Eximbank's competitiveness as an export credit provider was analyzed by the General Accounting Office (GAO) in a 1987 report to Congress. GAO noted that the Eximbank reports found the U.S. program fees, especially for short-term loans, to be highly competitive with other Bern Union (export credit guaranteeing) countries. The report also concluded that the United States was also highly competitive with other countries in its willingness to assume risks, although most of these competitor countries had become more cautious in assuming risks in recent years.

The GAO report analyzed nine Bern Union members which accounted for about 80 percent of the reported export credit guarantee insurance activity in 1986. GAO found that the U.S. programs (Eximbank and the Foreign Credit Insurance Association) accounted for the smallest percentage of exports supported by any of the nine national programs analyzed. Japan, France, and the United Kingdom accounted for the greatest dollar value of exports supported by their national export credit guarantee programs. Smaller U.S. trading partners (Austria and Denmark) accounted for the largest percentage of exports guaranteed. Among major paper machinery producers, the national programs of Japan and the United Kingdom were the most active. Hermes, the West German agency, was only slightly more active than the United States in guaranteeing loans during 1980-86. Finland and Canada were not included in the analysis.

The GAO report noted several trends affecting exports during 1980-86. Among these were (1) an overall 12 percent decline in real exports, with U.S. exports down 26 percent over the period; (2) exports covered by the insurance programs declined 46 percent; (3) claims paid in 1986 were about 185 percent greater than in 1980; and (4) all nine programs reported cumulative deficits at the end of 1986.2

Production Costs

The cost of manufacturing each paper machinery unit is fundamental to competitive and profitable pricing. The U.S. paper machinery industry has faced stiff competition from abroad in respect to major cost components such as steel and labor. The fall in the value of the U.S. dollar since 1985, however, has reduced this foreign advantage. For a more detailed discussion refer to Chapter III, Economics of the Industry.

2 See Export Credit Insurance: Assessment of Export-Import Bank's Role, U.S. General Accounting Office, Report No. GAO/NSIAD 87-189, September 30, 1987, Washington, D.C.

Tariffs and the Terms of Trade

The United States faces tariffs on paper machinery exports to most foreign markets. The tariffs represent an additional cost factor weakening the price competitiveness of U.S. paper machinery exports. In contrast, the U.S. paper machinery industry began 1987 facing an era of zero or near zero tariffs on U.S. paper machinery imports while still having to confront substantial foreign tariffs on its exports. As a result of agreements forged in the Tokyo Round of trade negotiations, tariffs on most U.S. paper machinery imports fell to zero on January 1, 1987. Some items, like dryers, continue to carry low tariff rates. Arrival on the free list for many of the industry's products follows a long period of staged decline in the tariff rates. The industry was well adjusted to low tariffs as rates were annually staged downward under the 1979 agreement.

Unfortunately, the concessions offered by the United States on paper machinery in 1979 were not matched by U.S. trading partners. This leaves U.S. producers of paper machinery facing substantial tariffs, generally ranging from 3.8 percent in the EC to 9.2 percent in Canada on U.S. paper machinery exports. Efforts are now under way in various international negotiations to secure a further general downward revision of tariffs. It is possible that paper machinery tariffs will be adjusted again in the future. The tariff disparities have not created the trade deficit which the U.S. industry faces. However, the tariff situation exacerbates the deficit and clearly threatens efforts to eliminate it.

Product Liability: A Cause For Concern

Although the proprietary nature of individual firm's product liability experience precludes the publication of data on this problem, it has been clear that for much of the decade, the U.S. paper machinery industry has been concerned about the cost of product liability insurance as an impediment to competitiveness. These concerns arise from the very different tort laws in competitor countries (that is, Finland, Japan, United Kingdom, and West Germany) which severely limit the potential product liability exposure of original equipment manufacturers, and from the greater exposure of U.S.-based producers to product liability litigation in U.S. courts. Additionally, the high premiums which manufacturers now pay for product liability insurance have reduced the price competitiveness of U.S.-based manufacturers against foreign produced machinery.

The industry sees the exposure to product liability suits arising from the long life of paper machinery as particularly unsettling. Most U.S.-based suppliers have been in business for substantial periods of time, often reaching back to the 19th century. Most older equipment in U.S. mills, from which product liability suits are most likely to arise, bears a U.S.-based manufacturer's

There

nameplate. Suco equipment may remain in mills for periods exceeding 50 years. Even though this equipment has generally been substantially rebuilt since first installation, the manufacturer is potentially liable for damages attributed to machinery which may no longer meet currently accepted industry operating standards. is a record of suppliers paying damages in suits arising from machinery in place since the early 1920s. Consequently, the industry has sought, at both State and Federal levels, statutes of repose which would bar damage awards arising from machinery more than 25 years old, unless required safety equipment was not provided.

Additionally, the paper machinery industry, along with other capital goods industries has supported broad product liability reform measures currently pending in Congress.

U.S. and Foreign Investment

Limited investment data for this industry suggest that clearly Finland and Japan have invested as much in plant and equipment in both relative and absolute terms as did the U.S. paper machinery industry. For example, capital expenditures by the dominant Finnish firm Valmet, a state-owned company, were approximately $60 million, 8 percent of total sales, compared to U.S. expenditures of about $40 million, about 3 percent of sales for the entire U.S. paper machinery industry. As regards Japan, one source estimates that over a 5-year period capital expenditures by the Japanese paper machinery industry were 3 to 15 percent of shipments value which in 1985 would translate to a capital expenditures range from $25 million to $125 million. Unfortunately, no West German capital expenditure data are available for this industry, thus no accurate quantitative comparison is possible. However, given that West German exports exceed those of the United States and Japan combined, it is likely that West Germany is among the leaders in capital expenditures by this industry.

U.S. and Foreign Research and Development

The goal of research and development (R&D) is technological discovery and improvement. Commercially this effort may be directed to (1) the manufacturing production process -- in the paper

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machinery industry leading to more competitive unit costs and prices -- and (2) the product leading to better quality paper machinery in terms of efficiency, ease of use, and durability for potential pulp and paper mill customers.

For

As regards production process R&D, the foreign paper machinery industry is on a competitive level with U.S. industry efforts. example, leading paper machinery firms in the United States and Finland have developed their own computer aided design and computer aided manufacturing (CAD/CAM) equipment. In the United States, for example, the Beloit Corporation began investigating the use of CAD/CAM equipment in 1977, envisioning it primarily as a drafting

aid.

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Subsequently, the firm developed a proprietary process known as BEL-CADDR. The first BEL-CADDR systems were brought on line in 1980, with 28 workstations in place by 1983 at Beloit plants. success of the system has produced exponential growth, with 217 workstations at 8 Beloit plants in 5 countries in operation at mid-1988. Future plans exist to extend use of the system to Beloit foreign licensees in Brazil, Spain, and Japan. 3

In respect to product R&D, U.S. paper machinery in the past had a reputation for the most advanced, efficient, and easiest equipment to operate. Today, however, that advantage is not as clear-cut as foreign competitors devote substantial resources to product R&D. For example, in 1987 Valmet, the Finnish state-owned company, budgeted approximately $30 million to R&D for paper machinery (4 percent of sales) compared to a U.S. Department of Energy budget of $20 million to $25 million.

Product R&D has focused on diverse areas from whole production systems to individual machinery components. In the last decade, researchers in the United States, Finland, and Sweden have developed mill-wide automated control systems which have become a feature of modern pulp and paper mill operation. In this development, reliance has been not only on R&D within the paper machinery industry but also on technology in the machine tool and other industrial process industries. R&D also has focused on improving technology in areas such as headboxes, twin-wire and top former design, suction boxes, wet pressing, drying systems, winding, sensors, and such off-machine processes as coating and black liquor recovery.

Summary

World exports of paper machinery have recovered from the recessionary low in 1983. Though the U.S. paper machinery industry continues as the world leader in shipments value, this U.S. industry still ranks a distant second to West German firms in exports value. The three most important price-related competitive factors hindering U.S. paper machinery exporters in the early 1980s were (1) a rising value of the U.S. dollar, (2) effective foreign export financing arrangements, and (3) lower foreign production costs. However, the decline in the value of the dollar since 1985 and improved credit arrangements by Eximbank have strengthened the U.S. competitive position. To sustain long-run competitiveness, the U.S. paper machinery industry must not be overtaken by formidable foreign competitor efforts in investment and R&D.

3

"Customized CAD/CAM Aids Machinery Manufacturer's Drawing Ability," Pulp & Paper, September 1987, pp. 72-73, as updated by Beloit in a later release. See also ibid., "Computer Innovations Challenge Engineers and Optimize Designs," pp. 56-59.

CHAPTER V

FOREIGN COMPETITORS AND REGIONAL MARKETS

This chapter discusses the current status of the paper machinery industry in the United States and key foreign markets. The individual foreign country sections discuss patterns of trade in paper machinery, leading competitor firms, the size and importance of each country's paper industry, research and development (R&D), and government assistance to the industry. These sections provide background for understanding the competitiveness of the major paper machinery manufacturing countries. Canada, with the largest industry and one closely tied to U.S. suppliers, is discussed first and at greater length than other markets. Major manufacturing countries such as Finland, Sweden, and West Germany follow, then rising producers such as Brazil and Japan. Countries such as China, Mexico, Australia, and New Zealand, which are attractive export markets, are grouped regionally with other markets.

Foreign Penetration of the U.S. Market

Foreign penetration of the U.S. market is clearly evident over the 10-year period from 1977-87. During the entire period, 70 paper machines were started up at U.S. mills or were committed to order. Of these, 52 percent was supplied by U.S.-based companies, and 48 percent was purchased from foreign-based manufacturers.

During the years 1974-77, an overwhelming 86 percent of new U.S. paper machines was purchased from domestically based firms. During 1977-87 barely half of all new paper machines installed in the United States has been acquired from domestically based companies. During one year, 1981, eight out of nine new machines were bought from foreign manufacturers. In 1986 four of the eight machines purchased were acquired from abroad.1

Between 1977-87, Finland accounted for 50 percent of the imports or 24 percent of overall shipments. Valmet with ten and Tampella with seven split the Finnish share. West Germany supplied 14 machines during 1977-87, of which Voith sold 12 and Sulzer-Escher Wyss two. KMW of Sweden sold two machines with Holder of the United Kingdom taking one. Beloit supplied over 90 percent of the domestically produced machines supplied between 1977-87.

The increased presence of foreign-owned subsidiaries and facilities in the United States has reduced U.S.-based firms' role in key decisionmaking. Now key decisions on R&D, plant location, capital

1 Pulp and Paper 1988 Factbook pp. 75-78.

See also Pulp & Paper, January 1987, p. 112-113.