Commentary

Intel’s Faustian Bargain

By Edward L. Hudgins
July 14, 1998

“First he makes love to me and lavishes me with gifts. Then he beats me.”

This isn’t the cry of the abused mistress of an unstable misogynist; it’s the refrain now heard from the Intel Corporation. The Federal Trade Commission has hit the producer of Pentium processors with a complaint of monopolistic practices. Yes, this is part of the Clinton administration’s ongoing assault on successful companies. Since the Antitrust Division of the Justice Department has its hands full strong-arming Microsoft, why not let the FTC in on the action?

But the FTC’s actions highlight the deeper dangers of the Faustian bargain of granting governments the power to “help” industries or ensure “fair” competition.

In the 1980s Intel, along with other American semiconductor manufacturers, whined to Washington that unfair Japanese business practices were holding their share of Japan’s market to only 10 percent. They also accused Japanese firms of dumping chips on American (and other) markets at unfairly low prices.

Washington listened. In the 1986 Semiconductor Agreement, the U.S. government thought it had gotten the Japanese government to guarantee a 20 percent share of it’s market for American products and to “voluntarily” restrict exports of semiconductors by Japanese manufacturers. Further, in that same year the federal government helped create Sematech, a research consortium of the 14 largest American semiconductor manufacturers. To date, Sematech has spent around $900 million in taxpayers’ funds to match industry contributions.

But the government’s manage-trade-by-the-numbers policy obscured the fact that part of the American industry’s situation was of its own making. The Japanese specialized in less-complex DRAMs, the memory chips used in appliances and consumer electronics. Around 1980, American manufacturers, including Intel, began shifting production away from DRAMs to higher-valued microprocessors, the brains of personal computers. But by the mid-1980s the Americans wanted to get back into DRAMs and were not shy about enlisting the U.S. government to help them establish their vision of “fairness.”


Businesses had better beware when they jump into bed with government. In the end they’re more likely to get the back of the hand than tender loving care.


These facts show the disingenuousness of the pleas of Intel and other American producers, as recently as 1996, for continuing trade protection. While American firms had 40 percent of the world market for all semiconductors, foreign firms — mainly American — only had 25 percent of the Japanese market. Unfair? At that time Intel had 64.2 percent of the Japanese market for high-valued microprocessors. And in any case, Japanese producers had 40 percent of the world market for all semiconductors but only 23 percent of America’s market. Under a regulate-by-the-numbers rule, Japan should have accused America of unfair practices.

With the trade restrictions under the Semiconductor Agreement, Intel and other American semiconductor producers were able to limit supplies and keep prices high. This harmed American enterprises — for example, computer manufacturers — that used semiconductors in their products.

Further, Sematech, with the federal government as sugar daddy, allowed Intel and others to bully their competitors. Smaller American firms were kept out of that consortium by high membership fees. Furthermore, Sematech forced some equipment manufacturers to sell exclusively to consortium members. These looked like monopoly practices, but the Antitrust division and the FTC knew their place. After all, this was a government-supported monopoly.

But now, with the FTC actions against Intel, the federal government has gone from benefactor to adversary. The lessons of Intel could not be clearer. First, governments, not the private sector, create and sustain coercive monopolies. If the U.S. government wants to ensure competition, it can unilaterally remove all of its trade barriers. Let the Japanese give Intel some real competition!

Second, businesses had better beware when they jump into bed with government. In the end they’re more likely to get the back of the hand than tender loving care. Ironically, Intel, in contrast to Bill Gates, has gone out of its way to appease federal officials. Intel COO Craig Barrett has put his executives through seminars to help them avoid antitrust conflicts. But the devil doesn’t play fair. One can just hear a government goon telling Intel, “Look, we made you; we can break you.”

Third, America’s antitrust laws should be repealed entirely. Alan Greenspan put it well when he wrote that antitrust “is a world in which competition is lauded as the basic axiom and guiding principle, yet ‘too much’ competition is condemned as ‘cutthroat.’ It is a world in which actions designed to limit competition are branded as criminal when taken by businessmen, yet praised as ‘enlightened’ when taken by the government. It is a world in which the law is so vague that businessmen have no way of knowing whether specific actions will be declared illegal until they hear the judge’s verdict — after the fact.”

The issue is not market shares, prices or bundling of products and services; it is the freedom of enterprises to offer whatever goods they wish to customers and the freedom of customers to accept or reject such goods. And the sooner governments stop trying to help or hinder enterprises, the sooner truly free markets can function.

Edward L. Hudgins is director of regulatory studies at the Cato Institute.