Select Committee on European Scrutiny Second Report


COM(01) 219

COM(01) 401

Fourth Commission Report to the Council on the Situation in the World Shipbuilding Market.

Proposal for a Council Regulation concerning a Temporary Defensive Mechanism for Shipbuilding.

Legal base:
Department: Trade and Industry
Basis of consideration: (a) EM of 28 June 2001
(b) EM of 8 October 2001
Previous Committee Report: None
To be discussed in Council: (a) Already discussed on 14-15 May 2001
(b) December 2001
Committee's assessment: Politically important
Committee's decision: (Both) Cleared


28.1 The Commission is required under Article 12 of the EU Shipbuilding Regulation to present to the Council a regular monitoring report on the economic health of shipbuilding and to assess whether European shipyards are affected by anti-competitive practices of any kind. If it is established that injury is being caused to the industry by such practices the Commission is required, where appropriate, to propose to the Council measures to address the problem. A first report was submitted to the Council in November 1999.[70]

The documents

28.2 Document (a) provides an economic analysis of world shipbuilding for 2000.

28.3 The report indicates that orders for new ships in 2000 rose by 56% compared with 1999. However, despite this increase, the world market for merchant shipbuilding, as in previous years, was characterised by low prices and excess capacity. Korea, which attracted the larger part of the increase in new orders, consolidated its position as the world's largest shipbuilder, accounting for 35% of all world tonnage. It is the Commission's view that significant over-capacity in Korea is preventing a recovery of prices in the world market.

28.4 Overall, the market share for EU shipbuilding for 2000 remained stable owing to additional orders for cruise ships, for which there is no Far East competition. This benefited Germany, Italy, Finland and France, which produce cruise ships, but not the UK. In 2000, the world market share of EU yards was 18% by volume, or less than 10% when cruise ships are excluded.

28.5 Since publishing its third report on shipbuilding in November 2000, the Commission has carried out seven further detailed cost investigations for orders placed in Korean yards, bringing the number of investigations to 32. According to the Commission, none of the new contracts examined has been placed at an economically viable level, i.e. covering operating costs, profits and debt repayments. It is estimated that losses on these newly investigated orders are 14% on average, which compares to average losses of 16% for the previously investigated orders. One order placed with Hyundai for a ferry for Stena, for which EU yards are known to have tendered, is estimated to have been won with losses of 21%.

28.6 The report, and unfair Korean trading practices, was discussed at the 14/15 May 2001 meeting of the Industry/Energy Council. The Council strongly supported the Commission's intention to launch a World Trade Organisation (WTO) procedure against Korea if a negotiated solution could not be achieved by 30 June 2001.

28.7 Despite failing to reach such an agreement, the Commission has not initiated its WTO action. Instead the Commission has decided to link the launch of its WTO action to its proposal (Document (b)) for the re-introduction of temporary operating aid for container ships and product/chemical tankers, the sectors most affected by Korean low-pricing. In her Explanatory Memorandum of 8 October 2001, the Minister for Competition, Consumers and Markets at the Department of Trade and Industry (Miss Melanie Johnson) says:

    "Under the proposal, the subsidy would be limited to those market segments where it has been demonstrated that the EU shipbuilding industry has been considerably injured by unfair Korean trade practices, namely container ships and product/chemical tankers. The aid ceiling would be 14% of contract price and all aid above 6% must be pre­notified to the Commission and approved by them. There is a consultation mechanism (inadequate in our view) aimed at ensuring the aid (over 6%) is the minimum necessary to secure the contract at an EU shipyard and to minimise any distortion of competition in the EU. The subsidy mechanism would run from the launch of the WTO action until end 2002 or earlier if the WTO proceedings are resolved."

The Government's view

28.8 The Minister for Competition, Consumers and Markets at the Department of Trade and Industry (Miss Melanie Johnson) says:

    "The UK and all other Member States fully support WTO action but are predictably split on the Commission's subsidy proposal. The Commission were well aware that Member States would be split on subsidies given the long EU debate to end shipbuilding operating subsidies over the last two years. At the 14/15 May 2001 meeting of the Industry Council there was unanimous support for WTO action against Korea if a negotiated solution was not achieved by 30 June 2001. The Commission also proposed its selective subsidy mechanism for container ships and product/chemical tankers to run in parallel with the WTO action but in view of the split on subsidies within the EU the Council simply took note of the Commission proposal. At the end of June, Korea had still not offered any effective bilateral solution. However, the Commission did not immediately launch the WTO action against Korea, as expected. Instead, the Commission again tried to secure agreement for its twin track approach at the July General Affairs Council (GAC). We are disappointed at this development, as it has generated an impasse on WTO action against Korea since July. Nevertheless, the Commission continues to push this approach as the only viable option for tackling Korea.

    "The UK has long and consistently opposed operating subsidies, as they have been ineffective in countering low cost Korean competition or in improving the competitiveness of UK/EU yards over the last 20 years. We led the successful EU debate to end these subsidies and they were only finally removed at the end of last year. We and the blocking minority do not believe the Commission's new proposal to reintroduce temporary subsidies will be effective, not least because they have not worked in the past. They will be unworkable in practice and will distort competition within the EU as only some Member States (primarily Germany) stand to gain. The subsidy will not benefit UK yards, as they do not build the relevant ships. Indeed, they are likely to damage UK yards since other EU yards will benefit from subsidies. (Such is the magnitude of Korean subsidies, and such is the propensity of Korean builders to drive down their prices far below market levels, that a 14% subsidy is unlikely to be effective in countering Korean unfair competition. However, a subsidy of this size to our EU competitors well could give them quite a large competitive advantage vis­à­vis ourselves, since the effect of such aid will inevitably be to strengthen the overall performance of benefiting yards. UK yards already lag most other EU yards in terms of productivity.) The UK trade association, the Shipbuilders & Ship Repairers Association (SSA), does not support the proposal. In our view and that of many Member States the proposal is seriously flawed, breaches any concept of the Single Market and is not WTO­compatible.

    "We are continuing to resist the Commission proposal and, together with France, Netherlands, Denmark, Finland and Sweden lead a blocking minority. Germany leads the pro­subsidy lobby (Italy, Spain, Greece and Portugal). Member States have put down a raft of reservations on the draft proposal, notably on its coverage and operability, and it is not clear that, even if the political impasse on the principle of the proposal was cleared, the proposal itself could be agreed. In view of the continuing split within the EU, WTO action against Korea has remained blocked since the July GAC. The Commission and Germany are insisting on further discussion of the political deadlock at the 8 October GAC, although the US terrorist attacks of 11 September may push it off the agenda. However, we do not expect the discussion, if it goes ahead, to unblock the issue. We expect the Commission to maintain their insistence on the linkage between the WTO action and the subsidy proposal and that our blocking minority will hold. France remains the key to maintaining the blocking minority and they have continued to stand firm.

    "We are pressing the Commission to launch immediate WTO action and to de­link this from the subsidy proposal. The Council Legal Service has recently advised that the Commission subsidy proposal is not WTO­compatible, although it remains to be seen whether this will move the Commission."


28.9 In the past, the UK Government has taken the view that Korea should be given time to demonstrate its compliance with the EU/Korea agreement, which included a commitment that its yards would be financed on a commercial basis only. At the 14/15 May 2001 meeting of the Industry Council there was unanimous support for World Trade Organisation action against Korea if a negotiated solution was not achieved by 30 June 2001. Despite failing to reach such a negotiated solution, the Commission has still not launched its action against Korea in the World Trade Organisation. The Commission seems to be refusing to launch its World Trade Organisation action until Member States agree to its proposal to allow operating subsides to be granted to shipyards. This linking of the World Trade Organisation action with the subsidy proposal has split the Council, with the UK and France, amongst others, forming a blocking minority. By its stand, the Commission has effectively blocked World Trade Organisation action against Korea since July. We also note the advice from the Council Legal Service that the proposal for subsidies is likely to be inconsistent with World Trade Organisation rules. In our view the Commission is abusing its position.

28.10 We believe the World Trade Organisation action against Korea is long overdue and is justified on its own merits, whereas the proposal to allow some Member States (primarily Germany) to provide costly operating subsidies to its shipbuilders represents a further unjustifiable distortion of the shipbuilding industry.

28.11 We clear the documents, but request to be kept informed of developments, and especially on the progress of any World Trade Organisation action against Korea.

70  (20564) 11919/99; see HC 34-xxx (1998-99), paragraph 10 (3 November 1999). Back

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