Opinion on the proposal for a Council Regulation (EC) on aid to shipbuilding

(96/C 39/20)

On 20 September 1995 the Council decided to consult the Economic and Social Committee, under Article 198 of the Treaty establishing the European Community, on the above-mentioned proposal.

The Section for Industry, Commerce, Crafts and Services, which was responsible for preparing the Committee's work on the subject, adopted its Opinion on 7 November 1995. The Rapporteur was Mr Simpson.

At its 330th Plenary Session (meeting of 23 November 1995), the Economic and Social Committee adopted the following Opinion unanimously.

1. Introduction

1.1. For many years, the shipbuilding industry in western Europe has faced very difficult trading conditions. The share of world production on the European Union (of 15 Member States) has fallen from 37 % in 1976 to under 25 % in 1993 (). In the same period the market share of production in Japan fluctuated slightly but remained above 37 % and that of Korea rose from under 2 % to nearly 15 %.

1.2. In the European Union (of 12) employment in the construction of new vessels, excluding military vessels, fell from over 208 000 in 1975 to under 69 000 in 1993.

1.3. During the last two decades the European Commission has played a leading role in the development of Community-wide policies in an attempt to balance the competing pressures of:

- a need to rationalize capacity in the EU in an orderly manner to reduce the degree of excess capacity;

- attempts by the Governments of Member States to sustain shipbuilding activity by providing subsidies to offset the losses caused by the differences between contract prices and the costs of production;

- enhanced and allegedly unfair competition from shipbuilders outside the EU, particularly in Japan, and more recently, Korea;

- distortions in pricing as a result of a combination of excess capacity, varying direct and indirect subsidies, and discretionary finance facilities;

- protectionist measures, linked to the use of domestically built and repaired ships, such as exist in the package of 'Jones Act' legislation in the United States.

1.4. Within the European Union, the most conspicuous action has been the introduction of a series of Directives limiting State aid to shipbuilding. These Directives have been refined over the years. The early Directives were designed to assist the shipbuilding industry in the EU to adapt to the increasing competition in world markets. Up to, and including, the Fifth Directive, which applied until the end of 1985, the policy was to encourage reductions in shipbuilding capacity in Europe as a means of reducing the problems caused by the existence of excess capacity. In the absence of a similar policy in other major shipbuilding countries, and in the face of expansion elsewhere, this policy was largely ineffective in restoring balance to the market, although it possibly reduced the scale of losses to be supported by Member States.

1.5. The Sixth and Seventh Directives reflected a change of policy. Instead of linking financial support to steps which encouraged rationalisation and restructuring of capacity to alleviate the problems, Member States were permitted to offer financial support on a scale which was estimated to meet a part of the difference between European costs and prices being quoted by other builders on world markets. Recently the Seventh Directive was extended, late in 1994, for a further year, to the end of December 1995 (). This Directive imposes a ceiling that is common throughout the EU on the aid which Member States may provide in support of shipyard production. The current ceiling is 9 % of the building cost. This ceiling is intended to cover the value of all production aid, by whatever means it is provided.

1.6. The Economic and Social Committee endorsed the extension of this Directive to the end of 1995 ().

1.7. A critical assumption, made at the time of this decision, was that a new international framework for aid to shipbuilding would be agreed and ratified in time to be implemented from 1 January 1996.

1.8. The Commission proposal to the Council which is the subject of this Opinion reflects the new international Agreement concluded within the framework of the OECD.

1.9. The ESC endorses the underlying principles which have lead to this Agreement and supports the Commission in the conclusion that a competitive shipbuilding industry remains of vital interest to the Community and will contribute to its economic and social development. Indeed the Committee believes that the industry is of strategic importance to the Community.

2. The OECD agreement

2.1. The main provisions of the Agreement reached under the auspices of the OECD are:

a)

all existing measures or practices which are inconsistent with normal competitive conditions in the commercial shipbuilding and repair industry will be eliminated;

b)

no new measures of support may be introduced;

c)

procedures will be introduced to penalize shipbuilders which sell commercial ships at less than their normal value and thus disrupt other shipbuilders, i.e. an anti-dumping provision.

2.2. On behalf of the EU, the Commission has negotiated as a party to the OECD Agreement. Now, to fulfil its international obligations, the Commission is proposing to introduce two instruments.

2.3. The first is the proposed Regulation on the control of financial support to firms in the industry, discussed in this Opinion. The second, yet to be debated by the Economic and Social Committee, will specifically relate to the detailed anti-dumping measures. The Committee would have preferred to examine both draft Regulations at the same time but the second was not available.

2.4. Whilst there are many complex questions about the future of the shipbuilding industry within the EU, some of which are debated later in this Opinion, none of these should detract from the major achievements which should be obtained as a result of the OECD Agreement.

2.5. The principle of a world-wide shipbuilding industry operating under normal commercial criteria, without significant subsidies specific to the industry, is supported by the Committee. However, as a later paragraph will confirm, this principle must be subject to an understanding, within the EU and with other countries, of the practical implications as they apply to the difference between specific subsidies and general national or regional aids to all industry, including shipbuilding.

2.6. The principle of an effective anti-dumping mechanism is also supported.

2.7. These two principles are, of course, interdependent.

3. General observations

3.1. The Committee has a number of concerns about the introduction of the new Regulation.

3.1.1. The first concern is that neither the draft Regulation, nor the Agreement made under the auspices of the OECD, make an explicit provision for a possible delay in the ratification of the Agreement by any of the major parties. The Committee recommends that the Commission should be ready to introduce a further short-term extension of the Seventh Directive if there is a delay in ratification by all signatories. If any of the other parties to the OECD agreement should fail to ratify the agreement before the end of 1995, then it would be unacceptable if shipbuilders within the EU were obliged to operate without support, at least on the level permitted by the Seventh Directive, whilst their competitors continued to function under the existing arrangements.

3.1.2. Another concern is the absence of any proposal to prevent or deter countries, which are not signatories to the OECD Agreement, from a policy of financial support for shipbuilding which would distort world markets. The best answer is that all shipbuilders should be brought within the scope of the Agreement. However, a number of significant shipbuilding countries are expected to be outside the direct impact of the OECD Agreement. The Parties to the OECD Agreement might, for example, have introduced a power to exclude ships, built in those countries with financial subsidies not allowed by the Agreement, from normal commercial trade in the ports of countries which accepted the Agreement. The absence of any sanctions is a weakness in the Agreement. The Committee stresses the need for the Commission to consider the methods by which sanctions might be introduced.

3.1.3. The Committee hopes that the OECD Agreement will be extended to cover all shipbuilding countries. It notes the interest, for example, of countries in Eastern Europe such as Poland and the Ukraine. Whilst the extension to include other countries is desirable, it should be without undue derogations which would invalidate the discipline of the Agreement.

3.1.4. If the Agreement comes into effect on 1 January 1996, and no contracts signed after that date can receive financial support specific to shipbuilding, other than the clearly defined export and domestic credits, there will be a period of years in which the effect of policies in the recent past carries an advantage into the future. For example, existing contracts (including those brought forward to be signed before the end of 1995) will be completed on terms originally negotiated which include financial support.

3.1.5. Even more significantly, existing shipbuilders which have benefited from capital support in the development of their infrastructure will have a temporary advantage.

3.1.6. Whilst the effects of a generous capital endowment would be difficult to measure and offset, they will diminish over time. The same cannot be said for the potentially recurrent benefits which accrue to vertically integrated organizations which purchase raw materials, particularly steel or engineering products, from related or subsidiary companies in the same group. Advantageous internal transfer pricing would, conceptually, fall within the provisions to prevent injurious pricing. In practice, this will be difficult for others to prove and convert into enforcement measures.

3.1.7. In the past some European shipbuilders have complained that the Commission has been less than forceful in the execution of its monitoring of the finances of shipbuilding within the EU. As part of the implementation of the new Regulation, the Committee considers that the Commission should increase the resources devoted to monitoring its implementation both within and outside the EU.

3.1.8. If the Agreement does not become effective on 1 January 1996 then the Committee recommends that the requirement that orders qualifying for aid under the 7th Directive be completed before 31 December 1998, should be amended to allow 3 years from the date on which the Regulation becomes effective.

3.2. Under the terms of the OECD Agreement, some forms of financial support continue to be permitted. However, these are carefully defined to prevent open-ended operational subsidies.

3.2.1. The permitted circumstances in which financial support may be introduced, or continue, are:

a)

aid for research and development;

b)

social aid related to closures;

c)

export credits for ships, as specified in the OECD understanding;

d)

domestic credits, under equivalent terms and conditions.

3.2.2. Since aid for research and development would be capable of different interpretations, the Committee notes that the types of work, and the scale of permitted assistance, have been carefully defined. In theory, the distinctions are useful. In practice, there may be scope for abuse.

3.2.3. The procedures for notification of proposals, and expenditure commitments, must be adequate to provide an acceptable means of international supervision. To reassure interested parties, notification of the purpose and scale of such payments should be followed by early publication of the details. The Commission should ensure that this information is collected from each country covered by the OECD agreement, verified by audit checks, and published on an annual basis, without undue delay.

3.2.4. This is in addition to the requirement to publish the results of any research undertaken.

3.3. The Committee notes that the current agreed restructuring schemes in Belgium, Portugal and Spain will be permitted to continue until the end of 1997, for Belgium, and the end of 1998 for the others.

3.3.1. The Regulation does not affect the very comprehensive aid already agreed and implemented for shipbuilders in (the former) East Germany which has helped to make these shipbuilders better able to compete in the new conditions.

3.3.2. Whilst an international agreement on policy for the shipbuilding industry is a welcome development, the Committee regrets that the full spirit of the OECD Agreement is not accepted by the Government of the United States. The Title XI subsidy scheme, available to US shipbuilders, is an important indirect subsidy . The financing package available under Title XI will, however, come down to 12 years in line with the Agreement. The exclusion from the OECD Agreement of domestic build requirements in the USA, under the Jones Act, as it relates to coastwise (or internal) trade is more than just a regrettable weakness.

3.3.3. Although a major problem is being caused by the rapid expansion of shipbuilding capacity in Korea, which further imbalances the relationship between supply capacity and demand in this industry, the restructuring of Daewoo and KSEC is to continue, as described to the OECD (). This provision contrasts, unfavourably, with the constraints on capacity which are component parts of schemes for restructuring within the EU. The Committee remains to be convinced that the imbalance between supply and demand, which is the fundamental cause of the crisis in the industry, can be corrected without some greater restraint on Korea's new and planned capacity increases.

3.3.3.1. The Commission acknowledges this problem by promising to continue 'with its efforts to exert the necessary pressure, both on a bilateral and on a multilateral level, in order to find a solution ...'. It is major weakness that this was not achieved as part of the OECD negotiations.

3.4. An export credits scheme, approved by OECD, is to remain and, in parallel, a similar scheme is allowed for domestic orders. It is to be more tightly defined than the former scheme. However, the scheme may need to be policed carefully. In the past, the interest rates used to determine export credits and the facilities for currency swaps have been means of distorting the application of these credits. The Commission must ensure that the Commercial Interest Reference Rates (CIRR) are commonly defined and the possibility of concealed, or indirect, subsidies is removed. The mechanisms to define the CIRR and the operational parameters have not yet been agreed and should be put in place before the Agreement comes into force.

3.5. In an earlier paragraph (2.5) the Committee referred to the distinction between specific aid for shipbuilders and general aid schemes determined by national or regional conditions. The Committee appreciates that there needs to be a common understanding on the role of general aid schemes, whether fiscal or expenditure related.

3.5.1. Whilst it is possible to argue that all aid schemes of any kind should be removed, this would have the effect of making shipbuilding less competitive than, for example, other engineering industries. Also, it can be argued that it is difficult to define what would constitute a general aid (for example, lower social security contributions for young workers in an area). The Committee recommends that, subject to the usual safeguards under Articles 92 and 93 of the Treaty, the terms 'no specific aids' should mean that shipbuilding should have no aids which give it an advantage over other industries in the same geographic region.

3.5.2. The Committee has a concern that permission to use general aids represents a potential loop-hole which might be abused either within Member States, or in other countries. The impact of general aids on shipbuilding activities within and outside the EU should be closely monitored by the Commission.

4. Specific comments

4.1. One of the features of the shipping industry in the past two decades has been the trend to maintain vessels in service which might be thought to have reached the end of their useful working lives. Low freight rates have deterred owners from replacing older vessels.

4.2. Whilst a policy to encourage earlier scrapping of older vessels lies outside the OECD Agreement, and therefore from the Commission proposals, the Committee considers that, in an overall policy for shipbuilding, which amongst other things has regard to environmental and security issues, 'scrap and build' should be urgently considered as a means to increase demand, efficiency and competitiveness.

5. Injurious pricing

5.1. This Opinion has commented only on the terms of the new draft Regulation on aid to shipbuilding. Some of the most difficult and contentious issues arising from the OECD Agreement relate to the means of preventing, challenging and penalizing injurious pricing by shipbuilders. The implications for the EU will be developed in a further proposal from the Commission. The Committee has noted the contents of the OECD Agreement, particularly the measures proposed to define and assess the merits of allegations of injurious pricing. There is particular interest in the scale of penalties which may be imposed and their enforcement. For this Opinion, the important feature is a recognition that, without effective provisions on injurious pricing, much of the benefit of the new regime would be lost.

6. Conclusions

6.1. The Committee welcomes the moves to place the world-wide shipbuilding industry in a normal competitive environment without excessive State aid.

6.2. To achieve a more normal competitive environment, abnormal aids must be removed in all major sectors of the industry and in all countries which influence the world market for shipbuilders.

6.3. The OECD Agreement offers a prospect that fair competition will produce an industry with a better balance of supply and demand and willing to invest in innovative techniques. It also provides an opportunity to introduce better environmental and safety criteria into the industry.

6.4. The Committee is concerned that the draft Regulation does not contain adequate means to ensure that sanctions can be applied to ships, and shipbuilders, which are outside the scope of the OECD Agreement.

6.5. There are obvious concerns which still remain. Will the Agreement be comprehensive enough to influence most of the shipbuilding industry world wide? Will the Agreement be ratified by all the major parties, and in time to be enforced in 1996? Will the introduction of new capacity in Korea and South East Asia destabilize the position? Will the conversion of military vessel shipbuilders to supply normal commercial markets, in the USA, Russia and in other east European countries, further destabilize the position?

6.6. In these circumstances, the OECD Agreement may not be an adequate mechanism to cope with further changes. The Commission must, therefore, prepare its position for further developments.

6.7. The OECD Agreement represents an opportunity to develop a coherent policy with world-wide significance. It sets a precedent for this type of agreement. The Committee recommends that the Commission, in negotiations of this kind, should also take explicit account of the consequences, not just for the industry, but also the need to protect the environment and the maintenance of basic social conditions for citizens who will be affected.

6.8. As a step towards a more competitive and profitable shipbuilding sector within the European Union, and on a global basis, the Committee welcomes the Draft Regulation.

Done at Brussels, 23 November 1995.

The President

of the Economic and Social Committee

Carlos FERRER

() OJ No C 375, 30. 12. 1994, p. 2.

() Directive 90/684/EEC as amended by Directive 94/73/EC.

() OJ No C 397, 31. 12. 1994.

() As specified in OECD paper C/WP6(91)58.

APPENDIX to the Opinion of the Economic and Social Committee

The following text, which received at least a quarter of the votes cast for it to be maintained, was deleted from the Opinion:

'4.1. Article 1 of the draft Regulation defines the meaning of the terminology. Although the Regulation is to apply to 'self-propelled sea-going vessels' and this definition has been used on previous occasions, there may be a case to widen the definition by deleting the word 'self-propelled'. This would open the requirements to contracts to build vessels and floating fabrications used in oil and gas exploration and exploitation. For example, offshore production and storage vessels may become an important component of demand in the next few years.'

Result of the vote

For: 30, against: 46, abstentions: 18.