September 18, 1985
"Semiconductor Trade Complaint Fails to Make the Case"
San Jose Mercury News
By Timothy Taylor
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SEMICONDUCTOR sales worldwide may fall 25 percent this year, so it's no wonder that Silicon Valley manufacturers are screaming. The Semiconductor Industry Association has reacted by filing an official trade complaint against Japanese barriers to U.S. chip exports.

It would be nonsensical to assert that the Japanese have a wholly open market. No country does, including the United States. But the evidence is very weak that Japanese trade practices are the major cause of the problems of the U.S. semiconductor industry.

In its supporting memorandum to the Office of the U.S. Trade Representative, the SIA argues that the Japanese government created a permanent barrier to U.S. chip exports by encouraging a close-knit market structure in the 1960s and early 1970s, in which a handful of major Japanese corporations only buy from and sell to each other. Once that pattern was established, the SIA argues, it has persisted without any necessity for the government to intervene again.

To splinter the combine, the SIA proposes that the U.S. trade representative negotiate with the Japanese government to require Japanese firms to buy a certain quota of American-made chips. The SIA also wants the Japanese government to investigate Japanese semiconductor manufacturers for antitrust violations and dumping.

The SIA argument is something of an innovation in trade law. Instead of being aimed at a particular foreign quota or tariff, the request is for Japan to fracture a successful industrial structure to benefit foreign manufacturers.

The SIA petition does not acknowledge that the structure of American industry is largely a result of government intervention as well. Pressure and funding from the military in the late 1950s created a variety of small semiconductor startups that have grown into some of today's industry giants. As late as 1965, defense bought 70 percent of the chips produced in this country.

That emphasis continues today with the government supporting research on Star Wars and the Very High Speed Integrated Circuit program. Military and aerospace users already buy 9 percent of chips made in the United States, and those sales are projected by Integrated Circuit Engineering Corp. to grow at 24 percent annually.

The U.S. manufacturers produce the bulk of their chips for data processing, with only 8 percent of their chips for consumer electronics. But the Japanese firms produce half of their chips for personal computers, VCRs, stereos and so on.

If two business enterprises choose a different emphasis, and then one has a difficult time selling to the other, no unfairness has occurred. The SIA complaint is a persuasive history of why Japan chose its route, but decade-old reasons for why a situation developed don't prove that trade barriers exist today.

The U.S. government disadvantages American chip manufacturers. Huge budget deficits have contributed to a strong dollar. By keeping the dollar about 20 percent above historical levels, even after its recent decline, deficits make U.S. products more expensive to foreign buyers.

Because the tax and retirement policies of the Japanese strongly encourage consumer saving, the Japanese save at three times the rate of Americans. The greater supply of savings is one main reason that the prime rate in Japan is now four points lower than in the United States. Japanese companies can take on more debt at lower cost, and invest in new facilities for less expensive production. In the face of these disadvantages, the U.S. industry has maintained about an 11 percent share of the fast-growing Japanese market, according to SIA statistics, while the Japanese share of the U.S. market hit 17 percent in 1984. The SIA requests that as an "interim" step, U.S. chip exports to Japan should jump 50 percent by next year, so that American firms have as much of the Japanese market as Japanese firms have of the U.S. market.

Leave aside whether equal market shares -- certainly not a principle the U.S. wants to uphold for every product -- even make sense. Leave aside the fact that the SIA statistics exaggerate the Japanese share of the U.S. market by leaving out 32 percent of the domestic market-- chips produced by companies like IBM and AT&T for their own use. Leave aside the fact that Japanese firms could complain that with 28 percent of the rest of the world market, they deserve a greater guaranteed quota in the United States.

Leave aside the Japanese emphasis on consumer electronics and the U.S. emphasis on military and data processing. Leave aside that the president of Fairchild Instrument and Camera has disavowed the SIA petition, that his company and Motorola, and Texas Instruments are investing heavily in Japan and must be expecting to sell to someone.

Leave aside the fact that the Japanese have just as many horror stories of poor American chip suppliers as the SIA does of unwilling Japanese chip purchasers. Leave aside a 1984 Hewlett-Packard study that found U.S. dynamic RAM chips to be three times less reliable than Japanese chips.

Accept for the sake of argument that U.S. firms should have at least the same share of the Japanese semiconductor market as the Japanese have of the American market. The SIA calculates that if that policy had been enforced from 1982 to 1984, it would have brought in an extra $600 million in sales.

Consider that figure. Semiconductor sales of U.S. companies from 1982 to 1984 totaled $29 billion, according to Dataquest. How much difference could an extra 2 percent have made? Sales went from $6.8 billion in 1982 to $13.4 billion in 1984, and may fall to $10 billion this year. If that varied by a couple hundred million, what difference would it make to the overall situation domestic manufacturers face?

Japanese semiconductor manufacturers do pose a powerful competitive threat to the U.S. industry. Perhaps any weapon, including trade complaints, should be used in the battle. But Japan is not some economic runt that will cripple one of its key industries in response to U.S. political pressure. The chip wars will be won in wafer fabs and R&D facilities, not in the offices of trade representatives.

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