Japan asked South Korea on Tuesday to launch bilateral talks over what it sees as Seoul’s unfair subsidies for shipbuilders, but a government source said the dispute will most likely go to the World Trade Organization.
Tokyo believes that massive assistance provided to the South Korean shipbuilding industry by government-affiliated financial institutions goes against international trade rules, but Seoul has resisted reviewing its subsidy program, claiming the institutions provide the assistance at their own discretion.
If the bilateral talks break down, the case will be brought to a WTO dispute settlement panel. It generally takes nearly two years for such a dispute to be settled under the WTO framework.
“We have conveyed concerns to South Korea that (the subsidies) could distort the market, but there have been no moves to correct the practice,” transport minister Keiichi Ishii told a news conference Tuesday.
The move comes just a week after Tokyo lodged a protest with Seoul over a court ruling ordering a Japanese company to compensate South Koreans for wartime forced labor. Tensions could further escalate if Japan begins the process to sue South Korea on the trade front.
The global shipbuilding industry has faced a supply glut due to massive investments made before the 2008 financial crisis triggered by the collapse of U.S. securities firm Lehman Brothers Holdings Inc.
Since 2015, the South Korean institutions have provided financial assistance worth a total of $11 billion to cash-strapped Daewoo Shipbuilding & Marine Engineering Co., one of the biggest shipbuilders in South Korea.
As such support has helped improve its financial standing, Daewoo Shipbuilding has sharply cut prices for its products, putting pressure on its rivals in Japan and elsewhere, according to Japanese officials.
In January, Japan sent a document to South Korea arguing that the financial support given to Daewoo violated WTO rules. In late October, the chief of the Japanese transport ministry’s maritime bureau requested South Korea stop providing subsidies to shipbuilders as soon as possible. South Korea rejected the calls.
In the early 2000s, the European Union took Seoul to the WTO over subsidies to South Korean shipyards, saying such a practice threatened the global shipbuilding industry. However, the WTO ruled effectively in favor of the South Korea in 2004, rejecting the bloc’s argument that the subsidy program itself violated WTO rules.
The Japanese shipbuilding industry was the world’s largest for decades after World War II but gave up the top spot in the 2000s amid intense competition from Chinese and South Korean rivals. The slump triggered realignment of the domestic industry.
Mitsubishi Heavy Industries has withdrawn from building large passenger ships and spun off its commercial ship business. The company has since shifted its focus to other segments, such as building oil storage depots.