oversight

International Trade: Revitalizing the U.S. Machine Tool Industry

Published by the Government Accountability Office on 1990-07-17.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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 .I II I) 1‘WO
           *4
                           INTERNATIONAL
                           TRADE
                           Revitalizing the U.S.
                           Machine Tool Industry




                                                                                       141800




                          RESTRICTED --Not      to be released outside the
                          General Accounting Office unless specifically
                          approved bythe Officeof
                          Relationa.


(;A()   NSIAI)-!)(I-182
National Security and
International Affairs Division

R-226367

July 17, 1990

The Ilonorable Helen Delich Bentley
I Iouse of Representatives

Dear Ms. Bentley:

This report responds to your request that we review the President’s Domestic Action Plan
for revitalizing the U.S. machine tool industry and evaluate the voluntary export restraint
agreements with Japan and Taiwan. In this report we discuss (1) the Commerce and Defense
Departments’ implementation of the President’s plan, (2) Commerce’s program to monitor
and ensure compliance with export restraints, and (3) the impact of these voluntary export
limits on the domestic machine tool industry.

As agreed with your office, unless you publicly announce its contents earlier, we plan no
further distribution of this report until 30 days from the date of this letter. At that time, we
will send copies to the Secretary of Commerce, the U.S. Trade Representative, and
appropriate congressional committees. We will also make copies available to others upon
request.

As agreed with your office, we did not obtain formal agency comments for this report. This
report was prepared under the direction of Allan I. Mendelowitz, Director, International
Trade, Energy, and Finance Issues. Please contact him at (202) 275-4812 if you or your staff
have any questions concerning the report. Other major contributors are listed in appendix III.

Sincerely yours,




Frank C. Conahan
Assistant Comptroller General
Executive Summary


             In December 1986, the President initiated a plan to help revitalize the
Purpose      US. machine tool industry. This plan was the result of several studies
             concluding that high levels of imports could erode the domestic
             industry’s capacity to manufacture certain machine tools critical to the
             national defense. The plan directs that actions be taken in nontrade and
             trade areas to improve the capacity and competitiveness of the domestic
             industry. The nontrade actions required the government to assist,
             encourage, and fund a variety of research and development activities to
             help modernize machine tool and manufacturing technology. The trade
             actions included 5-year voluntary export restraint agreements with
             *Japan and Taiwan to give the domestic industry an opportunity to
             increase sales and improve production capacity.

             Congresswoman Helen Delich Bentley asked GAOto determine how well
             the President’s plan is being implemented and if it is having a positive
             impact on the domestic industry.


             In March 1983, the National Machine Tool Builders Association (now
Background   called the Association for Manufacturing Technology) filed a petition,
             under section 232 of the Trade Expansion Act of 1962, for temporary
             relief from a high level of imports in several machine tool markets. Sec-
             tion 232 of the act gives the President authority to limit imports if he
             determines that they threaten to impair the national security. In Feb-
             ruary 1984, the Commerce Department concluded that imports in cer-
             tain machine tool markets did threaten the U.S. national security. In
             May 1986, the President announced that the United States would seek
             voluntary export restraint agreements with the major machine tool
             exporting countries as part of an overall plan to support the machine
             tool industry’s modernization efforts.

             In December 1986, the United States concluded S-year voluntary
             restraint agreements with Japan and Taiwan to limit their exports in
             certain categories of machine tools. At the same time, the United States
             requested that nine other countries limit their U.S. machine tool market
             shares to specific amounts or to 1986 levels. These latter requests were
             made to help ensure that domestic manufacturers rather than foreign
             competitors would be able to take advantage of the reduction in Japan’s
             and Taiwan’s market shares. The restraint agreements assure Japan and
             Taiwan that the United States will monitor all imports to ensure that
             this occurs.




             Page 2                                    GAO/NSIAD-90-182 International   Trade
                           Executive Summary




                           Work on all of the President’s nontrade-related proposals to share infor-
Results in Brief           mation and to encourage and fund research and development activities
                           on machine tools and manufacturing technology has begun or has
                           already been completed. However, it is too early to determine if actions
                           taken by the Defense Department and the civilian agencies will be effec-
                           tive in achieving the long-term objective of improving the industry’s
                           competitiveness; however, progress is being made.

                           GAO  found that Commerce’s Office of Agreements Compliance did not
                           have documentation of the policies, procedures, or criteria used to mon-
                           itor Japan’s and Taiwan’s compliance with export restraints or the
                           import penetration levels of other countries. In addition, Commerce did
                           not use the most timely methods available to measure quota compliance.
                           Moreover, Commerce did not use the most accurate data or timely
                           methods available to measure import penetration.

                           While the domestic industry’s share in all of the restricted machine tool
                           markets has improved, it has not always reached the levels intended by
                           the President’s plan, This shortfall is due to less than full compliance by
                           Japan and Taiwan with the provisions of the export agreements and
                           increased exports to the United States from all other countries,
                           including those that were requested to limit them.

                           GAO and Commerce agree that Japan and Taiwan have exceeded their
                           export quotas, but disagree on the extent of overages.



Principal Findings

Implementation of the      Currently, all of the nontrade activities under the President’s plan have
Nontrade Measures of the   either begun or been completed. For example, the Department of
                           Defense has (1) provided the industry with detailed information on its
President’s Plan Has       future machine tool needs, (2) shared its data on manufacturing tech-
Begun                      nology, and (3) participated in joint efforts to prioritize research and
                           development funding to the projects offering the most benefits. Also, the
                           private sector has been funding its own projects. These efforts have pro-
                           duced a number of advances with potentially significant impact. For
                           instance, the National Center for Manufacturing Sciences, which was ini-
                           tially funded by the Department of Defense, the industry association
                           and the state of Michigan, has sponsored numerous projects to help the



                           Page 3                                      GAO/NSLAD-30-182 International   Trade
                          ExecutiveSummary                                                       F




                          machine tool industry, including one for the development of a more effi-
                          cient machine tool.


Need to Document and      Federal standards and guidelines require agencies to identify or develop
                          internal control objectives for each of their key activities. Also, internal
Improve Monitoring        control systems and all transactions must be documented, and this docu-
Activity                  mentation must be readily available for examination. However, Com-
                          merce’s Office of Agreements Compliance does not have written policies
                          or procedures for monitoring the agreements and does not maintain
                          complete records of the monitoring it does. Thus, GAO could not review
                          the accuracy, completeness, or validity of Commerce’s monitoring
                          methods, calculations, or conclusions.

                          Commerce did not use the most timely methods available to monitor
                          Japan’s and Taiwan’s quota compliance. By May of each year, Com-
                          merce has sufficient data to determine Japan’s and Taiwan’s compliance
                          with the preceding year’s annual export quotas, but generally does not
                          reach agreement with Japan or Taiwan on their compliance until
                          6 months or more have passed. This method of reaching agreement on
                          export quota compliance will extend adjustments for the 2 final years’
                          overages beyond the life of the S-year agreements, thereby nullifying
                          the intended goals of these agreements. Commerce officials acknowledge
                          this problem and informed us they plan to address it by monitoring
                          imports on a monthly basis during 1991. Commerce could also determine
                          the impact of other countries’ import penetration of these markets using
                          more timely methods and more accurate data than it does.


GAO and Commerce Do not   GAO'S and Commerce’s analyses of Japanese and Taiwanese exports
Agree on Japan’s and      show that both countries have exceeded their export quotas. However,
                          GAO believes that Commerce should have found more Japanese and
Taiwan’s Exports          fewer Taiwanese annual overages for the period 1986 through 1988. For
                          the 3-year period, Commerce estimated overages for 250 Japanese and
                          2,127 Taiwanese machine tool exports, while GAO estimated overages for
                          1,363 Japanese and 1,866 Taiwanese machine tool exports. See
                          appendix II for an explanation of the difference between the GAO and
                          Commerce calculations.




                          Page4
                               Executive Summary




Other Countries Exceeded       GAOfound that several countries that were asked to limit their shares of
RequestedMarket Share          the domestic machine tool markets did not do so. For example, in 1987,
                               the United Kingdom increased its penetration of the US. non-numeri-
Levels                         cally controlled lathes market 12 percentage points above its 1986
                               levels, and West Germany increased its penetration of the U.S. numeri-
                               cally controlled punching and shearing machines market 4 percentage
                               points above the requested market share limit.

                               Commerce said it had not contacted the governments of any of these
                               countries about their increases in U.S. market shares because none of
                               the increases have harmed the domestic industry. However, Commerce
                               has no documentation supporting how it came to this conclusion.


                               GAOrecommends that the Secretary of Commerce direct the Office of
Recommendations                Agreements Compliance to

                           .   establish written policies and procedures to document how it monitors
                               (1) foreign countries’ compliance with trade restraint agreements, (2)
                               changes in other countries’ import penetration, and (3) the U.S. share of
                               each restricted market;
                               adopt more timely methods to monitor Japan’s and Taiwan’s quota
                               compliance;
                               use the more accurate data and more timely methods available to mon-
                               itor the changes in other countries’ import penetration; and
                               establish written criteria for evaluating the significance of changes in
                               import penetration by other countries.

                               GAOalso recommends that the Secretary of Commerce and the US.
                               Trade Representative establish criteria and guidelines for contacting the
                               governments of countries that increase their import penetration of
                               domestic machine tool markets before penetration levels can prove
                               harmful.


                               As requested, GAOdid not obtain official agency comments on a draft of
Agency Comments                this report; however, GAOdiscussed the report’s contents with Com-
                               merce officials whose comments were incorporated in the report where
                               appropriate.
            Y




                               Page 5                                    GAO/NSIAWO-182   International   Trade
Contents


Executive Summary                                                                                   2

Chapter 1                                                                                          8
Introduction           Objectives, Scope, and Methodology                                          9

Chapter 2                                                                                         12
Long-Term Plans to     New Research Projects
                       Sharing Information
                                                                                                  12
                                                                                                  13
Increase               Encouraging Exports                                                        13
Competitiveness        Industry Research and Development                                          13
                       Conclusions                                                                14

Chapter 3                                                                                         16
Short-Term Plans to    Need to Identify Policies, Procedures; Document
                           Monitoring Activities
                                                                                                  16
Lower Import Levels    OAC Lacks Criteria to Evaluate Other Countries’ Import                     16
                           Penetration
                       OAC’s Data Documentation and Coordination Efforts                          17
                           Need Strengthening
                       Need for More Timely Methods to Monitor Compliance                         18
                       More Accurate Data and More Timely Methods Exist for                       19
                           Monitoring Other Countries’ Import Penetration
                       Conclusions                                                                19
                       Recommendations                                                            20

Chapter 4                                                                                         21
The Domestic Machine   Domestic Market Share Changes
                       Agreement Countries’ Overages Were Greater Than Those
                                                                                                  21
                                                                                                  23
Tool Industry Has          Determined by OAC
Made Advances but      Other Restricted Countries Exceeded Requested Market                       26
Gained Less Than           Share Limits
                       OAC’s Reaction to Other Countries’ Import Penetration                      29
Intended               Emerging Machine Tool Exporters                                            29
                       Conclusions                                                                30
                       Recommendation                                                             30

AppendixesY            Appendix I: Data on the Market Share Limits and                            32
                           Changes for Machine Tools Represented in the
                           Agreements



                       Page 6                                   GAO/NSIAIMO-182 International   Trade
         Contents




         Appendix II: Methodology for Measuring Compliance                              38
             With Voluntary Restraint Agreements and Changes
             in Foreign Shares of the Domestic Machine Tool
             Markets
         Appendix III Major Contributors to This Report                                 43
                                                                                       -
Tables   Table 4.1: Actual Versus Intended Domestic Market                              22
             Shares
         Table 4.2: Percentage Point Changes in Domestic Market                         23
             Shares
         Table 4.3: GAO’s and OAC’s Assessment of Japan’s and                           24
             Taiwan’s Exports, Quotas, and Overages
         Table 4.4: Dollar Value of GAO’s Overage Calculations                          26
         Table 4.6: Other Countries’ Import Penetration                                 27
         Table 4.6: Value of Imports From Other Countries in                            28
             Excess of Requested Levels
         Table 4.7: Significant Market Share Increases by Other                         28
             Countries Requested to Limit Them
         Table 1.1: Market Share Limits for Japanese, Taiwanese,                        32
             West German, and Swiss Machine Tool Exports
         Table 1.2: Actual Percentage Point Changes in the                              33
              Numerically Controlled Lathes’ Market Shares
         Table 1.3: Actual Percentage Point Changes in the Non-                         34
              Numerically Controlled Lathes’ Market Shares
         Table 1.4: Actual Percentage Point Changes in the                              36
              Machining Centers’ Market Shares
         Table 1.6: Actual Percentage Point Changes in the Milling                      36
              Machines’ Market Shares
         Table 1.6: Actual Percentage Point Changes in the                              36
              Numerically Controlled Punching and Shearing
              Machines’ Market Shares
         Table 1.7: Actual Percentage Point Changes in the Non-                         37
              Numerically Controlled Punching and Shearing
              Machines’ Market Shares




         Abbreviations

         GAO        General Accounting Office
         OAC        Office of Agreements Compliance


         Page 7                                     GAO/NSIAJHO-182   International   Trade
Chapter 1

Introduction


               In December 1986, the President initiated a Plan to help revitalize the
               U.S. machine tool industry. This plan was the result of several studies
               concluding that high levels of imports could erode the domestic
               industry’s capacity to manufacture certain machine tools critical to the
               national defense. The plan directed that actions be taken in the nontrade
               and trade areas to improve the capacity and competitiveness of the
               domestic industry. The nontrade actions of this plan called for the gov-
               ernment to assist and fund a variety of research and development activ-
               ities to help modernize machine tool and manufacturing technology.
               Under the trade-related proposals of this plan, the United States acted
               to reduce foreign competition and to help the domestic industry increase
               sales through 5-year voluntary export restraint agreements with Japan
               and Taiwan and by requesting nine other countries to restrict their
               exports to the United States.]

               The Departments of Defense and Commerce and a number of other agen-
               cies are responsible for implementing the nontrade activities of the
               Domestic Action Plan. The Commerce Department’s Office of Agree-
               ments Compliance (OAC) is responsible for monitoring compliance with
               the export restraints.”

               Machine tools are essential to the manufacture of almost every man-
               made product and are vital to maintaining a strong national defense.
               Machine tools are used to produce a number of defense-related items,
               ranging from rifle ammunition to strategic nuclear weapons. During the
               late 1970s and early 198Os, domestic machine tool manufacturers’
               ability to compete with foreign producers declined.” Studies conducted
               at that time showed that the decline in U.S. competitiveness was due to
               a number of factors, including the cyclic nature of the domestic market,
               the small size of the average domestic machine tool company, the
               growing cost of research and development, the shorter delivery times of
               foreign manufacturers, the greater subsidization of foreign govern-
               ments’ own industries, and the changes in the value of the U.S. dollar.



               I West Germany, Switzerland, Brazil, Italy, Korea, Singapore, Spain, Sweden, and the United Kingdom
               were the nine countries identified as the largest machine tool supplier countries (other than Japan
               and Taiwan) and asked to restrict their exports to the United States.

               “The 1J.S.Customs Service is responsible for helping OAC monitor the agreements by providing data
               on the imports of restricted machine tools.
               “3According to the Secretary of Defense, from 1975 to 1985, the domestic share of all U.S. machine
               tool markets fell from 88 percent to 65 percent.



               Page 8                                                    GAO/NSIAD-90-182 International      Trade
                        Chapter 1
                        Introduction




                        In March 1983, the Association for Manufacturing Technology filed a
                        petition, under section 232 of the Trade Expansion Act of 1962, for tem-
                        porary relief from the high level of imports in several machine tool mar-
                        kets. Section 232 of the act gives the President authority to adjust
                        imports if he determines that they threaten to impair the national
                        security. In February 1984, the Commerce Department concluded that
                        imports in certain machine tool markets did threaten the U.S. national
                        security. Subsequently, the President announced in May 1986 that the
                        United States would seek voluntary export restraint agreements to
                        reduce machine tool imports as part of an overall Domestic Action Plan
                        supporting the industry’s modernization efforts.

                        In December 1986, the United States concluded 5-year voluntary
                        restraint agreements for Japanese and Taiwanese machine too1s.4At the
                        same time, the US. Trade Representative and the Secretary of Com-
                        merce requested that nine other countries limit their exports of these
                        machine tools to the United States.‘l The United States made these latter
                        requests to help ensure that the reduction in Japan’s and Taiwan’s
                        market shares would be made available to domestic machine tool manu-
                        facturers rather than to other foreign competitors. The agreements
                        assure Japan and Taiwan that the United States will monitor imports to
                        make certain that this occurs.


                        Congresswoman Helen Delich Bentley requested that we evaluate the
Objectives, Scope,and   implementation of the President’s plan to revitalize the domestic
Methodology             machine tool industry, including the nontrade activities of the Domestic
                        Action Plan, the agreements with Japan and Taiwan, and the restraints

                        4The agreements with Japan and Taiwan extend from 1987 through 1991, with respective 2- and 7-
                        month transition periods in 1986. The agreements restrict both countries’ exports of numerically and
                        non-numerically controlled lathes, machining centers, and milling machines. Numerically controlled
                        machine tools are those operated by numerically coded programs inserted or fed into a machine tool
                        control system on tape, punched cards, dials, or by other means. The agreements also restrict Japan’s
                        exports of numerically and non-numerically controlled punching and shearing machines. See
                        appendix I, table I. 1, for a list of the market share limits for each machine tool category and country.
                        Machining centers are metal-cutting machine tools that consist of a table that holds the work piece, a
                        vertical or horizontal spindle that drives the cutting tool against it, and an automatic tool changer.
                        Lathes, also called turning machines, are generally cylindrical, metal-cutting machine tools for
                        shaping the work piece. Milling machines are metal-cutting machine tools that remove metal by
                        moving the work piece into a rotating cutting tool that has one or more cutting teeth. Punching and
                        shearing machines are metal-forming tools.
                        “The United States requested that West Germany (five types) and Switzerland (one type) limit their
                        U.S. machine tool market shares to specific amounts and discouraged seven other countries from
                        increasing their shares of the U.S. markets for the six types of machine tools noted in the voluntary
                        restraint agreements. See appendix I, table 1.1,for a list of the market share restraints on West
                        German and Swiss machine tools.



                        Page 9                                                       GAO/NSIAD-90-182 International        Trade
Chapter 1
Introduction




on the U.S. market shares of nine other major exporting countries. She
also asked us to determine if the plan is having a positive impact on the
domestic machine tool industry.

We interviewed Department of Defense and Commerce officials and
reviewed Commerce’s documents and records to obtain information on
the implementation and effectiveness of the nontrade efforts of the
Domestic Action Plan. We interviewed and obtained documents and
records from Department of Commerce officials in four different offices:
the Bureau of the Census, the Bureau of Export Administration’s Office
of Industrial Resources Administration, the OAC,and the Office of Gen-
eral Industrial Machinery, Capital Goods, and International Construc-
tion; and from Department of Treasury officials in the U.S. Customs
Service, representatives of the Association for Manufacturing Tech-
nology, and an official at the Office of the U.S. Trade Representative to
determine the effectiveness of the voluntary restraint agreements and
other measures to limit imports. We reviewed the QAC’Srequirements and
system for monitoring compliance with the quotas and imports to deter-
mine whether they have achieved the agreements’ objectives. We mea-
sured this achievement by analyzing (1) the impact of trade restrictions
on the domestic machine tool industry, (2) Japan’s and Taiwan’s compli-
ance with their voluntary export quotas, and (3) the changes in other
countries’ shares of domestic markets. We used different methods and
data to perform each of these analyses.

We analyzed changes in the US. shares of the domestic machine tool
market to determine the impact of the export restrictions on the
domestic industry.” We compared the annual U.S. machine tool market
shares with the “ideal” that would have existed if the United States had
obtained the entire market shares that were to be vacated by Japan,
Taiwan, Switzerland, and West Germany and if all other countries, as
requested or assumed, maintained their 1986 market shares. We also
compared the increases in domestic market shares with the decreases in
Japan’s and Taiwan’s shares to determine which countries have bene-
fited from these reductions.

To verify OAC’S determinations of Japan’s and Taiwan’s compliance with
the voluntary export quotas, we obtained and analyzed data on their
exports and quota levels. We compared exports against the quota levels
(in units) for each machine tool type. We then compared the results of

“We did not measure the change in the machine tool industry’s capacity because Commerce and the
Association for Manufacturing Technology do not have these data.



Page 10                                                 GAO/NSIAD-90-182 International     Trade
.   Chapter 1
    Introduction




    our analysis of exports and quotas with the OAC’S analysis and found a
    number of differences. We computed the number and dollar value of the
    exports that exceeded the quotas.

    We also measured other countries’ shares of the domestic machine tool
    markets. We analyzed Swiss and West German compliance with
    requested limits on specific machine tool exports by matching their
    annual shares of each machine tool market against these limits. For each
    of the seven other countries that Commerce identified as major machine
    tool exporters, we matched their annual market shares with the 1986
    shares they were requested to maintain. We used 1986 market levels
    because the United States sent letters to these seven countries in
    December 1986 that requested each of them to maintain their market
    shares.

    We compared the domestic market shares of all other countries against
    their 1986 shares to determine if there were any significant changes. We
    defined significant changes in market share as those involving increases
    of 5 percentage points or more by any one country in any one of these
    restricted markets7 We calculated the dollar value of the increases in
    import penetration to determine the value of sales each country gained
    by increasing its market shares beyond requested levels.

    Appendix II describes the data and analytical methods we used in the
    above analyses. Our audit work was conducted from July 1988 through
    December 1989 in accordance with generally accepted government
    auditing standards.

    As requested, we did not obtain official agency comments on a draft of
    this report; however, we discussed the report’s contents with Commerce
    officials whose comments were incorporated in the report where
    appropriate.




    7The Association for Manufacturing Technology told us that domestic market share increases of 6
    percentage pointa or more by any one country would be considered significant.



    Page 11                                                  GAO/NSIAD-90-182 International     Trade
Chapter 2

Long-TermPlans to IncreaseCompetitiveness ’


                        The President’s Domestic Action Plan to revitalize the domestic machine
                        tool industry involves a variety of long-term activities to be undertaken
                        primarily by the Departments of Defense and Commerce. At the same
                        time, the industry is expected to improve its future domestic and inter-
                        national competitiveness. This plan proposes actions to (1) encourage
                        federal funding of research projects that seek to advance machine tool
                        and manufacturing technology, (2) share the available information on
                        this technology, and (3) work with the industry to develop a private
                        sector organization with the ability to advance technology and
                        encourage exports. Currently, all of the activities envisioned by the plan
                        have either begun or been completed. It is still too early to determine the
                        long-term impact that these actions will have, but progress is being
                        made.


                        Funding for research and development projects involving machine tool
New Research Projects   and manufacturing technology comes from the Defense Department,
                        civil agencies, and the machine tool industry. These organizations fund
                        projects individually and in joint ventures. The projects are primarily
                        funded by the Defense Department; the National Science Foundation;
                        the National Institute of Standards and Technology; and the industry’s
                        National Center for Manufacturing Sciences.

                        Beginning in 1987, the Department of Defense and industry officials met
                        on several occasions to discuss ways of jointly identifying which needs
                        were most important in advancing machine tool technology and which
                        projects would most likely meet those needs. Two projects that arose
                        from these discussions are already underway. One project sponsored by
                        the Department of Defense involves the “next generation controller” for
                        running the more complex machines and manufacturing processes of the
                        future. Another involves improved sensors to measure the results of
                        manufacturing operations more precisely and to provide this informa-
                        tion for quality control. Ideas for a number of other innovative projects
                        have been received and will be funded in the near future.

                        Other research and development programs already begun cover many
                        areas of machine tool technology. Two such projects that offer substan-
                        tial benefits are (1) a new software package, nearing commercial use,
                        that integrates the various manufacturing and design operations, thus
                        allowing large increases in cutting speed and shortening production time
                        (several sources, including the National Science Foundation, funded this
                        project), and (2) a joint effort by the U.S. Navy and the National Insti-
                        tute of Standards and Technology to develop a fully automated process


                        Page 12                                    GAO/NSIAD90-182 International   Trade
                        Chapter 2
                        Long-Term Plana to Increase Competitiveness




                        that makes spare parts for submarines at substantial savings in time
                        and money.


                        The Defense Department has collated and cross-indexed 11 volumes of
Sharing Information     information on machine tool and manufacturing technology. It provides
                        this updated information annually to the industry through the Associa-
                        tion for Manufacturing Technology, which restricts use to U.S. citizens.
                        In addition, Defense provides the industry annual 5-year estimates of its
                        needs for machine tools. Every other year, Defense participates in a pro-
                        curement conference where its component organizations describe their
                        current needs for machine tools and explain how to bid on projects to
                        fulfill these needs. These efforts encourage more domestic bidders and
                        allow a more efficient focus on the industry’s production.


                        To encourage and facilitate increased exports of domestic products,
Encouraging Exports     including machine tools, Commerce has (1) streamlined and automated
                        the process of obtaining export licenses, (2) removed a number of
                        machine tools from the list of those needing special reviews and
                        approvals, and (3) issued an export trading certificate to the Association
                        for Manufacturing Technology which, according to Commerce, allows
                        the association to develop joint export ventures without violating US.
                        antitrust laws, In addition to Commerce’s activities, the Export-Import
                        Bank has broadened its programs to provide financing for U.S. exports
                        through special insurance coverage. This insurance program permits the
                        Association for Manufacturing Technology to develop export ventures
                        by smaller firms that may not be able to finance such ventures without
                        such assurances. In addition to the U.S. government’s efforts, the pri-
                        vate sector has (1) arranged new ventures for exporting machine tools
                        to Egypt and China, and (2) encouraged increases in exports, by spon-
                        soring about 20 trade shows promoting U.S.-made machine tools.


                        In 1986, the National Center for Manufacturing Sciences was established
Industry Research and   to help determine the most productive areas for industry research and
Development             development efforts. The Center involves both large and small compa-
                        nies in joint projects where the results could have direct commercial
                        benefits. It initially received grants from the Manufacturing Technology
           Y            Association ($1 million), the state of Michigan ($2 million), and the
                        Department of Defense ($5 million for each of its first 3 years of opera-
                        tion). The Center, now in its fourth year of operation, has over 90 dues-



                        Page 13                                       GAO/NSIAD-90-182 International   Trade
              Chapter 2                                                                      ,
              Long-Term Plans to Increase Competitiveness




              paying members and is one of the largest research consortia in the
              country.

              The Center has brought together industry representatives to identify
              high-priority projects for funding. Currently, it is sponsoring over 40
              projects in varying stages of development. One of its most successful
              projects so far has been the development of a machine tool that com-
              bines both tap and drill functions. By combining these functions, the
              new machine tool requires 90 percent less floor space than earlier
              machine tools performing the same functions and vastly increases pro-
              ductivity. It is already being sold to a commercial market estimated at
              $1 billion.


              The impact on domestic machine tool sales of the advances in tech-
Conclusions   nology and efforts to increase exports will not be fully realized for sev-
              eral more years. Therefore, we believe that it is too early to assess the
              long-term effect of the nontrade activities of the President’s plan on the
              machine tool industry’s competitiveness. However, all of the activities
              the plan proposes are either underway or have been completed, and pro-
              gress is being made.




              Page 14                                       GAO/NSIADBO-182 International   Trade
Chapte; 3

Short-Term Plans to Lower Import Levels


               The short-term objective of the President’s plan for the domestic
               machine tool industry is to provide relief from foreign competition by
               lowering the level of certain machine tool imports critical to defense
               needs. To achieve this objective, the United States obtained voluntary
               restraint agreements from Japan and Taiwan and requested nine other
               major machine tool exporting countries to restrict the level of their
               machine tool exports to the United States. OAC monitors how Japan and
               Taiwan are complying with the quota levels and reviews all imports to
               ensure that the agreements’ objectives are met.’

               According to the agreements, Japan and Taiwan are responsible for
               restricting their machine tool exports by issuing export licenses and cer-
               tificates and by using other administrative procedures. Japan and
               Taiwan restrict their exports to specific quota levels that are based on
               the amount of U.S. apparent consumption for each machine tool type.
               An independent forecaster, Data Resources, Inc., estimates apparent
               consumption for each machine tool market 5 times a year, and OAC deter-
               mines actual apparent consumption once a year.2 OAC is also responsible
               for monitoring imports to ensure that Japan and Taiwan have received
               fair treatment (i.e., to ensure that the market share reductions made by
               Japan and Taiwan are primarily made available to domestic manufac-
               turers rather than to foreign competitors). At the end of the third year
               of the 5-year agreement periods, the United States, Japan, and Taiwan
               were required to assess how well the agreements have worked. At the
               time of our review, OAC and the representative offices from the agree-
               ment countries were in the process of conducting this assessment.

               Our review of the OAC'Ssystem and requirements for monitoring quota
               compliance and import penetration indicated that several factors weak-
               ened their effectiveness. These factors include a lack of (1) written poli-
               cies and procedures, (2) documentation of monitoring activities, (3)
               criteria for judging the level of increased import penetration by
               nonagreement countries that would threaten achievement of the agree-
               ments’ objectives, and (4) routine data coordination with other respon-
               sible agencies. In addition, the non-use of (1) more timely methods for
               monitoring quota compliance, and (2) more accurate data and timely
               methods for monitoring import penetration also weakened the effective-
               ness of monitoring efforts.


               ‘The U.S. Customs Service assists Commerce’s import monitoring by forwarding to the OAC all entry
               documents, invoices, and licenses for machine tool imports under the agreements.

               ‘Apparent consumption is defined as imports plus shipments minus exports.



               Page 16                                                  GAO/NSIAD-90-182 International     Trade
                          Chapter 3
                          ShofiTerm Plana to Lower Import Levels




                          OACofficials do not have written policies or procedures for monitoring
Need to Identify          the agreements and do not maintain complete records of the monitoring
Policies, Procedures;     they do. An OACofficial said there never have been any written proce-
                          dures for monitoring the agreements, and that written procedures would
DocUment     Monitoring
                            . .               *.
                          limit their flexibility.
Activities
                          According to the Comptroller General’s “Standards for Internal Controls
                          in the Federal Government,” each agency must identify or develop
                          internal control objectives for each key activity: These controls must be
                          logical, applicable, and reasonably complete. Also, internal control sys-
                          tems and all pertinent aspects of transactions of an agency must be dot-\
                          umented, and this documentation must be readily available for
                          examination.

                          Without written policies and procedures or documentation of monitoring
                          activities, it is difficult to ensure continuity and reliability in the moni-
                          toring system. For example, OACofficials did not readily know what
                          shipment data they used for some of their prior year consumption calcu-
                          lations These officials told us that their earlier calculations used ship-
                          ment tables different from the ones they now use. Also, they told us that
                          these prior calculations used unrevised shipment tables when more
                          accurate ones that were available should have been used.

                          Because OACofficials do not record their monitoring activities, we could
                          not review their system for completeness, accuracy, and validity.
                          Without such documentation, their figures are open to challenge from
                          the agreement countries. Also, without records of policies, procedures,
                          and monitoring activities, it is difficult to establish continuity of opera-
                          tions, to trace the data sources used for calculations, and to detect any
                          arithmetic or recording errors that may have been made.


                          CNCofficials have no written criteria for determining what level of
OACLacks Criteria to      increased import penetration by other countries would threaten achieve-
Evaluate Other            ment of the agreements’ objectives. They said that this is not unusual,
Countries’ Import         and that written criteria would only encourage foreign countries to
                          match their exports to the highest levels allowed.
Penetration
                          According to OACofficials, they have monitored import penetration by
                          following certain unwritten procedures. They measured import penetra-
               ii
                          tion of each machine tool market by all countries in aggregate as well as
                          for individual countries for the nine countries asked to restrict exports
                          to the United States. They looked at the interaction between each of


                          Page 16                                      GAO/NSIAD-90-182 International   Trade
                       chaptf3r 3
                       ShortTerm Planm to hwer Impmt Lmela




                       these nonagreement countries to see if reductions in import penetration
                       by some countries offset increases by others. According to these offi-
                       cials, there were no increases in import penetration that could have
                       harmed achievement of the agreements’ objectives. However, they have
                       no criteria on which to base this conclusion.

                       According to the industry officials in the Association for Manufacturing
                       Technology, a 5 percentage point or more increase in import penetration
                       by any one country in any machine tool market would be significant and
                       could harm achievement of the agreement objectives. We reviewed QAC’S
                       import penetration figures for each country and machine tool type and,
                       using the industry’s criteria, found substantial increases in import pene-
                       tration for certain machine tool markets. For example, according to OAC'S
                       figures, British import penetration of the non-numerically controlled
                       lathes market rose by 10 percentage points from 1986 to 1987; this rep-
                       resented an increase from 11 percent to 21 percent. The United States
                       had only a 3 percent share of the 1986 market and an increase in 1987
                       to 10 percent of the market. Since each country was separately
                       requested to limit exports, separate evaluations of their individual com-
                       pliance with these requests and responses to any large increases in
                       import penetration seem logical and prudent. OAChas not found any
                       increases it believes are harmful to the domestic industry and, therefore,
                       worthy of a response. However, these large increases in import penetra-
                       tion should have generated some form of response.


                       According to Commerce officials, OAC monitors agreement countries’
OAC’sData              exports to the United States by following certain unwritten procedures
Documentation and      and by using the best available data sources. However, because they do
Coordination Efforts   not keep complete records of their adjustments to these data, their
                       results are not verifiable.
Need Strengthening
                       To obtain total figures on agreement countries’ exports to the United
                       States, OAC reviews Customs’ entry documents and commercial invoices
                       for machine tool imports. OAC compares the export figures derived from
                       this review with official Census data to determine if they have received
                       all entry documents. The Census data are derived from the same Cus-
                       toms entry documents used by OAC.

                       ~AC’Scalculations of annual exports by Japan and Taiwan do not always
                       match the official Census data. OAC’S data differ from Census data




                       Page 17                                   GAO/NSLADM-182   International   Trade
                       Chapter 3
                       Short-Term Plana to Lower Import Levels




                       because QACcorrects the data for the number of reexports, kits,3 misclas-
                       sifications, and key punch errors detected in its review of Customs’ doc-
                       uments and commercial invoices. Although numerous errors have been
                       found in these entry documents, affecting all types of restricted machine
                       tools, OAC officials only maintained a cumulative total of these errors,
                       which they used in their calculations of total exports. While they
                       updated their own database with these figures, they did not routinely
                       inform Customs or Census about such errors. Consequently, they could
                       not justify the changes made in their data for errors found in their
                       review of Customs entry documents, and we could not verify their
                       results. In addition, because SACdoes not always inform Customs or
                       Census of their corrections to these data, the official trade statistics
                       Census produces are not corrected to account for these errors. We
                       believe OACshould inform Customs and Census about the errors found in
                       their data to provide them an opportunity to correct the entry docu-
                       ments and the official Census statistics,


                       QAL:officials did not monitor Japan’s and Taiwan’s quota compliance in
Need for More Timely   the most timely way available. The current methods of determining and
Methods to Monitor     agreeing on quota compliance create a lag period of 5 months or more
Compliance             before adjustments are made to the current year’s quotas in order to
                       correct for overages occurring in the prior year. In May of each year, OAC
                       officials determine final figures for Japan’s and Taiwan’s exports of
                       machine tools and how these compare to each quota. Although they
                       have this information in May, it is not until October, at the earliest, that
                       they have been able to reach agreement with Japan and Taiwan on the
                       total number of exports in the preceding year.4 Adjustments to subse-
                       quent years’ quotas are then made to compensate for the prior years’
                       overages. Also, many of the overages have been so large that OACoffi-
                       cials have allowed Japan and Taiwan to spread out their impact over
                       the following 2 to 3 years, rather than reducing the next year’s quota
                       for the full amount.

                       CZAL:
                           officials were not able to reach agreement with Japan or Taiwan on
                       the amount of 1987 exports until November 1988 and January 1989,
                       respectively. Taiwan’s 1987 overages were so large that they were
                       allowed to reduce 1989,1990, and 1991 quotas to lessen the impact of
                       the overage adjustment to the following year’s quota. This untimely

                       3A machine tool kit is a group of spare parts that represent a complete machine tool in disassembled
                       form.
                       4As of the end of March 1990, OAC had not reached agreement on Japan’s total 1988 exports.



                       Page 18                                                    GAO/NSIAD9@182 International        Trade
                         ShortTern   plans to lower Import kveb




                         method of reaching agreement on total export figures would not allow
                         export quotas for the last 2 years of the S-year agreements to be
                         adjusted for prior years’ overages before the agreements expired. There-
                         fore, the adjustments for overages would extend beyond the lives of the
                         agreements and thereby nullify their intended goals.

                         M officials acknowledge this problem and informed us they plan to
                         monitor imports on a monthly basis during 1991. They believe this will
                         allow them to properly adjust quota levels through the end of the
                         agreements.


                         While the agreements do not define the methods or data that OACshould
More Accurate Data       use to monitor imports, its data and methods are not the most timely
and More Timely          available. OACuses the monthly Census import report that counts each
Methods Exist for        country’s imports as of the date they are entered into the Census’
                         database. Since there is a lag between the time imports actually enter
Monitoring Other         the United States and the date they are entered into the Census
Countries’ Import        database, this report is not as accurate as the monthly Census report
Penetration              that counts imports on the day they enter the country, For example, by
                         December 1988, OACofficials had data only on import penetration cur-
                         rent through June 1988. Because these data lag 4 to 6 months behind the
                         actual imports entering the country, OAC’Simport penetration calcula-
                         tions cannot identify or respond in a timely manner to any increases in
                         import penetration.

                         The Census import report that lists all imports by their date of entry is
                         available earlier than the report OACuses. The forecasts of annual con-
                         sumption for each machine tool market are available 5 times a year. In
                         our opinion, if MC officials used these more accurate monthly import
                         reports and calculated import penetration using the available forecasts
                         of consumption, they could estimate monthly import penetration earlier
                         to detect and react to large increases in imports from any country.


                         We identified the following weaknesses in the analytical methods and
Conclusions              data used in OAC'Ssystem for monitoring quota compliance and other
                         countries’ imports:

                     .   OACofficials do not document the data they use or steps they take to
                         monitor the agreements or calculate import penetration. Thus, it is diffi-
                         cult to ensure continuity of operations, trace analytical steps, or find out
                         if any errors have been made. Without such documentation, OAC'S


                         Page 19                                     GAO/NSIAD-90-182 International   Trade
                      chapter 3
                      Short-Term Plans to Lower Import Leveb                                      ,




                    analyses are subject to challenge by agreement countries that may con-
                    tend that they have not reached their import limits.
                  l arc: has no written criteria for determining the level of increase in
                    import penetration by other countries that would be harmful to the
                    domestic industry.
                  l QACofficials adjust the data recorded on Customs’ entry documents that
                    are used to produce Census trade data without recording the reasons for
                    these adjustments or routinely informing Customs or Census of these
                    adjustments. Therefore, it is not possible to fully reconcile the differ-
                    ences between the OX’S and Census’ machine tool statistics.
                  . The current methods for reaching agreement on Japan’s and Taiwan’s
                    quota compliance create lags of 6 months or more. QACrecognizes it has
                    to change its procedures to be able to respond to overages that may
                    occur during 1991.
                  . The current methods for measuring import penetration are not the most
                    timely available; more accurate and timely data exist.


                      We recommend that the Secretary of Commerce direct the Office of
Recommendations       Agreements Compliance to strengthen its monitoring system by

                      1) establishing written policies and procedures to document how it
                      monitors Japan’s and Taiwan’s compliance with the agreements,
                      changes in other countries’ import penetration, and the U.S. share of
                      each restricted market,

                      2) establishing criteria for evaluating the changes in import penetration
                      by other countries,

                      3) recording its adjustments to Customs’ documents and Census data in
                      a format that indicates why adjustments were made and routinely
                      informing Customs and Census of the errors found.

                      4) adopting more timely methods to monitor Japan’s and Taiwan’s quota
                      compliance, and

                      6) using the more accurate data and timely methods available to mea-
                      sure other countries’ import penetration of the restricted machine tool
                      markets.




                      Page 20                                    GAO/NSIAD-90482   Intemational   Trade
Chapter 4

The DomesticMachine Tool Industry Has Made
Advances but GainedLessThan Intended

                      Since 1986, the voluntary restraint agreements have helped strengthen
                      the domestic share of the machine tool markets. However, these gains
                      have been less than those intended by the President’s plan. This situa-
                      tion occurred because (1) Japan and Taiwan did not reduce all their
                      exports to specified market share limits, and (2) other countries,
                      including those requested to limit their exports to the United States,
                      increased their shares of these markets. Our analyses of compliance
                      with export restraints and the changes in domestic and foreign shares of
                      these restricted markets show the following:

                  l In four of the six restricted machine tool markets, the domestic industry
                    did not gain all of the market shares intended by the President’s plan.
                  l Using the same methods and data that OACclaimed it used, we found the
                    amounts by which Japan and Taiwan exceeded their voluntary restraint
                    limits should have been greater than those determined by OAC,especially
                    for Japan.
                  . Eight of the nine other countries asked to do so did not limit their shares
                    in the domestic machine tool markets, and four of these countries
                    acquired substantial portions of the markets in which Japan and Taiwan
                    had reduced their shares.
                  l Commerce has not contacted the governments of any of the countries
                    (other than Japan and Taiwan) about the large increases in their U.S.
                    market shares.
                  l Two countries that were not among the major exporters identified in
                    1986 have emerged as significant exporters.


                      The President’s plan does not require anyone to analyze the annual
Domestic Market       impact of the agreements on the domestic machine tool industry. How-
Share Changes         ever, CL%officials said that they measured the annual changes in
                      domestic shares of each restricted machine tool market and found the
                      agreements have had a positive impact on the domestic machine tool
                      industry. However, OACofficials have not documented their analyses or
                      criteria and, therefore, we could not confirm their conclusions.

                      We, therefore, did our own analysis of the change in annual domestic
                      shares of each restricted machine tool market. As indicated in tables I.2
                      through I.7 of appendix I, our analysis showed that since the signing of
                      the agreements in 1986, the domestic market shares have risen in most
                      restricted machine tool markets. These tables show the domestic share
                      in five of the six individual markets (excluding milling machines)
                      increased by 2 to 19 percentage points above 1986 market share levels.
                      Further, from 1986 to 1988, the overall combined domestic share of all


                      Page 21                                    GAO/NSIAD-!W-182 International   Trade
                                          chapter 4
                                          The Domestic Machine Tool Industry Haa
                                          Made Advances but Gained Less
                                          Than Intended




                                          six restricted markets increased by 6 percentage points (worth about
                                          $130 million).

Table 4.1: Actual Versus Intended
Domestic Market Shares (As a Percent of                                                                     Actual                  Intended’
Total Market   Units)
                                          _.--.    ____-                                           1986       1987       1988      1987___-- 1988
                                          NCb lathes                                                   13        24         24        20        _-20
                                          Non-NC
                                          ---..       lathes                                            5         7          9        22         22
                                          Machining      centers                                       16        20         33        35         37
                                          Milling machines                                            53         53         53        57         53
                                          NC punching          and shearing   machines                42         48         61        59         65
                                          Non-NC      Dunchina      and shearina   machines           58         70         66        62         62
                                          Note: The intended U.S. share for each machine tool market is what the domestic industry would have
                                          achieved if Japan, Taiwan, Switzerland, and West Germany had restricted their exports to specific
                                          market shares, and if all other countries had maintained their exports at 1986 levels. The intended
                                          market share levels differ each year, depending on the number of special licenses that Commerce
                                          grants Japan and Taiwan yearly.

                                          %ecause the restrictions did not affect the full year of 1986, intended levels are not computed for 1986.
                                          bNC denotes numerically controlled.
                                          Source: Derived from Census Bureau data.


                                          We found, however, as indicated in table 4.1, that the domestic machine
                                          tool industry did not gain all of the intended market shares in four of
                                          these restricted markets (non-numerically controlled lathes, machining
                                          centers, milling machines, and numerically controlled punching and
                                          shearing machines). For example, while the domestic share of the non-
                                          numerically controlled lathes market increased from 5 percent in 1986
                                          to 7 percent in 1987 and 9 percent in 1988, it did not rise to the intended
                                          22 percent in each year.

                                          As displayed in table 4.3, one reason the United States did not gain all
                                          the potential market shares intended by the President’s plan was
                                          because Japan and Taiwan exceeded export limits for some of the
                                          restricted machine tool products in 1986, 1987, and 1988. In addition,
                                          table 4.2 shows that several other countries increased their US. market
                                          shares and acquired substantial portions of the markets in which Japan
                                          and Taiwan had reduced their shares. For the 1986 transition periods,
                                          and for 1987 and 1988, sales of these countries’ machine tools above
                                          agreement and requested market shares totalled an estimated $236
                                          million.

                                          As shown in table 4.2, in four machine tool markets where Japan and
                                          Taiwan had reduced their market shares, other countries, and not the



                                          Page 22                                                      GAO/NSIAD-W-182 International         Trade
                                         Chapter 4
                                         The Domestic Machine Tool Industry Han
                                         Made Advances but Gained Less
                                         Than Intended




                                         United States, were the primary recipients of these shares. For example,
                                         in the 1988 non-numerically controlled lathes market, the domestic
                                         industry only gained 2 percent of the 7 percent market share vacated by
                                         Japan and Taiwan.

Table 4.2: Percentage Point Changes in
Domestic Market Shares (1987 and 1988)                        1988 to 1987                             1987 to 1988

                                                     ___-          J%ra:           U.S. All others         J%za:         U.S. All others
                                         NO lathes
                                         --.                                (3)      11          (8)               (1)     0            1
                                         Non-NC lathes
                                         --___-      --                    (14)       2         12                (7)      2            5
                                         Machining
                                         .--        centers                 (6)       4          2              (17)      13            4
                                         Milling machines                   (2)       0          2                 (‘3     0         __ 6
                                         NC punching &
                                         shearing
                                         machines                          (12)       6           6                (9)     13          (4)
                                         L-
                                         Non-NC ounchina
                                         & shear&g        ”
                                         machines                           (7)      12          (5)               (1)     (4)         5
                                         aNC denotes numerically controlled.
                                         Source: Derived from Census Bureau data



                                         To the extent that Japan and Taiwan did not reduce their exports to the
Agreement Countries’                     agreed levels, the domestic machine tool industry’s opportunities to
Overages Were                            increase sales were lessened. Although Japan and Taiwan appear to
Greater Than Those                       have met their limits in several restricted markets, they have not done
                                         so in all markets. We found significantly larger overages than those
Determined by OAC                        determined by OAC. OAC monitors compliance by counting total exports
                                         listed in the commercial invoices and original Customs Service entry
                                         documents that make up the data used in official U.S. Census reports.
                                         (See app. II for more details on the methods and data the OAC and we
                                         used to calculate compliance.) Because OAC officials do not keep a record
                                         of all the individual errors they find in the entry documents, we could
                                         neither reconcile these differences nor determine the validity of the
                                         OAC’Scalculations. As shown in table 4.3, we found that Japan’s exports
                                         exceeded limits in two machine tool markets in 1986 and four in 1987
                                         and 1988. We found Taiwan’s exports exceeded limits in all four of its
                                         restricted markets in 1986 and 1987 and in one for 1988. In comparison,
                                         OACdetermined that Japan exceeded limits in three of its six restricted
                                         markets (only one instance in each of the 3 years), and that Taiwan
                                         exceeded its limits in all four of its restricted markets in all 3 years.




                                         Page 23                                                 GAO/NSIAD-90-182 International    Trade
                                        Chapter 4
                                        The Dome&c Machine Tool Indwtry   Haa                                                  .
                                        Made Advances but Gained Leas
                                        Than Intended




Table 4.3: QAO’s and OAC’s Assessment
of Japan’s and Taiwan’s Exports,                                                      1986 transition period
Quota& and Overages (1986-1986)                                           GAO                                   OAC
                                        Japan                  Exports    Quota        Overage      Exports     Quota     Overage
                                        NC” lathes                2,529     2,985              0       2,625      2,777              0
                                        Non-NC lathes
                                        --                          340       164            176         383        155            228
                                        Machining centers         1,340     2,215              0       1,939      1,955              0
                                        Milling machines          1,894       246              0         110        238              0
                                        NC punching and
                                        shearina machines          270          216            0         206       213               0
                                        Non-NC punching
                                        and shearing
                                        machines                   321          235          86          168       216               0
                                        Total overages                                      262                                    228
                                        Taiwan
                                        NC lathes                  299           30         269           84        30              54
                                                                                            279          892       427             465
                                        -Non-NC lathes             706          427
                                         Machining centers         158           56         102          137        56              81
                                         Milling machines          890          576         314          084       576             308
                                        Total overages                                      964                                    908




                    Y




                                        Page 24                                              GAO/NSIAD-90-182 International   Trade
                                                      chapter4
                                                      The Dome&k Machine Tool Industry Haa
                                                      Made Advances but Gained Less
                                                      Than intended




                                      1987                                                                    1988
                         GAO                             OAC                                     GAO                                     OAC
~- Exports                Quota Overage    Exports        Quota Overage            Exports        Quota Overage    Exports                Quota Overage
         3,475             3,389       86     3,250          3,389            0        3,666        3,624           42        3,588         3,572           16
-._..--_-- 164                 64     loo        36             64            0          248          133          115           39           204            0
---      2,411
          ---._-"--.--     1,970      441     1,970          1,970            0        2,088        1,825          263        2,003         2,065            0
           190               355        0       164              355          0          219          327            0          125           340            0

            166               148      ia       148              148          0            115          89          26           112          106               6


            207              260        0       180              345         0             169         361          0             99          382           0
                                      645                                    0                                    446                                      22

              211
-- ._-...-II_..--..    ----~ 161       50       178            161           17            145          -b         184           169          167               2
            1,122
I______--_--___-__            838
                           .-..-      2a4     1,141            817         324         1,077         1,309           0         1,214        1,124           90
              261             126     135       275            126         149           146           155          0           201           155          46
            2,106          1,867
--..-_-.__".._l.l -.I .--....-
                            "..----   239     2,108          1,867         241         1,971         1,995          0         2,432         2,082         350
                                      708                                  731                                    184                                     488

                                                      aNC denotes numerically controlled

                                                      bGAO’s 1988 quota calculation resulted in a negative figure because the reduction to this quota for our
                                                      calculation of prior years’ overages was greater than the quota itself.
                                                      Source: Derived from OAC and Census Bureau data.




                                                      Page 26                                                     GAO/NSIAD9@182 International          Trade
                                           Chapter 4                                                                                            I
                                           The Demestlc Machine Tool Industry Has
                                           Made Advancea but Gained Less
                                           Than Intended




                                           As shown in table 4.4, we have calculated that Japan’s exports in excess
                                           of quotas would have an estimated value of $118 million and Taiwan’s
                                           about $27 million.

Table 4.4: Dollar Value of QAO’s Overage
Calculatlonb (1986-1988)                   Dollars in thousands

                                                                                        1988O             1987             1988            3-Ez
                                           Qapan
                                           -.-.~                                       12,298           61,509            44,584         118,391
                                           Taiwan
                                           --~                                          9,565           10,537             7,229          27,331
                                           Total                                       21,883           72,048           51,813          145,722
                                           Note: Values are based on an average dollar value for each type of imported machine tool for each
                                           country for each year.

                                           a1966 figures are overages for Japan’s 7-month and Taiwan’s 2-month transition period.
                                           Source: Derived from Census Bureau data.



                                           The United States requested nine countries identified by OAC as the
Other Restricted                           largest exporters (other than Japan and Taiwan) of the machine tools
Countries Exceeded                         covered by the agreements to limit their U.S. market shares. This action
RequestedMarket                            was intended to help ensure that the domestic industry would have an
                                           opportunity to be the primary beneficiary of the new business created
Share Limits                               when Japan and Taiwan reduced their exports. Both the agreements
                                           assure Japan and Taiwan that the United States will guard against other
                                           countries’ acquiring the market shares they vacate.

                                           We measured these nine countries’ shares of the domestic machine tool
                                           markets and found that several had increased their U.S. market shares
                                           and captured substantial portions in some of the markets where Japan
                                           and Taiwan had reduced their shares.

                                           Although we used different import data than the OAC did, the results of
                                           both GAO and OAC analyses show that (1) at least three of the nine coun-
                                           tries substantially exceeded their requested market share levels in cer-
                                           tain machine tool markets, (2) several other countries not considered
                                           major machine tool suppliers in 1986 have substantially increased their
                                           U.S. market shares, and (3) as of the end of 1988, countries other than
                                           the IJnited States have acquired most of the market shares vacated by
                                           Japan and Taiwan in four of the six restricted markets.

                                           Table 4.5 shows that in 1987 and 1988, actual total import penetration
                                           by the nine countries increased substantially in four of the six restricted
                                           machine tool markets. For example, other countries’ aggregate import


                                           Page 26                                                     GAO/NSIAD90-182 International           Trade
                                                     Chapter 4
                                                     The DomeM.k Machhe Tool Industry Han
                                                     Made Advancea but Gained Lesrr
                                                     Than Intended




                                                     penetration in the non-numerically controlled lathes market rose from
                                                     49 percent in 1986 to 61 percent in 1987 and to 66 percent in 1988.
                                                     Those import levels substantially exceeded the 48 percent market share
                                                     envisioned for each of these 2 years. During the same 2 years, the
                                                     domestic share of this market was only 7 percent and 9 percent,
                                                     respectively.

Table 4.5: Other Countries’ Import
Penetration (Excluding Japan and Taiwan)                                                                        Actual                        Intended”
(Measured   in Percents   of Total Market   Units)
                                                                                                              1988     1987        1988       1987    1988
                                                     NCb lathes                                                  19         11        12         19          19
                                                     Non-NC lathes                                               49         61        66         48          48
                                                     Machinina
                                                     -._           centers                                        7          9        14          5           5
                                                     Milling   machines                                          20         22        29         20          20
                                                     NC punching 81 shearing machines
                                                     _--~-
                                                                                                                 11         17        13         12          12
                                                     Non-NC punchina & shearina machines                         28         23        28         28          28
                                                     aBecause the requests to the nine countries to limit their market shares were not sent until December
                                                     1986, we used 1986 as the base year and only computed “intended” levels for 1987 and 1988.

                                                     “NC denotes numerically controlled.
                                                     Source: Derived from Census Bureau data.


                                                     As displayed in table 4.6, imports from the nine countries that were for-
                                                     mally requested to limit them show that all (except for Switzerland)
                                                     exceeded these levels to some extent, resulting in sales estimated at
                                                     about $90 million above the limits. These overages were concentrated in
                                                     three markets (machining centers, milling machines, and non-numeri-
                                                     cally controlled lathes). Table 4.6 shows that four countries-the   United
                                                     Kingdom, West Germany, Korea, and Italy-were        responsible for about
                                                     88 percent of these sales.




                                                     Page 27                                                      GAO/NSIAD-90-182 International       Trade
                                            Chapter 4
                                            The Domestic Machine Tool Industry Has                                                                 .
                                            Made Advances but Gained Less
                                            Than Intended




Table 4.8: Value of Imports From Other
Countries in Excess of Requested Levels     Dollarsin millions
(1987, 1988)
                                            Countries                                                       1987               1988     P-year total
                                            United Kinadom                                                  $11.3              $31.5              $42.8
                                            West Germany                                                      14.0               10.7              24.7
                                            Korea                                                              2.8                3.5               6.3
                                            Italy                                                              3.4                2.2               5.6
                                            -.-
                                            SinaaDore                                                          1.2                2.4               3.6
                                            Sweden                                                             2.0                0.7               2.6"
                                            Brazil                                                             0.1                2.4               2.5
                                            Soain                                                              0.5                1.9               2.5=
                                            Total                                                           $35.3              $55.3              $90.6
                                            Note: Imports from Switzerland did not exceed specified market share limits.
                                            aValues do not always add due to rounding
                                            Source: Based on Census Bureau data.


                                            The Association for Manufacturing Technology told us that it believes
                                            an increase of 5 percentage points in domestic market share should be
                                            considered significant. Table 4.7 shows the significant market share
                                            increases by other countries in four markets. For example, in 1988, the
                                            United Kingdom exceeded its 1986 share of the milling machines market
                                            by 9 percentage points (worth about $13 million), while the agreement
                                            countries’ shares fell 6 percentage points below their 1986 level.

Table 4.7: Significant Market Share
Increases by Other Countries Requested                                                                                         1987           -.---1968
                                                                                                --
to Limit Them (Measured in Percentage       Non-NC0 lathes
Points Above Their Requested or Specified
Levels)                                     United  Kingdom                                           --... .-.                   12    -.-. _-        5
                                            _.. ..-~~-. .-. . --
                                            Korea                                                    -~--                          5                   3
                                            Brazil                                                                         -       0        --         7
                                            Machining centers
                                            United    Kingdom                        --                                            1                   5
                                            _-.-------.-~--.---
                                            Milling machines
                                                         -.-______                                                                                --
                                            United Kingdom                                           -___         __-.-            1      -_____ 9
                                            NC punching and shearing machines
                                            West Germany                                                                           4                   7
                                            aNC denotes numerically controlled.
                                            Source: Based on Census Bureau data


                                            Similarly, as shown in table I.3 in appendix I, in 1988, when Japan and
                                            Taiwan reduced their combined share of the non-numerically controlled
                                            lathes market 21 percentage points below their 1986 levels, Brazil,



                                            Page 28                                                     GAO/NSIAD-90.182 International            Trade
                     Chapter 4
                     The Domestic Machine Tool Industry Has
                     Made Advances but Galned Less
                     Than Intended




                     Korea, and the United Kingdom increased their combined share by 15
                     percentage points, while the domestic market share only increased 4
                     percentage points above its 1986 levels. Tables I.2 through I.7 in
                     appendix I show the changes in foreign and domestic shares of all the
                     restricted machine tool markets compared to the reduction in Japan’s
                     and Taiwan’s market shares in 1987 and 1988.


                     Although our analysis of other countries’ import penetration showed
OAC’sReaction to     substantial increases, OAC officials told us that these increases in other
Other Countries’     countries’ import penetration were not significant and have not harmed
Import Penetration   the domestic industry.

                     OACacknowledged that its evaluation of foreign imports in 1987 and
                     1988 showed substantial increases in the British import penetration of
                     certain markets but did not believe these increases posed a threat to the
                     domestic industry. OAC told us they have discussed the increased import
                     penetration with the U.S. importer of these machine tools, but have not
                     contacted the British government. OAC did not notify the British govern-
                     ment because the increase in imports (of machining centers and milling
                     machines) resulted from a strike at a U.S. plant that then imported its
                     needs from its British subsidiary. By purchasing foreign machine tools
                     to fill the gap created by this strike, the importer diminished the US.
                     machine tool industry’s potential to increase its shares in these machine
                     tool lines.

                     OAC lacks  written criteria to determine other responses short of the sanc-
                     tions,’ so that increases in imports will not grow to harmful proportions.
                     While there has been no official assignment of responsibility to OAC for
                     contacting countries that do not stay at their requested market share
                     levels, this, in our opinion, would be consistent with OAC’S responsibility
                     to monitor these situations.


                     When the agreements were established in 1986, only nine countries
Emerging Machine     aside from Japan and Taiwan were considered major suppliers of the
Tool Exporters       machine tools involved. Each of these countries had a 2 percent or
                     greater share in at least one of these markets. We believe that there was
                     an implicit assumption made at that time that imports from all other
           I(        countries would remain at their relatively low levels.

                     ‘The II.% letters to these countries state that the President is prepared to take unilateral action
                     against them if they increase their shares and threaten achievement of the revitalization program.



                     Page 29                                                    GAO/NSIAD-99-182 International       Trade
                                                                                             .
                 Chapter 4
                 The Domestic Machine Tool Induetry Has
                 Made Advancea but Gained Leea
                 Than Intended




                 Generally this has been the case. These other countries’ aggregate
                 import penetration in the six restricted markets rose only 1 percentage
                 point from 1986 to 1988. However, we found that in 1988, two countries
                 significantly increased their shares in one or more of these domestic
                 markets. In the non-numerically controlled lathes market, China
                 increased its 1988 share about 7 percentage points (worth about $2 mil-
                 lion) and Austria about 3 percentage points (worth about $2.5 million)
                 above their 1986 levels. Tables I.2 through I.7 in appendix I list the
                 countries that were not originally identified as major exporters but have
                 since increased their shares of the domestic machine tool markets. These
                 increases in other country shares can offset the reduction in Japan’s and
                 Taiwan’s shares of these restricted markets and thus threaten the revi-
                 talization of the U.S. machine tool industry.


                 We found four machine tool markets in which the domestic industry did
Conclusions      not obtain the increases in market shares that were intended by the
                 agreements and U.S. requests and restraints on other exports. Several
                 factors contributed to this situation. Although Japan and Taiwan
                 reduced their exports, thus lowering their shares of US. markets, they
                 have not reduced their exports to the limits set by the voluntary
                 restraint agreements. Further, we believe that OAC should have found
                 greater overages for these countries than they did. At the same time,
                 most of the nine countries that were asked to limit their domestic
                 market shares have not done so, and four of these countries have
                 acquired substantial portions of the market shares vacated by Japan
                 and Taiwan, OAC did not contact the governments of any countries that
                 increased their import penetration of the domestic machine tool markets
                 and does not have guidelines for contacting these governments when
                 they do. Further, two countries that were not identified as major
                 exporters in 1986 have since emerged as significant exporters. Thus, the
                 trade objectives of the President’s plan for revitalizing the machine tool
                 industry have not been fully realized.


                 We recommend that the U.S. Trade Representative and the Secretary of
Recommendation   Commerce establish criteria and guidelines for contacting the govern-
                 ments of countries that increase their import penetration of the
                 domestic machine tool markets before their penetration levels can prove
          ”      harmful.




                 Page 30                                    GAO/NSIAD-90-182 International       Trade
Y




    Page 31   GAO/NSLAD-90.182 International   Trade
                                                                                                                                           7”   ,I’ l,




Appendix I

Data on the Market ShareLimits and Chan&s*
for Machine Tools Representedin
the Agreements
                                     The following tables show (1) the specific required and requested
                                     market share limits on exports from Japan, Taiwan, West Germany, and
                                     Switzerland,’ and (2) the changes (1986 through 1988) in shares of the
                                     six restricted domestic machine tool markets. These tables indicate that
                                     the domestic industry has been the primary recipient of the market
                                     shares made available by reduced import penetration in four of the six
                                     markets, but has acquired little or none of these available shares in the
                                     milling machines (see table 1.5) and the non-numerically controlled
                                     lathes markets (see table 1.3).

Table 1.1: Market Share Limits for
Japanese, Taiwanese, West German,                                          1986 transltion period limit8
and SWISSMachlne Tool Exports                                                                                       Jaban              Taiwan
                                     Products                                                                  (perceirt)O             (units)b
                                     NC” lathes                                                                            66                55
                                     Non-NC lathes                                                                          5               427
                                     Machinina centers                                                                     73                56
                                     Milling machines                                                                       3               576
                                     NC punching and shearing machines                                                     43                NAd
                                     Non-NC ~~~punching
                                                    __ and shearing machines                                               10                NA
                                                                                      Annual market share limits (percent)
                                     Products                               Japan      Tarwan      West Qermany         Switzerland
                                     NC lathes- .__~~~_._~--
                                     __..___.._                                  57           3                       3                         NA
                                     Non-NC    lathes
                                          .._. _.-- __..._....___- -              5          25                       3                         NA
                                     Machinina centers                           52           5                       2                         NA
                                     Milling machines                             3          19                      NA                         NA
                                                                                                                                                -
                                     NC punching and shearing
                                        machines                                 19         NA                         3                             7
                                     Non-NC punching and
                                        shearing machines                         9          NA                        8                        NA
                                     aThe market share limits have been rounded to the nearest whole number. The agreements carry the
                                     market share limits out to IOOths of a percent.
                                     bThe Taiwanese agreement set unit limits on Taiwan’s exports during the 1986 transition period.

                                     CNC denotes numerically controlled.

                                     dNA signifies that limits are not applicable.
                                     Source: Voluntary export restraint agreements with Japan and Taiwan: December 1986 letters sent by
                                     the U S. Trade Representative and the Secretary of Commerce to West Germany and Switzerland.




                   Y




                                     IThe other seven countries requested not to increase their shares of the six restricted machine tool
                                     markets are not listed here because no specific market share limits were established.




                                     Page 32                                                      GAO/NSIAIHO-182 International          Trade
          .
                                          Appendix I
                                          Data on the Market Share Limits and Changes
                                          for Machine Tools Represented in
                                          the Agreementa




Table 1.2:Actual Percentage Polnt
Changes In the Numerically Controlled                                                                                       1987              1988
Lathes’ Market Shares (Compared to 1966   Agreement countries
Levels)                                                          -
                                            Taiwan                                                                            -5                -7
                                            Japan                                                                               2                 3
                                          Subtotal                                                                            -3                -4
                                          Other restricted countriesa
                                            West Germany                                                                       -1               -1
                                            Korea                                                                              -1               -1
                                            United Kinadom                                                                     -5               -3
                                          Subtotal                                                                            -7                -4b
                                          All restricted countries                                                             -9O              -8
                                          All other foreign countries                                                          -1               -3
                                          United States                                                                         11               11
                                          aEight countries other than Japan and Taiwan were requested to limit their U.S. shares to specific or to
                                          1986 shares of this domestic market. Five of these countries’ market share changes were less than 0.5
                                          percent (Sweden, Singapore, Spain, Italy, and Brazil).

                                          “Figures do not always add due to rounding and the omission of countries that showed market share
                                          changes of less than 0.5 percent.
                                          Source: Derived from Census Bureau data.




                                          Page 33                                                      GAO/NSIAD-90-182
                                                                                                                     InternationalTrade
                                                                                                                                       .
                                    Appendix I
                                    Data on the Market Share Limlta and Changes
                                    for Machine Tools Represented in
                                    the Agreemente




Table 1.3:Actual Percentage Polnt
Changes in the Non-Numerlcally                                                                                         1987                1988
Controlled Lathes’ Market Shares    Agreement Countries
(Compared to 1986 Levels)
                                      Taiwan                                                                             -8                -16
                                      Japan                                                                               -6                -5
                                    Subtotal                                                                            -14                -21
                                    Other restricted countriesa
                                      United Kingdom                                                                      12                     5
                                      Korea                                                                                5                     3
                                      Brazil                                                                             -2                      7
                                      Singapore                                                                          -1                 -1
                                      Italy                                                                              -1                 -2
                                    - West Germany                                                                       -2                 -3
                                    Subtotal                                                                              lob                 9
                                    All restricted countries                                                             -4                -12
                                    All other foreign countries
                                       China                                                                               0                     7
                                       Austria                                                                                1                  3
                                       Canada                                                                              0                     1
                                       Poland                                                                              0                     1
                                       Others                                                                              1                -3
                                    Subtotal                                                                               2                  9
                                    United States                                                                          2                  4
                                    aEight countries were requested to limit their U.S. shares to specific or to 1986 shares of this domestic
                                    market. Two of these countries’ market share changes were less than 0.5 percent (Sweden and Spain).
                                    bFigures do not always add due to rounding and the omission of countries that showed market share
                                    changes of less than 0.5 percent.
                                    Source: Derived from Census Bureau data.




                                    Page 34                                                       GAO/NSIAD-90-182 International        Trade
         ‘.




                                          Appendix I
                                          Data on the Market Share Limits and Changes
                                          for Machine Tools Represented in
                                          the Agreementa




Table 1.4:Actual Percentage Point
Changes in the Machining Centers’                                                                                            1987             1988
Market Shares (Compared to 1986 Levels’   Agreement countries
                                            Taiwan                                                                             -2                -6
                                            Japan                                                                              -4              -18
                                          Subtotal                                                                             -6              -24
                                          Other restricted countriesa
                                            United Kingdom                                                                       1                 5
                                            Korea                                                                                0                  1
                                            SinaaDore                                                                            0                  1
                                            West Germany                                                                         0               -1
                                          Subtotal                                                                               1                 6
                                          All restricted countries                                                             -5              -16b
                                          All other foreion countries                                                            1                1
                                          United States                                                                          4                   16
                                          Tight countries were requested to limit their U.S. shares to specific or to 1966 shares of this domestic
                                          market, Four of these countries’ market share changes were less than 0.5 percent (Spain, Italy, Brazil,
                                          and Sweden).
                                          ‘Figures do not always add due to rounding and the omission of countries that showed market share
                                          changes of less than 0.5 percent.
                                          Source: Derived from Census Bureau data.




                                          Page 38                                                      GAO/NSL4D-90-182 International        Trade
                                                                                                                                           --
                                          Appendix I
                                          Data on the Ma&et Share Limits and Changes
                                          for Machine Tools Represented in
                                          the Agreements




Table I.& Actual Percentage Point
Change, in the Milling Machiner’ Market                                                                                      1987               1988
Shares (Compared to 1986 Levels           Agreement countries
                                            Taiwan                                                                              -1                  -7
                                            Japan                                                                                 0                   0
                                          Subtotal                                                                              -2’                 -8’
                                          Other restricted countriesb
                                            United Kinadom
                                            Singapore                                                                                1                 0
                                            Spain                                                                               -4                  -2
                                          Subtotal                                                                              -la                    fa
                                          All restricted countries                                                              -3                  --la
                                          All other foreian countries
                                             France                                                                               1                    0
                                             China                                                                                1                    1
                                             Greece                                                                               1                    0
                                             Others                                                                               1                    0
                                          Subtotal                                                                                4                    1
                                          United States                                                                             0                  0
                                          aFigures do not always add due to rounding and the omission of countries that showed market share
                                          changes of less than 0.5 percent.
                                          bSeven countries were requested to limit their U.S. shares to specific or to 1986 shares of this domestic
                                          market. Four of these countries’ market share changes were less than 0.5 percent (Italy, Korea, Brazil,
                                          and Sweden).
                                          Source: Derived from Census Bureau data


Table 1.6:Actual Percentage Point
Changer in the Numerically Controlled                                                                                        1987               1988
Punching and Shearing Machiner’           Agreement countries
Market Sharer (Compared to 1986 Levels)
                                            Japan                                                                             -12                -21
                                          Other restricted countriesa
                                            West Germanv                                                                          4                   7
                                            Italy                                                                                 2                   0
                                            Switzerland                                                                         -1                  -4
                                          Subtotal                                                                                5                   3
                                          All restricted countries                                                              -6b              -18
                                          All other foreign countries                                                             1                 0
                                          United States                                                                           6                19
                                          aNine countries were requested to limit their US. shares to specific or to 1986 shares of this domestic
                                          market. Six of these countries’ market share changes were less than 0.5 percent (Sweden, Brazil,
                                          Korea, Singapore, Spain, and the United Kingdom).
                                          bFigures do not always add due to rounding and the omission of countries that showed market share
                                          changes of less than 0.5 percent.
                                          Source: Derived from Census Bureau data




                                          Page 36                                                       GAO/NSIAD90-182 International           Trade
                                       Appendix I
                                       Data on the nilarket Share Limits and Changes
                                       for Machine Tools Represented in
                                       the Agreements




Table 1.7: Actual Percentage Point
Changer In the Non-Numerlcally                                                                                             1987              1988
Controlled Punching and Shearing       Agreement countries
Machines’ Market Shares (Compared to
1986 Levels)                           - Taiwan                                                                                0                        1
                                         Japan                                                                               -8                -9
                                       Subtotal                                                                              -7’               -8
                                       Other restricted countriesb
                                         Sinaaoore                                                                                1                     1
                                         Spain                                                                                -2                     2
                                         United Kingdom                                                                        0                     2
                                         Italy                                                                               -2                    -1
                                         West Germanv                                                                        -3                    -4
                                       Subtotal                                                                              -8                      0
                                       All restricted countries                                                             -14a                   -9”
                                       All other foreign countries
                                          Belgium/Luxembourg                                                                      1                     1
                                          Canada                                                                                  1                     1
                                       7srael                                                                                     1                -1
                                          Others                                                                             -1                      0
                                       Subtotal                                                                                2                     1
                                       United States                                                                          12                     8
                                       aFigures do not always add due to rounding and the omission of countries that showed market share
                                       changes of less than 0.5 percent.
                                       ‘Eight countries were requested to limit their U.S. shares to specific or to 1986 shares of this domestic
                                       market. ‘hree of these countries’ market share changes were less than 0.5 percent (Brazil, Korea, and
                                       Sweden),
                                       Source: Derived from Census Bureau data.




                                       Page 37                                                       GAO/NSIAD-90-182 International         Trade
Appendix II                                                                                            *

Methodology for MeasuringComplianceWith                                                                    l




Voluntary IXestrtit Agreementsand Changes
in Foreign Sharesof the DomesticMachine
Tool Markets
               To determine whether the voluntary restraint agreement goals were
               being met, we analyzed (1) Japan’s and Taiwan’s compliance with
               export limits, (2) the changes in other countries’ shares of U.S. markets,
               and (3) the growth of domestic shares in the restricted markets. To per-
               form these analyses, we used the same methods and data sources
               (except where more accurate data were available) that OACused. We
               could not reconstruct OAC'Sfigures for machine tool imports and quota
               compliance and did not always derive the same results as OAC.



Data Sources

U.S. Imports   We did not use OAC’Sdata on U.S. imports because more accurate data
               were available. OACuses the Census’ IM 145 report as its source to mon-
               itor U.S. imports from all countries, adjusting these data for mistakes
               found in its review of Customs’ entry documents.’ The IM 145 report
               lists imports for each country by machine tool type. The import totals
               are counted by date of processing (i.e., the date that the imports were
               entered into Census’ database, which can be several months after the
               actual date of entry into the country). Thus, the reports, on an annual
               basis, include some imports that entered the country in a prior year and
               were recorded in a current year, and exclude some that entered in the
               current year but will be recorded at some point in the future.

               We used the Census’ IM 115 import report, which records imports by the
               date of entry into the country. The IM 115 data are also recorded by
               date of processing and form the basis of the IM 145 report used by OAC.
               We adjusted the import numbers from the IM 115 data we used for 1987
               and 1988 imports to reflect the changes made by OACas the result of its
               reviews of entry documents and other records. The adjustments affected
               all types of the restricted machine tools and involved reexports (where a
               foreign import into the United States is subsequently sent to another
               country); kits (a group of spare parts that OACdetermines is a complete
               machine tool in disassembled form); misclassifications (recording the
               import in the wrong category); and key punch errors (in counting,
               recording, or copying).



               ‘Customs does not transmit every entry document for each country and, in some instances, Customs
               failed to transmit over half of a country’s entry documents. Thus, Commerce’s corrections to the
               Census’ import reports are not complete.



               Page 38                                                 GAO/NSIAD-90-182 International      Trade
                 Appendix   II
                 Methodology for Measuring Compliance With
                 Voluntary Reatralnt Agreements and Changer
                 in Foreign Shares of the Domestic Machine
                 Tool Ma.rkete




                 Although Census provided import data (by date of entry) for the second
                 half of 1986 and for all of 1987 and 1988, it did not have these data on
                 machine tools imported in the first half of 1986. Therefore, to calculate
                 total 1986 imports, we combined the Census’ IM 116 report (for July
                 through December) with other data from Census (January through
                 June) recording the imports’ date of processing, which we then cor-
                 rected to reflect their date of entry using Census information on 1986
                 imports included in its 1986 data.

                 We calculated the average dollar values of imports for each machine tool
                 type using Census import data prepared by the Association for Manu-
                 facturing Technology. These are the only data available on import
                 values. To get the best approximation of each country’s return from
                 sales, we used a separate average value for each country, for each type
                 of machine tool imported, and for each year reviewed.


U‘3 Exports      To reconstruct the ~AC’Sfigures on US. exports, we obtained 1986,1987,
                 and 1988 data on exports from the Association for Manufacturing Tech-
                 nology’s publication of the Census’ EM 622 report. Although OAC told us
                 that it uses the same report as the source of its data on U.S. exports,
                 OAC’Stotals did not always match the totals we obtained using the same
                 data source.


U.S. Shipments   As did SAC,we obtained 1986, 1987, and 1988 data on shipment (units
                 and dollar values) from the “Current Industrial Reports-Metalworking
                 Machinery,” MQ 36W Series. Some shipment data are withheld to avoid
                 disclosing figures about individual companies. We obtained figures for
                 the unlisted shipments (in units and dollar values) from industry spe-
                 cialists in Commerce’s Office of General Industrial Machinery, Capital
                 Goods, and International Construction. OACobtains the same unlisted
                 data from this office but adjusts them based on its own knowledge of
                 these industries.

                 We could not verify QAC’Sshipment figures using these corrections and
                 formulas, Therefore, we estimated shipment units using the original raw
                 data and the formulas that Commerce’s industry specialists used.




                 Page 39                                      GAO/NSIAD-99-182 International   Trade
                        Appendix II
                        Methodology for Measuring Compliance With
                        Voluntary Restraint Agreements and Changes
                        in Foreign Shares of the Domestic Machine
                        Tool Markets




                        To verify the results of the OAC’Scalculations of Japan’s and Taiwan’s
Japan’s and Taiwan’s    compliance with export quotas, we reviewed the ~AC’Ssource data on
Exports to the United   these countries’ exports to the United States, but could not derive the
States                  figures that OACfound. To obtain total figures on these countries’
                        exports to the United States, OAC reviews Customs’ entry documents and
                        commercial invoices on their machine tools entering the United States.
                        OACcompares the export figures that result from this process with offi-
                        cial Census data (the Census IM 116 report) to determine if all entry
                        documents have been received. The IM 116 report is derived from the
                        data recorded on the entry documents.

                        QAC’Scalculations of annual exports by Japan and Taiwan do not always
                        match the official Census data. OAC's data differ from those on the
                        IM 116 report because OAC adjusts these data for the number of reex-
                        ports, kits, misclassifications, and key punch errors detected in its
                        review of Customs’ documents and commercial invoices.

                        We used the Census’ IM 116 import data on imports recorded (as of the
                        date they were exported) to determine Japan’s and Taiwan’s total
                        annual exports to the United States. We adjusted these annual data for
                        all OACcorrections, as discussed above. Although we used the Census
                        data derived from the same data sources SACuses and adjusted these
                        data for all of OAC'S corrections, our totals did not always match.


                        The “apparent consumption” of any machine tool is the annual sum of
Apparent                U.S. domestic shipments added to imports minus U.S. exports. Apparent
Consumption             consumption figures are used to establish the “total” market size (the
                        100 percent of the domestic market used to determine quotas and the
                        market shares held by any country).

                        Data Resources, Inc., publishes estimates of annual apparent consump-
                        tion for each restricted machine tool market 6 times a year (February,
                        May, August, October, and December). OAC uses these forecasts to set
                        estimated quota levels before actual consumption figures are available.
                        SACcomputes the actual consumption for each machine tool market in
                        May following each agreement year. At that time, all prior year data
                        (annual shipments, imports, and exports) are available. It then uses
                        these figures to determine the final actual quota numbers against which
                        the actual exports can be measured. The difference between actual
                        quota numbers and exports is then applied to the subsequent year’s
                        quotas, in the manner provided for in the agreements.



                        Page 40                                      GAO/NSIAJI-SO-182 International   Trade
                       Appendix II
                       Methodology for Measuring Compliance With
                       Voluntary Restraint Agreements and Changes
                       ln Foreign Sharee of the Domestic Machine
                       Tool Markets




                       QAL:also uses its calculations of apparent consumption and data from the
                       Census’ IM 146 import reports to calculate foreign countries’ import
                       penetration. Unlike its apparent consumption calculations for annual
                       quota adjustments in May, OX makes these calculations continuously
                       during the current year as revised shipment data become available.

                       We calculated the annual apparent consumption for each machine tool
                       market using ~AC’Sdata sources for U.S. shipments and exports but sub-
                       stituted the more accurate import data available from Census. Our cal-
                       culations of apparent consumption differed from those made by OAC(as
                       noted in prior discussions). We could neither reconstruct nor validate
                       0.4cfigures.


                       We measured Japan’s and Taiwan’s compliance with the quotas estab-
Japan’s and Taiwan’s   lished by the agreements (in units). We tried to reconstruct the ~AC’S
Compliance With        quota figures using the same methods and data sources that it used
Export Quotas          (except when more accurate data existed), but our results differed from
                       theirs. The more accurate data we used did not alone cause our numbers
                       to differ greatly from those determined by SAC;instead, the major differ-
                       ences were caused by the OAC’Sundocumented and unverifiable adjust-
                       ments to the raw data available.

                       According to the agreements, the annual export quotas are specific per-
                       centages of the last annual consumption estimate for each machine tool
                       market. The percentages are then converted to the appropriate number
                       of units of each machine tool type. Beginning with the results of the
                       transition periods, the quotas have been adjusted each year for (1) prior
                       years’ overages and (2) the effect of errors in the consumption esti-
                       mates.2 Although we used the same apparent consumption forecasts
                       from Data Resources, Inc., to calculate export quota numbers, our num-
                       bers differed from OAC'Sbecause (as noted previously) our data differed
                       for both total Japanese and Taiwanese exports and for actual apparent
                       consumption.


                       We analyzed the total and individual changes in other countries’ import
Import Penetration     penetration using the Census’ IM 116 data, which records imports by
From Other Countries   th -
                         eir entry date, and our calculations of apparent annual consumption.


                       %ee appendix I, table 1.1,for a list of the agreement limits for machine tool exporta from each
                       country.



                       Page 41                                                    GAO/NSIAD-90-182 International         Trade
                    Appendix II
                    Methodology for Measuring Compliance With
                    Voluntary Restraint Agreements and Changes
                    in Foreign Shares of the Domestic Machine
                    Tool Markets




                    For Swiss and West German imports, we matched annual penetration
                    against the specific market share limits noted in the letters the U.S.
                    Trade Representative and the Commerce Department sent in December
                    1986.

                    For each of the seven countries that were sent similar letters at the same
                    time, requesting them to maintain their penetration levels, we matched
                    annual penetration against their 1986 market shares. Since the letters
                    were sent to them in December 1986, we used these levels as the base
                    for measuring their subsequent changes in shares of the domestic
                    market. We also matched the penetration of all other countries against
                    their 1986 levels, as we assumed they were expected to maintain these
                    levels.

                    We analyzed import penetration for each type of machine tool, noting all
                    increases in market share of 6 percentage points or more. We calculated
                    the dollar value of the import penetration in excess of the requested
                    levels to determine the value of sales each country gained when it
                    exceeded these limits.


                    We determined the impact of restrictions on the domestic machine tool
Impact on the       industry by analyzing the change in the U.S. shares in each restricted
Domestic Industry   machine tool market. For each of the first 2 years of the plan, we com-
                    pared the U.S. share of each market to the “ideal” that would have
                    existed if Japan and Taiwan had reduced their exports to agreed-upon
                    market share levels; if Switzerland and West Germany had reduced their
                    machine tool exports to requested market share levels; and if all other
                    countries had maintained their 1986 market shares.




                    Page 42                                      GAO/NSIAD-90-182 International   Trade
Appendi; III

Major Contributors to This Report


                        John Watson, Assistant Director
National Security and   Roy Karadbil, Evaluator-in-Charge
International Affairs   Anne Pond, Evaluator
Division, Washington,
D.C




(rearee)                Page 43                             GAO/NSIAJMO-182 International   Trade
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