become institutionalized into codified laws and administrative rules. The existing ideational literature has thus far failed to address these questions. It is beyond the scope of this chapter to address these questions in great detail or to formulate a full-fledged theory of ideas. Nevertheless, in order to facilitate a systematic empirical investigation of the origins and development of ideas, the following set of hypotheses can be advanced as a framework for analysis.

The Popularization Hypothesis

At their origins, ideas are likely to be personal inventions. In order for ideas to have a meaningful effect on behavior, these ideas must have some form of coherence and consistency. Ideas that ultimately affect policy choices, however, cannot simply remain personal possessions of their inventors. How can we hypothesize the processes by which some ideas become popular and influential while others do not? The inventors of ideas, or “intellectual entrepreneurs,” are likely to try to sell their ideas to other individuals because of material interests, psychological needs, and various other reasons, even if these factors were not the

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driving motivations when the ideas were invented. But the inventors’ sales efforts alone are not enough. As Goldstein (1993: 24) notes: “For ideas to become politically salient they need to have sponsors. Those sponsors must either hold political power or influence those who do.” Thus, in order for their ideas to be popular and influential, intellectual entrepreneurs must be joined by a group of “political entrepreneurs” who are willing to buy these ideas as tools with which to pursue their own interests. Accordingly, we can hypothesize: Ideas become popularized if efforts by intellectual entrepreneurs to sell their personal ideas are joined by powerful political entrepreneurs who take advantage of these ideas for their own gain.

Conceptually, personal ideas must be distinguished from ideas that have become popularized and shared by a group of individuals. For the sake of clarity, the latter can be referred to as “norms.” That is, norms can be understood as ideas shared by (or imposed upon) a set of individuals in addition to the creators of the ideas. The Internalization Hypothesis

Not all ideas survive over time. Even widely popular ideas, or norms as defined above, are often temporary fads and may wane in popularity and influence. The immediate survival of norms depends on the second stage of ideational dynamics: internalization. Internalized norms can be distinguished from noninternalized norms in terms of their survivability. Clearly, noninternalized norms are less likely to survive in an evolutionary sense because the maintenance of such norms is extremely difficult. The maintenance of noninternalized norms, by definition, must be based on some external (i.e., either second- or third-party) sanction mechanisms. Actors comply with noninternalized norms not because they believe in them or feel guilty when violating them, but because of various kinds of punishment that noncompliance would incur. Such sanction mechanisms involve enforcement costs and thus pose a fundamental collective action problem. The nature of the problem has three aspects: (1) actors must be motivated to execute sanctions against violators of norms even if that execution is personally costly; (2) actors must be motivated to keep informed enough to know when sanctions are required, even though information-gathering activities may be personally costly; and (3) actors who witness the violation of norms must be motivated to report the episode, even though reporting may be personally costly.22 This collective action problem cannot be solved by invoking what Axelrod (1986) calls a “metanorm” of punishing those who have failed to punish the original violators, because the enforcement of such a metanorm would simply result in another collective action problem associated with the second-order enforce-

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ment costs. As Taylor (1987: 30) puts it, “The solution of collective action problems by norm [backed by sanctions] presupposes the prior or concurrent solution of another collective action problem.” Under what conditions then do norms become internalized? Because internalization is a human cognitive process, it is extremely difficult to hypothesize the exact causal mechanism. Nevertheless, precisely because of its cognitive nature, the likelihood of internalization of a particular norm must somehow be related to the state of mind of those individuals who adhere to that norm. More specifically, internalization can be interpreted as a psychological response of norm holders to an external pressure that would undermine the legitimacy of the norm. And the greater their interests in upholding the norm, the more natural it is for them to respond in such a manner. This formulation suggests the following hypothesis: A norm is more likely to be internalized when actors who have a vested interest in upholding the norm, are confronted with a strong competing counternorm.

Once a norm is internalized, its origin tends to be forgotten. It is no longer necessary for norm followers to remember who invented the idea, what the original interest behind it was, and how it became popularized.

The Formalization Hypothesis

For a short period, internalization alone may serve as sufficient glue to hold together the group of norm followers. In the long run, however, even internalized norms may lose their force; there will always be some unanticipated contingencies that lead one to question the substantive validity and consistency of the norm and thus may lead to the breakdown of the mechanism sustaining it. Norms, if they are to survive in the long run, must be formalized into codified rules and institutions. Of course, it is impossible for the community of norm holders to establish, ex ante, an exhaustive set of rules to govern their future actions. Nevertheless, formalization is likely to reduce various problems associated with transaction and information costs. Lack of formalization, for example, would impose on individual norm holders additional costs of information gathering in order to make sure that their actions conform to the norm. In the face of unexpected events, in particular, the lack of formalization is likely to lead to the coexistence of various and inconsistent interpretations of the norm within the community, resulting in the need for costly dispute resolution. A formalized norm with a “governance structure” (Williamson, 1985) would at least minimize these problems. This suggests that a norm is more likely to be formalized when the followers of the norm face a greater degree of uncertainty. The degree of uncertainty, in turn, is a function of two factors. Uncertainty increases when (1) norm holders are more concerned with the future, and/or (2) when the size

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and diversity of the community of norm holders increases. In either case, the increased likelihood of inconsistent interpretations of the norm, and thus the anticipated cost of resolutions, furthers the incentives of the followers to formalize their norms. Hence, the final hypothesis can be formulated as follows: A norm is more likely to be formalized when the holders of the norm face a greater possibility of inconsistent interpretations of the norm.

Once formalized into legislative rules and administrative institutions, ideas/ norms will have long-lasting effects on policy choices. Since these ideas/ norms now constrain individual political actors, and as long as it remains costly for these actors to change the relevant laws and bureaucratic structures, the ideas/norms can be treated as an autonomous casual force with lives of their own, apart from existing material interests. In light of the three hypotheses of ideational dynamics laid out here, the following section examines the evolution of U.S. techno-nationalism vis-àvis Japan in the 1980s. How was this new idea generated and how did it become institutionalized into new regulations? THE EVOLUTION OF U.S. TECHNO-NATIONALISM

Many analysts in the United States and Japan believe that techno-nationalism became a coherent element in U.S. policy in the late 1980s.23 It is true that U.S. anger and frustration toward Japan grew noticeably during the late 1980s as a result of a series of well-publicized and controversial incidents, including the FSX selection, Toshiba Machine’s violation of COCOM rules, the Fujitsu-Fairchild controversy, and the subsequent Exon-Florio amendment to the trade bill. However, the development of U.S. techno-nationalism precedes these incidents, dating back to the early 1980s. The purpose of this section is to describe several important cases that document the historical development of U.S. techno-nationalism vis-à-vis Japan, and to examine whether this sampling of cases supports the hypotheses laid out in the previous section.

Techno-nationalism as an Idea

The first important incident occurred in late October 1981. A leading Japanese semiconductor company, Fujitsu, lost its bid to supply a large part of the new optical fiber trunk line that American Telephone and Telegraph (AT&T) was constructing between Washington and Boston.24 While AT&T admitted that Fujitsu’s bid was the lowest, it nevertheless awarded the $75 million contract to its own subsidiary, Western Electric.

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Initially, AT&T emphasized that it was the firm’s decision to reject Fujitsu’s bid: “We felt a lot more comfortable and we feel we are serving the national interest best if we handle this domestically.”25 By early November, however, it became clear that the decision had been made under political pressure from Washington, where it had been argued that dependence on Japanese technology for a main telecommunications link would threaten U.S. security interests.26 Fujitsu and the Japanese government complained, but the Japanese protest was silenced when the U.S. Federal Communications Commission (FCC)—after consultations with the State, Defense, and Commerce Departments, as well as with the U.S. Trade Representative— turned down Fujitsu’s petition in April 1982. In many respects, this incident was a landmark in the evolution of U.S. techno-nationalism vis-à-vis Japan. First, the political maneuvering that had taken place in Washington to force the rejection of Fujitsu’s bid involved not only the executive agencies mentioned above, but also a number of influential individuals in the U.S. Congress.27 The effectiveness of their political pressure was noteworthy in that it had permeated the decisionmaking of such a powerful private corporation as AT&T. AT&T’s decision to reject Fujitsu’s bid was reached immediately after the FCC, having received letters from Congressman Wirth, Senators Inouye and Packwood, and others, ordered AT&T to “address the concerns raised” on national security in Wirth’s letter.28 Second, the U.S. government’s handling of this case was “unilateralist” insofar as it virtually ignored a relevant existing bilateral agreement. The socalled Okita-Askew agreement had been concluded in December 1980 to promote the reciprocal liberalization of the telecommunications equipment markets of the two countries. During the Fujitsu-AT&T controversy, U.S. government officials argued that they could not enforce the agreement in this case because AT&T, unlike its Japanese counterpart, Nippon Telegraph and Telephone, was a private enterprise. This argument, of course, did not satisfy the Japanese, as reflected in one senior diplomat’s comments: “The [Okita-Askew] agreement is not worth the paper it is written on, unless the liberalization applies to AT&T which has more than 80 percent of the market share in America.”29 Third, and most important, this incident set a precedent for using “national security” as the official rationale for regulating the economic activities of Japanese (and other foreign) high-technology firms in the United States. At the request of the FCC, the Department of Defense (DOD) prepared a report in October 1981 on the national security issues involved in this fiber-optics project. This report was an important U.S. government document that set the tone of U.S. techno-nationalism for the rest of the decade. The report, with an authoritative cover letter signed by Deputy Secretary Frank Carlucci, concluded that “if the U.S. telecommunications network became substantially dependent upon foreign-dominated technology or for-

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eign sources of supply, the U.S. might have difficulty rebuilding it after a military attack” (as paraphrased by Meadows, 1982: 59). There is no doubt that techno-nationalism gained momentum among U.S. policymakers after the Fujitsu-AT&T incident. The agencies related to national security, in particular the DOD and CIA, became increasingly sensitive to and concerned with the implications of the massive influx of Japanese investments into U.S. industries, especially into high-technology firms. The number of mergers and joint ventures between U.S. and Japanese companies was rising rapidly. CIA Director William Casey once described these cooperative arrangements as “Trojan Horses” and warned explicitly: “We view this as a dangerous course in a national security context as well as in a commercial context” (New York Times, May 6, 1984). Before turning to the subsequent development of U.S. techno-nationalism, it is crucial to identify how this nationalistic idea came into existence and became so influential that it not only determined the final outcome of the Fujitsu-AT&T case, but also changed the perceptions of many U.S. policymakers. It is important to note that political lobbying to reject Fujitsu’s bid was originally undertaken not by the DOD, the CIA, or any politician cited above, but by another U.S. firm that was also bidding for the project, the Harris Corporation. Harris’s lobbyists met with some twenty congressional members and staff aids over a short period and succeeded in calling attention to the Fujitsu-AT&T case in Washington. Harris’s vice president, Jack Arnold, was quoted (in Meadows, 1982: 58) as saying: “It seemed inappropriate for our national interest to allow a contract for high technology to go to a Japanese firm. . . . I felt Harris, as the only U.S. bidder other than Western Electric, could call this to everyone’s attention.” Harris’s sense of mission was not a product purely of concern about U.S. “national security.” Arnold, who confessed that Harris’s initiative in launching an anti-Fujitsu campaign was motivated by its own economic interests, “hoped that . . . if he could get Fujitsu knocked out of contention, a grateful Western Electric would share part of the business with Harris” (Meadows 1982: 58). Thus, “national security” was little more than a pretext with which to appeal to U.S. patriotism and to attract political attention to this project in Washington: “I thought one of the arguments that could be made would be one of national security. . . . These networks in the fiberoptics linkup are main arteries of communication” (Meadows, 1982: 59). It is also difficult to believe that those politicians who expressed support for Harris and wrote letters to the FCC regarding this case acted solely according to concerns over U.S. national security. Most of these politicians were members of Senate and House committees that dealt with commercial matters, such as telecommunications and transportation; no member of a committee related to defense and military issues was active in opposing Fujitsu’s involvement in the project. There are other reasons to believe that the alleged national security con-

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cern was simply a fabrication. First, the Pentagon, at least initially, did not recognize any security issue involved in this fiber-optics project. When Harris’s Arnold visited the DOD, officials pointed out that the fiber-optics system going into the North American Air Defense Command headquarters near Colorado Springs was going to be supplied by another Japanese firm. Arnold was then told that Fujitsu’s involvement in the project “was not a national security issue” (Meadows, 1982: 59). Second, as Fujitsu repeatedly argued in filing its complaints to the FCC, national security was a strange argument in this particular case because AT&T would have been provided with detailed blueprints for the project and the fiber-optics cable used in the project would have been U.S.-made. The above documentation of the Fujitsu-AT&T incident seems to support the first hypothesis about the popularization process of ideas. Arguably, U.S. techno-nationalism evolved out of the fear over national security fabricated by a private, economically motivated corporation. Harris was the key “intellectual entrepreneur,” promoting the innovative idea of using the national security rationale to regulate Japanese firms’ activities in the United States. This idea attracted wide attention since many “political entrepreneurs,” especially in the U.S. Congress, used it to promote their own interests in fiber-optics industries. It is difficult to speculate counterfactually on what would have happened if Harris’s efforts had not been joined by those members of Congress. But, judging from the evidence, in particular the fact that the DOD initially did not see any national security issues involved in this project, it is doubtful that Harris’s techno-nationalism would have been popularized in Washington to the extent that it was in the absence of such congressional influence. Despite its interest-driven origins, however, it would be a mistake to regard the idea of techno-nationalism simply as a “hook.” Harris’s idea not only influenced the final outcome of the Fujitsu-AT&T controversy, but it also had long-term implications for U.S.-Japanese interactions during the 1980s. The idea clearly outlived the original intention of its inventor “to knock out Fujitsu” and persisted beyond the interests involved in this particular fiber-optics project.

Techno-nationalism as a Norm

Soon after the Fujitsu-AT&T incident, the idea of regulating Japanese firms’ activities in the United States under the national security rationale gained legitimacy among many policymakers in Washington. A series of three incidents that occurred in 1983 indicates that this shared idea had become a consistent element in U.S. technology-security policy toward Japan. First, in February, Kyocera, a Japanese firm that dominated the field of new industrial ceramics, was forced to sell its U.S. subsidiary, Decksell, which was producing field-effect transistors used in U.S. fighters such as F-

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15s and F-16s, as well as in satellite communications. The Pentagon had imposed various constraints on Kyocera since it had started to produce Decksell’s products. For example, Kyocera was ordered in 1982 to replace all Japanese executives of Decksell with U.S. executives. With respect to the sale itself, the DOD reportedly gave specific instructions that Decksell be sold to a U.S. torpedo maker, Gould; Decksell was in fact sold to Gould.30 The second incident occurred in July 1983, when Nippon Steel was pressured by the DOD to cancel an agreement with Allegheny International to buy Allegheny’s subsidiary, Special Metals Corporation. Special Metals was known for manufacturing high-temperature-resistant alloys potentially applicable in aircraft engines. Originally, this deal was initiated by Allegheny, which wanted to diversify out of the metals industry. After a formal agreement was signed in April 1983, however, the DOD expressed its objection to the agreement and unilateral cancellation of the deal by Allegheny followed shortly thereafter. Nippon Steel had no choice but to comply with the cancellation.31 The third incident occurred in December. Sumitomo Metal Industries bought another Allegheny subsidiary, Tube Turns, but was forced to limit its takeover to the nonmilitary divisions of the firm. Designated “secret factories” of Turns, which only authorized U.S. personnel could enter, were reportedly producing welded couplings for piping steel used in U.S. naval ships. As with the Nippon Steel–Special Metals case, it was Allegheny that first approached Sumitomo, and an agreement was reached in July 1983 for a takeover by Sumitomo. But the DOD again intervened and proposed a “voting trust arrangement,” under which Sumitomo would give up its managerial rights over Tube Turns. Sumitomo thought this formula unworkable and decided to exclude the military-related factories from the deal.32 The contrast between these three cases and the previous Fujitsu-AT&T case is striking and points to a change in the basic nature of U.S. technonationalism. In the Fujitsu-AT&T case, it was a U.S. private firm that took the initiative in blocking the economic activities of the Japanese firm. In the subsequent three cases, it was the U.S. government, especially the DOD, that was determined to block Japanese investments. In the two cases involving Allegheny, in particular, the corporate transactions were initiated by the U.S. side. The principal driving force behind U.S. techno-nationalism had clearly shifted from the private to the public sphere: in contrast to the Fujitsu-AT&T case, the government was no longer simply reacting to pressure from “political entrepreneurs” who were involved in popularizing the idea, but rather was taking the initiative in intervening. There was no sign that political lobbying took place in Congress in these three cases. Thus, the idea of using the national security rationale to regulate Japanese economic activities seemed to have already become an internalized norm among U.S. policymakers. To understand exactly what happened between the Fujitsu-AT&T case

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in late 1981 and the three cases in 1983, it is necessary to put the analysis in the broader security debate that was taking place within the first-term Reagan administration. In fact, 1982 was a landmark year for the United States and its European allies in adopting the so-called Follow-on Forces Attack and other conventional warfare strategies vis-à-vis the Soviet Union, which were originally initiated by Defense Secretary Casper Weinberger at the North Atlantic Treaty Organization (NATO) meeting. Because the quantitative balance of conventional forces was overwhelmingly in favor of the Warsaw Pact countries, the NATO members came to recognize as top priority qualitative improvements of conventional weapons based on their superior technologies. President Reagan’s Executive Order 12356, issued in April 1982, was the first concrete policy implemented to respond to such strategic needs (Gonda, 1988: 54). To tighten the control of technology transfer to the Soviet bloc, this order gave a formal mandate for U.S. government agencies to restrict the release of scientific information at universities and academic conferences, while at the same time drastically broadening the range of classifiable information. The issuance of this order, and a package of other specific administrative directives, together with the DOD’s subsequent interventions in university and academic conferences,33 ignited a serious negative reaction from various sectors of the U.S. public. The legal community raised constitutional questions as to whether the order violated the First Amendment.34 Business also reacted negatively, claiming that tight export control measures would only result in creating an unnecessary barrier to the economic survival of U.S. high-technology industries.35 The most sweeping and authoritative criticism came from the academic community of scientific researchers: in September 1982, after reviewing extensive evidence on the benefits and costs of control measures, the ad hoc panel at the National Academy of Sciences published its report, known as the Corson Report, which concluded that a national strategy of “security by secrecy” would weaken, rather than strengthen, U.S. technological capabilities.36 In consequence, there was a sense of crisis at the core of the intelligence and defense communities. In the wake of rising opposition in the U.S. public, some of the new initiatives for tighter control taken by the government were abandoned or canceled.37 Also, additional time pressure made those involved in export control administration more insecure: the only legislative framework for export control, the 1979 (Amended) Export Administration Act, was due to expire in March 1984, and neither Congress nor the administration had reached a consensus over the shape of future legislation.38 It was in this broad context that the above cases involving KyoceraDecksell, Nippon Steel–Special Metals, and Sumitomo Metal–Tube Turns took place. It is reasonable to conclude, as the second hypothesis suggests, that the idea of techno-nationalism was internalized as a cognitive reaction among those DOD officials who had vested interests in controlling the

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export of information and technology for national security reasons. It is difficult to speculate on the counterfactual scenario, but if there had not been a surge of public opposition or added time pressure, such internalization probably would not have occurred. This internalization explains the lack of political lobbying, or serious public debate, about the national security issues involved in the three proposed takeovers by the Japanese firms. It could have been argued, to the contrary, that those investments from Japan, a U.S. ally, would strengthen rather than weaken U.S. high-technology industries and thereby protect the U.S. technological lead vis-à-vis the Soviet Union. Nevertheless, the DOD’s interventions were carried out without giving serious thought to such an argument. In sum, 1981–1983 was the critical period during which the idea of techno-nationalism became popularized and gained internal coherence and legitimacy, at least among those who were concerned with national security issues. But U.S. techno-nationalism had not yet been formalized into a new law or institution. Although techno-nationalists were especially concerned with increasing Japanese investments in U.S. high-technology industries, there was no specific legislation with which to regulate these incoming investments on national security grounds. Thus, in the cases involving Kyocera, Nippon Steel, and Sumitomo Metal, the Pentagon justified its intervention by relying on an old law, the Industrial Security Program, which was attached in the mid-1960s to the 1947 National Security Act. In late 1986, however, an incident occurred—the widely publicized FujitsuFairchild controversy—which finally made U.S. policymakers recognize that the existing legal framework was not sufficient, and which eventually led to the establishment of new legislation: the Exon-Florio amendment.

Techno-nationalism as an Institution

In October 1986, Fujitsu announced that it would acquire 80 percent of the shares of the California-based semiconductor producer Fairchild. Although Fairchild’s technology was generally considered obsolescent by that time, Fujitsu was interested in acquiring Fairchild for its well-developed distribution network and its advanced technology in high-speed logic (Okimoto et al., 1987: 25). Within less than a week after the announcement of the takeover, it became apparent that the Reagan administration was considering challenging the planned merger for national security reasons. U.S. officials noted that “Fairchild manufactures sophisticated microchips called high-end bipolar gate arrays, which are used to drive computers critical to the operation of certain weapons” (Wall Street Journal, October 31, 1986). To many informed observers, the national security concern was a strange reason for blocking this merger, since Fairchild was already owned by Schlumberger, an oil field services and electronics concern controlled by French interests.

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Nevertheless, the U.S. pressure on Fujitsu was quite apparent. Fujitsu was originally expecting to conclude the deal by January 1987, but the U.S. government demanded additional time in order to “investigate” the proposed merger more carefully (Nihon Keizai Shimbun, February 7, 1987). In February 1987, in the midst of the controversy, the DOD publicized a report that called attention to the declining U.S. share in semiconductor markets and warned that such a decline would have grave implications for U.S. national security interests.39 In March, two important cabinet members, Defense Secretary Casper Weinberger and Commerce Secretary Malcolm Baldridge, reportedly requested that the administration consider blocking Fujitsu’s planned takeover (New York Times, March 12, 1987). In the face of this kind of pressure from Washington, Fujitsu finally decided to drop its offer. The most important consequence of the Fujitsu-Fairchild incident was the attachment of the Exon-Florio amendment to the Omnibus Trade and Competitiveness Act, which was passed in 1988. According to this amendment, the president has discretionary authority to block, for national security reasons, mergers, acquisitions, and takeovers that would result in “foreign control of persons engaged in interstate commerce.” It was evident that this amendment would not have passed without the Fujitsu-Fairchild incident. Senator Exon was quoted (in Alvarez, 1989: 63) as saying: [The proposed Fujitsu-Fairchild transaction] threatened the national security. It was also my belief that the President possessed sufficient authority under the anti-trust statutes, the securities statutes, the economic emergency statutes, and his inherent powers as commander in chief, to take action in a merger situation to protect the national interest. To my disappointment, the Administration suggested [during the Fujitsu-Fairchild incident] that they were powerless to take any action. It is that suggestion which primarily motivates this amendment. . . . The legislation I propose explicitly grants the President that power.

There is no doubt that the Exon-Florio amendment marked a departure from a previous U.S. policy toward Japanese and other foreign direct investments. For example, under Exon-Florio the president was given authority to designate the Committee on Foreign Investment in the United States (CFIUS) to receive notices of proposed acquisitions and to conduct reviews and investigations. Prior to Exon-Florio, CFIUS had been regarded as simply a monitoring and coordinating body within the administration. The change in the role of the CFIUS was evident, exemplifying the institutionalization of techno-nationalism: while this committee met only twice a year on average in the period 1975–1988, in 1988–1989 it reviewed approximately 125 out of 646 cases in which U.S. companies were acquired by foreigners (Hodges, 1991: 55–56). And in April 1989, the U.S. government used Exon-Florio to block the takeover of New Jersey–based General

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Ceramics Inc. by a Japanese chemical company, Tokuyama Soda, requiring the divestiture of General Ceramics’ military division from the acquisition.40 In retrospect, Exon-Florio brought about some fundamental changes in government leaders’ attitudes. But it is also important to note that when Congress was deliberating over this amendment, there was actually a consensus among U.S. lawmakers that the proposed amendment would not break any new ground in foreign direct investment regulation. Senator Exon himself thought that his proposal was “relatively non-controversial” (quoted in Alvarez, 1989: 64) and believed, as did many other observers, that the amendment was simply “codifying” the status quo, i.e., giving the president no more than the formal statutory authority he always claimed to have had with regard to foreign investment. But if the senator really thought that he was not breaking new ground, then a crucial question remains: Why did he bother to introduce this new amendment in the first place? Obviously, Senator Exon, Representative Florio, and other proponents of the amendment were in favor of regulating the activities of foreign firms for national security reasons and, in this sense, they represented the voice of techno-nationalists in Washington. Indeed, the fact that there was a consensus regarding the noncontroversial nature of the proposed amendment suggests that techno-nationalism had become a norm widely shared by U.S. lawmakers. Thus, it was not the lack of a norm that motivated Senator Exon and others to campaign for the new amendment. What motivated them was instead the ambiguity of the existing norm, which they thought had allowed the administration to drag its feet in the Fujitsu-Fairchild case. As the passage quoted above indicates, Senator Exon was frustrated not because no one shared his view, but because his interpretation of what the president could have done was different from the administration’s position. Senator Exon wanted to formalize techno-nationalism into codified law precisely because, as the third hypothesis suggests, he thought it was necessary to clarify the content of the shared norm. What would the fate of techno-nationalism have been if the FujitsuFairchild incident had not occurred? Arguably, in the absence of this incident, the ambiguity in interpreting the presidential power to regulate foreign investments would not have been revealed, and thus there would have been no need for techno-nationalists to formalize their shared norm. It is also possible, however, that a difference in interpretations would inevitably have surfaced as a result of the changing environment surrounding U.S. technology-security policy. There was an increasing awareness within the Reagan administration of the strategic value of dual-use technologies, or the effect of “spin-ons,” in which technological innovations developed for the civilian sector were being used for military purposes.41 The diminishing demarcation between military and nonmilitary technologies compounded the complexity and redefined the nature of regulatory policy dealing with technology and information transfer. Thus, while there is no doubt that the

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Fujitsu-Fairchild case triggered the movement for establishing a new legislative framework for techno-nationalism, such a formalization process might have taken place anyway because of the inevitable transformation of the environment surrounding the norm. As a result of the establishment of the Exon-Florio amendment and the revitalization of the CFIUS, the idea of techno-nationalism became entrenched in the institutions of U.S. foreign policy making. In 1987 and 1988, the final stage of ideational dynamics, the formalization process, was completed. The “sense of completion” was well expressed by Commerce Secretary Malcolm Baldridge, who was quoted soon after Fujitsu decided to cancel the takeover: “I just get the feeling it’s an idea whose time has come. . . . Everybody wants an open investment policy . . . but there have to be some exceptions for the national interests” (New York Times, March 18, 1987). CONCLUSION

Ideas influence foreign policy in a dynamic and evolutionary way. Once invented and circulated, they tend to take on lives of their own, becoming autonomous causal forces apart from the original purposes of their inventors. While many studies based on the ideational approach have tried to show that ideas—in addition to basic material interests—matter, this study has attempted to formulate an analytical framework with which to understand the evolution of ideas themselves. The documentation of U.S. technonationalism in recent U.S. technology-security policy toward Japan provides some empirical support for the hypotheses about the three stages of ideational dynamics: popularization, internalization, and formalization. The claim that ideas influence foreign policy does not contradict an interest-driven explanation anchored in the rational-choice paradigm. In fact, the larger aim of this chapter has been to suggest, by hypothesizing the causal mechanism of ideational dynamics, that the ideational and interestbased approaches are reconcilable. More specifically, this study has hypothesized that ideas evolve from one stage to the next for “rational” reasons, such as inventors’ motivations to sell their ideas, norm holders’ psychological needs to respond to the counternorm, and lawmakers’ incentives to minimize potential conflicts and inconsistencies in interpretations. In this sense, this chapter has explored the microfoundation for the evolution of ideas. The framework presented in this chapter falls short of constituting a general theory of ideas. The most formidable difficulty in constructing such a theory probably relates to the problem of operationalization. How can one specify, ex ante, what is a “good match” between intellectual entrepreneurs’ efforts to sell, and political entrepreneurs’ efforts to buy, certain ideas? How can one know that ideas/norms are really internalized? And how can one

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measure the degree of uncertainty that would be sufficient incentive for the formalization of ideas/norms? To develop a more predictive device for examining the evolution of ideas, it will be necessary to resolve these difficulties. The evolutionary framework presented here does provide insights into how and why, if at all, a certain idea influences policy choices. In this sense, it provides a partial explanation for the puzzling phenomenon observed at the starting point of this chapter: the mixture of cooperative and nationalistic alliance behavior in recent U.S.-Japanese interactions. The evolutionary approach, however, is inadequate in answering various other questions. Why was U.S. techno-nationalism reflected in policy outcomes in some issue areas, especially the regulation of Japanese investments, and not in others, such as the provision of F-15s, Patriots, and other advanced military technologies? Was the idea of techno-globalism developing parallel to technonationalism in the United States? And, was there an interactive effect between the techno-nationalism in the United States and that in Japan? Having identified the development of U.S. techno-nationalism vis-à-vis Japan, these questions remain to be answered by future research. NOTES

1. To my knowledge, the term “techno-nationalism” was first used by R. Reich (1987) who discussed this form of nationalism in the context of increasing international interdependence and rapid technological innovations. Consistent with the spirit of Reich’s article, I prefer to conceptualize techno-nationalism restrictively as a phenomenon specific to the contemporary era. More precisely, I define the term techno-nationalism as ideological and policy orientations that favor, for national security reasons, avoiding or minimizing technological dependence on foreign countries. This definition allows one to concentrate on issues at the intersection of economic and security arenas, and thus to avoid conceptual confusion and overlap with similar conventional terminology, especially protectionism and (strategic) industrial policy. For a different and much broader conceptualization of technonationalism, see Samuels (1991). 2. Goldstein (1986, 1988, 1989, 1993) has probably been the most consistent proponent of the ideational approach to foreign policy analysis; see also Goldstein and Keohane (1991). The recent literature on “epistemic communities” (see Haas, 1990, 1992) also contributes to the theoretical debate as to whether “ideas matter.” 3. An important exception that attempts to theorize the evolution of ideas is Goldstein (1993). 4. Improved U.S.-Japanese defense cooperation was not limited to technology issues. Throughout the 1980s, the two countries strengthened their ties through frequent consultations on specific strategies and through regular joint military exercises. 5. Japan’s policy of banning arms exports evolved through several stages. The original “Three Principles of Arms Exports” were adopted in 1967 under the Sato administration. These principles prohibited exports to the Soviet bloc, countries under United Nations’ sanctions, and countries currently or about to be involved in

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war. In 1976, Prime Minister Takeo Miki further strengthened the ban by extending restrictions beyond the categories not listed above. In 1981, the Japanese Diet passed a resolution calling on the government to establish more effective and stricter measures to deal with weapons export control. For details, see Soderberg (1986: 96–104). 6. Nakasone justified the participation on grounds that there would be some potential gains for Japan in conventional aerospace technology. 7. The United States and Japan came to a formal agreement to start joint research on the “ducted” rocket engines in 1993. See Nihon Keizai Shimbun, March 11, 1992. 8. For details of this selection process, see Kohno (1989). 9. Yomiuri Shimbun, January 8, 1988, and Nihon Keizai Shimbun, September 22, 1989. See also Jane’s Defence Weekly, May 28, 1988. 10. Both quotes are from Funabashi et al. (1989: 9, 266), translated by author. 11. Japanese domestic production of military equipment under U.S. license had started in the late 1970s. For a general discussion of the changing armaments production policy of the United States, see Kapstein (1991/92). 12. A remark made by Charles Bennett of the House Armed Services Committee (quoted in Japan Times, June 18, 1988). 13. The three Japanese firms were C. Itoh, Fujitsu, and Toyota, and the professor was Michael Ledner of Northwestern University (Nihon Keizai Shimbun, January 7, 1987). 14. The first significant step was Executive Order 12356 on National Security Information, issued by President Reagan in April 1982, which imposed stricter controls on the release of scientific information, especially under the auspices of universities, to foreign nationals. In May 1983, Undersecretary of State William Schneider announced a new visa policy for foreign individuals suspected of technology acquisition aims. With regard to database access, the guideline was set by National Security Order 145 in September 1984. In March 1985, Secretary of Commerce Malcolm Baldridge sent a memorandum requesting various federal governmental agencies to tighten controls over database access. Subsequently, in November 1986, the DOD announced its plan to monitor the usage of databases. For an overview of these new regulations, see Gonda (1988). 15. See Alvarez (1989) for a comprehensive summary of this amendment from a legal perspective. 16. According to Long (forthcoming: 10), “Even DOD supported programs of economic openness” and “defense officials rejected protectionist trade and investment policies as detrimental to alliance relations and the projection of the U.S. image as a reliable world leader.” 17. This now well-cited survey was conducted by Robert Reich and reported in the Wall Street Journal (January 18, 1990). Reich asked public officials, business elites, professional economists, and several other groups the following question: “Which of these futures do you prefer? (a) Between now and 2000, the American economy grows a respectable 25%, but the Japanese economy grows a whopping 75%, (b) Between now and 2000, the American economy grows only 10%, and the Japanese economy grows an anemic 10.3%.” A majority of the respondents, except for the group of economists, preferred the latter. 18. For a discussion of the U.S. decline in the 1970s, see, for example, Keohane (1980) and Krasner (1982, 1988). It is, of course, extremely difficult to pinpoint exactly when U.S. power started to decline. Some analysts even argue that the United States has not declined in its overall power and influence (Russett 1985; Strange 1983, 1987; Nye 1990; and Nau 1990). I am not interested in this debate here

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because it is essentially a debate about empirical facts, and it thus raises nothing more than a methodological controversy as to how one should operationalize power, ex ante, without observing the behavioral outcome associated with it. 19. There are a few exceptions that attempt to incorporate the behavior of these other states in the framework of hegemonic stability theory. See, for example, Lake (1984). 20. This extreme position is no longer distinguishable from the “new institutionalism” championed by March and Olsen (1989). 21. For example, in the opening chapter of their volume on ideas and foreign policy, the editors (Goldstein and Keohane, 1991: 2) note: “We do not argue that ideas rather than interests move the world. Instead, we suggest that ideas as well as interests have causal weight in explanations of human action. The view that ideas are merely ‘hooks’ on which interests hang provides the null hypothesis for this study. It is against this null hypothesis that our contributors consider their explanations of the causal impact of ideas on policy.” This construction of the null hypothesis sets up an unjustified hierarchy of competing explanations because, if ideational and interestbased approaches converge in predicting policy outcomes, the null hypothesis cannot be rejected. Thus, contrary to their original intention of claiming “ideas as well as interests have causal weight,” Goldstein and Keohane are indeed privileging the interest-based approach, requiring researchers to select “tough cases” in which the two approaches diverge in prediction and to show that ideas rather than interests matter. 22. I borrowed this distinction of the three aspects from Milgrom, North, and Weingast (1990: 10). 23. See, for example, R. Reich (1987). 24. This project was called “the Northeast Corridor Lightwave Project.” 25. This remark was made by Alexander Stark, executive vice president of AT&T’s Long Lines Department, quoted in the Wall Street Journal, October 30, 1981. 26. See Nihon Keizai Shimbun, November 6, 1981. 27. The list of names included: Strom Thurmond (chair of the Senate Judiciary Committee); Timothy Wirth and James Collins (chair and member, respectively, of the House Subcommittee for Telecommunications); Robert Packwood (chair of the Senate Commerce, Science, and Transportation Committee); Daniel Inouye and Harrison Schmitt (members of the Senate Commerce, Science, and Transportation Committee); and Barry Goldwater (chair of the Senate Subcommittee on Communications). See Meadows (1982). 28. Ibid., p. 56. 29. Remark made by Nobuhiko Ushiba, quoted in Asahi Shimbun, April 30, 1982. 30. See Nihon Keizai Shimbun, February 26, 1983, February 27, 1983; and Asahi Shimbun, February 27, 1983. 31. See Asahi Shimbun, July 2, 1983; Japan Times, July 3, 1983; and Economist, July 9, 1983. 32. See Nihon Keizai Shimbun, December 16, 1983; Asahi Shimbun, December 17, 1983; and Japan Times, December 17, 1983. 33. For example, the Pentagon intervened in August 1982 at the International Congress of the Society of Photo-Optical Instrumentation Engineers in San Diego. Originally, there were 773 papers to be presented at this conference, but after warnings by the DOD that “their delivery might violate export regulations,” about 120 were withdrawn. See Gerjuoy (1985). 34. See, for example, Fricklas (1984).

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35. For example, David Packard, chairman of the board of the Hewlett-Packard Company and deputy secretary of defense under President Nixon, said: “I cannot resist the temptation to comment at this point on the grossly misguided current proposal by our Defense Department to censor the publication of the results of basic research funded by the Department at U.S. universities. . . . It will not seriously hamper the Soviets in their progress in technology for military equipment unless impregnable barriers can be placed around the Soviet Union and this, of course, is impossible. To put the matter in plain English, the current effort of the Defense Department to censor basic research in the United States is simply stupid” (quoted in Gerjuoy, 1985: 461–462). 36. Committee on Science, Engineering, and Public Policy, National Academy of Sciences, National Academy of Engineering, Institute of Medicine, Scientific Communication and National Security (Washington, D.C.: National Academy Press, 1982). 37. For example, a presidential directive, “Safeguarding National Security Information,” issued in March 1983, was withdrawn in February 1984 after substantial opposition arose among the general public. This directive would have required both government officials and those under contract to the government with access to sensitive information to submit for prepublication clearance anything written bearing on national security matters (Wallerstein, 1984: 462). 38. The Congress, in fact, could not pass new legislation by the expiration date and, for a time, the president had to administer the export control programs under the International Emergency Economic Powers Act of 1977. It took until July 1985 for Congress to pass the new law, the Export Administration Amendments Act. For details of the legislative debate and the statutory changes between the old and new act, see Overman (1985). 39. Report of the Defense Science Board Task Force, Defense Semiconductor Dependency (Washington, D.C.: Department of Defense, 1987). 40. See Yomiuri Shimbun, April 18, 1989; Shukan Toyo Keizai, June 3, 1989; and Keizaikai, June 27, 1989. Of course, the acquiring companies investigated under Exon-Florio came not only from Japan but also from other countries, including France, West Germany, India, and China. 41. This increasing awareness was reflected in the DOD’s annual report publicized on January 10, the president’s “Competitiveness Initiative Fact Sheet” announced on January 27, the DOD’s task force report (see note 39), and the agreement reached on March 4 between the DOD and the U.S. microchip producers to establish a new consortium, Sematech.

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Cooperating to Compete: The European Experiment Japan’s rise as a technological and industrial power has spurred the growth of new industries, one of which consists of studying and writing about competitiveness. The analysis of competitiveness has focused primarily on how Japan gained it, how the United States lost it, and how to manage U.S.Japanese competition. One could almost forget that the competitiveness game also involves Western Europe (and even some of the newly industrializing economies). Indeed, the soul-searching that has occurred in the United States concerning competitive decline would seem entirely familiar to many Europeans, especially those who remember the “technology gaps” crisis in Europe during the mid-1960s. Furthermore, European national governments have implemented the most far-reaching industrial policies, designed to enhance the competitiveness of key high-technology industries. Not even Japan has gone to the lengths that many European governments have to select and nurture “national champions.” Techno-nationalism and policies for national competitiveness have a long and rich tradition in Europe. Yet Europe has been the setting for a number of experiments in collective policymaking for industrial competitiveness. Common programs, especially in aerospace and electronics, have created a European level of industrial policy. Airbus and the European Space Agency (ESA) have enjoyed the support of governments for over two decades. The launching of several large and ambitious European programs in the 1980s, notably ESPRIT, RACE, and EUREKA, gave new impetus to regional cooperation. It is paradoxical that the monopoly of national governments on competitiveness policies has been most compromised in Europe, where industrial policies may have been the most nationalist and assertive. Since competitiveness policies are nationalist virtually by definition, the European experience with collaboration is an apparent anomaly, requiring explanation. The fact is that European governments have been willing to sponsor, and pay for, collective Europe-level programs to promote high-technology industries. Does the existence of collective policies for competitiveness in Western Europe signal an end to techno-nationalism on that continent? Has compet225

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itiveness been redefined, so as to locate it not at the national level but at the regional level? Even in aerospace and electronics, the answer to both questions must be “only partially and tentatively.” European collaboration on behalf of high-tech industries is driven largely by national objectives: political leaders continue to seek payoffs for domestic firms and workers. Industrial policy at the European level represents the pursuit of national goals via collective means; it does not imply the submersion of nation-states but cooperation among them. In this chapter I explain how and why competitiveness concerns came to be addressed at the regional level in Western Europe. I argue that the interests of European firms and governments interact with situational constraints (the global and regional contexts) to produce collaboration—and to limit it. The first part of the chapter briefly defines the concepts to be employed. The second section explains why firms whose technological and market interests increasingly extend beyond Europe can support industrial policies requiring them to collaborate at the European level; it also shows how the globalization of high-technology markets sets limits to how much collaboration firms will seek. The third section turns to governments to explain why Europe-level policies can be satisfactory for governments whose aims are necessarily (and rightfully) national. The domestic bases of political longevity also set limits to European collaboration. The chapter concludes that corporate and government interests delimit a zone in which collaborative competitiveness policies will be viable. European cooperation produces payoffs for the various actors, but since the interests of firms and governments are not primarily regional, collaborative advances on one front will often be balanced by retreats from collaboration on another. THE EVOLUTION OF THE COMPETITIVENESS PROBLEM IN WESTERN EUROPE

Competitiveness is first of all a concern for firms. In free markets, noncompetitive companies lose sales, become unprofitable, and die. Companies that survive in markets where buyers can choose among rival suppliers are by definition competitive. Indeed, markets (in the absence of government intervention or oligopolistic collusion) impose their own solutions to the competitiveness problems of firms: they weed out those companies that fail to make the changes necessary to remain profitable. For present purposes, the markets that matter are international; competitive firms are those that maintain sales and profits in the presence of rival international suppliers. For countries, the definition of competitiveness is not so straightforward. It might be tempting to define a competitive national economy by the existence of a balance, if not a surplus, on the current account. This is the implicit approach of those who see in the persistent U.S. trade deficit evi-

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dence of declining U.S. competitiveness. One problem with this approach is that the current account is not determined by the competitiveness of a country’s enterprises. The basic identity in national income accounting shows that the balance on current account is determined jointly by private saving, investment, and the government fiscal balance (Krugman and Obstfeld, 1991: 295–303). A more satisfactory definition of a country’s international competitiveness might focus on the income elasticities of imports and exports. A country with a competitive economy is one with a high elasticity for exports and a low one for imports. This would imply that as foreign incomes rise, overseas consumers increase their purchases of that country’s goods more than proportionally. As domestic income rises, purchases of foreign goods do not rise more than proportionally (Guerrieri and Padoan, 1989: 13–14). For an open economy, international competitiveness defined this way would imply high long-term growth. In practice, there is no single standard by which governments measure competitiveness. They almost certainly do not look at income elasticities of imports and exports and probably do not look first to long-term growth rates. Rather, judgments concerning a nation’s competitiveness seem to be based on the performance of selected industries that are exposed to international market rivalry. Furthermore, these bellwether industries are generally centered on high-technology products or processes. National competitiveness is not generally measured by the health of raw materials industries or “mature” manufacturing industries like footwear and glass. The logic behind this focus on high-technology sectors is that these are more likely to experience future growth and to generate positive externalities (raising productivity and growth in other sectors of the economy). Thus, governments concerned with competitiveness look at high-technology industries whose markets are international: aerospace, semiconductors, consumer electronics, machine tools, computers, telecommunications. Automobile industries are frequent subjects of competitiveness discussions because even though cars have been around for decades, they incorporate increasingly sophisticated microelectronics and utilize advanced manufacturing processes. The indicators used to gauge competitiveness generally focus on market share, either worldwide or in particular regions. Western Europe’s major competitiveness crises illustrate the concentration on high-technology industries as competitiveness indicators. In the mid1960s, Europe’s perceived technological deficit vis-à-vis the United States engendered widespread public debate over the future of European economies. The series of studies, titled Gaps in Technology and prepared by the Organization for Economic Cooperation and Development (OECD), provoked extensive handwringing and soul-searching in Europe. The main report declared that certain industries were essential to the “diffusion of new products and processes through the economy,” on which productivity improvements and economic growth depended (OECD, 1968a: 30). The

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report concluded that the United States enjoyed a substantial lead in spending on R&D, produced by far the largest share of significant innovations, and profited from the advantages these conferred on U.S. corporations. Semiconductors and computers were already being seen as keys to future competitiveness and growth, and Europe was clearly on the wrong side of the gaps in those industries (OECD, 1968b, 1969). Another book from the period, Jean-Jacques Servan-Schreiber’s The American Challenge, reached a wide audience in Europe and also stimulated worried discussions about Europe’s competitive prospects. ServanSchreiber (1968) did not understate his concerns: These figures are important to keep in mind, for electronics is not an ordinary industry; it is the base upon which the next stage of industrial development depends. If Europe continues to lag behind in electronics she could cease to be included among the advanced areas of civilization within a single generation.

So Europe’s technology gaps crisis emphasized a few high-technology sectors that were presumed to be crucial to European competitiveness more broadly. National governments in Europe responded by putting into place during the 1970s a full menu of policies designed to boost the competitiveness of their domestic semiconductor and computer industries. With trade protection, research and development subsidies, government procurement, and technical standards, each country sought to groom national champions that could compete in the international arena.1 A similar competitiveness debate took place in Europe in the early 1980s. Japanese firms had, in just a few years, vaulted to the top of the international leagues in semiconductors, consumer electronics, computers, and telecommunications equipment. The Japanese ascent highlighted the failure of national champion strategies in Europe to enhance the competitiveness of the targeted industries. In France, Germany, Italy, and the United Kingdom, electronics and computer champions were swallowing huge public subsidies and still losing money. The resulting public and policymaking discussions replicated much of the sense of panic and a good deal of the rhetoric associated with the technology gaps scare of the 1960s.2 For instance, in proposing the ESPRIT pilot phase, the Commission of the European Communities declared that the program was necessary “to provide the basic technologies which European industry needs to be competitive with that of Japan and the USA” (Commission of the European Communities, 1982: 6). The first technology gaps crisis did not lead to European cooperation to promote the industries in question. The second one, however, did. The principal difference between the two periods was that whereas in the earlier period national champion strategies seemed to governments to be the optimal policy path, by the later period unilateral strategies had proven inadequate.

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In fact, in both electronics and aerospace, cooperation emerged only after unilateral national approaches to high-tech competitiveness had been attempted and found lacking. In the commercial aircraft industry, the British government pushed the development of the Comet, which failed in the air, and the French government sponsored the Caravelle, which failed in the market. Only when governments decided to abandon unilateral national approaches could cooperation, in the form of Airbus, emerge. European governments also sought to nurture domestic industries that could compete in the growing commercial space markets, centered on launching satellites. Only when the expensive and ineffective national efforts were dropped in the mid-1960s did European space collaboration begin, culminating with the creation of the European Space Agency in 1973. Throughout the 1970s, European governments sought through a variety of measures to build up their indigenous semiconductor and computer producers. After the national champion policies had failed to produce the desired results, collaboration emerged. The European Community launched the ESPRIT3 program in 1984 to promote collaborative R&D among European firms and universities in microelectronics and computers (the “information technologies,” or “IT”), and the RACE program in 1987 to do the same in the telecommunications sector.4 The EUREKA program took shape outside of the European Community in 1985; it has had a heavy emphasis on information technologies but has also sponsored collaborative R&D in new materials, biotechnology, lasers, the environment, energy, and transportation. The ESPRIT, RACE, and EUREKA programs have among them committed approximately $19.4 billion, in public and corporate funds, to joint R&D projects in advanced technologies. The following sections develop a theoretical basis for understanding why firms being pulled toward broader extra-European linkages might desire European collaboration, and why governments primarily oriented toward domestic concerns might also support regional cooperation. That is, how can European cooperation be the outcome when the actors are all driven by interests that would seem to lead them away from “Europe”? The explanation focuses on the interests and beliefs of companies and governments and accounts for both the emergence of cooperation and its limits. HIGH-TECHNOLOGY FIRMS IN GLOBAL MARKETS

Perhaps national strategies for high-technology competitiveness were a disappointment in Europe because they were wrongly designed or ineffectively implemented. Could better policies or better implementation have produced the desired results? Probably not. The globalization of hightechnology industries was reducing the role that sectoral policies at the

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strictly national level could play in promoting competitiveness. By “globalization” I mean that, for the targeted high-tech industries, worldwide markets for goods and technologies were more important in shaping the business context for European firms than were national markets. By the 1980s, if not sooner, even the European market as a whole could not provide a selfcontained arena for Europe’s aerospace and electronics industries; they therefore had to be connected to worldwide networks of partners and customers. In aerospace, product markets are global because unit prices are high and buyers are relatively few. The price tag for the newest version of the Boeing 747 is about $150 million; an Airbus A-340 (the largest craft in the Airbus family) costs about $110 million. The world market for commercial aircraft totals only 500–750 planes per year. In 1992 (a terrible year for the industry), Airbus sold 157 airplanes, which gave it about 31 percent of the world market (second only to Boeing). The European Space Agency developed the Ariane series of satellite launchers. Commercialized by Arianespace (an enterprise in which all of Europe’s major aerospace companies hold stakes), Ariane has captured over half the world market for nonmilitary satellite launches. But it was a market that averaged only about eighteen launches per year from 1980 to 1990 (including public civil, but not military, satellites). This market will probably decline to about twelve launches per year by the end of the 1990s (Economist, June 15, 1991). The average price for a satellite launch is approximately $60 million, on top of the $80 million price of the satellite itself. For commercial aircraft and satellite launchers, the only market is the world market. The markets for various electronics products are also global. The competition in semiconductors, computers, and telecommunications equipment is worldwide; the European market is just one of the battlegrounds for U.S., Japanese, and European manufacturers. Of the top ten companies in the European semiconductor market (ranked by sales) in 1991, four were U.S. and three were Japanese (Financial Times, May 28, 1992). The share of European companies in the European semiconductor market dropped from 39 percent to 38 percent in 1991 (Financial Times, May 12, 1992). Trade is not the only means by which this worldwide semiconductor competition is carried out. The international political economy is also being integrated by foreign direct investment (FDI), through which companies establish subsidiaries outside their home country. Firms set up manufacturing or assembly facilities in foreign markets for a variety of reasons, but in general they do so to exploit firm-specific managerial or technological assets. Having a presence inside a foreign market can appeal to companies that need more direct interactions with foreign customers and suppliers, or that want to avoid trade barriers.5 Europe has participated in the growth of FDI, both as a recipient and as a source. For example, Toshiba, Mitsubishi, Hitachi, NEC, Fujitsu, IBM, Intel, Motorola, Texas Instruments, and LSI Logic all have or

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are building chip-making plants in Europe. By the same token, the three major European semiconductor producers—Philips, Siemens, and SGSThomson—all have production facilities in Asia. In computers, the European market is also just one segment of a worldwide competition. The three large European computer makers—Bull, SiemensNixdorf, and Olivetti—must contend with IBM, Digital Equipment, HewlettPackard, Unisys, Fujitsu, NEC, and Hitachi. All three of the European firms rely heavily on the European market, but even there they face stiff international competition. IBM is the largest IT supplier in every European country in which it has a presence; its sales are nearly four times as large as those of its nearest rival in the European market, Siemens-Nixdorf. The European computer makers have a modest presence in other markets: non-European sales in 1989 accounted for 37 percent of total sales for Bull, but only 19 percent for Olivetti and less than 10 percent for Siemens-Nixdorf (Datamation, June 15, 1990: 121; Economist, October 6, 1990). Product markets are not the only factors driving globalization in the high-technology sectors. Technological dynamism also pushes firms to find partners and allies from other parts of the world. Especially in electronics, innovation occurs so rapidly that no company can cover all the relevant technological bases on its own. Important product and process developments emerge from Asia, North America, and Europe. Producers increasingly cooperate with their customers on technological innovation and product development. A firm being out of touch with users and producers in major foreign markets results in technological stagnation. In addition, the development costs for new products are in some cases so immense that firms have a powerful incentive to share the costs and risks with their nominal rivals. For instance, the cost of developing each new generation of dynamic random access memory (DRAM) chip is over $1 billion, with a similar outlay needed to build a new factory to produce the chips (Economist, July 18, 1992). Joint development of the Airbus A-330 and A-340 cost an estimated $4 billion in the late 1980s (International Herald Tribune, May 20, 1987). The development costs for a super jumbo aircraft, capable of carrying up to 800 passengers on long routes, could reach $10 billion. Consequently, all major aerospace or electronics firms in the world participate in complex, international corporate networks. The links in these networks go beyond simple market relationships (buyers and sellers). Crossnational partnerships range in type from joint R&D projects, to patent sharing, to joint ventures, to shareholding. Even the industry giants rely on partners. For instance, Boeing, the world’s dominant aerospace firm, has alliances for production of the 777 model with Mitsubishi, Kawasaki, and Fuji from Japan; Aeritalia of Italy collaborates on the 767. Similarly, IBM has various corporate partnerships, including an agreement with Siemens to develop 64-megabit DRAMs and a 5.7 percent stake in Bull, announced in 1992. Under the terms of the latter alliance, IBM will market laptop com-

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puters produced by Bull’s subsidiary, Zenith, and purchase semiconductors from SGS-Thomson (Financial Times, January 29, 1992). The titans of the world semiconductor industry are all engaged in alliances: Hitachi and Texas Instruments, NEC and AT&T, Fujitsu and Advanced Micro Devices, Matsushita and Intel, Toshiba and Motorola. If even the industry leaders must find partners, then so, with greater need, must the followers. All of Europe’s major electronics producers have formed webs of international alliances. Through 1984, when the ESPRIT program began, European electronics firms had, according to one tabulation, 174 interfirm alliances with U.S. firms and 49 alliances with Japanese firms, compared to only 85 with other European companies (OECD, 1986: 19). During the 1980s, as the collaborative European programs got under way, the major European electronics firms maintained important ties with nonEuropean firms. Siemens mainframe computers were manufactured under license from Fujitsu; the German company also had semiconductor agreements with Intel and Toshiba. The Japanese firm NEC supplied mainframe computers for Bull, and the two companies jointly owned a U.S. subsidiary. The British computer company ICL had a semiconductor development arrangement with Fujitsu and sold computers from Fujitsu and Sun Microsystems. Olivetti struck a computer alliance with AT&T. Philips had partnerships with RCA, Control Data, and Intel. These examples are only illustrative; they cover only a fraction of the alliances forged by European electronics firms with U.S. and Japanese companies. The question then becomes, if global alliances are the name of the game in high-tech industries, why should European firms be interested in programs that privilege and encourage intra-European partnerships? Indeed, Europe-level competitiveness policies might seem to encourage an inward, regional focus for European firms, one that runs counter to the need for global horizons and partnerships. I assume that firms (or rather, their leaders) are rational. Their paramount goal is corporate survival; company leaders choose strategies deemed most likely to ensure survival of the enterprise. Why would such firms support regional programs if global links are the real necessity? A first plausible answer might be “pork.” This view sees European high-tech firms as rent-seekers that recognize a new venue for receiving subsidies. The collaborative programs might then be just pork barrels on a European scale. This argument partially fits Airbus and the European Space Agency. In the two aerospace cases, firms might plausibly be seen as collaborating in pursuit of subsidies. In the case of Airbus, those subsidies have reportedly totaled over $13 billion (Economist, January 9, 1993). For the space industries, ESA and national governments are virtually the only customers. It is therefore hard to say whether interfirm cooperation under ESA auspices amounts to rent-seeking behavior. To the extent that ESA contracts are inflated above market values (however market values could be determined in this sector), they include subsidies. On the other

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hand, since product cycles in aerospace can last decades, as compared to months in electronics, the pressure to stay technologically up-to-the-minute may not drive global alliances in aerospace to the extent that it does in electronics. In the electronics sectors, the rent-seeking argument faces two problems. The first is that, in the case of ESPRIT, RACE, and EUREKA, the pork is not free. The companies themselves must put up half the cost of each project. National or EU funds can (in most cases) only match what the firms are willing to invest in collaborative R&D. This cost-sharing approach certainly reduces the rents that firms might expect to garner from Europe-level programs. The second problem is that regional pork may be a fatally narrow diet. Global connections remain important, and resources devoted to European collaboration cannot also be directed to worldwide partnerships. Rational firms will perceive this. Still, the subsidies available in European programs are not irrelevant. Let us assume that global alliances have a high expected value, as European firms count on major technological gains from them. To the extent that potential European partners are not technology leaders, intra-European alliances have a lower expected payoff. Since all partnerships require an investment of resources, intra-European alliances would have a lower rate of return on the investment than would global alliances. The effect of the subsidies available for intra-European collaboration is to make European partnerships a rational choice despite a generally lower rate of return. Suppose a European firm has a fixed sum, I, that it is willing to invest in an alliance. For the net payoff from an investment in a European partnership to equal the net payoff from an outside (non-European) partnership, the following must hold: I (Ro) = (I + S) (Re),

where Ro is the rate of return on an alliance with an outside (non-European) partner, Re is the rate of return on a European partnership, and S represents the subsidy available for intra-European alliances. Rearranging, Re

Ro

=

I

I+S

The above equation shows that for any given rate of return on nonEuropean partnerships, the presence of a subsidy for European cooperation reduces the minimum rate of return necessary to make European partnerships the optimal choice for individual firms. For instance, if the subsidy is equal to the amount invested by the firm (as is the case in ESPRIT and RACE), then

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Re

Ro

=

1

2

and the rate of return on the European partnership need only be half as great as the rate on outside partnerships. To the extent that the return rate on European cooperation is greater than half the rate on outside partnerships (in this example), intra-European cooperation is clearly superior. Thus, because of the subsidy, European cooperation can be rational for firms even if such cooperation is less productive technologically than alliances with outside partners. This could explain why European industry actively participated in the organization and establishment of both Airbus and the European Space Agency and played a crucial role in launching the ESPRIT and RACE programs.6 Since 1984, programs like ESPRIT, RACE, and EUREKA have promoted intra-European alliances. As of mid-1992, the ESPRIT program had supported 643 R&D projects involving over 1,500 European firms, universities, and laboratories (Commission of the European Communities, 1992). RACE has brought together 294 organizations in 92 projects (Commission of the European Communities, 1991: 44). As of mid-1991, EUREKA had supported over 500 projects involving 3,000 organizations. In addition, European aerospace and electronics firms have been involved in more durable linkages through mergers and acquisitions. Deutsche Aerospace took over Fokker of the Netherlands. Siemens purchased its smaller German competitor, Nixdorf, and, together with the British electronics firm GEC acquired Plessey (also of the United Kingdom). The French and Italian flagship semiconductor firms—Thomson and SGS—merged in 1987 to form SGS-Thomson, which later bought the British company Inmos. But if the argument concerning globalization in high-tech industries is valid, European cooperation would not eliminate the need for partnerships outside the region. If some crucial technologies are not available within Europe, then European partnerships cannot always replace outside ones. In terms of the payoff calculations outlined above, a subsidy could not be large enough to make European cooperation rational because the technological payoff would be zero. In fact, new extra-European alliances in recent years show that European firms feel that they must maintain global connections. British Aerospace attempted to negotiate a collaborative partnership with Taiwan Aerospace. Boeing has approached Deutsche Aerospace over possible joint development of a super jumbo aircraft, with the possibility that British Aerospace or even Airbus as a whole could be involved in the massive project. Bull decided to seek a powerful partner and in 1992 chose IBM over Hewlett-Packard. Siemens announced in July 1992 that it would collaborate with IBM and Toshiba to develop 256-megabit DRAMs. In some cases, European firms have been the targets of takeovers by non-European enterprises. The British electronics conglomerate STC sold 80 percent of its

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computer subsidiary ICL to Fujitsu in 1990, resulting in ICL’s expulsion from a joint research program with Bull and Siemens. ICL later purchased Nokia Data of Finland. Digital Equipment has in recent years bought the German minicomputer maker, Keinzle, and the minicomputer business of Philips. In short, the collaborative logic for European high-technology firms leads them into global alliances because many crucial product and process innovations are occurring in Asia and North America, not in Europe. Still, some European partnerships make sense without subsidies when there is the same sort of technological complementarity that European firms seek in their outside partnerships. European firms will presumably find these alliances on their own, without national or EC subsidies. But when the rate of return on an investment in European partnerships is certain to be lower than that available elsewhere, subsidies can make intra-European collaboration the optimal choice for firms. I argue that the Europe-level procompetitiveness programs begun in the 1980s—ESPRIT, RACE, and EUREKA— have promoted European cooperation of the latter type. This would explain the large number of collaborative projects initiated under these programs, whereas European firms prior to 1984 were not collaborating among themselves to nearly the degree that they were with U.S. companies. GOVERNMENT AND THE RATIONALITY OF SECOND-BEST

Competitiveness policies are necessarily nationalist. Governments that pursue procompetitive policies do not act out of altruism, to enhance technological development and economic growth for the world as a whole. They want such policies to confer advantages on their own nation’s producers, so that they can increase their share of markets and expand national income. Of course, such advantages must come at the expense of producers in other nations. This nationalist thrust of competitiveness policies is not only understandable but also legitimate. After all, governments in the advanced industrial democracies are elected by their citizens to promote the latter’s welfare. Surely such governments ought to be responsive to the desires of their publics for good jobs and rising prosperity. Of course, since the primary interest of elected officials is to remain in power, they are strongly motivated to promote national economic well-being. Political longevity depends on producing economic payoffs for those constituencies that will constitute a winning electoral coalition. This premise is the basis for my argument that technological collaboration in Europe does not represent the abandonment by political leaders of the national orientation; in democracies politicians who do not focus on national constituencies risk losing elections. Rather, technological collaboration is the pursuit of domestic goals through cooper-

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ative international means. As Lewis-Beck (1988) shows, the relation between personal finances and voting is extremely weak; especially in Western Europe, people do not vote by their pocketbook. However, judgments of national economic wellbeing exert a strong effect on voting. Such economic evaluations of collective well-being are both prospective and retrospective. Since voters consider both the past and the future state of the economy, and since the timing of the economic effects of policies is highly uncertain, governments must seek consistently solid national economic performance. With regard to industrial competitiveness, the prevailing ideas in most European countries have been congenial to activist policies. Most European governments utilized some form of state guidance during the period of reindustrialization after World War II. Beginning in the 1960s, European political elites generally shared beliefs that justified, if they did not require, government policies to promote high-technology industries.7 The behavior of governments of the right has been virtually indistinguishable from that of governments of the left when it comes to industrial competitiveness policies. This has been true even in Germany and the United Kingdom, the two countries in which laissez-faire liberalism is most entrenched. Government support for the aerospace, semiconductor, and computer industries, initiated under the Labour government of Harold Wilson in the 1960s, continued under the Conservative government in Britain in the early 1970s. Even the militantly free market Thatcher government sought to promote high-tech industries, declaring 1982 the Year of Information Technology and providing R&D funding for IT through the Department of Trade and Industry. The Thatcher government also launched the Alvey Programme in 1983 to promote innovation in the information technology industries. Alvey was the largest civil R&D program in British history. The conservative government of Helmut Kohl did not curtail government support for high-tech industries when it came to power in 1982. In fact, the Kohl government unveiled in 1984 a new information technology program that would allocate DM 3 billion over five years to support R&D. In France, state promotion of high-technology industries has been more energetic (and planned) than in either Germany or Britain. Under Charles de Gaulle, high technology was crucial to French grandeur and independence. Governments since de Gaulle have maintained the commitment to high-tech competitiveness policies, though the rationale has more clearly emphasized the role of advanced industries (especially electronics) in France’s future economic well-being. By the 1980s, high-tech competitiveness was seen in Europe as more indispensable than ever. The oil crises had initiated an era of stubbornly high unemployment and low growth. Pressure from the newly industrializing countries mounted in mature industries like steel, shipbuilding, textiles, and even consumer electronics. The solution, as seen across Europe, was to

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move more expeditiously into high-technology industries. If European countries could not remain competitive in the “sunset” industries, then they must be competitive in the “sunrise” industries, where future growth, employment, and wealth would be generated.8 The virtually universal belief was that government policies could promote high-technology competitiveness. Indeed, the question in European governments was not whether they should do something about competitiveness, but what they should do. If a critical electoral incentive for governments in every country is to preside over a healthy national economy, and if the promotion of high-tech industries is believed to be crucial to national economic health, then hightech competitiveness policies are perfectly understandable—at the national level. Why would European governments collaborate? My answer includes two parts: (1) the failure of previous national champion strategies led to a reordering of government preferences; and (2) the rising level of economic integration in the European Community meant that each member state could enjoy gains from policies that enhanced economic growth and efficiency in other member states. Put differently, national governments have not suddenly subordinated national goals to European integration. Rather, European collaboration is a new means to pursue the same ends—the benefits of competitiveness for national constituencies. The result may be that European integration advances, but this is an unintended consequence of actions designed to achieve other goals. To explain the surge in high-technology collaboration in Europe during the 1980s, it is not sufficient simply to point out that simultaneous national strategies were inefficient because they duplicated efforts. As in many aspects of the international political economy, the goal of governments was not global or even regional efficiency but rather self-sufficient national competitive advantage. If efficiency were an adequate motive for international cooperation, then such cooperation would have emerged after the technology gaps crisis of the 1960s. It did not. But there was a key difference between the technology gaps crisis of the 1960s and that of the 1980s: in the interim, national governments had pursued aggressive national champion policies, and these had failed. Thus, as we would expect given the incentives facing governments, the first response to competitiveness concerns was strictly national. When a second crisis of competitiveness in the 1980s placed in high relief the failure of nationalist policies, governments were forced to reconsider unilateralism. The failure of national champion strategies in the electronics sectors was thus a necessary precondition for the collaborative programs of the 1980s: ESPRIT, RACE, and EUREKA. The same logic applies to aerospace: Airbus and the European Space Agency could come into being only after national governments concluded that their nationalist, unilateral strategies could not succeed.9 A second question is why, if governments were willing to consider international collaboration, that collaboration should be strictly European.

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The answer is not as obvious as might appear at first glance. In principle, collaboration with the United States or Japan, or even the newly industrializing economies of Asia (Hong Kong, Singapore, Taiwan, and South Korea) would offer similar, or perhaps greater, technological and economic benefits. And geographical proximity is certainly of decreasing importance in an era in which global transportation and communications have reduced the significance of distance. In fact, sharing borders can as easily lead to friction as common interests. The preference for European cooperation can be explained, however, by the effects of European integration on the interest calculations of member states. My argument will go beyond the effects of EC institutions in reducing transaction costs or providing leadership and will focus on basic considerations of economic gain.10 Consider first, as an extreme and limiting case, the possibility of cooperation between two countries whose economies are minimally integrated by trade, financial markets, and direct investment. Because the economies are minimally linked, the utility functions for each are independent—that is, the gains for country A do not show up as a positive factor in the utility function of country B. The gains for each country are simply the sum of the direct benefits to their own nationals. Extensive economic integration, in contrast, makes the utility functions of the two countries at least somewhat interdependent.11 That is, if two economies are closely linked by trade, finance, and direct investment, some portion of any gains to one country will show up as gains to the other. Some part of any increased growth in country A will mean enhanced demand for goods from country B. Technological advances that benefit firms in country B will translate into benefits for country A, in the form of cheaper imports or a broader selection of goods and services. For two countries whose economies are highly integrated, the benefits from cooperation include not only the direct ones but also the indirect ones. The upshot is that, other things being equal, the gains from cooperation will be greater for countries whose economies are highly integrated than for countries whose economies are not. The implication for Europe is that the high degree of economic integration attained by the 1980s increased the benefits of European collaboration relative to other possibilities. In 1962, intra-EC trade accounted for 39.7 percent of total Community trade (calculated on the basis of exports); by 1978, the same measure had reached 51.7 percent, and it continued to climb to 60.7 percent in 1990.12 Furthermore, for every member state the Community was by far the most important source of imports and exports. The United Kingdom in 1982 sent 41.0 percent of its exports to the EC, and that was the lowest share among the Ten (Commission of the European Communities, 1983: 281). The higher the level of trade integration in the EC, the greater the second-order benefits that each government could expect from common competitiveness policies. With more extensive economic integration, national borders are less able to contain the direct benefits of common poli-

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cies that promote high-tech competitiveness. This not only increases the benefits of cooperative programs, by enhancing second-order gains for each state, but also implies that the payoffs for any national competitiveness policies would likewise spill over national boundaries. Since governments are less able to capture the benefits of their investment in national high-tech competitiveness policies, the incentives for unilateral national strategies diminish. A high level of integration thus broadens to the European level the range of policies that can serve national goals—and domestic constituencies. Finally, though economic integration increases the payoffs that governments can expect from intra-European cooperation, such cooperation remains the second-best strategy from the point of view of any given government. Joint efforts to enhance competitiveness arise only after unilateral national strategies prove themselves incapable of achieving that goal. CONCLUSIONS: THE LIMITED ZONE OF COOPERATION

Competitiveness policies at the European level are thus limited at two levels. For high-technology firms, the subsidies generally available through European programs can make regional collaboration rational, even when the rate of return on an investment in European alliances is lower than that on an equal investment in an overseas partnership. But European cooperation is limited by the necessity for companies to maintain global ties, to be connected to overseas markets and the technological developments occurring in them. On the part of governments, European cooperation can be the best alternative when unilateral national approaches have failed. But such cooperation is bounded by the politically imposed (and rightful) primacy of domestic concerns in the calculations of governments. The necessary global focus of firms and the unavoidable national focus of governments leaves a bounded zone in which collaboration on competitiveness policies is rational for both firms and governments. The result is a set of collaborative European programs designed to enhance European competitiveness in selected industries: Airbus and ESA in aerospace; ESPRIT, RACE, and EUREKA in electronics and communications technologies. The programs do not add up to a Europe-level competitiveness policy. They are instead piecemeal responses to national competitiveness crises, when national solutions appear nonviable. The Commission of the European Communities has been trying to make its Framework Programme (the umbrella for EU technology projects, including ESPRIT and RACE) a larger, more coherent, and more strategic approach to solving jointly some of Europe’s competitiveness problems. Such an overarching regional competitiveness policy would have to be blind to the nationality of firms. Companies that national governments see

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as indispensable might not be when viewed from a European perspective. But governments are not yet ready to go that far. For instance, the French government in 1991 granted $1.5 billion in subsidies to the two French flagship companies in electronics, Thomson and Bull, despite the heavy involvement of both firms in European programs and despite EC regulations that prohibit such subsidies (Wall Street Journal, April 4, 1991). The French and Italian governments agreed in 1992 to put up $2 billion in fresh capital and research grants for SGS-Thomson, the semiconductor firm in which both states have an ownership stake (Financial Times, November 16, 1992). The ongoing “completion” of the internal market, symbolized by the 1992 project, may provide an additional impetus to competitiveness policymaking at the European level. As border obstacles to trade, finance, and direct investment within the EC have fallen, many industries have faced intense pressures to consolidate. Even the large EC market cannot sustain all the national champions that formerly thrived in national greenhouses. For instance, considerable consolidation has occurred in the telecommunications equipment and computer industries.13 Eventually, the high-technology sectors in Europe may be defined by huge, pan-European corporate networks linking the remaining giants and legions of smaller suppliers and subcontractors. The space sector already consists of a few immense, and quite flexible, consortia involving companies across Europe. Airbus is essentially the same. Electronics and telecommunications may be heading that way. In such a setting, competitiveness policies at the European level would be the only ones to have any meaning. NOTES

1. For more detail on national policy responses to the first technology gaps crisis, see Sandholtz (1992: ch. 4). 2. For example, one book addressing Europe’s high-technology predicament was entitled A High Technology Gap? (Pierre, 1987). For a sense of the perceived crisis, see also Sharp and Shearman (1987: ch. 1), and Salomon (1986). 3. The acronym stands for European Strategic Programme for Research and Development in Information Technology. 4. RACE stands for R&D in Advanced Communications Technologies in Europe. 5. For an overview of the theoretical arguments, see Graham and Krugman (1991: ch. 2). 6. For more detail on role of industry in establishing the collaborative programs, see Sandholtz (1992: chs. 5, 7–9). 7. Shonfield (1965) made this argument in his classic Modern Capitalism. 8. For samples of the argument for high-tech competitiveness in Europe in the 1980s, see Arnold and Guy (1986), Freeman (1987), Hall (1986b), and Mackintosh (1986). 9. Since I have developed this argument and elaborated the evidence for it more fully elsewhere, this chapter will rely on the brief recapitulation contained in

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the foregoing paragraph. For a more comprehensive treatment, see Sandholtz (1992). 10. For an analysis of the leadership role of the Commission of the EC in fostering cooperation, see Sandholtz (1993). 11. For an early statement of this general argument, see Cooper (1968). 12. These figures were drawn from various editions of the Commission of the European Community’s Basic Statistics of the Committee (Brussels). 13. The number of telecommunications equipment manufacturers in Europe fell from twelve at the start of the 1980s to about four or five at the end of the decade (joint ventures, including those with non-European firms, make it ambiguous as to which companies are European). In computers, ICL, Nokia, Nixdorf, and CGE are no longer independent producers. Industry observers are virtually unanimous that further consolidations are inevitable in both industries.

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Index account imbalances between the United States and Japan, 41 acquisitions, 17, 51, 92. See also mergers, and acquisitions adjustment: assistance in Europe, 165; costs of, 69 Adler, E., 57–58 administered protection, 165, 176n28 Advanced Micro Devices (AMD), 89, 232 Aegis air defense system, 17, 199, 203 Aeritalia, 231 aerospace industry, 227, 233; British, 236; European, 230, 240; international networks in, 192–193, 231; U.S., 45, 182–183, 189–190, 192–193. See also air transport; aircraft manufacture AFL-CIO, 167 “aggressive reciprocity” in U.S. trade negotiations, 138–139, 147, 151 “aggressive unilateralism” in U.S. trade policy, 19n1, 166, 172 agricultural products, in U.S.-Taiwan trade, 142, 151 air conditioners, manufacture of, 109 Air France, 187 air transport: barriers to liberalizing the international market, 185–186; decline of profitability of U.S. airlines, 184; deregulation, 16–17, 191–193; growth in, 182; international market in, 16; issue of foreign ownership of airlines, 186; liberalization of, 183–187; and recession in the early 1980s, 181; revenue passenger miles, 197n3; transition in the 1980s, 195; transnationalization of, 193; U.S. policy regarding, 179–180, 183. See also aerospace industry; aircraft manufacture Airbus, 18, 192, 194, 225, 229, 232, 234, 237, 239, 240; cost of joint development

of A–330 and A–340, 230–231; Industry of North America, 191; subsidies to, 198n15 aircraft manufacture, 197n12, 197n14; B–70 manned bomber program, 191; Brazilian, 181; British, 209; cut in funding for B–1 bomber, 191; effects of U.S. airline deregulation, 16–17, 191–193, 198n17; in Europe, 181, 229; and government intervention, 189; high costs of, 188, 190; in Israel, 181; in Indonesia, 181; Japanese, 72; market for, 182–183, 230; sources of financial support, 188–189; standardization trend in, 183; U.S. industry, 189, 190–191, 198n15; U.S. market, 182–183; U.S. policy regarding, 16–17, 179–180, 189, 191, 193, 198n17. See also aerospace industry airspace sovereignty, 183–185, 195–196 Akamatsu, K., “flying geese” model of East Asian development, 127 Alic, John, 34 Alitalia, 187 Allegheny International, 214 Allied occupation of Japan. See American Occupation Alps Electric: joint venture with Motorola, 97 Alvey Programme, 236 AMD (Advanced Micro Devices), 89, 232 American Challenge, The, by Jean-Jacques Servan-Schreiber, 228 American Occupation, effects of, 69–70; and Japanese antitrust laws, 170; survival of Japanese economic policies during, 83–84 American Telephone and Telegraph (AT&T), 17, 88, 210, 232 Anchordugoy, M., 97 antidumping: laws, 159–161; suspended, 175n19

267

268

Index

antitrust, 174n5; competitor protection in, 156; fairness, 162; Japanese, 170, 171, 177n42; laws, 62, 63, 159–160; need for international cooperation on, 172–173; regulations affecting international airline services, 186; U.S. investigations in Japan, 171; U.S. laws and regulations regarding, 75, 153, 156–159, 166, 186, 192; U.S. views and motives regarding, 91–92, 158, 174n9 Apollo space program, 87 Arianespace and Ariane satellite launchers, 230 Arnold, Jack, 212, 213 Asanuma, B., 44, 52n2 ASEAN (Association of Southeast Asian Nations), 109, 124; the ASEAN4, 105; Japanese economic role in, 115, 118; Japanese, Taiwanese, and Korean investment in, 105 AT&T. See American Telephone and Telegraph (AT&T) Australia, 175n19, 192 autarky, as goal of a fascist state, 69 auto industry: and competitiveness, 9, 149, 227; European, 74–75; exports to United States from Japan, 75; fuel efficiency, 74, 75; German, 75; Japanese, 11–12, 41, 43–47, 52n1, 53n9, 56, 64, 72, 74, 77–86, 94, 129n10; Korean, 122; people’s car project, 84; prewar Japanese market for U.S. and European cars, 77; profit rates on sales, 53n9; subsidiaries of Japanese firms or joint plants in the United States, 76, 171; subsidiaries of U.S. firms driven out of Japan, 79; U.S., 9, 45–47, 53n9, 56, 74–77, 92 Automobile Manufacturers Industrial Association, 80–81 Automobile Manufacturing Enterprise Law of May 1936, Japan, 79, 80, 82 aviation, commercial. See air transport; aircraft manufacture Axelrod, R., 208

“bailout,” in liberal societies, 62 Bain, J. S., 156–157 Baldridge, Malcolm, secretary of commerce, 217, 219, 221n14 Bank of Japan, 82 base years, manipulating selection of, 24 “Basic Policy for the Introduction of Foreign

Investment into Japan’s Passenger Car Industry,” 83 BATAs. See Bilateral Air Transport Agreements (BATAs) Batam industrial park, Malaysia, 118 Beijing, 117 Belgium, 184, 192 Berkeley Roundtable on the International Economy, 29, 106 Bernard, Mitchell, 4, 13, 14, 145 Big Three, 76. See also Chrysler; Ford; General Motors (GM) Bilateral Air Transport Agreements (BATAs), 184, 186, 188, 197n5 Bobrow, D. B., 158 Boeing Commercial Airline Company, 182, 190, 192, 234; Boeing 777 and 767, 231; price of Boeing 747, 230 Bork, R. H., 157, 174n5 Borrus, M., 88, 93–94 brain drain, of Chinese from Malaysia, 125 Brazil, 181, 192 British: Aerial Navigation Act, 183; Aerospace, 234; Airways, 185, 186, 187, 197n11 Bromley, Allan D., 36 budget deficits, U.S., 7, 33 Bull (computer manufacturer), 231, 232, 234, 235, 240 bumiputera (ethnic Malay), 118, 124, 131n36 bureaucracy, Japanese, 51, 71 Burke-Hartke Bill of 1971, 167 Bush administration, 176n34; trade relations with East Asia, 123, 141 business cycles, and trade deficits, 23 Business Week, 49, 88; “New Era for Auto Quality,” 43 “Buy America” campaigns, 4

Cabinet Research Bureau, 71 cabotage, 182, 186, 197n5 camera industry: of Japan, 45; of Taiwan, 112 Canada, 176n31, 192, 201; and fairness issues, 15, 165, 168, 171; and OFDI policy, 167 capital: access of Japanese firms to, 11–12, 48–51, 88, 93; markets, 26–27, 50 capital equipment, purchased from Japan by Japanese subsidiaries, 115 capitalism, Japanese- and U.S.-style, 42, 43, 47, 51–52 Caravelle (French aircraft), 229

Index Carlucci, Frank, 211–212 cartels, Japanese, 72, 80–81, 94, 95 Casey, William, CIA director, 212 Casio, 95 “Cassandras,” in the competitiveness debate, 11, 27, 28–32 ceilings and floors, in liberal states, 61–63 Central Intelligence Agency (CIA), 212 chaebol (Korean vertical conglomerates), 111, 121, 122, 131n32 chain stores, 156 chemicals industry, 25 Chiang Kai-shek, 71 Chicago Convention of 1944 on aviation, 183 “Chicago” school, 156, 157 China (PRC), 114, 115tab, 134–135, 192, 223n40; direct foreign investment in East Asia, 103; export-oriented manufacturing in coastal region, 108; indirect trade and foreign investment from Taiwan, 145; involved in regional networks, 111, 112, 115, 117; low-wage assembly in coastal region, 122; trade with Japan, 130n23; trade with North America and the United States, 115 Chinese: brain drain of, from Malaysia, 125; in Southeast Asia, 124–125, 131n37 Chrysler, 83; bankruptcy of, 75; loan guarantees made by Carter administration to, 75 CIA. See Central Intelligence Agency (CIA) civil aviation. See air transport Clark, Cal, 14 Clarkson, L. W., 181–182 Clayton Act, 155, 156, 159 Clinton, President Bill, 2; campaign of 1992, 176n34; research supported by administration of, 61 coal industry of Japan, 64 Cohen, S. S., 10, 30 Cohen, Stephen D., 5, 10–11 Cold War, 7, 20n4, 42, 134; effect on U.S. occupation policies, 81 Comet (British aircraft), 229 commerce, similarities between foreign and domestic, 172 commercial aircraft. See air transport; aircraft manufacture commercial fairness, 157, 172–173. See also fairness Commission of the European Communities, 228, 239

269

Committee on Foreign Investment in the United States (CFIUS), 217, 219 Communications Ministry, Korea, 124 communism, compared with fascism, 67 communitarianism, Japanese, 65 comparative advantage, 46, 162, 163, 167 competition, 19n3, 156; convergence of policy on, among European and North American countries, 165; domestic, 172; in the liberal state system, 61; and national interest, 165 competitiveness, 29; alternative measures of, 22–27; S. D. Cohen’s continuum of positions on, 11; concept of, 1–2, 6, 9; defined, 22, 38; denotation vague for, 5; an “essentially contested concept,” 1–3, 18; of firms and of nations defined, 106, 226; internal sources of, 3; international, 1, 37; interpreted various ways in East Asia, 120; national, 2, 4, 14, 15, 17, 226–227, 235; obsession with, criticized, 37; problems of measurement of, 21–23; a property of corporations, 4; pursuit of, in East Asia, 103–129; regained by U.S. auto industry, 9; relative gains and, 6–8; seen as a macroeconomic problem, 33; seen as a meaningless concept, 36–37; studies, 225; and U.S. trade policies in international air transport and commercial aircraft manufacture, 179–196; a useful concept, 10, 18–19. See also competition; competitiveness debate competitiveness debate, 1–2, 5–6, 18, 21–22, 225; a continuum of positions on, 10–11, 27–37; in Europe in early 1980s, 228; political nature of, 22. See also competition; competitiveness complex interdependence, 148 computer industry, 227, 228, 230; British, 236; dynamic random access memory (DRAM) chip, 231, 234; Emitter Coupled Logic (ELC) chip, 91; European, 241n13; Japanese, 65; U.S. software, 45; visuals produced in Taiwan, 114. See also electronics industry; specific company names Concorde project, 191 Connolly, W. E., 1, 6 consumer fairness, 15, 154, 157, 159, 161–166, 175n20; and IFDI, 166, 167; inconsistent with “results orientation,” 171; and international consumerism, 173; and Japan’s trade policies, 169–171; and

270

Index

U.S. export policy, 166; U.S. shift toward, 168; weak in Japan, 15–16. See also fairness “consumption binge,” 33 “controlled competition,” 98 Conybeare, J. A. C., 133 corporate networking. See networks corporations: international, 23, 24, 37, 60, 114; United States compared to Japanese, 11. See also Japanese corporations; specific corporations Corson Report, 215 cost of adjustment: in U.S. auto industry, 77; in U.S. semiconductor industry, 89 Council on Competitiveness, 29 countervailing duty laws, 161–162 currency: exchange values, 13; regulations, of Korea and Taiwan, 123. See also Japanese yen; Korean won; New Taiwanese (NT) dollar; Plaza Agreement(1985); U.S. dollar current account, 227; U.S. deficit in, 41 Cusumano, M., 78, 82, 85 Cypress Semiconductor Corporation, 92

Daewoo, 113, 131n32 Dahrendorf, R., 67 Datong (Taiwanese company), 113 de Gaulle, Charles, 236 Decca, Thai subsidiary of, 113 decisionmaking: in aircraft manufacture, 194; variables influencing, 180–181. See also ideology Decksell, 213–214 defense: U.S.-Japanese cooperation in technology of, 17; U.S. R&D expenditures on, 25–26 Defense Advanced Research Projects Agency (DARPA), 90 deficits. See budget deficits democracies, liberal vs. postfascist, 100. See also liberal states democratization, effects in East Asia, 122–123 Department of Defense (DOD), 17, 32, 87, 90, 191, 201, 211–215, 221n14, 221n16, 223n41; criticized for censoring publication of basic research, 223n35; and the Fujitsu-Fairchild controversy, 217; and techno-nationalism, 215–216 Department of Trade and Industry, British, 236

deregulation: organized labor’s opposition to, 175n14; of U.S. airlines, 16, 184, 185, 191–194, 197n8 Deutsche Aerospace, 234 developmental ideology, 120. See also ideology developmental school, 65, 67, 73 DHL Airways, 187 Diesel Motors, 82 Diet, Japanese, 71 Digital Equipment, 231, 235 discrimination: of firms in fascist states, 69; by Japanese firms, 91; practiced by the Japanese state, 66, 83, 96, 99, 101n6 domestic ownership issue, 166 domestic trade, similarity to foreign trade, 163, 164 downsizing, 6 dumping, 89, 98, 149, 159, 165; “intermittent,” 175n18; predatory and other forms, 160. See also antidumping

East Asia: changing patterns of investment and trade, 106; competitiveness of, 2, 103–129; defined, 129n1; different production practices of, 111; division of labor in, 103; economic relations with the United States, 104; factors promoting foreign investment, 104; and the fair markets issue, 19n1; interstate tensions in, 114, 117–118, 122; Japanese economic position in, 14, 110–115, 129; land and labor costs in, 104; regionalization of political economy and production in, 4, 13, 103–129; shift toward manufacturing for export, 128 Eastern Europe, 70 economic policies: European, 55; and ideology, 55–100; U.S., 55, 57–58. See also nondiscrimination economic rent, defined, 175n13; rent seeking, 232–233 efficiency, 154, 155, 174n5, 174n10, 176n33; and antitrust, 158, 174n9; and consumer fairness, 157; and equity, 176n6; and OFDI and IFDI, 167 Electrical Industries Provisional Development Act, 95 electrical machinery industry, 25; of East Asia, 105, 137 Electrics Industry Deliberation Council, 95 electronics industry, 227, 233; East Asian,

Index 105, 108, 111, 112, 133; European, 18, 228, 230, 232, 240; European market for, 230; international networks in, 231; Japanese, 41, 113, 116, 128, 230; Korean, 122; U.S., 31, 230. See also Sangshin Electric Electronics Research and Service Organization of the Industrial Technology Research Institute (ITRI), Taiwan, 124 Emitter Coupled Logic (ECL) chip, 91 employment: layoffs, 6; and OFDI, 167; in U.S. aerospace industries, 189–190. See also labor Encarnation, D. J., 84, 96 English common law, 155 environmental policy/practice, 175n22, 175n23 ESA. See European Space Agency (ESA) ESPRIT (European Strategic Programme for Research and Development in Information Technology), 18, 225, 228, 229, 232, 233, 234, 235, 237, 239, 240n3 EUREKA program, 18, 225, 229, 233, 234, 235, 237, 239 Europe, 165, 176n29, 189; air transport industry of, 182, 184, 187; aircraft manufacturing in, 181, 189; and airspace sovereignty, 183; antitrust practices of, 173, 186; competitiveness crises of, 18, 225, 237; and the competitiveness debate, 32; and fairness issues in, 165, 168, 171, 173; firms in networks, 120; foreign investment in Taiwan, 114; global collaboration, 18; and the issue of cabotage, 186; limitations of competitiveness policies of, 239; and OFDI policy, 167; regional collaboration and cooperation, 18, 225–226, 229, 235–236, 238–239; technology gaps perceived by, 18, 225, 228; trade with East Asian countries, 115, 142, 169; transnationalization of aerospace industry, 190, 193, 196. See also European Community European Community (EC), European Union (EU), 165; 175n19; and air transport, 187; increasing economic integrity, 237; intraEuropean Community trade, 238; and Japan, 168, 176n36; pressures on firms to consolidate, 240. See also Europe European Space Agency (ESA), 18, 201, 225, 229, 230, 232, 234, 237, 239 “excessive competition,” 71 Exchange Control Law, 79

271

Executive Order 12356 on National Security Information, 215, 221n14 Exon, Senator J. J., 217, 218. See also ExonFlorio amendment Exon-Florio amendment, Omnibus Trade and Competitiveness Act of 1988, 17, 210, 216–219, 223n40; provisions, 204–205 Export Trading Act of 1982, 166 exports: market conditions, 2; subsidization of, 149, 161, 162; U.S., 38–39, 104, 166

F–1, Japanese aircraft, 202 F–15s and F–16s, U.S. fighter planes, 202, 203, 213–214, 220 fair trade, 15, 58, 138, 148–149, 162, 165; laws, 156. See also Omnibus Trade and Competitiveness Act of 1988 Fairchild (semiconductor producer), 87, 88, 90–91, 216; joint venture with TDK, 97 fairness, 156, 158, 174n7; and “cheap foreign labor,” 162; commercial, 157, 172–173; concepts of, 153–154, 172; in direct investment, 166; in domestic and foreign trade, 154–166, 172–173; international criteria for, 52; international differences in thinking about, 154–155; issues in U.S. IFDI policy, 167; laws pertaining to international trade, 15, 159; national, 15, 154, 169–170, 173, 176n32; views on, in the United States, Canada, and Europe, 165–166. See also consumer fairness; fair trade Fanuc (Japanese firm), 110 fascism, 101n7; vs. communism and liberal democracy, 67–69; of prewar and postwar Japan, 68–71 Federal Communications Commission (FCC), 211, 212, 213 Federal Trade Commission, 156, 171; Act, 156 fiber-optics project. See Fujitsu, FujitsuAT&T controversy Fields, Craig, 31 Florio, Congressman James J., 218 Fokker of the Netherlands, 234 Follow-on Forces Attack, 215 Fong, G., 86, 89 Ford, 47, 74, 75; assembly plant in prewar Japan, 77–78; forced to leave Japan, 79; refused permission to reenter Japan after World War II, 81 “foreign currency budgets,” 72

272

Index

foreign direct investment (FDI), 23, 37, 62, 64, 76, 100n2, 103, 166, 167, 176n32, 177n44, 230; approvals, 106; in East Asia, 105, 113, 118, 127; and the “49% Rule,” 186; in Japan, 73, 83; outgoing, promoted by Japanese government, 104; via takeovers, 166, 177n44; in the United States, 62, 186, 100n2 foreign economic policymaking, 57 Foreign Investment Law of 1951, Japan, 83 foreign trade data, problems of, 128 Formosa Plastics, 123 Framework Programme, 239 France, 129n1, 192, 197n12, 223n40, 228; aircraft manufacturers, 189, 229; economic decisionmaking, 55; electronics firms subsidized, 240; Japanese imports to, 168; promotion of high-tech industries, 236; R&D, 25–26, 236 free trade, 58, 99, 147, 148–149, 153, 162, 163; U.S. commitment to, 138, 151. See also fair trade; trade Free Trade Agreement, Canada-U.S., 165 FSX fighter plane project, 17, 199, 201, 202, 210 Fuji, 231 Fujitsu (Japanese electronics firm), 17, 90–93, 96–98, 210, 216, 231, 232, 235; Fujitsu-AT&T controversy, 210–213; Fujitsu-Fairchild incident, 210, 216–219; plants in Europe, 230–231

Gaps in Technology, by OECD, 227–228 Garrett, G., 206 GATT. See General Agreement on Tariffs and Trade (GATT) GEC (British firm), 234 General Agreement on Tariffs and Trade (GATT), 135, 149, 163, 176n36, 177n41; diffuse reciprocity of, 149; exclusion of service and investment from, 167; and Japan’s trade policies, 169; mercantilist flavor of negotiations, 168; rounds, 165; Tokyo Round of, 198n15; and U.S.Japanese trade relations, 171; Uruguay Round of, 141, 173, 198n15 General Ceramics Inc., 204, 217–218 General Dynamics, 202 General Motors (GM), 47, 74, 75; assembly plant in prewar Japan, 77–78; excluded from Japan, 79, 81; and U.S. antitrust action, 91

Genther, P., 80, 81, 83, 84 Gephardt, Richard, 169 Germany, 129n1, 192, 228, 236; as a fascist state, 69; industry’s rate of return on capital, 49; Japanese imports to, 168; R&D, 25–26, 236; relative gains, 7; trade with Taiwan, 144; and the United States, 25, 184; West, 223n40 Gilpin, R., 133, 205 globalization, theorization and measurement confounded by, 10 Gold Star, 113 Goldstein, J., 58, 148, 208, 220n2 Golich, Vicki L., 16 goods and services, ability to sell, 2–3 Gould, torpedo manufacturer, 214 government intervention: Japanese industries helped by, 12; U.S., 91, 156, 157; in Western Europe, 236–237, 240. See also antitrust; deregulation; Japan, government role in the economy; Ministry of International Trade and Industry (MITI); subsidization Great Britain. See United Kingdom Great Depression, 148 Greece, 192 Gregor, A. J., 203 Grotius, Hugo, 183 guanxi (personal relations), 121 Guomindang Party, 121

Haggard, S., 148 Hall, P., 57 Hamilton, Alexander, 161 Hangzhou area, 117 Harris Corporation, 212, 213 “Harvard school”, 156, 157 Hatsopoulos, G. N., 31 Hayes, P., 68 HDTV project in Japan, 124 hegemonic predation, 14; case study regarding, 133–151 “hegemonic stability” theory, 205 Hewlett-Packard, 231 Hicom (Malaysian investment holding company), 125 hierarchies, regional, 128 high-tech industry: European, 225, 236–237, 240; in global markets, 229–235; Japanese, 65; measuring competitiveness by, 23, 31; and national competitiveness, 227; regional collaboration in, 239, 240;

Index and U.S.-Japanese competitiveness, 32; U.S. share of world trade in, 25. See also aerospace industry; aircraft manufacture; electronics industry; semiconductor industry Hirschman, A. O., 135 Hitachi, 93, 95, 96, 98, 232; plants in Europe, 230–231; production in U.S., 90 Hitler, Adolf, New Economic Order policies of, 72 Hollerman, L., 70 Honda, 76, 84–86, 101n14 Hong Kong, 106, 111, 112, 115tab House Armed Services Committee, 203 Hout, T., 79 Hyundai Motors, 118, 131n32

Iacocca, Lee, 144 IATA. See International Air Transport Association Iberia Air lines, 187 IBM (International Business Machines), 88, 89, 230–232, 234 ICL (British electronics company), 232, 235, 241n13 ideas: causal force of, 200; foreign policy influenced by, 17, 199–220; internalization of norms, 208–209; process of evolution of, 17, 207–208; techno-nationalism as an idea, 17, 199. See also ideational approach; ideology; technonationalism ideational approach: in foreign policy analysis, 199–200, 219; toward a theory of ideational dynamics, 206–210, 219 ideological consonance, 158, 164, 167 ideology: and competitiveness, 99; developmental, 120; differences of, between United States and Japan, 12; domestic, and institutional structures, 100; of economic liberalism, 12–13, 15; and economic policies of Japan and the United States, 55–100, 148; the term, 131n30. See also ideas; ideational approach IFDI (incoming foreign direct investment), 166, 167, 176n32 Iida, Yotaro, 203 Ikenberry, J., 150 impact transparency, 158, 164; of alleged Japanese protectionism, 172 imports, U.S., 7, 34, 38 income elasticities of imports and exports, 227

273

India, 192, 223n40 Indonesia: aircraft manufacturing, 181; antiJapanese riots, ll8; ethnic tensions, 126; foreign investment in, 106; Japanese investment in, 105; state intervention in, 124–125; trade with Japan, 130n23 industrial countries: investment cooperation among, 167–168; and the issue of subsidized exports, 175n20; restricted sectors of economies of, 167 Industrial Development Bank of Japan, 82 “industrial rationalization,” 71 industrial revolution, the third, 34 Industrial Security Program, 216 Industrial Technology Research Institute (ITRI), Taiwan, 124 Industries Control Law (1931), Japan, 72 industry: critique of U.S., 29–30; rates of return on capital in various countries, 49 “influence effect,” 135 information and communication technologies (ICT), 9–10. See also electronics industry; semiconductor industry information-related firms, U.S., 38 Information Technology, Year of (1982), 236 Inman, B. R., 30 Inmos (British company), 234 Inouye, Senator Daniel, 211 Institute for the New Generation of Computer Technology, 98 institutions, influence on policy, 17, 149, 158 Intel, 87, 88, 89, 111, 232; plants in Europe, 230–231 “intellectual entrepreneur,” 207, 213 intellectual property rights, 14; U.S.-Taiwan negotiations on, 139, 141. See also patent infringement interlocking shareholding, Japanese, 49, 51, 52. See also networks International Air Transport Association (IATA), 184–185, 187 International Civil Aviation Organization (ICAO), 183–184, 185 International Convention for the Regulation of Aerial Navigation, 183 international debt, a structural problem, 181 International Labour Organisation, 126 international political economy, structural changes in, 181–183 International Trade Association, 23 International Trade Commission (ITC), 89, 159–160

274

Index

Interstate Commerce clause, 161 inventory costs. See Just-in-Time (JIT) inventory system investment protectionism, 173. See also protectionism Ishikawaji Shipbuilding, 78 Ishikawajima-Harima Inc., 201 Israel, 192; aircraft manufacturing in, 181; U.S. air transport agreement with, 184 Isuzu, 76, 78–79, 80, 82, 84 IT. See Information Technology, Year of Italy, 192, 228; as a fascist state, 69

Japan, 129n1, 141, 176n35, 177n44, 192, 220n5; acquisition of overseas assets, 115; advice to United States, 170, 177n39; antitrust practices of, 171, 173, 177n42; Asian countries’ deficits with, 13–14; auto industry saved by banks, 82; bashing, 91, 149; bureaucracy of, 51, 71; competitive asymmetries with the United States, 41–52; competitiveness of, 2, 9–11, 12, 99–100; continuity of economic managerial personnel from prewar to postwar times, 72; core and peripheral industries, 72, 73tab; cost of capital to industries, 26, 50, 88, 93; and the debate on competitiveness, 5, 27, 32–33; declining industries, 64; discretionary power used by state, 84–85; discrimination in economic policy, 56, 73–74, 76, 104; domestication of missile defense system, 202; and East Asia, 13, 103, 105, 106, 108, 109, 111, 114–121, 127, 130n14–103n16, 131n26; economic decisionmaking, 55; economic system/structure, 12, 41; electronics and machinery companies, 113; export of capital goods and components from, 114; and fairness issues, 16, 168; as a fascist state, 12, 66–74; fear of “hollowing out” of domestic industry, 116, 128; future relations with the United States, 171–172; and GATT, 168; government role in the economy, 65, 67, 68–71, 84; growth industries, 64–65; high land and labor costs, 104; ideology and economic policy of, 64–74; imports from other East Asian countries, 115; investments in U.S. high-tech industries, 204; key industries of, 41, 45; light metals industry, 72; low rates of return on capital, 49, 50, 51; main banks, 42,

49–50, 93; “market school” view of, 65; more open to economic competition, 99; mutual defense and security ties with the United States, 199, 220n4; normalization treaty with Korea (1965), 108; occupation of, 69–70, 83–84, 170; offshore relocation of production facilities, 4; per capita investment rate, 32; postwar economic success, 64–65; postwar occupation of, 65, 69–71, 73; production and exports of electronic equipment, 116tab; production and technological innovation concentrated in, 103; production in East Asia before 1945, 107; R&D, 25–26; recession in, 9; relative gains, 7; role in international politics, 42; role of business firms and the state in economic development, 65; seen as a developmental state, 64; seen as unfair trader, 116; social structure of, 120; and technological innovation, 122; trade and investment barriers, 79, 83, 96, 168–173; trade and technology relations with NICs, 14; trade deficit with China and Indonesia, 130n23, 131n25; trade relations with Western countries, 115, 169–172; trade surpluses of, 13, 114–116 115tab, 169, 176n38; transnationalization of aerospace industry, 193; trend toward manufacture of capital goods and components, 128; U.S. and European subsidiaries in, 120; and U.S. competitiveness, 5, 24–25, 31; and U.S. relative gains concerns, 17, 20n4; and U.S. technonationalism, 17; Western countries’ views of, 27, 176n36; and Western European competition, 18. See also auto industry; competitiveness; competitiveness debate; Japanese corporations Japan Airlines, 187 Japan Automobile Manufacturers Association, 82 Japan Defense Agency (JDA), 201, 202; Technical Research and Development Institute (TRDI) of, 202, 203 Japan Development Bank, 83 Japan Electronic Computer Company (JECC), 95, 96 “Japan, Inc.” theory, 51 Japanese corporations: benefited by Taiwan’s liberalizing of trade, 151; dependence of East Asian networks on, 110–111, 119, 129; high-tech, 228; and issues of tech-

Index nology transfer, 110, 118, 203; in networks, 120, 231; prosecuted for bid-rigging, 171; role in economic development, 65; subsidiaries in the United States, 76–77, 144; U.S. fear of potential discrimination by, 92. See also Japan; Keiretsu Japanese Development Bank, 82 Japanese Fair Trade Commission, 171 Japanese yen, 104; appreciation of, 11, 13, 38, 115, 122; exchange rates, 52n3; and U.S. dollar, 9–10 JECC. See Japan Electronic Computer Company (JECC) JIT inventory system. See Just-in-Time (JIT) inventory system Johnson, C., 64, 70–71, 72, 96; “Japan, Inc.” theory, 51 joint ventures, U.S. and Japanese, 83, 97 Just-in-Time (JIT) inventory system, 44–48, 52, 108, 113

Kaishinsha, 78 Kalijarvi, T. V., 198n17 kanban system. See Just-in-Time (JIT) inventory system Kanematsu Gosho, 112–113 Katzenstein, P., 206 Kawasaki (Japanese corporation), 231 KEIKO missiles, 199, 201 Keinzle (German minicomputer maker), 235 keiretsu, 42, 48, 93, 108, 170 Keohane, R. O., 204 KLM, 187, 197n11 Kohl, Helmut, 236 Kohno, Masaru, 17, 18 Koito Seisakusho, 51 Korea/South Korea, 117, 130n14, 130n15, 131n26, 141, 192; authoritarian management practices, 122; beliefs about competitiveness, 121; chaebol, 111, 121, 122, 131n32; economic tensions with the United States, 104; foreign investments in East Asia, 103, 105, 106, 112; high land and labor costs, 104; incoming foreign investments, 105, 108, 118; in Japan’s pre–1945 empire, 107; labor disputes and union growth, 122; participation in international corporate networks, 120; postwar collaboration with Japanese firms, 107; R&D project for telecommunications, 123–124; and regional interstate tensions,

275

114; and regionalization in East Asia, 13, 120; restrictions on Japanese imports, 130n25; role of the state, 123; and Sangshin Electric, 4, 112–113; technicians of, used by Japanese firms, 114; technology issues, 118, 131n28; tensions about dependence on Japanese corporations, 118; trade balance with the United States, 13, 129n2; trade with Japan, 115tab; trade with North America, 115. See also Korean War Korean Ministry of Labor, 122 Korean War, effects of, 70, 81, 82 Korean won, 13, 104 Krasner, S. D., 58, 66 Krugman, P. R., 2, 3–4, 6, 8, 10, 19n2, 19n3, 31, 37 Kudrle, Robert T., 15, 158 Kyocera (Japanese industrial ceramics firm), 17, 213–214; Kyocera-Decksell case, 215–216

labor: child, 175n22; in East Asia, 126–127; and issues of competitiveness, 5–6; Korean, 104, 114, 122; organized, 159, 175n14; in Southeast Asia, 126 laissez-faire: liberalism, 236; tradition in Japan, 65 Lawler, Anthony J., 191 “leadership principle,” 67 Lenz, A. J., 3, 38 “level playing field” approach, 61 Lewis-Beck, M. S., 236 Liberal Democratic Party leaders, Japan, 202 liberal states: 59–64, 76; liberal democracies vs. postfascist democracies, 100 liberalization: of air travel, 187; in Southeast Asia, 126 licenses to obtain technology, 118, 124 Liebeler, Susan, 159 limited predation, 146–150 liquor and tobacco: U.S. export of, 142 Logic, 88 Lowi, T. J., 62–63 LSI Logic, 230–231 LSI, 88 Lufthansa, 187

Macdonald Commission, 165 machine tools industry, 227; in East Asia, 108, 111; Japanese, 41, 45, 72, 113; Taiwanese, 110, 137; U.S., 9, 142–144

276

Index

Made in America report, 29 Magaziner, I., 79 Mahathir Mohammad, prime minister of Malaysia, 118 Malaysia, 131n26; business sector, 131n35, 131n36; economy of, 125; electronics industry of, 112; ethnic tensions in, 126; export-oriented manufacturing, 108; foreign investment projects in, 105; growing tensions with Japan, 118–119; Japanese investment in, 105; privatization in, 131n36; Sangshin Electric project in, 5, 113; state intervention in, 124–125; trade with Japan, 115tab; trade with North America, 115 Manchuria, Japanese occupation of, 78, 107 market(s): access, 104; and corporate decisions, 180–181; defined by Adam Smith, 43; international, 2–3, 181; Japanese market share strategies, 11; and liberal states, 59–60; openness or fairness of, 2, 19n1; school, 65, 73. See also Japan, trade and investment barriers Mason, E. S., 156 Mason, M., 84, 96 Mastanduno, M., 20n4, 205, 206 Materials Mobilization Plan, 79, 80 Matsushita, 95, 232 Mazda, 76, 84 McDonnell Douglas, 192 MCI. See Ministry of Commerce and Industry (MCI) measurement: of competitiveness problematical, 21–22; of economic data confounded by globalization, 4–5, 10; shortcomings of state-based indicators, 127–128 Meiji Restoration, 65, 66 mercantilism, and trade negotiations, 163 mergers: and acquisitions (M&A), 17, 51; and cost savings, 175n11 metanorm, 208–209 microelectronics, 105, 108. See also electronics industry microwave ovens, 109, 111 Military Vehicle Subsidy Law of 1918, 77 Miller-Tydings Act, 156 Millstein, J., 88, 93–94 Milner, H. V., 133, 147 Ministry of Commerce and Industry (MCI), 71–72, 79, 80, 82, 85 Ministry of International Trade and Industry (MITI), 53n11, 64, 71, 94, 100, 101n4,

121; continuity of bureaucracy of, 72; export quotas set by, 98, 101n14; Heavy Industry Bureau of, 95; and the Japanese auto industry, 82–85; Japanese firms underwritten by, 88–89; and the Japanese semiconductor industry, 88–89, 97–98 Ministry of Munitions (MM), 71, 81, 85 Ministry of Posts and Telecommunications (MPT), 94–95, 97, 98 Ministry of Transport, 82 Minuteman II missile guidance system, 87 miryokuteki hinshitsu (glamorous quality), in auto design, 43 missiles, 87, 201–203, 220 MIT Commission on Industrial Productivity, Made in America report, 29 MITI. See Ministry of International Trade and Industry Mitsubishi, 76, 93, 96, 98, 231; Electric, 95–96; Heavy Industries, 82, 202, 203; joint production agreement with Chrysler, 84, 101n11; plants in Europe, 230–231 Mitsui, 118 MM. See Ministry of Munitions monopoly: and the fairness issue, 155–156; and profit, 175n16 Moore, B., 67, 69 Motorola, 88, 97, 120, 230–232 MPT. See Ministry of Posts and Telecommunications multinational corporations, U.S., 23, 24, 60

NAFTA. See North American Free Trade Agreement Nakamura, T., 131n29 Nakasone, Yasuhiro, 201, 202, 221n6 Nakatani, Iwao, 11–12 NASA. See National Aeronautics and Space Administration (NASA) nation-states, and the international political economy and the international system, 6 National Academy of Sciences, 28, 215 national advantage, 154 National Advisory Committee on Aeronautics, 189 National Aeronautics and Space Administration (NASA), 87, 90, 189, 203, 221n13 National Association of Manufacturers, 29 National Automobile Industry Revival Conference (1947), 82 “national champions,” 225, 228, 237

Index national competitiveness, 2, 4, 14, 15, 17, 226–337,. 235. See also competitiveness National Conductor, 91 national fairness, 15, 154, 173, 176n32; and Japan’s trade policies, 169–170. See also fairness National General Mobilization Law, 72, 79 National High Speed Computer program, 98 National Institutes of Health, 90 National Planning Association, 28 National Science Foundation, 90 national security: and IFDI, 167; and technonationalism, 203, 211–213, 216–218, 221n14; and U.S. aircraft manufacturing, 187, 189; U.S. government intervention, 91; and U.S. industrial competitiveness, 31–32; and U.S. telecommunications, 211. See also Department of Defense; technonationalism National Security Act of 1947, 216 National Semiconductors, 89 National Software Development program, 98 national treatment, of foreign affiliates, 62–63, 76, 166, 168 NATO. See North Atlantic Treaty Organization (NATO) Neale, A. D., 158 NEC, 90, 93, 95–96, 98, 230–232 neoinstitutional approach, 147, 222n20 Netherlands, 192; air transport agreements of, 184, 187; aircraft manufacturers, 189 networks: East Asian, 13, 103, 108–109, 110–112, 119–120, 129; hierarchic regional, 128; international aerospace and electronics, 231; Japanese corporate, 11, 43, 47–49, 51–52; Korean-Japanese, 111; personal, in Japanese commercial life, 177n43; in Southeast Asia, 113–114; types of, 130n15. See also Sangshin New Functional Elements for Semiconductor Devices program, 98 New Taiwan (NT) dollar, 13, 14, 104, 134; appreciation, 141, 144–145; value disputed, 138, 139, 140 newly industrialized countries (NICs), 13, 109, 225, 236; direct foreign investment in East Asia by, 103, 106; Japanese investment in, 105; trade relations with Japan, 14. See also Hong Kong; Korea/South Korea; Singapore; Taiwan 1979 (Amended) Export Administration Act, 215

277

1985 Report of the President’s Commission on Industrial Competitiveness, 22 Nippon Steel, 17, 214; Nippon Steel-Special Metals case, 215, 216 Nippon Telegraph and Telephone (NTT), 95–98, 211 Nissan, 44, 76, 78–85, 97 Noble, 64–65 Nokia Data, 235, 241n13 nondiscrimination: foreign affiliates favored by, 63; in Japanese policy in the early twentieth century, 66; and Sematech, 91–92; U.S. economic policy of, 56, 62, 76, 91–92, 99 “norms”: internalized, 208–209; formalized, 209–210 North, D. C., 59 North America: air traffic, 182; trade with East Asia, 115 North American Air Defense Command headquarters, 213 North American Free Trade Agreement (NAFTA), 187 North Atlantic air market, 184, 186–187 North Atlantic Treaty Organization (NATO), 215 Northwest Airlines, 187, 197n11 NT dollar. See New Taiwan (NT) dollar NTT. See Nippon Telegraph and Telephone Nye, J.S., 32, 34, 204

OECD. See Organization for Economic Cooperation and Development OEM (original equipment manufacture), 111, 112, 121–122 OFDI (outgoing foreign direct investment), 167 Office of Technology Assessment, congressional, 28 oil crises, 236; impact on Taiwan, 136–137 Oki (computer peripherals manufacturer), 93, 96, 98 Okimoto, D. I., 94, 95 Okita-Askew agreement (1980), 211 Olivetti, 231, 232 Olsen, J. P., 222n20 Omnibus Trade and Competitiveness Act of 1988, 17, 133, 141, 147, 153, 169, 170, 204, 217; Super 301 section, 15, 19n1, 141, 153, 170, 171, 177n41 OPEC (Organization of Petroleum Exporting Countries), 75

278

Index

Optical Measurement and Control System program, 98 Organization for Economic Cooperation and Development (OECD): countries, 119; Gaps in Technology report, 227–228 Organization of Petroleum Exporting Countries (OPEC), 75 original equipment manufacture (OEM), 111, 112, 121–122 outgoing foreign direct investment (OFDI), 167

Pacific Rim, growth in air transport, 182 Packwood, Senator Robert, 211 Pan American, 188 Paris conference on international air law, 1902, 183 patent infringement, by Japanese in semiconductor field, 97. See also intellectual property rights Patriot surface-to-air missiles, 203, 220 Peltzman, S., 157 Pempel, T. J., 69–70 Penang, Malaysia, 125 Pentagon, 32, 89; and the Fujitsu-AT&T controversy, 213; and technonationalism, 199, 214, 216, 222n33; and U.S.-Japanese military technological cooperation, 201 petrochemical industry: Japanese, 64; U.S., 45 pharmaceutical industry, U.S., 45 Philippines, Japanese investment in, 105 Philips (semiconductor firm), 231, 232 Pickens, T. Boone, 51 Plaza Agreement (1985), 13, 14, 103, 104, 129n1 Plessey (British firm), 234 Poland, 192 “policy entrepreneurs,” 6 “Pollyannas,” in the competitiveness debate, 11, 28, 35–36 Posner, R. A., 157 post-Fordist techniques, in Japanese production, 111 pragmatists, in the competitiveness debate, 34–35 predatory hegemon, 146, 148 President’s Commission on Industrial Competitiveness, 2, 28 pribumi interests promoted by Indonesian state intervention, 124 producer fairness, 154, 164, 165, 172; and

incoming foreign direct investment (IFDI), 166; in Japan’s domestic economy, 15–16, 171 production, 197n7; Japanese techniques of, 11; networks, 111–112; transational, 4. See also Just-in-Time (JIT) inventory system; networks; regionalization productivity: as a component of competitiveness, 3; and distribution, 100; U.S., 25, 35 profit orientation of U.S. firms, 11 protectionism, 99, 163–165; and comparative advantage, 163; in fascist Japan, 72; and the Great Depression, 148; investment, 173; Japanese, 66, 78, 170–172; resisted by the United States, 133; in the United States, Canada, and Europe, 101n8, 165; U.S. restrictions evaded by Taiwan, 149–150; and the U.S. semiconductor industry, 89. See also Japan, trade and investment barriers; technonationalism Pyle, K. B., 42

R&D. See research and development RACE. See Research and Development in Advanced Communications Technologies in Europe racial doctrines of fascist states, 69 rate of return on capital, in U.S. industry, 49 Ravenhill, John, 4, 13, 14, 145 “re-engineering,” 6 Reagan administration: concerned about trade deficits, 104, 138; Executive Order 12356 on National Security Information, 215, 221n14; fair trade endorsed by, 153; Korea and Taiwan pressured to liberalize trade and financial markets, 123; policy of “aggressive reciprocity,” 138–139, 147, 149, 151; Strategic Defense Initiative program, 201; technonationalism of, 216, 218; VER with Japan, 76 “Reaganomics,” 169 real incomes/wages, 2, 3, 30–31, 38 “recession cartels,” 94 reciprocal consent, 65–66; school, 73 Reconstruction Finance Bill (Japan), 82 “reform bureaucrats” of Japan, 71 regionalization: analysis of process of, 103–105; and changing state-society relations, 120–127; and denotational problems, 19; effects of, in East Asia, 123; of manufacturing and R&D, 126; of production networks, 129; of production of East

Index Asia, 4, 13–14, 103–129; of trade disputes, 115; of Western Europe, 18 Reich, Robert, 21, 220, 221n17; “Who Is Us?” 4 Reich, Simon, 12–13 relative gains, 6, 19n4; and the concept of competitiveness, 19; and U.S. policy toward Japan, 17, 205–206 rent. See economic rent Republic of China (ROC). See Taiwan research and development (R&D), 108, 130n13; and competitiveness issues, 25–26; costs, 25, 92–93, 228; in East Asia, 111, 114, 120; in Europe, 229, 233, 234, 236; in Japan, 11, 12, 46–47, 97–98; problems in measurement of, 26; subsidies in aircraft industry, 189; U.S., 25, 46–47, 171, 191, 228 Research and Development in Advanced Communications Technologies in Europe (RACE) program, 18, 225, 229, 233, 234, 235, 237, 239, 240n4 “Response to Unfair Trading Practices.” See Super 301 “results orientation” concept in U.S.-Japanese trade negotiations, 171 Ricardo, David: “law of comparative advantage,” 46; liberalism of, 59. See also comparative advantage; liberal states Robinson-Patman Act, 156, 174n6 Roh Tae-woo, 123 Rolls Royce of the U.K., 192 Rootes, 83 Ross Technology, 92,

Sabena Belgian World Airlines, 187 Samsung, 111, 113, 131n32 Samuels, R. J., 65 Samuelson, Paul, 162 Sandholtz, Wayne, 18 Sangshin Electric, 4–5, 112–113 Sarabria, S., 87, 91 Sarti, R., 79 satellite launch, average price of, 230 Schlumberger (French firm), 91, 216 Schultze, C. L., 36 science, U.S. strength in, 30, 36, 131n28 scientific instruments sector, Japanese and U.S., 25 Scott, B. R., 23, 32 scrap metal, U.S. export of, 144 Section 301: cited against Taiwan, 139; filed

279

against Japan, 89. See also Super 301 Seiko, 95 “self control” policy, 70 Sematech, 91–93, 223n41 semiconductor industry: British, 236; captive producers of chips, 88; and competitiveness, 86–99, 227, 228; dynamic random access memory chips, 111; Emitter Couples Logic chips, 91; European, 230; global market for, 230; international alliances in, 232; Japanese, 11, 12, 41, 45, 49, 56, 65, 74, 88, 93–99, 228; Japanese acquisition of U.S. firms, 92; Japanese firms accused of dumping, 89; “merchant” firms in, 88; U.S., 12, 50, 56, 87–93. See also electronics industry; Fujitsu-Fairchild controversy Semiconductor Industry Association (SIA), 89 Servan-Schreiber, Jean-Jacques, The American Challenge, 228 service industries: dependent on manufacturing sectors, 196; liberalized in Taiwan, 140; U.S., 25, 33–34, 166 SGS-Thomson, 231, 232, 234, 240 Shanghai, 117 Sharp (electronics firm), 95, 98 Shepsle, K. A., 207 Sherman Act (1890), 155, 156, 159, 166, 174n5 shipbuilding industry, Japanese, 72 Sidewinders, U.S. missiles, 203 Siemens, 231, 232, 234, 235 Siemens-Nixdorf, 231, 234 SII. See Structural Impediments Initiatives Simon, D. F., ll8 Singapore, 131n26; investments in Indonesia, 106; technicians of, used by Japanese firms, 114; trade surplus with the United States, 115tab Skinner, Samuel, 186 Smoot-Hawley Tariff Act, 147, 148 socialist countries: economic collapse of, 47; failure to consider demand, 44 Sony, 95, 97–98, 117, 131n26 Soshin Denki, 112–113 South Korea. See Korea/South Korea South Korean won, 13 Southeast Asia: benefits of regionalization, 117; businessmen of, 131n38; discontented with “technology-less” industrialization, 125; in East Asian regional trade dis-

280

Index

putes, 115; ethnic groups, 118, 124–125, 131n36, 131n37; export of low-tech manufactured goods from, 114; firms in networks, 111–112; import-substituting industrialization favored in, 124; international labor standards violated in, 126; interventionist states of, 124; liberalization in the government and business sectors, 125; low-wage assembly in, 122; newly industrialized countries (NICs) of, 13; pressured to liberalize trade and financial regimes, 124; role of state in, 118, 125; Sangshin Electric operations in, 113; Taiwanese investment in, 131n37; trade with Taiwan, 129; U.S. trade tensions with, 115. See also ASEAN Soviet: bloc, 7, 215, 220n5; Union, 203 space industries. See aerospace industry Spain, 192 Sparc microprocessors, 92 Special Metals Corporation, 214–216 “spin-ons,” 218 standard of living, 3; and free trade, 162; and national competitiveness, 2, 30; U.S., 8, 30 state: and liberal ideology, 59–64, 76, 100; shortcomings of indicators based on, 127–128; sovereignty vs. interdependent world economy, 16; and world political economy, 16, 181 state intervention: in Southeast Asia, 118, 124, 125; reasons for, in the United States, 91. See also antitrust; Japan, government role in the economy; Omnibus Trade and Competitiveness Act of 1988; Sematech STC, 235 steel industry, Japan, 64 Stigler, G. J., 157, 174n5 Strategic Defense Initiative (SDI) program, 201 structural discourse: shortcomings of structural explanations of U.S.-Japanese interactions in the 1980s, 204–206; “structural” view of market performance, 156 Structural Impediments Initiatives (SII), 42, 170, 171, 177n39, 177n40, 177n42 Subaru, 76; Subaru-Isuzu plant in Indiana, 76 subsidization: of Airbus, 198n15; of exports, 149, 159, 161, 162, 165, 175n20, 175n21; of French electronics firms, 240; of intraEuropean collaboration, 233; of R&D,

189; of regional collaboration in Europe, 239 Sumitomo Metal Industries, 17, 214; Sumitomo Metal-Tube Turns case, 215, 216 Summers, L. H., 31 Sun Microsystems, 232 Super 301, 19n1, 153, 170, 177n41; list of unfair traders, 141; official Japanese view of, 171. See also Omnibus Trade and Competitiveness Act of 1988; Section 301 Survey Committee for the Establishment of the Automobile Industry (Japan), 78 Suzuki, 85; agreement with GM, 101n11 Taipei: country landowners, 123; demonstration against United States, 140 Taiwan, 117, 130n15, 131n26, 192; barriers to imports, 138; beliefs about competitiveness, 121; changing role of the state, 123; cleavage between Taiwanese and mainlanders, 121; direct foreign investment in East Asia, 103, 105, 106, 112, 125; direct Japanese investment in, 105, 108, 112; and East Asian regionalization, 13, 114, 115, 120; ecological protests in, 123; export sector, 136, 144, 149–150; firms in networks, 111, 112, 120; foreign investment in, 114, 118; GNP growth, 135; high land and labor costs, 104; high turnover of employees, 122; industrialization process, 135; institutions, 149; land reform, 135; movement of small business owners to offshore locations, 145; overall import and export structure, 136tab, 137tab, 142, 143tab; part of Japan’s pre–1945 empire, 107; petrochemical industry, 118; postwar collaboration with Japanese firms, 107; rising real wages, 144; Six-Year National Development Plan to upgrade infrastructure, 123; state intervention, 124; technicians used by Japanese firms, 114; tensions about dependence on Japanese corporations, 118; trade practices, 15; trade relations with the United States, 13–14, 104, 115, 129n2, 134–146, 143tab, 150; trade surpluses of, 136–137; trade with Hong Kong/China and Japan, 145–146; trade with Japan, 115tab; trade with North America, 115; trade with Southeast Asia, 129; U.S. and European subsidiaries in,

Index 120; U.S. importance to, 134–135, 141 Taiwan Aerospace, 234 Takahashi, Harumi, 95 takeovers, 166; and the issue of access, 177n43. See also mergers, and acquisitions tariffs: imposed on Japanese consumer electronic imports, 90; average rates, 165 tax credit for foreign income taxes, 167 Taylor, M., 209 TDK, joint venture with Fairchild, 97 technological change, 109–110, 231; effects in East Asia, 123. See also technology transfer/diffusion technological cooperation, between the United States and Japan, 200–201 technological knowledge, tacitness of, 109–110 technology: gap, 18, 225; learning through copying, 121; U.S. position in, debated, 29 technology transfer/diffusion, 109–111, 121, 130n14, 130n15; curtailed to the Soviet Union, 215; in East Asia, 109, 117; to Japan from the United States, 205; from Japanese and Western corporations to East Asia, 118, 119; limited for Southeast Asian countries, 125; and national security, 203 technonationalism, 17, 18, 199; in Europe, 225; institutionalized, 216–219; as a norm, 213–216; the term, 220n1; in U.S. policies toward Japan, 199–220 telecommunications industry, 18, 227, 230, 240, 241n13 television manufacture, 109, 129n10 Temporary Materials Supply and Demand Control Law of 1946, 72 Temporary Measure Law Relating to Exports, Imports, and Other Matters, 79 Texas Instruments, 87, 88, 232; in joint venture agreement with Sony, 97; plants in Europe, 230–231 textile industry, Japan, 64 Thailand, 113, 115tab, 124, 131n35; antiJapanese riots in 1970s, ll8; export-oriented manufacturing, 108; foreign investment in, 105, 106 Thatcher, Margaret, 236 theory: of “hegemonic stability,” 205; of ideational dynamics, 206–210, 219; “Japan, Inc.” and “Three Sacred

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Treasures” theories, 51; and regionalized production networks, 127. See also competitiveness debate Thomson (French firm), 240; merger with SGS, 234. See also SGS-Thomson “Three Sacred Treasures” theory, 51 Tianjin, 117 TNCs (transnational corporations). See corporations Tokuyama Soda Company, 204, 218 Tokyo Gas and Electric, 78 Tokyo Round. See General Agreement on Tariffs and Trade (GATT) Toshiba Machine, 93, 95–96, 98, 117, 203, 210, 232, 234; “flash memory” technology of, 111; plants in Europe, 230–231 Toyo Kogyo, 84 Toyota, 44, 52n2, 76, 78–85, 97; Automatic Loom, 78 trade: problems of foreign trade data, 128; similarity of domestic and foreign, 165; “trade triangle,” 145–146, 150; U.S. terms of, 30. See also fair trade; free trade Trade Act of 1974, 147 Trade Act of 1988. See Omnibus Trade and Competitiveness Act of 1988 trade balance, as a measure of U.S. competitiveness, 23–24 trade deficits: seen as positive, 36; U.S., 7, 13, 23, 41, 45, 104, 134, 148, 226–227 trade imbalances, in East Asia, 117 transfer of technology. See technology transfer transnational alliances, in aerospace firms, 190–192 transnational communication, 105 transnationalization, 19; of manufacturing in East Asia; of production, 4–5. See also East Asia, regionalization transportation equipment industry, 25. See also aircraft manufacture; auto industry; truck production truck production, Japanese, 77, 79, 81 Truman Doctrine, 70 Tsutsui, Ryozo 203 Tube Turns, Inc., 17, 214 Tyson, Laura D., 28

unfairness: an issue in U.S.-Japanese economic relations, 168–172; “unfair trade” laws, 164. See also fairness

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Index

Unisys, 231 United Airlines, 187 United Kingdom, 25, 35, 129n1, 192, 197n12, 228; air transport agreements with other countries, 184, 187; aircraft manufacturers, 189; in European Community trade, 238; government support for high-tech industries, 236; industry’s rate of return on capital, 49; research and development, 25, 236; Sangshin Electric exports to, 112–113 United States, 9, 19n2, 129n1, 174n4, 176n29, 197n12; “aggressive reciprocity” in trade negotiations, 138–139, 147, 151; “aggressive unilateralism” of trade policy, 19n1, 166, 172; antitrust regulations and international airline services, 186; Bilateral Air Transport Agreements of, 184; competitive asymmetries with Japan, 41–52; competitiveness of, 9, 21–39; and corporate networks, 120, 235; critique of organization and practices of industry of, 29–30; debate on aerospace policy changes, 193–195; declining hegemony of, 153; defense cooperation with Japan, 17, 220n4; economic ideology in, 59–64; economic policy of, 55–56; economic relations with Canada, 168; economic relations with Mexico, 168; economic system of, 12, 41, 55; expenditures on R&D, 25–26; exports, 24, 38–39, 104, 144, 166; external debt, 41; and fairness issues and nondiscrimination, 15, 76, 153, 165, 168, 171, 173; federal budget deficit, 7, 33, 172; foreign direct investment in, 64, 76, 167; future relations with Japan, 171–172; future role in world economy, 172; and GATT, 177n41; Generalized Scheme of Preferences, 104; high-technology industries of, and Japanese capital inflows, 204; imports, 7, 34, 38; industrial policy of nondiscrimination, 56; industry’s rate of return on capital, 49; institutional structure for economic decisionmaking, 55; investment and savings practices, 32–33, 50, 153–154, 166–168, 173; key industries, 45; liberal economic ideology, 15; liberalization of air travel, 187; multinational corporations, 23, 24, 60; mutual defense and security ties with Japan, 199; and the occupation of Japan, 81; open markets, 60; and “predatory

hegemon” role, 133, 148, 150; productivity, 8, 24, 35; protectionism, 99, 187–193; relative gains, 6–7; role in international politics, 42; Sangshin Electric exports to, 112–113; science and technology strength, 30, 36, 131n28; technonationalism of, 17; trade and economic relations with Japan, 14, 89, 90, 98, 115, 168–172, 176n36, 176n38, 204; trade and economic relations with Taiwan, 14, 115, 121–122, 129n2, 134–147, 151; trade deficit, 141, 172, 226–227; trade policies, 58, 137–138, 153–154, 156, 159–165, 168–173, 181; trade relations with East Asian countries, 14, 104, 115, 121–122, 126; Trade Representative (USTR), 138, 211; transnationalization of aerospace industry, 192–193; U.S.-Japanese Joint Military Technology Commission, 201; and Western Europe, 18; world’s largest debtor, 7. See also nondiscrimination; American Occupation; technonationalism U.S. Congress, 164, 174n6, 174n7; and techno-nationalism, 211–214; and trade imbalance with Northeast Asian countries, 104 U.S. Department of Commerce, 23, 24, 211 U.S. Department of Justice, 171; 1984 Merger Guidelines, 158 U.S. dollar, 13, 129n1; depreciation of, 9–10, 24, 30, 38, 41; exchange rates, 52n3; overvalued, 138, 148, 181; weakened against yen, 9–10 U.S. Senate Appropriations Committee, 21 U.S. State Department, 211 Uruguay Round, 141, 173, 198n15. See also General Agreement on Tariffs and Trade (GATT) US Air, 186, 187, 197n11

VER. See Voluntary Export Restraint (VER) agreement Very High Speed Integration Circuit program (VHSIC), 90 Very Large Scale Integration (VLSI) project, 97–98 Vietnam War, 58 Vogel, E. F., 65 Volkswagen (VW), 75 Voluntary Export Restraint (VER) agreement,

Index 76, 85, 101n8 VSLI program, 97–98

Warsaw Pact countries, 215 Webb-Pomerene Associations for export trade, 166 Weinberger, Casper, U.S. secretary of defense, 215, 217 Weingast, B. R., 206 West Germany. See Germany Western Electric, 210, 212 Western Europe: and consumer fairness, 15; high-tech industries of, 25, 236–237; and the issue of competitiveness, 18, 225, 227; regional collaboration on electronics, 18; reindustrialization after World War II, 236; and Southeast Asia, 126 Westpac theater missile defense system, 201

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Wilson, Harold, Labour government of, 236 Wirth, Congressman Timothy, 211 World Bank: loan for Toyota funded by, 83; Report critical of Indonesian state intervention, 125 world markets, 24–25 World War II, postwar recovery, 47, 51

Yugoslavia, 192

zaibatsu, 66, 68, 70, 73, 84, 131n29; Japanese government policy toward, 77–78 Zenith, 232 Zhejiang province, 117 Zilog, 88 Zysman, J., 30, 88, 93–94

About the Book and the Editors The general public perception that the United States has lost some substantial measure of economic competitiveness—and that this loss is already manifest in the aggregate welfare and will be even more acutely felt in the future—has brought about pronounced changes in U.S. international trade policies. Aggressive unilateralism, technonationalist investment and R&D policies, and regional free trade agreements all raise disturbing implications for the viability and stability of international economic regimes. This volume examines the causes and consequences of changes in economic competitiveness. The authors locate the issue in the context of the debate in the late 1980s and early 1990s over relative U.S. decline, survey the various definitions and conceptual approaches to the subject, and provide theoretical perspectives on the sources of variation in competitiveness across time and differing countries. They also examine responses, mainly U.S. but also European, to the perceived competitive challenge posed by East Asian capitalism.

David P. Rapkin is associate professor of political science at the University of Nebraska. William P. Avery is professor of political science at the University of Nebraska.

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