WRITTEN QUESTION E-2358/02

by Charles Tannock (PPE-DE) to the Commission

(2 August 2002)

Subject: Korean shipbuilding subsidies and the Commission's failure to refer the matter to the WTO

In answer to Written Question E-0240/02(1), Commissioner Lamy addresses the issue of whether permitting shipbuilding subsidies within the EU as a response to similar practices in Korea would violate WTO rules. He does not, however, address the issue of whether such subsidies would violate the European Union's own internal competition requirements. Could the Commission indicate whether or not it believes that its proposals in this area in any way violate those requirements, whether they permit similar levels of subsidy in all Member States and what discretion it has in this regard consistent with the European Treaties? If the levels of proposed subsidy vary between Member States then which Member States would benefit the most?

The Commissioner argues for a European subsidy regime in the form of the proposed Temporary Defensive Mechanism on the grounds that WTO disputes procedures are lengthy and that the Union must show that it has the capacity of dissuasion if it wishes to arrive at an agreement with Korea, adding that the Temporary Defensive Mechanism could keep the pressure on Korean shipyards. The Commissioner also states that preparedness to start a WTO complaint and the Temporary

Defensive Mechanism cannot be disassociated as the latter cannot become effective until the Commission starts the WTO action against Korea. Is the Commission suggesting that a WTO dispute procedure cannot be initiated without an accompanying subsidy regime or that it would be inconsistent with WTO rules to introduce such a regime once a dispute procedure had been initiated? If not, then what is the justification for the Commission's refusal to initiate a WTO dispute procedure unless the Council first agrees to the Commission's Temporary Defensive Mechanism unless it is to ensure that only the Commission's current proposals for subsidy are accepted by the Council, and, if that is the case, how does the Commission defend itself from the charge that it is more interested in advantaging some Member States' shipbuilding industries against those of other Member States than in actually solving the dispute through the WTO?

(1) OJ C 229 E, 26.9.2002, p. 65.

Answer given by Mr. Lamy on behalf of the Commission

(8 October 2002)

The temporary defensive mechanism(1) (TDM) complies fully with the Community's internal competition requirements. Articles 87(3)(e) and 89 of the EC Treaty permit the Council, on a proposal by the Commission, acting by qualified majority and after consulting the Parliament, to specify certain categories of aid that may be considered as compatible with the common market. In the case of the TDM, these requirements have been met. Accordingly, there is no doubt that the TDM is compatible with the appropriate legal requirements.

If the Community starts World Trade Organisation (WTO) action against Korea, the Commission may authorise State aid up to a maximum of 6 % of contract value, subject to the conditions set out in Regulation (EC) No 1177/02. Member States wishing to grant aid under the TDM would be able to do so only in accordance with the notification and authorisation requirements, as laid down in the State Aid Procedural Regulation(2). The TDM is a clearly focused measure, that is limited in time (it will expire on 31 March 2004) and scope (it will authorise aid only in those sectors identified as suffering, material injury and serious prejudice caused by unfair Korean practices). Although the Commission cannot anticipate the levels of subsidies to be granted by individual Member States, it is clear that, if the TDM becomes effective, it would apply in a consistent way throughout the Community.

The linkage of the threat of WTO proceedings against Korea and the introduction of the TDM reflects political and strategic considerations rather than legal requirements. This so-called twin-track strategy does not mean that the Community lacks the right to initiate a WTO procedure against Korea without an accompanying subsidy regime nor that the TDM measures would be inconsistent with WTO rules once a dispute has been initiated. Indeed, the recourse by the Community to Dispute Settlement can in no way be seen as limiting the Community's normal rights and obligations under the WTO Agreements, including the right to adopt permitted policy measures such as the granting of aid. In the Commission's view, the TDM is fully compatible with WTO rules. Subsidies, provided that they are not prohibited and are not demonstrated to cause adverse effects, are legitimate national policy instruments, so far as the WTO is concerned.

The TDM should encourage the conclusion of a mutual satisfactory solution, which would avoid the reintroduction of state aids in the Community shipbuilding industry. However, were the forthcoming negotiations to fail to produce a successful outcome by 30 September 2002, the Community will initiate dispute settlement proceedings against Korea under the Understanding on the Rules and Procedures for the Settlement of Disputes and other relevant WTO provisions and, at the same time, the TDM will enable the Community industry to receive temporary support while the case is heard.

(1) Council Regulation (EC) No 1177/2002 of 27 June 2002 concerning a temporary defensive mechanism to shipbuilding, OJ L 172, 2.7.2002.

(2) Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 88 (ex Article 93) of the EC Treaty, OJ L 83, 27.3.1999.