First, Harry

English

Cornell Law Library

Cornell International Law Journal
Volume 22
Issue 3 Symposium 1989 Article 12
The View from 1984: What Have We Learned in
Five Years
Harry First
Follow this and additional works at: http://scholarship.law.cornell.edu/cilj
Part of the Law Commons
This Article is brought to you for free and open access by Scholarship@Cornell Law: A Digital Repository. It has been accepted for inclusion in Cornell
International Law Journal by an authorized administrator of Scholarship@Cornell Law: A Digital Repository. For more information, please contact
jmp8@cornell.edu.
Recommended Citation
First, Harry (1989) "The View from 1984: What Have We Learned in Five Years," Cornell International Law Journal: Vol. 22: Iss. 3,
Article 12.
Available at: http://scholarship.law.cornell.edu/cilj/vol22/iss3/12
Harry First *
The View from 1984: What Have We
Learned in Five Years?
I. Introduction
In this essay I would like to offer two perspectives on the United States-
Japan trade relationship.
The first is a time perspective. I spent a year in Japan, from 1983 to
1984, during which time I tried to pay some attention to the trade issues
people felt were important. I thought it might be interesting to reveiw
what the live trade issues were then and see whether we appear to have
made much progress since. This is the reason for the "view from 1984"
in my title.
The second perspective is a "disciplinary" perspective. My major
area of academic interest is antitrust law. We are now approaching the
centennial of antitrust law in the United States, but antitrust law is not
found only in the United States. Japan has had an antitrust law for more
than forty years. I would like to argue that an antitrust perspective is
vital for addressing the second part of my title, "what have we learned
in five years." Indeed, I believe that attention to antitrust concepts is
important not only for the U.S.-Japan trade relationship, but also if we
are to make progress in addressing significant issues of economic policy
for our domestic economy. Specifically, I will argue that the United
States should resist efforts to pursue a policy of "managed" trade, and
should instead focus on market oriented strategies.
H. The View From 1984
What was happening in 1983-1984 with regard to trade issues? A con-
venient way to refresh recollection is to look through a report published
in 1984 by a group of American andJapanese business people, the U.S.-
Japan Trade Study Group.1 Their report provides a laundry list of
products about which we were worried. Examples included beef and
oranges, soda ash, telecommunications equipment for NTT, communi-
* Professor of Law, New York University Law School
1. U.S.-JAPAN TRADE STUDY GROUP, PROGRESS REPORT: 1984 (Sept. 1984).
22 CORNELL INT'L LJ. 509 (1989)
Cornell International Law Journal
cations satellites, baseball bats and plywood. 2 The United States was
concerned about the sales of foreign-made automobiles in Japan, and
about Japan's heavy sales of automobiles in the United States. (Japan,
after "threatening" not to renew its voluntary restraints on exports of
automobiles to the United States, finally agreed in 1984 to limit exports
to 1.85 million vehicles.) The U.S. was also concerned about access to
service markets. It wanted to open Japan's capital markets to U.S. finan-
cial institutions and to open legal markets to U.S. lawyers.
A number of "structural issues," which went beyond problems of
selling specific products or services, were also being discussed in 1984.
One was Japan's arcane retail distribution system which, it was argued,
protected numerous small retailers who were closely tied to large Japa-
nese manufacturers, thereby making it more difficult for foreign firms to
penetrate domestic markets. Another structural issue was Japan's legal
mechanism for dealing with distressed industries, the apparent effect of
which was to exclude lower priced imported goods. A third structural
problem was Japan's system for protecting intellectual property which, it
was argued, failed to protect adequately U.S. patented, trademarked, or
copyrighted products. Finally, there was the yen-dollar exchange rate.
There were also several interesting political events occurring in that
time period. Ronald Reagan visited Japan and became the first United
States president to address the Diet. Prior to his visit Secretary of Com-
merce Baldridge had given a "harsh warning" to Japan that failure to
resolve trade issues could invite a political crisis for the Reagan Admin-
istration. After Reagan departed, Secretary of State Schultz pronounced
the visit "very successful." December elections then gave Prime Minis-
ter Nakasone an unexpected set-back, leading to expressions of caution
about his government's ability to make major trade concessions. In Jan-
uary 1984, our Ambassador to Japan, Mike Mansfield, warned Ministry
officials about the failure to make tangible progress on trade issues. In
February, the United States and Japan agreed to solve all pending trade
issues before Reagan and Nakasone met again in June 1984.
What has happened since 1984? As a general matter, the trade
problems of 1983-1984 have not been solved. Not that there have been
no changes. The value of the dollar has depreciated but the overall
place of imports in the economy ofJapan does not appear to have been
significantly altered. U.S. lawyers can practice in Japan without passing
the Japanese bar examination, but they are not permitted to give advice
on Japanese law nor are they permitted to form partnerships with Japa-
nese lawyers. It seems that they are free to give advice on U.S. law to
theirJapanese clients who wish to do business in the United States, but
they could have done that from New York or Los Angeles without pay-
ing Tokyo prices. Foreign auto imports into Japan are still less than 4%;
Honda (imported from the United States) is the fastest growing import,
with the Ford Probe (made by Mazda in Michigan) right behind. (I don't
2. Id. at 30-40.
Vol 22
1989 View From 1984
know what this says about the ability of "imports" to succeed in Japan.)
On the export side, the automobile voluntary restraints are still in place,
with the amount now set at 2.2 million vehicles (although Japanese car
makers are not reaching the overall quota at this point). We have yet to
sell a communications satellite to Japan, and Japanese government and
university officials are unwilling to buy our supercomputers. And, of
course, beef remains a problem, and rice has now been added to the list.
Political events still give the appearance of importance. We have a
new president, a new U.S. Trade Representative, and a new U.S. trade
law with the potential for increased sanctions if imports by Japan do not
increase, although exactly what will happen under this "Super 301" pro-
cess is as much an unknown to trade officials as it is to the Congress
which wrote it. We also have a major political scandal in Japan involving
possible bribery through stock distribution to favored politicians. On
April 25, 1989, Prime Minister Takeshita resigned as a result of the scan-
dal,3 throwing the ruling Liberal Democratic Party into disarray, at least
temporarily.4 Indeed, the scandal may significantly limit Japan's ability
to negotiate trade issues for months to come. 5
Actually, the comparison between 1984 and 1989 should not sur-
prise any student of U.S.-Japan trade relations. One could simply refer
back to the experience of Townsend Harris, 6 who went to Japan as our
first Consular official in August of 1856. Harris had the task of making a
treaty to "at once open Japan to our commerce." One of the areas of
friction then was the yen-dollar rate (we thought the dollar was deliber-
ately undervalued, impeding our ability to purchase Japanese goods
cheaply). Another area of friction was distribution. Japan's government
wanted to permit trade only through then-existing trading companies
(tonya) and only in one location, some 18 miles from Tokyo. Harris rec-
ognized that this would greatly handicap the sale of imported goods,
and the restriction was eventually dropped in the interest of "the experi-
ment of free trade."
Harris' negotiating problems also sound distressingly familiar. He
was first met with the argument that the Japanese, unlike the Americans,
could not respond rapidly to every request. He finally hit upon the fol-
lowing technique: "I felt.., that the more I yielded and acquiesced, the
more they would impose on me, while, by taking a bold attitude and
assuming a threatening tone, I should at once bring them to terms."
7
Harris did obtain an agreement on tariffs and export duties, and an
agreement to open the ports of Osaka and Tokyo to Americans within
five years. But strong political opposition arose even to this modest
3. Weisman, Takeshita Resigns as Japan "s Premier over Gift Scandal, N.Y. Times, Apr.
25, 1989, at Al, col. 7.
4. Pear, CS. Experts See Trade Disputes Put in Limbo as Tokyo Regroups, N.Y. Times,
Apr. 25, 1989, at A8, col. 6.
5. Id.
6. See generally, THE COMPLETE JOURNAL OF TOWNSEND HARRIS (M. Cosenza ed.
1930).
7. Id. at 496.
Cornell International Law Journal
agreement, and the Japanese negotiators refused to sign it. The agree-
ment was to be signed within two months, after obtaining the Emperor's
approval. Four months later, without the Emperor's approval, the Japa-
nese delegation finally signed the treaty.
Harris was not delighted with his two years of negotiation: "I shall
esteem myself lucky if I am not removed from office, not for what I have
done, but because I have not made a commercial treaty that would open
Japan as freely as England is open to us." 8
III. Two Paradigms
If little seems to have changed in five years (or, more pessimistically, 130
years), what should we learn from this? And what shouldn't we learn?
To answer these questions I offer two paradigms, semiconductors and
soda ash. I think that the way these two industries were handled in the
past five years points the way.
Clyde Prestowitz, in an influential book titled Trading Places, argues
for an increase in "managed trade."9 Managed trade recognizes that
"nation states" compete (perhaps more so than individual companies),
and that in this competition political and cultural norms may trump mar-
ket forces. It is not enough, then, to "open" markets. Trade must be
managed so that we get results, not just process. Results, in this con-
text, means guaranteed market share ("quotas").
One example Prestowitz gives for managed trade is the semicon-
ductor industry. After describing how Japan's government assisted the
development of Japan's semiconductor industry, Prestowitz details the
problems subsequently faced by the U.S. semiconductor industry. 10
Beginning in 1984,Japanese producers of mass production semiconduc-
tor chips instituted large price reductions, causing major financial losses
to U.S. manufacturers. Prestowitz indicates that U.S. trade policy then
became a search for a modus vivendi with the Japanese industry so as to
give U.S. firms time to regain their health."I The U.S. objectives were
higher prices (which required control ofJapanese output and the elimi-
nation of sales in "third markets") and an increase in U.S. market share
in Japan. This led to the "supreme irony"' 12 of asking Japan's govern-
ment to cartelize its industry. Nevertheless, "the original Japanese
intervention in the market had given rise to market distortion that could
be corrected only by further intervention." 13
But what were the effects of the semiconductor product agreements
for which Prestowitz argues? For one, these agreements put the Minis-
try of International Trade and Industry ("MITI") in control of world-
8. Id. at 374.
9. See C. PRESTOWITZ, TRADING PLACEs 322-27 (1988).
10. Id. at 44-45.
11. Id. at 61.
12. Id. at 62.
13. Id.
Vol 22
1989 View From 1984
wide semiconductor pricing. For another, the agreements left the Japa-
nese firms with high profits which they have proceeded to reinvest in
further development. In the last six months of 1988 approximately $3
billion in Japanese investment in new semiconductor lines was
announced. The agreements also raised input prices to downstream
U.S. computer manufacturers, to the dismay of our computer industry.
What didn't the agreements do? For one, they failed to attract entry
by U.S. firms into the mass production DRAM market. Japanese firms
continue to dominate this field. For another, the agreements have not
led to an increase in the share ofjapan's market held by U.S. firms. 14 In
fact, by January 1989, the U.S. chip industry was reported to be sliding
once again.
My other paradigm is soda ash. Soda ash is a raw material used in a
number of production processes, including glass. The United States has
extensive deposits of natural soda ash. Japan has none, relying instead
on more expensive manufactured soda ash. From 1973 to 1983, Japa-
nese manufacturers of soda ash formed a cartel to limit the imports of
the cheaper natural U.S. soda ash. The approach taken in this case by
the U.S. government and the U.S. industry, however, was not to "man-
age" trade in soda ash. Rather, it was to open Japan's market through
the use of Japan's antitrust law. In 1983, acting on complaints of the
U.S. industry, forwarded by U.S. government officials, the Japan Fair
Trade Commission (which enforces Japan's antitrust law) found that the
Japanese companies had violated the Antimonopoly Act and ordered the
cartel disbanded. 15 Imports did increase in the wake of this decision,
although the result has not been an unalloyed success.
The U.S. industry continues to believe that Japanese soda ash man-
ufacturers pressure their customers to limit purchases of U.S. soda ash.
In 1987, after further complaints by the U.S. industry, the Fair Trade
Commission called upon the domestic soda ash manufacturers to "take
care not to engage in any conduct that might obstruct fair competition
through unduly restricting the purchases of soda ash consumers or hin-
dering the sales of importers."' 6 The Commission did not, however,
find any further violations of the antitrust laws. Sales of U.S. soda ash
now appear to have flattened out at about 20% of the market, an
amount which is larger than the share prior to the Commission's 1983
decision, but which the U.S. industry still views as too low given its
apparent price advantage.
14. Both sides are now arguing over the meaning of a confidential side letter
regarding market share for U.S. firms in Japan.
15. The soda ash decision is discussed more fully in First, Japan's Antitrust Policy:
Impact on Import Competition, in FRAGILE INTERDEPENDENCE 67-69 (T. Pugel & R. Haw-
kins eds. 1986).
16. "Actual Situation and Other Aspects of the Soda Ash Market in Japan,"
Japan Fair Trade Comm'n, Nov. 25, 1987, at 3 (mimeo) (English translation).
Cornell International Law Journal
IV. Conclusion: The Failure of Managed Trade
What do the two paradigms tell us, aside from the fact that there are no
instant cures for trade problems? On the semiconductor/managed
trade side, I see three lessons. First, managed trade agreements do not
attack underlying problems. They carry no improvements beyond the
immediate relief of a particular problem-import competition. They do
not require that industry investments be made or innovations be under-
taken; real structural change does not occur. Indeed, by ignoring the
underlying economic phenomena which gave rise to the need (for exam-
ple, experience curve economies in semiconductor manufacturing),
managed trade agreements paper over problems rather than solve them.
Second, once in place, managed trade agreements do not disappear.
Steel and automobile restraints are still with us, for example, and I
would not expect semiconductor restraints to disappear when the agree-
ments expire in 1991. Third, managed trade agreements set up market
distortions which are costly and can create new problems. Industrial
development incorporates the restraints; product planning, investment,
and purchasing decisions are made based on their existence. Would
Japanese automobile manufacturers have moved to more "upscale"
models in the absence of export restraints? Does high definition televi-
sion ("HDTV") look more attractive given the existence of the semicon-
ductor agreements?
On the soda ash/competition side I see different lessons. Competi-
tive solutions are market driven. They are based on the only approach
that offers the possibility of long run success. Competitive solutions rec-
ognize the economic motivations of all. Japanese buyers of soda ash (or
beef) will prefer a less expensive product if they can get it; we will not
need quotas to force it on them. If producers are able to get cheaper
and better goods to consumers (whether the consumers are Japanese or
American), eventually consumers will buy. I don't mean to denigrate
the formidable obstacles to making this approach work. Identifying
structural impediments to competition is often difficult. Even in Japan,
cartels are not always as observable as the soda ash cartel. Still, it seems
to me to be preferable to make the effort to look for anticompetitive
agreements and to push antitrust enforcement authorities to do their
job, so that the market can do its job.
It would not surprise me if U.S. industry supports managed trade.
Why shouldn't our companies prefer guaranteed market shares to the
uncertainties of competitive markets? It would not surprise me ifJapa-
nese industry supports managed trade. The lessons of a guaranteed
market share in automobiles cannot have been lost on Japan's managers.
It would not surprise me if Japan's government supports managed
trade. Guiding industries based on market shares is not an unfamiliar
task to Japan's ministries (particularly MITI).
But what of the United States government? The policy drift of the
last eight years has been to negotiate industry-specific fixes from compe-
tition and to stop there. It is no wonder that these issues never seem to
116L.22
1989 View From 1984 515
go away and that our own economic problems seem to be growing. In
this context, managed trade is alluring. I would hope we pick a different
course, though. I would, on the one hand, take a more active govern-
mental role in directing strategic emerging and declining industries. At
the same time, I would reject the drift toward quota capitalism. Instead,
we should adopt policies that aim for the emergence of structurally com-
petitive markets in the United States and injapan. Competition-unpre-
dictable, pluralistic, and unruly-remains the best policy.



The View from 1984: What Have We Learned in Five Years

Scholarship @ Cornell Law

Cornell International Law JournalVolume 22Issue 3 Symposium 1989 Article 12The View from 1984: What Have We Learned inFive YearsHarry FirstFollow this and additional works at: http://scholarship.law.cornell.edu/ciljPart of the Law CommonsThis Article is brought to you for free and open access by Scholarship@Cornell Law: A Digital Repository. It has been accepted for inclusion in CornellInternational Law Journal by an authorized administrator of Scholarship@Cornell Law: A Digital Repository. For more information, please contactjmp8@cornell.edu.Recommended CitationFirst, Harry (1989) "The View from 1984: What Have We Learned in Five Years," Cornell International Law Journal: Vol. 22: Iss. 3,Article 12.Available at: http://scholarship.law.cornell.edu/cilj/vol22/iss3/12Harry First *The View from 1984: What Have WeLearned in Five Years?I. IntroductionIn this essay I would like to offer two perspectives on the United States-Japan trade relationship.The first is a time perspective. I spent a year in Japan, from 1983 to1984, during which time I tried to pay some attention to the trade issuespeople felt were important. I thought it might be interesting to reveiwwhat the live trade issues were then and see whether we appear to havemade much progress since. This is the reason for the "view from 1984"in my title.The second perspective is a "disciplinary" perspective. My majorarea of academic interest is antitrust law. We are now approaching thecentennial of antitrust law in the United States, but antitrust law is notfound only in the United States. Japan has had an antitrust law for morethan forty years. I would like to argue that an antitrust perspective isvital for addressing the second part of my title, "what have we learnedin five years." Indeed, I believe that attention to antitrust concepts isimportant not only for the U.S.-Japan trade relationship, but also if weare to make progress in addressing significant issues of economic policyfor our domestic economy. Specifically, I will argue that the UnitedStates should resist efforts to pursue a policy of "managed" trade, andshould instead focus on market oriented strategies.H. The View From 1984What was happening in 1983-1984 with regard to trade issues? A con-venient way to refresh recollection is to look through a report publishedin 1984 by a group of American andJapanese business people, the U.S.-Japan Trade Study Group.1 Their report provides a laundry list ofproducts about which we were worried. Examples included beef andoranges, soda ash, telecommunications equipment for NTT, communi-* Professor of Law, New York University Law School1. U.S.-JAPAN TRADE STUDY GROUP, PROGRESS REPORT: 1984 (Sept. 1984).22 CORNELL INT'L LJ. 509 (1989)Cornell International Law Journalcations satellites, baseball bats and plywood. 2 The United States wasconcerned about the sales of foreign-made automobiles in Japan, andabout Japan's heavy sales of automobiles in the United States. (Japan,after "threatening" not to renew its voluntary restraints on exports ofautomobiles to the United States, finally agreed in 1984 to limit exportsto 1.85 million vehicles.) The U.S. was also concerned about access toservice markets. It wanted to open Japan's capital markets to U.S. finan-cial institutions and to open legal markets to U.S. lawyers.A number of "structural issues," which went beyond problems ofselling specific products or services, were also being discussed in 1984.One was Japan's arcane retail distribution system which, it was argued,protected numerous small retailers who were closely tied to large Japa-nese manufacturers, thereby making it more difficult for foreign firms topenetrate domestic markets. Another structural issue was Japan's legalmechanism for dealing with distressed industries, the apparent effect ofwhich was to exclude lower priced imported goods. A third structuralproblem was Japan's system for protecting intellectual property which, itwas argued, failed to protect adequately U.S. patented, trademarked, orcopyrighted products. Finally, there was the yen-dollar exchange rate.There were also several interesting political events occurring in thattime period. Ronald Reagan visited Japan and became the first UnitedStates president to address the Diet. Prior to his visit Secretary of Com-merce Baldridge had given a "harsh warning" to Japan that failure toresolve trade issues could invite a political crisis for the Reagan Admin-istration. After Reagan departed, Secretary of State Schultz pronouncedthe visit "very successful." December elections then gave Prime Minis-ter Nakasone an unexpected set-back, leading to expressions of cautionabout his government's ability to make major trade concessions. In Jan-uary 1984, our Ambassador to Japan, Mike Mansfield, warned Ministryofficials about the failure to make tangible progress on trade issues. InFebruary, the United States and Japan agreed to solve all pending tradeissues before Reagan and Nakasone met again in June 1984.What has happened since 1984? As a general matter, the tradeproblems of 1983-1984 have not been solved. Not that there have beenno changes. The value of the dollar has depreciated but the overallplace of imports in the economy ofJapan does not appear to have beensignificantly altered. U.S. lawyers can practice in Japan without passingthe Japanese bar examination, but they are not permitted to give adviceon Japanese law nor are they permitted to form partnerships with Japa-nese lawyers. It seems that they are free to give advice on U.S. law totheirJapanese clients who wish to do business in the United States, butthey could have done that from New York or Los Angeles without pay-ing Tokyo prices. Foreign auto imports into Japan are still less than 4%;Honda (imported from the United States) is the fastest growing import,with the Ford Probe (made by Mazda in Michigan) right behind. (I don't2. Id. at 30-40.Vol 221989 View From 1984know what this says about the ability of "imports" to succeed in Japan.)On the export side, the automobile voluntary restraints are still in place,with the amount now set at 2.2 million vehicles (although Japanese carmakers are not reaching the overall quota at this point). We have yet tosell a communications satellite to Japan, and Japanese government anduniversity officials are unwilling to buy our supercomputers. And, ofcourse, beef remains a problem, and rice has now been added to the list.Political events still give the appearance of importance. We have anew president, a new U.S. Trade Representative, and a new U.S. tradelaw with the potential for increased sanctions if imports by Japan do notincrease, although exactly what will happen under this "Super 301" pro-cess is as much an unknown to trade officials as it is to the Congresswhich wrote it. We also have a major political scandal in Japan involvingpossible bribery through stock distribution to favored politicians. OnApril 25, 1989, Prime Minister Takeshita resigned as a result of the scan-dal,3 throwing the ruling Liberal Democratic Party into disarray, at leasttemporarily.4 Indeed, the scandal may significantly limit Japan's abilityto negotiate trade issues for months to come. 5Actually, the comparison between 1984 and 1989 should not sur-prise any student of U.S.-Japan trade relations. One could simply referback to the experience of Townsend Harris, 6 who went to Japan as ourfirst Consular official in August of 1856. Harris had the task of making atreaty to "at once open Japan to our commerce." One of the areas offriction then was the yen-dollar rate (we thought the dollar was deliber-ately undervalued, impeding our ability to purchase Japanese goodscheaply). Another area of friction was distribution. Japan's governmentwanted to permit trade only through then-existing trading companies(tonya) and only in one location, some 18 miles from Tokyo. Harris rec-ognized that this would greatly handicap the sale of imported goods,and the restriction was eventually dropped in the interest of "the experi-ment of free trade."Harris' negotiating problems also sound distressingly familiar. Hewas first met with the argument that the Japanese, unlike the Americans,could not respond rapidly to every request. He finally hit upon the fol-lowing technique: "I felt.., that the more I yielded and acquiesced, themore they would impose on me, while, by taking a bold attitude andassuming a threatening tone, I should at once bring them to terms."7Harris did obtain an agreement on tariffs and export duties, and anagreement to open the ports of Osaka and Tokyo to Americans withinfive years. But strong political opposition arose even to this modest3. Weisman, Takeshita Resigns as Japan "s Premier over Gift Scandal, N.Y. Times, Apr.25, 1989, at Al, col. 7.4. Pear, CS. Experts See Trade Disputes Put in Limbo as Tokyo Regroups, N.Y. Times,Apr. 25, 1989, at A8, col. 6.5. Id.6. See generally, THE COMPLETE JOURNAL OF TOWNSEND HARRIS (M. Cosenza ed.1930).7. Id. at 496.Cornell International Law Journalagreement, and the Japanese negotiators refused to sign it. The agree-ment was to be signed within two months, after obtaining the Emperor'sapproval. Four months later, without the Emperor's approval, the Japa-nese delegation finally signed the treaty.Harris was not delighted with his two years of negotiation: "I shallesteem myself lucky if I am not removed from office, not for what I havedone, but because I have not made a commercial treaty that would openJapan as freely as England is open to us." 8III. Two ParadigmsIf little seems to have changed in five years (or, more pessimistically, 130years), what should we learn from this? And what shouldn't we learn?To answer these questions I offer two paradigms, semiconductors andsoda ash. I think that the way these two industries were handled in thepast five years points the way.Clyde Prestowitz, in an influential book titled Trading Places, arguesfor an increase in "managed trade."9 Managed trade recognizes that"nation states" compete (perhaps more so than individual companies),and that in this competition political and cultural norms may trump mar-ket forces. It is not enough, then, to "open" markets. Trade must bemanaged so that we get results, not just process. Results, in this con-text, means guaranteed market share ("quotas").One example Prestowitz gives for managed trade is the semicon-ductor industry. After describing how Japan's government assisted thedevelopment of Japan's semiconductor industry, Prestowitz details theproblems subsequently faced by the U.S. semiconductor industry. 10Beginning in 1984,Japanese producers of mass production semiconduc-tor chips instituted large price reductions, causing major financial lossesto U.S. manufacturers. Prestowitz indicates that U.S. trade policy thenbecame a search for a modus vivendi with the Japanese industry so as togive U.S. firms time to regain their health."I The U.S. objectives werehigher prices (which required control ofJapanese output and the elimi-nation of sales in "third markets") and an increase in U.S. market sharein Japan. This led to the "supreme irony"' 12 of asking Japan's govern-ment to cartelize its industry. Nevertheless, "the original Japaneseintervention in the market had given rise to market distortion that couldbe corrected only by further intervention." 13But what were the effects of the semiconductor product agreementsfor which Prestowitz argues? For one, these agreements put the Minis-try of International Trade and Industry ("MITI") in control of world-8. Id. at 374.9. See C. PRESTOWITZ, TRADING PLACEs 322-27 (1988).10. Id. at 44-45.11. Id. at 61.12. Id. at 62.13. Id.Vol 221989 View From 1984wide semiconductor pricing. For another, the agreements left the Japa-nese firms with high profits which they have proceeded to reinvest infurther development. In the last six months of 1988 approximately $3billion in Japanese investment in new semiconductor lines wasannounced. The agreements also raised input prices to downstreamU.S. computer manufacturers, to the dismay of our computer industry.What didn't the agreements do? For one, they failed to attract entryby U.S. firms into the mass production DRAM market. Japanese firmscontinue to dominate this field. For another, the agreements have notled to an increase in the share ofjapan's market held by U.S. firms. 14 Infact, by January 1989, the U.S. chip industry was reported to be slidingonce again.My other paradigm is soda ash. Soda ash is a raw material used in anumber of production processes, including glass. The United States hasextensive deposits of natural soda ash. Japan has none, relying insteadon more expensive manufactured soda ash. From 1973 to 1983, Japa-nese manufacturers of soda ash formed a cartel to limit the imports ofthe cheaper natural U.S. soda ash. The approach taken in this case bythe U.S. government and the U.S. industry, however, was not to "man-age" trade in soda ash. Rather, it was to open Japan's market throughthe use of Japan's antitrust law. In 1983, acting on complaints of theU.S. industry, forwarded by U.S. government officials, the Japan FairTrade Commission (which enforces Japan's antitrust law) found that theJapanese companies had violated the Antimonopoly Act and ordered thecartel disbanded. 15 Imports did increase in the wake of this decision,although the result has not been an unalloyed success.The U.S. industry continues to believe that Japanese soda ash man-ufacturers pressure their customers to limit purchases of U.S. soda ash.In 1987, after further complaints by the U.S. industry, the Fair TradeCommission called upon the domestic soda ash manufacturers to "takecare not to engage in any conduct that might obstruct fair competitionthrough unduly restricting the purchases of soda ash consumers or hin-dering the sales of importers."' 6 The Commission did not, however,find any further violations of the antitrust laws. Sales of U.S. soda ashnow appear to have flattened out at about 20% of the market, anamount which is larger than the share prior to the Commission's 1983decision, but which the U.S. industry still views as too low given itsapparent price advantage.14. Both sides are now arguing over the meaning of a confidential side letterregarding market share for U.S. firms in Japan.15. The soda ash decision is discussed more fully in First, Japan's Antitrust Policy:Impact on Import Competition, in FRAGILE INTERDEPENDENCE 67-69 (T. Pugel & R. Haw-kins eds. 1986).16. "Actual Situation and Other Aspects of the Soda Ash Market in Japan,"Japan Fair Trade Comm'n, Nov. 25, 1987, at 3 (mimeo) (English translation).Cornell International Law JournalIV. Conclusion: The Failure of Managed TradeWhat do the two paradigms tell us, aside from the fact that there are noinstant cures for trade problems? On the semiconductor/managedtrade side, I see three lessons. First, managed trade agreements do notattack underlying problems. They carry no improvements beyond theimmediate relief of a particular problem-import competition. They donot require that industry investments be made or innovations be under-taken; real structural change does not occur. Indeed, by ignoring theunderlying economic phenomena which gave rise to the need (for exam-ple, experience curve economies in semiconductor manufacturing),managed trade agreements paper over problems rather than solve them.Second, once in place, managed trade agreements do not disappear.Steel and automobile restraints are still with us, for example, and Iwould not expect semiconductor restraints to disappear when the agree-ments expire in 1991. Third, managed trade agreements set up marketdistortions which are costly and can create new problems. Industrialdevelopment incorporates the restraints; product planning, investment,and purchasing decisions are made based on their existence. WouldJapanese automobile manufacturers have moved to more "upscale"models in the absence of export restraints? Does high definition televi-sion ("HDTV") look more attractive given the existence of the semicon-ductor agreements?On the soda ash/competition side I see different lessons. Competi-tive solutions are market driven. They are based on the only approachthat offers the possibility of long run success. Competitive solutions rec-ognize the economic motivations of all. Japanese buyers of soda ash (orbeef) will prefer a less expensive product if they can get it; we will notneed quotas to force it on them. If producers are able to get cheaperand better goods to consumers (whether the consumers are Japanese orAmerican), eventually consumers will buy. I don't mean to denigratethe formidable obstacles to making this approach work. Identifyingstructural impediments to competition is often difficult. Even in Japan,cartels are not always as observable as the soda ash cartel. Still, it seemsto me to be preferable to make the effort to look for anticompetitiveagreements and to push antitrust enforcement authorities to do theirjob, so that the market can do its job.It would not surprise me if U.S. industry supports managed trade.Why shouldn't our companies prefer guaranteed market shares to theuncertainties of competitive markets? It would not surprise me ifJapa-nese industry supports managed trade. The lessons of a guaranteedmarket share in automobiles cannot have been lost on Japan's managers.It would not surprise me if Japan's government supports managedtrade. Guiding industries based on market shares is not an unfamiliartask to Japan's ministries (particularly MITI).But what of the United States government? The policy drift of thelast eight years has been to negotiate industry-specific fixes from compe-tition and to stop there. It is no wonder that these issues never seem to116L.221989 View From 1984 515go away and that our own economic problems seem to be growing. Inthis context, managed trade is alluring. I would hope we pick a differentcourse, though. I would, on the one hand, take a more active govern-mental role in directing strategic emerging and declining industries. Atthe same time, I would reject the drift toward quota capitalism. Instead,we should adopt policies that aim for the emergence of structurally com-petitive markets in the United States and injapan. Competition-unpre-dictable, pluralistic, and unruly-remains the best policy.

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The View from 1984: What Have We Learned in Five Years

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