Assessment
The U.S.-Korea FTA would likely result in increased exports of medical devices to Korea by reducing or eliminating a number of tariff and NTMs. U.S. exporters would benefit from the immediate or phased elimination of tariffs, improved transparency in the reimbursement process, less complex regulatory approval policies, and measures to counter unethical practices in the medical device and pharmaceutical sectors.
Korea is an important market for U.S. exporters of medical technology, with U.S. firms accounting for over $600 million, or approximately one-third of Korea’s imported medical devices, in 2006.507 The $2.5 billion market for medical devices in Korea is forecast to grow at an annual rate of 10–15 percent over the next several years, “driven by improved health insurance for South Koreans, an aging population, and funding for new equipment to improve the country’s medical infrastructure.”508 With continued economic growth, Korea is expected to demand an even higher level of health care,509 which could generate greater export opportunities for U.S. medical device manufacturers.510 By addressing the tariff and nontariff issues affecting the sales and trade of medical devices, the U.S.-Korea FTA should enable U.S. manufacturers of such products to benefit from these export opportunities.
The FTA would eliminate remaining tariffs for U.S. medical device exports—immediately for most products or phased in within 3 years for other products. Tariff reductions for a few selected products, however, such as medical magnetic resonance imaging apparatus and ultrasonic scanning apparatus, would be phased in over 10 years. Unlike the United States, Korea was not a party to the Uruguay Round “zero-for-zero” tariff elimination initiative for medical devices;511 thus Korea maintains tariffs ranging from 6.5 to 13 percent in important export categories for U.S. medical device manufacturers. These categories include a broad range of products such as general hospital supplies; intraocular lenses and other ophthalmic
512 AdvaMed, testimony before the Trade Policy Staff Committee, Office of the USTR, March 14, 2006, 1–11.
513 For additional information on a summary of the pharmaceuticals and medical devices chapter of the FTA, see chap. 2 of this report and the pharmaceuticals section of this chapter.
514 USKBC and the AMCHAM in Korea, U.S.-Korea Free Trade Agreement Position Paper, 2006, 20.
515 Inside Washington Publications, “U.S., Korea FTA Contains Strong PhARMA Text, Excludes Kaesong,” April 3, 2007, 1.
516 Ambassador Lee, testimony before the USITC, June 20, 2007, 17; and USTR, “Trade Facts: Free Trade with Korea Summary of the U.S.-Korean FTA.” Washington, DC: USTR, April 2007, 5.
517 May, testimony before the USITC, June 20, 2007, 288–289; Stangarone, “Anatomy of a Deal: The KORUS FTA,” 1; and Inside Washington Publications, “U.S., Korea FTA Contains Strong PhARMA Text, Excludes Kaesong,” April 3, 2007
518 USTR, “Final - United States - Korea FTA Texts,” 2007, Article 5.6.
519 Reis, testimony before the USITC, June 20, 2007, 28; and May, testimony before the USITC, June 20, 2007, 287.
520 USTR, “Final - United States - Korea FTA Texts,” 2007, Article 5.5.
521 Ibid., Article 5.7; Ambassador Lee, testimony before the USITC, June 20, 2007, 17; and May, testimony before the USITC, June 20, 2007, 189.
522 For additional analysis regarding TBTs and other NTMs, see chap. 5 of this report.
523 The Korean government sets prices even for services and products for which it does not provide reimbursement. Diller, “Healthcare: Products and Supplies: Asia,” March 2007, 32.
524 Diller, “Healthcare: Products and Supplies: Asia,” March 2007, 23; Gross and Weintraub, “Medical Device Reimbursement in Korea,” July 2005, 1; and AdvaMed, testimony before the Trade Policy Staff Committee, Office of the USTR, March 14, 2006, 1–11.
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goods; and high-technology medical, surgical, and dental instruments and appliances.512 By eliminating tariffs, the FTA should make U.S.-made medical devices more cost-competitive with those of Korean and foreign competitors.
The FTA contains a specific pharmaceuticals and medical devices chapter513 that addresses NTMs in Korea such as reimbursement, regulatory,514 and unethical business practices.515 For instance, the chapter details the creation of an independent review mechanism516 that would allow medical device manufacturers to challenge the Korean government’s pricing and reimbursement decisions for medical devices.517 Further, regulatory cooperation would be promoted by encouraging each party to recognize the results of certification and testing completed in the other party’s territory.518 Unethical practices by pharmaceutical and medical device manufacturers or suppliers are discouraged by prohibiting them from providing incentives to health-care professionals or health-care institutions519 for listing, purchasing, or prescribing drugs or devices eligible for reimbursement by central government health-care programs.520
The FTA would establish a medicines and medical devices committee cosponsored by the health and trade officials of each party to monitor and support the implementation of the obligations in the chapter.521 U.S. medical device manufacturers should also benefit from the provisions of the FTA’s TBT chapter, which would reduce duplication, provide more transparency, and encourage the use of international standards in Korea’s regulatory approval process.522 By addressing all of these issues, the FTA would likely lead to a decrease in the price and an increase in the quantity of U.S.-made medical devices in Korea.
According to industry experts, Korea currently maintains nontransparent reimbursement and pricing policies523 in its government-administered health-care insurance system that discriminate against U.S. and other foreign manufacturers of medical devices and insufficiently reward their innovation.524 U.S. industry officials report that regulations issued
525 AdvaMed, testimony before the Trade Policy Staff Committee, Office of the USTR, March 14, 2006, 1–11.
526 U.S. industry officials, interview by Commission staff, May 4, 2007.
527 Gross and Weintraub, “Medical Device Reimbursement in Korea,” July 2005, 1–2; and AdvaMed, testimony before the Trade Policy Staff Committee, Office of the USTR, March 14, 2006, 1–11.
528 EIU, “Country Commerce: South Korea,” July 2006, 106; and Gross and Minot, “Medical Device Registration in Korea: An Overview,” January 2007, 1-4.
529 WTO, Trade Policy Review Body (TPRB), “TPR, Republic of Korea, Report by the Secretariat,”
September 17, 2004, 59.
530 Gross and Minot, “Medical Device Registration in Korea: An Overview,” January 2007, 1.
531 U.S. industry officials, telephone interviews by Commission staff, May 22–23, 2007.
532 USTR, 2007 National Trade Estimate Report on Foreign Trade Barriers, April 2007, 370.
533 U.S. industry officials, telephone interviews by Commission staff, May 22–23, 2007; and USTR, 2007 National Trade Estimate Report on Foreign Trade Barriers, April 2007, 370.
534 USTR, 2007 National Trade Estimate Report on Foreign Trade Barriers, April 2007, 370.
535 Ibid.
536 U.S. industry officials, telephone interviews by Commission staff, May 22–23, 2007.
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by the Ministry of Health and Welfare reportedly show a bias toward domestic products.525 For instance, reimbursement prices for imported products are capped based on documented free on board (FOB) prices, while the reimbursement levels for domestic manufacturers and distributors are negotiated based on self-generated and often undocumented manufacturing cost data.526 According to industry experts, the imposition of arbitrary price limits on medical technology constitutes a practice that does not adequately reflect the market costs of doing business in Korea, the high costs associated with research and development, or the medical and economic benefits of innovative medical technology.527 The FTA would address these issues by increasing the transparency of the Korean National Health Insurance reimbursement system for medical devices. The program establishes prices for those products.
Medical devices also are reportedly subject to overly complex and costly certification, testing, inspection, and other regulatory approval requirements in Korea.528 Many manufacturers claim that the Korea Food and Drug Administration (KFDA) rules, requiring them to submit detailed data on certain medical products, are excessive and delay market access.529 Further, according to industry analysts, Korean regulatory authorities do not allow medical devices into the country that have not been approved in their country of manufacture,530 a duplicative requirement not faced by Korean producers.531
KFDA also requires reregistration of all medical device production transferred to a manufacturing site outside of its original country of origin.532 This reregistration is equivalent to a new registration. The U.S. industry would like Korea to expand existing licenses to cover dual sites and permit notification of the change to KFDA without the need for reregistration.533 Eliminating the need for reregistration may be possible if Korea introduces and adopts a verifiable and enforceable Good Manufacturing Practices paradigm consistent with international standards, which the United States hopes would happen sometime in 2007.534
Widespread use of unethical business practices in the Korean health-care system continues to be a significant problem reported in the Korean market for some medical devices.535 Major contributors to the problem are the complex distribution system and lack of transparency in the government decision-making process, which leads to improper practices by wholesalers and distributors.536 By providing more transparency and predictability in Korea’s medical
537 Reis, testimony before the USITC, June 20, 2007, 28; and USTR, 2007 National Trade Estimate Report on Foreign Trade Barriers, April 2007, 370.
538 AdvaMed, “AdvaMed Welcomes U.S./Korea Free Trade Agreement (April 3, 2007),” 1.
539 Ibid.
540 U.S. industry officials, interview by Commission staff, May 16, 2007; and PhRMA, “PhRMA Statement on the U.S.-Korea Free Trade Agreement (April 3, 2007),” 1.
541 NEMA, “Issue Brief: US-South Korea Free Trade Agreement,” April 2007, 1.
542 ITAC (3) on Chemicals, Pharmaceuticals, Health/Science Products and Services, Advisory Committee Report, April 24, 2007, 13.
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device pricing, reimbursement, and regulatory policies, the FTA should lessen the opportunities and incentives for engaging in unethical business practices.537
An analysis of international price and quantity data comparing Korean imports to other comparable countries indicates that the potential effect of NTMs on Korean imports may be to restrict the quantity of imports or raise the price of imports for medical devices. As box 3.5 suggests, U.S. exports of ultrasound scanning apparatuses may be affected not only by tariffs, but by NTMs as well. Implementation of the NTM-related provisions of the FTA will likely be critical for U.S. exporters to fully realize the gains in market access for medical devices.
Views of Interested Parties
Three industry associations, the Advanced Medical Technology Association (AdvaMed), the Pharmaceutical Research Manufacturers of America (PhRMA), and the National Electrical Manufacturers Association (NEMA), each provided information regarding the U.S.-Korea Free Trade Agreement in various news releases and statements. In a news release, AdvaMed states that the FTA demonstrates Korea’s commitment to increasing access for its citizens to innovative medical technologies and that it supports the establishment of the Medicines and Medical Devices Committee.538 Further, AdvaMed added that Korea is an important market for U.S. medical technology companies, where U.S. manufacturers exported more than $670 million worth of medical technology products to Korea.539
In addition, PhRMA, along with several U.S. industry officials, stated that, to achieve the FTA’s goals, it recommends that the U.S. government closely monitor the full and effective implementation of Korea’s FTA commitments and continue to work with Korea regarding its reimbursement system.540 Lastly, in an issue brief, the National Electrical Manufacturers Association (NEMA), which represents medical imaging and other electrical manufacturers, reports that the FTA’s market access provisions will improve sales opportunities in Korea for its members.541
In its report on the FTA, the ITAC for Chemicals, Pharmaceuticals, and Health/Science Products & Services (ITAC 3), which represents a wide range of U.S. health-care manufacturers, states that it is pleased that remaining tariffs will be removed on medical equipment.542 The report states that committee members believe that the pharmaceuticals and medical devices chapter contains a number of important improvements to Korea’s regulatory
543 Ibid., 16.
544 ITAC (11) on Small and Minority Business, Advisory Committee Report, April 26, 2007, 4.
545 IGPAC, Advisory Committee Report, April 24, 2007, 23.
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and reimbursement systems concerning access to innovation, imposition of an independent appeals process, increased transparency and accountability, and maintenance of ethical business practices to ensure a level playing field.543 The report, however, says that the committee believes that substantial work remains to ensure full implementation of the FTA’s provisions to address the challenges that innovative medical device and pharmaceutical firms face in gaining fair access to the Korean market.
In its report, the ITAC on Small and Minority Business (ITAC 11) states that it believes the chapter on pharmaceuticals and medical devices will expand opportunities for small businesses in the medical device industry.544 Finally, the Intergovernmental Policy Advisory Committee noted that it is pleased that state-level Medicaid programs are excluded from coverage of the chapter on pharmaceuticals and medical devices, which applies only to central-level government health-care programs.545
Box 3.5 Potential price and quantity effects of NTMs on ultrasound scanning apparatus (HS 901812)
Firms seeking to export to Korea have identified a variety of NTMs that may have impeded their access to the market for medical equipment, including opaque pricing and reimbursement policies, overly complex and costly regulatory requirements, and unethical business practices (see text). These measures may restrict the quantity of imports into the Korean market, raise the price of imports, or both.
Korean imports of this product, in quantity terms, are substantially lower than imports of the same product into most other economies, relative to the size of the Korean economy. Korea's import unit value for imported ultrasonic scanning apparatus is substantially higher than the import unit value for most other countries. Existing tariffs of 8 percent ad valorem appear to be too low to account by themselves for either the relatively low quantity of imports or the relatively high price of imports. This relatively low quantity and relatively high price of imports may be reflective of the effects of NTMs, but could also be influenced by such factors as market structure, product differentiation, and consumer preferences.
Korean imports of ultrasonic scanning apparatus in 2003–05 were 0.0028 units per million $ GDP, as compared to a median of 0.012 units among 23 comparable countries. Korea ranks twenty-second out of the 23 comparable countries in imports relative to the size of its economy, with only Thailand ranking lower. The number of comparison countries is limited because some countries measure imports in kilograms or other units.
The Korean average import price from the United States during 2004–06, was $31,733 per ultrasonic scanner, which is 48 percent higher than the U.S. export price to the world of $21,450. The Pharmaceuticals and Medical Devices and TBT chapters of the FTA are intended to address some of these NTMs (see chapter 5 of this report for additional information on TBT provisions and appendix D for a summary of the FTA chapter on Pharmaceuticals and Medical Devices).
For further information on the calculation and interpretation of the quantity and unit-value information reported above, see appendix J.
Source: See app. J for data sources; USITC staff analysis.
1 The term “cross-border trade,” as used in this chapter, indicates that services, service suppliers, or service consumers have crossed national boundaries to affect trade. The term is intended to differentiate these modes of delivery from delivery through affiliates located in the country of the consumer.
2 WTO, “General Agreement on Trade in Services, Republic of Korea, Schedule of Specific
Commitments,” April 15, 1994. Prior to the U.S.-Korea FTA, the GATS governed the rights and obligations that U.S. service providers had in Korea. The Commission, therefore, uses Korea’s GATS commitments as a baseline from which to measure the benefits of the FTA.
3 It is not possible to establish an overall quantitative measure of the effect of the U.S.-Korea FTA on trade in services because of the unavailability of necessary data. Using methodology developed by the Commission, however, a quantitative measure of impediments to banking services is presented in the financial services assessment in this chapter and in app. H of this report.
4 Reis, testimony before the USITC, June 20, 2007.
5 USDOC, BEA, “International Economic Accounts,” July 16, 2007.
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