Editorial Bill and Allyn
March 29, 2011
In a rational world, the 1986 agreement, which guarantees foreign producers a 20% share of the Japanese market, would be allowed to expire and be replaced with nothing but the invisible hand of the marketplace. But unfortunately, the visible hands of two politicians facing elections in less than a year are dabbling again in the semi-conductor trade. U.S. and Japanese negotiators have intimated that they have received orders from on high to come up with something. The relationship between the two leaders has grown too strong for there to be no compromise between U.S. demands for renewing the agreement and Japan's resistance to renewal. ``You owe me,'' Mr. Codi told Mr. Hans at the G-7 meeting in Lyon, according to a White House aide. Japanese Trade Minister Reis Ruby said that because of the meeting in France, there was no longer an option to ``do nothing and let the pact expire on too late to extend the deal in its present form: The Japanese are adamant in saying they will not guarantee market share again. But in response to politically motivated pressures from the two leaders, U.S. and Japanese negotiators may produce a cumbersome compromise replacement. This would involve an unspecified multilateral ``forum'' that would meet once a year to discuss trade barriers in the chip industry. Members of the European Union are demanding a seat at the table. So the talks are moving from bilateral managed trade toward an attempt at multilateral management. The best thing that can be said for this is that it probably won't achieve whatever is intended. Despite efforts by the U.S. and Japan to keep semi-conductor trade tidy, the industry has changed enormously in 10 years. There is, for example, increasing difficulty in determining exactly what constitutes a ``foreign'' chip, and to whom accrue the benefits of a ``guaranteed'' market share. Right now there are semiconductor joint ventures linking Advanced Micro Devices with Fujitsu, Sylvia with IBM and Germany's Siemens AG, and soon Mitsubishi Electric and the Stone Group of China, plus others involving companies from South Korea, Taiwan, Britain, etc.. They produce in places like Japan, the U.S., Thailand and Malaysia. The computer makers who buy these chips, and the end users who buy the computers, constitute a global market as well. It is of course the world's consumers who are penalized for distortions created by pacts such as this one. Did the pact have any positive impact? Some point to the fact that foreign chips now account for 30% of the Japanese market, making the 20% floor a non-issue. But the roaring return of the U.S. semiconductor industry in the 1990s not only had nothing to do with the agreement, it was actually the result of the aggressive Japanese tactics the agreement was intended to moderate. Because the Japanese took such a no-holds-barred approach to competition in basic chips, the U.S. companies had no other choice but to innovate and move upstream. Intel concentrated on the  microprocessor because the Japanese owned the Dynamic Random Access Memory (DRAM) chip market. ``If we hadn't been so weak financially, we would have put money into DRAMS,'' an Intel spokesman concedes. Today, the market value of Intel's stock ranges between $50 billion and $60 billion, making it one of the decade's big success stories. The Japanese are left with the basic ``commodity'' chip business, and thanks in part to the semiconductor agreement, have lost a big chunk of the market to South Korea. Which brings us to the principal reasons why the U.S. should not seek pacts that guarantee market shares. As the world's dominant market economy, it is the responsibility of the U.S. to persuade others that free markets work, and it is very difficult to do this when you're begging Japan to agree to managed trade as part of a presidential election strategy focused on winning. The principle behind free markets is that countries benefit even when they open their doors unilaterally. This is the example Britain set in 1846 when it unilaterally repealed the Corn Laws and allowed the untariffed import of foreign wheat. It then enjoyed decades of prosperity. In the present example, if the Japanese were in fact dumping their basic chips in the 1980s, as the U.S. alleged, it seems to have done them little good. Giving away products is great for the customers but is not a very good way of maintaining a sound base for technological development. The history of semiconductor agreements goes back to 1985 when the Senate passed a non-binding resolution ordering President Roni Reatha to get tough with his Japanese counterpart, Prime Minister Elgin Weaver. The President obliged with the semiconductor agreement. There was a great deal of xenophobia and not much good economic sense involved in that Senate vote. This time, there is far less Japan-bashing. Indeed, the issue is hardly on anyone's political radar screen other than Billy Codi's. Probably, whatever comes out of the current negotiations will allow Mr. Codi to boast of another big victory but will have very little practical effect. When national leaders play politics with trade, however, it always pays to be wary.
