on 24 October 2000 the Commission received a complaint, pursuant to Articles 3 and 4 of Regulation (EC) No 3286/94 (1) (hereinafter 'the Regulation').

The complaint was lodged by the Committee of European Union Shipbuilders Associations (CESA), on behalf of the European Community (EC) shipbuilding industry and EC-shipbuilding enterprises. CESA is an association regrouping national shipbuilders and ship repairers associations with registered offices and principal places of business throughout the European Union. There is no significant production of seagoing ships in the EC taking place in companies not associated with CESA member organisations. CESA thus represents the major proportion of total commercial shipbuilding and ship repairing within the EU.

The complaint concerns commercial vessels for international commerce, including, more specificially:

The complaint concerns a trade barrier allegedly caused by subsidies conferred to, or otherwise benefiting, Korean shipbuilding companies by the Republic of Korea in violation of Articles 3 and 5 of the WTO Agreement on Subsidies and Countervailing Measures (ASCM) and resulting in adverse trade effects and injury suffered by Community shipbuilders.

The complaint is directed against subsidies allegedly granted by the Government of the Republic of Korea to its shipbuilding industry, or to upstream suppliers of said industry, that benefited production between 1997 and 2000 and will benefit future production. Alleged Korean subsidies have included export guarantees, export financing, debt forgiveness, debt-for-equity-swaps, interest relief and special tax concessions.

In particular, the alleged Korean subsidies that are expressly the subject of the complaint include:

The Korean shipbuilding enterprises claimed to have benefited from Korean Government subsidies include Halla Engineering and Heavy Industries (now called Samho Heavy Industries), Daedong Shipbuilding Co., Daewoo Heavy industries, Hyundai Heavy Industries, Hyundai Mipo, Samsung Heavy Industries, and Hanjin Heavy Industries & Construction Co.

CESA alleges that the above-described subsidies constitute obstacles to trade within the meaning of Article 2(1) of the Regulation as they would violate Articles 3 and 5 of the WTO Agreement on Subsidies and Countervailing Measures (ASCM). In particular, it is claimed that the KEXIM advance payment guarantee programme and export credit financing programme constitute obstacles to trade because they are prohibited export subsidies under Article 3(1)(a) of the ASCM or, in any event, actionable under Article 5 of the ASCM as they have caused adverse effects to the interests of the EC shipbuilders.

Moreover, the complainant alleges that the debt forgiveness, interest relief, debt-to-equity swaps and tax concessions provided to Korean shipyards, as well as the upstream subsidies provided to supplier Korean firms, are actionable subsidies in violation of Article 5 of the ASCM because they have caused 'adverse effects' to the interests of the EC shipbuilders.

CESA contends that 'adverse effects' (within the meaning of the ASCM) can be shown by the existence of 'serious prejudice' on the interests of the Community and its shipbuilding industry resulting from significant price undercutting, price suppression, and price depression by subsidised Korean commercial ships, and lost sales by Community enterprises in both Community and non-Community markets.

The Commission considers that the information provided in the complaint constitutes sufficient evidence to justify an examination of the alleged subsidies and their effects, with the exception of the allegation of illegal upstream subsidies.

CESA contends that it is suffering and is threatened to suffer further adverse trade effects within the meaning of Article 2(4)of the Regulation.

As mentioned above (see point 4), CESA claims that adverse effects can be shown by price undercutting, price depression, lost sales and markets shares both in the Community and the world market.

As regards price undercutting, a study conducted by CESA, which compares European cost-covering prices of several ship categories concerned by the complaint with Korean prices, appears to demonstrate that Korean shipyards have been undercutting prices by significant margins. This statement has also been confirmed by reports of the European Commission study on shipbuilding market monitoring (¹).

As regards price depression, the complainant claims that the dramatically declining prices for each category of cargo ships covered by the complaint from 1997 to 1999 result from the Korean shipyards' pricing vessels far below the cost of production. For example, new building prices (²) for Panamax container ships dropped by 28% during this period whereas VLCC (³) and Panamax bulk carrier prices decreased by approximately 16%.

Finally, in respect to the allegation of lost sales and markets shares, CESA affirms that Korea's share of the European and world markets for various ship types increased to the detriment of the EU market share. For example, Korean shipyards have increased their world market shares in the cargo ship segment(⁴) from 30,4% in 1998 to 40,9% in 1999. At the same time, the market shares of EU shipyards dropped from 11,9% in 1998 to 5,6% in 1999 (⁵).

CESA also claims that the threat of adverse trade effects is evidenced by the fact that the product mix and the pricing policy of Korean shipyards show a definite shift from less sophisticated products, such as cargo ships, towards more specialised high-end products, in particular cruise ships, for which the European shipbuilding industry is historically in a strong position. Therefore, Korea's targeting of such sectors of historic European strength, enabled through undercutting prices, is likely to develop into actual adverse trade effects.

Under such circumstances, there appears to be prima-facie evidence of adverse trade and threat of adverse trade effects as defined in Article 2(4) of the Regulation.

CESA claims that the alleged Korean subsidies have caused and threaten to cause injury to the European shipbuilding industry, within the meaning of Article 2(3) of the Regulation.

As already mentioned (see point 5), CESA provided sufficient evidence of price undercutting by subsidised Korean ships sold in third country markets or on the European market and corresponding lost sales by the Community shipbuilding industry.

According to the complainant, the lost sales by EU shipbuilders resulting from the significant Korean/European price differentials are evidenced by a steep loss of European market share held by European-built cargo ships and, more particularly, container ships. Indeed, in the container ships segment of cargo vessels, Korean shipyards won a 66% share of European orders in 1999, in compensated gross tons (CGT), compared to 50% in 1998 and 26% in 1997. European yards, meanwhile, captured only 10% in 1999 as compared to 36%in 1998 and 53% in 1997.

As regards the allegation of threat of injury, CESA contends that Korean subsidies threaten the Community shipbuilding industry in particular in the sector of high-tech transport ships. In this respect, the recent drop in the EU market share in this specific sector shows that Korean obstacles to trade are likely to develop into actual injury. Indeed, Korean yards increased their European market share in CGT to 34,7% in the first nine months of 2000 (from 14,8% in 1999 and 15,8% in 1998), whereas the European share in the same market in the same period decreased to 60,7 % in 1998, to 55,9% in 1999 and to 45,7% in the first nine months of 2000 (6)

Thereupon, the Commission considers that the complaint contains sufficient prima-facie evidence of injury and threat of injury, within the meaning of Article 2(3) of the Regulation.

Finally, the information in the complaint has sufficiently demonstrated that the alleged South Korean subsidisation can be held to constitute the principal causes of the alleged adverse effects and injury.

The EU shipbuilding industry represents a very important sector of economic activity in the EU as it accounted for 19,2% of total worldwide ship production in 1999 in CGT.

The EU labour force directly employed in shipbuilding and ship repair stood at 82 500 persons in 1999 and total EU direct and indirect employment by this important industry is more than 350 000 persons, with high-wage jobs in related industries and service sectors. Maintenance of shipbuilding activity in the EU is, therefore, of primary importance.

The subsidisation of shipbuilders in Korea is not a new problem for the EC. The Commission has, under Article 12 of Regulation (EC No 1540/98, in the past submitted two monitoring reports to the Council (¹), which showed that the Community shipbuilding industry has been confronted with unfair competition by the Korean shipyards.

In these circumstances, the Council called on the Commission to engage Korea in consultations with the view to halting the unfair pricing practices of the Korean shipyards. An agreement was reached in the form of 'agreed minutes', signed on 22 June 2000. However, Korea did not fulfil all its commitments and refused some concrete measures to implement the agreed minutes. Under these conditions, CESA decided to lodge the complaint under the Regulation concerning obstacle to trade.

In view of the above historical background of the dispute and also of the importance of the shipbuilding activity in the EU, the Commission considers it to be in the Community's interest to initiate an examination procedure.

Having decided, after consultation of the Advisory Committee established by the Regulation, that there is sufficient evidence to justify initiating an examination procedure for the purpose of considering the legal and factual issues involved, and that this is in the interest of the Community, the Commission has commenced an examination in accordance with Article 8 of the Regulation.

Interested parties may make themselves known and make known their views in writing, in particular by addressing the specific issues raised by the complaint, and by providing supporting evidence.

Furthermore, the Commission will hear parties who so request in writing when making themselves known, provided that they are a party primarily concerned by the result of the procedure.

This notice is published in accordance with Article 8(1) of the Regulation.

Any information relating to the matter and any requests for hearings should be sent in writing to:

European Commission

Directorate-General for Trade

Mr J. Aguiar Machado, DG Trade, Unit D/3

CHAR 15/217

Rue de Ia Loi/Wetstraat 200

B-1049 Brussels

Fax (32-2) 299 32 64.

Any such information or request for a hearing should reach the Commission not later than 30 days following the publication of this notice.