EU plots new line on ship aid

Date: 17/04/1997

By Bruce Barnard

THE EU and Japan are considering a go-it-alone deal to outlaw shipbuilding subsidies if the United States walks away from a global accord.

This is one of the options being contemplated amid mounting doubts about Washington's ability to secure congressional approval for the landmark deal struck in the Organisation for Economic Cooperation and Development (OECD).

European Commission officials will brief Union industry ministers in Luxembourg next week on how to respond to a likely congressional rebuff which would sink an accord that took seven years to pin down.

Ironically, the agenda of the ministerial meeting is topped by a vote on planned subsidies totalling around 1.8 billion ecu for shipbuilders in Germany, Spain and Greece. Member states are expected to approve the subsidies as they have been given a clean bill of health by Competition Commissioner Karel van Miert.

This has been seized on by US Trade Representative Charlene Barshefsky, who claims the hand-outs raise a question mark over the Union's commitment to the OECD deal.

But Van Miert is not going soft on shipbuilding. The Commission will call for a radical revamp of the EU's shipbuilding subsidy system if the OECD deal collapses. The most far-reaching suggestion is to subject yard subsidies to the 'one time, last time' rule covering hand-outs to airlines.

Time is fast running out to salvage the OECD accord, which has already been ratified by the EU, Japan, South Korea and Norway, with senior OECD officials warning privately that the US has until September to convince its partners that it can overcome congressional opposition.

EU officials believe that the agreement can survive if its implementation is delayed until January 1999, giving defence-oriented US shipyards a grace period to receive subsidies to ease the post-Cold War switch to merchant shipbuilding.

This would meet a key demand of opponents of the agreement in Congress who want a three-year extension of the US Title XI Ship Loan Guarantee Programme beyond the start of the OECD agreement, which was originally planned for 1996.

This government-supported programme guarantees 87.5&percent; of a shipbuilding loan for up to 25 years, while the OECD accord would cut this to 80&percent; over 12 years.

While the EU fears that delaying the accord until 1999 would send the wrong signal to the market, it has very little option if it wants the Americans on board.

But the Union and other signatories are beginning to wonder in private about breaking away from the US, which has a minuscule 1&percent; share of the world shipbuilding market.

At a recent meeting in Paris, the OECD warned that failure by the US to ratify the agreement would have “severe and long-lasting political and economic consequences” for the industry.

The biggest loser, according to OECD officials, would be the US itself, which pushed for the agreement in the 1980s in a bid to help its yards compete against heavily subsidised European and Japanese shipbuilders.

But a no-subsidy deal without the US would be fraught with problems because there is no guarantee that the other signatories or Union member states themselves would back such a radical approach.

EU sources suggest Japan, home to the world's biggest shipbuilders, could be won over, but South Korea, its closest challenger, is unlikely to proceed without the US. Failure to secure Seoul's support would seriously weaken any subsidy agreement as South Korean yards will be hungry for orders to match the planned doubling of their building capacity by 2000.

A go-it alone deal would also face hurdles within the EU, which is still split along north-south lines, with Denmark pressing for a complete ban on hand-outs while France - which fought the OECD deal right up to the very end - is arguing for a softer approach to limit job losses.

If the OECD accord flops, the EU could face another damaging internal row as it decides whether to extend its current subsidy regime - capping hand-outs at 9&percent; of the value of a contract - beyond the end of 1997.

Meanwhile, the OECD accord and the EU's subsidy system have been overtaken by market developments, particularly the weakening of the deutschemark and the yen against the dollar. The Korean won has also lost ground against the US currency, but it has hardened against the yen.

Even more important, budget-conscious EU governments are tiring of pumping money into no-hope yards.