U.S. Not Ready to Scrap Chip Pact With Japan : But May Have to Act if Agreement Doesn’t Start Working, Official Admits

SANTA CLARA —  Despite its dissatisfaction with Japan’s enforcement of the trade agreement on semiconductors, the U.S. Commerce Department is not ready to abandon it, Bruce Smart, undersecretary for international trade, said here Tuesday.

“Our first priority is to make the agreement work. And it’s probably our second priority, too,” Smart said in a session with members of the press. “But it’s not working at this point, and it may never work.

“If that’s the case, then we may have to (terminate the agreement and) recommend to the President that he take some action,” he added.

Smart was in Silicon Valley for the first time to tour chip making facilities and to meet informally with electronics industry representatives who are concerned about the pact’s implementation.

Semiconductor makers have complained about lack of progress in carrying out the agreement, most recently in a sharply worded letter warning that the industry would seek “additional action” by the U.S. government in the event that the current consultations do not yield a positive signal that Japan intends to eliminate chip “dumping” in places such as Southeast Asia. Dumping is the practice of selling below fair market value.

Smart, who said he found the Oct. 23 letter from the Semiconductor Industry Assn. “abrasive,” cautioned that it may be another two to three months before prices of Japanese-made chips sold in so-called third country markets (other than the United States and Japan) begin to rise. But he acknowledged that the U.S. government was distressed not to see any progress so far in closing the wide gap in pricing.

As part of the bilateral trade agreement signed Sept. 1, Japan agreed to eliminate dumping of the tiny electronic circuits in the United States and third country markets, to encourage fair pricing in its own markets and to help American companies gain a greater share of the Japanese chip market. Smart said U.S. companies have seen progress on the latter issue but “not of the cash register kind.”

The Commerce Department has set fair market values, or floor prices, for Japanese-made chips being sold here. And while those values have raised prices here, U.S. component buyers contend that chips are still being sold elsewhere at below cost. If the United States terminates the agreement because of continued violations, it would reinstate the two anti-dumping cases and the unfair trade complaint that were suspended as part of the pact.

To do so would likely result in dumping penalties being levied against Japanese chip imports and raise the specter of unilateral, retaliatory action against the United States’ largest trading partner.

Terminating the agreement and giving up the government’s leverage against third country dumping could be disastrous for the U.S. semiconductor industry by eventually driving its customers offshore for less-costly chips, Smart said. But barriers to Japanese imports--which President Reagan could erect under the unfair trading practices statutes, “would kill Japan,” he said.

In his Monday night meeting with chip users and makers, Smart indicated that the current talks should produce a definitive answer from Japan as to how it is going to close pricing gaps in third country markets, as well as in Japan, according to an industry source.

On Tuesday, Smart said that although the government has not set a deadline for evaluating the pact’s success, “we believe this thing (the agreement) has a short fuse. It won’t be long before we’re convinced that it’s working--or not working.”