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Technology and Global Industry: Companies and Nations in the World Economy (1987)

Chapter: Coping With Technological Change: U.S. Problems And Prospects

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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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Suggested Citation:"Coping With Technological Change: U.S. Problems And Prospects." National Research Council. 1987. Technology and Global Industry: Companies and Nations in the World Economy. Washington, DC: The National Academies Press. doi: 10.17226/1671.
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COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 160 Coping With Technological Change: U.S. Problems And Prospects RAYMOND VERNON The consequences of technological change on economic activity are extraordinarily diverse, and any effort to single out a "dominant" consequence that will overwhelm all the others is certain to fail. But to think seriously about public policy responses requires making guesses about the nature of future problems, distinguishing the exceptional from the commonplace, and differentiating the dominant from the trivial. This chapter will begin, therefore, by examining a set of broad generalizations about the economic consequences of technological change over the last four or five decades, generalizations that reach beyond the available facts in some respects to create a basis for policymaking. BASIC SHIFTS One development that deeply concerns policymakers is an apparent secular decline in the relative world position of U.S. industry, a decline that is usually attributed to a fall in U.S. industrial competitiveness in world markets. The idea of a decline in the "competitiveness" of any given sector in a national economy is not easy to define and document. It is not yet clear whether or not we understand the nature of the structural changes that have been going on in the U.S. economy during the past 20 years or so.1 Consider, for instance, the changing role of manufacturing in the U.S. economy. Some data point to the conclusion that the manufacturing sector of the U.S. economy has declined in relation to the U.S. economy as a

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 161 whole. For example, some shrinkage in the relative share of the U.S. labor force devoted to manufacturing occurred during the late 1970s and in the 1980s.2 Over the longer term, the contribution of the manufacturing sector to the country's GNP, when measured in current dollars, fell from 28 percent in 1960 to 21 percent in 1983. But during the same period, the manufacturing sector's contribution, when measured in constant dollars, hovered around 23 percent without a clear trend (Economic Report of the President, 1985, p. 244). Data that purport to measure national output in "constant prices" over a period as long as two decades are inescapably vulnerable. Yet, those data suggest that the apparent relative decline in manufacturing was due to a relative fall in the prices of manufactures rather than to a fall in real output. If that suggestion were based on more robust figures, it would put a wholly different complexion on the seeming decline in U.S. manufacturing over the past two decades. Those who believe that U.S. industry is losing in competitiveness also point to a decline in the importance of U.S. merchandise exports relative to the exports of all developed economies, a trend that has included such important sectors as chemicals, machinery, and automobiles (Lipsey, 1984, p. 70; United Nations, 1983, pp. 1046, 1048). Are these developments consistent with the idea of a decline in the competitiveness of U.S. manufactures? Since 1945 the number of producers and consumers on the world scene has undergone an extraordinary increase. Outstanding among this new contingent of producers and consumers have been the Japanese people and the populations of the various newly industrialized countries—notably, Korea, Taiwan, Hong Kong, Mexico, Brazil, and even India. And soon China will be joining the list. The emergence of these new producers and consumers in world markets has depended on various factors, including some extraordinary improvements in the technology of transportation and communication—improvements that have greatly reduced the costs to these late-industrializing countries of assimilating information from foreign countries and of moving goods and people across great distances. Once the information barrier was overcome, the comparative advantage of these countries shifted in favor of manufacturing activities, a shift that in the first instance was based largely on their wage structure in industry. The same technological changes in communication and transportation have contributed to the spread of U.S.-based multinational enterprises over the past four decades. Technological advances have reduced the cost of search for new locations on the part of multinational enterprises. And as multinational enterprises have gained experience at such locations, their responses to subsequent opportunities have been quicker and more assured.

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 162 To be sure, some multinational enterprises have drawn back from various foreign locations in recent years, reacting to political threats or poor profits or both.3 But, over the long run, U.S.-based enterprises have been drawing on foreign facilities with increasing alacrity as their experience with such facilities has broadened and deepened. For instance, a systematic study of the behavior of 57 manufacturing enterprises in the period from 1945 to 1975 dramatically illustrates the ratcheting effect of past experience on the disposition of those enterprises to set up additional facilities in foreign countries. In the decade after World War II, U.S.-based multinational enterprises that were entering on the manufacture of a new product typically allowed a considerable number of years to pass before setting up a manufacturing facility for the new product in a foreign location. By the 1970s, however, that lag was typically much shorter; and the greater the foreign experience of the firm, the more dramatic the shortening of the lag (Vernon and Davidson, 1979, pp. 37-62). The reactions of multinational enterprises to the revolutionary improvements in communication in recent decades have taken other forms as well. Such improvements have allowed enterprises to manage their various subsidiaries as related units in a unified system rather than as isolated freestanding investments. And the unitary approach has encouraged some multinational enterprises to plan their financing, production, and marketing activities on a global scale, thereby increasing the complementarities and interconnections among the various affiliates that made up the enterprise (Casson and Norman, 1983, p. 63; Porter, 1985, pp. 410-414; Teece, 1983). The impact of technology on the location of economic activity, however, has not been confined to multinational enterprises. With a relative decline in the costs of communication, the costs of transferring technology between independent parties can be presumed to have gone down, whereas the speed of such transfer has probably increased substantially. That development has been particularly important because of a concurrent development during these same decades—namely, an increase in the number of sources from which the technology required in any given product line could be drawn. Various studies demonstrate that as industries have matured, the number of firms engaged in the industry has tended to grow, as has the number of suppliers of equipment to such industries.4 As a consequence, newcomers aspiring to enter the industry are in a position to shop around among a larger number of firms that might be able to provide the necessary technology. The increase in the number of firms engaged in these technological transfers, whether as donors or recipients, has also been due in part to the efforts of various governments to support national champions—firms that

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 163 could represent their countries as entrants in some given product line. In the industrialized countries of Europe and in Japan, these national champions have typically been found in the technologically advanced sectors, such as biotechnology industries, computers, or commercial aircraft. In the newly industrializing countries, such as Brazil or Korea, governmental support has been thrown to the more mature industries, such as chemicals and metal fabricating. To launch this new generation of national champions has not always been easy; when governments have been successful, their success has usually been attributable to various policies, including a willingness to invest heavily in education and in the assimilation of foreign technologies. In many cases, the ability of the national champions to compete in technologically sophisticated lines of manufacture has also been helped by the import protection their governments provided in their home markets, as well as by the selective provision of various means of support.5 Many observers in the United States attribute the relative decline of U.S. industry during the past few decades to the unwillingness or inability of the United States to engage in policies of a similar kind (Diebold, 1983, pp. 644-654; Lodge, 1984, pp. 3-31; Magaziner and Reich, 1982, p. 326; Thurow, 1980, pp. 191-214). In reply, foreign commentators have contended that the R&D programs of the United States have been so large as to dwarf the support provided by other countries.6 Others have noted that the U.S. government has made extensive use of import restrictions during the past decade or so, matching or exceeding the import restrictions of the Europeans and Japan.7 It may be that the largest part of the new competition faced in recent decades by the United States was almost inescapable. A necessary condition contributing to that development was the technological improvements in communication and transportation, a force that dramatically reduced the costs to foreigners of acquiring technical skills and technological information. With these new opportunities universally available, some countries, such as Japan, Korea, and Brazil, exploited the new situation more effectively than others. But a substantial global rise in competition, especially in the more mature product lines, could not have been avoided. To be sure, the entry of a wave of new industrial producers—many of them protected in their home markets and bolstered by subsidy—created significant problems. In some industries, the more efficient production facilities of the newcomers made existing facilities in the United States redundant; this was a major factor in Japan's early reentry into the world steel market, for instance, as wen as the later entry of the newly industrializing countries not only in the steel market but also in many lighter product lines. Because many of the industries that were involved were

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 164 highly capital-intensive and characterized by substantial economies of scale, the appearance of the new entrants commonly produced a state of overcapacity, as in the ease of steel, basic chemicals, and petroleum refining. Some observers have attributed the relative decline in the share of U.S. manufacturing industries to other factors as well. None of these, in my opinion, is as important as the decline in the costs of acquiring technology and the concurrent starting up of industrialization programs in so many countries. One common contention, for instance, is that the capabilities and attitudes of U.S. managers have changed in recent years, reducing the capacity of U.S. firms to produce competitive products. Managerial attitudes and other cultural factors are no doubt relevant in a diagnosis of national business behavior; obviously, the values of British or German or Nigerian businessmen have something to do with their performance. But one should recall that throughout most of the 1950s and 1960s, observers were typically extolling the special virtues of American entrepreneurship, including its attention to profit and its swift responses to changes in the environment.8 Ten years later, some of these same characteristics were being condemned, charged with bringing about a decline in U.S. business (Abernathy and Hayes, 1980; Thurow, 1980, pp. 3-25). This rapid shift in perception raises questions about its credibility. Moreover, the global position of U.S.-based multinational enterprises, including their foreign affiliates, offers a different impression of U.S. managerial performance than does the output data for the United States alone; if the global exports of U.S.-based enterprises are taken as a guide, no competitive slippage occurred between 1966 and 1977 (Lipsey and Kravis, 1985). The apparent ability of these multinational networks to cling to their share of world export markets casts added doubt on the hypothesis that a deterioration in the quality of management explains the shrinkage in the U.S. position. A more serious contention with respect to the role of U.S. management in the asserted decline of U.S. industry is the view that U.S. management practices —epitomized by the Ford assembly line and time-and-motion studies of the 1920—have become obsolete, outdistanced by the more flexible management techniques of other countries, notably Japan (Reich, 1983, chapter 4). Undoubtedly, certain factors in the Japanese environment have contributed to strikingly high levels of productivity in some sectors of that economy (Brooks, 1985; Roy, 1982). The problem, however, is one of diagnosis. What is the critical variable? Is it the high levels of literacy of Japanese workers; the lifetime employment practices of the large firms; the recruitment and promotion practices relating to managers; the extensive use of subcontractors to provide flexibility; the financial

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 165 linkages of the big firms to private banks and public credit intermediaries; or some combination of the above? The basis for assessing the relative importance of these various factors is very slim. Besides, the competitive pressures coming from countries such as Korea or Brazil, where managerial practices differ from those of Japan, also have to be explained. Accordingly, the part played by managerial practices on the relative decline of U.S. industry continues to be uncertain. Another explanation that some analysts favor for the relative decline in U.S. industry is the effect of an overvalued dollar. This condition has plagued U.S. exporters since the early 1980s and has contributed to a significant increase in U.S. imports.9 But the allegations of a U.S. decline in competitiveness long antedate the recent period of marked overvaluation of the dollar; the long-term fall in the U.S. share of world merchandise exports, moving from 16.5 percent in 1955 to 12.2 percent in 1975, was already being observed and commented upon in the 1960s (Lipsey, 1984, p. 70). No doubt the overvaluation of the dollar in recent years has added to the difficulties of U.S. manufacturers. But it would be prudent for policymakers to assume that the overvaluation simply aggravated a tendency that had deeper causes and longer antecedents. In considering what policy responses might be desirable for the future, one cannot escape the need for projections. For instance, it seems plausible to assume that the rapid rate of industrial change will continue, requiring a continuous change in product lines. To be sure, some factors may slow the rate a little. For one thing, the initial surge of investment in Japan and the developing countries after World War H was fueled by policies of import substitution; and that factor is likely to play a lesser role in the future as the limits of import substitution are approached. In addition, Japan's entry into new product lines now requires her producers to take a much greater share of the risks and burdens of innovation, rather than depending primarily on absorbing and improving on existing technologies. The newly industrializing countries also face new financial constraints that may slow the rate of change; international lenders have grown much more cautious and governments much more chastened in planning for additions to industrial capacity. Nonetheless, the U.S. economy must count on continued rapid industrial change. Despite the widespread current sentiment in the United States for protection against imports, the probability that U.S. government policies can effectively slow such change appears to be fairly low. With multinational enterprises in the United States accounting for two-thirds or more of U.S. industrial output, most U.S. producers will be ceaselessly looking for opportunities to reduce their costs; and as the history of electronics, automobiles, and steel graphically suggest, an important aspect of the

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 166 adjustments to competition that such multinational enterprises will undertake is to create offshore sources for some part of their output. Are U.S. import restrictions likely to arrest this trend? Any U.S. decision to restrain such activities would have to overcome the opposition of a considerable sector of U.S. industry and could be implemented only with draconian measures of restriction. It is inconceivable, for instance, that U.S. policy would include prohibitions on U.S. firms from creating subsidiaries abroad to serve their markets in third countries. (Indeed, under present circumstances, it is hard to conceive of any market economy effectively imposing such a prohibition on its enterprises for very long, unless the enterprises are owned by the state.) Assuming that the conditions of rapid change continue, then, what problems are foreseen, and what policies seem indicated? THE PROBLEM REDEFINED Many economists have been skeptical that the apparent decline in the relative position of U.S. manufacturing poses any serious problem in public policy. They are quick to point out that, when a country loses markets to foreign competitors, those very losses initiate a series of internal and external adjustments that eventually make up the losses at levels of output that maximize national welfare. This demonstration, however, typically sets off a reaction of the deepest frustration on the part of politicians, newspapermen, and other ordinary mortals, and a reaction of the deepest annoyance on the part of other members of the economics fraternity, because of various critical and unanswered questions: • Are the economic costs associated with the consequent adjustments being distributed to various groups in the economy on a pattern that is politically tolerable? • Is the new production mix conducive to the continued future growth of the economy? • Is the new production mix adequate for national defense requirements? The Distribution Of Costs The problems and opportunities created by the increasing openness of the U.S. economy have fallen unevenly among the various U.S. industries. In other countries, such a disparate distribution might not have been so disturbing. In Japan, for instance, the remnants of the old zaibatsu organizations have created interest groups or conglomerates who characteristically embrace both rising and declining industries. Besides, operating according to a pervasive sense of ''fair shares,'' Japanese policymakers

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 167 have tended to limit the size of the adjustment burden that is placed on any group or industry (Vogel, 1979, pp. 117-124). In Europe, an official readiness to provide ad hoc support to faltering industries and laggard regions creates the appearance—and perhaps even the reality—of lesser risk for industrialists and their workers. Among U.S. industries, some of those beleaguered by foreign competition have had the prescience and the resources sufficient to escape from their U.S. locations and to set up producing facilities in lower-cost locations overseas; but others have failed to take such steps. According to various analyses, certain U.S. industries have been especially vulnerable to foreign competition because they have been paying wages in the United States well above the levels that seemed indicated on the basis of their productivity relative to other U.S. industries; in that category notably were automobiles and steel.10 A second group of affected industries were those that had been insulated from international competition by the frictional costs of distance, costs that had previously restrained producers from acquiring the necessary technical capabilities and from learning about foreign market opportunities; illustrative of such products were various consumer soft goods and electronic items. Some U.S. industries, however, have benefited from the shrinkage in the frictional costs of distance. One such industry has been the mass merchandisers of consumer products. With great rapidity, distributors such as Sears used the changed situation to search out low-cost foreign sources of consumer products, such as small black-and-white TV sets, for importation into the United States. In addition to the mass merchandisers, the U.S. industries that have derived advantages from the increased openness of the U.S. economy have been notably the exporters of capital goods, intermediate materials, services, and management skills. There are numerous indications that these offsets have been very large, indications reflected in the expanding importance of the export of technical services from the United States and of the flow of interest, dividends, and royalty income to the United States.11 But the U.S. industries that have profited from those expanded sales have not been the same as those affected by the increased competition from abroad. At least as important as the distribution of costs and benefits among U.S. industries, however, has been the distribution of costs and benefits among classes in the United States. Some U.S. residents see themselves as helped by the trend toward open markets because they can offer their services or their capital globally, thereby broadening their opportunities and their income. Other U.S. residents see themselves as hurt by the trend, in relative if not in absolute terms, because their jobs are displaced by increased foreign exports.

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 168 To be sure, some of the displacements forced on U.S. residents may have contributed so much to U.S. welfare as a whole as to justify the inequality in the burdens of adjustment. Nor instance, workers in industries in which relative wage levels have not reflected relative productivity, such as those in automobiles and steel, have in effect been extracting a rent from the rest of the U.S. economy. The reduction of that rent can be seen as a welcome contribution to the country's aggregate welfare, including the welfare of low-income groups. Moreover, increased international competition has probably helped low-income groups in the United States disproportionately in the effects of such competition on the prices of clothing, household appliances, food, and other staples. Yet the polarization issue still remains: The increasing openness of U.S. markets appears to reduce the going wage for factory labor as well as the ability of their unions to bargain. Meanwhile, the growth of the U.S. position in the export of capital, services, management, and high-tech products provides the most obvious income benefits for relatively high-income groups. The Requirements For Future Growth As suggested earlier, economists are likely to take somewhat different approaches from politicians in identifying the future problems of the United States. Economists tend to look on the U.S. economy as endowed with a given bundle of resources and to ask whether the U.S. economy, given its potential, is maximizing its opportunities for growth. Politicians, on the other hand, usually make no explicit assumptions about the U.S. potential and tend to. ask if the U.S. economy is keeping up with the growth of other countries, notably Japan. In political terms, it does little good to compare the U.S. economy's performance with some full-employment potential or to observe that its slippage in position for the most pan involves relative reductions in income, not absolute declines. In policymakers' eyes, the objective is not only one of equilibrium but also of a growth rate that matches the rates of other industrialized countries. U.S. policies in the field of technology are bound to reflect that preoccupation. With the prospects for future growth in mind, policymakers frequently express the concern that the U.S. economy will be turned into a "service economy," a phrase that conjures up a picture of an endless succession of ski resorts and hamburger stands. As noted earlier, the manufacturing component of the U.S. economy has been shrinking by some measures, holding its own by others. In any case, it is not at all clear that a shift toward a service economy would prejudice U.S. prospects for growth. A great deal depends on the nature of the services. Some services allow an economy to capture large rents, such as brain surgery and Disney World's

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 169 EPCOT Center. And other services, such as research in biotechnology, are building blocks for future growth. Nonetheless, some analysts argue that the service industries, especially when separated geographically from manufacturing activities, are in general a poor vehicle for capturing rents or ensuring future growth.12 Questions of this sort take us into uncharted waters, in which none of the diverse viewpoints is likely to represent more than an informed guess. Yet policymakers find themselves obliged to shape their policies on the best evidence available, even if the evidence is flimsy. Requirements For Defense Nations are doomed to prepare for the wrong war. No nation was much prepared for the trench warfare of World War I, the war of movement of World War II, or the jungle warfare of the Vietnam era; and none is likely to be much prepared for the next. One factor in preparedness is the altogether understandable desire for a minimax strategy. Of the various hypothetical possibilities, the assumption that the next war will be much like the last, however implausible that may be, still ranks very high. Hence the idea that a country will need, for example, a national steel industry, a national aluminum industry, and a national petroleum industry for defense purposes is bound to be an unshakeable element in national defense planning. If there were any significant probability of a prolonged conventional war on a large scale, the case for maintaining a large core of such industries might be reasonably strong. But conventional warfare on the Korean or Vietnamese scale, extensive as these were, poses almost no problem for the U.S. mobilization base, past or prospective. And if nuclear warfare is contemplated, the maintenance of a core of industries is almost irrelevant to the actual conduct of the war. On security grounds, therefore, the case for maintaining the usual core of basic industries is not obvious. The case for maintaining a large core of "defense" industries would be particularly weak if the policy were to interfere with another security objective of obvious importance, namely, that of maintaining a flexible work force, capable of technical improvisation and adaptation on a large scale. That need was evident even in the conventional warfare of World War II, when the German and Japanese economies managed to support a large-scale war effort for a sustained period despite the extensive damage done to their relatively slim industrial base (Schultze, 1973, p. 526; Vernon, 1955, pp. 77-88). In a world in which nuclear warfare cannot be excluded as a possibility, the capacity for adaptation and flexibility should be a paramount security objective.

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 170 Here again, more research is needed. But one must be realistic about the extent to which any research on this point can influence policy. Whatever the outcome of such research, it seems inevitable that the political process of the United States and of other countries will require policy-makers to cover altogether implausible contingencies, such as the possibility that World War H will be repeated. The Limits Of Policy Upon identifying the main issues, one is propelled to a basic conclusion: Given the nature of the issues, better data and closer analysis are unlikely to have more than a marginal effect on the behavior of the U.S. government and other governments. The problems are too large and too conjectural, and the domestic and international mechanisms for action too feeble to generate more than marginal impact. Yet as one sifts through the issues raised in this summary, there are three areas in which some marginal influence is possible and desirable. One such issue is how the United States can enrich and enlarge factors of production that are likely to operate on U.S. soil, especially the quality of its labor and management. A second issue, intimately related to the first, is how a tendency (or the appearance of a tendency) toward economic polarization within the U.S. economy—an apparent consequence of the economy's increased openness—can be arrested and reversed. A third issue, inseparable from the first two, is how those objectives can be achieved without beggaring other countries and thus setting in train a process that in the end would bring down the U.S. economy as well. ENHANCING THE FACTORS OF PRODUCTION The Educational Challenge As nearly as any analyst can tell, the ability of the U.S. economy to maintain a high living standard relative to other countries will depend on its being able to develop a literate and flexible labor force: literate so that it can perform complex and demanding tasks; flexible so that it can take on new tasks as products and processes continue to change. There is nothing new in that generalization. Historians usually explain the spectacular rise of Germany and Japan as well as the relative decline of the United Kingdom in part by reference to their respective systems of education (Landes, 1969, pp. 340-347). And if that factor was important in the environments of 50 or 100 years ago, it is many times more important today. Historically, the United States has provided its nationals with extensive

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 171 facilities for basic education. And it has led the way among the advanced industrialized countries in providing opportunities for higher education, at least as measured by the number and proportion of persons attending institutions of higher learning. Although illiteracy has been endemic in southern rural areas and city slums, that fact has not been sufficient to prevent the country from maintaining its high living standards. Increasingly, however, the quality of education in the United States is a matter of national concern. Pan of that concern is with the absolute quality of the education provided at all levels, given the demands of modern society, and pan is with the relative position of the United States as other countries extend and improve their education systems. In responding to that concern, the country's federal structure and traditions of local rule demand that its states and localities exercise a considerable role in determining the quality and content of education programs; but the consequences of their decisions are bound to be national rather than merely local. If Kentucky substitutes basketball for geometry, the consequences are felt in California; and when the central cities fall behind the suburbs in providing educational facilities, the suburbs cannot escape some of the consequences. Accordingly, the dramatic reduction in the federal government's oversight role in education during the past half-decade, although a logical corollary of the New Federalism concept, is also deeply worrying in its implications. To be sure, some localities have responded with sharply improved educational efforts. But the variations in educational services from state to state and between city and suburb are expected to grow, not decline. And the continuous influx of new immigrants could exacerbate these distinctions by placing heavy burdens on selected cities and 'states such as Los Angeles and New York. The problem is not solved by simply reestablishing some measure of federal oversight in the field of education. In the decade of the 1970s, while federal oversight was being strengthened and extended and while federal resources were being provided to supplement local financing, school curricula nevertheless deteriorated, and illiteracy in the United States probably increased. Yet as long as primary and secondary education is financed and controlled largely at the local level, there is almost no hope of bringing large pockets of the population up to the standards of literacy and flexibility that are consistent with the maintenance of the world's highest living standards. The problem is not limited to the fact that the U.S. labor force may be unable to provide the productivity that is consistent with high living standards for the country. A condition of that son is bound to sharpen the differences between those who draw their income from operating in a

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 172 world environment and those who rely on the U.S. environment for their income. Polarization in income and polarization in political outlook are likely to go hand in hand, leading to increasing bitterness over issues of transfer payments within the country and issues of international economic policy at the borders (Verba and Often, 1985, pp. 174-177). Of the various challenges that the United States faces for maintaining a lead in the modem world, this one heads the list. Improving Industrial Innovation Practically every econometric study of the sources of growth of the U.S. economy ascribes a considerable part of that growth to some amorphous factor beyond capital or labor, usually thought to be an amalgam of improved technology, improved organization, and increased education (Denison, 1979, pp. 104-107). Not surprisingly, therefore, the policy of the United States has been to encourage research and development activities on the part of industry, using tax credits and military procurement programs as the principal vehicles for official support. That government policies are capable of stimulating successful research and development is clear beyond question. The extraordinary increases in agricultural productivity in the United States and elsewhere during the past 50 years, although reflecting the joint efforts of the public and the private sectors, would have been impossible without the public contribution (Nelson, 1982, pp. 251-252). The U.S. aircraft industry has been overwhelmingly dependent on the military budget for much of its research and development; although various factors help to explain the performance of the civilian aircraft producers, including the existence of a large internal market, the support of the U.S. defense establishment has been a critical part of the mix. The technology of extraterrestrial space represents another partnership in which the public contribution has been critical. Not all public initiatives have been successful, however. Some have foundered on technical grounds, as in the case of the "transbus," and others because of a misreading of the market, as in the case of synfuels. Moreover, public initiatives such as military procurement sometimes generate costs that inhibit commercial research and development rather than support it. The principal means by which military programs encourage commercial research and development is through the spillover effects to nonmilitary applications. But military hardware is becoming highly specialized, being developed in systems that are increasingly remote from civilian applications; whereas the bombers of the 1940s and 1950s could be adapted eventually to commercial aircraft needs, the ICBMs of the 1980s offer no analogous possibilities (Brooks, 1986, pp. 134-135). In addition, some

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 173 analysts are of the view that U.S. military programs on balance raise the cost and reduce the availability of engineers and other technicians for commercial enterprises in the United States (Brooks, 1985, p. 349). Since the U.S. pool of engineers and technicians is smaller than that of Japan or Germany in relation to the total labor force, the United States is obliged to divert a substantial part of that pool to innovations that characteristically have no direct civilian use. A larger problem associated with the stimulation of research and development on the part of U.S. enterprise, however, applies not only to the stimulation provided by military programs but also to the stimulation generated by tax credits. The propensity of technology to cross national boundaries has been growing rapidly, mainly as a result of the improvements in communication and transport. That movement takes place through numerous channels: for instance, through word of mouth, patent applications, scientific meetings, licensing agreements, and communications among the affiliates in multinational networks. Accordingly, R&D programs whose costs are borne in part by the U.S. budget in the hope of increasing U.S. productivity eventually serve to increase the productivity of other countries as well, including that of competitors. To be sure, those benefits are not altogether lost on the U.S. economy, given the intimate relationship between the prosperity of other countries and that of the United States. But it cannot be assumed that the benefits of that increased productivity are fully returned to U.S. investors; more likely, they are shared with foreign workers, foreign governments, and foreign consumers. In any case, those whose eyes are fixed on U.S. adjustment problems resulting from the openness of the U.S. economy should not suppose that the stimulation of research and development by U.S. firms necessarily reduces those problems. The implications of the fact that technology cannot easily be locked onto any single national turf have not yet been fully assimilated in the minds of science policymakers anywhere in the world. Once policymakers in the United States grasp the point, they may be tempted to conclude that the U.S. government should withdraw its support from efforts to stimulate research and development. Yet if such a policy had been adopted as a guiding principle 50 years ago, the world's food production would be much lower today, and the extraterrestrial communication satellite would still be a remote vision. If the fruits of our technological efforts must inevitably be shared, however, there is a case for encouraging joint national programs in the stimulation of technology rather than unilateral national efforts, wherever that can be arranged. True, joint national efforts usually generate formidable organizational problems that national efforts can sometimes avoid; but confronting those problems may be seen as

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 174 preferable to assuming the full cost of research activities whose benefits, in the end, will be shared with other countries. In any case, the United States may have something to learn from the efforts of other countries to stimulate research and development. Numerous reasons have been cited why the efforts of other countries cannot always serve as a useful guide for policy in the United States. One reason commonly adduced for avoiding such policies is specious, but a second has to be taken more seriously. The specious reason is that if it were economically wise for enterprises to risk their funds in developing a given innovation, one or more enterprises would already be attempting to develop it. As numerous analysts have pointed out, there is a considerable risk that the private sector will underinvest in research and development, especially when the private firms are unsure whether they will be able to capture the profits that the invention might generate (Bozeman and Link, 1985, p. 376; Freeman, 1982, p. 168; Mansfield, 1968, p. 187). This is an acute problem, for instance, in products or processes that are not easily protected by patents, or in products that might prove to have a very short life, such as memory chips. In such cases, it may pay for the government to reduce some of the perceived risk by guaranteeing a minimum return in effect to the successful inventor. The second ground on which many U.S. policymakers refuse to entertain proposals for the public support of selected development targets is that the U.S. government is inherently unable "to pick winners and losers." Sometimes the contention is made as if it were axiomatic, an inescapable consequence of the characteristics of the system; but it is unclear why a system that is capable of producing the moon landing, agricultural research, and the space shuttle is inherently incapable of successfully identifying research goals that are technically feasible and socially profitable. Once one accepts that the market may be failing to provide reliable signals for profitable R&D investment, there is no reason to exclude the possibility that the government might do better. Stimulating Management With the swift changes of the past few decades in the structure of markets and enterprises, the U.S. landscape is littered with anachronistic regulations and outmoded precedents that tend to put a damper on managerial initiatives. Among the most obvious are those relating to antitrust and restrictive business practices. U.S. antitrust policy is built in part on the principle that maintaining competition depends on avoiding high levels of concentration of U.S. production among a few firms in any given product line.13 But as markets

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 175 have become global in scope, and as multinational enterprises have increased in number, the standards by which U.S. law and regulation have traditionally judged the effects of mergers and consolidations on competitive conditions in the United States have grown less relevant. Obviously, imports have to be taken into account in such an evaluation, a fact that lawmakers are just beginning to appreciate. But imports alone do not begin to reflect the changed competitive conditions of world trade and investment. The degree to which Fiat's existence acts as a brake on General Motor's market behavior in the United States cannot be judged simply by the level of U.S. imports of Fiat cars (which is small). Instead, as executives in the United States design their product and pricing policies, they are now obliged to consider the possibility that Fiat (or Toyota or Saab or Peugeot or Hyundai) might use their vastly increased capability for movement by establishing a production plant in the United States. As the statistics of foreign direct investment in the United States dramatically illustrate, that possibility is now very real.14 This profound change in international markets suggests the need for a radical overhauling of the standards and precedents of which the U.S. antitrust authorities are captive. It suggests the possibility of a more relaxed policy toward various forms of cooperation and mergers among U.S. producers in cases in which either foreign imports or foreign direct investment seem likely. It does not follow, however, that antitrust problems are declining in intensity in this new global environment. In fact, some of the new inter firm arrangements that are appearing in response to these changed conditions raise novel questions that could prove important in the decade ahead. During that decade, the world may well see a period of relatively slow growth. In that event, leading producers who are somewhat insulated from competition will be understandably reluctant to spend on the creation of new technologies or to apply all the technological advances that their laboratories are capable of producing. In the 1930s that combination of circumstances generated a substantial crop of international cartels coveting electrical, chemical, and mechanical products, many of them dedicated to holding back the introduction of new products and new processes (Hexner, 1946, pp. 203-349). Today it is unlikely that any arrangements among producers dedicated to such objectives would take the transparent and explicit forms that the cartels of the 1930s sometimes adopted. Since then, the antitrust programs of governments in the United States and Europe have increased measurably in potency and sophistication. But the recent proliferation of joint ventures among industry leaders of different nationalities raises the possibility that leading firms may once again attempt to control the introduction of new technolo

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 176 gies.15 Parties to such alliances, it is true, usually have an initial intention of pooling their technology in the interest of increasing productivity or generating new final products, not of holding back on technological advances. But one must realistically entertain the possibility that a spell of hard times will alter the original direction of the alliances, especially when the alliances have linked the technological leaders in any product line. The risk that technological advances will be checked by cartel-like international agreements arises from another direction as well. Numerous agreements among governments limiting the international movement of various types of steel now cover so large a part of the world's steel output as to take on many of the characteristics of a world steel cartel. The slow growth in the world demand for steel, when coupled with the curbs on international competition, could easily have the effect of arresting the steel industry's investments in new steel products and processes. That possibility is increased still further by the movement of the U.S. steel industry toward diversification into other industries, a movement that is likely to reduce the interest and the resources of management devoted to improving the productivity of steel facilities. The case of steel raises the question whether rapid technological change always must be counted benign, or whether in some circumstances it generates social costs that exceed its benefits.16 Many who support the international steel agreements would argue in favor of such agreements in precisely such terms. But that is a judgment better made by persons whose interests are centered on the welfare of the national economy as a whole rather than on the steel industry in particular. A critical question for the future is whether the steel situation represents a pattern that will be followed by other industries as the demand for their products levels off. In that case, the antitrust laws of the United States and other countries may prove irrelevant, even though the restrictive consequences of the arrangements may be indistinguishable from those generated by private cartels. Here again, we confront a problem for U.S. policymakers to which almost no attention has so far been given. REDUCING ECONOMIC POLARIZATION Efforts to reduce the tendency toward economic and political polarization that may accompany increased openness in the U.S. economy are desirable on both social and political grounds. Some of the measures that could improve the productivity of factors employed in the United States would at the same time contribute to reducing economic polarization. Broad-based support for elementary and high-school education, for instance,

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 177 would contribute to both ends. But other measures also need to be considered. One approach to this issue is to review and revise national policies that now influence managements to respond to foreign competition by creating new offshore facilities, rather than by attempting to increase their productivity and lower their costs in the United States. Of course, the possibility of increasing productivity in the United States in response to increased foreign competition is not always realistic; some old U.S. industries must give way to such competition if new U.S. industries are to flourish. But there have been enough successful eases of U.S. firms holding their ground on U.S. soil through productivity increases to suggest that more such possibilities exist; General Electric's comeback in the manufacture of diesel locomotives is a spectacular case in point. At the margin, some policies in the United States may be tailored to encourage such a response. For example, the tax forgiveness policies of other governments in some cases mean that profits generated by the foreign subsidiaries of U.S. firms are taxed at levels that are lower than the profits generated in the United States, a fact that may tip the U.S. firm's response in favor of an overseas location. Cases of this sort will increase as corporate income tax rates begin to rise again in the United States. Because this is a complex and tangled subject, answers to this problem do not come easily; but the issue is worth further exploration. More generally, numerous U.S. policies and programs are worth reviewing to determine whether modifications might keep production on U.S. soil. Any program that is aimed at reducing the polarizing effects of open international markets, however, will be inadequate if it fails to provide for some positive form of trade adjustment, that is, some substantial lubrication of the process by which productive facilities are redeployed in the U.S. economy. By now, the idea of trade adjustment has become a little shopworn. First adopted as policy in the Trade Expansion Act of 1962, the trade adjustment program failed to contribute very much to the adjustment process by the time it was abandoned in the early 1980s (Aho and Bayard, 1980; Richardson, 1983). The fact is, however, that the concept was abandoned almost before it was really tried. During most of the two decades in which the program was on the books, its contribution to the adjustment process was limited to extending the period in which laid-off workers received unemployment compensation. In the latter 1970s some more imaginative approaches to adjustment at last began to be undertaken; but within a few years of the commencement of such experiments, the concept was abandoned. Whether effective retraining and relocation are possible on a substantial scale in the United States remains an unanswered question.

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 178 Meanwhile, it should be remembered that the threat of increasing polarization is as much a problem of attitudes as an issue of the actual distribution of income. In this context, symbols count. For this reason, if for no other, the salaries and fringe benefits that the top managers of large U.S. corporations appropriate for themselves may be playing a role that is larger and more significant than the economic cost. On the basis of informal inquiries of knowledgeable observers, my impression is that U.S. managers are paid two or three times the amounts received by their Japanese counterparts in companies of comparable size and substantially more than their European counterparts.17 Those U.S. compensation levels cannot easily be justified as the impersonal outcome of the play of market forces. Such levels are in effect fixed by the managers who receive them; and the managers in each enterprise determine those levels by making comparisons with other firms whose managers are engaged in the same process. To be sure, any managerial group that choses not to keep up with the others would probably find some of its members, including valued ones, abandoning the firm. Accordingly, any individual firm has little incentive to drop out of the race of matching increase with increase. The situation, however, promises to exacerbate the division between managers and workers. Whereas workers see themselves as living in an atmosphere of givebacks and two-tier pay scales in order to remain competitive, management continues on its course, relatively undisturbed, except for the risk of takeover bids. The polarizing effects of a continuation of such trends deserves the closest attention of policymakers. AVOIDING A BEGGAR-THY-NEIGHBOR CYCLE In the context of U.S. politics, however, the problems of managing technological change are likely to be framed as problems in international trade policy, and the instrumental responses are likely to be measures for restricting trade. Managing technological change, therefore, embraces all the familiar issues associated with trade policy. The Shift In U.S. Position According to various counts, something like 300 bills were introduced in committees of the 99th Congress to deal with international trade problems of one kind or another. Practically all called for some measures of restriction on U.S. imports. Some provided for consultation with foreign countries as part of the process leading to import restrictions, and others called for uninhibited unilateral action. The extraordinary emphasis on

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 179 unilateral action is one manifestation of the gravity of the present situation. The United States seems prepared to court the obvious risk—one could almost say, the near certainty—that unilateral measures by the United States will generate unilateral countermeasures by others, contributing to a spiral that is hurtful to all countries.18 The U.S. willingness to expose itself to that risk reflects several different factors, including the ignorance of otherwise informed Americans about the extent to which the well-being of the U.S. economy has become related to the well-being of the world economy at large. Even a superficial review of the content of our school curricula and our mass media suggests why that ignorance exists. Courses in history and economics have almost disappeared from high school curricula, contributing to a pervasive indifference or illiteracy on subjects of international economic relations. To be sure, the media give occasional attention to some political or military spectacular involving foreign countries, such as an international hijacking, or a Gorbachev-Reagan encounter. But the coverage of international economic events is almost nonexistent in the mass media, whether in superficial or in serious form. Ignorance and indifference, however, are not the only reasons for the spate of trade-restricting bills. Another factor may be the polarization tendency mentioned earlier, the perception of the growing differences between the interests of those Americans whose stake lies directly in the growth of the world economy, such as managers and stockholders of multinational enterprises, and the interests of those whose livelihoods are linked more directly to the U.S. turf, such as semiskilled textile and electronic workers. With such polarization, some groups in the United States will be tempted to disregard the possibility that U.S. trade restrictions might initiate a series of events that will do considerable damage to all countries in the world, including eventually the United States itself. In the eyes of disadvantaged groups, those consequences might appear no worse than a set of policies whose costs have to be borne by them. Still a third strand in the current wave of demands for unilateral action is a mounting impatience among the American public and the Congress with the behavior of other governments in international trade.19 It is true that most governments are more active than the United States in devising special measures to improve the competitive position of their own industries, a reflection of a different approach to the role of government than exists in the United States. But some of the impatience of the American public and the Congress is based on the assumption—the largely erroneous assumption—that other governments are more careless about their international commitments than the U.S. government, a view that explains repeated references to restoring a ''level playing field'' in international

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 180 trade. To be sure, most governments are prepared to exploit every loophole created by the copious exceptions in the General Agreement on Tariffs and Trade (GATT) and axe sometimes prepared to disregard the agreement altogether (Patterson, 1983). In this respect, however, the behavior of other governments is not readily distinguishable from that of the United States, which has frequently enacted legislation in fiat violation of the GATT's provisions (Grey, 1983). The gap between conventional U.S. opinion about the behavior of foreign governments and cold reality is strikingly illustrated by the case of Japan. With regard to the GATT's formal requirements, that country today is probably as much in compliance as the United States (Saxonhouse, 1983). The principal difficulties that the United States now encounters in U.S.-Japanese bilateral trade relationships are of a kind that the GATT's provisions do not—and perhaps cannot—address: the yen-dollar exchange rate, the tight vertical structure of domestic Japanese industry, the attitudes of Japanese consumers, and so on (Bergsten and Cline, 1985, pp. 21-105). To deal with issues of that kind, we must begin thinking of new forms of international regimes and international agreements far more ambitious than those represented by the GATT. Practically all multilateral agreements are also bedevilled by the problem of the free rider. With more than 160 sovereign states of various sizes and interests engaged in international trade, countries that will hope to profit from open markets without opening their own are bound to appear in considerable number. That was true in 1948 when the GATT was created, and it remains true today. In 1948, however, the U.S. government believed that its interests were being served if some of these governments could be persuaded to give lip service to their adherence to a GATT regime, even if their role of free rider was legitimated in the process. Accordingly, the developing countries that joined the GATT were in effect exempted from any significant obligation under the GATT's rules while being entitled to the rights of a GATT member. Today, however, the United States no longer regards that lopsided situation as being in its interest, especially as it applies to such rapidly developing countries as Brazil and Korea. From the U.S. viewpoint, the remaining alternative to unilateral restrictions on trade is the increased use of persuasion or threat: persuasion aimed at convincing a group of like-minded countries that it is in their common interest to devise new rules of the game that are responsive to the demands for a "level playing field," or threats aimed at increasing the inhibitions of the free riders. The use of persuasion will not be easy. For instance, it should not be supposed that the advanced industrialized countries are in a mood for joining the United States in measures for the

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 181 liberalization of trade. In recent years, indeed, the European Economic Community has been pursuing its own program of trade-restricting measures, a program that more than matches the U.S. measures in its restrictiveness. The challenge is to turn this trend around, lest the remnants of the existing trade regime disappear. Constructive and Destructive Agreements For several years, in fact, the U.S. government has been moving toward a set of arrangements that have pointed away from the principles of non- discrimination and universality. Some of these arrangements have been constructive and benign, in the sense that they have probably improved the position of the United States without damaging the position of other countries. Others have been grossly destructive by these standards. Heading the list of destructive measures are the so-called voluntary export agreements (VEAs) or orderly marketing agreements (OMAs), which at present protect a considerable part of U.S. industry. The essential element of these agreements is that the U.S. government coerces an exporting country into restraining its exports of a given product to the United States. The U.S. government's objectives in having the exporter impose the desired restrictions rather than imposing U.S. import restrictions are reasonably clear: The U.S. government escapes some of the onus of imposing a restriction on imports, especially if the conditions are such that an import restriction would be in violation of existing U.S. law or in violation of international trade agreements, notably the GATT. The U.S. government can "target" specific threatening exporters rather than all exporters of a given product, thereby discriminating in a way that would violate the GAIT if incorporated in an import restriction; and the U.S. executive branch can buy off congressional opposition without taking on a legislative straggle. This practice has its obvious drawbacks. It allows the U.S. government to pretend that the restriction is not of its doing, thereby reducing the government's ability to extract programs of adjustment from the U.S. industries that are protected. It encourages corruption and evasion in the trade practices of foreign exporters, who commonly transship their goods through other countries as a way of entering U.S. markets. And it makes a mockery of the rules on international trade agreements. Worse still, it leads to a gross distortion of such agreements as the U.S. government and others seek to legitimate their practices by obtaining nominal absolution in the GATT. The headlong movement of the U.S. executive branch toward the expanded use of the coercive bilateral approach, incorporated in those VEAs and OMAs, could eventually destroy what is left of the tattered

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 182 rules of the GATT, before any successor regime can be devised. Finally, the VEAs and OMAs, to the extent that they are effective, have the unfortunate consequence of placing monopoly rents in the hands of the exporters, rents paid by the consumers in the United States. The "voluntary" restriction of Japanese car exporters from 1982 to 1984, for instance, was a bonanza for Japan's car exporters, increasing their margins of profit and their financial resources well beyond the levels they would otherwise have achieved and encouraging the accelerated upgrading of Japanese automobiles for sale in U.S. markets (Gomez- Ibanez et al., 1983). Although the VEAs and the OMAs have been destructive to international trade, it should not be assumed that all trade agreements that are less than universal in scope are necessarily destructive. Economists have long recognized that in some circumstances, trade agreements that are discriminatory in their application may actually foster trade and may contribute to the welfare of nonparticipating countries as well as of those that participate (Lipsey, 1960). The European Economic Community and the European Free Trade Area, for instance, were sanctioned by GATT members on that assumption; and although the Community's policies are fundamentally at variance with the nondiscrimination principles of the GATT, one can make a case that the Community's operations contributed on balance both to international trade and to global welfare. The U.S. government also has negotiated a series of less-than-universal agreements that presumptively have had benign rather than malign effects on trade, including notably a series of codes that were negotiated under the aegis of the GATT in 1979. More than a half dozen codes were initialed at the time, covering subjects such as the sale of commercial aircraft, practices in government procurement, and the use of certain types of subsidies that affect international trade.20 These codes have been open-ended in the sense that any member of the GATT has been free to subscribe, accepting the obligations and procuring the fights provided in the code. But the codes are discriminatory in the sense that GATT members choosing not to subscribe are likely to be denied the benefits under the code.21 Ultimately, the signatories have proved to be primarily the advanced industrialized countries. Although the GATT codes have been feeble instruments in the first years of their existence, they represent one of the few approaches that offer fresh promise of the development of a benign trade policy. To be sure, they are discriminatory in their application; but any country can cure the discrimination by ratifying the code. Accordingly, such agreements do not turn away once and for all from the principle of an open world trading system, a fact that has made it possible for the GATT structure to tolerate and even to foster such agreements.

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 183 The disposition of the United States to pursue trade-liberalizing measures where it can, without being blocked any longer by the principle of universality, is evident from a number of its other initiatives in recent years, such as its bilateral discussions with Japan aimed at added liberalization of the conditions of government procurement, its proposal for a free-trade area with Israel, its interest in pursuing a selective free-trade arrangement with Canada, and so on (Bilzi, 1985).22 Its eclecticism in trade matters now begins to approximate that of the European Economic Community, which has never been restrained by the principle of universality, as well as the approach of Japan, which also includes numerous departures from that principle. The approach, to be sure, courts some acute dangers. The line between trade-creating and trade-destroying agreements can be exceedingly fuzzy. Agreements that are ostensibly available for signature by any country can be constructed in ways that shut many countries out. But it is difficult to envisage any universal agreements on the GATT pattern that offer much hope of arresting the trend to protectionism. Instead of addressing the relatively simple question of the level of a tariff rate or the existence of a requirement for an import license, future agreements must take up such complex and subtle questions as the international effect of a domestic subsidy, or the international impact of a regulation ostensibly applied for reasons of safety or environmental control or the support of a lagging region. These are subjects in which facts are hard to come by, consequences are complex, and domestic politics play a dominant role. Such factors may explain in pan why the existing GATT codes have proved so feeble. The machinery required for any degree of effectiveness in agreements that deal with complex nontariff trade barriers is more nearly approximated by the institutions of the European Community, with its elaborate provisions for fact-finding and adjudication. So far, the minds of U.S. policymakers are far from considering any such ambitious possibilities. Instead, their next efforts are being directed at extending the GATT to the liberalization of services and of foreign direct investment, programs that seem even less appropriate to the GATT structure than dealing with the new wave of trade restrictions. We have scarcely begun, therefore, to fashion international institutions that can cope with the new problems in the field of international trade. U.S. POLITICS AND U.S. GOVERNANCE Before any constructive action can be envisaged among governments for dealing with the problems of adjustment and accommodation to technological change, the U.S. government itself must be prepared to sponsor

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 184 the requisite international action. The conventional wisdom of the moment, supported by the results of Gallup polls and the introduction of protectionist bills in the Congress, is that such sponsorship is almost out of the question. My own analysis, however, indicates that the U.S. position is far less determined than conventional wisdom would suggest. It has been repeatedly observed that U.S. policy is based on the outcome of struggles among interest groups rather than on the rational conclusions of thoughtful referees. On that basis, one could easily conclude that the U.S. political process was as likely to produce a decision in favor of promoting open international markets as at any time in modern history. To be sure, a surge of imports has added to the acute difficulties of many domestic industries. But U.S. industry as a whole—including some of the leading firms in the industries threatened by exports—has never been more involved in world markets; the dominance of multinational enterprises in the U.S. economy has no historical parallel. The stake of the large U.S. banks in maintaining open markets is also vital, especially if they are to hope eventually to collect some of their large foreign loans. And the capacity of labor unions to support a protectionist policy, while still strong, is diluted by three factors: the decline in labor union enrollment; the growth in the relative importance of nonmanufacturing workers in the labor union movement;23 and the decline in the level of unemployment. If sheer interest-group calculations were determining the direction of U.S. trade policy, therefore, one might reasonably expect a different atmosphere .than the one that now prevails. One key reason for the striking protectionist sentiment in Congress and the public press is that a coalition of protectionist interests in the United States has succeeded in a strategy that they have pursued persistently over the past 35 years. The strategy has been fundamentally to ensure that the problems associated with increased international trade are always addressed on a case-by- case basis rather than systemically. That result has been achieved by a succession of statutory measures that have given aggrieved domestic industries increasing powers to initiate individual proposals for trade restrictions. As long as such issues arise case by case, the atmosphere surrounding discussions of trade policy is bound to be protectionist, and the costs of imposing import restrictions on the economy at large—costs such as the impact on consumers and the risk of retaliation—are likely to play a secondary role in the decision- making process. From time to time during the past 50 years, despite the strategy of the protectionist alliance, the U.S. government has moved dramatically in the direction of liberalizing its trade regime. In each instance, that decision has been taken in a context in which the decision makers were in a position to weigh not only the benefits but also the costs associated with higher

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 185 import restrictions. Such moves occurred with the adoption of the Trade Agreements Act of 1934, the Trade Act of 1948, the Trade Expansion Act of 1962, the Trade Act of 1974, and the 1979 Trade Act. In each of these instances, costs and benefits of the trade regime were framed and presented as a single package. Those same acts, however, carried the seeds of the eventual undermining of the trade policy they supported, as a series of technical amendments made it increasingly easy for special interests to raise their trade problems on a case-by- case basis. Until those procedures have been curbed, U.S. policies will be acutely vulnerable to the initiatives of such special interests. Nevertheless, the bold moves by U.S. government toward trade liberalization—moves taken in each instance with the acquiescence of the Congress—underline a fundamental point with regard to congressional behavior. Conventional wisdom usually takes it for granted that the Congress will be protectionist, on the easy assumption that congressmen are doomed to bow to the interests that have been mobilized in their districts. But the record itself, as one or two studies indicate, is much more complex (Ahearn and Reifman, 1984; Pastor, 1980, pp. 186-199). Confronted with major choices that coupled the benefits with the costs, congressmen have been prepared to resist the pressures of specialized interests in their districts. In their handling of individual cases, administrators continue to be vulnerable to the tactical power and tactical skills of the interests. Accordingly, those who are skilled in broken field running through the sprawling governmental apparatus can often avoid the full exercise of the system of checks and balances to achieve their desired results in individual cases. The challenge is to find ways of restraining those possibilities so that the larger interests of the United States can play an appropriate role in the development of trade policy. Because U.S. institutions and processes are so vulnerable to special interests in the handling of individual cases, some analysts have resisted the idea of having the U.S. government pursue selective policies of industry targeting such as has been seen in Japan, France, and Korea. The fear is that the U.S. process would produce results that were unrelated to any rational analysis of the individual cases. On the record, that is not an unreasonable concern. Yet, the swiftly changing character of the economy in which we live implies that with increasing frequency, individual enterprises may encounter transitional problems that threaten their very existence. In theory, such problems may be solved in various ways, including merger and acquisition. But the experience of the U.S. government in helping Lockheed and Chrysler bridge their transitional difficulties a decade ago suggests that a role for government is not to be excluded. Accordingly, the U.S. government may have to build new capabilities into its system

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 186 of governance that allow it to deal rationally with critical individual cases as they emerge. Developing that capability is perhaps the most difficult of the various challenges discussed in this chapter. ACKNOWLEDGMENT I am grateful for the critical comments provided by Harvey Brooks, Roger Porter, Robert Reich, and Dani Rodrik, and for the research support of Debora Spar. NOTES 1. An excellent summary of the arguments on both sides of the issue is found in Norton, 1986. Underlying studies particularly worth consulting are President's Commission on Industrial Competitiveness, 1985, and Lawrence, 1984. 2. Between 1975 and 1983, the absolute size of the work force in U.S. manufacturing actually expanded by 15 million jobs, but its size relative to the total work force slipped to 18.0 percent from 20.9 percent (U.S. Bureau of the Census, 1985, p. 390). 3. From 1980 to 1984, foreign-direct investment as reported by U.S.-based firms has been virtually unchanged. See Economic Report of the President, 1985, p. 349, and Survey of Current Business, January 1986, p. 24. But that is probably the net result of a reduction in liquid assets and an increase in fixed assets abroad, as well as the revaluations of foreign assets related to an appreciating U.S. dollar. 4. A classic study of this phenomenon, covering the chemicals industry, is Stobaugh, 1968. For more general-data, see Vernon, 1977, pp. 26-81. 5. On Japan, see Vogel, 1979, p. 72. On other countries, see Pinder, 1982a; a comparative analysis of national policies in different industries appears in various chapters in Pinder, 1982b. 6. U.S. government expenditures in 1983 were well above the national R&D expenditures from all sources in Japan, France, Germany, or the United Kingdom; see National Science Board, 1985, p. 187. 7. As of 1981 the proportion of the national market for manufactured imports affected by major nontariff barriers was higher in the United States than in six other industrial countries, including Japan. See Cline, 1984, p. 60. 8. A characteristic evaluation of this son was that of Jean-Jacques Servan-Schreiber, 1968, p. 67. 9. The growth in the relative importance of merchandise imports in the United States is reflected in the increase in the ratio of nonagricultural nonpetroleum merchandise imports to value added by the U.S. manufacturing and mining sectors. That ratio rose from about 15 percent in the mid-1970s to about 23 percent in the early 1980s. From various issues of Survey of Current Business and Economic Report of the President, 1985, p. 244. 10. On steel, see Walters, 1983, pp. 484-486. On automobiles, see Cohen, 1983, p. 555. 11. Flows to the United States from abroad from royalties and fees, other private services, direct investments, and other private receipts rose from 1.3 percent of U.S. GNP in 1965 to 2.6 percent in 1984, reflecting a growth rate substantially higher than the

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 187 growth rate of total U.S. exports and of U.S. GNP. See SurVey of Current Business, June 1985, pp. 40-41. 12. Stephen S. Cohen and John Zysman argue this position eloquently in the manuscript of their forthcoming book: Manufacturing Matters: The Myth of the Post-Industrial Society, New York: Basic Books. 13. The principal provision is Section 7 of the Clayton Act. See Sherman, 1978, pp. 38-41. 14. Between 1970 and 1984, the book value of all foreign direct investment in the United States rose from $13.3 billion to $159.6 billion. The manufacturing component in 1984 amounted to $50.7 billion. From various issues of the Survey of Current Business. 15. The joint-venture trend is described in Ohmae, 1985; and Mowery and Rosenberg, 1985. 16. The subject is explored in Crandall, 1981, especially pages 129-140. 17. Hard data on this subject are not easily available. One study, reflecting conditions in the latter 1970s, concludes that in the United States, business executives received compensation that was about 15 times that of an auto worker, whereas the comparable figure in Japan was 9 times, and in Sweden (after taxes) only a little over 2 times; the figures appear in an unpublished manuscript by Sidney Verba and Gary Orren, which in turn relies on various surveys by others to generate the comparison. 18. For an insightful summary of U.S. trade practices, see Grey, 1983. 19. For congressional reactions, see Abeam and Reifman, 1984. 20. For illuminating discussions of the place of these codes, see Jackson, 1983; and Hufbauer, 1983. 21. The issue of nonsignatory rights has actually been in dispute in the GATT, with an ambiguous outcome; but the exclusionary intent in drafting the codes was reasonably clear. See Tarullo, 1984. 22. The significance of these departures from longstanding U.S. policy is emphasized in Samolis, 1984. 23. Although U.S. total manufacturing employment in 1983 was practically the same as in 1971, the number of union members in manufacturing declined by about 500,000, and the relative importance of the total union membership represented by manufacturing unions fell to 11.4 percent from 15.8 percent (U.S. Bureau of the Census, 1985, p. 423; Economic Report of the President, 1985, p. 275.) REFERENCES Abernathy, W., and R. H. Hayes. 1980. Managing our way to economic decline. Harvard Business Review (July-August):67-77. Ahearn, R. J., and A. Reifman. 1984. Trade policymaking in the Congress. Pp. 36-66 in Recent Issues and Initiatives in U.S. Trade Policy, R. E. Baldwin, ed. Cambridge, Mass.: National Bureau of Economic Research. Aho, M. C., and T. O. Bayard. 1980. American trade adjustment assistance after five years. The World Economy 3(November):359-376. Bergsten, C. F., and W. R. Cline. 1985. The United States-Japan Economic Problem. Washington, D.C.: Institute for International Economics. Bilzi, C. 1985. Recent United States trade arrangements: Implications for the most-favored nation principle and United States trade policy. Law and Policy in International Business 1:209-236.

COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 188 Bozeman, B., and A. Link. 1985. Public support for private R&D: The case of the research tax credit. Journal of Policy Analysis and Management 4(3):376. Brooks, H. 1985. Technology as a factor in U.S. competitiveness. Pp. 328-356 in U.S. Competitiveness in the World Economy, G. C. Lodge and B. R. Scott, eds. Boston: Harvard Business School Press. Brooks, H. 1986. National science policy and technological innovation. Pp. 119-167 in The Positive Sum Strategy: Harnessing Technology for Economic Growth, R. Landau and N. Rosenberg, eds. Washington, D.C.: National Academy Press. Casson, M., and G. Norman. 1983. Pricing and sourcing strategies in a multinational oligopoly. In The Growth of International Business, M. Casson, ed. London: George Allen and Unwin. Cline, W. R. 1984. Exports of Manufactures from Developing Countries. Washington, D.C.: Brookings Institution. Cohen, R. B. 1983. The prospects for wade and protectionism in the auto industry. In Trade Policy in the 1980s, W. R. Cline, ed. Cambridge, Mass.: MIT Press. Crandall, R. W. 1981. The U.S. Steel Industry in Recurrent Crisis. Washington, D.C.: Brookings Institution. Denison, E. F. 1979. Accounting for Slower Economic Growth. Washington, D.C. : Brookings Institution. Diebold, J. 1983. The information technology industries: A case study of high technology trade. In Trade Policy in the 1980s, W. R. Cline, ed. Cambridge, Mass.: MIT Press. Economic Report of the President. 1985. Washington, D.C.: U.S. Government Printing Office. Freeman, C. 1982. The Economics of Industrial Innovation, 2nd ed. Cambridge, Mass.: MIT Press. Gomez-Ibanez, J. A., R. A. Leone, and S. A. O'Connell. 1983. Restraining auto imports: Does anyone win? Journal of Policy Analysis and Management 2(2):196-219. Grey, R. de C. 1983. A note on U.S. wade. Pp. 243-257 in Trade Policy in the 1980s, W. R. Cline, ed. Cambridge, Mass.: MIT Press. Hexner, E. 1946. International Cartels. Chapel Hill: University of North Carolina Press. Hufbauer, G. C. 1983. Subsidy issues after the Tokyo round. Pp. 327-361 in Trade Policy in the 1980s, W. R. Cline, ed. Cambridge, Mass.: MIT Press. Jackson, J. H. 1983. GATT machinery and the Tokyo round agreements. Pp. 159-187 in Trade Policy in the 1980s, W. R. Cline, ed. Cambridge, Mass.: MIT Press. Landes, D. 1969. The Unbound Prometheus. London: Cambridge University Press. Lawrence, R. Z. 1984. Can America Compete? Washington, D.C.: Brookings Institution. Lipsey, R. E. 1960. The theory of customs union. Economic Journal 70:496-513. Lipsey, R. E. 1984. Recent Trends in U.S. Trade and Investment. Report No. 565. Cambridge, Mass.: National Bureau of Economic Research. Lipsey, R. E., and I. B. Kravis. 1985. The competitive position of U.S. manufacturing firms. Banco Nazionale de Lavoro Quarterly Review (June):127-154. Lodge, G. 1984. The American Disease. New York: Alfred A. Knopf. Magaziner, I. C., and R. B. Reich. 1982. Minding America's Business. New York: Harcourt Brace Jovanovich. Mansfield, E. 1968. The Economics of Technological Change. New York: W. W. Norton. Mowery, D., and N. Rosenberg. 1985. Commercial aircraft: Cooperation and competition between the U.S. and Japan. California Management Review (Summer):70-92. National Science Board. 1985. Science Indicators 1985. Washington, D.C.: National Science Board. Nelson, R., ed. 1982. Government and Technical Progress. New York: Pergamon Press.

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COPING WITH TECHNOLOGICAL CHANGE: U.S. PROBLEMS AND PROSPECTS 190 Vernon, R. 1977. Storm Over the Multinationals. Cambridge, Mass.: Harvard University Press. Vernon, R., and W. H. Davidson. 1979. Foreign Production of Technology-Intensive Products by U.S.-Based Multinational Enterprises. Report to the National Science Foundation, No. PB80 148638, January. Washington, D.C.: National Science Foundation. Vogel, E. 1979. Japan as No. 1: Lessons for America. Cambridge, Mass.: Harvard University Press. Walters, I. 1983. Structural adjustment and trade policy in the international steel industry. In Trade Policy in the 1950s, W. R. Cline, ed. Cambridge, Mass.: MIT Press.

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