Chip Accord Is Turning Point for U.S., Japan

The United States ran a $15.3-billion trade deficit last year in clothing and apparel, yet President Reagan vetoed legislation to protect that industry with its thousands of low-wage jobs. But for the semiconductor industry, his Administration fought hard in negotiations for a full year and last week imposed an extraordinary trade agreement on Japan.

Two questions: First, what’s so special about the semiconductor business? Its pain doesn’t seem severe compared to, say, motor vehicles, in which the United States ran a $39.8-billion trade deficit. In the non-consumer electronics industry, of which semiconductors are a part, the United States enjoyed a $2.4-billion global trade surplus last year--even if it did run an almost $10-billion deficit with Japan. Second, is this trade agreement likely to help the U.S. electronics industry any more than all of those quota deals helped cars and steel?

What’s so special is simple. The electronic components called semiconductors form the central nervous system of modern industry, from computers and telephones and factory machines to car engines and coffee pots. Advances in the technology of semiconductors power advances in practically all industry.

Industrial ‘War’

Therefore, the country that leads in semiconductors controls the pace of change in dress manufacturing as well as metal bending, and it will provide jobs not only for computer designers but for dressmakers and metalworkers, too. That’s why competition in these electronic products has been called the industrial equivalent of war.

What is special about last week’s agreement is that the American government acted directly to help U.S. companies in all foreign markets, including Japan, as well as to protect them in the U.S. market. In the agreement, the Japanese Ministry of International Trade and Industry (MITI) commits itself not only to monitoring Japanese semiconductor prices in the U.S. market but in every other world market as well, from West Germany to South Korea and from Taiwan to China. The ministry also commits itself to help U.S. and other foreign companies gain a larger share of Japan’s big semiconductor market.

Ostensibly, the worldwide monitoring is to prevent Japanese companies from dumping microchips in the U.S. market by way of third countries. But the real thrust of the U.S. action is aimed at ending Japan’s practice of adversarial trade. This marks a turning point in relations between the two nations, one that friends of Japan--notably management expert Peter F. Drucker in an essay this year on the “Perils of Adversarial Trade”--warned was coming.

Rules of Mercantilism

A nation practices adversarial trade when it tries as far as possible only to sell to the rest of the world, not to buy from it; it practices adversarial trade when it targets specific industries and builds its own companies into the exporting equivalent of football’s outlawed flying wedge. Adversarial trade doesn’t play by the rules of comparative advantage, which in the classic example trades the wine of Portugal for the wool of England, but by the rules of mercantilism, in which one nation prospers at the expense of others.

U.S. makers of television sets, automobiles and steel have accused Japan of practicing adversarial trade for years. But the verdict generally has been that the accusers wouldn’t have lost business if they had invested as much, worked as hard or made a product as good as the Japanese.

U.S. semiconductor makers don’t fit that mold, however. Companies such as Intel, Motorola, Texas Instruments and Advanced Micro Devices are known for investing heavily in research and development, for innovating constantly and for competing fiercely here and overseas. In pushing for last week’s agreement, the U.S. government obviously decided that there were reasons other than fair competition why American companies run a surplus with the world but a deficit with Japan, and why Motorola’s microprocessors are in practically every car engine in the world--except those built in Japan.

In a sense, Japan’s MITI pleaded nolo contendere in the agreement, admitting no wrongdoing but promising not to do it again--and adding its extraordinary promise of international monitoring.

So what happens now? Can U.S. companies really compete?

Of course they can. In the greatest advance of the semiconductor art, the computer-on-a-chip (or microprocessor), two U.S. companies--Motorola and Intel--dominate both the technology and world markets.

Japan’s challenge, essentially, has been in memory chips, which are at the low end technologically and price-wise. But, clearly recalling that Japan’s challenge in cars and office copiers, cameras and TV sets began in the low end and eventually ate whole industries, the United States decided that semiconductors were too important to leave to the mercies of adversarial trade. The agreement marks a turning point.