Competitive Conditions Affecting U.S. Exports of Medical Technology to Key Emerging Markets
Peter Herman
Jeff Horowitz
Mihir Torsekar
ECONOMICS WORKING PAPER SERIES
Working Paper 2018–08–A
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August 2018

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Competitive Conditions Affecting U.S. Exports of Medical Technology to Key Emerging Markets
Peter Herman, Jeff Horowitz, and Mihir Torsekar
Office of Economics Working Paper 2018–08–A

Abstract

The United States is the world’s largest supplier of medical technology (medtech). At the same time, growth in key emerging medtech markets—especially China, India, and Brazil—represent significant export opportunities for U.S. manufactures to further bolster their competitiveness. Yet, import restrictions arising from onerous regulatory procedures in these countries limit U.S. exports to these markets, particularly by extending the time to market for these goods to gain approval for sale. Using a gravity model approach, we estimate ad valorem equivalents (AVEs) for non-tariff measures (NTMs) in 167 countries and find that China, India, and Brazil all rank in the bottom half in terms of import competitiveness. Further, we run a second stage regression to identify specific factors that depress advanced medtech exports. Our results show that the estimated competitiveness of each country is tied to regulatory measures rather than demand factors. In particular, lengthy time-to-market and regulatory complexity significantly reduce a country’s import competitiveness. These findings suggest that the harmonization of China’s, India’s, and Brazil’s medtech standards to internationally accepted best practices would likely translate into greater U.S. exports to these markets. This paper is the first to quantify the impact of regulatory procedures on the import competitiveness of various global medtech markets.

Peter Herman
Office of Economics
peter.herman@usitc.gov
Jeff Horowitz
Office of Industries
jeffrey.horowitz@usitc.gov
Mihir Torsekar (corresponding author)
Office of Industries
mihir.torsekar@usitc.gov

### 1 Introduction

In recent years, the $400 billion global market for medical technology (medtech) has expanded rapidly as countries increasingly demand access to quality healthcare and the tools that provide it (Evaluate Medtech 2017). The United States, in particular, has benefitted from this market growth as it is the world’s leading provider of medtech products, representing close to one-quarter of global exports in 2016 (Comtrade, 2018). However, with growth in established markets (e.g. Germany and Japan) likely to remain relatively stable in the near term, emerging markets—such as China, India, and Brazil—may suggest opportunities for the United States to maintain its competitive trade position. In addition to boasting large populations, growing GDPs, and rising GDP per capita, each of these three countries have sizeable disease burdens and relatively low per capita spending on medical devices (medical device density) (The World Bank, 2018). Yet, despite these factors, our analysis finds that China, India, and Brazil remain relatively small importers of medtech. In order to better understand medtech trade and the factors that limit it, we estimate gravity trade models using bilateral trade data for each of a collection of medtech products. The results of the gravity models are used to rank countries based on their import competitiveness. Import competitiveness is a measure that reflects the value of imported medtech relative to a country’s economic size; a country that imports large values of medtech given their GDP is considered highly competitive while a country that imports relatively little is considered uncompetitive.1 To more concretely measure import competitiveness, we also calculate estimated ad valorem equivalent (AVE) trade costs that explain differences in competitiveness across 167 countries.2 Using this methodology, we find that China (ranked 126), India (ranked 125), and Brazil (ranked 92) rank relatively low in terms of import competitiveness compared to the rest of the world, suggesting that there is considerable export potential for U.S. firms if the source of this lack of competitiveness can be addressed. Next, we conduct a second regression using data that reflects regulatory requirements and medtech demand in order to identify the factors that influence import competitiveness. These estimates indicate that long and complicated approval processes significantly reduce import competitiveness, while key demand factors (per capita healthcare spending and medical device expenditures) have no effect. As the world’s most innovative medtech producer, the United States is especially disadvantaged by regulatory delays (Torsekar, 2014; USITC, 2007). This concern is aggravated by the relatively short product lifecycle (18-24 months) of the most advanced medtech for which the United States is especially competitive in manufacturing. Therefore, our results provide strong evidence that the United States will stand to benefit significantly from the harmonization of policy measures in the Chinese, Indian, and Brazilian medtech markets to international best practices. This work adds to the literature attempting to measure the impacts of trade restrictiveness measures. Kee, Nicita, and Olarreaga (2009) builds trade restrictiveness indices for 78 developed and developing countries. They estimate the trade restrictiveness indices (TRI) for countries by estimating AVEs of NTMs impact on imports, and then using that to observe the difference between a country’s overall restrictiveness and its tariff rates. Moreover, Kee, Nicita, and Olarreaga (2008) use Feenstra’s (1995) simplified trade restrictiveness index (TRI) at the country level rather than at the product level. Their results support the conclusion that poor countries have more restrictive trade policies and face higher export barriers. However, the quantitative analysis that has been done on the medtech sector specifically is quite limited. Sunesen, Francois, and Thelle (2009) find that medical device exports from the EU to Japan could increase by as much as 84 percent if the level of NTMs in Japan was comparable to that of the EU, but do not evaluate different types of NTMs. Additionally, a USITC (2007) study examining the competitive conditions affecting medtech trade identified “time to market” as a principal concern with respect to its effect on sales, but provided no empirical verification for this. To the best of our knowledge, our paper represents one of the first studies focusing entirely on quantifying policy barriers in medtech trade across multiple countries. The paper proceeds as follows. Section 2 defines medtech and describes how it is regulated. Section 3 presents an overview of the U.S. industry, as well as the current markets and regulatory environment in the key emerging markets of China, India, and Brazil. Section 4 describes the empirical methodologies used to measure import competitiveness and restrictiveness and presents the estimated results. Section 5 concludes. ### 2 Medical Technology and Regulations Medical technologies refer to the various implements, machines, appliances, and instruments that facilitate in the diagnosis, treatment, or alleviation of disease (WHO 2003). The products included in the medtech industry range in complexity from relatively unsophisticated goods, such as bandages and other hospital supplies, to high-tech capital goods, such as diagnostic equipment. Although there are several ways to classify medtech, recent research by Torsekar (2018a, 2018b) has applied a similar framework developed by Bamber and Gereffi (2013), which identifies four major product groupings, ranging from least to most sophisticated: (1) disposables (bandages, surgical gloves, and plastic syringes); (2) surgical and medical instruments (devices used in surgeries and cosmetic procedures); (3) therapeutics (includes implantable devices like hearing aids and prosthetics and non-implantable devices such as ventilators and infusion pumps); and (4) diagnostic equipment (capital equipment that is technologically complex). For the purposes of this paper, we emphasize trade in therapeutics and diagnostics because the majority of regulatory procedures apply to these devices. A full list of products included in the study can be found in table 4 in the appendix. #### 2.1 Regulating Medtech Regulatory practices are critical determinants of overall trade competitiveness for a given country, influencing market access for foreign producers and guiding pricing decisions of products within these markets. In the global medtech industry, nearly all major markets apply a risk-based classification system to regulate these goods, similar to the recommendations of the International Medical Device Regulators Forum (IMDRF), a voluntary international association aimed at harmonizing international medical device standards. The IMDRF builds upon similar efforts made by the The Global Harmonization Task Force (GHTF) which, prior to being disbanded in December 2012, recommended dividing medical devices into four categories based on the relative harm posed to patients; regulatory requirements are ideally supposed to increase in accordance with the device risk (figure 1).3 Figure 1: Conceptual illustration of the device class and corresponding regulatory requirements, as stipulated by the GHTF. Source: (GHTF, 2012, p. 11). Despite the prevalence of risk-based classification standards for medtech and escalating regulatory requirements for higher-risk devices within most international markets, differences in the application of specific measures can restrict trade by imposing NTMs, thereby limiting or delaying market access to foreign manufacturers (Johnson, 2008, p. 1). According to UNCTAD (2012), there are 16 recognized NTMs, of which technical barriers to trade (TBTs) are most germane to the global medtech market. TBTs typically refer to three types of measures (UNCTAD 2012; WTO 1995): • Technical regulations—documents which describe product characteristics and detail production methods. These may also address requirements for labelling. Compliance is mandatory. • Standards—similar to technical regulations, but with which compliance is not mandatory (i.e. voluntary standards). • Conformity assessment procedures—regulations detailing the sampling, testing, inspection, certification, and registration requirements for approval. These are the most common TBTs in the global medtech industry (Sunesen, 2009). While the 1995 WTO Agreement on TBTs (TBT Agreement) permits countries to implement their own regulations, standards, and conformity assessment procedures to fulfill legitimate regulatory concerns, countries are encouraged to accept other member countries conformity assessment procedures. With regard to medtech production, class C-D devices are subject to the highest regulatory scrutiny; manufacturers are required to submit to on-site audits of production facilities, submit documentation detailing the product design, provide data from product testing, and maintain a quality management system (QMS) (GHTF, 2012, p. 8-17).4 However, these procedures can run afoul of the TBT Agreement when they are deemed discriminatory, conferring an advantage to domestic producers at the expense of foreign manufacturers. Further, conformity assessment procedures requiring duplicative testing or product certifications and technical regulations imposing onerous labelling standards that require unnecessary information beyond the basics of what is needed to use the product are examples of likely TBT violations (UNCTAD, 2012). When signatories of the TBT Agreement consider updating their regulations in ways that may significantly impact trade or diverge from international standards, they must notify the TBT committee; these notifications can serve as a proxy for understanding a country’s overall regulatory market (Okun-Kozlowicki, 2016). During January 2013–August 2018, China and Brazil ranked first and third (behind South Korea), respectively, as having the highest number of medical device notifications submitted to the TBT Committee (figure 2); India did not have any notifications during this time. It should be noted that while these notifications don’t necessarily connote TBT violations, they can suggest additional trade costs and possible delays in securing approval for sale, arising from the demands of adapting to changing regulations upon implementation. Many of the provisions that Brazil and China raised during this time ranged from labeling requirements, to inspection and auditing standards. An additional caveat is that countries with relatively immature regulatory systems who are seeking to adopt international standards will notify the TBT Committee to confirm that they are following best practices. Encouragingly, industry representatives report that this is more often than not, the case with Brazil and China’s notifications to the Committee.5 Figure 2: Number of Medical Device TBT Notifications for Selected Countries and the Rest of the World (ROW), January 2013-August 2018. Source: TBT Information Management System (2018, accessed August 11, 2018 ### 3 Overview of U.S. Industry and Key Emerging Markets The U.S. medical device industry, which is valued at more than$153 billion in 2016, is the world’s largest (EY, 2017). Moreover, seven of the world’s ten largest medical device original equipment manufacturers (OEMs), by revenue, are headquartered in the United States (table 1). Although large firms command the greatest domestic market share, more than 80 percent of the industry’s 1,500 firms are small and medium-sized enterprises (SMEs) that employ less than 50 people (Carusi, 2014). Nonetheless, it is typically the larger OEMs that commercialize most medical devices due, in large part, to their financial resources. Despite producing devices across 90 distinct categories of products, U.S. firms specialize in high-value-added technologies requiring a highly skilled workforce of engineers and technicians. The U.S. medical device industry accounts for more than two million jobs (both indirectly and directly) throughout the country, paying wages that exceed most manufacturing jobs by 30 percent and 9,800 manufacturing facilities both in the United States and around the world (AdvaMed, 2017).

Table 1: Top 15 global medical device manufacturers in 2017 by revenue, headquarters, and 2015 market share.
 Company Headquartered Revenue ($bn) Global Market Share (%) Medtronic Ireland 28.8 8 Johnson & Johnson United States 25.1 6 Siemens Healthineers Germany 15.2 3 Becton Dickinson United States 12.5 3 Cardinal Health United States 12.4 3 Phillips HealthTech The Netherlands 12.4 3 Stryker United States 11.3 3 Baxter United States 10.2 2 Abbot Laboratories United States 10.1 2 Boston Scientific United States 8.4 2 Danaher United States 7.8 2 Zimmer Biomet United States 7.7 2 Essilor France 7.5 2 B.Braun Germany 6.8 2 Top 15 totals 176.2 43 Source: Fenske et al. (2017) and Snyder (2017). Note: Market share data presented for 2015, the most recent year for which these data were available. The competitiveness of the U.S. advanced medtech industry is also reflected in their status as the world’s largest exporter of these goods (figure 3). U.S. medical device OEMs earn between 40 and 50 percent of their revenues outside the United States, which reflect a combination of exports and activities by foreign-based subsidiaries (SP, 2014). Export decisions are largely influenced by the ease of foreign market entry. This is because, given the relatively short lifecycle of these technologies (18-24 months), U.S. firms may forgo significant potential earnings if a device is undergoing a lengthy review in a foreign country (USITC 2007). To that end, U.S. manufacturers have commonly generated roughly 30 percent of their revenues from the European Union (EU)—led by Germany—which have the lowest reported times to market of any of the world’s major medical device markets (Emergo, 2017a).6 In addition, a principal advantage of maintaining a presence in a variety of international markets is the ability for firms to mitigate the effects of currency swings by focusing on markets that benefit from the current value of the U.S. dollar at a particular moment in time;7 in recent years, an estimated 40 percent of revenues garnered by the top 10 U.S. medical device OEMs stemmed from beneficial foreign exchange rates (EY, 2012). Figure 3: The world's largest exporting countries of advanced medtech, 2016 (%) Source: Comtrade (2018, accessed June 18, 2018). Alongside Germany, Japan has also served as a leading destination for U.S. medtech. However, these established medtech markets are relatively mature,8 which implies relatively stable market growth. In contrast, the rapid expansion of key emerging medtech markets, led by China, India, and Brazil, may suggest substantial opportunities for U.S. manufacturers (Francis et al.,. 2011; Agarwal et al.,. 2016). Growth in these three countries reflects a combination of demographics (especially ageing populations in China), highly urbanized populations, and the growth and prevalence of non-communicable or lifestyle-related afflictions. At the same time, these three medtech markets remain chronically underserved. For example, medical device density for China, India, and Brazil each ranked in the bottom quartile according to a 2013 study by CHPI; out of the 67 countries studied, the three countries ranked 63rd, 58th, and 50th respectively. The United States has been the largest supplier of medtech to China, India, and Brazil for the past decade. More specifically, the United States has represented more than one-quarter of each of these countries’ medtech imports during this time (Global Trade Atlas, 2018).9 However, our analysis (which will be discussed in section 4) finds that these key markets rank low in import competitiveness, especially when compared to established medtech markets (as depicted in table 2). In particular, each of these countries maintains regulatory structures that are associated with extensive times to market for high-risk devices. The regulatory obstacles mostly fall under the purview of TBTs (especially conformity assessment procedures and technical regulations), but also include other NTMs (such as price controls), as summarized below: • Duplicative certification and testing procedures (China and Brazil). • Excessive data submission requirements (China and Brazil). • Documentation (including labelling) that must be transcribed in local languages (China, India, and Brazil). • Policies that privilege domestic production over foreign imports (China and India). Table 2: Comparison of regulatory factors, demand factors, and overall barriers in advanced medtech for key emerging medtech markets and established medtech markets  Key emerging Established medtech markets medtech markets China India Brazil Germany Japan Regulatory Factors Maximum time to market High High High Low Moderate Regulatory Complexity High Moderate High Moderate Moderate Regulatory Cost High Moderate High Moderate High Demand Factors Medical Device Density Low Low Low High High Per capita Healthcare spending Low Low Moderate High High Overall Barriers Import Competitiveness Low Low Moderate High High Source: Compiled by authors from Emergo (2017a). Note: Ratings (low, moderate, high) for maximum time to market, import competitiveness, and medical device density were assigned based on quartile rankings of these respective data sets. Quartile rankings of 4 were ranked “low” for time to market and import restrictiveness and “low” for medical device density. The country data on regulatory complexity and cost was ranked from 1–5, with 1 being the lowest and 5 the highest. In these cases, we assigned a rating of “moderate” to countries assigned listed as a 3 or 4 and a “high” to countries with a ranking of 5. Per capita healthcare spending of below 5 percent of GDP were considered low, spending between 6–10 percent were considered moderate, and anything at or exceeding 11 percent was deemed high. #### 3.1 China ##### 3.1.1 Market Overview As of 2016, China’s medical device market was valued at$8.7 billion (Emergo, 2017b) and ranked second behind Japan as Asia’s largest market. In particular, China’s rapid rate of urbanization, aging population, and increasing incidence of lifestyle-related afflictions has created substantial demand for various categories of advanced medtech (Luo, et al. 2014). For example, unprecedented urbanization (Roxburgh, 2017) has heightened the need for diagnostic technologies, pacemakers, dialysis systems, and intravenous diagnostic technologies. This trend reflects the various public health risks that accompany city dwelling.10 For example, 1 in 10 adults (110 million people) in China are estimated to have been diagnosed with diabetes (WHO, 2016). Further, China’s elderly population (those aged 65 and above)—already one of the world’s largest—is generating growing demand for orthopedic devices within the country; China may become the world’s largest orthopedic device market within 10 years, according to recent projections (Liu, 2017). Elderly populations are generally the largest consumers of these devices, due to the degradation of the musculoskeletal system and loss of bone strength generally associated with aging.

At the same time, government policies have helped expand the growth of China’s healthcare market. In an attempt to redress the country’s historically inequitable healthcare system, China implemented healthcare market reforms in 2009. According to the EIU, these have since been associated with improvements in the country’s primary healthcare system, having achieved near-universal health insurance through the expansion of basic health insurance, limiting out-of-pocket expenses, and reforming public hospitals. Further, in late 2016, China unveiled the country’s first long-term strategic health plan (“Healthy China 2030”), which aims to build off of previous initiatives to extend life expectancy among its citizens, increase the number of doctors, and reduce out-of-pocket expenses (EIU 2018a). In accordance with these plans, China has steadily increased its healthcare spending, which reached a historic high of 6 percent of GDP in 2016 (EIU, 2017a). Nevertheless, China’s per capita total healthcare spending remains low compared to other leading markets, such as the United States (17 percent), Germany (11 percent), and Japan (10 percent), for example (EIU, 2018b,c).

##### 3.1.2 Regulatory Overview

China is estimated to have the second longest time to market (behind the United States) and ranks among the world’s most complex and costly regulatory systems (Emergo, 2017a). China’s chief medical device regulatory agency, the China Food and Drug Administration (CFDA), is responsible for approving all devices for sale within the country. Much as in other markets, China requires foreign manufacturers to appoint an agent to liaise with the CFDA and an after-sales service representative after approval. The device registration process in China can be especially onerous and time consuming due to the requirement that foreign firms provide a file listing technical information, test reports, clinical data, and a document attesting to the quality of the device with all documentation provided in “simplified Chinese.” During this review, the CFDA reserves the right to perform audits of foreign manufacturers, which may entail an on-site review of production facilities (Emergo, 2016); these steps are often duplicative, as they have more than likely been performed in order to achieve market entry for sale in other countries (USTR 2016, 87).

Of particular concern to U.S. industry is China’s March 2014 revision of medical device regulations.11 These polices principally apply to conformity assessment measures and introduced two requirements on medical devices that have raised concerns from U.S. manufacturers. The first policy requires medtech exporters to be registered in their country before being eligible for registration in China. The second policy imposes new clinical trial requirements for the most advanced medical technologies. Both of these policies are believed to be associated with market delays and represent more stringent departures from previous policies (USTR, 2016, p. 88). For example, with regard to the new clinical trial requirements, China had previously permitted foreign firms that had obtained market clearance in other countries to sell in China without having to conduct multiple clinical trials (Luo et al., 2014). This practice was consistent with that applied in other leading markets, such as the EU, for example. In addition to adding to the overall approval times, this measure imposes high costs of between $1millionto$1.5 million (Giger, 2017). These high costs would likely discourage small producers in the United States, who lack the financial resources of their larger counterparts.

At the same time, China has implemented policies aimed at bolstering the domestic manufacturing sector. As part of their “Made in China 2025” campaign, the country has prioritized the production of advanced medtech to meet their domestic requirements. By 2025, China has established a semi-official target of supplying 70 percent of their domestic market for these goods with local production (Wubbeke, 2016). In particular, their innovation policies appear to favor domestic production over foreign (EIU, 2017b; Agarwal, 2015). For example, Chinese companies have been the principal beneficiaries of the country’s expedited review process for the most innovative devices; 90 percent of the 117 approved devices under this procedure have been produced by Chinese firms as of 2017 (EIU, 2017b).

These policies are consistent with China’s pricing policies, which are believed to disadvantage the types of advanced medical technology commonly supplied by the United States. China’s provincial tendering process, which determines the price at which medtech is sold, is associated with high administrative requirements that translate into lengthy delays for foreign manufacturers. For example, advanced medtech manufacturers must provide detailed specifications of their products and often enter into lengthy negotiations with the government in order to justify the higher prices that these goods command; it can take years before a device is priced for sale in a particular province (Torsekar, 2014). At the same time, U.S. industry representatives have suggested that price controls are applied in the tendering process, with ceiling prices that discourage the adoption of foreign medtech (USTR, 2017, p. 57).

#### 3.2 India

India’s medical device market is valued at roughly $5-6 billion12 and ranks as Asia’s fourth largest medical device market behind Japan, China, and South Korea (Emergo, 2017b). The market is largely being driven by rapid urbanization, the emergence of non-communicable diseases (e.g. cardiovascular disease and diabetes), and a growing middle class (Dey, 2017; SKP, 2017). Because domestic production is concentrated in disposables and other low-end segments, roughly three-quarters of its medical device market is supplied by imports, with the United States being the largest supplier (Torsekar, 2017). The highest imported categories of devices include therapeutics (especially hearing aids, pacemakers, and stents) and diagnostic equipment (SKP, 2017). Despite the large potential market opportunity, India’s healthcare system is chronically underfunded, spending less than five percent of its GDP on healthcare (EIU, 2018d). ##### 3.2.2 Regulatory Overview In contrast to all of the twenty foreign markets for which time to market data was available, India has been unique in its absence of a risk based classification structure. Instead, the country’s regulations have only extended to 22 types of devices, a process that created ambiguity with respect to classifying devices outside of these categories. Further, India has typically regulated medical devices as analogous to pharmaceuticals despite the notable differences between the two products, including the way that these products are designed, manufactured, and administered to patients, for example. A report from the USITC from 2014 noted that the disparity between regulated and unregulated devices, along with the requirement to comply with standards more appropriate for pharmaceuticals than medical devices created substantial burdens on foreign manufacturers. For example, producers of unregulated devices could be compelled to provide various documentation and paperwork at any time even after a device has been placed in the market; each document required of these firms was estimated to cost$1,000 (USITC, 2014).

In addition, during 2014, India’s Central Drugs Standard Control Organization—a regulatory body that governs the imports of medical devices—implemented India-specific labeling requirements for exporters of medtech. These standards list 14 steps that must be placed on a medtech label, including the date and place of manufacture, the maximum retail price, and manufacturing license numbers, to name a few (Morulaa, n.d; USITC, 2014). These requirements exceed GHTF recommendations, which advise that country-specific labeling be “kept to a minimum” or removed entirely (GHTF, 2011).

In response to these challenges, the Ministry of Health and Family Welfare in India began implementing the Medical Devices Rule of 2017 on January 1, 2018. Encouragingly, the policy has established the country’s first risk-based classification system for all medical devices and distinguishes these goods from pharmaceuticals. At the same time, these measures eliminate onerous procedures, such as the requirement for foreign manufacturers to register medical devices intended for sale and the periodic renewal of licenses (SKP, 2017; IQVA, n.d.).

Yet, even as India has made advances in standardizing its regulatory regime with international practices, the country has also pursued policies aimed at reducing its reliance on foreign imports while bolstering its domestic industry. According to SKP (2017), the country decided in February of 2017 to impose price controls on coronary stents,13 reducing their prices by nearly 75 percent. In August of 2017, a similar policy on knee implants reduced prices by as much as 87 percent depending on the type of device. Both policies have faced strong objections from U.S. manufacturers. For example, leading U.S. producers including Abbot Vascular and Boston Scientific attempted to withdraw their products from the market as a result, despite prohibitions against such actions for 12 months from the date of the notification. Further, in March of 2018, India’s Department of Pharmaceuticals issued a public procurement order which includes local content requirements ranging from 25 to 40 percent on various high-value medtech, such as implants.14 Taken in sum, these policies may place U.S. firms at a competitive disadvantage, as they are the leading suppliers of these high-end devices to India’s market (Torsekar, 2017).

Beyond the imposition of NTM’s India has also raised tariffs on medtech during 2016 in an effort to further dampen the country’s import dependence. Medtech tariffs increased from 5 percent to 7.5 percent, with the list of medtech including pacemakers, coronary stents and stent grafts, surgical equipment. In addition, by placing higher tariffs on finished medtech, as opposed to intermediate goods and parts (which are used in the production of finished goods), these policies are expected to further advantage domestic producers at the expense of foreign manufacturers (USTR, 2018, p. 225). While these measures don’t necessarily add to the complexity or extend time to market, it should be noted that policies that benefit local producers at the expense of foreign producers would likely discourage U.S. exports.

#### 3.3 Brazil

##### 3.3.1 Market Overview

Brazil is the largest medical device market in Latin America and was valued at $4.7 billion in 2016 (Emergo, 2017d). During the past decade, Brazil remained a top 15 destination market for exports of advanced medtech from the United States, though a recent economic recession has translated into declining exports for the past five years; according to GTIS (2018), U.S. exports of advanced medtech to Brazil declined by 17 percent during 2012–17 to$1.1 billion. However, the 3 percent expansion of U.S. exports of these products to Brazil’s advanced medtech market during 2016–17 suggests a reversal of the previous five-year trend.

The domestic market for disposables and other low-end hospital equipment is largely supplied by the domestic industry, presenting opportunities for U.S. manufacturers to supply the high-end of the market. The demand for these devices will likely grow as rising incomes in the urban south of the country translate into the emergence of non-communicable diseases (e.g. cardiovascular disease and cancer) which account for nearly three-quarters of deaths in the country (EIU, 2018e; WHO, 2014). As a result, Brazilian imports of diagnostic equipment, ranging from electrocardiographs, MRI machines are all projected to experience the double-digit import growth in both value and quantity in the near future (Roy, 2017).

##### 3.3.2 Regulatory Overview

The process of registering a medical device for sale in Brazil ranked among the world’s most complex, due largely to the frequently changing regulations and a relatively under-resourced Brazilian Health Surveillance Agency (ANVISA) (Emergo, 2017e; Dun, 2015). Brazil regulatory regime ranks among the world’s highest in both complexity and cost (Emergo, 2017a). There are several key measures associated with complying with the country’s medtech regulations. First, exporters need to appoint a Brazilian Registration Holder who acts as a regulatory liaison through the process and obtain a license to sell medtech within the country. This process alone can average more than one-year for the highest risk devices.15 All documents, including product identification, labeling, instructions for use of the product, and legal documentation, device descriptions, and manufacturing stages of the devices, provided during the process must be translated into Portuguese, which can be lengthy.

Next, foreign companies are required to comply with a local quality management system requirement called the Brazilian Good Manufacturing Practice (BGMP) for all devices. However, the most risky devices require an audit by Brazil’s National Health Surveillance Agency (ANVISA),16 and producers need to submit clinical data for regulatory compliance which can be a lengthy process (Emergo, 2017d; USTR, 2016, p. 54). For most implantable devices, the data that is submitted must also include pricing comparisons to other markets where the device is sold, along with pricing comparisons of analogous products that are being sold in Brazil. Further, with regard to testing requirements, Brazil applies a mandatory electrical safety testing and certification standard to selected devices. These requirements have raised concerns from U.S. industry representatives within the past decade as being excessive and unrelated to verifying the product safety (Johnson, 2008, p. 19).17 Reportedly, industry representatives have suggested that these challenges have been less of a problem in recent years.18

Delays in the overall approval process have been compounded by the lack of ANVISA federal inspectors to implement the program; during a 2012 meeting to discuss international TBTs, the EU argued that the timelines for registering medical devices in Brazil were too long, with delays being driven by the failure of Brazilian inspectors to conduct factory inspections of foreign producers in a timely fashion (WTO 2012).19 In particular, the final stages of review can result in significant delays, owing to the backlog of devices under review; the most risky devices can range from 8-15 months, or extend beyond 4 years (Emergo, 2017d). Moreover, backlogs in regulatory inspection procedures have also translated into customs delays for admitting imported medtech into Brazil. For example, in 2016 the time to import medical technology was estimated to be one of the highest in Latin America (Advamed, 2016). U.S. manufacturers have reportedly complained about the extensive documentation, which Brazil requires to import medtech (USTR, 2018, p. 67); the peak time for ANVISA to issue an import license for medtech in 2016 was 60 business days.20 Although ANVISA has recently been able to reduce this delay to a 15 business-day average, they are still not consistently meeting their target of 3-5 days.21 Notably, industry representatives report that Brazil’s medtech market is more accessible to U.S. manufacturers than China’s and India’s, respectively, despite these delays.22

### 4 Gravity Estimation of Competitiveness

To evaluate import competitiveness for medtech, we employ a gravity modeling approach that estimates the factors that determine trading patterns. The modeling approach identifies and ranks countries based on their global competitiveness as importers given their respective GDPs and relationships such as distance, common languages, and trade agreements with exporters. Countries that import large volumes of medtech given these factors are considered highly competitive while those import relatively little are considered uncompetitive. Using these measures of competitiveness, we calculate an ad valorem equivalent (AVE) trade cost that explains each country’s import activity relative to the most competitive country. To better explain the relative competitiveness of each importer and the implied AVE, we conduct a second estimation that relates the competitiveness of each country with factors that might explain these trends. The results suggest that barriers to importation in the form of long or complicated medtech approval processes significantly decrease the competitiveness of importers.

#### 4.1 Data

 $Xijs Y j = exp ∑ kaskz ijsk + ν is + μjs + ϵijs .$ (1)
Trade values from exporter $j$ to importer $i$ in product $s$ are denoted by $Xijs$. Unlike in many contemporary gravity models, the importing country’s GDP, which is reflective of market demand, is moved to the left hand side of the equation prior to estimation so as to remove it from the importer fixed effect. Doing so improves the connection between the estimated fixed effects and unobserved import restrictions. On the right hand side of the equation, $zk$ denotes a collection of conventional gravity variables as described above, $νis$ denotes an exporter fixed effect, and $μjs$ denotes an importer fixed effect.