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lower in competitor countries, the share of gross national product and hence the profile of the industry is greater in these nations. For example, in Finland, the industry maintains such substantial economic importance that it May effectively bring its needs to the attention of government policymakers.

The U.S. paper machinery industry's fluctuations in productivity have coincided closely with the rise and fall in its capital expenditures. Since 1983, both productivity and capital expenditures have shifted upwards.

Many paper machines installed in Mills worldwide are considered to be of U.S. origin, although it is impossible to establish an exact percentage. Much of this situation stems from a long domination of the North American market in the years prior to the mid-1970s. This position has eroded under stiff competition from West Germany and Finland.

Sales and advertising expenses are substantial. Sales are made through building trust and confidence on the part of the buyer and assuring quick field service. Domestic suppliers have provided a growing rapid field service away from the plant in competition with foreign suppliers. In addition to new machinery, the industry also supports an active market in used machinery and in so-called rebuilds, the latter undertaken most frequently to increase production capacity.

Prior to 1979, the U.S. paper machinery industry maintained a steadily positive balance of trade. A trade deficit first appeared in that year, subsequently disappeared, and then reappeared and grew wider with the recession of 1982–83. After exceeding $500 million in 1987, signs now point to some abatement in the growth of this deficit.

Chapter III highlights the economics of the industry and also discusses the role of research and development (R&D), describing the efforts of leading firms and of governmental, academic, and private sector organizations in such research at home and abroad. U.S. R&D efforts are primarily carried out by the largest companies. Strongly aided by government, R&D efforts in key competitor countries, including Sweden, Finland, and West Germany, have been very competitive with U.S. industry and academic R&D efforts. The R&D efforts of leading foreign countries are discussed in the country sections.

Chapter IV assesses and ranks the major competitive factors affecting the paper machinery industry. The most significant factor has been the value of the U.S. dollar in relation to key foreign currencies, especially those of West Germany, Finland, Sweden, and Japan. U.S. exports of paper machinery have proven highly sensitive to long-term fluctuations in the value of the dollar, with

the major impact usually registering 1-2 years after a peak or trough. From 1985 to 1987, the value of the U.S. dollar, as measured by a multilaterally weighted exchange rate index, declined 32 percent. This much improved competitive factor contributed to a strong recovery in U.S. paper machinery exports in 1987 almost to a 1981 peak value. Moreover, midyear 1988 results point to expected record high exports of paper machinery.

Next in importance is the role of export financing. U.S. export financing rates were found to be competitive with those offered by other Bern Convention signatories. However, some non-signers, notably Brazil, have offered attractive financing packages to lure plants and attract export business, primarily in North America. Costs of production were ranked third in importance, followed by tariffs and the terms of trade. Costs of certain materials, notably plate steel, and labor costs have operated to disadvantage U.S. producers. The tariffs on paper machinery have fallen sharply with many U.S. tariff items now at zero. However, the United States still faces substantial tariffs on its paper machinery exports to markets such as Finland, Canada, and the European Community. The U.S.-Canada Free Trade Agreement provides a 5-year phaseout of paper machinery tariffs between the two nations. The United States is also seeking in other ongoing trade negotiations to achieve a more equitable level of tariffs for this industry's products. Finally, substantial product liability costs are built into the costs of U.S. nameplate machinery and are far greater than comparable costs borne by foreign-based suppliers and have placed U.S.-based producers at a competitive disadvantage.

Limited investment data for this industry show that clearly Finland and perhaps Japan have spent as much or more for plant and equipment in both relative and absolute terms as did the U.S. paper machinery industry. Regarding R&D, the foreign paper machinery industry is on a competitive level with U.S. efforts in both production processes and product quality.

The second half of the report analyzes key foreign markets and competitors. The extensive foreign penetration of the U.S. market and its effects are assessed. The report also assesses the world market share of the United States and its key competitors and finds the United States losing ground to West Germany, Finland, and Brazil.

Countries are ranked in relative importance and grouped by region. Canada is the largest market for U.S. paper machinery exports and the most closely interlinked to the U.S. economy. Nearly all leading U.S. producers operate Canadian facilities. Competitive pressures from third countries, especially Finland and Brazil, are beginning to affect the Canadian market in much the same fashion as in the United States. Finland is the largest paper machinery producer in terms of percent of gross national product accounted for

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by the industry. The Finnish industry has been rapidly consolidating, to the special benefit of Valmet, Oy, the largest Finnish-based producer. The Finnish industry has been actively assisted by its government in enlarging its exports and modifying its structure to be more internationally competitive.

West Germany has been the leading source of paper machinery imports to the United States, with 1987 U.S. imports valued at $183 million. As a leading supplier of such items as machine calenders, supercalenders, and sheeters, West Germany is well placed to provide some equipment for any large mill project. West German firms have been especially active in establishing plants in the United States. Elsewhere in Europe, production of paper converting machinery has assumed greater importance. Switzerland, the leader in this industry segment, is also the major U.S. import source for paper converting machinery, while France also plays a major role in that industry segment.

The report also discusses the new or expanding markets, including Japan, the People's Republic of China, and Brazil. Brazil has gained a reputation as a significant producer of paper machinery, largely through offering attractive financing and its ability to offer equipment from leading U.S., Finnish, and West German producers.

This study presents a range of options for consideration by the U.S. Government. Some options focus on improving U.S. competitiveness in industry segments in sectors which have become most vulnerable to foreign competition. Others focus on enhancing the statistical capabilities of the government and its ability to recognize future competitiveness problems. Major competitiveness issues confronting the U.S. paper machinery industries are how to:

expand export markets

improve export financing

increase R&D

promote fairness in product liability laws

increase usefulness of U. S. Bureau of the Census
statistics

insure an adequate national security manufacturing base.

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Detailed proposals are offered to achieve these goals, including export promotion conferences; increased support for the U.S. Export-Import Bank, support for joint R&D; close monitoring of Federal and State legislative proposals for a 25-year statute of repose applicable to older industrial machinery; issuance of a Current Industrial Report for paper machinery industry; and a reevaluation of the industry's relationship to national security considerations.

CHAPTER I

INDUSTRY AND PRODUCT DESCRIPTION

The Early History of Paper Machinery

The production of paper by hand is an ancient craft, but the manufacture of machine-made paper is less than two centuries old. A Frenchman, Nicholas Louis Robert (1761-1828) invented the first paper machine, receiving a patent in 1799. Hence, much of the terminology surrounding the paper machine is French. The first practical paper machines were developed in England. Henry and Sealy Fourdrinier, London stationers of French Huguenot origin, obtained patents in 1806 and 1807 for what became commonly called the fourdrinier machine. Like many other inventors, the Fourdrinier brothers realized little profit from their invention. Improvements by John Gamble and Bryan Donkin, early British paper machine builders, allowed commercial introduction of machine-made paper about 1812 in Great Britain. John Dickinson, also an Englishman, invented and patented the cylinder-type paper machine in 1809. Subsequently, the cylinder machine would become a specialized device for linerboard production. The multicylinder board machine first appeared as an American invention in 1863.

Working from knowledge of a Dickinson cylinder-type machine, Thomas Gilpin placed a cylinder-type machine in operation in 1817 at his paper mill near Wilmington, Delaware. The first fourdrinier machine was imported from England and placed in operation at a mill near Saugerties, New York in 1827. A French-built fourdrinier was imported in pieces in December, 1827 and erected the next year at a mill in North Windham, Connecticut. The machine erectors subsequently incorporated as Phelps & Spafford in the adjoining village of South Windham. They produced fourdrinier machines which were installed respectively in 1829 and 1831 at Norwich and East Hartford, Connecticut. Reorganized after the 1837 recession, the firm operated into the 20th century as Smith and Winchester. The firm claimed a number of inventions, including the first American-made continuous web cutter and also produced an early Jordan. Phelps and Spafford also manufactured the first American-made paper driers, in 1830, apparently modifying an English model. Earlier British patents for steam dryers were issued to Thomas Bonsor Crompton in 1820 and to Bryan Donkin for modifications in 1823. Robert Ranson made improvements to the drying process in 1839. The dandy roll, used for marking the newly formed web, dates from 1825 when a patent was issued to John and Christopher Phipps. In 1839, William Joynson first placed letters and markings on the dandy roll allowing the production of watermarked paper. Out of favor in recent years, the dandy is now making a comeback as an integral part of the paper machine. Other improvements to the fourdrinier occurred during this period. George Dickinson invented the slice in 1828, a thin, flat board which lays across the surface of the wire in front of the headbox and smooths and directs the

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