Medical devices are not just simple commodities. They are the result of decades of research and development and scientific advancement, and an increasingly important sector for future economic development. Not simply because of the imminent demographic changes, the medical technology industry is one of the innovative and research intensive sectors that creates high- skilled jobs within its own sector and those sectors that use them.
Yet hip implants or cardiovascular equipment cannot be sold like most commercial goods. The marketing conditions for medical devices are to a great extent determined by public health pol- icies and regulations. The inherent policy dilemma is to establish a balance between promoting innovation and access to new devices while ensuring product safety.
Due to different political histories and regulatory traditions, countries have different regulatory regimes for the medical devices industry. As a result, duplicate testing of products, including du- plication of clinical trials, as well as non-value adding administrative requirements are common. Such procedures may delay access to certain devices, lead to higher prices for patients and are detrimental to the sustainability of healthcare systems. In practice, the range of available medical technologies differs between the EU and the US.
Previous attempts to address regulatory divergences in the field of medical devices have basically been fruitless. International regulatory coordination has progressed slowly and existing interna- tional agreements have very modest scopes. Products still have to go through duplicate clinical tests even though they have already been authorised in other countries.
This is where the Transatlantic Trade and Investment Partnership (TTIP) comes into the picture. Aiming to promote economic growth and jobs, one of the original key objectives of TTIP is to foster ‘enhanced compatibility of regulations and standards’.1
There is no doubt that the medical devices sector should be a key sector within TTIP. To begin, Europe, the US and Japan are highly dominant in both production and usage for medical devic- es, and economic benefits could be derived from further integrating the markets. Although tariffs are already relatively low, even if further progress needs to be made on some categories of devices, the next step must be to address the regulatory discrepancies. Meanwhile, it seems unfeasible to expect regulatory harmonisation to take place elsewhere – be it at multilateral level amongst the 159 members in the World Trade Organisation (WTO), or other forums. Considering the importance and complexity involved, any meaningful approach to regulatory issues in the sector are only likely to take place in bilateral agreements with like-minded economies of similar im- portance and level of development.
Additionally, a substantial amount of engagement from policy-makers, industry and regulators will be needed to achieve any results, which means that any deal on medical devices would have to be part of a bigger grand bargain with other sectors. Previous experiences in regulator-to-reg- ulator dialogue show that it is unlikely that a standalone agreement would mobilise the necessary political capital to achieve any meaningful progress in the sector. Meanwhile comprehensive economic integration is already taking place elsewhere, with or without Europe – most notably through Trans-Pacific Partnership (TPP).
Against this backdrop, this policy brief analyses possible ways of addressing regulations on med- ical devices in TTIP. First, the paper analyses the current market structure and past attempts of integrating the markets. Second, it explores possible ways of dealing with medical devices in TTIP, taking the defining features of both regulatory systems into consideration.
A STRONG CASE FOR ADDRESSING MEDICAL DEVICES IN TTIP
The economic rationale behind further market integration in the medical devices sector is underpinned by the dominance of the US and Europe on the world market and their shared export interests. The United States, Europe and Japan together represent almost 90 percent of global production and consumption of medical devices. Out of the total worldwide sales, amounting to approximately $300 billion, the US accounted for 40%, the EU for 30% and Japan just above 10%. In size, the European medical technology market is estimated at $100 billion. This dominance of the US and European producers in the global market strengthens the case for further market integration.
The medical devices industries in the EU and the US are organised slightly differently. Broadly speaking, the US industry consists of larger corporations, such as for example Johnson & Johnson, GE Healthcare, Medtronic, Baxter, Cardinal Health, Tyco Healthcare, Boston Scientific, Stryker, and others. These multinationals are very competitive in the segment and trade in highly innovative products, such as cardiovascular and orthopaedic devices. They invest large amounts to stay in the forefront of developing new advanced technologies, and US firms reinvest above 10 percent of their sales into R&D, while their European competitors spend merely 6 percent of their sales on R&D.
Also, thanks of the competitive business environment of their home market, US firms tend to have better access to capital and funding. But spending resources on R&D is not a self-fulfilling goal. The rate of return on the invested capital is essential in order to maintain a competitive edge. But even in this regard, the US medical devices industry outperforms the others. US labour productivity in medical devices is extremely high, over 70% higher than the EU firms in the sector. In effect, any capital invested the US medical devices sector generate significantly higher output compared to Europe.
This is partly due to the fact that the medical technology industry in Europe is fragmented, with a large number of small- and medium sized companies. In fact, 95% of the almost 25,000 European-based medical technology companies are SMEs with less than 250 employees. This does not only affect their ability to attract capital, but also affects the way in which they operate and trade: Few European-based companies have any significant market presence outside their home market, with the exception of multinationals like Siemens, Philips and B. Braun. SMEs in general have lower capacity to surmount non-tariff barriers (NTBs) and adapt to different regulatory systems in potential export markets.
Also, SMEs are less able to build and capitalise on global supply chains in their production. With less ability to diversify their risks, EU firms are more vulnerable to e.g. restrictive reimbursement policies that have become permanent fixtures of through austerity programs of recent years.
In other words, the EU would expect high benefits from regulatory harmonisation.
In geographic terms, the medical devices industry is concentrated in certain European countries, with Germany, France, United Kingdom and Italy dominating. The relative importance of the medical devices per capita is also significant in Ireland, Switzerland and Sweden. A key additional factor in favour of addressing medical devices in TTIP is the high concentration of high-skilled jobs that the industry supports in Europe, 575,000 (including Norway and Switzerland). While Germany has the highest absolute number of employees in the med-tech sector in the EU, Ireland has the highest per capita employment. The US medical technology sector employs a similar number, 520,000 people.
In addition, many medical devices firms in the EU compete in the low-end of the market, with established products. These are volume-driven markets with slim profit margins, where competition from third markets are expected. It is generally easier for competitors to ‘build-around’ a patented product in the medical equipment sector in comparison with the pharmaceutical sector.
Given the barriers to entry are higher for sophisticated products due to high start-up costs, EU firms face difficulties in climbing higher up in the value chain.
Strong demand for medical devices
The demand for medical devices is high and likely to increase in view of future demographic changes. In 2010, OECD-countries spent 9.5% of their GDP on health care on an average. This represents a significant increase from 4% in the year 2000. The expenditures have increased in recent years due to demographic factors, as well as the development of technically sophisticated equipment, which is more expensive. However, following the economic crisis, expenditures have slowed down in relative terms or even decreased.
Medical devices accounted for 6.7% of total health care expenditures in the European Union in 2012, with the corresponding figure for the US at 4%, bearing in mind that the US spends more than any other country on health care – approximately 14% of GDP.
The demand side of the market is heavily affected by political decisions. This is due to the way in which the health care systems are being administered, particularly in Europe, where health care is a universal service provided and subsidised by the public systems. Health care authorities often have monopsony power, i.e. they are often the sole or the main purchasers of medical equipment. Consequently, reimbursement policies implemented by governments or private insurers have a decisive impact on the industry. Furthermore, authorities also control market entry though testing and premarketing authorisation procedures, resulting in unparalleled market control.
Trade in medical devices
Europe and the US are not only the world’s two largest producers, but also the largest traders. Together with Japan, they accounted for around 70% of world trade in medical technologies in 2012, estimated to almost $400 billion in total. Europe (including Switzerland and Norway) enjoy positive trade balances in the sector; $20 billion in 2012, more than a twofold increase since 2006, while the US trade surplus is just $7 billion. The US market is Europe’s largest export destination, receiving 41% of EU exports. No other market comes near the US in this regard, compared to EU exports to Japan (10%), China (9.5%), Russia (5.5%).
This importance is reciprocated – the US accounts for 65% of EU imports. Almost half of US exports in the sector is destinated to European markets, which are twice as important than the Asian markets put together. Other important exporters to Europe are China (10.5%) and Japan (7%). Amongst the EU Member States, Germany is by far the major trader amongst the European countries, followed by the Netherlands, Belgium, Switzerland, Ireland and France.[11
Against this background, it is clear that the EU and the US have a shared interest in promoting exports of medical devices to each other’s markets as well as to third country markets and emerging economies, in particular China with its rising healthcare system: the sales of US medical devices to China increased by over 20% between 2009 and 2010.
As stated in the onset, tariffs are arguably not the main trade barrier in the sector, compared to the regulatory divergences. Harmonisation between the EU and the US would promote sales and secure access to medical technologies, which would also incentivise third markets to adopt similar regulations and pave the way for lower costs to market and market access on a global scale.
Conversely, Europe’s position in the medical devices are likely to be lost if an ambitious outcome cannot be achieved. Considering the European industry organisation and revenue models in the medical technologies are, by large, dependent on economies of scale, the EU depends on TTIP more than ever and anyone else. It is also unlikely that other countries would engage Europe in liberalising the medical devices sector. For example, the EU and Japan recently launched negotiations on a FTA where non-tariff measures are the main hurdles to accessing Japan.
 USITC (2007)
 The European Medical Technology Industry in Figures. MedTech Europe, 2014
 USITC (2007)
 Eucomed (2013)
 USITC (2007)
 USITC (2007)
 Eucomed (2013)
 USITC (2007)
 USITC (2007)
 World Trade Daily (2011-07-21)
 MedTech Europe (2014)