WT/DS273/R 
 Page F-1 
 
 
 
ANNEX F 
 
 
EXECUTIVE SUMMARIES OF THE ORAL STATEMENTS  
OF THE PARTIES - SECOND MEETING 
 
 
Contents Page 
Annex F-1 Oral Statement of the European Communities F-2 
Annex F-2 Oral Statement of Korea F-12 
 
 WT/DS273/R 
Page F-2  
 
ANNEX F-1 
 
 
ORAL STATEMENT OF TH E EUROPEAN COMMUNITIES 
 
 
(25 June 2004) 
   
TABLE OF CONTENTS 
 
Page
 
 
I. PROHIBITED SUBSIDIES ...............................................................................................F-3 
A. MANDATORY/DISCRETIONARY ISSUES.....................................................................F-3 
B. BENEFIT ..................................................................................................................... .........F-4 
1. KEXIM as such .................................................................................................................. .F-4 
2. APRG and PSL Progra mmes as su ch ...............................................................................F-4  
3. Individual Grants.............................................................................................................. ..F-4  
C. SAFE HAVEN.................................................................................................................. ....F-5 
II. ACTIONABLE SUBSIDIES..............................................................................................F-5 
A. FINANCIAL CONTRIBUTION ..........................................................................................F-5 
B. BENEFIT ..................................................................................................................... .........F-6 
C. SERIOUS PREJUDICE........................................................................................................F-7  
1. Same geographical and product market...........................................................................F-7  
2. Price Depression/Suppression and Causation ..................................................................F-8  
  WT/DS273/R 
 Page F-3 
 
 
1. Korea makes increasingly reference to the “f inancial and economic turmoil” the “assistance 
of the IMF in resolving the financial crisis or th e fact that other Members also subsidised their 
shipyards as an excuse for granting subsidies to its shipyards.  Why does Korea invoke these 
circumstances although the SCM Agreement  does not provide for justification on these issues? 
 I. PROHIBITED SUBSIDIES 
 
A. MANDATORY/DISCRETIONARY ISSUES  2. Contrary to the suggestions of Korea, the European Communities attaches great importance to 
its claims against the KEXIM legal framewo rk and its subsidy programmes “as such”.  
 
3. The European Communities does not accept th at measures can be brought outside the scope 
of the WTO Agreement  (or dispute settlement) simply by introducing an element of discretion. 
 
4. Whether a measure is inconsistent with a WTO obligation must depend on the characteristics 
of the measure and the terms of the WTO obligation in  question.  A discretionary measure must surely 
be inconsistent with a provision that prohibits su ch discretion.  For example, a discretion to impose 
antidumping duties at a level of treble the dumping margin is inconsistent with the obligation in 
Article 9.3 of the Antidumping Agreement  that “the amount of the anti-dumping duty shall not exceed 
the margin of dumping” especially when interpreted in the light of the obligation in Article 18.1 that 
“no specific action against dumping of exports from another Member can be taken except in 
accordance with the provisions of  GATT 1994, as in terpreted by this Agreement.”  On the other 
hand, a power for a government body to grant subsidies, without more, does not violate the SCM 
Agreement  because there is no prohibition on granting subsidies.  
 
5. The so-called mandatory/discretionary doct rine cannot overrule the conclusion reached from 
an interpretation of the text in accordance with the principles of the Vienna Convention.  The 
Appellate Body has already warned against the mech anistic application of this doctrine and expressly 
left open the possibility that “discretionary” measure s may violate WTO obligations.  It has also held 
that an assessment of the compatibility of a me asure cannot end with the conclusion that it is 
discretionary but must continue with an examination of the effects of the measure.  
 
6. It is true that there exists a presumption of  good faith in international law and the so-called 
mandatory/discretionary doctrine may be a manifest ation of it.  However, there is by no means a 
presumption of bad faith when it is assumed that a government or public body will act in accordance 
with the directions addressed to it in its governing law.  It does not matter that it has some discretion 
not to do so always or systematically, since this discretion must be exercised in accordance with the 
law  
 
7. If one wants to try to establish a principl e about what measures are subject to dispute 
settlement and which not, the relevant characteristi c is, in the view of the European Communities, 
whether the measure is normative  in relation to the behaviour covered by the WTO obligation in 
question.  That is, does the measure set out the principles that govern or influence how the WTO 
Member will act in some situation?  If the ac tion of the WTO Member is determined according to 
principles that are inconsistent with those th at it has agreed to follow in concluding the WTO 
Agreement , so that the action will at least in some cases be  inconsistent with that agreement, then that 
measures will be inconsistent “as such” with the WTO Agreement .   
 
8. The consistency of a programme with Article 3 of the SCM Agreement  depends on the rules 
governing the programme and indeed the purpose that it is designed to achieve.  It is not necessary 
that the programme should lead to an export subsidy in every single case (or even a “representative” 
number of cases), although the fact that there are some such cases is an important confirmatory 
element.   WT/DS273/R 
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9. Whether or not every APRG and every pre-sh ipment loan will be an export subsidy is not 
determinative (although the European Communities has demonstrated many such cases).  What is 
determinative is that the rules according to whic h the scheme operates may provide exporters with a 
benefit – indeed they are designed to do so.  These schemes are only open to exporters and provide 
important advantages that are not available on th e same terms on the market.  They both provide 
exporters with important financing facilities for export contracts in the critical period before (properly 
so-called) export credits and export credit guarantees become available.  Even if exporters do not 
always use these facilities (when a lternative finance is more conveni ently available), the availability 
of these programmes provides assuran ce that if market conditions were to change, finance from 
KEXIM would still be available at the pre-established conditions.  In this respect, it is important to 
note that Article 3.2 of the SCM Agreement  prohibits the maintenance of export subsidy programmes, 
even where they do not result in grants of export subsidies.  
 
10. Turning now to the other “as such” claim – th at against the legal framework of KEXIM – let 
me first say that the European Communities recognises the far-reaching nature of its claim but 
considers that it is justified in the circumstance s.  KEXIM is in reality a funding mechanism for 
directing state resources into the promotion of exports on better terms than commercial banks would 
offer.  It is directed to do so on the basis of its inte rest rate guidelines rather than at market rates and at 
below cost rates when “inevitable for maintain ing the international competitiveness to facilitate 
export”.   
 
B. BENEFIT 
 
1. KEXIM as such 
 11. KEXIM as such is a benefit because exporters  are provided with a bank that enjoys huge 
amounts of government money and unlimited state gua rantee with a mandate to promote exports and 
the requirement to disregard market principles where necessary to support the export competitiveness 
of key Korean industries.  The existence of such a body the work of which is not explicitly limited to 
either market principles or to OECD standards is  a very significant advantage for exporters, in 
particular shipbuilding which is in Korea an export oriented industry.  
 
2. APRG and PSL Programmes as such 
 
12. The possibility of obtaining a preshipment loan involves a tremendous advantage for shipyards because they can then o ffer tail-heavy payment terms with the majority of the payment 
delayed until delivery.  Contrary to what Korea a nd Drewry want to make the Panel believe, tail-end 
schemes have become common in recent years on the shipbuilding market. Tail-heavy payment 
implies that the payments to the shipyard are not sufficient to fund the cash flow during production 
and financing will therefore be required. Pre-ship ment loans (in the form of credit-lines) enable 
Korean shipyards to accept tail-heavy payment term s. The provision of this “financial product” 
provided by KEXIM that is not offered by other comme rcial banks confers a very significant benefit.  
The existence of the APRG and pre-shipment loan programmes provide financial and thereby 
economic stability to shipyards.    
3. Individual Grants 
 13. The European Communities noted that it had adequately rebutted Korea’s argument in the 
second written submission, but wishes to draw the Pane l’s attention to a pattern that runs through 
them:  Korea’s non-cooperation in providing the necessary information to  adjust the market 
benchmark in terms of duration and collateral.  Th e European Communities asked about collaterals as 
early as the Annex V procedure.   Korea did not respond.  The Panel gave Korea a further opportunity 
to submit “internal documentation” concerning KEXI M’s review/authorisation of a few transactions,  WT/DS273/R 
 Page F-5 
 
 
including worksheets and other documentation showi ng calculations of the interest rate and other 
terms, including consideration of collateral”.  Korea contented itself with providing the minutes of the 
Board of Director’s meeting and noting that “ it is not KEXIM’s policy to keep and maintain 
worksheets and similar documents.”  
Another tactic of Korea to obstruct the European Communities’ prima facie  case on benefit 
regarding individual transactions is the frequent “clar ification” of facts once it realised that it had 
mistakenly failed to withhold information that coul d be valuable to the European Communities’ case.   
The European Communities considers th at it has done more than making a prima facie  case and fully 
rebutting Korea’s defence on the issue of benefit by  taking full account of any differences in duration 
and collateral.  Korea has not rebutted the EC prima faci e case in a substantiated manner, e.g., by 
selecting some transactions and by providing indepe ndent expertise and supporting documents, e.g., 
on the value of the collateral - but as Korea admits, KEXIM does not keep such materials.  
 
C. SAFE HAVEN  
14. Korea does not respond to the EC argument th at APRGs and preshipment loans are not export 
credit instruments envisaged by items (j) and (k).    15. In making APRGs and preshipment loans, KEXIM assumes a risk that relates to the 
creditworthiness of the domestic exporters.  Expor t credit financing referred in items (j) and (k) 
however is different in a fundamental respect – it c oncerns foreign risk.  The underlying rationale of 
these provisions is that domestic banks typically do not have the means of assessing overseas risks of a potential buyer of an export product (or of rec overing money abroad).  In order to ensure the 
functioning of a free world market it is essential that overseas buyers have access to financing.  
16. The approach taken by the OECD (and WTO)  was to harmonise the specific instruments for 
export financing (guarantees and credits) and to allow the activities of stat e agencies in this few 
particular market segment.  Korea itself acknowledged that export financing within the meaning of the 
OECD Arrangement forms only a minor part KE XIM’s financial services provided to promote 
exports.   
17. Items (j) and (k) of Annex I to the SCM Agreement  cannot justify the provision of export 
subsidies to the producer through additional financing instruments that cover the domestic risk of the 
producer as provided by KEXIM.  
II. ACTIONABLE SUBSIDIES  
 
18. The European Communities has presented prima facie  evidence demonstrating that Korea has 
provided actionable subsidies to its shipbuilding indu stry, and has rebutted Korea’s contentions to the 
contrary.  In particular, the European Communiti es has demonstrated that public bodies and entrusted 
or directed private bodies have made financial contri butions to three Korean shipyards that provide a 
benefit, and that these subsidies were  specific within the meaning of the SCM Agreement  and caused 
serious prejudice to the European Communities’ interests.  
 A. FINANCIAL CONTRIBUTION 
 
19. The European Communities has demonstrat ed that that KEXIM, KAMCO, KDB, IBK, 
KDIC, and BOK were public bodies that acted pursuant to government policy when participating in 
the corporate restructurings.  We have explained that these bodies are subject to government control beyond ownership, pursue public policy objectives set by  the Korean Government, and are entitled to 
unlimited governmental guarantees of losses.  We have also shown that entrusted or directed private 
bodies involved in the restructuring provided financ ial contributions to the three Korean shipyards. 
 WT/DS273/R 
Page F-6  
 
20. The European Communities has provided evidence that the financial institutions involved in 
restructuring of the shipyards were unable to act independently, including the following:  
¾ letters from the Korean Government to th e IMF indicating that public funds would be 
withheld from banks that did not participate in corporate restructuring; 
 
¾ acknowledgement by a Korean bank that th e Government’s influence would cause it 
to make loans that it otherwise would not;  
 ¾ a signed commitment by banks to participate in restructurings;  
 
¾ Government decrees requiring bank par ticipation in financial stabilisation;  
 ¾ an explicit Government policy of s upporting failing companies through debt for 
equity swaps; and  
 
¾ statutory limits on the discretion of banks  to make decisions relevant to the 
restructuring. 
 21. The EC has demonstrated that the Korean  Government leveraged its multiple roles as 
decision-maker, legislator, executive, regulator, shar eholder, capital injector, guarantor, and lender to 
ensure that credit was provided and debt was forgiven for the failing shipyards. 
 B. BENEFIT  22. The European Communities has presented r easonable market benchmarks to measure the 
benefit of these financial contributions to the Ko rean shipyards.  This benchmark is based on the 
conduct of investors outside the reach of the Korean  Government’s tremendous influence. It showed 
that the Korean shipyards received a benefit because they paid less to be relieved of their debts to 
domestic creditors than they would have under fair market terms.  
 23. With respect to Daewoo, the European Commun ities logically compared the value of the debt 
with the value of the equity, which was based on the opening price of the Daewoo-SME stock on the 
first day of trading.  This comparison, which is the closest market benchmark available, shows that 
creditors swapped debt for equity  and did not receive market retu rn.  The European Communities has 
also provided additional evidence to reinforce the benchmark based on an Australian company’s offer 
to purchase the company.   
 
24. Daewoo’s creditors (public bodies and entrus ted or directed private bodies) conferred a 
benefit on Daewoo by paying too much for their equity .  The change of ownership, therefore, was the 
subsidy.   The creditors of Samho-HI/Halla-HI, on the other hand, once they became equity holders in 
the shipyard, conferred a benefit by  accepting too little for their equity when they sold to Hyundai-HI.  
In addition to conferring a benefit,  this transaction did not extinguish the benefits from the subsidies.  
 
25. Korea erroneously asserts that the Eur opean Communities failed to account for debt 
repayments by the shipyards when calculating the net value of the benefit.  With respect to Samho-
HI/Halla-HI, for example, there was no debt repa yment until the corporate reorganisation concluded 
in September 2000.   As for Daewoo, the plan provi ded a grace period until the end of 2002.   Indeed, 
because the benefit is composed primarily of the debt-for-equity swap and the negative net asset value 
of the remaining company, there was no reason to take into account the amount of debt repaid.   
 
26. Korea erroneously argues that the actions of KAMCO, in purchasing non-performing loans of 
foreign creditors at higher prices than those of domestic creditors, are irrelevant to the benefit 
analysis.  This disparate treatment shows that do mestic creditors demanded less for loans than the  WT/DS273/R 
 Page F-7 
 
 
foreign banks because domestic banks were influenc ed by the Government.  Moreover, the purchase 
and anticipated purchase of these loans from Daewoo’s creditors, for example, cleansed the creditors’ 
balance sheets in a manner that would not have been possible absent KAMCO’s actions. 
 27. In addition, Korea has failed to rebut th e EC’s evidence that Daewoo benefited from a 
specifically targeted tax exemption valued at KRW 236 billion. 
 C. SERIOUS PREJUDICE  28. The European Communities has shown that the subsidies to the Korean shipyards have caused 
serious prejudice to the European Communities’ in terests by causing significant price suppression and 
price depression in the same markets.  In response,  Korea submitted a report by its consultant, Drewry 
Shipping Consultants (“Drewry report”),  which attempts to prove that:   
 
¾ Korean and EC yards do not compete; 
 
¾ commercial ships are so different from each other that a meaningful economic 
comparison between products is not possible; 
 ¾ price suppression and depression do not exis t in the relevant product markets; 
 
¾ past price developments are not re lated to Korean subsidisation; and 
 ¾ Korean yards are more competitive than EC (and other) yards. 
 29. Careful scrutiny of the Drewry report, however, reveals that it: 
 
¾ provides a large quantity of i rrelevant information and data; 
 ¾ represents the European Communities’ pos itions in a subjective and biased manner; 
 ¾ bases the like product analysis entirely on the end use of vessels, despite the fact that 
this end use frequently changes over the lifetime of a ship, and its like product 
analysis fails to appreciate the necessity for a supply side perspective; 
 ¾ uses multiple contradictory analytical methodologies; 
 
¾ basically denies that an analysis of real shipbuilding costs is possible; and  
 ¾ contradicts itself and Drewry's own prior analysis of the shipbuilding market.   
 
1. Same geographical and product market 
 30. The European Communities has demonstrated th at the reference to “the same market” in 
Article 6.3(c) of the SCM Agreement  refers to both the same geographi c market (i.e. the world market 
in the case of shipbuilding), and the same product markets.  31. As for the geographic market, even Korea’ s own expert report acknowledges that ships are 
built “in a world market under open market competition.” 
 32. With respect to product markets, the Eu ropean Communities has presented evidence showing 
that (a) LNGs, (b) container ships, and (c) produc t/chemical tankers (not including pure chemical 
tankers) are three discrete product markets.  Kor ea has failed to rebut the relevance of these WT/DS273/R 
Page F-8  
 
categories, but continues to argue that the existe nce of different sizes of ships necessitates a further 
subdivision of the product market.    33. As with the product definitions in the cont ext of an anti-dumping or CVD investigation, 
claimants under Article 6.3(c) of the SCM Agreement must be accorded a certain degree of flexibility.  
As long as the complainant identifies markets or pro ducts that are reasonable and coherent, the Panel 
should accept that definition. The Panel should reject the complainant’s proposed definition only if it 
would make a market analysis impossible.  Far from impossible, the European Communities’ product 
market definition is used by a number of market analysts, including Drewry itself.   
 
34. Moreover, unlike lost sales claims, there is no need to demonstrate head-to-head competition 
in price depression or suppression claims.   This is especially true in the shipbuilding industry, where the price is set at the time that a ship is ordered, rather than after a product has already been produced.  
As long as a company is capable of offering to produce a ship, it does not matter whether it has 
produced that ship in the past.    
 
35. Korea’s narrow product market definitions cont radict reports from the leading experts in the 
commercial shipbuilding industry.  It is obvious that ships, as made-to-order products, will show 
variations in size and specifications.  But shipbu ilders can easily accommodate these variations in the 
course of their normal business.  From a technical point of view, all commercial vessels share the same key product characteristics.  They have a weld ed steel hull and superstructure, they are powered 
by similar types of engines; they have to fulfil the same navigational and re gulatory requirements; and 
they are subject to the same principal constructi on rules put forward by the classification societies. 
 36. Although it is not necessary to demonstrate the existence of head-to-head competition, the 
European Communities has shown, as do Korea’s own tables, that EC and Korean shipyards often do 
sell ships in the same product markets.    
 37. Without justification, Korea has requested  adverse inferences based on the European 
Communities’ alleged failure to produce detailed information about the many EC shipyards that 
produce vessels within the scope of the dispute.   The European Communities did in fact provide 
sufficient evidence to the panel, but, aside fro m this, the request for adverse inferences is 
inappropriate, because the claims do not require proof  of head-to-head competition, but only that 
prices have been suppressed or depressed at the stage of bidding.    38. Drewry’s attempt to support Korea's position that EC yards are concentrating on different 
vessels is undermined by the realities of the industr y and by Korea’s own arguments in this case.  
Indeed, the orderbooks of Korean yards show that th ey, like the major EC yards, are universal yards.  
Drewry’s own tables and statistics thus reveal that Korean and EC shipyards build vessels in the same 
markets.    39. In addition, Drewry argues that the product market is highly segmented by exaggerating differences on the demand side of the market (i.e . end uses and ship specifications) and ignoring 
similarities on the supply side (i.e. the capability of  modern shipyards to produce a wide variety of 
vessels).  This argument, however, is contradict ed elsewhere in the report where it speaks of 
standardised ship types with regard to containe r ships and LNG carriers, and ships built on market 
speculation or "commodity vessels".  Ships cannot be commodities on the one hand and too 
specialised to compare on the other.   
 
2. Price Depression/Suppression and Causation 
 
40. The European Communities has already demonstr ated that the Korean subsidies have caused 
significant price depression and suppression of LNGs, and significant price suppression of container 
ships and product/chemical tankers .  Based on this evidence, the European Communities has shown  WT/DS273/R 
 Page F-9 
 
 
that, but for the massive subsidies, the tremendous overcapacity maintained by the Korean shipyards 
would have been significantly reduced.  Such a reduc tion in capacity, given the large market share of 
the restructured Korean shipyards, would have ha d a significant effect on prices in the three product 
markets at issue.    
41. Korea fails to acknowledge the common sense  approach to finding adverse effects of 
subsidies, which is reflected in Articles 6.1 and 6.2 of the SCM Agreement .  It is, for example, a basic 
principle of economics that the maintenance of capac ity will lead to lower prices (all other variables 
being constant), or that direct forgiveness of larg e debts will affect prices by reducing the producer’s 
costs.  The SCM Agreement  does not require the Panel to perform complex calculations that will yield 
obvious results.    
 (a) Korean shipyards have influenced world market prices 
 
42. In order to conceal the true market share of the three Korean shipyard s in question, Korea and 
Drewry assess market share according to the numbe r of ships ordered and produced rather than the 
combination of physical size and work content (expressed in compensated gross tonnes (CGT)) of 
ships ordered and produced, which is the standard  industry method.  Because Korean yards tend to 
produce ships at the upper ends of the relevant si ze ranges, Korea’s method un derstates their market 
share.  The European Communities’ use of CGT to measure market share follows the practice of the 
OECD, as well as the Korean Shipbuilders’  Association and Drewry, themselves. 
 
43. Measured according to size and work content, th e three shipyards primarily at issue in this 
dispute together account for about one-third of th e orderbook in Korea and twelve percent of the 
global orderbook.  By way of comparison, the volume of orders in the three Korean shipyards alone is equivalent to ninety percent of the orderbook of a ll the Chinese shipyards and seventy-five percent of 
the orderbook of all EC shipyards.  With this level of market share, there is little doubt that the three 
Korean yards exercise considerable  influence over world prices.  
 44. The influence of the three Korean yards on wo rld prices is even greater when viewed in the 
context of the specific product mark ets, which have a small number of suppliers.  For example,  
Daewoo-HI/Daewoo-SME alone accounts for 32 per cent of the global orderbook for LNGs. Daewoo-
HI/Daewoo-SME, Samho-HI/Halla-HI,  and Daedong/STX are three of the five Korean shipyards that 
collectively control nearly two-thirds of the mark et for LNGs.  Samho-HI/Halla-HI accounts for 7 per 
cent of the global orderbook for container ships, a nd, together with its parent, the Hyundai group, 
accounts for 33 per cent of the orderbook.  Dae dong/STX and Samho-HI/Halla-HI are two of four 
Korean shipyards that control 60 per cent of the ma rket for product/chemical tankers. These statistics 
and other evidence provided by the European Co mmunities demonstrate that the three Korean 
shipyards have a large enough market share to exer cise significant influence over the world price of 
tankers, containership, and LNGs.  
 
(b) Temporal link 
 
45. Korea’s arguments about the absence of a tem poral link between the subsidies and the price 
effects ignore the fact that pressures on price in th e shipbuilding industry are first felt when price 
offers are presented, and well before a contract is actually secured.  This bidding usually takes place 
several months or even more than a year before the contract is signed.  Moreover, there is generally a 
lag of some years between taking an order and buildin g the ship.  Many of the orders taken by Korean 
shipbuilding in 2003, for example, are for delivery in 2007 or 2008.  
 (c) Specific effects of the restructuring subsidies on prices  46. Simply stated, the subsidies enabled the sh ipyards to remain in operation and gave them 
economic stability in a particularly cyclical and unstable business.  Drewry itself stated in a 1999 WT/DS273/R 
Page F-10  
 
report that Korean yards were almost solely respon sible for increases in capacity and that investments 
in these yards were viable only as long as the compan ies did not face the true cost of borrowing (the 
banks did instead).   47. Korea also confirms through Drewry’s report that shipyards with overcapacity tend to offer 
low prices, a factor that lies at the base of the European Communities’ assessment of the problems in 
the world shipbuilding market.   (d) Assessment of shipbuilding prices and costs  
48. The European Communities has presented accura te and comprehensive information regarding 
the various factors that influence shipbuilding prices and costs.  Korea, by contrast, fails to take 
account of overhead costs, or the depreciation a nd interest charges.  The European Communities’ 
evidence of the rising costs of ship production for th e three Korean yards is based on consideration of 
all relevant costs, and accounts for the cost-adva ntages enjoyed by those yards.  The European 
Communities and FMI stand by the results of their cost modelling and market and price analyses; all 
efforts by Korea to disprove these results have failed.  49. With respect to prices, Drewry fails to re fute directly the price indices offered by the 
European Communities for each of the three product markets.  In stead, Drewry argues that it is 
impossible to derive meaningful price indices fo r these product markets, even though Drewry uses 
these very same indices in chapter 8 of its re port and in its own non-commissioned works.  The 
European Communities has shown that a convergen ce of the following three factors should have 
caused shipbuilding prices to rise  (in the case of product/chemical tankers, container ships, and 
LNGs) or not to fall (in the case of LNGs): increasing volume, increasing producer costs and high customer earnings.    
 
(e) Valuation of subsidies  50. Although the SCM Agreement  does not require a complainant to  calculate the precise value of 
subsidies for purposes of demonstrating serious prejudice, the European Communities nonetheless has 
done so.  Korea disputes the calculation of the bene fit from the restructuring subsidies to Daewoo, 
arguing that it improperly looks beyond the liabilities of the core business of shipbuilding.  The 
European Communities’ point, however, is that th e restructuring would not have occurred if the 
creditors had acted pursuant to market consider ations, and the company would have retained all of its 
liabilities, whether or not related to its “core” operations.  
51. With respect to the calculation of benefit to  Samho-HI/Halla-HI, Korea disputes the European 
Communities’ stock valuations.  In fact, this valuation must be considered correct unless Korea admits that Rothschild made an incorrect valu ation of Samho.  The European Communities has 
already explained why Korea’s proposed valuation b ased on net asset value is inadequate and further 
notes that no consultant has ever used this methodology to value shipyards.  
52. Korea’s reference to the long-term benefit of investments in facilities is a red herring, because 
Korean shipbuilders made no such investments after 1996.  Based on investments in tools, machinery, 
and equipment for ships, it is reasonable to assume that the subsidies granted after 1997 had a useful 
life of about 10 years.   
 
53. Korea fails to rebut the European  Communities’ argument that KEXIM
 pre-shipment loans 
and APRGs contribute to over-capacity, and therefore price suppression and depression.  Korea states that KEXIM pre-shipment loans were granted for only “a limited number of shipbuilding projects” 
even though it supplied a list of hundreds of pre- shipment loan transactions in the Annex V process.  
  WT/DS273/R 
 Page F-11 
 
 
54. With respect to Korea’s attack of the Europ ean Communities’ attempt to  quantify the value of 
a KEXIM pre-shipment loans and APRGs, the Euro pean Communities has already explained that it 
made reasonable estimates based on the limited eviden ce provided by Korea.  Even on the basis of the 
new information on disbursement da tes the quantified value remains high.  
 WT/DS273/R 
Page F-12  
 
ANNEX F-2 
 
 
ORAL STATEMEN T OF KOREA 
 
 
(28 June 2004) 
  
I. INTRODUCTION AND EVIDENTIARY MATTERS 
 
1. Korea is presented at this Second Meeting with a difficult task brought on by the litigation 
tactics of the EC claiming that it was not required to demonstrate the necessary facts to establish a 
prima facie  case. The EC claims that a prima facie  case can be based on simple assertions of facts that 
do not need to be proven if undisputed by the res pondent. Hence, all a complainant would have to do 
is to make allegations which would shift the burden to the respondent to rebut them.  Only then would 
the complainant need to adduce any evidence to support its claims.  Th e EC further argued at the First 
Meeting that it need not demonstrate elements of  its case that it considered “obvious”, but then 
refused to identify just wh ich elements those were.  
 2. The EC’s position could not be  more contrary to the jurisprudence of the WTO.  This is 
summarized by the Appellate Body statement in US – Wool Shirts and Blouses  to the effect that 
“[W]e find it difficult, indeed, to see how any system of judicial settlement could work if it incorporated the proposition that the mere assertion of a claim might amount to proof.” 
 
3. Following from its legal proposition regard ing the burden of proof, the EC provided a 
virtually fact-free First Submission and oral presentation at the First Meeting.  This forced Korea, arguing in the alternative and in response to Pane l questions, to provide a considerable amount of 
argumentation and facts.  Only then, did the EC submit a large number of new arguments and 
supporting “facts” in its Second Submission.  This left  Korea with the task of presenting rebuttal data 
at the Second Meeting in response to EC material that should have been provided at earlier stages of 
the dispute to support establishment of the EC’s prima facie  case in accordance with WTO rules and 
jurisprudence.  Korea has responded as thoroughly as  possible with arguments in the alternative, 
while reserving all of its rights regarding the bur den of proof, due process and the Panel’s Working 
Procedures.  Korea specifically recalls the Appellate Body findings in Japan – Agricultural Products 
II and Chile – Price Bands  to the effect that the Panel is not to use its investigatory powers to make 
the complainant’s case for it nor to answer affirma tively claims that have not been effectively 
advanced by the complainant.  Particularly in light  of the difficulty of benchmarking during the period 
of the financial crisis, Korea also recalled the reasoning of the panel in the US – Section 301  dispute 
to the effect that, if faced with a situation where th e arguments of two parties left it in uncertainty or 
equipoise then, logically, the proper allocation of the burden of proof would mean that the benefit of 
the doubt would go to the respondent.  4. It is useful to step back and look at what is really going on in the shipbuilding markets -- 
recognizing, of course, that it plays out somewhat differently for each product.  If there is indeed a 
problem with subsidies, it is with the EC that has splurged hundreds of millions of euros of subsidies 
of all forms.  The EC Commission acknowledges in its  periodic shipbuilding reports that EC subsidies 
have actually caused significant overall harm to th e EC industries.  In contrast, Korea has built a 
vibrant set of shipbuilding industries that compete fiercely but fairly based on efficient, flexible labour and a vastly lower cost structure. All of th e trend lines the EC refers to concerning the 
competitiveness of the Korean industries are in exis tence from the late 1980’s and early 1990’s.  
There is nothing new and different about the period 1997-2001 except that the whole Korean 
economy went through a terrible financial crisis that spread out of Southeast Asia and nearly brought  WT/DS273/R 
 Page F-13 
 
 
the whole country to its knees.  In this financial cr isis, the EC has seen an opportunity to extract a 
competitive advantage that it could not through competition in the marketplace.      5. Regarding the issue of “public bodies”, Ko rea agrees with the EC that the question of 
government ownership can be a good starting point.  However, the EC has developed a non-treaty 
based test that is little more than variations on the theme of government ownership.  In order to 
properly define the term, the obvious place to start is the treaty text itself.  It sets up three categories of entities.  At one end of the spectrum are the organs of government themselves.  This would be 
something such as the Finance Ministry, for example.  At the other end would be unarguably private entities.  In between these poles ex ists something else referred to as a “public body” and the question 
becomes how to evaluate this term.  The first poi nt is that public bodies and the government are 
grouped together.  Indeed, they are collectively re ferred to as “the government” in Articles after 
Article 1.1.  As Korea has noted, the obvious implicati on of this is that it refers to actions that are 
essentially “governmental” in nature.  Moreover, it al so clearly implies that there are some actions 
that such entities can take which are not governmental action.  That does not leave any gaps in the 
overall treaty scheme, despite what the EC alleges, for even if an entity is not considered a public 
body for purposes of the measure at issue, there is  still the possibility of demonstrating that the 
government entrusted or directed the actions in qu estion.  Thus, while ther e is no gap in coverage, 
there is a distinction in the manner of proof.  And th is is where the EC ran into trouble for it has no 
evidence at all of entrustment or direction by the government.  
6. For purposes of providing interpretative guidance,  Korea refers the panel to Articles 4, 5 and 
8 of the International Law Commission’s Articles on State Responsibility that were commended in a 
December 2001 Resolution by the UN General Assembly to the membership for consideration.  These 
three Articles provide a close parallel to the langu age of Article 1.1 of the SCM Agreement.  In 
particular, Article 5 refers  to entities empowered by a State’s laws  to exercise governmental authority; 
it further notes that a measure at issue will be considered state action only to the extent it was taken 
pursuant to such authority.  The Commentaries to the Articles note that  this was meant to cover para-
statal entities that act in place of the organs of stat e.  Thus, the Articles outline a two stage test that 
corresponds closely with the logic of the treaty langua ge.  Korea also noted again that this approach 
was consistent with the definitions provided in the GATS Annex on Financial Services.  Korea also 
pointed out that the EC had presented its argum ents against KEXIM and then applied them mutatis 
mutandis  to the other government-owned banks, thereby improperly lumping everything together; this 
clearly did not satisfy the EC’s burden of proof.  7. Regarding “private bodies” acting on entrustmen t or direction of the government, Korea noted 
that the EC continued to make a straw man argum ent regarding the admissibility of circumstantial 
evidence.  Korea agrees that circ umstantial evidence is admissible, but  specifically noted that the legal 
probity of such evidence was suspec t the further it got away from direct  evidence.  The real issue was 
whether the evidence of whatever type demonstr ated conclusively that there was explicit and 
affirmative entrustment or direc tion by the government to the private entity in question to take the 
measure at issue.  This is the l ogic of the findings by the panel in US – Export Restraints . Korea noted 
that the EC expressly rejected this idea and proposed  a test based on what it referred to as “general 
direction.”  Korea further noted that even under th is test, the EC’s “eviden ce” was mere inference and 
stereotyping.  8. With respect to the issue of timing of allege d subsidization, Korea noted that the EC was once 
again setting up a straw man to knock down rather th an addressing the real issues at hand.  Korea was 
not arguing that older data was not admissible or that there was some sort of legal bar to discussing it.  
Rather, the issue was one of evaluatin g the evidence.  In this regard, it  was clear that the period of the 
financial crisis was sui generis .  Korea’s concern is that the EC was attempting to take advantage of 
the financial turmoil during this period to extract  a competitive advantage that it could not in the 
marketplace.  Specifically, the EC was comparing f actors from outside that period with factors from 
that period.  This was illogical and impermissi ble.  Moreover, the EC was attempting to take WT/DS273/R 
Page F-14  
 
advantage of the difficulty of establishing benc hmarks during such a period to argue that any 
governmental activity during the period was a subsidy.   Korea recalled that the burden was on the EC 
as complainant to establish and demonstrate appropriate market benchmarks.  
II. ALLEGATIONS OF PROHIBITED SUBSIDIZATION 
 9. The EC’s arguments that the KEXIM Act and the two programmes are per se  illegal would 
overturn decades of GATT and WTO jurisprudence re garding the distinction between mandatory and 
discretionary measures.  There is no indication that  the Appellate Body intended such a conclusion in 
the US – Sunset Review  dispute cited by the EC.  Korea again went through the various provisions of 
the KEXIM Act and described how they did not result in a mandatory requirement of export 
subsidization by KEXIM.  Korea also reviewed  the empirical evidence demonstrating how KEXIM 
always covered its operating costs (which is, in any event, an issue of cost to government and is not 
relevant at this juncture) and th at KEXIM was in competition with ot her lenders throughout the period 
of the inquiry.  Korea also reviewed KEXIM’s me thods for setting its rate s and demonstrated how 
they could not be interpreted as requiring subsidies; indeed, they resulted in market-based rates. 
 10. With respect to the APRG programme, Korea noted that there was a general lack of APRG 
activity during the period of the financial crisis , and that, as detailed in Response 47 to the Panel 
Questions, while the APRG rates in Korea prior to the Asian financial crisis  ranged from 0.1 per cent 
to 0.2 per cent, KEXIM doubled or more its overall rate to around 0.4 per cent during the crisis, which 
is composed of the base rate and the spreads.  This increase in rates shows that KEXIM adjusted 
appropriately to reflect the changed circumstances.  In contrast, the EC has cited a couple of isolated 
instances of APRGs from foreign banks that were not  representative.  There are two ways that APRGs 
are procured.  The first is selection by the shipya rd.  In such cases, shipyards select the issuer 
considering, inter alia , the competitiveness of the premium rates proffered and the past transaction 
experiences with the issuer.  In some other isol ated cases, the buyer designates the provider of 
APRGs.  Buyers designated a couple of foreign banks  right after the onset of the 1997 financial crisis 
but this practice rapidly subsided as the Korean fi nancial industry regained creditworthiness.  These 
buyer-designated providers generally  were not as familiar with the practice and charged higher rates 
reflecting their ignorance of the companies and the mark ets.  They also followed the standard lending 
practice of charging country risk premiums which were relatively high during the financial crisis.  
There also was generally lesser collateral both qua ntitatively and qualitatively for the foreign banks.  
The EC admitted that it did not have adequate evid ence to support its claims and asked for adverse 
inferences under the authority of  Annex V which is exclusively limited to the issue of serious 
prejudice.  Indeed, this request demonstrated again the abusive nature of the EC’s demands during the 
Annex V process, a matter Korea still requested the Panel to address.  In the meantime, the EC’s 
request provided an admission against interest regarding the lack of a prima facie  case. 
 11. Regarding the pre-shipment loan programme, Korea noted that the EC had introduced a large amount of new “evidence” regardi ng its proposed benchmarks.  This evidence was not in rebuttal, but 
was part of the EC’s initial prima facie  case.  Therefore, the requirements of due process, WTO 
precedent and the Panel’s working procedures required th at it be dismissed.  Nonetheless, arguing in 
the alternative, Korea rebutted the EC’s evidence which was based on bond indices.  Korea noted that 
the bond indices were distinct in a number of ways.    
• Despite the fact that the KSDA data for 6 mont h corporate bond yield rates are available, the 
EC has intentionally taken 1 year corporate bond  yield rates and made distorted adjustments 
to make them allegedly comparable to the 6 month corporate bond yield rates; 
 
• The EC misapplied the value of Yangdo Dambo collateral; 
 
• The EC misapplied the credit rating for DHI/DSME;   WT/DS273/R 
 Page F-15 
 
 
 
• The EC failed to adjust Samho Heavy Industri es’ pre-shipment loan rates for the 100 per cent 
physical collateral provided; and 
 
• The EC failed to consider the fair value of th e other relevant factors that have substantial 
security value and mitigate the risk fo r KEXIM’s pre-shipment loans.   
 
12. Korea noted, moreover, that as the financial cr isis ebbed, the instruments the EC offered and 
the pre-shipment loan rates conve rged as the underlying economic issues meant that they were more 
closely comparable.  13. Regarding the issue of safe havens, in Ko rea’s view it was quite clear from the Appellate 
Body’s statements in Brazil – Aircraft (Recourse to Article 21.5)  that such safe havens existed.  
Unlike the EC, Korea does not consider it appropri ate to disregard the Appellate Body’s clear 
language. The EC has rejected the Appellate Body’s ar gument with respect to item (k) first paragraph 
on the basis that Annex I is an Illustrative List  and therefore a non-exhaustive list cannot provide a 
safe harbour.  However, the EC then seems to forg et this and argues that item (j) does provide a safe 
harbour.  Purportedly, this is because item (j) cont ains a “proviso”, but that distinction remained 
unexplained.  The EC also contended that item (k) was exclusively in reference to the OECD.  Aside 
from the fact that the OECD is not mentioned, its relevance was limited to the exception of the second 
paragraph of item (k) and could not be read as defini ng the broader rule of the first paragraph.  In 
Korea’s view, there is either an a contrario  reading of footnote 5 that leads to safe harbours in both 
item (j) and item (k), first paragraph, or there is not an a contrario  reading.  There is no logical or 
treaty-based, linguistic way of splitting the interpretation between the two. 
 14. Korea also noted that there was no basis in logic for distinguishing between the legality based 
on who receives the benefit.  While the EC has claimed that this was a settled matter in the OECD, that was not the case.  Other OECD members had rai sed concerns about not being so formalistic as to 
create loopholes.  Moreover, Korea noted that th e EC was explicitly separating item (j) from the 
OECD.  Furthermore, as noted above, there was no legitimate basis for reading OECD requirements 
into the first paragraph of item (k).  Korea ha d presented ample evidence to demonstrate, as an 
argument in the alternative, that the APRG an d pre-shipment loan programmes satisfied the 
requirements of item (j) and (k) in such manner as to qualify for the safe havens. 
 
III. ALLEGATIONS OF ACTIONABLE SUBSIDIES 
 
A.  GENERAL MATTERS AND RESTRUCTURINGS 
 15. One of the issues of continued disagreement between Korea and the EC is whether or not a 
panel can make simultaneous findings that one set  of measures are both prohibited and actionable 
subsidies.  In Korea’s view, the unique nature of  actionable subsidies claims where actual adverse 
effects must be demonstrated requires a negativ e answer because otherwise there will be double-
counting of subsidies.  Korea notes that the EC asks the Panel to ignore Article 7 as the issue of 
remedies is not before the Panel.  However, Article  7 is part of the context of Articles 5 and 6 and 
indicates the unique nature of Part III of the SCM Ag reement.  Article 7.8 states that the remedy can 
be either removal of the adverse effects or withdraw al of the subsidy.  This possibility of removal of 
the adverse effects is unique in the sense that everyw here else the requirement is bringing the measure 
into conformity with WTO obligations.    16. In light of this, it is important to look at  what happens when there is determination of 
prohibited subsidization.  In such situations, if an  export subsidy is found to exist under the terms of 
Part II of the SCM Agreement, then the only remedy , according to Article 4.7, is withdrawal without 
delay.  Therefore, such subsidy would already be required to be removed by operation of law.  If a WT/DS273/R 
Page F-16  
 
panel were, nonetheless, to consider the effects of such a subsidy under Part III, it raises the 
possibility of an affirmative finding with respect to  the other subsidies which might not be, on their 
own, causing adverse effects.  In effect, the reme dy under Article 7.8 would already exist.  So, this 
becomes an empty exercise and one that is contrary to  the very nature of Part III where there is not to 
be an affirmative finding unless the subsid ies at issue are causing adverse effects. 
 
17. Regarding the restructurings themselves, Korea demonstrated the following:  
• The EC has failed to show that the banks  are public bodies for purposes of the subsidy 
analysis 
 
• The EC has created a new standard for directi on and entrustment and – by any standard – has 
failed to show how the Government of Korea dir ected or entrusted the banks to subsidize the 
shipyards. 
 
• The EC has failed to show how a financial c ontribution was provided to the shipyards when 
debt was switched for equity. 
 
• The EC has failed to show how a benefit is provided to a company through a bankruptcy or 
corporate restructuring proceeding. 
 
• If there was a benefit, the EC has failed to show  how this benefit carried through to the new 
owners of the companies. 
 
• Finally, the EC has failed to show how the bankruptcy or corporate reorganization 
proceedings were specific to the three yards. 
 
18. Regarding the issue of benefit in light of changes of ownership, Korea notes that there was 
nothing in the theory of changes in ownership th at the Appellate Body and panels relied upon that 
limited the decisions in the previous cases to priv atizations.  Indeed, the Appellate Body was quite 
clear that privatization was only one example of the theory and, in fact, the one instance where change 
of ownership was least likely to result in extinguishm ent of the benefit.  In the present case, the net 
debt was owned by the previous ow ners who were all wiped out, or virtually so.  At that point, the 
creditors have control of the company.  They have  effectively written off that net debt and the loans 
are re-valued accordingly.  This is why Korea has spoken about the change in form rather than a 
change in value.  As a result, there can be no financial contribution when the instrument does not 
represent any change in value.  Furthermore, even if this were considered a financial contribution, 
there is no benefit, because the creditors (i.e., the new owners) received nothing of greater value than 
what they had before. The EC’s response here is  to focus on the alleged benefit to the productive 
assets themselves, not the persons holding such assets.   For example, the EC states that the assets 
would not have continued in existence but for the allege d subsidy.  Of course, this is directly contrary 
to the findings of the Appellate Body in US- Lead Bars  and US -- Countervailing Mea sures where the 
Appellate Body rejected this “but for” argument wh en it was presented by the United States in those 
cases.  19. Moreover, the EC in general has offered th e Panel its own example of how to do workouts 
and insolvencies.  The EC claims that they must  be accompanied by permanent capacity reductions.  
This does not seem to be the case with the East German shipyards or those of the acceding EC 
countries.  There have been no permanent facility shut downs in those yards.  Furthermore, there is no 
indication whatever of capacity or production constr aints in the recent case of the Alstom bankruptcy.  
Indeed, all that is evident on the record is the continued generous subsidi zation of all of the EC 
shipyards. 
  WT/DS273/R 
 Page F-17 
 
 
20. Regarding DSME , the EC has alleged that the Korean  government “controlled” the process.  
However, even if the panel were to agree that mere government ownership of several Korean banks 
made them public bodies, these entities did not cont rol enough of the outstanding credit to control the 
process under the prevailing arrangements.  The EC al so refers to the alleged “control” that the 
Government of Korea had over all of the banks during the financial crisis.  However, despite the EC’s 
repeated attempts to get the IMF to support the EC’s point, the evidence is conclusive that the 
restructuring of the financial sector pursuant to  the agreement with the IMF was done on market 
principles and banks restructured their bad loans to maximize value.  Thus, any influence of the 
government had exactly the opposite effect that the EC  alleges.  The sole piece of “evidence” the EC 
proposed regarding alleged improper influence was revealed by Korea’s provision of the full 
quotation by a single Korean bank to be a reference to the real estate sector and even that was 
specifically noted by the bank’s lawyer not to refe r to even the general point the EC was alleging. 
 21. Regarding the issue of benefit in the DSME restructuring, the EC offered a report by its consultant, Price Waterhouse Coopers (PwC) critiqui ng the workout report done by Anjin, the former 
Korean affiliate of Arthur Andersen.  A response by the authors of the Anjin Report as well as an 
independent retired senior British banker, Mr. Willia m Lawes, confirmed that the Anjin Report was 
objective and fair; it was commissioned for the pur pose of determining the best commercial, value-
maximizing solution to the insolv ency of DHI resulting from the credit crunch brought on by the 
Asian financial crisis.  Anjin was required by the te rms of its contract to act in an objective manner 
and there is absolutely no evidence of any sort that  it did not do so.  Anjin was not directed to come 
up with any particular answer, but provided an in dependent opinion as to the relative values of the 
available options.  Mr. Lawes found that the Anjin Report was appropriately done, took into 
consideration all of the appropriate facts and was ove rall consistent with just the sort of evaluation 
that would be expected on the part of  banks utilizing the “London Approach” to maximize value in 
situations of corporate insolvency.  Mr. Lawes also  confirmed the logical point that the foreign-owned 
banks were in a fundamentally different circumst ance and had every incentive to take a better short 
term deal but with less long-term potential. Such a decision led to negotiations to sell their debt for as 
high an immediate payout as possible to those domest ic banks, who had more at stake and more time 
and inclination to follow the workout route which coul d lead to a greater potential recovery over time.  
Again, the bargain for a residual amount of warrants  demonstrates that the foreign banks recognized 
this trade-off. 
 
22. The EC continued to argue that the debt-e quity somehow “cleansed” the balance sheet of 
DSME despite the fact that the new owners were  the old creditors making it impossible to see what 
exactly was cleansed.  Any further debt could not ha ve resulted in any changes in the debt equity 
swap as the players and the value were both the same under either scenario offered by the EC.  The 
EC also pointed to the purchase of debt by KAMCO  as cleansing the balance sheet.  However, it was 
irrelevant to the balance sheet of DSME for it only resulted in a change of creditors, not a reduction of 
debt.  23. The EC also challenged the valuation done by  Anjin given the allegedly low price offered for 
the stock of DSME by an objective foreign bidder.  The EC referred to newspaper reports of a bid by 
an Australian company, Newcastle Heavy Industries.  Korea rebutted this allegation by showing that 
NHI actually offered a substantial pr emium over what the EC alleged. 
 24. Regarding specificity, the EC’s argument was little more than an allegation that the size of the 
Daewoo group meant that the restructuring was sp ecific.  However, the workout approach was 
broadly available and Korea had earlier submitted ev idence demonstrating that a great number of 
companies availed themselves of the approach.  Size alone does not render a procedure specific. 
 25. Regarding the alleged tax subsidies in the case of the DHI spin-off, there was no valuation 
gain or profit because the DHI assets were simply  allocated at “book value” to the two spun-off 
companies and the remaining DHI. Therefore, becau se the assets were simply moved from one entity WT/DS273/R 
Page F-18  
 
to another there was no taxable event and no forgoi ng of any government revenue that was otherwise 
due.  Therefore, Article 45-2 did not confer a benefit.  Korea noted that the numbers the EC presented were taken exclusively from a news paper report and that was not suffi cient evidence.  Moreover, the 
number the EC alleged was with respect to all of DHI and did not reflect any allocation between the 
divisions.  Korea further demonstrated that the ta x laws in question were not specific to the DSME 
transaction.  If they had been, there would have b een no reason to extend them for a further two years 
after the DHI spin-offs.  As noted above, Article 46 of the Corporate Tax Act mandates specific tax 
treatment with respect to “gain”  or “profit” realized to the spun-off company as a result of the 
“valuation” of assets conducted in the course of spin-off.  
26. Regarding the Samho restructuring , Korea noted that the EC seemed to drop any reference 
at all to the role of the judges in the transacti on.  The reorganization proceeding cannot start unless the 
court determines that the going concern value of th e subject company is greater than its liquidation 
value.  If such is the case, the court has the power to order a receiver to submit a reorganization plan 
based on the continuation of business activities of the company concerned.  If the plan submitted does 
not conform the provisions of the Corporate Reorgani zation Act or is unfair, unequal or not feasible, 
the court may decide not to refer the plan to the me eting of the interested parties for resolution. The 
court also has the authority to approve or reject the pl an adopted by the interested parties. In sum, it is 
the court that decides whether to permit the subject  company to continue its business operations.  In 
order to establish that the court receivership, and an y transaction done within the context of the court 
receivership, was not done at arm’s length or conferre d a benefit, the EC needs to show that the judge 
in this instance did not do his job, that he failed in his legal and fiduciary responsibility to maximize 
the return on the debt to the creditors.  The EC  has presented no such evidence.  None exists. 
 27. The EC contradicted its approach to the DS ME workout where the EC alleged that the new 
owners overpaid, by now arguing that the new owne rs of Samho underpaid.  Of course, once again, 
the real answer is that facts do not support the EC’s allegations regardl ess of which of their 
contradictory approaches they choose. In the case of Halla/Samho (as with Daedong/STX discussed 
later), the court determined that the going concer n value was greater than the liquidation value and 
decided to proceed with the corporate reorganizati on. This court decision was based on the valuation 
by Rothschild, a financial advisor, and on Rothsch ild’s corporate reorganization proposal which was 
drafted to maximize the debt repayment to the cred itors.  Moreover, among the many factual errors in 
the EC allegations was the basic point that the EC neglected to include the assumption of debt in the 
purchase price of Samho.  28. Regarding the issue of specificity, the EC argue d that if Article 1.1(a) is satisfied because 
there was a financial contribution pursuant to governme nt action and that Article 1.1(b) was satisfied 
in that a benefit has been demonstrated, then  Articles 1.2 and 2 regarding specificity are automatically  
satisfied.  That is, the EC reads Articles 1.2 and 2 completely out of the SCM Agreement.  Obviously, the Panel cannot adopt an interpretation of the treaty that reads whole provisions as nullities.  29. Regarding STX , the EC argued that the sale of the company by the bankruptcy court was 
improper because it was sold to a Korean company.  In an unfortunate instance of stereotyping, the 
EC claimed an “inherent defect” on the part of an y Korean company.  Korea demonstrated that the 
sale pursuant to a Recommendation Report by KPMG went to the highest bidder out of five.  Of the five, two and perhaps three were non-Korean comp anies.  The EC then reverted back to its 
unsupportable argument that any result from insolvency other than  termination of the company and 
selling it for scrap was a benefit.  Regarding specifi city, the EC made the same incorrect arguments 
that it did with respect to Samho whereby the st ep of determining specificity was automatically 
satisfied by a finding of government involvement and benefit.   WT/DS273/R 
 Page F-19 
 
 
B. SERIOUS PREJUDICE  30. There is a basic disagreement between Korea and the EC on the issue of whether there is a 
need for the complainant to demonstrate serious prej udice.  According to the EC the treaty contains a 
very mechanistic test.  If any one of the elements of Articles 6.3 (a), (b) or (c) is shown, then the 
serious prejudice element of the case automatically  is satisfied.  The complainant need show nothing 
more.  Essentially, the case is over.  Of course, th is approach requires reading out of the treaty some 
very important words.  The chapeau of Article 6.3 provides that serious prejudice may exist when one 
or several  of those elements are demonstrated.  The EC reads the word “may” to mean “shall”.  
Indeed, the EC really is replacing it with somethi ng more; it is really saying “shall be deemed to 
exist” because once again the EC is trying to creat e presumptions as substitutes for proof.  It is worth 
noting that the EC interprets the term “may” in mu ch the same way as it interprets the term “shall” 
from the now-expired presumption-creating provisions of  Article 6.1.  Next, the EC reads the “or 
several” out of the text.  If any one element were enough to lead to an automatic  and necessary 
conclusion of serious prejudice, why would there ev er be a purpose in demonstrating others?  Of 
course, there would not be.  The words “or several” would be totally superfluous. 
 31. The EC attempts to eliminate the word “seri ous” from the treaty text.  The EC’s only attempt 
to respond to Korea’s reference to the extensive ju risprudence that confirms that “serious” indeed 
connotes a higher standard than “material” is to jumb le up Articles 5(a) and 6.3( c).  Similarly, the EC 
attempts to read out of the treaty the term “pre judice”.  As Korea has noted there is no basis for 
reading the term prejudice as somehow lower than the term injury.  In Korea’s view, the term 
“interests” refers not only to the state of the compla ining party’s industry, but also to something more.  
The term “interests” is a broader term.  Simply put, a complaining Member should not be permitted to 
potentially adversely affect the terms of sale in thir d country markets of other Members in this fashion 
unless it can show that its broader interest s are seriously negatively affected.   
 
32. Even more surprisingly, the EC maintain s that it does not have to establish like product 
categories.  Korea considers it fundamental to th e treaty structure and plain logic that like product 
categories must be established by the complainant.  Unless the complainant does so, there is simply 
no coherent manner of discussing the elements of th e case.  The EC argues that Korea’s reference to 
like product in Article 15.2 of the SCM Agreement and Article 3.2 of the Antidumping Agreement is 
misplaced because those provisions  refer to like products in imported  markets.  This argument seems 
to have been pulled from the air, for it is quite illogi cal and has no basis in the treaty.  The EC fails to 
explain Articles 6.3(a), (b) and (c), as well as 6.4 an d 6.5 which all refer to like products and none of 
which involve importation into the complaining Member’s market.  
33. The EC has built its whole case on an argument of price suppression or depression due to 
capacity issues.  However, how can one discuss either capacity or price suppression or depression without rigorously defining markets?  Capacity in what products causing price suppression or depression of what products?  The EC only provides a bunch of charts of shifting product groups (for 
instance, at various times the EC has endorsed the Japanese suggestion that there is only one like 
product category) and even tried to sell the Pane l on causation due to a “kink” in a price chart 
including apparently all commercial ships.  Is the reason the EC  suddenly decided in the middle of the 
case to exclude pure chemical tankers from the disput e because of the effect on their pricing charts of 
inclusion of this product?  The EC claims that within the product types that it has distinguished 
(container ships, product and chemi cal tankers and LNGs) there is no need to further distinguish by 
size because vessels of all sizes can be substitutable in many instances on all routes. It thus not only 
contradicts the size differentiations that are comm only made in shipbuilding and shipping trade but 
also the statement of its own expert that substituti on is rarely possible on a size basis because of the 
economics of trade and that one seventy thousand dwt ship, for example, is not operationally or 
economically equivalent to two thirty-five thou sand dwt ships.  The EC’s reliance on supply 
substitutability -- claiming that vessels are merely an assembly of steel and that a shipyard can build 
any type of vessel -- is hardly understandable an d is certainly contradictory with the EC’s own WT/DS273/R 
Page F-20  
 
exclusion of all sorts of products from cruise ships to Ro-ro ferries to pure chemical tankers. First, 
what is a like product must be determined pr imarily from the demand side based on technical 
characteristics and their value added for the use of the products as perceived by the user. Second, no 
single yard in the world claims that it can build all vessels.  In reality, EC yards intentionally - well 
before the corporate restructuring in Korea - c oncentrated on the smaller like products as well as on 
high value added niche vessels including cruise ships, ferries or roll-on roll-off vessels. It is equally 
an arbitrary and broad brush conclusion by the EC to refer to “Korea” in general when the 
participation of the restructured and non-restructur ed yards in different like product vessel markets is 
widely different. This is true all the more in th at those like product vessels where there still is some 
competition between EC and Korean vessels, most, if not all of these Korean vessels were built by 
non-restructured yards that did not benefit from the alleged corporate restructuring subsidies. 
 34. Of course, the EC insists on calling it an over-capacity issue.  This addition of “over” is 
nothing but an emotive term that the EC hopes will af fect the way the Panel views the market.  As the 
EC has itself acknowledged, there is not an agreed upon way of defining capacity in shipbuilding.  In 
fact, there is general agreement the other way, i. e., that there is no universally applicable or 
unambiguous way of defining capacity.  Any existence of capacity will affect the market whether it is 
from Estonia or Korea.  And, of course, the larger  the country’s industry, the larger the impact of 
production from that country. Obviously, the EC is tryi ng to direct the case away from the issue of the 
effect of the subsidies and get the Panel to focus on the effect of the products.  If it can do that, then 
under the EC’s approach, the sheer size of the Korean industry today (as should the size of the 
Japanese industry today or the Chinese industry to morrow) will result in an affirmative decision 
without regard to the treaty requirement of linking significant price suppression to the effects of the 
alleged subsidy.  35. Regarding the EC’s allegation of pricing matt ers, as Korea has pointed out and the EC cannot 
deny, Korean shipyards enjoy a significant cost adva ntage over the EC.  This has been the case for a 
long time.  This advantage has been accentuated in th e past couple of years generally by a still weak 
Won and particularly by the relative strengthening of the Euro compared to the Won.  In spite of this, 
the EC offered a speculative cost model based on unexplained and unproven assertions.  
Notwithstanding these estimations and assumptions, the EC is trying to make an inference  of 
subsidization based on these speculative projected co st calculations.  This would not be acceptable on 
the part of a domestic authority doing a constructed valu e determination in an antidumping case; it 
would be bizarre if used in a countervailing duty in vestigation and it is who lly unexplained why this 
Panel in a serious prejudice case should engage in such speculation based on cost modelling and 
inflation projections that it has not even seen.  
36. The EC tries to reassert the abandoned cl aims of price undercutting.  The “evidence” 
submitted by the EC is factually false.  This is  illustrated by the Hamburg Sud case where it is shown 
that the European yard Odense was th e price leader.  Moreover, it is impermissible for the EC to try to 
reintroduce previously abandoned claims at this stage. The EC tried to justify this by saying it is not 
claiming price undercutting as such, but only to support  its price suppression arguments.  This is mere 
sophistry. Normally cases are built on interlocking elements of evidence including “one or several” of 
the factors listed in Article 6.3.  The EC rejected  that approach and cannot change it, no matter how 
much it now regrets its earlier decision.  Viewing the EC efforts of trying to establish this serious prejudice case on the narrow basis of price depress ion or suppression due to capacity issues to the 
exclusion of every other element of proof is like watching an elephant trying to balance on a pin. 
 
37. Even considering that, if the EC’s speculativ e cost modelling projects a uniform effect across 
the whole of Korean industry, it necessarily follows that the price effects are not from the alleged 
subsidies, but are instead from the pricing practic es of the majority of shipyards that were not 
restructured.  It is illustrative that the EC conti nues to claim price leadersh ip by non-restructured yard 
Hyundai Mipo based on the allegation that H yundai Mipo has benefited from the APRGs or PSLs. 
However, Hyundai Mipo had only a very limited number of PSLs and APRGs and the amounts of  WT/DS273/R 
 Page F-21 
 
 
benefits (if any) were minimal and certainly by far insufficient to explain the price difference of 
15 per cent which the EC alleges with the competing Lindenau offer. (Korea also notes that the EC ad 
valorem  subsidization across its shipyards is much hi gher and would need to be considered in any 
proper causation analysis.)  That is, the EC’s own approach of lumping ever ything together based on 
generic cost/price modelling actually leads to the opposite conclusion of what the EC wishes.  Any 
price effect is not that of the alleged subsidies. 
 38. One of the many problems here is that the EC is collapsing distinct steps.  The treaty text in 
each of the subparagraphs of Article 6.3 is that th e “effect of the subsidy” is to cause one of the 
possible elements that can be a constituent of  serious prejudice.  That is, the causation within 6.3(c) is 
not of serious prejudice, but of the possible supporti ng factors.  The treaty clearly states that the EC 
must demonstrate that the effect of the alleged subsidies is to cause significant price depression or suppression.  There is no dancing around these words.   Those specific identified subsidies must be 
actually having an effect themselves of significant price depression or suppression.  Other factors may be at play and they may also have price depressive  or suppressive effects, but such effects cannot be 
attributed to the alleged subsidies.   Korea mu st point this out once again because the EC does not 
even get to the point of separating out the effect of th e subsidies and, instead, tries to rely on the effect 
of the products .  Only then after that element is establishe d as an effect of the alleged subsidy can the 
complainant move on to show that that one elemen t listed in 6.3 alone or along with others of the 
several  identified elements may be causing serious prejudice.  It is axiomatic that other factors 
causing the prejudice cannot be attributed to the allege d subsidies.  This is not only required by the 
jurisprudence relating to all injury-type inquiries,  but it is also mandated by the full contextual 
analysis of Part III which provides in Article 7.8 that  one available remedy is to remove the injury.  If 
there has not been a reliable anal ysis tracing through from the alleged subsidy having the effect of 
significant price suppression which, in turn causes seri ous prejudice, then this analysis is rendered 
literally impossible. 
 
39. In conclusion, it is clear that the EC has fa iled to carry its burden of proof, indeed, has 
misconstrued that burden as a matter of law.  Moreove r, arguing in the alternative and at the request 
of the Panel, Korea has adduced substantial eviden ce on each legal point demonstrating that there is 
no basis for the EC’s claims.  Accordingly, Korea re quests that the Panel reject the EC’s claims under 
Parts II and III of the SCM Agreement.