OPINION OF THE ECONOMIC AND SOCIAL COMMITTEE on the proposal for a Council Regulation (EC) on aid to shipbuilding
Date: 1995-11-23
Institutions: European Economic and Social Committee
Subjects: OECD, State aid, anti-dumping legislation, competition, shipbuilding













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51995AC1317

OPINION OF THE ECONOMIC AND SOCIAL COMMITTEE on the proposal for a Council Regulation (EC) on aid to shipbuilding  


Official Journal C 039 , 12/02/1996 P. 0102 





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. Introduction1.1. 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 agreement2.1. 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 observations3.1. 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 comments4.1. 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 pricing5.1. 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. Conclusions6.1. 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 Presidentof the Economic and Social CommitteeCarlos 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 CommitteeThe 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  voteFor: 30, against: 46, abstentions: 18.