Government Intervention in the Shipping Industry
by
Georgios Kokkalas
M.S., Naval Architecture and Marine Engineering
National Technical University of Athens, 1999
Submitted to the Department of Ocean Engineering
in Partial Fulfillment of the Requirements for the Degree of
Master of Science in Ocean Systems Management
at the
Massachusetts Institute of Technology
May 2002
2002 Georgios Kokkalas
All rights reserved
The author hereby grants to MIT permission to reproduce and to
distribute publicly paper and electronic copies of the thesis document in whole or in part.
Signature of A uthor.........................................................
..............
...........
Department of Ocean Engineering
May 14, 2002
L
C ertified by...............................
cceUPte A
dIb
a/
Professor of Ocean
.....................
Henry S. Marcus
Management
esis Supervisor
y..................................
Henrik Schmidt
P f
or of Ocean Engineering
Chairman, Department Committee on Graduate Students
MASSACHUSETTS INSTITUE
OF TECHNOLOGY
AUG 212002
LIBRARIES
BARKER
Government Intervention in the Shipping Industry
by Georgios Kokkalas
Submitted to the Department of Ocean Engineering
on May 10, 2002, in partial fulfillment
of the requirements for the degree of
Master of Science in Ocean Systems Management
Abstract
National governments engage in subsidy wars in an attempt to support their
registries and shipbuilding industries. The abundance of measures available has created
havoc in the industry and led to operating standards far from their point of optimality. By
re-evaluating the significance of the shipping industry in world trade as well as the
measures that have so far been taken in its aid, policy makers will be able to assume
measures that will benefit their states in a long as well as short-term basis. Tax havens
and subsidy-oriented policies adopted worldwide fail to serve the global community, as
would moderate tonnage tax regimes and case-specific, time-constrained aids.
Thesis Supervisor
Henry S. Marcus
Title
Professor of Ocean Systems Management, Department of Ocean
Engineering
2
Acknowledgments
Researching for this paper, I was far from alone and without support. There are
many who contributed into the completion of this thesis that I need to pay homage to in
this section. I wish to first of all thank our Lord for having kept me in good health and
able to complete this research, as well as my patron saint, Saint Nektarios for keeping a
watchful eye over me, throughout the days of my life.
My sincere thanks to my advisor, Professor Hank Marcus for his guidance and
support throughout the course of my studies as well as for providing me with data that I
needed in order to complete my research. My heartfelt thanks also go out to Mr. Tsagris
of the Greek delegation in the European Commission in Brussels, Dr. Luken, Secretary
General of the EU shipbuilders' associations, Mr. Bergman and Mrs. Jaspers of the EU
Competition Directorate-General, Mr. Vopel of the EU Enterprise Directorate-General,
Mr. Tutgat, executive adviser of the EU shipowners' association for providing me with
essential data that made this research possible and Mrs. Staikou for her legal advice on
the shipping regime in Greece.
I would furthermore like to thank my father Constantine, for having always
provided for me and for doing so during my days in the US, as well as for his support in
providing useful feedback to go into my research. My mother Cleopatra for the moral
support she provided in difficult times for me away from home and for believing in me,
and my sister Marietta for always lending an ear to listen to my worries and problems.
My thanks go out to my cousins, Father Michael and Presvitera Stamatia Prevas who,
alongside their families and especially my aunt Letta and yaya Tula, did everything in
their power to make living away from home durable for me.
3
My thanks to Dr. Michael and Dr. Olympia Lytinas for being such outstanding
supporters of my work and struggles over the period of the elaboration of my thesis, for
being there for me at all times and for making me part of their family.
I would also like to thank my friends and colleagues Georgios Papaioannou for
the assistance he has been providing, literally from the first moment I set foot on this
continent and Athanasios Denisis for providing me with software support and for his
assistance in keeping back-up files of my research.
Last, but most certainly not least my thanks go out to Catherine, for her love and
affection during extremely difficult times, for her support throughout my stay in the US
and for making the time to search and provide data that assisted me in the completion of
my research.
This research could not have been completed, had it not been for all of you. I
thank you all from the bottom of my heart. May our Lord bless you and keep you well at
all times.
Boston Massachusetts
May
8
th
2002.
4
Dedicated to the sun and the sea,
the sights and sounds of a country
that have kept me going in a perpetualanticipation
of the longed-for return
To Greece
5
TABLE OF CONTENTS
Abstract.........................................................................................................................
2
Acknowledgm ents....................................................................................................
3
Table of Contents ....................................................................................................
6
List of Tables ................................................................................................................
9
List of Figures .............................................................................................................
10
1. Introduction
1.1 General..................................................................................................................
11
1.2 Scope ....................................................................................................................
11
2. The Supply and Demand Mechanism and its Application in the Shipping Market
2.1. Historical Background........................................................................................
13
2.2 Generic Approach of Supply and Demand. ..........................................................
15
2.2.1 M arket D emand..............................................................................................
15
2.2.2. M arket Supply ................................................................................................
18
2.3. Effects of Supply and Demand in the Shipping Industry. .................................
22
2.3.1 Demand Side of the Shipping Industry.............................................................
22
2.3.2. Supply side of the Shipping Industry .............................................................
24
2.4. Rem arks ...............................................................................................................
28
3. Significance of the Shipping Industry to National States
3.1. Introduction..........................................................................................................
30
3.2. The Shipping Industry as a Vehicle towards Globalization. ...............................
32
3.3. The Claim s Against Protected Trade..................................................................
35
3.4. The Claim s in Support of Protected Trade. .......................................................
40
3.4.1. Environm ental Issues.....................................................................................
43
3.4.2 National Defense ..............................................................................................
43
3.4.3 The Balance of Paym ents ................................................................................
44
3.4.4. National Prestige and Infant Industries...........................................................
44
3.4.5. Lower cost competitors, Infant Industries, Employment and Safety. ............... 45
3.5. Conclusions .........................................................................................................
6
46
4. Government Intervention and its effects in the Shipbuilding Industry.
4 .1 Intro duction ...........................................................................................................
47
4.1.1. Types of Intervention.....................................................................................
48
4.1.2 Distinction between Shipping M arket Segments .............................................
49
4.2. Economic Analysis of Aid. ...............................................................................
50
4.2.1. Impact of Subsidies and Regulations...............................................................
50
4.3. Intervention in the Shipbuilding-Shiprepairing industry (SSI)............................
54
4.3.1. Tariffs on Imported Steel ................................................................................
54
4 .3 .2. R egulatio n s........................................................................................................
55
4.3.3. Direct Subsidies to the SSI ............................................................................
57
4.3.4 Intervention in the US SSI...............................................................................
58
4.3.5. Intervention in the SSI of the Rest of the W orld..............................................
62
4.4 The EU-S.Korea Dispute ...................................................................................
66
4 .5 . Conclu sio n . ..........................................................................................................
68
5. Government Intervention in Vessel Operation
5 .1. Intro ductio n ..........................................................................................................
69
5.2. The Role of the Flag-State in Shipping .............................................................
70
5 .2 .1 B ack gro und ........................................................................................................
71
5.2.2. Flags of Convenience. ....................................................................................
73
5.2.2.1. The US involvement in the creation of FoC registries ..................................
74
5.2.2.2. Reasons for the Increasing Flagging-Out from National Registries ........
76
5.3. The Regulatory Framework of National Registries. .........................................
81
5.4. Other Support M easures. ..................................................................................
88
5.5. Government Regulations the Liner Industry.......................................................
90
5 .6 . Conclu sio n ...........................................................................................................
94
6. Evaluation of Support Measures and Recommendations for Future Actions
6 .1 Intro du ctio n ..........................................................................................................
96
6.2. Evaluating the claims in support of government intervention ............................
97
6.2.1. Monopolies and Oligopolies ..........................................................................
99
6.2.2. Environmental and National Prestige Issues.....................................................
101
7
6.2.3 National Defense. .............................................................................................
102
6.2.4. Balance of Payments and National Economy Issues.........................................
104
6.2.5. Lower cost competitors, Infant Industries, Employment and Safety ................. 107
6.3 The need to support the shipping industry............................................................
110
6.4. Seeking the optimum ..........................................................................................
112
6.5 Conclusion ..........................................................................................................
118
7. Conclusion
7.1. Overview ............................................................................................................
119
7.2 Final Remarks .....................................................................................................
120
Appendices
Appendix A. The Awes-Korea Dispute ....................................................................
122
Appendix B. Correlation between the Greek Fleet and Earnings from Abroad........... 123
Appendix C. The Greek Flag (1929-2000).................................................................
124
References................................................................................................................
125
8
LIST OF TABLES
Table 2.3.2.1 World Fleet in Millions Dwt. ..............................................................
27
Table: 5.2.2.2.1 EU Second Registries......................................................................
80
Table 5.3.1. Top Ranking National Fleets of the World ...........................................
81
Table 5.3.2. Greek Tonnage Tax (1)........................................................................
82
Table 5.3.3. Greek Tonnage Tax (2)........................................................................
82
Table 5.3.4. Norwegian Tonnage Tax......................................................................
86
Table 6.2.4.1 Value Added in the EU ........................................................................
106
Table 6.2.4.2 Backflow to the government ...............................................................
106
Table 6.2.5.1 Employment in the EU maritime cluster in 1997 ..................................
107
Table 6.4.1. EU Tonnage Tax Comparison Table ......................................................
114
Table 6.4.2. Tonnage Tax in FoC regimes .................................................................
115
9
LIST OF FIGURES
Fig 2.2.1.1. The Downward-Sloping Demand Curve ...............................................
16
Fig. 2.2.2.1 The supply curve ..................................................................................
18
Fig. 2.2.2.2 The equilibrium point ...............................................................................
21
Fig. 2.3.2.1 Supply and Demand in Shipping...........................................................
26
Fig. 2.3.2.2.Deliveries of Newbuildings 1980-1999..................................................
28
Fig. 3.1.1. Transport D ecision V ariables....................................................................
31
Fig. 3.1.2. Trade between the US and Latin America................................................
31
Fig. 3.2.1. Correlation between Tonne-km and GDP in the EU .................
33
Fig. 3.2.2. The growth of seaborne trade in comparison with world imports and exports
....................................................................................................................................
34
Fig. 3.3.1 Supply and Demand Analysis of Undistorted Trade..................................
35
Fig. 3.3.2. Economics of Tariff application ..............................................................
36
Fig. 3.3.3. U S Steel Im ports from the EU ....................................................................
39
Fig. 4.2.1.1 Effects of Taxation on Supply and Demand ...........................................
50
Fig. 4.2.1.2. Effects of W age Regulation .................................................................
52
Fig. 4.2.1.3 Effects of 'ceiling' imposition ..............................................................
53
Fig. 4.3.2.1. New Orders for Tanker Vessels ............................................................
56
Fig. 4.3.4.1 U S SSI share .........................................................................................
60
Fig. 4.3.4.2 US SSI Orderbook History ...................................................................
60
Fig. 4.3.4.3 CD S paym ents (1985 USD)...................................................................
61
Fig. 4.3.5.1. SSI Market share of Selected Nations .................................................
64
Fig. 4.4.5.1 Shipbuilding Market Share 1979-1998..................................................
66
Fig. 5.2.1. Merchant Fleets of Selected Maritime Nations.........................................
71
Fig. 5.2.2.1.1 Total Monthly Wages of Several National Flags in 1953.....................75
Fig. 5.2.2.2.1 Fleets of the World 1939-2000...........................................................
78
Fig. 6.2.4.1 :Balance of Payments vs. Net Income from Abroad for Greece........ 104
Fig. 6.2.4.2 Korean Balance of Payments Current Account........................................
105
Fig. 6.2.5.1. Shipbuilding and Shiprepairing Job Slots ..............................................
108
Fig. 6.4.1. Fleets of Selected Maritime Nations by Flag.............................................
112
10
Chapter 1
Introduction
1.1 General
The maritime sector has been the matter of public scrutiny over the last few years.
This high risk-medium return sector of the world trade market mechanism has over the
years evolved into a pantheon of contradicting views and policies that cause considerable
confusion to industry analysts. National governments have actively intervened and
continue to do so in order to support domestic shipping in general, claiming that it is an
inextricable part of national welfare.
The issue of government intervention in the shipping industry has been the subject
of an abundance of studies in the field of maritime management. Most of these studies
however, focus on a specific part of the industry and then again provide for a limited
array of options assuming that the interrelation between the different segments of
shipping will provide for the dynamic to enhance all other sectors. In the era of
globalization one should assume a broader, alas more generic, view of the correlation
between those segments and re-evaluate the need for undertaking supportive measures
that distort the effects of the driving forces of all markets; those of supply and demand.
1.2 Scope
The main objective of this paper is to present and evaluate the measures that have
at times been used by governments in support of the domestic shipping and shipbuilding
industries as well as recommend actions based on the long-term welfare of consumers. In
order to do so, a discussion of the effects of the supply and demand forces on the industry
11
will precede the analysis. An analysis of the sort should be based upon a critique of the
claims in support of intervention in the industry. For this reason, the most prominent
justifications are presented, analyzed and proved or disproved according to the author's
views and current market data.
The research conducted for the purpose of this paper includes the presentation of
current issues, both in the shipping and shipbuilding sector, a comparison between
measures assumed by different countries as well as an assessment of their effectiveness.
Based on this information, recommendations as to the most efficient measures available
to governments are presented.
The results of this study were evaluated upon the long-term welfare of nations in
general and individuals in particular. Subsidies have consumed large parts of national
budgets in the past and it was thus that every attempt was made in order for any costs
incurred by the implementation of the measures suggested to remain in the lowest
possible levels. Since the recommended measures are generic enough to be easily tailored
to the needs of national governments, the calculation of the exact costs incurred was not a
feasible task. However, the evaluation of past practices in the industry can provide the
reader with an understanding of the related costs of such measures.
In considering the options available to policy makers, undistorted trade is
probably the most lucrative of all. However, under-developed and developing nations
have, along the course of history, been willing to assume losses in anticipation of future
gains from the reinforcement of their trading capabilities.
Applying such an
understatement to the shipping industry one can easily understand the need to plumb into
the essence of the underlying forces of such undertakings. This is the reason why the
following chapter deals with those exact forces: Supply and Demand.
12
Chapter 2
The Supply and Demand Mechanism and its Application in the Shipping Market
2.1. Historical Background
One of the most controversial though favorite topics of discussion concerning
modern finance, is the economic systems assumed by governments around the globe in an
attempt to control their local markets and place them as high as possible in the
international arena. A profound comprehension of those and their application into the
shipping industry requires an in-depth view of what the history of such systems has been
throughout the global era of industrial development as well as that of the markets and the
factors/variables that drive them in our world.
All the aforementioned systems fall under three core categories, namely market,
command and mixed economies'. The primal differentiation factor amongst the three is
the degree of governmental control into each country's financial operations. In the market
economy, the government plays no role at all, allowing private organizations and
individuals to form the economic status quo, whereas in a command economy, all
controls lie in the hands of government officials. Anywhere between those two extremes
lie most of the economic systems today. The term mixed economies has been attributed
to systems where the market, especially the private sector, drives the needs and makes
most of the decisions in the financial transactions of an economy, where at the same time
governments play an equally important role by supervising those transactions. Such
supervision can be accomplished by means of regulating the market via laws and rules of
financial conduct imposed frequently in our days.
Samuelson and Nordhaus: Economics, 17' Edition
13
The distinction between such markets was more than obvious almost 30 years ago
when the so-called Eastern-block had not yet collapsed (though it still can be witnessed in
the last strongholds of socialist governments such as China, Korea and the like).
Communist economies were founded on the basis of government control over all
transactions, an inherent banning of competition and a limited, if any, private sector.
Antipodal to those economies was the one of nineteenth-century England, which formed
a nearly perfect market economy. Most of the other Western-European countries as well
as the U.S.A. had adopted mixed economy systems early on. However, as deregulation,
decreased taxation and lesser government intervention were adopted, the regulated
economies of the welfare states in the early twentieth century were soon replaced by the
increasingly market-oriented economies of our time.
As markets evolved throughout the years, political scientists attempted numerous
approaches in the comprehension of the driving forces behind the market as well as the
underlying mechanisms applicable. The supply and demand mechanism has proven an
invaluable tool in the hands of researchers, assisting them in their quest for a profound
understanding of the way capital markets operate. More to it, this approach makes future
projections possible since it involves a dynamic, rather than static time specific,
appreciation of the forces involved in forming the market as we know it today. An
analysis of the shipping industry and shipping markets would therefore be obsolete, had
no specific reference been made to the driving forces behind the 'scene'. Though the
scope of this paper is not that of analyzing market mechanisms, supply and demand are
factors that need to be addressed.
In the sections that follow through the end of this chapter an attempt has been
made to state the principles of supply and demand, their imposition in the shipping
14
industry, as well as to make reference to the problems arising from the application of
economics in the highly complex industry of shipping. It is extremely important for the
reader to understand the usage of the point of equilibrium in the supply and demand
mechanism, since it is the only point where no 'correcting' forces are applied. This is an
imaginary, albeit important, point towards which all markets are shifting.
2.2 Generic Approach of Supply and Demand.
There are many different views on the subject of addressing capital market
analysis. There are even those who think that supply and demand is too general a tool to
use, since it is not situation specific. For example, forecasting models such as the
Arbitration Pricing Theory, a brilliant theory with many applications, are being developed
nowadays to address the missing link of forecast. However, even if their evolvement
creates a powerful forecasting, or other, tool, their application will cause the researcher to
miss the opportunity of grasping the total economic 'picture' that the supply and demand
mechanism offers.
On the other hand, as someone said: '...you cannot teach a parrot to be an
economist simply by teaching it to say 'supply' and 'demand'...'. This intensifies the
need to reach even deeper into the secrets of this wonderful mechanism and see how it
functions.
2.2.1 Market Demand.
Though it may be easy to understand what it means for a single product, namely
the quantity of the product requested for consumption, the matter of demand becomes
more complex when the discussion is about the whole market. According to Samuelson
15
and Nordhaus, market demand '...represents the sum total of all individual demands.' A
schematic representation of the market-specific demand curve, in the form that will be
seen throughout the paper is the one that follows. For ease of exposition, the good in
question is the production of apples:
-P2
L-...
-.
P1
:Q2
iQl
Quantity of apples (millions of pounds)
Fig 2.2.1.1. The Downward-Sloping Demand Curve.
Demand is shown to slope downwards. The graph shows one of the elementary
properties of the demand curve, namely the 'law of downward sloping demand'. It shows
that, as the price of a specific commodity increases, other things held constant, consumers
tend to purchase fewer quantities of the commodity in question (here apples). On the
microeconomic aspect of the matter, the parameters that drive demand are a) consumer
income. The more people can spend, the more prone they are to give up part of their
wealth in order to acquire goods in prices that might be higher than expected (shifting the
demand curve to the right). b) Substitution aspects. The more options consumers have on
acquiring less expensive substitute products, of similar quality and usefulness, the less
willing they will be to buy a good when its price increases (shifting the demand curve to
the left) and c) preferences and influences. The specific interests of the consumers related
to ethics, traditions as well as characteristics of their domicile or business, tend to affect
the demand curve in more than one way.
16
When one, some or all of the factors mentioned earlier, any but the price, changes
for some reason, it causes the demand curve to shift. Demand increases/decreases (the
curve shifts to the right/left),
as the quantity requested
at a specific price
increases/decreases.
Another important property of the demand curve 2is elasticity. Demand Elasticity,
is defined as: 'the outcome of the division between the percentage change in quantity
demanded, to the percentage change in price'. Going back to figure 2.2.1.1, the formula
for the calculation of the curve's elasticity would be:
AQ
ED
(Q1 Q 2 )/2 , (Equation 2.2.1.2.)
AP
(P 1+P2)/2
Knowledge of the curve's elasticity is essential in order to be able to anticipate its
'reaction' to changes in the driving factors. There are three types of demand elasticities:
a) Elastic demand (JED 1> 1): a price decrease, causes total revenues (price Pi times
quantity
Qj)
to increase b) In-elastic demand (lED I< 1): a price decrease, causes total
revenues to decrease and c) Unit-Elastic demand (lED
=1),
whereby a price decrease,
does not change the total revenue.
Should one therefore be in the position to know the way factors driving demand
react to price changes, one could easily predict where the new equilibrium point would
most likely be. Since price changes not only cause reactions from the consumers but also
from the producers, one has to take into consideration the effects of such price alterations
2 The
terms demand and demand curve (as the terms supply and supply curve) are used
throughout the chapter as having the same meaning unless otherwise specified.
17
to the producers. Their behavior is illustrated in another curve on the quantity-price
diagram, namely the supply curve.
2.2.2. Market Supply
In accord to the demand curve, the supply curve shows the quantities in which,
producers are willing to sell their products given a specific price (other things held
constant). Again, the market supply curve would be the sum of individual supply curves
for all producers and would gear a macro-supply through the summation of individual
components. In the example of apples that was used earlier, the supply curve, could be
graphed as follows:
QP
Q2
Quantity of apples (millions of pounds)
Fig. 2.2.2.1 The supply curve
The supply curve is shown to be upward sloping. This is a characteristic property
that can be attributed to common sense since, the higher the price of a commodity, the
more quantities producers will be willing to 'throw' into the market (other things held
constant).
On a microeconomic view3 , the forces that drive supply in a market are a)
production costs (including prices of protogenic inputs and funds for production
3 The term 'miCroeCOnomic' (used here to study individual prices, quantities and markets)
is being used to distinguish between the study of market forces that simultaneously affect
18
modernization processes). Part of the asking price for any commodity (the most
significant part) is that of the cost of production. Expensive products are commonly the
ones that require capital-intensive processes for production, or the ones with expensive
feedstock being processed. b) Prices of substitute products. It is easily understood that,
the higher the price of a particular type of product, the more production lines will be
allocated to its production. c) Special conditions. As adverse conditions might arise in a
particular area of production, be it geographical or market niche, less of that particular
commodity will be available for purchase (for example weather conditions, oil or power
shortages and the like) and d) Government intervention
This brings us to the reason why this chapter is dedicated to the analysis of the
supply and demand approach of market evaluation. It is the part of the chapter where the
subject of this paper falls into play. Governments 4 around the globe cannot control the
will or the tastes of a consumer (even though they can influence them up to a certain
extent). However, they can impose their power onto the production processes since the
funds required are considerable, to say the least, and government support, or even
tolerance sometimes, is essential.
The supply curve has another important property relative to that of the demand curve,
namely supply elasticity. The mathematics behind it is very similar to those witnessed
earlier. Supply elasticity can be defined as 'the result of the division between the
percentage change in quality supplied and the corresponding percentage change in price'.
Looking at Fig. 2.2.2.1, the formula for calculating elasticity would be:
many companies, consumers and markets, namely macroeconomics. Macroeconomic
effects will be discussed in later chapters.
4 Reference is being made to democratic states. Totalitarian regimes cannot be analysed
with methods that assume free market economies.
19
AQ
E
(Q1 +Q 2 )/2
AP
(P +P 2 )/2
Equation 2.2.2.1
There are three types of supply elasticities: a) Elastic supply (EsI > 1): a
price increase, causes total revenues (price Pi times quantity
Qi) to
increase b) In-elastic
supply (IEs I< 1): a price increase, causes total revenues to decrease and c) Unit-Elastic
supply (|Es =1), whereby a price increase, does not change the total revenue. Should
supply elasticities, i.e. the reaction of the supply side of a market to price alterations, be
known, one would be in the position to anticipate the market, once demand elasticities
were at hand as well.
As far as the forces behind supply elasticities are concerned, production capacity
and time considerations are the dominant two. The faster a production line can react to a
price increase by increasing production, the more price elastic the supply. It combines
with the time considerations whereby, inability to increase production immediately after
price increases, causes highly inelastic supply. Given a longer time frame however,
businesses may be able to acquire the capital and labor necessary to respond, thereby
increasing elasticity.
The essence of the analysis so far, comes down to the identification of the point
where demand for a volume of a product at a specific price, meets with the willingness of
industries to produce to that volume at the specified price. At that point equilibrium is
reached. It is there where no forces are being imposed toward either reduction/increase of
price or reduction/increase of the volume produced. It is there when no stock exists, and
20
where production meets exactly with consumption. The figure that follows, represents
such an equilibrium in detail:
D'
D
S
~P2
- -PI
--- - --- - --- --
--
B-
--
D'
S
D
Q1 i
Q2
Quantity of apples (millions of pounds)
Fig. 2.2.2.2 The equilibrium point
Let us assume that an equilibrium point has been reached at point B shown above.
Since the forces that move the curves are basically enforced due to a deficit between
quantities demanded and supplied at each price, one would be correct to assume that
reaching point B would bring the market at stable equilibrium. Far from it, market
equilibriums do not last long, provided they are ever reached. Economy is such a highly
complex network of transactions between money and goods that a change in an element
will cause chain reactions to other parts of it.
For example in Fig. 2.2.2.2, should scientific research prove that apples could
fight cancer, the demand for apples would increase by those who would believe the
theory and a new equilibrium point would be reached at B'. Consumers demand more
apples than they used to. Since demand increases, the price of a pound of apples increases
as well and consumers are willing to pay for it. This shifts the curve upwards and to the
left.
Shifts in curves are not only a matter of scientific advances. As was stated earlier
in the chapter, government interventions tend to cause such disruptions in equilibriums
21
reached. State policies include taxation, subsidies and regulations. When these are
imposed upon a country's infrastructure, or on a macroeconomic scale into global
production, they influence the number of competitors as well as their location, the profit
margins that producers will have, as well as the processes used for production (essentially
setting the lower limit for their total production cost). The ways that these are imposed
are going to be the subject of the chapters that follow. In order for the reader however, to
have a better appreciation of how they affect the shipping industry, a market-specific
analysis of the driving forces behind the supply and demand is being attempted here.
2.3. Effects of Supply and Demand in the Shipping Industry.
One of the most important idiosyncrasies of the shipping industry is that as a
market, it itself comprises of four individual markets. These individual markets are a) the
shipbuilding and shiprepairing market b) the freight market c) the sale and purchase
market and d) the scrap market. A more in depth analysis of those as well as those of the
forces that drive supply and demand in the shipping industry will prove the effect that
states have in the industry in general.
2.3.1 Demand Side of the Shipping Industry
The variables of the world economy that drive demand can be considered to be
the following: a) world economy6 b) the commodities to be transported as they are
By the term shipping industry, the author will be making reference to all the markets
included, such as the ones mentioned in this paragraph.
6 Its analysis is intentionally omitted since it will be analysed in the following
chapter.
5
22
determined by income growth (the buyer power) 7 as well as the seasonal variations
caused by harvests and weather phenomena (harsh winters cause the demand for heating
oil to increase) c) the average haul in ton-miles and substitution effects, as distance might
drive consumers to seek alternative products d) political events such as wars, crises in
canals like the Suez Canal in the 1956 and 1967 crises and e) transport costs. The effect
of the latter becomes obvious when economies of scale achieved through the utilization
of larger, faster and in general more effective vessels are appreciated. For example8 , in
1950 a 20,000-dwt vessel would transport coal at a cost of $10-15 per ton. In 1990, a
150,000-dwt carrier would transport coal for the exact same price per ton.
The demand for sea transport can be assumed to be a derived demand. It is
derived from the demand for certain goods. Cargo space is not itself a good. One of the
exceptions dates back to the era of sailing ships when cargo space was purchased to store
wines from Madeira 'which were thought to mature better in motion' 9. One more recent
example is that of passenger or cruise vessels where the vessel is 'the final destination'
instead of a means to an end.
The familiarity or expectancy of the aforementioned factors is not surprising.
They fall into the general categories that were devised earlier in this chapter, in order to
group the forces that drive market demand in general. In the spirit of the analysis
conducted over the general properties of demand, elasticities came into play. One good
example of shipping market demand elasticities is that of the demand elasticity for cargo
space. Should freight rates rise, demand will, in the long run, be dependent upon the
The complexity of this analysis is also shown here; what constitutes demand for one
market is a driving force of supply in another.
8 Source: Martin Stopford, 'Maritime Economics' 2 "dEdition
9 Source: Carleen O'Loughlin, 'The Economics of Sea Transport'
7
23
ability of homemade goods to substitute for imported ones. On the flipside, should freight
rates decline, demand will depend on the relative value of importing goods instead of
producing them.
Demand for cargo space is, in general, relatively inelastic to increases in freight
rates when the cargo in question is a high-value, low volume one. On the contrary, it is
highly elastic to rate increases for low-value, 'bulky' commodities. One final example
can be derived from the cruise shipping industry where demand is highly elastic to
income shifts and price changes. As price increases the demand for cruises (other things
held constant) decreases. As incomes increase, prices relatively decrease and as that
happens, the demand increases. Demand is generally inelastic to 'luxury' goods.
The goal of this chapter is to analyze the market forces behind shipping, thus
unveiling all areas where control mechanisms can be applied. To do so, one also needs to
analyze the driving forces of supply in the shipping market.
2.3.2. Supply side of the Shipping Industry
Before we begin our analysis of the supply of sea transport, due attention should
be given to the behavioral aspect of shipping relationships. People who control the
shipping market are very often based on their experience and intuition when making their
forecasts. A shipowner might therefore decide not to build a vessel when the market
conditions are the same as at the time when he placed a new-building order. All analysts
should therefore use caution when making assumptions concerning future outcomes
based on past practices.
Of the main forces driving supply, we can distinguish the following: a) the
merchant fleet; the more the total of operating and in lay-up vessels exist, the higher the
24
number of 'production units' available to consumers b) Fleet utilization; technological
advances have decreased the port time required for vessels to load and unload as well as
time spent on stand by due to heavy port movement c) shipbuilding production; as the
numbers of shipyards around the globe increase and their productivity improves in
tons/man-hour (given better labor-training, more efficient facilities) so does the capability
to supply more cargo space should it be required and d) the freight rates. Rates are highly
related to the profits of shipping companies and their level (high or low) plays a very
significant role in their decision about scrapping, building, move to repair yards (thus offthe market for a certain period) or even lay-up their vessels. Finally one needs to mention
the impact of liner-conferences in the supply side of shipping. As their freight rates and
areas of service are pre-determined, they play an important role since there are cases
where conferences maintain rates that do not lead to equilibrium, in anticipation of a
favorable future market.
In discussing the elasticities of supply, time needs to be given special attention.
Supply tends to be inelastic for short-term 'responds' to price increases, gradually
becoming more price-elastic for long-term considerations. The reason is as follows:
Freight rates, (a driving factor for supply) may not increase significantly so long as there
are vessels that can assume the increases in demand. However, as all operational vessels
are used up, and vessels have to be called up from lay-up, freight rates increase
dramatically since costs related to recomissioning of vessels are substantial. This causes
the supply curve to have a steep slope, as shown below:
25
S
P3
-
P2
P1
-----------
D"
D'
D
0.
Number of Vessels available
Fig. 2.3.2.1 Supply and Demand in Shipping
The supply of vessels is limited and therefore at peaks of demand, supply can be
very inelastic at the point where all available tonnage is in use. The curve shown above
represents such a situation at the intersection of curves S-D. Let us now suppose that the
demand rises sharply, to the extent that recomissioning vessels becomes a necessity in
.
order to meet demand. To 'attract' those vessels out of lay-up freight rates increase to P 2
Should demand continue to increase, then bringing more or all available vessels into
service would become essential and D" would then be the new demand curve.
Continuing increase would cause prices to rise even more and the supply curve to become
almost vertical in the short-term.
In accord with the scope of this chapter, no further analysis of the supply and
demand mechanisms is considered necessary. The remaining markets react in a similar
manner as with the freight market. Specifically the shipbuilding and scrap-market seem to
have an extremely high correlation, since their peaks and troughs occur in the same
periods. This can be explained by the fact that in times of forecasted increased demand
and high rates, ship-owners choose to renew their fleet, by scrapping old vessels and
building new ones in anticipation of a higher market. The sales and purchase market
26
booms at times when the shipping outperforms the forecasts and prices of vessels reach
up to five times their book value price.
In order to illustrate the accuracy of the analysis attempted in this chapter, the
following example is provided. It represents the available data for the period between
1980-1999, and analyzes them using the methods suggested in this chapter.
The first table represents the tonnage oversupply in the world merchant fleet from
1992-1999. These figures provide us with an example of the existing laid-up tonnage per
year. The figures show a constant decrease throughout 1999. For laid-up dwt. to be
decreasing, we should anticipate an increase in the freight rates during the same period.
1992
1993
1994
1995
1996
1997
1998
1999
Million Dwt.
World Fleet
694.7
710.6
719.8
734.9
758.2
775.9
788.7
799.0
Surplus Tonnage
71.7
72.0
63.4
50.8
48.8
29.0
24.7
23.7
Percentage
10.3
10.1
8.8
6.9
6.4
3.7
3.1
3.0
Source: UNCTAD Review of Maritime Transport2000
Table 2.3.2.1 World Fleet in Million Dwt.
According to the United Nations Conference on Trade And Development
(UNCTAD) Review of Maritime Transport 200010, freight rates in the liner as well as the
tramp market increased in the '90s, up until 1997 when the Asian economic and market
crisis struck.
Increased rates in the beginning of the '90s brought by an increase in
newbuildings as shown by the following graph:
1 Chapter IV, Trade and Freight Markets
27
Deliveries of Newbuildings 1980-1999
U Total No. of Vessels 0 100,000 dwt
1200
1000800600400200-
,
0
1980
1985
1990
1996
1995
1997
1998
1999
Year
Source: UNCTAD Review of Maritime Transport2000
Fig. 2.3.2.2. Deliveries of Newbuildings 1980-1999
As the graph shows, increased rates after 1990 revitalized the market and most of
the shipowners attempted to earn a piece of the continuously extended pie. However,
increased rates did not last very long. Recomissioning of laid-up tonnage played a
significant part into 'normalizing' the freight rates increase throughout the decade.
2.4. Remarks
This chapter was dedicated into providing the reader with an understanding of the
way the shipping market operates, providing the basis for the analysis that will follow on
government intervention. The supply-demand approach that is presented here will also be
used within this paper to better illustrate the effects of taxation, subsidies and regulations.
It proved an invaluable tool, in analyzing the forces behind the shipping industry.
Issues such as pricing, production costs, commodities being transferred and the
world fleet, are all variables that can be significantly influenced by state regulations in
any shape or form. The importance of those variables was stated in this chapter. One that
was intentionally not analyzed here was that of the World Economy. The reason is that
global economy needs to be examined separately. This is one of the scopes of the
28
following chapter; namely, the interrelation between shipping, trade and the global as
well as the national economies.
29
Chapter 3
Significance of the Shipping Industry to National States
3.1. Introduction
The shipping industry has been a subject of dispute between economists,
politicians and people working in the field for many years. The epicenter of these
disputes lays in the way they perceive the industry's effects on the welfare of national
economies. Politicians for example may argue that fostering a national fleet or supporting
domestic shipyards takes up a larger portion of a government's budget than it should be
consuming. Economists on the other hand might argue that the return on investment in
the shipping business is too low for a government to even consider spending more in
support measures. Seafarers and shipyard workmen would certainly oppose these views,
arguing that the services provided by the industry are too important to be handled so
lightly by government officials.
The delicacy of these issues, namely the importance of a national shipping
industry, alongside the need to comprehend the drivers behind opposing views called for
a part of this thesis to analyze. The issues to be dealt with include the arguments for and
against state intervention in the industry, the economics behind undistorted trade, as well
as the monopolistic and oligopolistic (or monopsonistic and oligopsonistic) practices that
state control wishes to police.
Shipping has been the main agent for the trade of commodities around the globe
for centuries now. Even though the use of airplanes made many analysts skeptical about
the predominance of shipping in global trade, both the airline and the shipping industries
30
have managed to assume different market segments in the trading of goods. The
following graph depicts the decision variables of a logistics-oriented decision.
Sea Transport
Air Transport
High
The decision lies with
the shippers logistics
division
0
Low
Sea Transport
Sea Transport
High
Low
Volume
Fig. 3.1.1. TransportDecision Variables.
As it can be seen, airfreight transport is being used as an extreme solution,
assumed in cases of extreme peaks in demand or very sensitive cargo. Alongside the
technological advancements of the
2 0 th
century, came the increasing need for the
transportation of high-value goods.
-
-
-
-
-
-
-
-
90.00%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
-
Trade Between US-Latin America (1996)
-
0.00%
Water
Cross Border
Air
M By Volume G By Value
Fig. 3.1.2. Trade between the US and Latin America
Source: US Department of transportation
The figure shown above signifies that even in the era of intense usage of air
transport, seaborne trade outperforms all other means of commodity 'traffic' (pipeline
31
and other land-based intermodal means) amongst the nations. Even in the Transatlantic
and Transpacific trades (where cross border trade does not exist) the predominance of
sea-transport has been constant throughout the years. However, the importance of the
shipping industry in the development of national economies and world trade has been
more apparent in the
2 0 th
century.
3.2. The Shipping Industry as a Vehicle towards Globalization.
'Globalization' is a term often used to denote an increase in economic integration
amongst nations. Such an increase can today be seen in the dramatic growth in the flows
of goods, services and capital across national borders2 . One can therefore argue that
increasing trade amongst nations has made 'world economy' a possibility in our era.
Since trade has been conducted mostly onboard ocean vessels, a logical deduction would
be that 'the shipping industry' was what gave birth to the global society of our times.
Adam Smith was amongst the first to argue that the size of a market determines
the strength of an economy. He went further to note the importance of shipping in the
expansion of the world markets. The effects of shipping, he argued, would be made
apparent through the reduction of transportation costs. In 1776, in his book The Wealth of
Nations he states: 'As by means of water carriage, a more extensive market is opened to
every soft industry than what land carriage alone can afford it, so it is upon the seacoast, and along the banks of navigable rivers, that industry of every kind naturally
begins to subdivide and improve itself, and it is frequently not until a long time after
those improvements extend themselves to the inlandparts of the country...'
1In volume as well as in value.
2 Ibid
Chapter 2, Footnote 1
32
His insights, almost 230 years later, would come true in the most vivid of ways.
The following graph proves the correlation between trade and production output. The
European Union was deliberately chosen as an example since it was created from the
accumulative unification of national markets, now 3 trading as one with the rest of the
world.
Correlation between Tonne-km traded and GDP
in the EU (1980=100)
250
200150--_
_
_
_
_
_
_
10050
- - - Tonne-km -
GDP
Fig. 3.2.1. Correlationbetween Tonne-km and GDP in the EU (2002-2010 estimates)
Source: Eurostat 2001
The correlation coefficient of the above graph was calculated equal to 0.995.
However, it is not only the interdependence between trade and world output that should
draw our attention. The graph shows an overall growth of 100% for both variables in the
past 30 years. Attributing such an immense growth to one or the other variable is
practically impossible given their increased correlation. What is certain however, is the
fact that seabome trade and the economies of scale it provides have played a significant
role in the growth of the overall trade in the past few years. The following graph proves
that point:
3April
2002
33
Comparative Growth: Seaborne Trade vs Imports
& Exports (1980=100)
250200
150-
100
50
00'-
I/
M
It.
M) O MO- 0
M~ 0
-
N.
M'
qt
M
CD
Volume of Seaborne Trade MEVolume of Imports 0 Volume of exports
Fig. 3.2.2. The growth of seaborne trade in comparison with world imports and exports
Sources: UNCTAD Review of Maritime Transport 1989-2000
UNCTAD Handbook of Trade and Development Statistics 1996-2000
The increased importance of the shipping industry is clear. What can also be
inferred (given that export and import volumes provided in the graph are the world total)
is that airborne cargo, intermodal modes of transportation, as well as pipelines that are
being constructed for the transfer of natural gas and oil, have also been assuming a big
.
share of the 'trade market' 4
These observations prove the impact of trade, seaborne trade in particular, into the
formulation of the common global market, which exists today. Why is it then that nations
around the world strive to maintain national shipping industries by means that cost
considerable portions of their annual budgets? What are the incentives behind
intervention in the industry, especially in an era of globalization?
Responding to these questions is all but an easy task. The following paragraphs
shall attempt to clarify the most predominant ones, analyze the validity of the claims used
4 The fact that the total volume of imports and exports has more than quadrupled in the past 30 years when
the volume of seabome cargo has merely doubled proves that point.
34
by government officials and provide the reader with the arguments against the use of such
practices.
3.3. The Claims Against Protected Trade.
Economists consider undistorted competition as the most desirable state of trade in
the interest of efficiency.
Adam Smith, the father of modern economics, writes in The
Wealth of Nations in 1776, about a 17th century guild master struggling to improve his
weaving 5. The town guild decided: 'if a cloth weaver intends to process a piece
according to his own invention, he should obtain permissionfrom the judges of the town
to employ the number and length of threads that he desires after the question has been
considered by four of the oldest merchants and four of the oldest weavers of the guild'.
Smith argued that such restrictions limit market efficiency and harm producers and
consumers.
Adam Smith's views can be incorporated into the supply and demand analysis
that was introduced in the previous chapter. The following graph clearly depicts a freetrade approach:
D
E
DS
World
"unnly
G
Imports
R
DS\DI
Quantity
Fig. 3.3.1 Supply and DemandAnalysis of UndistortedTrade
At the no-trade equilibrium, a nations' price of a commodity would stand at E.
5 Ibid Chapter 2, Footnote 1
35
However, the world market's price of that same commodity stands at the GR
level. Should free trade be allowed, the domestic market could import from the rest of the
world at a lower price. This would have two effects. First of all the domestic demand
(DD) would increase given the lower price, thus increasing consumption. On the other
hand, domestic supply (DS) would decrease which can be interpreted by a decrease in
employment in that particular industry, as well as shutting down of facilities and supplier
businesses.
Though the economic effects of government intervention in the shipping industry
will be discussed in detail in the following chapter, it is necessary for any analyst to
understand the effects of protectionist measures in trade. This will assist in a more
profound understanding of the claims for and against intervention that are the main scope
of this chapter. Their effects are different from those of taxes, subsidies and regulations in
that the former measures affect commodities traded and 'shrink' the market that the
shipping industry services.
DS
D
K
O
AN
World Price plus tariff
World Price
T
DS
X
D
Quantity
Fig. 3.3.2. Economics of Tarfif application(8)
This graph6 shows the way that tariffs (and most trade barriers such as quotas)
affect the price of a commodity. Keeping Figure 3.3.1 in mind, one can see the way that
6
The graph is heavily based upon Ibid Chapter 2, Footnote 1
36
tariffs decrease the quantities imported and increase the quantities produced domestically.
Should a state impose a tariff equal to TA, imports would decrease from IX (undistorted
trade) to NO. The price of the commodity would increase by the amount of the tariff
imposed, but domestic production would at the same time increase from TI to AN. Those
who are in favor of regulation in the market would argue that the imposition of a tariff
increases domestic production and, in essence, benefits the state. However, economics
prove that theory wrong. Attempts to revitalize or support an economy should have longterm objectives. The long-term effects of such an imposition are rather undesirable:
The highlighted rectangle R is the amount of revenue that goes to the government
and equals the price of the tariff times the quantity imported. Producers, under the
protection of the government, increase their output to N, and their total profits increase by
TINAT, given that rectangle G is the increase in production costs. The consumer loss is
equal to TAOXT, and the net loss (E) for the nation can be calculated equal to:
E= TAOXT-TINAT-R-G,
that is represented by triangle E in the above graph. In summary, the imposition of tariffs
on a commodity has the following effects:
*
Inefficient domestic production
0
Increased revenues for the government that are offset by,
0
Overall loses for the consumers, who reduce their demand (in our example from
point X to point 0).
In summary, reasoning against protected trade can be limited to supporting the use
of a nation's comparative advantage. Given that a) the number of commodities traded is
increasingly high, b) countries differ in the stock of supplies and c) the number of input
mixes for the production of such commodities increases and changes constantly given the
37
technological advancements, each country should focus on the production of those
commodities that it can efficiently produce. The nation would then be able to export the
surplus of those goods domestically produced and imports the ones in shortage. The
targeted goal is that of reaching the optimum point of production where all domestic
resources, including minerals, labor and capital will be used at their most efficient levels.
Were we to include wages and production cost in these assumptions about efficiency, we
would have to include domestic financial indices in the discussion. Should, for example,
the country in question have inflexible exchange rates and production costs in most of the
aspects of its industrial output, there might initially be imbalances in the national trade
flows.
Such imbalances could be offset by eventual adjustments to exchange rates and
wages altering relative costs and prices until an equilibrium point was reached. The
theory of undistorted trade also applies in the shipping industry. The 'product' in our case
is the ship. In shipbuilding, according to the theory, countries with cheaper labor costs
and/or advanced technology that minimizes production costs and/or lower primary
production costs should produce the bulk of the vessels trading in the world with no
intervention from third parties (the two parties are the manufacturer and the customer).
As far as shipping is concerned the commodity to be exported is the vessel flying the flag
of the country in question. Should the operation of these vessels be economically more
efficient, foreign investors should be able to purchase them, in a sense importing this
'commodity'. The laws of free-market, especially that of supply and demand, would then
apply in determination of quantities and prices.
Another argument in support of unprotected trade is the one concerning
'protection competition'. Should a state issue a tariff in support of a commodity, or a
38
subsidy in support of an industry, or even reduce taxation in support of a shipping
company, competitors would then be expected to retaliate. Retaliatory measures would
include the imposition of even greater tariffs and subsidies or even lower taxation for
their companies. One of the most recent examples of such an international unrest caused
by protectionist measures is that of the increase on imported steel tariffs in the US. On
March 20h 2002 the US increased tariffs on imported steel by as much as 30%.
According to government officials the increase was necessary to protect the domestic
steel industry from protectionist measures used in the past by foreign governments and
caused overcapacity in the global steel industry.
US Steel Imports from the EU
4500
o 4000
c, 3500
300025000 2000
1500-0 1000-C 500-
--
1996
1999
1998
1997
111111
US total
2000
E EU
Fig. 3.3.3. US Steel Importsfrom the EU
Source: US International Trade Commission
7
The European Union seeing that the larger importer of its' steel exports enforces
protectionist practices took the matter to the World Trade Organization (WTO) and
threatens to retaliate by June 18th 20028.
The theory of undistorted trade does not have many followers in the modern
world. This unfortunate finding can be supported by the fact that there are few industries
7
EU steel exports to the US accounted $6B in 1996. The trade was seaborne.
this deadline expire the EU can no longer claim losses.
8 Should
39
where the total lack of tariffs, quotas, subsidies and favorable taxation regimes are all but
rare phenomena in world trade. There are therefore those who strongly oppose the lack of
protectionism in shipping as well as in most aspects or 'modes' of trade. The following
paragraph will be dealing with the arguments used in favor of intervention in the industry.
3.4. The Claims in Support of Protected Trade.
The reasons for the employment of protectionist measures in the shipping industry
fall under the following categories:
" The need to ascertain continuous trade of commodities that may be uneconomic in
a strictly financial sense, but necessary for the economic development of the
domestic market or for the provision of essential communications
*
Environmental Issues
" National Defense issues
" Balance of payments accounts
" National 'prestige'.
" Protection of the domestic market against lower cost competitors and countries
whose regime the government might disapprove of.
" Infant industries
" Employment and Safety
An example of uneconomic operation of a liner vessel would be a liner passenger
vessel servicing domestic isolated islets, thus maintaining trade in the area. The argument
employed here is that in the case of free trade, such a service would be permanently
discontinued since the profit would be minimal or even non-existent. In effect, the
population of those islands would diminish and emigration would increase leading to
40
rural depopulation. Such is the case in several West Indies islands, as well as a few
islands of the Greek Archipelago. In the Greek example, the industrial revolution caused
rural population to move to the cities in search of employment. The inhabitants of the,
over 2000 islands and islets, rural areas diminished at very high rates.
The government saw no other way of halting emigration other than maintaining
seaborne service to those areas in the hope that trade would assist in their development.
Unwilling to purchase and operate a state-owned passenger fleet, the government found a
different way to intervene. In order to issue the 'certificate of convenience and necessity',
required for a passenger vessel shipowner servicing a specific waterway, it added those
islands to the itineraries that were the most profitable. Since the overall trade might then
become uneconomic, the government accepted that those islands be excluded from the
itinerary on the provision that different vessels of the same shipowner maintain adequate
service to those areas.
Governments often support their industries claiming their attempt to avoid the
emergence of monopolistic or monopsonistic statuses that would harm the domestic
markets. In the case of a monopoly there is only one source of supply to satisfy demand.
This may lead to output inefficiencies, production shortages and increased pricing.
Furthermore there are no incentives for technological advancement since there are
practically no competitors. Monopolies are rare in our world. Whenever they appear
however, they are the product of government intervention. On the other side of the supply
and demand analysis there is monopsony. The case where there is only one buyer for the
produced commodity. This can create inefficiencies in the sense that competitors might
even go below cost levels to ascertain a greater part of the market. Producers then engage
in price competition until there are only a few remaining in the market.
41
Oligopolies are a more common phenomenon. A group of producers, in view of
their common interests in their trade, 'coordinate their behavior' and set the prices and
production output in a way that is beneficial for their countries and disastrous for the
others. In response to the threat of such practices, governments impose tariffs, quotas,
lower taxes and subsidize domestic industries so that they can still operate in the
international environment.
The studies on monopolies and oligopolies have been extensive and an attempt to
present the theory behind them in further detail would go beyond the scope of this paper.
However let us see how they affect the shipping industry. Let us suppose that countries
X, Y and Z are the only ones with shipbuilding potential9 . Should they decide to increase
their profits and collectively engage in price fixing, the results for the shipowners initially
and consumers in the long run would be detrimental. Also, in shipping, should 10-12
companies carry 95% of the cargo traded and then reach an agreement on what they will
charge, this would result to extra costs for the consumers.
In anticipation of monopolistic prices governments subsidize their industries (as is
the shipbuilding/shiprepairing one) so that they will be able to assume a greater market
share in the event of monopolistic practices, and scrutinize pooling of vessels under the
suspicion of injurious practices. There will be a detailed reference on this issue in Chapter
5. One can also argue that the lack of government intervention would lead to the drastic
deterioration of the environment.
9 The use of three countries does not suggest that this is the number of 'coalition members' required for an
oligopoly to occur. In the case of oligopolies the number of 'players' required depends upon the size of the
market.
42
3.4.1. Environmental Issues
Industries are only interested in profit, and it would be unlikely for them to
assume the costs for the purification of contaminated waters and polluted air, caused by
their production processes. Governments can impose quotas, increase taxation or apply
regulations in certain fields, so as to restrict or modify production processes or trading
practices or even cause the need for technological advancements. The examples of
regulations imposed in the shipping industry after the accidents of the Exxon Valdez and
the Erika fall under this category.
3.4.2 National Defense
Another argument in support of intervention is that of national defense.
Elaborating on the issue, one could argue that the mere consequence of higher costs for
the domestic production of a commodity should not refrain governments from supporting
industry outputs should the commodity be essential for the national defense. This
argument combines with one that the author calls 'craftsmanship derogation'. As an
industry producing goods sensitive to the national defense discontinues operations, in the
name of free trade and worldwide benefits, the nation will after some years lose the craft
of that particular production. Applying it to the shipping industry, a country that has not
been involved in the production of navy or merchant vessels for 20 years (or even less)
will not be able to initiate production of such vessels in a time of war. The same applies
to effectively manning and operating commercial fleets. In times of war, the nation
requires people who will obtain the knowledge of handling the difficult logistics issues
involved. The best qualified for these positions are people who had been engaging similar
43
issues in the past. Therefore, the theory goes, measures need to be taken in order to
ascertain maintenance of the skills and craft required.
3.4.3 The Balance of Payments
The financial considerations of the matter are of extreme importance. A nations'
balance of payments account is one of them. Since it will be encountered again in the
following chapters, a more detailed analysis of its meaning is provided here. As its name
suggests, the balance-of-payments account is a double entry, showing receipts from
foreign earnings and the payments to the rest of the world. The theory of protected trade
suggests that the foreign exchange saved by the increasing exports and minimizing
imports will benefit the aforementioned balance.
As far as shipping is concerned national fleets are considered beneficial since the
costs of exports are paid in foreign currency (usually USD), and can therefore assist in
strengthening local currencies. The same applies to shipbuilding and shiprepairing. Since
the norm used in payments involves USD, it is in the interests of the state to oversee the
upkeep and expansion of such local industries. Why is the balance of payments
important? The answer cannot be simplified enough. The greater the surplus in the
current account of the balance of payments, the more able the country is to invest abroad
and abstain from borrowing to cover excess imports. Therefore the higher the account the
stronger a national economy is.
3.4.4. National Prestige and Infant Industries.
There have been cases where tradition has played a significant role in the
decisions on protection of certain industries. In general, governments are unwilling to let
44
the laws of supply and demand lead national industries out of the market if the country's
industrial might has coincided with the development or world dominance of its own
domestic industry. Though a weak argument, it holds that nations that have managed to
dominate a market segment, will at all costs safeguard their top of the world status since
failure to do so would mean heavy and negative criticism of the governments actions
from the population. In that sense S.Korea will most likely refuse to halt aid to shipyards
(we will discuss this matter in detail in the following chapter), as Greece is not likely to
increase taxation or impose any restrictions to the domestic shipping industry that brings
the country in the top of the world's shipping listl
3.4.5. Lower cost competitors, Infant Industries, Employment and Safety.
Those in support of protectionism might argue that the need for government
intervention becomes even more necessary in the early stages of the development of
domestic industries. Developing industries that would, theoretically, be able to produce
efficiently can only be accomplished through government support in the first stages of
their function. A prerequisite for the efficient operation of an industry is low-income
labor. Since it is impossible for developed nations to compete with underdeveloped ones
in the compensation of labor, governments should step in and assist domestic industries.
What is more, when governments disapprove of the existing regime of a competing
nation, or even in cases of rivalries amongst nations, domestic industries should be
supported in an attempt to enfeeble the rival nations' production capacity.
Domestic industries also provide jobs. A government that cares for the welfare of
the society should assist the operation of domestic industries in order to provide
'0 In vessel ownership.
45
employment for the local workforce. Protectionism also provides safe working
conditions. Since industries rely on support from the government, it is difficult for them
to oversee government regulations concerning safety.
3.5. Conclusions
This chapter provided the reader with an understanding of the importance the
shipping industry has in national, as well as the global economy. It further analyzed the
arguments in support as well as against intervention in the global market mechanisms and
their applications to the maritime industry in general.
The chapters that follow analyze past and present practices in support of the
shipping industry, both the shipbuilding/shiprepairing segment and the ship-owning one.
The author's comments on the arguments referred to in this chapter as well as the views
on what an optimum strategy would be are presented in Chapter 6.
46
Chapter 4
Government Intervention and its effects in the Shipbuilding Industry.
4.1 Introduction
Governments around the globe have considered the shipping industry as one of
the most important segments of their national outputs as proved in the previous chapter.
They have therefore attempted to intervene in the industry's operations since the early
19 th
century in numerous ways. The data available however can often be misleading,
inaccurate or even distorted since practices that would damage the interests of other
nations cannot, for this reason, be published and documented in full.
The primary scope of this chapter is to analyze their impact on the supply and
demand mechanism as well as their effects on the shipbuilding industry. Secondly this
chapter will present policies used in the past, as well as one of the most significant
examples of government intervention in the shipbuilding industry, namely the conflict
between the E.U. and S.Korea. Claims by the former of monopolistic practices assumed
by the latter require an analysis of the effects of monopolies and oligopolies. This latter
analysis is presented in the final part of the chapter.
One of the very first examples of government intervention in modern history is
that of the United Kingdom Navigation Acts that initiated in 1609 and throughout the
17 th
century. The assumption of mercantilistic approaches led to the declaration that 'fishing
in English waters would be reserved for English vessels' by James I. Another example
comes yet again from the UK in 1839. At the time of the laisser-faire (undistorted trade)
doctrine in economics, there was no room for direct subsidies in the shipping industry.
What the British government initiated at that time may have been one of the predecessors
47
of modem protectionist measures in the industry. They attempted to masquerade a direct
operating subsidy to shipping companies in the form of postal grants. Those grants
accounted, in many cases, for more than 50% of the actual carrying costs of providing the
.
service of carrying the country's mail as estimated by the Postal Unions1
Many European countries as well as the United States, where the extent of the
subsidy reached the amount of 4000% of the actual carrying costs, soon followed their
example. Postal grants were terminated soon after the First World War. One case of an
official discontinuation of such measures was the Merchant Marine Act of 1936
terminating all U.S. mail contracts.
The cases presented above prove the claim that government intervention is far
from a recent phenomenon. It is an issue that has been concerning officials for centuries
and one that certainly needs to be thoroughly examined.
4.1.1. Types of Intervention
Grouping the forms of intervention currently available was considered necessary,
in order to enable the analyst to recognize and distinguish between the measures provided
(or masqueraded, as in the example previously made) in each case. Based on the research
conducted for the scope of this paper, such measures fall under the following categories2
0
Protectionist Measures
These include all measures introduced in order to protect domestic and foreign routes,
as well as the domestic shipping industry from malicious practices.
*
Subsidies
Ibid Chapter 2, Footnote 9
The effects of such measures will be analysed throughout this thesis to the extent possible. The analysis
will follow the discussion of their implementation.
2
48
Aid to the industry in the form of subsidies can be provided through cash subsidies
(directly), special tax treatment and loan guarantees (indirectly).
& Regulations
Governments have attempted to regulate several segments of the market to the
interest of consumer wealth (as is the case with liner conferences), as well as to the
interest of safety and environmental protection.
4.1.2 Distinction between Shipping Market Segments
In analyzing the effects and history of subsidies in the shipping industry 3 , one
comes across the need to distinguish between the market segments receiving the aid as
well as the types of available subsidies for each one. For the purpose of this paper, it was
considered best suited that the distinction be made between the ship owning and the
shipbuilding companies for the following reasons:
0
Though closely linked, the shipbuilding segment of the market has not been
researched as much as that of ship ownership.
0
Shipbuilders (shipyards) are companies that have not been recipients of favorable
taxation in the past, at least not to the extent that shipping companies have.
*
Measures taken in support of the shipbuilding industry produce results much later
than those concerning shipping companies.
*
Shipping companies have the unique characteristic whereby residents of one
country may own a fleet registered to another 4 . This characteristic requires that special
reference be made to shipping companies.
3 As defined in Chapter 2.
4 This is rarely the case in shipbuilding, even though there have been such incidents, as that of the
acquisition of the German shipyard HDW by a US company and that of the acquisition of a Romanian
shipyard by a Korean one.
49
Before we initiate our analysis on the forms of aid applicable to shipbuilding it is
imperative that we comprehend the general effects of aid in any form, from an economic
perspective.
4.2. Economic Analysis of Aid.
In the world of economists, government aid is divided and analyzed in the context
of two categories: that of tax implications and that of regulation impacts on the supply
and demand models of the influenced markets. The cases that follow, though generic,
apply equally well to the shipping industry in accordance to the study attempted during
the second chapter of this thesis.
4.2.1. Impact of Subsidies and Regulations
Governments provide subsidies, levy taxes and impose regulations on industries,
thus controlling the quantity, price and type of goods supplied. The way this control is
imposed can be viewed through the supply and demand analysis.
PA
s'
D
E'
I
(P2 -P.)
-
-
-
5,
Is
sS
S Pi -------------------- ---------
D
E'".
Quantity of commodity produced
Fig. 4.2.1.1 Effects of Taxation on Supply and Demand
The effects of taxation can be seen in the above graph5 . In this scenario the
.
government is supposed to have increased the price of a commodity by P 2-P1
This is one of the effects that the imposition of a tax may have on the supply and demand equilibrium of a
product.
5
50
Assuming that the demand curve is inelastic 6 , the supply curve will shift upwards
by an amount equal to that of the increase caused by the imposition of the new tax.
Another question that could be posed at this point is that of the side that will be burdened
with the increased price. Will it be consumers, producers or both and by how much? To
answer this, one has to know the exact prices of the elasticities of the supply and the
demand curve. In our example, the E'E"' segment represents the increase in price. E'E"
denotes the part that affects consumers and E"E"' the part of the P 2-P 1 increase that
affects producers.
In general, the more inelastic demand is to supply, the more part of the increased
cost will be passed to consumers. Should supply be more elastic, most of the tax costs
would be returned to the producers7.
The fact that subsidies work in a reverse manner should come as no surprise.
Subsidies, in a situation like the one previously described, cause the supply curve to shift
downwards. This is the same effect that a tax cut on the produced commodity would have
on supply. Therefore a subsidy to any industry, including shipping, might be considered
as having the same effects as a tax relief of a percentage equal to that of the aid provided.
This apothegm applies more effectively to cases where such subsidies involved total
production of an industry (all sectors of the newbuilding industry for example). In order
to allocate the benefits of such a subsidy, the analyst should again have clear knowledge
of the price elasticities. The more inelastic demand was to supply, the less the decrease in
price would be for consumers, as producers would use this cost deduction to increase
their profits.
6 The
term was defined in chapter 2.
7 The assumption of 'all else being equal' made by economists when performing supply and demand
analyses, also applies in our case.
51
Market intervention and industry protectionism by governments usually takes the
form previously discussed. However, what economists claim is the least effective
measure taken, that of regulating the market, should also be analyzed as to its
implications on the supply and demand mechanism 8
Let us assume for, ease of exposition, that the US government, concerned about
the declining numbers of mariners, decides to increase the minimum wages in the hope to
attract more crews in US-owned vessels. The effects on supply and demand can be seen
on the following graph:
D
s
Cs,
U
CD'
WMIN
WEXIST------C
I
s
'D
MD
MIrr
MS
Fig. 4.2.1.2. Effects of Wage Regulation
The scenario used to construct this graph assumes the minimum salary for US
seafarers being WEXIST before the regulation and WMIN afterwards. The initial point of
equilibrium lies at C. Upon imposition of the regulation, the number of US mariners
'supplied' or willing to work in the shipping industry, increases from MINIT to Ms (since
more individuals will be willing to enter the profession given the increase in salary). On
the other hand, the demand for US mariners will fall to MD since ship-owners will
consider it uneconomical to man their vessels with US mariners after the rise in salary.
As shown by the graph, the measure produces negative results. The net decrease
in US mariners caused by it can be calculated equal to
MINIT-
MD,
and the unemployment
provided here were based heavily on the examples provided by Samuelson's and Nordhaus'
'Economics' 17' edition, and altered to fit the shipping industry.
8 The examples
52
will be equal to Ms -MD. In all, this example shows how well intended measures have had
.
harmful effects in the shipping industry9
The example that was provided here is, in the words of economists, called a 'floor
setting'. There is a similar example of government regulation called 'ceiling price
setting'. Let us assume that the price of steel (assuming 10% of the total cost structure of
a merchant vessell) increases to the point that a government decides to harness its price
by setting a maximum. This situation can be depicted as follows:
D
D
G
R
Ceiling price
s
D
Quantity of steel pmduced
Fig. 4.2.1.3 Effects of 'ceiling' imposition
The initial point of equilibrium lies at Ds. The moment the regulation comes into
effect, the quantity demanded increases to R and the quantity supplied (at the maximum
price) reduces to G. The GR segment of the ceiling price line constitutes the deficiency
between supply and demand. Let as look at possible scenarios for evolution of such a
case.
One possible scenario is that the country in question does not have the capacity to
accommodate the demand for steel and that it is already running at 100% production
utilization. Should importers be unable to find less expensive steel in the world market
and given the inability of building new steel mills (given a lack of resources for
example), industries in need of steel would come to a standstill. Privileged operators with
9 As earlier stated, the effects were measured provided 'all
else being equal' which might be an
oversimplification of the real situation, it depicts however the gross effect of the measure.
10
See also, Georgios Kokkalas, Shipbuilding Market Analysis, MIT 2001
53
access to the black market might be able to overcome the problems at first, but the rest of
the industrial sector in question would have to halt or reduce production.
Another scenario might be that domestic steel mills were not utilizing their full
production capacity. Should their owners be willing to increase production, given the
price limitation, the supply curve would shift to the right thus overcoming any
deficiencies that might exist. The measure would then be a success, since both the
domestic 'steel producing' and 'steel consuming' industries would benefit from it.
Both examples were used to show the ease at which a well-intended but
inefficient regulatory measure may harm an industry rather than assist its market share
increase. Measures that have been taken in the aid of the shipbuilding and shiprepairing
industries around the globe as well as their effects are the subject of the following
section.
4.3. Intervention in the Shipbuilding-Shiprepairing industry (SSI).
In recording protectionist practices assumed by governments with respect to the
SSI, one has to make the distinction between measures that are aimed directly to the
industry in question, and those that are applied in protection of a country's domestic
industries in general.
4.3.1. Tariffs on Imported Steel
An example of the latter measures can be derived from the steel industry,
mentioned in the previous paragraph. The measures taken by the US government in
March 2002, whereby imported steel tariffs were increased by 30%, were not necessitated
54
by the SSI. However they affect it a great deal. By a 30% increase in imported steel, such
a commodity becomes uneconomical for shipyard operators.
Tariff imposition will turn the yards into the domestic market for the portion of
steel that they would otherwise import. The price of steel in the US is higher than the one
imported, hence the need for measures to be taken, causing US yards to grow even more
expensive for shipowners.
4.3.2. Regulations
Environmental considerations often lead officials to impose regulations on the
operation of shipping companies. Though not directly imposed by governments, they are
ratified by them, and they therefore obtain legislative value. The effects of those
regulations have an indirect impact on the SSI. Such regulations have been:
" The Oil Pollution Act (OPA) of 1990 following the tragic accident of the vessel
Exxon Valdez in 1989. Section 4115 requires phasing out of all single hull oil
carriers by 2010. An extension of five (5) years is provided to single hull carriers
with double bottoms or sides.
" The Amendment to Marine Pollution Act (MARPOL) 73/78 Annex I, in 1992.
Under paragraph 13G (MARPOL 13F, Reg. 4a for newbuildings) all existing
single hull oil carriers were to be modified into obtaining double hulls, no later
than 30 years from the date of delivery. Double hulls were to be fitted to all new
oil carries after 1996. Under paragraph 13G, hydrostatic balance loading was
allowed to compensate for the lack of double bottoms or sides.
" The amendment the aforementioned paragraph 13G Annex I of the MARPOL
73/78 in 2000 following the tragic accident of the vessel 'Erika', leading to an
55
acceleration of the phasing-out of existing single hull tankers. The new regulation
shall come into effect as of September l't 2002, and provides
The effects that these regulations had on the SSI can be seen in the following graph:
New Orders ('000 dwt)
35000--30000--250002000015000100005000-
0
1987
1989
1991
1993
1995
1997
1999
Year
Fig. 4.3.2.1. New Ordersfor Tanker Vessels
Source: UNCTAD Review of Maritime Transport 1989-2000
The graph shows an increase in orders in the years 1990 and 1997. This can be
attributed to two factors: a) an increase in rates and b) an attempt from the market to
replenish the tanker fleet given the regulations. The average age for the tanker fleet in
1988 was 12.5 years. With the International Maritime Organization (IMO) restrictions in
effect, most of the existing tanker fleet would have to be replenished by approximately
2003. Last orders would be placed around 1999.
Bearing such a strategy in mind, and given that: 1) tanker freight rates in 1990 and
1997 were equivalent on average 2) the Gulf crisis occurred in the last quarter of 1990
which forced many shipbuilders to postpone new orders, it can be argued that IMO
regulations certainly influenced production.
56
0
At times, environmental protection measures taken by the IMO require vessels
to undergo modifications in order to be eligible for trade. Such measures
include arrangements for the installation of emergency towing systems for
tankers, prohibitions of the use of asbestos as well as reinforcing the Nol
Hold bulkhead for bulk carriers". Again, shipyards benefit from such
measures given that revenue increases above that projected for the specific
year/s.
The need for regulations in protection of the environment is immense, and the fact
that shipyards benefit from the imposition of such measures cannot be considered
harmful to trade. Such regulations affect the industry in the way analyzed in paragraph
4.2.1. However, careful estimation of the time required for the replenishment of the
existing fleets, has not led to the market inefficiencies dreaded by many.
4.3.3. Direct Subsidies to the SSI
Apart from the aid provided to the SSI indirectly, there have been measures
exclusively targeted to this market. One of the first ones in history was that provided in
the Navigation Act of 1651. It clearly stipulated that goods imported or exported by the
English colonies in Africa, Asia and America 2 , be shipped on vessels constructed by
English shipbuilders. Trade outside the colonies would be conducted either on English
built vessels or on vessels built in the exporting or importing nation.
This, in turn led to the birth of the American Shipbuilding Industry, and increased
the might of the, then, powerful English Shipbuilding Industry. In an economic view, the
" Following the accident of the 'Derbyshire'.
12 England of the 17 th Century: 'the empire of the seven seas and five
continents. The empire upon which
the sun never set'
57
regulation set a minimum standard for the supply of English built vessels. The
discrepancy between those demanded and those supplied was offset by two factors: a) the
English and Dutch controlled 17
century trade and b) the trans-Atlantic trade growth
was unprecedented given continuous exploration in the Americas. The measure intended
to safeguard English shipbuilders and shippers, as well as to weaken the sphere of
influence that the Dutch had at the time. The result: As there was no 'world economy' in
the modem sense to damper the effects of such measures, and given that no higher
authority existed for the resolution of disputes amongst nations, the Anglo-Dutch war of
1652 broke out.
History is an inexhaustible source of examples of subsidies on the SSI. However,
the purpose of this paper targeting recent developments in the field, we shall move to
subsidies recorded in the 20th century.
4.3.4 Intervention in the US SSI.
Before we engage in the analysis of subsidy policy towards the US SSI, we should
look at the way the World Trade Organization (WTO) defines subsidies 3 . According to
the WTO Agreement on Subsidies and Countervailing Measures (SCM), Part I, Article 1,
Appendix H, a government action constitutes subsidy when there is 'a) a financial
contribution by the government or any public body and when there is b) a benefit
concerned'. Both these conditions have to be met.
The US has, throughout the 20th century, had a full-scale, continued subsidization
program in the SSI under the justification of the necessity for bridging the gap between
The WTO, established 1995, is the only global international organization dealing with the rules of trade
between nations. WTO agreements need to be ratified by national parliaments in order to come into effect,
and they then constitute government actions.
13
58
the costs of ships in the US and in other countries. Shipyard workers' wages around the
globe have remained approximately one third of the US level (AWES 2001).
One of the first such measures was the Merchant Marine Act (MMA) of 1936,
whereby a construction differential subsidy (CDS) was established to offset the high costs
of construction of ships in US shipyards. Subsidies were designed to offset the
differential between costs of constructing vessels in the US and abroad with a cap of 50%
of the US costs. Vessels constructed under CDS monies had to be available 'for use by
the United States for national defense or military purposes in time of war or national
emergency', and they were therefore restricted to US-flag vessels.
Such subsidies applied to freighters only and were payable to ship operators. The
merchant marine act of 1970 extended the CDS to bulk carriers as well and allowed the
subsidy to be paid directly to the shipyard. This constituted a change of the form of
subsidy, since the shipyard would now be able to charge less for constructing the vessel.
Subsidies of the kind were not available to Jones Act Trade vessels.
The 1938 amendment to the MMA of 1936 (title XI) established a federal loan
insurance to help finance the construction of vessels. In 1972 the program was modified
to one of loan guarantees. Though not a subsidy, loan guarantees reduce the borrowers'
interest costs.
Funding for new ships under the CDS program was ended in 1981 by the Reagan
administration.
In evaluating the policies assumed by the US governments throughout the
century, one has to examine their impact on the SSI. The following graph represents the
US SSI market share over a period of 80 years
59
MMME tt
-
MA-nt--
"'
PX , --
-
.- - - - -
- -- -
-
- -
-
US shipbuilding (excluding reserve fleet). World share
90.00%80.00%70.00%60.00%50.00%40.00%30.00%
20.00%10.00%
Elf.Mion
0.00%
905
1915
1925
Eu.-,
1935
1965
1955
1945
1975
1985
year
Fig. 4.3.4.1 US SSI share
Source: Lloyd's register of Shipping
One could argue, based on this graph that all the measures taken by US
governments in support of the SSI have proved ineffective. The following graphs, further
support this notion:
Commercial and Naval Vessel
Orderbook History
As of December 1998
60
40
20
-
-
-
E
z
80
-
120100-
076
78
82
80
84
86
88
90
92
94
96
98
Year
---
Commercial -4-Naval
Fig. 4.3.4.2 US SSI Orderbook History
Source: American Shipbuilders Association (ASA)
Though limited in respect to the former graph, it clearly shows that even in the
last 20 years the decline of the SSI of the world's superpower has been significant.
60
-
-,
Furthermore, it shows that US shipyards have focused mainly on naval shipbuilding,
given their apparent inefficiency.
Annual Ouflay of CDS Payments
S300
-2 250200-N
.rs 150-
2 100
=
50
Year
Fig. 4.3.4.3 CDS payments (1985 USD)
Source: ASA
The attempt of the US governments to maintain a viable industry, cost dearly. In
order to calculate the total expenditure of the CDS in recent dollars one should use the
GNP deflector. The sum of CDS payments made from 1936-1985 (in 1985 USD) reaches
the amount of USD 7.6 Billion (White 1985).
It was not the lack of aid that harmed the SSI in the US. It was the implementation
of an inefficient policy that has led US yards to the brink of closure. As seen in the first
paragraphs of this chapter, subsidies aim to increase the quantity of a commodity
demanded for a fixed price. Given the idiosyncrasies of the shipping industry, particularly
the global arena of operation and the labor-intensive nature of the industry, calculating
the optimum amount of aid provided is far from an easy task. CDS was imposed
alongside ODS1 4 and was therefore attractive to US-flag shipowners alone. What is more,
US shipowners were amongst the first to use international registries extensively (Stopford
1997). This means that the idea of owning a US-flag vessel was far from attractive, even
14
Operating Differential Subsidy: See next chapter for an analysis.
61
though the US have always possessed a great share of the world trade as shown in
Chapter 3. Since the two industries were connected, the US SSI's decline should have
been considered a certainty.
US yards have proven their ability to produce efficiently twice in the last century,
both times during the world wars. It was then that massive shipbuilding programs were
mounted and carried off effectively.
In conclusion, the inability to subsidize to the extent that would effectively cover
the difference between US and foreign newbuildings, as well as linking the SSI with the
shipping industry appear as the two prominent reasons for the markets' inability to
compete in our times. For ease of exposition, recommendations on measures to revive the
industry appear in Chapter 7.
4.3.5. Intervention in the SSI of the Rest of the World.
We will begin our analysis by focusing on the situation in the European yards.
What should be noticed at this point is that European Union (EU) member states have
been working towards a common policy with regards to the SSI. This however has not
always been the case.
What is unique about Europe (and the rest of the world; the US excluded) is that
though references to subsidies can be found, documents with the exact amounts and ways
that government aid was implemented are scarce. In that sense, we know that prior to
WWI, shipbuilding subsidies were granted in Austria, Greece, Japan, Italy and Russia.
One might argue that the nations that pioneered in subsidizing their SSI should be the
leading players in the current market. Given the current market situation however, it is
certain that whatever measures had been taken, with the exception of Japan, were not
62
effective. This can possibly be attributed to the fact that their shipbuilding industry could
not easily switch from wooden shipbuilding to the more capital-intensive process of
building steel ships. National governments should have anticipated the switch and
provided their yards with the aid required to withstand such a restructuring.
In Britain, the world's dominant power of the seas until the beginning of the
20 th
century, the SSI was thriving alongside the shipping industry. The country controlled
commerce, had colonies around the globe and had restricted trade with England to
domestic vessels, built within the country or its colonies. British shippers preferred
homeland yards for the construction of their vessels even after the abrogation of the
Navigation Acts (1951) that heavily protected the industry. The momentum was
unprecedented. 80% of the world's shipbuilding was in English control. After each of the
WW however, England lost parts of its colonies, therefore the monopoly over trade, and
alongside that, lost control of the shipping industry. The SSI followed soon after despite
the United Kingdom Export Credit Guarantee Scheme whereby foreign purchasers were
able to obtain more favorable credit terms than British owners. This was an attempt to
attract foreign investment.
In a futile attempt to harness the decline rate of the industry the 'Geddes Report'
of 1966 recommended subsidies as a means to aid reorganizationand rationalizationof
the industry.
The French government subsidized the construction of tanker vessels in the pre-
WW2 era, without much success. It is imperative to note that from 1900-1950, Europe
was the theater of two world wars. Industries in Europe suffered immensely and the fact
that they have not yet recovered is that their world market share is around 25%, their
63
1902-1939 average. The following graphs show the way the SSI evolved throughout the
century in Europe.
Percentage of World Market Share
70.00%60.00%50.00%40.00%30.00%20.00%10.00%0.00%
1905 1915 1925 1935 1945 1955 1965 1975 1985
Year
1 Britain U Continental Europe 0 Japan 0 Scandinavia
Fig. 4.3.5.1. SSI Market share of Selected Nations
Source: Lloyd's Register of Shipping
The SSI of the EU member states lost their competitive advantage after WW2.
Japan on the other hand, notwithstanding the destruction following its defeat, managed to
steadily increase its market share, which in 1985 was over 50% of the world market.
The Japanese government instituted a very well planned subsidization program
for the shipbuilding industry in 1947. That program is still in effect today along the same
lines that were laid down at that time. The idea behind it is simple: Each year the
government holds a meeting along with the advisors of the Shipping and Shipbuilding
Rationalization Council 'in order to decide on the tonnage of the vessels and vessel types
to be built... and allocates production contracts and the ships amongst the applicant
domestic shipbuilders and shipowners. The selected shipping lines receive preferential
64
financing and are in turn subject to close government supervision'
.
Loan guarantees are
also provided through the government owned Japan Development Bank.
Even though the program was not as effective for the shipping industry, the
Japanese SSI managed to become one of the markets' leading players. What differentiates
this program from that of the EU and the US, is the fact that the measure taken, allows for
speedy changes in reaction to market needs. On the supply and demand model, it
illustrates a constant repositioning of the Japanese supply of vessels in regards to the
world fleet demands, instead of a one time measure, be it subsidy or reduced taxation, or
incentive towards the vessel operators which is difficult to amend, and requires long talks
with all parties involved. The Japanese SSI could throughout the years adapt to the needs
of the market within a very short period.
The need for increasingly sophisticated and larger trading weight vessels was met
by the construction of large modern shipyards. The need of, and gains from, mass
production was recognized early on. The yards were capable of producing VLCC's and
large bulk carriers at a rate of five and six per annum.
The Koreans copied the Japanese model in the early 70's, and initiated a wellplanned industrial program in the early 70's. Again huge facilities, subsidized by the
government, were built in order for the then infant industry to become a key player in the
market. The success of their strategy is shown in the following page.
"5 See also Martin Stopford: Maritime Economics
65
1979
Rest of World
4ir
1988
China
3%
China
mRest ofworld
cturm
South Korea
3%
ESouthKorea
0%
65%
United States
9%
F9%1998
SJapan
23%
China
rea
24%
<b
World
49%
United
States
Japan
United states
,.pan
1South
%
Korea
36%
or
Japan
24%23
0%
Japan
34%
%
United
States
1
Fig. 4.4.5.1 Shipbuilding Market Share 1979-1998
Source: ASA
Perhaps one of the most efficient ways to analyze current methods employed in
the aid of shipyards is that of the EU-S.Korea dispute over shipyard subsidization.
4.4 The EU-S.Korea Dispute16
The EU in an attempt to set the example of less intervention in the SSI lowered
the operationalaid that was provided to EU yards from 28% in the 80's to 9% then 4.5%
and finally as of December 2000, it seized any operational aid towards the SSI. At the
same time, EU shipbuilders market share shrunk by 30%. What is more the anticipation
of increased demand due to regulations imposed by the IMO as well as market trends
towards containerization and increased trade volumes failed to become a reality.
These observations in the early 90's as well as the fact that Korea's share in the
market was increasing rapidly, led officials to scrutinize the way shipyard modernization
and expansion had taken place, alleging illegal subsidization by the Korean government
and the Korean banks, aiming at market monopoly.
The claims of the Association of Western European Shipbuilders (AWES) and the
counter-arguments by the Korean Shipbuilders Association (KSA) are grouped in
16 The author does not intend to declaim against either of the sides in the dispute. The case is analysed here
for the presentation of possible measures taken by governments in support of the SSI, as well as to depict
one of the biggest disputes involving government intervention.
66
Appendix A. The KSA does not refute the allegations by the AWES. It just states that the
measures taken were not illegal. Grouping them here for ease of exposition they involve:
" Advance payment refund guaranteeprograms
"
Export Loans and Pre-ShipmentExport Credits
*
Debt-for-equity-swaps and interest relief by
government-owned and
government controlledbanks and institutions.
*
Subsidy programsfor upstream suppliers of the shipbuilding industry whose
subsidized inputs, such as steel andfavorable taxation regimes.
The aim of the aforementioned measures is obvious. By providing export credits
and export loans, the Korean Banks attract foreign shipowners, since the former
guarantee the necessary funding. Debt-for-equity swaps allow the yard to continue
operation even in cases of increased debt. Ownership of the yard may be passed on to
creditors, however the continuous operation is guaranteed. The effects of favorable tax
regimes as well as those of subsidies to marine related products (steel in our case) were
analyzed earlier in this chapter.
What the Koreans have managed to accomplish, in an economic aspect, is to shift
the newbuilding supply curve lower, creating benefits for the customers. The AWES
claims that shipbuilding prices in Korean yards are through these practices, lower than
EU prices at a rate of 30%. EU officials claim that Korean yards have accumulated a
debt-to-equity ratio of 23 and that for every compensated gross tonnage (CGT) built,
there is $250 of debt that is not serviced.
Whichever the case may be the measures assumed by Koreans are dangerously
costly to their national economy to say the least. Government officials should constantly
examine their effects on the economy (national debt and balance of payment accounts).
Cost-Benefit analyses would provide the assurance that prolonged protectionism will not
67
lead the Korean economy to yet another crisis. Should the measures be within legal
limits, they will not only manage to lead Korea to world shipbuilding market dominance
(unless China undergoing severe restructuring and investment in shipbuilding, manages
to take part of that share), but also to drive competitors out of the market. Re-entry
barriers in the SSI and especially in shipbuilding are extremely high, becoming the
AWES' main concern.
To hedge that risk the EU shall propose the re-initiation of operating subsidies to
shipyards producing those types of vessels where the comparative advantage once
possessed by EU yards tends to 'move Eastbound'. The proposed aid reaches the amount
of 14%, in certain cases, and is in line with the authors' view on the appropriate measure
in the aid of shipyards that will be discussed later on.
4.5. Conclusion.
The aim of this chapter was to give the reader a clear understanding of the effects
of different types of government intervention in the shipbuilding industry.
This was attempted through an analysis of the effects of such measures on the
supply and demand mechanism, and then by providing examples of such interventions
throughout the century as well as their intended goals and effects. The author's comments
and recommendations will be part of the
6th
Chapter of this thesis.
As stated earlier in this chapter, it is difficult to distinguish between the shipping
and the shipbuilding industry. In order for the analysis of measures taken to support those
industries to be complete, the following chapter will analyze world shipping.
68
Chapter 5
Government Intervention in Vessel Operation
5.1. Introduction
From the times of Ancient Greece when trade amongst city-sates and their
colonies was conducted solely onboard 'domestic' fleets, to the
17th
century where trade
between Great Britain and the colonies was restricted to all vessels other than those flying
the flag of the state, governments have always considered shipping as the means to an
end: public welfare and homeland security. This was the case not only in island nations
like Greece and England, but also in any other state that depended upon trade in order to
develop infrastructure and increase wealth.
The significance of the shipping industry (analyzed in Chapter 3 of this paper) has
led officials to intervene in more than one way in order to maintain or develop a
stronghold in an industry where barriers to entry are high and learning effects are of
immense importance. Shipyards, whose importance is at times neglected, the heart of the
industry, the places where shipping is borne, maintained and terminated, could not remain
unaffected by such interventions. Their significance as well as the relevant supporting
measures were analyzed in the previous chapter.
We will now turn to the actual 'traders'. These are the shipping companies;
companies that may own one or multiple vessels of one or more types and accommodate
trade throughout the globe. The scope of this chapter is to attempt an analysis of the
common forms of intervention in this segment of the industry and explain the parameters
that need to be taken into consideration when such interventions are attempted. This part
69
of the study will focus on grouping the examples of measures taken by governments in
their attempt to support shipping
Before we begin our venture into the different types of state aid available, it is
imperative to comprehend the role of the flag-state for a vessel and the holding company
as well as the difference in importance between domestically owned fleet and
domestically controlled fleet. This will be the subject of the following paragraph.
5.2. The Role of the Flag-State in Shipping
The aft masts of all vessels trading in the globe today fly more than just a flag.
They fly the symbol of the state under whose laws the ship and owner are subject.
Registration in a particular country (the flag-state) extends the country's territory at sea.
Ideally all nations stretch beyond their homeland with the addition of the square mileage
of the area covered by the vessels carrying their flag.
By entering into a ship registry, the vessel and the owner are bound to abide by
the following:
" The laws of the state, including corporate and tax laws as well as those that
pertain to manning requirements for vessels.
" The international treaties and agreements of which the country of registration is a
signatory (with particular emphasis given on safety and pollution acts)
*
Salvage and protection at sea. This involves treaties signed on actions taken in
case of vessel distress due to adverse weather, damage, collision or piracy as well
as military assistance in time of war. In such a case the vessel automatically
becomes 'enemy territory' for the country's adversaries and may be impounded
by the government for military use.
70
In addition, the flag-state is not determined only once in the useful lifetime of the
vessel. Throughout its life, the owner may choose to trade under different flags choosing
the ones that best serve his/her interests at a given period. The following graph provides
evidence of the constantly evolving status of the flag-state strength in the world:
Merchant Fleets of Selected Maritime Nations by
Flag
400000I-300000-
o2000000
11
1989
1990
1991
1992
E Norway
E Liberia
GJapan
* Greece
Panama
E
Kingdom
* United
1994
2000
U United States
Fig. 5.2.1. Merchant Fleets of Selected MaritimeNations
Source: UNCTAD Review of Maritime Transport 1989-2000
Figure 3.2.1 shows that during the past 11 years flagging-out' has been
extensively used as a means to a better placement for shipowners, expected to provide a
comparative advantage over competitors. This is where government intervention falls into
play: rules, regulations and laws governing the state affect revenue and profits, and
shipping companies have always been on the lookout for registries that would provide
them with such opportunities.
5.2.1 Background
Shipping history provides no examples of penalties imposed for failing to enter a
register. This may be attributed to the fact that such vessels would be unlikely to tender
'Flagging-out' denotes the change of registry and flag state of a vessel.
71
requests for the transportation of goods. In recent years, charterers, insurance companies
and trade regulations expect vessels to be registered under any flag. For the scope of this
paper, we shall divide the registers in the following categories:
" National Registers (NR's), where the shipping company is treated more or less
(however loose the term) in the same way as any other company within the
nation. In this case the company may or may not be controlled by nationals.
" Open Registers (widely known as Flags of Convenience) (FoC's), that have been
set up in order to accommodate the domestic industry, providing an abundance of
favorable terms such as low or no taxation and lack of manning requirements.
The fact that some corresponding states do not enforce certain international
agreements may also be considered as an advantage by some shipowners, since it
allows them to reduce their overall expenditure and allocate their financial
resources on more 'profit bearing' activities.
The historical data of shipowners joining registries that they considered to be
more profitable prove that flagging-out has not been a recent phenomenon.
16 th
century
English merchants turned to the Spanish flag in order to enable their vessels to carry
cargo exported from the West Indies. In 1922 two US vessels changed to the Panamanian
registry in order to avoid laws preventing onboard sale of alcoholic beverages. In the
1930s and the 1940s shipowners would flag-out from registries that belonged to the Axis
or Allies, into neutral countries registries in an attempt to avoid hostile acts. In some
cases government intervention was again apparent:
'Between 1939 and 1941 PresidentT. Roosevelt urged US shipowners to
circumvent neutrality by adopting the Panamanianflag, enabling them to
trade with future allies'. (Cafruny 1987)
72
The most recent example of flagging out, however, is that of 201h and
2 10t
century
shipowners, pooling their vessels into FoC registries. The advantages provided by such
registries pertain to the low registration fees, absence of taxation as well as any operating
and manning requirements (Panamanian and Liberian registries in the early 50's). The
significant reduction of operating costs, since the shipowner has the freedom to choose
the least expensive crew, as well as the tax shelters provided, appeared as the two most
significant advantages. After all, shipping is a 'mobile' industry and shipowners can
therefore move to where they can receive a higher return. In order to deconstruct the
elements that turn a registry into an 'attractive' one for a shipowner, prove or disprove
the assumption made about manning costs and tax shelter being the two most significant
and better understand the way governments intervene in such cases, the FoC's will be the
theme of the next paragraphs.
5.2.2. Flags of Convenience.
Alternatively called funny, free, runaway, bogus, or private flags, even 'flags of
attraction or necessity', they refer to registries of countries:
'...whose laws allow-and indeed make it easy for-ships owned by foreign
nationals or companies to fly these flags. This is in contrast to the practice
in the maritime countries (and in many others) where the right to fly the
nationalflag is subject to stringent conditions and involves far-reaching
obligations'(OECD Maritime Transport Committee, Paris1958)
The ease with which one can register a vessel under a FoC proves the operational
freedom provided to shipowners by these registries. To create a Panamanian company for
example, one can complete the formalities by correspondence through a New York,
73
London or Piraeus office (amongst others) and operate the vessel(s) from that exact
location. The state allows the shipowner to handle manning matters at his/her own
discretion and charges extremely low taxes and registration fees. A characteristic
example of such taxes is that of Liberia which in 1985 charged $0.40 per grt2 . The owner
of a 'good sized' tanker of 36,000 dwt, which is the equivalent of 20,000 grt , would
under the Liberian flag in 1985, pay an annual tax of $8,000. For ease of exposition, the
average workers' annual wage in Cambridge, Massachusetts in the year 1985 was
$22,571 4
The creation of FoC registries is the 'fruit' of government intervention. It can be
attributed to the competitive disadvantage that the US and England were under in the
years preceding the Second World War. More to the point, their very existence can be
attributed to the implementation of the American doctrine that 'the control of shipping
corresponds to the control of cargoes' 5 . The path to cargo domination however, was not
paved with flowers.
5.2.2.1. The US involvement in the creation of FoC registries
The competitive disadvantage of the US maritime industry was primarily based
on labor costs, as well as the fact that unions had a very strong presence in the field. In
1953, US crews cost 72% more than the average OECD crew. What is more, 75% of the
crew of US-flagged vessels had to be American officers and ratings. The following graph
2 UNCTAD
'Action on the question of Open Registries', cited in 'Ruling the Waves' by A. Cafruny
'Vessel Study', vol2, app.4, Conversion Tables.
4 Source: Massachusetts Division of Labour and Training, 2001. Values, in 1985 USD.
5 The theory of the American influence on the creation of FoC registries is based on the claims made by
Alan Cafruny of the University of Virginia, cited in his book 'Ruling the Waves', ch.4. These claims are
aligned with my prior knowledge on the subject, which was up to the date of researching for this paper
based purely on hearsay.
3 NTUA,
74
compares the total (referring to total vessel complement) monthly wages amongst various
national flags in 1953:
Total monthly Wages (1953 USD)
3000025000200001500010000-
5000-
-
0
Fig. 5.2.2.1.1 Total Monthly Wages of Several National Flags in 1953
Source: US Department of Commerce
In the post WW2 world, coal was no longer the primary source of energy.
Technological advancements increased oil reserves utilization and the US needed a
stronghold in that market if cargo domination was to take place. However, given the
operational cost disadvantage, US-flag ships could not serve that purpose. American
shipowners were among the first to turn into the Panamanian registry, and owned 66% of
the registered vessels in 1949.
In 1947, Edward Stettinius, President Roosevelt's secretary of state, used his
influence in order to create the open registry of Liberia, thus providing yet another Trojan
horse in the US trade arsenal. Despite the opposition of the US Congress and several
European Maritime powers the Liberian register soon became a reality. Alas, this was not
enough.
75
What followed was a barrage of loan issuances from US banks to non-nationals
that peaked in the years from 1948 to 19596 . The arrangements involved loans that
reached up to 95% of the capital costs and time charters provided from US companies
that were used as collateral. Slowly but steadily the US managed to control the world
bulk trade, not necessarily by trading it around the globe but by aligning its interests with
those of the carriers.
The results of such interferences created havoc in the industry and resulted in the
highly complicated maritime schemes of our days. Today a merchant ship may be owned
by an individual or a company of one state, managed by a ship management company of
a second state and registered in a third state. The ship may then be sub-chartered, possibly
under a bareboat charter agreement, to a company of yet another state7 and crewed by
officers and ratings from a wide variety of different countries. The vessel may then sail
between states totally unconnected with the ship owners, the ship management company,
.
the state where the ship is registered or the crew 8
5.2.2.2. Reasons for the Increasing Flagging-Out from National Registries
The example provided in the previous paragraph -the norm in modern shippingproves the point that shipowners wish to disconnect themselves from the authoritative
influence and intervention of national governments. First of all, FoC's provide legal
haven: By allowing single-vessel company structures, shipowners can not be held liable
for any accidents that may occur since the company's single asset is the vessel. The
6 The
Greek and Norwegian fleets that in the year 2000 controlled 26% of the world shipping tonnage,
experienced unprecedented growth during that period. (Source: UNCTAD Review of Maritime Transport)
7 This is called dual registration and is usually carried out in cases where the first state of registration
imposes restrictive regulations to the shipowner that the latter wishes to circumvent.
8 Russell Brennan. 2000.
76
example of the tanker vessel 'Arrow' falls under this category. In 1970 the vessel sank
off the coast of Nova Scotia spilling all off her cargo into the ocean. The vessel was
owned by the Onassis group, was registered in Liberia and technically belonged to
Sunstone Marine of Panama. Furthermore it was operated by Olympic Maritime of Monte
Carlo, chartered by Standard Tankers of the Bahamas and sub-chartered to Imperial Oil
of Canada. In assigning blame for the accident the authorities attempted to establish proof
of ownership. This in turn was an impossible task since Sunstone shares were held
anonymously and the vessel was Sunstone's sole asset.
Apart from this apparent need for disengagement from national governments, the
arguments in support of FoC registries can be supported on the operational benefits it
provides to shipowners. Bearing figure 5.2.2.1.1 in mind, one can make reason against
national registries as follows: Assume a 30,000 dwt Product Tanker registered in the US.
The weight of wage costs on the total operational expenses in such a vessel is 8.6%9. In
turn, US crews are more expensive than Far East crews by an amount that at times
reaches 72%1. From the above, the operational advantage offered to FoC vessels can
reach the amount of 6.2% from wage differential alone, in an industry where the return on
investment is calculated in the area between 6-10%. It should be noted however that the
cost advantages presented here refer mainly to the bulk trade. The significance of wages
in the overall operating costs of vessels in the liner trade is noticeably lower. This is also
the reason why the bulk market was a much more fertile ground for FoC regimes to
prosper.
The financial obligations deriving from the fiscal obligations imposed by the flagstate are of equal, if not greater, importance. Financial obligations include, but are not
9 Source: Georgios Kokkalas, 'Tanker Vessel Design Study', N.T.U.A. Athens 1999
10 Source: Henry Marcus et al, 'US Owned Merchant Fleet', M.I.T. Cambridge 1991
77
limited to taxation. Alongside those, are the financial incentives provided by state
legislation that will be discussed later in this chapter. Using the same vessel as an
example: For a US-flagged vessel tax obligations rise up to 34% of the revenues . For a
Liberian-flagged vessel, tax obligations are infinitesimal. Therefore, the total advantage
on revenues from taxation alone (excluding any subsidies on the US part) would be an
additional 34% of the total revenues and therefore the profit. The combination of
manning and taxation differential between the US and Liberia would rise an approximate
40% of the profits. Though a generic approach and unadorned in its conception, it
represents a rough albeit realistic approximation of the differences between the two flags,
as well as an understanding of the advantages of using FoC's versus national registries.
While the US is considered as one of the most unattractive registries, the
advantages of FoC registries over national ones in terms of providing increased profits to
shipowners have caused the tonnage of the latter registries to diminish in time. The
following graph, a complement to Figure 5.2.1, proves this change in favor of FoC's over
the last century:
Fleets of the World by Flag (percentage of total)
40
35
30
25
20
15
10
5
0
1939
1948
1963
1973
1983
1992
IGLiberia EPanama DUK DNorway EGreece D US
Fig. 5.2.2.2.1 Fleets of the World 1939-2000
Source: various Sources
" Source: Henry Marcus et al, 'US Owned Merchant Fleet', M.I.T. Cambridge 1991
78
2000
The UNCTAD Review of Maritime Transport Report of the year 2000 places the
following registers under the FoC category: Bahamas, Bermuda, Cyprus, Liberia, Malta,
Panama, and Vanuatu. These flags controlled 46% of the world total in that year and their
role seems to be assuming an even greater portion of the world tonnage as time
progresses and the need to increase profitability increases.
As a means of halting flagging-out from their registries, many states decided to
relax the measures imposed to shipowners, particularly manning requirements and
taxation. There were two ways of accomplishing this: The first was by formally relaxing
shipowners' obligations within their existing registries. The second is by creating new
registries, since the existing ones may have already been characterized as unattractive by
shipowners. Such registers, formally known as 'second' or 'captive' registers allow the
state to exercise control over the vessel flying its flag and at the same time increase the
competitiveness of the domestic shipping industry. Such EU registers are shown below:
X
Belgium
X
Denmark
X
Finland
X
France
X
Germany
X
Greece
X
Register
Off-shore Register
-
Austria
2 nd
-
Vt
Register
1
The Danish International
Register of Shipping (DIS)
The Finland International
Shipping Register
Kerguelen Register
-
The German International
Shipping Register
-
EU Members
79
Others
EU Members
1
Register
Off-shore Register
2 "dRegister
Ireland
X
Italy
X
Luxembourg
X
Netherlands
X
Norway
X
Norwegian International
Shipping Register (NIS)
Portugal
X
The Madeira International
Shipping Register (MAR)
Others
Italian International
Shipping Register (IIR)
Antilles Register
The Canary Islands Special
X--
Spain
X
Ship Register (REC)
---
Sweden
The Register of:
X
U.K.
The isle of Man
The Gibraltar
Bermuda
Register
Cayman
Table: 5.2.2.2.1 EU Second Registries
Source: European Shipowners Association
Their importance can be witnessed through the success of registers such as the
Norwegian 2
Registry (NIS), which in 1991 had exceeded the traditional Norwegian
Registry by 322% in number of vessels registered
12
The analysis that was attempted in these paragraphs aimed at providing the reader
with the reasons for the unprecedented increase in the number of vessels registered under
FoC regimes. As it was argued earlier, they are the result of intense governmental activity
in the industry. The prevailing arguments in favour of such regimes concentrate around
12
Ibid p.10 footnote 11
80
the freedom provided to the shipowner as regards crewing, and tax obligations. We will
now turn to the direct measures currently into effect by selected states around the world,
in order to preserve their national fleets. The examples of Japan, Norway, Greece and the
United States will be discussed in the following paragraphs.
5.3. The Regulatory Framework of National Registries.
Ever since the end of WW2 and the rise of FoC's in the maritime industry,
national registries have been struggling to attract new vessels in their records so as to
maintain a significant presence in the market. For the scope of this paper we will examine
the registries of the three following countries: Greece, Norway and the United States. As
will be shown below these have been leading the worlds' national fleets for the past 15
years and the author therefore considered that additional attention be given to the
practices that those governments have used in order to preserve their position amongst the
world's leaders in the field.
Ranking Amongst World National Fleets
1989
1990
1991
1992
1993
1994
2000
Greece
2
3
1
1
1
1
1
Norway
4
2
2
3
2
2
2
U.S.A.
3
4
4
4
4
4
3
Table 5.3.1. Top Ranking National Fleets of the World
Source: UNCTAD Review of Maritime Transport 1989-2000
We will now turn into each one in more detail, with a particular interest in the
Greek Registry. The reasons are a) It is the world's largest maritime nation and b) the
author of this paper is of Greek heritage and was therefore inclined to research the
particular registry in more detail.
81
GREECE:
The Greek register was amongst the first to impose a tonnage tax law in support
of the shipping industry in the beginning of the 20th century. Therefore, the corporate tax
laws that were in effect for other companies in Greece did not apply to shipping
companies. The tax law currently in use is the Law of The Greek State N.27/1975, Article
6, by which vessels under the Greek Registry and over 100 grt, are taxed as follows:
USD/GRT (increasing by 4%
Group
Vessel Age (years)
A
0-4
0.53
B
5-9
0.95
C
10-19
0.93
D
20-29
0.88
E
30-above
0.68
p.a. since '75)
Table 5.3.2. Greek Tonnage Tax (1)
Source: Greek Ministry of Finance
The aforementioned amounts, are further multiplied by the following coefficients
in order for the tax to be calculated:
Group
GRT
Coefficient
1
100-10,000
1.2
2
10,001-20,000
1.1
3
20,001-40,000
1
4
40,001-80,000
0.9
5
80,001-above
0.8
Table 5.3.3. Greek Tonnage Tax (2)
Source: Greek Ministry of Finance
By combining the two tables one can calculate the most and least favourable
combination according to the Greek laws. In declining order they are:
A5-A4-A3-E5-A2-E4-Al-E3-D5-C5-E2-B5-D4-El-C4-B4-D3-C3-B3-D2-C2-B2-D1Cl-B1
82
What seems to be the pattern in the Greek case is that the law is in favour of large
(Groups 4-5) very new (Group A) or very old vessels (Group E). The assumption one can
make from the above is that the law is making special provisions for older vessels whose
laid-up time will be higher while at the same time attracting new vessels of considerable
size. The intervention from government officials
is obvious: care for the less
advantageous segments of the market and driving national shipowners to assume
economies of scale through the construction or acquisition of newer and bigger vessels.
Article 7 of the aforementioned legislation provides further tax reductions as
follows:
" Vessels built in Greece are exempt from any taxation for the period of 6 years.
" For vessels in any liner trade between Greek and foreign ports or solely between
foreign ports as well as cruise vessels payments are reduced by half of those
calculated in Article 6.
" Vessels under 20 years of age undergoing reconstructions, modifications or
replacement of their propulsion or other auxiliary systems, and repairs of any kind
of repairs in general, and provided that they are undergone in Greece and that all
costs are covered through foreign currency that is imported from abroad, are
exempt from tax for one year per 100,000 USD of repairs. The total exemption
will be lower than 50% of the total repairs and the years that the vessel will be
exempt from that amount cannot exceed a 6-year period.
" The aforementioned exemptions can only be imposed to vessels that enter the
Greek Registry for the first time. Should a company fall under more categories
than one, and then only one may be applied for exemption.
83
According to article 2 of the same law:
" The excess earnings be they from vessel disposition, receipt of insurance
premium or any other source are tax-exempt.
" Any Greek or foreign shipping company that engages in other businesses apart
from possessing and operating vessels under the Greek registry is eligible for tax
exemption to the amount of net earnings from shipping equal to 'the percentage
of shipping net earnings to the gross revenue from all business engagements'.
According to article 25 of the same law as amended by article 28 of the law
N.814/78, article 77 of N.1892/90 and article 4 of N.2234/94, non-nationals may form
companies dealing with the administration, exploitation, chartering, insurance, average
adjustments, agency and shipbuilding of vessels that belong to Greek and foreign
registries. The same article refers to Controlled Foreign Corporations (CFCs).
Amending article 1 of N.89/67 and N.2687/53/A-317, paragraph 1 of the article
states that CFC's are exempt from any tax provided that their annual operational costs in
Greece exceed the amount of USD 50,000. The expenses should be paid in foreign
currency brought to Greece from abroad.
NORWAY
Until the tax reform act of 1992 Norwegian shipowners enjoyed several tax
privileges that enabled them to defer tax charges virtually indefinitely. The 1992 reform
challenged those privileges and upon its effective date, it was a matter of public scrutiny
since it was expected to harm a traditional industry. A new reform came into play on
December 1996, whereby a special taxation arrangement (STA) was established. It is in
84
the discretion of the companies to apply to the government in order to fall under the
provisions of the new law, or remain in the system that was in effect after 1992.
According to clause 51A of the aforementioned reform, 'income from the
operation, leasing and operation of ships and other qualifying vessels is exempt from
current taxation'. Untaxed income however, becomes taxable when distributed to the
company's shareholders. An additional tonnage tax was also applied, based on the net
tonnage of the vessels. The STA makes provisions for joint-stock companies only, i.e.
companies that are incorporated in Norway. Qualifying companies, may own vessels or
act as holding companies for other Norwegian or non-resident joint-stock companies.
Furthermore the STA system is neutral with respect to the registry of the vessels
in question. The may be registered under the Norwegian or any foreign registry. Section
51 A-2 allows STA companies to own vessels indirectly through subsidiary joint-stock
companies, CFC's and partnerships. Any losses carried forward until the year 1997 are
terminated upon entering the STA regime and 'reserves generated in 1997 and later years
calculated at the difference between capital allowances claimed in accordance with
section 44 A-5 (declining balance at 20% annual rate) and straight line depreciation
stipulated in accordance with section 44 B-3 as economically 'correct' (4% annual value
reduction) will be taxable at the point of moving into the STA regime'.
As far as taxation within the STA is concerned, Sections 51 A-6 and A-7 state that
companies are exempt from current taxation on current profits and net gains, however the
exemption does not extend to the net financial income. This means that STA companies
can effectively only deduct debt interest to the extent that it is set off against financial
income. Untaxed income is taxed upon the distribution of dividends to the shareholders.
85
Consolidations of losses with other companies a shipping group may have are not
allowed.
Computation of the tonnage tax that is imposed to shipping companies is made in
accord to Section 51 A-7 (1) and Regulation Section 3 (4). The rates for the income years
1996 and 1997 are as follows13
NOK 0
For the first 1000 net tonnes, thereafter
NOK 18
Per day per 1000 n.t. up to 10000 n.t.
thereafter
NOK 12
Per day per 1000 n.t. up to 25000 n.t.
thereafter
NOK 6
Per day per 1000 n.t.
Table 5.3.4. Norwegian Tonnage Tax
Source: Bergesen d.y. ASA
UNITED STATES
The United States provides for an abundance of laws governing the taxation of
shipping companies dating back to the beginning of the
2 0 th
century. The current situation
that was imposed by the Tax Reform Act of 1986 is probably the least favourable
amongst the ones that had been in effect in the past. Under the tax regime currently into
effect, shipping companies are treated in the same way as other US corporations. The key
aspects of the current law are4:
* Consolidation of losses through simultaneous control over a shipping and other
businesses is subject to strict limitation
13
14
The exchange rate for the Norwegian currency on April 29th 2002 was 1NOK=0. 12USD
These comments are based heavily on 'A comparative study on International Taxation Regimes' 1990
86
"
Depreciation of ships used predominantly outside the US is depreciated over an
18-year useful life and then only on a straight-line method.
" Gain may only be deferred if a like-kind exchange is completed within 180 days
of the initial transfer by the shipowner
The majority of the United States fleet is under a non-US register. In the US, any
corporation will be treated as a CFC if more than 50% of its shares (by vote or value) are
owned (directly, indirectly or constructively) by US shareholders (or US persons who
own at least 10% of those shares by vote).
CFCs shareholders are taxed on the allocable share of subpart F income. That
income is treated as a deemed dividend and is included in the shareholder's gross income
on a current basis regardless of whether an actual dividend is paid. Income subject to this
rule includes income from chartering, bareboat or otherwise, and gains from the
disposition of ships. In determining the amount of income included:
" A deficit in Earnings and Profits may be carried forward only.
" Consolidation of losses is permitted amongst CFC's only and then under severe
limitations.
" Income deferred as a result of the reinvestment of shipping income in other
shipping assets may be recaptured
Of the three cases presented above, Greece proves to be by far more lenient on the
obligations imposed to the ship-owner. It might therefore be argued that the maritime
might of this country comes as no surprise. Evaluation of the policies that were discussed
here will be done in the following chapter in search of the optimum level of intervention
in aid of the shipping industry.
87
The following paragraph will discuss protectionist measures that have been
assumed by governments around the globe in support of shipping, in addition to the ones
aimed at increasing the attractiveness of national registries.
5.4. Other Support Measures.
The previous paragraphs were dedicated to the analysis of the fiscal measures that
have been assumed by governments of leading maritime nations around the world, as
well as the impact that extremely lenient registries, such as the Liberian or the
Panamanian, have had so far. If we were to segregate the types of aid available, they
would fall under the following categories: a) direct subsidies b) registry leniency
measures and c) indirect measures. Having covered the largest part of the second
category, we will now focus on the first and third.
Section 27 of the Merchant Marine Act of 1920 (also known as the Jones Act)
required that US-flag vessels conduct all trade between US ports. This measure intended
to increase the demand for US-flag vessels since it regulated trade throughout the states.
However, the deregulation of rail and truck freight rates, the loopholes that existed for
certain areas such as the Virgin Islands and Guam as well as the introduction of pipelines
for the transportation of oil and gas seriously damaged the effectiveness of this measure.
A category 'a' measure, namely a direct subsidy, was introduced through the
Merchant Marine Act of 1936. According to the provisions of the act, vessels that did not
engage in the Jones Act trade, would receive the difference between the costs of
operating a US-flag vs. a foreign flag vessel. This measure, named the Operating
Differential Subsidy (ODS) program, was intended for US-flag vessels that were built
under the CDS program introduced in the previous chapter. In 1981 the Reagan
88
administration added Section 615 allowing ODS shipowners to purchase or construct
vessels abroad. The provision lasted for only one year; however US shipowners took
advantage of it as best as they could.
Another type of aid that falls under the category of indirect supporting measures is
that of cabotage. Whereas the Jones Act is a 'cabotage measure' there have been many
countries around the world that have used it. Greece is an example. According to the
Greek cabotage restrictions, passenger vessels on fixed routes within the state borders
need to be registered under the Greek registry.
Another example of policies in support of the shipping industry are 'cargo
preference acts'. The Military Transportation Act of 1904 required that all supplies for
the US armed forces, stationed outside the United States be shipped onboard US-flagged
vessels. What is more, the Cargo Preference Act of 1954, which required that at least
50% of US government-generated cargoes be carried on US-flag vessels. In addition to
the above, Public Resolution 17/1934 required that all cargoes generated by the US
Export-Import Bank be shipped on US-flag vessels. In 1983 the cargo preference acts led
preference cargoes to assume 40% of the total volume of goods transported on-board USflag vessels.
15
Some other measures that have been taken by governments of developing
.
countries in support of their national fleets are summarized below'6
" Multinational Trade Agreements such as the one between Argentina and Uruguay
including 50-50 cargo-sharing clauses.
" Tax exemptions for exports or imports carried on vessels that belong to the
National Registry.
s White, International Trade in Ocean Shipping Services
Source: The Rise of National Fleets, H. P. Drewry Ltd., London
16
89
*
Clauses pertaining to certain amounts of exports or imports being carried on
government owned vessels
Throughout the chapter we have been dealing with the way governments
attempted to increase the competitiveness of their registries. As it was previously
mentioned, the majority of such measures affected the bulk market. The following
paragraph discusses the issue of the liner fleets and especially the impact of the
UNCTAD code of Conduct in the liner market.
5.5. Government Regulations the Liner Industry.
Liner trades are, in their majority, organised in conferences, which are cartels that
serve specific trade routes. Since the existence of cartels in the shipping industry might
hold shipping companies liable for infringing antitrust laws, both the United States and
the European Union have made provisions for the exclusion of such cartels from antitrust
regulation.
In the US, the Shipping Act of 1916 (as amended by the Shipping Act of 1984)
provides immunity of the cartels from such legislation. An authoritative body, the Federal
Maritime Commission (FMC), is supervising the operation of such conferences. The
latter may reach agreements on tariffs or schedules that need to be approved by the FMC
before they come into effect. Conferences may not reject qualifying liner companies to
join the conference, nor can they forbid independent action by a member once the FMC
has approved it.
FMC has power over domestic as well as foreign liner trades even though the
former, are a minority percentage over the latter.
90
The approach that FMC has used in its rulings has been case sensitive. Though the
generic form of competition was known, specific alterations had to be made in an attempt
to preserve as much an undistorted trade as possible. It was thus that the antitrust
immunity to liner conferences was widened in 1984 to include seemingly unfavourable
shipping regimes in order to prevent increases in transportation costs and reductions in
transportation services. The amendment of 1984 further provided the FMC with the
authority to allow special rates in cases of 'unfair' competition from foreign liner carriers.
The US Ocean Shipping Reform Act of 1998 allows carriers and shippers to put
together individual contracts on a confidential basis, with only tariffs filed with the
authorities. It is also expected to help increase the number of global carrier/shipper
contracts, as it is expected that lines which have previously fought shy of entering various
US trade lanes, will take the opportunity to enter these markets in the light of a more
open market policy. Within the scope of the act, carriers may:
" Discuss, fix, or regulate transportation rates, including through rates, cargo space
accommodations, and other conditions of service.
" Pool or apportion traffic, revenues, earnings, or losses.
" Allot ports or restrict or otherwise regulate the number and character of sailings
between ports;
" Limit or regulate the volume or character of cargo or passenger traffic to be
carried.
" Engage in exclusive, preferential, or co-operative working arrangements among
themselves, or with one or more marine terminal operators or non-vesseloperating common carriers.
91
*
Control, regulate, or prevent competition in international ocean transportation;
and/or regulate or, prohibit their use of service contracts. Discuss and agree on
any matter related to service contracts.
The situation within the EU is still evolving. The most recent evolution was the
adaptation of Regulation EC 823/2000. Under chapter II, article III of this regulation the
EU states the activities under which exemption from antitrust laws will be granted:
* The joint operation of liner shipping transport services which comprise solely of
the following activities: (1) the coordination and/or joint fixing of sailing
timetables and the determination of ports of call, (2) the exchange, sale or crosschartering of space or slots on vessels, (3) the pooling of vessels and/or port
installations, (4) the use of one or more joint operation offices, (5) the provision
of containers, chassis and other equipment and/or the rental, leasing or purchase
contract of such equipment, (6) the use of computerized data exchange system
and/or joint documentation system.
* Temporary capacity adjustments
* The joint operation or use of port terminals and related services, such as
stevedoring services.
* The participation in one or more of the following pools: cargo, revenue or net
revenue
* The joint exercise of voting rights held by the consortium in the conference within
which its members operate, in so far as the vote is being jointly exercised
concerns the consortium's activities as such
*
A joint marketing structure and/or the issue of a joint bill of lading and
92
* Any other activity ancillary to those referred above that is necessary for their
implementation.
In 1994, the Commission took two important decisions. The first concerned the
Transatlantic Agreement
(TAA),
which at the time accounted for 70% of the
containerised liner services between the EU and the US. In October of the same year the
EU banned the conference on the grounds that it had raised freight rates 'to unreasonable
levels' given that no improvement on services was noticed and because the tariff structure
was not in line with that required in the Community definition of a conference. (EC
Regulation 4056/86 is still considered as one requiring extensive review) In December
1994 and November 1996 the EU withdrew immunity from antitrust fines for the Far
Eastern Freight Conference (FEFC) and the Trans-Atlantic Conference Agreement
(TACA), a successor of TAA, for inland price fixing practices.
All three cases were appealed to the Court of First Instance in Brussels. On
February
28 th
2002, the court ruled in favour of the EU on the two cases (the TAA and
FEFC) by stating (in summary) that:
" Inland Price fixing and Capacity management are illegal
" Obliging a conference member to offer the same conference freight tariff to all
shippers who want to ship a given commodity is illegal
The court also annulled Article 5 of the decision, which imposed an obligation on
the TAA to inform its customers that they were entitled to renegotiate or terminate their
contracts, on the basis that the EU had failed to forewarn the parties that it intended to
impose such an obligation.
93
Both the court rulings and the US Ocean Shipping Reform Act of 1998, signal a
new era in the liner industry, which, as someone said, 'is the only industry in the world
where your customer is your enemy and your competitor is your friend'.
5.6. Conclusion
This chapter was aimed to provide an understanding of the multitude of ways that
government intervention is applied within the Shipping Industry. For this reason the first
part discussed the FoC issue, probably one of the most vivid illustrations of government
intervention in the bulk market, and presented the key factors differentiating open and
national registries.
Though taxation and manning requirements were found to be important factors in
determining the 'attractiveness' of a registry, taxation emerged as the most prominent
one. For this reason, the key tax and other fiscal requirements of selected maritime
powers were also presented.
In order for the analysis attempted in the chapter to be as complete as possible,
indirect supporting measures from various countries around the globe were discussed, as
was the legislative impact of intervention in the US and EU liner conferences.
In most of the cases presented, the attempt has either been that of protecting trade
(the case in liner shipping) through extensive supervision of the companies' operation, or
that of artificially increasing the demand for national fleets (the case of the bulk trade).
Both the effects of regulation imposition and taxation laws on the supply and demand
analysis of a market that were discussed in previous chapters come into play very lucidly
through the examples presented in this chapter.
94
Since both the shipping and shipbuilding markets have been discussed, it is now
appropriate to comment and propose on the data that have been presented throughout this
paper. This will be the subject of the following chapter.
95
Chapter 6
Evaluation of Support Measures and Recommendations for Future Actions
6.1 Introduction
Throughout this paper an attempt was made to analyze the effects of government
intervention in the shipping industry, by providing examples of measures that have been
taken in the past or are still assumed by officials in aid of the domestic industry.
Furthermore, we conducted an analysis of the reasons claiming the importance of
maintaining a strong domestic shipping industry.
The scope of this chapter is to perform an evaluation of the reasons that support
the assumption of such measures, an evaluation of the measures themselves and lastly
suggest actions that might prove more efficient from the ones currently in use by
governments around the globe. Conducting this research, the examples of Greece and
Korea will be used in our quest for the most successful measures that have been taken in
the ocean shipping and the shipbuilding industry respectively. The author considers that
the hypothesis whereby the 'leading nation in an industry is the one that has assumed the
most effective measures' stands for the majority of industries, including shipping. Since
this assumption will play a quintessential role in the analysis to follow, let us deconstruct
its essential elements.
By 'leading nation' we will imply the country that has managed to acquire the
largest market share based on current data available. The analysis will therefore be resultoriented with specific reference made to the strategic deployment of options available to
national governments. In determining the 'leader' many subjective criteria fall into play.
Should a country be considered as the leader in shipbuilding if the cost of supporting the
96
industry has harmed the national economy to the extent that it cannot recover or prosper?
Should a nation be considered leading the world in shipping if certain political or
economic interests outside the country have allowed it to take this place? Objectivity lays
in the correct interpretation, and in some cases manipulation, of the available data. Such
are the data that will be used throughout the chapter in support of the author's views. A
short subjective evaluation will be presented in the end of the chapter.
The term 'position acquired by effective measures' denotes those measures that
have assisted in the accomplishment of the leading nation in question. They are effective
in that they enhanced the country's position in the comparative data available to
researchers. Before we embark in the analysis of these measures, let us evaluate the
reasons behind the implicit need for government intervention in the shipping industry.
6.2. Evaluating the claims in support of government intervention.
Amongst the first issues to be analyzed in this paper were the claims in support of
protected trade'. Throughout the chapters an attempt was made to prove the negative
effects of the implication of such policies and the harm caused by them to trade in general
and consumers accordingly. In this part of the paper we will refer to those claims and
attempt to scrutinize them to the extent possible in anticipation of disproving their
validity or accommodating the theoretical basis upon which they lay.
The first argument made was that of the need to ascertain continuous trade of
commodities that are necessary for the economic development of the domestic market, or
provision of essential communications. In the example provided, the need for maintaining
trade in isolated areas of a country and harness emigration to urban areas, the assumption
Ibid, paragraph 3.4
97
made is annulled by its results alone. The sheer certainty that a measure has been taken in
that account, relaxes the need for officials to seek measures that will actually prevent
emigration and provide trade that is actually necessary. In our case, neither shipowners
nor the inhabitants of rural areas benefited from such measures. The former realized
extreme losses by operating vessels carrying less than 40% of their capacity and the latter
witnessed service of an extremely low quality since the vessels used in that trade met
only the minimum standards imposed by authorities. The result was that 80%2 of the
population of isolated islands and islets immigrated to larger islands or cities while the
demand for shipowners to maintain trade with those areas is still in effect. What the
government attempted to harness backfired in the end.
It is for those reasons exactly that the author stands in favor of measures that have
longer-term views, instead of subsidies that may cover political needs (such as preelection commitments) and eventually harm both the people and the shipping industry. A
better solution in this case would be the creation of hub-islands with regular service to the
'isolated' ones, using vessels that would belong to the municipal authorities. Should
infrastructure be supported on those hub-centrals, the revenues from trade within the
newly formed communities would fall back inside the local economy, thus creating a
momentum that would lead to rapid development without damaging the interests of the
domestic shipping industry.
The suggested solution would require a case-specific, one-time intervention that
would cost far less than the measures actually assumed turned out to. Changing the
paradigm is of the essence and the solution provided constitutes an example of how such
cases should be treated. Case-specific interventions will most certainly prove more
2
Source: Greek Ministry of Interior, Department of Decentralization, Annual Reports 1994-2000
98
effective than general measures lacking provisions for the idiosyncrasies of the market
segments that they cover.
6.2.1. Monopolies and Oligopolies
Another argument is that of protecting trade against the appearance of monopolies
and oligopolies. One might question the sincerity of this argument based on the fact that,
even though governments have always condemned the effects of monopolies, the former
have been their supporters whenever the nation's interests are served. This oxymoron
scheme can be illustrated by an example: The United States appears as the world's
'flagship' in the 'battle' against the formation of oligopolistic practices that harm trade as
can be seen by the multitude of measures taken against it. Yet at the same time the FMC,
through the 1984 amendment of the Ocean Shipping Act of 1916, was given the freedom
to 'allow special rates for US conferences in cases of unfair competition from foreign
liners' 3 . This is a highly loose term in that it allows the FMC to act in favor of US liner
cartels whenever their competitors pose a threat to national interests4 . Furthermore, in the
early 50's, the bulk market was 'struck' by an oligopoly whereby seven American and
British companies 5 controlled 92% of the reserves outside North America and the Soviet
Union. Their dominance in the market was protected (or at least not challenged) by any
legislative body in the US or abroad.
In imposing measures that protect the shipping industry against alleged foreign
oligopolies there are three questions that we need to ask: a) can the measures lower
foreign competitors' prices b) will the measures about to be assumed benefit society as a
3 Ibid, Chapter 5, Paragraph 5.5
4 Another highly debatable issue is what the national interests are and how are they best served.
5 Exxon, Gulf, Texaco, Socal, Mobil, BP and Shell.
99
whole and c) is the timing of the assumption of such measures the correct one or has the
industry reached a point where no measure is expected to provide a lost competitive
advantage? The first question applies to the liner industry in particular. Lowering rates
for a US conference versus a foreign one that operates in a 50-50 or a 40-40-20 trade6
does not necessarily mean that the competitor will lower rates immediately. Competitors
may in turn request the assistance of their national governments and maintain low rates
leading to a 'subsidy was' amongst nations. There are those who think that such wars
work to the advantage of consumers. Though a true statement in a short-term analysis,
long-term trends will prove otherwise.
The cost of assuming such measures is a considerable one since the companies
might engage in a price war that would minimize or even eliminate their gains. Should
direct subsidies be granted, the funds going into protecting the shipping industry will be
taken out of the accounts of other social funds, in effect harming consumers. What is
more, lower rates would cause a relative increase in the rates of foreign conferences. This
would in turn increase the transportation costs of those shipping companies (relatively).
Within the shipping industry, this could be viewed as an imposition of tariffs on foreign
flag vessels (domestic carriers are more attractive when subsidized). However, as was
proven earlier7 , upon imposition of tariffs consumers assume part of their value (value of
subsidies in our case). In addition, the protected domestic industry, keeping within the
'bubble' of government protection loses its ability to remain abreast of the technological
advancements that would place it in a competitive advantage. It is then that the pseudo
dilemma arises: Once under protection, how can an industry compete freely in the open
50-50: 50% of the cargo is carried on vessels flying the flag of the trading countries. 40-40-20: 40% for
each of the trading countries and 20% on third country vessels.
7 Ibid, Chapter 3, Paragraph 3.3
6
100
market? The answer is simple. It cannot. Officials should therefore assume such
protective measures with extreme caution. For it is obvious that once within the 'bubble'
it is difficult to effectively operate out of it.
As for the importance of assuming measures as a result of foreign oligopolistic
practices, the EU-Korean conflict on shipbuilding provides a good example. Even though
the EU is considering reinstatement of the aid provided to shipbuilders, the question to
the author remains as to the effectiveness of such measures at this instance. The Koreans
have not only managed to tender the majority of orders in the Oil Tanker, Product and
Chemical Carrier as well as Container vessel markets in the past three years8, but were
also able to create an unprecedented momentum to their favor. Production lines have
become a norm and the author considers that the likelihood of rebuilding the trust once
enjoyed by EU yards will be difficult if an arbitrary percentage were to be provided in the
form of a subsidy. It should be noted that aid to shipyards was abolished in December
2000, when Korea had already proven its potential might so there exists no reason to
believe that its reinstatement would make significant changes in the market share
assumed by EU countries in the area of production overlap between the EU and Korea.
6.2.2. Environmental and National Prestige Issues
Here are two arguments that at first glance may appear unimportant to the analyst.
The role they play however is crucial to national governments. Here is why: There are
those who believe that the imposition of extremely high penalties to shipping companies
involved in marine pollution would discourage them from relaxing their measures against
preventive measures of the kind. Is that possible? The author's view is that it is not.
8 Source: AWES 2000-2001-2002 (estimates) reports.
101
Given that two tablespoons of vegetable oil can contaminate 120m 3 of fresh water, one
can understand the threat that 2.2 billion tons of oil and its products, traded within the
year 2000 alone 1 , can pose to the environment. Our society cannot afford many accidents
such as the Erika or the Exxon Valdez. Regulation in the industry, in order to protect the
environment is therefore unavoidable. How about FoC vessels? In the decade from 19631974 they accounted for 54% of the world total losses of vessels at sea. This proves that
such flags should come under close scrutiny and their corresponding registries be
required to enforce international safety agreements.
The national prestige issue is undoubtedly a major concern for governments.
National societies often times neglect the complex environment that the shipping industry
operates in. Any measure that would relax government support on an industry considered
'the nation's pride in the global markets' might come under the scrutiny of the opposition
and cost voters. It is thus that the governments of Greece and South Korea are highly
unlikely to discontinue support in the ship operating and shipbuilding industries
respectively.
6.2.3 National Defense.
Probably the strongest argument in support of aid to the shipping industry,
national defense claims the need to avoid what the author introduced as 'craftsmanship
derogation' in Chapter 3. Maintaining the skills required in order to man a fleet in case of
war is indeed of prime importance. This is a multi-faceted issue. Manning a naval fleet is
not the only aspect of it albeit the most important. Operating the fleet is also of significant
importance, especially for countries such as the US that fight their battles away from
Source: Hellenic Navy, Salamis Naval Base, Technical Division: Study on Water Pollutants 1999
10 Source: UNCTAD Review of Maritime Transport, 2000.
9
102
home. The Gulf war, the war in Bosnia and recently the war in Afghanistan triggered by
the tragic events of September 11th 2001, prove the point that there need to be reserves
able to handle a profusion of issues. One of those is that of shiprepairing and
shipbuilding. Though many argue that modem conflicts do not last for as long as the
campaigns of the
2 0
th
century, the aforementioned examples prove the exact opposite. It
is therefore imperative for a nation to obtain the skills required in the industry since such
an emergency might require the replenishment and maintenance of the fleet during the
war. A counter argument suggests that the US during both world wars managed to reach
vessel production times of 275 days when it was amongst the countries that obtained only
a few percent of the world's total shipbuilding output in the preceding decades. Though
true, this argument cannot suggest that maintaining shipbuilding skills is unimportant for
the following reasons: a) Not all countries have the industrial might of the US b) Such
productivity levels may not be reached in the future given the advanced worker skills that
are required in modem shipbuilding and c) the role played by the vessels built in that
period, prove the necessity of shipbuilding capability even during war.
The importance of national fleets increases for nations where the outcome of
maritime battles might play a decisive role in the course of a conflict. The question that
can then be asked is how many vessels might a nation need in such a conflict? Certainly
not the number that Greece controls might be the answer. In the year 2000, Greeks owned
3.247 vessels'1 . Even if we make the moderate assumption' 2 that the average overall
length of these vessels was 117m, these vessels placed from stem to bow would create a
bridge from Piraeus (Greece) to Smyrna (Turkey) 13. The example provided may not be a
" Source: UNCTAD, Review of Maritime Transport 2000.
12 A 30,000 dwt Product Carrier has an approximate length
of 160m.
13 The distance is 205 nautical miles. The conversion factor from n.m.
to km is 1.852
103
characteristic one , it can however be used to prove that: a) even in the case of national
defense, optimality is of the essence and b) the application of support measures that are
not case specific might lead to results that far exceed the targets set by those who
imposed them (or fall far behind those expectations).
6.2.4. Balance of Payments and National Economy Issues.
The argument suggests that receipts from foreign earnings attributed to the
operation of domestic ship owning and shipbuilding companies increase the ability of the
country to abstain from borrowing to cover excess imports. A way to measure the latter
capacity is through the balance of payments account (BoP). In order to comment on the
credibility of this statement let us see how the Greek and Korean economies have
performed in the past years in correlation with their shipping and shipbuilding capacities
respectively:
Greece: BoP vs NIfA 1976-1999
0
1200
1000
800
-
-2000
-600
-400
-4000-
200
-6000
-- 0
200
-8000
-o- Balance of Payments Account (US Mill)
--
Net Income from Abroad (Bill of Drachmas)
Fig. 6.2.4. J:Balance of Payments vs. Net Income from Abroadfor Greece.
Source: UNIDO, Industrial Statistics
14 To the knowledge of the author the Greek Government never claimed
that a fleet-size increase is
essential for National Defence purposes
104
Given that the correlation coefficient between the two graphs was calculated equal
to -0.4 one can therefore derive that the two entities are almost 'neutral' to each other.
We then turned to calculate the correlation between the Net Income from Abroad and the
size of the Greek National Fleet. The correlation coefficient in that case exceeded 0.75,
and the corresponding graph is provided in Appendix B. The unexpected element of the
research was the higher correlation between net income and national fleet than net
income and total controlled fleet. This signifies that providing for a protected domestic
ship-operating base (in cities such as Piraeus or London) is profitable, though not as
profitable to the state as that of providing for a large national fleet.
The Korean example is illustrated in the following graph:
Korean Balance of Payments Current Account (in Bill. of
Won)
5000040000300002000010000-
-
0
-1000
>0o(6 o
-20000-30000
Fig. 6.2.4.2 Korean Balance of Payments CurrentAccount
Source: UNIDO Industrial Statistics
The situation is a lot more difficult to evaluate in this case due to lack of accurate
data on the completions of vessels in Korean yards from the 1970's when the expansion
initiated to the 90's when Korea emerged as the leading shipbuilding nation. However,
expecting an upward trend in the graph ever since the 70's when the expansion begun, the
claim that shipbuilding can significantly improve the balance of payments is not
105
witnessed here. The sharp rise in 1998 should be attributed to the aid provided to Korea
by international institutions given the extremely adverse financial situation of 1997.
Analysts claim that the added value of the maritime cluster should also be taken
into consideration when evaluating the effects of the shipping industry in the national
economies. The following graph shows the added value of the EU maritime cluster for
the year 199715 which accounted for 1% of the EU GDP for that year:
2
05
0
<
Direct
15 729
3 183
2 233
1 291
9
6 519
1 504
1 044
373
15 186
6 697
1 016
417
1 332
4 319
9 254
70 105
8 841
6463
4 085
1405
1 668
1 107
15
199
50
4 141
713
2 890
635
434
203
14
380
46
1 830
4
557
114
1 177
342
5 480
914
1 083
694
6 430
2336
40 085
14682
31033
8674
4595
2739
28 12913
2175
22474
622 20040 10222
2 627
633
1757
6319 18021
12472
Indirect
- domestic
- intercountry
Total
double counts due to purchases within the cluster
Total i.pact mariti0e cluster
govrn
en
(1997,
e o $C)
55
milioER)
Ji
347
170
-13911
11011
<
U
-.8
8
-
Table 6.2.4.1 Value Added in the EU
Source: Policy Research Corporation N.V. and ISL
The following figure refers to the backflow to the governments:
869 1382
850
435
3271
1405
579
411-
Direct
3
Indirect(domesticonly)
277
1429
72
45
822
448
300
-1
997
515
227
191
-
493
189
95
254
56
Ttaxes on profits
employers' social contributions
employees' social contributions
taxes on tabour income
-VAT
on consumption
846
140
868
1 883
7
Total
2
129
898 1 132
587
-1
-
1
84
578
599
48
371
255
354
13970
286
736
69
724
67 14 2
151 5 695
62
21
610
094
16-5
197
183
175
1 5.54
265
38
931
2 294
562
641
131
268
36
40
26
52
13
307
2
781
538
271
370
4 214
2
445
126
560
3 973
1995
5968
23 430
12 896
686
348
50
113
511
3264
793
176
673
166
45
17
30
1 975
184
614
260
49
30
67
192
106
436
300
46
917
2 373
14 893
138
405
2430
1
280
307
50
12
306
1 839
300 1 046
36326
2909
9
6
878
217
-3 276
330 96
double counts due to purchases within the cluster
Total backflow maritime cluster
Table 6 .2.4. Backflow to the government
Source: Policy Research Corporation N.V. and ISL
15
1464
The EU includes Greece and Norway, the two largest ship-owning nations in the world.
106
The two figures shown above, prove that the three main sources of income from
the maritime cluster for the EU states, in order of importance are: a) shipping b) ports and
port related services and c) shipbuilding and shiprepairing.
Based on the data provided in this paragraph, we can conclude that the
significance of domestic shipping and shipbuilding industry is considerable to national
economies. Government attempts to maintain them are therefore justified under this
theory. Neglected in such approaches however, are the opportunity costs of the policies
applied to maintain the strength of these industries. The main determinants of the welfare
of national economies are macroeconomic policies and not trade intervention. A closer
look into the segments that comprise the figures presented above proves that most of
them have been receiving governmental aid for many years, not only in the EU but in the
rest of the world as well. This in turn may be shifting resources from industries that could
provide for greater efficiency and increased total benefits.
6.2.5. Lower cost competitors, Infant Industries, Employment and Safety.
S>
-.
a)
0.
302
70
27
35
0
138
33
17
6
217
295
33
8
27
74
262
1545
- d0nestic
- inte-ountry
183
122
8D
27
34
21
6
0
0
111
17
11
86
61
14
12
4
0
1
39
3
129
1
24
8
8
2
23
7
4
13
44
819
279
Total
307
178
74
62
1
266
47
47
11
318
368
65
12
36
116
436
2644
Drect
Indrect
double courts due to purhases within the cluster
-252
Total ipact rmuritin duster
2392
Table 6.2.5.1 Employment in the EU maritime cluster in 1997
Source: Policy Research Corporation N.V. and ISL
107
Figure 6.2.5.1 shows that approximately 2.4 million Europeans were employed
within all sectors of the shipping industry in the year 1997. This comprises of 1.6% of the
total workforce employed within the EU in that year16. The task of supporting those has
been assumed for many years now through subsidies and aids. Intervention in this case is
not the answer. As technology advancements fall into play, the number of workers
required to carry out a specific task has decreased and will continue to do so in the next
years. The Korean example, whereby shipyard workforce has not been increasing with
the rates the industry's world market share does, proves that point:
Shipbuilding and Shiprepairing Job Slots (in '000s)
250200
150
-
100
-
50
0
-+- US -0-
Korea
Fig. 6.2.5.1. Shipbuilding and ShiprepairingJob Slots (in '000s)
Source: UNIDO Industrial Statistics
Thus, it would not be pragmatic to assume that a given number of jobs should be
maintained in the sector. A decrease is inevitable. As in the case discussed in the previous
paragraph, government support can only maintain a certain number of job-slots that may
not be required. By artificially increasing the demand for workers in the field, the costs of
production will increase as well. What is more, efficiency rates will drop and allow for an
even harder competition from lower-wage countries.
16
Source: Eurostat 1997.
108
The effects of lower-wage countries have a great impact on the domestic
industries that they compete. The difference in the cost of production may shift market
trends from one country to another if it is significant enough for importers. Countries that
are able to compete in cost have always had the most advantageous positions in the world
market. Thus, the argument goes, there is a need for protection of the domestic industry
against those states. Upon answering to these claims, one might state that there are many
industrial sectors where the state might be in a comparative advantage. Exploiting the
potential of such sectors is crucial, prior to the assumption of measures that will benefit
certain industries and harm others. Though a sound counter-statement, it fails to consider
the effects that focusing on one or even few sectors would have to national economies.
When at competition with low-wage states, a government that will hope to wait until the
time that the former country will lose its competitive edge" commits the error of
negligence. As is the case with Korea, shipowners who have been entrusting the
construction of their vessels in those yards will not return to EU shipyards even though
differences in workers' wages are infinitesimal. 'Bonds of trust' created through years of
cooperation are hard to break and the momentum that emerging or else 'infant' industries
create should not be taken lightly.
The issue of infant industries is one that has caused too many arguments in
opposition as well as support. Regulations that prohibit support to infant industries are
hard to be enforced. Any nation should be able to foster the establishment of an industrial
sector that did not exist in the past but is considered essential for national defense
purposes or for the increase of the nations' export capacity. In that sense, suggestions that
" This has been the case in more than one occasion. The example of Korea, the dominant power in
shipbuilding is one of them. Today, 30 years after it emerged as a shipbuilding nation, it has lost its lowwage characteristic that slowly turns to a disadvantage. Korean wages approximate the ones in Germany.
109
infant industries should be able to finance the losses of their first years from funds they
would generate prior to venturing into the new market, are good in theory but impractical
in their implementation.
As far as safety is concerned, labor unions stress the need to maintain government
control over working environment conditions. Once the state supports an industry, the
later abides by the former's regulations. This claim is a faulty one. Companies are
supposed to abide by the letter of the law and the regulations pertaining to their industry,
with no need for additional incentives, let alone monetary aids. This is the reason why
governments have formed groups of inspectors who monitor the situation. What is more,
in most of the democratic states, labor unions or even individual workers can file a
complaint to the relevant ministry on hazardous or inappropriate working conditions at
work.
September 11th attacks have increased the need not only for the monitoring of
working environments but also for providing security in an area such as shipping, highly
susceptible to attacks by terrorist groups. Though the second argument has only recently
appeared as an important issue of concern, it will certainly remain as one of the profound
reasons for government intervention in the field.
6.3 The need to support the shipping industry.
Having evaluated all the claims in support of aiding the shipping industry and
weighing all the factors for and against undistorted trade, it is now time to take sides and
explain the measures that the author believes will assist in the creation of a trade flow
with benefits for all sides.
110
In the opening statements of Chapter 2, the issue of trade intervention was
regarded as one that has initiated much debate amongst economists. Scrutinizing the
effects of such protectionist measures in the shipping industry in particular, we witnessed
the applications of such measures in the maritime sector. By now the reader has had an
inclination as to where the author's views lay. Let us analyze the facts:
" It is more than certain that undistorted trade would benefit consumers since all
provisions in favor of lower production and transportation costs would be come in
effect.
" It is highly unlikely that trade may exist in an undistorted form since there are a
lot at stake for governments around the globe. What is more, support policies are
difficult to police, as proved the Korean case whereby internationally accepted
agreements were neglected and no apparent penalties were applied.
* The shipping industry plays and will continue to play a quintessential role in trade
for the years to come.
* Furthermore, shipping companies' and shipbuilding/shiprepairing revenues have
supported the upkeep of national economies throughout the world, only when
economies of scale were assumed, and only in cases where the national GDP was
in low enough levels.
*
A much oxymoron scheme exists in modern shipping economics. On the
shipbuilding sector, an industry which assumed great support from its time as an
infant industry (namely Korea in the early 70's) up to our days is thriving, as do
shipping companies that belong to countries where governments refrained from
' What the author implies in this part is that shipping revenues and net income for states such as the US
would be much less significant even if the US were the leading maritime nation. Even for countries with a
GDP in much lower levels (Greece, Norway), the effects of shipping could not be as high if their position
in the maritime sector were not amongst the first few.
I11
any kind of interference and accommodated the needs of the market worldwide
(Liberia, Panama).
The optimum point in our case lies between the two extremes: that of absolute
interference and that of complete freedom from government intervention. The quest for
pinpointing the optimum has certainly been the subject of extreme debate and economic
analysis. For the purposes of this paper, the author will go into further depth on what
caused the Greek supremacy of the seas and the Korean hegemony of the yards.
6.4. Seeking the optimum
Many analyses have been carried out so far in search of the optimum. However,
only a few have explored the correlation between the rise and decline of national fleets
from around the globe. Such a distinction is essential since it eliminates common factors
such as historical events and trade crises:
Fleets of Selected Maritime Nations by Flag ('000
GRT)
50000-
4000030000
-
20000
10000-
0
-<>-
Greece --- Norway
-A-
USA
Fig. 6.4.1. Fleets of Selected Maritime Nations by Flag
Source: Lloyd's Register of Shipping Statistical Tables (cited Harlafti: The History of Greek-owned Shipping)
What the calculations revealed comes as no surprise: The two countries with a
similar taxation model as regards shipping, namely Greece and Norway, have a
112
correlation coefficient that reaches 0.75. The US on the other hand is almost absolutely
negatively correlated with Norway since the coefficient reaches -0.93. If we take national
GDP into account, the dominance of tonnage taxation schemes over any other corporate
tax regime is more than evident. Are shipping companies so important that the earnings
from such ventures should not be counted upon as a form of income for governments?
The author's view is that it depends on the government's target. Should that be direct
domination of the industry, then the answer is a negative one. If, on the other hand, the
government wishes to control trade through the control of cargo as was the case presented
in the last chapter then the answer is a positive one.
Since market domination is, in this paper, viewed as direct leadership in the
number of GRT controlled by a given country, tonnage tax systems prove to be the most
effective in increasing the size of the fleet. Both Greece and Norway had assumed such
systems from the beginning of the
20 th
century. What is more, both those countries took
even more steps in order to enhance the attractiveness of their fleets. They allowed for
consolidation of losses within their taxation systems of restricted scale as well as carrying
back or carrying forward losses, again not indefinitely but for a certain period of time.
In order to see how some government measures taken in the past affected the
industry as well as some other fleet characteristics that assist the growth of national fleets
we will turn into the Greek fleet. Appendix C shows the growth of the Greek national
fleet from 1929 to 2000. A newly formed Greek state in the beginning of the 20th century
strived to enter the market, only to be halted from the Second World War. In the years
that followed the end of the war, shipping activities were re-initiated and Greece held a
very low percentage of total world trade. The two greatest changes, the ones that turned
the tide in favor of the Greek flag, were the ones occurring in the Greek Mercantile
113
Marine Law in the years 1953 and 1958. By the Law of the Greek State 2687/53, Greece
provided for favorable terms in the repatriation of profits for vessels under the Greek flag
as well as determining the legal status of controlled foreign companies (Article 13), again
with highly favorable terms. Finally in 1958, Greece codified its maritime law under
3816/58. These two actions provided for an unprecedented rise in the number of
registered vessels, mostly from Greek shipowners who turned their vessels into the Greek
registry.
Yet another point of stagnation was witnessed in the years from 1973-1975. This
should be attributed to the extreme political instability in the country. However by the
Law 27/75, the national registry got back on an increasing track. Law 27/75 stated the
exact way for the calculation of the Greek tonnage tax, as well as the incentives provided
for building the vessel in Greece etc.
In an attempt to offset the negative climate in the early 80's, the government
attempted a different approach. This time the attempt was focused on relaxing the
manning criteria. Intervention was required twice, within a period of 4 years. After the
1983 and 1986 amendments, complements of Greek flag vessels consisted of 100%
Greek officers and 60% Greek sailors. The measures taken at that time proved effective
and the size of the fleet continued to rise. Vessel complement was again altered, in favor
of lower cost crews, in the beginning of the 90's in anticipation of market downturns.
vessel Characteristics
EU Tonnage Tax Flags (Annual Tax in USD)
Category
GRT
NRT
AGE
GRE*
HOL
GER
UK
1
2220
1377
15
5053
1321
1223
1195
2
18812
12678
15
41152
9418
8703
8498
3
36284
24044
15
75519
15312
14144
13819
4
77135
48543
15
113271
21910
20240
19774
5
196334
167958
15
159854
52856
48829
47693
Table 6.4.1. EU Tonnage Tax Comparison Table
Source: Naftemporiki January 2002
114
In the beginning of the
2 1st
century, more and more countries adopted tonnage tax
systems in the hope that they will manage to revive their national fleets. Figure 6.4.2
shows exactly how the situation stood for a 15-year vessel in January 2002 in countries
within the EU. The Greek government is currently considering revising the taxation
regime since it is now the most expensive tonnage tax in existence. For ease of
comparison, the Annual Tax due for the same vessels in FoC countries is provided below:
Flags Of Convenience
MAR.
BAH
VIN
2541
1900
275
8158
5300
3171
1267
4535
2404
Category
MLT
CYP
PAN
LIB
1
1363
1030
3229
3176
2
3991
4577
6348
3
5093
6674
7825
10125
8096
4
6682
10490
11010
13310
14222
7475
4854
5
11488
20026
26534
28833
41681
21804
16795
Table 6.4.2. Tonnage Tax in FoC regimes
Source: Naftemporiki, January 2002
One more example of a successful application of a tonnage tax law is that of the
Netherlands. Within two years from the adaptation of a tonnage tax, their fleet increased
by 100 vessels. However, they are still facing manning problems. It has been calculated
that by 2004, there will not be enough seafarers to man the vessels flying the flag of
Holland. In an attempt to avoid such misfortunes, Greece is relaxing the regulations on
seamen. In particular Greek seamen will pay less taxes by 3%. Repatriation costs are not
an issue since they were long granted to seafarers. Finally their repatriated income will be
considered as tax relieved to a greater percentage than did today.
The example of Greece was provided in this section for it offers an abundance of
examples of government intervention. The main target through all these strategies is to
achieve a result bearing provisions for all the industry segments.
In all, governments around the globe should come to assume a tonnage tax
system. It has proven effective in creating the momentum required for maintaining
115
skillful seamen within the industry and avoids company distress during market
downturns. National fleets can still compete with FoC regimes, even effectively as the
Greek and Norwegian examples proved. National Flags should use their comparative
advantage of being well-respected flags and alongside trained national officers lead
national fleets to new heights. Lastly, fleet diversification is of extreme importance. The
Greeks for example, survived the 1973 oil crisis unharmed due to the fact that they did
not have as many tanker vessels as they did bulkers. The reverse situation appeared in the
80's when the bulk trade was seriously 'injured' by low market rates. Tanker vessels
managed to maintain the high level of Greek ownership in the seas.
We will now turn to the shipbuilding/shiprepairing industry and focus on the EUKorean conflict since it provides for a situation that can be applied in many cases
throughout the shipbuilding world.
What is certain is that shipbuilders cannot remain unsupported. The situation is by
no means easier than that of the shipowners. Barriers to re-entry are extremely high
especially in modern shipbuilding where technology advancements require the allocation
of extreme sums of capital. Waiting for competitors to lose their advantages will cost
thousands of jobs and many shutdown yards. What is more, national yards are the
providers of national navies around the world.
Maintaining
shipbuilding and
shiprepairing skills is a goal most governments fail to realize. What is even worse is that
officials have so far failed to provide the industry with a plan viable over a long termbasis.
In order to become more specific, in the case of the EU-Korea conflict, the
decision-makers have been unable to 'create value' in the 'arena'. On the contrary they
116
'claim value' and will continue to do so for as long as no decision is being reached. Let
us look at the facts:
" Whichever the case with Korea may turn out to be, the country has managed to
emerge as a shipyard nation from practically scratch.
" The Koreans control approximately 26% of the market and only in certain
segments of the shipbuilding industry.
" EU yards control the construction of General Cargo vessels, Combined Carriers,
Ferries, Passenger Ships and other non-cargo vessels.
The proposal in this case, might be one that would seek to 'expand the pie', create
value and then claim it. In order to create value an agreement should be reached under the
auspices of the WTO or the IMF, on particular vessels to be built in the EU or Korea. In
this way, both countries shall use their competitive advantages and create value. The EU
is considering operating aid to shipyards up to 14% for the types of vessels where the
Koreans have a comparative advantage. The author's view is that such a suggestion could
at no time result in reviving European Shipyards. A much-preferred settlement could
involve:
" Absolute transparency on any support by the government to shipyards
" Aid to EU shipyards for all types of vessels for up to 5 years.
" Aid to EU shipyards in order to assist in restructuring into Ferry and General
Cargo Vessel industries. Apart from the restructuring phase, yards that entered the
shipbuilding market for the first time should also be provided assistance for a
maximum period of time to be calculated by the officials upon negotiations with
the industry experts.
117
6.5 Conclusion
The main argument that can be taken away from this chapter is that 'The road to
waste is paved with good intentions'. Even though government officials try their very
best in order to assist the increase of national fleets and the profitability of their
shipbuilding industries, there are many parameters that they fail to recognize. Though
simple in their conception they are the only ones that can be expected to lead to benefits
for all, and above all customers.
Though undistorted trade and application of the laws of supply and demand would
lead to better results for the industry, the significance of shipping to trade and national as
well as global welfare cannot be left unnoticed. Time limitation and case specific
approaches are the ones missing both for the shipping as well as the shipbuilding
companies. The final paragraphs of this chapter were dedicated to providing the reader
with the author's views on what might constitute long-term view options for both
industries.
118
Chapter 7
Conclusion
7.1 Overview
This paper ventured into the world of the shipping industry, in an attempt to better
understand the mechanics of the way government intervention operates and affects the
operation of shipping as well as shipbuilding corporations. It was therefore essential to
analyze the economic aspects and effects of support measures commonly used not only in
the shipping industry but also in trade in general, before any analysis was initiated.
As in many aspects of our everyday lives, the importance of trade is often times
devaluated out of the shear fact that it falls into play in almost every part of our daily
purchases and sales. What becomes evident therefore is that the significance of the
shipping industry could not be an exception to the rule. Government officials however,
dealing with public welfare, lack the luxury of ignoring its contribution to domestic
economics. Economic theories are based on the assumption of the existence of trade and
trade exists on the assumption that there are the means to carry it out. Vessels have
proved the most prominent trading 'vehicles'. Shipyards are thus the guarantors of the
maintenance and expansion of trade, as we know it today.
For these reasons the shipping industry in general has become an issue of scrutiny
from officials seeking ways to manipulate trade to the benefit of their states. Long ago
this was reason enough for a country to declare war to another. Today there has been a
'shift' in hostile practices focusing on economic dominance. Again, the industry is of
extreme importance if such a goal is to be reached.
119
The analysis of both major segments of the industry where state aid is obvious
revealed the need for governments to strengthen their presence as accommodators of
trade as we know it. The examples provided throughout the paper supported this point.
7.2. Final Remarks
What the results of the research conducted herein expose to the reader is that our
society is amidst a subsidy war that does not have a foreseeable end. Confronting this
realization many researchers support the view of ending all kinds of aids and subsidies in
the trade of goods and the related industries (including shipping). Such has been the trend
within the European Union where officials believe that discontinuing support to domestic
industries will set the example to the rest of the world. Though noble in its
conceptualization, it is impractical in its enforcement since there will always be nations
that will attempt to profit from the arbitrary conditions arising from the absence of
government monitoring.
It is thus that government intervention seems as an unavoidable malevolence in
the case of trade in general and the case of the shipping industry in particular. Adopting
case-specific measures using milestone approaches to track their effectiveness will ensure
that the domestic shipping industry has not fallen victim to foreign malicious practices.
Especially in the case of shipping companies, governments need to maintain control over
the practices used in operating vessels that trade billions of tons of cargo around the
globe. Environmental concerns have been increasing since the time that FoC's emerged
as a major competitor in the field. Ill-trained crews were susceptible to overlooking safety
procedures, becoming the highest source of marine accidents.
120
The case that this paper presented proved that even though the ideal case cannot
be reached, that of undistorted trade, there are other points of optimality that the shipping
industry should be moving towards. The inaction of authoritative and legislative bodies
bearing international accreditation and having actual power over the decisions made by
national governments would be a step to the right direction. The auspices of the WTO
and the IMF have not proved efficient in dispute resolution nor have they any power over
policing the implementation of the measures they suggest should be taken.
There are ways around the stagnation points that many international disputes have
reached, as are strategic placements to provide national registries with a long-lost
competitive advantage. Governments around the globe need to define their needs as far as
the shipping industry is concerned and then work on multinational agreements, setting the
pace towards an internationally beneficial trading market. The use of financial force, as
the use of force in general, can hardly provide for the long-term stability that trading
requires in the era of globalization. This paper along with many others on the field prove
what Themistocles, an Admiral of the Ancient Athenian fleet once said:
'Mega to tis thalassiskratos'
Or in free translation
'Great is the state of the seas'
121
APPENDIX A
The AWES - KSA dispute
AWES
KSA
1. Violation of articles 3 and 5 of the WTO Agreement on Subsidies and
1. APRG premium provided by KEXIM fall under item (j) Annex 1 of
via the advance payment refund
the ASCM, since the premiums are set at rates that are adequate to cover
Countervailing Measures (ASCM)
guaranteeprogram (APRG) provided by the Korean Export and Import
KEXIM's operating costs and losses
Bank (KEXIM)
2. Illegal subsidizing via Export Loans and Pre-Shipment Export Credits 2. Korean exporters are eligible for Loans. KEXIM export loans meet and
provided by KEXIM to Korean Yards
are compatible with OECD guidelines. Pre-Shipment Export Credits fall
under the WTO haven of Paragraph 1, Item (k), Annex 1 of the ASCM.
3. Malicious practices through Debt forgiveness, debt-for-equity-swaps 3. No debt has been forgiven. The state-run Korean Asset Management
and interest relief by government-owned and government controlled Corporation (KAMCO) has been purchasing Non-Performing Loans
banks and institutions.
(NPL) from creditors of the shipyard. The yard then 'owes' to KAMCO.
As for yards under restructuring, creditors trade debt-to-equity according
to the norms of the financial markets. This also enables them to oversee
the restructuring program.
4. Malicious practices through Korean Government subsidy programsfor 4. Special Tax Treatment Control Laws apply to many industries in
upstream suppliers of the shipbuilding industry such as steel suppliers Korea. They are not specific to shipyards. The fact that shipyard supplies,
andfavourabletaxation regimes.
including steel, are less expensive in Korea was not caused or pursued by
the KSA.
122
APPENDIX B
Correlation between the Greek fleet and Earnings from Abroad
1200
90000
80000
1000
70000-800
60000 --
0
0
0
50000--
-600
40000--
-400
30000--
200
20000
-
I-
10000
0
1
I
I
-0
'4'
I~I~I~
I
N Z0N
"%'I"tNOL
0)0 )0 0 )0
I
I
I
,to(N
N
)0)0
I
IN
I
ZOV.N6t
WN
0N
N - OL 4)L O oZ( 0N0W( (
)0 0
) )0
)0 0 )0
) )0
)0
'000 GRT
i
I
I
I
I
NO
NNNNN O-N
)0)MNN0
)0
-+-
I
I
I
I
I
I
I
I
NNomo
M vLON
0 00 ocod 0d 0
Billions OF DRCH
Source: UNIDO Industrial Statistics
Hellenic Ministry of Mercantile Marine
123
I
I
I
I
I
I
I
I
o'-cjcwooWo z
)0)0
)0
-200
APPENDIX C
The Greek Flag ('000s of GRT)
100000-
90000
80000
70000
60000-
50000
r
40000
-
30000
20000-
10000
Source: Greek Ministry of Merchant Marine
124
References
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Issue 1, 2000
4. Brownrigg M., Dawe G., Mann M. and Weston P., 'Developments in UK
shipping: the tonnage tax', Lloyd's List 2001
5. Cafruny A. 'Ruling the Waves', University of California Press 1987
6. Cheng P. 'Financial Management in the Shipping Industry', Cornell Maritime
Press, Centerville 1987
7. Commission of the European Communities
'Report on the Long Term
Development of the Shipbuilding Industry' EC, 1971
8. Damas P. 'OECD's reform agenda', American Shipper, February 20002
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transport', Official Journal of the European Communities, 1997
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certain categories of agreements, decisions and contracted practices between liner
shipping companies', Official Journal of the European Communities, 2000
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temporary defensive mechanism to shipbuilding', Commission of the European
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