participants. Going into the "lion's den," the mission raised the profile of the paper machinery industry. In February 1987, the U.S. industry conducted a successful private seminar/mission to Australia and New Zealand. The industry then followed with another successful private trade/seminar mission to West Germany in November 1987.

Import Trends with Major Trading Partners

As paper machinery trade has evolved in the 1980s, four countries--Finland, West Germany, Sweden, and Switzerland--have emerged as the leading contributors to the U.S. trade deficit in this industry. Trade with Canada, historically our leading trading partner in paper machinery, has provided a steady but diminishing favorable U.S. balance. Several other countries, notably the United Kingdom, Mexico, and Australia, also are positive contributors to the U.S. balance of trade in paper machinery (see Figure 3).

U.S. imports of paper machinery from West Germany were 14 times U.S. exports in 1986. Imports totaled $200 million; exports just under $14 million. Imports nearly doubled between 1984 and 1986, from $108 million to a record $200 million. Finland was the next largest contributor to the trade deficit during this period. Paper machinery imports from Finland totaled $55 million in 1986, up more than four times from the $12 million imported in 1984. Such sharp swings in U.S.-Finnish paper machinery trade are not uncommon. During one year in the 1970s imports rose from $3 million to $29 million. The all-time high was $98 million in Finnish imports in 1981, immediately prior to the 1982 recession which dried up demand for Finnish imports as effectively as it did domestic shipments. Switzerland continues as the major import source of converting machinery, accounting for $37 million in 1986, up from $20 million in 1982. This figure includes shipments from Bobst, an industry leader, which maintains a U.S. plant at Roseland, New Jersey. While Switzerland has maintained its position as the primary U.S. import source for box-making machinery, its lead is being challenged. Imports from Japan totaled $24 million in 1986 with another $15 million entering from the West Germany. By comparison, 1982 imports from these markets totaled only $7 million combined. Imports of parts and paper boxes totaled some $150 million in 1986, accounting for half of the 1986 deficit.

Imports from Canada, level at $30 million between 1981 and 1983, rose to $53 million by 1986. Exports, which had remained relatively steady through the recessionary period in the United States and Canada, fell in 1986 to $67 million, $5 million below the 1985 lível. Over the past decade the trade balance has shifted in favor of Canada. The overall balance now stands in a 6-5 ratio, U.S.-Canada, as against the 3-1 ratio common in the mid-1970s.

Japan has also recently become a major supplier of paper machinery to the United States. With $60 million in 1986 imports, Japan now

trails only the West Germany as an import source. This volume of imports represents more than a threefold jump from $18 million during 1982. Over the same period, U.S. exports to Japan, primarily

papermaking and pulp-making machinery, rose from $13 million to $29 million.

Paper Products and National Security Concerns

In a national emergency, paper products and the machinery to produce paper are essential to both the military and supportive civilian forces. Communication, educational, personal, and industrial needs all require these products. Equally important is the adaptability of the paper machinery industry to the production of military hardware. Historical experience well attests to this industry's successful convertibility to military applications. During both World Wars factories normally producing paper machinery were retooled to produce military goods. The configuration of the industry's plants made the facilities especially adaptable to the demands of military production. For example, Beloit Corporation manufactured naval gun barrels, powder mills, and crank-pin turning lathes. 7 The geographical dispersal of the industry through northern small towns also increased the safety of the industry's plants in wartime. The industry's skilled labor force, heavy with scientists, engineers, and machinists, is an economic asset in a time of national emergency.

By comparison many foreign paper machinery plants in Finland and West Germany are located close to potential areas of conflict. Several of these firms, including the leading Finnish company, also produce defense equipment.

The importance of this sector to national security underscores the fact that its competitiveness is vital to national as well as industrial survival. In the face of foreign penetration of the U.S. market and the rising incidence of joint ventures in the industry, the U.S. paper machinery industry must retain a sufficient domestecilly based component to serve national emergency needs.

7

Thompson, William F., A History of Wisconsin: Volume 6, Continuity and Change, State Historical Society of Wisconsin, Madison, Wisconsin, 1968, pp. 93-94 describes World War II military contracting in Rock County (Beloit-Janesville).

CHAPTER III

ECONOMICS OF THE INDUSTRY

Any manufacturer faces various types of costs, with materials, labor, energy, and capital costs among the most significant. The manufacturer seeks to minimize these costs in the interest of maximizing profits and return to stockholders. The total cost to the U.S. paper machinery industry has increased significantly as the costs of major production inputs, materials and labor, have risen. Among the most effective means of shifting and/or reducing costs is the availaāility of multiple manufacturing facilities, preferably both domestic and foreign. As production of paper machinery has globalized, the major producers have become multinational firms, able to source production and purchases of raw materials on different continents. This has applied to the major U.S.-based and foreign producers. In a highly competitive environment, these firms are now able to bid on mill projects, offering to produce in the country or countries in which total costs; financing, or both make it most attractive to do so. As a result there is no longer a purely domestic or North American industry but a worldwide industry in which the nameplate on the machine is no longer a guarantee that the product was largely produced in the country in which the home office of the firm is located.

Materials Costs

In

Materials costs represent the largest element in the cost of production. In 1986 the total cost of materials to U.S.-based paper machinery manufacturers was $860 million or 53 percent of the value of industry shipments. This represented an increase of 73 percent in the cost of materials over the 3-year period between 1983 and 1986. Over the same period, materials costs rose from 43 to 53 percent of the value of shipments. Since the start of the decade, overall materials costs rose by 28 percent from $672 million. 1986 materials costs actually exceeded value added by manufacture by $154 million. In only one other year since 1967 has value added been below materials cost for this industry. In 1980 materials costs represented 51 percent of the value of shipments and exceeded value added by $20 million. Combined, the cost of materials and payrolls totaled 80 percent of the value of shipments in that year and had risen to 87 percent by 1986.

Additional data are also collected in the Census of Manufactures covering the cost of specific major materials consumed, which for paper industries machinery were primarily metals, gears, motors, and fluid power systems. Table 10 shows the major items purchased and

consumed.

Table 10 shows that steel has been the major materials input consumed by the paper machinery industry and thus is a key indicator

Source: U.S. Dopartment of Commerce, U.S. Bureau of Census, 1982 Census of Manufactures, Special Industry Machinery, Materials Consumed by Kind, p. 35D-29. Total will not add to 100 percent because of items not shown. Total value is delivered cost of the selected materials consumed and will not equal the total of materials consumed shown in Table 11.