WT/DS273/R 
 Page D-1 
 
 
 
ANNEX D  
 
 
RESPONSES OF THE PARTIES TO QUESTIONS FOLLOWING 
THE FIRST MEETING OF THE PANEL 
 
 
Contents Page 
Annex D-1 Responses of the European  Communities to Questions from the 
Panel D-2 
Annex D-2 Responses of the European Communities to Questions from 
Korea D-44 
Annex D-3 Responses of Korea to Questions from the Panel D-52 
Annex D-4 Responses of Korea to Questions from the 
European Communities D-95 
Annex D-5 Comments of Korea on Responses by the 
European Communities to Questions from the Panel D-106 
 
 
 
  WT/DS273/R 
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ANNEX D-1 
 
 
RESPONSES OF THE EUROPE AN COMMUNITIES TO  
QUESTIONS FROM THE PANEL 
 
 
(22 March 2004)  
 
 
 
TABLE OF CONTENTS 
 
Page  
 
A. QUESTIONS TO EC........................................................................................................... D-4  
 
1. Question 1 .................................................................................................................. ......... D-4 
2. Question 2 .................................................................................................................. ......... D-4 
3. Question 3 .................................................................................................................. ......... D-5 
4. Question 4 .................................................................................................................. ......... D-5 
5. Question 5 .................................................................................................................. ......... D-5 
6. Question 6 .................................................................................................................. ......... D-6 
7. Question 7 .................................................................................................................. ......... D-6 
8. Question 8 .................................................................................................................. ......... D-7 
9. Question 9 .................................................................................................................. ......... D-8 
10. Question 10 ................................................................................................................ ......... D-8 
11. Question 11 ................................................................................................................ ......... D-8 
12. Question 12 ................................................................................................................ ......... D-9 
13. Question 13 ................................................................................................................ ......... D-9 
14. Question 14 ................................................................................................................ ....... D-10 
15. Question 15 ................................................................................................................ ....... D-12 
16. Question 16 ................................................................................................................ ....... D-12 
17. Question 17 ................................................................................................................ ....... D-12 
18. Question 18 ................................................................................................................ ....... D-15 
19. Question 19 ................................................................................................................ ....... D-16 
20. Question 20 ................................................................................................................ ....... D-16 
21. Question 21 ................................................................................................................ ....... D-17 
22. Question 22 ................................................................................................................ ....... D-18 
23. Question 23 ................................................................................................................ ....... D-19 
24. Question 24 ................................................................................................................ ....... D-20 
25. Question 25 ................................................................................................................ ....... D-20 
26. Question 26 ................................................................................................................ ....... D-21 
27. Question 27 ................................................................................................................ ....... D-21 
28. Question 28 ................................................................................................................ ....... D-23 
29. Question 29 ................................................................................................................ ....... D-24 
30. Question 30 ................................................................................................................ ....... D-25 
31. Question 31 ................................................................................................................ ....... D-26 
32. Question 32 ................................................................................................................ ....... D-26 
33. Question 33 ................................................................................................................ ....... D-28 
34. Question 34 ................................................................................................................ ....... D-28 
35. Question 35 ................................................................................................................ ....... D-29  WT/DS273/R 
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36. Question 36 ................................................................................................................ ....... D-30 
37. Question 37 ................................................................................................................ ....... D-31 
38. Question 38 ................................................................................................................ ....... D-33 
39. Question 39 ................................................................................................................ ....... D-33 
40. Question 40 ................................................................................................................ ....... D-33 
41. Question 41 ................................................................................................................ ....... D-34 
42. Question 42 ................................................................................................................ ....... D-35 
43. Question 43 ................................................................................................................ ....... D-35 
44. Question 44 ................................................................................................................ ....... D-36 
45. Question 45 ................................................................................................................ ....... D-36 
 
B. QUESTIONS TO BOTH PARTIES.................................................................................. D-38  
 
95. Question 95 ................................................................................................................ ....... D-38 
96. Question 96 ................................................................................................................ ....... D-38 
97. Question 97 ................................................................................................................ ....... D-39 
98. Question 98 ................................................................................................................ ....... D-40 
99. Question 99 ................................................................................................................ ....... D-40 
100. Question 100 .............................................................................................................. ....... D-40 
101. Question 101 .............................................................................................................. ....... D-41 
102. Question 102 .............................................................................................................. ....... D-42 
 
LIST OF ATTACHMENTS......................................................................................................... D-4 3 
 LIST OF EXHIBITS............................................................................................................... ...... D-43 
 WT/DS273/R 
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A. QUESTIONS TO EC  
1. Question 1 
 
 What makes an entity a public body?  Is th e power to regulate and tax a necessary and 
sufficient condition to qualify an entity as a public body? 
 
Response
 
 
1. The purpose of Article 1.1(a)(1) of the SCM Agreement  providing that financial contributions 
can be made by “any public body” as well as by “a government” is to capture all use of State 
resources to influence the decisions of enterp rises in pursuit of a public policy objective.  
Accordingly, the EC considers the following factors to be relevant in an assessment of whether an 
entity is a public body:  
 ¾  Whether the entity is controlled by the gove rnment, be it through ownership or by a 
public statute establishing the body; 
  ¾  Whether the entity pursues public policy objectives; 
  ¾  Whether the entity has access to State res ources either through the use of capital on 
which it is not obliged to secure a comme rcial return or through a government 
guarantee of debts or losses. 
 2. The Panel does not need to decide in this  case whether it is sufficient that one of these 
conditions is fulfilled or whether all of these conditio ns need to be fulfilled cumulatively to make an 
entity a “public body”.  All the entities claimed to be public by the EC in this case are established and 
controlled by the government through public statut es that set public policy purposes and give these 
bodies access to state resources.    3. The powers to regulate and tax are essential gove rnmental powers. Thus, an entity that shares 
these powers can be considered to be part of  the government.  These powers may therefore be 
considered sufficient conditions to make an entit y part of the government.  These powers are not 
however necessary conditions for an entity to be a public body.   
2. Question 2 
 
 Para. 83 of the EC's first written submission describes the purpose of permitting prospective challenges against mandatory legisl ation.  What would be the purpose of 
prospective challenges against non-mandatory legal instruments?  What would Members protect themselves against by bringing a prosp ective challenge against another Member's law 
that allows, but does not require, the grant of prohibited export subsidies?  
Response
 
 
4. A power for a government to make grants obvi ously allows the grant of a prohibited export 
subsidy.  But it would be an improper presumption of bad faith to assume that it would be so used.   
 
5. However a law that provides a public body with  explicit objective or instruction to promote 
exports or assist exporters with subsidised f unding and a prohibition on competing with commercial 
banks goes further than simply allowing the grant of an export subsidy – it specifically envisages the 
grant of export subsidies.  It is not an improper presumption of bad faith to assume that public bodies 
will do what they are created and instructed to do. 
  WT/DS273/R 
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3. Question 3 
 
 Please comment on para. 119 of Korea's first written submission, regarding the 
interpretation of the word "maintain" set forth in Article 3.2 of the SCM Agreement.  
4. Question 4  
 What is the basis for interpreting Article 3.2 in a manner that prohibits legislation 
containing a discretion to provide prohibited export subsidies?  
Response (to questions 3 & 4)
 
 
6. The EC agrees that the word “maintain” im plies continuance rather than prevention but 
believes that this argument misses the point.  
7. The EC considers that the word “maintain” in Article 3.2 signifies that the prohibition of 
export subsides applies not only to individual grants  of subsidy but also to schemes (or programmes, 
to employ the term that is used in the SCM Agreement ) under which they are granted.  Individual 
subsides are granted, not maintained.  Subsidy sch emes or programmes are maintained, not granted. 
 8. The fact that schemes or programmes are cove red by the prohibition of export subsides is 
confirmed by the other provisions of the SCM Agreement .  For example, Article 28.1 refers to: 
 
Subsidy programmes which have been establis hed within the territory of any Member 
before the date on which such a Member  signed the WTO Agreement and which are 
inconsistent with the provis ions of this Agreement … 
9. And, even more significantly, Articles 29.2 and 29.3 both refer to “subsidy programmes 
falling within the scope of Article 3”.   10. Also, item (j) of the illustrative list of export subsidies in Annex I to the SCM Agreement  
deems to be an export subsidy prohibited by Ar ticle 3.1: “export credit guarantee or insurance 
programmes , of insurance or guarantee programmes”. The ordinary meaning of the word 
“programme” is: “A plan or outline of (esp. intended) activities; transf. a planned series of activities 
or events”.
1 
 11. This definition does not imply that the progra mmed acts are “mandatory”, only that they are 
planned or intended.  Accordingly, the prohibiti on of export subsidy programmes applies not only to 
measures that “mandate” the grant of subsides but also  to measures that plan or intend, or, as the EC 
puts it, specifically envisage, the grant of individual export subsidies.  
5. Question 5 
 
 What were the credit ratings, by Ko rean Investor Services, of each Korean 
shipyard alleged to have received subsidies,  for each of the years 1997-2003, inclusive? 
 
Response  
 
12. The EC does not know the credit ratings accorded these companies by Korean Investors 
Services but presumes that these credit ratings ar e similar to those provided by Korea in 
                                                      
1 Shorter Oxford English Dictionary (4th edition, 1993), p. 2371.  WT/DS273/R 
Page D-6  
 
attachment 1.1(24)-1 of its Annex V replies.
2 Indeed, as stated by Kor ea, prior to the new credit 
system adopted by KEXIM, KEXIM compared the cr edit ratings made by various credit information 
companies including the Korean Investor Services (a ttachment 1.1(24) to Korea’s Annex V replies). 
However, the credit ratings were only provided fo r each of the years 1997-2002. Year 2003 is not 
available. 
 
6. Question 6 
 
 Is the EC of the view that finance / guarantee measures provided under the KEXIM 
legal regime would necessarily be inconsistent  with Articles 3.1(a) and 3.2 of the SCM 
Agreement?  Please explain. 
 
Response  
 
13. The EC considers that it is possible that  measures taken by KEXIM (either a subsidy 
programme or an individual subsidy grant) would no t be inconsistent with Articles 3.1(a) and 3.2 of 
the SCM Agreement .   
 14. The question before the Panel is however wh ether some 200 individual grants, the actual pre-
shipment loan and APRG schemes described in the EC’s first written submission and the KEXIM 
legal regime itself are inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement .   
 
15. The EC does not believe that a legal regime such as that of KEXIM will only be inconsistent 
with Article 3.1(a) and 3.2 SCM Agreement  if it is absolutely inevitable or certain or “mandatory” (in 
the sense that Korea uses this term) that expor t subsidy programmes or individual export subsidy 
grants will arise in all cases.  For the reasons explai ned above, it is sufficient if this is the intent or 
purpose of the measure. 
 
7. Question 7 
 
 The KEXIM 2002 Annual report (Exhibit EC- 14) contains a chapter entitled Bank 
Operations.  That chapter refers to a decline in KEXIM's export credit business. It states that 
"[m]ajor Korean exporters were reluctant to u se bank loans, instead they preferred raising 
funds from direct markets which was possible due to their successful corp orate restructuring".  
Does this suggest that KEXIM's export credit term s are less attractive to Korean exporters than 
the terms for competing financing fr om other sources?  Please explain. 
 
Response
 
 
16. The KEXIM 2002 Annual report uses the term “export credits” for loans to exporters - as 
evidenced by the reference to Korean exporters as th e takers of these loans. Loans to foreign buyers – 
for which the term “export credit” is conventionally reserved – are referred to as “direct loans” in the 
Annual Report3 and, in the same section as that referred to by the Panel, KEXIM reveals that it 
granted the first true export credit in its history in 2002.  
 
17. Although the volume of these loans to exporte rs showed a decrease in 2002, they still 
represented 89.2 per cent of KEXIM’s disbursements.  (T he same section of the report explains that it 
has decreased from 95 per cent to 89.2 per cent in 2002). 
 
18. Thus, although it may be true that the major beneficiary of these loans – Korean shipbuilders 
– were able, due to the infusions of subsidised equity or loan capital or resulting improved access to 
                                                      
2 Exhibit EC – 30. 
3 Page 2 of KEXIM’s Annual Report (Exhibit EC-54).  WT/DS273/R 
 Page D-7 
 
 
finance from the corporate bond market to reduce th eir use of short term pre-shipment loans from 
KEXIM, it is still clear that the amount of lo ans to exporters was still very high in 2002 – 
KRW 7,473 billion.  19. The statement does not therefore demonstrate th at KEXIM's export loans are less attractive to 
Korean exporters than the terms for alternative fina nce. It only suggests that the margin of advantage 
involved in using KEXIM’s export loans may have reduced due to alternative finance becoming 
easier.  The high level of KEXIM’s export loans shows that these are still offered at very attractive 
rates.  
20. What is clear from the statement referred to  is that it constitutes an admission by KEXIM that 
previously companies were unable to obtain fi nance on such favourable terms as available from 
KEXIM.  
8. Question 8 
 
 Para. 122 of the EC's first written submi ssion states that the KEXIM legal regime, as 
"confirmed by KEXIM practice", provides for the grant of subsidies.  Is the EC challenging "KEXIM practice" as well as the KEXIM legal regime as such, or does the EC rely on evidence regarding "KEXIM practice" in support of its claim against the KEXIM legal regime as such?  
If the latter, please explain how evidence regarding  "KEXIM practice" is relevant to the Panel's 
assessment of whether the KEXIM legal regime as such  is, or is not, in conformity with the SCM 
Agreement. 
 
Response
 
 
21. The EC’s position is that KEXIM’s legal regi me is inconsistent with Article 3 of the SCM 
Agreement  because it specifically envisages the grant of export subsidies.  The EC considers that this 
conclusion derives principally from:  
 
 ¾  KEXIM’s statutory objectives of promoti ng economic development and financing 
exports – Article 1 of the KEXIM Act;  
 
 ¾  Financial contributions granted by KEXI M, pursuant to Article 18 of the KEXIM 
Act, are “for the purpose of facilitating exports of products”, and, therefore, contingent on export within the meaning of Article 3.1(b) of the SCM Agreement ; 
 
 ¾  The huge amount of new capital (over KR W 1.9 trillion between 1998 and 2003)  
provided by the Korean government
4 for free – Article 37 of the KEXIM Act 
provides that it is not to pay dividends to the Korean Government;  
 
 ¾  The KEXIM Act, including Articles 19, 36 (2), and 37 thereof, guarantees that 
KEXIM does not need to act on market terms or with proper regard to risk, and 
provides KEXIM with virtually unlimited funds from Korea;  
 
 ¾  The KEXIM Act imposes no requirements that KEXIM take market conditions into 
account when disbursing funds. Instead, Article 24 of the KEXIM Act prohibits KEXIM from competing with other financia l institutions, thereby providing a benefit 
that is not available on the market;  
 
 ¾  Article 26 of the KEXIM Act provides that interest rates do not need to be set “to 
cover the operating expenses, commissions for undertaking of delegated operations, 
                                                     
 
4 Korea’s Response to Annex V Questions, Attachment 1.1(11) (BCI). WT/DS273/R 
Page D-8  
 
interest on borrowed funds, and depreciation of assets” when “ inevitable for 
maintaining the international comp etitiveness to facilitate the export .” This 
demonstrates that KEXIM values the “i nternational competitiveness” of Korean 
export-oriented industries over its own fina ncial condition, a condition that increases 
KEXIM’s ability to provide support on term s better than those available in the 
market.  
 
 ¾  [BCI:  Omitted from public version.]  
 
22. KEXIM’s practice of granting pre-shipment loans and APRGs at subsidised rates confirms the soundness of this understa nding of KEXIM’s legal regime. 
 23. The practices are however separate violations  in their own right although these are linked to 
the violation inherent in KEXIM’s legal regime in th e sense that the former is the consequence of – as 
well as confirmation of – the latter. 
 
9. Question 9 
 
 How does the EC's claim against the "APRG programme" as such differ from its claim 
against the KEXIM legal regime as such?  Isn't  the "APRG programme" based on the KEXIM 
legal regime?  Is it conceivable to assess on e of them differently from the other? 
 Response
 
 
 See answer to question 8 above. 
 10. Question 10 
 
 Is the website document cited in footnote 109 of your submission the only basis for your 
statement that PSLs are not export credits?  
Response
 
 
24. The definition of “export credits” given by the OECD reflects the generally accepted meaning 
of term as evidenced by the documents cited to in  paragraphs 57-59 in the EC Oral Statement.  
 25. In addition it is clear from the reference to  the OECD Arrangement in paragraph 2 of item (k) 
that the term “export credit” used in the second pa ragraph has the meaning given to it in the OECD 
Arrangement.    26. In view of the close parallels between the fi rst and second paragraph it must be assumed, in 
the absence of any indication to the contrary, that th e term has the same meaning in both the first and 
second paragraphs. 
 
11. Question 11 
 
 How does the EC's claim against the "PSL programme" as such differ from its claim 
against the KEXIM legal regime as such?  Isn't the "PSL programme" based on the KEXIM 
legal regime? 
 
Response
 
 
 See answer to question 8 above.   WT/DS273/R 
 Page D-9 
 
 
12. Question 12 
 
 Do the activities of KEXIM in the form of APRGs or PSLs constitute "government 
practice" in the sense of Article 1 of the SCM Agreement?  Please explain.  
Response
 
 
27. Yes, KEXIM’s APRG and pre-shipment loan  programmes constitute ‘government practice’ 
within the meaning of Article 1 of the SCM Agreement . 
 
28. Article 1.1(a)(1) of the SCM Agreement  lays down that the first component of a subsidy is:  
 
a financial contribution by a government or any public body within the territory of a 
Member (referred to in this Agreement as "government") 
29. It makes clear therefore that wherever the wo rd “government” appears in the Agreement, it 
means government or public body. 
 30. The first instance of a financial contribution that is given is:  
(i) a government practice involves a direct tr ansfer of funds (e.g. grants, loans,  
and equity infusion), potential direct transfers of funds or liabilities (e.g. loan 
guarantees); 
31. This therefore covers loans and guarantees made by governments (in the strict sense) and 
loans and guarantees made by public bodies.    32. Practice is defined by Oxford English Di ctionary as “usual or customary action or 
performance”.
5 Because KEXIM is a public body, its practice (i.e., “usual or customary action or 
performance”) must be considered “government pr actice” because KEXIM is a public body, its loan 
and guarantee practices are financial contribut ions. Korea makes a fundamental error in 
paragraphs 161-163 of its first written submission when it defines “government practice” without 
reference to the fact that government is defined as both government and public body. For example, it 
states that “even if a body is a public body, it does not make a financial contribution if it is not 
involved in a government practice”.6  Korea forgets that government as defined in Article 1.1(a)(1) of 
the SCM Agreement also includes any public body.   
 
13. Question 13 
 
 In note 163 to its first written submission, Korea asserts that "no allegations have been 
made about APRGs having been extended by KE XIM to Hyundai and Hyundai Mipo".  During 
the first oral hearing, however, the EC stated that it was challenging APRGs provided in respect 
of Hyundai commercial vessel transactions.  Please confirm the EC's position in this regard. 
 
Response  
 
33. Note 163 to Korea’s first written submission is incorrect.   
 34. First of all, the APRGs listed in figure 12 of the first written submission of the EC as benefiting Samho HI/Halla HI were still outstanding  when Hyundai took complete control of that 
entity. 
                                                     
 
5 Shorter Oxford English Dictionary (4th edition, 1993) at p. 2317. 
6 First written submission of Korea, para. 161.  WT/DS273/R 
Page D-10  
 
 35. More generally however, the EC explained, in paragraph 173 of its first written submission, 
that “other Korean shipyards … have paid si gnificantly lower premiums for APRGs granted by 
KEXIM than for similar APRGs”.   
36. It is true that the European Communities only proceeded to provide deta ils in this section of 
APRGs to Hanjin and Samsung, but this was clearly by  way of example.  (In the case of pre-shipment 
loans, the examples included Hyundai Mipo and Hyundai HI but not Samsung.) Contrary to what is suggested by Korea in its footnote 163, there is no implication that Hyundai Mipo and Hyundai HI did 
not benefit from APRGs at subsidised rates. This is also clear from the conclusion in paragraph 182, 
where the EC stated that it had “detailed the speci fic grants of APRGs and pre-shipment loans of 
which it is aware”.  37. The EC’s claim against the pre-shipment lo an and APRG schemes as such are not, by their 
nature, limited to these shipyards but relate to the schemes. 
 
38. The EC is not however asking the Panel to ru le that any specific APRGs granted to Hyundai 
Mipo and Hyundai HI (apart from APRGs to Samho wh ich were outstanding when it became part of 
Hyundai HI) are prohibited export subsidies.  39. Although Hyundai an d Hyundai Mipo have received APRGs almost exclusively from 
KEXIM, the EC cannot establish what the benef it is since it lacks the necessary information. 
 
14. Question 14 
 
 Regarding your argument at para. 239 of your first written submission that GOK will 
guarantee losses by private financial institutio ns participating in the chaebol-restructuring 
process, please indicate precisely which provisions of the Chaebol Restructuring Plan explicitly 
provide for such guarantee.  
Response
 
 
40. The Agreement for the Restructuring of the top 5 chaebols of December 19987 refers in 
point 18 to the GOK  
 
upholding the soundness of the financial institutions in connection with the 
implementation of the agreed restructuring plan.   
41. Even if the agreement does not use the term  “guarantee” the language used in policy notes 
have effectively constituted one.  A normal reading of the provision by a bank means that they can 
proceed with the restructuring without be ing constrained by possible financial losses.8 
 
42. In other instances, the Korean Government was even more explicit. For example, with regard 
to investment trust companies which were holde rs of Daewoo bonds (and creditors of DHI) the 
                                                      
7 Exhibit EC-40. 
8 The 1998 December Agreement for the Restructuring of the Top 5 Chaebols was preceded by an 
Agreement in January 1998 and followed by a third in August 1999 . 
 The EC cannot provide the content of these ag reements as the Government of Korea refused 
to provide to the European Communities, in the context of the Annex V procedure, a copy claiming 
that “ the question [was] irrelevant ”. However, the European Communities considers that this 
document is quite relevant to this dispute b ecause it shows the degree of intervention of the 
Government of Korea in the corporate sector. The European Communities therefore asks the Panel to 
draw adverse inferences from Korea’s refusal to provide a copy of the January Agreement  WT/DS273/R 
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Ministry of Finance promised that it would “pump pu blic funds” into market stabilization funds with a 
view to buying “unlimited amounts of corporate bonds from the investment trust firms” which are exposed to the dismantled Daewoo Group. In particular, it stated that:  
In a bid to stabilize interest rates, the government will inject 20 trillion won in bond-
market stabilization funds into the financia l market by October 15.  The funds will be 
used to buy out corporate bonds that investme nt trust firms, which are exposed to the 
dismantled Daewoo Group, may sell to raise the funds necessary to cope with possible massive redemption from their depos itors.  If needed, the government will 
also expand the size of funds to buy unlimited amounts of corporate bonds from the 
investment trust firms.   …..    
If investment trust firms face fund shorta ges, the government will pump public funds 
into those firms to guarantee th e payments to their investors.
9 
43. Furthermore, Korea explained in detail th e massive action plan taken by GOK to assist 
financial institutions including the 
 
Restructuring and recapitalization of financial institutions based on sound 
rehabilitation or closing where needed a nd with mergers including with foreign 
financial institutions if needed and the acceleration of non-performing loans as well.10  
44. In fact, the Korean Government pum ped into the financial institutions over [BCI:  Omitted 
from public version].  
 
45. Thus, financial instituti ons depended on GOK for their liquidity and/or survival. 
 46. Moreover, the GOK made access to this liquidity assistance subject to a number of conditions, the most important of wh ich was participation of banks to corporate restructuring. These 
conditions were clearly spelled out in Korea’s polic y statements to the IMF. For example, the Letter 
of Intent (LOI) of 24 September 1998:  
Government confirms that public funds w ill be used only: …..- where the bank is 
making adequate process on implementation of sound corporate debt restructuring….
11 
47. This condition was further refi ned in the LOI of 13 November 1998  where it was made clear 
that there would be no KAMCO purchasing of bad de bts, no capital injections to banks which do not 
wish to participate in the restructuring of troubled firms.  
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.
12  
48. The above condition was included in all of Korea’s policy notes to the IMF until at least 
July 2000. Thus, Korea effectively ensured that onl y financial institutions which participated in the 
restructuring effort would have access to public funds. 
                                                      
9 MOFE press release – published on MOFE website on 6 October 2000 (Exhibit EC – 101). 
10 Attachment 5 of  First written Submission by Korea. 
11 Korea Letter of Intent to IMF of 24/09/1998 (Exhibit EC-102) . 
12 Exhibit EC-36. WT/DS273/R 
Page D-12  
 
 
15. Question 15 
 
 Please provide the Panel with an estimate of the magnitude of the total amount of 
subsidization resulting from the measures identified in your Article 5(c) claims, along with an 
explanation and demonstration of how this estimat e was derived.  Please relate this estimate to 
the degree of price suppression / depression alleged by the EC.  
Response
 
 
49. The EC attaches an estimation of the magnit ude of the amount of subsidisation resulting from 
the measures identified in the EC’s Article 5(c) claims in Attachment 1  to this submission.  The EC 
also attaches as Attachment 2  an estimation of price depression a nd suppression together with other 
relevant information prepared by the EC’s cons ultants, First Marine International.     
 
50. However, the EC maintains that there is no obligation to quantify the amount of subsidisation 
and its relation to price depression and suppr ession for all serious prejudice claims.  .  [Add text]  
 
16. Question 16 
 
 In its third party submission in the US – Export Restraints case, the EC argued that 
there is no government entrustment or direction in  a case where freedom of action is "limited", 
but not "curtailed", i.e., where "the producer ca n still make choices".  Does the EC consider 
that the freedom of action of private financial institutions participating in the restructuring 
process was (i) "limited" or (ii) "curtailed"?  Were those companies able to make choices 
regarding their participation in the restructuring process?  Please explain. 
 Response
 
 
51. The US - Export Restraints case related to a rather particular s ituation.  It concerned the rather 
contorted position taken by the US in its counterva iling duty practice that export restraints constitute 
the entrustment or direction of private parties to  sell more goods on the domestic market than they 
would otherwise.  The panel in that case was therefor e considering a very different situation to that 
prevailing in this case which relates not to a genera l legislative measure but to specific measures taken 
with regard to the policies of banks. Obviously, operators who cannot export are not entrusted or 
directed to sell more domestically.  They can simply  not produce that which they would have exported 
if this were allowed. 
 
52. The EC would approach the application of Article 1 of the SCM Agreement  to the present 
case by interpreting the words of that provision accordi ng to their ordinary meaning and in the light of 
their context and purpose rather than interpreting wo rds used to describe the way the provision might 
apply in a very different case.  17. Question 17 
 
 Are you arguing in paragraph 73 of your oral statement that the banks that participated 
in the Corporate Restructuring Agreement ther eby legally committed themselves up front to 
follow the direction of the government?  Did such undertaking(s) by the banks affect all
 of the 
restructurings referred to in your complaint?  Please elaborate and provide specific evidence. 
 
Response  
 
53. Yes, under the Corporate Restructuring Agreement (CRA), banks explicitly legally 
committed themselves to   WT/DS273/R 
 Page D-13 
 
 
  ¾  restructuring (as opposed to liquidation) through debt-for equity swap and other 
measures listed in the Agreement.
13   
  ¾  certain procedures, i.e., leader bank will chair meetings thereby influencing the 
process, majority voting.
14  
  ¾  shorter time for decision-taking.
15 
 54. Korea themselves admits in its First Written S ubmission that by entering into this Agreement, 
domestic banks limited their ability to behave ” independently and in their own self-interest ” as 
opposed to (foreign) banks which did not sign the CRA.
16  
 55. Hence, the CRA already generally curtailed the discretion of individual private banks in 
deciding how to use their rights as creditors, e.g., in the restructuring for Daewoo.  
 
56. Furthermore, the signing of the CRA by ba nks under Government pressure should not be seen 
in isolation.  Already the Agreement for the R estructuring of the top 5 Chaebols of December 1998
17 
(originally also foreseen for Daewoo) reflects th e Korean Government’s policy of resolving the 
corporate crisis through debt/equity swaps .   
 
57. Through the Agreement for the Restructuring of the top Five Chaebols  of December 1998 
major creditor institutions18 agreed with the Korean government to support the restructuring of the 
top 5 chaebol particularly through debt/equity swaps.   58. Point 17 of the 1998 December Agreement for the Restructuring of the Top Five Chaebols  
provides: 
 
(17) Creditor banks will have primary r esponsibility for examining and monitoring 
implementation. Also, the creditor banks sh all carry out pledges toward providing 
support to restructuring, such as debt/equity swap. 
59. However, as explained by the European Co mmunities in its First Written Submission and its 
Oral Statement, the discretion of Korean banks wa s then further curtailed by a number of “stick-and-
carrot- measures”.
19    
 60. The EC in its Oral Statement has already produced evidence from private banks showing how 
the government was ready to use its influence w ith private banks to privilege certain sectors:
20 
 
"by requesting banks to participate in remedial programmes for troubled corporate borrowers and  
by identifying sectors of the economy it wishes to promote and  
                                                     
 
13 See Articles 1 and 2.2 of the CRA (Exhibit-EC 42). 
14  See Article 15.2 of the CRA. 
15 4-6 months, see first written subm ission of Korea, at para. 302  
16 First written submission by Korea at para 355. 
17 Exhibit EC-40. 
18 The agreement was signed by the Korea Devel opment Bank, the Commercial Bank of Korea, the 
Korea First Bank, Hanil Bank and the Korea Exchange Bank. 
19 First written submission by the European Communities at paras 231 to  243 
20 Oral statement by the Europe an Communities at para 75. WT/DS273/R 
Page D-14  
 
by making low interest loans available to banks and financial institutions who lend to 
borrowers in these sectors.  
… government policy may influence us to lend to certain sectors or in a manner in 
which we otherwise would not in the absence of the government policy".
21 
61. In addition, the EC noted at the first substa ntive meeting with the parties that these banks 
were at the time of the restructuring in an immediat e need of capital in order to ensure their survival. 
Therefore, one would have expected them to pursu e all means to increase cash  inflows including the 
liquidation of troubled borrowers.  This was even  more so for banks which were in possession of 
secured credits.   
62. Under normal market considerations this f act would have tilted the decision of the banks 
towards liquidation as opposed to restructuring. Debt a nd equity do not have the same value.   Debt is 
supposed to be repaid in full with interest wh ile the return on shares and their value are highly 
volatile. A debt requires interest payment and repaym ent at a fixed moment in time.  The swap into 
equity relieves the debtor from these obligations.  The risk is entirely on the equity-holder whether the 
value of the shares raises and he receives divide nds.  The return is volatile and uncertain.   
 63. Thus, from the perspective of the creditor bank,  debt-to-equity swaps not  only do not generate 
any capital for the bank but also further reduce capita l inflows as debt needs no longer be repaid; they 
are, thus, rather a luxury enjoyed by healthy banks which can afford to wait and see if the swap will 
eventually produce any benefits in the future. 
 
64. Korean banks which participated  in the restructuring of the ship yards were in exactly such an 
onerous situation. A careful examination of the s ituation of each of DHI`s creditors reveals that 
almost all of the creditors were facing at the time  severe financial difficulties which led to government 
intervention. This intervention took many forms de pending on the type of the financial institution 
involved and its particular needs such as: 
  ¾   capital injections (in most cases leading to the Government of Korea obtaining 
important shareholdings - in some cases up to 100 per cent),  
  ¾  assurance of government intervention in case of liquidity problems, or 
 
 ¾   the outright provision of public funds.   
 65. On top of the above tailor-made measures a ll of DHI creditors benefited from the Korean 
Government’s assistance through KAMCO, i.e.,  from KAMCO`s purchases of their bad loans which 
led to KAMCO obtaining 26 per cent of DSME shares after the debt-to-equity swap. 
 66. EC submits separately an Attachment  3 which shows in what way each DHI creditor was 
assisted by the Korean Government.   67. In the above circumstances, where the above  financial institutions depended on the Korean 
Government for their survival, it is highly questio nable to what extent these institutions could 
maintain views which departed from those of the Ko rean Government  concerning the restructuring.  
 68. Finally, banks which had recei ved public funds were limited in the way they could exercise 
their independence in participating in a restructuring. Article 18 of the Special Act on the 
Management of Public funds
22  obliges banks to enter into writte n agreements with the companies 
                                                      
21  Kookmin Bank brochure, p. 22, (Exhibit EC-100). 
22  Special Act on the Management of Public funds (Exhibit EC-103).  WT/DS273/R 
 Page D-15 
 
 
they wish to support the details of which are set out in a Presidential Decree.23  Furthermore, banks 
are prohibited from providing funds if the agreements  are not implemented or are not likely to be 
implemented.  69. In short, the banks already curtailed thei r choice between liquidation and restructuring 
through debt-for-equity swaps by signing the CRA .  Their discretion how and when to provide funds 
to companies was then further curtailed by the ot her measures described above , which together form a 
clear demonstration of government involveme nt on the banks’ financing decisions.   
 70. As the CRA framework was only set up in the first half of 1998, it was too late to be used by 
Halla and Daedong which faced problems already in 1997 and wh ich were obliged to follow the then 
existing framework (court-supervised corporate re organisation proceeding).Daedong applied for it on 
10 February 1997 and Halla on 6 December 1997. This , however, did not change their situation as 
explained above and in question 21.  18. Question 18 
 
 How did the Daewoo debt-for-equity swap cons titute a financial contribution by a public 
body, and on whom was any resultant benefit conferred?  Is there evidence that debts were 
swapped for less than fair market value, or that equity was obtained for a price greater than its 
market value? 
 Response
 
 
71. The Daewoo debt-for-equity swap constitute d a financial contribution because it involved 
forgiveness of debt and a debt-for-equity swap and th erefore direct transfers of funds through grants 
and equity infusions within the meaning of  Article 1.1(a)(1) of the SCM Agreement : 
 72. As has been explained in responses to Ques tions 14 and 17 above, the creditors deciding on 
the debt-for-equity swap were public bodies or private bodies entrusted or directed by the government within the meaning of Article 1.1(a)(1) of the SCM Agreement .  Thus, the debt-for-equity swap 
constitutes a financial contribution.   
 
73. The resulting benefit of this creation subsid y was conferred on the restructured company, 
Daewoo.   74. As to its amount, it is important to note that  from the perspective of the recipient, i.e., the 
restructured Daewoo, a debt-for equity swap is not  simply a reorganization of the balance sheet not 
involving flow of new money.  75. First, debt and equity do not have the same valu e, a debt is supposed to be repaid in full with 
interest while the return on shares and their value are highly volatile. Thus, formalistically, one could 
see a debt-for equity swap per se as conferring a benefit, in particular  if the recipient is an insolvent 
company or is in such a poor financial state that no private investor would have participated in such 
an action. A debt requires interest payment and repa yment at a fixed moment in time.  The swap into 
equity relieves the debtor from these obligations.  The risk is entirely on the equity-holder whether the 
value of the shares rises and he receives dividends.  The return is volatile and uncertain.  Having said 
this, it is difficult to generalize about these issues, as the facts of each individual case will vary.  The 
existence of a subsidy and the amount of the benef it will depend on the circumstances of each case.  
 
                                                     
 
23 During the Annex V process, Korea refused to provide the Presidential Decree stating that a 
translated copy of the Decree was not available; see Korea’s response to the EC follow-up questions of 
20 October 2003 under the section “attachment 2.1(6) at pages 7 and 8. WT/DS273/R 
Page D-16  
 
76. The SCM Agreement  is not drafted in terms of flows of money.  Article 1 provides for the 
existence of a financial contribution in the event of certain actions  by a government, or by private 
parties acting at its behest.  The existence of a bene fit is determined in relation to what could have 
been obtained by the recipient on the market in arm’ s length transaction.  The amount of benefit must 
also be assessed on that basis, as indicated in Article 14 of the SCM Agreement . 
 
77. As evidenced by the calculations in Attachment 1  to these responses, the creditors of 
Daewoo overpaid for the equity in the debt for equity swap on 14 December 2000 by KRW 649,089 million when compared to the price of the stock when it was first publicly traded on 
2 February 2001.
24   
 
78. However, the EC wishes to clarify that the calculation of the benefit resulting from the debt-
for-equity swap assumes that the restructuring plan itself was market based.  Yet, the EC maintains 
and will further develop its argument that  the mark et as evidenced by the fo reign creditors would not 
have agreed to the restructuring plan including the debt-for-equity swap at all and that therefore, the 
amount of the benefit to Daewoo is significan tly higher. (See response to Question 15 and 
exhibit 112).  
19. Question 19 
 
 Please comment on para. 56 of Korea's oral statement, regarding the impact of changes-
in-ownership on the benefit analysis. 
 
Response
 
 
79. Korea’s argument, if the EC understands corr ectly, is that the restructured yards did not 
receive a benefit because the restructuring pro cess involved changes-in-ownership.  However, the 
reference to the privatization cases is entirely misplaced.  The fundamental rationale behind the 
privatisation cases is that it cannot be presumed that  a privatised company continues to benefit from 
financial contributions provided to a former stat e-owned holder of the assets where the sale was at 
arm’s length and for market value. In such a case,  the benefit no longer accrues to the privatised 
company but to the former owner of the assets and if this is the government itself the subsidy is 
effectively withdrawn.  
 80. The situation is very different in the case be fore this Panel.  The change in ownership and
 the 
subsidy constitute one and the same  measure and it is the successor co mpany that is the only recipient 
of the benefit; the predecessor company never receive s a benefit.  Moreover, the change in ownership 
was not at arm’s length and indeed is part of  the measure that constitutes the subsidy.   
 
20. Question 20 
 
 The EC asserts (first written submissi on, para. 281) that KAMCO purchased non-
secured loans held by foreign creditors of DHI on  terms more favourable than those offered to 
domestic creditors.  How is this relevant to the Panel's examination of the issues of whether or 
not there was a financial contribution a nd benefit to the restructured company? 
 
Response  
 
81. Over the period August 1999 to June 2000 KAMCO purchased [BCI: Omitted from public 
version]  worth of Non performing loans (NPLs) of DHI.25  From financial institutions of which [BCI:  
                                                      
24 First written submission of the European Communities, paras. 258 and 284. 
25 Responses by Korea to the  Annex V Questions (Business-Confidential Version) (Exhibit EC-39), 
response to question 30 at page 80.  WT/DS273/R 
 Page D-17 
 
 
Omitted from public version] related to Daewoo-SME26 and became a creditor of DAEWOO-SME  
holding [BCI :  Omitted from public version]  of the shares after the swap.27 
 82. KAMCO bought Non-Performing Loans at rates of [BCI:  Omitted from public version]  
from foreign creditors and [BCI: Omitted from public version]  from domestic creditors of Daewoo-
HI.  KAMCO’s purchase of non-secured loans at a disc ount is a financial contribution in the meaning 
of a grant/equity infusion in DSME.  83. The purchase by KAMCO proves that independe ntly and market oriented behaving foreign 
creditors did not agree to restructuring.  As Kore a stated in para. 356 of its first written submission, 
the foreign creditors could have obstructed the liqui dation.  The purchase at a higher rate can be seen 
as evidence that the foreign creditors were “bought out”.  84. Even  according to the Arthur Andersen Repor t the total recoverable value  compared to the 
creditors outstanding claims was only claimed to be: 
 
 ¾  [BCI:  Omitted from public version] under the Liquidation value scenario  
 
 ¾  [BCI:  Omitted from public version] under the “going concern value” scenario.
28 
 
85. KAMCO’s purchase of more than [BCI: Omitted from public version] of DHI non-
performing loans29 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;
30 
 
 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. 
 86. In sum, these financial contributions were not  made directly to Daewoo but did benefit it by 
facilitating its restructuring and allowing it to emer ge with a healthier balance sheet than would 
otherwise have been the case.   
 
21. Question 21 
 
 In paragraph 296 of its submission, Korea defends its action in the restructuring in the 
context of both workout proceedings and corporat e reorganizations on the basis that they were 
subject to the majority votes of secured and uns ecured creditors; and in the case of corporate 
reorganizations, Korea argues in addition that th ese were effected by court decision.  Please 
comment.  
                                                     
 
26 Responses by Korea to the  Annex V Questions (Business-Confidential Version) (Exhibit EC-39), 
response to question 36 at page 52. 
27 Attachment 3.1(13) of Responses by Korea to the Annex V Questions (Business-Confidential 
Version) . 
28 The total recoverable Korea states in para. 348 of its First Written Submission. 
29  Korea’s Responses to Annex V Questions (Exhibit EC-39) (BCI) question 30 at page 80. 
30 See reply to Question 17 above. WT/DS273/R 
Page D-18  
 
Response
 
 
87. With respect to the DHI workout, the EC has explained above (response to question 17) how 
creditors were directed by the Korean government in their decisions.  
88. With regard to court-supervised proceedings , the EC would point out that the court only 
examines whether a number of conditions for opening of the restructuring proceeding, the approval of 
the restructuring plan and the closing of the restru cturing proceeding are fulfilled.  One of them is 
whether the creditors agreed with a 2/3 (for secured creditors) and 3/4 (for unsecured creditors) 
majority respectively to the restructuring plan.
31  Thus, it is the creditors that exercise the discretion.  
Without their agreement, the court cannot take a decision.   
 89. Thus, the fact that the restructuring of these firms was supervised by the court does not mean that there is no subsidy since the role of the court was merely to ensure that creditors had followed the 
proper procedures. Nowhere in the information s ubmitted, it is even suggested that the court 
interfered with the decision making process or that it substituted its opinion for that of the creditors. 
On the contrary, Korea has repeat edly stated that creditors took decisions in these cases on the basis 
of their own interests.  90. Also, the fact that the Halla/Samho and D aedong restructurings took place under an existing 
legal framework (as opposed to the pa ra-legal nature of the workouts) does not preclude a finding that 
a subsidy might have been granted. If such a view was to prevail, it would preclude the application of 
the SCM Agreement  on any restructuring/bankruptcy proceedi ngs – a result certainly not foreseen by 
the spirit or letter of that WTO Agreement.  
22. Question 22 
 
 Please elaborate on your argument concerning the alleged specificity of the corporate 
restructuring, as referred to in paragraphs 87-89 of your oral statement.  That is, setting aside the issues of financial contribution and benefit, what is the basis for your allegation that the 
restructuring was specific?  Do you argue de jure  or de facto  specificity in this regard? 
 
Response
 
 
91. The corporate restructuring subsidies are specific under Articles 2 (a) and (b) of the SCM 
Agreement  because they are individual measures only applying to the restructured yard and are per se  
not generally available to all enterprises.  The ava ilability of the corporate restructuring subsidies is 
limited by law to individual enterprises, because it selectively benefits certain enterprises, as opposed 
to a broad economic policy measure, such as the reduction of corporate taxes.    92. More specifically, the amount of the benefit granted to, e.g., Daewoo, does not result from an 
automatic application of objective criteria within th e meaning of Article 2(b) and footnote 2 of the 
SCM Agreement . These provisions state in relevant part: 
 
In order to determine whether a subsidy, as defined in paragraph 1 of Article 1, is 
specific to an enterprise or industry or group of enterprises or industries (referred to in this Agreement as "certain enterprises" ) within the jurisdiction of the granting 
authority, the following principles shall apply: 
(a) Where the granting authority, or the legislation pursuant to which the 
granting authority operates, explicitly li mits access to a subsidy to certain 
enterprises, such subsidy shall be specific. 
                                                     
 
31 First written submission of Korea, para. 302.  WT/DS273/R 
 Page D-19 
 
 
(b) Where the granting authority, or the legislation pursuant to which the 
granting authority operates, establishes objective criteria or conditions2 
governing the eligibility for, and the am ount of, a subsidy, specificity shall 
not exist, provided that the eligibility is automatic and that such criteria and 
conditions are strictly adhered to.  The criteria or conditions must be clearly 
spelled out in law, regulation, or other official document, so as to be capable 
of verification. 
  2 Objective criteria or conditions, as used herein , mean criteria or conditions which are neutral, 
which do not favour certain enterprises over others, and which are economic in nature and horizontal in 
application, such as number of employees or size of enterprise. 
 
93. The benefit resulting from a restructuring d ecision, e.g., the one in the case of Daewoo is 
nowhere laid down as “objective criteria” in the way required by Article 2(b) of the SCM Agreement  
and footnote 2.  In particular, the specific amount  of the subsidy and the eligibility criteria are not 
generally described and automatically applied to all other firms that apply for a restructuring 
proceeding. No Korean legislation or any other measures, and in particular not the CRA provide that all companies in difficulty are (i) restructured  as is Daewoo and the (ii) receive the same specific 
amount  of benefit resulting from debt-forgiveness, interest rebates, debt rescheduling and finally debt-
for-equity swap enjoyed by Daewoo.  Rather , the rules governing workout proceedings and 
restructuring are entirely procedural and leave the discretion of whether and how to restructure to the creditors in each individual case.  94. The individual nature of, e.g., the Daewoo restructuring measures is further corroborated by the fact that the eligibility criteria for work-out were in any case not strictly applied.  The first 
“disqualifying criterion”
 32, whereby an applicant “may be disqualified” is  
 
A company whose outstanding debts significantly exceeds its sales revenue and profitability of its core business.  
95. It is evident from the Arthur Anderson report that this was very far from being the case for 
DHI. 
 
 [BCI:  Omitted from public version.]  
 
96. Indeed Korea agreed in the responses to th e Annex V questions that this criterion was not 
fulfilled) and further admitted that these eligibility criteria were not strictly applied but are rather 
“factors to be considered in determining whethe r companies may be disqualified as candidates for a 
workout.  None of these factors in isolation is decisive.”
33 
 
23. Question 23 
 
 Is it your position, as Korea argues, that all insolvent companies should be liquidated 
and wound up, rather than restructured?  If not,  what criteria should determine whether to 
keep an insolvent company in operation?  In this  context, what weight or importance should be 
given to a going concern analysis or assessment?  
Response
 
 
97. No, the EC fully accepts that bankruptcy law is  a necessary part of a market economy and that 
a properly conducted bankruptcy pro ceeding would normally not give rise to a subsidy.  However, 
                                                      
32 First written submission of Korea, attachment 8, p. 2, last paragraph and p. 3. 
33 Korea’s Response to Annex V Question (BCI) 3.1.2. 11, p.69. WT/DS273/R 
Page D-20  
 
where the outcome of a bankruptcy proceeding or a co rporate 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 arisen if the creditors ha d 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. 
 
98. The relevant criteria to determine whether to  keep an insolvent company in operation are: 
  ¾  Whether a market creditor/investor in si milar circumstances, given probable market 
developments and the position of the undertaking would have acted in the same way, 
i.e., agreed to waive or reschedule debts.  With respect to a debt for equity swap, it 
should be considered whether a rationale private investor operating in a market 
economy would have purchased the equity at the price provided in the restructuring plan. 
 
 ¾  Whether a restructuring plan exists that r estores the long-term viability of the firm 
within a reasonable timescale and on the basis of realistic assumptions as to future operating conditions.  The restructuring plan should also describe the circumstances that led to the company’s difficulties, th ereby providing a basis for assessing whether 
the proposed measures are appropriate.   
 
 ¾  Whether the recipient is able to make a significant contribution to the restructuring 
plan from its own resources, including through the sale of assets that are not essential to the firm’s survival, or from external  financing at market conditions.  Such 
contribution is a sign that the markets belie ve in the feasibility of the return to 
viability. 
 
99. As to evidence, the EC considers that the primordial indicia is the behaviour of actual other creditors that were not influenced  by the government (in this case foreign creditors).  Moreover, the 
ability of the company to obtain credit or attract investment on the market is highly relevant.  The existence of a going concern analysis can be an indi cia that a hypothetical private creditor would have 
acted in the same manner, if that analysis cont ains the above elements and was provided to the 
creditors in sufficient time so as to  take an informed decision.   
 
24. Question 24 
 
 Where a government entity is a creditor of  an insolvent company being restructured, 
will the restructuring always
 result in a subsidy?  Why or why not? 
 
Response  
 
100. The restructuring will always result in a fi nancial contribution wher e it consists of debt-
forgiveness, debt-rescheduling or a debt-for-equity swap.  However, such financial contribution 
would not necessarily always result in a benefit and therefore a subsidy.  The existence of a benefit 
depends on whether the government creditor acted li ke private creditor would have done on the basis 
of the elements described in response to question 23.  
25. Question 25 
 
 In your view, does the concept of "like product" apply in respect of claims of price 
suppression/depression?  Please explain your view , including the textual basis and any other 
elements that you deem relevant.   WT/DS273/R 
 Page D-21 
 
 
Response  
 
101. The relevant portion of Article 6.3(c) of the  SCM Agreement  does not refer to “like product” 
with respect to price depression and suppression. The EC considers that the Agreement therefore intends to give flexibility as to how to determin e the “same market” in wh ich price effects occur. 
 
102. Thus, Article 6.3(c) of the  SCM Agreement  provides for the tailoring of criteria appropriate to 
grasp price developments in the relevant product and geographic market affected by subsidisation 
taking on a case-to-case basis.  26. Question 26 
 
 You have argued that a "product segmentat ion" approach should be applied in this 
case.  In what respects, if at all, does this concept differ from "like product" as defined in 
footnote 46 of the SCM Agreement? 
 Response
 
 
103. The EC noted with approval the statement of the Panel in Indonesia Cars  that a market 
segmentation approach is consistent with the criteria for a like product analysis under the SCM 
Agreement  (as opposed to a like product analysis under Articles III:2, III:4, of the GATT 1994 as 
argued by Korea).  
 104. Footnote 46 of the SCM Agreement  provides in relevant part:  
 
Throughout this Agreement the term "like product" ("produit similaire") shall be 
interpreted to mean a product which is iden tical, i.e. alike in all respects to the 
product under consideration, or in the absence of such a product, another product 
which, although not alike in all respects, has characteristics closely resembling those of the product under consideration 
105. Products belonging to one market segment will generally have characteristics closely 
resembling each other, because buyers and sellers w ill consider that the products have the same or 
similar end-uses
.  Accordingly there will be a strong correla tion between prices of products with the 
same end use.  Hence, changes in price by one pr oducer will affect the prices of other producers of 
that product. Generally, the goal of like product anal yses is to assess precisely the effects of a subsidy 
given to the producer of one product on the prices for products produced by other producers.  Thus, in 
effect , a market segmentation analysis involves simila r questions as posed in a like product analysis 
under the SCM Agreement . 
 
27. Question 27 
 
 Korea argues that there is considerable variation  or diversity of products within each of 
the product segments proposed by you, meanin g that these product segments are too broad and 
should be broken down, for example, at least in to different size ranges.  Please comment on the 
diversity of products within each of the produc t segments that you propose, and in this context 
please respond specifically to Korea 's arguments on this point. 
 WT/DS273/R 
Page D-22  
 
Response
 
 
106. Korea contents itself with generally questioni ng the three market segments identified by the 
European Communities (LNGs, container chips and product tankers)34 without any substantiated 
argument, why these should not be correct.  If at all,  Korea asserts that the market segments should be 
further broken down according to different sizes within these ship types.35  
 107. As already explained in our Oral Statement there are no standard classifications for ships.  
The difficulty of classifying ships results from the f act that they are customized and made-to-order 
product and thus show a considerable variety of technical specifications.   
 
108. Within the OECD Working Party on Shipbuildi ng, there is not even consensus as to whether 
there is   
One single market for all ship types or a number of market segments based on the 
main  vessel types (i.e., a tanker market, a cruise market etc.).  In defining the product 
market, there was a commonality of views among experts that demand substitutability and supply substitutability s hould both be considered.
36 
109. Curiously, Korea in that forum claims that “t he level of supply substitutability was so high to 
make shipbuilding a single market for all vessel types” and invoked the “abil ity of shipbuilders to 
switch easily from the production of one vessel ty pe to another as a strong evidence of high supply 
substitutability” while EC with other economies claime d that “the shipbuilding market [is] fragmented 
into ship type segments…”.   110. For the purpose of this WTO dispute which re quires an identification of markets in which the 
effects of subsidies can be felt, the EC has explaine d in its Oral Statement why both the perspective of 
the ship-owner (demand side) and the perspectiv e of the shipbuilder (supply side) should be 
considered.  
 
111. The EC submits that all analysts in this industry make the distinction between major ship 
types, and so do the Korean yards on the product pages of their web sites.
37  These support the use of 
the main types proposed by the Eu ropean Communities for the purpose of this dispute, i.e., LNGs, 
market definition in container ships and product/chemical tankers.  
 
112. However, contrary to what Korea argues, th ere is no basis of further segmenting relevant 
markets according to size. First, there standard si ze by which ships within these main types could be 
meaningfully distinguished.  Indeed, curiously, Korea itself refers to different size bands even in its 
First Written Submission.  Thus, for example, it 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 its First Written 
Submission while then citing with approval to the ve ssel categories used in an analysis of FMI which 
looked at “container feeder vessels (up to about  3,500 TEU)” in para. 515 of its First Written 
Submission.    
 
113. Any further segmentation of the main typ es according to size does not  answer the question 
which ships serve the same end uses and are th erefore substitutable from the perspective of the 
shipowner.  The European Communities refers to figures 2.2 and 3.2 contained in Attachment 2.  
                                                      
34 First written submission of the European Communities,  paras. 417, 418.  See also Oral Statement, 
paras. 101-110.   
35 First written submission of Korea, paras. 514. 
36 OECD Council Working Party on Shipbuilding, Report by the Chairman of the Informal Experts 
Group Held on 1-2 March 2004 (C/WP6/SNG(2004)5, (Exhibit EC – 104) (Emphasis added). 
37 See compilation of products listed on websites of Korean and EC producers in Attachment 4 .  WT/DS273/R 
 Page D-23 
 
 
They present a histogram of the frequency of a ll product tanker and container ship orders placed 
between 1997 and 2002 (based on Lloyd’s Register data), distributed by deadweight.    114. While figure 2.2 shows certain peaks for pr oduct tankers, these size bands, e.g., between 
32,000 dwt and 40,000 dw t cannot be seen as  strict standards for sizes demarking a line for 
substitutability or end uses.  Thus,  a 31.000 dwt pro duct tanker is fully substit utable to a 32,000 dwt 
tanker, for the purpose of end uses.   With respect to container ships, this is even clearer, because 
figure 3.2 does not even reflect any clear peaks, and hence any subdivision as to sizes would be 
arbitrary.  
 
115. As the European Communities explained in its Oral Statement, from the perspective of ship-
owners size may limit full substitutability, however, both for c ontainer ships and product tankers there 
is a significant overlap between the end uses of ships of all sizes.
38  Indeed, there is no market, e.g., 
for a container to be transported through the Pa nama or Suez Channel or between main hubs and 
smaller ports.  Shipping companies run networks of routes and exchange ships according to routes 
which are constantly adapted to market needs.   
 
116. In any case, from the perspective of the shipbui lder, the distinction between even ship types is 
less important as the production technology is larg ely the same for all commercial vessels and in 
particular between the main types identified by the European Communities.  Under no circumstances 
can one say that size plays a significant from the perspective of the shipbuilders.39 
 
117. In short, the market segmentation proposed by the EC is sound both from the demand and supply side perspective.  
28. Question 28 
 
 Please comment on Korea's statement that "the Korean and EC shipbuilders have and 
continue to operate in totally different segme nts of the shipbuilding market and that the 
segments where certain competition may exist a re marginal and demand for those segments has 
shown slackening" (para. 19, Korea's first written submission).  
Response
 
 
118. In paragraph 19 of its submission, Korea provi des a snapshot picture and tries to minimise 
actual participation  or operation  of EC yards in certain selected si ze ranges within the three markets.  
However, for the purpose of a price depression or suppression claim it is not  relevant whether EC and 
Korean producers actually “operate” or “participate” in  the same market as argued by Korea.  What is 
required is that EC producers compete  for all the products and are able to build them. 
 119. In this respect it is important to recall that  competition between yards materialises at the stage 
of tendering
 for a contract. Tendering involves first technical  specifications and a price offer. It often 
also includes financing aspects and comes at substa ntial costs for the tendering yard.  Hence, the 
absence of an order does not indicate an absence of co mpetition in the market.  EC shipyards are well 
experienced in all the contested market segments and are actively seeking opportunities to win orders 
in all sectors.     
                                                     
 
38 Oral Statement by the European Communities at the First Substantive Meeting with the Panel, 
paras. 105-107. 
39 Oral Statement by the European Communities at the First Substantive Meeting with the Panel, 
paras. 108-109. WT/DS273/R 
Page D-24  
 
120. This can first be proven by the list of available standard product categories on their 
websites.
40  
 121. Moreover, Korea itself recognises that EC ya rds and Korean yards compete in the same 
market segments and makes it clear in its recent Pa nel request in the case DS 301 of 6 February 2004 
where Korea considers that 
 
the EC and its Member State measures referred to above are in breach of the EC and its Member State obligations under the follo wing provisions: Articles I:1 and III:4 of 
GATT 1994 because the TDM Regulation and Member State implementing measures 
involving the bestowal of German, Danish, Dutch, French and Spanish grants to 
shipyards on a vessel-specific and product-related basis, adversely modify conditions 
of competition between Korean commercial vessels  and the like vessels built in third 
countries and Korean commercial vessels and the like vessels built in the EC, 
respectively ”. 
29. Question 29 
 
 You argue that there are three mark et "segments" relevant to your price 
suppression/depression claim:  LNGs, chem ical/product tankers, and container ships. 
  (a) Is the implication of this that in your view, price suppression/depression should 
be found in respect of each of these segments separately? 
 
Response
 
 
122. Yes.  
 (b) If so, what is the relevance of figure s 33-36 of your submission?  That is, please 
explain what conclusions about price and cost trends in respect of the particular kinds of ships referred to in your claim can be drawn from these graphs, which appear to represent averages for all
 ships of all  types. 
 
Response  
 
123. Paragraphs 443-453 of our First Written Submission and Fi gures 33-36 deal with price 
suppression at an aggregate level before addressing pr ice/cost developments in the three particular 
segments.  The under-lying principles are the same whether considered at the aggregate level or 
specifically fore the three market segments as fu rther elaborated above: Newbuilding prices have 
disconnected from the key economic drivers, namely  order volume (i.e. demand), freight rates and 
costs of production.   124. The EC also notes that major shipbuilding cons ultants maintain a composite ship newbuilding 
price index, along with their more specific price information for particular ship-types. Also, the 
OECD issues regularly its own newbuilding price an alysis which  contains a composite price index 
with a timeline.  
 (c) Do you agree with Japan's argument that a low price for any individual 
transaction will put downward pressure on all
 types of ships, whether 
substitutable or not?  If so, why?  Does a decline in the price of a ship of a 
certain type, for instance a container ship, cause a decline in the price of ship of another type, e.g., a tanker or passenger ship?  Is it not more defensible to argue 
                                                     
 
40 See Attachment 4.  WT/DS273/R 
 Page D-25 
 
 
that a decline in the price of one ship causes a decline in the price of another ship 
with the same end-use? 
 
Response  
 
125. Yes we agree. As explained in the answer to question 30 below, the end use of the ship is to a 
large degree irrelevant to the shipbuilder, just as the end use of a building is largely incidental to the 
business of a construction company.   It is common pr actice in shipbuilding for shipyards to shift their 
focus between market segments to respond to shifts in the market.  Because of this ability, or even 
necessity, to shift, it is a misconception to assume that shipyards are only affected if they are 
competing directly for the ship types that are the subject of accusations of price suppression.   
 126. Therefore, a decline in prices for one ship-type will de facto  always go hand in hand with 
price developments for another.  However, the co rrelation between price developments will be higher 
for ships with the same end-use. 
 
30. Question 30 
 
 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.  
Response
 
 
127. All shipyards are ultimately constrained only by size.  From the point of view of a 
shipbuilder, however, within this size constraint th ere is a great deal of flexibility for substitution 
between products.  
128. In the eyes of a shipbuilder a ship is an assembly of steel panels, into which is fitted 
machinery, pipes, cables, accommodation and so on, a nd the ultimate function of the ship is largely 
irrelevant.  In the eyes of a shipbuilder a tanker, a dry bulk carrier and a container ship are broadly 
similar products, even though the arrangement and pr oportions of the parts that are assembled differ 
in each product.  Whilst shipbuilders seek to impr ove economic efficiency by series building similar 
products, very few shipyards specialise in a single pr oduct type, although there are examples of this.  
Thus, for example, Hyundai Heavy Industries, with in the same shipyard, cu rrently has orders for 
tankers of different sizes, container ships of di fferent sizes, LPG tankers, dry bulk carriers and LNG 
tankers.  Similarly, Daewoo is cu rrently constructing tankers, LNG ca rriers, LPG carriers, car carriers 
and container ships within broadly the same faciliti es.  Most shipyards take orders in this way, 
building a wide range of ship types. 
 
129. In this respect shipbuilding can best be compared to the construction industry whereby a 
construction company will be capable of building a wi de range of building types and the end use is of 
little relevance to the building process.  The charac teristics of the interim products produced by the 
shipyard from which the ships are assembled will be broadly similar between the different ship types 
and the assembly and outfitting processes will also be broadly similar, even though the final product 
assemblies will have widely di fferent shipping functions. 
 130. Specific prior experience is of limited significance for most ship types.  The exceptions to this are LNG tankers and cruise ships where entry cost s are high and a significant amount of development 
will be needed to gain market entry. WT/DS273/R 
Page D-26  
 
 131. The number of relevant EU shipyards is too many to be specific about the final part of this question.  LNG tankers are on order in shipyards e xperienced in this sector in France (Chantiers de 
l’Atlantique) and Spain (Izar), and the market has been competed strongly by Finnish shipyards also 
well experienced in building LNG carriers, although as yet without an order.  Container ships are built 
throughout Europe in all size ranges,  with German and Danish shipyard s concentrating in particular in 
the larger size ranges.  Similarly there is a wi de experience of building product tankers throughout EU 
shipbuilding, although with few orde rs won by European yards in th e face of low price competition in 
recent years.  31. Question 31 
 
 Is "head-to-head" competition a necessary  precondition for any finding of serious 
prejudice based on price suppression or depression?  If not, why not?  If so, how can such head-
to-head competition in respect of various kinds of  ships be observed?  Please provide or refer to 
any relevant evidence to illustrate your response. 
 
Response
 
 
132. Whilst there are numerous examples within EU sh ipbuilding of contracts lost in head to head 
competition with the disputed Korean shipyards,  this is not a necessary precondition for finding 
serious prejudice based on price depression or suppression.  
 133. As explained in response to Question 29 it is sufficient to establish that producers of the complainant and defendant compete on the market se gments for which serious prejudice is alleged.  
The ability and the willingness to prod uce vessels of any kind or size is the decisive factor and should 
not be confused with the actual regular success to secure specific orders in the market. Thus, the 
realistic presence of a yard (in terms of available f acilities, technology and building slots) in a certain 
market segment is sufficient to establish the market  mechanisms. Typically, brokers would be able to 
name yards that were invited to make a quote. Th e fact that brokers would consider a yard as a 
potential bidder, would prove presence in the market, irrespective whether the yard has recently been 
active in the market segment or not. 
 
134. Ultimately shipyards will stop tendering for orders that they know they are incapable of winning, because the cost of tendering is so high.  Th e exit of a shipyard in this way is the ultimate 
expression of serious prejudice resulting from price suppression and depression, but this will not be identified through an analysis of contr acts lost in head to head competition.  
 32. Question 32 
 
 Please identify in as precise terms as possi ble the products, within each of the product 
segments that you propose, for which the Eu ropean and Korean shipyards compete most 
directly.  Please describe the nature of the comp etition between European and Korean ships of 
each of these types. 
 
Response
 
 
135. The EC refers to Attachment 6  which describes the ordering and market shares within the 
three product segments.   
  WT/DS273/R 
 Page D-27 
 
 
 (a) Product tankers41 
 
136. Within this market one can distinguish th ree sub-types bands above 20,000 dwt: handysize, 
handymax and panamax.  These three typ es are demonstrated in figure 2.2 of Attachment 2  which 
shows peaks in the size bands of:  
  ¾  32,000 to 40,000 dwt (Handysize) 
 ¾  44,000 to 51,000 dwt ( Handymax) 
 ¾  69,000 to 76,000 dwt( Panamax)  
 
137. As to the nature of the competition between European and Korean ships within the product 
tanker segment, the EC refers to the further information in Attachment 6 . Korea dominates all three 
sub-sectors, whilst EU shipyards have lost almost al l share of the market in the face of low prices.  
There are currently four handysize ships on order in Italy and one in Spain.  There are no ships of the 
two larger types on order in the EU.  In the past this has been an important market sector for EU 
shipyards, with a considerable track record invested in EU shipyards. 
 
 (b) LNG carriers 
 
138. Whilst there are, technically speaking, two va riants of the LNG tanker, the spherical and the 
membrane type, the size of ships, at least up to now, has been fairly uniform (and there is no 
difference in the use of these two variants).  This is  demonstrated by figure 1.2 of Attachment 2 which  
presents a histogram of the frequency of all L NG tanker orders placed be tween 1997 and 2002 (based 
on Lloyd’s Register data), distributed by deadwei ght.  There are a very small number of ships built 
outside this range (four were ordered outside this  range out of 86 total LNG carrier orders placed 
between 1997 and 2002), but the majority of ships lie in a relatively narrow band around 140,000 to 
150,000 cubic metres cargo capacity. 
 139. As to the nature of competition w ithin this segment, the EC refers to Attachment 6 . Korea 
dominates, with almost 60 per cent market share, wi th very limited opportunities for EU shipyards to 
take orders.  There are currently three ships in order in France, two in Spain, with a total market share 
of 7.3 per cent.
42    The capability to produce this ship type is inherent in a number of EU shipyards.  
The failure of European builders to gain any appreciable  market share in this sector in the face of very 
low prices, and despite strenuous efforts at product development and cost reduction, has been the 
source of considerable frustration.  
 (c) Container ships 
 140. The container ship market is less clearly dema rcated in terms of sub-classes by size, than the 
other disputed ship types, as is evidenced by figure 3.2 in Attachme nt 2 which   presents a histogram 
of the frequency of all container ship orders placed between 1997 and 2002 (based on Lloyd’s 
Register data), distributed by TEU.    
141. Above the size band for feeder ships ( ca.  500-3500 TEU), peaks can be seen for:  
 
 ¾  Panamax ships (between about 4,000 and 5,000 TEU) 
 ¾  Post-panamax ships (above about 5,000 TEU) 
 
                                                     
 
41 As clarified in para. 103 of the Oral Statement by the European Communities, the claim relating to 
product and chemical tankers does not cover pure chemical  tankers.  Therefore, the EC will henceforth refer to 
this segment collectively as the “product tanker market”. 
42 (Note: the very small ship on order in Netherlands is an unusual variant of this ship type and is not 
included in the general market for large LNG tankers of around 150,000 m3). WT/DS273/R 
Page D-28  
 
142. The nature of competition is described in Attachment 6 . Korea takes around three-quarters of 
orders for both panamax and post-panamax ships.  EU shipyards have lost all share of the post-
panamax sector and retain less than 1 per cent of th e panamax sector.  This is despite considerable 
efforts at marketing in these sectors and a good track reco rd of production.  In the feeder sector Korea 
has the highest market share but without dominan ce.  EU shipyards retain around one quarter of 
orders, primarily in German shipyards.  Denmark a nd the Netherlands participate in this sector but 
only to a limited degree.  
33. Question 33 
 
 Please provide the data underlying your estimates of 2002 EC market share referred to at paragraph 15 of your submission (i.e., 17 per cent of worldwide CGT, and one-third of world 
turnover for ships).  How many ships of  which types do these figures represent? 
 
Response
 
 
143. The information on market share is based on Lloyd's Register data comes from the OECD.43 
The OECD does not refer to numbers of  ships and only uses cgt as reference. 
 144. The economic and employment data for the EC shipbuilding industry are contained in the AWES (Association of European Shipbuilders and Ship Repairers) Annual Report for 2002.
44 AWES 
also has Norway, Poland, Romania and Croatia as members. The figures for these countries have not 
been included in the EC totals.  145. In terms of production (delivered ships in 2002) the AWES countries, excluding Norway, Poland, Romania and Croatia had an output of 289 ship s. In its statistics AWES does not differentiate 
by country and
 ship type. Therefore the following breakdown refers to all AWES countries (total of 
425 ships):  
Deliveries in 2002 by ship type:  Oil tankers        4 
Product/chemical tankers    22 
Bulk carriers        3 General cargo ships     46 Containerships      66 RoRo ships        8 
Car carriers        9 
LPG tankers        1 F e r r i e s        2 7  Passenger ships      28 Fishing vessels      66 Other     145  
 34. Question 34 
 
As a general matter, please describe the precise  nature of the analysis that you believe is 
required to establish serious prejudice through price suppression/price depression, including 
the following issues:   
 
                                                     
 
43 OECD document C/WP6/SG(2003) 3 "WORLD SHIPBUILDING ACTIVITIES IN 2002". (Exhibit 
EC – 105). 
44 AWES – Annual Report 2002-2003 (Exhibit EC – 106).  WT/DS273/R 
 Page D-29 
 
 
 ( a) Must there be (at least inter alia ) a demonstration that the prices for the 
complaining party's products have been s uppressed or depressed, or is the focus 
of the analysis instead the prices for th e allegedly subsidizing party's product?  
Or are both sets of prices relevant? 
 
Response  
 
146. The EC believes that there is serious prejudice in the form of price depression or suppression 
where prices are depressed or suppressed on any mark et in which the products of the complaining 
Member compete with those of the subsidising Me mber.  As noted above, this competition can be 
“head-to-head” or simply at the level of being potenti ally able to tender for contracts to build the same 
ships.  Thus price depression or suppression on a ma rket may lead the suppliers of the complaining 
Member not to go to considerable expense of tendering for contracts at depressed or suppressed 
prices.   
147. In other words price depression or suppressi on describes a condition of the overall market.  
(Establishing price undercutting on the other hand may require evidence of  actual sales by the 
respective suppliers.)    148. Since the market for ships is a global one , price depression or suppression is not limited to 
one region.  Rather all prices offered anywhere  in the world may lead to price depression or 
suppression throughout the global market.  
 
 (b)  How if at all should these two sets of prices be juxtaposed against or related to 
one another? 
 
Response
 
 
149. As stated above, price depression or suppressi on has to be established on a market where the 
products of the complaining Member compete with t hose of the subsidising Member.   Since, in the 
view of the EC, this is the global market, it is sufficient to show price depression or suppression of 
any prices.  The EC has shown with its graphs price depression/suppression for Korean shipbuilders 
(prices not following the evolution of costs) a nd also price throughout the world (prices not 
responding to increased demand). Since Korean shipbuilders are the price leaders, price depression/suppression in Korea is particularly importa nt. It affects, that is depresses/suppresses the 
prices of all shipbuilders throughout the world.  
 
 (c)  How similar must the complaining party's and allegedly subsidizing party's 
products be? 
 
Response
 
 
150. They need only be sufficiently similar that ch anges in the price of one affects the price of the 
other. 
 
35. Question 35 
 
 The nature of your basic argument as to price suppression/depression in this case, and 
particularly as to the role and significance of Korean  ship prices, is not fully clear.  Please 
comment on the following:   (a)  Is it your argument on price suppression/price depression that Korean
 prices 
have dropped, or failed to increase, in sp ite of various factors that should have 
caused them to increase, and that th is situation (these trends in Korean  prices) WT/DS273/R 
Page D-30  
 
itself constitutes the "price suppression" or "price depression" referred to in 
SCM Article 6.3(c)? 
    (b)  Or is your argument that Korean prices have caused EC shipyards' prices to 
decline or have prevented them from increasing? 
 
 (c)  Or is your argument rather that Kore an prices have caused "world prices" for 
ships either to decrease or have prevente d them from increasing, and that these 
trends in world
 prices constitute the price suppr ession or depression referred to 
in Article 6.3(c)? 
 
 (d)  How do the examples described as "lost sales" in your first submission 
specifically relate to and support your allegations of price suppression/depression? 
 
Response
 
 
151. All of the phenomena described in (a), (b) and (c) have occurred.  The critical element is 
probably that described in point (c).  This has been caused by the phenomenon described in (a) and 
has caused that described in (b).   
152. Lost sales (d) were for purely illustrative purpo ses showing the actual effect of Korean prices 
on EC prices.  
36. Question 36 
 
 Assuming that there is a world market that  allows competition between all suppliers for 
the sale of a particular ship, is it your position that if a bid goes to, say, a Finnish or German or 
Japanese shipyard, the reason for the lower price of the winning bid is a natural competitive advantage (i.e., lower cost or higher productivi ty), while if the winning bidder is a Korean 
shipyard, you exclude such a possibility?  Please explain. 
 Response
 
 
153. The EC accepts that different yards have different competitive advantages, also within a 
specific shipbuilding country or region. However, by  systematically excluding certain cost factors 
such as debt servicing or inflation, Korean yards ar e able to offer prices that cannot be matched by 
any competitor. Shipbuilding costs are quite transparent and reasonable assumptions about key costs 
and profitability of yards can be made.  154. It should be remembered that the real costs of production appear only years after the tendering 
for and contracting of a vessel. Yards can ma ke unreasonable quotes without needing a subsidy 
instantly. The EC alleges that the Korean subsidies have allowed certa in yards to stay in the market 
and assume price leadership by setting artificially low prices that then became the new benchmark. 
 155. Furthermore, Japan in its Third Party submission clearly indicates
45 that “Japanese 
shipbuilders experienced a number of lost sales of L NGs carriers in competition with offers made by 
Korean shipbuilders at the prices that were 10 to  27 per cent lower.…Jap anese shipbuilders also 
reported lost sales of some container vessels, since the prices offered by Korean competitors were 15 
to 17 per cent lower”.  Japan makes clear that for ce rtain shiptypes, only Korean shipyards made very 
low offers preventing other competitors to win bids.  
 
                                                      
45 See Third Party submission of Japan, para 18.  WT/DS273/R 
 Page D-31 
 
 
156. The EC would recall however that it is not claiming prejudice in the form of specific instances of lost sales.  It is rather complain ing that prices have been depressed or suppressed 
significantly and this is due to a subsid isation of a number of Korean yards. 
 
37. Question 37 
 
 You argue that "in the same market" refers to  any market in which there is competition 
between the subsidizer and the complaining party, and that in the case of ships, which are not in 
any meaningful sense imported, the only relevant ma rket in this sense is the global market.  
Concerning "the same market" you also quote with approval, at paragraph 392, the Panel's 
statement in its 19 September 2003 response to Korea's  request for preliminary ruling, that "the 
same market" is "a market where Korea n and European Communities producers of 
commercial vessels compete and where the alleged adverse effects of the subsidies on prices or 
sales will need to be established".  
 (a)  What in your view distinguishes a "g lobal market" from a series of national or 
perhaps regional markets, and how wo uld price suppression/price depression 
analysis for a "global market" differ from such an analysis for a national or regional market?  Please respond to the US argument that a purchaser of any product always has the option of importing it from a number of countries, but that this does not change the scope of the market where the sale takes place. 
 Response
 
 
157. National or regional markets are often distinct  because buyers are not entirely free to purchase 
wherever they wish and sellers not entirely able to  sell wherever they wish under the same conditions 
because of the existence of tariffs, different regulator y regimes or simply the costs of buying or selling 
far from home. None of these restrictions apply in the shipbuilding market.  For example:  
 
 ¾  Ships are by nature highly mobile (and tran sporting them is an insignificant cost 
compared to their value);  
 
 ¾  Ships do not normally need to be imported, i.e. cleared through customs or subjected 
to duties;  
 
 ¾  Regulations and standards are typically harmonised or international – and the 
existence of “open registries” and flags of convenience make attempts to impose 
significantly different national ta xes and regulations unworkable;  
 
 ¾  Shipbuilders operate on a large scale and are active throughout the “global market”;  
 
 ¾  Ship-owners are also larg e enterprises and are established in many different 
territories.  
 
158. Contrary to the US suggestion, the situati on is significantly different for most other goods.  
 
 (b)  Are ships in each of the "product se gments" identified by the EC purchased in 
all regions/countries in the world? 
 Response
 
 
159. Yes. Ships in the three product segments iden tified by the EC are indeed purchased in all 
regions/countries in the world. This is demonstrated by the table contained in Attachment 7 , showing 
the number of vessels ordered in the period Janua ry 1997 to December 2002, broken down per WT/DS273/R 
Page D-32  
 
“country of economic benefit”
46 (where such information is available). The table clearly indicates that 
the three relevant ship types are indeed purchased by a wide variety of countries. 
 
 (c)  Do/have EC shipyards bid for business in all of these regions/countries for all of 
these product segments? 
 
 (d)  Do/have the Korean shipyards?  
Joint Response
 
 
160. Yes.  The tables in Attachment 7  also separate orders secured by EU yards and those secured 
by South Korean yards. From these tables, it appear s that the orders secured by EU and Korean yards 
have been placed by a wide variety of countries, and that a significant part of those countries have purchased vessels both from EU and Korean yards.   
161. It is recalled that in many cases the orders  for vessels are the result of a tendering process by 
which all interested yards are free to make an offer,  whatever their nationality. In case a ship broker is 
involved, he might guide the owner in his choice of a yard. For this purpose, the reputation of a yard 
for building a specific ship type and possibly the ava ilability of an established standard ship may play 
a role, but the nationality of the yard is not a relevant criteria here. Indeed, most major yards 
worldwide will offer an acceptable design and qualit y for the relevant ships in their product mix. 
 
162. In addition to the above mentioned tables, showing that both EU and Korean yards compete 
on a worldwide basis, the EC has also provided – in the framework of the annex V procedure – 
example of cases where EC yards have, in various  instances, submitted a price offer for the three 
relevant sectors, but for which the order wa s subsequently placed with a Korean yard.
47 This was 
namely the case for most of the major orders placed  for LNG’s. This again demonstrates that there are 
bids by EC and Korean yards for the same project s, and that therefore both EC and Korean yards 
compete in the three relevant sectors.  
 (e)  Are there any technical or legal constraints on the EC industry's (or individual 
EC shipyards') ability to compete for the full spectrum of this business? 
 Response
 
 
163. In principle, no.  
 
164. However, only six EC yards have a track r ecord in LNG carrier construction and currently 
only three of them participate actively in this ma rket which requires extensive know-how and facility 
investment.  165. Eastern German shipyards which have a str ong focus on container ships are still subject to 
capacity (i.e. cgt output) restrictions following the approval of earlier restructuring aid, but there is no 
known instance where these restrictions would have prohibited yards to participate in tenders for 
container ships. Rather, the restrictions have kept the concerned yards from seeking cruise ships 
contracts as this ship type has a significantly highe r cgt contents than container ships or other non-
passenger vessels. 
                                                     
 
46 This term refers to the owner that derives bene fit from the operation of the ship. Lloyd’s Register 
now uses the term ‘country of economic benefit’ to designate the best country in which to count ownership, 
based on beneficial ownership. Indeed, whilst at first glance it may appear that the registered ownership may be the best guide to the owner of the ship there are a numbe r of complications that clo ud this category: registered 
owner may be a finance company, a web comp any that is registered offshore, etc. 
47 See EC reply to the annex V procedure, annex 7.  WT/DS273/R 
 Page D-33 
 
 
 
38. Question 38 
 
 In arguing, on the basis of US – Norwegian Salmon CVD  and Article 15 of the SCM 
Agreement that an "a cause" standard is suffi cient for a finding of serious prejudice, are you 
implying that the causation standard for s erious prejudice is the same as that for a 
countervailing measure?  If so, what is the textual basis for such an argument?  If not, what is 
the relevance to this dispute of either SCM Article 15 or the standard applied by the Salmon 
CVD  panel?  In this context, please respond to the US comment pointing to the difference in 
drafting between SCM Article 6.3(c) and SCM Arti cle 15 ("the effect of the subsidy [...]" versus 
"the effects of the subsidized imports [...]", respectively). 
 
Response  
 
166. The EC referred to Article 15 of the SCM Agreement  as contextual support for its argument 
that the subsidies do not have to be the sole cause of the price depression or suppression, but rather a 
cause.  Article 15 of the SCM Agreement  distinguishes more precisely between the “effects of 
subsidies” as opposed to other possible causes (15.5) a nd the “effect/impact of the subsidised imports” 
on prices in the domestic market (15.1, 4, 6).   This corroborates that the phrase “effect of the 
subsidy” must not be read to require that subs idies are the exclusive cause of price depression or 
suppression, as also agreed by the United States.48 
 
39. Question 39 
 
 In Figures 11-25 of your first submission, you list individual APRGs and PSLs to 
Korean shipbuilders that you allege were made at  below-market terms.  Is it your contention 
that EC shipyards competed with the Korean ship yards for each of these sales?  If so please 
provide details.  If not please explain the signif icance to your adverse effects claims of these 
instances of financing.  
Response
 
 
167.  The listed transactions are produced as examples  of KEXIM export subsidies and thus cover 
almost all major ship sectors including sectors not refe rred to in the actionable subsidies part such as 
oil tankers, Ro-Ros etc.  
 
168. EC yards compete in all of these sectors. However, given that the information was only provided by Korea as BCI in the context of th e Annex V process, the EC could not share this 
information with EU yards to verify whether they  participated in any bidding relating to these 
transactions.  
40. Question 40 
 
 You make no argument concerning the effects of individual APRGs or PSLs on the prices of the individual transactions in which th ose instruments were used.  Instead, you seem to 
limit your argument in respect of the alleged adverse effects of APRGs and PSLs to the more general point that these instruments contri buted to "rescu[ing] th[e] shipyards from 
liquidation", by improving the attractiveness of  keeping them in operation as opposed to 
shutting them down. 
  (a)  Is this a correct understanding of your argument as to the alleged adverse effects 
of the APRGs and PSLs? 
                                                     
 
48 Third Party Submission by the United States, para. 50. WT/DS273/R 
Page D-34  
 
 
Response
 
 
169. Yes. 
 
170. The EC wishes to clarify alleged adverse ef fects with respect to the APRG and PSL scheme 
merely indeed but not limited to specific transactions.  171. The EC does not accept that APRGs or PSLs have no effect on the prices of individual 
transactions in which those instruments were used. Ho wever, their effect is very difficult to calculate 
in the absence of the precise details of the transac tions. In that respect, Korea has refused to provide 
the EC with key data such as the contract prices, th e payment terms or the dates of deliveries of ships. 
(See Korea’s response of 10 October 2003 at para. 3).  172. Nevertheless, the EC has produced in Attachment 5 an example of what the impact of an 
APRG and a PSL would be on a couple of transac tions using best information available. The 
examples show that the impact of APRGs or PSLs ca n indeed be very significant (up to 2 per cent of 
the transaction price).  173. The EC, however, wants to underline the impact  of the availability of these instruments on the 
market in general as the impossibility for a yard to offer an APRG to a buyer would more often than 
not lead buyers to shipyards which can offer such a guarantee. 
 174. Indeed, the availability of an APRG is so essential for a shipyard that Arthur Andersen in 
their reviewal of DHI's causes of financial distress
49 pointed to the refusal of Korean banks to provide 
APRGs to DHI  and to the increase in the premia  demanded by foreign banks as a principle cause of 
this financial distress.  In particular, Arthur A ndersen explained that th e non availability of the 
APRGs (or the availability of expensive APRGs) led to DHI orders being cancelled or delayed. 
 175. Similarly, the availability of PSL means that  a yard can offer a buyer heavy-tail payment 
terms (which buyers generally prefer as they need to advance less cash for the ship) without worrying 
about financing the construction costs. 
 
 (b)  If so, what if any impact does the ti ming of individual APRGs and PSLs have on 
the analysis?  If not, please explain. 
 
Response
 
 
176.  Both the APRGs and PSLs produce their impact at the time of the negotiations with the buyer 
as their availability influences the choice of the ya rd and the payment terms a yard can offer the 
buyer.  
41. Question 41 
 
 Please respond to Korea's argument that you allege subsidization of some but not all 
Korean shipyards, that only shipyards receiving  any alleged subsidies could possibly cause 
serious prejudice, but that nevertheless the information you present in the context of serious prejudice concerning the Korean industry covers the industry as a whole. 
 
                                                     
 
49 Exhibit EC-64 at page 40.  WT/DS273/R 
 Page D-35 
 
 
Response  
 
177. To respond to this argument it is necessary to  understand the nature of  the current competitive 
situation in shipbuilding in South Korea.  
178. All shipyards are faced with an imperative  to keep the order-book well stocked to support 
expensive facilities, potentially high debts and large workforces.  This impera tive is reinforced in 
South Korea by the search for high volume to try to counteract the effects of low prices through 
seeking economies of scale.  For this reason shipyards are forced to take as high a share as possible of 
their chosen market sectors.  W ith the major shipyards in South Korea targeting broadly the same 
market sectors, that is those that present th e greatest opportunity for volume coupled to the 
(perceived) highest value, intense intern al competition within South Korea results. 
 179. In the most heavily contested market sectors,  where shipyards perceive the greatest value to 
be, up to three-quarters of the market can be cont rolled by as few as four shipyards.  The dominance 
of a small number of suppliers has a significant effect on the market and, in particular, prices.  It is 
competition against these major suppliers that a shipya rd will have in view when setting the price of a 
contract.  Detailed order-book statistics are attached in Attachments 2 and 6. They show South Korean 
shipbuilding being in a dominant position in all th e disputed market segments, and the disputed 
shipyards being amongst the dominating yards in each sector.  
180. Against this pattern of competition the low prices offered by the subsidised yards forces 
competitors to offer low matching prices, irrespect ive of the long-term economic consequences.  It 
should be kept in mind that the ec onomic consequences of taking an or der will be felt in two to three 
years time when production takes place, not at the time of taking the order.    
181. The ultimate determinant of the price of a ship is not ‘the market’ but the contract between the 
shipyard and the ship owner.  This  raises the question at what price can  a shipyard afford to take an 
order?  Surely the answer to this can not be at  any price, irrespective of the effect on long term 
profitability and liquidity.  
 
42. Question 42 
 
 Please respond to Korea's argument that the effect of any alleged subsidy must be 
"current", and thus that past subsidies should  not be taken into account unless they can be 
shown to have such a current effect.  
Response
 
 
182. As the EC explained at the first meeting with  the Panel, there is no rule in the WTO that 
provides that a violation is forgiven once it is in th e past.  Obligations are drafted in the present tense 
to express the intention that they should apply all the time – in the past, in the present and in the 
future! However, it is also clear to  the EC that Korean subsidisation is still having adverse effects in 
the form of prices depression/suppression on the wo rld shipbuilding market.  The EC presents in 
Attachments 1, 2  and 5 to these responses analyses of the quantit ative effect of the subsidies and the 
effects in terms of price depression/suppression of these subsidies.  It will develop further in its rebuttal submission its explanation of the relati onship between these phenomena, taking into account 
also the information produced by Korea in  response to the questions put to it. 
 
43. Question 43  
 
 Please comment on the US statement that you r basis for asserting that the alleged price 
suppression/depression is "significant" is that EC shipyards are facing large problems as a 
result of suppressed/depressed world prices.  Is this a correct characterization of your WT/DS273/R 
Page D-36  
 
argument?  If so, please explain its textual and ot her bases.  If not, please clarify the basis on 
which you assert that the alleged price suppression/depression is "significant".  
Response
 
 
183. While the US is correct in stating that th e EC shipyards are facing large problems due to 
suppressed and depressed world prices for ships, this is  not the full extent of the EC’s argument.   
 184. The EC has explained that price depression and suppression are significant.  
185. The adjective “significant” only relates to th e terms “price suppression and “price depression” 
(as opposed to the phrase “effect of the subsidy”. Thus , there must be a decline in prices or absence of 
price increases which is noticeable  as opposed to insignificant. 
 186. The fact that price falls were not only “signi ficant” in themselves, but even drove us out the 
market only illustrates how significant these price falls were. 
 
44. Question 44 
 
 We note that Article 6.3(c) establishes that price suppression or depression must be 
"significant" for any finding of serious prejudice on  that basis to be made.  How can the Panel 
know whether the effect of the alleged subsidies is significant if we do not know what price(s) 
would have prevailed in the absence of subsidies?  On what basis can the Panel make any such judgement?  Is not the size of the alleged subsidy relevant to this issue?  
Response
 
 
187. The EC presents Attachments 1, 2  and 5 to these responses to provide a further basis for 
establishing price depression/suppression resulting from the subsidies.  However, the EC maintains 
that quantifying the effect of the particular types of subsidies at issue (which include forgiveness of 
government-held debt in several restructuring process) does not assist in fully understanding the effects of these subsidies.   Article 6.1(d) of the SCM Agreement  laid down a direct presumption of 
serious prejudice in case of direct forgiveness of debt in addition  to the quantitative avenue provided 
for under Article 6.1(a) of the SCM Agreement .   
 188. The EC reiterates that the preservation of cap acity in South Korea has led to very heavy 
competition between the major Korean shipyards, wi th shipyards having to offer matching low prices 
to achieve orders.  Detailed cost modelling unde rlying the EC price suppression claim has revealed 
that this has led shipyards to ignore future profitab ility in the pursuit of order volumes.  In particular 
prices have, in general, been found to not cover infla tion, debt servicing costs and profit.   It may be 
assumed that a balance of capacity and demand would have led the shipyards in South Korea into a 
position whereby they could fully cover costs, incl uding debt commitments and inflation, and make a 
profit of 5 per cent profit.   Thus, for example, for LNGs a price of aroun d $168 million could have 
been expected.  This compares to  an indicated price $155 million at year end 2003.  In its rebuttal 
submission the EC will seek to further assist the Panel in making the judgment it is called upon to 
make by drawing on this information and taking account of that produced by Korea in response to the questions put to it.  45. Question 45  
 
 Please comment on China's argument, in paragraph 46 of its written submission, that if 
the total amount of a subsidy is ten dollars only, it cannot be successfully demonstrated that the 
effect of such a subsidy is to significantly suppress or depress the price of a one-billion-dollar 
vessel.  WT/DS273/R 
 Page D-37 
 
 
 
Response  
 
189. China’s reads too much into the term “signifi cant”.  That term relates exclusively to the 
degree of price depression or suppression.  The amount of the subsidy is not directly relevant in that 
respect.  Therefore, the term “significant” is no basi s for an obligation to quantify the effect of the 
subsidy and to relate it to the degree of price depr ession or suppression.   In any case, the hypothetical 
is unreal, because a $10 subsidy is unlikely to signifi cantly depress the price of vessels that usually 
cost $1 bio.  WT/DS273/R 
Page D-38  
 
B. QUESTIONS TO BOTH PARTIES  
95. Question 95 
 
 Article 11-2 of the Guidelines for Interest and Fees (Amended)  (Exhibit EC-13) 
provides that [BCI:  Omitted from public version]. 
  (a) To Korea
:  Does this suggest that KEXIM considers that foreign financial 
markets constitute an appropriate market benchmark?  Please explain. 
 
 (b) To EC :  What impact, if any, does this provi sion have on the EC 's argument that 
KEXIM is not required to act on commercial principles?  Please explain. 
 
Response  
 
190. KEXIM’s interest rates are made up of a num ber of elements some of which involve some 
limited discretion.  Article 11 relates to the base rate s, which is the starting point for the calculation of 
actual rates.  The principle that appears from Article 11 is that the base rate corresponds to the rate at 
which KEXIM is able to borrow funds on the fina ncial markets (the “Export-Import Financing Bond” 
is issued by KEXIM for this purpose) – that is its cost of funds.  
191. KEXIM’s cost of funds does not however corre spond to the market rate applicable to its 
clients for the kind of financing that they obtain fro m KEXIM.  And the extent to which this rate can 
be adjusted upwards (or downwards) to take account of actual market rates of fered by other financial 
institutions is limited to 0.5 per cent.  
192. The provision does not therefore indicate either that KEXIM is required to or that it does in 
fact act on commercial principles. 
 
96. Question 96 
 
 Can footnote 5 of the SCM Agreement be used to justify an a contrario  reading of 
item (j) and the first paragraph of item (k) of th e Illustrative List of Export Subsidies?  Please 
explain. 
 
Response
 
 
193. No.  Footnote 5 has to be interpreted accord ing to its terms which are that Measures referred 
to in Annex I as not constituting export subsidies shall not be prohibited under this or any other 
provision of this Agreement.  194. Therefore only measures “referred to in A nnex I as not constituting export subsidies” benefit 
from what is known as a “safe haven”. 
 
195. A generalised a contrario reading of footnote 5 would conflict with the fact that it is list of 
measures that are deemed to be prohibited export subsidy (whether or not they would otherwise fall 
under Article 3.1(a))
50 and that this list is only illustrative. 
 
                                                      
50 This reading was confirmed, for example, by the panel in Canada – Regional Aircraft para. 7.395, 
where it held “item (j) sets out the circumstances in which the grant of loan guarantees is per se deemed to be an 
export subsidy” and the Appellate Body in Brazil - Aircraft , para. 179, where the Appellate Body held that 
“[t]he first paragraph of item (k) describes a type of subsidy that is deemed to be a prohibited export subsidy”.   WT/DS273/R 
 Page D-39 
 
 
196. The Illustrative List, by its very terms, is  not intended to be an exhaustive list of export 
subsidies. “Illustrative” is defined as “p roviding an illustration or example”.51 An a contrario  reading 
of the list as “permitting” measures that otherwise falls under the definition of export subsidy under 
Article 3.1(a), would be the equiva lent of treating the Illustrative List as an exhaustive list of export 
subsidies and conflict with the te rms of Article 3.1(a) which prohi bits all subsides contingent upon 
export performance including those illustrated in Annex I .   
 197. The first paragraph of item (k) does not ‘re fer to’ any measures as ‘not constituting export 
subsidies’, and therefore can not be read in an a contrario manner.  This is particularly clear from the 
context formed by the second paragraph, which clearly does refer to measures not being export 
subsidies.  It would be bizarre for a single provisi on which explicitly refers to certain measures not 
being export subsidies to be interpreted a contrario as referring to all measures not falling under its 
terms not to be export subsidies. Wher e a provision is intended to be read a contrario as authorising 
that which is not prohibited, it would not include an  explicit exception.  Indeed, where if there is an 
explicit exception, it could equally be cons idered that the exception must be read a contrario, which 
would then completely undermine the dis tinction between principle and exception.  
 198. The fact that the focus must be on whether there is a “reference” to a measure not being an 
export subsidy was confirmed by panel in Brazil – Aircraft , Second Recourse to 21.5 which stated 
that “the first paragraph of item (k) does not ‘refer to’ any measures as ‘not constituting export 
subsidies’ within the meaning of the footnote [5]”).
52  
 
199. Korea relies heavily on a statement by the Appellate Body in Brazil-Aircraft.  Whatever the 
Appellate Body meant by that statement, it was not an interpretation of footnote 5 since it stated “[w]e 
wish to emphasize that we are not interpreting foot note 5 of the SCM Agreement, and we do not opine 
on the scope of footnote 5.”  Moreover, the Appellate Body’s statement was an obiter dictum because 
it relied for its finding on the fact that the payments at  issue were used to secure a material advantage. 
 200. The context of item (j) is very different fro m item (k) and it would see m possible to consider 
that the words “at premium rates which are inadequate to cover the long-term operating costs and 
losses of the programmes” constitute a proviso and t hus refer to export credit guarantees at premium 
rates that cover the long-term operating costs and losses of the programmes as not constituting export 
subsidies. 
 
97. Question 97 
 
 What is the meaning of the term "material advantage" in the first paragraph of item (k) 
of the Illustrative List of Export Subsidies? 
    
Response
 
 
201. The EC does not believe that this question arises in this case since item (k) is not applicable to 
pre-shipment loans. 
 202. In any event it is admitted by Korea that its pre-shipment loans do not qualify as export 
credits under the second paragraph of item (k) and th erefore the EC does not believe that the CIRR 
rate used in the OECD understanding provides a relevant benchmark.  Indeed there is no CIRR 
corresponding to loans of the duration of pre-shipment loans.   
 
                                                     
 
51 The New Shorter Oxford English Dictionary (1993), p. 1311. 
52 In paras. 5.274 and 5.275. See also the obiter dictum in the first panel report Canada -  Aircraft , 
para. 9.117.     WT/DS273/R 
Page D-40  
 
203. The Appellate Body in Brazil – Aircraft  (Article 21.5) considered that it was necessary for a 
WTO Member which claimed that it was not provi ding a “material advantage” through the use of 
export credits to prove, first, that it has identifie d an appropriate "market benchmark"; and, second, 
that the rates it applied are at or above that benchmark.
53  Korea has done neither. 
 98. Question 98 
 
 As a legal matter, does the definition of ex port credits used by the OECD in the context 
of the Export Credit Arrangement govern the meaning of this term in the first paragraph of item (k) of the Illustrative List of Export Subsidies?  Why/why not? 
 Response
 
 
204. As already indicated in response to questi on 10, the EC considers that the definition of 
“export credits” given by the OECD reflects the gene rally accepted meaning of term in the relevant 
circles, that the term “export credit” used in the second paragraph has the meaning given to it in the 
OECD Arrangement and that in view of the clos e parallels between the fi rst and second paragraph it 
must be assumed, in the absence of any indication to  the contrary, that the term has the same meaning 
in both the first and second paragraphs.  
99. Question 99 
 
 Would you provide us with the rationale be hind your definition of export credits and 
export credit guarantees?  Does an export credit have always to be a credit extended by the 
exporter or a financial institution to the buyer, and does an export credit guarantee always have 
to be a guarantee of such a credit?  PSLs are loans extended by KEXIM to the shipbuilder, not 
to the buyer.  APRGs are guarantees extended by KEXIM to the buyer, not to guarantee a 
credit given by the exporter or by a private fina ncial institution to the buyer, but to guarantee 
that an advance payment by the buyer to the ex porter shall be refunded in case of a contractual 
default.  Does this exclude APRGs and PSLs from  the realm of export credits/export credit 
guarantees?  
Response
 
 
205. Yes, pre-shipment loans and APRGs are not export credits/export credit guarantees. 
 206. The justification or rationale for providing special rules for export credits and export credit 
guarantees and insurance (including a safe haven in th e second paragraph of item (k)) is that special 
rules and conventions for this form of export subsidy have bee developed internationally, in particular 
at the OECD.  The principles that are app lied are harmonisation and transparency.   
 207. This justification and rationale does not appl y to pre-shipment loans and APRGs as developed 
by Korea, for which no in ternational consensus …  
 
208. Indeed, if the intention was that “export credit s” were to include all ty pes of state assistance 
which has some relevance to exports, then automati cally all export subsidies would constitute export 
credits making the distinction between “expor t subsidy” and “export credit” obsolete. 
 100. Question 100 
 
 In the Indonesia – Autos
 dispute (the only circulated panel report to date addressing 
serious prejudice claims), the panel in analysing the claims of displacement or impedance of 
                                                      
53 Appellate Body Report, Brazil-Aircraft (Article 21.5),  para. 69.  WT/DS273/R 
 Page D-41 
 
 
imports into the Indonesian market applied a " but for" approach.  In particular, the panel 
asked the question whether, "but for" the subs idies, the complaining parties' sales volumes 
and/or market shares in the Indonesian market either would not have declined, or would have 
increased by more than they in fact did.  
 Would an analogous approach be appropriate here?  That is, in assessing the price 
suppression/depression claims, should the Pane l seek to answer the question whether, but for 
the subsidies, the prices in question either would not have declined, or would have increased more than they in fact did?  
 If so, what sorts of considerations should the Panel take into account in trying to 
determine what the price movements would have b een in the absence of the alleged subsidies?  
If not, why not, and what other approach should be used?  
Response
 
 
209. Yes. In accordance with EC – Sugar  and Indonesia – Cars , the Panel should consider whether 
the subsidies established by the EC are a contribut ing or amplifying cause of the significant price 
depression and suppression demonstrated by the EC.    This can only be done on a case to case basis. 
The Panel can consider factors such as price trends  of the products over time, the evolution of prices 
of different ship types, the price behaviour of diffe rent shipyards, the evolution of prices compared to 
costs and the evolution of prices compared with that of demand.  
 
210. The EC had provided further data in Attachment 2  and will elaborate further in its second 
written submission in the light also of informati on to be submitted by Korea in response to the 
questions addressed to it. The EC also refers to its response to Question 44.  
 101. Question 101 
 
 Does the word "may" in the chapeau of Article 6.3 mean that a complainant of a 
"serious prejudice" must prove something more than the existence of price suppression/depression? 
 
 If so, what is it that the complainant ha s to prove beyond price suppression/depression, 
and what is the basis in the text for any such additional requirements?   If not, what is the significance of the word "may"? 
 Response
 
 
211. As explained in the EC Oral Statement, there is no requirement in Article 6.3 of the SCM 
Agreement  to prove anything beyond the existence of price suppression or depression.  The EC will 
explain in more detail below that the term “may” in the chapeau  of Article 6.3 of the SCM Agreement  
is consistent with that interpretation. 
 212. The ordinary meaning of the term “may” is “to express possibility, opportunity, or 
permission ”.
54  The structure of Article 6 of the SCM Agreement  confirms that the term “may” is used 
in Article 6.3(c) of the SCM Agreement  to express “permission”.  Thus, Article 6 sets forth a self-
contained regime defining the notion of serious prejudice.  While Article 6.1 presumed  the existence 
of serious prejudice is presumed in certain situations and Article 6.7 excludes  the existence of serious 
prejudice in certain situations, Art. 6.3 permits  a finding of serious prejudice if the complainant 
establishes that one or more of pa ragraphs of 6.3(a)-(d) apply. 
                                                      
54 Random House Dictionary, cited in US submission at para. 38. WT/DS273/R 
Page D-42  
 
 213. This interpretation is confirmed by the immediat e context of the term “may” in Art. 6.3 (c), 
which uses the phrase “in any case where one of several” of paragraphs (a)-(d) apply.  Therefore, a 
WTO Member can pursue subsidies as actionable unde r Article 6.(3)(c) in all cases where one of the 
effects described in Article 6.3(c), e.g., price depression or suppression is given.
55    
 
214. Furthermore, footnote 13 to Article 5(c) of the SCM Agreement  clarifies that the term “serious 
prejudice” is used in the same sen se as used in paragraph 1 of Article XVI of the GATT 1994.  GATT 
(and WTO) Panels already found “serious prejudi ce” based solely on price depression and price 
undercutting, respectively.56  
 
102. Question 102 
 
 In its arguments concerning price supp ression/depression, the EC has focused on 
demand side factors.  Korea, on the other hand, has focused on the supply side.  Is it not more 
correct that the two aspects should be taken together.  Please explain the impact of such an 
approach on your argument concerning price suppression/depression.  
Response
 
 
215. The EC has made its price depression a nd suppression argument taking account of both 
demand and supply side factors beca use it considers that both are rele vant in determining the markets 
for the products at hand and their prices.   
 
 
                                                      
55 This also is confirmed by the Spanish language version : “en cualquier caso” and French “dès lors 
qu’il existe l’une ou plusieur s des situations ci-après”. 
56 EC-Refunds on Exports of Sugar  (p. 24, para. V.f) and the WTO Panel on Indonesia – Autos 
(paras. 14.254-14.246),  WT/DS273/R 
 Page D-43 
 
 
 
LIST OF ATTACHMENTS 
 
Attachment 1 Quantitative analysis of restructuring subsidies  
Attachment 2 Estimation of price suppression and suppression prepared by First Marine 
International 
 Attachment 3 Analysis of DHI creditors’ situation  
Attachment 4 Compilation of Products listed on websites of Korean and EC Producers  
 Attachment 5 Ad valorem  impact of APRG and pre-shipment loans 
 Attachment 6 Further information on the nature of competition in shipbuilding 
 
Attachment 7  Number of vessels ordered per “country of economic benefit”   
LIST OF EXHIBITS 
 EC - 101 MOFE press release of 6 Oct ober 2000 – published on MOFE website  
 EC - 102 Korea Letter of Intent to IMF of 24/09/1998   EC – 103 Special Act on the Management of Public funds 
 
EC – 104 OECD Council Working Party on Shipbuilding, Report by the Chairman of the 
Informal Experts Group Held on 1-2 March 2004 (C/WP6/SNG (2004)5 
 EC – 105 OECD Council Working Party on Shipbuilding, World Shipbuilding Activities in 
2002 – 4 March 2003 (C/WP6/SG(2003)3 
 
EC – 106 AWES – Annual Report 2002-2003  EC – 107 DHI 1999 Audited Accounts  
EC – 108 DSME 2000 Audited Accounts 
 EC – 109 DSME 2001 Audited Accounts  EC – 110  Balance Sheets of DHI as of September 30, 2000  
EC – 111 HHI Income Statement for 2002 and 2003 
 EC – 112  PriceWaterhouseCoopers’ Analysis of the Arthur Andersen Report  WT/DS273/R 
Page D-44  
 
ANNEX D-2 
 
 
RESPONSES OF THE EURO PEAN COMMUNITIES  
TO QUESTIONS FROM KOREA 
 
 
(22 March 2004)  
 
 
Question 1 
 
 In the EC’s view is an entity a “public body” for all purposes? 
 
Response  
 
1. Yes, an entity is either a public body or it is not.  
 
Question 2  
 
 Are all State Trading (as per Article XVII of  the GATT 1994) entities “public bodies”?  
For all activities?   
 
Response  
 
2. The EC does not see any necessary connection between these concepts. Its position on public 
bodies is set out in response to question 1 from the Panel.  
 
Question 3  
 
 Regarding the previous question, if not, what are the criteria for distinguishing: (a) 
State Trading entities that are “public bodies” from those that are not? (b) “public body” 
related activities from those that are not? 
 
Response  
 
3. See EC response to Panel question 1. 
 
Question 4  
 
 The EC argues that the Appellate Body’s findings in Japan -- Apples provides that it 
does not have to prove every fact it asserts.  Can the EC identify which facts it considers it must 
prove and which it does not have to prove? 
 
Response  
 
4. The question as posed is too general. The EC  has explained its position most recently at 
paras. 9 to 15 of its oral statement. 
  WT/DS273/R 
 Page D-45 
 
 
Question 5 
 
 What criteria does the EC propose for determining which facts it must prove and those 
with respect to which it considers it has no burden?  
Response
 
 
5. See answer to question 4 above. 
 
Question 6 
 
 In its oral statement, the EC stated that it was “not necessary to prove the obvious”. Recognizing that in the context of a dispute, it is possible that not all parties or the Panel might 
consider the same issues as “obvious”, please iden tify those elements of its case which the EC 
considers “obvious” and that it is, therefore, not required to prove.  
 Response
 
 
6. An example is offered at para. 11 of EC’s oral statement. 
 
Question 7  
 
 Is the EC referring to the same concept in  paragraph 10 of its Opening Statement and 
paragraph 61 of its first submission?  
Response
 
 
7. If the question refers to the “prima facie” con cept, the EC has explained that it accepts it has 
the burden of presenting a “prima facie” case. The EC considers that it has met this burden. 
 
Question 8  
 
 Is empirical evidence of application of a measure of any legal relevance in establishing whether a measure “on its face” is inconsistent with WTO law?  
Response
 
 
8. The notion of ‘empirical evidence’ is not  clear. A government practice can be a separate 
violation in its own right and this can be evidenced  by its actual application in individual instances. 
See the EC’s response to question 8 of the Panel. 
 
Question 9  
 If a measure provided a “benefit” at one poin t in time or in a particular instance, but 
not at another, can it be considered “o n its face” inconsistent with WTO law? 
 
Response
 
 
9. Yes, for example, if a government rules that export loans are to be granted in all cases (i.e. 
independently of the creditworthiness of the recipient) at a fixed rate of, say, 5 per cent  a benefit will 
be granted with respect to some recipients but not  necessarily with other recipients. Such a measure 
would be on its face inconsistent with WTO law.  WT/DS273/R 
Page D-46  
 
Question 10  
 
 If a measure as applied is considered inconsistent with WTO law at an earlier period, 
but is not proved to be inconsistent in the mo st recent period, what would the remedy be under 
Article 4 of the SCM Agreement? 
 Response
 
 
10. The question of remedies is a separate issue from that of the existence of the violation and is 
one on which the Panel has not been asked to rule.  
 
Question 11  
 
 Please identify and quantify all adjustments to reflect such factors as different time 
periods, security interests and redemption priori ties that the EC made in its comparison of 
corporate bonds with pre-shipment loans? 
 Question 12  
 
 If the EC made no adjustments to reflect su ch factors, please explain the legal basis for 
comparability. 
 Response to questions 11 and 12
 
 
11. The EC has set out its views on the comparability of the benchmark in its first written 
submission, if Korea considers that adjustments ar e needed it should explain why and provide a basis 
for making them. 
 
Question 13  
 
 Does the EC have any evidence of currently applicable extensions of APRGs that it 
considers confer a benefit on any Korean person?  If so, please identify all such APRGs. 
 Response
 
 
12. The EC has provided evidence of subsidized tr ansactions of which it is aware. The EC has no 
information to indicate that KEXIM has stopped issui ng APRGS at subsidized rates. Please also refer 
to the EC response to question 42 of the Panel. 
  
Question 14  
 
 Does the EC have any evidence of currently applicable extensions of pre-shipment loans 
that it considers confer a benefit on any Korean person?  If so, please identify all such pre-
shipment loans. 
 
Response  
 
13. The EC has provided evidence of subsidized tr ansactions of which it is aware. The EC has no 
information to indicate that KEXIM has stopped issuing pre-shipment loans at s ubsidized rates. Please 
also refer to the EC response to question 42 of the Panel.   WT/DS273/R 
 Page D-47 
 
 
Question 15  
 
 In terms of benefit analysis, should the analysis in a debt-to-equity swap case be 
conducted from the perspective of the private inv estor or the perspective of a creditor holding 
distressed assets? 
 Response
 
 
14. A benefit analysis is in principle conducted from the point of view of the recipient. The EC 
has set out its views on the issue in r esponse to question 18 from the Panel. 
 
Question 16 
  Does the EC argue that the Daewoo creditors received (i) too high or, (ii) too low a return on their Daewoo debt?  
 
Response
 
 
15. The public bodies and entruste d private bodies received too low a return And would not have 
agreed to the restructuring under market conditions.  Question 17  
 
 Please quantify the over or undervaluation you are alleging. 
 
Response
 
 
16. See reply to Question 15 of the Panel. 
 
Question 18 
  In the case of an insolvent company, does the EC  believe that the option to sell its debt as 
followed by the foreign lenders was rea sonably available to all creditors? 
 
Response
 
 
17. The EC notes that KAMCO in fact bought the debt of foreign creditors separately and are 
more favourable conditions than it bo ught debt from Korean creditors. 
 
Question 19  
 
 Did any EC shipyards bid on any Japanese LNG contracts? If so, please identify the 
bidders and the level of their bids? 
 Response
 
 
18. The EC does not understand the relevance of th is question since the EC does not allege that 
Japanese shipyards are subsidized and causing serious prejudice. 
 WT/DS273/R 
Page D-48  
 
Question 20  
 
 If the EC is no longer supporting the poin t made regarding the Japanese market in the 
Sixth Report from the Commission to the Co uncil on the situation in world shipbuilding
1, is the 
EC repudiating the Commission’s conclusions there?  If so, please identify the facts that cause 
the EC to view the situation differently now. 
 
Response  
 
19. The EC's shipbuilding reports are political anal yses of the situation in the world shipbuilding 
industry. They are not strictu sensu  economic analyses. The chapter Korea refers to deals with the 
response in certain shipbuilding regions to market de velopments in the course of 2002. With regard to 
Japan the report states that Japanese yards are being restructured and that synergies have resulted from 
that. In particular the series production of bulk car riers (which are not subject to the EC claim of 
adverse effects) is mentioned, together with the f act that for these ships 50 per cent of the orders in 
Japan are of domestic origin. As a matter of fa ct, by the end of 2003, Japanese owners had 
12 container ships, 2 oil tankers and 2 LNG carriers on order from Korean yards.  
Question 21  
 
 Is the US market open to all ships in the product categories the EC proposes? 
 
Question 22  
 
 If the US market is not open to all pro ducts, please provide data demonstrating what 
portion of the product categories are closed due  to US import restrictions on a product-by-
product basis. 
 
Response to questions 21 and 22
 
 20. Yes. Only the US cabotage market is not available to non-US yards, but this market 
comprises less than 1/3 of the orders from US owne rs, i.e. US owners place 3 times as many orders 
abroad as they place with US yards. According to Lloyd’s Register the total orderbook backlog in the 
US end December 2003 amounted 0,8 mio CGT. In the meantime the orders for US owners worldwide amounted 2,7 mio CGT.  US cabotage laws do not affect LNG carriers at all, and latest 
figures indicate that almost all of US foreign sea borne trade is done by non-US built vessels. The 
trades affected by US cabotage legislation are mainly  to/from Alaska and Hawaii, and are thus limited 
in size and demand for vessels. 
 
Question 23  
 
 Please itemize which factors should be taken into account in defining a product 
category? 
 Response
 
 
21. It is impossible to answer this question in  the abstract. However, the EC has set out its 
position on the appropriate market segments to be used  in this case in the oral statement and in its 
response to  question 27 of the Panel.  
 
                                                      
1 COM(2002)622 final, 13 November 2002, Section 2.2.3, page 8. See also Seventh Report from the 
Commission to the Council on the Situation in World Shipbuilding, COM(2003)232 final, 6 May 2003, 
Section 2.1.1, page 5.  WT/DS273/R 
 Page D-49 
 
 
Question 24 
  How did the EC take into consideration t echnical differences, payment terms, delivery 
terms and other differences in its causation analysis?  
Question 25  
 
 How did the EC factor out ships built in co untries other than in Korea in its causation 
analysis?  
Joint Response to questions 24 and 25
 
 22. Please refer to the EC answers to questions 34 to 39 of the Panel.  
 
Question 26  
 
 How did the EC factor out Korean ships that were built by yards that were not 
restructured?  
Response
 
 
23. Please refer to the EC response to question 41 of the Panel.  
 
Question 27  
 
 What is the EC’s position with regard to the conclusion of its expert, FMI, that EC and 
Korean yards compete only as regards feed er container vessels and chemical tankers? 
 Question 28 
 
 What is the EC’s position on FMI’s conclusion that even in these segments, it is 
impossible to identify Korea as price leader since they are characterized by significant 
competition from other countries practicing low prices? 
 
Response to questions 27 and 28
 
 
24. The EC has explained, most recently in res ponse to  question 28 of the Panel that EC and 
Korean shipyards compete across the entire range of the product segments the subject of this dispute. 
As regards chemical tankers, the EC has clarified at the first substantive meeting that these are not 
subject to its claim. See also question 27.  
 
Question 29  
 
 In the same vein, what is the EC’s position vis-à-vis the table shown at page 4 of Korea’s first submission indicating the EC and Korea n vessels are only present in the segments below 
100,000 GT (with a small presence in the segment between 150,000 and 200,0 00 GT but which is 
characterized by a sizeable presence of Japanese yards)?  
Response
 
 
25. Please refer to the EC oral statement at paras. 109 and 110 as well as to the EC response to 
question 28 of the Panel.  WT/DS273/R 
Page D-50  
 
Question 30  
 
 Considering this segmentation, please ex plain how the alleged corporate restructuring 
subsidies depressed or suppressed  prices in all size segments? 
 
Response
 
 
26. Please refer to the EC response to question 29 of the Panel.  
 
Question 31  
 
 Do LNGs compete with any other vessels? 
 
Response  
 
27. Not directly, but please refer to the EC response to question 29 of the Panel on inter-segment 
relationships.  
 
Question 32  
 
 Please identify all EC shipyards that produce LNGs or that the EC regards as capable of 
producing LNGs.  
 
Response  
 28. Chantiers de l’Atlantique (Fr), Izar (S) and Kvaener Masa (FIN) have been active on the 
market in terms of bidding and/or orders. All othe r major EC shipyards would also be interested in 
building LNG’s if the price level were not so depressed.  
Question 33  
 
 Please confirm that the EC shipyards saw declining profitability in 1997 and 1998 and 
increasing profitability for 1999 through 2001.  Please provide breakdown by shipyard and 
product and provide supporting data. Please al so provide such data for 2002 and 2003. 
 
Response
 
 
29. EC shipyard profitability figures were alread y provided to Korea in the framework of the 
Annex V procedure - see reply to Korea’s qu estion 4 (and accompanying  Annex 4a and 4b). 
 
Question 34 
  Does the EC consider that serious prejudice can exist in a shipyard that is making 
vessels not subject to competition from Korean shipyards?  If so, please specify the market 
mechanism that transmits such effects.  Question 35  
 If not, what level of competitive overl ap between Korean products and the EC 
shipyards’ products is necessary for a subsid y to be a cause of serious prejudice?  
  WT/DS273/R 
 Page D-51 
 
 
Joint Response to questions 34 and 35  
 30. It is WTO Members that need to be shown to suffer serious prejudice, not individual shipyards. For a better understanding of inter-segme nt relations please refer to the EC response to 
question 29 of the Panel.  
 
Question 36  
 
 Please explain in detail how the EC meas ures capacity in the shipbuilding industry? 
 
Response
 
 31. Capacity in shipbuilding is extremely diffi cult to measure, as it depends on the production 
facilities and
 the production portfolio.  
 
32. In order to efficiently use their technical and human resources yards try to maintain a product 
mix. At the same time they try to fill their berths  with ship types they are specialised in. This makes 
the actual production capacity dependent on the orders  contracted and it may therefore change from 
year to year. Capacity in shipbuilding should be related to actual or historical production output 
(measured in cgt - compensated gross tonnes), as it is extremely difficult to derive an abstract 
production volume from the extent of the physical  construction facilities. Physical construction 
facilities are generally defined by, among others, available steel cutting lines,  dock space and 
cranage, but the same facilities can be used for si mple ships (giving a small cgt figure) or for highly 
sophisticated ships (giving a high cgt figure). Ther efore, the most appropriate means of a yard’s 
production capacity is its maximum historical  production output of the existing facility. 
 WT/DS273/R 
Page D-52  
 
 
ANNEX D-3 
  
RESPONSES OF KOREA TO QUESTIONS  
FROM THE PANEL 
  
(22 March 2004) 
 
 
 
I. QUESTIONS TO KOREA 
 
A. GENERAL 
 
46. Is there a financial contribution if a government provides a cash grant to a government-
owned company?  Please explain in light of Korea's argument that one cannot make a financial contribution to oneself (para. 319 of Korea's first written submission).  
 
 At the outset, Korea notes that, while the issues of financial contribution and benefit are 
legally distinct, many of the same facts and arguments are relevant to the two issues.  The issue in this 
regard arises from the privatization cases wherein th e EC argued for an absolute rule of looking 
through the assets to the actual owners to determine if there is a benefit. Necessarily, this means that if 
the owner and the contributor are the same “person”  the issue arises as to whether there has actually 
been a financial contribution at all.  There are i ndeed, some interesting legal issues arising from the 
reasoning championed by the EC in the privatizati on cases.  The EC apparently wants one rule that 
applies to them in the situation of privatization they  face and another that applies to the rest of the 
world when it is convenient for the EC. Of course,  this cannot be the case; the WTO rules apply to 
every Member uniformly.   The Panel does not face such a sweeping issue in  this dispute, however.  To take just one 
example, Korea is of the view that so-called equi ty infusions into a government majority-owned entity 
can be a financial contribution.  So-called “equity infusions” are often covers for direct subsidies to 
cover operating losses.  As an illustration, over a lo ng period of time the French government has made 
so-called equity infusions into th eir aircraft engine company, SNECMA.  The purported capital calls 
generally were mere shams reflected by the unwillin gness of minority shareholders to respond. The 
issue in a debt-for-equity swap made  in an insolvency situation is different, however.  In such cases, 
where the company is insolvent and, therefore, in  the hands of the creditors, the swap reflects a 
change in form of financial instrument. The credito r financial institutions were not holding cash which 
they could invest in a range of financial instrume nts; they were holding debt and the issue was what 
they could do with the debt in order to maximize their return.  More specifically, the creditors were 
holding debt in distressed companies in a country facing a financial crisis. The EC’s odd diversion at 
the First Substantive Meeting into an elementary d escription of the different characteristics of the two 
forms of financial instruments was completely beside the point.   Thus, it does not automatically follow from this that any transfer of funds by the Government-
owned company into a private company involves a financial contribution und er Article 1.1 of the 
SCM Agreement . The EC again fails to apply the co rrect consequences of the WTO case-law 
indicating that “any analysis of whether a benefit exis ts should be on ‘legal or natural persons’ instead  WT/DS273/R 
 Page D-53 
 
 
of productive operations.”1  In this case, the benefit analysis adopted by the Appellate Body in the 
privatization cases has necessary logical implicati ons for the issue of financial contribution. 
 B. KEXIM LEGAL REGIME  47. At Attachment 1, page 4, of its first written submission, Korea states that "KEXIM's 
interest rates and guarantee conditions star ted from a market base rate to which 
different spreads were added".  Does Korea claim that KEXIM provides financing and guarantees at above-market rates?  
 
 As a threshold issue, it is necessary to clarif y what the “market rate” is supposed to mean. 
There is no single “market interest rate” or “market premium”. Rather, the market rate exists in the 
form of certain “ranges” or “bands” of different interest rates or premia. Otherwise, there can be no competition among banks in terms of  interest rates or premia. Therefore, in Korea’s view, the 
question is whether the KEXIM rates are within the ra nges or bands prevailing in the relevant market.  
 
 Next, in order to answer the question, the st ructure for determining the interest rates and 
premia must be borne in mind. As Korea submitted  in its First Written Submission and stated at the 
First Substantive Meeting, KEXIM’s interest rates and fees are determined by adding up the base rate
 
plus spreads  such as “credit risk spread”, “target ma rgin”, “Market Adjustment Rate”, etc.  
 
 With respect to the interest rates, KEXIM set s the base rate differently depending on whether 
the loan is denominated in Korean won or in a fore ign currency as well as whether the interest rate is 
fixed or floating as stipulated in the Interest Rate  Guidelines (Articles 10, 11 & 11-2, Korea Annex V 
Response Attachment 1.1(15), Exhibit EC-13 ). Below is a chart summarizing the base rates currently 
in force for loans extended by KEXIM. 
 
 [BCI:  Omitted from public version .] 
 
 While the base rates thus obtained are not th e final rates at which KEXIM loans are extended, 
because various spreads are to be added thereto, th e base rate by itself is designed to adequately 
reflect the prevailing level of interest rates in the financial market at the time of the loan as well as 
KEXIM’s cost of procuring the required funds (e.g ., overseas borrowing and the issuance of  KEXIM 
bonds). Further, it is a standard market practice fo r all Korean commercial ba nks to use LIBOR rates 
or CD yield rates as the base rates for their floa ting rate loans (Korea notes that loans with floating 
interest rates account for the absolute majority of  all loans extended by KEXIM). In light of this, 
KEXIM’s interest rate structure ensures that the KEXIM interest rates fall within the “range” or 
“band” prevailing in the relevant market. In conn ection with this, Korea has not claimed that KEXIM 
interest rates are necessarily above  “market rates”.  
  With respect to the guarantee fees, until the occurrence of the Asian Financial Crisis, all 
participants in the APRG market, including KEXIM, had applied similar premia ranging from [BCI:  
Omitted from public version] .  KEXIM offered premia within this range based on its past 
experience in this field and also taking into acc ount the competition in the market. For the periods 
during and immediately following the crisis, however, other financial institutions seldom participated 
in the market. Therefore, there existed virtually no comparable premia offered by other financial 
institutions in Korea. During the crisis, KEXIM introd uced the fee structure co mposed of the base rate 
and credit risk spread. The base rate was calculated ma inly based on the historical cost associated with 
the provision of guarantees, and the credit risk spread  was introduced to reflect credit risks involved in 
individual transactions. As the financial market has b een stabilized after the crisis (more specifically 
since 2002), other commercial banks re-entered the market, bringing about competitions in the APRG 
market again. In response to this change in th e market, KEXIM introduced another spread factor 
                                                     
 
1 Appellate Body Report, US – Countervailing Measures on Certain Products from the EC , para. 110. WT/DS273/R 
Page D-54  
 
called the “Market Adjustment Rate” which gives the KEXIM managers flexibility to react to the 
market situations and reflect customer relationship.  As a result, KEXIM’s fee rate structure ensures 
that the premia charged fall within the range of “market premia”.  
48. In para. 133 of its first written submissi on, Korea "denies that the KEXIM Act, Decree 
and Interest Rate Guidelines provide for the provision of subsidies within the meaning 
of the SCM Agreement , let alone prohibited subsidies contingent upon export 
performance, within the meaning of Article 3(1)(a) of the SCM Agreement ."  Does Korea 
contest the EC's claim that loans and guarantees provided under the KEXIM legal regime are contingent upon export performance within the meaning of Article 3.1(a) of 
the SCM Agreement ? 
 
 In the above-mentioned paragraph, Korea intende d to emphasize simply that the KEXIM Act, 
Decree and Interest Guide lines as such cannot constitute subsid ies within the meaning of the SCM 
Agreement and, thus, it was not necessary to discuss further any “export contingency” of such alleged 
subsidies. Korea has not taken any position as to wh ether such loans and guarantees are contingent on 
export performance.  
49. Regarding para. 158 of Korea's first wr itten submission, please provide evidence to 
support Korea's argument that GOK made ca pital injections into KEXIM in order to 
"avoid negative credit ratings" rather than to  cover losses.  If capital injections were 
made for this purpose, what impact would th is have on Korea's assertion that KEXIM's 
operations are always profitable?  In particular, why would KEXIM's credit rating have been at risk if its operations were always profitable?  
 
 As Korea submits in its First Written Submi ssion, the capital injections into KEXIM were 
necessary for maintaining good credit rating as well as sound BIS adequacy ratio as KEXIM relied on 
overseas borrowings for procuring its required funds. [BCI:  Omitted from public version]  whereas 
other export credit agencies in Jap an or the US procure 80~100 per cent out of their total required 
funds through borrowings from their governments. Therefore, maintaining high credit rating and the 
sound BIS adequacy ratio was key to the KEXIM operations.   
 As the BIS adequacy ratio is defined as the ratio  of the “equity capital” of a company to “risk-
weighted assets” that the company is exposed to (i.e., it is the product of equity capital divided by 
risk-weighted assets x 100 per cent), the operating profits  have no direct relation or impact to the BIS 
adequacy ratio unless and until such operating profits are converted into the equity capital by way of 
“capitalization of reserves”. Further, given the size of “risk-weighted assets” and “equity capital”, the 
ultimate impact of the operating prof its being converted into equity capital to the BIS adequacy ratio 
is generally insubstantial.    At the time KEXIM increased its capital in 1998 and 1999, the risk-weighted assets of KEXIM rose to a substantial degree as, among others, the majority of loans extended by KEXIM was composed of foreign currency denominated loans an d the won-dollar exchange rates were extremely 
high. In addition, KEXIM anticipated that the demands for foreign currency denominated loans would 
substantially increase given the market situations.    Under these circumstances, KEXIM’s BIS ratio and credit rating were expected to decline 
despite its overall profitability. Thus, KEXIM had to  increase its capitals to sustain these indicators. 
For the reference purposes, Korea submits the credit rating changes by S&P for the relevant periods 
and the operating profits of KEXIM from its establishment.   
 [BCI:  Omitted from public version.] 
  WT/DS273/R 
 Page D-55 
 
 
50. Does KEXIM's profitability of operations exclude the possibility that it has provided 
subsidies? 
 
 The issue of KEXIM’s profitability really goes to two different questions.   
 First, Korea has not claimed that the profitability of KEXIM operations necessarily excludes 
the possibility that it has provided subsidies. Howe ver, the overall profitability of KEXIM operations 
directly refutes the EC argument that KEXIM has be en required by certain provisions of the KEXIM 
Act and related guidelines to provide loans and guara ntees at loss-making rates or without regard to 
commercial or market principles. As the market prin ciple is to generate profits, Korea believes that 
KEXIM’s continuous profitabilit y shows that it has acted according to market principles. 
  Second, in response to the point raised by the United States that cost to government issues are 
determinative of the issue of benefit to the recipien t, Korea has both pointed out the legally irrelevant 
nature of cost to benefit and then has followed up by showing that, in any event, KEXIM always has 
shown a profit indicating that as a factual matter, it does not operate at below cost.
2 
 
51. Regarding para. 159 of Korea's first wr itten submission, what is the reason for 
conferring on GOK a status that is less preferen tial than other shareholders?  Is this not 
suggestive of some form of special relationship between KEXIM and GOK?  
 
 The provision of Article 36 of the KEXI M Act as such does not suggest any special 
relationship between KEXIM and GOK. It would give a better understanding of this provision if it is 
read in the context of Article 4 of the KEXIM Act which lists the entities that can contribute capital to 
KEXIM. When the KEXIM Act was enacted on 28 July 1969, it was considered that only the 
Government would inject the equity capital to KE XIM. However, Article 4 of the KEXIM Act was 
amended on 24 December 1974 in order to induce co mmercial financial institu tions and other entities 
to participate in capital contributions into KEXI M. With a view of encouraging those commercial 
financial institutions and other entities to invest in  KEXIM, Article 36 was also amended to provide 
differential treatments between th e Government shareholder and ot her non-Government shareholders. 
Moreover, it is not uncommon in private corpora tions that the major shareholders receive less 
dividends and take more risks than other minor shareholders. 
 
52. In paragraph 128 of its submission the EC quotes from the KEXIM “On-Line Road 
Show” to the effect that KEXIM states that one part of its mission is to serve “a complementary but pioneering role and functi on for the national economy, which would 
be hard for commercial banks to shoulder” .  Is this not evidence of below-market 
financing by KEXIM?  
 
 The “On-Line Road Show” was prepared main ly to cater to the potential investors who 
subscribe for the bonds issued by KEXIM. In  the above-mentioned On-Line Road Show, KEXIM 
attempted to describe the specialized role and func tion being performed by it as an export credit 
agency (ECA). Export credit agencies, such as KEXI M, generally provide specialized trade-related 
financing. Such financing typically involves longer- term project-related loans (e.g., mid- and long-
term export loans), special payment terms (e.g., deferred or specially structured payments) or 
specialized collateralization methods. Given these pe culiarities and specialties of the ECA financing, 
it is not inaccurate to say that there is “a comp lementary but pioneering” role and function which 
commercial banks find difficult to perform. Particularly, the long term export credit financing 
provided on deferred payment basis is the area in  which only KEXIM specializes. However, it is 
                                                     
 
2 For purposes of clarity regarding the response to th is question, Korea notes that it is arguing in the 
alternative.  In referring to cost to government, Kore a does not concede that KEXI M is a public body.  Korea 
would like to note that this issue of  arguing in the alternative arises in  numerous places through the answers and 
Korea requests that  this reservation be accepted gene rally without the need to repeat it in each instance. WT/DS273/R 
Page D-56  
 
equally true that, as Korea explained at the Fi rst Substantive Meeting, commercial banks have 
advanced to most of the financing areas in whic h KEXIM operates and they are now competing with 
KEXIM pursuant to market terms. It is important to remember the context of the establishment of 
KEXIM. Korea was a developing country with inad equately formed capital markets, among other 
things.  It is quite typical in such situations for specialist banks to be set up to provide such pioneering 
expertise. Thus, it is a matter of technical speci alization and, as the Korean economy matures and 
expands, such expertise spreads, t oo, diluting the “pioneering role”. 
  The “On-Line Road Show” has been presente d against such background. It is simply 
irrelevant to the question of below-market financing by KEXIM. 
 
53. Please explain your understanding of the "non-competition" clause in the KEXIM legal 
framework.  What in practice does it mean  to not compete with commercial banks?  
What does Korea mean when it argues th at KEXIM does compete with commercial 
banks?  You seem to explain this clause in terms of different maturities of KEXIM and 
commercial loans.  Yet PSLs are for a peri od of 90-180 days, which falls squarely within 
the range of commercial bank terms.  Fur ther, APRGs are given for not less than 6 
months and not more than 25 years, which covers a wide range in which commercial banks are operating.  Please comment.  
 
 As Korea stated at the First Substantive Meeting, in order to  properly understand the meaning 
and relation of Article 24 vis-à-vis Article 25.2, it is necessary to understand the major financial 
services provided by KEXIM. KEXIM financial services can roughly be categorized into the four (4) areas referred to below:    
(1) Export financing : export loans; loans on deferred payment terms regulated by the 
OECD Arrangement; pre-shipment loans (which are the measure at issue); 
 (2) Overseas investment credits : These are the long-term credits extended by KEXIM in 
conjunction with overseas investment. Generally, these credits mature after 2~5 years;   
 
(3) Import credits : These are also long-term credits ex tended in conjunc tion with imports 
of capital goods; and  
 (4) Guarantees : KEXIM extends performance guarant ees, bid bonds, retention bond, 
warranty bonds and APRGs (which are the measure at issue).  
 
 These financial services generally involve longer-t erm trade-related financings and they also 
involve foreign-currency loans. When KEXIM was est ablished in 1976, there we re not many financial 
institutions to provide these types of financial services. Therefore, the principal purpose of 
establishing KEXIM was to provide such longer-term, trade-related financial services for which there 
was no competition from commercial banks at that time. Against this background, Article 24 was 
introduced to describe the specialized nature of  KEXIM business. But the general “non-competition” 
statement in Article 24, by nature, was not intende d to provide a very precise definition of the KEXIM 
operations. In this regard, Article 25.2 describes th e KEXIM financial services in terms of the length 
of loan maturity by stating that the maturity of KEXIM loans should be between 6 months and 25 years. Of course, this provision was not intende d to implement the “non-competition” statement in 
Article 24, as the ‘6 month-to-25 years’ maturity is so broad that most of the financing services 
provided by other commercial financial institutions  will fall within this ‘6 month-to-25 years’ 
maturity. However, the 25 year maturity is a ve ry long term for which few commercial banks provide 
financing. In this regard, Article 25.2 still indicates the special role of KEXIM focusing on very long term financing where commercial ba nks do not normally operate. In any event, it should be noted that 
none of these provisions is intended to prohibit other financial institutions to participate in long-term,  WT/DS273/R 
 Page D-57 
 
 
trade-related financial services extended by KEXIM or  to require KEXIM to exit the market for these 
financial facilities as soon as they are pr ovided by other financial institutions. 
  After KEXIM was incorporated, the Korean financial market has developed and commercial financial institutions began to provide the specialized financing services in which KEXIM had 
operated. Thus, at present KEXIM is in competition with commercial banks in all areas of financial 
services, except the long-term export credits with deferred payment terms which are regulated by the 
OECD Arrangement. As for the pre-shipments lo ans, KEXIM competes with other financial 
institutions which provide “general loans” or othe r short term loans. In the field of overseas 
investment credits, as the foreign exchange regula tions were amended to allow commercial banks to 
provide such overseas investment credits, all financ ial institutions can now freely extend such credits. 
As for the APRGs, KEXIM took only a small portion of  the market share (less than 20 per cent) prior 
to the Asian Financial Crisis, as Korea submitted.    Furthermore, the true meaning of Article 24 of the KEXIM Act can be clearly explained by 
reference to the changes in Article 18 of the KE XIM Act which directly enumerates the types of 
operations to be carried out by KEXIM. Prior to 16 September 1998, Article 18 provided that 
“KEXIM may engage in the operations prescribed in  [each subparagraph of Article 18] that are not 
normally conductible by other financial institutions ”. In other words, Article 18 was clearly confining 
KEXIM’s operations to those financial services th at could not be provided by other financial 
institutions. However, by way of the 16 Sept ember 1998 amendment, such “non-competition” 
restriction on KEXIM’s business scope was elim inated and Article 18 now provides that KEXIM 
“may engage in the operations prescribed  in the [subparagraphs of Article 18] ” without any 
limitations (please refer to Amendments to KEXIM Act and Decree, Korea Annex V Response 
Attachment 1.1(1)-3, Exhibit EC-12) . This amendment explains how Article 24 of the KEXIM Act 
has been understood and applied.  
 
 As the situation in the financial market has changed since the enactment of the KEXIM Act, 
and in light of the above amendment to Article 18, the non-competition clause of Article 24 of the 
KEXIM Act should have been repealed. In fact, for this reason, KEXIM has been contemplating 
proposing the repeal of or amendment to Article 24  of the KEXIM Act. This is nothing unusual.  
Every jurisdiction in every WTO Member has some  outdated statutory provisions on the books that 
should be changed, but sometimes are not in the press of crowded legislative agendas. 
 
54. At para. 170, Korea asserts that Article 24 of the KEXIM Act should be read in 
conjunction with Article 25.2 thereof.  In the absence of any explicit linkage between these provisions, please provide support in respect of this argument (such as the 
negotiating history of Article 24, for example).  If Korea's assertion regarding the 
relationship between these provisions is correct, and if Article 25.2 explicitly sets restrictions on the term of financing that KEXIM may provide, what is the purpose of Article 24, i.e., what does it add to Article 25.2?  
 
 Please refer to Korea’s responses to Question 53 above.  
55. Regarding Article 26 of the KEXIM Act, Korea  suggested at the oral hearing that this 
provision should be interpreted in the context of the entirety of that legal instrument.  What other provisions of the KEXIM Act have a bearing on the interpretation of Article 26?  Please explain.  
  Article 26 has no purpose other than to provide th at all fees and rates must cover “at least” the 
costs when KEXIM provides financing. It does not prohibit KEXIM from earning profits and, instead, 
effectively requires it to carry on profitable ope rations. In fact, KEXIM has earned substantial 
amounts of operating profits since its establishmen t as shown in the response to Question 49 above. 
Further, other relevant provisions of the KEXIM Decree effectively require KEXIM to carry on its WT/DS273/R 
Page D-58  
 
business for profit. More specifically, Articles 17-3 through 17-13 of the KEXIM Decree provide the 
parameters for sound and profitable management of KEXIM. In addition, the Interest Rate Guidelines 
of KEXIM provides for the mechanism of determining interest rates and fees which is structured to 
align KEXIM rates always with market rates (see
 Chapters 2, 3 & 4 of the Interest Rate Guidelines). 
 56. Article 26 of the KEXIM Act provides, in particular, that except where "inevitable for 
maintaining the international competitiveness to facilitate [...] export [...]", interest rates 
shall be set so as to cover inter alia  operating expenses.  
 
 (a) What is the meaning of the phrase "i nevitable for maintaining the international 
competitiveness"? 
  (b) How is this phrase applied in practice?  In any such case, where the interest rate 
is reduced to maintain international co mpetitiveness, would this not imply that 
the final rate is below market?    
 
 As Korea noted during the First Substan tive Meeting, the phrase mentioned above was 
included in the KEXIM Act in order to allow KEXIM the option to provide financing at below-cost level in exceptional situations when KEXIM faces severe ‘rates’ competition from foreign financial 
institutions.  A typical example is a situation where KEXIM has to apply “matching” as permitted 
under the OECD Arrangement. Under the OECD Arra ngement, if a counterpart export credit agency 
deviates from the guidelines under the OECD Arrange ment, other export credit agencies are permitted 
to lower their interest rates to ma tch such interest rates of their counterpart. In order to provide for 
such possibility, Article 26 was introduced into th e KEXIM Act. However, as this “matching” would 
be exceptional, Article 26 uses the term “inevita ble”, which means that under normal or ordinary 
circumstances this exception must not be applied. Korea notes that this exception under Article 26 has 
never been applied in practice thus far. Further,  KEXIM has interpreted this Matching mechanism in 
such a restrictive manner that it can be applied only for matching of [BCI:  Omitted from public 
version.]   (see
 Article 43 of the Interest Rate Guidelines). 
  In any event, Korea believes th at the Panel’s sub-question (b) do es not appear to be relevant 
with the definition of subsidy or market benchmark. Because the benefit is not determined by 
reference to the cost of the granting authority, but to the advantages received by the beneficiary of the 
subsidy, a fact that KEXIM’s interest rate may in exceptional cases go below its “operating expenses” 
referred to in Article 26 has noting to do with the finding of a ‘benefit’ or a ‘subsidy’. Instead, as long 
as Article 26 permits KEXIM to match the low inter est rates applied by other competing financial 
institutions, KEXIM will always end up applying the market benchmark, whether or not the KEXIM 
rate is below or above its “operating expenses”. In sum, Article 26 does not imply that the final 
KEXIM rate is “below market”.  C. APRG PROGRAMME  
57. Are we correct in understanding that the Market Adjustment Rate means an upward or 
downward adjustment, toward the market rate, of  the base rate plus spreads?  Does this 
not mean that applying a Market Adjustment Rate could
 result in a below-market rate?  
Please explain.  
 
 First of all, as explained in its response to Question 47 above, Korea would like to clarify that 
the “market rate” should exist in the form of “range” or “band”, not a single rate. 
  The Market Adjustment Rate is one of the spr eads (or premium) that is to be applied upward 
or downward to the base rate in addition to othe r spreads such as “credit risk spread” and “target 
margin”. [BCI:  Omitted from public version.]  
  WT/DS273/R 
 Page D-59 
 
 
 It is commercially reasonable and fully market-oriented that the rates of other competing financial institutions are considered in determining the final rates or that a borrower who has a long 
relationship with KEXIM and a good track record may obtain lower interest rates and/or fees. Korea 
would like to note that applying such Market Adjustme nt Rate or similar spreads is a market practice 
applied by all other commerc ial financial institutions. 
 
 [BCI:  Omitted from public version.]  
 
 Korea does not believe that this Market Adjustme nt Rate causes the final fee rate to be set 
below the market rates. It is b ecause the base rate and the spreads,  including the Market Adjustment 
Rate, are determined and applied according to the market-oriented criteria and it is always assumed 
that the final rate will stay with in the range of ‘market rates’. 
 
58. Please provide examples of KEXIM APRGs provided to purchasers of commercial 
vessels where the Market Adjustment Rate ha s been (i) upwards, (ii) downwards, and 
(iii) zero/neutral.  During 2003, what proportion of the totality (i.e., shipping sector and 
beyond) of KEXIM's APRGs involved (i) upward, (ii) downward, and (iii) zero/neutral Market Adjustment Rates?  
  [BCI:  Omitted from public version.]  
 
59. In transactions in which there is no "e xport credit" to the Korean exporter, is the 
argument set forth in para. 263 of Korea's  first written submission (that Korean 
exporters who export capital goods which qualify for loans under KEXIM policies on 
export loans also are eligible for APRGs) re levant?  Would the APRG still constitute an 
"export credit guarantee" in such circumstances?  Please explain. 
  Korea raised this issue as part of its arguments  in the alternative relating to the safe harbors 
provided by Items (j) and (k) of A nnex I. Korea invoked the similarity  in eligibility criteria for export 
credits and APRGs as an additional indicator to support its conclusion that APRGs are export credit 
guarantees. The fact that APRGs may be granted wh en export credits in the narrow sense are not does 
not prevent APRGs from being qualified as export credit guarantees because it still is a guarantee 
accessory to an export transaction similar to a loan guarantee which covers a default by the borrower. 
Moreover, in the opinion of Korea, APRGs are guara ntees against increases in the cost of the exported 
products in the sense of Item (j) of Annex I for th e reasons explained in paras 265 to 267 of its First 
Written Submission.  60. Regarding the argument in para. 266 of Korea's first written submission, (that APRGs 
provide a safeguard against increases in the cost  of production of a vessel, by relieving 
the shipbuilder of the need to borrow working capital) is it Korea's position that the provision of an APRG precludes any increase in the cost of producing a commercial vessel?  
 
 No Korea is not arguing that in the broadest sense that it precludes “any” increases in costs.  
The APRG programme is fairly limited.  It only ap plies with respect to the cost associated with the 
working capital necessary to produce the ship.  The reference to the guarantee against increases of 
costs also demonstrates that item (j) is not limited to guarantees extended directly to buyers, for the reference to “costs” – which are more closely associat ed with risks carried by the seller – is the term 
used rather than the reference to being a safegua rd against increases in “prices”, which would more 
clearly indicate a focus on buyers.  WT/DS273/R 
Page D-60  
 
D. PSL PROGRAMME  
61. In light of paras. 260 and 271 of Korea's first  written submission, is it Korea's position 
that any official measure to promote exports co nstitutes an official export credit?  Please 
explain. 
 
 Korea did not mean to imply that any
 official measure to promote exports constitutes an 
official export credit when it referred in paragraph 260 of its First Written Submission to Section 4 of 
the Sector Understanding for Export Credits for Ship s. Korea also referred to Section 3 of the OECD 
Arrangement in paragraph 259 to clarify that expor t credits may be given in the form of direct 
credits/financing, refinancing, interest rate s upport, guarantee or insurance. Korea nevertheless 
invoked Section 4 in support of its argument that  the concept of “export credit” and “export credit 
guarantee” should not be given an unduly restricted  interpretation that would exclude APRGs from 
Item (j) while these show a close connection with the financing that the shipowner obtains for the 
building of the vessel covered by the APRGs.  Korea also notes that the term “official export credit” is 
found only in the second paragraph of Item (k) a nd provides part of the definition of a narrow 
exception to the broader language in the first paragr aph of Item (k). Thus, whatever would be an 
“official export credit” for purposes of the second  paragraph of Item (k) necessarily would be 
included within the provisions of the first paragr aph.  The OECD references are illustrative here. 
 
62. Regarding para. 272 of Korea's first writte n submission, do shipyards necessarily grant 
credits to buyers in every case that  they avail themselves of a PSL? 
 
 Yes, in the sense that a shipowner is never re quired to settle the price for the vessel at once 
but in installments of which the time period a nd amounts vary depending on the negotiations between 
the shipbuilders and the shipowners. Hence, the shi powners are always allowed to defer payment as 
mentioned in the quotation in paragraph 272 of Ko rea’s First Written Submission. The larger the 
amount that the shipowner is entitled to defer during the building of the vessel as a result of the payment term agreed upon, the greater the likely need of the shipbuilder for a pr e-shipment loan or an 
equivalent financing facility for financing the pur chase of materials and the building of the vessel 
concerned.  63. At paragraph 159 of its submission the EC quotes a statement by KEXIM that the PSL 
programme involves “larger credits and long er repayment terms than what suppliers or 
commercial banks would provide”.  Why is th is not evidence that PSLs are provided on 
below-market terms?  
 
 Korea notes that Exhibit EC-21 referred to in footnote 116 at paragraph 159 does not contain 
the phrase quoted above. Further, Korea is not able to locate the quoted phrase in any other exhibits 
the EC provided. Hence, Korea is not in a position to  respond to this Question at this time. Korea also 
notes that the sentence quoted does not, in any event, lead to the suggested conclusion.  For example, 
providing a longer term than is generally available do es not mean that the rates are below market.  It 
depends on how they are adjusted to reflect the di fferent terms. The size of a credit may or may not 
require different rates; it depends on factors extrane ous to size alone. Therefore, that part of the 
statement would seem completely beside the point.  
64. Please provide details of two Base Rate calc ulations for two fixed rate loans to Korean 
shipyards, taking into account and making reference to the component elements thereof 
referred to in the Interest Rate Guidelines.  
 
 As noted in the response to Question 47 above, the loans with fixed interest rate are rather 
exceptional. Nonetheless, Korea submits the details fo r two loans with fixed interest rate as below. 
[BCI:  Omitted from public version
.] 
  WT/DS273/R 
 Page D-61 
 
 
65. At para. 199 of its first written submission , Korea states that the terms of PSLs normally 
do not exceed 6 months.  At para. 277, Korea  asserts that the usual maturity of PSLs is 
between 90 and 180 days.   Please explain these different descriptions of the maturity of PSLs.  What is the typical maturity of a PSL?  
 
 Korea notes that the above two statements describ e the same fact in a slightly different form. 
In terms of maturity of disbursements of PSLs, there is no “typical” maturity of a PSL. [BCI:  
Omitted from public version.]  
 
66. Are all PSLs at floating rates?  Are any made at fixed rates? 
  PSLs may take either floating rates or fixed ra tes. Korea submits examples of fixed rate PSLs 
in its response to Question 64 above.  E. INDIVIDUAL APRG TRANSACTIONS 
 
67. Please provide internal documentation concerning KEXIM's review / authorization of 
the APRG issued on [BCI: Omitted from public  version].  Please include in particular 
the worksheets and other documentation showing calculations of the interest rate and other terms, including consideration of collateral, related to KEXIM's review / 
authorization of this APRG.  
  Korea submits in Exhibit Korea - 57
 the relevant minutes of the Board of Directors Meeting 
and related documents authorizing the APRG tr ansaction concerned. Korea notes that it is not 
KEXIM’s policy to keep and ma intain worksheets and similar documents. Hence, Korea cannot 
provide such documents. 
 
 [BCI:  Omitted from public version.] 
 68. Regarding para. 207 of Korea's first wri tten submission, please explain the basis for 
Korea's assertion that the EC "confirmed" that the market which provides other alternatives available to the recipient must be confined to the domestic market. 
  Korea’s statement in paragraph 207 of its  First Written Submission, referred to in 
paragraph 145 of the EC’s First Written Submission where the EC stated that the KEXIM APRGs confer a benefit to Korean exporte rs “by providing financial support on more advantageous terms than 
they otherwise would be able to obtain in the Korean financial market.” 
 
69. Regarding para. 213 of Korea's first wr itten submission, please provide an example 
(with supporting documentation) of two instances in which different Korean shipyards were not able to select the APRG provider th emselves.  Please also provide supporting 
documentation for the instance referred to in note 161 to Korea's first written submission.  
 
 [BCI:  Omitted from public version.]  
 
70. Regarding the last sentence of the quote co ntained in note 157 to Korea's first written 
submission, is it only when "physical" colla teral is provided that "the credit rating of 
the borrower will not influence the determin ation of the spread"?  Please explain.  
 
 Attachment 1 of the Interest Rate Guidelines provides for the application of different credit 
risk spreads depending on the typ es of security interests provided. According to this Attachment, 
[BCI:  Omitted from public version.]  
 WT/DS273/R 
Page D-62  
 
71. Regarding the second sentences of paras.  218 and 221 of Korea's first written 
submission, and the third sentence of para. 223, please specify precisely which APRGs by which domestic financial institutions Korea considers would constitute a more 
appropriate market benchmark, and provide details thereof.  
 
 First, Korea re-emphasizes that the EC bears the burden of proof to establish the appropriate 
market benchmarks and has, so far, failed  to do so and thereby failed to establish a prima facie  case 
on export subsidies. However, for the purpose of showing that the EC has in fact selected and 
provided misleading data, Korea s ubmits below certain APRG rate s charged by other financial 
institutions which can be compared with the ra tes charged by KEXIM at the comparable time. 
 
 [
BCI:  Omitted from public version. ] 
 F. INDIVIDUAL PSL TRANSACTIONS  72. Please provide internal documentation concerning KEXIM's review / authorization of 
PSL [BCI:  Omitted from public version].  Pl ease include in particular the worksheets 
and other documentation showing calculations of the interest rate and other terms, including consideration of collateral, related to KEXIM's review / authorization of this 
PSL. 
 
 Korea submits in Exhibit Korea - 60
 the relevant minutes of the Board of Directors Meeting 
and related documents authorizing the PSL transacti on concerned. Korea notes that it is not KEXIM’s 
policy to keep and maintain worksheets and othe r similar documents. Hence, Korea cannot provide 
such documents.   
 
73. Regarding paras. 233 and 240 of Korea's first written submission, please explain 
precisely how the collateralization and di fference in maturity of the relevant PSLs 
accounted for the difference between the rates for those corporate bonds and the 
KEXIM PSL rates, which sometimes was as much as [BCI:  Omitted from public version].  Please comment on Attachment 1 to the KEXIM Interest Rate Guidelines in 
this respect.  
  First of all, Korea notes that the corporate bond rates offered by the EC are hypothetical ones 
and, thus, cannot constitute comparable benchmarks  to PSLs. The corporate bond rates offered by the 
EC are the rates which the Korea Securities Dealers Association (“KSDA”) announces for the 
purposes of general indices. More specifically, in order for KSDA to post corporate bond yield rates 
daily, the securities dealers of 10 securities houses de signated by KSDA provide KSDA with the daily 
yield rates which are not based on the statistics of actual yield rates, but based on their own 
projections taking into account the market situati ons on that date. In turn , KSDA simply averages 
those rates and posts it. Thus, the KSDA rates must also be hypothetical on es. The KSDA rates do not 
reflect the difference in the industry sectors whic h the issuing company belongs to, the different 
financial strengths of individual issuers (e.g., whethe r the company is an affiliate of a Chaebol), and, 
most importantly, the specific terms and conditions (especially the maturities and collateral) of the 
actual corporate bonds being traded in the market. When looking at the individual companies even having the same credit ratings, the companies may be perceived and treated differentially in the market considering various factors. Accordingly, th e actual yield rates of the corporate bonds of the 
issuers with the same credit rating may be substan tially different. Considering all these, there must be 
differences or gaps between the KSDA rates and the actual corporate bond rates of individual 
companies. Hence, Korea doubts, from the outset, whether the KSDA rates th emselves can constitute 
appropriate benchmarks for PSLs , let alone the discussion on different terms and conditions 
(particularly the maturities and the collaterals).   WT/DS273/R 
 Page D-63 
 
 
 Further, Korea notes that the collateralization s ubstantially affects the application of credit 
risk spreads as explained in the response to Question 70 above, wh ich in turn causes substantial 
differences in the final interest rates. [BCI:  Omitted from public version.]  
  Further, as the graph attached hereto (Exhibit Korea - 62
) clearly shows, the interest rates of 
loans with longer term maturity we re generally higher than the loans with shorter term maturity. Also, 
KEXIM has applied higher credit risk spreads for the loans having over 1 year maturity than the 
spreads for the loans having 1 year or less maturity (see  Attachment 1 to the Interest Rate Guideline). 
Thus, the difference in maturity also clearly aff ects the overall interest rate although the degree of 
such differences has varied from time to time. 
 
74. Regarding para. 241 of Korea's first writte n submission, please provide a copy of the 
relevant agreement between KEXIM and Hyundai Heavy Industries.  
 
 Korea submits herewith KEXIM’s notice of approval relating to the transaction as Exhibit 
Korea - 63 . 
 
75. Regarding paras. 272 and 273 of Korea's first  written submission, do the terms on which 
PSLs are provided vary according to the amount, duration or terms of any credit provided by the Korean exporter to its cu stomers?  Please explain, and provide 
supporting documentation where relevant.  
 
 If the payment term agreed upon between the Ko rean exporter and its customer is tail-heavy, 
i.e., most of the purchase price is paid at a later stage during the manufacture of the product concerned 
and after its delivery, it means that the shipbuilder  must procure the production cost through its own 
financing (e.g., PSLs), rather than through advanc e payment from the ship buyer (i.e., payments 
received prior to the delivery of the vessel concerne d). Therefore, at least the ‘amount’ of the PSLs 
will vary according to the ‘amount’ and the “duration” of the credit provided by the shipbuilder to its 
customer. This will influence the term spr ead taken by KEXIM when granting the PSL.  
  However, Korea has no document that shows a clear linkage between the terms of PSLs and the terms of supplier credits to ship buyers. 
 
G. ACTIONABLE SUBSIDIES   
76. Does Korea accept the EC's argument that the Korea Depository Insurance Corporation 
and the Bank of Korea constitute "public" bodies in the sense of Article 1.1(a)(1) of the 
SCM Agreement ?  Please answer yes or no, and give reasons.  If yes, what characteristics 
do these entities have that KEXIM does not?  Do these entities have the authority to 
regulate and / or tax?  
 
 (a) Yes, Korea agrees that at least the Ba nk of Korea constitutes a “public” body in the 
sense of Article 1.1(a)(1) of the SCM Agre ement. As explained below, the Bank of 
Korea possesses the essential powers characterizing the exercise of ‘governmental’ 
authority, that is, authority to ‘regulate’, ‘restrain’, ‘supervise’ or ‘control’. Further, the Bank of Korea is not engaged in the supply of goods or services on commercial terms on markets which are open to privat e operators. KEXIM (and KDB and IBK as 
well) do not have such powers and characteristics. 
 
  The main powers and characteristics of the Bank of Korea include the following: 
   - As the central bank of the Republic of Korea, it issues the legal currency of 
Korea;  
 WT/DS273/R 
Page D-64  
 
  - It establishes and enforces the mone tary and credit policies, controlling the 
amount and flow of money and stabilizing the prices; 
   - It acts as the “bank of the bank s”, receiving deposits from and extending 
loans to banks and other financial institu tions, in order to sustain the systemic 
operation and security of the Korean financial market; 
   - It acts as the bank of the Government , receiving and paying the tax and other 
government revenues and keeping th e Government-owned securities in 
custody; 
 
  - It operates and manages the nation-wide payment settlement system;    - It possesses and manages foreign currency-denominated assets of the 
Government and advises the Government on its foreign exchange policies; 
 
  - It maintains the stability and soundness of the national financial system by 
analysing and inspecting the operations of banks; 
   - It carries out the inspection and research of the overall status and 
development of the national economy and issues various statistical reports on 
the national economy; 
   - It represents the Korean Government in connection with any affairs, 
negotiations and transactions with intern ational monetary or financial bodies 
of which the Republic of Korea is a member; 
 
  - In carrying out these powers, the Bank of Korea can exercise the power to 
order other banks and financial institu tions to submit necessary materials and 
information; 
   - The Governor, Vice Governor, Audito r and employees of the Bank of Korea 
are treated as ‘public servants’ for th e purpose of applying the criminal law 
and the penal provisions of other laws; 
   - The Bank of Korea is in principle prohibited from engaging, directly or 
indirectly, in any commercial (profit-generating) activities, and from 
receiving deposits from or lending money to individuals and corporations 
other than the Government, government  agencies and financial institutions. 
  (b) The main powers and characteristics of the KDIC include the following:    - The KDIC is vested with two main functions: (i) operate the ‘deposit 
insurance system’ to protect deposito rs with the banks and financial 
institutions by paying deposits from a deposit insurance fund when the banks 
or financial institutions become unable to pay deposits to the depositors due 
to bankruptcy, etc.; and (ii) arrange for merger or assignment of business of 
‘unsound’ financial institutions and pr ovide financing in relation to such 
merger or business assignment;  
   - In carrying out such functions, the KDIC exercises the power to (i) require 
materials from, and inspect the financia l institutions covered by the deposit 
insurances of the KDIC; (ii) institute legal actions against the directors, 
officers and employees of ‘unsound’ fina ncial institutions, the directors,  WT/DS273/R 
 Page D-65 
 
 
officers, employees and major shareholders of the debtor company, or any other third parties which are believed to  have contributed to the financial 
institution becoming ‘unsound’ (collectively the “responsible parties”); and (iii) require materials from and inspect the business and assets of the responsible parties; 
 
  - Any person who fails to submit th e required materials or submits false 
materials to the KDIC or who refuses, interferes with or avoids the inspection by the KDIC will be punished by imprisonment or fine; 
 
  - The directors, officers and employers of the KDIC are treated as ‘public 
servants’ for the purpose of applying the applicable provisions of the criminal 
code. 
 
77. If a loan is denominated in US dollars, isn't it appropriate to have regard to the US 
market in order to determine the pre vailing market rate for such a loan?  
 
 KEXIM has carried on financing businesses in the Korean domestic markets in terms of 
customers and competing financial institutions. Ther efore, KEXIM does not consider the US market 
rate as the prevailing market rate for KEXIM’s US dollar denominated loans. [BCI:  Omitted from 
public version.] 
 
78. Regarding para. 347 of Korea's first written submission, was the liquidation / going-
concern value assessment of Daewoo made on  the assumption that there would be a 
particular restructuring (e.g., the restructuring proposed by Arthur Andersen), or instead on the assumption that no restructuri ng would take place?  If the going concern 
value was based on the assumption of a given prospective workout or CRP process, what 
would be the value of your statement that in every case of restructuring of a ship producer, the going concern value was greater than the liquidation value?  Is it not the 
case that with certain assumptions regarding  the content of the restructuring process, 
any company however insolvent could be ma de to have a higher going concern value 
than liquidation value?   
 
 (a) It is not correct that the liquidatio n / going-concern value assessment of Daewoo 
Heavy Industry (“DHI”) was made on the assu mption that there would be a particular 
restructuring. The reverse was true. That is, Arthur Andersen proposed the restructuring of DHI after it had confirmed that the going concern value of DHI was 
greater than its liquidation value. The main responsibility of Arthur Andersen at the 
time was to carry out due diligence examination of DHI’s assets and liabilities, to assess whether the going concern value was great er than the liquidation value, and, if 
the going concern value was found to be great er than the liquidation value, then to 
propose a feasible restructuring plan. Therefore, there could be no particular assumption of restructuring when Arthur  Andersen made the liquidation/going-
concern value assessment of DHI. 
   - This fact can be established by the history of Arthur Andersen’s involvement 
and its role in the DHI workout. As clearly stated in Section 2(a) of the World Bank SAL II Policy Matrix on Corporate Restructuring (Exhibit Korea
 
- 30), the role of the financial advisor was to indicate “how best to maximize 
the return to creditors – i.e., throu gh voluntary workout, composition, 
reorganization or liquidation”,  after the workout procedure had been 
initiated by the CCFI. Based on the professional assessment of this financial WT/DS273/R 
Page D-66  
 
advisor, the Lead Bank either proceed s with the preparation of a workout 
plan or proposes that the CCFI terminate the workout procedure initiated.
3 
   -  [BCI:  Omitted from public version.]  
 
 These facts show that Arthur Andersen dischar ged its professional duty to analyze “how best 
to maximize the return to creditors – i.e., thr ough voluntary workout, composition, reorganization or 
liquidation”, without any pre-established assumption of the workout.    (b) In calculating the going-concern value of DHI, Arthur Andersen applied the 
‘discounted cash flow’ (DCF) method whereby the enterprise value of the company is 
determined by discounting, with appropriate discount rate, the estimated cash flows to 
be generated by the company in future. (see
 Exhibit EC-64, Arthur Andersen 
Corporate Workout Report on DHI, pp. 103-104). In accordance with the modern financial management theory, the DCF method calculates the enterprise value (free 
cash flows) mainly based on the operational aspects (i.e., operating assets and 
operating liabilities). The assumption for the DCF valuation of the enterprise value is that the company continues as a going concer n, but a “particular restructuring (e.g., 
the debt restructuring proposed by Arthur Andersen) was not considered at the stage 
of the assessment of DHI’s enterprise value as a going concern. 
 
  Under the DCF valuation method, the going concern value of a company can be 
either higher or lower than its liquidati on value, depending on the profitability and 
cash flows of the company’s business operati on. For example assume that a company 
holds operating assets (book value) of 1,000,  operation liabilities (book value) of 300, 
interest bearing debt of 400 and equity of  300, with discount rate (WACC) of 10 per 
cent. And also assumes that in the case of liquidation, the company is expected to 
have liquidation value of 700. The comparison between the company’s going concern value and the liquidation value is as follows: 
 
  1. In the case of annual operating cash  flows being 100, the going concern value 
of the company would be 100/0.1=1,000, which is greater than the liquidation 
value of 700. 
   2. In the case of annual operating cash  flows being 70, the going concern value 
of the company would be 70/0.1=1,000, which is the same than the liquidation value of 700. 
 
  3. In the case of annual operating cash  flows being 50, the going concern value 
of the company would be 50/0.1=1,000, which is less than the liquidation value of 700 
 
79. The EC states, at footnote 31 of the its s ubmission, that Korea refused to provide a copy 
of the January 1998 Agreement with the top 5 chaebols on the grounds that this 
Agreement was “irrelevant”.  Is this correct?  If so, please explain why this Agreement is 
irrelevant.  
 
 It is true that Korea did not provide copies of  the agreements relating to the self-restructuring 
of the top five chaebol (hereinafter, “top-5 chae bols agreements”). Korea believed and still believes 
that the EC was making another fishing expedition by  asking for documents whic h were irrelevant to 
the present dispute. 
                                                     
 
3 Attachment 8 to Korea’s First Written Submission, “Description of the Workout Procedures pursuant 
to the CRA.”  WT/DS273/R 
 Page D-67 
 
 
  The top-5 chaebols agreements are irre levant to the present dispute because: 
  - These agreements provided for some prin ciples of the so-called “self-restructuring”, 
which was to be implemented voluntarily by each of those top-5 chaebols outside of  
the workout procedures under the Corporate Restructuring Agreement (CRA) 
framework or the court-supervised insolv ency procedures. None of the corporate 
restructuring measures at issue in the present dispute was taken in the form of such “self-restructuring”. Therefore, there w as no reason for the EC to ask for the 
agreements relating to such self-restructuring. 
 
 - The EC argued, at footnote 31 of its First Written Submission, that “this agreement is 
quite relevant to this dispute because it shows the degree to intervention of the 
Government of Korea in the corporate sector .” The EC attempts to mislead the Panel 
by intentionally using such vague words as “intervention … in the corporate sector.” 
But the role of the Korean Government was confined to encouraging the top-5 
chaebols to take self-initiated actions to enhance their management transparency, 
eliminate cross guarantees, improve financial structures (e.g., reduce debt/equity ratios), and dispose of non-viable aff iliates and focus on core businesses.  
  - Such a limited role of the Korean Gove rnment in connection with self-restructuring 
by the top 5 chaebols was also clearly stated in section 3(h) of the World Bank Policy 
Matrix on Corporate Restructuring attached to the LOI between IMF and Korea (Exhibit Korea-30). It should be noted that this reference in the LOI to the top 5 chaebols’ self-restructuring was made in the context of the corporate restructuring ‘principles’ set out in the LOI: i.e., “ All corporate restructuring should be voluntary 
(i.e., not government directed) and market oriented …..” (See Exhibit EC-36, the LOI 
of 2 May 1992 between IMF and Korea, Attachment “Korea – Updated Memorandum on the Economic Program for the Second Quarterly Review, 1998”). 
Therefore, it is obvious that the top 5 chaebol agreements do not indicate the intervention of the Korean Government  in the “corporate restructuring”.  
 
 Furthermore, it is now clear that when the EC requested Korea to provide the January 1998 
Agreement, it had already possessed the top 5 chaebols agreement of 7 December 1998 and 
understood what the top 5 chaebols agreements were all about (see Exhibit EC-40). Moreover, in its 
Annex V responses, Korea provided sufficient inform ation on the contents of these agreements that 
clearly shows the irrelevance of these agreemen ts to the present dispute (see Korean’s Annex V 
Response, Sections 2.2 (20), (21) and (22)).  In th is regard, the EC’s allega tion of adverse inferences 
is baseless.   Despite the irrelevance of the top 5 chaebols ag reements to the present dispute, Korea hereby 
submits the January 1998 Agreement as Exhibit Korea – 65.  80. Please explain the different debt-recovery  rates paid by KAMCO for unsecured loans 
held by Daewoo's domestic and foreign creditors respectively.  
  [BCI:  Omitted from public version.]  
81. You argue that the restructuring was not specific, because many companies underwent 
restructuring during the same period as the shipbuilders.  Is your argument that the restructuring packages and work-outs were ess entially standardized, and subject to 
"objective criteria or conditions governing th e eligibility for, and the amount of" the 
measures involved, and that such criteria and conditions were "strictly adhered to"?  WT/DS273/R 
Page D-68  
 
Or is it the case that each restructuring or work-out was tailor-made to the particular 
company involved?  Please explain.  
 
 Our argument is two-fold: First, assuming for the sake of argument that each of the creditor 
financial institutions of the three restructured Kor ean shipbuilders constitutes the “granting authority” 
as referred to in Articles 2.1(a) and (b) of the SCM Agreement , the granting authority, or the 
legislation pursuant to which the granting auth ority operates (i.e., the CRA and the Corporate 
Reorganization Act), did not explicitly limit access to an alleged subsidy to shipbuilders. Instead, the 
restructuring legislation or scheme provides for standardized sets of rules and procedures and is generally applicable to all companies irrespective of  their industrial sectors. Therefore, no specificity 
can be found pursuant to the principle laid down in Article 2.1(a).  
  Second, we also argue that the restructur ing legislation or scheme established “objective 
criteria or conditions governing the eligibility for, a nd the amount of, a subsidy” and, therefore, the 
non-existence of specificity can be established by  virtue of Article 2.1(b). Footnote 2 of the SCM 
Agreement  enumerates ‘number of employees’ or ‘size of enterprise’ as examples of ‘objective 
criteria or conditions’ as used in Article 2.1(b). Ho wever, ‘objective criteria or conditions’ is more 
broadly defined to mean “criteria or conditions which are neutral, which do not favour certain 
enterprises over others, and which are economic in  nature and horizontal in application.”   
  The CRA and the Corporate Reorganization Ac t, which constitute legal frameworks for the 
workout and corporate reorganization proceeding, respectively, authorized the creditor financial 
institutions or the court to grant the restructuring measures to any corporation which was insolvent or 
suffering liquidity problems but whose going concern value is greater than liquidation value. Korea 
believes that these criteria clearly govern the eligib ility for the restructuring measures, and constitute 
“objective criteria or conditions” as defined in the footnote 2 of the SCM Agreement. Furthermore, 
according to the Operational Guidelines for Workout Ag reement, if a request for workout is filed by a 
company, the lead bank must set up an independe nt Workout Eligibility Review Committee to review 
the eligibility of the subject company.  The Review  Committee is required to review the applicant’s 
financial and management status to asse ss the viability of that company.   
  Although the amount of the alleged subsidy it self was not spelled out in the restructuring 
legislation or scheme in terms of numerical figur es, the above going concern value standard would 
also constitute objective criteria or conditions ‘govern ing’ the amount of the alleged subsidy, in the 
sense that the alleged subsidy amount should be lim ited to the extent necessary for restructuring to 
realize the established going concern valu e and maximize returns to the creditors. 
 
H. SERIOUS PREJUDICE 
 
82. Please comment on the EC's assertion that the competition complaint filed by Samsung 
demonstrates the unfair pricing advantage enjoyed by restructured Korean shipyards.  
 
 The Ministry of Commerce, Industry and Ener gy ("MOCIE") intervened in the Hamburg Süd 
case in accordance with the provisions of the Overseas Trade Act. Article 43 of the Act authorizes the 
MOCIE to issue to exporters of goods a "coordinati on order" with respect to the terms of export 
(including without limitation prices, quantity, and qua lity), if, among others, the exporters engage in 
any of the following types of behavior and if it is  deemed necessary to prevent acts which threaten to 
disturb fair competition in the export of goods or to impair Korea's external credit and reputation: 
 
 1. If an exporter unreasonably excludes othe r traders in connection with export of 
goods; 
 
 2.  If an exporter unreasonably induces or coer ces the counterpart of another trader to 
refuse to deal with that trader in connection with export of goods; or  WT/DS273/R 
 Page D-69 
 
 
  3.  If an exporter unreasonably interferes with the overseas business activity of other 
traders in connection with export of goods. 
 
As can be seen from the above provision, this provision is a special competition law provision  
applicable specifically to export trade transactions. In common law jurisdictions it is closer to so-
called tortious interference than competition law.  
  [BCI:  Omitted from public version.]   The MOCIE was not concerned with whether prices 
offered by the shipbuilders involved were high or lo w, but just looked into the way or fashion in 
which the competition was taking place. The MOCIE c onsidered that the behaviour was problematic 
in light of the provisions of Article 43 of the Over seas Trade Act. As a result, the MOCIE issued the 
coordination order to stop unreasonable competition.  This coordination order dealt with the unique 
situation of a particular case from a Korean competit ion law perspective, and in no respect supports 
the serious prejudice argument of the EC. 
 
83. Does the EC correctly characterize your ar gument as being that no violation can be 
found based on a past action?  Please explain your position on this issue, including any relevant past disputes.  Does your position differ as between alleged prohibited and 
allegedly actionable subsidies? 
 
 Korea believes that the EC has not properly re flected Korea’s position in paras 17 to 20 of its 
Oral Statement. Korea does not argue that the subsid ies must still be current on the day that the Panel 
issues its report or on the day that the DSB adopts its report. However, where a statutory framework 
or a programme is challenged as such, as a prohibite d export subsidy, such statutory framework or 
programme at the time of the initiation of the dispute settlement proceeding must still reflect the deficiencies complained about. Simply put, the facts are completely contrary to the EC’s argument regarding the programmes “as such”.   Moreover, in the present dispute, it must be recalled that the period under review is not a 
single continuum.  It is not the case as it would be if this Panel were examining the long history of EC 
subsidization of its shipyards where the underlying ec onomic conditions were rela tively stable.  In this 
case, the early part of the period the EC identif ies was one of huge generalized financial and 
economic turmoil in Korea and other Asian countri es. Reviewing this time of financial turmoil 
becomes of questionable relevance in light of the act ions taken over a reasonabl e period of time in the 
most recent past.  As Korea noted, the period of extreme financial turmoil does indeed make it 
difficult to find market benchmarks not just in this matter but in any other aspect of Korea’s economy during that period.  Korea is firmly of the view th at, if proper adjustments are made to reflect these 
conditions, it is clear that there was no subsidization at  that time either.  Thus, is it not a question of a 
legal bar on examining the earlier part of the period, it  is a matter of probity and relevance of the data.  
 
 The EC itself refers to the fact that a cred it risk assessment was intr oduced in Korea’s APRG 
transactions in March 1998. It is neither reasonable nor in line with Article 3.2 of the SCM Agreement  
that a possible deficiency remedied some 5 years before the initiation of the dispute settlement should 
still be challenged. In that sense, a WTO Member ca nnot be said to “maintain” a prohibited subsidy. 
 
 Korea wishes also to bring to the attention of the Panel that the EC in support of its arguments 
has relied on APRGs and PSLs that were frequently affo rded up to some 5 or 6 years ago while Korea 
had submitted much recent data. Thus:   (i) for Daewoo: the EC shows APRGs issued from 1997 to 2001 (Figure 11 of the EC’s 
First Written Submission) and PSLs issued from 1999 to 2001 (Figure 16 of the EC’s 
First Written Submission); 
 WT/DS273/R 
Page D-70  
 
 (ii) for Halla: the EC shows APRGs issued in 2000 (Figure 12 of the EC’s First Written 
Submission) and PSLs issued primarily be tween 2001 and 2002 with two only in 
May 2003 (Figure 17 of the EC ’s First Written Submission); 
  (iii) for Daedong: the EC shows APRGs issu ed in 1999 (Figure 13 of the EC’s First 
Written Submission) and the PSLs issued in 2002 and three only in May 2003 
(Figure 18 of the EC’s First Written Submission); 
  (iv) for Hanjin: the EC shows APRGs issued  in 2002 (Figure 14 of the EC’s First Written 
Submission) and PSL’s issued between 1999 a nd 2001 (Figure 21 of the EC’s First 
Written Submission); 
  (v) for Samsung: the EC show s APRGs issued in 1997 (Figure 15 of the EC’s First 
Written Submission); 
 
 (vi) for Hyundai Mipo: the EC shows PSLs issued between 1999 and October 2002 
(Figure 19 of the EC’s First Written Submission); 
  (vii) for Hyundai: the EC shows PSLs  issued between 1999 and 2003. 
 
 The EC has made a selective approach of APRGs and PSLs and selected for a number of 
shipyards “old” APRGs or PSLs wh ile additional data was provided by Korea on more recent APRGs 
and PSLs in Annex 1.2(31)-1 and 1. 2(30) of the responses filed by Korea in the Annex V process, i.e.: 
  (i) Daewoo: APRGs issued by KEXIM in  2002 and 2003 were shown as well as PSLs 
with commitment dates in 1996, 1997 and 1998;  
 
 (ii) Halla: data on APRGs issued by KEXI M in 1997, 1998, 1999, 2002 and 2003 were 
shown as well as PSLs with commitmen t dates in 1996, 1997 and 2000. 
  (iii) Daedong: data on APRGs issued by  KEXIM in 1998, 2000, 2001, 2002 and 2003 
were shown. 
 
 (iv) Hanjin: data on APRGs issued by KEXIM in 1998, 2000, 2001 and 2003 were shown 
as well as PSLs with commitment dates in 2002 and 2003; 
  (v) Samsung: data on APRGs issued by KEXIM in 1998, 1999, 2000, 2001, 2002 and 
2003 (many) were shown as well as PSLs with commitment dates in 1998, 2000, 
2001 and 2002; 
  (vi) Huyndai Mipo: data on APRGs issued by KEXIM in 1998, 1999, 2000, 2001, 2002 
and 2003 was shown as well as PSLs with commitment dates in 1996 and 1998; 
 
 (vii) Hyundai: data on APRGs issued by KEXIM in 1997, 1998, 1999, 2000, 2001, 2002 
and 2003 was shown. 
  The position taken by the EC in paragraph 38 of  its Oral Statement is simply incorrect as a 
matter of law. Panels cannot make rulings based  on an assumption of bad faith implementation by 
Members. In addition, if the EC’s point were take n to its logical conclusion, one fails to see what 
would be the use of consultations. If a settlement is  found during consultations, the principle is that 
this obviates the need for a dispute settlement even if  it is theoretically conceivable that a defending 
party could change its legal system again. What is  the difference with a defending party that has itself 
remedied a deficiency in its legal or regulatory framework before there was even any mention of a  WT/DS273/R 
 Page D-71 
 
 
possible dispute settlement? As mentioned by China in its third-party submission (paragraph 18), the 
word “maintain” in Article 3.2 of the SCM Agreement  does not mean “prevent”.  
  The case of actionable subsidies covered by Articles 5 and 6 of the SCM Agreement  is indeed 
different from that of prohibited subsidies. Simp ly put, the complainant must show adverse trade 
effects. It is not like demonstrating nullification or impairment elsewhere under the WTO Agreements 
where there is a presumption created if legal incons istency is demonstrated. All but the most recent 
past practice will be of extremely limited legal a nd factual relevance especially when there is a 
qualitative distinction represen ted here by the financial crisis as a compared to the returning normality 
of the recent past.   
 
 Moreover, it is important to recall that under Ar ticle 7.8 the remedy is the withdrawal of the 
subsidy or
 its adverse trade effects. The negotiators, ther efore, contemplated that adverse trade effects 
had to exist at the time of the dispute settlement. Korea has further submitted that the use of the 
present tense “is” in Article 6.3(c) contrasts with the wording of Article 15.2 of the SCM Agreement  
which refers to “whether there has been  a significant price undercutting by the subsidized imports … 
or whether the effect of such imports is otherwise to depress prices to a significant degree or to prevent price increases, which otherwise would have occurred
, to a significant degree”. The provision 
of Article 15.2 contemplates a review over a referen ce period sufficiently long in order to provide a 
trend showing injury to the domestic industry. In the case of Article 6.3(c), Korea submits that price depression or suppression must be shown in a relatively recent period preceding the initiation of the 
dispute settlement. In support, it has refe rred to the conclusion of the Panel in US – Wheat Gluten  in 
paragraph 543 of its Fi rst Written Submission. 
  Korea has noted that the EC in support of its allegation of price depression as regards LNGs, 
has provided a graph with newbuilding price devel opments up to January 2003 (Figure 30). However, 
Korea submits that the EC should show LNG pr ice developments up until June 2003 taking into 
account prices submitted by Korea in the Annex V process and other prices as has become publicly available since January 2003. Similarly, in support of  price suppression, the price data supplied by the 
EC are the same graph showing prices only up to Jan uary 2003 and for container vessels and chemical 
and product tankers up to the end of 2002 only (refer to Figures 39 and 42 of the EC’s First Written 
Submission) whilst price data was obviously availabl e to the EC in terms of the monthly reports 
prepared by its own expert, FMI, and particularly relevant as shown in Annex 5a of the EC responses 
to the Annex V process.  
84. Is it your position that the outcome of all restructurings is ipso facto  a market outcome, 
making the existence of subsidization impossible?  Please explain.  What is meant by 
your statement that every corporate restructuring was "market oriented"?  Do you mean that its going concern value was higher than its liquidation value, or do you mean something else or something in addition? 
 
 Where an insolvency procedure can proceed only after it has been confirmed that the going concern value of the insolvent company is greater than the liquidation value and creditors can make a 
most market-oriented decision through mutual nego tiations and a majority rule when adopting the 
restructuring plans, Korea considers that the in solvency procedure yields a market outcome. In 
particular, in the three cases at issue, each was market oriented in th e sense that each creditor 
attempted to maximize the return on the debt it w as holding. In these cases, it means that it was more 
profitable to continue operating the companies th an winding them down and liquidating the assets. 
The existence of insolvency rules (corporate reor ganization or workout) is the essence of a market 
economy; if the restructuring is made according to the insolvency rules on a market-oriented basis, 
then there is no subsidization.  
 
85. You argue that the concept of "like product" applies in respect of price 
suppression/price depression, yet the relevant portion of SCM Article 6.3(c) does not WT/DS273/R 
Page D-72  
 
refer to "like product".  What in your view is the significance of the fact that "like 
product" is not referred to in respect of price suppression/price depression or lost sales?   
Is your argument that this was an inadvertent omission by the negotiators?  If so, is there any evidence to support this?  Please explain.   
 
 Korea considers that the wording of Article 6.3( c) is consistent with a finding that the concept 
of “like product” applies with respect to price s uppression/price depression. Article 6.3(c) states in 
this regard that serious prejudice may arise where:  
the effect of the subsidy is a significant price undercutting by the subsidized product 
as compared with the price of a like product of another Member in the same market 
or significant price suppression, price depression or lost sales in the same market… 
The fact that the word “like product” is not rep eated in the second part of the sentence after the 
disjunctive “or” is neither an omission on the part of the drafters, nor, in Korea’s view, should it be 
interpreted to imply that the concept of “like product” does not apply in the context of price 
suppression/price depression. Read in context, Korea believes that the term “like product” in the first 
part of the sentence refers also to “price suppressi on, price depression or lost sales” in the second part 
of the sentence. The reason why the words “like pr oduct” are not repeated in the second part of the 
sentence, while the words “same market” are repeated, is that repetition of the former is superfluous 
while the latter is not. In this regard, throughout th e subparagraphs of Article 6.3, the treaty specifies 
and differentiates the geographic boundaries of the market  that is being referred to, i.e. the “market of 
the subsidizing Member” in subparagraph (a), a “t hird country market” in subparagraph (b) or a 
“world market” in subparagraph (d) etc. In the c ontext of the contrasting geographic markets being 
juxtaposed in subparagraphs (a)-(c), it is therefore logical that the dr afters would take care to specify 
the geographic boundaries within which the serious prejudice criteria (price undercutting, price depression etc.) should be examined. 
 
 In contrast, the term “like product” is not differentiated or redefined in each of 
subparagraphs (a)-(c) and con sequently there is no need to again de fine or refer to this term in the 
second part of the sentence.   Indeed, comparable formulations are found elsewhere in the Anti-Dumping and SCM 
Agreements . In this regard, Article 3.2 of the Anti-Dumping Agreement  states with respect to the 
injury analysis that:  
With regard to the effect of the dumped imports on prices, the investigating authorities shall consider whether there has been a significant price undercutting by 
the dumped imports as compared with the price of a like product  of the importing 
Member, or  whether the effect of such imports is otherwise to depress prices to a 
significant degree or prevent price increases , which otherwise would have occurred… 
(Emphasis added). 
 Article 15.2 of the SCM Agreement  similarly provides: 
 
With regard to the effect of the subsid ized imports on prices, the investigating 
authorities shall consider whether there has been a significant price undercutting by 
the subsidized imports as compared with the price of a like product  of the importing 
Member, or whether the effect of such imports is otherwise to depress prices to a 
significant degree or to prevent price increases , which otherwise would have 
occurred… (Emphasis added) 
 In both the above formulations, the term “like product” is not repeated in the second part of 
the sentence after the disjunctive “o r.” Nonetheless, Korea considers th at the drafters clearly intended  WT/DS273/R 
 Page D-73 
 
 
that depressed prices or lack of price increases in the context of the above-quoted Articles are to be 
analyzed by reference to the “like product” c oncerned and not by some novel undefined standard. 
There is no reason to interpret the use of the term “like product” in Article 6. 3(c), and its applicability 
to the evaluation of price-suppression/depression, differently.  
 As Korea argued in its First Written Submi ssion, Articles 6.3(a), (b) and (c) posit "like 
product" and "market" as different  requirements (paragraph 506). Yet,  the EC would have the Panel 
conclude that the words “in the same market” in  the context of price suppression/depression suddenly 
comprises both a geographic and product dimension. This construction is illogical. It would require 
reading into the text of Article 6.3(c) a wholly  undeclared and unexplained intent that the word 
“market” should comprise only a geographic dimens ion in some cases (e.g. subparagraph (a) and (b)) 
but in the context of subparagraph (c) the sa me word implies both a product and geographic 
dimension.   Moreover, to hold that “like product”  does not apply in respect of price 
suppression/depression  would mean that the absence of  the word “like product” in the second part of 
the sentence under subparagraph (c) sh ould be interpreted to mean – with no express words to that 
effect – that the SCM Agreement  took the exceptional step introduc ing a new and undefined standard 
in the context of the subparagraph (c), despite that  ‘like product’ is a cornerstone found throughout the 
SCM Agreement  and indeed the WTO Agreement . Had the drafters intended such a result, Korea 
considers that they would have made this inte nt explicit and would more over have defined or 
elaborated the alleged product dimension of the “sa me market” in the context of evaluating price 
suppression/depression. Korea notes in this regard that footnote 46 to the SCM Agreement  provides 
that:  
Throughout this Agreement the term "like product" ("produit similaire") shall be 
interpreted to mean a product which is iden tical, i.e. alike in all respects to the 
product under consideration, or in the absence of such a product, another product 
which, although not alike in all respects, has characteristics closely resembling those of the product under consideration. 
 
Had the drafters intended to introduce a special product dimension to the term “same market” in 
Article 6.3(c) the drafters would presumabl y have similarly defined this concept. 
  For these reasons, in addition to Korea’s pr eviously submitted arguments, Korea considers 
that under the ordinary meaning of the terms in Arti cle 6.3(c), read in their context, the concept of 
“like product” applies to price suppression/depression under subparagraph (c). 
 
 Finally, the issue here is not simply a matter of what label ones applies.  The real problem is that it is impossible to have a sensible discussion of  the market unless one first defines that market.  
As noted above, the whole structure of the SCM Agreement  is premised on defining that market in 
terms of “like product” and there is no indicati on of an exception for this one single portion of 
Article 6.3(c).  But, even if one were to choose a different term, one still needs to define the market.  
Is there significant price depression in the market?   But, what market , one must ask. The parameters 
must be rigorously defined or one is left with the situation de monstrated by the EC’s arguments where 
they refer to some vague categories through which certain products sail at random such as the sudden 
exclusion of certain types of “pure” chemical tanke rs. At the next moment, the EC is endorsing the 
apparent Japanese view that there is a single product category and that every ship affects every other 
in a legally relevant manner.  This vagueness renders it quite litera lly impossible for Korea to respond 
and the Panel to make a determination.  
86. Do you think that footnote 46 of the SC M Agreement establishes a narrower definition 
of "like product" than that applicable und er Article III, paragraphs 2 and 4 of the WT/DS273/R 
Page D-74  
 
GATT 1994?  Could similarity of end-use be a criterion for determining "like product" 
as defined in footnote 46?  Why or why not?  
 
 As explained more fully below, Korea is of the view that Article III provides a single 
analytical framework for determining “like produc t.”  However, Article III does not provide one 
single definition of “like product.”  The term “like product” under Article III can be broad in some 
instances and more narrow in others (the so-called accordion).  Footnote 46, with its narrow definition 
focused on physical characteristics is similar to th e narrow approach required by Article III:2 first 
sentence.  As with Article III:2 first sentence, e nd-use can be a criterion incorporated into the like 
product analysis, but end-use cannot be used to br oaden the scope of the like product away from the 
narrowness of the definition  implied by the reference to physical characteristics.  
  The answer to this question and Question 87 have many overlaps.  It is important to 
emphasize that Korea does not agree that the EC has adopted a “product segment” analysis like that 
suggested by the Panel in Indonesia – Autos .  With its vague refere nces and shifting product 
categories and the utter lack of any sort of proof of any sort, the EC has not followed any recognizable 
approach followed under any provision of the WTO Agreements.      In Indonesia – Autos , the Panel explicitly referred to the like product test as developed in the 
jurisprudence of Article III, explicitly citing the Appellate Body analysis in Japan – Alcoholic 
Beverages .
4  Indeed, the EC also endorsed this  Article III-based analytical approach5, but then 
completely abandoned any attempt to follow-through on the analysis.  Instead, the EC tried to claim 
the right to make mere assertions of points that it subjectively considered “obvious” and hopes to shift 
the burden onto Korea to prove th e negative of its assertions.   
  In contrast to the EC’s approach, the Panel in Indonesia – Autos  then went through the list of 
issues it would be examining including, physical characteristics, consumer perceptions, end-uses, 
price differences and tariff classifications.  The Panel stat ed that it considered that, in the specific case 
before it, it found physical characteris tics to be particularly important, but did not limit itself to that 
element of the like product analysis.   The term ‘characteristics closely resembling’ [as per footnote 46] in its ordinary meaning 
includes but is not limited to physical characteristics, and we see nothing in the context or object and 
purpose of the SCM Agreement that would dictate a different conclusion.
6 
  Thus, it is clear that the Panel in Indonesia – Autos  was not attempting to construct a new 
analytical approach to like product based on some thing outside the treaty language called “product 
segmentation” as proposed by the EC.  Rather, th e Panel was bringing the like product analysis of 
footnote 46 within the analytical context of th e like product analysis used elsewhere in the WTO 
Agreements, including Article III of the GATT 1994.     By referring to Article III, the Panel in Indonesia – Autos  was endorsing the analytical rigor 
of the Article III approach and certainly would not  have approved the fuzziness and vagueness of the 
EC approach.  According to the EC at times, there is a single product category of all ships.  This was 
how it was described in parts of the EC’s First Wr itten Submission and certainly was the basis of the 
EC’s endorsement of the Japanese approach in th e First Substantive Meeting where any commercial 
vessel has a legally recognized impact on any other vessel regardless of type.
7  This is in contrast with 
                                                      
4 Indonesia – Autos  at para 14.174. 
5 EC First Written Submission at para. 39. 
6 Indonesia – Autos at para. 14.173 
7 In this regard, Korea would like to draw the Panel’s attention to the discussion in the Panel Report in 
Korea – Alcoholic Beverages wherein the Panel noted that, in the context of a discussion of the broad category 
of whether products are directly competitive or substitutabl e, at some general level all products and services are  WT/DS273/R 
 Page D-75 
 
 
other suggestions by the EC that there are three pr oduct categories rather than one.  But even with 
three categories, the EC has failed to provide any sort  of rigorous analysis of the parameters of such 
categories.  Indeed, the parameters are so fluid that  they apparently can permit certain types of ships 
to sail in and sail out of the categories depending on the complainant’s supply si de factors in isolation 
from any other sort of analysis.8 
 
 The key point to understand from the jurispr udence under Article III is that it defines an 
analytical  approach  to defineroduct categories.  This analy tical approach is essentially the same in 
Articles III:2 and III:4.  There are three different results  of the approach depending on whether a 
panel is making fact findings with respect to Ar ticle III:2, first sentence regarding “like product”, 
Article III:2, second sentence, regarding “directly competitive products”, or Article III:4, “like 
products”.  Thus, the conclusion  will differ based on the breadth of the categories, but the analytical  
approach  is basically the same.   
  Accordingly, the Appellate Body in Japan – Alcoholic Beverages  found that the definition of 
“like product” was narrow and used an analogy to an accordion to denote how the term can be narrow 
or more expansive given the context.
9  Directly competitive products are a broader category, of which 
like products are essentially a subset.  This was made very explicit in Korea- Alcoholic Beverages  
where the Panel applied essentially the same analy tical tools to both analyses and found that the 
narrower like product categories had not been proved by the complainants.10 
 
 This approach was confirmed in EC – Asbestos , where the Appellate Body used the multi-
element analytical approach and specifically critic ized the Panel for looking at only one factor in 
making its like product analysis.11  The Appellate Body then applied the tests but reached a 
conclusion based on a broader definition of like product than used for Article III:2, first sentence.  In 
doing this, the Appellate Body expressly noted that  it had not decided that the broader like product 
analysis of Article III:4 was coterminous with the directly competitive product analysis of 
Article III:2, second sentence, but it left open the possibility.12  The conclusions of the Appellate 
Body in this regard necessarily mean  that the analytical approach of the like product and directly 
competitive analyses of the different parts of Article  III must be the same.  The issue of narrowness of 
the product category becomes an issue of interpretation of the results of the analytical approaches, not 
any differences in the elements c ontained within such approaches.13   
 
 Footnote 46 of the SCM Agreement focu ses on identical products or products with 
characteristics closely resembling each other.  This is , on its face, a strong physical identicallity test.  
The Panel in Indonesia - Autos  was applying this in a manner that found that physical characteristics 
could subsume some of the other issues such as end- uses, tariff classification and price relationships.  
That is, those other factors could also be taken into account within a like product analysis undertaken 
                                                                                                                                                                     
competitive with each other, but that the requirements of  Article III meant that a more rigorous and specific 
analysis was required. Panel Report in Korea – Taxes on Alcoholic Beverages at paras. 10.39-10.43 (Panel Report approved without modification by the Appellate Body).  If that was the case for the broad category, it 
certainly should be the case for th e narrower category of like product. 
8 The EC stated at the First Substa ntive Meeting that a certain type of specialty chemical tanker was no 
longer relevant because the EC yards do not construct such vessels. However, the question of whether the EC 
makes a particular product is irrelevant in answering th e question as to whether such specialty chemical tankers 
are similar or dissimilar to the other chemical tanke rs, i.e., whether there are similarities in physical 
characteristics, end-uses, and demand side price relationships.  The causal relationships cannot be analyzed 
unless these parameters are properly established. 
9 Appellate Body Report in Japan – Taxes on  Alcoholic Beverages  at p. 21. 
10 Panel Report in Korea – Taxes on Alcoholic Beverages at paras. 10.103-10.104  (Panel Report 
approved without modification by the Appellate Body). 
11 Appellate Body Report in EC – Asbestos  at paras. 119-120. 
12 Ibid. at para. 99. 
13 Ibid. at paras 101-102. WT/DS273/R 
Page D-76  
 
pursuant to footnote 46.  The language of footnote 46 clearly means that the conclusions drawn from such analyses must be taken on the basis of th e “closed accordion” of like product definitions. 
  Korea considers this Indonesia – Autos  approach, properly understood, as clearly within the 
jurisprudence that has developed under Article III wh ich looks to these various elements of the like 
product/ directly competitive product test.  However, the treaty text is quite clear in footnote 46 that 
the test for purposes of the SCM Agreement acco rds with the narrow approach adopted by the 
Appellate Body in Article III:2, first sentence,  not the broader analyses of Article III:4 and 
Article III:2, second sentence.  
 In the present dispute, the problem has arisen that the EC has attempted to avoid the issue 
completely and claim that the Panel in Indonesia – Autos  developed a whole new test of “product 
segmentation” that is not based on the treaty text a nd apparently is more vague, completely fluid and 
quite broad.   This is contrary to the approach used by panels and the A ppellate Body pursuant to 
Article III, as endorsed by the Indonesia – Autos  panel.   There simply is no way to read that panel 
report to imply a broadening of the interpretation of  like products or a weakening of the analytical 
rigor needed to define the parameters of the categories.   In the absence of such rigorously defined produc t categories, it is simply impossible for the 
respondent or the Panel to address the complaint in  any meaningful manner and the claims necessarily 
must fail as a matter of law.  As Korea – supported by the US – has argued, the abdication by the EC 
of establishing the like product categories (regardless of  whether the EC now tries to apply a different 
label) should end the Panel’s inquiries because  the EC  has failed to carry its burden of proof.  As the 
Appellate Body emphasized in Japan – Agricultural Products II ,
14 the purpose of Panel questions 
asked pursuant to DSU Article 13 is to better unde rstand the parties’ arguments, not to make the 
complainant’s case for it. 
 
87. If the concept of "like product" does apply in respect of price suppression/price 
depression analysis, what in your view would be the appropriate "like product" 
categories to be used in this dispute?  Do you agree with the EC on the general idea that 
like products could be defined on the basis of a market segmentation approach similar 
to that used by the Indonesia – Autos  panel (even though the panel notes your 
disagreement with the particular market  segments proposed by the EC)?   
 
 (a)  At the outset, Korea is fo rced to note that it is deeply  troubled by this question and 
wishes to reiterate its position that the burden  of proof to demonstrate the existence of 
serious prejudice rests on the EC.  If the Panel agrees with Korea (as supported on 
this issue by the US) that this requires an analysis based on like products, then the 
inquiry ends. The EC, to use its term, “rejects”  the relevance of like product.  
  Korea recognizes the broad authority of Panels  to ask questions for purposes of clarifying the 
parties’ arguments and also recognizes that by mere ly asking a question, the Panel is not stating its 
position on a legal issue. Of course, therefore, Kor ea will do its best to answer this question in as full 
a manner as possible in the ten-day period allotted.   However, Korea is concerned that when it 
answers this question, the EC will incorrectly try to shift the burden of carrying the argument to 
Korea.  Therefore, Korea must note for the reco rd its objection to being required to formulate ab initio  
a “like product” presentation in the face of the EC’s rejection of its legal relevance.   
 
 The requirement of pursuing a like product analysis  was confirmed by the Panel in Indonesia 
– Autos , the very case invoked by the EC itself in relati on to the “like product” definition. That Panel 
observed:  
                                                     
 
14 Appellate Body Report in Japan – Agricultural Products II  at para. 129.  WT/DS273/R 
 Page D-77 
 
 
In assessing the arguments of the parties, we  are cognizant that the complainants are 
required to demonstrate the existence of serious prejudice by positive evidence. Thus, we agree with Indonesia that the comp lainants bear the burden of presenting 
argument and evidence
 with respect to each element of their serious prejudice claims 
– including the existence of effects on a “like product” .15 (Emphasis added) 
 The EC has failed to carry its burden of proof. In paragraph 393 of its First Written 
Submission, it has stated that the same product mark et in Article 6.3(c) requi res showing that products 
are competing which can be done by using the factors used in the “like product” analysis developed in 
the case-law on Article III of GATT 1994. It proposes a “market segmentation” approach used by the 
Panel in Indonesia – Autos  in relation to an assessment on the existence of price undercutting under 
Article 6.3(c). It has then proceeded to posit as three separate products, LNGs, container vessels and 
product and chemical tankers but without  any argument or evidence as to why these products are 
separate like products from the point of view of the factors that were taken into account even by the 
Panel in Indonesia – Autos . The EC’s Oral Statement only makes general references to cross-price 
elasticity and substitutability from the point of view  of the shipyards and the shipowners, without any 
presentation of supporting evidence at all. It indicat es that container vessels can be used on a variety 
of routes and that for a shipbuilder it is immaterial which ship it builds as every ship is an assembly of 
steel products. So far, however, there is no clear indication on the specific criteria based on which the 
EC considers that it can identify LNGs, all contai ner vessels and all product and chemical tankers as 
separate like products. Hence, Korea considers that the EC has not carried its burden of proof and that 
this deficiency cannot be remedied at this stag e of the proceeding. Nevertheless, as discussed above, 
despite its deep reservations about the appropriaten ess of requiring Korea to provide this like product 
analysis, in the face of the EC’s rejection of its le gal relevance, and in a spirit of co-operation, Korea 
ab initio submits herewith as Exhibit Korea – 66  its a pproaches regarding how it considers that “like 
product” should be established.  In doin g so, Korea reserves all of its rights.   
 
 (b)  In referring explicitly to the Panel’s analysis in Indonesia – Autos  which, Korea 
repeats, relates to an assessment of pri ce undercutting under Article 6.3(c), the EC 
has, in effect, admitted that the concept of  “like product” applies or at least provides 
determining guidance for the purpose of the assessment on price depression or suppression under Article 6.3(c). When the EC then turns and “rejects” the legal relevance of the concept of “like produc t”, it is admitting it has not carried the 
necessary burden in this dispute. Indeed, th e so-called market segmentation used by 
the Panel in Indonesia – Autos , is not some new test created out of whole cloth totally 
apart from the treaty.  If it were, it would not be useful as a reference.  Rather market segmentation occurs within the concept of “ like product” as set forth in Article 6.3(c) 
and explained in Footnote 46 to the SCM Agreement . Establishing market segments is 
none other than determining the “contours” – using  the EC’s own term – of the 
products that can be considered to be clo sely resembling in order to constitute a “like 
product”. The core issue is nevertheless which criteria to use to determine the 
contours of what is a market segment or a lik e product. In this regard, Korea refers to 
the following statement by the Panel in Indonesia – Autos : 
 
 Turning first to the argument of the European Communities that all passenger 
cars should be considered “like products” to th e Timor, we consider that such a broad 
approach is not appropriate in this case. Wh ile it is true that all passenger cars “share 
the same basic physical characteristics and sh are an identical end-use”, we agree with 
Indonesia that passenger cars are highly differentiated products. Although the 
European Communities have not provided th e Panel with information regarding the 
range of physical characteristics of passe nger cars, all drivers know that passenger 
cars may differ greatly in terms of size, weight, engine power, technology, and 
                                                     
 
15 Panel Decision in Indonesia – Autos , para. 14.169. WT/DS273/R 
Page D-78  
 
features. The significance of these extensive phy sical differences, both in terms of the 
cost of producing the cars and in consumer perceptions regarding them, is manifested 
in huge differences in price between brands and models.  It is evidence that the 
differences, both physical and non-physical, between a Rolls Royce and a Timor are enormous, and that the degree of substitutab ility between them is very low. Viewed 
from the perspective of the SCM Agreement, it is almost inconceivable that a subsidy 
for Timors could displace or impede imports of Rolls Royces, or that any meaningful analysis of price undercutting could be performed between these two models. In 
short, we do not consider that a Rolls Ro yce can reasonably be considered to have 
“characteristics closely resembling” those of the Timor.
16 (Emphasis added) 
 As discussed in response to th e previous question, these are th e common criteria used in “like 
product analyses under Article III, as well.  Therefor e, in the present dispute, Korea proposes to make 
use of the indicators referred to by the Panel in Indonesia – Autos  coinciding with the indicators 
frequently used for the definition of “like product”, i.e., physical characteris tics, customer  perception 
and end-use.17 This is no different from how the EC itself has assessed the shipbuilding market as is 
shown in several statements made by the EC a nd its expert FMI in va rious documents. These 
statements cannot simply be discarded by the EC as needed only “to follow developments in certain 
characteristic sub-types of most interest to EU  yards for purely information purposes” (paragraph 106 
of the EC’s Oral Statement). Reference is made to  the document in Exhibit EC-1 to the EC’s First 
Written Submission entitled “Overview of the Inte rnational Commercial Shipbuilding Industry, 
Background Report” (May 2003), i.e., an FMI report dated May 2003 in which the FMI states the 
following with regard to tankers, bulk carriers and container ships: 
 
The above three ship types make up by far the largest portion of the fleet and a significant proportion of the output from the shipbuilding industry. These main volume products are normally further sub-divided into distinct sub-classes, as 
described in table 3.2. The main ship t ypes and sub types listed in this table are 
according to common industry usage and the terminology used will be found in any 
documentation relating to the fleet . The main ship type is defined by the function of 
the ship and the sub types are defined by  size classifications demanded by operators 
of the ship . The sub-classifications have been developed to suit the economic 
conditions of the main trades in each sector  and can largely be regarded as standard 
products . There is little material difference in  operational terms between different 
ships within any class of sub-type, whoeve r the supplier may be. It should be note 
that the economic classes of ship represen ted by the sub-types listed below are not 
readily substitutable for other ship types. For example, it may be technically possible to adapt a bulk carrier to carry containers  but in operational terms this would be 
unfeasible. Similarly, substitution is rarely  possible on a size basis because of the 
economics of trade. One seventy thousand dw t ship, for example, is not operationally 
or economically equivalent to two thirty-five thousand dwt ships . 
 To this should be added the following FMI statement on container ships in particular 
indicating that container vessels have different uses depending on their size:  
There are a wide range of sizes of ships on a wide range of routes, typically following 
an established ‘hub and feeder’ pattern. Very  large ships (the largest of which now 
rival the largest category of tankers in te rms of physical dimensions) carry boxes on 
trans-oceanic routes servicing the main hu b ports in the Far East, Europe, North 
America and Middle East. Smaller ‘feeder’  ships then distribute the boxes from the 
                                                     
 
16 Panel Decision, Indonesia – Autos , para. 14.175. 
17 In the Indonesia – Autos case, the Panel considered  that all cars had the same end-use to transport 
passengers. This is not the case of the commercial vessels  subject of the dispute as is mentioned in (a) above.  WT/DS273/R 
 Page D-79 
 
 
main hub ports to local ports. The contents  of the boxes is made up of ‘general 
cargo’, and may include such diverse items as machinery, white goods, clothing, 
electronic equipment, and so on.  
88. To whose prices do the terms "price supp ression" and "price depression" refer:  the 
subsidizer's, the complainant's, or both? 
  Because the issue is serious prejudice to the interests of the complaining party, the price 
suppression must be of the complaining party, otherw ise there cannot logically be serious prejudice to 
the interests of that Member, as required by Ar ticle 5(c). However, Korea would note that the 
significant price suppression or depression has to be cau sed by the subsidies. The EC has ignored the 
causation analysis. Please refer to the response in Question 91 below.  89. The panels in the GATT 1947 disputes on EC – Sugar
 brought by Australia and Brazil 
found that EC export refunds had contributed to depressed world prices for sugar, thus 
indirectly causing serious prejudice to Australia's and Brazil's interests.  In other words, in those cases, the market in  question was a world market, the prices in question were 
world market prices, and the finding of serious prejudice to Australia's and Brazil's 
interests was exclusively based on the depres sion of those (world market) prices.   
 
 You argue, by contrast, that the price suppression/depression provisions of the SCM 
Agreement neither contemplate nor permit an analysis based on a "world market".  You also argue that price suppression/depressi on by itself does not constitute sufficient 
evidence of serious prejudice, but rather that  a complaining party must (1) present 
evidence and analysis to establish that its own domestic industry is suffering significant 
overall impairment, i.e., something similar if no t identical to "serious injury" such as for 
a safeguard investigation, and (2) must show as well that the survival of the industry in question is vital to the complaining party's overall interests.   
 
 (a) Is there anything in the text of the SCM Agreement to support your position that 
the domestic industry of the complainin g party should suffer the equivalent of 
"serious injury", when SCM Article 5 clearly treats injury and serious prejudice as two separate concepts?   
 
 (i)  The word “may” as used in the chapeau of Article 6.3 does not stand for “permitted”, 
at least as that was used by the EC dur ing the First Substantive Meeting. If the 
negotiators had meant to indicate that ser ious prejudice would exist any time only one 
of the factors stipulated in Article 6.3(a) to (d) were achieved, they would have used 
the word “shall” as was done in many of th e provisions of the WTO Agreements. The 
word “may” indicates that serious prejudi ce does not automatically exist when any 
one or more of the factors in Articles 6.3(a) to (d) is found to exist. 
  (ii)  The use “one or several” in the chap eau of Article 6.3 further confirms that the 
existence of any single factor does not ipso facto  lead to an affirmative finding on the 
existence of serious prejudice.  
 
 (iii)  Price suppression or depression are two indicators only of the existence of material 
injury of which Article 15.2 provides that “no one or several of these factors can necessarily give decisive guidance.” If it were  allowed pursuant to Article 6.3 to find 
serious prejudice if there was either price depression or price suppression, the standard to find serious prejudice under Article  5(c) would be substantially below that 
to find material injury under Article 5(a)  and footnote 11. However, the Appellate 
Body in US – Lamb has concluded that the “word ‘serious’ connotes a much higher WT/DS273/R 
Page D-80  
 
standard of injury than the word ‘material’”.
18 The qualitative difference between 
“serious” and “material” does not change depending on whether it qualifies “injury” 
or “prejudice”. It is inherent to the meaning of the words viewed in isolation. 
 
 (b) Is there anything in the text of the SCM Agreement to support your position that 
for serious prejudice to be present, the su rvival of the domestic industry of the 
complaining party must be vital to its overall interests?   
 
 Korea stated that it considered the term “prejudi ce” to be within the series of terms used in the 
WTO such as “injury”, “damage” or resulting in “market disruption”.  Korea was noting that the 
whole phrase of “serious prejudice to the interests of  another Member” connotes a standard that is not 
only higher than material injury (based on the consid erable jurisprudence in this regard), but also 
broader, as the interests of a Member necessarily en compass something more than just the industry at 
question. The domestic industry is part of the inte rests of the Member but cannot automatically be 
equated to the broader interests of a WTO Member.  Far from addressing this issue of “serious 
prejudice to the interests of another Member”, the EC attempts to construct a case that would not even 
satisfy the requirements of initiating  an investigation by a national investigating authority under 
Part V of the SCM Agreement.  The “standards” pr oposed by the EC are so low and so vague that 
apparently they can be met by showing a “kink” on a graph.  
 
 (c) How do you square your arguments with the quite different approach and 
results of the prior GATT panels cited above?   
 
 The Sugar Panels cited examined the EC’s export refunds for sugar under Article XVI:1 and 
XVI:3 of the GATT. Article XVI:1 imposes a notif ication and a consultation requirement for “any 
subsidy, including any form of income or price support, which operates directly or indirectly to 
increase exports of any product from, or to reduce im ports of any product, into its territory”. The 
operative section is Part B referring to “Export Subsid ies” which are not relevant to the interpretation 
of Part III of the SCM Agreement.  Specifically, Ar ticle XVI:3 provides that, for export subsidies, if a 
Member grants directly or indirectly any form of subsidy that operates to increase the export of any 
primary product from its territory “such subsidy shall not be applied in a manner which results in that 
contracting party having more than an equitable sh are of would export trade in that product”. In that 
sense,  to the extent that there is relevance under Part III of the SCM Agreement  relating to export 
subsidies as actionable subsidies,  the provisions are closer to (but still not the same as) Article 6.3(d) which considers the situation where the effect of s ubsidy is an increase in the world market share of 
the subsidizing Member in a particular subsidized  primary product or commodity which is the only 
provision of Article 6.3 which explicitly provides th at a “world market” may be taken into account. 
 
 The provisions of Article XVI:1 and XVI:3 i ndicate that the notification and consultation 
requirements must apply and that a subsidy cannot gi ve a contracting party more than an equitable 
share of the world export trade as  the word “shall” is used thr oughout these provisions. In this sense, 
the wording of the chapeau of Article 6.3 is different and, hence, it is  not possible to derive any direct 
implications from the above Sugar Panels  for the purpose of its interpretation.  
  (d) In this regard, what in your view is the significance of footnote 13 to SCM 
Article 5(c), which provides that the term "serious prejudice" in the SCM Agreement has the same meaning as in GATT Article XVI:1?  We note that Article VI:1 of GATT 1994 contains no reference to injury to the domestic 
industry of the complainant.  Is the purpose of this footnote to incorporate into 
the SCM Agreement the interpretations of the prior GATT panels on serious prejudice?  If not, what is the purpose of this footnote?    
 
                                                     
 
18 Appellate Body Report, US – Lamb , para. 124.  WT/DS273/R 
 Page D-81 
 
 
 Given the explicit provisions of the chapeau of Article 6.3, the purpose of footnote 13 is to clarify that a threat of serious prejudice, as is e xplicitly provided in Article XVI:1 is also covered 
under Article 5(c) of the SCM Agreement . In addition, the reference can be interpreted to mean that a 
finding of price depression or suppression is not enough but must be accompanied by an increase in exports by the subsidizing Member from its territory  or decrease in imports into its territory which 
must be shown to be result of th e alleged subsidy. In response to  both this and the previous sub-
question, Korea would like to recall that th e Appellate Body explicitly approved the following 
statement by the Panel in Brazil – Desiccated Coconut  regarding the relationship between the SCM 
Agreement  and Article VI, which applies equally with resp ect to Article XVI, particularly in light of 
footnote 13: 
 
 Article VI of the GATT 1994 and the SCM Agr eement represent a new and different package 
of rights and obligations, as among WTO Members, re garding the use of countervailing duties.  Thus, 
Article VI and the respective SCM Agreements  impose obligations on a potential user of 
countervailing duties, in the form of conditions that have to be fulfilled in order to impose a duty, but 
they also confer the right to impose a counterva iling duty when those conditions are satisfied.  The 
SCM Agreements do not merely impose additional substantive a nd procedural obligations on a 
potential user of countervailing measures.  Rather , the SCM Agreements and Article VI together 
define, clarify and in some cases modify the whol e package of rights and obligations of a potential 
user of countervailing measures.
19 
 
 There is nothing in Article XVI that detracts from the proposed interpretation of Articles 5 to 
7 of the SCM Agreement .  Indeed, when combined with an exam ination of Article VI and Part V of 
the SCM Agreement , it is quite evident that it is the EC’s mini malist approach that is inconsistent with 
the overall scheme of the treaty language.  The EC’s  approach is vague a nd standards-less with no 
like product analysis, no examination of the stat e of the complaining Member’s industry, no 
examination of the broader scope of that Member ’s interests and only the most minimalist causation 
analysis that is not in harmony with the treaty.  The EC’s approach would render the standards of 
Part II of the SCM Agreement  and Article XVI affecting markets in other Members at a much lower 
level than those required for examining imports into  a Member’s own market pursuant to Article VI 
and Part V of the SCM Agreement .  This is both logically absurd and completely without support in 
the broader scheme of the treaty language. 
 
90. In your view is the causation standard for serious prejudice the same as that in a 
countervailing duty investigation?  If so, th en what accounts for the very different 
drafting of the respective provisions of the SCM Agreement, and for the clear distinction in SCM Article 5 between injury  and serious prejudice?  If not, please 
explain the differences.   
 
 The causation standard for serious prejudice a nd in a countervailing duty investigation are 
different. Pursuant to Article 6.3(c), it must be show n that it is the challenged subsidy specifically that 
is causing the alleged price de pression or suppression. Article 6. 3(c) explicitly states: “the
 effect of 
the subsidy is a significant …” It is, therefore, not sufficient to show that the products that are being 
subsidized are causing price suppression or depression but it must be shown that the subsidy in 
isolation has caused significant price depression or suppression. As stated in Korea’s First Written 
Submission (paragraph 532), where price depression or suppression significant enough to cause serious prejudice is not caused by the alleged subsid y but by other factors, the actionable subsidies 
cannot be prohibited. When price depression or suppr ession is caused by the alleged subsidy and by 
other factors, the actionable subsidies can only be  prohibited when the alleged subsidy itself has 
caused significant price depression or suppression consider ed in isolation from other factors. This too 
requires a quantification of the alleged subsidy as explained in paragraph 536 of Korea’s First Written 
                                                     
 
19 Panel Report in Brazil – Desiccated Coconut at para . 246, as approved in the Appellate Body Report 
in Brazil – Desiccated Coconut, at p. 17. WT/DS273/R 
Page D-82  
 
Submission.  As Korea noted at the First Substan tive Meeting, it is possible to consider both the 
causation and injury standards for countervailing dut y investigations as lesser standards subsumed 
within the standards of Articles 5 and 6.  Thus, proving the elements of injury and causation under 
Part V could be considered as necessary, but not sufficient, elements of demonstrating serious 
prejudice under Articles 5 and 6.  
 91. In respect of causation, you argue that no  matter what other factors may be present in 
the market, the subsidization independently  of these other factors must itself cause 
serious prejudice.   
 
 (a) How could such an analysis be performed?  
 
 As discussed above in regard to the issue of  “like product”, Korea would like to note its 
concern about burden shifting.  The EC has rejected  any sort of conventional approach to causation, 
instead relying on a vague, mechan ical approach that has a far lowe r standard than any trade remedy 
investigation or dispute under any of the WTO Agreem ents.  Thus, if the Panel agrees that some sort 
of normal causation analysis should be pursued, th e dispute should conclude at that point, for the 
complainant has rejected that appr oach and refused to provide any ev idence or arguments of that sort. 
  As Korea has noted, the Appellate Body made it very clear in Japan – Agricultural Products 
II that the Panel has a broad mandate to gather in formation for purposes of clarifying the parties’ 
arguments, but not making the complainant’s case for it.  Again, recognizing that questions are not 
statements of position, Korea provides the following discussion setting out its views.  However, Korea 
must again reserve all of its rights so that its res ponse cannot be interpreted as its agreement to assume 
a burden belonging to the complainant.  
 Subject to these reservations, Korea believes th at, in order to establish the causation between 
the subsidy and the price depression or suppression, the analysis could be performed in accordance 
with the following order: 
 
 Step I: The alleged subsidy must be quantifie d with respect to each subsidized shipbuilder. 
  - If the quantity of the alleged subsidy is insignificant, the analysis must end there. 
 
 - If the quantity of the alleged subsidy is  significant, the Panel should proceed to 
Step II. 
  Step II: The effect of the subsidy on the prices of the subsidized shipbuilder must be 
quantified. 
  - Logically, the chain of causation should begi n with the effect of the subsidy on the 
prices of the subsidized shipbuilder. In a competitive market, it is generally assumed 
that prices are set at the level of the to tal production cost, even though actual prices 
may sometimes go below cost of production in the case of a highly capital-intensive, 
cyclical industry such as the shipbuilding industry. A subsidy would enable the 
subsidized shipbuilder to sell its products at prices below the competitive price level 
by either lowering the production cost or simply compensating the loss from sales 
below the production cost, depending on the nature of the subsidy in question. 
Therefore, the effect of the subsidy on the prices of the subsidized shipbuilder may be 
measured by (i) determining first the leve l of production cost not affected by the 
subsidy (e.g., the actual unit cost plus the prorated subsidy amount per unit of the 
subsidy that reduced the production cost (hereinafter the “non-subsidized production 
cost”) and then (ii) comparing this non-s ubsidized production cost with the prices of 
the subsidized shipbuilder.  WT/DS273/R 
 Page D-83 
 
 
  - If the prices of the subsidized shipbuild er still exceed the non-subsidized production 
cost, the subsidy has not affected the actua l prices of the subsidized shipbuilder. 
Therefore, the subsidy has not had price depression or suppression for its effect. 
  - On the other hand, if the prices of th e subsidized shipbuilder are below the non-
subsidized production cost, the subsidy has affected  the prices of the subsidized 
shipbuilder downward by an amount which is equivalent to the smaller of (i) the 
difference between the subsidized shipbuilder’s prices and its non-subsidized production cost or (ii) the prorated subs idy margin included in the above production 
cost (this difference can be called the “subs idy effect margin” for convenience in the 
explanation).  
 
 - If the ‘subsidy effect margin’ is insignifi cant, there is no causal link and the serious 
prejudice analysis must be ended. 
  - If the ‘subsidy effect margin’ is found to be significant, the analysis should move to 
Step III. 
  Step III: The price depression and suppression margin must be quantified.   - This is a complex process of determining the percentage margin by which the prices 
of the like product produced by the shipbuild ers of the complaining Member (i.e., the 
EC) have been depressed or suppressed.  
 
 - For this purpose, ‘like products’ produced by the shipbuilders of the complaining 
Member must first be identified. 
  - Then, it should be analyzed whether the prices of the shipbuilders of the complaining 
Member would have been significantly depressed or suppressed as a result of the 
subsidy granted to the subsidized shipbuild ers (i.e., the ‘subsidy effect margin’). In 
this regard, the causation analysis is an inte gral part of the process of determining the 
existence of a ‘significant price depression or suppression’.  
 
 - The detailed analytical methods suggested will be explained in subsection (d) below. 
Any elements of fair competition leading to  a decrease in the price of the allegedly 
subsidized products (economies of scale, cost advantages, etc.) must be assessed. 
 
 - The effects of competing non-subsidized  products from other sources on the price 
levels must be considered. An allegation of the maintenance of capacity due to the 
alleged subsidy is insufficient to establish that the
 subsidy caused significant price 
depression or suppression is insufficient when there are significant other sources of like products that are not subsidized. 
 
 - For price suppression, all factual and economic elements, including economic factors 
relevant to the industry of the complaini ng member, affecting price levels must be 
determined in order to assess whether prices would have increased in the absence of 
the alleged subsidies. 
 
 Taking at least all of these elements into account, the effects in isolation of the alleged 
subsidies on price levels must be determined to  assess whether the subsidies specifically caused 
significant price depression or suppression.  Korea would like to emphasize that this question is 
difficult to answer in isolation fro m the complainant’s arguments. The EC has explicitly rejected price 
undercutting.  In this regard, the burden is on the complainant to demonstrate the market mechanism WT/DS273/R 
Page D-84  
 
transmitting the effect of the subsidy to the allege d price depression or suppression.  To do this, the 
EC has relied almost exclusively on issues of capacity.  When challenged on this point, the EC denied that they were looking at just capacity and stated  that it necessarily includ es a multi-faceted approach 
including a certain amount of price undercutting.  Korea would agree with  the complexity and 
subtlety needed, but in the EC’s case it must be explicitly  to the exclusion of price undercutting.  
Thus, in providing the above response, Korea notes th at this is not necessarily the exclusive way to 
demonstrate causation if one were to take a more ra tional, broad based approach.  It also still might 
not be applicable in this case to the extent th at there remain elements of a prohibited price 
undercutting argument.   (b) You suggest that one part of the anal ysis would be to quantify the amount or 
degree of subsidization and to compare th is to the degree of price suppression or 
depression that may exist.  Please clarify this argument.  In particular, would the degree of subsidization be compared with  the alleged degree of suppression or 
depression of the subsidized product's price?   
 
 As mentioned in subsection (a) above, Korea su bmits that the subsidy must be quantified and 
pro-rated so as to determine its possible effect on th e price of the allegedly subsidized product (i.e., 
the ‘subsidy effect margin’ to be calculated in Step II mentioned above). Then, as explained in 
subsection (d) below, at Step III this ‘subsidy eff ect margin’ will be added to the actual prices of the 
subsidized product to calculate the ‘hypothetical non- subsidized prices’ of the vessels produced by the 
subsidized shipbuilder. This “hypothetical non-subsid ized prices” of the subsidized shipbuilder are 
necessary to assess whether the prices of the shi pbuilders of the EC as the complaining Member 
would have been depressed or suppressed as the effect of the subsidy. 
  In light of the above analytical process, it would be inaccurate to state that the degree of 
subsidization must necessarily be compared w ith the alleged degree of suppression or depression. 
Korea refers to Section (d) below.  
 Again, Korea would like to note its reserva tions concerning the potential for incorrectly 
shifting the burden of proof and also the limita tions of this proposed methodology which is 
constructed in the absence of direct price comparisons.  
 
 (c) Or would it be compared with the alle ged degree of suppression or depression of 
the price of the complaining party's product?  If the latter, what if anything is 
the logical connection between the specific amount by which a particular country may subsidize a given product and the degree to which the price of the same product produced by a producer in another country may be affected?    
 
 Korea considers that price suppression or de pression must be shown to the prices of the 
complaining party’s products but that the establishmen t of a causal link requires it to also investigate 
the price depression/suppression at the level of the produc ts of the subsidizing party. As mentioned in 
subsections (b) above and (d) below, however, the alleged ‘subsidy effect margin’ would not be 
directly compared with the alleged degree of s uppression or depression, but will be considered as a 
crucial factor in determining the degree of such suppression or depression.  
 
 A mere allegation as mentioned by the EC of the continued existence of capacity due to the 
coverage of debt-servicing cost through the subsidy without investigation into causal link as indicated 
in (a) above is insufficient. 
  Korea would like to refer again to the EC Commission’s Third Report on World Shipbuilding 
where it outlines the massive amounts of subsidies provided to the EC shipyards over the decades.  
These were as high as 28 per cent direct operati ng subsidies as recent as 1988, only being phased 
down to a “mere” six percent at the present time.  As the Commission noted, this was only one form  WT/DS273/R 
 Page D-85 
 
 
of subsidization.  There also was export subsidization, research and development subsidization; equity 
injection subsidization; regional subsidization, r esearch and development subsidization (now as high 
as 25 per cent), tied aid subsidization, etc. This is  one of the anomalies of the EC’s narrow focus on 
maintenance of capacity.  The Commission itself noted  that the EC had maintained too much capacity 
and had not made sufficient competitive adjustment due to this sustained high le vel of subsidization.  
If one is looking at the question of maintained capaci ty, as per the EC’s argument, then the causal link 
lies much more firmly with the EC’s subsidies than any other Member.  
 
 (d) How, in concrete terms, is the de gree of price suppression or depression 
quantified and expressed?    
 
 Korea submits that the price suppression or depression means, with respect to each like product identified, the percentage margin by whic h the price of the products of the complaining 
Member’s products have been suppressed or the pe rcentage margin by which the price has been 
depressed, as the effect of the subsidy.  In or der to determine the degree of price suppression or 
depression, the Panel should analyze whether the prices of the shipbuilders of the complaining 
Member have been significantly suppressed or depr essed as a result of the subsidy granted to the 
subsidized shipbuilders. 
 
 In order to determine whether there is any significant price depression or suppression; Korea 
believes that the Panel should consider all the factor s that will determine the prices.  In this regard, 
Korea considers that the Panel could take the following steps: 
 
 Step 1:  The prices of ‘like products’ sold by a ll the shipbuilders that are believed to affect the 
prices of the ‘like products’ of the EC shipbuilders must be identified  
 
 - The prices of the non-subsidized EC shipbuilders’ like products must be determined 
as from the period immediately preceding the granting of the subs idy throughout the 
most recent period preceding the initiati on of the dispute settlement procedure 
 
 - The hypothetical non-subsidized prices of the like products sold by the allegedly 
subsidized shipbuilder in Korea must be  determined for the same period. These 
hypothetical prices can be determined by in creasing the actual prices of the allegedly 
subsidized shipbuilder by the ‘subsidy effect  margin’ since the granting of the alleged 
subsidy 
  - The prices of non-subsidized like produc ts from other WTO Members must also be 
determined for the period immediately preceding the granting of the alleged subsidy 
throughout the most recent period preceding the initiation of the dispute settlement 
procedure. 
  Step 2: All the factors that are believed to  affect the prices of the non-subsidized EC 
shipbuilders must be assessed in respect of their possible effect on such prices. 
 
 (a)  Demand and supply factors 
 
 - As the prices are determined by the in teraction of supply and demand, those factors 
that constitute the demand and supply, respectively, should be identified and 
assessed. 
  - On the demand side, a main indicator ma y be the trend in new orders. If the demand 
has increased in excess to th e capability of the shipbuilder s in the market to supply 
products, prices would have increased wh ile if the demand has decreased over the 
production capability, the prices would have decreased.  WT/DS273/R 
Page D-86  
 
  - An important supply side factor is the trend of major cost items. The ship prices are 
sensitive to cost movements. As demonstrat ed by Korea, the price decline as alleged 
by the EC coincides with the decline of  steel and other cost items as well as 
devaluation of Korean won. In such case, the causation analysis should stop there. If 
the decline of production cost is not suffici ent to the entire price movements, then the 
actual impact of the cost decline must be accurately quantified and should be 
compared with other causation factors.  
 
 (b)  Effect of prices of other non-subsidized shipbuilders (whether Korean or third 
country shipbuilders) 
 
 - If, with respect to each like produc t, there are a number of non-subsidized 
shipbuilders which collectively have sufficien t market shares to be able to lead or 
substantially influence 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. Thus, the causation of the effect of the alleged subsidy is cut. 
  (c)  Effect of the prices of the subsidized shipbuilders  
 
 - In the absence of any other causes menti oned above that are reasonably considered to 
disrupt the causal link between the alleged subsidy and the alleged price suppression 
and depression, the Panel can proceed to anal yze the effect of the alleged subsidy; 
 
 - First, the Panel should look into whether the allegedly subsidized shipbuilder has the 
ability to lead or substantially influence the market prices of the like products, in terms of its market share or otherwise. If th e market share is insufficient, or if the 
shipbuilder has not maintained a substan tial market share consistently, it will be 
difficult to find a causal link as such.  
 
 - Only if the subsidized shipbuilder has main tained a sufficient mark et share to lead or 
substantially influence the market prices , should the Panel proceed to examine the 
effect of the subsidy on the prices of the shipbuilders of the EC. The Panel can 
compare the hypothetical non-subsidized prices of the allegedly subsidized 
shipbuilders (“Price A”) with the actual pr ices of the non-subsidized EC shipbuilders 
(“Price B”). 
 
 - If Price A is higher than Price B, it can be said that Price B, i.e., the prices of the non-
subsidized EC shipbuilders were prevented from increasing up to the level of Price A. 
On the other hand, if Price B is equal to or below Price A, it can be assumed that, 
regardless of the effect of the alleged s ubsidy, the prices of the non-subsidized EC 
shipbuilders would have decreased (no pri ce depression) or would not have increased 
(no price suppression) in any event. 
 
 - In such case, if the price difference is insignificant, the Panel should find that there 
was no “significant” price suppression or depression. On the other hand, if the difference is significant and the ‘subsidy eff ect margin’ is also significant, the Panel 
may find that there was “significant” price suppression or depression as the effect of 
the subsidy. 
 
 - In cases where the effect of the subsidy or th e effect of other causes is not decisive or 
has equal force, then the quantity of the subsidy effect should be compared with the  WT/DS273/R 
 Page D-87 
 
 
aggregate quantities of all other factors, in order to determine whether “the effect of 
the subsidy” in isolation was the cause of significant price suppression or depression. 
 
 Korea would again like to note that it has an swered this question the best that it can, but 
recalls that the EC has excluded price undercutting.  In light of the EC’s exclusion of such a critical 
element – which probably is presen t in the approach noted above – it is inequitable that Korea has 
been asked to construct an analytical approach ab initio  to fit the skewed EC argument.  This burden 
should be on the EC; thus, Korea reserves all of its rights even though it is attempting to be as 
responsive as possible to the Pane l’s questions in this regard.  
 
92. What is the basis for your argument that the complaining Member must prove the effect 
of the alleged benefit from each alleged s ubsidy individually, rather than the combined 
effect of the alleged subsidies?  How does th is square with, for example, the approach to 
calculating the 5 per cent subsidization under the now-expired SCM Article 6.1, in 
respect of which paragraph 6 of Annex IV pr ovided that "In determining the overall 
rate of subsidization in a given year, s ubsidies given under different programmes and by 
different authorities in the territory of a Member shall be aggregated", which seems to have implied that it was the overall impact of  the subsidies in question that was relevant 
to the existence of serious prejudice?  Ho w in practice could a Panel conduct such a 
separate analysis of the effects of each subsidy individually? 
 
 The chapeau of Article 5 refers to “any subsidy” . In addition, Article 7.8 provides that when a 
Panel or Appellate Body report is adopted in which it  is determined that “any subsidy” has resulted in 
adverse effects to the interest of another Member, the subsidizing Member must either remove the 
adverse effects or withdraw the subsidy.  The use of the term “any subsidy” confirmed by the multiple 
references to “the subsidy” in Article 6.3 confirms that the effects of a subsidy must be reviewed for 
each subsidy separately. In that regard, the wording of Article 6.1(a) and paragraph 6 of Annex IV is 
different from that in Article 6.3.   The analysis described in the response to qu estion 91 above should be carried out for each 
subsidy individually. 
  As Korea noted during the First Substantive Mee ting, this does not mean that after assessing 
each subsidy individually, a sum of the actionable subsidies cannot be aggregated  for purposes of 
making the final causal assessment.  But, unless they  are broken down, the possibility of removing the 
adverse effects under Article 7.8 could not be d one in any rational manner. Article 7.8 provides 
important context for understanding Articles 5 and 6 and is not a disembodied provision to only be 
looked at in isolation during implementation. To sev er it in such a manner would be contrary to the 
provisions of Article 31 of the Vie nna Convention.  Rather, Article 7.8 serves as a useful illustration 
of the uniqueness of a trade effects dispute under the WTO.  Because no other provision entails an 
adverse trade effects demonstration, no other provi sion allows for limiting the remedy to removing the 
adverse trade effects.  Thus, in understanding what would need to be done to alleviate adverse trade 
effects later, a panel must build the case from the bo ttom up, one element at a time so that it is a 
comprehensible whole.  
93. Is it your argument that, in a case involving  multiple actionable subsidies, there would 
be double-counting of effects if somehow it could be demonstrated that in the absence of 
one of the subsidies, the remaining ones could not have caused adverse effects?  What is 
the basis in the text of the SCM Agreement  to such an approach to adverse effects? 
 
 No, there is not necessarily double-counting per se . In the question posed by the Panel, Korea 
is of the view that in the case of multiple actionabl e subsidies, the effect of the subsidies must be 
aggregated to determine whether in total they cause adverse effects. If one th en removes one subsidy, WT/DS273/R 
Page D-88  
 
and the effect of the remaining subsidies is not a dverse, then no remedy is required. The support for 
this conclusion comes from Article 7.8.    The double-counting issue only arises when there is a simultaneous clai m regarding the same 
measure under Parts II and III of the SCM Agreement.   The answer to the previous question shows 
why combining prohibited subsidies and actionable subsidies would result in double counting.  To 
stack the prohibited subsidies on top of the actiona ble subsidies for purposes of the causation analysis 
would be including subsidies that as a matter of law  under Article 4 will be re moved.  If they will be 
removed, then they should not be considered as part of the accumulated subsidies examined for 
purposes of causation in a trade effects case.  For exam ple, were they to be the subsidies that tipped 
the balance to an affirmative finding, then Artic le 7 becomes moot because the prohibited subsidies 
must be removed pursuant to Article 4.  Thus, there would be no adverse trade effects to remedy and, therefore, no basis for the initial affirmative finding.  The jurisprudence is quite clear that a treaty 
cannot be interpreted in a ma nner that renders part of inutile . 
 94. Please provide examples of recent bids for container ships, product/chemical tankers, 
and/or LNGs, which were won by Korean ship yards not alleged by the EC to have 
received subsidies, and for which bids you consider that at least one EC shipyard was a competitor.   
 
 As the Korean and EU shipyards focus on diffe rent product categories, the Korean yards, 
whether alleged by the EC to have been subsidi zed or not, did not compete with the EU shipyards 
with respect to many projects. One example of recent competition between Korean and EU yards would be the bids for a LNG Carrier order placed by Gaz de France (GDF). For this order, 5 shipyards (Mitsui, Chantiers de L’Atlantique, Daewoo- SME, Samsung and Hanjin) submitted bids, and 
Chantiers de L’Atlantique has won the order, thanks  to the substantial amount of subsidies granted by 
the EC. 
  For details on this dubious transaction, please re fer to the news articles, which are submitted 
herewith as Exhibit Korea – 67
. 
 
 
II. QUESTIONS TO BOTH PARTIES  
95. Article 11-2 of the Guidelines for Interest and Fees (Amended)  (Exhibit EC-13) 
provides that [BCI:  Omitted from public version].   
 (a) To Korea
:  Does this suggest that KEXIM considers that foreign financial 
markets constitute an appropriate market benchmark?  Please explain. 
 
 As stated in Korea’s response to the Panel’ s question No. 77, KEXIM operates mainly in the 
Korean financial market in terms of its customer s and competing financial institutions. Therefore, 
Korea is of the view that the appropriate market benchmark for KEXIM’s interest rates is the Korean 
market. The fact that KEXIM may adjust the Base Rates by a marginal amount, taking into account 
the trends of domestic or foreign financial markets pursuant to Article 11-2, does not in and of itself 
support that KEXIM ‘s overall interest rates must be comparable to the interest rates charged by foreign financial institutions.   (b) To EC
:  What impact, if any, does this provi sion have on the EC 's argument that 
KEXIM is not required to act on commercial principles?  Please explain.  
 
96. Can footnote 5 of the SCM Agreement  be used to justify an a contrario reading of item (j) 
and the first paragraph of item (k) of the Illu strative List of Export Subsidies?  Please 
explain.    WT/DS273/R 
 Page D-89 
 
 
 
 Yes, in Korea’s view so-called “safe harbors” do exist based on an reading of items (j) and (k) 
read in light of footnote 5 and the broader c ontext of the SCM Agreement.  While some have 
attempted to argue that the Appellate Body’s statements in this regard in Brazil – Aircraft 
(Article 21.5 – Canada)20 are mere dicta and do not mean anything, Korea is not of the view that the 
Appellate Body’s views can be taken so lightly.  Indeed, it is clear that any other reading risks 
rendering meaningless items (j) and (k), first paragraph.   In Korea’s view a perfectly harmonious reading of the broader treaty text is achieved if there 
is an a contrario  reading of these provisions.  First, the la nguage of items (j) and (k) both imply that 
the relevant issue is whether the programmes at is sue cover the costs to the government of operating 
such programmes.
21  While some have expressed concerns th at this reading in some way undermines 
the benefit to the recipient standard of Article 1.1(b), this is not the case at all.  This is clear from the 
language of footnote 5 which provides that: “M easures referred to in Annex I as not constituting 
export subsidies shall not be  prohibited  under this or any other provision of this Agreement.” 
(emphasis added).  This language can be contrasted  with the language of Article 8.1 which identified 
subsidies that “shall be considered as non-actionable ” (emphasis added).  Thus, it can be seen that all 
footnote 5 does is establish that measures that are not export subsidies under Annex I are not 
considered prohibited subsidies.  It is a safe harb or with respect to Part II alone and is simply 
irrelevant to the analysis of benefit.  
 To put the issue another way, if benefit to the recipient is established pursuant to 
Article 1.1(b) and the other elements of the various tests are satisfied, then there is a subsidy.  The 
question remains as to whether the subsidy is prohib ited or actionable.  All, footnote 5 – read in 
context with the language of items (j) and (k), first paragraph – does is provide that such subsidies are 
not prohibited.  It is silent as to whether they ma y be actionable.  If more were intended the drafters 
would have used the term “non-actionable” in footnote 5 as they did in Article 8.1.  The harbors may 
be safe, but they are not all-encompassing.   Indeed, this point is illustrated in this very case.  The EC has argued that the KEXIM 
measures are both prohibited and actionable.  Th e safe harbors would render them immune form 
attack under Part II, but are not relevant to the anal ysis under Part III.  Thus, even after the application 
of the safe harbors, the EC could still pursue its  claims regarding alleged KEXIM subsidies under 
Part III.  In this regard, it is worth recalling that  Korea has not argued that the EC cannot claim that 
the KEXIM measures are actionable.  Rather, Korea has only argued that they cannot be considered by the Panel as both prohibited and actionable simultaneously because that would result in double-counting in terms of considering serious prejudice. 
 
97. What is the meaning of the term "material advantage" in the first paragraph of item (k) 
of the Illustrative List of Export Subsidies?   
 
 The term “material advantage” refers to whether the measure in question provides the 
exporter with some advantage relative to  an appropriate “market benchmark”.
22 
 
                                                      
20 Appellate Body Repost in Brazil – Aircraft(Article 21.5 – Canada)  at paras. 80-81. 
21 Canada – Dairy (Article 21.5 – New Zealand and US)  at para.93. 
22 In Brazil – Aircraft, the Appellate Body noted that one example of a material advantage would be if 
the net interest rate was higher than the relevant CIRR.22  However, the fact that the CIRR provided only one 
example and not the exclusive reference point for determining market benchmarks was re-emphasized by the 
Appellate Body in the Article 21.5 proceeding in that dispute.  The Appellate Body  noted that the CIRR reflects certain market conditions in one currency at one particular time and does not, in fact reflect the rates available in 
the marketplace.  Thus the CIRR does no t constitute the sole market benchmark.  Brazil – Aircraft (Article 21.5 
– Canada) at para. 64. WT/DS273/R 
Page D-90  
 
 The Appellate Body stressed in Brazil – Aircraft that one cannot ignore the term “material” in 
item (k) first paragraph.
23  It logically must mean something more than the term benefit in Article 1.1.  
Of course, it must be observed that the issue of “advantage” requires a question of advantage relative 
to something.  If it is merely an advantage rela tive to what would otherwise be available to the 
recipient, then it is simply redundant, as the Appellate  Body noted.  It, therefore, necessarily implies 
that it cannot be at a rate that gives the recipi ent a meaningful competitive advantage over other 
sellers, but must provide a competitive advantag e as seen from the perspective of the buyer. 
 
98. As a legal matter, does the definition of ex port credits used by the OECD in the context 
of the Export Credit Arrangement govern the meaning of this term in the first 
paragraph of item (k) of the Illustrative List of Export Subsidies?  Why/why not?  
 
 The terms are not identical.  The second para graph of item (k) provides a very specific 
exception to the rule provided in the first paragraph.  This exception effectively applies with respect to 
a very limited number of Members that are also OECD members and in a very specific circumstances 
described in the second paragraph.  In this regard, it should be noted that the full term in the first 
paragraph is “export credits”, while the full term in the second paragraph is “official export credits” 
which refers back to the very specific OECD agre ements described further in the second paragraph.  
As is generally the case, exceptions should be co nstrued narrowly and it follows that there is no 
reason for the term in the operative paragraph to be  constrained by the definition of a specific narrow 
exception.   
 
 This conclusion also follows from the discussion in response to the previous question where it 
was demonstrated that the Appellate Body did not find that the language in the first paragraph was 
constrained by the OECD terms applied pursuant to the exception contained in the second.  Thus, just 
as the CIRR does not provide the sole market benchm ark relevant for determin ing material advantage 
in the first paragraph, so the reference to “offici al export credits” covered by the OECD arrangements 
in the second paragraph cannot be considered controlling on the definition of “export credits” in the 
first paragraph.   
99. Would you provide us with the rationale behind your definition of export credits and 
export credit guarantees?  Does an export cred it have always to be a credit extended by 
the exporter or a financial institution to the buyer, and does an export credit guarantee 
always have to be a guarantee of such a credit?  PSLs are loans extended by KEXIM to the shipbuilder, not to the buyer.  APRGs are guarantees extended by KEXIM to the buyer, not to guarantee a credit given by the exporter or by a private financial 
institution to the buyer, but to guarantee that an advance payment by the buyer to the 
exporter shall be refunded in case of a cont ractual default.  Does this exclude APRGs 
and PSLs from the realm of export credits/export credit guarantees?   
 
 Please refer to the Answers to questions 60, 97 and 98.  With respect to item (j), it is clear that 
the definitions of the relevant terms should not be  limited to guarantees provide d to buyers only.  The 
reference in the second sentence of item (j) to guara ntees against increases in cost implies a reference 
to the seller, for that is the party that generally carries the risk of increases in cost, while the buyer 
generally carries the risk of increases in price.  At th e very least, the reference to costs implies that the 
guarantees at issue in item (j) can cover both ends of the transaction and are not limited to buyers only.  
 Regarding item (k), it would seem to follow that there is no reason to assume that the 
prohibition contained in the first paragraph of item (k) should be narrower than that contained in the 
first paragraph of item (j).  As discussed in the pr evious two questions, the indirect reference to the 
OECD in the narrow and quite specific exception contained in the second paragraph of item (k) 
                                                     
 
23 Brazil – Aircraft  at para. 177.  WT/DS273/R 
 Page D-91 
 
 
cannot logically be taken to mean that terms used in the broader positive rules have the same narrow 
meanings.  The manner in which the Appellate B ody referred to the use of the CIRR - as but one 
possible market benchmark rather than the ex clusive benchmark - supports this conclusion. 
  Moreover, the economic effect of credits and guarantees can be the same whether the 
extension of the guarantees or credits are to the buy er or the seller.  There is nothing in the language 
of items (j) and (k) that implies such an ec onomically non-sensical limitation to the language. 
 
100. In the Indonesia – Autos
 dispute (the only circulated panel report to date addressing 
serious prejudice claims), the panel in analyzing the claims of displacement or impedance of 
imports into the Indonesian market applied a " but for" approach.  In particular, the panel 
asked the question whether, "but for" the subs idies, the complaining parties' sales volumes 
and/or market shares in the Indonesian market either would not have declined, or would have 
increased by more than they in fact did.    
 (a) Would an analogous approach be appropriate here?  That is, in assessing the 
price suppression/depression claims, should the Panel seek to answer the question whether, but for the subsidies, the prices in question either would not 
have declined, or would have increased more than they in fact did?    
 
 The Panel in Indonesia – Autos  used a but/for test for a displacement or impedance case, with 
it being particularly relevant to impedance. In the present dispute, the Panel is examining what 
actually has happened in the market rather than wh at would have happened in the form of possible 
establishment or entry into the market. Thus, Korea is somewhat reluctant to endorse a test that has 
been applied in a different setting without knowin g precisely what the Panel means in this setting. 
Korea believes that the approach th at it has described in the respon se to Question 91 above is much 
more nuanced than a strict “but for” approach, but if that is what the Panel means by analogizing the 
test (as opposed to adopting it as applied), then perhaps the label could be used.    Obviously, no but/for test can be applied unl ess the subsidies in question have been precisely 
quantified and the EC has not only failed to do this , it has affirmatively refused to do it.  The EC 
threw out some general numbers without any supp ort and asserted that there was no burden on it to 
supply anything, even those assertions.  Again, regard less of the label applied, Korea is of the view 
that the approach it suggests in the answer to Qu estion 91 requires that the subsidy specifically must 
have caused significant price depression or suppression but also does not exclude an analysis of whether other factors may have caused significant price depression or suppression.  Indeed, it is required that an assessment of such other factors be made.
24  The assessment in this regard will very 
much depend on a case-by-case assessment. Thus, for example, where non-subsidized like products 
have an important part of the like product mark et and prices for these non-subsidized products have 
decreased substantially over the period considered w ithout it being possible to demonstrate that these 
prices followed the prices of the allegedly subsid ized products, in Korea’s opinion, it will not be 
possible to conclude that the price depression or suppression is the specific effect of the alleged 
subsidy. 
 
 (b) If so, what sorts of considerations should  the Panel take into account in trying to 
determine what the price movements would have been in the absence of the alleged subsidies?  If not, why not, and what other approach should be used?  
                                                     
 
24 Korea notes that the EC claimed at the First Substantive Meeting th at Korea agreed that there were 
no other such factors in this case. (See EC Oral Statement at para. 120)  A re view of the section of Korea’s First 
Written Submission cited by the EC makes it clear that Korea was using the term “other factors” at that point to refer to the other elements listed in Article 6.3.  The us e of the term “factors”  there in Korea’s submission was 
not the best, although the broader context makes it clear that Korea in no manner agrees with the EC that other 
market factors than the alleged Korean subsidies ar e relevant to this dispute.  Quite the contrary. WT/DS273/R 
Page D-92  
 
  Korea refers to the approach which it has s ubmitted in the response to Question 91 above.   
 
101. Does the word "may" in the chapeau of Article 6.3 mean that a complainant of a 
"serious prejudice" must prove something more than the existence of price 
suppression/depression?  
 
 (a) If so, what is it that the complainant has to prove beyond price 
suppression/depression, and what is the basis in the text for any such additional requirements?   
 
 (b) If not, what is the significance of the word "may"?  
 
 The inclusion of the term “may” does not mean that something else must be shown.  But, 
equally, it does not mean that demonstrating one element automatically  leads to a finding of “serious 
prejudice,” and by implication something more could be required to establish serious prejudice, is the 
use of word “may” in the chapeau of Article 6.3.    As discussed in Korea’s response to question 89( a), the word “may” as u sed in the chapeau of 
Article 6.3 does not stand for “permitted” as was argued by the EC during the First Substantive Meeting. In Korea’s view, this can be clearly establis hed by a plain reading of the text of Article 6.3, 
according to the ordinary meaning of th e terms used and in their context. 
  The word “may” is defined, inter alia, as “might…a possibility…”
25 In some case the word 
may indeed mean “permitted” as s uggested by the EC. But the EC’s interpretation does not apply in 
the context of Article 6.3. Article 6.3 chapeau states that: 
 
Serious prejudice … may arise  in any case where one or several of the following 
apply…  
 If the word "may" is in this context interp reted as "permitted" rather than "might" or 
"possible," the sentence becomes nonsensical. One cannot logically say that serious prejudice is 
"permitted to arise." Rather, in the context of the chapeau, it seems that the drafters clearly intended 
the word "may" to read as "might” or “possibly” (e.g. “serious prejudice might arise…”). 
  Further support for this interpretation is found by contrasting the word “may” in Article 6(3) 
with the word “shall” in the (expired)  Article 6.1. Article 6.1 provides: 
 
Serious prejudice in the sense of paragraph (c ) of Article 5 shall be deemed to exist
... 
 Korea notes that in the context of Article 6. 1, the word "shall" refers to the conclusion  that 
serious prejudice shall be "deemed" or "determine d" to exist in the circumstances described in 
subparagraphs (a)-(d). By contrast, the words "m ay arise" in Article 6.3 do not refer to a 
determination. Rather, they refer to the possibility that a situation might (or might not) arise if the 
circumstances described in subparagraphs (a)-(d) of  that Article are established. Had the drafters 
intended the word “may” to mean “permitted” in this context, the provision should more properly 
have read that serious prejudice "may be deemed  to exist" in the circumstances described in 
subparagraphs (a)-(d).    The conclusion therefore should be that while Ar ticle 6.1 referred to s ituations where serious 
prejudice is “deemed” automatically to exist, Ar ticle 6.3 chapeau makes clear that it refers to 
circumstances where serious prejudice “might” exis t, or by implication, might not. The chapeau 
                                                     
 
25 The New Shorter Oxford English Dictionary.  WT/DS273/R 
 Page D-93 
 
 
therefore makes it clear that a finding of serious prejudice is not  automatic even if the existence of 
price suppression/depression is shown to exist. It shoul d also be noted that as the word “may” is found 
in the chapeau of 6.3, this interpretation applies to all subparagraphs in Article 6.1.    
  The use “one or several” in the chapeau of Artic le 6.3 further confirms that the existence of 
any single factor does not ipso facto  lead to an affirmative finding on the existence of serious 
prejudice.    Against this background, with respect to wh at else might need to be proved beyond price 
suppression/depression in order to establish serious prejudice, Korea would first recall that 
Article 5(c) refers to serious prejudice to the “interests
” of a “Member.”  As Korea has noted, 
Presumably there was a reason the term “interests” was chosen rather than injury and it clearly 
implies something more than just the alleged da mage to specific industry(ies) for a Member’s 
“interests” are necessarily broader than just that. Against this background, the finding that alleged 
subsidies have resulted in price suppression or depre ssion with respect to a particular like product may 
not, on its own, rise to the level of harm resulting in  serious prejudice to the more broader “interests” 
of the Member concerned. Under this reading, the EC needs to demonstrate, and the Panel would need 
to find, not only the existence of price depression, bu t that the subsidies complained of have risen to 
the requisite degree of harm to the interests of the EC.   The EC has failed however to provide any b asis for such a finding. The EC does not address 
the question of what EC interests have supposedly been seriously prejudiced and how that might have 
occurred.  There is no evidence supplied about the st ate of the EC industry or “industries.” Moreover, 
the EC did not provide any evidence on the level of the alleged subsidization. Without such evidence, 
it is impossible in Korea’s view to make a determin ation that any subsidies, even if found to exist, 
would rise to the requisite level of harm to the inte rests of the EC. Korea would also recall that the EC 
has failed to establish a causal link between the a lleged subsidies and the serious prejudice claimed. 
Korea considers that these are some of the additi onal factors that would be encompassed in proving 
serious prejudice.  Korea believes that other factors could be taken into account and that this list may 
not be exhaustive. Korea would finally recall that price suppression or depression are only two 
indicators of the existence of material injury of which Article 15.2, which provides that “no one or 
several of these factors can necessarily give decisi ve guidance.” It would seem to follow that the 
existence of price depression or suppression, if not dispositive on their own in the context of the lower 
standard of “material injury,” should equally not be  determinative in the context of the much higher 
threshold of “serious prejudice” in Article 6.3(c).  
 (b)   Korea refers to its reply under part (a) above with respect to the significance of 
the word “may” in Article 6(3) chapeau. 
 
102. In its arguments concerning price supp ression/depression, the EC has focused on 
demand side factors.  Korea, on the other hand,  has focused on the supply side.  Is it not 
more correct that the two aspects should be ta ken together.  Please explain the impact of 
such an approach on your argument concerning price suppression/depression.   
 
 Korea disagrees with the premise of this question.  In fact, the reverse appears to be the case.  
The EC has looked at the supply side almost exclusiv ely to support its argument that there is no like 
product because virtually any yard can build any sh ip (which is, of course, inaccurate).  Korea 
discussed the issue of capacity to a great extent becau se that necessarily is all that is left of the EC’s 
causation analysis once they so dramatically narrowed their claims.  Korea was emphasizing how 
extremely difficult it is to demonstrate causation on such a narrow basis, particularly when a great 
deal of the world capacity consists of inefficient and uneconomic EC yards that have been maintained 
for decades on the back of huge subsidies, as acknow ledged by the Commission in its Third Report on 
World Shipbuilding.  Indeed, the alleged difficulties of  the EC industry bear an interesting correlation 
with the enforced decline of those subsidies from the early 1990’s when the EC started reducing the WT/DS273/R 
Page D-94  
 
direct operating subsidies from the astronomical le vel of 28 per cent.  This correlation is much 
stronger than any alleged relationship to the events ar ising out of the systemic financial crisis of the 
late 1990’s.  Korea’s focus on the supply side was onl y to illustrate the lack of evidentiary and logical 
bases of the EC’s approach.  
 In Korea’s view, as far as the defi nition of “like product” used in the SCM Agreement  is 
concerned, the EC’s “competition market” approach  based on supply side’s substitutability is not 
acceptable. However, Korea ag rees that, in conducting the causation analysis, all elements 
contributing to the setting of the vessel prices must be taken into account both from the supply and 
demand side. This is the purpose of its respon se to Question 91-(a) hereinabove as well as of 
paras 522 to 527 of its First Written Submission. In assessing the causal link between any alleged 
subsidy and significant price depression or suppr ession, all supply and demand factors should be 
taken into account including the increase in orders, freight rate or production costs as submitted by the 
EC. These alone are not, however, sufficient and f actors such as overcapacity, building expertise, 
payment terms, slot availability, delivery time and changes in demand patterns must also be taken into 
account. The assessment of the causal link is fact -driven and must be done in a comprehensive 
manner and carried out on a case-by-case basis.     WT/DS273/R 
 Page D-95 
 
 
ANNEX D-4 
  
RESPONSES OF KOREA TO QUESTIONS FROM  
THE EUROPEAN COMMUNITIES 
 
 
(22 March 2004) 
 
 
I. QUESTIONS TO KOREA 
 
1. In paras 4-8 of its oral statement, Korea repeatedly invoked the “financial contagion”.  
In which way did the “contagion” hit the three shipyards who went bankrupt differently than 
the ones who survived.  
 The impact of the “financial contagion” on the Korean shipyards varied according to the 
financial or business conditions of each shipyard. For instance, Daewoo was more heavily hit by the 
contagion than other major Korean shipyards as Da ewoo held a substantial portion of non-operating 
assets as a result of investments in other Daew oo Group affiliates, such as Daewoo Motor. The 
difficulties Daewoo Motor ran into with various i nvestments such as its Polish car plant are well 
known.    However, the real reason for Korea’s reference to this financial contagion is set forth in 
paragraphs 8 and 9 of its Oral Statement. That is , Korea wished to highlight the following facts:  
 
 -  the financial contagion first hit the banks, resulting in a serious credit crunch where 
money was not available for rolling over loans;  
  - the Government of Korea used the IMF funds to provide liquidity to the banks;   
 - there were conditions attached to this provision of funds, which required the banks to 
enhance financial soundness, reduce outstandi ng bad debts and meet BIS ratios; as a 
result, they needed to ensure that all co rporate restructurings were done pursuant to 
market-oriented principles, including maximization of returns from their debts.  
 
These facts as such negate the EC’s allegation th at the Korean banks some how misbehaved in the 
restructuring process to subs idize the insolvent firms. 
 
2. Korea points out that EC yards have recen tly produced smaller vessels than Korean 
yards (graph in para. 10 and the comments of Korea on the different sizes and types of EC and 
Korean ships in para. 13). Is this in line with  the Korean presentation made during the last 
OECD meeting, where they explain that yards ca n easily switch from one ship to another?  
 
 At the last OECD meeting in early Marc h 2004, competition law experts and government 
officials discussed whether a si ngle shipbuilder can acquire a dominant position (or monopoly power) 
in the world shipbuilding market from the ‘competiti on law’ perspective. At that meeting, Korean 
experts explained that, in order to determine the possibility of a ‘market dominance’, one must first 
define the relevant ‘product market’ as well as th e ‘geographical market’. However, the context of 
those discussions was quite different and had nothi ng to do with WTO “like product” definitions.  
  As demonstrated in paragraphs 10 – 13 of Korea’s First Written Submission, it is supported 
by empirical evidence that the Ko rean and EU shipbuilders operate in largely different product and WT/DS273/R 
Page D-96  
 
size segmentations. As a result, the area of competiti on between the Korean and EU shipbuilders is at 
best marginal. This divergence between the Korean and EU shipbuilders is not transient, but rather 
structural, as it has been due to the changes in patterns of demand and the differences in dock sizes 
and technical and cost advantages betw een the Korean and EU shipyards. 
 3.  In its oral statement today, the EC  hypothesized a scheme whereby the Minister for 
export promotion of a WTO Member would be empowered to award any sum he considered 
necessary to ensure that an exporter wins a contract against foreign competition where he 
considers this to be in the national interest. Wo uld Korea consider such a scheme to be entirely 
compatible with Article 3 of the SCM Agreement ? 
 
 Korea considers that a scheme allowing but not mandating the Minister to award an amount ensuring that an exporter obtains a specific contr act would not necessarily be incompatible with 
Article 3 of the SCM Agreement . It would still be necessary to dete rmine whether, in the individual 
circumstances of the recipient, it was granted in a form and under conditions that would constitute a 
financial contribution under Article 1.1(a)(1) of the SCM Agreement  conferring a benefit under 
Article 1.1(b) thereof.  
4. Does Korea believe that a body can not be considered a “public body”, or a government 
agency can not be considered a “government” if it provides goods or services on competitive terms? 
 
 Korea submits that the mere shareholding or  controlling interest by the government in a body 
and the pursuit of a public policy objective is not sufficient to qualify such body as a public body when it participates in the market together with private bodies on a market-oriented basis. 
 5. Does Korea believe that the same institut ion can be a “public body” for some of its 
activities, and a “private body” for other activi ties? If so, how is this view supported by 
Article 1.1 of the SCM Agreement? 
 
 Yes, Korea submits that this can be the case. Article 1.1(a) is aimed at covering all financial 
contributions whether conferred by a public body under Article 1.1(a)(1)(i) to (iii) or by private 
bodies acting under direction and entrustment of th e government under Article 1.1(a)(1)(iv). Case-law 
has indicated that the provisions aim to be exhaus tive and that the only difference lies with the actor 
of the financial contribution rather than with th e functions. Hence, for those functions for which a 
body cannot qualify as “public body”, it would s till qualify as “private body” if it acted under 
direction or entrustment of the government. 
 
6. In your opinion is KEXIM a “special institution controlled by” the Korean government 
within the meaning of items (j) and (k) of Annex I or a “special institution acting under the 
authority of” the Korean government within the meaning of item (k). 
 
 KEXIM is neither a “public body” nor a private body “entrusted or directed” by the 
Government of Korea as those terms are used in Article 1.1 of the SCM Agreement . Korea notes that 
the EC has made no claims that Ko rea has acted inconsistently with the terms of items (j) or (k) of 
Annex I.  The issue of the applicability of these items only arises as a possible safe harbor under the a 
contrario  reading implied by footnote 5 and the plain meaning of the language of items (j) and (k), 
first paragraph.  As such, these constitute affirma tive defenses that the Panel need only address if it 
has already reached conclusions contrary to Korea’ s arguments under Article 1.1.  Article 1.1(a)(1) 
provides that for purposes “of this Agreement” both the government and public bodies shall be 
referred to as “government”.  Thus the reference to “government” in items (j) and (k) would cover 
KEXIM, if the Panel makes an affirmative findi ng with respect to KEXIM as a public body.   
  WT/DS273/R 
 Page D-97 
 
 
 Thus, the questions of the applicability of these safe harbours only arises as arguments in the 
alternative made by Korea, a concept that should be quite familiar to the EC.   
 
7. Korea states in para. 156 of its submission that Article 26 of the KEXIM Act requires 
KEXIM to operate with the goal of achieving a profit. Please refer to Article 26 (Exhibit EC - 
10) and explain where there is any reference to profit?  
 
 Please refer to Korea’s responses to Panel’s question No. 55 addressed to Korea.  
 
8. In para. 170 of its submission, Korea attempts to explain away Article 24 of the KEXIM 
Act (which states that it must not compete with commercial banks) by claiming that it must be 
read together with Article 25, para. 2 of the KEXI M Act. Please explain how you arrive at this 
construction since there is no cross-reference be tween these articles in the text of the Act? 
 
 Please refer to Korea’s responses to Pane l’s question No. 53 addressed to Korea.  
 9. Korea provides, in para. 172 of its submission, an explanation of the function of the market adjustment rate provided in the KEXIM Interest Rate Guidelines. Please provide the source of this interpretation?  
 
 Please refer to Korea’s responses to Pane l’s question No. 57 addressed to Korea.  
 10. Is the statement in para. 184 of Korea’s submission that “foreign institutions were less equipped to monitor the collateral offered by th e shipbuilders and, accordingly, insisted on 
APRGs without adequate collateral, but with hi gher premium rates” based on conjecture or on 
evidence? If the latter, what evidence?  
  The assessment by Korea is based on discussions  with the shipyards and KEXIM. Korea has 
asked the shipyards and KEXIM for any furthe r documentation and it will be submitted when 
provided to the Government of Korea. However, Ko rea notes that the EC is in a better position to 
make inquires of the foreign lenders than Korea. Wh ile the EC has developed a habit of attempting to 
shift the burden of proof to Korea, the EC is not relieved of the burden of establishing its case.  The 
plain facts are that the foreign credit providers did not require the same level of collateral. Beyond 
this, the rationale of such lenders see ms to be of no evidentiary value.  
 
11. What is the value of “Yangdo Dambo” collateral
1 at the beginning of a project, when an 
APRG or pre-shipment loan is first granted? 
 
 [BCI:  Omitted from public version.]  
 12. Korea states in para. 199 of its submission that the term of pre-shipment loans normally 
does not exceed period that it designates as [BCI :  Omitted from public version]. How does this 
comport with Korea’s argument in para. 170 of the submission that “KEXIM financing may be 
extended only ‘when the term …  is six (6) mont hs or more”, and with the fact that the KEXIM 
pre-shipment loans listed in paras. 175-179 of the EC’s first written submission are for terms 
greater than 6 months (and some have terms up to 24 months)?  
 
 Article 9 of the KEXIM Interest Rate Guide line prescribes that the loan period applied for 
calculating the loan interests shall commence from th e date of initial disbursement and end on the 
final repayment date. In other words, the loan pe riod does not start until the loan disbursement is 
actually made.   
                                                     
 
1 Defined by Korea in its reply to follow-up question 7 of the EC on 10 October 2003. WT/DS273/R 
Page D-98  
 
 In the case of PSLs, the period between the “commitment date” and the “expiry date” ranges between [BCI:  Omitted from public version.]   Korea believes that such weighted average of actual 
disbursement periods must be used as the loan pe riod of PSLs for the purpose of finding comparable 
benchmarks, because the KEXIM’s Interest Rate Guideline calculates interests starting from the 
actual “disbursement” date, rather than the “commitment” date. 
 
 However, for the purpose of Article 25.2 of  the KEXIM Act, the maturity of ‘6 months’ 
referred to in that Article may be interpreted to m ean the period from the “commitment date”. In such 
case, the maturity of PSLs in general is not less than 6 months.  
 
13. Please provide the (1) sales contract (2) th e loan amount for the following preshipment 
loans granted to DSME:   • Project Nr: 000110 P Commitment date 12 October 2000  • Project Nr: 000142 P Commitment date 21 December 2000 
 • Project Nr: 010008 P Commitment date 8 March 2001  
 
 This is a request for new evidence that the EC has no legal basis to make. After the First 
Substantive Meeting, submission of new evidence is prohibited except for purposes of rebuttal, but 
not be asking questions. As for the loan amount, please refer to Korea’s response to EC question 
No. 16 below. 
 
14. Korea argues in para. 207 of  its submission, without any citations or evidentiary 
support, that the collateral required by KEXIM was “stronger” than collateral required by 
foreign financial institutions. Please provide speci fic information regarding the valuation of the 
collateral involved in the transactions by Korean  and foreign banks listed in pans. 170-173 of 
the EC’s first submission to justify this statement.  
 It is the obligation of the EC to establish th e comparability of the benchmarks it proposed.  
Moreover, Korea has no access to the information rega rding the valuation of the collateral by foreign 
banks and other domestic banks as it is proprietary information in natu re and is not publicly available. 
The EC is in a better position to obtain that info rmation and has the responsibility to build its own 
case.  Therefore, Korea provides only the informa tion regarding whether any collateral was provided 
for the projects the EC enlisted and, if so, what  type of collateral it was, as set forth below. 
 
 [BCI:  Omitted from public version.] 
 
15. In order to enable the panel to place values on the benefit of the KEXIM APRGs listed in paras. 170-173, please provide the actual values of the guarantees, or, alternatively, the monetary value of the APRG premiums.  
 
 The EC is assuming a legal conclusion in its quest ion; there is no “benefit”.  Again, this is 
new evidence that the EC is attempting to derive to support its initial prima facie  case.  According to 
the DSU  and the Panel’s Working Procedures, the time is long past for the EC to attempt this.  It was 
the legal obligation of the EC to calculate what it considered the “benefit”. The Panel is not a 
domestic investigating authority.  The Appellate Body opinion in Japan – Agricultural Products II  
makes it very clear that panels are prohibited fro m making the complainant’s case for it. This question 
serves as an admission by the EC that it has not fulfilled its obligation to establish a prima facie  case 
in this regard.  
 
16. In order to enable the panel to place actual values on the benefit of the KEXIM pre-
shipment loan transactions listed in paras. 175-179 of the EC’s first submission, please provide the actual value of the loans for the transactions listed therein. 
  WT/DS273/R 
 Page D-99 
 
 
 Please refer to Korea’s responses to EC question No. 15 above.  
17. Korea includes several charts in paragraphs 231, 233, and 236 of its submission 
purportedly showing the interest rates of corpor ate bonds issued by DSME, Samho, and STX. 
In order to allow the Panel to determine whethe r this is a relevant market benchmark, please 
provide all detailed information available related to the issuance of these bonds, including, but 
not limited to, (a) whether the bonds were issu ed below, above, or at par value, (b) the 
difference between the interest rates on the bonds and the yields, (c) the terms of the bonds, (d) guarantees by other entities (including KAMCO, Seoul Guarantee Insurance, etc.) of the bonds, 
(e) who underwrote the bond issue, and (f) the relationship between the yield/interest rate on the 
bonds and the corporate restructuring of the shipyards. Was there any guarantee between the 
underwriting bank and the yards to buy a certain percentage of the bonds if all bonds were not underwritten?  
  [BCI:  Omitted from public version.] 
 
18.  Korea states in para. 348 of its First Wr itten Submission that according to the Arthur 
Andersen Report the expected collection rate i. e. the total recoverable value compared to the 
creditors outstanding claims was:  
 
 [BCI:  Omitted from public version] under the Liquidation value scenario.  
 
 [BCI:  Omitted from public version] under the “going concern value” scenario. 
 
 Please explain why KAMCO bought NPLs at  rates of [BCI:  Omitted from public 
version] from foreign creditors and [BCI:  Omitted from public version] from domestic 
creditors although the expected return under th e going concern scenario was only [BCI:  
Omitted from public version]. 
 
 The purchase prices for NPLs held by domestic  and foreign creditors were determined 
through negotiations between the parties in [BCI:  Omitted from public version].  By the time that 
these negotiations took place, the business conditions of DHI and the external shipbuilding market 
environment had improved far more substantially than that assumed by Arthur Andersen when it 
assessed the value of DHI as of August 1999.   In contrast, as indicated in its workout repor t, Arthur Andersen made very conservative 
assumptions of various factors (such as growth rate s) for its valuation, which resulted in the total 
recoverable value of [BCI:  Omitted from public version]  under the “going concern value” scenario. 
In other words, the price differential can be explai ned by the difference in timing and the difference 
between the assumed growth and the actual growth, as well as the fact that the KAMCO purchase 
prices were ‘negotiated prices’.  
19. Are the Pre-shipment loans provided as lump-sum payment, i.e., 100 per cent of the loan 
amount provided at the commitment date, as opposed to a credit line? 
  Has this been a consistent practice since 1997? If not please detail all changes in policies. 
 
 [BCI:  Omitted from public version.]  
 
20. Korea states in para. 308 of its submission that “Articles 31 and 23 of the KAMCO Act 
provide that KAMCO realizes profits”. Please point to the text in these provisions that Korea believes justifies that statement (see Exhibit EC - 45). 
 WT/DS273/R 
Page D-100  
 
 Korea refers to the provisions of Articl es 31 and 32 of the KAMCO Act and apologizes for 
the error in the reference in para. 308 of its written submission. Still, the KAMCO Act does provide 
for the realization of profits through the fees and sales margin in performing its services and the 
income arising from operation (Artic le 31) and provides for the settle ment of dividends after reserves 
are made (Article 32). 
 
21. Please provide the basis for Korea’s statement in its submission (para. 323) that 
“circumstantial evidence” cannot be used to de monstrate entrustment or direction of a private 
body pursuant to Article 1.1(a )(1)(iv) of the SCM Agreement. 
  The Panel in US – Export Restraints  stated the following: 
 
It follows from the ordinary meanings of th e two words “entrust” and “direct” that the 
action of the government must contain a notion of delegation (in the case of entrustment) or command (in the case of direction). To our minds, both the act of 
entrusting and that of directing therefore necessarily carry with them the following 
three elements: (i) an explicit and affirm ative action, be it delegation or command; 
(ii) addressed to a particular party; and (iii)  the object of which action is a particular 
task or duty. In other words, the ordinary meanings of the verbs “entrust” and “direct” 
comprise these elements – something is necessarily delegated, and it is necessarily delegated to someone; and, by the same token, someone is necessarily commanded, 
and he is necessarily commanded to do something. We therefore do not believe that 
either entrustment or direction could be said to have occurred until all of these three 
elements are present.
2 
Korea agrees with the above analysis by the Pane l and has, accordingly, stated in para. 323 that 
challenges cannot be made on the basis of vague ci rcumstantial evidence that does not amount to an 
explicit and affirmative action.  Thus, as Korea noted  in response to the Panel in the First Substantive 
Meeting, while paragraph 323 may be too categorical, wh at is certainly the case is that very firm and 
persuasive evidence must be presented by the compla inant to carry the substa ntial burden of proving 
the three elements necessary to demonstrate entrustm ent and direction.  While circumstantial evidence 
may be legally recognized, a great deal of firm and persuasive circumstantial evidence must be 
presented in the face of a total lack of direct evid ence.  In paragraph 323, Korea was reacting to the 
utter lack of proof in the EC’s submission – either  direct or circumstantial – which has carried over 
into the First Substantive Meeting.  Instead of offe ring real proof, whether circumstantial or direct, the 
EC has offered vague assertions based in large part on grotesque and discredited stereotyping. 
 
22.  If there is no subsidy where a creditor ba nk becomes owner of a company (as argued in 
para. 319) what is the purpose of the term “equity infusion” in Article 1.1(a)(1)(a) of the SCM 
Agreement? 
 
 This question does not make any sense as there is a logical disconnect in the middle of it.  
Equity infusions are legally distinct from debt-for-equi ty swaps.  There are also differences in their 
practical effect.  So called “equity infusions” often are covers for direct subs idies to cover operating 
losses.  For example, over a long period of time th e French government has made so called equity 
infusions into their aircraft engine company, SN ECMA.  The purported capital calls generally were 
mere shams reflected by the unwillingness of privat e minority shareholders to respond.  Thus, the 
“purpose” of the term equity infusion is to cover such sham direct contributions of funds to cover 
operating losses.  
  The issue in a debt for equity swap is differe nt. In such cases, where the company is insolvent 
and therefore in the hands of the creditors, the swap reflects a change in form of financial instrument. 
                                                     
 
2 Panel Report, US – Export Restraints , para. 8.29.  WT/DS273/R 
 Page D-101 
 
 
The creditor financial institutions were holding debt  and the issue was what they could do with the 
debt in order to maximize their return. More specifi cally, the creditors were holding debt in distressed 
companies in a country facing a financial crisis. The EC’s odd diversion at the First Substantive 
Meeting into an elementary description of the diffe rent characteristics of the two forms of financial 
instruments (debt and equity) was completely beside the point. There is no logical relationship of 
debt-equity swaps to the term equity infusion. 
 
23. In light of the same para. 319, is it Korea’s position that a government can never 
subsidize a state-owned company? 
  No. As noted above, a government holding cash th at makes an equity infusion into a state-
owned company is making a financial contributi on to the company.  Whether the financial 
contribution is a subsidy depends on whether a benefit is conferred to the recipient. 
 
24. In Annex V question Nr. 3.1(12), the EC asked Korea to provide a complete list of 
creditors in: (i) DHI as of August 1999; (DSME), DHIM, and DHI as of mid-October 2000 (i.e., 
before the debt-for-equity swap); and (iii) DSME , DHIM, and DHI as of December 2000 (i.e., 
following the debt for equity swap). In response,  Korea refers to attachme nt 3.1(12). However, 
that attachment does not contain all the informat ion. Thus, Korea did not provide the data on 
sub-questions (ii)-(iii). In response to a follo w-up question Korea maintained that it had 
provided all the requested information. However,  the EC has never received it. Please provide 
the missing information.  
 
 Korea’s Annex V Attachment 3.1.2(12) contains all
 the information requested by the EC. In 
any event, Korea will provide again the data on sub- questions (ii) and (iii) requested by the EC. ( See 
Korea’s Annex V Attachment 3.1(12) attached hereto as Exhibit Korea - 69).  
 
25. Please provide a breakdown for each DHI creditor between secured and unsecured 
claims. (Not just for DSME creditors so that the Panel can assess the interest of each creditor in 
restructuring or liquidation.)  
 
 Korea has already provided the data on DSME  creditors. Beyond that, the “interest of each 
creditor in restructuring or liquidation” can be c onfirmed by the Arthur Andersen’s workout report 
and the decisions of the CCFI to adopt the proposed workout plan.  
26. Please provide the dates on which KAMCO purchased non-performing loans from each 
creditor. In your answer, please distinguish betw een the foreign and the domestic creditors. 
 
 [BCI:  Omitted from public version.
] 
 
27. Please identify those creditors that refused to participate in the workout.  
 
 The question is not clear which “creditors” a nd which “workout” it refers to. If the EC meant 
the financial institutions which did not sign the Co rporate Restructuring Agreement (CRA), a workout 
framework agreement, they were 231 mutual savi ngs banks, 1,592 credit unions, and 47 branches of 
foreign banks.  28. What was the market value of the warrants issued to foreign creditors of Daewoo-HI, as 
described in para. 358 of Korea’s submission? 
 
 No information is available to the Government of Korea.  The EC is in a better position than 
the Government of Korea to develop that inform ation from the foreign creditors.  Korea notes again 
that the information the EC would develop in th is regard would be new evidence and would be 
inadmissible absent good cause.  Korea reserves its rights in this regard. WT/DS273/R 
Page D-102  
 
 
29.  Korea states in para. 356 that foreign lenders were able to obstruct the workout 
procedure, even though they held a minori ty stake among creditors?  Why did not {sic} 
domestic creditors also have this ability? 
  The domestic creditors did have the ability to  obstruct the workout process within the creditor 
committee. And, indeed, the first Daewoo reorganiza tion plan was rejected by a blocking minority of 
creditors during the early meetings of the credito r committee. Nevertheless, domestic creditors were 
also conscious that, if they pursued an obstructiv e path, the workout company’s financial conditions 
would rapidly deteriorate and would always be th rown into the insolvency procedures. During the 
financial crisis, this woul d have inevitably led to the collapse of the whole national economy and there 
would be no financial institution that could survive. Therefore, they decided not to pursue legal means 
on their own or to seek individual repayment (i.e . outside of the process) by agreeing to the CRA 
workout process. From a commercial point of view, this  was the best option for them to take to avoid 
their own demise. 
 
30. Please provide citations or other evidentiary support, other than Korea’s own Annex V 
answers, for the statement in para. 385 of Ko rea’s first submission that the purchasing 
conditions for debts of foreign and local creditors were “slightly different.” 
 
 For more detailed information on this question,  please refer to Korea’s response to the Panel’s 
Question No. 80.  
 
31. Korea argues that foreign banks do not understand the Korean system sufficiently to 
participate in a work-out proceeding and ca n therefore not be considered as benchmark.
3  Why 
does then the Corporate Restructuring Promotion Law of August 2001 which “replaced” the 
Corporate Restructuring Agreement by creating  a statutory legal framework for workouts4 – 
also include obligatorily foreign creditors in any future workouts. Have foreign creditors suddenly been considered more understanding? 
 
 Korea regrets that the EC continues to feel  it necessary to inject such sarcasm into its 
questions.  As stated in Article 1 (Purpose) of  the Corporate Restructuring Promotion Act of 
August 2001 (the “CRPA”), the main purpose of this Act was to “facilitate a continuous and market-
oriented corporate restructuring by prescribing th e matters necessary or required for implementing 
corporate restructuring in swift and orderly manner” . (See
 Korea’s Annex V Attachment 2.2(16)). 
To achieve this purpose, the CRPA created a statut ory legal framework for workouts which had been 
regulated by the CRA. 
 
 In line with the stated purpose of facilitating the corporate restructuring (workout) in a more 
orderly manner, the CRPA has included in the Counc il of Creditor Financial Institutions (“CCFI”) all 
“financial institutions” which operate in Korea und er Korean law, including domestic branches of 
foreign financial institutions and mu tual savings banks which had not participated in the former CRA. 
However, the CRPA also allows financial institutions  to withdraw from participation in the CCFI or 
individual workout procedures if they so wish: First, the CCFI can exclude from the CCFI 
membership small creditors which hold less than a cer tain percentage of the total loans, not exceeding 
5 per cent of the total outstanding loans extende d by all the CCFI members (CRPA, Article 25). 
Second, any creditor financial institutions that object  to the proposed initiation of a particular workout 
procedure or to the proposed debt restructuring in  the workout procedure, are entitled to exercise an 
appraisal right whereby such objecting creditors can  request the CCFI (which approved the proposals) 
                                                      
3 First Written Submission of Korea, para. 378. 
4 See response to question 16, page 39 of Korea’s Annex V Response and Attachment 2.2(16) of 
Korea’s Annex V Response.  WT/DS273/R 
 Page D-103 
 
 
to purchase the debt held by the objecting creditors at a certain negotiated or appraised value (CRPA, 
Article 29).   In sum, although the CRPA expanded the general scope of financial institutions participating 
in the workout framework, any foreign or domestic financial institutions which hold a small portion of 
debts or which are only interested in immediate coll ection of their loans at a reduced value, rather 
than long term recovery through workout, can still refuse to participate in the CCFI or in the particular 
workout plan. In this regard, it can be said that th ere is no substantial diffe rence between the former 
CRA and the present CRPA.  32. Please clarify where the shipbuilding industr y is accounted for in the table provided in 
para. 392 of Korea’s first submission. 
 
 The shipbuilding industry is included in Machinery/Plants.    33. With respect to the Rothschild Report ref erred to in para. 413 of Korea’s first 
submission, please provide the Rothschild valuation  report, in its entirety. (So far Korea has 
provided the valuation for the shipbuilding division). 
 
 We understand that the “Rothschild Report” in th e above question refers to both the ‘Proposal 
of Restructuring of Halla Group ’ dated June 1998 (Korea’s Annex V Attachment 3.2(47)-1; Exhibit 
EC - 81) and the ‘Final Proposal for Restructur ing of Halla Group’ date d 8 September 1998 (Korea’s 
Annex V Attachment 3.2(47)-2; Exhibit EC - 75). As these titles indicate, such Rothschild Report was 
in fact a compilation of the discrete reports rela ting to 4 independent Halla Group companies: Mando 
Machineries, Co., Halla Cement, Co., Halla Constr uction, Co., and Halla Heavy Industries (“Halla-
HI”). 
 
 Korea has provided all available reports of Rothsch ild to the extent that they relate to ‘Halla-
HI’ which was the only Halla Group companies at issue in this dispute. [BCI:  Omitted from public 
version.] 
 
34. Please state whether other companies were gi ven the opportunity to manage and take an 
option over Halla in the same way as Hyundai?  
 The Government of Korea has no information in this regard. 
 
35. Please specify the price for the call option paid by Hyundai?  
 
 [BCI:  Omitted from public version.] 
 
36. According to para. 460 of Korea’s submissi on, five companies submitted final offers to 
invest in Daedong. Were any of these companies foreign companies? 
  The KPMG carried out an international bidding for sale of Daedong. Therefore, foreign 
investors may have possibly been included in the five final bidders. However, it is impossible to confirm any further information. There was c onfidentiality agreement between KPMG and the 
bidders.  37. Korea states in paragraph 475 of its submission that it was fully responsive to the EC’s 
questions regarding Daedong’s unsecured credito rs. The EC disagrees. Please provide specific 
information regarding the creditors that held 58.94 per cent of the unsecured debt Annex V attachment 3.3(54) (also Exhibit EC - 93) does not provide any information about these creditors, but simply lists them as “general commercial claims”. Were any of these commercial WT/DS273/R 
Page D-104  
 
claims held by foreign creditors? If so, how di d these foreign creditors vote with respect to the 
reorganization?  
 
 Korea has provided full information on Daedong’s creditors, whether or not the EC agrees. 
[BCI:  Omitted from public version.] 
 
38. According to para. 458 of Korea’s submis sion, one of the shareholders of Daedong, 
Mr. Do-Sang Lee, agreed to a complete reduction in his shareholding ownership. What were the 
terms of this agreement? Why did Mr. Do-Sang L ee agree to treatment less  favourable than the 
other shareholders? How can Korea  argue that he acted in his own self-interest, as it does in 
para. 476, when he agreed to take a total loss of his investment?  
 
 [BCI:  Omitted from public version.]   Article 221(4) provides that at least 2/3 of the shares 
held by the shareholder who influenced the direct ors in the mismanagement of the bankrupt company 
shall be written-off. [BCI:  Omitted from  public version.] 
 
 [BCI:  Omitted from public version.]   At least in Korea, registering an objection to the 
stock write-off may be viewed as a shameful behavi our for a controlling shareholder and CEO of the 
bankrupt company.  In any event, Korea is not  in a position to comment on Mr. Lee’s personal 
motivation.  39. Can Korea confirm that the Korean Shipbu ilders’ Association uses a breakdown by ship 
types for categorizing the Korean shipbuilding pr oduction, which identifies four distinct ship 
types in the production of which Korean yards are particularly active, namely LNG carriers, 
tankers, containerships, bulk carriers?
5 
 
 The Korean Shipbuilders’ Association (KSA) uses different breakdowns of ships according to 
the diverse purposes of such breakdown. There is no reason for KSA to apply a WTO ‘like product’ definition when it generally describes the ship types in which the Korean yards are active. Moreover, 
as the Appellate Body found in Japan – Alcoholic Beverages , the definition of “like product” can 
differ according to the provision at issue.  This was confirmed in EC – Asbestos .  
 40. Is it true that after the take-over of Ha lla/Samho by Hyundai the management tried to 
renegotiate contract prices as Halla’s prices were seen as too low compared to Hyundai’s? 
 
 [BCI:  Omitted from public version.] 
 
41. In para. 579 of its first submission, Korea  lists the factors that it believes provide 
significant cost advantages for Korean shipyar ds, when compared with European shipyards. 
Notably missing from this analysis is the cost of  debt servicing, and the cost of maintaining and 
constructing facilities. Why does Korea exclude these important factors from its analysis? Do 
prices charged by Korean shipyards not take account of these costs? 
  As mentioned in the Annex V process, debt ser vicing costs and the cost of maintaining and 
constructing facilities are taken into account when Ko rean shipbuilders determine their sales prices. 
The analysis provided by Korea in para. 579 aimed at listing those elements of costs in which Korea 
has a significant advantage over the EC; debt servici ng and the cost of maintenance and construction 
of facilities is a cost that all shipyards overall need  to incur in order to maintain efficient production. 
 
42. Can Korea indicate to which extent the production value of Korean yards is hedged 
against currency exchange rate risks?  
 
                                                     
 
5 http://www.koshipa.or.kr/upload/english/industry.pdf  WT/DS273/R 
 Page D-105 
 
 
 Again, this is new evidence that the EC is attempting to derive to support its initial prima 
facie  case.  According to the DSU and the Panel’s Wo rking Procedures, the time is long past for the 
EC to attempt this.  Nonetheless, Korea notes th at some Korean yards do not hedge the currency 
exchange risk at all, while some others do hedge. For those who hedge against foreign exchange risks, 
the production values covered by the hedging vary from company to company and project to project.  
 
43. Can Korea indicate the typical time period  that elapses between first contacts with an 
owner or broker and the actual signing of a shipbuilding contract?  
 
 There is no typical time period. It ranges from several months to more than one year after receipt of inquiry, depe nding on the projects. 
 
44. Can Korea confirm the exact price fo r the Nigerian LNG carriers from Hyundai 
mentioned in para 561 of the Korean submi ssion (only a price range is indicated)?  
 
 Why does Korea claim that Hyundai is non- subsidized? It has taken over Halla and 
benefits from the subsidies granted through these transactions? 
 
 The Government of Korea does not know  the exact price for the Nige rian LNG carriers from 
Hyundai.  Moreover, Korea notes the EC has expr essly rejected price undercutting arguments.  The 
price on an individual sale is, therefore, not legally relevant to the EC’s claims.   
 
The EC again fails to apply the correct conse quences of the WTO case-law indicating that “any 
analysis of whether a benefit exists should be on ‘legal or natural persons’ instead of productive 
operations.”
6  As part of the Halla reorganization process,  the stockholders lost their shares in Samho 
(first change in ownership); subsequently, the cred itors who owned Samho sold all of their shares to 
Hyundai (second change of ownership). Therefore, Hyundai obtained no benefit. 
 This is the first time that the EC alleges Hyunda i to have been “subsidized”. Moreover, the EC has 
never alleged that the purchase of Samho by Hyundai was anything but an arm’s-length transaction.   
45. Is the market share analysis given in para . 595 based on number of ships, rather than 
tonnage or cargo carrying capacity? If so, why was this particular indicator chosen?  
 The market share analysis provided is based on CGT.  
                                                     
 
6 Appellate Body Report, US – Countervailing Measures on Certain Products from the EC , para. 110. WT/DS273/R 
Page D-106  
 
 
ANNEX D-5 
 
 
COMMENTS OF KOREA ON RESPONSES BY THE 
EUROPEAN COMMUNITIES TO QUESTIONS 
FROM THE PANEL 
 
 
(22 March 2004) 
   
I. QUESTIONS TO THE EC 
 
A. GENERAL  
1. What makes an entity a public body?  Is the power to regulate and tax a necessary and 
sufficient condition to qualify an entity as a public body? 
  Korea would like to refer to the position which the EC itself took in US – Export Restraints  in 
which it stated that:  
“Public bodies” are types of emanations of the government, without necessarily equalling the “government” proper. Their sp ecific characteristic is the (at least 
occasional) exercise of public authority
 (imperium).1 
2. Para. 83 of the EC's first written submission describes the purpose of permitting 
prospective challenges against mandatory legisl ation.  What would be the purpose of 
prospective challenges against non-mandatory legal instruments?  What would Members protect themselves against by bringing a prosp ective challenge against another Member's law 
that allows, but does not require, the grant of prohibited export subsidies? 
 
 Korea submits that in the case of discretiona ry legislation, the benefits accruing to WTO 
Members under the WTO Agreements are not impa ired in the terms of Article 3.3 of the DSU .  
Challenging a discretionary legisla tion would be tantamount to be pr esuming bad faith on the part of a 
WTO Member. In practice, in cases of doubt on the implementation of the said discretionary 
legislation, Article 25.8 of the SCM Agreement  provides a WTO Member with an instrument to seek 
information on the manner in which the legisla tion concerned is implemented and to discuss the 
matter in order to make certain that the implemen tation of the said legislation is WTO-compliant. 
 
4. What is the basis for interpreting Article 3.2 in a manner that prohibits legislation 
containing a discretion to provide prohibited export subsidies? 
 
 Korea refers to and supports the position take n by the USA in para. 12 of the third-party 
submission which the USA entered on 9 Februa ry 2004 and which stated the following: 
 
With respect to Article 3.2 of the SCM Agreement , the EC emphasizes the phrase 
“neither grant nor maintain,” asserting that the word “maintain” would have no 
meaning if legislation providing for the discretionary grant of subsidies was not 
                                                     
 
1 Panel Report, US – Export Restraints , Annex B-3, para. 12.  WT/DS273/R 
 Page D-107 
 
 
prohibited.2  Accepting for purposes of argument (1) the EC’s definition of the word 
“maintain” as “cause to continue,” and (2) th e notion that “maintain” refers to subsidy 
legislation rather than a “subsidy”  itself, the application of the 
mandatory/discretionary distinction to  Article 3.2 does not render the word 
“maintain” meaningless.  The word “grant ” can be construed as applying to actual, 
discrete bestowals of subsidies under subsid y legislation – “as applied” situations – 
while the word “maintain” can be cons trued as applying to the enactment of 
legislation that mandates the “grant” of pr ohibited subsidies, thereby causing such 
subsidies to continue – “as such” situations .  Under this approach, legislation that 
conferred discretion to bestow subsidies would not run afoul of either term insofar as 
an “as such” challenge is concerned. 
B. KEXIM LEGAL REGIME 
 
6. Is the EC of the view that finance / guarantee measures provided under the KEXIM 
legal regime would necessarily be inconsistent  with Articles 3.1(a) and 3.2 of the SCM 
Agreement?  Please explain.  
 Korea will await the position of the EC in this regard but, at this stage, wishes to point out 
that even if it were considered that the KEXIM legislation mandates giving export assistance (which 
Korea disputes), this still is not incompatible with  Articles 3.1(a) and 3.2 as no benefit is afforded. 
Further, specific grants of financing and guara ntee measures are not inconsistent necessarily with 
Articles 3.1(a) and 3.2. In fact, the EC did not and could not argue that all of the APRG/PSL grants 
were subsides although Korea provided data on these grants. 
 7. The KEXIM 2002 Annual report (Exhibit EC- 14) contains a chapter entitled Bank 
Operations.  That chapter refers to a decline in KEXIM's export credit business. It states that 
"[m]ajor Korean exporters were reluctant to u se bank loans, instead they preferred raising 
funds from direct markets which was possible due to their successful corp orate restructuring".  
Does this suggest that KEXIM's export credit term s are less attractive to Korean exporters than 
the terms for competing financing fr om other sources?  Please explain. 
 
 Yes, KEXIM export credits are now less attractive. This is demonstrated by the fact that Korean shipbuilders are now using KEXIM preship ment loans for a small portion (approximately 
20 per cent) of their shipbuilding projects. Moreove r, some Korean shipbuilders are never using the 
KEXIM preshipment loans at all.  8. Para. 122 of the EC's first written submi ssion states that the KEXIM legal regime, as 
"confirmed by KEXIM practice", provides for the grant of subsidies.  Is the EC challenging "KEXIM practice" as well as the KEXIM legal regime as such, or does the EC rely on evidence regarding "KEXIM practice" in support of its claim against the KEXIM legal regime as such?  
If the latter, please explain how evidence regarding  "KEXIM practice" is relevant to the Panel's 
assessment of whether the KEXIM legal regime as such  is, or is not, in conformity with the SCM 
Agreement.  
 In the opinion of Korea, para. 131 of the EC’s  first written submission confirms that the EC’s 
assertions are based both on the legal regime and the a lleged practice and that the EC considers that it 
cannot rely on the legal regime alone. Indeed, the EC states that “[t]hese factors, when considered 
together with the record of KEXIM financing detailed below , establish that the KEXIM Act, Decree 
and Interest Rate Guidelines provide  for WTO-inconsistent actions.”  
 
                                                      
2 EC’s First Written Submission, paras. 79-80. WT/DS273/R 
Page D-108  
 
 At a different level but based on the same argument, Korea reiterates that the EC has never defined the so-called KEXIM APRG and pre-shipment loans other than by the individual instances in 
which APRGs and PSLs were issued to shipbuilders.  C. APRG PROGRAMME 
 
9. How does the EC's claim against the "APRG programme" as such differ from its claim 
against the KEXIM legal regime as such? Isn't the "APRG programme" based on the KEXIM legal regime? Is it conceivable to assess on e of them differently from the other? 
  As mentioned above, Korea considers that the EC has never defined what the APRG 
programme really is in terms of statutory frame work. Beyond that, however, the conditions at which 
APRGs can be afforded are set forth in the KEXIM Interest Rate Guidelines which, in accordance 
with the EC’s own arguments, are part of the KE XIM legal regime that is challenged as such.  
 
D. PSL PROGRAMME 
 
11. How does the EC's claim against the "PSL programme" as such differ from its claim 
against the KEXIM legal regime as such?  Isn't the "PSL programme" based on the KEXIM legal regime? 
  Korea refers to its comments in relation to Qu estion 9 above which equa lly applies as regards 
the PSLs.  F. ACTIONABLE SUBSIDIES  16. In its third party submission in the US – Export Restraints case, the EC argued that 
there is no government entrustment or direction in  a case where freedom of action is "limited", 
but not "curtailed", i.e., where "the producer ca n still make choices".  Does the EC consider 
that the freedom of action of private financial institutions participating in the restructuring 
process was (i) "limited" or (ii) "curtailed"?  Were those companies able to make choices 
regarding their participation in the restructuring process?  Please explain. 
 
 In the same vein, Korea would like to mention the EC’s response to a question raised by the 
Panel in US – Export Restraints : 
  (b) Why would the “pre-determined conditions” have to exist in order for a private body 
to be carrying out a function normally vested in a government? 
  As already explained by the EC in its Written Submission, the actions contemplated by 
Article 1.1(a)(1)(iv) of the SCM Agreement  are not “expansive”, but limited to those 
enshrined, for governments or public bodies, in subparagraphs (i) to (iii) of the same Article. 
 
 Therefore, the determining factor for a private body carrying out the functions normally 
vested in the government  and the practice differing, in no real sense, from practices normally 
followed by governments  (which is the full text of the releva nt part of Article 1.1(a)(1)(iv) of 
the SCM Agreement ) is that the private body must, through government direction, perform 
materially the same function as would otherwise be carried out by the government itself – and 
caught by Article 1.1(a)(1)(i)(iii) of the SCM Agreement . 
  Now, when a government decides to provide a subsidy to a certain industry or part of an 
industry, the government will decide in advance the kind of action it wishes to take, the class 
of beneficiaries it wishes to reach and the extent of the “benefit” it wishes to confer. The same 
standard must apply in the case of an ‘indirect subsidy’  with the government predetermining,  WT/DS273/R 
 Page D-109 
 
 
through regulatory means, essentially the same conduct for the private body, and the same 
result for the beneficiary industry, than th e government would otherwise “directly” have 
implemented itself. 
  Only if such pre-determination exists, will the private body become a quasi-emanation of the 
government. Only then will it carry out a subs idizing function “normally vested in the 
government”, and only then will the practice “in no real sense differ from practices normally followed by governments”. In the EC’s view, ther efore, the existence of (government) “pre-
determined conditions” is a sine qua non  for the existence of an indirect financial contribution 
in the sense of Article 1.1(a)(1)(iv). 
 
 Korea submits that the Government of Korea has not predetermined the kind of action that 
private banks had to take when participating in co rporate restructuring, which specific companies had 
to go in corporate restructuring or the extent of th e benefit (if there were one, which Korea denies) to 
confer. The private creditors of DHI, Halla and Daedong freely determined whether to apply for 
workout or corporate reorganizati on and which measures to take in the corporate restructuring. The 
many creditor meetings and the opposition of pr ivate creditors to initial restructuring plans 
demonstrate that there were no pre-determined conditions of such a nature that there was direction or entrustment on the part of the Korean Government vis-à-vis the private creditors participating in the 
corporate restructuring.  17. Are you arguing in paragraph 73 of your oral  statement that the banks that participated 
in the Corporate Restructuring Agreement ther eby legally committed themselves up front to 
follow the direction of the government?  Did such undertaking(s) by the banks affect all
 of the 
restructurings referred to in your complaint?  Please elaborate and provide specific evidence. 
  The fact that creditors opted for a corporate reorganization in the case of Halla and Daedong 
rather than for a workout demonstrates that the ba nks that participate in the CRA did not commit “to 
the workout as the solution for bankruptcy” as is stated by the EC in para. 73 of its oral statement.   The CRA aims to achieve the promoti on of workouts as an accelerated means for 
restructuring in accordance with Korea’s negotia tions with the IMF. Nevertheless, nothing in 
Articles 1, 2 and 20 referred to by the EC entails any waiver by the domestic banks from their rights 
to act independently. In particular, the penalty provide d in Article 20 does not relate to a breach of the 
CRA itself but would apply if a creditor institution wh ich freely entered into a workout plan failed to 
implement the workout plan. It is a penalty for a contractual default but not a penalty in case the financial institutions failed to  participate in a workout. 
 
20. The EC asserts (first written submissi on, para. 281) that KAMCO purchased non-
secured loans held by foreign creditors of DHI on  terms more favourable than those offered to 
domestic creditors.  How is this relevant to the Panel's examination of the issues of whether or 
not there was a  financial contribution a nd benefit to the restructured company? 
  Korea also refers to the response it provides to  Question 80 of the questions addressed to it by 
the Panel.  
24. Where a government entity is a creditor of  an insolvent company being restructured, 
will the restructuring always
 result in a subsidy?  Why or why not? 
 
 As long as the government – creditor behave d according to commercial standards, the 
restructuring does not constitute a subsidy.  WT/DS273/R 
Page D-110  
 
G. SERIOUS PREJUDICE  
27. Korea argues that there is considerable variation  or diversity of products within each of 
the product segments proposed by you, meanin g that these product segments are too broad and 
should be broken down, for example, at least in to different size ranges.  Please comment on the 
diversity of products within each of the produc t segments that you propose, and in this context 
please respond specifically to Korea 's arguments on this point. 
 
 With regard to Questions 25, 26 and 27, Korea refers to the responses which it provided to questions 86 and 87 that were raised to it by the Panel. 
 
29. You argue that there are three mark et "segments" relevant to your price 
suppression/depression claim: LNGs, chemica l/product tankers, and container ships.   
  (a) Is the implication of this that in your view, price suppression/depression should 
be found in respect of each of these segments separately?   
  (b) If so, what is the relevance of figure s 33-36 of your submission?  That is, please 
explain what conclusions about price and cost trends in respect of the particular kinds of ships referred to in your claim can be drawn from these graphs, which appear to represent averages for all
 ships of all  types.   
 
 Where there are different like products as stat ed by the EC or for like products as submitted 
by Korea, price depression or suppression must be established for each of those separately. Where no 
significant price depression or suppression is found for one or more of them, then no adverse effects can be found for that like product and no remedy should be adopted as regards that like product. 
Therefore, the burden of proof lies on the EC not only to determine, as is argued by Korea, the like 
product but also to prove the existence of price depression or price suppression for each like product separately. The graphs submitted by the EC reflect ship types as diverse as cr uise ships, RoRos, bulk 
carriers, container vessels, L NGs, pure chemical tankers and pr oduct and chemical tankers, etc. 
without evidentiary nature for the price depressi on or suppression of each of the three ship types 
concerned. 
 
 (c) Do you agree with Japan's argument that a low price for any individual 
transaction will put downward pressure on all
 types of ships, whether 
substitutable or not?  If so, why?  Does a decline in the price of a ship of a certain type, for instance a container ship, cause a decline in the price of a ship 
of another type, e.g., a tanker or passen ger ship? Is it not more defensible to 
argue that a decline in the price of one ship causes a decline in the price of another ship with the same end-use? 
 
 We do not agree with this statement from Japan for several reasons.    
 First, shipping markets, e.g., product tanke rs for carrying oil and containers vessels are 
discrete segments, which operate with  no possibility of vessel substitution.  It is also the case that each 
market will follow its own freight cycle, due to un derlying movements in vessel supply and demand.  
Furthermore, it is rare for individual markets to be at the same stage in the development of the freight 
cycle (increasing or decreasing).  The freight cycle is important, in that it influences the level of 
earnings for the ship owner and in turn this will ha ve a bearing on new ordering levels. Normally, in a 
strong freight market new ordering will rise.     From the shipbuilders perspective it is not  uncommon to witness a situation where new 
ordering for one type of ship is strong, but for a nother weak. As such, it does not follow that if new  WT/DS273/R 
 Page D-111 
 
 
ordering in one sector is weak and a builder accepts a “low” price, that price in other sectors (where 
ordering levels maybe stronger) would be under downward pressure.     In fact, there are examples of where ship pr ices by sector move in opposite directions, due in 
the main to differences in demand for individual  ship types.  For example, between 1998 and 1999 
newbuilding prices for oil tankers of all types fell, while prices for bulk carriers of all types rose. Even 
in individual market sectors, e. g., oil tankers, there will be diffe rences in price changes between one 
vessel type and another due to the existence of diffe rent specifications even wi thin the same type of 
vessels as stipulated by Korea.  
 Second, most shipbuilders and owners are aware that a price for a ship will be determined by 
many factors, not least of which are the vessel’s physical specifications, yard material, labour and production costs and exchange rates.  One transaction in isolation does therefore not set a trend for the 
industry as a whole. Although it is true that the “l ast quoted price” will have a bearing on the next 
subsequent order for that particular ship type, provi ded the ship is of a similar specification. However, 
the influence of “last business” will not necessarily extend to all other ship types within a sector and 
certainly not across all fleet sectors.   Third, in a typical year between 1,500 and 2, 000 new orders (for all commercial ship types) 
will be placed with the world’s shipbuilders.  Th ere is no established mechanism for making the 
prices of these contracts known publicly; indeed many are concluded on private and confidential 
basis.  In short, shipbuilders will not be aware of ev ery price transaction, so it is illogical to argue that 
a single transaction can set a price trend for the whole industry.  
 (d) Is it not more defensible to argue that a decline in the price of one ship causes a 
decline in the price of another ship with the same end-use? 
 
 Within fleet sectors there is some crossover between individual segments.  For example, a suezmax tanker at the low end of the suezmax si ze spectrum may at times compete with larger 
aframaxes for cargoes.  However, a VLCC does not compete with a handy tanker.   Overall, if the newbuilding price for a VLCC is either falling or rising it will have a bearing 
on price trends in other adjacent oil tanker segment s. Movements in newbuilding prices between ship 
types in a sector are not always uniform.  Once again,  the reason being that there will be differences in 
demand for individual ship types within a sector.  
34. As a general matter, please describe the preci se nature of the analysis that you believe is 
required to establish serious prejudice through price suppression/price depression, including 
the following issues:     (a) Must there be (at least inter alia ) a demonstration that the prices for the 
complaining party's products have been s uppressed or depressed, or is the focus 
of the analysis instead the prices for th e allegedly subsidizing party's product?  
Or are both sets of prices relevant?   
  (b) How if at all should these two sets of prices be juxtaposed against or related to 
one another?   
 
 (c) How similar must the complaining party's and allegedly subsidizing party's 
products be?   
 
 Korea refers to the response it is submitting to Qu estion 91 of the questions raised to it by the 
Panel. 
 WT/DS273/R 
Page D-112  
 
38. In arguing, on the basis of US – Norwegian Salmon CVD
 and Article 15 of the SCM 
Agreement that an " a cause" standard is sufficient for a finding of serious prejudice, are you 
implying that the causation standard for s erious prejudice is the same as that for a 
countervailing measure?  If so, what is the textual basis for such an argument?  If not, what is 
the relevance to this dispute of either SCM Article 15 or the standard applied by the Salmon 
CVD  panel?  In this context, please respond to th e US comment pointing to the difference in 
drafting between SCM Article 6.3(c) and SCM Article 15 ("the effect of the subsidy  [...]" versus 
"the effects of the subsidized imports [...]", respectively).   
 
 Korea refers to the response which it is submitti ng to Question 90 of the questions raised to it 
by the Panel. 
 
41. Please respond to Korea's argument that the effect of any alleged subsidy must be 
"current", and thus that past subsidies should  not be taken into account unless they can be 
shown to have such a current effect.   
 
 Korea refers to its response to Question 83 of  the questions raised to it by the Panel. 
 
45. Please comment on China's argument, in par agraph 46 of its written submission, that if 
the total amount of a subsidy is ten dollars only, it cannot be successfully demonstrated that the 
effect of such a subsidy is to significantly  suppress or depress the price of a one-billion-dollar 
vessel.    
 With respect to questions 44 and 45, Korea refers to its response to Question 91 of the questions raised to it by the Panel.