International Security 16:1 82 economic interests to the pursuit of political harmony or solidarity within the alliance.In short,the transformation of international economic and se- curity structures should inspire a dominant state to act more as an "ordinary country,"and strive for relative economic advantage in relations with its allies. This article may be viewed as a preliminary effort to examine the hypoth- esis that,as relative economic power declines and external security threats diminish,a hegemonic state is likely to pursue relative gains more forcefully in economic relations with its allies.While some scholars rightly emphasize that U.S.power remains considerable in absolute terms,it is equally clear that in relative terms U.S.economic power has declined significantly over the course of the postwar era.20 By the latter half of the 1980s the United States still possessed the world's largest economy,but no longer enjoyed the unambiguous technological or financial superiority that had characterized its position in the two decades following the second World War.21 Moreover, Japan emerged as the principal economic challenger to the United States. Japanese firms equalled and then surpassed their American counterparts in traditional industries such as autos and steel,and in high technology areas such as semiconductors and automated machine tools.22 The massive sur- pluses Japan accumulated in trade with the United States during the 1980s translated into increased financial power,as the United States came to rely upon Japanese investments to finance part of its persistent trade and budget deficits. By the end of the 1980s,these shifts in relative economic power were accompanied by the now familiar changes in the international security en- vironment-the end of the Cold War and the collapse of Soviet power in Central Europe.These changes,coupled with the profound political and economic crises confronting the Soviets domestically,rendered it unlikely 20.Those who stress America's enduring capabilities in absolute terms include Joseph S.Nye, Jr.,Bound To Lead:The Changing Nature of American Power (New York:Basic Books,1990);and Susan Strange,"The Persistent Myth of Lost Hegemony,"International Organization,Vol.41,No. 4(Autumn 1987),pp.551-574.Those who emphasize relative decline include Krasner,"Amer- ican Policy";Robert Gilpin,The Political Economy of International Relations(Princeton,N.J.:Prince- ton University Press,1987);and Paul Kennedy,The Rise and Fall of the Great Powers:Economic Change and Military Conflict from 1500 to 2000 (New York:Random House,1987). 21.Gilpin,Political Economy of International Relations;and United States Department of Com- merce,International Trade Administration,An Assessment of U.S.Competitiveness in High Tech- nology Industries (Washington,D.C.:U.S.Government Printing Office [U.S.GPO],February 1983). 22.Ferguson,"American's High Tech Decline";and Prestowitz,Trading Places
International Security 26:1 1 82 economic interests to the pursuit of political harmony or solidarity within the alliance. In short, the transformation of international economic and security structures should inspire a dominant state to act more as an "ordinary country," and strive for relative economic advantage in relations with its allies. This article may be viewed as a preliminary effort to examine the hypothesis that, as relative economic power declines and external security threats diminish, a hegemonic state is likely to pursue relative gains more forcefully in economic relations with its allies. While some scholars rightly emphasize that U.S. power remains considerable in absolute terms, it is equally clear that in relative terms U.S. economic power has declined significantly over the course of the postwar era.20 By the latter half of the 1980s the United States still possessed the world's largest economy, but no longer enjoyed the unambiguous technological or financial superiority that had characterized its position in the two decades following the second World War.21 Moreover, Japan emerged as the principal economic challenger to the United States. Japanese firms equalled and then surpassed their American counterparts in traditional industries such as autos and steel, and in high technology areas such as semiconductors and automated machine tools.22 The massive surpluses Japan accumulated in trade with the United States during the 1980s translated into increased financial power, as the United States came to rely upon Japanese investments to finance part of its persistent trade and budget deficits. By the end of the 1980s, these shifts in relative economic power were accompanied by the now familiar changes in the international security environment-the end of the Cold War and the collapse of Soviet power in Central Europe. These changes, coupled with the profound political and economic crises confronting the Soviets domestically, rendered it unlikely 20. Those who stress America's enduring capabilities in absolute terms include Joseph S. Nye, Jr., Bound To Lead: The Changing Nature of American Power (New York: Basic Books, 1990); and Susan Strange, "The Persistent Myth of Lost Hegemony," International Organization, Vol. 41, No. 4 (Autumn 1987), pp. 551-574. Those who emphasize relative decline include Krasner, "American Policy"; Robert Gilpin, The Political Economy of International Relations (Princeton, N. J.: Princeton University Press, 1987); and Paul Kennedy, The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500 to 2000 (New York: Random House, 1987). 21. Gilpin, Political Economy of International Relations; and United States Department of Commerce, International Trade Administration, An Assessinent of U.S. Competitiveness in High Technology Industries (Washington, D.C.: U.S. Government Printing Office [U.S. GPO], February 1983). 22. Ferguson, "American's High Tech Decline"; and Prestowitz, Trading Places
Do Relative Gains Matter?83 that the Soviet Union would continue to be perceived unambiguously as a significant threat to Western security. The three areas chosen for investigation-aircraft,satellites,and HDTV- involve U.S.-Japanese competition in the development and commercializa- tion of advanced technology.A realist might plausibly expect the United States to be sensitive to relative gains in these areas,since success in ad- vanced technology is generally taken to be a critical asset in the pursuit of both economic welfare and military security.Moreover,each of the three areas was targeted in recent years by the Japanese government as a priority for technological and commercial success.That the Japanese government has sought to enhance the capabilities of Japanese firms in each of these areas should have provided an additional impetus for the United States to react in accordance with the logic of relative gains. If realism is a useful guide to state behavior,then we would expect to find evidence of relative gains concerns in the U.S.policy process and in policy outcomes.The specific policies associated with relative gains concerns will vary,depending on the particular concern that is motivating policy-makers. For example,if policy-makers fear that mutually beneficial economic inter- action will lead to a dangerous increase in their partner's military capabilities, they might be inclined to adopt export controls on militarily significant trade, as did the United States and its Western allies vis-d-vis the Soviet Union during the Cold War.23 If the concern is that economic interaction will provide another state with a significant source of political leverage,policy-makers might seek to diversify either their sources of supply or their markets.24 Finally,if the concern is that economic interaction will endanger a country's competitive position economically,we should expect officials to contemplate and adopt measures associated with strategic trade policy,such as the tar- geting or promotion of "strategic"industries,or the disruption of efforts by other governments to lend their industries a competitive advantage.25 23.Mastanduno,Economic Containment. 24.This concern is addressed in the specific context of the defense industry by Theodore H. Moran,"The Globalization of America's Defense Industries:Managing the Threat of Foreign Dependence,"International Security,Vol.15,No.1(Summer 1990),pp.57-99.The classic account is Albert Hirschman,National Power and the Structure of Foreign Trade,2nd ed.(Berkeley:Uni- versity of California Press,1980). 25.In general,strategic industries or activities are those which generate higher than normal economic returns,or which generate externalities or"spillovers"that benefit other parts of the national economy.See Paul R.Krugman,ed.,Strategic Trade Policy and the New International Economics (Cambridge:MIT Press,1986);and J.David Richardson,"The Political Economy of Strategic Trade Policy,"International Organization,Vol.44,No.1 (Winter 1990),pp.107-135.The
Do Relative Gains Matter? 1 83 that the Soviet Union would continue to be perceived unambiguously as a significant threat to Western security. The three areas chosen for investigation-aircraft, satellites, and HDTVinvolve U.S.-Japanese competition in the development and commercialization of advanced technology. A realist might plausibly expect the United States to be sensitive to relative gains in these areas, since success in advanced technology is generally taken to be a critical asset in the pursuit of both economic welfare and military security. Moreover, each of the three areas was targeted in recent years by the Japanese government as a priority for technological and commercial success. That the Japanese government has sought to enhance the capabilities of Japanese firms in each of these areas should have provided an additional impetus for the United States to react in accordance with the logic of relative gains. If realism is a useful guide to state behavior, then we would expect to find evidence of relative gains concerns in the U.S. policy process and in policy outcomes. The specific policies associated with relative gains concerns will vary, depending on the particular concern that is motivating policy-makers. For example, if policy-makers fear that mutually beneficial economic interaction will lead to a dangerous increase in their partner's military capabilities, they might be inclined to adopt export controls on militarily significant trade, as did the United States and its Western allies vis-a-vis the Soviet Union during the Cold War.23 If the concern is that economic interaction will provide another state with a significant source of political leverage, policy-makers might seek to diversify either their sources of supply or their markets.24 Finally, if the concern is that economic interaction will endanger a country's competitive position economically, we should expect officials to contemplate and adopt measures associated with strategic trade policy, such as the targeting or promotion of "strategic" industries, or the disruption of efforts by other governments to lend their industries a competitive advantage.25 23. Mastanduno, Econoinic Containment. 24. This concern is addressed in the specific context of the defense industry by Theodore H. Moran, "The Globalization of America's Defense Industries: Managing the Threat of Foreign Dependence," International Security, Vol. 15, No. 1(Summer 1990), pp. 57-99. The classic account is Albert Hirschman, National Power and the Structure of Foreign Trade, 2nd ed. (Berkeley: University of California Press, 1980). 25. In general, strategic industries or activities are those which generate higher than normal economic returns, or which generate externalities or "spillovers" that benefit other parts of the national economy. See Paul R. Krugman, ed., Strategic Trade Policy and the New International Economics (Cambridge: MIT Press, 1986); and J. David Richardson, "The Political Economy of Strategic Trade Policy," International Organization, Vol. 44, No. 1(Winter 1990), pp. 107-135. The
International Security 16:184 The FSX Agreement:Relative Gains and Renegotiation The 1989 controversy over joint U.S.-Japanese development of the "FSX" fighter aircraft had its roots in two prior developments-Japan's interest in nurturing a commercial aircraft industry,and an established pattern of U.S.- Japanese cooperation in military aircraft co-production.The former was ap- parent by the mid-1950s,when the Japanese government passed the first Aircraft Industry Promotion Law and collaborated with industry to develop and produce a commercial aircraft,the YS-11.That venture was largely unsuccessful,but by 1970 the Ministry of International Trade and Industry (MITI)had targeted aerospace as one of three key technologies for the twenty- first century.It reaffirmed that assessment in 1980,and by the middle of that decade had provided subsidies to the aircraft sector equal to or greater than those provided to other critical areas,including computers,energy,and telecommunications.26 MITI also encouraged Japanese firms to enter collab- orative arrangements with more advanced Western producers of airframes and engines,such as Boeing and Rolls-Royce.To the Japanese government, a presence in commercial aircraft-a sector of exceptional weakness in post- war Japan-was necessary to reinforce Japan's position in other high tech- nology areas,and also to provide an expansion opportunity for Japanese heavy industries that faced slower growth and overseas competition in tra- ditional activities such as shipbuilding.27 American-Japanese military co-production began in the 1950s.It acceler- ated significantly by the late 1970s,in the wake of the U.S.government's decision to allow Japan to co-produce the F-15 fighter aircraft.Between 1976 and 1980 the U.S.government authorized over one hundred military co- production agreements between American and Japanese firms,the majority of which involved the production of aircraft components.28 While the U.S. pursuit of strategic trade policy is not necessarily incompatible with that of free trade,as illustrated below by the satellite case. 26.Richard Samuels and Benjamin Whipple,"Defense Production and Industrial Development: The Case of Japanese Aircraft,"in Chalmers Johnson,Laura D'Andrea Tyson,and John Zysman, eds.,Politics and Productivity:The Real Story of Why Japan Works (Cambridge,Mass.:Ballinger, 1989),Pp.275-318,at275-278. 27.See John Harbison,"Taking Japan Seriously in Aero,"New York Times,June 25,1989,p.F3. 28.U.S.General Accounting Office,U.S.Military Coproduction Programs Assist Japan in Developing its Civil Aircraff Industry,Report to the Chairman,Subcommittee on Trade,House Ways and Means Committee(Washington,D.C.:U.S.GPO,March 18,1982),Appendix II
International Security 16:1 1 84 The FSX Agreement: Relative Gains and Renegotiation The 1989 controversy over joint U.S.-Japanese development of the "FSX" fighter aircraft had its roots in two prior developments-Japan's interest in nurturing a commercial aircraft industry, and an established pattern of U.S.- Japanese cooperation in military aircraft co-production. The former was apparent by the mid-1950s, when the Japanese government passed the first Aircraft Industry Promotion Law and collaborated with industry to develop and produce a commercial aircraft, the YS-11. That venture was largely unsuccessful, but by 1970 the Ministry of International Trade and Industry (MITI) had targeted aerospace as one of three key technologies for the twentyfirst century. It reaffirmed that assessment in 1980, and by the middle of that decade had provided subsidies to the aircraft sector equal to or greater than those provided to other critical areas, including computers, energy, and telecommunication^.^^ MITI also encouraged Japanese firms to enter collaborative arrangements with more advanced Western producers of airframes and engines, such as Boeing and Rolls-Royce. To the Japanese government, a presence in commercial aircraft-a sector of exceptional weakness in postwar Japan-was necessary to reinforce Japan's position in other high technology areas, and also to provide an expansion opportunity for Japanese heavy industries that faced slower growth and overseas competition in traditional activities such as ~hipbuilding.~~ American-Japanese military co-production began in the 1950s. It accelerated significantly by the late 1970s, in the wake of the U.S. government's decision to allow Japan to co-produce the F-15 fighter aircraft. Between 1976 and 1980 the U.S. government authorized over one hundred military coproduction agreements between American and Japanese firms, the majority of which involved the production of aircraft c~mponents.~~ While the U.S. pursuit of strategic trade policy is not necessarily incompatible with that of free trade, as illustrated below by the satellite case. 26. Richard Samuels and Benjamin Whipple, "Defense Production and Industrial Development: The Case of Japanese Aircraft," in Chalmers Johnson, Laura D'Andrea Tyson, and John Zysman, eds., Politics and Prodtictivity: The Real Story of Why Japan Works (Cambridge, Mass.: Ballinger, 1989), pp. 275-318, at 275-278. 27. See John Harbison, "Taking Japan Seriously in Aero," New York Times, June 25, 1989, p. F3. 28. U.S. General Accounting Office, U.S. Military Coproduction Programs Assist Japan in Developing its Civil Aircraft Industry, Report to the Chairman, Subcommittee on Trade, House Ways and Means Committee (Washington, D.C.: U.S. GPO, March 18, 1982), Appendix 11
Do Relative Gains Matter?85 government endorsed such arrangements primarily for defense and foreign policy reasons,the Japanese government proved as much if not more con- cerned with economic and industrial development.MITI,which sets policy for both military and civilian aircraft production in Japan,played a key role in the evaluation and implementation of co-production arrangements,seek- ing to ensure that such arrangements enhanced the technology base and production capabilities of Japanese firms.According to the U.S.General Accounting Office (GAO),co-production deals contributed significantly to the development of Japan's aircraft industry,by introducing new engineering and quality control techniques,providing experience for management and labor,and helping to develop an infrastructure of parts and equipment suppliers.29 More generally,co-production complemented MITI's strategy, apparent by the mid-1980s,of seeking to use the expansion of military production as a means to enhance the overall development of Japan's aero- space industry.30 Japan's need to replace its aging F-1 fighter sparked a domestic debate in the early 1980s,between those favoring the indigenous design and devel- opment of a new aircraft,and those urging reliance on the traditional co- production pattern,which they viewed as less costly and more predictable. The former,who believed that passive co-production,given increasingly restrictive U.S.technology transfer requirements,would perpetuate the back- wardness of Japanese industry,ultimately prevailed over their domestic op- ponents.However,they ran into opposition from U.S.officials,who argued that in light of the bilateral trade deficit and the fact that indigenous devel- opment would complicate joint defense planning,Japan should either pur- chase U.S.planes off-the-shelf or agree to co-produce.3 By late 1987 the Japanese government proclaimed a compromise,and announced its intention to co-develop the FSX with General Dynamics,using the latter's F-16 as its model and starting point.Co-development,as opposed to co-production, suggested that Japanese firms would not merely assemble aircraft based on existing U.S.designs,but would work with General Dynamics to create a new design,and,in effect,a new aircraft.Co-development would involve 29.Ibid.,p.11. 30.Samuels and Whipple,"Defense Production and Industrial Development,"pp.281-284. 31.Ibid.,pp.293-303;and Prestowitz,Trading Places,pp.8-31.Prestowitz provides the best description of the bilateral negotiations that led to the FSX agreement,and of the subsequent political controversy in the United States
Do Relative Gains Matter? 1 85 government endorsed such arrangements primarily for defense and foreign policy reasons, the Japanese government proved as much if not more concerned with economic and industrial development. MITI, which sets policy for both military and civilian aircraft production in Japan, played a key role in the evaluation and implementation of co-production arrangements, seeking to ensure that such arrangements enhanced the technology base and production capabilities of Japanese firms. According to the U.S. General Accounting Office (GAO), co-production deals contributed significantly to the development of Japan's aircraft industry, by introducing new engineering and quality control techniques, providing experience for management and labor, and helping to develop an infrastructure of parts and equipment suppliers.29 More generally, co-production complemented MITI's strategy, apparent by the mid-1980s, of seeking to use the expansion of military production as a means to enhance the overall development of Japan's aerospace industry. 30 Japan's need to replace its aging F-1 fighter sparked a domestic debate in the early 1980s, between those favoring the indigenous design and development of a new aircraft, and those urging reliance on the traditional coproduction pattern, which they viewed as less costly and more predictable. The former, who believed that passive co-production, given increasingly restrictive U.S. technology transfer requirements, would perpetuate the backwardness of Japanese industry, ultimately prevailed over their domestic opponents. However, they ran into opposition from U.S. officials, who argued that in light of the bilateral trade deficit and the fact that indigenous development would complicate joint defense planning, Japan should either purchase U.S. planes off-the-shelf or agree to co-produce.31 By late 1987 the Japanese government proclaimed a compromise, and announced its intention to co-develop the FSX with General Dynamics, using the latter's F-16 as its model and starting point. Co-development, as opposed to co-production, suggested that Japanese firms would not merely assemble aircraft based on existing U.S. designs, but would work with General Dynamics to create a new design, and, in effect, a new aircraft. Co-development would involve 29. Ibid., p. 11. 30. Samuels and Whipple, "Defense Production and Industrial Development," pp. 281-284. 31. Ibid., pp. 293-303; and Prestowitz, Trading Places, pp. 8-31. Prestowitz provides the best description of the bilateral negotiations that led to the FSX agreement, and of the subsequent political controversy in the United States