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Not a MyNAP member yet? Register for a free account to start saving and receiving special member only perks. During the s a number of disputes centered on trade and investment in technology—and capital-intensive sectors.
These include so-called high-technology sectors such as pharmaceuticals and aircraft , as well as some such as autos that are classified as medium-technology sectors because the Organization of Economic Cooperation and Development OECD definitions are based on research and development intensity, which reflects only one, albeit important, characteristic of such industries.
There are a number of reasons why technology issues have featured more prominently in the international agenda over the past decade and a half. Perhaps the most fundamental was the emergence by the end of the s of the "convergence club" of the developed countries i.
This convergence was largely a result of "catch-up. The convergence was greatly facilitated by the reduction of barriers to trade and. Other characteristics such as patent activity and scientific and engineering manpower are also relevant, and the OECD provides data on these aspects as well. But no other complex categorization has been developed that would consider input and output measures as well as capital intensity, concentration measures, product and process innovation, specialized suppliers of technology-intensive components, etc.
For a sectoral taxonomy that attempts to deal with some of the aspects of Paolo Guerrieri, see Harris and Moore, eds.
So one source of the technology focus of the s was rising concern in the United States about challenges to American technological preeminence in both medium-technology capital-intensive sectors such as autos and technology-intensive components and equipment as well as high-technology sectors.
Thus, as can be seen from Table 1 , the U. Furthermore, as is clear from Table 1 , the real impact of the Japanese challenge over the past two decades has been rising import penetration rather than declining export share. But Japan's import shares did not follow this trend. Thus, one consequence of le defi Japanais was a marked increase in international friction that centered on export access rather than import protection in these technology-intensive sectors.
But there is more to the story than opening international markets for particular goods. In the s there was a change in the climate of ideas among economists and policymakers that generated a lively and still ongoing debate about why high-technology matters and what governments should do about nurturing high-technology industries located in their own countries.
Although European technology and industrial policies had started much earlier in member states, in the s there was a new drive at the European Community level.
And in the United States, a traditional aversion to such policies gave way to new initiatives by both the Reagan and Bush administrations that have continued in recent years. The rationale for fostering domestic-based high-technology—the change in the climate of ideas—rested on economists' notion of market failure. If a firm is unable to appropriate fully the returns to its investments, it will tend to underinvest in that activity from a social point of view.
Hence government action, for example through patents or by research subsidies, can improve public welfare. Furthermore, in the s it became clear that patents were ineffectual in some leading sectors, such as semiconductors, computers, telecommunications, and aircraft.
In these sectors, companies reap return mainly by achieving a head. They fully expect their rivals to pick up and use their invention, but with a lag. That lag has become shorter and shorter in recent years.
So the basic argument presented in support of government intervention was to capture, on home territory, the externalities generated by innovation in these high-technology industries, which—another argument in support of inter. Furthermore, because other countries see these possibilities, and often the world market may be able to sustain only a small number of firms, a country that seizes them first or pursues them most aggressively and sustainedly can reap significant national returns not only in a particular sector but also, more broadly, because of inter-industry spillovers in the case of intermediate products.
Of course there were many economists who argued that market failure did not make a case for intervention because government failure picking winners was even more likely. But the shift in domestic policy to nurture high-technology sectors and to lessen the speed of diffusion of technology across borders was and is an extremely important element in high-technology friction in both trade and investment. In addition to these two factors—OECD convergence and changes in domestic policies—there were also changes in the patterns of both trade and investment that have heightened the international significance of technology issues.
Increasingly, trade among developed economies has involved the exchange of specialized products within the same industry, i. Intra-industry trade develops mainly in technology-and capital-intensive sectors and in industries that supply highly sophisticated intermediate goods for these industries.
This shows up in the shift of share away from low-technology goods in manufacturing trade among OECD and, increasingly, the dynamic Asian countries. The changing composition of trade among industrialized countries provides a backdrop for the escalation of international rivalry for marketshare to capture economies of scale in these oligopolistic industries.
But, again, this is not the entire story. These developments on the trading front cannot be understood without taking account of equally profound changes in international investment. As mentioned above, much of the trade in high-technology sectors flows within the firm. Although figures are unfortunately scarce, it is estimated that in nearly 40 percent of U. However, these figures do not capture the full impact of multinational enterprises MNEs on the global economy. This remarkable enlargement of the activities of the MNEs reflects the surge in foreign direct investment in the second half of the s see Table 4.
It was the investment surge of the s that spawned the term globalization. Growth of investment from to averaged nearly 30 percent per year, four times the rate of world output and three times the rate of trade. Most of it was in capital-and technology-intensive sectors. Technology flows as captured. An example of intra-industry trade is when Japan exports laptop computers to the United States while the United States exports mainframe computers to Japan.
To be able to compare between countries and industries, the measure is expressed as a percentage of each industry's combined exports and imports. The index varies between 0 and If a country exports and imports roughly equal quantities of a certain product, the IIT index is high. If it is mainly one-way tradej whether exporting or importing , the IIT index is low. For aggregation purposes, the measure can be summed over many industries.
After a slowdown in the early s because of a recession in the OECD countries , investment flows have started to pick up again, especially in the East Asian dynamic economies.
Although part of the ''bulge" of the s was due to one-off factors e. Thus, the traditional international rivalry among MNEs is greatly intensified by the ongoing technological revolution, as corporations seek to capture economies of scale and scope, customize products to satisfy consumer tastes, generate sophisticated high-quality inter-and intra-corporate networks, and strive to gain access to knowledge, both technological and "tacit," which is accessible only by continuing on-site learning.
For the globalizing MNE, preponderantly in high-technology sectors, market entry by means of trade and investment is essential: The two modes are complements rather than alternatives. And market presence is a two-way channel for both technology diffusion and technology access.
Impediments to effective access are no longer confined to overt border barriers to trade or explicit restrictions.
Rather, impediments to effective access can often arise from domestic regulatory policies or private sector actions that have an exclusionary effect by accident or design. In summary, a number of fundamental changes in both the international environment and in the tilt of domestic "industrial" policies that emerged in the s generated new types of international friction, much of it centered on technology-intensive sectors.
In the following section these issues are presented by a matrix so as to illustrate the cross-cutting dimension of high-technology friction that effectively rules out proposals for an overall, or comprehensive, high-technology international policy. For the most part, the only feasible approach is to devise adaptations to existing rules that are discussed in the section on high-technology policymaking.
There is one exception, however, to this adaptive incrementalism, which is the need for new rules for international cooperation in science and technology, which is discussed in the concluding remarks. As the review in the preceding discussion suggests, high-technology frictions in international trade and investment arise basically from two main sources: On both of these fronts American policy making has played a lead role for reasons mentioned above.
Similarly, firms may, under certain circumstances, seek to use private standards as a means of achieving market dominance and, again, when economies of scale are important, this dominance may not be eroded easily. Indeed it could be regarded as an absence of policy, especially, perhaps, competition policy.
Yet the result may be to enhance the monopoly profits of home-based firms as well as home-based technological capabilities. The above is by way of a warning about the preliminary nature of the matrix that is presented.
It is intended to serve primarily as a means of beginning a discussion on a number of complex and interrelated issues, especially relevant to the high-technology sectors, that have been neglected or overlooked both in the Uruguay Round and in the ongoing debate about the post-Uruguay agenda.
As the policy matrix below illustrates, some existing trade policy rules in the World Trade Organization WTO could be adapted to improve their effective-. Suggestions in this respect are presented below. But it is important to note that, in the case of some of these trade policy instruments and strategic alliances in the investment box , effective adaptation would also involve competition policy. Because no international competition policy regime exists in the WTO, the only feasible option at present would be to promote bilateral or plurilateral cooperative arrangements.
Similarly, in the case of investment, apart from the trade-related investment measures TRIMs agreement, no comprehensive set of rules is included in the WTO. Finally, the proposals with respect to structural impediments are intended to launch a discussion rather than propose rules because there is little agreement today even about the legitimacy of the concept, let alone its precise dimensions. The Uruguay Round Agreement provides specified exemptions from countervailing duties for basic and applied industrial research.
Continuing disputes are likely to arise from definitions of what is "basic" and what is "applied" and therefore what should or should not be "greenlighted. However, a provision also permits a potentially enormous escape hatch by allowing countervailing without prenotification and removal if the subsidy was proved nonactionable ex post, leaving it to other countries to bring action so that subsidizers can buy valuable time and reduce transparency. Because even scientific and technology experts are unlikely to agree about definitions—for one thing, differences across industries are so great that rules for one may make no sense for others—the WTO committee looks set for a lot of fruitless haggling.
This is a field in which the OECD can play a role. These definitions and this methodology should form the basis for the Committee on Subsidies and Countervailing Measures' reviews, data collection, and the WTO dispute settlement procedure. Although this proposal may not solve all the difficult and complex definitional issues, it would. Another potentially fractious aspect of the subsidies code concerns the national security exemption.
The impact of the end of the Cold War on the extent and nature of defense expenditure will be profound. But only one aspect need concern us here: So what could be done to mitigate this potential but probable friction?
Perhaps the time has come to initiate this process! One possibility could be a joint OECD-NATO task force of experts in both military and commercial technology to explore the concept of dual use with a view to producing a taxonomy of more precisely specified and graduated exemptions in the WTO subsidies code.
Also, the issue of dual use arises in a somewhat different fashion in the investment field. Defense Authorization Act of requires a report by the President to the Congress on the results of each investigation by the Committee on Foreign Investment in the U. Government procurement for high-technology products should be tackled by a separate negotiation in the WTO on a conditional most-favored-nation basis.
But as the experience of the disputes of the s in this area illustrates, the codes of behavior that would govern the action of government agents for many high-technology products would not be adequate to avert international conflict if acceptable norms of performance are not established.
For some of these products, an internationally funded performance center could be established to develop technical standards for performance evaluation. In addition to performance standards, another issue that has emerged from high-technology procurement disputes concerns "bid rigging" or collusive arrangements among domestic suppliers on pricing offers. More transparency in procurement specifications on both performance and price, as well as an agreement to bring bid-rigging or other pricing behavior such as deep discounting charges under the new WTO dispute settlement mechanism, which are discussed in more detail below, are also options worth exploring.
The government procurement market for high-technology products is enormous. So the new code, a major accomplishment of the Uruguay Round, provides a good launching pad for further negotiations.