David Glen CITM IMSF Conference Singapore April 2007

1. Shipbuilding Disputes: WTO panel rulings and the elimination of operating subsidy from Shipbuilding David Glen CITM IMSF Conference Singapore April 2007

2. Outline • Key features of Shipbuilding Industry • Regulatory background • WTO disputes • EU and the TDM • Rep of Korea’s reaction • Possible ‘model’ of process • Future issues

3. Features of Industry • Labour intensive • Geographically concentrated • Bespoke orders limits scale economies • History of ‘state’ support • Yards often located in areas with limited alternative employment • Productivity comparisons difficult – use of cgt

4. Shipbuilding Output (mn cgt) Source: Glen (2006)

5. Shipbuilding Employment (000) Note. 1. Includes employment in related industry Source: Glen (2006)

6. Labour Productivity (cgt/head)

7. Industry trends • EU operating aid was due to be phased out by 2001 • 9% figure reached by 1992 (28% in 1988) • Korea’s market share rose sharply between 1996 and 2001 (22% to 30.2%) • EU’s fell (from 21.3% to 18.1%) • Korean industry restructured following 1997 devaluation and financial crisis

8. Regulatory background • Regulation of competitive behaviour non-existent • OECD agreement on Export credit terms for ships ‘not a legally binding or enforceable document’ • EU enshrined this into European law • Unfair pricing practice rules only apply to traded goods (that pass a physical frontier) • Ships are not traded goods in that sense

9. OECD had reached an outline agreement on pricing practices in 1994 • Japan and EU ratified it, but US Congress refused • EU objective:- elimination of yard subsidy • US objective:- elimination of discriminatory prices for ships between owners (King 1999)

10. EU operating subsidy • Due for phase out 2001 • EU published a succession of reports into World shipbuilding alleging Korean underpricing of newbuilding contracts • Twin track policy • Proposed temporary defence mechanism, i.e. retention of operating subsidy (2002- 2005) • Entered into negotiation with Korea over pricing

11. WTO dispute 1 • EU (2002) charged Korea that • KEXIM was structured to allow Korean capital goods exporters preferential rates • PSL and APG schemes of KEXIM were discriminatory, providing export subsidies • Specific PSL and APG’s awarded to certain Korean yards provided export subsidies • Corporate restructuring measures post 1997 were a disguised export subsidy • Special tax arrangements created an export subsidy

12. WTO dispute 2 • Republic of Korea counterclaimed (2003) that:- • The TDM of the EU breached the WTO rules on subsidies and countervailing measures (SCM), as well as its rights under various articles of GATT. • Targeted national regulations implementing the TDM in Denmark, Germany, Italy, France, and The Netherlands • Argued unilateral action by the EU breached GATT rules

13. Findings • EU case lost in principle • Panel ruled that • KEXIM was set up fairly • The APRG and PSL schemes were not in principle, a form of subsidy • Specific claims that certain APRG & PSL to certain companies were upheld • Restructuring measures & tax arrangements were not in breach of the trade rules

14. APRG and PSL subsidy • The findings in favour of the EU related to • 3 subsidised APRG in LNG (out of 37 in Korea, and 62 worldwide, - 2000-2001) • 2 subsidised APRG in products/chemicals out of 218 in Korea (all tankers, 1999 – 2001) • 8 subsidised APRG (1997 -2001)and 21 PSL for containerships (2001 – 2002). But 276 such ships were on order from Korean yards, and 576 worldwide, in Jan 2004

15. Panel conclusions • The subsidies did not distort world competition for ships, nor had a significant effect on world ship prices • For the Korean counterclaim, the adjudicating panel found in Korea’s favour

16. Last throw of the dice • Given the EU’s failure at the WTO, one other option possible • Attempt to revive OECD agreement on shipbuilding • Would allow anti-dumping claims to be applied to ships • The deadline for agreement was December 2005 – 12 year mandate expired. • At December meeting, no agreement reached. • No further option is now available to the EU

17. Making sense of the story • Why did the EU take the claim to the WTO? • Who were the beneficiaries of the EU TDM?

18. Why? Use Olson’s model • Result of ‘asymmetric pressure’ from interest groups • Olson’s model of dynamic behaviour of groups in the allocation of public goods

19. A group will put effort into lobbying the govt to provide it with a benefit, when the marginal gain to the group, when weighted by the share obtained by the individual member, equals the marginal cost of obtaining the good itself. • Example of a public good ‘ a group of property owners lobbying for a property tax rebate’ Olson, 1971, p23.

20. “This means that there is a presumption that the collective good will be provided if the cost of the collective good is, at the optimal point for any individual in the group, so small in relation to the gain of the group as a whole from that collective good, that the total gain exceeds the total cost by as much as or more than the gain to the group exceeds the gain to the individual.” (Olson 1971, p.24-25)

21. Role of pressure groups • Owners of the yards (CESA/AWES) • Workers in the yards (Labour unions) • Workers in dependent sectors (????) • Taxpayers (??????) • Shipowners (Shipowners’ Associations)

22. European Parliament Taxpayers European Council of Ministers Labour Unions Internal Competitive Environment Rules on Competition Policy Non-discriminatory rules European Commission Yard Employees Indirect Employees External Trade Environment WTO Trade Rules CESA/AWES Stakeholders in the dispute

23. For CESA • Small number of yard owners with a common interest in persuading the EC of the validity of its case. The costs of persuasion are relatively low, and the benefits (subsidy) are retained by a small number of firms. Benefits are large relative to costs. • For taxpayers • Large numbers with no common interests – costs of organisation are large and individual marginal benefit is small. European Parliament is marginal.

24. Only one of these groups has a clear focus, strong representation, and access to relevant sections of the EC. • EC case against Korea constructed by hiring consultants who ‘know’ the outcome expected from the consultancy • EU evidence appears to be based on a model of full cost pricing

25. Where did the subsidy go? • It is fully passed on to the ship purchaser. • It is entirely retained by the yard owners, and appears in the reported profits, and ultimately, shareholder dividends. • It is passed to yard workers, either in the form of higher real wages for the same number of workers, or same real wages but more workers than otherwise would be employed. • Some combination of the above

26. If ship prices market driven • If retained by yard owners, no price reduction, so no gain in market share • If passed on to purchaser, no gain to yard owners • Assuming the latter, will freight rates fall as a result? If No, then the subsidy goes into the pocket of the shipowners. • Why should European taxpayers subsidise the world’s shipowners?

27. Summary • EU case appears flawed to start with • Explicable in terms of asymmetry of lobby group pressure on the EC • If no effect on prices as claimed by panel, net beneficiaries appear to be shipowners • Why should EU taxpayers subsidise the world’s shipowners?

28. References • Glen, D. (2006) “Shipbuilding disputes: the WTO panel rulings and the elimination of operating subsidy from shipbuilding” Maritime Policy and Management 33, no. 1. pp. 1-21. • Mitra, D. (1999) “Endogenous Lobby Formation and Endogenous Protection: A Long-Run Model of Trade Policy Determination” American Economic Review, 89, No. 5, pp. 1116-1134. • Olson, M. (1971) The Logic of Collective Action: Public Goods and the Theory of Groups Cambridge, MA: Harvard University Press