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Strengthening Economic Security

Strengthening
Economic Security

A central goal of our nation's national security strategy is to promote America's prosperity through efforts both at home and abroad. Our economic and security interests are increasingly inseparable. Our prosperity at home depends on engaging actively abroad. The strength of our diplomacy, our ability to maintain an unrivaled military, the attractiveness of our values abroad-all these depend in part on the strength of our economy.

A National Security Strategy of Engagement and Enlargement, 1995

The Policy Challenge

Over the past several decades, the U.S. economy has experienced a profound transformation. Thirty years ago the U.S. economy accounted for well over a third of the world's total, and U.S. companies were leaders in most manufacturing industries. By 1994 the U.S. contribution had fallen to about a fifth of the world economy, with industries in Europe and Asia now fierce competitors. Since World War II other nations have rebuilt their industries, made improvements in technology, upgraded their education systems, and adopted new and innovative management practices. With the end of the Cold War, the globalization of markets, and rapid technological progress worldwide, foreign competition has put unprecedented pressure on American industry. Advanced technology has been at the heart of America's competitive advantage, and today technological leadership means the difference between success and failure in the new global economy.

The technology base that propels the economy is in turn increasingly crucial for national defense. In a number of important technologies, the defense industry no longer leads the commercial sector. For example, the new technologies that are most critical to our military advantage-software, computers, semiconductors, telecommunications, advanced materials, and manufacturing technologies-are being driven by fast-growing and changing commercial demand. In the past, it was more common to think of technologies as "spinning off" from military development to civilian markets. Technologies today are in growing numbers "spinning on" from civilian labs and commercial products to military uses. These dynamic commercial markets must be tapped to provide for a more sophisticated military defense at a lower cost to the taxpayer.

Through engagement abroad, U.S. leadership in commercial technology also strengthens the stability of strategic nations, working to prevent conflict before it occurs. A combination of competition and cooperation in science and technology with these economies promotes their stability, enhances integration with the global economy, and contributes to growth in the United States.

Fully exploiting the technology base to meet economic, defense, and global stability goals is thus a growing demand of policy and is increasingly important in the face of tight Federal budgets. The need to reduce the size of the Federal deficit means that every dollar invested by the government must bring a maximum return to the public and leverage to the greatest extent possible the capabilities of the private sector.

This chapter describes Administration policies in science and technology that are designed to bolster the nation's long-term economic security through both domestic economic growth and international trade.

Administration
Policy

Now, more than ever, science and technology are critical to our nation's future. It is the belief of this Administration that technology is the engine of economic growth, and science is the fuel that stokes this engine. From the steam engine to the airplane, from electrical power to the transistor, from the telephone to the microchip-scientific discovery combined with technological innovation have dramatically changed our lives, the workplace, and our economy. In the process, entirely new industries and new high-wage jobs have been created. However, international and domestic changes bring continuing challenges to sustaining U.S. leadership.

Science and technology are cornerstones of the Administration's strategy for economic security. To address the new global challenges, the Administration is pursuing a strategy designed to equip American companies and workers to compete and win in the international economy. Elements of this strategy are the following:

Creating a climate that fosters private-sector innovation and commercialization.
Supporting industry-led technology development partnerships.
Facilitating the rapid deployment of civilian technologies.
Building a 21st-century infrastructure.
Maintaining strong support for basic science.
Supporting education in science and technology.
Leveraging dual-use technologies for commercial markets.
Promoting international economic development and trade through international collaboration.

Each of these policy priorities is summarized below.

Creating a climate that fosters private-sector innovation and commercialization. A broad range of factors affect the ability of U.S. companies to develop technology, turn innovations into products and services, and bring them to global markets. Continued emphasis on debt reduction is essential to free up capital for private-sector investment in research and development, plant and equipment, and new or expanding businesses. Other measures include tax policies that encourage innovation including extension of the research and experimentation tax credit; reform of regulatory barriers to innovation while safeguarding the environmental and health goals that are the object of regulation; and reducing outdated Cold War export controls.

Export Control Reform

The end of the Cold War, the outbreak of regional conflicts, and the emergence of countries that have repeatedly provided support for acts of international terrorism have led the Administration to fundamentally reevaluate U.S. export control policies. With the demise of the Soviet Union and the Warsaw Pact, the United States is involved in negotiations to establish a new multilateral export control regime to succeed the Coordinating Committee for Multilateral Export Controls (COCOM), which ceased to exist after March 31, 1994. The COCOM successor regime is aimed at controlling exports of sensitive dual-use items and conventional weapons on a worldwide basis, with special focus on certain countries of concern and countries located in geographic areas where the military balance could easily be altered or destabilized.

Although the Administration has addressed the shifting focus of U.S. export controls from their previous emphasis on the strategic concerns of the Cold War to a more balanced consideration of proliferation concerns and regional stability interests, it has not failed to recognize that export controls can have a significant effect on domestic businesses and industries, the well-being of which is critical to U.S. economic security. One of the most important objectives listed in the September 1993 report to Congress by the Trade Policy Coordinating Committee (TPCC) was the Administration's determination to "ensure that U.S. economic interests play a key role in decisions on export controls." Accordingly, the TPCC report announced a number of measures designed to lessen the negative economic impact of export controls on U.S. businesses, consistent with our national security interests. The measures included liberalizing controls on telecommunications equipment and computers. For example, the performance threshold above which prior written permission is required to export computers was raised from 195 to 1,000 MTOPS (million theoretical operations per second) for most destinations. These recommendations have removed over $32 billion worth of exports from the requirement of advance approval.

The Administration has addressed economic security issues vis a vis the export control system in other significant ways. In April 1994, it acted to reduce the economic burden of export controls by establishing a new General License, GLX, which authorized exports without prior written permission of a wide range of dual-use commodities to civil end users in the People's Republic of China, Russia, and other newly independent countries of the former Soviet Union and Eastern Europe. Export control liberalization has also provided the former Soviet Union and China with the telecommunications equipment they need, enhancing business with the United States. The Administration is continuing further reform of the export control system through its ongoing efforts to streamline the export license review process and to resolve longstanding problems with the commodity jurisdiction process. For example, the number of licenses required fell from 25,000 in 1993 to fewer than 15,000 in 1994, with a further drop expected this year. The Administration has also, in consultation with industry, issued the first comprehensive rewrite of the dual-use export control regulations since they were first implemented. Successful completion of these initiatives will significantly reduce the burden of export controls and will enhance overall efforts to bolster U.S. economic activity.

Support for industry-led technology development partnerships. The accelerating pace of technological advance, increasing cost of research and development, ever-shorter product cycles, and rapid worldwide diffusion of technologies mean that many companies are finding it harder to afford investment in risky or longer term research and development than in the past. For example, in the electronics industry, the lifetime of a personal computer model is less than two years, forcing firms to manage three generations of the technology at once and squeezing out resources for longer term technology-base R&D. In the semiconductor industry, new plant investments can exceed 1 billion dollars, with the next generation running two or three times that much, again drawing resources away from the longer term R&D that would form the base for future industries. Overall, we find that industries are devoting 80 to 90 percent of their R&D resources to short-term product development and process improvement. We are thus seeing a gap in the innovation system, in funding for mid- and long-range R&D, which threatens to dry up the wells of new technology from which our companies must draw in the future to remain competitive. Pressure to realize near-term returns is aggravating, in particular, the gap in R&D in the five- to seven-year time frame.

Individual companies are particularly reluctant to move forward with research and development projects, when a substantial fraction of the total return may not be captured by the investing company. Government risk-sharing can provide a bridge that mitigates underinvestment in research and development and supports broad diffusion to society of the benefits of R&D. The social rate of return on R&D investments, where the benefits accrue to many firms and to consumers in the form of less costly and higher quality products, is about twice as high as the average private rate of return on investment for individual firms.

The problem of capturing private returns on precommercial research and development investments is especially great in widely dispersed and fragmented industries such as building and construction. And where the benefits of technological advance include public returns-to the environment, public health, or national defense-the arguments for government risk-sharing are especially strong. If government fails to support advances in precommercial technologies for these purposes, at least on a cost shared basis, it is very likely that they will not get developed?or will be developed by international competitors.

The Administration has redesigned government partnership programs to ensure that they are:

Market-driven, with industry leading the joint research agenda.
Cost-shared, with the private sector providing half or more of the money, as a test to make sure the technological risk is worth taking.
Competitive, merit-based, and peer-reviewed.
Evaluated periodically and rigorously to make sure the projects have the intended effect.

Industry-government partnerships such as the Partnership for New Generation Vehicles, Advanced Battery Consortium, American Textile Consortium, and projects in the Advanced Technology Program all are examples of the industry identifying its longer term needs and sharing the risks and uncertainties in pursuing those developments with the government. In addition to the government, universities are increasingly being sought not only as sources of educated students but also as partners in joint research and development. Addressing longer term research and development needs in a commercial environment that emphasizes near-term returns is a growing challenge for industry and public policy. Joint government-industry funding can extend time horizons, increase the number of riskier projects in the national portfolio, and fill the gaps that open in our nation's complex and dynamic science and technology system.

Facilitating the rapid deployment of civilian technologies. Stimulating the development of technologies is only part of successful innovation. Another essential aspect is to make sure that all U.S. industry, including the small and medium-sized firms that constitute the foundation of American manufacturing, get access to efficient, up-to-date production methods. The Manufacturing Extension Partnership operated by the National Institute of Standards and Technology (NIST) in the Department of Commerce is a grassroots effort to provide such information and training to improve the competitiveness of the nation's 380,000 smaller manufacturers. Currently, the network includes 43 centers, and the goal is to create a national network of 100 centers able to meet the needs of America's smaller manufacturers. NIST is also addressing work force involvement in technology development to ensure that technology is adopted and diffused as effectively as possible and that work force education and training issues are considered from the start of the technology development cycle.

The fullest use of technologies developed by our public laboratories is also a continuing challenge. If our public R&D investments are to continue to pay the kinds of economic dividends we have enjoyed in the past, government must improve on the management of its own technology-related assets. We must narrow the time gap of technology transfer by bringing technology creators and users closer together. One such mechanism is the cooperative research and development agreement (CRADA) between companies and Federal labs which creates market pull on the Federal research enterprise.

Building a 21st-century infrastructure. Development of the National Information Infrastructure (NII) and the emerging Global Information Infrastructure (GII) is a top priority. Our nation leads the world in developing and applying information technology that can revolutionize the way we live, learn, and work. Because of the strategic value of these technologies and their potential for fostering economic growth, nations around the globe are investing heavily in the development and deployment of computer systems and telecommunications networks. Our vision for Federal investment in information technology is to accelerate the evolution of existing technology and to nurture innovation that will lead to universal, accessible, and affordable application to enhance U.S. economic and national security in the 21st-century.

The NII includes the Internet, the public switched network, and cable, wireless, and satellite communications. It includes public and private networks. As these networks become more interconnected, individuals, organizations, and governments will use the NII to engage in multimedia communications, buy and sell goods electronically, share information holdings, and receive government services and benefits. Information security is critical to the development and operation of a viable NII. One of the goals of The National Information Infrastructure: Agenda for Action is to ensure information security and network reliability. Without confidence that information will go where and when it is supposed to go-and nowhere else-the NII will not be used to support health, education, commerce, public services, and advanced communications to the fullest extent. In the NII, elements of effective security include assuring confidentiality-the assurance that information will be held in confidence with access limited to appropriate persons; integrity-the confidence that information will not be accidentally or maliciously altered or destroyed; reliability-the confidence that systems will perform consistently and at an acceptable level of quality; and availability-the assurance that information and communications services will be ready for use when expected. These are important building blocks of the NII strategy.

Also of prime importance to economic growth in the next century is a renewed and efficient transportation system. Our highway, air, and rail systems have given Americans the benefits of flexibility, low cost, and personal freedom, but they are in urgent need of renewal. In addition, other countries experiencing rapid economic growth are investing heavily in infrastructural development, creating major opportunities for U.S. goods and services. A coordinated public and private research and development effort should meet these domestic and international objectives for future transportation needs: safe and reliable physical infrastructure, information infrastructure for transportation, and next-generation transportation vehicles.

Support for basic science. America's future demands an expanding knowledge base, which requires investment in our people, institutions, and ideas and cooperation with international partners to expand our access to data and information. Science lies at the heart of that investment-it is an endless, sustainable, and renewable resource with extraordinary dividends. Today's investments in basic science build a foundation for commercial products and services of the future. The nation's commitment to world leadership in science, engineering, and mathematics created the world's leading scientific enterprise, whether measured in terms of discoveries, citations, awards and prizes, advanced education, or contributions to industrial and informational innovation. Our scientific strength is a treasure we must sustain and build on for the future, and this Administration is firmly committed to its support.

The United States has refined a system for selecting excellence in ideas, individuals, and institutions that is extremely competitive and productive. It is a system that achieves quality by emphasizing peer review and promoting creativity. The system cannot always predict the exact areas or nature of scientific breakthroughs or the timeline for fundamental discoveries. Over decades, however, it reliably produces discoveries that enrich the lives and prospects of our citizens and, when transformed to practical cost-effective products, reorganizes old businesses and creates new ones.

Firms are increasingly turning to universities as partners in research as a result of shrinking private-sector resources for these long-term investments. This pooling of resources can invigorate university research and is a healthy development as long as it does not compromise the basic research conducted by universities which serve as the well-spring of new knowledge.

The Federal Government has long played a vital role in ensuring American leadership in science, mathematics, and engineering, and investment in basic science continues to be an essential component of our innovation portfolio.

Education and training. The Administration is committed to sustaining a high-quality system of education. Few enterprises touch the lives of as many people as those concerned with education and training. High-quality education and training benefit the individual whose knowledge and skills are upgraded, the business seeking a competitive edge, and the nation in increasing overall productivity and competitiveness in the global marketplace. It is essential that all Americans have access to the education and training they need and that the teaching and learning enterprise itself becomes a high-performance activity.

The Administration has developed a research and development initiative aimed at using the power of modern information technology to achieve the Administration's lifelong learning goals-including the Goals 2000 and School-to-Work programs. We believe computer and multimedia technology will make individualized, learner-centered, exploratory learning possible at affordable prices. And by using communications systems to connect homes, schools, and workplaces, we enhance the potential for learning outside school and continuing learning throughout our lifetimes.

Federal investment priorities include five main areas: (1) demonstrations that test advanced concepts in learning technologies will expand the state of the art in curriculum design, learner-centered and exploratory instructional strategies, and use of advanced software design; (2) fundamental research on the way people learn will focus on the way new technologies can be used to enhance learning; (3) development of learning tools will ensure availability of tools for synthetic learning environments, collaborative problem-solving environments, software interfaces, instructional software development tools, interactive instructional systems, intelligent learning associates, and tools for searching multimedia databases and digital libraries; (4) development of assessment tools will undoubtedly change our expectations about learning and about the kinds of skills that can be measured; and (5) digitization of Federal resources will provide key resources for commercial developers interested in marketing interactive systems to both education and entertainment markets.

While virtually all other sectors of the economy have been transformed by technological innovation and accompanying structural reorganization in the 20th century, methods used for education and training look much like they have for generations. By accelerating the development and adoption of information education and training, we hope to ensure all Americans access-anytime and anyplace-to quality education and training tailored to their needs.

Dual-use technologies. The role of the Administration's dual-use technology policy in supporting our nation's defense needs was described in Chapter 2, with a focus on its value in strengthening defense capabilities. The other half of the dual-use strategy is its contribution to economic growth. Commercial benefits arise from the "spinoff" of technologies from military use to commercial markets, the "spin-on" of technologies from civilian to military use, and the process of dual-use technology development. Commercial industries have historically benefited from the spinoff of technologies developed for defense purposes into commercial markets. For example, this spinoff of technologies has been central to the launching of the U.S. aerospace, computer, and semiconductor industries, all of which are major sectors of today's economy. In addition, both industry and the military are benefiting increasingly from the opposite, spin-on process as well. As described in Chapter 2, commercial technologies are leading military technologies in performance and cost in a growing number of areas. Increasing the use of civilian technologies in military applications increases the markets available to commercial firms through Department of Defense procurements and strengthens innovation. This spin-on of technologies is enhanced by the Administration's commitment to defense acquisition reform. Finally, there is the strategy of dual-use research and development which captures the energy and capabilities of both our civilian and military technology bases to speed innovations in advanced technologies. The National Flat Panel Display Initiative is an example of a program which develops an advanced technology by combining military need with the vitality and incentives of the commercial markets.

Innovation, Economic Integration, and Trade

A key component of economic security lies in economic integration with the world's nations. Such integration would increase opportunities for U.S. firms in rapidly growing markets; encourage other nations to adopt the norms of free trade, thereby reducing international tensions; provide the United States with access to the capabilities found abroad that strengthen our economy; and strengthen international economic growth and political stability.

Promoting Economic Integration and Trade
Through Innovation Policies

Rapid economic growth in other economies of the world provide the United States with vast opportunities for increased integration and trade with these nations. This Administration has placed a high priority on facilitating this integration by pressing for the removal of barriers to trade and investment and through its strong support of the formation of the World Trade Organization.

In October of 1994, the Administration released the National Export Strategy, which describes the priority it places on promoting trade and removing impediments to exports. The Administration is targeting 65 areas in which it improves its support for the export opportunities of the nation's firms. Types of actions undertaken include supporting U.S. bidders in global competitions, improving trade finance, removing obstacles to exporting such as export controls, helping small and medium-sized businesses, and promoting U.S. exports of environmental technologies and services.

A central element of the National Export Strategy is the attention it gives to high-priority emerging markets. Ten economies are expected to account for over 40 percent of total global imports over the next 20 years: Mexico, Argentina, Brazil, the Chinese Economic Area, India, Indonesia, South Korea, Poland, Turkey, and South Africa. These countries are geographically large, have significant populations, are growing very rapidly, and represent major markets for a wide range of products.

An important link in strengthening economic and political integration, as well as trade, with these economies is collaboration in science and technology. The Office of Science and Technology Policy is coordinating the development of strategies in international collaboration to support and complement the National Export Strategy and the Big Emerging Market Strategies of the Department of Commerce. As noted in the examples of South Africa and China in the box entitled, "Strategic Science and Technology Cooperation and Emerging Markets," this coordination of strategies enhances the economic and political value of our international science and technology activities.

In addition to collaboration, this Administration will continue to press for the removal of barriers to collaboration and trade, and promote the use of internationally recognized standards for technology development and testing. The Administration has placed a high priority on ensuring the protection of intellectual property rights, which fosters innovation and the absence of which inhibits international joint ventures.

Strategic Science and Technology Cooperation
and Emerging Markets

The White House Office of Science and Technology Policy (OSTP) is developing strategic priorities for science and technology cooperation with other countries. As decribed in Chapter 4, priority is placed on countries that are key to the stability of their region, that have a sufficient science and technology base to attract long-term trade and investment, and that represent emerging markets for U.S. goods and services. The primary objectives of these "country strategies" are to identify strategic goals that agencies may wish to pursue in planning future cooperative activities and to promote the integration of cooperative science and technology policy into the larger realm of U.S. foreign and economic policy.

Trade promotion is an important aspect of the "country strategies." OSTP is seeking to use cooperation in science and technology to create opportunities for U.S. industries to increase exports, expand their investment base, and gain access to useful science and technology investments. To achieve this goal, each "country strategy" is based on an analysis of potential markets for U.S. technologies and includes bilateral cooperative activities that can expand U.S. market share. Areas of collaboration include energy, environment, telecommunications, health, agriculture, space, standards, and basic science. Some specific examples follow.

Energy. In the energy sector, the United States and China have signed agreements on clean coal technology utilization and fossil energy research and development, and the Department of Energy is currently planning a joint demonstration combined-cycle coal-fired power plant. These projects are positioning U.S. firms to capture a share of China's projected $90 billion market in power-generating equipment. At the same time, they contribute to the strategic goals of environmental stability and economic development of the region.

Standards. U.S. manufacturers often face standards-related barriers which limit or delay their access to export markets. The Department of Commerce's National Institute of Standards and Technology (NIST) seeks to remove these barriers by collaborating with emerging markets on the development of standards. NIST now has standards experts in many important markets. Workshops with U.S. and foreign standards and trade specialists are used to develop contacts needed to successfully negotiate the removal of technical barriers to trade. In South Africa, the new government has recognized that sound technical standards contribute to more efficient economic growth and has begun reviewing all standards, accreditation, and certification programs. NIST is taking advantage of the opportunity to influence the development of standards through science and technology cooperation. For example, NIST is developing a cooperative agreement with the South African Council for Scientific and Industrial Research on materials, manufacturing, and building technologies, which will facilitate trade in these sectors. NIST is also working with the South African Bureau of Standards to organize a workshop in Pretoria on the use of standard reference materials.

Telecommunications. International cooperation in telecommunications is critical to expanding trade with countries that represent big emerging markets. The current $33 billion market for telecommunications outside the United States is projected to double to $64 billion by 1998, with the highest demand for know-how, technology, and investment expected in developing countries. The development of a Global Information Infrastructure (GII) will facilitate the sharing of information, creating a global information marketplace. A GII could serve U.S. industry by opening overseas markets, eliminating barriers caused by incompatible standards, and examining international and domestic regulations.

Promoting Innovation Through Collaboration
With Other Economies

Recognizing that leading-edge technology is now increasingly developed overseas, the United States must take advantage of opportunities to understand and access foreign scientific knowledge and innovations to enhance domestic economic growth and the competitiveness of U.S. firms. Assessing technologies against international benchmarks and integrating international developments into domestic research and development in a timely manner are challenges that have begun to receive greater priority by both government and industry in the United States.

The U.S. Government assists industry, particularly small and medium-size enterprises, by facilitating international, industry-led cooperative efforts to develop advanced technology and by providing information on foreign technical expertise. For example, programs such as the Manufacturing Technology Fellowship Program and the Intelligent Manufacturing Systems Initiative expose U.S. engineers and firms to the best foreign manufacturing practices and improve communication with foreign firms which may become customers, suppliers, or partners. These projects also establish international "rules of the game" for collaboration. Ensuring adequate protection of intellectual property rights and accommodating the array of international competitive dimensions of our agreements are important to realizing effective global cooperation in technology. To balance the benefits and the risks inherent in international agreements, we must also be vigilant of the potential for an adverse national security impact.

Finally, other programs such as the Japan Technical Literature Program allow U.S. firms access to hard-to-obtain information on the technological capabilities of our international competitors. This makes it possible for U.S. firms to more readily obtain the world's best technology and management practices. The National Critical Technologies Report also provides information that compares the state of advance of science and technology in the United States with principal competitors overseas to identify areas of our strengths as well as areas of possible policy concern.