We need policies, and we need mechanisms to identify from specific cases the kind of general policies that are appropriate.

Now, let me make the last two points very briefly.

In response to international trade pressures, the United States has had, with very few exceptions, only one policy-trade protection. We have really attempted to insulate the American economy from foreign pressures and the technique which has ultimately been one form or another of quantitative limitations loosely called, "orderly marketing agreements," has usually sparked our trade competitors to make competitive adjustments rather than our own firms.

Without some form of domestic policy to promote competitive responses in our industries, it is inevitable that groups within this economy will attempt to protect themselves against these international changes. No one wants to pay the price of industrial change while others reap the gains.

Now, as Ambassador Strauss emphasized, once these tactics were used in a limited range of sectors-mostly low-wage sectors, sectors we in some sense wanted to get out of-policymakers could argue that these protections were simply the price paid to gain general free trade legislation, but because the range of trade-effected sectors and sectors in which the trade problems are generated by foreign government policies have grown, the basis of a broader protectionist coalition has also grown.

Domestic policies-industrial policies, if you will-that promote adjustment and insure the competitive position of American firms are ultimately the only alternative that this country has to trade protection and the kinds of disasters that we all envision with that. The last remark is simply that the open trade system has been part of the basis of the Western Alliance and it has also served to assist the expansion of the American company in the postwar years. The major choice we have really, is one in which the stakes in the industry and trade game are double or nothing.

We will really achieve both open trade and a competitive industry or will achieve neither. Some form of domestic policy aimed at addressing the concrete problems of American industry competing in a changing world economy will be required to assure that we manage to win that double state.

Thank you.

[Mr. Zysman's prepared statement "Policy for a Period of Industrial Challenge" follows:]

POLICY FOR A PERIOD OF INDUSTRIAL CHALLENGE

John Zysman

Director, Berkeley Roundtable on the International Economy (BRIE),
Associate Professor of Political Science,
University of California, Berkeley

The trade news has moved from the business page to the front page. The United States stands at an economic crossroads that will affect both

our domestic well-being and our international strength. The nation emerged at the end of the Second World War as the preeminent industrial military and political power in the world. Now its industrial preeminence, on which its military and political positions rest, is being challenged on several fronts: in sectors such as textiles, where standard technology and low cost labor can be easily combined; in complex manufacturing sectors including vital consumer durables such as automobiles, where innovations in production processes abroad have affected the competitive position of American firms; and even in the advanced technology sectors where competitive firms and aggressive government policies are establishing the basis of enduring market position for foreign nations. The entrance (and changing position) of foreign producers in world markets comes precisely at the moment when shifts in manufacturing strategy are facilitated by basic changes in manufacturing technologies such as numerically controlled machine tools, robots, and computeraided design. Finally, state centered development and trade strategies underlie not only the marketplace challenge to American firms, but a fundamental

challenge to the rules of open trade and American economic leadership.1

While an end to world recession and a readjustment of exchange rates will ease these pressure, the problems will not be resolved quickly or easily. It is this triple challenge (a changing world economy, the emerging revolution in production technology, and the neo-mercantilist challenge to the liberal trade system) which the debate on industrial policy must address and on which our work at the Berkeley Roundtable on the International Economy (BRIE) focuses (see Appendix A).

I would like to make five points in these remarks. First, government policies for industrial development--industrial policies, if you will-actively shape the outcomes of international trade. Organized public interventions do more than simply distort the workings of otherwise efficient markets.

Instead they permanently alter the terms of international competition and can irrevocably change the very structure of the market and the position of American industries in the world markets. Government policies can gradually

turn a temporary comparative disadvantage into enduring strength in national markets. Unless we respond, the structure of American industry will be formulated by policies of those governments which do consciously promote the development of their industries. Traditional trade theory suggests to many that if another government wishes to subsidize its industries--creating an arbitrary advantage--then the U.S. government should gladly accept what amounts to a foreign subsidy to its nation's consumers. This is a fundamentally misleading view. If foreign subsidy slowly shifts a nation's comparative advantage toward technology intensive, high value added, high wage sectors,

1See The Mercantilist Challenge to the Liberal International Trade Order, Joint Economic Committee, Congress of the United States, GPO 1982.

then the temporary subsidy is a dangerous gift for us to accept. I will not belabor this argument, which is laid out in detail in Appendix B to this testimony. The conclusion is simple. Industrial policy can create enduring

competitive advantage for a nation's firms and slowly change a nation's comparative advantage.

Second, state strategies to promote economic development have worked in a number of countries.

East Asian countries such as Korea and Taiwan,

as well as Japan, have visibly intervened to reshape their economies.

In

earlier years, the French Planning Apparatus promoted the rapid post-war
development of the French economy although the pace of change has slowed
in recent years.
Nonetheless, in particular sectors such as aircraft and

in the promotion of foreign sales, French development strategies are as
3
important to American firms as Japanese policies.

There are no panaceas to be drawn from these lessons--no single elements
of policy that can be readily copied. There is rather a web of policies.
In Japan, for example, a range of policies allowed the government to play
the twin roles of gatekeeper between the domestic and international economy
and promoter within the domestic economy. In Appendix C I have summarized
our understanding of the operation of Japanese industrial policy.

In all countries, industry policy has served two purposes: first, technically, it has lifted or altered structural obstacles to the growth and transformation of the economy by assuring vital support sectors and

2See John Zysman and Laura Tyson, eds., American Industry in International Competition (Ithaca, NY: Cornell University Press, 1983).

3 For

a more detailed analysis of this see John Zysman, Governments, Markets, and Growth: Financial Systems and the Politics of Industrial Change (Cornell, 1983).

infrastructure; second, policy has served to block or dissolve political
4
opposition to industrial change.

Third, industrial policies are the expression of political priorities

to use the weight of government to sustain economic transformation. Above

all, when successful, those policies have served to ride with the market, to channel and sometimes accelerate it, but not to attempt to override it. Policies that have attempted to suppress the price signals from international markets--signals that indicate what firms must do to establish competitive positions--have been costly failures. The particular form of the policies in Japan, East Asia in general, and France, have depended on very particular institutional arrangements--an elite bureaucracy quite insulated from detailed parliamentary pressures and credit-based financial systems in which allocation is dependent on government choice as much as on price signals. Consequently, the United States cannot in any simple way imitate the policies abroad, both the institutional and political conditions are dramatically different. American policy, however, can be effective by providing the infrastructure for an economy of the twenty-first century and refining market mechanisms to assure that private firms can take advantage of that infrastructure.

A policy for industrial development does not require a detailed response for the problems of each firm or industry. It does require a capacity to learn from the problems of those sectors. The case of the semiconductor industry is a case in point, and one which we are quite familiar with.