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Competition and Subsidy in Commercial Shipbuilding

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Competition and Subsidy in Commercial Shipbuilding Competition and subsidy in commercial shipbuilding Paul William Stott This dissertation is presented for consideration for the Degree of Doctor of Philosophy Newcastle University School of Marine Science and Technology May 2017 Acknowledgements Sincere thanks are expressed to the following for help in this work, in no particular order: My original supervisor, Dr Peter Wright, for his advice and support in setting up this PhD. Supervisors Professor John Mangan and Professor Richard Birmingham. Particular thanks go to Professor Birmingham for giving me the opportunity to do a PhD at all, and to Professor Mangan for his patient advice and guidance in all things academic and for his excellent supervision. Emeritus Professor Ian Buxton of Newcastle University School of Marine Science and Technology, for his encouragement and access to his encyclopaedic knowledge of the marine industries and to the Marine Technology Special Collection of historical documents held at Newcastle University. Dr Sylvia de Mars of Newcastle University Law School, for her suggestions as to appropriate reading on the complex subject of like product in WTO law and for commenting on drafts relating to that key subject. Associate Professor Helen A. Thanopoulou of the University of the Aegean for her review of the section on maritime economics and suggestions for improvement. John Craggs, formerly managing director of both First Marine International and A&P Appledore, for his leadership of research in shipbuilding in the consultancy context. Ronald Vopel, Principal Administrator, European Commission, for his leadership of research commissioned by EC that improved the industry’s understanding of the economics of shipbuilding. Professor Martin Stopford, Visiting Professor in MaST and Chairman of Clarkson Research, for advice and insight over many years and for comments on the conclusions of this work. Dr Alessio Tei of Newcastle University for his assistance and invaluable advice on maritime economics and methodologies. i Dr Sasi Wilmott for advice and help in understanding and applying statistical techniques. Dedication Dedicated to the memory of my father Albert Edward Stott (1926 to 1978), who started life as an apprentice sheet metal worker at the Cammell Laird shipyard in Birkenhead and who would have made a much better job of this but was never given the chance. I still haven’t read Mathematics for the Million (1936) by Lancelot Hogben (his recommendation for improving my mathematical ability), but plan to do so – some day! ii Abstract Limitations in the shipbuilding industry’s understanding of the precise workings of its market have led to difficulties in the prosecution of a subsidy and countervailing measures case in WTO and to obstacles in the furtherance of an international shipbuilding agreement in OECD. Weaknesses stem in particular from lack of precision in the definition of the market, from incomplete understanding of the concept of ‘like product’ as it relates to commercial shipbuilding, and from limited research into cross price elasticity. In this dissertation the nature and boundaries of the market are investigated, leading to a simple definition of the ‘international commercial shipbuilding market’. This differs from existing definitions, for example in OECD and EU, in that it is based on the attributes of the shipbuilder, rather than attributes of the product. A meaning of ‘like product’ that is consistent with WTO case law is defined for commercial shipbuilding, with the conclusion that likeness between products should be determined by competition for the same units of capacity. Technical substitutability of a unit of shipbuilding capacity is analysed in relation to factors that determine competitiveness, concluding that substitutability is wide with few exceptions and that technical aspects of the products are therefore of limited significance in determination of ‘likeness’. Correlation and linear regression are used to demonstrate empirically that cross price elasticity exists in the commercial shipbuilding market, thereby establishing that apparently dissimilar products, such as an LNG tanker and a capesize bulk carrier, may compete for capacity in the same market and can therefore be considered as ‘like products’. The nature of market leaders, pursuing competitiveness through high investment and economies of scale, and the persistence of cycles in demand mean that subsidy and conflict are likely to remain a feature of competition in international commercial shipbuilding. Conclusions presented in this dissertation will assist in the future analysis and definition of such conflicts and hopefully also in resolution. It is hoped that conclusions will also assist in the pursuit of improved governance of the industry at the inter-governmental level. iii Contents Acknowledgements ..................................................................................................... i Dedication .................................................................................................................. ii Abstract ...................................................................................................................... iii Contents .................................................................................................................... iv List of tables .............................................................................................................. vii List of figures .............................................................................................................. x Abbreviations ............................................................................................................ xiv Note on key commercial data sources ..................................................................... xvi Data annex ............................................................................................................... xvi 1. Introduction and statement of the problem ......................................................... 17 2. Background and literature .................................................................................. 22 2.1 The evolution of commercial shipbuilding ..................................................... 22 2.1.1 The evolution of technical and engineering aspects .............................. 22 2.1.2 The evolution of cycles and volatility ...................................................... 37 2.1.3 The evolution of global competition ....................................................... 45 2.1.4 The persistence of subsidy .................................................................... 50 2.2 The economic and regulatory context .......................................................... 58 2.2.1 Shipbuilding in the context of WTO ........................................................ 58 2.2.2 Shipbuilding in the context of maritime economics research ................. 61 3. Objectives and research questions .................................................................... 66 3.1 Research objective ....................................................................................... 66 3.2 Research questions...................................................................................... 66 4. R1 – What is the legal definition of ‘like product’ in the context of WTO? .......... 69 5. H1 - The commercial shipbuilding market exists ................................................ 79 5.1 R2 – Does the functioning of the international commercial shipbuilding market correspond to the accepted definitions of what constitutes a market in the economic sense? ................................................................................................... 79 iv 5.1.1 Empirical acceptance of the existence of the market ............................. 79 5.1.2 Benchmarking commercial shipbuilding against definitions of the economic concepts of a ‘market’ ......................................................................... 82 5.2 R3 – What are the boundaries of the market and how is it constituted in terms of products and their characteristics? ........................................................... 88 5.2.1 The broad definition of the ‘commercial market’ .................................... 88 5.2.2 Legislative and industry definitions ........................................................ 89 5.2.3 Material demarcation ............................................................................. 90 5.2.4 Size demarcation ................................................................................... 92 5.2.5 Product types and materials .................................................................. 97 5.2.6 Variation in market cycles and volatility ................................................. 99 5.2.7 Local and regional purchasing ............................................................. 103 5.3 Conclusions for Hypothesis H1: The commercial shipbuilding market exists 105 6. H2 – Like products exist in the commercial shipbuilding market ...................... 109 6.1 R4 – How do shipyards compete and what determines competitiveness between shipyards and between products? ......................................................... 109 6.1.1 Overview of commercial shipbuilding competitiveness ........................ 109 6.1.2 The development of economy of scale in commercial shipbuilding in the fifty years 1960 to 2010..................................................................................... 112 6.1.3
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