ARENA Working Papers
WP 97/13



Interactive Levels of Policy-Making in the European Union«s Common Commercial Policy

Finn Ola Jølstad



The European Union has become one of the three most important players on the world economic scene alongside the USA and Japan. As the world's largest trading block, the EU is today accounting for around one fifth of world trade. Established in the articles 110-116 of the Rome Treaty is the Common Commercial Policy (CCP) which aims to contribute to the harmonious development of world trade and the progressive removal of tariffs. A common trade policy is necessary for the EU because in its absence internal trade will be impeded and the purpose of a common market frustrated. Moreover, it is desirable insofar it strengthens the bargaining power of the EU (McAleese, 1994). Therefore, the exclusive authority of the EU to enter into international trade agreements on behalf of its member states in areas where common (internal) EU rules exist or where the development of such would be hindered by national action is one core element of the CCP (Murphy & O'Donnell, 1994). In procedural terms, the Council acts on the basis of qualified majority and mandates the Commission to negotiate on its behalf with third countries or in international organisations. The European Court of Justice has repeatedly confirmed that the member states are no longer competent to act on their own in the field covered by the CCP, and this is also recognised by the other contracting parties The EU does in this sense have a clear external relevance in shaping the international trade regime. (Murphy, 1990; Devuyst, 1992). The question is not whether the EU has a foreign economic policy, but rather how and when it can translate its economic potential into economic and political effects (Smith, 1994). This question concerning EU's bargaining power relates to the EU as a system of governance, capable of acting united towards other actors in trade policy matters.

One parsimonious explanation of EU policy-making is provided by the intergovernmentalists who claim that EU politics «is the continuation of domestic politics by other means» (Moravcsik, 1991:25). This theoretical tradition builds on the assumption that states are the principal actors in the international system, and that interstate bargains reflect national interest and relative power. EU institutions are given the function of a regime which will shape interstate politics by providing a common framework that reduces the uncertainty and transaction cost of interstate negotiations (ibid.:27). In this article it will be argued that the intergovernmentalist theory is incapable to provide an overall explanation of EU policy-making in the CCP because it fails to theorise about the other institutional levels than the domestic and therefore cannot capture the dynamics of international bargains. Wheras the intergovernmentalist theory simply add international instutional structures to the domestic policy-making, there is a need for a more integrated analysis of how these systems of governance relate to each other. One have to focus on the multi-layered nature of policy-making where the various actors taking part in the policy process have several access points for influence. According to an intergovernmentalist logic, the EU will have agreed on a common position prior to the international negotiations and EU's bargaining power will be strengthened by the pure economic weight the EU carry relatively to the other actors in the world trade system. This study recognise the face value of the EU's economic strength, but will also provide alternative explanations of how the EU is capable to act as a active and deliberate actor towards other actors in the international system. It especially points to the role of the Commission as the EU's chief negotiator, and its ways to restructure the bargaining situations and to facilitate arrangements which can secure an international agreement at the same time as ratification in the Council is ensured. Instead of a pure intergovernmentalist model one therefore have to modify the two-level bargaining model (Putnam, 1988) to take into account the unique institutional structure of the EU.

These arguments will be exemplified on the basis of a study presented in length of a recent international trade negotiation; the OECD agreement respecting normal competitive conditions in the commercial shipbuilding and repair industry, which was conducted between 1989 and 1994. Additional examples will be drawn from the GATT Uruguay Round.

Two-level bargaining and the intergovernmentalist approach

In international relations theory, Robert Putnam's (1988) approach towards understanding international bargains has gained a lot of attention, and it has also led the way for much of the recent theorising about the EU. Recognising that domestic politics and international relations are entangled, Putnam conceives the politics of international negotiations as constituting a two-level game where the state act at the two levels simultaneously, - the domestic and the international: «At the national level, domestic groups pursue their interests by pressuring the government to adopt favourable policies, and politicians seek power by constructing coalitions between those groups. At the international level, national governments seek to maximise their own ability to satisfy domestic pressures, while minimising the adverse consequences of foreign developments» (ibid.:434). Between the international and the domestic level, the state is functioning as «gate-keeper», and a crucial theoretical link between the two levels is the requirement of domestic ratification of the international agreement.

Starting from this international relation tradition, the intergovernmentalist analytical framework view the EU as essentially a forum for interstate bargaining where the member states of the Union serve as the crucial link in the two-level game of European policy processes (Moravcsik, 1993). Based on the assumption of rational state behaviour constrained by domestic preferences, the intergovernmentalists model international conflict and co-operation as a process that takes place in two successive stages: «governments first define a set of interests, then bargain among themselves in an effort to realise those interests» (Moravcsik, 1993a:487). In the intergovernmental view, «the unique institutional structure of the [EU] is acceptable to national governments only insofar it strengthens, rather than weakens, their control over domestic affairs, permitting them to attain goals otherwise unachievable» (ibid.:507).

The EU, the CCP and the two-level metaphor

The key provisions for the Common Commercial Policy (CCP) regarding trade agreements are found in Article 113 the Treaty of Rome which states that the CCP shall be based on:

«uniform principles, the conclusion of trade and trade agreements, the achievement of uniformity in measures of liberalisation, export policy and measures to protect trade such as those to be taken in case of dumping or subsidies».

As this list is not exhaustive, there have been disputes about the EU competence on various occations. A clarification of this was made by the European Court of Justice in 1971 when it ruled that the EU has exclusive authority to enter into international trade agreements in areas where common (internal) EU rule exist or where development of such would be hindered by national action [1]. The key institutions involved in the CCP are the Commission, the Council and the Article 113 Committee. The role of the European Parliament (EP) in trade negotiations is limited as agreements concluded under Article 113 do not require EP approval, but in practice, the Commission, and sometimes the Council, usually discuss upcoming and ongoing trade matters with the EP on an informal basis (Nugent, 1994:179). The 113 Committee has its name from Article 113 of the Rome Treaty which states:

«The commission shall conduct.......negotiations in consultation with a special committee appointed by the Council to assist the Commission in this task and within the framework of such directives as the Council may issue to it.»

The Committee 113 is the main contact point between the Commission and the member states in the negotiations. Although the Treaty speaks of only one Article 113 Committee, in practice a division of labour has developed between various committees [2]. All these 113 Committee meetings allow the Commission to consult the member states with regard to the important trade policy initiatives which is developing (Devuyst, 1992). The role the various institutions play in the CCP can be illustrated through the policy-making process: First, the Commission drafts proposals for negotiation and presents them to the Council. These proposals are then discussed in The Committee for Permanent Representatives (COREPER) before the Council, on the basis of these discussions, approves the Commission to enter into negotiations. In doing so, the Council may amend, reject or supplement the Commission's proposals. On the basis of this mandate, the Commission negotiates on behalf of the EU in consultation with the Article 113 Committee. The Commission may request additional negotiating mandates from the Council. After the final trade agreement is initiated by the Commission, it has to be approved by the Council by a qualified majority vote (Nugent, 1994; Murphy, 1990).

From an intergovernmentalist view, the participation of the EU in international trade negotiations will imply another stage in the intergovernmental policy-making process [3]. There will be three levels of analysis; the state level, the EU level and the international level. Governments first define a set of interests, then bargain among themselves in an effort to realise those interests through the negotiating directive issued to the Commission (intra-EU game). The Commission will take part in the international negotiations, under tight controle maintained by the Article 113 Committee, in order to realise the objectives laid down in the negotiating directive (extra-EU game). These two games are linked by the Council ratification of the international agreement.

The EU's shipbuilding policy in a changing world market; a historical background

Industrial policy is not given much place in the Rome Treaty, but the developments in the international market eventually made a common policy on shipbuilding a neccessity. After the World War II there was impressive growth in the shipbuilding industry with a tenfold increase in output between 1950 and 1975. The driving force for this was the development of seaborne trade. Expansion in the industrial centres of Western Europe, the US and Japan required the importing of raw materials, most notably oil. Fuelling the economic growth, international trade has grown nearly twice as fast as world output. Not only did this stimulate the demand for seaborne trade, the transport distances did also increase (Stråth, 1987). As a result of high profits returned to shipowners and the number of newcomers attracted by shipping, the freight market collapsed in the late 1950s, and the international market went into booms and slumps for the next decade. In 1967 the closure of the Suez Canal increased the shipping distance for oil cargo when tankers had to round the Cape of Good Hope and this created a need for larger ships and new technology. The development of new production methods and ship designs combined with favourable financial terms increased Japan's already dominant position and established it as the world's largest shipbuilding nation. The tanker boom lasted until the end of 1973 when the outbreak of the Middle East War and the subsequent raising of the oil price culminated in a sharp drop in freight prices. The re-opening of the Suez Canal in 1975 after the six-day war closure in 1967 further reduced the the demand for tanker capacity as a reult of the fall-back in freight distances. Due to full orderbooks this did not affect the shipbuilding industry immediately, and thus the growth in shipbuilding output peaked in 1975 where the proportion of tankers of all ships built was 66.5 per cent. From then the demand for newbuildings dropped drastically until 1979 where the annual output was less than half the level attained in 1975 (Todd, 1991). The burden of this plunging market was carried unevenly among the various nations hosting shipbuilding industry. Whereas the two biggest shipbuilders at the time, Japan and West Germany, in 1979 managed to launch respectively 24% and 15% of the tonnage of four years earlier, South Korea incresed its earlier output by 9%, and has since then become the dominant producer alongside Japan (ibid.).

In the European Union the question of a common shipbuilding policy was first raised by members of the European Parliament in 1964, but the Commission restricted its involvement to co-ordination of national plans. It was not until the summer of 1973 the Commission on the basis of pessimistic forecasts of market trends told the Council it wanted to establish an institutional framework able to deal with the problem of shipbuilding. This was rejected by the Council as the yards at the time could boast full order books. In the aftermath of the oil crises of 1973-74, however, the Council realised that a plan for shipbuilding was necessary and asked the Commission to draw a plan on a shipbuilding policy. The main proposal in the first plan of 1977 was to bring about substantial cuts in shipbuilding capacity to improve competitiveness of the surviving yards. When this attempt to restrict supply failed to find support, one entered the alternative policy of stimulating demand. Through a scrap and build programme one hoped to help shipping and shipbuilding simultaneously, but an agreement on this plan proved itself not to be feasible. In 1983 the Commission again tried to establish a common shipbuilding policy. The aim of its guidelines for restructuring the industry was to stop EU shipbuilders out-competing each other with the help of public money. On the basis of an exemption from the general ban on subsidies in the Treaty of Rome, directives on aid to shipbuilding became established [4]. Under these directives the Commission has tried to bring about som harmonisation of aid to as to avoid a serious distortion of competition within the Union and thus coming in conflict with the articles in the Treaty of Rome. The Commission sets the maximum level of aid to shipbuilding as percentage of the value of the contract, and vets individual contracts. The aid ceiling is to be fixed by the Commission with reference to the prevailing price difference between cost structures of the most competitive yards in the Union and the prices charged by their main international competitors with particular regard to the market segments in which the EU yards remain relatively most competitive. Over the years the OECD negotiation took place, the aid level has been lowered as shown in table 1 below:

An overview of the support to the shipbuilding industry in the member states was provided by the Commission in the «Third survey on state aids in the European Community in the manufacturing and certain other sectors» published in 1992. The figures in this survey are not comparable to the aid ceilings set by the Commission, and they also have to be interpreted with some caution [5]. However, the figures show big variations between the countries and also within the single country between time periods. France and Italy both had an aid level above EU average for both time periods (1986-88 and 1988-90). The survey also shows that the aid level given for shipbuilding is 10 times as big as the average aid level of all other industries (Commission, 1992; ECON, 1993).

Table 1: EU aid ceiling 1987 - 1994:

value > 6 mill. ECU value < 6 mill. ECU
1987 28 20
1988 28 20
1989 26 16
1990 20 14
  value > 10 mill. ECU value < 10 mill ECU
1991 13 9
1992 9 4.5
1993 9 4.5
1994 9 4.5

Source: ECON (1993); Lloyd’s List, various issues.

The size of the shipbuilding sector also varies a lot among the major countries of Europe. Germany has after the unification has become the world's third largest producer with a production capacity of 1.8 million tonnes. As an average of the years 1990-1994, Germany completed constructions of more than 1.0 mill CGT [6] per year, whereas the second largest group of producers (Denmark, Italy, The Netherlands and Spain) were within the range of 300,000 - 400,000 CGT per year. Finland produced sligthly over 200,000 CGT per year and both France and Great Britain were within the range of constructing 100,000 - 200,000 CGT per year. The rest of the EU member states are small or marginal producers, and produced less than 100,000 CGT per year.

The OECD Negotiations

The talks in the OECD shipbuilding group, Working Party 6 (WP/6), with the aim to bring about normal competitive conditions in the shipbuilding and shiprepairs industry was initiated in June 1989 and ended in July 1994. The negotiating parties were the USA, Japan, South Korea, Finland, Norway, Sweden and the EU, and together these accounted for nearly 80 per cent of world shipbuilding production. The relative size of the contracting parties' shipbuilding industry is shown in table 2 below:

Table 2: New orders 1994 by contracting parties to the OECD agreement:

NO. 1000 CGT %  
EU [7] 332 3390 19.6  
NORWAY 41 265 1.5  
JAPAN 613 6841 39.6  
S. KOREA 144 3137 18.1  
USA 33 110 0.6  

Source: AWES, Annual Report 1994-1995

Initiation and agenda-setting

When the US became part of the WP/6 in June 1989, a petition was filed by the Shipbuilders Council of America (SCA) accusing Norway, West Germany, Japan and South Korea of massively subsidising their shipyards, and hence distorting competition (GATT, 1991). Rather than open proceedings under section 301 of the US Trade Act of 1974, Mrs Carla Hills, the US trade representative, decided to settle the dispute through multilateral negotiations. This was welcomed by the Commission which stated: «The Commission ..... believes that the only way to satisfactory resolve the problems facing the world shipbuilding industry is through multilateral negotiations aimed at restoring normal market conditions. Such an approach implies reducing aids granted in this sector, with the objective of eventually eliminating them, in parallel with the removal of other pervasive unfair trade practises. The Commission of the European Communities confirms its willingness to enter into consultations in this matter to explore appropriate ways to meet objectives described above» [8].

An abolition of subsidies (direct and indirect) was welcomed in principle by all participants, and the first phase of the talks was dedicated to describe and quantify measures and practices existing in the different constructor countries to make these transparent. Afterwards, exploratory discussions on the contents of an agreement were initiated. Being the first time a negotiation was constructed with the aim to eliminate all subsidies granted to one industrial sector, one had to reach an agreement on several disputed issue areas [9]. One of the most disputed issues became the US coastal laws. Whereas the European and Asian countries mainly support their shipbuilders by granting subsidies over their budget, US protection takes place mainly in the form of legislative measures like the Jones Act which provides a closed market for US shipbuilders for American coastal traffic. The Japanese home-credit scheme did also call for long negotiations as the Japanese government claimed that the favourable credit terms given to domestic owners did not contain any stipulation that the ships had to be built in Japan. The other negotiating parties on their side claimed it represented a «de facto» subsidy for Japanese shipbuilders since the orders invariably went to Japanese yards within the «keiretsu» industrial structure. Furthermore, a lot of effort was laid down to fill a hole in the GATT anti-dumping code which did not encompass shipping and shipbuilding. Applying an anti-dumping code on capital goods differs from consumer goods as, in this case, ships normally are built after specifications for the single ship rather than in large series. Another problem was to define who should pay the injurious pricing charges as the shipping's ownership structures makes it an almost impossible task determining who is the genuine «importing» shipowner, which according to the original GATT provision would have been the target. To ensure commitment to the agreement, dispute settlement procedures to solve disagreements about the interpretation of the rules were also integrated in the final text. Parallel with the talks on shipbuilding subsidies, talks were also conducted to revise the existing «Understanding on export credits for ships» [10].

Setting the strategies

Althought the participants agreed in principle on the abolition of subsidies to the shipbuilding sector, the US deadline set to end of March 1990 was seen as unrealistic by the others. The Commission was at this stage not yet issued by a formal negotiating mandate, but only instructed to conduct exploratory talks in order to define the situation of the negotiation as accurately as possible. US trade officials were frustrated with the lack of negotiating power given to the EU team, something which they believed was due to internal pressure in the EU, particularly from Spain and Italy [11]. Nevertheless, enough progress had been made when the first US deadline of March 31 1990 expired that a 60 day extension was by the Americans seen as sufficient for finalising the talks.

Showing a sign of good faith with regard to its OECD partners in the WP/6 negotiations, the Commission took the opportunity in early May 1990 to announce a new orientation in its proposal to a seventh directive concerning aid to the shipbuilding industry. One of the most important new elements proposed under the seventh directive, was that aid was to be degressive [12].

Although considerable progress had been made towards the new deadline, a new move by the EU just before the new deadline of May 31, 1990, threw the negotiations into a tumult. At this stage the EU began to raise the new issue about establishing rules that would prohibit the practice of dumping ships on the world market. Despite the «chaos» this move generated, the working party made a renewed commitment to achieve a satisfactory result by December 14 1990 [13]. Acting without a formal negotiating mandate, the Commission was allowed to make this move after consulting the representatives of the member states in the 113 Committee. According to Sjöstedt (1977) the Commission has at this stage no powers to disclose the aims of the Union or to commit it any ways. Nevertheless, although the Commission only was instructed to conduct exploratory talks in order to define the situation of the negotiations, it was important to be active right from the start to influence the agenda for the discussions [14]. Working in close consultation with the 113 Committee, the EU negotiators were fully aware of the positions both in regard to the other parties as well as within the EU, and could therefore make moves in the interest of the Union. After raising this issue, the Commission considered the state of the initial discussions to be such that it now was time to proceed to the formal negotiating stage. Even though it was referred to «persistent rumours» saying that Spain, Italy and France were reluctant to back a negotiation they feared could come in conflict with the EU shipbuilding policy [15], an authorisation to the Commission to negotiate was given by the Council in late July, four months after the first US deadline for the negotiations. The negotiating mandate stressed the need for the same transparency in other shipbuilding nations as the EU had for their subsidies. Aid going through shipowners or other third parties should be banned, and regulations by individual countries reserving shipping routes for ships built on their own ground should be removed. The Community also wanted a dispute panel procedure to prevent unilateral measures to be taken, and to establish a control mechanism to stop unfair pricing spoiling normal competition conditions [16].

The guidelines of the 7th directive on shipbuilding to come into effect from 1991 passed with an unanimous agreement in the Council, but Denmark failed to persuade the other 11 ministers to include a formal commitment to cut subsidies under the directive and limit its terms to two years. Fearing the Danish hard-line, the European shipbuilders engaged in lobbying the Commission to counter the Danish view of rapid and substantial reductions of the aid ceiling [17]. In December, a split in the EU on the 7th directive stalled the OECD talks. The proposal from competition Commissioner Sir Leon Brittan to cut the aid-level from 20% to 11% got support from the EU negotiators in the OECD who said that the cut to 20% in 1989 had been a positive move, and that further cuts would encourage an agreement. The opponents stated that reducing the subsidies would be a suicidal tactic. Japan and South Korea had from their point of view a lot of hidden subsidies while the EU system was transparent. By reducing the level of subsidy year by year, they believed this would lessen the incentives for Japan and South Korea to reach an agreement [18]. The Commission's power to set the aid ceiling was a double-edged tool, cutting across the two games. In the extra-EU game it could be used to signal willingness to phase out shipbuilding subsidies and thus increase the credibility of the EU negotiators and the likelihood of an agreement. At the same time, in the intra-EU game, a reduction of the aid ceiling could contribute to increase the attraction of a multilateral deal within the individual member states. In so far the subsidies led to a diversion of contracts from low-cost producers to subsidised yards in the EU, the shipbuilding interests would have a strong case for lobbying for subsidies. When the EU aid ceiling was lowered, as presupposed in the 7th directive, a multilateral agreement to phase out all subsidies would be increasingly more attractive for the EU shipbuilders compared to a situation where the EU did not subsidise whereas some others did. On the other side, a lowering of the aid ceiling could also reduce the bargaining strength of the EU and the competitiveness of its shipbuilders. As it had been made clear that «The European [Union] does not intend to sacrifice its interests unilaterally [19]», the Commission had to find a compromise between the various demands of the extra-EU game and the intra-EU game when determining the aid ceiling [20]. According to Lloyd's List (12/12-90) Sir Leon Brittan was said to have backing for the cut from his Dutch and Danish colleagues, sharing the responsibility for external relations and commercial policy, and from economic liberals. His support also included the Commissioner from land-locked Luxembourg, much to the irritation of his opponents. Eventually, the Commission landed on a compromise of 13% for 1991. At the same time, the Germans sought exemptions from the general aid ceiling for restructuring of the yards in the former East Germany. This aid, as later approved, would allow access to subsidies above the EU ceiling until year 2005 conditioned on a limitation of the shipbuilding capacity. A spokesman for the Competition Directorate in the EU said it would not make a direct impact on the phasing out of subsidies, but admitted that it was a «new element within the equation» [21].

After the failure of reaching a final agreement by the December deadline, and with only little progress in February 1991, the US began to show its capability to act unilaterally. After a hearing in the US in April 91 where the shipbuilders called for unilateral action, a shipbuilding trade reform bill was introduced before the Congress. This bill, known as «the Gibbons Bill», required any vessel seeking to unload cargo or debark passengers at a US port to certify that it was built or modified without subsidy. If no such certificate could be presented, the Bill would require the owner or operator of the subsidised ship either to repay the subsidy to the foreign government or to pay an amount equal to the subsidy to the US, in order to gain access to US ports. The work on this new legislation was begun without the support of the Bush administration, which still preferred to seek a negotiated settlement, but it was clear that the administration was under a strong internal pressure for rapid action [22]. The European and Japanese shipowner lobby took a strong stand against this Bill. If implemented, this legislative initiative would increase the shipowners' cost of a failure of the OECD agreement, thus adding to their interest in reaching an agreement in the WP/6 [23].

The negotiations proceeded through 1991 to result in a draft report being presented on the December meeting. It was in general well received, but it was decided that the compromise paper should undergo a certain amount of reworking before resubmitted to the various governments as the basis for an agreement. The questions related to injurious pricing in a shipbuilding context were seen as particularly complex, and the EU had also signalled that they would need an end to the US Jones Act and the Japanese home-credit schemes to reach an agreement. Coming in the middle of the December talks, the EU subsidy ceiling for shipbuilding was set to 9% for 1992 when a majority of the Commission backed a compromise put forward by Commission President Jaques Delores. A 5% proposal from Sir Leon Brittan got only a minority backing. Lloyd's List (19/12-91) reports that «certain southern» EU states favoured the status quo being maintained through 1992, thus confirming the north-south split in the EU on these matters [24]. Denmark on the other side had warned that it would be prepared to take legal steps against the EU Commission if the level was not brought down substantially. The EU decision was followed by a statement from the Commission which said: «..[The EU]..has shown its willingness to contribute to a normalisation of conditions in this sector, and expect other parties to the OECD negotiations to make similar contributions to the removal of remaining obstacles to an international agreement».

The recess

The talks resumed in February 1992 with what Lloyd's List (22/1-92) refer to as «minimal public comments because of the delicate stage of negotiations», and later it was reported that the talks were «on the brink of collapse». Following the expiration of the US negotiating mandate in April, some of the Far East delegates put the blame of the failure of producing an agreement on the EU rather than the US. They raised doubts about the EU's commitment to achieve a positive outcome at the Paris meeting, and observers felt that the EU position had altered over the recent period of time due to different views among the member states of the Union (Lloyd's List, 13/4-92).

The 14th of May the Gibbons Bill passed the US House of Representatives with the vote of 339-78. A number of members who earlier had opposed the measure swung behind the Bill due to the collapse of the OECD talks. The US administration opposed the Bill, and said it would prefer a multilateral agreement [25]. With the US presidential elections coming up later the same year, further attempts to reach a deal in the OECD were postponed.

A new attempt

A new attempt to reach an international agreement on shipbuilding industry was made in May 1993 when the US, after a recess of more than one year, rejoined the talks under the new Clinton administration. The talks proceeded throughout 1993 along the same lines as where they had ended the year before. In the US, a revised Gibbons Bill was waiting to be tried for the House committees when a similar anti-subsidy bill (the Breaux Bill) was filed for the US Senate in May, adding to the US pressure on the other negotiating parties. In the EU, the Delors's third Commission brought about changes in the content and distribution of portfolios, and Sir Leon Brittan from the UK now became Commissioner responsible for external economic affairs and commercial policy. Since the last talks the shipbuilding market had slumped, leaving yards short of orders, and the EU aid ceiling for 1993 had been pegged to 9% as the result of a compromise in the Commission. Some Commissioners had advocated a rise in the aid ceiling on the grounds of market factors which had weakened the industry's position relative to Far East competition. The Commissioners from Britain, Denmark, and The Netherlands had again been pushing for a lower aid ceiling. In maintaining the subsidy ceiling at the 1992 level the Commission insisted its decision was compatible with a policy of cutting support in the OECD talks.

Since the last talks the Austrian chairman of WP/6, Georg Lennkh, had stepped down to be replaced by Sweden's OECD representative, Staffan Sohlman. Whereas Lennkh had been running plenary sessions, Sohlman chose towards the end to run the negotiations «under restraint». The meetings were then conducted with a limited number of experts present, or sometimes with the leaders of the delegations alone. This gave the negotiations a different climate from the plenary sessions where up to 100 negotiators and experts had been present at the same meeting. When the negotiations were conducted «under restraint», the EU was only represented by the Commission negotiators despite the individual membership of the member states to the OECD. Members of the 113 Committee were kept informed by Commission officials about the progress of the talks, but its members did also approach the delegates from the other negotiating parties to gain information on what really had been going on behind the closed doors [26]. According to a Danish member of the 113 Committee, the Commission was sticking to its mandate throughout the OECD negotiations, and the relationship between these institutions was best characterised as transparent. Nevertheless, some members of the 113 Committee found reasons to keep an additional check on the work of the Commission. How much discretion the Commission can enjoy in regard to the members of the Union in international trade negotiations vary according to circumstances. Hayes (1993:124) points to instances where the Commission has acted under time-pressure to commit the EU on certain matters. Retrospective approval has been obtained by challenging the representatives of the member countries to repudiate what has been done in the name of the Union. Because of the danger of involuntary defection [27], this is a risky strategy and one used only with great causion as it easily can backfire on the Commission. Whereas it would be quite clear that the Commission had more discretion when the negotiations were conducted «under restraint» than what it had with the member states representatives present, the key to an agreement is still Council ratification. The EU negotiators thus need a good feel for the boundaries of member states governments and of how much room the negotiating directives leave them to manoeuvre.

The December meeting in the OECD became postponed because of the GATT talks in Brussels on the same day where one of the key issues was the inclusion of maritime services. This could embrace the US Jones Act. In Geneva, when the Uruguay Round was declared concluded, some issues had been left unclarified for later talks under the World Trade Negotiations (WTO). Among these issues were marine transport and shipping services [28]. Although the related sectors for the shipbuilding industry were left for later negotiations, the conclusion of the Uruguay Round brought and new optimism into the OECD shipbuilding subsidy talks as it was believed to create a new momentum for trade liberalisation [29].

This optimism was short lived when the Ministry of Commerce and Trade in South Korea in December 1993 announced that the self imposed legislative restrictions in capacity of 1989 would no longer remain in force from 1 January 1994, something which was heavily criticised by the other parties in the talks [30]. Based on an economic analysis carried out by an independent consultant, the EU Commission decided to peg the subsidy ceiling for shipbuilding at 9% for 1994. However, it said it would review its aid ceilings and accept an elimination from January 1, 1995, if the other negotiating parties in the OECD talks were prepared to eliminate similar trade distorting measures. The January meeting of 1994 stalled, and the remaining main issues were the Japanese home-credit scheme, the US Jones Act, and the text of the «injurious pricing» clause. The US maintained its view that the Jones Act was of minor importance, about two or three vessels to be built per year to the end of decade [31], whereas the EU continued to insist on bringing an end to the Jones Act, refusing an US offer to put a cap on US-built Jones Act tonnage [32]. Nevertheless, in a meeting between the US trade representative Mickey Kantor and the industry Commissioner Martin Bangemann, the common desire of the EU and the US to go further in the organisation and liberalisation of international trade in the aftermath of the GATT Uruguay Round was highlighted, and they agreed that the OECD negotiations had to be concluded urgently [33].

As the talks progressed, the EU Commission had to have a meeting in March 1994 to resolve a split over the EU stance in the OECD talks [34]. The 17 European commissioners were said to be almost evenly split between those in favour of reaching an agreement through compromise and those against any deal which would leave the EU at a disadvantage. Sir Leon Brittan, wanted a free hand to do a deal and was backed by the industry Commissioner Martin Bangman, but was opposed by Commission president Jaques Delors and several of the other Commissioners.

Reaching an agreement

The chairman of the OECD talks, the Swedish OECD ambassador Staffan Sohlman, had threatened to resign if an agreement could not be reached at the March meeting, but was persuaded to adjourn the talks as the negotiating parties felt they were close to a deal. To be able to finalise the negotiation, he was asked by the negotiating parties to draft a proposition for a complete agreement to be circulated among their governments [35]. In order to resolve key issues the EU and the US conducted a round of bilateral talks, but when they did not succeed to come to an agreement, the May round of OECD talks became postponed. The major problem was US refusal to change some provisions in the Jones Act which the EU saw as incompatible with the aim of scrapping direct subsidies. According to the US shipbuilders' association, SCA, it was France who pushed on the hardest to include the Jones Act as an issue [36].

In France, the campaigning for the presidential election had begun, and internal political considerations gained increasingly more attention. One of the candidates, Jaques Chirac, attacked the shipbuilding negotiations and compared it with the Blair House compromise in GATT. He said: «We are surely not going to deprive France of its shipbuilding on the pretext that Lord Brittan has reached an understanding with two officials of the OECD and an American at France's expense» [37]. Although the OECD negotiations had not attracted much public attention and employed only 4,800 workers in France in 1994, issues tend to be politicised ahead of elections. According to Putnam (1988:445) this often tend to activate groups who are less worried about the cost of no-agreement, thus making it more difficult to strike a deal. The statement from Jaques Chirac also show the French dissatisfaction with the Commissioner in charge of trade negotiations, Lord Brittan. During the final stages of the Uruguay Round, Sir Leon Brittan had been attacked by the French for acting on an often disputed mandate and not showing enough consideration of the member states' arguments. One example of this is from the Blair House negotiations [38], when Lord Brittan picked apart a French-German draft on the grounds that it risked tying his hands in future negotiations with the US. The furious reaction from the French foreign minister, Alain Juppé, was a remainder to Lord Brittan that he was «a mere official» who would kindly take his orders from the assembled EU ministers [39].

The OECD negotiations resumed in Paris the 11th of July, and it had been announced that this would be the final round of negotiations. Lloyd's List reports from the meeting on the 13th of July that it appeared to be on the brink of collapse which urgent meetings among European Union members were trying to prevent. As the meetings moved on, much of the efforts were concentrated on the French delegation which was insisting on compensation for the US being allowed to retain the Jones Act and its domestic-build requirements.

The breakthrough in the Paris meeting came in the early hours of the morning, Sunday the 17th of July. The solution found was to put a cap on the capacity of vessels built under the provisions of the Jones Act to 200,000 tons gross a year. The Japanese home-credit scheme was put off to an undermined date in the future. Commenting on a short statement made by a French government official to the heads of the seven delegations shortly before the closing session, a member of the US delegation said: «They made it quite clear that they were upset about the agreement» [40]. The US SCA president, Mr Stocker, warned that if the French succeeded in blocking the OECD deal the US would be quick to bring forward its unilateral legislation penalising subsidised ships calling at US ports.

The ratification process in the EU

The OECD talks were concluded without the support of France. The French, which exports practically all newbuildings, wanted compensation for the US Jones Act and the Japanese home-credit schemes. The exemption the EU had secured for the member states to support restructuring and modernisation of their yards [41] was not seen as sufficient by the French, and one official said: «We have done our modernisation, we want subsidies [42]». Commission officials said France was in «a minority of one» and that no additional incentives were being offered to the French to back the deal [43]. At a General Affairs Council meeting in July the French minister asked for the guaranteed continuation of its production capacity as shipbuilding was an «essential interest» for France, and called on the European Commission to go back to the negotiating table as the deal did not meet the demands of France [44]. A statement from Sir Leon Brittan, the trade Commissioner, gave no details on any further talks. As the Commission did not support the demands to reopen the extra-EU game, the solution to the French opposition had to be found in the intra-EU game.

From the Commission it was in September expressed fear for a delay of the implementation of the OECD agreement as the EU still had not come up with a solution to the French opposition. In October, Jose Rossi succeeded Gerard Longuet as French minister for industry, and he stated that France wanted a «specific plan» for the safeguard of its shipbuilding sector in return for its acceptance of the OECD agreement. He also told that the French government currently was in consultation with the European Commission on the subject [45].

At Council meeting of the industrial ministers in November, the EU was reluctant to put the issue to vote as the French claimed the accord threatened its vital national interest and stated that they would use the Luxembourg clause to stop the OECD agreement. France could have constituted a blocking minority together with e.g. Spain and either Portugal or Belgium, but these countries had been given concessions in the OECD agreement for additional restructuring aid to their yards, prolonging already existing schemes approved by the Commission. Grandfathering of existing programmes can be presented as a continuation of EU politics, but they were also part of a two-level strategy serving the neccessity to achieve ratification on the OECD deal [46].

At the same meeting in November, France implicitly linked this issue to its agreement on German aid to Eko-Stahl in the context of the take-over of this public steel company by a Belgian group. Under article 95 of the Treaty of Rome this aid had to be accepted by the Council by an unanimous vote. France was not willing to give its approval to state aid to Eko-Stahl unless the EU offered France a «flexible transitional regime» to prepare its shipbuilding industry for the OECD agreement [47].

The 19th of November, Lloyd's List reports there was speculation saying that France and the Commission were close to a deal allowing extra indirect subsidies in what was called a compensation package, but the proposed date for signing of the OECD agreement at the European Council of foreign ministers on November 28-29 had to be postponed. The 7th of December the French government claimed to have won concessions from the Commission to provide an aid package of estimated FFr 3.5bn over three years covering restructuring costs, research and development, and the same day it was reported that the Council at last was expected to provide an unanimous solution to the problem of the steel group EKO-Stahl. The spokesman of the external affairs, Sir Leon Brittan, said the Commission was «absolutely determined» to see the OECD agreement go through, and whatever was offered France would not breach neither the OECD agreement nor the EU's 7th shipbuilding directive. The other member states were said to be «infuriated» by the French stand [48]. According to Hayes (1993:131-132), the typical method of negotiation in the Community has been to combine a number of issues, so that each member country has the incentive to make concessions on some points in order to secure gains on others. In trade questions, this log-rolling appears typically to have been over time rather than between different issues at any one time. However, the French have in trade policy negotiations «an established technique of arguing for their position up to the last moment or rather beyond, then making the minimum of concessions necessary to secure agreement and congratulating themselves on their cooperative spirit (a view not always shared by others)» (ibid.). This technique was also evident from the Blair House agreement where one observer commented: «The French have always been last minute merchants. They sit and sit until they have pushed the other side as far it will go - then they back down» [49].

The week after the Commission approved a package amounting to FFr 2.6bn over three years in indirect aid to the French shipyards. This subsidy was said to cover research and development, retraining and «social aid» as there was an opening for in the OECD agreement. It proved to be an arrangement which could conclude the international negotiation simultaneously as it answered to the needs of the opposing member state of the EU, thus displaying the logic of the two-level metaphor. Similar agreements on compensation for market opening and/or industry adjustment strategies have been facilitated in other sectors such as textiles and clothing or automobiles (Murphy & O'Donnell, 1994:553). Although the Union needs to have an agreed position towards the other parties in the international negotiations, this may still allow separate national arrangements to be made either in the international agreement (as for Spain, Portugal and Belgium), or within the EU (as for France). Wheras the adjustment of the French shipbuilders would be eased because of the transitional support approved by the Commisssion, their German and British neighbours would have to adapt to the new OECD no-subsidy standard from day one.

The General Affairs Council adopted December 19 1994 the decision which approves the OECD agreement, and two days later this was signed in Paris. However, two years after the signing ceremony, the agreement has yet not been ratified by the US. The proposal which passed the House of Representatives included amendments which would guarantee subsidies exclusively to US shipbuilders. Since these amendments breach the text of the OECD agreement, it was in effect voted down. The final word is not yet said as it still is unclear what stand the US Senate will take in this issue. If the Senate reach a different conclusion, representatives from the Senate and the House of Representatives will together form a group to look at the matter. This change in the US policy came as a result of lobbying from the new American Shipbuilding Association which was formed by the major naval yards after a split in the Shipbuilders' Council of America (SCA). Commenting on the US situation, Mr. Arild Wegner, a Norwegian shipping representative, said: «Representatives for American shipbuilders have all the way claimed they were not competitive because of the other countries' subsidies. Now that the subsidies will be eliminated, they find out that the US yards are not competitive anyway [50]».

The EU, the International and the Domestic Level

There are two parallel processes crucial to the international activity of the Union. The intra-EU game spills over or is projected into the international arena at the same time as external developments and external actors can become part of the EU bargaining process (Smith, 1994:296). The EU shipbuilding policy had external effects on the international shipbuilding market and the individual constructor insofar the subsidisation policy lead to a diversion of contracts from shipbuilders who otherwise would have won the contracts to EU shipbuilders. Additionally, the subsidisation policy has been part of creating a surplus capacity of tonnage, depressing the freight rates and making the market more volatile. Whereas the EU had relied on its directives on aid to the shipbuilding industry, the OECD agreement would redefine the EU policy towards being part of an international no-subsidy regime. The content of this policy was defined through the bargaining process in the WP/6 between the seven negotiating parties.

The mutual dependence between the EU and the international political economy has been noted long ago by the European Court of Justice: «A commercial policy is in fact made up by the combination and interaction of internal and external measures, without priority being taken by one over the other. Sometimes agreements are concluded in execution of a policy fixed in advance, sometimes policy is defined by the agreements themselves [51]». Writing on EU trade diplomacy in the GATT Uruguay Round, Woolcock (1993:305) notes that there were few similarities between agriculture and services in the way the EU managed to conduct the negotiations, and Murphy (1990) also point to sectoral differences in EU's approach to multilateral trade negotiations. The connectedness of internal and international policy measures are also evident also from these cases where, for example, the 1992 CAP reform was clearly designed with the constraints of a possible GATT settlement very much in mind (Franklin and Ockenden, 1995; Smith, 1994b) and the negotiations on services and public purchasing showed a genuine interaction between the multilateral process and the creation of the EU's Single European Market (Woolcock, 1993:300). Differences in the EU's performance in international negotiations dependent on whether it acts on the basis on an already established policy or not, is something which has to be explored further in later studies.

Recognising that the EU is a part of the international political economy, and that causes and effects may go both ways between the European and the international political economy, would seem like a self-evident observation. Nevertheless, it is also an observation which have to be translated back into the theoretical propositions of EU policy-making, as «....the question facing international relation theorists today is not whether to combine domestic and international explanations,....but how best to do so» [52]. In the intergovernmentalist approach, Moravcsik (1993a) present a sequential approach towards international bargaining. To recapitulate; on the basis of the three essential elements of his liberal intergovernmentalism: the assumption of rational state behaviour, a liberal theory of national preference formation, and an intergovernmental analysis of interstate negotiation; Moravcsik concludes that «parsimonious explanations of international conflict or co-operation can be constructed by employing two types of theory sequentially: a theory of national preference formation and a theory of interstate strategic interaction» (ibid.:482). In the intergovernmentalist theory, national preference formulation comes prior to the interstate strategic interaction. The divide between the two levels of analysis is upheld as the state is distinct from the EU, and the relationship between them is a priori established. Gourevitch (1978:883) says that «in using domestic structure as a variable in explaining foreign policy, we must explore the extent to which that structure itself derives from the exigencies of the international system». When Moravcsik (1993:483) says that these effects have to go via the transmission belt of domestic politics, they logically belong to the first stage of his sequential two-stage approach, prior to the interstate bargaining. The strength of the feed-back from negotiations at Union level into national policies can thus not be examined from a sequential intergovernmentalist framework [53].

The history of EU shipbuilding policy shows that the Commission has through its policy initiatives been an active part in shaping the EU's shipbuilding policies over time, and it was also playing an active part in the OECD negotiations. Even though the Cockfield white paper (establishing the Single European Market) did not include EU legislation to reduce state subsidies, the Commission has over the past years become more agressive against the subsidiation policy, pushing towards reductions [54]. It first proposed in 1977 to cut supply through reducing shipbuilding capacity, then to increase demand through a scrap and build program. When these initiatives failed, the Commission managed to establish a policy of uniform aid ceilings, before it finally accepted the US initiatives for a multilateral deal on scrapping of shipbuilding subsidies. The negotiating mandate for the OECD negotiations was established on the basis of a Commission proposal after the exploratory talks the Commission had conducted in co-operation with the 113 Committee. Through its independent powers of setting the aid ceiling the Commission could increase the support behind the multilateral talks among the member states as this ceiling was lowered, and ratification was ensured by facilitating side-payments to the French in approving the «transitional-support» scheme. These events cannot be answered from the intergovernmentalist logic because of its failure to theorise about other levels of policy-making than the domestic. The intergovernmentalist theory can therefore neither account for the developents over time where the EU can transform the internal determinants of national preference formulation, nor the direct involvement of the EU institutions in the the policy-making process.


EU policy-making does not take place in a vacuum, but is placed within a larger setting. As noted by Woolcock (1993:293): «Economic interdependence goes hand in hand with a high degree of policy interdependence. Decisions taken by the [EU] will have an immediate effect on its trading partners, and vice versa». The development of complex linkages in the world economy has created a lot of boundary problems between what is «domestic» and «international» politics. The EU policy is not only shaped from an intergovernmental bargaining between the Union members, it is also shaped by initiatives deriving from external actors and EU institutions. The member states do, of course, play a central part in the policy development in the European Union, but a narrow conception of bargaining among the member states' governments would be misleading. Even though the EU's policy is rooted in the member states, one cannot provide a comprehensive explanation of EU policy-making without analysing the origins of national preference formulation in an open and changing world economy. One must overcome the divide between the levels of analysis created by an intergovernmentalist analysis which add one level to the other in a process taking place in successive stages. Further studies on the EU trade-policy making must rather aim for an integrated approach where all institutional levels in the policy-making process are theorised about, as well as the interplay between these levels.


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[1] Murphy & O'Donnell (1994:549) with reference to the ERTA (European Road Agreement) Case (22/70): Commission of the EC v. Council of the EC, [1971] European Court Reports, 263. See also Maas (1976).

[2] In the OECD negotiations the 113 Committee was also called The Shipbuilding Committee, and the representatives came from their national ministries responsible for shipbuilding questions. The Commission was represented by experts from the DGs. Formally, the negotiations were delegated to DGI (External Relations), but DGIV (Competition) was also heavily involved, and DGIII (Internal Market and Industrial Affairs) did also take part to a lesser degree.

[3] See Moravcsik (1993:508-517)

[4] Industrial policy had hardly been given place in the Rome Treaty. The original objectives were only related to competition policy (Articles 85-89) and government aid and subsidies (Articles 92-94). The Treaty of Rome stipulates a general ban on all national subsidies which are declared incompatible with the common market. A similar ban on any national aid «in so far as it affects trade between member states» is provided by the Article 92.1. This general prohibition is qualified by certain exemptions, one of them is in Artcle 92.3d) which gives the Council the possibility to add on to the list of exemptions acting by a qualified vote on a Commission proposal.

[5]The survey shows aid relative to gross value added in the shipbuilding sector while the ceilings set by the Commission are linked to the contract prices of ships. The uncertainty is because of intransparent subsidy schemes and lack of data to calculate value added (Commission 1992; ECON 1993).

[6] Compensated Gross Tons (CGT) gives a rough estimate of the working hous of shipbuilding, but is a better measure for international comparisons than the single shipyard's production (Todd, 1991).

[7] The figures for EU also include Finland (7 new orders) and Sweden (no new orders) as they by their acquisition to the EU became represented by the EU signature.

[8] Agence Europe 25/7-1989.

[9] See also Drewry (1995), St.prp nr 64 (1994-95) and various issues of Lloyd's List.

[10] The arrangements on export credits for ships have been negotiated separately from the more general OECD «Consensus» on Export Credits, and has a different status than the «Consensus». The first «Understanding was reached in 1969, and the terms have since then been revised. (Ray, 1986; Pearce, 1980).

[11] Lloyd's List, 4/4-90

[12] Agence Europe, 2/5-90.

[13] Lloyd's List 7/5-91.

[14] Interview with a member of the 113 Committee, July 1996.

[15] Lloyd's List, 26/6-90; 19/7-90.

[16] Lloyd's List 19/7-90.

[17] Lloyd's List 29/11-90.

[18] Lloyd's List 12/12-90.

[19] Commission vice-president Martin Bangemann insisting on an international binding agreement in front of the AWES annual conference 1990 (Agence Europe, 22/7-1990).

[20] A Danish member of the 113 Committee could confirm that they were fully aware of the importance of lowering the aid ceiling as a signal to the other parties as well as the effect this could have on the interest of the member states (interview, July 1996).

[21] Lloyd's List, 19/11-90; 29/11-90.

[22] Lloyd's List, 30/12-91

[23] Although shipowners in the short run can reap some benefit from ordering vessels to below normal cost due to the subsidisation policy, these low priced ships have also distorted the supply/demand situation in shipping, resulting in surplus capacity and depressed freight rates. The shipowners therefore had an interest in restoring normal competitive conditions in the shipbuilding industry.

[24] A Norwegian member of the negotiations had the impression that the EU member countries became more hostile towards the OECD talks the closer they were to the Mediterranean Sea. This impression was also confirmed by a Danish member of the 113 Committee.

[25] Lloyd's List, 16/5-92.

[26] According to a Norwegian negotiator (interview, 1996).

[27] «an agent who is unable to deliver on a promise because of failed ratification» (Putnam, 1988:438).

[28] Large areas of the maritime sector are still excluded from the GATT/WTO regime. With government procurement outside GATT/WTO rules, national preference policies can still be applied to military and aid cargoes. Shipbuilding issues are still to be resolved through the OECD.

[29] Lloyd's List, 16/11-93; 17/12-93.

[30] The South Korean stand was that the OECD talks concerned state aid and injurious pricing, not capacity regulation, and that dock expansion thus was an affair of private company decisions, not governmental regulations (Lloyd's List, 20/1-94; Drewry, 1995:152-155).

[31] This was claimed by the US negotiators with support from WP/6 chairman Lennkh (Lloyd's List 30 Nov. 1991). The report from ECON (1993) about aid to the shipbuilding industry also claims that today very few ships are built according to the Jones Act.

[32] Lloyd's List, 6/4-94.

[33] Agence Europe 11/1-94.

[34] Lloyd's List.,16/3-94; 17/3-94.

[35] Lloyd's List, 19/3-94; 23/3-94.

[36] Lloyd's List, 23/5-94.

[37] Lloyd's List, 28/5-94.

[38] The bilateral agreement between the United States and the EU, which underpinned the Uruguay round agricultural settlement on 20 November 1992 in Washington DC.

[39] See Smith (1994) and various issues of Financial Times. The quote is taken from Financial Times, 21/9-93.

[40] Lloyd's List, 18/7-94.

[41] Belgium has until 1998 to modernise and Spain and Portugal until 1999. These are existing programmes which have been grandfathered. See the notes to annex II in the agreement (OECD, 1994).

[42] Statement from a French official (Lloyd's List, 19/7-94).

[43] Lloyd's List, 19/7-94.

[44] Agence Europe, 14/9-94.

[45] Lloyd's List,10/11-94.

[46] Confirmed by a memeber of the 113 Committee. Interview, July 1996.

[47] Agence Europe, 24/10-94; 9/11-94.

[48] Lloyds list, 7/12; 8/12-94; Agence Europe, 7/12-94.

[49] Financial Times, 26/8-93.

[50] Dagens Næringsliv 9/1-95. My translation.

[51] The quote is taken from the ERTA (European Road Agreement), Case (22/70): Commission of the EC v. Council of the EC, [1971] European Court Reports, 263; cited in Maas (1976:384).

[52] Moravcsik (1993b:9) emphasis in original.

[53] A similar argument is made by Hayes (1993:123)

[54] Woolcock (1993:301) with a reference to a speech by Sir leon Brittan at the Confindustria, Rome, November 1990. See also Brittan, Sir Leon (1994): Europe. The Europe We Need. London: Hamish Hamilton. , e.g. pp 86-87.

[Date of publication in the ARENA Working Paper series: 15.6.1997]