IMPORTS OF SELECTED PRODUCTS FROM TAIWAN TO JAPAN AND THE UNITED STATES, 1978 AND 1979

1 Japanese value data reported in thousand yen have been converted to U.S. dollars at IMF rate of 194.60 yen per dollar for 1978 and 219.17 yen per dollar for 1979.

2 Japanese import data from "Japan Export & Imports," Japan Tariff Association.

3 U.S. import data compiled from official statistics of the Department of Commerce. 4 Less than $50,000.

Chapter V: Long-Term Future Industrial Problems and the Need for a U.S. Response

In this report, our principal goal is to encourage U.S. Government and business leaders to focus on long-term structural problems in our bilateral relationship and to begin to find solutions to those problems. As we indicated in our last report:

Part of the certainty of a continuing trade crisis with Japan is due to Japan's industrial policy which has recently targeted or set as a goal Japanese leadership in high technology fields presently dominated by the United States and constituting our areas of strongest exports: computers, advanced electronics, telecommunications equipment, industrial robots (possibly aircraft, at least at the coproduction stage), etc.

These are the high value industries of the future and it is perfectly logical that Japan should be moving out of older, labor intensive, and less sophisticated industries into these new "21st century" fields.

The problem lies (1) in the way [i.e., the use of subsidies] that Japan is achieving this transition; and (2) U.S. failure to have a comparable industrial policy in which there is a consensus in American business, labor, and government of where we as a society should be going.

We believe that the Japanese threat in these high technology areas may soon become the most explosive economic issue between our two nations.

Japan is now or will soon be challenging America in a number of key industrial product lines that will raise further questions about U.S. technological leadership.

We believe that Japan's rate of industrial progress and stated economic goals should be as shocking to Americans as was Sputnik. And like Sputnik, we should be shocked into responding to the challenge. Nothing could serve the world economy better than good, clean competition with Japan in high-technology innovation. It is time that we respond to the Japanese economic challenge. As with Sputnik, we did not block Soviet efforts we bettered them. The same approach should guide us in dealing with Japan; we don't need protectionism-we need to make our own economy better.

Following are some examples of high technology areas where the Japanese are either gaining on our traditional leadership or have already surpassed us. It is worth looking at their activities in these areas to obtain a sense of the challenge facing America in some of the high-technology "products of the future." The latter part of the chapter discusses some of the reasons for these challenges and how America can respond.

SEMICONDUCTORS AND COMPUTERS

Semiconductors-the building blocks of computers, and the key to telecommunications and "smart machines"-have been described as industry's "oil" of the future. The implication is that in the future, who controls the latest developments in the semiconductor field will be in a position similar to OPEC in the energy field.

Japan has caught up to the United States in semiconductor technology and in certain areas may be ahead of us.' While each nation supplies about 5 percent of the other's semiconductors, last year, the Japanese captured 42 percent of the most advanced part of the market, the 16K RAM. This places them in an excellent position to capture the profits from this high technology product and to compete better in the next "generation product", the 64K RAM. There is serious concern within the U.S. electronics industry that Japan may become dominant in the development of the latest model "chips", which will increasingly ensure her future dominance in the growing area of machines and devices using evermore dense and complex microcircuits.

Japan has achieved her success in semiconductors because of programs "targeting" this key industry for growth. But in addition to government promotion programs, portions of the U.S. semiconductor industry fear that the very structure of the Japanese economy and its ability to supply lower-cost capital to firms will create fundamental, long-term problems for the U.S. industry.

The Subcommittee has explored the semiconductor issue in two field hearings within the last year. While these hearings have probably raised as many questions as they have answered, several things are clear:

1. We did not find in Japanese imports any clear evidence of the traditional types of unfair trade practices;

2. Following the last recession, the domestic industry does not appear to have had enough capital to expand capacity sufficiently to meet the demand which has developed in the past several years. Japanese firms, on the other hand, had access to capital, concentrated resources on expansion, and have participated dramatically in meeting the recent domestic demand for "chips".

3. Japan has supported the development of her industry, through preferential government procurement practices (see for example the discussion on NTT): trade protection through significantly higher tariffs than exist in the United States, and customs difficulties (such as arbitrary uplifts); and joint, subsidized R. & D. projects (such as the VLSI lab).

Progress on item 3 above has been very slow. As the discussions on NTT indicated, changes in Japanese Government procurement may not occur. Japan is gradually reducing her tariffs on semiconductors, but the rate of reduction is slow and is a disadvantage to the United States in the face of Japan's competitiveness. Japan has, however, offered to make the results of her joint research projects available to foreigners, and this cooperation is appreciated. Our inability to sell more of these high technology products into Japan is troublesome and we urge the Administration to continue to explore access problems.2

1 Nihon Keizai, March, 1980 issues. There have also been allegations that the quality of Japanese chips is better than the U.S. product, but the evidence in this area is very unclear. See, for example, the Subcommittee's hearings on semiconductors at Farmingdale, N. Y., April 28, 1980.

2 Mr. L. J. Sevin, Chairman of the Board and Chief Executive Officer of Mostek Corp. made an interesting point in testimony before the Joint Economic Committee, October 10, 1979:

"The Japanese have vociferously defended their protectionist policies. For example, we hear a litany of excuses why the Japanese do not import more U.S. goods, which include: out-of-date and inefficient U.S. factories; declining U.S. labor productivity; poor U.S. quality and lack of quality control; and the U.S. has forfeited export opportunities.

"These arguments simply do not apply to the U.S. semiconductor industry. Our labor productivity is extremely high. Objective tests show that our quality is unsurpassed. And our export effort has been remarkably successful everywhere, that is, except Japan, where the governmental policies frustrate meaningful import competition.

"To sum up, in my view anyone who applies the traditional Japanese arguments to the U.S. semiconductor industry simply does not know the history of our industry. We have not been 'reluctant exporters.' We have, however, been stonewalled in Japan."

Items 2 and 3 point to serious, long-term problems:

-The Japanese semiconductor firms tend to be large, intergrated companies which manufacture semiconductors partly for their own use and partly for sale (merchant trade);

-With several exceptions, the U.S. semiconductor firms tend to be smaller, merchant companies, selling their "chips" to others for end product use; and

-Research and production costs in the industry are rising rapidly and it is easier for the larger Japanese firms to find the capital to meet these rising costs; as a result, the domestic industry faces serious future problems as a result of the basic difference in the structure of the two nation's industries.

The U.S. industry can respond to this basic structural difference by merging and becoming part of corporations which are end users of semiconductors. To some extent, this may be an "evolutionary" development which is already occurring. There is concern, however, that the fantastic creativity of the small domestic companies will be stifled in larger firms and there is special merit in encouraging the maintenance of small, independent, U.S. producers. Various changes in tax and research policy (described in pp. 47-50) may help independent companies survive in the face of Japanese competition. Without changes in the basic structure and domestic operating conditions facing the semiconductor industry, we can expect that the U.S. firms will continue to lose world and domestic market share to the Japanese.

As stated, semiconductors are the building blocks of computers. Japan has used support programs similar to those used in semiconductors to promote her computer industry, and success in semiconductors will "drive" her computer industry to future successes. Already, Japan is considered the approximate equal to the United States in hardware (computer mainframes and support equipment). For example, Japan is the only nation in the world where U.S. computer firms do not have the majority of the market. In the last few months, a Japanese computer firm displaced IBM of Japan as the number one seller of computers in Japan. Japan is planning for a major share of the world computer market-a drive which will cut into one of the principal areas of U.S. export leadership. For example: "By 1985, (Japan) plans to sell some ¥384 billion ($1.66 billion) worth of computers in the U.S.-some 15% to 20% of their total production and 60% of their total exports .

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As in small autos, the Japanese will be particularly competitive in the smaller, individual office and home type computers which will probably be the big growth market of the future.

The Japanese are generally considered behind the U.S. computer firms in the quality of their software (programs)* and they have formed a computer software "cartel" or joint research project to up-grade and become more competitive in writing software. They are also providing special tax deferrals for software operations.

Japan also has a long-range vision to create the "5th generation" of computers. This effort, encouraged by MITI and relying on joint research, seeks to take a look at the fundamentals of computers and design new systems for the years beyond 1990. While individual U.S. companies are undoubtedly planning for the computers of the 1990's

3 From a survey/series of interviews by Anthony Durniak, "U.S. Beachhead for Japanese Computers Is Only the Start," Electronics, March 27, 1980, vol. 53. 4 Even this may be questionable. Ibid., p. 33.