|
The Japanese challenge in semiconductors has been concentrated in mass-produced, interchangeable memory chips, in which competition is very fierce and success depends on low profit margins and low costs, rather than in more specialized chips where success depends more on design and performance and US leadership remains. US anti-dumping suits prompted governmental talks, resulting in the 1986 US-Japan Semiconductor Arrangement, intended to ensure free trade. It established a price floor to prevent dumping, defined as full average cost plus an 8% profit margin, and provisions designed to open the Japanese market to foreign semiconductor producers and double US market share there. In Discussion Paper No. 387, Research Fellow Richard Baldwin argues that the arrangement has in fact made the market less competitive, due to the interaction of the price floor with specific characteristics of semiconductor production, in which average costs fall rapidly through the product life. At the beginning, a facility is set up to produce a set number of chips per period. Only a small part of the early output is saleable, but due to learning by doing, the yield of saleable chips rises. Thus average costs and the market price fall as more chips are sold each period. The effect on average cost is approximately one-to-one since the total cost of producing all the chips, saleable and unsaleable, is approximately constant throughout the product life. As the demand elasticity for semiconductors is greater than one, prices fall less rapidly than costs. For the market to be competitive, Baldwin argues, in the sense that firms make no pure profits, they must sell below average cost early in the product life, in order to offset profits at the end. This implies that the observed tendency for Japanese firms to price below average costs was not in fact predatory. To meet the requirement that the price be 8% above average cost at all times, Japanese producers must now restrict the capacity devoted to exports, at least early in the product life, ensuring that over time, they make pure profits in the export market. In addition, Japanese administrators now monitor semiconductor exports in order to enforce the Arrangement, in a manner which a GATT panel thought constituted export restriction. So far from making the semiconductor market more competitive, Baldwin argues, the price floor guarantees pure profits and has forced capacity reduction, higher world prices and cartelization of the market. Turning to the other part of the Arrangement, Baldwin argues that there is strong prima facie evidence that the Japanese market is, informally, closed. US firms dominate every market except Japan, which accounts for nearly half the total, while US market share in Japan has held at around 10% throughout the 1980s, despite a sixfold increase in the value of world sales, a 30% to 80% rise in the Japanese share of the world memory chip market, and two massive swings of the yen/dollar exchange rate. Market closure harms foreign producers and lowers the marginal cost of Japanese semiconductors, giving domestic firms a significant edge in world markets. In earlier work Baldwin calculated that the market access restriction raised the price of 16k chips by about 15%. The US share of the Japanese market has hardly changed since the Arrangement was signed in 1986, suggesting that its market access provisions have not been complied with. Baldwin concludes that, had the market access provisions been implemented and the anti-dumping provisions ignored, the Arrangement would have promoted competition and free trade. Since exactly the opposite occurred, the Arrangement has led to cartelization and a rise in the world price of semiconductors The US-Japan Semiconductor Arrangement Richard E Baldwin Discussion Paper No. 387, March 1990 (IT)
|