Goodbye, Mr. Chips; M. Becker

44 agreement. Buyers faced with higher prices are cutting back on purchases. And as is often the case when government intervenes in the free market, the agreement will have several unin tended consequences-consequences now be ginning to show up. One of these is reduced international compet itiveness for American companies which use chips, such as computer and electronics manu facturers. American firms faced with higher domestic prices will relocate in other countries. Immediately following the agreement, Hong Kong and Singapore were described as "mob scenes" as U.S. firms attempted to find manu facturing space overseas to avoid the premium. This will mean a loss of American jobs. Less visible will be the jobs lost in American firms who find it impractical to move overseas, but will be at a competitive price disadvantage against foreign companies with access to cheaper chips. This disadvantage will mean fewer sales; fewer sales mean fewer jobs.

In addition to these direct costs - higher prices, fewer jobs-the agreement has pro duced a variety of other unintended conse quences. First, it will prove difficult to enforce. South Korea, for example, is not a party to the agreement, and South Korean manufacturers can undercut the cartel's price. The Japanese Michael Becker is a policy analyst with Citizens for a Sound Economy. He is also a researchfellow at the Center for the Study of Market Processes at George Mason Uni versity. Goodbye, Mr. Chips: U.S. Creates a High-Tech OPEC by Michael Becker P laying a role usually reserved for Arab oil sheiks, the U.S. government recently created its own high-tech OPEC in the semiconductor industry. As a result, consumers will likely pay hundreds of millions of dollars more for home computers, videocassette re corders, microwave ovens, and other products which use computer chips. The new government-enforced cartel results from a recent agreement on computer chip trade between the U.S. and Japan. The agree ment, in effect, represents the Reagan adminis tration's attempt to respond to Congressional pressure to "do something" about America's negative balance of trade figures. Egged on by the Commerce Department, an agreement has been produced which can only hurt American consumers, workers, and chip users.

The agreement has three major provisions. The two governments agreed to fix minimum prices for chips, assign market quotas, and guarantee that the Japanese would not undercut the agreement with sales in third countries. For those acquainted with OPEC, all of this should sound familiar. Price increases, market shares, concerns about "cheating" and being undercut through third countries-this is the jargon of a cartel. The agreement already is causing chaos in the chip market. U. S. chip users, who have come to expect declining prices, have seen prices of some chips double and triple since the GOODBYE, MR. CHIPS: U.S. CREATES A HIGH-TECH OPEC 45 companies themselves have been accused of violating the agreement by "dumping" chips in third countries. It has also proved quite easy to attach chips to circuit boards overseas and then import them duty free. After all, the restrictions are on chips, not circuit boards.

The agreement has also produced a black market in computer chips - a black market that some estimate to be a $1 billiona-year busi ness. Chip smuggling already is so rampant that domestic chip distributors on the spot market are finding that it is necessary to pur chase smuggled chips to stay in business. The next stage of this game is now being played as the government sends out customs agents to "crack down" on illegally imported inexpen sive chips. When the agreement is circumvented, Amer ican consumers benefit. The danger is that the agreement's unintended consequences will simply lead to more protectionism. The U. S. government has started down a course which will require more government in tervention to deal with the consequences of the chip agreement. While the chaos in the industry may not reach consumers, higher prices will. Under the original terms of the agreement, for example, the price of imported Japanese 256K memory chips doubled from around $2.40 to $5.00. Consumer products which use chips personal computers, VCRs, calculators, and home appliances-will cost more. The price of an average personal computer could rise by as much as $45, experts believe.

The chip agreement was premised on charges raised in 1985 that Japanese chip producers were engaging in predatory pricing, that is "dumping" chips into the U.S. for less than it cost to produce them. The U.S. International Trade Commission (ITC) investigation which followed produced little or no evidence to prove this. Japanese 256K memory chips, for example, prior to the agreement sold for $2.60 in the U.S. compared to $1.70 in Japan. Prices for Japanese chips overall were higher in the U.S. than in Japan. Despite this, the ITC simply inferred that because prices were drop ping and U.S. firms were losing business, the Japanese were guilty. The more plausible reasons for the drop in chip prices - declining demand and the obso lescence of some chips-were ignored. Also ignored was another factor which contributes to lower prices for chips: efficiency. The semi conductor industry has a "learning curve"

which results in falling unit costs as producers accumulate experience in producing chips. The learning curve gives companies an incentive to price low and generate a high sales volume in order to "learn" how to produce chips more cheaply in the future. This price-cutting incen tive has in fact been one of the driving forces behind the sharp price decreases and innovation which have characterized the industry. Under the terms of the agreement, however, Japanese companies must price above the bu reaucratically determined "fair price." At tempts to price low in order to take advantage of the learning curve are likeIy to be interpreted as predatory pricing by government regulators. As a result, this beneficial practice will be cur tailed. Essentially, the ITC and Commerce Depart ment have declared illegal the very practices which have produced the high level of growth and innovation in the industry. In the long run, these new protectionist measures can only de stroy the competition which has made the semi conductor industry such a dynamic and produc tive economic force. The industry and con sumers can do without a government-enforced high-tech cartel. One OPEC is bad enough. 0 Trade and Productivity T he rule to remember is that what hurts consumers hurts business, and what hurts business hurts proficiency. After all, what is profi ciency? Simply the power to produce. The power to produce is best determined by free trade, and not by bureaucratic decree. The power to produce is a corollary of the power to trade. Thus the more trade the more production, and the more production the more trade.

- WILLIAM H. PETERSON IDEAS ON LIBERTY 46 A Visit to South Africa by John Hospers T he media create a misleading impression of life in South Africa. It's not that what they report is untrue; it is what they de cline to report that distorts the picture. I spent part of July and all of August 1986 in South Africa, under the auspices of the Free Market Foundation of South Africa, giving lec tures and seminars at a dozen universities in Pretoria, Johannesburg, Cape Town, Stellen bosch, Durban, and Pietermaritzburg, as well as Namibia (Southwest Africa) and Umtata (in the "independent republic" of Transkei). I spoke with many people of various races and walks of life, and visited numerous areas, from rural black school districts to the private palace of the Anglo-American Oil Company. I walked the streets of cities for hours, meeting people and talking with them, trying to capture the ambience of each place and to sort out what were the sources of strife as well as of har mony, who was to blame for what, and how the problems could be solved or ameliorated.