The Destruction of the American Television Industry

Here is one chapter of the 1990 book
Agents of Influence:
How Japan Manipulates America's Political and Economic System

by Pat Choate.
Some background information is in the Wikipedia article
Electronics industry in Japan.”
Further information is in
The Japanese Television Cartel: A Study Based on “Matsushita v. Zenith”
by David A. Schwartzman.

The emphasis is added.

Chapter 6
Japan Takes Television

The revolving door between public office and private gain
has tainted the integrity and degraded the quality
of U.S. trade policy—
at an increasing cost to the U.S. economy.
Just how great this cost has been—
and how tawdry the trade policy business has become—
is revealed by the secret history of
how Japan destroyed the American television industry.

This is a story of how Japanese manufacturers
and the Japanese government
first created an anti-competitive cartel
and then reinforced it with
diplomacy, fraud, and the influence of Washington insiders
in a direct assault on the American consumer electronics industry.
It is history, but it is also a crime story.

At a technology conference sponsored by the National Academy of Sciences
in October 1988,
Nobutoshi Akao, economic minister at Japan’s Washington embassy,
and Erich Spitz, executive vice president for research and development
at Thomson CSF of France,
were supposed to talk about international R&D cooperation.
But their discussion soon degenerated into
a debate over whether the United States
should adopt Japanese or European technical standards
for high-definition television (HDTV),
an innovation that produces pictures with the sharpness of 35mm film
and sound with the clarity of a compact disc.

Both men knew that
the difference between today’s television receivers and those of HDTV
is so great that most of America’s existing 160M sets
are likely to be replaced over the next decade.
Similar changes would then take place in the markets for
videocassette recorders, video cameras, and computer monitors.
By one estimate, the market for HDTV in the United States alone
will reach $20G/year by the end of the 1990s.

Akao and Spitz also knew that
each HDTV will be crammed with scores of advanced microelectronic chips.
Whoever dominates the HDTV market in the 1990s
is virtually assured domination of the global semi-conductor industry—
as well as the upper hand in dozens of other industries
that will depend on the next generation of advanced technology.
Indeed, whoever controls production of HDTV
will almost certainly dominate the high-technology industries
of the next century.

Notably absent from the debate was
any mention of the plans of the American television industry.
Because there is virtually no American television industry.
By 1990,
there was only one remaining American television manufacturer—Zenith—
and it was under intense pressure to sell of its television division.
Zenith stood alone because, between 1968 and 1988,
a roster of some of the most distinguished names
in American consumer electronics—
Philco, Sylvania, Emerson, Motorola, RCA, Westinghouse, Admiral, GE, Magnavox, and many others
either went out of the television manufacturing business
or were acquired by foreign competitors.

The decimation of the American-owned television industry
can be directly traced to:
  • A sustained, predatory attack
    by a cartel of Japanese television manufacturers
    operating with the knowledge and support
    of the Japanese government.
  • Secret, illegal payments
    to American importers of Japanese products.
  • A secret trade agreement
    that obligated the U.S. government to side with Japan
    against its own companies and workers.
  • The covert transfer of “inside” information
    about proposed actions by the U.S. government.
  • The metamorphosis of
    more than twenty high-ranking federal officials
    handling the television case
    into well-paid agents of influence for the Japanese.

This is the story of how it all happened.

Japan’s assault on the American television and consumer electronics market
dates back to 1956,
when the largest Japanese manufacturers—
who then held 90 percent of their own domestic market—
formed the Home Electric Appliances Market Stabilization Council,
an illegal production cartel.
The intent of the cartel’s participating companies was twofold:
to monopolize the domestic market
for television receivers, radios, and other home electric products
and to exclude foreign imports.
Once their home market was secure,
the Japanese would launch a drive against
the far richer American market.

The Stabilization Council
set minimum price levels for domestic sales of television and radio receivers;
established profit margin levels for retailers (22 percent)
and wholesalers (8 percent);
boycotted nonmembers; and
denied foreign companies critical access to Japanese distribution networks.
At the same time,
the council worked with the Japanese government
to raise a protectionist wall of tariff and nontariff barriers
to foreign imports.

The council and its member companies had just one problem:
the Japanese Fair Trade Commission (JFTC).
The JFTC had been created after World War II
to enforce the antitrust laws imposed during the American occupation.
In 1956, and again in 1966,
the Fair Trade Commission filed cases
against all the major consumer electronics manufacturers,
with the exception of Sony.
These charges included:
illegally cartelizing the Japanese market;
enforcing industry-wide high price levels;
collusively setting rebates and profit margins for distributors; and
collectively boycotting nonaffiliated wholesalers.

When the JFTC exposed these schemes,
the Japanese manufacturers in effect pleaded “no contest.”
But they were never prosecuted,
and they were never ordered
to make any structural changes in their operations.
In fact,
the firms were allowed to continue their monthly meetings.
Benign neglect of antitrust statutes was, in fact,
the deliberate policy of the Japanese government.

The JFTC’s charges—and its subsequent inaction—
revealed a fundamental political conflict
among Japan’s government agencies.
The bureaucrats of the JFTC
advocated a Western-style, pro-competition approach
in which the interests of consumers were taken into account.
MITI, by contrast, advocated hardball industrial policies
to advance the interests of domestic producers in global markets.
MITI won the bureaucratic fight
and in the early 1960s targeted consumer electronics
as a key element in its national industrial policy.

The first step in Japan’s targeting initiative
was to acquire America’s television technology,
which was then state-of-the-art.
In the 1950s, American television manufacturers were internationally minded.
They were investing in European production facilities
to get under Europe’s tariff wall.
But since the Japanese market was closed to them,
the only way they could generate earnings in Japan was
to license their technology to members of the newly formed cartel.
Foolishly, they did.
RCA, GE, and Westinghouse
each licensed and then transferred its monochrome technology
to members of the cartel.
In 1962,
RCA went one step further
and licensed its color technology to the Japanese.

Once the Japanese had the U.S. technology,
they were in a position to launch phase two of their plan:
a full-scale assault on the very American companies
that had licensed their technology to the Japanese.

In 1963,
Japanese television manufacturers created the Television Export Council
to set cartel policy.
For day-to-day administrative guidance,
they also created the Television Export Examination Committee.

One of the council’s first actions was to require
that cartel members provide, prior to any U.S. shipment,
an “application for validation.”
The purpose of the application was to identify
the Japanese manufacturer,
the trading company,
the U.S. purchaser,
the merchandise’s trademark,
its model and model and model number,
the quantity to be shipped,
the unit price, and
the U.S. customer’s registration number.
The customer registration number was critical.
Cartel members were bound by their agreement
to exclude U.S. customers not registered with the Export Council,
and during some periods
were not allowed to change customers during the term of the cartel agreement
without the cartel’s consent.

The cartel also established its own enforcement mechanisms:
the authority to investigate violations lay in the hands of
the Television Export Council and the Examination Committee.
Potential financial penalties could equal the total value of any shipment.

The cartel members knew that their success depended on
protection of their home market.
Japanese consumers had to be gouged to provide higher profits.
That was the only way to make up for the losses incurred by
selling the same products abroad at artificially low prices.
Thus, a de facto Market Stabilization Council was re-created.
This time, however, the council operated in secret.

To administer its price fixing,
the cartel formed three groups.
The Tenth Day Group was a working committee comprised of
executives from the television divisions of the cartel members.
They met monthly
(usually on the tenth day; hence the name)
to review production schedules, technical details, and prices.
If the Tenth Day Group could not resolve a problem,
it passed the matter along to the Palace Group.
This group consisted of more senior executives from the companies
and met at Tokyo’s Palace Hotel.
If a problem lay beyond the decision-making authority of the Palace Group,
it would be passed on to the Okura Group.
This group, which met in the Okura Hotel—
at the time, Tokyo’s finest—
consisted of the chairmen and presidents of the cartel companies.
The Okura Group had the last word on all cartel activities.

Participating Japanese manufacturers agreed to maintain
consistent domestic price and production schedules.
The cartel set prices, production volumes, and shipment to the United States.
Members also exchanged technical and commercial information.
Government officials helped by ensuring that
U.S. exporters were harassed by import safety inspectors.
The Electronics Industries Association of Japan
persuaded Japanese distributors not to handle certain American television products.
American television exports to Japan soon fell precipitously.
(In 1976, only 500 of the 5 million television sets sold in Japan
were made by non-Japanese companies.)
The result:
Japanese manufacturers soon had such a stranglehold on their domestic market
that they could sell a set for more than twice as much in Japan
as they could abroad.
(Typically, a Japanese set that sold for $350 in the United States
would sell for a minimum of $700 in Japan.)

Once the manufacturers agreed upon a price,
it was submitted to MITI,
where it was approved and became known as the official “check price.”
But the check price was not the real price.
According to the U.S. Justice Department,
the Japanese manufacturers also had concocted a secret “double-pricing” scheme with the help of eighty American importers—
among them Sears and Alexander’s.
Through this scheme,
the Japanese paid U.S. importers secret rebates
f roughly $40 for each Japanese set.

These illegal rebates were paid in several ways.
Some Japanese manufacturers
deposited money for their American co-conspirators
in secret bank accounts in Switzerland, Hong Kong, or Japan.
Others sent telegraphic transfers of money
marked as “credits” for spare parts.
Still others
gave American importers extended payment terms for their purchases—
and forgave the interest.
Japanese firms also provided offsetting discounts
on other merchandise sold to TV importers,
as well as payment disguised as “market research.”

The objective was to destroy the American industry
by selling goods extraordinarily cheaply,
often at prices far below production costs.
To avoid detection by the U.S. government
and lawsuits by American manufacturers,
the participants in this scheme
filed falsified documents with the Customs Service,
citing their “check price”
as the amount they had received for each set.
By reporting the higher, fraudulent price,
the Japanese manufacturers were forced to pay higher U.S. import duties.

[Footnote: This additional ad valorem duty
was almost certainly less than
the additional dumping duty would have been
had the cartel members reported the true prices
of their television set sold in the United States.]

There was no way for U.S. officials or American manufacturers to know
how much American importers were actually paying
for the Japanese goods.
It was a nearly perfect crime.

With the help of
these secret rebates, already low check prices,
and high profits from sales in their closed domestic market,
the Japanese could easily underprice their American competitors.
Jobs in the U.S. television manufacturing industry
fell 50 percent between 1966 and 1970.
They dropped another 30 percent between 1971 and 1975,
and 25 percent more between 1977 and 1981.

Even without the illegal rebates,
the official check price for Japanese sets sold in the United States was so low
that it constituted “dumping.”
When American manufacturers realized what the Japanese were doing,
they sought protection under U.S. law.

In March 1968,
the Import Committee of the U.S. Electronics Industries Association
filed a petition with the Treasury Department alleging that
television sets from Japan
were being unfairly and illegally dumped in the U.S. market.

In June 1968, the Treasury Department began an investigation.
It sent questionnaires to five major Japanese television manufacturers—
Sony, Sharp, Mutsushiti, Toshiba, and Hitachi—
seeking information about their American sales.
Sears, J.C. Penny, and Singer were also questioned
about their import arrangements.
(Without this information,
Treasury could not legally determine
whether the Japanese were, in fact, dumping their products.)

The Japanese manufacturers and their American importers
simply stonewalled the requests.
The cartel members and their American partners knew that
if their kickback arrangements were revealed,
they would face fines and penalties totaling hundreds of millions of dollars.
A year went by and nothing happened.
When Treasury pressed its demand, the Japanese Embassy requested more time.
So did Japan’s American importers.

One way to frustrate the Treasury inquiry and avoid these fines
was to shred the evidence.
In October 1970,
an executive of one U.S. importer wrote to his superior suggesting that
perhaps the firm’s files and back purchase orders be “purged.”
Another—perhaps more predictable—solution
was to go on a legal counteroffensive.
One of Matsushita’s New York attorneys
proposed filing suit against the Treasury,
challenging the anti-dumping investigation.
The American attorney counseled his Japanese client that
“litigation might provide protection against ‘double pricing’ exposure.”

Such worries were premature.
The double-pricing scheme went undiscovered for more than a decade—
until Gambles Import, a U.S. importer of Japanese sets, voluntarily paid Customs duties on the real prices on the televisions it imported.
In 1970,
Treasury could only conclude that,
on the basis of the “check prices” reported by the U.S. importers to Customs,
there was clear evidence that
the Japanese were dumping television sets on the American market.

Treasury referred its ruling to
what is now the International Trade Commission (then the Tariff Commission).
Finally, in March 1971,
almost three years after the American manufacturers filed their complaint,
the U.S. government issued an official finding that
the Japanese were dumping.

By then, however, much damage was done.

America’s television firms were badly hurt
over the three years it took to get government action.
More than half of them suffered heavy losses in 1968, 1969, and 1970—
the direct result of Japanese dumping and U.S. governmental complacency.
What they now needed—and need quickly—
was for the Treasury Department to calculate and collect
the anti-dumping levies the law required to offset the cartel’s advantage.

By law, this levy was to be calculated as
the arithmetical difference between the “fair price”—
what the Japanese were charging for comparable sets in Japan—
and the price they were charging in the American market.

Calculating the levy involved a complex formula
dependent on timely, accurate information from the Japanese about
manufacturing and shipping costs, domestic price formulas,
and a number of other factors.
Equally important was that the levies would apply retroactively,
but only from the date that the ITC’s dumping appraisal was published—
September 7, 1970.
The cartel’s illegal gains of prior years were, in effect, a windfall gain.

Years would go by before the Treasury Department came up with a number.

While the dumping investigation dragged on,
American companies sought other legal remedies.
In December 1970,
the National Union Electric Corporation (NUE),

whose products were sold under the brand names of Emerson and Dumont,
filed a private antitrust suit against
certain Japanese manufacturers, their trading companies, their U.S. subsidiaries,
and several American importers.

NUE charged that the Japanese and their American collaborators
were engaged in a conspiracy to restrain competition
and drive American firms—including its own—out of business.
NUE asked the court to award it damages.

In 1974,
Zenith filed a similar suit,
challenging Matsushita’s purchase of the entire Consumer Products Division of Motorola.

It also filed a petition with Treasury in 1970, alleging that
the Japanese were subsidizing export sales to the United States
by rebating taxes back to the manufacturers.

By exporting tax-free goods,
the Japanese manufacturers could reduce the export price of their sets
by 13 to 15 percent.
American manufacturers, by contrast,
had to pay American taxes on the products they sold.
To level the competitive playing field,
Zenith asked Treasury to impose a countervailing duty on Japanese imports
equal to their tax rebates.

The first Zenith petition posed a difficult dilemma for the Treasury Department.
Though the Japanese tax rebates
were consistent with basic international trade agreements
permitting reimbursement of consumption taxes on export goods,
prior ruling of the U.S. Supreme Court
had found tax rebates to be a subsidy.
Zenith argued that these rulings required Treasury to act.

If Treasury ruled in Zenith’s favor,
similar countervailing duties could be imposed on most U.S. imports.
To avoid a trade conflict with other countries,
the United States could then be forced
either to alter its tax system to confirm to global trade treaties
or to renegotiate the essential elements of these treaties.

Treasury chose a third option: it did nothing.
Of its tens of thousands of employees in the early 1970s,
only one official was assigned to administer
America’s countervailing duty laws.
Although he worked hard, he was perpetually behind.
This gave Treasury officials the opportunity to bury Zenith’s papers
amidst huge stacks of unexamined countervailing duty petitions.

One former U.S. trade negotiator recounts
a fundamental government tenet of the late 1960s and early 1970s:
“Our trade policy was to keep U.S. markets open
and the Congress pacified.”

In large measure, this policy reflected the attitudes of Richard Nixon [37]
and his National Security Adviser, Henry A. Kissinger.
Neither had much interest in trade matters,
except when they impinged on foreign or defense policies.
Perhaps the best example of their approach to trade matters
is the way they disposed of a 1968 Nixon campaign pledge
to reduce Japanese textile imports.

Kissinger himself recalls the textile wrangle as
“a case of low comedy, frustration, and near fiasco.”
In his memoirs (White House Years), he writes that, in early 1969,
Nixon ordered him to strike a deal with the Japanese on three matters:
the deployment of nuclear weapons,
the return of Okinawa, and
the reduction of Japanese textile exports to the United States.
Kissinger claims that
he was unenthusiastic about linking Okinawa with textiles,
which he saw as only
“a transient domestic political problem.”

Kissinger quickly established a secret negotiating channel
with an emissary of Japanese Prime Minister Eisaku Sato,
bypassing the bureaucracies of both nations.
Together, Kissinger and the Japanese representative
crafted a secret agreement
to limit Japanese textile exports to the United States.

Nixon and Sato approved this agreement
at a White House meeting in November 1969.
But it was kept secret,
since the strategy was to let the accord surface publicly only later,
as a product of staged negotiations.
Kissinger explains:
“Since the solution had to emerge from a negotiation that had not yet started,
Sato could hardly indicate its outcome in advance.
And it would impair the new relationship
if it appeared that we had traded Okinawa for concessions on textiles.”

But there was a problem:
MITI officials and Japanese politicians refused to accept
any reduction in textile exports to the United States.
So for two years the United States and Japan
held increasingly acrimonious discussions.
And for two years the issue went unresolved.
Finally, with the 1972 election only thirteen months away,
Nixon threatened to impose quotas on the Japanese textile imports
under the 1917 Trading with the Enemy Act,
which gave him wide latitude to exclude certain imports.
The Japanese soon relented
and agreed to limit their textile shipments to the United States.

By that time,
textiles were only one of many sources of political strain
between America and Japan.
Indeed, many Japanese leaders still resent the “Nixon Shocks”—
the July 1971 announcement that America had reestablished relations with China and
the August 1971 unveiling of America’s New Economic Policy,
which included floating exchange rates.
Japan had been consulted on neither.
Japanese leaders also recall
the 10 percent duty surcharge that Nixon unilaterally imposed on imports,
as well as
the pressure that his Administration put on the Japanese government
to revalue its currency.

Through clever diplomacy,
Japan used these frictions
to gain political leverage with the Nixon Administration.
Japanese officials knew that, as the presidential election neared,
Nixon wanted to appear as a strong, successful international leader.
In early 1972,
Japan proposed that
the two nations delay discussions on a number of trade issues—
including television dumping.
Japanese strategists realized that a year’s delay
would strengthen the position of the Japanese television manufacturers—
and perhaps fatally weaken their American competitors.
As is often the case, politics dominated economics:
the Nixon Administration blithely agreed to the Japanese proposal.

This momentary truce was shaken in May 1972,
when Treasury began an internal review of
the countervailing duty petition Zenith had filed two years earlier [¶6.2.2].
The Japanese, always alert to actions within the U.S. bureaucracy, protested.
In July, newly chosen Prime Minister Kakuei Tanaka
asked for a summit meeting with Nixon
to discuss trade problems
and set the stage for a fresh line of diplomacy
on such matters as Sino-Japanese relations.
Nixon agreed to a two-day meeting in Honolulu in August 1972—
barely two months before the elections.

To prepare for the summit,
William Eberle and Harold Malmgren, then America’s top trade negotiators,
met with MITI officials at the Hakone Hot Springs resort near Tokyo.
Kissinger went to Japan as well
to iron out various summit details with Japanese leaders.

At the summit’s conclusion,
Nixon and Tanaka announced that the Japanese
would buy more than $1 billion worth of American goods,
would reduce barriers to American investment,
would liberalize access to the Japanese distribution system, and
would support a new round of GATT negotiations.

Their final communique said nothing about U.S. concessions to the Japanese.
Neither did it mention the television dumping case.

Many lawyers and former executives from the U.S. television industry
believe Nixon struck another secret deal with the Japanese—
one in which he agreed to halt U.S. actions against the television cartel.
Officials close to Nixon claim that
his subsequent inaction on the television case
simply reflected the low priority he accorded trade concerns,
as well as his growing preoccupation with the Watergate scandal.

Whatever the real story,
the Nixon Administration—and later the Ford [38] Administration—
did virtually nothing about the cartel’s violations of U.S. trade laws.
In particular, Treasury failed to collect anti-dumping duties.
When the International Trade Commission
began to investigate the double-pricing scheme in March 1976,
Treasury even went so far as to refuse ITC investigators access to its files.
the Nixon and Ford Justice Departments stood by passively
as American companies struggled with
their antitrust suits against the Japanese cartel.

So little was done about countervailing duty petitions
that a frustrated Congress gave Treasury a mandate:
it had one year to rule on these duty cases.
Those cases that were already pending
would have to be decided within a year of the enactment of the 1974 Trade Act.
And so on January 5, 1976—exactly one year to the day—
Treasury denied Zenith’s petition.
Zenith was forced to make a court appeal.

The repeated, deliberate delays in enforcing U.S. trade laws
hopelessly undermined the strength and competitive position
of American television companies.

It also made them easy acquisition targets.
In May 1974,
Motorola sold its television operation to Matsushita.
Magnavox was purchased by N V. Philips, a well-known Dutch firm.
Warwick Electronics,
until then one of America’s largest private television manufacturers,
was purchased by Sanyo.
In less than a year, three other U.S. television companies
were either acquired or forced out of business.

In 1968,
there were twenty-eight American-owned television manufacturers in business.
By the end of 1976, only six remained.
Though weakened,
these six companies persisted in their fight against the Japanese cartel.

But they were tilting at windows.

When Jimmy Carter [39] became President in 1977,
he inherited the result of years of inaction on the television case.
By then, six years’ worth of anti-dumping levies
had gone uncalculated and uncollected.
Zenith’s countervailing duty petition, rejected by Treasury in 1976,
remained pending in U.S. Customs Court.
The NUE (Emerson) and Zenith anti-trust suits also awaited decision.

GTE/Sylvania had petitioned the International Trade Commission,
charging that
the Japanese cartel had violated U.S. antitrust and predatory-pricing laws.

If the ITC agreed,
the U.S. government would have been forced to embargo
all illegally imported televisions.
Several unions also had petitioned Treasury
to restrict Japanese television imports,
citing international trade agreements that permitted such restrictions
if a domestic industry faced irreversible damage as a result of dumping.

In addition,
the Committee to Preserve American Color Television (COMPACT)
a coalition of the remaining U.S. television manufacturers and unions—
had petitioned the federal government to issue
a quantitative restriction on the import of all finished color televisions.

This action, COMPACT, maintained,
was permissible under both U.S. law and the laws of the GATT
whenever a domestic industry faced irreparable harm.

The double-pricing scheme soon began to unravel.
In March 1976,
the ITC initiated a preliminary investigation of the secret rebate program.
The Justice Department also started an investigation.

The Japanese cartel faced a minefield of proceedings and investigations.
It badly needed to strike a political accommodation with the U.S. government.
It badly needed Harald Malmgren.

Malmgren was the perfect candidate
to broker a favorable deal for the Japanese.
Having previously served as
Deputy Special Trade Representative for Presidents Nixon and Ford,
he was intimately familiar with the television case.
He had worked with Eberle
to craft America’s position for the Nixon-Tanaka summit in 1972.
When he left government in the mid-1970s,
Malmgren became a free-lance agent of foreign influence.
In 1977, five cartel members—
Hitachi, Mitsubishi Electric, Sanyo, Sharp, and Toshiba—
hired him to solve their problems.

Under the terms of his employment with the Japanese,
Malmgren was obliged to work closely with the government of Japan.
In fact, his contract said,
“In carrying out the responsibilities under the retainer agreement,
[Malmgren] is required to work closely with MITI.”

Malmgren quickly delivered.
As the Japan Economic Journal reported:
“In three short months,
Mr. Malmgren was able to talk to all sides involved in the dispute,
and work out a compromise that was later called
the orderly marketing agreement for Japanese color TV exports to the U.S.”

The Orderly Marketing Agreement (OMA)
limited Japanese television exports to the United States
to 1.75 million units a year for three years.
But it allowed the Japanese to use their newly acquired U.S. base—
the previously American-owned manufacturing companies they had purchased—
to fill orders that exceeded their quota.
And what they couldn’t fill with their new U.S. facilities,
they could always meet with the stockpile of Japanese-made televisions
already sitting in American warehouses.

The American television companies that had licensing arrangements with the Japanese—GE and Zenith—
thought the quotas “a good compromise.”
Zenith and others opposed them,
insisting that they would be able to compete fairly with Japan
only if Treasury would collect anti-dumping duties—
and thereby negate the cartel’s predatory-pricing advantage.

Malmgren’s OMA quota was imposed anyway.

But much more than the television quota was agreed to
in those telling first days of the Carter [39] Administration.

Carter’s point man on trade
was Robert Strauss,
the newly appointed
Special Trade Representative
and the former chairman
of the Democratic Party
[sic—Democratic National Committee]
as well as a top fund-raiser
for Democratic candidates.
As Strauss himself admitted,
he knew virtually nothing
about trade negotiations.

In a March 1977 Newsweek article,
Strauss put it this way:
“I knew something more than absolutely nothing, but less than a little.”
Two months later,
Strauss proved his point.
As part of the deal,
he signed a secret side letter with the Japanese
and agreed to provisions
that would hamper American actions on the television case
for years to come.
Strauss committed the United States to:
  1. Limit the ITC investigation of predatory pricing by the Japanese cartel.
  2. Appeal an earlier ruling by the Customs Court in favor of Zenith.
    (The Japanese rebate of consumption taxes
    had been ruled a bounty or grant
    that required the Treasury Department
    to impose a countervailing duty.)
  3. Liquidate anti-dumping duties expeditiously.
    (The Japanese understood this to mean that
    U.S. officials would settle for little or nothing.)
  4. Ignore monopolization charges against Japanese companies
    when they were acting domestically in accordance with
    the directives of the Japanese government.
    (This gave the cartel an inviolable sanctuary from which
    they could pursue their anti-competitive schemes.)
  5. Inform the Japanese government quickly of
    any significant findings arising from
    U.S. investigations on the television case,
    and be open to informal Japanese communications
    (that is, create a back channel).
Strauss was badly outnegotiated.

Foremost on the American negotiating agenda had been
the multilateral GATT negotiations and
Japan’s continued participation in those talks.
For Strauss and the U.S. trade negotiating office,
bilateral issues like the television case
were little more than hindrances to America’s larger GATT agenda.

The Japanese, on the other hand,
saw the GATT negotiations as merely a sideshow.
They [the Japanese] wanted
firm control of specific end-use industries—
especially, the critical consumer electronics sector.
Thanks to Strauss, the cartel
achieved a political solution to most of its legal problems
in a single bold stroke—
and at virtually no cost.
It now had everything it needed
to complete its assault on
what remained of the American television industry.

As Strauss had promised, the ITC dropped its investigation.
A leading U.S. government figure in the case was Daniel Minchew,
chairman of the International Trade Commission
during the Carter Administration
and a former lobbyist for the Japanese.
While the GTE/Sylvania petition was under ITC review,
Minchew was in Tokyo exchanging views about television dumping
with the Vice Minister of MITI and members of the Diet.
When Congress got word of this,
Minchew was publicly reproached
in a hearing of the House Ways and Means Subcommittee on Trade.
[Aside from possible turf battles with the Trade Representative,
I don’t see what’s so bad about the ITC chairman talking to foreign trade dignitaries.]

While still ITC chairman-
and before he later went to prison for unrelated criminal activities—
Minchew negotiated a contract to lobby for the Japanese once again.

Dropping the ITC case
was only one of many ways in which the federal government—
following the pattern set by the Strauss agreement—
sided with the Japanese cartel against America’s own television industry.
In quick succession,
the government led a successful fight
to overturn Zenith’s favorable ruling in the Customs Court,

thereby relieving the Japanese of countervailing duties.
The Justice Department reviewed the Zenith and NUC antitrust cases
and ruled—incredibly—that it found
“no evidence of concerted predatory conduct
intended to destroy and supplant the U.S. color TV industry,
either at an earlier period of time or at the present time.”

Treasury went through the pretense of beginning to collect dumping duties.
Customs was to set a figure
on how much the Japanese manufacturers and their importers owed.
The Japanese knew, of course, that thanks to the Strauss agreement
they owed nothing.
But Customs and the other agencies were unaware of the agreement.

During the Nixon [37] and Ford [38] years,
the Japanese had been able to frustrate the inquiry
by refusing to provide the information needed
to make the dumping calculations.
In late 1977, however, the Customs Service realized that
there was an easy way to accurately calculate such duties—
even without Japanese cooperation.
Customs could simply use
the commodity tax collected by the Japanese government
as the basis for estimating U.S. anti-dumping duties.

The anti-dumping statutes
had defined foreign market value in almost the same manner
as the Japanese government defined the basis for its commodity taxes.
Moreover, in the absence of timely and reliable information,
the Commissioner of Customs had the legal authority
to use the best information available.
This was it.

[Footnote: The wording of Japan’s commodity tax law is roughly the same as the wording of U.S. anti-dumping law where calculations of duties are concerned.
But under U.S. anti-dumping laws, there is an adjustment mechanism for different circumstances of sale that the Japanese commodity tax does not include.
Therefore, the U.S. method results in some inflation.
Still, it was the best information available to Customs officials.]

In December 1977,
the Customs Service initiated Program Omega
to calculate and assess the duties quickly.
By early March 1978, it was ready.
The bill was going to be enormous—
almost $382 million for duties on televisions dumped between January 1972 and April 1977 alone.
The fees were scheduled to be collected on March 31, 1978.
[From whom?]

On March 20, 1978,
the Customs Service sent a letter to its field offices
ordering them to keep the pending duty bill secret.
It was too late.
Three days earlier [March 17],
Robert Mundheim, general counsel of the Treasury Department,
had informed the Japanese government on a “strictly confidential basis”
about the proposed U.S. actions.
[Why? What was his justification? How did this benefit the United States?]

Mundheim told the Japanese that,
while their companies might wish to litigate the pending duties,
“the law requires that the anti-dumping duties assessed be paid
before the litigation begins.”
On the other hand, Mundheim wrote,
“we would be prepared to work out an approach with the affected importers
that would permit them to obtain a judicial ruling
on the major legal aspects of Customs’ action
without first paying all of the duties that are likely to be assessed.”
[In how many other cases where this law was applied
were such special accommodations offered?]

Nor did Treasury stop there in its efforts to help the Japanese.
A Mundheim aide, Jordan Luke,
was sent to coach a representative of the Japanese Embassy
on how to obtain a Customs Court decision
before the total amount of duty on all entries would have to be paid.

Naturally, the Japanese cartel was immediately informed
of Mundheim’s confidential letter to the Japanese government.
The cartel’s representatives and lobbyists soon besieged Treasury officials.
Meanwhile, American manufacturers and Congress were told nothing.

Ten days after Mundheim’s letter [March 27],
the Japanese government officially protested the proposed collections.
It also requested an emergency meeting
between Treasury officials and lawyers from the Japanese cartel.
The meeting was held the following day at Treasury.
Twenty representatives from the cartel attended,
as did a handful of Japanese Embassy officials.
One embassy official drolly argued that
Customs’ anti-dumping determination could only be made with
information supplied by the Japanese cartel.
The cartel’s American lawyers urged that the U.S. government
not inform Congress, the press, or U.S. companies
about what was being considered or the negotiations with the cartel.
Treasury complied,
enabling the cartel to orchestrate all the political leverage it needed
during the critical next few days.

On March 30, the Japanese Ambassador
met with Mundheim and Treasury Under Secretary Bette Anderson
to voice the objections of the government of Japan.
He urged a delay until
the “propriety of using the proposed methodology”
could be discussed between the two governments.
The same day—one day before the levy collection was to take place—
Treasury was deluged with phone calls from American importers
who made emotional pleas and threats.
One Puerto Rican distributor of Japanese television sets
threatened to kill himself if high duties were assessed.

The Treasury Department quickly gave in.
It agreed to reconsider its calculation procedures
and to collect only $46 million in anti-dumping duties
for the April 1972–June 1973 period.
Because the Customs liquidation notices assessing the penalties
had already been distributed for posting the next morning,
overnight telexes had to be sent to each Customs office
ordering them to adjust the notice before posting it.

Only then did Congress learn about the notices.
Two of the most powerful congressmen—
Charles Vanik (D-Ohio), chairman of the House Ways and Means Subcommittee on Trade, and
Dan Rostenkowski (D-Ill.), a senior member of the committee—
lambasted Treasury,
citing its procedural delay
and blatant disregard for the American television industry.
For years afterward,
both congressmen would press reluctant Treasury officials
to fully assess the anti-dumping duties owed by the Japanese.
But that was still to come.
In 1978, the real challenge was simply to ensure that
Treasury collected the $46 million it had already assessed.

Treasury’s unexpected accommodation of the Japanese
created chaos within the Customs Service.
Two weeks after the March 30 decision,
Customs staff lawyers sent an extraordinary joint letter to their superiors
asking for clarification of the Treasury decision.
The letter complained that
Customs’ lawyers were “discovering Treasury policy
through the often dubious representations of the affected parties.”

The letter also reported what the Japanese were saying—
namely, that the assessment was merely provisional,
no more than a political sop,
and that it would be mitigated (or settled)
through informal, government-to-government negotiations
or relatively informal contacts
between Japanese manufacturers and the Treasury Department.
Customs’ lawyers were especially disturbed
to see Mundheim express willingness in his March 17 letter to defer collection.
They protested:
“Customs was not only not in receipt of a copy of this letter,
it was not aware of its existence
until Mr. Tanabe [of the Japanese Embassy] brought it to our attention.”
Obviously, the Japanese knew much more about
what was happening at the highest levels of the Treasury Department
than did the Customs officials
who were responsible for collecting the anti-dumping duties.

Soon after the March announcement,
the Treasury Department again acceded to Japanese political pressure,
agreeing to find “better numbers” for duty assessments.
What was unclear to outsiders was what “better numbers” meant.
Was Treasury searching for yet another estimating procedure
or was it looking for a face-saving way to settle on the cheap?

While Treasury sought its “better numbers,”
the cartel and its American corporate partners
tried to make an end run around the Justice Department’s fraud investigation.
In 1978, they tried to slip into law
an amendment granting retroactive immunity
to importers who had falsified Customs documents.
According to members of Congress,
the amendment was drafted by the law firm of Baker and McKenzie,
counsel to Mitsubishi Electric,
and introduced by Congressman Jim Jones (D-Okla.),
who would become a lobbyist for Toshiba
when he left Congress some years later.
The immunity ploy quickly collapsed
once the Washington Post revealed the scheme.

In April 1978,
Japan presented to the State Department
its objections to Zenith’s suit against the U.S. government [¶¶ 6.2.2 and 6.2.20]
for not collecting countervailing duties from the Japanese television manufacturers.

The Japanese warned that
if the Supreme Court ruled in Zenith’s favor,
the decision not only would damage U.S.-Japan trade
but would also “adversely affect world trade generally.”
the Japanese government predicted that a ruling for Zenith
“could bring about a breakdown of the GATT system itself
and seriously impair the chances for success
in … multilateral international trade negotiations.”

The State Department sent Japan’s paper
to Wade McCree, then U.S. Solicitor General,
who passed it on—at the State Department’s request—
to Michael Rodak, than the clerk of the Supreme Court,
for distribution to each of the nine justices.

After Rodak distributed the paper,
he sent the following message back to McCree:
I am not aware of any rule of this Court
which would permit correspondence of this nature
to be received and distributed to this Court.
If the Government of Japan
wished to express its views concerning this case
it should have filed a printed brief …
as provided for in Rule 42 of the Rules of this Court.
What Rodak meant was that
the Japanese government had no business petitioning the Supreme Court
in such a manner
and, more important,
that the State Department and the Solicitor General
had no business acting as conduits for the government of Japan.

On April 26, 1978, the Supreme Court heard arguments on the Zenith countervailing duty case.
In the session,
Justice Harry Blackmun reprimanded the Solicitor General
for his role in Japan’s attempt to intimidate the Court.
The exchange between Blackmun and McCree went like this:
[JUSTICE BLACKMUN]: Mr. Solicitor General,
could I ask a question which perhaps I shouldn’t ask.
It may be a little delicate,
but at the request of the Department of State
you distributed a communication from the government of Japan
in this matter….
What does this mean vis-à-vis this case?

MR. McCREE: I don’t think it means anything
as far as the duty of this Court is concerned here today.

[JUSTICE BLACKMUN]: You do not regard it as a threat to this Court?

MR. McCREE: I do not
and I certainly circulated it only because
it had been forwarded to us from the Department of State
and we circulated it for what it was worth ....

[JUSTICE BLACKMUN]: In any event,
you are here in good faith doing your best
to uphold the position espoused by the government of Japan anyway?

MR. McCREE: Well, if the Court please,
I regard my role here
as seeking to uphold the construction that the Congress,
that the Secretary of the Treasury
has placed upon the statute committed to you to administer,
and the client of the government here
is the Secretary of State
and not a foreign prince or potentate.

In the end, the Supreme Court voted 9–0 against Zenith.

A year and a half after Robert Strauss made his secret commitments [in May 1977],
Dan Rostenkowski learned of them.
At a Ways and Means hearing,
he asked Strauss for a copy of the secret side agreement,
which he was given for the record.
[On 2012-10-12 I searched Google for this letter
(letter from Robert S. Strauss to Fumihiko Togo).
There were four references to the letter
(the first being the one, to page 88, in Choate’s book),
but at least on the first Google page not the letter itself.]

Surprisingly, virtually none of the American manufacturers ever learned of it.
More important, the U.S. government remained committed to its deal.

In late 1978, the Japanese stepped up the pressure
for a political compromise on the dumping case.
Their lobbyists besieged Congress and the Administration.
Prime Minister Takeo Fukuda sent President Carter [39] a personal letter
protesting U.S. actions to collect anti-dumping duty.

The one thing that the cartel and its U.S. importers did not do
was pay the levied anti-dumping duties.
Treasury pressed for its money only gingerly.
By the spring of 1979,
Customs had collected only $5.6 million of the $46 million it was owed.
Of that, $5 million came from Sears.

In a September 1978 Ways and Means subcommittee hearing,
Vanik lashed out at Mundheim:
“If your Department has a claim through IRS on a taxpayer,
you have him tied up before he can turn around.
He has liens all over him to keep him from breathing until he pays up, or get out, if that is the case.”
Vanik demanded the same treatment for the Japanese cartel.

Throughout 1978, working groups within Treasury and Customs
struggled to come up with a “better number”—
one acceptable to the Japanese.
In December, Treasury found its “better numbers.”
The only obstacle to a settlement was Congress.

In December,
Mundheim met with Congressman Vanik to solicit his support for a quick deal.
Though the estimated television dumping duties for 1972 through April 1977
had been nearly $382M
(plus an additional $200M for the two years that followed.),
Mundheim asked Vanik
if he would agree to settle the entire dumping case for $50 million.
Mundheim also wanted to settle the kickback fraud for $5 to $10 million.
(Under the law as much as $1 billion in fines could have been levied.)

The congressman angrily rejected the Treasury proposal.
If the Administration settled on the cheap, he said,
he would oppose legislation that Treasury had been seeking
to allow the United States to adopt the multilateral trade agreements
that had been negotiated in Tokyo.

So Treasury returned to its traditional negotiating posture: it stalled.
It also went back to the drawing board to find another set of “better numbers.”
This time, however, it relied on data provided by the Japanese cartel.
Customs’ staff lawyers now went into open revolt.
In a group memo dated March 2, 1979,
nine of the staff lawyers vigorously protested
the limited nature of and unverifiable statistics employed in
the new approach.
They argued that the Japanese commodity tax was remarkably reliable
and should be used to make the calculations.
What they understood was that,
while members of the Japanese cartel might lie to the U.S. government,
they would not lie to Japanese tax authorities.
More important,
Customs’ lawyers knew the Japanese commodity tax figure was reliable,
because the Japanese television manufacturers had no reason to inflate
the amount of taxes they had to pay.

While Treasury was trying to engineer a settlement,
it moved with glacial speed to collect the duties it had assessed.
In late 1978 and early 1979,
Treasury repeatedly granted interest-free payment extensions.
It even offered to accept 25 percent of the payment in cash
and the balance in the form of an interest-free promissory note.

Treasury’s passivity infuriated Vanik and Rostenkowski.
They prodded Treasury to make a full and immediate collection.
After all, the purpose of the anti-dumping levy
was to offset
the predatory-price advantage the Japanese had over the U.S. companies.
The longer Treasury dallied, the more U.S. industry was harmed.
In a March 19, 1979, letter,
Vanik wrote Robert Chasen, Commissioner of Customs:
“I am compelled to point out that
Customs’ solicitous regard
for the potential adverse impact of a full cash collection upon importers
is completely at odds with
the lack of concern for the injury of the domestic injury
which has characterized the entire history of this case.”

The congressmen knew that
once the GATT negotiations were completed and approved by Congress,
much of their political leverage would be lost.
And so, predictably,
the Treasury Department withheld action on the television case
until it was clear that the Trade Agreements Act of 1979 would become law.

To facilitate a political settlement,
the cartel and the Carter [39] Administration devised a clever ploy.
A provision was eased into the Trade Agreements of 1979
that allowed the Customs Service to compromise U.S. claims
and not be challenged in court
if the deal was completed before January 1, 1980.
In the same legislation, a disgusted Congress
transferred the Treasury Department’s authority
to administer countervailing duty and anti-dumping laws
to the Commerce Department.
The effective date of this transfer would also be January 1.

In July 1979, the Customs Service created
a Special Task Force on Japanese Televisions.
Ted Hume, a Mundheim aide, was put in charge.
His mandate: clear the slate.
Hume and his team made every effort to engineer a solution
before the New Year’s deadline.
On October 31,
the Customs Service issued a news release about Treasury’s intentions
to make some “adjustments” to its March 31, 1978, assessments.

Vanik and Rostenkowski dug in their heels.
They pressured Treasury Secretary William Miller
not to settle the matter before the end of the year.
At the same time,
the U.S. Electronics Industries Association and COMPACT filed suit
to enjoin Treasury from entering into a compromise or settlement
prior to January 1.

Although Treasury did try to wrap up a deal before January 1,
it missed the deadline.
On January 2,
the responsibility for assessing and collecting the anti-dumping duties
shifted to the Commerce Department.

Any hope that
Commerce would be more aggressive than Treasury in the television matter
was soon dashed.
In retrospect, it is hardly surprising:
Commerce had the same political masters as did Treasury,
and most of the same people continued to work on the case.
The Treasury staff
who had administered the dumping and countervailing duty program
went to Commerce;
Ted Hume went to the Office of the U.S. Trade Representative.

On January 3, 1980,
Hume wrote one of his new bosses,
USTR general counsel Robert Cassidy, Jr.,
a detailed status report on the television case.
Hume criticized the use of the commodity tax approach.
On the other hand, he acknowledged that
the government did not know how much was owed
as a result of the fraud cases being pursued by the Justice Department.
He also noted that
many importers were refusing to pay the assessments levied in March 1978
and that the Justice Department had filed six collection suits.

Hume told Cassidy that
the Secretary of Commerce had the authority to settle the case
and that
“such compromises are relatively invulnerable from judicial attack,
if orchestrated properly.”
He advised Commerce to move quickly and
“involve as few people as possible.
(It is critical to control the facts.)”
Hume was given the job of orchestrating a compromise.

In March 1980,
Hume went to Tokyo and met with MITI officials to discuss a settlement.
Each side spoke of “better numbers” that ranged from $50 to $100 million.
Eventually, they split the difference.
The question was how to make this deal politically palatable in America.

On April 28, 1980,
Homer Moyer, Commerce’s general counsel, announced that
the potential anti-dumping duties owed the United States
were really only $138.7 million,
and not the $382 million Treasury had been ready to assess in March 1978.
He also revealed that
the government had settled the matter for $77 million,
and that
Commerce would dismiss suits for the collection of duties
assessed upon entries prior to January 1, 1973.
Finally, he said that
Commerce would abandon all other investigations,
claiming that
“the United States knows of no violation or potential violation of law
relating to or arising from
the importation, sale or exportation of television receivers.”

The compromise was a major political and economic victory for the cartel.
It was the settlement on the cheap that the Japanese had sought
through Strauss’s secret side letter of May 20, 1977.
During the Reagan [40] Administration,
the magnitude of the Japanese victory
became even more apparent.
Of the final $77 million settlement,
only $16 million was ever collected.
By way of comparison,
had the U.S. government not made deals and merely enforced the law,
it would have collected a minimum of $1 billion.

Almost immediately after Moyer’s announcement,
COMPACT and Zenith filed suits challenging the settlement agreement.
Both suits contended that
it unlawfully forgave hundreds of millions of dollars in anti-dumping duties
owed by the Japanese.
Zenith argued that the Commerce Secretary, in fact,
lacked the authority to make a settlement.
Vanik agreed.

The government struck back against Zenith and COMPACT
with a zeal it had never shown
in its confrontations with the Japanese cartel.
The Justice Department stonewalled requests for information,
forcing Zenith and COMPACT to pry out the facts piecemeal
through federal court orders.
To price Zenith out of the litigation,
Justice demanded that Zenith post $11.5 million as security,
or an amount equal to 15 percent interest,
for one year of the uncollected settlement.
The court reduced this bond to $250,000.

Ultimately the COMPACT and Zenith cases hinged on
whether the Commerce Secretary had the legal authority
to settle the anti-dumping suits
In 1979,
Congress had sharply limited the President’s authority to settle such cases.
To the surprise of Zenith, COMPACT, and legal scholars,
the court interpreted the law to mean that
such authority was still vested in the Commerce Secretary.
Appeals were made to the Supreme Court,
which chose not to review the case.
Zenith and COMPACT were out of luck.

But the government wasn’t satisfied with victory: it sought vengeance.
It sued Zenith to collect the $250K bond,
ostensibly as compensation for the interest lost while the suit was being tried.
(By contrast, the government decided not to collect
the unpaid interest owed by the Japanese cartel and its importers,
an amount worth millions to the Treasury.)

Zenith fought back, and in 1986
the Court of International Trade ruled in Zenith’s favor.
In its newfound zeal,
the Justice Department appealed the ruling to the Court of Appeals.
In July 1987, however, the lower court decision was upheld.
As one legal scholar notes, it was a bittersweet victory for Zenith:
it had won a minor skirmish but lost the greater battle.
After twenty years, the anti-dumping case was over.

As the anti-dumping proceedings wound down in the late 1970s,
the fraud investigation was shifting into high gear.
In 1978, federal prosecutors took some of America’s leading retailers
before grand juries in Los Angeles, Chicago, and Norfolk, Virginia.

In January 1979,
Seymour Hersh broke the story about the grand jury investigation
on the front page of The New York Times.
In the article, a spokesman for the Japanese cartel
blamed their American importers
for any crimes that may have been committed.

A Customs Service official also spoke to Hersh.
He maintained that
“the most momentous aspect of the grand jury investigation
was the possibly enormous civil penalties facing the importing companies
if they were convicted of Customs fraud.

Under this law, the civil penalties theoretically could equal
the total value of the goods fraudulently imported—at least $1 billion.”
Other Customs officials told Hersh that
the threat of such penalties provided the impetus
for Treasury’s fast-track efforts to settle the dumping and civil fraud penalties.

Hersh’s article was widely distributed in Congress.
His revelations about the alleged kickback scheme
and Treasury’s apparent empathy for the Japanese
caused a political furor.

In March 1979,
Alexander’s, Inc., a large department store chain,
pleaded guilty to one count for its involvement in the television conspiracy.
Alexander’s received the maximum fine: $5,000.

Sears, America’s largest retailer and importer of television sets,
was indicted on multiple counts.
Sears was accused of filing fraudulent Customs documents
to obscure kickbacks, rebates, and illegal credits
from Japanese manufacturers.
The Justice Department also named
thirty-seven unindicted co-conspirators:
Toshiba and eleven of its employees, Sanyo and six of its employees,
and eighteen Sears employees and lawyers.
The roster of unindicted co-conspirators included John Rehm,
who had been the Special Trade Representative’s top lawyer in the 1960s.
All denied any wrongdoing.

In 1980, the Sears case went before
the U.S. District Court for the Central District of California.
By a twist of fate,
the case was assigned to the court’s chief judge, Manuel L. Real.
Sears’s litigator was a former assistant to Judge Real.

Early on, Sears quickly moved that the case be dismissed,
asserting that the prosecutor
had used inflammatory language about the Japanese
and had made selective allegations before the grand jury.
[What prosecutor doesn’t make selective allegations?]
Judge Real dismissed the case,
The Justice Department appealed the decision.
In 1981, the U.S. Court of Appeals for the Ninth Circuit
reinstated the indictment.

Again, Sears moved that the case be dismissed,
this time because of a legal technicality.
Again, Judge Real dismissed the case.
The Justice Department appealed.
In 1983, the Circuit Court again reinstated the indictment.

Sears found another legal technicality
and again moved to have the case dismissed.
Again, Judge Real complied.
The Justice Department appealed.
And again the Circuit Court reinstated the indictment.
This time, however, the Circuit Court did something highly unusual:
it ordered Judge Real to reassign the Sears case to another judge.

Rather than follow the court’s order,
Judge Real filed his own independent petition to the Supreme Court [!!!!!!],
asking that it prohibit his removal from the case.
On December 1, 1986, Judge Real’s petition was denied.

But Judge Real did not reassign the case. [!!!!!!]
Instead, he directed both the Justice Department and Sears
to file briefs addressing the question of
whether the Circuit Court had the authority to order his removal from the case.
[This sounds crazy.
How would Sears have the expertise to answer that question?
Further, after all that came before,
clearly Sears could be presumed to have a vested interest in keeping on the case
the judge who had made so many previous ruling favoring them.
This is judicial impartiality?]

The Justice Department appealed.

The case had now become a struggle between the two courts.
The Circuit Court order the clerk of the court for the Central District of California
to randomly select another judge within seven days.
Judge Real appealed the order.
The bottom line from the Circuit Court:
in June 1987, it informed Judge Real that
if the case was not reassigned
“he might well be punished for contempt.”

Judge Real got the message.
In July 1987, the case was assigned to Senior District Judge A. Andrew Husak,
who is semi-retired but occasionally takes a case.

Sears again petitioned for a dismissal,
claiming that it had been denied speedy trial. [!!!!]
In January 1988, Judge Husak dismissed the indictment.
For the fifth time,
the Justice Department appealed to the Circuit Court.
In September 1989,
the Circuit Court sent the case back to trial.
By this time,
one of the government’s key witnesses had died.
The memory of another had faded.
The Justice Department dropped its case.

The private antitrust suits by NUE and Zenith
moved as slowly as the Sears case did.
En route to trial,
Zenith was sued for $1.2 billion by Japanese manufacturers
who claimed—quite imaginatively—
that Zenith was unfairly restricting
their efforts to expand their American market share.
The discovery process in this countersuit
delayed matters for another two years.

In 1980, the antitrust case was finally brought to
the summary judgement phase of pretrial proceedings.
In a wild series of twists and turns during the evidentiary stage,
the presiding judge ruled that
the tenets of the Anti-dumping Act of 1916
were not applicable to the case
because of certain technical differences
between television sets sold in Japan and those sold in the United States.
More critically, however, he ruled that
key pieces of the NUE and Zenith evidence were inadmissible.
Among those items that the judge would not allow:
  1. The Treasury Department’s finding that
    the Japanese had engaged in dumping.
  2. The unanimous finding by the U.S. Tariff Commission that
    American firms had been injured by the cartel’s dumping.
  3. Evidence of the vast differential between
    the prices the cartel was charging in Japan
    and those it charged in America.
  4. The Japanese Fair Trade Commission’s finding that
    the cartel’s actions had been anti-competitive.
  5. Business diaries, memoranda, minutes and agendas
    of meetings of the cartel companies’ executives
    that showed how they acted in concert.
  6. Portions of the reports submitted by the plaintiffs’ economic experts.
Absent this proof, the District Court dismissed the conspiracy case
on the grounds of insufficient evidence.

NUE and Zenith appealed the ruling
to the U.S. Court of Appeals for the Third Circuit.
In late 1983, the Appeals Court ruled unanimously that
a fact finder could reasonably conclude form the admissible evidence that:
  1. The Japanese manufacturers had agreed
    to stabilize prices of televisions in Japan.
  2. The domestic and international competitive situation
    for the Japanese television makers
    gave them a motive to enter into the alleged conspiracy.
  3. The Japanese entered into formal written agreements
    that established minimum prices (or check prices)
    for television sets sold for export to the United States.
  4. The Japanese allocated customers in the United States
    by means of the “five-company rule,” pursuant to which
    each petitioner agreed to sell directly
    to only five customers in the United States
    (including each manufacturer’s U.S. sales subsidiary).
  5. Japanese prices for televisions sold in the United States
    were substantially lower than
    prices for comparable televisions in Japan.
    In fact, these were “dumping prices”
    that might help support an inference of predatory intent.
  6. The Japanese firms
    deceived the American government as well as their own government
    about the prices charged in the United States
    by systematically giving secret rebates to U.S. purchasers.
    Each Japanese manufacturer, moreover,
    knew that its Japanese rivals were also giving rebates.

The Appeals Court ruled that
this “amounted to sufficient evidence of the alleged conspiracy”
to send the case to trial.
Officials at Zenith and NUE were jubilant,
thinking that they would finally be able to try their case.
But their elation was premature.

In a stunning blow to Zenith and NUE,
the Justice Department filed a “friend of the court” brief
on behalf of the Japanese manufacturers
In it, Justice made three arguments.

First, it argued that the Japanese companies had acted legitimately.
Their parallel low prices, claimed Justice,
should be viewed as the result of independent action,
rather than systematic collusion.
(Ironically, the Justice Department’s case against Sears
had named several of the same Japanese companies
as unindicted co-conspirators
for paying kickbacks and filing false import documents
on their television exports.)

Second, Justice argued that
“activity that is compelled by a foreign sovereign
should not lead to liability in a private antitrust suit.”
Justice claimed that the cartel’s actions were legal
because they were prompted by the Japanese government—
the “devil made me do it” excuse.
Here is the second irony:
when American companies
form an export cartel under U.S. law to export to Japan,
the U.S. government has no objection
if the firms are prosecuted under Japanese antitrust laws.
In other words,
while the Japanese television cartel was immunized from U.S. laws,
a defensive U.S. cartel would have been vulnerable to certain prosecution.

the Justice Department argued that
a finding in favor of Zenith and NUE
could harm U.S. foreign policy interests.
To support this point,
the Justice Department told the Supreme Court that
“the Governments of Australia, Canada, France, Japan,
the Republic of Korea, Spain and the United Kingdom
have formally advised the Department of State
of their concerns about
the potential impact of the court of appeals’ decision.”

In this last argument, the U.S. government boldly affirmed
what the American companies had alleged all along:
their survival was being recklessly endangered by
the amorphous goals of U.S. foreign policy.

In a narrow 5-4 decision,
the Supreme Court found insufficient evidence of a conspiracy
and sent the case back to the Appeals Court
to determine whether more evidence was available.
The Appeals Court dismissed the antitrust suit,
saying it was “somewhat confused” by the Supreme Court.
In April 1987,
the Supreme Court refused to hear a final appeal by the American companies.

At long last, the antitrust case was over.
Japan’s television cartel had won.

By the late 1980s, electronics
Japan dominated America’s television and consumer electronics markets.
The logical next step was to squeeze extra profits from this dominant position.

In 1989,
New York Attorney General Robert Abrams revealed that
Panasonic and Technics (both subsidiaries of Japan’s Matsushita)
had mounted a vertical price-fixing scheme in America.
Matsushita, of course, was a founding member of the television cartel.
The Panasonic/Technics scheme was hauntingly reminiscent
of what the Home Electric Appliance Market Stabilization Council had pulled off
in Japan in the 1950s.

Abrams revealed that between March 1988 and August 1989
the Japanese companies had forced their American retailers—
among them, Best Products, K Mart, Montgomery Ward, Circuit City—
to charge fixed minimum prices for their products.
Though his charge referred only to
the sixteen most popular products of Panasonic and Technics—
VCRs, camcorders, cordless telephones, answering machines, and stereo equipment, among other items—Abrams said that the firms had, in earlier efforts,
tried to set fixed prices on
all three hundred items they sole in the United States.

Through their schemes,
the firms artificially had raised their U.S. prices by 5 to 10 percent.
Abrams said the price-fixing was administered
“through an elaborate nationwide scheme
involving scores of [Panasonic and Technics] sales executives
pressuring thousands of retailers to comply with the scheme
and monitoring the prices they actually charged.”

To enforce this price-fixing effort,
Panasonic directed its executives to keep all U.S. retailers of Panasonic goods
in step with the firm’s policies.
Panasonic told its employees that
“those dealers not adhering to company policy
could ‘create chaos in the marketplace’
and would allow Panasonic to ‘lose face with the entire industry.’ ”

The question that lingers is
whether the rest of “the entire industry,” as Panasonic called it,
really did know about Matsushita’s price-fixing activities.
If they did not,
then how could Panasonic “lose face”?
More important,
were other consumer electronics companies participating in
similar vertical price-fixing schemes?

When Abrams confronted Panasonic and Technics,
they immediately agreed to a settlement—
without actually acknowledging wrongdoing.
The settlement required the companies
to stop price-fixing,
to repay $16 million in overcharges to nearly 700,000 customers, and
to pay another $2 million to the state for settlement administration charges.

The settlement also revealed:
  • Lechmere, Inc.,
    a retailer with stores in New York and other north-eastern states,
    was told by Panasonic that
    it would “make an example of dealers
    charging below the ‘go’ price [the fixed price]
    and would terminate all or part of its shipments
    to noncomplying dealers.”
  • When Luria and Sons, a Florida retailer,
    under cut Panasonic’s fixed price on a cordless telephone,
    four different Panasonic representatives threatened that
    Panasonic would cease doing business with noncomplying retailers.
As in Japan, this sort of price-fixing
allows the manufacturer to gain an unearned monopoly profit,
which can then be used to subsidize dumping
and other anti-competitive behavior.

But the Japanese were able to extort monopoly profits from American consumers
because America’s own television industry in effect
had been destroyed by two decades of illegal, anti-competitive behavior
by the Japanese.

In the late 1980s, the one hope that remained for an American television manufacturing industry was the emergence of high-definition television (HDTV).

Both Zenith and RCA executives had faith that the HDTV technologies were as much an improvement over current television technology as color had been over black and write.
Just as Americans replaced their black-and-white sets with color sets in the 1960s and 1970s, they seemed likely to replace their existing receivers with HDTV in the 1990s.

For Zenith and RCA, this pending switch to a new technology offered a unique opportunity to get back into the television business.

Japanese and European companies realized this, too.
All were racing to develop a technical standard for HDTV, and pressing the Federal Communications Commission to adopt their individual HDTV standards for the American market.
Yet in 1986, in [yet] another blow to the American companies, the State Department urged the FCC to adopt Japanese HDTV standards.
The message from the State and Justice departments was that the federal government was not only indifferent but actually somewhat hostile to the fate of the remnants of the American television industry.

In 1986, RCA was bought by General Electric.
GE then sold the RCA television subsidiary to Thomson, a French company.
[As of 1990], RCA’s old research facility is owned and operated by a new European owner, but it has drastically reduced the number of workers.
That leaves Zenith as the sole U.S.-owned television manufacturer.
It holds a 12 percent share of the American market and is barely breaking even.
Zenith is attempting to quickly introduce a leading-edge HDTV system, but the American government remains indifferent to the company’s fate and that of the industry.
The bulk of the American market is supplied by American-based operations of foreign-owned companies.

In large measure,
the collapse of the U.S.-owned television industry can be traced to
the failure of the American government to stop
the predatory practices of the Japanese cartel.

When confronted with Japanese subsidies,
the federal government opposed its own industry’s efforts
to apply countervailing duties.

When faced with the cartel’s anti-competitive behavior,
the American government refused to mount an antitrust suit
and it actively opposed those filed by private American companies.

When presented with clear evidence of a kickback scheme and Customs fraud,
the federal government scuttled
an International Trade Commission investigation.

When the Japanese cartel engaged in massive dumping,
the federal government took twelve years
to provide relief to American companies—
and then settled their claims for less than two cents on the dollar.

Moreover, at critical moments,
the federal government repeatedly leaked vital information
to the Japanese government—
information that it withheld from American companies and Congress.

The failure of the federal government
to enforce the legal protections it owed to the U.S.-owned television industry
was no accident.
Nor was it the consequence of bureaucratic incompetence.
Even at its worst,
American government is not that incompetent.
it was the direct result of deliberate, repeated delays—
a critical part of the strategy devised by
the American agents of the Japanese cartel.

As of 1989, more than twenty former government officials
with some responsibility for the television case
had been hired directly by the Japanese television manufacturers
or by the law firms and lobbying organizations that represent them.
Many other ex-officials involved in this case
have gone to work for related Japanese interests.
Under existing ethics laws, this is entirely legal.

The decline and fall of the U.S.-owned television industry
is an economic loss of historic proportions.

During the 1980s, the U.S. market for VCRs alone
generated more than $71G in sales for Japanese manufacturers,
and added significantly to the U.S. trade deficit with Japan.

The loss of the American television industry
also undermined the television parts industry—
a producer of such integral components as semiconductors,
which are also used in hundreds of other industries.
The Commerce Department’s own analysts have concluded that
a key factor in the decline of the American semiconductor industry
was the loss of U.S. television manufacturers,
who were among its largest customers.

Much like falling dominoes,
the decline of the semiconductor industry
now threatens dozens of other related U.S. industries,

such as supercomputers and advanced machine tools.
[See Eamonn Fingleton’s In Praise of Hard Industries for a discussion of this.]

Japan’s success in this bold attack—
which catapulted it to global dominance in the electronics industry—
has put Japan today in a position from which
it can easily launch similar strikes against
all the world’s high-technology markets.
HDTV is but one such industry.

[End of Chapter 6]

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