JUNE 1999

OFFICE OF INDUSTRIES

PUBLICATION 3206
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 are not 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.

The information and analysis in this series are for the purpose of this report only. Nothing

in this report should be construed to indicate how the Commission would find in an

investigation conducted under any statutory authority.

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 ITTR, 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

assisted by

Zema Tucker

Sharon Greenfield

Contributing Authors

Chris Melly

Jennifer M. Baumert

Dennis R. Luther

Robert A. Rogowsky

Director of Operations

Vern Simpson

Director of Industries
OMB No.: 3117–0188

ITC READER SATISFACTION SURVEY

The Industry, Trade, and Technology Review (ITTR)


  
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Industry Trade and Technology Review
JUNE 1999

Industry, Trade, and Technology Review Cumulative Article Listing

i

Listing of Published Articles

(July 1996 - June 1999)

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
JUNE 1999

Cumulative Article Listing Industry, Trade, and Technology Review

ii

Listing of Published Articles—Continued

January 1998

Free trade in information technology goods 

Factors affecting the commercialization of new manufacturing processes

for materials

Thermoplastic elastomers in the auto industry: Increasing use and the potential

implications

March 1998

Textiles and apparel: New U.S. trade program likely to spur imports from

Israel and Jordan

The assembly industry in Hungary: Favorable business climate creates new

opportunities for U.S. industries

Indian market reforms attract U.S. investment and trade in capital goods

and equipment

June 1998

China's evolving automotive industry and market

Canadian involvement in Mexico's Maquiladora industry

September 1998

Internet advertising

Progress in recognizing and regulating global professional service providers

Deregulation fosters globalization of the electric power industry

December 1998

Impediments to competitiveness in Russia’s minerals and metals sector

Nonstore retailing: Alternative retailers attracting customers

Apparel sourcing strategies for competing in the U.S. market

March 1999

Korea’s foreign exchange crisis and its implications for U.S.-Korean trade

Advanced structural ceramics: Vast potential has yet to be realized

June 1999

Energy services: Recent trends and future prospects

Market trends affecting the U.S. environmental services sector

Health care services: Strong fundamentals and innovations foreshadow growth in 

U.S. exports and foreign direct investment
JUNE 1999

Industry, Trade, and Technology Review Contents

iii

CONTENTS

Page

Energy services: Recent trends and future prospects .... 1

Affiliate transactions .................................................... 2

U.S. competitive position in the global energy services market ..................... 5

Outlook .............................................................. 6

Market trends affecting the U.S. environmental services

sector ................................................................. 9

U.S. trade in environmental services ........................................ 10

The U.S. environmental services sector ...................................... 12

The global environmental services market .................................... 13

Trade barriers ......................................................... 15

Future prospects ........................................................ 16

Health care services: Strong fundamentals and innovations

foreshadow growth in U.S. exports and foreign direct

investment ............................................................ 19

Recent trends ......................................................... 20

Cross-border trade .................................................. 20

Affiliate transactions ................................................. 20

Market outlook ........................................................ 22
JUNE 1999

Contents Industry, Trade, and Technology Review

iv

CONTENTS—Continued

Page

Appendix A: Key performance indicators of selected

industries .................................................................. A-1

Steel:

Figure A-1 Steel industry: Profitability by strategic group ................... A-2

Table A-1 Steel mill products, all grades ................................ A-2

Table A-2 Steel service centers ....................................... A-3

Figure A-2 Steel mill products, all grades: Selected industry conditions ......... A-3

Automobiles:

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, January 1998-March 1999 ......... A-4

Figure A-3 U.S. sales of new passenger automobiles, by quarter ............... A-4

Aluminum:

Figure A-4 Aluminum: U.S. imports, exports, and price ..................... A-5

Table A-4 U.S. production, secondary recovery, imports, import penetration,

exports, average nominal price, and inventory level of aluminum, by

specified periods, for first quarter 1998, fourth quarter1998, and first

quarter 1999 ..................................................... A-5

Flat glass:

Figure A-5 Average monthly Japanese imports of flat glass, by quantity and value,

from the United States and all countries, 1995-99 ......................... A-6

Services:

Figure A-6 Balance on U.S. service trade accounts, by quarter, 1998 ........... A-7

Figure A-7 Surpluses on cross-border U.S. service transactions

with selected trading partners, by selected quarters, 1997-98 ................. A-7

#
JUNE 1999

Industry, Trade, and Technology Review Energy Services

 

1

 The views expressed in this article are those of the author. They are not the views of the

International Trade Commission or any of the Commissioners.

 

2

 Electric power transmission involves the movement of large amounts of electricity across

significant distances through high-voltage grids, whereas electric power distribution involves the

delivery of lower voltage electricity to the ultimate consumer.

 

3

 Although electricity itself is traded across borders, it is classified as a commodity and

therefore recorded in the merchandise trade account.

1

Energy Services: Recent Trends and Future

Prospects

Chris Melly1

melly@usitc.gov

(202) 205-3461

The two major components of the energy services sector--petroleum-related

services and utility-related services--have been undergoing dramatically

different market trends in recent years. While demand for petroleumrelated services has declined as a result of the Asian crisis and reduced oil

prices, opportunities in the utilities-related services sector have been

growing rapidly due to increased demand for electricity and the sale of

several state-owned electricity providers in developed countries. U.S. firms

are well-positioned to compete internationally in both of these markets.

This article discusses the extent of U.S. trade in energy services, evaluates

the competitive position of U.S. firms in the global energy services sector,

and assesses the future prospects for U.S. trade and investment in this

sector.

Energy services consist of a wide variety of activities involved with energy exploration,

production, and delivery. These services may be broadly divided into two categories:

petroleum-related services and utility-related services. Petroleum-related services principally

include oil field services, pipeline transportation and storage services, tanker services, and

services provided by petroleum wholesalers and retailers. Utility-related services comprise

sales of services by firms engaged in the distribution of natural gas and the generation,

transmission, and/or distribution of electrical energy.2 Energy services may include design

and engineering; transportation; storage; trading, marketing, and brokerage; commodity and

price risk management; demand-side and other customer services; as well as waste

management and disposal services.3

As with most industries, energy services may be sold to foreign customers either through

cross-border channels or through foreign-based affiliates. Energy services most likely to be

traded on a cross-border basis include transportation; design and engineering; and some of the

financially oriented activities such as energy trading, marketing, brokerage, and risk

management. Services provided through foreign affiliates tend to be those that require a direct
JUNE 1999

Energy Services Industry, Trade, and Technology Review

 

4

 This means that sales of different kinds of services by a single affiliate can not be

distinguished. For example, sales of telecommunication services by a subsidiary of a U.S. electric

power company can not be distinguished from sales of electricity distribution services -- they both

will be classified as services provided by electric power affiliates. 

 

5

 Sanitary services can not be separated from electric and gas services, which results in some

overstatement of energy service transactions. However, as noted previously, energy services

provided by construction, engineering, or consulting firms are not captured in the data, which

results in some understatement of energy service transactions.

 

6

 In 1995, foreign affiliates of U.S. energy service firms held assets measuring $123 billion,

which were nearly three times larger than the $43 billion in assets held by U.S. affiliates of

foreign energy firms. U.S. Department of Commerce (USDOC), Bureau of Economic Analysis

(BEA), Foreign Direct Investment in the United States, preliminary 1995 estimates, June 1997,

table A-1; and U.S. Direct Investment Abroad, preliminary 1995 estimates, Oct. 1997,

Table II.A 1. 

2

presence in foreign markets, such as oil field services, gas pipeline transportation, or electric

power generation, transmission, and distribution services. Official data on cross-border

energy services transactions are unavailable principally because they are not captured by an

individual service category. Instead, cross-border transactions in energy services are reflected

in other data on engineering, financial, transportation, consulting, or other services. With

respect to affiliate transactions, some official data are reported on sales of services by utilities

and petroleum-related firms. However, as with cross-border transactions, the affiliate data

do not capture energy-related sales of services by engineering, construction, or transportation

companies, because such transactions cannot be distinguished from non-energy sales. Due

to these data limitations, the following data discussion addresses only affiliate transactions by

firms engaged directly in petroleum-related and utility businesses.

Affiliate Transactions

International services transactions by affiliates are reported based upon the industry

classification of the foreign affiliate rather than the type of service sold.4 With respect to

energy services, data are reported under two industry categories: petroleum services and

public utilities. Petroleum services comprise sales of services by affiliates associated with

petroleum production, transportation, and distribution. Data on public utilities include sales

of services by affiliates established as electric, gas, and sanitation service providers.5

In 1996, foreign affiliates of U.S. energy service firms recorded sales of $20.1 billion to

foreign customers, reflecting a 39-percent increase from sales of $14.5 billion in 1995 (figure

1). Such sales were almost evenly proportioned between petroleum-related services and utility

services, at 48 percent and 52 percent, respectively. Sales were nearly three times the

corresponding purchases of energy services by U.S. customers through U.S. affiliates of

foreign firms, which were $7.7 billion in 1996. U.S. purchases of energy services also were

fairly evenly divided between petroleum-related services and services provided by utilities, at

44 percent and 56 percent, respectively. The $12.4-billion difference between U.S. sales and

purchases of energy services through affiliates reflects U.S. firms’ more pronounced presence

abroad.6
JUNE 1999

Industry, Trade, and Technology Review Energy Services

 

7

 USITC, “Deregulation fosters globalization of the electric power industry,” Industry, Trade,

and Technology Review, USITC publication No. 3134, Sept. 1998, pp. 49-55.

3

1992 1993 1994 1995 1996

0

5

10

15

20

25

Sales Purchases Balance

Billion dollars

Source: U.S. Department of Commerce (USDOC), Bureau of Economic Analysis (BEA), Survey of Current Business,

Sept. 1994, pp. 135-136; Sept. 1995, pp. 104-105; Nov. 1996, pp. 111-112; Oct. 1994, pp. 137-138; Oct. 1998,

pp. 115-116; and USDOC, BEA, U.S. Direct Investment Abroad, 1994 Benchmark Survey, Final Results, table III.F

20.

Figure 1

Energy service transactions by majority-owned affiliates: U.S. sales,

purchases, and balance, 1992-96

As noted, sales of energy services by foreign affiliates of U.S. firms grew by 39 percent in

1996, considerably faster than the 9-percent average annual growth rate recorded during

1992-95. This growth was principally driven by an 84-percent increase in sales of services

by utilities, which in turn reflected a number of major acquisitions in the United Kingdom and

Australia by U.S. electric power companies.7 By contrast, purchases of energy services from

U.S.-based affiliates of foreign firms in 1996 grew by 10 percent, slightly slower than the 14-

percent average annual growth rate during 1992-95.

On a regional basis, European-based affiliates of U.S. firms accounted for 46 percent of U.S.

sales of energy services through foreign affiliates in 1996 (figure 2). Affiliates in the United

Kingdom alone accounted for 29 percent of such sales. The regional distribution of energy

service sales varied somewhat by industry. Sales of services through petroleum-related

affiliates were relatively widely distributed geographically. U.S.-owned affiliates in Europe

accounted for 31 percent of such sales, almost half of which occurred in the United Kingdom,

while Latin America accounted for 21 percent, and a collection of other countries in Asia and

the Middle East accounted for 26 percent. By contrast, U.S. sales of services through

foreign-based affiliates in the utility industry were much more concentrated in Europe. In

1996, European-based affiliates accounted for 60 percent of utility-related services sales

through affiliates, with those in the United Kingdom alone accounting for 41 percent of sales.

Australian-based affiliates of U.S. firms also recorded significant utility-related sales,

accounting for 16 percent of U.S. sales. The predominance of affiliate
JUNE 1999

Energy Services Industry, Trade, and Technology Review

 

8

 Sales of services by utilities that are foreign affiliates of U.S. firms operating in the United

Kingdom increased by $3.2 billion in 1996, which accounted for 67 percent of the increase in

worldwide service sales by foreign affiliates of U.S. firms in the utility sector. Similarly, sales of

services by utilities that are foreign affiliates of U.S. firms operating in Australia increased by

$1.2 billion in 1996, which accounted for 26 percent of the increase in worldwide service sales by

foreign affiliates of U.S. firms in the utility sector.

 

9

 USITC staff estimates, based on USDOC, BEA, “Direct Investment Positions for 1997: 

Country and Industry Detail,” Survey of Current Business, July 1998, p. 44.

4

Sales Balance

Other

Canada

Latin America

Europe

-2 0 2 4 6 8 10

Billion dollars

Source: U.S. Department of Commerce (USDOC), Bureau of Economic Analysis (BEA), Survey of Current

Business, Sept. 1994, pp. 135-136; Sept. 1995, pp. 104-105; Nov. 1996, pp. 111-112; Oct. 1997, pp. 137-138;

Oct. 1998, pp. 115-116; USDOC, BEA, U.S. Direct Investment Abroad, 1994 Benchmark Survey, Final Results,

table III-F 20; and USITC staff estimates.

Figure 2

Energy service transactions by majority-owned affiliates: U.S. sales and

balance, by major trading partners, 1996

transactions generated in the United Kingdom and Australia was a direct result of

privatization and deregulation programs undertaken by these countries, which facilitated U.S.

investment in the electric power sector during the mid-1990s. In particular, new acquisitions

by U.S. firms in the United Kingdom and Australia together were responsible for 93 percent

of the growth in sales of services by utilities during 1996.8

With respect to U.S. purchases of energy-related services from U.S.-based affiliates of foreign

firms in 1996, affiliates with parent firms in Canada accounted for 41 percent, while those

with European parents are believed to have accounted for about 30 percent.9 Canadian-owned

affiliates were particularly prominent in the utilities sector, accounting for 65 percent of U.S.

purchases of services from U.S.-based utility affiliates of foreign firms. European-owned

affiliates held a more significant position in the petroleum-related sector, where they accounted

for 35 percent of U.S. purchases of petroleum-related services through affiliates in 1996,

followed by 11 percent purchased through U.S.-based affiliates of Canadian firms. 
JUNE 1999

Industry, Trade, and Technology Review Energy Services

 

10 CNN News Network, “Halliburton, Dresser merge,” Feb. 26, 1998, found at Internet

address http://cnnfn.com/, retrieved Mar. 17, 1998; Baker Hughes Company Profile, found at

Internet address http://www.bakerhughes.com/, retrieved Nov. 10, 1998; and Standard & Poor’s,

“Oil & Gas: Equipment & Services,” Industry Surveys, Sept. 11, 1997, p. 7.

 

11 Bhushan Bahree, “Oil prices likely to stay low through next year,” Wall Street Journal,

Nov. 10, 1998, p. A2.

 

12 Upstream activities include exploration, development, and production functions. Anne

Marie Morrego, “Unocal, Mobil to cut capital spending, joining moves of other oil companies,”

Wall Street Journal, Nov. 12, 1998, p. A20; and Texaco, “Texaco announces worldwide

upstream reorganization,” press release of Nov. 12, 1998, found at Internet address

(continued...)

5

In sum, available data on affiliate transactions indicate that sales of energy services through

foreign-based affiliates of U.S. firms increased significantly in 1996, principally due to several

major acquisitions by U.S. firms. Meanwhile, U.S. purchases of energy services from

affiliates of foreign firms increased somewhat more slowly than in previous years, reflecting

stable market conditions and the absence of major acquisitions by foreign firms. Regionally,

European-based affiliates accounted for most U.S. sales of energy-related services through

foreign affiliates, while Canadian-owned affiliates accounted for most U.S. purchases from

affiliates.

U.S. Competitive Position in the Global Energy Services

Market

With several strong, well established firms, U.S. providers of energy services are well

positioned to compete internationally in both the petroleum and utility businesses. In the oil

field services industry, consolidation has resulted in the formation of three powerful U.S.

companies with broad international activities: Baker Hughes, Halliburton, and

Schlumberger.10 Major U.S. oil companies, such as Chevron and Exxon-Mobil, are similarly

well established global players that provide various services related to petroleum and natural

gas extraction and distribution. Enron, a large U.S. energy concern with expertise in the

natural gas sector, is also expanding in the electric utility sector, joining a number of private

electric power companies that are major global competitors, including AES, CMS, Edison

Mission Energy, Entergy, PP&L, Southern Energy, Texas Utilities, and Utilicorp.

U.S. firms such as these are well endowed in financial, managerial, and technological

resources. Competitive threats and opportunities facing these firms are driven principally by

economic and political forces that may alter the operating environment. In 1998, these forces

appeared to be sending petroleum-related businesses into decline while fostering international

growth in the electric power industry. During 1997-98, increases in oil supplies from nonOPEC countries, combined with diminished demand in Asian markets, reduced oil prices from

a high of $27 to $13 per barrel.11 With oil prices low, demand for services related to new

exploration or relatively expensive extraction techniques is likely to decline as well. Such a

decline was manifested by reductions in capital spending of 10 to 15 percent by the major oil

companies in 1998, and by the November 1998 announcement of layoffs at Texaco, which

plans to reduce “upstream” employment by 12 percent.12
JUNE 1999

Energy Services Industry, Trade, and Technology Review

 

12 (...continued)

http://www.texaco.com/, retrieved Nov. 18, 1998.

 

13 Standard & Poor’s, “Oil & Gas: Equipment & Services,” Industry Surveys, Sept. 11, 1997,

p. 8.

 

14 USITC, “Deregulation fosters globalization of the electric power industry,” Industry, Trade,

and Technology Review, USITC publication 3134, Sept. 1998, p. 43.

 

15 USDOC, BEA, Survey of Current Business, Sept. 1997, p. 147.

 

16 Ibid., pp. 42-3.

 

17 U.S. Department of Energy, Energy Information Administration, “Asian economic

downturn slows growth in oil prices through 2007,” press release of Nov. 17, 1998; and Bhushan

Bahree, “Oil prices likely to stay low through next year,” Wall Street Journal, Nov. 10, 1998,

p. A2.

 

18 Kathryn Kranhold, “PacifiCorp says it is quitting foreign projects,” Wall Street Journal,

Oct. 26, 1998, p. A4; Business Wire, “Utilicorp announces Power New Zealand transaction

creating largest New Zealand electric lines company,” Nov. 13, 1998, found at Internet address

http://www.energycentral.com/, retrieved Nov. 17, 1998; Reuters, “Texas Utilities in final

Australia CitiPower bids,” Nov. 16, 1998, found at Internet address http://www.energycentral.com, retrieved Nov. 17, 1998; Reuters, “CMS says plans to invest $800 million in

Brazil,” Nov. 13, 1998, found at Internet address http://www.energycentral.com, retrieved

Nov. 17, 1998; and Reuters, “Enron Mexico aims for top energy spot,” Sept. 25, 1998, retrieved

through Pointcast Sept. 28, 1998.

6

In contrast, government policy changes are fostering growth in international electric power

services. To meet rapidly rising demand for electric energy, governments in developing

countries are turning toward foreign investors, seeking their participation in build-operatetransfer programs, selling state-owned enterprises, and offering concessions to manage

distribution services.13 Meanwhile, to drive down electricity costs and improve service

quality, governments in developed countries are breaking up monopolies and introducing

competition into the generation and distribution sectors.14 The net effect of these policy

changes is a boom in opportunities for foreign direct investment in electricity services, which

has been manifested by 107-percent average annual growth in the U.S. direct investment

position in foreign utilities during 1994-96.15 In dollar terms, the United Kingdom and

Australia have been the largest recipients of U.S. direct investment, reflecting U.S.

acquisitions of eight electric power distribution companies in the United Kingdom and five in

Australia.16

Outlook

The opposing trends of declining demand for petroleum-related services and increasing

opportunities in the electric power industry suggest that future prospects for energy services

trade are mixed. Growth in world oil demand is projected to slow through 1999, and prices

currently are not expected to recover soon, which suggests that sales of related services will

likely suffer.17 Meanwhile, U.S. electric power providers appear to be continuing with their

international expansion programs, despite some retrenchments. Although PacifiCorp and

Entergy are exiting from foreign projects, other firms such as Utilicorp, Texas Utilities, CMS,

and Enron are increasing their international activities.18 Due to the Asian economic

slowdown, near-term growth in demand for electric power will likely slow and government-
JUNE 1999

Industry, Trade, and Technology Review Energy Services

 

19 Reuters, “Spain opens electricity market to REN, Electrabel,” Nov. 12, 1998, found at

Internet address http://www.energycentral.com, retrieved Nov. 17, 1998; and USITC,

“Deregulation fosters globalization of the electric power industry,” Industry, Trade, and

Technology Review, p. 37.

 

20 Statoil and Tractebel, a majority-owned affiliate of Suez Lyonnaise des Eaux of France,

already own some electric power plants in the United States. Kathryn Kranhold, “Planned

purchase of GPU power plants highlights push by foreigners into U.S.,” Wall Street Journal,

Nov. 10, 1998, p. A4, and Business Wire, “Sithe Energies wins bid for GPU generating assets,”

Nov. 9, 1998, found at Internet address http://www.energycentral.com/, retrieved Nov. 10, 1998.

7

sponsored development projects may be curtailed across Asia. Despite such adverse market

conditions, U.S. firms may actually find more opportunities to establish foreign affiliates in

Asia as the weakened financial condition of Asian governments may accelerate the ongoing

shift to private funding of electric power sector development. In addition, Latin American

countries such as Mexico and Brazil continue to seek foreign investment in the electric power

industry, and the European Union’s movement toward the creation of a Common Energy

Market is creating new business opportunities for affiliates of U.S. energy firms.19 These

factors suggest that, despite an ailing petroleum industry, sales of energy services through

U.S. affiliates will likely continue to grow strongly as utilities pursue international expansion,

although, it is unlikely that the very high rate of growth experienced during 1995-96 will be

sustained.

U.S. purchases of energy services through affiliates of foreign firms are likely to encounter

similar forces, characterized by slowing growth in purchases of services from petroleumrelated affiliates and accelerating growth in purchases from utilities owned by foreign firms.

The U.S. electric power industry is undergoing significant change as several states restructure

their regulatory frameworks to permit competition. Such changes provide increased incentives

and opportunities for new competitors, both foreign and domestic, to enter U.S. regional

markets through mergers and acquisitions. For example, in November 1998, New Jerseybased GPU announced the sale of 23 power generation plants to Sithe Energies, a U.S.

affiliate of the French company, Vivendi, for $1.7 billion. The transaction allows GPU to

concentrate on electricity distribution, while enabling Sithe to become the largest independent

power producer in the United States. A number of other foreign companies are reportedly

considering similar acquisitions in the United States, including Scottish Power and PowerGen

of the United Kingdom, Statoil of Norway, and Tractebel of Belgium.20 Should these

acquisitions take place, U.S. purchases of energy services would likely increase significantly

in the near future.#
JUNE 1999

Industry, Trade, and Technology Review Environmental Services

 

1

 The views expressed in this article are those of the author. They are not the views of the

International Trade Commission or any of the Commissioners.

 

2

 The Bureau of Economic Analysis (BEA) does not classify and report data that indicate

cross-border trade in environmental services or transactions by majority-owned affiliates in the

environmental services industry in its annual report in the Survey of Current Business entitled

“U.S. International Sales and Purchases of Private Services.” Consequently, this chapter includes

data compiled and reported by industry sources, primarily Environmental Business International,

Inc. (EBI) and Engineering News-Record, published by the McGraw-Hill Companies.

 

3

 Organization for Economic Cooperation and Development (OECD), report prepared in

conjunction with OECD/Eurostat Informal Working Group on the Environment Industry,

“Interim Definition and Classification of the Environment Industry” (Paris: OECD, 1996), p. 7.

 

4

 United Nations Conference on Trade and Development (UNCTAD), “Strengthening

Capacities in Developing Countries to Develop their Environmental Services Sector,” May 12,

1998, p. 5.

 

5

 The scope of the environmental services sector, as discussed herein, is that used by EBI (see

footnote 2) in the compilation of trade and market data.

9

Market Trends Affecting the U.S.

Environmental Services Sector

Jennifer M. Baumert1

jbaumert@usitc.gov

(202)205-3450

In recent years, slower growth in demand for environmental services in the

largely compliant U.S. market has led to increased U.S. industry

consolidation and a shift in emphasis to the international market among

U.S. environmental service providers. This shift in focus, together with the

United States’ competitive position in the environmental services sector

and growing demand in foreign markets, suggests that U.S. exports of

environmental services will likely experience continued growth in the

future. This article assesses U.S. trade performance in the environmental

services sector; the effect of U.S. and foreign environmental market

structures, recent trends, and foreign trade barriers on the ability of U.S.

firms to compete in this sector; and future prospects for the U.S. and global

environmental services sectors.

The environmental services sector2 as defined by the Organization for Economic Cooperation

and Development (OECD), broadly comprises those activities incidental to the cleanup,

mitigation, prevention, study, and measurement of environmental damage affecting air, land,

water, noise levels, and ecosystems.3 However, because of the relatively recent emergence of

the environmental services industry, there is no consensus regarding the precise scope of this

sector.4 For the purposes of this article, environmental services5 specifically include solid and
JUNE 1999

Environmental Services Industry, Trade, and Technology Review

 

6

 Remediation services comprise the cleanup of polluted land and water sites, as well as the

emergency cleanup of accidents that damage the environment, such as oil spills. UNCTAD,

“Strengthening Capacities in Developing Countries to Develop their Environmental Services

Sector,” p. 5. 

 

7

 UNCTAD, “Strengthening Capacities in Developing Countries to Develop Their

Environmental Services Sector,” p. 5.

 

8

 World Trade Organization (WTO), Committee on Trade and Environment, contribution by

the United States, “Liberalization of Trade in Environmental Services and the Environment”

(WT/CTE/W/70), Nov. 21, 1997.

 

9

 UNCTAD, “Strengthening Capacities in Developing Countries to Develop their

Environmental Services Sector,” p. 11.

 

10 Environmental services trade data published by EBI are only available for the years 1994,

1995, 1996, and 1997.

 

11 The U.S. analytical services sector registered a small surplus of $0.03 billion in 1997. 

During 1994-96, no imports or exports were registered in this sector.

10

hazardous waste management, environmental consulting and engineering, remediation,6

environmental analysis, and water treatment.

Engineers, consultants, architects, and other professional service providers typically supply

environmental services. National governments, local governments, and firms bound by

environmental guidelines are the principal consumers of environmental services,7 with public

sector spending accounting for the greatest share of environmental services demand in all

OECD countries, except the United States and the Netherlands.8 Environmental goods and

services are often provided as part of a single package, in which services frequently play the

more important role.9 Although the data used in this article do not distinguish between crossborder trade and affiliate transactions, it is likely that trade in environmental services is

conducted primarily through overseas affiliates, as cross-border trade is often infeasible in this

sector. 

U.S. Trade in Environmental Services

U.S. exports of environmental services reached $3.5 billion in 1997, a 4-percent increase from

the previous year (figure 1). This increase was lower than the average annual increase of 22

percent observed during 1994-96.10 U.S. imports rose by 43 percent to $2 billion in 1997.

This increase was in sharp contrast to the average annual decrease of 3 percent during 1994-

96. As a result, although the U.S. environmental services trade surplus increased at an

average annual rate of 58 percent during 1994-96, the surplus decreased by 24 percent to $1.5

billion in 1997. These trends are likely a result of the recent consolidation of the U.S.

environmental industry, which is discussed in further detail in the following section. Solid

waste management services and consulting and engineering services accounted for the greatest

share of U.S. exports, as well as a majority of the U.S. surplus in environmental services trade

during 1994-97.11 In 1997, solid waste management services and consulting and engineering

services respectively accounted for exports of $1.3 billion and $1.7 billion, and trade

surpluses of $1.1 billion and $1.4 billion. In that same year, U.S. hazardous waste

management services and remediation and industrial services accounted for trade surpluses
JUNE 1999

Industry, Trade, and Technology Review Environmental Services

 

12 In 1997, no U.S. imports were registered in the hazardous waste management and

remediation and industrial services sectors.

 

13 EBI, Environmental Business Journal, Overview 1998, vol. 11, No. 7, p. 7; Annual Industry

Overview, Aug. 1995, vol. 8, No. 8, p. 2; Apr. 1996, vol. 9, No. 4, p. 7; and Apr. 1997, vol. 10,

No. 4, p. 11.

 

14 USITC staff estimates, based on data reported by Andrew G. Wright and Debra K. Rubin,

et. al., “Despite Some Rough Spots in Asia, International Markets Forge On,” Engineering NewsRecord, July 6, 1998, p. 49. 

11

1994 1995 1996 1997

0

0.5

1

1.5

2

2.5

3

3.5

4

Exports Imports Balance

Billion dollars

Source: EBI, Environmental Business Journal, Overview 1998, vol. 11, No. 7, p. 7; Annual Industry Overview, 

Aug. 1995, vol. 8, No. 8, p. 2; Apr. 1996, vol. 9, No. 4, p. 7; and Apr. 1997, vol. 10, No. 4, p. 11.

Figure 1

Environmental services: U.S. exports, imports, and balance, 1994-97

of $0.1 billion and $0.3 billion, respectively.12 Waste water treatment is the only

environmental service sector in which the United States registered a trade deficit, amounting

to $1.5 billion in 1997.13

Available trade data do not indicate which countries or regions account for the greatest share

of U.S. environmental services imports and exports. However, data do reveal the relative

importance of certain foreign markets for the U.S. environmental industry. Europe is

reportedly the largest market for U.S. environmental goods and services, accounting for 44

percent of the overseas revenue earned by the leading 200 U.S.-based environmental firms

(figure 2). Asia/Australia, Latin America, and Canada are also important markets for U.S.

environmental goods and services, accounting for 19 percent, 16 percent, and 13 percent of

overseas revenues in 1997, respectively. By contrast, the Middle East and Africa accounted

for only 7 percent and 1 percent of such revenues, respectively.14 Because environmental

goods and services are often provided simultaneously, it is likely that these figures closely

reflect the proportion of international revenues earned by the U.S. environmental service

providers in each of these markets.
JUNE 1999

Environmental Services Industry, Trade, and Technology Review

 

15 David R. Berg and Grant Ferrier, “The U.S. Environmental Industry Meeting the

Challenge: U.S. Industry Faces the 21st Century,” Sept. 1997, found at Internet address

http://www.gnet.org/, retrieved July 8, 1998; and EBI, Environmental Business Journal,

Overview 1998, vol. 11, No. 7, p. 15.

 

16 UNCTAD, “Strengthening Capacities in Developing Countries to Develop their

Environmental Services Sector,” May 12, 1998, p. 6; and Berg and Ferrier, “The U.S.

Environmental Industry Meeting the Challenge: U.S. Industry Faces the 21st Century,” Sept.

1997.

 

17 Berg and Ferrier, “The U.S. Environmental Industry Meeting the Challenge: U.S. Industry

(continued...)

12

Europe 43.9%

Asia/Australia 19.3%

Latin America 15.8%

Canada 12.8%

Middle East 7.2%

Africa 1.0%

 

1

 Data relating to the environmental industry, as presented in the Engineering News-Record, comprise both goods

and services revenues earned by the leading 200 U.S.-based environmental firms in the following environmental

sectors: hazardous waste management, nuclear waste management, water quality, wastewater treatment,

environmental compliance, and other environmental markets.

Source: Compiled by USITC staff using data reported by Wright and Rubin, “Despite Some Rough Spots in Asia,

International Markets Forge On,” Engineering News-Record, July 6, 1998, p. 49.

Figure 2

Environmental industry:1 Foreign revenue of U.S.-based environmental

goods/services firms, by region, 1997

The U.S. Environmental Services Sector

Environmental firms in the United States have traditionally focused on meeting domestic

demand, which is substantial. In 1997, less than 10 percent of U.S. environmental industry

revenues were generated abroad.15 The domestic market has been particularly important to

the small- and mid-size firms that generate more than half of U.S. environmental industry

revenues, as such firms are frequently unable to market their goods and services abroad due

to insufficient resources.16 In recent years, however, the U.S. environmental sector has

experienced slower growth in domestic demand, because many firms have come into

compliance with present environmental law, and little new legislation has been introduced.

This slowdown in the U.S. market has led to greater competition and declining industry

profits.17 Consequently, U.S. firms are pursuing mergers and acquisitions more aggressively,
JUNE 1999

Industry, Trade, and Technology Review Environmental Services

 

17 (...continued)

Faces the 21st Century,” Sept. 1997.

 

18 Wright and Rubin, “Booming Economy Keeps Green Markets Afloat,” p. 38.

 

19 Cary Perket, “Environmental Service Demands Shrink, Close Smaller Shops,” World

Wastes, May 1998, found at Internet address http://www.umi.com/proquest/, retrieved 

June 30, 1998.

 

20 Berg and Ferrier, “The U.S. Environmental Industry Meeting the Challenge: U.S. Industry

Faces the 21st Century,” Sept. 1997.

 

21 EBI, Environmental Business Journal, Apr. 1997, vol. 10, No. 4, p. 11; Apr. 1996, vol. 9,

No. 4, p. 7; and Aug. 1995, vol. 8, No. 8, p. 2.

 

22 Berg and Ferrier, “The U.S. Environmental Industry Meeting the Challenge: U.S. Industry

Faces the 21st Century,” Sept. 1997.

 

23 Ibid.

 

24 Ibid.

 

25 UNCTAD, “Strengthening Capacities in Developing Countries to Develop their

Environmental Services Sector,” p. 7.

13

in an effort to broaden their companies’ expertise and increase growth potential.18 Slowing

growth in demand for environmental services also has precipitated market exit by many small

environmental services firms.19

As a result of domestic trends, U.S. firms have shown increasing interest in the overseas

environmental market, which is growing more rapidly than the domestic market for

environmental services.20 Increasing international orientation is well illustrated by the fact

that U.S. exports of environmental services grew at an average annual rate of 15 percent

during 1994-97, while the domestic U.S. environmental services market registered average

annual growth of 1 percent during that same period.21

The relatively large number of small- and mid-size companies in the U.S. environmental

sector, together with the traditional industry focus on domestic compliance, have had a

negative effect on the overall competitiveness of the U.S. environmental goods and services

industry.22 The U.S. environmental goods industry lags behind competitors from countries

such as Germany and Japan in certain equipment sectors.23 However, with the exception of

services incidental to water treatment works--in which France and the United Kingdom

reportedly have a competitive advantage--U.S. firms are competitive in all areas of the

environmental services industry.24

The Global Environmental Services Market

The growing need for environmental goods and services in developing countries--caused by

increasing population, urbanization, and industrialization--could precipitate the rapid growth

of their environmental markets. However, potential market growth in the developing world

is hampered by limited resources and a lack of environmental regulation, enforcement

mechanisms, and knowledge.25 Currently, industrialized countries reportedly remain the most

important overseas markets for U.S. environmental goods and services firms. Europe had the

fastest growing market for environmental services in 1997 (figure 3). Between 1996 and

1997, European revenues for the leading 200 U.S.-based environmental
JUNE 1999

Environmental Services Industry, Trade, and Technology Review

 

26 Industry representatives indicate that business has decreased substantially in both Asia and

Latin America as a result of the crisis, while another has suggested the possibility that the Asian

crisis could have a delayed impact on the environmental industry. Moreover, the Asian crisis has

reportedly resulted in an unwillingness to borrow funds for environmental projects from

multilateral development banks, such as the Inter-American Development Bank. Wright and

Rubin, “Despite Some Rough Spots in Asia, International Markets Forge On,” Engineering

News-Record, July 6, 1998, p.49; and industry representatives, facsimile responses to questions

posed by USITC staff, received Oct. 15, 1998, Nov. 16, 1998, and Dec. 18, 1998.

 

27 Wright and Rubin, “Despite Some Rough Spots in Asia, International Markets Forge On,”

Engineering News-Record, July 6, 1998, p. 49. 

 

28 Ibid. 

14

1996 1997

Europe Asia/Australia Latin America Canada Middle East Africa

0

500

1000

1500

2000

2500

Million dollars

 

1

 Data relating to the environmental industry, as presented in the Engineering News-Record, comprise both goods

and services revenues earned by the leading 200 U.S.-based environmental firms in the following environmental

sectors: hazardous waste management, nuclear waste management, water quality, wastewater treatment,

environmental compliance, and other environmental markets.

Source: Wright and Rubin, “Despite Some Rough Spots in Asia, International Markets Forge On,” Engineering NewsRecord, July 6, 1998, p. 49.

Figure 3

Environmental industry:1 Foreign revenue of U.S.-based environmental

goods/services firms, by region, 1996 and 1997

goods and services firms increased by 80 percent, from $1.2 billion in 1996 to $2.2 billion in

1997. This growth has been attributed to the low risk and relatively solid economic climate

that have encouraged investment in the European market. The Latin American and Canadian

revenues of leading U.S. environmental firms also grew significantly in 1997, registering

increases of 66 percent and 53 percent, respectively. Though environmental business in Asia

has slowed due to the recent currency crisis,26 the Asia-Pacific revenues of leading U.S.

environmental firms also rose by 18 percent in 1997.27 By contrast, revenues generated by

U.S. firms in Africa and the Middle East that year decreased by 34 percent and 12 percent,

respectively.28
JUNE 1999

Industry, Trade, and Technology Review Environmental Services

 

29 UNCTAD, “Strengthening Capacities in Developing Countries to Develop their

Environmental Services Sector,” May 12, 1998, p. 21.

 

30 Ibid., p. 2. Additional information on recent trends in professional services provision can

be found in chapters 5 and 21 of Recent Trends in U.S. Services Trade (USITC publication 3198;

May 1999).

 

31 Ibid., p. 17.

 

32 “Frost & Sullivan–Regulations and Infrastructure Developments Drive Mexican Water and

Wastewater Treatment Market,” Frost & Sullivan, received by NewsEDGE/Lan, 

Oct. 19, 1998; and industry representative, facsimile response to questions posed by USITC staff,

received Nov. 16, 1998.

 

33 Tied aid is project financing to which certain conditions are attached. Recipients of tied aid

are often required to procure goods and services from firms based in the country that provides the

aid.

 

34 Berg and Ferrier, “The U.S. Environmental Industry Meeting the Challenge: U.S. Industry

Faces the 21st Century,” Sept. 1997.

 

35 Industry representative, facsimile response to questions posed by USITC staff, received Nov.

16, 1998.

 

36 “Export Financing for Service Industries,” Business America, Apr. 1998. 

15

Trade Barriers

The ability of U.S. environmental firms to provide services abroad is dependent on various

factors. For example, government procurement regulations, as well as the transparency of

these rules, can have a considerable effect on environmental services providers, as federal and

local governments are frequently the purchasers of environmental services. In some countries,

government procurement restrictions place foreign firms at a competitive disadvantage, or

prohibit their participation in the procurement process.29 Because engineers, architects,

consultants, and other professionals provide many environmental services, restrictions on the

presence of foreign professionals, the failure to recognize professional degrees, and other

barriers to professional services provision also have a chilling effect on the foreign provision

of environmental services.30 Barriers to commercial presence, a principal mode of

environmental services supply, can also impede foreign provision of such services.31

Moreover, access to financing is crucial. For example, firms that can secure project financing

reportedly are more likely to win business in the water and wastewater treatment sector.32

Countries such as Canada, France, Germany, Japan, Korea, the Netherlands, and the United

Kingdom reinforce the international competitiveness of their environmental industries by

offering incentives such as “tied aid”33 and generous financing packages to potential

customers.34 In addition, European environmental firms occasionally provide analysis or

management services inexpensively or at no charge in an effort to attract business.35 U.S.

services providers, on the other hand, can obtain financing from U.S. agencies such as the

Export-Import Bank of the United States (Eximbank) and the Small Business Administration

(SBA).36 Creative financing techniques, such as build-operate-
JUNE 1999

Environmental Services Industry, Trade, and Technology Review

 

37 When operating under a BOT contract, a firm builds and operates a facility for a certain

period of time, gradually transferring ownership to a public authority. UNCTAD, “Strengthening

Capacities in Developing Countries to Develop their Environmental Services Sector,” p. 22.

 

38 Ibid., p. 22.

 

39 Industry representative, facsimile response to questions posed by USITC staff, received Dec.

18, 1998.

 

40 Jennifer Lin, “China awakes to the fact that its growth has created an environmental

disaster,” Knight Ridder/Tribune Information Services, received by NewsEDGE/Lan, 

Nov. 7, 1998.

 

41 Industry representative, facsimile response to questions posed by USITC staff, received Dec.

18, 1998.

 

42 “Frost & Sullivan–Regulations and Infrastructure Developments Drive Mexican Water and

Wastewater Treatment Market,” Frost & Sullivan, received by NewsEDGE/Lan, 

Oct. 19, 1998.

 

43 Obligations could also be satisfied through various other means, including emissions

reducing projects in developing countries and the purchase of pollution permits. Though not in

effect, this protocol has been agreed to by 160 countries. “Administration pushes Kyoto Protocol

despite strong industry opposition,” Chemical Marketing Reporter, Aug. 31, 1998, found at

Internet address http://www.umi.com/proquest/, retrieved Nov. 5, 1998.

16

transfer (BOT),37 have also been used in the environmental services sector.38 However,

because BOT projects are perceived as being risky, few U.S. environmental firms pursue such

projects.39 Client countries can also obtain project financing from various international

agencies.

Future Prospects

If current trends persist, growth will likely continue in the world environmental services

market in spite of the recent economic downturn caused by the Asian currency crisis.

Increasing environmental awareness, the return of economic growth, and new environmental

legislation may cause demand for environmental services to rise in the developing world. For

instance, China has recently demonstrated heightened environmental awareness and a greater

willingness to enforce environmental regulations in response to poor environmental conditions

caused by years of rapid industrialization. Government officials have adopted new laws and

fines, closed a large number of small factories, and advocated media exposure of polluters.40

Reportedly, business opportunities for U.S. environmental services firms in Eastern Europe

are relatively abundant as a result of increasingly strict environmental regulations and a high

regard for U.S. technologies in that region.41 In Mexico, decreasing supplies of potable water,

together with a growing population and expanding industrial sector, likely will lead to

increased demand for water and wastewater treatment goods and services in the near future.42

The Kyoto Protocol and efforts to comply with ISO 14000 standards also could increase

business opportunities for U.S. environmental services providers. Under the Kyoto Protocol,

industrialized countries would be required to reduce greenhouse gas emissions significantly.43

ISO 14000 is a set of standards according to which providers of environmental auditing

services can certify the environmental management systems (EMS) of firms in various goods

and services industries. Firms that obtain ISO 14000 certification may gain a competitive
JUNE 1999

Industry, Trade, and Technology Review Environmental Services

 

44 Glenn Hasek, “ISO’s green standards take root,” Industry Week, Feb. 16, 1998, found at

Internet address http://www.umi.com/proquest/, retrieved Mar. 10, 1998; and Charles W.

Thurston, “Latin America finds profit in ISO 14000,” Chemical Marketing Reporter, 

Feb. 16, 1998, found at Internet address http://www.umi.com/proquest/, retrieved 

Nov. 5, 1998.

17

advantage among potential customers who prefer to do business with environmentally

responsible companies. Though these standards are voluntary, approximately 1,500 firms

around the world already have become ISO 14000 certified.44 #
JUNE 1999

Industry, Trade, and Technology Review Health Care Services

 

1

 The views expressed in this article are those of the author. They are not the views of the

International Trade Commission or any of the Commissioners.

 

2

 For the purpose of this article, health care services include services provided to patients by

hospitals and hospital chains; offices and clinics of medical doctors and other health care

professionals; nursing homes and other long-term care providers; rehabilitation facilities; home

health care providers; certain health maintenance organizations (HMOs); medical and dental

laboratories; kidney dialysis centers; and specialty outpatient facilities. This discussion

encompasses HMOs or similar organizations that provide medical or other health care services to

members, but does not include organizations that provide only insurance for hospitalization or

medical costs, as these services are captured under insurance services.

19

Health Care Services: Strong Fundamentals

and Innovations Foreshadow Growth in U.S.

Exports and Foreign Direct Investment

Dennis R. Luther1

luther@usitc.gov

(202) 205-3497

Health care services encompass a broad range of activity provided by

medical professionals and health care institutions.2 Substantial visitation

by foreign individuals to the United States for medical treatment and rising

foreign direct investment in U.S. health care institutions testify to the

vitality of U.S. health care services, despite pressures of high health care

costs. Admittedly, the most recently reported official data reflect a

slowdown in U.S. health care export growth in 1997 and a sudden, steep

decline in transactions by foreign health care affiliates of U.S. firms in

1996. This article examines the principal factors contributing to the

slowdown as well as market factors that suggest a likely increase in U.S.

exports and direct investment in health care services in the United States

and abroad.

Today, U.S. medical facilities and health insurers are expanding international marketing

efforts, and “telemedicine” via telecommunication technologies is proliferating across national

boundaries. At the same time, opportunities for mergers and acquisitions are likely to

continue to attract foreign investors to the U.S. health care market, and some large U.S.

investors seem willing to explore market niches gradually opening abroad.

U.S. health professionals provide services to foreign patients and health care facilities both

through cross-border transactions and through affiliates established in foreign markets.

Cross-border trade consists of the treatment of citizens of one country by health care providers
JUNE 1999

Health Care Services Industry, Trade, and Technology Review

 

3

 Cross-border exports largely consist of the treatment of foreign persons in the United States

by hospitals, clinics, medical doctors, and other health care service professionals. Cross-border

imports comprise the treatment of U.S. citizens overseas by foreign health care service providers.

 

4

 Reportedly, such data are very difficult to capture and presumed to be quite small. Bureau of

Economic Analysis representative, telephone interview by USITC staff, Nov. 24, 1998.

 

5

 U.S. industry representatives, telephone interviews by USITC staff, Oct. 27-29, 1997.

20

in another country.3 Affiliate transactions reflect health care services provided to persons or

facilities in their home countries by affiliates also based there, but whose parent firm is based

in another country. Cross-border transactions account for the greatest proportion of U.S.

receipts (exports) for providing health care services, while affiliate transactions account for

most U.S. purchases (imports). This indicates that most U.S. transactions in health care

services involve the provision of treatment within the territory of the United States, as crossborder receipts are driven by patients traveling to the United States for treatment; and

purchases through affiliates are driven by foreign firms acquiring or establishing health care

facilities in the United States, which subsequently provide treatment to U.S. citizens.

Recent Trends

Cross-Border Trade

In 1997, U.S. cross-border exports of health care services amounted to $888 million.

Corresponding imports of health care services are not available because data on medical

services are not reported by official data collection agencies.4 U.S. cross-border exports of

health care services increased by 2 percent in 1997, slower than the 5-percent average annual

rate of growth recorded during 1992-96. Slowing growth of health care services exports is

likely a result of currency devaluations in Asia, Latin America, and Canada, which made

traveling to the United States for elective procedures considerably more expensive in 1997.

Although official data do not identify exports of health care services by country, Canada is

believed to be the dominant export market for U.S. health care services.5 Other sizable

markets for U.S. cross-border exports of health care services include the United Kingdom,

Germany, Mexico, Australia, and Japan. 

Affiliate Transactions

Sales of services by foreign-based affiliates of U.S. health care companies fell to $360 million

in 1996, while purchases of services through U.S.-based affiliates of foreign health care

companies increased to $3.5 billion (figure 1). The $3.1-billion difference between U.S. sales

and purchases of services through affiliates reflects the fact that the United States offers

considerably greater opportunities for private-sector participation in the health care sector

than most other countries. As a result, foreign firms have acquired or established health care

facilities in the United States to a much larger extent than U.S. firms have abroad.
JUNE 1999

Industry, Trade, and Technology Review Health Care Services

 

6

 In 1996, Tenet Healthcare sold two hospitals in Singapore, a 30-percent interest in a

Malaysia hospital, a 52-percent interest in Australian Medical Enterprises, a 40-percent interest

in a hospital in Thailand, and a 42-percent interest in Westminster Health Care Holdings of the

United Kingdom. These sales represented a divestiture of $464 million in assets. 

Columbia/HCA sold 50 percent of four hospitals it owned in the United Kingdom to PPP

Healthcare Group (now a unit of Guardian Royal Exchange Group). Community Psychiatric

Centers sold Priory Hospitals, an acute psychiatric company in the United Kingdom, to Foray 911

Ltd., for $135 million. Foray 911 is a new British company formed by Mercury Development

Capital, a division of Mercury Asset Management, Plc. Corporate annual report filings with the

U.S. Securities and Exchange Commission, retrieved from http://www.sec.gov, Dec. 2-4, 1998.

 

7

 In the case of Tenet, the restructuring was driven in part by major lawsuits brought by the

U.S. Department of Justice concerning inappropriate business practices. In June 1994, Tenet,

which at the time was named National Medical Enterprises, listed more than 50 percent of its

hospitals in a guilty plea to criminal conduct (fraud). Under the settlement terms, Tenet was

fined $379 million and required to sell 75 percent of its U.S. hospitals. With respect to

(continued...)

21

1992 1993 1994 1995 1996

-4

-3

-2

-1

0

1

2

3

4

5

Sales Purchases Balance

Billion dollars

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, Sept. 1995, 

pp. 104 -105; Nov. 1996, pp. 111-112; Oct. 1997, pp. 137-136; and Oct. 1998, pp. 115-116.

Figure 1

Health care service transactions by majority-owned affiliates: U.S. sales,

purchases, and balance, 1992-96

Sales of services by foreign affiliates of U.S. health care companies declined by 47 percent

in 1996, which represents a significant reversal from the trend of 25-percent average annual

growth recorded during 1992-95. This dramatic reduction in sales reflects a retrenchment by

U.S. health care service providers, particularly Tenet Healthcare, Columbia/HCA, and

Transitional Hospitals Corporation (formerly Community Psychiatric Centers).6 Each of

these companies has undertaken substantial restructuring programs to better focus resources

on core business activities in the home market.7 By contrast, foreign firms increased their
JUNE 1999

Health Care Services Industry, Trade, and Technology Review

 

7

 (...continued)

Community Psychiatric Centers, changes in the structure of the psychiatric care industry resulted

in reduced profitability, prompting the company to exit the business and focus instead on the

provision of long term acute care services under the new corporate identity of Transitional

Hospitals Corp. In 1996, Columbia/HCA was focusing its resources on continuing its aggressive,

acquisition-driven expansion in the United States. By 1997, however, Columbia/HCA had

become the target of a U.S. Department of Justice investigation that prompted major management

changes and the sale of several institutions. J.M. Wynne, “The Corporate Scene in Health,”

found at Internet address http://www.uow.edu.au, retrieved Dec. 4, 1998; corporate annual report

filings with the U.S. Securities and Exchange Commission, retrieved from http://www.sec.gov,

Dec. 2-4, 1998; and Columbia/HCA press releases, found at Internet address

http://www.columbia-hca.com, retrieved Dec. 4, 1998.

 

8

 The slower growth trend reflects a decline of 6 percent recorded in 1995, which partially

offset the modest growth recorded during 1992-94.

 

9

 Weiss, Peck, & Greer Private Equity, “Paracelsus Healthcare Corporation,” found at Internet

address http://www.wpgequity.com, retrieved Dec. 1, 1998.

 

10 Fresenius Medical Care, Annual Report 1996, found at Internet address http://www.fmcag.com, retrieved Dec. 2, 1998.

 

11 USITC staff estimates.

22

level of participation in the U.S. market substantially in 1996. As a result, purchases of

health care services through U.S.-based affiliates of foreign firms increased by 126 percent

in 1996, reflecting a major jump from the 4-percent average annual rate of growth recorded

during 1992-95.8 Much of this increase may be explained by two major acquisitions by the

German firms Paracelsus Healthcare and Fresenius AG. In August 1996, Paracelsus

Healthcare merged with Champion Healthcare, a U.S. firm, to form a for-profit hospital

management company that owns and operates 31 acute care and psychiatric hospitals in eight

states.9 Meanwhile, Fresenius became the world’s largest fully integrated renal health care

company in September 1996 when Fresenius AG acquired National Medical Care, Inc.,

formerly a subsidiary of W.R. Grace.10

As the foregoing discussion suggests, Germany appears to account for the majority of U.S.

purchases of health care services through affiliates, followed by Canada.11 Australia and

Japan are the only other countries from which purchases through U.S.-based affiliates were

reported in 1996, but such purchases amounted to only $14 million and $5 million,

respectively. U.S. sales of services through foreign-based health care affiliates were

concentrated in the United Kingdom, which accounted for 51 percent of total sales through

foreign affiliates in 1996. Switzerland also appears to account for significant U.S. sales of

health care services through affiliates, although the actual value is not officially reported in

order to avoid disclosing financial data concerning individual firms.

Market Outlook

U.S. international trade in health care services reflects the widely recognized capabilities of

U.S. medical institutions. Significant numbers of foreign individuals travel to the United

States each year to receive medical treatment at U.S. facilities. As a result, the United States

is believed to consistently record a substantial surplus in cross-border trade of health care
JUNE 1999

Industry, Trade, and Technology Review Health Care Services

 

12 “Health Care in America: Medicine for Export,” The Economist, Mar. 7, 1998, and

Standard & Poor’s, Industry Surveys, Healthcare: Facilities, Nov. 19, 1998, p. 2.

23

services. With respect to affiliate transactions, the strength and diversity of the U.S. health

care industry has prompted foreign firms to enter the U.S. market by acquiring or establishing

health care facilities. By contrast, U.S. firms typically have had relatively few investment

opportunities abroad, where government agencies often control the entire health care system

or where financing is unavailable for the provision of services by private institutions. The

disparity between investment opportunities in the United States and abroad is manifested by

the substantially greater volume of U.S. health care purchases through affiliates of foreign

firms relative to U.S. sales by foreign affiliates. 

Since cross-border trade in health care services is largely dependent upon the ability of foreign

individuals to travel to the United States and typically to finance their treatment through

personal resources, this trade is heavily influenced by changes in currency values.

Consequently, the Asian financial crisis, which resulted in currency devaluations in Asia and

Latin America, had a dampening effect on U.S. exports of health care services in 1997.

Transactions through affiliates respond to different forces, as these are driven by new

international investments and the microeconomic conditions of countries in which affiliates

are located. In 1996, affiliate transactions reflected retrenchment by U.S. health care firms

and further expansion by foreign firms into the U.S. market. In both cases, these actions

appear to have been driven by individual corporate objectives rather than broader economic

factors. 

Strategically, the U.S. health care industry is well positioned with respect to international

competitors. The industry enjoys the strengths of a large, wealthy domestic market with

advanced capabilities in technology and expertise, while suffering from few, if any, functional

weaknesses. The large volume of individuals who travel to the United States for medical

treatment and the substantial level of foreign direct investment testify to the vitality of U.S.

health care sectors. The principal challenges to the industry are financial and philosophical.

Rising health care costs have become increasingly difficult to sustain in the United States and

abroad, forcing governments, insurance companies, and health care institutions to adopt

policies such as managed care programs.12 Such policy shifts apply financial pressure to

various segments of the market and force adaptation, as demonstrated by the rise of health

maintenance organizations and the consolidation of hospitals into health care systems in the

United States. The philosophical challenge confronting the industry lies in the common belief

that health care is a fundamental right to which all members of society are entitled. In many

countries, this provides the rationale for the government to serve as the principal provider of

health care services. As a result, private health care companies are excluded from many of

the world’s markets, which limits international growth opportunities for U.S. firms. 

Despite these challenges, international prospects for the U.S. health care industry are

promising. The flow of patients into the United States for treatment is likely to continue

growing, as medical centers are expanding their international marketing efforts. For example,

a number of hospitals in the Boston area have begun working cooperatively to attract patients
JUNE 1999

Health Care Services Industry, Trade, and Technology Review

 

13 “Boston area hospitals seek global market,” Marketing News, Mar. 3, 1997.

 

14 “International Health Alliance offers first online global plans,” PR Newswire, Dec. 15,

1998.

 

15 Ernest D. Plock, “Telemedicine is emerging as a cost-effective health care alternative,”

Business America, Jan. 1998.

 

16 Official of American Telemedicine Association, interview by USITC staff, Washington,

DC, June 8, 1999. 

 

17 “BeeZee Launches Telemedicine Centre in Mumbai,” Economic Times, Jan. 2, 1998; and

K.S. Nayar, “U.S. Firm Offering Care via Telemedicine,” India Abroad, Apr. 4, 1997.

 

18 Official of American Telemedicine Association, interview by USITC staff, Washington,

DC, June 8, 1999. 

 

19 Standard & Poor’s, Industry Surveys, Healthcare: Facilities, Nov. 19, 1998, pp. 2 and 6.

 

20 HealthSouth Corporation, “HealthSouth acquires Australian Rehabilitation Hospital,” press

(continued...)

24

from around the world to their facilities.13 The development of new health insurance products

may further foster cross-border exports of health care services. In December 1998,

International Health Alliance introduced a global medical plan that allows policy holders to

travel anywhere in the world for treatment.14 This program is specifically marketed to nonU.S. citizens as well as to those who travel frequently for extended periods. A third factor

that may influence cross-border trade in health care services is the increasing use of

telemedicine, which involves providing health care services via telecommunication technology.

For example, diagnostic images such as x-rays or magnetic resonance images may be

transmitted via the Internet for examination by specialists in another country.15 The

proliferation of applications of telemedicine has spurred formation of demonstration projects

and associations of telemedicine practitioners worldwide.16 As a leading provider of both

health care technology and medical expertise, the United States could benefit significantly by

the development of telemedicine applications. U.S. organizations such as Telequest, the

University of California San Francisco, and Telemedicine Applications Company, have

already engaged in telemedicine ventures in India.17 Meanwhile, issues concerning the scope

of practice, ethics, licensing, liability, and payment, among others, are currently subject to

debate largely in the absence of regulations specifically formulated for such rapidly developing

health care services.18

International trade of health care services through foreign affiliates is likely to undergo

continued growth as well. The United States remains an attractive market for foreign

investors, particularly in discrete market segments such as dialysis treatment, while financing

constraints are likely to create opportunities for additional merger and acquisition activity.19

Abroad, the investment climate seems to be showing signs of promise. Many countries are

beginning to embrace participation by private institutions in at least some segments of their

market. At the same time, some of the larger U.S. health care companies appear to have

strengthened their domestic position to the extent that they are now exploring international

opportunities more earnestly. As a result of these factors, U.S. firms appear to be gradually

increasing their international activities. For example, in October 1997, HealthSouth acquired

the Cedar Court Physical Rehabilitation Hospital in Melbourne, Australia; and in April 1998,

Columbia/HCA acquired 54 percent of the Instituto Dexeus, a private, 110-bed tertiary-care

hospital located in Barcelona, Spain.20
JUNE 1999

Industry, Trade, and Technology Review Health Care Services

 

20 (...continued)

release of Dec. 5, 1997, found at Internet address http://www.healthsouth.com, retrieved Dec. 1,

1998; and “Columbia completes acquisition of majority interest in Instituto Dexeus in Barcelona,

Spain,” PR Newswire, Apr. 25, 1998.

25

While there are some inherent impediments to trading health care services, and current global

economic conditions appear to be having a deleterious effect, the overall outlook for health

care trade is promising. The United States continues to hold a leadership role in technology

and quality of care, which should translate into additional international opportunities.

Financial limitations pose the principal constraint on the health care field, as even wealthy

countries are increasingly having difficulty paying for high-quality treatment for all of their

citizens. However, such financial constraints may also present opportunities for private firms

that can develop management techniques or serve a market niche so as to offer cost savings

without compromising the quality of care.#
JUNE 1999

Industry, Trade, and Technology Review Key Performance Indicators

A-1

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 Tsuji, 202-205-3434/tsuji@usitc.gov)

~ FLAT GLASS (James Lukes, 202-205-3426/lukes@usitc.gov)

~ SERVICES (Tsedale Assefa, 202-205-2374/assefa@usitc.gov) 
JUNE 1999

Key Performance Indicators Industry, Trade, and Technology Review

A-2

STEEL

• All three groups of steelmakers reported lower profitability for the first quarter of 1999 compared to the first

quarter 1998, with integrated steel producers reporting negative profitability. Steel companies cited lower

average selling prices and increased imports as factors contributing to increasingly competitive markets for steel

mill products. 

 

• Qualitech Steel Corp. of Indiana filed for Chapter 11 bankruptcy protection in late March 1999. The mill

began rolling operations in May 1998 and produced its first steel in July 1998, but suffered setbacks due to

production difficulties, weak markets for the company’s special bar quality and iron carbide products, a fire,

and increased import competition.1

_____________

1Darrel Hassler, “Sell-offs eyed to rescue Qualitech,” American Metal Market, Mar. 25, 1999, p. 1.

 

Table A-1

Steel mill products, all grades

Item Q1 1999

Percentage

change, Q1

1999 from 

Q1 19981 YTD 1999

Percentage

change, YTD

1999 from 

YTD 19981

Producers’ shipments (1,000 short tons) ........... 24,046 -12.0 24,046 -12.0

Imports (1,000 short tons) ...................... 7,849 2.6 7,849 2.6

Exports (1,000 short tons) ...................... 1,161 -28.3 1,161 -28.3

Apparent supply (1,000 short tons) ............... 30,733 -7.9 30,733 -7.9

Ratio of imports to apparent supply (percent) ........ 25.5 22.6 25.5 22.6

 

1Based on unrounded numbers.

 

2Percentage point change.

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

Source: American Iron and Steel Institute.
JUNE 1999

Industry, Trade, and Technology Review Key Performance Indicators

A-3

STEEL

Table A-2

Steel service centers

Item Dec. 1998 Mar. 1999

Percentage

change, Mar.

1999 from

 Dec. 19981 Q1 1999 Q1 1998

Shipments (1,000 net tons) ................... 2,143 2,692 25.6 7,343 7,666

Ending inventories (1,000 net tons) ............. 8,544 8,109 -5.1 8,109 7,435

Inventories on hand (months) .................. 4.0 3.3 (

2

) 3.3 2.9

 

 1Based on unrounded numbers.

 

 2Not applicable.

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

Source: Steel Service Center Institute.

• The Steel Service Center Institute (SSCI) reported a decrease in shipments and an increase in inventories for Q1

1999 compared with Q1 1998. However, inventories declined throughout the quarter to 8.1 million tons at the

end of March 1999, and shipments increased over 25 percent in the recent quarter, reflecting continued strong

demand for steel products.

• Total U.S. steel imports decreased for the second consecutive quarter to 11.6 million tons; however, imports

remained 3 percent above the levels reported for Q1 1998. Import penetration declined from 33 percent for Q4

1998 to 26 percent for Q1 1999. 

• Capacity utilization averaged 79.3 percent for Q1 1999, which is an improvement from the average of 76.7

percent reported for Q4 1998.

AUTOMOBILES
JUNE 1999

Key Performance Indicators Industry, Trade, and Technology Review

A-4

I II III IV I II III IV I II III IV I II III IV I

0

500

1000

1500

2000

2500

Total sales-consumption Domestic sales

Import sales

Figure A-3

U.S. sales of new passenger automobiles, by quarter

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.

2,016,190

1,645,223

370,967

1995 1996 1997 1998 1999

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, January 1998-March 1999

 Percentage change 

Item

Jan.-Mar.

1999

Jan.-Mar. 1999

from 

Oct.-Dec. 1998

Jan.-Mar. 1999

from 

Jan.-Mar. 1998

U.S. sales of domestic autos

(1,000 units)

1

................................... 1,645 1.6 6.3

U.S. sales of imported autos

(1,000 units)

2

................................... 371 5.4 13.9

Total U.S. sales (1,000 units)

1, 2

....................... 2,016 2.3 7.7

Ratio of U.S. sales of imported autos to 

total U.S. sales (percent)

1, 2

........................ 18.4 3.0 5.8

U.S. sales of Japanese imports as a 

share of the total U.S. market (percent)

1, 2

.............. 9.3 0.0 7.5

1

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

2

 Does not include automobiles imported from Canada and Mexico.

Source: Compiled from data obtained from Automotive News.
JUNE 1999

Industry, Trade, and Technology Review Key Performance Indicators

A-5

Q1 Q1 Q1 Q1

0

200

400

600

800

1000

0

10

20

30

40

50

60

70

80

Imports (Y1) Exports (Y1) Price (Y2)

Figure A-4

Aluminum: U.S. imports, exports, and price

 1 Crude forms (metals and alloys) and mill products (e.g., plates, sheets, and bars) for consumption.

 2 Quarterly average of the monthly U.S. market price of primary aluminum ingots.

Source: U.S. Geological Survey.

1 2

1996 1997 1998 1999

ALUMINUM

• Announced capacity closures failed to spark the global aluminum market in first quarter 1999, as demand outside the

United States and Western Europe remained weak. The supply-demand imbalance was reflected in rising London Metal

Exchange (LME) inventories to the highest levels in 2 years, and declining prices for primary ingot by 3.2 cents per

pound from the previous quarter’s level.

 

• Total U.S. output increased slightly over the previous quarter’s level; this, coupled with growth in domestic demand for

aluminum mill products in transportation and construction markets caused a slight drop in import penetration, despite

increased net U.S. imports.

 

• The Venezuelan Government announced in late March, 1999, a fourth attempt at privatizing its aluminum smelting

sector, although bauxite and alumina production would remain under state ownership.

 

Table A-4

U.S. production, secondary recovery, imports, import penetration, exports, average nominal price, and

inventory level of aluminum, for first quarter 1998, fourth quarter 1998, and first quarter 1999

 Percentage change 

Item

Q1

1998

Q4

1998

Q1

1999

Q1 1999

from

 Q1 1998

Q1 1999

from

Q4 1998

Primary Production (1,000 metric tons) ............ 901 939 922 2.3 -1.8

Secondary Recovery (1,000 metric tons) ........... 863r 881r 901 4.4 2.3

Imports (1,000 metric tons) ..................... 779 724 805 3.3 11.1

Import Penetration (percent)

1

.................... 34.6r 33.4r 32.5 2

-2.1 2-0.8

Exports (1,000 metric tons) ..................... 271 305 284 4.8 -6.9

Average Nominal Price (¢/lb) .................... 70.5 61.6 58.4 -17.2 -5.3

LME Inventory Level (1,000 metric tons) ........... 546 636 818 49.8 28.6

 

1Calculations based on unrounded data.

 

2Percentage point change.

 Note.-- revised data indicated by “r”

Sources: Compiled from data obtained from U.S. Geological Survey and World Bureau of Metal Statistics.
JUNE 1999

Key Performance Indicators Industry, Trade, and Technology Review

 

1

Flat glass is largely unworked; safety glass (tempered or laminated) and insulating glass are also covered under the U.S.-

Japanese agreement on flat glass.

 

2 USITC, “Flat glass,” Industry, Trade, and Technology Review, Oct. 1997, p. 42.

 

3 USITC, “Flat glass,” Industry, Trade, and Technology Review, June 1998, p. 37.

 

4 U.S. Trade Representative, “1999 Trade Policy Agenda,” downloaded from http://www.ustr.gov/tpa/1999/index.html on

Mar. 18, 1999.

A-6

FLAT GLASS

Background

 

• The U.S.-Japanese agreement on Japanese market access for imports of flat glass1 seeks to increase access and

sales of foreign flat glass in Japan through such means as increased adoption of nondiscriminatory standards

and expanded promotion of safety and insulating glass.2 The agreement covers the 1995-99 period.

 

• Japanese demand for imported glass began weakening in the second half of 1997. The Asian financial crisis and

an increase in the Japanese consumption tax from 3 to 5 percent likely were contributing factors.3

 

Current

 

• Japanese demand for imported glass has continued to weaken, although the U.S. share of the market has

improved. The average monthly quantity of Japanese imports from all countries decreased by 3 percent for the

first two months of 1999 to 1.5 million square meters, while the average monthly value of such imports

increased by 8 percent to $11.8 million as the average unit value of imports increased by 11 percent. Imports

from the United States in Jan.-Feb. 1999 increased 6 and 8 percent to 468,000 square meters ($6.5 million),

respectively. The shift to an increase in imports from the United States occurred as the U.S. dollar appreciated

against the Japanese yen, and the average unit value of imports from the United States increased by 1 percent,

compared with an average increase of 16 percent for imports from other countries.

 

• Flat glass continues to be considered a key sector in efforts by the U.S. Government to obtain genuine

deregulation of the Japanese economy and greater market opening.4
JUNE 1999

Industry, Trade, and Technology Review Key Performance Indicators

A-7

SERVICES