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Moreover, a preliminary projected estimate of 1988 exports indicates a forthcoming record high of about $420 million -- attesting to the competitive level of the recent value of the U.S. dollar.

Furthermore, a strong association is evident not only for the two longer sweeps of time just discussed. The graph also shows that paper machinery exports were often sensitive to shorter-time- period directional shifts in the exchange rate index. The repeated lagged opposite directions of the exchange rate index and U.S. paper machinery exports are particularly striking for exports between 1972–75, 1975–77, 1977–81, and 1981-83.

Additional support for the visually evident association was a very high linear correlation coefficient of minus 0.92. This result emanated from the exchange rate index lagged 1 year behind paper machinery exports for the period from 1971-72 through 1980-81. After 1981, the correlation value was still correctly negative in algebraic sign but much lower.

In conclusion, the historical evidence suggests that exchange rates were especially important for paper machinery exports from 1972 to 1981. After 1981, though the value of the dollar remained a significant competitiveness factor, the lower correlation coefficient indicates that other factors May have increased in importance.

In addition to its effect on U.S. paper machinery exports, the high value of the dollar also affected U.S. industry executives' equipment sourcing decisions. During the recent period in which the value of the dollar was rising consistently, U.S.-based firms often found it necessary to quote jobs, even for domestic Mills, using foreign-sourced equipment. Once established to penetrate closed or less accessible foreign markets, foreign affiliate plants now play an increasing role in directly supplying U.S. domestic machinery needs.

Export Financing

The availability of export financing and the terms on which it is offered have a direct bearing on the price competitiveness of paper machinery. Prior to the 1982 recession, the industry had sought Eximbank support for its exports. In 1982, the Eximbank approved a $14.85 million loan to Taiwan, on behalf of the Taiwan Chung Hsing Paper Corporation. The loan assisted Beloit Corporation to export a paper machine and a stock preparation system. Eximbank noted at the time of its approval that suppliers from West Germany, Finland, Italy, Japan, and the United Kingdom had competed for the contract. In 1985 the paper machinery industry resumed approaching Eximbank for preliminary commitments on long-term financing for exports of pulp and paper machinery. After a hiatus caused by a recession, suppliers

Figure 4

U.S. Paper Machinery Exports & Exchange Rate
Index of the U.S. Dollar

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Sources: Exports from U.S. Department of Commerce; Exchange rate index

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sought five preliminary commitments. Of these sales, three were lost to foreign competition and two await determination at the time of writing. Including an earlier project which was abandoned, the projects' total export value was $143 million and included new Mills and machine rebuilds.

Though the above information indicates increased activity by the industries in seeking support from Eximbank, particulars as to why individual firms did not consummate substantial export sales remains; as confidential proprietary information of the individual firms. Thus, there is no available documented evidence that would indicate whether competitive inadequacies rested more with the paper machinery firms or with Eximbank or both groups. In general, however, Eximbank has appraised its competitive stance vis-a-vis foreign export credit agencies in annual reports to the U.S. Congress. Regarding problems in 1985, Eximbank cited the following:

o Eximbank was uncompetitive in respect to extraordinary support. particularly by France and Japan. The areas needing most attention were mixed credits and foreign content.

o Though Eximbank was competitive with other OECD nations in respect to interest rates per the Consensus agreement, non-OECD nations such as Brazil and South Korea are not parties to the Consensus.

Eximbank responded to these problems by (1) providing a mixed credit capacity, (2) initiating a major evaluation of its foreign content policies, and (3) requesting a $300 million war-chest appropriation to counter specific foreign financing maneuvers.

The 1986 Eximbank report showed an overall ranking of major exporting nations in respect to the long-run competitiveness of their export credit agencies. France led, followed closely by Japan, after which came the United Kingdom, Canada, Italy, West Germany, and the United States.

A more recently issued 1987 report concludes that empirical data, exporters, and private sector Banks agreed that during 1986 Eximbank was basically competitive in regard to official credit terms for the long run. However, the business public was still dissatisfied with two deficiencies (1) the 2 percent application fee and (2) tied-aid (mixed) credits. In May 1987 the bank adjusted its application fee structure to meet competition from foreign credit agencies. A very recent Eximbank report in 1988 shows that the use of mixed credits by the Eximbank's competitors continued to increase in 1987. In response to foreign mixed-credits, Eximbank is continuing use of its war chest. 1

* See Report to the U.S. Congress on Export credit competition and the Export-Import Bank of the United States, June 1986, June 1987 and June 1988.

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) a}l nine programs reported cumulative deficits at the end of 1986.

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.

* See Export Credit Insurance: Assessment of Export-Import Bank's Role, U.S. General Accounting Office, Report No. TGAO7NSIADT37-189, 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

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