Tensions rise as aid deal for shipyards faces collapse

Date: 20/02/1997

By Bruce Barnard

EUROPEAN Union governments are approaching the imminent collapse of an international accord to outlaw shipbuilding subsidies with mixed feelings.

For some it would provide a convenient excuse to justify bigger hand-outs to EU yards, while others are warning of a ruinous subsidy war which would only benefit Asian shipbuilders.

The EU, Japan, South Korea and Norway will learn the fate of the global accord at a meeting at the headquarters of the Organisation for Economic Cooperation and Development (OECD) in Paris on 11 March - the deadline for the United States to say whether it will ratify the agreement.

Europe's credibility has been undermined in the run-up to the Paris meeting by hardening evidence that some member states are flouting current Union rules which cap subsidies at 9&percent; of a vessel's contract value.

Failure to secure US ratification of the deal, which was originally intended to come into force in January 1996, would exacerbate transatlantic tensions at a time when Brussels and Washington are at loggerheads over the anti-Cuba Helms Burton Act.

The impasse over the OECD accord has a wider significance for EU trade policy-makers because it has highlighted the fact that deals made with the Clinton Administration will increasingly be held hostage by Congress.

The House of Representatives voted for the agreement with amendments last year, but it never made it to the Senate.

The OECD deal, struck after seven years of tortuous negotiations, marked a breakthrough because it would have created a genuinely open market for ships by banning subsidies in countries accounting for more than 70&percent; of global output.

But the US, which promoted the agreement back in the Eighties to allow its yards to compete against heavily subsidised European and Asian rivals, looks unlikely to meet the March deadline.

The Clinton Administration is committed to ratification, but faces a hostile Republican majority in Congress which threatens to block the accord unless the White House accepts key amendments.

But that is unacceptable to the Union as well as Japan and South Korea, who all ratified the agreement in 1996.

EU officials who had pinned their hopes on a return to Democrat control of the house in last November's elections are now resigned to a US 'no' at the March meeting unless there is an 11th hour breakthrough in Washington.

And that is looking increasingly unlikely as the opponents of the accord dig their heels in, with Senate majority leader Trent Lott supporting the threat to block the deal unless President Clinton accepts amendments to ease the ban on subsidies to American shipbuilders.

Lott complains that while the OECD arrangement rules out aid to help US yards make the transition from the naval market to commercial shipbuilding, it gives “special deals, exemptions and transition programmes worth billions of dollars for Belgium, Portugal, Spain, Germany, France and South Korea”.

The US industry itself is deeply divided, with the American Shipbuilding Association, which represents the country's six largest yards, backing the OECD deal while the Shipbuilders' Council, representing the smaller yards, is calling for changes.

Failure to ratify the accord could have serious consequences in the Union because it risks triggering a new round of subsidies.

The agreement negotiated by the European Commission did not enjoy the full support of the member states. France, in fact, tried to block it at the last minute and is not over-concerned at its probable demise.

With unemployment scaling post-war highs, European governments are under intense pressure to subsidise labour-intensive, heavily unionised shipyards which are usually located in depressed regions.

French Prime Minister Alain Juppé was lobbied recently to save Chantiers de l'Atlantique, the Le Havre yard, from a looming bankruptcy brought on by the late delivery of a 150-million-ecu contract for three 37,000-gross-ton chemicals carriers. The Portuguese government was also called in to provide a loan guarantee of some 20 million ecu for the financial restructuring of ship repairer Lisnave.

Meanwhile, the Commission has widened its investigation into aid for Spain's state-owned Astilleros Espanoles and the sale by the Greek government of a 49&percent; stake in the Hellenic shipyards, and is examining a request by east German yards for hundreds of millions of ecu of state aid.

The haggling between EU governments and the Commission is providing useful ammunition for American opponents of the OECD deal who claim that the European industry is still awash with subsidies, despite Brussels' call for an end to hand-outs. Much was made in the US of the Bremer Vulkan affair, involving the 'loss' of hundreds of millions of ecu in subsidies.

Governments find themselves squeezed between the Commission and the shipyard unions.

Thus Spain is pressing Astilleros Espanoles workers to adopt more flexible working practices and offering Brussels a 12.5&percent; cut in the company's capacity to gain approval for a 540-million-ecu state hand-out.

The dynamics of the shipbuilding market have changed since the OECD accord was signed in July 1994, with the 40&percent; plunge in the value of the yen against the dollar providing a massive boost to the world's leading shipbuilding nation.

Moreover, the success of Korean workers in resisting moves by the Seoul government to tamper with their 'jobs for life' labour contracts has dashed any lingering hopes in Brussels that the world's second biggest shipbuilding country will abandon plans to double its capacity by 2000. South Korean yards need more work simply to keep employees occupied.

Conversely, the strength of the dollar has cooled the enthusiasm of American yards to compete unaided in the world market.

Currency movements have also had an impact on the European industry. The 20&percent; slide of the deutschemark against the dollar since the spring of 1995 has sharpened the competitiveness of the German yards, while the surge in the Finnish markka and the Italian lira has made life more difficult for the world's premier builders of luxury cruise liners.