Tales of a New America

by Robert B. Reich

  This distinction between sharing experience and providing information is an important one. It has been lost on the Pentagon. Defense officials worry incessantly that the Soviets will get information about our advanced technologies. But the Pentagon’s increasing attempts to block access have only made it more difficult for American scientists and engineers to share experience with one another. Here again, the two racecourses have begun to diverge: In seeking to prevent Soviet access to our high-technology information, we have stifled our own high-technology learning.

  By the mid-1980s the Pentagon was casting a veil of secrecy over a great deal of American research. Star Wars offered a pretext. Never before had America entrusted so much technological development to the Pentagon in so short a time, and in such a clandestine manner. A handful of Pentagon officials were preempting scientific resources and picking winners and losers of the technology race. Most decisions were made in secret. While there would be public debate about the wisdom of Star Wars as a defense strategy, there would be none among scientists, engineers, or politicians about the implications of these decisions for our economic future.

  When the Japanese have targeted certain emerging technologies, decisions about which ones deserve advantageous treatment have been arrived at consensually, through ongoing conversations among trading companies, industry groups, and government analysts. But the Pentagon was never a model of decision making by consensus. The Pentagon’s proposed budget for fiscal 1987 included $8.6 billion for research specified only by unintelligible code words. Thus about 5 percent of all the research to be undertaken in the United States, in both private and public sectors, would remain shrouded in mystery.9

  Ever more research was classified as secret. A 1985 executive order made it relatively easy to classify documents without considering the public’s need to know. Even unclassified research was being controlled. Under another ruling, the secretary of defense was authorized to stop disclosure of about a fifth of the unclassified technological research done under Pentagon contracts. In addition, the Pentagon and other government agencies were routinely insisting that they had the right to review university-based research before the results were published in scientific journals; they included prepublication-review clauses in their research contracts, classified as secret academic research already completed, and pulled scientific papers from academic conferences.10

  The net result of this activity has been difficult to measure because so much of that which might be measured is, after all, secret. But few would contend that the Soviets have had any great difficulty obtaining whatever information they have sought about our latest weapons. Because so much of our high technology involves software and microelectronic circuitry, information can be smuggled out on minuscule tapes, intercepted through the airwaves, or simply transferred via satellite from a computer here to one there. The art of espionage has progressed far beyond suitcases filled with blueprints and exotic machinery.

  While they probably have obtained the information they want, however, the Soviets have not obtained the experience on which it is based. This is a critical distinction. Shared experience cannot easily be purchased—not even in the open market through the merger or acquisition of a whole company (as some corporate raiders have discovered, too late). At most, the Soviets have been able to discover what we are building. This may have enabled them to gain an equal footing with us in some technologies for a short time, until we have made the next improvement.

  The Soviets are the victims of their own success in this regard. Ironically, the more information they steal from us, the more difficult it becomes for their own scientists and engineers to garner valued experience, because the latest American designs preempt any invention on their part. The information supplies them with the answers, so there is no reason for them to learn how to find the answers (or, more subtly, the questions) for themselves. It is like trying to learn to solve puzzles with the answer book open in front of you, or learning directions from here to there as a passenger rather than a driver. The ready availability of help substitutes for direct experience, and thereby inhibits new learning. Without such experience, the Soviets have less capacity to make their own improvements on state-of-the-art technologies. Thus they are forever catching up. Had we set out consciously to ensure that the Soviets could never challenge our technological superiority, we could have come up with few better plans than to leak to them, steadily, our latest secrets.11

  The irony is richer than that, however, because our secrecy has reduced our own capacity to gain collective experience, and thereby to innovate for the future. It is only through constant innovations over existing technologies that we can maintain our position in either race.

  6

  Thus the Boomerang Principle is at work. For our ability to maintain peace and deter aggression depends, fundamentally, on our overall prosperity, and that of others around the globe; the resources and commitments that national defense requires over the long term can be sustained only amid a growing and buoyant economy. Unlike the military and diplomatic contest that preoccupies our foreign policy, or the related mercantilist contest in products related to defense, the contest in commercial high technology can pay a dividend to the rest of the world in the form of better products at lower costs. It is also crucial to our long-term security. But in our preoccupation with the other races, this is the one race we (and consequently others) may lose.

  CHAPTER 6

  THE RISE OF THE JAPANESE-AMERICAN CORPORATION

  1

  The mythology that informs both popular opinion and congressional deliberation depicts America and Japan competing on a clearly delineated economic playing field. On the one side are Japanese corporations, aided by their government. On the other, American corporations, handicapped by theirs. The National Chamber of Commerce and other boosters of American business typically complain that the playing field is tilted, to Japan’s advantage. The Mob at the Gates does not play the game fairly. To even things up, it is argued, their government must stop subsidizing and protect them. And ours must relax the antitrust laws, corporate taxes, and regulatory burdens that shackle American companies. In the mid-1980s American politicians of all stripes were threatening to close off the American market to Japanese goods unless Japan stopped “cheating.” The Reagan administration, meanwhile, was busily dismantling the supposed impediments to American business.

  This view is misleading in two central respects. First, as already suggested, America is by no means an exemplar of laissez faire. The United States government has been, if anything, rather more involved in technological development than has the Japanese government, although from the perspective of commercial competitiveness this involvement, by and large, has been perverse in recent years. Nor has the sin of protectionism been solely or even primarily a Japanese failing. The Japanese have deliberately limited imports of tobacco, beef, and baseball bats; cumbersome procedures have limited some other imports. But in several major areas of trade—automobiles, steel, textiles, services, and high technologies—American import barriers have been considerably higher than Japan’s. Thus while the economic playing field is far from flat and open, this is not simply because “they” have been cheating.

  The metaphor of America’s corporate champions sallying forth to heroic (if rigged) battle is flawed in a more fundamental way, however. It rests on the presumption that the economic prospects of the United States are so tightly linked to the prospects of American-based firms as to amount to the same thing. Perhaps this premise was once tenable; it no longer is. By the mid-1980s, in the most competitive fields of endeavor, there were ever-fewer companies that could be considered uniquely “American” in resources, orientation, or loyalties. Trade competition across the Pacific was on the way to being dominated by one type of player. Sometimes it went by a Japanese name, sometimes by an American. It took several forms. Occasionally American firms linked up with their former rivals in joint ventures and purchase agreements. Or Japanese companies bought up
American companies, or built new plants in the United States, employing American workers. Or American companies built plants in Japan, hiring Japanese. Regardless of form, the result was approximately the same—a transpacific entity, neither solely Japanese nor solely American, but something in between: a Japanese-American corporation.

  If increasing global economic integration is both desirable and inevitable, one would think this is a welcome trend, and it is, to the extent that the rise of the Japanese-American corporation reduces the propensity of either America or Japan to seek advantage at the direct expense of the other (an effort that I have already suggested is likely to render both sides worse off). But the trend is less desirable if, as has been the case, it simultaneously reduces the willingness of Americans to develop our own skills and capacities.

  The emerging Japanese-American corporation is problematic in this regard, for although it invests diligently in the skills of Japanese workers, it tends to shortchange American workers. As we shall observe, this is not because of any nefarious motive on the part of the Japanese; it is rather a function of the different ethical and economic premises they bring to corporate activity. The Japanese part of the Japanese-American corporation is dedicated to enhancing the wealth and influence of everyone associated with the firm; the American part, to enhancing the wealth of its shareholders (and top executives). The Japanese-American corporation will provide Americans with jobs, to be sure, but not with the training they need to keep pace with the new world economy. The image of trade competition as mostly a matter of rivalry between Japanese and American companies blinds us to this fundamental dilemma and the question it raises—who will attend to the long-term development of the American work force?

  2

  The case of Houdaille Industries offers an illustration.1 This Florida-based manufacturer of computer-controlled machine tools set out in 1982 to block imports of competing Japanese tools. The company followed the prescribed route, guided by a prominent Washington law firm. It first petitioned the U.S. government for protection, accusing the Japanese machine toolmakers of dumping their wares here at prices below their production costs, with government subsidies making up the difference. That strategy failed for lack of evidence, despite the efforts of a Houdaille agent who prowled around Japanese machine tool factories with a video camera seeking signs of unfair government assistance. Next, Houdaille tried to persuade the Reagan administration to deny to American buyers of Japanese machine tools the 10 percent investment tax credit on equipment. After a bitter split in the administration over what to do, Japanese Prime Minister Yasuhiro Nakasone personally sought President Reagan’s assurance that the company’s request would be denied. Undaunted, Houdaille then made the rounds of the Defense Department and Congress, arguing that its own continued profitability was critical to national security.

  When this last ploy failed, Houdaille abruptly changed course. In the spring of 1984 it announced that it would seek a joint venture with Japan’s Okuma Machinery Works. Okuma would supply Houdaille with ready-made machine tools, which Houdaille would then market and distribute in the United States under its own trademark. “If we can’t beat them,” a company spokesman told The New York Times, “we’ll joint venture with them.” The new strategy might boost Houdaille’s lagging profits, at least in the short term. It might even preserve some American jobs. But it brought to a halt one stream of domestic economic endeavor. American workers would no longer be developing this set of skills; competence in designing and making machine tools would be permanently surrendered.

  By 1986 almost every American industry with a history of bitter conflict with Japan was showing sudden signs of born-again cooperation. Trade names were becoming irrelevant for distinguishing Japanese from American products. General Motors was buying diesel engines and subcompacts from Isuzu, and making cars in California jointly with Toyota; most of the robots and computerized machine tools it used to assemble its cars also came from Japan. Chrysler was getting many of its transaxles, engines, and subcompacts from Mitsubishi; Ford bought key parts from Mazda. Kodak’s copiers were made by Canon; Kodak’s 8-millimeter video cameras, by Matsushita, which was also supplying General Electric with televisions, disk players, and air conditioners. Honeywell’s computers were manufactured by NEC, and the list goes on.2

  Meanwhile, Japanese factories were beginning to dot the American landscape. Honda was making cars in Ohio; Mazda, in Michigan; Mitsubishi Motors, in Illinois; Nissan, trucks in Tennessee. (All told, Japanese automakers expected to build more than 1 million vehicles in the United States by 1990.) Hitachi was producing large-scale disk drives in Oklahoma and semiconductors in Dallas. Hundreds of Japanese high-tech companies were setting up shop in Oregon and California, assembling everything from personal computers to cellular mobile telephones. The locations of corporate headquarters said little about national orientation. IBM’s top executives inhabited offices in Armonk, New York. But 10 percent of IBM’s employees were Japanese, living in Japan, and a growing percentage of their officers and directors were non-American. And IBM was producing most of the computers exported out of Japan.3

  Ownership was becoming blurred as well. In 1986 Ford owned one quarter of Mazda; Chrysler, almost one quarter of Mitsubishi. Kodak, 10 percent of Chinon. Nippon Kokan, Japan’s second biggest steel maker, had a controlling interest in National Steel, and a 40 percent stake in Martin Marietta’s California metals operations. As securities markets around the world became more closely integrated, private investors worldwide bought stocks based on profit expectations rather than nationality. Between 1980 and 1985, U.S. institutional investors increased their holdings of foreign stocks more than fivefold, from $3 billion to $16 billion.4

  That Japan and the United States have been engaged in a heated contest over trade there can be no doubt. But by the close of the 1980s it was becoming ever more difficult to say which companies were representing which side. Company names, affixed to final products or displayed over factory gates and headquarters, or even engraved on stock certificates, revealed less and less about which nation’s work force was actually doing what. Studies purporting to show relative market shares of Japanese and American companies in a given industry were equally beside the point. But of this there could be little question: no longer was the “American” corporation doing business across the Pacific the obvious custodian of America’s long-term economic well-being.

  3

  The rise of the Japanese-American corporation could be explained, in part, by the new requirements of global competition. In years past, large corporations in one nation often maintained subsidiaries in other nations. These subsidiaries were largely independent of their parent. They typically designed, manufactured and marketed their goods exclusively within their adopted country. They were like any other national company, except that a portion of their profits periodically were shipped back to their foreign parent. In the 1960s the Ford Motor Company had subsidiaries in Latin America, Australia, and all over Europe. In general, each produced a different line of cars; English Fords resembled American Fords in name only.

  These subsidiaries prided themselves on being good corporate citizens of their adopted nations. They were run by citizens of the host country; they employed local workers; they sought to appeal to local tastes. Most people who consumed their products had little idea that these companies were answerable to foreign managers; when they were aware, they probably did not much care. There was no reason to.5

  This changed when the trends we have already examined converged in the 1970s. First, the costs of sending goods and information around the globe dropped dramatically. This made it possible for the production of an item to be fragmented and parceled out to wherever each function could be undertaken most cheaply, and then routed to central locations for assembly. Second, the technologies of making things improved to such an extent that vast economies of scale became possible: The greater the number of identical units that could be produced at any particular location, the lower t
he cost of making each one. Third, the tastes of consumers around the world began to grow more alike.

  Taken together, these trends meant that self-contained subsidiaries no longer made economic sense. For many industries, it was far more efficient to integrate the entire production process globally, with each subsidiary specializing in producing whichever part or service it could provide most easily. Many of the services associated with marketing and distributing would still, of necessity, be undertaken wherever the goods were to be sold. But even here there might be opportunities for global specialization and economies of scale, as in the provision of shipping containers, global warehousing, advertising, and insurance.

  This phenomenon was not unique to the relationship between Japan and the United States, of course. Regardless of whose nameplates graced their exteriors, the trend was for automobiles, heavy equipment, computers, robots, esoteric electronic gadgets, not to mention the services associated with them (design, fabrication, sales, marketing, distribution, maintenance, and so on) to become multinational creations. By 1986 Ford was manufacturing a Mazda-designed car in Mexico, for sale around the world; AT&T was making its semiconductors in Spain, to be used in communications equipment assembled in Brazil for worldwide distribution. Consider the extent of this trend: As exports from America became a decreasing share of global trade, exports shipped by corporations based in America actually increased their share. Quite apart from the rise of the Japanese-American corporation, it was reasonable to suppose that by the close of the century neither General Motors cars nor IBM computers nor AT&T communications equipment would bear any special relationship to the United States. One would no longer be able to speak with pride, or concern, or any meaningful emotion at all, about “American” products.