Union shipbuilders prepare to set sail on subsidy-free seas

Date: 04/01/01

By Bruce Barnard

EUROPEAN shipbuilders are entering uncharted waters as they trawl for orders without the aid of subsidies for the first time since the 1980s.

The European Commission is also moving into new territory as it pursues an in-depth investigation into South Korean shipbuilding practices which could end up at the World Trade Organisation later this year.

The Commission's decision not to renew operating subsidies, worth up to 9% of the contract price of a ship, beyond the 31 December 2000 cut-off date means European shipbuilding has lost its status as a special industry which needs protection to survive in the world market. Subsidies, introduced to bridge the price gap between European and Asian yards, were once as high as 23% and were often bloated by under-the-counter handouts.

The Union executive has ignored claims by the industry, supported by several member states including Germany and France, that some vulnerable yards will go bankrupt because subsidies are needed to combat the unfair tactics of their South Korean rivals. The European shipbuilders' official complaint against South Korea last October was seen as a none-too-subtle attempt to win a stay of execution for subsidies.

The Commission's action - and the half-hearted attempt by EU governments to change its mind - underscore a sea- change in the Union's industrial policy over the past decade. Even a couple of years ago, the executive probably would have buckled under the pressure from EU capitals and cited "unfair" competition from Korea to justify subsidies for yet another year.

True, the Commission's hand was strengthened by the fact that shipbuilding is on a roll, with most yards in Europe and Asia fully booked for the next two years. With freight rates close to 30-year highs and world trade growing faster than expected, owners are spending record sums on new ships. Orders for container vessels soared to €11.65 billion in the first ten months of the year from €7.25 billion in the same period in 1999, while the value of contracts for tankers rose from €5.5 billion to 10.75 billion euro, according to London-based Clarkson Research Studies.

Europe's shipbuilding industry has stabilised after shrinking for the past three decades. Together, the Union plus Norway had 16% of the world market in tonnage terms in 1999 compared with roughly 40% each for Japan and South Korea. But measured by the value of contracts and employment, the gap between Europe and its Asian rivals is significantly narrower.

Handouts to Europe's shipbuilders increased from €347 million in 1997 to €538 million in 1998 - equivalent to €28,000 for each worker in the industry - according to the latest figures. Yet European yards completely dominate some sectors, especially cruise ships, where they have staved off a challenge from Japan and South Korea.

A few days after industry ministers debated the 'crisis' in the sector last December, France's Chantiers de l'Atlantique signed a contract with Japanese-owned Crystal Cruises for a 540-cabin luxury cruise ship worth an estimated 390 million euro, taking its total orderbook to 13 ships, including the Queen Mary 2.

While the Commission rejected the yards' call for the subsidies to be rolled over into 2001, it agreed that their complaint against the Koreans had merit. It is investigating whether practices such as export guarantees, debt forgiveness, export financing, special tax concessions and debt-for-equity swaps are in breach of Seoul's obligations under WTO rules.

The probe is taking place in an atmosphere fraught with drama as Korea consolidates its position as the world's top shipbuilding nation. Orders soared by 168% in the first nine months of 2000, boosting Korea's world market share from 40% to more than 51% and that could rise higher this year as a competitive won/yen exchange rate takes orders away from Japanese yards. That probably explains why Tokyo has publicly pledged its support for the EU in its battle with Korea.

Seoul is playing for high stakes because shipbuilding is a much more important industry in Korea than in Japan or Europe, where it is a fringe activity, and profits from the shipyards are providing urgent relief to the financially ailing giant chaebols which own them. As a result, both sides want to prevent the dispute spiralling out of control.

But time is running out for a settlement. The Commission wants to wrap up its investigation in the next three months so it can present a report to member states by April. Trade Commissioner Pascal Lamy has set a 1 May deadline for reaching an agreement with Seoul or filing a complaint with the WTO.

The Union executive has scored a moral victory by srcapping operating subsidies which Seoul claims has allowed EU yards to "cheat". But it has kept open the option of temporarily reinstating the aid regime, on a selective basis, if there is no breakthrough in the talks with the Koreans.

The yards say the Commission should have kept subsidies in place until it had completed its investigation, claiming it will be very difficult to win orders while the talks are under way. They also fear the ending of subsidies will allow the Koreans to break into new markets, including cruise ships.

There is a danger that sectoral aid could return via the backdoor. The Commission has suggested that member states should overhaul rules covering subsidies for research and development, innovation and regional investment to make it easier for shipyards to apply, although some observers fear this would be an open invitation for EU governments to bend the rules. British trade union officials claim that it is already standard practice in certain member states, especially Italy. Shipyard subsidies could yet return to haunt the Commission.

European shipbuilders are entering uncharted waters as they trawl for orders without the aid of subsidies for the first time since the 1980s.