Industry and globalisation

Shipbuilding Agreement - Overview


1. In December 1994, the Commission of the European Communities, and the Governments of Finland, Japan, the Republic of Korea, Norway, Sweden and the United States signed the Final Act of the "Agreement Respecting Normal Competitive Conditions in the Commercial Shipbuilding and Repair Industry". The Agreement was scheduled to enter into force on 15 July 1996 after all Parties to it had concluded their national ratification procedures. However, the United States has still not ratified the Agreement, and as a consequence, the Agreement is not yet in force. The goal of the Agreement is to establish, in a legally binding manner, normal, i.e subsidy and dumping-free, competitive conditions in the shipbuilding industries of OECD countries. In this way, it will provide a "level playing field" for nearly 80 per cent of the world shipbuilding industry.

2. The negotiations on the Agreement were launched by the US Government in the autumn of 1989, in the framework of the OECD Council Working Party on Shipbuilding. The intention of the US Government was to create a new discipline for all government support to shipbuilding. For its part, the European Commission proposed that "unfair pricing" or dumping practices - later called 'injurious pricing' in the Agreement - also be covered. Government support and private dumping practices are thus the two targets of the Agreement. To ensure effectiveness, the Agreement was intended from the beginning of the negotiations to be legally binding, with provisions for dispute settlement, 'remedies' to be applied in case of violation, and 'sanctions' to enforce implementation of the remedies.

3. The Agreement can be seen as a response to some important features of shipbuilding, namely a strong tendency for governments to assist their industries, and a pronounced cyclicality of shipbuilding activity which induces companies in bad times to engage in the shipbuilding equivalent of price dumping, resulting in distortion of competition among countries and shipbuilding companies alike. These problems have existed for a long time and severe crises, such as in the 1970s and 1980s, have made them particularly apparent, prompting OECD governments to develop policy responses for one of the causes of distortion of competition, namely subsidies: an General Guidelines for Government Policies in the Shipbuilding Industry (first negotiated in 1969), a General Guidelines for Government Policies in the Shipbuilding Industry (1972), and General Guidelines for Government Policies in the Shipbuilding Industry (1976) were concluded over the years. But their effectiveness was limited because of their non-binding nature.

4. Much hope was placed in the Agreement Respecting Normal Competitive Conditions in the Commercial Shipbuilding and Repair Industry because of its legally binding character, because it deals with all kinds of state support - direct and indirect - and, moreover, because it also covers dumping practices of shipyards - which had been considered by some countries to be a problem that warranted the provision of offsetting subsidies. With an initial coverage of about 80 per cent of the world shipbuilding market, the Agreement was expected to have a gravitational effect on other shipbuilding countries to accede to it once in force, thereby extending the area of fair competition beyond its initial bounderies (major other countries are Brazil, China, Russia and Ukraine).

Government Support

5. The Agreement sets a stringent discipline for government support to the shipbuilding industry, whether it is provided directly to the shipbuilder or indirectly through shipowners or other parties. The Agreement details, comprehensively, the kinds of support that would be prohibited in the future. This includes financial support as well as administrative regulations in favour of the domestic shipbuilding industry. In practice, direct subsidies, loans and guarantees are the most important types of support. However, the Agreement also prohibits other types, such as forgiveness of debts, provision of equity capital not consistent with usual investment practices, assistance to suppliers of goods and services, and others [see below: "The Agreement at a Glance "].

6. In order to prevent "last minute" support from being given, there was an understanding among the Participants to the Agreement that they would not, from the signing of the Final Act (i.e. December 1994), increase the subsidy level of existing support measures or introduce new measures, pending entry into force of the Agreement. In the same spirit, all support, or undertaking to provide support, with regard to vessels that were to be delivered after 1998, was forbidden.

7. Although the catalogue of prohibited government support is comprehensive and detailed, not all government support to the shipbuilding industry would be banned under the Agreement. There were five exceptions, four of which were to be permanent. First, officially supported export credits would continue to be permitted on condition that they respect the provisions of the Understanding on Export Credits for Ships which severely limits any concessional element. This Understanding, which has existed since 1969, was revised in the context of the negotiations on the Agreement and was to become effective in its revised form upon the entry into force of the Agreement (but of course, this has not yet happened). Its main new provisions were the commercial interest reference rates (replacing the hitherto fixed interest rate of 8 per cent), the repayment period of 12 years (extended from previously 8 1/2 years) to take account of the reality in ship financing, and the prohibition of aid credits for vessels that are commercially viable. This was in line with the 1992 revision of the OECD Arrangement on Guidelines for Officially Supported Export Credits.

8. Second, "home credits", that is, government assisted loans and guarantees to domestic buyers of ships, intended for the modernisation of the domestic fleet would be allowed, subject to a stringent discipline. Such credits could be given only if they met specific conditions which are principally that they are no more "concessional" than permitted for export credits - the logic being to treat domestic and foreign buyers of ships in an equal manner.

9. The third and fourth exceptions were support for research and development and for shipbuilding workers losing their employment. R&D and new technologies are increasingly playing a pivotal role in the shipbuilding industry, both in the development of high performance ships and in ship construction itself. Government support for R&D activities would therefore be permitted generously, but in descending order of intensity the closer the activity is to the market. In addition, R&D undertaken by small and medium sized ship yards as well as R&D related to safety and the environment could benefit from higher than 'normal' rates. The social dimension of the Agreement was reflected by provisions that permit support to be provided to workers who lose their employment or retirement benefits. Finally, the shipyard restructuring that was underway in some countries (Korea, Belgium, Portugal and Spain) was permitted to continue as planned at the time when the Agreement was concluded, but no new restructuring programmes could be permitted.

10. A special feature of the Agreement was the treatment of the "Jones Act" of the United States. As an exception from the prohibition of official regulations and practices which favour the domestic shipbuilding industry, the United States retained the domestic build provision of some of its laws. However, this exception was to be subject to transparency and possible sanctions for abuse.

11. To ensure effectiveness of the Agreement, a binding dispute settlement and enforcement mechanism was devised to deal with violations of the discipline on Government support. In such a case, and if violation was confirmed by the binding judgement of an independent international Panel, the illegal support measure would have to be eliminated and the illegal benefit paid back, with interest, by the shipbuilder who received it ('remedy'). Should the government not terminate the support, or the shipbuilder did not pay back the illegal benefit, 'sanctions' could be authorised. They could take two forms: the suspension by the party (or parties) adversely affected by the illegal benefit, of GATT concessions related to products associated with shipbuilding, and/or the denial to the illegally subsidised shipbuilder of the right to complain about dumping (injurious pricing) by other shipbuilders.

Injurious Pricing

12. The Injurious Pricing Code of the Agreement would make anti-dumping applicable to shipbuilding for the first time. The Code condemns injurious pricing (export sales of ships below normal value) if it causes or threatens injury to an established shipbuilding industry or retards the establishment of a domestic industry of another Party. It is based on the Anti Dumping Code of GATT 1994 and adjusts it to the particularities of shipbuilding. These are mainly the fact that ships are not normally imported for sale - and thus escape the GATT anti-dumping mechanism which is enforced through anti-dumping duties on imported goods - and the non-series production of ships.

13. If the shipbuilding industry in one Party to the Agreement claims to have been injured by the sale to a buyer within that country of a ship from another Party, at a price below that which it should normally command, the investigating authorities of the first may determine whether injurious pricing has indeed occurred. They would apply a multi-step approach: first, they would determine whether their industry had had a sufficient prospect of making the sale and whether it had met other criteria to be eligible to complain ('initiation'); second, they would determine the existence of injurious pricing (determination of injurious pricing') and the impact of the sale below normal value on the domestic industry (determination of injury).

14. As a rule, the provisions of the Injurious Pricing Code of the Agreement regarding the determination of injurious pricing and of injury would follow closely the Anti Dumping Code of GATT 1994. For example, in determining injurious pricing, the investigating authorities would compare the export price of the vessel in question with (1) the domestic price of the like vessel, or (2) the export price of a like vessel to a third country, or (3) the cost of production plus normal profit in the exporting country. In the examination of the impact on the domestic industry, i.e. the determination of injury, the investigating authorities would evaluate all relevant economic factors having a bearing on the state of the industry; this would include actual and potential decline in sales, profits, output, market share, productivity, return on investments, or utilisation of capacity; factors affecting domestic prices; the magnitude of the margin of injurious pricing; actual and potential negative effects on cash flow, inventories, employment, wages, growth, ability to raise capital or investments.

15. If the investigating authorities have to confirm injurious pricing and impose a levy upon the vessel in question, this 'injurious pricing charge' would have to be paid by the exporting shipbuilder - in contrast to the provisions in the GATT Anti Dumping Code, where the charge would be paid by the importer in the form of extra import duties. The shipbuilder would have to pay the charge within 180 days or later if payment within that period would render it insolvent. But the shipbuilder would have the option to void the sale in question or to comply with an alternative remedy.

16. As in the case of illegally received Government support, 'sanctions' are foreseen if the shipbuilder does not pay the injurious pricing charge (or void the sale, or comply with an alternative remedy). These are severe: the country that has investigated the injurious pricing case may, on its own initiative, deny onloading and offloading privileges for a maximum period of four years after delivery to certain vessels built by that shipbuilder (i.e. vessels contracted for during a period of four years after public notice). Because of the requirement of prior public notice this would discipline the shipbuilder via the threat of losing orders, but it would not injure innocent shipbuyers. A Panel could extend or limit this countermeasure.

17. When (and if) the Agreement enters into force, its functioning would be subject to close supervision through a 'Parties Group'. There would be regular consultations and permanent transparency on matters such as ship prices, provision of permitted assistance, and others. The procedures foreseen for dealing with violations, whether in the area of government support or of injurious pricing, are such that a balance between all parties would be assured and that there would always be the possibility of recourse to the Panel or the Parties Group in case of differences of views. Three years after the Agreement enters into force, a major review is foreseen to examine the experience to that date.

18. There is the expectation that if the Agreement were to come into force, it would have a sustained positive impact on the world shipbuilding market by repressing government support which has been a serious problem for years, and by punishing dumping practices that were judged to be damaging other shipbuilders. Non-availability of government support and the prosecution of injurious pricing would bring to light the economic advantages of the various countries and the true competitivity of individual shipbuilders.

19. Shipowners, for their part, would be confronted with a situation where ships are no longer available at subsidised or dumped prices. They may consequently change their expectation as to the profits they can make with a vessel, especially from speculative buying and selling of ships. Changed ordering behaviour for ships may, in turn, therefore contribute to stabilising the shipbuilding market and thus contribute to establishing normal competitive conditions in the shipbuilding industry.