EXAMINATION PROCEDURE CONCERNING AN OBSTACLE TO TRADE, WITHIN THE MEANING OF COUNCIL REGULATION (EC) No 3286/94, CONSISTING OF TRADE PRACTICES MAINTAINED BY KOREA AFFECTING TRADE IN COMMERCIAL VESSELS

　

　

(CESA)

　

　

On 24 October 2000, CESA lodged a complaint pursuant to Articles 3 and 4 of Council Regulation 3286/94 (the Trade Barriers "TBR" Regulation) against subsidies granted to Korean shipbuilding companies in violation of Articles 3 and 5 of the WTO Agreement on Subsidies and Countervailing Measures ("ASCM"). The Commission, after consulting the TBR Committee, initiated the investigation on 2 December 2000.

　

The Commission services gathered information and comments from the Community producers; Korean authorities; Korean shipyards; Korean financial institutions; Other third parties (shipbrokers, shipowners). Moreover, verification visits took place in the European Community and Korea.

　

The proceeding concerns commercial vessels for international commerce, including: bulk carriers, container ships, oil tankers, product and chemical tankers, passenger and RoRo ferries and other non-cargo vessels (including offshore units) and cruise ships.

　

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

　

It was established that the banks were effectively directed in organising the debt restructuring of the corporations involved. The financial institutions (i) were themselves in the process of being restructured, (ii) were financially weak, (iii) were partly or totally owned by GOK and (iv) essentially dependent on GOK for their future liquidity. In these circumstances they were called upon to take decisions concerning their participation in the corporate restructuring process the latter being a cornerstone of GOK's policy towards the management of the financial crisis. Even though the workout/restructuring agreements were in theory "voluntary", the package of measures adopted by GOK combined with the mandatory restructuring of the banking sector (under FSC supervision) and the attractive aid packages to banks made it virtually inevitable for banks to participate to the framework.

　

It was established that three shipyards (Daewoo, Halla/Samho and Daedong¹ benefited from assistance form financial institutions acting on behalf of the Korean government during their restructuring process. The benefit is estimated at (all in US$) : Daewoo 2.26 billion, Samho 1.5 billion, Daedong 48.3 million.

　

It appears that Hyundai Heavy Industries, Hyundai Mipo, Samsung and Hanjin did not receive subsidies through the corporate restructuring process.

　

　

It was established that Daewoo has benefited from two tax programmes linked to corporate workouts. The combined benefit from these schemes is estimated at won 78 billion.

　

　

KEXIM and the shipyards have refused to provide information on the terms of the loans or the rate of the premia, in particular the risk premium assessment. On the basis of facts available, it is shown that the GOK has granted prohibited export subsidies under the KEXIM schemes to Korean shipyards.

The investigation showed that the market for commercial vessels is a world market. As a consequence, no distinction was made between injury suffered by the Community industy on the Community market and adverse trade effects it suffered in third country markets, during the investigation period ('IP'), i.e. from January 1997 to November 2000.

　

The evidence showed that, during the investigation period, the Community industry suffered adverse effects within the meaning of Article 5 of the ASCM and Article 2(3) and Article 2(4) of the TBR, in the form of injury within the meaning of Article 5(a) of the ASCM, namely, significant price undercutting, negative effects on market share, capacity utilisation, profit, sales prices, employment, investments and serious prejudice within the meaning of Article 5(c) of the ASCM, namely, significant price undercutting, price depression and lost sales.

　

By sector, considerable injury and serious prejudice were found in container ships and product and chemical tankers. Injury and serious prejudice was suffered also, albeit to a lesser extent, in the bulk carrier and oil tanker sectors and passenger and RoRo ferries, while no injury or serious prejudice was found in the remaining sectors. Finally, no threat of injury or serious prejudice was established for cruise ships.

　

On the basis of the above, it is concluded that the substantial increase in volume and market share of Korean shipyards as well as the considerable decrease in their sales prices and the level of price undercutting found during the IP coincided in time with the injury and serious prejudice suffered by the Community industry. The other factors found which could have contributed to the adverse affects are not such as to break the causal link between the subsidies and the adverse effects suffered by the Community industry.

　

The shibuilding industry in the Community represents a very important sector of economic activity in terms of enployment, either direct in the shipyards or indirect in subcontracting or supplying companies. On the basis of the information available it seems reasonable to forecast that, should the Korean subsidy practices be halted, the Community industry may be able to regain at least part of its lost market shares and improve its profitability.

　

In the light of the foregoing, the conclusions and the suggested course of action are as follows:

　

The evidence available leads to the conclusion that the KEXIM programmes led to the granting of subsidies within the meaning of Article 1 of the ASCM to all Korean shipbuilders.

　

Furthermore, the investigation shows that Korea has granted through corporate restructuring subsidies within the meaning of Article 1 of the ASCM to the following shipyards:

　

- Halla Engineering and Heavy Industries (now called Samho Heavy Industries),

- Daedong Shipbuilding Co., and

- Daewoo Heavy Industries (now called Daewoo Shipbuilding Marine Engineering).

　

A subsidy has also been granted to Daewoo through taxation programmes.

　

The KEXIM subsidies are de jure export contingent within the meaning of Article 3 of the ASCM and, therefore, in accordance with Article 2.3, specific.

　

There is an indication that the corporate restructuring and taxation subsidies could be export contingent within the meaning of Article 3 of the ASCM and therefore, in accordance with Article 2.3, specific; they are in any event specific within the meaning of Article 2.1 of the ASCM.

　

There is evidence that the subsidies are causing adverse effects to Community industry within the meaning of Article 5 of the ASCM and are, therefore, actionable.

　

The investigation will continue with a view to collect further information, in particular with regard to the export subsidies.

　

The Commission will immediately pursue the matter with the Korean authorities in order to obtain the withdrawal of the subsidies or the removal of tne adverse effects. Unless such a solution is achieved amicably within the next few weeks the initiation of a procedure within the framework of the WTO Dispute Settlement Understanding, and more particularly pursuant to the relevant provisions of the ASCM, might be required.