Cato Policy Analysis No. 99 January 28, 1988

Policy Analysis

The Semiconductor Industry
and Foreign Competition

by Eugene Volokh

Eugene Volokh is vice president of research and development at VESOFT, Inc., a software firm specializing in the Hewlett- Packard large business minicomputer market.


Executive Summary

Perhaps the most disquieting aspect of the troubles presently faced by America's semiconductor industry is that high technology was the very area in which the United States was supposed to be superior. When the automobile and steel industries were in deep trouble in the late 1970s and early 1980s, pundits predicted that the future of American industry lay in "sunrise industries," high-technology fields where the cheap labor available to foreign competitors would be more than compensated for by our Yankee ingenuity.

Unfortunately, it seems we Yankees do not possess a monopoly on ingenuity, for the Japanese semiconductor industry has proven very competitive. In one particular area--the production and sale of general-purpose memory chips, so-called DRAMs (Dynamic Random Access Memory) and EPROMs (Erasable Programmable Read Only Memory)--the performance of American companies has been disastrous. In 1975, U.S. merchant producers (companies that make chips to sell to others rather than just for their own internal use) had 100 percent of the U.S. DRAM market. In 1986, they had 5 percent of that market.(1) When all chips sold by merchant producers are taken into account, the U.S. producers' market share declined from 60 percent in 1975 to less than 50 percent in 1985, while the Japanese share rose from 20 percent to 40 percent in the same period.(2)

Naturally, such a loss of industrial competitiveness and the accompanying losses in employment quickly turned the issue from a private one into a public one. In 1983, the Semiconductor Industry Association (SIA) published a report that accused the Japanese of a variety of unfair trade practices.(3) In 1986, the United States and Japan signed the Semiconductor Trade Agreement, under which the Japanese promised to take steps designed to alleviate the plight of American chipmakers. In February 1987, the Department of Defense's Science Board issued its "Report on Defense Semiconductor Dependency," which asserted military reasons for protecting and strengthening America's semiconductor industry; in April 1987, in response to Japanese violations of the 1986 Semi- conductor Trade Agreement, the U.S. government imposed trade sanctions on Japanese imports; and, currently, the congressional trade bill would authorize $500 million over the next five years to finance Sematech, a government-industry research consortium to develop new semiconductor manufacturing techniques, a proposal advanced by the SIA and then by the Defense Science Board.

This, of course, is not the first time foreign trade and protectionism have been discussed in the United States, and will certainly not be the last. In a democracy, it is inevitable that whenever one segment of society feels put upon by forces it believes are outside its control, it will petition the government for help; and there might well be some cases where a hands-off approach to international trade is not the best solution. However, before the United States embarks on a new round of trade protectionism, it should first investigate where the true interests of the nation as a whole--not just the semiconductor manufacturers--lie.

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