What price a level playing field?

While deadlines come and go with regular monotony, there is no end in sight to the European Union (EU)-Korea shipbuilding dispute ? particularly if the case is referred to the World Trade Organisation (WTO). Delays in resolving this issue are claimed to be putting the European shipbuilding industry under increasing pressure. Some are saying it could result in the demise of a number of yards. Certainly the current gloom hanging over the world economy will result in yard closures if it persists for any length of time, so additional uncertainty over the action (or inaction) of the EU towards Korea cannot help. The charges go back to the first half of 1999, when South Korea?s share of the world?s ship market increased from 25% a year earlier, to 35%. Over the same period the EU?s share fell from 25% to 17%. The EU builders? claim that ship prices have decreased between 15% and 35% since 1997. This is solely due to the pricing practices of South Korean yards, they say. Specifically, the EU accuses the South Korean government of dumping prices in the shipbuilding sector by allowing shipyards to sell below cost and forgiving them massive debt. The EU purports that Korean newbuilding prices were up to 39% below cost. The EU initially threatened to take the matter to the WTO in November 1999. It now seems that the emphasis of the debate has shifted away from the elimination of Korean government shipbuilding subsidies to the question of how shipbuilding prices could be raised. This was the focus of the meeting held on May 28 and 29, when the EU and Korea had consultations in Seoul. Although Japan has been supportive of the EU?s position, its stance is still linked to the original complaint of securing a level playing field before attempting any other solutions. The Shipbuilders? Association of Japan (SAJ) strongly believes in the principle of free and fair competition in the world shipbuilding market. Toshimichi Okano, chairman of SAJ, has called for the elimination of market distortions including government financial support under whatever guise. Only when this has been achieved does the SAJ believe a hike in shipbuilding prices will be a practical and workable proposition. For its part, the Committee of European Union Shipbuilders? Associations (CESA), is encouraged by the Commission?s resolution to adopt a strong posture against the alleged injurious practices of the Korean shipbuilding industry. The Commission has stressed that shipbuilding is a high-tech industry and claims that EU shipbuilders have amply demonstrated their ability to compete in all fields where fair competition has left them a chance. So, despite intense talks in Seoul in late May and in Brussels on June 25 and 26, the European Commission could not bring the Korean authorities to a commitment to raise the prices of ships up to what it sees as normal value, i.e. covering all costs. Although both sides voiced their commitment to seek an amicable solution, a considerable gap remained between their respective positions. The EU has withdrawn its own shipbuilding aid, but has threatened to reintroduce it if no agreement with Korea is reached. The Korean Shipbuilders? Association (KSA) retorted to these threats: “The EU?s agenda is still being driven by countries with inefficient yards that continue to rely on subsidies.” The continued fall of newbuilding prices The EU?s report notes that the year 2000 saw a significant expansion in orders for new ships, with 56% more orders being placed than in 1999. Most of this increase, triggered by an expanding world economy, higher oil prices and historically low ship prices in certain market segments, has benefited South Korean yards, which again increased their market share. EU yards have also benefited from stronger demand, mainly for cruise ships, a sector where Korean yards offer no direct competition. However, only a limited number of EU yards produce cruise ships with the bulk of yards still striving to compete against Asian yards on standard merchant vessels. Including cruise ships, the market share for the EU and Norway is around 18%. If orders for cruise ships are excluded from the overall figures, the market share of EU yards for new orders has fallen to a historic low of below 10%. Last year prices for new ships were reported to have recovered in certain market segments. This upward trend has not been sustained, leading one to conclude that overall price levels have not in fact recovered and are still significantly lower than before the Asian crisis of 1997. There is no indication that Korean shipbuilders have raised price levels across the board, as repeatedly announced by Korean sources. Therefore the Commission maintains its view that significant over-capacities in South Korean shipbuilding, combined with an ongoing need to generate new orders in order to assure sufficient cash flow, are preventing a recovery of prices and the market in general. Since the Commission?s last report seven more detailed cost investigations for orders placed in Korean yards have been undertaken. In no case has it been concluded that any of the contracts examined has been priced at an economically viable level, i.e. covering operating costs, profits and debt repayments. The report asserts that losses, calculated in this way, on these newly investigated orders are 14% on average, and there is, apparently, mounting evidence that state-owned and state-controlled banks in South Korea have been instrumental in financing unviable shipyard operations. Strong KSA case The Korea Shipbuilders? Association (KSA) maintains that the EU Commission?s unfounded and contradictory demands make an agreement unlikely despite every effort to co-operate on increasing world shipbuilding prices. However, Commission demands to include large container ships, LNG and LPG carriers are not based on any facts, says the KSA, since European and Korean shipbuilders do not compete in these market segments. They are politically driven and not based on any injury, it says pointing to the Commission?s own Trade Barrier Regulation report. Even for product tankers, chemical carriers and medium-sized container ships, where the Trade Barrier Regulation report had alleged injury to European shipbuilders, EU Commission demands for steep increases in a short time period are neither realistic nor achievable, according to the KSA. KSA has categorically rejected European shipbuilders? accusations of anti-competitive behaviour which it says are unfair, unfounded and designed to bolster their claims to subsidies. KSA is quietly confident that any procedure brought by the EU Commission under the World Trade Organisation?s Dispute Resolution Procedure will show this to be true. By the same measure, the illegal subsidies, both direct and indirect, that European shipbuilders have benefited from for many years will doubtless come to light, it says. In the meantime, Korean shipbuilders have nudged up a series of successes with container ships, LNG carriers and offshore production units. Latest developments Newbuilding prices remain low. Despite the fact that the shipyard talks ended in a stalemate in late June, it is reported that top executives of the European Commission and Korean Government will make a further effort to establish a framework to increase newbuilding prices. The SAJ would welcome such a framework if newbuilding prices were to subsequently recover. However, in view of the fact that newbuilding prices are actually decided by supply and demand, Okano emphasised that it is essential to make the market mechanism more generally workable by eliminating distortions such as government subsidies. Further negotiations to broker a deal were held in July between a special Korean envoy and top EU officials in Brussels. These appear to have achieved little and the EU has yet to decide whether to move the dispute to the WTO. Final talks in late September with South Korean Trade Minister Han Duck-Soo also ended in deadlock with the South Korean government telling the EU that it could only agree to an increase in shipbuilding prices if the pact also applied to European yards. The message was delivered to European external trade commissioner Pascal Lamy by his South Korean counterpart Hwang Doo Yun while both were attending an economic ministers? meeting in Hanoi last week. As a last resort it appears that Lamy will send his director general Peter Kann to South Korea to look at a new solution proposed by the Koreans. Lamy, however, appears somewhat pessimistic about the outcome and the EU is pushing for an early round of WTO talks that would include discussion of anti-dumping issues as well. These dispute procedures in Geneva can take 2.5 years before they begin to show results. In that period a number of European shipyards could fail. What now? The principles governing the shipbuilding market are no different from those of the free market economy in general. If there is no difference in non-price compet-itiveness, i.e. quality, design and delivery, then it is unsurprising that shipowners place their newbuilding orders with yards quoting lower prices. This however presupposes that the mechanism governing price competitiveness is functioning in a fair and free environment. As it stands, protectionism is rife in this industry with political agendas featuring heavily in the equation including items such as employment, industrial kudos and national defence. At the time of writing, Okano expressed the hope that this whole issue will be addressed at the JEKU meeting of leading players in the shipbuilding industry, which is scheduled to take place in Cadiz, Spain, from October 17 to 19. One of the main items to be discussed was the creation of a trading environment governed by free and fair competition, avoiding production volume-orientated rivalry and providing reasonable financial returns on investment.