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

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Fax: 202-205-3161

Requests for copies of the ITTR, or to be added to the mailing list, should be addressed to the

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Quarterly Review Staff

Larry Brookhart

Karl S. Tsuji

assisted by

Zema Tucker

Sharon Greenfield

Contributing Authors

Jonathan Coleman

Tracy Quilter

Deborah McNay

Laura Polly

Robert A. Rogowsky

Director of Operations

Vern Simpson

Director of Industries
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Industry Trade and Technology Review
OCTOBER 2000

Industry Trade and Technology Review Index of Articles

i

Listing of Published Articles

(July 1997 - October 2000)

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

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
October 2000

Index of Articles Industry Trade and Technology Review

ii

Listing of Published Articles—Continued

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

October 1999

Outsourcing by the pharmaceutical industry provides opportunities for fine chemical

producers worldwide 

Thailand’s financial crisis and progress towards recovery—Implications for

U.S. trade

December 1999

Air transport services: International regulation and future prospects for liberalization

Renewed services trade negotiations in the WTO

March 2000

Machine vision: Vital technology for manufacturing industries

Agriculture in the WTO: The Seattle Ministerial and beyond

July 2000

Express services: Issues for negotiation in the World Trade Organization

Production-sharing update: Developments in 1999

Apparel market: New U.S. legislation places CBERA countries on a more equal

competitive basis with Mexico

October 2000

WTO agricultural trade negotiations: An update

Steel sector explores E-commerce although wary of quick transition

Mexico’s emergence as a global automotive production center drives 

trade and investment
OCTOBER 2000

Industry Trade and Technology Review Contents

iii

CONTENTS

Page

WTO agricultural trade negotiations: An update ......... 1

Recent developments .................................................... 1

June proposals ......................................................... 2

Export competition .................................................. 3

Market access ...................................................... 3

Domestic support ................................................... 3

Special and differential treatment ........................................ 5

Nontrade concerns ................................................... 5

Implementation issues ................................................... 6

Steel sector explores E-commerce although wary of quick

transition ............................................................ 7

Scope of E-commerce and transactions ...................................... 9

E-commerce in operation ................................................. 11

Effects of E-commerce .................................................. 12

Outlook -- What it takes for an exchange to succeed ............................. 16

Mexico’s emergence as a global automotive production

center drives trade and investment ........................... 19

Improved competitive status of Mexico’s automotive industry ..................... 20

Mexico’s recent bilateral trade agreements .................................... 24

EU-Mexico free-trade agreement ........................................ 24

Mexico-Brazil automotive decree ........................................ 26

Automotive investment trends in Mexico ..................................... 26

U.S.-Mexico trade patterns and production sharing ............................. 27

Implications of foreign direct investment for U.S.-Mexican automotive trade .......... 32
OCTOBER 2000

Contents Industry Trade and Technology Review

iv

CONTENTS—Continued

Page

Appendix A: Key performance indicators of selected

industries and regions ............................................. A-1

Steel:

Figure A-1 Integrated producers continue profitability improvement in

second quarter ................................................... A-2

Table A-1 Imports of finished steel products exceed 1999 levels ............... A-2

Table A-2 Steel service center inventories reach record high in June ............ A-3

Figure A-2 Steel mill products, all grades: Capacity utilization in June remains 

high despite increasing imports ....................................... 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 1999-June 2000 .......... A-4

Figure A-3 U.S. sales of new passenger automobiles continue to increase in

second quarter 2000; sales of imports as a percentage of the U.S. market 

remain unchanged from previous quarter ................................ A-4

Aluminum:

Figure A-4 Aluminum: U.S. exports increase despite production cutbacks 

related to weaker prices during second quarter 2000 ....................... A-5

Table A-4 U.S. primary aluminum production scaled back amid weaker 

aluminum prices-net imports filled the gap-during second quarter 2000 ......... A-5

Flat glass:

Figure A-5 Talks stall as Japanese imports rise ........................... A-6

Services:

Figure A-6 Balance on U.S. service trade accounts, by quarter, 1999-2000 ....... A-7

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

with selected trading partners, by selected quarters, 1998-2000 ............... A-7

North American trade:

Table A-5 North American trade, 1995-99, January-June 1999,

and January-June 2000 ............................................. A-9

#
OCTOBER 2000

Industry Trade and Technology Review WTO Negotiations on Agriculture

 

1

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

International Trade Commission or any of the Commissioners.

 

2

 See “Agriculture in the WTO: The Seattle Ministerial and Beyond,” Industry Trade and

Technology Review, USITC publication 3293, Mar. 2000, pp. 21-45 at USITC Internet server at

http://www.usitc.gov.

 

3

 “WTO Services and Agriculture negotiations: meetings set for February and March, WTO

press release, Feb. 7, 2000, found at http://www.wto.org/english/news_e/pres00_e/pr167_e.htm,

retrieved Feb 10, 2000.

 

4

 Article 20 of the Uruguay Round Agreement on Agriculture requires that a new Round of

talks should be initiated by the final year of the implementation period (Jan. 1, 2000). However,

article 20 does not indicate specific areas of negotiation nor a deadline for the negotiations to be

completed.

 

5

 For added detail regarding trade reform issues, see “Agriculture in the WTO.”

 

6

 The concept of agriculture’s multifunctionality is that farmers contribute more than food and

fiber production and farmers’ compensated. Debate centers on whether a future agreement

should address the “multifunctionality” of agriculture and whether governments should have the

right to compensate producers for providing such nonagricultural spillover goods and services,

which include environmental benefits, food safety, rural employment and development, cultural

values, and ethical treatment of animals. U.S. Department of Agriculture (USDA), Ecnomics

Research Servive (ERS), “The Use and Abuse of Multifunctionality,” Nov. 1999. Also refer to

“Agriculture in the WTO.”

1

WTO Agricultural Trade Negotiations: An

Update

Jonathan Coleman1

jcoleman@usitc.gov

(202) 205-3465

A recent review regarding the status of multilateral trade negotiations for

agriculture2 identified important policy differences among the major

participants and described why compromise in Seattle could not be

reached. This update reviews how the current WTO agricultural trade

negotiations under article 20 of the Uruguay Round Agreement on

Agriculture (URAA) are proceeding based on the first 9 months of the new

Round. 

Recent Developments

In early February 2000, the World Trade Organization (WTO)’s General Council agreed on

the organization of further negotiations to liberalize services and agriculture.3 As a result of

the suspension of the Seattle Ministerial Conference without agreement on key issues related

to agriculture, the new Round of talks is based on article 204 of the URAA and likely will

focus on several key issues of trade reform,5 including domestic supports, export competition,

market access, biotechnology, state-trading enterprises (STEs), preferential treatment for

developing countries, and nontrade concerns (multifunctionality).6 Trade negotiations are

being held in special sessions of the WTO Agriculture Committee (reporting directly to the

General Council), with another chairperson steering the sessions. The WTO Agriculture

Committee will also continue to conduct sessions involving other such issues as monitoring

current agreements and commitments.
OCTOBER 2000

WTO Negotiations on Agriculture Industry Trade and Technology Review

 

7

 “Negotiations set to open Thursday afternoon,” WTO Watch, Mar. 17, 2000.

 

8

 The Cairns Group strongly favors trade liberalization, including elimination of all export

subsidies, significant increases in market access, and deep cuts in internal supports. The EU and

Japan want to retain the right to use export subsidies, minimize further major increases in import

access, and preserve the right to maintain producer subsidies. For more detail, see “Agriculture in

the WTO.”

 

9

 “U.S., European Union flex muscles as WTO agriculture negotiations start,” Feedstuffs, 

April 3, 2000.

 

10 “WTO settles on Peruvian to head agricultural talks,” Feedstuffs, May 22, 2000.

 

11 “U.S. and EU flex muscle as agriculture negotiations resume,” WTO Watch, Mar. 24, 2000.

 

12 “Countries start delivering proposals in WTO talks,” WTO Watch, June 26, 2000.

 

13 “U.S. and EU flex muscle as agriculture negotiations resume,” WTO Watch, Mar. 24, 2000.

2

Negotiations got off to a rocky start with major disagreements over who should chair the trade

negotiating agricultural committee (TNAC).7 Even though the chairman is expected to be

impartial, the European Union (EU) and Japan reportedly would not accept the candidacy of

the Brazilian ambassador to the WTO, because Brazil is a member of the Cairns Group of

countries.8 9 In response, the Cairns Group would not consider any candidate from the EU.

It took until May to finally appoint Jorge Voto-Bernales from Peru, a food-importing

developing country in neither group.10

The first meeting of the TNAC, absent a permanent chairman, took place in late March 2000.

Negotiators reached agreement on two major items: a schedule of work for the next 14 months

and a list of technical work needed from the WTO Secretariat in support of the negotiating

process.11 The timetable provides that proposals for negotiations should be developed by

WTO members and presented at committee meetings scheduled for June, September, and

November 2000. Countries would then have time to review all the proposals before the start

of earnest negotiating sessions beginning in March 2001 after the U.S. Presidential elections.12

Some members reportedly speculated that negotiations could be wrapped up by the end of

2002. Negotiators asked for the WTO Secretariat to deliver technical background papers on

negotiating areas, including internal supports, tariff-rate quotas (TRQs), and export subsidies

and credits.13 It was also agreed that the Secretariat would analyze the URAA with respect

to developing countries and food-importing countries.

June Proposals

At the June 2000 meeting of the TNAC, several country proposals and position papers were

submitted for discussion. These proposals centered on five areas: export competition, market

access, domestic support, special and differential treatment for developing countries, and

nontrade concerns.
OCTOBER 2000

Industry Trade and Technology Review WTO Negotiations on Agriculture

 

14 WTO Committee on Agriculture Special Session, WTO Negotiations on Agriculture. 

Cairns Group Negotiating Proposal. Export Competition. G/AG/NG/W/11, June 28, 2000, found

at: http://www.wto.org/english/tratop_e/agric_e/ngw11_e.doc, retrieved June 30, 2000.

 

15 WTO Committee on Agriculture Special Session. Proposal for Comprehensive Long-Term

Agricultural Trade Reform. Submission from the United States. G/AG/NG/W/15, June 28, 2000,

found at: http://www.wto.org/english/tratop_e/agric_e/ngw15_e.doc.

 

16 WTO Committee on Agriculture Special Session. WTO Negotiations on Agriculture:

Market Access. A Negotiating Proposal by Canada. G/AG/NG/W/12, June 28, 2000, found at:

http://www.wto.org/english/tratop_e/agric_e/ngw12_e.doc.

 

17 Tariff escalation is the application of higher tariffs on the processed or higher value-added

form of a particular product, compared to the primary form. For example, applying a higher

tariff to flour than to wheat. 

 

18 Zero-for-zero agreement is to liberalize trade in a specific range of products by eliminating

all border measures and export subsidies.

 

19 Article 5 of the URAA allows the imposition of transitional tariff surcharges if imports

reach a quantitative threshold or lower prices below a trigger level.

 

20 Blue box policies are permitted support payments not subject to reduction commitments

because they are direct payments under production-limiting programs. For more information, see

(continued...)

3

Export Competition

The Cairns Group countries14 called for the elimination and prohibition of all forms of export

subsidies for all agricultural products, with a 50-percent reduction in the first year of the

implementation. The Cairns Group also proposed to eliminate any subsidy element of other

forms of “unfair” export competition, including export credits and export credit guarantees.

The U.S. proposal15 recommended elimination of export subsidies and export taxes. The

United States also encouraged adding transparency to the operation of export-orientated STEs

by requiring them to notify the WTO on sales information, acquisition costs, and export

pricing, and to eliminate government financial support of such monopoly exporters. The U.S.

proposal continued to call for negotiations on export credits to be covered under the

Organization for Economic Cooperation and Development (OECD).

Market Access

Canada16 proposed applying formula reductions to single tariffs, curbing tariff escalation,17

increasing TRQ quantities, and eliminating in-quota tariffs. Other Canadian proposals

included improved rules for TRQ administration and zero-for-zero provisions18 for some

commodities, such as oilseeds, barley, and malt. The United States proposed to reduce all

tariffs and disparities between countries, and to achieve tariff simplifications by allowing

either specific or ad valorem tariffs (not a combination of the two) and by eliminating special

agricultural safeguards as outlined in article 5 of the URAA.19 The U.S. proposal called for

eliminating in-quota tariffs, increasing TRQ quantities, establishing rules on TRQ

administration, and increasing transparency on import-orientated STEs. Finally, the U.S.

proposal requested that disciplines be introduced to ensure that processes covering trade in

products developed through new technologies are transparent, predictable, and timely.

Domestic Support

Country proposals differed widely. In its proposal, the United States encouraged the

elimination of blue box policies,20 with supports split into two categories—those exempt from
OCTOBER 2000

WTO Negotiations on Agriculture Industry Trade and Technology Review

 

20 (...continued)

“Agriculture in the WTO,” Box 3, p. 34.

 

21 The Aggregate Measure of Support (AMS) provides an estimate of the expenditure on

trade-distorting programs that must be reduced under provisions of the URAA. For added

details, see “Agriculture in the WTO,” Box 1, p. 24.

 

22 “U.S. declares war on CAP direct aids,” Agra Europe, June 30, 2000.

 

23 For example, take the case of two countries, each with a production value of $200,000

billion in a base period (1997-99, for example)—one with a final bound URAA AMS of $80

billion and the other with only $20 billion. Assuming it was agreed in the new round that the

AMS of each country were to be reduced to 10 percent of the production value by the end of the

implementation period, both countries would have to reduce supports to $20 billion (10% of

$200,000), however one country would have to cut supports by $60 billion, while the other would

have to make no cuts at all. The final bound URAA AMS level can not be raised to a level equal

to the fixed percentage of the value of agricultural production.

 

24 WTO Committee on Agriculture Special Session, European Communities Proposal. The

Blue Box and Other Support Measures to Agriculture, G/AG/NG/W/17, June 28, 2000, found at:

http://www.wto.org/english/tratop_e/agric_e/ngw17_e.doc, retrieved June 30, 2000.

 

25 “Blue box defense is key to EU’s WTO position,” Agra Europe, June 30, 2000.

 

26 OECD, Policy Evaluation Matrix Report (Paris: OECD, Feb. 2000).

 

27 Green box policies are not considered to be trade-distorting and are not subject to

limitations. For added information, see “Agriculture in the WTO,” Box 3, p. 34.

 

28 WTO Committee on Agriculture Special Session, Agreement on Agriculture: Green

Box/Annex 2 Subsidies. Proposal to the June 2000 Special Session of the Committee on

Agriculture by Cuba, Dominican Republic, Honduras, Pakistan, Haiti, Nicaragua, Kenya,

Uganda, Zimbabwe, Sri Lanka, and El Salvador, G/AG/NG/W/14, June 28, 2000, found at:

http://www.wto.org/english/tratop_e/agric_e/ngw14_e.doc, retrieved June 30, 2000.

 

29 Amber box policies are considered to be trade-distorting and are subject to limitations. For

more information, see “Agriculture in the WTO,” (Box 3), p. 34.

 

30 OECD, Agricultural Outlook, 2000-05. Paris. 2000.

4

disciplines (with no or minimal trade-distorting effects on trade or production) and those

nonexempt. In addition, the U.S. proposal contended that the Aggregate Measure of Support

(AMS)21 should be reduced from the final bound URAA AMS level to a final bound level

equal to a fixed percentage (e.g., 10 percent) of the value of agricultural production in a base

period.22 The fixed percentage would be the same for all countries, thus requiring greater cuts

by those countries with higher levels of domestic support.23 In one of three position papers,24

the EU strongly defended the continued use of the blue box exemption, asserting that blue box

supports would continue to be an important tool for further agricultural reform of their

Common Agricultural Policy.25 The paper cited an OECD study26 which notes that, when

compared to market support, area payments typically lead to smaller production, trade, and

welfare impacts on other countries. Thus, it appears that the EU is determined to retain the

compensatory payments system as a central feature of its future agricultural policy.

Domestic support disciplines were also addressed in a paper on green box policies27 by a

coalition of 11 developing countries,28 which notes that AMS requirements have cut amber

box policies29 while green box policies have been increasing. The paper also cited a recent

OECD report30 finding that even though payments under green box policies may be decoupled

from output, payments will inevitably impact production levels. Such payments reportedly

have a favorable impact on producers’ income (which in turn improves producers’ ability to

invest in production-enhancing technologies), and reduce the financial risks associated with

the variability of agricultural production. Decoupled payments also raise land values and
OCTOBER 2000

Industry Trade and Technology Review WTO Negotiations on Agriculture

 

31 “Farm income support. Implications for gains from trade of changes in methods of support

overseas,: Australian Bureau of Agricultural and Resource Economics, Current Issues, No. 98.4,

Aug. 1998.

 

32 The recent emergency assistance to U.S. farmers, amounting to $30 billion during 1998-

2000, has come under criticism from developing countries as well as the EU. “Tough words come

from Fischler on recent, continual U.S. farm aid,” Feedstuffs, June 26, 2000.

 

33 WTO Committee on Agriculture Special Session.. Agreement on Agriculture: Special and

Differential Treatment and a Development Box. Proposal to the June 2000 Special Session of the

Committee on Agriculture by Cuba, Dominican Republic, Honduras, Pakistan, Haiti, Nicaragua,

Kenya, Uganda, Zimbabwe, Sri Lanka, and El Salvador, G/AG/NG/W/13, June 28, 2000, found

at: http://www.wto.org/english/tratop_e/agric_e/ngw13_e.doc, retrieved June 30, 2000.

 

34 The support level as a percentage of the value of production below which assistance is

excluded from the AMS calculation. 

 

35 URAA special safeguard provisions enable countries to temporarily apply extra duties for

products specified in their schedules of concessions if import prices should fall below a certain

level or if the quantity of imports rises too quickly in relation to an average over the previous 3

years.

5

thereby result in land being kept in production that otherwise would be diverted to other

purposes.31 Developing countries also proposed creating a general subsidies box that would

be subject to discipline, thus dropping the distinction between trade-distorting and non-tradedistorting supports. This proposal was based on the argument that green box programs are

not neutral with respect to trade.32

Special and Differential Treatment 

The majority of WTO members support continuing the special treatment for developing

countries that grants them longer implementation periods and some degree of exemption from

the rules. A paper submitted by a coalition of developing countries33 contended that

developing countries have different economic, financial, and development circumstances

compared with developed economies, and therefore should be granted special advantages and

flexibility within the multilateral trading system. Because of food security issues, these

developing countries contended that special treatment is especially needed in the agricultural

sector. The paper encouraged the creation of a food security/development support policy

category exempt from disciplines. Under the proposal, developing countries would be allowed

to (1) exempt specified products from disciplines, (2) re-evaluate and adjust tariff levels to

protect domestic producers from “cheap” imports, (3) increase the de minimus level on

domestic support disciplines34 to 20 percent (compared with 10 percent under the URAA), and

(4) prohibit developed countries from the use of Special Safeguards.35

Nontrade Concerns

The U.S. proposal noted the continued government role in agriculture in providing an income

safety net for producers and in assisting farmers in development risk management tools, as

well as a role for government in domestic food aid, environmental and natural resource

protection, rural development, and structural adjustment in agricultural and rural

communities. However, the U.S. proposal contended that support for these activities should

be delivered in a manner that is, at most, minimally trade-distorting. Meanwhile the EU is

continuing to push for nontrade concerns to be addressed in any new agreement on agriculture.
OCTOBER 2000

WTO Negotiations on Agriculture Industry Trade and Technology Review

 

36 The EU is not expected to submit a comprehensive proposal until the end of the year.

“Tough start to WTO talks,” Feedstuffs, July 10, 2000.

 

37 WTO Committee on Agriculture Special Session, European Communities Proposal. Animal

Welfare and Trade in Agriculture, G/AG/NG/W/19, June 28, 2000, found at:

http://www.wto.org/english/tratop_e/agric_e/ngw19_e.doc, retrieved June 30, 2000.

 

38 WTO Committee on Agriculture Special Session, European Communities Proposal. Food

Quality—Improvement of Market Access Opportunities, G/AG/NG/W/18, June 28, 2000, found

at: http://www.wto.org/english/tratop_e/agric_e/ngw18_e.doc, retrieved June 30, 2000.

 

39 So-called, implementation issues center of the failure of many developing countries to meet

their January 1, 2000, transition deadlines agreed to under the Uruguay Round Agreements. 

Customs valuation, investment measures, and intellectual property rights are the most immediate

implementation concern. 

 

40 “WTO to deal with poor countries' problems in implementing agreements,” WTO News,

found at http://www.wto.org/english/news_e/news_e.htm, retrieved July 10, 2000.

 

41 “Flexibility needed before new round, says WTO head,” Feedstuffs, Aug. 14, 2000.

6

For example, the EU provided papers covering animal welfare and food quality.36 The

proposal on animal welfare37 supported a discussion on whether producers faced with higher

costs arising directly from improved animal welfare conditions should be compensated

whereas the EU paper on food quality38 discussed the need for labeling requirements to protect

legal recognition of product names and processes.

Implementation Issues

Beyond specific issues affecting the agricultural negotiations, the WTO leadership has

reportedly made considerable efforts in the period since Seattle to undertake confidence

building steps aimed at addressing concerns of developing countries. Part of this process is

to resolve implementation issues left unresolved in December 1999.39 For instance, special

sessions of the WTO General Council to address implementation concerns began in late June,

and a work program for addressing problems of developing countries in implementing WTO

agreements has been initiated.40 In May 2000, WTO Members reached a compromise in

which the WTO Goods Council would review favorably most member requests to extend

missed implementation deadlines, as well as consider the broader contention that several of

the Uruguay Round Agreements are failing to provide the developing countries with the

benefits they expected when becoming WTO Members. General Council special sessions on

implementation began in June 2000 with the goal of resolving remaining implementation

issues no later than the Fourth WTO Ministerial Conference, anticipated about December

2001.

Nine months after the Seattle meeting, the prospects look dim for agreement and timely end

to negotiations, according to various observers. After two meetings of the WTO Committee

on Agriculture (March and June) the fundamental policy positions of the reformers (United

States and Cairns Group) and status quo countries (EU and Japan) have not changed.41

Observers point to the reality that reformer, status quo, and developing country position

papers presented at the June meeting indicate that each side may have grown further apart,

especially on how to handle domestic support disciplines. Although it is early in the process

and countries are still staking out initial policy positions, clearly negotiators have their work

cut out if negotiations are to be completed by a proposed December 31, 2002, target date.#
OCTOBER 2000

Industry Trade and Technology Review Steel Sector E-Commerce

 

1

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

International Trade Commission or any of the Commissioners.

 

2

 Most companies surveyed for this article reported that they have sold or purchased steel

products through E-commerce, but that the number of completed transactions, although

increasing, has been relatively small. World Steel Dynamics (WSD) predicts that the number of

transactions will increase slowly during the first 2 years as sales channels adjust. WSD, “eCommerce in Steel: Electrifying Some; Electrocuting Others,” Core Report PPP, Apr. 2000, 

p. 2-1.

7

Steel Sector Explores E-Commerce Although

Wary of Quick Transition 

Tracy Quilter1

tquilter@usitc.gov

(202) 205-3437

Steelmakers and steel buyers around the world have recently aligned

themselves with various Internet-based marketplaces (E-commerce

exchanges or exchanges) to improve efficiencies and decrease costs.

Electronic commerce (E-commerce) has led to many strategic alliances and

joint ventures among industry participants as well as between steel-related

and high-technology companies. However, the amount of steel sold to date

through E-commerce has necessarily been limited2 because the technology

to conduct transactions online is still evolving. Steel is a complex product

with thousands of specifications and quality requirements, necessitating a

close working relationship between a mill and its customers. Moreover,

mill production schedules, logistics planning, and price negotiations

require a high level of communication and organization among industry

participants. Hence, buyers, sellers, and facilitators need electronic

integration for E-commerce to be worthwhile to the industry over the long

run. This article examines the benefits and costs of E-commerce to the steel

industry, efforts to surmount obstacles, and the prospects for further

development of an electronic marketplace for steel.

The emerging E-commerce models potentially offer the steel industry significant benefits

inasmuch as the industry’s highly fragmented and multilayered structure invites streamlining

of transaction costs, from raw materials procurement to distribution of finished products. In

addition, the steel industry is subject to price volatility and to an overall lack of transaction

transparency. The Internet disseminates information quickly, and at the same time reduces the

number of participants (mills, service centers, distributors, and traders). Moreover, the steel

industry is large enough to justify the capital expenditures necessary to develop steel- and

metals-specific electronic marketplaces, as well as to generate revenues to sustain these

exchanges.

E-commerce, a component of electronic business (E-business), allows companies to conduct

business transactions such as customer orders, insurance premium payments, or rent on a
OCTOBER 2000

Steel Sector E-Commerce Industry Trade and Technology Review

 

3

 “Point and Click: Buying and Selling Metals Online,” 33 Metalproducing, Aug. 2000,

p. E3.

 

4

 USITC staff interview with industry representative, Sept. 6, 2000.

 

5

 e-Steel, “e-Commerce and Steel: The New Industry Advantage,” white paper, undated, p. 4,

found at Internet address http://www.esteel.com/whitepapers.shtml, retrieved Aug. 30, 2000.

8

facility with all concerned parties, through and along the Internet.3 For the steel industry, Ecommerce takes place between businesses through electronic exchanges that speed the flow

of information and facilitate the sale of products through auctions, negotiations, or catalogs.

Such communications are commonly known as business-to-business (B2B) transactions,

rather than business-to-consumer (B2C) transactions, by which a consumer purchases items

from Internet-based retailers such as Amazon.com, or from a popular retailer’s online catalog.

E-commerce in the steel industry

developed from electronic data

interchange (EDI) systems between

mills and their customers (text box),

interactive websites that allow

customers to place and track orders,

and company websites that provide

information about products and

contacts. All three systems require

varying degrees of technological

sophistication to use and run. Many

companies have spent much time

and money implementing these

systems, and are in no hurry to

discontinue their use;4 therefore, Ecommerce exchanges compete with

these existing systems. However, Ecommerce exchanges differ in that

companies do not need to invest

significant capital (although some

hardware and software upgrades

may be required, along with an

Internet connection), and the trading

community is open to a wide variety

of participants. A recent paper

asserts that E-commerce provides

services similar to EDI to more

market participants at a much lower

cost.5

Electronic Data Interchange

An integrated means of exchanging

information is not new to the steel industry.

Steel companies and their customers have

long used electronic data interchange (EDI)

networks to facilitate transactions between

companies. EDI networks are proprietary

systems that “connect a trading community

and establish a communication standard.” EDI

networks, in effect, transfer orders, invoices,

materials certifications, and product

specifications between a mill and its customer. 

EDI networks grew out of the commercial

relationship between steel mills and

automobile manufacturing companies. Even

today, only large companies participate in EDI

networks because they are very expensive to

create and operate; an EDI network designed

to accommodate one buyer and one supplier

can cost between $25,000 and $250,000. 

E-commerce brings technology similar to

EDI networks to medium- and small-sized

companies, thus expanding the customer and

supplier base of participants in the steel

distribution chain. 

Source: USITC staff interviews with industry

representatives, Aug. 31 to Sept. 18, 2000;

and Morgan Stanley Dean Witter, “Steel B2B

E-Commerce,” Sept. 24, 1999, pp. 5-7.
OCTOBER 2000

Industry Trade and Technology Review Steel Sector E-Commerce

 

6

 USITC staff interview with MetalSite representatives, Sept. 18, 2000.

 

7

 Representative of MetalSite, American Institute of International Steel Annual Conference

(AIIS), Mar. 28, 2000.

 

8

 Representative of e-Steel, AIIS Annual Conference, Mar. 28, 2000.

 

9

 MetalSite, “MetalSite Leads the Way in Online Sales Transactions,” news release, Aug. 25,

2000.

 

10 WSD, “E-commerce in Steel,” p. 1-13.

 

11 Projections of global transactions via E-commerce can vary widely. For example, Morgan

Stanley Dean Witter projects that from 5 to 6 million metric tons will be traded on a global basis

in 2000 and that the quantity could be double in 2001. This projection for 2001 is about one-half

the level forecast by WSD in that year. Representative of Morgan Stanley Dean Witter, AIIS

Annual Conference, Mar. 27, 2000. 

9

Scope of E-Commerce and Transactions

E-commerce exchanges anticipate offering the steel industry multifaceted solutions to their

buying and selling needs, and providing value-added services.6 The initial services provided

by the exchanges center on buying and selling steel mill products: MetalSite began by

offering nonprime (secondary) products, whereas e-Steel followed with prime steel products.

However, the goals of the exchanges go far beyond acting as mere facilitators, and these

companies want to expand their capabilities to offer a wide range of services. The exchanges

anticipate that these services will address problems such as high inventory levels, poor cycle

times, low inventory turns, poor customer service, inconsistent communication, and the need

for significant cost reduction.7 Services available online vary from exchange to exchange, but

many plan to include risk management, supply chain management, logistics, credit services,

integration of systems, and customized content.8

Data regarding the total number of transactions or quantity of steel sold through E-commerce

exchanges are not readily available. MetalSite reported that it facilitated 6,000 transactions

totaling 200,000 short tons of steel products in July 2000 alone.9 e-Steel does not publish

transaction information. World Steel Dynamics (WSD) estimated that each E-commerce

company needs transactions totaling 30 million metric tons per year in order to be

successful.10 Given the number of existing exchanges (table 1) and the WSD global

transaction forecasts for the quantity of steel anticipated to be sold via this method (following

tabulation)11, it seems likely that there will be a consolidation in the market.

Year Quantity

(MMT)

1

1999 ............................ 0

2000 ............................ 5

2001 ............................ 24

2002 ............................ 44

2003 ............................ 62

2004 ............................ 89

2005 ............................ 132

2010 ............................ 400

 

1

 Million metric tons.

Source: World Steel Dynamics, “E-Commerce in

Steel: Electrifying Some; Electrocuting Others,” Core

Report PPP, Apr. 2000, p. 2-6.
OCTOBER 2000

Steel Sector E-Commerce Industry Trade and Technology Review

10

Table 1

Steel- and metals-related E-commerce exchanges

Company

(Base location) Metals industry ownership1

Target market2

Region Product

Asia-steel.com

(Hong Kong)

Asia Ferrous metals

BuyStainlessOnline.com

(Bensalem, PA, USA)

Stainless steel

Clickforsteel.com 

(India)

Middle East, 

Southeast

Asia, Indian

sub-continent

e-Steel.com

(New York, NY, USA)

US Steel, National Steel,

Dofasco

Global, through

affiliates

FerrousExchange.com

(New York, NY, Pittsburgh,

PA, USA; Singapore)

Ispat International, Gibraltar

Steel

Global

ibuysteel.com

(Canton, OH, USA)

Small steel buyers

iSteelAsia.com 

(Hong Kong)

Asia

Materialnet.com

(Lake Success, NY, USA)

Marketplace for service

centers, all industrial metals

metaljunction.com

(India)

SAIL, TISCO, and Kalyani

Steels

Global

MetalSite.net 

(Pittsburgh, PA, USA)

Weirton, LTV, Steel Dynamics,

Bethlehem Steel, Ryerson Tull

United States

metal-smart.com

(New York, NY with

international offices)

Raw materials (ferroalloy,

noble alloy, and minor

metals)

MetalSpectrum.com

(Atlanta, GA, USA)

Alcoa-Reynolds, Allegheny

Technologies, Kaiser Aluminum,

North American Stainless, Olin,

Vincent Metals Goods, Thyssen

Krupp

North America Aluminum, stainless steel,

copper, brass, nickel alloys,

and titanium (specialty

metals)

OnlineMetals.com

(Seattle, WA, USA)

Specializes in cut-to-length

small orders for businesses

and individuals using UPS

for delivery

Steel24-7.com

(Europe)

Arbed/Aceralia, Corus, Thyssen

Krupp, and Usinor

See footnotes at end of table.
OCTOBER 2000

Industry Trade and Technology Review Steel Sector E-Commerce

 

12 Morgan Stanley Dean Witter estimates that the steel spot market accounted for 158.5

million metric tons, or one-half of the 317 million metric tons sold worldwide. Morgan Stanley

Dean Witter, “B2B Basic Materials,” p. 76. U.S. industry representatives suggest that from 20 to

30 percent of domestic sales are in the spot market. USITC staff interview with industry

representative, Sept. 11, 2000.

 

13 However, one company indicated that it maintains a policy of promoting E-commerce use

with its contract customers. USITC staff interview with industry representative, Sept. 12, 2000.

 

14 USITC staff interview with industry representatives, Aug. 31 to Sept. 12, 2000.

11

Table 1—Continued

Steel- and metals-related E-commerce exchanges

Company

(Base location) Metals industry ownership1

Target market2

Region Product

SteelPartner.com

(Washington, DC, USA)

American Iron and Steel

Institute

Steelscreen.com

(Stockholm, Sweden)

Europe

SteelVillage.com

(Houston, TX, USA)

Global Long products

WorldMetal.com

(Hong Kong)

China, South

Korea, Russia

 

1

 Identifies equity interests of steel mills, service centers, and other metals firms.

 

2

 Company may not necessarily target both a regional and product market.

Source: Compiled by Commission staff.

E-Commerce in Operation

Exchanges currently facilitate a small portion of prime and nonprime steel product sales in a

spot market that reportedly accounts for one-half of the steel sold throughout the world.12 Spot

market sales differ from contract sales in that they typically involve higher prices, along with

smaller volumes and shorter turnaround times. Participants on both sides of the spot market

may benefit from E-commerce because it has the potential to provide more comprehensive and

timely information related to transactions and inventory management. Industry representatives

disagree about the extent to which E-commerce will affect the contract market. Currently, the

steel industry continues to negotiate long-term contracts through traditional channels.13 This

type of business is likely to stay outside E-commerce channels until the exchanges can become

fully integrated with information technology systems (i.e., EDI) already in place.14

MetalSite and e-Steel offer the most advanced and well-known models for facilitating sales

of steel products, by providing support services such as lines of credit and logistical

requirements, as well as plans to enable steel mills and their customers to integrate their

information technology networks with E-commerce systems. Integration with sellers has partly

been achieved at MetalSite, for example, where one participant, Steel Dynamics, has been

able to post products for sale directly from its inventory control system. These exchanges offer

various means by which to buy and sell steel, ranging from auctions and catalogs to
OCTOBER 2000

Steel Sector E-Commerce Industry Trade and Technology Review

 

15 FerrousExchange, “Benefits to Members,” found at Internet address

http://www.ferrousexchange.com/Fex/ui/html/Navigation-Brochure/Marketplace/frameset.html,

retrieved Sept. 15, 2000.

 

16 USITC staff interview with MetalSite representatives, Sept. 18, 2000.

 

17 Because steel refining is a batch process, steelmakers may sometimes have to produce

certain products in excess of known orders. 

 

18 USITC staff interview with industry representative; Sept. 6, 2000, and MetalSite

representatives, Sept. 18, 2000.

 

19 Ted Slowik, “e-Commerce Energizes Logistics,” Metal Center News, Aug. 2000, found at

Internet address http://www.metalcenternews.com/2000/Aug00/MCN0008f5.htm, retrieved

Sept. 6, 2000.

12

negotiations and request-for-quotes, and the choice of one partner or just a few versus the

entire site membership. In effect, electronic exchanges take existing relationships and transfer

them to the Internet.

FerrousExchange.com is a newly active marketplace that offers three different trading

“platforms” that vary depending on the product to sell or buy. Commercial grades of steel are

sold on the Exchange platform; customized products are sold on the Request for Quote

platform; and nonprime material is sold on the Auction platform.15 These “platforms” appear

to represent the various models prevalent in the marketplace.

In contrast, MetalSite offers several options depending on the transaction method best suited

to each customer.16 Auctions are largely for spot purchases, and the accompanying reports can

generate information such as the number of bids received for a product. Product catalogs are

targeted at recurring contract-type sales. The quote finder option, introduced in September

2000, allows buyers to specify product requirements, and can include report information such

as the length of negotiating time. An additional option permits mills to, in effect, sell available

capacity online, enabling buyers to access mill schedules and purchase excess product17 before

it is rolled. This “time-on-the-mill” technology is still in the early stages of development, but

in time may aid coordination between mills and their customers.18

Exchanges also offer additional services such as financial arrangements or logistics

management. FerrousExchange shields the seller from a buyer’s payment default through

Gerling Credit Insurance Group. e-Steel announced a program with First International Bank,

whereby First International provides 14 types of commercial and international loans to e-Steel

members to facilitate transaction financing and settlement online. Logistics management

services are available at FerrousExchange through eflatbed.com, and at MaterialNet through

CarrrierPoint.com. These sites help coordinate shippers and carriers or try to reduce the

number of empty backhauls in the trucking industry. Such partnerships enable exchanges to

arrange transportation services as the final stage in a transaction.19

Effects of E-Commerce

Steel companies with an E-commerce strategy anticipate that the technologies developed on

behalf of the exchanges will help lower costs and improve efficiency by reducing both the time

required and the number of staff needed to complete both sales and procurement transactions.

As regional and global exchanges evolve, they should offer “both buyers and sellers the
OCTOBER 2000

Industry Trade and Technology Review Steel Sector E-Commerce

 

20 Paul Millbank, “e-Commerce Clicks Into Place,” Metal Bulletin Monthly, June 2000, 

pp. 30-31.

 

21 Ibid.

 

22 Ibid., p. 31.

 

23 e-Steel, “e-Commerce and Steel: The New Industry Advantage,” p. 4.

 

24 USITC staff interview with MetalSite representatives, Sept. 18, 2000.

 

25 USITC staff interview with industry representatives, Sept. 12, 2000, and MetalSite

representatives, Sept. 18, 2000.

 

26 WSD, “e-Commerce in Steel,” p. 2-25.

 

27 Ibid., pp. 7-8 to 7-13.

 

28 Ibid.

 

29 The Internet site www.asia-steel.com posts current bidding and asking prices. 

13

opportunity to participate in a much larger marketplace and find new, commercially

compatible partners in the process.”20 Such exchanges may also serve to drive down prices.21

Through E-commerce, steel companies hope to improve production scheduling, facilities use,

sales, and inventory management.22 Potential benefits to the industry include lower transaction

costs, reduced transaction time, and increased productivity. Typically steel orders are

completed through multiple contacts via fascimile or phone to establish specifications, quality,

logistics, and price. E-commerce exchanges expect costs to decrease as intermediary

steps/transactions are removed, thus reducing the amount of time it takes to process an order.

For example, e-Steel cited a Credit Suisse First Boston estimate that put the average

transaction cost at $30-$70 per ton on a spot mill order and $125-$225 per service center

transaction; E-commerce models could decrease the cost by $10-$30 per ton for mills and

$75-$125 per transaction for service centers.23

Other operations streamlined by E-commerce include data collection and report generation.

MetalSite noted that buyers and sellers can obtain aggregated information regarding their

transaction history, enabling them to perform necessary analysis on data such as daily marketclearing prices.24 The value to the company is the immediate availability of real-time reports,

rather than compiling complicated spreadsheets generated by in-house sales and marketing

personnel, which in turn frees them for other business activities. In time, some exchanges

anticipate the ability to provide aggregated industry data, or indices, to assist members’

decision-making processes.25

Not all analysts agree that business costs will be substantially reduced through investment in

E-commerce. One report, although citing potential for long-term cost reductions, suggested

that buyers and sellers may initially need to maintain existing networks while implementing

E-commerce systems that are likely to increase costs in the short run.26 Further, transaction

fees (paid by the seller only) are an added cost of business via the exchanges. Transaction fees

on auction sales at MetalSite reportedly range from 1 to 2 percent of the transaction value,

and fees on other sales range from 0.25 percent to 1 percent.27 At e-Steel, transaction fees

reportedly range from 0.3 percent to 0.875 percent, and are based on quantity transacted.28

Price discovery will be easier at those exchanges that provide aggregated price information

on their sites.29 The open-auction format (such as Freemarkets.com) enables participants to

submit repeated bids to counter other offers as the auction progresses. So far, the number of

transactions has been too small to affect overall steel prices; although industry observers

anticipate that prices will be affected by E-commerce, there are different opinions as to the

degree of potential shifts.
OCTOBER 2000

Steel Sector E-Commerce Industry Trade and Technology Review

 

30 WSD, “e-Commerce in Steel,” pp. 2-29 to 2-32.

 

31 Morgan Stanley Dean Witter, “B2B Basic Materials: The Supply Chain Moves Online,”

May 2000, pp. 82-83.

 

32 “e-Steel’s Founder Stresses the Value of Negotiation-Based e-Commerce,” 33

Metalproducing, May 2000, p. 18.

 

33 Service centers purchase steel products from mills and process the steel (by cutting,

bending, coating, etc.,) to customer specifications.

 

34 WSD, “e-Commerce in Steel,” p. 5-3.

 

35 Russ Banham, “Special Report, e-Commerce: The World Is Enough,” CFO, Jan. 2000.

14

• World Steel Dynamics suggests that E-commerce will increase the volatility of steel

prices both in magnitude and frequency as the market adjusts to oversupply conditions

or production cutbacks. However, prices will become more transparent as the industry

increasingly relies on E-commerce rather than traditional methods of price

determination.30

• In contrast, Morgan Stanley Dean Witter anticipates that transaction prices will

remain relatively unaffected or possibly increase since some exchanges do not give

buyers the opportunity to “comparison shop;” steel producers are unlikely to give up

“their ability to segment the market by disclosing ‘private’ transaction prices;” and

mills can aggregate small quantity orders that would typically go to service centers.31

Several exchanges operate a closed-bid auction system, whereby the only bid displayed is the

one submitted by the individual participant. Some orders may only involve two parties, as

exchanges develop the capability to allow buyers and sellers to designate a single party with

whom to negotiate. For example, e-Steel’s “SteelDIRECT” function identifies the buyer and

seller, so that the parties know “to whom they are talking”32 and can customize the terms of

a transaction depending on the customer. However, long-term contracts for large volumes of

steel are expected to be negotiated through traditional channels and subject to customary

volume discounts. In these instances, price remains nontransparent and E-commerce is merely

a sales tool similar to a facsimile or an E-mail. Regardless of the sales method used, local

prices remain subject to normal supply and demand pressures, resulting in increased prices

as customers need steel to meet orders, or lower prices during inventory liquidations.

The effect of E-commerce on steel service centers33 also has yet to be seen. Service centers

that do not provide value-added services reportedly are the most at risk, along with small to

medium-sized service centers. According to industry observers, the medium-sized service

centers (servicing regional customers) will now face competition for market share from large

service centers who place their catalogs online and have a wider geographic reach.34 Those

companies that simply break down large quantities of steel to sell in smaller quantities are

most likely to face stiff competition from E-commerce exchanges. Small processors are now

able to go online to bid for products directly from the mills as an alternative to obtaining

products from a company that warehouses products. For example, Ratner Steel, a coilprocessor, reportedly used MetalSite to buy steel directly from LTV, which is “now (Ratner’s)

second-largest supplier, when (it) didn’t buy one ounce of (LTV’s) steel in the past.”35

Steel mills and service centers acknowledge the need for a business strategy that includes an

E-commerce component. However, several obstacles are blocking a quick transition to this
OCTOBER 2000

Industry Trade and Technology Review Steel Sector E-Commerce

 

36 Philip Burgert, “Service Centers Feel e-Commerce Strategy Pinch,” American Metal

Market, Sept. 21, 2000, p. 4A.

 

37 Ibid.

 

38 Scott Robertson, “Marmon/Keystone Remains Wary of e-Commerce Hype,” American

Metal Market, Sept. 21, 2000, p. 2A.

 

39 The American Iron and Steel Institute (AISI) announced the formation of a group of

companies that will work to establish guidelines and create a uniform environment (“XML” or

“extensible markup language”) for steel E-commerce transactions. AISI, “AISI Forms XML

Workgroup to Develop Guidelines for Internet-based Steel Transactions,” press release, Sept. 18,

2000, found at Internet address http://www.steel.org/news/pr/2000/pr000918.htm, retrieved

Sept. 27, 2000.

 

40 Ford, together with General Motors and DaimlerChrysler, also has announced the formation

of an electronic marketplace for original equipment manufacturers and their suppliers to reduce

costs and improve efficiencies. The new exchange, Covisint, was approved by the U.S. Federal

Trade Commission in September and by the Federal Cartel Office in Germany in October, and is

expected to be operational in the fourth quarter 2000. WSD suggested that the automakers’

exchange will have virtually no impact on MetalSite or e-Steel, because they do not buy steel on a

spot basis. Covisint, “Covisint Receives Bundeskartellamt Clearance,” press release, Sept. 26,

2000, found at Internet address http://www.covisint.com, retrieved Oct. 6, 2000; Mark Roberti

and Elizabeth Wasserman, “Big 3’s Auto Exchange Gets Green Light,” The Standard, Sept. 11,

2000, found at Internet address http://www.theindustrystandard.com, retrieved Sept. 12, 2000;

and Peter Marcus, WSD, AIIS Annual Conference, Mar. 27, 2000. 

 

41 “Ford Will Procure Steel Through e-Steel,” New Steel, July 2000, pp. 9-10.

15

new business model. Many companies choose to operate their own websites that enable their

customers to place and track orders, while at the same time participating as members in Ecommerce exchanges. Currently, several exchanges are either planned or operational, and

participants are unwilling to establish relationships with only one or a few exchanges because

of uncertainty about which ones may survive consolidation.36 Further, service centers

reportedly suggest that current E-commerce exchanges accommodate steel mills which

emphasize quantity rather than service centers which stress meeting customer needs.37

Currently, members must learn the operating models for several exchanges, as customers and

suppliers may use different exchanges (or operate their own websites),38 and each one has its

own system standards.39

Steel customers have also entered into strategic alliances with the exchanges. Ford Motor

Co.,40 announced a multiyear agreement with e-Steel for the procurement of steel products for

its metal-stamping suppliers. In addition, Ford has a minority equity position in e-Steel.41

Therefore, in this instance, suppliers to Ford are encouraged to use e-Steel. Steel mills and

service centers acknowledge the need to remain flexible in order to meet customer demands,

and may use several exchanges. E-commerce companies will need to demonstrate that their

exchange provides value to both steel users and their suppliers in order to survive.
OCTOBER 2000

Steel Sector E-Commerce Industry Trade and Technology Review

 

42 MetalSite recently announced intentions to form an alliance with MetalSpectrum, an

exchange founded by several specialty metals-industry companies, to cooperate and integrate

supply-chain technology solutions. “MetalSite, MetalSpectrum Eye Alliance,” American Metal

Market, Sept. 11, 2000, p. 2.

 

43 Paul Taylor, “MetalSite: Your e-Commerce Opportunity,” white paper version 1.2, Feb. 15,

2000, found at Internet address http://www.metalsite.net.

 

44 Representatives of J.P. Morgan Securities and Morgan Stanley Dean Witter, AIIS Annual

Conference, Mar. 27, 2000.

 

45 More integrated mills have taken an active interest in ownership of exchanges than have

minimills, whereas minimills have been industry leaders regarding steelmaking technology in

recent years.

16

Outlook--What It Takes for an Exchange to Succeed

Most industry observers agree that consolidation will occur among the exchanges because the

market is not large enough to support all of the existing operations. Speculation centers on the

number of exchanges that will survive and what factors will determine their survival.

Exchanges that concentrate on specific products may end up merging with companies that

maintain a broader product range.42 MetalSite identifies several characteristics or assets it

considers to be crucial in order to attract initial users and maintain members:

• Sustain sufficient volume to attract participants on a regular basis;

• Provide information regarding the products available;

• Develop a global reach for steel as an industry with buyers and sellers worldwide;

• Offer several different ways to conduct transactions;

• Have the ability to integrate existing systems (i.e., EDI) into the exchange’s

format;

• Maintain neutrality despite steel mill equity interest in many exchanges;

• Ensure the security of business proprietary information; and

• Achieve an advantage by being first to the market.43

Several mills have an equity position in the exchanges, thus ensuring seller participation,

which in-turn attracts buyers. Adequate volume and product availability, along with attentive

service, are considered essential to ensure buyer participation in the various exchanges and

to encourage repeat business. Industry observers have asserted that producer involvement in

E-commerce sites is crucial to achieving these business goals.44 MetalSite founders include

Weirton Steel, LTV, and Steel Dynamics. In contrast, e-Steel began with no steel industry

investment, but eventually offered equity positions to Dofasco and US Steel Group of USX

Corp.45 Each exchange is run as an independent, “neutral” company in order to ensure the

security of confidential information despite steel mill and service center equity interest in the

exchanges. However, some exchanges operate without any industry ownership (see table 1).

A significant component of the steel E-commerce exchanges is their ability to integrate with

the legacy systems already in place and accommodate multiple users. e-Steel and MetalSite

both have systems that are designed to eventually integrate with those of exchange

participants. e-Steel has teamed with USX Engineers and Consultants to implement

integration services in an effort to “significantly (decrease) transaction processing costs and
OCTOBER 2000

Industry Trade and Technology Review Steel Sector E-Commerce

 

46 e-Steel, “STEELlink,” found at Internet address http://www.esteel.com/steellink.shtml,

retrieved Sept. 7, 2000.

 

47 USITC staff interview with industry representative, Sept. 6, 2000.

 

48 Morgan Stanley Dean Witter, “B2B Basic Materials,” p. 74.

17

(shorten) sales cycles for both made-to-order and existing steel inventory.”46 According to

industry sources, industry knowledge and experience is important to creating E-commerce

processes that will meet the needs of the metals industry. E-commerce will become more

valuable once such integration has occurred; until then, it adds to the cost of a transaction

rather than decreasing the cost because companies are required to maintain dual systems.47 As

recently as May of this year, one report observed that “the major limiting factor (regarding

the rate in adoption of the Internet by the steel industry) is the shortcomings of the current

B2B technology, which cannot yet fully handle inquiry to settlement and/or more sophisticated

product offerings.”48

Integration among steel and metals buyers, sellers, and facilitators is key to achieving the full

potential of E-commerce in the steel industry. Although some administrative efficiencies are

already apparent, and limited customer-base enlargement has occurred, the perception in the

industry is that the number of completed transactions is still relatively small and participation

in exchanges comes with its own costs. However, these companies report that they intend to

continue to develop E-commerce strategies in an effort to enhance their business. E-commerce

is a tool that they cannot afford to be without because some customers are ready to use it now,

whereas others are still more comfortable with traditional methods of communication. In order

to increase the number of transactions, E-commerce exchanges must prove their value to both

steel sellers and steel buyers, who will reward the successful exchanges with the quantity of

steel needed to make them profitable.#

OCTOBER 2000

Industry Trade and Technology Review Mexico’s Automotive Production Center

 

1

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

U.S. International Trade Commission or any of the Commissioners.

 

2

 Passenger vehicles refer to passenger cars and light trucks (minivans, sport-utility vehicles,

and pickup trucks). This article primarily discusses passenger vehicles and related parts,

although certain tables provide data for all motor vehicles (passenger cars, light trucks, mediumand heavy-duty trucks, buses, and bodies and chassis of such vehicles).

 

3

 “Mexico’s Automotive Industry Successfully Competes in the Global Market,” NAFTA

Works, May 2000, p. 1.

 

4

 Automotive News, 2000 Market Data Book, p. 38.

19

Mexico’s Emergence as a Global Automotive

Production Center Drives Trade and

Investment

Deborah McNay1 Laura Polly1

mcnay@usitc.gov polly@usitc.gov

(202) 205-3425 (202) 205-3408

U.S., European, and Japanese automakers and producers of automotive

parts have invested in new and existing assembly plants throughout North

America, further integrating the regional automotive market and

manufacturing base. Mexico, in particular, is benefitting from increased

foreign direct investment (FDI) as a result of the North American FreeTrade Agreement (NAFTA) and Mexico’s numerous bilateral trade

agreements with some 28 countries, including the 15 members of the

European Union (EU). Mexico’s long-term role as an important

automotive manufacturing and export base also stems from its strategic

advantages as a member of NAFTA. U.S.-Mexican trade in automotive

products will likely increase as production is rationalized within North

America, as European automakers and suppliers increase their investments

in Mexico, and as Mexican market demand increases in the future. This

article examines the development of Mexico as a leading automotive

production center, both as an integral player in the North American

industry and as a key manufacturing location for global producers as freetrade agreements (FTAs) and other bilateral agreements are negotiated.

The Mexican automotive industry emerged from the country’s 1995 economic crisis in a

strong competitive position. The Mexican passenger vehicle manufacturing industry,2 which

specializes in the production of small and medium-size cars and light trucks, produced a

record-setting 1.5 million vehicles in 1999, an increase of 5 percent over the 1998 total. This

year, 2000, production is expected to reach a new record of 1.7 million vehicles, with more

than 70 percent for export.3 Moreover, motor vehicle sales in Mexico reached 665,783

vehicles in 1999 (up 35 percent from the 1998 total), with imports from all countries

accounting for 37 percent of the Mexican market.4
OCTOBER 2000

Mexico’s Automotive Production Center Industry Trade and Technology Review

 

5

 For additional information on increasing global market integration of the automotive sector,

especially in North America, see United States International Trade Commission (USITC),

Production Sharing: Use of U.S. Components and Materials in Foreign Assembly Operations,

1995-1998 (ch. 3, Motor Vehicles and Parts), USITC publication 3265, Dec. 1999, pp. 3-1 to 3-

12, posted at USITC Internet server at www.usitc.gov (“Reports and Publications” and search for

production sharing).

 

6

 Automotive News, 2000 Market Data Book, May 2000, p. 31.

 

7

 Brain Corbett, Drew Winter, and Katherine Zachary, “Ay Caramba! Mexico is heading into

the automotive big leagues,” Ward’s Auto World, May 2000, p. 50.

 

8

 Corbett, Winter, and Zachary. Hermosillo benefits from a higher level of automation than

that found in most Mexican operations, approaching the automation level typical of U.S. plants. 

“1 goal, 2 paths: Two plants paint different pictures of Ford’s assembly operations,” excerpt from

Harbour Report 2000 by Harbour & Associates, Inc., Automotive News, Aug. 21, 2000, p. 24P.

 

9

 Cross-over, or hybrid, vehicles fuse characteristics of more than one class of vehicle. The

Aztek was designed as an all-in-one vehicle that drives like a sport sedan, has the functionality of

a van, and conveys the off-road characteristics of a sport-utility vehicle.

20

Although Mexico currently ranks as the world’s 11th-largest producer of motor vehicles, the

Mexican industry is composed almost entirely of subsidiaries of foreign manufacturers that

determine the local product mix and local production levels as part of their global vehiclemanufacturing strategies.5

 Volkswagen accounts for the bulk of passenger car manufacturing

in Mexico, at 41 percent of the 1999 total. Other passenger vehicle manufacturers with

operations in Mexico, in descending order of production volume, are General Motors (GM),

DaimlerChrysler (DC), Ford, Nissan, Honda, and BMW (table 1).6 Medium- and heavy-duty

truck manufacturers include DC (Chrysler, Mercedes-Benz, and Freightliner brands)

(Germany), Dina (Mexico), Ford (United States), Kenworth (United States), GM (United

States), Navistar (United States), Oshkosh (United States), and Scania (Sweden).

The following discusses competitive factors, bilateral trade agreements, and investment trends

affecting Mexico’s emergence as a leading automotive production center. The implications of

foreign direct investment for future U.S.-Mexico automotive trade are also addressed. 

Improved Competitive Status of Mexico's Automotive

Industry

Because of Mexico’s geographic location, manufacturing competence, and existing automotive

manufacturing infrastructure, Mexico is increasingly chosen as the lead North American

assembly site for key new vehicles and components.7 DC debuted production of the PT

Cruiser in Toluca, which was originally the sole global source for the vehicle. Overwhelming

demand for the vehicle prompted DC to add production in Austria. Volkswagen’s Puebla

factory is the exclusive world producer of the New Beetle. The Ford Focus, an important new

entrant in the small car segment, is produced in two North American production sites, of

which one is Hermosillo, which industry experts report as one of Ford’s premier plants in the

world.8 Production of GM’s first cross-over vehicle,9 the Pontiac Aztek, began in 2000 at

Ramos Arizpe, to be followed by production of the Buick Rendezvous at that same plant.
OCTOBER 2000

Industry Trade and Technology Review Mexico’s Automotive Production Center

 

10 Corbett, Winter, and Zachary.

 

11 Because of differences in the scope of products included in the term “auto parts,” data cited

in this article from various sources may not be directly comparable.

 

12 U.S. Department of State, Mexico - Automotive Aftermarket Parts - ISA981101, Market

Research Reports, Nov. 1, 1998.

21

Table 1

Motor vehicle production in Mexico by plant, in units, 1999

Manufacturer (city, state) Models produced

Production

Export 1999 Total 1999

BMW (Toluca, Mexico) BMW 3 series, 5 series, 7 series,

Porsche 911

0 1,605

Chrysler (Lago Alberto, Mexico City) Ram pickup, Ramcharger 79,741 96,455

Chrysler (Saltillo, Coahuila) Ram pickup 143,707 143,707

Chrysler (Toluca, Mexico) Cirrus, Neon, Sebring, Stratus 72,303 92,624

Ford (Cuautitlan, Mexico) Contour, Mystique, F Series truck,

medium truck

27,566 70,332

Ford (Hermosillo, Sonora) Escort, Focus, Tracer 109,521 126,940

Ford (Monterrey, Nuevo Leon) Chassis 26,930 26,930

General Motors (Ramos Arizpe,

Coahuila)

Cavalier, Joy/Swing, Monza, Sunfire,

Chevy pickup

81,672 189,541

General Motors (Silao, Guanajuato) Chevy CK pickup, Chevy Suburban,

GMC Suburban, Silverado, Tahoe,

Yukon, Yukon XL

124,159 133,219

General Motors (Toluca, Mexico) Chevy CK pickup, Chevy P Model,

Chevy CT Series

225 8,261

Honda (El Salto, Durango) Accord 1,795 10,241

Mercedes Benz (Santiago, Mexico) C Class, E Class, Freightliner Truck,

Mercedes Truck

0 21,941

Nissan (Aguascalientes, Aguascalientes) Sentra, Tsuru 41,732 101,489

Nissan (Cuernavaca, Morelos) Lucino, Sentra, Tsubame, Tsuru,

Chassis, Nissan pickup

8,667 84,085

Volkswagen (Puebla, Puebla) Beetle, Golf, Jetta, Sedan Type 1,

Cabrio

341,306 410,308

Various other heavy truck makers Dina, Navistar, Oshkosh, Kenworth,

Scania

0 16,482

Source: Ward’s AutoInfoBank.

Silao was selected as the lead plant for launching GM’s all-new Suburban/Yukon XL full-size

sport-utility vehicles. Nissan’s Aguascalientes facility is the sole supplier of the new Sentra

for North America.10

Automotive parts production11 from approximately 1,000 Mexican component producers has

been estimated to range between $44 billion to $56 billion in 1998.12 These components

include those destined for the original equipment manufacturers (OEM) market (i.e.,

automakers) as well as those shipped to the aftermarket as replacement parts. Delphi
OCTOBER 2000

Mexico’s Automotive Production Center Industry Trade and Technology Review

 

13 “Mexico Shapes Up as European Gateway to US,” Automotive World, July 24, 2000, found

at Internet address http://www.just-auto.com/, retrieved July 25, 2000.

 

14 The PT Cruiser provides a good example of the pull of motor vehicle manufacturers. TRW,

Oxford, Valeo, Meritor, Lear, Johnson Controls, and Standard Products are among the suppliers

that located or expanded facilities to supply the PT Cruiser at Toluca. Brian Corbett, “Toluca

Feels Blessed by PT Cruiser Duty,” Ward’s Automotive Reports, Mar. 27, 2000, pp. 1-2. 

However, the Cruiser program is also supplied by many U.S. plants, which provides a boost to

U.S. parts production. Brendan M. Case and Laurence Iliff, “U.S. Car-Makers’ ‘South of the

Border’ Plants Boost Mexico’s Economy,” Dallas Morning News, Apr. 19, 2000, found at

Internet address http://today.newscast.com, retrieved Apr. 25, 2000.

 

15 For example, TRW has established a goal to supply two-thirds of its actuation system

components from North America by 2003, and is encouraging its European suppliers to source

from North America. “TRW Launches North American Actuation Center of Excellence,” May

17, 2000, found at Internet address http://today.newscast.com, retrieved May 18, 2000.

 

16 Peter Marsh, “European and U.S. Links Have Helped Mexican Component-Maker Nemak

Prosper,” Mar. 1, 2000; and Peter Marsh and Andrea Mandel-Campbell, “Unik: A Piston-Maker

Owes Much to Foreign Assistance,” Mar. 1, 2000, found at Internet address http://today.

newscast.com, retrieved Mar. 2, 2000.

 

17 U.S. Department of State, Mexico - Automotive Original Eq. Manufacturers - ISA970801,

Market Research Reports, Aug. 1, 1997.

 

18 “Brake Business Moves South of the Border,” Ward’s AutoWorld, July 2000, p. 34.

22

Automotive Systems, the former parts division of GM, is the largest component manufacturer

in Mexico. Other U.S. firms, such as Lear and Johnson Controls, also have a major presence

in the Mexican market.13 In addition to motor vehicles, U.S. automakers also manufacture

engines and engine components in Mexico for incorporation into vehicles assembled

throughout North America. Several Mexican firms, such as Sanluis Rassini (a producer of

foundation brakes and leaf springs) and engine component manufacturers Teksid and Nemak,

have developed the technological and manufacturing capabilities to become significant

suppliers to the North American automotive industry.

U.S. and foreign suppliers of automotive parts have followed their customers to Mexico in

response to automakers’ pursuit of localized production, just-in-time deliveries, increased

local content, sourcing diversity, smaller supplier bases, and greater modularity.14 Not only

automakers but large manufacturers of automotive components are encouraging their

suppliers to localize supply because of these changes in manufacturing and sourcing

strategies.15 Through their Mexican operations, these manufacturers have introduced

technological improvements and marketing skills that have enhanced Mexico’s

competitiveness and industrial base.16 Moreover, the presence of non-U.S. suppliers in

Mexico has also created a more competitive environment for U.S. firms that have traditionally

dominated the Mexican market.17

With the increased adoption of manufacturing improvements, automotive producers located

in Mexico have been able to expand their manufacturing capabilities and product base beyond

traditional labor-intensive assembly to include sophisticated production operations and centers

of engineering and technical excellence. These operations now often supply the entire North

American market rather than just Mexican assembly plants of U.S. and other foreign

automakers, and often complement the activities of North American parts facilities. TRW

Inc., for example, has named its Santa Rosa plant as its only “Center of Excellence” for brake

actuation systems,18 and Johnson Controls opened its seat mechanism technical center in
OCTOBER 2000

Industry Trade and Technology Review Mexico’s Automotive Production Center

 

19 “Company Report: Johnson Controls,” Twin Plant News, Feb. 2000, p. 10.

 

20 “Delphi Attacks Spare Parts Market in Mexico,” Reforma/Infolatina, Apr. 19, 2000, found

at Internet address http://today.newcast.com, retrieved May 22, 2000.

 

21 According to Harbour & Associates, Ford Hermosillo, DC Saltillo, and GM Silao are

among the most competitive plants in North America, and Hermosillo surpasses the performance

of many other Ford plants in the region. “1 goal, 2 paths: Two plants paint different pictures of

Ford’s assembly operations,” excerpt from Harbour Report 2000 by Harbour & Associates, Inc.,

Automotive News, Aug. 21, 2000, p. 24P.

 

22 Corbett, Winter, and Zachary.

 

23 Ibid.

 

24 Manufacturing cost advantages resulting from Mexico’s low wage rates reportedly are

offset to some degree by in-bound and out-bound freight costs. Corbett, Winter, and Zachary. 

Nissan Mexico officials report that wage rates are not a significant factor when doing business in

Mexico, because the labor content is less than 10 percent of total vehicle costs in the United

States. Katherine Zachary, “Mexico: Ground zero for Nissan’s revival,” Ward’s Automotive

International, May 2000, p. 1.

 

25 Brendan M. Case and Laurence Iliff, “U.S. Car-Makers’ ‘South of the Border’ Plants Boost

Mexico’s Economy,” Dallas Morning News, Apr. 19, 2000, found at Internet address

http://today.newscast.com, retrieved Apr. 25, 2000.

 

26 “Mexican Auto Sector Comes of Age,” North American Free Trade and Investment Report,

June 15, 2000, p. 18.

23

Reynosa, Tamaulipas, in May 2000.19 In addition, U.S. parts manufacturers intend to expand

beyond their OEM customer base to tap the Mexican aftermarket. Delphi plans to enter with

a new division named Delphi After Market, with components sourced locally as well as

imported.20 Meritor Automotive, another U.S.-based parts manufacturer, is also active in the

spare parts market with its dedicated aftermarket business.

Similarly, Mexico’s motor vehicle industry has demonstrated significant improvements in

labor productivity, product quality, and competitiveness. According to a noted automotive

manufacturing productivity analyst, adoption of lean manufacturing techniques in Mexico

have led to these improvements.21 Further, the quality of vehicles built in Mexican plants has

been steadily improving and is currently comparable to vehicles built in the United States and

Canada. Despite extensive reliance on manual labor, many Mexican plants are reported by

industry observers as having better labor productivity than comparable U.S. or Canadian

plants.22 Some industry observers also claim that training and education of workers in most

Mexican assembly plants is comparable to their counterparts in the United States,23 and that

this skilled low-cost24 workforce contributes to overall industry efficiency.25 Although plant

productivity would likely be even higher if increased automation were introduced to the

production process (and low labor costs tend to discourage investment in costly automation),

lower levels of automation result in relatively more flexible operations, a competitive

advantage in terms of facilitating changes in production volumes.26

Although Mexico offers an attractive manufacturing environment for automakers, several

obstacles impede the automotive industry in Mexico from attaining its full competitive

potential. First, despite consistent growth in the Mexican economy since 1996, relatively low

per capita incomes and high interest rates restrict domestic demand for new car sales and lead

producers to focus on export markets. Domestic demand should pick up, however, with

continued expansion of the Mexican economy and with more competitive interest rates

anticipated to accompany increased participation in the Mexican market by foreign banking
OCTOBER 2000

Mexico’s Automotive Production Center Industry Trade and Technology Review

 

27 Economist Intelligence Unit (EIU), “Mexico’s automotive sector: taking centre stage in

global production strategies,” ch. 5 in Motor Business International, 2nd quarter 2000, p. 71.

 

28 Corbett, Winter, and Zachery.

 

29 For further explanation, see USITC, Production Sharing, p. 1-11.

 

30 Lindsay Chappell, “Mexico lures overseas suppliers,” Automotive News, May 15, 2000, 

p. 30; and “Brazil, Mexico agree on reduced tariffs,” Ward’s Automotive International, May

2000, p. 2. 

 

31 U.S. Department of State telegram No. 131328Z, “Mexico’s Expanding Trade and FTAs

with Central America,” U.S. Embassy, Mexico City, July 2000.

 

32 Trade balancing elements of that decree require that foreign automobile producers in

Mexico export $0.66 for every $1.00 imported into Mexico. The decree also sets local content

requirements.

24

services. Retail prices also are expected to decline with the elimination of automotive tariffs

among NAFTA partners by 2004 and with intensified price competition anticipated to follow

an influx of new automakers drawn to Mexico by the EU-Mexico FTA.27 Second, the auto

industry in Mexico also faces infrastructure problems such as water and power shortages28

that reportedly continue to hamper manufacturing efficiency. Finally, the automakers’ supply

network in Mexico continues to be highly fragmented as a result of decades of protection

through restrictions on foreign ownership prior to NAFTA, and local content requirements for

motor vehicle producers in Mexico. Auto parts assembly plants established under the

Maquiladora and PITEX programs29 form a tier of suppliers benefitting from relatively

modern equipment and technology not available to many indigenous Mexican firms. Parts

made by indigenous, formerly “protected,” producers are often not competitive with parts

made by foreign-based companies.

Mexico’s Recent Bilateral Trade Agreements

The rules of origin and content requirements specified by bilateral trade agreements and the

market-access preference accorded to signatory countries encourage consideration of Mexico

as an ideal location for automotive-related FDI. Automakers in Mexico can take advantage

of a comparatively large number of bilateral trade agreements, including current agreements

with the United States and Canada, the EU, Brazil, Chile, Colombia, Venezuela, Bolivia,

Costa Rica, Nicaragua, Guatemala, El Salvador, Honduras, and Israel. Reportedly, Argentina

and Singapore are also interested in negotiating such agreements with Mexico.30 Mexico is

also negotiating an FTA with Panama that would give Mexico complete FTA coverage in

Central America.31

EU-Mexico Free-Trade Agreement

The EU-Mexico FTA entered into force on July 1, 2000. Provisions of the the agreement that

apply to the automotive sector include the following: 

• Mexico’s elimination of its “Decree for the Development and Modernization of the

Automotive Industry” by January 1, 2004;32

• Reductions of Mexican tariffs on most EU vehicles from 20 percent to 3.3 percent

upon entry into force of the FTA and elimination by January 1, 2003; 

• Application of these preferential duties within a tariff quota of 15 percent of the

Mexican market (EU vehicles currently represent 2 percent of the Mexican market);
OCTOBER 2000

Industry Trade and Technology Review Mexico’s Automotive Production Center

 

33 U.S. Department of State telegram No. 251612Z, “Details of EU-Mexico Free Trade

Agreement,” US-EU Brussels, Feb. 2000.

 

34 U.S. Department of State telegram, “Details of EU-Mexico Free Trade Agreement,” Feb.

2000. The local content requirement will increase from 45 percent in 2000 to 50 percent in

2002, reaching its final level of 60 percent in 2005. “EU Commission Prepares to Approve

Uneven Mexico Trade Deal,” Jan. 14, 2000, found at Internet address

http://www.insidetrade.com/, retrieved Jan. 14, 2000.

 

35 “EU, Mexico sign trade pact,” Ward’s Auto World, Jan. 2000, p. 13.

 

36 Bob Schnorbus, “Mexico: Autos and Trade Drive Economy,” The Power Report, Mar. 2000,

p. 15.

 

37 “EU Pact Seen Spurring Investment in Mexico,” Ward’s Automotive Reports, Jan. 24, 2000,

p. 3.

 

38 Just-Auto Editorial Team, “EU carmakers converge on Mexican gateway,” Jan. 5, 2000,

found at www.just-auto.com, retrieved June 12, 2000.

 

39 Andrea Wielgat, “Mexico-EU treaty to encourage foreign investment,” Ward’s Automotive

International, Feb. 2000, p. 12.

25

• Elimination or reduction of Mexican tariffs on EU automotive parts to 5 percent or

less by January 1, 2003; and

• Abolishment of all duties by the EU on Mexican vehicles by January 1, 2003.33

In addition, vehicles from Mexico and the EU must have local content of 60 percent to qualify

for FTA benefits. However, Mexico was granted a 5-year transition period to reach that level

of local content.34 The rules of origin for automotive products were drafted to assure that

Mexico would not become a platform for duty-free entry into Europe of vehicles assembled

in Mexico chiefly from U.S.-made parts.35 The rules of origin that determine local content of

auto parts differ from those applied to assembled vehicles.

As a result of the EU-Mexico FTA, some observers expect Mexico to become the common

bridge between Western Europe, North America, and South America, using its advantages to

become an intercontinental hub of automotive manufacturing.36 European automakers may

begin looking more seriously at investment in Mexico because the agreement puts them on a

competitive level comparable with U.S. automakers that benefit from NAFTA. Significantly,

by permitting EU automakers that do not have a manufacturing presence in Mexico to benefit

from the EU-Mexico FTA automotive tariff cuts, the agreement may ultimately lead to

substantial investments in Mexico because some of these producers may prefer to establish

a market presence through imports prior to investing in local manufacturing facilities.37

Since completion of the EU-Mexico FTA negotiations, several automakers announced plans

to invest over $2 billion in Mexican operations. Renault and Nissan are investing in their first

joint operation since merging in 1999, and Peugeot is considering its first investment in

Mexican operations as well. Volkswagen, already the largest motor vehicle producer and

exporter in Mexico, has committed to spending one-third of its global budget during the next

5 years on its operations in Mexico. The EU-Mexico FTA is especially beneficial for

Volkswagen, which reportedly ships over 2,000 New Beetles weekly from Mexico to Europe,

and imports one-third of its manufacturing inputs from Germany.38 Recent reports indicate,

however, that Volkswagen would like to reduce its reliance on parts from Europe in an effort

to limit transport costs and take advantage of just-in-time delivery.39 In addition, Hyundai

(Korea) is opening a bus-manufacturing operation in Mexico. 
OCTOBER 2000

Mexico’s Automotive Production Center Industry Trade and Technology Review

 

40 The “Decree for the Application of the Additional 7th Protocol of the Agreement in Pursuit

of the 9th Partial Renegotiation between the Government of the United States of Mexico and the

Government of the Federal Republic of Brazil” is part of the larger Latin American Integration

Association agreement.

 

41 “Brazil trade pact talks with Mexico continue,” Ward’s Automotive International, Sept.

2000, p. 5.

 

42 U.S. Department of State telegram No. 161651Z, “Exports bring hope for auto makers after

heavy losses,” , U.S. Consulate, Sao Paulo, Mar. 2000.

 

43 “Brazil close to motors accord with Mexico,” Financial Times Electronic Publishing,

received Apr. 12, 2000.

 

44 Reuters, “Mexico, Brazil to Slash Vehicle Tariffs,” Los Angeles Times, Apr. 26, 2000,

p. C7.

 

45 Case and Iliff.

26

Mexico-BrazilAutomotive Decree

Mexico and Brazil concluded a 2-year automotive decree40 in April 2000, covering passenger

cars and trucks of up to 9 metric tons. The decree provides for each country to import up to

40,000 vehicles from the other country in the first year, and 50,000 vehicles in the second

year, at an 8-percent tariff. If these first- and second-year quotas are not met, the remainder

may be imported at the preferential tariff rate in a third-year extension of the decree.

Previously, Mexico was assessing a 20-percent tariff on Brazilian-made autos, and Brazil was

assessing a 35-percent tariff on autos from Mexico. Brazil and Mexico are currently

negotiating a wider reaching bilateral trade agreement that is expected to be signed by the end

of 2000, which may extend the automotive decree an additional 5 years. With this new

agreement, Brazil would like for Mexico to increase the quota for Brazilian cars to 100,000

annually. In addition, Mexico and Brazil are negotiating an agreement to mutually reduce

tariffs on automotive parts to 8 percent. Mexico is also negotiating another agreement with

the Mercosur trade bloc that should be in place by the end of 2001.41

Rules of origin that determine local content are an important component of the Mexico-Brazil

agreement because Mexico’s motor vehicle industry is heavily integrated with that of the

United States under NAFTA, whereas Brazil shares a vehicle regime with Argentina.

Reportedly, exporting companies in both Mexico and Brazil would be required to have plants

in both countries and the exported vehicles must have a minimum of 30-percent domestic

content.42 GM, Ford, DC, Nissan, Renault, Volkswagen, BMW, Honda, Volvo, and Scania

have plants in both countries, and Brazilian subsidiaries of Renault, Mercedes, Scania, and

VW all have significant export operations to Mexico.43 This decree is especially important

to the Mexican subsidiaries of Volkswagen and DC; in early 2000, the Government of Mexico

raised the preferential tariff rate of 8 percent granted these two automakers on imports into

Mexico from their Brazilian subsidiaries to 23 percent.44

Automotive Investment Trends in Mexico

U.S., Japanese, and European automakers have made considerable investments in new and

existing assembly plants throughout North America to introduce new models and expand

capacity for current popular models. Auto companies have invested $30 billion in Mexico

since 1994 and could invest an additional $13 billion over the next 3 years, according to

industry observers.45 Announced plans by the world’s leading automakers to begin production
OCTOBER 2000

Industry Trade and Technology Review Mexico’s Automotive Production Center

 

46 Joel Millman, “Mexico Becomes a Leader in Car Parts,” Wall Street Journal, Mar. 30,

1999, p. A21.

 

47 “Mexico Shapes Up as European Gateway to US.”

 

48 EIU, p. 75.

27

or increase capacity indicate Mexico’s increasing importance to their global production

strategies (table 2).

Ongoing and planned expansions in North American motor vehicle manufacturing capacity

and increased production rationalization have generated new market opportunities for

suppliers and stimulated investment in the regional automotive parts sector (table 3). For

example, Mexican, U.S., and European parts producers are expected to invest over $10 billion

in the Mexican parts industry within the next 2 years,46 in addition to the nearly $7 billion

invested in the Mexican supplier industry since 1994.47

U.S.-Mexico Trade Patterns and Production Sharing

Mexico surpassed Japan as the second-leading market for U.S. motor vehicle exports in 1997,

as U.S. exports to Mexico registered an average annual increase of 131 percent during 1995-

97, but slowed considerably to 17 percent in 1998 (table 4). In 1999, U.S. exports to Mexico

increased by $29 million (1 percent) to $2.3 billion. Mexico’s level of motor vehicle imports

is likely to rise further as manufacturers round out their product offerings in Mexico, reduce

the number of models and platforms manufactured in Mexico to achieve increased economies

of scale, and implement production rationalization strategies.48 Mexico ranks as the thirdleading source of U.S. motor vehicle imports, accounting for 13 percent of such imports in

1999. U.S. motor vehicle imports from Mexico increased by $2.6 billion (20 percent) to

$15.8 billion in 1999.

The importance of Mexico in North American automotive production and trade extends into

the parts sector, reflecting the influence of NAFTA in shaping North American industry

integration. The U.S. automotive industry is believed to incorporate a significant level of U.S.

parts in its Mexican operations, generating large trade flows in such sectors as engines and

related parts. As a result, Mexico is the second-leading market for U.S. exports of automotive

parts, accounting for $5.1 billion (19 percent) of such exports in 1999 (table 5). Mexico is

also a leading U.S. import source of automotive components, supplying $3.4 billion (16

percent) of such imports in 1999.
OCTOBER 2000

Mexico’s Automotive Production Center Industry Trade and Technology Review

28

Table 2

Motor vehicles: Selected investment and production plans for Mexico

Manufacturer Capacity expansion/investment plans in Mexico

Plant location (city,

state)

DaimlerChrysler Began production of the PT Cruiser at Toluca in

January 2000, with a capacity of 100,000 per year for

global distribution. Planning to invest $1.2 billion

during 2000-02 mainly to expand production lines as

part of the company’s $2.0 billion, 5-year plan for its

Mexican operations.

Toluca, Mexico

Lago Alberto, Mexico City

Saltillo, Coahuila

Ford Committed $1 billion to expand its Mexican operations

during 1997-2000. One-half was devoted to a new

small car engine plant in Chihuahua, and one-half was

allocated to development of the Focus and Visteon

parts plants. 

Chihuahua City,

Chihuahua

Hermosillo, Sonora

General Motors Will double its Mexican capacity from 300,000 to

608,000 vehicles per year by 2007. Doubled the size of

its Ramos Arizpe plant to build SUV crossover vehicles

Pontiac Aztek, Buick Rendezvous, and a Saab model

beginning in January 2001. May also double capacity

at Silao to add a GMT800-based model.

Ramos Arizpe, Coahuila

Silao, Guanajuato

Hyundai (Bering Hyundai

International)

Is investing $7 million during 2000-04 to build a bus

plant in Puebla; production will be for Mexican and U.S.

markets.

Puebla, Puebla

Renault-Nissan Nissan completed during the first part of 2000 an $800

million project to move all production of the Sentra for

the Western Hemisphere to Aguascalientes. Nissan is

increasing production at its two plants by 50 percent in

2000. Nissan reportedly is also considering producing

a full-sized pickup for export to the United States.

The Renault-Nissan Alliance is investing $400 million to

implement its plan for Mexico, which includes

introducing production of two Renault models at Nissan

plants - the Scenic at Cuernavaca in 2001 and the Clio

at Aguascalientes in 2002. The two automakers may

also jointly produce a new car for the Mexican market.

Aguascalientes,

Aguascalientes

Cuernavaca, Morelos

Volkswagen Inaugurated a $50 million design center in 1999. Will

spend $1 billion during 2000-04 on improvements to

Puebla, including engine production and preparations to

build a convertible model of the New Beetle. 

Volkswagen may decide to produce an extended-cab

pickup; Puebla would be a likely choice for North

American production.

Puebla, Puebla

Volvo AB Invested $20 million in 1999 to increase bus and truck

capacity.

San Nicolas de la Garza,

Nuevo Leon

Sources: EIU, Motor Business International, 2nd quarter 2000, ch. 5; and various industry trade publications.
OCTOBER 2000

Industry Trade and Technology Review Mexico’s Automotive Production Center

29

Table 3

Motor vehicle parts: Selected investments in Mexico

Manufacturer (country) Investments in Mexico Plant location (city, state)

Oxford Automotive (U.S.) New plant for the production of automotive

assemblies; February 2000 start-up.

Ramos Arizpe, Coahuila

Eaton (U.S.) New plant for the production of heavy truck

transmissions; expected start-up in 1st

quarter 2001.

San Luis Potosi, San Luis Potosi

Meritor Automotive (U.S.) New plant for the production of heavy-duty

drive axles and drivelines; February 2000

start-up. Expansion of its wheel facility.

Queretaro, Queretaro

San Luis Potosi, San Luis Potosi

Budd Co. (U.S.) New plant for the manufacture of

automotive stampings; April 2000 start-up.

Silao, Guanajuato

TRW (U.S.) New plant for the production of brake parts

and assemblies; May 2000 start-up.

Santa Rosa Jauregui, Queretaro

Hayes Lemmerz (U.S.) Expansion of its aluminum wheels facility to

be completed in 2001.

Chihuahua City, Chihuahua

Mannesman Sachs (Germany) New plant for the production of torque

converters; March 1999.

Ramos Arizpe, Coahuila

Lenische Cable Assemblies

(Germany)

New plant for the production of wiring

harnesses; 2nd quarter 1999 start-up.

Hermosillo, Sonora

Lemforder Corp. (Germany) New plant for the manufacture of chassis

components; May 1999 start-up.

Toluca, Mexico

Sources: Various industry publications

.

Table 4

Motor vehicles: U.S. exports of domestic merchandise, imports for consumption, and merchandise trade

balance, 1995-99

(Million dollars)

Country 1995 1996 1997 1998 1999

U.S. exports of domestic merchandise:

Canada .......................... 11,301 12,030 14,201 13,369 14,425

Japan ............................ 2,981 2,562 1,558 1,118 807

Mexico ........................... 361 1,158 1,929 2,248 2,277

Germany ......................... 641 1,163 1,092 1,163 1,075

Other ............................ 6,053 5,768 5,592 4,624 3,465

Total ........................... 21,337 22,681 24,372 22,522 22,049

U.S. imports for consumption:

Canada .......................... 33,235 33,675 35,883 37,670 46,563

Japan ............................ 28,994 26,861 27,906 28,864 32,115

Mexico ........................... 8,386 11,714 12,270 13,225 15,813

Germany ......................... 7,661 8,346 9,761 12,484 15,094

Other ............................ 5,939 6,518 7,164 7,583 10,078

Total ........................... 84,215 87,114 92,984 99,826 119,663

U.S. merchandise trade balance:

Canada .......................... -21,934 -21,646 -21,682 -24,301 -32,138

Japan ............................ -26,013 -24,300 -26,347 -27,745 -31,308

Mexico ........................... -8,025 -10,556 -10,340 -10,976 -13,537

Germany ......................... -7,020 -7,183 -8,669 -11,322 -14,019

Other ............................ 115 -748 -1,574 -2,961 -6,612

Total ........................... -62,877 -64,433 -68,612 -77,305 -97,614

Note.--Calculations based on unrounded data.

Source: Compiled from official statistics of the U.S. Department of Commerce.
OCTOBER 2000

Mexico’s Automotive Production Center Industry Trade and Technology Review

 

49 The term “rationalization of production” generally refers to a strategic location of

production processes at different locations that take advantage of inherent efficiencies or reduced

costs of the various production inputs (e.g., labor wage rates, skilled workforces, key materials,

etc.) available from each locale. Other factors that have an impact on plant location decisions

include transport costs, infrastructure, and proximity to strategic markets.

 

50 For added information and specific detail on the automotive sector, see USITC, Production

Sharing, and USITC, “Production-Sharing Update: Developments in 1999" (Automotive Sector),

Industry Trade and Technology Review, USITC publication 3335, July 2000, p. 12, posted at

USITC Internet server at www.usitc.gov (“reports”).

 

51 Imports that incorporate U.S. content can enter the United States either free of duty or at

reduced duties under the production-sharing provisions of chapter 98 of the HTS which provide

the only U.S. source of data for documenting the use of U.S.-made components in foreign

assembly. However, official U.S. statistics are increasingly unable to quantify the magnitude and

scope of production-sharing activity. A significant and growing portion of motor vehicle and

(continued...)

30

Table 5

Certain motor-vehicle parts: U.S. exports of domestic merchandise, imports for consumption, and

merchandise trade balance, 1995-99

(Million dollars)

Country 1995 1996 1997 1998 1999

U.S. exports of domestic merchandise:

Canada .......................... 12,619 12,774 14,206 14,308 16,218

Mexico ........................... 3,767 3,725 5,074 4,903 5,088

Japan ............................ 789 1,050 1,337 1,253 997

Germany ......................... 691 654 642 602 498

Other ............................ 4,399 4,590 5,065 4,922 4,480

Total ........................... 22,265 22,793 26,324 25,988 27,281

U.S. imports for consumption:

Canada .......................... 6,383 6,753 7,335 7,576 9,009

Mexico ........................... 2,170 2,500 2,981 3,184 3,687

Japan ............................ 4,191 3,774 3,493 3,491 4,562

Germany ......................... 787 873 812 887 951

Other ............................ 2,767 2,967 3,183 3,629 4,516

Total ........................... 16,298 16,867 17,804 18,767 22,725

U.S. merchandise trade balance:

Canada .......................... 6,236 6,021 6,870 6,732 7,209

Mexico ........................... 1,597 1,225 2,094 1,719 1,400

Japan ............................ -3,402 -2,724 -2,156 -2,238 -3,564

Germany ......................... -96 -219 -170 -285 -453

Other ............................ 1,632 1,623 1,882 1,293 -36

Total ........................... 5,967 5,927 8,520 7,221 4,557

Note.–Calculations based on unrounded data; figures may not add to totals shown.

Source: Compiled from official statistics of the U.S. Department of Commerce.

Mexico is a significant production-sharing partner for the U.S. automotive industry.

Rationalization of production49 through investment in production-sharing operations is one of

various strategies employed by the automotive industry to reduce costs or to achieve other

competitive advantages in U.S. and third-country markets.50 Many motor vehicles and

automotive parts assembled in Mexico incorporate numerous U.S.-origin components and

materials. In 1999, the official reported value of U.S. content ($850 million) contained in

imports from Mexico of motor vehicles entered under production-sharing provisions of the

Harmonized Tariff Schedule (HTS) accounted for more than one-half of the $1.5 billion in

total imports of motor vehicles entered under these provisions (table 6).51 Nearly all motor
OCTOBER 2000

Industry Trade and Technology Review Mexico’s Automotive Production Center

 

51 (...continued)

parts imports from production-sharing operations, for example, does not enter under these

chapter 98 provisions because the goods are eligible for duty-free treatment under NAFTA. 

 

52 Association of International Automobile Manufacturers, Inc., written submission to the

USITC in connection with inv. No. 332-237, Production Sharing: Use of U.S. Components and

Materials in Foreign Assembly Operations, 1993-1996, USITC publication 3077, Dec. 1997,

Sept. 20, 1996, p. 7.

 

53 Assembly plants can operate under either the PITEX (Program for Temporary Importation

to Manufacture Exported Products) or the Maquiladora Program, but not both.

 

54 The data reflect goods classified in the Harmonized System (HS) as destined for use in

motor vehicles, but do not include data for instruments, audio equipment, electronic components,

or parts made of rubber, plastics, or metal imported by PITEX and maquiladora companies for

automotive assembly that are not separately identified in the HS as specifically dedicated for

motor vehicles. Compiled by USITC staff from “World Trade Atlas: Mexico

Edition, Annual Summary 1993 to 1999,” which used data provided by INEGI, the statistical

agency of the Government of Mexico.

31

Table 6

Motor vehicles: Total U.S. imports from Mexico, and U.S. imports from Mexico under NAFTA and the

production sharing provisions of HTS Chapter 98 (HTS PSP), 1998 and 1999

Source of imports 1998 1999

Change in

value 1998-99

Percentage

change 1998-99

 –––––––––– Thousand dollars ––––––––––

Total imports .......................... 13,224,569 15,813,389 2,588,820 20

Entered under:

NAFTA and HTS PSP ................ 444,877 1,480,334 1,035,457 233

NAFTA only ....................... 12,750,878 14,310,598 1,559,720 12

HTS PSP only ...................... 1,496 918 -578 -39

All other .......................... 27,318 21,538 -5,780 -21

Total NAFTA1........................ 13,195,756 15,790,933 2,595,177 20

Total HTS PSP2...................... 446,373 1,481,252 1,034,879 232

U.S. content in total HTS PSP .......... 249,080 849,927 600,847 241

 

1

 NAFTA only plus NAFTA and HTS PSP.

 

2

 HTS PSP only plus NAFTA and HTS PSP.

Note.–Calculations based on unrounded data; figures may not add to totals shown.

Source: Compiled from official statistics of the U.S. Department of Commerce.

vehicles imported from Mexico entered duty-free under NAFTA in 1999, totaling $15.8

billion. Industry sources have reported that, beginning with the implementation of NAFTA,

many U.S. importers of motor vehicles discontinued use of the production-sharing provisions

of the HTS and opted for the more favorable and less onerous regulatory requirements of

NAFTA.52 Motor vehicle parts imported from Mexico under the production-sharing

provisions in 1999 (valued at more than $1.2 billion) also contained a significant share of U.S.

content (nearly 68 percent), which totaled $847 million (table 7).

Official Mexican statistics also provide a gauge for the total value of such U.S. components

used in Mexico’s automotive operations. U.S.-made parts imported by Mexico for use in

automotive plants operating under the PITEX and Maquiladora programs53 totaled $8.4

billion in 1999.54 Facilities operating under these programs exported vehicles valued at
OCTOBER 2000

Mexico’s Automotive Production Center Industry Trade and Technology Review

 

55 Chappell, “Mexico lures.”

32

Table 7

Motor vehicle parts: Total U.S. imports from Mexico, and U.S. imports from Mexico under NAFTA and the

production sharing provisions of HTS Chapter 98 (HTS PSP), 1998 and 1999

Source of imports 1998 1999

Change in

value 1998-99

Percentage

change 1998-99

 ––––––––––Thousand dollars –––––––––

Total imports ........................... 3,184,094 3,687,493 503,399 16

Entered under:

NAFTA and HTS PSP ................. 1,260,232 1,151,743 -108,489 -9

NAFTA only ........................ 1,672,734 2,227,481 554,747 33

HTS PSP only ....................... 78,267 96,753 18,486 24

All other ........................... 172,861 211,517 38,656 22

Total NAFTA1......................... 2,932,966 3,379,224 466,258 16

Total HTS PSP2....................... 1,338,499 1,248,496 -90,003 -7

U.S. content in total HTS PSP ........... 924,286 847,172 -77,114 -8

 

1

 NAFTA only plus NAFTA and HTS PSP.

 

2

 HTS PSP only plus NAFTA and HTS PSP.

Note.–Calculations based on unrounded data; figures may not add to totals shown.

Source: Compiled from official statistics of the U.S. Department of Commerce.

$12.7 billion and automotive components valued at $15.5 billion to the United States in 1999.

U.S. and Mexican data suggest that U.S.-made components supplied to Mexico’s automotive

assembly operations remain of significant magnitude as the trend toward full integration of

the North American automotive industry continues.

Implications of Foreign Direct Investment for U.S.-Mexican

Automotive Trade

Although the Mexican motor-vehicle industry is dominated by the presence of foreign

manufacturers that produce in Mexico, the Government of Mexico has altered the competitive

landscape by negotiating a number of preferential trade agreements with non-NAFTA trading

partners that will likely influence automakers’ strategic decisions, enhancing the country’s

position as an attractive investment site and gateway to the European, South American, and

North American markets. U.S. and foreign vehicle and parts manufacturers are likely to

increase their FDI in the Mexican automotive industry to meet local content requirements

specified in recent bilateral trade agreements. The goals of this added investment are to meet

growing Mexican consumer demand, access untapped markets, and further rationalize North

American production. Influx of additional new motor vehicle and component manufacturers

and products will continue to strengthen the manufacturing and technological base of the

Mexican automotive industry, thus helping to create a more competitive and attractive

investment environment, and to provide greater sourcing and manufacturing flexibility and

cost savings opportunities for foreign producers.55
OCTOBER 2000

Industry Trade and Technology Review Mexico’s Automotive Production Center

 

56 “EU carmakers converge on Mexican gateway.”

33

Production and trade levels of Mexican motor vehicles and parts will likely increase as

automotive manufacturers supply the domestic and foreign markets from their Mexican

manufacturing and assembly plants. Industry observers believe that with the signing of the

EU-Mexico FTA, the Mexican Government hopes to increase exports as a means of lowering

Mexico’s trade deficit with Europe, as well as diversify its customer base and decrease its

trade dependence on North America, especially the United States.56 However, the United

States will likely remain the focal point of Mexican automotive trade because of geographic

proximity, the long-established integration of the North American market, and continued FDI

by U.S. firms in the Mexican automotive industry.#

OCTOBER 2000

Industry Trade and Technology Review Key Performance Indicators

A-1

APPENDIX A

KEY PERFORMANCE INDICATORS OF SELECTED

INDUSTRIES AND REGIONS

~ 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) 

~ NORTH AMERICAN TRADE (Ruben Mata, 202-205-3403/mata@usitc.gov)
OCTOBER 2000

Key Performance Indicators Industry Trade and Technology Review

A-2

STEEL

• All three sectors of the steel industry posted profitability increases for the second quarter of 2000. 

Several integrated producers cited a combination of increased shipments, higher average selling

prices, and a better value-added product mix as contributing to improved profitability since the fourth

quarter of 1999.

 

• The U.S. Emergency Steel Loan Guarantee Board approved $365 million in guaranteed loans to 

Geneva Steel, GS Technologies, Northwestern Steel & Wire, and Wheeling-Pittsburgh. WheelingPittsburgh announced in September temporary layoffs at its Steubenville, Ohio plant. J&L Structural

of Pennsylvania filed for Chapter 11 bankruptcy protection, but plans to maintain production while the

company restructures.

 

Table A-1

Imports of finished steel products exceed 1999 levels

Item Q2 2000

Percentage

change, Q2

2000 from 

Q2 19991 YTD 2000

Percentage

change, YTD

2000 from 

YTD 19991

Producers’ shipments (1,000 short tons) ........... 28,647 11.8 57,311 15.4

Finished imports (1,000 short tons) ............... 8,145 22.5 15,470 18.7

Ingots, blooms, billets, and slabs (1,000 short tons) ... 2,377 2.5 4,822 27.4

Exports (1,000 short tons) ...................... 1,599 29.2 3,305 37.7

Apparent supply, finished (1,000 short tons) ........ 37,570 12.6 74,298 15.9

Ratio of finished imports to apparent supply (percent) . 28.0 21.1 27.3 21.1

1

 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.
OCTOBER 2000

Industry Trade and Technology Review Key Performance Indicators

A-3

STEEL

Table A-2

Steel service center inventories reach record high in June

Item Mar. 2000 June 2000

Percentage

change, June

2000 from

 June19991 Q2 2000 Q2 1999

Shipments (1,000 net tons) ................ 2,856 2,316 -8.5 7,696 7,354

Ending inventories (1,000 net tons) .......... 8,708 8,898 2.2 8,898 7,854

Inventories on hand (months) ............... 3.3 3.6 (

2

) 3.6 3.3

 

1

 Based on unrounded numbers.

 

2

 Not applicable.

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

Source: Steel Service Center Institute.

 

• Service centers registered record inventory levels in June 2000 as inventories grew for the tenth

consecutive month.1 SSCI indicated that while demand factors remained high, some areas, such as

construction spending, had slowed. In September, 61 percent of surveyed SSCI members considered

current inventory levels to be too high compared with current shipments.2

 

• Second quarter imports of finished steel mill products reached their highest levels since the fourth

quarter of 1998. Imports of semifinished steel products increased slightly from the same period in

1999. Imports of all steel mill products from India, Ukraine, China, and Taiwan experienced the

greatest percentage increases from the second quarter of 1999 to the second quarter of 2000.

 

1

 SSCI, press release, “Service Centers Settle Into Summer,” Aug. 4, 2000.

2

 SSCI, “Business Conditions, Part I-North America,” Sept. 8, 2000.
OCTOBER 2000

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 II

0

500

1000

1500

2000

2500

Total sales-consumption Domestic sales

Import sales

Figure A-3

U.S. sales of new passenger automobiles continue to increase in second quarter 2000; sales

of imports as a percentage of the U.S. market remain unchanged from previous quarter

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

States; these same units are not included in import sales.

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

2,486,495

1,938,059

548,436

1996 1997 1998 1999 2000

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 1999-June 2000

 Percentage change 

Item

Apr.-Jun.

2000

Jan.-Jun.

2000

Apr.-Jun. 2000

from

Jan.-Mar. 2000

Jan.-Jun. 2000

from

Jan.-Jun. 1999

U.S. sales of domestic autos

(1,000 units)

1

........................... 1,938 3,686 10.9 2.4

U.S. sales of imported autos

(1,000 units)

2

........................... 548 1,041 11.4 25.3

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

1, 2

............... 2,486 4,727 11.0 6.7

Ratio of U.S. sales of imported autos to 

total U.S. sales (percent)

1, 2

................ 22.1 22.0 0.4 17.4

U.S. sales of Japanese imports as a 

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

1, 2

...... 9.8 10.0 -5.4 12.1

1

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

2

 Imports do not include automobiles imported from Canada and Mexico.

Source: Compiled from data obtained from Automotive News.
OCTOBER 2000

Industry Trade and Technology Review Key Performance Indicators

A-5

ALUMINUM

 

• The quarterly average price of primary aluminum ingot fell 7.4 cents per pound in second quarter 2000, as announced

restarts of some idled aluminum smelting capacity and scheduled boosts in global production over-shadowed concerns

about the continued drop in London Metals Exchange (LME) inventory levels. At the same time, U.S. smelters scaled back

production of primary aluminum because of higher Pacific Northwest electricity prices, tight supplies of alumina, and

sagging aluminum prices. However, domestic aluminum consumption remained robust, resulting in a slight increase in

import penetration.

 

• Boosted by the enthusiastic response of Algroup (Switzerland) shareholders to its stock-swap offer, Alcan (Canada)

anticipates completing its two-way merger with Algroup by mid-to-late October. U.S.-based Alcoa has been negotiating

agreements to sell off certain smelting and refining interests as part of the merger-approval conditions with U.S.-based

Reynolds, and also acquiring businesses to enhance its aluminum, specialty metals, and plastics product lines. Meanwhile,

the Russian aluminum industry has also experienced restructuring. Two new aluminum groups have formed or will be

formed from consolidations of individual facilities--Russky Aluminy (RussAl) in March and the Siberian Urals Aluminum

Co. (SUAL), anticipated in fall 2000.

 

Table A-4

U.S. primary aluminum production scaled back amid weaker aluminum prices–net imports filled

the gap–during second quarter 2000

 Percentage change

Item Q2 1999 Q1 2000 Q2 2000

Q2 2000

from 

 Q2 1999

Q2 2000

from 

Q1 2000

Primary production (1,000 metric tons) .......... 938 964 942 0.4 -2.3

Secondary recovery (1,000 metric tons) .......... 844r 935r 935 5.8 0.0

Imports (1,000 metric tons) ................... 1,043 862 880 -15.6 2.1

Import penetration (percent)

1

.................. 40.8r 34.5r 35.2 2

 -5.6 2 0.7

Exports (1,000 metric tons) ................... 306 293 307 0.3 4.8

Average nominal price (¢/lb) .................. 63.3 78.8 71.4 12.8 -9.4

LME inventory level (1,000 metric tons) .......... 756 755 515 -31.9 -31.8

1

 Calculations based on unrounded data

2

 Percentage point change

Note: Revised data indicated by “r.”

Sources: Compiled from data obtained from U.S. Geological Survey and World Bureau of Metal Statistics.
OCTOBER 2000

Key Performance Indicators Industry Trade and Technology Review

A-6

FLAT GLASS

Background

 

• The U.S.-Japanese agreement on Japanese market access for imports of flat glass sought 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. The agreement

covered the 1995-99 period and expired on December 31, 1999.1

 

Current

 

• Japanese demand for imported glass has continued to improve in 2000. However, despite an increase

of imports from the United States, the U.S. share of Japan’s market has declined because of a large

increase of less expensive imports from Thailand, Indonesia, China, Korea, and Malaysia. The average

monthly quantity of Japanese imports from all countries increased by 49 percent for 2000 (Jan.-May) to

2.8 million square meters, while the average monthly value of such imports increased by 53 percent to

$20.8 million. Imports from the United States in 2000 (Jan.-May) increased by 16 percent to 500,000

square meters, and increased in value by 40 percent to $9.9 million.

 

 

• An anticipated joint government/industry meeting to address the remaining market access barriers has

thus far failed to materialize following government-to-government discussions between the U.S. and

Japanese Governments earlier in the year.

 

1 Office of the U.S. Trade Representative (USTR), “The President’s 1999 Annual Report on the Trade

Agreements Program,” p. 227, downloaded from http://www.ustr.gov/reports/tpa/2000/index.html on Mar. 3, 2000.
OCTOBER 2000

Industry Trade and Technology Review Key Performance Indicators

A-7

SERVICES
OCTOBER 2000

Key Performance Indicators Industry Trade and Technology Review

A-8

North American Trade

U.S. trade with its NAFTA partners, and the use of U.S.-made components in Mexican assembly plants

based on imports under the production-sharing tariff provisions of HTS chapter 98, are highlighted in table

A-5. The following is a summary of key developments in the first half of 2000.

• During January-June 2000, total U.S. trade with its NAFTA partners ($308 billion) increased by 20

percent ($50 million) over the comparable period of 1999. The U.S. merchandise trade deficits with

Canada ($-34 billion) and Mexico ($-17 billion) continued the upward trend which began in 1998,

increasing by 43 percent and 17 percent, respectively. These increased deficits in the first half

principally reflect sustained growth in the U.S. GDP (up by 5.2 percent) and greater U.S. demand for

oil and natural gas as Canada and Mexico supply one-third of total U.S. energy-related imports.

• Mexico’s economy grew by 7.8 percent in the first half whereas Canada posted a 1.2 percent growth

rate in the period. This economic expansion bolstered U.S. exports to Mexico by 29 percent (to $48

billion) and to Canada by 11 percent (to $81billion) over the comparable 1999 period. Exports to

Mexico and Canada accounted for more than half of the total growth in U.S. manufactured exports

whereas U.S. exports to the other major trading partners, such as the European Union, were up only 4

percent during the same period. 

• U.S. imports from Canada during the first half of 2000 increased by 19 percent ($18 billion) to $115

billion compared with an increase from Mexico of 26 percent ($13 billion) to $65 billion. Automobiles,

auto parts, crude petroleum, natural gas, computers and peripherals were the leading U.S. imports

supplied by both countries. Telecommunications equipment from Canada, and apparel, electronic

equipment, and television receivers from Mexico also accounted for an important part of the higher

U.S. imports from North American partners.

 

• Reflecting the broad eligibility of goods for duty-free treatment under trade agreements (e.g., Uruguay

Round, NAFTA) or tariff-preference programs, and the elimination of the Customs user fee on

NAFTA-eligible goods, imports from Mexico of products assembled from U.S. components and

entered under the production-sharing provisions dropped by 25 percent ($33 billion) during the first

half of 2000 to $10 billion. The share of total U.S. imports from Mexico accounted for by goods

entering the United States under these provisions fell from 26 percent to 16 percent. Meanwhile, U.S.

imports entering under NAFTA increased by 22 percent ($7.5 billion) to $41 billion, or 64 percent of

total U.S.-Mexico trade.

• As the staging for the elimination of tariffs on goods made in Mexico progresses under the various

free trade agreements negotiated by Mexico with 28 countries (including the European Union (15) and

Israel that entered into force on July 1, 2000), Mexico is likely to become an even more attractive

location for foreign investment. Mexico provides an appealing target for investment by companies that

seek duty-free entry into these global markets and are willing to use assembly plants in Mexico to gain

“Made in Mexico” status under the rules of origin that determine local content requirements of these

agreements.
OCTOBER 2000

Industry Trade and Technology Review Key Performance Indicators

A-9

NORTH AMERICAN TRADE

Table A-5

North American trade, 1995-99, January-June 1999, and January-June 2000

 Percent

January-June change

Item 1995 1996 1997 1998 1999 1999 2000 1999/00

---------------------------Value (million dollars)------------------------------

U.S.-Mexico trade:

Total imports from Mexico .... 61,721 74,179 85,005 93,017 109,018 51,446 64,868 26

U.S. imports under productionsharing provisions (PSP) of

HTS Chapter 98:1

Total value .............. 24,962 27,925 28,883 27,162 25,875 13,394 10,083 -25

Percent of total imports ..... 40 38 34 29 24 26 16 -

U.S. components in HTS PSP 

imports:

Total value .............. 12,833 14,649 15,483 14,484 13,928 7,328 5,474 -25

Percent of HTS PSP imports . 51 52 54 53 54 55 54 -

Percent of total imports ..... 21 20 18 16 13 14 8 -

U.S. imports under NAFTA:2

Total value .............. 43,927 55,076 62,837 68,326 71,318 33,696 41,232 22

Percent of total imports ..... 71 74 74 73 65 65 64 -

Total exports to Mexico ...... 44,881 54,686 68,393 75,369 81,381 37,174 48,118 29

U.S. exports of components3 to 

HTS Chapter 98 productionsharing operations as a 

percent of total U.S. exports . 29 27 23 19 17 20 11 -

U.S. merchandise trade balance 

with Mexico4........... -16,840 -19,493 -16,612 -17,648 -27,637 -14,272 -16,750 -17

U.S. -Canada trade:

Total imports from Canada .... 144,882 156,299 167,881 174,685 198,242 96,420 114,503 19

Total exports to Canada ...... 113,261 119,123 134,794 137,768 145,731 72,893 80,911 11

U.S. merchandise trade balance 

with Canada5............ -31,621 -37,176 -33,087 -36,918 -52,511 -23,526 -33,592 -43

1The production-sharing provisions of HTS Chapter 98 are 9802.00.60, 9802.00.80, and 9802.00.90.

2Some import entries from Mexico declare eligibility for preferential tariff treatment under both NAFTA and

the HTS production-sharing provisions (PSP); such entries are reported in the totals for both imports under

HTS PSP (and U.S.-made components in HTS PSP imports) as well as imports under NAFTA.

3Represents the total value of U.S. components in HTS production-sharing provision imports.

4The hyphen (-) symbol indicates a loss or trade deficit, or not applicable. The $27.6 billion deficit in U.S.

merchandise trade with Mexico in 1999 was partially offset by a $2.6 billion U.S. surplus in bilateral services

trade.

5The $52.5 billion deficit in U.S. merchandise trade with Canada in 1999 was partially offset by a $5.8

billion U.S. surplus in bilateral services trade.

Source: Compiled by U.S. International Trade Commission staff from official statistics of the U.S. Department

of Commerce. Statistics in footnote 4 on U.S. services trade with Mexico are based on preliminary data

provided in U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, July

2000, Vol. 80, No.7.