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The Wall Street Journal: Why Europe's Silicon Valley Is In a Rut, January 30, 1997 | Cypress Semiconductor

The Wall Street Journal: Why Europe's Silicon Valley Is In a Rut, January 30, 1997

Last Updated: 
May 24, 2012

The Wall Street Journal: Why Europe's Silicon Valley Is In a Rut, January 30, 1997

T.J. Rodgers

Last September the U.S. and the European Union agreed to eliminate tariffs on electronic products, including semiconductors, computers, and telecommunications equipment. But the EU continues to drag its feet on establishing a timetable for the phase-out. Several weeks ago, the EU urged Japan not to participate in an April semiconductor forum with the U.S. and other nations until a broader trade pact on information-technology products is completed.

Obviously, EU leaders still don't understand that tariffs hurt their own member nations -- and the technology companies based within their borders -- worse than they hurt outside companies or nations. In fact, even if all EU chip tariffs were eliminated tomorrow, it would come too late for much of the European electronics industry, which has been decimated over the years by well-meaning socialist governments aiming to protect companies and workers, rather than to make them more competitive.

With Japan and the U.S. far in the lead in semiconductor manufacturing, the EU long maintained stiff tariffs of 14% on chips, only last year reducing them to 7% on a range of products. (Duties already have been eliminated on some products, including microprocessors.) Any chip type that was available from both European and external sources was subject to the tariff, though chips that European companies don't make were exempt. The tariff was justified on the grounds that semiconductors are a "strategic industry." But in reality, these policies were a concession to the European semiconductor companies with political clout. As usual, Europeans subsidized the companies that managed to lobby for an entitlement.

It appears that most of the European semiconductor industry used its tariff subsidy (along with other subsidies) to remain comfortably inefficient. In 1988 Europe-based companies manufactured 10.2% of the world's chip supply, according to market researcher In-Stat Inc. In 1996, according to a preliminary estimate, they weighed in with a meager 5.4% share. Both tariffs and corporate welfare crippled the European chip industry.

And the big losers were European computer companies, the consumers of semiconductor chips. Silicon chips are the basic component of computers, often comprising more than 20% of their value. More-expensive chips mean less-competitive computer companies. Nixdorf, one of Germany's most important computer companies, had a cash-flow crisis and had to be acquired by Siemens to survive. ICL, the United Kingdom's largest computer company, was saved by Fujitsu, which now owns half the company. France's Groupe Bull has been bleeding for years and would not have survived without massive government funding. Olivetti, Europe's largest manufacturer of personal computers, has "hollowed out," focusing on design and distribution while eliminating many manufacturing jobs. (To escape the onerous semiconductor tariff, some computer companies negotiated minor changes to chip specifications in order to claim that the chips they bought were proprietary and therefore exempt.)

Overall, the European market share of electronic data products -- a world-wide market including personal computers, mini- and microcomputers, digital signal processors, and peripherals -- fell to only 18.3% last year from 23.1% in 1988, according to In-Stat. Socialist thinkers have not only cut the European semiconductor industry in half, but also its computer industry by 20%. During that process, every European citizen paid extra not only for higher taxes to subsidize crippled industries, but also for higher product prices.

Japan's economy is even deeper into its industrial-policy woes, with no improvement in sight. We should remember these colossal blunders the next time we hear our administration talking about a tariff to save some strategic industry and its jobs. The Clinton administration recently triggered a trade war with Mexico by placing a tariff on the import of Mexican brooms. It will be interesting to hear what creative rationale the administration creates for this maneuver. The "strategic industry" argument will be difficult to apply with a straight face.

- Courtesy The Wall Street Journal. © Copyright Dow Jones & Co.