THE THREAT OF U.S. LOSS OF COMPARATIVE ADVANTAGE IN TECHNOLOGY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83M00914R001000010001-3
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• Document Creation Date: December 20, 2016
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• Content Type: REPORT

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I
Special Assistant to the Director
Central Intelligence Agency
Washington, D.C. 20505
0
Thank you very much for sending me Bill's global assessment. I
think it is a very good statement--very well written and, most
important, the judgments are sound, at least as far as my
understanding of the relevant trends is concerned.
I hope, however, that this assessment is only the first step,
or the point of departure, and that the next time around you
will substantially deepen as well as broaden this assessment,
especially in the direction of w the trends are as they are
and what they imply for the country's future. Once you do that,
you will discover quite a few opportunities for national policy
initiatives and which, as I see it from my "corner," only Bill
can undertake. I think he would also enjoy doing so.
Attached is a copy of a synopsis on the threat of U.S. loss of
comparative advantage in technology which I prepared on the
basis of my analysis for Lionel Olmer's presentation at the
meeting of Cabinet Council on Commerce and Trade on June 23.
I hope that by the time you start working on the next
installment you will have the benefit of a complete report
on my analysis of the evolution of the American economic
position in the world since World War II.
Sincerely,
UNITED STATES DEPARTMENT OF COMMERCE
International Trade Administration
Washington, D.C. 20230
Michael Boretsky
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U.S. DEPARTMENT OF COMMERCE
INTERNATIONAL TRADE ADMINISTRATION
OFFICE OF THE UNDER SECRETARY
THE THREAT OF U.S. LOSS OF COMPARATIVE
ADVANTAGE IN TECHNOLOGY
A Synopsis
In 1953 Wassily Leontieff, the famous inventor of input-output
analysis for which he received the Nobel prize in 1974, challenged
the then prevailing belief among economists that the U.S. economy's
comparative advantage was based on its abundance of material capital.
Were material capital the foundation of U.S. comparative advantage,
Leontieff reasoned, in line with the established theory, the United
States would be largely exporting capital-intensive commodities, and
importing labor-intensive ones. But the evidence Leontieff found
was contrary to this a priori expectation--the United States was
largely exporting labor-intensive and importing capital-intensive
commodities.
This challenge, which the economic literature has labeled as
the Leontieff "paradox," initiated an intensive search for the true
area of U.S. comparative advantage. By the early 1970's, researchers
arrived at what seems to be a general consensus even now--the U.S.
comparative advantage is based on an abundance of superior
agricultural land, favorable climate, and, even more important,
a relative sophistication of industrial technology rather than an
abundance of "material capital" as such. The rationale for this
consensus is obvious from the figures given in the following table:
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COMPOSITION OF U.S. MERCHANDISE TRADE BALANCES BY
BASIC COMMODITY GROUP, SELECTEI YEARS 1951-1980
$ Billion
Commodity Group
1951-1955
Average
1960
1966
1971
1976
1980
Raw Materials and Energy
Not Technology-Intensive
-2.0
-1.7
-3.1
-4.1
-30.6
-68.3
Manufactured Products
Technology-Intensive
+1.8
-0.9
-3.6
-8.3
-13.2
-21.5
Manufactured Products
+5.7
+6.6
+8.4
+8.3
+25.7
+42.5
Agricultural Products
-1.2
+1.0
+2.3
+1.9
+11.8
+23.8
Total Merchandise Trade
+4.6
+5.5
+4.8
-1.5
-5.7
-20.1
+ denotes trade surplus
denotes trade deficit
aTotal merchandise trade includes the four listed groups, commodities not
classified by kind and reexport of foreign merchandise
In parallel with this search, however, various students and
business observers have been calling attention to a rapid erosion
of U.S. agricultural land and, arising therefrom, limitation for
further real growth of U.S. exports of agricultural products, on
the one hand, and alarming losses of U.S. domestic industries'
competitiveness in what became known as "technology-intensive" and
"high-technology" products, on the other. The latter, if it is of
a secular rather than a temporary nature, would obviously be
tantamount to the U.S. loss of comparative advantage in technology.
Both of these observations, if true, would obviously be of great
concern, but especially the latter, because of its implications for
the economic potential and national security of the country.
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The Framework of Our Analysis
Since the issue of the erosion of U.S. agricultural land and
the problems arising therefrom has been the subject of a long-term
study by the Department of Agriculture, our analysis focusses
exclusively on the problem of U.S. domestic industries'
international competitiveness in trade in advanced-technology-
dependent products. This analysis of U.S. domestic
industries' comparative performance is made in the context of
what we define as either technology-intensive or high-technology
prcducts.
The criteria for defining each of these two groups are the
relative "normal" use of basic new-technology-generating inputs
in their production--expenditures on R & D as a percentage of
value added of the industries in question, and employment of
scientists, engineers, and technicians (S & T) as percentage of
their total employment. As a general proposition,
e Technology-intensive industries are defined as those which
normally spend 5 percent or more of gross product (BEA concept of
value added) on R & D and/or whose total employment consists of
5 percent or more of "natural" scientists, engineers and technicians.
The industries in this category are: chemicals and related products
(SIC 28), nonelectrical machinery (SIC 35), electrical and
electronic machinery and equipment (SIC 36), transportation
equipment and missiles (SIC 37), and professional and scientific
instruments and controls (SIC 38);
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? High-technology industries are defined as those which
normally spend at least 10 percent of their gross product (value
added) on R & D and/or at least 10 percent of their total
employment consists of "natural" scientists, engineers and
technicians. The U.S. manufacturing industries meeting these
criteria include drugs and medicinals (SIC 283); office, computing,
and accounting equipment (SIC 357); radio, television, communication
equipment and electronic components (SIC's 36.5, 366, and 367); all
other electrical apparatus and equipment (SIC 36 minus SIC's 365,
366, and 367); aerospace equipment, missiles, and certain ordnance
products (SIC 372 and 376); and professional and scientific
instruments and controls.
In addition to these two definitions of industries by the
degree of their relative use of new-technology-generating inputs,
one might also define and use the concept of not technology-
intensive industries. Consistent with the definition of technology-
intensive industries, U.S. not technology-intensive industries
would be those which spend up to 5 percent of their gross product
(value added) on R & D and/or up to 5 percent of their total
employment are "natural" scientists, engineers, and technicians.
In reality, however, most of the U.S. industries other than
those defined as technology-intensive normally spend only
between 1 and 2 percent of their gross product on R & D, and
only about 2 percent of the persons they employ are scientists,
engineers, and technicians.
As for the definitions of technology-intensive and high-
technology industries, the latter would most probably be more
attractive were we to study the recent contributions of new
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technology to the U.S. economy and U.S. national security
without any reference to what is going on elsewhere in the
rest of the world. For purposes of comparative analysis,
however, the concept of technology-intensive industries is
more appropriate because the broader spectrum of industries
allows us to consider variations in individual countries'
objectives and strategies in their pursuit of technological
progress and, therefore, it is conducive to a more accurate analysis.1
11n the course of the study a suggestion was made to use applied
R & D expenditure as a percentage of value of shipments of 3-digit
product groupings as a criterion of technological intensity of
traded commodities. However, for purposes of a comprehensive
analysis the suggested criterion is inferior to the ones adopted in
this report for the following reasons:
a. In contrast to the measure of value added, which contains no
multiple counting, the measure of commodity shipments contains
multiple counting, the amount of which varies from product group
to product group and, therefore, any ranking of R & D expenditure
as a percentage of such a nonuniform measure is by definition
extremely erratic and unreliable;
b. The criterion would not allow taking into account techno-
logical improvements achieved by S & T manpower working in functions
other than R & D. (Such commodities as nuclear reactors, machine
tools and material handling devices, including robots, where the
bulk of technological progress is made by production, assembly, and
quality testing engineers, would fall into the category of not
technology-intensive products);
c. No account can readily be made of purchased R & D via
purchase of components (hence, such products as consumer electronics
would fall into the not technology-intensive category);
d. The analysis employing this classification of trade data
cannot readily extend to analysis of relevant trends in employment,
productivity, inflation, Department of Defense procurement, etc.,
because all of these data are reported in terms of industries and
not commodity groups; and
e. Analysis employing the suggested classification cannot be
extended to international comparisons because other countries'
R & D and most other data are reported in terms of industries
and not commodities.
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In addition to their critical importance to the country's
foreign trade, as noted earlier, the industries in question here
are also critically important to the domestic economy in many
other respects. Thus, for example:
? In 1970-1980 the real growth in annual output of technology-
intensive industries accounted for 32.4 percent of the real growth
of the entire U.S. business economy, and that of high-technology
industries for 26.2 percent;
? In the same timespan, the technology-intensive industries
contributed about 23 percent and high-technology industries 18 percent
of the private sector's growth in employment;
? In the same timespan, the technology-intensive industries'
growth in real output due to productivity growth accounted for
about 45 percent of such growth in the entire private business
sector, and that of high-technology industries to 40 percent;
? In the same timespan, the average annual inflation rate
originating in the technology-intensive industries was only
three-fourths as high as in the entire private business economy,
and the average rate in the high-technology industries was less
than 40 percent as high, which means that the technology-
intensive industries were retardants rather than promoters of
inflation in the economy;
? In the 1970's the technology-intensive industries
provided between about 84 (1972) and 87 (1979) percent of the
Department of Defense total procurement from manufacturing
industries, and the high-technology industries between 48 and
50 percent.
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In analyzing foreign trade performance, we determine the
"comparative performance" of the U.S. domestic industries in
question here on the basis of the relative success of these
industries in generating positive trade balances and the
relative growth or decline in their share of OECD countries'
exports to the world and/or certain specified narrower markets.
The adjective "comparative" refers to relative performance
vis-a-vis the major U.S. competitors--Japan, West Germany,
France, Italy, and United Kingdom. The relative sizes of the
trade balances of the industries in question at any give time might obviously
also be interpreted as measures of the industries' relative strength of
comparative advantage in technology among the industries of the five countries.
The Comparative Strength of U.S.' Industries' Advantage in Technology
Implicit in Their Relative Trade Balances
s In 1980 U.S. technology-intensive industries' trade surplus
with all countries in the world amounted to $42.4 billion, up
from $10.4 billion or so ten years earlier. This performance is
usually cited as proof of an extraordinary and still growing
strength of the industries' comparative advantage. However, these
figures look much less impressive when the whereabouts of their
origin is identified and, especially so, when they are compared
with such figures of other countries:
-- Only about 37 percent of the 1980 U.S. industries' surplus
of technology-intensive products came from developed
countries and OPEC; about 63 percent came -fran non-OPEC LDC's
which, in most cases, require not only long-term and
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frequently unrepayable loans in order to import our
industries' products but they also frequently require
subsequent loans to pay interest on the preceding loans;
-- Throughout the seventies and in 1980 U.S. trade balances
were progressively negative with both West Germany and,
especially so, with Japan;.
-- The 1980 U.S. trade surplus in technology-intensive
products was only about 60 percent as large as the
Japanese worldwide surplus in this product group (in
trying to fully understand the significance of this
disparity, bear in mind that in 1980 the Japanese
economy constituted only 34 percent of the U.S.
economy, both measured by GNP valued with purchasing
power equivalents rather than the official exchange
rates), and 66 percent as large as West Germany's
surplus (in .1980 the West German economy constituted
21 percent of the U.S. economy);
-- Throughout the 1970's the rates of growth in U.S. trade
surpluses in technology-intensive products were also
substantially smaller than the growth of French
surpluses in this commodity group, although in
absolute magnitude the French surpluses were
substantially smaller than those of the U.S. (in 1980,
the French surplus amounted to-$10.0 billion compared
to $42.4 billion for the U.S.).
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? As of 1980, the relative position of U.S. high-technology
industries seems to have. been somewhat stronger than
that of the entire technology-.intensive spectrum, bilt they. were facing
equally adverse competitive odds. These industries' 1980 trade
surplus amounted to $19.2 billion, up from $4.8 billion in 1970,
and the bulk of it, 75 percent, was derived from trade with
developed countries and OPEC rather than non-OPEC LDC's.
However, even this 1980 surplus of U.S. industries was smaller
than Japan's in absolute terms, and its growth was less than
one-half of the Japanese growth and one-third smaller than the
growth of the French trade surplus in high-technology products.
All of the above implies that although the U.S. industries in
question still would seem to have a formidable comparative
advantage in technology on the world scene, they are rapidly
losing this advantage in favor of other countries, especially
in favor of Japan and, to a much lesser extent, in favor of
France.
The Extent and Nature of U.S. Industries' Loss of Comparative
Advantage in Technology Since the Mid-1950's
? The analysis of changes in U.S. industries' shares in
OECD export markets rather than the changes in relative trade
balances indicates, however, that at least in the case of U.S.
technology-intensive industries the onset of the decline in
their comparative advantage in technology goes back to at
least the mid-1950's rather than 1970, as the preceding
discussion might have implied. Indeed, from
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1954 until l970,the U.S. world export market share in technology-
intensive products declined from 35.5 percent to 23.1 percent, or
by 35 percent, whereas Japan's share increased at that time
from 1.8 to 9.7 percent, or 439 percent; Germany's share increased
from 17.6 to 20.4 percent, or 15.9 percent; France's share
increased from 6.4 to 7.6 percent, or 18.9 percent; and Italy's
share increased from 2.4 to 5.6 percent, or 133 percent. At that
time the only major country that lost in its world export
market share, other than the United States, was Great Britain. Its
export market share in technology-intensive products-declined-from 19.0 percent
in 1954 to 10.1 percent in 1970, or 47 percent of the 1954 level.
? One might obviously argue that all of the countries which
have increased their world export'shares between 1954 and 1970
did so because of their "low base" in 1954, due to World War II
damages still existing in that year. The fact is, however, that
at least in the case of Japan, France, and Italy their export
market shares in technology-intensive or analogous products in
years prior to 1954 had never been as high as in 1954. For this
reason, the argument of "low base" is not valid here.
? In the period from 1970 to 1980, the preceding (1954-1970)
trends in world export market shares in technology-intensive
products continued with only slight modifications:
-- United States lost an additional 3.2 percentage points of
its world export market share, from 23.1 to 19..9 percent,
Which makes for a loss of 13.9 percent in just ten years;
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-- Japan gained an additional 4.8 percentage
points, from 9.7 to 14.5 percent, or almost
50 percent in the ten years, and France gained
1.4 percentage points or 18.5 percent;
-- However, in the 1970-1980 period Germany and the
United Kingdom each lost 1.1 percentage points,
and Italy lost 1/10 of a percentage point.
? The U.S. losses of its market share in 1970-1980 were
evidently even more significant than the changes in the worldwide
markets indicate (loss of 3.2 percentage points) because the U.S.
export share to developed and OPEC countries, that is, the
"solid" credit countries, shrank by 4 percentage points, or by
18.9 percent of the 1970 level, and that to the non-OPEC LDC's
increased by 1.5 percentage points, or by 5 percent of the 1970
level.
? In the 1970-1980 period the export market shares of U.S.
high-technology industries decreased relatively even more than
those of the entire spectrum of technology-intensive industries,
and the losses were also concentrated in developed and
OPEC countries' markets.
Thus, the analysis of both the relative changes in trade
balances and the relative changes in export market shares
indicates an unmistakable decline in U.S. industries'
comparative advantage in technology, and this conclusion holds
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whether we base it on the relative developments of technology-
intensive or high-technology industries. The decline so far
has been quite substantial, to say the least, and the process
continues.
In the 1950's and 1960's the gainers of comparative
advantage were Japan, West Germany, France, and Italy.
In the 1970's, however, the gainers were Japan and, to a much
lesser degree, France. Germany and Italy lost some of the
ground they gained in the 1960's. The United Kingdom also
lost some more ground, but compared with its losses in the
1950's and 1960's, its loss in the 1970's was very small.
By now Japan is clearly the giant of comparative
technological advantage, unseating U.S. industries from their
former role of technological leadership and evidently
hopelessly frustrating the ambitions the German industries
might have had in this regard in the recent past.
The above analysis is based solely on the relative
developments emanating from individual countries as such.
Strictly speaking, therefore, the above conclusion refers to
the decline of the comparative advantage of U.S. domestic
industries only. Data on the changes in the relative sizes
of multinational corporations by their country of origin
compiled by the National Planning Association in the last
several years imply, however, that this conclusion applies to
U.S. business enterprises globally, that is, wherever they
operate.
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The Causes of U .S. Loss of Comparative Advantage in Technology
The loss has undoubtedly been produced by a great variety of
forces. We have identified ten factors which we believe have had
a lot to do with this loss.
1. The first to mention is the almost unilateral export of
advanced technology in "naked" form by the United States. By
export of technology in "naked" form we mean sales or analogous
transfers of patent rights and licenses with appropriate
instructions, blueprints and other technical assistance on the
part of the seller or exporter, which permit the buyer or recipient
a quick and full exploitation of the know-how either for a fixed
fee, or for "running" royalty payments. The alternative to such
exports are exports of commodities embodying the technology in
question. There is tremendous controversy regarding the extent
and nature of the impact of "naked" exports of technology on the
economy, but it is virtually impossible to believe that if you
export technology in a "naked" form and this technology is, in
turn, used abroad in industrial activity competitive with the
United States, such as production of internationally traded
goods, such exports will not adversely affect U.S. exports.
We do not have accurate statistics showing how much
technology we export and how much we import, but the data on
U.S. receipts for and payments of technological royalties and
license fees imply that since the late 1950's the United States
has been exporting from 8 to 10 times as much as it has been
importing. The reverse has been true in Japan, Germany,
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France, and Italy. Assuming that the price U.S. companies are
getting for their exports of technology averaged about 4 percent
of "revelant" sales, this would imply that in 1970 the value of
products produced abroad on the basis of U.S. technology
amounted to a minimum of some $33 billion and in 1980 to more
than $100 billion. Had U.S. industries kept this technology at
home and tried to fill the latent foreign demand for the
products by exporting from the United States, given appropriate
support by the Government, the country would not have any trade
problem, and much less of an unemployment problem, even if it
exported only one-third of the products the exported technology
yields in production and sales abroad.
2. The second in importance, though far from that of export of
technology, has been foreign countries' relative increase in R & D
effort. In 1964 the aggregate expenditures on industrial R & D
of the five foreign countries analyzed in depth in our report
amounted to about 32 percent of the U.S. expenditures, but by
1979 this proportion rose to 75 percent. Obviously this
increased effort must have produced some competitive gain for
these countries vis-a-vis the United States. However, in
making this judgment we must bear in mind that there is no one
to one relation between R & D effort and export market share
(Germany, for example, spends only 20 percent as much on industrial
R & D as the United States, but. its share of the export market is some
7 percent larger than the .Unite.d.Sta.tes) . and that throughout the
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time period the United States continued to do a lot more R & D even
than the five foreign countries ccmbiner?, let alone any individual country.
3. The third in importance has probably been U.S. industries'
falling behind the Japanese and Germans in the quality of
products they produce. It is generally known that this problem
is "big" in the automobile industry, but also in the production
of many electrical consumer goods and, especially so, in the
production of electronic "chips."
4. Of some importance has also been a relatively lower
protection of U.S. domestic markets than is true abroad.
By "protection" we obviously mean not only the use of such
traditional tools as tariffs and imports quotas, but also the
use of "value-added-tax" gimmicks, government procurement
preferences for domestic products, and the entire battery of
nontariff trade barriers.
5. In some measure, however small it might have been, the
loss must have been caused by a smaller export promotion effort
exerted by the United States at large, meaning business plus
Government, than is true for most other countries, especially for
Japan.
6. In the 1950's and 1960's, the U.S. loss of comparative
advantage in technology was also in some measure caused by U.S.
industries' price and cost disadvantages. In all probability,
however, this factor was not important in the 1970's, although
a number of U.S. industries, most notably steel, automobiles,
and consumer electronics, have considerable cost disadvantages
vis-a-vis the Japanese.
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7. In some measure the U.S. export market shares of both
technology-intensive and high-technology products have
obviously been adversely affected by the U.S. Government's
strictly political decision to deny the Soviet Union access to
U.S. technology which might have national security implications.
However, in all probability this factor has been much smaller
than our business community tends to assume.
8. It is conceivable that in some very minute measure the
U.S. loss of comparative advantage might have been caused by the
less flexible export financing provided by the United States
than abroad. In all probability, however, this is more of a
latent "force" for the future than a significant one in the past.
9. It is also conceivable that in the most recent years
the U.S. loss might have been caused in small measure by a
decline in the supply of new scientists and engineers,
particularly so if the proportion of U.S.-trained foreign
students who stay in the United States after completion of their
studies has been smaller than is generally assumed.
10. Finally, the U.S. industries' trade performance in
technology-intensive and high-technology products has undoubtedly
suffered from the less supportive role the U.S. Government has
played in matters of domestic industries' technological progress.
Most other governments, especially the French and Japanese,
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are much more active in promoting technological progress.
By "supportive role" we mean not only export
promotion, protection from imports and financial support of
industrial R & D, but also such things as strategic planning
for industrial-technological development, development strategies
for imports of advanced technology from abroad, provision of
industrial-technological intelligence to domestic industries,
etc. Without a doubt, Japan would not have experienced the
phenomenal technological growth which is the envy of the world
in the absence of MITI. Nor would France have made her
technological advances without the "administrative guidance"
of its Ministry of Industry and, lately, its "comite
interministeriel pour le developpement des investissements
et de 1' emploi" (CIDISE). There are indications that in the
future we shall witness even more active participation on the
part of foreign governments in matters of technology than was
the case in the past.
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The Consequences For the United States Should the Current Trends
Continue-o
There is no doubt whatever that the threat to U.S. industries
is real, multidimensional, deep-seated and by now extremely
acute. Moreover, what is really threatened is not only the
viability of many (and the most advanced) U.S. industries, but
the entire economic potential of the country. In a large measure
this threat is of our own making and is propagated by our
policies pursued even today. There is no chance that this
threat might somehow wither away by itself, or by the "invisible
hand," nor is it probable that the current economic policies of
the Administration might avert it.
Continuation of current trends would result in,
? On the domestic economic front:
-- Progressively reduced potential for progress in
innovation, productivity growth, and growth in
standard of living;
-- Progressively reduced potential for real growth of
the economy;
-- Progressively declining market-induced employment
opportunities; and
-- Unabatedly growing inflationary pressures.
? On the international economic front:
-- Decline in the country's economic and political position
in the world;
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-- Progressively growing pressures on the external value
of the dollar once the interest rates have been brought
down to more realistic levels;
-- Progressively worsening of the country's "terms of
trade" causing a lowering of the standard of living.
? On the foreign policy and national security front:
-- Progressive weakening of the U.S. leadership position
in the Western World;
-- Gradual decay of the progressiveness quali`ty' Qf the
industrial and technological base of our military
power.
Prepared by
Michael Boretsky
With the assistance of
James Gillula
and
Jane Bardon
ITA
June 22, 1982