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Strategic Trade Theory & its Application to the Japanese-United States Semiconductor Battles
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Describes Strategic Trade Theory as one in which economies or industries are in direct competition. Examines the US/Japan Semiconductor wars of 1987-97 as a case study.... More...
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Paper Abstract:
Describes Strategic Trade Theory as one in which economies or industries are in direct competition. Examines the US/Japan Semiconductor wars of 1987-97 as a case study.

Paper Introduction:
Strategic Trade Theory and its Application to the Japanese-United States Semiconductor Battles The Theory Defined Strategic Trade Theory, as it is defined by Robert E. Kennedy (1996) is a new way of analyzing the trade relationships between two countries which in effect turns against some of the traditional theories of comparative advantages. Kennedy states: "The theory of comparative advantage is one of the most widely accepted economic principles among economists. The theory, as well as substantial historical evidence, suggests that free trade raises national income, while government intervention in trade relations generally lowers a nation's wealth" (Kennedy, 1996, 1). But. argues Kennedy, the comparative advantage theory does

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Trade face-off: A dangerous U.S.-Japanconfrontation. Russell, G.(1987, April 13). U.S., Japanese semiconductor chiefsto cooperate. Japan andAmerica reached an agreement in 1987 and that allowed for rapid productionof Japanese semiconductors. This cooperation is, logically, the best application of thecompetitive trade theory. Advantage of Learning byDoing occurs when the accumulative business skills connected with amanufacturing process improve, thereby eventually lowering the costs. Reuters Business Report. argues Kennedy, the comparative advantage theory does not applyequally well to imperfectly competitive industries. The economic gains from trade:Theories of strategic trade. After being pressured by the U.S. * The U.S., Europe, Korea, and Japan will make their trade data moreavailable so that each country's industries will have fair access to theother's markets. Harvard Business School. R. Note 9-796-184. In April 1997, just about 1 years after the first rumblings of amajor trade war hit the world press the chiefs of the world's biggestcomputer chip companies agreed at an industry summit to cooperate ondeveloping next-generation chip making technologies. 92. As Russell (1987)noted, "it is no larger than a few grains of rice, but it was big enough tocause one of the most serious episodes between the U.S. The first concept of Non Retaliation doesn'tstand up to reality since it assumes that one country will not retaliateagainst another once restrictions are applied. The four member nations account for 9 percentof the world's chip production. This theory is called"competitive trade," and Kennedy points out that there are four maintheories that are dominating the scholarly discussion of this new theory.Those four theories are: The Advantage of Market Power; The Advantage ofProduction Economies of Scale; The Advantage of Learning by Doing; and, theAdvantage of Externalities. Itis important for government intervention to restrict inflow of competitivegoods during this period. and Japan since theend of World War II. Their production, which grew by almost 1 % a year compounded in the 198 s, shrank by 1 .6%, to $189 billion. Schlender, B.R. . One of the news stories generated by the event said this:"Cooperation between American and Japanese semiconductor industries issomething relatively new. Strategic Trade Theory and its Application to the Japanese-United States Semiconductor BattlesThe Theory Defined Strategic Trade Theory, as it is defined by Robert E. (1996, November 25). computer and chip makers andby upstarts from South Korea, Taiwan, and Southeast Asia. The Economies of Scale advantage occurs when a product hasprogressively lower manufacturing costs as manufactured volume increases.In this situation, the government helps the manufacturer become a power bykeeping foreign products out of its markets. After six years, the Japanese manufacturerswere facing problems, which show how the assumption that companiesmanufacture alike really does not work. This tactical move can be countered byanother country imposing tariff limitations on that same product. To put that in perspective, the $22.3 billion shortfall is equivalent to what the U.S. Kennedy. relationship will be examined. For once two nations have battered each other inthe battle of the marketplace, the wise executives realize that cooperationwith every one sharing a piece of the global pie is preferable to wantingthe whole thing for one country References Karimkhany, K. Schlender goes on to note that, like IBM, these companies found outthat "protecting established lines of business instead of quickly embracingnew technologies is a dead-end strategy" (Schlender, 1993, 92). . Fortune. They also agreed tothe following: * A task force to study how best to measure internationalsemiconductor trade and market share figures. When applied to thesituation between Japan and the United States regarding the two nations'semiconductor policies, the competitive advantage theory falls flat. Once again, the Japan-U.S. This logic has been used to justify subsidies andimport protection to a variety of high-technology industries" (Kennedy,1996, 1).The Theory Applied to Japan/US Semiconductor Industry Critics of the competitive strategy theory argue in five main areas,and this analysis will deal with two of those: Non-Retaliation andMutuality of Manufacturing. He saysthat "In the competitive case, a tariff lowers both domestic and foreignwelfare" (Kennedy, 1996, 2). But. 28. Kennedy (1996)is a new way of analyzing the trade relationships between two countrieswhich in effect turns against some of the traditional theories ofcomparative advantages. TIME. Over timethese companies found themselves in a difficult situation because they were"being squeezed both by bolder and leaner U.S. That article detailed the threats and counter-threatsmade between Japan and America concerning the semiconductors Japan wasmaking and selling to America for a lower cost than those same chips madeby American manufacturers. government Japan signed anagreement in 1986, and another in 1991, to increase the share of foreignsemiconductor companies within the Japanese market to 2 percent. The second argument made against the competitive trade theory is thatthe assumptions are dependent on "somewhat obscure assumptions aboutindustry structure and behavior" (Kennedy, 1996, 2). Thebattle first came to light more than 1 years ago. This competitive technique is seen whenone country decides to increase profitability by restricting output,thereby creating a false scarcity. The Advantage of Market Power exists when one country "exercisessignificant market power over the supply of a good, such as Saudi Arabia'soil reserves," (Kennedy, 1996, 1). . (1997, April 12). electronics industry would lose if Hewlett-Packard and Apple Computer both shut down for a year"(Schlender, 1993, 92).The problem, as Schlender points out, is that the Japanese companies, oncetheir advantage was secure, or their "perception" of the advantage wassecure, rested on its accomplishments, and let other companies overtakethem. missiles" (28). Thus far, we have seen how twoaspects of the competitive theory -- non-retaliation and manufacturingmutualities do not hold up. Semiconductor trade was one of the biggestsources of conflict between Washington and Tokyo in the 198 s" (Karimkhany,1997). Insteadof a formal trade agreement, American and Japanese semiconductor executivesset up the Semiconductor Council to resolve their trade issues.Early in 1997, the Korean and European semiconductor industry associationsasked to join the council. One of theassumptions is that two companies in two countries are competing on thebasis of quantity produced, not quality, price, R&D, or other factors.This concept shall be called "Mutuality of Manufacturing" and it will betested against the competitive advantage theory. The theory, as well as substantial historical evidence,suggests that free trade raises national income, while governmentintervention in trade relations generally lowers a nation's wealth"(Kennedy, 1996, 1). (1993, March 22). It is the tiny microchip, a sophisticated bit ofsilicon that is the indispensable heart of the techtronic age, the rawmaterial for everything from talking teddy bears to personal computers to.. Since industries existwithin a nation, he argues, then it might be possible to increase anation's wealth by increasing its composite industries to increase theirwealth through a series of government controls. As Schlender (1993) points out: In Japan, 1992 was the Year of the Monkey, and it turned out to be the year electronics makers found the monkey on their backs. Kennedy states: "The theory of comparativeadvantage is one of the most widely accepted economic principles amongeconomists. Japanhad achieved that goal by 1996, when the second agreement expired. However, the competition between the Japaneseand Americans over the issue of semiconductors, although never "won" byeither side, did have an unusual side effect: fierce competition producedcooperation. Advantage of Externalities is the theory of what happens when abusiness decides to overproduce or underproduce to neutralize the negativeaspects connected with manufacturing. copying manyof Japan's aggressive strategies of a decade ago" (Schlender, 1993, 92).The Future of Competitive Strategy Theory Whether the competitive advantage theory will ever replace thecomparative advantage theory of trade relations is a matter forcontemplation outside this analysis. Competition: Japan hard times forhigh tech. Kennedy finds that "some expertsbelieve that innovation and knowledge generation create positiveexternalities -- generating social returns beyond those captured by theinnovative firms...

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