WT/DS273/R 
 Page G-1 
 
 
ANNEX G 
 
 
RESPONSES OF THE PARTIES TO  QUESTIONS FOLLOWING THE 
SECOND MEETING AND COMMENTS THEREON 
 
 
Contents Page 
Annex G-1 Responses of the European  Communities to Questions from the 
Panel (2 July 2004) G-2 
Annex G-2 Comments of the European Communities on New Factual 
Information Provided by Korea (9 July 2004) G-44 
Annex G-3 Responses of the European Communities to Supplemental 
Questions from the Panel (16 July 2004) G-62 
Annex G-4 Responses and Comments of Korea to Questions from the 
European Communities and from the Panel (2 July 2004) G-73 
Annex G-5 Responses of Korea to Supplemental Questions from the Panel 
and Comments on the Supplemental Questions to the European Communities (9 July 2004) G-147 
Annex G-6 Comments of Korea on the Responses by the European 
Communities to Supplemental Questions (23 July 2004) G-182 WT/DS273/R 
Page G-2  
 
ANNEX G-1 
  
RESPONSES OF THE EURO PEAN COMMUNITIES  
TO QUESTIONS FROM THE PANEL 
 
 
(2 July 2004) 
 
 
I. TO THE EC 
 
A. KEXIM LEGAL REGIME 
 
Question 128 
  Does a government necessarily provide a subs idy if it makes a financial contribution 
outside the normal field of commercial behaviour?  Assume a government creates a new special finance mechanism that has never been offered by private banks.  Assume that private banks 
subsequently begin providing the same fina nce mechanism on the same terms as the 
government initially offered.  Assuming that the finance mechanism constitutes a financial 
contribution, would the initial offer of that  finance mechanism by the government confer a 
benefit?  Please explain.  
Response
 
 1. The European Communities not es that the question requires an assumption that the finance 
mechanism constitutes a financial contribution.   
 
2. In these circumstances, the European Communities believes th at the hypothetical measure 
constitutes a subsidy since it is conferring a benefit in the form of a finance mechanism that is not 
available on the market.  Whether it is a prohibited or an actionable subsidy will of course depend on 
whether it fulfils the other conditions for this in the agreement (and in particular specificity) and 
whether any exception or exclusion is available.  
3. Once private banks begin providing the same  finance mechanism on the same terms as the 
government, the benefit and hence the subsidy may well disappear.  This does not however have any 
retroactive effect and does not change the fact that a subsidy was provided initially. 
 
Question 129 
 
 The EC submits that KEXIM's website describes the PSL programme as designed “to 
encourage the export of capital goods such as . . . ships . . . involving larger credits and longer 
repayment terms than what suppliers or commercia l banks would provide.”  Isn't this what any 
development bank does?  Do development banks n ecessarily provide subsidies?  Please explain. 
 
Response
 
 4. It is not clear to the European Communities wh at the term “development bank” refers to.   
 5. The first comment that the European Communiti es would make is that the issue of special and 
differential treatment of developing countries is not an issue in this case si nce Korea has not invoked, 
and could not invoke, deve loping country treatment.  WT/DS273/R 
 Page G-3 
 
 
 6. In any event, if a public body of a WTO Me mber that is a “development bank” engages in 
export contingent  lending at preferential rates, it w ill be providing export subsidies unless an 
exemption or exclusion under the SCM Agreement  or another covered ag reement is available.  
 
B. APRG/PSL 
 
Question 130   Please comment on Exhibit Korea-87,  concerning country risk spreads. 
 
Response
 
 7. Korea submits Anjin’s Opinion on Country Risk Factor in determining APRG Premium Rate  
(Exhibit Korea-87)  to support its contention that “rates of APRGs issued by foreign banks must be 
higher than those by domestic banks due to the application of country risk premium”.
1  
 8. The European Communities strongly disagrees with Korea’s argument and the opinion set out 
in Exhibit Korea-87 .  The European Communities submits in response Exhibit EC-148  with an 
opinion from  PriceWaterhouseCoopers  which explains in detail that: 
 
As a consequence, the risk of providing an APRG to a Korean company in a 
foreign currency , as it is the case for most of the APRG’s, is the same regardless of 
where the bank is based  and thus the country risk of Korea needs to be taken into 
account in the price: 
-  as an add-on to cover the transfer risk  resulting from the company needing to 
find foreign currency in the case where a government wants to keep the 
“strong” foreign currencies; 
-  as an add-on resulting from the bank’s needs to obtain refinancing in the 
foreign currency.2 
9. Hence, there is no basis for rejecting th e APRG premium rates charged by foreign banks 
(CITI and ABN AMRO) as market-benchmarks.     
10. Korea did not even attempt to provide r ecalculations of the numerous EC APRG benefit 
calculations.  Indeed, even if Korea was right and 61 points (the “country risk premium” identified on 
p. 5 of Exhibit Korea-87) could be deducted ( quod non ), the KEXIM rates are still significantly below 
the foreign bank rates.  This is illustrated in the tables below:   [BCI:  Omitted from public version.] 
 
11.   12. In short, the benefit demonstrated by the European Communities in comparing KEXIM 
APRG premiums to those charged by foreign ba nks and to those extended by domestic banks
3 remain 
intact.   
                                                     
 
1 Oral statement by Korea at the second su bstantive meeting with the Panel, para. 80. 
2 Report by PriceWaterhouseCoopers, June 2004 (Exhibit EC-148) , para. 3.2 at p. 10. 
3 First Written Submission by the European Communities, paras.170 to 173 and Oral statement by the 
European Communities at the second substantive meeting, para.36. WT/DS273/R 
Page G-4  
 
Question 131 
  Why, in its benefit calculations for KEXIM financing did the EC apply the S/M credit rating to DSME for the entire period for wh ich calculations are presented, including in 
particular the post-restructuring period?  Is it the position of the EC that DSME remained 
uncreditworthy even after the restructuring?  Please explain. 
 
Response
 
 13. The European Communities has applied the cr edit ratings provided by the Korean credit 
agencies.
4  [BCI:  Omitted from public version.]5  In line with its calculation methodology6, the 
European Communities, therefore, correctly applied the S/M rating for the entire period covered by its 
calculations and has never claimed that DSME rema ined uncreditworthy after the completion of the 
workout.  Question 132   Please comment on Korea's assertion that the collateral offered in respect of certain 
APRGs provided by foreign banks "covered only a sm all portion of the guarantee" (para. 81 of 
Korea's oral statement at the second substantive meeting).  
Response
 
 14. At the outset, it should be noted that Ko rea nowhere substantia ted its assertion with 
supporting evidence showing the precise amount of the cash collaterals. Instead, Korea gave shifting 
indications as regards the percentage  covered.  Thus, in its first written submission, Korea stated that 
NHIC and CITI extended APRGs in re turn for bank deposits amounting [BCI:  Omitted from public 
version].
7  In its  Response to Question 14 raised by the EC, Korea stated that [BCI:. Omitted from 
public version.]   In its second written submission, Korea reduced the bank deposit required by NHIC 
to [BCI:  Omitted from public version]  of the advance payments, again, without explaining the 
factual change and providing any supporting evidence.    
15. In any event, Korea’s assertion does not ad equately respond to the EC argument that cash 
deposits offered as collatera ls to foreign banks are stronger form s of collateral as compared to Yangdo 
Dambo.
8   
 16. Therefore, the collateral value of the cash deposit must be considered to be at least equivalent 
with the Yangdo Dambo unless Korea had provided detailed materials and assessments of the 
respective value of the Yangdo Dambo.  However, as  Korea stated in response to Panel Questions, 
KEXIM does not keep such materials.   
Question 133 
 
 At para. 105 of its second written submission , the EC states that only domestic banks 
with "government association" provided APRGs to Samho.  Regarding Figure 12 of the EC's 
first written submission, is Chubb a domestic bank?  If so, does it have a "government 
association"?  If there is such an associat ion, what is its nature?  Please explain. 
 
                                                     
 
4 Koreas Response to Annex V questions, attachment 1.1(24)-1 (Exhibit EC-30) . 
5 First written submission of Korea, para. 362. 
6 (Exhibit EC-125).  
7 First written submission of Korea, para. 207. 
8 Price Waterhouse Coopers report on Pre-shipment loans and APRGs, p.15 (Exhibit EC-118) .  WT/DS273/R 
 Page G-5 
 
 
Response  
 17. The statement in para. 105 of ou r second submission refers to the period before  Samho’s 
restructuring which was completed (according to Korea, on 27 October 1999
9).   
 
18. Chubb was only referred to with respect to the period after  Samho’s restructuring. The 
evidence submitted by Korea10 indicates that on at least four occasions APRGs were extended to 
Samho by Chubb.  The European Communities u nderstands that CHUBB is a global insurance 
company with no government associations.  The Eu ropean Communities compar ed the rates offered 
by Chubb to those provided by KEXIM in its oral statement at the second substantive meeting and 
demonstrated that KEXIM rates were 50 per cent lower than Chubb’s.11     
 
Question 134 
  In Exhibit EC-118, PWC asserts that "[t]h e KSDA Bond Matrix is the accepted mark-
to-market price for the domestic market".  Does  this mean that the EC disagrees with Korea's 
argument that the bond matrix represents hypothet ical / projected rates, or does the EC accept 
Korea's argument but consider that the inde x nevertheless constitutes a reliable market 
benchmark?  Please explain.  What does "mar k-to-market" in this context mean?  In 
particular, who was marking what to which market?  
Response
 
 19. Yes, the European Communities disagrees w ith Korea.  The KSDA Bond Matrix is not a 
hypothetical or projected rated, but a reliable market  benchmark to assess interest rates for loans.  
“Mark-to-market” is “the act of assigning a value to  a position held in a tradeable financial instrument 
based on the current market price for that instrument”.
12 The KSDA bond matrix does this in the 
following way :  
Based on the definition provided by Bloomberg on KSDA Corporate Bond, “KSDA collects daily pricing for each sector from  10 major investment banks for tenors 
ranging from three months to five years. The indices are calculated daily and re-
balanced weekly. All such changes are upda ted weekly in the Index Constituents so 
you can see the new underlying securities for e ach sector. Credit rating changes are 
updated monthly by the KSDA. […] The KSDA Bond Matrix is the accepted mark-
to-market price[6]  for the domestic market” .
13  
 
20. In short, the KSDA bond matrix is the accepted ma rk to market price, i.e. that it reflects the 
current market price  of bonds, since bond prices and yields are updated daily based on data 
collected from a wide number of representative local securities houses.  As reconfirmed by 
PriceWaterhouseCoopers:  
This is therefore, the best representation of the yield required by investors at a 
specific moment in time, on Korean oblig ations having a specific maturity and a 
specific rating.
14 
                                                      
9 First written submission of Korea, para 422. 
10 List of APRGs to Korean Shipyards (Attachments 1.2(31)-1-1.2(31)-8) (Exhibit EC-24) . 
11 Oral statement by the European Communities at the second substantive meeting, para. 36. 
12 Report by PriceWaterhouseCoopers, June 2004 (Exhibit EC-148) , footnote 6. 
13 Report by PriceWaterhouseCoopers, June 2004 (Exhibit EC-148) , para. 4.1., p. 11. 
14 Report by PriceWaterhouseCoopers, June 2004 (Exhibit EC-148) , para. 4.1. WT/DS273/R 
Page G-6  
 
 21. Korea appears to argue that the KSDA bond matrix is “hypothetical and projected” in 
comparison with interest rates of existing DHI ob ligations.  However, as explained in detail before
15, 
the corporate bonds actually issued by the yard s were not appropriate benchmarks as regards 
corporate bonds (i) because they were guaranteed by a bank, (ii) were not issued in the same currency 
or (iii) not issued at the same time as KEXIM’s PSLs.  As regards other sources of financing, they 
were not considered as an appropriate benchmar k since their rate may depend on the particular 
relationship between the bank and the debtor.  
Question 135 
 
 Korea criticizes the EC for having used in it s benefit calculations the 1-year bond price 
index instead of the 6-month index.  Why was the 1-year index used?  What is the effect on the EC's calculations of using the 6-month index?  
Response
 
 22. The European Communities used the 1-year bond price index because it was not aware of the 
existence of the latter (the KSDA website is in Korean language).  The 1-year bond price index was 
therefore the closest benchmark available to the European Communities, which was then duly 
adjusted by subtracting the spread between Korean Treasury Bonds 6 months /12 months as provided 
by Bloomberg and suggested by the Consultant
16 in order account for the difference in duration.  
 23. As is explained in more detail in our response to Panel Question 136, the European 
Communities has recalculated the benefit using the 6-months index ( Attachment EC–10 ).  The re-
calculation demonstrates that the difference between  the adjusted 1-year bond price index and the 
6 months index is negligible and still results in a benefit. 
 
Question 136 
  At para. 95 of its oral statement, Korea presents a number of points criticizing the EC calculation methodology, and states that further details are contained in Exhibits Korea 90-102.  
Please respond to Korea's criticism in detail, in cluding with reference to the content of these 
exhibits.  
Response
 
 
24. Korea provides five general criticis ms of the EC calculation methodology.17  These are further 
explained in two exhibits.18 Korea then provides a “Corrigendum” to the EC calculation of benefit 
from pre-shipment loans for each of  the seven shipyards concerned.19 
 25. The European Communities will first address Ko rea’s general criticisms (Section 1).  That 
section explains (supported by a Report from PriceW aterhouseCoopers) why thr ee of these criticisms 
(misapplication of DHI/DSME credit rating, failure to  consider Samho’s collaterals and other factors 
mitigating Kexim’s risks) must be rejected by the Panel.  The European Communities will then 
provide a re-calculation ( Attachment EC-10 ) taking account of  
 
                                                     
 
15 Second written submission by the European Communities, paras. 122 and 123. 
16 Price Waterhouse Coopers report on Pre-shipment loans and APRGs, (Exhibit EC-118) , p.15. 
17 Oral statement by Korea at the second su bstantive meeting with the Panel, para. 95. 
18 Oral statement by Korea at the second  substantive meeting with the Panel, (Exhibits Korea 90-91). 
19 Oral statement by Korea at the second  substantive meeting with the Panel, (Exhibits Korea – 94-
100).  WT/DS273/R 
 Page G-7 
 
 
 ¾ the new information on KSDA 6-month bond yield rates; 
  ¾ the new value of Yangdo Dambo for yard s with investment grade ratings (above 
BBB-);  
 
 ¾ a number of unavoidable calculation mistakes or  otherwise clerical errors pointed to 
by Korea in its Corrigendums (Section 2). 
 26. Section 3 then further comments on Korea’ s corrigendum and notes that even under Korea’s 
calculation there is benefit. 
 
1. EC Response to Korea ’s General Criticisms 
 
27. This Section responds to Ko rea’s general criticisms that: 
 
 ¾ Credit ratings of corporate bonds assigned by other credit agencies to shipyards are 
not comparable to the Kexim’s credit ratings; 
  ¾ The European Communities should ha ve used KSDA 6-months rates; 
  ¾ The European Communities mi sapplied the Yangdo Dambo;  
 
 ¾ The European Communities misapplied the credit rating for DHI/DSME; 
  ¾ The European Communities failed to adjust Samho’s PSL for 100 per cent physical 
collateral; 
 
 ¾ The European Communities failed to consider  the fair value of the other relevant 
factors that have substantial security value 
 (a) Credit ratings of corporate bonds assigne d by other credit agencies to shipyards are 
comparable to the Kexim’s credit ratings 
 
28. Korea states that the corporate bond rating and the KEXIM credit ratings are not directly comparable because:   ¾ the levels of underlying credit risk with in credit rating by KEXIM and corporate bond 
rating agencies are different and; 
  ¾ factors for grading are not alike. 
 29. The European Communities contests these arguments.  
30. One of Korea’s main arguments for saying th at the levels of underlying credit risk within 
credit ratings by KEXIM and corporate bond ra ting agencies are different is according to Exhibit 
Korea – 91  that  
 
corporate bond rating [the rating of a bond i ssued by a company] in Korea could 
actually be considered same with issuer” [t he rating of the company issuing the bond] 
whereas KEXIM ratings were taking into acc ount all the characteristics of the credit 
facility.
20 
                                                      
20 Korea Exhibit – 91 , para . 2 a). WT/DS273/R 
Page G-8  
 
 31. As explained in our Second written submissi on and reconfirmed by PriceWaterhouseCoopers,  
 
Most if not all of the DSME bonds issu ed between 1997 and 1999 had either bonds 
collateral or bank and/or company guarantees. Therefore, the ratings of these bonds 
CANNOT be considered the same as the rating of DSME . The rating of the bonds 
reflects the collateral of the bond emissi ons just as KEXIM ratings reflect the 
collateral of the loans granted.
21 
32. With respect to Korea’s argument looking at  the performance of US privately placed bonds 
versus public bonds22, and considering that “default rate for a bank credit rating is lower than for the 
corresponding corporate bond rating”, the European Communities notes: 
 33.   that credit exposure from investment grade and BB rated private placement loans are 
comparable to credit exposure of public debt w ith the same rating. It  also appears that 
when discussion arises on specific rating, the more pessimistic one is usually the 
one with the highest predictive power . Consequently, the correlation between 
corporate bond ratings and KEXIM ratings, shoul d exist at least for ratings better than 
or equal to BB (as shown by (Exhibit Korea – 93).
23 
34. Also Korea’s argument regarding the specific co llateral(s) and structure(s) of the loans that 
are supposed to be taken into account in the KEXIM rating and not in the CB rating24 fails.  The basic 
principle behind a rating is:  
 
A rating is issued to assess an exposure risk in terms of the repayment capacity of the obligor and will in the case of bond rati ngs (issue rating) take into account the 
existence of all possible collateral. As a result, a private loan and a bond having the 
same ratings will present the same obligor  repayment capacity and the same credit 
exposure risk. Both should therefore be re munerated with the same interest rate.
25 
35. Korea argues in Exhibit Korea - 91  that factors for grading are not alike.  Specifically, Korea 
alleges:    
Banks generally employ so-called 'point in  time' approach,  under which the time 
period for validity of a risk assessment is ge nerally one-year period from  the date of 
assessment" and that "KEXIM is using this  approach to evaluate the borrower's 
'current' conditions" whereas Moody's a nd Standards & Poors (S&P) are rating 
corporate bonds based on through cycle appr oach and are looking  at the worst case 
scenario.
26 
36. This is wrong.  As explained in furthe r detail in the Report by PriceWaterhouseCoopers: 
 
Nowhere in the definition of the rating [as reported by S&P] is mentioned that this 
rating is based on the worst-case scenario. It is based on the creditworthiness of the 
obligor and on the guarantees. Second, when  determining a rating to set an interest 
rate on a loan, we suppose KEXIM looks at mo re than just the "current situation". If 
                                                      
21 Report by PriceWaterhouseCoopers, June 2004 (Exhibit EC-148) , para 2.1.1 p. 4 
22 Exhibit Korea – 91 , para. 2 c). 
23 Report by PriceWaterhouseCoopers, June 2004 para. 2.1.1, p. 5  (Exhibit EC-148) .  
24 Exhibit Korea 91 , para. 2a), b) and e). 
25 Report by PriceWaterhouseCoopers, June 2004, para 2.1.1, p.5 (Exhibit EC-148)   
26 Exhibit Korea-91 , para. 3, d).  WT/DS273/R 
 Page G-9 
 
 
this were not the case, KEXIM wouldn’t have carried on providing loans to 
DSME when it was bankrupt...  And if KEXIM looks at more than the "current 
situation" when a company is close to bankr uptcy, we would expect that it also looks 
at the future when the company is presen ting good results (just in case...). Would it 
not be the case, this would mean that the interest rate quoted on the loan does not 
reflect all the future risks of the loan and as such, would not represent a "normal" 
market rate.27 
37. Moreover, the fact that there are differences between rating practices by banks does not mean 
that the ratings cannot be reconciled.  Pr iceWaterhouseCoopers analyses and concludes: 
 
Where there is disagreement, the more p essimistic rating appears to have more 
predictive power for incidence rates, suggesti ng that investors be attentive to ratings 
assigned by others even when they disagree with such ratings.28 
38. Finally, even using the data provided by Korea in Exhibit Korea-92  – Table 1, and the 
spreads provided by independent credit rating ag encies, PriceWaterhouseCoopers, confirms that 
KEXIM’s P5 rating is comparable to a “BBB”, i.e., investment rating.29  KEXIM’s use of “P5” credit 
ratings (and interest rates) for DSME where inde pendent credit rating agencies assigned a rating of 
amounts to a benefit because it disregarded the actual cr edit risk of the company.  The interest rates 
did not reflect commercial market rates.  (b) KSDA corporate bond yield rates: 1 year versus 6 months  
 
39. The European Communities has explained in  its response to Panel Question 135 why it was 
not aware of the existence of KSDA 6-months i ndex and that it used in good faith the 1-year bond 
price while properly adjusting it.  However, as demonstrated in the recalculation in Attachment EC-
10, the use of the 6-months corporate bond yield rates does not lead to significantly different results. 
 
(c) Misapplication of the Yangdo Dambo   40. Korea argues that the European Commun ities misapplied the value of the Yangdo Dambo.
30  
The European Communities notes that this argument only applies to yards with “investment grades” 
above BBB- and that Korea has to date not provided  the actual adjustments granted by KEXIM for the 
collateral in each case and supported this with ev idence. Instead, Korea relies on values for the 
collaterals as provided by in KEXIM’s interest rate guidelines. 31  
 41. In consequence the benefit calculated for DSME  and Samho is not affected since their ratings 
were below BBB-.  As demonstrated in Attachment EC-10 , even when adjusting its findings, the 
European Communities is still in a position to show benefit.  
 (d) No misapplication of the credit rating for DHI/DSME  42. Korea continues to deny that a corporate bond rating of “C” is the equivalent of KEXIM’s 
credit rating “SM”
32  and presents in Exhibit Korea-92  CB ratings and KEXIM’s Credit rating for 
shipyards.  This is untenable.  KEXIM is free to  use its own credit rating system.  However, as 
                                                      
27 Report by PriceWaterhouseCoopers, June 2004, para. 2.1.2, p. 6 (Exhibit EC-148) .  
28 Report by PriceWaterhouseCoopers, June 2004, para. 2.1.2, p. 6 (Exhibit EC-148) .  
29 Report by PriceWaterhouseCoopers, June 2004 para., 2.2, p. 7 (Exhibit EC-148) . 
30 Exhibit Korea-90, para IV. 
31 Korea’s Responses to Annex V questions, attachment 1.1(15). 
32 Korea’s Responses to Annex V questions, attachment 1.1(15) WT/DS273/R 
Page G-10  
 
explained above and confirmed by PriceWaterhous eCoopers, each bank would take account of credit 
ratings provided otherwise on the market.    43. Korea Information Service is an independent body  providing a C rating on some specific 
debt.  KEXIM’s rating of the shipyard should therefor e have been worse than or equal to the rating of 
the bond (the latter being potentially covered by  guarantees or collateral). On that basis, 
PriceWaterhouseCoopers concluded:  
We would therefore expect the rating of th e shipyard to be SM or worse, based on 
Table 1 (from Exhibit Korea–93 ) and this until November 2001 (see Exhibit 
Korea 92 ).
33 
44. KEXIM did therefore not correctly assess the creditworthiness of DSME.  While Korea 
Information service, an independent body  provided a “C” rating equivalent to a KEXIM “SM 
rating”, KEXIM provides loans provides under the P5 rating conditions.  As explained and reconfirmed by PriceWaterhouseCoopers
34 according to the rating definition comparison, these are 
equivalent of a BBB (investment grade) rating.  
 45. The European Communities, therefore, mainta ins that it correctly applied the “C” rating to 
DSME as provided by the agencies, i.e. a “SM” rating in Kexim’s own credit rating.  46. Korea cannot explain this glaring disregard of market conditions by pointing to the fact that 
KEXIM actively monitors the lenders.
35   As to the monitoring, in particular, of collaterals, KEXIM 
itself admitted that it does not even keep supportin g documents and assessmen ts of the collaterals 
which are essential for a monitoring.36    
 47. Korea also referred at the oral hearing to the “special relationship” between KEXIM and its 
creditors.  That relationship is the core of the EC  complaint against KEXIM.  The special relationship 
between KEXIM and its clients (exporting industry) is laid down by the KEXIM statute itself.  
Because Korea’s shipbuilding industry is more than 90 per cent export oriented, KEXIM has repeatedly identified the shipbuilding industry as its particular target.  Thus, KEXIM stated, for example in its Operations Programme for 1999:  
In order to effectively overcome the As ian Economic Crisis [it shall] support the 
export of capital goods such as ships, indus trial plant, machinery which creates high 
net export earnings and industrial backward-forward effect.
37 
48. Similar language was still found in the 2002 Operating Programme.38  
 
(e) No failure to adjust Samho’s PSL for the 100 per cent physical collateral 
 49. Korea never provided substantiated evidence of  the existence and monitoring of collaterals 
and replied to the Panel
39 that it is not “Kexim’s policy to keep  and maintain any worksheet or similar 
documents” necessary for the consideration of collatera ls.  There is, therefore, no justified reason to 
consider “real property” as covering 100 per cent of the risk.  On the basi s of best information 
                                                      
33 Report by PriceWaterhouseCoopers, June 2004, (Exhibit EC-148) , para 2.2. 
34 Report by PriceWaterhouseCoopers, June 2004 (Exhibit EC-148) , para. 2.2. 
35 Exhibit Korea-91  section e) and Second written submission by Korea, para. 56.  
36 Korea’s Response to Panel Question 67 at the second substantive meeting. 
37 Responses to Annex V Questions (BCI) Attachment 1.1 (10), (Exhibit EC-58) , p. 3. 
38 Ibid. 
39 See Reply by Korea to Panel question 72 following the first substantive meeting.  WT/DS273/R 
 Page G-11 
 
 
available, the European Communities applied the sa me rule as for the Yangdo Dambo adjustment, i.e. 
a 50 per cent of the credit risk spread.  50. Moreover, Korea’s criticism does not relate  to the following two transactions showing 
benefit: 
 
 [BCI:  Omitted from public version.] 
 
(f) No failure to consider the fair value of the ot her relevant factors that have substantial security 
value 
 
51. Korea argues that the PSL payment process allows Kexim to continuously monitor and 
review the financial conditions of shipyards wh ereas the bond holders cannot have such opportunity 
and this should mitigate Kexim's risks.  This argumen t is to a certain extent valid but only if Kexim 
effectively adjusts the credit spr ead following the downgrading of a shipyard financial situation. 
However, this is not the case as already demonstr ated in EC first written submission (para 181) where 
Kexim's Daewoo-SMI/Daewoo-HI risk spread did not change when the credit rating changed from 
BB+ before the workout to C after the workout (for transactions with similar collaterals and duration). 
Furthermore, even if Kexim was really monitoring and managing
 this situation, the impact on the 
credit spread at issuance of the credit would be very limited.   
52. In addition, Korea argues that by virtue of  the disbursement mechanism for PSL, Korea can 
promptly stop disbursing additional instalment s and recover the outstanding loans by disposing 
collaterals and this should mitigate Kexim's risks. Tw o things should be noted here. First, the EC has 
no evidence that Kexim has ever stopped disbursing a dditional instalments when the credit situations 
degraded. Second, Kexim’s credit spreads already t ook into account the existence of collaterals by 
adjusting downward the credit spread (without colla teral); consequently, there is no reason why the 
above disbursement mechanism for PSL should fu rther mitigate Kexim’s risk. Furthermore, the 
argument itself is flawed. In the case of Yangdo Dambo,  the collateral is supposed to increase in value 
as the total amount disbursed increases. The cove rage is supposed to in crease in line with the 
exposure. Stopping the disbursement will not increas e the value of what will be recovered, just the 
opposite as the ship will not be finished  and will be more difficult to sell. 
 
53. Korea argues that the EC failed to consider the collateral value of joint and several personal 
liability guarantees. Contrary to what Korea says the EC has never considered that the collateral value 
of joint and several personal liability guarantees wa s worth nothing. On the contrary, and according to 
PWC’s report
40 the EC considers that joint and several  personal liability guarantees may have a 
certain value but should be carefully assessed as de pending on the credit quality of the individual. 
This is why the value may vary from 0 to 8 (with 10 e qual to the best collateral) similarly to the value 
of a Yangdo Dambo (value from 0 to 7). Needless to add that if the credit quality of the individual is 
poor or if the collateral is not carefully assessed, th e collateral may be worth 0. In addition, as Korea 
confirms in exhibit Korea -90 that “Although KEXIM treated these personal guarantees as if no collateral were provided, it was only due to Kexim’ s policy of evaluating security interests in most 
conservative manner”. In consequence, provided that  Kexim itself treat these collaterals as if no 
collateral were provided and that  Korea never provided any material evidence on the assessment of 
collaterals, the EC has no reason to consider that Kexim’s’ risk should be mitigated.  
 54. Again the EC would like to add that Korea critics the collaterals valuation done by the EC 
without being in a position to give details on Kexim’s’  own calculations or provide material evidence.  
 
                                                     
 
40 Price Waterhouse Coppers report on pre-shipment loans and APRGs, p.15 and 16, (Exhibit EC-
118).  WT/DS273/R 
Page G-12  
 
2. Recalculation taking account of Korea’s criticisms 
 
55. The European Communities submits as Attachme nt EC-10 a recalculation of the PSL benefits 
taking account of the 6-months KSDA bond yield rat es and the new application of the Yangdo Dambo 
value for yards with investment grade ratings.  The recalculation also mends numerous minor errors 
detected by Korea in its Corrigendum
41 unless they are moot.42 
 56. These calculations reveal an important benefit.  
3. Further note on Korea’s corrigendum 
 
57. Finally, the European Communities takes issue with Korea’s assertion at para. 96 of its oral 
statement at the second substantive meeti ng that the evidence demonstrates that  
 
if these corrections are made, none of the seven Korea yards will be found to have 
received benefits from the KEXIM pre-shipment loans even under the EC’s own 
methodology.  According to Korea’s calcula tions, the alleged benefit margins for all 
of the pre-shipment loan projects enumerated  by the EC turn out to be negative or, at 
best, negligible ranging at far less than 1 per cent.
43 
58. What Korea describes as “benef it margins” is the actual difference between the interest rates 
and it implies that anything less than 1 per cent is neg ligible.  First, it should be noted that contrary to 
what Korea alleges, there are nu merous instances of benefit ev en under Korea’s calculations and 
definition of “benefit margin” up to 2.61 per cent.44  However, the European Communities considers 
that benefit is better appreciated when the differen ce is expressed as a proportion of the actual spread 
applied by KEXIM and not as such.  The Europ ean Communities notes that even under Korea’s own 
calculations (which it contests), there are numero us instances, where the difference between the 
market benchmark and the KEXIM rate is more than 30 per cent when expressed as a proportion to 
the KEXIM actual spread rate.45  
 
Question 137 
  Korea submitted evidence (in response to Question 74 from the Panel) that KEXIM 
reduced the credit risk spread for HHI to [BCI:  Omitted from public version].  Did the EC 
apply this [BCI:  Omitted from public version] cred it risk spread in the relevant part of its PSL 
analysis?  Please refer to the relevant calc ulations where this adjustment was made. 
 
Response
 
 
59. Yes, the EC applied the re duced credit spread for HHI of [BCI:  Omitted from public 
version] .46 
 
                                                      
41 [BCI:  Omitted from public version.] 
42 Moot errors concern all errors concerning the yiel ds for corporate bonds 1 year since the adjusted 
benchmark is yields for corporate bonds 6 months. Korea exhibit 94 for Hanjin in which (CB1Y,BBB+) yield on 19/07/2001 is 7.24 per cent and not 7.76 per cent or Korea exhibit 95 for HHI in which (CB1Y,A-) yield on 
12/12/2002 is 5.69 per cent and not 5.91 per cent. 
43 Oral statement by Korea at the second su bstantive meeting with the Panel, para. 96. 
44 [BCI:  Omitted from public version.]  
45 [BCI:  Omitted from public version.]  
46 Table concerning HHI pre-shipment loans project number 000107P (Exhibit EC-125).  WT/DS273/R 
 Page G-13 
 
 
Question 138 
  The EC does not appear to have answered Questions 9 and 11 from the Panel.  The EC's replies referred the Panel to the EC's reply to Question 8.  That reply, however, focuses on 
Kexim’s "practice" of providing APRGs and PSLs, without identifying the APRG and PSL 
programmes "as such", and without explaining how (if at all) they differ from the KEXIM legal 
regime "as such".  Please provide full answers to Questions 9 and 11.  
Response
 
 
60. In Questions 9 and 11, the Panel asked how the EC’s claims against the APRG programme 
and PSL programme as such differ from its claims  against the KEXIM legal regime as such, 
specifically whether the APRG programme is not based on the KEXIM legal regime and whether it is conceivable to assess them differently from each other.  
61. The European Communities agrees that a lthough the KEXIM legal regime and the two 
programmes are distinguishable they are also linked.   62. The two export credit programmes and the bene fits they provide are a consequence of the 
KEXIM legal regime and its requirement to promot e exports and to lend below cost if necessary.   
 
63. The state guarantee, dispensation from paying dividends and the requirement to promote 
exports confer a benefit as such to exporters b ecause they specifically envisage the provision by 
KEXIM of financial services under conditions not offe red by the market.  The existence of such a 
bank is a benefit as it provides economic stability or a safety valve to exporters.   
64. However, these financial services do not neces sarily need to be the APRG and pre-shipment 
loan programmes.  KEXIM could provide export assistan ce to exporters in another form.  It is in this 
sense that the KEXIM legal regime is a sepa rate violation from the two programmes.  
 65. The individual export subsidy transactions are similarly a consequence of the existence of the 
programmes (and thus of the KEXIM legal regime ) but are nonetheless separate, even if linked, 
violations. 
 
Question 139 
  The Panel refers to Attachment 5 to the EC 's replies to the Panel's questions after the 
first substantive meeting, which contains transact ion-specific alleged benefit calculations for one 
PSL and one APRG.  Please make the same calculation for each of the APRGs and PSLs at issue in these proceedings.  In other words, for each shipyard, specify which APRG / PSL relates to 
either LNG, product / chemical tankers, or cont ainer ships, and specify the amount of the 
alleged benefit as a % of the ship price.  Please attach detailed worksheets.  
Response
 
 66. In Attachment EC 5  to the Replies by the European Co mmunities to the Panel’s questions 
after the first substantive meeting, the European Communities produced a calculation of the impact of 
an APRG and a pre-shipment loan in two transact ions.  These calculations were based on the best 
information available to the European Commun ities (ship price, PSL ceiling, commitment date, 
payment terms, expiry date, base rate and spread applied) from which it reconstructed the amount of 
the advance payments.  WT/DS273/R 
Page G-14  
 
67. Korea criticised these calculations for not taking account of certain additional features of these financing transactions.
47 Korea provided in Attachment Korea-4  to its second written 
submission, a recalculation of the impacts of these transactions, including for the first time information about disbursement date and amount.  
68. However, Korea never provided the following information for all pre-shipment loans and 
APRGs:  69. dates and amounts of disbursements under th e pre-shipment loan and exact dates and 
amounts of advance payments benefiting from the APRG or at least ship prices and 
payment terms; 
70. completion date (repayment of pre-shipment loan and end of APRG). 
 71. Since for most transactions, the information on the record is not sufficient to even reasonably 
reconstruct the amounts of the advance payments, th e EC could only make the requested calculations 
for a limited number of transactions.  The Europ ean Communities provides these re-calculations in 
Attachments EC – 11 and 12 .  However, it remains the understa nding of the European Communities 
that there is no obligation or otherwise need to qua ntify the amount of subsidies, in particular under 
the export subsidy claims.  
Question 140 
 
 Please comment on Korea's argument that KEXIM PSLs are made "at rates far higher 
than those the government has to pay for the funds so employed" (para. 277, Korea's first 
written submission).  
Response
 
 72. This statement by Korea implicitly admits  that Kexim’s loans are made from government 
funds.  73. The fact that they are made at rates higher than those the government has to pay for the funds 
(assuming it to be true) does not demonstrate that th ere is no subsidy.  There are costs involved in 
making pre-shipment loans – administrative costs a nd in particular the costs implicit in the risks 
undertaken.  74. In any event, Korea made the above assertion to  invoke the first paragraph of item (k) of the 
SCM Agreement  as a safe haven.  Yet, PSL’s do not fall under the term “export credits” in item (k) 
and the first paragraph of item (k) is not open to an a contrario  reading as its second paragraph 
explicitly sets forth a safe haven.   C. ALLEGED ACTIONABLE SUBSIDIES 
 
Question 141   
  Para. 215 of the EC's first written submi ssion states that "Daewoo" benefited from a 
236 bn tax exemption alleged to be a subsidy.  Para. 226 then refers to alleged benefit to "Daewoo-SME".  Para. 232, however, refers to benefit to "Daewoo-HI/D aewoo-SME".  Please 
indicate precisely which legal entity received / benefited from the alleged tax concession. 
 
                                                     
 
47 Second written submission by Korea, para. 283.  WT/DS273/R 
 Page G-15 
 
 
Response  
 75. Pursuant to the available evidence, the EC understands that the new tax provisions at issue 
“exempt[ed] a workout company from ta xes related to corporate splitting.”
48  Furthermore, Korea has 
confirmed that these provisions exempted the spun- off companies from taxes that they otherwise 
would have been required to pay.49  Thus, the benefit of the tax concession was received by the two 
spun-off companies -- Daewoo-SME and Daewoo-HIM.  76. Please note that the paragraphs mentioned in the Panel’s question refer to the EC’s second  
written submission, not the first written submission as indicated. 
 
Question 142 
  In percentage terms, how much of the alle ged benefit resulting form the "Daewoo" tax 
concession should be attributed to DSME's production of (i) LNGs, (ii) product / chemical 
tankers, and (iii) container ships?  Please attached detailed worksheets. 
 
Response
 
 77. As the tax concession subsidy to Daewoo-SME w as not tied to any particular ship type, it 
should be allocated over Daewoo-SME’s overall sales.     
 
78. In Attachment-13
50, the EC has re-quantified the subsidies received by Daewoo-SME by 
taking into account the tax subsidy, which was be fore erroneously omitted (in Attachment 1 to the 
EC’s response to the Panel questions of 22 March 2004). 
 Question 143   Is it the EC's argument that the tax exemption was determinative in the decision to maintain Daewoo's shipbuilding operations as a going concern, rather than liquidating them?  
If so, where is this reflected in the Arthur Andersen/Anjin report or in other documentation 
before the Panel? 
 Response
 
 79. In any restructuring review, the tax imp act should be carefully assessed.  However, as 
confirmed by PriceWaterhouseCoopers
51, the Arthur Andersen Daewoo-HI workout report made no 
reference to the fiscal effects of th e restructuring.  The report should ha ve calculated the tax to be paid 
following the spin-off without the exemption b ecause the report was issued in November 199952, 
eleven months before the tax exemption was approved.53  If the report had properly calculated the tax 
consequences of the restructuring, it would have  reduced Daewoo-HI’s going concern value by KRW 
236 billion, which is the amount that spin-off compan ies would have owed but for the tax exemption, 
according to Daewoo officials.54  
 
                                                      
48 See Exhibits EC-137 & EC-138 . 
49 Oral statement by Korea of 17 June 2004, paras. 206-208. 
50 Quantification of Subsidies to Daewoo, In cluding Tax Concession (Attachment EC-13). 
51 PriceWaterhouseCoopers June 2004 Report, at Chapter 5 (“Tax Impact on DSME Restructuring”) 
(Exhibit EC-148) . 
52 Second Written Submission by the European Communities, para. 197.  
53 Second Written Submission by the European Communities, para. 221. 
54 Second Written Submission by the European Communities, para. 223. WT/DS273/R 
Page G-16  
 
80. The EC maintains that the tax exemption w as a determinative factor in the decision to 
maintain Daewoo's shipbuilding operations as a going c oncern, rather than liquidating them.  Without 
the exemption, Daewoo’s value as a going concern w ould have been dramatically reduced.  The EC 
also notes that a prudent creditor would have take n into account the tax consequences in making its 
decision whether to opt for liquidation or restructuring.  If the tax exemption were in preparation but 
not yet approved, prudent creditors would have taken into account the risk that the law would not pass 
or at least would not pass expeditiously.  
Question 144 
 
 Para. 162 of Korea's second oral statement re fers to creditors rejecting the initial DHI 
workout proposal.  Were such creditors included in  the EC's claim of government entrustment 
or direction?  If they were entrusted or directed  by GOK, why / how did they reject the initial 
workout proposal?  
Response
 
 81. Korea's second oral statement refers to an article from Seoul Economic Daily News, but this 
article does not identify the group of creditors that allegedly objected to Daewoo-HI’s workout.
55   In 
fact, Daewoo-HI’s workout is referred to only once in the article (p. 2, 3rd paragraph), without 
providing any specific information.  The reference to investment trust companies relates to the 
restructuring of Daewoo Electronics Co Ltd (p. 1, para. 3).  The EC does not, therefore, believe that 
the article supports Korea’s contention.   82. Korea explained in its first written submission,  however, that objections by the investment 
trust companies at the third meeting of the Council of Creditor Financial Institutions (CCFI) related to 
the treatment of a specific loan from 19 July 1999.
56  Indeed, these objection were not linked to the 
more general issue of whether or not to save Daewoo-HI from liquidation, as this issue was pre-determined by the Government’s entrustmen t/direction of the financial institutions. 
 83. In other words, the general plan to restruct ure Daewoo-HI had been agreed to at the third 
CCFI meeting, and the objections at issue related onl y to specific details that were sorted out at the 
fourth CCFI meeting.  This was confirmed by Korea in its reply to the EC during the TBR 
investigation.
57 
 84. As detailed herein, KAMCO eventually  purchased the 19 July loan at a rate [BCI:  Omitted 
from public version]  that was not justified by the circumstances (i.e . non-secured Daewoo-HI loans 
were otherwise purchased at [BCI:  Omitted from public version] .
58  In this way, the Government of 
Korea, KAMCO, and the private creditors worked toge ther to agree on the details of a plan that would 
ultimately save Daewoo-HI from liquidation, regardless of market considerations.  85. In fact, financial institutions were origina lly directed/entrusted by the GOK to provide the 
19 July loan at issue.   The World Bank reported as follows:  
 
When the Daewoo group faced a sever e liquidity problem last summer, the 
government put strong pressure on domestic financial institutions  to purchase 
4 trillion Won of Daewoo CP, backed by  collateral worth 10 trillion Won. With 
falling securities prices, the value of collateral has dropped to one trillion Won . 
                                                     
 
55 See Exhibit Korea-104. 
56 First written submission by Korea, para. 351. 
57 See Daewoo-SME’s February 2001 Response to the Questionnaire intended for the 
Exporter/Producer for Investigation under the Trade Barrier Regulation, (Exhibit-EC 55) , at p. 29. 
58 See reply to question 30 of Korea's Annex V main response at page 80 (Exhibit-EC 39) .  WT/DS273/R 
 Page G-17 
 
 
KAMCO has offered to pay domestic financ ial institutions 80 per cent of the face 
value of the CP, but the financial in stitutions strongly oppose the 20 per cent 
discount. Because of their weak financia l conditions, many of the financial 
institutions are not in a position to absorb  these additional losses and would require 
government help. (emphasis added)59 
86. [BCI:  Omitted from public version.]60  Thus, investment trusts were directed/entrusted to 
provide a loan on the basis of security of questionable value.  When the investment trusts realised that 
the security was reduced to a quarter of the original  value and that the loan became unsecured, they 
raised a specific objection at the third CCFI meeting.  [BCI:  Omitted from public version.]     
 
87. In particular, Korea confirmed61 that at the 4th CCFI meeting held on 26 November 1999 (NB: 
merely 2 days after the 3rd CCFI meeting), the investment trusts  
 
[BCI:  Omitted from public version.]62 
88. Consequently, the loan was purchased by KAMCO at [BCI:  Omitted from public version]  
its face value, just as would a fully secured loan.63  Interestingly, following KAMCO’s purchase of 
the loan from investment trusts64, its fate changed once more and it was eventually (1 year later at the 
17th CCFI meeting of 6 December 2000) swapped as non-secured.65  
 
Question 145   
 
 The EC requests an adverse inference regarding Korea's alleged failure to provide a 
copy of the workout plan / report submitted by  KDB on 24 November 1999.  Please comment on 
the explanation set forth at paras 194 and 195 of Korea's second oral statement.  If the EC still maintains its request, what is the legal basis for that request?  Why does the EC consider that Korea should have made this report available to the EC / Panel earlier? 
 Response
 
 89. Korea contests the use of a dverse inferences regarding its failure to produce KDB’s workout 
plan, alleging that it was presented to the EC during the TBR investigation, an d that the EC has used 
this information in Exhibits EC-55 to EC-57 .  
 
90. Korea is incorrect.  The exhibits in ques tion contain only the Memorandum of Understanding 
signed by financial institutions on 20 January 2000,  but do not include the KDB workout plan of 
24 November 1999.  This plan h as never been submitted to the EC. 
 
91. Adverse inferences are justified in this case,  as Korea revealed the existence of the KDB 
workout plan only after the EC had highlighted that the Arthur Andersen report was issued on the very same day (24 November 1999) as the restructuri ng decision.  Korea argued that Arthur Andersen 
had supplied KDB with a preliminary report on 30 Oc tober 1999, and that creditors were therefore 
aware of the essence of the report in advance of th e 24 November meeting.  However, Korea has now 
                                                     
 
59 See World Bank report on Korea (18 September 2000). (Exhibit-EC-149).  
60 See reply to question 2 of Korea’s Annex V main response, at p. 59 (Exhibit-EC 39) . 
61 See reply to question 25 of Korea’s Annex V main response, at p.  76 (Exhibit-EC 39) . 
62 See reply to question 25 of Korea's Annex V main response, at p. 77 (Exhibit-EC 39) . 
63 See reply to question 2 of Korea’s Annex V main response, at p. 60 (Exhibit-EC 39) . 
64 KAMCO purchased the loan from the investment trusts before the spin-off of Daewoo-SME and the 
completion of the debt-to-equity swap which was completed on 14 December 2000.  See First written 
submission by Korea, at para 360, and Attachment 3.1(2) of Korea’s Annex V response (Exhibit-EC 150) . 
65 See reply to question 25 of Korea’s Annex V main response, at p. 78 (Exhibit-EC 39) . WT/DS273/R 
Page G-18  
 
made clear that the Arthur Andersen report was not the actual workout plan voted upon by the creditors.  Paragraph 194 of Korea’s second oral statement confirms that KDB proposed a “workout 
plan to the 3
rd CCFI meeting for deliberation and adoption by the creditor financial institutions, and 
that this Daewoo-HI workout proposal was, of course, based on the Arthur Andersen report”.  
 
92. Independent of any adverse in ferences, the EC wishes to emph asise the implication that the 
creditors did not seriously consider rejecting the reorganisation, given that they were required to 
decide upon Daewoo-HI’s workout plan  after having been presented w ith the plan (as opposed to the 
Arthur Andersen report) on the same day that they voted on the plan.  
93. By contrast, as confirmed by Korea, independent  investors that considered whether to obtain a 
stake in Daewoo-HI prior to its collapse (February - August 1999)  “needed considerable time to 
negotiate for sale of such a big business as DHI’s  shipbuilding division”  and “could not have 
completed their due diligence investigations by the time that the Daewoo- HI workout commenced.”
66 
Consequently, Korea’s explained that “all negotiatio ns for the sale of the shipbuilding division was 
halted since no investor would invest in the shipbuild ing division in light of the financial uncertainty 
during the workout procedures”.67 
 94. This difference in approach casts heavy doubt up on Korea’s statements that (with or without a 
KDB plan) Korean creditors took important restruct uring decisions during this short period (24 to 
26 November) pursuant to market considerations.  
 
Question 146 
  In response to Question 23 from the Panel, the EC asserts that "[t]he existence of a 
going concern analysis can be an indicia that a hypothetical private creditor would have acted 
in the same manner."  Does the EC accept that  the individual components of the Daewoo 
workout can be assessed on the basis of the Arth ur Andersen report?  If the Panel rejects the 
EC's argument that the Arthur Andersen report incorrectly determined that the going concern value of DHI exceeded its liquidation value, does this necessarily mean that the Panel should reject the EC's claims regarding the individual components of the workout?  Please explain. 
 
Response
 
 95. The individual components of the Daewoo workout (i.e. debt-to-equity swap, debt rescheduling, and spin-offs) were simply the vehi cles proposed by Arthur Andersen for ensuring the 
viability of the spun-off companies Daewoo-SME an d Daewoo-HIM after the report established that a 
restructured Daewoo-HI would not be viable as such. 
 96. However, the EC has submitted evidence
68 that shows that the Arthur Andersen Report 
contained important “uncertainties” which cast doubt upon the finding that, under normal market 
conditions, the going concern value of Daewoo-HI was hi gher than its liquidation value.  In particular, 
as stated in the report by PriceWaterhouseCoopers, “a bank faced with the decision to go either for the 
liquidation scenario or the going concern scenario, w ould require more in de pth understa nding of the 
competitive positioning of the respective companies a nd impact thereof on the various cash flow 
scenarios before taking a final decision. That info rmation is not provided by the Arthur Andersen 
report”.69  Thus, a prudent creditor, even before addr essing the individual components of the Daewoo 
workout, would have questioned the premise that the going concern value of Daewoo-HI was higher 
than its liquidation value. 
                                                      
66 See reply to question 9 of Korea’s Annex V main response, at p. 68 (Exhibit-EC 39) . 
67 See reply to question 9 of Korea’s Annex V main response, at p. 68 (Exhibit-EC 39) . 
68 See PriceWaterhouseCoop ers Analysis of the Arthur Andersen Report (Exhibit EC-112) , at p. 2.  
69 See PriceWaterhouseCoop ers Analysis of the Arthur Andersen Report (Exhibit EC-112) , at p. 3.  WT/DS273/R 
 Page G-19 
 
 
 97. Nevertheless, even if the Pa nel rejects the EC's argument that the Arthur Andersen report 
incorrectly determined that the going concern value of Daewoo-HI exceeded its liquidation value, this 
does not mean that the Panel should reject the EC's claims regarding the individual components of the 
workout.  Indeed, a subsidy can still be granted to a company even where the decision to restructure is 
market-based. The terms of the restructuring, such  as the amount of debt remaining in the shell 
company, the amount of debt in the spin-off compani es and the price at which debt is to be converted 
to equity are decisions that can lead to a benefit fo r the recipient if they are more favourable than what 
would be obtained on the market.  Question 147    The EC asserted at the second meeting that creditors should have got more out of the Daewoo debt/equity swap.  How could creditors have  got more?  Who / what benefited from the 
fact that they did not? 
 Response
 
 98. The creditors of Daewoo could ha ve recovered more of the debt owed to them if they had not 
agreed to go along with the restructuring in  the first place.  As the EC’s consultant, 
PriceWaterhouseCoopers, has determined, that  under scenarios, the liquidation option was 
economically preferable to reorganisation.
70  The fact that the creditors did not demand liquidation 
conferred a benefit on Daewoo, which was able to stay in business. 
 99. In addition, once the creditor s accepted restructuring, they failed to demand terms that would 
maximise their recovery, as creditors normally would in a free-market system.  As the EC has 
explained, these creditors, which are public bodi es and entrusted or directed private bodies, 
participated in the debt for equity swap on non-market  terms.  As detailed in Attachment 1 to the EC’s 
response to the Panel’s questions following the firs t meeting of the Panel, the value of the debt 
forgiven by the creditors significantl y exceeded the value of the equity received by them in exchange.   
 100. The creditors could have mini mised their losses by either refu sing to accept restructuring or, 
once they accepted restructuring, by refusing to swap  their debt for less valuable equity.  The two 
spun-off companies -- Daewoo-SME and Daewoo-HIM – benefited from the creditors’ losses, without 
which they would not have survived or  would have had a high level of debt. 
 
Question 148 
 
 The EC proposes an outside investor standard when challenging the reorganization of Samho.  This contrasts with the position taken by the EC in the GATT case concerning 
United States - Imposition of a Definitive Countervailing Duty on Imports of Certain Steel Products Originating In France, Germany, and the United Kingdom.  Why has the EC changed 
its position on this issue?  Why does the EC no w consider that the outside investor standard is 
preferable to the inside investor standard?  Please explain. 
 
Response
 
 101. The concepts “outside investor” and “inside investor” are not used in the SCM Agreement .  
The European Communities considers that the appropr iate benchmarks for assessing the presence of a 
subsidy is market-based or commercial behaviour, whatev er that may be in relation to the facts of the 
case.   
                                                     
 
70Second written submission by the European Communities, para. 194, citing Exhibit EC-133  at p. 3. WT/DS273/R 
Page G-20  
 
102. As the European Communities explained at pa ra 245 of its second written submission, there 
were, in relation to Samho, no “inside investors” that were free form government control and so the 
question does not in fact arise.  103. In that respect, the European Communitie s wishes to respond to Korea’s second oral 
statement
71 that it has failed to identify which creditors  of Halla were under government control. The 
European Communities has relied on the informati on provided by Korea in the Annex V procedure72 
which showed that government owne d or controlled secured creditors73  had a ratio exceeding by far 
the required 75 per cent 74 and could effectively decide on the restructuring as they saw fit. 
Considering that these creditors were also the cred itors which participated at the DHI restructuring 
there was no need for repeat statements; th e European Communities has submitted extensive 
information showing government control over these entities.75 76 
 104. The European Communities comments on the relevance of the GATT case referred to in 
response to Question 172 below. 
 
Question 149 
  If the Panel were to reject the EC's clai m of government entrustment / direction of 
private creditors, would this mean that tho se private creditors provide a reliable market 
benchmark for determining whether or not the restructurings at issue conferred a benefit?  
Please explain.  Did the EC address this issue in its previous written and oral submissions to the 
Panel.  If yes, please indicate precisely where it did so.  
Response
 
 
105. As summarised in paragraphs 49-50 of the EC’s  Oral Statement of 17 June 2004, the EC has 
presented powerful evidence to demonstrate that the pr ivate creditors were entrusted/directed by the 
Government of Korea.    106. If the Panel were to disagree with the Eur opean Communities on this point, this would not 
mean that the actions of the private creditors coul d be considered a “reliable market benchmark.”   
 
107. Article 1 of the SCM Agreement  does not make “directed or entrusted” by the government 
equivalent to non-commercial.  Therefore, even it cannot be demonstrated that private bodies were not 
“directed or entrusted”, it may still be that their actio ns do not constitute a reliable market benchmark.  
The question of whether there has been a financial contribution by an entrusted/directed private body 
in Article 1.1(a) is distinct from the issue of whether a benefit has been conferred pursuant to 
Article 1.1(b).  108. The tremendous government influence over the ac tions of private creditors (even if the Panel 
were to find that it does not rise to the level of entrustment/direction), certainly raises strong doubts as 
to their ability to act acco rding to market considerations (as is required for a valid benchmark).  Thus, 
the Panel would still be required to look elsewhere  for a market benchmark -- either to foreign 
investors, outside investors, or another reliable source. 
                                                     
 
71 At para 211 
72 See Korea Annex V response to question 42 at page 85 (Exhibit EC 39) . 
73 KEB, Kexim, KDB, Seoul Bank, CHB, Kamco had jointly 87.81 per cent of the secured loans. 
74 See Korea Annex V response to question 45 at page 88 (Exhibit EC 39) . 
75 See Attachment 3 to EC’s Answers to Panel question 17 of 22 March 2004 
76 Unsecured creditors were obviously not an obstacl e to the restructuring as most of the unsecured 
loans were held by other Halla group companies, See Korea Annex V response to question 42 at page 85 
(Exhibit EC 39) .  WT/DS273/R 
 Page G-21 
 
 
 
Question 150 
  Regarding the EC's Question 33 to Korea a fter the first substantive meeting, please 
explain why, if at all, the value of Samho's construction business is relevant to the present 
proceedings. 
 
Response
 
 109. Up until now, Korea has provi ded discounted cash flow valuation or going-concern value for 
the shipbuilding business of Halla -HI, but has provided only the liquidation value for Halla-HI’s other 
businesses divisions (plants and constr uction heavy equipment).  In order to further assess whether the 
restructuring plan was made pursuant to market c onsiderations (i.e. whethe r the going-concern value 
exceeded the liquidation value), the EC wanted to  compare liquidation and going-concern value for 
the same entities. This is why the EC asked Korea to provide the valuation report in its entirety. 
 
Question 151  
  Korea asserts that the share of debt he ld by the foreign creditors who failed to 
participate in the Daewoo workout was around [B CI:  Omitted from public version].  Is it 
reasonable to expect a panel to condemn a rest ructuring on the basis of the behaviour of 
creditors holding only [BCI:  Omitted from public version] of the debt?  
Response
 
 110. Under ordinary market conditions, the fact  that foreign creditors had rights to only 
approximately 3 per cent of the debt would result in  the Government of Korea being little concerned 
with their reaction, given that foreign creditors did not have sufficient interest to block a vote on reorganisation – i.e. more than 25 per cent of the vot es.  Yet, as detailed in  paragraphs 189-191 of the 
EC’s second written submission, the Government reali sed that it had to pay special attention to the 
foreign creditors because -- being outside the scope of the Government’s influence -- they might vigorously attempt to disrupt the pre-determined pr ogression to reorganisation.  In fact, the EC has 
provided evidence that the Government  of Korea  and the foreign creditor banks entered into 
negotiations to avoid this situation.
77 
 111. Accordingly, the foreign creditors are the b est available benchmark against which to judge 
whether the restructuring was market based and the level of the resulting benefit.  
 
Question 152 
  Regarding the Daewoo workout, the EC makes various arguments regarding the purchase of debt and bonds by KAMCO.  It is unclear whether these arguments support a 
separate claim regarding the KAMCO rates, or whether those arguments are made in support 
of the more general claim concerning the use of  foreign creditors as the market benchmark.  
Please explain.  
Response
 
 
112. The EC has made these arguments in support of the more general claim concerning the use of 
foreign creditors as the appropriate market benchmark.  
                                                     
 
77 Second written submission by the European Communities, para. 189, quoting (Exhibit EC-132) . WT/DS273/R 
Page G-22  
 
113. The EC has explained the multiple roles pl ayed by KAMCO in the restructuring process, 
serving as a vehicle for providing funds to cash-hungry creditors of Daewoo-HI, and as a Daewoo-HI creditor, itself.   114. In its answer to question 14 by the Panel, the EC explained that, in the Letters of Intent dated 
on or after 13 November 1998, the Government of Korea stated as follows: 
 
In order to enhance the incentives for banks  to participate fully in the corporate 
restructuring process, no public funds, whether by way of KAMCO purchases  or 
capital injections or other means, shall be  made available to banks which are not 
certified by the FSC to be performing their role in the corporate sector restructuring 
process.”
78 (emphasis added)  
115. Moreover, in its reply to question 20 of th e Panel, the EC summarised KAMCO’s role as 
follows:  
 KAMCO’s purchase of more than [BCI:  Omitted from public version]  of DHI non-
performing loans provided a benefit to the restructured Daewoo Shipbuilding Company, because:  
  ¾  it cleansed the balance sheets of DHI credito rs which could not otherwise have agreed 
to proceed to a debt/equity swap given their precarious situation; 
 
 ¾  it enabled a public body (KAMCO) to swap debt for up to [BCI:  Omitted from 
public version]  of DSME’s capital; and  
  ¾  it allowed a substantial amount of DHI debt to remain idle in the hands of KAMCO 
until it is resold as opposed to remaining in  the hands of creditors which would have 
pursued all available legal means to obtain repayment including through the 
liquidation of troubled borrowers.  
  (footnotes deleted)  116. These arguments support the claims of direc tion and entrustment of private creditors, as 
KAMCO’s purchase of non-performing loans by Daewoo-HI creditors, and its participation in the 
Daewoo-HI restructuring were clearly ma ndated by the Government of Korea. 
 
Question 153 
 
 Please comment on Korea's argument (at para. 191 of Korea's second written 
submission) that the EC, in its response to Question 22 of the Panel (which concerned the "alleged specificity of the corporate restructuring" generally
), allegedly concedes that the Court 
supervised corporate reorganizations undertak en by Halla and Daedong were not specific 
"because these companies seemed to have disappe ared and the EC answers the question only in 
regards to DHI". 
 Response
 
 117. The EC continues to maintain the reasoni ng presented in its (1) First Written Submission 
(paras 350-354 and paras. 380-384), and (2) Second Written Submission (paras. 248-252 and 
paras. 268-269) demonstrating that the corporate reorganisations of Halla and Daedong were specific 
within the meaning of Article 2 of the SCM Agreement .    
 
                                                     
 
78 (Exhibit EC-36) .  WT/DS273/R 
 Page G-23 
 
 
118. The specific references to Daewoo in response to Question 22 were made by way of example, 
and the EC was careful to include “e.g.” to reflect th is throughout its response.  If the EC had decided 
to take the dramatic change of position alleged by Korea, it would have certainly made this clear 
through an affirmative statement to that effect.    Question 154     Regarding the STX reorganization, we note that the debt rescheduling / exemption from 
interest is the sole element identified by the EC when calculating the amount of alleged benefit in Annex 3 of Attachment 1 to its replies to quest ions from the Panel after the first substantive 
meeting.  We further note that the EC's rebutta l submission does not refer to the other elements 
of the restructuring identified in its first written submission, such as the issuance of bonds by Daedong.  Does the EC still claim that the oth er elements of the restructuring, including the 
bond issuance by Daedong, constituted a subsid y?  If so, why were they not included in the 
abovementioned Attachment 3? 
 Response
 
 119. The EC maintains that the sole element iden tified as a benefit is the debt rescheduling and 
exemption from interest, as provided in Annex 3 of A ttachment 1 of EC’s reply to questions from the 
Panel after the first substantive meeting.   
 
D. SERIOUS PREJUDICE 
 
Question 155  
 The EC has indicated that the Panel should determine the existence of price 
suppression/depression separately for LNGs, prod uct/chemical tankers, and container ships.  
  (a) Does this mean that the EC is asking the Panel to issue three separate serious 
prejudice rulings, on LNGs, product/chemical tankers, and container ships, respectively?   
 
 (b) If not, please explain.  
Response
 
 
120. Serious prejudice must be to the interest of a WTO Member and there is not therefore any 
need for three separate serious prejudice findings.   121. The serious prejudice finding that is requested should be based on price suppression and/or depression in the three product markets each of which is a global geographical market.   Article 6.3 of 
the SCM Agreement refers to "serious prejudice . . . where one or several of the following apply".
79  
Just as serious prejudice can be determined based on  various combinations of Article 6.3(a), (b), (c), 
and (d) – serious prejudice may also be based on multiple findings of price depression and/or 
suppression in the global market (albeit in three different sub-markets of commercial vessels).  Moreover, Article 6.3(c) re fers to the "effect of the subsidy," wh ere subsidy is singular.  The subsidies 
at issue in this case were granted to shipyards that produce a variety of commercial vessels.  In this 
way, the same subsidy caused price suppression and/or depression in the three product markets at 
issue.  Thus, there is no need for three separat e serious prejudice findings in this dispute. 
 
                                                     
 
79 Emphasis added. WT/DS273/R 
Page G-24  
 
Question 156 
  In the information before the Panel, incl uding the Annex V information, are there 
additional examples (beyond those already referred to in the EC submissions) of bids by Korean 
shipyards, for which EC shipyards also are bidding, and where in the view of the EC the 
Korean yards have led prices downward. 
 
Response
 
 122. The EC submitted, in the framework of the Annex V proceedings, various examples of 
instances when EC yards offered a price, but the orde r was ultimately secured by a Korean shipyard at 
depressed prices.  123. The relevant documents ar e included in the EC’s responses to question 7 by Korea (and 
relevant annexes 7.1 to 7.17) from the Annex V procedure.  
 
124. The EC particularly wishes to point out the example in annex 7.3, in which the broker clearly explained that the guideline in terms of prices c onsists of the newbuilding price in Korea.   
 125. More specifically, with respect to price de pression in the LNG segment, see bullet point C 
(and relevant annexes 7.13 to 7.17) of the EC’s re plies to question 7, as well as the annex 8.C, which 
includes an explanation as to how prices were le d downwards by Korean yards in that segment. 
 
Question 157 
  (a) In the information before the Panel, including the Annex V information, are 
there examples/evidence of instances in which EC shipyards have considered, 
but declined to, bid due to low preva iling prices?  For example, can the EC 
provide records of instances in which an EC yard was contacted by a ship 
broker concerning the possibility of bidding, but decided not to do so because of 
low prices. 
 
 (b) In any such instances, does the inform ation before the Panel contain evidence of 
Korean pricing/bidding for the same sale? 
 
Response
 
 
126. As previously explained by the EC, the major part of the correspondence between ship 
owners, brokers and shipya rds takes place on an informal basis.  Therefore, documentary evidence in 
many cases does not exist.  In addition, most shipyards usually do not keep faxes or other 
correspondence received from brokers concerning th e possibility of bidding for projects on which 
they eventually decided not to submit an offer (whe ther for price reasons or otherwise).  Finally, no 
such examples/evidence were requested in the frame work of the Annex V procedure, and thus they 
were not submitted at that time.  
 127. For those reasons, the EC is not in a position to provide examples other than those referred to 
in the reply to Question 156, above.  Question 158   (a) Is it the view of the EC that excess shi pbuilding capacity exists only in Korea, or 
is there also excess capacity in other countries?   
 
 (b) If your view that excess capacity ex ists only in Korea, please explain.    WT/DS273/R 
 Page G-25 
 
 
 
 (c) If your view is that there is excess capa city also outside of Korea, where and how 
much is the excess?   
  (d) Is there any excess shipbuilding capacity in the EC?  If not, what is the basis for 
this conclusion? 
 
Response
 
 
(a)-(c): 
 
128. The development of capacity is discussed in  “Overview of the International Commercial 
Shipbuilding Industry”, section 5.2, page 14 ( Exhibit EC-1 ), which also provides estimates of 
shipbuilding capacity by region, based on OECD report C/WP6/2001/6.80 
 
129. As shipbuilding is an integrated world market, i.e. any owner can buy at any yard, and sales 
are determined by market considerations (with  the exception of the US Jones Act), the world 
shipbuilding capacity also must be seen in this way.  As with the shipbuilding market, shipbuilding capacity can be regarded as something of a contin uum, and it is therefore meaningless to say that 
shipbuilding overcapacity exists only in Korea.  However, as described in Exhibit EC-1  and the 
OECD report referred to therein, the problem of ove rcapacity has long been known, but this has not 
stopped the Korean shipyards from massive expansion in recent years.  Indeed, the OECD found that 
shipbuilding capacity in the 1990s had been increased primarily by Korean shipyards.
81  T h i s  
expansion has been aimed at the pursuit of volume w ith the aim of reducing unit costs.  It is this 
expansion that is at the core of the accusations that Korea is responsible for global overcapacity, not 
only by the EC and FMI, but also by most industry an alysts.  This was detailed in Attachment EC-8 to 
the EC’s second oral statement.82  For example, a January 1999 report by Drewry explained as 
follows:    
Economic growth in South Korea until r ecently was based on an open understanding 
between the Government, which planned whic h industrial sectors should be entered, 
and the banks, which would provide capital fo r investment at ra tes more favourable 
than the financial markets would warrant to a small group of very powerful 
conglomerates (the chaebols).  As with the Japanese, the chaebols’ main objective 
was to increase market share in  their chosen sectors, rather than to ensure profitability 
and returns to shareholders.  This formul a led to a massive increase in shipbuilding 
capacity as well as in car manufacturing, and mi cro chip plants (it is notable that all 
these industries are now faced with oversupply of capacity, and ensuing low prices, 
and low profitability world wide).
83  
130. In an integrated market, capacity reductions in one region cannot have a positive effect on the 
world market if additional capacity is created at the same time in another region.  If the new additional 
capacity in Korea exceeds the reductions in the EC (as it did), the new EC shipbuilding capacity 
would also appear to exceed actual world-wide de mand, although the market distortion originated in 
                                                      
80 OECD, Evaluation of World Shipbuilding Capacity (2000 Revision), C/WP6(2001)6  (29 May 2001)  
(Exhibit EC-151) . 
81 OECD, Evaluation of World Shipbuilding Capacity (2000 Revision), C/WP6(2001)6 (29 May 2001), 
at para. 55 .  (Exhibit EC-151) . 
82 “Detailed Rebuttal of Exhibit Korea-70”, p. 3 at  para. 16, & page 4, at para. 23 – Attachment EC-8 
to EC’s second oral statement. 
83 “Detailed Rebuttal of Exhibit Korea-70”, p. 3 at  para. 18 -- Attachment EC-8 to EC’s second oral 
statement. WT/DS273/R 
Page G-26  
 
Korea. Consequently, the EC views the reduction of  non-viable capacity (i.e. the capacity of failed 
yards) as the only meaningful way to address the problem.   131. In the EC, this has led to a series of yard closures and company restructurings (typically going along with capacity reductions) since 1975.  In Jap an, shipbuilding facilities have been mothballed. 
Contrary to these developments, Korea has expande d shipbuilding capacity since the early 1990's.  
 132. Capacity control measures enforced by th e main shipbuilding blocks have included the 
following:  
 ¾ In the EU, shipbuilding directives in force from the mid-1980’s until the end of 2000, 
in particular the fifth, sixth and seventh directives, limited the level of assistance that 
governments could offer to shipyards, while  at the same time strictly controlling 
capacity development. Ailing shipyards c ould not be rescued, and new shipyard 
facilities had to demonstrate that they did no more than replace existing capacity that 
had to be removed from the market as the new facilities came on stream. 
  ¾ In Korea, the shipbuilding industry had been previously regulated by the Shipbuilding 
Industry Rationalisation Law, implemented in  1988 by the Ministry of Trade and 
Industry.  This law froze the developmen t of new facilities and banned low-priced 
bookings.  The overall aim was to improve competitive conditions.  The law was 
repealed in December 1993, followed by unrestrained capacity expansion. 
  ¾ Japan has been controlling capacity since 1950, through the “Zosen Ho” shipbuilding 
law which restricts construction of sh ips over 500GT or 50m length.  Other 
legislation enacted in 1953 enables the government to monitor and control production 
volume before the commencement of work, applying to ships of over 2,500 GT or 
90m length, regardless of whether they are domestic or export contracts.  These 
legislative controls remain in force today,  to be exercised when market and economic 
conditions dictate. 
 
(d): 
 
133. In addition, the EC would like to emphasise that Europe has experienced capacity reductions, 
with 90 per cent of the workforce being shed sin ce 1975. Shipyards continue to be forced into 
bankruptcy, leading to their permanent closure.  Th is market mechanism regulates capacity in the EC.  
By contrast, no shipyard has ever closed due to market forces in South Korea without being re-
opened. 
 
Question 159 
  The Panel's written question 30 followi ng the first meeting was as follows: 
 
 "In general, how much flexibility does a typical shipyard have to produce all or a broad 
range of ship types?  What are the physical and other constraints on any given shipyard's 
potential product range?  How important is prio r experience to a shipyard's production cost 
and capability to build a particular type of sh ip?  With reference to the above considerations, 
please describe the capabilities and experience of  each EC shipyard that produces or is capable 
of producing some or all of the kinds of commercial vessels cited in your serious prejudice 
claim ." 
  Please present a summary of any informatio n already before the Panel, including the 
Annex V information, that is relevant to this po int but was not referred to in the EC's original 
answer to this question.  WT/DS273/R 
 Page G-27 
 
 
 
Response  
 134. The flexibility of shipyards and the nature of constraints is discussed in section 4 of the “Overview of the International Commercial Shipbuilding Industry”, Exhibit EC-1 . 
 
135. The order books of the major shipyards show  a wide range of ship types under production 
(see, e.g. , Clarkson World Shipyard Monitor).
84  Within the constraints d escribed in the EC's answer 
to Question 30 by the Panel and in Exhibit EC-1 , yards maintain the capability to design and build all 
kinds of sea-going vessels. Exhibit Korea-70 (the "D rewry Report") provides a wealth of statistical 
information that shows that EC yards are active in all contested market segments (see, in particular, 
chapters 5-7).  Section II(C) of the EC's First Wr itten Submission describes the portfolios of the major 
EC yards, demonstrating that these yards produce a wide range of ship types.  
Question 160 
 
 Concerning the composite ship newbuilding price index furnished by the EC, the EC indicates that major shipbuilding consultants al so maintain "more speci fic price information 
for particular ship types".  In Attachment 2 to its answers to questions, the EC provides price 
information for two sizes of tankers and for eight sizes of container ships. 
 
 (a) Is this the "more specific" info rmation to which the EC refers?   
  (b) Why does the EC show the particular  breakouts that it does?  Do other 
breakouts exist for these products?  Please explain.  
 
Response
 
 
(a): 
 
136. The most commonly used source of newbu ilding prices is “Clarkson World Shipyard 
Monitor”.85  The section of that publication entitled “Shipbu ilding Price Trends”, at page 8, provides 
the most comprehensive overview of prices available, and is the source of price data presented in the 
EC’s attachments.  A more detailed time series of prices reported by this publication can be found in 
Exhibit EC-146 , “FMI June 2004 Report, technical support to the WTO hearings”, submitted with 
the second oral statement, at page 5.  (b):  
 
137. The specific breakouts were chosen by the EC  because they corresponded to the available 
information on Korean costs from the cost monitori ng exercises, which enabled cost and price indices 
to be shown together for Korea.  The cost inform ation is ship-type specific, and cost/price indices 
have not been created for the full range of products.  
 
Question 161  
  The EC presents indices of estimated Korea n production costs versus prices in support 
of its argument that there is price suppression/depression.  The EC indicates that its consultant, 
FMI, prepared the cost estimates, taking into  account various known cost trends and cost 
advantages of the Korean yards.  The EC in its answers to questions following the first meeting 
provided a description of the methodology used by FMI to prepare these estimates.  The EC also 
                                                     
 
84 Clarkson World Shipyard Monitor (Exhibit EC-152) . 
85 Clarkson World Shipyard Monitor (Exhibit EC-152) . WT/DS273/R 
Page G-28  
 
indicated that, should the Panel so request, it wo uld furnish the detailed underlying data.  Is it 
the view of the EC that a graphical presentation of price indices, along with a description of methodology, constitutes prima facie evidence of evolution in Korean shipbuilding costs?  Please 
explain. 
 Response
 
 138. The EC has provided a graphical presentation of price and cost indices to provide, in an easily-viewed form, a summary of the detailed data that its consultant, FMI, has collected during 
years of intensive research and investigation.  In particular, the EC has monitored prices and costs in 
Korean yards for almost 5 years,  leading to seven shipbuilding market reports that have been 
presented to the Panel.
86   
 139. The cost analyses by FMI, which are project-sp ecific, take account of all relevant cost factors 
in shipbuilding, and are regularly updated.  Natura lly, these forward cost estimations are complex and 
require a sound understanding of th e shipbuilding process with its numerous intermediate steps.  
 140. The EC encloses a sample of such a detailed cost estimation, concerning a LNG carrier order 
at Daewoo.
87  The spreadsheet shows the various cost cat egories and the details of the estimations 
made. In total more than 60 such cost estimations ha ve been made for orders placed in Korean yards, 
and each analysis would concern a number of vessel s as typically ships are ordered in short series. 
The EC took great care to investigate orders that are typical for the production of Korean yards, in 
order to arrive at a conclusive picture. More deta iled cost estimations can be made available to the 
Panel upon request.  141. The analyses undertaken have led the EC to conc lude that prices offered by Korean yards are 
not in line with costs of production, and that this gap is widening. 
 142. It is not the EC's assumption that cost de velopments can be derived from price indices.  
Rather, the EC sees prices and costs in Korean shipbuilding as being disconnected, as Korean yards 
tend to offer the price that gets them the order a nd fills their shipbuilding capacity, but that does not 
necessarily reflect the full costs of production.  Cons istently low prices at a time of rising costs are a 
clear indication of behaviour that leads to price suppression and price depression. 
 
Question 162 
  What specific evidence/examples are containe d in the information before the Panel in 
support of the EC argument that prices at on e end of the product spectrum for a particular 
kind of ship influence prices along the entire spectrum?  (For example, is there specific evidence in the information before the Panel that a down ward movement in very large container ships 
brings about commensurate downward movement  in all smaller sizes of container ships?) 
 
Response
 
 
143. The best evidence for this can be seen in Exhibit EC-146 , “FMI June 2004 Report, technical 
support to the WTO hearings”, submitted with th e second oral statement (Figure 1, page 5).  
Shipbuilding prices tend to move in unison, with some variation.  Th is can also be seen in the graph 
                                                      
86 Responses by the European Communities to Annex V Questions, Annex 10c containing the 
seven Commission reports to the Council on the situation in world shipbuilding. 
87  Cost Moedelling Details Angelicousis LNG Tanker at Daewoo  (Exhibit EC-156) .  WT/DS273/R 
 Page G-29 
 
 
on page 8 of the Clarkson World Shipyard Monito r, clearly showing tanke r prices moving together, 
regardless of the size of the ship.88   This is discussed further in  response to Question 163 below. 
 144. Moreover, a recent document from the OECD Secr etariat emphasises the contagious effect of 
specific behaviour in the shipbuilding market:  
 
[S]hipbuilding is, from a geographical point  of view, a single, integrated global 
market. This imparts shipbuilding with uni que characteristics, as this integration 
would suggest that an impact in one part of the market would be readily felt in the rest of the market.  It is further suggested that the effect would be quite different in 
sectors that were not so closely integrated.
89 
Question 163 
  (a) For each ship category, in practi cal terms how substitutable are different 
sizes/configurations (containment system s, in the case of LNGs)?  Are there 
specific evidence/examples in the informat ion before the Panel?  In addition, 
please furnish relevant portions of the industry publications discussed at the second meeting. (For example, one industr y expert referred at the meeting to 
one of the industry publications that contains information relevant to cross-price elasticities). 
 
 (b) Can the EC cite specific instances/situ ations in the information before the Panel 
where a shipowner has purchased and u sed a larger-than-usual ship for a 
particular run, due to a relatively low price for the larger ship? 
 
Response
 
 
(a): 
 
145. The best evidence of the supply-side substituta bility of products is f ound by browsing through 
the orderbooks reported in Clarkson World Shipyard Monitor.90  Further information on this matter 
can be found in Exhibit EC-1 , “Overview of the International Commercial Shipbuilding Industry”, 
including chapters 4, 6 and 7.  Most products within  a shipyard are substitutable, with the exception of 
LNG tankers and cruise ships.  LNG tankers are exceptional because of the difficulty and cost of 
obtaining licenses, and the initial investment co st.  Cruise ships involve brand-conscious and 
conservative buyers, and require high costs of entry.   These are the only two exceptions to supply-side 
substitutability.  On the demand side, the two LNG c ontainment systems are fully substitutable.  They 
both do the same job.  On the supply side, the substitution is more difficult because it requires a 
change in licences, but the switch by Hyundai Heavy Industries between the two types illustrates that 
it is possible.  
 146. The data regarding relevant cross-price elast icity appears in the graph on page 8 of the 
Clarkson World Shipyard Monitor, which shows pr ices of different sizes of ship moving together.
91  
The difficulty in doing a true cross price elasticity analysis for the shipbuilding industry is that, in 
recent years, demand has been disconnected from pr ices due to the overcapacity problem.  Analysing 
price against demand has therefore had little relevan ce and is inconclusive.  From the information 
                                                      
88 Clarkson World Shipyard Monitor (Exhibit EC-152) .  Detailed descriptions of the ship types shown 
in that graph can be found in (Exhibit EC-1) , “Overview of the International Commercial Shipbuilding 
Industry”, at section 3.2. 
89 OECD document C/WP6/SNG(2004) (Exhibit EC-153) . 
90 Clarkson World Shipyard Monitor (Exhibit EC-152) .  
91 Clarkson World Shipyard Monitor (Exhibit EC-152) , p. 8.  WT/DS273/R 
Page G-30  
 
presented on prices in figure 1 of Exhibit EC-146  and information on demand (represented by total 
contracting activity, as reported on page 4 of the Clarkson World Shipyard Monitor
92) it is possible to 
illustrate the effects by looking at a specific case.  147. A specific sub-type has been chosen becau se it provides a good example of a market where 
there has been little change in demand over the past year, but a significant movement in price.  Figure 
1 below presents the movement in price of Panamax ta nkers over the past year (this is one of the lines 
included in figure 1, page 5, of Exhibit EC-146 ) and figure 2 below presents the volume of ordering 
over the same period.  
30.0032.5035.0037.5040.0042.5045.00
May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May
 
Figure 1 – Movement in Panamax tank er prices in 2003 / 2004 ($ million) 
 
-0.10.20.30.4
May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May
 
 
Figure 2 – Volume of Panamax tanker orders pl aced per month in 2003 / 2004 (million CGT) 
 
                                                      
92 Clarkson World Shipyard Monitor (Exhibit EC-152) .   WT/DS273/R 
 Page G-31 
 
 
148. It is clear that there has been no correlation between price and demand in this sector over this 
period.  If the price is correlated against the overall FMI newbuilding price index, however, a strong correlation is seen.  This is shown in figure 3 below.  
R2 = 0.9613
100.0110.0120.0130.0140.0150.0160.0170.0180.0
32.00 34.00 36.00 38.00 40.00 42.00
Panamax price ($ million)FMI newbuilding price index
 
Figure 3 – The relationship between Panamax tanker prices and the newbuilding  
price index between May 2003 and May 2004 
 
149. Thus, the price of Panamax tankers has followe d the general trend in newbuilding prices, but 
has no apparent relationship to demand in this speci fic sector.  Likewise, the general trend in prices 
has not followed the overall trend in demand.  Figure 4, below, shows the total volume of contracting 
reported by Clarkson over the past year, which has remained largely level.  Newbuilding prices, by 
contrast, have increased as shown in the newbu ilding price index for the period in figure 5. 
 
-1.02.03.04.05.06.0
May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May
 
Figure 4 - Volume of all orders placed per month in 2003 / 2004 (million CGT) 
 WT/DS273/R 
Page G-32  
 
100.0120.0140.0160.0180.0
May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May
 
Figure 5 – FMI newbuilding price index in 2003 / 2004 (1987 = 100) 
 
150. Price has not always been de-coupled  from supply and demand.  Economist 
Dr Martin Stopford, author of the definitive te xt “Maritime Economics” and managing director of 
Clarkson Research, has theorised that shipbuilding prices are determined through supply and demand, 
but that the supply and demand functions shift over time.93  Long term analysis of the market shows 
this is true, with shifts caused, for example, by increasing costs in price-leading countries or changes 
in capacity.  The relationship between price, on th e one hand, and supply and demand, on the other, 
normally reasserts itself following a shift.  For example, this happened from 1999 to 2001, following 
the shift in the supply function that accompanied th e Asian financial crisis, and in particular the 
collapse of the Won.  The link with the market disa ppeared thereafter in the dash for orders and is 
only now starting to reassert itself. 
 
151.   
(b):  
 152. The concept of customers purchasing a larger-tha n-usual ship for a particular run, due to a 
relatively low price for the larger ship, was raised by Korea.  The EC is not aware of such incidents in 
the market.  Typically, an owner has a clear idea abou t the market in which its new ship will be used.  
His key parameters will be cargo carrying capacity a nd vessel speed.  While he may accept variations 
in the ship's specification ( e.g., a higher or lower speed), he will not see any benefit in buying a larger 
vessel for the same price if the available cargo remains limited. Where available cargo is unlimited, he 
will opt for the largest design possible, as currently seen  with container ships.  However, he will also 
take account of market volatility and operating costs,  assessing whether the larger ship can actually be 
filled throughout its useful life.  This has, for ex ample, limited the growth of crude oil tankers, as the 
largest designs today are around 300.000 dwt, while designs of up to 1.000.000 dwt were discussed 
and planned before the oil crisis of 1973. 
 
153. The important relationship between ship size and trading can be found in Exhibit EC-1 , 
“Overview of the International Commercia l Shipbuilding Industry”, at Section 3. 
 154.  
                                                     
 
93 Martin Stopford, “Maritime Economics” (Second Edition) 1997.  pp 472-473.  WT/DS273/R 
 Page G-33 
 
 
Question 164 
  What specific evidence is there in the in formation before the Panel that APRGs and 
PSLs around the time of the restructuring helped the shipyards in question to remain in operation, whether by improving their ba lance sheets/cash flow or otherwise? 
 Response
 
 155. It is obvious that access to pre-shipment lo ans and APRGs at a time when private creditors 
either would not have provided such facilities, or, if  they had, would have charged higher rates or fees 
based on market conditions, improved the shipyards’  cash flows and profitability.  This self-evident 
conclusion is supported by the following general statement from KEXIM itself, as quoted in 
paragraph 160 of the EC’s first written submission:  
 
The 1998 KEXIM Annual Report explained that KEXIM, “as an export credit 
agency, played a rescue-operation role, transfusing emergency loans to Korean 
exporters and importers at the onset of the crisis when the banking sector in Korea 
was nearly paralyzed .”  As KEXIM’s Chairman stated in the 1999 KEXIM Annual 
Report, KEXIM “contributed to the economic recovery by providing a variety of financing programmes to exporters . . . who experienced difficulty in obtaining 
adequate trade-related financing from commercial financial institutions , due to the 
government-initiated restructuring plan in the financial and corporate sectors.” 
156. In addition, as explained in paragraph 489  of the EC’s first written submission, APRGs 
caused orders to be placed with  these yards, which led to full orderbooks, which in turn led to 
optimistic sales projections for the purpo ses of establishing going concern value. 
 Question 165   For each category of ship, what has been the evolution in prices versus costs in other 
major shipbuilding countries since the mid-1990s, a nd how does this compare with the trends in 
Korean prices versus costs?  
Response
 
 157. With respect to prices, the world market do es not distinguish among countries of production.  
Any yard can set a price level that will be noted in  the world market, and that will be the relevant 
benchmark, as long as production capacity exceeds demand.   A yard can set such a price level even if 
it does not reflect its cost of production, as the lo sses will not occur until the vessel's delivery a couple 
of years later.    158. In the shipbuilding industry, it is not concei vable that a yard can ask a higher price for the 
same or similar vessel design, unless the buyer is  somehow constrained to purchase at a competing 
yard.  Such constraints do not exist for the large major ity of ship owners.  They exist only in particular 
cases, such as for US owners operating between US  ports (thus being subject to the Jones Act), 
Japanese owners operating on domestic routes (who must obtain licenses from regional authorities that may indicate their preference for a domestically  built vessel) or cruise ship operators who need 
vessels of such sophistication that Korean and Ch inese yards are not considered experienced enough 
to deliver an acceptable ship. 
 
159. Regarding costs, reference is made to th e answer to question 161.  The analysis of 
shipbuilding costs is a complex undertaking requiring significant resources.  The EC has had no reason to investigate shipbuilding co sts in Japan, as EC yards do not consider the business practices of 
Japanese yards as injurious. There has also been no r eason to monitor shipbuilding costs in EC yards, WT/DS273/R 
Page G-34  
 
as these yards operate in a free market environm ent, and losses from extremely low prices would put 
the company into financial difficu lties.  If such losses would be compensated through subsidies, the 
EC competition law would apply.  Recently, the EC has started to monitor shipbuilding costs in China, but no results are available at this time.  
160. In general, certain costs would not be country-specific or only on a limited scale.  For 
example, steel is more or less a global commodity, and major equipment such as engines, cranes, etc., 
are procured by yards on a global scale. The main  cost differences between countries result from 
labour costs, productivity levels, excha nge rates and financial instruments. 
 Question 166   (a) For each of the three ship types, wh at specific evidence/examples are there in the 
information before the Panel (in addition to the domestic complaint by Samsung 
against Daewoo) that the restructured shipyards were the price leaders among 
the Korean producers? 
  (b) What evidence is there in the informatio n before the Panel  in support of the EC 
argument that the alleged restructuring subsidies enabled the restructured yards to drive down the prices charged by all other Korean shipyards?   
 
 (c) What has been the annual financial performance of the other (non-structured) 
Korean shipyards since the restructuring? 
 
Response
 
 (a) – (b): 
 
161. The price leadership is dependent on the cap acity exercised in the market and on market 
share.  It is also related to the dynamics within  small groups of dominant shipyards, amongst which 
are the disputed yards.  This is discussed in Exhibit EC-146  at Section 3, page 4.  Additional 
information on the strength of the restructured Korean shipyards can be found in Clarkson World 
Shipyard Monitor, including section “Shipyard Capacity”, page 16, and in the detailed sections 
showing the distributions of orders by type.
94 
 162. As explained in response to question 162, th e low prices in the shipbuilding market have a 
contagious effect in the shipbuilding market.  Furt hermore, the WTO Secretar iat itself recognised that 
Korean shipyards are the price l eaders when it pointed out the strong market position of the five big 
chaebols, with about 95 per cent of the Korea output , three of which are restructured shipyards: 
 
Since 1999,  Korea has been the world's leading shipbuilder (second in 1998) and thus a price leader  for many types of ships; its share in global ship production 
attained 30 per cent-35 per cent (1999).  Shipbuilding, a capital-intensive industry 
strongly linked to, inter alia, the cargo hand ling, steel and electronics industries, is 
among the few sectors that emerged virtually unscathed from the recent recession.  The depreciation of the won (as well as high wage levels in Japa n and the bilateral 
strength of the yen) helped boost the export competitiveness of Korean shipyards (vis-à-vis China and Japan), which rely heav ily on the building of large-sized ships.  
Between 1995 and 1998, the output of the shipyards, which are dominated by five 
chaebols (Hyundai, Daewoo, Samsung, Hanjin , and Halla account for about 95 per 
cent of output), grew steadily by more than 17 per cent.  Between 1995 and 1998, Korea virtually doubled its trade surplus in  ships (US$7.6 billion), as imports fell by 
                                                     
 
94 Clarkson World Shipyard Monitor (Exhibit EC-152) .   WT/DS273/R 
 Page G-35 
 
 
75 per cent and exports grew by 45 per cent;  in 1998, ships accounted for 6 per cent of Korean exports.
95 
(c):  
 
163. The EC does not possess information regarding the annual financial performance of the other 
(non-structured) Korean shipyards since the restructuring.  
 
Question 167    
 
 If, as the EC argues, shipyards have near-total flexibility to produce any kind of ship, 
and the Korean yards are heavily subsidized , why are Korean shipyards not more-or-less 
equally active in all kinds of ships (including cruise ships, ferries, etc.)?  
Response
 
 
164. The Korean shipyards have been pursuing sectors that they anticipate provide the greatest 
economic benefits, either through volu me or value.  This does not mean to say that they will not shift 
into other sectors as they perceive changing conditions. 
 165. For example, Daewoo, Hyundai Heavy, Hy undai Mipo and Samsung have begun to build 
ferries, and Samsung has committed significant invest ment to pursue the cruise ship sector.  Korean 
yards cherry pick the contracts and sectors that th ey see as having the greatest advantage at the time.  
The ferry and cruise ship sectors are generally cons idered as “niche market” where the volume of 
orders is more cyclical, and relatively low in terms of number of ships.  In recent times, volume has 
dictated order intakes, with the Korean yards ta rgeting the greatest volume sectors.  Not all sectors 
generate the same amount of work.  This is discussed in Exhibit EC-1 , “Overview of the 
International Commercial Shipbuilding Industry”, at Sections 4 and 5. 
  
II. TO BOTH PARTIES 
 
A. ITEM (J) / ITEM (K), FIRST PARA.  Question 168   The parties disagree as to whether APRG s constitute export credit guarantees and 
whether PSLs constitute export credits.  Plea se provide any document ation (either from the 
shipbuilding industry, the OECD, or any other so urce) that you consider supports your position 
on these issues.  
Response
 
 166. The European Communities has already prov ided documentation supporting that APRGs and 
pre-shipment loans do not constitute export credits because they assume a risk that relates to the 
creditworthiness of the domestic exporters.
96   
 167. This is further confirmed by the Knaepen Package  agreed between OECD Members in 
1997.
97  The OECD Arrangement on Export Credits  did not address premia at the time of the Uruguay 
                                                      
95 WTO Trade Policy Review Mech anism of 2000, WT/TP/S/73 (Exhibit EC-82)  (footnotes omitted).  
96 Oral Statement by the European Communities to the first meeting with the Panel, paras. 56-64 and 
Exhibits EC-98 and EC-99 . WT/DS273/R 
Page G-36  
 
Round.  The Knaepen Package  contains rules on calculating the premia drafted solely with the 
creditworthiness of the buyer-country  in mind. The Knaepen Package  states that the guiding 
principles for setting premia fees under the Arrangement on Guidelines for Officially Supported 
Export Credits  set minimum premium rates for sovereign and country credit risks irrespective of 
whether the buyer/borrower is a privat e or public entity. Principles for the commercial risk  on the 
buyer  are still outstanding for negotiation.  
 168. There is no suggestion in the Knaepen Package , nor indeed was there during the negotiations 
that led to its adoption, that premia should be set according to the risk of the exporting country or of the seller, exporter or producer.  Any loans or guarantees which involve risks incurred within the 
exporting country would be subject to the sam e considerations as normal domestic loans and 
guarantees.  
Question 169 
 
 Item (j) refers to the provision of various "p rogrammes".  Assuming that an a contrario 
interpretation of item (j) is permissible, could it operate as a defence for individual APRG transactions, as opposed to the APRG programme pe r se?  Please explain.  In particular, if the 
focus of item (j) is on the long-term operati ng costs of the programme, how could item (j) 
determine whether or not individual transact ions under the programme constitute export 
subsidies? 
 Response
 
 169. Assuming that an “ a contrario” interpretation of item (j) is permissible, it could not operate 
as a defence for individual APRG transactions but only for the APRG programme per se . 
 
170. The existence of an export subsidy progra mme and an individual export subsidy transaction 
are two separate questions.    171. Item (j) clarifies that certain export credit programmes are not WTO incompatible if they cover long-term operating costs.  However, item (j ) is not relevant for the determination (under 
Article 1 of the SCM Agreement ) whether an individual transaction was market based or a subsidy.  
Even if a programme is set to cover long-term ope rating cost, it may be that an individual transaction 
confers a benefit because the guarantee is granted without regard to market principles, e.g., the 
corporate risk of the shipyard.  
B. APRG/PSL 
 
Question 170   Korea asserts that KEXIM PSL rates have been above certain DSME bond rates since 1999 (para. 231, Korea's first written submission).   The EC asserts that certain DHI bonds were 
guaranteed (para. 124, EC's second written submi ssion).  Are the parties referring to the same 
bonds, or were the DSME bonds referred to by Korea different from the DHI bonds referred to 
by the EC?  Please explain.  
Response
 
 
172. The DSME bond rates shown in Para 231 of Korea's first written submission reflect quarterly 
summaries of outstanding borrowings in corporate bonds and not the interest rates at which 
                                                                                                                                                                     
97 The Knaepen Package: Guiding Principles for Setting Premia Fees under the Arrangement on 
Guidelines for Officially Supported Export Credits , entry into force by 1 April 1999 (Exhibit EC-154) .  WT/DS273/R 
 Page G-37 
 
 
DHI/DSME bonds were issued.  In consequence,  one cannot compare directly the bonds rates as 
provided in para 231 of Korea's first written subm ission and the bonds rates to which the European 
Communities refers in para 124, of its second written submission.   
 
173. The EC’s assertion that most DHI and DS ME bonds were guaranteed is supported by Exhibit 
EC-129 , which contains a table listing lists all DHI issues of corporate bonds from 1986 until 
December 1998. It demonstrates that most of the DHI bonds issues were guaranteed during this 
period.  
 
174. The EC in Question 17 at the first hearing asked Korea to provide details on corporate bond issues referred to by Korea in para 231 of its first written submission.
98 Korea provided a table limited 
to only 6 issues from 1997 to 1998 whereas the issues amounted to 39 in that period ( see Exhibit - 
129). In consequence, the EC can only reply for the 6 issues provided by Korea, which are the same 
as the ones provided by the EC. Out of these 6 issues, 3 issues were guaranteed.   
175. However, it should be noted that as regards the remaining corporate bond issues, Korea failed 
to provide the required information. The EC in question 17 to Korea specifically asked for detailed 
information, including on “d) guarantees by other entities”. Korea replied that this information was 
not available.  The European Communities consid ers that Korea failed to cooperate because the 
requested information is not confid ential, available for any investor
99 and Korea has therefore not 
rebutted the EC prima facie  case on this point. 
 
176.   
Question 171 
 
 Regarding Exhibit Korea – 16, are "KEB", "CHB" and Hanil Bank public bodies?  If 
not, are they "entrusted or directed" private bodies?  Please explain.  
Response
 
 177. In this case the EC has not argued that KEB (Korea Exchange Bank), CHB (Chohung Bank) 
and Hanil bank are public bodies but that they were  "entrusted or directed" private bodies. These 
Banks were in a weak financia l condition and were helped by GOK through capital injections. GOK 
has substantial shareholdings in all three of them.  178. In particular, with regard to KEB the EC has explained
100 that KEB was established as a fully 
government-owned bank in 1967 to specialise in th e foreign exchange and trade business. For a 
decade it had the exclusive right of offering trade financing and foreign exchange services. In 1997 
trade financing and foreign exchange services were  liberalised and KEB ventured into commercial 
banking. Still in 1997 GOK was the major shareholder (47.88 per cent); as of 31 December 2000 it is 
owned by the State 43.17 per cent (KEXIM 32.50 per cent, Bank of Korea 10.67 per cent) and Commerzbank (32.55 per cent)
101. Still after its partial privatisation (Commerzbank acquired its 
share in July 1998), the Korean Government as the major shareholder continued to exercise its 
influence and provided substantial support to the Bank through capital injections : 336 Billion 
Won  in April 1999 and 400 Billion Won in December 2000.102 
                                                      
98 Korea’s response to the question 17 by the EC following the first substantive meeting. 
99 See unredeemed Corporate bonds of DHI Source : DHI marketable Securities Statement for offering 
the 229th Non-Guaranteed Corporate Bonds, submitted to Financial Supervisory Service (FSS) on 25 May 1999 
(Exhibit EC-129).  
100 See Attachment 3 to EC’s Answers to Panel question 17 of 22 March 2004 
101 See Korea’s Annex V main response, reply to question 5 at page 26, (Exhibit-EC 39) . 
102 See Korea’s Annex V main response, reply to question 5 at page 27, (Exhibit-EC 39) . WT/DS273/R 
Page G-38  
 
 179. With regard to Chohung Bank , the EC has explained
103 that it was established in 1943 to 
engage in commercial banking. Soon after the financ ial crisis erupted Chohu ng went into financial 
dire straights so that in 1999 the Kor ean Government stepped in and acquired 80 per cent of stock  
(which it still holds). In its Annex V response Korea states that Chohung received a capital injection 
of 2.7 trillion Won104. 
 180. With regard to Hanil  in its Annex V response Korea states that Hanil received a capital 
injection of 1.6 trillion Won.
105 Korea has not reported the sh areholding obtained by GOK through 
this capital injection. 
 
C. ALLEGED ACTIONABLE SUBSIDIES 
 
Question 172  
 Please comment on paras 504 – 509 of the report of the GATT panel in United States - 
Imposition of a Definitive Countervailing Du ty on Imports of Certain Steel Products 
Originating In France, Germany, and the United Kingdom.  
Response
 
 
181. The panel report referred to related to a dispute under the 1979 GATT subsidies code and was 
never adopted.  Its pertinence is already for that reason limited.  182. That said, the European Communities would not e that the Panel did not express any absolute 
preference for one or the other standard.  It contented itself with concluding that the rejection of the 
“inside investor” standard was not an error in the lig ht of the facts of the case at hand, in the light of 
the reasoning provided by the US agency involved (DOC). In fact it concluded that:  
507. The Panel was aware that there might be circumstances under which inside and outside investors might behave differently  because of factors such as differences in 
the availability of relevant information to inside and outside investors and the 
presence of barriers to exit and entry. Howe ver, the Panel did not consider that the 
arguments of the EC showed that such f actors were relevant under the facts of the 
cases at hand. 
508. In sum, the Panel found that the DOC had expressly addressed the issue of the 
alleged need to distinguish between insi de and outside investors and that the 
explanation provided by the DOC for its deci sion not to make such a distinction could 
not be said to be inadequately supported by rational analysis. The arguments of the EC at best indicated that an alternative approach was possible. The Panel therefore 
could not find on the basis of these arguments that the DOC, by not making a distinction between inside investors and outsi de investors, had failed to consider a 
relevant fact.  
509. In the light of the considerations a bove, the Panel saw no merit in the argument 
of the EC that the United States acted incons istently with the Agreement when, in the 
countervailing duty investigations of imports  of certain hot-rolled lead and bismuth 
carbon steel products from France and the United Kingdom, the DOC did not make a distinction between the perspectives of insi de investors and outside investors in its 
                                                     
 
103 See Attachment 3 to EC’s Answers to Panel question 17 of 22 March 2004 
104 See Korea’s Annex V main response, reply to question 5 , table d) at page 26, (Exhibit-EC 39) . 
105 idem  WT/DS273/R 
 Page G-39 
 
 
analysis of whether or not subsidies arose from the provision of equity capital by the Governments of France and the United Kingdom.
 
183. In any event, as the explained in response to question 148 above, the European Communities 
does not believe that this is an issue in th e present case.  The only case where Korea invokes this 
concept (Samho) is one where there was no “inside investor” that was free from government control.  
 
D. SERIOUS PREJUDICE 
 
Question 173  
 (a) For each of the three ship types at issue in this dispute, how are ship data 
normally maintained by the industry, and by industry analysts?   
  (b) In particular, are these three categori es of ships recognized and used routinely 
for purposes of industry analysis?   
 
 (c) If so, how are they defined, and fo r what purposes are these categories used?   
  (d) When analysts report on pricing tre nds, do they normally refer to prices for 
each category as a whole, or for subcate gories thereof, broken out, for example, 
by size and/or other characteristics.   
 
 (e) If they provide a range of pricing in formation at different levels of aggregation, 
how are these different data series used?   
  (f) Please provide documentation (including  in particular relevant excerpts from 
the published industry reports discussed at the second meeting) showing 
examples of the various breakouts to which you refer.  
 
Response
 
 
(a): 
 
184. There are numerous sources of information on the industry.  FMI, in particular, maintains 
subscriptions with those analysts that have s hown the greatest consistency and accuracy, including 
publications from Lloyd’s Register and Clarkson Research.  A note on these sources is given in Exhibit EC-1 , “Overview of the International Commercial Shipbuilding Industry”, at Section 1.3, 
page 2.  The two most important publications from the point of view of the shipbuilding industry are 
provided herein as exhibits, i.e. Clarkson’s monthly World Shipyard Monitor
106 and Lloyd’s 
Register’s quarterly World Shipbuilding Statistics.107  Many other consultancy reports and analyses, 
including much of FMI’s work, are derivatives of th ese sources.  The main advantage of the Clarkson 
publication is that it examines prices, not considered by Lloyd’s, and it looks at the shipyard level, 
where Lloyd’s only looks to the country level.  Th e main advantage of the Lloyd’s publication is the 
level of completeness of the data, which is based on Lloyd’s Register.  Virtually all ships will appear 
in Lloyd’s Register, while Clarkson concentrates on the mainstream market sectors.  FMI also 
subscribes to Lloyd’s Register’s database, to enable  more detailed analysis of the statistics presented 
in the publication, including at the shipyard level.  
                                                     
 
106 Clarkson World Shipyard Monitor (Exhibit EC-152) .  
107 Lloyd’s Register’s “World Shipbuilding Statistics” (Exhibit EC-155) . WT/DS273/R 
Page G-40  
 
(b) and (c): 
 
185. A good illustration of the grouping and hierarchy of ship types is given on pages 6 and 7 of 
the Lloyd’s Register publication “World Shipbuilding Statistics”.
108  It is broadly this taxonomy that 
is used by FMI in its analyses.  Th e three ship types can be clearly seen  within this table.  The use of 
these groupings is fundamental to the analysis of shipping and all related industries, including 
shipbuilding.  Definitions of the ship types concerned are given in Exhibit EC-1 , “Overview of the 
International Commercial Shipbuilding Industry”, at Section 3.  
(d), (e) and (f): 
 
186. The most complete source of price inform ation and trends is Clarkson’s World Shipyard 
Monitor.
109  The “Shipbuilding Price Trends” description on page 8 thereof presents prices for various 
classes of ships.  For example, one price index is  given based on the average movement of tankers 
(both crude and products) and dry bulk carriers.  This  index clearly groups together ships of different 
types and sizes to look at the average movement of prices.  See also Exhibit EC-1 , “Overview of the 
International Commercial Shipbuildin g Industry”, at Section 3, for a description of the meaning and 
implications of bulk ship types included in this index.  
Question 174 
 
 Korea argues that demand should be measured in numbers of vessels, and/or workload 
years (i.e., order backlog) rather than compensate d gross tons of new orders.  The EC responds 
that CGT is more accurate as a measure of s upply and demand, and that even measured in 
workload years, demand trends are as represented by the EC.  
 (a) Could each party explain the technical differences between the two measures, 
and provide further detail as to why it believes its preferred measure represents a more accurate picture of demand than the other.   
  (b) Which measure is used by industry analysts and the industry when analyzing 
demand trends?   
 
 (c) If both are routinely used, please ex plain the circumstances in which they are 
used, and provide examples from indepe ndently prepared sources (the published 
industry reports discussed at the meeting, OECD documents, etc.). 
 
Response
 
 
(a): 
 
187. A description of CGT and other measurements is presented in Exhibit EC-1 , “Overview of 
the International Commercial Shipbuilding Industry”, at Section 2, page 3.  The EC has used CGT 
because it measures the amount of work involved in  building ships, and therefore the amount of 
capacity required.  A shipyard has the capacity to u ndertake a certain amount of work in a given 
period.  Because of the nature of the product, th is is not necessarily related to the number of ships 
produced or their physical size.  At the extremes, for example, constructing a single VLCC will provide more work than constructing two handy-siz e tankers.  Constructing a single cruise ship will 
provide more work than the construction of several very large tankers.  CGT is the unit that connects 
supply and demand, and is therefore the key to price behaviour.  
                                                     
 
108 Lloyd’s Register’s “World Shipbuilding Statistics” (Exhibit EC-155) . 
109 Clarkson World Shipyard Monitor (Exhibit EC-152) .  WT/DS273/R 
 Page G-41 
 
 
(b) and (c): 
 
188. The measure used by analysts depends on the analysis being undertaken.  Both the Clarkson 
and Lloyd’s publications provide a range of units to enable a proper analysis to be performed.110  For 
example, a tanker owner will be interested in  the total deadweight of tankers on order111 because it 
measures the cargo carrying capacity of the ship, and th at is what interests the owner.  Gross tonnage 
measures the physical size of ships and is the “offi cial” (i.e. registered) measure of the size of the 
fleet.  It also has significance for owners of ships th at are “volume carriers” (i.e. that carry low density 
cargoes) where it better represents cargo-carrying cap acity than deadweight.   Passenger ships are a 
good example of such a ship type. 
 
189. CGT is almost solely used in relation to th e shipbuilding industry.  For example, the OECD 
uses CGT when assessing production capaciti es, and their relationship to demand.112  The number of 
ships is of limited significance in statistical analys is of either the shipping or the shipbuilding 
industry, although it is reported in th e statistical sources and it is some times used for very specific and 
narrow analyses.  FMI has used th e number of ships, for example,  to examine product focuses of 
specific shipyards, in terms of the internal distri bution of their order books.  This has been necessary 
because of data lags in information provided by Lloyd’ s Register.  At the early stage of a contract, the 
register may not have complete tonnage informa tion, and the number of ships provides a temporary 
guide.  If the information were available, the dist ribution by CGT would be more appropriate for the 
analysis. 
 
Question 175  
  In response to EC arguments concerning mark et share as a factor in price leadership, 
Korea variously states that market share does not demonstrate price leadership, but also that 
Korean yards' market shares are too small for them to be able to influence prices.  Both sides 
thus seem to view market share as somehow relevant to the question of price leadership. 
  (a) How (on the basis of what sort of  concrete data and analysis) can price 
leadership be determined/established?   
 
 (b) What role in such an analysis would levels and trends in market shares play?  
  (c)  How large a market share would a give n market participant need to be able to 
exercise price leadership. 
 
Response
 
 
(a), (b) and (c): 
 
190. The determination of price is fundamentally related to the exercise of capacity in the market.  
The positioning of the Korean ship yards in this respect can be seen in Clarkson World Shipyard 
Monitor.113  Over the past two to three years, becaus e of the seemingly inexhaustible availability of 
capacity, the dynamics between small groups of lead ing shipyards have been determining prices.  
(This is discussed in Exhibit EC-146 , “FMI June 2004 Report, technical support to the WTO 
                                                      
110 Clarkson World Shipyard Monitor (Exhibit EC-152) ; Lloyd’s Register’s “World Shipbuilding 
Statistics” (Exhibit EC-155) . 
111 See (Exhibit EC-1) , “Overview of the International Commercial Shipbuilding Industry”, at 
Section 2, page 3, for the definition of tonnage measures. 
112 OECD, Evaluation of World Shipbuilding Capacity (2000 Revision), C/WP6(2001)6 (29 May 2001)  
(Exhibit EC-151) . 
113 Clarkson World Shipyard Monitor (Exhibit EC-152) , p. 16. WT/DS273/R 
Page G-42  
 
hearings”, at Section 3, page 4, and the prices in general are discussed in Exhibit EC-1 , “Overview of 
the International Commercial Shipbuilding Industry” , at Section 8, page 25).  Because of the 
dynamics between these groups, the amount of capacity exercised does not have to be large.  Every 
order will be contested on the basis that if a matc hing price is not offered, there is other capacity 
available that will snap it up.   
 
191. Furthermore, two referenc e documents, one issued by the WTO Secretariat
114 and one issued 
by the OECD Secretariat115  confirm that Korean Shipyards are the price leader  on the world 
wide market. As already indicated in our response to Panel question 163, three of the five Korean 
leading shipyards are restructured shipyards, exercising a strong pressure on the other Korean 
shipyards preventing prices to incr ease when the demand increases. The OECD Secretariat notes that 
under normal economic theory:  
high demand would drag up prices, as the market sought some kind of equilibrium. The combination of high demand and lower input costs should also signal a period of 
high profits for all manufacturers, but this h as not happened. The fact that this has not 
happened, and does not show any signs of happening, would reinforce the view that 
the industry is still affected by  considerable excess capacity.
116 
192. Then, the OECD notes as well that the explan ation of low prices cannot be found through a 
strong decrease in material/metal cost. The conclusion of the OECD “ is that the market is being 
interfered with, which prevents prices from responding to steeply increasing demand ”.117  The t w o 
factors identified to explain such a situation are (i) the Korean shipyards overcapacity resulting from 
restructuring subsidies and (ii) the price depressi on and suppression leadership by Korean shipyards. 
  
                                                     
 
114 TPRM Korea ( Exhibit EC-82 ). 
115 OECD Document  “Recent Newbuilding Price Developments” C/WP6/SG(2003)10 (Exhibit EC-
157), paragraph 10. 
116 Ibid., para. 9. 
117 Ibid, para. 13.  WT/DS273/R 
 Page G-43 
 
 
 
LIST OF ATTACHMENTS  
 
Attachment EC-10  EC – Calculation for Benefit PSL  
 
Attachment EC-11  EC – Calculation for AdValorem Benefit PSL 
 Attachment EC-12  EC – Calculat ion for AdValorem Benefit APRG 
 Attachment EC-13  EC – Calculation Subsid ies to Daewoo, including Tax Concession 
 
 
L
IST OF EXHIBITS  
 
Exhibit EC-148  Report by PriceWaterhouseCoopers, June 2004  
 
Exhibit EC-149   World Bank Report on Korea (18 September 2000).   
Exhibit EC-150 Details of 19 July 1999 Loan to Daewoo-HI (Attachment 3.1(2) of 
Korea’s Annex V response) 
 Exhibit EC-151   OECD Evaluation of World Shipbuilding Capacity (2000 Revision), 
C/WP6(2001)6 (29 May 2001) 
 Exhibit EC-152   Clarkson World Shipyard Monitor  
Exhibit EC-153   OECD Document  C/WP6/SNG(2004) 
 Exhibit EC-154   The Knaepen Package: Guiding Principles for Setting Premia Fees 
under the Arrangement on Guidelines for Officially Supported Export Credits, entry into force by 1 April 1999 
 
Exhibit EC-155   Lloyd’s Register ’s “World Shipbuilding Statistics” 
 
Exhibit EC-156  Cost Modelling Details Angelicousis LNG at Daewoo  
 
Exhibit EC-157   OECD Document  “Recent Newbuilding Price Develoments” 
C/WP6/SG(2003)10   
  
Note:  Attachments and Exhibits in bold contain BCI. 
 WT/DS273/R 
Page G-44  
 
  
ANNEX G-2 
 
 
COMMENTS OF THE EUROPE AN COMMUNITIES ON NEW 
FACTUAL INFORMATION PROVIDED BY KOREA 
 
 
(9 July 2004) 
 
 
I. INTRODUCTION 
 
1. The European Communities thanks the Panel for providing it with an opportunity to comment on any new factual information to submitted by Kor ea in conjunction with the 2 July answers to the 
Questions from the Panel.   2. The invitation by the Panel to comment, as the European Communities understands it, is 
strictly confined to new factual information submitted by Korea in its Responses to the Panel 
Questions following the second substantive meeting with parties.  Therefore, the European 
Communities will not comment, again, on any facts reite rated by Korea in that context, appreciation 
of old and new facts or otherwise legal argumen ts.  Therefore, the fact that the European 
Communities does not comment on the latter does not m ean that they are no longer disputed by the 
European Communities.  The European Communities refers the Panel to its positions on facts and 
legal arguments as previously expressed. In additio n, the European Communities has sought to limit 
its comments to new factual elements that a ppear relevant to the Panel’s deliberations. 
 3. For the convenience of the Panel, where th e European Communities has a comment to make 
on new factual information introduced by Korea, the European Communities fi rst repeats the question 
and the response by Korea before setting out its comment.   II. KOREA’S RESPONSES TO QUESTIONS BY THE EC   4. Paragraph 209 of Korea’s Oral Statement:  If the tax breaks pursuant to Article 45-2 of the Corporate Tax Act referred to were not inte nded to apply only to the Daewoo workout why 
were they introduced in conjunction with that  workout and granted for only three months – 
enough time to allow Daewoo to capture them? How may other companies have benefited? Is it 
still in force?  
Korea’s Response
 
 
 Article 45-2 of the STTCL was intended to exte nd the tax provision to workout companies as 
well as companies undergoing corporate reorganization.  When the law was deliberated at the National 
Assembly, every company which could be affected by  the proposed law was interested and waited for 
the law to be passed. The law has a broad base of a pplication in terms of the companies to which it 
could apply.  
 The law was extended twice so that workouts and corporate reorganizations carried out until 
the end of 2002 could be covered. It is normal for ta x laws in Korea to be adopted on an annual basis. 
No records have been kept either in court or by the tax administration to identify the companies that 
made use of this tax provision.  WT/DS273/R 
 Page G-45 
 
 
 
EC Comment 
  Korea claims that it has not kept any record s that it would allow it to identify companies 
using the tax break.  The European Communities woul d note that Article 46(3) of the Corporate Tax 
Act, which is applicable to Article  46(1) of the Corporate Tax Act referred to in Article 45-2 STTLC 
and therefore to this tax break requires, companies th at request its application to submit “a detailed 
statement on corporate division to th e competent district tax office”. 
  In view of Korea’s statement that there a re no records, the European Communities considers 
that the Panel can only assume that there are no other cases of application of Article 45-2 STTLC. 
 III. KOREA’S RESPONSES TO QUESTIONS FROM THE PANEL  110. Please comment on the EC’s assertion (a t part 107 of its Second Written Submission) 
that Korea failed to provide details of the rat es of five of the APRGs issued for Samsung by 
commercial banks in 1997.  
 
Korea’s Response
 
  Korea provided the best information available at the time of the Annex V procedure. Korea 
notes that much of the information requested in A nnex V and subsequently has not been in the hands 
of the Government of Korea. Having confirmed with  Samsung, Korea understands that the rates of the 
five APRGs referred to by the EC were not av ailable as the required preservation period of the 
relevant documents had expired. Where informati on for some of the APRGs issued in 1997 was still 
available, such information was submitted.  
 
EC Comment 
  The European Communities does not find it credible that a company like Samsung would not keep documents for more than five years or, indeed , that it would do for some APRG documentation 
but not for others.  
 
 The European Communities considers that the Panel should infer that the missing 
documentation was not provided because it woul d have shown the existence of a subsidy. 
 113. In respect of Koreas repl y to Question 71 from the Pane l, please provide supporting 
evidence for Korea’s assertion that the Kook min and Woori Bank rates for Samsung APRGs 
were [BCI:  Omitted from public version] inst ead of [BCI:  Omitted from public version]. 
 
 Korea hereby confirms that the Kookmin  Bank and Woori Bank rates for Samsung APRGs 
were [BCI:  Omitted from public version] . Korea’s prior statement that is not consistent with this 
information was inadvertently made due to clerical  mistake by the company in pulling together the 
response. Korea regrets any confusion. 
 
EC Comment 
  Korea re-confirms the original EC assertion (based on Annex V information provided by 
Korea) that the Kookmin Bank and Woor i Bank rates for Samsung APRGs were [BCI:  Omitted from 
public version] .  The EC calculations on APRGs are based  on this assumption and therefore remain 
valid.  
 WT/DS273/R 
Page G-46  
 
116. Korea asserts that Articl e 45-2 of the Corporate Tax Act does not constitute revenue 
forgone, and did not confer a benefit. According to the news report in Exhibit EC-136, however, 
a Daewoo company official stated that Daewoo would “be exempted from taxes totaling 236 billion won’. Please comment, and explain how a 236 billion won tax exemption is not revenue 
forgone and did not confer a benefit 
 Korea’s Response
 
  Under the SCM Agreement , the EC has the burden to prove specifically what government 
revenue was otherwise due and how su ch revenue was foregone or not co llected (Article 1.1(a)(1)(ii)). 
The EC has failed to carry this burden of proof. Moreover, it appears that the EC still has no clear 
understanding of the Korean tax scheme. As a resu lt, Korea still can not determine specifically what 
the EC’s allegations on tax concessions are about.   The news report in Exhibit EC - 136, which quoted the alleged statement by a Daewoo 
official, establishes nothing about the types of taxes concerned, applicable pr ovisions of tax laws, tax 
rates, calculations of the tax amount involved, how  they were foregone, etc. Given the complication 
and technicalities of the tax issues, no Panel wo uld make an affirmative finding of financial 
contribution and benefit on the basis of such a very questionable newspape r article. Moreover, the 
amount of KRW 236 billion allegedl y mentioned by a Daewoo official does not distinguish what 
portion of this total amount is attributable to DSME  as distinguished from the portions attributable to 
the machinery company and to the remaining DHI. In short, the EC has not established a prima facie 
case of the tax concession as required by Article 1.1(a)(1)(ii) of the SCM Agreement .  
  Under these circumstances, Korea is placed in  an awkward position when it is asked by the 
Panel to “explain how a 236 billion won tax exempti on is not revenue foregone  and did not confer a 
benefit”. This question assumes that there was a tax exemption of KRW 236 billion, but Korea 
disagrees that a 236 billion won tax exemption has ev er been established by the EC. Unless the EC 
first explains how KRW 236 billion or whatever  amount has been calculated and under what 
provisions of tax laws, it is impossible for Korea to  explain how this amount is not revenue forgone. 
Nonetheless, Korea would like to comply with th e request of the Panel by providing further 
explanations on the tax issue, while again reser ving its rights regarding the burden of proof. 
 
 First of all, Korea refers the Panel to pa ragraphs 221 and 222 of the EC’s Second Written 
Submission, in which the EC made clear that its “core claim” was the “temporary tax exemptions” granted under Article 45-2 of the Special Tax Treat ment Control Law (“STTCL”) which extended tax 
incentives under Article 46 of the Corporate Tax Act. It  appears that the EC believes that Exhibit EC - 
136 provides evidence of the size of tax incentives under the above Article 46 of the Corporate Tax 
Act which had been “extended” by Article 45-2 of the STTCL.   However, as Korea has repeatedly explained (see, e.g., paras. 206 – 208 of Korea’s Oral Statement at the Second Panel Meeting), the special tax treatment under Article 46 applies only when 
“valuation gains” have arisen to a spun-off company as a result of the “valuation” of assets carried out 
at the time of the spin-off. In the case of the DHI workout, the assets of the original DHI were spun-
off to DSME and the machinery company at book value (i.e., without “valuation” of those assets). Therefore, DSME could not obtain any tax incentiv es under Article 46 of the Corporate Tax Act as 
extended by Article 45-2 of the STTCL.  
 The fact that the DHI assets were transfe rred at book value to the spun-off companies is 
clearly demonstrated by Exhibit Korea – 120
 (1999 Anjin’s Workout Report, excerpted pages, 
Appendix 10), as well as by Exhibit EC-55 (DHI Workout Plan), Appendix D-11 (balance sheet) and Exhibit EC-56 (Structure of spin-off). Also , the EC has never disputed this fact.  
  WT/DS273/R 
 Page G-47 
 
 
 Therefore, contrary to the allegation by the EC, there was no tax exemption granted to DSME 
under Article 45-2 of the STTCL and Article 46 of the Corporate Tax Act. Thus, the EC’s “core 
claim” fails, and the questionable statement by a Daewoo official in Exhibit EC-136 cannot prove 
anything when what the EC proposes to prove on th e basis of hearsay cannot “legally” make sense. 
For the avoidance of any doubt, Korea hereby submits  the text of Article 46 of the Corporate Tax Act 
(both the Korean original and English translation) as Exhibit Korea – 121 . 
  In this situation, it is questionable that a Daewoo official could really have made the 
statement about KRW 236 billion as was written by  the journalist or whether the journalist 
misunderstood. If a Daewoo official really made that  statement, it may well be that he misunderstood 
the facts and the applicable tax law. The other pl ausible answer might be that the Daewoo official 
may have referred to a totally diffe rent type of tax incentive. A possible candidate is the “special 
additional tax” which could have b een levied if there were gains from the transfer of certain assets 
from DHI to the spun-off companies. However, this tax was to be levied on DHI
 (remaining after the 
spin-off) under Article 99 of the Corporate Tax Act. 
 
 Prior to 31 December 2001, the Corporate Ta x Act provided that, if a company realized 
capital gains from the transfer of certain assets (e.g.,  land, building and other real property rights), the 
transferring company was required to pay, in addition to ordinary corporate income tax, the so-called 
“special additional tax” at the rate of 16.5 per cent of the capital gains so realized ( See Exhibit Korea 
– 121 , Articles 2 and 99 of the Corporate Tax Act). For the purpose of this tax, the ‘capital gains’ 
meant the amount of the transfer price of the assets concerned, minus their original acquisition price 
and acquisition costs. In the context of the DHI spin-off, DHI may have been required to pay a 
substantial amount of such special additional tax if capital gains had b een realized through the transfer 
of assets to DSME and the machinery company. Even if the transfer of assets was made at book value, 
the book value of those assets could have been higher than their acquis ition prices and costs as a result 
of, among others, re-valuation made prior to the spin-off pursuant to the Asset Re-valuation Act. 
  Again, it should be noted that the payer of such  special additional tax was the transferor of the 
assets subject of the special additional tax (i.e., the remaining DHI). However, by virtue of a special 
provision of Article 99(11) of the Corporate Tax Act, the transferor’s payment of special additional tax could be deferred if the transfer of assets took place as a result of, among others, a spin-off that 
satisfies the requirements of Article  46 of the Corporate Tax Act. ( See Exhibit Korea – 121, 
Article 99(11)). In the case of companies in restruct uring, a problem arose due to the technical issue 
of not having precisely equal shareholding ratios due to the normal rules of share allocations in such 
situations.  If a provision such as Article 45-2 ha d been included in the STTCL, thereby treating a 
spin-off made on unequal shareholding ratios as sa tisfying the requirement of Article 46 of the 
Corporate Tax Act, then, the remaining DHI’s liab ility for special additional tax could have been 
deferred (not exempted) pursuant to Article 99(11) of the Corporate Tax Act and the remaining DHI 
would have been relieved of the burden to pay sp ecial additional tax immediately upon the spin-off. 
  However, by virtue of a subsequent legislati on, the “special additional tax” was repealed as of 
1 January 2002 ( See Exhibit Korea – 121
, Law No.6558 of 31 December 2001). As a result, any 
special additional tax liability of the remaining DHI  (the provisions were  only relevant to the 
transferor, not a transferee such as DSME) was completely extinguished.1 This repeal was made 
mainly because the special additional tax was c ontroversial as it operated as a double taxation in 
addition to ordinary corporate income tax which would also be assessed on the same capital gains as 
those subject to special additional tax.  
 
 
                                                      
1 Korea also notes that this was generally available for any and all Korean corporations involved in any 
“asset transfer” transactions because the “special additional tax” itself wa s withdrawn in its entirety from the 
Korean tax system by virtue of the law of 31 December 2001. WT/DS273/R 
Page G-48  
 
EC Comment 
  The European Communities cannot hide its amazement that Korea is now claiming for the first time (without providing, however, any suppor ting documentation) that Article 45-2 was not 
applicable to the Daewoo restructuring and that an y benefit would have allegedly been to DHI under 
Article 99 of the Corporate Tax Act. 
  The European Communities is unable at this time to obtain the tax advice necessary fully comment on the plausibility of these claims.  Such tax advice would not however appear necessary in the light of the following facts: 
 
• Korea does not deny the fundamental point in the Newspaper article that the Daewoo 
restructuring would not have gone ahead without the tax exemption (whatever the precise legal basis);  
 
• Korea confirms that the Arthur Andersen Repor t did not analyse the tax consequences of the 
restructuring plan (this is stated even more clearly stated in reply to question 123).  This fact 
either adds to the flaws of the Arthur And ersen Report already identified by the European 
Communities and further reduces the going co ncern value or it shows that the entire 
restructuring was precooked from the beginning  with Arthur Andersen knowing about the tax 
exemption well before it was adopted.  
 125. (a)  The list of factors identified in the Drewry Report  as determinants of ship price 
includes freight rates, delivery date/build time (which would s eem to be related 
to capacity and thus supply and demand), and payment terms (which would seem to be related to financing). Drewry does not refer to any measure of the aggregate level of demand as such. Please explain. 
 
Korea’s Response
 
  Drewry considers that the trend in demand for each like product separately is one of the 
factors that contribute to the relevant price level for the product considered. However, as mentioned in 
Section 1.2.2 of the Drewry report, considering only that price will vary directly in line with demand 
does not go far enough as there are many other demand and supply-related factors that contribute to 
determining the price level for any like product. In Section 1.2 of Exhibit Korea  – 70, Drewry 
identifies a range of factors that are consider ed to have an impact on ship price, i.e.: 
 
• External factors (para 1.2.1) 
 o Freight rates 
 o Exchange rates 
 o Metals prices index 
• Supply side (para 1.2.2) 
 o Workload shortage or overcapacity 
• Demand side (paras 1.2.3 and 1.2.1) 
 o Size 
 o Delivery date 
 o Payment terms 
 o Build time 
 o Shipbuilding orderbook 
• Demand side – technical factors (para 1.2.3) 
 o Speed and manoeuvrability 
 o Hull strengthening  WT/DS273/R 
 Page G-49 
 
 
 o Equipment specification 
 o Paint & coatings 
 o Innovative design 
 o Regulatory: Class and Ship Register 
 
 While the aggregated supply-demand balance is, th erefore, clearly a factor which affects price 
in the shipbuilding industry, Drewry considers that it is not the only or dominant factor. Applying the 
simple economic concept of supply-demand bala nce, however, encounters some problems in 
shipbuilding, primarily: 
 
• the difficulty in quantifying shipbuilding capac ity (as opposed to historical output levels) 
 
• the fact that this capacity is not all dedicated to merchant shipbuilding and may also be in 
used for naval shipbuilding, ship repair and conversion and offshore structure construction in 
particular 
 
• the lack of homogeneity in aggregate demand (pri marily due to different ship types and sizes) 
 
• the lack of homogeneity in aggregated supply due  to the size capability of yards’ facilities and 
the experience base regarding ship types th at they have experience in building. 
  The result is that whilst demand may be able to  be categorized according to size and type of 
vessels, supply cannot rigorously be divided on th e same basis and so there is considerable non-
homogeneity within the supply-demand balance.   
EC Comment 
  Contrary to what Korea states, there is no significant non-homogeneity within the supply-
demand balance.  CGT is the factor designed to iron  out non-homogeneity.  Th is is acknowledged by 
Korea, e.g., in its response to Panel Question 173(b) at p. 73, last paragraph .  
 
 (b) Also, in discussing Korean cost ad vantages on the supply side, Korea does not 
refer to cost of debt service/interest expenses. Please explain. 
 Korea’s Response
 
  Debt service costs tend to be specific to a par ticular yard’s situation, both in terms of the 
structure of its financing of capital assets and also it s working capital requirements.  It is, therefore, 
not possible to take general economic indicators to estimate the relative cost advantages or otherwise 
of different yards in this respect. For example, in  the EC there are many long established yards whose 
capital cost of facilities has long since been amortized and any interest on debt related to this will also 
have gone. Debt service costs related to facilities ar e, therefore, likely to be those associated with 
improvements and modernizations.  In  general terms, there has been a lower level of modernization at 
EC yards, but exceptions to this are to be found in the passenger shipbuilding yards and most 
particularly in the former East German yards like Aker MTW and Kvaerner Warnow Werft. In these 
yards the modernizations were state funded and then  when the yards were privatized the new owners 
inherited the new facilities at a fraction of the investme nt costs – in this situation, the debt levels and 
hence debt service costs are driven by very specific circumstances which does not make for easy 
comparisons. 
 
 However, the area where Korea has significant cost advantages fo r such costs is in terms of 
the scale factor of its production. Firstly, debt service costs are supported by high workload volume WT/DS273/R 
Page G-50  
 
throughputs and as such on a basis of output units th e cost per unit will be lower than for smaller 
yards.   This is particularly relevant in the case of financing of facilities and capacity where the capital 
cost of providing 1,000 cgt of capacity will be fa r lower than in smaller capacity yards.  The 
Figure 8.1 in Exhibit – Korea 70 gives an indicatio n of the throughput scale differences between EC 
and Korean yards, particularly recognizing that most of the bigger EC entries are in fact groups comprising more than one yard.   A good example of the economies of scale is  evident from the exam ple of LNG-specific 
investment. As highlighted in the KPMG report submitted as Exhibit Korea – 108, FMI assessed that 
a European yard would need to cover the investme nt burden of LNG specific investment over a series 
of 3 LNG ships but subsequently changed its estim ates for Daewoo to recovery over 10 ships, to 
reflect the higher throughput volumes of such v essels at the Korean yard.  By the end of 2002, 
Daewoo had in fact received orders for 21 LNG ve ssels and so its capital expenditure and any debt 
service cost associated with this is likely to be mu ch lower than any European  yard with only short 
series builds.   In respect of working capital requirements and the debt service costs of these, the Korean 
yards are considered to operate at an advantage to EC yards in this respect in view of the generally 
better cash flows achieved by their more front -end loaded contract payment installments. 
 
 Therefore, Korea submits that the EC has not shown that debt service costs/interest expenses 
of the allegedly subsidized Korean yards have incurre d such an increase over the years as to offset the 
decrease in costs that was shown in the Drewry report in Exhibit – Korea 70. And, in fact, as 
mentioned above, the debt service costs and interest expenses, as confirmed by the EC’s expert, FMI, 
have shown a decreasing effect due to their sp read over a greater throughput. Thus, Drewry’s 
conclusion stands: the decrease in Korean costs of production is clearly greater than the decrease in 
prices of the vessels concerned.   
EC Comment  
 
 Of course, debt service costs are specific to particular shipyards. Their analysis is 
straightforward based on information available in company accounts and documents such as work-
out plans.  The cost modeling undertaken by FMI takes  this into account: The level of debts for each 
yard is analysed and a contribution is calculated pr o rata for each project of the yard during the 
period in question. If a yard has received a high number of orders, debt service costs would of course 
be spread over all orders, but a reasonable estimation of the costs of production, which have to be at 
the base of the final offer price, cannot take into account future orders which have not yet 
materialized. That is to say that e.g. Daewoo could not have assumed in 2000, when estimating its 
costs of production for a LNG carrier, that by the en d of 2002 there would be a total of 21 orders and 
debt service costs would therefore be lower fo r each individual project. Concerning Drewry's 
conclusion, the EC notes that Drewry only made  qualitative assessments of the cost advantages in 
Korean yards and claims that costs of production are extremely difficult to estimate. It is therefore not 
clear how Drewry can come to such a specific conclusion.   
 
126. Korea seems to imply that shipyards special ize in producing certain kinds of ships. If a 
given Korean shipyard has no history of producing,  for example, ferryboats, could this be the 
basis for concluding that that shipyard cannot produce them? Please explain. 
 
Korea’s Response
 
  The fact that a national industry or individual shipyard does not produce a particular type of 
ship, does not necessarily mean that it is physically or technically incapable  of building that type of  WT/DS273/R 
 Page G-51 
 
 
vessel. The reality is that there is a range of factors which places limitations (physical, economic and technical) on the shipyard such that it is either not economically viable for the yard to build them or that it does not have credibility as a comp etent builder in the customers’ eyes. 
 The following are the main factors imposing limitations: 
 
• ship size – the shipyard has to have buildi ng locations big enough to build the ship in 
question, this includes the height of lift for cranage and or headroom clearance in covered 
building berths for ships with very high superstructures; 
 
• specialist facilities or skills – for certain ty pes of vessels specialist facilities are required 
which must be provided in the shipyard or some times from a supplier or sub-contractor.  Ship 
types that are generally recognised to have such requirements include: 
  o Cruise ships: skills for the installation of  glass atriums and interior decoration; high 
volume of modular cabins, highly complex in teraction of specialist sub-contractors; 
 
 o Ro-Ro ships: skills to install the water tight bow and stern doors and associated ramps; 
  o Chemical tankers: some chemical tankers include tanks made of stainless steel which 
requires special welding equipment and welding skills; 
  o LNG ships: ability to construct the special containment gas containment tanks or to 
lift in and install such tanks made by su b-contractors; high levels of insulation 
‘boxes’ required to insulate the tanks; sk ills in the installation of steam turbine 
engines which are rarely used in other me rchant ship types; and most recently gas 
turbines and dual fuel engine arrangements; 
 
 o FPSO and drill ships: skills in the installa tion of what is referred to as the ‘topside’ 
equipment for these vessels involved in seabed  oil extraction and storage; specialist 
mooring and pipeline connections for loading and unloading cargo; 
  o Fast ferries: skills and facilities for construction of the aluminium hull and 
superstructure which requires specialised welding facilities and skills and sometimes 
hull jigs; 
  o Tankers: although less dramatic, tankers of most kinds have much higher levels of 
pipework and valves so a shipyard buildin g tankers must have superior pipeshop 
capabilities and facilities in-house or by sub-c ontract than those building other ship 
types. 
  Shipyards tend to have a range of ship typ es and sizes which they produce and for which they 
gain a reputation in the marketplace with customers and hence they will focus their marketing efforts 
on these ship types and sizes. These are ship typ es and sizes in which they can be most cost 
competitive and where they have good customer credib ility in terms of design, price, and delivery. 
Through a combination of self-selection and custom er selection they focus on market sectors where 
they can maximise their competitive advantage.     This is not to say that they  cannot move into other markets that are within their physical 
capability but to do this they will have to be ab le to hone their productivity; offer good designs and 
will need to build customer awar eness in their competence and compe titiveness in this market. They 
will recognize that yards already well established a nd active in these markets will have an advantage 
over them initially.  WT/DS273/R 
Page G-52  
 
  The fact that yards specialize in specific lik e product vessels can be shown for yards all over 
the world including for Japanese and Chinese yards but  also for the EC yards as is demonstrated 
below. The data covers the same timescale of deliveries or orders from 1990 and records the 
involvement of 290 EC yards across all ship types over that time: 
 
• General Cargo and Multi-purpose ships : 75 EC shipyards (or shipyard groups if not 
reported at yard level) have been involved in  this sector so there has been plenty of 
participation with 771 vessels involved. But th ere has been no involvement by any the IZAR 
yards in Spain; any of the Fincantieri yards in Italy, Chantiers de l’A tlantique, Odense, Aker 
MTW, HDW, Lindenau, Kvaerner Masa Yards.  The major yards involved have been Damen 
group, Peters Scheepswerf, Ferus Smit, Bodew es and Vollharding of Holland and JJ Sietas of 
Germany which have built 347 of the 771 ships. 
 
• Bulk Carriers:  39 EC shipyards have been involved in this sector involving 154 ships but 
there has been no involvement from Chantiers de  l’Atlantique, Odense, Aker MTW, Kvaerner 
Warnow Werft, Volkswerft, HDW, Lindenau, Kvaerner Masa Yards and only two built at 
IZAR group yards. Fincantieri yards however we re involved with 16 of the 154 vessels. The 
market leader in this sector is Japan where 2, 152 ships were involved followed by China with 
454 ships. So any lack of involvement seems unlikely to be connected to Korean yards. 
 
• Container Ships: 51 EC shipyards have been involved in this sector involving 693 ships but 
participation has varied dramatically by size of vessel.  Whilst 39 yards were involved in 
building container ships of <1,000 teu, only 5 ya rds were involved in building container ships 
of 3,500 teu and above; 21 yards were i nvolved with building mid range vessels of 
1,000<3,500 teu. Kvaerner Masa Yards and Ak er Finnyards of Finland and Chantiers de 
l’Atlantique of France did not participate in this  market at all, whilst in Spain,  IZAR groups 
yards built just 10 and Union Naval Valencia built another 2; and in Italy Fincantieri yards were the only ones to participate with 9 vessels.  The concentration of containership building 
within EC lies with the German yards, Dutch yards (for ships on less than 1,000 teu only) and 
with Odense of Denmark. 
  It is evident that the shipyard supply market within the EC is far fr om homogenous and some 
shipyards have a particularly strong focus on certain size or types of vessels, i.e.: 
 
• Damen Shipyards  group of Holland built 251 ships dur ing the period of which 194 were 
either Tugs, General Cargo or  Multi-purpose Cargo ships.  
 
• Lindenau Shipyard  in Germany where 21 of the 24 vessels with which it was involved 
during this period were Chemical Tankers. 
 
• Odense Shipyard  in Denmark, where 59 of the 76 vessels were container ships. 
 
• Chantiers de l’Atlantique  in France, where 32 of the 47 ships were Cruise Ships. 
 
• Kvaerner Masa Yards  where out of 54 ships, 25 were Cruise Ships, 9 were Ferries and 8 
were Offshore. 
 
• Aker Finnyards
 where out of 41 ships, 20 were either Cruise, Ferry or Passenger ships and 
another 4 were Reefers ships and 3 were RoRos. 
 
• Smaller Italian Yards : Morini where 13 out of 20 ships were chemical tankers; Orlando 
where 10 out of 14 ships were chemical tankers ; de Poli where 10 out of 20 were chemical  WT/DS273/R 
 Page G-53 
 
 
tankers and another 7 were LPG ships; Rodriqu ez where 18 out of 29 were ferries and 6 were 
passenger ships; SEC where 16 out 24 were chemical tankers and 5 were Ro-Ros; Visentini where 14 out of 25 were Ro-Ro and 11 were ferries. 
 
• Smaller Spanish Yards : Armon group where 47 out of 91 were fishing vessels and 43 were 
Tugs; Zamacona where out of 55 ships 36 were Tugs and 9 were fishing vessels; UN 
Valencia where out of 45 ships 23 were Tugs a nd 9 were chemical tankers; Freire where 21 
out 27 ships were fishing vessels; Gijon Naval where out of 14 ships, 7 were fishing vessels and 7 were chemical tankers; Cies where 10 out of 11 were fishing vessels; Barreras where 11 out of 31 were fishing vessels, 9 were Vehicle Carriers and 6 were Ferries; Balenciaga where 
out of 16 ships 7 were fishing vessels and 6 were Tugs; de Huelva where 23 out of 35 were 
fishing vessels. 
 
• Small Dutch Yards : Peters Scheepswerf where 57 out of 60 ships were General Cargo; 
Bodewes were 26 were Gene ral Cargo and 22 were Multi- purpose Cargo (MP Cargo);  
Vollharding where 25 were MP Cargo and 17 were  General Cargo out of 63 ships; Tille 
where out of 22 ships 10 were Containers a nd 9 were MP Cargo; IHC Holland where 48 out 
of 51 ships were Dredgers; K Damen wher e 13 out of 20 were chemical carriers; 
  We believe that the above demonstrates that th e supply side of the shipbuilding market is far 
from homogenous and that yards do tend to speciali ze in certain types and sizes of vessels.  The 
reasons for this may relate to facility limitati ons, but may also be driven by the yards own 
appreciation of the sectors that it has the best co mpetitive advantage in or by customers’ views on 
technical competence and competitiv eness for certain ship types. 
 
EC Comment 
  The EC is pleased to note that Korea is revising its previous untenable position. While it 
claimed in para 294 of its second written submission that "Korean shipbuilders and the EC shipyards 
operate to a large extent in different like products  markets", Korea now acknowledges that some EC 
yards are active in each segmen t where Korean yards operate, in particular, container ships. 
  Korea’s attempt to argue that smaller and bigger EC yards are not active in the same 
segments is irrelevant.  In the view of the European Communities it is sufficient that at least one yard 
of the EC shipbuilding industry is capable of producing ships in the same market segment .   
  
IV. KOREA’S COMMENTS TO QUESTIONS FROM THE PANEL TO THE EC 
 
158. (a) Is it the view of the EC that excess sh ipbuilding capacity exists only in Korea, or 
is there also excess capacity in other countries? 
  (b) If your view that excess capacity exists only in Korea, please explain. 
 
 (c) If your view is that there is excess capa city also outside of Korea, where and how 
much is the excess? 
  (d) Is there any excess shipbuilding capacity in the EC? If not, what is the basis for 
this conclusion? 
 WT/DS273/R 
Page G-54  
 
Korea’s Comments
 
  It is recognized within the industry that there is no easy way to rigorously measure shipbuilding capacity.  However, significant attemp ts have been made over recent years, under the 
auspices of the OECD Working Party on Shipbuilding, to improve the estimation of shipbuilding 
capacity. 
  The latest estimates of capacity from OECD sources are an estimated figure for actual capacity in 2000 and a figure for anticipated capacity  in 2005 which was also made and agreed in 
2001
2 from estimates provided by the Japanese, EC, USA and Korean shipbuilding associations 
expressed in cgt. The following table shows an assessment of capacity utilization for the major 
shipbuilding regions based on these capacity assessment s and shipbuilding output statistics from LR 
Shipbuilding returns.   
 Versus 2000 capacity Versus  projected 2005 capacity 
 2001 2002 2003 2001 2002 2003 
Japan 90% 93% 95% 84% 86% 88% 
South Korea 94% 104% 111% 77% 84% 90% 
EU countries 87% 84% 76% 78% 76% 68% 
AWES non EC 1 86% 83% 74% 78% 76% 68% 
Other European  61% 80% 87% 54% 71% 77% 
China, PR of 96% 110% 180% 63% 72% 118% 
Asia & Pacific 43% 63% 48% 39% 58% 44% 
NIS Countries 2 29% 83% 64% 27% 77% 59% 
North & South 
America 32% 44% 58% 29% 39% 52% Africa & Middle 
East 8% 8% 8% 8% 8% 8% 
Others 0% 0% 0% 0% 0% 0% 
WORLD TOTAL 85% 91% 96% 74% 79% 83% 
 
1 AWES non EC = Norway, Poland and Romania 
2 NIS = Russia, Ukraine, Latvia, Lithuania, Georgia, Azerbaijan 
 
 
 While Korea is not endorsing this extremely general overview as an appropriate measure for 
the multiple industries examined in this WTO dis pute, nonetheless, the table helps to indicate the 
situation regarding estimated excess capacity in the ma in shipbuilding regions in spite of the difficulty 
in defining shipbuilding capacity and the fact that the 2005 figure is a projection which is now some 
3 years old.  
  Against both the 2000 capacity estimate and the 2005 capacity projection it can be seen that excess capacity exists all around the world. Regardi ng the major shipbuilding regions, it is noted that 
there is significant excess capacity within the EC  yards and some overcapacity in Japan. The table 
below shows a country level breakdown for the EC’s main shipbuilding countries. 
  
                                                     
 
2 OECD Document C/WP6(2001)16 of 'Present Market Conditions and Future Outlook for the World 
Shipbuilding Industry' dated November 14, 2001 and prepared  by the Secretariat of whic h an excerpt is attached 
in Exhibit Korea – 123 .   WT/DS273/R 
 Page G-55 
 
 
 Versus 2000 capacity Versus  projected 2005 capacity 
 2001 2002 2003 2001 2002 2003 
Denmark 68% 82% 72% 61% 73% 65% 
Finland 116% 88% 69% 116% 88% 69% 
France 165% 107% 139% 147% 95% 124% 
Germany 102% 106% 79% 90% 93% 70% 
Italy 80% 89% 88% 69% 77% 76% 
Netherlands 77% 72% 43% 69% 64% 38% 
Spain 59% 67% 88% 54% 62% 81% 
United Kingdom 19% 21% 28% 19% 21% 28% 
EU countries 87% 84% 76% 78% 76% 68% 
 
 
 Of particular note is the situation regarding Ch ina, where it is shown that output has exceeded 
the projected 2005 assessment.  At the time of the 2001 projection, unlike the other major shipbuilding regions of Japan, Korea and the EC , China did not supply its own estimate nor has it 
done so subsequently.  The OECD capacity estimat es show that output has exceeded the estimated 
2000 capacity figure in both 2002 and 2003 and ex ceeded the 2005 projected capacity in 2003.  
 
 However, there has been considerable grow th in capacity in China since 2000 both through 
improved performance
3 and additional or enhanced faciliti es. Drewry Shipbuilding Consultants 
believes that there has been excess capacity within  China during this period. Over the period 1999-
2001 it is estimated that the top 20 shipbuilding yards in China (which represented approximately three quarters of the country capacity) were work ing at 55 per cent of their capacity.  Drewry 
undertook a detailed estimate of capacity in China, based on the agreed OECD guidelines which 
reflects the type of ships built and performance over the period 1999-2001, which was published in its 
(non-commissioned) report on China’s Shipyards issu ed in July 2003.  Th is assessed Chinese capacity 
to be 3.187million cgt at the end of 2002 which take n in conjunction with the reported output for 
China in 2002 and 2003 would indicate utilization levels  of 49 per cent and 81 per cent respectively. 
Furthermore, Drewry calculated that a projected additional 0.353 million cgt was scheduled to come 
on line by 2005/6.  This estimated 2005/6 capacity of  3.54 million cgt contrasts with the earlier OECD 
estimate for 2005 of 2.18 million cgt.  
EC Comment 
 
 Korea provides two OECD tables in order to argue that there is overcapacity in the European 
Communities and otherwise in the world.  However, this evidence is irrelevant, since it the tables 
concern capacity utilization and not capacity.  The reason for lowered capacity utilization in the 
European Communities is the consequence of the serious prejudice caused by Korean subsidies. 
Moreover, utilization rates of Korean yards are misleading as they have filled their capacities 
through low-price offers.  Korea seems to argue t hat a yard brimming with orders cannot contribute 
to shipbuilding overcapacity although that yard is maintained only due to subsidization.  
  Exhibit Korea -123  actually confirms Korean capacity expansion through the 1990s while EC 
and Japan remained flat.    Korea nowhere contested th e fact that capacity of EC shipyards has been 
reduced significantly over the last 20 years (Second written submissi on by the European 
Communities, para. 395).    
 
                                                     
 
3 One of the great difficulties in this area is th at potential capacity is profoundly influenced by 
efficiency of production, not just by  nominal physical capacity. This explains in part why China with its great 
potential is such a “wild card” in the projections. WT/DS273/R 
Page G-56  
 
161. The EC presents indices of estimated Ko rean production costs versus prices in support 
of its argument that there is price suppression/depression The EC indicates that its consultant, FMI, prepared the cost estimates, taking into  account various known cost trends and cost 
advantages of the Korean yards. The EC in its an swers to questions following the first meeting 
provided a description of the methodology used by  FMI to prepare these estimates. The EC also 
indicated that, should the Panel so request, it would furnish the detailed underlying data. Is it 
the view of the EC that a graphical presentation of price indices, along with a description of methodology, constitutes prima facie evidence of evolution in Korean shipbuilding costs? Please 
explain.  
Korea’s Comments
 
  Korea observes that the EC has not even provided production cost versus price indices for each of the vessel segments that the EC itself has identified. In the Second Substantive Meeting, upon 
a request of the Panel, the EC has confirmed that a serious prejudice assessment should be made for 
each of the three product segments identified by the EC separately. While the same question is now 
addressed in writing to the EC, having clearly separated the three product segments, in the EC’s rationale, there is no reason why the EC should r espond differently in writing. Thus, when the EC 
alleges that price suppression must exist because in  the absence of price pressure due to Korean 
subsidies, the increase in demand, freight rates and cost of production would have led to price 
increases, the EC should have made a prima facie  case in support of its allegations already in its First 
Written Submission for each of its own product segments separately.  
  The EC failed to do so and even further weakened the strength of its allegations in 
Attachments 2 and 6 of its responses to the Pa nel’s questions as well as in its Second Written 
Submission. The following will clarify this: 
 
 
 First Written Submission Attachmen t 2 of the EC’s responses to 
the Panel’s questions 
 Price 
developments Price and cost 
index Price 
developments Price and cost 
index 
LNGs Newbuilding price 
developments (Figure 30 at page 
164) Cost and price 
indices for Korean LNGs (Figure 38 at 
page 165) 
 No explanation on 
how these cost 
indices were obtained and which 
LNGs are reflected 
in these LNGs . Year-end prices of 
LNGs (Figure 1.3 at page 3) 
 
  Cost and price 
indices for Korean LNGs (Figure 1.5 at 
page 4 
 Half of one page 
explanation on the 
“estimation” of cost indices (Section 4 at 
page 16) but still no 
clear explanation on how these costs were 
calculated or which 
LNGs are reflected 
in these indices.  
Container vessels A graph with world 
market prices for 3,500 teu and for 
1,100 teu container 
vessels taken from Clarkson Research 
Studies 
  Cost and price 
indices for Korean 3,500 teu container 
vessels (Figure 40 
at page 166 of the EC’s First Written 
Submission) 
  A graph is shown 
with price developments for 8 
different sizes of 
containers based on Clarkson research. Cost and price 
indices are shown for a Korean 
panamax container 
ship (Figure 3.7 at page 15. 
 
   WT/DS273/R 
 Page G-57 
 
 
 First Written Submission Attachmen t 2 of the EC’s responses to 
the Panel’s questions 
 Price 
developments Price and cost 
index Price 
developments Price and cost 
index 
(Figure 41 in the 
EC’s First Written 
Submission, at page 
167) Price indices 
presumably 
calculated based on 
Figure 41. 
 No explanation on 
how these cost 
indices were obtained and which 
container vessels 
are reflected.  
No explanation as 
to why conclusions for all container 
vessels are drawn 
on the basis of a specific size range 
only.  The comments with 
regard to the data in 
the First Written 
Submission remain. 
In addition, it is questioned whether 
the cost and price 
indices shown in Figure 3.7 can be 
reconciled with 
those in the First Written Submission. 
The latter reflected 
those of 3,500 teu container vessels 
while Attachment 6 
to the EC’s responses to the 
Panel questions 
indicates that Panamax container 
vessels which are 
reflected in Figure 
3.7 cover vessels 
between about 4,000 and 5,000 teu (item 
7. at page 1.) There 
seems to be an inconsistency in the 
EC’s demonstration.  
Product and 
chemical tankers No price 
developments shown at all. Cost and price 
indices for Korean handysize product 
and chemical 
tankers (Figure 43 at page 169 of the 
EC’s First Written 
Submission)  
No indication on 
how the price indices were 
determined. 
 
No explanation on 
how these cost indices were 
obtained and which 
container vessels are reflected. 
 
No explanation as to why conclusions 
for all product and 
chemical tankers Price developments 
for handymax and panamax products 
tankers taken from 
Clarkson’s (Figure 2.3 at page 8)  
 
 The data is shown 
for “product 
tankers” while the EC has constantly 
indicated that 
“product and 
chemical tankers” 
are concerned by the present dispute 
and has indicated 
in the Second Substantive 
Meeting that it is 
concerned with tankers that 
transport both oil 
and chemical No cost and price 
indices are shown and there is no 
indication as to 
whether the EC maintains those 
shown in Figure 43 
of its First Written Submission. 
 
There is total uncertainty as to the 
allegations. If the 
EC meant to 
maintain Figure 43, 
the questions/observatio
ns in the third 
column of  this table remain valid. WT/DS273/R 
Page G-58  
 
 First Written Submission Attachmen t 2 of the EC’s responses to 
the Panel’s questions 
 Price 
developments Price and cost 
index Price 
developments Price and cost 
index 
are drawn on  
the basis of a 
specific size range 
only. 
  products. It is, 
therefore, not clear 
whether these 
prices reflect sown 
in Figure 2.3 reflect those of the 
products concerned 
by this dispute. 
 
  As mentioned, it is not clear how the cost i ndices used were arrived at or whether the cost 
reports of FMI submitted in Annex 10a of the docum ents supplied by the EC in the Annex V process 
were taken into account. However, if they were, in addition to the criticism already mentioned by 
Korea in its Second Written Submission (at page 124) or in the Drewry Report (Exhibit Korea – 70 at 
page 8.22), Korea submits that the cost calcula tions are not sufficiently representative as to be 
conclusive. Indeed, cost calculations were made  for the following vessels subject to the present 
dispute:  -  Hanjin 4,900 teu container; 
-  Daewoo 5,100 teu container 
-  STX 51,000 dwt tanker (which may be a pr oduct tanker not concerned by this dispute) 
-  Hyundai Mipo handymax tanker
4 
-  Daewoo LNG for Exmar -  Hyundai LNG for Golar 
-  Hyundai 2,500 teu 
-  Samsung 5,500 teu container -  Samsung LNG for British Gas -  STX panamax products tanker (which may not be concerned by this dispute that concerns 
combined product and chemicals tankers) 
-  STX product and chemicals tankers
5 
-  Hyundai 7,200 teu container vessel, 
-  Daewoo LNG for Bergesen -  Samho Aframax tankers (which may not be con cerned by this dispute that concerns combined 
product and chemicals tankers) 
-  Samsung 7,200 teu container ship 
-  Daedong 2,500 teu container ship 
-  Hyundai Mipo handysize products tanker (whi ch, as mentioned above, may not be concerned) 
-  Shin-A handysize products tankers (whi ch as mentioned above, may not be concerned)
6 
-  Daedong 35,000 dwt tanker (if a product ta nker, this product may not be concerned) 
-  Hanjin 5,608 teu container ship 
-  Hanjin 1,200 teu container ship 
                                                      
4 For details on this vessel and the preceding three,  refer to Section 6 of the FMI Mid-term report, 
Shipbuilding Marketing Report – Phase 4, March 2003, Annex 10a of the documents submitted by the EC in the 
Annex V process. 
5 For details on this vessel and the preceding five, refer to Section 6 of the FMI Final report, 
Shipbuilding Market Monitoring – Phase 3, August 2002, Annex 10a of the documents submitted by the EC in 
the Annex V process. 
6 For details on this vessel and the preceding si x, refer to Section 6 of the FMI Final report, 
Shipbuilding Market Monitoring, Phase 2, May 2001, Annex 10a of the documents submitted by the EC in the 
Annex V process.  WT/DS273/R 
 Page G-59 
 
 
 -  Hanjin 6,250 teu container ship -  Halla 3,500 teu container ship -  Hyundai 6,800 teu container ship -  Hyundai 5,600 teu container ship 
-  Hyundai LNG for Bonny Gas Transport 
-  Hyundai 5,500 teu container ship -  Samsung 5,500 teu container ship -  Samsung 3,400 teu container ship
7 
 
 Thus, it would seem that cost calculations have been made at best for around 25 vessels out of 
the hundreds of Korean vessels sold that are vessel types concerned by the dispute. Not even half of 
these cost calculations concern vessel s built by restructured yards.  
  Korea, therefore, submits that if this were th e basis for the cost indices set forth by the EC in 
relation to price indices, these cost indices are not representative compared with the total sales of the 
vessels concerned by the restructured yards in terms of the number of vessels sold or in terms of like 
product coverage. If these are not the basis for th e cost indices, the indices relied upon by the EC 
constitute all the less prima facie  evidence sufficient to demonstrate the existence of price suppression 
as they are assertions only without any substantiating evidence. In any event, Korea submits that the 
EC has not carried the burden of proof that rested on it. 
 
162.  What specific evidence/examples are contained in the information before the Panel in support 
of the EC argument that prices at one end of the product spectrum for a particular kind of ship influence prices along the entire spectrum? (For exampl e, is there specific evidence in the information 
before the Panel that a downward movement in very  large container ships brings about commensurate 
downward movement in all smalle r sizes of container ships?) 
 
EC Comment 
  The cost investigations listed by Korea are ind eed those undertaken by the EC which fall into 
the disputed product categories. However, Korea’s c annot dismiss the EC cost calculations as not 
being representative.  Each of these cost calcul ations concerns a number of ships due to series 
building, and the EC has made great efforts to sel ect orders for cost analysis that can be considered 
representative for the production of  Korean yards.  Moreover, as of May 2003 another 17 cost 
investigations had been made which are not listed by Korea as they do not concern the disputed 
product categories. Nevertheless, these cost estimat ions have helped the EC to understand better the 
cost structures and pricing behaviour of Korean yards. 
 173. (a)  For each of the three ship types at issu e in this dispute, how are ship data normally 
maintained by the industry, and by industry analysts? 
  (b) In particular, are these three categories of  ships recognized and used routinely for 
purposes of industry analysis? 
 
Korea’s Comments
 
  The basis of most analysis is the electronic da tabases referred to earlier together with market 
intelligence and detailed market know ledge and these are used to prepare certain regularly issued 
reports.  
                                                     
 
7 For details on this vessel and the preceding five, refer to Section 2.2.2 of the FMI Final summary 
report, Shipbuilding Market Monitoring, April 2000, Annex 10a of the documents submitted by the EC in the 
Annex V process. WT/DS273/R 
Page G-60  
 
  These reports routinely provide informati on based on ship types but do not necessarily 
coincide with the categorization of containershi ps, product and chemical ta nkers and LNGs proposed 
by the EC which explains why it is, in particular, so difficult to identify the EC’s product category for 
product and chemical tankers.   
 The product chemical and LNG ship types covere d by this dispute fall within the category of 
tankers (as shown in the ship type classification table in the response to Question 173 – (a) above), 
which is a broad grouping which includes, crude oi l tankers, product tankers , chemical tankers, gas 
carriers as well as specialist types (again, without an y category for product and chemical tankers). In 
the LR Fairplay Register of Ships, for example,  this includes the following tanker types: Beer, 
Bitumen, Chemical/Oil Products, Chemical, Crude Oil, Ed ible Oil, Fish Oil, Fruit Juice, Latex, LNG, 
LPG, Molasses, Oil Products, Oil Sludg e, Vegetable Oil, Water, Wine. 
  General type classification are, however, sometime s inconsistent with detailed technical fields 
as a result of data input or reporting inconsistencies,  and as such data must be looked at taking into 
account the context in which information is required to avoid misleading, inaccurate or incomplete 
data.
8 
  In general terms, the following classifications  of tankers are generally widely observed: 
 
• Crude oil 
• Oil Products 
• Chemical
9 
• Gas Carriers – which consistently identify LPG and LNG as separate types 
 
As far as containerships are concerned, these are us ually referred to separately to other ship types. 
  Size bands are used for almost all in-sector an alyses and also for some cross sector analyses. 
Exhibit Korea – 131
 shows the use of size bands within ship types on a regular basis in various 
industry publications. See the response to Question 173(c), (d) and (f) for examples of those 
commonly used for reporting and analysis purposes. Common statistics are the numbers of 
ships/orders, GT (gross tonnage) and dwt (deadweig ht tonnage for cargo carrying ships only) and in 
the case of containerships teu capacity - this inform ation is used by shipyards and shipowners alike 
and covers both new orders, orde rbook and deliveries. Orderbook info rmation is generally shown both 
in aggregate terms and phased by year of delivery.   
 Cgt (compensated gross tonnage) is of no inter est to shipowners or brokers, but is regularly 
used for certain shipbuilding purposes, namely shipbuilding capacity, aggregated shipbuilding 
demand and shipbuilding output.  The choice of whic h parameter to use is determined by the purpose 
for which the analysis is to be undertaken.  
 Other characteristics of the vessels such as whet her they are equipped with gearing or have 
reefer capacity may also be taken into account in a number of industry reports. 
 
                                                     
 
8 For example, in the preparation of the Drewry reports in Exhibit Korea – 70, 109 and 110, Drewry 
established through inspection of the above sources that  ships with IMO chemical classes were listed as oil 
product tankers and vice-versa . Thus, there was considerable inaccuracy  and incompleteness in this respect. 
Drewry therefore made use of various sources to maximize the accuracy and completeness of the 
products/chemical tanker category. 
9 Note that in Exhibit Korea – 130 , LR Fairplay include chemical/o il tankers under the category of 
chemicals and not oil products which contrasts with how the EC has used this data.  WT/DS273/R 
 Page G-61 
 
 
EC Comment  
 
 Drewry’s own taxonomy exa mple provided in exhibit Korea 131 gives size bands for 
containerships (500, 1000, 1500, 2000 TEU) that a re entirely inconsistent with Drewry’s report 
(Exhibit Korea-70) which uses <1000, 1000-2500, 2500-3500, 3500-5000  and >5000 TEU.  This 
contrasts with size bands previously referred to by Ko rea.  As noted in the Response by the European 
Communities to Panel Question 27 at the first subst antive meeting, Korea itself refers to the market in 
“container vessels up to 1,999 TEU” and the “market in container vessels from 2,000 to 3,999 TEU” 
in para. 19 of Korea’s first writte n submission while then citing with approval to the vessel categories 
used in an analysis of FMI which looked at “cont ainer feeder vessels (up to about 3,500 TEU)” in 
para. 515 of Korea’s first written submission.   
  The shifting size bands used by Korea and other industry analysts are evidence against 
Korea’s own argument that size bands can be  used to sub-divide the product.   
 
173. (e) If they provide a range of pricing info rmation at different levels of aggregation, 
how are these different data series used? 
 
Korea’s Comments
 
  The main level of aggregation is from a range of  price series into a single newbuilding index.  
This is usually done as a mathematical average (or price per dwt average) and not a weighted average 
reflecting the overall composition of the fleet. A single newbuilding index is a basic way of looking at 
what is happening overall to shipbuilding prices as opposed to sector or size band specific trends. So 
if a broad range of price series is used and pri ces are rising in some and dropping in others, the 
newbuilding index trend will be m oderated by this.  However, as the price indices do not cover all 
ship types and because it is not weighted by the composition of the demand across different types and 
sizes, it has to be used with extreme caution and in terpreted in the light of industry knowledge.  
  Price series are not generally aggregated to pr ovide a single trend for a particular broad ship 
category because it is recognized that the differing tr ends between different size bands is a significant 
factor. Whilst these trend differences may seem small in relation to overall market price movements, 
they are highly significant to industry players becau se they demonstrate different underpinning factors 
for different ship sizes. For example, there may be a particular shortage of smaller vessels affecting freight rates and hence ordering trends for these vessels and not larger ones.    Price series are therefore only indicators of wh at is happening for sample ship types which 
will be chosen to reflect commonly used types or sizes of vessels. Where a range of sizes are given, 
they are useful to see that trends can be varying differently within the same  ship type.  When only a 
single price trend is given for a particular type this  generally means that this is the most popular size 
of vessel in use or that there is not a consistent e nough stream of data for a nother size to construct and 
maintain a price series.  
 Industry players are generally fully aware that price series data must always be used with 
caution and care.  
EC Comment 
 
 The discussion with respect of price indices is misleading. FMI produces a price index 
covering a wide spectrum of ship types, and Clarks ons covers a wide spectrum of differing bulk ship 
types. The concept of weighting in this respect is incorrect and displays a lack of understanding of the 
monitoring of the market. The aim of the price indices (none of which are weighted, including Drewry's when they publish it) is to monitor price l evels, not shipyard revenues.  The use of weighting 
would shift this to monitor ordering value, not price levels. WT/DS273/R 
Page G-62  
 
 
ANNEX G-3 
  
RESPONSES OF THE EURO PEAN COMMUNITIES TO 
SUPPLEMENTAL QUESTIONS FROM THE PANEL 
 
 
(16 July 2004) 
  
Question 187 
 
 Please comment on Korea’s recalculations of benefit in Exhibits KOR-91-102  
Response
 
 1. Please see EC reply to question 136 of the 2 July submission for extensive comments on 
Korean Exhibits 91-102. 
 
Question 188 
  Concerning the question of whether the restru cturing of Daewoo was subsidized, please 
provide a summary based on all of the submissions of Arthur Andersen/Anijn and PWC, of the 
EC’s analysis and conclusions in respect of whether DHI should have been liquidated instead of 
restructured.  In this summary, all relevant figures should be shown in tabular form, with cities 
and cross-references to the original Arthur  Andersen report of November 1999 assessing the 
value of DHI under various scenarios.  
Response
 
 2. Please see Section 3 of Exhibit EC-158 (PWC Report) for the information in tabular form with references as requested.  
 
Question 189 
  Concerning the Daewoo restructuring   (a) Concerning the most recent PWC submission (Exhibit EC-145), please explain in 
detail the statement at page 3 that the Anijn analysis indicated “that the 
Enterprise Value of the restructured company is lower than the Enterprise 
Value of the company computed without debt restructuring”. 
  (b) What is “enterprise value” and how does it differ from “going concern value”?  
 (c) What is the significance of the fact that the “enterprise value” was lower under 
one set of calculations than under another?  How if all does it affect the central 
issue raised by the EC, namely the deci sion to restructure instead of liquidate 
Daewoo? 
  (d) What is the significance of Anijn’s reply in Exhibit KOR-70 that enterprise 
value was reduced under the analysis of the restructuring scenario from what it 
had been under the valuation of the non-restructured company? What if  WT/DS273/R 
 Page G-63 
 
 
anything is the significance that enterprise value calculations differed under two 
scenarios for the central issue posed by th e EC, namely whether it was better to 
liquidate  or to restructure Daewoo? 
 
Response  
 
3. Please see Section 4 of Exhibit EC-158 (PWC Repor t) for a reply to sub-questions (a) to (d). 
 4. As explained in that section, the enterpri se value of a company having too much financial 
debt is lower than the enterprise value of a comp any that generates the same cash flows but which 
bears a reasonable amount of debt.  As a result, one would expect that the enterprise value of a 
company having undergone financial restructuring is higher than the enterprise value of the same 
company before its restructuring.  This wa s not the case in the analysis performed by 
Arthur Andersen.  
5. Consequently, either the pre-restructuring en terprise value of DHI was over-estimated or the 
post-restructuring enterprise value was underestimated .  To come up with a post-restructuring value 
that is higher than the pre-restructuring value, Arthur Andersen suddenly took into account factors 
excluded from their analysis up to that stage (asset s recoverable from DHI).  Considering that these 
elements were suddenly introduced without any explanation and based on estimates without any 
supporting evidence, under normal circumstances, cr editors would certainly have demanded more 
information on that aspect. 
 6. The above is simply an additional question raised by the AA report, which along with all 
other open questions (EBIT margin, lack of analys is of tax consequences of the restructuring, 
enterprise value being lower after restructuring, investment level for the residual value, etc.) 
demonstrates that no prudent creditor would have taken such an important decision on restructuring 
on the basis of such a question-ridden report.  To  the contrary, prudent creditors would not have 
agreed to any solution other than liquidation w ithout requiring much more in-depth analysis.  
 
7. It is now clear that the Arthur Andersen Repor t could at best be considered as a very first and 
rudimentary analysis of the DHI situation at the time, on the basis of which no prudent creditor would 
have acted. Under normal circumstances, prudent cr editors would have required a lot more in-depth 
information and would have questioned a number of elements and assertions of the Report.  Please see 
Section 5 of Exhibit EC-158 (PWC report) for further comments regarding the EBIT margin (page 10 of Exhibit Korea-141) and the recovery value of DHI (pages 7 and 8 of Exhibit Korea-141) used in the Arthur Andersen report. 
 
8. Moreover, the European Communities would like to point out a major new fact presented by 
Korea in Exhibit Korea-141 (pages 5, 8, and 9).  In  particular, Korea has stated that the liquidation 
value of DHI was [BCI:  Omitted from public version]  as opposed to the figure of [BCI:  Omitted 
from public version]  used previously in the Arthur Ander sen Report. It seems, therefore, that a 
different liquidation value is used depending on th e desired outcome.  This new higher liquidation 
value would make it clearer that DHI ought to have b een liquidated.  See Section 3 of Exhibit EC-158 
(PWC report).  
 
Question 190  
 The data presented in Exhibit KOR-108 show  interest and depreciation expense in the 
cost/profitability analysis for Daewoo. Please comment. How can this be reconciled with the 
EC’s assertion that these costs have not been  adequately reflected in Daewoo’s prices? 
 WT/DS273/R 
Page G-64  
 
Response
 
 9. The European Communities notes that the KPMG  analysis of production costs for three LNG 
carriers (Exhibit Korea-108) is based on DSME figu res and not on audited facts.  Thus, it is not 
independent.  KPMG confirms only that the figures presented correspond with the figures held in the 
Daewoo cost accounting system.  The inclusion of costs has not been audited, as indicated in the letter 
accompanying this exhibit, and no opinion has been given by KPMG as to whether all costs are included.  10. We also note that the ship prices given by KPMG in chapter 2.5.2 [BCI:  Omitted from 
public version] .  The summary of cost analysis on page 3 gives yet another set of figures: dividing 
the indicated sales prices in Won by the indicated sales prices in USD (on page 2) yields exchange rates of [BCI:  Omitted from public version] .  None of these exchange rates corresponds to the 
exchange rates allegedly applied by KPMG as indicate d on page 7.  If KPMG is not even clear on this 
basic parameter, one must wonder about the rest of the assessment. 
 
11. For the Bergesen LNG carrier th e price difference is significant [BCI:  Omitted from public 
version].  
 
12. KPMG undertakes to compare cost estimates ma de by FMI at the time of contracting the 
vessel with real costs incurred.  In the case of th e Bergesen LNG carrier the cost estimate by FMI was 
made in July 2000 (2 months after the conclusion of the contract), including (mostly) figures provided 
by Daewoo during the bilateral discussions with the European Communities.  At this time, DHI 
continued to have a significant amount of debt, a nd FMI calculated the debt service accordingly as the 
shipyard should have done when preparing its bid (unless the shipyard knew already in July 2000 that 
its debts would be forgiven in December 2000).  It is not conceivable that DHI could have arrived at 
the offer price of [BCI:  Omitted from public version]  if it had taken into account the actual debt 
situation at the time.   13. It should also be noted that DHI could not  have known in 2000 how many LNG carriers it 
would contract in the mid-term, and how the depreci ation of LNG related inve stment costs would thus 
be allocated per vessel.  FMI had to base its analys is on the actual order situation (as any reasonable 
shipyard estimator would have done) and not on some  speculative market pros pect.  Again, it is not 
conceivable that DHI could have arrived at the offe r price if it had taken into account the very limited 
number of confirmed orders for LNG carriers at the time.  14. There remains a difference primarily relating to costs of development of both the product and 
the processes to build the product.  FMI’s model in cludes an assessment of what they believe these 
costs may be, based on the known costs of others entering this sector.  It is likely that Daewoo would want to contest these costs in terms of their magnitu de, but it is difficult to understand the claim that 
the costs do not exist at all.  If  they do not exist, they must ha ve been written off at some point 
because it is not possible to enter this market, le t alone become the global market leader, without 
incurring significant expense.  
 
15. Further information to back up this point of view is given below, by reviewing the 
contribution to overhead indicated for the three ship s analysed in Exhibit Korea-108 against the total 
workload of the business and the total depreciation cost.  
16. Table 1 presents information taken from DS ME’s audited accounts published on the web site 
www.DSME.co.kr, showing depreciation in million W on.  For the purposes of comparison, the table 
also shows the value of depreciation for the sh ipbuilding portion of DHI in 1999, prior to the 
bankruptcy and restructuring of the company, using information from DHI’s published audited 
accounts for that year.  
  WT/DS273/R 
 Page G-65 
 
 
 
Year Depreciation 
(million Won) 
1999 (DHI)1 115,116 
2000  20,636 
2001  80,027 
2002 85,563 
2003 101,148 
 
Table 1 – Depreciation at DSME (and DHI shipbuilding operations for 1999 ) 
 17. It can immediately be seen that the deprecia tion carried by shipbuilding operations at DSME 
is considerably lower than that carried by the shipbuilding operations of DHI.  The difference is even 
more marked when it is noted that the DHI figur e for 1999 includes only depreciation attributed to 
shipbuilding operations while the DSME figures cover shipbuilding and other operations.  The 
proportion of sales attributed to shipbuilding (excluding offshore and other business) and the 
proportion attributed to LNG tankers alone are pres ented in Table 2, using information from DSME’s 
published accounts.  
 
Year Proportion of sales 
attributable to 
shipbuilding Proportion of sales 
attributable to LNG 
tankers alone 
2001  75% 15% 
2002 84% 30% 
2003 70% 32% 
 
Table 2 – Proportion of sales at DSME attributable to pure shipbuilding operations  
 
18. Table 3 below presents data from Exhib it Korea-108 indicating the amount of overhead 
recovered from each of the three contracts evaluate d.  This has been proportioned over the work 
content of the ship according to its CGT value noted  in Lloyd’s Register.  This gives the amount of 
overhead recovered per unit of work on these ships, which can be compared to the values per unit of 
work in the shipyard as a whole.  [BCI:  Omitted from public version.] 
 
19. For comparison, Table 4 summarises the average cost of depreciation per unit of work in the 
shipyard as a whole.  The assumptions made in this  table are that the total depreciation cost is 
distributed across the company accord ing to sales value and that this is evenly distributed across the 
output of the shipyard – i.e. with an average cost of depreciation for each unit of work (CGT) 
produced.   
 
 [BCI:  Omitted from public version.] 
 
20. This allocation of depreciati on to shipbuilding through sales is a little simplistic, as some of 
the offshore business will involv e shipbuilding operations.2  In the absence of detailed audited 
accounting information, however, these percentages ar e used in the following analysis with the note 
that the results will err on the side of caution.  21. Comparison of the right hand column of Ta ble 4 with the right hand column of Table 3 
indicates how the actual contribution per unit of  work from the three LNG tankers discussed in 
                                                     
 
1 Depreciation allocated to shipbuilding only. 
2 E.g., the fabrication of hulls for offshore storage and processing vessels. WT/DS273/R 
Page G-66  
 
Exhibit Korea-108 compares to the average.  On average, the contribution from LNG tankers to 
depreciation is around the average level per unit of work for the shipyard as a whole over the period 
shown.  22. These results are hard to understand, given th at LNG tankers would be expected to contribute 
greater than the average level to depreciation given the cost of product and facilities developments for 
this very complex type of ship.  The development of the capability to build LNG tankers is a lengthy 
business.  The extreme potential hazard represente d by these ships, which carry around 75,000 tonnes 
of liquid methane at around -160
oC, requires a high level of certification and approval, including a 
license to build from the developers of the cargo cont ainment systems.  This requires the development 
of the design of the ship, development and appr oval of special production procedures, training of 
personnel, and development of specialised facilities and equipment.  The specialised facilities include 
support structures for the tanks, in particular special  staging for construction inside the tanks, facilities 
for production of insulation boxes, robotic welding machinery and robotic machinery for the application of separating materials, facilities for cl ean working, facilities for atmospheric control, etc. 
 
23. KPMG points out on page 13 of Exhibit Korea- 108 that “FMI failed to explain why the cost 
model of European shipyards applicab le to these ‘other direct costs’ should apply to Korean shipyards 
that are generally known to be the most efficient ya rds in the world.”  This is misleading, however, 
because efficiency does not relieve the shipyard of costs associated with capital expenditure to gain 
the capability to build this ship type, and the effi ciency of the building process does nothing to lower 
the investment cost.  Pursuit of efficiency may actua lly raise this cost as was the case, for example, 
when DSME in 2002 constructed a new outfitting pier for LNG tanker construction to improve 
workflow in the shipyard (reported cost 40 Mio USD).  24. FMI’s estimates were based on a cost estimate made for a series of LNG tankers by a 
European shipyard.  This includes a cost of 15.5 Mio USD per ship for capital investment directly 
related to the ships’ construction.  It does not incl ude provision for the training and market entry costs 
discussed above.  As discussed above, it would be e xpected that DSME may argue that this provision 
is too high.  During the bilateral discussions in  2000, however, it was claimed that these costs do not 
exist at all, a view also put forward by KPMG in Exhibit Korea-108.  The potential argument that 
greater throughput means that costs are depreciated over a greater number of ships is limited, because 
more investment has to be made to enable this greater throughput to be accommodated.  
 25. Finally, profit margins of [BCI:  Omitted from public version]  are virtually unheard of in 
shipbuilding as any analyst will confirm.  It is not r ealistic to think that DHI could have offered, for 
example, the Exmar LNG carrier (hull number 2213) at a price of [BCI:  Omitted from public 
version]  and still broken even.  
 
Question 191   Exhibit KOR-107 sets forth the results of the court-ordered/supervised restructuring of 
Daedong. Presumably, such a restructuring had to proceed in accordance with Korean 
bankruptcy law. On what basis does the EC allege that nevertheless it involved a subsidy? 
 
Response
 
 26. As the European Communities stat ed in its response to Question 23: 
 
The EC fully accepts that bankruptcy law is a necessary part of a market economy and that a properly conducte d bankruptcy proceeding would normally not give rise to 
a subsidy.  However, where the outcome of a bankruptcy proceeding or a corporate 
restructuring is determined by public bodies – or private bodies acting under their 
direction – and leads to a more beneficial outcome for the enterprise than would have  WT/DS273/R 
 Page G-67 
 
 
arisen if the creditors had acted according to market principles, all of the components 
of a subsidy are present.  There is no basis in the SCM Agreement  to allow insolvency 
to be a loophole in the subsidy disciplines.3 
27. Moreover, the fact that a restructuring pr oceeded in accordance with  Korean bankruptcy law 
says nothing about whether creditors or investors did or did not provide a subsidy.  The terms of the 
restructuring, such as the amount of debt to be forgiv en, are decisions that can lead to a benefit for the 
recipient if they are more favourable than what would be obtained on the market even within a 
bankruptcy proceeding.  
 
Question 192 
 
 One conclusion that might be drawn from  Exhibits KOR-91-102 is that Korea accepts 
that there is a benefit from the KEXIM financing at issue, but that the benefit in a number of cases is quite small (0.5 per cent or less). If on e accepts that the benefit is of the magnitude 
reflected in these Korean exhibits, what woul d be the implications for the EC’s serious 
prejudice analysis and conclusions?  
Response
 
 28. First, it is important to note that even a sm all percentage of the value of a multi-million dollar 
vessel provides a considerable and significant benefit.   Moreover, the ability of Korean shipyards to 
make use of the benefits from KEXIM financing, whether in the form of pre-shipment loans or 
APRGs, can often be the deciding factor in thei r ability to offer a lower price than competing 
shipyards or to otherwise provide the most attractive contract terms for the buyer.  Thus, even in those 
instances where KEXIM subsidies constitute a relativel y small benefit in terms of percentage, they 
significantly strengthen the ability of KEXIM-subsidi sed shipyards to maintain  their capacity (and the 
low prices in the market) when they would otherwise exit the market or reduce capacity.  
 
Question 193   Exhibit KOR-112, concerning MOCIE’s interv ention at the request of Samsung, could 
be viewed as indicating that the government takes action if prices are too low
. If this is the case, 
what are the implications for the EC’s serious prejudice claim? 
 
Response  
 29. As MOCIE does not take actions against low prices b ased on the standards of “significant 
price suppression” or “significant price depression” within the meaning of Part III of the SCM 
Agreement , MOCIE’s actions do not have any implicati ons for the EC’s serious prejudice claim.  
Moreover, there is certainly no indication that MO CIE takes actions in a systematic way for every 
situation in which it considers that prices are too low.   
 
Question 194 
 
 If the Panel were to accept the product subdivisions set forth in Exhibit KOR-109, how 
would this affect the EC’s analysis of pri ce suppression/depression? Please respond in detail. 
 
                                                     
 
3 Responses to Questions from the Panel following the First Substantive Meeting by the 
European Communities, 22 March 2004, question 23, para. 97. WT/DS273/R 
Page G-68  
 
Response
 
 30. Drewry, in Exhibit Korea-109, argues that sh ip size needs to be taken into account when 
comparing price developments.  Of course, no one w ould argue that a larger ship does not cost more 
than a smaller ship.  However, the analysis pr esented in Exhibit Korea-109 inevitably leads to a 
skewed result because it analyses price against cargo carrying capacity (TEU and dwt) and not against 
work content.  The price analysis should, correctly, be undertaken on the basis of CGT because that is 
the unit that measures work content and its relationshi p to capacity in shipbuilding.  The analysis is 
intended to look at the situation with respect to the shipbuilding industry, not the shipping industry, 
and the appropriate denominator must therefore be used. 
 
31. The weighting of prices according to product mix in the graph on page 4 is particularly 
misleading.  The use of weighting factors in this s ituation is incorrect because the analysis is intended 
to reveal trends in ship prices and not the value of the orderbook.  The use of weighting in a ship price 
index demonstrates a lack of understanding of the economics of shipbuilding prices. 
 
32. The remainder of Exhibit Korea-109 primar ily repeats previous arguments regarding 
differences between and within ship types.  Its rele vance is questionable.  This portion culminates in 
section III starting on page 13, with misleading asser tions about the non-substitutability of shipyard 
capacity.  Complex passenger vessels (“cruise ferries”)  have recently been built in both South Korea 
(by Hyundai, Samsung, and Daewoo) and China.  Th e breadth of shipbuilding orderbooks in South 
Korea (as can be seen from the Cl arkson Monitor, Exhibit EC-152) gives ample demonstration of the 
broad potential for substitution, w ith passenger ships, offshore vessels, container ships, tankers, LNG 
carriers, etc., all proceeding through the same facilities.  33. As ships are made-to-order products, certa in differences between individual vessels can 
always be found.  Taking this specific feature of the shipbuilding industry to the limit would make it 
impossible to undertake a price suppression/depression analysis, as product markets would contain only a handful of vessels or even just one ship.  Korea is obviously attempting to avoid the SCM 
disciplines by creating an unlimited number of cate gories of products.  As the European Communities 
has set out in its oral statement of 17 June (par agraphs 66-67), such an approach cannot be correct. 
 
34. Exhibit Korea-109 makes little reference to price depression and suppression apart from 
trying to suggest that it does not exist because li ke products are too difficult to identify.  The 
European Communities stands by the model of price suppression and depression and the mechanisms 
previously explained, at the broad product level.   Detailed explanation of the mechanisms can be 
found in attachment 2 (“Estimation of price suppr ession and depression prepared by FMI”) to the 
EC’s responses to questions from the Panel following th e first substantive meeting.  Clearly, it follows 
from this that if the mechanism is active at the br oad product level it is also active at any sub-category 
level.  This is amply demonstrated by the gra ph on page 5 of Exhibit EC -146 (FMI June 2004 report, 
“Technical Support to the WTO Hearings”), which shows prices of sub-classes of ships moving broadly in unison.   
35. Consequently, the European Communities do es not see the subdivisions put forward in 
Exhibit Korea-109 affecting the price suppression/depression analysis.  More detailed analyses would reveal the same mechanisms and would give the same result.  
 
36. In fact, if the Korean analysis of sub-t ypes were to be accepted, the mechanism whereby 
dominating capacity has a suppressive effect on the market is more clearly seen.  The European 
Communities has argued that price suppression is le d by intense competition between concentrations 
of capacity in a limited number of very large shipya rds.  In the handymax products tanker sector, for 
example, South Korean shipyards have a share of the orderbook of 53.3 pe r cent, shared between 
three shipyards: STX, Hyundai Mipo, and Shin A.  The top four shipyards, including Shin Kurishima 
in Japan, control about two-thirds of the market .  In the panamax products tanker sector, South  WT/DS273/R 
 Page G-69 
 
 
Korean shipyards account for 63.7 per cent of the orderbook, spread between four shipyards: Hyundai Heavy, STX, Samsung, and Daewoo.  In the LNG tanker sector, Daewoo and Samsung together 
account for 47 per cent of all orders.  In the pana max container sector, Hyundai, Hanjin, and Samho 
together account for 70 per cent of all orders, and in the post-panamax sector, Hyundai Heavy, Samsung, and Daewoo account for two-thirds of all or ders.  The disputed shipyards regularly appear 
among the small concentrations of shipyards whose capacity is leading prices.  
 
Question 195   Please comment on Exhibit KOR-115. 
 Response
 
 37. Regarding Exhibit Korea-115, a table co mpiled from a 19-page August 2003 FMI report on 
key price movements (originally submitted as Anne x 5a-2, submitted by Korea as Exhibit Korea-142), 
the European Communities first notes that Korea finds  it useful to monitor new shipbuilding prices in 
USD/CGT.  38. Korea referred to this exhibit in its oral  statement of 17 June 2004 in paragraph 293, 
indicating that Korean offer prices were not alwa ys the lowest for a number of ship types.  The 
indicated price levels are the average of reported c ontract prices for the ship types in question for a 
seven-year period (1997-2003), adjusted by CGT.  These averages are a very minor part of the FMI 
report and are meaningless without the time series gr aphs that accompany them.  The graphs showing 
the relative movement in prices over time betwee n the different nationalities are of particular 
importance, and this analysis in no way supports th e contentions made in para graph 293 of the Korean 
oral statement.  The Korean presentation overs implifies the price setting mechanism in the 
shipbuilding market.  Price competition is based on shipyards’ bids for individual shipbuilding 
contracts, not on long-term averages for a large group of shipyards in a specific shipbuilding region.  Long-term averages are only meaningful for a trend analysis, which was the purpose of the 
August 2003 FMI report.  Additional quotes from the report can help to make the situation more 
transparent and provide the trend information that is missing from Exhibit Korea-115:  
From the conclusions
 
 
In all cases a significant fall in prices can be  seen in South Korea in 1998.  As a 
general comment, other builders followed suit with price reductions but at a slower rate than was seen in South Korea.  
Price leadership in the product/chemical tanke r sector is varied.  China appears to be 
the price leader for panamax tankers and S outh Korea for the smaller ship types.  
Croatian shipyards had a significant presence in the handymax sector although with 
prices generally higher than those offered in  the Far East.  Chemical tanker prices 
have been led by China since 2001. 
In the feeder container sector, prices appear to have been led in recent years by South 
Korea and China but with strong competiti on from Poland, Singapore and Taiwan.  In 
the panamax and post panamax container ship sectors, South Korea has a strong lead.  In the post panamax sector, China and Japan appear to have been trying to undercut 
South Korean prices to increase market sh are although with only limited success. 
Concerning handysize products tankers
 
 
Competition is predominantly between Chin a and South Korea, with South Korea 
dominating. WT/DS273/R 
Page G-70  
 
South Korea reduced prices for this class of ship significantly in 1998 from a level of 
around $1,500 to $1,60 0 per CGT to a level of around $1 ,200.  Prices in general have 
risen since then.  Prices in China fell more slowly than in South Korea and have been 
competitive with South Korean prices since 2001. 
Concerning handymax products tankers
 
 
Orders in this sector are competed by S outh Korea, Japan and China, with South 
Korea dominating.  
As with handysize products tankers, South Korea appears to have been the price 
leader in this sector with prices falling over 1998 from a level of around $1,400 per 
CGT to around $1,100.  Prices from other count ries also showed a declining trend but 
less sharp than in South Korea and without falling to such a low point.  Since 2001 prices have been competed at around $1,200  to $1,400 per CGT.  Since the start of 
2000, prices from Croatian shipyards have b een generally higher than those from Far 
East shipyards. 
Concerning panamax products tankers
 
 
The market for panamax products tankers was quiet in the period up to 2001 and increased after that time.  The market is co mpeted by China, Japan and South Korea, 
with South Korea being the market leader in recent years. 
China has remained the price leader in th is sector over the period examined, with 
prices falling over the past three years from around the $1,350 per CGT level to 
around $1,200.  South Korea reduced pri ces in 2001 and 2002 and market share 
correspondingly increased, taking share from Chin ese builders.  Japan also saw a fall 
in prices in 2001, in competition with China and South Korea. 
Concerning chemical tankers
 
 
The analysis of chemical tankers is made difficult by variations in specification.  Not all records in the data set indicate the IMO classification of the ship.  The majority of 
ships where the IMO class is indicated are either class II or class II/III.  A small 
number were indicated as class I/II, with a correspondingly higher price.  Class I/II ships were indicated only in Poland and the EU, although this does not mean to say 
that none of the ships from other countries wher e no class is indicat ed are cla ss I/II.  
Even where class is indicated, there is no cl ear trend in price between classes in the 
same country.  It has not therefore been possible to subdivide the data set any further on this basis. 
Japan, South Korea and China have offered the lowest prices and in the past two 
years China appears to have been the pr ice leader.  Prices from EU shipyards are 
generally significantly higher than those fro m the Far East.  It is not possible to say 
how much of this higher price is due  to differences in specification. 
Concerning container feeder vessels
 
 
The market has been competed primarily  by China, EU, South Korea and Other 
countries.  “Other” refers in particul ar to Singapore, Taiwan and Poland. 
The pricing situation in this sector is complex and difficult to summarise.  
South Korea reduced prices over 1997 a nd 1998 from around $1,700 per CGT to  WT/DS273/R 
 Page G-71 
 
 
around $1,300.  Competitors in other countries followed suit but were unable to match the price level achieved in South Korea.  When South Korean prices increased in late 1999 and 2000, relative competitiv eness returned to China, EU and other 
countries.  Subsequent significant falls in price in South Korea and other countries in 2001, to below $1,200 per CGT, were not matched by Chinese and EU builders.  EU 
shipyards have been losing ground through increasing prices since 2001. 
Concerning panamax container vessels
 
 
South Korea has dominated the market w ith intermittent orde rs taken by Other 
countries.  “Other” in this table refers to Taiwan and Poland. 
Prices from South Korean shipyards fell in 1998 from around $1,500 per CGT to 
around $1,300.  Prices increased again in 2000 but have fallen fairly steadily since that time, remaining at around the $1,300 pe r CGT level in 2002 and 2003.  There has 
been limited competition from elsewhere over this period with other countries apparently struggling to compete with the price level set by South Korean 
shipbuilders. 
Concerning post-panamax container vessels
 
 
As with panamax ships, the market is dominated by South Korea. 
Both China and Japan appear to have been offering prices to undercut South Korea in 
a bid to gain market share, although with only limited success. 
 WT/DS273/R 
Page G-72  
 
LIST OF EXHIBITS 
 
 
Exhibit EC-158  Report by PriceWaterhouseCoopers, July 2004 
  
    Note:  Exhibits in bold contain BCI. 
 
   WT/DS273/R 
 Page G-73 
 
 
ANNEX G-4 
 
 
RESPONSES AND COMMENTS OF KOREA TO QUESTIONS 
FROM THE EUROPEAN  COMMUNITIES AND 
FROM THE PANEL 
 
 
(2 July 2004) 
  RESPONSES OF KOREA TO QUESTIONS ADDRESSED BY THE EUROPEAN COMMUNITIES TO KOREA FOLLOWING THE SECOND MEETING OF THE PANEL 
 
1. Question  
In paragraph 69 of its Oral Statement, Korea states that government funds constitute less 
than 3 per cent of the total requirement funds.  
(a)  Please explain what this means.  Is it not true that KEXIM has received capital 
injections every year since 1997-2001?  
 
Response
 
  The “less than 3 per cent” in the Oral Stat ement represents the ratio of the outstanding 
borrowings from the Government of Korea to the total outstanding borrowings of KEXIM in 2002. 
More specifically, the KEXIM borrowing from the Government at the end of 2002 was [BCI:  
Omitted from public version]  of the total borrowing.  The ratios of borrowings from the 
Government of Korea have continuously decreased as shown in the table below. [BCI:  Omitted 
from public version.] 
 
 This is distinct from the question of paid-in capital.  The EC is mixing apples and oranges. 
 
 (b)  Please explain the statement in Moody’s opinion of August 2002 (Exhibit EC-
120): 
 
  KEXIM A3 senior debt rating and Prime-2-short-term rating reflect its 
government ownership, and the governments’ responsibility under the KEXIM act to cover the bank’s a nnual losses beyond its reserves 
   Wholly owned by the Korean government , KEXIM issued debt shares the same 
A3 investment grade rating as a government bond 
 
Response
 
  Korea will not speculate on Moody’s opinion.  The EC could have solicited a further 
explanation from Moody’s in a timely fashion had it so wished. As Korea has stated, KEXIM does not 
borrow with a sovereign guarantee. 
 WT/DS273/R 
Page G-74  
 
  Why would KEXIM need to borrow from the state under these conditions?  
 
Response
 
  KEXIM borrows funds because it is a financia l institution independent of the Government. 
Article 19 of the KEXIM Act specifically allows  KEXIM to borrow such funds from Korean and 
foreign governments, international financial organizations as well as commercial financial 
institutions. As with any financial instituti on, KEXIM borrows from a variety of sources. 
  (c)  Please comment on page 14 of the KEXIM brochure (Exhibit EC – 97) 
indicating that the government was KEXI M's main funding source in the period 
1998-2000 (42.1 per cent in 1998, 45.6 per cent in 1999 and 47.1 per cent in 2000).  How does this tie in with the statement made in paragraph 69 of the oral statement that the government funds constitute less than 3 per cent?  
 
Response
 
  The percentages indicated in the KEXIM br ochure represent the ratios of borrowings from 
public sectors to the total KEXIM borrowings in th e respective years. The public sectors include the 
Government of Korea and international financia l organizations such as the IBRD. For example, 
47.1 per cent in 2000 means the percentage of the borrowings from [BCI:  Omitted from public 
version]  to the total KEXIM borrowings. 
 
 (d) Please explain the statement on page 3 of the KEXIM brochure that "the 
Government shall provide funds to cover any net loss beyond the Banks' reserve which implies pre-emptive and sufficient support"  
 
Response
 
  The statement is simply reiterating Article 37 of the KEXIM Act which requires the Government of Korea to cover net loss beyond reserv es as the major shareholder. This is merely an 
indication that it is unlikely that KEXIM would go into bankruptcy. This is a characteristic of all 
government-owned corporations, whet her financial or otherwise, in  all Member states. However, 
KEXIM has never incurred any losses since its establishment.   
 (e)  Please explain the statement (page 4) that the "continuous capital injections [by 
the government] reaffirm KEXIM to be a valid sovereign entity". 
 
Response
 
  Again, this is describing the participations  by the Government of Korea in the capital 
increases of KEXIM. KEXIM increased its capital in 1998, 1999 and 2000 to meet BIS requirements. 
As to the details of KEXIM capital increases, pl ease refer to Korea Response 1.1(11) to Annex V 
Questions. There is no disagreement that KEXIM is government-owned. 
 
2. Question  
  In paragraph 106 of its Oral Statement Ko rea states that Korean domestic banks’ 
returns on equity (ROE) were negative 17.2 per cent during this critical period. Please confirm 
that the critical period referred to is 1997-2001 and that Korea has not included the KDB and IBK in that calculation? 
  WT/DS273/R 
 Page G-75 
 
 
Response  
  As clarified by Korea during the Second Subs tantive Meeting, the period concerned is 1997-
2001 and the ROE does not include KDB and IBK.  3. Question    Korea is correct that one of the key elements  in the dispute is the relationship between 
the Korea and the IMF and the degree to whic h bailout funds may be shielded from SCM 
disciplines. Could Korea please explain why the Letter of Intent between Korea and the IMF 
contained the following statement: 
In order to enhance the incentives for banks to participate fully in the corporate restructuring process, no public funds, whether by way of KAMCO (NPA Fund) purchases or capital injections or other me ans, shall be made available to banks 
which are not certified by the FSC to be performing their role in the corporate 
sector restructuring process.
1 
 Why was this statement repeated in all subsequent Letters of Intent to the IMF until 
July 2000?2 
 
Response  
 
 The above statement in the LOI was incorporated  into the LOI at the initiative of the IMF. As 
a matter of fact, the provisions of the LOIs require d the Government of Korea to do, or refrain from 
doing, something that had been proposed by the IMF. As the borrower under the IMF stand-by arrangement, Korea had to accept the pr oposals of the IMF in most cases. 
 
 What the IMF was aiming at with the above-quoted LOI provision was to restore the 
soundness of the Korean financial sector. In order to achieve this objective, the IMF thought that 
banks should provide some impetus for corporate restructuring as it was essential to reduce their 
exposure to corporations ( See Exhibit Korea - 2, Carl-Johan Lindgren et al, Financial Sector Crisis 
and Restructuring – Lessons from Asia (IMF Occasional Paper 188, 1999), p. 76).  
 The LOI statement quoted above refers to banks “performing their role in the corporate sector 
restructuring processes.” This is a very general statem ent. In fact, the “corporate sector restructuring”, 
as used in the LOIs, was a generic term that covers a variety of objectives, including, without limitation, reducing cross guarantees, improving cor porate governance, strengthening the role of the 
Fair Trade Commission to enforce antitrust laws, and strengthening the legal framework for creditors’ 
rights by improving the insolvency system.
3  Furthermore, as demonstrated by these LOIs, the specific 
contents and focus of the corporate sector restructuring have continuously changed.  
  Despite all of these ambiguities, however, the LOIs laid down certain rules for the Korean 
Government and banks to abide by in connection with such corporate sector restructuring. First, “ [t]o 
strengthen market discipline, bankruptcy provisions  according to Korean law will be allowed to 
                                                     
 
1 Korea Letter of Intent and Memorandum of Economic Policies, 13 November 1998, (Exhibit EC-36) 
and Annex to Korea Letter of Intent and Memorandum of Economic Policies, 13 November 1998, p. 7 (Exhibit 
EC-117). 
2 See for example : Korea Letter of Intent and Memorandum of Economic Policies, 24 November 1999, 
at 6 ; Korea Letter of Intent and Memorandum of Economic Policies for 2000, 12 July 2000, at 7 (Exhibit EC-
36). 
3 See Exhibit EC - 34, e.g., 24 July 1998 LOI (World Bank SAL II, Policy Matrix on Corporate 
Restructuring), 10 March 1999 LOI (Corporate Restructuring part), 24 November 1999 LOI (World Bank 
CFSRL – Policy Matrix II. Corporate Sector Reform). WT/DS273/R 
Page G-76  
 
operate without government interfer ence. No government subsidized support or tax privileges will be 
provided to bail out individual corporations ” (Exhibit EC-36, 3 December 1997 LOI, para. 35). 
  Second, “ [a]ll corporate restructuring should be voluntary (i.e. not government directed) and 
market oriented; and public funds will not  be used to bail out corporations ” (Exhibit EC - 36, 2 May 
1998 LOI, section on “Corporate Governance and Restructuring”). 
  Thus, although it is unclear what “roles” the LOIs expected Korean banks to perform in 
connection with the corporate sector restructuring, the LOIs clearly circumscribed such “roles” to be performed by the banks. In no event had the banks b een directed to bail out corporations and act 
against the market principles. In this regard, the EC’s  allegation to the contrary is refuted by the LOIs 
as such.   As Korea has noted, the IMF was apparently concerned with the example of some other countries experiencing financial stress where banks did not move expeditiously to clear up problem 
loans and instead left unrestructured loans on their books. The results in some places were 
unfavourable.  The IMF made clear that it was interested in seeing a rapid and market-based 
restructuring of bad loans. The IMF made clear to the EC a number of times that it considered that 
Korea banks were quite successful in purs uing market-based results from this process. 
 
4. Question  
 
 Paragraph 209 of Korea’s Oral Statement:  If the tax breaks pursuant to Article 45-2 of the Corporate Tax Act referred to were not inte nded to apply only to the Daewoo workout why 
were they introduced in conjunction with that  workout and granted for only three months – 
enough time to allow Daewoo to capture them? How may other companies have benefited? Is it 
still in force?  
Response
 
  Article 45-2 of the STTCL was intended to exte nd the tax provision to workout companies as 
well as companies undergoing corporate reorganization.  When the law was deliberated at the National 
Assembly, every company which could be affected by  the proposed law was interested and waited for 
the law to be passed. The law has a broad base of a pplication in terms of the companies to which it 
could apply.   The law was extended twice so that workouts and corporate reorganizations carried out until 
the end of 2002 could be covered. It is normal for ta x laws in Korea to be adopted on an annual basis. 
No records have been kept either in court or by the tax administration to identify the companies that 
made use of this tax provision.  
5. Question 
 
 Paragraph 291 of Korea’s Oral Statement:  Does Korea agree that Exhibits Korea-113 
and 114 do not relate to the Hambur g Süd/MOCIE case that is referred to? 
  The ship subject to the DSME offer (Exhibit Korea – 114) is a 5.600 teu container ship (Ref. No. BPT-HAM-101-001) for USD 53 Mio while the MOCIE letter to DSME and SHI 
(Exhibit Korea – 112) concerned a 4.100 teu container ship (Ref. No. HAM-100-001) for a 
contract price of USD 58 Mio. Exhibit Korea – 113 also refers to a ship priced at 53 Mio. USD, 
with payment terms different from those listed in the MOCIE letter.  
  WT/DS273/R 
 Page G-77 
 
 
Response  
  Korea reconfirms that both E xhibits Korea -113 and 114 are indeed related to the Hamburg 
Süd containership contract.  
 The EC fails to recognize that the shipbuild ing industry uses two sta ndards of measurement 
for the loading capacity of a containership, i.e. teu and ‘14 tonne homogenised’ teu value.
4 This is 
reflected in the seemingly different descriptions between the MOCIE letter (Exhibit Korea – 112) and 
the DSME offer (Exhibit Korea – 114) which nevert heless designate the same vessel. In the Hamburg 
Süd case, the buyer initially specified the containershi p with a capacity of 5,600 teu by using the first 
method. But, at the later stage of negotiations, the buyer began to use the second method, i.e. the 
14 tonne homogenised teu measurement, thereby conver ting the capacity into 4,100 teu. This is the 
reason why the initial DSME offer referred to a 5,600 teu containership while the MOCIE letter 
referred to 4,100 teu, quoting it from the final contract. Therefore, Korea again confirms that Exhibits 
Korea -113 and 114 are addressing the same Hamburg Süd project in question which the EC has been 
taking issue in the present proceeding. 
  Also, “HAM-100-001’ and “BPT-HAM-101-001” were only the reference numbers of the 
subject vessel specifications. DSME initially used  reference number “BPT-HAM101-001” to refer to 
“outline specification”. But, as the specifications have  been finalized as a result of negotiations with 
Hamburg Süd, DSME assigned the final reference number “HAM-100-001”. However, these numbers 
referred to the same project. Designating different specification reference numbers at different stages 
of the negotiation process is a normal practice in the shipbuilding industry. Such a practice is the 
result of the fact that shipbuilders and buyers need  to identify the agreements reached at different 
levels due to the sheer length of the negotiations for a shipbuilding contract. 
 
 In addition, as the EC well knows, it is not uncommon for a shipyard to make different price 
quotations depending on the payment te rm that the buyer will ultimately select. As is clearly stated in 
Exhibit Korea – 114, DSME quoted two different prices for the same vessel based on different 
payment terms. Thus, USD 53 million was offered based on a “top heavy” payment term whereby 
90 per cent of the price would be settled at the time  of the signing of the contract and 10 per cent at 
the time of the delivery of the ship. At the same ti me and in the same written offer, a price of USD 58 
million was also offered based on a rather “tail h eavy” payment term, i.e, 10 per cent at contract 
signing, 10 per cent six months after the contract, 10 per cent at keel-laying, 10 per cent at launching, and 60 per cent at delivery. DSME gave this offer verbally to the broker (Water J. Hinneberg) on 
30 August 2002 and then confirmed it by sendi ng a written offer (Exhibit Korea – 114) on 
2 September 2002. The price offered of USD 53 m illion mentioned in the broker’s letter (Exhibit 
Korea – 113) meant the “top heavy” price offered by  DSME, which was equivalent to USD 58 million 
on a “tail heavy” basis.    As stated by Korea in its Oral Statement a nd response to the EC’s question at the Second 
Substantive Meeting, the buyer, Hamburg Süd, unr easonably forced DSME to reduce the offer price 
to the level of USD 55 million on a “tail heavy” basis, which was the price level offered by a 
European shipyard, Odense (Exhibit EC-88). At that time, the Korean shipyards, DSME and 
Samsung, had already offered prices at the level of USD 58 million. 
                                                     
 
4 Teu stands for twenty-foot equivalent unit and measures a vessel’s capacity to load containers. The 
accuracy of this measurement depends on the method of ca lculation, whether the ship capacity for only loaded 
containers is taken into account, and whether the deadweight capacity allows a full load of containers. The 
industry has therefore developed a measure (known as ‘14 tonne homogenised’ teu value) which is the 
deadweight (payload) of the container ship divided by 14.  This gives the number of containers (1 standard container = 1 teu) that a ship can carry within its dead weight payload if each one weighted 14 tonnes.  This 
figure can be significantly different to the stated teu va lues of some ships.  This value represents a ‘nominal 
container capacity’ calculate d on a standard basis. WT/DS273/R 
Page G-78  
 
 
 Does Korea admit that MOCIE intervened and asked Daewoo to raise the price by 
USD 3 Mio which is supported by the clear language in Exhibit Korea – 112. Does this not contradict what Korea responded in its Resp onse to Question 82 from the Panel where you 
stated that MOCIE was not concerned with the price level?  
 
Response
 
  In Korea’s opinion, there is no difference be tween the language in Exhibit Korea – 112 and 
the response to Question 82. It is clear from both that MOCIE was not concerned with the price level 
as such but with the anticompetitive behaviour. 
 
6. Question  
  Regarding paragraph 292 of Korea’s Oral  Statement, explain what USD 10 million 
vessel you are referring to and what inti mation by the EC this refers to.   
 
Response
 
  As was clarified by Korea during the Second S ubstantive Meeting as well as in the final text 
of the Oral Statement filed on 14 June 2004, this refers to paragraph 331 of the EC’s Second Written 
Submission.  WT/DS273/R 
 Page G-79 
 
 
 RESPONSES OF KOREA TO QUESTIONS FROM THE PANEL AT THE SECOND MEETING AND COMMENTS OF KOREA TO SOME OF THE QUESTIONS ADDRESSED BY THE PANEL TO THE EUROPEAN COMMUNITIES
 
 I. TO KOREA  A. KEXIM LEGAL REGIME  103. What is the precise legal basis for Korea ’s assertion (at para. 99 of its rebuttal 
submission) that KEXIM is explicitly required by  law to operate on a market-oriented basis? 
 
Response
 
  Korea considers that the following criteria must be reviewed for determining whether a 
financial institution is operating on a market-oriente d basis: (i) whether to appropriately assess the 
credit risks of the borrower; (ii) whether to apply interest rates or guarantee premia commensurate to 
credit rating of the borrower/applicant; (iii) whethe r to take into account market situations when 
setting up interest rates/premium; (iv) whether to  properly manage risks associated with the KEXIM 
business and (v) how to ensure soundness of management.  
(i)  Assessment of the credit risks of the borrower 
  Already in the period preceding 2000, KEXIM co mpared the credit ratings made by outside 
credit rating agencies, and for any given borrower (applicant) KEXIM used the lowest credit rating 
found with respect to the borrower (applicant). In f act, in order to effectively manage credit risks, 
KEXIM established the Risk Management Commi ttee as early as in 1998 to set up policies and 
guidelines (e.g., Regulations for Credit Rating Evaluati on) regarding risk management in KEXIM. In 
addition, the Risk Management Department and the Credit Evaluation Office have been set up under 
the Committee for implementing and administeri ng the policies and guidelines by the Committee. 
These two departments have been in operation inde pendently from the financing departments in order 
to ensure a transparent and effective risk management. 
 
 As from 2000, as noted in Exhibit Korea – 91, KEXIM implemented its own credit rating system pursuant to the recommendations by the Ba nk for International Settlement (through Basel II) 
and the Financial Supervisory Service of Korea, a nd has since then evaluated credit ratings of the 
borrowers (applicants) in accordan ce with the enhanced credit risk management. Currently, KEXIM 
classifies the credit ratings into 14 grades and evalua tes credit ratings of borrowers (applicants) after 
assessing five factors of credit risks (i.e. industry risk, business risk, management risk, financial risk and future cash flow risk) associated with borrowe rs/applicants. For the details of KEXIM’s credit 
rating system, please refer to Exhibit Korea – 117
 (Korea Annex V Attachment 1.1(24)-2) submitted 
herewith.   
(ii) Application of credit risk spr eads commensurate to credit ratings 
  Pursuant to Articles 8, 14 and 25 of the KE XIM Guidelines for Interest Rates and Fees 
(Exhibit EC - 13), it is required to add credit risk sp reads onto the base rates (whether it be an interest 
rate for loans or a premium for guarantees). Thes e credit risk spreads to be added are varying 
depending on the credit ratings of bor rowers/applicants. This may in turn result in different overall 
interest rates or premia applied to the borrowers/a pplicants. As to the structures of KEXIM interest 
rates and guarantee premia, please refer to Korea’s Response 47 to the Panel Questions and Exhibits 
Korea - 12 & 14.   WT/DS273/R 
Page G-80  
 
(iii)  Taking into account market situations   As detailed in Korea’s Response 47 to the Panel Questions, the base rates for KEXIM loans, which are determined pursuant to Articles 10 & 11 of the KEXIM Guidelines for Interest Rates and 
Fees, are by themselves designed to properly reflect the prevailing level of interest rates in the 
financial market at the relevant time. In addition, the “market adjustment rates” which are to be 
applied pursuant to Articles 14 & 25 of said Guidelin es also ensure the interest rates and guarantee 
premium to fully reflect the current market situati ons (for details of market adjustment rates, please 
refer to Korea Response 57 to Panel Questions).  
(iv)  Proper management of business risks 
  In order to properly manage business risks of  KEXIM, Article 17-10 of the KEXIM Decree 
(the Enforcement Decree of KEXIM Act, Exhibit EC-11) requires KEXIM to establish and operate a 
risk control system, and currently the above-menti oned Risk Management Committee is in charge of 
such risk control tasks. For admi nistering these tasks, the Committ ee has set forth and enforced the 
Regulation for Risk Management whereby all ri sks associated with KEXIM business including the 
credit risk, market risks and the li quidity risk are being closely watched.  Further, pursuant to 
Article 29 of the KEXIM Act (Exhibit EC - 10) an d Article 17-10 of the KEXIM Decree, KEXIM has 
established the standards and procedures for business conducts (one of which is the Operating Manual 
submitted in the Annex V process as Attachment 1.1(9 )), which are to reduce potential risks related to 
day-to-day business practices of KEXIM.  
 (v)  Ensuring sound management of KEXIM   Articles 17-5 through 17-9 of the KEXIM Decree specifically set limitations and restrictions 
to KEXIM practices for the purpose of ensuring th e sound management of KEXIM. Such limitations 
and restrictions pertain to credit extension ceili ngs, restrictions on investment activities or holding 
securities and disposals of non-business assets. These limitations and restrictions safeguard KEXIM 
against potential business risks. Further, KEXIM is subject to supervision by the Financial 
Supervisory Commission (“FSC”) as well as the Mi nistry of Finance and Economy pursuant to 
Article 39 of the KEXIM Act and Articles 17-12 & 17-13 of the KEXIM Decree. The Ministry and 
the FSC regularly review KEXIM’s compliance with  the limitations and restrictions as mentioned 
above. In addition, KEXIM is required to regular ly check the soundness of its holding assets and to 
maintain an appropriate level of reserves for ba d debts. KEXIM is also required to follow FSC 
regulations regarding the BIS adequacy ratio and the ratio for the foreign currency assets/liabilities. 
The limitations, restrictions and requirements re lated to the sound management are corresponding and 
similar to those imposed onto the other commerc ial banks under the Banking Act. The FSC may issue 
an order to KEXIM to take the necessary measur es (which are equivalent to “Prompt Corrective 
Measures” by the FSC against other commercial banks) in cases where it finds that KEXIM’s management is insufficiently sound due to its  non-compliance with the FSC regulations ( See 
Article 39 of the KEXIM Act and Article 17-13 of the KEXIM Decree).  
Legal requirement for operating on a market-oriented basis
 
  As shown above, the KEXIM Act, the Decree and other internal regulations, which can be 
collectively referred to as the KEXIM legal regime, aim at making certain that KEXIM operates on a market-oriented basis. In other words, the system ic safeguards, all of which are based on the KEXIM 
legal regime, require and enable KEXIM to secure its operations on a market-oriented basis. Korea 
reiterates that KEXIM has continuously earned op erating profits since its establishment (as to 
KEXIM’s operating profit, please refer to the Korea Response 49 to the Panel Questions). 
 
104. Korea states (in response to Question 53 fr om the Panel) that Article 24 of the KEXIM 
Act should have been repealed, and that in fact “KEXIM has been contemplating proposing the  WT/DS273/R 
 Page G-81 
 
 
repeal or amendment of Article 24”. Please provide proof or supporting evidence (minutes of 
meetings, for example) for this assertion? 
 
Response  
 
 Korea hereby submits Exhibit Korea – 118  which proves that KEXIM contemplated the 
repeal of the provision of Article 24 of the KEXIM Act already in 1999/2000. As explained in the Korea’s response to the Panel’s Question 53, the restriction on KEXIM’s business scope had already been eliminated by amending Article 18 of the KE XIM Act in 1998. This amendment was enacted in 
order to fully and appropriately reflect financial market realities which had materially changed since 
the enactment of the KEXIM Act. While this amendment officially allowed KEXIM to fully 
participate in the financial market, even prior to this amendment, KEXIM had already been active in 
the market where other commercial banks were prev alent, therefore entailing increased competition. 
Thus far, the repeal of the provision has not been proceeded with b ecause of the burdensome 
legislative procedures required for the amendment. In practice, in light of Article 18 of the KEXIM 
Act and because KEXIM has had no restrictions for competing with other commercial financial 
institutions notwithstanding Article 24, KEXIM has not been constrained by the anachronistic “non-
competition” provision in the KEXIM Act.  Further, Korea notes that it already has provided considerable empirical evidence of competition between KEXIM and other financial institutions. 
 
105. Until what date was Article 24 applied, and in which specific instances? Please explain 
and describe in full.  
Response
 
  As submitted, after the incorporation of KEXI M, the Korean financial market developed and 
commercial financial institutions began to provide the specialized  financing services in which 
KEXIM had been involved. This resulted in compe tition with other financial institutions in virtually 
all areas of the KEXIM financial services (as to the types of KEXIM financial services, please refer to Korea’s Response to the Pa nel’s Question 53). Korea re iterates that none of the relevant provisions in 
the KEXIM Act are intended to prohibit other financia l institutions to participate in financial services 
extended by KEXIM or, conversely, to require KEXI M to exit the market as soon as other financial 
institutions entered into the mark et. As submitted, as for the APRG, KEXIM took only a small portion 
of the market share (less than 20 per cent) prior to  the Asian financial crisis, which shows that there 
was a fierce competition in the market. Virtually all financial institutions have provided overseas 
investment credits since the restrictions on foreign currency business were lifted in the late ‘90s. Also, 
KEXIM has been competing with other financial ins titutions in the area of the import credit market. 
Having extended such financial services, KEXIM has never been sanctioned by the supervisory 
authorities or challenged by other commercial fina ncial institutions by claiming the existence of 
Article 24 of the KEXIM Act.  
106. At para. 45 of Korea’s second oral statement, you argue that if lending is provided on 
commercial terms the lending entity is not a public  body. Would this reasoning apply in the case 
where the Finance Ministry has a general practice  of lending on a commercial basis? That is, 
would the Finance Ministry be a private body (o r in any event not be a public body)? Would the 
analysis be the same if one day, exceptionally , the Finance Minister instructs his/her employees 
to provide a loan to his/her friend’s company at one third of the market rate? Would that loan 
constitute a financial contribution? Why, or why not? 
 
Response
 
  Korea stated in paragraph 24 of its Oral Statem ent that it considers there to be three distinct 
categories: (1) governmental organs; (2) public bo dies; and (3) private bodies.  Korea offered the 
Finance Ministry as an example of a governmental organ that would be included in category (1).  In WT/DS273/R 
Page G-82  
 
contrast, with respect to para-statal entities th at are not organs of government, under the treaty 
language as well as the interpretative guidance of the Articles on State Responsibility and 
Commentaries, they are prima facie  not considered as acting with governmental authority.   
  Paragraph 45 was not referring to an organ of government, but to a situation involving a para-
statal or government-owned entity.  The EC has neve r alleged that any of the banks in question were 
organs of government, only that they were public  bodies. Thus, the second half of the question does 
not really apply in the context of the Finance Minist ry. On the other hand, if a para-statal entity were 
operating a commercial programme (and therefore would not be considered a public body), the sort of 
intervention noted in the question could constitute entrustment of the para-statal entity as a private 
body depending on the facts. As Korea has noted in  paragraphs 43-44, there is no loophole in the 
treaty scheme; the difference is in the type of proo f that must be presented depending on whether it is 
a private or public body.  The utter lack of eviden ce regarding entrustment or direction is what has 
compelled the EC to try to construct a nove l and sweeping definition of “public body”. 
 107. At para. 56 of Korea’s second oral stat ement, Korea states that so-called “market 
window” financing falls outside the coverage of  the OECD) export credit  arrangement Is Korea 
thereby arguing that such financing falls outside the coverage of the SCM Agreement? If so, is this because Korea considers that such financin g does not constitute a financial contribution? 
Please explain your reasoning. 
 Response
 
  The Panel’s characterization of Korea’s comment  in paragraph 56 is, perhaps, somewhat too 
categorical.  Korea purposely used a passive grammatical construct: “They are considered market-based commercial activities in competition with other banks.”  The reason for this construct is that 
because there is a lack of reporti ng, there is a certain amount of self-definition as to what is included 
in the concept of “market-window”.  Nonetheless, irrespective of what is included as a practical 
matter, Korea does consider that the concept provides a valid distinction. 
  In order to answer the Panel’s question, one must once again refer to the different categories 
of entities as discussed in the answer to the previous question.  Therefore, if an organ of government 
is offering the financing, it may be a subsidy depend ing on whether or not there is a benefit.  On the 
other hand, if the financing is being offered as part of a commercial programme  by a para-statal 
entity, it is presumptively not “governmental” and therefore would not be considered a financial 
contribution by a government unless specifically demonstrated as such.  There are two points to note here. First, the issue of whether or not it is a commercial programme is one for the complainant to 
establish as an initial matter. Merely alleging that the programme is not co mmercial because the entity 
is government-owned as the EC has done collapses two distinct analytical steps into one. Second, as 
also discussed, even if the overall programme is on a commercial basis and, therefore, the entity is not 
considered as a public body for purposes of a disput e, it is still the case that the complainant has the 
possibility of demonstrating that there was governmental  entrustment or direction in a particular case. 
Of course, the EC has been unable to do this (becau se the evidence does not exist), which is why it is 
trying to build its whole case on the fact of government ownership. 
 B. PAST SUBSIDIES  
 
108.  Korea has made various comments regardi ng the EC’s claims concerning so-called 
“past” subsidies. In particular, Korea referred to  this issue in its reply to Question 83 from the 
Panel, and at paras. 62, 63 and 93 of its second oral statement. We understand that Korea is not 
seeking a ruling that the EC is precluded from ch allenging “past” subsidies. Is this a correct 
understanding? If not, why not? 
  WT/DS273/R 
 Page G-83 
 
 
Response  
  It is correct that Korea is not making a gene ral argument that the EC cannot challenge alleged 
past subsidies as a matter of principle. However, to be clear, there are two different aspects to this 
issue depending on whether one is refe rring to Part II or Part III of the SCM Agreement .  Allegations 
of prohibited subsidization are much more of th e nature of “standard” GATT/WTO dispute settlement 
cases where the complainant is generally considered  to have a general right to request a ruling 
regarding the imposition of a measure by another Memb er that it considers is inconsistent with the 
other Member’s treaty obligations. It may be the case, of  course, that such a ruli ng is of only historical 
interest if the facts are that the respondent is no  longer implementing measures that are inconsistent 
with its obligations. This would be the case if there were no longer benefits being provided within the 
meaning of Article 1.1(b) of the SCM Agreement . Of course, it does raise a question as to the 
meaningfulness of such a ruling or recommendati on by the DSB for a Member to withdraw the 
subsidy as required by Article 4.7 if in fact there is no longer any subsidy. In light of this point, the Panel must take into consideration with in the full context of Part II of the SCM Agreement  whether it 
considers that there actually are prohibited subsidies being provided. 
  Regarding claims under Part III with respect to allegations of Adverse Effects, the Panel must 
recognize the sui generis  nature of its inquiry in this rega rd.  In no other area of WTO dispute 
settlement must a complainant demonstrate that a measure has caused adverse effects. To put it 
another way, subsidies are considered illegal only if they cause adverse effects.  Moreover, Article 7.8 
provides that they are illegal only to the extent  of such an adverse effect. Thus, there is the unique 
situation of a measure only being “partially” incons istent with a Member’s WTO obligations. One can 
assume that, in determining whether the alleged subs idies in question have caused adverse effects, a 
panel will look at such alleged effects over a period of  time. It is axiomatic that in any injury-type 
inquiry, the most recent period is the most rele vant. Thus, the probative value of evidence of 
subsidization in earlier periods is highly questionable if the evidence is that there was no subsidization 
or no adverse effect in the most recent period. Thus, it is not a qu estion of a legal bar to looking at 
earlier periods; rather, it is a question of the releva nce and probative value of such evidence. In light 
of the requirements that there be a demonstration of  actual adverse effects and that the subsidies are 
only illegal to the extent of such causation, a panel would need to explain in detail why it considered 
that a subsidy that was no longer causing adverse effects would be actionable. Thus, Korea is not 
saying that historical evidence is irrelevant in analyz ing trends that lead to present adverse effects; it 
can have an impact on the overall analysis. Howeve r, in the case where the evidence is that such 
adverse effects are no longer being caused or there is no longer a subsidy, it is unclear what the basis of such a determination would be.  
C. APRG/PSL 
 
109. Korea argues at para. 80 of its second or al statement that foreign APRG providers 
include a country-risk spread for APRGs extended  to Korean shipyards, which accounts for the 
higher rates charged by the foreign APRG issu ers than those charged by KEXIM. Should not 
KEXIM have applied a similar country-risk spread,  or otherwise have taken into account the 
risk factor of investing in  Korea? Please explain. Why sh ould foreign APRG providers, 
including those based in Korea (See Exhibit Ko rea – 87, page 5, which indicates that both 
foreign banks A and B issue APRGs though their Korean branches) incur more risk in investing 
in Korea than Korean banks? 
 Response
 
  As detailed in Exhibits Korea - 84 thr ough 87 and stated by Korea during the Second 
Substantive Meeting, the country risk premium (or count y risk spread) is to be applied to the financial 
transactions between companies established in differe nt countries. In general, the term “country risk” 
typically covers the risk that economic, social, a nd political conditions and events in a foreign country WT/DS273/R 
Page G-84  
 
may adversely affect an institution’s financial inter est. The country risk factor is not understood in 
financial markets to cover risks in transactions between parties established in the same country. 
Rather, in these instances, the lenders or providers  focus on the general credit risks of their counter-
parties.   
 For the better understanding of the Panel and for illustrative purposes, Korea submits the 
elements of country risk assessed under the OECD  Arrangement on Officially Supported Export 
Credits ( See Article 24.a) of the OECD Arrangement). These are: 
  - general moratorium on repayments decr eed by the buyer's/borrower's/guarantor's 
government or by that agency of a country through which repayment is effected; 
  - political events and/or economic diffic ulties arising outside the country of the 
notifying Participant or legislative/administrative measures taken outside the country of the notifying Participant which prevent or  delay the transfer of funds paid in 
respect of the credit; 
  - legal provisions adopted in the buyer's/bo rrower's country declaring repayments made 
in local currency to be a valid discharge of the debt, notwithstanding that, as a result 
of fluctuations in exchange rates, such re payments, when converted into the currency 
of the credit, no longer cover the amount of the debt at the date of the transfer of 
funds; 
  - any other measure or decision of the government of a foreign country which prevents 
repayment under a credit; and 
 
 - cases of force majeure  occurring outside the country of the notifying Participant, i.e. 
war (including civil war), expropriation, revol ution, riot, civil disturbances, cyclones, 
floods, earthquakes, eruptions, tidal waves and nuclear accidents. 
  When KEXIM extends APRGs to Korean shipya rds, the transactions involve parties in the 
same country of establishment and there is, as a result, no need for KEXIM to consider a “country 
risk.” Rather, as explained in Response 103 above, KE XIM is looking at the general credit risks of the 
applicant by factoring in all relevant risks su ch as industry risk, business risk, management risk, 
financial risk and future cash flow risk of the applicant. In contrast with KEXIM, on top of 
considering the usual expected risks, foreign APRG providers needed to take into account a risk of a 
different dimension, i.e. the country risk, as they  are located outside Korea. The additional risk 
notwithstanding, foreign providers extended APRG s to Korean shipyards when they were so 
designated by the buyers and, in fact, earned, high guarantee premia.    Further, Korean branches of foreign APRG provide rs need to factor in such country risk, as 
the foreign APRG providers themselves, not the br anches of such foreign providers, will bear the 
ultimate and final legal liability (this is evident by  the operation of law) of having to settle the 
advance payments to the buyer of the vessels in case  of a contractual default by a Korean shipbuilder. 
As a result, the country risks have been factored  into the premium for guarantees issued by Korean 
branches of foreign APRG providers.  
110. Please comment on the EC’s assertion (a t part 107 of its Second Written Submission) 
that Korea failed to provide details of the rat es of five of the APRGs issued for Samsung by 
commercial banks in 1997. 
  WT/DS273/R 
 Page G-85 
 
 
Response  
  Korea provided the best information available at the time of the Annex V procedure. Korea 
notes that much of the information requested in A nnex V and subsequently has not been in the hands 
of the Government of Korea. Having confirmed with  Samsung, Korea understands that the rates of the 
five APRGs referred to by the EC were not av ailable as the required preservation period of the 
relevant documents had expired. Where informati on for some of the APRGs issued in 1997 was still 
available, such information was submitted.   
111. In response to Question 72 from the Panel, Korea submitted certain documents 
containing redactions. What is the reason for those redactions? 
 
Response
 
  In Question 72, the Panel requested Korea to pr ovide internal documents related to a certain 
project specifically identified by the Panel. As the original document (of which the version with 
redactions was submitted by Korea as Exhibit Korea – 60) contained information on other projects (which were not requested by the Panel) which is  by nature business confidential information, Korea 
deleted the information not related to the project identified by the Panel.  
112. Were any APRGs issued to Korean shipyards by independent financial institutions after 
28 May 2001? If so, why weren’t these included in Korea’s reply to the Facilitator’s 
questionnaire under the Annex V procedure? 
 
Response
 
 
 Korea would like to note that it considers KEXIM to be an “independent financial 
institution.”   Notwithstanding this, Korea confirms that it pr ovided all information in Attachments 1.2(31)-
1 through 1.2(31)-8 of the docum ents submitted during the Annex V process as to APRGs issued by 
Korean financial institutions (except some informati on related to foreign APRGs) to Korean shipyards 
up until the Annex V procedure was initiated. Inform ation as to APRGs issued after 28 May 2001 was 
included therein also. Please refer to Attachment  1.2(31)-1 through 1.2(31)-8 (Exhibit EC-24) as 
regards the information on such APRGs.  
113. In respect of Koreas repl y to Question 71 from the Pane l, please provide supporting 
evidence for Korea’s assertion that the Kook min and Woori Bank rates for Samsung APRGs 
were [BCI:  Omitted from public version] inst ead of [BCI:  Omitted from public version]. 
 
Response
 
  Korea hereby confirms that the Kookmin  Bank and Woori Bank rates for Samsung APRGs 
were [BCI:  Omitted from public version] . Korea’s prior statement that is not consistent with this 
information was inadvertently made due to clerical  mistake by the company in pulling together the 
response. Korea regrets any confusion.  
114. Regarding Exhibit Korea – 99, why did KEXIM continue to apply the same credit 
spread after DSME entered financial difficulties?  
Response
 
  As clarified during the Second Substantive Mee ting, Korea did not, and could not, endorse the 
EC’s benchmark as suggested in Exhibit EC - 125 or EC Attachment - 9. Korea merely submitted WT/DS273/R 
Page G-86  
 
Exhibits Korea - 93 through 100 (i) to illustrate that there are critical fallacies in the EC’s calculations 
due to its misunderstanding regarding the interest ra te structure of the KEXIM PSLs and (ii) to show 
that no benefit exists even under the EC’s ow n hypothetical and inaccurate methodology. Thus, 
Exhibit Korea – 99 is the basis for an argument in th e alternative and is also a hypothetical one based 
on various assumptions, not reflecting actual transactions . In particular, it was prepared to show that 
even if DSME had the worst credit rating during the period of the workout, no benefit was afforded. 
  As evidenced in Exhibit Korea – 92, DSME was rated as P5 by KEXIM during the workout 
period when DSME was under the worst financial situ ation. Hence, despite the fact that KEXIM did 
not retain its current credit rating system before the Asian Financial Crisis and DSME workout, it is a 
logical speculation that DSME’s credit rating prior to the workout would have been better off 
compared to its rating when DSME was going through  the workout process. This can be substantiated 
by the fact that the credit rating of DSME was adju sted upward to P4 right after the graduation out of 
the workout (s ee Exhibit Korea – 92). Nonetheless, Exhibit Korea – 99 was submitted to show that 
during the entire period the EC indicated in its Exhibit EC – 125, no benefit was afforded to DSME. 
And, of course, if the better credit rating were to  be assigned in Exhibit Korea – 99 for the period 
preceding the workout, it would be shown that th e negative benefit margins would even become 
larger.  D.  ALLEGED ACTIONABLE SUBSIDIES  115. Please comment on para. 259 of the EC’s  Second Written Submission, concerning the 
fate of Mr. Do-Sang Lee’s [BCI:  Omitted from public version] shareholding in Daedong. Under 
what legal previsions did the complete cancellation  of Mr. Lee’s shareholding take place? Please 
explain fully. 
 Response
 
  In the context of “corporate reorganization” (cour t receivership) under Korean law, the fate of 
shareholders of the subject company is pre scribed by the Corporate Reorganization Act ( See 
Exhibit EC - 43). Articles 221(3) and (4) of the Corporate Reorganization Act provide as follows:   
 (3) In cases where the total liabilities of th e company at the time of commencement of 
the reorganization proceeding exceed its tota l assets, the reduction of capital shall be 
provided for [in the reorganization plan] on su ch terms that no less than a half of the 
company’s issued stock is written off. 
 
 (4) In cases where the commencement of the reorganization proceeding has been caused 
by acts for which directors or equivalent pe rsons, or managers of the subject company 
are seriously responsible, the reduction of  capital shall be provided for [in the 
reorganization plan] on such terms that no less than two thirds of the shares of stock held by a shareholder who has exercised considerable influences on such acts, his 
relatives, and other shareholders who have a special relationship with him as set forth 
in the Supreme Court Regulations, are written off.
5 
  As clearly indicated in the above provisions, the thresholds of a “half” or “two thirds” mentioned in the above provisions constitute a mi nimum level for the stock write-off. Therefore, 
Article 221 of the Corporate Reorganization Act requi res that the reorganization plan provide for a 
stock write-off that should not be less than th ese levels but may even achieve the complete 
cancellation of the stock. Based on these legal requi rements, the bankruptcy courts in most cases 
                                                     
 
5 This is more accurate transla tion. The unofficial translation of  the Corporate Reorganization Act 
submitted by the EC to the Panel as Exhibit EC - 43, is not entirely accurate. For verification purposes, Korea 
submits the Korean version of Article 221 of the Act as Exhibit Korea – 119 .  WT/DS273/R 
 Page G-87 
 
 
completely cancelled the shares held by a controllin g shareholder particularly when the shares had no 
value due to insolvency.   In the case of Daedong, it was determined th at the total liabilities of Daedong exceeded the 
total assets (Exhibit EC - 78, Final Corporate Reorganization Plan for Daedong, Attachment 1, 
Balance Sheet). As such, the receiver was required by law to write-off the shares by not less than 
50 per cent. Therefore, the receiver proposed a reor ganization plan whereby the shares held by all the 
shareholders of Daedong, except Mr. Do-Sang Lee, we re reduced by 80 per cent (i.e. 5:1 ratio). In 
addition, the shares of Mr. Do-Sang Lee, who, as th e major shareholder, had exercised a considerable 
influence over the acts of directors and managers , were required by the Corporate Reorganization Act 
to be reduced by at least two thirds. Ultimately, taking into account the fact that the Daedong shares 
had no value and that Mr. Lee was fully responsible  for the failure of Daedong, the receiver proposed 
the complete cancellation of Mr. Lee’s shares. Ulti mately, however, the acceptance of this proposal 
was Mr. Lee’s choice. Korea cons iders that the EC’s highly personal, disparaging remarks about 
Mr. Lee’s motivation are regrettable. 
 
116. Korea asserts that Articl e 45-2 of the Corporate Tax Act does not constitute revenue 
forgone, and did not confer a benefit. According to the news report in Exhibit EC-136, however, 
a Daewoo company official stated that Daewoo would “be exempted from taxes totalling 236 billion won’. Please comment, and explai n how a 236 billion won tax exemption is not 
revenue forgone and did not confer a benefit 
 
Response
 
  Under the SCM Agreement , the EC has the burden to prove specifically what government 
revenue was otherwise due and how su ch revenue was foregone or not co llected (Article 1.1(a)(1)(ii)). 
The EC has failed to carry this burden of proof. Moreover, it appears that the EC still has no clear 
understanding of the Korean tax scheme. As a resu lt, Korea still can not determine specifically what 
the EC’s allegations on tax concessions are about.   The news report in Exhibit EC - 136, which quoted the alleged statement by a Daewoo official, establishes nothing about the types of taxes concerned, applicable pr ovisions of tax laws, tax 
rates, calculations of the tax amount involved, how  they were foregone, etc. Given the complication 
and technicalities of the tax issues, no Panel wo uld make an affirmative finding of financial 
contribution and benefit on the basis of such a very questionable newspape r article. Moreover, the 
amount of KRW 236 billion allegedl y mentioned by a Daewoo official does not distinguish what 
portion of this total amount is attributable to DSME  as distinguished from the portions attributable to 
the machinery company and to the remaining DHI. In short, the EC has not established a prima facie 
case of the tax concession as required by Article 1.1(a)(1)(ii) of the SCM Agreement .  
  Under these circumstances, Korea is placed in  an awkward position when it is asked by the 
Panel to “explain how a 236 billion won tax exempti on is not revenue foregone  and did not confer a 
benefit”. This question assumes that there was a tax exemption of KRW 236 billion, but Korea 
disagrees that a 236 billion won tax exemption has ev er been established by the EC. Unless the EC 
first explains how KRW 236 billion or whatever  amount has been calculated and under what 
provisions of tax laws, it is impossible for Korea to  explain how this amount is not revenue forgone. 
Nonetheless, Korea would like to comply with th e request of the Panel by providing further 
explanations on the tax issue, while again reser ving its rights regarding the burden of proof. 
 
 First of all, Korea refers the Panel to pa ragraphs 221 and 222 of the EC’s Second Written 
Submission, in which the EC made clear that its “core claim” was the “temporary tax exemptions” granted under Article 45-2 of the Special Tax Treat ment Control Law (“STTCL”) which extended tax 
incentives under Article 46 of the Corporate Tax Act. It  appears that the EC believes that Exhibit EC - WT/DS273/R 
Page G-88  
 
136 provides evidence of the size of tax incentives under the above Article 46 of the Corporate Tax 
Act which had been “extended” by Article 45-2 of the STTCL.   However, as Korea has repeatedly explained (see, e.g., paras. 206 – 208 of Korea’s Oral Statement at the Second Panel Meeting), the special tax treatment under Article 46 applies only when 
“valuation gains” have arisen to a spun-off company as a result of the “valuation” of assets carried out 
at the time of the spin-off. In the case of the DHI workout, the assets of the original DHI were spun-
off to DSME and the machinery company at book value (i.e. without “valuation” of those assets). Therefore, DSME could not obtain any tax incentiv es under Article 46 of the Corporate Tax Act as 
extended by Article 45-2 of the STTCL. 
 
 The fact that the DHI assets were transfe rred at book value to the spun-off companies is 
clearly demonstrated by Exhibit Korea – 120
 (1999 Anjin’s Workout Report, excerpted pages, 
Appendix 10), as well as by Exhibit EC-55 (DHI Workout Plan), Appendix D-11 (balance sheet) and Exhibit EC-56 (Structure of spin-off). Also , the EC has never disputed this fact. 
 
 Therefore, contrary to the allegation by the EC, there was no tax exemption granted to DSME 
under Article 45-2 of the STTCL and Article 46 of the Corporate Tax Act. Thus, the EC’s “core 
claim” fails, and the questionable statement by a Daewoo official in Exhibit EC-136 cannot prove 
anything when what the EC proposes to prove on th e basis of hearsay cannot “legally” make sense. 
For the avoidance of any doubt, Korea hereby submits  the text of Article 46 of the Corporate Tax Act 
(both the Korean original and English translation) as Exhibit Korea – 121
. 
  In this situation, it is questionable that a Daewoo official could really have made the 
statement about KRW 236 billion as was written by  the journalist or whether the journalist 
misunderstood. If a Daewoo official really made that  statement, it may well be that he misunderstood 
the facts and the applicable tax law. The other pl ausible answer might be that the Daewoo official 
may have referred to a totally diffe rent type of tax incentive. A possible candidate is the “special 
additional tax” which could have b een levied if there were gains from the transfer of certain assets 
from DHI to the spun-off companies. However, this tax was to be levied on DHI (remaining after the 
spin-off) under Article 99 of the Corporate Tax Act.  
 Prior to 31 December 2001, the Corporate Ta x Act provided that, if a company realized 
capital gains from the transfer of certain assets (e.g.,  land, building and other real property rights), the 
transferring company was required to pay, in addition to ordinary corporate income tax, the so-called 
“special additional tax” at the rate of 16.5 per cent of the capital gains so realized ( See Exhibit Korea 
– 121 , Articles 2 and 99 of the Corporate Tax Act). Fo r the purpose of this tax, the ‘capital gains’ 
meant the amount of the transfer price of the assets concerned, minus their original acquisition price 
and acquisition costs. In the context of the DHI spin-off, DHI may have been required to pay a 
substantial amount of such special additional tax if capital gains had b een realized through the transfer 
of assets to DSME and the machinery company. Even if the transfer of assets was made at book value, 
the book value of those assets could have been higher than their acquis ition prices and costs as a result 
of, among others, re-valuation made prior to the spin-off pursuant to the Asset Re-valuation Act. 
 
 Again, it should be noted that the payer of such  special additional tax was the transferor of the 
assets subject of the special additional tax (i.e. the remaining DHI). However, by virtue of a special 
provision of Article 99(11) of the Corporate Tax Act, the transferor’s payment of special additional tax could be deferred if the transfer of assets took place as a result of, among others, a spin-off that 
satisfies the requirements of Article  46 of the Corporate Tax Act. ( See Exhibit Korea – 121
, 
Article 99(11)). In the case of companies in restruct uring, a problem arose due to the technical issue 
of not having precisely equal shareholding ratios due to the normal rules of share allocations in such 
situations.  If a provision such as Article 45-2 ha d been included in the STTCL, thereby treating a 
spin-off made on unequal shareholding ratios as sa tisfying the requirement of Article 46 of the 
Corporate Tax Act, then, the remaining DHI’s liab ility for special additional tax could have been  WT/DS273/R 
 Page G-89 
 
 
deferred (not exempted) pursuant to Article 99(11) of the Corporate Tax Act and the remaining DHI 
would have been relieved of the burden to pay sp ecial additional tax immediately upon the spin-off. 
  However, by virtue of a subsequent legislati on, the “special additional tax” was repealed as of 
1 January 2002 ( See Exhibit Korea – 121
, Law No.6558 of 31 December 2001). As a result, any 
special additional tax liability of the remaining DHI  (the provisions were  only relevant to the 
transferor, not a transferee such as DSME) was completely extinguished.6 This repeal was made 
mainly because the special additional tax was c ontroversial as it operated as a double taxation in 
addition to ordinary corporate income tax which would also be assessed on the same capital gains as 
those subject to special additional tax.  
 
117. Korea argues that the Daewoo workout was good for both domestic and foreign 
creditors, and that the fact that foreign creditors took warrants is an indication of their support 
for the workout. Could the foreign creditors ever have prevented the workout? Since they held 
only [BCI:  Omitted from the pubic version] per cen t of the debt, were they ever in a position to 
force liquidation / court receivership? Please explain.  
Response
 
  Under Korean law, the foreign creditors were  able to obstruct DHI’s workout by filing a 
petition for a straightforward bankruptcy proceedin g. The Bankruptcy Act of Korea authorizes “any 
creditor” (regardless of the percentage of debt held by it to the total debt) to file a bankruptcy petition 
when there is a cause of bankruptcy ( See Exhibit Korea – 122
, excerpted Articles, Article 122(1)). 
The cause of bankruptcy exists when the debtor is no t able to pay debts (Article 116) or its total debt 
exceeds the total assets (Article 117). Once the bankruptcy court adjudicates a bankruptcy, the court-appointed receiver liquidates assets and distributes the proceeds from liquidation to the creditors. 
 
 Through a due diligence investigation, Ar thur Andersen (Anjin) found that, as of 
August 1999, DHI was not able to pay its total de bts and the creditors would recover only 28.4 per 
cent of their total debts ( See Exhibit Korea – 120
, 1999 Arthur Andersen Report, excerpted pages, 
page 38). Therefore, any foreign creditor was ab le to file a petition for a bankruptcy proceeding 
against DHI. 
 
 Despite a petition for bankruptcy proceeding, a court-receivership proceeding can be initiated. 
Thus, if a petition for court-receivership (corporate re organization) proceeding is filed with respect to 
a debtor which is under a bankruptcy proceeding, the latter can be suspended by the court order 
(Exhibit EC - 43, Corporate Reorganization Act, Ar ticle 37). However, the fact that the debtor 
company was going through a creditors-led “workout” procedure under the Corporate Restructuring 
Agreement cannot stop the bankruptcy proceeding.    In the case of DHI, the foreign creditors we re also in a position to petition for a court 
receivership as their total debt ( [BCI: Omitted from public version] , See Korea’s Annex V response 
Attachment 3.1(12)) accounted for approximately 17 pe r cent of the DHI’s total shareholders’ equity 
([BCI:  Omitted from public version] ). Under the Corporate Reorganization Act, any creditor can 
petition for a corporate reorganization only if their debt accounts for not less than 10 per cent of the debtor company’s “capital” (shareholder equity), not of the total debt ( See Exhibit EC - 43, Corporate 
Reorganization Act, Article 30(2)).  
 Of course, the foreign creditors, holding less th an 3 per cent of the total debt, would not have 
been able to “force” DHI into court-receivership,  as it was the court that ultimately decides on 
                                                     
 
6 Korea also notes that this was generally available for any and all Korean corporations involved in any 
“asset transfer” transactions because the “special additional tax” itself wa s withdrawn in its entirety from the 
Korean tax system by virtue of the law of 31 December 2001. WT/DS273/R 
Page G-90  
 
whether to put the debtor into court-receivership an d, also, the reorganization plan had to be approved 
by the three groups of interested parties (i.e. 4/ 5 secured creditors, 2/3 of non-secured creditors, and a 
majority of shareholders). Nonetheless, it is true  under the Korean law that, as long as the foreign 
creditors wanted to obstruct the creditors-led wor kout procedure for DHI, they could do so by simply 
filing a petition for bankruptcy or court receivership. 
 
 However, it should be noted that the foreign creditors of DHI were all non-secured creditors 
which might have ended up recovering only a mini mal amount of their debt if DHI had undergone a 
bankruptcy or court-receivership proceeding. Therefor e, it is inconceivable that the foreign creditors 
would have ever considered petitioning for su ch a – for them - unfavourable proceeding. 
 
118. According to para. 139 of Korea’s rebuttal s ubmission, “Article 18 [of the Special Act on 
the Management of Public Funds” strictly controls provision of new loans by the receiving banks. Thus, this Article provides that ‘[i]f a financial institution which received Public Funds pursuant to the provision of Article 17(1) intends to provide new funds to an unsound company 
as prescribed by the Presidential Decree’, it will be  subject to a requirement that it shall enter 
into a restructuring agreement with that unsound company” Does Article 18 only impose 
restrictions on publicly-funded financial institut ions that intend to provide new funds to 
unsound companies? Are restrictions also impo sed if a publicly-funded financial institution 
chooses to do something other than provide ne w funds to unsound companies? If the latter 
question is answered in the negative, please give  an example of something that a publicly-funded 
financial institution could do without incurring obligations under the Special Act on the 
Management of Public Funds. 
 
Response
 
 
 The purpose of Article 18 is to minimize the loss  of public funds by restricting the banks that 
received public funds from lavishly providing new loans to unsound companies. This provision does not affect the discretion of the institutions that obtained public funds to decide whether or not to 
extend new loans, but it applies only when a publicly-funded bank intends to provide new loans to “unsound” companies.   
 Moreover, as clearly indicated by the provision of Article 18 itself (see Exhibit EC - 103), this 
provision applies to a publicly-funded bank’s individual lending activity. In other words, the restriction applies only when a publicly-funded financia l institution decides to extend a new loan to an 
unsound company in an individual transaction betw een that particular bank and the unsound company 
as a borrower. Therefore, the “restructuring agreemen t” referred to in Article 18 means an agreement 
between the lending bank and borrowing comp any (normally called an “Memorandum of 
Understanding”) whereby the unsound  borrower agrees to implement self-initiated actions, such as 
disposing of unnecessary assets or businesses or reducing labour costs, in order to make itself more accountable for the new borrowing.   In this regard, the provision of Article 18 does not apply to  the cases where the publicly-
funded banks participate in a workout or court-r eceivership proceeding as a member of the creditors’ 
council or other interested parties’ meeting. In th e context of such a workout or court-receivership 
proceeding, the creditors are required to act pursu ant to a resolution adopted collectively by all 
creditors and also in accordance w ith the rules set out in separate insolvency laws or a framework 
agreement (CRA). Therefore, there is no room for Ar ticle 18 to come into play in such insolvency 
proceeding. 
  Finally, in response to the Panel question, Ko rea confirms that the restriction set forth in 
Article 18 is imposed only when publicly-funded financ ial institutions intend to provide “new loans” 
to unsound companies. Such restriction does not appl y when the financial institutions are engaged in  WT/DS273/R 
 Page G-91 
 
 
other activities, e.g., when a publicly-funded bank inte nds to collect existing loans, the requirement 
under Article 18 does not apply.  
119. After the spin-of that led to the creation of DSME, what happened to the debt and assets 
left behind with DHI? Who were the creditors and owners of DHI after the spin-off and what 
percentage did each hold of the total debt and (n egative) equity, respectively, of the post-spin-off 
DHI? What was the ultimate disposition of this debt and equity? What if any impact did this 
have on DSME and DMI? 
 
Response
 
 
(1) The post-spin-off status of debt and assets left with DHI    After the spin-off in October 2000, DHI h as been selling assets and collecting debts from 
debtors (mainly Daewoo affiliates). With the proceed s of such sales and debt collections, DHI has 
continuously repaid debts to its creditors. As of  31 May 2004, DHI has repaid KRW 260 billion to the 
creditors.   (2) Creditors and shareholders of DHI after the spin-off (as of December 2000)  
 (Unit: 1,000 shares, billion won) 
Name of shareholders
* Numbers of Shares 
(percentage) Name of creditors Amount 
(percentage) 
Daewoo Corporation 68,426(24.8%) KAMCO 1,722.3(39.7%) 
KDB 32,254 (11.7%) KDB 138.8(3.2%) 
Woo Chung Kim 22,814(8.3%) Korea First Bank 116.8(2.7%) 
Daewoo Electronics 17.091(6.2%) Korea Exchange Bank 182.6(4.2%) 
Daewoo Precision 4,065(1.5%) Daehan ITC 120.5(2.8%) 
General Public ** 131,134(47.5%) Other minority creditors*** 2,051.6(47.4%) 
Total 275,784(100%) Total (borrowings) 4,332.6(100%) 
  * The shares of DHI were traded on th e stock exchange after spin-off until 
23 May 2001. As a result, the shareholders  changed and the current shareholders 
comprise:  KDB (1.45 per cent) and genera l public/minority shareholders (98.55 per 
cent). 
  ** General public includes numerous minority  shareholders each of which holds only 
fractional shares in no event more than 1 per cent of the total shares. 
  *** Minority creditors refer to small credito rs each of which has outstanding loans of less 
than 1 per cent of the total borrowings.  
 
(3) Plan for the ultimate dispos ition of DHI’s debt and equity. 
  DHI will continue to carry on debt repayment activities until the end of 2004. Thereafter, DHI 
and its creditors would discuss the possibility of petitioning for bankruptcy proceeding in order to 
dispose of DHI’s remaining debt and assets.  
(4) Impact on DSME and DHIM (machinery company) 
  There is no particular impact that the ultimat e disposition of DHI’s de bt and assets may have 
on DSME and DHIM.  WT/DS273/R 
Page G-92  
 
120. Please comment on the EC’s observation that  the fact that 210 financial institutions 
signed the Corporate Restructuring Agreement in  less than one week suggests that they were 
induced to do so by the Government of Korea. 
 
Response
 
 
 The workout framework was not created over such a short period of time as alluded by the EC. As early as in April 1998, the Korean banks be gan to study a coherent framework of the workout. 
At the same time, a task force carried out a more in-depth study of the basi c concept of workout.  
 
 On 19 June 1998, the basic concept and struct ure of the Corporate Restructuring Agreement 
(CRA) as the framework agreement for workout was explained to 28 banks and financial institutions. 
Between 19 June and 24 J une 1998, an intense process of co mmenting and negotiations took place 
among the financial institutions through their tr ade associations. On 24 June 1998, 33 financial 
institutions and associations representing all different  financial sectors had the final negotiations and 
agreed to the final draft of the CRA. These represen tatives also set 25 June 1998 as the effective date 
of the CRA. Thereafter, the final draft of th e CRA was sent through their respective sectoral 
associations to all individual financial institutions for review and signature. The financial institutions 
reviewed the draft CRA and signed it of their own vo lition. Due to the complexity of such review and 
signing procedure, the signed versions of the CRA were collected over a considerable period of time 
even after the effective date of 25 June 1998. At  that time, nobody knew exactly how many financial 
institutions would sign the CRA, and it eventually tu rned out that 210 financial institutions signed it. 
The above negotiation procedures followed by the fi nancial institutions were reasonable given the 
complexity and urgency of the matter. Moreover, the CRA was merely a “framework” agreement which did not in itself pose any substantive controversial issues (see Exhibit EC-42, Corporate Restructuring Agreement). 
 
 More importantly, at that time, there was a consensus among the financial institutions that, 
without a systematic framework for debt workout  in place, the conditions of financially unsound 
companies would be aggravated and the creditor financial institutions’ po tential exposure to non-
collectible debts will rapidly increase. Therefore, negotiating this workout framework agreement in a 
swift manner served the common interest of the financ ial institutions. In addition, as a general matter, 
the CRA was an implementation of the so-calle d London Approach.  This provided a commonly 
accepted international basis that gave the instituti ons a general comfort level regarding the CRA and 
letting them focus on the details of its implementation.  
121. Regarding the Daewoo workout, were any studies commissioned by creditors regarding 
the relationship between the going concern and liquidation values of Daewoo, other than the 
Arthur Andersen report? In particular, were an y such studies commissioned by any creditors? 
Please provide copies of any such studies commissioned by any of the creditors. 
 
Response
 
 
 As far as the Government of Korea is aware, other than the Arthur Andersen report, there was 
no study commissioned by any creditor (whether domestic or foreign) of DHI.  
122. Please comment on the EC’s argument (paras. 257 of the EC’s First Written 
Submission) that DSME assets ‘should also have  assumed 55 per cent of the negative net worth 
left behind’ in DHI.  
Response
 
  The EC failed to clarify why it believes that  DSME should have assumed 55 per cent of the 
negative net worth of the remaining DHI. The EC’s argument seems to be ba sed on its belief that the  WT/DS273/R 
 Page G-93 
 
 
spin-off structure whereby DHI was divided into  3 companies was wrong and that, instead, DHI 
should have been spun-off into only two operating companies in the proportions of [BCI:  Omitted 
from public version] , respectively   
  The DHI workout plans had been devised as a single global package to seek maximum 
recovery of debt on an aggregate basis and, thus, th e issue of benefit can not be analyzed on the basis 
of individual components of the workout plan as if each such component constituted a discrete act of financial contribution.   Moreover, the EC’s assumption that the DHI spin-off should have followed only two-
company approach has no reasonable basis. Ther e are no multilaterally agreed rules on insolvency. 
Even within the EC there are many models. The only common element is determining what the best 
method for maximizing value recovery by the cred itors is. In its 1999 report, Arthur Andersen 
established that a 3-company approach was a more a dvantageous alternative th an the 2-company spin-
off for the creditors ( See Exhibit Korea – 120
, section VIII. 2.2.2, pp. 89-90). The EC has failed to 
prove that the 2-company approach was more beneficial to the creditors.  
  Furthermore, in the case of DHI, the negative ne t worth of the remaining DHI was a result of 
trade receivables of Daewoo Motor and Daewoo Cor poration that had been inserted into the DHI 
balance sheet and had no direct or  indirect relationship with the production and sale of commercial 
vessels ( See para. 256 of the EC’s First Written Submissi on). Therefore, there was no rational basis 
for attributing the negative net worth of the remaining DHI to the shipbuilding operations of DSME. 
 
123. Was Arthur Andersen / Anjin’s determination that the going-concern value of DHl 
exceeded its liquidation value premised (at least in  part) on the enactment of Article 45-2 of the 
Special Tax Treatment Control Law? In other words, was the KRW 236 billion tax measure 
taken into account by Arthur Andersen /Anjin in its analysis? Please explain. 
 
Response
 
  The Arthur Andersen’s determination of th e going concern value and the liquidation value 
was not premised on the enactment of Article 45-2 of the Special Tax Treatment Control Law 
(“STTCL”). There is no indication in the Arthur A ndersen report that Arthur Andersen took into 
account any spin-off-related tax in its analysis.  E. SERIOUS PREJUDICE  124. On factors influencing ship prices, Ko rea argues that high freight rates are not 
particularly important at present, in view of th e fact that currently the ship market ‘is a buyers’ 
market’. Korea’s Drewry Report states that “workload shortage or overcapacity” are important 
determinants of price: “… yards that are short of work may prefer to take a lower price rather 
than have under-utilised capacity’. This represen tation by Korea’s consul tant would seem to be 
consistent with the EC’s argument that excess capacity (in the Korean industry, supported by 
alleged subsidies) is a key factor behind the pr ice suppression/depression it alleges, In other 
words, both sides seem to agree that excess capa city can drive down prices. Please comment on 
this specific point. 
 
 (The Panel recognizes that the parties dis agree with respect to wh ether Korean capacity 
is ‘excess’ and whether the restructuring that  kept the Korean shipyards in operation was 
subsidized, so it is not necessary to comment on that aspect.) 
 WT/DS273/R 
Page G-94  
 
Response
 
  Korea considers that shipbuildin g prices are the result of a number of factors, none of which 
alone determine price levels for vessels. Rather, it is all the factors in interaction which determine 
such price levels. It has consistently argued that  for the determination of whether alleged price 
depression or suppression is the effect of the subsidi es which are claimed to exist, the existence and 
effect of all of these factors in combination must be taken into account, fa iling which a distorted or 
inaccurate picture is yielded of how the shipbuilding market evolves in terms of prices.   Korea has indicated that capacity is indeed one of the factors that influences prices, but 
maintains that this is only one of the factors and th at it cannot be looked at in isolation from the other 
factors to assess why any price trend occurred. In Paragraphs 524 to 527 of its First Written 
Submission, Korea has confirmed that ship prices ar e deeply influenced by the interaction of supply 
and demand. It stated that demand means the dema nd/order including price requirements made by the 
shipowners who will take the tre nd in freight prices into account in  formulating their requirements. 
On the supply side, Korea has indicated that wh ether there is any overcapacity and how production 
costs develop are the two main factors influencin g price levels. In addition, however, Korea has 
indicated that other factors as well may greatly infl uence the price level of vessels. These relate to 
productivity improvement, insufficient workload or other factors specific to particular shipyards 
including expertise in designing and building certain types of vessels, payment terms, slot availability 
and delivery time.
7 Korea maintains its position that the assess ment of the causal link is fact-driven 
and that all factors must be assessed in a comprehensive matter on a case-by-case basis. 
  This is no different from the position expr essed by Drewry in Exhibit Korea – 70 in 
Section 3.6 when it states that “[p]rices in the shipbuilding market have always been volatile reflecting the influences of a variety of supply a nd demand side factors”. Drewry considered the 
following factors, i.e.: 
  (i) Drewry concurred with the factors id entified in the OECD report of March 2003 on 
“Recent Newbuilding Price Developments”, i.e. shipbuilding orderbook, metals prices index, freight rates and exchange rates which are considered. 
 
 (ii) Drewry nevertheless considered that the OECD did not list all relevant factors and 
indicated that the following should also be considered: 
   - as regards supply side factors, workload shortage or overcapacity which may 
lead a yard to prefer to take lowe r prices rather than having under-utilized 
capacity; and 
   - as regards demand side factors, size, delivery date, payment terms, build 
times, speed – engine and hull form variations and manoeuvrability, hull 
strengthening e.g. for ice operation, e quipment specification (brand name vs 
generic equipment), paint & coatings, innovative design, regulator (class and 
ship register), freight rates. 
  The EC itself during the First Substantive Meeting denied that it was looking at just capacity in its assessment on the existence of a vector wher eby the alleged subsidies could have caused price 
suppression or depression. The EC, in the opinion of Korea correctly, indicated  that the assessment on 
causation must include a multi-faceted approach. 
                                                     
 
7 This approach is also reflected in Step 2 of Korea’s proposed method to determine the degree of 
suppression or depression in response to the Panel’s Ques tion 91(d) (at pages 46 and 47 of Korea’s responses to 
the Panel’s questions) and in Korea’s response to the Panel’s Question 102 (at pages 55 and 56 of Korea’s 
responses to the Panel’s questions).  WT/DS273/R 
 Page G-95 
 
 
  In line with the above, Korea considers that the EC has still not given a clear response on how 
alleged over-capacity would necessarily affect price levels. Having indicated itself that several factors in relation to supply and demand determine the pric es of the commercial vessel s in dispute, the EC 
has nevertheless failed to assess each of these factors and their effect on price levels and, as a result, 
has failed to demonstrate that the alleged subsidies themselves had price depression or suppression for 
their effect because of the existence of overcapac ity as a vector. In fact, the EC has failed to 
demonstrate that the alleged restructuring subsidi es caused overcapacity capable of influencing prices. 
The EC seems to presume that, in the absence of th e alleged restructuring subsidies, the shipyards 
Daewoo, Halla and Daedong would ha ve disappeared. But, as mentioned by Korea, nowhere in the 
world does insolvency ipso facto  lead to termination and sale for scrap and, in the cases at issue all the 
less since the EC itself has pointed out that there we re possible acquirers such as NHI for the yards in 
question. In addition, the EC itself has shown in its Attachments EC-2 and 6 to its responses to the Panel questions that these three yards in each like product type of vessels did not occupy a market 
position so as to be able to create significant price depression or suppression. In this regard, Korea 
refers to paragraphs 251 to 259 of Korea’s Second Written Submission. 
 
125. (a)  The list of factors identified in the Drewry Report  as determinants of ship price 
includes freight rates, delivery date/build time (which would s eem to be related 
to capacity and thus supply and demand), and payment terms (which would seem to be related to financing). Drewry does not refer to any measure of the 
aggregate level of demand as such. Please explain. 
 
Response
 
  Drewry considers that the trend in demand for each like product separately is one of the 
factors that contribute to the relevant price level for the product considered. However, as mentioned in 
Section 1.2.2 of the Drewry report, considering only that price will vary directly in line with demand 
does not go far enough as there are many other demand and supply-related factors that contribute to 
determining the price level for any like product. In Section 1.2 of Exhibit Korea – 70, Drewry identifies a range of factors that are consider ed to have an impact on ship price, i.e.: 
 
• External factors (para 1.2.1) 
 - Freight rates 
  - Exchange rates   - Metals prices index 
• Supply side (para 1.2.2) 
 - Workload shortage or overcapacity 
• Demand side (paras 1.2.3 and 1.2.1) 
 - Size 
  - Delivery date 
  - Payment terms   - Build time   - Shipbuilding orderbook 
• Demand side – technical factors (para 1.2.3) 
 - Speed and manoeuvrability 
  - Hull strengthening 
  - Equipment specification   - Paint & coatings   - Innovative design   - Regulatory:  Class and Ship Register 
 WT/DS273/R 
Page G-96  
 
 While the aggregated supply-demand balance is, th erefore, clearly a factor which affects price 
in the shipbuilding industry, Drewry considers that it is not the only or dominant factor. Applying the 
simple economic concept of supply-demand bala nce, however, encounters some problems in 
shipbuilding, primarily:  
• the difficulty in quantifying shipbuilding capac ity (as opposed to historical output levels) 
• the fact that this capacity is not all dedicated to merchant shipbuilding and may also be in 
used for naval shipbuilding, ship repair and conversion and offshore structure construction in 
particular 
• the lack of homogeneity in aggregate demand (pri marily due to different ship types and sizes) 
• the lack of homogeneity in aggregated supply due  to the size capability of yards’ facilities and 
the experience base regarding ship types th at they have experience in building. 
 
 The result is that whilst demand may be able to  be categorized according to size and type of 
vessels, supply cannot rigorously be divided on th e same basis and so there is considerable non-
homogeneity within the supply-demand balance.    
 (b) Also, in discussing Korean cost adva ntages on the supply side, Korea does not 
refer to cost of debt service/interest expenses. Please explain. 
 Response
 
  Debt service costs tend to be specific to a par ticular yard’s situation, both in terms of the 
structure of its financing of capital assets and also it s working capital requirements.  It is, therefore, 
not possible to take general economic indicators to estimate the relative cost advantages or otherwise 
of different yards in this respect. For example, in  the EC there are many long established yards whose 
capital cost of facilities has long since been amortized and any interest on debt related to this will also 
have gone. Debt service costs related to facilities ar e, therefore, likely to be those associated with 
improvements and modernizations.  In  general terms, there has been a lower level of modernization at 
EC yards, but exceptions to this are to be found in the passenger shipbuilding yards and most 
particularly in the former East German yards like Aker MTW and Kvaerner Warnow Werft. In these 
yards the modernizations were state funded and then  when the yards were privatized the new owners 
inherited the new facilities at a fraction of the investme nt costs – in this situation, the debt levels and 
hence debt service costs are driven by very specific circumstances which does not make for easy 
comparisons. 
 
 However, the area where Korea has significant cost advantages fo r such costs is in terms of 
the scale factor of its production. Firstly, debt service costs are supported by high workload volume throughputs and as such on a basis of output units th e cost per unit will be lower than for smaller 
yards.  
 This is particularly relevant in the case of financing of facilities and capacity where the capital 
cost of providing 1,000 cgt of capacity will be fa r lower than in smaller capacity yards.  The 
Figure 8.1 in Exhibit – Korea 70 gives an indicatio n of the throughput scale differences between EC 
and Korean yards, particularly recognizing that most of the bigger EC entries are in fact groups comprising more than one yard. 
 
 A good example of the economies of scale is  evident from the exam ple of LNG-specific 
investment. As highlighted in the KPMG report submitted as Exhibit Korea – 108, FMI assessed that 
a European yard would need to cover the investme nt burden of LNG specific investment over a series 
of 3 LNG ships but subsequently changed its estim ates for Daewoo to recovery over 10 ships, to 
reflect the higher throughput volumes of such v essels at the Korean yard.  By the end of 2002, 
Daewoo had in fact received orders for 21 LNG ve ssels and so its capital expenditure and any debt  WT/DS273/R 
 Page G-97 
 
 
service cost associated with this is likely to be mu ch lower than any European  yard with only short 
series builds.   In respect of working capital requirements and the debt service costs of these, the Korean 
yards are considered to operate at an advantage to EC yards in this respect in view of the generally 
better cash flows achieved by their more front-end loaded contract payment instalments. 
  Therefore, Korea submits that the EC has not shown that debt service costs/interest expenses 
of the allegedly subsidized Korean yards have incurre d such an increase over the years as to offset the 
decrease in costs that was shown in the Drewry report in Exhibit – Korea 70. And, in fact, as 
mentioned above, the debt service costs and interest expenses, as confirmed by the EC’s expert, FMI, 
have shown a decreasing effect due to their sp read over a greater throughput. Thus, Drewry’s 
conclusion stands: the decrease in Korean costs of production is clearly greater than the decrease in 
prices of the vessels concerned.   126. Korea seems to imply that shipyards special ize in producing certain kinds of ships. If a 
given Korean shipyard has no history of producing,  for example, ferryboats, could this be the 
basis for concluding that that shipyard cannot produce them? Please explain. 
 
Response
 
 
 The fact that a national industry or individual shipyard does not produce a particular type of 
ship, does not necessarily mean that it is physically or technically incapable  of building that type of 
vessel. The reality is that there is a range of factors which places limitations (physical, economic and technical) on the shipyard such that it is either not economically viable for the yard to build them or that it does not have credibility as a comp etent builder in the customers’ eyes. 
 
 The following are the main factors imposing limitations:  
• ship size – the shipyard has to have buildi ng locations big enough to build the ship in 
question, this includes the height of lift for cranage and or headroom clearance in covered 
building berths for ships with very high superstructures; 
 
• specialist facilities or skills – for certain ty pes of vessels specialist facilities are required 
which must be provided in the shipyard or some times from a supplier or sub-contractor.  Ship 
types that are generally recognised to have such requirements include: 
 
- Cruise ships: skills for the installation of  glass atriums and interior decoration; high 
volume of modular cabins, highly complex in teraction of specialist sub-contractors; 
 
 - Ro-Ro ships: skills to install the water tight bow and stern doors and associated ramps; 
  - Chemical tankers: some chemical tankers include tanks made of stainless steel which 
requires special welding equipment and welding skills; 
 
 - LNG ships: ability to construct the special containment gas containment tanks or to 
lift in and install such tanks made by su b-contractors; high levels of insulation 
‘boxes’ required to insulate the tanks; sk ills in the installation of steam turbine 
engines which are rarely used in other me rchant ship types; and most recently gas 
turbines and dual fuel engine arrangements; 
 WT/DS273/R 
Page G-98  
 
 - FPSO and drill ships: skills in the installa tion of what is referred to as the ‘topside’ 
equipment for these vessels involved in seabed  oil extraction and storage; specialist 
mooring and pipeline connections for loading and unloading cargo; 
  - Fast ferries: skills and facilities for construction of the aluminium hull and 
superstructure which requires specialised welding facilities and skills and sometimes 
hull jigs; 
  - Tankers: although less dramatic, tankers of most kinds have much higher levels of 
pipework and valves so a shipyard buildin g tankers must have superior pipeshop 
capabilities and facilities in-house or by sub-c ontract than those building other ship 
types. 
  Shipyards tend to have a range of ship typ es and sizes which they produce and for which they 
gain a reputation in the marketplace with customers and hence they will focus their marketing efforts 
on these ship types and sizes. These are ship typ es and sizes in which they can be most cost 
competitive and where they have good customer credib ility in terms of design, price, and delivery. 
Through a combination of self-selection and custom er selection they focus on market sectors where 
they can maximise their competitive advantage.     This is not to say that they  cannot move into other markets that are within their physical 
capability but to do this they will have to be ab le to hone their productivity; offer good designs and 
will need to build customer awar eness in their competence and compe titiveness in this market. They 
will recognize that yards already well established a nd active in these markets will have an advantage 
over them initially.   
 The fact that yards specialize in specific lik e product vessels can be shown for yards all over 
the world including for Japanese and Chinese yards but  also for the EC yards as is demonstrated 
below. The data covers the same timescale of deliveries or orders from 1990 and records the 
involvement of 290 EC yards across all ship types over that time:  
• General Cargo and Multi-purpose ships:  75 EC shipyards (or shipyard groups if not 
reported at yard level) have been involved in  this sector so there has been plenty of 
participation with 771 vessels involved. But th ere has been no involvement by any the IZAR 
yards in Spain; any of the Fincantieri yards in Italy, Chantiers de l’A tlantique, Odense, Aker 
MTW, HDW, Lindenau, Kvaerner Masa Yards.  The major yards involved have been Damen 
group, Peters Scheepswerf, Ferus Smit, Bodew es and Vollharding of Holland and JJ Sietas of 
Germany which have built 347 of the 771 ships. 
 
• Bulk Carriers:  39 EC shipyards have been involved in this sector involving 154 ships but 
there has been no involvement from Chantiers de  l’Atlantique, Odense, Aker MTW, Kvaerner 
Warnow Werft, Volkswerft, HDW, Lindenau, Kvaerner Masa Yards and only two built at 
IZAR group yards. Fincantieri yards however we re involved with 16 of the 154 vessels. The 
market leader in this sector is Japan where 2, 152 ships were involved followed by China with 
454 ships. So any lack of involvement seems unlikely to be connected to Korean yards. 
 
• Container Ships:  51 EC shipyards have been involved  in this sector involving 693 ships but 
participation has varied dramatically by size of vessel.  Whilst 39 yards were involved in 
building container ships of <1,000 teu, only 5 ya rds were involved in building container ships 
of 3,500 teu and above; 21 yards were i nvolved with building mid range vessels of 
1,000<3,500 teu. Kvaerner Masa Yards and Ak er Finnyards of Finland and Chantiers de 
l’Atlantique of France did not participate in this  market at all, whilst in Spain,  IZAR groups 
yards built just 10 and Union Naval Valencia built another 2; and in Italy Fincantieri yards  WT/DS273/R 
 Page G-99 
 
 
were the only ones to participate with 9 vessels.  The concentration of containership building 
within EC lies with the German yards, Dutch yards (for ships on less than 1,000 teu only) and 
with Odense of Denmark. 
  It is evident that the shipyard supply market within the EC is far fr om homogenous and some 
shipyards have a particularly strong focus on certain size or types of vessels, i.e.: 
  
• Damen Shipyards  group of Holland built 251 ships dur ing the period of which 194 were 
either Tugs, General Cargo or  Multi-purpose Cargo ships.  
 
• Lindenau Shipyard  in Germany where 21 of the 24 vessels with which it was involved 
during this period were Chemical Tankers. 
 
• Odense Shipyard  in Denmark, where 59 of the 76 vessels were container ships. 
 
• Chantiers de l’Atlantique  in France, where 32 of the 47 ships were Cruise Ships. 
 
• Kvaerner Masa Yards  where out of 54 ships, 25 were Cruise Ships, 9 were Ferries and 8 
were Offshore. 
 
• Aker Finnyards  where out of 41 ships, 20 were either Cruise, Ferry or Passenger ships and 
another 4 were Reefers ships and 3 were RoRos. 
 
• Smaller Italian Yards:  Morini where 13 out of 20 ships were chemical tankers; Orlando 
where 10 out of 14 ships were chemical tankers ; de Poli where 10 out of 20 were chemical 
tankers and another 7 were LPG ships; Rodriqu ez where 18 out of 29 were ferries and 6 were 
passenger ships; SEC where 16 out 24 were chemical tankers and 5 were Ro-Ros; Visentini 
where 14 out of 25 were Ro-Ro and 11 were ferries. 
 
• Smaller Spanish Yards:  Armon group where 47 out of 91 were fishing vessels and 43 were 
Tugs; Zamacona where out of 55 ships 36 were Tugs and 9 were fishing vessels; UN Valencia where out of 45 ships 23 were Tugs a nd 9 were chemical tankers; Freire where 21 
out 27 ships were fishing vessels; Gijon Naval where out of 14 ships, 7 were fishing vessels 
and 7 were chemical tankers; Cies where 10 out of 11 were fishing vessels; Barreras where 11 
out of 31 were fishing vessels, 9 were Vehicle Carriers and 6 were Ferries; Balenciaga where 
out of 16 ships 7 were fishing vessels and 6 were Tugs; de Huelva where 23 out of 35 were fishing vessels. 
 
• Small Dutch Yards:  Peters Scheepswerf where 57 out of 60 ships were General Cargo; 
Bodewes were 26 were Gene ral Cargo and 22 were Multi- purpose Cargo (MP Cargo);  
Vollharding where 25 were MP Cargo and 17 were  General Cargo out of 63 ships; Tille 
where out of 22 ships 10 were Containers a nd 9 were MP Cargo; IHC Holland where 48 out 
of 51 ships were Dredgers; K Damen wher e 13 out of 20 were chemical carriers; 
  We believe that the above demonstrates that th e supply side of the shipbuilding market is far 
from homogenous and that yards do tend to speciali ze in certain types and sizes of vessels.  The 
reasons for this may relate to facility limitati ons, but may also be driven by the yards own 
appreciation of the sectors that it has the best co mpetitive advantage in or by customers’ views on 
technical competence and competitiv eness for certain ship types. 
 
127. In relation to the EC argument that the restructured yards pulled down prices of all other Korean yards, Korea asks the rhetorical question. Why stop there? Why not also blame Chinese or Japanese shipyards, if Korean subsidies triggered a price war? Is Korea’s argument WT/DS273/R 
Page G-100  
 
that, if a global price war has been set off by  a particular player in the market, that player 
should rot be deemed to be responsible becau se other players have followed its lead? Please 
explain. 
 
Response
 
 
 At the outset, Korea must note that the whole issu e of price leadership is a difficult one in this 
case because the EC has dropped its claims of price undercutting.  Normally cases can be expected to 
be built upon several possible elements of proof. Th e EC has chosen to avail itself of only price 
suppression or depression as is permitted under the treaty.  However, simply because the treaty 
language permits of such a finding, that does not mean  that it is a simple or even a normal thing to 
demonstrate adverse trade effects based on a single element of proof.  In this dispute, the EC has 
explicitly rejected proving such other elements as  price undercutting because, as the EC stated at the 
First Substantive Meeting, it could not meet the elem ents of proof of, for example Article 6.5. The EC 
has now tried to demonstrate price undercutting in a nu mber of situations and attempted to claim that 
there is a difference between using price undercuttin g as a primary element of proof and using it to 
support price suppression or depression. This is fal se logic and a fatal legal flaw in the EC’s 
argument. It has chosen to try to build a case without  reference to the interrelated elements of proof; it 
is legally precluded from attempting to reintroduce them in another guise.       Keeping in mind the difficulty of identifying exactly what is meant by price leadership in 
light of the preclusion of arguments based on pri ce undercutting, Korea considers as a general matter 
that it is possible for a single company to be a price leader. However, there are a number of 
qualifications to this statement. First, it must be sh own that the price leadership is the effect of the 
alleged subsidy. To simply say that a company’s pr oducts were price leaders is legally meaningless in 
the light of the treaty language of Article 6.3(c). 
 
 Second, regarding the assertions of the EC in pa ragraphs 80-82. Korea strongly objects to this 
line of argumentation. First of all, there is no lega l basis or relevance for asserting that the “Korean 
shipyards” were price leaders. Unless the EC is a lleging a separate geographic market for Korea there 
is no legal basis for lumping all of the Korean yard s together in the manner done by the EC in those 
paragraphs. The EC reiterated that it was not making su ch an argument; therefore, its statements such 
as “Daedong/STX and Samho-HI/Hall-HI are two of four Korean shipyards that control 60 per cent of 
the market for product/chemical tankers” is legally  meaningless. Unless the EC can demonstrate that 
STX and Halla individually were price leaders as an effect of the alleged subsidies, then the 
statements including the other yards are pointless. To take an example, if four companies (a 
subsidized Korean yard, a non-subsidized Korean ya rd, a Japanese yard and a European yard) were to 
compete for four sales and each obtained one sale, the EC claims that this means that the subsidized 
Korean yards won 50 per cent of the competitions. Ho wever, the non-subsidized Korean yard is in 
precisely the same position as the EC and Japanese ya rds. Each has a 25 per cent market share and 
each is equally influenced, or not, by the subsidi zed yard. Unless the EC is now implicitly trying to 
put forward some baseless allegations of collusion (of which we have seen no evidence nor heard any 
arguments), the mere fact of nationality does not sw eep the other Korean yard s into the subsidized 
yard’s market share. The subsidized yard may or ma y not be a price leader in this hypothetical, but the 
proof of it will have to stand on the effects of that yard’s subsidy, not throug h some bizarre nationality 
theory.    The Panel will recall that when challenged by Korea to defend these statements, the EC 
offered no proof whatever except to revert to some  arguments about internal price competition that 
would arguably be relevant only in the context of an antidumping investigation or a subsidies dispute 
where there were separate geographic markets of wh ich Korea was a distinct market. The EC offered 
no actual evidence because it has none.  Quite simply, the EC has failed to provide any evidence that 
the allegedly subsidized yards were the price leaders a nd were so as an effect of the alleged subsidies. 
  WT/DS273/R 
 Page G-101 
 
 
 Korea must also note again for the written record  its objections to the way the EC has phrased 
its market share allegations.  The EC several ti mes referred to market sh ares of order books. Of 
course, those order books stretch over several years and can vary tremendously from yard to yard and 
from year to year. Therefore, it is impossible to know  actually what the market share is or will be at 
any given time because the comparisons are not of the same time periods. At other points, the EC 
follows on such statements by making general alle gations about market shares without identifying 
whether or not it is again referring to order books or  some particular year. The EC does not identify 
any particular years. The EC is simply attempti ng to mislead the Panel by trying to disguise small 
shipyards within statistics that include larger  shipyards over an unknown period of years. 
 
 Korea would also like to recall to the Pane l the extensive information supplied by Korea 
demonstrating the significant cost advantages of all of the Korean shipyards. It is because of this 
indisputable fact that the EC has rejected its obligation to demonstrate that any alleged price leadership is an effect of the subsidization. As  Korea pointed out in paragraph 282 of Korea’s Oral 
Statement at the Second Substantive Meeting, th e EC’s continual reference to Hyundai-Mipo as a 
price leader when Hyundai-Mipo was not restructured and received a very limited number of APRGs 
and pre-shipment loans (even considering the de minimis  levels of such credits even under the EC’s 
calculations) demonstrates conclusively that any price leadership was not pursuant to the alleged 
subsidies.   II. TO THE EC 
 
A. KEXIM LEGAL REGIME   
128.  Does a government necessarily provide a s ubsidy if it makes a financial contribution 
outside the normal field of commercial behaviour? Assume a government creates a new special 
finance mechanism that has never been offered by private banks. Assume that private banks 
subsequently begin providing the same fina nce mechanism on the same terms as the 
government initially offered, Assuming that th e finance mechanism constitutes a financial 
contribution, would the initial offer of that  finance mechanism by the government confer a 
benefit? Please explain. 
 
Comments
 
  Korea observes at the outset that this hypothetical question is based on an assumption that the “government” is providing a particular  financial instrument. Particularly  in the area of finance, many 
banks in the developing world (and in some EC member states as well) were set up to provide 
commercial lending in areas where there was simply  a dearth of private sector experience and 
capability. As an initial matter, it must be determ ined whether these entiti es lending on a commercial 
basis are public bodies.     Korea assumes from the hypothetical that the Pa nel is positing for simplicity of argument that 
the finance mechanism is being extended by an orga n of government (e.g., the Finance Ministry as per 
Question 106). In such a case, the SCM Agreement  should not be interpreted as prohibiting the 
government from providing finance instruments that are new to the market.  Such a presumption would be unduly constraining on all Members and pa rticularly on developing country Members. A 
lack of an identical financial instrument in a certa in period requires that the complainant must use data 
from a comparable period or comparable instruments with  appropriate adjustments from the same 
period as a benchmark to determin e whether there is a benefit. 
 
129. The EC submits that KEXIM’s website describes the PSL programme as designed “to 
encourage the export of capital goods such as  … ships ... involving larger credits and longer WT/DS273/R 
Page G-102  
 
repayment terms than what suppliers or commerc ial banks would provide~” Isn’t this what any 
development bank does? Do development banks n ecessarily provide subsidies? Please explain. 
 
Comments
 
 
 Korea would like to note again the oddity of the EC’s argument regarding the status of 
KEXIM as based on credits of longer  terms. This dispute is about extremely short  term instruments. 
The EC also claims that KEXIM could offer larger  amounts of credit, but the evidence is quite clear 
that the programmes in question were no larger in  size than what commercial banks were willing to 
provide. Thus, the “evidence” that the EC offers cuts against its per se  argument and also undermines 
any implication regarding governmental authority regarding the programmes in question (please refer 
to the answers to Questions 106 and 107, above).  B. APRG/PSL  
130. Please comment on Exhibit Korea – 87, concerning country risk spreads. 
 
131. Why, in its benefit calculations for KEXIM financing did the EC apply the S/M credit 
rating to DSME for the entire period for wh ich calculations are presented including in 
particular the post-restructuring period? Is it the position of the EC that DSME remained uncreditworthy even after the restructuring? Please explain. 
 
Comments
 
  This is an example of the EC’s false accu sations against Korea permeating throughout this 
proceeding. While Korea will not reiterate its review  of the fallacies of the EC’s attempt to equate 
KEXIM credit ratings and other rating agencies’ rati ngs (for the details with this respect, please refer 
to Exhibit Korea – 91), Korea would like to point  out that KEXIM as well as other credit rating 
agencies adjusted DSME’s credit rating upward ri ght after its graduation from the workout (s ee 
Exhibit Korea – 92), having found that DSME’s creditworthiness had improved through the workout 
exercise. Despite this, the EC baselessly treated DS ME as being continuously in the worst financial 
situation. The EC’s intent for doing so is quite evident. By falsely rating DSME’s creditworthiness, 
the EC wished to prove the existence of a great benefit conferred on DSME. 
 132. Please comment on Korea’s assertion that the co llateral offered in respect of certain APRGs 
provided by foreign banks covered only a small portion of the guarantee” (para. 81 of Korea’s oral 
statement at the Second Substantive Meeting). 
 
133. At para. 105 of its Second Written Submission,  the EC states that only domestic banks with 
“government association’ provided APRGs to Samho.  Regarding Figure 12 of the EC’s First Written 
Submission, is Chubb a domestic bank? If so, does it have a “government association”? If there is 
such an association, what is its nature? Please explain,  134. In Exhibit EC-118, PWC asserts that “ [t]he KSDA Bond Matrix is the accepted mark-
to-market price for the domestic market”. Does this mean that the EC disagrees with Korea’s 
argument that the bond matrix represents hypothet ical I projected rates, or does the EC accept 
Korea’s argument but consider that the inde x nevertheless constitutes a reliable market 
benchmark? Please explain. What does market-to- market in this context mean? In particular, 
who was marking what to which market? 
 
Comments
 
  As detailed in Korea’s Response to Panel Question 73, the KSDA bond rates are not the 
actual rates (or yields) of a specific corporate bond instrument, but simply a general index which  WT/DS273/R 
 Page G-103 
 
 
shows daily market trends or changes. As such, cons iderations as to industry sectors, issuers or terms 
and conditions for each instrument are not taken into account. Korea submits again that companies 
with the same credit ratings are perceived and treated differently in the market. As stated in paras 88 
through 92 of the second Oral Statement by Korea, it would make no sense to maintain that general 
bond indices are somehow better than using financial instruments that the firms under examination 
actually used. Korea submitted Exhibits Korea – 18 through 22 as to financial instruments actually 
used.   135. Korea criticizes the EC for having used in its benefit calculations the 1-year bond price index 
instead of the 6-month index. Why was the 1-year  index used? What is the effect on the EC’s 
calculations of using the 6-month index? 
 136. At para. 95 of its oral statement, Korea presents a number of points criticizing the EC 
calculation methodology, and states that further deta ils are contained in Exhibits Korea 90-102. Please 
respond to Korea’s criticism in detail, including w ith reference to the content of these exhibits. 
 
137. Korea submitted evidence (in response to Qu estion 74 from the Panel) that KEXIM reduced 
the credit risk spread for HHI to [BCI:  Omitted from public version] . Did the EC apply this [BCI:  
Omitted from public version]  credit risk spread in the relevant part of its PSL analysis? Please refer 
to the relevant calculations where this adjustment was made.  
138.  The EC does not appear to have answered  Questions 9 and 11 from the Panel. The EC’s 
replies referred the Panel to the EC’s reply to Question 8. That reply, however, focuses on KEXIM’s 
“practice” of providing APRGs and PSLs, without identifying the APRG and PSL programmes “as 
such and without explaining how (if at all) they differ from the KEXIM legal regime “as such”. Please 
provide full answers to Questions 9 and 11. 
 
139. The Panel refers to Attachment 5 to the EC’s  replies to the Panel’s questions after the First 
Substantive Meeting, which contains transaction-sp ecific alleged benefit calculations for one PSL and 
one APRG. Please make the same calculation for each of the APRGs and PSLs at issue in these 
proceedings. In other words, for each shipyard, specify which AFRG I PSL relates to either LNG, 
product / chemical tankers, or container ships, and specify the amount of the alleged benefit as a % of 
the ship price. Please attach detailed worksheets. 
 
140. Please comment on Korea’s argument that KEXIM PSLs are made “at rates far higher 
than those the government has to pay for the funds so employed” (para. 277, Korea’s First 
Written Submission). 
 
Comments
 
  Korea refers the Panel to para 112 of Ko rea’s Second Written Submission which shows the 
KEXIM cost of funds for the relevant period.  
C. ALLEGED ACTIONABLE SUBSIDIES 
 
141. Para. 215 of the EC’s First Written Submi ssion states that “Daewoo” benefited from a 
236 bn tax exemption alleged to be a subsidy. Para. 226 then refers to alleged benefit to  
Daewoo-SME”. Para. 232, however, refers to be nefit to “Daewoo-HI / Daewoo-SME”. Please 
indicate precisely which legal entity received / benefited from the alleged tax concession.  
Comments
 
  See Korea’s response to Panel Question 116. 
 WT/DS273/R 
Page G-104  
 
142. In percentage terms, how much of the alleged benefit resulting form the “Daewoo” tax 
concession should be attributed to DSME’s  production of (i) LNGs, (ii) product / chemical tankers, 
and (iii) container ships? Please attached detailed worksheets. 
 
143. Is it the EC’s argument that the tax exem ption was determinative in the decision to 
maintain Daewoo’s shipbuilding operations as a goi ng concern, rather than liquidating them? If 
so, where is this reflected in the Arthur Andersen/Anjin report or in other documentation before the Panel? 
 
Comments
 
 
 See Korea’s response to Panel Question 123. There was no tax exemption of KRW 236 
billion. Further, no tax exemption was refl ected in the Arthur Andersen report. 
 144. Para. 162 of Korea’s second oral statement refers to creditors rejecting the initial DHI 
workout proposal. Were such creditors included in  the EC’s claim of government entrustment or 
direction? If they were entrusted or directed by GOK, why /  how did they reject the initial workout 
proposal?  145. The EC requests an adver se inference regarding Korea’s  alleged failure to provide a copy of 
the workout plan / report submitted by KDB on 24 November 1999. Please comment on the 
explanation set forth at pans 194  and 195 of Korea’s second oral statement. If the EC still maintains 
its request, what is the legal basis for that request ? Why does the EC consider that Korea should have 
made this report available to the EC / Panel earlier?  
146. In response to Question 23 from the Panel, the EC asserts that “[t]he existence of a going 
concern analysis can be an indicia that a hypothetical private creditor would have acted in the 
same manner” Does the EC accept that the i ndividual components of the Daewoo wrkou1 can 
be assessed on the basis of the Arthur Andersen  report? If the Panel rejects the EC’s argument 
that the Arthur Andersen report incorrectly determined that the going concern value of DHI exceeded its liquidation value, does this necessar ily mean that the Panel should reject the EC’s 
claims regarding the individual componen ts of the workout? Please explain. 
 
Comments
 
  As stated in Korea’s res ponse to Panel Question 122, the DHI workout plans had been 
devised as a single global package to ensure maximum recovery of debt on an aggregate basis and, 
thus, a benefit cannot be analyzed on the basis of  individual components. Therefore, if the Panel 
accepts that the creditors acted pursuant to market pr inciples when they chose the workout rather than 
straightforward bankruptcy (liquidation), the Pane l should reject the EC’s claims regarding the 
individual components of the workout.  147. The EC asserted at the second meeting that cr editors should have got more out of the Daewoo 
debt/equity swap. How could creditors have got more? Who /  what benefited from the fact that they 
did not?  
148. The EC proposes an outside investor sta ndard when challenging the reorganization of 
Samho. This contrasts with the position taken by the EC in the GATT case concerning United 
States – Imposition of a definitive Countervailin g Duty on Imports of Certain Steel Products 
Originating In France, Germany and the United Kingdom.
8 Why has the EC changed its 
position on this issue? Why does the EC now co nsider that the outside investor standard is 
preferable to the inside investor standard? Please explain. 
                                                      
8 Report of the GATT Panel, SCM/185, issued 15 November 1994 (unadopted).  WT/DS273/R 
 Page G-105 
 
 
 Comments
 
  Korea refers to its response to Question 172.  149. If the Panel were to reject the EC’s cl aim of government entrustment / direction of 
private creditors, would this mean that tho se private creditors provide a reliable market 
benchmark for determining whether or not the restructurings at issue conferred a benefit? Please explain. Did the EC address this issue in it s previous written and oral submissions to the 
Panel. If yes, please indicate precisely where it did so. 
 
Comments
 
  The EC itself in paragraph 106 of its First Written Submission indicates that Article 1.1 of the SCM Agreement  distinguishes between “government”, “public  body” and “private body” and that the 
concept of “private body” has been defined negativ ely as “any entity that is neither a government nor 
a public body” to ensure that there is no reason for ci rcumvention in sub-paragra ph (iv) of this Article. 
In other words, the EC has acknowledged that Article  1.1 has set up a closed framework of instances 
in which financial contributions may give rise to a subsidy that is either pr ohibited or actionable under 
the SCM Agreement . Thus, if a financial contribution is made  neither by a government nor by a public 
body carrying out a government practice nor by a private body acting upon the entrustment or 
direction of the government, the financial contribution is not
 covered by Article 1.1 of the SCM 
Agreement . One must then logically conclude that nothing distinguishes the financial institutions 
which were found not to have acted  under government direction or entr ustment from any other private 
bodies and that they could as, in any other situa tion, provide a suitable be nchmark for determining 
whether a benefit existed. In particular , there is nothing in Article 1.1 of the SCM Agreement , explicit 
or implicit, that creates a special category of priv ate bodies which having been considered not to have 
undergone direction or entrustment of the government , would still be set aside as being an improper 
benchmark to determine whether a fi nancial contribution afforded a benefit. All private bodies that are 
not under government direction or entrustment need to be treated alike.   In the EC’s own rationale, those financia l institutions that were not operating under 
entrustment or direction of the Government of  Korea should be a proper benchmark to assess the 
existence of a benefit as the EC stated the fo llowing in paragraph 277 of the EC’s First Written 
Submission:  
The relevant benchmark in the present case is the commercial behaviour of the 
private investors that at the same time were  creditors of the distressed company. It is 
only the behaviour of financial institutions /creditors operating outside the scope of 
the Government of Korea’s pressure that ma y be considered in assessing whether the 
restructuring plan for Daewoo-HI/Daew oo-SME was carried out on terms more 
favourable than those otherwise available in the market. 
 The EC also took the position that all financ ial institutions not acting under direction or 
entrustment are the benchmark for assessing the exis tence of a benefit in the response to Question 23 
of the Panel at paragraph 99 of the EC’s responses to the Panel’s questions.
9 
  In relying on the actions of creditors that it cl aims to be outside the control of the Government 
of Korea to determine a benchmark for the assessment  on the existence of a benefit, the EC itself has 
made it clear that if domestic financial institu tions do not act under gove rnment entrustment or 
                                                     
 
9 The same position is expressed in the EC’s response to the Panel’s Question 24 at paragraph 100 of 
the EC’s responses to the Panel’s questions. WT/DS273/R 
Page G-106  
 
direction, these domestic financial institutions can be taken as a benchmark for the assessment on 
benefit.  150. Regarding the EC’s Question 33 to Korea af ter the First Substantive Meeting, please explain 
why, if at all, the value of Samho’s constructi on business is relevant to the present proceedings. 
 
151. Korea asserts that the share of debt held by the foreign creditors who failed to participate in 
the Daewoo, workout was around [BCI:  Omitted from public version] . Is it reasonable to expect a 
panel to condemn a restructuring on the basis of the behaviour of creditors holding only [BCI:  
Omitted from public version]  of the debt? 
 
152. Regarding the Daewoo workout, the EC mak es various arguments regarding the purchase of 
debt and bonds by KAMCO. It is unclear whether these arguments support a separate claim regarding the KAMCO rates, or whether those arguments ar e made in support of the more general claim 
concerning the use of foreign creditors as the market benchmark. Please explain. 
 
153. Please comment on Korea’s argument (at para. 191 of Korea’s Second Written Submission) that the BC, in its response to Question 22 of the Panel (which concerned the ‘alleged specificity of 
the corporate restructuring” generally), allegedl y concedes that the Court supervised corporate 
reorganizations undertaken by Halla and Dae dong were not specific “because these companies 
seemed to have disappeared and the BC answ ers the question only in regards to DHI”. 
 
154. Regarding the STX reorganization, we not e that the debt rescheduling exemption from 
interest is the sole element identified by the EC  when calculating the amount of alleged benefit in 
Annex 3 of Attachment 1 to its re plies to questions from the Panel af ter the First Substantive Meeting, 
We further note that the EC’s rebuttal submission does not refer to the other elements of the 
restructuring identified in its First Written Subm ission, such as the issuance of bonds by Daedong. 
Does the EC still claim that the other elements of the restructuring including the bond issuance by 
Daedong, constituted a subsidy? If so, why were they not included in the abovementioned 
Attachment 3?  D. SERIOUS PREJUDICE 
 
155. The EC has indicated that the Panel should determine the existence of price 
suppression/depression separately for LNGs, produc t/chemical tankers, and container ships. 
  (a) Does this mean that the EC is aski ng the Panel to issue three separate serious 
prejudice rulings, on LNGs, product/che mical tankers, and container ships, 
respectively? 
  (b) If not, please explain  
156. In the information before the Panel, including the Annex V information are there 
additional examples (beyond those already referred to in the EC submissions) of bids by Korean 
shipyards, for which EC shipyards also are bidding, and where in the view of the EC the Korean yards have led prices downward.  157. (a)  In the information before the Panel, including the Annex V information, are 
there examples/evidence of instances in which EC shipyards have considered, 
but declined to, bid due to low preva iling prices? For example, can the EC 
provide records of instances in which an EC yard was contacted by a ship 
broker concerning the possibility of bidding, but decided not to do so because of 
low prices. 
  WT/DS273/R 
 Page G-107 
 
 
 (b)  In any such instances, does the info rmation before the Panel contain evidence of 
Korean pricing/bidding for the same sale? 
 
Comments to questions 157 and 158  
 
 The EC itself has refrained from invoking Article 6.3(c) of the SCM Agreement  on the basis 
of price undercutting or lost sales which are set fort h in this Article as grounds for challenges separate 
from price depression or suppression. Therefore, Korea wishes to reiterate its concern that data on bids by EC and Korean yards showing price co mpetition that might have constituted evidence on 
price undercutting or lost sales cannot now be reintr oduced in the framework of this proceeding which 
is not based on price undercutting or lost sales. In addition, even if individual bids showing price 
competition were taken into account on the ground previously advocated by the EC during the First 
Substantive Meeting that there must be a certain am ount of price undercutting in order for there to be 
price depression, based on Article 6.3(c) itself – as acknowledged by the EC – no price undercutting 
can be established unless there a strict test determ ining that the vessels in competing bids are “like 
products”.  
  Notwithstanding these reservations, Korea notes that, out of the many hundreds of sales, the EC has only submitted data on a few bids in which EC and Korean yards participated that can, at best 
be qualified as shallow and repetitive since the sa me examples were used throughout the EC’s 
submissions. Korea has identified the following: 
 
 -  the sale by DHI of 2 LNGs to Solaia Shipping and to Repsol and 1 LNG to Bergesen 
(Responses to Annex V Questions, Attachment  4.4(21)-1, Exhibits  EC-84, 85, 141, 
142);
10 
 
 -  the sale of a container vessel to Hamburg Süd (Exhibit EC-88);11 
  -  the offer for sale of a product and chemical tanker by EC yard Lindenau in 
competition with an unspecified Korean  yard and as regards an unspecified 
shipowner (Exhibit EC-89) and the offer for sale of three product and chemical tankers by Aker covered in the same Exhibit;
12 
 
 -  the offer for sale of a product and chemical tanker by Lindenau for an unspecified 
Italian owner (Exhibit EC-90).13 
  Korea stresses that these were the only exampl es of actual competing bids referred to by the 
EC since the filing of its First Written Submission.  
  Even in the Annex V procedure, when the EC  had not yet communicated its decision not to 
rely on price undercutting or lost sales, the eviden ce provided on the existence of price undercutting 
or lost sales was scarce and inconclusive.  
                                                     
 
10 Korea rebutted the allegations made by the EC as regards these bids in paragraph 564 of its First 
Written Submission. A case study was also submitted by Drewry in its report attached as Exhibit Korea – 70, 
pages 7.25 to 7.27. 
11 Korea rebutted the allegations made by the EC as regards this bid in paragraph 584 of its First 
Written Submission. 
12 Korea rebutted the allegations made by the EC as regards this bid in paragraph 588 of its First 
Written Submission. 
13 Korea rebutted the allegations made by the EC as regards this bid in paragraph 589 of its First 
Written Submission. WT/DS273/R 
Page G-108  
 
 Annex 6 submitted by the EC in the Anne x V process contains four pages of price 
undercutting calculations for the following:   (i)  containerships between 19,000 to 35,000 cgt for the period from 1 January to 
31 December 1999 for 8 EC vessels vis-à-vis 6 Korean vessels; 
 
 (ii) containerships between 45,000 and 60 ,000 cgt for the period from 1 January to 
31 December 1999 for 3 EC vessels vis-à-vis 7 Korean vessels; 
   (iii)  container vessels from 19,000 to 35,000 cgt for the period from 1 January to 
30 November 2000 for 18 EC vessels vis-à-vis only 3 Korean vessels; 
  (iv)  LNGs for the period from May to July 2000 for 3 EC LNGs vis-à-vis 3 Korean 
LNGs; 
 
 (v)  product and chemical carriers between 17,000 to 20,000 cgt for 3 EC vessels vis-à-vis 
5 Korean vessels and only covering 2000. 
  This is not conclusive for the existence e ither of price undercutting or even of price 
undercutting that would allegedly give rise to pri ce depression (in addition to the calculation errors 
which were according to Korea made in the calcula tions). The EC itself has provided in Annex 1b a 
list of 163 transactions involving EC vessels built fro m 1997 to June 2003 and, of course, Korea itself 
provided several hundreds of transactions for Korean vessels out of which only 24 were selected as 
having given rise to price undercutting. In additi on, the instances selected by the EC are not 
representative of the time period covered in the pre sent dispute from 1997 through 2003. It must be 
emphasized that, in spite of the data available,  no single example of alleged price undercutting has 
been shown for 2001, 2002 or 2003. Also, while the EC does make the price comparison on the basis 
of differences in sizes (which, as mentioned, by Korea is the bare minimum to make a correct assessment of any sort of price trends in relati on to commercial vessels), the ranges selected expressed 
in cgt are not representative of the full range in which container vessels and product and chemical 
tankers are sold. Finally, no accurate price comparis on of the vessels can be made without considering 
differences in physical characteristics such as gearing,  the type of engine and other features that were 
listed in Exhibit Korea – 109.
14 
  Annex 7 submitted by the EC in the Annex V process contains 17 alleged examples of lost 
sales, by far not representative of the number of ve ssels contracted for during the relevant period from 
1997 to 2003.  In some instances, they are not attr ibuted to any specific Korean yard. Moreover, in 
addition to being statistically and timewise not  representative, the documents submitted contain 
several flaws of which some of the main ones are mentioned below:   -  there is no direct documentary evidence and only hearsay is being offered by the EC 
yards (Annexes 7.4, 7,5, 7.6, 7.7, 7.8, 7.9, 7.10); 
  
 -  cheaper vessels are recogni zed to exist in Eastern Europe or in Japan (Annexes 7.1, 
7.3); 
  -  the design offered by the EC yard is over-specified compared  to the shipowners 
requirements or the vessel offered by a Korean  yard  or the design was not available 
(Annexes 7.1, 7.2, 7.3, 7.5, 7.12); 
                                                     
 
14 Korea notes that it does not agree with the data or conclusions shown in this Annex 6 for various 
reasons including the fact that a price comparison made should have been made in US dollars, i.e. the currency 
universally used by yards to quote most of the sales prices of their vessels and not in EUROs which could not 
provide a true picture of price undercutting caused by subsidies.  WT/DS273/R 
 Page G-109 
 
 
  - the EC offer is made without there being any order prospect and a broker just issued a 
general inquiry (Annexes 7.2, 7.3); 
  - the Korean yard alleged to have been competing is not shown in any register as 
having obtained an order from the shipow ner concerned raising serious doubts as 
regards the accuracy of the lost sales allegations (Annex 7.4, 7.8); 
  -  the contracts that exist with a Korean yard  are for a substantially larger ship than that 
referred to in the alleged lost sale documents (Annex 7.9, 7.10); 
 
 -  the tenders made by the Korean yards concerned are for a series of vessels, which has 
an effect on the price given economies of scal e, without this being mentioned in the 
alleged lost sales documents and without it being indicated whether the EC yards 
concerned could build the full series with in the time required by the shipowner 
(Annex 7.10); 
  -  there was fierce competition am ong EC shipyards (Annexes 7.6/7.12); 
  - the EC yards were faced with dock rest rictions requiring the adjustment of their 
designs (Annex 7.13); 
 
 - the EC yard was licensed to build Moss spherical type LNG containment systems, 
rather than GT membrane types and all the orders from the Repsol/Enagas tender 
were for Membrane GT type containment systems as a result of which the bid from the EC yard cannot be considered like (Annexes 7.14 and 7.16). 
 
 As a result, the documents provided by the EC  cannot from the basis of any price depression 
allegations and, conspicuously, the EC made use of  only a few of these documents in the actual panel 
process.   Moreover, in the alleged price undercutting cases referred to in Annex 6 in the Annex V 
process, there is no evidence of EC and Korean ya rds bidding for the same tender. All the EC has 
done is to compare prices for different bids for vesse ls that might fall in the same wide size range but 
may otherwise differ in important technical features.   In the alleged lost sales cases referred to in  Annex 7 to the Annex V process, the Korean 
prices invoked are based on hearsay or allegations by the shipbrokers without any direct supporting 
evidence being supplied.  
158. (a) Is it the view of the EC that excess sh ipbuilding capacity exists only in Korea, or 
is there also excess capacity in other countries? 
 
 (b) If your view that excess capacity exists only in Korea, please explain. 
  (c) If your view is that there is excess capa city also outside of Korea, where and how 
much is the excess? 
 
 (d) Is there any excess shipbuilding capacity in the EC? If not, what is the basis for 
this conclusion? 
 WT/DS273/R 
Page G-110  
 
Comments
 
  It is recognized within the industry that there is no easy way to rigorously measure shipbuilding capacity.  However, significant attemp ts have been made over recent years, under the 
auspices of the OECD Working Party on Shipbuilding, to improve the estimation of shipbuilding 
capacity. 
  The latest estimates of capacity from OECD sources are an estimated figure for actual capacity in 2000 and a figure for anticipated capacity  in 2005 which was also made and agreed in 
2001
15 from estimates provided by the Japanese, EC , USA and Korean shipbuilding associations 
expressed in cgt. The following table shows an assessment of capacity utilization for the major 
shipbuilding regions based on these capacity assessment s and shipbuilding output statistics from LR 
Shipbuilding returns.  
 Versus 2000 capacity Versus  projected 2005 capacity 
 2001 2002 2003 2001 2002 2003 
Japan 90% 93% 95% 84% 86% 88% 
South Korea 94% 104% 111% 77% 84% 90% EU countries 87% 84% 76% 78% 76% 68% AWES non EC 
1 86% 83% 74% 78% 76% 68% 
Other European  61% 80% 87% 54% 71% 77% China, PR of 96% 110% 180% 63% 72% 118% Asia & Pacific 43% 63% 48% 39% 58% 44% NIS Countries 
2 29% 83% 64% 27% 77% 59% 
North & South America 32 % 44% 58% 29% 39% 52% 
Africa & Middle East 8% 8% 8% 8% 8% 8% Others 0% 0% 0% 0% 0% 0% WORLD TOTAL 85% 91% 96% 74% 79% 83% 
1 AWES non EC = Norway, Poland and Romania 
2 NIS = Russia, Ukraine, Latvia, Lithuania, Geogia, Azerbaijan 
 
 While Korea is not endorsing this extremely general overview as an appropriate measure for 
the multiple industries examined in this WTO dis pute, nonetheless, the table helps to indicate the 
situation regarding estimated excess capacity in the ma in shipbuilding regions in spite of the difficulty 
in defining shipbuilding capacity and the fact that the 2005 figure is a projection which is now some 3 years old.  
 
 Against both the 2000 capacity estimate and the 2005 capacity projection it can be seen that excess capacity exists all around the world. Regardi ng the major shipbuilding regions, it is noted that 
there is significant excess capacity within the EC  yards and some overcapacity in Japan. The table 
below shows a country level breakdown for the EC’s main shipbuilding countries. 
 
                                                     
 
15 OECD Document C/WP6(2001)16 of 'Present Market Conditions and Future Outlook for the World 
Shipbuilding Industry' dated November 14, 2001 and prepared  by the Secretariat of whic h an excerpt is attached 
in Exhibit Korea – 123 .  WT/DS273/R 
 Page G-111 
 
 
 Versus 2000 capacity Versus  projected 2005 capacity 
 2001 2002 2003 2001 2002 2003 
Denmark 68% 82% 72% 61% 73% 65% 
Finland 116% 88% 69% 116% 88% 69% France 165% 107% 139% 147% 95% 124% Germany 102% 106% 79% 90% 93% 70% Italy 80% 89% 88% 69% 77% 76% Netherlands 77% 72% 43% 69% 64% 38% Spain 59% 67% 88% 54% 62% 81% United Kingdom 19% 21% 28% 19% 21% 28% 
EU countries 87% 84% 76% 78% 76% 68% 
 
 Of particular note is the situation regarding Ch ina, where it is shown that output has exceeded 
the projected 2005 assessment.  At the time of the 2001 projection, unlike the other major shipbuilding regions of Japan, Korea and the EC , China did not supply its own estimate nor has it 
done so subsequently.  The OECD capacity estimat es show that output has exceeded the estimated 
2000 capacity figure in both 2002 and 2003 and ex ceeded the 2005 projected capacity in 2003.  
  However, there has been considerable grow th in capacity in China since 2000 both through 
improved performance
16 and additional or enhanced faciliti es. Drewry Shipbuilding Consultants 
believes that there has been excess capacity within  China during this period. Over the period 1999-
2001 it is estimated that the top 20 shipbuilding yards in China (which represented approximately 
three quarters of the country capacity) were work ing at 55 per cent of their capacity.  Drewry 
undertook a detailed estimate of capacity in China, based on the agreed OECD guidelines which reflects the type of ships built and performance over the period 1999-2001, which was published in its 
(non-commissioned) report on China’s Shipyards issu ed in July 2003.  Th is assessed Chinese capacity 
to be 3.187 million cgt at the end of 2002 which ta ken in conjunction with the reported output for 
China in 2002 and 2003 would indicate utilization levels  of 49 per cent and 81 per cent respectively. 
Furthermore, Drewry calculated that a projected additional 0.353 million cgt was scheduled to come 
on line by 2005/6.  This estimated 2005/6 capacity of  3.54 million cgt contrasts with the earlier OECD 
estimate for 2005 of 2.18 million cgt.  159. The Panel’s written question 30 following the first meeting was as follows:  
“In general, how much flexibility does a typical shipyard have to produce all or a broad range of ship types? What are th e physical and other constraints on any 
given shipyard’s potential product range?  How important is prior experience to 
a shipyard’s production cost and capability to build a particular type of ship? 
With reference to the above considerations,  p1ease describe the capabilities and 
experience of each EC shipyard that pr oduces or is capable of producing some 
or all of the kinds of commercial vessels cited in your serious prejudice claim.” 
 Please present a summary of any informatio n already before the Panel, including the 
Annex V information, that is relevant to this point but was not referred to in the EC’s original 
answer to this question.  
                                                     
 
16 One of the great difficulties in this area is that potential capacity is profoundly influenced by 
efficiency of production, not just by  nominal physical capacity. This explains in part why China with its great 
potential is such a “wild card” in the projections. WT/DS273/R 
Page G-112  
 
Comments
 
  In light of the Panel’s question, Korea cannot help but reiterate that the EC has not made 
available any information in this regard, whether by ship type or, a fortiori , by like product vessel in 
the framework of this proceeding.  Korea has already expressed its su rprise at the EC’s statement in 
paragraph 131 of the EC’s response to the Panel’s Question 30. Indeed, the EC has circulated three 
questionnaires to the EC shipyards in the course of  the EC’s Trade Barrier Regulation proceedings 
during the period from 2000 to 2002 requesting in formation on vessels built and sold by the EC 
shipyards. It has obtained the co-operation of around 21 shipyards over this period providing responses to these questionnaires ( See also Annex 1a of the documents submitted by the EC in the 
Annex V process). Based on the detailed informatio n that it must have received and on data that 
should be available to its expert, FMI, it should have been possible to address at least for these 21 of 
the most important EC shipyards their capabilities a nd experience in producing some or all of the 
kinds of commercial vessels cited in the serious prejudice claims.  
 Korea also refers to Annex 1b of the documen ts supplied by the EC in the Annex V process 
which clearly indicates that many if not most of the EC yards during the period from 1997 to June 2003 produced only one - or at most two - types of commercial vessels concerned by the present 
dispute, for example:   - Aker MTW:  product and chemical carriers, container ships; 
 - HDW:   container ships; 
 - IZAR:   product and chemical carriers, LNGs;  - Kvaerner Warnow: container ships  - Odense:  container ships  - Thyssen:  container ships 
 - Fincantieri:  product and chemical carriers 
 - Kröger Werft:  container ships  - Stralsund:  container ships  - Peene Werft:  container ships  - Flender Werft:  container ships  - Lindenau:  product and chemical carriers 
 - SSW:   container ships 
 - Aker Ostsee:  container ships.   Chantiers de l’Atlantique is not even on th e list but should be listed only for LNGs anyways. 
This is confirmed for the above EC yards and for ot hers in Annex 2b filed by the EC in the Annex V 
process with the list of orders  per shipowner’s nationality. 
  In fact, if the correct like product determination were taken into account, as argued by Korea, it would also be established that EC yards concentr ate in specific size ranges within the product types 
of container ships and product and chemical carriers.  Moreover, this is not the result of the bestowal 
of the alleged Korean subsidies but is the result of  a more than decade-long evolution. This evolution 
started well before any of the alleged subsidies were  granted and reflects a decision on the part of the 
EC yards to specialize in specific like product types of vessels, with the largest amongst the EC yards 
having decided to concentrate in particular on high va lue added vessels such as cruise ships, ferries or 
roll-on-roll-off vessels where they cont inue to occupy a very high mark et share. This may, however, 
be an effect of the myriad EC subsidies. 
 
 The EC yards have no intention to build every type of vessel or every type of size but have specialized more narrowly and made investments acco rdingly. By way of example, Korea refers to 
Annex 4b of the documents submitted by the EC in th e Annex V process.  In particular, the financial 
statements for 2002 of Aker MTW (refer to the Ma nagement Report for Fiscal Year 2002, Section 1 
on Business Development at Exhibit 4/2) which, having stated that the yard wa s able to “beat Korean  WT/DS273/R 
 Page G-113 
 
 
competitors” for the order of 6 container ships of  2500 teu, to be built for the Iranian shipping line 
IRISL, and having a cruise ship on order.   
In 2002, the focus of investment was the re placement of equipment and systems, esp. 
to allow the parallel manufacture of container ships and cruise ships. 
 Reference is also made to the financial statem ents for Chantiers de l’ Atlantique for the year 
closed on 31 March 2001 also included in Annex 4b of  the data submitted by the EC in the Annex V 
process.  In particular, the Message from the CEO Pie rre Bilger at page 14 where it clearly identifies 
ferries, cruiseships and LNGs as well as naval build ing to be the continued priority. Of course, only 
LNGs are the subject of the present dispute, thereby confirming that Chantiers de l’Atlantique is not 
interested in containerships or product and chemical  carriers (as is confirmed also by the fact that 
France has applied for the EC’s temporary defen se mechanism aid only in respect of LNGs).  
  Korea further refers the Panel to the financial st atements of the  important EC yard Fincantieri 
in Annex 4b.  Korea notes that, while the yard in its annual reports refers in elaborate terms to its 
building of cruiseships and ferries, there is nothing on  the building of other commercial vessels, save 
a cursory reference to the building of chemical tankers of which the EC itself says that these are 
outside the purview of the present dispute, notwithst anding that it maintains a supply substitutability 
for all vessels alike.   HDW in its financial statements for the y ear ended on 30 September 1997 also attached in 
Annex 4b states the following at page 12: 
 
Our product developments in merchant sh ipbuilding revolve round customer-driven 
solutions to sea transport problems of all ki nds and also new concepts for passenger 
ships. HDW cruise ships are either modern ship s built in the style of past eras or new 
types of luxury apartment ships never built be fore. With regard to freighters, we are 
concentrating on developing fast ferries a nd container ships, new insulating systems 
for gas tankers and designing ships fo r transporting reefer containers. 
 Having thus set its priorities, it is clear that HDW did not wish to pursue other vessel types 
such as LNGs or product and chemical tankers, or di d not consider itself capable  with respect to such 
other vessel types. 
 
 The Management Report for the 2001 Financial ye ar of the financial statements of Kvaerner 
Warnow (Annex 4 thereto, Section 4) states the following:  
Container ships will continue to form K WW’s core business. However the shipyards 
plans to expand its range of products in order to reduce its  dependence on price trends 
in the container ship market. This objec tive will be attained in cooperation with 
partner shipyards within the Group. The expertise and reputation the yard has 
acquired in building the drilling platform  will open up new opportunities for other 
offshore projects and will be built on and expanded in cooperation with partner yards 
within the Group. 
 Having already stated in Section 1.5 that R&D focused on the development of designs for 
standard container ships, it is clear that Kvaerne r Warnow intentionally concentrated on the building 
of container ships and did not contemplate di versifying into other commercial vessels, but 
contemplated the additional building of drilling rigs.
17 
                                                      
17 Reference is also made to Kv aerner Warnow’s management report for the 2000 financial year 
(Annex 4, page 5 of 6) also attached in Annex 4b wh ere the yard stated that “K WW, which has specialised in 
the container ship market, will continue in the near future to depend on obtaining new contracts in this field.” WT/DS273/R 
Page G-114  
 
  The same is true for Volkswerft Stralsund wh ich in Section 3. of its Annual Management 
Report attached to its financial statements for 1 999 in Annex 4b indicated that “[t]he yard will 
continue to concentrate its marketing activities on medium-sized container ships and large special-
purpose vessels for the offshore sector.”
18 
 
160. Concerning the composite ship newbuildin g price index furnished by the EC, the EC 
indicates that major shipbuilding consultants also  maintain “more specific price information for 
particular ship types”. In Attachment 2 to its answers to questions, the EC provides price 
information for two sizes of tankers and for eight sizes of container ships. 
 
 (a) Is this the “more specific’ information to which the EC refers?   (b) Why does the EC show the particular breakouts that it does? Do other 
breakouts exist for these pr oducts? Please explain. 
 
Comments
 
  Korea refers to its response to Question 173 d) and e) regarding the detailed price series 
indices that are used in the industry.  161. The EC presents indices of estimated Ko rean production costs versus prices in support 
of its argument that there is price suppression/depression The EC indicates that its consultant, FMI, prepared the cost estimates, taking into  account various known cost trends and cost 
advantages of the Korean yards. The EC in its an swers to questions following the first meeting 
provided a description of the methodology used by  FMI to prepare these estimates. The EC also 
indicated that, should the Panel so request, it would furnish the detailed underlying data. Is it 
the view of the EC that a graphical presentation of price indices, along with a description of methodology, constitutes prima facie evidence of evolution in Korean shipbuilding costs? Please 
explain. 
 
Comments
 
 
 Korea observes that the EC has not even provided production cost versus price indices for each of the vessel segments that the EC itself has identified. In the Second Substantive Meeting, upon 
a request of the Panel, the EC has confirmed that a serious prejudice assessment should be made for 
each of the three product segments identified by the EC separately. While the same question is now 
addressed in writing to the EC, having clearly separated the three product segments, in the EC’s 
rationale, there is no reason why the EC should r espond differently in writing. Thus, when the EC 
alleges that price suppression must exist because in  the absence of price pressure due to Korean 
subsidies, the increase in demand, freight rates and cost of production would have led to price 
increases, the EC should have made a prima facie  case in support of its allegations already in its First 
Written Submission for each of its own product segments separately.  
 
 The EC failed to do so and even further weakened the strength of its allegations in 
Attachments 2 and 6 of its responses to the Pa nel’s questions as well as in its Second Written 
Submission. The following will clarify this:  
                                                                                                                                                                    
 
Korea notes for the record that the same report mentions that “[t]he competitiveness and profitability of the 
shipyard would be improved if the production limits imposed by the EU were eased or lifted.” 
18 Section 5. of the management report for the 2002 financial year also attached in Annex 4b) confirms 
that: “[o]ur acquisition activity will continue to focus on the tried and tested market segment of mid-sized 
container ships and supply ships.”  WT/DS273/R 
 Page G-115 
 
 
 
 First Written Submission Attachment 2 of the EC’s responses to the 
Panel’s questions 
 Price developments Price and cost 
index Price developments Price and cost index 
LNGs Newbuilding price 
developments (Figure 30 at page 
164) Cost and price 
indices for Korean LNGs (Figure 38 at 
page 165) 
 No explanation on 
how these cost 
indices were obtained and which 
LNGs are reflected 
in these LNGs . Year-end prices of 
LNGs (Figure 1.3 at page 3) 
 
  Cost and price indices 
for Korean LNGs (Figure 1.5 at page 4 
 
Half of one page explanation on the 
“estimation” of cost 
indices (Section 4 at page 16) but still no 
clear explanation on 
how these costs were 
calculated or which 
LNGs are reflected in these indices.  
Container vessels A graph with world 
market prices for 
3,500 teu and for 1,100 teu container 
vessels taken from 
Clarkson Research Studies 
(Figure 41 in the 
EC’s First Written Submission, at 
page 167) Cost and price 
indices for Korean 
3,500 teu container vessels (Figure 40 
at page 166 of the 
EC’s First Written Submission) 
 
Price indices presumably 
calculated based 
on Figure 41.  
No explanation on 
how these cost indices were 
obtained and which 
container vessels 
are reflected. 
 No explanation as 
to why conclusions 
for all container vessels are drawn 
on the basis of a 
specific size range only.  A graph is shown 
with price 
developments for 8 different sizes of 
containers based on 
Clarkson research. Cost and price indices 
are shown for a 
Korean panamax container ship (Figure 
3.7 at page 15. 
  
 
The comments with regard to the data in 
the First Written 
Submission remain. In addition, it is 
questioned whether 
the cost and price indices shown in 
Figure 3.7 can be 
reconciled with those 
in the First Written 
Submission. The latter reflected those of 
3,500 teu container 
vessels while Attachment 6 to the 
EC’s responses to the 
Panel questions indicates that 
Panamax container 
vessels which are reflected in Figure 3.7 
cover vessels between 
about 4,000 and 5,000 teu (item 7. at page 1.) 
 
There seems to be an inconsistency in the 
EC’s demonstration.  
Product and 
chemical tankers No price 
developments 
shown at all. Cost and price 
indices for Korean 
handysize product Price developments 
for handymax and 
panamax products No cost and price 
indices are shown and 
there is no indication WT/DS273/R 
Page G-116  
 
 First Written Submission Attachment 2 of the EC’s responses to the 
Panel’s questions 
and chemical tankers (Figure 43 
at page 169 of the 
EC’s First Written 
Submission) 
 No indication on 
how the price 
indices were determined. 
 
No explanation on how these cost 
indices were 
obtained and which container vessels 
are reflected. 
 No explanation as 
to why conclusions 
for all product and chemical tankers 
are drawn on  
the basis of a specific size range 
only. 
 tankers taken from 
Clarkson’s (Figure 
2.3 at page 8)  
 
 
The data is shown for “product 
tankers” while the 
EC has constantly indicated that 
“product and 
chemical tankers” are concerned by 
the present dispute 
and has indicated in the Second 
Substantive 
Meeting that it is concerned with 
tankers that 
transport both oil and chemical 
products. It is, 
therefore, not clear whether these 
prices reflect sown 
in Figure 2.3 
reflect those of the 
products concerned by this dispute. as to whether the EC 
maintains those shown 
in Figure 43 of its 
First Written 
Submission. 
 There is total 
uncertainty as to the 
allegations. If the EC meant to maintain 
Figure 43, the 
questions/observations in the third column of  
this table remain 
valid. 
 
  As mentioned, it is not clear how the cost i ndices used were arrived at or whether the cost 
reports of FMI submitted in Annex 10a of the docum ents supplied by the EC in the Annex V process 
were taken into account. However, if they were, in addition to the criticism already mentioned by 
Korea in its Second Written Submission (at page 124) or in the Drewry Report (Exhibit Korea – 70 at 
page 8.22), Korea submits that the cost calcula tions are not sufficiently representative as to be 
conclusive. Indeed, cost calculations were made  for the following vessels subject to the present 
dispute: 
 
 -  Hanjin 4,900 teu container;  -  Daewoo 5,100 teu container  -  STX 51,000 dwt tanker (which may be  a product tanker not concerned by this 
dispute) 
 -  Hyundai Mipo handymax tanker
19 
 -  Daewoo LNG for Exmar  -  Hyundai LNG for Golar  -  Hyundai 2,500 teu  -  Samsung 5,500 teu container  -  Samsung LNG for British Gas 
                                                     
 
19 For details on this vessel and the preceding three, refer to Section 6 of the FMI Mid-term report, 
Shipbuilding Marketing Report – Phase 4, March 2003, Annex 10a of the documents submitted by the EC in the 
Annex V process.  WT/DS273/R 
 Page G-117 
 
 
 -  STX panamax products tanker (which ma y not be concerned by this dispute that 
concerns combined produc t and chemicals tankers) 
 -  STX product and chemicals tankers20 
 -  Hyundai 7,200 teu container vessel,  -  Daewoo LNG for Bergesen 
 -  Samho Aframax tankers (which may not be  concerned by this dispute that concerns 
combined product and chemicals tankers) 
 -  Samsung 7,200 teu container ship  -  Daedong 2,500 teu container ship  -  Hyundai Mipo handysize products tanker  (which, as mentioned above, may not be 
concerned) 
 -  Shin-A handysize products tankers (which as mentioned above, may not be 
concerned)
21 
 -  Daedong 35,000 dwt tanker (if a product ta nker, this product may not be concerned) 
 -  Hanjin 5,608 teu container ship 
 -  Hanjin 1,200 teu container ship 
 -  Hanjin 6,250 teu container ship  -  Halla 3,500 teu container ship  -  Hyundai 6,800 teu container ship  -  Hyundai 5,600 teu container ship  -  Hyundai LNG for Bonny Gas Transport 
 -  Hyundai 5,500 teu container ship 
 -  Samsung 5,500 teu container ship  -  Samsung 3,400 teu container ship
22 
  Thus, it would seem that cost calculations have been made at best for around 25 vessels out of 
the hundreds of Korean vessels sold that are vessel types concerned by the dispute. Not even half of 
these cost calculations concern vessel s built by restructured yards.  
 Korea, therefore, submits that if this were the basi s for the cost indices set forth by the EC in relation 
to price indices, these cost indices are not representati ve compared with the total sales of the vessels 
concerned by the restructured yards in terms of th e number of vessels sold or in terms of like product 
coverage. If these are not the basis for the cost indi ces, the indices relied upon by the EC constitute all 
the less prima facie  evidence sufficient to demonstrate the existence of price suppression as they are 
assertions only without any substantiating evidence. In  any event, Korea submit s that the EC has not 
carried the burden of proof that rested on it.  
162.  What specific evidence/examples are contained in the information before the Panel in support 
of the EC argument that prices at one end of the product spectrum for a particular kind of ship influence prices along the entire spectrum? (For exampl e, is there specific evidence in the information 
before the Panel that a downward movement in very  large container ships brings about commensurate 
downward movement in all smalle r sizes of container ships?) 
 
                                                     
 
20 For details on this vessel and the preceding five, refer to Section 6 of the FMI Final report, 
Shipbuilding Market Monitoring – Phase 3, August 2002, Annex 10a of the documents submitted by the EC in 
the Annex V process. 
21 For details on this vessel and the preceding six, refer to Section 6 of the FMI Final report, 
Shipbuilding Market Monitoring, Phase 2, May 2001, Annex 10a of the documents submitted by the EC in the 
Annex V process. 
22 For details on this vessel and the preceding five, refer to Section 2.2.2 of  the FMI Final summary 
report, Shipbuilding Market Monitoring, April 2000, Annex 10a of the documents submitted by the EC in the 
Annex V process. WT/DS273/R 
Page G-118  
 
163. (a)  For each ship category, in prac tical terms how substitutable are different 
sizes/configurations (containment syst ems, in the ease of LNGs)? Are there 
specific evidence/examples in the inform ation before the Panel? In addition, 
please furnish relevant portions of the industry publications discussed at the second meeting. (For example, one industr y expert referred at the meeting to 
one of the industry publications that contains information relevant to cross-price 
elasticities). 
 
Comments
 
 
 For all ships, size is a major barrier  to substitutability for several reasons: 
  1. bigger ships cannot physically operate on many of the routes or ports serviced by 
smaller vessels,  
 
 2. trade volumes would mean that bigger sh ips would have to operate part empty on 
many lower volume routes serviced by smaller vessels; and 
  3. ship operating economies of scale are such that it is considerably more expensive per 
unit of cargo carried in a small ship compar ed with a larger vessel (which is why 
larger ships are built). Information was provided in Exhibits Korea - 70 and 109 
regarding the different operating costs of v essels and this information is published in 
Drewry’s industry reports. 
  There are other reasons which tend to be more  ship type specific, some of the main ones 
include: 
 
Product/chemical tankers:
 
  
• IMO Class of the tanks on product chemical tankers limits the cargoes a vessel can carry by 
regulations, it would be particularly unlikely th at expensive IMOI/II vessels would be used to 
carry oil products; 
 
• Tank coatings limit the cargoes that can be ca rried in oil products and chemical/products 
tankers; 
 
• Some cargoes trade in relatively small volumes from one destination to another whilst others 
are traded in high volume, small volumes of car go require smaller tanks and higher levels of 
tank subdivision and it is economically not viable  to carry small volumes in large tanks or 
vice-versa . 
 
Container ships  
 
• Smaller vessels tend to have lo wer speeds and can therefore not maintain the time schedules 
for liner services on routes that are operated by large vessels – this would result in a major failure of delivery service to customers; 
 
• Large containerships are built without their own cargo handling gear because they trade 
between dedicated container ports which are e quipped with high speed unloading facilities. 
They would therefore not be able to unload in  less specialized ports that do not provide these 
since the ships are too large to be serviced by the cranes available in smaller ports. For this 
reason the ships using these smaller ports are equipped with their own cargo handling cranes; 
  WT/DS273/R 
 Page G-119 
 
 
• On certain trade routes – notably north–south routes – there are significantly higher volumes 
of refrigerated cargoes and these cannot effectivel y be traded by ships with lower levels of 
reefer capability which are intended to be traded on East-West routes. 
 LNG ships
 
 
• Ships destined to trade to ports that do not have land-side re-liquefaction facilities must 
incorporate these facilities on the ship or they cannot discharge their cargoes.  The expansion 
of LNG trade is seeing an in crease in such instances; 
 
• Certain membrane systems experience ‘sloshing’ problems if they have partly empty tanks so 
they cannot discharge parts of their cargoes at di fferent ports.  This is mainly a consideration 
on certain Japanese LNG routes. 
 
 (b) Can the EC cite specific instances/situa tions in the information before the Panel 
where a shipowner has purchased and used a larger-than-usual ship for a particular 
run, due to a relatively low price for the larger ship? 
 
164.  What specific evidence is there in the information before  the Panel that APRGs and PSLs 
around the time of the restructuring helped the shipya rds in question to remain in operation, whether 
by improving their balance sheets/cash flow or otherwise?  165. For each category of ship, what has been the evolution in prices versus costs in other major 
shipbuilding countries since the mid-1990s, and how does this compare with the trends in Korean 
prices versus costs?  166. (a)  For each of the three ship types, wh at specific evidence/examples are there in the 
information before the Panel (in additi on to the domestic complaint by Samsung 
against Daewoo) that the restructured sh ipyards were the price leaders among the 
Korean producers? 
  (b) What evidence is there in the information before the Panel in support of the EC 
argument that the alleged restructuring subs idies enabled the restructured yards to 
drive down the prices charged by all other Korean shipyards? 
 
 (c)  What has been the annual financial perfo rmance of the other (non-structured) Korean 
shipyards since the restructuring? 
 
167. If, as the EC argues, shipyards have near-total flexibility to produce any kind of ship, 
and the Korean yards are heavily subsidized , why are Korean shipyards not more-or-less 
equally active in all kinds of ships (including cruise ships, ferries, etc.)?  
Comments
 
  Refer to the response to Question 126 which de monstrates that EC shipyards do not practice 
full supply-side substitutability across all ship typ es. The following examples demonstrate this is a 
common situation in other regions as well.   Japan has a large number of shipyards and build s ships across a wide range of ship types. 
Furthermore as it has a strong domestic customer base, it is unlikely that a yards absence from a market reflects any alleged anti-competitive actions by other countries’ yards.  Out of 130 yards in 
Japan that have delivered ships since 1990 or currently have ships on order: 
 WT/DS273/R 
Page G-120  
 
• only 5 are active in the LNG sector 
• only 11 are active in the passenger/crui seship market for larger cruiseships 
• 24 yards are active in the Reefer (refrigerated) ship market 
• 26 yards are active in the Crude Oil tanker market 
• 36 yards are active in the Containership market  and only 9 are active in the market for teu 
ships of 3,500 teu or larger 
• 47 yards are active in the LPG market 
  Some ship types are so specialist that there are only a few yards active across the whole world 
market. The obvious examples are for large Cruise sh ips where there are 7 yards worldwide who have 
built (or have on order) cruise ships of 60,000 gross tons or larger since 1990, and of the 86 ships 
involved 80 of them have been shared amongst 4 sh ipyard groups, namely: Chantiers de l’Atlantique, 
Fincantieri group, Kvaerner Masa Yards and Meye r Werft. The remaining 6 comprise 2 each at 
Bremer Vulkan, Lloyd Werft (both EC yards) and Mitsubishi HI of Japan. In the LNG sector, the 
number of active players is also of course limited, where 14 yards have built (or have on order) the 
169 ships involved since 1990.  
 In fact, a full analysis of all ship types i ndicates that over 1100 yards (or shipbuilding groups) 
have participated in the market since 1990 and of these:  
• 52 have built or have orders for Reefer ships 
• 71 have built Crude Oil tankers 
• 85 have built Dredgers 
• 92 have built LPG 
• 157 have built Ro-Ro ships 
• 180 have built Container ships 
• 211 have built Bulk Carriers 
• 214 have built Offshore vessels 
• 224 have built some IMO class of Chemical tanker 
• 386 have built General Cargo or Multi-purpose cargo ships 
 
 Much reference has been made to the emerge nce of China as a major shipbuilding nation and 
a similar profile for China shows that of record ed deliveries/orders (some domestic and smaller 
vessels are unlikely to be fully reported) since 1990 there are 100 active shipbuilding yards, of which: 
 
• none are involved with Cruise ships 
• 1 is involved with LNG ships 
• 3 are involved with Reefer ships 
• 5 are involved with LPG ships 
• 8 are involved with Ro-Ro ships 
• 10 are involved with Crude Oil tankers 
• 12 are involved with some IMO class of Chemical tanker 
•
 22 are involved with Offshore vessels 
• 33 are involved with Bulk Carriers 
• 37 are involved with Container ships 
• 58 are involved with General Cargo or Multi-purpose cargo ships 
 
 We believe that this highlights the non-homoge neity of the shipbuilding market supply side, 
and the fact that in practice yards do not try to oper ate in all market sectors but concentrate on certain 
types where they have a competitive advantage. 
   WT/DS273/R 
 Page G-121 
 
 
III. TO BOTH PARTIES 
 
A. ITEM(J) / ITEM (K), FIRST PARA.  
168. The parties disagree as to whether APRG S constitute export credit guarantees and 
whether PSLs constitute export credits. Plea se provide any documentation (either from the 
shipbuilding industry, the OECD, or any other so urce) that you consider supports your position 
on these issues. 
 
Response
 
 
 The EC has challenged whether APRGs and PSLs are export credit guarantees based largely 
on who receives the facility.  A couple of problems w ith the EC arguments are that the “beneficiary” 
as the EC identifies it, are different in the two instances. According to the EC’s arguments, APRGs 
are on behalf of the foreign buyer and that is not an e xport guarantee. Of course, PSLs are on facilities 
provided directly to the shipbuilder which causes some problems in the EC’s argumentation.   
  The EC tries to get around this problem by i gnoring it and making a blanket statement that the 
second paragraph of item (k) refers to the OECD and therefore this must be the context for 
interpreting the first paragraph. Thus, according to the EC, the OECD interpretations would not 
encompass PSLs. As Korea has noted, there is no legal or logical basis for this line of argumentation. 
It is axiomatic that an exception is to be constr ued narrowly. Therefore, there is no basis at all for 
construing the rule and the exception to be of pr ecisely the same breadth. The treaty language itself 
gives no such primacy to the OECD over the WTO.  While the second paragraph of item (k) has been 
interpreted as providing a specific exception that  applies to the OECD, this is a matter of 
interpretation for the OECD is not mentioned in the treaty text; While Korea, of course, is not 
rejecting the OECD as a useful gatherer of informati on, this sort of judicial interpretation certainly 
cannot be the basis for subordinating the WTO tr eaty to other provisions in the OECD documents. 
  The EC continues with its creation of new le gal rules outside of the plain meaning of the 
language by arguing that export credit guarantees ar e meant only to include support for domestic 
producers to protect them from unknown foreign risks. Of course, the provisions of the items (j) and 
(k), first paragraph, do not limit themselves in this  manner. This proposed limitation is a creation of 
the EC and one that the EC had to acknowledge during the course of the Second Substantive Meeting is anachronistic even if it were appropriate for the Panel to rely in its legal analysis on a somewhat 
dubious EC rendition of the “philosophy” of the OE CD Arrangements. Moreover, as is demonstrated 
below, this EC characterization of covered and non-covered instrume nts is both highly artificial and 
simply inaccurate. 
  Korea has discussed before how it disagrees w ith the EC about the EC’s extremely narrow 
construction (when it suits the EC’s purposes) on th e OECD language. Korea has already specifically 
provided evidence that the United States has made its views known in the OECD that it does not agree 
with such an overly narrow interpretation of what  constitutes an export credit or guarantee. Indeed, 
Korea remains somewhat puzzled by this EC argu ment. The EC refers to the APRGs as guaranteeing 
the shipbuilders’ domestic  risk rather than the foreign risk. Of course, the parties would not be 
discussing the safe harbours if one was not assuming arguendo  that the Panel had already found that 
these were export subsidies. As Korea noted during the Second Substantive Meeting, the nature of 
disputes such as this is that the respondent has to  argue in the alternative on every contested issue 
after the first one. The respondent presents continge nt arguments on the hypothetical assumption that 
it has lost the previous issues. On the other hand, th e situation is totally different with respect to the 
complainant. The complainant must prevail on every one  of the issues and, while it is not a rigid rule, 
normally would only address issues arguendo  if it is making, for instance, a non-violation claim under 
Article 26 of the DSU. In this instance, it is impos sible to see how the EC can argue that these are 
domestic instruments and not export instruments unl ess it wishes to concede the basic point of its WT/DS273/R 
Page G-122  
 
whole claim, i.e. export contingency. If it is a programme of credit guarantee and is contingent on 
exportation, it follows that it is an “export credit gua rantee” within the meaning of item (j). In relation 
to this, the explanation by the UN Economic and Social Commission as to “export credit guarantee” is 
enlightening. The Commission defines the export cred it guarantee as “instruments to safeguard export 
financing banks from losses that may occu r from providing funds to exporters.”
23 The Commission 
sees that export credit guarantee is likewise benefici al to exporters, as “[s]uch guarantee allows 
exporters to secure pre-shipment financing or post-shipment financing from a banking institution 
more easily.”24 When read in light of the following examples of other Member’s practices, it is clear 
that the APRG squarely falls in the export credit guarantee, as it is an instrument to safeguard ship-
buyers or the financing banks on their behalf from losses that may occur from providing funds to 
shipyards.   
  KEXIM is not alone in offering these sorts of instruments. For example, the Finnish ECA, 
Finnvera offers bond guarantees of various types. According to the Finnvera website, “the Bond 
Guarantee is a countersecurity for the bank i ssuing a bond on behalf of the exporter in favour of the 
foreign buyer . The bonds that the buyer may require include, for example, a bid bond, an advance 
payment bond , a performance bond or a maintenance period bond.”
25  There are two important aspects 
to the explanation of the guarantee. First, Finnvera does not limit the guarantee to situations arising 
from foreign risk. Second, it also illustrates how a fa cility that nominally protects the foreign buyer 
really can operate to protect the shipbuilder from such foreign political risks – just the sort of risk the 
EC says are the focus of item (j): “For the exporte r, the guarantee is an insurance against call of the 
bond. The guarantee provides cover against unfair call of the bond and against call owing to political 
risks.  Political risks include war, insurrection or ot her such event in the buyer’s country preventing an 
exporter from fulfilling the obligations under the cont ract, with the result that the buyer calls the 
bond.”  
 Similarly, Hermes of Germany provides for th e availability of the following kinds of bonds 
and guarantees: “Advance payment bonds, performance bonds and maintenance bonds.”
26 ECGD in 
the United Kingdom provides a variety of export cred it facilities to both buyers and suppliers; it does 
not seem to limit itself to one side of the tran saction. Among the instruments it provides are various 
Bond Insurance Policies, or BIPs. ECGD identifies these BIPs as including:   
Advance Payment Guarantees.  These are to  protect the buyer against the loss of 
money paid in advance.  They are partic ularly common where there is a significant 
design and manufacturing phase before the deliv ery of the equipment or goods to the 
buyer.  The key risk for exporters with these bonds is that political events may frustrate a contract after the advance paym ent has been received, but before the goods 
have been delivered or the contract completed.
27 
 The ECGD website goes on to explain that this foreign political risk is an import aspect, but 
not the only one.  The BIPs guarantee against any unfa ir call of the bond, not just political risks which 
ECGD identifies separately. Another example comes from the EFIC (the Export Finance and 
Insurance Corporation) of Australia. The EFIC prov ides on behalf of eligible exporters “Advance 
Payment and Performance Bonds” as security for a dvance payments or in support of exporters’ 
performance obligations under the contract.28 
                                                      
23 Exhibit Korea – 137. Excerpt from Trade Facilitation Handbook  by UN Economic and Social 
Commission for Asia and the Paci fic (p. 61) (ST/ESCAP/2224). 
24 Ibid. 
25 Exhibit Korea – 124. (emphasis added) 
26 Exhibit Korea – 125. 
27 Exhibit Korea – 126. Korea would specifically like to bring to the Panel’s attention that the term 
“bond” is used interchangeab ly with the term “guarantee” by the ECGD and implicitly so by the other ECAs. 
28 Exhibit Korea – 138.  WT/DS273/R 
 Page G-123 
 
 
  Export Development Canada (“EDC”), provides for pre-shipment financing “for exporters 
who need cash for manufacturing their goods before they export.”
29  EDC goes on to explain: 
 
Pre-Shipment Financing helps Canadian exporters win more business by raising 
sufficient working capital to fund up-front costs associated with export contracts.  
EDC encourages Canadian financial instituti ons to advance pre-shipment loans to 
exporters.30  
 GIEK of Norway provides a “Pre-shipment gua rantee. Protects the exporter against losses that 
may occur during the production, prior to deliver y.” It also provides “B ond Guarantees. Helps the 
exporters to furnish guarantees for tenders , advance payments or competition (bonds)”.31  
  The ECGD and the Indian Exim Bank both provide for post shipment loans directly to the supplier, but that is not legally distinguishable fro m precisely the type of pre-shipment loans offered 
by various ECAs.  Indeed, India Exim also offers th e same sort of facility on a pre-shipment basis: 
 
Pre-Shipment Rupee Credit 
Pre-shipment Rupee Credit is extended to finance temporary funding requirement of 
export contracts.  This facility enables pr ovision of rupee mobilization expense for 
construction/turnkey projects.  Exporters could also avail of credit in foreign 
currencies to finance cost of imported inputs for manufacture of export products to be 
supplied under the projects.  Commercial banks  also extend this facility for definite 
periods.
32 
 India Exim also provides what it describes as Non-Fund based facilities that are “guarantees 
directly or in participation with other banks , for project export contract”.  These include:  
 
Advance Payment Guarantee.   
Exporters are expected to secure a mobili zation advance of 10-20 per cent of the 
contract value which is normally released  against bank guarantee and is generally 
recovered on a pro-rata basis from the progress payments during the project execution.
33 
 It can be seen from these examples that both APRGs and pre-shipment loans are not limited 
to Korea.  These facilities also do not fit so easily in to the EC’s simplistic construct of what is a 
domestic or foreign risk.34 Clearly APRGs and PSLs are the instru ments to which the safe harbours in 
items (j) and (k) first paragra ph, respectively, may apply. 
 
169. Item (j) refers to the provision of various “programmes”. Assuming that an a contrario 
interpretation of item (j) is permissible, could it operate as a defence for individual APRG 
transactions, as opposed to the APRG programme per Se? Please explain. In particular, if the 
focus of item (j) is on the long-term operati ng costs of the programme, how could item (j) 
                                                      
29 Exhibit Korea – 127. 
30 Ibid. 
31 Exhibit Korea – 128. 
32 Exhibit Korea – 129. 
33 Ibid. 
34 Indeed, if the EC’s narrow and simplistic construct is correct, then a number of EC Member States 
are prima facie  in violation of Part II of the SCM Agreement  as their programmes would be outside of the 
parameters of the OECD Arrangement and not protected by any safe harbours. WT/DS273/R 
Page G-124  
 
determine whether or not individual transact ions under the programme constitute export 
subsidies? 
 
Response
 
 
 As discussed during the Second Substantive Mee ting, the language of item (j) would appear 
to require an assessment on a programmatic basis. That is, the Panel must look to see whether the 
premia charged in the programmes are covering th e long-term operating costs of such programmes. 
Once that is established, then even if an individua l transaction might be at a premium level that, if 
applied generally, would not cover the long term operating costs, then  because the programme covers 
such costs, such an individual transaction would be w ithin the safe harbour.  The flip side of this point 
is that it necessarily follows that if the programme  is not covering its long term operating costs, an 
individual transaction will not be within the safe ha rbour even if it is at a premium level that, if 
generalized, would cover the long term operating costs.    
 In Korea’s view, the Panel must make a judgm ent call as to what is “long term” and then 
assess the evidence regarding whether or not the programme in question h as covered its operating 
costs and losses during such period. While that may be a difficult inquiry in some other cases, Korea 
has supplied evidence in this dispute that demons trates that the APRG and pre-shipment loan 
programmes have covered KEXIM’s operating costs a nd losses over all periods including the difficult 
period of the Asian financial crisis.   
 
B. APRG/PSL  
170. Korea asserts that KEXIM PSL rates have  been above certain DSME bond rates since 
1999 (para. 231, Korea’s First Written Submission ). The EC asserts th at certain DHI bonds 
were guaranteed (para. 124, EC’s Second Writte n Submission). Are the parties referring to the 
same bonds, or were the DSME bonds referred to by Korea different from the DHl bonds 
referred to by the EC? Please explain. 
 
Response
 
 
 Korea would like to note that the statement by the EC in para 124 of its Second Written 
Submission is incorrect and misleading.  Firstly, as clearly indicated in its Exhibit EC – 129 which 
was referred to in para 124 by the EC, all bonds lis ted therein are not guaranteed. While some of them 
are guaranteed, the rest are “non-guaranteed” (for example, see page 3 of Exhibit EC – 129).  
Secondly, as submitted earlier by Korea, when DSME and DHIM were spun-off from DHI, debts 
including corporate bonds were allocated to the tw o companies in accordance with the relevance to 
the spin-off companies. In other words, all DHI debts incurred thus far relating to shipbuilding 
business were assigned to DSME, and all debts incurre d thus far relating to machinery manufacturing 
business were assigned to DHIM. However, Exhibit EC – 129 is not the one which took into account 
such debt allocation (as it was made prior to the spin-off), simply listed all the then outstanding DHI 
corporate bonds. The debts which were allocated to  a distinct company cannot make a benchmark for 
DSME’s loans. Korea hereby submits Exhibit Korea – 139 . It lists such bonds that were ultimately 
assigned to DSME upon the spin-off out of the bonds listed in Exhibit EC – 129. 
  In contrast with this, the Exhibit Korea – 18 shows the balance of outstanding corporate 
bonds (which were ultimately assigned to DSME) as at the end of each quarter and the average 
interest rates of the outstanding bonds for the respec tive quarters. Thus, it can be said that the Exhibit 
Korea – 18 has reflected parts of Exhibit EC – 129, but not all of it. Korea considers that Exhibit Korea – 18 is more relevant than Exhibi t EC – 129 when finding the benchmark. 
 
171. Regarding Exhibit Korea – 16, are “KEB”, “CHB” and Hanil Bank public bodies? If 
not, are they “entrusted or direct ed” private bodies? Please explain.  WT/DS273/R 
 Page G-125 
 
 
 Response
 
  KEB, CHB and Hanil Bank (currently W oori Bank) are commercial banks operating under 
the Banking Act which is generally applicable to  all commercial banks. For the transition period 
during the Asian Financial Crisis a nd subsequent thereto, the Government of Korea and/or KDIC used 
to hold shareholdings in these banks  as they had contributed capital in  the framework of the financial 
sector restructuring.    As submitted by Korea in relation to the concep t of “public body”, a two-step analysis is 
required: i.e. (i) an entity will be a public body if it is empowered by the law of the State to exercise 
elements of the governmental authority and (ii) the acts in question will be considered acts of the State 
only if such entities were acting pursuant to such aut hority in the particular instance. Relating to the 
first step, there are no laws which empower the banks referred to above to exercise elements of the 
governmental authority. Further, when issuing the APRGs, these banks exercised no governmental 
authority. In light of this, these banks cannot be regarded as public bodies for the purpose of the SCM 
Agreement . 
  In order for the entrustment/direction to be est ablished, the following three elements are to be 
satisfied: (i) an explicit and affirmative action be  it delegation or command; (ii) addressed to a 
particular party and (iii) the object of which acti on is a particular task or duty. The EC has not 
established a prima facie  case as to the entrustment/direction of the above banks to issue the APRGs 
concerned. Further, the EC has never specified any particular “function” that a private body was 
allegedly entrusted or directed by the Government  of Korea to carry out. Korea reiterates that the 
requirements of Article (a)(1)(iv) are met only wh en it is established that the private body was 
entrusted or directed “to carry out one of more of th e type of functions illustrated in (i) to (iii) above 
which would normally be vested in the government and the practice, in no real sense, differs from 
practices normally followed by governments.” Kore a does not see any governmental practice involved 
in the issuance of APRGs. Importantly, beyond gene ralized assertions that at times border on crude 
stereotyping, the EC has offered no evidence of an  explicit and affirmative delegation of command 
addressed to the specific banks orderi ng them to provide subsidies. 
 
C. ALLEGED ACTIONABLE SUBSIDIES 
 
172. Please comment on paras 504-509 of the report of the GATT panel in United States - 
Imposition of a Definitive Countervailing Du ty on Imports of Certain Steel Products 
Originating In France, Germany, and the United Kingdom. 
 
Response
 
  Korea looks forward to seeing the EC’s res ponse to this question and Question 148.  There 
are several ways of distinguishing the Steel CVD  case. Unfortunately for the EC, all of them cut the 
wrong way and would support the EC’s inside investor  standard proposed in th at case.  Korea notes 
that the first point to take from the Steel CVD  case is that it illustrates a couple of the differences 
between equity infusions and debt equity swaps in insolvency.   
  The whole issue of whether an inside investor or an outside investor would put further funds 
into a company in the form of equity infusions de pends on an analysis of the possibility of achieving 
comparable rates of return on the marginal amounts of new investment. The EC was arguing that an 
inside investor has a somewhat different pers pective because it will take into account the funds 
already invested when adding new marginal amounts.  That is, if the new money can optimize returns 
on previously invested amounts, then the inside investor will be willing to possibly accept a lower 
nominal rate of return on the new investment.  In effect, the inside investor looks at the new 
investment as a catalyst for a better return on the full investment.  However, an outside investor, WT/DS273/R 
Page G-126  
 
according to the EC does not have that perspec tive of seeing new funds serving a catalytic function 
for a larger initial investment and therefore will requi re a higher rate of return on the new investment 
that it views in isolation.  In essence both investors are acting on a rational market basis; it is simply a matter of different perspectives.  
 In the case of an insolvency, however, there is no new money being invested.  The goal is to 
maximize the return on whatever was already lent, recognizing that it will in all cases be – at least in 
the short term – a negative return. The inside/outsi de investor discussion serves as an analogy for this 
decision making process. The foreign creditors who ha ve a very small stake in the business are less 
willing to deal with the legal and workout processes in another country.  There is an administrative 
carrying cost for getting involved in such processes that can be quite high.  On the other hand, 
domestically-based creditors that have a larger e xposure both to the company and to the market in 
general are in a position analogous to an inside investor who has a much larger stake to protect and for whom the carrying costs of dealing with a Korean insolvency are significantly  less than the foreign 
lender.  In addition , just as the incentives are differe nt, the leverage is different. The party that has a 
desire to get out and has a relatively small expos ure can block the process in a manner that would 
bring disproportionate pain to the inside lenders. Thus, by using this levera ge, the foreign creditors 
can obtain a higher initial payment on their debts from other creditors. But the issue does not end there in the case of DSME for the outside lenders  asked for a residual amount of out-of-the-money 
warrants. If one steps back and looks at the tran saction as a whole, the inside lenders took less up 
front, but a larger long term potential benefit throug h the equity they received in exchange for their 
debt. The outside lenders took a larger initial amount  and settled for a smaller long-term potential with 
the warrants thereby minimizing their risks and carry ing costs for dealing with  a Korean insolvency. 
Thus, both sides took similar amounts out of the transaction but in different forms.  Both acted as perfectly rational creditors or “investors” reflecti ng their different perspectives as domestic/inside and 
foreign/outside players.
35 
 
 Korea also notes that it does not have the benefit of seeing the academic report the US relied upon in the Steel CVD case, but the description of it sounds abstract in the extreme and, therefore, of 
limited use. It is a highly academic exercise to posit th at two parties are in precisely the same position. 
No persons have exactly the same perspective and no persons have perfect in formation upon which to 
base their decisions.  That is why there are negotia tions.  If this were not the case, the Doha Round 
would not just have begun at Doha, but would also have ended there fo r all of the perfectly informed 
rational Member representatives would have been ab le to instantly settle their differences. There 
would have been no different perspectives if the hypothetical were followed because everyone would 
be in identical positions. Of course, the real world does not operate that way and did not in the Korean 
workouts. The parties bargained to obtain the best results they could in diffi cult circumstances. They 
set their goals according to their specific needs and used what leverage they had to achieve them as 
best they could. Thus, the EC’s argument regarding the different perspectives of inside investors in 
the case of equity infusions applies even more strongl y in the case of different creditors in the case of 
insolvency workouts.   In light of the above discussion, Korea also w ould like to point out another issue illustrated by 
the comparison of these issues in the Steel CVD  case with the current workouts. As Korea has noted in 
its submissions and the Substantive Meetings , there is no transfer of funds in the present case. The 
debt was valued by the lenders and the negotiatio ns to carve up the remains of the company were 
undertaken based on their respective valuations. Ther e were no new sources of funds to pay any of the 
creditors. Thus, for the EC to say that the domes tic creditors took too little for their debt simply 
ignores the point that there was nothing more there for them to get. It was merely a question of 
allocation between creditors . The only possible source of extra funds would have been if the 
valuation exercise had resulted in a determination that the termination and selling for scrap of the 
                                                     
 
35 Korea notes that the Lawes Report, Exhibit Korea – 105, supports this conclusion.  WT/DS273/R 
 Page G-127 
 
 
assets would have yielded more funds than doing the workout. No creditors -- either domestic or foreign, insiders or outsiders -- came to that conclusion.   Korea also notes that in some  cases a litigant will abandon an earlier position if it loses that 
argument. In the referenced pane l report, however, the EC did not “lose” the point. Rather, the Panel 
explicitly was deferring to the administering author ity regarding the insider/outsider argument. In 
paragraphs 466 and 490, the Panel noted that it w as not up to it to make its own judgments about the 
weight of the evidence. In paragraph 503, the Pane l noted that it was the Panel’s duty to see whether 
the EC had established that the administering author ity had not acted on a ratio nal basis. In paragraph 
507 the Panel noted that there might be circumstance s where inside and outside investors might have 
different perspectives. In paragraph 508, the Panel noted that the EC had presented a possible 
alternative approach, but that was not enough when the task of the Panel was examining whether there 
was a failure of the DOC to consider relevant facts (the DOC also claimed that it had in fact considered some of the factors put forward by th e EC).  Thus, the EC did not lose the point as to 
which was a better approach. Rather, the EC was me rely unable to assert that the approach it put 
forward was the only rational approach. In contrast , this Panel is not reviewing an administrative 
decision and, therefore, must make its own judgm ent about which approach is best. If the EC now 
abandons its earlier position it is, to say the very least , opportunism practiced at the expense of logic 
and consistency.  D. SERIOUS PREJUDICE 
 
173. (a)  For each of the three ship types at  issue in this dispute, how are ship data 
normally maintained by the industry, and by industry analysts? 
 
Response
 
 
 Industry data for ships and shipbuilding is ma intained and held through detailed electronic 
ship databases, including:   - LR Fairplay Register of Ships,   - LR Fairplay World Shipping Encyclopedia/PC Register/ Newbuilding Register, 
 - Clarksons Ship Registers (available for Bulk Carriers, Chemical Tankers, Gas 
Carriers (only LPG), Containerships (i ncluding multi-purpose and Ro-Ro ships), 
Offshore Service vessels, Reefers, and Tankers). 
 - Marbase  
 These electronic databases comprise individua l ship records for completed ships and each 
record comprises many detailed fields of tec hnical, commercial, opera tional and construction 
information. The data in these fields is subject to availability and reflect s the type of ship and 
technical characteristics. Ship type and sub-type cat egories are used in all and whilst there is much 
commonality of data, there is no standard format.  Sub-type data provides much greater detail than 
primary or main ship type groupings and hence users of the data choos e which level is most 
appropriate for their use. The following examples are provided: WT/DS273/R 
Page G-128  
 
 
Lloyds Register Fairplay 
World Shipping Encyclopedia/PC Register Register of Ships 
Vessel Types Ship Types 
Bulker 
Combination 
Container 
Dry Cargo Miscellaneous 
Offshore 
Passenger/Ferry Reefer 
Ro-Ro 
Tanker (including LNGs) Bulk Carriers – 14 sub types 
Dry Cargo/Passenger – 24 sub types (incl 
containers and reefers) 
Tankers – 19 sub types (including LNGs) Offshore – 9 sub types 
Fishing – 9 sub types 
Miscellaneous – 30 sub types Non-merchant ships – 4 sub types 
Non-propelled – 2 sub types 
Non-seagoing merchant ships – 13 sub types Non-ship structures – 1 sub type 
180 Sub Type codes approx 125 Sub Type codes approx 
 
 The tables attached in Exhibit Korea – 130  show the groupings of ship types used in the LR 
Fairplay World Fleet Statistics which is also used in  LR Fairplay Quarterly Shipbuilding Statistics. In 
this Exhibit, it can be seen that the chemical/o il product tanker category is included with chemical 
tankers in the basic grouping of the chemical ra ther than oil tankers reflecting the significant 
complexity that IMO chemical requirements bring. This contradicts the EC’s attempts to include chemical/oil tankers with pure oil products tankers. 
 
 Common ship-type specific informa tion held in databases includes: 
  - Containerships – teu capacity, reefer slot capacity, cargo handling gear details, 
 - Chemical Tankers – IMO Class, tank cap acities in cu metres, numbers of tanks, 
 - LNG Ships - tank capacity in cu m,  
 
 There are a huge number of fields covering technical characteristics which are completed 
subject to data availability. Gross tonnage is a fiel d common to all ship types, deadweight is a field 
common to all cargo ships and teu to all container ships. cgt values are sometimes held in some 
database, cgt coefficients in others but cgt values can be calculated from GT. Certain information such 
as price is generally from public sources and so may be only sporadically ava ilable and of variable 
accuracy. These databases also generally hold more lim ited data on ships on order (but not delivered) 
availability of technical and other details is far more spasmodic fo r these than for delivered vessels. 
  These electronic databases form the basis of many  of the statistical reports produced at time 
intervals and the extensive number of fields ava ilable means that data can be summarized in many 
different ways. These databases are generally ava ilable on subscription and many industry players 
(shipowners, shipyards, and analysts) will have ac cess to these and use them as a key information 
source.   The importance of these databases  is that the availability of information is no longer restricted 
by the format of regular statistical reports and industry analysts can access and interrogate data in 
whatever form is necessary to ensure accuracy and consistency.  
 (b) In particular, are these three categori es of ships recognized and used routinely 
for purposes of industry analysis? 
  WT/DS273/R 
 Page G-129 
 
 
Response  
  The basis of most analysis is the electronic da tabases referred to earlier together with market 
intelligence and detailed market know ledge and these are used to prepare certain regularly issued 
reports.  
 
 These reports routinely provide informati on based on ship types but do not necessarily 
coincide with the categorization of containershi ps, product and chemical ta nkers and LNGs proposed 
by the EC which explains why it is, in particular, so difficult to identify the EC’s product category for 
product and chemical tankers.    The product chemical and LNG ship types covere d by this dispute fall within the category of 
tankers (as shown in the ship type classification table in the response to Question 173 – a) above), 
which is a broad grouping which includes, crude oi l tankers, product tankers , chemical tankers, gas 
carriers as well as specialist types (again, without an y category for product and chemical tankers). In 
the LR Fairplay Register of Ships, for example,  this includes the following tanker types: Beer, 
Bitumen, Chemical/Oil Products, Chemical, Crude Oil, Ed ible Oil, Fish Oil, Fruit Juice, Latex, LNG, 
LPG, Molasses, Oil Products, Oil Sludg e, Vegetable Oil, Water, Wine. 
  General type classification are, however, sometime s inconsistent with detailed technical fields 
as a result of data input or reporting inconsistencies,  and as such data must be looked at taking into 
account the context in which information is required to avoid misleading, inaccurate or incomplete 
data.
36 
 
 In general terms, the following classifications  of tankers are generally widely observed: 
 
• Crude oil 
• Oil Products 
• Chemical37 
• Gas Carriers – which consistently identify LPG and LNG as separate types 
  As far as containerships are concerned, these are usually referred to separately to other ship 
types. 
  Size bands are used for almost all in-sector an alyses and also for some cross sector analyses. 
Exhibit Korea – 131
 shows the use of size bands within ship types on a regular basis in various 
industry publications. See the response to Question 173(c), (d) and (f) for examples of those 
commonly used for reporting and analysis purposes. Common statistics are the numbers of 
ships/orders, GT (gross tonnage) and dwt (deadweig ht tonnage for cargo carrying ships only) and in 
the case of containerships teu capacity - this inform ation is used by shipyards and shipowners alike 
and covers both new orders, orde rbook and deliveries. Orderbook info rmation is generally shown both 
in aggregate terms and phased by year of delivery.  
 
 Cgt (compensated gross tonnage) is of no inter est to shipowners or brokers, but is regularly 
used for certain shipbuilding purposes, namely shipbuilding capacity, aggregated shipbuilding 
                                                      
36 For example, in the preparation of the Drewry reports in Exhibit Korea – 70, 109 and 110, Drewry 
established through inspection of the above sources that  ships with IMO chemical classes were listed as oil 
product tankers and vice-versa . Thus, there was considerable inaccuracy  and incompleteness in this respect. 
Drewry therefore made use of various sources to maximize the accuracy and completeness of the 
products/chemical tanker category. 
37 Note that in Exhibit Korea – 130 , LR Fairplay include chemical/o il tankers under the category of 
chemicals and not oil products which contrasts with how the EC has used this data. WT/DS273/R 
Page G-130  
 
demand and shipbuilding output.  The choice of whic h parameter to use is determined by the purpose 
for which the analysis is to be undertaken.   Other characteristics of the vessels such as whet her they are equipped with gearing or have 
reefer capacity may also be taken into account in a number of industry reports. 
 
 (c) If so, how are they defined, and for what purposes are these categories used? 
 
Response
 
 
 The use of ship type categories is not rigorously defined and therefore reflects the categories 
used by those providing the original data as well as some data input discrepancies. The general categories used are listed in (b) above.   The categories as defined in (b) are used fo r an extensive number of purposes but most 
regularly in reports reflecting numbers of vessels,  orders or output by shipyards and shipbuilding 
countries. The following types of industry analysis ma ke use of these categories which, Korea repeats, 
are significantly more complex than the three broad categories that the EC tries to portray as being 
standard in industry reports:  
 - Statistical reports produced at regular time intervals – yearly, quarterly, monthly etc, 
including 
 
• LR Fairplay World Fleet Statistics – Annually 
• LR Fairplay Quarterly Shipbuilding Statistics 
• BRL Newbuilding Enquiry – Quarterly 
• Clarksons World Shipyard Monitor – Monthly 
• Drewry Monthly 
• Fairplay Solutions with Newbuildings – Monthly 
• Clarksons Shipping Intelligence - Weekly 
• Ship Price Series ( See response to section (c) for details) 
 
 - Industry reports – providing commentary and deeper insights as well as data – 
examples include shipbuilding reports from analysts like Ocean Shipping Consultants 
and Drewry Shipping Consultants 
  - Brokers reports – with commentary and ad-hoc information on different shipping 
sectors from broking houses such as Fearnleys and BRS 
 
 Additionally, there are certain shipbuilding statistics available from international organizations such as the OECD although not all co untries submit reports on a regular basis and the 
OECD will often refer to other industry sources for data  analysis purposes. Certain information is also 
provided by government agencies or national industry associations/bodies. 
 
 Examples are provided in Exhibit Korea – 131
 of sample sections of the following 
publications to give an indication of the format and parameters used in such reports including the use 
of size bands with ship types:  
• LR Fairplay Quarterly Shipbuilding Statistics 
• Clarksons World Shipyard Monitor 
• Drewry Monthly 
• Drewry World Shipbuilding Reports, 1999. 
  WT/DS273/R 
 Page G-131 
 
 
 (d) When analysts report on pricing tends,  do they normally ref er to prices for each 
category as a whole, or for subcategories thereof, broken out, for example, by 
size and/or other characteristics. 
 
Response  
 
 A number of industry analysts report pricing trends using Ship Price Series38, in addition to 
commentary and qualitative reports. The main ones of these are:   - Clarksons Ship Price Series and Newbuilding Price Index 
 - Drewry Ship Price Series 
 - Lloyds Shipping Economist   Such price information is kept by vessel type and size. The following tables show the vessels types and sizes for which price series informa tion is available from Clarksons, Lloyds Shipping 
Economist and Drewry.  Whilst other organisations do  publish similar information sporadically, these 
are felt to be the main regular sources of publicly available information of this nature.  Exhibit Korea 
– 131 includes price series data from Clarksons World Shipyard Monitor and Drewry Monthly publications. Other price series data is publis hed in quarterly and annual publications.  
  It can be seen that in virtually all cases, ship  types are broken down by size.  Moreover, whilst 
the individual size categories may vary, there is a certain level of commonality. Key characteristics or 
qualifiers are also provided in some indices such as IMO Class for Chemical Tankers and whether a 
series is for a geared or gearl ess ship in the case of containers. 
  
 
Ship Type Clarksons 
World 
Shipyard 
Monitor Lloyds 
Shipping 
Economist Drewry Monthly / 
Quarterly or 
Annual Reports 
Oil Tanker /Tankers 
 VLCC 300,000 dwt 300,000 dwt 260-280,000 dwt 
 Suezmax Tkr 150,000 dwt 160,000 dwt 140-145,000 dwt 
 Aframax Tkr 110,000 dwt 110,000 dwt 95-105,000 dwt 
 Panamax Tkr 70,000 dwt 72,000 dwt 68-70,000 dwt 
 Handy Tanker 47,000 dwt   
 Handymax – clean  45,000 dwt  
 Products Tkr   40-45,000 dwt 
Chemical Tkrs    
 42-45,000 dwt IMO III   42-45,000 dwt 
 37,000 dwt IMO III   37,000 dwt 
 14-16,000 dwt IMO II   14-16,000 dwt 
 5-6,000 dwt IMO II   5-6,000 dwt 
Bulk Carriers     
 Capesize BC 170,000 dwt 170,000 dwt 150-180,000 dwt 
 Panamax BC 75,000 dwt 72,000 dwt 70-75,000 dwt 
 Handymax BC 51,000 dwt 51,000 dwt 40-45,000 dwt 
 Handysize BC 30,000dwt 45,000dwt 25-30,000dwt 
Container     
 Container   400 teu - geared 
 Container 725 teu   
 Container 1,000 teu 1,000 teu 1,000 teu - geared 
                                                      
38 A ship price series is where the approximate current price of a particular size of ship is reported and 
recorded by industry analysts on a regular basis to monitor price trends for th at type and size of ship. WT/DS273/R 
Page G-132  
 
 
Ship Type Clarksons 
World 
Shipyard 
Monitor Lloyds 
Shipping 
Economist Drewry Monthly / 
Quarterly or 
Annual Reports 
 Container   1,500 teu – geared 
 Container 1,700 teu   
 Container 2,000 teu  2,000 teu – gearless 
 Container  2,500 teu 2,500 teu – gearless 
 Container 2,750 teu   
 Container 3,500 teu  3,500 teu – gearless 
 Container  4,000 teu  
 Container 4,600 teu   
 Container   5,500 teu – gearless 
 Container 6,200 teu   
 Container   6,500 teu - gearless 
 Container  7,000 teu  
Gas Carriers     
 LNG 138,000cu m 140,000cu m 125-138,000cu m 
 LPG 78,000cu m 78,000cu m 75,000cu m 
 LPG  52,000cu m 35,000cu m 
 LPG  24,000cu m 15,000cu m 
 LPG  8,000cu m 3,000cu m 
General Cargo    
 General Cargo  20,000 dwt  
 General Cargo  10,000 dwt  
     
Other     
 Ro-Ro    
 Ro-Ro    
 Reefer  10,000 dwt  
     
Price Index  Yes  Not routinely 
published 
 
 
 The price information used to compile these data comes from price reports for individual ship 
types from order records and, in the absence of su ch order records, from brokers’ reports regarding 
‘rumoured’ negotiations.   
 (e) If they provide a range of pricing info rmation at different levels of aggregation, 
how are these different data series used? 
 
 The main level of aggregation is from a range of  price series into a single newbuilding index.  
This is usually done as a mathematical average (or price per dwt average) and not a weighted average 
reflecting the overall composition of the fleet. A single newbuilding index is a basic way of looking at 
what is happening overall to shipbuilding prices as opposed to sector or size band specific trends. So 
if a broad range of price series is used and pri ces are rising in some and dropping in others, the 
newbuilding index trend will be m oderated by this.  However, as the price indices do not cover all 
ship types and because it is not weighted by the composition of the demand across different types and 
sizes, it has to be used with extreme caution and in terpreted in the light of industry knowledge.  
 
 Price series are not generally aggregated to pr ovide a single trend for a particular broad ship 
category because it is recognized that the differing tr ends between different size bands is a significant 
factor. Whilst these trend differences may seem small in relation to overall market price movements, 
they are highly significant to industry players becau se they demonstrate different underpinning factors  WT/DS273/R 
 Page G-133 
 
 
for different ship sizes. For example, there may be a particular shortage of smaller vessels affecting freight rates and hence ordering trends for these vessels and not larger ones.    Price series are therefore only indicators of wh at is happening for sample ship types which 
will be chosen to reflect commonly used types or sizes of vessels. Where a range of sizes are given, 
they are useful to see that trends can be varying differently within the same  ship type.  When only a 
single price trend is given for a particular type this  generally means that this is the most popular size 
of vessel in use or that there is not a consistent e nough stream of data for a nother size to construct and 
maintain a price series.  
 Industry players are generally fully aware that price series data must always be used with 
caution and care.  
 (f) Please provide documentation (including  in particular relevant excerpts from 
the published industry reports discussed at the second meeting) showing 
examples of the various breakouts to which you refer. 
 
Response
 
  Examples provided, in addition to those provide d in the responses to earlier sections of this 
question: 
 
• Drewry Annual Shipbuilding Review 2000
39 
• Drewry LNG Market Review 2003/0440 
• Clarksons World Shipyard Monitor41 
• Clarksons Shipping Intelligence Weekly.42 
 
174. Korea argues that demand should be measur ed in numbers of vessels, and/or workload 
years (i.e. order backlog) rather than compensa ted gross tons of new orders. The EC responds 
that cgt is more accurate as a measure of su pply and demand, and that even measured in 
workload years, demand trends are as represented by the EC. 
  (a) Could each party explain the technical differences between the two measures, 
and provide further detail as to why it believes its preferred measure represents a more accurate picture of demand than the other. 
 Response
 
  Compensated Gross tonnage (“cgt”) is a measu re developed by the shipbuilding industry as a 
broad brush estimate of the workload content for th e construction of ships. It is calculated by 
multiplying the Gross Tonnage value of a ship by a compensation coefficient from an agreed list of 
coefficients for different types and sizes of vessel s. Gross Tonnage - despite it name is in fact a 
volume measure which reflects the physical volumetric size of the ship – and not a weight measure. A copy of the OECD agreed list of coefficients is provided in Exhibit Korea – 136
 and it can be seen 
that the coefficients are applied to broad size bands .  Hence, the measure is a crude one and one which 
takes no account of specification or design differences between similar ships. 
 
 The measure was developed to allow cross s ector assessments for the purposes of assessing 
and recording total shipbuilding activity levels and assessing capacity versus demand. Using this 
                                                      
39 Exhibit Korea – 132. 
40 Exhibit Korea – 133. 
41 Exhibit Korea – 134. 
42 Exhibit Korea – 135. WT/DS273/R 
Page G-134  
 
measure it was possible for example to aggregat e demand for passenger ships with that for bulk 
carriers or for containerships and tankers. It wa s never intended for ship-by-ship comparisons, for 
detailed market demand analysis or as a mechanis m for looking at price influences by like product 
vessels.  
 Korea agrees that overall shipbuilding demand (i.e . cross ship type aggregate demand) is best 
considered in terms of cgt when looking at the leve l of shipbuilding activity overall. Similarly, overall 
shipbuilding capacity is best measured (however prob lematic a rigorous assessment is) in terms of cgt.  
In this fashion, an estimated aggregated supply- demand balance can be considered which inevitably 
needs to be a reflection across ship  types.  However, it is well recognized by the industry that the 
supply-demand balance is not the only or dominant factor in terms of price influence. 
  The difference of opinion between Korea and the EC relates to determining which sectors 
Korean and EC yards compete in, what the price infl uences or influencers are and the interpretation of 
supply-demand balance indicators. Korea believes it is  necessary to concentrate on numbers of orders 
and timeframe of those orders when looking to dete rmine the market strength of a yard and its ability 
or likelihood to influence prices.    Orderbook phasing and timing of new Orders
 
  Firstly, in respect of the interpretation of supply-demand balance, the true supply-demand 
balance can only be determined by looking at th e phasing of orders over the orderbook timeframe. 
The level of the orderbook in itself cannot indicat e what level of supply-demand balance exists, 
neither can it indicate the market share of any particular market player over the orderbook period.     By way of example and ignoring the issue of work-in-progress: if world shipbuilding capacity 
is for simplicity, sake assumed to be 25 million cgt,  and the orderbook is 75  million cgt, what does 
that mean? If this orderbook is phased over three y ears then in simple terms it would indicate full 
capacity, if however it is phased over 5 years it represents a significant shortfall of demand against capacity. Furthermore, without looking at the phasing of that orderbook it cannot tell us whether there is excess capacity in the early years or whether this is simply the feathering of demand as it fades out gradually at the ends of the orderboo k following a period of full utilisation.
43  
 
 The delivery timescale of an order has to be take n into consideration in order to determine the 
true supply-demand balance for a delivery at a given date. Two orders placed in the same month but 
for different delivery dates reflect different dema nd-supply balances. A highly competitive yard with 
a long orderbook may not in fact be able to quote for an owner who needs a ship quickly – in this case 
a less competitive yard with a shorter orderbook may quote possibly at a low price to win work (to 
avoid underutilization). Alternatively, an owner with an existing order for that delivery may decide to 
sell his delivery slot at a premium price. The price le vel in this situation is clearly not influenced by 
the yard with the long orderbook. Timing of the orderbook is therefore clearly important. Exhibit 
Korea – 132  shows that demand projections are phased over time. Exhibits Korea – 134 and 135  
show that orderbook is reported in indus try publications showing phasing over time. 
 
 Similarly, it is clear that if one country has 50 per cent of the orderbook at the present time this does not indicate that they will eventually have delivered 50 per cent of the output, it depends over what period of time their orderbook is spread in  comparison to other countries.  It is a recognized 
fact that the timescale of orderbooks and the lead time on orders can vary significantly from country 
to country.  Korea believes theref ore that in considering the curr ent orderbook it is always necessary 
to consider the time horizon of this and how this can  vary from yard to yard and country to country. 
This is why the EC’s assessment of market position in  Attachments E – 2 and 6 of the EC’s responses 
                                                     
 
43 In reality of course it is further complicated by what proportion of that orderbook is already under 
construction and over what period of time this will be delivered.  WT/DS273/R 
 Page G-135 
 
 
to the first Panel questions based on a snapshot situ ation in January 2004 gives no accurate picture of 
the actual comparative market strength of any shipbuilding country or individual shipyard. 
  The level of new orders or order intake is a cl earer indication of who is actively contracting at 
a particular time and hence who is actually winning c ontracts at a particular price level.  If a country 
or yard has a full orderbook for e.g. the next three years, it may decide not to take on further orders 
and therefore may cease winning orders in that year.  In this situation, it is likely to have a high share of the orderbook, but as it is not actively signing up new orders it is difficult to see how it can be a 
major influencer of prices at that time. Korea therefore does not agree that an orderbook is a 
meaningful indicator of who can influence prices. 
 
Use of cgt versus number of vessels
 
  Consideration of the market in cgt without size bands means that it is not possible to differentiate between a single order for a large ve ssel and multiple orders for smaller vessels – Korea 
believes that these situations need to be considered differently.  For this reason, Korea believes that it 
is the number of orders placed at a particular time for ships of a given type and size that needs to be considered. To provide an example: a workload of 60,000 cgt in the container sector could, without 
any further qualification, equally represent one or der for a 7,500 teu ship or 12 orders for 500 teu 
ships or some other combination.  
 To understand why Korea believes it is the numbe r of orders within a particular size range 
that should be considered to assess market share a nd influence, rather than the total workcontent 
across all size bands, we offer an example. Consid er the situation when an owner wishes to place an 
order for say a 7,500 teu containership. This is  a large vessel measuring around 320m in length and 
43m in width and many shipyards will not have su fficiently large building facilities to construct a 
vessel of this size (although they may regularly build smaller container ships that are within their size 
capability). The owner will therefore be considering on ly those yards that have the physical capability 
to build such a large vessel, and of these there will be a list of yards which have experience in such 
vessels and which are considered to be most comp etitive for this type of vessel – these will be the 
preferred yards.   
 At the same time another owner is looking to place an order for a 500 teu containership, this 
is a much smaller ship at around 1 20m in length and 20m in width. There are a much larger number of 
yards with smaller facilities that will be capable of  building of and have experience in building such 
vessels. Whilst the larger yards can also build this size of vessel it is not economic for them to do so 
as it results in poor utilization of the dock or building berth (to be partially occupied by such a small 
vessel) and other production facilities.  Furthermore, the larger yard knows there will be much higher 
levels of competition for this ship. So it is highly unlikely that either the owner or the larger build 
yards will be seriously contemplating the placing/winni ng of this small ship order at a larger shipyard. 
  In terms of end use, the 7,500 teu containers hip will be used on the major long haul high 
volume container routes, typically running East – W est, between large dedicated container ports with 
highly sophisticated in-port container handling cran es. The smaller ship will however be operating on 
coastal or feeder routes on low volume trade routes, typically between smaller ports that do not have 
dedicated specialized container handling facilities.  It  would not be physically possible for the larger 
ship to access the smaller ships’ ports and clearly on a low volume route it would run nearly empty and have no on-deck cranes to unload its cargo.  Th e smaller ship, could operate on the bigger ships 
routes. However, its operating costs would make it highly uneconomic, its speed would mean it could 
not maintain the schedule and of course it would need lots of these ships to handle the total cargo 
volume.     In this scenario, the smaller ship will be built  in different yards to the bigger vessel and will 
operate on different routes.  So with no supply or demand side commonality it is difficult to see how WT/DS273/R 
Page G-136  
 
the price of one could depress, suppress or inflate the price of the other. The consideration of cgt, rather than numbers of vessels, without reference to size bands would assume that not only would the 
order, and hence builder, of the larger ships have an  impact in the separate market of the smaller ship, 
but its impact would be around 12 time greater (with a value of around 60,000 cgt) than that exerted 
by the builder of the smaller vessel (with a value of around 4,500 cgt). Why would an order for a very 
large vessel placed with a yard that  would not build the smaller vessel influence the price asked by the 
smaller yard that could not build the larger vessel?    In contrast, the consideration of numbers of orders placed within broad size bands, recognizes 
the supply side and demand side commonality of su ch vessels, which will operate on similar routes 
and be built in yards with similar size and experi ence capability. It is therefore possible that similar 
factors will affect the prices of these vessels whethe r they be the supply side factors e.g. shipyard 
supply-demand balance or the demand side factors e.g. fre ight rates. In this situation however it is also 
important to consider the timing of both order and delivery.  
 
 One final note is that the EC’s point th at considering small and large vessels purely on 
numbers leads to a small fishing boat yard becoming the price leader, is clearly erroneous.  Firstly, all analysis on the basis of numbers is being looked at within a given ship type and, secondly, it is being 
considered in terms of size bands, and so orde rs for small fishing boats will not come into 
consideration when considering price influences for containerships be they large or small. 
 
 Therefore in summary in simply looking at a ggregated demand-supply balance then cgt is the 
appropriate measure, and to assess levels of utili sation, the orderbook must be phased over time to 
compare it with capacity.    In terms of determining who or what influences prices, it is necessary to consider the 
transactions that are taking place rather than the vol ume of work, the size bands that different yards 
are active in, and the level of ordering activity that  is going on at the current time.  It must be 
remembered however that those orders may be be ing placed on different timescales and hence against 
different supply-demand balances.  
 (b) Which measure is used by industry analysts and the industry when analyzing 
demand trends? 
 
Response
 
  (i)  Shipbuilding demand is driven by two f actors; Firstly replacement, i.e.: demand for 
ships going out of service and, secondly, expansion demand due to projected increase 
in cargo-miles (i.e. cargo volumes x shipping distances). Demand for cargo ships, therefore, has to be assessed in terms of cargo carrying capacity and the base measures are, therefore, cargo measures such as deadweight, teu, or cubic metres of gas, depending on which ship ty pe is under consideration. This demand then has to be 
converted into the numbers and sizes of ships.  Exhibit Korea – 132
 shows examples 
of ship type specific demand projection in cargo volumes and size bands. 
   To calculate aggregate demand this has th en to be turned into GT demand by each 
ship type and size and then again into cgt by applying the relevant compensation 
factors to the GT volumes.  Shipbuilding demand cannot be projected in cgt directly.  
Exhibit Korea – 132
 shows aggregated shipbuilding demand projection in cgt and 
numbers of vessels. 
  (ii)  Monitoring of shipbuilding output, howe ver, is generally done in terms numbers of 
vessels, GT and deadweight for most cargo ship types and also in terms of teu and 
CU metres for containerships and LNG and LPG gas carriers. Exhibit Korea – 131
  WT/DS273/R 
 Page G-137 
 
 
shows examples of dwt, teu and cu metres as well as numbers of ship/orders.  Shipbuilding output is also monitored in cgt and this is done by applying the appropriate compensation coefficient for th e ship type and size to the GT value. 
  (iii)  Shipbuilding capacity is assessed in cgt and the OECD agreed methodology for doing 
this is to assess yard capacity based on th e ship types and sizes currently being 
produced and reflecting current productivity or delivery performance in terms of the 
time taken to construct such ships types.  He nce a yard or country’s capacity will alter 
if it alters the type of vessels that it ge nerally builds or its performance in building 
those. 
 
 (iv)  Industry analysts compare shipbuilding capacity and projected capacity in cgt with 
actual shipbuilding output and projected shipbuilding demand in cgt in order to consider the supply-demand bala nce and capacity utilization. 
 
  Whilst shipbuilding output and projected demand can be considered by ship types, 
shipbuilding capacity cannot be segmented on this basis because yards may build a 
limited range of different ship types. Ship type specific supply-demand balances 
cannot therefore be developed. 
  (v)  Very little if any analysis is done into who influences prices and so there are no easy 
benchmarks to compare against. The analysis of price tends to be either a simple 
indication of what is happening to the price rather than why it is happening or simply offers qualitative commentary.   
  Korea reiterates that measureme nts used in the industry to reflect demand such as cgt cannot 
be transposed to determine market position and the capability of yards to influence prices. There are a 
range of supply and demand side factors or external factors that can influence prices. Prices can be influenced by any or all of these (and other) factors at any particular time. Supply-demand balance is 
not the only or necessarily dominant factor. Analysis of price trends may tend to look at the various different factors, and the basis of analysis will reflect that perspective. However, in this situation it is 
not looking at the impact of a particular yard or group of yards but simply the contributory effect of 
one factor on ship prices.  Factors such as stee l prices and exchange rates are not sector specific, 
whereas factors such as freight rates do have sector specific dimensions.  Freight rates and ship prices do however show different trends within different size bands within a particular ship type. 
  In the previous section an explanation is provided to explain why Korea feels that it is more 
appropriate to consider the numbers  of orders, ship type and size bands rather than simply the ship 
types and cgt volume. In the following question Korea explains why market shares should be considered in similar terms of consider ing price suppression or depression allegations. 
 
 (c) If both are routinely used, please ex plain the circumstances in which they are 
used, and provide examples from indepe ndently prepared sources (the published 
industry reports discussed at the meeting, OECD documents, etc.). 
 
Response
 
  Numbers of ships, deadweight, GT and cgt ar e only routinely used for shipbuilding demand 
projection and output monitoring a nd not for analysis of price influences.  Various examples have 
been provided showing output monitoring re ports and order volumes and orderbooks.  
  Exhibit Korea – 131
 shows orderbook, completions and new orders by numbers of vessels 
and cargo measures (deadweight, teu and cu me tres) according to ship type and size. 
 WT/DS273/R 
Page G-138  
 
 Exhibit Korea – 134
 shows ship deliveries reported by number of vessels, deadweight and 
cgt in for different ship types and size bands, and with orderbook (future deliveries) phased over 
timescale.   Exhibit Korea – 135
 shows orderbooks by ship type and size bands measured in numbers or 
ships and cargo volumes and with orde rbook delivery phased over timescale. 
 
175.  In response to EC arguments concerning ma rket share as a factor in price leadership, 
Korea variously states that market share does not demonstrate price leadership, but also that 
Korean yards’ market shares are too small for them to be able to influence prices. Both sides 
thus seem to view market share as somehow relevant to the question of price leadership. 
  (a) How (on the basis of what sort of  concrete data and analysis) can price 
leadership be determined/established? 
 Response
 
  Korea considers and has consistently taken the position that the market share of the allegedly 
subsidized shipbuilders is one of the indicators to take into account in determining whether it is the 
alleged subsidies that have a price depressive or suppressive effect (refer to Korea’s response to the 
Panel’s Question 91(d) at pages 46 and 47) but is no t solely sufficient to show a price depressive or 
suppressive effect due to the subsidies themselves.  The allegedly subsidized Korean shipbuilders 
alone did not occupy such a market position that they could lead prices for each of the product segments concerned because the EC or other shipbuil ders had comparatively equal or stronger market 
positions or because of fluctuations in market sh ares (refer to Korea’s First Written Submission at 
pages 228 to 231 as well as its Second Writte n Submission at pages 105 to 110). 
 
 In order to determine whether subsidies  have caused any price depression or suppression 
through the allegedly subsidized yards acting as pr ice leaders, Korea submits that all the steps 
described in its response to Panel Question 91 shoul d be followed. The concrete data and analysis 
indicated therein should be compiled and assessed so as to determine whether it was the alleged 
subsidies that caused price depression or suppression, i.e. including the compilation of the demand 
and supply factors, the effect of prices of other non-subsidized shipbuilders or the effect of the prices 
of the subsidized shipbuilders.  
 (b) What role in such an analysis would levels and trends in market shares play? 
 
Response
 
  In Korea’s view, levels and trends in market share play a dual role as explained in its response 
to Question 91(d), i.e.:   - if, with respect to each like product,  there are a number of non-subsidized 
shipbuilders which collectively have sufficien t market shares to be able to lead or 
substantially influence the setting of the market prices, then the prices charged by 
these non-subsidized shipbuilders will constitute  the ceiling of the prices that can be 
charged by the EC shipyards, regardless of  the effect of the alleged subsidy in 
question. 
 
 - if with respect to each like product, the allegedly subsidized shipbuilders have 
sufficient market shares to be able to l ead or substantially influence the setting of 
market prices, one should proceed to comp are the prices of the vessels sold by the 
allegedly subsidized shipbuilders with t hose of the non-subsidized shipbuilders to 
determine whether the subsidies have ha d price depression or suppression for their  WT/DS273/R 
 Page G-139 
 
 
effect. If the market share of the allegedly su bsidized shipbuilders is insufficient or if 
these shipbuilders have not maintained a substantial market share consistently, no such price comparison need to be made as it will be impossible to establish a causal link of sufficient strength between the existe nce of the alleged subsidies and any price 
depression or suppression. Moreover, this exerci se requires a detailed cost analysis to 
compare any cost advantages to the size of the alleged subsidy and, in turn, a 
comparison to the other prices offered.  The onl y alternative is a “but for” analysis to 
the effect that but for the subsidy the ya rd’s capacity would have completely exited 
the market.  In fact, that was what the EC was trying to rely on exclusively before it 
improperly attempted to reintr oduce price undercutting again. 
 
 (c) How large a market share would a given market participant need to be able to 
exercise price leadership. 
 
Response
 
 
 No simple figure can be given as to the thres hold which is sufficient for a market participant 
to be able to influence prices. This will depend on the product and the market concerned. In the 
present case of commercial vessels, the relative mark et share of all market participants and, 
separately, of the allegedly subsidized shipyards mu st be determined over a sufficient period of time 
and for each product separately. A relatively equa l or stronger market share of non-subsidized 
participants will be a strong indicator that the a llegedly subsidized shipyards cannot have exercised 
price depression or suppression. In addition, in a highly fragmented market characterized by many 
market participants, a very low market share may be sufficient whilst in other cases, when the number 
of market participants is relativ ely small as in the present case, a much higher market share will be 
required to exercise price depression or suppression. 
 
 The period of time over which market share is held should be sufficient in order to determine 
that there is an established market position; a shor t-term increase in market share as such will be 
insufficient to establish a price lead ership in terms of price depression or suppression. In addition, in 
the case of an inquiry into subsidies, market shar es must be investigated over a period of time 
preceding the bestowal of the alleged subsidies and th ereafter in order to determine whether there is a 
timewise coincidence between the occupation or th e maintenance of a market share of sufficient 
strength and the granting of the subsidies.   It is on this basis that Drewry has drawn its conclusions on the possibility for the three 
allegedly restructured yards to depress or suppress prices of the EC like product vessels in its report 
submitted as Exhibit Korea – 110.  
  In Exhibit Korea – 115, Korea summarized the findings of the EC’s consultant FMI from their ‘Background report – Detailed evaluation of key price movements’ dated August 2003 
(Annex 5a of the Annex V responses). Whilst Korea reserves its position in respect to a number of 
findings of this report, it is clear from this that th e EC’s own interpretation of price leadership was in 
no way consistent with the market share of the alleged price leaders. It is also noted that in six out of 
seven categories FMI identified that Kor ea was not the lowest price competitor. 
  
IV.  TO THIRD PARTIES 
 
A.  ITEM (J) I ITEM (K), FIRST PARA.  176.  The parties disagree on whether or not AP RGs and PSU constitute export credit guarantees 
and export credits respectively. The EC submits that they do not, whereas Kore a asserts that they do. WT/DS273/R 
Page G-140  
 
Would your export credit agency treat APRGs as  export credit guarantees, and PSLs as export 
credits? Please explain and provi de relevant documentation.  
  WT/DS273/R 
 Page G-141 
 
 
KOREA’S COMMENTS WITH REGARD TO 
 
ATTACHMENT EC – 8 ATTACHMENT EC – 9 
EXHIBIT EC – 146 
EXHIBIT EC – 147 
  
1. Comments with regard to Attachment EC – 8 
  The EC’s detailed points on the Drewry report submitted in Exhibit Korea – 70 run to some 
20 pages of comments from which it is simply not possible to derive coherent lines of argument or 
comment. Many of the points concentrate on irre levant issues, are repetitive or not intelligible. 
Beyond these issues on which Korea disagrees but whic h it considers are not of prime relevance, the 
following issues are important most of which are, in fact, reflected in the Panel’s questions to which 
Korea responded in the present document or on whic h it commented when the question was addressed 
to the EC. These are the following:   (i) The fact that no accurate assessment on price depression or suppression can be 
prepared with regard to containerships , product and chemical tankers and LNGs 
without a strict like product identification taking into account the size and the use of 
the vessels. Korea has shown in its responses to Panel Questions 173 that 
shipbuilding industry publications do not always identify separately the three product categories referred to by the EC (in partic ular, the product and chemical tankers) and 
that industry publications do most often identify separately the different sizes of vessels as well as certain other characteristics (such as gearing or reefer capability) 
including when prices are reported.  
   Korea confirms that there are clear di fferences in end-uses between the like product 
vessels that were identified in the Drewry report in Exhibit Korea – 70 as elaborated 
on in Exhibit Korea – 108. In this regard, th e EC’s claim that the end use of a vessel 
can change during its lifetime is not grounde d in fact: post panamax container vessels 
will not change to be used as small coaster feeders no more than oil products will be 
transported in chemical tankers.  
  (ii) The fact that the market strength of th e allegedly subsidized Korean yards must be 
assessed based on the number of vessels ordered with them over a representative 
number of years preceding and following their corporate restructuring. Korea has 
elaborated on its response to Panel questi on 174 on the grounds that render CGT and 
the orderbook on 1
 January 2004 inadequate to assess market strength such that the 
yards could influence prices. CGT is consid ered the proper standard of measurement 
for overall shipbuilding demand and capacity  thus allowing an assessment on the 
aggregated supply-demand balance. However,  as the measure is developed for an 
across sector assessment but not for ship-to-ship comparisons. Consideration of the 
market in CGT without size bands does not  allow to properly assess market strength 
for price assessment purposes and is not u sed for this purpose in the industry. 
  (iii) The fact that the allegedly subsidized  Korean yards and the EC yards compete as 
regards different like product vessels. A detailed Drewry report has been submitted in 
Exhibit Korea – 110 showing for each like product, the number of vessels sold by the EC and the allegedly restructured Korean yards. This clearly indicates that these 
Korean yards have primarily sold like product vessels that were not or hardly sold by 
the EC yards and this already during the period well preceding the bestowal of the 
alleged subsidies. WT/DS273/R 
Page G-142  
 
 
2. Comments with regard to Attachment EC – 9 
 
 The EC started its Attachment – 9 based on the Attachment 4 to Korea’s Second Written Submission. However, as the recalculation provided in the EC Attachment – 9 is incorrect, it does not 
prove that a benefit was conferred. The fallacies ar e the following: (i) the EC erroneously equated a 
corporate bond rating “C” with a KEXIM credit rating “SM”; (ii) the EC misunderstood the structure of KEXIM interest rates; and (iii) the EC did not reflect the early repayments by DSME of its debt. Korea will discuss each issue briefly.  (i)  Erroneous equation “C” with “SM” 
 
 As detailed in Exhibit Korea – 91, the cor porate bond ratings by outside rating agencies and 
KEXIM credit ratings are incompatible.  Not only ar e the underlying risks different, but the grading 
factors are as well. Korea would like to note that  such incompatibility resu lts in “mismatches” of 
KEXIM credit ratings and bond ratings shown in Ex hibit Korea – 92. Indeed, while KEXIM graded a 
company with P4, P5 or SM, a credit rating agency  rated the company’s bond with rating “C”. The 
similarity on rating definitions only cannot justify the inherent distinctiveness of the ratings. 
 
(ii)  Misunderstanding of KEXIM interest rate structure 
  As submitted in Korea Response to Panel Qu estions 47 and 73 and Exhibit Korea – 93, 
KEXIM interest rates were determined by adding up  the base rate plus the then applicable spreads 
(target margin, credit risk spread, mark et adjustment rates, etc.). When Yangdo Dambo  was provided, 
the “credit risk spread” was decreased by 50 per cent. Notwithstanding this, the EC appears to 
calculate the rates by adding up the base rate plus  50 per cent of credit risk spread only, which is 
incorrect. For all transactions referred to in EC Att achment – 9, KEXIM determined the interest rates 
based on “WNPRI 6month” the base rate plus spread of 1.96. The spread is composed of a credit risk 
spread of 0.15 (50 per cent of 0.3 which was the then  applicable credit risk spread) and an adjustment 
spread of 0.46. ( See page 2 of Exhibit Korea – 93)
44   
 
(iii)  Early repayments 
 
 Also, DSME made early repayments of its PSLs for projects 000145P and 000146P. This 
resulted in small amounts of interests incurred ( See Attachment – 4 to Korea’s Second Written 
Submission). While the EC did not have this info rmation regarding early repayments by DSME, it 
should nevertheless have been more cautions and raised the issue after reviewing Attachment 
Korea - 4.  
 
3. Comments with regard to Exhibit EC – 146 
 
3.1 Contrary to FMI’s statement  in Section 2.1 of the Exhibit EC – 146, Korea does not qualify the cost modeling done by the EC team as being li ghtweight. Certainly, a significant amount of efforts 
has gone into the calculations made but it remains as the EC claims itself that the cost modeling 
process is based on “assumptions” in which shipbuilding costs have been estimated or assumed to be 
at a certain level. No amount of effort and resear ch will fundamentally alter the inherent accuracy 
limitations of the model. The inaccuracy of th ese assumptions has been demonstrated in Exhibit 
Korea – 108 in which KPMG has made a cost analys is of certain LNG carriers built by DSME. This 
report shows that the actual costs amounts and th e FMI assumptions/estimations are strikingly 
different primarily as regards the following: 
                                                     
 
44 Korea corrects that the commitment dates for all projects concerned were 21 December 2000 , not 
21 December 2001. The “adjustment spread” had been  effective until it was replaced with the “market 
adjustment rate” in June 2001.  WT/DS273/R 
 Page G-143 
 
 
  - material costs  - labour cost  - license fee  - overhead and SG&A 
 - debt service costs 
 - non-operating expenses.  Hence, these estimations, proven wrong with the ac tual figures, cannot be the basis for a conclusion 
that the costs of the allegedly subsidized Korean ya rds have increased to such an extent that prices 
should have increased and, hence, that price suppression or depression existed. Furthermore the 
inherent inaccuracy of the model has been demonstr ated by the level of revisions/recalculations that 
the EC/FMI have already made in their detailed reports. As a matter of fact, nowhere do the EC or FMI indicate the link between the results of the cost  model and the conclusion that the overall costs 
increased since the time when FMI started preparing the cost model. 
 
 When describing the approach to the treatment of  overhead costs in the model, it is stated that 
these are spread evenly (t he basis of allocation is not however discussed) across the full output of the 
shipyard and states specifically: “If this is not  the case it would have to be shown that some 
proportion of the workload is capable of contri buting more than its average share of overhead 
burden.” This seems curious when elsewhere, EC a nd FMI have gone to considerable effort to then 
separate out that certain investments and overhead cost s must be specially attributed to LNG, and has 
then struggled to come up with sensible ship seri es numbers over which to attribute this for Korean 
yards in comparison to EC yards.  Furthermore elsewhere the EC has made strenuous efforts to 
suggest that shipyard supply has full substitutability and that any yard can build any ships type but it 
simultaneously advises the hearing that of the special  skills and investment needed for LNG and that 
‘not any yard can build an LNG ship’. In fact, it is  the EC and FMI’s arguments that seem to change 
dramatically depending on what it wants to prove and this is all within the confines of this case. 
  The EC and FMI try to portray it as if Korea a nd Drewry had omitted to  take depreciation and 
debt-servicing costs into account when concluding th at Korean costs decreased  instead of increased. 
However, in the first place, the EC and FMI did not show that depreciation and debt-servicing costs 
increased over the relevant period of time in order to  substantiate their finding that prices should have 
increased and, in fact, as mentioned in Exhib it Korea – 108, DSME by paying its debts early, 
decreased its debt-servicing costs. If debt-service cost s have not increased and have in some instances 
been significantly decreased by early repayment, th e effect on overall costs will be at worst neutral 
and at best an improvement. Certainly there has been no fundamental reduction in throughput 
volumes that would in any way have increased the cost  per unit output, if anything, the reverse would 
be the case.   Reference is also made to Korea’s response to Panel Question 125(b) in the present document 
where it is explained that debt-service costs tend to be very specific to a particular yard’s situation 
and, hence, not amenable to general trend indicators.  This fact is evidenced by the situation at the 
former East German yards of Kvaerner Warnow  Werft, Aker MTW and Volkwerft Stralsund where 
the state-funded investment was written-off and th e new owners inherited the newly constructed 
facilities at a fraction of their cost and hence debt- service cost.. In any event, Korea considers that it 
has given full evidence of the fact that cost econo mies achieved by the thr ee allegedly subsidized 
yards have been significantly greater than price decre ases and that, as a result, there is no substance to 
the EC’s allegation that increased costs should have led to increased prices. 
 3.2 With regard to FMI’s assertions on the factor s that have an influence on prices in the first 
paragraph of Section 3 of the FMI report in Exhibi t EC – 146, Korea refers to its response to Panel 
Questions 124 and 125 in the present document in which it also addresses the allegations on capacity 
in the second paragraph of this Section of the FM I report. In particular, Korea reiterates that the WT/DS273/R 
Page G-144  
 
measurement of capacity in CGT and based on a snaps hot for May 2004 yields an arbitrary result that 
does not reflect the true market position of the thr ee allegedly subsidized yards. First, as the EC 
alleges that price depression or suppression was ca used to container ships, product and chemical 
tankers and LNGs through the allege d subsidies, the market position of the allegedly subsidized yards 
must at the very least be specified in these th ree vessel categories and not include other vessel 
categories as well (refer to the two last sentences of paragraph 2 of Section 3 of the FMI report). 
Second, no assessment on price depression or suppr ession and the vector that can lead to price 
depression or suppression can be made without strict  assessment of the like products involved and 
assessment for each of the like products separately. Korea has demonstrated in its earlier submissions 
and in the present document that there is no glob al like product for cont ainerships, product and 
chemical tankers and LNGs and that significan t differences exist within these broad categories 
including as regards the use of vessels. Hence,  the market position of each of the allegedly 
restructured yards must be determined for each like product vessel separately.  Finally, for the reasons 
set forth by Korea in its responses to Panel Questi ons 173 and 174 in the present document, the use of 
CGT and orderbook yields no accurate reflection of th e true market position of any shipyard at any 
given point in time. 
 3.3 As regards the lumping together of various Ko rean shipyards whether allegedly subsidized or 
not, Korea has reiterated the reasons this is inco rrect in its response to Panel Question 127 in this 
regard. Not only is such lumping of all or several of the Korean shipyards not supported in law but, in addition, it is pointless in practical terms as the Korean  shipyards that are not alleged to be subsidized 
are in exactly the same competitiv e position as non-Korean shipyards. 
 3.4 FMI persists in expressing the view that pri ce depression or suppression must be assessed for 
so-called coherent sections of the industry en bloc in the fourth paragraph of  Section 3 and refers to 
the 1999 report of Drewry Shipping Consultants.  In th is regard, in the first instance the tenets of price 
depression and suppression for this case are driv en by the specific legal aspects of the SCM 
Agreement , which is not something which is, or ever  would be, addressed in a general industry 
publication. In fact, in some places EC and FMI app ear to be suggesting that price effects tend to be 
universal on an industry-wide basis (i.e. all shipbui lding sectors), and in this they are straying into 
areas that are outside the scope of this case, in others  they seem to say that they are consistent against 
‘coherent sections’ (a concept which they do not explain). In any case th is is simply not correct – in 
fact, in the Appendices to Drewry’s 1999 report (tha t was selectively invoked by the EC) a table is 
included which shows the different price trends of different ships types, sizes and specifications. 
Inspection of this data clearly demonstrates that prices have not moved in the same manner across all 
sectors and size segments (this Appendix is included in Exhibit Korea – 131 of the responses to Panel 
questions). Furthermore in the basic shipbu ilding demand assessments (Forecast newbuilding 
deliveries) also contained in the Appendices to these reports, the demand is clearly indicated on a ship 
type and size band basis, with no concept of a crude ‘en bloc’ approach.  3.4 Significant evidence that there is no genera l supply substitutability as claimed by FMI has 
been provided by Korea including in Exhibit Korea – 108 and in the responses to the Panel Questions 
126 and in the comments to Question 159. Since many years including the period well preceding the 
bestowal of the alleged subsidies, the EC yards ha ve specialized in specific vessel categories and sizes 
thereof. Their own statements in their financial st atements and the specialized press indicate that this 
was a conscious and rather permanent move.  3.5 General price indices (which, in fact, refl ect market anticipations and not actual price 
developments) for the shipbuilding industry as a w hole or broad vessel categories are not suited to 
address the specific legal question of Article 6.3(c), i.e. whether the subsidies had price depression or 
suppression for their effect for the like product vessels. In particular, Figure 1 presented in Exhibit EC – 146 is not suitable for the assessment under Article 6.3(c) as it reflects a relatively short period and 
a distant fraction of the period after the bestowal of the alleged subsidies. In addition, Korea has noted 
that FMI itself admits that “there are clearly di fferences in elasticity depending on specific conditions  WT/DS273/R 
 Page G-145 
 
 
in the market sector concerned”. Korea reiterate s that it is precisely these differences that are 
important and must be grasped in order to dete rmine whether it is the subsidies that had price 
depression or suppression for their effect. A general tre nd as such is not a standard for the assessment 
under Article 6.3(c).  4. Comments with regard to Exhibit EC – 147 
 
 The situation involved in the present dispute settle ment procedure is subject to a strict legal 
framework that is totally outside the purview of an y general industry publications as is the case of the 
1999 Drewry report referred to in this Exhibit. Howe ver, much more importantly, the excerpt selected 
by the EC is extremely selective and does not provide an accurate portrayal of a report that is over 220 
pages. In particular, the EC omits to make referen ce to the following issues th at are also addressed in 
the report:   - No reference is made to the significant c overage (4 pages) of EC subsidies and other 
direct interventions in the shipbuilding ma rket that is also present in the report; 
  - No reference is made to the statements  made in the report regarding the Chinese and 
Japanese influences on capacity growth including “… the Japanese responded by removing production constraints which toge ther with improvements in productivity 
boosted their capacity by as much as 20 per cent … the Chinese have also more than 
doubled their capacity during the 1990s”; 
  - The use of CGT as a measure is clearly explained in relation to its relevance to 
volume of work content involved in newbuilding, not interpretation of price influences and influencers; 
 
 - The report clearly differentiates chemical from products tankers, and clearly analyses 
ship types within size bands which is consis tent with Drewry’s approach in Exhibit 
Korea – 70. The EC is, therefore, incorrect to  state that it refers to three main sectors 
of tankers, container ships and bulk carriers, and that no subdivision of this is made; 
 
 - No mention is made of the fact that Drewry produces other regular specialist shipping 
publications that analyze chemical, LNG, dry bulk and products tankers with substantial detail of size, sub-categori es, ownership, trading patterns, etc. 
Additionally, no reference is made to the later Shipbuilding Report published by 
Drewry in Nov 2000. 
 
 - The headline item on newbuilding prices st ates “currency devaluation, failing steel 
prices and advances in technology are the main reasons why newbuilding prices fell 
by as much as 20 per cent in 1998”; 
  - The report does not offer any comments on the presence or otherwise of price 
depression, suppression, lost sales or serious prejudice, and it is not clear why 
selective references are being made to support the EC’s case on this; 
  - Drewry does not routinely publish a general newbuilding price index recognizing the 
danger of using such figures in isolation or without caution; 
 
 - No reference is made to the clear stat ement that it was Japan that was clearly the 
leading shipbuilding nation – and it is, ther efore, difficult to see how it is Korean 
yards that could be considered price dominant; 
 WT/DS273/R 
Page G-146  
 
 - If the report states that Korean shipyard s globally are competitive, that is not an 
indication of any price depression or suppression by the allegedly restructured yards caused by the alleged subsidies. 
  The EC and FMI’s reference to this excerpt has been used to imply that excess capacity has 
been solely caused by Korean yard s, when very clearly the report ma kes reference to capacity growth 
(as a result of performance, new facilities and de-l imitation) in many areas, specifically Japan and 
China as well as Korea.   WT/DS273/R 
 Page G-147 
 
 
ANNEX G-5 
 
 
RESPONSES OF KOREA TO SUPPLEMENTAL QUESTIONS FROM 
THE PANEL AND COMMENTS  ON THE SUPPLEMENTAL  
QUESTIONS TO THE EU ROPEAN COMMUNITIES 
 
 
(9 July 2004) 
  
I. TO KOREA 
 A. APRG/PSL 
 
177. Korea argues that country risk accounts fo r the difference in premia charged on APRGs 
by foreign banks as compared to Korean banks . What specific examples of foreign issued 
APRGs are there in which not only the existence but the amount of country risk premium can 
be shown, and what specific examples of Korean- issued APRGs are there in which the absence 
of country risk premium can be shown? 
 
Response
 
 
 As described in Exhibits Korea – 86a and 86 b, when setting the APRG premia foreign APRG 
issuers separately consider the country risk of Korea on top of the general risks (financial and 
performance risks) of the shipyards. However, give n that the foreign APRG issuers treat the amount 
of country risk premium as strict business confidential information, information on specific amount of country risk actually applied by foreign banks is not readily accessible to the Government of Korea. Nonetheless, Korea hereby submits Exhibit Korea – 140
 which indicates that [BCI: Omitted from 
public version].    
 
 As for the Korean-issued APRGs, Korea refe rs the Panel to Korea’s response to Panel 
Question 58 wherein Korea provided three exam ples which are clearly showing the absence of 
country risk premium. Korea reiterates below these examples for the convenience of the Panel. 
 
 [BCI:  Omitted from public version.] 
 
178.  Concerning the examples submitted by Ko rea in Exhibit KOR-83 of instances where the 
buyer imposed requirements concerning the issuer of the APRG in question, it appears that the 
buyers were seeking guarantors with  strong credit ratings/financial soundness. What is the 
relevance of these examples to the question of whether or not KEXIM was charging market 
rates on its APRGs? 
 
Response  
 
 Korea submitted that information to demons trate the material distinctions between the 
positions of the foreign APRG issuers and Korean issu ers of APRGs. The foreign issuers were used in 
the limited period of the Asian financial crisis (s ee Exhibits Korea 86a and 86b) due to the specific 
request by certain foreign (EC) buyers. Because the requirements of the customers were different and 
the situations of the issuers were different, these isol ated and statistically irrelevant instances were not 
representative of the general conditions pertaining wi thin the Korean market. Among other things, due 
to the strong credit rating of the foreign issuers, th ey were considered bette r guarantors and therefore WT/DS273/R 
Page G-148  
 
could charge higher premia. They also had to refl ect the country risk premium which was relatively 
high during the financial crisis. Moreover, as Ko rea submitted in paras 207 through 216 of its First 
Written Submission, in order for certain rates to be eligible for any market benchmarks, not only such 
rates must have comparable terms and conditions including comparable collateral, but also such rates 
have to constitute a statistically representative number of transactions. Because APRGs extended by 
certain financial institutions are rare and exceptiona l due to empirical differences, the rates of such 
APRGs cannot constitute a comparable and objec tive benchmark. Please also refer to Korea 
Response 47 to Panel Questions for further details. 
 
179. The “County Risk Management” Comptroll er’s handbook of the US Comptroller of the 
Currency, attached as Exhibit KOR-84 states at p age 3 that “a domestic borrower’s credit risk 
might increase because of significant export receivables from a foreign country...”. Does this 
passage not suggest that a Korean bank issuing an APRG to a Korean shipyard would bear a 
certain country risk because the transaction was an export transaction, i.e. involved “export 
receivables from a foreign country”? 
 
Response
 
  Nowhere does the handbook imply that the country  risk can be applied to “every” domestic 
counterparty that is involved in “an export transac tion”. Rather, the handbook itself establishes that 
the country risk may be exceptionally applied to tr ansactions with domestic counter parties under very 
limited circumstances, e.g., where the business of  a domestic borrower is heavily relying on the 
businesses associated with that particular foreign c ountry with respect to which the country risk is 
assessed.   The handbook confirms that the application of c ountry risk to domestic transactions is not a 
general practice. Along the line, it states that the country risk fact or may be applied to domestic 
counterparties “where appropriate when assessing the creditworthiness of domestic counterparties”, 
and states that “country risk would be pertinent to exposures to US-domiciled counterparties if the 
creditworthiness of the borrower
 or of a guarantor …is significantly  affected by events in a foreign 
country .” (see the third full paragraph on page 2 of  the handbook et. seq.; emphasis added).  
 
 This explanation is unde rstandable because, in the situati ons where the business of a borrower 
(or guarantor) is heav ily relying on transactions associated with a specific foreign country , events in 
such a foreign country will directly and significantly affect the general credit risks of the borrower (or 
guarantor) which in turn will significantly and dir ectly affect the creditworthiness of the borrower (or 
guarantor). Only in such specific circumstances, would it make sense to take into account the country 
risk of such specific foreign country  when assessing the creditwor thiness of such borrower (or 
guarantor).    By contrast, no Korean shipyards deal exclusively with a specific foreign country  such that 
the events in such foreign country would significan tly and directly affect the creditworthiness of the 
Korean shipyards. Further, it should be noted that  among the buyers of Korean ships, the absolute 
majority of buyers are coming from the so-calle d “High Income OECD countries”, e.g., the EU, 
Norway, US and Japan as defined by the World Ba nk. No foreign financia l institution would apply 
country risk with respect to counterparties from su ch countries as they do not bear any country risks. 
For reference, under the Arrangement on Officially  Supported Export Credit, the High Income OECD 
countries are classified as “category 0” countries, to which no country risk is assigned ( see Article 24 
b) and c) of the OECD Arrangement).  
  Moreover, even if a Korean shipyard were expo sed to the country risk of a particular foreign 
country by retaining significant “export receivables ” from the buyers in that foreign country, the 
country risk it bears is the country risk of that particular “foreign” country, and not the country risk of  WT/DS273/R 
 Page G-149 
 
 
“Korea”. In other words, in such  case, any Korean banks issuing APRGs to such Korean shipyard 
would apply the country risk of the said “foreign” country, not the “Korean” country risk.   In light of the above, a Korean bank issuing an  APRG to a Korean shipyard would not bear a 
country risk merely on the ground that a transac tion was an export transaction (i.e. involved “export 
receivables from a foreign country”). Korean yards do not bear a country risk because their export 
receivables are not from a foreign country that ca rries any noticeable country risk, but from High 
Income OECD countries. Even if they were exposed to the risk of a particular foreign country, the 
country risk that the Korean banks issuing APRGs to  Korean shipyards must consider is that of a 
particular “foreign” country, not the country ri sk of “Korea” which is at issue in the present 
proceeding. 
 
180. Further on country risk, was it not the case that during the period of the financial crisis 
in particular, the Korean domestic banks were faci ng similar “Korea risks”  to those that would 
have been faced by foreign banks (for example, ri sk of expropriation of assets, risk of currency 
manipulations, etc.)? Please explain in detail.  
Response
 
  Country risk by definition is the risk that economic, social, and political  conditions and events 
in a foreign country will adversely affect  an institution’s financial interests ( see also the response to 
Panel Question 179). In other words, it is the risk that  a country will not be able to honour its external 
financial commitments due to the occurrence of cert ain conditions or events. Therefore, in assessing a 
country risk, the likelihood of whether a country will service its external debts is to be measured and 
analyzed. As such, the country risk is the factor to  be examined, reviewed and considered by a party 
outside  the country concerned. As a result of a forei gn party’s (e.g., foreign APRG issuer) efforts to 
hedge such country risk, such foreign part y tends to charge higher premium rates.  
 
 On the other hand, Korean domestic banks, by definition, cannot face the risk of their own 
country. Risks from events in their own country are no longer “country risk.”   Korea does not agree that the Korean domestic  banks were facing similar “Korean risks” to 
those that would have been faced by foreign banks . Korea would like to emphasize that, when “Korea 
risks” was mentioned in the context of country risk , it meant the risk to Korea’s ability to honour its 
“external” financial commitments. In this regard , Korean domestic banks cannot face similar “Korea 
risks” to those faced by foreign banks. Moreover, in light of the definition of country risk, the country risk factors (risk of expropriation of assets, risk  of currency manipulations, etc.) must be understood 
to mean those that are of such nature that rather di rectly affect external fina ncial obligations of Korea. 
Therefore, these risks, by nature, could not be th e same as those risks faced by Korean domestic 
banks.   In any event, it may be true that during the period of the financial crisis, the Korean banks 
were facing credit risks which were generally increas ed throughout the countr y, even though they are 
of different nature from the “country risk factors” as faced by foreign banks. Such an increased risk 
during the crisis was, however, taken into account by the Korean banks as the “g eneral credit risk” of 
the Korean shipyards. Of course, foreign banks, too,  considered the same “general credit risk” with 
respect to the Korean yards, separately and in addition to the country risk of Korea. 
 WT/DS273/R 
Page G-150  
 
181. Would not similar considerations as to risk of expropriation, risk of currency 
manipulation, etc. be taken into account by any bank involved in financing foreign trade (wherever that bank happens to be domiciled)? Please explain in detail. 
 
Response
 
 
 Korea’s response to Question 180 also applies here.   Having said that, Korea takes the term “financi ng foreign trade” in a broad sense to mean any 
financing related to foreign trade. As noted in Responses 179 through 180 above, every export 
transaction does not trigger a bank’s consideration of  country risks. As Korea noted in Response 179 
in detail, it depends on the types of such financing transactions and in what co ntext the country risk of 
a borrower is examined.   In addition, as far as country risk is concerne d, whether the bank is located inside the country 
or outside the country is the determining factor. Please refer to Reponses 179 and 180 above for more 
details.  
182. At paragraph 81 of its oral statement, Korea argues that it is not only the type but also 
the amount of coverage by collateral that is important in comparing different APRGs. In this 
connection, Korea argues that the collateral ci ted by the EC at paragraph 100 of its second 
submission covered only a small portion of the guarantee. Korea then cites Exhibit Korea – 88, 
a transaction which according to Korea involved no  collateral. How does this demonstrate that 
the collateral referred to by the EC covered  only a small portion of the guarantee? 
 
Response
 
 
 Korea submitted Exhibit Korea – 88 to confir m and clarify its response to Panel Question 71 
(as well as Korea’s response to EC Question 14) in wh ich it explained that in the specific instance of 
the APRG transaction between Shinhan Bank and Han jin no collaterals were involved. As the EC 
subsequently challenged such statements by Korea ( see para. 106 of the EC’s Second Written 
Submission), Korea submitted the Exhibit for confirmation and clarification purposes. 
 
 Korea refers the Panel to Korea’s response to EC Question 14 in relation to the provision of 
no collateral or a small collateral c overage that directly affects th e determination of APRG premium 
rates.  
B. ALLEGED ACTIONABLE SUBSIDIES 
 
183. Please comment on Exhibit EC - 145, containing PwC’s reactions to the Arthur 
Andersen/Anjin submission in Exhibit KOR-79. 
 
Response
 
 
 Despite numerous points raised by PwC in Exhibit EC – 145, it failed to establish that it was better for the creditors to liquidate, rather than r estructure, DHI. As explained in detail by Anjin in 
Exhibit Korea – 141
, the creditors’ recoverable amount under any going concern scenario was 
always higher than the recoverable amount in th e liquidation scenario. This was so even when 
correction is made for the double-counting of tax shield effect. 
  For details, please refer to Anjin’s response ( Exhibit Korea – 141
) to PwC’s comments. 
  WT/DS273/R 
 Page G-151 
 
 
184.  In particular, please comment on the statement at page 3 that “the Enterprise Value of 
the restructured company is lower than the Ente rprise Value of the company computed without 
debt restructuring”. 
 
Response  
 
 It is true that, according to Anjin’s calcula tions in the 1999 Report, the Enterprise Value of 
the restructured company was lower than the Enterprise Value of the same company without 
restructuring. This was a formalistic result from the technical model used by Anjin arising from a 
carry-over of a residual amount of shareholder value in the debt/equity swap. However, the creditors 
decided that the proposed workout plan of spinni ng off the two companies that had no synergistic 
value and undertaking debt/equity sw aps and debt restructuring was preferable from the perspective of 
ultimate collectibility on the debt. Moreover, as Anjin  points out and PwC does not contradict, in no 
event was the Enterprise Value of the restructured  company lower than the liquidation value of the 
same company. Therefore, this fact does not affe ct the creditor financial institutions’ decision to 
restructure DHI, rather than liquidate it.  
  For details, please refer to Anjin’s response ( Exhibit Korea – 141
) to PwC’s comments. 
 C. SERIOUS PREJUDICE  185. Concerning Exhibit KOR-115:    (a) No information is provided as to th e source for the prices presented in this 
document. Please identify in detail the source(s). 
 
 (b) No dates are associated with any of  the prices shown in the documents. Please 
provide this information. 
  (c) No information is provided as to what the prices shown in the document 
represent (i.e., contract prices, bids, etc.).  For each price shown, please indicate 
precisely what it represents.  
 
 (d) No information is provided in respect of LNGs. Please provide the same sort of 
information on LNGs for the same peri od(s) and on the same basis as the 
information in the table. 
 Response
 
  (a)  The source of the information is the document entitled “Background report – Detailed 
evaluation of key price movements” prepared by the EC’s consultant, FMI, in August 2003
1 that was submitted as Annex 5a-2) by the EC itself in the Annex V 
process and is submitted herewith fo r the convenience of the Panel in Exhibit Korea 
- 142 .  
  (b)  The prices shown are the average prices  for the period from 1997 to 2003, i.e., the 
prices shown in the following tables in the FMI report supplied as Annex 5a-2) by the EC in the Annex V process and now attached as Exhibit Korea – 142: 
 
                                                     
 
1 Refer to paragraph 293 of Korea’s Oral Statement delivered at the Second Substantive Meeting which 
identifies the source of the data shown in the table in Exhibit Korea – 115. WT/DS273/R 
Page G-152  
 
  - for handysize tankers:   Table 2.1 at page 2 of the report;   - for handymax product tankers:  Table 2.2 at page 4 of the report;   - for panamax product tankers:  Table 2.3 at page 6 of the report;   - for chemical tankers:   Table 2.4 at page 8 of the report;   - for feeder container vessels:  Table 3.1 at page 12 of the report; 
  - for panamax container vessels:  Table 3.2 at page 15 of the report; 
  -  for post panamax container vessels: Table 3.3 at page 16 of the report.   (c)  According to Section 1.1 of the FMI report in Exhibit Korea – 142, the prices are the 
average price per CGT calculated for the period from 1997 to 2003. FMI identifies 
the source of the data as being BRL Shipping Consultants. Korea assumes but the EC 
and its consultant would be be tter qualified to confirm that this data reflects the order 
prices shown in the FMI reports which th e EC itself submitted as Annex 10 in the 
Annex V process. The important factor is th at these are average prices set forth by the 
EC’s consultant, FMI, and the EC themselves. 
 
 (d)  Korea is unable to provide the same info rmation for LNGs as the data source which is 
the FMI report submitted by the EC in the A nnex V process does not contain this data 
for LNGs. 
 
186. Concerning Exhibit KOR- 109, Korea presen ts certain breakouts of different sizes of 
container ships and tankers. For LNGs, while the text in Korea - 109 refers to various sizes of 
LNGs, no statistics are presented broken out by size. Please explain. 
 
Response
 
 
 As at February 2004 and since 1996 virtually a ll LNG vessels that have been ordered have 
been for vessels of 135,000 cu metres or larger, re flecting the recent growth in LNG ship sizes as 
LNG trade volumes have increased. In fact, of near ly 100 orders placed from 1996 only three have 
been for smaller vessels, one for a small coastal ve ssel of <10,000 cu metres capacity built in EC, 
another of 74,000 cu metres capacity built in EC and a third of 23,000 cu metres capacity built in 
Japan. The other vessels all fall within the 135 – 145 ,000 cu metres capacity range except for one 
single vessel of 153,000 cu metres on order in France.  Orders for the next generation of larger LNG 
vessels in the 180 – 250,000 cu metres capacity range have yet to be confirmed.   Given this concentration of vessel size over th e timescale covered by this complaint and the 
fact that Korea has only built vessels of 120,000 cu me tres or larger, no breakdown of LNG orders by 
size was felt to be appropriate or necessary to re flect the current size band in which LNG vessels are 
primarily built.   
II. TO THE EC 
 A. APRG/PSL 
 
187. Please comment on Korea’s recalculations of benefit in Exhibits Korea - 91-102. 
 
B. ALLEGED ACTIONABLE SUBSIDIES 
 
188. Concerning the question of whether the rest ructuring of Daewoo was subsidized, please 
provide a summary, based on all of the submission s of Arthur Andersen/Anjin and PwC, of the 
EC’s analysis and conclusions in respect of whether DHl should have been liquidated instead of restructure. In this summary, all relevant figures should be shown in tabular from, with cites  WT/DS273/R 
 Page G-153 
 
 
and cross-references to the original Arthur  Andersen report of November 1999 assessing the 
value of bill under various scenarios.  189. Concerning the Daewoo restructuring   
 (a) Concerning the most recent PwC submission (Exhibit EC - 145), please explain 
in detail the statement at page 3 that the Anjin analysis indicated “that the Enterprise Value of the restructured company is lower than the Enterprise Value of the company computed without debt restructuring”. 
 
 (b) What is “enterprise value” and how does it differ from “going concern value”?  
  (c) What is the significance of the fact that the “enterprise value” was lower under 
one set of calculations than under another? How if at all does it affect the central issue raised by the EC, namely the deci sion to restructure instead of liquidate 
Daewoo? 
  (d) What is the significance of Anjin’s reply in Exhibit KOR-7O that enterprise 
value was reduced under the analysis of the restructuring scenario from what it 
had been under the valuation of tile non-restructured company? What if anything is the significance that enterprise value calculations differed under two 
scenarios for the central issue posed by th e BC, namely whether it was better to 
liquidate
 or to restructure Daewoo? 
 190. The data presented in Exhibit KOR-108 show interested depreciation expense in the in the cost/profitability analysis for Daewoo. Please comment. How can this be reconciled with the 
EC’s assertion that these costs have not been  adequately reflected in Daewoo’s prices? 
 191.  Exhibit KOR-107 sets forth the results of th e court-ordered/supervi sed restructuring of 
Daedong. Presumably, such a restructuring had to proceed in accordance with Korean 
bankruptcy law. On what basis does the EC allege that nevertheless it involved a subsidy?  
C. SERIOUS PREJUDICE 
 
192. One conclusion that might be drawn from  Exhibits KOR-91-102 is that Korea accepts 
that there is a benefit from the KEXIM financing at issue, but that the benefit in a number of cases is quite small (0.5 per cent or less). If on e accepts that the benefit is of the magnitude 
reflected in these Korean exhibits, what woul d be the implications for the EC’s serious 
prejudice analysis and conclusions? 
 
Comment by Korea on this question addressed to the EC
 
  Without prejudice to the fact that Korea does not accept in its Exhibits Korea – 91 to 102 that 
the KEXIM facilities conferred a benefit,
2 Korea considers that the KEXIM facilities cannot have had 
price depression or suppression for their effect in  the first place because the EC itself admits that 
KEXIM’s base rate for APRGs has increased while its credit risk spreads became more conservative. 
Hence, if anything the KEXIM facilities should have exercised less pressure on the prices for vessels. 
In addition, the EC itself shows fluctuating price trends (i.e., decreases and increases) in Attachment 2 
to its responses to the Panel questions (especially in  Figure 2.3). As it does not show a decrease in the 
benefits allegedly afforded by KEXIM in periods  of increasing price trends, there is all the less 
evidence of a price depressive or suppressive effect of the KEXIM financing facilities. In the second place, the magnitude of the price depression/supp ression alleged in Attachment 2 to the EC’s 
                                                     
 
2 See, for example, Korea’s resp onse to Panel Question 114. WT/DS273/R 
Page G-154  
 
responses to the initial Panel questions is blatantly ou t of proportion with the magnitude of the alleged 
benefit.    Notwithstanding the EC’s allegations of qua litative effects of the KEXIM facilities (which 
Korea disputes), Article 6.3(c) of the SCM Agreement  explicitly requires that the alleged subsidies 
must have “significant” price depression or suppr ession for their effect. Hence, the letter of this 
provision requires a quantification of the effects of the subsidies and a benefit of 0.5 per cent does not 
meet this threshold while the blat ant difference in the proportion of th e alleged benefit and the alleged 
price depression/suppression clearly demonstrates that there is no causal link between the alleged KEXIM benefits and the price depression/suppression asserted. 
 
 Once again, in response to this new EC “eviden ce” Korea must recall that, even if one were to 
accept the EC’s approach, the EC still has not explained how such de minimis  subsidies contribute to 
developing or improperly maintaining excess capacity  leading to price suppression. As Korea has 
noted in the past, the EC seems to be trying to a void this very direct and clear requirement of the 
treaty language to demonstrate that the significant price suppression is the effect of the subsidy by 
trying to attach any alleged subsidy it can to a produc t and then sweep that product as a whole into the 
price suppression analysis. Furthermore, the EC does not  really attempt to do this in relation to the 
products. The EC even ignored evidence that many ships produced by unrestructured shipyards did 
not “benefit” from APRGs or pre-shipment loans, but nonetheless attempted to sweep every ship into 
its analysis. 
 
 The EC at the latter stages attempted to move a little away from this totally capacity 
dependant approach and reintroduce price unde rcutting as a supporting element of its price 
suppression/depression analysis. Aside from the lega l block on this reintroduction of an abandoned 
argument, the EC leaves unexplained how such de minimis  subsidies could have resulted in the 
alleged price suppression or depression when, by the EC’s own admission, the Korean yards enjoyed 
a considerably larger cost advantage. There would simply be no competitive effect from such subsidy. 
  Finally, if these de minimis  subsidies were to have such an e ffect, then the causal effect of the 
much higher level of EC subsidies (which the EC does not and cannot contest) on the marketplace would overwhelm and displace any effect of the alleged Korea subsidies. In such a case, it would be 
impermissible to attribute to the Korean subsidies ef fects that were actually caused by the much larger 
EC subsidies.  
193. Exhibit KOR-112, concerning MOCIE’s interv ention at the request of Samsung, could 
be viewed as indicating that the government takes action if prices are too low. If this is the case, 
what are the implications for the EC’s serious prejudice claim?  
Comment by Korea on this question addressed to the EC
 
  In its response of 2 July 2004 to the EC’s Qu estion 5 addressed to Korea, Korea explained in 
detail the background of MOCIE’s intervention in the Hamburg Sud-DSME transaction. As 
demonstrated there, MOCIE was not concerned with the price level as such, but with the anti-
competitive behaviour of the parties involved in that transaction. In any event, this MOCIE 
intervention does not support the EC’s serious pr ejudice claim. Instead, it indicates that it was a 
European shipyard, Odense, that  was offering the lowest prices and thus depressing prices ( see 
Exhibit EC - 88). 
 
194. If the Panel were to accept the product subdivisions set forth in Exhibit KOR-109, how 
would this affect the EC’s analysis of price suppression/depression? Please respond in detail.  
 195. Please comment on Exhibit KOR-115.  WT/DS273/R 
 Page G-155 
 
 
COMMENTS BY KOREA ON THE NEW FACTUAL INFORMATION SUBMITTED BY THE EC AND THE US ON 2 JULY 2004   
134. In Exhibit EC - 118, PwC asserts that “ [t]he KSDA Bond Matrix is the accepted mark-
to-market price for the domestic market”. Does this mean that the EC disagrees with Korea’s 
argument that the bond matrix represents hypothet ical / projected rates, or does the EC accept 
Korea’s argument but consider that the inde x nevertheless constitutes a reliable market 
benchmark? Please explain. What does “mark~to~m arket” in this context mean? In particular, 
who was marking what to which market? 
 
Comment on the EC’s new factual information;  Exhibit EC – 148 regarding KSDA Bond Matrix
 
  In Exhibit EC – 148, PwC argues that the KSDA Bond Matrix is the mark-to-market price for 
the domestic market and that “mark-to-market” means that “KSDA employees update every day the 
price and yields of the bond used in all the indices”.  While the explanation by PwC regarding the term 
“mark-to-market” is not clear enough to fully resolve its ambiguity (please recall that the Panel specifically asked who was marking what to which market ), PwC nonetheless seems to focus on daily 
collection activity of data.    However, such daily collection activity do es not automatically mean that the Matrix 
accurately reflects the “price” of a bond or even bonds i ssued in a particular sector of industry. In fact, 
PwC itself admits the limitation of the Matrix by sta ting that it is the “representation of the yield … at 
a specific moment in time”. This statement is nothi ng but saying that the Matrix is only a general 
index, which Korea already explained in its r esponse to Panel Question 73. Representation is a 
representation (whatever it may mean). It cannot be the price (i.e., yield in the instant context) of a 
specific bond. 
  For the better understanding of the Panel, Ko rea submits below some cases showing actual 
yields of specific bonds compared to the co rresponding KSDA Bond Matrix (both of which are 
available at the KSDA website).  
Case 1
 
 Issuing Company:   Hyundai Heavy Industry  Bond Classification:   HHI 100   KSDA Standard Code:  KR6009544M29  
Issue Date:    21 February 2001  Expiry date: 21 February 2004  
Credit Rating upon Issuance:  A0   
(Unit: %) 
KSDA Bond 
Matrix 
Rated A0 KSDA Bond 
Matrix 
Rated A0 KSDA Bond 
Matrix 
Rated A0 Date HHI 100 
Weighted 
Average Yield 
3M 6M 9M 
2003-11-26 4.38 4.8   
2003-11-24 4.38 4.8   
2003-09-02 4.32  4.89  
2003-05-26 5.9   5.08 
2003-05-23 5.87   5.06 
 WT/DS273/R 
Page G-156  
 
Case 2
 
 Issuing Company:   Hyundai Heavy Industry  Bond Classification:   HHI 102  KSDA Standard Code:  KR6009544M78 
Issue Date:    23 July 2001   Expiry Date: 23 July 2004  
Credit Rating:    A0 
 
(Unit: %) 
KSDA Bond 
Matrix 
Rated A0 KSDA Bond 
Matrix 
Rated A0 KSDA Bond 
Matrix 
Rated A0 Date HHI 102 
Weighted 
Average Yield 3M 6M 9M 
2003-12-17 4.8   5.24 
2003-11-24 4.99   5.11 
  Case 3
 
 
Issuing Company:   Samsung Heavy Industry 
Bond Classification:   SHI 84   KSDA Standard Code:  KR6010144M21 Issue Date:    24 February 2001  Expiry Date: 24 February 2004 
Credit Rating:    A0 
 
(Unit: %) 
KSDA Bond 
Matrix 
Rated A0 KSDA Bond 
Matrix 
Rated A0 KSDA Bond 
Matrix 
Rated A0 Date Weighted 
Average 
Yield Rate 3M 6M 9M 
2003-12-11 4.52 4.93   
2003-11-11 4.32  4.88  
2003-07-25 4.72  5.13  
2003-05-28 5.15   5.05 
2003-05-20 5.13   5.02 
Note:  The months (3M, 6M, 9M) represent th e remaining months to the expiry date. 
 
 
 The above tables show that the KSDA Bond Ma trix does not represent actual yields of the 
bonds issued. For example, when looking at yields ra tes of HHI 100 (the remaining period of which to 
the expiry is approximately 3 months) on 26 N ovember 2003 and the KSDA Bond Matrix 3M on that 
date, several questions arise inevitably: (i) What is  the market price of a bond with credit rating A? 
HHI 100 bond yield? or the KSDA Bond Matrix?; (ii) Is HHI 100 bond yield below market price if 
the KSDA Bond Matrix is the “market price”?; ( iii) Does this mean that HHI 100 bond yield was 
above the market price back in May 2003? (i v) (Assuming so,) then why do investors make 
investment into HHI 100 bond on 26 November 2003?; (v) (Further assuming that an investor purchases bonds of a company in the same industry sector as HHI), which one should be the reference, HHI bond yield or the KDB Bond Matrix?;  (vi) Why the prices of HHI 100 bond and HHI 
102 bond are different as at the time both bonds are having the same months remaining period? (vii) 
Why the prices of HHI 100 bond and SHI 84 bond (both of which are having 3 months remaining period as of November 2003) are different?; a nd the questions may continue on and on.. 
  WT/DS273/R 
 Page G-157 
 
 
 Should the KSDA Bond Matrix be the market pri ce, it provides no clear answers to the above 
questions. This means that the KSDA Bond Matrix is only an index which indicates the market situations on a specific date. It does not reflect speci fic situations of the industry sector, the issuers, 
and the preferences in the market. Thus, it can in no event be a “price” at which a specific bond can be 
purchased. At best, it may be a preliminary indicator  that an investor may use as a first reference 
before studying the market further. 
  Further, Korea would like to clarify certain points made by the EC which are misleading and 
factually baseless. The EC submitted that “the corpor ate bonds actually issued by the yards were not 
appropriate benchmarks as regards corporate bonds (i ) because they were guaranteed by a bank, (ii) 
were not issued in the same currency or (iii) not issued at the same time as KEXIM PSLs” ( see 
para. 21 in the EC response to Panel Questions). These assertions are incorrect. In the first place, in no 
instance were bank guarantees provided in relation to the corporate bonds issued by the Korean yards. 
The EC has never provided any evidence to substa ntiate this assertion. Secondly, most bonds were 
issued in Korean Won. The in stances where foreign currency bonds were issued were extremely 
limited (i.e., [BCI:  Omitted from public version] ). As indicated in Exhibit Korea – 139  submitted 
already, even [BCI:  Omitted from public version]  issued its bonds in Korean Won in most of the 
cases and no other Korea yards have issued bonds in foreign currency. Lastly, the EC asserts that 
bonds were not issued at the same time with PSLs. While bonds may not have been issued on the 
exact same dates as PSLs, this fact cannot necessar ily dismiss those corporate bonds actually issued 
by the shipyards from the eligible list of benchmar ks. There is no requirement that, in order to be 
comparable, an instrument being compared must be  issued on the same date as another instrument 
concerned. As stated in Korea’s response to Pa nel Question 170, Korea considers that the average 
interest rates for financial instruments actually u sed by the shipyards, presented on a quarterly basis, 
would be proper benchmarks and these quarterly data can avoid possible anomalies when comparing the instruments on day-to-day basis. 
 
136. At para. 95 of its oral statement, Korea pr esents a number of points criticizing the EC 
calculation methodology, and states that further details are contained in Exhibits Korea 90-102. Please respond to Korea’s criticism in detail, in cluding with reference to the content of these 
exhibits. 
 Comment on the EC’s new factual information
 
 Comments on Exhibit EC - 148 regarding incompatibility of credit ratings
 
  On the issue of compatibility of KEXIM credit ratings for PSLs with the bond ratings by 
other rating agencies, PwC contests in Exhibit EC – 148 Korea’s arguments that (i) the levels of 
underlying credit risks are different and (ii) factors for grading are not alike.   First of all, the content of PwC’s report casts into question whether PwC really has the expertise to opine on the nature and mechanism of determining credit ratings. As discussed below and 
demonstrated by the report and materials submitted by Korea, PwC’s analysis is full of fallacies and 
distortions which a banking expert would never make.  
  In particular, Korea is surprised by the bold statement of PwC that “…a private loan and a 
bond having the same ratings will present the same obligor repayment capacity and the same credit 
exposure risk…Both should therefore be rem unerated with the same interest rate” ( see the last 
paragraph at page 5 of Exhibit EC – 148. Emph asis added). When making this puzzling statement, 
PwC seems to be ignorant of the fact that bank s and rating agencies apply different factors in 
determining the ratings for different types of financia l products and, therefore, that different types of 
products (e.g., bank loan v. corporate bond, cor porate bond v. commercial paper) carry different 
interest/yield rates even where the borrower or the issuer of these products is the same company. This 
is a fact well-known to every financial expert in th e world. According to the PwC’s logic, a company WT/DS273/R 
Page G-158  
 
(e.g., Hyundai), which has a stable and uniform ra ting, should borrow loans or issue bonds, CPs, CDs 
or whatever instruments always at the same intere st rate at a given time, assuming that maturity and 
collateral (or non-collateral) are the same. This is non-sensical, at the very least. 
   PwC begins its fallacious analysis by challe nging the statement in Exhibit Korea – 91. It 
disputes the statement that corporate bond rating (i.e., issue rating) in Korea could actually be 
considered same as the “issuer” rating whereas KE XIM ratings were the “facility rating” that takes 
into account all the characteristics of the credit facility. Then, PwC takes the DSME bonds as an 
example, and states that the ratings of these bonds as secured by collateral, cannot be considered the 
same as the rating of DSME and that [t]he rating of the bonds reflects the collateral of the bond 
emission just as KEXIM ratings reflect the collateral of the loans granted . PwC first ignores the fact 
that the corporate bonds issued and traded in Ko rea are mostly non-collateralized bonds and the bond 
rates quoted by KSDA are based on “unsecured long-te rm senior bonds”. Second, after admitting that 
the rating of DSME bonds reflect collaterals just as KEXIM rating does, PwC then fails to explain 
why the DSME bonds cannot be used as benchmark for KEXIM’s PSLs. 
 
 Thereafter, based on a study by the society of actuaries, PwC attempts to rebut Korea’s 
argument that there is no correlation between KEXIM rating on its loans (which are equivalent to 
privately-placed bonds) and the ratings on the publicly  traded corporate bonds because default rates 
for private debt placements are lower than that for public debt placements. However, this study does 
not contradict the conclusions of Carey (1998)  relied upon by Korea. Indeed, PwC quoted the 
following statements which appear, in fact, to contradict the allegation by the EC: 
  - “Over the sample period studied, private pl acements with most recent internal ratings 
the equivalent of investment grade and BB have loss experience similar to publics in 
spite of worse incidence or default rates because of better loss severities  on private 
placements ”, 
  - “Relative to publicly issued bonds, priv ate placements with most recent internal 
ratings the equivalent of B and riskier offer superior experience
 with respect to all of 
incidence, severity and economic loss”  (see the first paragraph on page 5 of Exhibit 
EC – 148. Emphasis added). 
 
 Korea cannot figure out what PwC is trying to establish with these statements. The plain reading of these statements still leads to the conclu sion, as drawn by Korea, that the privately placed 
debt instrument (such as KEXIM’s PSLs), by nature , generally involves lower default risks than 
public placements with a given credit rating. Hence,  PwC’s analysis fails to rebut Korea’s argument 
(i) that credit risks for a bank credit rating are lo wer than those for the corresponding corporate bond 
rating and (ii) that for the same corporate entity, the corporate bond rating must be higher than the 
credit rating for bank facilities in order to have equivalent credit risk.   Interestingly, the statement by the societ y of US actuaries admits that the insurance 
companies fairly frequently disagree with NAIC an d with each other on credit rating, although, on 
average, the disagreements are small. These disagreem ents arise even if the companies engaged in the 
same insurance business ar e assessing the credit risk involved in the same financial product, i.e., 
corporate bonds. This demonstrates how significan t the disagreements would be in cases where 
KEXIM as a bank assesses the credit risk of its bor rower in loan transactions while a credit rating 
agency, such as KIS, assigns ratings to corporate bonds which are totally different products from a 
bank loan. In this regard, the PwC’s assertion that  “the correlation between corporate bond ratings and 
KEXIM ratings [on loans] should exist at least for rati ngs better than or equal to BB [rating by a credit 
rating agency on corporate bonds]” is non-sensical.    In order to redress this flaw, PwC quotes the actuaries society’s statement that “the more 
pessimistic one is usually the one with the highest predictive power”( see the second paragraph on  WT/DS273/R 
 Page G-159 
 
 
page 5 of Exhibit EC – 148). However, it is obvious  that this “usual” order of predictive power 
applies only within the context of the same insu rance companies who are assessing credit risks on the 
same financial instrument (i.e. corporate bond). In addition, the society of actuaries has never 
conducted a study, and therefore does not dare to e xpress an opinion on whether such “usual” order of 
predictive power would apply to a totally heterogeneous situati on where a bank assigns rating to a 
borrower in loan transactions while a credit rating ag ency assigns a rating to a corporate bond. In such 
a case, a comparison is not possible as the two agencies are using two different measurements, considering totally different factors.    PwC’s egregious analysis does not stop here. It  further attempts to convince the Panel of the 
correlation by trying to implement a mechanistic ma tch between the credit rating agency’s “A to C” 
ratings and KEXIM’s “P to SM” rating system merely based on definitional similarities. At the outset, Korea would like to point out that such a mechan istic matching technique is meaningless as long as 
rating agencies do in practice assign different ratings to  even the same borrower/issuer or to the same 
financial instrument under different circumstances.  Using the same rating definition (expressed in 
language that permits diverse applications in actua l cases) does not guarantee that all different raters 
would assign the same rating. As mentioned earlier, th e statement by the actuaries society admits that 
disagreements in rating frequently take place even  among companies engaged in the same insurance 
business.    Moreover, Korea cannot understand where PwC’ s conclusion that KEXIM’s P5 rating is 
comparable to a “BBB” rating comes from. PwC appear s to take P5 instead of P4 simply because P5 
is a lower rating to P4 ( see Table 1 on page 7 of Exhibit EC – 148). However, Figure 2 in the same 
page of the PwC report seems to either conflict with  Table 1, or only shows that the credit spread for 
BBB is corresponding to the credit spread for P4, not  P5. Furthermore, PwC has failed to provide any 
support for its conclusion that KEXIM’s SM rati ng should be equivalent to “C”. PwC has only 
provided Table 1 which only refers to the chronology  of the changes implemented by KEXIM in its 
credit rating systems of KEXIM, but ends with “BB” as the worst rating in the last column of the first 
row ( see Table 1 on page 7 of Exhibit EC – 148). The natu ral reaction to this would then be to inquire 
why it is only “C”, not “single B”that corresponds to KEXIM rating SM?    In any event, as noted before, this whole ma tching exercise is highly mechanistic and cannot 
support the EC’s allegation that rating X on co rporate bonds always corresponds to rating Y in 
KEXIM rating system. This means that the EC’s attempt to use corporate bonds as a benchmark for 
KEXIM PSLs is not acceptable. Assuming arguendo  that there was a financial contribution, the right 
approach would be to compare the rates of KEXIM PSLs granted to a shipbuilder with the rates of 
other financial products used by the same shipbuilder. 
 
 In order to support Korea’s claim that KEXI M credit ratings are not compatible with the 
corporate bond ratings and to rebut various othe r allegations of the PwC and the EC, Korea 
supplements Exhibit Korea – 91 with a report by  KEXIM as a banking expert, which is submitted 
herewith as Exhibit Korea – 143
. Korea summarizes below the key information provided by this 
report.   
 
(1)  First of all, the report points out that the elements for assessing credit risks are different from each other. More specifically, KEXIM credit rating sy stems look into “probability of defaults”, “loss 
given default” and “expected loss”. The report states:   
It is a uniform practice in banking industry to review, examine and analyze following 
three elements when assigning credit ratings: probability of default (PD), loss given 
default (LGD), and expected loss (EL) . (See the second paragraph of II.A.1. of  
Exhibit Korea – 143 ). 
 WT/DS273/R 
Page G-160  
 
By contrast, the rating agencies are reviewing only the “probability of defaults”, not “loss given default” or “expected loss.” This must result in having materially different horizons as to the risks 
associated. The report further continues:  
According to Moody’s study on Bank Loan Loss Given Default, it is evident that 
there exists a significant difference in e xpected loss between bank loan rating and 
corporate bond rating. In consequence, the risk premiums are different, which ultimately results in the difference in interest rates. 
<Exhibit 6: “Bank Loan Loss Given Default”, N ovember 2000, Moody’s Investors Service, p.9> 
 
 
As shown in the chart above in Exhibit 6 to Bank Loan Loss Given Default by Moody’s, “the mean bank loan value in de fault is 69.5 per cent for senior secured and 
52.1 per cent for senior unsecured,”
3 whereas the mean value of long-term public debt 
is 59.1 per cent for senior secured and 45.1 per cent for senior unsecured. ( See 
para. II.A.2.of Exhibit Korea - 143 .) 
 
(2)  Secondly, as Korea submitted, banks adopt a so-called “point-in-time” approach whereas 
rating agencies use the “through-the-cycle” appro ach. This makes the two rating systems quite 
different from each other as the banks seek “most likely cases” while the ag encies are anticipating 
“stress” scenario. This inevitably results in the different properties of both ratings so that, for 
example, in contrast with bank credit rating system , “agency ratings may not have the same sensitivity 
to change… of bank risk ratings” ( see the last paragraph of II.B.1 of Exhibit Korea – 143 ). 
 
 In view of these distinctive properties includi ng different elements for assessing credit risks 
and dissimilar approaches, bank credit rating syst ems cannot be compatible with agency rating 
systems. This is supported by Moody’s, which clearly states that:   
In which Moody’s has rated both a compa ny’s credit facilities and its bonds, the bank 
loan rating is one or more refined rati ng categories higher than the bond rating. ( See 
the first paragraph of III of Exhibit Korea – 143 ). 
Based on the reasons as detailed above, Korea reite rates that bank credit rating systems cannot be 
compatible with agency rating systems.  
Comments on Attachment EC - 10 regarding recalculations of benefit by the EC
 
  In Attachment EC - 10, the EC provided a chart showing that KEXIM PSLs conferred a benefit by way of recalculations showing certain ad justments. While Korea will show the fallacies in 
these recalculations below, Korea would like to emphasize some additional points. 
                                                     
 
3 Bank Loan Loss Given Default, November 2000, Moody’s Investors Service, p.1  WT/DS273/R 
 Page G-161 
 
 
  ¾ Korea cannot agree that the KSDA Bond Matrix provides a benchmark. 
  As Korea detailed in its comments on the EC ’s response to Panel Question 134 above, the 
KSDA Bond Matrix is mere a preliminary indicator that an investor may use as a first reference 
before studying the market further. It cannot be a market price or benchmark. 
  ¾ Further, Korea cannot agree that KEXIM credit ratings and corporate bond ratings are 
comparable. 
 
 As explained in detail above and in Exhi bit Korea – 143, KEXIM credit rating are not 
comparable to ratings by credit rating agencies.  This is undoubtedly supported by the unequivocal 
statements by Moody’s. Korea will not  reiterate those herein again. 
  ¾ In most cases, the EC found “negative or minimal” margins only. 
 
 As Korea cannot agree on the methodology sugg ested by the EC, Korea denies the existence 
of any benefits. However, even if Korea accep ts the methodology for the discussion purposes only, 
most cases reflect negative or minimal benefit margin s. This is so even when following the EC’s 
methodology in its entirety, and it is even more  so when following the methodology corrected by 
Korea. Korea herewith submits Exhibits Korea – 145 through 149
 to substantiate this claim. 
 
 In relation to this, the EC made another atte mpt to provide a misleading portrayal of hard 
facts. In para. 58 of its responses to the Panel Qu estions, the EC states that “the difference between 
the market benchmark and the KEXIM rate is mo re than 30 per cent when expressed as a proportion 
to the KEXIM actual spread rate ” (emphasis added). It is evident why the EC did this. After 
establishing that even in the EC’s own methodology,  only minimal benefit margins are obtained, the 
EC now attempts to exaggerate the magnitude of  alleged benefit margins by comparing those with 
KEXIM’s credit risk spread. The credit risk spread , however, is only a fraction of the overall rate. 
  In addition, as Korea explained during the Se cond Substantive Meeting, the EC can show 
these “minimal” alleged benefit margins for only a small fraction of the PSLs extended by KEXIM. 
The tables below are summaries in relation to th ese instances. Given the small number of instances 
where the minimal margins would be found and the ma gnitude of such margins,  Korea considers that 
the EC’s claims are unfounded and unsupported and mu st be rejected by the Panel when taking a 
decision on all facts and evidence before it.  
EC Recalculation 
 
Alleged Benefit 
Shipyard PSL Cases 
where 
positive 
benefit was 
found lower 
than 
-1% -1 ~ -
0.5%-0.5 
~ 
0% 0 ~ 
0.25%0.25 
~ 
0.5% 0.5 ~ 
0.75%0.75 
~ 1% Over 
1% 
DSME 37/136      5  32 
HHI 22/197  4 29 5 6 6 2 3 
Mipo 27/142  1 1 11 3 3 4 6 
Samsung 1/8   1 1     
Hanjin 8/45  3 4 1 3 3  1 
Samho 8/45       4 4 
STX 6/6        6 
Total 109/579  8 35 18 12 17 10 52 
 WT/DS273/R 
Page G-162  
 
 
Corrigendum by Korea 
 
Margin 
Shipyard PSL Cases 
where 
positive 
margin was 
found lower 
than 
-1% -1 - -
0.5% -0.5 – 
0% 0 - 
0.25
% 0.25 
– 
0.5% 0.5 - 
0.75
% 0.75 
– 1% Over 
1% 
DSME 0/136 1 12 24      
HHI 17/197  5 33 4 4 9   
Mipo 23/142  1 5 12 9 2   
Samsung 1/8   1 1     
Hanjin 6/45  3 6  2 3  1 
Samho 0/45  2 6      
STX 6/6        6 
Total 53/579 1 23 75 17 15 14 0 7 
Note:  The number “579” is the total PS L cases listed in Korea’s Annex V Responses 
 Attachment 1.2(30).    ¾ The EC’s approach is inconsistent as rega rds the selection of its alleged benchmarks. 
 
 As Korea established with the concurrence of the EC, the PSL is a short term loan facility, the 
duration of which is not exceeding 6 months. This has been an undisputed fact in this proceeding as is 
also shown by the EC itself when it used benchmarks of a 6 month duration in Exhibit EC – 125.  
 Notwithstanding this, the EC now abruptly starts  to allege that a benchmark with a 1-year 
duration should be used in certain cases. In suppor t, the EC alleges that the base rates for certain 
instances of PSLs are [BCI:  Omitted from public version] .  This is non-sensical. As has been 
established and thus far alleged by the EC itself, a proper benchmark must be a facility conferred with 
similar terms and conditions. The term must be asses sed based on its duration, not the name of base 
rates. Korea would like to ask the EC how and why the EC used the 6 month KSDA Bond Matrix to 
PSLs conferred to STX where the base rates were “fixed” rates.   Korea provides one example to show that wh ile the base rate is WNPRI1Y, the average 
duration of PSL instalments is not exceeding 6 months as below.    [BCI:  Omitted from public version.] 
 
 ¾ The EC still failed to adjust Samho’s PS L for a 100 per cent physical collateral. 
  In this connection, the EC has kept profferi ng its traditional “best information available” rule 
by stating that it is not “KEXIM’s policy to keep  and maintain any worksheet or similar documents 
necessary for the consideration of collaterals” ( See para. 49 of its response). This is egregious, and it 
is another example showing the bad faith of the EC.   Korea submitted KEXIM’s list of pre-shipment loans to sh ipbuilders as Korea Annex V 
Attachment 1.2(30)-1 and Exhibit Korea – 60 which clearly show that as to [BCI: Omitted from 
public version.]   Korea hereby submits the relevant pages of KEXIM list of pre-shipment loans to 
shipbuilders as Exhibit Korea – 144
 to substantiate this (the EC  purposefully submitted as Exhibit 
EC – 24 only a part of the list). For more details, please refer to the corrigendum on the EC’s recalculation with respect to Samho ( Exhibit Korea – 145
).  
  WT/DS273/R 
 Page G-163 
 
 
 ¾ The EC wrongly applied “Adjustment Duration (AD Duration)”. 
  As the EC explained, the “AD duration” was employed for obtaining the 6-month KSDA 
Bond Matrix in Exhibit EC –125 with respect to certain PSL instances as to DSME. The AD duration 
was explained as the difference between the Treasury Bond yield 1 year and Treasury Bond yield 6 
mont.sh. Given that a 6-months KSDA Bond Matrix  exists, there is no need to consider the AD 
duration. Further, with respect to DSME, the EC did not apply the KSDA Bond Matrix. Instead, it followed the interest rate determ ination procedure under the KEXI M Guidelines Interest Rates and 
Fees. In these circumstances, it is not necessary to consider the AD Duration. Please refer to 
corrigendum with respect to DSME ( Exhibit Korea – 146
).  
 
 ¾ Korea submits Exhibits Korea – 145 through 149  for corrigendum on the EC’s 
recalculation. 
  While Korea does not agree with the EC’s methodology, Korea nonetheless submits Exhibits 
Korea – 145 through 149  on the EC’s benefit recalculation in orde r to correct manifest clerical errors 
by Korea in previous Exhibits and to identify the EC’s misunderstandings  or false allegations. 
 
139. The Panel refers to Attachment 5 to the EC ’s replies to the Panel’s questions after the 
first substantive meeting, which contains transact ion-specific alleged benefit calculations for one 
PSL and one APRG. Please make the same calculat ion for each of the APRGs and PSLs at issue 
in these proceedings. In other words, for each shipyard, specify which APRG I PSL relates to 
either LNG, product / chemical tankers, or cont ainer ships, and specify the amount of the 
alleged benefit as a % of the ship price. Please attach detailed worksheets. 
 
Comment on the EC’s new factual information
 
 
Comments on Attachment EC – 11  
  In Attachment EC - 11, the EC attempted to pr ovide the ad valorem bene fits with respect to a 
fraction of PSL instances. Korea is compelled to point  out below the serious fallacies contained in this 
document. 
 
 ¾ Korea does not agree that benefits were conferred. 
  As explained above, the benefit calculation me thodology by the EC including the selection of 
benchmarks is affected by grave and inherent fa llacies. Hence, Korea rejects the existence of any 
benefit and the magnitude of the be nefit alleged by the EC. Korea refe rs to its above explanations in 
this regard.   ¾ The EC’s PSL duration is false. 
  This is another example to show the bad faith by the EC. As clearly indicated in Attachment 
Korea - 4 to Korea’s Second Written Submission and described in Korea response to EC Question 19, 
PSLs are disbursed in several instalments generally at the time of “steel-cutting”, “keel laying”, and 
“launching”. The number of instalments and disbur sement amounts vary depending on the projects. 
Hence, each instalment must have a different duration.  
 This notwithstanding, the EC applied the en tire period from the commitment date to the 
expiry date as the duration of the PSL. This by it self is conflicting with it ow n benchmark which is a 6 
month KSDA Bond Matrix. In addition, Attachment EC – 11 itself refers to Attachment EC – 9, 
which, in turn, is based on Korea’s Attachment Ko rea - 4 above. Should the instalment disbursements 
be taken into account, the calculation would be co mplex. However, irrespective of whether the WT/DS273/R 
Page G-164  
 
calculations are complex, the EC is not exempted from its obligation to provide correct calculations 
(assuming all other factors are established). To disregard this is not justifiable.   ¾ The ad valorem benefit would be decreased substantially. 
 
 Korea hereby submits Exhibit Korea – 150
 in order to show (i) again the duration of each 
instalment disbursement as for the all projects for which the EC provided “projected” ad valorem 
benefits and (ii) there are early repayments in so me cases, which must be taken into account for 
calculation and to provide the PSL interest amounts that KEXIM charged.  
 If the EC should count all of these factors,  the ad valorem benefit would be decreased 
substantially.  Comments on Attachment EC – 12
 
 
 Also, as explained by Korea during the Second Substantive Meeting, the EC alleges that it 
established a benefit for a small fraction of APRGs only. The table below is the summary of those 
instances. Korea submits this for the better unders tanding as to the egregiousness of the EC’s claim. 
   
Shipyard Alleged number of APRG instances out of total 
APRG transactions 
DSME 21/261 
Mipo 0/126 
HHI 0/347 
Sansung 4/141 
Samho 4/82 
Hanjin 2/32 
STX 2/126 
Total 33/1115 
 
In addition, in Exhibit EC – 12, the EC attempted to  provide the ad valorem benefits with respect to a 
fraction of APRG instances. As with the PSLs, th e EC made the same egregious and bad faith 
attempts. 
 
 ¾ Korea cannot, and shall not, agree on the existence of benefit. 
  As submitted earlier, Korea cannot agree on the be nchmarks the EC proffered. As stated, in 
order to be eligible for constituti ng benchmarks, (i) the subject rates must be market representative in 
terms of instances and (ii) the terms and conditions  must be comparable. However, the proffered 
benchmarks are gravely lacking those criteria. Thus , Korea neither agrees that a benefit was conferred 
nor a benefit of the magnitude alleged. Korea refers  to its explanations in this regard hereinabove. 
  ¾ The EC disregarded the fact that advance payments are to be made in instalments. 
 
 While the EC itself indicated in its Attachment  EC – 12 that the advance payments are to be 
made in instalments, the EC di sregarded this and took the entire period from the contract date to 
delivery date as the duration for entire advance payments.    While the EC finger-pointed Korea for not provi ding the relevant information, it should have 
made, at least, an attempt for a reasonable reconstr uction. Without this, the EC should be condemned. 
  WT/DS273/R 
 Page G-165 
 
 
142. In percentage terms, how much of the a lleged benefit resulting from the “Daewoo” tax 
concession should be attributed to DSME’s production of (i) LNGs, (ii) product I chemical tankers, and (iii) container ships? Please attach detailed worksheets. 
 
Comment on the EC’s new factual information
 
 
 In Attachment EC - 13, the EC has re-quan tified the alleged subsidies received by Daewoo-
SME by adding the alleged tax subsidy. The EC argues that the total benefit provided to Daewoo-
SME under “scenario 1”4 amounts to KRW 2,889,985 million which is summarized in the table 
below. 
 
 In million KRW 
Debt-for-equity swap 649,089 
Tax concessions: 55%  * 236,000 129,800 
Debt rescheduling 173,153 
Negative net worth of DHI to be assumed 
by Daewoo-SME = 55%*3,523,533 1,937,943 
Total 2,889,985 
 
  However, Korea has demonstrated that the DHI  restructuring had been made under market 
conditions and that there was no bene fit conferred.  Therefore, the EC ’s quantification of the alleged 
benefits is fictional. 
 
 Nonetheless, Korea would like to make a few comments below to show that, even under the 
EC’s incorrect assumptions, no benefit h as been conferred or continues.  
  (a) Debt-for-equity swap 
 
 For those reasons presented by Korea
5, KRW 3,500 which was the stock price on the first day 
of trading6 cannot represent the true value of the stock of DSME. 
  Instead, the DSME creditors ag reed to the debt-for-equity swap as a long term investment, 
and Exhibit Korea – 103
7 clearly demonstrates that the price of DSME shares as of August 2001 was 
in the range of US$ 10 (approximately KRW 12.000 – 13,000) per share. 
  (b) Tax concessions   As demonstrated by Korea
8, the EC has failed to establish th at any financial contribution had 
been made to, or any benefit had been confe rred upon, DSME in the form of tax concessions. 
  (c) Debt rescheduling   The EC has calculated the alleged benefit from the debt rescheduling based on the terms of 
debt rescheduling (e.g., reduction of interest rates and changes in the repayment schedule of 
principals) as provided in the Comprehensive Agreement on Corporate Workout (MOU) of 20 January 2000. However, the EC fails to recogni ze the fact that DSME graduated from the workout 
                                                     
 
 4 This means an alleged scenario that DHI restructuring was not made under normal conditions and, 
thus, the company should have been liquidated. 
5 Korea’s Second Written Submission, paras 160 – 167. 
6 Attachment EC -13, Footnote 2. 
7 Non-binding Offer by Newcastle Heavy Industries dated 16 August 2001. 
8 See, e.g., Korea’s response to the Panel Question 116. WT/DS273/R 
Page G-166  
 
on 23 August 2001 due to its remarkable business perfor mance and that, as a result, the original terms 
of debt rescheduling under the a bove MOU have been cancelled.  
  The following table summarizes the original terms of debt rescheduling under the MOU and 
the revised terms of the principal and interest pa yments agreed upon between DSME and the creditor 
financial institutions at the time of te rmination of the DHI workout procedure:
9 
  
 Original terms under MOU Revised terms upon Workout termination 
Terms of 
repayment of principal To be repaid each year from 
and after 2003 in the amount equivalent to 5% of the total 
principal amount  As for KAMCO and SGIC, to be repaid in 
equal instalments during 2002-2003 (actually so repaid);  
As for other financial in stitutions, to be repaid 
in equal instalments during 2002-2004 (actually so repaid). 
Terms of interest payments Interest on secured debt: 
Prime rate  Interest on unsecured debt: Prime rate – 3% As for financial institutions which have 
applicable interest rates for the outstanding debt: the applicable interest rates at CB credit rating BBB or above. 
As for those which do not have applicable 
interest rates: the interest rates determined by adding not more than 2.5% to yield rates on 3 year national treasury bonds. 
  The EC also fails to acknowledge that mo st of the DSME debts assumed from DHI through 
spin-off (“workout debts”) have been repaid (or swapped into equity) during 2002 – 2004. Korea has 
provided complete details of the changes in the interest rates during the DHI workout and at the 
termination of the workout procedures, as well as  the dates and amounts of repayments by DSME 
debt principals.
10  
  As a result of such early repayment (or swap into equity as of 14 December 2000) by DSME, 
the workout debts of DSME have been dras tically reduced from KRW 1,095 billion as of 
31 December 2000 to KRW 34.9 billion as of 31 December 2003.  
  <Status of Workout Debt Repayments>  (In billions of KRW) 
 
12/31/2000 12/31/2001 12/31/2002 12/31/2003 
1,095.3 187.7 74.8 34.9 
 
 The EC argues that DHI obtained “gains on exemption of debts” of KRW 1,321,830 million 
and that, of this amount, KRW 173,153 million is to  be allocated to DSME. The EC argument is 
based on “DHI 1999 audited accounts.”   However, these “debt exemption gains” i ndicated in the 1999 audited accounts were 
calculated based on the assumption that the origin al debt restructuring terms under the MOU of 
20 January 2000 would continue to  be implemented according to those terms. Because the MOU debt 
restructuring terms have not been implemented as or iginally agreed, the EC’s benefit calculation is 
flawed even under the EC’s own ‘benefit’ calcula tions. Furthermore, the “gains” as used in 
accounting theory cannot be considered as equivalent  to the legal concept of “benefit” within the 
meaning of Article 1.1(b) of the SCM Agreement .  
                                                     
 
9 See Exhibit Korea – 151 , Korea Development Bank’s Notices on termination of DSME workout.  
10 Exhibit Korea - 77, Repayment of Debt Principal by DSME (Annex V Attachment 3.1(21)).  WT/DS273/R 
 Page G-167 
 
 
  Once again, it can be seen that the EC is ma king an argument that any debts restructured 
during proceedings subsequent to insolvency are per se  subsidies. The EC’s purported calculation of 
the subsidy amount consists of the full debt load wit hout any restructuring. Of course, this is not in 
accord with the legal principles of any market economy, including those of each and every EC 
Member State. The EC has completely failed to pr esent to this Panel any workable model based on 
either normative or empirical standards for the proper amount of debt to be restructured. Of course, as 
a matter of logic and as supported by the evidence, by  the time there is an insolvency, the debt has 
been valued by the market. Restru cturing it is merely reflecting on th e books the reality of the market 
place. There was no new equity being inserted into  these companies; it was merely a matter of 
allocating the value as between the various classes of financial instruments. The only question is 
whether these companies were kept in existence as  going concerns rather than being terminated and 
sold off for scrap to obtain a higher value for the creditors. And the EC has presented no evidence that 
any creditors, either domestic or foreign or of  any class of creditor favoured such a result. 
 
 (d) Re-allocation of negative net worth 
  Please refer to Korea’s response to the Panel Question 122.  
143. Is it the EC’s argument that the tax exem ption was determinative in the decision to 
maintain Daewoo’s shipbuilding operations as a goi ng concern, rather than liquidating them? If 
so, where is this reflected in the Arthur Andersen/Anjin report or in other documentation 
before the Panel? 
 
Comment on the EC’s new factual information
 
 
 In Exhibit EC - 148, PwC argues that tax consequences of the DHI restructuring would result 
in lower values for the going concern scenario. B ased on this view, the EC argues that the tax 
exemption was a determining factor in the decisi on to maintain DHI’s shipbuilding operations as a 
going concern, rather than liquidating them.   However, as elaborated by Korea in its respon se to Panel Question 116, the EC’s “core claim” 
based on Article 46 of the Corporate Tax Act does not make sense, as the proposed DHI spin-off was 
to be made at book value (i.e., without valuation at the time of spin-off). Arth ur Andersen’s analysis 
of the going concern value had also been based on th e assumption that the spin-off would be made at 
book value and, thus, no tax liability would arise under Article 46 of the Corporate Tax Act in 
connection with the DHI spin-off. In that regard, c ontrary to the EC’s allegation, there were no tax 
consequences that Arthur Andersen had to consid er in its analysis of DHI’s going concern value. 
  As indicated in Korea’s response to Panel Ques tion 116, even if the DHI restructuring had, in 
theory, entailed a special additiona l tax, it was the remaining DHI as the “transferor” of the assets, not
 
DSME that was responsible for any such liability under the Corporate Tax Act (Articles 2 and 99).11  
 
 Therefore, the going concern value of DHI could not have been affected by such tax 
consequences (if any), because DHI’s going concer n value was to be calculated on the basis of 
estimated cash flows from the shipbuilding and machinery operations of DHI (i.e., DSME and 
DHIM).   
                                                     
 
 11 Exhibit Korea – 121, Articles 2 and 99(1). Moreover, the remaining DHI’s obligation to pay the 
special additional tax was to be deferred (i.e., the remaining DHI did not have to pay the tax following the spin-
off) by virtue of Article 99(11) of the Corporate Tax Act, as the terms of DHI spin-off as assumed by Arthur 
Andersen satisfied all the criteria set out in Article 46 of the Corporate Tax Act.  WT/DS273/R 
Page G-168  
 
144. Para. 162 of Korea’s second oral statemen t refers to creditors rejecting the initial DHI 
workout proposal. Were such creditors included in the EC’s claim of government entrustment or direction? If they were entrusted or directed by GOK, why / how did they reject the initial 
workout proposal? 
 Comment on the EC’s new factual information
 
  Based on the Exhibits referred to in its respon se, the EC makes new arguments that distort the 
facts relating to the rejection by certain creditors of the proposed DHI workout plan.  
 As described in Korea’s First Written Submission
12, the DHI workout plan itself (i.e., spin-
off, debt rescheduling and debt-for-e quity swap) was rejected at the 3rd CCFI meeting held on 
24 November 1999. Attachment 10 to Korea’s Fi rst Written Submission also shows that Agenda 
Nos. 1, 2 and 3, which constituted key features of  DHI workout plan, were  rejected at the CCFI 
meeting. Therefore, the EC’s allegation that “the  general plan to restructure Daewoo-HI had been 
agreed to at the 3rd CCFI meeting” (para. 83) is false.13 The fact that the “ DHI restructuring plan” 
itself was rejected at that mee ting is also supported by the artic le from Seoul Economic Daily News 
(Exhibit Korea – 104) which clearly states that  the “proposed workout plan” was rejected. 
  Moreover, contrary to the EC’s allegation, the creditors who rejected the proposed workout 
plan included not only the investment trust companies, but also other financial institutions (mainly 
non-secured lenders). The investment trust companie s accounted only for 31.99 per cent of the total 
voting rights at the CCFI meeting
14, while the actual voting results at the 3rd CCFI meeting15 shows 
that the voting percentage of the dissenting creditors  was substantially greater than 31.99 per cent. In 
this regard, the article from Seoul Economic Daily Ne ws again confirmed that the issue was “the debt 
recovery ratios between the secured and non-secured creditors,”16 and therefore, was not confined to 
investment trust companies. 
  In its response to the Panel question, the EC failed to explain why these creditors had rejected 
the workout proposal if they were entrusted or direct ed by the Government of Korea. Instead, it tries 
to avoid this difficult question by focusing only  on the 4 trillion Won Daewoo CPs because this was 
an issue for investment trust companies which pur chased Daewoo CPs, but not necessarily so for the 
other financial institutions which also rejected the purposed DHI workout plan. 
  However, it is not clear what the EC is trying to establish by arguing that the investment trust companies objected to the treatment of the 4 trilli on Won CPs with the view that the Government 
(through KAMCO) would recognize the “clear inequities”
17 and that, “consequently,” the loan was 
purchased by KAMCO at [BCI:  Omitted from public version]  of its face value.18 First of all, with 
this argument, the EC admits that the investment trust companies were not directed or entrusted to 
accept the proposed DHI workout plan. Instead, accord ing to the EC, the investment trust companies 
rejected the proposed workout plan in order to dr aw the Government’s attention to their problem. 
  Second, the EC conceals the fact that it was almost one year later that KAMCO purchased the 
Daewoo CPs from the investment trust companie s (i.e., between September and December 2000).
19 It 
                                                      
12 See paragraph 351. 
 13 The EC relies on the ambiguous statement in Exhibit EC-55, but this must be read in the more 
specific context of the CCFI meeti ng described in Attachment 10 to Korea’s First Written Submission. 
14 Attachment 9 to Korea’s First Written Submission. 
15 See Attachment 10 to Korea’s First Written Submission. 
16 Exhibit Korea – 104. 
17 The EC response, paragraphs 86 and 87. 
18 The EC response, paragraph 88. 
19 See the last paragraph in Korea’s reply to Annex V Questions at page 60 (Exhibit EC-39).  WT/DS273/R 
 Page G-169 
 
 
is non-sensical to argue that the investment trust co mpanies’ rejection of the DHI workout plan that 
took place on 24 November 1999 was the reason fo r KAMCO’s purchase of Daewoo CPs that took 
place 1 year later.  
145. The EC requests an adverse inference regar ding Korea’s alleged failure to provide a 
copy of the workout plan / report submitted by KDB on 24 November 1999. Please comment on 
the explanation set forth at paras 194 and 195 of Korea’s second oral statement. If the EC still 
maintains its request, what is the legal basis for that request? Why does the EC consider that 
Korea should have made this report available to the EC / Panel earlier? 
 Comment on the EC’s new factual information
 
  Korea still cannot understand the basis of the EC ’s request for adverse inferences and what 
the EC tries to establish through the alleged adverse inferences.  
 It appears that the EC assumes that “the wor kout plan” existed in the form of a separate report 
similar to the report prepared by Arthur Ander sen. This is not true. The KDB proposed a workout 
plan, based on the Arthur Andersen report, only in the form of “agenda” submitted to the CCFI 
meetings. Attachment 10 to Korea’s First Written Submission clearly shows what the workout plan 
was actually meant to be. In fact, the agenda  No. 1 through No. 7 tabled before the 3
rd CCFI meeting 
constituted the “workout plan” proposed by KDB. There was no separate report containing the DHI 
workout plan. 
  On the other hand, in its very First Written Submission, Korea made clear that KDB had proposed a “workout plan” (i.e., agenda submitte d to the CCFI meetings) based on the Arthur 
Andersen report and that the initial workout plan ha d been continuously revised by KDB as the lead 
bank and proposed to the CCFI meetings in the form of agenda.
20  Korea stated that the basic features 
of the workout plan had been finalized through th e third, fourth and sixth meetings of the CCFI.21 In 
this way, Korea made the existence of workout plan known to the EC and never concealed it. 
  Therefore, the EC’s allegation that Korea re vealed the existence of the workout plan only 
after the EC had highlighted it, is inconsistent with  the submissions of Korea, and therefore must be 
rejected. 
 
158. (a) Is it the view of the EC that excess sh ipbuilding capacity exists only in Korea, or 
is there also excess capacity in other countries?  
 
 (b) If your view that excess capacity ex ists only in Korea, please explain.  
  (c) If your view is that there is excess capa city also outside of Korea, where and how 
much is the excess?  
  (d) Is there any excess shipbuilding capacity in the EC?  If not, what is the basis for 
this conclusion? 
 
Comment on the EC’s new factual information
 
  Korea notes that there is nothing in paragraph 55 of the OECD document in Exhibit EC – 151 
that confirms that Korean shipyards have massively expanded  as the EC claims. What the document 
states is that Korea has stepped up capacity “by im proving productivity at its yards, especially its 
newer facilities that started a more full range of  operations since the mid-1990s”. If the increased 
                                                     
 
20 Korea’s First Written Submission, paragraphs 351 – 353. 
21 Korea’s First Written Submission, paragraph 350. WT/DS273/R 
Page G-170  
 
capacity was achieved by improving productivity (for all Korean yards alike, restructured or not 
restructured), the excess capacity  is not caused by the alleged subsidies. Why would Korea have 
stopped productivity increases yielding lower costs,  as the EC asserts it should have, because of 
existing excess capacity in other shipbuilding countries? This makes no sense.  159. The Panel's written question 30 following the first meeting was as follows:   "In general, how much flexibility does a typical shipyard have to produce all or a broad range of ship types? What are the physical and other constraints on any given shipyard's 
potential product range? How impo rtant is prior experience to a shipyard's production cost and 
capability to build a particular type of ship? With reference to the above considerations, please 
describe the capabilities and experience of each EC shipyard that produces or is capable of 
producing some or all of the kinds of comme rcial vessels cited in your serious prejudice claim ". 
  Please present a summary of any informatio n already before the Panel, including the 
Annex V information, that is relevant to this po int but was not referred to in the EC's original 
answer to this question.  
Comment on the EC’s new factual information
 
 The Clarkson World Shipyard Monitor for May 2004 now submitted by the EC in Exhibit EC - 152 
confirms rather than rebuts Korea’s demonstration that yards do heavily specialize in specific ship 
types and size bands and that all yards do not build a full range or even a very wide range of vessels. 
Exhibit Korea – 152
 hereto reflects some examples by way of  illustration of what is contained in 
Exhibit EC – 152 and confirms Korea’s position. Ther e is, therefore, not supply-side substitutability. 
 
160. Concerning the composite ship newbuildin g price index furnished by the EC, the EC 
indicates that major shipbuilding consultants al so maintain "more speci fic price information 
for particular ship types". In Attachment 2 to its answers to questions, the EC provides price information for two sizes of tankers and for eight sizes of container ships. 
  (a) Is this the "more specific" info rmation to which the EC refers?  
 
 (b) Why does the EC show the particular breakouts that it does? Do other 
breakouts exist for these pr oducts? Please explain.  
 
Comment on the EC’s new factual information
 
 
 It is a matter of opinion only as to what is the most commonly used source of newbuilding prices. There are many sources other than the “Clark son World Shipyard Monitor” referred to by the 
EC such as electronic databases, brokers, broker repo rts and other indices as indicated by Korea in its 
response to Panel Question 173.  
 In addition, Exhibit EC - 152 does not supply price series indices for all ship types covered by 
other analysts and at the very least cannot, therefore, reasonably be described as the most comprehensive source. The table provided by Korea in its response to Panel Question 173 d) shows 
that both Lloyds Shipping Economist and Drewry pub lish prices series in their routine publications 
which include ship types and sizes not covered by Clarksons, i.e. Chemical Tankers, Refrigerated 
ships (Reefers), General Cargo, LPG (more size options offered), Bulk Carriers (additional size 
options) and containers (more size options). For th is reason alone, these other sources of ship prices 
must also be considered for th e purpose of the present proceeding. 
 
161. The EC presents indices of estimated Ko rean production costs versus prices in support 
of its argument that there is price suppression/depression. The EC indicates that its consultant,  WT/DS273/R 
 Page G-171 
 
 
FMI, prepared the cost estimates, taking into  account various known cost trends and cost 
advantages of the Korean yards. The EC in its an swers to questions following the first meeting 
provided a description of the methodology used by  FMI to prepare these estimates. The EC also 
indicated that, should the Panel so request, it would furnish the detailed underlying data. Is it the view of the EC that a graphical presentation of price indices, along with a description of 
methodology, constitutes prima facie evidence of evolution in Korean shipbuilding costs? Please 
explain. 
 
Comment on the EC’s new factual information
 
 
 In connection with Exhibit EC - 156 (FMI ’s “cost modelling deta ils Angelicousis LNG 
Tanker at Daewoo”), the EC does not explain the basis and methodology of FMI’s cost estimation. 
The spreadsheet shows various cost categories and relative percentages of cost allocation between 
cost categories, but it fails to explain why and ho w such relative percentages between cost categories 
represent those of DSME. 
 
 Korea has already shown that the EC’s cost estimation is unr ealistic. In Exhibit Korea – 108 
(Cost Analysis Report), KPMG has verified the actual costs incurred by DSME for production of 
LNG carriers and confirmed that FMI’s cost estimation was simply a fiction. FMI’s cost analysis is nothing but an “estimation” from various sources including EC yards and cannot replace the actual costs. Moreover, it is based on FMI’s experience with  the shipbuilding activity of European shipyards. 
It is non-sensical to argue that such a fictitious an alysis can provide any plausible estimate of Korean 
yards’ costs.   Interestingly, Exhibit EC - 156 concerns the “Angelicousis” project for which DSME has not even begun any production work and, therefore, has not yet incurred any actual cost of production. 
Nonetheless, the EC claims that it already knows what the DSME cost would be. 
  In this situation, it is ridiculous for the EC to state that these cost analysis have led it to 
“conclude” that prices offered by Korean yards are not  in line with costs of production, and that this 
gap is widening.   
 In this regard, Exhibit EC - 156 demonstrates that the EC’s argument on suppression or 
depression is totally baseless and unrealistic, ra ther than supporting the EC’s claim. 
  Korea has observed a number of times how the EC has attempted to use anti-dumping theories to support it subsidies case and how ill they fit the treaty language. Now, in addition to trying 
to base their subsidization theory on a constructe d value approach, it may be observed from this new 
EC “evidence” that they have added the new oddity of apparently claiming that Korea is a non-market 
economy and trying to use the EC to develop a surrogate price.   
162. What specific evidence/examples are contai ned in the information before the Panel in 
support of the EC argument that prices at on e end of the product spectrum for a particular 
kind of ship influence prices along the entire spectrum? (For example, is there specific evidence 
in the information before the Panel that a down ward movement in very large container ships 
brings about commensurate downward movement  in all smaller sizes of container ships?) 
 
Comments on the EC’s new factual information
 
 
 The quotation by the EC in its paragraph 144 does not respond to the Panel’s question. Indeed, as the EC’s citation clearly indicat es, the document deals with the geographical
 market and 
indicates that the impact on one part of the geographical  market is felt in the rest of the geographical  
market. That is totally different from stating that th e price of a particular kind of ship influences the 
prices along the entire spectrum of the like product ve ssels. Moreover, in any event, the statement by WT/DS273/R 
Page G-172  
 
the OECD Secretariat as referred to by the EC has been the subject of a specific disagreement entered 
by Korea and China.
22 
  In addition, the information presented by the EC itself in Exhibit EC – 152, page 8 of 
Clarksons World Shipyard Monitor for May 2004 issu e, demonstrates that prices of different sizes of 
vessels, contrary to the EC’s a llegations, do not move together.  
  The scale on both the graph on this page and al so Figure 1 in Exhibit EC – 146 also referred 
to, obscures the detail of price trends. The following table takes the ship prices from page 8 of Exhibit 
EC – 152 and shows the year-on-year percentage vari ations of prices for the different types and sizes 
of ships. 
  
Ship 1997 v 
1996 1998 v 
1997 1999 v 
1998 2000 v 
1999 2001 v 
2000 2002 v 
2001 2003 v 
2002 Apr 04 v 
2003 
VLCC – 300,000 dwt 1% 
-13% -5% 11% -8% -9% 21% 12% 
Suezmax Tkr – 150,000 
dwt 2% -15% -3% 24% -11% -6% 18% 14% 
Aframax Tkr – 110,000 
dwt 1% -16% -4% 26% -13% -3% 19% 16% 
Panamax Tkr – 70,000 dwt  -16% 0% 16% -11% -2% 20% 9% 
Handy Tkr – 47,000 dwt 0% -17% 0% 13% -11% 3% 17% 16% 
Capesize BC – 170,000 
dwt 4% -19% 6% 16% -11% 1% 32% 17% 
Panamax BC – 75.000 dwt 2% -26% 10% 2% -9% 5% 26% 30% 
Handymax BC – 51,000 
dwt -2% -20% 11% 2% -10% 3% 26% 21% 
Handysize BC – 30,000 
dwt -5% -21% 9% -3% -3% 3% 20% 14% 
LNG 5% -17% -13% 5% -4% -9% 3% 9% 
LPG -9% -6% -3% 7% 0% -3% 9% 11% 
Container - 725 teu  -21% 4% 0% -7% 0% 35% 9% 
Container - 1,000 teu  -10% -3% 3% -14% 0% 19% 19% 
Container - 1,700 teu  -16% -6% 9% -14% -2% 21% 18% Container - 2,000 teu  -12% -3% 13% -11% -4% 
13% 8% 
Container - 2,750 teu  -18% 6% 14% -17% -5% 25% 14% 
                                                      
 22 Korea refers to Document C/WP6/SNG/M(2004)1/REV.1 of 4 June 2004 which contains a revised 
summary record of the OECD meeting of 29 – 30 March 2004 and provides at paragraph 14 that: 
 
Korea and China made it clear that they do not agree with one of the 
characteristics of the shipbuilding market described in paragraph 12(b), 
C/WP6/SNG(2004)2, which is not agreed among the SNG members. 
Reference is also made to paragraph 17 of OECD Document C/WP6/SNG/M(2004)2 of 5 July 2004 
containing the summary record of the OECD meeting held from 27 to 28 May 2004 which refers to the following statement by China: 
The Delegate of China indicated that the effect of an individual transaction on 
other transactions should not be overstated, because a single shipyard’s influence is limited (due to the comp etitive nature of the market). Also, 
transactions are all different, and shipbu ilding prices are not transparent in the 
market.  WT/DS273/R 
 Page G-173 
 
 
Ship 1997 v 
1996 1998 v 
1997 1999 v 
1998 2000 v 
1999 2001 v 
2000 2002 v 
2001 2003 v 
2002 Apr 04 v 
2003 
Container - 3,500 teu  -16% -10% 9% -13% -8% 29% 13% 
Container - 4,600 teu      -13% 26% 15% Container - 6,200 teu      
-17% 18% 15% 
RoRo 1,200 - 1,300 Lm   10% -7% -5% -3% 19% 9% 
RoRo 2,300 - 2,700 Lm   8% 2% -6% 0% 6% 9% 
         
Index -2% -15% -4% 7% -5% -2% 12% 12% 
Note: Tkr = tanker, BC = bulk carrier, LPG = Liquefied Petroleum Gas, Lm = Lane metres 
 
  The maximum and minimum percentage price ch anges are shown in bold and highlighted in 
yellow. It can be seen that there is a huge variety of differing trends between both ship types and 
different sizes of ship, which is consistent with the fact that there are a range of factors which influence price as stated by Korea previously.
23  For example: 
 
• At end 1999 compared to end 1998 : The largest (VLCC) tanker prices had dropped by 5 per 
cent whilst the two smallest (Panamax & Handy ) showed no change; The largest bulk carrier 
had risen  by 6 per cent whereas the Handymax had ri sen by nearly double that at 11 per cent; 
the 3,500 teu container ship price had dropped  by 10 per cent whereas the 725 teu and 2,750 
teu prices had risen  by 4 and 6 per cent respectively. 
 
• At end 2002 compared to end 2001 : The largest (VLCC) tanker has dropped by 9 per cent 
whereas the smallest (Handy) has risen by 3 pe r cent; the Capesize Bulk  carrier had risen by 
1 per cent whereas the strongest rise was shown by the Panamax bulk carrier which had risen 
by 5 per cent; the two smallest (750 teu and 1, 000 teu) container ship s had shown no change 
whereas the price for the largest (6,200 teu)  had dropped by 17 per cent; the price for the 
larger Ro-Ro remained stable whilst that of  the smaller vessel dropped by 3 per cent. 
  Virtually every year shows examples of diffe rences like these. There are also certain common 
overall trends often reflecting world-wide macro-ec onomic factors, e.g., all prices showed decline 
between end 1997 and end 1998 and all prices showed  an increase between end 2002 and end 2003 
but even then the strength of movement varied from –6 per cent to –26 per cent from 1997 to 1998 and from 3 per cent to 35 per cent from 2002 to 2003. In other years the trend is mixed with some ship series showing prices rising and others showing prices dropping but still with significant differences 
in absolute percentage change.  
 
 To clarify that this variability has existe d across the whole time period, the maximum 
variations from the 21 price series for each of the yearly comparisons are:  
• 1997 v 1996: -9% to +4% 
• 1998 v 1997: -6% to –26% 
• 1999 v 1998: -13% to +11% 
• 2000 v 1999: -7% to +26% 
• 2001 v 2000: -17% to 0% 
• 2002 v 2001: -17% to +5% 
• 2003 v 2002: 3% to 35% 
 
                                                     
 
23 Korea Exhibit 70, Korea response to Panel Question 124 and 125. WT/DS273/R 
Page G-174  
 
 These are enormous variations that cannot be dismissed on the basis of gross, macro-level 
pricing charts. As Korea has pointed out in many  instances regarding the EC's assertions, such a 
superficial level of analysis as the EC offers  here would never be accepted from a domestic 
investigating authority and it follows that the Pa nel cannot base its own decision on such misleading 
generalities. The EC's generalized asserti ons conceal more than they reveal. 
 
163. (a) For each ship category, in prac tical terms how substitutable are different 
sizes/configurations (containment syst ems, in the case of LNGs)? Are there 
specific evidence/examples in the inform ation before the Panel? In addition, 
please furnish relevant portions of the industry publications discussed at the 
second meeting. (For example, one industr y expert referred at the meeting to 
one of the industry publications that contains information relevant to cross-price elasticities). 
  (b) Can the EC cite specific instances/situ ations in the information before the Panel 
where a shipowner has purchased and u sed a larger-than-usual ship for a 
particular run, due to a relatively low price for the larger ship? 
 
Comments on the EC’s new factual information
 
  Korea refers to its comments above as regards the factual information submitted by the EC in 
response to Questions 159 and 162. 
  The EC attempts to allege that the estab lishment of cross-elasticities must be assessed 
independently from demand factors because alle gedly demand has been disconnected from price 
because of overcapacity. It then tries to assert that  there is cross price elasticity by comparing the 
price development for one single  type of tankers (Panamax tankers) by comparing the price 
development for this single ship type against the development of a price index for a non-specified scope of vessels but which seems to cover many di fferent ship types incl uding those that are not 
concerned by the present proceeding. In fact, however , Korea has argued all along that several factors 
contribute to the price level for vessels including demand.
24 At the same time, it is a gross 
exaggeration to assert as does the EC that for the pu rpose of determining price elasticities, the demand 
factor must be neutralized because of the exis tence of overcapacity. Thus, for the example of 
Panamax tankers chosen by the EC itself, pages 4 and 5 of Exhibit EC – 152 show an increase in 
orders from 2002 to 2003 and a corresponding in crease in prices, alleged overcapacity 
notwithstanding.   
 The demonstration by the EC for one single vessel  type is neither a complete response to the 
Panel’s question nor representative of the vessels con cerned by the present proceeding. This is true all 
the more because significant confusion has always existed in the EC’s definition of the product and 
chemical tankers concerned by this proceeding and it is not clear to what extent the Panamax tankers 
referred to in Exhibit EC – 152 coincide with the co mbined product and chemical tankers that the EC 
claims to be the subject of the present proceeding. In addition, however, there are significant flaws in 
the EC’s presentation, i.e.:  
 
• The EC has used the example of a Panamax ta nker which it cites as having ‘little change in 
demand but significant movement in price’ but this is not corroborated by the data on Pages 4 and 5 of the Exhibit EC – 152.  
 
• Page 4 and 5 of Exhibit EC – 152 show that for Panamax tankers, the ordering trend for Apr 
2004 (year to date orders) against last year is shown as ‘ down by 19 per cent ’ and the order 
                                                     
 
24 As last reiterated in Korea’s response to Panel Questions 124 and 125.   WT/DS273/R 
 Page G-175 
 
 
volumes in both dwt and cgt25 in 2003 are shown as, respectively, ‘77 per cent and 82 per 
cent up’  on the levels of 2002. This does not in dicate a condition of constant demand.  
 
• Figure 2 shows a line which is by no means constant26 and moreover month on month order 
levels changes are not usually treated as significant trends in themselves. 
 
• The trend is shown over a short time period of one year, during a period where all prices were 
seen to be rising to varying degrees. 
 
• In Figure 3, the EC plots the Panamax price against the FMI newbuilding price index, to try 
and demonstrate a correlation with overall shi pbuilding price movements. The detailed basis 
of construction of the FMI index is not known,  but Korea has indicated before that price 
indices need to be used with extreme care. To  demonstrate this, attention is drawn to the 
Clarkson’s price index on Page 8 of Exhibit EC – 152, where at the end of 1996 and the end 
of April 2004 the index is shown to be the sa me (at 133) but the prices for the various ship 
series are in fact significantly different – the most extreme being the Capesize bulk carrier at $39 million at the end of 1996 and $56 million at  the end of April 2004. The correlation (or 
otherwise) of a particular ship series with a price index is not an indication that price 
movements or levels are constant within or across ship types and sizes.  
 
166. (a) For each of the three ship types, wh at specific evidence/examples are there in the 
information before the Panel (in addition to the domestic complaint by Samsung 
against Daewoo) that the restructured shipyards were the price leaders among 
the Korean producers? 
  (b) What evidence is there in the informat ion before the Panel in support of the EC 
argument that the alleged restructuring subsidies enabled the restructured yards to drive down the prices charged by all other Korean shipyards?  
 
 (c) What has been the annual financial performance of the other (non-structured) 
Korean shipyards since the restructuring? 
 
Comments on the EC’s new factual information
 
 
 Acknowledging that there is no responsive inform ation currently before the Panel, the EC 
attempts to rely on new information in Exhibit EC – 152 that was not already before the Panel. The 
EC thereby fails to appropriately and accurately r espond to the Panel’s question. In any event, Korea 
notes that the data shown at page 16 of Exhibit EC – 152 shows only the total  output in 2003 or total  
orderbook as at April 2004 for each yard (recognizing again the near uselessness of the orderbook for 
calculating annual market shares). It therefore does not provide any information regarding the 
respective market shares in each of the different ship  types as requested by the panel. Because the data 
is across ship type, the ranking is based on the cgt figure, which allows the workload of different 
types of ships to be aggregated. This gives no actual reflection or measurement, however, for the 
respective market position of the restructured yards for the ship types subject of the present dispute. 
Most importantly, it gives no support at all to any argument that the alleged subsidies  resulted in price 
leadership. Indeed, it demonstrates that the EC ha s abandoned this critical causal link. Hence, as 
Exhibit EC – 82 as well gives no evidence on an alleged price leadership specifically of the 
restructured yards and, in particular, in a causal fashion that somehow affected the un-restructured 
                                                      
25 Information on page 5 of the Exhibit. 
26 The source of this monthly data does not seem to be in this Exhibit EC – 152. WT/DS273/R 
Page G-176  
 
Korean yards in a special manner of some sort, the EC has failed to provide any evidence as requested 
by the Panel.
 27 
  Korea refers to its comments to the Pa nel Question 162 regarding the EC’s claim in 
paragraph 162 that low prices have a contagious eff ect in shipbuilding. On a point of detail, the EC 
also makes an error in interpreti ng the extract from Exhibit EC – 82 when it asserts that three of the 
five big chaebols referred to are restructured ship yards. The reference to the 5 big chaebols is to 
Hyundai, Daewoo, Samsung, Hanjin and Halla, of which only 2 are (the antecedents of) restructured shipyards – Daewoo and Halla.  168. The parties disagree as to whether APRG s constitute export credit guarantees and 
whether PSLs constitute export credits. Plea se provide any documentation (either from the 
shipbuilding industry, the OECD, or any other so urce) that you consider supports your position 
on these issues. 
 Comment on the EC and US new factual information
 
  The EC cites the so-called Knaepen Report to support its narrow reading items (j) and (k), 
first paragraph, of Annex I to the SCM Agreement . However, this illustrates the issue of the 
impropriety of making the WTO subservient to th e OECD for interpretation of WTO treaty language. 
In its response, the EC acknowledges that the OECD was silent on the point of calculating premia at 
the time of conclusion of the Uruguay Round. But the EC offers its interpretation  of a later OECD 
agreement to the effect that only reference to the buyer-country is u sed and therefore this later OECD 
agreement should be binding on the interpreta tion of items (j) and (k), first paragraph. 
  First, Korea does not agree with the interp retation put by the EC on the Knaepen Package 
which merely sets guidelines for determining premia in the case of an export country risk but does not 
state what other risks can occur in  case of an export credit. There is nothing in the language that 
compels a limitation in terms of risk  factor or recipient of the fac ility. The EC also ignores the fact 
that, as Korea demonstrated in its answer to Question 168, many WTO Members (including a number 
of EC Member States) issue just the sort of credits and guarantees as provided by KEXIM. These take into account a number of risk factors, but explicitl y state that they take into account buyer political 
factors regardless who the direct recipient of the inst rument is. As was also demonstrated by Korea in 
its answer, there is no limitation based on whom is th e recipient of the credit or guarantee. Indeed, it 
would create a huge loophole to do otherwise. In light of the EC’s stance and the evidence Korea has submitted, Korea must once again ask the question: is  the EC admitting on the record that it considers 
its Member States to be offering prohibited export subsidies? 
 
 Second, even if one were to agree arguendo  with the EC’s interpretation of the Knaepen 
Package in the context of the OECD, such an OE CD interpretation cannot bind the whole of the WTO 
Membership. It illustrates perfectly the fallacy of the EC’s approach. Accord ing to panels and the 
Appellate Body, the narrow exception of item (k), second paragraph, applies to the OECD 
Arrangements even though the OECD is not menti oned. This has been both troublesome and 
controversial given the narrow base of OECD Membersh ip. However, to try to claim that this narrow 
group can self-define on behalf of the whole WTO Membership the meaning of other WTO  treaty 
terms such as those in items (j) and (k), first pa ragraph, is unacceptable. The WTO is not subservient 
to the OECD. Whatever might be the OECD’s role under the narrow exception of item (k), second 
                                                     
 
 27 To avoid any possible confusion, Korea would like to  clarify that the column s headed Capacity* at 
page 16 of Exhibit EC – 152 is not an assessment of capacity in accordance w ith OECD accepted guidelines. 
The footnote qualifies that the first three columns provide details of the number of building berths and docks and maximum length of these, the fourth column is the largest individual vessel built at the yard measured in 
gross tons since 1991, and the fifth column is the maximum annual output in CGT since 1991 which can still be 
considerably less than the capacity.
  WT/DS273/R 
 Page G-177 
 
 
paragraph, that is the extent of its lega l authority with respect to the WTO treaty.28 The OECD’s remit 
does not in any manner go to defining the WTO treaty terms in a manner binding on the DSB and the WTO Membership.    Furthermore, without some sort of dispute resolution mechanism within the OECD, there is 
simply no basis for stating that the OECD has assi gned a certain meaning to a term. The EC and its 
Member States do not control the interpretation of OECD provisions. If another OECD Member such 
as Korea disputes the interpretation of OECD langua ge being offered by another OECD Member such 
as the United States or the EC Member States, then this Panel cannot simply take the EC’s word on it 
for what the OECD Arrangement provides. That is  one of the many reasons why the Panel must 
interpret such terms as “export credits” or “export credit guarantees” on the basis of their ordinary 
meanings, not on a self-serving interpretation of  the OECD Arrangement offered by the EC. 
  The United States submits some responses fro m the US Ex-Im Bank in response to the 
Panel’s question. Korea notes that  the US takes a much narrower a pproach to defining terms than it 
has in other contexts in the WTO.
29  But, perhaps not -- Korea notes th at the response is quite strictly 
phrased as that of the US Ex-Im bank and not the US government as a whole. The submission 
concludes: “Because the Ex-Im guarantee covers the ri sk of the US exporter, rather than the foreign 
buyer, Ex-Im does not consider this program to be  an export credit within the meaning of the OECD 
Arrangement.” (Emphasis added) This answer may be all that Ex-Im is le gally permitted to expound 
upon, but it is not responsive to the Panel’s question.  It also illustrates the difficulty with the EC’s 
response as well. The question was whether it is an export credit within the meaning of the WTO 
treaty, not the OECD Arrangement . The US answer is illuminating, but more for what it does not say 
than what it does.   
173 (a) For each of the three ship types at issue in this dispute, how are ship data 
normally maintained by the industry, and by industry analysts?  
  (b) In particular, are these three categori es of ships recognized and used routinely 
for purposes of industry analysis?  
  (c) If so, how are they defined, and for what purposes are these categories used?  
 
 (d) When analysts report on pricing tre nds, do they normally refer to prices for 
each category as a whole, or for subcate gories thereof, broken out, for example, 
by size and/or other characteristics.  
 
 (e) If they provide a range of pricing in formation at different levels of aggregation, 
how are these different data series used?  
  (f) Please provide documentation (including  in particular relevant excerpts from 
the published industry reports discussed at the second meeting) showing examples of the various breakouts to which you refer. 
 
                                                     
 
 28 Korea also notes that extreme caution must be  exercised on this i ssue of what the OECD 
Arrangements mean. Korea has had to illustrate to the Panel a number of instances when the EC has cited documents that do not reflect a consensus within the OECD. Even worse, the EC has attempted several times to 
cite OECD Secretariat language that the EC would (at le ast in instances when it is convenient) have the Panel 
refer to as controlling interpre tations of WTO treaty language. Often it is no t even clear if it is an official OECD 
Secretariat view or that of some individual staff me mbers. Certainly OECD Secretariat views cannot be 
considered controlling; indeed, regarding the WTO treaty, they cannot be considered authoritative. 
29  See Korea First Submission, para. 275, footnote 177, citing: www.fas.gov. itp.wto.disciplines.htm. WT/DS273/R 
Page G-178  
 
Comments on the EC’s new factual information
 
  Lloyd’s Register in Exhibit EC – 155 groups their ship type categories of:  
• ‘Chemical/oil products tanker’ under the basic gr ouping of Chemical vessel s. It is clear from 
this that it is the intention that this category would comprise vessels with chemical capability 
and hence an IMO Chemical Class.
30  
 
• ‘Oil products tankers’ under the basic groupi ng of Oil along with Crude oil tankers. 
 Additionally, it should be noted that Clarksons, in  their publications and databases which are referred 
to by FMI (including Exhibit EC – 152), classifi es its oil and chemical tanker data as follows: 
 
• Tanker  - refers to an uncoated vessel, i.e. cargo tanks are not coated  
• Product tanker  – refers to a coated vessel, i.e. cargo tanks are coated 
• Chemical and oil carriers  - refers to vessels with some form of IMO grade tanks (IMO I to 
III) 
  It is clear that these two reputable industry data sources, submitted as Exhibits by the EC, 
both consider vessels with any chemical capability to be a separate category to oil tankers and 
specifically to products tankers.  
  The EC and FMI have, however, chosen to i gnore this and to try to group together some 
vessels with chemical classification with oil products  tankers. Thus, they have artificially separated 
some chemical vessels from others and
 separated oil products tankers from other oil tankers such as 
crude tankers. Their categorization and analysis do es not therefore reflect the main industry sources 
that they have, themselves, identified here. The classification used by FMI and the EC does not, 
therefore, broadly follow this taxonomy as claime d, and in the case of  product/chemical tankers 
actually cuts right across it.   The above comments make it clear that the ship price series referr ed to by the EC in Exhibit 
EC – 152, do not include price trends for chemical vessels.  
  The EC also erroneously describes the price i ndex published in Exhib it EC – 152 on page 8 
‘Shipbuilding Price Trends’ as one relating to the average movement of tankers and bulk carriers 
when it is in fact constructed from price moveme nts on a wider range of ship types including, as 
confirmed by Clarksons, tankers, bul k carriers, container ships and other dry cargo ships. Korea’s 
previous comments on the caution required when using pr ice index data are corroborated by this fairly 
basic error made by the EC and its advisors who see m, in fact, to place such store on this one data 
source to the exclusion of others.  174. Korea argues that demand should be measur ed in numbers of vessels, and/or workload 
years (i.e., order backlog) rather than compensa ted gross tons of new orders. The EC responds 
that CGT is more accurate as a measure of s upply and demand, and that even measured in 
workload years, demand trends are as represented by the EC.   (a) Could each party explain the technical differences between the two measures, 
and provide further detail as to why it believes its preferred measure represents 
a more accurate picture of demand than the other. 
 
                                                     
 
 30 Korea has already noted that it is always necessary to be alert to the possibilities of anomalies caused 
by data input errors or misreporting.  WT/DS273/R 
 Page G-179 
 
 
 (b) Which measure is used by industry analysts and the industry when analyzing 
demand trends?  
  (c) If both are routinely used, please ex plain the circumstances in which they are 
used, and provide examples from indepe ndently prepared sources (the published 
industry reports discussed at the meeting, OECD documents, etc.). 
 
Comments on the EC’s new factual information
 
  The Exhibits referred to by the EC do not s upport the conclusion drawn by the EC. Whilst the 
EC in referring to Exhibits EC – 152 and 155 has high lighted that there are a range of units provided 
which are used according to the requirements of  the analysis, (as stated also by Korea
31), there is a 
significant difference between stating that CGT is almost solely used in relation to shipbuilding  and 
inferring that it is also the only measure used in shipbuilding. The EC makes reference to the OECD 
use of the measure in capacity evaluation in Exhibit EC – 151, which is entirely appropriate, as it 
relates to capacity and cross sector capacity-demand balance. However, it makes no reference to the 
OECD’s use of other measures such as, for example,  in their own shipbuilding information statistics 
which show numbers of vessels, gross tons and CG T as is demonstrated in the OECD statistics on 
ship production, exports and orders in 2003 (D ocument C/WP6/SG(2004)5 of 2 May 2004 of which 
excerpts are submitted herewith in Exhibit Korea – 153 ). 
 
 The EC is wrong in paragraph 189 to infer from its  reference to Exhibit EC – 151, that ‘The 
number of ships is of limited statistical significance in  statistical analysis of either the shipping or the 
shipbuilding industry….’. For example: it does not  seem to recognize that one of the two main 
elements of shipbuilding demand – replacement de mand – has to be based on an analysis of the 
numbers of ships likely to be taken out  of service over a given time period.  
 
 Any analyst recognizes that there is a huge difference between a shipyard that has an 
orderbook or annual output of 150,000 cgt comprising:  
• a single vessel e.g. 120,000 cgt cruise ship 
• 3 large crude oil tankers e.g. 316,000 dwt VLCC 
• 6 large oil product tankers e. g. 72,00 dwt product tankers 
• 12 small bulk carriers e.g. 30,000 dwt bulk carriers 
• a mix of more sophisticated ship types e,g. Ro-Ro, cable layer, ferries 
 
All of the above options could equate to the same cgt value but a very different workload or order 
portfolio.   
175.  In response to EC arguments concerning ma rket share as a factor in price leadership, 
Korea variously states that market share does not demonstrate price leadership, but also that 
Korean yards' market shares are too small for them to be able to influence prices. Both sides 
thus seem to view market share as somehow relevant to the question of price leadership. 
 
 (a) How (on the basis of what sort of  concrete data and analysis) can price 
leadership be determined/established?  
 
 (b) What role in such an analysis would levels and trends in market shares play?  
  (c)  How large a market share would a give n market participant need to be able to 
exercise price leadership. 
                                                     
 
31 Korea’s response to Panel Question 173 b). WT/DS273/R 
Page G-180  
 
  Page 16 of Exhibit EC – 152 refers to capac ity but, as mentioned in Korea’s comments to 
Panel Question 166, not in any terms that are used by the OECD. In addition, any reference to existing 
capacity does not mean that there is  any excess capacity as such that would explain, as the EC tries to 
portray, a fierce price competition among Korean shipyards triggering price depression or 
suppression, let alone prove that the subsidies themselves caused the price depression or suppression. 
Finally, the so-called capacity  shown in the relevant page is globa l capacity and not, as the EC tries to 
portray, capacity in the market sectors concerned  by the present proceeding . Hence, this data cannot, 
in any event, support the view that excess capacity caused price depression or suppression for containerships, product and chemical tankers or LNGs. 
 
 As mentioned above, paragraph 10 of the OE CD document supplied by the EC has been 
vigorously contradicted by Korea and China ( see Korea’s comments to Panel Question 162).  
  Finally, whether in Exhibit EC – 82 or in Exhibit EC – 157, reference is made to the Korean 
shipyards as a whole and not to each of the three rest ructured shipyards indivi dually. Thus, the EC has 
not responded to the Panel’s question in particular in subsection (c) thereof. But, in addition, there is 
nothing in these documents to support the view that  the subsidies themselves caused price depression 
or suppression. Even if there were excess capacity  on the part of the Korean yards that did not 
undergo restructuring that would have brought these yards to lower prices (which Korea disputes), this would still not demonstrate that the subsidies granted to the allegedly restructured yards caused 
price depression or suppression, all the more that there are other large shipyards on the market that 
participated vigorously in the bids for the vessels concerned by this dispute.  
   
  WT/DS273/R 
 Page G-181 
 
 
 
List of Exhibits  
 
 
Exhibit Korea – 140  Letter by ABN-AMRO re country risk premium 
 
Exhibit Korea – 141   Anjin comments on the PwC analysis in Exhibit EC – 145 
 
Exhibit Korea – 142   “Background report – Detailed eval uation of key price movements” 
prepared by the EC’s consultant, FMI, in August 2003 
 
Exhibit Korea – 143   KEXIM report regarding the incompatibility between credit and 
corporate bond ratings  
 
Exhibit Korea – 144   KEXIM’s list of PSLs (excerpts) 
 
Exhibit Korea – 145   Corrigendum to the EC’s recalculation on Samho  
 
Exhibit Korea – 146   Corrigendum to the EC’s recalculations on DSME 
 
Exhibits Korea – 147   Corrigendum to the EC’s recalculations on Hanjin 
 
Exhibit Korea – 148   Corrigendum to the EC’s recalculations on HHI 
 
Exhibit Korea – 149   Corrigendum to the EC’s recalculations on Mipo 
 
Exhibit Korea – 150   PSL duration for each instalment disbursement 
 
Exhibit Korea – 151   Korea Development Bank’s Notices on termination of DSME 
workout 
 
Exhibit Korea – 152   Absence of supply-side substitutability as demonstrated in Exhibit 
EC – 152 
 Exhibit Korea – 153
  OECD statistics on ship productio n, exports and orders in 2003, 
C/WP6/SG(2004)5 of 2 May 2004 (excerpts) 
 NOTE
:  Exhibits containing Business Confid ential Information are shown in bold 
hereinabove. WT/DS273/R 
Page G-182  
 
  
ANNEX G-6 
 
 
COMMENTS OF KOREA ON THE RESPONSES BY THE 
EUROPEAN COMMUNITIES  TO SUPPLEMENTAL 
QUESTIONS 
 
 
(23 July 2004) 
 
 
II. TO THE EC 
 
A. APRG/PSL 
 
187. Please comment on Korea’s recalculations of benefit in Exhibits Korea - 91-102. 
 Korea’s comments
 
  Please refer to Korea’s comments on the Panel’s Question 136 to the EC at pages 16 to 23 of Korea’s submission of 9 July 2004.  
 
B. ALLEGED ACTIONABLE SUBSIDIES 
 
188. Concerning the question of whether the rest ructuring of Daewoo was subsidized, please 
provide a summary, based on all of the submission s of Arthur Andersen/Anjin and PwC, of the 
EC’s analysis and conclusions in respect of whether DHl should have been liquidated instead of 
restructured. In this summary, all relevant figures should be shown in tabular from, with cites 
and cross-references to the original Arthur  Andersen report of November 1999 assessing the 
value of DHI under various scenarios.  
Korea’s comments
 
 
 Nothing in Exhibit EC-158 (PwC’s Report) est ablishes that DHI should have been liquidated 
instead of restructured. Despite all of the anal yses which PwC attempted to build in its various 
reports, PwC continuously concludes that the goi ng concern value of DHI was greater than the 
liquidation value or that “it is not clear” that the going concern scenario, after taking into account the correction for the tax shield effect, woul d have remained the preferred solution. 
 
 In any event, PwC’s assertions are based on a mis-presentation of facts and an application of 
finance theory that makes no sense.  Exhibit Korea-141 (Anjin’s 2nd Response) clearly demonstrates 
that the restructuring of DHI was the best solutio n for the creditors. In addition, Korea submits as 
Exhibit Korea – 154
 Anjin’s 3rd Response, dated 23 July 2004, to the PwC’s report (Exhibit EC-
158). 
 
189. Concerning the Daewoo restructuring:  
  (a) Concerning the most recent PwC submission (Exhibit EC - 145), please explain 
in detail the statement at page 3 that the Anjin analysis indicated “that the  WT/DS273/R 
 Page G-183 
 
 
Enterprise Value of the restructured company is lower than the Enterprise 
Value of the company computed without debt restructuring”.  
 
 (b) What is “enterprise value” and how does it differ from “going concern value”?  
 
 (c) What is the significance of the fact that the “enterprise value” was lower under 
one set of calculations than under another? How if at all does it affect the central issue raised by the EC, namely the deci sion to restructure instead of liquidate 
Daewoo? 
 
 (d) What is the significance of Anjin’s reply in Exhibit KOR-7O that enterprise 
value was reduced under the analysis of the restructuring scenario from what it had been under the valuation of tile non-restructured company? What if anything is the significance that enterprise value calculations differed under two scenarios for the central issue posed by th e BC, namely whether it was better to 
liquidate
 or to restructure Daewoo? 
 
Korea’s comments  
 
 Please see Section III.2 of Exhibit Korea – 154  (Anjin’s 3rd Response) for detailed 
comments on the EC’s reply. 
 
 As explained in the above section, the EC is trying to mislead the Panel by concealing the fact 
that the debt-to-equity swap contemplated in the DHI restructuring reduced the enterprise value of 
DHI as a restructured company by increasing the We ighted Average Cost of Capital (the discount 
rate). Contrary to the EC’s allegation, Anjin (A rthur Andersen)’s calculation of the enterprise value 
was accurately made in accordance with the fina nce theory and there was no underestimation or 
overestimation.    Consequently, the EC’s allegation that Arthur  Andersen suddenly took into account the value 
of the remaining DHI’s assets in order to come up w ith a post-restructuring enterprise value that is 
higher than the pre-restructuring value, is totally without merit. Moreover, Korea has demonstrated, as 
supported by Anjin’s report (Exhibit Korea-141), th at the size of any recoverable amounts from the 
remaining DHI does not make any difference in th e comparison between the going concern value and 
the liquidation value, because the same estimated recoverable amount was incorporated into both the 
going concern value and the liquidation value. Please see also section III.2.2 of the Exhibit Korea- 
154, Anjin’s 3rd Response. 
 
 The EC argues that the liquidation value of [BCI:  Omitted from public version] was a 
“new fact”. However, this figure was not a “new” fact. As explained in Section III.1.1 of Exhibit 
Korea- 154  it was already presented in the 1999 Arthur Andersen Report (Appendix 11). This means 
that when the creditors consider ed all the valuations presented by Arthur Andersen in the 1999 
Report, they also considered the amount of [BCI:  Omitted from public version]  which was 
mentioned in that Report. 
  In fact, the 1999 Report, as analysed and cl arified by PwC and Anjin in their numerous 
reports submitted to the Panel as exhibits, clearly  demonstrates that this 1999 Report was a thorough 
and comprehensive report based on in-depth analysis  and gave the creditors reliable information in 
deciding on the restructuring of DHI. The 1999 Report  shows that, when it made its assessment, Anjin 
considered carefully all the relevant data a nd circumstances relating to the Korean economy, 
shipbuilding industry and individual shipbuilders, as well as the business plans of DHI, in order to provide an objective and independent assessment of  the real situation of DHI and of the various 
options available to the creditor financial instituti ons. Therefore, the creditor banks acted prudently WT/DS273/R 
Page G-184  
 
when they decided on the DHI restructuring ta king into account the findings and recommendations 
contained in the 1999 Report.  
190. The data presented in Exhibit KOR-108 show  interest and depreciation expense in the 
cost/profitability analysis for Daewoo. Please comment. How can this be reconciled with the 
EC’s assertion that these costs have not b een adequately reflected in Daewoo’s prices?  
 
Korea’s comments
 
 
 (i) With regard to paragraph 9 of the EC’s response:  
 Please see the document entitled “Response to Para. No. 9” in Exhibit Korea – 155
 
(KPMG’s Supplemental Response) for comments on this paragraph.   (ii) With regard to paragraphs  10 and 11 of the EC’s response: 
 
 Please see “Response to Para. Nos. 10 and 11” of Exhibit Korea – 155  for comments on 
paragraphs 10 and 11.   (iii)  With regard to paragraph 12 of the EC’s response:  
 As conceded by the EC itself, KPMG has comp ared the cost estimates or assumptions made 
by FMI with the real costs incurred by  DSME. KPMG has found that FMI’s cost 
estimates/assumptions were extremely higher than the real costs.    Of course, the real costs incurred by DSME were based on the debt situation of DSME after 
the debt restructuring was made, as the actual construction of the vessel was carried out after the debt 
restructuring in October 2000. Nevertheless, contra ry to the EC’s allegation, KPMG also confirms 
that, even if the pre-restructuring debt alleged by the EC had been taken into account, DSME could 
have offered the price of [BCI:  Omitted from public version]  that would still have yielded revenue 
and profit (see section 2.5.4 of Exhibit Korea- 108 (KPMG’s Cost Analysis Report)). KPMG has 
confirmed that the ordinary income from the thre e LNG carrier projects ranged from 18.8 per cent to 
28 per cent of the sales revenue. Under these circumst ances, even if the “pre-restructuring” debt 
servicing costs alleged by the EC were reflected in  the DSME’s cost base, the projects would still 
have generated a substa ntial ordinary profit. 
  This means not only that the FMI’s “cost estimation or assumption” bears no relationship 
with reality and that it is useless for providing an y sort of indication or guidance as regards DSME’s 
actual costs, but also that there was no causal link between the alleged subsidy granted to DSME and 
the actual prices for the LNG carrier projects.   (iv)  With regard to paragraph 13 of the EC’s response:  
 Please see “Response to Para. No. 13” in Exhibit Korea – 155 . 
  (v)  With regard to paragraph 14 of the EC’s response   Please see “Response to Para. Nos. 14 and 22” in Exhibit Korea – 155  for comment on 
paragraph 14. 
  (vi)  With regard to paragra phs 16 and 17 of the EC’s response: 
  Please see “Response to Para. Nos. 16 and 17” in Exhibit Korea –155 . 
  WT/DS273/R 
 Page G-185 
 
 
 (vii)  With regard to paragra phs 17 to 21 of the EC’s response: 
  Please see “Response to Para. Nos. 17 - 21” in Exhibit Korea– 155  for detailed comments on 
these paragraphs.  
 (viii)  With regard to paragraph 22 of the EC’s response: 
  Please see “Response to Pa ra. Nos. 14 and 22” in Exhibit Korea – 155  for comments on this 
paragraph.  
 (ix)  With regard to paragraph 23 of the EC’s response: 
  Efficiency is achieved not only by investment in facilities, but also by the increase in the 
productivity of the workforce, development of ef ficient management systems and other similar 
intangible improvements in the building process. Kor ean shipbuilders are known to be particularly 
efficient in terms of these latter factors. Shipyards which are efficient in this sense would have a low 
level of the “contract specific cost” which the EC includes in the category of  “other direct costs.” 
  Moreover, although it may be true that DS ME made some capital expenditures towards 
building LNG carriers, DHI began to make such inv estments already in the early 1990’s. Therefore, 
FMI’s assumption that DSME made all of capital expe nditures when it procured the LNG contracts in 
2000 is not correct. Furthermore, KP MG has confirmed that the actual cost of investment incurred by 
DSME was far lower than what has been assumed by FMI based on its experience with the European 
yards.   In any event, as a matter of principle, it is in correct to attribute to Korean shipyards the costs 
of the European shipyards as was done by FMI since th e cost structure of Korean and EC shipyards is 
totally different.   (x)  With regard to paragraph 24 of the EC’s response:   Again, in this paragraph, the EC is trying to impose the European yards’ cost model upon 
DSME. There is no point in this line of argument in  a situation where an independent accounting firm 
has confirmed that the cost structure suggested by FMI based on the European model was totally 
different from the actual cost structure of DSME.   Contrary to the EC’s allegation, KPMG did no t say that these costs did not exist at all in 
DSME. In Exhibit Korea-108, KPMG indicated that the cost items mentioned by FMI (i.e., “cost of 
investment” and “contract specific costs”) were included in the DS ME’s cost items under different 
account names (e.g., “repair expenses”  and “depreciation” for “cost of  investment”, “overhead costs” 
and “SG&A expenses” for “contract specific costs”). Please see section 2.5.3(3) b. and c. of KPMG’s 
Cost Analysis Report (Exhibit Korea-108). In additi on, KPMG has confirmed that, in any event, the 
amounts allocated by FMI to these costs were signi ficantly higher than the actual costs confirmed by 
KPMG from DSME’s accounts.  
  (xi)  With regard to paragraph 25 of the EC’s response:   The EC presents no plausible basis to s upport its doubts regarding the accuracy of the 
ordinary income margin as confirmed by KPMG. Howe ver, the ordinary income of DSME is a “fact” 
that cannot be denied by a mere suspicion. From the viewpoint of inefficient European yards, it may 
look unrealistic that the Korean yards are making such  high profits. But it should be noted that the 
outstanding performance by the Korean LNG yards h as been made possible by such a profitability. 
 WT/DS273/R 
Page G-186  
 
191.  Exhibit KOR-107 sets forth the results of th e court-ordered/supervi sed restructuring of 
Daedong. Presumably, such a restructuring had to proceed in accordance with Korean 
bankruptcy law. On what basis does the EC allege that nevertheless it involved a subsidy?  
Korea’s comments
 
 
 The EC fails to acknowledge that the decisions  to restructure a bankrupt company within the 
bankruptcy proceeding are made by the bankruptcy court, not by the creditors. Korea has demonstrated that, although a creditor bank may participate in the bankruptcy proceeding as members of the interested parties’ meeting, it can neither  take nor control the decision to restructure the 
company under the Korean law. In such a legal syst em, the EC fails to explain how the restructuring 
decision made by the bankruptcy court can constitute a subsidization by a creditor. 
  Moreover, the EC does not explain what “market”  it refers to, when it says that a benefit may 
exist if the terms of the restructuring are more favourable than what would be obtained in the 
“market” even within a bankruptcy proceeding. In the court receivership proceeding, the restructuring 
has to proceed in accordance with  the bankruptcy law. The bankruptcy court initiates the proceeding 
and approves the restructuring plan only when the going concern value of the company has been determined to be greater than the liquidation valu e. Other than this, the Korean bankruptcy law does 
not require the bankruptcy court to look into any “m arket” in approving the restructuring plan. Indeed, 
it does not make sense for the EC to suggest that a Korean bankruptcy court should try to find a 
benchmark for a restructuring procedure of a partic ular corporation where such argument is unheard 
of for any bankruptcy proceeding in any jurisdiction. In fact, there is no “market” that the court can 
refer to when it determines the restructuring plan, because the restructuring plan, in nature, has to be 
tailored to the specific situation of a particular bankrupt company.  
 In any event, the EC has failed to prove that  the terms of the restructuring of Samho and 
Daedong were more favourable than what would be obtained on the “m arket” (whatever that may be) 
within the specific bankruptcy proceeding for these companies. 
 C. SERIOUS PREJUDICE 
 
192. One conclusion that might be drawn from  Exhibits KOR-91-102 is that Korea accepts 
that there is a benefit from the KEXIM financing at issue, but that the benefit in a number of cases is quite small (0.5 per cent or less). If on e accepts that the benefit is of the magnitude 
reflected in these Korean exhibits, what woul d be the implications for the EC’s serious 
prejudice analysis and conclusions? 
 Korea’s comments
 
  At the outset, Korea notes that it was offering the referenced analysis in the alternative.  
Korea does not in any manner accept the EC’s premise that there was a benefit provided.  In Korea’s 
view, the EC has utilized incorrect benchmarks a nd analytical approaches.  However, Korea has 
endeavoured to show that, even using such fl awed data, the EC’s calculations result in a de minimis  
level of subsidization.  It is in the nature of cases such as this where there are a great many issues 
dependent on previous affi rmative findings by the Panel that, in the absence of knowing ahead of time 
whether the Panel has made such affirmative findi ngs on specific issues, Korea has felt compelled to 
respond to many EC allegations that Kor ea considers should be moot but cannot assume  to be moot 
for purposes of presenting its case.  It is also in th e nature of such cases, that this arguing in the 
alternative is a burden that weighs particularly heavily on the respondent.  Korea considers it very 
important that none of its arguments in the altern ative be taken to mean that it accepts the EC’s 
arguments on prior elements of the case.   WT/DS273/R 
 Page G-187 
 
 
 Keeping the above-qualifications in mind, Korea notes that the EC continues to allege in its 
response that the KEXIM financing allows Korean shipyards “to offer a lower price than competing 
shipyards or to otherwise provide the most attract ive contract terms for the buyer” and would thus 
“significantly strengthen the ability of KEXIM-subsid ised shipyards to maintain their capacity (and 
the low prices in the market) when they would otherwise exit the market or reduce capacity”. 
 
 Korea notes that there is not even an attemp t on the part of the EC to adduce evidence in 
support of its response to the Panel’s question. Ne ither does the EC respond to Korea’s arguments in 
its comments to this Question as set forth in Korea’ s submission of 9 July. In short, for the Panel’s 
convenience, these comments were the following: 
 
- the conditions at which KEXIM financing w as extended became more expensive as is 
recognized by the EC – these more expensive conditions (i.e., no longer a “benefit”) cannot, 
therefore have led to price suppression or depression;1 
 
- qualitative effects of an alleged subsidy only are insufficient when Article 6.3(c) of the SCM 
Agreement  requires to demonstrate that the alleged subsidies have had a significant  price 
depressive or suppressive effect, thus requiring a quantification;  
 -  the very small benefit that the EC has been  able to allege through the KEXIM financing is 
totally out of proportion with the range of th e price depression and/or suppression margin that 
the EC alleges – there is no significant price depression and/or suppression caused by the 
alleged KEXIM benefits, all the more since the EC recognizes a very substantial cost 
advantage to the Korean shipyard s vis-à-vis the EC shipyards; 
 - the EC fails to demonstrate that the alleged subsidies as such (rather than the products) have 
caused significant price depression and/or su ppression though this is required under 
Article 6.3(c); 
 -  even if one were to consider the effect of the products rather than that of the subsidies, the EC 
makes price depression and/or suppression alle gations for the Korean commercial vessels at 
large in spite of the fact that the evid ence demonstrates that KEXIM financing was not 
granted for many of the vessels sold thereby di sproving that the financing kept in place 
capacity that would otherwise have exited the market; 
  -  allegations in relation to price undercu tting that the EC itself abandoned cannot be 
reintroduced under the guise of establishing price depression/suppression; 
 
- EC subsidies of a substantia lly higher level are afforded to  the EC shipyards overwhelming 
and displacing any effect of the alleged Kor ea subsidies - it would be impermissible to 
attribute to the Korean subsidies effects that  were actually caused by  the much larger EC 
subsidies. 
 193. Exhibit KOR-112, concerning MOCIE’s interv ention at the request of Samsung, could 
be viewed as indicating that the government takes action if prices are too low. If this is the case, 
what are the implications for the EC’s serious prejudice claim?  
Korea’s comments
 
 
 Korea stands by its earlier explanation of MOCIE’s actions. Please refer to Korea’s comments 
on this Panel Question, submitted on 9 July 2004. 
                                                      
1 Korea would like to recall its overall arguments regarding evidence in the context of injury-type 
investigations, that it is necessarily the case that the most recent periods are the most relevant.   WT/DS273/R 
Page G-188  
 
  However, it is with interest that Korea notes th e EC now is forced to deny the role for MOCIE 
that the EC itself alleges. If the EC’s allegations  regarding MOCIE were to be considered correct, 
then the MOCIE intervention indeed does undercut th e EC’s serious prejudice claim.  The EC cannot 
have it both ways.  
 
194. If the Panel were to accept the product subdivisions set forth in Exhibit KOR-109, how 
would this affect the EC’s analysis of price suppression/depression? Please respond in detail.  
 
Korea’s comments
 
 
 The EC’s answer has begged the Panel’s question. Instead of  responding to the question, it 
attempts to make claims contradicting its former statements, hiding between  a wall of generalization 
whilst making disparaging remarks without purpose or s ubstance. Korea reads this lack of substantive 
response and mix of contradictory claims to demons trate that the EC does not wish to answer the 
Panel’s question because it will corroborate Korea’s approach and claims. 
  (i) With regard to paragraph 30 of the EC’s response   The EC now confirms that a larger ship costs more than a smaller ship and that economies of 
scale mean that parametric unit prices reduce as ships get bigger. This is precisely what Korea has 
been arguing: by amalgamating ships of different sizes, prices are taken into account that are not 
comparable because they reflect sh ips that are widely different in size. This cannot yield an accurate 
portrayal of price trends. Whether for price undercutting, price depression or suppression, prices for different sizes of ships are widely different and ca nnot be compared in order to derive an accurate 
price trend.  
 
 The EC further implies that work content is the only measure relating to shipbuilding whilst 
cargo-carrying parameters relate only to shipping . The shipbuilding market comprises suppliers and 
customers and the customers are shipowners who deal in cargo measures, hence cargo measures are 
part of the shipbuilding market, as well as the shipping market. Shipbuilding demand has to be 
calculated from a basis of cargo measures because that is the demand driver which underpins the 
requirement for ships (i.e, ships are required in order to carry cargo). Following the projection of 
demand in cargo measures, because of the differing  cargo measures used for different ships, cargo 
measures are converted into CGT, using assumptions on vessel size mix distributions. This is done to 
allow the aggregation across different ship typ es that is necessary to calculate total demand. 
Shipbuilding capacity cannot be calculated separately by ship type
2 and hence it is not possible to 
undertake supply-demand balance analysis at ship type level. Thus, the EC’s reliance on CGT is 
inconsistent with its own suggested th ree-way segmentation of the market.  
  The EC’s view that price should be considered  solely on a parametric basis of CGT would 
imply that price is considered only to be influe nced by the aggregate supply-demand balance or by 
supply side work content criteria and that price will vary directly in relation to CGT for all sizes of 
vessels of a given ship type. Hence, the EC now seems  effectively to be saying that material resources 
have no impact on the ship prices
3. This in turn would imply that the demand side criteria, such as the 
earnings capacity of the ship, have no influence at all on the investment price that an owner will 
                                                      
 2 This inability to segment shipbuilding capacity by ship type is the non-homogeneity referred to by 
Korea in its response to Panel Question 125 which seems to have confused the EC in its ‘Comments on New 
Factual Information’, page 10 as submitted by the EC on 9 July 2004. 
3 It should be remembered of course that CGT in no  way indicates the amount of material required to 
build the ship only the labour content. Hence, it take s no account of the different ec onomies of scale present in 
terms of material resources compared to labour  resources for building ships of different sizes.  WT/DS273/R 
 Page G-189 
 
 
accept. This, presumably, would imply, for example that the shipowner has no interest on the return 
on their investment. It is clear that this is simply not the case.  
  The weakness of the EC’s relia nce on CGT is further exposed when it is realised that ships 
are never  segmented size wise on the basis of CGT. The onl y place that Korea has ever seen this is in 
the EC’s own analysis and Annex V disclosures in respect of price undercutting, suppression and 
depression. At no time has the EC put forward third party examples of the use of CGT for size segmentation and this is because it is simply not used in the industry. If the EC accepts size segmentation, it must accept this on the basis of cargo measures, which would question its absolute 
dependence on CGT as the basis for all its analysis. 
 
 Korea has made it clear that it believes that pri ces in shipbuilding are influenced by a range of 
factors. Examples of such factors have been referr ed to by the EC as well as Korea. OECD documents 
have been submitted showing that OECD members cons ider that prices are influenced by a range of 
factors even though there are differences of opinion on the full range of the factors concerned and the 
extent of correlation between these factors under di ffering market conditions. The EC cannot now be 
arguing that only work content or macro-level supply-demand balance influence ship prices.  
  In its simplest form, cost is generally c onsidered a supply-side factor whereas price is 
considered a demand side factor. It is hard, th erefore, to understand the logic which underpins the 
claim that a price analysis should consider only one si de of the market and that this should be dictated 
by a supply-side measure such as CGT (which onl y sellers understand and use), rather than demand 
side measures such as cargo measures (which both buyers and sellers use and understand) and that 
furthermore it is only the labour aspects of work c ontent that should be considered. Moreover, if, as it 
has been alleged, the shipbuilding market is a buye r’s market, it then follows that demand side criteria 
are more likely to dominate. 
 
 It is interesting to note that, Clarkson’s Ship yard Monitor (and its sister publication Shipping 
Intelligence Weekly), which the EC believes to be the leading source of industry data, compiles its 
newbuilding index by averaging the US $/DWT acro ss a broad basket of ship types calculated from 
its price series for different ship types.  Clarkson’s would therefore seem to feel that price per cargo unit (dwt being a cargo measure) is an important part of shipbuilding. This is confirmed in Clarkson’s 
Sources and Methods statement (Page 4 last paragr aph under section on Newbuilding Contracts and 
Prices) which is provided in Exhibit Korea – 156
.  
  (ii) With regard to paragraph 31 of the EC’s response  
 The EC makes disparaging remarks about  Korea’s understanding of the economics of 
shipbuilding prices, whereas it might be better serve d by reading what was actually written. All the 
while, the EC does not respond to the simple mathema tical fact noted by Korea: an average price for 
period A during which primarily large-size, low unit- priced ships are built cannot be compared to an 
average price in the successive period B during wh ich primarily small-size, high unit-priced vessels 
were built to determine whether price depression or suppression existed. This is inherent in the 
statement made by the EC itself: large-size ships ar e sold at much higher prices than small-size ships.  
 
 We note that the EC refers to weighting of prices according to product mix. Product mix is a 
term that refers to types of ships and sizes of ve ssels, however in this instance, the graph only 
represents weighting by size and not type of vessels, and so the EC is referring only to one of the two 
aspects of product mix.  It is, however, worth noting, that the EC has in this fashion confirmed that 
both size and type are important parts of shipbuildi ng product mix, but it is therefore all the more 
difficult to understand their stance that ship size do es not count. The illustration in the graph referred 
to by the EC using weighted average pricing was used to demonstrate the distortion that can be 
produced in simple average parametric prices (e.g., $/TEU) if no consideration is taken of the size mix 
of the demand over one period compared to the size mi x of another period.  This relates to the fact WT/DS273/R 
Page G-190  
 
that there are different factors that do not work in unison for all ship sizes. This in turn relates to the 
case put by Korea that ship size categories need to  be taken into account as they represent different 
market factors because, for example:   - Not all shipyards can build all sizes of ships;
4 
 
 - Ships of differing size are not used interchangeably;    - Economies of scale exist in relation to bot h ship construction costs and ship operating 
costs;  
 
 - Prices vary differently for different types and sizes of ships;   - Freight rates vary differently for different types and sizes of ships.  
 The EC in its price analysis, invokes this sort of distortion when it uses parametric pricing 
without the use of size bands – a weighted average price at any given point of time when primarily large ships are built simply cannot be  compared to a weighted average price in the next period when 
primarily small ships are built.    (iii) With regard to paragraph 32 of the EC’s response 
 
 Yet again the EC contradicts itself regarding its reference to complex passenger vessels when 
its states that ‘cruise-ferries’ are being built in  Korea and China when trying to rebut Korea’s 
arguments against universal supply-side substitutab ility. In paragraph 158 of the EC’s response to 
Panel Question 165, the EC itself states “ or in the case of cruise ship operators who need vessels of 
such sophistication that Korean and Chinese yards are not considered experienced enough to deliver 
an acceptable ship.’  Now it seems when this argument does not  suit them they refer to ‘cruise-
ferries’ being built in South Korea and China. Whic h of these conflicting statements does the EC wish 
the Panel to believe? Further, Korea would like to point out that these ‘cruise-ferries’ are in fact 
ferries not cruise ships, as the EC is now trying to imply, and small ones at that. The maximum size of 
such vessels:  
 
 - in Korea being approximately 45,000 GT with a length of 210m   - in China being approximately 30,000 GT with a length of 200m   
in contrast to the cruise ships of up to 148,000 GT  with a length of up to 350m being built in the EC 
cruise shipbuilding yards. Cruise ships involve th e height of luxury and only carry passengers for 
dedicated leisure purposes. Ferries can carry people and/or vehicles and may be used for both leisure 
and/or commercial purposes. They do  not involve the height of luxu ry and can range from very basic 
cross-river craft to higher technology sea-going vessels, however in no way do they approach the complexity of cruise ships. Trying to compare thes e vessels to each other and group them in to the 
same complexity category is like trying to compar e a crop-spraying aeroplane with an executive Lear 
jet aeroplane.   To further demonstrate the inconsistency of th e EC, in paragraph 165 of the EC’s response to 
Panel Question 167, the EC refers quite clearly to  ferries being built in Korea and refers of Korea’s 
intentions to ‘pursue the cruise ship sector’ recognisi ng that it does not currently build such vessels. In 
no way are the terms ‘cruise ship’ and ‘ferry’ treated  by the EC as being the same, but now suddenly, 
these ferries are being described as ‘cruise-ferries’. The reality is that Korea builds some ferries but 
does not build cruise ships. China builds some ferries  too but also does not build cruise ships. Japan 
                                                     
 
4 Korea also submits that not all shipyards are credible build ers of all types of ships.  WT/DS273/R 
 Page G-191 
 
 
delivered its first cruise ship in February this  year (i.e. 2004). Cruise shipbuilding competence is 
centred in EC yards despite th e EC attempts now to imply otherwise and to dismiss Korea’s 
comments by misrepresentation.  
 
 The EC refers to Exhibit EC-152 regarding the alleged diversity of the Korean shipyard orderbooks but with its now familiar unspecified generalisations.  Korea offers the following facts 
from the shipyard orderbook section of this Exhibit
5: 
 
• Samho  has 70 ships on order totalling 8.3m DWT of which 39 are container ships of 4,130 
TEU and above, 25 are tankers of 105,000 DWT and above (i.e. outside the size of the EC’s 
ill-defined product/chemical category), 4 are bulk carriers of 170,00 DWT or above and 2 are 
LPG ships of 82,000 cbm.  Only the container ships therefore overlap with the ship types 
under review and these are all above 4,000 TEU and 75 per cent of them are above 
5,000 TEU. 
 
• Daewoo  has 104 ships on order totalling 11.4 milli on DWT of which 34 are tankers of 69,000 
– 306,000 DWT. 19 are container ships of 4,000 TEU and above, 17 are LNG ships of 
138,000 cbm and above (three of which have regasification capability), 13 are pure car 
carriers, 8 are bulk carriers of 75,000 – 174,000 DWT, 7 are LPG ships of 38 – 78,000 cbm, 6 are products tankers of 49,000 – 105,000 DWT.  There are also two non-ship offshore structures on order. 
 
• STX  has 95 vessels on order totalling 4.8m DWT of  which 67 are products tankers of 29,000 
– 75,000 DWT, 18 are container ships of 2,500 – 3,500 TEU , 6 are bulk carriers of 75,500 
DWT, 2 are chemical/oil carriers of 38,000 DWT and 2 are LPG ships of 23,000 cbm. 
  The EC claim seems therefore to have mixed typ es from various yards together to arrive at its 
list.  
 
 (iv) With regard to paragraph 33 of the EC’s response 
  Both parties are now it seems in agreement th at ships are made-to-order products and that 
there will inevitably be differences of specificatio n between such ships. However, it should be 
remembered that elsewhere in its arguments, the EC has looked at price undercutting allegations on a 
US$/CGT price basis without any acknowledgement that specification differences may underpin price 
differences, as well as other factors. Once again it s position seems to change according to its current 
line of argument.   The EC alleges that Korea has tried to a void SCM disciplines by creating unlimited numbers 
of categories of products. However Korea has, in fact, not only based its price analysis on basic ship 
type and size band categories but has also demonstrat ed that there are other owner requirements which 
differentiate ships that may lie within the same si ze and type groupings. Such factors can significantly 
alter the cost of such vessels and th e price that an owner will be prep ared to pay.  Far from tying to 
avoid SCM disciplines, Korea has recognised that practi cal consideration must be given to the basis of 
analysis
6 in accordance with the strict provisions of the SCM Agreement  and has, therefore, 
undertaken its price analysis on clearly defined size and type groupings. 
  Korea considers that it is the EC that is trying to avoid the SCM disciplines by gross 
generalisation and its extraordinary claims that all ships of one basic type are interchangeable and are 
to be treated collectively irrespec tive of size. In its attempts at collectivisation, it has made some 
                                                     
 
5 We have had to use Clarksons ship type categories for tankers, which include chemical/oil for ships 
with some IMO class and products. 
6 Exhibit Korea – 70 page 5.21 and others. WT/DS273/R 
Page G-192  
 
serious errors, for example, it firstly tried to cl aim that product and chemic al tankers are a single 
entity, it subsequently confirms that it is excl uding pure chemical carriers, it then uses sloppy and 
inaccurate data classifications that do not recogni se regulatory differences between chemical tankers 
(as reflected by IMO chemical cl asses) and now seeks to group toge ther some, still undefined, types 
of chemical tankers with pure products tankers, the latter of which are not allowed to carry chemicals 
at all.   
  Korea has taken considerable care to clearly e xplain the differences that do exist, to explain 
that there are inevitably grey areas
7 of overlap but that size and type categorisation result in a more 
pertinent analysis of the facts than the gross genera lisations that the EC puts forward. The fact that 
much of the expert analysis undertaken by FMI for the EC has also chosen to adopt broadly similar 
size bands8 clearly demonstrates that size segmentation is normal but that there are variations on the 
bands used by various parties or for various purpo ses. This is not evidence to support the EC’s ‘no 
size segmentation’ arguments. One must ask the ba sic question of why the EC and its advisors FMI 
have ever made use of size bands if their assertion is  that no size segregation is relevant rather than a 
difference of view in respect of the actual bands used  for analysis? The EC is therefore consistent only 
in its inconsistency – overlooki ng its own use of size bands when it sees advantage in 
‘collectivisation’.   (v) With regard to paragraph 34 of the EC’s response  
 Exhibit Korea - 109 was submitted to summa rise and present the case for like product 
definition and not to restate the analysis rebu tting alleged price suppression and depression which is 
reflected in the Drewry Report submitted as Exhi bit Korea - 70. The legal concept of like product 
requires market categorisation which is driven by di fferences in technical characteristics as perceived 
by the user and reflected in end use. The disagre ement between the EC and Korea on the use of CGT 
vs DWT/TEU or other cargo measures lies at the h eart of this. The Panel recognises this, together 
with size segmentation, in its question with its re ference to ‘product subdivisions’ but the EC has 
chosen to ignore this in its response.    The EC refers to its Attachment 2 to the Response to Panel Questions following the first 
substantive meeting in respect of its price analysis. It is interesting to note that in the first paragraph of 
this document the EC recognizes ship size in its statement ‘ and figure 1.2 shows how this order 
intake was distributed by size’ . If size is not an issue in price suppression and depression, why is it the 
second factor highlighted in the FMI report?   Korea has already highlighted in its comment s on the EC’s response with regard to Panel 
Question 162 submitted on 9 July 2004 that the gra ph submitted by EC on page  5 of Exhibit EC-146 
does not demonstrate ‘sub-classes of ships moving broadly in unison’  and that the small scale with 
which the EC has presented this graph has masked significant variations, which are clearly evident in 
the numeric tabular format used by Korea to analy se the same Clarkson’s price series data. Korea has 
in no way been selective in doing this as it has used  the example quoted by the EC and has analysed 
every price series in that example and the result is  evidence of significant price trend differences. 
 
 Korea’s presentation of evidence in this fash ion also demonstrates the inaccuracy of FMI’s 
comments regarding ‘strong correlation of price m ovements’ in its Attachment 2 document. Once 
again, the EC has used small-scale graphical prese ntation to mask the significantly different price 
variations that are evident from numerical presentatio n of price trends. For example Korea’s analysis 
highlights that between the end of 1998 and 1999, VLCC tanker (300,000 DWT) prices dropped by 
5 per cent whereas Panamax (70,000 DWT) and Handy Tankers (47,000 DWT5) prices remained 
constant. But by the end of 2000 VLCCs had rise n by another 11 per cent (cf end 1999) whereas 
                                                     
 
7 Exhibit Korea – 109,  page 1. 
8 As highlighted in Exhibit – Korea 109.  WT/DS273/R 
 Page G-193 
 
 
Aframax Tankers (110,000 DWT) had risen by 26  per cent, Panamax tankers by 16 per cent and 
Handy Tankers by 13 per cent. Prices do note even necessarily move in the same direction, for example at end 2002 VLCC prices were 9 per cent lo wer than at end 2001 but Handy Tanker prices 
were 3 per cent higher. This is not a pattern of ‘moving broadly in unison’  or ‘strong correlation’  as 
the EC and its advisors claim. 
 
 (vi) With regard to paragraph 35 of the EC’s response   On the basis of the price change differentials  demonstrated by Korea in its comments to the 
EC’s new factual information, the EC has no grounds  for claiming that a more detailed analysis on the 
basis of size segmentation would reveal the same me chanisms and would give the same results. The 
evidence provided by Korea is quite clear and th e EC has provided no substantiated evidence to 
contradict it; its mere assertions to the contrary do not suffice. 
  (vii) With regard to paragraph 36 of the EC’s response 
 
 Korea has already explained
9 that the use of orderbook as a measure of market presence is 
misleading because of the varying time horizons of orderbooks between regions and individual yards. 
It has also demonstrated that third party sources do not use orderbook in isola tion but also present the 
phasing of the orderbook.10 
 
 Korea notes once again the lack of clarity a nd openness by the EC in not defining the size 
bands associated with its use of the terms ‘handy max, panamax and post-panamax’.  The EC quotes 
highly specific and emotive orderbook percentages but declines to clearly define the basis of these, so 
that its statements cannot be counter ed to demonstrate its misleading u se of statistics. This is another 
example of the EC trying to blur the argument through statistical imprecis ion and to hide behind 
generalisation. 
  In addition, the EC continues to amalgamate r estructured and non-restructured yards alike and 
makes assertions with reference to  the Korean orderbook position desp ite the fact that unrestructured 
yards are significantly or even predominantly present in the orderbook position relied upon by the EC. 
Again, the EC relies on the alleged effect of the Korean vessels while the Treaty requires it to show 
the effect of the alleged Korean subsidies. 
 
195. Please comment on Exhibit KOR-115. 
 
Korea’s comments
 
 
 The EC in its response to the Panel’s question a lleges that the price levels indicated in Exhibit 
Korea - 115 “are the average of reported contract pri ces for the ship types in question for a seven-year 
period (1997-2003), adjusted by CGT.  These averages are a very minor part of the FMI report and 
are meaningless without the time series graphs that  accompany them”. The EC further asserts that the 
“graphs showing the relative movement of differe nt nationalities are of particular importance”. 
 
 In fact, the graphs with the lines shown for di fferent countries in the FMI report supplied as 
Exhibit Korea – 142 ( see Figures 2.3, 2.8, 2.12, 2.18, 3.6 and 3.11) are simply inaccurate and 
misleading because of the following errors:  
• These graphs are prepared from the 'spot graphs' offered for each country ( see Figures 2.1, 
2.2, 2.4, 2.5, 2.6, 2.7, 2.9, 2.10, 2.11, 2.13, 2.14, 2.15, 2.16, 2.17, 3.1, 3.2, 3.3, 3.4, 3.5, 3.7, 3.8, 3.9, 3.10). Nevertheless, these spot graphs reflect many half year points for which there 
                                                     
 
9 Korea’s response to Panel Question 174. 
10 Korea’s response to Panel Question 174. WT/DS273/R 
Page G-194  
 
are no spots, presumably because there were no c ontracts or because there was no price data 
available.   
 
• The error occurs when these spot graphs are tr anslated into line graphs because they have 
simply joined the available dots, without any r ecognition of the fact that some times there was 
no data. This results in lines which may show as higher than Korea at a time when there is in 
fact no data.  
 
• For example, in Figure 2.18 Korea, is shown as having lower prices (albeit marginally) than 
China over the period 1
st half of 1998 to 2nd half of 1999. However, in  fact, there were no data 
points for Korea on the spot graph in Figure 2.18 for the 1st and 2nd halves of 1998 and the 1st 
half of 1999 and there were different missing points for China in the spot graph in Figure 
2.13. Absent any pricing data for Korea, the gr aph is wrong in implying that the prices for 
Korean vessels could have caused price depressi on or suppression. The time graphs shown in 
the FMI report are, therefore, inaccurate and misleading. In fact, the EC and FMI are over-
simplifying the price setting for vessels and not Korea as the EC has stated. 
  The proper fashion to plot the spot graphs on a time series graph is to plot these as spot and 
partial line graphs. To demonstrate the profound  difference that correct plotting makes, Korea 
presents one of these graphs, firstly as plotted by FMI in their document and secondly as replotted by 
Korea recognizing the absent data points. Exhibit Korea – 157
 shows all of the graphs replotted and 
highlights the erroneous commentary arising from the original graphs. 
 
 
  
  WT/DS273/R 
 Page G-195 
 
 
Fig 2.8 Replotted by Korea
Handymax product tankers
8001,0001,2001,4001,6001,800
97/1H
97/2H
98/1H 98/2H 99/1H 99/2H 00/1H 00/2H 01/1H
01/2H
02/1H
02/2H
03/1H
03/2H$ per CGT
China Japan Korea Other
 
 
• It remains that FMI itself has supplied in Tables 2.1, 2.2, 2.3, 2.4, 3.1, 3.2 and 3.3 average 
prices for different like product vessels for China, Korea, Japan, the EC and other 
shipbuilding countries for the period 1997 to 2003 and that the EC has submitted this data in 
the Annex V process. These prices must have a meaning or they would not have been 
included in an FMI report. They cannot be discarded as setting forth a minor part of the 
report. As the EC itself states, long-term pric e averages are meaningful for a trend analysis 
but the assessment on the existence of price depr ession or suppression is precisely an analysis 
of trends. 
 
 Korea further notes that the quotations cited to in the EC’s response to the Panel’s questions 
support rather than contradict what Korea has been stating all along, i.e., that the EC considers the 
alleged impact of Korean vessels, rather than the im pact of the alleged Korean subsidies. In addition, 
even if the impact of Korean vessels is cons idered without considering whether these vessels 
benefited from the alleged subsidies (indeed, the EC  considers sweeps all Korean vessels into its 
product depression and suppression allega tions), the EC evidence itself fails to indicate that price 
depression or suppression were caused by the Korean vessels and a fortiori  by the alleged subsides 
themselves. Reference is made by way of exampl e to the following statements made by FMI: 
  - China appears to be the price leader for panamax tankers; 
 
 - Chemical tanker prices have been led by China since 2001;   - In the feeder container sector, prices appear  to have been led in recent years by South 
Korea and China but with strong competition from Poland, Singapore and Taiwan; 
 
 - Handysize product tankers: China and South Korea, with South Korea dominating 
(note: but no sales or prices were plotted for the EC without any explanation), 
  - Panamax product tankers: China has remained  the price leader in this sector over the 
period examined; 
  - Chemical tankers: Japan, South Korea and China have offered the lowest prices and 
in the past two years China appear s to have been the price leader. 
  Korea notes that, contrary to the EC insinuations , it does not agree to the use of CGT for the 
purpose of measuring any capability to depress or s uppress prices. Nevertheless, the EC itself relies WT/DS273/R 
Page G-196  
 
on this standard of measurement and its data conf irms that Korean prices were not as a rule below 
those of EC vessels such as to cause price depression or suppression.   In respect of the EC’s comment in paragra ph 37, Korea notes that it has simply used the 
information that the EC has presented in its own case,  and this does not in any way imply that Korea 
believes $/CGT to be the most appropriate measure for parametric pricing. Korea provides this as an 
argument in the alternative. Korea retains its view as expressed in Exhibit Korea – 70 that parametric 
pricing should be based on cargo measures such as dwt, teu and cbm. Korea has reiterated its 
previously stated reservations regarding the use of  $/CGT in its comments pertaining to Question 194 
in this document. Furthermore Korea reminds the Panel that CGT only reflects the labour work 
content of supply costs not the material content.  
 
 Korea stands by its own price analysis in  Exhibit Korea – 70 which found no evidence of 
price depression or suppression in the market under review.  
  WT/DS273/R 
 Page G-197 
 
 
 
List of Exhibits  
 
 
Exhibit Korea – 154   Question 188  – Anjin’s third response dated 23 July 2004 
 
Exhibit Korea – 155   Question 190 - Supplemental response by KPMG  
 
Exhibit Korea – 156   Question 194  - Clarkson’s Sources and Methods statement (excerpt) 
 
Exhibit Korea – 157   Question 195  – Detailed comments on the FMI report in Exhibit 
Korea – 142 
   
Note
:  The exhibits shown in bold contai n Business Confidential Information.