OCTOBER 1997

Joining Technologies Industry, Trade, and Technology Review

steel and other metals.* The U.S. automotive industry has increased the polymeric materials*
and aluminum content of a typical family vehicle (table 1), particularly in applications for
nonload-bearing parts, e.g. plastic hoods, roofs, and side panels; and aluminum wheels,
brakes, air conditioning compressors, heat exchanger, radiators and engine blocks.‘
Traditionally, these parts have been made of steel.

Atypical family vehicle, material content and total weight

1976 1986 1996 1976-1996

Percent Percent Percent percent

Material/ year Pounds __oftotal__Pounds__of total_Pounds __ of total change
Iron and steel . 2,785.0 74.1 2,190.0 69.0 1,890.0 61.0 -32.0
Polymeric material 325.0 8.6 433.0 13.7 642.0 21.0 97.5
i 85.5 23 139.5 44 257.0 8.3 200.0
564.5, 15.0 407.5 12.9 301.0 9.7 470

Total vehicle weight .. 3,760.0 100.0 3,170.0 100.0 3,090.1 100.0 18.0

Source: Recent trends in automobile recycling: an energy and economic assessment, ORNU/TM/12628, March

As a means to limit emissions of carbon dioxide, and to meet corporate average fuel
efficiency (CAFE) standards,’ U.S. automobile manufacturers reduced the weight of the steel
portion of the average passenger car by 21 percent between 1976 and 1986. The overall
weight of the average car declined by 18 percent between 1976 and 1996. However, nearly
all of the reduction was achieved by 1986, when auto makers were producing fleets in
compliance with CAFE standards (table 1). Since then, the weight of the average car has
remained stable, mainly because of the combined effect of unchanging CAFE standards and
increased consumer demand for large accessory-laden vehicles.

* For an analysis of the pros and cons of steel versus aluminum and plastic in automobile
manufacturing , see Frank R. Field III, and Joel P. Clark, “A Practical Road to Lightweight Cars,”
MIT Technology Review, Jan. 1997, found at http://web.mit.edu/techreview/
www/articles/jan97/clark.html, retrieved June 17, 1997.

5 Polymeric materials include all plastics and polymer composites. Plastic is a nontechnical
term for “resin system,” and polymer composites are resin systems that are reinforced with a
fibrous material in order to enhance mechanical and physical properties. Most auto parts that do
not have a load-bearing function are made of resin systems although the load-bearing parts must be
strong and are made with polymer composites. This article is concerned with the development of
joining and bonding methods for polymer composite load-bearing structures for automobiles, such
as frames. The term “plastic” will be used to refer to auto parts that are nonload-bearing (such as
dashboards) and are made of nonreinforced resin systems.

° For details on the use of aluminum in the automobile industry see USITC, “Aluminum Product
Development and the Automotive Industry,” Industry Trade and Technology Review, USITC, May
1994, pp. 17-25.

7 CAFE standards were established in 1975 by the Energy Policy and Conservation Act.
According to these standards, automakers are required to meet fuel economy ratings for each fleet
of passenger cars they produce. Since 1986, the fleet average has been 27.5 miles per gallon,
although industry officials anticipate a higher standard during the next several years. See the data
found at http://www ita.doc.gov/industry/basic/cafe/html, after June 23, 1997.

14


OCTOBER 1997
Industry, Trade, and Technology Review Electronic Commerce

Conclusion

Internet technology provides for fast, reliable, and high-quality transmission of audio and
video content, making it an attractive medium for distributing motion pictures and other
audiovisual works. However, before the Internet can become a popular means of accessing
audiovisual and other works, the international community must address a number of formal
and informal impediments. Among formal impediments are restrictions on trade in
audiovisual services and regulatory tendencies that, while they serve important social and
economic objectives, may make use of the Internet more cumbersome and expensive. Informal
impediments include increased potential for infringement of intellectual property rights and
security breaches. Although new copyright and performance treaties developed by the WIPO
are useful initial steps to safeguard intellectual property, it appears that there remains
substantial room for government and industry to establish or negotiate policies that promote
growth and welfare while preventing inappropriate or malicious use of the network. =

35


OCTOBER 1997
Industry, Trade, and Technology Review Electronic Commerce

international standard for copyright protection, and extend the scope to electronic trade,
network transmissions, and computer systems reproductions.*

Content Regulation on the Internet

Internet regulation in most countries is rudimentary or nonexistent.” Countries that have
developed guidelines pertaining to the Internet have taken varying approaches. For example,
the United States and Japan largely favor self-regulation by the industry. Some European and
emerging countries, on the other hand, are developing new Internet laws that generally reflect
their respective broadcast regulations. The status of regulations in developed and emerging

* markets, most of which focus on censoring or limiting the availability of material that is
detrimental to minors and to public morals, is summarized below.

The United States and Japan

US. industry preference for a largely self-regulated Intemet were facilitated by a recent court
decision. In June 1997, the Supreme Court struck down provisions in the Communications
Decency Act” which sought to criminalize the distribution o “obscene or indecent” material
to minors over the Internet.* Soon after the Supreme Court decision, a group of companies
that provide Internet services announced a plan to create a voluntary standard for Internet
content. The companies proposed to develop filtering and rating systems associating labels
with Intemet content. The systems would also be assessed by independent reviewers.” The
proposal was supported by the Clinton administration, which, in the Framework for Global
Electronic Commerce released in July 1997, encouraged private industry to develop a system.
for self-regulation.>°

In Japan, officials have chosen a path similar to that of the United States for developing the
Internet service industry with minimal regulatory burden.*!_ Japan’s Telecommunications
Business Law does not provide a definition of Intemet services, and Intemet broadcasting in
Japan is currently dealt with as a data transmission service,” which is largely unregulated for
content.

25 WIPO Copyright Treaty; and WIPO Performances and Phonographs Treaty, Dec. 23, 1996,
found at http://www.wipo.org, retrieved Aug. 5, 1997.

26 A. Michael Froomkin, “The Internet As a Source of Regulatory Arbitrage,” found at
http://www.law.miami.edu~froomkin, retrieved June 5, 1997.

77 The Communications Decency Act is part of the Telecommunications Act of 1996.

% “Government’s Effort to Keep ‘Cybersmut’ Away from Minors Deemed Unconstitutional,”
Communications Today, June 27, 1997, , found at http://www.commtoday.com, retrieved July 29,
1997.

2 Digital Equipment Corp., “Leading Internet companies to create standards for self-
regulation of content,” July 18, 1997, found at http://www.dec.com, retrieved Sept. 15, 1997.

» “Clinton Report Focuses On Market-Driven Strategy To Internet,” Communications Today,
July 2, 1997, found at http:/Avww.commtoday.com, retrieved July 29, 1997.

31 U.S. Department of State telegram No. 006691, “Electronic Commerce: Special Press
Report,” prepared by U.S. Embassy, Tokyo, July 31, 1997.

»? OECD, Communications Outlook 1997, vol. 2, (Paris: OECD, 1997), p. 189.

31


Key Performance Indicators

AUTOMOBILES

Figure A-3
U.S. sales of new passenger automobiles, by quarter

1,000 units
2500

OCTOBER 1997

Industry, Trade, and Technology Review

2,210,529

2000 a
oe 229
1500

1000

500 SSI ggg B20

tou om vot oh mw vot ot Wm wd
+ 1993 1994 | 1995

Total sales-consumption
—*— _Importsales

1996
—*— Domestic sales

TTT

mon of ot
| 1997

Note.—Domestic sales include all automobiles assembled in Canada and imported into the
United States under the United States-Canadian automobile agreement; these same units

are not included in import sales.

Source: Automotive News; prepared by the Office of Industries.

Table A-3

U.S. sales of new automobiles, domestic and imported, and share of U.S. market accounted for by
sales of total imports and Japanese imports, by specified periods, Jan. 1996-June 1997

Peres ange—
Apr.June 1997 Jan.-June 1997
Apr.-June Jan.-June from from
Item 1997 1997 Jan.-Mar.1997__ Jan.-June 1996
U.S. sales of domestic autos
(1,000 units)’ 0.2... cece eee eee 1,831 3,503 96 74
U.S. sales of imported autos
(1,000 units)? 379 734 68 5.9
Total U.S. sales (7, 2,211 4,237 9.1 5.3
Ratio of U.S. sales of imported autos to
total U.S. sales (percenf)'? ............ 17.2 17.3 -2.1 11.9
U.S. sales of Japanese imports as a
share of the total U.S. market (percent)? 8.5 10.8 -36.0 65

7 Domestic automobile sales include U.S.-, Canadian-, and Mexican-built automobiles soid in the United States.

2 Does not include automobiles imported from Canada and Mexico.

Source: Compiled from data obtained from Automotive News.

40


OCTOBER 1997

Pharmaceuticals Industry, Trade, and Technology Review
Table 3
Sales and pricing data on the ethical pharmaceuticals industry,’ 1992-96
Average annual
Year Absolute change change
Item. 199219931994 1995 1996_ 1992-94 1994-96 1992-94 __ 1994-96
Million dollars —— Percent —~

Domestic ethical

pharmaceutical sales... 48,095 48,591 50,740 57,146 62,612 2,645 11,872 27 114.4
U.S. ethical pharma-

ceutical sales abroad... 25,744 26,467 26,871 33,893 36,346 1,127 9,475 2.2 16.3

Indices (1984 = 100)

Producer price:

Pharmaceuticals . « 165.72 172.43 174.81 178.70 181.20 9.09 6.39 2.7 1.8

All manufacturing . 117.35 119.12 120.71 124.19 124.70 3.36 3.99 1.4 1.6
Consumer price:

Pharmaceuticals ..... 214.70 223.0 230.6 235.0 242.90 15.90 12.30 3.6 26

All manufacturing . « 140.32 144.46 148.23 152.38 154.10 7.91 5.87 28 2.0

* Ethical pharmaceuticals (available by prescription) include items covered by the reciprocal duty elimination for
which PPI and CPI data are available, and comprise only a portion of the total trade of pharmaceutical products
(table 1) covered by the reciprocal duty elimination.

Source: Bureau of Labor Statistics, and data from Pharmaceutical Research and Manufacturers Association

(PhRMA).

Pricing is another indicator that can be examined with respect to possible changes in the
pharmaceutical industry resulting from elimination of duties. The tariff eliminations would
have been expected to lower input costs for finished pharmaceutical products. Moreover,
according to economic theory, a reduction of tariffs on pharmaceutical imports and certain
chemicals used in the production of finished pharmaceutical products should assert downward
pressure on consumer prices, assuming the tariff saving is passed on to the consumer. Several
factors such as shifts in exchange rates or product mix, however, may partially mask any
pricing effects due to tariff changes. Adjustments in input costs for production ultimately will
be reflected in the Producer Price Index (PPI) for the pharmaceutical industry. The PPI
showed a steady increase from 1992-96 (table 3), although increasing at nearly double the rate
in the pre-zero-for-zero period of 1992-94 compared with the PPI for all manufacturing
industries (1.4 percent average annual growth). However, the pharmaceuticals PPI grew more
slowly from 1994-96 than it did from 1992-94 (and nearly the same as the growth in PPI for
all manufacturing from 1994-96), indicating that the pharmaceutical zero-for-zero agreement
may be reflected in the index by the slower PPI growth. Although the average annual change
in the PPI for pharmaceuticals slowed down to approximate recent growth in the PPI for all
manufacturing, it is not certain to what degree the overall trend is an indicator of general
manufacturing activity. Regardless of the reason, the reduction in the growth rate of the
pharmaceuticals PPI, in turn, should have resulted in lowered consumer prices for
pharmaceuticals.

The Consumer Price Index (CPI) for pharmaceuticals, after growing by an average annual rate
of 3.6 percent from 1992-94, increased by only 2.6 percent from 1994-96 (table 3). In
comparison, the CPI for all manufacturing showed an annual increase of 2.8 percent from
1992-94 and only 2.0 percent from 1994-96. Whether the duty savings are actually reflected

8




OCTOBER 1997
Joining Technologies Industry, Trade, and Technology Review

joining technologies described below address two production challenges faced by the
consumers of adhesives; lengthy curing time required to set each bond, and the need to treat
the substrate surfaces before bonding. Although not technically joining technologies,
microwave curing treatment and laser ablation perform functions that address these joining
challenges. Technologies that meet these challenges will offer auto producers a greater choice
of materials.'®

Microwave Curing Treatment

The use of microwave radiation to hasten the curing process of polymer composites joined
by an adhesive bond has proven to be successful.!” Adhesives are conventionally cured with
thermal heat, but the microwave process can create an adhesive bond of equal strength and
performance in much less time.'* Microwave radiation requires one-third to one-quarter of
the time required to cure with thermal heat." Joining by microwave radiation enables greater
flexibility in the manufacturing process since, to a degree, a higher microwave power shortens
the required curing time. Reduced processing time leads to energy and labor savings,” an
effect that not only improves the manufacturing process but also facilitates wider adoption of
composites and other alternative materials. Research and development of microwave curing
is currently sponsored by the U.S. Department of Energy (DOE) at Oak Ridge and Los
Alamos National Laboratories.

Diffusion-Enhanced Adhesion (DEA)

The DEA process was developed at the University of Delaware’s Center for Composite
Materials and was applied to the development of a composite armored tank vehicle capable
of withstanding extreme battlefield conditions. The joining process was used to bond a
composite gun projection platform to the body of the vehicle." As a polymer composite layer
is co-molded to the gun projection platform, a compatible epoxy adhesive is diffused into the
composite layer and a bond is formed. A DEA bond is extremely strong and requires less
equipment than traditional steel welding. DEA also requires low pressure, low temperature,
and minimal assembly, which translates into lower manufacturing costs.” Another potentially

'6 Adhesives have been used in the automotive industry for years as plastics became the
materials of choice for nonload-bearing interior parts, in the 1970s and 1980s. For an analysis of
the adoption of adhesives in the auto industry see “Economics and Innovation Spur Shift,” USITC,
Industry, Trade and Technology Review, Aug. 1994.

"©. David Warren, R. G. Boeman, and F. L. Paulauskas, “Adhesive Bonding of Polymeric
Materials for Automotive Applications,” prepared for the Proceedings of the 1994 Annual
Automotive Technology Development Contractors Coordination Meeting, Dearborn, MI, Oct..24-
27, 1994, n.p.

18 Thomas T. Meek, “Adhesive Bonding via Exposure to Microwave Radiation and Resulting
Mechanical Evaluation,” prepared for the Spring Materials Research Society (MRS) meeting, Apr.
1996.

'9 Warren, Boeman, and Paulauskas, n.p.

20 Estimates of costs savings associated with microwave curing treatment are not available.

; Melissa Larson, “Quality Gets a Boost From Materials Science,” Quality, Nov. 1996, p. 32.

Ibid.

18




OCTOBER 1997
Industry, Trade, and Technology Review Contents

CONTENTS

Page
The Uruguay Round elimination of duties on
pharmaceuticals: Developments in the 2 years
since implementation ...................0....0..-seeeeeeeeeeeeeeeees 1
Trade shifts associated with tariff elimination ...............cceeeeeee eee eens 3
Economic indicators affected by tariff elimination : 7
Findings 2.0.6... cece cece cece cece eee nee n ence e ence eee e nent n eee neers 10
Alternative materials in the U.S. automotive
industry promote development of joining
and bonding technology ..................-..-ccececececteeeteeeees 13
Joining and bonding .......... 0. cece cece cence cece ence eee e eee teseeteee 17
Adhesive bonding ......... 0... c cece eee cence eee neces eer enees o 17
Microwave curing treatment .......... 2... e cece eee cence eee o 18
Diffusion-enhanced adhesion (DEA) ...........0eeeeceeeecees . 18
Laser ablation ...... 00.06. e cece cece cece cece eee eee e en eeees oe 19
Welding .......... cece cece cece cece nen e tenet e en eeeneaes o 19
Laser welding . 20
Advanced welding .......... . o 20
Other bonding and joining technologies .............0.00seeeeeeeee oe 21
Diffusion bonding ........... ccc ccc e cece eee eee eee neeees a 21
Microwave for ceramics ........ 00... c cece cece eee en een e ence an 21
Outlook 22.6... cece cece teen e eee eee nent e teen eee ens e teens 22
Electronic trade transforms delivery of
audiovisual services ...............--.eceeeeeee eee eee ees 25
The internet medium ........ 2.0... ec eee eee e ence eee ete e ener eee e een eneeees 26
The internet market .... 27
Convergence of content-related services and service providers . 29
Issues in electronic trade of content services .. 30
Piracy, security and intellectual property . . . 30
Content regulation on the internet ....... os 31
The United States and Japan ........ . 31
The European Union ............ . 32
Conclusion ...... 0.0. c ccc e cece eee eee eee eet e eee teen eee e teen etneee 35

iii


OCTOBER 1997
Industry, Trade, and Technology Review Electronic Commerce

Convergence of Content-Related Services and
Service Providers

Intemet distribution of information, artistic and otherwise, will speed the convergence of once-
distinct products (e.g., text and video), and display devices (e.g., televisions and computer
monitors). At the same time, Internet distribution will place a premium on the creation of
content. The so-called “content industry” creates entertainment and information products and
services for on-line delivery. It comprises the existing recorded entertainment industries, such
as the audiovisual and music industries, and new services especially created for the Internet.
Many new operations exclusively dedicated to the production of on-line content are emerging
every day. In addition, existing companies in the software, computer, audiovisual,
telecommunications, and cable television industries are undertaking efforts to fully exploit the
possibilities offered by the Intemet. These efforts are two-pronged: securing content
production capability and increasing access to distribution channels.

Recent actions undertaken by Microsoft Corp., a leader in the new information market,
illustrate the developments in the content industry."© The company entered Internet-based
service provision in 1996 by investing aggressively in both content production and Internet
expansion. For example, it teamed with NBC to form MSNBC, a 24-hour cable TV news
channel, with connections to the NBC network and a presence on the Internet. In direct
competition with the print media, Microsoft launched many on-line publications such as
Sidewalk, a travel and entertainment information service focused on U.S. cities, and Slate, a
political magazine. Microsoft also endeavored to increase the accessibility of the Internet.
In 1997, the company spent $1 billion on Comcast, a cable television company, reportedly to
enable high-speed Internet access. Microsoft invested $425 million to acquire WebTV
Networks, a maker of Internet adapters for television, to hasten the provision of Internet
services through television monitors.’”

Other U.S. cable television and direct-to-home satellite service firms also are preparing to
distribute Internet content over their networks. The cable television industry expects to
broadcast video programs using Intemet technology in less than 2 years.!* DirectPC, a
satellite system developed by Hughes Network Systems, reportedly has the capacity to deliver
Internet signals 15 times faster than standard modems.!°

16 Steve Lohr, “Microsoft Looks Beyond Computer Nerds,” The New York Times,
June 10, 1997, found at http:/Avww.nytimes.com, retrieved Sept. 24, 1997.

1” Louise Kehoe, “Microsoft up 89% but sees slower growth,” Financial Times Limited,
July 18, 1997, found at NewsEdge/Web, retrieved July, 18, 1997.

18 USITC staff interview, cable television industry representative, Washington, DC,
July 10, 1997.

1° David Elrich, “For Futuristic Home Gadgets, the Future Now Has a Due Date,” The New
York Times, Jan. 23, 1997, found at http://www.nytimes.com, retrieved Aug. 18, 1997.

29


OCTOBER 1997
Industry, Trade, and Technology Review Joining Technologies

Since a 25-percent decrease in vehicle weight could save 13 percent in gasoline consumption
and reduce carbon dioxide emissions by 101 million tons per year,* manufacturers are
experimenting with further weight reductions by using alternative materials for auto parts
made of steel and other traditional metals. Alternative material candidates include polymer
composites reinforced with glass (25-35 percent of the weight of steel), carbon fiber-
reinforced polymer composites (50-65 percent of the weight of steel), and aluminum (one-half
of the weight of steel)? Although CAFE standards have not changed in recent years, auto
manufacturers are developing process technology for automobile production with lightweight
materials."° Manufacturers are more likely to produce a vehicle with improved fuel economy
once such technology becomes widely available. A higher CAFE standard would push the
development of this process technology and lead manufacturers to increase their use of
lightweight materials.

The adoption of alternative materials can also reduce manufacturing costs. Material
properties (such as the temperature at which a material becomes malleable) are key
determinants of the processing and assembly methods, which directly effect productivity rate
and cost. For example, molded polymer composite auto parts cost less to manufacture than
stamped steel parts because complex shapes can be formed in one large mold. The process
requires less joining, bonding, and machining. Manufacturing costs are further reduced
because less labor is required to complete the process. The material switch may also affect
the speed of production because less time is needed to assemble consolidated parts.

Automakers are investing in research of joining and bonding technologies for alternative
materials. The lack of fully developed joining technologies is considered a barrier to the
utilization of advanced lightweight materials to form automotive structures.'' Traditional
means of joining steel parts--welding, brazing, and soldering—do not effectively bond polymer
composites, and adjustments to welding and brazing must be made to successfully join
aluminum. Mechanical fasteners continue to be a viable joining option, but they are typically
used in conjunction with another method. For example, adhesively joined polymer
composites may be mechanically fastened (either permanently or temporarily while the
adhesive bond sets). The ideal joining methods would have the capacity to bond both similar
and dissimilar materials, such as aluminum to steel, or polymer composite to aluminum. One
well-known consortium conducting research on joining and bonding polymeric composites
and aluminum auto parts is the Partnership for a New Generation of Vehicles (PNGV),
highlighted in the text box.

* “Transportation Technologies,” found at http:/www.oml.gov/ornl/energy_Efficiency/
trans.html#ctp, retrieved Aug. 13, 1997.

° National Materials Advisory Board, Materials Research Agenda for the Automotive and
Aircraft Industries, NMAB-468 (Washington, DC: National Academy Press, 1993), p. 34.

' Toni Marechaux, U.S. Department of Energy, Office of Transportation Technologies, USITC
staff interview, June 1997.

"| “Adhesive Bonding Technologies for Automotive Structural Components,” found at
http://www.ornl.gov/ orcmt/capabilities/dtin384.html, retrieved June 16, 1997.

15


OCTOBER 1997
Industry, Trade, and Technology Review Joining Technologies

Other Bonding and Joining Technologies
Diffusion Bonding

This process was originally developed by an aircraft manufacturer and an aluminum producer.
Diffusion bonding is a combination of two distinct processes; first, complex shapes are
formed from a single piece of material, and second, materials are joined by diffusion.” The
process relies on superplasticity, a property in which a material can become extremely
elongated without breaking. For example, aluminum alloy can be treated to take on a
superplastic property that facilitates the formation of complex auto parts. The number of parts
to join is reduced; for example, Big Three collaborative work on a composite pickup truck
bed of 20 pieces could replace a steel bed of 200 parts.** After the parts are formed, the
metals are bonded by keeping the base-metal microstructure intact at the joint interface. The
method works for dissimilar metals. Researchers claim that the combination of superplastic
forming and diffusion bonding combines the benefits of each to form a joint of superior
strength.** The method leads to greaterfreedom of design, a potential for energy-savings, and
cost-effective manufacturing. However, the process takes time, which is a major drawback
for its application in the auto industry. Research on diffusion bonding is underway at the
Lawrence Livermore National Laboratory and is sponsored by the DOE.”” The technology
is not yet commercialized.

Microwave for Ceramics

Ceramic is an alternative material for some automobile engine components. Ceramics are
lightweight and have the capacity to withstand very high temperatures; two qualities that can
help auto manufacturers reduce fuel consumption. Ceramic engine parts such as piston heads
and rotors allow the engine to run without a cooling system and with less fuel. Although
ceramic engine parts facilitate fuel efficiency, reliable joining methods are needed.
Microwave energy is one alternative to bonding ceramics by thermal heat, which requires
extremely high temperatures to work successfully.

Ceramics can be joined to composite materials by applying a microwave heating process. As
a joining technology, the microwave process forms an interlayer of active braze alloy and
successfully creates a bond between the ceramic engine parts and composite base material.”
The heating characteristics of ceramics are favorable to the creation of a high-strength bond;
the bond is formed from the inside out (the middle is heated from center and outward). The

* Diffusion is a joining process whereby two flat surfaces are heat treated, causing the
molecules to intermingle and bond.

+5 C, David Warren, program manager, Transportation Composite Materials Research, Oakridge
National Laboratory, Oakridge TN, and advisor to the Automotive Composites Consortium,
USITC staff interview, Sept. 1997.

6 Larson, “Quality,” Quality, p. 30.

37 Ibid.

38 Ahmad Iftikhar, et. al. “Microwave Joining of SiC Ceramics and Composites,” proceedings
of the First World Congress on Microwave Processing, Orlando, FL, Jan. 5-9, 1997.

»* Tid.

21


OCTOBER 1997
Industry, Trade, and Technology Review Joining Technologies

Joining and Bonding

A portion of the research and development (R&D) on the future generation of vehicles is
focused on surmounting the difficulties associated with bonding polymer composites,
aluminum, and steel. More specifically, R&D is underway on less costly and quicker
assembly and processing methods (relative to traditional materials) for joining alternative
materials.” Research in this area is critical to support the application of alternative materials
in the automotive industry." The joining technologies described below show promise in
facilitating the manufacture and adoption of structural auto parts composed of polymer
composites and aluminum.

Although research on new joining technologies is underway, these methods are not yet
commercialized. The ability to predict the behavior of a joint is stalled to a large extent by
the lack of reliable nondestructive testing methods. Once reliable testing methods are
developed and the technology produces satisfactory results, one less obstacle will exist for
auto manufacturers who want to make composite and aluminum auto parts. The degree to
which the joining and bonding methods described below are adopted can become known only
as the auto industry gains greater experience with their application.

Adhesive Bonding

Adhesive bonding is the primary method for joining polymer composites, although metals
will also bond with adhesives. The auto industry consumption of adhesives already has been
increasing. Plastic has become the dominant material for interior auto parts. The change in
bonding technology lowered production costs as the manufacturing process was streamlined
and required fewer mechanical fasteners.’ Adhesive bonds are stronger due to the wider
distribution of load at the joint, unlike mechanical fasteners that are stressed at a single point.
Auto manufacturers have greater design flexibility with adhesive bonds that have a smooth
joint surface. No universal adhesive exists; an adhesive formula is chosen based on the
properties of the substrate, the function of the joint, and the environmental conditions that the
joint must endure. Three of the most common adhesives used to bond composites are
epoxies, acrylics, and urethane.’

Aside from determining the best adhesive formula for a composite, a producer must have
effective assembly and processing technologies to implement the bonding methods. The

1 Research goals for the development of assembly and processing technologies such as joining
and bonding are outlined in Partnership for a New Generation of Vehicles, Report of Workshop on
Composite Vehicle Structures, Sept. 28, 1995, Detroit, MI.

© The joining techniques described in this report are intended to bond load-bearing structural
auto parts made of aluminum or polymer composites. Joining techniques for load-bearing parts
require greater strength than techniques for joining interior nonload-bearing auto parts, such as
dashboards.

“ USITC, “Economics and Innovation Spur Shift from Mechanical Fasteners to Adhesives and
Sealants in Certain Automotive Applications,” Industry, Trade and Technology Review, Aug.
1994,

15 “Joining Composites,” Machine Design, Sept. 14, 1995, p. 81.

17


OCTOBER 1997
Electronic Commerce Industry, Trade, and Technology Review

Internet-related alliances between information technology and content provider firms are also

taking place in Europe. Media and content service providers accounted for 13 percent of
European merger deals in 1996, a 61-percent increase over the previous year.”°

Issues in Electronic Trade of Content Services

To secure the benefits of Internet distribution, the international community must address
problems related to piracy, transmission security, and intellectual property protection of
content, which threaten to impede the growth of Internet-based trade. In addition, countries’
policies pertaining to the Internet or to broadcasting may also constitute barriers to trade in
content.

Piracy, Security and Intellectual Property

In 1996, U.S. audiovisual and sound recording companies lost an estimated $2.2 billion and
$1 billion in worldwide revenue, respectively, due to piracy of copyrighted material” U.S.
industries’ total losses due to piracy are estimated at $15 billion.” The entertainment sector
is particularly vulnerable to piracy because digital technology permits successive reproduction
of music and video products without any perceptible loss of quality. Counterfeits made from
broadcasts and retail copies are indistinguishable from the original products. Consequently,
the provision of a secure digital environment worldwide, protected against unauthorized access
to and copying of proprietary services, is vital to the content industry. Therefore, the motion
picture and sound-recording industries in the United States support the development of a
voluntary, private licensing system that will incorporate an encrypted code embedded in
authorized products.* The code will be used to identify authentic products and aid the
enforcement of laws protecting intellectual property.

The protection of intellectual property also requires the adoption of copyright and antipiracy
laws. To this end, the U.S. audiovisual industries endorse international treaties under the
auspices of the World Intellectual Property Organization (WIPO). WIPO’s Copyright Treaty
updates existing copyright treaties to include digital technology, while the Performances and
Phonograms Treaty extends to the recording industry the copyright protection standards
enjoyed by other industries, such as publishing.“ Both treaties raise the minimum

° Douglas Haywire, “Overseas Mergers Soaring Study Says,” Techwire, July 30, 1997, found
at http:/Aechweb4.web.cerf.net, retrieved July 30, 1997.

2! Motion Picture Association of America, “Congress should ratify the new World Intellectual
Property Organization (WIPO) copyright treaties without concurrently considering the issue of
OSP (online service provider) liability,” press release, fax June 24, 1997; and Recording
Association of America, press release, found at http://www.riaa.com, retrieved Aug. 4, 1997.

2 Motion Picture Association of America, Trade Barriers to Exports of U.S. Filmed
Entertainment, Washington, DC, Nov. 1996, p. iii.

> Ibid.

* Ibid.

30


OCTOBER 1997
Pharmaceuticals Industry, Trade, and Technology Review

valued products such as pharmaceuticals, the savings benefit would not be expected to be
immediately realized by the average consumer.

It is equally likely that the savings resulting from the elimination of the average U.S. rate of
duty of 4.23 percent ad valorem had no significant effect on the PPI and the CPI, other than
possibly contributing to some slowing in the growth rate (table 3). It appears from PPI and
CPI data that pharmaceutical prices increased in 1995 and 1996, and they did so at a faster
rate compared to other products. Employment growth for production workers since 1994 may
have been slightly affected by the elimination of duties, although industry rationalization is
likely responsible for the addition of 5,700 production jobs to the U.S. workforce in 1995 and
a loss of 3,700 production jobs in 1996.

Changes in other areas of the pharmaceutical industry include some fluctuation in the growth
rate of R&D expenditures in 1995 and 1996, compared with that in prior years (table 5).
Profitability among the larger pharmaceutical companies (e.g., Merck, Bristol-Myers Squibb)
appears to have changed little between 1994 when duties were present and 1995, the first year
of duty-free treatment; most companies have sustained double-digit growth in sales and
earnings in year-to-year comparisons, 1994-95 (table 6).

No single measure of industry performance, other than increased imports, is likely to be
attributable to the elimination of tariffs on pharmaceutical products; even trade shifts are
difficult to isolate, given the short time during which the zero-for-zero agreement has been
in effect and other factors including trade-related agreements such as NAFTA, exchange rate
fluctuations, and the dynamic changes in production of pharmaceuticals. However, additions
to the zero-for-zero roster may provide a clearer picture in the future.TM

12


OCTOBER 1997
Pharmaceuticals Industry, Trade, and Technology Review

Table 1
U.S. Imports and exports of pharmaceutical products covered by the reciprocal duty eliminations, by
Harmonized Tariff Schedule (HTS) product group, 1992-1996

Average Average

annual annual
change, change,
HTS product group 1992 4993 1994 1995 1996 1992-94 1994-96
1,000 dollars Percent
Imports:
Bulk active ingredients:
2936-Vitamins . . 343,692 426,414 505,358 558,548 627,081 21 11
2937-Hormones 94,832 101,979 134,296 177,075 271,258 19 42
2939-Alkaloids . 173,480 174,883 184,155 198,497 481,323 3 62
2941-Antibiotics 454,310 512,477 582,795 753,051 828,647 13 19
30-Pharmaceutical
products (finished
dosage) .......-.--- 2,809,729 3,008,529 3,360,113 3,905,410 4,920,476 9 21
Subtotal .........- 3,876,043 4,224,282 4,766,717 5,592,581 7,128,785 1 22
“Other bulk 'K’
pharmaceuticals” and
chemical intermediates
covered in the Appendix
ofthe HTS" ......... i) ® @) 3,896,865 5,267,651 i) 335,
Total, selected groups. 3,876,043 4,224,282 4,766,717 “5,592,581 “7,128,785 "1 22
Exports:
Bulk active ingredients:
2936-Vitamins . 123,398 135,163 187,359 318,316 318,746 23 30
2937-Hormones . 360,354 427,953 376,131 374,860 321,794 2 38
2939-Alkaloids . 16,440 22,504 22,949 19,860 25,589 18 6
2941-Antibiotics 1,438,776 1,094,139 1,008,831 1,052,465 1,013,405 16 0
30-Pharmaceutical
products (finished
dosage) ............ 3,616,579 4,012,946 4,487,107 4,637,276 5,457,389 11 10
Subtotal ......... 5,555,547 5,692,705 6,082,377 6,402,777 7,136,923 5 8
“Other bulk 'K’
pharmaceuticals” and
chemical intermediates
covered in the Appendix
of the HTS'......... (om () io) ® io) o) oe)
Total, selected groups. 5,555,547 5,692,705 6,082,377 6,402,777 7,136,923 5 8

1 Includes imported bulk products covered by the pharmaceuticals appendix that are classified in chapter 29 and
in other chapters, and which enter under an HTS subheading that has a letter “K” in the special rate of duty column
of the HTS. The categories of pharmaceuticals included are ethical, or prescription drugs, and over-the-counter
(OTC) preparations. OTC preparations include many widely available cough, cold, and pain remedies, while
prescription drugs are those dispensed at the direction of a licensed health care official.

? Not available.

3 A measure of the change in import trade since implementation of the reciprocal duty elimination is shown by the
annual change from 1995-96.

4 For purposes of comparison, total does not include 1995 or 1996 imports of the group “Other bulk 'K’
pharmaceuticals” and pharmaceutical chemical intermediates covered in the Appendix of the HTS" shown above.

Source: Official statistics of the U.S. Department of Commerce.


OCTOBER 1997
Industry, Trade, and Technology Review Electronic Commerce

Table 2

Network capacity for multimedia applications

Connection tine Bandwidth oe ‘Application
POTS - Standard analog 28.8 kbps Audio (mono quality)
telecommunication lines
ISDN (Integrated Services Digital 144 kbps - 1544 kbps Audio (stereo to CD quality)
Network) Video (low to high quality)
T-1 - digital transmission links 1544 kbps Audio (CD quality)

Video
ATM - Asynchronous Transfer Mode up to 622,000 kbps Audio (CD quality)

Video (broadcast quality)

Virtual reality applications

Source: Dave Krupinski, “Computer Telephony and the Internet: A Stylus White Paper,” Artisoft Inc., found at

http:/Awww. stylus.

com/hvim.htm, retrieved Aug. 18, 1997.

Low barriers to entry for on-line service providers and low access and usage costs for
consumers also encourage rapid market growth. An individual equipped with a computer and
a telephone line can initiate transmissions at any point on the Intemet. After an initial
investment in a computer, telephone connection, and access to an Intemet service provider,
the cost to the consumer is also low. According to industry representatives, the low capacity
of existing telecommunication networks currently poses the main obstacle to the transmission
of video programming over the Intemet.° Audio and video transmissions require higher
bandwidth, or transmission capacity, than the 28.8 kilobits-per-second (kbps) capacity of
standard analog telecommunication lines. Thus, widespread commercial transmission of
multimedia works depends on the upgrade of telecommunication infrastructures to higher
bandwidth, such as integrated services digital networks (ISDN) and T-1 digital transmission
links, and implementation of new technologies such as asynchronous transfer mode (ATM)
transmission (table 2).

The Internet Market

Perhaps the most striking characteristic of the Intemet is its rapid rate of growth, and potential
to become widely available on a global basis in a short time. The number of users is estimated.
to have doubled every year in the past 5 years, and is projected to continue increasing by
more than 50 percent per year until the end of the decade.° Although a precise assessment is
difficult, estimates of the number of Internet users in 1997 range between 46 and 57 million
people in 194 countries,’ and could reach 157 million in the year 2000.* More than 3,000 new

5 USITC staff interview, cable television industry representative, Washington, DC, July 10,
1997.
¢ Mary Meeker and Chris DePuy, The Internet Report (Morgan Stanley, 1996), pp. 2-3, 3-2.
7Tbid.; and Rodger Doyle, “Access to the Internet,” Scientific American, July 1997, ,
http://www.sciam.com, retrieved July 24, 1997.
8 Mary Meeker and Chris DePuy, The Internet Retailing Report, May 28, 1997 (Morgan
(continued...)

27


OCTOBER 1997
Joining Technologies Industry, Trade, and Technology Review

new joining and bonding technologies allow for the wider use of lightweight materials in the
manufacture of automobiles. Although not central to a material choice, without effective
joining and bonding methods, material choice is limited. The benefit accrued to auto
manufacturers who adopt new joining and bonding methods is not cost-related at this point,
since reinforced composites and aluminum are currently more expensive than steel. However,
according to one source, there is a measurable environmental benefit associated with the
adoption of lightweight materials. By comparing the material content of a 1996 typical vehicle
referred to in table 1 with a passenger vehicle made largely of composites, the latter would
generate 400 to 500 pounds of scrap after a 15-year life span and would produce 3,000 to
4,000 pounds less of particulate matter, a source of air pollution. According to this source,
buried composite scrap is stable and less harmful to humans and the environment than the
particulate matter released by an average vehicle not reduced in weight.*!

Many technologies profiled in this report are not yet commercialized. It is widely agreed
among auto industry officials, however, that the next generation of vehicles will be made
largely of aluminum and a subsequent generation will be made of polymer composites. As
this material shift occurs, demand for reliable joining technologies that are adaptable to large
scale auto production will increase. Continued research and development therefore, appears
ensured for joining and other enabling technologies that support alternative materials in the
automobile industry.#

5! Warren, USITC staff interview, Sept. 1997.

24


OCTOBER 1997
Industry, Trade, and Technology Review Pharmaceuticals

The Uruguay Round Elimination of Duties
on Pharmaceuticals: Developments in the

2 Years Since Implementation

David Michels/Elizabeth Nesbitt

(202) 205-3352

dmichels@usitc.gov

The United States and most of its major trading partners agreed to eliminate
duties on substantially all pharmaceuticals and on certain chemicals and
semifinished goods during the Uruguay Round of multilateral trade
negotiations. Duties were eliminated on January 1, 1995, when the
Uruguay Round Agreements (URA) entered into force. Since the date of
implementation, world trade in the covered products has continued to
expand at a rate relative to the rate of expansion in the years just prior to
implementation. The elimination of duties on pharmaceuticals is expected
to encourage further consolidation among world producers and expansion
of trade, and to sharpen world competition, particularly in generic
pharmaceutical products. This article examines the trends in the U.S.
pharmaceutical industry and pharmaceutical trade during 1995-96 as
compared with 1993-94 before the elimination of duties went into effect.

During the Uruguay Round, the United States sought the reciprocal elimination of duties
(“zero-for-zero”) among major trading countries in a wide range of sectors of key interest to
US. firms. The U.S. zero-for-zero initiative was achieved in only some sectors, and one of
those was the pharmaceuticals sector. Under the URA, the United States and 16 other
countries' agreed to eliminate their most-favored-nation duties on about 7,000
pharmaceuticals and chemical intermediates used primarily for the production of
pharmaceuticals. These countries also agreed to conduct a review at least once every 3 years
to identify products to be added to the list of covered products.? The pharmaceutical and
intermediate products initially covered by the elimination of duties are highlighted in the text
box.

' The EU-12, Switzerland, Norway, Japan, and Canada.

? Negotiators from several World Trade Organization (WTO) members, including the United
States, engaged in the first review in early 1996 and reached agreement on the addition of 496
pharmaceutical products and chemical intermediates used for producing pharmaceuticals. Of these
products, 262 are pharmaceutical products with International Nonproprietary Names (INNs) and
234 are chemical intermediates. Duties on these additional products and their derivatives were
eliminated as of April 1, 1997.


OCTOBER 1997
Contents Industry, Trade, and Technology Review

CONTENTS--Continued

Page
Appendix A: Key performance indicators of selected
industries .............--.ccc.-eeeeeeee ce eeee cette eet tees eee: 37
Steel:
Figure A-1 Steel industry: Profitability by strategic group, producer price
index for steel products ......... 0... c cece cece eee e eee nett eeeees 38
Table A-1 Steel mill products, all grades 38
Table A-2 Steel service centers ............eseeeeeeeees see 39
Figure A-2 Steel mill products, all grades: Selected industry conditions ......... 39
Automobiles:
Figure A-3 U.S. sales of new passenger automobiles, by quarter ............+++ 40
Table A-3 U.S. sales of new automobiles, domestic and imported,
and share of U.S. market accounted for by sales of total imports
and Japanese imports, by specified periods, Jan. 1996-June 1997 ............- 40
Aluminum:
Figure A-4 Aluminum: Selected U.S. industry conditions . . 41
Figure A-5 Aluminum: Price and inventory levels 41
Flat glass:
Figure A-6 Average monthly Japanese imports of flat glass, by quantity,
from the United States and all other countries, 1994-97 ........ 00... e cee eeee 42
Services:
Figure A-7 Balances on U.S. service trade accounts, second quarter 1996
through first quarter 1997 0.0... 0 cece c eee cece cette e tence ete n ences 43
Figure A-8 Surpluses on cross-border U.S. service transactions
with selected trading partners, by quarter, 1995-97 .... 43



OCTOBER 1997
Industry, Trade, and Technology Review Joining Technologies

Alternative Materials in the U.S. Automotive
Industry Promote Development of Joining

and Bonding Technology

Susan H. Lusi
(202) 205-2334
slusi@usitc.gov

The development and commercialization of processing technology is
considered an important factor in improving industrial competitiveness.
This article is the fifth in a series presenting ongoing USITC Office of
Industries research on new manufacturing processes for materials (NMPM).
NMPM are viewed as potentially cost-effective in ensuring greater
productivity and efficiency.

Joining and bonding technologies have changed as industrial applications
Jor nontraditional materials have expanded. For example, the auto industry
has increased its consumption of lightweight materials over the past 20
years as fuel efficiency standards increased and as auto makers responded
by producing lighter cars. As the polymer composite and aluminum content
of automobiles increased, so did the need for specialized joining
technologies. This article examines several joining technologies currently
under development that may offer auto makers a competitive advantage as
alternative materials make inroads into the auto industry.

The U.S. automobile industry, the world’s single largest car and truck producer, accounted
for approximately 21 percent of global production in 1996.' During that same year, the Big
Three U.S. auto producers captured 35 percent of worldwide sales,” largely because of their
effective response to market and regulatory demands. Consumer expectations of higher
quality, increasingly stringent environmental standards, and heightened safety awareness
have raised the intensity level of competition in the market. U.S. producers have responded
by reducing costs and improving productivity (often through changes in manufacturing
processes).*

Auto producers employ many strategies to maintain their competitive position. One strategy
designed to meet environmental regulations is the substitution of lightweight materials for

' Automotive News, 1997 Market Data Book, May 23, 1997, various pages.

? Derived from sales figures in Ward's Automotive Yearbook, 1997, p. 126; and Automotive
News, p. 24.

U.S. Department of Commerce, Motor Vehicle Division, “Drivers of the U.S. Automotive
Industry,” prepared by Albert T. Warner, director, Motor Vehicle Division, Feb. 27, 1996, found
at http://www.ita.doc.gov/ industry/basic/hondsp.html, retrieved July 8, 1997.

13


OCTOBER 1997
Industry, Trade, and Technology Review Pharmaceuticals

in other chapters,‘ that are provided for in the pharmaceuticals appendix and which enter
under a subheading which has a letter “K” in the special rate of duty subcolumn of the
Harmonized Tariff Schedule of the United States (HTS) are eligible for duty-free entry.

A summary of recent trade in the products covered by the initial agreement is provided in
table 1. Along with other tables presented in this article, table 1 compares developments in
the pharmaceutical industry in the pre-zero-for-zero period (from 1992-94) and the post-zero-
for-zero period (from 1994-96).

Trade Shifts Associated with Tariff Elimination

The tariff eliminations that became effective January 1, 1995, pursuant to the “zero-for-zero”
agreement amounted to a removal of the average 4.23 percent ad valorem U.S. duty rate for
pharmaceutical products compared with the elimination of the somewhat higher average duty
rates previously levied by the EU and Japan (figure 1).' The major export markets for

Figure 1
Average pre-URA duty rates for pharmaceutical products eliminated under the zero-for-zero
agreement

5.89% 4.73% 4.23%

European
Union

Source: U.S. Department of Commerce, International Trade Administration.

‘In addition to chapter 29 of the HTS, bulk INN products are classified in chapters 28, 31, 32,
34, 35, 38, and 39.

5 U.S. Department of Commerce , International Trade Administration, Uruguay Round
Opportunities: Pharmaceuticals, Sept. 22, 1995.

3


OCTOBER 1997
Industry, Trade, and Technology Review Joining Technologies

cost-reducing aspect of DEA is the elimination of the need to pretreat the composite surface.”
One difficulty associated with DEA is the length of time required to make the bond. The auto
industry is not likely to adopt a technology that slows production. The U.S. Department of
Defense funded the project, and reportedly there are no commercialized applications of DEA
in the auto industry.

Laser Ablation

Contaminants on a material surface often inhibit the chemical bond of an adhesive so most
composite surfaces must be treated prior to bonding. Laser ablation is a surface treatment that
removes the contaminants on the composite surface and also some of the resin. This creates
arough surface area as the fibers (carbon or graphite) characteristic of all reinforced polymer
composites are exposed. The resin surrounding the exposed fibers interface with the
adhesive, creating a joint that is resistant to cracks. The strength of the bond is attributable
to the large surface area contact created as the fibers of one part extend across the joint and
intermingle with the fibers of the other part. The production rate of structural auto parts
treated with laser ablation would likely increase because of the time savings incurred by the
elimination of surface treatment.” Glass-fibers of reinforced composites are inclined to split
from the intensity of the laser beam, producing a weak bond. The technique appears to work
better on composites reinforced with carbon-fiber rather than glass-fiber.* There is no
commercialized technology of this type in the automobile industry, but extensive research
sponsored by DOE is conducted at Oak Ridge National Laboratory.”*

Welding

Welding is one of the low-cost methods for joining aluminum. Auto manufacturers have
welded steel auto parts together for decades, but welding aluminum does require some
process modifications. As the aluminum content in automobiles has increased, alternative
welding techniques have become more important in the industry. Current research focuses
on the development of modified welding methods, process monitoring, and noninvasive
testing of welded joints.”” Welding techniques that enhance productivity and maintain or
improve product quality could lead to greater consumption of aluminum by auto producers;
two techniques, laser and advanced welding, are undergoing further development.

2 Estimates of costs savings associated with DEA are not available.

2 Estimates of costs savings associated with laser ablation are not available.

5 C, David Warren, Felix L. Paulauskas, Ray G. Boeman, “Laser Ablation Assisted Adhesive
Bonding of Automotive Structural Composites,” project completion report, Oak Ridge National
Laboratory, Feb. 4, 1997.

6 Toid.

27 “1 ight-weight Materials, III. Findings and Recommendations,” found at
http://www.pmi.princeton.edu /conference /future vehicles/lightweight.html, retrieved June 12,
1997; and “Research aims at better laser welding for aluminum auto parts,” press release, May
1996, found at http://www.anl.gov/opa/news96/news960509.html, retrieved Aug. 10, 1997.

19


October 1997

INDUSTRY
TRADE AND
TECHNOLOGY

Re Vilevy

OFFICE OF INDUSTRIES


OCTOBER 1997
Key Performance Indicators Industry, Trade, and Technology Review

FLAT GLASS
Figure A-6
Average monthly Japanese imports of flat glass, by quantity, from the United States and all other
countries, 1994-97

Mution
Sotere

ree — 20
——=— United States (left scale) (v1)
«ray
2000 (right seate (v2)

1600

1000

500

ot T Oo
1994 1995 1996 1907"

‘January-July.

Source: Compiled from official statistics of the Ministry of Trade and Industry, Japan.

© In 1995, the United States and Japan reached agreement! on Japanese market access for imports of flat glass.’ The
agreement continues until the end of 1999 and seeks to increase access through such means as increased adoption
of nondiscriminatory technical and performance standards for construction competition, and expanded promotion
of safety and insulating glass. One goal of the agreement is to increase sales of foreign flat glass in Japan, although
the agreement specifies no numerical targets.’

© The average monthly quantity of Japanese imports of flat glass from all countries increased by 79 percent in the
first year of the agreement, before declining 9 percent from 1995-96. However, these imports posted a gain of 25
percent for the first seven months of 1997, reaching an average 1.9 million square meters ($17 million); during this
same period, average monthly U.S. imports of flat glass from all countries (not shown) averaged 2.6 million square
meters ($14 million). Average monthly Japanese imports from the United States grew steadily during 1995-97,
more than tripling in volume to 700,000 square meters ($10.9 million).

At the second annual review of the U.S.-Japan Glass Agreement in Washington on May 14, 1997, the United
States rated the results over the past year as “poor,” citing little progress in opening Japan’s highly controlled
glass distribution system, despite improved efforts by U.S. glass firms. As a result, the USTR warmed that the
United States was considering seeking another Japan Fair Trade Commission (JFTC) investigation’ or citing this
issue in USTR’s super 301 report. In July 1997, twenty-six members of the United States Senate and fifty-three
members of the House of Representatives requested the President to urge Japan to significantly improve its
performance during the remainder of the five-year agreement.

The USTR subsequently included this issue in its 301 report, issued on October 1, 1997,° citing the low volume of
foreign glass in the Japanese distribution system, the lack of growth in overall use of insulated glass, and a decline
in the use of safety glass. The USTR indicated that it will pursue U.S. concerns during consultations with the
Japanese in late October.

| "Measures by the Government of Japan and the Government of the United States of America Regarding Flat
Glass.” U.S. Trade Representative (USTR), facsimile of agreement, received Feb. 2, 1995.

? Flat glass is largely unworked; it may be surface ground or polished and have an absorbent, reflecting or non-
reflecting coating, but it has not been tempered, laminated, bent, edge-worked, engraved, drilled, enameled, or
otherwise worked. Safety glass (tempered or laminated) and insulating glass are also covered under the U.S.-
Japanese agreement on flat glass.

3U.S. producers have participated in the global trend to establish production facilities (primarily joint ventures) in
Asia; Guardian Industries Corp. has invested in plants in India and Thailand, and PPG Industries, Inc., has invested
in plants in China. Such facilities give firms the option of servicing the Japanese market from relatively nearby
countries.

4 U.S. Department of State (USDOS) telegram, “Glass: Second Annual Review of the Agreement,” message
reference no. 005113, prepared by U.S. embassy, Tokyo, June 12, 1997.

5 Previous reviews of the glass industry by the JFTC have not revealed antitrust behavior. USDOS telegram,
“Glass: Second Annual Review of the Agreement.”

6 USTR, “Identification of Trade Expansion Priorities Pursuant to Executive Order 12901,” found at Internet
address http://www.ustr.gov/reports/1290 lreport97.pdf, retrieved Oct., 10, 1997.

.

42


OCTOBER 1997
Pharmaceuticals Industry, Trade, and Technology Review

Table 2

“Dutiable” imports, duty rate, and calculated duty savings, by Harmonized Tariff Schedule (HTS)
product groups, 1995 and 1996 (projected)

1995 1996
1995 calculated estimated
“dutiable” 1996 Estimated duty duty
HTS product group imports’ imports duty rate” savings’ savings*
— 1,000 dollars — Percent — 1,000 dollars——
Bulk active ingredients:
2936 - Vitamins and provitamins .... 548,260 627,081 45 24,672 28,219
2937 - Hormones . 168,938 271,258 3.9 6,589 10,579
2939 - Alkaloids . 169,200 481,323 48 8,122 23,104
2941 - Antibiotics .... wee 684,305 828,647 48 32,847 39,775
30 - Pharmaceutical products (finished
dosage) ...... 2... eee e eee eee eee 2,933,635 4,920,476 44 129,080 216,501
Subtotal, bulk actives and dosage
form pharmaceuticals ........ 4,504,338 7,128,785 ¢) 201,310 318,178
“Other bulk 'K' pharmaceuticals” and
chemical intermediates covered in the
Appendix of the HTS . . 3,896,865 5,267,651 6.4 249,399 337,130
Total, all groups ..... wee 8,401,203 12,396,436 (eo) 450,709 655,308

1 The “dutiable” value of 1995 imports represents that portion of 1995 imports that would have been dutiable
in the absence of the URA duty-free provisions.

2 Estimated by the staff of the U.S. International Trade Commission based on 1994 ad valorem equivalent
rates of duty. .

? Calculated by multiplying estimated duty rate by 1995 “dutiable” imports except for the subtotal and total.

Calculated by multiplying estimated duty rate by 1996 imports except for the subtotal and total.

5 Not applicable.

Source: U.S. Department of Commerce and estimates by the staff of the U.S. International Trade Commission.

(the “K” imports covered by the pharmaceuticals appendix) amounted to an estimated $249
million in 1995, based on 1994 AVE rates of duty. The total revenue impact is a duty savings
estimated at $451 million for 1995 on imports of $8.4 billion. Applying the same 1994 rates
to 1996 imports would amount to a duty savings of approximately $655 million for 1996 on
imports of $12.4 billion. However, factors such as rate staging from other agreements tend
to increase the uncertainty of this 1996 estimate of duty savings.

Nevertheless, the duty savings are likely to have affected the level of imports of various
pharmaceutical products. According to economic theory, the elimination of tariffs on bulk
active ingredients and finished dosage form pharmaceutical products would be expected to
result in increases in U.S. imports of these products and, possibly, decreases in domestic
production, employment, and earnings, as well as reduced sales and profitability for certain
companies." Conversely, if imports of chemical intermediates increase as a result of the

1° For companies using offshore facilities to produce patent-protected products, the local tax
structure, labor and other input costs would be significantly different from those of producers
entirely within the United States; thus, the overall impact of changes in imports on companies with
(continued...)


OCTOBER 1997
Industry, Trade, and Technology Review Pharmaceuticals

USS. pharmaceuticals are Japan and the EU. Since the United States had the lowest average
tariff rate on pharmaceuticals among its major trading partners prior to implementation of the
URA, the average U.S. reduction in rates was the smallest. U.S. exporters, therefore, should
potentially receive the largest benefit from the duty elimination.

Although certain categories of U.S. exports have shown significant gains (table 1), the
greatest impact of the duty eliminations on the U.S. industry in 1995 and 1996 appears to be
the increase in all categories of U.S. imports. Imports of pharmaceuticals classified in HS
headings 2936, 2937, 2939, 2941 and chapter 30 increased by $2.4 billion from 1994-96,
compared with an increase of $890 million from 1992-94. Imports of antibiotics, the largest
category of bulk active ingredients by trade value, increased by an average annual 13 percent
from $454 million in 1992 to $583 million in 1994, and then by 19 percent to $829 million
from 1994-96. Other products covered by chapter 30 increased by an average annual
9 percent from 1992 levels to a total of $3.4 billion in 1994, and then by 21 percent to $4.9
billion from 1994-96. The bulk “K” pharmaceuticals, including chemical intermediates,
amounted to nearly $3.9 billion in 1995, and increased by 35 percent to $5.3 billion in 1996.
Members of the EU and other WTO signatories that agreed to eliminate duties dominate the
mix of these “K” pharmaceutical import sources. Industry sources indicate that company
mergers and large-scale foreign plants principally have resulted in the more economical
production of bulk active ingredients overseas whereas finishing and formulation typically
occurs in the United States.

It is likely that the elimination of duties in key U.S. export markets contributed to increased
exports by U.S. firms to those markets. Although total exports of pharmaceuticals ’ grew
overall by an average annual 5 percent in the pre-zero-for-zero period (1992-94) and by 8
percent in the post-zero-for-zero period (1994-96), year-to-year growth in exports was the
largest in 1995-96 (11 percent)’ The export category with the largest absolute gain and
average annual growth (30 percent) from 1994-96 was vitamins and provitamins (HS heading
2936).

The duty savings on imports for the industry, calculated for finished dosage form
pharmaceuticals and bulk antibiotics, hormones, vitamins and alkaloids, amounted to an
estimated $201 million in 1995 and approximately $318 million in 1996 (table 2).°
Additionally, the duty savings for bulk, unfinished pharmaceutical products and intermediates

® Industry sources have indicated that in addition to the duty elimination, other factors that may
account for the increase in imports include an increase in foreign production of “off-patent” or
generic drugs, and production shifts resulting from recent merger and acquisition activity.

7 Trade data for U.S. exports of the products denoted by the “K” special rate symbol are not
available because the agreement concems tariff treatment for imported products and has no
provisions for requiring the reporting of exports.

* Additional factors influencing export growth are addressed in the next section relative to
certain U.S. pharmaceutical sales abroad.

° The duty savings for this product group are calculated based on ad valorem equivalent (AVE)
rates of duty for 1994 and comparable adjustments of import levels already accorded duty-free
treatment under the Generalized System of Preferences, the United States-Israel Free Trade
Agreement, the Caribbean Basin Economic Recovery Act, and the North American Free Trade
Act.


OCTOBER 1997

Key Performance Indicators Industry, Trade, and Technology Review
STEEL
Figure A-1
Steel industry: Profitability by strategic group,’ producer price index for steel products
-— — Integrated (v1) —+— _ Minimilis (71)
——+—_ Specialty (¥1) —>— __ PPI (right scale) (¥2)
44. ee = PPLi982 #109 440
12 = = — = 120
10 — —, 100
a Me M50
6 60
: — a ra <0
2 20
a2 e3 a4 ai a2 a3 as at a2
95 1 96 1 97

PPI = Producer Price Index
‘Operating profit as a percent of sales. Integrated group contains 9 firms. Minimill group contains 7 firms. Specialty group contains 5
firms.

‘Source: Individual company financial statements and U.S. Bureau of Labor Statistics.

© Despite the relatively flat producer price index for steel products, the price increases announced in the first
quarter 1997 have reportedly been accepted by downstream industries. Additionally, in July, beam producers
announced price increases as demand from the construction sector remains strong and capacity was reduced
via facility closures by Bethlehem and Northwestern.'

* Integrated steel producers experienced a further increase in profitability during the second quarter of 1997 as
operating income rose while companies improved efficiency and implemented cost controls, in addition to
growth in net sales. The resolution in August of a 10 month work stoppage at Wheeling-Pittsburgh should
improve that company’s profitability as production returns to normal levels.

¢  Minimills increased operating profitability to 9 percent for the quarter ending June 1997 from 8 percent for the
quarter ending March 1997. This improvement was primarily led by an increase in operating income.
Profitability of the specialty steel producers has fluctuated in a narrow range since the fourth quarter of 1995.

1 Corinna C. Petry, “More Beam Prices Boosted,” American Metal Market, Jul. 15, 1997, p. 1.

Table A-1
Steel mill products, all grades
Percentage Percentage
change, change,
Q2 1997 Q2 1997
from Jan.June from
Item Q2 1997 Q1 1997 1997 Q2 1996"
Producer's shipments (1,000 short tons) ........... 26,645 5.5 51,895 26
Imports (1,000 short tons) 8,186 19 16,222 30.7
Exports (1,000 short tons) 1,462 5.4 2,853 37
Apparent supply (1,000 short tons) ... . 33,370 46 65,264 8.4
Ratio of import to apparent supply (percent) ......... 24.5 2.06 24.9 72.8
* Based on unrounded numbers.
2 Percentage point change.

Note.-Because of rounding, figures may not add to the totals shown.

Source: American Iron and Steel Institute.

38


Electronic Commerce

The Internet Medium

OCTOBER 1997
Industry, Trade, and Technology Review

The Intemet has the potential to revolutionize the delivery of audiovisual works. Although
the transmission of electronic mail is the most common application of the Internet to date, the
underlying digital technology can support high-quality multimedia transmission in audio,
video, text and graphic formats, while packet-switching* ensures high-speed and reliable
delivery (table 1), Further, the Internet is quickly becoming ubiquitous because of an open
standard that is compatible with major computer operating systems.

Table 1

Internet attributes

Feature

Availability Global The Internet is available worldwide and growing rapidly.

Standard Open Internet protocol (TCP/IP) is compatible with every
major computer operating system.

Switching mechanism Packet Data are broken into packets that are sent via different
routes on the circuit. The packets are reassembled and
sorted at the destination.

Technology Digital Digital data signaling eliminates noise and distortion in
transmission and reproduction.

Audio and video capability Emerging Transmission of audiovisual data requires high network
capacity (see table 2).

Text and graphics capability High Fully developed.

Access through computers High Fully accessible.

Access through TV monitors Emerging Currently being developed.

Cost of entry Low Broadcasting requires investment in a computer and
telephone line only.

User cost Low Low cost access through public networks.

Usage and content Multifaceted The Internet can support text, graphic, audio and video
content for information, educational, entertainment, and
other uses.

Location Decentralized Broadcasts can originate from any point on the network.

Source: Dave Krupinski, “Computer Telephony and the Internet: A Stylus White Paper,” Artisoft Inc., found at
http:/Awww.stylus.com/hvim.htm., retrieved Aug. 18, 1997, Mary Meeker and Chris DePuy, The /nternet Report,
(Morgan Stanley, 1996); and USITC staff.

4 Packet-switching breaks digital messages into individual packets, enabling each packet to
arrive at the same destination by different route. It provides for uninterrupted transmission when
part of the circuit is down, and concurrent use of the same telecommunication lines to transmit

many messages.

26


OCTOBER 1997

Industry, Trade, and Technology Review Key Performance Indicators
SERVICES
Figure A-7
Balance on U.S. service trade accounts, second quarter 1996 through first quarter
1997"
Trade accounts
Tourism = =
2 T I T I !
‘Transportation cee | I ! |
} : ever : merrrrerrrses
Royatiesticense fees = 1 1 1 i I
Education = ' I HE Second quarter96
A Thi
France = Hastarinien
Insurance =z ; First quarters
Telecommunication | | ! | \ |
\ i 1 I t |
Business i-=== cpa I 1
I i 1 !
one ——_
4 0 1 2 3 4 5 6
Billion dollars

‘ Figures reflect trade among unaffiliated firms only.
2 includes port fees.

‘Source: Bureau of Economic Analysis, Survey of Current Business, July 1997 table 3, p. 83.

Figure A-8
Surpluses on cross-border U.S. service transactions with selected trading partners,
by quarter, 1995-97'

FA European Union Japan canada

7 Billion dollars
6 5
5 : :
“-E : = : :
a: : : : :
2-H : z : He

H 1 = rt H
a: : : : : : =
° = A HY HY 4 H HY

f t 4 7
95, W925 196 196 m1-96 Wv-96 197
{Figures reflect private-sector transactions only itary shipments and other pubi-sector ransactions have boon

‘Source: Bureau of Economic Analysis, Survey of Current Business. table 10, July 1997, pp . 92-95

43


OCTOBER 1997
Industry, Trade, and Technology Review Electronic Commerce

Electronic Trade Transforms Delivery of
Audiovisual Services

Tsedale M. Assefa

(202) 205-2374

assefa@usitc.gov

This article discusses the potential for electronic trade of audiovisual
works over the Internet. It explains the capabilities of the Internet with
respect to audiovisual services, identifies factors motivating greater
Internet use, describes the ongoing evolution of the audiovisual and other
so-called “content” industries, and then examines formal and informal
impediments to international, Internet-based trade in audiovisual services.
This article follows previous work that examined the mergers and
acquisitions undertaken to enhance distribution of motion pictures and
other creative works.

The advent of the Internet” has given a new stimulus to electronic trade by simplifying and
accelerating the transfer of information. Intemnet access through personal computers is
growing rapidly, and impending access through television sets will further hasten the growth
of the electronic market. Trade in audiovisual services may change dramatically because of
the new medium, which allows the electronic transfer of recorded products in many forms, and
leads to the convergence of entertainment and information service industries into a new so-
called “content” industry. Worldwide sales of content-related Internet services, estimated at
less than $100 million in 1997, are expected to exceed $10 billion by the year 2000.3 These
developments create significant opportunities for U.S. firms, which are among the largest and
most technologically advanced in the world, and which are the leading providers of Internet
content. However, issues regarding piracy, transmission security, intellectual property
protection, and restrictive government regulations must be resolved before the provision of
content services over the Internet can attain its predicted potential.

1 See USITC, “U.S. film industry: How mergers and acquisitions are reshaping distribution
patterns worldwide,” Industry, Trade, and Technology Review, Jan. 1997.

? "Internet" refers to the global information system that (i) is logically linked together by a
globally unique address space based on the Internet Protocol (IP) or its subsequent
extensions/follow-ons; (ii) is able to support communications using the Transmission Control
Protocol/Internet Protocol (TCP/IP) suite or its subsequent extensions/follow-ons, and/or other
IP-compatible protocols; and (iii) provides, uses, or makes accessible, either publicly or privately,
high-level services layered on the communications and related infrastructure. Barry M. Leiner et
al., “A Brief History of the Internet,” (Internet Society, Feb. 20, 1997) found at
http://info.isoc.org/internet-history/, retrieved July 24, 1997.

3 Dave Krupinski, “Computer Telephony and the Internet: A Stylus White Paper,” Artisoft
Inc., found at http://www stylus.com/hvim.htm, retrieved Aug. 18, 1997.

25


OCTOBER 1997
Pharmaceuticals : Industry, Trade, and Technology Review

Pharmaceutical Products Covered by Reciprocal Duty Elimination

The pharmaceuticals portion of the Uruguay Round Agreements covering reciprocal
elimination of duties in the pharmaceuticals sector covers a list of goods in four
annexes.' They are --

. Pharmaceutical active ingredients having an International Nonproprietary
Name (INN) from the World Health Organization, and designated in annex I.
° Salts, esters, and hydrates of pharmaceutical products that are described by the

combination of an INN active ingredient contained in annex I with a prefix or
suffix as designated in annex II, as long as such salt, ester, or hydrate is
classified in the same 6-digit HS subheading as the INN active ingredient.

. Salts, esters, and hydrates of INN active ingredients that are separately
contained in annex III and that are not classified in the same 6-digit HS
subheading as the INN active ingredient.

. Additional products used for the production and manufacture of finished
pharmaceuticals, as well as certain finished pharmaceutical products, as
designated in Annex IV.

In addition, most-favored-nation duties are eliminated on the following:

. Items included in chapter 30 of the Harmonized System (HS) -- formulated
and/or packaged drugs.

. Items included in HS headings 2936, 2937, 2939, and 2941-- mainly bulk
active ingredients for drugs in certain therapeutic classes.

1 Exceptions to the product coverage include those items identified as agriculture products in the
Agreement on Agriculture and specific products~Levomenthol, Monosodium glutamate, Paracetamol (also
known as acetaminophen), Ibuprofen, and Dihydrostreptomycin (including its salts, esters, and hydrates).

The products accorded the reciprocal duty elimination are classified in several HS provisions
and chapters. Those products classified in chapter 30 of the HS are the finished
pharmaceuticals that have been packaged for retail sale, including dosage forms. Bulk
products that are not in dosage form, but are used as active ingredients in pharmaceuticals,
are generally classified in chapter 29 of the HS.> Within chapter 29, certain classes of bulk
active ingredients classified as vitamins (HS 2936), hormones (HS 2937), glycosides and
alkaloids (HS 2939), or antibiotics (HS 2941) enter free of duty under the reciprocal tariff
treatment. U.S. imports of other bulk pharmaceuticals classified in chapter 29, as well as those

3 Once bulk active ingredients are finished into dosage-form products such as tablets, capsules,
ampules, ointments and powders--through the addition of fillers or diluents, binders, flavorings,
ointment bases or stabilizers, or further processing such as microencapsulation--they are classified
in chapter 30. INNs (text box) refer to specific chemical products, whether they are in bulk or
dosage form.


OCTOBER 1997
Joining Technologies Industry, Trade, and Technology Review

Partnership for a New Generation on Vehicles (PNGV)

Research on joining technology for automobile manufacturing is sponsored by private and public
collaboration, through the PNGV. The partnership was founded in 1993 between the U.S. Government
and the Big Three U.S. car makers to develop the automobile of the future. Each PNGV activity
contributes to one of the three goals that guide the program:

= improve U.S. competitiveness in automobile manufacturing
= develop and apply new innovations to conventional vehicles

= develop a vehicle with up to three times the fuel economy of
conventional mid-sized sedans while maintaining current
performance, safety standards, and cost of ownership

The PNGV strategy to reach the fuel economy goal is the reduction of vehicle weight. The goal is
supported by a host of research projects on aluminum and polymer composites conducted in the national
research facilities and Big Three laboratories. Materials research, including the development of joining
technologies for alternative materials encourages progress toward this objective.

The 1996 PNGV report hailed several research projects on joining methods ‘significant technical
accomplishments.’ A project on adhesive bonding technologies for automotive structural components was
successful in creating standardized test methods to analyze the durability of bonded joints. Also, the
bonding of aluminum to composites and a material surface treating method to improve a bond was
addressed. The latter will soon be patented. A project on aluminum laser-welding led to the development
of a computer controlled process monitor. No joining technology developed under the PNGV currently is
used in the mass production of automobiles.

Ultra-light Steel Autobody (ULSAB) program

The steel industry has mobilized to maintain one of its largest markets. The ULSAB program is a
international project initiated by the automotive industry (in this case European) and the steel industry to
develop a lightweight steel autobody structure. Its members include 35 steel makers from 18 countries.
The ULSAB has addressed the automobile industry’s need to reduce the average vehicle weight by using
a computer model to design a high-strength steel body and parts.

Auto/Steel Partnership and European Aluminum Association

The Auto/Steel Partnership is a consortium of the U.S. Big Three vehicle manufacturers and major U.S.
and Canadian integrated steel mills. Twelve task forces conduct precompetitive research on standardization,
cost-reduction, and design issues. Three of the task groups research welding technology and standards. The
European Aluminum Association is also active in promoting the aluminum content in European-made
automobiles.

16


OCTOBER 1997

Industry, Trade, and Technology Review

Electronic Commerce

Every EU Member State except the United Kingdom has constitutional provisions for
broadcast content, and all EU countries explicitly prohibit the broadcast of certain material
for the purpose of protecting minors. With few exceptions, the broadcast laws of EU Member
States cover all media, including print and broadcast (table 5). Those of Greece, Ireland, and
Luxembourg are essentially limited to the press, including print and broadcast media. Control
measures generally provide for legal recourse after the broadcast has taken place, although
Treland, Italy, and Spain do not specify the timing of control measures.

Table 5

EU member-states’ constitutional provisions for content control

Country Coverage
Austria Spoken, written, print or pictorial Ex post' legal contro!
representation
Belgium All expression and media Ex post legal control
Denmark All media Ex post legal control
Finland All media Ex post legal control; prior control
allowed for the protection of children
France All media Ex post legal control
Germany Speech, writing and pictures Ex post legal control; laws protecting
youth and personal dignity
Greece The press Ex post legal control on the basis of
insults to Christianity or other religions
and to the president, obscenity, or
compromises to national security
Ireland Expression of convictions and opinions Restrictions are allowed to protect public
order or morality (blasphemy, indecency)
and the authority of the state
Italy All media Restrictions on public morality grounds
Luxembourg Oral expression and the press Ex post legal control
Netherlands All media Ex post legal control; non-press and non-
broadcast media may be censored for
persons under 16
Portugal All expressions Ex post legal control
Spain Thoughts, ideas and opinions through On the basis of rights of honor, privacy,
any media self-image and protection of minors
Sweden General General control of “acceptability ina
democratic society”
Specific to the press, film, television, Ex post legal control based on the
and possibly on-line media protection of minors, violence, and racial
hatred,
United Kingdom None None

1 The measure is applied retroactively after distribution has taken place.

Source: European Union, “Green Paper on the Protection of Minors and Human Dignity in Audiovisual and
Information Services,” Info2000, 1996, found at http:/Avww.echo.lu/legal/en, retrieved June 5, 1997.

33


OCTOBER 1997

Electronic Commerce Industry, Trade, and Technology Review

Table 6

The applicability of some European broadcast laws to the Internet is also being tested in court.
For example, Georgia Tech Lorraine, the European campus of the Georgia Institute of
Technology, was the target of a lawsuit in France because its Internet site did not offer a
version in French. The lawsuit was based on the “Toubon” law, which requires that all
commercial messages promoting services or products within France be made available in the
French language. The court dismissed the suit on procedural grounds without addressing
the question of whether the "Toubon" law is applicable to the Internet.>” Whether Internet
transmission is considered a broadcast service for regulatory purposes, and whether the
physical location of the server is material in the determination of the origin of a message, also
remain unanswered questions. In the same vein, it is not clear that the broad restrictions on
trade in audiovisual services, as specified in the EU schedule annexed to the General
Agreement on Trade in Services,” are applicable to the Internet.°

On-line trade of content products may not enjoy significant growth in some emerging markets.
Although telephone and personal computer penetration rates currently are low, emerging
markets also have erected barriers restricting on-line trade and other Internet services in a
variety of ways. Internet services are often provided by government telecommunication
monopolies that limit user access to the network (table 6). For example, Saudi Arabia
reserves the Intemet for educational and other governmental uses whereas India’s high access
fees limit the service to a small segment of the potential market. In contrast to regulations in
developed countries, which generally apply legal measures after the broadcast has taken place,
emerging markets often impose censorship that requires that broadcast material be cleared
before transmission. For example, Singapore regulates the Internet as a broadcast medium,
i.e. it requires the vetting of content prior to broadcasting and censors as necessary. China
also imposes censorship and requires users and Internet service providers (ISP) to register
with government authorities.

Internet restrictions in selected emerging countries

Country ___ Measures limiting internet access. === Access provider _

China Censorship; user registration Government; rooistered private ISP
India High access rates State owned

Korea Censorship Government and private ISP

Saudi Arabia” Restricted use State owned

Singapore Censorship Government-sponsored ISP.

Source: Human Rights Watch, “Silencing the Net: The Threat to Freedom of Expression On-Line,” The New York
Times, May 1996, found at http:/Awww.nytimes.com, retrieved June 6, 1997.

% Guido Guissani, “Georgia Tech is sued for Non-French Web site,” The New York Times,
Dec, 31, 1996, found at http://www.nytimes.com, retrieved May 12 , 1997.

3’ Guido Guissani, “French Court Dismisses Suit on Georgia Tech Site,” The New York
Times, June 10, 1997, found at http://www.nytimes.com, retrieved July 29, 1997.

* For in-depth discussion of these measures, see USITC, “U.S. film industry: How mergers
and acquisitions are reshaping distribution patterns worldwide.”

» European Information Technology Observatory 97 (Frankfurt, 1997), p. 206.

34


OCTOBER 1997

Joining Technologies Industry, Trade, and Technology Review

Outlook

bond also forms quickly due to the fast-heating microwave.” Ceramics can also be joined to
metals with soldering and adhesive bonding.’ Microwave technology for joining ceramics
is not yet commercialized, although continuing research on the technology is supported by the
DOE and the Continuous Fiber Ceramic Composites Programs.” Research to expand the role
of ceramics in automobiles is conducted through the Ceramic Technology Project at Oak
Ridge National Laboratory.”

As alternative materials continue to make inroads into the U.S. auto industry, demand will
increase for new manufacturing technologies and associated joining and bonding
technologies. Joining technologies for lightweight materials facilitate improved productivity,
lower manufacturing costs, and a more flexible manufacturing setup. Adhesives and new
welding techniques are a means to ensure greater design freedom for manufacturers. More
significantly, the joining technologies profiled in this article are likely to contribute to the
competitive advantage enjoyed by auto manufacturers of standard passenger vehicles made
largely of lightweight polymer composites or aluminum.

Several circumstances challenge the widespread adoption of lightweight materials by the auto
industry despite the need for continued improvements in processing technology. Some
particular circumstances are as follows:

¢ Material cost is the most significant barrier to the use of polymer composites and
aluminum in the auto industry.“ Carbon steel has a clear cost advantage. On a per-
pound basis, carbon steel is 4 times less costly than aluminum, 3 times less costly
than of glass fiber-reinforced polymer composites, and 20 times less costly than
carbon fiber-reinforced polymer composites.

¢ While it may be possible to manufacture a polymer composite frame, the technology
to mass-produce load-bearing composite parts currently does not exist.“

Craig Saltiel, et. al. “Materials Processing with Microwave Energy,” Mechanical
Engineering, Aug. 1995, p. 102.

“' “Joining Metals and Ceramics,” Machine Design, Sept. 14, 1995, p. 81.

® Tfikhar.

“ Ceramics and Energy Efficiency, found at http://www.ornl/energy_eff/transp.html, retrieved
Aug. 13, 1997.

“ Thomas S. Moore, General Manager, Liberty and Technical Affairs, Chrysler Corp., “Making
Composites Economically Competitive for High-volume Structural Automotive Applications,”
read at the Advanced Composite Conference and Exposition, Nov. 9, 1995.

45 Since less alternative material is needed on a per-pound basis, the cost relative to steel is
aluminum, 2 times; glass fiber-reinforced polymers, 1.5 times; and carbon reinforced polymers, 5
times. U.S. Congress, Office of Technology Assessment, Advanced Automotive Technology:
Visions of a Super-Efficient Family Car (Washington, DC: GPO) OTA-ETI-638, Sept. 1995, p.
62.

“W Thid., p. 64.

22


OCTOBER 1997
Cumulative Article Listing Industry, Trade, and Technology Review

Listing of Published Articles--Continued

April 1996

Approaching the next frontier for trade in services: Liberalization of
international investment

The impact of Cubas’s new foreign investment law

The development of information technology in the Arab world

July 1996

Computer services: Examination of commitments scheduled under the General
Agreement on Trade in Services

The global positioning system advances toward universal acceptance

Reformulated gasoline program achieves smooth transition

October 1996

World textile and apparel trade: A new era

World shipbuilding and the status of the OECD Agreement to eliminate subsidies
Thin-slab casting/flat-rolling: New technology to benefit U.S. steel industry

January 1997

Basic telecommunication service negotiations in the World Trade
Organization: Impetus, offers, and prospects

U.S. film industry: How mergers and acquisitions are reshaping distribution
patterns worldwide

Global competitiveness and organized labor: The case of Caterpillar Inc. and
the United Auto Workers Union

Evolution of the U.S.-Japanese semiconductor trade regime

April 1997

Liberalization of the Mexican telecommunication sector

Use of magnesium castings in automobiles rises, but challenges remain
U.S. trade in intangible intellectual property: Royalties and licensing fees

July 1997

Mobile satellite services

India’s steel industry emerging as a competitive global player

Textiles and apparel: India’s integration into the world economy and
opportunities for U.S. firms

October 1997

The Uruguay Round elimination of duties on pharmaceuticals: Developments
in the 2 years since implementation

Alternative materials in the U.S. automotive industry promote development of
joining and bonding technology

Electronic trade transforms delivery of audiovisual services


OCTOBER 1997

Industry, Trade, and Technology Review Key Performance Indicators
ALUMINUM
Figure A-4
Aluminum: Selected U.S. industry conditions—
1000 metric tons Percent
41200 100
1000 — Se
800

Qi Q2 Q3 Q4 at Q2 QB a4 QI G2 G3 Q4 QI Q2 Q3 a4 QI Q2 Q3 a4 at

1992 1993 1994 1995 1996 1997
—=— Primary Produotion (¥1) —4— Secondary Recovery (Y1)
——e— _importe (v1)? B Import Penetration (Y2) 7

igrude, (mptals apg alloys) and primary, (0.4. plates. sheets, and bars) forms for consumption.

Source: U.S. Geological Survey.

° Globally, robust conditions continued through first quarter 1997 as orders remained strong
throughout the major consuming regions. Primary-aluminum capacity utilization averaged over 90
percent. Price premiums for immediate delivery of ingot continued, indicating tight supply-demand
balance. There was little apparent consumer restocking of inventories, largely due to anticipated
restart of idled capacity and despite uncertainty about the level of inventories held outside the LME.
The LME’s inventories continued to decline for a second straight quarter, dropping 93,000 metric
tons (10 percent) during first quarter 1997 to 853,000 metric tons.

. U.S, aluminum output held steady during the first quarter 1997 reflecting the order rates across
end-use sectors. Ingot production remained relatively static at 1.7 million metric tons, with a
decrease in primary production being offset by increased secondary recovery. Demand for can
stock (the largest single product category) weakened, but was offset by stronger demand for other
mill products, especially consumption of sheet and plate outside the beverage industry. With
primary-production operating rates approaching 95 percent of capacity, the industry relied upon
increased imports to meet demand. Import penetration rose one percentage point to 30 percent,
up 6,000 metric tons to 628,000 metric tons. These conditions were reflected in dramatically
higher prices from the previous quarter's level. The average U.S. price for primary ingot was up 8.8

Figure A-5
Aluminum: Price and inventory levels—

i i TM

@1 a2 a8 a4 a1 a2 a9 a4 a1 G2 a2 a4 a1 a2 as a4 a1 az as a4 oF
19% 1994 1997
Nominal U.e. ‘Viarket Prive 1) B vis iwentarioe wy

} Quarterly average of the monthly U.S. market price of primary aluminum ingots.
End of quartor inventories.

Sources: U.S. Geological Survey, World Bureau of Metal Statistios, Metals Week, and U.S. Bureau of Economic

41


OCTOBER 1997

Industry, Trade and Technology Review Key Performance Indicators
STEEL
Table A-2
Steel service centers
Percentage
change, June 2nd 2nd
June 1997 from Quarter Quarter
Item 1997 Mar. 1997% 1996. 1997
Shipments (1,000 net tons) . 2,408 2.6 7,336 6,771
Ending inventories (1,000 net tons) . 7,225 2.2 7,225 6,614
Inventories on hand (months) 3.0 (a) 3.0 29
’ Based on unrounded numbers.
2 Not applicable.

Note.—Because of rounding, figures may not add to the totals shown.
Source: Steel Service Center Institute.

¢ The Steel Service Center Institute reported that the average daily shipping rate for steel service centers
remained above 110,000 tons for the first six months of 1997. This puts the shipping rate year to date
ahead of 1995, which is the current record shipping year. Inventories on hand remained stable
throughout the second quarter at 3 months, as ending inventory tonnage increased by only 2 percent from
March 1997.!

* Exports have increased steadily since September 1996, including an overall increase of 4 percent for the
first six months of 1997 over the first six months of 1996. Global prices continue to recover as world
steel production approaches 96 percent of its effective capacity.? Domestic demand remains strong;
therefore, imports through June increased 31 percent from 1996 levels. Domestic capacity utilization
remains steady at 88 percent.’

1 Steel Service Center Institute Business Conditions Report, Jul. 22, 1997.
? Peter F. Marcus and Karlis M. Kirsis, “New Game, New Rules,” World Steel Dynamics, Jun. 1, 1997. p. 39.
3 American Iron and Steel Institute, Jun. 1997.

Figure A-2
Steel mill products, all grades: Selected industry conditions

—TM=— Capacity Utilization (left scale) (¥1)

——+—_ Import Penetration (left scate)** (Y1)

—*— Imports (right scale) (¥2)

—*— __ Exports (right scale) (¥2)

Percent ‘Net tons (mittions)

Jun Sep Dec| Mar Jun Sep Dec | Mar Jun Sep Dec | Mar Jun
95 96 97

“Import share of apparent open market supply.
Source: American Iron and Steel Institute.

39


OCTOBER 1997

Industry, Trade, and Technology Review

Pharmaceuticals

in the CPI cannot be inferred from the available information due to several factors, such as
the change of the import mix of pharmaceutical products from year to year, and the
introduction of newer (generally higher priced) pharmaceutical products which take the place
of older products each year. Also, imports account only for about 14 percent of domestic
consumption of pharmaceutical products so that the elimination of duties is only one factor,
along with the effects of industry rebate programs and the emergence of health maintenance
organizations (HMOs), that has probably contributed to a slower rate of growth in U.S.
consumer prices for pharmaceuticals in recent years.

Employment levels also may be examined to assess whether the U.S. pharmaceutical industry
has benefited from the zero-for-zero agreement. U.S. employment in the pharmaceutical
industry has fluctuated during the past 5-year period (table 4). Employment for all
pharmaceutical workers increased by an average annual rate of 1.2 percent from 1992-94,
then decreased by 0.9 percent from 1994-96. The number of production workers increased
by an annual average of 3.9 percent from 1992-94, then increased 0.8 percent from 1994-
1996. Industry sources noted that mergers in the industry have led some of the major
pharmaceutical firms to combine workforces while eliminating overlapping jobs. The result
of industry restructuring may be reflected in the decline in the overall number of workers from
1994-96 whereas increased industry output has increased the number of production workers
since 1994. Employees had higher average weekly and hourly earnings from 1994-96, as
compared with 1992-94, whereas average weekly hours remained relatively unchanged during
1993-96 after declining in 1993.

Table 4
Employment data for the pharmaceuticals industry, 1992-96

Average annual

Year Absolute change change (percent)

Employment factors 1992 1993 1994 1995 1996 1992-941994-96 1992-94 1994-96
All workers (1,000) ...... 257.3 264.4 263.3 259.5 258.6 6.0 47 1.2 0.9
Production. workers

(1,000) .... 0... 0 cece 112.14 117.1 121.0 126.7 123.0 8.9 2 3.9 08
Average weekly earnings

(dollars) .......+.-+-- 99.68 607.34 610.41 635.36 654.95 10.73 44.54 0.9 3.6
Average weekly hours ... 425 414 413 418 414 1.2 0.1 14 0.1
Average hourly earnings

(dollars) .........0505 14.11 14.87 14.78 15.20 15.82 0.67 1.04 2.3 3.5
Employees~all industries :

000) .... 2... e ee eee 108,604 110,730 114,034 116,607 119,523 5,430 5,489 25 24

Pharmaceutical workers as

@ ratio of employees in all

industries (percent) .... 0.2 0.2 0.2 0.2 0.2 0) 0) 0) 0)

1 Not applicable.

Source: Bureau of Labor statistics and estimates by the staff of the U.S. International Trade Commission.

"2 Health maintenance organizations, or HMOs, are generally for-profit organizations that
emphasize cost-cutting methods to maximize profits. With respect to pharmaceuticals, HMOs
generally use generic substitution and bulk buying programs in order to obtain medicinals at the

lowest price.


OCTOBER 1997

Industry, Trade, and Technology Review Pharmaceuticals
Table 6
Sales, earnings, profitability and growth for selected pharmaceutical companies, 1994-95
Sales Eamings Profitability” Increase 1994-95
Company? 1994 1995 1994 1995 1994 1995 Sales Eamings
Million dollars Percent
8,710 15,475 1,933 2,120 22 14 78 10
14,970 16,681 2,997 3,335 20 20 1 "1
11,984 13,767 2,331 2,600 19 19 15 12
Pfizer 8,281 10,021 1,298 1,554 16 16 21 20
‘SmithKline Beecham 9,532 10,800 928 1,000 10 9 13 8
Johnson & Johnson ........ 5,158 6,274 1,669 2,039 32 32 22 22
Pharmacia-Upjohn .... 3,345 6,900 489 895 15 13 106 83
American Home Products.... 8,966 13,376 1,528 1,365 17 10 49 14
Eli Lilly ........... . 5,712 6,764 1,286 2,291 23 4 18 78
Schering-Plough 3,880 4,472 1,204 1,381 31 31 15 15
Abbott Labs ... 4,951 5,629 1,385 1,586 28 28 14 15
Wamer-Lambert 2,079 = 2,356 M7 401 17 17 13 16
Novartis ©) 10,940 7) 9) Yo @& (0) 0
Hoechst 11633 9) 1,519 () 13 7) @ (o)
Hoffmann-LaRoche . 8339 () () 0) 7) (0) ) 0)
Rhone Poulenc Rorer . . 4487 5,142 367 357 8 7 15 3
Total, selected
companies‘ ........... 112,027_ 128,597 19,281 20,924 17 16 15 9

1 Sales and earnings are shown for the pharmaceutical segment of the company if available; otherwise, full
company figures are shown.

? Profitability shown as the percentage of sales represented by company eamings.

° Not available.

“Totals shown for comparison only.

Source: Standard & Poors, Securities and Exchange Commission, and estimates by the staff of the U.S.
International Trade Commission.

As noted, the benefits of free or liberalized trade (e.g., reduced import duties) should result
in a savings that may be passed on by the importer to a distributor or manufacturer, when
further processing is required. In turn, the lower price of the imported good may accrue to
multiple layers of consumers (e.g., the formulator, the pharmacist, and the person being
treated).

For this sector, the most discernible immediate impact of duty elimination appears to have
been on U.S. imports, specifically alkaloids and hormones (table 1). In addition, total
U.S. imports of the products claimed for duty-free entry under the zero-for-zero agreement
increased by almost $2.4 billion from 1994-96, excluding bulk “K” pharmaceutical and
chemical intermediate products for pharmaceuticals." The estimated duty savings related to
all these products increased from $451 million in 1995 to approximately $655 million in
1996. The total amount of duty savings on imported goods is relatively small compared with
total sales by the largest companies which approximated $129 billion in 1995. For high-

13 Imports of bulk “K” pharmaceuticals and chemical intermediate products increased to $5.3
billion in 1996 (table 1). Comparable data did not exist in 1994.

ll


OCTOBER 1997
Industry, Trade, and Technology Review Cumulative Article Listing

Listing of Published Articles
(October 1994 - October 1997)

October 1994

Bovine somatotropin (bst): An application of genetic engineering to increase milk
production

Impact of environmental disposal laws on packaging worldwide

Titanium industry seeks new markets which could bring competitive benefits to
end users

Regulatory environment impacts emerging personal communications industry

Emerging focus on quality systems registration enhances market prospects for
the U.S. instruments industry

March 1995

NAFTA update: Steady U.S. bilateral trade growth with Mexico faces mixed
prospects in 1995

New manufacturing processes for materials: Government policies and programs
towards commercialization

Globalization and growth herald new markets for passenger rail suppliers

Forces behind restructuring in U.S. apparel retailing and its effect on the
U.S. apparel industry

Steel in residential construction: A potentially significant developing market

May 1995

Section 22: Uruguay Round Agreement changes U.S. operation of agricultural
program

Telecommunication services: Bell companies act to join global network alliances

The information superhighway: Global implications from current test projects

Direct ironmaking: A case study in government and industry cooperation to
commercialize new manufacturing processes for materials

September 1995
Structural changes and competitive strategies of the U.S. footwear industry
in the 1990s
U.S./EU toy safety standards and the implications for APEC harmonization
Comparison of production-sharing operations in the Caribbean Basin
with those in Mexico and in selected East Asian countries
Free-trade zones: Global overview and future prospects

December 1995

Financial services: An overview of the World Trade Organization’s negotiations

Sol-gel: Industry seeks to commercialize energy-saving technology for existing
and emerging markets

China’s evolving grain trade opens new marketing opportunities for U.S.
exporters

NAFTA update: Early signs confirm benefits


OCTOBER 1997

Electronic Commerce Industry, Trade, and Technology Review

The European Union

European governments tend to regulate the Internet more actively, in part to safeguard the
development of their Intemet industry, which reportedly lags far behind that of the United
States. While the European Union (EU) has no Unionwide directive pertaining to Internet
services, some Member States are developing national regulations. For example, Germany’s
“Information and Communication Services Bill,” which took effect in August 1997, extends
existing consumer privacy protection laws into cyberspace.®> The main provisions of the law
prohibit propagating pomography, neo-Nazi material, racial hatred, violence, and prostitution
on the Internet. These restrictions are also found in the country’s broadcast regulations
pertaining to audiovisual and information services (table 4). The law places the responsibility
for content with the content supplier and not the Intemet service provider, and requires that
material unsuitable for minors be identified as such.

Table 4
EU member states: Specific restrictions on broadcast material
Restrictions
Incitement to
Contrary to discrimination, Child sexual
sound morality Detrimental to hatred, and abuse and
Country Obscenity or decency human dignity violence pornography
Austria x x x
Belgium x x x x
Denmark x x
Finland x x x
France x x
Germany. x x x
Greece x x x
Ireland x x x x
Italy x x x
Luxembourg x x x
Netherlands x
Portugal x x
Spain x x
Sweden x x
United Kingdom. x x x x

Source: European Union, “Green Paper on the Protection of Minors and Human Dignity in Audiovisual and
Information Services,” Info2000, 1996, found at http:/Awww.echo.lu/legal/en, retrieved June 5, 1997, and Bruno
Guissany, “Why Europe Won't have a Decency Act,” The New York Times, Nov. 12, 1996, found at
http:/Awww.nytimes.com, retrieved May 12, 1997.

3 U.S. Department of State telegram No. 006691, “Electronic Commerce: Special Press
Report,” prepared by U.S. Embassy, Tokyo, July 31, 1997.

* European Union, “Green Paper on the Protection of Minors and Human Dignity in
Audiovisual and Information Services,” Info2000, 1996, found at http://www.echo.lu/legal/en,
retrieved June 5, 199.

35 Guido Guissani, “Proposed German statute would regulate content,” The New York Times,
Jan. 11, 1997, found at http://www.nytimes.com, retrieved June 6, 1997.

32


OCTOBER 1997
Joining Technologies Industry, Trade, and Technology Review

Laser Welding

Laser welding is a promising method for joining aluminum, although the method works on
other materials such as ceramics. Aluminum is difficult to weld with traditional electric-
welding techniques because, unlike steel, it is a high conductor of electricity. It is also
difficult to laser-weld because it is highly reflective and tends to scatter the laser beam.
Compared to several other alternative welding techniques, however, laser welding is fast,
precise, and requires less heat.* One drawback of laser-welding equipment is its sensitivity
to contaminants commonly found in the automobile-manufacturing environment. Wider
application of laser welding is dependent upon a resolution to this difficulty and the
technology must be refined to so that joint strength, assembly times, and cost meet the
standards and efficiencies already achieved for bonding steel components.” The development
of process controls for laser welding to improve joint quality is conducted under the auspices
of PNGV by private companies and several national laboratories. The progress of this
research is marked by the development of an on-line weld monitor that can detect surface
features and other measures, as the joint is formed. A patent for the technology is now
pending.

Advanced Welding

A manufacturing process designed to form and join preshaped aluminum and tubular steel is
under development by Dana Corp., an automotive-component parts supplier (Reading, PA).*!
The project supports automakers’ efforts to increase fuel efficiency by substituting lightweight
materials to achieve weight reduction of the load-bearing frames of cars and light trucks. The
process more precisely forms the load-bearing structures that reduces the need for filler
material to join parts. Preshaped aluminum or tubular steel is formed by exposure to high
pressure within very precise die cavities and then machined according to a computer-aided
design (CAD) file. The method has several advantages: dissimilar metal substrates can be
joined, the time required to cure the joint is minimal, and the process need not be fixed to one
area of the factory floor.” The process makes the adoption of aluminum a viable option for
U.S, auto makers and its flexibility allows manufacturers to readily respond to consumer
demands. The manufacturing process is not yet commercialized, and Dana Corp. is supported
by the National Institute for Standards and Technology (NIST), under Advanced Technology
Program funding. *

8 Compared to arc welding (electrical-current method), PNGV Technical Accomplishments,
July 1996, np.

? Estimates of costs savings associated with laser welding are not available.

3° PNGV Technical Accomplishments, n.p.

3! Larson, “Quality,” Quality, p. 32.

32 Estimates of costs savings associated with advanced welding are not available.

3% ATP project brief, “Advanced Welding Technology for Structural Automotive Products,”
found at http://www.atp.nist.gov/www/comps/briefs/95020055.html, retrieved Sept. 30, 1997.

20


PREFACE

‘The Industry, Trade, and Technology Review (ITTR) is a quarterly staff publication of the
Office of Industries, U.S. International Trade Commission. The opinions and conclusions it
contains are those of the authors and do not necessarily reflect the views of the Commission
or of any individual Commissioner. The report is intended to provide analysis of important
issues and insights into the global position of U.S. industries, the technological
competitiveness of the United States, and implications of trade and policy developments.

Inquiries or comments on items appearing in this report may be made directly to the author,
or to:,

Director of Industries
Industry, Trade, and Technology Review
U. S. International Trade Commission
500 E Street, SW
Washington, DC 20436
Fax: 202-205-3161

Requests for copies of the JTTR, or to be added to the mailing list, should be address to the
Office of the Secretary, U.S. International Trade Commission, 500 E Street SW, Washington,
DC 20436, or by fax: 202-205-2104

Quarterly Review Staff

Larry Brookhart
Robert Hughes

assisted by

Zema Tucker
Sharon Greenfield

Contributing Authors

David Michels
Elizabeth Nesbitt

Susan H. Lusi
Tsedale M. Assefa

Robert A. Rogowsky
Director of Operations

Vern Simpson
Director of Industries




OCTOBER 1997
Electronic Commerce Industry, Trade, and Technology Review

commercial enterprises are believed to secure a presence on the Internet every day, adding
close to 100,000 new sites to the network every month.? Internet use correlates strongly with
the number of personal computers (PC). The near doubling of worldwide PC users between
1995 and 2000 is expected to generate a 17-fold growth in Internet use (table 3).° In
addition, Internet access through television monitors, which is currently being developed, will
put the network within reach of the world’s 800 million households with television."

Table 3
Estimates of PC and Internet use
World Us US. share of world markets
Year PC Internet PC Internet PC Internet
Million persons Percentage
140 9 69 6 49 67
167 28 82 14 49 50
191 46 96 25 50 54
219 82 112 4 51 50
246 134 130 58 53 43
269 157 151 67 56 43
Percent —— Percentage change ——

Annual growth 1995-
2000 ............- 14 77 17 62 7 24

‘Source: Mary Meeker and Chris DePuy, The Internet Report, (Morgan Stanley, 1996), pp. 3-1, 3-16; and Mary
Meeker and Chris DePuy, The Internet Retailing Report, May 28, 1997, (Morgan Stanley, 1997), found at
http:/Avww.ms.com, retrieved Aug. 28, 1997, p. 2-7.

With an estimated 25 million people on-line in 1997, the United States is by far the leading
market for Intemnet-based services,’* accounting for more than one-half of Internet
connections," and 58 percent of the 16.1 million’ hosts’ in the world. Although the U.S.
share of the world market is likely to decline as Internet use increases at faster rates in regions
of Europe and Asia, it is expected to remain the largest for the foreseeable future.

§ (...continued)
Stanley, 1997), found at http://www.ms.com, retrieved Aug. 28, 1997, p. 2-6.

° Ibid, p. 2-3.

1° Thid, p. 3-5.

" Standard and Poor, “Movies and Home Entertainment,” Industry Surveys, Feb. 27, 1997,
p. 12.

” Meeker and DePuy, 1996, p. 3-5.

3 Internet connections include hosts and users on the network.

“Doyle.

15 A host is a computer that provides services to other computers on the Internet.

28


OCTOBER 1997
Industry, Trade, and Technology Review Key Performance Indicators

el

APPENDIX A
KEY PERFORMANCE INDICATORS OF SELECTED
INDUSTRIES

STEEL (Tracy Quilter, 202-205-3437/tquilter@usitc.gov)
AUTOMOBILES (Laura A. Polly, 202-205-3408/polly@usitc.gov)
ALUMINUM (Karl S. Tsuji, 202-205-3434/tsuji@usitc.gov)
FLAT GLASS (James Lukes, 202-205-3426/lukes@usitc.gov)
SERVICES (Christopher Melly, 202-205-3461/melly@usitc.gov)

oo0q00n0


OCTOBER 1997
Industry, Trade, and Technology Review Joining Technologies

¢ The automobile industry’s lack of demand for polymer composites does not inspire
suppliers to increase their production capacity.”

¢ The lack of understanding of the nature and behavior of composites and other
advanced materials may delay the adoption of alternative materials in the U.S. auto
industry. Detroit does not have the design experience and familiarity with advanced
materials that exists in the aerospace industry.”

¢ Nondestructive testing methods are needed to test the quality and reliability of joints
and bonds.

Finally, the steel industry is not relinquishing its role as a major supplier easily, and it is
cooperating with the auto industry to develop better products and reduce costs. The auto/steel
partnership poses competition for composite and aluminum suppliers who are vying for new
business in the auto industry. Despite innovations such as ultralight steel, no type of steel is
as lightweight as polymer composites or aluminum. These alternative materials are more
likely than steel to be chosen for the production of a lightweight vehicle.

Despite some hindering circumstances, alternative materials potentially offer many
competitive advantages to the auto industry, including--

¢ The tooling cost for polymer composites is less than steel.” A manufacturer must
sell 300,000 to 500,000 cars to recover the cost of the die for a steel frame. For
polymer composites, it is less than 50,000.

¢ The similarity of aluminum to steel reduces the cost of retooling because aluminum
parts can be processed with some of the same equipment used to stamp steel. The
design of aluminum parts is also similar to that for steel, which is important in an
industry where consistency is valued highly.

¢ The prospect of reducing emissions of carbon dioxide is perhaps the most valuable
result of the widespread adoption of lightweight materials by auto producers.

Effective joining and bonding technology for alternative materials is a small but important
part of reducing the weight of the average vehicle. Joining and bonding methods are
“enabling technologies.” These enabling technologies always provide a benefit: in this case,

“ Auto makers currently do not demand a high volume of composite parts, and suppliers lack
capacity to produce a high volume. The rate of production of composite vehicle parts is slow,
roughly 15 minutes per part for liquid-molded composites, compared with 17 seconds to stamp a
steel part. Since these conditions have remained unchanged over the past several years, it is not
cost-effective to mass-produce polymer composite parts. OTA, Advanced Automotive
Technology; and USITC staff interviews with industry contacts.

“ Warren, USITC staff interview, June 17, 1997.

“ Marechaux, USITC staff interview, June 1997; and OTA, Advanced Automotive Technology,
Sept. 1995, p. 63.

* Warren, USITC staff interview, June, 1997; and Field and Clark, “A Practical Road to
Lightweight Cars.”

23


OCTOBER 1997
Industry, Trade, and Technology Review Pharmaceuticals

elimination of duties, increases in domestic production and domestic exports of finished
pharmaceutical products could be expected because the cost of producing finished
pharmaceuticals would be lower. With the exception of the recently created categories for
chemicals imported under the “K” provision, imports for each of these product categories
have increased since 1994 as reflected in table 1."" The economic effects of duty elimination
likely would be greater in regard to imports of generic or OTC pharmaceutical products, as
they are more freely traded and have fewer restrictions than the patented pharmaceutical
products. For chemical intermediates, various factors such as fungibility, uniqueness or
product specifications, lower the overall elasticity of demand so that a reduction in tariffs
likely would have less effect on import volume.

Economic Indicators Affected by Tariff
Elimination

In addition to trade shifts that have occurred since the implementation of the zero-for-zero
agreement, certain economic indicators for the U.S. pharmaceutical industry may also provide
insights about the effects of duty elimination. These include changes in domestic and foreign
sales levels, employment, producer costs, and research and development (R&D) expenditures.
The pharmaceutical industry already had changed rapidly in recent years as a result of
industry consolidation and the development of new products. The large companies in the
industry have grown larger in size, principally through mergers and acquisitions, many of
which have been international in scope. Some U.S. firms in the industry have proven superior
in developing and marketing new and more effective products, and have gained market share
at the expense of less successful firms. Other U.S. firms have experienced the expiration of
patents on key products and now face more intense foreign and domestic competition in the
highly competitive generic drug market.

Developments in sales of domestic ethical pharmaceuticals indicate growth of the industry in
each of the 3 years prior to and the 2 years after implementation of the zero-for-zero
agreement (table 3). However, the average annual growth rate of nearly 3 percent from 1992-
94 increased to 11 percent from 1994-96. Sales abroad by U.S. pharmaceutical firms prior
to the agreement grew at a similar average annual rate of 2 percent from 1992-94, whereas
such sales increased after the agreement by 16 percent from 1994-96. In addition to the
apparently improved access to foreign markets resulting from elimination of duties, it is
important to note that this improved export growth also may have been affected by other
agreements such as the NAFTA, which entered into force on January 1, 1994. Other factors
that could have influenced export growth include the shipment of bulk ingredients for
production overseas and efforts by companies to increase penetration in foreign markets.

1°(...continued)
offshore facilities would be different as well.

" The degree to which the anticipated changes in domestic production of finished products
offset each other, however, cannot be determined.

7




OCTOBER 1997

Pharmaceuticals Industry, Trade, and Technology Review

Historically, the pharmaceutical industry has been highly dependent on R&D of new products
to ensure growth of the industry, and relatively large amounts have been invested. Thus,
trends in R&D expenditures can be examined for possible increases, as R&D budgets could
be expanded in light of savings from the elimination of duties. Domestic R&D percentage
of U.S. sales has grown over the past 5-year period, reaching a high of nearly 22 percent of
sales in 1994 and over 21 percent of sales in 1996 (table 5). Analysis of annual trends shows
that absolute expenditures on domestic R&D have increased each year and the average annual
growth rate has increased as well; in 1994-96, domestic R&D grew by 9.6 percent, compared

with 9.2 percent during 1992-94.

Table 5
R&D expenditures and other economic factors in the pharmaceuticals industry, 1992-96
Average annual
Year Absolute change —_ change (percent)
Item 1992 1993 1994 1995 1996 1992-94 1994-96 1992-94 1994-96
Domestic R&D
(million dollars) :.. 9,312.1 10,477.1 11,101.6 11,874.0 13,378.5 1,789.5 2,276.9 9.2 9.6
R&D spending by
U.S. firms overseas
(million dollars) ... 2,155.8 2,262.9 2,347.8 3,333.5 3,539.6 192.0 1,191.8 44 22.8
Domestic R&D as a
share of sales
(percent) ........ 19.4 21.6 21.9 20.8 21.4 25 0.5 ¢) ()
T Not applicable.

Source: Estimates by the staff of the U.S. International Trade Commission and data from PhRMA.

Although total profitability among selected pharmaceutical companies was about comparable
in the respective pre- and post-zero-for-zero periods of 1994 and 1995 (table 6), total
company sales grew by 15 percent from 1994 to 1995 and total company earnings grew by
9 percent in the year-to-year comparison, as reflected by information on trends in individual
pharmaceutical company performance. It should be noted, however, that these trends may
also be due to factors other than tariff elimination, such as changes in exchange rates, gains
from consolidation and, for some companies, the development of and demand for new patent-
protected products.

Findings

The duty elimination resulting from the zero-for-zero agreement in pharmaceuticals is
difficult to link directly to the various industry changes that have occurred during 1995-96
because of the likely impact of other economic factors during the period. In light of this
complexity, and the relatively short time the agreement has been in effect (2 years), findings
are preliminary and inconclusive. The pharmaceutical industry, however, believes the
agreement to be successful enough that negotiators have already begun to pursue the second
update round.

10