US treads water on subsidies

Kvaerner Govan built the 49,500 tonne gas carrier Havis. The company has benefited from state aid, which will end when the OECD Shipbuilding Agreement is ratified

European moves to outlaw state aid in shipbuilding have been torpedoed by the US. George Paloczi-Horvath explains why

In any tussle over subsidies for industry, it is usually the US that lectures Europe about the need to stop feather-bedding. Now the tables have been turned over that most emotive of industries – shipbuilding.

Europe and the rest of the industrialised world wants the US to ratify the Organisation for Economic Cooperation and Development (OECD) Shipbuilding Agreement – a deal which could bring an end to state subsidies for shipbuilding.

The Europeans are willing to sign the agreement. The US, so far, is not.

Because of this, last month the European Commission extended the Seventh Shipbuilding Directive for another year and with it, the subsidy it can provide. This now stands at 9% of the cost of new construction and 4.5% of the cost of ship repair and small shipbuilding contracts.

The directives date from the 1980s when allowable state aid was more than three times as high. The commission feels it has done a lot to cut subsidies since then and expects the US to do the same.

With the Seventh Directive extended, UK commercial shipyards – including Kvaerner Govan, Harland & Wolff, the resuscitated Swan Hunter and A&P Appledore – will be relieved that they can rely on another year’s state largesse.

Japan, South Korea and the other shipbuilding powers will also ratify the deal, but the European Union will not agree until the US does.

The US was expected to agree last January, then again in June. At last October’s meeting of the OECD Shipbuilding Agreement powers in Paris, the commission said it hoped US Congress would ratify the agreement `early in the new year’. But so far there is little prospect of that.

So why is the US stalling? According to a European shipyard executive: `The Europeans expected the Americans to ratify. But the US Navy’s shipyards need more time to become competitive in the commercial market.’

Or as the commission said last autumn: `US ratification has been blocked by strong, vested interests which seek to benefit from large subsidies to re-enter the market for merchant vessels.

`International disciplines are the only way to avoid the continuation of distortive practices and a costly spiral of subsidies in the shipbuilding industry. We therefore trust that common sense will prevail so taxpayers on both sides of the Atlantic are spared needless expense.’

Sam Cameron, marketing director of Kvaerner Govan, the UK subsidiary of Europe’s biggest shipbuilder Norway’s Kvaerner A/S, echoed the commission: `We would welcome the ratification by the Americans, so we can abolish subsidy schemes and have a level playing field.’

Jochen Kubosch, spokesman for European industry commissioner Martin Bangemann, says the commission is `ready to abolish’ subsidies, leaving only state aid for conversion of shipyards to other uses and for `social measures’ to relieve the effect of shipyard layoffs. `As the agreement is not ratified, we maintain support for the industry.’

Nick Granger, director of Britain’s Shipbuilding and Shiprepair Association, said: `The irony is that it was the US which had called so strongly for an end to worldwide shipbuilding subsidies.’

The Shipbuilders Council of America was central to this process. The US and the other OECD nations negotiated a deal in 1994, but the American Shipbuilding Association split from the Shipbuilders Council to defend the interests of large naval shipyards fearful of the weakness of their competitive position.

These large shipyards are opposed to the OECD deal. Supported by the ASA, they have persuaded the US Senate to block ratification, even though the Shipbuilders Council of America, representing small and medium-sized yards, backs the pact.

Last October, the European Commission said lamely that it appreciated the `strong commitment’ to the deal’s ratification made by the Clinton administration. But that same administration was responsible for resurrecting the loan guarantee programme that allowed yards doing mostly military work to bid for commercial work at below commercial rates.

This was a major improvement in the prospects of an industry which had been badly distorted by its reliance on military work during the Cold War. In 1992-93, just one ocean-going commercial ship was on order from an ASA yard, while by last October there were 16.

As December’s ASA review of the industry said: `By international standards, that represents a minuscule order book, but for our shipyards, which have been virtually absent from the market for 15 years, this is at least a start.’

Those 16 ships represent only 0.1% of the world market, but now they have got this far, the big US yards do not want to let go of their slender market presence. The overall US order book last September was small: just 2.6% of vessels displacing more than 100 gross registered tons. (The UK figure was 1.1%.)

The problem is that the ASA yards may have clawed their way back too late, just as the rest of the world is singing a different anti-subsidy tune.

Everything depends on whether the Clinton administration deems it more important to support large US shipyard interests rather than toe the line of international consensus.