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AND REPAIR INDUSTRIES . ~~0ifil'.\\*[email protected]~~~

Report to the Committee on
Ways and Means, U.S. House
of Representatives, on
Investigation No. 332-197
Under Section 332(9) of
the Tariff Act of 1930


APRIL 1985

Unitad Stataa lntematlonal Trade Commia11ion I Wa11hlnaton. D.C. 20436

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Paula Stern, Chairwoman

Susan W. Llebeler, Vice Chairman .
Alfred E. Eckes

Seeley G. Lodwick

David B. Rohr

This report was prepared principally by

Deborah Ladomirak, Diane Manifold, and John Cutchin
Machinery and Equipment Division

Constance Hamilton, Kim Skidmore, Roy Ginsberg, and Paul Golding
Office of Economics

Office of Industries
Vern Simpson, Acting Director

Address all communications to

Kenneth R .. Mason, Secretary to the Commission
United S~ates International Trade Commission

·w ashington, DC 20436

Page 121


namely: shipbuilding, electric power production, iron and steel production,
and coal mining. KDB services include long-term loans to finance the
acquisition of equipment and machinery for which other sources of finance are
unavailable, repayment guarantees on foreign arid domestic loans, underwriting
and subscribing to c~rporate bonds issued to finance major projects, and
working capital loans. !/

The National Investment Fund,(NIF) was established in 1974 to provi~e the
investment and loan funds needed to promote the development of major · .
industr,ies. KDB administers the Fund in accordance with goals established in
the 5-year economic plan. As shown in table C-12, from FY 1978 through FY
1983 the proportion of NIF loans·to shipbuilders under the Government-supported
shipbuilders program (described below) increased significantly.

Table C-12.--Kore~n National Investment Fund loans for shipbuilding,
fiscal years 1975/76 to 1983/84

Fiscal year Amount Percent of total loans

Killion won

4.9 1975---------------------:.








Source: Compiled from data supplied by the Bank of Korea, National
Investment Fund Statistics: 1974-83.

Government-Supported Shipbuilding Program (GSSP).--The·cssp was .
established in 1975 as part of Government efforts to increase the amount of
domestic ships built in Korean yards. 'l:/ At its inception, GSSP provided up
to 90 percent financing for domestic ships built for the domestic
12~13 percent interest. ~/ Since 1983, GSSP loans have been reduced to
80 percent of contract price with the following terms and conditions: .,the.
interest rate for a loan denominated in Korean won for a deep sea or coastal
vessel is 10 .to 11.5 percent. Repayment terms for the deep ~sea vessel is. i3
years with a 5-year grace period and 8 years with 3 years ·g~ace for the
coastal vessel. Loans denominated in U.S. dollars for a de~p sea or coastal
vessel have. an interest rate based on London Interbank Offered Rate (LIBOR)
and are repayable in a maximum of 10 years with a 4-year grace period.·:

1/ The Economics Intelligence Unit, op. cit., p. 8.
21 Article 4 of Karine Industry Transportation Promotion Act.
31 Seatrade, "S. Korean Report," April 1984, p. 101.

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Since implementation, GSSP has been responsible for constructing 567
Korean ships, totaling 1.71 .milli~n grt, or about 25 percent of the country's
fleet. 11 About 30 billion won ($42 million) was allocated in 1984 for loans
financing the conversion of older ships into energy-conserving vessels. ~/

"Encouragement" subsidies are available to international transporters who
contribute significantly to foreign exchange earnings. When the Government
grants these operating· reserves the right to demand the recipient
company operate on a specific route for a fixed period. "The Korean Government
sustains any losses incurred from this service.


To be eligible for operating subsidies, a company must contribute
significantly to foreign exchange earnings and have a minimum tonnage of
20,000 grt and a minimum capital_ of 500 mUlion won. Joint ventures are
eligible for the subsidi~s w:hen the Korean share of the venture is at least
51 percent and Korean representation on the Board of Directors amounts to
three-fifths of voting rights. 11 Reportedly the Government will end the
"encouragement subsidies" after fiscal year 1986. !!/

Export financing assistance.--The Korean Export-Import Bank (KEXIK) was
established in 1976 to promote national development and economic cooperation
with foreign countries by extending financial assistance for export-import
transactions, overseas investment, and overseas resources development. ·

Foreign shipowners or Korean exporters can receive KEXIK loans for up to
56 percent of snip cost at 9 percent interest with repayment over 8 years
including a 2-~ear grace period. Cofinancing from other banks for up to
24 percent (resulting in total financing of 80 percent) is repayable over
5 years at an interest rate based on LIBOR. ~/

To date, shipbuilding has accounted for most of the following KEXIK
financing: 83.8 percerit of .. total loan disbursements in 1980; 91.5 percent in
1981; 88.2 percent in 1982; 79.9 percent· in 1983; and-89.3 percent in January
to October 1984. ~/ However, KEXIM has recently suggested it plans to divert
more of its resources to other export industries thereby decreasing its
involvement in shipbuilding. In accordance with there plans, KEXIM will no
longer grant the 2-year moratorium on shipbuilding loans and the interest rate
will increase from 9 percent to 10 percent for contracts negotiated after
1984. 7/ .

Other policies and assistance;--Licenses to import vessels into Korea are
restricted in such a way as to protect. the local industry. Since 1977, the
import of new:ly built ships has been "banned in principle" and all new ships
built for the Korean merchant fleet must be built at domestic yards, except

11 Sea trade,. "S .. Korean Repqrt," April 1984, p, 101.
~/ Ibid·.
3/ U.S. Department of Transportation, Maritime Administration, World

Government Aid to Shipbuilders and Shipowners, March 1984, p. 23.
!I Republic of Korea Government.
~I U.S. Department of Transportation, op. cit., p. 86.
6/ Government of the Republic of Korea.
71 World Government Aid to Shipbuilders and Shipowners, op.cit., p. 24.

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