REPORT TO THE TRADE BARRIERS REGULATION COMMITTEE
EXAMINATION PROCEDURE CONCERNING AN OBSTACLE TO TRADE, WITHIN THE MEANING OF COUNCIL REGULATION (EC) No 3286/94, CONSISTING OF TRADE PRACTICES MAINTAINED BY KOREA AFFECTING TRADE IN COMMERCIAL VESSELS
SUPPLEMENTARY REPORT ON EXPORT SUBSIDIES
COMPLAINT SUBMITTED BY:
COMMITTEE OF EUROPEAN UNION SHIPBUILDERS ASSOCIATIONS
KEXIM: Korean Export Import Bank
GOK: Government of Korea
KDB: Korean Development Bank
ASCM: Agreement On Subsidies And Countervailing Measures
the Arrangement: OECD Arrangement on Guidelines for
Officially Supported Export Credits
the Understanding: Sector Understanding on Export
Credits for Ships
IP: Investigation period (1 January 1997-30 November 2000)
On 24 October 2000, CESA lodged a complint pursuant to Articles 3 and 4 of Council Regulation 3286/94 (the Trade Barriers "TBR" Regulation) against subsidies granted to Korean shipbuilding companies in violation of Articles 3 and 5 of the WTO Agreement on Subsidies and Countervailing Measures ("ASCM"). The Commission, after consulting the TBR Committee, initiated the investigation oh 2 December 2000.
The Commission's TBR investigation report was presented to the Member States Advisory Committee on 8 May 2001. The investigation showed that Korea has granted substantial amounts of subsidies, mainly through export schemes by the state owned Korean Export-Import Bank (KEXIM) and debt forgiveness and debt-to-equity swaps by government owned or government controlled financial institutions. Furthermore there was evidence that the subsidies in question were causing adverse effects to EU industry within the meaning of the WTO Subsidies Agreement and were, therefore, actionable.
With regard to the KEXIM programmes, on the basis of facts available, it was considered that the GOK has granted prohibited export subsidies under Article 3 of the ASCM to all Korean shipyards. The Commission stated, however, that it would continue its investigation into the export subsidy schemes on which the Korean authorities and shipyards did not supply crucial information and that a further report on these schemes as well as on their impact would be released in due course.
B. The challenged practices
(i)Export loans to Domestic Suppliers
KEXIM provides loans to Korean shipyards in case a shipyard has agreed deferred payment terms with a foreign buyer.
The information available cannot lead to a conclusion on whether KEXIM respects, or not, the provisions of the OECD Understanding on ships. In view, however, of the limited impact of the scheme, it is not considered necessary to draw a conclusion on this issue.
KEXIM provides pre-delivery loans to shipyards to finance shipbuilding production costs, such as raw material cost, labour and overheads until delivery of the ships. Pre-shipment loans constitute direct subsidies contingent upon export falling under paragraph (a) of Annex I of the ASCM.
The availability of pre-shipment loans is particularly injurious as it provides a direct competitive advantage to Korean shipbuilders. Pre-shipment loans permit yards to offer buyers low prices in conjunction with attractive payment terms.
(iii)Advance payment refund guarantees
KEXIM provides a guarantee that a foreign buyer will be refunded any advance payments given to a Korean shipyard, inc luding any accrued interest on the advance payments, in case the Korean shipyard fails to perform its obligations under the relevant contract. The APRG programme constitutes a prohibited subsidy under Article 3.1 (a) ASCM.
A refund guarantee facility is a very important source of working capital for a yard. Unless a shipyard is able to arrange such a guarantee from a bank it would be highly unlikely for a buyer to conclude a contract. Consequently, although the amount of the actual benefit of a subsidised guarantee scheme might be small in proportion to the overall price of a ship, its impact is far greater as its very existence is decisive for concluding a contract.
The evidence available leads to the conclusion that the KEXIM "pre-shipment loan" and "advance payment guarantee" programmes led to the granting of subsidies within the meaning of Article 1 of the ASCM to Korean shipbuilders.
The KEXIM subsidies in question are de jure export contingent within the meaning of Article 3 of the ASCM and therefore, in accordance with Article 2.3, specific.
The Commission is in the process of discussions with the Korean authorities in order to obtain the withdrawal of the subsidies or the removal of the adverse effects. Unless such a solution is achieved amicably the initiation of a procedure within the framework of the WTO Dispute Settlement Understanding, and more particularly pursuant to the relevant provisions of the ASCM, might be required.