4. Conclusions and Recommended Actions
There can be no doubt that the market for merchant ships is in crisis. Although this industrial sector has seen problems over a long period of time, the situation is becoming increasingly critical as capacities continue to grow, competition from low-wage countries is getting stronger and prices are nose-diving.
For certain shiptypes, profits from shipbuilding operations seem to be almost unachievable. This process has been dramatically accelerated by the Asian crisis.
At the onset of the crisis, Asian manufacturers did not enjoy an immediate advantage from currency devaluations. Instead, the crisis deeply affected Asia's financial sector and made ship financing difficult.
The emergency measures for the revitalisation of the Asian financial markets have improved financing conditions, leaving Asian yards with competitive advantages from wage cuts and devalued local currencies.
It should, however, be recognised that Asian shipyards, in particular in South Korea, are strong competitors in their own right. Yard facilities are often state-of-the-art, the work force is skilled and flexible and the product quality matches shipowners' demands. Moreover the local supplier base is able to provide major equipment at significantly lower prices. This, however, does not excuse unfair business practices and price offers that are below costs. There are indications that injury to competing EU yards has indeed been caused to some extent and that Korean yards have received and may continue to receive support under non-market conditions from state controlled banks. This gives rise to concerns regarding possible indirect state support.
Capacity cuts in the market are necessary in order to return to a balanced and healthy shipbuilding market. Only then will prices recover to allow shipyards to operate profitably. Unfortunately the OECD agreement has not entered into force and even were this now to be achieved, capacities would not be immediately affected as the agreement does not address this issue. Voluntary capacity cuts by Korean yards, which are chiefly responsible for the increase in capacity, seem to be similarly elusive as most companies are regarded as "too big to fail" and from past experience expect the government to bail out the industry. The cases of Halla, Daewoo and Daedong indicate that further investigations on a potential indirect bail-out of these yards are necessary.
Looking at forecasts for demand and capacity, a quick improvement in the situation cannot be expected. Answers to the problem therefore need to be given under various timeframes, with more in-depth investigations on the general market developments being performed in parallel:
■ Damaging or non-market business practices, in particular on the part of Korean manufacturers, need to be stopped as quickly as possible. It must be ensured that the conditions and assumptions under which the IMF-led rescue package was given to Korea and to which the Korean government agreed, are fully respected. The IMF, in the context of the economic programme supported by the stand-by arrangement, can help to ensure that budgetary subsidies and other possible forms of government support are not given to ailing shipyards. Member States could instruct their Executive Directors to stress this point at the IMF Board. The particular issues that need to be addressed are: the degree of state control in each of the major creditors of Korean shipyards, especially in those who participated in the debt write-offs and/or moratoria; the question of whether the latter' s actions are justified under market economy criteria; the question of whether the Korean government's undertaking to the IMF not to bail out ailing companies has been fully respected in the cases of Halla, Daewoo and Daedong.
■ Trade remedies are an important line of action. Traditional anti-dumping or countervailing measures are not applicable to shipbuilding as ships are not imported and since the OECD agreement has not entered into force, there are no direct instruments to combat injurious pricing. However, in the multilateral disciplines section, the "Agreement on Subsidies and Countervailing Measures" (ASCM) of the WTO (which has so far not been applied to the shipbuilding sector)provides a dispute settlement mechanism that can be employed against subsidies granted by a WTO member and causing adverse effects to the interests of other WTO members. The ASCM currently establishes a presumption of serious prejudice when it is demonstrated that subsidies of 5% ad valorem, or subsidies to cover operating losses and direct forgiveness of debts exist. Information recently collected appears, for the first time, to contain some initial indication that the debt forgiveness arrangements from which at least one Korean shipyard has benefited might constitute a subsidy within the definition of the ASCM. However, given the very strict conditions which have to be met under the Agreement, such information is clearly insufficient for WTO action to be launched at this stage. If elaborated and structured in the appropriate way, the information collected could form the basis for the preparation and lodging of a Trade Barriers Regulation complaint by industry. This would give rise to an examination procedure during which the Commission would thoroughly investigate all factual and legal aspects of the prima facie evidence submitted and collect additional information to substantiate an action which would meet the WTO standards and would have a chance to be successful. The appropriateness of resorting to a WTO action would then be assessed on the basis of the Commission's investigation report. In that context it is worth noting that Korea or any other WTO member could also challenge the EU state aid regime on the basis of the multilateral disciplines section of the ASCM, provided it can be established that adverse effects have occurred on the side of the complaining party.
■ To support the above approach more information is urgently required on the financial structures and instruments employed in Korea in general. This includes the relationships between banks and other financial institutions active in shipbuilding, the principles under which credits and guarantees are awarded, and the probability of debt repayments under normal market conditions. The European Commission through its continued monitoring efforts will, in co-operation with industry, continue to examine allegations of subsidisation through such activities and present its findings to the Council.
■ For the future the conclusion of an agreement establishing a level playing field in the sector should be pursued. It should include as many players as possible, at least the important and the emerging shipbuilding countries, and cover all important issues that need to be addressed to establish a healthy shipbuilding environment in the long run. Working Party 6 of OECD, during its last session in June 1999, agreed to aim at improved transparency in the sector by intensifying work on supply and demand and by providing governments and industry with information and analysis of the market conditions, especially in relation to the supply side. This will encompass the production of common forecasts on supply and demand to be updated annually, and the creation of a database on prices of vessels. In addition to the transparency exercise on recent policy developments this will provide a forum to exchange views on capacity and potential price problems. Member States should give maximum support to this approach. Notwithstanding the clear difficulties of putting a global shipbuilding agreement in place in the near future, efforts must continue in this direction.
Maritime business is a global one by its very nature, and the shipbuilding market has become subject to globalisation earlier and to a greater extent than other capital goods markets. The distortions resulting from different business cultures and practices, including the level of state intervention and the attitude towards such intervention, should not be accepted as an unavoidable side effect of globalisation. Rather these distortions need to be addressed proactively before the market balance is finally and irreversibly destroyed.
