WORLD TRADE  
ORGANIZATION  WT/DS301/R 
22 April 2005 
 (05-1627) 
 Original:   English 
 
 
 
 
  
 
  
 
  
EUROPEAN COMMUNITIES – MEASURES AFFECTING 
TRADE IN COMMERCIAL VESSELS 
 
 
Report of the Panel 
 
 
 
 
 
  
 
  WT/DS301/R 
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 TABLE OF CONTENTS 
Page  
 
I. INTRODUCTION ................................................................................................................... .1 
A. COMPLAINT OF KOREA ...............................................................................................................1  
B. ESTABLISHMENT AND COMPOSITION OF THE PANEL ..................................................................1  
C. PANEL PROCEEDINGS ..................................................................................................................2  
II. FACTUAL ASPECTS ..............................................................................................................2  
III. PARTIES' REQUESTS FOR FIND INGS AND RECOMMENDATIONS.........................2  
A. KOREA ............................................................................................................................... ..........2  
B. EUROPEAN COMMUNITIES ..........................................................................................................3  
IV. ARGUMENTS OF THE PARTIES ........................................................................................3  
A. BACKGROUND .............................................................................................................................3  
B. PRELIMINARY ISSUES ..................................................................................................................4  
1. EC Conditional Request fo r Preliminary Ruling...................................................................4  
2. Other Prelim inary Issues ....................................................................................................... ..8 
C. LEGAL CLAIMS ..........................................................................................................................10  
1. Article III:4 of th e GATT 1994..............................................................................................10  
2. Article I:1 of the GATT 1994.................................................................................................14  
3. Article 32.1 of the SCM Agreement ......................................................................................18  
4. Article 23 of the DSU .......................................................................................................... ....29  
(a) General Arguments .............................................................................................................. .....29  
(b) Article 23.1 of the DSU ........................................................................................................ ....36  
(c) Article 23.2 of the DSU ........................................................................................................ ....42  
(i) Article 23.2.(a) of the DSU .................................................................................................... ...42 
(ii) Article 23.2.(b) of the DSU .................................................................................................... ...49 
(iii) Article 23.2.(c) of the DSU .................................................................................................... ...50 
(d) The EC Member State Implementing Measures Violate Article 23.1 of the DSU ...................50  
5. Articles  4 and 7 of the SCM Agreement ..............................................................................51  
V. ARGUMENTS OF THE THIRD PARTIES ........................................................................52  
A. INTRODUCTORY REMARKS .......................................................................................................52  
B. LEGAL CLAIMS ..........................................................................................................................53  
1. Article III:4 of th e GATT 1994..............................................................................................53  
2. Article 32.1 of the SCM Agreement ......................................................................................53  
(a) Specific action in response to subsidies....................................................................................56  
(b) Action against subsidy ......................................................................................................... .....57  
3. Article 23 of the DSU .......................................................................................................... ....57  WT/DS301/R 
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 (a) General Arguments .............................................................................................................. .....57  
(b) Article 23.2.(a) of the DSU.................................................................................................... ...62 
VI. INTERIM REVIEW...............................................................................................................62  
A. CONDITIONAL PRELIMINARY OBJECTION OF THE EUROPEAN COMMUNITIES ............................63  
B. VESSELS AS IMPORTED PRODUCTS ............................................................................................63  
C. REFERENCES TO PRESS RELEASES .............................................................................................64  
VII. FINDINGS....................................................................................................................... ........66  
A. INTRODUCTION ..........................................................................................................................66  
1. Findings requested by the parties..........................................................................................66  
2. Order of Analysis .............................................................................................................. ......67  
3. Burden of proof................................................................................................................ .......67  
4. Preliminar y issues ............................................................................................................. ......68  
(a) Conditional preliminary request of the European Communities...............................................68  
(i) Main arguments of the parties .................................................................................................. 68 
(ii) Evaluation by the Panel........................................................................................................ ....70  
(b) New Measures of EC member States........................................................................................73  
(c) Whether the present dispute is a dis pute between Korea and the European 
Communities or a dispute between Korea and the European Communities and its 
member States.................................................................................................................. .........74  
(d) Other "preliminary issues" raised by the European Communities in its first 
submission ..................................................................................................................... ...........75  
5. Measures at  issue .............................................................................................................. ......75  
(a) Council Regulation (EC) No 1177/2002, as amended..............................................................75  
(b) Authorization by the European Commission, on the basis of the TDM Regulation, of  
state aid granted by EC member States.....................................................................................78  
6. The nature of the TDM Regulation and its relationship with national measures adopted by EC member States...............................................................................................79
 
B. CLAIM UNDER ARTICLE III:4  OF THE GATT  1994 ....................................................................80  
1. Arguments of the parties....................................................................................................... .80 
2. Arguments of th ird parties..................................................................................................... 82 
3. Evaluation by the Panel........................................................................................................ ..82 
C. CLAIM UNDER ARTICLE I OF THE GATT  1994..........................................................................85  
1. Arguments of the parties....................................................................................................... .85 
2. Evaluation by the Panel........................................................................................................ ..86 
D. CLAIM UNDER ARTICLE 32.1  OF THE  SCM  AGREEMENT ..........................................................90  
1. Whether the TDM Regulation constitutes "specific " action within the meaning 
of Article 32.1 of the SCM Agreement ..................................................................................90  
(a) Arguments of the parties....................................................................................................... ....90  WT/DS301/R 
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 (b) Arguments of third parties ..................................................................................................... ...93 
(c) Evaluation by the Panel ........................................................................................................ ....94  
2. Whether the TDM Regulation constitutes specific action "against " a subsidy 
within the meaning of Article 32.1 of the SCM Agreement ..............................................105  
(a) Main arguments ................................................................................................................. .....105  
(i) Arguments of the parties ....................................................................................................... ..105  
(ii) Arguments of third parties ..................................................................................................... .107 
(b) Evaluation by the Panel ........................................................................................................ ..108  
E. CLAIMS UNDER ARTICLE 23 OF THE DSU .................................................................................114  
1. General........................................................................................................................ ...........114  
2. Article 23.1................................................................................................................... ..........114  
(a) Main arguments ................................................................................................................. .....114  
(i) Arguments of the parties ....................................................................................................... ..114  
(ii) Arguments of third parties ..................................................................................................... .116 
(b) Evaluation by the Panel ........................................................................................................ ..117  
(i) Meaning of the requirement to have recou rse to the DSU when Members seek the 
redress of a violation ......................................................................................................... .....118  
(ii) Whether by adopting the TDM Regulation the European Communities acted in 
violation of Article 23.1 of the DSU by unilaterally seeking the redress of a violation 
without having recourse to the DSU.......................................................................................126  
3. Article 23.2................................................................................................................... ..........131  
(a) Arguments of the parties....................................................................................................... ..131  
(b) Evaluation by the Panel ........................................................................................................ ..132  
F. CLAIMS UNDER ARTICLES 4 AND 7 OF THE SCM  AGREEMENT ..............................................132  
1. Main arguments of the parties.............................................................................................132  
2. Evaluation by the Panel........................................................................................................ 133 
VIII.  CONCLUSIONS AND RECOMMENDATION ................................................................133  
IX. ANNEX .......................................................................................................................... ........135  
 WT/DS301/R 
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 TABLE OF CASES CITED IN THIS REPORT 
 
Short Title Full Case Title and Citation 
Argentina – Footwear (EC)  Panel Report, Argentina – Safeguard Measur es on Imports of Footwear , 
WT/DS121/R, adopted 12 January 2000, as modified by the Appellate Body 
Report, WT/DS121/AB/R, DSR 2000:II, 575 
Australia – Automotive Leather II
  Panel Report, Australia – Subsidies Provided to Producers and Exporters of 
Automotive Leather , WT/DS126/R, adopted 16 June 1999, DSR 1999:III, 951 
Australia – Salmon  Appellate Body Report, Australia – Measures Affecting Importation of Salmon , 
WT/DS18/AB/R, adopted 6 November 1998, DSR 1998:VIII, 3327 
Belgium – Family Allowances Working Party Report, Belgian Family Allowances (allocations familiales) , adopted 
7 November 1952, BISD 1S/59.  
Brazil – Aircraft  (Article 21.5 – Canada)
  Appellate Body Report, Brazil – Export Financing Programme for Aircraft – 
Recourse by Canada to Article 21.5 of the DSU , WT/DS46/AB/RW, adopted 
4 August 2000, DSR 2000:VIII, 4067 
Brazil – Aircraft 
(Article 22.6 – Brazil) Decision by the Arbitrators, Brazil – Export Financing Programme for Aircraft – 
Recourse to Arbitration by Brazil under Ar ticle 22.6 of the DSU and Article 4.11 of 
the  SCM Agreement , WT/DS46/ARB, 28 August 2000 
Canada – Autos  Appellate Body Report, Canada – Certain Measures Affecting the Automotive 
Industry , WT/DS139/AB/R, WT/DS142/AB/R, adopted 19 June 2000, 
DSR 2000:VI, 2985 
Canada – Autos  Panel Report, Canada – Certain Measures Affecting the Automotive Industry , 
WT/DS139/R, WT/DS142/R, adopted 19 June 2000, as modified by the Appellate Body Report, WT/DS139/AB/R, WT/DS142/AB/R, DSR 2000:VII, 3043 
Canada – Periodicals  Appellate Body Report, Canada – Certain Measures Concerning Periodicals , 
WT/DS31/AB/R, adopted 30 July 1997, DSR 1997:I, 449 
Canada – Periodicals  Panel Report, Canada – Certain Measures Concerning Periodicals , WT/DS31/R 
and Corr.1, adopted 30 July 1997, as modified by the Appellate Body Report, WT/DS31/AB/R, DSR 1997:I, 481 
Chile – Alcoholic Beverages  Appellate Body Report, Chile – Taxes on Alcoholic Beverages , WT/DS87/AB/R, 
WT/DS110/AB/R, adopted 12 January 2000, DSR 2000:I, 281 
Chile – Alcoholic Beverages  Panel Report, Chile – Taxes on Alcoholic Beverages , WT/DS87/R, WT/DS110/R, 
adopted 12 January 2000, as modified by the Appellate Body Report, 
WT/DS87/AB/R, WT/DS110/AB/R, DSR 2000:I, 303 
EEC – Oilseeds I Panel Report, European Economic Community – Payments and Subsidies Paid to 
Processors and Producers of Oilseeds and Related Animal-Feed Proteins , adopted 
25 January 1990, BISD 37S/86. 
EC – Asbestos  Appellate Body Report, European Communities – Measures Affecting Asbestos and 
Asbestos-Containing Products , WT/DS135/AB/R, adopted 5 April 2001, DSR 
2001:VII, 3243 
EC – Asbestos  Panel Report, European Communities – Measures Af fecting Asbestos and Asbestos-
Containing Products , WT/DS135/R and Add.1, adopted 5 April 2001, as modified 
by the Appellate Body Report, WT/DS135/AB/R, DSR 2001:VIII, 3305 
EC – Bananas III  Appellate Body Report, European Communities – Regime for the Importation, Sale 
and Distribution of Bananas , WT/DS27/AB/R, adopted 25 September 1997, 
DSR 1997:II, 591 
EC – Bananas III (Guatemala 
and Honduras)  Panel Report, European Communities – Regime for the Importation, Sale and 
Distribution of Bananas – Complaint by Guatemala and Honduras , 
WT/DS27/R/GTM, WT/DS27/R/HND, adopted 25 September 1997, as modified by the Appellate Body Report, WT/DS27/AB/R, DSR 1997:II, 695 
EC – Bananas III (Mexico)  Panel Report, European Communities – Regime for the Importation, Sale and 
Distribution of Bananas – Complaint by Mexico , WT/DS27/R/MEX, adopted 
25 September 1997, as modified by the Appellate Body Report, WT/DS27/AB/R, 
DSR 1997:II, 803 WT/DS301/R 
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 Short Title Full Case Title and Citation 
EC – Bananas III (US)  Panel Report, European Communities – Regime for the Importation, Sale and 
Distribution of Bananas – Complaint by the United States , WT/DS27/R/USA, 
adopted 25 September 1997, as modified by the Appellate Body Report, WT/DS27/AB/R, DSR 1997:II, 943 
EC – Bananas III (Ecuador)  Panel Report, European Communities – Regime for the Importation, Sale and 
Distribution of Bananas – Complaint by Ecuador , WT/DS27/R/ECU, adopted 
25 September 1997, as modified by the Appellate Body Report, WT/DS27/AB/R, 
DSR 1997:III, 1085 
EC – Bananas III (US) 
(Article 22.6 – EC)  Decision by the Arbitrators, European Communities – Regime for the Importation, 
Sale and Distribution of Bananas – Recourse to Arbitration by the European Communities under Article 22.6 of the DSU , WT/DS27/ARB, 
9 April 1999, DSR 1999:II, 725 
EC – Poultry  Appellate Body Report, European Communities – Measures Affecting the 
Importation of Certain Poultry Products , WT/DS69/AB/R, adopted 23 July 1998, 
DSR 1998:V, 2031 
EC – Sardines  Appellate Body Report, European Communities – Trade Description of Sardines , 
WT/DS231/AB/R, adopted 23 October 2002 
EC – Sardines  Panel Report, European Communities – Trade Description of Sardines , 
WT/DS231/R and Corr.1, adopted 23 October 2002, as modified by the Appellate Body Report, WT/DS231/AB/R 
India – Patents (US)  Appellate Body Report, India – Patent Protection for Pharmaceutical and 
Agricultural Chemical Products , WT/DS50/AB/R, adopted 16 January 1998, 
DSR 1998:I, 9 
Indonesia – Autos  Panel Report, Indonesia – Certain Measures Affecting the Automobile Industry , 
WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R and Corr.1, 2, 3, and 4, 
adopted 23 July 1998, DSR 1998:VI, 2201 
Italy – Agricultural Machinery  Panel Report, Italian Discrimination Against Imported Agricultural Machinery , 
adopted 23 October 1958, BISD 7S/60. 
Japan – Semi-Conductors Panel Report,  Japan – Trade in Semi-Conductors , Adopted 4 May 1988, 
BISD 35S/116 
Japan – Alcoholic Beverages II  Appellate Body Report, Japan – Taxes on Alcoholic Beverages , WT/DS8/AB/R, 
WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, DSR 1996:I, 97  
Japan – Alcoholic Beverages II  Panel Report, Japan – Taxes on Alcoholic Beverages , WT/DS8/R, WT/DS10/R, 
WT/DS11/R, adopted 1 November 1996, as modified by the Appellate Body 
Report, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, DSR 1996:I, 125 
Japan – Film  Panel Report, Japan – Measures Affecting C onsumer Photographic Film and 
Paper , WT/DS44/R, adopted 22 April 1998, DSR 1998:IV, 1179 
Korea – Various Measures on 
Beef  Appellate Body Report, Korea – Measures Affecting Imports of Fresh, Chilled and 
Frozen Beef , WT/DS161/AB/R, WT/DS169/AB/R, adopted 10 January 2001, 
DSR 2001:I, 5 
US – Section 337 Panel Report, United States – Section 337 of the Tariff Act of 1930 , adopted 
7 November 1989, BISD 36S/345. 
US – Malt Beverages Panel Report , United States – Measures Affe cting Alcoholic and Malt Beverages , 
adopted 19 June 1992, BISD 39S/206. 
US – 1916 Act  Appellate Body Report, United States – Anti-Dumping Act of 1916 , 
WT/DS136/AB/R, WT/DS162/AB/R, adopted 26 September 2000, DSR 2000:X, 
4793 
US – Carbon Steel  Appellate Body Report, United States – Countervailing Duties on Certain 
Corrosion-Resistant Carbon Steel Flat Products from Germany , WT/DS213/AB/R 
and Corr.1, adopted 19 December 2002 
US – Certain EC Products  Appellate Body Report, United States – Import Measures on Certain Products from 
the European Communities , WT/DS165/AB/R, adopted 10 January 2001, 
DSR 2001:I, 373 
US – Certain EC Products  Panel Report, United States – Import Measures  on Certain Products from the 
European Communities , WT/DS165/R and Add.1, adopted 10 January 2001, as 
modified by the Appellate Body Report, WT/DS165/AB/R, DSR 2001:II, 413 WT/DS301/R 
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 Short Title Full Case Title and Citation 
US – Cotton Yarn  Appellate Body Report, United States – Transitional Safeguard Measure on 
Combed Cotton Yarn from Pakistan , WT/DS192/AB/R, adopted 5 November 2001, 
DSR 2001:XII, 6027 
US – FSC  (Article 21.5 – EC)
  Appellate Body Report, United States – Tax Treatment for "Foreign Sales 
Corporations" – Recourse to Article 21.5 of the DSU by the 
European Communities , WT/DS108/AB/RW, adopted 29 January 2002 
US – FSC  
(Article 22.6 – US)  Decision by the Arbitrator, United States – Tax Treatment for "Foreign Sales 
Corporations" – Recourse to Arbitration by  the United States under Article 22.6 of 
the DSU and Article 4.11 of the SCM Agreement , WT/DS108/ARB, 
30 August 2002 
US – Line Pipe  Appellate Body Report, United States – Definitive Safeguard Measures on Imports 
of Circular Welded Carbon Q uality Line Pipe from Korea , WT/DS202/AB/R, 
adopted 8 March 2002  
US – Offset Act  
(Byrd Amendment ) Appellate Body Report, United States – Continued Dumping and Subsidy Offset Act 
of 2000 , WT/DS217/AB/R, WT/DS234/AB/R, adopted 27 January 2003 
US – Offset Act  
(Byrd Amendment ) Panel Report, United States – Continued Dumping and Subsidy Offset Act of 2000 , 
WT/DS217/R, WT/DS234/R, adopted 27 January 2003, as modified by the 
Appellate Body Report, WT/DS217/AB/R, WT/DS234/AB/R 
US – Section 301 Trade Act  Panel Report, United States – Sections 301-310 of the Trade Act of 1974 , 
WT/DS152/R, adopted 27 January 2000, DSR 2000:II, 815 
US – Wool Shirts and Blouses  Appellate Body Report, United States – Measure Affecting Imports of Woven Wool 
Shirts and Blouses from India , WT/DS33/AB/R and Corr.1, adopted 23 May 1997, 
DSR 1997:I, 323 
 
 
 
 WT/DS301/R 
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 I. INTRODUCTION 
A. COMPLAINT OF KOREA  
1.1 On 3 September 2003, Korea requested consulta tions with the European Communities ("EC") 
and certain EC member States pursuant to Article 4 of the Understanding on Rules and Procedures 
Governing the Settlement of Disputes  ("DSU"), Article XXIII:1(a) of the General Agreement on 
Tariffs and Trade 1994 ("the GATT 1994"), Article XXIII:1(b) of the GATT 1994 and Article 5(b) of 
the Agreement on Subsidies and Countervailing Measures ("SCM Agreement"), and Articles 4, 7 
and 30 of the SCM Agreement, with regard to  measures affecting trade in commercial vessels.1  
Korea and the European Communities held consul tations on 9 October and 14 November 2003, but 
failed to settle the dispute. 
1.2 On 12 September 2003, China requested, pursuant to Article 4.11 of the DSU, to be joined in 
the consultations.2 
B. ESTABLISHMENT AND COMPOSITION OF THE PANEL  
1.3 On 5 February 2004, Korea requested the estab lishment of a panel pursuant to Articles 6 of 
the DSU and Article XXIII:2 of the GATT 1994.3  At its meeting of 19 March 2004, the Dispute 
Settlement Body (the "DSB") established a Panel in  accordance with Article 6 of the DSU to examine 
the matter referred to the DSB by Korea in document WT/DS301/3.4  At that meeting, the parties to 
the dispute also agreed that the Panel should have st andard terms of reference.  The terms of reference 
are, therefore, the following: 
"To examine, in the light of the relevant provisions of the covered agreements cited 
by Korea in document WT/DS301/3, the matter  referred to the DSB by Korea in that 
document, and to make such findings as will assist the DSB in making the 
recommendations or in giving the rulings provided for in those agreements." 
1.4 On 7 May 2004, Korea requested the Director-G eneral to determine the composition of the 
Panel, pursuant to paragraph 7 of Article 8 of the DSU.  This paragraph provides: 
"If there is no agreement on the panelists within 20 days after the date of the 
establishment of a Panel, at the request of  either party, the Director-General, in 
consultation with the Chairman of the DSB and the Chairman of the relevant Council 
or Committee, shall determine the com position of the panel by appointing the 
panelists whom the Director-General considers most appropriate in accordance with 
any relevant special or additional rules or  procedures of the covered agreement or 
covered agreements which are at issue in th e dispute, after consulting with the parties 
to the dispute.  The Chairman of th e DSB shall inform the Members of the 
composition of the panel thus formed no later than 10 days after the date the 
Chairman receives such a request". 
                                                      
1 WT/DS301/1. 
2 WT/DS301/2. 
3 WT/DS301/3, attached as Annex.  
4 WT/DS301/4. WT/DS301/R 
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 1.5 On 13 May 2004, the Director-General acco rdingly composed the Panel as follows: 
 Chairman: Professor William J. Davey 
  Members: Professor Donald M. McRae 
   Mr. Daniel Jacobus Jordaan 
 
1.6 China, Japan and the United States reserved their rights to participate in the Panel proceedings 
as third parties. 
C. P
ANEL PROCEEDINGS  
1.7 The Panel met with the parties on 3-4 August 200 4, and on 5 October 2004.  It met with third-
parties on 3 August 2004. 
1.8 The Panel submitted its interim report to th e parties on 23 December 2004.  The Panel 
submitted its final report to the parties on 10 February 2005. 
II. FACTUAL ASPECTS 
2.1 This dispute concerns the European Comm unities' Temporary Defensive Mechanism for 
Shipbuilding (the "TDM Regulation") set fort h in Council Regulation (EC) No 1177/2002, and 
modified in product coverage and duration by No tice 2003/C 148/10 published on 25 June 2003 and 
Council Regulation (EC) No 502/2004 of March 2004, respectively. 
2.2 The dispute also concerns certain measure s of EC member States, and corresponding 
European Commission decisions:   
− Germany:  Case N 744/2002, Commission Decision (2003)788 fin of 19 March 2003. 
 
− Denmark:  Case N 141/2003, Commission D ecision (2003)1765 fin of 24 June 2003. 
 
− The Netherlands:  Case N 780/2002, Commission De cision (2002)2019 fin of 9 July 2003 and 
Case N 339/03, Commission Decision (2003)3378 of 18 September 2003. 
 
− France:  Case N 232/03, Commission Decision (2003)3234 fin of 17 September 2003. 
 
− Spain:  Case N 812/02, Commission Decision (2003)4079 fin of 11 November 2003. 
 
III. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS  
A. KOREA  
3.1 Korea requests the Panel to find that: 
(a) the TDM Regulation, its member State implementing provisions as well as any 
instances of application of the TDM scheme, and any EC Decisions approving 
member State implementing provisions pursuant to the TDM scheme, are inconsistent 
with the European Communities' and its member States' obligations under Article 23.1, 23.2(a), 23.2(b) and 23.2(c) of the DSU; 
(b) the TDM Regulation, its member State implementing provisions as well as any 
instances of application of the TDM scheme, and any EC Decisions approving WT/DS301/R 
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 member State implementing provisions pursuant to the TDM scheme, are inconsistent 
with the European Communities' and its member States’ obligations under 
Article 32.1 of the SCM Agreement; 
(c) the TDM Regulation, its member State implementing provisions as well as any 
instances of application of the TDM scheme, and any EC Decisions approving 
member State implementing provisions pursuant to the TDM scheme, are inconsistent 
with the European Communities' and its me mber States’ obligatio ns under paragraphs 
1-4 and 10 of Article 4 and pa ragraphs 1-4 and 9 of Artic le 7 of the SCM Agreement; 
(d) the TDM Regulation, its member State implementing provisions as well as any 
instances of application of the TDM scheme, and any EC Decisions approving 
member State implementing provisions pursuant to the TDM scheme, are inconsistent with the European Communities' and its member States’ obligations under 
Article III:4 of the GATT 1994; and 
(e) the TDM Regulation, its member State implementing provisions as well as any 
instances of application of the TDM scheme, and any EC Decisions approving 
member State implementing provisions pursuant to the TDM scheme, are inconsistent 
with the European Communities' and its me mber States’ obligations under Article I:1 
of the GATT 1994. 
3.2 Korea considers that the above violations have nullified and impaired benefits accruing to it 
under the WTO Agreement.  In consequence, Ko rea requests the Panel to recommend that the 
European Communities bring its inconsistent meas ures into conformity with its WTO obligations.
5   
B. EUROPEAN COMMUNITIES  
3.3 The European Communities requests  the Panel to find that: 
(a) the TDM Regulation is not in violation of  Article 23.1, 23.2(a)-(c) of the DSU, 
Articles 4, 7 and 32.1 of the SCM Agre ement and Articles I and III:4 of the 
GATT 1994; and 
(b) the national TDM measures (to the extent that they still exist) are not in violation of 
Article 23.1, 23.2(a)-(c) of the DSU, Artic les 4, 7 and 32.1 of the SCM Agreement 
and Articles I:1 and III:4 of the GATT 1994. 
IV. ARGUMENTS OF THE PARTIES 
4.1 The arguments of the parties are set out in their submissions to the Panel, and their answers to 
the questions.  The parties' arguments are summarized in this section. 
A. BACKGROUND  
4.2 Korea  asserts that this dispute arises from an attempt by the European  Communities to take 
the law into its own hands.  According to Korea,  the European Communities alleged that Korea has 
subsidized certain of its shipyards, an “unfair trade practice” that has caused “adverse effects” and 
“serious prejudice” to the European Communities and its  shipbuilding industry.  Based solely on these 
allegations, the European Communities has taken c ountermeasures against Korea as contained in the 
                                                      
5 As discussed below in Section VII.A.4(a), Korea has also requested that the Panel make a specific 
recommendation concerning a particular aspect of the measures at issue in this case.  WT/DS301/R 
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 Temporary Defensive Mechanism (“TDM”), an EC  Council Regulation.  The European Communities 
has explicitly linked these countermeasures to the init iation and pendency of the WTO dispute, not its 
conclusion.  This case is about EC unilateralism. 
4.3 According to Korea, the Eur opean Communities explicitly adopted a two-track strategy to 
challenge alleged Korean subsidies.  It (i)  made  a determination of subs idization and implemented 
countermeasures against Korea and (ii) initiated a WT O dispute alleging violations by Korea of the 
SCM Agreement.  These countermeas ures are found in the TDM that is the subject of this dispute.  
This TDM is inextricably tied to the WTO disput e settlement proceedings.  By its terms, it was 
effective on the day consultations began pursuant to Article 4 of the DSU and it will be terminated 
upon completion of such proceedings.  Korea argues that the European Communities and its member 
States, in adopting the TDM and associated meas ures, violated several provisions of the WTO 
Agreement, namely, Article 23 of the DSU, Artic les 4, 7 and 32.1 of the SCM Agreement, and 
Articles I:1 and III:4 of the GATT 1994.   
4.4 The European Communities  dismisses Korea's characteriza tion of the TDM Regulation and 
the "twin-track" strategy adopted by the Europ ean Communities in 2002, asserting that Korea's 
allegations are politically unjust and legally unfoun ded.  According to theEuropean Communities, the 
world shipbuilding sector has been subject to serious  crises and injurious pricing due to overcapacity 
and government intervention.  The European Co mmunities has been actively engaged in seeking 
multilateral solutions to the problems of subsid isation and injurious price competition in the 
shipbuilding sector.  However, negotiations at th e OECD failed and Korea decided to ignore its 
bilateral commitments on injurious pricing agreed  with the European Communities (the Agreed 
Minutes signed in 2000).  That notwithstanding, since the 1990s the EC industry has engaged in a 
major process of restructuring and operating aid has been gradually reduced and eventually abolished 
by the European Communities. 
4.5 When the EC industry was threatened with fu ll collapse, it exercised its right to launch a 
complaint under the EC Trade Barriers Regulation ("TBR Regulation").  The investigation provided 
factual evidence of (i) Korean subsidies; and (ii) injury in certain sectors of the EC industry.  The 
European Communities then decided under its TBR Regulation to launch a WTO dispute settlement 
proceeding against Korea that seeks cessation of a number of narrowly defined subsidies 
(WT/DS273).  
4.6 To the European Communities, the TDM Regul ation and national subsidy programmes (the 
measures attacked by Korea in this case) are pure state aid measures.  They must be seen in the 
context of EC state aid law, which prohibits the granting of subsidies unless a specific exception is 
provided for by the EC Treaty, as the main source of EC state aid law, or by the secondary legislation adopted on the basis of this Treaty.  Throughout  the 1990s operating aid was progressively reduced, 
and ultimately was abolished as of  1 January 2001.  The European Communities asserts that the TDM 
Regulation provides for the limited re-authorisation of  state aid to shipbuilding that had previously 
been phased out.  According to the European Communities, the li nk between the WTO dispute and 
the TDM is purely political.  Moreover, both tracks of the “twin-track-strategy” address the same 
broader problem, but neither resolves it. 
B. P
RELIMINARY ISSUES  
1. EC Conditional Request for Preliminary Ruling 
4.7 The European Communities  asserts that Korea expanded the scope of its claim to 
“individual instances of application” of the TDM Regulation by the Commission and the respective 
EC member States, the application of the TDM scheme in specific cases, or TDM contributions 
provided pursuant to the TDM framework.  The Eur opean Communities claims that the request for the WT/DS301/R 
Page 5 
 
 
 establishment of the Panel does not explicitly iden tify as impugned measures any individual grants.  
The European Communities also clai ms that Korea in the request for the establishment of the panel 
explicitly distinguished between the national sch emes as such and “particular instances” of 
subsidisation in its description of the consultations6 and can therefore not claim that the term 
“implementing measure” comprises individual grants.  Such expansion of the claims would be 
contrary to Article 6.2 of the DSU because individual measures under the national TDM measures 
were not covered by Korea’s request for est ablishment of the Panel.  Therefore, the 
European Communities submits that the claim in sofar as it relates to individual instances of 
applications is contrary to Article 6.2 of  the DSU and requests that it be dismissed. 
4.8 Korea  argues that the granting of the European Communities' request would amount to ruling 
that, even if the European Communities' author izing measures are found inconsistent with the 
European Communities' WTO obligations, the individua l disbursements will be legal.  Korea also 
argues that the European Communities' argument is  groundless because of the lack of legal precedents 
supporting its position and of the absence of any prej udice stemming from the lack of specificity in 
Korea's panel request, so as to cause the Europ ean Communities' due process rights to be adversely 
affected. 
4.9 Korea further maintains that the European Communities' preliminary ruling request is 
factually inaccurate, because it is based on a misquot ation of Korea's request for establishment of a 
panel, as it was clear from such request that it included other measures than those specifically 
identified therein, through the use of the expression inter alia .  Moreover, Korea alleges further that 
the request for consultations included reference to Article XXIII:1(b) of the GATT 1994.  In Korea’s 
view, the somewhat different legal basis of such cl aims requires a more detailed exploration of the 
actual disbursement patterns over the relevant peri od in order to see whether there was a reasonable 
expectation of no further subsidization.  The Panel in the GATT case EEC – Oilseeds I  looked at 
whether there had been an increase in subsidization be yond that already in existence at the time of the 
tariff binding in deciding whether there had been a non-violation nullification or impairment.  Thus, a 
review of specific subsidy patterns was relevant.  However, the present Panel does not have 
Article XXIII:1(b) of the GATT 1994, nor DSU Article  26 within its terms of  reference and with 
respect to the violation claims, such information is  useful, but not necessary, background information. 
4.10 Korea also notes that the European Communities’ statem ent not only ignores the chapeau  of 
the referenced paragraph and the context of the descr iption of the consultations, but it also ignores the 
reference to disbursements in the statement of clai ms.  The first bullet of the description of the actual 
claims states: "Articles I:1 and III:4 of the GATT 1994 because the TDM regulation and member 
States implementing measures involving the bestowal of  German, Danish, Dutch, French and 
Spanish grants to shipyards on a vessel-specific and product-related basis .  .  ." Korea submits 
that this statement is a clear reference to the individual grants. 
4.11 Korea also alleges that the Eur opean Communities' request is legally insupportable, in that 
reference to the individual grants was not needed in order to include such grants within the parameters 
of the dispute.  Korea argues that the effect of  granting the European Co mmunities’ request for a 
preliminary ruling here would be to force compla inants to list all of the actual trade damaging 
instances as claims and then assume an undue burden of  proof in establishing them.  For Korea, such 
ruling would be contrary to the Appellate Body decision in EC – Bananas III , where it upheld the 
panel's decision on the grounds that there is no need to show trade damage to substantiate a claim of 
nullification or impairment, based on Article 3.8 of the DSU.  The Appellate Body has reinforced the 
breadth of this provision in its Report in US – Offset Act (Byrd Amendment ).7 
                                                      
6 Request for the Establishment of a Panel by Korea of 6 February 2004, WT/DS301/3, p. 1. 
7 Appellate Body Report, US – Offset Act  (Byrd Amendment)  at para. 212. WT/DS301/R 
Page 6 
 
 
 4.12 Korea argues that should the Panel exclude these applications  of the challenged measures, 
every complainant would be required to list in its pa nel request all of the instances of inconsistency in 
addition to identifying the inconsistent measures th emselves.  This would be  impossibly burdensome, 
would surely miss many applications that actually  occurred but were not publicly known (as is the 
case with the disbursements in th e European Communities) and necessarily would exclude all the 
illegal transactions that took place after the submissi on of the request for establishment.  For Korea, 
this would undermine the very security and predicta bility of the multilateral trading system that the 
Article 3.2 of the DSU says is the fundamental purpose of the dispute settlement system. 
4.13 Korea further submits that legal provisions not listed in a panel request nevertheless can be 
within the scope of the terms of reference if they  are “directly related” to the identified measures.8  
Thus, if the Panel were to consider the grants as measures, Korea submits that they would clearly be 
“directly related” as they are pursuant to the TDM a nd EC member State  laws.  However, in Korea’s 
view, the Panel need not reach this issue because  these are not new measures, but rather are mere 
applications of the TDM and the EC member State  implementing laws. 
4.14 Korea argues that if a measure were to be  found inconsistent w ith a Member’s WTO 
obligations, while any specific applications were  to be excluded unless individually listed in the 
request for establishment, the result would seem to be that such applications could continue, at least to 
the extent that they had been committed, but  not paid, prior to the DSB’s rulings and 
recommendations.  However, such a re sult would be directly contrary to the Appellate Body Report in 
Brazil – Aircraft (Article 21.5)  wherein the Appellate Body stated that “to continue to make payments 
under an export subsidy measure found to be prohib ited is not consistent with the obligation to 
“withdraw” prohibited export subsidies.”9 
4.15 At the first substantive meeting with the Panel10, the European Communities  explained 
further why an importation into this dispute of  individual disbursements would have severely 
hampered its due process rights.  Individual disbursements are granted by the member States and the 
European Communities would have needed considerab le time to obtain the relevant evidence from the 
member States.  Moreover, the European Commun ities would have needed to request additional 
working procedures for the protection of Business Confid ential Information.  It is for that reason that 
the European Communities sought clarification whether or not Korea had pursued a claim on the basis 
of individual grants.  The European Communities ra ised this issue through a conditional request for a 
preliminary ruling so as to allow the issue to be settled by a simple clarification by Korea.  The 
European Communities also disagreed with Kor ea’s argument that the description of these 
implementing measures as “involving the bestowal of grants to shipyards on a vessel-specific and 
product related basis” in the context of the Article  III:4 GATT claim can be read as identification or 
reference to individual disbursements to warn th e European Communities that  such measures will be 
covered by the dispute.  That phrase only refers to the “implementing measures” defined previously as 
the general schemes.  The European Communities then  noted that Korea had confirmed, in its Oral 
Statement, that it does not base its case on individual grants.  Indeed, independently from the scope of 
                                                      
 8 See, e.g., Argentina – Footwear (EC) at paras 8.24-8.45, citing EC – Bananas III , Japan – Film  and 
Australia – Automotive Leather II . 
 9 Appellate Body report in Brazil – Aircraft, Article 21.5  at para 45.  Korea recognizes that SCM 
Article 4.7 refers to withdrawal without delay, while DS U Article (which is applicable in the present dispute) 
uses somewhat different language; i.e., bringing a measure into conformity.  Nonetheless, the analogy holds.  
Indeed, in Korea’s view the language in SCM Article  4.7 is simply the particular application of DSU 
Article 19.1 in the context of a prohibited subsidies cas e.  This is in contrast with SCM Article 7.8 which 
provides for an additional possible remedy of removal of the adverse effects. 
10 The remarks of the European Communities as reflected in this paragraph, and the remarks of Korea 
as reflected in the next paragraph, were made during the course of an oral discussion on this point during the 
first substantive meeting, and are not fully reflected in th e written versions of the parties' oral statements.  The 
description of these remarks thus is based on a transcription of the relevant part of that meeting.   WT/DS301/R 
Page 7 
 
 
 the request for the establishment of the Panel, Ko rea had not pursued, in its first submission, any 
claim relating to individual grants  which would have required identification of such instances.  On 
that basis the European Communiti es withdrew its conditional request for a preliminary ruling, after 
having expressed its disagreement with Korea on the scope of a future implementation phase in this 
case (under the remedy sought in this proceeding, only the general measure could be targeted and 
withdrawn) and the interplay between the measure s covered under this di spute and those covered 
under another dispute settlement pro ceeding (the individual disbursements that are the subject of a 
separate request for consultations under WT/DS307).   
4.16 Korea expressed its concerns about the withdrawal of the request for a preliminary ruling, in 
that it could bring a fundamental misunderstanding about the nature of the disbursements, as the 
European Communities is classifying them as "measu res".  For Korea, the disbursements are not 
measures and even if they were they would be "d irectly related" and therefore properly before the 
Panel.11 
4.17 During the first substantive meeting with th e Panel, the Panel expressed its view on the 
matter, as follows: 
"[...] the Panel's view at this point is that the EC has withdrawn its request for a 
preliminary ruling and so we will not be making a preliminary ruling.   
As to the implementation issues generally, the Panel noted: 
"We are aware that both sides have specific concerns on the issue that we were 
talking about; we are aware of those concerns and we are not making any decision, one way or the other, on any of the issues that were being discussed yesterday.  We 
assume that you may well have more to say on those issues and, if necessary, we may 
have additional questions on those issues in due course." 
4.18 Subsequently, Korea
 requested the Panel to "make a decision as to whether or not it considers 
the disbursements to be separate measures".12  Korea argued that if the Panel were to find the 
disbursements to be distinct, the Panel should al so find them to be covered in the request for 
establishment of the panel because they are “directly related” to the cited measures and therefore are 
inconsistent with the European Communities' obliga tions under the WTO provisions referenced in the 
request for the establishment of the Panel.  If, on th e other hand, the Panel were to agree with Korea 
that they should not be considered separate measu res and are simply the implementation of measures 
found to be illegal, Korea requested the Panel to  make an affirmative recommendation pursuant to 
Article 19.1 that the European Communities immedi ately cease any further disbursements of illegal 
funding.  Otherwise, the European Communities’ statements would lead to the conclusion that 
circumvention of prospective DSB rulings and r ecommendations was already being contemplated by 
the respondent. 
4.19 In Korea's view, the EC statement that the nati onal measures “are likely to expire” before the 
issuance of the Panel Report and that therefore th ere is no basis for an Ar ticle 19.1 recommendation, 
in fact illustrates the necessity of such a recommendation.  First, Korea notes that the 
European Communities qualifies this conclusion with the reference “are likely to” rather than “will” 
expire.  Second, and most importantly, the point is that the disbursements might continue for a period 
of years after the expiration of the authority un der the TDM as long as they were approved before 
such expiration.  Thus, the European Communities highlights perfectly the need for an Article 19.1 
recommendation. 
                                                      
11 See footnote 10. 
12 Second submission of Korea, at para. 32. WT/DS301/R 
Page 8 
 
 
 4.20 The European Communities  responds that for the reasons provided there is no basis to 
consider (non identified) disbursements as separat e measures and to make a separate recommendation 
on them. 
2. Other Preliminary Issues  
4.21 The European Communities  alleges that Korea identified five subsidy measures13 adopted 
by EC member States.  However, in response to a Panel question, Korea claims that it has specifically 
included in its request for establishment of a panel all member States “implementing provisions” 
including those in new member States and those whic h entered into force since this request.14 
4.22 According to the European Co mmunities, Korea cannot ask the Panel to make findings on 
measures that were not included in the request for the establishment of the Panel and could indeed not 
even have existed at that time.  The request explicitly includes the TDM Regulation and the five 
member State schemes existing at the time of th e request.  While the European Communities accepted 
in good faith that the request covers the two ex tensions of these five schemes (the other three 
expired), Korea cannot expand the scope of this pr oceeding to any future measures of all future 
possible new EC member States.  According to  the European Communities, the member State 
measures are not implementing measures of the TD M Regulation.  They are autonomous decisions on 
whether or not to make use of the derogation fro m the prohibition under EC law of contract-related 
operating aid in the shipbuilding sector. 
4.23 Since this is the first EC state aid measure at issue in a WTO proceeding, the European 
Communities attaches great importance to the correct  appreciation of the legal status of the TDM 
Regulation and the five national measures identifie d by Korea.  The European Communities states 
that the TDM Regulation has the nature of a limited derogation  from a general prohibition of 
subsidisation; it is not a “specific authorisation” and the five member States measures are not “implementing” measures.  Moreover, Korea has iden tified five national measures.  The scope of this 
proceeding does not extend to other such measures (if any), in particular measures taken by any of the 
new member States that acceded after th e commencement of the Panel proceeding. 
4.24 Korea
 disagrees with the European Communities'  argument that new measures of EC 
member States that might come into effect s hould not be subject to any rulings by the Panel.15  Korea 
refers the Panel to its discussion of “dir ectly related” measures in this regard.16  Korea also disagrees 
with the European Commun ities’ statement that the only respondent in this dispute is the European 
Communities as such and not its member States.17  Korea's position is that all EC member States are 
independently WTO Members, and that internal EC  constitutional issues cannot adversely affect the 
rights of Korea or any other WTO Member. 
4.25 The European Communities  submits further preliminary comments on the legal claims 
presented by Korea.  First, the European Communities claims that Korea’s description of the measure 
at issue is unclear.  Korea first attacks the “twi n-track-strategy” (described through a number of press 
releases), refers to the “Temporary Defensive Mech anism and associated measures”, then lists five 
national schemes and finally refers to “individua l instances of applications of the TDM in the 
respective member States.” However, the Euro pean Communities alleges that Korea nowhere 
specifies any individual grants under these five national measures. 
                                                      
13 Oral statement of Korea at the first substantive m eeting of the Panel with the parties, at para. 8. 
14 Response of Korea to Panel Question 4. 
15 Second submission of the European Communities, para. 33. 
16 Attachment 2 to oral statement of Korea at the firs t substantive meeting of the Panel with the parties. 
17 Response of Korea to Panel Question 4. WT/DS301/R 
Page 9 
 
 
 4.26 Second, the European Communities asserts that the TDM Regulati on is not a legally relevant 
measure.  Contrary to what Korea alleges, the TDM Regulation does not prescribe rules for regulating 
the provision of state funded payments to EC shipbui lders which is then implemented by EC member 
States.  It only contains a limited exempti on from the general prohib ition of (contract-related 
operating) aid.  It does not oblige or even encourage member States to grant such types of aid.  If at 
all, the national measures can be measures that set forth positive action. 
4.27 Third, according to the European Communities,  the five national TDM programmes attacked 
by Korea expired on 31 March 2004, and only two (the  French and Netherlands measures) had been 
prolonged.18  Fourth, the European Communities furthe r argues that Korea makes strikingly little 
reference to the TDM Regulation or the national TDM programmes, but refers instead to a wide 
variety of press releases.  Korea does not clai m that these statements constitute measures and 
generally statements can only serve as further confir mation of a set of facts that have already been 
found to exist.  Therefore, the European Commun ities asks the Panel to base its analysis of the 
measure on the measure itself.  The press releases se lectively cited by Korea are politically motivated 
statements by individual Commissioners that cannot and do not contain a legally binding or otherwise 
relevant interpretation of the TDM Regulation and its legal nature.   
4.28 Korea  responds to the first EC point by reca lling its arguments discussed above regarding 
the necessary illegality of any disbursements or impl ementation of measures found to be inconsistent 
with the European Communities’ obligations by the DSB.   
4.29 Korea also takes issue with th e European Communities' argument that the TDM is somehow a 
“limitation” on subsidies.  Korea re calls the Appellate Body’s decision in India – Patents  (US)  that a 
panel is not constrained by a Me mber’s proffered interpretation of  its own laws in examining the 
consistency of such measures w ith international obligations.19  Moreover, the European Communities’ 
argument regarding the characterization of the TDM makes no sense.  The European Communities 
has acknowledged that, prior to the TDM, the EC member States did not have the authority to 
promulgate laws or regulations pr oviding for the discriminatory funding described in the TDM.  Thus, 
at that point, there was no legal authority for any f unding.  After the TDM, such authority existed.  
Hence, it clearly is an authorizing regulatory measure. 
4.30 Regarding the third point, Korea stated that the attempts by the European Communities to 
deny the evidentiary value and relevance of EC press releases, memoranda  and documents, and its 
arguments that such evidence should be “disregard ed” are legally and factually unsupportable.  The 
European Communities’ position is a futile attempt to  try to explain away the massive quantity of 
testimony that all point in the same direction to confirm what is clearly discernable from the TDM 
Regulation and EC member State measures themselves – that they are unilateral retaliatory measures which discriminate against Korea in violation of the above-cited WTO provisions.  There is no legal 
or procedural basis for contending that this type of  evidence should be “disregarded” in this case.  The 
European Communities itself has conceded that in any event “the press releases do not in any way 
contradict the content of the measures.”
20And as noted by the Panel in Chile-Alcoholic Beverages,  
“statements by a government against WTO interests,  e.g., indicating a protective purpose or design, 
are most probative.”21 
                                                      
18 Response of the European Communities to Panel Question 2.   
19 Appellate Body Report, India – Patents  (US)  at para. 66 . 
 20 First submission of the European Communities, para. 106. 
 21 Panel Report, Chile – Alcoholic Beverages , paras 7.118 and 7.119. WT/DS301/R 
Page 10 
 
 
 C. LEGAL CLAIMS  
1. Article III:4 of the GATT 1994  
4.31 Korea  asserts that the Appellate Body has held that  three main elements must be satisfied for 
a violation of Article III:4 of the GATT 1994 to be established: 
• the measure at issue is a “law, regulation or re quirement affecting [a product’s] internal sale, 
offering for sale, purchase, transportation, distribution or use”;  
• the imported and domestic vessels at issue are “like products”; 
• the imported products are accorded “less favorab le treatment than that accorded to like 
domestic products.”22 
4.32 Korea submits that the TDM Regulation, as a generally applicable Council Regulation 
adopted in accordance with the legislative procedures laid down in the Treaty Establishing the 
European Community, clearly qualifies as a “law” or “regulation.”  
4.33 Furthermore, the TDM Regulation “affects” the internal sale, offering for sale, purchase etc.  
of imported products.  The word “affecting” in Article  III:4 has been interpreted by previous panels as 
having a broad scope of applicati on and covers measures which in a broad sense have an effect on 
imported goods.23  In Canada – Automobiles , the Panel elaborated that “the word ‘affecting’ implies a 
measure that has ‘an effect on’ and this indicates a broad scope of application.” The Panel noted that 
the word ‘affecting’ in Article III:4 of the GATT 1994 covers any laws or regulations which might 
adversely modify the conditions of comp etition between domestic and imported products.”24  
4.34 Korea maintains that the contributions scheme provided for by the TDM clearly affects and 
adversely modifies the conditions of competition be tween, on the one hand, domestically produced 
container ships, product/chemical tankers and LNG carriers, and on the other hand, Korean origin 
imported vessels of the same type.  The TDM Regulation only applies when there is direct 
competition between a Korean and EC shipyard biddi ng for a particular vessel sale and where the EC 
shipyard concerned supplies evidence that a comp eting Korean yard is offering a lower price.25  The 
injection of the TDM retaliatory contributions in favour of the EC yard, but not the Korean yard, 
allows the EC shipbuilder to artificially lower th e price for the ship being offered and thereby the 
TDM alters the conditions of competition – esp ecially price competition – between the EC and 
Korean products to the clear disadvantag e of the Korean product, Korea claims. 
4.35 As noted by the Panel in Indonesia – Autos , subsidies can be found to affect imports in a 
manner violating Article III when they have a component that introduces discrimination between 
foreign and domestic products.26  Clearly, the contract-related and vessel-specific TDM contributions 
introduce precisely such discrimination between do mestic and imported (Korean) products.  Indeed, 
                                                      
22 Appellate Body Report, Korea – Various Measures on Beef , para. 133. 
23 Korea notes the statement of the Appellate Body in EC – Bananas III,  para. 220, in the context of its 
discussion of Article I:1 of the GATS that: 
the ordinary meaning of the word “affectin g” implies a measure that has “an effect 
on,” which indicates a broad scope of application.  This interpretation is further 
reinforced by the conclusions of previous panels that the term “affecting” in the 
context of Article III of the GATT is wider in scope than such terms as “regulating” 
or “governing .” [Emphasis added by Korea]. 
24 Panel Report, Canada – Autos , para. 10.80. 
25 Article 2.1, TDM Regulation. 
26  Panel Report, Indonesia - Autos , para. 14.45. WT/DS301/R 
Page 11 
 
 
 as the TDM retaliatory contribution directly aims at and affects the price of the vessel, the ship-owner 
is the ultimate beneficiary of the TDM retaliatory contribution as he effectively settles the lower price 
for the vessel subject of the TDM contribution. 
4.36 Korea also states that the TDM Regulation appl ies to Korean and EC “like products”.  
According to well-established GATT/WTO jurisprude nce, the physical properties of the products 
themselves, their end-use, consum er tastes and habits and the tari ff classification of the product are 
taken into account for determining whether products are “like”.27  In EC – Asbestos , the Appellate 
Body noted that the definition of “likeness” in Ar ticle III:4 of the GATT 1994 must be read in the 
light of the overarching objective of Article III, wh ich is to provide equality of competitive conditions 
for imported products in relation to domestic products.  Since it is products that are in a competitive 
relationship in the marketplace that could be affected by measures treating imports less favourably than the treatment accorded to domestic products, th e Appellate Body concluded that “it is important 
under Article III:4 to take account of evidence whic h indicates whether, and to what extent, the 
products involved are – or could be – in a competitive relationship in the marketplace”.
28  
4.37 With respect to vessels covered by the TDM Re gulation, Korea asserts that the “competitive 
relationship” between the imported (i.e.  Korean) and domestic vessels could not be more manifest.  
By its terms, the TDM Regulation provides that TD M contributions may only be granted where it is 
established that an EC yard is competing with a “Korean shipyard offering a lower price” in the 
context of a specific shipbuilding bid.29  By requiring competition from a Korean-origin vessel, the 
TDM Regulation operates so as to limit its application exclusively to cases where Korean and EC origin vessels are “in a competitive relationship in  the marketplace.”  The TDM Regulation moreover 
requires that this competitive relationship be pr esent on a contract-by-cont ract basis since TDM 
contributions apply only where there has been compet ition from a Korean yard in relation to a specific 
individual shipbuilding contract.   
4.38 Moreover, Korea argues, the competing EC and Korean vessels subject to the TDM will have 
nearly or identical physical properties.  This is because in the context of su ch shipbuilding bids, the 
ship-owner and broker lay down concrete specifications  for the precise characteristics of the ship they 
are seeking to purchase.  The Korean and EC shipyards will thus inherently be competing to provide a ship with identical or nearly identical physical properties (in accordance with the purchaser’s pre-
determined specifications and requirements).  In each case, the competing Ko rean and EC vessels will 
fall within the definition of container ships, product or chemical tankers or LNG carriers laid down in 
Article 1(a)-(d) of the TDM Regulation.  In addition, the competing vessels will be even more 
narrowly tailored to the purchaser’s further specifi cations in terms of weight, size, and other 
characteristics.  The EC and Korean vessels subject  to the TDM Regulation are therefore inescapably 
“like” by virtue of the way the TDM operates. 
4.39 Under the TDM Regulation, competing EC and Ko rean vessels will have identical end-uses 
as well.  For example, LNG carriers meeting the product definition of such  carriers specified in 
Article 1.(d) of the TDM Regulation encompass “shi ps designed with a single deck hull with fixed 
integral and/or independent tanks suite d to carry natural gas in liquid form
.”30 The end-use of LNG 
carriers is clearly for the transport of natural gas in  liquid form.  In addition, the prospective purchaser 
                                                      
27  Korea notes that the Appellate Body in Japan - Alcoholic Beverages II , p. 21, held that uniform 
classification in tariff nomenclature can serve as a useful basis for confirming the likeness of products but 
should not be the determining factor.  See also the Appellate Body Report in EC - Asbestos , para. 101.  Korea 
notes that the Appellate Body found in EC - Asbestos  that the like product definition in Article III:4 was broader 
than that utilized in Article III:2.  However, given the operation of  the terms of the TDM, the breadth of the 
definition should not matter in this regard. 
28 Appellate Body Report, EC – Asbestos , paras. 99 and 103. 
29 Article 2.1, TDM Regulation. 
30 Emphasis added by Korea. WT/DS301/R 
Page 12 
 
 
 who has laid down requirements in advance will obvi ously have the same end-use in mind, whether 
the Korean or EC origin vessel is  eventually selected.  Korea subm its that Korean and EC vessels 
covered by the TDM Regulation are therefore “lik e products” for the purposes of Article III:4 of the 
GATT 1994. 
4.40 Finally, the TDM Regulation accords to the Korean vessels concerned treatment less 
favourable than to the like EC vessels.  This re quirement in Article III:4 of the GATT 1994 has been 
consistently interpreted to mean that a Member ’s measures must ensure effective equality of 
opportunities between imported pr oducts and domestic products.31  
4.41 Korea submits that since a fundamental objective of Article III is the protection of 
expectations on the competitive relationship betw een imported and domestic products, a measure can 
be found to be inconsistent with Ar ticle III:4 merely because of its potential  discriminatory impact on 
imported products.32  Hence, it is not necessary to show actual effects on trade flows.33  Indeed, it 
suffices that the expectations  regarding the competitive relations hip between imported and domestic 
products are adversely affected to conclude to a violation of Article III:4.  The notion of equal 
competitive opportunities between foreign and domestic products implies, at the very least, that 
foreign products be allo wed equal access to the market compared to like domestic products.  The 
TDM contributions clearly reduce opportunities for Ko rean vessels to compete under equal conditions 
with like vessels built in the Eur opean Communities.  Because these contributions are only available 
if the vessels are built at an EC shipyard as opposed  to a Korean yard, they produce an incentive for 
shipowners to place orders with EC shipyards.  This artificial incentive provides treatment less 
favourable to the Korean products.   
4.42 In light of the above, Korea maintains that the TDM Regulation violates Article III:4 of the 
GATT 1994.  These conclusions apply mutatis mutandis  to the EC member State implementing 
measures and TDM contributions provided pursuant to the TDM framework, and the EC Decisions 
approving such measures.   
4.43 The European Communities  responds that to fall under the scope of Article III:4 of the 
GATT 1994, a subsidy must have a structure or co ntent that discriminates between domestic and 
foreign producers, e.g., through differential applica tion of tax measures, or internal postal rates.  
Article III:8(b) of the GATT 1994 exempts from the scope of the national treatment clause the 
payment of subsidies to producers which involves th e expenditure of revenue by a government.  In 
short, it clarifies that WTO Members are not requi red to pay domestic subsidies to foreign producers 
by virtue of the national treatment rule.  The Eur opean Communities also submits that it is undisputed 
between the parties that the entire structure, design and effect of the TDM Regulation and the national 
TDM measures is one of budgetary state aids to th e producer.  The measure is therefore within the 
scope of Article III:8(b) of the GATT 1994 and conse quently outside the purview of Article III:4 of 
the GATT 1994. 
4.44 Korea  states that the European Communities do es not offer any defence regarding Article 
III:4 itself.  This is not surprising for the TDM provides for de jure  discrimination against Korean 
ships.  The European Communities’ only defence is that it is protected by the exception of 
Article III:8(b) which provides in relevant part: “The  provisions of this Article shall not prevent the 
payment of subsidies exclusively to domestic producers.  .  .” 
                                                      
31 GATT  Panel Report, US - Section 337 , para. 5.11. 
32 GATT Panel Report, US - Section 337 , paras. 5.11 and 5.13. 
33 Appellate Body Report, Japan - Alcoholic Beverages II , p. 16 and Panel Report, EC - Bananas III , 
para. 7.179. WT/DS301/R 
Page 13 
 
 
 4.45 Korea fails to see the relevance of Article III:8( b).  With respect to Article III:4, Korea is 
challenging the TDM Regulation which is a regulat ory framework, or as the European Communities 
states “the TDM is a state aid regulatory instrument”.34  The European Communities has reiterated the 
argument that the TDM is a regulatory provision a nd not a subsidy provision merely three pages 
before it asserts exactly the opposite under Article III:8(b).  The European  Communities has stated 
that “[a]s noted above, the TDM Regulation does not result in any payment and cannot even assume 
that member States indeed decide to adopt a national scheme”.35  Thus, the TDM does not satisfy the 
basic, elemental requirement of Article III:8( b).  Furthermore, the Appellate Body in Canada – 
Periodicals  made it clear that to qualify for the Article III:8(b) exception, the subsidies must consist 
of payments, i.e., actual outlays of funds.  The TDM does not involve actual outlays (as the 
European Communities has made clear repeatedly, in cluding in its request for a preliminary ruling). 
4.46 Korea asserts that the EC Commissioner Monti has made very clear that the TDM is not 
meant as a general subsidies scheme but is a narrowly focused trade measure against Korea: 
"The [TDM] is an exceptional response to difficult problem: it does not at all 
represent a general reintroduction of operati ng aid to shipbuilding, which came to an 
end on 31 December 2000, but will strengt hen the Community’s efforts to combat 
damaging anti-competitive practices by Korea."36 
4.47 In the view of Korea, this is not a case agains t EC subsidies as such.  This is a case against 
discriminatory EC regulatory measures.  Dispute DS 307 is in regard to Korea’s broader allegations 
against EC subsidization and those claims are no t before this Panel.  Korea states that the 
European Communities appears to ag ree with Korea in this regard, which makes quite puzzling the 
basis for the European Communities' asser tion of the exception of Article III:8(b). 
4.48 In respect of the European Communities' ar gument that GATT 1994 Articles III and I do not 
apply because there are no imports, Korea states that this is simply unproven as a matter of fact and 
incorrect as a matter of law.  As the panel stated in US – Section 301  “[i]t is commonplace that 
domestic law in force imposing discr iminatory taxation on imported prod ucts would, in and of itself, 
violate Article III irrespective of proof of actual discrimination in a specific case.”37  While the 
European Communities has been invited to make the cas e that it is legally impossible to import ships, 
it has been unable to do so.  In fact the Eur opean Communities’ own tariff nomenclature, i.e., the 
Combined Nomenclature, contains Heading 8901 20 10 for sea going tankers; and 
Heading 8901 90 10 for sea going other vessels for th e transport of goods and other vessels for the 
transport of both goods and persons.  The European  Communities' own statis tical data show that 
imports take place under both headings. 
4.49 With respect to the European Communities'  argument that Article III:8(b) was an 
“exemption” rather than an “excep tion”, Korea claims that while the Appellate Body used the term 
“exempt” in its discussion of Article III:8(b) in Canada – Periodicals38, there was no indication that it 
put any significance on the term as a contrast to th e term “exception”.  More over, a review of the US - 
Malt Beverages  GATT panel report, cited with a pproval by the Appellate Body in Canada - 
Periodicals , reveals that the panel drew an important di stinction between Article III:8(a) which states 
that “this Article shall not apply” and Article I II:8(b), which uses the words “shall not prevent”.  
                                                      
34 First submission of the European Communities, para. 70.   
35 First submission of the European Communities, para. 210. 
36 Exhibit Korea – 9.  See also Exhibit Korea – 2 wherein Commissioner Monti stated that the 
generalized operating aid had been “definitively abolished”. 
37 Panel Report, US - Section 301 Trade Act ,  para. 783.  
38 Appellate Body Report, Canada – Periodicals, p.  34.  Korea notes that one of the seminal 
commentators in the area refers to Article III:8(b) as an exception: John H.  Jackson, World Trade and the Law 
of the GATT , the Michie Company (1969) at p.  381.  WT/DS301/R 
Page 14 
 
 
 According to the panel, the differences in langua ge are important.  The panel took the “shall not 
apply” language of Article III:8(a) to  be broader.  The panel went on to  note that subsidies are covered 
by Article III, but that Article III:8(b) provides an exception for a specific type of subsidy, i.e., payments to producers.
39  This formulation by the panel clearly implies a narrow interpretation 
consistent with an exception, whatever it might be labelled. 
4.50 The European Communities  responds that Korea’s attempt to  argue that Article III:8(b) of 
the GATT 1994 does not apply to the TDM Regulation because that Regulation in itself does not 
provide for the payment of money is without grounds.  The fact that a measure is regulatory in nature 
or sets forth conditions does not automatically make it a "law, regulation or requirements affecting the 
internal sale of products" within the m eaning of Article III:4 of the GATT 1994.40  Korea does not 
identify any regulatory effect of the TDM Regulation that affects the internal sale of ships.  As 
clarified by the Appellate Body in Canada – Periodicals , Article III:8(b) of the GATT 1994 does not 
exempt from the scope of the national treatment requi rement measures that regulate internal sales in a 
discriminatory manner if they thereby provide a s ubsidy (e.g., the application of different postal 
rates).  However, the TDM Regulation is neither a "subsidy" nor a "discriminatory regulation." If at 
all it can be seen as clearing the way for the provis ion of budgetary resources to domestic producers.  
If so, the TDM Regulation is covered by Article III:8(b) because apart from clearing the way for subsidies it does not have any other discriminatory legal effect. 
4.51 Furthermore, the European Comm unities alleges that Korea in its rebuttal submission did not 
rebut the status of Article III:8(b) as exemption by noting that Article III:8(b) uses the term “prevent” instead of “apply” as used in Article III:8(a).  The purpose of Article III:8(b) is clear.  It was added: 
"to the Geneva draft because it was felt that  if subsidies were paid on domestic and 
not on imported products, it might be constr ued that Members were not applying the 
‘national treatment’ rule."
41 
4.52 Measures that provide for the payment of domes tic subsidies to producers in the form of 
budgetary payments can therefore not constitute a violation of the national treatment rule.  
Consequently, such types of subsidies cannot be ma tters referred to in Article III:4 of the GATT 1994.  
Such measures are therefore also not covered by  the most-favoured-nation ("MFN") obligation in 
Article I:1 of the GATT 1994 where it refers to  advantages in connection with matters under 
Article III:4 of the GATT 1994. 
2. Article I:1 of the GATT 1994 
4.53 Korea  argues that Article I:1 of the GATT 1994 is  concerned with discrimination among like 
products from or destined for different countries.42  Under the TDM Regulation, Article 2.1 provides 
that "direct aid in support of contracts for the building of container ships, product and chemical 
tankers as well as LNG carriers shall be considered compatible with the common market when there 
has been competition for th e contract from a Korean  shipyard offering a lower price".  The TDM 
Regulation is, Korea asserts, for all intents and pur poses an instrument specifically and exclusively 
directed against Korea  and not against any other WTO Member.    
                                                      
39 Panel Report, US – Malt Beverages , para 5.8  
40 Response of the European Communities to Panel Question 55. 
41 Analytical Index of the GATT with re ference to E/CONF.2/C.3/A/W.49, p.2. 
42 Appellate Body Report, Canada – Autos,  para. 84. WT/DS301/R 
Page 15 
 
 
 4.54 Korea submits that the following elements must be satisfied in order to establish that the 
TDM contributions are in breach of Article I:1 of the GATT 1994:43 
• the TDM contributions fall within the sc ope of measures covered by Article I:1; 
• the TDM contributions grant an “advantage, favor, privilege or immunity” of the type 
covered by Article I:1 to certain WTO Members in respect of the commercial vessels falling within its scope; 
• this advantage is not "accorded immedi ately and unconditionally" to like vessels 
originating in Korea. 
4.55 Korea claims that the TDM falls within the scope of Article I:1 of the GATT 1994 which 
applies, among others, with respect to “matters referr ed to in paragraphs 2 and 4 of Article III [of the 
GATT 1994].” As discussed elsewhere, the TDM falls within the matters referred to and covered by 
Article III:4 of the GATT 1994.   
4.56 Moreover, the TDM Regulation grants an “advant age, favour privilege or immunity” within 
the meaning of Article I:1 of the GATT 1994 to cer tain WTO Members in respect of the commercial 
vessels falling within its scope.  In Canada – Autos , the Appellate Body stressed that:  
"The words of Article I:1 refer not to so me advantages granted ‘with respect to’ the 
subjects that fall within the defined scope of  the Article, but to ‘any advantage’; not 
to some  products, but to ‘any product’; and not to like products from some other 
Members, but to like products originating in  or destined for ‘all other’ Members."
44 
4.57 Korea maintains that the TDM Regulation creates an imbalance in the competitive 
opportunities the European Communities grants to Korean vessels vis-à-vis the competitive 
opportunities that the European Communities gran ts to like vessels originating in other WTO 
Members.  The WTO Members other than Korea can export ships to the European Communities 
without having to face anti-competitive funding from EC member States as authorized by the TDM.  One could consider that the avoidance of such anti-competitive regulation is a privilege  accorded to 
those other Members, i.e., a favour  of open competition that they are granted or an advantage  in the 
competitive sphere that they enjoy.  For exampl e, Japanese or Chinese yards may attempt to compete 
and sell their products freely in the European Communities without fear of trade distortive 
interventions by the European Communities being di rected against them.  A Japanese shipyard, for 
example need not fear that if it happens to quote a price lower than a competing EC yard, this will 
trigger the provision of TDM contributions to its dir ect EC competitor, designed to allow the latter to 
lower its own price (and possibly thereby alter th e outcome of the bidding process at the eleventh 
hour).  Indeed, the TDM Regulation grants th e Japanese (or other WTO Member's) yard full 
immunity from these damaging countermeasures, leav ing it free to set whatever bid price it deems 
advantageous or viable.  Only Korean competition is singled out for discriminatory and 
disadvantageous treatment. 
4.58 Therefore, Korea alleges, the TDM Regulati on grants Japanese and other non-Korean yards 
and vessels the advantage or favour of being able to  trade on equal terms with EC competitors without 
the prospect of provoking unilateral countermeasur es in the form of TDM contributions to their 
competitors.  This advantage or favour  is not extended to Korea.  Indeed it is solely singled out so that 
the gap in competitive opportunities widens.  Put the other way around, Japanese and other non-
Korean yards are granted complete immunity fro m having trade-distorting countermeasures in the 
                                                     
 
43 See e.g., Panel Report, Indonesia - Autos , para. 14.138. 
44 Appellate Body Report, Canada – Autos , para. 79. WT/DS301/R 
Page 16 
 
 
 form of TDM contributions applied against their bids .  This immunity is not extended to Korea.  The 
TDM Regulation thus grants a “favour,” “privilege” or “immunity” within the meaning of Article I:1 
of the GATT 1994 to products originating in certa in WTO Members, which is intentionally not 
provided to Korean-origin ships.   
4.59 Moreover, Korea asserts that this discriminatory treatment is based solely on the origin of the 
shipyard/vessel concerned, which is the most blat ant form of MFN violation imaginable.  Since 
Article I:1 is concerned not with any individua l trade volume but with equality of competitive 
opportunities, a favour, privilege or immunity which alters the competitive opportunities of some of 
the European Communities' WTO trade partners specifically at the expense of others goes to the very 
heart of an MFN violation and constitutes de jure  discrimination.45  
4.60 Finally, this favour, privilege or immunity gran ted to Japanese or other non-Korean shipyards 
and vessels is not accorded “immediately and unconditiona lly” to like vessels originating in Korea.   
4.61 Thus, Korea argues, the TDM Regulation is inconsistent with the European Communities' 
MFN obligations and thereby violates Article I:1 of the GATT 1994.  These conclusions apply 
mutatis mutandis  to the EC member State implementing measures and TDM contributions provided 
pursuant to the TDM framework, and the EC Decisions approving such measures. 
4.62 The European Communities  responds that while WTO jurisprudence has interpreted 
Article I:1 of the GATT 1994 broadly to cover even de facto  discrimination between Members arising 
from discriminations between a single firm of anot her Member, any such advantage or disadvantage 
must be related to measures imposed in connection w ith importation or relate to matters referred to in 
paragraph 2 and 4 of Article III of the GATT 1994.  Subsidisation is not an advantage to any other 
country within the meaning of Article I:1 of the GATT 1994 in the form of a measure relating to 
customs duties or other measures in connection with importation or a matter referred to in 
paragraphs 2-4 of Article III of the GATT 1994. 
4.63 The European Communities disputes Korea’s br oad allegation that the TDM Regulation is 
providing “highly discriminatory and focused contributions exclusively when a Korean yard is 
bidding with an EU competitor” and therefore di sproportionately, specifically and exclusively hits 
Korea.  Even if true, this does not establish a violation of Article I:1 of the GATT 1994.  The allegation is not borne out by the operative parts of  the TDM Regulation.  Payments may be granted 
whenever there is competition from a Korean yard.  It may well be that a Korean yard only made a 
first offer, but that Chinese and Japanese yards participated in the bidding process and the Korean 
yard did not make a second offer.   
4.64 Most importantly, however, the particular singling out of Korea results from the non-
implementation of the bilateral treaty between the two parties:  the Agreed Minutes.  The MFN obligation cannot prohibit such measures that fall outside the scope of advantages bound through 
Article I:1 of the GATT 1994 – it does not set fort h a general prohibition of  discrimination between 
WTO Members. 
4.65 The European Communities states th at Korea, following the Panel’s request to clarify that it 
does not base its MFN claim on a measure relating to “importation”, now has changed its mind and 
surprisingly claims that the TDM Regulation was
 a measure in connection with importation.  The 
European Communities submits that Korea nowhere identifies even in a rudimentary manner how the 
TDM Regulation could be seen as a “customs duty” or “charge” or “method of levying such duties” or 
“any rule or formality in connection with importation”. 
                                                      
45 Although, Korea notes, the Appellate Body in EC - Bananas III  made clear that Article I:1 GATT 
encompasses both de jure  and de facto  discrimination, para. 232. WT/DS301/R 
Page 17 
 
 
 4.66 Korea  replies that, as the European Communities ha s admitted with respect to Article III:4, 
there is de jure  discrimination against Korean ships.  Article I:1 prohibits discrimination as between 
Members with respect to all matters referred to in paragraphs 2 and 4 of Artic le III.  Thus, it follows 
that there is a violation of Article I. 
4.67 Korea also asserts that the Eu ropean Communities offers a repetition of its Article III:8(b) 
defence against this claim.  As discussed before by Korea, this defence does not apply to the TDM 
which is a discriminatory regulatory measure, not a subsidy as such.  Furthermore, even if 
Article III:8(b) were to apply with respect to th e claims under Article III:4, it has no relevance to 
Article I claims at all.  Article III:8(b) provides that: “The provisions of this Article  shall not apply 
. . ” (emphasis added) Thus, Korea claims that, by its explicit terms, the exception provided in 
Article III:8(b) is expressly limited to Article III and does not apply to Article I:1.  Moreover, 
Article I:1 does not incorporate by referen ce Article III; rather, it refers to “ all matters referred to  in 
paragraphs 2 and 4 of Article III.”  Article III only describes the issues, it does not apply directly 
through Article I:1.  Thus, Article III:8(b) is irrelevant to the analysis under Article I:1. 
4.68 Indeed, for Korea, it would be quite surprising if Article I:1 was so limited.  While the 
drafters of the GATT decided to provide an excepti on within Article III to accord with the rules that 
certain levels of subsidization to  a domestic industry may be legal, there would be no reason at all to 
permit a Member to provide subsidies in a manner that discriminates between two other Members.  
There would be no legitimate developmental or soci al policy aspect to such discrimination; it would 
be punitive.  Indeed, this is precisely what Ko rea has demonstrated: th e EC measures are punitive 
measures aimed directly and exclusively at Korea, specifically against alleged Korean subsidization, 
and outside of the WTO dispute settlement system. 
4.69 Korea takes issue with the Europ ean Communities' argument that a de jure  discriminatory 
measure should not be proscribed because it is de facto  non-discriminatory.46  Korea is not aware of 
any such defence ever being asserted much less being successful.  Korea takes note of the concerns of 
China that the TDM might have adverse spill-over effects in some instan ces.  But such random 
damage to other Members’ trade cannot refute the de jure  discrimination in the wording of the TDM. 
4.70 In addition, the US - Malt Beverages  Panel report supports the view that a distinction must be 
made between Article III:8(a) which states that “t his Article shall not apply” and Article III:8(b), 
which uses the words “shall not prevent”.  The latt er does not cover a broad derogation such as the 
exemption advocated by the European Communities.  Article III:8(b) must be interpreted narrowly.  
Moreover, as that panel made clear, subsidies are covered by Articles III:2 and III:4.  While the 
drafters of the GATT decided to provide an excepti on within Article III to accord with the rules that 
certain levels of subsidization to  a domestic industry may be legal, there would be no reason at all to 
permit a Member to provide subs idies in a manner that discriminates between two other Members 
inconsistent with Article I:1 of the GATT 1994. 
4.71 Korea submits that the Europ ean Communities misquotes Article I:1 of the GATT 1994.  At 
the point where the two clauses are linked by the word “and”, the European Communities left out a 
phrase and two very crucial commas.  The European Communities tries to make the provision read as 
if it is an accumulative provision that requires a showing of both of these elements while omitting the intermediate one.  The missing commas make it clear th at this is a list of independent clauses.  Most 
significantly, the European Commu nities totally leaves out the critical fourth one.  The 
European Communities' arguments hinging on this tr ansparent misquoting and leaving out the very 
phrase applicable to this dispute cannot be accepted. 
                                                     
 
46 First submission of the European Communities, para. 241. WT/DS301/R 
Page 18 
 
 
 4.72 Korea further submits that Article I:1 is struct ured in such a way that certain substantive 
obligations apply with respect to four elements or categories of measures.  The four categories are 
listed in the first half of Article I:1.  Th e first and third are those identified by the 
European Communities.  Including the missing second cat egory, they are: (1) with respect to customs 
duties and charges of any kind; and (2) the method of levying such duties and charges; and (3) with 
respect to all rules and formalities in connection wi th importation or exportation.  Then there is a 
fourth category which the European Communities also skipped.  It is: (4) “and with respect to all 
matters referred to in paragraphs 2 and 4 of Article III.” 
4.73 Korea asserts that with respect to all of these four categories, the Member has the substantive 
obligation to make certain that any advantage, fa vour, privilege or immunity granted by the Member 
is immediately accorded to all other Members. 
4.74 Thus, Korea does not need to show that there were any customs duties or charges involved in 
the TDM and/or that it involved discrimination in te rms of rules or formalities.  Those are only two of 
the four categories of measures all of which the Eu ropean Communities is obligated to apply in a non-
discriminatory manner.  Rather, Korea has only to show that the TDM and EC member State 
measures are matters referred to in Articles III:2 or III:4, which is the fourth category – one of the two 
the European Communities failed to quote.   
3. Article 32.1 of the SCM Agreement 
4.75 Korea  asserts that Article 32.1 of the SCM Agreement requires that no “specific action 
against a subsidy of another Member” be ta ken except in accordance with the GATT 1994 as 
interpreted by the SCM Agreement.  As previous ly explained, the TDM Regulation is designed to 
counteract the alleged Korean WTO-inconsis tent shipbuilding subsidies found by the 
European Communities in its TBR investigations.  Indeed, only those vessels types found to have 
been subsidized may benefit from the TDM contributions.47  The TDM Regulation is therefore 
“specific” to subsidies.   
4.76 Korea claims that the TDM Regulation is al so an action “against” the alleged Korea 
subsidization.  The Appellate Body in US – Offset Act (Byrd Amendment) noted that “against 
subsidization” means that the measure is “opposed to,” or has an “adverse bearing on” or tends to 
dissuade the subsidy practice complained of.48  The TDM is clearly a measure aimed “against” the 
Korean alleged subsidies.  The European Communities itself has noted that the TDM is a measure 
aimed at “fighting”49 the Korean subsidy practices it found to exist.  The Regulation does not apply 
against any other country and was designed to exclusively oppose alleged Korean subsidies.  
Moreover, the TDM measures “create an incentive to terminate [the] practices” in the form of the 
subsidies the European Communities alleges Korea to be providing.  The TDM Regulation reinforces 
this incentive by effectively promising to suspend or promptly terminate the countermeasure if Korea 
resolves the dispute by ceasing the subsidy practices complained of.   
4.77 Finally, Korea assert that the TDM Regulation is  not a measure “taken in accordance with the 
provisions of the GATT” as interpreted by the SCM Agreement.  In US – Offset Act (Byrd 
Amendment) , the Appellate Body determined that the GATT 1994 and the SCM Agreement provide 
four responses to a subsidy: price undertakings, provisional anti-dumping measures, definitive anti-dumping measures or multilaterally-sanctioned coun termeasures under the WTO dispute settlement 
                                                     
 
47 Moreover, Korea states, Commissioner Monti sp ecifically stated that this was not a generalized 
authorization for state aids.  European Commission Press Release No IP/02/945, 27 June 2002.  Provided in 
Exhibit Korea – 2. 
48 Appellate Body Report , US – Offset Act (Byrd Amendment) , para. 254. 
49 European Commission Press Release No IP/01/1078.  Provided in Exhibit Korea – 9. WT/DS301/R 
Page 19 
 
 
 system.  The TDM Regulation manifestly cannot fit into any of the above characterizations.  The 
TDM Regulation is not therefore a measure take n in accordance with the GATT 1994 as interpreted 
by the SCM Agreement.  In light of the above, Korea submits that the TDM Regulation violates Article 32.1 of the SCM Agreem ent.  These conclusions apply mutatis mutandis to the EC member 
State implementing measures and TDM contributions  provided pursuant to the TDM framework, and 
the EC Decisions approving such measures. 
4.78 The European Communities
 maintains that contrary to what Korea suggests, it is not 
sufficient to establish some kind of general link between the measure and subsidisation.  Two 
conditions must be met in order for a measure to be  captured by Article 32.1 of the SCM Agreement.  
First, the measure must be “specific” to subsidisa tion, i.e.  taken only when the constituent elements 
of dumping or a subsidy are present.  Second, the measure must be “against”, i.e.  its design and 
structure is such that the measure has the effect of dissuading the practice of subsidization, or creates 
an incentive to terminate such practice.   
4.79 The European Communities states that Korea contents itself with interpreting a general 
temporal or political link into the measure and finds it sufficient that the TDM Regulation would 
make an implicit link to a TBR report.  The Europ ean Communities asserts that Korea is only able to 
refer to language in the recitals of the TDM Regulation that motivat es the limitation of its scope to 
market segments where the European Communities has found the existence of adverse effects and 
injury on the basis caused by “unfair practices”. 
4.80 Concerning Korea's reading of the TDM Regula tion, the European Communities argues first 
that the key motivation for the TDM Regulation is  the non-implementation of the Agreed Minutes and 
indeed “unfair practices”.  That term encompasses injurious pricing that is significantly broader than 
subsidisation and refers to the conduct of individual shipyards.  The TDM Regulation refers to the 
TBR investigation only in order to limit the ma rket segments where the EC industry experiences 
particularly severe problems, a nd which consequently can benefit from State aid.  Second, the 
specificity of the action cannot be established, as a ttempted by Korea, on the basis of general political 
statements in the recitals or in accompanying press releases.  Specific action against subsidisation has 
to be established on the basis of the operative part of the Regulation.   
4.81 The European Communities further asserts that  the relevant operational provision is 
Article 2.1 of the TDM Regulation which does not contain an inextricable link between the actual 
granting of a contract-related aid and the constituent elements of subsides for four simple reasons:  
First, aid can be granted against an offer from any Korean yard, independently of whether it benefits 
from measures contested by the European Communities in DS273.  Second, as acknowledged by 
Korea, aid can be granted against any Korean comp etition, without the need to determine how much 
lower the price is and whether that lower price is due to subsidisation or otherwise unfair pricing as 
described above.  Third, the TDM Regulation itself do es not result in any payments.  Contract related 
aid is granted under a national measure and is not conditional on any new finding of subsidisation.  
Korea has grossly misrepresented the relationshi p between the TDM Regulation adopted at the 
Community level and the national TDM measures.  The TDM Regulation does not require or even 
encourage the payment of subsidies by member States.  The European Commission differs from 
governments of other WTO Members in that it do es not pay subsidies to industrial products but limits 
them.  The TDM Regulation, as any other state aid measure sets forth conditions and limits to the 
granting of subsidies, but does not itself provide for the payment of even 1€.  Indeed, only a few 
member States currently have a national TDM measu re in place and Korea has not pointed to any 
individual instances of subsidisation.  Contract re lated aid is granted under a national measure and is 
equally not conditional on any findi ng of subsidisation by the member States.  Finally, the fixed 
amount of six per cent contract-related aid is neither  related to any amount of subsidy in terms of 
benefit to a Korean shipyard, nor to actual undercu tting by a Korean bid or even to the undercutting 
margins found in the TBR investigation. WT/DS301/R 
Page 20 
 
 
 4.82 The European Communities proceed s to assert that, in short, the payments under the national 
TDM measures cannot only be made following a de termination that the constituent elements of 
subsidisation are present, but in any situation wh ere there is competition from a Korean yard offering 
a lower price independently of whether that yard has received subsidies. 
4.83 The European Communities asserts that the obj ect and purpose of Article 32.1 of the SCM 
Agreement is to codify and restrict the right to r esort to self-help and the range of self-help measures 
that WTO Members can take unilaterally to coun ter a subsidy of anothe r Member.  However, 
Article 32.1 of the SCM Agreement does not prohibit any action that might have an effect on a 
subsidy granted by another WTO Member.  The key term limiting the scope of Article 32.1 is the 
criterion “specific”. 
4.84 The European Communities asserts that the ad jective “specific” before the phrase “action 
against a subsidy of another Member” means that a particular subsidy (i.e.  a financial contribution 
and a benefit) must be targeted.  The term “specific action” in the first paragraph of Article 32 has to 
be contrasted with the term “action”, as used in  footnote 56 to Article 32 of the SCM Agreement.  If 
any action broadly responding to a situation of  which subsidisation may be one cause would be 
covered, the meaning of the term “specific” would run empty.   
4.85 Second, Article 32.1 makes a close link between those unilateral actions that are permitted  
and those that are prohibited .  All actions that are permitted  (countervailing duties and prohibited and 
actionable subsidy actions) have one thing in  common: they are conditioned on a specific 
determination that a subsidy exists.  The phrase “no specific action against a subsidy of another 
Member can be taken” directly links the notion of a prohibited “specific action” with action taken “in 
accordance with the provisions of the GATT 1994, as inte rpreted by this Agreement”.  Therefore, the 
nature of the prohibited  actions must be comparable to that of the permitted measures in that they are 
conditioned on a specific determination that a subsidy exists. 
4.86 The European Communities states that this w as confirmed by the Appellate Body when it 
referred to measures “that may be taken only where the constituent elements of [a subsidy] are 
present”.  In the two cases adjudicated thus far, th e operation of the measure was circumscribed by a 
specific finding of dumping or subsidisation.  It is true that the Appellate Body left explicitly open, 
whether a lesser degree of specificity is sufficient.  However, the Appellate Body already clarified that 
to be a specific action against a subsidy, a “measure must be inextricably linked to , or have a strong 
correlation with , the constituent elements of […]  a subsidy”.   
4.87 The European Communities asserts that Korea is  not able to refer the Panel to such an 
inextricable link between subsidies granted by individual member States (if any) under the TDM 
Regulation and the constituent elements of a subs idy.  Moreover, the European Communities argues 
that all of the arguments advanced by Korea point at best to a general political link or a factual 
coincidence between the TDM Regulation and the gran ting of subsidies by Korea.  In particular, 
Korea’s case hinges on one reference to “adverse effects in the form of material injury and serious prejudice caused by unfair Korean competition” in th e third recital (as opposed to the operative part) 
of the TDM Regulation. 
4.88 The phrase “unfair Korean competition” relates to injurious pricing.  This is clear from the 
reference to the non-implementation of the Agreed Mi nutes in the first recital of the TDM Regulation.  
The Agreed Minutes are a bilateral agreement that  sets forth a comprehensive scheme to ensure 
stability and fair competition in the shipbuilding sector  in the future.  In signing this treaty, Korea 
itself acknowledged that lower bids from Korean sh ipyards are not just a question of yards being 
subsidised by the government but result from nume rous factors ranging from the lack of accounting 
and financial responsibility rules to pricing below value which may result from cross subsidisation by WT/DS301/R 
Page 21 
 
 
 domestic sales of the same product or sales of ot her products.  These factors may be totally 
independent from subsidisation by  the government or a public body. 
4.89 The European Communities clarifies that, when highlighting that injurious pricing may be 
due to many other factors than subsidisa tion, in particular dumping behaviour, the 
European Communities is not arguing that because the TDM Regulation cove rs both “dumping” and 
“subsidisation” or something third, it cannot be  an action against subsidisation.  For the 
European Communities, the salient point is that the TDM Regulation simply does not operate 
explicitly nor implicitly by reference to any act of subsid isation.  It merely refers in its recitals to the 
state of the domestic EC industry in order to motivate the limitation  of the re-introduced state aid.  
The findings of the TBR investigation have been u sed to identify market segments where the industry 
experiences particularly severe problems, and whic h consequently can benefit from state aid.  The 
sole purpose of the reference to adverse e ffects in the third recital is to motivate limitation  of the state 
aid to as few market segments as possible. 
4.90 As to the term “against”, the European Commun ities claims that the sole argument advanced 
by Korea is that the payment scheme is likely to in tervene in the bidding pro cess so as to modify the 
relative competitive position of the EC ship bei ng offered for sale compared to the competitive 
position of the Korean ship offered for sale, to the disadvantage of the Korean product.  This 
“conditions of competition” test has already been rejected by the Appellate Body in US – Offset Act 
(Byrd Amendment)  for it would give to Article 32.1 of the SCM Agreement a scope of application that 
is overly broad.  Indeed, if any measure that provi des for payments to the domestic industry and that 
is capable of affecting the conditions of compet ition with subsidised exporters of other WTO 
Members would fall foul of Article 32.1 of th e SCM Agreement, Articles 5 and 6 of the SCM 
Agreement would be rendered inutile. 
4.91 The European Communities asserts that the structure and design of the national TDM 
schemes are not even remotely compar able to the measure at issue in US – Offset Act (Byrd 
Amendment) .  The financial payments (if any) are fina nced through budgetary resources – not through 
countervailing duties on exporters of ships and bear  no relation to any countervailing duties that any 
exporter could be liable to, or even with any inves tigation or finding of subsidisation.  Moreover, the 
level of contract related aid (six per cent of the contract value) is even below what was considered 
necessary to ensure survival of th e industry from injurious pricing under the previous EC shipbuilding 
aid programmes and therefore, entirely incapable of o ffsetting the effects of Korean subsidisation that 
one potential Korean bidder may have possibly recei ved.  Korean products are in no way hindered 
either on the Community market or on the world market.  Furthermore, the European Communities 
alleges that Korea has not substantiated in any other way, how the granting of the six per cent 
operating aid (a level lower than the level of aid previously phased out) could have had any effect on 
Korea’s yards or Korea to the effect of dissuad ing the granting of a subsidy or stopping it. 
4.92 Regarding the first issue ("specific"), i.e., whether the TDM was specifically against the 
alleged Korean subsidies, Korea responds that  the European Communities has argued a version of its 
position regarding unilateralism; i.e., that the aut horization of anti-Korean funding contained in the 
TDM had nothing to do with subsidies.  The Eur opean Communities offers as the WTO legal standard 
an odd reading of the US – Offset Act (Byrd Amendment)  case that would mean that if the challenged 
measure did not exactly track the SCM Agreement,  then it would not be a specific action against 
subsidization.  That is, it is a specific action ag ainst subsidization only if each separate element of 
subsidization as defined in the SCM Agreement is  part of the determination in the challenged 
measure.  As the third parties have aptly pointed out, this leaves an enormous loophole.  A Member 
could take unilateral countermeasur es against another Member’s a lleged subsidies, but if that 
retaliating Member tweaks its countermeasure just slightly to vary it from the SCM Agreement, it 
would not be covered by Artic le 32 of the SCM Agreement. WT/DS301/R 
Page 22 
 
 
 4.93 Korea further submits that not only is the Eu ropean Communities' position illogical because it 
would strip Article 32.1 of all meaning and utility, but  it also, of course, does not reflect at all what 
the Appellate Body has said.  The Appellate Body in the US – Offset Act (Byrd Amendment) was 
discussing the close relationship of the Byrd Am endment to the provisions of the Antidumping 
Agreement and the SCM Agreement.  That is, th e facts in that case demonstrated the necessary 
specificity.  There was no indication that this was intended as a limiting  analysis by the Appellate 
Body.  Because the Byrd Amendment was an integr al part of the US antidumping and countervailing 
duty laws, it cannot be simply inferred that any measure that is not an integral part of a Member’s 
antidumping and countervailing duty implementing laws is permissible .  In other words, to say that a 
particular set of facts led to an affirmative finding does not mean that any other set of facts must  result 
in a negative determination. 
4.94 According to Korea, one need only look as far as the decision in the US –1916 Act  case to see 
this.  Indeed, a good deal of the US defence in that dispute was that the 1916 Act was highly dissimilar to an antidumping measure, despite its title, and was in fact an antitrust statute dealing with 
predatory pricing.  The Appellate Body rejected this defence, noting that there might, in fact, be extra 
elements referred to in the 1916 Act, but that di d not mean that it was not specifically against 
dumping or, in this case, subsidization. 
4.95 Moreover, it is simply not accurate that the TDM Regulation itself does not establish the link 
to subsidization in the operative part.  Article 4 of  the TDM Regulation in particular clearly legally 
binds the duration of the TDM Regulation to th e WTO dispute DS273, i.e., the alleged Korean 
subsidies which are the subject of that dispute. 
4.96 According to Korea, the European Commun ities argues that Korean “unfair practices” 
referred to in the TDM Regulation does not mean subsid ies, but rather relates to “injurious pricing” 
which is “broader” than subsidization.”
50 Even assuming for the sake of argument that this were 
accurate, for Korea, the Appellate Body in US – 1916 Act  made clear that a measure does not have to 
be exclusively restricted to the elements of dum ping (or in this case subsidies) and nothing else in 
order for there to be a finding that the measure is sp ecifically against dumping (or subsidization in this 
case).51  Moreover, the European Communities implicitly  concedes that even its own definition of 
“injurious pricing” encompasses subsidies even if  it is supposedly “broader” and not “just [i.e.  
exclusively] a question of yards being subsidized.”  Thus, even under the European Communities' own 
definition the TDM covers subsidization. 
4.97 Korea asserts that the European Communities al so tries to disassociate the TDM from the 
preceding TBR proceedings.  For Korea, the TBR proceedings and decision are not directly subject to challenge in this dispute because Ko rea agrees that the TBR Report is not an operative measure in the 
sense of imposing penalties on Korea as the TDM does.  However, it is very re levant in understanding 
the basis of the TDM and what it is inte nded to do.  As Korea has pointed out, the 
European Communities explicitly stated that the T BR findings regarding subsidies were the basis for 
the TDM.  This was also made quite clear by Commissioner Liikanen when  he stated that LNG 
tankers could not be added to the TDM until the TBR process had established that the 
European Communities considered them to be subsidized.
52 
4.98 Korea maintains that the European Communiti es misses the point when it argues that the 
TDM remedy does not refer to all of the constituen t elements of subsidization.  The Panel and 
Appellate Body findings in the US – Offset Act (Byrd Amendment)  dispute were not dependent on the 
form of the implementation of the measure; it could ha ve been anything (say, treble damages as in the 
                                                      
50 First submission of the European Communities, paras. 195-196. 
  51 Appellate Body Report, US – 1916 Act , at para 132.  
52 See paragraph 47 of Korea’s first submission and Exhibit Korea – 7. WT/DS301/R 
Page 23 
 
 
 US – 1916 Act  case).  Korea’s argument is not based on the individual payments under the authority 
of the TDM (although they clearly are illegal, too); rather, the TDM is itself at issue and the TDM is 
based upon the TBR process and is legally dependent  on the European Communities' WTO dispute 
settlement challenge to the a lleged Korean subsidization. 
4.99 For Korea, the European Communities tries to pe rsuade the Panel that interpretation of the 
TDM can only be made on the basis of the few word s in the measure that the European Communities 
declares are operative.  This argument al so was made by the United States in the US – Offset Act 
(Byrd Amendment)  case and firmly rejected by the Appellate Body which found that it was not 
necessary for the elements to be spelled out in the measure.  Among other things, the European 
Communities claims that the preambular language is me rely “political” and to be ignored.  There is no 
basis for such an argument, Korea submits.  I ndeed, the European Communities argued exactly the 
opposite before the panel in the EC – Sardines  case.  That panel found, as a factual matter, that the 
complainant had discussed the measure in  its entirety, including the preamble53  and the Appellate 
Body completely upheld the Panel’s reasoning and conclusion.54  
4.100  Korea also recalls its earlier discussion of the complete illogic of the European Communities' 
argument trying to disassociate the TDM from its complaint against Korea under the SCM 
Agreement.  If a measure is dependent on and coterm inous with the outcome of a WTO dispute, it is 
incontestable that it is a measure specifically agains t the alleged subsidies subject to that dispute.  
Even if one were to incorrectly agree that the Ag reed Minutes dealt with subsidies and then something 
extra as well, why would enforcement of those countermeasure provisions by the European Communities terminate upon the conclusion of the WTO dispute if the TDM were not at 
least in part related to the issue of subsidization? The European Communities' post hoc  rationalization 
is both inconsistent with the explicit wording of the TD M and its extension.  It is also simply illogical.  
The wording of the TDM (no matter how narrowl y the European Communities wishes to read it) 
necessarily leads to the conclusion th at it is specific action related to  Korea’s alleged subsidization. 
4.101  According to Korea, the Agreed Minutes encap sulated an understanding that the minutes  
related to the application of the SCM Agreement to  the shipbuilding sector, and how the parties would 
encourage WTO consistent behaviour.  Korea reject s the European Communities' argument that the 
Minutes were in fact a type of international pr ice-fixing agreement.  The only thing a Member 
government can agree to under the WTO is with r espect to subsidy matters.  Beyond the possible 
indirect effects of subsidies, pricing is an issu e between private parties.  Under long-standing GATT 
and WTO jurisprudence, Korea states, antidumping prevention cannot be enforced by an exporting 
Member by border restrictions.  The days of so- called voluntary restraint agreements have long since 
passed. 
4.102  Moreover, Korea asserts that the "inextricable  link" or correlation between the measure and 
the subsidy may be derived from the text of the m easure itself but can also be derived from other 
evidence and can be implicit.
55  The Appellate Body in US – Offset act (Byrd Amendment)  stated that 
a measure that may be taken only when the constituen t elements of a subsidy are present is a “specific 
action” against such subsidization.  However, th is in no way implies that Article 32.1 of the SCM 
Agreement is restricted to measures that may onl y be taken when the constituent elements of a 
subsidy are present, as argued by the European Communities.56  The correctness of Korea’s 
interpretation is made crystal clear in the Appellate Body Report in US – 1916 Act  where the 
                                                      
53 Panel Report in EC – Sardines  at paras 7.31-7.34.   
54 Appellate Body Report in EC – Sardines  at 192, citing previous findings in this regard in the 
Appellate Body Report in EC – Asbestos  at para. 64. 
55 Appellate Body Report, US – Offset Act (Byrd Amendment) , para. 244.   
 56 First submission of the European Communities, para 185, quoting the Appellate Body Report in US – 
Offset Act (B yrd Amendment)  at para. 239. WT/DS301/R 
Page 24 
 
 
 Appellate Body, analyzing the Anti-dumping Ag reement’s ‘equivalent’ to Article 32.1 SCM 
Agreement57 stated that “specific action against dumping must, at a minimum, encompass action that 
may be taken only when the constituent elements of ‘dumping’ are present.”58 The wording “at a 
minimum” clearly implies that “specific” action is broader. 
4.103  According to Korea, the European Communities' argument that there is no inextricable link 
between the TDM measures and the constituent el ements of a subsidy is flatly incorrect.59  The 
European Communities appears to argue that by simply omitting explicit reference to “Korean WTO 
inconsistent subsidies” and detailing the constituen t elements of the subsidies therein, the TDM 
Regulation escapes all scrutiny under Article 32.1 of the SCM Agreement.  The Appellate Body has 
rejected such a formalistic approach by specifying that the link to a subsidy in a contested measure 
may well be implicit.60  
4.104  With respect to the second element ("against "), Korea rebuts the European Communities' 
argument that the TDM is not “against” Korean subsid ies, alleging that it is hard to imagine anything 
that is more against something.  The Appellate Body  has determined that “against” means “related to” 
or “associated with”.  The European Communitie s merely repeats the losing arguments of the 
United States in the US – Offset Act (Byrd Amendment)  dispute.  The European Communities bases its 
defence on the notion that a measure is not “against” subsidies if it is “legal”.  Of course, this is absolutely contrary to the findings in the US – Offset Act (Byrd Amendment) dispute.  There was no 
finding that the Byrd Amendment subsidies were il legal.  Quite the contrary, the Panel found that 
Mexico had failed to establish such  claim of illegal subsidization. 
4.105  In relation to the alleged rejection by the Appe llate Body of a “conditions of competition” test 
in the US – Offset Act (Byrd Amendment) case, Korea maintains that the Appellate Body merely said 
that it was not necessary to go so far as to demo nstrate that the conditions of competition were 
affected.  Instead, the Appellate Body said the pa nel should only have looked at the structure of the 
measure itself.  In this case, the structure and design of the TDM is that the measure provides for 
funds to be given to any EC shipyard that is in  competition against – specifically and exclusively - a 
Korean shipyard and that asks for such funds.  The design of the TDM is to counteract “unfair” 
Korean practices which Korea has established to mean alleged Korean subsidies.  For Korea, it is hard 
to imagine anything more clearly “against”  the alleged Korean subsidized products. 
4.106  Korea asserts that, according to the Appellate Body Report in US – Offset Act (Byrd 
Amendment) , there is no requirement in Article 32.1 of the SCM Agreement that the TDM measure 
must take direct action against the Korean ship s, the shipbuilders, or the Korean government 
responsible for the alleged subsidies in order for th e TDM to be a measure “against” subsidization.  
On the contrary, the Appellate Body in US – Byrd Amendment  found that even indirect actions – such 
as countermeasures taken against other products than the subsidized products - may constitute actions 
“against” a subsidy.
61 
4.107  On the European Communities' argument that the measure picks up all Korean ships, not just 
those that are allegedly subsidized, Korea states that that is not a qu estion under the issue of “against”, 
for if it is against all or just some Korean ships, it still is against something.  That really goes to the 
issue of against what , against alleged subsidization or someth ing else.  Second, relating to both steps 
of the Article 32 argument, the TDM is clearly aimed at alleged Korea subsidies despite its scatter 
                                                      
57 I.e., Article 18.1 of the Anti-dumping Agreement.   
58 Appellate Body Report, US – 1916 Act , para. 122.  Underlining added by Korea.  Italics in original.  
59 Oral statement of the European Communities at the first substantive meeting of the Panel with the 
parties, para. 24. 
60 Appellate Body Report, US – Offset Act (Byrd Amendment), para 244. 
  61 Appellate Body Report, US – Offset Act (Byrd Amendment) , para. 251.  WT/DS301/R 
Page 25 
 
 
 shot aspect that might cover all Korean ships.  What the European Communities argues here is 
inconsistent with its arguments in DS273.   
4.108  Finally, Korea recalls the explanation of the Appellate Body in US – Offset Act (Byrd 
Amendment)  as to why the issue of “against” did not come up in the US - 1916 Act  findings: 
"[W]e did not focus on the word 'against' in our ruling in US 1916 Act, because there 
was no dispute there that the measure (imposing civil and criminal liabilities on 
importers) was indeed 'against' something – the question there was whether the action 
was against dumping, or some other conduct (predatory pricing)."62 
4.109  Korea further notes that when a government pr ovides companies with a subsidy, it does so 
with the aim of giving the company a market adva ntage over rivals.  That advantage is offset if 
another government specifically subsidizes competitors of that company.  This is certainly likely to dissuade or provide an incentive to stop granting the subsidy (provided the other government is 
prepared to do so) and therefore such s ubsidies can act “against” subsidization. 
4.110  Korea also claims having provided a mass of  evidence showing that the TDM is against 
subsidization, including characterizations by t op EC officials themselves confirming over and over 
that the TDM is “specifically designe d to counter unfair Korean practices”
63, i.e., subsidies, for a 
period necessary for the conclusion of the WTO procedure.  The TDM is variously described by EC officials as a “weapon” against Korean subsidies
64, a “punishment” against the alleged Korean 
practices, “countermeasures”65 against Korea pending the outcome in dispute DS273 concerning 
allegations of Korean subsidies, or a measure taken to “support” the European Communities' WTO 
action in DS273. 
4.111  With respect to the "specific action" elemen t of Article 32.1 of the SCM Agreement, the 
European Communities  counters that Korea refuses to cons ider the operative part of the TDM 
Regulation, in particular Article 2.1, on the basi s that it is not necessary to assess the double test on 
the basis of the measure.  The European Commun ities also recalls Korea's claim that it is not 
necessary that a specific action is part of the gene ral trade defence law as was the case in the Byrd 
Amendment dispute, but that the measure “as a whole” must be considered. 
4.112  The European Communities maintains that Korea’ s attempt to ridicule the competition aspect 
of the Agreed Minutes by calling it an international “price fixing cartel” reveals the flaw of its own 
position.  A price fixing cartel seeks to achieve pri ces on the market that do not reflect those resulting 
from a competitive market process.   
4.113  The Agreed Minutes seek precisely the opposite, the European Communities asserts.  They 
attempt to ensure the transparency of Korean pr ice-determination with a view to combating anti-
competitive behaviour.  This cannot be equated with an internationa l price fixing cartel.  Obviously, 
measures that ensure pricing at normal costs do not fix prices since the prices will vary according to 
the normal costs of each producer and correspond to the prices that a rational economic operator 
would seek on the market.   
                                                      
 62 Appellate Body Report, US – Offset Act (Byrd Amendment,  para. 245. 
  63 Exhibit Korea – 19. 
  64 Korea refers to his statement of 7 May 2001 re ferenced above as well as to the article in 
Europolitique dated 29 June 2002 referenced  above also referring to the TDM Regulation as a weapon. 
 65 Draft report on the proposal for a Council Regulation concerning a temporary defensive mechanism 
for shipbuilding (COM(2001)401 – C5-0393/2001 – 2001/0153(CNS)), Committee on Economic and Monetary 
Affairs, Rapporteur: Karin Riis-Jørgensen, Preliminary 2001/0153(CNS), 8 October 2001, Exhibit Korea - 31.  WT/DS301/R 
Page 26 
 
 
 4.114  The four distinct obligations (relating to  banking, transparent accounting standards, 
commercially viable practices and co-operation) accep ted by Korea in the Agreed Minutes are a first 
but important step to ensure fair and co mpetitive conditions in the shipbuilding sector. 
4.115  As regards the obligation to ensu re commercially viable pricing practices that reflect “normal 
value” in Section 3 of the Agreed Minutes, the European Communities tak es issue with Korea's 
argument that because the WTO Agreement only condemns dumping but does not oblige WTO 
Members to combat dumping practices, WTO Members are not competent  to do so.   
4.116  The European Communities fails to see where in the WTO Agreement Members limited their 
capacity to prevent dumping and anti-competitive behaviour by their companies.  The 
European Communities also fails to see th e relevance of Korea’s reference to Japan – 
Semiconductors .  That case concerned border restrictions that operate with respect to minimum prices.  
Specifically, the European Comm unities in that case challenged non-automatic export licenses as 
opposed to government control of dumping prices as such.  The Panel found that Japan’s system 
violated Article XI:1 of the GATT 1947 because the export licensing practices by Japan led to delays 
of up to three months in the issuing of licenses for semi-conductors destined to contracting parties 
other than the United States and th erefore constituted restrictions on the exportation of such products 
inconsistent with Article XI:1 of the GATT 1947.   The European Communi ties further argues that 
Korea can find no support in that Panel Report that  Article VI of the GATT 1947 curbs the rights of 
exporting Members to take action against dumped expor ts.  To the contrary, the Panel in that case 
explicitly noted that Article VI is “silent on actions by exporting countries”.   
4.117  WTO Members are of course entitled to take actions against dumping or otherwise anti-
competitive behaviour of their companies as long as such action does not take the form of an export 
restriction contrary to the GATT 1994, the Europ ean Communities submits.  Otherwise, can Korea 
explain to the Panel, why it has engaged in OECD negotiations on that very topic since the early 
1990s? And can Korea explain, why it has establishe d its MOCIE authority responsible to combat 
anti-competitive behaviour that has in the past interv ened in the contracted price offered by a Korean 
shipyard following a complaint by another Korean shipyard? 
4.118  The European Communities states that Korea was unable to respond adequately to the Panel’s 
specific question on how Section 6 of the Agreed Minutes would confirm that the Agreed Minutes 
interpret WTO law, rather than addressing additiona l issues related to competition law.  Essentially 
Korea claims that that section clarifies that  the Agreed Minutes only seek to interpret WTO 
Agreement while at the same time ensuring that  this interpretation does not affect other WTO 
Members. 
4.119  The European Communities argues that Korea’s answer itself reveals the flaw of Korea’s 
position.  There are two means of interpreting WTO la w, either an interpretation via Article IX:2 of 
the WTO Agreement or through the dispute settlement system.  A bilateral interpretation would have 
little value in a dispute before the WTO. 
4.120  The European Communities submits that the stated  goal of the Agreed Minutes as reflected in 
the first preambular paragraph is “promoting stability  and fair competition”.  Moreover, both sides 
expect, as recorded in the 3rd preambular paragraph, that the achievement of the four specific 
objectives set out in the Sections 1-5 of the Ag reed Minutes will “contribute in a major way to 
restoring normal competitive conditions on the market , and to providing for an effective means of 
protection against sales of ships at price below cost”.   
4.121  With respect to the "against" element of  Article 32.1 of the SCM Agreement, the 
European Communities claims that Korea cannot demonstrate on the basis of the operative part of the 
TDM Regulation or any of the national measures any specific effect against a Korean subsidy.  The WT/DS301/R 
Page 27 
 
 
 European Communities recalls the letter of Artic le 4 of the TDM Regulation, which limits its 
temporary scope to the termination of the WTO dispute settlement proceedings.  As the 
European Communities submitted66, it considers the dispute settleme nt to be resolved with the 
adoption by the DSB of the Report of the Panel (or the Appellate Body), whatever the outcome of the 
case is.  The TDM Regulation cannot therefore fo rce Korea to adopt any kind of position in the 
dispute settlement proceedings in question or to an early withdrawal of its subsidies.  At most, the 
TDM Regulation might encourage Korea to come back  to the negotiating table in the framework of 
the Agreed Minutes. 
4.122  Korea  takes issue with the European Communities' summary of its arguments on “against.” 
Korea challenges the EC statement that it has demonstrated that the TDM authorized funding applies 
to “any offer independently on [sic] whether there is a directly competing Korean offer.” The funding 
is not authorized unless  there is a demonstration of a lower Korean offer.  Korea also disagrees that 
the level of EC funding is unrelated to the level of alleged Korean subsidies, because, in its view the 
TDM is similar to US – 1916 Act , a dispute that involved treble damages, i.e., amounts that were not, 
by definition, correlated to the actual alleged dama ges.  The European Comm unities admits that its 
funding alters the conditions of competition.  Mo reover, the defence that counter-subsidies may be 
“legal” from the point of view of Part III of the SC M Agreement is irrelevant to Article 32.1 and flatly 
contradictory to the arguments raised by th e European Communities that prevailed in US – Offset Act 
(Byrd Amendment) . 
4.123  Regarding the issue of “against what”, Ko rea disagrees with the European Communities' 
argument that unless a challenged measure spells out in precise detail on its face every element of a 
subsidies case, it is not a specific measure against subsidies.  Furthermore, the European Communities 
has “accepted that there may be a remote economic link between the subsidies allegedly granted by 
Korea and the state of the EC industry.” The Eur opean Communities argues as if it has reluctantly 
accepted some “remote” link that Ko rea or someone else forced upon it.  However, the whole basis of 
the European Communities' request  for establishment of the panel in DS273 was based on allegations 
of a strong causal link.   
4.124  According to Korea, the strong correlation is in the words and structure of the TDM.  It is a 
twin track strategy for dealing with the alleged Kore an subsidization.  It involves establishment of a 
panel (DS273) and a pre-emptive retaliation both of  which are – by operation of the single legal 
instrument they are contained in – legally depende nt upon and coterminous with the WTO dispute.  
The issues the European Communities listed in its request for establishment of Panel for DS273 are 
the constituent elements of subsidization, the same elements that underlie the TDM. 
4.125  Korea states that it is simply illegal for a Me mber country to impose export price controls 
such as the European Communities is contending are at the heart of the Agreed Minutes.  Its first 
defence was based on anti-dumping, but that has now shifted to competition issues.  In this 
framework, the European Communities finally men tioned the seminal case on illegal minimum price 
controls, i.e., the Japan- Semiconductors  case but misconstrues this case.  This case was not only 
about restrictive licensing which is clear from th e paragraph preceding para graph 118 of the panel 
decision on which the European Communities relies, i.e.:  
"The Panel concluded that the complex of  measures constituted a coherent system 
restricting the sale for export of mon itored semi-conductors at prices below 
company-specific costs  to markets other than the United States, inconsistent with 
Article XI:1."  (emphasis added) 
                                                      
66 Response of the European Communities to Panel Question 6. WT/DS301/R 
Page 28 
 
 
 4.126  This description also applies to the scheme that the European Communities now says it was 
trying to foist upon the world shipping markets.  Bu t Korea did not enter into such a blatantly WTO-
illegal and anticompetitive agreement.  The Europ ean Communities states in paragraph 70 of its 
Second Written Submission that the Japan – Semiconductors  case does not stand for the proposition 
that Article VI limited the rights of Contracting Parties to impose anti-dumping measures.  The 
European Communities cites paragraph 121 of the pane l report which has nothing at all to do with the 
point the European Communities is trying to make.  Th e issue there was that Japan tried to justify its 
export price-raising measures by stating that it was trying to control below-cost dumping and noting that Article VI provides that “dumping is to be condemned.”
67  The European Communities well 
understood this argument by Japan and argued that  Article VI did not provide for independent 
authority to end anti-dumping pricing into third country markets.68  The panel agreed completely with 
the European Communities and stated: 
"The Panel therefore found that Article VI did not provide a justification for measures 
restricting the exportation or sale for e xport of a product inconsistently with 
Article XI."69 
4.127  Korea asserts that the European Communities attempts to justify its right to compel Korea to 
impose border price measures on the basis of some vague competition law basis.  But there is no 
international competition law agreement and the European Communities cannot enforce a non-
existent agreement.  If price controls at the border  cannot be justified by reason of Article VI of the 
GATT which provides that dumping is to be condemn ed, they certainly cannot be justified on the 
basis of some invented competition law agreement.70 
4.128  The European Communities  asserts that Korea's argument (picked up from China), whereby 
it is not necessary under a countervailing duty measure that each duty is subject to a specific finding of subsidisation, turns against Korea.  Articles 9.3 of the Anti-Dumping Agreement and 19.3 of the 
SCM Agreement clarify that any anti-dumping or countervailing duty must be established on an 
individual finding of dumping or subsidisation.  The same is required for the other specific actions 
against a subsidy permitted by the SCM Agreemen t, an actionable or prohibited subsidy case. 
4.129  Korea disregards the term “specific” and its context, the European  Communities asserts.  
Indeed, it is noteworthy that Korea did not respond to one single argument made by the 
European Communities relating to the significance of  the qualifier “specific”.  The context mandates a 
distinction between general “actions  against subsidies” and “specific” actions against subsidies.  
Moreover, Article 32.1 clarifies what specific actions against subsidies are by referring to those that 
are permitted under the SCM Agreement.  As explai ned before, these are all well targeted measures 
depending on a specific finding that at least the co nstituent elements of a subsidy are present, the 
European Communities adds. 
4.130  The European Communities claims that a very broad political link between a subsidy measure 
that applies to entire market segments, independently  from the existence of subsidisation, is simply 
not sufficient.  Neither is a politically motivated temporal link to a WTO case limiting in time the re-
authorisation of previously phased out subsidies. 
4.131  The European Communities argues that, instead  of responding to the detailed and reasoned 
explanation that it has advanced as to why the opera tion of the measure cannot be seen as inextricably 
                                                     
 
67 Japan – Semiconductors  at paras  45 and 68. 
68 Id. at para. 47 . 
69 Id. at para 120. 
70 Korea notes that it made these arguments in its general comments and considers the findings of the 
panel in Japan – Semiconductors  to be equally applicable to the discussions regarding DSU Article 23. WT/DS301/R 
Page 29 
 
 
 linked to the constituent elements of a subsidy, Korea invokes the measure “as a whole”, including its 
preamble.  Yet, whatever term Korea points to in  the whereas clauses of the TDM Regulation, i.e., 
“unfair competition”, the Agreed Minutes or the “material injury and serious prejudice” suffered by the domestic industry, they cannot serve as a basi s for establishing an inextricable link between the 
operation of the TDM Regulation and the specific s ubsidies at issue in an ongoing WTO case.  These 
terms merely motivate the temporary reintr oduction of operating aid and its limitation. 
4.132  The European Communities continues its argument ation with respect to the "against" element 
of Article 32.1, taking issue with Korea's argument  that Article 32.1 of the SCM Agreement prohibits 
“counter subsidies”.  The European Communities not es that the US made that argument without 
defining the notion of counter subsidies and with the explicit statement that it cannot assess whether 
the TDM is such a counter subsidy.  The Europ ean Communities further explains that the term 
counter subsidy has no basis in the Agreement and that, similar to “matching aid”, a counter subsidy 
would need to cancel out the effects of a particular  other subsidy.  There must be targeting.  As 
explained before, the TDM Regulation does not ope rate with respect to any WTO inconsistent 
subsidies of Korea.  It merely grants subsidies to some EC shipyards at a level below the intensity of 
aid previously phased out. 
4.133  Finally, for the European Communities, the TDM Regulation is defensive as opposed to 
offensive.  This is clear, both from its name (“Te mporary Defensive Mechanism”) and its operation: a 
general subsidy at a level below any previously author ised intensity of contract related aid.  The need 
for such temporary aid is motivated by the non-impl ementation of the Agreed Minutes.  As explained 
above, the Agreed Minutes are not about “subsidies” and in particular not subsidies that are covered in 
the DS273 case. 
4. Article 23 of the DSU 
(a) General Arguments 
4.134  Korea
 states that the provisions of the TDM Regulation71 as extended in product scope to 
cover LNGs72, and as extended in duration until March 200573, are on their face inconsistent with the 
European Communities' obligations under Article 23 of the DSU.  Individual instances of application 
of the TDM Regulation are likewise in consistent with this provision. 
4.135  Korea alleges that the TDM provides for special state-funded contributions on a contract-
specific and product-specific basis, for the building of container ships, produc t and chemical tankers 
as well as LNG carriers when ther e has been competition from a Korean yard allegedly “offering a 
lower price”.74  Furthermore, the TDM contributions amount to (maximum) six per cent of the 
contract value prior to the contribution.75  The contributions are made in support of contracts to be 
delivered within three years from the date of signing of the contract (though extension of the three-year delivery deadline remains possi ble in special circumstances).
76  Korea also asserts that the TDM 
Regulation allows the contributions only with resp ect to EC shipyards in those segments judged by 
                                                      
71 Council Regulation 1177/2002 Concerning a Temporary Defensive Mechanism for Shipbuilding, OJ 
(2002) L 172/1.  Provided in Exhibit Korea - 4(a). 
72 Notice 2003/C 148/10 published on 25 June 2003.  Provided in Exhibit Korea – 4(b). 
73 Council Regulation 502/2004 Amending Regulation 1177/2002 Concerning a Temporary Defensive 
Mechanism for Shipbuilding, OJ (2003) L 081/6.  Provided in Exhibit Korea – 4(c). 
74 Article 2.1, TDM Regulation. 
75 Article 2.3, TDM Regulation. 
76 Article 2.4, TDM Regulation. WT/DS301/R 
Page 30 
 
 
 the European Communities to have suffered “a dverse effects” or “serious prejudice” caused by 
“unfair Korean competition”.77 
4.136  Moreover, Korea asserts that the TDM Regula tion is expressly designed to be coterminous 
with, and legally dependent upon initiation of, WTO dispute settlement proceedings (brought by the 
European Communities in the dispute Korea – Commercial Vessels (DS273)).  The TDM Regulation 
applies to contracts signed from 24 October 2002, i.e.  the date of the European Commission's 
Notice78 announcing the initiation of WTO dispute settlem ent proceedings against Korea as a result of 
the investigation conducted under the EC Trade Barrier Regulation79 concerning certain alleged 
subsidies received by the Korean shipbuilding industry, until one month after the 
European Commission gives notice in the Official Journal of the European Communities that these 
dispute settlement proceedings are resolved or suspended.80 
4.137  Korea states that the TDM Regulation was supposed  to expire on 31 March 2004.  However, 
the duration of the TDM was extended by Council Regulation 502/2004 by one year to 
31 March 2005.  Recital 5 of Re gulation 502/2004 explicitly states that the extension of the TDM 
beyond 31 March 2004 was necessary because “WTO  disputes settlement proceedings are not 
expected to have been r esolved by that date.” 
4.138  On the matter of the relationship of th ese two measures (TDM contributions and WTO 
proceeding), Korea recalls official papers and pr onouncements by EC Commissioners, for example: 
(i) European Commission Press Release IP/01/1078, Brussels, 25 July 2001;   
(ii) European Commission Press Release IP/02/945, Brussels, 27 June 2002; and,  (iii) European Commission Press Release IP/03/895 , Brussels, 25 June 2003.  Korea emphasizes the 
importance of these statements.  Korea argues that the European Communities' attempts to dismiss 
these statements of its own Commissioners, as mere ly “political” statements to be ignored, are 
unfounded.  Korea further recalls that, in a backgr ound memorandum to the European Parliament with 
respect to the TDM Regulation, the European Co mmunities stated that the so-called twin-track 
strategy involved the following: 
"(i) the initiation of an action against the Republic of Korea at the World Trade 
Organisation (WTO) and (ii) the authorisa tion of temporary and limited contract 
related operating aid under the Temporary Defensive Mechanism (TDM) to assist 
Community shipyards in those segments wh ere they have suffered adverse effects 
caused by unfair Korean competition.   
[…] 3.  […]only those market segments wher e it has been demonstrated that the EU 
shipbuilding industry has suffered adverse effects caused by unfair Korean trade 
practices are eligible for aid: container sh ips; chemical and pro duct tankers; as well as 
Liquefied Natural Gas (LNG) carriers.  Second, the defe nsive mechanism expires on 
31 March 2004, which was consistent with the anticipation, at the time of adoption of 
Regulation (EC) No.  1177/2002, that the relevant WTO proceedings would have 
been concluded at that date.   
                                                     
 
77 Recital 4, Article 2.2 (with respect to LN G carriers) and Article 2.5, TDM Regulation. 
78 O.J. No C 257, 24.10.2002, p. 11. 
79 Council Regulation (EC) No. 3286/94 of 22 Decem ber 1994 laying down Community procedures in 
the field of the common commercial policy in order to ensure the exercise of the Community's rights under 
international trading rules, in particular those establis hed under the auspices of the World Trade Organization, 
O.J. [1994] L 349/71, as amended by Council Regulation (EC) No.  356/95 of 20 February 1995, O.J. [1995] L 
413.  Provided in Exhibit Korea – 5. 
80 Article 4, TDM Regulation. WT/DS301/R 
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 […] 5.  It should also be stressed that , from the outset, the two instruments making up 
the twin-track strategy were closely interre lated, in particular as regards timing.  
Pursuant to the TDM Regulation, the s upport mechanism could only be activated 
after the Commission had initiated WTO dispute settlement proceedings against 
Korea - which was done on 8 October 2002 2.  By the same token, it was expressly 
provided that the mechanism was to be a pplied only until the conclusion of these 
proceedings or the suspension of such proceedings on the grounds that the 
Community considered that the Agreed Minutes had been effectively implemented 
(and, in any case, not after 31/03/04).  In othe r words, the twin-track strategy is built 
on a simultaneous use of its two instruments."81 
4.139  Korea claims that this is entirely consistent with what the TDM itself stipulates, for instance 
in paragraphs (4) and (7) of its preamble.   
4.140  Moreover, Korea rejects the European Communities' argument that the legally coterminous 
and dependent link between the TDM and the WTO di spute DS 273 is a coincidence and was merely 
intended to limit the TDM scheme by reference to an  “objective” date that was outside the discretion 
of the European Communities.  The authorization in Article 4 of the TDM Regulation to provide 
funding to their shipyards when in competition with  Korean shipyards is legally contingent upon the 
initiation and duration of a WTO dispute challenging  alleged Korean subsidies pursuant to the SCM 
Agreement.  The language of the TDM Regulation a nd other evidence cited by Korea make clear that 
the link is not coincidental and anything but “obj ective.” The legal contingency for the beginning and 
the end of the TDM authority is linked excl usively and directly to the WTO dispute. 
4.141  Korea also challenges the European Communitie s' argument that the TDM was not aimed at 
subsidies, but at injurious pricing as prohibited under the Antidumping Agreement as expressed in the 
Agreed Minutes.  First of all, the Agreed Minutes do not say at all what the European Communities 
claims.  Korea challenges the European Communiti es to point to one single commitment in the 
Agreed Minutes whereby Korea agreed  to use border controls to impose pricing agreements.  It is 
simply untrue that Korea agreed to take action to end dumping at its border.  Nothing in Sections 3 
and 4 of the Agreed Minutes commits either govern ment to intervene directly in private pricing 
practices.  An a contrario  reading of these provisions leads to the logical conclusion that where there 
is a lack of any such commitment, there is no agr eement to enforce.  This must be the case because it 
is the only legally permissible conclusion under GATT and WTO jurisprudence and section 6 of the 
Agreed Minutes makes it clear that the Agreed Minu tes must be interpreted in the context of the 
parties’ WTO rights and obligations.  Korea  did not and emphatically does not agree that Korean 
shipyards are dumping.  The shipyards that the European Communities claims are all selling below 
cost are all extremely profitable.  Indeed, the onl y allegation the European Communities has come up 
with is that the companies are not burdened with the right amount of debt because the Korean 
Government has forgiven such debt.  Korea disagrees, but that, of course, is exclusively a 
disagreement on a question of subsidization.  Thus , the only permissible interventionist role for a 
WTO Member government can be with respect to subsid ies.  Dumping is an i ssue of private parties; 
more than that, it is a company-specific pricing issue.   Thus, it must follow that, to the extent there are 
price effects, they run from the a lleged subsidies and that was all that the Government of Korea could 
ever agree to. 
4.142  Korea rebuts the European Communities' ar gument that the TDM was meant as an 
enforcement of the Antidumping Agreement and theref ore is not relevant to Article 32 of the SCM 
                                                      
 81 Korea notes that the text of the Commission Memora ndum is referenced also in the Report to the 
European Parliament by German Social Democrat  Christa Randzio-Plath (CNS/2004/0008).  The 
European Parliament adopted the report on 26 February 2004, approving the extension of the TDM mechanism 
until 31 March 2005.  Provided in Exhibit Korea – 1. WT/DS301/R 
Page 32 
 
 
 Agreement.  In this respect, Korea clai ms that what remains unanswered by the 
European Communities is how it could claim as a defence against the prohibition against 
unilateralism in DSU Article 23 that the European  Communities was seeking to unilaterally enforce 
the provisions of the Antidumping Agreem ent rather than the SCM Agreement. 
4.143  For Korea, the statements of the Europ ean Communities in its legal documents, its 
explanatory memoranda, and the very words of its hi ghest officials make very clear exactly what the 
TDM was all about.  It was an enforcement me chanism implemented at the initiation of a WTO 
dispute settlement proceeding, extended to remain coterminous with such a proceeding and scheduled 
to end when such a proceeding ended.  If there we re two completely different matters at issue under 
the TDM, why would it terminate when a totally unrelated matter terminated.  If, as the 
European Communities argues, the Agreed Minutes  had to do with the antidumping practices of 
private companies, of what possible relevance coul d it be if a WTO subsidies case was resolved.  To 
illustrate the European Communities' illogic,  Korea offers the following hypothetical: 
Assume a Member has taken two actions: A and B.  Another Member disagrees with 
both actions A and B.82  In response, Member 2 begins a WTO dispute settlement 
proceeding which it claims is with resp ect to only action A.  It then imposes 
countermeasures only with respect to B.  Howe ver, it states that the countermeasures 
will end upon the conclusion of either the WTO case against action A or the 
resolution of action B. 
4.144  Korea submits that this makes no sense.  If the countermeasures were taken only with respect 
to action B, there would be no reason at all for any reference to action A.  Even if the reference to 
terminating the countermeasures referred to the end of both the WTO case and the resolution of action 
B, it would still be illegal.  There is no permission under the DSU to take unilateral countermeasures 
if they apply to resolutions of WTO disputes as well as something else in addition .  They cannot be 
used to resolve WTO disputes at all. 
4.145  In addition, Korea notes, the langua ge of the TDM does not support the 
European Communities' argument that there are two di stinct matters.  Article 4 of the TDM provides 
that it is effective until the EC Commission publis hes a notice that “these dispute settlement 
proceedings are resolved or suspended on the ground s that the Community cons iders that the Agreed 
Minutes have been effectively implemented.”  For Korea, there is only one sensible way of reading 
this statement.  The resolution and suspension  are with respect to “these dispute settlement 
proceedings”.  That is, the suspension upon agreem ent of effective implementation of the Agreed 
Minutes is a suspension of the WTO proceedings .  This can only mean that the Agreed Minutes are 
the subject of the WTO proceedings, not of something distinct.  The simple little word “or” destroys 
the European Communities' whole argument. 
4.146  While the TDM language is not a model of clarity,  the explanation in the second recital of the 
TDM extension confirms these points.  It reads as follows: 
"In particular, the temporary defensive mechanism was only authorized after the 
Community initiated dispute settlement pro ceedings against the Republic of Korea 
and could no longer be authorized if these dispute settlement proceedings were 
resolved or suspended ." (emphasis added) 
4.147  Thus, reading the TDM and its extension together , it could not be clearer that there were not 
two different matters that were the subject of the TDM.  The TDM referred only to the subsidization 
                                                      
82 Of course, Korea states, in the present case, action A corresponds to the alleged subsidization and 
action B refers to the alleged failure to enforce the Agreed Minutes. WT/DS301/R 
Page 33 
 
 
 issue for which the European Communities in itiated dispute settlement proceedings.  The 
European Communities makes an inaccurate post hoc  rationalization when it argues that the TDM 
referred to two distinct matters, i.e., on the one hand, the WTO proceedings with respect to the 
subsidies issue and, on the other hand, the Agreed  Minutes with respect to something completely 
distinct. 
4.148  Korea further addresses the European Commun ities' argument that DSU Article 23 only 
applies if the retaliation is pursuant to a formal determination.  For Korea, apparently, a Member 
needs to put in the title of the offending measure “Cont rary to Article 23, it is determined.  .  .”  
Nothing ever quite reads in this overly formalistic way.  This common sense point is made very clear 
in the Panel Report in US – Certain EC Products  wherein it was stated that: 
"In the context of the WTO, we consider that a determination that a WTO violation 
has occurred is a decision that a WTO Memb er has violated the WTO Agreement and 
which bears consequences in WTO trade relations."83 
4.149  For Korea, it must be beyond question that the TDM was a decision.  And as it was made 
effective only upon initiation of a WTO dispute and te rminates only upon resolution or suspension of 
such dispute, the conclusion is inescapable that it was a decision that Korea has violated the SCM 
Agreement.  Korea alleges that it is also indisput able that it had consequences in WTO trade relations.  
It imposed a highly discriminatory penalty against Korean products. 
4.150  Korea states that the Appellate Body in US – Certain EC Products  held that Article 23.1 of 
the DSU imposes a general obligation to redress vi olations “only by recourse to the rules and 
procedures of the DSU, and not through unilatera l action.”  Furthermore, Article 23.2(a)-(c) 
demonstrated the close connection to Article 23. 1 and together “all concern the obligation of 
Members of the WTO not to have recourse to unilateral action.”84 
4.151  Thus, the scope of Article 23 is quite broad.  It  is not limited to formal determinations that 
explicitly state that they are outside the DSU, nor  to measures that involve suspension of concessions 
under the DSU. 
4.152  Korea comments on European Communities' hypothetical,85 arguing that it seems to equate 
the Agreed Minutes with the exceptio n provided for Free Trade Agreements (“FTA”) contained in the 
GATT 1994 Article XXIV.  For Korea, this is an over-stretched analogy that the 
European Communities leaves unexplained.  Second,  with an FTA, Article XXIV provides a specific 
exception to permit two or more WTO Members to offer each other special privileges not provided to other Members on an MFN basis.  The European Communities posits a situation where, following a 
disagreement, some or all of those privileges ar e withdrawn, the exception no longer applies and the 
situation returns to standard WTO MFN status.  Korea would like the European Communities to 
clarify just what extra privileges (i.e., WTO “plus” privileges) were being offered by Korea and the 
European Communities to each other through the Agr eed Minutes.  Clearly, there were none.  That 
being the case, this is not a situation of withdraw ing extra privileges and going back to the status quo; 
rather, it was an agreement on interpretation of WTO rules and the action taken by the 
European Communities is not a return to the WTO status quo, but an imposition of penalties.  If the 
European Communities argues that it is a return to status quo because it removes the unfair trade 
practice of subsidization by Korea, the response is  that only the DSB can make such rulings in the 
face of Korea’s emphatic rejection of the European  Communities' allegations of subsidization.   
                                                     
 
83 Panel Report, US – Certain EC Products  at para. 6.98. 
84 Appellate Body Report, US - Certain EC Products , at para 111. 
85 First submission of the European Communities, para. 137. WT/DS301/R 
Page 34 
 
 
 4.153  Korea offers the following hypothetical for the consideration of the Panel:   
One WTO Member (the “complaining Member”) considers that another Member (the 
“responding Member”) has provided support an d subsidies to a particular domestic 
capital goods industry.  According to the complaining Member, such support and aids 
are inconsistent with both the WTO SCM Agreement as well as perhaps an earlier 
bilateral agreement; one reached in, to pick  a hypothetical date, say 1992.  The Trade 
Minister of the complaining Member states that he has had enough of the subsidies 
and price undercutting resulting from the breach of the 1992 Agreement by the responding Member and so he is putting in to place a twin-track strategy that will 
bring the responding Member to the table so that it will fulfil its obligations.  First, 
the complaining Member launches a WTO dispute settlement case under the SCM Agreement.  Second, it suspends the landi ng rights of aircraft of the responding 
Member coterminous with the WTO dispute settlement case.  The complaining 
Member’s Trade Minister points out that , pursuant to the Annex on Air Transport 
Services to the GATS, bilateral air transport landing rights are not subject to WTO 
rules.  Therefore, the complaining Memb er, when challenged regarding these twin 
tracks, replies that the suspension of landing rights has nothing to do with the SCM claims and the SCM claims are being d ealt with exclusively under the dispute 
settlement portion of the twin track.  It  claims that the second track is related 
exclusively to the 1992 Agreement between the parties.   
4.154  According to the European Communities' argume nt in this case, the complaining Member in 
the hypothetical will be correct in such an argum ent and there can be no possible challenge to the 
complaining Member’s suspension of landing rights under either the DSU or the SCM Agreement.  In Korea’s view, any such interpretation is in contradi ction with the explicit wording of DSU Article 23 
and would leave the door wide open for WTO Members to retaliate in all sorts of non-covered sectors 
or areas, clearly affecting trade between WT O Members before any WTO dispute settlement 
proceeding is carried out or without such procedure ever being carried out, clearly thereby 
undermining the very letter and spirit of DSU Article 23.   
4.155  The European Communities
 explains that the term “unilateral measures” referred to in 
existing case law and the negotiating history is conf ined to “wild” retaliation through suspension of 
concessions or other obligations leading to spirals of retaliations and destabilising the GATT system.  
However, Article 23 of the DSU was not meant to prohibit what is termed under public international 
law an “unfriendly act”, a measure compatible with WTO law. 
4.156  On the matter of whether Article 23 would c ontain more than a prohibition of unilateral 
suspensions of concessions, the European Comm unities notes that, according to the Panel in US – 
Section 301 , the second paragraph of Article 23 prohibits  certain particularly egregious cases of 
unilateral conduct.  The Panel in that case clarifie d that the less egregious cases of conduct contrary to 
the dispute settlement procedures would be other proce dural omissions, e.g.  failure to consult before 
requesting a Panel. 
4.157  In essence, the European Communities posits, Ar ticle 23.2 of the DSU records a deal between 
the then GATT contracting parties concerning the use of Section 301, a US law calling for the 
imposition of unilateral trade sanctions against other GATT contracting parties whenever the 
United States determined they were in  violation of their GATT obligations. 
4.158  The European Communities further alleges that th e essential features of Section 301 were that 
it would have authorised a determination of WTO in consistency and retaliation in form of suspension 
of concessions without awaiting the outcome of a WT O dispute settlement proceeding.  In particular 
the phrase “ before  suspending concessions or other obliga tions under the covered agreements” in WT/DS301/R 
Page 35 
 
 
 Article 23.2 reflects that Members wanted to curb  such unauthorised retaliations.  However, when 
agreeing to prohibit certain forms of unilateral conduct, GATT Parties did not agree to create a 
“locked circle” whereby Members would forego their right to take even perfectly legal measures in 
response to a WTO violation of another WTO Member. 
4.159  The negotiating history further confirms that Article 23 of the DSU only meant to curb 
unilateral measures that were otherwise WTO inc onsistent.  The first drafts of the rules on 
“strengthening the multilateral system” envisaged that: 
"The contracting parties shall: (i) abid e by GATT dispute settlement rules and 
procedures; (ii) abide by the recomme ndations, rulings and decisions of the 
Contracting Parties (iii) not resort to unilateral measures or the threat of unilateral 
measures inconsistent with GATT rules and procedures  and (iv) for the purposes of 
(iii), undertake to adapt their domestic trad e legislation and enforcement procedures 
in a manner ensuring the conformity of all measures with GATT dispute settlement 
procedures." (emphasis is added) 86 
4.160  Negotiators wanted to prevent unilateralism in the form of unauthorised “countermeasures”.  
These are defined under public international law as:  
"A law enforcement measure which cons ist in a temporary dispensation from 
complying with the law.  In relation to the classical unilateral peacetime remedies, 
this term should theoretically encomp ass the suspension of the treaty and the 
reprisals; that is to say, the two tem porary measures which go beyond equivalence 
and which would in principle be unlawful if they were not resorted to as reactions to 
an international offense." 87 
4.161  The European Communities claims that c ountermeasures or unilateral measures do not 
comprise acts of retorsion.  A retorsion is defined as: 
"An unfriendly but nevertheless lawful act  by the aggrieved party against the 
wrongdoer.  As such retorsion is not circum scribed by the international legal order."88 
4.162  The prohibition of unilateral measures under the DSU not only excludes retorsions, but also 
those acts that may be illegal under a bilateral agreem ent between the two disputing parties, but that 
are outside the scope of the WTO Agreement.  Th e European Communities submits that the following 
hypothetical for the consideration of the Panel: 
The European Communities and Korea have concluded a bilateral agreement not to 
grant any subsidies.  The European Commun ities believes that Korea has violated its 
obligations not to grant export subsidies under the WTO Agreement and the bilateral 
Agreement.  The bilateral Agreement does not have a dispute settlement mechanism.  The European Communities seeks condemnati on of the export subsidies in the WTO 
but also decides to suspend its bilateral obligation not to grant any subsidy by 
reinstating certain WTO compatible aids. 
                                                     
 
86 Report by the Chairman “Profile on the Status of the Work in the Group”, MTN.GNG/N13/W/43 of 
18 July 1990, p. 4;  Secretariat Non-Paper 25 March 19 91, p. 13; Draft Text on Dispute Settlement by the 
Negotiating Group on Dispute Settlement, MTN.GNG/NG13/W/45 of 21 September 1990; p. 7. 
87 Elisabeth Zoller, Peacetime Unilateral Remedies/ An Analysis of Countermeasures , (Transnational 
Publishers: 1984), p. 75.  
88 Zoller, p. 5. WT/DS301/R 
Page 36 
 
 
 4.163  For the European Communities, the suspension of the bilateral obligation such as in this case 
is not a relevant measure under Article 23 of the DSU as long as it is not demonstrated that it violates 
a substantive WTO obligation.  Article 23 of the DSU cannot prohibit conduct that is otherwise WTO 
compatible.  The scope of the procedural obligation under the DSU in the form of an exclusive 
jurisdiction and special suspension clause must parallel  the scope of the material obligations under the 
substantive Agreements. 
4.164  The European Communities furt her maintains that had WTO Members indeed wished to 
create a locked circle, where WTO Members forego their right to resort to retorsions or measures that 
are otherwise compatible with WTO law they woul d have used much stronger language in Article 23 
of the DSU.  Article 23, entitled “ strengthening  the multilateral system” takes a first step into that 
direction by curbing unilateral suspensions of con cessions and obligations.  It does not create a basis 
for the far reaching consequence of “locking WTO Members in a multilateral system.” 
4.165  Therefore, the European Communities concludes by  stating that the suspension of obligations 
under another international agreement or an act that is not even incompatible with any international 
norm but merely an unfriendly act, which does not  fall under the scope of Article 23 of the DSU.  
(b) Article 23.1 of the DSU   
4.166  Korea  submits that the TDM Regulation on its face is inconsistent with  Article 23.1 of the 
DSU.  According to Korea, Article 23.1 requi res that in any case where a WTO Member "seeks 
redress" of an alleged WTO violation the Member mu st: (i) have exclusive recourse to the multilateral 
dispute settlement process set out in the DSU; (ii)  abide by the rules and procedures set out in the 
DSU. 
4.167  By adopting the TDM Regulation, Korea subm its that the European Communities “sought 
redress” for what it claimed to be Korean WTO violations.  Indeed, the TDM Regulation was enacted following detailed investigations by the European  Communities into alleged Korean shipbuilding 
subsidies under the European Communi ties' TBR investigative procedure.
89  The investigative reports 
of the Commission under this procedure conclude d that Korean shipbuilding measures were 
prima facie  WTO-inconsistent subsidies causing adverse effects  and serious prejudice  within the 
meaning of Articles 5 and 6 of the SCM Agreement.90  In response, the European Communities 
sought redress for these alleged Korean WTO viola tions through the “twin-track” strategy, which 
involved pursuing WTO dispute settlement against Ko rea over the alleged subsidies, while at the 
same time seeking immediate and unilatera l redress by adopting the TDM Regulation. 
4.168  Moreover, Korea alleges that the TDM Regul ation was adopted shortly thereafter and 
published in the Official Journal on 2 July 2002.   The TDM Regulation sought to redress the “adverse 
effects” and “serious prejudice” the European Co mmunities had (unilaterally) determined its 
shipyards suffered as a result of illegal Korean subs idization of its shipbuilding industry.  Under the 
TDM, this “redress” takes the form of highly ta rgeted contributions provided to EC shipyards 
exclusively  when those shipyards can show they are in  competition with a Korean yard offering a 
lower price in the bidding process for a specific TDM-covered vessel.  As explained in Recital 3 to 
the TDM Regulation, the TDM was adopted as “...a n exceptional and temporary measure…in order to 
                                                      
89 Council Regulation (EC) No.  3286/94, as amended.  Provided in Exhibit Korea – 5 . 
90  EC Commission Report to the Trade Barriers Commi ttee on alleged obstacles to trade from Korean 
shipbuilding practices.  Initial report presented to the Trade Barrier Regulation Committee on 8 May 2001.  
Supplementary report presented in July 2001.  Updating reports presented on 9 May 2002 and in June 2003 on 
LNGs.  All four provided in Exhibit Korea – 6. WT/DS301/R 
Page 37 
 
 
 assist Community shipyards in  those segments that have suffered adverse effects  in the form of 
material injury and serious prejudice  caused by unfair Korean competition…”91  
4.169  Korea asserts that the language of Article 4 of the TDM Regulation92 shows that both the 
TDM Regulation and the European Communities' purs uit of WTO dispute settlement proceeding are a 
response to, and a form of redress against, allege d Korean WTO violations.  Otherwise there can be 
no rational explanation for the European Communi ties explicitly linking these two events in the 
legislation.  The European Communities was fully  aware that the WTO dispute settlement it was 
pursuing, and any favourable ruling it might hope to  obtain in a panel or Appellate Body proceeding 
would of course take time.  Rather than wait for the outcome of WTO dispute settlement, the 
European Communities took matters into its own hands by enacting the TDM and imposing 
retaliatory measures targeted exclus ively at Korean competing ships. 
4.170  For Korea, Article 23.1 of the DSU however pr ovides that in cases where a Member considers 
another Member’s measures to be WTO- inconsistent, the complaining Member shall  have recourse to 
the dispute settlement system.  The Panel in US - Section 301 Trade Act made it crystal clear that the 
words "shall have recourse to" means that Members must only and exclusively  have recourse to the 
multilateral DSU framework.  What is especially prohibited is any form of unilateral enforcement of 
WTO rights or obligations.93  In adopting the TDM Regulation, the European Communities 
manifestly failed to have exclusive recourse to th is multilateral framework contrary to Article 23.1. 
4.171  Indeed, if Members are allowed to enforce th eir perceived rights unilaterally through any 
means as long as they do not involve a suspension of  concessions or other obligations, then there 
obviously is no exclusivity.  This provides fertile grounds for circumvention of the system.  WTO 
dispute settlement simply becomes one option of ma ny.  Allowing unlimited extra-treaty enforcement 
of rights cannot be consistent with promoting the security and predictability of the multilateral trading 
system and would moreover unfairly favour the most powerful WTO Members.  
4.172  Finally, Article 23.1 of the DSU requires that Members must "abide by" the rules and 
procedures of the DSU.  The US - Section 301 Trade Act Panel confirmed that this requires abiding by 
all applicable DSU rules and procedures.94  By unilaterally seeking redress through the TDM 
Regulation, the European Communities necessarily fa iled to “abide by” the DSU rules and procedures 
in violation of Article 23.1.95  
4.173  The European Communities  submits that to violate Article 23.1 of the DSU, a WTO 
Member must (i) “seek the redress” (ii) “o f a WTO violation”.  According to the 
European Communities, the interpretation of this  expression in its immediate context and purpose 
                                                      
91 Recital 3, TDM Regulation. 
92 Article 4, TDM Regulation:  
"The Regulation shall be applied to final contr acts signed from the entry into force of this 
Regulation until its expiry, with the exception of final contracts signed before the Community 
gives notice in the Official Journal of the European Communities that it has initiated dispute 
settlement proceedings against Korea by requ esting consultations in  accordance with the 
World Trade Organization’s Understanding on the Rules and Procedures for the Settlement of 
Disputes and final contracts signed one month or more after the Commission gives notice in 
the Official Journal of the European Communities that these dispute settlement proceedings 
are resolved, or suspended on the grounds that the Community considers that the Agreed 
Minutes have been effectively implemented."  [Emphasis added]. 
93 Panel Report, US – Section 301 Trade Act , para. 7.43. 
94 Panel Report, US – Section 301 Trade Act , para. 7.43. 
95 Korea argues that the European Communities specifically challenged the right of another Member to 
impose measures concurrently with a WTO dispute proceeding when it requested the establishment of a panel in 
US – Tariff Increases on EC Products . WT/DS301/R 
Page 38 
 
 
 clarifies that only measures of a retaliatory natu re are covered, that is measures amounting to a 
suspension of concessions or obligations under the WTO Agreement. 
4.174  The European Communities asserts that the chapeau  of Article 23.2 of the DSU, explicitly 
links the general obligation “shall seek to redress violations of WTO law” with three specific 
obligations in Article 23.2.(a)-(c) of the DSU th rough the phrase “in such cases, Members shall”.  
Article 23.2 of the DSU is therefore linked to, and h as to be read together with, Article 23.1 of the 
DSU.  It follows that a prohibited unilateral action that redresses a WTO violation must have elements 
of the three sub-paragraphs, i.e., a determination that has the effect of suspending concessions or 
obligations without awaiting a reasonable period fo r implementation and prior authorisation through 
WTO dispute settlement proceedings. 
4.175  The European Communities further argues that  this is corroborated by the purpose of 
Article 23 of the DSU which is simply to set out a lex specialis  to public international law rules on 
suspension of the operation of a treaty. 
4.176  For the European Communities, the notion of countermeasures or retaliatory measures under 
public international law is confined to measures that  would otherwise be incompatible with a treaty or 
an obligation of the state under public internationa l law, because obviously, a treaty cannot prohibit a 
retaliatory measure outside the material scope of th at treaty.  The same applies to Article 23 of the 
DSU.  If that Article were interpreted in th e broad manner Korea suggests, the WTO dispute 
settlement would – via Article 23 of the DSU – beco me a means to discipline the conduct of states 
outside the realm of the WTO Agreement. 
4.177  Korea’s argument that the TDM Regulation is a countermeasure to a WTO law violation 
essentially rests on the fact that the timing of th e TDM Regulation is coterminous with the WTO 
proceeding, the European Communities submits.  Howe ver, there is a simple and rational explanation 
for this.  The European Commission and Council ag reed to exceptionally and partially re-authorise 
operating aid only under the condition that such aid is strictly limited (in time and scope).  The link to 
the WTO proceeding merely aims at setting an objective time-limit and it is not the only temporal link 
contained in the TDM Regulation.  In the case, the Agreed Minutes were implemented before the 
resolution of the WTO proceedings, no aid could be  granted by virtue of Article 4 of the TDM 
Regulation. 
4.178  According to the European Communities, Kore a also claims that the TDM Regulation is 
linked to an alleged determ ination of WTO inconsistent subsidies gr anted by Korea.  In fact, the term 
“subsidies’ is not even mentioned.  The exact wording “suffered adverse effects in the form of 
material injury and serious prejudice caused by unfair  Korean competition” (recitals 3 and 4) refers to 
the state of the EC industry as a result of the broader problem of injurious pricing.  This is made clear 
through the explicit reference in the 1st and 2nd recital of the TDM Regulation to the  failure by Korea 
to implement the Agreed Minutes.   
4.179  Korea then appears to argue that the TDM Regul ation refers to “injury and adverse effects” 
established in the TBR investigations which led to the launching of the DS273 WTO case.  The 
European Communities fails to understand the releva nce of that fact.  As mentioned earlier, it was 
necessary to limit the material scope of the TDM Regu lation in the effort not to reintroduce to the full 
extent operating aid into the sector.  The informati on gathered in the TBR investigation in respect of 
the state of the EC shipbuilding industry was simply  the most appropriate and readily available basis 
to determine the precise needs of that industry at that time. 
4.180  Korea does not explain how the TDM Regulation can be capable of “remedying” or 
“redressing” subsidisation granted by Korea.  Fi rst of all, the TDM Regulation does not have any 
immediate effect.  Only if a member State decides to devote budgetary resources to a scheme, and that WT/DS301/R 
Page 39 
 
 
 scheme is approved by the Commission, an EC shipya rd would be able to obtain operating aid.  Even 
the national programmes of the member States have not such an immediate effect unless they are 
actually used.  Second, the European Communities fails to see how the limited re-authorisation of 
subsidies (at a lower level than authorised before  for many years) can be capable of inducing the 
cessation of WTO inconsistent subsidies or adverse effects thereof.   
4.181  Finally, under no circumstances can the limited re -authorisation of subsidies be qualified as a 
suspension of concessions or obligations under the WTO Agreement.  As the European Communities 
puts it, Korea nowhere even attempts to argue that the TDM Regulation authorises subsidies in 
violation of Articles 3 and 5 of the SCM Agreement,  and there is no violation of Articles I:1 and III:4 
of the GATT 1994 and Article 32.1 of the SCM Agreement. 
4.182  The European Communities takes the view that Ar ticle 23 of the DSU contains:  an exclusive 
jurisdiction clause for the WTO dispute settlement; a restatement of the obligation to follow the 
procedural rules otherwise in the DSU when bringing a WTO case; and a specific prohibition of 
particularly egregious unilatera l conduct, in the form of suspension of concessions or other 
obligations following a unilateral determination th at another WTO Member has violated WTO law. 
4.183  On the issue of Article 23 of the DSU contai ning an "exclusive jurisdiction clause", the 
European Communities asserts that the text of Ar ticle 23.1 of the DSU is entirely procedural in 
nature.  As noted by the Panel in US – Section 301  Trade Act  the phrase “[w]hen Members seek the 
redress of a violation of obligations under the cove red agreements[…] they shall have recourse to, and 
abide by, the rules and procedures of this Understa nding” is an “exclusive dispute resolution clause”.  
Moreover, the first important purpose of Article 23.1 of the DSU is to ensure the exclusivity of WTO 
jurisdiction over WTO law and the suspension of concessions.  Secondly, the first paragraph of 
Article 23.1 reaffirms that “when bringing a dispute to the WTO, Members have to abide by the rules 
of the dispute settlement Understanding”.  This ex hausts the meaning of the first paragraph of 
Article 23 of the DSU, according to the European Communities. 
4.184  According to the European Communities96, the meaning of Article 23.1 must therefore be 
ascertained by an interpretation that takes account of  all interpretative means envisaged by Article 31 
of the Vienna Convention.  The European Communiti es has demonstrated that the first paragraph of 
Article 23 of the DSU when read in light of its c ontext, purpose and (if necessary) public international 
rules on state responsibility or Article 60 of th e Vienna Convention governing the suspension of 
obligations as well as circumstances of the conclusion or travaux préparatoires  does not cause WTO 
Members to lose their rights to take measures that are not prohibited by WTO law.   
4.185  Article 23 of the DSU is essentially a suspensi on clause specific to the one set out in 
Article 60 of the Vienna Convention.  Article 23.1 of the DSU is of a procedural nature.  It refers to 
the rules of the DSU, in particular those governi ng the suspension of concessions in Article 22 of the 
DSU.  Indeed, the close relationship between Article s 23 and Article 22 of the DSU is reflected in the 
systematic position of Article 23 directly after Article 22.   
4.186  The European Communities asserts that it suffices to note here that Korea cites with approval 
the discussion by the panel in US – Certain EC Products of the relationship between the DSU and 
Article 60 of the Vienna Convention (and otherw ise public international law rules governing the 
taking of countermeasures).  Indeed, the succinctn ess by which that panel describes the scope of 
Article 23 of the DSU stands for itself and should therefore be quoted in full (emphasis added): 
"Even if it were true that the European  Communities delayed DSB meetings and the 
arbitration process (and arguably violated the DSU  and rules of the DSB meetings), it 
                                                      
96 Responses of the European Communities to Panel Questions 12 and 23. WT/DS301/R 
Page 40 
 
 
 is clear that a Member cannot find in another Member's violation a justification to set 
aside the prescriptions of the DSU .  The US argument (which implies that it considers 
itself justified to do what it did because what the European Communities would have 
done was WTO illegal) is exactly what is prohibited by Article 23 of the DSU : 
unilateral determination that a WTO vi olation has occurred and the unilateral 
imposition of suspensions of concessions or other obligations .  In short the regime of 
counter-measures, reprisals or retaliatory me asures has been strictly regulated under 
the WTO Agreement .  It is now only in the institutional framework of the WTO/DSB 
that the United States could obtain a WTO compatible determination that the 
European Communities violated the WT O Agreement, and it is only in the 
institutional framework of the WTO/DSB that the United States could obtain the 
authorization to exercise remedial action.170 
__________________________________________________________ 
170 Therefore, in the WTO context, the provision of Article 60 of the Vienna 
Convention on the Laws of Treaties (1969) on this matter does not apply since the 
adoption of the more specific provisions of Article 23 of the DSU ." 
4.187  According to the European Communities, the US – Certain EC Products panel confirms in 
clear words the EC view that Article 23 of the DSU is a more specific rule to the international regime 
governing the suspension of concessions under Artic le 60 of the Vienna Convention and counter 
measures, reprisals and retaliatory acts by prohi biting:  “a unilateral determination that a WTO 
violation has occurred and the unilateral imposit ion of suspensions of concessions or other 
obligations”.  It therefore aims at regulating th e unilateral conduct of WTO Members relating to the 
suspension of WTO concessions and obligations.   
4.188  Absent Article 23 of the DSU, the European Communities submits, the public international 
rules on State responsibility and suspension of concessi ons would apply, in par ticular, Article 52.3 of 
the draft articles on Responsibility of States for internationally wrongful acts. 
4.189  The European Communities recalls that, in its comm entary to Article 52.3 of the draft articles 
on Responsibility of States for internationally wrongf ul acts, the ILC indicates that Paragraph 3 is 
based on the assumption that the court or tribunal to  which it refers has jurisdiction over the dispute 
and also the power to order provisional measures.  By contrast, if the judge does not have such power, 
i.e., if the system does not provide for efficient me asures to prevent a situation to worsen, recourse to 
countermeasures is once again permitted.  A fortiori , the European Communities maintains, recourse 
to retorsions (i.e., acts that do not involve a viol ation of international la w) is permitted under public 
international law rules. 
4.190  According to the European Communities, Korea r ecognised the interpreta tive relevance of the 
ILC draft articles on State Responsibility.97  The European Communities fails to see how Korea can 
then read Article 23.1 of the DSU in the light of ex isting public international law to prohibit acts that 
are not prohibited under public inte rnational law rules although th e DSU explicitly prohibits the 
suspension of concessions and obligations during a pending dispute; and although the DSU does not 
provide for interim protection or for retroactive remedies. 
4.191  The European Communities claims that it is not only at the legal level that Korea’s claim 
lacks any basis.  Factually, the European Commun ities recalls that Korea nowhere has substantiated 
how the TDM Regulation constitutes a “redress” in the form of a “ret aliation” as it now claims after 
having abandoned the term “counter measure”, nor does Korea defines the notion of “retaliation”. 
                                                      
97 Response of Korea to Panel Question 27. WT/DS301/R 
Page 41 
 
 
 4.192  The European Communities argues that Korea has neither identified any legal view that was 
enforced by the European Communities on Korea, nor any effect of the TDM Regulation that could 
reasonably be understood by Korea as an attemp t by the European Communities to force Korea to 
withdraw subsidies before a WTO Panel has given its view on it.  The European Communities recalls 
that Korea has not even attempted to claim and sp ecify any adverse effects by the hardly used TDM 
subsidies.  
4.193  Korea  disagrees with the European Communities' ar gument that there is no separate violation 
possible of Article 23.1 in and of itself.  Ar ticle 23.1 uses the imperative “shall”, indicating 
affirmative obligations.  It instructs that redress fo r perceived violations of WTO rules shall be taken 
pursuant to the WTO dispute settlement system.  As the US – Section 301  Trade Act  panel found, this 
requires Members to use the WTO dispute settlement system exclusively.98  Moreover, the panel in 
US – Section 301  stated explicitly that Article 23.1 covers a “great deal more” than the examples in 
Article 23.2.99  There is simply nothing in the language of Article 23.1 that would, in any way, imply 
that a measure could not be found inconsistent with  its provisions alone, independent of Article 23.2. 
4.194  Korea disputes the European Communities' cont ention that “redress” in DSU Article 23 is 
restricted to meaning a specific response intended to remedy a WTO violation.  In fact, the panel in 
US – Certain EC Products  found that “seeks redress” is a broad term.  As Korea noted in response to 
Panel Question 12, there are three separate possibilities under Article 23.1.  The redress could be 
redress with respect to perceptions of (1) a violatio n of obligations; (2) nullification or impairment of 
benefits under the covered agreemen ts; or (3) an impediment to a ttainment of any objective of the 
covered agreements.  As mentioned in Korea’s res ponse, the term “redress” has been defined by the 
panel in US – Certain EC Products  as per its normal dictionary meaning as involving the reparation of 
or compensation for a wrong or consequent loss, the remedy for or relief from some trouble or 
correction or reformation of something wrong.  In relation to the violation of WTO obligations, the 
panel stated that “redress” implies a reaction by a WTO Member against another WTO Member, 
because of a perceived (or WTO determined) WTO vi olation.  If the TDM is not a measure seeking 
redress then nothing is.  It is clearly linked by its terms and by the numerous explanations provided by 
EC Commissioners and in official EC pa pers to the alleged Korean subsidies. 
4.195  Korea asserts that there is no basis to support the European Communities' argument that the 
“ordinary meaning” of “seek to redres s” means suspension of concessions.  The 
European Communities then tries to rely on DSU Ar ticles 3.2 and 3.7 for this constricted view of 
Article 23.  Article 3.7 provides that suspension of  concessions or other obligations should be a last 
resort.  Somehow, the European Co mmunities considers that this admonition not to take retaliation 
until all other avenues have been tried is actually permission to take retaliation at the outset, before 
any other avenues have been tried, as long as th e retaliation is not a suspension of concessions or 
other obligations.  This turns the policy purpose of Article 3.7 on its head. 
4.196  Korea states that the European Communities appare ntly rejects the decision of the panel in  
US – Section 301  to the effect that Article 23.1 is an inde pendent provision, violation of which is not 
dependent on a finding of inconsis tency with Article 23.2.  For Korea, the European Communities 
makes a convoluted argument based on a reading of Article 60 of the Vienna Convention and 
Article 52 of the ILC’s Articles on State Responsibilit y regarding “countermeasures” to the effect that 
Article 23.1 is merely descriptive or process orie nted.  There is no basis for incorporating any 
concepts from Article 60 into interpretation of Ar ticle 23 of the DSU.  The European Communities' 
main argument is that Article 23 relates to “count ermeasures” as described in Article 52 of the ILC 
draft.  However, in doing so, the European Communities conveniently ignores Professor Crawford’s 
statement to the effect that: 
                                                      
98 Panel Report, US - Section 301 Trade Act , para 7.43. 
99 Panel Report, US – Section 301 Trade Act , para 7.45. WT/DS301/R 
Page 42 
 
 
 “Countermeasures are to be clearly distinguished from the termination or suspension 
of treaty relations on account of the material breach of a treaty by another State, as 
provided for in article 60 of the Vienna  convention on the Law of Treaties.”100 
4.197  Korea recalls that the panel in US – Section 301  Trade Act  found that there was a “great deal 
more” covered by Article 23.1 th an was listed by Article 23.2.101  As that panel then found, this 
requires Members to use the WTO dis pute settlement system exclusively.102  T h e  
European Communities has not provided any basis to depart from the reasoning in that case.  Indeed, 
if Members are allowed to enforce their perceive d rights unilaterally through any means as long as 
they do not involve a suspension of concessions or  other obligations, then there obviously is no 
exclusivity.  This provides fertile groun ds for circumvention of the system. 
4.198  Korea notes that the European  Communities was unable to refute Korea’s example of a 
Member removing aircraft landing rights as an “unfriendly act”.  The European Communities' only 
response was to shift to a completely different issu e from that covered by the example and state that 
the example covered a situation that was a subj ect of both the SCM Agreement and a bilateral 
agreement while the European Communities alleges th at the TDM has nothing at all to do with the 
SCM Agreement.  Korea would like to make a fu rther note regarding its example and just how 
enormously dangerous the European Communities' a pproach would be.  In the hypothetical, what if 
the Member whose aircraft landing rights were susp ended disagreed both with the legal interpretation 
of a violation and with the scale of the other Member ’s retaliation? Without the DSU, who is to judge 
whether the retaliation is equivalent  to the alleged violation? Would the other Member then be free to 
counter-retaliate to “equalize” the state of affair s? It is just the sort of scenario that the 
European Communities now argues is legal that woul d lead to the “wild” spirals of retaliation that 
according to the European Commun ities the DSU was intended to prevent.  Also, allowing unlimited 
extra-treaty enforcement of rights cannot be co nsistent with the promoting the security and 
predictability of the multilateral trading system as required by DSU Article 3.2 and would moreover 
unfairly favour the most powerful WTO Members. 
(c) Article 23.2 of the DSU  
(i) Article 23.2.(a) of the DSU 
4.199  Korea  argues that by adopting the TDM Regulation, the European Communities made an 
impermissible “determination” to the effect that Korea was in violation of its WTO commitments, 
contrary to the requirements of Article 23.2(a).  The term "determination" was considered by the 
Panel in US – Certain EC Products to mean “a decision  that a WTO Member has violated the WTO 
Agreement and which bears consequences in WTO trade relations .”103 
4.200  For Korea, the TDM Regulation includes a decision that Korea violated its WTO 
commitments.  The TDM Regulation explicitly stat es that the Community sh ipyards “have suffered 
adverse effects in the form of material injury and serious prejudice caused by unfair Korean 
competition .”104 It is clear that the “unfair” Korean practices, “adverse effects” and “serious 
prejudice” referred to in the Regulation refer to  the WTO-inconsistent subsidies found in the 
preceding TBR investigation.  This is further c onfirmed by the express link in the TDM Regulation 
between the duration of the TDM and the dur ation of the WTO dispute brought by the 
                                                      
 100 James Crawford, The International Law Commission’s Articles on State Responsibility, 
Introduction, Text and Commentaries,  Cambridge University press, 2002, at p.  282. 
101 Panel Report, US – Section 301  Trade Act , para 7.45. 
102 Panel Report, US - Section 301 Trade Act , para 7.43. 
103  Panel Report, US – Certain EC Products , para. 6.98.  (Emphasis added by Korea). 
104  TDM Regulation, recital 3  (Emphasis added by Korea). WT/DS301/R 
Page 43 
 
 
 European Communities specifically concerning a lleged Korean shipbuilding subsidies causing, 
among others, “serious prejudice” to the European Co mmunities.  As noted by the Commission Press 
Release IP/01/656: 
"The investigation into subsidies carried  out under the Trade Barriers Regulation 
(TBR) has established that substantial s ubsidies have been granted to Korean 
shipyards through both export and domes tic programmes which contravene the 
WTO’s 1994 Subsidies Agreement .  On this basis … the Commission will propose 
accompanying measures in the form of a temporary support mechanism to European 
shipyards for the market segments consider ably injured by un fair Korean trade 
practices and for the period required for the conclusion of the WTO procedure."105  
4.201  Korea submits that the TDM Regulation is also a decision that “bears consequences” in WTO 
trade relations.  The TDM contributions are designed to alter the competitive position and 
opportunities of Korean vessels competing with EC-origin vessels in the marketplace.  The 
European Communities, by making this determination unilaterally, failed to abide by the requirement 
to make any such determinations exclusively "t hrough recourse to dispute settlement in accordance 
with the rules and procedures” of the DSU and "consis tent with the findings contained in [a] Panel or 
Appellate Body report adopted by the DSB, " in clear violation of Article 23.2(a). 
4.202  Korea further states that Article 23.2(a) do es not refer to the determination of the manner  of 
retaliation, it refers to the determination that there is a violation per se .  The measure of whether there 
has been an improper determina tion, according to the panel in US – Certain EC Products was whether 
there were consequences in trade relations.  In th is case, Korea states that the European Communities 
has admitted that there are and that the Eu ropean Communities acknowledges that it is taking 
“unfriendly acts” against Korea.  This certainly aff ects trade relations dramatically.  In addition and in 
any event, Korea recalls that it has demonstrated that the TDM violates Article 32.1 of the SCM 
Agreement and Articles I and III of the GATT 1994. 
4.203  The European Communities  submits that Korea’s claim unde r Article 23.2.(a) of the DSU 
must equally fail.  A “determination” that a WTO violation has occurred in the meaning of 
Article 23.2.(a) requires a decision that a WTO Me mber (i) has violated the WTO Agreement and  
(ii) which bears consequences in WTO trade relations.  Korea fails to point to any “determination” in 
the TDM Regulation or otherwise whereby Korea has violated WTO law through the grant of 
subsidies.  The mere use of evidence gathered in  the TBR investigation was necessary to motivate the 
limited scope of the temporary re-authorisati on of operating aid.  It does not amount to a 
determination that Korea granted WTO inconsistent subsidies.  Further, whatever “determination” 
Korea might still attempt to find, under no circum stances can it establish that such “determination” 
bore any consequences in WTO trade relations.  The TDM Regulation does not suspend concessions 
or obligations under WTO law. 
4.204  The European Communities asserts that Korea is  unable to point to any “determination” by 
the European Communities of WTO inconsistent behavi our within the meaning of Article 23.2.(a) of 
the DSU.  The European Comm unities also presents dictionary definitions of the term 
"determination": 
• The settlement of a suit or controversy by the au thoritative decision of a judge or arbiter;  
• A settlement or decision so made, an authoritative opinion. 
                                                      
105  Provided in Exhibit Korea – 8.  (Emphasis added by Korea.)  Korea refers also to Commission doc. 
MEMO/01/167 which according to Korea  sets out this linkage in a more formal document. WT/DS301/R 
Page 44 
 
 
 • The settlement of a question by reasoning or argument.   
4.205  In the view of the European Communities, the term "determination" involves a certain 
element of finality.  Accordingly, the Panel in US – Certain EC Products  clarified that not any 
internal measure by which a WTO Member decides to pursue the perceived violation of WTO law by 
another Member is a “determination” within the mean ing of Article 23.2.(a) of the DSU.  Rather such 
“determination” must bear “consequences in trade rela tions”.  It must be final in that it sets in motion 
the suspension of concessions or obligations under WTO law. 
4.206  The European Communities submits that Korea attempts to interpret such a “determination” 
into a perceived “implicit” link between the TDM Re gulation and certain TBR Reports.  However, in 
whichever way one looks at this , neither these reports nor the TD M Regulation nor both can be 
qualified as a “determination.” The refe rence to the state of the domestic industry in the recitals of the 
TDM Regulation (as opposed to its operative part) are merely to limit the re-introduction of operating 
aid.  To do so, the legislative organs of the Eu ropean Communities needed to use the information 
from the TBR investigation.  That informati on was compiled in the TBR Reports.  These TBR 
Reports are internal Commission documents without any legal status.  They enabled the Commission 
services to propose to the Commission to launch a WTO case against Korea and motivate that 
decision.  That internal determination of WTO inc onsistency bears no relevant  consequences in trade 
relations.  The launching of the WTO case against Ko rea is a perfectly legal act.  So is the TDM 
Regulation, which provides for subsidies that ar e not inconsistent with the WTO Agreement. 
4.207  Furthermore, the European Communities argues that the term “determination” within the 
meaning of Article 23(2)(a) must: (a) have an el ement of finality (thereby excluding “internal 
determinations”); (b) be made for the purpose of suspending WTO concessions or obligations and be 
directed against another Member; or (c) be otherw ise inextricably linked or the pre-condition for a 
suspension of concessions or obligations unde r WTO law.  Moreover, where a Member has 
consistently followed certain procedures to make a determination of WTO viol ations through explicit 
acts that clearly spell out the WTO violations and the DSB ruling that confirmed them, it will be more 
difficult to read such a determination into unrel ated acts in making an objective assessment of the 
matter. 
4.208  The conditionality of the TDM subsidies on th e commencement of the WTO dispute cannot 
constitute such a determination.  The request for cons ultations is a perfectly legal exercise of a right.  
It was based on a preliminary internal finding that it “appears” that Korea grants subsidies.  That 
finding in the Commission Decision closing the TBR pro cedure is explicitly not a final determination.  
Indeed, the basic TBR Regulation prohibits such  final determinations before a WTO dispute 
settlement Panel has ruled. 
4.209  Contrary to what Korea alleges, the Eu ropean Communities has provided a reasonable 
explanation for the reference to the WTO case in Arti cle 4 of the TDM Regulation.  This was the most 
objective criterion to limit the duration of the TDM mech anism by reference to an outside event that is 
reasonably predictable. 
4.210  According to the European Communities, the Panel’s analysis ought to end here.  As 
explained again before, there is no basis to refer to any press releases or subsequent Commission acts, 
or to any preceding or subsequent acts merely d escribing in form of reports the political initiatives 
relating to shipbuilding.  These cannot serve as the determination Korea looks for either. 
4.211  According to the European Communities, ther e are no factual elements pointing towards a 
“determination”.  None of the elements referred to by Korea can reasonably be interpreted as a 
“determination” by the European Co mmunities to the effect that Korea has violated Articles 3, 5 and 6 
of the SCM Agreement.   WT/DS301/R 
Page 45 
 
 
 4.212  In this respect, the European Communities stat es that Recitals 3 and 4 do not equate “unfair 
Korean shipbuilding practices” with alleged subsidies at issue in DS273.  The European Communities 
asserts that Korea has not responded to the EC expl anation that these recitals simply motivate the 
choice of the market segments for the temporary re-i ntroduction of the EC state aid.  Moreover, Korea 
has not responded to the EC argument that those rec itals merely refer to the state of the industry.  
Indeed, Korea confirms that the only affirmativ e finding contained in the TDM Regulation is one 
relating to the state of the EC industry, as reflect ed in the use of the past participle “suffered.” 
Moreover, Korea cannot convince the Panel that a ll elements of the WTO violations it mentioned 
(Articles 3, 5 and 6 of the SCM Agreement) are reflected in the recitals. 
4.213  Concerning whether adverse effects in the sense of Article 5 of the SCM Agreement in 
themselves constitute a violation of the WTO Agr eement, the European Communities asserts that 
Korea had to admit that adverse effects are not the only element of a violation of Article 5 of the SCM 
Agreement.  Article 5 of the SCM Agreement is fulfilled only where a WTO Member applies (i) a 
subsidy to (ii) cause (iii) advers e effects.  An analysis of Article 5 of the SCM Agreement thus 
commences with the identification of a subsidy.  Korea’s attempt to read into the phrase “unfair 
competition” or into the “Agreed Minutes” a referen ce to specific subsidies has been rebutted in the 
European Communities' arguments concerning Ar ticle 32.1 of the SCM Agreement.  A mere 
reference to effects  that may be caused by many different f actors cannot constitute a determination of 
a WTO violation.   
4.214  As to the alleged determination of a violation by Korea of Article 3 of the SCM Agreement, 
the European Communities cannot ev en identify any argument by Kor ea to demonstrate to the Panel 
on the basis of the text of the TDM Regulation the elements of a violation of Article 3 of the SCM 
Agreement, that is a subsidy that is contingent upon exportation.  Because there is none, Korea then 
carries on to import into the TDM Regulation (a state aid measure) the internal TBR Reports 
produced by the Commission Services in preparation of a Commission Decision whether to launch a 
WTO case or not under the TBR Regulation. 
4.215  Concerning the equation of unfair competition and subsidies at issue in the WTO dispute 
settlement proceeding DS273 in Recital 4 of th e TDM Regulation, the European Communities 
submits that Korea again misrepresents the language of a three word phrase.  The actual term used in 
Recital 4 of the TDM Regulation is “unfair Kor ean competition”.  This expression simply does not 
refer to a subsidy that causes adverse effects through price suppression and depression or is export 
contingent as is the claim of th e European Communities in DS273. 
4.216  With respect to the legal contingency in Recita ls 7 and Article 4 of subsidy disbursement on 
commencement of WTO proceeding, neither the TBR Reports nor the Commission Decision concluding the TBR investigation can be seen as involving a determination  of a subsidy.  Indeed, 
Korea now acknowledges that the TBR Reports have  no legal value and agrees with the Commission 
that evidence  from the TBR investigation was used in mo tivating the scope of the TDM Regulation. 
4.217  There is no reason why the European Communities should not be able to use the preliminary 
factual results of a TBR investigation also in ot her areas of EC competence, for instance for the 
purpose of adoption of a state aid measure like th e TDM Regulation.  In order to avoid a full 
reintroduction of operating aid, yet with the need  for some limited support in mind, the Council 
determined the two sectors (and later included the LNGs) where the situation of EC shipbuilders was 
the most serious.  Asserting that any evidence obtaine d in a trade investigation, whether contained in 
TBR reports or in the Commission Decision authorising the request for consultations in DS273, 
should be considered as a unilatera l determination of violation is nonsensical.  If Korea thought that 
the Commission Decision initiating DS273 constituted a unilateral determination, why did Korea not 
bring up this point at the time the latter decision was adopted?  And why did Korea omit it from the 
factual part of its first written submission? WT/DS301/R 
Page 46 
 
 
 4.218  For the European Communities, the explicit te rms of the TBR Reports and the Commission 
Decision concluding the TBR investigation clarify that these are internal factual findings of the 
Commission necessary to motivate a decision whethe r or not to launch a WTO case.  Because the 
TBR Reports and the Commission Decision concluding the TBR investigation do not contain such a 
determination, they cannot be read into the TDM Regulation as the “determination” Korea is 
desperately looking for. 
4.219  The European Communiti es asks the Panel to note that Korea nowhere responds to the EC 
argument that the sole Article of the Commission Decision N° 2002/818/EC provides that subsidies 
“appear ” to be granted and that therefore a re quest for consultations should be made. 
4.220  The European Communities submits that Ko rea has been equally unable to respond 
adequately to the Panel’s most pertinent ques tion about the fact that the Commission Decision 
concluding the TBR investigation was only adopted after  the adoption of the TDM Regulation.  In 
response to this question Korea relies on the fact that the TDM Regulation is  legally dependent on a 
request for DSU consultations.   
4.221  The European Communities asserts that Korea is unable to explain how it can understand a 
request for consultations or the Commission Deci sion concluding the TBR investigation as inserting 
ex post  into the TDM Regulation a specific finding of  illegal Korean subsidisation while it did not 
attack the Commission Decision concluding the TBR i nvestigation (and indeed omitted its existence 
in its factual part of its first written submission).  Korea did not comment on this argument that this 
temporal condition is simply an objective criterion to limit the temporal scope of the TDM Regulation.   
4.222  On Korea's consideration of the use of “affi rmative language” in the TDM Regulation, the 
European Communities mentions that Korea refers to  the definitive wording used in Recital 4 (“have 
suffered”).  It is true that this wording has some kind of affirmative character.  However, Recital 4 of 
the TDM Regulation does not affirm the existence of a WTO violation by Korea.  As noted before, it 
describes the state of the industry in some market segments.  It does so be cause it was necessary to 
motivate the limitation of the re-authorisation of st ate aid to a few sectors.  Yet such descriptive 
language in no way implies a legally relevant dete rmination of a subsidy granted by Korea, the 
European Communities asserts. 
4.223  Moreover, for the European Communities, it is noteworthy that Korea contradicts here its 
own argument that the TDM Regulation contains a determination of WTO inconsistency because of 
the link to the WTO Panel proceeding.  Case DS 273 is not based on a claim of adverse effects 
through material injury to the domestic industry.  It is based on a price suppression and depression 
claim.  The reference to "material injury" "su ffered" by the Community industry, in the TDM 
Regulation is nothing but a description of the state of the industry. 
4.224  The European Communities further discusses th e existence of other "elements" of a 
"determination" identified by Korea in the TDM Re gulation.  The European Communities asserts that 
none of these elements can alone or together be qualified as a “determination” within the meaning of 
Article 23.2(a) of the DSU.  For the Europ ean Communities, wherever Korea searches for a 
“determination”, there is none.  Presumably for th at reason, Korea continues to refer to the TDM 
Regulation “as a whole” and its background, which no w is not only to include political statements of 
no relevance to this dispute, but also an Apr il 2002 Report to the Council adopted several months 
before the TDM Regulation and the prolonga tion of the TDM Regulation in 2004.   
4.225  The European Communities further submits that Korea cannot escape from its onus to 
identify a “determination” in the TDM Regulation by pointing to EC – Sardines  where the Panel 
found that a measure must be examined as a whole , i.e., including all provisions and preambular WT/DS301/R 
Page 47 
 
 
 paragraphs.  Korea is unable to point to any element in the TDM Regulation that could possibly 
reflect the “determination” it seeks to interpret into it.  In such situa tion, the reference to some kind of 
transcendental “whole” is nothing but an empty phrase and admission that the measure does not contain such determination.  Neither in the ope rative part nor in the Preamble nor elsewhere. 
4.226  As to the April 2002 Report cited to by Kor ea, the European Communities states that a 
reading of that Report immediately reveals that Ko rea has provided selective citations pasted together 
in the continuing effort to squeeze from the facts a “determination”.  For example, Korea takes out of 
context two paragraphs of the report which appear  to link the TDM Regulation to the TBR proceeding 
examining whether Korea had granted subsidies in violation of the SCM Agreement.  Yet, these 
paragraphs are preceded by a paragraph which details  the failure of the Agreed Minutes.  Thus, the 
“consequently” is linked to the two preceding pa ragraphs detailing how EC shipyards became 
threatened in their continued existence.  The Report,  thus, merely confirms the twin actions as already 
described by the Community: WTO pr oceedings against subsidization by Korea, a defensive TDM 
Regulation responding partially to the non-impl ementation of the Agreed Minutes.  The 
European Communities fails to see how an Apr il 2002 Report by the Commission to the Council, 
preceding  the adoption of the TDM Regulation and gene rally describing current political initiatives, 
can constitute the “determination” Korea is searching for.   
4.227  Similarly, Korea’s reference to the prol ongation decision of the TDM Regulation as 
containing a “determination” only reveals that there is no determination to the effect that Korea has 
violated its obligations under WTO law in the TD M Regulation.  The sole legal effect of the 2004 
prolongation Decision was to extend the temporal  scope of the TDM Regulation.  It cannot ex post  
make a determination of WTO violations that was not there before, nor do any other documents, 
statements or whatever Korea sees as “bac kground” of the measure without defining it. 
4.228  Finally, the European Communities maintains th at there were no consequences in WTO trade 
relations stemming from the TDM Regulation.  Ev en if the Panel found any determination of a 
violation of WTO obligations by Korea, such dete rmination is entirely irre levant in WTO relations 
and does not have consequences in  WTO relations in the form of a suspension of concessions or 
obligations.  The European Comm unities maintains that, as explained above, Korea has indeed not 
identified any effect at all, neither in nor outsi de WTO relations other than an encouragement to 
resume the negotiations under the Agreed Minutes. 
4.229  Korea
 states that in its long discussion about th e TBR process, it is almost as if the 
European Communities has missed  the Panel’s question regardi ng the distinction between a 
conclusion and a determination.  The European Co mmunities is, in effect arguing that the TBR is a 
“conclusion” that it should initiate a WTO dispute.  However, the question is whether the TDM is a 
prohibited determination, not whether the T BR process is a permitted conclusion.  Had the 
European Communities merely initiated a WTO dis pute after the conclusion of the TBR process and 
done nothing more, then there would be no DS301.   
4.230  For Korea, the relevance of the TBR process  is that it provides an illustration of, and 
background for, just what was contained in the de termination that is actually the subject of the 
dispute; i.e., the TDM.  The TBR process was about  alleged subsidization with affirmative findings 
being made under Articles 3, 5 and 6 of the SCM Agreement; it never mentioned any of the 
competition issues that the European Communities now raises as post hoc  interpretations of what the 
TDM was all about.  If the TBR process was a ne cessary step to include products under the TDM 
authority and the TBR process was based on subsidi es issues, then it follows that the TDM was about 
subsidies.   WT/DS301/R 
Page 48 
 
 
 4.231  Korea also notes the European Communities' cons truction of a new test for what constitutes a 
“determination.”106 According to the Europ ean Communities, a Member’s retaliatory measure does 
not constitute a “determination” unless it reads like a panel or Appellate Body report in the way it sets 
out the alleged violation of Article s 3, 5 and 6 of the SCM Agreemen t.  This would make Article 23 
extremely easy to circumvent. 
4.232  Korea submits that the Europ ean Communities also raises again a question of timing by 
arguing that the TBR process concluded after the adoption of the TDM.  As Korea has noted, the 
TDM was contingent upon the initiation of the WT O dispute, and which in turn could only be 
initiated upon completion of the TBR process.  T hus, the TDM, even though adopted earlier would 
have been a dead letter had the European Co mmunities not concluded the TBR process first and 
initiated the WTO proceeding.  Thus, the TDM might have been adopted earlier, but the TDM’s legal 
effectiveness was subsequent to the WTO pro ceeding initiated based on the results of the TBR 
process. 
4.233  In Korea’s view, the test used by the panel in US – Certain EC Products  is a valid approach 
to the issue.  It is a two-step test as to whet her there was a “decision” that had consequences in 
international trade.  Clearly, the TDM was a form al decision by the EC Council to authorize specific 
types of funding, Korea adds.  It is just as clear that  the TDM had consequences in international trade.  
Every competition for a sale of a ship by Korean producers was potentially faced with discriminatory 
funding of up to six percent by EC member State governments in an attempt to change the results of 
the competition.  That certainly is consequential. 
4.234  Finally, Korea notes that the United States questi ons as to whether the second step of the test 
is necessary.  Korea sees some merit in the US position, particularly to the extent that there is a threat 
of trade consequences rather than just actual con sequences.  However, Korea does not think that this 
Panel needs to delve into the dept hs of this issue because it is clea r that the TDM resulted in trade 
consequences and satisfies the second step of the test. 
4.235  The European Communities  responds that, as to Korea's counterarguments that under the 
EC standard Members could get off the hook by not writing into the act “contrary to Article 23 of the 
DSU I determine”, this is a non-argument.  Indeed, it is Korea’s  lax standard that turns political 
statements which are part of the daily communica tion between political institutions and their citizens 
or WTO Members into a determination prohibited by Article 23.2 of the DSU.  If Korea had its way, 
the political communication and information process would be frozen.  Article 23.2(a) of the DSU does not protect WTO Members from bold political statements.  It protects them from official 
determinations that can be reasonably expected to lead to a suspension of concessions or other WTO 
obligations. 
4.236  Article 23.2(b) of the DSU when read in cont ext of Article 3.2 of the DSU can only protect 
other WTO Members and their economic operators from acts that lead to a suspension of concessions 
or obligations on which they relied in their daily operations.  The Korean shipyards could not have 
relied in their daily operations on the prohibition of subsidies in th e European Communities as long as 
they are not export contingent or cause adverse effe cts.  Indeed, they gain ed market share despite 
those subsidies.  It is hard to see how the partia l reintroduction of contract-related operating aid at a 
lower level and only for a very limited time, can have an y relevant effect at all.  In any event, it does 
not amount to a suspension of WTO concessions or other obligations. 
4.237  The European Communities considers those points on the scope of the DSU highly pertinent, 
and argues that Korea did not respond to the Europ ean Communities' reference to Article II:1 of the 
WTO Agreement which limits its scope to th e concessions and obligations in the covered 
                                                     
 
106 Second submission of the European Communities, paras. 102-104. WT/DS301/R 
Page 49 
 
 
 Agreements.  Moreover, the European Communities cl aims that Korea does not explain what justifies 
a prohibition of WTO Members to act in areas which are no yet covered by the WTO Agreement 
merely because there is a general political link to a WTO dispute. 
4.238  Indeed, the European Communitie s asserts that Korea itself admits that its position has no 
legal basis by repeating, again, its unfounded allega tion that the DSU cannot be interpreted in such a 
manner that gives special advantages and privileges to the largest Members beyond what they already 
have due to their size and resources.  Contrary to  what Korea opines, the European Communities is 
one of the promoters of a DSU that is open to all WTO Members, including the small ones and in 
particular developing country Members. 
4.239  The European Communities also alleges that Korea itself does not add any facts to its 
generalisation that would demonstrate that the Eu ropean Communities is a big Member and Korea a 
small Member in the context of this case.  Indeed , the market share of the European Communities in 
the shipbuilding market and even more of its few me mber States that have decided to grant subsidies 
is negligible.  For example, the Netherlands, to which Korea often refers, has a market share of 
1.7 per cent in 2002 as opposed to 31.8 per cent in CGT of Korea and certainly does not have a bigger 
financial muscle than Korea to grant subsidies. 
4.240  The European Communities claims th at Korea does not explain why the 
European Communities and the US as big Members are not entitled to predictability in what they 
agree and not under the WTO Agreement.  Nor do es it explain why the 25 member States of the 
European Communities should be punished for ha ving formed a regional trade block that goes 
significantly beyond WTO law by prohibiting subsidi es.  The European Communities submits that 
they should not. 
(ii) Article 23.2.(b) of the DSU   
4.241  Korea  asserts that the European Communities took  unilateral action against alleged Korean 
WTO violations through the TDM Regulation before any panel findings had b een made, let alone the 
expiry of a reasonable period of time for the im plementation of any rulings.  For Korea, the 
European Communities thereby manifestly failed to follow the procedures set forth in Article 21 of 
the DSU, and thus violated Article 23.2(b) of the DSU which requires that Members “follow the procedures set forth in Article 21 to determine the reasonable period of time for the Member 
concerned to implement the r ecommendations and rulings.” 
4.242  The European Communities
 asserts that Korea’s claim that the TDM Regulation failed to 
await a reasonable period of time to implement the recommendations and ruling in breach of 
Article 23.2(b) of the DSU is based on the flawed assumption that the TDM Regulation is a 
countermeasure.  The European Communities submit s that even if the Panel found that the TDM 
Regulation involved a suspension of  concessions and obligations, Article 23.2(b) of the DSU is not 
applicable in this particular case. 
4.243  Korea  asserts that the European Communities has made no arguments with respect to 
Article 23.2(b) that are not contingent on its singl e defence that anything other than suspension of 
concessions or other obligations is not prohibited by Article 23.  Korea considers that the 
European Communities admits that th ere have been no rulings or r ecommendations made by the DSB.  
In the absence of such a DSB decision, the reta liatory steps taken by the European Communities 
cannot be in accordance with the rules for im plementing such decisions including according a 
reasonable period of time pursuant to DSU Article 21.  It follows that such retaliatory measures were 
not imposed in accordance with Article 21.  Moreover, even if one were to accept the 
European Communities' flawed premise about the sc ope of Article 23, Korea has demonstrated that 
the EC retaliatory measures involve a suspension of  the European Communities'  obligations to Korea WT/DS301/R 
Page 50 
 
 
 under Article 32.1 of the SCM Agreement and Ar ticles I and III of the GATT 1994.  Thus, the 
European Communities' sole defence does not stand, even under its own approach to this provision. 
(iii) Article 23.2.(c) of the DSU 
4.244  Korea  submits that the TDM Regulation is also inconsistent with Article 23.2(c) because the 
European Communities manifestly failed to first  obtain DSB authorization and follow the procedures 
laid down in Article 22 of the DSU before  taking any countermeasures or suspending concessions or 
obligations towards Korea under the covered Agreements, as required under Article 23.2(c). 
4.245  Korea also argues that Article 23.2(c) requires Members to follow the procedures of 
Article 22 to determine the level of suspension of concessions or other obliga tions and to obtain DSB 
permission to do so.  The European Communities' prem ise is that if a lesser offence is prohibited 
(suspending concessions or other obligations unilaterally) then a greater offence of imposing 
retaliation before there is even a determination of inconsistency is permitted .  That is, if there was no 
DSB ruling at all because th e European Communities skippe d the whole process then the 
European Communities considers that the DSB’s silen ce is affirmative permission to take retaliatory 
steps.  For Korea, this position must be rejected.   
4.246  The European Communities  states that Korea’s claim that the TDM mechanism is in breach 
of Article 23.2(c) of the DSU by suspending concessi ons or other obligations without following the 
procedures set forth in Article 22 of the DSU fails  because it is based on the flawed assumption that 
the TDM Regulation is a countermeasure.  As  explained above, the TDM Regulation does not 
suspend concession or WTO obligations. 
4.247  The European Communities further asserts that Ko rea is not able to explain to the Panel how 
the explicit text of Article 23.2.(c) of the DSU can  be seen to prohibit the taking of other forms of 
countermeasures than the suspension of concessions or obligations.107  That notwithstanding, Korea 
claims that Article 23 prohibits any “retaliation… wh ether or not such retaliatory actions constitute a 
suspension of WTO concessions or obligations.”  
4.248  For the European Communities, Korea’s argume nt reveals the weakness of its own position 
that Article 23 of the DSU governs more than th e suspension of concessions.  If Article 23 covered 
countermeasures other than suspension of concessions and obligations, then Article 22 would have to 
cover such other countermeasures as well.  It does not.  The DSU in Article 22 only foresees a 
procedure to obtain authorisation for the suspensi on of concessions or obligations, which is focused 
on the balancing of the level of nullification and impairment.   
4.249  In any event, the notion of “countermeasu res” under public international law only 
encompasses illegal acts and Korea has had to con cede this.  Korea does not claim that the EC 
measures are otherwise incompatible with internationa l law.  They can, therefore, also not constitute 
countermeasures in addition to “suspensi ons of concessions or obligations”. 
(d) The EC Member State Implementing Measures Violate Article 23.1 of the DSU 
4.250  Korea  submits that the EC member State implementing TDM Measures, including those of 
the Netherlands, Germany, Denmark France and Sp ain equally violate Article 23 of the DSU: the 
member State measures are legally based on the EC  TDM Regulation and are simply a reflection and 
application of the EC TDM Regulation at the nationa l level.  Thus, the arguments above applying to 
the EC TDM Regulation apply mutatis mutandis  to the EC implementing measures, which also violate 
Articles 23.1, 23.2(a), (b) and (c) of the DSU. 
                                                      
107 Response of Korea to Panel Question 29. WT/DS301/R 
Page 51 
 
 
 5. Articles  4 and 7 of the SCM Agreement 
4.251  Korea  submits that Articles 4 and 7 of the SCM Agreement contain additional dispute 
settlement provisions specific to cases involving actionable or prohibited subsidies under the SCM Agreement.  In particular, paragraphs 4-12 of Ar ticle 4 and paragraphs 2- 10 of Article 7 contain 
special or additional dispute settlement rules and proc edures which are listed as such in Appendix 2 to 
the DSU.  The injunction against WTO Members taking unilateral action against real or perceived 
subsidies outside the WTO framework is equally applicable in the c ontext of Articles 4 and 7 of the 
SCM Agreement.  These conclusions apply mutatis mutandis  to the EC member State implementing 
measures and TDM contributions provided pursuant to the TDM framework, and the EC Decisions 
approving such measures. 
4.252  The European Communities
 fails to see the legal basis for this claim separately from 
Article 23 of the DSU, and submits that Korea acknowledged108 that its claims under Articles 4 and 7 
of the SCM Agreement are not self-standing but should be read together with Article 23 of the DSU.  
In any case, the European Commun ities asserts that neither the TDM Regulation nor any of the 
national measures (as far as they still exist) is a co untermeasure within the meaning of Articles 4.10 
and 7.9 of the SCM Agreement.  Theref ore, Korea’s claim is without merit. 
4.253  For the European Communities, Korea still do es not explain how the European Communities 
failed to follow the procedures for the request fo r consultations and establishment of the Panel in 
DS273 as prescribed in Articles 4.1-4.4 and 7.1-7.4 of the SCM Agreement while at the same time it 
complains that the TDM Regulation was activated through the EC request for consultations and 
acknowledge that the European Communities has ind eed requested a Panel.  Nor does Korea explain 
how the European Communities can have violated  Articles 4.5-4.9 and 7.5-7.9 which contain 
procedural rules governing the Panel process.   
4.254  To the extent that Korea “draws special attention”109 to Articles 4.10 and 7.9, the 
European Communities recalls that the TDM Re gulation is not a “countermeasure” within the 
meaning of Articles 4.10 or 7.9 that has been app lied without obtaining prior authorisation from the 
DSB.  According to the European Commun ities, Korea has acknowledged that the term 
“countermeasures” refers to a suspension of concessions and other WTO obligations.110 
4.255  The European Communities further submits th at the TDM Regulation does not involve any 
suspension of concessions or obligations.  As an aside, the European Communities would note that the 
reference in Articles 4 and 7 of the SCM Agreemen t, to countermeasures as  opposed to “suspensions 
of concessions” indicates that the amount of the suspension is determined by the entire amount of the 
benefit as opposed to the level of the nullifica tion or impairment that has been caused. 
4.256  Korea  denies having acknowledged that the term countermeasures refers to suspension of 
concessions or other WTO obligations.  Of course, Ko rea specifically did not do so in the context of 
Articles 4 and 7.  Korea acknowledged that the Inte rnational Law Commission ("ILC") used the term 
in that manner and stated that Korea had been us ing the term in a broader sense up to that point.  
Therefore, for purposes of clarity Korea would change to the term “retaliation”, which is a more 
accurate description of the European Commun ities' unilateral measure in any event.   
4.257  In the context of Articles 4 and 7, Korea specifically stated that it had doubts about the 
applicability of the ILC language given that the terms came directly from the GATT Subsidies and 
Antidumping Codes that were negotiated long before the ILC came up with its draft.  The issue of 
                                                      
108 Response of Korea to Panel Question 49. 
109 Response of Korea to Panel Question 50. 
110 Responses of Korea to Panel Questions 27 and 30. WT/DS301/R 
Page 52 
 
 
 countermeasures has been the most contentious of a ll matters discussed by the ILC.  Korea rejects any 
implication that the ILC draft or other aspects of substantive public international law are binding on 
WTO Members.  Article 3.2 of the DSU provides for the applicability of the rules of interpretation of 
public international law and such rules, through a standard a contrario  reasoning, lead to the 
conclusion that the substantive rules do not directly apply.   
4.258  As for the European Communities' argument th at the term “countermeasures” has a different 
meaning in Articles 4 and 7 than suspension of c oncessions or other obligations, Korea recalls the 
European Communities' attempts to relate DSU Article 23 and “countermeasures” in the ILC draft 
and stand them as lex specialis  of Article 60 of the Vienna Convention.  For Korea, the structure and 
operation of Article 60 is totally different from Artic le 23, thereby undercutting any useful parallels 
that might be drawn.  The European Commun ities ignores Professor Crawford’s admonition that 
Article 60 is in contrast  to “countermeasures”.  This illustrates the convenience with which the 
European Communities adopts or discards the substantiv e rules of public international law and that is 
precisely why Korea notes that caution must be exercised. 
V. ARGUMENTS OF THE THIRD PARTIES 
5.1 The arguments of the third parties, China, Jap an, and the United States are set out in their 
submissions to the Panel, and their answers to the questions.  The third parties' arguments as presented 
in their submissions are summarized in this section. 
A. I NTRODUCTORY REMARKS  
5.2 Japan , prior to discussing Korea’s individual claims, emphasizes the particular importance of 
the discipline over subsidies in the shipbuilding sect or, which should be taken into due consideration 
as a background for this dispute.  Korea’s claims  and arguments tend to focus on the element of 
“unilateralism” of the EC measures at issue111, but Japan is of the view that it is equally or more 
important for the Panel to keep in mind that subsid ies are particularly problematic in the shipbuilding 
sector.   
5.3 First of all, as a direct effect, a subsidy w ill increase the possibility for a subsidy receiving 
shipbuilder to obtain an order which would not be po ssible without the subsidy.  The price per unit of 
vessels is very high, and thus, the economic impact  of a single lost sale is significant for other 
shipbuilders.  More importantly, a subsidy in the sh ipbuilding sector would cause an indirect effect of 
a significant magnitude.  It is widely acknowledged that a price reduction observed in any segment of 
the shipbuilding market will be likely to impose a significant downward pressure on the price level of 
any other segment of the shipbuilding market and in  any other country since the shipbuilding market 
is a single integrated market.  This downward tre nd in all segments of the shipbuilding market tends 
to lead to severe price competition, often at prices below the level required to cover production costs.  
Subsidized shipbuilders can enjoy an artificia lly advantageous position in such competition. 
5.4 Therefore, Japan is of the view that the unique nature of the shipbuilding industry demands 
that governmental intervention which “distorts the ma rket” of shipbuilding be prohibited in general, 
as much and as broadly as possible.  Otherwise, ev en the most competitive or efficient producers may 
not survive in global competition.   
5.5 Despite the particular necessity for regulati on of subsidies or any other governmental 
assistance, the existing worldwide restrictions on subsidy measures – in the form of the SCM 
Agreement – provide only insufficient disciplines for the shipbuilding sector.   
                                                      
111 First submission of Korea at paras. 20, 106 and 132.   WT/DS301/R 
Page 53 
 
 
 5.6 The countervailing duty measure, which is consider ed to be effective to counteract injurious 
subsidization at national borders, is not practically effective in the shipbuilding sector due to the 
unique characteristics of this sector.  It is widely pe rceived that the shipbuilding market is indeed an 
integrated global market.  Since ship-owners can choose where to register their vessels, national 
borders have no significance at all; and accordingly,  neither do border measures such as tariffs and 
anti-dumping and countervailing duties.  Thus, new Shipbuilding Agreement has been negotiated in 
the OECD forum to regulate, among others, subsidi es in the shipbuilding sector in a more stringent 
and effective manner. 
5.7 Based upon the foregoing considerations, Jap an expresses serious concern over the EC 
measures at issue, taken under the Temporary Defe nsive Mechanism measures, which grant subsidies 
to EC shipbuilders and thereby run a risk of causi ng negative effects in the shipbuilding market.  At 
the same time, Japan would point out that the TDM measures might have been chosen at least partly 
due to the fact that countervailing duty measures ar e not effective in the shipbuilding sector.  Japan 
shares the difficulties the European  Communities is facing as a result of the Korean measures since 
shipbuilding industry of Japan has also been affected by Korea’s subsidies.  However, even if the EC 
measures are a response to Korea’s non-implementati on of the Agreed Minutes with respect to unfair 
practice in the shipbuilding sector, Japan does not consider that they are the most appropriate response. 
B. L
EGAL CLAIMS  
1. Article III:4 of the GATT 1994 
5.8 Japan  disagrees with Korea’s claim that the EC  subsidy measures are inconsistent with 
Article III of the GATT 1994, without re gard to recipients of the subsidy112, for Korea’s claim runs 
afoul of the explicit provisions of Article III of the GATT 1994. 
5.9 According to Japan, Article III:8(b) of the GATT 1994 explicitly excludes “the payment of 
subsidies exclusively to domestic producers” from  it s scope.  Korea seems to argue as a basis for its 
Article III claim of the GATT 1994 only that the EC TDM measures give an advantage to certain 
commercial vessels of EC origin in competiti on with “like” vessels of Korean origin.113  In Japan’s 
view, however, the EC TDM measures can be deemed to be the payment of subsidies exclusively to 
domestic producer within the meaning of Article III:8(b)  and therefore, need to be examined in light 
of the SCM Agreement rather than Article III of the GATT 1994. 
2. Article 32.1 of the SCM Agreement 
5.10 The United States  notes that Korea claims that the TDM Regulation and the other measures it 
cites are inconsistent with Article 32.1 of the SCM Agreement, because they constitute “specific 
action against a subsidy of another Member” – Korea – that is not taken “in accordance with the provisions of the GATT 1994, as interpreted by [t he SCM Agreement].”  Because Korea’s claim 
raises many factual issues, the United States offers no  view on the ultimate resolution of that claim.  
Nevertheless, it appears to the United States that  in this dispute the European Communities is 
advocating a surprisingly narrow interpretation of Artic le 32.1 that is not supported by the Appellate 
Body reports to which it cites.
114 
                                                      
112 First submission of Korea at para. 156. 
113 Id., at paras. 153-154. 
114 At the outset, the United States wishes to note that both parties claim to be following the approach to 
Article 32.1 articulated by the Appellate Body in US – Offset Act (Byrd Amendment) .  Although the 
United States continues to be troubled by that approach, in view of that common ground between the parties, the 
United States in this submission has limited itself to  addressing the parties’ use of that approach. WT/DS301/R 
Page 54 
 
 
 5.11 The United States asserts that the European Communities begins its discussion of Article 32.1 
by misquoting the Appellate Body.  In discussing the Appellate Body report in US – Offset Act (Byrd 
Amendment) , the European Communities ma kes the following statement:115 
"According to the Appellate Body in US – Offset Act (Byrd Amendment) , Article 32.1 
of the SCM Agreement  covers 
'a measure that may be taken only when the constituent elements of 
dumping or a subsidy are present.'" 
5.12 This quotation of the US – Offset Act (Byrd Amendment)  report is inaccurate, because in the 
report there is no period after the word “present.”  Instead, the sentence continues, the full sentence 
reading as follows: 
"Accordingly, a measure that may be taken only when the constituent elements of 
dumping or a subsidy are present, is a “speci fic action” in response to dumping within 
the meaning of Article 18.1 of the Anti-Dumping Agreement  or a “specific action” in 
response to subsidization within the meaning of Article 32.1 of the SCM Agreement ." 
5.13 In the view of the United States, there is a subtle but important difference between the two 
quotations.  The EC version of the quotation suggest s that coverage of Article 32.1 is limited to 
measures that may be taken “only” when the c onstituent elements of dumping or a subsidy are 
present.  The full quotation, however, indicates th at Article 32.1 includes, but is not necessarily 
limited to, “measures that may be taken only when  the constituent elements of dumping or a subsidy 
are present.”   
5.14 This understanding of that quotation is borne out by the report in US – 1916 Act , in which the 
Appellate Body found that: “‘Specific action agai nst dumping’ of exports must, at a minimum , 
encompass action that may be taken only when the constituent elements of ‘dumping’ are present.”116  
By its use of the phrase “at a minimum”, the United St ates adds, the Appellate Body indicated that the 
universe of measures subject to Article 18.1 included, but was not necessarily limited to, “measures 
that may be taken only when the constituent elements  of dumping are present.”  Indeed, the Appellate 
Body stated that it was not making any findings regarding the precise scope of Article 18.1.117 
5.15 In the view of the US, the European Co mmunities' discussion of the phrase “against 
subsidization” suffers from similar difficulties.  The European Communities quotes the passage from 
the US – Offset Act (Byrd Amendment)  report in which the Appellate Body stated that “the CDSOA 
effects a transfer of financial resources from the producers/exporters of dumped or subsidised goods 
to their domestic competitors.”118  The sole purpose of this quotation appears to be to create the 
impression that only measures that involve a similar “transfer of financial resources” are capable of 
falling within the scope of Article 32.1 as interp reted by the Appellate Body.  If this is the 
European Communities' aim, then it is misguided, because the Appellate Body did not find that the 
                                                      
115 First submission of the European Communities, para. 185, quoting  US – Offset Act (Byrd 
Amendment) , para. 239 (emphasis added by EC)  
116 Appellate Body Report, US - 1916 Act , para. 122 (underscoring added by the US; italics in original) 
The United States notes that the Appellate Body was discussing Article 18.1 of the Agreement on 
Implementation of Article VI of the General Agreem ent on Tariffs and Trade 1994 (“AD Agreement”), the 
provision of the AD Agreement that corresponds to Article 32.1 of the SCM Agreement. 
117  Appellate Body Report, US - 1916 Act , note 66 (“We do not find it necessary, in the present cases, 
to decide whether the concept of ‘specific action against dumping’ may be broader.”). 
118, Appellate Body Report , US - Offset Act (Byrd Amendment) , para. 255. WT/DS301/R 
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 universe of actions “against subsidization” are limited to those involving a transfer of resources.  
Instead, it simply found that that universe includes actions involving a transfer of resources.119 
5.16 More important, however, is the fact that th e European Communities never explains why a 
system of counter-subsidies cannot, to use the language of the Appellate Body in US – Offset Act 
(Byrd Amendment) , dissuade the practice of subsidization or  create an incentive to terminate such 
practice.120  It seems obvious to the United States that when, for example, a government provides one 
of its companies with a subsidy, it does so with th e aim of giving that company an advantage in the 
market.  That advantage is offset, in whole or in  part, if another government provides subsidies to 
competitors of that company.  When this happens, the subsidy provided by the first government is, to 
some extent, wasted.  Because a rational governme nt presumably will not want to waste finite 
resources, under the Appellate Body’s approach, counte r-subsidies would be, in principle, capable of 
dissuading the practice of subsidization or creating an incentive to terminate subsidies.  Thus, while 
the United States offers no views concerning the facts of this particular dispute, it would seem that 
under that approach, in principle, counter-subsid ies are capable of falling within the scope of 
Article 32.1. 
5.17 For the United States, the European Communities al so appears to suggest that an action is not 
a “specific action” within the meaning of Artic le 32.1 if it deals with anything other than 
subsidization.  Thus, the European Communities ar gues that because the TDM Regulation refers to 
“unfair practices” rather than “subsidization, ” and because the Agreed Minutes between the 
European Communities and Korea suggest that ther e also was a problem concerning the dumping of 
ships, the TDM Regulation cannot constitute  “specific action against a subsidy.”121  This is a new 
position for the European Communities, directly contrary to that taken in disputes where the 
European Communities was a complaining party.122 
5.18 The United States sees it as an interpretive stre tch to read the phrase “specific action against 
subsidization” as including only actions that deal “e xclusively” with subsidization.  For one thing, 
such an interpretation would make it relatively easy  to evade the scope of Article 32.1 of the SCM 
Agreement and Article 18.1 of the AD Agreement as  interpreted by the Appellate Body.  A measure 
simply would have to purport to deal with both subsidization and dumping and it would not be subject 
to either provision, because the measure would not  deal exclusively with “subsidization” or 
exclusively with “dumping.”123 
5.19 The United States recalls the European Commun ities' assertion that:  “Specific action against 
subsidisation has to be esta blished on the basis of the operative part  of the Regulation.”124  T h e  
European Communities offers no support for this asser tion, and the United States is not even certain 
                                                      
119 The United States asserts that in this regard, it is important to note that this portion of the US – 
Offset Act (B yrd Amendment)  report is based upon a factual premise that is demonstrably inaccurate.  The 
Appellate Body stated that the CDSOA effected a transfer of financial re sources from producers/exporters to 
their domestic competitors, because “the CDSOA offs et payments are financed from the anti-dumping or 
countervailing duties paid by the foreign producers/exporters.”  US – Offset Act (Byrd Amendment) , para. 255.  
This statement is manifestly inaccurate, because US anti-dumping and countervailin g duties are paid by US 
importers, not foreign producers/exporters.  See WT/DSB/M/142 (6 March 2003), para. 56 (remarks of the 
United States). 
120 Appellate Body Report , US – Offset Act (Byrd Amendment) , para. 256. 
121 First submission of the European Communities, paras. 195-196. 
122 See, e.g. , Panel Report, US – Offset Act (Byrd Amendment) , para. 7.24. 
123 The United States notes that in this regard, it is in teresting to consider the CDSOA that was at issue 
in the US – Offset Act (Byrd Amendment)  dispute.  Because the CDSOA author ized the distribution of both anti-
dumping and countervailing duties, under the European Communities' logic in the instant dispute, the panel and 
the Appellate Body should not have found the CDSOA to be inconsistent with Article 18.1 or Article 32.1. 
124 First submission of the European Communities, para. 201. WT/DS301/R 
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 what it means.  In any event, Article 4 of the TDM Regulation appears to create a link between the 
TDM and DS273, the dispute commenced by the Eu ropean Communities under the SCM Agreement.  
Thus, the TDM Regulation itself suggests that the pur pose of the Regulation is to take action against 
subsidization. 
5.20 Moreover, the reasons cited by the European Communities as to why Article 2.1 of the TDM 
Regulation does not contain an inextricable link with the elements of subsidization are not 
convincing.125  The fact that subsidies can be granted against any Korean competition or offers from 
any Korean yard, regardless of the extent to wh ich the Korean merchandise is subsidized, simply 
suggests that the counter-subsidies may be greater  than necessary.  Likewise, the limitation on 
contract-related subsidies to 6 percent may render the counter-subsidies too small to dissuade or 
terminate subsidization.  However, these facts do not mean that the counter-subsidies are not “specific 
action against subsidization.”  Would the offset payments at issue in US – Offset Act 
(Byrd Amendment)  have been permissible if they had been automatically halved?  Or doubled? 
5.21 The United States finishes by stating that the Eu ropean Communities' analysis of Article 32.1 
and the Appellate Body reports di scussing it is overly narrow.  In US – Offset Act (Byrd Amendment) , 
the Appellate Body concluded that the SCM Agr eement prohibits the provision of subsidies in 
response to another Member’s subsidies.126  Thus, the question for the Panel is whether the EC 
measures cited by Korea are in response to Korean subsidies.  
5.22 China  notes that the Appellate Body in US – Offset Act  established two conditions to be met 
in order for a measure to be subject to th e discipline of Article 32.1, namely, “specific  action against  a 
subsidy”.   
(a) Specific action in response to subsidies 
5.23 First, China submits that the scope of applica tion of Article 32.1 is not necessarily limited to 
measures that may be taken only  when the constituent elements of a subsidy are present.  China 
submits that the ruling by the Appellate Body in US -1916 Act  should not be misconstrued and that 
the analysis of whether the TDM measure constitu tes a “specific action” in response to a subsidy 
should not end even if it is concluded th at the TDM is not a measure taken only  when the constituent 
elements of a subsidy are present.   
5.24 Second, contrary to the EC argument, China considers it irrelevant that the actual granting of 
State aid is not subject to a finding of the constituen t elements of subsidies.  It is the TDM measure, 
instead of each individual grant under the measure, that is under review in this proceeding.  Therefore, 
the focus should be placed on whether the TDM measur e is adopted as a specific action in response to 
Korean subsidies rather than on whether an indivi dual grant is made in response to a subsidy.   
5.25 Third, China submits that in these proceedings, in  applying the test set forth by the Appellate 
Body in US – Offset Act (Byrd Amendment) , it should be assessed whether the scope of application of 
the TDM measure has a strong correlation with the c onstituent elements of Korean subsidies.  China 
suggests distinguishing the concept of “the scope of  application” of the measure and that of the 
qualifying condition of granting State aid.  In China’s view, the scope of application of the TDM 
measure should be the three segments determined by the European Communities to be adversely 
                                                      
125 First submission of the European Communities, para. 205. 
126  Appellate Body Report,  US – Offset Act (Byrd Amendment) , para. 273 (“To be in accordance with 
the GATT 1994, as interpreted by the SCM Agreement, a response to subsidization must be either in the form of 
definitive countervailing duties, provisional measures or price undertakings, or in the form of multilaterally-
sanctioned countermeasures resulting from resort to the dispute settlement system.”). WT/DS301/R 
Page 57 
 
 
 affected by Korean subsidies while the qualifying  condition of granting State aid is competition from 
a Korean shipyard offering a lower price.   
(b) Action against subsidy 
5.26 China submits that WTO precedents have clarified that such actions are not limited to those 
that directly counteract subsidized imports or en tities responsible for such imports.  An action that 
does not come into direct contact  with the subsidized imports or  the entities responsible for such 
imports may as well constitute a specific measure against a subsidy.   
5.27 China further submits that, in judging whether a measure is against a subsidy, it is not 
required by Article 32.1 that the measure at issue must be capable of effectively  dissuading the 
practice of subsidization.  The word “against”  does not carry with it such implications.   
5.28 In addition, with respect to the relation between  Articles 5 and 6 and Article 32.1, China holds 
that Article 5 and Article 32.1 of the SCM Agre ement set forth two totally different types of 
obligations for WTO Members.  Article 5 sets forth the discipline on the use of subsidies by imposing 
the obligation of not causing adverse effects to the interests of other Members while Article 32.1 is 
aimed at disciplining countermeasu re that a Member may take against subsidies.  Therefore, a 
measure that conforms with Articles 5 and 6 is not necessarily consistent with Article 32.1.   
3. Article 23 of the DSU 
(a) General Arguments 
5.29 Japan  expresses the view that the renunciation of un ilateral trade measures in DSU is one of 
the most important disciplines established under the WTO Agreement.  With respect to Article 23 of 
the DSU, as the panel on US – Section 301  Trade Act  found correctly, “[f] irst, ‘it imposes on all 
Members to ‘have recourse to’ the multilateral proc ess set out in the DSU when they seek the redress 
of a WTO inconsistency’”, and further, “[t]hese rules and procedures [ of the DSU] clearly cover 
much more than the ones specifically mentioned in Article 23.2.”127 
5.30 Therefore, for Japan, the threshold issue to be  resolved by the Panel in Korea’s claim of 
inconsistency with DSU Article 23 is whether or  not the EC TDM measures are taken to seek the 
redress of an alleged WTO inconsis tency or other nullification or impairment by Korea.  In this 
regard, the European Communities ar gues that the EC TDM measures have been triggered by Korea’s 
non-implementation of a bilateral agreemen t, the “Agreed Minutes” signed between the 
European Communities and Korea, rather than by th e violation of the WTO Agreement, as mentioned 
in the relevant Council Regulation.128  Korea argues otherwise.  Therefore, the Panel should carefully 
examine the relevant facts so as to resolve the issue before it. 
5.31 The United States  notes Korea's claims that the EC measures are inconsistent with its 
obligations under Article 23.1 and s ubparagraphs (a)-(c) of Article 23.2 of the DSU.  In responding to 
these claims, the European Communities relies heav ily on the argument that its counter-subsidies 
cannot be regarded as “countermeasures”.129  According to the European Communities: “A 
fundamental tenet of the subsidy disciplines enshri ned in the SCM Agreement is that Members are 
permitted to grant or maintain specific subsidies to the extent that they do not constitute a prohibited 
                                                      
127 Panel Report, US - Section 301 Trade Act , paras 7.43-7.44.  
128 Council Regulation (EC) No.  1177/2002 of 27 June 2002 concerning temporary defensive 
mechanism to shipbuilding, O.J.  L172/1 (2.7.2002). 
129 First submission of the European Communities, paras. 168, 177, 178.  Japan states that the 
European Communities appears to use the term “countermeasures” as a shorthand expression for the 
“suspension of concessions or other obligations”, as used in Article 23 of the DSU. WT/DS301/R 
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 subsidy within the meaning of Article 3 of th e SCM Agreement and do not cause adverse effects 
within the meaning of Articles 5 and 6 of the SCM Agreement.”130 
5.32 This statement is only half right.  The Eur opean Communities is correct that, under those 
articles of the SCM Agreement, Members are permitte d to grant or maintain subsidies other than 
prohibited subsidies or actionable subsidies that cau se adverse effects.  Th e European Communities is 
incorrect, however, in asserting that the entiret y of WTO subsidies disciplines are set forth in 
Articles 3, 5 and 6 of the SCM Agreement.  One obvious example that this is not the case is 
Article III:4 of the GATT 1994, which has been in terpreted so as to prohibit certain types of 
subsidies.131  And, as discussed in the preceding section, Article 32.1 has been interpreted by the 
Appellate Body so as to prohibit counter-subsidies. 
5.33 Thus, in order to evaluate the “countermeasu re” element of the European Communities' 
arguments, the United States submits that it appears that the Panel may have to make a finding as to 
whether the measures challenged by Korea are proh ibited by Article 32.1 of the SCM Agreement or 
another provision of the WTO Agreem ent under one of Korea’s claims.  If so, then the Panel may also 
need to address the other elements of what  is essentially a claim by Korea that the 
European Communities has engaged in impermissible unilateral action.  In so doing, the Panel may 
want to bear in mind the following observation of the European Communities: 
"[I]f Members take the law into their ow n hands and unilaterally impose their own 
views on their rights under the WTO by threatening or taking measures violating their 
obligations, they risk provoking spirals of retaliatory actions that would jeopardise 
the results of half a century of trade negotiations."132 
5.34 The United States believes that the European Co mmunities has skipped a step in arguing that 
Article 23.1 of the DSU does not prohibit meas ures that are otherwise permitted by the WTO 
agreements.  The first question to be answered under Article 23.1 in this context is whether the 
European Communities is seeking redress of a viola tion of WTO obligations.  This question would 
appear closely linked to Article 23.2(a) in that a Member would only be seeking redress of obligations 
if the Member has determined that there is a breach  of those obligations.  In this instance, the first 
question then would be whether the European Co mmunities has made such a determination outside 
the context of WTO dispute settlement.  If so, then  the European Communities would be in breach of 
Article 23.2(a) and by extension Article 23.1 of the DSU.  If the measures taken in seeking redress 
amounted to a suspension of WTO concessions or othe r obligations, then there might also be a breach 
of Article 23.2(c).   
5.35 If the European Communities has not made such  a determination outside the context of 
dispute settlement, then Article 23.1 would appear not to be applicable  and there would be no need to 
address, for purposes of DSU Article 23, the question of whether the measures taken were themselves 
consistent or inconsistent with the WTO. 
5.36 The United States also explains that neither Article 60 of the Vienna Convention on the Law 
of Treaties nor Article 49(2) of the Draft ILC Ar ticles on State Responsibility is relevant to the 
question presented.133  With respect to the Draft Articles, the United States does not believe that a 
report prepared by the International Law Commission (not a body composed of WTO Members) of which the UN General Assembly simply “took note” in 2001 can inform the meaning of provisions of 
the WTO agreements that entered into force almost six years earlier.  Nor do the Draft Articles set 
                                                     
 
130 First submission of the European Communities, para. 168. 
131 See, e.g., Appellate Body Report,  US - FSC (Article 21.5-EC) , para. 256(e). 
132 Panel Report, US - Section 301 Trade Act , para. 4.81. 
133 First submission of the European Communities, paras. 132-135. WT/DS301/R 
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 forth “customary rules of interpretation of public international law,” the standard by which WTO 
dispute settlement bodies are to clarify existing prov isions of the covered agreements pursuant to 
Article 3.2 of the DSU.   
5.37 With respect to Article 60 of the Vienna C onvention, the United States observes that the 
Vienna Convention is not a covere d agreement nor is it context for purposes of interpreting the WTO 
agreements.  Furthermore, Article 60 does not reflect a customary rule of interpretation of treaties.  
Therefore, whatever the rules for suspension of a treaty might be under Article 60, they do not 
establish the rights and obligations actually provide d by WTO covered agreements, and of course 
Article XV of the WTO Agreement provides th e WTO rule for withdrawal from the WTO 
agreements.   
5.38 The United States opines that the Panel need not  address these subsidiary arguments of the 
European Communities.  In the view of the United St ates, the first question to resolve is whether the 
TDM Regulation and the related measures are incons istent with any provision of a WTO agreement 
other than Article 23 of the DSU.  In this regard, one such provision cited by Korea is Article 32.1 of 
the SCM Agreement.  As indicated in the US writte n submission, in order to determine whether the 
EC measures are inconsistent with Article 32.1, the Panel will need to determine whether the EC 
measures cited by Korea are in response to Korean subsidies.134 
5.39 If the Panel determines that the EC measures are inconsistent with a provision other than 
Article 23 of the DSU, the Panel would seem to have  two choices.  First, it could invoke principles of 
judicial economy, and stop there.  Finding an incons istency with Article 23 of the DSU arguably does 
not provide much in the way of additional assistance to the parties or the Dispute Settlement Body.  
Alternatively, the Panel could go on to conduct the analysis under Article 23, in which case it would 
have to address the other issues raised by the parties concerning Article 23. 
5.40 If, however, the Panel determines that the EC me asures are not inconsistent with a provision 
other than Article 23 of the DSU, the Panel may wish to proceed to determine if the 
European Communities has made a determination c ontrary to DSU Article 23.1 and 23.2(a).  In 
looking at the question of what would constitute a determination, the United States notes that this 
question would appear to be distinct from the qu estion of whether there has been a suspension of 
concessions in breach of Article 23.2(c).  In US - Section 301  Trade Act , the European Communities 
itself took the position that a determination only ha d to be formal and le gally binding and could 
include determinations  of WTO consistency.135  The EC position in this dispute that there must also 
be trade consequences is a new position by the Europ ean Communities, and it is not clear what textual 
support there is for that new position. 
5.41 In response to a question posed by the Europ ean Communities, the United States notes that it 
is difficult to discuss such broad concepts as the sc ope of DSU Article 23 in the abstract.  In the 
context of this particular dispute, the Un ited States has taken no position on whether the 
European Communities has made a determination that  Korea has acted inconsistently with the WTO 
Agreement.  However, the United States would obser ve that Article 23.1 requires Members to have 
recourse to the DSU when they “seek redress” of a violation of an obligation under the WTO 
Agreement.  “Redress” is defined as  
"1.  Reparation of or compensation for a wrong or consequent loss.  2(a).  Remedy for 
or relief from some trouble; assistance, aid, help.  (b) (obsolete) Correction or 
reformation of something wrong.  3(a)  A means of redress; an amendment, an 
                                                      
134 Third party submission of the United States, para. 12. 
135 Panel Report, US - Section 301 Trade Act , para. 4.844. WT/DS301/R 
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 improvement.  (b) (obsolete) A person who or  thing which affords redress.  4.  The 
act of redressing; correction of amendment of a thing, state, etc."136 
5.42 The United States notes that various Members have  explained that they are not in a position to 
suspend concessions effectively or have recourse to other modes of redress.137  Therefore, the main 
form of redress or “assistance” available to them is a finding that another Member’s measure is 
inconsistent with the WTO Agreement. 
5.43 Article 23.2(a) provides further support that  a determination of a breach of the WTO 
Agreement can be a method of seeking redress.  Article 23.2(a) specifically singles out a 
determination, outside DSU procedures, of a br each of the WTO Agreement as being inconsistent 
with the DSU.  Article 23.2(a) does not require that the determination be  accompanied by any other 
action or trade consequences.138  As a result, it would appear that a determination of a breach of the 
WTO Agreement could be sufficient in and of itself to be proscribed by Article 23, irrespective of 
whether it is accompanied by actions with trade cons equences.  In this connection, the United States 
notes that, while the panel in US - Certain EC Products  suggested that “determinations” under 
Article 23.2(a) are ones which bear consequences in WTO trade relations,139 that panel’s 
Article 23.2(a) finding was reversed because the European Communities never even raised a claim 
under that provision – in other words, the parties never presented arguments on whether a determination need have “consequences for trade relations,”
140 and the panel’s statement is little more 
than an unsupported assertion. 
5.44 According to the United States, if there is a de termination inconsistent  with Article 23.2(a), 
then that would be sufficient to establish a conseque ntial breach of Article 23.1.  There would appear 
to be little need then for the Panel, in its analys is of Korea’s Article 23 claims, to further examine 
whether any measures of the European Communities responding to such a determination are consistent with the WTO Agreement.  It may, ho wever, be appropriate to examine whether those 
measures are consistent with othe r provisions of the WTO Agreement that are the subject of Korea’s 
claims. 
5.45 In response to a further question from the Eur opean Communities, the United States notes that 
Article 23.2 nowhere refers to measures other than  a determination or the suspension of concessions 
or other obligations.  Accordingly it is difficu lt to see how measures consistent with the WTO 
Agreement would be covered by Article 23.2.  Si milarly, Article 23.1 simply commits Members to 
have recourse to, and abide by, the rules and proce dures of the DSU.  The DSU is not concerned with 
rules or procedures for a Member to adopt or main tain measures that are consistent with the WTO 
Agreement, so it is difficult to see how Article 23.1 would apply to such measures.  Of course, in the 
context of this dispute, if the Panel were to dete rmine that the EC measures at issue are inconsistent 
with the WTO Agreement, in particular the SCM Ag reement, then Article 23 of the DSU could also 
apply to those measures. 
                                                     
 
136 The New Shorter Oxford English Dictionary , 4th edition, vol.  2, p.  2515. 
137 The Unites States notes that, for example, this i ssue has arisen several times during the course of 
negotiations on the DSU. 
138 The United States is unclear as to what is meant by “consequences in WTO trade relations.”  A 
determination that another Member is failing to abide by its WTO commitments would certainly appear to have 
potential “consequences in WTO trade relations ,” if only with respect to the Member’s willingness to enter into 
further commitments with that other Member.  However, for purposes of this reply the United States assumes 
the EC intends this term to refer to trade effects rather than simply the quality of the trade relationship between 
Members. 
139 Panel Report, US – Certain EC Products,  para. 6.98. 
140 Appellate Body Report, US – Certain EC Products , paras. 107-115. WT/DS301/R 
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 5.46 In response to a question posed by the Eur opean Communities concerning the term “counter 
subsidy”, the United States notes that it used the term  to refer to a subsidy provided by one Member in 
response, either in whole or in part, to a subsidy provided by another Member. 
5.47 In response to questions posed by Kor ea concerning the European Communities' 
characterization of the DSU’s negotiating history, the United States notes that Article 23 of the DSU 
records an agreement reached among all the Urugua y Round participants as to how WTO Members 
would conduct themselves in light of the new DSU being agreed.  In this respect, it protected all 
Members, including the United States, against the ac tions described.  Most fundamentally, the intent 
of a treaty provision is to be found in the language of the provision itself.  DSU Article 23.2 by its 
terms is not limited to Section 301 of US law or to the determinations or suspensions of concessions 
by any particular Member; it applies equally to all Members.  Had the Members intended a narrower application of the disciplines of Article 23.2, they would have drafted the provision accordingly. 
5.48 In China
’s view, concerning the threshold for the application of Article 23 of the DSU, it 
should be firstly assessed whether the TDM is a measu re seeking the redress of a WTO violation.  
China submits the following opinion on this threshold issue.   
5.49 China does not agree with the European Communities that the term “seek to redress” covers 
“any action that is capable of inducing another Member  to terminate a breach of WTO obligations”, or 
even only “measures amounting to a suspension of concessions or obligations under the WTO 
Agreement”.  On the basis of the meanings of th e terms “seeking” and “redress” considered by the 
Panel in US – Certain EC Products , it is essential to find out whether the purpose of the measure at 
issue is “with a view to remedying  the situation” of a WTO violation.   
5.50 Secondly, China submits, although only remedial actions envisaged in the WTO system can 
be used by a Member to redress a WTO vi olation, this does not mean that only  such actions can be 
deemed as remedial actions falling within the ambit of Article 23.  On the contrary, Article 23 covers 
any remedial action that is adopted against another Member and in response to a WTO violation.  If 
Article 23 is interpreted to only cover a suspension of concessions or  obligations, it would effectively 
mean that Members are free to take whatever acti ons they like to redress a WTO violation except for a 
suspension of concessions or obligations.  This cl early runs against the DSU’s object and purpose of 
protecting the security and predictability of the multilateral trading system. 
5.51 Thirdly, China believes that the structure of Ar ticle 23 is:  paragraph 1 provides for a general 
obligation to have exclusive recourse to the multila teral dispute settlement mechanism pursuant to the 
rules and procedures of the DSU while paragra ph 2 provides for specific instances of prohibited 
unilateral actions.  Therefore, China does not agree to the EC argument that “a prohibited unilateral 
action that redresses a WTO violation must have  elements of the three sub-paragraphs” of 
Article 23.2.  In China’s opinion, each of th e forms of unilateral actions provided for under 
Article 23.2 is explicitly prohibited.   
5.52 Turning to the current dispute, China suggests that the following facts, if established by the 
Panel, should be helpful for ascertaining whether th e TDM is a measure seeking the redress of a WTO 
violation:  (i) the TDM is closely linked to the TBR investigation conducted by the 
European Communities on the allegedly WTO-inconsistent subsidies provided by Korea.  Via the TBR investigation, a link may be established betw een the TDM and the perceived WTO-inconsistent 
subsidies of Korea; (ii) in terms of the appli cation period of the TDM measure, the TDM appears to 
be an ancillary instrument that comes into play while the WTO proceedings do not produce effective 
remedies for the European Communities as early as it desires; (iii) as indicated by the Press Release of 
the European Communities, the so-called “twin-tr ack strategy” consists of the TDM and the WTO 
proceedings launched by the European Communities ag ainst Korean subsidies; (iv) the form of the 
TDM measure is direct aid for shipbuilding contract s in case of Korean competition.  Thus, it is WT/DS301/R 
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 aiming at counteracting the low-price competition perceived by the European Communities as a result 
of subsidies granted by Korea. 
5.53 China also submits that alt hough the TDM was initially inte nded as a countermeasure against 
the perceived subsidies of Korea, it may have ser ious impact upon the world shipbuilding market.  
The TDM Regulation provides that an EC government may grant direct aid to EC shipyards in case of 
competition from Korean shipyards.  However, it do es not exclude its application to the situations 
where there are competitors from countries other than  Korea.  On the global market, it is extremely 
common that shipyards from not only the European Communities and Korea, but also other countries 
compete for a new shipbuilding order.  The Eur opean Communities itself admits that “there is per se  
always competition from a Korean” yard.  Therefor e, the TDM measure, through direct government 
intervention in the bidding process par ticipated by market players from all over the world, is likely to 
arm the EC shipyards with an artificial price edge of up to six per cent of the contract price and 
thereby seriously damage the normal competitive conditions of the world shipbuilding market.  
5.54 On the basis of the above, China urges the Pane l to take into account the impact of the TDM 
measure on the global trade order in the shipbu ilding sector when assessing its consistency with 
Article 23 of the DSU. 
(b) Article 23.2.(a) of the DSU 
5.55 With respect to the issue of whether the TDM constitutes a determination within the meaning 
of Article 23.2(a) of the DSU, China  firstly refers to the holding of the Panel in US – Section 301 
Trade Act .  That Panel considered that a determination “implies a high degree of firmness or 
immutability, i.e.  a more or less final decision by a Member in respect of the WTO consistency of a 
measure taken by another Member”.   
5.56 Second, China submits that the following facts seem  to indicate that the TDM is of the degree 
of firmness and immutability required by the meaning of a “determination” in Article 23.2(a):  (i) the 
recitals of the TDM Regulation firmly conclude th at certain segments in the EC shipbuilding industry 
have suffered “adverse effects in the form of material  injury and serious prejudice”.  In the context of 
the SCM Agreement, these words may be understood to be referring to adverse effects in the sense of 
Article 5 of the SCM Agreement; (ii) the act of aut horizing direct aid specifically to certain segments 
identified by the TBR investigati on seems to demonstrate the TDM Regulation’s nature of firmness 
and immutability.   
5.57 Third, China considers that the phrase “to the effect” contained in Article 23.2(a) indicates 
that the measure under review does not need to clea rly set out in its text that a WTO violation has 
occurred.  China suggests that emphasis should be  placed on the substantive implications of the 
measure rather than its forms.  Such a point of view is supported by the Panel in US – Section 301  
which held that whether an act constitutes a “determina tion” is a more or less formal requirement that 
needs broad reading.  China further submits that  the vague language of the TDM Regulation should 
not be taken literally and linked to the “broader  problem of injurious pricing” since the TDM 
Regulation is closely associated with the TBR investigation and the TBR Commission Decision 
manifestly concluded that “Korea has granted expor t and actionable subsidies within the meaning of 
the SCM Agreement”. 
VI. INTERIM REVIEW 
6.1 The Panel issued its Interim Report pursuant  to Article 15.2 of the DSU on 23 December 
2004.  On 13 January 2005, both parties submitted written requests to the Panel to review precise 
aspects of the Interim Report but neither party request ed an interim review meeting.  On 20 January 
2005, both parties commented in writing on the other party's requests for review of the Interim WT/DS301/R 
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 Report.  Pursuant to Article 15.3 of the DSU, this section contains the Panel's response to the 
comments of the parties on the Interim Report and forms part of the Panel's findings.  
6.2 In addition to the changes discussed below, the Panel has corrected a certain number of 
typographical errors in the Interim Report.  
A. C ONDITIONAL PRELIMINARY OBJECTION OF THE EUROPEAN COMMUNITIES  
6.3 Both parties request the Panel to modify a nd/or clarify certain paragraphs in Section 
VII.A.4(a) of the Interim Report which discusses a conditional preliminary objection raised by the 
European Communities with respect the reference in Korea's first submission to "individual instances 
of application" of the TDM Regulati on and the national TDM schemes.    
6.4 The European Communities requests the deletion of the first sentence of paragraph 7.10 and 
the last sentence of paragraph 7.25 of the Interim Report (which correspond to, respectively, paragraphs 7.10 and 7.23 of the Fi nal Report)  on the ground that those sentences incorrectly suggest 
that the European Communities has stated before the Panel that a DSB recommendation would have 
direct effect under the internal law of the Eur opean Communities.  The European Communities also 
request us to change paragraph 7.10 of the Interi m Report to include certain arguments.  Korea objects 
to most of these changes proposed by the European Communities.  
6.5 Korea requests the Panel to further clarify th e reasoning behind the distinction made in 
paragraph 7.23 of the Interim Report (paragraph 7. 21 of the Final Report) between  "individual 
instances of application" and "disbursements of fu nds".   Secondly, regard ing paragraph 7.24 of the 
Interim Report, Korea disagrees with the implicit cr iticism to the effect that "Korea has presented no 
evidence or specific arguments relating to any indivi dual instances of application or disbursements of 
funds".   Thirdly, with respect to the statemen t in paragraph 7.25 of the Interim Report (paragraph 
7.23 of the Final Report) that it is not possible to state ex ante  when an inconsistency with a panel 
ruling would arise from payments made pursuant to an impugned measure after the DSB  rulings and 
recommendations, Korea does not see how there can be  any instance when such payments would be 
consistent.  Given the ambiguity of the European Communities with regard to the issue of whether 
disbursements of funds would be affected by a DSB recommendation, Korea requests the Panel to 
further clarify the final sentence of paragraph 7.25 of the Interim Report (paragraph 7.23 of the Final 
Report) to make it extra clear that disburseme nts of funds would be covered by the DSB's 
recommendation.  Closely related to this, Korea re quests the Panel to modify paragraph 8.4 of the 
Interim Report (paragraph 8.4 of the Final Re port), which discusses the scope of the Panel's 
recommendation, to make a less conditional statement or at least to make clarifying suggestions 
pursuant to Article 19.1 of the DSU.  The European  Communities objects to the changes requested by 
Korea.  
6.6 In light of the relatively extensive comments of the parties on this part of the Interim Report, 
we have made significant revisions with a view to better explaining our reasoning. The changes are 
reflected in paragraphs 7.10, 7.15-7. 25  and 8.4 of the Final Report.  
B. 
VESSELS AS IMPORTED PRODUCTS  
6.7 The European Communities  request that we change para graph 7.64 of the Interim Report 
(paragraph 7.63 of the Final Report) which discusses the issue of whether the vessels covered by the 
TDM Regulation are "imported products" within th e meaning of Article III of the GATT 1994.  The 
European Communities submits that it has not argued as part of its legal defence in this case that ships 
are not imported products and that it was the Panel that  had raised questions on this issue to the parties 
after Korea had stated in its first submission that ship s are not often imported.  It is in that connection 
that the European Communities has explained that due to transit rules ships have not been subject to WT/DS301/R 
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 importation requirements in the European Communities,  as evidenced by the fact that import statistics 
on ships provided by Korea and relied upon by the Pa nel are explicitly based on changes of ownership 
not on data on importation.  Since the notion of impor tation with respect to ships is complex and the 
Panel has correctly dismissed the claim of Kor ea under Article III:4 of th e GATT 1994, the European 
Communities requests the Panel to leave this issue open or  at least to delete the reference in the fourth 
sentence of paragraph 7.64 to "the volume and va lue of imports of seagoing tankers during the period 
1998-2003".   
6.8 Korea  objects to the changes proposed by the Eur opean Communities.  Korea points out that 
the European Communities in response to Panel qu estion 51 clearly stated that the notion of 
importation within the meaning of Article I.1 of the GATT 1994 does not apply to this case as the 
vessels covered by the TDM Regulation are generally not imported, and that these vessels are means of transport in transit.  While the European Comm unities clearly constructed an argument on the basis 
of an allegation that there are no imports of these sh ips, it has not been able to show that importation 
of these vessels is legally impossible.  Finally, the argument of the European Communities regarding 
the status of ships as means of transport in transit is  irrelevant to the issue of whether these ships can 
be imported. 
6.9 The Panel notes that in response to Panel qu estion 51 and in its statement at the second 
meeting the European Communities has taken the position that ships, at  least the vessels subject to the 
TDM Regulation, are not  imported within the meaning of Article I:1.  It is true that strictly speaking 
the European Communities has not submitted this view specifically as part of its legal defence against 
Korea's claim under Article III:4, nor has the EC argued that these ships cannot  be imported.  This 
said, it is difficult to see how Article III can apply to  products that cannot be imported.  Therefore, 
even though this issue was not expressly discussed in  the context of the claim under Article III:4, it 
presented the Panel with an important threshold ques tion regarding the applicability of that provision.  
We therefore consider that it was logical to a ddress this issue in our findings on the claim under 
Article III:4 even though we realize that in light of our substantive conclusion on the merits of that 
claim under Article III:4, it might not have been st rictly necessary.  However, we have adjusted 
paragraph 7.63 of the Final Report in light of the comments of the European Communities on the 
basis for the collection of statistics on imports of the vessels in question.  
C. 
REFERENCES TO PRESS RELEASES  
6.10 The European Communities  objects to the fact that the Panel has attached certain 
evidentiary value to certain press releases submitted  by Korea.  In this regard, the European 
Communities recalls that in its first written submis sion and in its statement at the second substantive 
meeting it has explained in detail why it rejects the use of press releases of the European Commission, and more precisely of individual Commissioners, for the interpretation of the measure at issue, which 
is a Regulation of the Council of the European Un ion.  The European Communities states that the 
Panel has correctly rejected the evidentiary valu e of the press releases in paragraph 7.172 of its 
Interim Report but that it has in appropriately relied on those press re leases in paragraphs 7.25, 7.64, 
7.137, 7.212, 7.213 and 7.218 and in footnotes 197, 1 98, 273, 397, 398 and 399 of the Interim Report.  
The European Communities considers that the expl anation proffered by the Panel in footnotes 274 
and 396 of the Interim Report that these statements  are relevant because of "the role of the 
Commission in initiating the legislation" is based on a misunderstanding of the legislative process in 
the European Communities.  The European Communities submits in this regard that individual 
members of the European Commission are not the orga n that initiates legislation but that it is the 
entire Commission that adopts a legislative proposal, and that in any event, once legislation has been 
adopted, it is exclusively the motivation and intent of  the final act that describes the institutionally 
legitimised motivations of the act.  A purely politica lly motivated press release of individual members 
of the Commission or even the Co mmission itself cannot modify or ot herwise affect such Council act.  
In this case, the press releases were those of the individual Commissioners.  The European WT/DS301/R 
Page 65 
 
 
 Communities considers that the use by the Pane l of these press releases amounts to a serious 
misrepresentation of its internal legislative procedur es, division of competences and legal effects of 
acts.  The European Communities argu es that, contrary to what is suggested in footnote 396 of the 
Interim Report, the Panel Report in US – Certain EC Products  is not relevant precedent.    
6.11 Korea  argues that it has submitted a mass of ev idence on the nature of the TDM Regulation 
including official EC explanatory memoranda, interviews with Commissioners statements to 
Parliamentary Committees and press releases.  Those press releases differed in regard to their degree 
of formality, and it is factually incorrect to assert that they were politically motivated statements of 
individual members of the European Commission.  Korea submits that a WTO Member does not have 
the exclusive right to characterize its laws with resp ect to WTO obligations.  Korea also refers to the 
fact that the EU's website describes the Commission as the driving force within  the EU's institutional 
system in that it proposes legislation, policies and programmes of action and is responsible for 
implementing the decisions of Parliament and the Council.  The same source describes the 
Commission as the European Un ion's executive body and as an important mouthpiece for the 
European Union on the international stage.  In  the case at hand, the Commission proposed the TDM 
regulation, shepherded the regul ation through the Council and Parlia mentary processes and retained 
for itself the authority to decide when to activat e the TDM Regulation by initiating the WTO dispute 
settlement process upon which the TDM authority depended.  The role of the Commission as 
executive body means that statemen ts by the Commissioners are highl y probative with regard to the 
implementation of a measure.  Korea also submits that not all paragraphs cited by the European 
Communities contain references to press releases and, that where reference is made to press releases 
these are of the European Commission and not of individual Commissioners.  Referring to the Panel 
Report in Chile – Alcoholic Beverages  and Article 4 of the ILC's draft Articles on State 
Responsibility, Korea also submits that the Eu ropean Communities cannot disavow the stated 
positions of its representatives.  Finally, Korea ar gues that all of the statements, memoranda, press 
releases, etc. submitted by Korea lead to the same conclusion regarding the nature structure and intent 
of the TDM Regulation, and that the statements of  the Commission referred to by the Panel therefore 
are not isolated statements that might not reflect the understanding and intent of the Commission.   
6.12 The Panel notes that a number of paragraphs and footnotes mentioned by the European 
Communities do not make reference to press relea ses.  Specifically, we see no such reference in 
paragraphs 7.25, 7.64 and 7.213 of  the Interim Report (paragraphs 7.23, 7.63 and  7.212 of the Final 
Report), nor in footnotes 197 and 198 of the Interim Report (the text of which has been deleted from 
the Final Report) and footnote 398 of the Interim Re port (footnote 402 of the Final Report)   The issue 
therefore arises only in respect of paragraphs  7.137, 7.212 and 7.218 of the Interim Report 
(paragraphs 7.136, 7.211 and 7.217 of the Final Repor t) and footnotes 273, 397 and 399 of the Interim 
Report  (footnotes 277, 401 and 403 of the Final Report).   In these paragraphs and footnotes reference 
is made to two press releases, IP/01/656 and IP/01/ 1078, which are quoted in part in footnote 273 of 
the Interim Report (footnote 277 in the Final Report)  and in paragraph 7.218 of the Interim Report 
(paragraph 7.217 of the Final Report). After carefu lly reviewing the arguments of the European 
Communities, we see no reason to change the text  of the Report as requested by the European 
Communities.   
6.13 First, we note that, as explained in the firs t and last sentences of paragraph 7.137 of the 
Interim Report ( paragraph 7.136 in the Final Repor t) and in footnotes 274 and 396 of the Interim 
Report (footnotes 278 and 400 of the Final Report), we have relied on these two press releases for the 
limited purpose of confirming a conclusion drawn from an analysis of the text of the TDM 
Regulation.  We do not believe that our use of these press releases can be interpreted to mean that we 
view the statements in those press releases as autono mous sources of interpretation that can be relied 
upon independently of an analysis of the preamble  and operative provisions of the TDM Regulation.  
Secondly, while the summary section of each of  these press releases includes in one sentence a 
comment made by an individual Commissioner, whic h has been omitted from the quotations in the WT/DS301/R 
Page 66 
 
 
 Panel Report, as a whole these press releases clearly describe and explain decisions and actions taken 
by the Commission as such, not its individual member s.  Thus press release IP/01/656 of 8 May 2001 
is entitled "Commission sets out strategy on Korean  shipbuilding case following investigation into 
unfair trade practices" and its summary states inter alia  that "...the Commission today approved the 
strategy it will propose to the Council of Ministers...", that "the Commission will recommend that the 
matter be taken before the WTO ...", and that "the Commission will propose accompanying measures 
in the form of a temporary support mechanism to  European shipyards...". Similarly, press release 
IP/01/1078 of 25 July 2001 is entitled "Commissi on proposes temporary defensive mechanism for 
shipbuilding against unfair Korean practices" and th e summary section of that press release begins by 
stating that "[t]he Commission today adopted a pro posal for a Council Regulation..."  We therefore 
can see no factual support for the argument of the Eu ropean Communities that "[i]n this case the press 
releases were those of individual Commissioners".  With respect to the argument of the European 
Communities that the reference in footnotes 274 a nd 396 of the Interim Report (footnotes 278 and 400 
of the Final Report) to "the role of the Commissi on in initiating the legislation" reflects an incorrect 
understanding of the internal legislative process, we consider that it is clear that the expression "the 
role of the Commission in initiating this legislation", when read in context, simply means the role of 
the European Commission as an institution in prop osing the draft TDM Regulation to the Council.  
Since the relevant paragraphs of the Panel Report cl early refer to statements of the Commission, not 
its individual members, there is nothing in these pa ragraphs to suggest that the Panel considers 
individual members of the European Commission as "legislators".  As to the argument of the 
European Communities that "once legislation is adopt ed it is exclusively the motivation/intent of the 
final act that describes the institutionally legitimis ed motivations of the act" and that "politically 
motivated press releases of individual Commissioners or even of the EC Commission cannot modify or otherwise affect such Council act", we reiterate  that the Report relies on these two press releases 
only to confirm a conclusion derived from the analysis  of the text of the TDM Regulation.  Finally, 
regarding the argument of the European Communities that the reference in footnote 396 of the Interim 
Report  (footnote 400 in the Final Report) to the Panel Report in US - Certain EC Products  is not a 
relevant precedent, we note that the primary r eason why we consider it appropriate to lend some 
weight to the press releases is explained in the first sentence of the footnote and that the reference in 
the second sentence to US – Certain EC Products  is of subsidiary importance.   
VII. FINDINGS 
A. 
INTRODUCTION  
1. Findings requested by the parties 
7.1 Korea  requests the Panel to find that: 
(a) the TDM Regulation, its member State implementing provisions as well as any 
instances of application of the TDM scheme, and any EC Decisions approving 
member State implementing provisions pursuant to the TDM scheme, are inconsistent with the European Communities' and its member States' obligations under 
Articles 23.1, 23.2(a), 23.2(b) and 23.2(c) of the DSU; 
(b) the TDM Regulation, its member State implementing provisions as well as any 
instances of application of the TDM scheme, and any EC Decisions approving 
member State implementing provisions pursuant to the TDM scheme, are inconsistent 
with the European Communities' and its member States’ obligations under 
Article 32.1 of the SCM Agreement; 
(c) the TDM Regulation, its member State implementing provisions as well as any 
instances of application of the TDM scheme, and any EC Decisions approving WT/DS301/R 
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 member State implementing provisions pursuant to the TDM scheme, are inconsistent 
with the European Communities' and its member States’ obligations under 
Article 4.1-4 and Article 7.1- 4 and 9 of the SCM Agreement; 
(d) the TDM Regulation, its member State implementing provisions as well as any 
instances of application of the TDM scheme, and any EC Decisions approving 
member State implementing provisions pursuant to the TDM scheme, are inconsistent 
with the European Communities' and its member States’ obligations under 
Article III:4 of the GATT 1994; and 
(e) the TDM Regulation, its member State implementing provisions as well as any 
instances of application of the TDM scheme, and any EC Decisions approving 
member State implementing provisions pursuant to the TDM scheme, are inconsistent with the European Communities' and its me mber States’ obligations under Article I:1 
of the GATT 1994. 
7.2 The European Communities  requests the Panel to find that:  
(a) the TDM Regulation is not in violation of  Articles 23.1, 23.2(a)-(c) of the DSU, 
Articles 4, 7 and 32.1 of the SCM Agreement and Articles I and III:4 of the GATT 
1994; and 
(b) the national TDM measures (to the extent that they still exist) are not in violation of 
Articles 23.1, 23.2(a)-(c) of the DSU, Articles 4, 7 and 32.1 of the SCM Agreement 
and Articles I:1 and III:4 of the GATT 1994. 
2. Order of Analysis 
7.3 The order in which we analyze the claims of  Korea takes into account their substantive 
interrelationship.  Given that a key question of inte rpretation in this case is whether Article 23 of the 
DSU can prohibit a measure that does not entail a suspension of concessions or other obligations 
under the WTO Agreement, we examine first whether the measures at issue are inconsistent with the 
provisions of the GATT 1994 and the SCM Agreement cited by Korea.  We also note the 
interrelationship between the claims of Korea unde r Articles I and III of the GATT 1994, given that 
Korea challenges the TDM Regulation under Article  I of the GATT 1994 as an internal measure 
covered by Article III:4 of the GATT 1994.  Finally, we note the close relationship between the issues 
raised by Korea under Articles 4 and 7 of the SCM Agreement and under Article 23 of the DSU.  In 
light of these considerations, we decide that the most efficient manner to proceed is to analyse first the 
claims of Korea under Articles III and I of th e GATT 1994, followed by Korea's claims under 
Article 32.1 of the SCM Agreement, Article 23 of the DSU and Articles 4 and 7 of the SCM 
Agreement.  
3. Burden of proof 
7.4 We recall that the general principles applicable to burden of proof in WTO dispute settlement 
require that a party claiming a violation of a pr ovision of the WTO Agreement by another Member 
must assert and prove its claim.
141  In these Panel proceedings, Korea, which has challenged the 
consistency of the European Comm unities' measures, thus bears the burden of demonstrating that the 
measures are not consistent with the relevant provisions of the Agreement.  Korea also bears the 
burden of establishing that its claims are properly befo re us.  We also note that it is generally for each 
                                                      
141 Appellate Body Report, US – Wool  Shirts and Blouses , p. 16. WT/DS301/R 
Page 68 
 
 
 party asserting a fact to provide proof thereof.142  In this respect, therefore, it is also for the 
European Communities to provide evidence for the facts which it asserts.  We also recall that a 
prima facie  case is one which, in the absence of effec tive refutation by the other party, requires a 
panel, as a matter of law, to rule in favour of the party presenting the prima facie  case.   
4. Preliminary issues  
(a) Conditional preliminary request of the European Communities  
(i) Main arguments of the parties  
7.5 In its first submission, the European Communities  made a conditional request for a 
preliminary ruling by the Panel that Korea had violated Article 6.2 of the DSU on the grounds that 
Korea's first submission expanded the claims of Kore a to include "individual instances of application" 
of the TDM Regulation by the European Commissi on and the respective EC member States, "the 
application of the TDM scheme in specific cases" , and "TDM contributions provided pursuant to the 
TDM framework".143 
7.6 In support of this request, the European Comm unities argued that the request of Korea for the 
establishment of a panel144 explicitly did not identify as impugned measures any individual grants.  
Since Korea's request explicitly distinguished betw een the national TDM schemes of the EC member 
States as such and "particular instances" of grants in  its description of the consultations that had taken 
place in this dispute, Korea could not claim that the reference to "implementing measures" comprised 
individual grants.  The European Communities request ed the Panel to invite Korea to clarify that 
individual instances of application of the nationa l TDM measures were not within the scope of the 
proceeding and, if Korea were to insist on the inclus ion of individual instances of application, to rule 
that the claim, insofar as it related to the individual  instances of application was contrary to Article 6.2 
of the DSU and should, therefore, be dismissed.145    
7.7 Korea  requested the Panel to deny the request of the European Communities on the following 
grounds.146  First, the paragraph of Korea's request for the establishment of a panel that described the 
content of the consultations did not make a le gal distinction between the TDM Regulation and 
implementing measures, on the one hand, and the actua l instances of grants of funds, on the other, but 
only contained a non-exhaustive list of the issues that were the subject of the consultations.  Moreover, Korea's request for the establishment of a panel referred to disbursements in that it 
identified the measures as "...the TDM Regulation and member States implementing measures 
involving the bestowal of German, Danish, Dutch,  French and Spanish grants to shipyards on a 
vessel-specific and product-related basis...".  Sec ond, if a Member challenged a measure as WTO-
inconsistent, the Member did not need to include the actual instances of nullification and impairment 
for them to be included within the dispute.  Third, while Korea considered that individual grants were 
not separate measures but were mere applications of the TDM Regulation and the EC member States' 
implementing laws, if the Panel considered that i ndividual grants were separate measures, they would 
still be covered by the terms of reference as directly  related to the measures at issue.  Fourth, the 
European Communities had not shown how its due pro cess rights were adversely affected by a lack of 
clarity of the request for the establishment of a panel.  Finally, if specific applications of a measure 
found to be WTO-inconsistent were to be ex cluded from the scope of a panel ruling unless 
                                                     
 
142 Ibid.   
143 The European Communities referred to, respectively, paras. 12-13; p. 14; and paras. 131, 140, 169, 
and 192 of the first submission of Korea.   
144 WT/DS301/3, attached as Annex.    
145 First submission of the European Communities, paras. 107-113.   
146 Attachment 2 to the oral statement of Korea at the first substantive meeting of the Panel with the 
parties.   WT/DS301/R 
Page 69 
 
 
 individually listed in the request  for establishment, the result would be that such applications could 
continue, at least to the extent they had been comm itted but not yet paid prior to the DSB rulings and 
recommendations.   
7.8 At the first substantive meeting of the Panel147, Korea indicated that it did not seek a ruling of 
the Panel on each disbursement.  However, it reject ed the argument of the European Communities that 
disbursements were not covered by the dispute.  Korea expressed concern regarding the systemic 
implications of a preliminary ruling that disburseme nts of funds were not cove red because this would  
mean that where a measure was found to be WTO-in consistent, a Member could continue to apply 
that measure in individual cases if those individual  instances had not been specifically identified.   
7.9 The European Communities  inferred from this statement of Korea that Korea did not ask 
this Panel to find that individual disbursements of funds under the TDM we re WTO-inconsistent.  
Regarding the concern expressed by Korea with r espect to a Panel ruling that would not cover 
individual instances, the European Communities ar gued that Korea was challenging these individual 
instances in another disp ute settlement proceeding148 in which context the specific remedies provided 
for in the SCM Agreement would possibly apply.  In the present case, however, the only remedy 
possible was a remedy of a prospective nature in th e form of a recommendation  to bring the general  
measure into conformity with WTO obligations.   
7.10 In response to questions from the Panel, the Eu ropean Communities indicated that if the Panel 
were to find the TDM Regulation and the national measures of the five EC member States (to the 
extent still in force) to be inconsistent with the WTO Agreement, the European Communities would 
bring those measures into conformity.  The European Communities also stated that if the basic law is 
incompatible with the WTO Agreem ent, there would be no basis for further granting any aid. The 
European Communities also indicat ed that the TDM Regulation and the national measures as a legal 
basis for providing aid will expire on 31 March 2005, i.e.., possibly even before  a final report in this 
proceeding is adopted. The European Communities also pointed out that it often happens that a law or 
subsidy scheme is attacked without equally attacki ng individual applications, for example, the recent 
Byrd case.  The issue of the payment of state aid pur suant to aid granted before the effective date of 
such a recommendation was a matter for implementati on.  The European Comm unities, in response to 
another question of the Panel, also clarified that  Korea's statement that it was not asking for any 
findings or recommendations on specific measures ha d allayed the concerns that had led to the 
conditional request for a preliminary ruling.   
7.11 Referring specifically to the comment of th e European Communities on payments made 
pursuant to subsidies granted before a DS B recommendation would become effective, Korea  
requested the Panel to clarify that the case-by- case implementation of an illegal measure would be 
covered by a ruling against such measure.  The position of the European Communities on individual 
instances of application as separate measures that needed  to be identified in order to be covered by the 
dispute made it necessary for the Panel to clarify th at such instances would be covered by any ruling 
or recommendation against the TDM Regulation and the national measures.   
7.12 After hearing the parties' views on this matter at the first substantive meeting, and taking into 
account the European Communities' d eclaration (para. 7.10 above) that  Korea's statement had allayed 
the concerns that had led to its conditional request  for a preliminary ruling, the Panel stated that: 
                                                      
147 The remarks of Korea and the European Communities as reflected in paragraphs 7.8-7.11 were 
made during the course of an oral discussion on this point during the first substantive meeting, and are not fully 
reflected in the written versions of the parties' oral statem ents.  The description of these remarks thus is based on 
a transcription of the relevant part of that meeting.   
148 WTDS307. WT/DS301/R 
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 "[...] the Panel's view at this point is that the EC has withdrawn its request for a 
preliminary ruling and so we will not be making a preliminary ruling.   
As to the implementation issues generally, the Panel noted: 
"We are aware that both sides have specific concerns on the issue that we were 
talking about; we are aware of those concerns and we are not making any decision, 
one way or the other, on any of the issues that were being discussed yesterday.  We 
assume that you may well have more to say on those issues and, if necessary, we may 
have additional questions on those issues in due course." 
The European Communities raised no objection to the Panel's characterization of the status of the 
European Communities' conditional re quest for a preliminary ruling. 
 7.13 In its second written submission, Korea  reverted to this matter and requested the Panel to 
clarify whether or not it considered the disbursement s of funds to be separate measures.  If the Panel 
considered them to be distinct measures, the Pane l should find that they were covered in the request 
for the establishment of a panel because they were directly related to the cited measures and, in 
addition, were identified in that request, and the Panel should find the disbursements to be 
inconsistent with the obligations of the Europ ean Communities under the WTO provisions referenced 
in the request for the establishment of a panel.  On the other hand, if the Panel agreed with Korea that 
the disbursements of funds were not separate meas ures but simply the implementation of measures 
found to be illegal, Korea requested the Panel to  make an affirmative recommendation pursuant to 
Article 19.1 of the DSU that the European Comm unities immediately cease any further disbursements 
of illegal funding.
149    
7.14 The European Communities  recalled its position that while the request of Korea for the 
establishment of a panel did not cover individua l disbursements, its concerns regarding the 
implications of the inclusion of such disburseme nts within the scope of the present proceedings had 
been alleviated by Korea's clarification at th e first meeting that Korea did not base its case on 
individual grants.  For this reason, the European  Communities considered that the request of Korea 
that the Panel clarify the theoretical relationshi p between general subsid y schemes and individual 
disbursements was an inappropriate request for an advisory opinion.150  
(ii) Evaluation by the Panel  
7.15 From a procedural viewpoint, the Panel finds  itself confronted with a somewhat unusual 
situation:  while initially it was the European Communities which presented a conditional request for 
a preliminary ruling concerning "individual inst ances of application", subsequently, after the 
Communities indicated that it no longer considered it necessary to pursue this matter, Korea requested 
the Panel to decide whether "disbursements of funds" pursuant to the TDM Regulation and national 
measures are part of the subject matter of this dispute.   
7.16 The Panel notes that Korea has confirmed that it is not seeking specific findings on individual 
disbursements of funds but that Korea neverthe less requests the Panel to clarify that such 
disbursements would be covered by any ruling or recommendation against the TDM Regulation and 
the measures of the member States.  Korea's po sition is that separate findings on individual 
                                                      
149 Second submission of Korea, paras. 25-34;  see also oral statement of Korea at the second 
substantive meeting of the Panel with the parties, para. 67.   
150 Further comments on preliminary issues and Korea's DSU Article 19.3 request by the 
European Communities (delivered as part of the oral statement of the European Communities at the second 
substantive meeting of the Panel).   WT/DS301/R 
Page 71 
 
 
 disbursements are not necessary to bring them  within the scope of any Panel ruling or 
recommendation, i.e., that they are inherently part of  the subject of this dispute.  By contrast, the 
European Communities has withdrawn its conditional request for a preliminary ruling on the basis of 
a statement of Korea that it was not seeking findings  on individual disbursements, but it would appear 
that the European Communities' withdrawal of th e request for a preliminary ruling does not signify 
that the Communities shares Korea's position that individual disbursements are inherently part of the 
subject matter of this dispute.  The issue on which Korea asks us to rule thus is whether individual 
disbursements are covered by our terms of reference.   
7.17 Under its terms of reference, a panel's authority to examine and make findings is restricted to 
the matter referred to in the request for establishment of a panel.  Whether an issue is properly within 
a panel's terms of referenc e depends upon whether that issue forms part of the matter described in the 
request for establishment, defined in terms of claims and measures.    
7.18 Korea’s request for establishment of a panel151 indicates that consultations took place in this 
dispute with regard to, on the one hand, the provi sions of the TDM Regulation and the EC member 
States implementing provisions as such, and, on the other, the provision of subsidies by the European 
Communities and its member States “in particular in stances”; and that these consultations have failed 
to resolve the dispute between parties concerning “the TDM Regulation…and the EC member States’ implementing provisions”.  The request next states th at: "[t]he measures that are the subject of this 
request are the EC and its member States' legal provisions and decisions providing for the supply of 
grants to shipbuilders . . . ."  Korea consider s in particular "that the following measures are 
inconsistent with the European Communities' obligations under the SCM Agreement": the TDM 
Regulation, "the EC member State implementi ng provisions of the TDM regulation", and "the 
European Commission Decisions approving these implementing provisions".  The request then lists these "implementing measures" and Decisions.
152  The "implementing measures" listed provide a 
general framework for providing aid, and do not rela te to the actual provision of aid in individual 
instances.  Finally, the request states that "the EC and its member State measures referred to above" 
are inconsistent with Articles I:1 and III:4 of th e GATT 1994, Articles 23.1 and 23.2 of the DSU and 
Articles 4 and 7 of the SCM Agreement, and Artic les 32.1 and 4 and 7 of the SCM Agreement.   
7.19 The request for establishment therefore does not explicitly identify either “individual 
instances of application”, the expression used in the first submission of Korea, or "disbursements of 
funds", the expression subsequently used by Kor ea.  The Panel considers this omission from the 
request for establishment especially significant as th e request for consultations explicitly covered the 
provision of subsidies by EC member States in "particular instances" as a subject distinct from the 
provisions of the TDM Regulation and the EC memb er States' implementing provisions "as such".  
The Panel further notes, in this connection, that in  February 2004 Korea submitted another request for 
consultations153 indicating that while Korea had "requested  the establishment of a panel with respect 
to the TDM Regulation and its inconsistency w ith certain provisions of the GATT 1994, the SCM 
Agreement and the DSU", Korea now "wishes to pro ceed with consultations with the EC regarding 
other aspects of the TDM Regulation and other measur es which were the subject of its September 3rd 
request along with additional measures recently adopted by the EC".  That request clearly identifies as 
the measures at issue relevant legal provisions at the EC and member State level as well as the 
granting of aid in particular instances.   
7.20 In order to decide on Korea's request, we would have to determine whether "individual 
instances of application" or "disbursements of funds" were somehow implicitly identified in the 
request for establishment, and if not, whether the re quest otherwise covers such disbursements either 
                                                      
151 WT/DS301/3, attached as Annex.   
152 Id.  
153 WT/DS307/1.   WT/DS301/R 
Page 72 
 
 
 because they are "applications" of the cited measures or because they are "directly related" to those 
measures.154  The Panel is not persuaded, however, th at it is necessary or appropriate for it to 
pronounce on these questions.   
7.21 In this regard, the Panel recalls first that th e conditional request of the European Communities 
for a preliminary ruling pertained to "individual in stances of application", and that Korea's first 
submission contained similar notions.  By contr ast, the request as made by Korea in its second 
submission refers to the "disbursement of funds ".  In the Panel's view, while the expression 
"individual instances of application" refers generall y to the provision of aid in particular cases, the 
expression "disbursement of funds" is a more specific  reference to the act of "payment" of aid.  
Concerning individual instances of application in  this sense, the European Communities has not 
contested in this proceeding that, in the event of a DSB ruling that the TDM Regulation and the 
national TDM schemes are inconsistent with WT O provisions, the obligation of the European 
Communities to implement the concomitant recomm endation under Article 19.1 of the DSU would 
cover future decisions by EC member States to grant state aid in response to new applications for such 
aid.  Thus, the question of the implications of su ch a recommendation for the provision of TDM aid in 
particular cases (i.e., individual instances of appli cation) has not given rise to controversy between the 
parties.   
7.22 Korea's request to the Panel for a decision rega rding the status of "disbursements of funds" 
thus exclusively relates to the act of payment of aid, and specifically to the application of a DSB 
recommendation to future such payments155.  Korea's concern in this regard pertains to whether, in the 
event of a DSB recommendation to bring the TD M Regulation and national aid schemes into 
conformity with WTO obligations, EC member Stat es could continue to make payments after the 
effective date of such a recommendation pursu ant to aid authorized before that date.156   
7.23 We acknowledge that the continued payment of money, following a DSB recommendation 
that the European Communities bring the TDM Regulation and the national TDM schemes into 
conformity with WTO obligations, pursuant to st ate aid authorized previously under national TDM 
schemes, might well constitute a breach of WTO obligations157.  However, to determine precisely 
when an inconsistency with WTO obligations would arise from such payments would require analysis 
of factual and legal issues which would be neither feasible nor appropriate to attempt ex ante  in the 
context of the present proceeding.  The Panel considers that this issue rather should be addressed at an 
implementation stage, on the basis of the specific fact s presented to the Panel at that time.  To attempt 
                                                      
154 See cases discussed in WTO Analytical Index , at 1305—1308.  
155 Korea indicated in interim review that "[t]he issue is the future disbursements  of monies made 
pursuant to the impugned measure"(emphasis in original). 
156 Our understanding of Korea's request is confirmed by its position in interim review.  At the second 
meeting of the Panel with the parties, the European Comm unities stated that if the Panel were to find the TDM 
Regulation and the national measures of the five EC member States (to the extent still in force) to be 
inconsistent with the WTO Agreement, the EC would bring those measures into conformity.  The European 
Communities also stated that if the basic law is incompatible with the WTO Agreement, there would be no basis 
for further granting any aid.  We under stand these statements to mean that , in the event of a finding of WTO-
inconsistency, the European Communities would bring the TDM and the national measures into conformity with 
its WTO obligations, and that such action would remove the legal basis for granting any further aid.  In response 
to this statement by the European Communities, Korea,  in its interim review comments, has indicated its 
concern that "the EC is referring to the lapse of the authority of the EC member states to grant new aid rather 
than with respect to continued disbursement of already granted aid . (emphasis added)." 
157 Thus, for example, the Panel notes the reference made by Korea to the statement of the Appellate 
Body in paragraph 45 of its report in Brazil – Aircraft (Article 21.5 - Canada) that "to continue to make 
payments under an export subsidy measure found to be prohibited is not consistent with the obligation to 
'withdraw' prohibited export subsidies" in which connection Korea argues that the language in Article 4.7 of the 
SCM Agreement is simply the particular application of Artic le 19.1 of the DSU.   Oral statement of Korea at the 
first substantive meeting of the Panel with  the parties, Attachment 1, para. 16.  WT/DS301/R 
Page 73 
 
 
 to do so now would require us to speculate with r espect to facts not placed before us and with respect 
to developments that have not yet occurred.   
7.24 The Panel also notes Korea's request that, if the Panel agrees with Korea that individual 
disbursements of funds are not separate measures but  are simply the application or implementation of 
the measures found to be illegal, the Panel make  a recommendation under Article 19.1 of the DSU 
that the European Communities i mmediately cease any further disbursements of illegal funding.  We 
do not see how the text of Article 19.1 permits us to make a recommendation other than that the EC 
"bring its measures into conformity with that agre ement".  Therefore, even if we agreed that 
disbursements of funds are applications of th e measures identified in Korea's request for the 
establishment of a panel, Article 19.1 of the DSU would preclude us from making the kind of specific 
recommendation requested by Korea.   
7.25 To conclude, the Panel takes note  that the European Communities has indicated that it is not 
necessary for the Panel to make the prel iminary ruling initially requested by the 
European Communities; and decides  that it is neither necessary nor appropriate to clarify the status of 
disbursements of funds in the manner requested by Korea.    
 
(b) New Measures of EC member States  
7.26 In response to a question of the Panel, Korea  indicates inter alia  that "it has specifically 
requested in its request for Panel Establishment the inclusion of all EC member State provisions 
implementing the TDM Regulation including the impl ementing provisions by the new member States 
that acceded to the European Communities on 1 May 2004.  The TDM Regulation constitutes a 
regulatory framework that gives the authority but the EC member State provisions are the 
implementation of the unilateral and discrim inatory retaliation in the TDM Regulation".158  
7.27 The European Communities  objects to this reference by Korea to implementing provisions 
including those in new member States and those th at entered into force since the request for the 
establishment of a panel.  The European Communiti es argues that Korea cannot ask the Panel to make 
findings on measures that were not included in th e request for establishment of a panel and could 
indeed not even have existed at that time.  Si nce the request only includes the TDM Regulation and 
the five schemes existing at the time of the requ est, Korea cannot expand the scope of this proceeding 
to any future measures of all future possible ne w EC member States.  In this context, the 
European Communities also rejects Korea's char acterization of the national TDM measures as 
"implementing" measures.159  
7.28 In response, Korea  argues that new measures of EC member States would certainly be 
covered and refers in this respect to its discussion of the notion of "directly related" measures in its 
opening statement at the first meeting.160  
7.29 As noted above (paras. 7.18-7.19), Korea' s request for the establishment of a panel161 refers 
to: (i) the TDM Regulation as extended in product sc ope and proposed to be extended in duration; and 
(ii) the EC member State implementing provisions of the TDM Regulation and the European 
Commission Decisions approving these implementing provisions, including the measures adopted by 
Germany, Denmark, the Netherlands, France, and Sp ain.  The Panel finds nothing in this request 
suggesting that, as Korea now argues before the Pane l, Korea "specifically requested...  the inclusion 
                                                      
158 Response of Korea to Panel Question 4.   
159 Second submission of the European Communities, paras. 32-33.   
160 Oral statement of Korea at the s econd substantive meeting of the Panel with the parties, para. 64.   
161 WT/DS301/3, attached as Annex. WT/DS301/R 
Page 74 
 
 
 of all EC member State provisions implementi ng the TDM Regulation, including the implementing 
provisions by the new member States that acced ed to the European Communities on 1 May 2004". 
7.30 We note that neither party has identified any further implementing provisions by any member 
State, whether new or existing as of the date of its request for establishment of a panel, beyond the 
five implementing measures specifically identified by  Korea.  Nor has either party identified any 
further proposed implementing provisions by other member States.  In fact, there is not a scintilla of 
evidence before the Panel, nor in fact any basis to  speculate, that any further implementing provisions 
are envisioned.  To the contrary, we note that of the five implementing provisions specifically identified, three have been allowed to expire.  We do not consider that an abstract ruling on 
hypothetical future measures is necessary nor helpful to the resolution of this dispute.
162 
7.31 Therefore, the Panel does not further address this matter.   
(c) Whether the present dispute is a dispute between Korea and the European Communities or a 
dispute between Korea and the European Communities and its member States   
7.32 The parties have raised certain issues relating to the identification of the Member to whom 
our rulings and recommendations should be addre ssed, with respect to measures taken by the EC 
member States.  More specifically, the European  Communities considers that it is the "proper 
respondent" for the measures at issue and states th at it "takes full responsibility under international 
law"163 for measures taken by EC member States pursuant to the TDM Regulation, and that for the 
purposes of WTO law, such  measures are taken by the European Communities as a Member of the 
WTO.  Korea, for its part, while taking note of the European Communities' statement that it takes full 
responsibility for the measures, considers that "the  present dispute is between Korea and the EC and 
its member States.  Hence Korea requests the Panel to make findings in relation to the 
European Communities and EC member State measures and to recommend that both the EC TDM Regulation and the EC member State provisions sh ould be brought in conformity with the WTO 
obligations".
164   
7.33 We note that there is no dispute that both the TDM Regulation and the EC member State 
measures are within our terms of reference and that, in the event they are found inconsistent with the 
WTO Agreement, they would be subject to our recommendation to the extent that they are still 
operational.  As to the WTO Member to whom any recommendations should be addressed in relation 
to these measures, we first note that Korea in its first submission requested that we recommend that 
the European Communities  bring all these measures into conformity.  Korea's articulation of its 
requests for rulings and recommendations subseque ntly varied somewhat in the course of the 
proceedings, but the Panel understands Korea's pr incipal concern to be that any ruling or 
recommendation should cover the EC member State measures as well as the TDM Regulation.  We also recall the European Communities' declarati on that it assumes full responsibility for all these 
measures, including the EC member State measur es.  We understand this to mean that the 
European Communities accepts resp onsibility for any actions that may be required to bring into 
conformity the measures at issue.  We also note that the measures at issue were taken by the EC 
member States pursuant to the TDM Regulation itself.  In light of these elements, we would find it 
                                                     
 
162 The European Communities in its first submission also raised as issues the status of expired 
measures and the lack of clarity of Ko rea's description of the measures at issue.  The Panel notes however that 
the European Communities, while characterizing these issues  as "preliminary issues relating to the measures at 
issue", does not specifically request the Panel to rule on this basis that particular measures are outside its terms 
of reference, and we therefore will not do so.  We note , however, that the national measures which expired on 
31 March 2004 were specifically identifie d Korea's request for the establishment of a panel and were in force on 
the date of the establishment of the Panel's terms of reference (19 March 2004).       
163 First submission of the European Communities, para. 93. 
164 Response of Korea to Panel Question 4. WT/DS301/R 
Page 75 
 
 
 sufficient, in the circumstances of this case, to address our recommendation to bring the measures at 
issue into conformity to th e European Communities.   
(d) Other "preliminary issues" raised by the European Communities in its first submission 
7.34 In addition to the conditional request for a preliminary ruling on whether the individual 
instances of application of the TDM Regulation and th e national measures are covered by this dispute, 
other preliminary issues raised by the European Communities  in its first submission pertained to: 
(i) the alleged mischaracterization by Korea of the legal nature of the TDM Regulation and its 
relationship with the national TDM programmes;  and (ii)  Korea's reliance on press releases.165   
7.35 In the Panel's view, the observations offered by the European Communities in this part of its 
first submission concern certain legal and fact ual aspects of the measures involved that the 
European Communities considers to be particularly  important to a correct  understanding of these 
measures.  The Panel addresses these issues when discussing the factual and legal aspects of the 
claims raised by Korea.166 
5. Measures at issue 
(a) Council Regulation (EC) No 1177/2002, as amended  
7.36 The principal measure at issue in this pr oceeding is Council Regulation (EC) No 1177/2002 
of 27 June 2002 concerning a temporary defensiv e mechanism to shipbuilding (hereinafter: TDM 
Regulation)167, which was extended in pro duct coverage in June 2003 a nd the duration of which was 
extended  by Council Regulation (EC) No 502/2004  of 11 March 2004.  The TDM  Regulation was 
adopted by the Council of the European Union on the basis of, in particular, Articles 87(3)(e), 89  and 
133 of the Treaty establishing the European Community , which deal with respectively state aids and 
the common commercial policy.   
7.37 In June 1998, the Council had a dopted new rules on state aids to the shipbuilding sector 
providing inter alia  for the phase out of contract-related operating aid by 31 December 2000.168   
However, the TDM Regulation provides that, as a temporary and exceptional measure, contract-
related operating aid for the building of containe r ships, product and chemical tankers and LNG 
carriers169 shall be considered compatible with the common market.170  
                                                      
165 First submission of the European Communities, paras. 92-106.  Korea's specific responses to the 
observations of the European Communities appear in para s. 11-25 of the oral statement of Korea at the first 
substantive meeting of the Panel and in Korea's responses to Panel Questions 7-8 and 10. 
166 See infra , paras. 7.52-7.54 and footnotes 278 and 400. 
167 OJ L 172, 2.7.2002, p. 1, reproduced in Exhibit Korea -4 (a).  
168 Council Regulation (EC) No 1540/98 of 29 June 1998 establishing new rules on aid to shipbuilding, 
OJ L 202, 18.7.1998, p.1, reproduced in Exhibit EC-18.  Article 3(1) of this Regulation provided: 
"Until 31 December 2000, production aid in su pport of contracts for shipbuilding and ship 
conversion, but not ship repair, may be cons idered compatible with the common market 
provided that the total amount of all forms of ai d granted in support of any individual contract 
(including the grant equivalent of any aid granted to the ship-owner or third parties) does not 
exceed, in grant equivalent, a common maximum ai d ceiling expressed as a percentage of the 
contract value before aid.  For shipbuilding contracts with a contract value before aid of more 
than ECU 10 million, the ceiling shall be 9 per cent in all other cases the ceiling shall be 
4.5 per cent."   
169As explained below, LNG carriers were not covered by the TDM Regulation from the outset but 
were   included in its scope in June 2003.    
170 Article 1 of the TDM Regulation defines the terms "container ships", " chemical tankers", "product 
tankers", and "LNG carriers":  WT/DS301/R 
Page 76 
 
 
 7.38 The introductory Recitals of the TDM Regulati on explain the considerations motivating its 
adoption and design as follows.   
7.39 First, it is stated that, while in June 2000 th e European Commission and the Government of 
Korea signed Agreed Minutes relating to world shi pbuilding with the aim of restoring fair and 
transparent conditions171, Korea has not effectively implemen ted the commitments under the Agreed 
Minutes, notably the commitment of ensuring an effec tive price mechanism.  S econd, it is stated that 
although operating aid has not been effective in preventing the European shipbuilding industry from 
being injured by competition not respecting nor mal competitive conditions and that accordingly 
contract-related operating aid may not be gran ted in respect of contracts agreed as from 
1 January 2001, a temporary defensive mechanism should nevertheless be authorized for limited 
market segments and for a short and limited period only as an exceptional and temporary measure and 
in order to assist Community shipyards in those se gments that have suffered adverse effects in the 
form of material injury and serious prejudice caused by unfair Korean competition.   
7.40 Third, regarding the product coverage of the TDM Regulation, the fourth Recital notes that, 
while there are segments of the Co mmunity shipbuilding industry in which Community shipyards are 
in a strong position on the international market, "i n other segments, there is evidence that Community 
shipyards have suffered adverse effects in the form  of material injury and serious prejudice caused by 
unfair Korean competition", and contract-related aid may therefore be authorized in those sectors in 
certain circumstances, namely container ships a nd product and chemical tankers.  Regarding LNG 
carriers, the fifth Recital points to the exceptional development in this sector and states that contract-related temporary support may be authorised in th is sector "if the Commission confirms, on the basis 
of investigations covering the period of 2002, th at the Community industry has suffered material 
injury and serious prejudice in this sector caused by unfair Korean practices to the same extent as has 
been found for container ships and product and chemical tankers".   
7.41 Fourth, regarding the level of aid, the sixth R ecital states that operating aid of 6 per cent of 
contract value before aid may be authorized "in or der to effectively enable Community shipyards to 
overcome unfair Korean competition". 
7.42 Finally, in respect of the temporal application of the aid scheme, Recital 7 of the TDM 
Regulation states that the temporary defensive mechanism should only be authorized after the 
initiation of WTO dispute settlement proceedings by the European Communities against Korea and 
                                                                                                                                                                    
 
(a) 'container ships' shall mean ships designed with a single deck hull with an 
arrangement of holds to carry containers (standard or non-standard; refrigerated or non-
refrigerated), whose holds ar e fitted with cell guides to facilitate the positioning of the 
containers, as may be some of the deck stor age space.  Other ships combining cargo carrying 
capacity for containers and other cargo are considered as containe r ships if the larger part of 
the cargo carrying capacity is  dedicated to containers;  
(b) 'chemical tankers' shall mean ships designed with a single deck hull with an 
arrangement of integral and/or independent tanks suited to carry chemical products in liquid 
form.  Chemical tankers are characterized by the ability to carry and handle several substances 
at the same time and the particular equipment of the tanks with coatings, reflecting the nature 
and hazard of the cargo carried; 
(c) 'product tankers' shall mean ships designed with a single deck hull with an 
arrangement of integral and/or independent tanks suited to carry refined petroleum products in 
liquid form; 
(d)  'LNG carriers' (Liquefied Natural Gas ca rriers) shall mean ships designed with a 
single deck hull with fixed integral and/or independent tanks suited to carry natural gas in 
liquid form.   
171 Agreed Minutes between the European Community and the Government of the Republic of Korea 
relating to the world shipbuilding market, OJ L 155, 28.6.2000, p. 49, reproduced in Exhibit EC-6.   WT/DS301/R 
Page 77 
 
 
 may no longer be authorized  "if these dispute se ttlement proceedings are resolved, or suspended on 
the grounds that the Community considers that  the agreed minutes have been effectively 
implemented".   
7.43 The key operative provisions are in Articles 2(1)-(4) of the TDM Regulation:  
"1. Subject to paragraphs 2 to 6, direct aid in support of contracts for the building 
of container ships, product and chemical ta nkers as well as LNG carriers shall be 
considered compatible with the common ma rket when there has been competition for 
the contract from a Korean shipyard offering a lower price.   
2. Direct aid in support of contracts for the building of LNG carriers may only 
be authorised under this Article for fina l contracts signed after the Commission gives 
notice in the Official Journal of the European Communities  that it confirms, on the 
basis of investigations covering the period of 2002, that Community industry has 
suffered material injury and serious prejudice in this market segment caused by unfair 
Korean practices.   
3. Aid under this Article may be authorised for shipbuilding contracts up to a 
maximum  intensity of 6 % of contract value before aid.   
4. This Regulation shall not apply in r espect of any ship delivered more than 
three years from the date of signing of the final contract.  The Commission may, 
however, grant an extension of the three-year delivery limit when this is found 
justified by the technical complexity of the individual shipbuilding project concerned 
or by delays resulting from unexpected disrup tions of a substantia l  and defensible 
nature in the working programme of a yard due to exceptional circumstances, 
unforeseeable and external to the company."   
In June 2003, the European Commission publis hed a notice under paragraph 2 of this Article 
confirming, on the basis of investigations covering the period of 2002, that the Community industry 
had suffered material injury and serious prejudice in  the market segment of LNG carriers caused by 
unfair Korean practices.172 
7.44 Article 3 of the TDM Regulation stipulates that  the operating aid covered  by the Regulation 
shall be subject to Article 88 of the EC Treaty, wh ich Article provides for the supervision of state aid 
by the European Commission, not ably through a mechanism of ex ante  control on the basis of 
notifications by member States.   
7.45 Article 4 of the TDM Regulation provides that th e application of the Regulation is limited to 
contracts signed in the period from the date of the initiation by the European Communities of WTO 
dispute settlement proceedings against Korea until the date one month after the resolution or suspension of those proceedings:  
"The Regulation shall be applied to final c ontracts signed from the entry into force of 
this Regulation until its expiry, with the ex ception of final contracts signed before the 
Community gives notice in the Official Journal of the European Communities  that it 
has initiated dispute settlement proceedings against Korea by requesting consultations 
in accordance with the World Trade Organi zation's Understanding on the Rules and 
Procedures for the Settlement of Disputes and final contracts signed one month or 
                                                     
 
172Notice under Article 2 of Council Regulation (EC) No 1177/2002 of 27 June 2002, OJ C 148, 
25.6.2003, p.14, reproduced in Exhibit Korea- 4 (b). WT/DS301/R 
Page 78 
 
 
 more after the Commission gives notice in the Official Journal of the 
European Communities  that these dispute settlement proceedings are resolved, or 
suspended on the grounds that the Commun ity considers that the Agreed Minutes 
have been effectively implemented."  
The European Commission published a notice under this Article of the initiation of WTO dispute 
settlement proceedings  on 24 October 2002.173  
7.46 The TDM Regulation entered into force on 3 Ju ly 2002 with an original expiry date of 
31 March 2004.  Council Regulation (EC) No 502/2004 of 11 March 2004 amended the TDM 
Regulation to extend its du ration until 31 March 2005.174  
(b) Authorization by the European Commission, on th e basis of the TDM Regulation, of  state aid 
granted by EC member States  
7.47 The European Commission has adopted decisions175 authorizing aid schemes notified by 
Germany176, the Netherlands177, Denmark178, France179 and Spain180 after it had satisfied itself that the 
proposed scheme was in conformity with the provisions of the TDM Regulation.   
7.48 The legal instruments embodying the specific me asures adopted by these five member States 
are the following:181 
Germany  Richtlinien des Bundesministeriums fur Wirtschaft 
and Arbeit zu befristeten Schutzmassnahmen für des 
Schifbau vom 24.  Oktober 2002 (Directives of the 
Federal Ministry for Economy  and Work on 
temporary defensive measures for Shipbuilding of 
24 October 2002) 
Netherlands Regeling van de Staatssecretaris van Economische 
Zaken van 17 juli 2003, nr.  WJZ 3040972, houdende 
regels inzake het verstrekken van subsidies aan de 
scheepsbouwsector bij wijze van tijdelijke defensieve 
maatregel "Tijdelijke Regeling Ordersteun 
Scheepsniewbouw  van 17 Juni 2003" "Kaderwet EZ 
subsidies" ("Framework law for Grants from the 
Ministry of Economy), Art. 3 
Denmark  "Lov om midlertig kontraktbetinget driftsstotte til 
bygning af visse skibstyper" (law) "Bekendsgorelse 
om administration af lov om midlertidig 
kontraktbetinget drifssstotte til bygning af visse 
skibstyper" (administrative decision).   
                                                      
173 Notice under Article 4 of Council Regulation No 1177/2002 of 27 June 2002, OJ C 257, 24.10.2002, 
p. 11, reproduced in Exhibit Korea-16.   
174Council Regulation (EC) No 502/2004 of 11 March 2004 amending Regulation (EC) No 1177/2002 
concerning a temporary defensive mechanism to shipbuilding, OJ L 81, 19.3.2004, p. 6, reproduced in Exhibit 
Korea-4(c).   
175 Exhibits Korea 11-15. 
176 OJ C 108, 7.5.2003, p. 5.   
177 OJ C 221, 17.9.2003, p. 10 and  OJ C 269, 8.11.2003, p. 23. 
178 OJ C 227, 23.9.2003, p. 7.   
179 OJ C 257, 25.10.2003, p. 2. 
180 OJ C 6, 10.1.2004, p.22. 
181 Attachment EC-1.   WT/DS301/R 
Page 79 
 
 
 France No legal act, but budgetary line for this purpose in the 
Finance law for the year in question.  Ad hoc decision 
of a special inter-ministerial committee created for this 
purpose 
Spain Real decreto 1274/2003 de 10 de octubre, por el que se 
modifica el real decreto 442/1994, de 11 de marzo, 
sobre primas y financiación a la construcción naval" 
(Royal Decree 442/1994 on 11 March on premiums 
and financing for shipbuilding, as amended by Royal 
decree 1274/2003 of 10 October), Art. 9.   
7.49 There is a difference in product coverage betw een these measures in that  the French measure 
is limited to LNG carriers while all other schemes cover container ships, pr oduct tankers, chemical 
tankers and LNG carriers.182  
7.50 In the proceedings before the Panel, the European Communities indicated that the aid 
schemes adopted by France and the Netherlands have been extended until 31 March 2005 but that the 
other three schemes have  expired on 31 March 2004.183  The European Communities also explained 
that no application for operating aid could be made after 31 March 2004 in the case of the expired 
measures and after 31 March 2005 in the case of the two extended national schemes.184  
7.51 Authorization by the European Commission appli es to the aid scheme as such, not to the grant 
of aid in individual cases pursuant to the aid schem e.  There is no information before the Panel 
regarding individual cases of application of the natio nal aid schemes authorized by the Commission.   
6. The nature of the TDM Regulation and its relationship with national measures adopted 
by EC member States   
7.52 The parties disagree on the correct characterization of the nature of the TDM Regulation and 
its relationship with national aid schemes adopted by  EC member States.  The principal issues that 
have arisen in this respect are:  (i)  whether the TDM Regulation is an "authorization" of state aid or a 
"limitation" on state aid;  (ii) whether the me asures adopted by EC member States are properly 
viewed as measures "implementing" the TDM Regul ation; and (iii) whether the TDM Regulation 
constitutes a state aid measure.   
7.53 The Panel notes that the TDM Regulation was adopted pursuant to, inter alia , Article 87(3)(e) 
of the EC Treaty.  This clause, one of the exemptions from the general prohibition in Article 87(1) of 
the EC Treaty of state aid that distorts competition and affects trade, provides that the Council may 
specify categories of aid considered compatible with the common market.  The Panel further notes 
that the kind of aid provided for by the TDM Regulation had been prohibited under Council 
Regulation 1540/98 as of 1 January 2001.  While th e TDM Regulation arguably can be regarded as a 
"limited derogation" from the self-i mposed general prohibition on the use of state aid contained in 
Article 87(1) of the EC Treaty, its  legal effect under Community law is  to provide the necessary legal 
basis without which the introduction of new national aid schemes providing for this kind of aid would 
not have been possible.  However, strictly speakin g, the term "authorization" may not be accurate 
insofar as it suggests that the Regulation itself is  a sufficient basis to permit member States to 
introduce such aid schemes.  It is clear that th e member States cannot without Commission approval 
adopt these schemes directly on the basis of the TDM Regulation.  Similarly, the term 
"implementation", if used in relation to the aid gran ted by the member States within the framework of 
                                                      
182 Attachment EC-1.   
183 Response of the European Communities to Panel Question 2.   
184 Response of the European Communities to Panel Question 2.   WT/DS301/R 
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 the TDM Regulation, is somewhat lacking in precision in that individual member States are obviously 
not under any obligation to introduce schemes provi ding for the kind of operating aid referred to in 
the TDM Regulation.  Finally, as regards the issue of whether the TDM Regulation is a state aid measure, the Panel notes that the TDM Regulation was adopted on the basis of inter alia  the 
provisions of the EC Treaty on state aid and that these provisions are the same that formed the legal 
basis of Council Regulation 1540/98.  However, the Panel does not consider that whether or not the 
TDM Regulation constitutes a state aid measure with in the meaning of EC law is of particular 
relevance to the Panel's analysis of the conform ity of this Regulation with WTO provisions.   
7.54 Closely related to its argument that Korea misr epresents the nature of the TDM Regulation, 
the European Communities characte rizes the Regulation as not "legally relevant" because it neither 
provides for nor authorizes the granting of subsidies.
185  In this regard, we note however, that the 
European Communities does not explain why this w ould make the TDM Regulation legally irrelevant 
in the context of WTO dispute settlement.  After all,  it is the legal authority under which EC member 
States provide subsidies in certain instances, and the European Communities has indicated that it 
accepts responsibility for such member State actions .  Moreover, it is not in dispute that the TDM 
Regulation is a measure of the European Communities that is clearly within the Panel's terms of 
reference.  In the Panel's view, although the Regulat ion may not by itself direct or authorize the EC 
member States to take certain action, this does not imply that the Regulation cannot be in violation of 
the WTO Agreement.  Whether or not this is the cas e is an issue that we will address in our findings 
in light of our analysis of the s ubstance of the claims of Korea. 
B. CLAIM UNDER ARTICLE III:4  OF THE GATT  1994 
1. Arguments of the parties186 
7.55 Korea  argues first, that the TDM Regulation is a "l aw" or "regulation" within the meaning of 
Article III:4 of the GATT 1994 which affects the inte rnal sale, offering for sale, purchase etc.  of 
imported products because it clearly affects and adversely modifies the conditions of competition 
between domestic and imported Kor ean products.  Second, the dom estic and Korean-origin vessels 
covered by the TDM Regulation are "like products " for purposes of Article III:4 of the GATT 1994.187  
Third, the TDM contributions clearly reduce opport unities for Korean vessels  to compete with EC 
vessels under equal conditions.  Since the contributions are only available in case of vessels built at 
EC yards they create an incentive for shipowners to  place orders with EC shipyards.  It is this 
"artificial incentive to purchase EC origin vessels at the expense of competing Korean like products" 
that constitutes less favourable treatment of Korean like products.188  Korea also points to the fact that 
the TDM Regulation is a narrow trade weapon aime d exclusively at Korea and not a generalized 
subsidy programme for the benefit of the deve lopment of the EC shipbuilding industry.   
7.56 In response to the argument of the Europ ean Communities that the TDM Regulation is 
covered by Article III:8(b) of the GATT 1994, Kore a submits that it challenges the TDM Regulation 
as a regulatory framework rather than as a subsidy measure per se .189  As a discriminatory regulatory 
framework, the TDM Regulation is not covered by  Article III:8(b) because it does not actually 
provide for the payment of subsidies and because it is not a measure that serves the general economic 
development purposes contemplated by the drafters of Article III:8(b).190  Korea also rejects the 
argument of the European Communitie s that Article III:8(b) is an "exemption" that clarifies that 
                                                      
185 First submission of the European Communities, p. 31.  
186 For a more detailed account of the argumen ts of the parties, see Section IV.C.1. 
187 First submission of Korea, paras. 157-162. 
188 First submission of Korea, paras. 163-165.   
189 Oral statement of Korea at the first substantive m eeting of the Panel with the parties, paras. 60-62. 
190 Second submission of Korea, paras. 200-215. WT/DS301/R 
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 subsidies to producers are not measures affecting the "internal sale, offering for sale, purchase, 
transportation, distribution or use" of products.191  
7.57 The European Communities  argues that the notion of regulati ons "affecting the internal sale, 
offering for sale, purchase, transportation, distribu tion or use" of imported products does not cover 
budgetary aids to producers within the meaning of  Article III:8(b) of the GATT 1994 and that the 
TDM Regulation and national TDM m easures are legally excluded from the scope of Article III:4 of 
the GATT 1994.192  First, Article III:8(b) clarifies that the national treatment rule in Article III does 
not require WTO Members to pay domestic subsidi es to foreign producers.  A subsidy can be 
inconsistent with Article III:4 only if it discriminates between domest ic and foreign producers through 
differential application of tax measures, internal postal rates, etc.193  Second, the TDM Regulation and 
the national TDM schemes are outside the scope of Article III:4 of the GATT 1994 because they 
involve the payment of subsidies exclusively to domestic producers.  The fact that the aid provided for 
is not general but temporary and limited to certain sectors does not remove it from the scope of 
Article III:8(b).194  
7.58 The European Communities argues that Article III: 8(b) is an "exemption" rather than an 
"exception" because it clarifies that  subsidies to domestic producers are not "laws, regulations, or 
requirements affecting the internal sale...of an imported product." The European Communities rejects 
the argument of Korea that the TDM Regulation is covered by Article III:4 as a discriminatory 
regulatory framework rather than as a subsidy.  In  the view of the Europ ean Communities, Korea has 
not established how the Regulation, when viewed as a regulatory framework, affects the internal sale ...of imported products.
195  
7.59 Korea  notes that the fact that vessels are not often "imported" into the 
European Communities does not prevent the application of Articles III (and I) of the GATT 1994 because these provisions apply regardless of wh ether the measure in question produces trade 
effects.
196  In response to a Panel question, Korea argues that the burden is on the 
European Communities to show that importation of sh ips is impossible.  Nevertheless, Korea submits 
that it is possible for ships to be imported and that "the general paucity of im portation is not the result 
of a legal bar but, instead, reflects the tendency of sh ip owners to move to flags of convenience as an 
economic matter". That ships generally do not ente r another Member's customs territory as part of 
their day-to-day operations of transporting people and goods is quite distinct from the issue of 
whether they can be imported at the time of initial delivery.  Nothing in Articles I and III of the GATT 
indicates that the drafters intended to exclude ships from these provisions.197  Korea points out that the 
European Communities' Combined Nomenclature c ontains headings for "sea going tankers" and for 
"sea going other vessels for the transport of goods and other vessels for the transport of both goods 
and persons", and provides data on the import volume and value recorded by the statistical office of 
the European Communities for the vessels concerned during the period 1998-2003.198  
7.60 In response to a Panel question, the European Communities  states that the notion of 
importation within the meaning of GATT Article I:1 does not apply to the present case because the 
four types of vessel involved are generally not im ported.  As confirmed by Article V of the GATT, 
the customs status of these ships is th at of means of transport in transit.199  T h e  
                                                      
191 Second submission of  Korea, paras. 209-210 and 218. 
192 First submission of the European Communities, para. 222. 
193 First submission of the European Communities, paras.224-228. 
194 First submission of the European Communities, paras. 292-232. 
195 See also second submission of the Eu ropean Communities, paras. 40-42.   
196 First submission of Korea, para. 149. 
197 Response of Korea to Panel Question 51. 
198 Second submission of Korea, paras. 206-207 and Exhibit Korea 46.   
199 Response of the European Communities to Panel Question 51.   WT/DS301/R 
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 European Communities submits that the existen ce of headings for ships in the Combined 
Nomenclature does not automatically mean that ships are cleared throug h customs because these 
headings are also applied for the purpose of collecti ng statistics, and that statistics on imports of ships 
into the European Communities are not  based on customs data but on cha nges in ownership of ships.   
2. Arguments of third parties 
7.61 Japan argues that the TDM measures involve "t he payment of subsidies exclusively to 
domestic producers" within the meaning of Article  III:8(b) of the GATT 1994 and are therefore not 
covered by Article III.200 
3. Evaluation by the Panel 
7.62 Article III:4 of the GATT 1994 provides in relevant part: 
"The products of the territory of any Member  imported into the territory of any other 
Member shall be accorded treatment no l ess favourable than that accorded to like 
products of national origin in respect of  all laws, regulati ons and requirements 
affecting their internal sale, offering for sal e, purchase, transportation, distribution or 
use."  
7.63 Article III:4 applies to "the products of the terr itory of any Member imported into the territory 
of any other Member..."  The Panel notes that in response to a question of the Panel the European 
Communities has expressed the view that the notion of  importation within the meaning of Article I of 
the GATT 1994 does not apply to the vessels cove red by the TDM Regulation because they are 
treated as means of transport in transit.201  The European Communities find support for this position in 
the provisions on freedom of transit in Article V of the GATT 1994.  Although the view of the 
European Communities specifically refers to the notion of importation under Article I of the GATT 
1994, the Panel considers that it is also relevant to Article III whic h applies to "products...imported 
into the territory of any other Member".  In the view of the Panel, in order to find in a particular case 
that Article III:4 does not apply because the produ cts in question are not "imported products", it 
would be necessary to establish that importation of tho se products is inherently impossible.  While the 
Panel realizes that most ships entering the Eur opean Communities carrying goods are in transit and 
are not formally imported, that does not preclude the possibility of a ship being imported.  In this regard, the Panel agrees with Korea that a distinct ion can be made between entry as part of normal 
commercial operations and entry at the time of the initial delivery of a vessel.  The fact that Article V 
of the GATT 1994 obligates Members to accord vessel s freedom of transit across their territories does 
not establish that such vessels cannot be imported into  the territory of a Member.  The Panel notes that 
in any event the European Commun ities does not rely on this view regarding the customs status of 
ships as part of its legal defence against Ko rea's claims under Article III:4 of the GATT 1994.
202  
7.64 In order to establish that a violation of Article III:4 has occurred, it must be demonstrated 
"that the imported and domestic products at issue are ' like products'; that the measure at issue is a 'law, 
regulation, or requirement affecting their internal  sale, offering for sale, purchase, transportation, 
                                                      
200 Third party submission of Japan, paras. 15-17. 
201 Responses of the European Communities to Panel question 51.  
202Thus in its comments on the Interim Report, the European Communities observed that "it wishes  to 
clarify that it never defended itself legally by arguing that ships are not imported products within the meaning of 
Article III:4 of the GATT 1994". Comments of the European Communities on the Interim Report, 13 January 
2005, p. 3.  
 WT/DS301/R 
Page 83 
 
 
 distribution or use'; and that the imported products are accorded less favourable  treatment than that 
accorded to like domestic products..."203   
7.65 As to whether the measure at  issue accords imported products less favourable treatment, the 
Panel recalls that, in respect of subsidies, vi olations of Article III:4 have been found where 
discrimination between domestic and imported products results from the conditions attached to the 
granting of subsidies.204  This is the case, for example, if a s ubsidy is granted on the condition that the 
recipient of the subsidy purchases products of dom estic origin, thereby discriminating against the 
suppliers of the foreign-origin product.  Kore a's arguments on how the TD M Regulation affects the 
internal sale...of imported products and accords t hose products less favourable treatment within the 
meaning of Article III:4 would however appear to be  based on the theory that the state aid provided 
under the TDM Regulation to Community shipyards adversely affects the conditions of competition 
between the domestic products produced by Comm unity shipyards and the imported products from 
Korean yards, rather than on specific conditions li nked to the subsidies that reward purchasers/users 
for discriminating in favour of domestic products.   
7.66 However, the European Communities argues that  in any event the TDM Regulation is not 
covered by Article III:4 of the GATT 1994  because the state aid permitted under this Regulation falls 
within the scope of Article III:8(b) of the GATT 1994.   
7.67 Article III:8(b) of the GATT 1994 provides that: 
"The provisions of this Article shall not pr event the payment of subsidies exclusively 
to domestic producers, including payments  to domestic producers derived from the 
proceeds of internal taxes or charges applie d consistently with the provisions of this 
Article and subsidies effected thr ough governmental purchases of domestic 
products."205   
                                                      
203 Appellate Body Report, Korea - Various Measures on Beef , para. 133.   
204 See, e.g. Panel Report in Indonesia - Autos , paras. 14.29-14.46. 
205 Article III:8(b) of the GATT 1994 is identical to Article 18.8(b) of the Havana Charter for an 
International Trade Organization.  That provision had been added to the draft Charter during the second session 
of the Preparatory Committee.  It was explained  during  the Havana Conference by the Chairman of a Working 
Party examining this Article that this sub-paragraph "had  been added to the Geneva draft because it was felt that 
if subsidies were paid on domestic and not on imported products, it might be construed that Members were not 
applying the 'national treatment' rule.  The object of this sub-paragraph, in the view of the United Kingdom  
delegate, was to make it clear that internal taxes could be entirely non-discriminatory and that subsidies could be 
paid quite separately to domestic producers from the exchequer."  (E/CONF.2/C.3/A/W/49, 10 February 1948, 
p.2)  The sub-paragraph was redrafted at the Havana Conference "in order to make it clear that nothing in 
Article 18 could be construed to sanction the exemption of domestic products or the remission of such taxes.  At 
the same time, the Sub-Committee recorded its view that nothing in this sub-paragraph or elsewhere in 
Article 18 would override the provisions of section C of Chapter IV ["Subsidies"]." (United Nations Conference 
on Trade and Employment, Reports of Committees and Principal Sub-Committees ,  Geneva: Interim 
Commission for the International Trade Organization, September 1948, p.  66) The drafters of Article 18 of the 
ITO Charter specifically rejected a proposal by Cuba at  the Havana Conference that would have amended the 
Article to provide that "[t]he provis ions of this Article shall not preclud e the exemption of domestic products 
from internal taxes as a means of indirect subsidizati on in the cases covered under Article  25 ["Subsidies in 
general"]." (E/CONF.2 /C./3/6, 8 December 1947, p. 17.)  We note in this regard  that the GATT 
CONTRACTING PARTIES at their Second Session in Sept ember 1948 decided to repl ace the original text of 
GATT Article III with the text of Article 18 of the Havana Charter mutatis mutandis .  This change was effected 
through a Protocol Modifying Part II  and Article XXVI, which entered in to force on 14 December 1948.  The 
text of Article III has not been amended since the entry into force of that Protocol.  See Guide to GATT Law and 
Practice  (1995), p. 206. WT/DS301/R 
Page 84 
 
 
 Article III:8(b) thus clarifies that "the payment of subsidies exclusively to domestic producers" is not 
to be construed as a breach of the national treatme nt requirement of Article III.  The fact that 
Article III "shall not prevent" the payment of subsid ies that meet the conditions of Article III:8(b) 
means that if a measure is covered by Article III:8( b), it cannot be inconsistent  with any provision in 
Article III, including Article III:4.206   
7.68 Turning to the conditions of Article III:8(b), th e "payment of subsidies" "not prevented" by 
Article III:8(b) only covers subsidies “exclusivel y to domestic producers” of a given product.  We 
understand this to mean that a subsidy is not in consistent with Article III:4 merely because it is 
granted only to domestic producers of a product and not to foreign producers of that product.   
7.69 Applying these conditions to the TDM Regulation,  the Panel recalls that the TDM Regulation 
creates the legal basis for the European Commission to authorize the adoption of aid schemes by the 
member States providing for "direct aid in support of  contracts for the building of" container ships, 
product tankers, chemical tankers and LNG carriers, i.e.  state aid to member State producers of these 
products.  The availability of the state aid only to domestic producers of certain vessels207 but not to 
foreign producers of those vessels is precisely the ki nd of different treatment that is covered by 
Article III:8(b) and thus not inc onsistent with Article III.   
7.70 The Panel is not persuaded by Korea's argument that Article III:8(b) is not relevant to this 
case because Korea challenges the TDM Regulation as a discriminatory regulatory framework, rather 
than the subsidies as such.  In particular, Ko rea's claim that the TDM Regulation as such is 
inconsistent with Article III:4 of the GATT 1994 is based on the subsidies that can be provided within 
the framework of that Regulation.  The "discrim inatory" character of the "regulatory framework" 
alleged by Korea consists of the impact of the subsidies authorized by that Regulation on price 
competition between Community yards and Korean yards.  Since the subsidies paid under the 
framework are covered by Article III:8(b), however, the "regulatory framework" within which these 
subsidies are provided cannot be inconsiste nt with Article III:4 of the GATT 1994.   
7.71 Korea, referring to Canada – Periodicals , argues that since the TDM Regulation itself does 
not involve an actual outlay of funds it cannot be covered by Article III:8(b).208  The Panel does not 
consider Canada – Periodicals to be relevant to this dispute, how ever.  What matters in the Panel's 
view is not whether the TDM Regulation itself involv es outlays of funds by governments, but rather 
that the measures provided for under the TDM Regul ation, state aids, are outlays of funds by 
governments. 
7.72 Korea also argues that the TDM Regulation is  not covered by Article III:8(b) because the 
subsidies it provides for are not general in nature.  The Panel, however, can see no basis in the text of 
Article III:8(b) for the proposition that its app licability depends not only upon whether a measure 
constitutes "the payment of subsidies exclusively to  domestic producers", but also upon whether that 
measure serves "the general public purposes of economic development".209  The Panel also notes that 
                                                      
206 It is not necessary in order to resolve this dispute for the Panel to express an opinion on whether 
Article III:8(b) is an "exemption", whic h "clarifies" that Article III is inhere ntly inapplicable to subsidies paid 
exclusively to domestic producers, or an "exception", which removes from the scope of Article III:4 measures 
that would otherwise be covered by that provision.   
207 As confirmed by WTO and GATT dispute settlement reports, Article III:8(b) does not apply to the 
payment of subsidies to processors or users of the product with respect to which discrimination is alleged.  E.g.  
Panel Report, Indonesia – Autos,  para. 14.43;  Panel Report, EEC – Oilseeds I , para. 137; Panel Report, Italy -  
Agricultural Machinery , para. 14.  In the Panel's view, Korea has not submitted arguments and evidence to 
contest the fact that the TDM Regulatio n provides for aid only to producers of the product with respect to which 
discrimination is alleged.   
208 Korea refers to the Appellate Body Report in Canada - Periodicals , p. 33. 
209 Second submission of Korea, para. 215.   WT/DS301/R 
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 Korea has failed to explain how this argument is supported by the text, context or object and purpose 
of Article III:8(b).   
7.73 The Panel notes that Korea argues, althou gh not specifically in connection with 
Article III:8(b), that the formal recipient of the subsidies provided for under the TDM Regulation is 
irrelevant because the ultimate be neficiary of the subsidy is the ship-owner.  The Panel can find no 
textual support in Article III:8(b) for the view that a distinction must be made, for purposes of 
application of that provision, between the "forma l recipient" and the "ultimate beneficiary" of a 
subsidy solely on the grounds that the subsidy allows the producer to sell a product at a lower price.  
Indeed, were such a price effect a sufficient basis to conclude that a subsidy is not a "payment of 
subsidies exclusively to domestic producers", Article III:8(b) would be deprived of its effectiveness as 
production subsidies can have such an effect in many instances.   
7.74 In short, while the Panel realizes that the state aid provided for by the TDM Regulation may 
adversely affect the conditions of competition betw een domestic and Korean products, that effect is 
not relevant to whether Article III:8(b) applies to the aid.   
7.75 The Panel concludes  that the state aid provided for by the TDM Regulation is covered by 
Article III:8(b) of the GATT 1994 and that, as a conse quence, the TDM Regulation is not inconsistent 
with Article III:4 of the GATT 1994.  Therefore, the Panel also concludes  that the national TDM 
schemes of Denmark, France, Germany, the Netherlands and Spain and the Decisions of the 
European Commission authorizing those schemes, ar e not inconsistent with Article III:4 of the 
GATT 1994.   
C. CLAIM UNDER ARTICLE I OF THE GATT  1994 
1. Arguments of the parties210 
7.76 In support of its claim that the TDM Regulati on is inconsistent with Article I:1 of the 
GATT 1994, Korea  submits three main arguments.  First,  the TDM Regulation is covered by the 
phrase "all matters referred to in paragraphs 2 and 4 of Article III" in Article I:1 because it is a 
measure affecting the "internal sale, offering for sale,  purchase, transportation, distribution or use" of 
imported products within the meaning of Article III:4.211  Second, the TDM Regulation grants an 
advantage, favour, privilege or immunity within th e meaning of Article I:1 to certain WTO Members 
in respect of the commercial vessels within its scope.  Specifically, the TDM Regulation "grants 
Japanese and other non-Korean yards  and vessels the advantage or favour of being able to trade on 
equal terms with EC competitors without the pros pect of provoking reprisals or countermeasures in 
the form of TDM contributions to the competitors".212  Third, the advantage granted by the TDM 
Regulation in respect of the container ships, produc t and chemical tankers and LNG carriers of certain 
WTO Members is not accorded immediately and uncond itionally to like vessels originating in Korea.  
Korea submits that the TDM Regulation amounts to de jure  discrimination.213 
7.77 The European Communities argues that the TDM Regulation is not within the scope of 
Article I:1 of the GATT 1994 because subsidization is not an "advantage" covered by Article I:1.214  
Article I:1 cannot apply to the TDM Regulation because Article III:8(b), which exempts the TDM 
Regulation from Article III:4, thereby also remove s the Regulation from the scope of "all matters 
                                                      
210 For a more detailed account of the argumen ts of the parties see Section IV.C.2. 
211 First submission of Korea, para. 177;  response of Korea to Panel Question 56; second submission 
of Korea, para. 224.   
212 First submission of Korea, para. 181;  second submission of Korea, para. 221.   
213 First submission of Korea, paras. 187-191.   
214 First submission of the European Communities, para. 238. WT/DS301/R 
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 referred to in paragraphs  2 and 4 of Article III".215  For the same reason, the fact that the TDM 
Regulation targets Korea is not a basis for finding a violation of the MFN clause in Article I:1 of the 
GATT 1994.  Apart from the fact that the TDM subs idies will in many cases affect competitors from 
other countries, the targeting of Korea results from the non-implementation by Korea of the Agreed 
Minutes.  Article I:1 of the GATT 1994 is not a ge neral prohibition of discr imination between WTO 
Members and cannot prohibit such measures if they are not advantages within the meaning of that 
provision.216   
7.78 Korea  rejects the defence of the European Comm unities based on Article III:8(b).  According 
to Korea, this provision is irrelevant because, firstly Korea does not challenge the TDM Regulation as 
a subsidy but as a regulatory framework, and, secondly, Article III:8(b) is expressly limited to the 
provisions of Article III.  In Korea's view, the matter s "referred to" in paragra phs 2 and 4 of Article III 
are the matters "mentioned" in those paragraphs, including "all laws, regulations and requirements 
affecting...", regardless of whether they are subject  to the obligations of Article III.  Korea also 
submits that there was no reason for the drafters  of the GATT to permit discrimination between 
products of different countries in the provi sion of subsidies to domestic producers.217  The 
European Communities  submits that it is irrelevant fo r purposes of Article III:4 that Korea 
challenges the TDM Regulation not as a subsidy but as a regulatory measure218, and that Korea 
misconstrues the relationship between Articles III:8( b) and I:1 of the GATT 1994.  According to the 
European Communities, Article III:8(b) is not an "ex ception" but an "exemption" in that it clarifies 
that the granting of a subsidy to a domestic pr oducer from budgetary resources is not a regulatory 
requirement affecting the sale of that product.219  
2. Evaluation by the Panel 
7.79 Article I:1 of the GATT 1994 provides: 
"With respect to customs duties and charg es of any kind imposed on or in connection 
with importation or exportation or imposed on the international transfer of payments 
for imports or exports, and with respect to the method of levying such duties and 
charges, and with respect to all rules a nd formalities in connection with importation 
and exportation, and with respect to all matte rs referred to in pa ragraphs 2 and 4 of 
Article III,*220 any advantage, favour, privilege or  immunity granted by any Member 
to any product originating in or destined  for any other country shall be accorded 
immediately and unconditionally to the like pr oduct originating in or destined for the 
territories of all other Members." 
                                                      
215 First submission of the European Communities, para. 239.   
216 First submission of  the European Communities, para. 242.  See also the response of the 
European Communities to Panel Question 53.   
217 Oral statement of Korea at the first meeting, para s. 60-67; second submission of Korea, paras. 216-
219. 
218 Response of the European Communities to Panel Question 55. 
219 Response of the European Communities to Panel Question 54.   
220 Ad Article I:1 of the GATT 1994 reads as follows:   
"The obligations incorporated in paragraph 1 of Article I by reference to paragraphs 2 and 4 of 
Article III and those incorporated in paragraph 2(b) of Article II by reference to Article VI 
shall be considered as falling within Part II for the purposes of the Protocol of Provisional 
Application. 
The cross-references, in the paragraph immediately above and in paragraph 1 of Article I, to 
paragraphs 2 and 4 of Article III shall only appl y after Article III has been modified by the 
entry into force of the amendment provided for in the Protocol Modifying Part II and Article 
XXVI of the General Agreement on Tariffs and Trade, dated September 14, 1948."  [footnote 
omitted.] WT/DS301/R 
Page 87 
 
 
 In order to determine whether a measure is in consistent with the most-favoured-nation (MFN) 
treatment required by Article I:1, it must first be  established that that measure is covered by the 
subject matter of  that clause.  Korea argues that the TDM Regulation results in a denial of MFN treatment to imported Korean products in that bids by Korean shipyards will lead to the granting of 
subsidies to Community shipyards that compete w ith the Korean shipyards whereas bids by shipyards 
of countries other than Korea will not lead to the gr anting of such subsidies.  We must determine, 
therefore, whether the provision of the subsidies re ferred to in the TDM Regulation falls within the 
subject matter of Article I:1.    
7.80 Article I:1 of the GATT 1994 applies to:  (i) "customs duties and charges of any kind imposed 
on or in connection with importa tion or exportation or imposed on the international transfer of 
payments for imports or exports"; (ii) "the method of levying such duties and charges"; (iii) "all rules 
and formalities in connection with importation and exportation" ; and (iv) "all matters referred to in 
paragraphs 2 and 4 of Article III".   
7.81 Korea claims that the TDM Regulation is a meas ure within the scope of Article III:4 of the 
GATT 1994 which is thereby subject to Article I:1 by  virtue of the phrase "all matters referred to in 
paragraphs 2 and 4 of Article III".
221  We recall, however, that we have concluded that the TDM 
Regulation is a measure that falls within the sc ope of Article III:8(b) of the GATT 1994 because it 
provides for "the payment of subsidies exclus ively to domestic producers" and that the TDM 
Regulation is therefore not inconsistent with Article III:4.  In that connection, we have rejected the 
argument of Korea that since Korea challeng es the TDM Regulation as a regulatory framework, 
Article III8(b) is irrelevant.  The question that is now before us is whether our conclusion that the 
TDM Regulation is covered by Artic le III:8(b) and hence not inconsistent with Article III:4 means 
that the TDM Regulation is also outside the scope of  the MFN obligation in Article I:1 as applied to 
"all matters referred to in paragr aphs 2 and 4 of Article III".   
7.82 It should be emphasized that the issue here is not whether Article III:8(b) somehow affects the 
scope of Article I in its entirety.  Rather, th e question is limited to whether and if so how 
Article III:8(b) affects the scope of "all matters refe rred to in paragraphs 2 and 4 of Article III".  In 
this connection, the argument of Korea that Article  III:8(b) only refers to "the provisions of this 
Article" and therefore does not apply to Article I is unpersuasive.  To the extent that Article III:8(b) 
plays a role in determining the scope of the matt ers referred to in Article III:2 and III:4, a direct 
reference to Article I is not necessary.   
7.83 In considering whether Article III:8(b) affect s the meaning of "all matters referred to in 
paragraphs 2 and 4 of Article III" in Article I, we note that Articles III:2 and 4 lay down substantive 
legal obligations.  In light of this use of the wo rd "matters" to refer to provisions containing legal 
obligations, we consider that among the various di ctionary definitions, "subject" and "substance" are 
particularly pertinent to define the meaning of the word "matters" as used in Article I:1.222  Therefore, 
interpreting the ordinary meaning of the terms used  in their context, the Panel considers that the 
phrase "matters referred to in..." in Article I:1 refers  to the subject matter of those provisions in terms 
of their substantive legal content.  Understood in this sense, it is clear  to us that the "matters referred 
to in paragraphs 2 and 4 of Artic le III" cannot be interpreted without  regard to limitations that may 
exist regarding the scope of the substantive oblig ations provided for in these paragraphs.  If it is 
explicitly provided that a particular measure is not  subject to the obligations of Article III, that 
measure in our view does not form part of the "matte rs referred to" in Articles III:2 and 4.  Thus, since 
Article III:8(b) provides that Article III "shall not prevent the payment of subsidies exclusively to 
                                                      
221 See, e.g., first submission of Korea, para. 176; response of Korea to Panel Question 56; second 
submission of  Korea, para. 224.   
222 The New Shorter Oxford English Dictionary  (1993), p.1717. WT/DS301/R 
Page 88 
 
 
 domestic producers", such subsidies are not part of the subject matter of Article III:4223 and cannot be 
covered by the expression "matters refe rred to in paragraphs 2 and 4 of Article III"  in Article I:1.   
7.84 Therefore, the Panel considers that Korea's argu ment that "matters referred to..." means the 
"measures mentioned" in Articles III:2 and 4, including measures explicitly not subject to the 
obligations of those provisions, is unsupported by the text and context of the phrase "all matters 
referred to in paragraphs 2 and 4 of Article III".  Nor can we find support for this proposed 
interpretation in the supplementary means of treat y interpretation invoked by Korea.  If anything, 
those supplementary means suggest the opposite. 
7.85 In support of its reading of "all matters referred to in paragraphs  2 and 4 of Article III", Korea 
argues that this phrase was inserted during the Geneva Session of the ITO Preparatory Committee in 
1947 in order to extend the grant of MFN treatment  to all matters dealt with in those paragraphs 
regardless of whether national treatment is provided for in respect of such matters.224  We note in this 
respect that during that session of the ITO Preparatory Committee the United States made a proposal 
to amend the text of what was then draft Article  14 (general most-favoured-nation treatment) of the 
ITO Charter by replacing the phrase "with respect to a ll matters in regard to which national treatment 
is provided for in Article 15" (national treatment) w ith "with respect to all matters referred to in 
paragraphs 1,2,3, and 4 of Article 15".  The explanation of this proposal was: 
"The changes proposed in line 8 of paragr aph 1 are designed to extend the grant of 
most–favoured-nation treatment to all ma tters dealt with in Article 15 (except 
governmental operations under paragraph 5 of Article 15) regardless of whether 
national treatment is provided for in respect of such matters ."225 
The statement thus makes it clear that the proposed  drafting change would apply the MFN clause to 
"all matters referred to in paragra phs 1,2,3 and 4 of Article 15" but not to "governmental operations 
under paragraph 5 of Article 15".  At the time the United States made this proposal, paragraph 5 of 
Article 15, which eventually became paragraph 8 of Article 18 of the Havana Charter and of 
Article III of the GATT, provided that the nati onal treatment obligations would not apply to 
government procurement.226  The statement of the delegate of the United States made it clear that 
under the  proposed amendment to Article 14, the MFN clause would not apply to "governmental operations" that were explicitly removed from th e scope of the national treatment clause under 
                                                     
 
223 We recall that we do not express a view on whet her Article III:8(b) must be characterized as an 
"exemption" or "exception".   
224 First submission of Korea, para. 176.   
225 United Nations Economic and Social Council, Second Session of the Preparatory Committee of the 
United Nations Conference on Trade and Employment, E/PC/T/W/146 (30 May 1947).  The statement in the 
Guide to GATT Law and Practice , Vol.  I (1995), p.30, referred to by Korea in support of its argument contains 
an incomplete quotation:  "This phrasing was inserted during the Geneva session of the Preparatory Committee 
in 1947, in order 'to extend the grant of most-favoured-n ation treatment to all matters dealt with in [these 
paragraphs] regardless of whether national treatment is provided for in respect of such matters.' " 
226 The proposal of the United States was made in May 1947.  Shortly thereafter, it was suggested to 
expand paragraph 5 to exclude subsidies to domestic producers from the scope of the national treatment article.  
Thus paragraph 5 of the draft national treatment article (18) resulting from the Geneva Session of the ITO 
Preparatory Committee pr ovided as follows:  
"The provisions of this Article shall not apply to the procurement by governmental agencies of 
products purchased for governmental purposes and not for resale or use in the production of 
goods for sale, nor shall they prevent the payment to domestic producers only of subsidies 
provided for under Article 25, including payments to domestic producers derived from the 
proceeds of internal taxes or charges and subs idies effected through governmental purchases 
of domestic products."   
Report of the Second session of the Preparatory Committee of the United Nations Conference 
on Trade and Employment , E/PC/T/186 (10 September 1947), p. 19. WT/DS301/R 
Page 89 
 
 
 paragraph 5 of Article 15.  Therefore, we fail to see how this statement can support the position taken 
by Korea in this dispute that a measure expressly removed from the scope of the national treatment 
obligation in Article III can nevertheless be among the "matters referred to in paragraphs 2 and 4 of 
Article III".   
7.86 It is noteworthy in this regard that in a discussion on draft Article 18.8(a) of the Havana 
Charter corresponding to Article III:8(a), it was ob served at a meeting in February 1948 that: 
"...the Sub-Committee had considered that th e language of paragr aph 8 would except 
from the scope of Article 18 [nationa l treatment] and hence from Article 16 [MFN 
treatment], laws, regulations and requirements governing purchases effected for 
governmental purposes where resale was only incidental...".  227  
This clearly suggests that negotiators understood th at the reference to government procurement in 
Article 18.8(a) would also apply in the context of the MFN clause (Article 16).   
7.87 Thus the relevant drafting history that we are aware of shows that the exclusion of 
government procurement from the national treatment article would also apply to the MFN clause.  
Given that the reference to "the payment of su bsidies paid exclusively to domestic producers" 
appeared in the same paragraph as the reference to government procurement, the logical implication is 
that the drafters also intended to remove such subsidies from the application of the MFN clause to 
internal measures.   
7.88 We also note the argument of Korea that " GATT practice and panels" provide support for its 
interpretation of how Article I:1 applies to intern al taxation and regulation covered by Article III.228  
The factual basis for this assertion is unclear.  Korea does not refer to specific GATT/WTO dispute 
settlement reports to substantiate this assertion.  While there would appear to have been no panel 
report that directly addresses this issue in respect of Article III:8(b), the Report of the Panel on Complaints in Belgian Family Allowances  is relevant to the issue of whether Article III:8(a) limits the 
scope of "all matters referred to in  paragraphs 2 and 4 of Article III" for the purposes of Article I:1.   
7.89 The measure at issue in that  case was a levy charged by Belgium on foreign products 
purchased by public bodies when the products originat ed in a country whose family allowance did not 
meet certain requirements.  The Panel first determined  that the levy was an internal charge within the 
meaning of Article III:2 of the GATT and then found that the levy was subject to Article I:1 as a 
matter referred to in paragraph 2 of Article III.  Since Belgium had granted exemptions from this levy 
to certain countries, it was required to exte nd this advantage unconditionally to other GATT 
Contracting Parties.  In this respect, the Pa nel considered, but rejected, the application of 
Article III:8(a) as follows:  
"The Panel did not feel that the provisions  of paragraph 8 (a) of Article III were 
applicable in this case as the text of the paragraph referred only to laws, regulations 
and requirements and not to internal taxes and charges."
229  
If the Panel had considered that the phrase "all matters referred to in paragraphs 2 and 4 of Article III" 
in Article I:1 applies to any measure in the field of internal taxation and regulation, irrespective of 
whether the national treatment obligation applies to  such measure, it would not have been necessary 
                                                      
227 United Nations Conference on Trade and Employment, Third Committee: Commercial Policy, 
Summary Record of the Forty-First Meeting, E/CONF.2/C.3/SR.41 (23 February 1948), p. 3.  (Emphasis added) 
228 First submission of Korea, para. 176.   
229 Panel Report, Belgium - Family Allowances , para. 4.  The Panel notes that the text of Article III:8(a) 
of the GATT 1994 is identical to the text of Artic le III:8(a) of the GATT  1947 examined in the Belgian Family 
Allowances dispute. WT/DS301/R 
Page 90 
 
 
 for the Panel to consider the applicability of Article III:8(a) to the facts of this particular case.  The 
fact that the Panel considered it n ecessary to state that Article III:8(a)  was not applicable to this case 
because this provision only deals with laws, regula tions and requirements and not with internal taxes 
and charges clearly suggests that the Panel was of the view that Article III:8(a) would remove from 
the scope of Article I:1 a measure relating to government procurement in the form of law, regulation 
or requirement.   
7.90 Therefore, to the extent that there exists relevant GATT/ITO drafting history and GATT 
practice, it confirms our understanding that "matters referred to in paragraphs  2 and 4 of Article III" 
should be construed in light of the scope of the substantive obligations in those provisions.  The 
payment of subsidies exclusively to domestic producer s is not a "matter referr ed to in paragraphs 2 
and 4 of Article III" because it is excluded from the subject matter of Article III as a whole.  Since we have concluded that the TDM Re gulation is covered by Article III:8(b), we find that the TDM 
Regulation is not a measure falling within the scope of the subject matter of Article I:1 of the 
GATT 1994.  Thus the question whether and how this  measure results in different treatment of 
imported products of different countries does not arise.   
7.91 The Panel concludes  that the TDM Regulation is not inc onsistent with Article I:1 of the 
GATT 1994.  It follows that the national TDM schemes of Denmark, France, Germany, the 
Netherlands and Spain, and the Decisions of th e European Commission authorizing those schemes, 
are also not inconsistent with Article I:1 of the GATT 1994.   
D. 
CLAIM UNDER ARTICLE 32.1  OF THE  SCM  AGREEMENT  
7.92 The Panel will first consider whether the TDM Regulation is a "specific" action within the 
meaning of Article 32.1 of the SCM Agreement before  turning to the question of whether it is action 
"against" a subsidy of another Member.   
1. Whether the TDM Regulation constitutes "specific " action within the meaning of 
Article 32.1 of the SCM Agreement 
(a) Arguments of the parties230 
7.93 Korea argues that the TDM Regulation is "specific " action within the meaning of Article 32.1 
of the SCM Agreement, as that term ha s been interpreted by the Appellate Body231, because the TDM 
measures "are inextricably linked to or have a st rong correlation with the constituent elements of a 
subsidy".  While the TDM Regulation does not expr essly refer to "the constituent elements of a 
subsidy", these elements can be derived fro m other evidence and are implicit in the TDM 
Regulation.232  
7.94 Korea argues that, since "adverse effects" and "serious prejudice" are concepts under 
Articles 5 and 6 of the SCM Agreement that refer to situations where subsidies within the meaning of 
Article 1 of that Agreement are generating such effects and which have no meaning under EC law 
independent of their use under the SCM Agreement, the fact that the TDM Regulation provides that 
aid may be provided in those sectors of the EC shipbuilding industry that  have suffered "adverse 
effects" such as "material injury" and "serious  prejudice" caused by "unfair Korean practices" 
necessarily implies a determination that the constituent elements of a subsidy are present.  Related to 
                                                      
230 For a more detailed account of the argumen ts of the parties, see Section IV.C.3. 
231 First submission of Korea, para. 105.   
232 First submission of Korea, paras. 106-117; oral statement of Korea at the first substantive meeting 
of the Panel with the parties, paras. 27-29; responses of Korea to Panel Questions 34, 37, 38 and 39; second 
submission of Korea, paras. 35-81, 142 and 155.   WT/DS301/R 
Page 91 
 
 
 this, Korea refers to the fact that the evidence on th e existence of those "adverse effects" was based on 
findings made by the European Commission in an  investigation under the European Communities' 
Trade Barriers Regulation that certain subsidies gr anted by Korea had caused material injury and 
serious prejudice.233 
7.95 Korea argues that Recital 7 and Article 4 of the TDM Regulation, which provide that the 
TDM will be coterminous with the WTO case launched by the EC against Korea, demonstrate that the 
measures of Korea that are the subject of the dispute settlement case are the same measures that 
prompted adoption of the TDM Regulation.234  Korea submits that the existence of a link between the 
TDM Regulation and the constituent elements of a subsidy is al so demonstrated by various 
Commission press releases and memoranda  indicating that, as part of a "twin-track" strategy to 
respond to alleged Korean subsidies, the TD M Regulation was designed to accompany a WTO 
dispute settlement proceeding against Korea.235  
7.96 Korea submits that the TDM Regulation itself is specific because it is premised on the 
conclusion drawn by the European Commission rega rding the existence of subsidies provided by 
Korea and is legally dependent upon the WTO di spute settlement.  Consequently, it is without 
relevance that individual payments of subsid ies are not actually subject to a finding of 
subsidization.236  In any event, it is factually incorrect  that the TDM Regulation does not establish a 
link with the existence of subsidi zation in its operative part becau se the Regulation legally binds its 
duration to the WTO dispute settlement proceedin g instituted by the European Communities with 
respect to alleged Korean subsidies.237  
7.97 Korea submits that the Agreed Minutes between  the European Community and Korea relating 
to the world shipbuilding market ("Agreed Minut es") encapsulated an understanding relating to the 
application of the SCM Agreement to the shipbuild ing sector.  The Agreed Minutes did not contain a 
commitment on the part of Korea to impose price controls on exports to end dumping.238  Korea only 
committed to refrain from granting subsidies and to  continue implementing internationally recognized 
accounting principles.239  Korea argues that the relationship established in Article 4 of the TDM 
Regulation between the effective implementation of the Agreed Minutes and the possible solution or 
suspension of the WTO case demonstrates that the Agreed Minutes are the subject of the WTO 
dispute settlement proceedings.240  Korea argues that even assuming arguendo that "unfair practices" 
referred to injurious pricing as a problem which is  broader in scope than subsidization, the TDM 
                                                      
233 First submission of Korea, paras. 108-114; response of Korea to Panel Question 37; second 
submission of Korea paras. 71-78.  Korea refers to  reports submitted by the Commission to the EC Trade 
Barriers Regulation Committee in May 2001, July 2001, May 2002 and (with respect to LNG carriers) 
June 2003, and cites the finding in the May 2001 Report, confirmed in the subsequent reports, that export-
contingent subsidies granted by Korea are causing adve rse effects to the Community industry.  First written 
submission of Korea, paras. 109-112; second submission of Korea, paras. 75-79; Exhibit Korea- 6.   
234 First submission of Korea, paras. 116-117; oral st atement of Korea at first meeting, paras. 33-37; 
responses of Korea to Panel Questions 34 and 35.   
235 First submission of Korea, paras. 113-114; oral st atement of Korea at the first substantive meeting 
of the Panel with the parties, paras. 27-29; second submission of Korea, paras. 35-61. 
236 Oral statement of Korea at the first substantive meeting of the Panel with the parties, para. 51; 
second submission of Korea, para. 168.   
237 Second submission of Korea, para. 169.   
238 Oral statement of Korea at the fi rst substantive meeting of the Panel with the parties, paras. 5, 30-33 
and 71. 
239 Response of Korea to Panel Questions 44-45.   
240Oral statement of Korea at the first substantive meeting of the Panel with the parties, paras. 34-35. WT/DS301/R 
Page 92 
 
 
 Regulation would still be specific because a measure do es not have to be exclusively restricted to the 
constituent elements of a subsidy to be specific.241  
7.98 The European Communities submits that the TDM Regulation is not a "specific " action 
against a subsidy of another Member, as that te rm has been interpreted by the Appellate Body242, 
because there is no inextricable link, implicit or  explicit, between the TDM Regulation and the 
constituent elements of a subsidy.  In order for an action to be specific, a particular subsidy must be 
targeted243 and a specific determination must be made that a subsidy exists.244  The Appellate Body 
has confirmed this understanding of the meaning of "specific" action when referring to measures "that 
may be taken only where the constituent el ements of [a subsidy] are present."245   
7.99 The European Communities contends that th e language in the Recitals of the TDM 
Regulation cited by Korea only serves to motivate  the limitation of the scope of the TDM Regulation 
to market segments wh ere the Commission has found the existen ce of adverse effects and injury 
caused by "unfair practices".246  The expression "unfair practices" does not demonstrate a link with a 
finding of subsidies, but encompasses the problem of  injurious pricing, which is significantly broader 
in scope than subsidization and refers  to the conduct of individual shipyards.247  
7.100  In the latter regard, the Eur opean Communities argues that th e principal motivation for the 
adoption of the TDM Regulation is the non-implementation by Korea of the Agreed Minutes.248  The 
Agreed Minutes go beyond the SCM Agreement in that they acknowledge that lower prices by 
Korean shipyards are due not only to subsidization but also to inadequate accounting and financial 
responsibility rules and to below cost pricing resu lting from cross-subsidization of export sales by 
domestic sales, which can be completely in dependent of any government subsidies.249  T h e  
European Communities rejects Korea's characteriz ation of the Agreed Minutes as an understanding 
regarding the interpretation of the SCM Agreement.250  The European Communities also rejects the 
argument of Korea that the Agreed Minutes concer n the subsidies at issue in the WTO dispute 
settlement case brought by the Eu ropean Communities against Kor ea.  The European Communities 
submits in this respect that the discretion provided to the Commission to suspend the WTO 
proceeding in case the Agreed Minutes had been impl emented was meant to create an incentive for 
Korea "to come back to the negotiating tabl e in the framework of the Agreed Minutes."251   
7.101  The European Communities argu es that the TBR Report cited by Korea cannot constitute a 
determination of the existence of the constituent el ements of a subsidy as it is merely an internal 
working document of the Commission without any lega l effect and that the formal decision of the 
Commission of 8 October 2002 on the outcome of this investigation only announced that there was 
                                                      
241 Second submission of Korea, paras. 170-176. 
242 First submission of the European Communities, paras. 185-187. 
243 Oral statement of the European Communities at the first substantive meeting of the Panel with the 
parties, para. 21.   
244 Oral statement of the European Communities at the first substantive meeting of the Panel with the 
parties, para. 21.   
245 First submission of the European Communities, para. 185; oral statement of the 
European Communities at the first substantive meeting of the Panel with the parties, para. 22.   
246 First submission of the European Communities, paras. 194 and 200; oral statement of the 
European Communities at the first substantive meeting of the Panel with the parties, para. 29. 
247 First submission of the European Communities, para. 195.  
248 First submission of the European Communities, para. 196.   
249First submission of the European Communities, para. 196; oral statement of the 
European Communities at the first substantive meeting of the Panel with the parties, paras. 26-27.   
250 First submission of the European Communities, paras. 154-155. 
251 Responses of the European Communities to Panel Question 15.   WT/DS301/R 
Page 93 
 
 
 sufficient evidence to warr ant initiation of a WTO case.252  The TDM Regulation uses the findings of 
injury and serious prejudice and links them more br oadly to the failure of Korea to implement the 
Agreed Minutes.253  According to the European Communiti es, this link between the TDM Regulation 
and the findings made in the Trade Barriers Regula tion investigation is of a purely political nature.254   
7.102  The European Communities argues that the choi ce of the WTO dispute settlement proceeding 
as one of the criteria to limit the temporal scope of the TDM Regulation was "politically motivated"  
in that it sought to clarify that the previously abol ished state aid would not be generally reintroduced.  
The link with the WTO dispute settlement case establis hed an "objective" criterion in the sense that 
expiration of the TDM Regulation was made dependant upon an event external to the 
European Communities.255  
7.103  The European Communities submits that whethe r the TDM Regulation is specific must be 
established on the basis of the operative part of the Regulation and not on the basis of the motives 
mentioned in the Recitals or accompanying politi cal statements accompanying its adoption.  The 
conditions defined in the operative part of the TD M Regulation are not inextricably linked to the 
constituent elements of a subsidy.  An analysis of the relevant operative provision- Article 2(1) of the 
TDM Regulation- shows that:  (i) aid can be gran ted under the TDM Regulation against an offer from 
any Korean shipyard regardless of wh ether that yard benefits from subsidies;  (ii) aid can be granted 
against any competition from Korea without the need to determine to what extent the price of the 
Korean offer is lower and whether that lower price is  due to subsidization or unfair pricing;  (iii) the 
TDM Regulation by itself does not result in any paym ents;  and (iv) there is  no relationship between 
the fixed amount of 6 per cent contract-related ai d and any actual undercutting by a Korean bid or 
even the undercutting margins found in the TBR inves tigation.  Thus contrary to the situation in  
US-Offset Act (Byrd Amendment),  the payment of aid under the national TDM measures cannot be 
made only following a determination that the constituent elements of  a subsidy are present but in any 
situation involving competition from a Korean shipya rd offering a lower price, irrespective of whether 
that shipyard has received subsidies.256  
(b) Arguments of third parties 
7.104  The United States argues that the Appellate Body Reports in US - Offset Act (Byrd 
Amendment)  and US - 1916 Act  indicate that the coverage of Ar ticle 32.1 of the SCM Agreement is 
not limited to measures that may be taken "only" when the constituent elements of a subsidy are 
present.  The United States also submits that specific action against a subsidy is not limited to actions that deal exclusively with subsidization.  Fina lly, the United States considers that the European 
Communities provides no support for its assertion that  whether the TDM Regulation is specific action 
against a subsidy must be established on the basi s of the operative part of the TDM Regulation and 
that in any event the reasons cited by the Eur opean Communities as to why Article 2.1 of the TDM 
Regulation does not contain an inextricable link with the constituent elements of a subsidy are 
unconvincing.
257  
7.105  China submits that  the scope of the phrase "specific action against a subsidy" is not confined 
to measures that may be taken only when the constituen t elements are present.  In light of the criteria 
formulated by the Appellate Body, the TDM Regul ation is specific because of the relationship 
                                                      
252 First submission of the European Communities, para. 198.   
253 First submission of the European Communities, para. 198,  
254 First submission of the European Communities, para. 199.   
255 First submission of the European Communities, para. 147; response of the European Communities 
to Panel Question 11; second submission of the European Communities, para. 59. 
256 First submission of the European Communitie s, paras. 201-207; oral statement of the 
European Communities at the first substantive meeti ng of the Panel with the parties, paras. 31-36. 
257 Third party submission of the United States, paras. 4, 9 and 10.   WT/DS301/R 
Page 94 
 
 
 between the scope of application of the TDM Regula tion and the constituent elements of a subsidy.  
In this respect, it is irrelevant that the granti ng of state aid in individual cases does not require a 
determination of the existence of a subsidy.258  
(c) Evaluation by the Panel  
7.106  Article 32.1 of the SCM Agreement  provides: 
"No specific action against a subsidy of another Member can be taken except in 
accordance with the provisions of GATT 199 4, as interpreted by this Agreement." 
A footnote (56) to this sentence provides:  
 
"This paragraph is not intended to preclude  action under other relevant provisions of 
GATT 1994, where appropriate." 
7.107  The question addressed by the Panel in this sectio n of its report is whether the measures at 
issue constitute  "specific" action within the meaning of Article 32.1. 
7.108  The Panel notes that the parties to the dispute base their arguments on the meaning of 
"specific action against a subsidy of another Memb er" on the analysis of the Appellate Body in  
US - 1916 Act  and US - Offset Act (Byrd Amendment) .259  While they differ in their interpretation of 
the exact meaning of some of the statements ma de by the Appellate Body, they clearly accept the 
Appellate Body's general approach in those cases.   
7.109  The Appellate Body first elaborated its views as to the interpretation of "specific" action in 
Article 18.1 of the Anti-Dumping Agreement and Article 32.1 of the SCM Agreement in US  – 1916 
Act.  In that dispute, the Appellate Body stated that: 
"In our view, the ordinary meaning of the phrase 'specific action against dumping' of 
exports within the meaning of Article18.1 is  action that is taken to respond to the 
constituent elements of 'dumping'.  'Specific action against dumping' must, at a 
minimum, encompass action that may be ta ken only when the constituent elements of 
'dumping' are present.66 
___________________________________________ 
66 We do not find it necessary, in the present case, to decide whether the concept of 
'specific action against dumping' may be broader."260 
Thus, the Appellate Body tells us in US – 1916 Act  that there is "specific action" in respect of  
dumping (or subsidization) at a minimum  where, as in that case, action could be taken only where the 
constituent elements of dumping (or subsidization) ar e present.  As this was all that was necessary to 
decide that case, the Appellate Body explicitly did not go further to examine whether the outer 
boundary of the phrase extended further.     
7.110  In US – Offset Act (Byrd  Amendment), the Appellate Body explaine d and further developed its 
interpretation of the concept that there must be a "specific action".  The Appellate Body stated that: 
                                                     
 
258 Oral statement of China at the first substantive mee ting of the Panel with the parties, paras. 4-6.   
259 See, e.g., first submission of Korea, paras. 103- 104; first submission of the European Communities, 
paras. 183-192.   
260Appellate Body Report, US – 1916 Act,  para. 122.   WT/DS301/R 
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 "We recall that, in  US – 1916 Act , the United States argued that the 1916 Act did not 
fall within the scope of Article VI of the GATT 1994 because it targeted predatory 
pricing, as opposed to dumping.  We disagreed, and determined that the 1916 Act was a 'specific action against dumping' because the constituent elements of dumping were 
'built into' [Footnote omitted] the essential elements of civil and criminal liability 
under the 1916 Act.  We also found that the 'wording of the 1916 Act … makes clear 
that these actions can be taken  only  with respect to conduct which presents the 
constituent elements of 'dumping'."[Footnote omitted]  Accordingly, a measure that may be taken only when the constituent elements of dumping or a subsidy are 
present, is a 'specific action' in response to dumping within the meaning of 
Article 18.1 of the  Anti-Dumping Agreement   or a 'specific action' in response to 
subsidization within the meaning of Article 32.1 of the  SCM Agreement .  In other 
words, the measure must be inextricably linked to, or have a strong correlation with, 
the constituent elements of dumping or of a s ubsidy.  Such link or correlation may, as 
in the 1916 Act, be derived from the text of the measure itself."
261 
7.111  In US – Offset Act (Byrd Amendment) , the Appellate Body therefore provides a clear and 
explicit explanation of the nature of the link that  must exist between a measure and the "constituent 
elements of dumping or of a subsidy" in order for the measure to constitute a "specific action" related 
to dumping or subsidization.  Specifically, the meas ure must "be inextricably linked to, or have a 
strong correlation with, the constituent elements of dumping or a subsidy."262 
7.112  With respect to how to examine whether this t est is met, the Appellate Body observed in  
US – Offset Act (Byrd Amendment)  that the criterion articulated in US-1916 Act   
"...is not whether the constituent elements of dumping or of a subsidy are explicitly 
referred to in the measure at issue, nor wh ether dumping or subsid ization triggers the 
application of the action, nor whether th e constituent elements of dumping or of a 
subsidy form part of the essential components of the measure at issue".263 
Rather, this test may be met where the constituent elements of dumping or of a subsidy "are implicit 
in the express conditions for taking such action".264  
7.113  In light of the foregoing, the task before th is Panel is to consider whether the TDM is 
inextricably linked to, or has a strong correlati on with, the constituent el ements of a subsidy.265   
7.114  It is clear that the TDM Regulation is a measure adopted by the Council of the 
European Union in response to certain conduct of the Government of Korea and practices of Korean 
shipyards.  The rationale of the TDM Regulation, as expressed in the introductory Recitals, can be 
summarized as follows: as a consequence of Korea's fa ilure to implement the Agreed Minutes, and in 
                                                      
261Appellate Body Report, US - Offset Act (Byrd Amendment),  para. 242. 
262 The Appellate Body further explained that the role of footnote 56 to Article 32.1 is to confirm that 
an action that is not "specific" within  the meaning of Article 32.1 but is nevertheless related to subsidization, is 
not prohibited by that Article.  Appellate Body Report, US - Offset Act (Byrd Amendment) , para. 262.  Although 
the European Communities has referred to footnote 56 as co ntext relevant to interpreting the term "specific", it 
has not asserted that the TDM is "action under other relevant provisions of GATT 1994" within the meaning of 
that footnote. 
263Appellate Body Report, US - Offset Act (Byrd Amendment),  para. 244. 
264Appellate Body Report, US - Offset Act (Byrd Amendment) , para. 244. 
265 We note that Article 1 of the SCM Agreement contains a definition of the term subsidy "[f]or the 
purpose of this Agreement".  It follows that the constituent elements of a subsidy for the purposes of 
Article 32.1 are those set forth in Article 1.  See Appellate Body Report, US – Offset Act (Byrd Amendment),  
para. 240.     WT/DS301/R 
Page 96 
 
 
 order to assist those segments of the Community shipbuilding industry that have suffered adverse 
effects in the form of material injury or ser ious prejudice due to unfair Korean competition or 
practices, it is necessary to establish a temporary defensive mechanism in the form of operating aid aimed at enabling Community shipyards to overc ome Korean competition.  State aid can be 
authorized on the basis of the TDM Regulation on ly  when there is competition from Korea.   
7.115  While the TDM Regulation is clearly directed at  Korea, neither the operative part nor the 
explanatory Recitals of the TDM Re gulation refer explicitly to subsidi es.  According to Article 2 (1) 
of the TDM Regulation, state aid may be provided "when there has been competition for the contract 
from a Korean shipyard offering a lower price".  Moreover, the introductory Recitals of the TDM 
Regulation refer to: "fair and transparent competitiv e conditions" (Recital (1)); "ensuring an effective 
price surveillance mechanism" (Recital (1));  "competition not respecting normal competitive 
conditions" (Recital (2)); "adverse effects in the form  of material injury and serious prejudice caused 
by unfair Korean competition" (Recitals (3) and (4)); "material injury an d serious prejudice...caused 
by unfair Korean practices " (Recital (5)); and " unfair Korean competition" (Recital (6)).  Thus the 
problem that prompted adoption of the TDM Regulation is described as competition that is unfair, 
abnormal or non-transparent, but there is nothing to  indicate explicitly that this problem of unfair 
competition or unfair practices is caused by  subsidies. 
7.116  Notwithstanding this lack of express references to  subsidies, the Panel finds that the text of 
the TDM Regulation and the context of its adoption demonstrate that the Regulation is related to 
subsidies allegedly provided by the Government of Korea to its shipbuilding industry.   
7.117  The Panel notes, in this regard, that the elig ibility for state aid pursuant to the national aid 
schemes approved under the TDM Regulation is limited to certain sectors of the Community 
shipbuilding industry.   
7.118  Recitals (3), (4) and (5) and Article 2(2) of the TDM Regulation indicate that the inclusion of 
a particular segment of the Community shipbuildi ng industry within the scope of the Regulation was 
dependent upon whether that segment had suffered adverse effects in the form of material injury and 
serious prejudice caused by " unfair Korean competiti on" or "unfair Korean practices".  Recitals 3-5 
provide: 
"However, as an exceptional and temporary measure, and in order to assist 
Community shipyards in those segments that  have suffered adverse effects in the 
form of material injury and serious prej udice caused by unfair Korean competition, a 
temporary defensive mechanism should be authorised for limited market segments 
and for a short and limited period only, ... 
The situation in the Community shipbuildi ng industry is heterogeneous.  According 
to the Commission's Fourth and Fifth Reports on the Situation in World Shipbuilding, 
approximately half of all compensated  gross tonnage produced in Community 
shipyards concerns the market segments in which Community shipyards are in a 
strong position on the international market.  However, in other segments, there is 
evidence that Community ship yards have suffered adverse effects in the form of 
material injury and serious prejudice caused by unfair Korean competition.  Therefore, contract-related temporary support may be authorised in certain 
circumstances in tho se segments, namely container ships and product and chemical 
tankers.   
Considering the exceptional development in the sector of LNG carriers, the 
Commission will continue to monitor this  market.  Contract-related temporary 
support may be authorised in this sector if the Commission confirms, on the basis of WT/DS301/R 
Page 97 
 
 
 investigations covering the period of 2002,  that the Community industry has suffered 
material injury and serious prejudice in this  sector caused by unfair Korean practices 
to the same extent as has been found for container ships and product and chemical tankers."  
Article 2(2) of the TDM Regulation provides:  
"Direct aid in support of contracts for the building of LNG carriers may only be 
authorised under this Article for final contracts signed after the Commission gives 
notice in the Official Journal of the Eu ropean Communities that it confirms, on the 
basis of investigations covering the period of 2002, that Community industry has 
suffered material injury and serious prejudice in this market segment caused by unfair 
Korean practices." 
7.119  It is clear, therefore, that the limitation of th e eligibility of state aid to container ships and 
product and chemical tankers was based on eviden ce that Community shipyards in those segments 
had "suffered adverse effects in the form of mate rial injury and serious prejudice caused by unfair 
Korean competition", and that the possible future in clusion of LNG carriers within the scope of the 
Regulation was conditional on confirmation by the European Commission that the Community 
industry in this sector "has suffered material injury and serious prejudice in this market segment caused by unfair Korean practices".
266    
7.120  The Panel realizes that the above-mentioned Recitals and provision of the TDM Regulation 
refer to "unfair Korean competition" and "unfair Korean practices", and that  the Regulation does not expressly mention subsidies provided by the Govern ment of Korea.  However, the TDM Regulation 
employs terms -- "adverse effects", "material injury" and "serious prejudice" -- which, in the SCM 
Agreement, denote the effects of actionable subsidie s.  If, as argued by the European Communities, 
the concepts of "unfair competition" and "unfair practices"  as used in the TDM Regulation do not 
refer to subsidies but to a broader problem of "injur ious pricing", the Panel finds it hard to understand 
why the Regulation in describing the effects of th is "unfair competition" and these "unfair practices" 
employs terminology so intimately c onnected with the SCM Agreement.   
7.121  Moreover, it is undisputed th at the evidence of the existe nce of the "adverse effects", 
"material injury" and "serious prejudice" referred to in Recitals 3-5 and Article 2(2) of the TDM 
Regulation was the result of an investigation conducted by the European Commission pursuant to the 
European Community's Trade Barriers Regulation.
267  The practices subject to this investigation were 
certain subsidies allegedly granted by the Govern ment of Korea to its shipbuilding industry:   
"The investigation was directed agains t subsidies allegedly granted by the 
Government of the Republic of Korea to its shipbuilding industry that benefited 
production between 1997  and 2000 and will benefit fu ture production.  Alleged 
Korean subsidies have included, export con tingent financing, debt forgiveness, debt-
for-equity-swaps, interest relief and special tax concessions in the context of  
                                                      
266As noted above, in June 2003, the European Commission published a notice under Article 2(2) of the 
Regulation confirming, on the basis of investigations covering the period of 2002, that Community industry had 
suffered material injury and serious prejudice in the ma rket segment of LNG carrier s caused by unfair Korean 
practices. 
267 First submission of the European Communities, para s. 158-162.  The Trade Barriers Regulation is a 
mechanism "laying down Community procedures in the fi eld of common commercial policy in order to ensure 
the exercise of the Community's rights under international trade rules, in particular those established under the 
auspices of the World Trade Organization".  Council Regulation (EC) No 3286/94.     WT/DS301/R 
Page 98 
 
 
 preferential restructuring packages provide d in order to save various shipbuilding 
enterprises from imminent collapse." 268  
7.122  Reports269 on the results of this investigation submitted by the Commission to an Advisory 
Committee consisting of representatives of the member  States found that subsidies within the meaning 
of Article 1 of the SCM Agreement granted by Korea were causing adverse effects in the form of 
injury and serious prejudice within the meaning of Article 5 of the SCM Agreement and Article 2 of 
the Trade Barriers Regulation to the Community producers of product and chemical tankers and 
container ships. 
7.123  The Panel notes that, at the time of the adopti on of the TDM Regulation, the “findings” of the 
European Commission on the adverse effects of subs idies allegedly granted by the Government of 
Korea were not yet embodied in instruments with a formal legal status under Community law but in 
reports submitted by the Commission to an Adviso ry Committee, which could in some sense be 
considered to be “internal” and that the form al Decision in which the Commission reported on the 
outcome of the investigation under the Trade Barriers Regulation was promulgated only in 
October 2002.270  Nevertheless, these "internal" reports  formed the basis upon which the Commission 
in May and July 2001 proposed a particular course of action, including adoption of the TDM 
Regulation. 
7.124  Consequently, it is clear to the Panel that the sectoral scope of the TDM Regulation was 
determined on the basis of evidence of the existence of adverse effect s caused by subsidies within the 
meaning of Article 1 of the SCM Agreement allege dly provided by the Government of Korea to its 
shipbuilding industry.271  
7.125  The European Communities acknowledges that it used the evidence of the existence of 
adverse effects from the investigation conducted und er its Trade Barriers Regulation in determining 
the scope of the TDM Regulation272, but submits that the use of this evidence about the state of the 
domestic industry is explained by the need to limit the material scope of the TDM Regulation so as 
not to reintroduce to the full ex tent operating aid into the sector.273 
7.126  The Panel does not contest that the scope fo r providing contract-rela ted operating aid under 
the TDM Regulation is significantly more limit ed than was the case until 31 December 2000 under 
Article 3 of Council Regulation 1540/98, and that th is was due to the fact that the scope of the 
Regulation was defined on the basis of evidence obtai ned in the investigation under the Trade Barriers 
Regulation on the existence of adverse effects to  certain segments of the European Community 
shipbuilding industry.  However, the fact remains that the adverse effects in question were adverse 
                                                      
268 Commission Decision of 8 October 2002 under the provisions of Council Regulation (EC) No 
3286/94 concerning trade practices maintained by Ko rea affecting trade in commercial vessels, OJ L 281, 
19.10.2002, p. 15, Recital (5).   
269 Reproduced in Exhibit Korea-6.  Article 8(8) of the Trade Barriers Regulation requires that in an 
investigation under this Regulation the Commission must report to the Advisory Committee "when it has 
concluded its examination," and that this "report should normally be presented within five months of the 
announcement of initiation of the procedure, unless the complexity of the examination is such that the 
Commission extends the period to seven months."    
270 Commission Decision of 8 October 2002 under the provisions of Council Regulation (EC) 
No 3286/94 concerning trade prac tices maintained by Korea affec ting trade in commercial vessels, Official 
Journal of the European Communities , L 281/15, 19.10.2002.   
271 We recall that the "constituent elements" of a subs idy are those identified in Article 1 of the SCM 
Agreement.  See footnote 265.   
272 See e.g., first submission of the European Communities, para. 158.   
273 First submission of the European Communities, pa ras. 161-162 and 200; oral statement of the 
European Communities at the first substantive meeting of the Panel with the parties, para. 29.   WT/DS301/R 
Page 99 
 
 
 effects caused by subsidies allegedly granted by Ko rea, and that, consequently, the limitation of the 
scope of the TDM Regulation was based on the effects of  subsidies.  Therefore, that the reference to 
adverse effects served the important political purpo se of  explaining the reintroduction of operating 
aid only in certain sectors does not mean that there is no relationship  between the scope of the TDM 
Regulation and the effects of subsidies allegedl y granted by the Government of Korea.   
7.127  The Panel also considers relevant the fact that the TDM Regulation makes a link between the 
temporal application of the Regulation and the initiation and resolution or suspension of the WTO 
dispute settlement proceeding that the European Communities initiated against Korea in October 2002 
regarding certain subsidies allegedly provided by the Government of Korea to its shipbuilding 
industry.     
7.128  The relationship between the TDM Regulation a nd the WTO dispute settlement proceeding is 
expressed in Recital (7) and Article 4 of th e TDM Regulation.  Recital (7) provides: 
"The temporary defensive mechanism should only be authorised after the Community 
initiates dispute settlement proceedings agai nst Korea, by requesting consultations 
with Korea, in accordance w ith the World Trade Organisation’s Understanding on the 
Rules and Procedures for the Settlement of Disputes and may no longer be authorised 
if these dispute settlement proceedings are r esolved, or suspended on the grounds that 
the Community considers that the Ag reed Minutes have been effectively 
implemented." 
Article 4 of the TDM Regulation reads: 
 
"The Regulation shall be applied to final c ontracts signed from the entry into force of 
this Regulation until its expiry, with the ex ception of final contracts signed before the 
Community gives notice in the Official Journal of the European Communities  that it 
has initiated dispute settlement proceedings against Korea by requesting consultations 
in accordance with the World Trade Orga nisation’s Understanding on the Rules and 
Procedures for the Settlement of Disputes and final contracts signed one month or 
more after the Commission gives notice in the Official Journal of the 
European Communities  that these dispute settlement proceedings are resolved, or 
suspended on the grounds that the Commun ity considers that the Agreed Minutes 
have been effectively implemented."   
7.129  It is evident from Article 4 that there is a direct operational link between the duration of the 
authority to provide aid under the Regulation and the resolution or suspensi on of the WTO dispute 
settlement case brought by the European Communiti es.  The Panel sees th is operational linkage 
between the TDM Regulation and the WTO di spute settlement case initiated by the 
European Communities against Korea as further evid ence to support the proposition that the practices 
that the TDM Regulation is designed to address are th e same practices – i.e., subsidies -- that are the 
subject of the WTO dispute settlement case. 
7.130  The Panel next considers issues relating to th e relationship between the TDM Regulation and 
the Agreed Minutes.  In this regard, the European  Communities argues that the references in the TDM 
Regulation to "adverse effects" of "unfair practic es" and "unfair competition" must be understood to 
refer to the problem of "injurious pricing", which is distinguishable from subsidies.  The 
European Communities submits in this respect that  the principal reason for the adoption of the TDM 
Regulation was the non-implementation by Korea of its commitments under the Agreed Minutes, 
which relate to "injurious pricing", an issue distinct from subsidies.274  The European Communities 
                                                      
274 E.g., first submission of the European Communities, paras. 151-154 and 196. WT/DS301/R 
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 refers in this regard to references to the Agreed Minutes in the "whereas" clauses to the TDM 
Regulation. 
7.131  The Panel first emphasizes that its review of the text of the Agreed Minutes only serves the 
purpose of enabling it to decide a factual issue on which the parties disagree and that it is not 
interpreting the Agreed Minutes in order to determ ine the rights and obligations of the parties under 
that bilateral agreement.275  
7.132  The Panel notes that certain provisions of the Agreed Minutes clearly pertain to subsidies.  
The first operative clause of the Agreed Minut es contains the following commitments regarding 
"action by public authorities in respect of shipyards in financial difficulties": 
"Both sides agree that all financial in stitutions shall conduct their business with 
shipbuilders in a commercially sound manner. 
In that respect, the Korean Government w ill continue to supervise strictly the asset 
soundness of the financial institutions. 
In line with the Korean Government's polic y of non-intervention, and conscious of 
the imbalance in world shipbuilding markets,  the Korean authorities will ensure, in 
the context of bank supervision, that banks  in which the Korean Government has a 
shareholding or private banks acting on its behalf will only extend new loans, write 
off or roll over existing loans or provide any type of support on a commercial basis.  
The Korean Government confirms that it will not provide these financial institutions 
with public support for the purpose of c overing losses resulting from their business 
relations with any specific enterprise or industry.   
The Korean Government agrees that KA MCO should purchase bad loans related to 
shipyards at prices that reflect actual and expected recovery rates as well as funding costs, and at minimal prices for unsecured loans. 
The Korean Government confirms that: 
-It will not extend support to its sh ipbuilders which is inconsistent 
with Korea's international obligations.   
-The management takeover of Samho by Hyundai will not be 
accompanied by publicly supported debt restructuring and/or 
moratoria operations.   
While under government ownership Ko rean banks will, when dealing 
with shipbuilding companies, be  operated on a fu lly commercial 
basis.  The Korean Government w ill not be involved in the day-to-
day management.  Public banks will grant no favourable repayment 
guarantees for shipbuilding contracts entered into by shipyards in 
financial difficulties or under court r eceivership.  Further to that, the 
conditions for repayment guarantees  shall reflect the substantial 
commercial risk stemming from the shipyards' precarious situation." 
                                                     
 
275 We note in this regard that the Agreed Minutes are not a "covered agreement" within the meaning of 
Article 1 and 2 of the DSU.  S ee e.g., Appellate Body Report, EC – Poultry , para. 79.   WT/DS301/R 
Page 101 
 
 
 This first Section clearly includes several commitme nts on the part of Korea to refrain from providing 
certain forms of public support to fina ncial institutions and to shipbuilders. 
7.133  The Panel further notes that Section (3) of the Agreed Minutes deals with "injurious pricing":   
"Both sides recognize that injurious pricing of ships should be remedied or prevented 
to ensure normal competitive conditions  in the world shipbuilding market. 
In this regard, the Korean Government agrees that the level of ship prices shall reflect 
all the factors of costs according to the definition of a normal value under the WTO 
anti-dumping Agreement." 
This Section clearly does not contain a commitment by  Korea to refrain from the granting of subsidies 
but this does not mean that the provisions in this  Section are unrelated to subsidies.  Given the 
background of the conclusion of the Agreed Minutes,  particularly the timing and nature of certain 
subsidies allegedly granted by Korea, the recogn ition of the need to remedy or prevent injurious 
pricing of ships and of the need for prices of ships to  reflect all the factors of cost can be explained at 
least in part as an attempt to address the continuing effects of past subsidies granted by Korea.  Action 
relating to prices of ships may well have been viewed  as necessary to prevent subsidies granted in the 
past by the Government of Korea from continuing  to cause adverse effects.  The Panel notes that 
Article 18 of the SCM Agreement, which provides for the possibility of price undertakings as an 
alternative to the application of countervailing duties, suggests that commitments by exporters 
regarding pricing can be a remedy against subsidies.276 
7.134  Thus, it appears that the Agreed Minutes relate to an important extent to subsidies in that they 
contain commitments of Korea either to refrain from granting certain subsidies or to take action that 
would mitigate the adverse effects of past subsidies.  The Panel considers, therefore, that the Agreed 
Minutes as a whole cannot be characterized as pertaining to a problem of injurious pricing that is distinct from subsidies.  In any event, even assuming that the Agreed  Minutes deal with "injurious 
pricing" as distinct from subsidies, the Panel finds no indication in the text of the introduction or of 
the operative part of the TDM Regulation that this  problem of "injurious pricing" was a factor 
determining the scope, design and structure of the TDM Regulation.  As discussed above, the 
information before the Panel indicates that the sectoral scope of the TDM Regulation was determined on the basis of evidence on the adverse effects of cert ain subsidies granted by Korea.  There is nothing 
to suggest that the sectoral scope depended upon an as sessment of the effects of "injurious pricing" as 
distinct from subsidies.  The reference to the Ag reed Minutes in the introduction to the Regulation 
does not detract from the link between the scope of the TDM Regulation and the adverse effects of 
subsidies allegedly granted by Korea.   
7.135  In fact, the Panel considers that the linkag es between the TDM Regulation, the WTO dispute 
settlement case and the Agreed Minutes support the vi ew that the TDM relates at least in part to 
subsidies allegedly provided by Korea.  The Pa nel notes that Article 4 of the TDM Regulation 
provides that the TDM may no longer be applied if  the WTO dispute settlement proceedings are either 
(i) "resolved"  or (ii) "suspended" on the basis that the European Communities considers that Korea 
has effectively implemented the Agreed Minutes.  The effective implementation of the Agreed 
Minutes necessarily implies effective implementation of the commitments contained therein with respect to subsidies.  Thus measures taken by Korea,  including with respect to the type of subsidies 
                                                     
 
 276 In referring to Article 18 of the SCM Agreement, the Panel does not wish to suggest that Section 3 
of the Agreed Minutes contains a pri ce undertaking within the meaning of that Article.  The key point from the 
Panel's perspective is simply that a provision on pricing is not necessarily unrelated to subsidies.  The Panel 
does not deem it necessary for it to characterize the precise nature of the commitment undertaken by Korea 
under this Section with regard to prices of ships.   WT/DS301/R 
Page 102 
 
 
 identified in the Agreed Minutes, can lead to  the suspension of the WTO dispute settlement 
proceeding, which in turn results in the termina tion of the authority to provide state aid under the 
TDM Regulation. 
7.136  Although we have focused our analysis on the elements that can be derived from the TDM 
itself, we note that our conclusions find confirmation in public statements of the 
European Commission.  These statements indicate that the TDM Regulation was designed as part of a 
twin-track strategy that was adopted following th e findings made in the Trade Barriers Regulation 
investigation that subsidies granted by the Governme nt of Korea were causing adverse effects to the 
Community industry.277  Since the proposal for a temporary defensive mechanism, described as “one 
element of the Commission’s two-part strategy agai nst unfair Korean practices in this sector”, was 
adopted following an investigation "which foun d evidence of substantial subsidies that are 
incompatible with WTO rules”, it is reasonable to conclude that “unfair Korean practices” in this 
connection refers to the subsidies found in the investigation conducted under the Trade Barriers 
Regulation.  These statements provide further conf irmation that the TDM Regulation was designed to 
                                                      
 277 Thus, on 8 May 2001, when the Commission submitted its first report on this investigation, which 
contained evidence that certain subsidies granted by Ko rea were causing adverse effects, the Commission issued 
a press release the summary of which stated inter alia :  
"Further to the adoption of its fourth report on the state of the EU shipbuilding industry last 
week, the Commission today approved the strategy it will propose to the Council of Ministers 
on 14/15 May, in order to address the persistent problems posed to the European shipbuilding 
industry by unfair trade practices by Korean shipyards.  The investigation into subsidies 
carried out under the Trade Barriers Regulation (TBR) has established that substantial 
subsidies have been granted to Korean shipyards through both export and domestic 
programmes which contravene the WTO's 1994 Su bsidies Agreement.  On this basis, the 
Commission will recommend that the matter be taken before the WTO through the initiation 
of a dispute settlement procedure by 30 June unless an amicable solution can be reached in the 
interim period.  In parallel, the Commission w ill propose accompanying measures in the form 
of a temporary support mechanism to Euro pean shipyards for th e market segments 
considerably injured by unfair Korean trade practices and for the period required for the 
conclusion of the WTO procedure.  Its enteri ng into force will be simultaneous with the 
effective start of the WTO action."  IP/01/656, 8 May 2001, Exhibit Korea-8 
 
In July 2001, when the Commission submitted its proposal to the Council, it issued a press release which stated: 
"The Commission today adopted a proposal for a Council Regulation which would put in 
place a temporary defensive mechanism for Eur opean shipbuilding.  The proposal is one 
element of the Commission's two-part strategy ag ainst unfair Korean practices in this sector 
and will cover the market segments that are considerably injured by these practices.  It comes 
after a series of negotiations between the Commission and Korea, which failed to produce an 
agreement that would restore normal trading conditions.  The proposal is an accompanying 
measure to dispute settlement proceedings agai nst Korea, which will be initiated in the WTO 
as soon as the Council expresses its fav ourable position on the temporary defensive 
mechanism.  ... 
The proposal for a defensive temporar y support mechanism follows a Commission 
investigation which found evidence of substantia l subsidies that are incompatible with the 
WTO rules.  Despite a series of negotiations between the Commission and the Korean 
Government, no amicable solution has yet been achieved.  Accordingly,  the Commission has 
instigated its two part strategy for fighting these unfair practices: proposing a temporary 
defensive mechanism and the initiation of dispute settlement proceedings.   
The proposal for the temporary defensive mechanism is limited to those market segments in 
which the Commission investigation found that EU industry had been considerably injured by 
unfair Korean trade practices, namely container ships and product and chemical tankers."  
IP/01/1078, Exhibit Korea-9 WT/DS301/R 
Page 103 
 
 
 address adverse effects to certain segments of the EC shipbuilding industry in the form of material 
injury and serious prejudice caused by subsidies allegedly provided by Korea.278 
7.137  In light of the aforementioned considerations c oncerning the scope of the Regulation;  the use 
of terminology intimately connected with th e SCM Agreement; the relationship of the TDM 
Regulation to the findings made in the investig ation under the Trade Barriers Regulation of adverse 
effects caused by subsidies; a nd the relationship between the te mporal application of the TDM 
Regulation, the WTO dispute settlement case and the "effective" implementation of the Agreed 
Minutes, the Panel is of the view that th e TDM Regulation is an action taken by the 
European Communities related to subsid ies allegedly provided by Korea.   
7.138  While the Panel has found that the TDM Regulation is in fact related to subsidies allegedly 
provided by Korea, the question remains whether the cl oseness of the relationshi p is such that, in the 
words of the Appellate Body, the measure is "inext ricably linked to, or [has] a strong correlation to", 
the constituent elements of the subsidy. 
7.139  The Panel recalls a variety of features of the TDM that demonstrate the strength of the link 
and correlation between the subsidies identified by  the European Communities and the eligibility of 
aid pursuant to the TDM.  These features are in subs tantial part the same features that were relevant 
for establishing that the TDM was more generally a r esponse to those subsidies.  First, a European 
shipyard is only eligible for aid where there h as been competition for the contract from a Korean 
shipyard offering a lower price.  Thus, there is  a correlation between the Member found to be 
providing subsidies in the TBR investigation and the scope of the TDM Regulation.  Second, the 
scope of the TDM Regulation correlates closely with  the sectors of the Korean shipbuilding industry 
found to be subsidized.  Thus, European shipbui lders may only be eligible for aid where the 
competition with a Korean shipyard relates to cont ainer ships, chemical tankers, product tankers and 
LNG carriers.  As previously noted, these are precis ely the categories of ships for which affirmative 
findings of adverse effects caused by Korean subsidies were made in the TBR investigation.279  Put 
simply, the TDM allows European shipbuilders to receive aids only with respect to contracts where 
there is competition from a country found to be pr oviding subsidies and in regard to particular 
categories of ships with respect to which a dverse effects resulting from subsidies were found.280 
7.140  We further recall that the temporal application of the TDM is linked to the resolution of the 
WTO dispute regarding Korean subsidies or its suspension based upon the "effective implementation" 
of the Agreed Minutes.  Resolution of the WTO dispute implies either a recommendation that the 
alleged subsidies be withdrawn or  their adverse effects removed281, or findings that the measures are 
not subsidies, are not prohibited subsidies, an d/or do not cause adverse effects.  Effective 
                                                      
278 We acknowledge that the TDM Regulation was adopted by the Council not by the Commission but 
consider nevertheless that in view of the role of the Commission in initiating this legislation it is not 
inappropriate to accord some evidentiary weight to these press releases  to reinforce a conclusion derived from 
an analysis of the text of the Regulation.   
279 As previously noted, while these findings were not yet embodied in instruments with formal status 
under Community law when the TDM Regulation was adopted, they formed the basis on which the Commission 
proposed, inter alia , adoption of the TDM Regulation.  Findings of the Commission were published a few 
months later.  See para. 7.123 supra . 
280 We recognize that the TDM Regulation correlates onl y to the subset of alleged subsidies considered 
by the European Communities to be causing adverse effects.  The presence of this further limiting consideration 
does not in our view negate the existence of a strong correlation between the TDM Regulation and alleged 
subsidies.  We note in this respect that a similar limitation existed in respect of US – Offset Act (Byrd 
Amendment) , in that offset payments could be made only where duties had been collected on dumped or 
subsidized imports, which duties in turn could only be collected pursuant to a finding that the dumped or 
subsidized imports had caused or threatened to cause material injury to a domestic industry.   
281 See SCM Agreement Articles 4.7 and 7.8.   WT/DS301/R 
Page 104 
 
 
 implementation of the Agreed Minutes implies, inter alia , not applying certain subsidies in the future 
and taking steps to remove the price effects of subsid ies applied in the past.  In other words, the TDM 
Regulation would cease to apply if Korea were to cea se future subsidization and remove the effects of 
past subsidization by Korea as re flected in resolution of the WTO dispute settlement case or effective 
implementation of the Agreed Minutes.  These linkages establish a further temporal correlation 
between the continued existence of alleged subsid ies and their adverse effects and the continued 
application of the TDM. 
7.141  The Panel acknowledges that the Regulation does not provide that state aid can only be 
granted if it is determined on a case-by-case basi s that the particular shipyard with which a 
Community producer is in competition for a contr act has been subsidized with respect to the 
transaction in question.  The Panel further realizes th at the measures that were found to be specific by 
the Appellate Body in US - 1916 Act  and US - Offset Act (Byrd Amendment ) were linked to formal 
determinations of the existen ce of dumping or subsidization.282  The Panel does not believe, however, 
that a finding of a "strong correlation" or "inext ricable link" between the measure and the constituent 
elements of a subsidy requires a case-by-case determ ination.  Indeed, to specify that a finding of 
"specific action" requires such a determination in  all cases would be a recipe for circumvention of 
Article 32.1.283  That may well explain why the Appellate  Body did not require a perfect match 
between the scope of the measure and the constituent el ements of the subsidy.  What it required is a 
"strong correlation" or an "inextricable link".  Thus, what is crucial is the cl oseness of the correlation 
or link.   
7.142  In this case, the Panel notes that, with resp ect to three major Ko rean shipyards, the 
European Communities found the existence of non-recurring subsidies (in particular, restructuring 
subsidies).  These (alleged) restructuring subsidies would as a matter of logic confer a benefit with respect to all transactions entered into by the yards over a number of years.
284  Thus, it may 
reasonably be inferred that the European Communities had in fact made ex ante  findings that contracts 
                                                      
282See, e.g., Appellate Body Report, US - Offset Act (Byrd Amendment) , para. 242.   
283 For example, if a case-by-case determination of  subsidization were required, a Member could 
preclude a finding of "specific action" by designing a measure that, while directed  at subsidization, swept 
somewhat more broadly to include some non-subsidized transactions. 
284 As explained by the Commission in its report to the Trade Barriers Regulation Committee regarding 
LNGs: 
"The subsidies granted to Korean shipbuilder s during the restructuring process constituted 
one-off events involving large amounts which benefited their present and future production.  
This is because non-recurring  subsidies (i.e.  subsidies which are granted on a one-off basis) 
are normally linked to the acquisition of fixed assets and therefore the total value of the 
subsidy is spread over the normal life of the assets." 
 
The Commission proceeded to note that the life of machinery and equipment in the shipbuilding industry was 
10-12 years.  Report to the Trade Barriers Regulation Committee, Examination Procedure Concerning an 
Obstacle to Trade Within the Meaning of Council Regulation (EC) No 3286/94, Consisting of Trade Practices 
Maintained by Korea Affecting Trade in Commercial Vessels – Supplementary Report on Adverse Effects 
Concerning LNG Carriers , p.  5. 
 
More generally, we recall that statement by the Commission in its Decision of 8 October 2002 that: 
 
"The investigation was directed against subsidies allegedly granted by the Government of the 
Republic of Korea to its shipbuilding industry that benefited production between 1997 and 
2000 and will benefit future production." 
 
Commission Decision of 8 October 2002 under the provisions of Council Regulation (EC) No 3286/94 
concerning trade practices maintained by Korea affecting trade in commercial  vessels, OJ L 281, 19.10.2002, p.  
15, Recital (5).     WT/DS301/R 
Page 105 
 
 
 relating to those shipyards were subsidized.  While other (alleged) subsidies may have been 
transaction-specific in nature, they were provided pursuant to programmes that the 
European Communities considered to be available to all shipyards and used by all investigated 
shipyards.285  Thus, the link or correlation is very close as it is clear that the TDM was specifically 
tailored to make aid available in a manner that wa s targeted with substantial precision to alleged 
Korean subsidization.   
7.143  Therefore, the Panel finds  that the TDM Regulation is “specific action" within the meaning of 
Article 32.1 of the SCM Agreement because it has a strong correlation and inextricable link with the 
constituent elements of a subsidy.   
2. Whether the TDM Regulation constitutes specific action "against " a subsidy within the 
meaning of Article 32.1 of the SCM Agreement 
(a) Main arguments286  
(i) Arguments of the parties 
7.144  Korea  argues that the TDM Regulation is specific action "against " a subsidy of another 
Member because, in the words of the Appellate Body Report in US - Offset Act (Byrd Amendment) , 
the structure and design of the Regulation are clear ly "opposed to" the practice of subsidization or 
"creates an incentive to terminate such practices".287  That the TDM Regulation constitutes "motion or 
action in opposition to" and "in hostility or active oppo sition to" alleged subsidies of Korea is evident 
from statements of EC Commission officials;  from th e fact that the Regulation targets Korea;  and 
from the fact that the Regulation is similar in inte nt, character and purpose to the action taken by the 
European Communities in launching a WTO dispute settlement case against Korea as both actions 
were part of a twin-track strategy.288  In Korea's view, the TDM Regulation "creates an incentive to 
terminate" the alleged Korean subsidies becau se it establishes a link between the suspension or 
termination of the Regulation, on the one hand, a nd the resolution of the WTO dispute settlement case 
and Korea's implementation of the Agreed Minutes, on the other.289  Korea also submits in this 
connection that the TDM Regulation creates a competitive disadvantage for Korean products in 
relation to domestic products and other foreign products.290 
7.145  Korea submits that the argument of the Eur opean Communities that a measure cannot be 
"against" a subsidy if the measure is  legal is contrary to the conclu sion of the Appellate Body in the 
US - Offset Act (Byrd Amendment)  case in which the Appellate Body did not find that the monies 
disbursed under the Byrd Amen dment were illegal subsidies.291  Second, the Appellate Body in  
US-Offset Act (Byrd Amendment ) did not actually reject a "conditions of competition" test but stated 
that it was not necessary to go so far as to demonstr ate effects on competition and that the focus of the 
analysis should instead be on the structure of the meas ure.  In this regard, Korea submits that since the 
TDM Regulation provides for funds to be given to any Community shipyard that is in competition 
with a Korean shipyard, it is hard to imagine anything more clearly "against" the alleged Korean 
                                                      
285 See Report to the Trade Barriers Regulation Committee, Examination Procedure Concerning an 
Obstacle to Trade Within the Meaning of Council Regulation (EC) No 3286/94, Consisting of Trade Practices 
Maintained by Korea Affecting Trade in Commercial Vessels – Supplementary Report on Export Subsidies , 
pp. 21, 27 (all shipyards investigated used the pre-shipment loan and advanced payment guarantee schemes). 
286 For a more detailed account of the argumen ts of the parties, see Section IV.C.3. 
287 First submission of Korea, para. 120.   
288 First submission of Korea, paras. 121-122. 
289 First submission of Korea, paras. 123-124. 
290 First submission of Korea, paras. 125-126. 
291 Oral statement of Korea at the first substantive meeting of the Panel with the parties, para. 55; 
second submission of Korea, para. 187.   WT/DS301/R 
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 subsidized products.292  Third, Korea rejects as irrelevant th e fact that the subsidies under the TDM 
Regulation are available in the event of any compe tition from Korean ships, not just those ships that 
have actually been subsidized.293 
7.146  Korea argues that the TDM is not an ordinary s ubsidy in that it is specifically and exclusively 
directed against Korea, and more particularly ag ainst Korean subsidization.  Nonetheless, Korea 
agrees with the argument of the United States th at counter-subsidies can be actions "against" a 
subsidy of another Member under Ar ticle 32.1 of the SCM Agreement.294  
7.147  Korea argues that, contrary to what the Eu ropean Communities asserts, the TDM Regulation 
applies only when there is a demonstration of a lower Korean offer.295  It is irrelevant in Korea's view 
that the level of EC funding is unrelated to the leve l of  the alleged Korean subsidies because to be 
against does not involve exact amounts.296  Regarding the argument that the TDM Regulation does not 
involve a transfer of resources, Korea asserts that Parts II and III of the SCM Agreement provide 
actions against subsidies other than countervailing duties.297    
7.148  The European Communities  argues that the TDM Regulation is not a measure "against " a 
subsidy of another Member.  First, the impact that  any aid granted by member States may have on the 
competitive position of Korean yards is not a sufficient basis to conclude that such aid is a form of 
action "against" the subsidy of another Member.  Korea's argument, in this regard, reflects a 
"conditions of competition" test that has alr eady been rejected by the Appellate Body in US - Offset 
Act (Byrd Amendment)298 and that is inconsistent with a b asic tenet of the SCM Agreement that 
Members may grant specific subsidies provided they  do not cause adverse effects within the meaning 
of Articles 5 and 6 of that Agreement.299  Second, the  state aid provided by EC member States under 
the TDM Regulation is very different from  the type of measure at issue in the US - Offset Act (Byrd 
Amendment)  in that it is financed through budgetary resources, not through countervailing duties, 
bears no relationship with a finding of subsidizati on and only serves to help the domestic shipbuilding 
industry to survive until the problem of injurious pr icing is resolved throug h implementation of the 
Agreed Minutes.300  Third, in view of its modest amount, su ch aid cannot offset the effects of Korean 
subsidization.301  Fourth, the link between the TDM Regulation and the WTO dispute settlement case 
launched by the European Communities against Kor ea does not establish that the Regulation is an 
action against a subsidy of another Member.  Th e Regulation and the dispute settlement case both 
relate to the broad objective of addressing injurious  pricing, but their immediate goals are entirely 
different in that the WTO dispute settlement case seeks to secure the cessation of WTO-inconsistent 
subsidies whereas the TDM Regulation seeks to address the non-implementation of the Agreed 
Minutes by providing subsidies necessar y for the survival of the EC domestic industry.  Fifth, the aid  
                                                      
292 Oral statement of Korea at the first substantive meeting of the Panel with the parties, para. 56; 
second submission of Korea, paras. 184-185.   
293 Oral statement of Korea at the first substantive m eeting of the Panel with the parties, para. 57-58.   
294 Second submission of Korea, paras. 188-189. 
295 Oral statement of Korea at second substantive m eeting of the Panel with the parties, para. 43.   
296 Oral statement of Korea at the s econd substantive meeting of the Panel with the parties, para. 44.   
297 Second submission of the European Communities, para. 46.   
298 To support its assertion that the Appellate Body Report in US - Offset Act (Byrd Amendment)  rejects 
a "conditions of competition" test for determining whether a measure is "against" a subsidy of another Member, 
the European Communities refers to paras. 253-254 and 257 of that Report.   
299 First submission of the European Communities, paras. 209-212.  The European Communities refers 
to para. 258 of the Appellate Body's Report.  The European Communities elaborates on its argument about the 
irrelevance of a "conditions of competition test" in paras. 37-40 of its oral statement at the first meeting of the 
Panel.   
300 First submission of the European Communities, paras. 213-214. 
301 First submission of the European Communities, paras. 215-216.   WT/DS301/R 
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 does not influence the behaviour of Korea and does not penalize the unfair practices of Korean 
shipyards.302  
7.149  The European Communities submits that the fact that a subsidy is granted to any Community 
shipyard that is in competition with a Korean shi pyard does not mean that the subsidy is against the 
allegedly subsidized Korean products because the gr anting of a subsidy to producers of products that 
are in competition with other producers known to receive subsides does not ipso facto  amount to 
action "against" a subsidy.303  
7.150  Regarding the argument of the United States  that Article 32.1 of the SCM Agreement is not 
limited to measures involving a transfer of fina ncial resources from the producers of the imported 
product to the producers of the domestic product, th e European Communities ar gues that existing case 
law only concerns measures involving this type of tr ansfer of resources and that this was considered 
to be the decisive element by the Appellate Body  in finding that the Byrd Amendment Act constituted 
action against dumping and subsidies.304  The only general conclusion that can be drawn from the 
Panel and Appellate Body Reports in US - Offset Act (Byrd Amendment)  is that the nature of the 
measure as a subsidy does not prevent that measure  from being covered by Article 32.1 of the SCM 
Agreement.305  
7.151  The European Communities asserts that Korea has been unable to demonstrate any specific 
effect of the TDM Regulation or the national measures against a Korean subsidy.306  Regarding the 
argument of Korea that the effect of the TDM Regula tion is to force Korea to  accept the interpretation 
of the European Communities of Korea's WTO oblig ations, the European Communities submits that 
Article 4 of the TDM Regulation limits the temporal scope of the Regulation to the termination of the 
WTO dispute settlement case, regardless of the out come.  Therefore, the Regulation cannot force 
Korea to adopt any particular position in the disput e settlement case or to an early withdrawal of its 
subsidies.  At most, the Regulation might encourag e Korea to resume negotiations in the framework 
of the Agreed Minutes.307   
(ii) Arguments of third parties 
7.152  The United States  submits that the Appellate Body Report in US - Offset Act 
(Byrd Amendment)  does not support the view that only measu res involving a transfer of financial 
resources similar to the Byrd Amendment paymen ts can constitute action "against" a subsidy.308  
Second, the United States argues that the European  Communities fails to explain why "a system of 
counter subsidies" could not dissuade the practice of  subsidization or create an incentive to terminate 
such practice.  A rational government may well be dissuaded from granting subsidies if the 
competitive advantage generated by those subsidi es is offset by subsidies granted by other 
countries.309  Finally, the United States asserts more ge nerally that the European Communities adopts 
an overly narrow interpretation of the ruling in US - Offset Act (Byrd Amendment) ; according to the 
United States, the Appellate Body in that case "concluded that the SCM Agreement prohibits the 
provision of subsidies in response to another Member's subsidies".310  
                                                      
302 First submission of the European Communities, paras. 217-220. 
303 Response of  the European Communities to Panel Question 47.   
304 Response of the European Communities to Panel Question 40.   
305 Response of the European Communities to Panel Question 40.   
306 Second submission of the European Communities, para. 77.   
307 Second submission of the European Communities, para. 79. 
308 Third party submission of the United States, para. 6.   
309 Third party submission of  the United States, para. 7. 
310 Third party submission of the United States, para. 12.  The United States refers here to para. 273 of 
the Appellate Body Report.   WT/DS301/R 
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 7.153  China  argues that for a measure to be action "aga inst" a subsidy, it is not necessary for that 
measure "to directly counteract subsidized imports or entities res ponsible for such imports."  As 
indicated by the Appellate Body in US - Offset Act (Byrd Amendment) , multilaterally sanctioned 
countermeasures are a form of action "against" a s ubsidy notwithstanding that they do not directly 
affect the subsidized products.311  Second, a measure can be "against " a subsidy  even though it is not 
effective in dissuading the practice of subsidization.312  Third, the fact that subsidies that do not cause 
adverse effects within the meaning of Article 5 and 6 are permitted under the SCM Agreement does 
not mean that a counter subsidy cannot be in violation of Article 32.1 of the SCM Agreement.313   
(b) Evaluation by the Panel 
7.154  Having found that the TDM Regulation is a "sp ecific" action, the question which the Panel 
must now address is whether the TDM Regulation is also an action "against " a subsidy of another 
Member within the meaning of Article 32.1 of the SCM Agreement.   
7.155  The Appellate Body examined the meaning of th e word "against" in Article 18.1 of the Anti-
Dumping Agreement and Article 32.1 of the SCM Agreement in its Report in US - Offset Act 
(Byrd Amendment ).  The Appellate Body analyzed the possi ble relevance to the ordinary meaning of 
the word "against" as used in these provisions of  three dictionary definitions posited by the 
United States:  (1) "of motion or action in oppositio n"; (2) "in hostility or active opposition to ";  and 
(3) "in contact with."  According to the Appellate Body, the third definition cited by the United States 
was inconsistent with "the idea of opposition, hos tility or adverse effect" conveyed by the word 
"against" as used in these provisions.314  As a consequence, the Appellate Body rejected the view 
advanced by the United States that an action agains t dumping or a subsidy must have direct contact 
with the imported good, or the entity responsible for the dumped or subsidized good.315  
7.156  Having rejected "in contact with" as an appropria te definition of the meaning of "against" in 
the context of Article 18.1 of the Anti-Dumping Ag reement and Article 32.1 of the SCM Agreement,  
the Appellate Body observed:  
"Recalling the other two elements of the definition of "against" from the  New Shorter 
Oxford Dictionary   relied upon by the United States, namely "of motion or action in 
opposition" and "in hostility or active opposition to", to determine whether a measure 
is "against" dumping or a subsidy, we be lieve it is necessary to assess whether the 
design and structure of a measure is such that the measure is "opposed to", has an 
adverse bearing on, or, more specifically, h as the effect of dissuading the practice of 
dumping or the practice of subsidization, or creates an incentive to terminate such 
practices.  In our view, the CDSOA has ex actly those effects because of its design 
and structure".316   
7.157  With respect to the measure at issue in that  dispute -- the Continued Dumping and Subsidies 
Offset Act -- the Appellate Body concluded that its  design and structure had the effect of dissuading 
                                                      
311 Oral statement of China at the first substantive m eeting of the Panel with the parties, para. 7.   
312 Oral statement of  China at the first substantiv e meeting of the Panel with the parties, para. 8. 
313 Oral statement of China at the first substantive m eeting of the Panel with the parties, para. 9.   
314Appellate Body Report, US - Offset Act (Byrd Amendment) , paras. 248-250.   
315 The Appellate Body also considered that this argu ment of the United States was contradicted by  the 
fact that Article 18.1 of the Anti-Dumping Agreement an d Article 32.1 of the SCM Agreement refer to measures 
against dumping or a subsidy and not to measures against dumped or subsidized products or entities responsible 
for dumped or subsidized products;  by the inclusion of multilaterally sanctioned countermeasures in the SCM 
Agreement; and by the object and purpose of  Article 18.1 of the Anti-Dumping Agreement and 32.1 of the 
SCM Agreement.  Appellate Body Report, US - Offset Act (Byrd Amendment) ,  paras. 251-253.   
316Appellate Body Report, US - Offset Act (Byrd Amendment) , para. 254. WT/DS301/R 
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 the practice of dumping or the practice of subsidiza tion, or created an incentive to terminate such 
practices, because the Act "effects a transfer of financial resources from the producers/exporters of 
dumped or subsidized goods to their domestic competitors".317  It is clear from the text of the Report 
that the Appellate Body attached d ecisive importance to this aspect:  
"All these elements lead us to conclude that the CDSOA has an adverse bearing  on 
the foreign producers/exporters in that  the imports into the United States of the 
dumped or subsidized products (besid es being subject to anti-dumping or 
countervailing duties) result in the financing of United States competitors—producers of like products—through the transfer to the latter of the duties collected on those 
exports.  Thus, foreign producers/exporters have an incentive not to engage in the 
practice of exporting dumped or subsidized pr oducts or to terminate such practices.  
Because the CDSOA has an adverse bearing on, and, more specifically, is designed 
and structured so that it dissuades the practice of dumping or the practice of 
subsidization, and because it creates an in centive to terminate such practices, the 
CDSOA is undoubtedly an action "against" dum ping or a subsidy, within the meaning 
of Article 18.1 of the  Anti-Dumping Agreement  and of Article 32.1 of the 
SCM Agreement ".
318 
7.158  The Appellate Body's focus on the transfer of financial resources319 as the basis for its 
conclusion that the Continued Dumping and Subsid ies Offset Act was a measure "against" dumping 
or a subsidy differed from the Panel's analysis, which had concluded that the Act was a measure 
"against" dumping mainly on the ground that the co mbination of  offset payments and anti-dumping 
duties had an adverse impact on the competitive relationship between dum ped imports and goods 
produced by "affected domestic producers".320  The Appellate Body considered in this regard that:  
"...in order to determine whet her the CDSOA is 'against' dumping or subsidization, it 
was not necessary, nor relevant, for the Panel to examine the conditions of 
competition under which domestic products a nd dumped/subsidized imports compete, 
and to assess the impact of the measure on the competitive relationship between 
them.  An analysis of the term 'against', in  our view, is more appropriately centred on 
the design and structure of the measure; such an analysis does not mandate an 
economic assessment of the implications of the measure on the conditions of 
competition under which domestic produc t and dumped/subsidized imports 
compete."321 
7.159  The Appellate Body again emphasized the transfer of financial resources from foreign 
producers and exporters to domestic competitors as th e key element in its conclusion that the Act was 
a measure "against" dumping or a subsidy in a passage in which it explained that it was not necessary 
for the Panel to inquire into the intent of the legislators:  
                                                      
317Appellate Body Report, US - Offset Act (Byrd Amendment) ,  para. 255. 
318Appellate Body Report, US - Offset Act (Byrd Amendment) , para. 256 (emphasis added).   
319 The Panel notes that the United States in its third party submission in this dispute questions whether 
the Appellate Body's characterization of the Continued Dumping And Subsidies Offset Act as entailing a 
transfer of financial resources was factually accurate.  Third party submission of the United States, para. 6, 
footnote 6.  The Panel does not need to pronounce on this issue.   
320 Panel Report, US - Offset Act (Byrd Amendment) , paras. 7.35-7.41.  The Panel found further support 
for its view of the Act as a measure against dumping or  a subsidy in the incentives  which the Act created for 
domestic producers to file or at least support applicatio n for the initiation of anti-dumping or countervailing duty 
investigations.  Ibid., paras. 7.42-7.45.   
321Appellate Body Report, US - Offset Act (Byrd Amendment) , para. 257. WT/DS301/R 
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 "The text of the CDSOA provides sufficien t information on the structure and design 
of the CDSOA, that is to say, on the manner in which it operates, to permit an 
analysis whether the measure is 'against' dumping or a subsidy.  Specifically, the text of the CDSOA establishes clearly that, by virtue of that statute, a transfer of financial 
resources is effected from the producers/exporters of dumped or subsidized goods to 
their domestic competitors.  This essential f eature of the CDSOA constitutes, in itself
, 
the decisive basis for concluding that the CDSOA is 'against' dumping or a subsidy—
because it creates the 'opposition' to dumping or  subsidization, such that it dissuades 
such practices, or creates an incentive to terminate them."322   
7.160  The Appellate Body's ruling in US - Offset Act (Byrd Amendment)  provides the Panel with the  
relevant parameters for assessing whether a measure is "against" the subsidy of another Member.  
First, the Appellate Body indicated that an analys is whether a measure is "against" a subsidy must 
assess whether the design and structure of the measur e has the effect of dissuading the practice of 
dumping or subsidization, or creates an incentive to terminate such practices.  Second, the Appellate 
Body in applying its "design and structure" analysis  focused almost exclusively on the existence of a 
"transfer of financial resources" between foreign pr oducers/exporters and their domestic competitors.  
Put simply, we understand the Appellate Body to be say ing that the "decisive basis" for ruling that the 
Offset Act  was a "measure" against dumping or subsidization was the fact that the greater dumping or 
subsidization, the more financial resources were taken from the foreign expor ters/producers and given 
to domestic competitors.  It was the dissuasive nature of this aspect of the design or structure of the 
Offset Act that made it a measure "against"  dumping or subsidization.  By contrast, the Appellate 
Body not only did not rely on the existence of subsidization in response to dumping or subsidization 
as the basis for its ruling, but it ruled that it was ne ither necessary nor relevant for the Panel to have 
conducted an examination of the effects of th e subsidy on conditions of competition between 
domestic and impor ted products.323 
7.161  While the transfer of financial resources may be something that is peculiar to the facts of the 
Byrd Amendment  case, nevertheless it is indicative of the high standard that must be met in 
determining whether a measure "has the effect of dissu ading ...the practice of subsidization, or creates 
an incentive to terminate such practi ces".  The need for such a high standard is supported by a reading 
of that provision in the broader context of the SC M Agreement.  If the mere fact that a subsidy 
granted by a Member to its domestic producers mitig ates, or is intended to mitigate, the competitive 
impact of a subsidy granted by another Member to its domestic producers were sufficient to treat the 
subsidy granted by the first Member  as action "against" the subsidy of the second Member, this would 
create a new type of substantive disciplines on the pr ovision of subsidies in addition to the disciplines 
already contained in Parts II and III of the SCM Ag reement.  Subsidies that in themselves are not 
prohibited because they are not subsidies of the kind covered by Article 3, and which do not 
necessarily even produce the effects that are the basis for a successful challenge under Articles 5 
and 6 of the SCM Agreement, would nevertheless be  prohibited because they are granted in reaction 
to subsidies of other Members.  The Panel consid ers it unlikely that the drafters, having created a 
structure for the Agreement under which prohibited s ubsidies were regulated by in Part II of the 
                                                      
322Appellate Body Report, US - Offset Act (Byrd Amendment) , para. 259 (emphasis added).   
323 Appellate Body Report, US - Offset Act (Byrd Amendment) , para. 257.  This was consistent with the 
approach of the panel in th at dispute, which stated:  
"We wish to emphasize that our findings and conclusions relate exclusively to the CDSOA, 
which combines the imposition of anti-dumping/countervail orders with the bestowal of offset 
payments in very particular circumstances, such as to constitute 'specific action against 
dumping"/subsidisation.  Though we consider th at subsidization should not generally be used 
as a surrogate contingent trade remedy, our conclusion  (that the CDSOA constitutes 'specific 
action against dumping') is not based on a finding that subsidization in and of itself necessarily 
constitutes 'specific action against dumping'/subsidization." Panel Report, US - Offset Act 
(Byrd Amendment) , para. 7.52. WT/DS301/R 
Page 111 
 
 
 Agreement and actionable subsidies by Part III, woul d have then inserted a very significant additional 
prohibition in the concluding provisions of the Agreement. 
7.162  This interpretation finds further support in th e consideration of the Agreement's object and 
purpose.  A broad interpretation of "against" that relied on the effects of a subsidy on conditions of 
competition would create an incentive for a Member to  be "first in" with a subsidy and would treat 
less favourably a Member which responded in kind by  providing an identical subsidy.  Specifically, 
the Member initiating the subsidy competition could be challenged in WTO dispute settlement only if 
its subsidy could be shown to be prohibited under Pa rt II of the SCM Agreement or demonstrated to 
cause adverse effects under Part III thereof.  By contrast, the Member responding to subsidization 
initiated by another Member could be challenge d independently of wh ether its subsidy was 
inconsistent with Part II or III of the SCM Agreem ent, merely because its subsidy was responsive in 
nature.324  Such an interpretation would thus have the perverse effect of encouraging Members to beat 
their competitors to the provision of subsidies in orde r to gain the advantage.   We consider that a 
reading of Article 32.1 which in fact would encourag e Members to be "first in" with subsidies would 
be very difficult to square with the object and purpose of the SCM Agreement of providing 
strengthened disciplines on the use of trade-distorting subsidies.325  
7.163  We find confirmation of this interpretation of the scope of Article 32.1 in the historical 
development of that provision.  We note that Artic le 32.1 is a verbatim tran sposition of Article 19.1 of 
the Tokyo Round Subsidies Code, and that the basic idea underlying Article 19.1 had already been 
articulated at the time of the GATT/ITO negotiations.326  The results of the GATT/ITO negotiations 
reflect no substantive disciplines on the provision of subs idies – the only requirement of the original 
Article XVI of GATT 1947 was a consultation oblig ation – and the sole action possible against 
subsidies was therefore countervailing action.  Even  at the time of the Tokyo Round Code, subsidies 
disciplines were quite limited indeed, with a prohibiti on applicable solely to export subsidies provided 
by developed countries in respect of other than prim ary products, and what were in effect non-binding 
rules on serious prejudice.  Nor have we been ab le to identify any substantive discussion in the 
Uruguay Round negotiations relating to the transposi tion of Article 19.1 into the current Agreement, 
                                                      
324 This is in fact precisely what has happened in the case of shipbuilding.  The European Communities 
has brought a case against Korea under Parts II and III of the SCM Agreemen t with respect to Korea's alleged 
subsidies See Korea – Measures Affecting Trade In Commercial Vessels , WT/DS273.  While Korea's initial 
response to the European Communities' alleged respon sive subsidies under the SC M Agreement involved both 
serious prejudice claims under Part III and its claims in this dispute, it has limited its panel request to 
Article 32.1 of the SCM Agreement and the other non-SCM claims before this Panel.  See European 
Communities – Measures Affecting Trade in Commercial Vessels, request for consultations by Korea, 
WT/DS/301 (11 September 2003), Section IV.   
325 See, e.g. Appellate Body Report, US – Carbon Steel , para. 73.  ("Taken as a whole, the main object 
and purpose of the  SCM Agreement   is to increase and improve GATT disciplines relating to the use of both 
subsidies and countervailing measures".)     
326 In September 1948, the CONTRACTING PARTIES to the GATT adopted a report of a working 
party that had considered amendments to be made to th e GATT in light of the Havana Charter.  This report 
recommended the substitution of the text  of Article VI of the GATT by the text of Article 34 of the Havana 
Charter:  
"While agreeing that there is no substantive difference between Article VI of the General 
Agreement and Article 34 of the Charter, the working party recommends the replacement of 
that article, as the text adopted at Havana contains a useful indication of the principle 
governing the operation of that article and constitutes a clearer formulation of the rules laid 
down in that article.  The working party, endorsing the views expressed by Sub-Committee C 
of the Third Committee of that Havana Conf erence, agreed that measures other than 
compensatory anti-dumping and countervailing duties may not be applied to counteract 
dumping or subsidization except in so far as such other measures are permitted under other 
provisions of the General Agreement ."  GATT, Basic instruments and Selected Documents , 
Vol.  II.  (May 1952), p.  41 (emphasis added). WT/DS301/R 
Page 112 
 
 
 much less an indication that the same language was intended to take on a different meaning in the new 
Agreement.  Given that there were effectively no multilateral disciplines on subsidies when the idea 
underlying Article 32.1 was conceived, and very few when the precise language now contained in 
Article 32.1 was drafted, it seems to us very unlikel y indeed that the idea reflected in Article 32.1 was 
to prohibit the provision of counter-subsidies, as Korea seems to suggest.   
7.164  Taking the Appellate Body's reasoning in US - Offset Act (Byrd Amendment ) into account, we 
conclude that a subsidy provided in response to anot her Member's subsidy – that is to say, a counter-
subsidy – will not, merely because of its impact on conditions of competition, constitute specific 
action "against" that subsidy and therefore be proscr ibed by the SCM Agreement.  Rather, there must 
be some additional  element, inherent in the design and structure of the measure, that serves to 
dissuade, or encourage the termination of, the practi ce of subsidization.  One such element would be 
where the counter-subsidy was funded through a transf er of financial resources between the foreign 
producer/exporter and the domestic competitor.  There may well be other elements which would 
satisfy this requirement, al though we will not attempt ex ante  to define what those elements might be.  
The Panel will therefore examine the TDM Regul ation in light of these conclusions.    
7.165  The Panel considers that the factual and legal arguments of Korea do not warrant a conclusion 
that the design and structure of the TDM Regulati on demonstrate its nature as an action "against" a 
subsidy of another Member. 
7.166  The Panel observes that the essential feature of the TDM Regulation is that it creates the legal 
basis necessary under European Comm unity state aid law for the provision by EC member States of 
contract-related operating aid to certain sectors of  the Community shipbuild ing industry whenever 
there is competition from a Korean shipyard offering lower prices.   
7.167  Korea submits that the fact that the TDM Regul ation applies specifically and exclusively in 
the context of competition for a particular cont ract between Community shipyards and Korean 
shipyards shows that its design and structure is such that it acts "against" a subsidy of another 
Member.  However, the arguments of Korea in this  regard essentially concern the impact of the 
Regulation as a subsidy on the conditions of comp etition between Community shipyards and Korean 
shipyards.327  We do not dispute that a counter-subsidy may reduce or even eliminate the competitive 
advantages another Member may be seeking to achieve  through subsidies and th us may in some sense 
dissuade or provide an incentive to terminate the subsidization.  For the reasons discussed above, 
however, we do not consider that this is a suffici ent reason to find that the TDM Regulation is action 
"against" a subsidy of another Member.  Rather, ther e must some additional element, inherent in the 
design and structure of the TDM Regulation, that goes beyond the effects on conditions of 
competition between Korean and European shipya rds of the subsidies provided for under the TDM 
Regulation.  Korea has not identified any such  additional element in this dispute.   
7.168  With reference to Article 4 of the TDM Re gulation, Korea asserts that the Regulation 
reinforces the incentive to terminate the practice of subsidization by effectively promising to suspend 
or promptly terminate the countermeasure in re turn for Korea either implementing the Agreed 
Minutes or ensuring that the WTO dispute settleme nt proceeding is resolved at the earliest 
opportunity.328  Closely related to this, Korea argues that by adopting the TDM Regulation the 
European Communities sought to provide an inducemen t for Korea to try to settle the WTO dispute, 
                                                      
327 First submission of Korea, para. 125; oral statem ent of Korea at the first substantive meeting of the 
Panel with the parties, paras. 56-57; second submission of Korea, para. 185.   
328 First submission of Korea, para. 123.   WT/DS301/R 
Page 113 
 
 
 which implied that Korea would agree to stop the al leged subsidization, and that the TDM Regulation 
was thereby also a bargaining chip w ith which to build pressure on Korea.329   
7.169  We do not doubt that the linkages between the TDM, the dispute settlement case and the 
Agreed Minutes represent a signal that the Europ ean Communities will eliminate the TDM if Korea 
takes steps to address its alleged subsidies and the adverse effects allegedly flowing from them.330  
Indeed, we have placed significant emphasis on these linkages in our analysis as to whether the TDM 
is a "specific action".  Nor do we doubt that the TDM Regulation constitutes pressure by the 
European Communities on Korea.  The Panel howeve r recalls that the possible dissuasive impact 
arising from the effects of a subsidy on conditions of  competition is not sufficient to make a measure 
"against" subsidies.331  Rather, there is a need for some a dditional element beyond the effect of the 
subsidies themselves, such as a transfer of fina ncial resources.  The linkage between the TDM, 
dispute settlement and the Agreed Minutes does not repr esent such an additional element.  Rather, it is 
merely evidence – albeit rather compelling eviden ce – of the connection between the TDM and the 
Korean subsidies.  As such, the linkage is not decisive in our analysis of whether the TDM is 
"against" Korean subsidies. 
7.170  Finally, Korea relies to an important extent upon statements of the European Commission and 
of its individual members to support its asserti on that the TDM Regulation is action "against" a 
subsidy of another Member.332  In particular Korea refers to st atements that the adoption of the TDM 
Regulation signals to Korea the European Comm unities' determination to resolve the dispute;333 that 
the TDM Regulation is part of a strategy "aimed at fighting these unfair [Korean practices]"334, that 
the TDM Regulation is part of the Commission's twin-track strategy;335 that the TDM Regulation is 
specifically designed to counter unfair Korean pr actices for a period necessary for the conclusion of 
the WTO procedure;336 that the TDM Regulation is intended to increase the weapons arsenal vis-à-vis  
alleged Korean subsidies;337 and that Commissioner Lamy wants to use subsidies as leverage against 
South Korea to stop supporting its industry.338   
7.171  In the Panel's view, Korea's reference to such  statements does not demonstrate how through 
its design and structure the Regulation operates in a manner that dissuades the practice of 
subsidization or creates an incentive to terminat e that practice other than through the competitive 
impact of the subsidies provided for under the TDM Regulation.  In addition, apart from the issue of 
whether the European Commission and its members can be considered to be "legislators" in relation 
to an act adopted by the Council of the European Un ion, the Panel also recalls the statement of the 
                                                      
329 First submission of Korea, para. 124.   
330 We recall that, under Article 4 of the TDM Regulation, operating aid can only be provided in 
respect of contracts signed during a period beginning when the Commission gives notice of the initiation of a 
WTO dispute settlement proceeding against Korea and ending one month after the Commission gives notice that 
these proceedings are resolved, or su spended on the grounds that the Co mmunity considers that the Agreed 
Minutes have been effectively implem ented.  The dispute settlement proceed ing is resolved within the meaning 
of Article 4 when the DSB adopts the report of the Pane l established in this procee ding or of the Appellate 
Body.   
331 See, paras. 7.160-7.164, supra . 
332 First submission of Korea, paras. 120-121;  second submission of Korea, paras. 192-194 and 198.   
333 First submission of Korea, para. 120.   
334 First submission of Korea, para. 121.   
335 First submission of Korea, para. 122.   
336 Second submission of Korea, para. 194.   
337 Second submission of Korea, para. 197.   
338 Second submission of Korea, para. 198.   WT/DS301/R 
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 Appellate Body that a finding of whether a measure is "against" a subsidy of another Member cannot 
be based on the intent of legislators.339  
7.172  In light of the above considerations, the Panel finds  that the TDM Regulation is not an action 
"against" a subsidy of another Member within the meaning of Article 32.1 of the SCM Agreement.   
7.173  The Panel concludes  that the TDM Regulation is not a "specific action against a subsidy of 
another Member" inconsistent with Article 32.1 of the SCM Agreement. 
7.174  The Panel also concludes,  as a consequence, that the TDM aid schemes of Denmark, France, 
Germany, the Netherlands, and Spain, and the De cisions of the European Commission authorizing 
those aid schemes, are not "specific actions agains t a subsidy of another Member" inconsistent with 
Article 32.1 of the SCM Agreement.   
E. CLAIMS UNDER ARTICLE 23 OF THE DSU  
1. General 
7.175  Korea  claims that the TDM Regulation, its member State implementing provisions as well as 
any instances of application340 of the TDM scheme, and any EC Decisions approving member State 
implementing provisions pursuant to the TDM scheme,  are inconsistent with the obligations of the 
European Communities and its member States under Ar ticles 23.1, 23.2(a), 23.2(b) and 23.2(c) of the 
DSU.   
2. Article 23.1 
(a) Main arguments 
(i) Arguments of the parties341 
7.176  In support of its claim of a violation of Article 23.1 of the DSU, Korea  submits that by 
adopting the TDM Regulation the European Commun ities sought the redress of a violation by Korea 
of its obligations under the SCM Agreement without  having recourse exclusively to, and abiding by, 
the rules and procedures of the DSU.342  According to Korea, the European Communities "imposed 
retaliatory measures directed specifically agains t Korea as a weapon to induce compliance with the 
European Communities' interpretation of Kore a's WTO obligations under the SCM Agreement".343   
7.177  In Korea's view, Article 23.1 of the DSU prohib its any form of remedial action of a Member 
in response to what that Member considers to be a violation by another Member of its WTO obligations that does not involve exclusive recourse  to the DSU.  Korea in terprets Article 23.1 as a 
"broad prohibition on unilateralism"
344 and emphasizes that the term "seek redress" is "a broad 
formulation clearly intended to capture a wi de range of potential measures and actions".345  
Article 23.1 is a legally binding provision that can be  violated in many situations other than those 
identified in Article 23.2 of the DSU.346  Korea rejects the view of the European Communities that 
                                                      
339Appellate Body Report, US - Offset Act (Byrd Amendment ), para. 259. 
340 The Panel recalls its discussion in section VII.A.4(a) of the conditional preliminary objection raised 
by the European Communities.   
341 For a more detailed account of the argumen ts of the parties, see Section IV.C.4. 
342 E.g., first submission of Korea, paras. 36-62, 63-67, and 68-71. 
343 First submission of Korea, para. 20.   
344 Response of Korea to Panel Question 26.   
345 First submission of Korea, para. 42.   
346 E.g., response of Korea to Panel Question 18.   WT/DS301/R 
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 Article 23 cannot prohibit measures that do not involve a suspension of concessions or obligations 
under a covered agreement.347  In the latter regard, Korea's use of the terms "countermeasures" and 
"retaliation" in relation to the TDM Regulation is me ant to refer to actions other than just suspension 
of concessions or obligations.348 
7.178  With reference to the discussion of the meaning of "seek the redress of a violation..." in the 
Panel Report on US - Certain EC Products , Korea points to a number of factors demonstrating that 
the TDM Regulation embodies an "attempt" or "effo rt" by the European Communities to obtain a 
"remedy or relief from trouble" which the European  Communities perceived to be caused by Korean 
illegal subsidies and that the TDM Regulation was also "a reaction" by the European Communities 
against another Member because of a perceived vi olation of a WTO obligation "with a view to 
remedying the situation".349  These factors include the fact that the temporal application of the TDM 
Regulation is legally dependant upon the WT O dispute settlement case launched by the 
European Communities in respect of certain subsid ies allegedly provided by Korea;  the terms and 
design of the TDM Regulation; various bac kground documents and statements of the 
European Commission and statements by its indi vidual members; the relationship of the TDM 
Regulation with an investigation conducted by  the European Communities under the Community's 
Trade Barriers Regulation; the link between the TD M Regulation and the Agreed Minutes;  and the 
wording of the Regulation that extende d the duration of the TDM Regulation.350  
7.179  The European Communities  submits that, while taken in isolation the term "redress" might 
lend itself to a broad interpretation, when viewed in  context and in light of the purpose of Article 23, 
its drafting history and international public law rules on state responsibility and the suspension of 
treaty obligations, it is clear that "the general obligation not to seek redress of a WTO violation 
outside the WTO system cannot prohibit measures ot her than retaliatory measures in the form of 
suspension of WTO concessions or obligations".351  Thus the phrase  "seek the redress of a 
violation..." in Article 23.1 does not apply generally to any kind of reaction by a Member to a measure 
of another Member that it considers to be in viol ation with that Member's obligations under the WTO 
Agreement.  Rather, a "measure seeking redress of a WTO violation must at least identify a particular 
WTO violation and suspend concessions or obligati ons with a view to inducing compliance by the 
other Member or to re-establish th e balance of rights and obligations".352  The European Communities 
submits that Article 23.1 of the DSU is entirely procedural in nature.353  Its first purpose is "to ensure 
the exclusivity of WTO jurisdiction over WTO law and the suspension of concessions".354  T h e  
obligation to have recourse to the DSU is an ex clusive jurisdiction clause and requires Members to 
have recourse only to WTO dispute settlement as opposed to another international tribunal.355  The 
only other aspect of  Article 23.1 is the reaffirmation of the obligation to abide by the rules of the 
                                                      
347 Oral statement of Korea at the fi rst substantive meeting of the Panel with the parties, paras. 40-45; 
second submission of Korea, paras. 110-118.  
348 Response of Korea to Panel Question 27. 
349 First submission of Korea, para. 39.   
350 E.g., first submission of Korea, paras. 39-62. 
351 First submission of the European Communities, para. 129.   
352 Response of the European Communities to Panel Question 14.   
353 Oral statement of the European Communities at the first substantive meeting of the Panel with the 
parties, para. 47. 
354 Oral statement of the European Communities at the first substantive meeting of the Panel with the 
parties., para. 48. 
355 Responses of the European Communities to Panel Questions 16 and 19.   WT/DS301/R 
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 DSU.356  In the view of the European Communities, Article 23.1 cannot prohibit unilateral acts other 
than those listed in Article 23.2 of the DSU and act s that are otherwise inconsistent with the DSU.357  
7.180  The European Communities also argues that it is  difficult to imagine how redress within the 
meaning of Article 23.1 of the DSU is being sought in  the absence of a determination that a violation 
of obligations under the WTO Agreement has occurred, and refers in this respect to its arguments to 
rebut Korea's claim that the TDM Regulation contains  a determination contrary to Article 23.1 of the 
DSU.358   
7.181  The European Communities also re jects Korea's claim of a violation of Article 23.1 of the 
DSU on more factual grounds.  In particular, the European Communities submits that the relationship 
between the temporal application of the TDM Re gulation and the WTO dispute settlement proceeding 
initiated by the European Communities against Kor ea is explained by the need for an objective 
criterion to limit the duration of the aid; that th e reference made in the TDM Regulation to injury 
caused by "unfair Korean competition" does not refer to WTO-inconsistent subsidies; that the primary 
motivation for the adoption of the TDM Regulation was the non-implementation by Korea of its commitments under the Agreed Minutes; and that Korea has failed to explain how the TDM 
Regulation can be effective as a form of remedy or redress.
359  
(ii) Arguments of third parties 
7.182  China submits that the TDM measures are covered by Article 23.1 of the DSU because they 
were adopted by the European Communities to "seek the redress of a violation..." as that phrase has 
been interpreted by the Panel in US - Certain EC Products .  The criterion to decide whether a measure 
falls within the scope of Article 23.1 is whether th e measure is adopted with a "view to remedying the 
situation".  Thus, Article 23.1 is not limited in scope to measures involving a suspension of 
concessions or obligations under the WTO Agreemen t but covers any other remedial action taken 
against another Member in response to a violation of the WTO Agreement.360  China points to the 
close relationship of the TDM Regulation with the investigation under the Trade Barriers Regulation; 
the temporal linkage between the TDM Regulat ion and the WTO dispute settlement proceeding 
initiated by the European Communities against Korea;  the fact that the TDM Regulation was adopted 
as part of a twin-track strategy and the targeted  nature of the TDM measures as factual elements 
demonstrating that the TDM measures were taken to "seek the redress of a violation..." within the 
meaning of Article 23.1 of the DSU.361  
7.183  The United States  argues that the European Communities has skipped a step in arguing that 
Article 23.1 of the DSU does not prohibit meas ures that are otherwise permitted by the WTO 
Agreement.  If the European Communities has made a determination in the sense of Article 23.2(a) 
outside the framework of the DSU, it would be in br each of Article 23.2(a) and thereby Article 23.1.  
There might also be a breach of Article 23.2(c) if  the measures taken by the European Communities in 
seeking the redress of a violation amounted to a suspension of WTO concessions or other 
obligations.362  Thus the suspension of concessions or othe r WTO obligations is not the only form of 
                                                      
356 Oral statement of the European Communities at the first substantive meeting of the Panel with the 
parties, paras. 49-50.   
357 Second submission of the European Communities, para. 85.   
358 Oral statement of the European Communities at the second substantive meeting of the Panel with 
the parties, para. 75. 
359 E.g., first submission of the European Communities, paras. 144-166. 
360 Third party submission of China, paras. 4-8. 
361 Third party submission of China, paras. 14-19. 
362 Oral statement of the United States at the first substantive meeting of the Panel with the parties, 
paras. 2-3.  WT/DS301/R 
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 redress within the meaning of Article 23.1.363 Article 23.2(a) provides further support that a 
determination of a breach of the WTO Agreement can be a method of seeking redress because it does 
not require that the determination be accompan ied by any other action or trade consequences.364   In 
response to a question, the United States also submits  that  Article 23.2 of the DSU nowhere refers to 
measures other than a determination or the suspension of concessions or other obligations and that 
Article 23.1 only commits Members to have recourse to, and aide by, the rules and procedures of the 
DSU, and that it is therefore difficult to see how Article 23.1 applies to measures that are consistent 
with the WTO Agreement.365  The United States considers that Article 60 of the Vienna Convention 
on the Law of Treaties and Article 49(2) of the Draft ILC Articles on State responsibility are not 
relevant to the questi on presented to the Panel.366   
(b) Evaluation by the Panel 
7.184  Article 23.1 of the DSU provides: 
"Strengthening of the Multilateral System  
 
1. When Members seek the redress of a violation of obligations or other 
nullification or impairment of benefits  under the covered agreements or an 
impediment to the attainment of any objec tive of the covered agreements, they shall 
have recourse to, and abide by, the rul es and procedures of this Understanding." 
7.185  As noted above, the arguments of the parties as to whether or not the TDM Regulation is 
inconsistent with Article 23.1 of the DSU reflect fundamental differences of interpretation of the 
scope and nature of the obligations  contained in that provision, particularly with regard to the 
requirement that Members "have recourse to" the ru les and procedures of the DSU when  they "seek 
the redress of a violation of obligations..."  Whereas Korea asserts that this requirement prohibits any 
form of unilateral conduct whereby a Member attempts  to remedy a violation by another Member of 
its obligations under the WTO Agreement, the Eur opean Communities submits that this requirement 
is of a purely procedural nature and cannot prohib it a measure that does not involve the suspension of 
concessions or obligations under the WTO Agreement. 
7.186  The Panel recalls that it has found that the TDM Regulation is not incons istent with Articles I 
and III of the GATT 1994 and Article 32.1 of the SCM Agreement.  Consequently, if the Panel were 
to agree with the interpretation of Article 23.1 a dvanced by the European Communities, it would not 
be necessary to examine the detailed arguments of the parties regarding specific factual aspects of 
Korea's claim.  Therefore, the Panel must first in terpret the scope and nature of the requirement in 
Article 23.1 of the DSU that Members "have rec ourse" to the DSU when "seeking the redress of a 
violation...".  In so doing, the Panel must apply customary rules of interpretation of public 
international law367, as set out in Articles 31 and 32 of the Vienna Convention on the Law of Treaties 
(1969).  As expressed in Article 31.1 of that Conventi on, the fundamental rule is that "[a ]treaty shall 
be interpreted in good faith in accordance with the or dinary meaning to be given to the terms of the 
treaty in their context and in light of its object and purpose".   
                                                      
363 Replies of the United States to the questions from the European Communities and Korea, para.1.  
364 Replies of the United States to the questions from the European Communities and Korea, para.2. 
365 Replies of the United States to the questions from the European Communities and Korea, para. 4. 
366 Oral statement of the United States at the first substantive meeting of the Panel with the parties, 
paras. 5-6.  
367 Art. 3.2 of the DSU.   WT/DS301/R 
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 (i) Meaning of the requirement to have recourse to  the DSU when Members seek the redress of a 
 violation  
7.187  The obligation in Article 23.1 to have recour se to (and abide by) the rules and procedures of 
the DSU applies "when Members seek the redress of a violation of obligations or other nullification or 
impairment of benefits under the covered agreements or an impedi ment to the attainment of any 
objective of the covered agreements".368, 369  Thus, an essential element in the interpretation of the 
scope of this obligation is the meaning of  "seek the redress of a violation..."   
7.188  The phrase "seek the redress of a violation ..." implies that one necessary condition of the 
application of Article 23.1 of the DSU is that a Me mber acts in response to what it considers to be 
conduct of another Member that is in violation of that Member's obligations.  In the words of the 
Panel in US - Section 301 Trade Act , a decision by a Member to "seek the redress of a violation..." 
means that "in its preliminary view, there may be a WTO inconsistency".370  The Panel in US - 
Certain EC Products  referred to this aspect of "seek the re dress of a violation..." as action "because of 
a perceived (or WTO determined) WTO violation" a nd "action in response to what [a WTO Member] 
views as a WTO violation".371  We agree with this approach.   
7.189  With regard to the meaning of  "seek the redress  of a violation", the Panel notes the definition 
of "redress" in the New Shorter Oxford English Dictionary:  
"1.  Reparation of or compensation for a wrong or consequent loss.  2(a).  Remedy for 
or relief from some trouble; assistance, aid, help.  (b) (obsolete) Correction or 
reformation of something wrong.  3(a) A means of redress; an amendment, an improvement.  (b) (obsolete) A person who or  thing which affords redress.  4.  The 
act of redressing; correction or amendment of a thing, state, etc."
372   
The fact that "redress" can mean "reparation of" or  "compensation for" a wrong or consequent loss but 
also "remedy for" or "relief from" some trouble sugg ests that "the redress of a violation..." within the 
meaning of Article 23.1 of the DSU can take variou s forms.  One obvious modality of "redress" of a 
violation that a Member will "seek" is action by anot her Member to bring itself into conformity with 
                                                      
368 Hereinafter, we shall use "seek the redress of a vi olation..." to refer to these three causes of action. 
369 We note that Part III of the SCM Agreement contai ns specific provisions that apply when a Member 
considers that another Member causes adverse effects to its interests by using a subsidy within the meaning of 
Article 1 of the SCM Agreement.  These provisions on "actionable" subsidies in effect define causes of action in 
terms that differ in part from those of Article 23.1 of the DSU.  In the Panel's view , however, Article 23.1 also 
applies to instances in which a Member seeks to redre ss conduct that is WTO–inconsistent within the meaning 
of Part III of the SCM Agreement.  To hold otherwise would yield an absurd result.  It would mean, for 
example, that while a Member is required to have re course to the DSU when its seeks the redress of a non-
violation nullification or impairment of benefits, it would not be required to have recourse to the DSU when it 
seeks the redress of serious prejudice caus ed by a subsidy of another Member.   
370 Panel Report, US - Section 301 Trade Act , para. 7.50, footnote 657.   
371 Panel Report , US - Certain EC Products , paras. 6.22 and 6.23. 
372 The Panel also notes that the Panel in US - Certain EC Products interpreted the phrase "seek the 
redress ..." as follows: 
"The term 'seeking' or 'to seek' is defined in the Webster New Encyclopedic Dictionary  as: 'to 
resort to, … to make an attempt, try'.  This term would therefore cover situations where an 
effort is made to redress WTO violations (wheth er perceived or WTO determined violations).  
The term 'to redress' is defined in the New Shorter Oxford English Dictionary  as 'repair (an 
action); atone for (a misdeed); remedy or remove ; to set right or rectify (injury, a wrong, a 
grievance etc.); obtaining reparation or compensation'.  The term 'redress' is defined in the 
New Shorter Oxford English Dictionary  as: 'reparation of or compensation for a wrong or 
consequent loss; remedy for or relief from some trouble; correction or reformation of 
something wrong'.  Panel Report, US - Certain EC Products , para. 6.22.   WT/DS301/R 
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 its obligations by removing a WTO-inconsistent measure, but "redress" includes other possible 
"remedies", such as compensation or suspension of concessions or obligations.  Therefore, to "seek 
the redress of a violation..." may include but is not limited to a suspension of concessions or 
obligations.373  As observed by the Panel in US - Certain EC Products, the phrase "seek the redress of 
a violation..." in the context of Article 23.1 of the DSU can be defined rather broadly as a "reaction 
against another Member, because of a perceived (or WTO determined) WTO violation, with a view to 
remedying the situation".374 
7.190  In interpreting the phrase "seek the redress of a vi olation...", the Panel must also take into 
account as one relevant contextual element the fact th at this phrase appears in a clause contained in an 
article designed explicitly with a view to "stre ngthening the multilateral system".  These words must 
therefore be given a meaning consistent with that stated objective.  Another relevant element of the 
context of the phrase "seek the redress of a viola tion..." in Article 23.1 is that the DSU clearly 
provides for different types of "remedy".  In the Pane l's view, an interpretation of Article 23.1 in light 
of the objective of Article 23 and its context in  the DSU suggests that it must apply to any act 
whereby a Member seeks to obtain unilaterally results  that can be achieved via the remedies of the 
DSU through means other than recourse to the DSU.375  If Members were free to attempt to seek the 
redress of a violation by trying to achieve unilatera lly what could be obtained through the DSU, it is 
difficult to see how the obligation to have recourse to the DSU could contribute to the "strengthening 
of the multilateral system".   
7.191  In this regard, the Panel considers that the obligation "to have recourse" to the DSU is 
necessarily of an exclusive character.  The Panel finds confirmation of its view on this exclusive 
character of Article 23.1 in the statement made by the Appellate Body in US - Certain EC Products : 
"Article 23.1 of the DSU imposes a ge neral obligation on Members to redress a 
violation of obligations or other nullifica tion or impairment of benefits under the 
covered agreements only by recourse to the rules and procedures of the DSU, and not 
through unilateral action.  Subparagraphs (a ), (b) and (c) of Article 23.2 articulate 
specific and clearly-defined forms of pr ohibited unilateral action contrary to 
Article 23.1 of the DSU.  There is a close relationship between the obligations set out in paragraphs 1 and 2 of Article 23.  They  all concern the obligation of Members of 
the WTO not to have recourse to unilateral action.  (...) ."
376 
The fact that Article 23.1 contains a general obligation to have recourse to the DSU, instead of acting 
unilaterally to "seek the redress of a violation" , and that Articles 23.2(a)-(c) are "specific... forms of 
                                                      
373The Panel also notes the argument of the United Stat es that for Members who are not in a position to 
suspend concessions effectively or have recourse to ot her modes of redress, the main form of redress or 
assistance available is a finding that another Me mber's measure is inconsistent with the WTO 
Agreement.  See replies of the United States to  the Questions from the European Communities and 
Korea, para.1.   
374 Panel Report, US - Certain EC Products , para. 6.22.   
375 This does not preclude Members from engaging in informal consultations or reaching mutually 
agreed solutions.   
 376 Appellate Body Report, US - Certain EC Products , para. 111.  The Panel also notes that the Panel in 
US - Certain EC Products  discussed Article 23.1 of the DSU as follows:  
"An important reason why Article 23 of the DSU must be interpreted with a view to 
prohibiting any form of unilateral action is b ecause such unilateral actions threaten the 
stability and predictability of th e multilateral trade system, a n ecessary component for 'market 
conditions conducive to individual economic activity in national and global markets' which, in 
themselves, constitute a fundamental goal of th e WTO.  Unilateral acti ons are, therefore, 
contrary to the essence of the multilateral trade system of the WTO."  Panel Report, US -
Certain EC Products , para. 6.14 (footnote omitted). WT/DS301/R 
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 prohibited unilateral action contrary to Article 23.1" indicates that Article 23.1 constitutes an 
independent obligation not limited in scope to the particular instances of unilateral conduct identified 
in Article 23.2.   
7.192  We note that the Panel Reports in US - Section 301  Trade Act  and US - Certain EC Products 
express a similar view on the nature and scope of Ar ticle 23.1 as an independent  obligation.  Thus, for 
example, the Panel Report in US - Section 301  Trade Act  states inter alia  that: 
"There is a great deal more State conduct which can violate the general obligation in 
Article 23.1 to have recourse to, and abid e by, the rules and procedures of the DSU 
than the instances especially singled out in Article 23.2."377   
The Panel in US - Certain EC Products  considered that:   
"The structure of Article 23 is that the firs t paragraph states the general prohibition or 
general obligation, i.e.  when Members seek the redress of a WTO violation, they 
shall do so only through the DSU.  This is a general obligation.  Any attempt to seek 
'redress' can take place only in the institu tional framework of the WTO and pursuant 
to the rules and procedures of the DSU. 
The prohibition against unilateral redress in the WTO sectors is more directly 
provided for in the second paragraph of Article  23.  From the ordinary meaning of the 
terms used in the chapeau of Article 23.2 (" in such cases, Members shall"), it is also 
clear that the second paragraph of Article 23 is  'explicitly linked to, and has to be read 
together with and subject to, Article 23.1'.  That is to say, the specific prohibitions of 
paragraph 2 of Article 23 have  to be understood in the context of the first paragraph, 
i.e.  when such action is performed by a WTO Member with a view to redressing a 
WTO violation.   
We also agree with the US – Section 301  Panel Report that Article 23.2 contains 
'egregious examples of conduct that cont radict the rules of the DSU' and which 
constitute more specific forms of unilateral actions, otherwise generally prohibited by 
Article 23.1 of the DSU."378  
7.193  It follows from this conception of Article 23.1 as a general obligation no t to act unilaterally 
when seeking redress of a violation of an obliga tion under the WTO that the requirement to have 
recourse to the DSU is not limited to an "exclusive  jurisdiction clause", in the sense in which that 
expression is used by the European Communities.  Interpreted in light of its context and purpose, 
Article 23.1 not only ensures the exclusivity of the WTO vis-à-vis  other international fora but also 
protects the multilateral system from unilateral conduct.   
7.194  We note in this respect that the European Co mmunities refers to the notion of "exclusive 
dispute resolution clause" in the Panel Report in US - Section 301 Trade Act as support for its 
interpretation of Article 23.1 as simply an "exclusive  jurisdiction clause".  The relevant paragraph of 
that Report reads as follows:  
"Article 23.1 is not concerned only with specifi c instances of violation.  It prescribes 
a general duty of a dual nature .  First, it imposes on all Members to 'have recourse to' 
the multilateral process set out in the DS U when they seek the redress of a WTO 
inconsistency.  In these circumstances, Members have to have recourse to the DSU 
                                                      
377 Panel Report, US – Section 301 Trade Act , para. 7.45 (footnotes omitted). 
378 Panel Report, US - Certain EC Products , paras. 6.17-6.19 (footnotes omitted). WT/DS301/R 
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 dispute settlement system to the exclusion of any other system, in particular a system 
of unilateral enforcement of WTO rights and obligations .  This, what one could call 
'exclusive dispute resolution clause', is an important new element of Members' rights and obligations under the DSU."
 379 
Thus it is clear from the context that the Panel used  the term "exclusive dispute resolution clause" to 
refer in particular to the prohibition of "unilate ral enforcement of WTO rights and obligations".   
7.195  To summarize, based on an interpretation of Artic le 23.1 in light of the ordinary meaning of 
its terms and in light of its context and object and purpose, and having regard to the reasoning of the 
Appellate Body and panels in pr evious disputes concerning Artic le 23, we consider that the 
requirement "to have recourse to" the DSU when Me mbers "seek the redress of a violation..." is 
broader in scope than suggested by the expressi on "exclusive jurisdiction clause" used by the 
European Communities.  This requirement is viol ated not only when Members submit a dispute 
concerning rights and obligations under the WTO Ag reement to an international dispute settlement 
body outside the WTO framework but also when Member s act unilaterally to seek to obtain the results 
that can be achieved through the remedies of the DSU.   As a consequence, we reject the view of the 
European Communities that Article 23.1 of the DS U cannot prohibit acts other than those that are 
inconsistent with Article 23.2 or with other DSU rules.   
7.196  As discussed above, the Panel considers that Ar ticle 23.1 must be interpreted to mean that 
Members may not seek to obtain results that can be achieved through the remedies of the DSU by 
means other than recourse to the DSU.  The Panel in US - Certain EC-Products  observed that the 
"remedial actions" envisaged in the WTO system:  
"relate to restoring the balance of rights a nd obligations which form the basis of the 
WTO Agreement, and include the removal of the inconsistent measure, the possibility 
of (temporary) compensation and, in the l ast resort, the (temporary) suspension of 
concessions or other obligations authorised by the DSB (Articles 3.7 and 22.1 of the 
DSU).  The latter remedy is essentially retaliatory in nature".380   
This statement is consistent with our  view of what "seek the redress of a violation" means.  Therefore, 
the phrase "seek the redress of a violation..." covers  any act of a Member in response to what it 
considers to be a violation of a WTO obligation by another Member whereby the first Member 
attempts to restore the balance of rights and obligations by seeking the removal of the WTO-
inconsistent measure, by seeking compensation fro m the other Member, or by suspending concessions 
or obligations under the WTO Agreement in relati on to that Member.  In the case of actionable 
subsidies, seeking the removal of the WTO-inconsis tent measure includes seeking the removal by the 
subsidizing Member of the adverse effects of the subsidy.  In our view, any unilateral attempt to 
obtain these results would be a violation of Article 23.1 of the DSU. 
7.197  In the Panel's view, however, the concept of "seeking the redress of a violation" does not 
encompass the situation where a Member takes actions  to compensate or attenuate the harm caused to 
actors within the aggrieved Member as a result of  the allegedly WTO-cons istent action, provided 
those actions are not designed to influence the conduct of the Member taking the allegedly WTO-
inconsistent action, as outlined in the preceding pa ragraph.  Thus, for example, trade adjustment 
assistance provided to help companies or workers affected by an allegedly WTO-inconsistent 
quantitative restriction to shift into other economic  activities may be a response to WTO-inconsistent 
behaviour but would not constitute "seeking redress".  This type of palliative action might address the 
                                                      
379 Panel Report, US - Section 301 Trade Act , para. 7.43 (emphasis added). 
380 Panel Report, US - Certain EC Products , para. 6.23.   WT/DS301/R 
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 harm caused to particular actors within a WTO Me mber by an alleged WTO violation but it is not 
designed to restore the balance of rights and obligations between Members.   
7.198  We have rejected the argument of the Eur opean Communities that, to the extent that 
Article 23.1 is an independent obligation, it is simp ly an "exclusive jurisdiction clause".  Another key 
argument of the European Communities is that th e relationship between Ar ticles 23.1 and 23.2 and 
between Articles 23.2(a) and (c) of the DSU provi des contextual support for an interpretation of 
Article 23.1 according to which acts not involvi ng a suspension of WTO concessions or other 
obligations cannot be covered by the phrase "seek th e redress of a violation..." in Article 23.1 of the 
DSU.381  The European Communities refers in par ticular to the close textual link between 
Articles 23.1 and 23.2 of the DSU and cites the view of the Panel in US - Certain EC Products  that 
the term "determination" in Article 23.2(a) must "bear consequences in WTO trade relations".  The European Communities infers from this that a dete rmination within the meaning of Article 23.2(a) 
must lead to the suspension of concessions or obligat ions within the meaning of Article 23.2(c) of the 
DSU and that "this confirms contextually that th e general obligation not to seek redress of a WTO 
violation outside the WTO system cannot prohibit measures other than reta liatory measures in the 
form of suspension of WTO concessions or obligations".
382  
7.199  Article 23.2 sets forth three more specific oblig ations that apply when a Member "seek[s] the 
redress of a violation...": 
"2. In such cases, Members shall: 
(a) not make a determination to the effect that a violation has occurred, that 
benefits have been nullified or impaired or that the attainment of any objective of the 
covered agreements has been impeded, ex cept through recourse to dispute settlement 
in accordance with the rules and procedur es of this Understanding, and shall make 
any such determination consistent with the findings contained in the panel or 
Appellate Body report adopted by the DS B or an arbitration award rendered under 
this Understanding; 
(b) follow the procedures set forth in Article 21 to determine the reasonable 
period of time for the Member concerne d to implement the recommendations and 
rulings;  and 
(c) follow the procedures set forth in Article 22 to determine the level of 
suspension of concessions or other obligations and obtain DSB authorization in accordance with those procedures before suspending concessions or other obligations 
under the covered agreements in response to the failure of the Member concerned to 
implement the recommendations and rulings within that reasonable period of time." 
7.200  In the Panel's view, the close connection betw een the two paragraphs of Article 23 means 
that, as stated by the Appellate Body in US - Certain EC Products , "[s]ubparagraphs (a), (b) and (c) of 
Article 23.2 articulate specific and clearly-defined forms of prohibited unilateral action contrary to 
Article 23.1" and that there is a "close relationship between paragraphs 1 and 2 of Article 23 in that 
they all concern the obligation of Members of the WTO not to have recourse to unilateral action".
383  
The Panel is not persuaded, however, by the ar gument of the European Communities that the 
                                                      
381 See in particular first submission of the European Communities, paras. 122-129. 
382 First submission of the European Communities, paras. 123-129. 
383Appellate Body Report, US – Certain EC Products , para. 111.  The need to read Article 23.2 
together with Article 23.1 was also highlighted by the Panel Report in US - Section 301 Trade Act , paras. 7.44-
7.45.   WT/DS301/R 
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 relationship between Articles 23.1 and 23.2 mean s that acts not amounting to a suspension of 
obligations or concessions are not covered by the phrase "seek the redress of a violation" in 
Article 23.1, for the very reason that the Panel is  not persuaded that a determination within the 
meaning of Article 23.2(a) must be linked to a su spension of concessions or other obligations within 
the meaning of Article 23.2(c).  The wording of Article 23.2(a) does not support an interpretation 
according to which a unilateral determination that a nother Member has violated obligations under the 
WTO Agreement is only inconsistent with this provision if such a dete rmination is made in 
connection with the application of a measure involving a suspension of concessions or other 
obligations under the WTO Agreement.  If, as argue d by the European Communities, Article 23.2(a) 
only covers determinations made for the purpose of suspending concessions or obligations under 
Article 23.2(c), the drafters of the DSU could easily have used a formulation to express that linkage.  
The fact that unilateral determinations are covere d by a separate clause, without an explicit textual 
linkage to Article 23.2 (c), as part of an article  aimed at "strengthening the multilateral system" 
suggests that such determinations by themselves we re viewed by the drafters as contrary to the 
multilateral system.   
7.201  The Panel notes, in this regard, that the Panel Report in US - Certain EC Products,  referred to 
by the European Communities as support for the pro position that a determination within the meaning 
of Article 23.2(a) must be linked to a suspension of concessions or obligati ons, offers no explanation 
for its view that a determination under Article  23.2(a) must "bear consequences in WTO trade 
relations".384  Moreover, the Panel did not elaborate on the meaning of "consequences in WTO trade 
relations".  In any event, the Panel did not expr essly link this notion of "consequences in WTO trade 
relations" to the suspension of concessions or obliga tions under Article 23.2(c)  of the DSU, and its 
finding of a violation of Article 23.2(a) was not dependent upon a finding of a violation of 
Article 23.2(c).  Thus, it is not at all clear that "c onsequences in trade relations" as used in that report 
necessarily refers to a suspension of concessions or  other obligations under the WTO Agreement.  
The fact that the Panel in US - Certain EC Products  found that the United States acted inconsistently 
with Article 23.2(a) by making a unilateral determ ination and did not base this finding on the link 
between this unilateral determination and a suspen sion of concessions in ou r view confirms that 
Article 23.1 can prohibit acts that do not involve a suspension of concessions or obligations.  The 
Panel further notes that the Appellate Body reversed the finding of that Panel under Article 23.2(a) of 
the DSU on procedural grounds.385   
7.202  Finally, the Panel also notes that the earlier Panel Report in US - Section 301  Trade Act  does 
not make any mention of the idea of "consequences in  WTO trade relations" or of similar notions in 
its discussion of the meaning of "determination" in Article 23.2(a) of the DSU.386  The Panel notes the 
                                                      
384 Panel Report, US - Certain EC Products , para. 6.98. 
385 Appellate Body Report, US - Certain EC Products , paras. 107-115.   
386 Panel Report, US - Section 301 Trade Act , para. 7.50, footnote 657: 
"(...) Both parties also agree that determinations  under Section 304 meet the second of the four 
elements, a determination in the sense of Article 23.2(a).  We agree.  Some of the relevant 
dictionary meanings of the word "determination" in the context of Article 23.2(a) are:  'the 
settlement of a suit or controversy by the authoritative decision of a judge or arbiter; a 
settlement or decision so made, an authoritative opinion … the action of coming to a decision; 
the result of this; a fixed intention' ( The New Shorter Oxford English Dictionary , Ed.  Brown, 
L., Clarendon Press, Oxford, Vol.  1, p.  651).  Without there being a need precisely to define 
what a 'determination' in the sense of Article 23.2(a) is, we consider that – given its ordinary 
meaning – a 'determination' implies a high degree of firmness or immutability, i.e. a more or 
less final decision by a Member in respect of the WTO consistency of a measure taken by 
another Member. 
Given that Article 23.2(a) only deals with 'det erminations' in case a Member is seeking redress 
of WTO inconsistencies, we are of the vi ew that a 'determination' can only occur subsequent  
to a Member having decided that, in its prelim inary view, there may be a WTO inconsistency, WT/DS301/R 
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 argument of the European Communities that "the decision of the Panel in US - Section 301  Trade Act  
was based on the understanding th at a determination of WTO inc onsistency under section 304 (b) is 
inextricably linked to a suspension of rights and concessions, i.e.  a decision that may have legal 
effects on the balance of rights and obligations".387  Assuming that this is factually correct, the fact 
remains, however, that while the Panel Report in US - Section 301  Trade Act  contains a careful 
analysis of the meaning of the word "determinati on" in Article 23.2 (a) and of the conditions under 
which determinations under Secti on 304 would be inconsistent with  Article 23.2, that analysis 
nowhere relates the term "determination" within th e meaning of Article 23.2(a) to the suspension of 
concessions or obligations under Article 23.2(c).388  In fact, the Panel in US - Section 301  Trade Act  
made a preliminary conclusion that Section 304 vi olated Article 23.2(a) simply because it mandated a 
determination, potentially of WTO inco nsistency, prior to any DSB action.389  An examination of the 
US statute390 indicates that a determination under Section 304 could, but does not necessarily, lead to 
the suspension of WTO concessions or obligations.  In some cases, following such a determination, 
the USTR has discretion as to whether to take acti on at all (Section 301(b)) and even in those cases 
where action is normally mandated (Section 301(a)), there are exceptions (see Section 301(a)(2)(B)).  
The list of potential actions that the USTR is author ized to take includes acti ons that do not involve 
suspension of WTO concessions or obligations (see Section 301(c)).  Moreover, the potential actions 
are defined as including those “that are within the po wer of the President with respect to trade in any 
goods and services, or with respect to any other area of p ertinent relations with the foreign country ” 
(Section 301(a)(1) & 301(b)(2)).  Thus, the US - Section 301 Trade Act Panel Report stands for the 
proposition that there may be a violation of Artic le 23.2(a) independently of Article 23.2(c). 
7.203  Therefore, the Panel considers that a determinati on can be inconsistent w ith Article 23.2(a) of 
the DSU regardless of whether and how that de termination is connected to a suspension of 
concessions or other obligations unde r Article 23.2(c).  This confirms that a violation of Article 23.1 
does not require a suspension of concessions or oblig ations.  Thus, although Article 23.2 is part of the 
context for the interpretation of Article 23.1, Ar ticles 23.2(a) and (c) of the DSU do not provide 
contextual support for the view of the European Co mmunities that the obligation in Article 23.1 of the 
DSU to have recourse to the DSU cannot prohibit acts not involving a suspension of WTO concessions or other obligations.   
7.204  The European Communities also ass erts that the purpose Article 23 of the DSU is to set out a 
lex specialis  in relation to public international law rules on the suspension of the operation of a treaty, 
particularly Article 60 of the Vie nna Convention on the Law of Treaties
391, and that Article 23 should 
                                                                                                                                                                     
i.e. only once that Member has decided to seek redress of such inconsistency.  Mere opinions 
or views expressed before that stage is r eached, are not intended to be covered by 
Article 23.2(a).  However, once a Member does  bring a case under the DSU, in particular once 
it requests the establishment of a panel, one can assume that this preliminary stage has been 
passed and the threshold of a 'determination' met.  Such reading of the term 'determination' is 
confirmed by the exception provided for 'determinations' made 'through recourse to dispute 
settlement in accordance with' the DSU, an exception th at explicitly allows for the 
'determination' implicit in pursuing a case before a panel.  In any event, what is decisive under 
Article 23.2(a) is not so much whether an act constitutes a 'determination' – in our view, a 
more or less formal requirement that needs broad reading -- but whether it is consistent with 
DSU rules and procedures, the fourth element discussed below."  
387 Response of the European Communities to Panel Question 20.   
388 Panel Report, US - Section 301 Trade Act , para. 7.50, footnote 657. 
389 Panel Report, US - Section 301 Trade Act , para. 7.96. 
390 Panel Report, US - Section 301 Trade Act , Annex I. 
391 Article 60 provides:   
"Termination or suspension of the operation of a treaty as a consequence of its breach WT/DS301/R 
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 be interpreted in light of that provision.392  In the view of the Europ ean Communities, the purpose of 
Article 23 was to prevent the unilate ral resort to "countermeasures" as  that term is used in public 
international law on state responsibility, i.e. measure s that would otherwise be incompatible with a 
State's international obligations, as distinguished from acts of retorsion.393  T h e  
European Communities asserts that the Panel Report in US - Certain EC Products confirms its view 
that Article 23 of the DSU is a more specific rule  to the international regime governing the suspension 
of concessions under Article 60 of the Vienna Convention and countermeasures, reprisals and 
retaliatory acts.394   
7.205  The Panel recalls that it has concluded, based on an interpretation of Article 23.1 of the DSU 
in accordance with the ordinary meaning of its te rms and in light of the object and purpose of the 
provision, that measures not involving a suspension of WTO concessions or other obligations are not 
excluded from its scope.  While the Panel realizes that in a number of WTO dispute settlement and 
arbitration cases reference has been made to the p ublic international law concepts invoked by the 
European Communities395, the Panel can see no basis for using these concepts to read into Article 23.1 
                                                                                                                                                                     
 1.  A material breach of a bilateral treat y by one of the parties entitles the other to 
invoke the breach as a ground for terminating the treaty or suspending its operation in whole 
or in part. 
 2.  A material breach of a multilateral treaty by one of the parties entitles: 
(a) the other parties by unanimous agreement to suspend the operat ion of the treaty in 
whole or in part or to terminate it either: 
  (i) in the relations between themselves and the defaulting State, or 
  (ii) as between all the parties; 
(b) a party specially affected by the breach to invoke it as a ground for suspending 
the operation of the treaty in whole or in part in the relations between itself and the 
defaulting State; 
(c) any party other than the defaulting State to invoke the breach as a ground for 
suspending the operation of the treaty in whole or in part with respect to itself if the 
treaty is of such a character that a mate rial breach of its provisions by one party 
radically changes the position of every part y with respect to the further performance 
of its obligations under the treaty. 
 3.  A material breach of a treaty, for the purposes of this article, consists in: 
 (a) a repudiation of the treaty not sanctioned by the present Convention; or  
(b) the violation of a provision essential to the accomplishment of the object or 
purpose of the treaty. 
4.  The foregoing paragraphs are without prejudice to any provision in the treaty 
applicable in the event of a breach. 
5.  Paragraphs 1 to 3 do not apply to provisions relating to the protection of the 
human person contained in treaties of a humanitarian character, in particular to 
provisions prohibiting any form of reprisals against persons protected by such 
treaties." 
392 First submission of the European Communities,  paras. 132-133; second submission of the 
European Communities, para. 151. 
393 First submission of the European Communities., paras. 134-136; oral statement of the 
European Communities at the first substantive meeting of the Panel with the parties, paras. 58-63; response of 
the European Communities to Panel Question 27; second submission of the European Communities, paras. 153-
159.   
394 Second submission of the European Communities, para. 154.   
395 Thus, for example, the Appellate Body has referred to  "the rules of general international law on state 
responsibility, which require that coun termeasures in response to breaches by states of their international 
obligations be commensurate with the inju ry suffered".  Appellate Body Report, US - Cotton Yarn , para. 120.  
See also Appellate Body Report, US - Line Pipe , para. 259.  The concept of co untermeasures as used in the 
international law on state responsib ility has also been referred to in US - FSC (Article 22.6-US) , paras. 5.58-
5.60;  Brazil - Aircraft (Article 22.6-Brazil), para. 3.44 and EC - Bananas III (US) (Article 22.6-EC) , para. 6.16. WT/DS301/R 
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 a limitation that is unsupported by an interpre tation based on its text, context and object and 
purpose.396   
7.206  The Panel notes that in response to a question by the Panel, the Eur opean Communities refers 
to Article 3.2 of the DSU as support for its pos ition on the scope of Article 23.1 of the DSU.397  
However, the assertion that the DSU protects the stab ility and predictability of the multilateral trading 
system and that the multilateral trading system is composed of the rights and obligations of Members 
under the WTO Agreement begs the question of what t hose rights and obligations are.  We note in this 
respect that it is clear from Article 1 of the DSU th at the DSU not only protects rights and obligations 
under a covered agreement but also applies to di sputes concerning rights and obligations under the 
DSU.  Thus, Article 3.2 is not directly relevant to  the particular question of  interpretation before us, 
i.e. whether WTO Members have assumed an obliga tion under Article 23.1 to refrain from acts that 
are not otherwise inconsistent with their obligations  under the WTO Agreement.  We consider in this 
respect that the argument of the European Co mmunities based on Article 3.2 involves circular 
reasoning.  The same applies to the reference made by the European Communities to other WTO 
provisions, (Article II of the WTO Agreement and Articles 3.3, 3.7 and 4.2 of the DSU398) as support 
for its position that the DSU "only protects Memb ers from measures that offset the rights and 
obligations in the WTO Agreement".399   
7.207  In sum, the Panel considers, based on an in terpretation of Article 23.1 of the DSU in 
accordance with the ordinary meaning of its terms in their context and in light of the object and 
purpose of the provision, that the obligation to ha ve recourse to the DSU when Members "seek the 
redress of a violation..." covers any act of a Member in response to what it considers to be a violation 
of a WTO obligation by another Member whereby that  first Member attempts unilaterally to restore 
the balance of rights and obligations by seeking the removal of the WTO-inconsistent measure, by 
seeking compensation from that Member, or by su spending concessions or obligations under the 
WTO Agreement in relation to that Member.   
(ii) Whether by adopting the TDM Regulation the Eu ropean Communities acted in violation of 
Article 23.1 of the DSU by unilaterally seeki ng the redress of a violation without having 
recourse to the DSU.   
7.208  In light of its conclusion above, the Panel mu st now proceed to a factual assessment to 
determine, in light of its interpretation of Ar ticle 23.1, whether the European Communities, by 
adopting the TDM Regulation, sought the redress of a violation by Korea of its obligations under the 
WTO Agreement without having recourse to the DSU.   This means that the Panel must determine 
whether the European Communities acted in response to  what it considered to be a violation of WTO 
obligations by Korea, and, if so, whether the Eu ropean Communities sought redress of that violation 
by unilaterally attempting to restore the balance of  rights and obligations by seeking the removal by 
Korea of the WTO-inconsistent measure or of the ad verse effects of the alleged Korean subsidization, 
by seeking compensation from Korea, or by suspending concessions or obligations under the WTO Agreement in respect of Korea.  In this case, th e precise issue is whether the European Communities 
sought redress of a perceived WTO violation by ta king unilateral action to obtain the removal by 
Korea of the allegedly WTO-inconsistent measures (o r their effects).  We first consider whether the 
European Communities acted in respon se to what it considered to be a violation by Korea of its WTO 
                                                     
 
396We also note that the Panel in US - Certain EC Products  stated that because of the more specific 
provision of Article 23, Article 60 of the Vienna Conven tion "does not apply" in the WTO context, but that the 
Panel did not state that the coverage of Article 23 of the DSU is confined to that of Article 60.  Panel Report, US 
- Certain EC Products , para. 6.133. 
397 Response of the European Communities to Panel Question 23, paras. 47-48. 
398 Response of the European Communities to Panel Question 23, paras. 49-53.   
399 Response of the European Communities to Panel Question 23, para. 52.   WT/DS301/R 
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 obligations.  We then consider whether the European Communities act ed unilaterally to obtain the 
removal by Korea of the measures at issue.  
Did the European Communities act in response to what it considered to be a violation by Korea of its 
obligations under the WTO Agreement ? 
7.209  In considering whether the European Commun ities’ adoption of the TDM Regulation was in 
response to what it considered to be a violation by Korea of its WTO obligations, the Panel recalls 
that it has already discussed a cl osely related issue at length.  In paragraphs 7.114-7.143 we 
considered the relationship of the TDM Regulation to Korean subsidization and found that the TDM 
Regulation had a close correlation and inextricable link to the constituent elements of subsidization, in 
large part because of the use in the Regulation an d related materials of terms taken from the SCM 
Agreement’s provisions disciplining the use of subs idies.  Thus, much of our discussion in those 
paragraphs is relevant to the question of whether the European Communities acted in response to a 
perceived violation by Korea of the WTO Agreement a nd we incorporate it into this section, and, in 
addition, highlight the following points. 
7.210  On its face, the TDM Regulation does not indicate that it is designed as a response to a 
violation by Korea of its obligations under the WTO Agreement.  Accord ing to Korea, the TDM 
Regulation was based on an allegation that Korea had violated its obligations under Articles 3, 5 and 6 
of the SCM Agreement.  Neither the introducto ry section nor the operative part of the TDM 
Regulation contains an explicit statement that Kor ea has acted inconsistently with its obligations 
under the SCM Agreement.  Nevertheless, the Pane l considers that the TDM Regulation reflects an 
allegation of WTO-inc onsistent conduct.   
7.211  The TDM Regulation uses terminology that is intimately connected with the provisions of 
Articles 5 and 6 of the SCM Agreement.  The th ird Recital observes that a temporary defensive 
mechanism should be authorized  for limited market segments and fo r a short and limited period only, 
"as an exceptional and temporary measure, and in  order to assist Community shipyards in those 
segments that have suffered adverse effects in the fo rm of material injury and serious prejudice caused 
by unfair Korean competition".  Article 2(2) a llows for the extension of the Regulation to LNG 
carriers if the Commission gives notice that it conf irms that "[the] Community industry has suffered 
material injury and serious prejudice in this mark et segment caused by unfair Korean practices".  The 
Regulation was proposed by the Commission when an investigation under the Trade Barriers 
Regulation had produced evidence that subsidies granted by Korea were causing adverse effects 
within the meaning of the SCM Agreement to certain segments of the Community shipbuilding 
industry.  We note that in explaining the background to the proposed TDM mechanism, the 
European Commission stated in July 2001 that th is proposal "follows a Commission investigation 
which found evidence of substantial subsidies th at are incompatible with the WTO rules".400  When 
the Commission issued its first report on the results of  this investigation, it stated publicly that 
"substantial subsidies have been granted to Ko rean shipyards through both export and domestic 
programmes which contravene the WTO's 1994 Subsidies Agreement."401  These factors demonstrate 
a clear factual link between the adoption of the TDM Regulation and the findings of WTO-
                                                      
400 IP/01/1078, 25 July 2001, Exhibit Korea 9.  We acknowledge of course that the TDM Regulation 
was adopted by the Council not by the Commission but consider nevertheless that in view of the role of the 
Commission in initiating this legislation it is not inappropri ate to accord some evidentiary weight  to these press 
releases to reinforce a conclusion derived from an analysis of the text of the Regulation.  We note that the  Panel 
in US - Certain EC Products  relied inter alia  on a USTR press release and statements of a deputy USTR at a 
press conference as evidence in sup port of its finding that the United States was "seeking the redress of a 
violation..."  Panel Report, US - Certain EC Products , paras. 6.25 and 6.31.   
401 IP/01/656, 8 May 2001, Exhibit Korea 8.   WT/DS301/R 
Page 128 
 
 
 inconsistent conduct by Korea.  In the Panel's view, the application of Article 23.1 of the DSU is not 
limited to cases involving an explicit alle gation of WTO-inconsistent conduct.   
7.212  The Panel recalls its observation above that  when a Member seeks "the redress of a 
violation..." it has necessarily arrived at a "prelimi nary view" that a violation has occurred.  The Panel 
agrees with the remark of the Panel in US - Section 301  Trade Act  that such a preliminary view is 
distinct from a "determination" within th e meaning of Article 23.2(a) of the DSU.402  The evidence 
before us indicates that the TDM Regulation was b ased on factual findings that clearly amounted to at 
least a "preliminary view" that Korea had commi tted breaches of its obligations under the SCM 
Agreement.  It is not necessary to ascertain whethe r or not these findings, as contained in the reports 
submitted by the European Commission to the Advi sory Committee, qualify as determinations within 
the meaning of Article 23.2(a) of the DSU.   
7.213  The Panel also notes that the TDM Regulation is specifically directed against Korea.  
Article 2(1) of the Regulation provides that: 
"Subject to paragraphs 2 to 6, direct aid in support of contracts for the building of 
container ships, product and chemical ta nkers as well as LNG carriers shall be 
considered compatible with the common ma rket when there has been competition for 
the contract from a Korean shipyard offering a lower price."   
The possibility to provide contract-related operating ai d is confined to precisely those segments of the 
Community shipbuilding industry found by the Eu ropean Communities to have suffered adverse 
effects of "unfair Korean  competition" or "unfair Korean  practices" and such aid may be provided 
only in cases where there has been compe tition for a particular contract from a Korean  shipyard 
offering a lower price.  The temporal applicati on of the TDM Regulation depends upon the initiation 
and resolution or suspension of a WTO dis pute settlement proceeding brought by the 
European Communities against Korea .  The focus on Korea is also evident in that the introductory 
Recitals motivate the adoption of the Regulation by referring to Korea's alleged non-implementation 
of the Agreed Minutes relating to world shipbuilding and to the adverse effects on certain segments of 
the Community shipbuilding industry caused by "unfair Korean competition" or "unfair Korean 
practices".  The fact that the Regulation sing les out Korea in its manner of operation and its 
motivation demonstrates that the Regulation is "a r eaction by a Member against another Member".   
7.214  In light of these considerations, the Panel is satisfied that by adopting the TDM Regulation 
the European Communities acted in re sponse to what it considered to be a violation by Korea of its 
obligations under the WTO Agreement.   
Did the European Communities seek to resto re the balance of rights and obligations?  
7.215  With regard to whether the TDM Regul ation is a unilateral act whereby the 
European Communities sought to restore the WTO balance of rights and obligations by seeking 
removal of Korea's allegedly WTO-inconsistent me asure (or its effects), the Panel considers the 
following factors particularly relevant.   
7.216  A key element of the design and structure of the TDM Regulation is that its application is 
explicitly limited to contracts signed during a period  determined by the initiation and resolution or 
suspension of a WTO dispute settlement  proceeding agai nst Korea.  This is stipulated in Article 4:  
"The Regulation shall be applied to final c ontracts signed from the entry into force of 
this Regulation until its expiry, with the ex ception of final contracts signed before the 
                                                      
402 Panel Report, US - Section 301 Trade Act , para. 7.50, footnote 657. WT/DS301/R 
Page 129 
 
 
 Community gives notice in the Official Journal of the European Communities  that it 
has initiated dispute settlement proceedings against Korea by requesting consultations 
in accordance with the World Trade Orga nisation’s Understanding on the Rules and 
Procedures for the Settlement of Disputes and final contracts signed one month or 
more after the Commission gives notice in the Official Journal of the 
European Communities  that these dispute settlement proceedings are resolved, or 
suspended on the grounds that the Commun ity considers that the Agreed Minutes 
have been effectively implemented."  
The fact that once the WTO dispute settlement cas e is resolved or susp ended the TDM mechanism 
ceases to apply suggests that this mechanism serves  to seek the same type of redress as the WTO 
dispute settlement case.  The Panel recalls in this  respect that the WTO dispute settlement case and 
the TDM Regulation are closely linked elements of th e  European Communities' "twin-track" strategy 
to deal with unfair Korean practices in the shipbuilding sector. 
7.217  Thus, when the Commission submitted its first report on the investigation under the Trade 
Barriers Regulation, it stated the following in a press release:  
"Further to the adoption of its fourth report on the state of the EU shipbuilding industry last week, the Commission today appr oved the strategy it will propose to the 
Council of Ministers on 14/15 May, in order to address the persistent problems posed 
to the European shipbuilding industry by unf air trade practices by Korean shipyards.  
The investigation into subsidies carried  out under the Trade Barriers Regulation 
(TBR) has established that substantial s ubsidies have been granted to Korean 
shipyards through both export and domes tic programmes which contravene the 
WTO's 1994 Subsidies Agreement.  On this  basis, the Commission will recommend 
that the matter be taken before the WTO th rough the initiation of a dispute settlement 
procedure by 30 June unless an amicable solution can be reached in the interim 
period.  In parallel, the Commission will propose accompanying measures in the form 
of a temporary support mechanism to Eur opean shipyards for the market segments 
considerably injured by unfair Korean trade  practices and for the period required for 
the conclusion of the WTO procedure .  Its entering into force will be simultaneous 
with the effective start of  the WTO action." 
403  
In July 2001, when the Commission submitted a form al proposal to the Council, it issued a press 
release which stated: 
"The Commission today adopted a proposal for a Council Regulation which would 
put in place a temporary defensive mech anism for European shipbuilding.  The 
proposal is one element of the Commission's two-part strategy against unfair Korean 
practices in this sector  and will cover the market segments that are considerably 
injured by these practices.  It comes after a series of negotiations between the Commission and Korea, which failed to produce an agreement that would restore 
normal trading conditions.  The proposal is an accompanying measure to dispute 
settlement proceedings against Korea, which will be initiated in the WTO as soon as 
the Council expresses its favourable positi on on the temporary defensive mechanism .  
... 
The proposal for a defensive temporary support mechanism follows a Commission 
investigation which found evidence of subs tantial subsidies that are incompatible 
with the WTO rules.  Despite a series of  negotiations between the Commission and 
                                                     
 
403 IP/01/656, 8 May 2001, Exhibit Korea 8 (emphasis added).   WT/DS301/R 
Page 130 
 
 
 the Korean Government, no amicable solution has yet been achieved.  Accordingly, 
the Commission has instigated its two part strategy for fighting these unfair practices: proposing a temporary defensi ve mechanism and the initiation of dispute 
settlement proceedings .   
The proposal for the temporary defensive mechanism is limited to those market 
segments in which the Commission investigation found that EU industry had been 
considerably injured by unfair Korean tr ade practices, namely container ships and 
product and chemical tankers.
404  
7.218  Moreover, that the period during which Community shipyards can receive aid under the  
TDM Regulation is so explicitly linked to the WTO dispute settlement case also creates an incentive 
for Korea to alter its conduct regarding the measures at  issue in that dispute settlement case.  The state 
aid provided for under the national aid schemes adopt ed within the framework of the TDM Regulation 
is designed to shift the balance of competitive adva ntages in favour of Community shipyards relative 
to Korean shipyards.405  Article 4 of the TDM Regulation makes it clear that Korea can limit the 
period during which its shipyards will be confronted  with this competitive disadvantage if it takes 
steps with regard to the practices at issue in the dispute so as to make an early resolution of the 
dispute possible, or if it takes steps with regard to the implementation of the Agreed Minutes, which 
as seen above, relates to an important extent to su bsidies and the continuing effects of subsidies on 
prices.  The Panel realizes that it has no information before it demonstrating that the impact on 
Korean shipyards of the state aid provided as a resu lt of the TDM Regulation has actually influenced 
the conduct of the Government of Korea in the dis pute initiated by the European Communities.  In the 
Panel's view, however, the decisive consideration is  that Article 4 of the TDM Regulation is designed 
to have an effect of inducing Korea to take steps to remove the alleged WTO- inconsistent measure.  
Since the TDM Regulation is designed to influence Korea's conduct, the Panel does not consider as 
persuasive the argument of the European Commun ities that the link between the TDM Regulation and 
the WTO dispute settlement case is merely of a politi cal nature and is explained simply by the need 
for an objective criterion to limit the duration of the aid scheme.   
7.219  As noted above, the simple fact that a Memb er responds to a perceived WTO violation by 
seeking to compensate or attenuate the harm cause d to actors within the Member resulting from an 
alleged violation does not in itself represent "seek ing redress" provided the action is not designed to 
restore the (perceived) balance of rights and obl igations between the Members.  Thus, if the 
European Communities had simply reinstituted in 20 02 its former system authorizing member State 
aid to shipbuilding, such an action would likely no t raise issues under DSU Ar ticle 23.  However, in 
the view of the Panel, the TDM Regulation goes beyond a measure whereby the European Communities seeks to compensate or to  attenuate the harm resulting from an alleged 
violation by Korea of its obligations under the SC M Agreement.  The TDM Regulation, by its design 
and structure, is explicitly tied to WTO dispute se ttlement.  That tie is confirmed by the Commission 
statements quoted above.  In our view, the TDM Regul ation operates directly and exclusively to alter 
the conditions of competition between Korean and Community shipyards in respect of individual 
                                                     
 
404 IP/01/1078, 25 July 2001, Exhibit Korea 9 (emphasis added)  
405 In our analysis under Article 32.1 of the SCM Ag reement, we have identifie d several considerations 
supporting the view of the Appellate Body that the effect of a subsidy on conditions of competition is not a 
relevant factor in determining whether that subsidy is an action "against" a subsidy of another Member.  In 
particular, we referred to the overall structure of the SCM Agreement, its object and pu rpose, and the historical 
background of the concept embodied in Article 32.1 of the SCM Agreement.  These co nsiderations do not apply 
in the context of Article 23.1 of the DSU.  Since the purposes and background of Article 23 of the DSU and 
Article 32.1 of the SCM Agreement ar e very different, a given set of factual elements that would not be 
sufficient for a measure to be an action "against" a su bsidy in the sense of Article 32.1 of the SCM Agreement 
might still be sufficient for a finding that a measure "see ks the redress of a violatio n..." within the meaning of 
Article 23 of the DSU.    WT/DS301/R 
Page 131 
 
 
 transactions and is clearly designed to restore the balance of rights and obligations by inducing Korea 
to remove the alleged WTO- inconsistent measure.   
7.220  In light of all the above factors, the Pane l considers that the European Communities has 
sought unilaterally to achieve results that Article 23.1 requires to be sought through recourse to the 
DSU.  By adopting the TDM Regulation, the Euro pean Communities acted in response to what it 
considered to be a violation by Korea of its obligations under the WTO Agreement and sought to 
restore the balance of rights and obligations by inducing Korea to remove the alleged WTO-
inconsistent measure.  As such, the TDM Regula tion is a measure subject to the requirement of 
Article 23.1 of the DSU that Members "have recour se" to the DSU when they  "seek the redress of a 
violation...", covered by Article 23.1 of the DSU.  We emphasize that this conclusion is based on an 
analysis of the design and structure of the TDM Regulation and does not depend upon whether the European Commission has actually authorized the member States to adopt TDM aid schemes and 
whether member States have actually provided state aid within the framework of such schemes.  In 
the Panel's view, the TDM Regulation by itself is  action taken by the European Communities that 
"seeks the redress of a violation..." . 
7.221  Since it is undisputed that the European Co mmunities adopted the TDM Regulation without 
having recourse to the DSU, the Panel concludes  that by adopting the TDM Regulation the 
European Communities acted inconsistently with Article 23.1 of the DSU.   
7.222  The Panel also concludes,  as a consequence, that since the TDM aid schemes of Denmark, 
France, Germany, the Netherlands, and Spain, and the Decisions of the European Commission 
authorizing those aid schemes, are measures taken in  application of the TDM Regulation, they are 
also inconsistent with Article 23.1 of the DSU.   
3. Article 23.2 
(a) Arguments of the parties
406 
7.223  Korea  submits that the TDM Regulation is inco nsistent with Article 23.2(a) because it 
includes a "determination" that Korea has acted in consistently with its obligations under the WTO 
Agreement that was not made through exclusive reco urse to dispute settlement in accordance with the 
rules and procedures of the DSU.407  Korea also argues that the TDM Regulation violates 
Article 23.2(b) of the DSU because the Europ ean Communities adopted the Regulation without 
following the procedures set forth in Article 21 of the DSU to determine the reasonable period of time 
for the Member concerned to implement recommendations and rulings.408  Finally, Korea submits that 
the European Communities acted inc onsistently with Article 23.2(c) of the DSU in that it failed to 
first obtain DSB authorization and follow the pro cedures laid down in Article 22 of the DSU before 
applying any countermeasures or suspending concessions or obligations towards Korea.409 
7.224  The European Communities, referring to the interpretation of the word "determination" in 
Article 23.2(a) by the Panel in  US - Certain EC Products , argues that   the TDM Regulation does not 
contain a finding of WTO inconsistency and b ears no consequences in WTO trade relations. 
Therefore, the Regulation is not inconsistent with Article 23.2(a).410  The European Communities 
                                                      
406 For a more detailed account of the argumen ts of the parties, see Section IV.C.4. 
407 First submission of Korea, paras. 72-85. 
408 First submission of Korea, paras. 86-88. 
409 First submission of Korea, paras.89-91. 
410 First submission of the European Communities, paras.  170-176. WT/DS301/R 
Page 132 
 
 
 rejects Korea's claims under Article 23.2(b) and (c ) on the grounds that the TDM Regulation is not a 
countermeasure because it does not suspend WTO concessions or obligations.411  
(b) Evaluation by the Panel 
7.225  We note the guidance provided by the Appellate Body as to the exercise of judicial economy.  
We are not required to examine all claims raised by Korea but only those claims that must be 
addressed to resolve the matter at issue in this disput e.  However, as stated by the Appellate Body in 
Australia - Salmon , we must address those claims on which a finding is necessary to enable the DSB 
to make sufficiently precise recommendations and rulings so as to allow for prompt compliance by a Member in order to ensure effective resolution of disputes to the benefit of all Members.
412   
7.226  We consider that action by the Europ ean Communities to comply with a DSB 
recommendation based on our conclusion that the TDM Regulation, the Commission Decisions and 
the national aid schemes are inconsistent with Article 23.1 of the DSU would also remove any 
inconsistency with Article 23.2 of the DSU.   
7.227  In light of these considerations , the Panel does not consider it necessary to examine whether 
in addition to Article 23.1 of the DSU, the measures at  issue are also inconsistent with Article 23.2 of 
the DSU.   
F. CLAIMS UNDER ARTICLES 4 AND 7 OF THE SCM  AGREEMENT  
1. Main arguments of the parties413 
7.228  Korea argues that by acting unilaterally outs ide the framework of the dispute settlement 
provisions of the SCM Agreement, the European Communities violated Articles 4.1-4 and 7.1-4 of that Agreement.
414  Korea also claims that the European  Communities acted inconsistently with 
Articles 4.10 and 7.9 of the SCM Agreement by faili ng to seek and obtain authorization of the DSB to 
apply countermeasures.415  In response to a question by the Panel, Korea subsequently stated that 
"SCM Articles 4.2 to 4.12 and 7.2 to 7.10 have been violated, for the reasons explained in 
paragraphs 132-140 of Korea's Fi rst Written Submission.  Korea draws special attention to SCM 
Articles 4.4, 4.10, 7.4 and 7.9".416   
7.229  The European Communities argues hat there is  no legal basis for Korea's claims under 
Articles 4 and 7 of the SCM Agreement separatel y from Korea's claim under Article 23 of the DSU 
and that even when considered in conjunction with  Korea's claim under Article 23, these claims must 
be rejected because the European  Communities has strictly adhered to the DSU.  Moreover, the TDM 
Regulation and the national measures adopted with in the framework of the Regulation are not 
countermeasures within the meaning of Articles 4 and 7 of the SCM Agreement.  In the view of the 
European Communities, Korea has failed to expl ain how the European Communities has acted in 
violation of specific procedural requirements of Articles 4 and 7.417   
                                                      
411 First submission of the European Communities, paras. 177-178. 
412 Appellate Body Report, Australia - Salmon , para. 223. 
413 For a more detailed account of the argumen ts of the parties see Section IV.C.5. 
414 First submission of Korea, paras. 134-135. 
415 First submission of Korea, paras. 137-139. 
416Response of Korea to Panel Question 50.   
417 First submission of the European Communities,  paras. 179-181; second submission of the 
European Communities, paras. 141-148.   WT/DS301/R 
Page 133 
 
 
 2. Evaluation by the Panel 
7.230  The Panel notes that Articles 4.1-4 and 7. 1-4 of the SCM Agreement define certain 
procedural rights of Members with respect to consultations and the est ablishment of panels in disputes 
concerning prohibited subsidies and actionable subsid ies.  In our view, the claims of Korea under 
these Articles involve the same fundamental issue of unilateral conduct by the European Communities 
outside the framework of the WTO dispute settlement procedures that we have already found to be in 
breach of Article 23.1 of the DSU.  We recall our discussion above in the context of Article 23 of the 
guidance provided by the Appellate Body in respect of the exercise of judicial economy.  Applying the considerations articulated by the Appellate  Body, we do not consider that findings under 
Articles 4 and 7 of the SCM Agreement, in addition to the finding already made under Article 23.1 of 
the DSU, are necessary to enable the DSB to make  sufficiently precise recommendations and rulings 
so as to allow for prompt compliance by the Euro pean Communities in order to ensure effective 
resolution of this dispute.  We also note in this respect that Korea has submitted little detailed 
argumentation to support its claims under these provisions and that while they are discussed in Korea's first submission, Korea's second s ubmission is silent on these claims.   
7.231  Therefore, we decide not to examine Kore a's claims under Articles 4 and 7 of the SCM 
Agreement. 
VIII.  CONCLUSIONS AND RECOMMENDATION 
8.1 The Panel concludes:  
(a) the TDM Regulation, the national TDM schemes of Denmark, France, Germany, 
the Netherlands and Spain, and the European Co mmission Decisions authorizing those schemes, are 
not inconsistent with Article III:4 of the GATT 1994; 
(b) the TDM Regulation, the national TDM schemes of Denmark, France, Germany, 
the Netherlands and Spain, and the European Co mmission Decisions authorizing those schemes, are 
not inconsistent with Article I:1 of the GATT 1994; 
(c) the TDM Regulation, the national TDM schemes of Denmark, France, Germany, 
the Netherlands and Spain, and the European Co mmission Decisions authorizing those schemes, are 
not inconsistent with Article  32.1 of the SCM Agreement;  
(d) the TDM Regulation, the national TDM schemes of Denmark, France, Germany, 
the Netherlands and Spain, and the European Co mmission Decisions authorizing those schemes, are 
inconsistent with Article 23.1 of the DSU; and 
(e) in light of its finding in respect of Article 23.1 of the DSU, it is not necessary for the Panel to 
make findings regarding the claims of Korea under Articles 23.2(a),(b) and (c) of the DSU and under 
Articles 4 and 7 of the SCM Agreement.   
8.2 Under Article 3.8 of the DSU, in cases where there is an infringement of the obligations 
assumed under a covered agreement, the action is considered prima facie  to constitute a case of 
nullification or impairment of benefits under that ag reement.  Accordingly, we conclude that, to the 
extent the European Communities has acted inconsis tently with the provisions of the DSU, it has 
nullified or impaired benefits accruing to Korea under that agreement.   WT/DS301/R 
Page 134 
 
 
 8.3 In light of these conclusions, we recommend that the DSB request the 
European Communities418 to bring its measures listed in paragr aph 1(d) into conformity with its 
obligations under the DSU.   
8.4 We are aware that the TDM aid schemes of Denmark, Germany and Spain expired on 
31 March 2004 and were not renewed.   The Appellate Body Report in US - Certain EC Products  
suggests that it is inappropriate to make a recommend ation within the meaning of Article 19 in respect 
of a measure that no longer exists.419  However, the notion of a measure that no longer "exists" is not 
always straightforward.  In the present case, it is clear from the information before the Panel that 
where national aid schemes have e xpired, no new applications for TD M aid can be submitted.  On the 
other hand, however, we cannot dete rmine with certainty whether and to what extent it is possible that 
subsidies continue to be provided pu rsuant to applications made befo re the expiry of those schemes.  
Therefore, the Panel considers that its recomme ndation does not apply to the schemes that have 
expired, except to the extent that those schemes continue to be operational.420   
 
_______________ 
 
                                                      
418 We have already explained in Section VII.A.4(c)  of this Report why we consider that in the 
circumstances of this case a recommendation addressed onl y to the European Communities is sufficient.   
 419 Appellate Body Report, US – Certain EC Products , para. 129.  
 420 We have explained in Section VII.A.4(a)(ii) of this Report why we consider that we cannot make 
the specific recommendation requested by Korea in respect of  disbursements of funds.  In its  comments on the 
Interim Report, Korea requests us at least to make "clarifying suggestions" pursuant to our authority under Article 19.1 of the DSU.  For the reasons discussed in paragraph 7.23 of this Report, we do not think it would be 
appropriate to do so.   
  
 WT/DS301/R 
Page 135 
 
 
 IX. ANNEX 
 WORLD TRADE  
ORGANIZATION  WT/DS301/3 
6 February 2004  
 
(04-0470) 
 Original:   English 
 
  
EUROPEAN COMMUNITIES – MEASURES AFFECTING TRADE 
IN COMMERCIAL VESSELS 
 
Request for the Establishment of a Panel by Korea
 
 
 
 The following communication, dated 5 February 2004, from the delegation of Korea to the Chairman of the Dispute Settlement Body, is circulated pursuant to Article 6.2 of the DSU. 
 
_______________ 
  
 On 3 September 2003, the Republic of Korea ("Korea") requested consultations with the European Communities ("EC") and its Member States pursuant to Article 4 of the Understanding on 
Rules and Procedures Governing the Settlement of Disputes (DSU ), Article XXIII:1(a) of General 
Agreement on Tariffs and Trade 1994  ("GATT 1994 "), Article XXIII:1(b) of GATT 1994 and 
Articles 4, 7 and 30 of the SCM Agreement  with regard to measures affecting trade in commercial 
vessels, as elaborated below. 
  Consultations were held on 9 October and 14 November 2003.  The consultations held 
between Korea and the EC related to various EC and Member State measures in relation, inter alia,  to 
the following:  
 
 i. The provisions of EC Regulation 1177/2002 (the "TDM Regulation") and EC 
Regulation 1540/98 as such, as well as th e EC Member States' implementing 
provisions as such. The above provisions provides for granting of subsidies in favour 
of commercial vessels, whether directly to th e shipbuilders or indirect aid, including 
operating aid, restructuring aid, insolvency and closure aid, aid for regional or other 
investment, research and development aid and aid for environmental protection; 
  ii. The EC and its Member States have in pa rticular instances, through federal, regional 
or local authorities and government-own ed or government-controlled financial 
institutions, provided subsidies in direct or indirect support of commercial vessels built in the EC particularly but not exclusively in the form of (a) operating aid granted 
on a contractual basis in forms such as grants, export credits, guarantees or tax 
breaks, (b) restructuring aid, (c) regional or other investment aid, (d) research and development aid, (e) environmental protecti on aid and (f) insolvency and closure aid. 
 
 Unfortunately, these consultations have failed to resolve the dispute between parties as 
regards the TDM Regulation (and proposed extens ion) and the EC Member States' implementing WT/DS301/R 
Page 136 
 
 
 provisions. Korea hereby requests that a panel be established pursuant to Articles 6 of the DSU  and 
Article XXIII:2 of GATT 1994 with respect to the measures described as below .  
  The measures that are subject of this requ est are the EC and its Member States' legal 
provisions and decisions providing for the supply of grants to shipbuilders for containerships, product 
tankers, chemical tankers and liqui d natural gas carriers ("LNGs") adversely affecting the conditions 
of competition and seeking a unilateral redress of a perceived violation of Korea's obligations under 
the SCM Agreements. In particular, Korea considers that the following measures are inconsistent with 
the European Communities' obligations under the SCM Agreement : 
 
(i) The provisions of the TDM Regulation as extended to cover LNGs by 
Notice 2003/C 148/10 published on 25 June 2003 (currently proposed to be extended 
until 31 March 2005 pursuant to European  Commission proposal COM(2004)26 final 
of 21 January 2004); 
 
(ii) The EC Member State implementing provisions of the TDM Regulation and the 
European Commission Decisions approving these implementing provisions, including: 
 
  –  G e r m a n y :   
  "Richtlinien des Bundesministerium für Wirtschaft und Arbeit zu befristeten 
Schutzmassnahmen für den Schiffbau", 24 October 2002; 
 
   Case N 744/2002, Commission Decisi on (2003)788 fin of 19 March 2003. 
 
  – Denmark 
 
  "Lov om midlertidig, kontraktbetinget driftsstotte til bygning af visse 
skibstyper, LOV No 305", dated 30 April 2003 ; 
 
   Case N 141/2003, Commission Deci sion (2003)1765 fin of 24 June 2003. 
 
  –  T h e  Netherlands  
   "Tijdelijke regeling ordersteun sch eepsnieuwbouw, Regeling van de 
Staatssecretaris van Economische Zaken, No WJZ3040972", 17 July 2003; 
 
  Case N 780/2002, Commission Decision (2002)2019 fin of 9 July 2003 and 
Case N 339/03, Commission Decision (2003)3378 of 18 September 2003. 
 
  – France  
  Application du Réglement N° 1177/20 02 du Conseil par la décision d'une 
commission interministérielle (as refe rred to by the European Commission in 
the publication of the approval of the French aid for LNGs). 
    Case N 232/03, Commission Decision (2003)3234 fin of 17 September 2003. 
 
  –  S p a i n
 
 WT/DS301/R 
Page 137 
 
 
   Real Decreto 442/1994 of 11 March 1994 as amended by Real Decreto 
1274/2003 of 10 October 2003; 
   Case N 812/02, Commission Decision (2003)4079 fin of 11 November 2003.  
 Korea considers that the EC and its Member St ate measures referred to above are in breach of 
the EC and its Member State obligations under the following provisions: 
 
• Articles I:1 and III:4 of GATT 1994  because the TDM Regulation and Member State 
implementing measures involving the bestow al of German, Danish, Dutch, French 
and Spanish grants to shipyards on a v essel-specific and product-related basis, 
adversely modify conditions of competition between Korean commercial vessels and 
the like vessels built in third countries a nd Korean commercial vessels and the like 
vessels built in the EC, respectively; 
 
• Article 23(1) and (2) of the DSU , as well as Articles 4 and 7 of the SCM Agreement , 
because the TDM Regulation and Member States' implementing measures – which 
are aimed at assisting EC or its Member State shipyards in those segments that are 
claimed to have suffered from subsidies alle gedly granted to Korean shipyards - have 
been effectively designed and implemented as unilateral measures seeking redress of 
a perceived violation of Korea's obligations under the SCM Agreement  which should 
occur exclusively through dispute settleme nt and not through unilateral action;  
 
• Article 32(1) of the SCM Agreement,  as well as Articles 4 and 7 of the SCM 
Agreement , because the TDM Regulation and Member State implementing measures 
constitute specific actions against perceive d subsidies of another Member not in 
accordance with the GATT 1994 as interpreted by the SCM Agreement . 
 
 Korea requests that a panel be immediately estab lished with standard te rms of reference, in 
accordance with Articles 6 and 7 of the DSU  and Article 30 of the SCM Agreement . 
 
 Korea asks that this request for establishment of a panel be placed on the agenda for the next 
meeting of the Dispute Settlement Body, which is scheduled to take place on 17 February 2004. 
 
__________