When the Chips Are Down

In 1986, the U.S. semiconductor industry convinced the government that Japanese manufacturers had won a large and growing share of the domestic market by "dumping" chips in the United States below cost. So the Reagan administration pressured the Japanese government into establishing production quotas on semiconductors in order to limit supply and boost prices.

The agreement met its goal. In a little more than a year, chip prices doubled and then some. This added more than $100 to the price of a $600 personal computer, estimates Brookings Institution economist Kenneth Flamm.

Unbelievably, there is talk of extending the agreement. This despite the fact that the U.S. market was never actually in any "danger" of being taken over by the Japanese. The Japanese share of the U.S. market is neither large nor growing, reports California Technology Stock Letter. It has held at about 10 percent over the last five years.

Advocates of the agreement used a subtle two-step argument to make Japanese companies' market share seem larger than it really is. First, they left out a third of the market by omitting chip consumption by major computer manufacturers such as IBM and Texas Instruments that make their own semiconductors.

Then they shrank the market even further by considering only sales of dRAMs, the most basic memory chips. U.S. manufacturers have concentrated their efforts on the more sophisticated chips used by the military or in telecommunications. Japanese manufacturers have poured their efforts into making dRAMs, which are more easily mass-produced.

This creative definition is what made it seem that the Japanese dominated the U.S. chip market—and what consumers have paid dearly for.