Brussels, 28 February 2003 Ref. 116/03 OECD ; Negotiation on Shipbuilding - Definition of Support Measures

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1 EUROPEAN COMMISSION Directorate-General for Trade Brussels, 28 February 2003 Ref. 116/03 [Publliic] OECD ; Negotiation on Shipbuilding - Definition of Support Measures

2 NON PAPER Subject : OECD ; Negotiation on Shipbuilding - Definition of Support Measures. Ref : document : STI/DOT/ On 17 December 2003, the OECD Secretariat circulated to SNG Heads of Delegation, at their request, a list of categories of support measures as well an "illustrative list" of generic support measures to comment on. The EC greatly appreciates the Secretariat s efforts in preparing and circulating these support measures comprehensive lists. These lists will assist the SNG in discussing what measures should be covered by the Agreement. We take note that at the first meeting of the Special Negotiating Group on Shipbuilding, there was wide support for a definition of support measures modelled on a "WTO Plus" approach. The Secretariat's approach comes close to the one adopted in the context of the 1994 Shipbuilding Agreement. However, in the meantime the WTO has been founded and its Agreement on subsidies and countervailing measures (ASCM) was adopted. Taking into account this development, an alternative approach could be suggested to structure these lists with only two categories i.e. subsidies and other support measures (other than subsidies). Such an approach is further developed in an Annex. This contribution is a technical document designed to contribute to the discussion in the SNG. As far as subsidies are concerned, we would like to refer to the WTO (ASCM) definition of subsidies but consider that stricter disciplines than those prevailing under the ASCM should be imposed in order to take into account the specificity of the shipbuilding sector and to comply with the logic of the 1994 Agreement. All measures included in the OECD list which are subsidies would be covered by the above definition, even if they are not explicitly mentioned. Point 1.a refers to the existence of a financial contribution and 1.b explains the circumstances under which a benefit exist with regard to certain practices. In addition we have provided a list of possible permitted subsidies which could be subject to further discussion in the Special Negotiating Group. As far as other support measures are concerned, this approach should retain the measures listed by the OECD which are not subsidies in the sense of the ASCM definition. They should also be subject to a prohibition because of their possible injurious effect. This list is of an indicative nature and should also be subject to further discussion in the SNG.

3 ANNEX The following measures and practises are prohibited if they are specifically provided, directly or indirectly, to the commercial shipbuilding and repair industry by a Party its regional or local authorities or their agencies or instrumentalities, or through public resources or public intervention in any form. The term specifically shall be interpreted in accordance with Articles 2 and 3 of the GATT 1994 Agreement on Subsidies and Countervailing Measures. I. Subsidies 1. Prohibited subsidies A prohibited subsidy shall be deemed to exist if there is a financial contribution by a government or any public body within the territory of a Party or there is any form of income or price support in the sense of Article XVI of GATT 1994 and a benefit is hereby conferred. 1.a. There is a financial contribution by a government or any public body within the territory of a Party where: (i) a government practice involves a direct transfer of funds, potential direct transfers of funds or liabilities; (ii) government revenue that is otherwise due is foregone or not collected 1 ; (iii) a government provides goods or services other than general infrastructure, or purchases goods; (iv) a government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments. 1.b. With regard to such financial contributions, the existence of a benefit shall be determined as follows: (i) (ii) (iii) government provision of equity capital shall not be considered as conferring a benefit, unless the investment decision can be regarded as inconsistent with the usual investment practice (including for the provision of risk capital) of private investors in the territory of that Party; a loan by a government shall not be considered as conferring a benefit, unless there is a difference between the amount that the firm receiving the loan pays on the government loan and the amount the firm would pay on a comparable commercial loan which the firm could actually obtain on the market. In this case the benefit shall be the difference between these two amounts; a loan guarantee by a government shall not be considered as conferring a benefit, unless there is a difference between the amount that the firm receiving 1 It might be necessary to clarify the notion of revenue foregone or not collected on the basis of the experience gathered by the Parties.

4 (iv) the guarantee pays on a loan guaranteed by the government and the amount that the firm would pay on a comparable commercial loan absent the government guarantee. In this case the benefit shall be the difference between these two amounts adjusted for any differences in fees; the provision of goods or services or purchase of goods by a government shall not be considered as conferring a benefit unless the provision is made for less than adequate remuneration, or the purchase is made for more than adequate remuneration. The adequacy of remuneration shall be determined in relation to prevailing market conditions for the good or service in question in the country of provision or purchase (including price, quality, availability, marketability, transportation and other conditions of purchase or sale). 2. Permitted subsidies Notwithstanding the provisions of Article I.1, the following could be authorised (subject to discussion in the SNG): Note: the specific conditions (option, thresholds, scope ) under which the schemes mentioned below are permitted will need to be discussed during the negotiations. (i) (ii) (iii) (iv) (v) Research and Development aid, including aid granted for innovation in existing shipbuilding, ship repair and ship conversion yards up to a maximum [CONDITIONS AND MAXIMUM AMOUNT TO BE DISCUSSED] environmental aid, i.e. aid to promote adaptation by the shipbuilding, ship repair or ship conversion undertakings of existing facilities to new environmental requirements imposed by law and/or regulations which result in greater constraints and financial burden OR aid enabling the shipbuilding, ship repair or ship conversion undertakings to improve on the environmental standards imposed by the national legislation of the Party concerned [OPTION AND SPECIFIC CONDITIONS/THRESHOLDS TO BE DISCUSSED] closure aid, including aid to defray the normal costs resulting from the total or partial closure of shipbuilding, ship repair or ship conversion yards provided that the resulting capacity reduction is of a genuine and irreversible nature; regional investment aid which comply with the following requirements [TO BE DEFINED] export credit programmes which are consistent with the provisions of the Arrangement on guidelines for officially supported export credits including the Sector Understanding on export credits for ships annexed thereto, and export credit guarantee or insurance programmes at premium rates which are adequate to cover the long-term operating costs and losses of the programme. (vi) development aid [to be further discussed taking into account the developments on export credit in the OECD]

5 (vii) Measures referred to in Annex I of the GATT 1994 Agreement on Subsidies and Countervailing measures as not constituting export subsidies. II. Other support measures The measures and practices listed below, to the extent that they do not constitute a subsidy as defined under I, shall be prohibited : Note: the list below was created on the basis of the OECD Document STI/DOT/ and is submitted for discussion subject to some preliminary comments between brackets. - finance for the development of shipbuilding capacity abroad; - customs duty on imported ships [IS THIS A RELEVANT MEASURE?]; - import restrictions [RELATING TO WHAT GOODS?] (including the requirement of buying national goods and services); - domestic build or repair, or domestic content requirements that discriminate in favour of the domestic industry [AS SUCH PRACTICE WOULD ALREADY BE PROHIBITED BY ARTICLE III OF GATT, IS IT NECESSARY TO INCLUDE IT AS A PROHIBITED SUPPORT MEASURE?]; - cargo reservation schemes directly linked with domestic shipbuilding and repair requirements; - preferential [TO BE FURTHER QUALIFIED] access to goods or services provided, directly or indirectly, by governments or their agencies; - tax advantages through consolidation of losses inside conglomerates [IS IT APPROPRIATE TO PROHIBIT THIS MEASURE?] - assistance provided to suppliers of goods and services to the shipbuilding industry that confer benefits to shipbuilding industry of that country; - provision by the government of goods or services to the shipbuilding industry at prices, or terms and conditions, that are more favourable than those available to other consumers; - purchase by the government of goods under circumstances not corresponding to normal commercial behaviour; - exoneration or reduction of taxes for national shipowners in order to facilitate investments in domestic newbuildings, conversions and repairs; - exoneration, reduction or deferral of taxes of financial institutions or other investors on revenues from investments in the domestic shipbuilding industry; - subsidies, grants or other support measures to shipowners and other third parties intended to facilitate the purchase of domestically produced vessels; - administrative acts, guidance or practices which authorise, encourage or require shipbuilders or ship repairers to enter into anti-competitive arrangements with competitors, including (but not limited to) agreements to fix prices, rig bids, allocate markets, restrain production or sales, fix capacity or engage in predatory pricing;