THE AGREEMENT RESPECTING NORMAL COMPETITIVE
CONDITIONS IN THE COMMERCIAL SHIPBUILDING AND REPAIR INDUSTRY
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 is scheduled to enter into force on 15 July 1996 after
all Parties to it have concluded their national ratification procedures.
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 and
Korea. 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 low price actions, 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 Understanding on Export Credits for Ships
(first negotiated in 1969), a General Arrangement for the Progressive Removal of Obstacles to Normal Competitive Conditions 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 can be 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 can be expected to have a gravitational
effect on other shipbuilding countries to accede to it in the
future, thereby extending the area of fair competition beyond
its initial bounderies (major other countries are Brazil, China,
Poland, Russia and Ukraine).
II. Main Elements of the Agreement
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 are 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.
But 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 is an understanding among the Participants
to the Agreement that they will 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 July 1996. In the same spirit, all support,
or undertaking to provide support, with regard to vessels that
will be delivered after 1998, is forbidden.
7. Although the catalogue of prohibited government
support is comprehensive and detailed, not all government support
to the shipbuilding industry will be banned in the future. There
are five exceptions, four of which are permanent. First, officially
supported export credits will 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 will become
effective in its revised form upon the entry into force of the
Agreement. Its main new provisions are 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 - 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 ship, intended
for the modernisation of the domestic fleet will be allowed, subject
to a stringent discipline. Such credits may be given only if they
meet 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 ship
in an equal manner.
9. The third and fourth exceptions are 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 will 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 may benefit from higher than 'normal' rates. The social
dimension of the Agreement is reflected in the Agreement, in that
it permits support to be provided to workers who lose their employment
or retirement benefits. Finally, the shipyard restructuring that
is underway in some countries (Korea, Belgium, Portugal and Spain)
may be continued as planned at the time when the Agreement was
concluded. But no new restructuring programmes will be permitted.
10. A special feature of the Agreement is 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 retains
the domestic build provision of some of its laws. However, this
exception is subject to transparency and possible sanctions for
11. To ensure effectiveness of the Agreement, a binding
dispute settlement and enforcement mechanism has been devised
to deal with violations of the discipline on Government support.
In such a case, and if violation is confirmed by the binding judgement
of an independent international Panel, the illegal support measure
will have to be eliminated and the illegal benefit will have to
be paid back, with interest, by the shipbuilder who received it
('remedy'). Should the government not terminate the support, or
the shipbuilder does not pay back the illegal benefit, 'sanctions'
can be authorised. They can 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.
12. The Injurious Pricing Code of the Agreement makes
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 will apply a multi-step approach: first, they will
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 will 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 follow closely the Anti Dumping Code of
GATT 1994. For example, in determining injurious pricing, the
investigating authorities will 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
will evaluate all relevant economic factors having a bearing on
the state of the industry; this shall 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 confirm injurious
pricing and impose a levy upon the vessel in question, this 'injurious
pricing charge' will have to be paid by the exporting shipbuilder
- in contrast to the provisions in the GATT Anti Dumping Code,
where the charge is to be paid by the importer in the form of
extra import duties. The shipbuilder has to pay the charge within
180 days or later if payment within that period would render it
insolvent. But the shipbuilder has 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 will discipline the shipbuilder via the threat
of losing orders, but it will not injure innocent shipbuyers.
A Panel can extend or limit this countermeasure.
17. When the Agreement enters into force (scheduled
for 15 July 1996), its functioning will be subject to close supervision
through a 'Parties Group'. There will 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
is assured and that there always is recourse possible to the Panel
or the Parties Group in case of differences of views. Three years
after the Agreement has entered into force, a major review is
foreseen to examine the experience to date.
18. There is the expectation that the Agreement will
have a sustained positive impact on the world shipbuilding market
by repressing government support which has been a plague for years,
and by punishing dumping practices that are believed to have been
damaging shipbuilders. Non-availability of government support
and the prosecution of injurious pricing should bring to light
the economic advantages of the various countries and the true
competitivity of individual shipbuilders.
19. Shipowners, on their part, will 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.