49

As the research professor at the Brookings Institution

who authored the cited study subsequently explained,

"Perhaps the most important area where much more
concern is needed about the possible adverse effects on
trade of various policies is that of government subsidies
to various domestic groups. Domestic subsidies differ
from export subsidies in that they are made to producers
whether they export their output or not. However, those
that do sell abroad obtain an artificial competitive advan-
tage in export markets over foreign producers just as
if they alone had received the subsidy. Domestic producers
are also given a special advantage in competing against
imports. In short, domestic subsidies have the same
directional effect in distorting trade as export subsidies
and import duties."47

The Government of Japan has fostered the vigorous growth
comprehensive program of subsidies

of its electronic industry under

established under the Provisional Measures Law concerning the Promotion of the Electronic Industry.4 48 This program emphasized the exportation of consumer electronic products as well as the development of the technical competence of the Japanese industry in industrial electronic apparatus.

Under the law, members of the Japanese electronics industry were formed into an "Electronics Industry Deliberation Council," which operated as an advisory group in conjunction with the newly established electronics industry section of the heavy industry bureau of the Ministry

47 Robert E. Baldwin (Professor of Economics, University of Wisconsin), "Nontariff Distortions of International Trade," as published in Volume I, Compendium of Papers Submitted to the Commission on International Trade and Investment Policy, Washington, D. C., July 1971, pp. 641, 649-50.

48 Law No. 171, June 11, 1957, as amended by Law No. 95, 1964.

50

of International Trade and Industry. These private and public advisory groups collaborated in fostering the development of the electronics industry in Japan. The specific object of the program was to strengthen the competitive position of the Japanese electronics industry against inroads into the Japanese market by U. S. electronics products, and to promote the strong penetration of the U. S. electronic products markets by Japanese products.49

During the life of this fourteen-year program, the development by the U. S. electronics industry of the technology of integrated circuits signaled an impending revolution in the sophistication of both consumer and industrial electronic products, their circuitry, and component materials. The Japanese Government reacted to this development by adopting a policy of supplying firm "guidance" for the restructuring of the Japanese electronic industry in order to fortify it against the anticipated intensification of competition from the U. S. industry. A keystone of this policy was to exclude foreign manufacturers of integrated circuits from the Japanese market. Further, the Government of Japan directed a threefold restructuring of the electronic components industry:

1. Mass production of integrated circuit semiconductors

was assigned to the giant integrated electronics firms
in Japan;

49 "Study of the Japan Electronics Industry," Coral, Incorporated, Japan, 1 November 1967, as published by U. S. Dept. of Commerce, BDSA, Foreign Market Survey PB 177 883, pp. 3, 4 (supplementary report).

51

نه

The production of large-scale integrated circuits

(LSI's) was assigned to the large nonintegrated elec

tronics firms in Japan; and

3. The thin film and hybrid IC's, which did not lend them

selves to mass production techniques, were assigned

to medium and small firms, which the government then
required to merge into larger groups under a "cartel

system" financially supported by the Japan Development
Bank.

This program was carried forward by "the delicate process of 'admin-
istrative guidance.'"50

The techniques employed in the execution of this vast program of the subsidization and restructuring of the Japanese electronics industry included a determination by MITI, based on advice from the Electronics Industry Deliberations Council of (1) the desirable kinds of technologies to be developed by the Japanese electronics industry, (2) the targets for achievement of technical competence, production capabilities, and cost reductions to be undertaken by the industry, and (3) the financing of such activity through a combined program of grants, low-interest loans, and tax incentives.51

The program includes outright grants to finance research and development (including prototype production runs), low-interest

50 "Study of the Japan Electronics Industry," op. cit., pp. 4, 5. 51 U. S. Dept. of Commerce, Bureau of International Commerce, Foreign Market Survey, DIB 71-04-504, November 1970, p. 94.

52

loans to finance capital investment in the creation or expansion of
capacity, as well as the modernization of facilities and the ration-
alization of production,5 52 special depreciation allowances on such
investment for tax purposes, the deferral of expenses connected with
the sale of such products in export markets and other favorable tax
treatment of costs incurred in developing export markets,5
53 and the
remission of internal taxes on exports.

Under this comprehensive subsidy program, MITI annually designated in three groups the specific electronic equipment, components, and materials which were to be subject to assistance under the program. These groups and the number of products designated for assistance thereunder during the fourteen-year life of the program were as follows: 1. Those particularly necessitating the promotion of

research and development; a total of 133 designations.

2. Those particularly necessitating the start of industrial production or an increase in production volume; a total of 18 designations.

3. Those particularly necessitating rationalization of production facilities; a total of 179 designations.

products:

These designations included the following categories of

52 U. S. Dept. of Commerce, Bureau of International Commerce, Foreign Market Survey, DIB 71-07-509, January 1971, pp. 92-95.

53 Finance Ministry Notification No. 56, April 1970; Law 26 of 1957; Cabinet Order 43 of 1957; MITI Notification 183 of 1968.

1971.

Group 1, 13 designations;
Group 2, 3 designations;
Group 3, 22 designatios.

Other electronic parts, components, and materials

(including electron tubes and passive components);

Group 1, 28 designations;
Group 3, 109 designations.

The 1957 law, as amended, expired on March 31, 1971. It

was superseded by the "Specified Electronic Industry and Specified Machinery Industry Promotion Temporary Measures Law," effective April 1, 54 Under the new law, financial assistance in the form of grants, low-interest loans, and tax incentives, and overall policy direction will be supplied by the Government of Japan to specific sectors of the

54 Law No. 17 of 1971.