RESTRICTED  WORLD TRADE  
ORGANIZATION  WT/DSB/M/187 
25 April 2005 
 (05-1683) 
Dispute Settlement Body 
11 April 2005  
 
 
 
MINUTES OF MEETING 
 
Held in the Centre William Rappard  
on 11 April 2005  
 
Chairman:  Mr. Eirik Glenne (Norway) 
  
 
1. Korea – Measures affecting trade in commercial vessels 
(a) Report of the Panel (WT/DS273/R) 
1. The Chairman  recalled that at its meeting on 21 July  2003, the DSB had established a panel to 
examine the complaint by the Euro pean Communities pertaining to this matter.  He noted that the 
Report of the Panel contained in WT/DS273/R had been circulated on 7 March 2005 as an 
unrestricted document, pursuant to the Procedures  for the Circulation and Derestriction of WTO 
Documents contained in WT/L/452.  The Panel Re port was now before the DSB for adoption at the 
request of Korea.  This adoption procedure was w ithout prejudice to the right of Members to express 
their views on the Panel Report. 
2. The representative of  Korea  said that his country wished to thank the members of the Panel 
and the Secretariat for their hard work in this complex and difficult case.  He recalled that the 
proceedings in this case had been complicated by the passing away of Mr. Said El-Naggar, the 
original Chairman of the Panel.  Mr. S. El-Na ggar's intelligence, professionalism and personal warmth 
were all evident in this case and he would be gr eatly missed. Fortunately for the parties and the 
dispute settlement system, Mr. Julio Lacarte-Muró had b een willing and completely able to step in to  
assume the duties as Chairman of the Panel.  Korea was deeply grateful for his assistance and for the 
fine work that he and other panelists had done. 
3. Korea was satisfied overall with the results  of these proceedings.  The issue of the 
restructuring was at the heart of the case that the EC had been pressing for years.  As Korea 
maintained, no subsidization had taken place rega rding the restructuring of certain Korean 
shipbuilding companies as a result of the Asian financ ial crisis.  The IMF had previously stated that, 
as a general matter, Korea had done a good job of rest ructuring its financial sector on the basis of 
market principles.  It was also noted generally that  the restructurings of companies with much debt 
held by the domestic financial sector, had been based  on market principles.  The Panel had found that 
the specific restructurings at issue were market-b ased and did not involve subsidization.  Korea 
welcomed the rejection of the EC's allegations in th is regard.  The Panel had also rejected the EC's 
contentions that the KEXIM1 Act and advanced payment refund guarantees (APRGs) and pre-
shipment loans (PSLs) offered by KEXIM were e xport subsidies "as such".  The Panel had also 
determined that the APRG and PSL programs were no t, as a factual matter, covered by items (j) and 
(k) of the Illustrative List of Export Subsidies.  Korea accepted that factual finding, but believed that, 
the Panel could have simply halted at that point.  Instead, the Panel had continued with a hypothetical 
                                                      
1 The State-owned Export-Import Bank of Korea. WT/DSB/M/187 
Page 2  
 
analysis of the issue of the a contrario  reading of footnote 5 of the SCM Agreement and the so-called 
safe harbors that was in defiance of the Appellate Body's reasoning and had le nt more confusion than 
clarity to the interpretation of the Illustrative List .  Ultimately, it was not up to panels, the Appellate 
Body or the Secretariat to set the rules.  It w as the responsibility of WTO Members to do so.  Perhaps 
it was time for a more thorough review of the in terpretation and even continued viability of the 
Illustrative List. 
4. He noted that the Panel had found that certain  specific instances of APRGs and PSLs were 
export subsidies.  Korea did not agree with the Pa nel's approach or analysis on these issues.  In 
Korea's view,  the Panel had shifted the burden of  proof to the respondent regarding the issue of 
market benchmarks.  Moreover, the methodology adop ted by the Panel in determining the appropriate 
benchmarks did not reflect the commercial realities.  However, even with that flawed methodology, 
the Panel had only found a limited number of instanc es of subsidization.  Mo re importantly, the Panel 
had confirmed that these subsidies did not cause serious  prejudice to the interests of the EC within the 
meaning of Articles 5 and 6 of the SCM Agreement.   The Panel had come to this conclusion even 
though, in Korea's view, it had adopted several e rroneous interpretations of Articles 5 and 6.  
Nevertheless, these isolated instances were not suffi cient to have any significant effect on the EC 
shipbuilding industries.  Besides, all these instances of APRGs and PSLs were not only of de minimis  
levels, but were also historical since all such lo ans and guarantees had now been repaid or had expired 
and were no longer in effect.  Accordingly, Kor ea was in compliance and no further actions were 
necessary to implement the DSB's recommendations and rulings in this dispute.  Finally, Korea supported the adoption of the Panel Report by the DSB at the present meeting.  
5. The representative of th e European Communities
 said that the EC would first like to thank the 
DSB facilitator, the Panel and the WTO Secretaria t for their work devoted to this case.  The 
facilitator, which had been appointed by the DS B pursuant to Annex V of the SCM Agreement, 
Mr. A. Szepesi,  had managed to guide the parties through a delicate and complex exercise under Annex V of the SCM Agreement.  The EC also wi shed to pay particular respect to the late 
Mr. S. El-Naggar and his substantial work as Chairm an of the Panel.  This was a very long and, 
legally and factually, complex Report.  The Panel had managed to clarify novel and important aspects 
of the SCM Agreement.  In doing so, the Panel had followed in many respects, in its legal analysis, 
the views expressed by the EC during the proceedings.  At the present meeting, the EC would not enter into specific details, it only wished, however, to underline its complete disagreement with the 
Panel's use of the so-called "mandatory/discretionary" doctrine.  In that respect the Panel had failed to 
respond to many arguments raised by the EC, and ha d also misinterpreted the recent guidance of the 
Appellate Body on this issue. 
6. In terms of the actual facts, the EC was pleased  that the Panel had established that Korea had 
been providing illegal export subsidies to its industr y for many years.  These subsidies were in the 
form of loans and guarantees by the state-owned Export-Import Bank of Korea (KEXIM).  Such 
subsidies were instrumental in giving Korean  yards an unfair competitive advantage over their 
European counterparts.  However, the Panel ha d not supported the EC's claim concerning the 
subsidization of Korean yards through debt restructuring measures. Even though it had been established that substantial amounts of  debt held by three of Korea's most important shipyards were 
actually forgiven or otherwise restructured by st ate-owned and state-contro lled banks, the Panel had 
not, on the basis of the evidence available, conclude d that these measures were actionable subsidies.  
The EC noted its disagreement with that conclu sion, but acknowledged that given the extremely 
factual intensive nature of the case and the tight deadlines which applied under the DSU, the Panel's 
task was not easy in that respect. Considering that the EC had very strict internal state aid rules 
dealing with restructuring cases, the result was to a certain extent disappointing, because it appeared 
to give rise to difficulties in ensuring a "level pl aying field" between WTO Members.  However, the 
EC intended to continue its dialogue with Korea and other OECD Members with a view to finding a 
solution to the problem of injurious pricing in the shipbuilding sector.  For that reason, the EC had  WT/DSB/M/187 
 Page 3 
 
 
decided not to file an appeal despite its disagreem ent with the aspects of the Panel Report, which had 
been outlined above. 
7. With regard to the issue of implementation, the EC disagreed with Korea that there was 
nothing to be done.  Such a comment was quite  surprising since the Panel had made a clear 
recommendation imposing an obligation on Korea to w ithdraw its subsidies within 90 days.  The EC 
expected Korea to implement the recommendation w ithin the prescribed time-limit, in accordance 
with its obligations under the SC M Agreement and the DSU.  It would be for Korea to explain in 
detail after the 90 days period why nothing had to be done and the EC reserved all rights in this 
respect. 
8. The representative of the United States  said that the Panel Report in this dispute provided 
much food for thought, and the United States was still in the process of analyzing that Report. 
Furthermore, as a third party in this dispute, the United States was not in a position to comment on the 
Panel's ultimate findings.  However, there were a few striking aspects of the Panel's analysis on which 
the United States wished to offer some brief comme nts.  First, the United States wished to commend 
the Panel for its analysis and application of the manda tory/discretionary distinction.  In particular, the 
United States referred Members to the Panel's discussi on of the mandatory/discretionary distinction at 
paragraphs 7.60 to 7.64 of the Pa nel Report.  The Panel's analysis was thorough and workmanlike, 
and reached the correct conclusion that a measure coul d not be found to be inconsistent "as such" with 
a Member's WTO obligations unless the measure mandated WTO-inconsiste nt action or precluded 
WTO-consistent action.  
9. Unfortunately, there were other aspects of the Pane l Report that were deeply troubling.  First, 
there was the Panel's interpretation of the meaning of the phrase "entrusts or directs" under 
Article 1.1(a)(1)(iv) of the SCM Agreement.  The Panel's analysis of this phrase was set forth at paragraphs 7.365 to 7.372 of the Panel Report.  The Pane l equated the phrase "entrusts or directs" 
with the phrase "delegation or command".  However, the Panel's interpretation was inconsistent with 
the ordinary meaning of the terms "entrusts" and "d irects" in their context and in light of the object 
and purpose of the SCM Agreement.  The Panel's in terpretation was too narrow, and had resulted in 
improperly excluding from the disciplines of the SC M Agreement the range of actions by which a 
government might provide subsidies through private bodi es.  The United States noted that the Panel in 
the current "US - DRAMS"  dispute had applied the exact same in terpretation.  The United States had 
appealed the Panel Report in that dispute.  The US  appellant submission, which had been filed on 
5 April and was available on the USTR website, contained a thorough critique of the Panel's 
interpretation. 
10. Another problem with the Panel Report in "Korea - Vessels"  was the Panel's articulation and 
application of a "probative and compelling" evid entiary standard with respect to issues of 
"entrustment or direction".  The Panel had first set fo rth this standard at para graph 7.372 of its Report. 
The United States had no problem with the use of th e word "probative."  Indeed, the statement that 
evidence must be "probative" was tautological in that "evidence" was not "evidence" unless it was 
"probative" of some fact or conclusion.  Howeve r, the use of the word "compelling" was a totally 
different matter.  The Panel had not explained what it thought this word meant, but – notwithstanding 
that this phrase was nowhere to be found in th e SCM Agreement – dictiona ries defined "compelling" 
as meaning "irrefutable" or "overwhelming".  Thus , the Panel had appeared to be asserting that in 
order to prove a claim of government entrustment or  direction of a private body, a complaining party 
must present "irrefutable" or "overwhelming" eviden ce of entrustment or direction.  The Panel had 
never explained the source of the evidentiary standard  that it proclaimed.  There was no basis for such 
a standard in the SCM Agreement, the DSU or any other covered agreement. Again, the panel in "US 
- DRAMS" had taken the exact same approach as the Panel in "Korea - Vessels".   The United States 
had also appealed this issue, and it again referred interested Members to the US appellant submission 
in that dispute. WT/DSB/M/187 
Page 4  
 
11. The final problem that the United States wished to mention at the present meeting involved 
the Panel's analysis of footnote 13 of the SCM Ag reement, which provided that the term "serious 
prejudice" was used in the same sense as it wa s used in Article XVI:1 of GATT 1994.  At 
paragraphs 7.590 through 7.602 of its Report, the Panel had asserted that footnote 13 essentially 
codified the findings of the pre-WTO panels in the two Sugar Exports disputes brought against the 
European Communities by Australia and Brazil.  The United States would not engage in a thorough 
critique of this rather startling finding of the Panel.  Suffice it to say that ther e was absolutely no basis 
for the Panel's conclusion that by using the phrase "in the sense of" in footnote 13, the drafters of the 
SCM Agreement intended to codify pre-WTO panel reports involving claims of serious prejudice. 
Unfortunately, this aspect of the Panel's finding woul d not be subject to appeal.  However, the United 
States trusted that future panels and the Appella te Body would not follow the Panel's erroneous 
reasoning. 
12. The representative of Korea
 said that his delegation wished to briefly respond to a couple of 
points raised by EC and to one point made by the United States.  He recalled that the EC had stated 
that the specific APRGs and PSRs, found to be inconsistent by the Panel, had given Korea 
shipbuilders an unfair competitive edge.  In its statem ent, Korea had pointed out that that was not the 
case.  A close reading of the Panel's reasoning revealed  that there was really no meaningful effect at 
all from those isolated de minimis  transactions.  The EC shipbuilders could no longer blame Korea for 
their problems.  Another point raised by the EC to  which Korea wished to refer at the present meeting 
related to implementation.  In this regard, Korea had pointed out that the loans and guarantees, which 
had been found to be inconsistent by the Panel, had now been repaid or had expired and were no 
longer in effect.  Therefore, in Korea's view, it was not necessary to take any further action to 
implement the DSB's recommendations and rulings in  this dispute.  He noted that, after the 
establishment of the Panel to examine this case, it had taken one year and eight months to complete the proceedings.  The EC had also had recourse  to  the procedures under Annex V of the SCM 
Agreement and this had, in fact, added another six m onths to the process.  As a result, the Panel would 
now be adopted while the measures at issue had alre ady expired.  With regard to the reference made 
by the United States to the interpretation of "entrust ment and direction" standards, he said that, as the 
United States had pointed out, this was an important  issue in the proceedings of the "US - DRAMS" 
case currently under appeal.  At the present meeting, he did not wish to enter into any substantive 
discussion on this issue, but only to indicate that Korea looked forward to meeting with the United States during the Appellate Body proceedings regardi ng this matter.  Finally, Korea also wished to 
pay tribute to the contribution made by Mr. A. Szepesi, who had been appointed as the DSB 
representative pursuant to Annex V of the SCM Agre ement, and who had originally been suggested 
by Korea for this task. 
13. The DSB took note
 of the statements and adopted  the Panel Report contained in document 
WT/DS273/R. 
 
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