Great ResignationClimate ChangeLeadershipInflationUkraine Invasion

Commentary: Who Wins After U.S. Antitrust Regulators Attack? China.

March 29, 2018, 9:10 PM UTC

A central issue in the trade war between the U.S. and China is the Chinese practice of demanding that U.S. and other foreign companies transfer technology to Chinese partners as a condition of doing business in China. By doing so, China’s state-backed firms get the benefits of foreign research and development without contributing to it, while eroding the lead of American industry.

Even many critics of the Trump administration’s tariffs on Chinese imports agree that this is a serious problem. But it is important to recognize that America’s own antitrust policies perversely encourage the loss of technological leadership to rival nations.

Today it is often claimed that large firms stifle innovation—and the cure is antitrust regulation. Charles Duhigg summed up the growing view in a recent New York Times Magazine article about Google: “If you love technology … then perhaps you ought to cheer on antitrust prosecutors.”

One outcome of federal antitrust prosecutions can be to break up firms. But even if firms are not pulverized, the Justice Department can order them to share technology they have developed with others.

Today’s antitrust advocates look back with nostalgia to the post-World War II era, when the Justice Department brought scores of antitrust cases against some of the largest tech firms in America. As Barry Lynn and Phil Longman have written, “Antitrust enforcers weren’t content simply to prevent giant firms from closing off markets. In dozens of cases between 1945 and 1981, antitrust officials forced large companies like AT&T, RCA, IBM, GE, and Xerox to make available, for free, the technologies they had developed in-house or gathered through acquisition.” For Lynn, this was “the greatest dissemination of industrial knowledge in human history.”

To be sure, forcing companies to give their technology to competitors spurred some innovation in the receiving firms; how could it not when thousands of companies received a windfall of valuable intellectual property? But here’s where it gets tricky—in the real world, not merely firms but also nations compete.

In their zeal to limit market power, U.S. antitrust enforcers in the past inadvertently inflicted real damage on a number of American advanced technology firms, while at the same time giving foreign competitors the intellectual crown jewels. In so doing, they seriously set back the U.S. economy, the effects of which continue to be felt to this day.

The AT&T case is illustrative. After inventing the transistor at its Bell Labs facility, the company faced pressure from antitrust regulators to make the technology widely available at a low price. And so, in 1952, AT&T licensed the technology for just $25,000 to 35 companies. On one level, that spurred innovation in some emerging companies, such as Texas Instruments and Fairchild Semiconductor, the predecessor of Intel. But because the fee was so low, a small, struggling company in Japan was able to afford the license. This turned out to be the key leg up Sony needed to eventually propel itself to global leadership, taking market share from the leading U.S. consumer electronics firms.

The RCA case was even more damaging. Indeed, as historian John Steele Gordon has written, “Perhaps the best example of the harm antitrust has sometimes done to our economy is RCA.” RCA was the Apple and Intel of its day—all rolled into one. Formed in 1919 under pressure by the U.S. Navy (because the dominant radio firm, American Marconi, was foreign-owned), RCA became the leader first in radio innovation, and then in television. Because it had a dominant share in the emerging color television industry, achieved by its own superior internal R&D, the Justice Department required RCA to provide its valuable patent portfolio to U.S. competitors at no cost. However, RCA was allowed to license the patents to foreign companies for the usual royalty arrangement.

Because RCA had long relied on licensing revenue, it now was essentially forced to license its technology to foreign firms—in this case predominantly Japanese firms—that had been seeking to break into the color TV market with little success. As James Abegglen, a leading technology historian, has written, “RCA licenses made Japanese color television possible.” Armed with this valuable technology—produced through years of research and engineering that cost RCA billions of dollars—Japanese TV manufacturers, which were protected from foreign competition by the Japanese government, soon took over the U.S. market, and an industry invented in America was destroyed. And what had been the real cost to consumers of this RCA “monopoly”? One study found that it only raised the price of televisions by 2.26%.

Unfortunately, this kind of reverse industrial policy in the name of antitrust continues. In 2016, the Federal Trade Commission required that the semiconductor maker NXP divest its RF (radio frequency) power business as a condition for its $11.8 billion acquisition of U.S.-based Freescale Semiconductor Ltd. While this was done with a focus on the consumer, it opened up the business for acquisition by the Chinese investment company Jianguang Asset Management Co. Ltd., which has financial backing from the Chinese government. Just like that, thanks to an action undertaken by the U.S. government, critical U.S. technology capabilities went to China.

The lesson from this tale of unintended consequences for current antitrust enforcement is clear: It is time to stop ignoring potential adverse consequences of U.S. antitrust policy for America’s international competitiveness. Antitrust policies may be justified in terms of limiting anti-competitive behavior that hurts other firms in the U.S. economy. But when antitrust judgments weaken U.S. firms, allowing foreign firms and nations to free-ride on American R&D in order to catch up with and sometimes eliminate entire U.S. firms and industries, the result is to enrich other countries at America’s expense.

Maintaining American technological primacy in key industries should be a key consideration of U.S. antitrust policy—not just reducing concentration ratios in particular industries. The Justice Department and FTC appear to have little interest or capacity to consider the effects of their actions on U.S. international competitiveness. Going forward, when they decide to take action affecting a leading U.S. innovation-based firm, experts on the broader national interest in maintaining global competitiveness should have a seat at the table.

It is time for antitrust policy regarding firms in advanced technology industries to be carried out in coordination with the Commerce Department. The alternative is to allow antitrust actions, which are supposed to benefit all Americans, to backfire by helping foreign rivals bring American firms and industries down.

Robert D. Atkinson is the president of the Information Technology and Innovation Foundation. Michael Lind is a visiting professor at the University of Texas Johnson School of Public Affairs. They are co-authors of the new book Big Is Beautiful: Debunking the Myth of Small Business.