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Korean Shipbuilding - Dispute with Europe

The policy of the European Community has been to encourage the restructuring and reduction of capacity. Industry sources state that any increases in Western European shipbuilding capacity during the coming years will be primarily the result of the ongoing efforts to improve productivity, mainly through improved work planning, standardization, and automation of production. During 1975-90, available capacity in West European yards decreased by 63.5 percent, from 8.5 million cgt to 3.1 million cgt.20 European shipyards that had specialized in building large tankers and bulk carriers reduced capacity by as much as 75 percent during the period.

At a meeting late in December 1999, the South Korean association of shipyards strongly refuted allegations by the EU of price dumping and of indirect state subsidies being used as means of obtaining a larger share of the orders on the global market. The EU has not been convinced by the arguments submitted by South Korea and is considering introducing sanctions if no progress takes place in the negotiations before the end of February 2000.

Up to May 2001, the European Commission tried to engage South Korea in talks aiming to stabilise the world shipbuilding market through market instruments. The investigation into subsidies carried out under the trade barrier regulation (TBR) established that substantial subsidies had been granted to South Korean shipyards through both export and domestic programmes, which contradicted the WTO's 1994 Subsidies Agreement. These efforts took place on a bilateral level and in the OECD. However, no progress was achieved, as the South Korean government claimed that it had no influence on the shipyards or on the financial institutions supporting them, and further said that it was convinced business was conducted along free market principles.

After the fruitless talks between South Korea and the EU, the Commission drew up a TBR report in May 2001. It found that Korean State aid to shipyards included, in particular, aid totalling EUR 2,600 million to Daewoo and EUR 1,700 million to Sambo. In October 2000, the Committee of European Union Shipbuilders' Associations (CESA) lodged a complaint under the TBR in order to eliminate certain trade practices caused by the subsidising of commercial shipbuilding in South Korea and adversely affecting EU sales of commercial vessels. The report found subsidies in the form of the advance payment guarantees and loans provided by the State-owned Export-Import Bank of Korea (KEXIM), which were not consistent with WTO regulations, debt forgiveness and interest relief by government-owned and government-controlled banks, and special tax concessions.

In the middle of the trade dispute with the EU, South Korea unveiled an ambitious program on 17 June 2002 to extend the country's leadership in the industry, ignoring foreign pressure to reduce capacity. The programme - suggested at a meeting of government officials and shipbuilders - called for US$170 million to develop new technology over the next 10 years. At the meeting, the South Korean shipbuilders agreed to raise their global market share from 30 % in 2001 to 40 % in 2010. It was suggested that high-end and high-margin vessels such as cruise ships and supply vessels should account for 35 % of total production in 2010 compared with 13 % in 2001. Furthermore, they promised to boost exports of shipbuilding equipment and parts to USD 2 000 million by 2010 from USD 370 million in 2001.

In 2001, ship exports accounted for 6.4 % of South Korea's total exports. The program also highlighted concerns about Japanese shipbuilders who were teaming up to compete with South Korean rivals through mergers and strategic partnerships. Still, the South Korean shipbuilders had enough construction orders to keep them busy until the end of 2003. In May 2002, the world's largest shipbuilder, Hyundai Heavy Industries, won US$400 million worth of orders from four shipping firms to build 12 petroleum carriers. At that time, Hyundai had captured orders for 22 ships worth about US$800 million, bringing its backlog to 110 ships, enough to occupy its shipyards for the next two and a half years.

In order to further increase sales in the EU, South Korean shipbuilders have been holding talks with several Dutch companies, which are said to be very strong in fields like navigation, consulting and high-tech equipment. Furthermore, the Netherlands has the asset of the Port of Rotterdam, which has grown to become one of the busiest in the world. In 2001, the Netherlands was the second largest investor in South Korea, after the USA. Korean shipbuilders are also highly interested in the Czech Republic, which they hope to use as an entry point to the EU market. The country was ideal for investments just before it became a part of the EU, since there were many advantages for foreign investors: cheap labor, 10-year tax holidays, job creation grants and duty-free import of machinery. Furthermore, the country's steel production is known by shipbuilders worldwide to be of high quality.

On 11 June 2003, the Community called on the Dispute Settlement Body (DSB) to establish a panel on the unfair practices of South Korea's shipbuilding sector. As Regulation (EC) No 1177/2002 was due to expire on 31 March 2004 and as the Republic of Korea had not yet implemented the measures decided upon in the 'agreed minutes' and the discussions in the WTO had little chance of finishing before that date, it was decided that the temporary defensive mechanism would be extended to 31 March 2005.