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tax purposes and receive at most a two-thirds investment credit on that equipment. Many depreciation reform proposals provide little benefit for such short-lived equipment. Indeed, under some proposals, including “10-5–3” if made mandatory, the period of time over which such equipment can be depreciated would actually be increased over present law. We believe that any proposal for depreciation reform should provide for a two or three-year useful life for such equipment and a full investment tax credit. Such a proposal is the only way in which depreciation reform can provide significant tax benefits for innovative, growth companies with shortlived equipment.
In addition to the R&D tax credits and modifications to depreciation reform proposals, the Semiconductor Industry Association supports other tax measures on which we and others have commented more extensively elsewwhere. These include reduction in the corporate tax rate, lowering the maximum capital gains tax, the reinstatement of qualified employee stock options, and the provision of an exemption for the earned income of Americans working abroad. However, the main point we wish to stress here is that tax legislation aimed at providing R&D incentives and aimed at significantly increasing the tax benefits from depreciation and the investment credit for short-lived equipment can significantly aid the semiconductor industry in maintaining its world leadership.
The U.S. semiconductor industry has proven its ability to compete effectively in world markets. With the right combination of domestic and international trade policies, it can retain the competitive edge it has gained in international markets by virtue of American innovativeness and entrepreneurship. In the international domain, what is needed is a trade policy which insures for U.S. products access to key foreign markets.
For Japan, the Task Force report correctly points out that there continue to be restrictions which limit access to U.S. products. As a matter of national policy, the compelling argument for greater access to the Japanese market is that we have an opportunity to manage a potential trade problem before pressure builds for a protectionist response. Both countries' industries would benefit from a mutual reduction of remaining barriers.
Japanese companies have become world class competitors. Operating initially from a relatively protected market, they have developed the technology, improved the capacity and established themselves in the high growth, high value added markets, the markets which are the future of this industry. Perhaps best known is their success in the 16K RAM market in which they have acquired a 42 percent share of the world market over the last five years. Even more impressive is their showing in the state-of-the-art market for 64K RAMS—the new microprocessor which can hold up to 64,000 bits of information. According to this Tuesday's New York Times, Japanese companies are ahead of the United States in introducing models of the 6ĀK RAM and are in a position to acquire 50 percent of the world market for that product.
Our trade balance with Japan in semiconductors also reflects the growing competitiveness of Japanese producers. Imports from Japan have risen sharply since 1978, increasing 138 percent from 1978 to 1979 and an estimated 88 percent from 1979 to 1980, even in a period of general recession. Meanwhile, demand for U.S. semiconductors in Japan has significantly dampened. Japanese imports from the United States increased just 54 percent from 1978 to 1979 and only an estimated 3 percent from 1979 to 1980. There has clearly been a trend toward more domestic sourcing and away from purchases of U.S. semiconductors.
Looking to the future, these trends suggest an all too familiar pattern in U.S. trade relations with Japan. One could easily predict a potential conflict should the U.S. industry turn to seeking restrictive measures to respond to increasing Japanese import penetration. Such a response is not, however, inevitable. The U.Š. industry has proven its ability to compete and will continue to compete effectively in international markets. With the trade measures outlined below and a consistent domestic policy rewarding innovation and providing an environment for a healthy U.S. industry, U.S. companies are fully prepared to meet the challenge from Japanese competitors.
What is needed is a renewed commitment to reciprocal market access. In this respect, the United States and Japanese Governments should pick up where the MTN agreements left off. Two areas are critical to this effort: The opening of procurement by the Nippon Telephone and Telegraph Corporation (NTT), and the elimination of the remaining tariff barriers existing in Japan to semiconductor imports.
Access to NTT procurement would allow U.S. companies to compete for the $2.9 billion of telecommunications equipment procured annually by NTT. While U.S. semiconductor companies do not produce the electronic switching equipment which will be a major portion of NTT procurement as it converts from the electromechanical devices currently in use, a substantial portion of the value of this electronic switching equipment consists of semiconductor devices. Therefore, access to NTT procurement could open a substantial new market in Japan for the sale of semiconductor components. To insure that U.S. semiconductors can be purchased by both Japanese and American companies which offer their products to NTT, a mechanism should be implemented which would protect U.S. component suppliers against any discriminatory standard-making or specification-setting activity
Even more important than NTT in improving access for U.S. semiconductors in Japan is reduction of the Japanese duty on semiconducors. As the Subcommittee is aware, an agreement was reached in the MTN between the United States and Japan which was designed to achieve the objective of harmonizing reciprocal duties on semiconductors by 1987. A final rate of 4.2 percent will be achieved by the gradual staging of reductions over the next eight years. However, because the Japanese reduction begins from a much higher base, namely a 15 percent GATT bound rate and a 12 percent applied rate, the United States will continue to have a relative disadvantage in the Japanese market until 1987. (Currently, the Japanese tariff is nearly twice that of the U.S.-10 percent to our 5.8 percent.)
The Semiconductor Industry Association is not calling into question the basis for that agreement. What SIA seeks is that an additional step be taken now to furher liberalize reciprocal access. That first step would consist of accelerating the reduction in duties so that by April 1, 1981 the United States and Japan would each put in place a tariff of 4.2 percent. Both semiconductor industries stand to benefit from such an agreement. Clearly, it is essential to Japan_that it have an assurance of continued open access to the United States market. For U.S. producers, the agreement would give an opportunity to compete head-to-head with the Japanese producers in their home market with the single most visible inequality in the conditions of competition removed.
Agreement to provide immediate tariff parity would serve to reaffirm the commitment of the United States and Japan to compete on an equal basis in a free international market. Additionally, the agreement would signal a commitment to eliminate all remaining restrictions in trade in high technology items. Ultimately, a free trade arrangement can be envisaged which would, like the Agreement on Trade in Civil Aircraft, eliminate remaining tariff barriers and establish principles governing the imposition of nontariff barriers. The SIA sees accelerated staging as the first step in this ultimate free trade arrangement and would support legislation authorizing the President to negotiate and implement an agreement with Japan leading to the total elimination on a reciprocal basis of tariffs on semiconductors.
Finally, I would like to make some comments about the development of a national industrial policy. We
agree with the Subcommittee that we cannot continue the essentially de facto industrial policy which has been in effect in the United States for the past several years. We can no longer afford Government policies and measures which provide a deteriorating environment for our industries, reducing the international competitiveness of our companies. We must reverse the trend toward lower productivity growth rates, lower real wage gains, declining R&D and rates of capital formation in the nation as a whole.
We believe that an effective industrial policy. should be based on a systematic analysis by the U.S. Government of the kinds of measures needed to allow maximum freedom for initiatives in the private sector to contribute most significantly to improvement in the overall economy, in savings, capital formation, and export competitiveness. The Task Force Report is a welcome beginning to the process of finding an appropriate American response to the foreign industrial challenge.
2/ Semiconductor Industry Association. Includes not only U.S. exports,
exports from U.S.-owned plants abroad as well.
3/ Calculated by multiplying January-June 1980 actual shipments times 2 to annualize.