Capitol as there was on the Senate side when it passed 77 to 0. I don't think that that piece of legislation by itself will eliminate our overall trade problem but is symbolically an important step. Moreover, the failure to take that step might very well be perceived to be a step backwards.

So, if I might encourage this subcommittee in its wisdom to look favorably on that-

Mr. VANIK. We have done that. We have reported it.

Mr. WEIL. I also hope that the DISC provision will be added again.

Mr. VANIK. We did not approve that. We are going to hold that for further deliberation.

Mr. WEIL. Last, I will make one anecdotal comment in light of your question, Chairman Vanik, on the retail costs in Japan versus in the United States. I was in Japan in June and I met an American who had been in a line at a U.S. airport behind a Japanese businessman going through the security check before going on the airplane to Japan. The Japanese man had a box which the X-ray people were puzzled about and insisted on opening.

This man was reluctant. Out of it came a Sony television set. The American businessman said to the Japanese, "Why are you taking coals to Newcastle?" He said "Because they are cheaper here.' The fact is that many consumer goods, manufactured goods, of an identical nature are in fact cheaper in our retail system.

Ambassador Ingersoll put his finger on part of the reason which is that all goods, foreign or domestic, in Japan are more expensive because of their quite different distribution system. But they also I believe don't feel as strongly as we do about enforcing the right of the consumer distribution system to be competitive in pricing. I think that there is more general agreement on what the retail price ought to be. I think we should follow the course you have started and do everything we can do to push the Japanese to open more competition at the retail level.

I think your report is exceedingly useful.

I would like to end on one specific point. The NTT subject is delicate, but it too is progressing. I think that the comments I heard earlier about the inclusion of the development process is key. If we could find a way to insure that American corporations, who are in the business of being potential suppliers, are included in a bona fide way as prospective certified and qualified suppliers, that we could at least for a phase watch how that works. It would be best not to be too doctrinaire about all aspects of the Government Procurement Code. Further progress will be seen if we can be flexible and innovative.

Mr. VANIK. Why has the use of the TFC dropped off so sharply in the past 2 years?

Mr. WEIL. I think for two reasons. It got an initial shot in the arm when it came into existence because people's hopes and expectations were up when it started. Because it was not seen as a body that could get quick, certain economic results there was a reluctance to bother. Some companies are reluctant to come out in the open because they are fearful of various forms of retaliation. I also suspect that the broad agenda, including the trade negotiations, was preoccupying some of the people who would otherwise adminis

tratively have been concerned with the TFC. Still encouragement is justified.

Mr. JONES. In relation to that and this whole problem of American telecommunications companies being frozen out of the process of procurement in Japan, should the TFC be amended in its purpose in some way so that our Government or some third party entity other than a specific company may be allowed to bring a complaint to the TFC with regard to telecommunications and pursue it that way?

Mr. WEIL. The terms of reference for the TFC could very well be modified to become a mechanism for watching, even in an informal way, and enforcing a telecommunications procurement process. That would require careful study and analysis. The thrust of your question is would that help? I think it could.

Mr. VANIK. Thank you very much, Mr. Secretary. I appreciate your statement.

Mr. Tom Skornia, vice president and general counsel of Advanced Micro Devices, Inc.

STATEMENT OF THOMAS SKORNIA, VICE PRESIDENT AND GENERAL COUNSEL, ADVANCED MICRO DEVICES, INC., ON BEHALF OF THE SEMICONDUCTOR INDUSTRY ASSOCIATION, ACCOMPANIED BY MIKE GADBAW AND PAUL OSTERHUIS, COUNSELS

Mr. SKORNIA. My name is Tom Skornia. I am vice president and general counsel of Advanced Micro Devices, Inc., of Sunnyvale, Calif., and secretary and chairman of the Lawyers' Committee of the Semiconductor Industry Association, which I am representing here today.

Mr. VANIK. We heard your testimony in California earlier.

Mr. SKORNIA. Yes, as a matter of fact, I think it was 2 years ago when you were there. Also with me are Joe Willett of Chase Financial Policy, who will comment on matters of cost of capital and rate of capital return compared to the Japanese, and Mike Gadbaw and Paul Osterhuis, who are in a position to respond to any technical questions the committee may have.

Advanced Micro Devices is a prime example of the dynamic possibilities of the U.S. semiconductor industry. Founded in 1969, the firm has grown from $50,000 in initial capital to $100 million in equity capital and almost $300 million annual sales. Advanced Micro Devices develops and sells state-of-the-art devices. A substantial share of our total international sales of $100 million is marketed in Japan.

This spectacular growth is attributable to a highly favorableand perhaps bygone-economic environment. Increasingly, we find ourselves addressing problems which require a reorientation in national economic policy. It was this realization which led to the establishment of the Semiconductor Industry Association, (SIA) of which my company is a founding member, just 31⁄2 years ago. In the interest of time I will depart from my text and discuss briefly the choice which the Congress and we all are going to be faced with shortly based on what I have heard today and what I have read in the task force report. That is a choice between an

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oncoming wave of protectionism and some basic structural reforms in the way business is taxed and regulated in the United States. We have a very clear and well stated preference for the basic structural reforms which would head off what we think otherwise would be an inevitable wave of protectionism. I pledge to the committee and Congress that the Semiconductor Industry Association will not be a part of such a wave and will not be part of starting one.

With respect to those structural reforms we think a number of initial reforms are already before the Congress, particularly in the form of Chairman Vanik's bill to provide favorable tax treatment for research and development grants by business to universities, and in the form of a bill by Congressmen Pickle and Vander Jagt providing favorable tax treatment for research and development done directly by industry; and indeed with some slight modifications, recognizing some problems of ours in the form of Mr. Jones' initiative on depreciation reform. We think there are also other lesser but still important provisions included in the tax bill reported last month by the Senate Finance Committee which will go a long way toward addressing the kind of structural reform we think should be made.

Far from being proponents of protectionism I would like to make the point that the semiconductor industry would like to see things move in exactly the opposite direction. The current tariff structure on semiconductor devices, both in Japan and the United States, is now scheduled to be reduced in stages between now and 1987 to a rate of 4.2 percent from their present higher rates. Within the week we will propose through the Office of the U.S. Trade Representative that this reduction be implemented in a single step on or before April 1 of next year and that authority be provided to drop those rates to zero as soon thereafter as possible and indeed on April 1 if that is possible.

Mr. VANIK. You are making a major statement. Ambassador Hormats, are you aware of the statement made on semiconductors? Why don't you back up?

Mr. SKORNIA. We had a meeting yesterday with USTR general counsel, Robert Cassidy to indicate that this initiative would be coming from us. We are in the process now of preparing a letter which will outline our proposal as I have just indicated.

1?

Mr. VANIK. Your proposal is that you do it in one stage by April

Mr. SKORNIA. Yes, instead of the 8-year staging through 1987 which was agreed upon during the MTN negotiations. We would prefer to go quickly on a bilateral basis with Japan. I understand we will need legislative authority to go to zero.

Mr. VANIK. What is your case to support that argument?

Mr. SKORNIA. We feel we will be better able to penetrate the Japanese market with our products by a reduction in their tariff schedule. We believe that our industry and our companies were created and have thrived generally in a free trade atmosphere. We think more free trade rather than less will continue to make it possible for us to compete internationally assuming that we have an economic environment in the United States which makes it

possible for us to raise capital and make a rate of return which is competitive with the Japanese.

[The prepared statement follows:]

STATEMENT OF THOMAS SKORNIA, VICE PRESIDENT, ADVANCED MICRO DEVICES, INC., ON BEHALF OF THE SEMICONDUCTOR INDUSTRY ASSOCIATION

My name is Tom Skornia. I am vice president and general counsel of Advanced Micro Devices, Inc., of Sunnyvale, Calif., and secretary and chairman of the lawyers' committee of the Semiconductor Industry Association.

Advanced Micro Devices is a prime example of the dynamic possibilities of the U.S. semiconductor industry. Founded in 1969, the firm has grown from $50,000 in initial capital to $100 million in equity capital and almost $300 million annual sales. Advanced Micro Devices develops and sells state-of-the-art devices. A substantial share of our total international sales of $100 million are marketed in Japan. This spectacular growth is attributable to a highly favorable-and perhaps bygone-economic environment. Increasingly, we find ourselves addressing problems which require a reorientation in national economic policy. It was this realization which lead to the establishment of the Semiconductor Industry Association, (SIA) of which my company is a founding member.

On behalf of the association, I would like to congratulate the task force on their extremely valuable contribution to the development of appropriate Government policy with respect to U.S. economic relations with Japan. SIA believes that the task force has correctly analyzed the critical problems faced by U.S. high technology industries in our trade with Japan. SIA can fully support the conclusions reached by the task force and has some specific suggestions as to their implementation. First, the report quite properly compares the challenge posed by competition from Japan with that first posed by the launching of the Soviet Sputnik almost two and a half decades ago. That image is especially meaningful for an entire generation of Americans. I was attending a meeting in Kansas City, Mo., where the major topic of discussion was the state of American technology. The sight that I and my colleagues witnessed, as that first satellite crossed the early morning sky, motivated our country profoundly, and we demonstrated what we are capable of achieving.

The challenge that we face as a nation today is far more subtle, but no less real. The question is whether we will respond quickly enough with no dramatic event, like a Russian satellite, to spur us on.

The heart of the challenge we face is international competition, foreign competition which operates from a highly favorable domestic economic environment, more favorable than our own. Japanese industry offers a prime example. As Joe Willett of Chase Manhattan Bank is testifying about in greater detail today, Japanese companies are able to operate with higher debt equity ratios and accordingly lower capital costs than American companies, despite the fact that their returns on sales are significantly lower than typical American companies. There are other advantages, but this one is fundamental, and quantifiable.

The Japanese producers have exploited this advantageous position as should be expected. In 10 years, Japanese companies have established themselves as the major threat to U.S. technological leadership in this critical field. The tables attached to this statement show an impressive growth in worldwide sales by Japanese companies. Indeed, in some of the fastest growing segments of the integrated circuit market, the Japanese are enjoying growth rates in sales of 50 to 60 percent every year.

Japan is not alone in fostering the growth of its high technology industries. Electronics News on September 15, 1980, reported that the EEC proposes to embark upon a program to reduce the European lag in microelectronics, essentially semiconductors, at an estimated cost of $140 million over 4 years. This program "would coordinate separate national development efforts to establish a minimum viable common basis in design and production of competitive submicron technology circuits by 1985."

1

Thus, Brussels considers it imperative to mobilize pan-European resources-uni

1 Submicron refers to line widths in silicon chips of less than one micron; today's chips are in the 3-4 micron range of miniaturization.

versities, technical institutions and corporations-to move Europe to a more competitive posture vis-a-vis the United States and Japan than the approximately 10 percent world market share which the EEC currently commands.

With this challenge clearly before us, we need to take up your task force's call for national policies to maintain U.S. international competitiveness. One substantial aspect of this program will of necessity be the adoption of measures designed to offset the competitive structural advantages enjoyed by our competitors.

One key to designing solutions is to keep in mind the need to insure rates of return which take into account the costs of capital in a freely operating market. At present, our cost of capital is 17 percent-compared to 9 percent for Japanese companies and our rate of return is 17 to 18 percent. This is barely adequate for the present. It is at the margin. We cannot afford to see it erode.

With an artificially low cost of capital, it is possible, at a lower rate of return, to finance increasingly costly research and development as well as investment in increasingly costly capital equipment. The prize is to reach the next generation of technology first, to develop it, exploit it, and capture global markets. The price of failure is loss of technological leadership which would not only be costly to the national economic interest, but harmful to the national defense.

One way to lower the cost of capital is to emulate the foreign subsidization of favored industry. While subsidies can reduce the cost of capital over the short term, we are very concerned about possible impairment to the capacity to innovate and the negative effect on rates of return which would naturally follow. We would prefer to develop an American response designed to increase the rate of return sufficiently to neutralize the structural advantages of foreign competitors.

We agree with the Task Force in the need to focus on two areas of action: (a) tax incentives and (b) access for U.S. products in key foreign markets. Specific measures in these areas can create the conditions for rapid, flexible innovation.

TAX INCENTIVES

The enactment of appropriate measures can provide significant help in reducing the disparity between the favorable environment provided Japanese companies and that provided our own. In past years, three-quarters of the new capital of American semiconductor companies has come from reinvestment of after-tax earnings. Thus, sizable tax reductions, particularly reductions aimed at encouraging additional investment in research and development and capital goods, can quickly translate into increased capacity and competitive ability for U.S. semiconductor companies.

New incentives for increased research and development are imperative. To high technology industries such as the semiconductor industry, research and development expenditures are as important, if not more important, than capital goods expenditures. Moreover, economic studies have consistently shown that tomorrow's improvements in productivity are linked in substantial part to the research and development efforts undertaken today by U.S. industry and by the U.S. academic community.

For these reasons we strongly support H.R. 6632, introduced by Mr. Vanik, which provides a tax credit for corporate funding of U.S. university research. Such legislation could provide the initiative for a new period of cooperation between high technology companies and American universities. Equally important, the funds made available to our universities can result in the training of additional students as qualified scientists and engineers, which are vitally needed in growing numbers by high technology companies.

We also support H.R. 7983, introduced by Congressmen Pickle and Vander Jagt, and co-sponsored by Mr. Frenzel, which would provide a 25 percent tax credit for increases in in-house research and development in the current year over that of the past three years. This provision was approved overwhelmingly by the Senate Finance Committee in its consideration of tax cut legislation last month. The legislation would provide increased cash flow to high technology companies out of which additional research and development expenditures could be funded. Moreover, it would reduce the after-tax cost of additional R&D expenditures, thereby providing substantial encouragement for companies to devote a high proportion of their scarce financial resources to research and develoment activities. We believe that passage of both of these provisions would provide the kind of strong government support for private sector research and development which is imperative if the United States is to meet international competition.

The Semiconductor Industry Association supports depreciation reform as is reflected in "10-5-3" and other proposals, including that approved by the Senate Finance Committee last month. However, semiconductor manufacturing companies under present law depreciate most of their equipment over five or fewer years for