EUROPEAN COMMUNITIES – MEASURES AFFECTING TRADE IN COMMERCIAL VESSELS
Document: Report of the Panel
Date: 22 April 2005
Document codes: WT/DS301/R
Complainant: South Korea
Respondent: EU
Third parties: China, Japan, U.S.
Dispute stage: Panel
Agreements cited: Art. I:1, III:4  GATT 1994Art. 23  Dispute Settlement Understanding (DSU)Art. 4, 7, 32  Subsidies and Countervailing Measures (SCM)

EUROPEAN COMMUNITIES – MEASURES AFFECTING
TRADE IN COMMERCIAL VESSELS

Report of the Panel

I. INTRODUCTION
A. COMPLAINT OF KOREA
1.1 On 3 September 2003, Korea requested consulta tions with the European Communities ("EC")
and certain EC member States pursuant to Article 4 of the Understanding on Rules and Procedures
Governing the Settlement of Disputes ("DSU"), Article XXIII:1(a) of the General Agreement on
Tariffs and Trade 1994 ("the GATT 1994"), Article XXIII:1(b) of the GATT 1994 and Article 5(b) of
the Agreement on Subsidies and Countervailing Measures ("SCM Agreement"), and Articles 4, 7
and 30 of the SCM Agreement, with regard to measures affecting trade in commercial vessels. 1
Korea and the European Communities held consul tations on 9 October and 14 November 2003, but
failed to settle the dispute.
1.2 On 12 September 2003, China requested, pursuant to Article 4.11 of the DSU, to be joined in
the consultations.2
B. ESTABLISHMENT AND COMPOSITION OF THE PANEL
1.3 On 5 February 2004, Korea requested the estab lishment of a panel pursuant to Articles 6 of
the DSU and Article XXIII:2 of the GATT 1994. 3 At its meeting of 19 March 2004, the Dispute
Settlement Body (the "DSB") established a Panel in accordance with Article 6 of the DSU to examine
the matter referred to the DSB by Korea in document 4 At that meeting, the parties to
the dispute also agreed that the Panel should have standard terms of reference. The terms of reference
are, therefore, the following:
"To examine, in the light of the relevant provisions of the covered agreements cited
by Korea in document , the matter referred to the DSB by Korea in that
document, and to make such findings as will assist the DSB in making the
recommendations or in giving the rulings provided for in those agreements."
1.4 On 7 May 2004, Korea requested the Director-G eneral to determine the composition of the
Panel, pursuant to paragraph 7 of Article 8 of the DSU. This paragraph provides:
"If there is no agreement on the panelists within 20 days after the date of the
establishment of a Panel, at the request of either party, the Director-General, in
consultation with the Chairman of the DSB and the Chairman of the relevant Council
or Committee, shall determine the com position of the panel by appointing the
panelists whom the Director-General considers most appropriate in accordance with
any relevant special or additional rules or procedures of the covered agreement or
covered agreements which are at issue in th e dispute, after consulting with the parties
to the dispute. The Chairman of th e DSB shall inform the Members of the
composition of the panel thus formed no later than 10 days after the date the
Chairman receives such a request".

1 WT/DS301/1.
2 WT/DS301/2.
3 WT/DS301/3, attached as Annex.
4 WT/DS301/4.

1.5 On 13 May 2004, the Director-General accordingly composed the Panel as follows:
 Chairman: Professor William J. Davey

 Members: Professor Donald M. McRae
 Mr. Daniel Jacobus Jordaan

1.6 China, Japan and the United States reserved their rights to participate in the Panel proceedings
as third parties.
C. P
ANEL PROCEEDINGS
1.7 The Panel met with the parties on 3-4 August 2004, and on 5 October 2004. It met with third-
parties on 3 August 2004.
1.8 The Panel submitted its interim report to th e parties on 23 December 2004. The Panel
submitted its final report to the parties on 10 February 2005.
II. FACTUAL ASPECTS
2.1 This dispute concerns the European Comm unities' Temporary Defensive Mechanism for
Shipbuilding (the "TDM Regulation") set fort h in Council Regulation (EC) No 1177/2002, and
modified in product coverage and duration by No tice 2003/C 148/10 published on 25 June 2003 and
Council Regulation (EC) No 502/2004 of March 2004, respectively.
2.2 The dispute also concerns certain measure s of EC member States, and corresponding
European Commission decisions:
− Germany: Case N 744/2002, Commission Decision (2003)788 fin of 19 March 2003.

− Denmark: Case N 141/2003, Commission Decision (2003)1765 fin of 24 June 2003.

− The Netherlands: Case N 780/2002, Commission Decision (2002)2019 fin of 9 July 2003 and
Case N 339/03, Commission Decision (2003)3378 of 18 September 2003.

− France: Case N 232/03, Commission Decision (2003)3234 fin of 17 September 2003.

− Spain: Case N 812/02, Commission Decision (2003)4079 fin of 11 November 2003.

III. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS
A. KOREA
3.1 Korea requests the Panel to find that:
(a) the TDM Regulation, its member State implementing provisions as well as any
instances of application of the TDM scheme, and any EC Decisions approving
member State implementing provisions pursuant to the TDM scheme, are inconsistent
with the European Communities' and its member States' obligations under
Article 23.1, 23.2(a), 23.2(b) and 23.2(c) of the DSU;
(b) the TDM Regulation, its member State implementing provisions as well as any
instances of application of the TDM scheme, and any EC Decisions approving

member State implementing provisions pursuant to the TDM scheme, are inconsistent
with the European Communities' and its member States’ obligations under
Article 32.1 of the SCM Agreement;
(c) the TDM Regulation, its member State implementing provisions as well as any
instances of application of the TDM scheme, and any EC Decisions approving
member State implementing provisions pursuant to the TDM scheme, are inconsistent
with the European Communities' and its member States’ obligations under paragraphs
1-4 and 10 of Article 4 and paragraphs 1-4 and 9 of Article 7 of the SCM Agreement;
(d) the TDM Regulation, its member State implementing provisions as well as any
instances of application of the TDM scheme, and any EC Decisions approving
member State implementing provisions pursuant to the TDM scheme, are inconsistent
with the European Communities' and its member States’ obligations under
Article III:4 of the GATT 1994; and
(e) the TDM Regulation, its member State implementing provisions as well as any
instances of application of the TDM scheme, and any EC Decisions approving
member State implementing provisions pursuant to the TDM scheme, are inconsistent
with the European Communities' and its me mber States’ obligations under Article I:1
of the GATT 1994.
3.2 Korea considers that the above violations have nullified and impaired benefits accruing to it
under the WTO Agreement. In consequence, Ko rea requests the Panel to recommend that the
European Communities bring its inconsistent measures into conformity with its WTO obligations.
5
B. EUROPEAN COMMUNITIES
3.3 The European Communities requests the Panel to find that:
(a) the TDM Regulation is not in violation of Article 23.1, 23.2(a)-(c) of the DSU,
Articles 4, 7 and 32.1 of the SCM Agre ement and Articles I and III:4 of the
GATT 1994; and
(b) the national TDM measures (to the extent that they still exist) are not in violation of
Article 23.1, 23.2(a)-(c) of the DSU, Artic les 4, 7 and 32.1 of the SCM Agreement
and Articles I:1 and III:4 of the GATT 1994.
IV. ARGUMENTS OF THE PARTIES
4.1 The arguments of the parties are set out in their submissions to the Panel, and their answers to
the questions. The parties' arguments are summarized in this section.
A. BACKGROUND
4.2 Korea asserts that this dispute arises from an attempt by the European Communities to take
the law into its own hands. According to Korea, the European Communities alleged that Korea has
subsidized certain of its shipyards, an “unfair trade practice” that has caused “adverse effects” and
“serious prejudice” to the European Communities and its shipbuilding industry. Based solely on these
allegations, the European Communities has taken c ountermeasures against Korea as contained in the

5 As discussed below in Section VII.A.4(a), Korea has also requested that the Panel make a specific
recommendation concerning a particular aspect of the measures at issue in this case.

Temporary Defensive Mechanism (“TDM”), an EC Council Regulation. The European Communities
has explicitly linked these countermeasures to the init iation and pendency of the WTO dispute, not its
conclusion. This case is about EC unilateralism.
4.3 According to Korea, the Eur opean Communities explicitly adopted a two-track strategy to
challenge alleged Korean subsidies. It (i) made a determination of subs idization and implemented
countermeasures against Korea and (ii) initiated a WT O dispute alleging violations by Korea of the
SCM Agreement. These countermeas ures are found in the TDM that is the subject of this dispute.
This TDM is inextricably tied to the WTO disput e settlement proceedings. By its terms, it was
effective on the day consultations began pursuant to Article 4 of the DSU and it will be terminated
upon completion of such proceedings. Korea argues that the European Communities and its member
States, in adopting the TDM and associated meas ures, violated several provisions of the WTO
Agreement, namely, Article 23 of the DSU, Artic les 4, 7 and 32.1 of the SCM Agreement, and
Articles I:1 and III:4 of the GATT 1994.
4.4 The European Communities dismisses Korea's characteriza tion of the TDM Regulation and
the "twin-track" strategy adopted by the Europ ean Communities in 2002, asserting that Korea's
allegations are politically unjust and legally unfoun ded. According to theEuropean Communities, the
world shipbuilding sector has been subject to serious crises and injurious pricing due to overcapacity
and government intervention. The European Co mmunities has been actively engaged in seeking
multilateral solutions to the problems of subsid isation and injurious price competition in the
shipbuilding sector. However, negotiations at th e OECD failed and Korea decided to ignore its
bilateral commitments on injurious pricing agreed with the European Communities (the Agreed
Minutes signed in 2000). That notwithstanding, since the 1990s the EC industry has engaged in a
major process of restructuring and operating aid has been gradually reduced and eventually abolished
by the European Communities.
4.5 When the EC industry was threatened with fu ll collapse, it exercised its right to launch a
complaint under the EC Trade Barriers Regulation ("TBR Regulation"). The investigation provided
factual evidence of (i) Korean subsidies; and (ii) injury in certain sectors of the EC industry. The
European Communities then decided under its TBR Regulation to launch a WTO dispute settlement
proceeding against Korea that seeks cessation of a number of narrowly defined subsidies
(WT/DS273).
4.6 To the European Communities, the TDM Regul ation and national subsidy programmes (the
measures attacked by Korea in this case) are pure state aid measures. They must be seen in the
context of EC state aid law, which prohibits the granting of subsidies unless a specific exception is
provided for by the EC Treaty, as the main source of EC state aid law, or by the secondary legislation
adopted on the basis of this Treaty. Throughout the 1990s operating aid was progressively reduced,
and ultimately was abolished as of 1 January 2001. The European Communities asserts that the TDM
Regulation provides for the limited re-authorisation of state aid to shipbuilding that had previously
been phased out. According to the European Communities, the li nk between the WTO dispute and
the TDM is purely political. Moreover, both tracks of the “twin-track-strategy” address the same
broader problem, but neither resolves it.
B. P
RELIMINARY ISSUES
1. EC Conditional Request for Preliminary Ruling
4.7 The European Communities asserts that Korea expanded the scope of its claim to
“individual instances of application” of the TDM Regulation by the Commission and the respective
EC member States, the application of the TDM scheme in specific cases, or TDM contributions
provided pursuant to the TDM framework. The European Communities claims that the request for the

establishment of the Panel does not explicitly iden tify as impugned measures any individual grants.
The European Communities also clai ms that Korea in the request for the establishment of the panel
explicitly distinguished between the national sch emes as such and “particular instances” of
subsidisation in its description of the consultations 6 and can therefore not claim that the term
“implementing measure” comprises individual grants. Such expansion of the claims would be
contrary to Article 6.2 of the DSU because individual measures under the national TDM measures
were not covered by Korea’s request for est ablishment of the Panel. Therefore, the
European Communities submits that the claim in sofar as it relates to individual instances of
applications is contrary to Article 6.2 of the DSU and requests that it be dismissed.
4.8 Korea argues that the granting of the European Communities' request would amount to ruling
that, even if the European Communities' author izing measures are found inconsistent with the
European Communities' WTO obligations, the individua l disbursements will be legal. Korea also
argues that the European Communities' argument is groundless because of the lack of legal precedents
supporting its position and of the absence of any prej udice stemming from the lack of specificity in
Korea's panel request, so as to cause the Europ ean Communities' due process rights to be adversely
affected.
4.9 Korea further maintains that the European Communities' preliminary ruling request is
factually inaccurate, because it is based on a misquot ation of Korea's request for establishment of a
panel, as it was clear from such request that it included other measures than those specifically
identified therein, through the use of the expression inter alia. Moreover, Korea alleges further that
the request for consultations included reference to Article XXIII:1(b) of the GATT 1994. In Korea’s
view, the somewhat different legal basis of such cl aims requires a more detailed exploration of the
actual disbursement patterns over the relevant peri od in order to see whether there was a reasonable
expectation of no further subsidization. The Panel in the GATT case EEC – Oilseeds I looked at
whether there had been an increase in subsidization be yond that already in existence at the time of the
tariff binding in deciding whether there had been a non-violation nullification or impairment. Thus, a
review of specific subsidy patterns was relevant. However, the present Panel does not have
Article XXIII:1(b) of the GATT 1994, nor DSU Article 26 within its terms of reference and with
respect to the violation claims, such information is useful, but not necessary, background information.
4.10 Korea also notes that the European Communities’ statement not only ignores the chapeau of
the referenced paragraph and the context of the descr iption of the consultations, but it also ignores the
reference to disbursements in the statement of clai ms. The first bullet of the description of the actual
claims states: "Articles I:1 and III:4 of the GATT 1994 because the TDM regulation and member
States implementing measures involving the bestowal of German, Danish, Dutch, French and
Spanish grants to shipyards on a vessel-specific and product-related basis . . ." Korea submits
that this statement is a clear reference to the individual grants.
4.11 Korea also alleges that the Eur opean Communities' request is legally insupportable, in that
reference to the individual grants was not needed in order to include such grants within the parameters
of the dispute. Korea argues that the effect of granting the European Co mmunities’ request for a
preliminary ruling here would be to force compla inants to list all of the actual trade damaging
instances as claims and then assume an undue burden of proof in establishing them. For Korea, such
ruling would be contrary to the Appellate Body decision in EC – Bananas III , where it upheld the
panel's decision on the grounds that there is no need to show trade damage to substantiate a claim of
nullification or impairment, based on Article 3.8 of the DSU. The Appellate Body has reinforced the
breadth of this provision in its Report in US – Offset Act (Byrd Amendment).7

6 Request for the Establishment of a Panel by Korea of 6 February 2004, WT/DS301/3, p. 1.
7 Appellate Body Report, US – Offset Act (Byrd Amendment) at para. 212.

4.12 Korea argues that should the Panel exclude these applications of the challenged measures,
every complainant would be required to list in its pa nel request all of the instances of inconsistency in
addition to identifying the inconsistent measures th emselves. This would be impossibly burdensome,
would surely miss many applications that actually occurred but were not publicly known (as is the
case with the disbursements in th e European Communities) and necessarily would exclude all the
illegal transactions that took place after the submissi on of the request for establishment. For Korea,
this would undermine the very security and predicta bility of the multilateral trading system that the
Article 3.2 of the DSU says is the fundamental purpose of the dispute settlement system.
4.13 Korea further submits that legal provisions not listed in a panel request nevertheless can be
within the scope of the terms of reference if they are “directly related” to the identified measures. 8
Thus, if the Panel were to consider the grants as measures, Korea submits that they would clearly be
“directly related” as they are pursuant to the TDM a nd EC member State laws. However, in Korea’s
view, the Panel need not reach this issue because these are not new measures, but rather are mere
applications of the TDM and the EC member State implementing laws.
4.14 Korea argues that if a measure were to be found inconsistent w ith a Member’s WTO
obligations, while any specific applications were to be excluded unless individually listed in the
request for establishment, the result would seem to be that such applications could continue, at least to
the extent that they had been committed, but not paid, prior to the DSB’s rulings and
recommendations. However, such a result would be directly contrary to the Appellate Body Report in
Brazil – Aircraft (Article 21.5) wherein the Appellate Body stated that “to continue to make payments
under an export subsidy measure found to be prohib ited is not consistent with the obligation to
“withdraw” prohibited export subsidies.”9
4.15 At the first substantive meeting with the Panel 10, the European Communities explained
further why an importation into this dispute of individual disbursements would have severely
hampered its due process rights. Individual disbursements are granted by the member States and the
European Communities would have needed considerable time to obtain the relevant evidence from the
member States. Moreover, the European Commun ities would have needed to request additional
working procedures for the protection of Business Confid ential Information. It is for that reason that
the European Communities sought clarification whether or not Korea had pursued a claim on the basis
of individual grants. The European Communities ra ised this issue through a conditional request for a
preliminary ruling so as to allow the issue to be settled by a simple clarification by Korea. The
European Communities also disagreed with Kor ea’s argument that the description of these
implementing measures as “involving the bestowal of grants to shipyards on a vessel-specific and
product related basis” in the context of the Article III:4 GATT claim can be read as identification or
reference to individual disbursements to warn th e European Communities that such measures will be
covered by the dispute. That phrase only refers to the “implementing measures” defined previously as
the general schemes. The European Communities then noted that Korea had confirmed, in its Oral
Statement, that it does not base its case on individual grants. Indeed, independently from the scope of

 8 See, e.g., Argentina – Footwear (EC) at paras 8.24-8.45, citing EC – Bananas III , Japan – Film and
Australia – Automotive Leather II.
 9 Appellate Body report in Brazil – Aircraft, Article 21.5 at para 45. Korea recognizes that SCM
Article 4.7 refers to withdrawal without delay, while DS U Article (which is applicable in the present dispute)
uses somewhat different language; i.e., bringing a measure into conformity. Nonetheless, the analogy holds.
Indeed, in Korea’s view the language in SCM Article 4.7 is simply the particular application of DSU
Article 19.1 in the context of a prohibited subsidies cas e. This is in contrast with SCM Article 7.8 which
provides for an additional possible remedy of removal of the adverse effects.
10 The remarks of the European Communities as reflected in this paragraph, and the remarks of Korea
as reflected in the next paragraph, were made during the course of an oral discussion on this point during the
first substantive meeting, and are not fully reflected in th e written versions of the parties' oral statements. The
description of these remarks thus is based on a transcription of the relevant part of that meeting.

the request for the establishment of the Panel, Ko rea had not pursued, in its first submission, any
claim relating to individual grants which would have required identification of such instances. On
that basis the European Communiti es withdrew its conditional request for a preliminary ruling, after
having expressed its disagreement with Korea on the scope of a future implementation phase in this
case (under the remedy sought in this proceeding, only the general measure could be targeted and
withdrawn) and the interplay between the measure s covered under this di spute and those covered
under another dispute settlement pro ceeding (the individual disbursements that are the subject of a
separate request for consultations under WT/DS307).
4.16 Korea expressed its concerns about the withdrawal of the request for a preliminary ruling, in
that it could bring a fundamental misunderstanding about the nature of the disbursements, as the
European Communities is classifying them as "measu res". For Korea, the disbursements are not
measures and even if they were they would be "d irectly related" and therefore properly before the
Panel.11
4.17 During the first substantive meeting with th e Panel, the Panel expressed its view on the
matter, as follows:
"[...] the Panel's view at this point is that the EC has withdrawn its request for a
preliminary ruling and so we will not be making a preliminary ruling.
As to the implementation issues generally, the Panel noted:
"We are aware that both sides have specific concerns on the issue that we were
talking about; we are aware of those concerns and we are not making any decision,
one way or the other, on any of the issues that were being discussed yesterday. We
assume that you may well have more to say on those issues and, if necessary, we may
have additional questions on those issues in due course."
4.18 Subsequently, Korea
 requested the Panel to "make a decision as to whether or not it considers
the disbursements to be separate measures". 12 Korea argued that if the Panel were to find the
disbursements to be distinct, the Panel should al so find them to be covered in the request for
establishment of the panel because they are “directly related” to the cited measures and therefore are
inconsistent with the European Communities' obliga tions under the WTO provisions referenced in the
request for the establishment of the Panel. If, on th e other hand, the Panel were to agree with Korea
that they should not be considered separate measu res and are simply the implementation of measures
found to be illegal, Korea requested the Panel to make an affirmative recommendation pursuant to
Article 19.1 that the European Communities immedi ately cease any further disbursements of illegal
funding. Otherwise, the European Communities’ statements would lead to the conclusion that
circumvention of prospective DSB rulings and r ecommendations was already being contemplated by
the respondent.
4.19 In Korea's view, the EC statement that the nati onal measures “are likely to expire” before the
issuance of the Panel Report and that therefore th ere is no basis for an Ar ticle 19.1 recommendation,
in fact illustrates the necessity of such a recommendation. First, Korea notes that the
European Communities qualifies this conclusion with the reference “are likely to” rather than “will”
expire. Second, and most importantly, the point is that the disbursements might continue for a period
of years after the expiration of the authority un der the TDM as long as they were approved before
such expiration. Thus, the European Communities highlights perfectly the need for an Article 19.1
recommendation.

11 See footnote 10.
12 Second submission of Korea, at para. 32.

4.20 The European Communities responds that for the reasons provided there is no basis to
consider (non identified) disbursements as separat e measures and to make a separate recommendation
on them.
2. Other Preliminary Issues
4.21 The European Communities alleges that Korea identified five subsidy measures 13 adopted
by EC member States. However, in response to a Panel question, Korea claims that it has specifically
included in its request for establishment of a panel all member States “implementing provisions”
including those in new member States and those which entered into force since this request.14
4.22 According to the European Co mmunities, Korea cannot ask the Panel to make findings on
measures that were not included in the request for the establishment of the Panel and could indeed not
even have existed at that time. The request explicitly includes the TDM Regulation and the five
member State schemes existing at the time of the request. While the European Communities accepted
in good faith that the request covers the two ex tensions of these five schemes (the other three
expired), Korea cannot expand the scope of this pr oceeding to any future measures of all future
possible new EC member States. According to the European Communities, the member State
measures are not implementing measures of the TD M Regulation. They are autonomous decisions on
whether or not to make use of the derogation fro m the prohibition under EC law of contract-related
operating aid in the shipbuilding sector.
4.23 Since this is the first EC state aid measure at issue in a WTO proceeding, the European
Communities attaches great importance to the correct appreciation of the legal status of the TDM
Regulation and the five national measures identifie d by Korea. The European Communities states
that the TDM Regulation has the nature of a limited derogation from a general prohibition of
subsidisation; it is not a “specific authorisation” and the five member States measures are not
“implementing” measures. Moreover, Korea has identified five national measures. The scope of this
proceeding does not extend to other such measures (if any), in particular measures taken by any of the
new member States that acceded after the commencement of the Panel proceeding.
4.24 Korea
 disagrees with the European Communities' argument that new measures of EC
member States that might come into effect s hould not be subject to any rulings by the Panel. 15 Korea
refers the Panel to its discussion of “dir ectly related” measures in this regard. 16 Korea also disagrees
with the European Commun ities’ statement that the only respondent in this dispute is the European
Communities as such and not its member States. 17 Korea's position is that all EC member States are
independently WTO Members, and that internal EC constitutional issues cannot adversely affect the
rights of Korea or any other WTO Member.
4.25 The European Communities submits further preliminary comments on the legal claims
presented by Korea. First, the European Communities claims that Korea’s description of the measure
at issue is unclear. Korea first attacks the “twi n-track-strategy” (described through a number of press
releases), refers to the “Temporary Defensive Mech anism and associated measures”, then lists five
national schemes and finally refers to “individua l instances of applications of the TDM in the
respective member States.” However, the Euro pean Communities alleges that Korea nowhere
specifies any individual grants under these five national measures.

13 Oral statement of Korea at the first substantive meeting of the Panel with the parties, at para. 8.
14 Response of Korea to Panel Question 4.
15 Second submission of the European Communities, para. 33.
16 Attachment 2 to oral statement of Korea at the first substantive meeting of the Panel with the parties.
17 Response of Korea to Panel Question 4.

4.26 Second, the European Communities asserts that the TDM Regulati on is not a legally relevant
measure. Contrary to what Korea alleges, the TDM Regulation does not prescribe rules for regulating
the provision of state funded payments to EC shipbui lders which is then implemented by EC member
States. It only contains a limited exempti on from the general prohib ition of (contract-related
operating) aid. It does not oblige or even encourage member States to grant such types of aid. If at
all, the national measures can be measures that set forth positive action.
4.27 Third, according to the European Communities, the five national TDM programmes attacked
by Korea expired on 31 March 2004, and only two (the French and Netherlands measures) had been
prolonged.18 Fourth, the European Communities furthe r argues that Korea makes strikingly little
reference to the TDM Regulation or the national TDM programmes, but refers instead to a wide
variety of press releases. Korea does not clai m that these statements constitute measures and
generally statements can only serve as further confir mation of a set of facts that have already been
found to exist. Therefore, the European Commun ities asks the Panel to base its analysis of the
measure on the measure itself. The press releases se lectively cited by Korea are politically motivated
statements by individual Commissioners that cannot and do not contain a legally binding or otherwise
relevant interpretation of the TDM Regulation and its legal nature.
4.28 Korea responds to the first EC point by reca lling its arguments discussed above regarding
the necessary illegality of any disbursements or impl ementation of measures found to be inconsistent
with the European Communities’ obligations by the DSB.
4.29 Korea also takes issue with the European Communities' argument that the TDM is somehow a
“limitation” on subsidies. Korea recalls the Appellate Body’s decision in India – Patents (US) that a
panel is not constrained by a Me mber’s proffered interpretation of its own laws in examining the
consistency of such measures with international obligations.19 Moreover, the European Communities’
argument regarding the characterization of the TDM makes no sense. The European Communities
has acknowledged that, prior to the TDM, the EC member States did not have the authority to
promulgate laws or regulations providing for the discriminatory funding described in the TDM. Thus,
at that point, there was no legal authority for any f unding. After the TDM, such authority existed.
Hence, it clearly is an authorizing regulatory measure.
4.30 Regarding the third point, Korea stated that the attempts by the European Communities to
deny the evidentiary value and relevance of EC press releases, memoranda and documents, and its
arguments that such evidence should be “disregard ed” are legally and factually unsupportable. The
European Communities’ position is a futile attempt to try to explain away the massive quantity of
testimony that all point in the same direction to confirm what is clearly discernable from the TDM
Regulation and EC member State measures themselves – that they are unilateral retaliatory measures
which discriminate against Korea in violation of the above-cited WTO provisions. There is no legal
or procedural basis for contending that this type of evidence should be “disregarded” in this case. The
European Communities itself has conceded that in any event “the press releases do not in any way
contradict the content of the measures.”
20And as noted by the Panel in Chile-Alcoholic Beverages,
“statements by a government against WTO interests, e.g., indicating a protective purpose or design,
are most probative.”21

18 Response of the European Communities to Panel Question 2.
19 Appellate Body Report, India – Patents (US) at para. 66.
 20 First submission of the European Communities, para. 106.
 21 Panel Report, Chile – Alcoholic Beverages, paras 7.118 and 7.119.

C. LEGAL CLAIMS
1. Article III:4 of the GATT 1994
4.31 Korea asserts that the Appellate Body has held that three main elements must be satisfied for
a violation of Article III:4 of the GATT 1994 to be established:
• the measure at issue is a “law, regulation or re quirement affecting [a product’s] internal sale,
offering for sale, purchase, transportation, distribution or use”;
• the imported and domestic vessels at issue are “like products”;
• the imported products are accorded “less favorab le treatment than that accorded to like
domestic products.”22
4.32 Korea submits that the TDM Regulation, as a generally applicable Council Regulation
adopted in accordance with the legislative procedures laid down in the Treaty Establishing the
European Community, clearly qualifies as a “law” or “regulation.”
4.33 Furthermore, the TDM Regulation “affects” the internal sale, offering for sale, purchase etc.
of imported products. The word “affecting” in Article III:4 has been interpreted by previous panels as
having a broad scope of applicati on and covers measures which in a broad sense have an effect on
imported goods.23 In Canada – Automobiles, the Panel elaborated that “the word ‘affecting’ implies a
measure that has ‘an effect on’ and this indicates a broad scope of application.” The Panel noted that
the word ‘affecting’ in Article III:4 of the GATT 1994 covers any laws or regulations which might
adversely modify the conditions of competition between domestic and imported products.”24
4.34 Korea maintains that the contributions scheme provided for by the TDM clearly affects and
adversely modifies the conditions of competition be tween, on the one hand, domestically produced
container ships, product/chemical tankers and LNG carriers, and on the other hand, Korean origin
imported vessels of the same type. The TDM Regulation only applies when there is direct
competition between a Korean and EC shipyard biddi ng for a particular vessel sale and where the EC
shipyard concerned supplies evidence that a comp eting Korean yard is offering a lower price. 25 The
injection of the TDM retaliatory contributions in favour of the EC yard, but not the Korean yard,
allows the EC shipbuilder to artificially lower th e price for the ship being offered and thereby the
TDM alters the conditions of competition – esp ecially price competition – between the EC and
Korean products to the clear disadvantage of the Korean product, Korea claims.
4.35 As noted by the Panel in Indonesia – Autos , subsidies can be found to affect imports in a
manner violating Article III when they have a component that introduces discrimination between
foreign and domestic products. 26 Clearly, the contract-related and vessel-specific TDM contributions
introduce precisely such discrimination between do mestic and imported (Korean) products. Indeed,

22 Appellate Body Report, Korea – Various Measures on Beef, para. 133.
23 Korea notes the statement of the Appellate Body in EC – Bananas III, para. 220, in the context of its
discussion of Article I:1 of the GATS that:
the ordinary meaning of the word “affectin g” implies a measure that has “an effect
on,” which indicates a broad scope of application. This interpretation is further
reinforced by the conclusions of previous panels that the term “affecting” in the
context of Article III of the GATT is wider in scope than such terms as “regulating”
or “governing.” [Emphasis added by Korea].
25 Article 2.1, TDM Regulation.

as the TDM retaliatory contribution directly aims at and affects the price of the vessel, the ship-owner
is the ultimate beneficiary of the TDM retaliatory contribution as he effectively settles the lower price
for the vessel subject of the TDM contribution.
4.36 Korea also states that the TDM Regulation appl ies to Korean and EC “like products”.
According to well-established GATT/WTO jurisprude nce, the physical properties of the products
themselves, their end-use, consum er tastes and habits and the tari ff classification of the product are
taken into account for determining whether products are “like”. 27 I n EC – Asbestos , the Appellate
Body noted that the definition of “likeness” in Ar ticle III:4 of the GATT 1994 must be read in the
light of the overarching objective of Article III, wh ich is to provide equality of competitive conditions
for imported products in relation to domestic products. Since it is products that are in a competitive
relationship in the marketplace that could be affected by measures treating imports less favourably
than the treatment accorded to domestic products, th e Appellate Body concluded that “it is important
under Article III:4 to take account of evidence whic h indicates whether, and to what extent, the
products involved are – or could be – in a competitive relationship in the marketplace”.
28
4.37 With respect to vessels covered by the TDM Re gulation, Korea asserts that the “competitive
relationship” between the imported (i.e. Korean) and domestic vessels could not be more manifest.
By its terms, the TDM Regulation provides that TD M contributions may only be granted where it is
established that an EC yard is competing with a “Korean shipyard offering a lower price” in the
context of a specific shipbuilding bid. 29 By requiring competition from a Korean-origin vessel, the
TDM Regulation operates so as to limit its application exclusively to cases where Korean and EC
origin vessels are “in a competitive relationship in the marketplace.” The TDM Regulation moreover
requires that this competitive relationship be pr esent on a contract-by-cont ract basis since TDM
contributions apply only where there has been competition from a Korean yard in relation to a specific
individual shipbuilding contract.
4.38 Moreover, Korea argues, the competing EC and Korean vessels subject to the TDM will have
nearly or identical physical properties. This is because in the context of su ch shipbuilding bids, the
ship-owner and broker lay down concrete specifications for the precise characteristics of the ship they
are seeking to purchase. The Korean and EC shipyards will thus inherently be competing to provide a
ship with identical or nearly identical physical properties (in accordance with the purchaser’s pre-
determined specifications and requirements). In each case, the competing Korean and EC vessels will
fall within the definition of container ships, product or chemical tankers or LNG carriers laid down in
Article 1(a)-(d) of the TDM Regulation. In addition, the competing vessels will be even more
narrowly tailored to the purchaser’s further specifi cations in terms of weight, size, and other
characteristics. The EC and Korean vessels subject to the TDM Regulation are therefore inescapably
“like” by virtue of the way the TDM operates.
4.39 Under the TDM Regulation, competing EC and Ko rean vessels will have identical end-uses
as well. For example, LNG carriers meeting the product definition of such carriers specified in
Article 1.(d) of the TDM Regulation encompass “shi ps designed with a single deck hull with fixed
integral and/or independent tanks suite d to carry natural gas in liquid form
.”30 The end-use of LNG
carriers is clearly for the transport of natural gas in liquid form. In addition, the prospective purchaser

27 Korea notes that the Appellate Body in Japan - Alcoholic Beverages II , p. 21, held that uniform
classification in tariff nomenclature can serve as a useful basis for confirming the likeness of products but
should not be the determining factor. See also the Appellate Body Report in EC - Asbestos, para. 101. Korea
notes that the Appellate Body found in EC - Asbestos that the like product definition in Article III:4 was broader
than that utilized in Article III:2. However, given the operation of the terms of the TDM, the breadth of the
definition should not matter in this regard.
28 Appellate Body Report, EC – Asbestos, paras. 99 and 103.
29 Article 2.1, TDM Regulation.
30 Emphasis added by Korea.

who has laid down requirements in advance will obvi ously have the same end-use in mind, whether
the Korean or EC origin vessel is eventually selected. Korea subm its that Korean and EC vessels
covered by the TDM Regulation are therefore “lik e products” for the purposes of Article III:4 of the
GATT 1994.
4.40 Finally, the TDM Regulation accords to the Korean vessels concerned treatment less
favourable than to the like EC vessels. This re quirement in Article III:4 of the GATT 1994 has been
consistently interpreted to mean that a Member ’s measures must ensure effective equality of
opportunities between imported products and domestic products.31
4.41 Korea submits that since a fundamental objective of Article III is the protection of
expectations on the competitive relationship betw een imported and domestic products, a measure can
be found to be inconsistent with Ar ticle III:4 merely because of its potential discriminatory impact on
imported products. 32 Hence, it is not necessary to show actual effects on trade flows. 33 Indeed, it
suffices that the expectations regarding the competitive relations hip between imported and domestic
products are adversely affected to conclude to a violation of Article III:4. The notion of equal
competitive opportunities between foreign and domestic products implies, at the very least, that
foreign products be allo wed equal access to the market compared to like domestic products. The
TDM contributions clearly reduce opportunities for Korean vessels to compete under equal conditions
with like vessels built in the Eur opean Communities. Because these contributions are only available
if the vessels are built at an EC shipyard as opposed to a Korean yard, they produce an incentive for
shipowners to place orders with EC shipyards. This artificial incentive provides treatment less
favourable to the Korean products.
4.42 In light of the above, Korea maintains that the TDM Regulation violates Article III:4 of the
GATT 1994. These conclusions apply mutatis mutandis to the EC member State implementing
measures and TDM contributions provided pursuant to the TDM framework, and the EC Decisions
approving such measures.
4.43 The European Communities responds that to fall under the scope of Article III:4 of the
GATT 1994, a subsidy must have a structure or co ntent that discriminates between domestic and
foreign producers, e.g., through differential applica tion of tax measures, or internal postal rates.
Article III:8(b) of the GATT 1994 exempts from the scope of the national treatment clause the
payment of subsidies to producers which involves th e expenditure of revenue by a government. In
short, it clarifies that WTO Members are not requi red to pay domestic subsidies to foreign producers
by virtue of the national treatment rule. The Eur opean Communities also submits that it is undisputed
between the parties that the entire structure, design and effect of the TDM Regulation and the national
TDM measures is one of budgetary state aids to th e producer. The measure is therefore within the
scope of Article III:8(b) of the GATT 1994 and conse quently outside the purview of Article III:4 of
the GATT 1994.
4.44 Korea states that the European Communities do es not offer any defence regarding Article
III:4 itself. This is not surprising for the TDM provides for de jure discrimination against Korean
ships. The European Communities’ only defence is that it is protected by the exception of
Article III:8(b) which provides in relevant part: “The provisions of this Article shall not prevent the
payment of subsidies exclusively to domestic producers. . .”

31 GATT Panel Report, US - Section 337, para. 5.11.
32 GATT Panel Report, US - Section 337, paras. 5.11 and 5.13.
33 Appellate Body Report, Japan - Alcoholic Beverages II , p. 16 and Panel Report, EC - Bananas III ,
para. 7.179.

4.45 Korea fails to see the relevance of Article III:8( b). With respect to Article III:4, Korea is
challenging the TDM Regulation which is a regulat ory framework, or as the European Communities
states “the TDM is a state aid regulatory instrument”.34 The European Communities has reiterated the
argument that the TDM is a regulatory provision a nd not a subsidy provision merely three pages
before it asserts exactly the opposite under Article III:8(b). The European Communities has stated
that “[a]s noted above, the TDM Regulation does not result in any payment and cannot even assume
that member States indeed decide to adopt a national scheme”. 35 Thus, the TDM does not satisfy the
basic, elemental requirement of Article III:8( b). Furthermore, the Appellate Body in Canada –
Periodicals made it clear that to qualify for the Article III:8(b) exception, the subsidies must consist
of payments, i.e., actual outlays of funds. The TDM does not involve actual outlays (as the
European Communities has made clear repeatedly, including in its request for a preliminary ruling).
4.46 Korea asserts that the EC Commissioner Monti has made very clear that the TDM is not
meant as a general subsidies scheme but is a narrowly focused trade measure against Korea:
"The [TDM] is an exceptional response to difficult problem: it does not at all
represent a general reintroduction of operati ng aid to shipbuilding, which came to an
end on 31 December 2000, but will strengt hen the Community’s efforts to combat
damaging anti-competitive practices by Korea."36
4.47 In the view of Korea, this is not a case agains t EC subsidies as such. This is a case against
discriminatory EC regulatory measures. Dispute DS 307 is in regard to Korea’s broader allegations
against EC subsidization and those claims are no t before this Panel. Korea states that the
European Communities appears to ag ree with Korea in this regard, which makes quite puzzling the
basis for the European Communities' assertion of the exception of Article III:8(b).
4.48 In respect of the European Communities' ar gument that GATT 1994 Articles III and I do not
apply because there are no imports, Korea states that this is simply unproven as a matter of fact and
incorrect as a matter of law. As the panel stated in US – Section 301 “[i]t is commonplace that
domestic law in force imposing discr iminatory taxation on imported prod ucts would, in and of itself,
violate Article III irrespective of proof of actual discrimination in a specific case.” 37 While the
European Communities has been invited to make the cas e that it is legally impossible to import ships,
it has been unable to do so. In fact the Eur opean Communities’ own tariff nomenclature, i.e., the
Combined Nomenclature, contains Heading 8901 20 10 for sea going tankers; and
Heading 8901 90 10 for sea going other vessels for th e transport of goods and other vessels for the
transport of both goods and persons. The European Communities' own statis tical data show that
imports take place under both headings.
4.49 With respect to the European Communities' argument that Article III:8(b) was an
“exemption” rather than an “excep tion”, Korea claims that while the Appellate Body used the term
“exempt” in its discussion of Article III:8(b) in Canada – Periodicals38, there was no indication that it
put any significance on the term as a contrast to the term “exception”. Moreover, a review of the US -
Malt Beverages GATT panel report, cited with a pproval by the Appellate Body in Canada -
Periodicals, reveals that the panel drew an important di stinction between Article III:8(a) which states
that “this Article shall not apply” and Article I II:8(b), which uses the words “shall not prevent”.

34 First submission of the European Communities, para. 70.
35 First submission of the European Communities, para. 210.
36 Exhibit Korea – 9. See also Exhibit Korea – 2 wherein Commissioner Monti stated that the
generalized operating aid had been “definitively abolished”.
37 Panel Report, US - Section 301 Trade Act, para. 783.
38 Appellate Body Report, Canada – Periodicals, p. 34. Korea notes that one of the seminal
commentators in the area refers to Article III:8(b) as an exception: John H. Jackson, World Trade and the Law
of the GATT, the Michie Company (1969) at p. 381.

According to the panel, the differences in langua ge are important. The panel took the “shall not
apply” language of Article III:8(a) to be broader. The panel went on to note that subsidies are covered
by Article III, but that Article III:8(b) provides an exception for a specific type of subsidy, i.e.,
payments to producers.
39 This formulation by the panel clearly implies a narrow interpretation
consistent with an exception, whatever it might be labelled.
4.50 The European Communities responds that Korea’s attempt to argue that Article III:8(b) of
the GATT 1994 does not apply to the TDM Regulation because that Regulation in itself does not
provide for the payment of money is without grounds. The fact that a measure is regulatory in nature
or sets forth conditions does not automatically make it a "law, regulation or requirements affecting the
internal sale of products" within the m eaning of Article III:4 of the GATT 1994. 40 Korea does not
identify any regulatory effect of the TDM Regulation that affects the internal sale of ships. As
clarified by the Appellate Body in Canada – Periodicals, Article III:8(b) of the GATT 1994 does not
exempt from the scope of the national treatment requi rement measures that regulate internal sales in a
discriminatory manner if they thereby provide a s ubsidy (e.g., the application of different postal
rates). However, the TDM Regulation is neither a "subsidy" nor a "discriminatory regulation." If at
all it can be seen as clearing the way for the provis ion of budgetary resources to domestic producers.
If so, the TDM Regulation is covered by Article III:8(b) because apart from clearing the way for
subsidies it does not have any other discriminatory legal effect.
4.51 Furthermore, the European Comm unities alleges that Korea in its rebuttal submission did not
rebut the status of Article III:8(b) as exemption by noting that Article III:8(b) uses the term “prevent”
instead of “apply” as used in Article III:8(a). The purpose of Article III:8(b) is clear. It was added:
"to the Geneva draft because it was felt that if subsidies were paid on domestic and
not on imported products, it might be constr ued that Members were not applying the
‘national treatment’ rule."
41
4.52 Measures that provide for the payment of domes tic subsidies to producers in the form of
budgetary payments can therefore not constitute a violation of the national treatment rule.
Consequently, such types of subsidies cannot be matters referred to in Article III:4 of the GATT 1994.
Such measures are therefore also not covered by the most-favoured-nation ("MFN") obligation in
Article I:1 of the GATT 1994 where it refers to advantages in connection with matters under
Article III:4 of the GATT 1994.
2. Article I:1 of the GATT 1994
4.53 Korea argues that Article I:1 of the GATT 1994 is concerned with discrimination among like
products from or destined for different countries. 42 Under the TDM Regulation, Article 2.1 provides
that "direct aid in support of contracts for the building of container ships, product and chemical
tankers as well as LNG carriers shall be considered compatible with the common market when there
has been competition for th e contract from a Korean shipyard offering a lower price". The TDM
Regulation is, Korea asserts, for all intents and pur poses an instrument specifically and exclusively
directed against Korea and not against any other WTO Member.

39 Panel Report, US – Malt Beverages, para 5.8
40 Response of the European Communities to Panel Question 55.
41 Analytical Index of the GATT with reference to E/CONF.2/C.3/A/W.49, p.2.
42 Appellate Body Report, Canada – Autos, para. 84.

4.54 Korea submits that the following elements must be satisfied in order to establish that the
TDM contributions are in breach of Article I:1 of the GATT 1994:43
• the TDM contributions fall within the scope of measures covered by Article I:1;
• the TDM contributions grant an “advantage, favor, privilege or immunity” of the type
covered by Article I:1 to certain WTO Members in respect of the commercial vessels
falling within its scope;
• this advantage is not "accorded immedi ately and unconditionally" to like vessels
originating in Korea.
4.55 Korea claims that the TDM falls within the scope of Article I:1 of the GATT 1994 which
applies, among others, with respect to “matters referr ed to in paragraphs 2 and 4 of Article III [of the
GATT 1994].” As discussed elsewhere, the TDM falls within the matters referred to and covered by
Article III:4 of the GATT 1994.
4.56 Moreover, the TDM Regulation grants an “advant age, favour privilege or immunity” within
the meaning of Article I:1 of the GATT 1994 to cer tain WTO Members in respect of the commercial
vessels falling within its scope. In Canada – Autos, the Appellate Body stressed that:
"The words of Article I:1 refer not to so me advantages granted ‘with respect to’ the
subjects that fall within the defined scope of the Article, but to ‘any advantage’; not
to some products, but to ‘any product’; and not to like products from some other
Members, but to like products originating in or destined for ‘all other’ Members."
44
4.57 Korea maintains that the TDM Regulation creates an imbalance in the competitive
opportunities the European Communities grants to Korean vessels vis-à-vis the competitive
opportunities that the European Communities gran ts to like vessels originating in other WTO
Members. The WTO Members other than Korea can export ships to the European Communities
without having to face anti-competitive funding from EC member States as authorized by the TDM.
One could consider that the avoidance of such anti-competitive regulation is a privilege accorded to
those other Members, i.e., a favour of open competition that they are granted or an advantage in the
competitive sphere that they enjoy. For exampl e, Japanese or Chinese yards may attempt to compete
and sell their products freely in the European Communities without fear of trade distortive
interventions by the European Communities being di rected against them. A Japanese shipyard, for
example need not fear that if it happens to quote a price lower than a competing EC yard, this will
trigger the provision of TDM contributions to its dir ect EC competitor, designed to allow the latter to
lower its own price (and possibly thereby alter th e outcome of the bidding process at the eleventh
hour). Indeed, the TDM Regulation grants th e Japanese (or other WTO Member's) yard full
immunity from these damaging countermeasures, leav ing it free to set whatever bid price it deems
advantageous or viable. Only Korean competition is singled out for discriminatory and
disadvantageous treatment.
4.58 Therefore, Korea alleges, the TDM Regulati on grants Japanese and other non-Korean yards
and vessels the advantage or favour of being able to trade on equal terms with EC competitors without
the prospect of provoking unilateral countermeasur es in the form of TDM contributions to their
competitors. This advantage or favour is not extended to Korea. Indeed it is solely singled out so that
the gap in competitive opportunities widens. Put the other way around, Japanese and other non-
Korean yards are granted complete immunity fro m having trade-distorting countermeasures in the

43 See e.g., Panel Report, Indonesia - Autos, para. 14.138.
44 Appellate Body Report, Canada – Autos, para. 79.

form of TDM contributions applied against their bids . This immunity is not extended to Korea. The
TDM Regulation thus grants a “favour,” “privilege” or “immunity” within the meaning of Article I:1
of the GATT 1994 to products originating in certa in WTO Members, which is intentionally not
provided to Korean-origin ships.
4.59 Moreover, Korea asserts that this discriminatory treatment is based solely on the origin of the
shipyard/vessel concerned, which is the most blat ant form of MFN violation imaginable. Since
Article I:1 is concerned not with any individua l trade volume but with equality of competitive
opportunities, a favour, privilege or immunity which alters the competitive opportunities of some of
the European Communities' WTO trade partners specifically at the expense of others goes to the very
heart of an MFN violation and constitutes de jure discrimination.45
4.60 Finally, this favour, privilege or immunity gran ted to Japanese or other non-Korean shipyards
and vessels is not accorded “immediately and unconditionally” to like vessels originating in Korea.
4.61 Thus, Korea argues, the TDM Regulation is inconsistent with the European Communities'
MFN obligations and thereby violates Article I:1 of the GATT 1994. These conclusions apply
mutatis mutandis to the EC member State implementing measures and TDM contributions provided
pursuant to the TDM framework, and the EC Decisions approving such measures.
4.62 The European Communities responds that while WTO jurisprudence has interpreted
Article I:1 of the GATT 1994 broadly to cover even de facto discrimination between Members arising
from discriminations between a single firm of anot her Member, any such advantage or disadvantage
must be related to measures imposed in connection w ith importation or relate to matters referred to in
paragraph 2 and 4 of Article III of the GATT 1994. Subsidisation is not an advantage to any other
country within the meaning of Article I:1 of the GATT 1994 in the form of a measure relating to
customs duties or other measures in connection with importation or a matter referred to in
paragraphs 2-4 of Article III of the GATT 1994.
4.63 The European Communities disputes Korea’s br oad allegation that the TDM Regulation is
providing “highly discriminatory and focused contributions exclusively when a Korean yard is
bidding with an EU competitor” and therefore di sproportionately, specifically and exclusively hits
Korea. Even if true, this does not establish a violation of Article I:1 of the GATT 1994. The
allegation is not borne out by the operative parts of the TDM Regulation. Payments may be granted
whenever there is competition from a Korean yard. It may well be that a Korean yard only made a
first offer, but that Chinese and Japanese yards participated in the bidding process and the Korean
yard did not make a second offer.
4.64 Most importantly, however, the particular singling out of Korea results from the non-
implementation of the bilateral treaty between the two parties: the Agreed Minutes. The MFN
obligation cannot prohibit such measures that fall outside the scope of advantages bound through
Article I:1 of the GATT 1994 – it does not set fort h a general prohibition of discrimination between
WTO Members.
4.65 The European Communities states th at Korea, following the Panel’s request to clarify that it
does not base its MFN claim on a measure relating to “importation”, now has changed its mind and
surprisingly claims that the TDM Regulation was
 a measure in connection with importation. The
European Communities submits that Korea nowhere identifies even in a rudimentary manner how the
TDM Regulation could be seen as a “customs duty” or “charge” or “method of levying such duties” or
“any rule or formality in connection with importation”.

45 Although, Korea notes, the Appellate Body in EC - Bananas III made clear that Article I:1 GATT
encompasses both de jure and de facto discrimination, para. 232.

4.66 Korea replies that, as the European Communities ha s admitted with respect to Article III:4,
there is de jure discrimination against Korean ships. Article I:1 prohibits discrimination as between
Members with respect to all matters referred to in paragraphs 2 and 4 of Artic le III. Thus, it follows
that there is a violation of Article I.
4.67 Korea also asserts that the Eu ropean Communities offers a repetition of its Article III:8(b)
defence against this claim. As discussed before by Korea, this defence does not apply to the TDM
which is a discriminatory regulatory measure, not a subsidy as such. Furthermore, even if
Article III:8(b) were to apply with respect to th e claims under Article III:4, it has no relevance to
Article I claims at all. Article III:8(b) provides that: “The provisions of this Article shall not apply
. . ” (emphasis added) Thus, Korea claims that, by its explicit terms, the exception provided in
Article III:8(b) is expressly limited to Article III and does not apply to Article I:1. Moreover,
Article I:1 does not incorporate by referen ce Article III; rather, it refers to “ all matters referred to in
paragraphs 2 and 4 of Article III.” Article III only describes the issues, it does not apply directly
through Article I:1. Thus, Article III:8(b) is irrelevant to the analysis under Article I:1.
4.68 Indeed, for Korea, it would be quite surprising if Article I:1 was so limited. While the
drafters of the GATT decided to provide an excepti on within Article III to accord with the rules that
certain levels of subsidization to a domestic industry may be legal, there would be no reason at all to
permit a Member to provide subsidies in a manner that discriminates between two other Members.
There would be no legitimate developmental or soci al policy aspect to such discrimination; it would
be punitive. Indeed, this is precisely what Ko rea has demonstrated: th e EC measures are punitive
measures aimed directly and exclusively at Korea, specifically against alleged Korean subsidization,
and outside of the WTO dispute settlement system.
4.69 Korea takes issue with the Europ ean Communities' argument that a de jure discriminatory
measure should not be proscribed because it is de facto non-discriminatory.46 Korea is not aware of
any such defence ever being asserted much less being successful. Korea takes note of the concerns of
China that the TDM might have adverse spill-over effects in some instan ces. But such random
damage to other Members’ trade cannot refute the de jure discrimination in the wording of the TDM.
4.70 In addition, the US - Malt Beverages Panel report supports the view that a distinction must be
made between Article III:8(a) which states that “t his Article shall not apply” and Article III:8(b),
which uses the words “shall not prevent”. The latt er does not cover a broad derogation such as the
exemption advocated by the European Communities. Article III:8(b) must be interpreted narrowly.
Moreover, as that panel made clear, subsidies are covered by Articles III:2 and III:4. While the
drafters of the GATT decided to provide an excepti on within Article III to accord with the rules that
certain levels of subsidization to a domestic industry may be legal, there would be no reason at all to
permit a Member to provide subs idies in a manner that discriminates between two other Members
inconsistent with Article I:1 of the GATT 1994.
4.71 Korea submits that the Europ ean Communities misquotes Article I:1 of the GATT 1994. At
the point where the two clauses are linked by the word “and”, the European Communities left out a
phrase and two very crucial commas. The European Communities tries to make the provision read as
if it is an accumulative provision that requires a showing of both of these elements while omitting the
intermediate one. The missing commas make it clear th at this is a list of independent clauses. Most
significantly, the European Commu nities totally leaves out the critical fourth one. The
European Communities' arguments hinging on this tr ansparent misquoting and leaving out the very
phrase applicable to this dispute cannot be accepted.

46 First submission of the European Communities, para. 241.

4.72 Korea further submits that Article I:1 is struct ured in such a way that certain substantive
obligations apply with respect to four elements or categories of measures. The four categories are
listed in the first half of Article I:1. Th e first and third are those identified by the
European Communities. Including the missing second cat egory, they are: (1) with respect to customs
duties and charges of any kind; and (2) the method of levying such duties and charges; and (3) with
respect to all rules and formalities in connection wi th importation or exportation. Then there is a
fourth category which the European Communities also skipped. It is: (4) “and with respect to all
matters referred to in paragraphs 2 and 4 of Article III.”
4.73 Korea asserts that with respect to all of these four categories, the Member has the substantive
obligation to make certain that any advantage, fa vour, privilege or immunity granted by the Member
is immediately accorded to all other Members.
4.74 Thus, Korea does not need to show that there were any customs duties or charges involved in
the TDM and/or that it involved discrimination in te rms of rules or formalities. Those are only two of
the four categories of measures all of which the European Communities is obligated to apply in a non-
discriminatory manner. Rather, Korea has only to show that the TDM and EC member State
measures are matters referred to in Articles III:2 or III:4, which is the fourth category – one of the two
the European Communities failed to quote.
3. Article 32.1 of the SCM Agreement
4.75 Korea asserts that Article 32.1 of the SCM Agreement requires that no “specific action
against a subsidy of another Member” be ta ken except in accordance with the GATT 1994 as
interpreted by the SCM Agreement. As previous ly explained, the TDM Regulation is designed to
counteract the alleged Korean WTO-inconsis tent shipbuilding subsidies found by the
European Communities in its TBR investigations. Indeed, only those vessels types found to have
been subsidized may benefit from the TDM contributions. 47 The TDM Regulation is therefore
“specific” to subsidies.
4.76 Korea claims that the TDM Regulation is al so an action “against” the alleged Korea
subsidization. The Appellate Body in US – Offset Act (Byrd Amendment) noted that “against
subsidization” means that the measure is “opposed to,” or has an “adverse bearing on” or tends to
dissuade the subsidy practice complained of. 48 The TDM is clearly a measure aimed “against” the
Korean alleged subsidies. The European Communities itself has noted that the TDM is a measure
aimed at “fighting”49 the Korean subsidy practices it found to exist. The Regulation does not apply
against any other country and was designed to exclusively oppose alleged Korean subsidies.
Moreover, the TDM measures “create an incentive to terminate [the] practices” in the form of the
subsidies the European Communities alleges Korea to be providing. The TDM Regulation reinforces
this incentive by effectively promising to suspend or promptly terminate the countermeasure if Korea
resolves the dispute by ceasing the subsidy practices complained of.
4.77 Finally, Korea assert that the TDM Regulation is not a measure “taken in accordance with the
provisions of the GATT” as interpreted by the SCM Agreement. In US – Offset Act (Byrd
Amendment), the Appellate Body determined that the GATT 1994 and the SCM Agreement provide
four responses to a subsidy: price undertakings, provisional anti-dumping measures, definitive anti-
dumping measures or multilaterally-sanctioned coun termeasures under the WTO dispute settlement

47 Moreover, Korea states, Commissioner Monti sp ecifically stated that this was not a generalized
authorization for state aids. European Commission Press Release No IP/02/945, 27 June 2002. Provided in
Exhibit Korea – 2.
48 Appellate Body Report, US – Offset Act (Byrd Amendment), para. 254.
49 European Commission Press Release No IP/01/1078. Provided in Exhibit Korea – 9.

system. The TDM Regulation manifestly cannot fit into any of the above characterizations. The
TDM Regulation is not therefore a measure take n in accordance with the GATT 1994 as interpreted
by the SCM Agreement. In light of the above, Korea submits that the TDM Regulation violates
Article 32.1 of the SCM Agreem ent. These conclusions apply mutatis mutandis to the EC member
State implementing measures and TDM contributions provided pursuant to the TDM framework, and
the EC Decisions approving such measures.
4.78 The European Communities
 maintains that contrary to what Korea suggests, it is not
sufficient to establish some kind of general link between the measure and subsidisation. Two
conditions must be met in order for a measure to be captured by Article 32.1 of the SCM Agreement.
First, the measure must be “specific” to subsidisa tion, i.e. taken only when the constituent elements
of dumping or a subsidy are present. Second, the measure must be “against”, i.e. its design and
structure is such that the measure has the effect of dissuading the practice of subsidization, or creates
an incentive to terminate such practice.
4.79 The European Communities states that Korea contents itself with interpreting a general
temporal or political link into the measure and finds it sufficient that the TDM Regulation would
make an implicit link to a TBR report. The Europ ean Communities asserts that Korea is only able to
refer to language in the recitals of the TDM Regulation that motivat es the limitation of its scope to
market segments where the European Communities has found the existence of adverse effects and
injury on the basis caused by “unfair practices”.
4.80 Concerning Korea's reading of the TDM Regula tion, the European Communities argues first
that the key motivation for the TDM Regulation is the non-implementation of the Agreed Minutes and
indeed “unfair practices”. That term encompasses injurious pricing that is significantly broader than
subsidisation and refers to the conduct of individual shipyards. The TDM Regulation refers to the
TBR investigation only in order to limit the ma rket segments where the EC industry experiences
particularly severe problems, a nd which consequently can benefit from State aid. Second, the
specificity of the action cannot be established, as a ttempted by Korea, on the basis of general political
statements in the recitals or in accompanying press releases. Specific action against subsidisation has
to be established on the basis of the operative part of the Regulation.
4.81 The European Communities further asserts that the relevant operational provision is
Article 2.1 of the TDM Regulation which does not contain an inextricable link between the actual
granting of a contract-related aid and the constituent elements of subsides for four simple reasons:
First, aid can be granted against an offer from any Korean yard, independently of whether it benefits
from measures contested by the European Communities in DS273. Second, as acknowledged by
Korea, aid can be granted against any Korean comp etition, without the need to determine how much
lower the price is and whether that lower price is due to subsidisation or otherwise unfair pricing as
described above. Third, the TDM Regulation itself do es not result in any payments. Contract related
aid is granted under a national measure and is not conditional on any new finding of subsidisation.
Korea has grossly misrepresented the relationshi p between the TDM Regulation adopted at the
Community level and the national TDM measures. The TDM Regulation does not require or even
encourage the payment of subsidies by member States. The European Commission differs from
governments of other WTO Members in that it do es not pay subsidies to industrial products but limits
them. The TDM Regulation, as any other state aid measure sets forth conditions and limits to the
granting of subsidies, but does not itself provide for the payment of even 1€. Indeed, only a few
member States currently have a national TDM measu re in place and Korea has not pointed to any
individual instances of subsidisation. Contract re lated aid is granted under a national measure and is
equally not conditional on any findi ng of subsidisation by the member States. Finally, the fixed
amount of six per cent contract-related aid is neither related to any amount of subsidy in terms of
benefit to a Korean shipyard, nor to actual undercu tting by a Korean bid or even to the undercutting
margins found in the TBR investigation.

4.82 The European Communities proceed s to assert that, in short, the payments under the national
TDM measures cannot only be made following a de termination that the constituent elements of
subsidisation are present, but in any situation wh ere there is competition from a Korean yard offering
a lower price independently of whether that yard has received subsidies.
4.83 The European Communities asserts that the obj ect and purpose of Article 32.1 of the SCM
Agreement is to codify and restrict the right to r esort to self-help and the range of self-help measures
that WTO Members can take unilaterally to coun ter a subsidy of anothe r Member. However,
Article 32.1 of the SCM Agreement does not prohibit any action that might have an effect on a
subsidy granted by another WTO Member. The key term limiting the scope of Article 32.1 is the
criterion “specific”.
4.84 The European Communities asserts that the ad jective “specific” before the phrase “action
against a subsidy of another Member” means that a particular subsidy (i.e. a financial contribution
and a benefit) must be targeted. The term “specific action” in the first paragraph of Article 32 has to
be contrasted with the term “action”, as used in footnote 56 to Article 32 of the SCM Agreement. If
any action broadly responding to a situation of which subsidisation may be one cause would be
covered, the meaning of the term “specific” would run empty.
4.85 Second, Article 32.1 makes a close link between those unilateral actions that are permitted
and those that are prohibited. All actions that are permitted (countervailing duties and prohibited and
actionable subsidy actions) have one thing in common: they are conditioned on a specific
determination that a subsidy exists. The phrase “no specific action against a subsidy of another
Member can be taken” directly links the notion of a prohibited “specific action” with action taken “in
accordance with the provisions of the GATT 1994, as inte rpreted by this Agreement”. Therefore, the
nature of the prohibited actions must be comparable to that of the permitted measures in that they are
conditioned on a specific determination that a subsidy exists.
4.86 The European Communities states that this w as confirmed by the Appellate Body when it
referred to measures “that may be taken only where the constituent elements of [a subsidy] are
present”. In the two cases adjudicated thus far, th e operation of the measure was circumscribed by a
specific finding of dumping or subsidisation. It is true that the Appellate Body left explicitly open,
whether a lesser degree of specificity is sufficient. However, the Appellate Body already clarified that
to be a specific action against a subsidy, a “measure must be inextricably linked to , or have a strong
correlation with, the constituent elements of […] a subsidy”.
4.87 The European Communities asserts that Korea is not able to refer the Panel to such an
inextricable link between subsidies granted by individual member States (if any) under the TDM
Regulation and the constituent elements of a subs idy. Moreover, the European Communities argues
that all of the arguments advanced by Korea point at best to a general political link or a factual
coincidence between the TDM Regulation and the gran ting of subsidies by Korea. In particular,
Korea’s case hinges on one reference to “adverse effects in the form of material injury and serious
prejudice caused by unfair Korean competition” in th e third recital (as opposed to the operative part)
of the TDM Regulation.
4.88 The phrase “unfair Korean competition” relates to injurious pricing. This is clear from the
reference to the non-implementation of the Agreed Minutes in the first recital of the TDM Regulation.
The Agreed Minutes are a bilateral agreement that sets forth a comprehensive scheme to ensure
stability and fair competition in the shipbuilding sector in the future. In signing this treaty, Korea
itself acknowledged that lower bids from Korean sh ipyards are not just a question of yards being
subsidised by the government but result from nume rous factors ranging from the lack of accounting
and financial responsibility rules to pricing below value which may result from cross subsidisation by

domestic sales of the same product or sales of ot her products. These factors may be totally
independent from subsidisation by the government or a public body.
4.89 The European Communities clarifies that, when highlighting that injurious pricing may be
due to many other factors than subsidisa tion, in particular dumping behaviour, the
European Communities is not arguing that because the TDM Regulation cove rs both “dumping” and
“subsidisation” or something third, it cannot be an action against subsidisation. For the
European Communities, the salient point is that the TDM Regulation simply does not operate
explicitly nor implicitly by reference to any act of subsid isation. It merely refers in its recitals to the
state of the domestic EC industry in order to motivate the limitation of the re-introduced state aid.
The findings of the TBR investigation have been u sed to identify market segments where the industry
experiences particularly severe problems, and whic h consequently can benefit from state aid. The
sole purpose of the reference to adverse e ffects in the third recital is to motivate limitation of the state
aid to as few market segments as possible.
4.90 As to the term “against”, the European Commun ities claims that the sole argument advanced
by Korea is that the payment scheme is likely to in tervene in the bidding pro cess so as to modify the
relative competitive position of the EC ship bei ng offered for sale compared to the competitive
position of the Korean ship offered for sale, to the disadvantage of the Korean product. This
“conditions of competition” test has already been rejected by the Appellate Body in US – Offset Act
(Byrd Amendment) for it would give to Article 32.1 of the SCM Agreement a scope of application that
is overly broad. Indeed, if any measure that provi des for payments to the domestic industry and that
is capable of affecting the conditions of compet ition with subsidised exporters of other WTO
Members would fall foul of Article 32.1 of th e SCM Agreement, Articles 5 and 6 of the SCM
Agreement would be rendered inutile.
4.91 The European Communities asserts that the structure and design of the national TDM
schemes are not even remotely compar able to the measure at issue in US – Offset Act (Byrd
Amendment). The financial payments (if any) are fina nced through budgetary resources – not through
countervailing duties on exporters of ships and bear no relation to any countervailing duties that any
exporter could be liable to, or even with any inves tigation or finding of subsidisation. Moreover, the
level of contract related aid (six per cent of the contract value) is even below what was considered
necessary to ensure survival of the industry from injurious pricing under the previous EC shipbuilding
aid programmes and therefore, entirely incapable of o ffsetting the effects of Korean subsidisation that
one potential Korean bidder may have possibly recei ved. Korean products are in no way hindered
either on the Community market or on the world market. Furthermore, the European Communities
alleges that Korea has not substantiated in any other way, how the granting of the six per cent
operating aid (a level lower than the level of aid previously phased out) could have had any effect on
Korea’s yards or Korea to the effect of dissuading the granting of a subsidy or stopping it.
4.92 Regarding the first issue ("specific"), i.e., whether the TDM was specifically against the
alleged Korean subsidies, Korea responds that the European Communities has argued a version of its
position regarding unilateralism; i.e., that the aut horization of anti-Korean funding contained in the
TDM had nothing to do with subsidies. The European Communities offers as the WTO legal standard
an odd reading of the US – Offset Act (Byrd Amendment) case that would mean that if the challenged
measure did not exactly track the SCM Agreement, then it would not be a specific action against
subsidization. That is, it is a specific action ag ainst subsidization only if each separate element of
subsidization as defined in the SCM Agreement is part of the determination in the challenged
measure. As the third parties have aptly pointed out, this leaves an enormous loophole. A Member
could take unilateral countermeasur es against another Member’s a lleged subsidies, but if that
retaliating Member tweaks its countermeasure just slightly to vary it from the SCM Agreement, it
would not be covered by Article 32 of the SCM Agreement.

4.93 Korea further submits that not only is the Eu ropean Communities' position illogical because it
would strip Article 32.1 of all meaning and utility, but it also, of course, does not reflect at all what
the Appellate Body has said. The Appellate Body in the US – Offset Act (Byrd Amendment) was
discussing the close relationship of the Byrd Am endment to the provisions of the Antidumping
Agreement and the SCM Agreement. That is, th e facts in that case demonstrated the necessary
specificity. There was no indication that this was intended as a limiting analysis by the Appellate
Body. Because the Byrd Amendment was an integr al part of the US antidumping and countervailing
duty laws, it cannot be simply inferred that any measure that is not an integral part of a Member’s
antidumping and countervailing duty implementing laws is permissible. In other words, to say that a
particular set of facts led to an affirmative finding does not mean that any other set of facts must result
in a negative determination.
4.94 According to Korea, one need only look as far as the decision in the US –1916 Act case to see
this. Indeed, a good deal of the US defence in that dispute was that the 1916 Act was highly
dissimilar to an antidumping measure, despite its title, and was in fact an antitrust statute dealing with
predatory pricing. The Appellate Body rejected this defence, noting that there might, in fact, be extra
elements referred to in the 1916 Act, but that di d not mean that it was not specifically against
dumping or, in this case, subsidization.
4.95 Moreover, it is simply not accurate that the TDM Regulation itself does not establish the link
to subsidization in the operative part. Article 4 of the TDM Regulation in particular clearly legally
binds the duration of the TDM Regulation to th e WTO dispute DS273, i.e., the alleged Korean
subsidies which are the subject of that dispute.
4.96 According to Korea, the European Commun ities argues that Korean “unfair practices”
referred to in the TDM Regulation does not mean subsid ies, but rather relates to “injurious pricing”
which is “broader” than subsidization.”
50 Even assuming for the sake of argument that this were
accurate, for Korea, the Appellate Body in US – 1916 Act made clear that a measure does not have to
be exclusively restricted to the elements of dum ping (or in this case subsidies) and nothing else in
order for there to be a finding that the measure is specifically against dumping (or subsidization in this
case).51 Moreover, the European Communities implicitly concedes that even its own definition of
“injurious pricing” encompasses subsidies even if it is supposedly “broader” and not “just [i.e.
exclusively] a question of yards being subsidized.” Thus, even under the European Communities' own
definition the TDM covers subsidization.
4.97 Korea asserts that the European Communities al so tries to disassociate the TDM from the
preceding TBR proceedings. For Korea, the TBR proceedings and decision are not directly subject to
challenge in this dispute because Korea agrees that the TBR Report is not an operative measure in the
sense of imposing penalties on Korea as the TDM does. However, it is very relevant in understanding
the basis of the TDM and what it is inte nded to do. As Korea has pointed out, the
European Communities explicitly stated that the T BR findings regarding subsidies were the basis for
the TDM. This was also made quite clear by Commissioner Liikanen when he stated that LNG
tankers could not be added to the TDM until the TBR process had established that the
European Communities considered them to be subsidized.
52
4.98 Korea maintains that the European Communiti es misses the point when it argues that the
TDM remedy does not refer to all of the constituen t elements of subsidization. The Panel and
Appellate Body findings in the US – Offset Act (Byrd Amendment) dispute were not dependent on the
form of the implementation of the measure; it could ha ve been anything (say, treble damages as in the

50 First submission of the European Communities, paras. 195-196.
 51 Appellate Body Report, US – 1916 Act, at para 132.
52 See paragraph 47 of Korea’s first submission and Exhibit Korea – 7.

US – 1916 Act case). Korea’s argument is not based on the individual payments under the authority
of the TDM (although they clearly are illegal, too); rather, the TDM is itself at issue and the TDM is
based upon the TBR process and is legally dependent on the European Communities' WTO dispute
settlement challenge to the alleged Korean subsidization.
4.99 For Korea, the European Communities tries to pe rsuade the Panel that interpretation of the
TDM can only be made on the basis of the few word s in the measure that the European Communities
declares are operative. This argument al so was made by the United States in the US – Offset Act
(Byrd Amendment) case and firmly rejected by the Appellate Body which found that it was not
necessary for the elements to be spelled out in the measure. Among other things, the European
Communities claims that the preambular language is merely “political” and to be ignored. There is no
basis for such an argument, Korea submits. I ndeed, the European Communities argued exactly the
opposite before the panel in the EC – Sardines case. That panel found, as a factual matter, that the
complainant had discussed the measure in its entirety, including the preamble 53 and the Appellate
Body completely upheld the Panel’s reasoning and conclusion.54
4.100 Korea also recalls its earlier discussion of the complete illogic of the European Communities'
argument trying to disassociate the TDM from its complaint against Korea under the SCM
Agreement. If a measure is dependent on and coterm inous with the outcome of a WTO dispute, it is
incontestable that it is a measure specifically agains t the alleged subsidies subject to that dispute.
Even if one were to incorrectly agree that the Agreed Minutes dealt with subsidies and then something
extra as well, why would enforcement of those countermeasure provisions by the
European Communities terminate upon the conclusion of the WTO dispute if the TDM were not at
least in part related to the issue of subsidization? The European Communities' post hoc rationalization
is both inconsistent with the explicit wording of the TDM and its extension. It is also simply illogical.
The wording of the TDM (no matter how narrowl y the European Communities wishes to read it)
necessarily leads to the conclusion that it is specific action related to Korea’s alleged subsidization.
4.101 According to Korea, the Agreed Minutes encap sulated an understanding that the minutes
related to the application of the SCM Agreement to the shipbuilding sector, and how the parties would
encourage WTO consistent behaviour. Korea reject s the European Communities' argument that the
Minutes were in fact a type of international pr ice-fixing agreement. The only thing a Member
government can agree to under the WTO is with r espect to subsidy matters. Beyond the possible
indirect effects of subsidies, pricing is an issu e between private parties. Under long-standing GATT
and WTO jurisprudence, Korea states, antidumping prevention cannot be enforced by an exporting
Member by border restrictions. The days of so- called voluntary restraint agreements have long since
passed.
4.102 Moreover, Korea asserts that the "inextricable link" or correlation between the measure and
the subsidy may be derived from the text of the m easure itself but can also be derived from other
evidence and can be implicit.
55 The Appellate Body in US – Offset act (Byrd Amendment) stated that
a measure that may be taken only when the constituen t elements of a subsidy are present is a “specific
action” against such subsidization. However, th is in no way implies that Article 32.1 of the SCM
Agreement is restricted to measures that may onl y be taken when the constituent elements of a
subsidy are present, as argued by the European Communities. 56 The correctness of Korea’s
interpretation is made crystal clear in the Appellate Body Report in US – 1916 Act where the

53 Panel Report in EC – Sardines at paras 7.31-7.34.
54 Appellate Body Report in EC – Sardines at 192, citing previous findings in this regard in the
Appellate Body Report in EC – Asbestos at para. 64.
55 Appellate Body Report, US – Offset Act (Byrd Amendment), para. 244.
 56 First submission of the European Communities, para 185, quoting the Appellate Body Report in US –
Offset Act (Byrd Amendment) at para. 239.

Appellate Body, analyzing the Anti-dumping Ag reement’s ‘equivalent’ to Article 32.1 SCM
Agreement57 stated that “specific action against dumping must, at a minimum, encompass action that
may be taken only when the constituent elements of ‘dumping’ are present.” 58 The wording “at a
minimum” clearly implies that “specific” action is broader.
4.103 According to Korea, the European Communities' argument that there is no inextricable link
between the TDM measures and the constituent el ements of a subsidy is flatly incorrect. 59 The
European Communities appears to argue that by simply omitting explicit reference to “Korean WTO
inconsistent subsidies” and detailing the constituen t elements of the subsidies therein, the TDM
Regulation escapes all scrutiny under Article 32.1 of the SCM Agreement. The Appellate Body has
rejected such a formalistic approach by specifying that the link to a subsidy in a contested measure
may well be implicit.60
4.104 With respect to the second element ("against "), Korea rebuts the European Communities'
argument that the TDM is not “against” Korean subsid ies, alleging that it is hard to imagine anything
that is more against something. The Appellate Body has determined that “against” means “related to”
or “associated with”. The European Communitie s merely repeats the losing arguments of the
United States in the US – Offset Act (Byrd Amendment) dispute. The European Communities bases its
defence on the notion that a measure is not “against” subsidies if it is “legal”. Of course, this is
absolutely contrary to the findings in the US – Offset Act (Byrd Amendment) dispute. There was no
finding that the Byrd Amendment subsidies were il legal. Quite the contrary, the Panel found that
Mexico had failed to establish such claim of illegal subsidization.
4.105 In relation to the alleged rejection by the Appellate Body of a “conditions of competition” test
in the US – Offset Act (Byrd Amendment) case, Korea maintains that the Appellate Body merely said
that it was not necessary to go so far as to demo nstrate that the conditions of competition were
affected. Instead, the Appellate Body said the pa nel should only have looked at the structure of the
measure itself. In this case, the structure and design of the TDM is that the measure provides for
funds to be given to any EC shipyard that is in competition against – specifically and exclusively - a
Korean shipyard and that asks for such funds. The design of the TDM is to counteract “unfair”
Korean practices which Korea has established to mean alleged Korean subsidies. For Korea, it is hard
to imagine anything more clearly “against” the alleged Korean subsidized products.
4.106 Korea asserts that, according to the Appellate Body Report in US – Offset Act (Byrd
Amendment), there is no requirement in Article 32.1 of the SCM Agreement that the TDM measure
must take direct action against the Korean ship s, the shipbuilders, or the Korean government
responsible for the alleged subsidies in order for th e TDM to be a measure “against” subsidization.
On the contrary, the Appellate Body in US – Byrd Amendment found that even indirect actions – such
as countermeasures taken against other products than the subsidized products - may constitute actions
“against” a subsidy.
61
4.107 On the European Communities' argument that the measure picks up all Korean ships, not just
those that are allegedly subsidized, Korea states that that is not a question under the issue of “against”,
for if it is against all or just some Korean ships, it still is against something. That really goes to the
issue of against what, against alleged subsidization or someth ing else. Second, relating to both steps
of the Article 32 argument, the TDM is clearly aimed at alleged Korea subsidies despite its scatter

57 I.e., Article 18.1 of the Anti-dumping Agreement.
58 Appellate Body Report, US – 1916 Act, para. 122. Underlining added by Korea. Italics in original.
59 Oral statement of the European Communities at the first substantive meeting of the Panel with the
parties, para. 24.
60 Appellate Body Report, US – Offset Act (Byrd Amendment), para 244.
 61 Appellate Body Report, US – Offset Act (Byrd Amendment), para. 251.

shot aspect that might cover all Korean ships. What the European Communities argues here is
inconsistent with its arguments in DS273.
4.108 Finally, Korea recalls the explanation of the Appellate Body in US – Offset Act (Byrd
Amendment) as to why the issue of “against” did not come up in the US - 1916 Act findings:
"[W]e did not focus on the word 'against' in our ruling in US 1916 Act, because there
was no dispute there that the measure (imposing civil and criminal liabilities on
importers) was indeed 'against' something – the question there was whether the action
was against dumping, or some other conduct (predatory pricing)."62
4.109 Korea further notes that when a government pr ovides companies with a subsidy, it does so
with the aim of giving the company a market adva ntage over rivals. That advantage is offset if
another government specifically subsidizes competitors of that company. This is certainly likely to
dissuade or provide an incentive to stop granting the subsidy (provided the other government is
prepared to do so) and therefore such subsidies can act “against” subsidization.
4.110 Korea also claims having provided a mass of evidence showing that the TDM is against
subsidization, including characterizations by t op EC officials themselves confirming over and over
that the TDM is “specifically designe d to counter unfair Korean practices”
63, i.e., subsidies, for a
period necessary for the conclusion of the WTO procedure. The TDM is variously described by EC
officials as a “weapon” against Korean subsidies
64, a “punishment” against the alleged Korean
practices, “countermeasures”65 against Korea pending the outcome in dispute DS273 concerning
allegations of Korean subsidies, or a measure taken to “support” the European Communities' WTO
action in DS273.
4.111 With respect to the "specific action" elemen t of Article 32.1 of the SCM Agreement, the
European Communities counters that Korea refuses to cons ider the operative part of the TDM
Regulation, in particular Article 2.1, on the basi s that it is not necessary to assess the double test on
the basis of the measure. The European Commun ities also recalls Korea's claim that it is not
necessary that a specific action is part of the gene ral trade defence law as was the case in the Byrd
Amendment dispute, but that the measure “as a whole” must be considered.
4.112 The European Communities maintains that Korea’s attempt to ridicule the competition aspect
of the Agreed Minutes by calling it an international “price fixing cartel” reveals the flaw of its own
position. A price fixing cartel seeks to achieve pri ces on the market that do not reflect those resulting
from a competitive market process.
4.113 The Agreed Minutes seek precisely the opposite, the European Communities asserts. They
attempt to ensure the transparency of Korean pr ice-determination with a view to combating anti-
competitive behaviour. This cannot be equated with an internationa l price fixing cartel. Obviously,
measures that ensure pricing at normal costs do not fix prices since the prices will vary according to
the normal costs of each producer and correspond to the prices that a rational economic operator
would seek on the market.

 62 Appellate Body Report, US – Offset Act (Byrd Amendment, para. 245.
 63 Exhibit Korea – 19.
 64 Korea refers to his statement of 7 May 2001 re ferenced above as well as to the article in
Europolitique dated 29 June 2002 referenced above also referring to the TDM Regulation as a weapon.
 65 Draft report on the proposal for a Council Regulation concerning a temporary defensive mechanism
for shipbuilding (COM(2001)401 – C5-0393/2001 – 2001/0153(CNS)), Committee on Economic and Monetary
Affairs, Rapporteur: Karin Riis-Jørgensen, Preliminary 2001/0153(CNS), 8 October 2001, Exhibit Korea - 31.

4.114 The four distinct obligations (relating to banking, transparent accounting standards,
commercially viable practices and co-operation) accep ted by Korea in the Agreed Minutes are a first
but important step to ensure fair and competitive conditions in the shipbuilding sector.
4.115 As regards the obligation to ensu re commercially viable pricing practices that reflect “normal
value” in Section 3 of the Agreed Minutes, the European Communities tak es issue with Korea's
argument that because the WTO Agreement only condemns dumping but does not oblige WTO
Members to combat dumping practices, WTO Members are not competent to do so.
4.116 The European Communities fails to see where in the WTO Agreement Members limited their
capacity to prevent dumping and anti-competitive behaviour by their companies. The
European Communities also fails to see th e relevance of Korea’s reference to Japan –
Semiconductors. That case concerned border restrictions that operate with respect to minimum prices.
Specifically, the European Comm unities in that case challenged non-automatic export licenses as
opposed to government control of dumping prices as such. The Panel found that Japan’s system
violated Article XI:1 of the GATT 1947 because the export licensing practices by Japan led to delays
of up to three months in the issuing of licenses for semi-conductors destined to contracting parties
other than the United States and th erefore constituted restrictions on the exportation of such products
inconsistent with Article XI:1 of the GATT 1947. The European Communi ties further argues that
Korea can find no support in that Panel Report that Article VI of the GATT 1947 curbs the rights of
exporting Members to take action against dumped expor ts. To the contrary, the Panel in that case
explicitly noted that Article VI is “silent on actions by exporting countries”.
4.117 WTO Members are of course entitled to take actions against dumping or otherwise anti-
competitive behaviour of their companies as long as such action does not take the form of an export
restriction contrary to the GATT 1994, the Europ ean Communities submits. Otherwise, can Korea
explain to the Panel, why it has engaged in OECD negotiations on that very topic since the early
1990s? And can Korea explain, why it has establishe d its MOCIE authority responsible to combat
anti-competitive behaviour that has in the past interv ened in the contracted price offered by a Korean
shipyard following a complaint by another Korean shipyard?
4.118 The European Communities states that Korea was unable to respond adequately to the Panel’s
specific question on how Section 6 of the Agreed Minutes would confirm that the Agreed Minutes
interpret WTO law, rather than addressing additiona l issues related to competition law. Essentially
Korea claims that that section clarifies that the Agreed Minutes only seek to interpret WTO
Agreement while at the same time ensuring that this interpretation does not affect other WTO
Members.
4.119 The European Communities argues that Korea’s answer itself reveals the flaw of Korea’s
position. There are two means of interpreting WTO la w, either an interpretation via Article IX:2 of
the WTO Agreement or through the dispute settlement system. A bilateral interpretation would have
little value in a dispute before the WTO.
4.120 The European Communities submits that the stated goal of the Agreed Minutes as reflected in
the first preambular paragraph is “promoting stability and fair competition”. Moreover, both sides
expect, as recorded in the 3 rd preambular paragraph, that the achievement of the four specific
objectives set out in the Sections 1-5 of the Ag reed Minutes will “contribute in a major way to
restoring normal competitive conditions on the market , and to providing for an effective means of
protection against sales of ships at price below cost”.
4.121 With respect to the "against" element of Article 32.1 of the SCM Agreement, the
European Communities claims that Korea cannot demonstrate on the basis of the operative part of the
TDM Regulation or any of the national measures any specific effect against a Korean subsidy. The

European Communities recalls the letter of Artic le 4 of the TDM Regulation, which limits its
temporary scope to the termination of the WTO dispute settlement proceedings. As the
European Communities submitted 66, it considers the dispute settleme nt to be resolved with the
adoption by the DSB of the Report of the Panel (or the Appellate Body), whatever the outcome of the
case is. The TDM Regulation cannot therefore fo rce Korea to adopt any kind of position in the
dispute settlement proceedings in question or to an early withdrawal of its subsidies. At most, the
TDM Regulation might encourage Korea to come back to the negotiating table in the framework of
the Agreed Minutes.
4.122 Korea takes issue with the European Communities' summary of its arguments on “against.”
Korea challenges the EC statement that it has demonstrated that the TDM authorized funding applies
to “any offer independently on [sic] whether there is a directly competing Korean offer.” The funding
is not authorized unless there is a demonstration of a lower Korean offer. Korea also disagrees that
the level of EC funding is unrelated to the level of alleged Korean subsidies, because, in its view the
TDM is similar to US – 1916 Act, a dispute that involved treble damages, i.e., amounts that were not,
by definition, correlated to the actual alleged dama ges. The European Comm unities admits that its
funding alters the conditions of competition. Mo reover, the defence that counter-subsidies may be
“legal” from the point of view of Part III of the SCM Agreement is irrelevant to Article 32.1 and flatly
contradictory to the arguments raised by th e European Communities that prevailed in US – Offset Act
(Byrd Amendment).
4.123 Regarding the issue of “against what”, Ko rea disagrees with the European Communities'
argument that unless a challenged measure spells out in precise detail on its face every element of a
subsidies case, it is not a specific measure against subsidies. Furthermore, the European Communities
has “accepted that there may be a remote economic link between the subsidies allegedly granted by
Korea and the state of the EC industry.” The Eur opean Communities argues as if it has reluctantly
accepted some “remote” link that Korea or someone else forced upon it. However, the whole basis of
the European Communities' request for establishment of the panel in DS273 was based on allegations
of a strong causal link.
4.124 According to Korea, the strong correlation is in the words and structure of the TDM. It is a
twin track strategy for dealing with the alleged Kore an subsidization. It involves establishment of a
panel (DS273) and a pre-emptive retaliation both of which are – by operation of the single legal
instrument they are contained in – legally depende nt upon and coterminous with the WTO dispute.
The issues the European Communities listed in its request for establishment of Panel for DS273 are
the constituent elements of subsidization, the same elements that underlie the TDM.
4.125 Korea states that it is simply illegal for a Me mber country to impose export price controls
such as the European Communities is contending are at the heart of the Agreed Minutes. Its first
defence was based on anti-dumping, but that has now shifted to competition issues. In this
framework, the European Communities finally men tioned the seminal case on illegal minimum price
controls, i.e., the Japan- Semiconductors case but misconstrues this case. This case was not only
about restrictive licensing which is clear from th e paragraph preceding para graph 118 of the panel
decision on which the European Communities relies, i.e.:
"The Panel concluded that the complex of measures constituted a coherent system
restricting the sale for export of mon itored semi-conductors at prices below
company-specific costs to markets other than the United States, inconsistent with
Article XI:1." (emphasis added)

66 Response of the European Communities to Panel Question 6.

4.126 This description also applies to the scheme that the European Communities now says it was
trying to foist upon the world shipping markets. Bu t Korea did not enter into such a blatantly WTO-
illegal and anticompetitive agreement. The Europ ean Communities states in paragraph 70 of its
Second Written Submission that the Japan – Semiconductors case does not stand for the proposition
that Article VI limited the rights of Contracting Parties to impose anti-dumping measures. The
European Communities cites paragraph 121 of the pane l report which has nothing at all to do with the
point the European Communities is trying to make. Th e issue there was that Japan tried to justify its
export price-raising measures by stating that it was trying to control below-cost dumping and noting
that Article VI provides that “dumping is to be condemned.”
67 The European Communities well
understood this argument by Japan and argued that Article VI did not provide for independent
authority to end anti-dumping pricing into third country markets. 68 The panel agreed completely with
the European Communities and stated:
"The Panel therefore found that Article VI did not provide a justification for measures
restricting the exportation or sale for e xport of a product inconsistently with
Article XI."69
4.127 Korea asserts that the European Communities attempts to justify its right to compel Korea to
impose border price measures on the basis of some vague competition law basis. But there is no
international competition law agreement and the European Communities cannot enforce a non-
existent agreement. If price controls at the border cannot be justified by reason of Article VI of the
GATT which provides that dumping is to be condemn ed, they certainly cannot be justified on the
basis of some invented competition law agreement.70
4.128 The European Communities asserts that Korea's argument (picked up from China), whereby
it is not necessary under a countervailing duty measure that each duty is subject to a specific finding
of subsidisation, turns against Korea. Articles 9.3 of the Anti-Dumping Agreement and 19.3 of the
SCM Agreement clarify that any anti-dumping or countervailing duty must be established on an
individual finding of dumping or subsidisation. The same is required for the other specific actions
against a subsidy permitted by the SCM Agreement, an actionable or prohibited subsidy case.
4.129 Korea disregards the term “specific” and its context, the European Communities asserts.
Indeed, it is noteworthy that Korea did not respond to one single argument made by the
European Communities relating to the significance of the qualifier “specific”. The context mandates a
distinction between general “actions against subsidies” and “specific” actions against subsidies.
Moreover, Article 32.1 clarifies what specific actions against subsidies are by referring to those that
are permitted under the SCM Agreement. As explai ned before, these are all well targeted measures
depending on a specific finding that at least the co nstituent elements of a subsidy are present, the
European Communities adds.
4.130 The European Communities claims that a very broad political link between a subsidy measure
that applies to entire market segments, independently from the existence of subsidisation, is simply
not sufficient. Neither is a politically motivated temporal link to a WTO case limiting in time the re-
authorisation of previously phased out subsidies.
4.131 The European Communities argues that, instead of responding to the detailed and reasoned
explanation that it has advanced as to why the opera tion of the measure cannot be seen as inextricably

67 Japan – Semiconductors at paras 45 and 68.
68 Id. at para. 47.
69 Id. at para 120.
70 Korea notes that it made these arguments in its general comments and considers the findings of the
panel in Japan – Semiconductors to be equally applicable to the discussions regarding DSU Article 23.

linked to the constituent elements of a subsidy, Korea invokes the measure “as a whole”, including its
preamble. Yet, whatever term Korea points to in the whereas clauses of the TDM Regulation, i.e.,
“unfair competition”, the Agreed Minutes or the “material injury and serious prejudice” suffered by
the domestic industry, they cannot serve as a basi s for establishing an inextricable link between the
operation of the TDM Regulation and the specific s ubsidies at issue in an ongoing WTO case. These
terms merely motivate the temporary reintroduction of operating aid and its limitation.
4.132 The European Communities continues its argument ation with respect to the "against" element
of Article 32.1, taking issue with Korea's argument that Article 32.1 of the SCM Agreement prohibits
“counter subsidies”. The European Communities not es that the US made that argument without
defining the notion of counter subsidies and with the explicit statement that it cannot assess whether
the TDM is such a counter subsidy. The Europ ean Communities further explains that the term
counter subsidy has no basis in the Agreement and that, similar to “matching aid”, a counter subsidy
would need to cancel out the effects of a particular other subsidy. There must be targeting. As
explained before, the TDM Regulation does not ope rate with respect to any WTO inconsistent
subsidies of Korea. It merely grants subsidies to some EC shipyards at a level below the intensity of
aid previously phased out.
4.133 Finally, for the European Communities, the TDM Regulation is defensive as opposed to
offensive. This is clear, both from its name (“Temporary Defensive Mechanism”) and its operation: a
general subsidy at a level below any previously author ised intensity of contract related aid. The need
for such temporary aid is motivated by the non-impl ementation of the Agreed Minutes. As explained
above, the Agreed Minutes are not about “subsidies” and in particular not subsidies that are covered in
the DS273 case.
4. Article 23 of the DSU
(a) General Arguments
4.134 Korea
 states that the provisions of the TDM Regulation 71 as extended in product scope to
cover LNGs72, and as extended in duration until March 2005 73, are on their face inconsistent with the
European Communities' obligations under Article 23 of the DSU. Individual instances of application
of the TDM Regulation are likewise inconsistent with this provision.
4.135 Korea alleges that the TDM provides for special state-funded contributions on a contract-
specific and product-specific basis, for the building of container ships, produc t and chemical tankers
as well as LNG carriers when ther e has been competition from a Korean yard allegedly “offering a
lower price”. 74 Furthermore, the TDM contributions amount to (maximum) six per cent of the
contract value prior to the contribution. 75 The contributions are made in support of contracts to be
delivered within three years from the date of signing of the contract (though extension of the three-
year delivery deadline remains possi ble in special circumstances).
76 Korea also asserts that the TDM
Regulation allows the contributions only with resp ect to EC shipyards in those segments judged by

71 Council Regulation 1177/2002 Concerning a Temporary Defensive Mechanism for Shipbuilding, OJ
(2002) L 172/1. Provided in Exhibit Korea - 4(a).
72 Notice 2003/C 148/10 published on 25 June 2003. Provided in Exhibit Korea – 4(b).
73 Council Regulation 502/2004 Amending Regulation 1177/2002 Concerning a Temporary Defensive
Mechanism for Shipbuilding, OJ (2003) L 081/6. Provided in Exhibit Korea – 4(c).
74 Article 2.1, TDM Regulation.
75 Article 2.3, TDM Regulation.
76 Article 2.4, TDM Regulation.

the European Communities to have suffered “a dverse effects” or “serious prejudice” caused by
“unfair Korean competition”.77
4.136 Moreover, Korea asserts that the TDM Regula tion is expressly designed to be coterminous
with, and legally dependent upon initiation of, WTO dispute settlement proceedings (brought by the
European Communities in the dispute Korea – Commercial Vessels (DS273)). The TDM Regulation
applies to contracts signed from 24 October 2002, i.e. the date of the European Commission's
Notice78 announcing the initiation of WTO dispute settlement proceedings against Korea as a result of
the investigation conducted under the EC Trade Barrier Regulation 79 concerning certain alleged
subsidies received by the Korean shipbuilding industry, until one month after the
European Commission gives notice in the Official Journal of the European Communities that these
dispute settlement proceedings are resolved or suspended.80
4.137 Korea states that the TDM Regulation was supposed to expire on 31 March 2004. However,
the duration of the TDM was extended by Council Regulation 502/2004 by one year to
31 March 2005. Recital 5 of Re gulation 502/2004 explicitly states that the extension of the TDM
beyond 31 March 2004 was necessary because “WTO disputes settlement proceedings are not
expected to have been resolved by that date.”
4.138 On the matter of the relationship of th ese two measures (TDM contributions and WTO
proceeding), Korea recalls official papers and pr onouncements by EC Commissioners, for example:
(i) European Commission Press Release IP/01/1078, Brussels, 25 July 2001;
(ii) European Commission Press Release IP/02/945, Brussels, 27 June 2002; and,
(iii) European Commission Press Release IP/03/895 , Brussels, 25 June 2003. Korea emphasizes the
importance of these statements. Korea argues that the European Communities' attempts to dismiss
these statements of its own Commissioners, as mere ly “political” statements to be ignored, are
unfounded. Korea further recalls that, in a background memorandum to the European Parliament with
respect to the TDM Regulation, the European Co mmunities stated that the so-called twin-track
strategy involved the following:
"(i) the initiation of an action against the Republic of Korea at the World Trade
Organisation (WTO) and (ii) the authorisa tion of temporary and limited contract
related operating aid under the Temporary Defensive Mechanism (TDM) to assist
Community shipyards in those segments wh ere they have suffered adverse effects
caused by unfair Korean competition.
[…] 3. […]only those market segments wher e it has been demonstrated that the EU
shipbuilding industry has suffered adverse effects caused by unfair Korean trade
practices are eligible for aid: container ships; chemical and product tankers; as well as
Liquefied Natural Gas (LNG) carriers. Second, the defe nsive mechanism expires on
31 March 2004, which was consistent with the anticipation, at the time of adoption of
Regulation (EC) No. 1177/2002, that the relevant WTO proceedings would have
been concluded at that date.

77 Recital 4, Article 2.2 (with respect to LNG carriers) and Article 2.5, TDM Regulation.
78 O.J. No C 257, 24.10.2002, p. 11.
79 Council Regulation (EC) No. 3286/94 of 22 Decem ber 1994 laying down Community procedures in
the field of the common commercial policy in order to ensure the exercise of the Community's rights under
international trading rules, in particular those establis hed under the auspices of the World Trade Organization,
O.J. [1994] L 349/71, as amended by Council Regulation (EC) No. 356/95 of 20 February 1995, O.J. [1995] L
413. Provided in Exhibit Korea – 5.
80 Article 4, TDM Regulation.

[…] 5. It should also be stressed that , from the outset, the two instruments making up
the twin-track strategy were closely interre lated, in particular as regards timing.
Pursuant to the TDM Regulation, the s upport mechanism could only be activated
after the Commission had initiated WTO dispute settlement proceedings against
Korea - which was done on 8 October 2002 2. By the same token, it was expressly
provided that the mechanism was to be a pplied only until the conclusion of these
proceedings or the suspension of such proceedings on the grounds that the
Community considered that the Agreed Minutes had been effectively implemented
(and, in any case, not after 31/03/04). In othe r words, the twin-track strategy is built
on a simultaneous use of its two instruments."81
4.139 Korea claims that this is entirely consistent with what the TDM itself stipulates, for instance
in paragraphs (4) and (7) of its preamble.
4.140 Moreover, Korea rejects the European Communities' argument that the legally coterminous
and dependent link between the TDM and the WTO di spute DS 273 is a coincidence and was merely
intended to limit the TDM scheme by reference to an “objective” date that was outside the discretion
of the European Communities. The authorization in Article 4 of the TDM Regulation to provide
funding to their shipyards when in competition with Korean shipyards is legally contingent upon the
initiation and duration of a WTO dispute challenging alleged Korean subsidies pursuant to the SCM
Agreement. The language of the TDM Regulation a nd other evidence cited by Korea make clear that
the link is not coincidental and anything but “obj ective.” The legal contingency for the beginning and
the end of the TDM authority is linked exclusively and directly to the WTO dispute.
4.141 Korea also challenges the European Communitie s' argument that the TDM was not aimed at
subsidies, but at injurious pricing as prohibited under the Antidumping Agreement as expressed in the
Agreed Minutes. First of all, the Agreed Minutes do not say at all what the European Communities
claims. Korea challenges the European Communiti es to point to one single commitment in the
Agreed Minutes whereby Korea agreed to use border controls to impose pricing agreements. It is
simply untrue that Korea agreed to take action to end dumping at its border. Nothing in Sections 3
and 4 of the Agreed Minutes commits either govern ment to intervene directly in private pricing
practices. An a contrario reading of these provisions leads to the logical conclusion that where there
is a lack of any such commitment, there is no agr eement to enforce. This must be the case because it
is the only legally permissible conclusion under GATT and WTO jurisprudence and section 6 of the
Agreed Minutes makes it clear that the Agreed Minu tes must be interpreted in the context of the
parties’ WTO rights and obligations. Korea did not and emphatically does not agree that Korean
shipyards are dumping. The shipyards that the European Communities claims are all selling below
cost are all extremely profitable. Indeed, the onl y allegation the European Communities has come up
with is that the companies are not burdened with the right amount of debt because the Korean
Government has forgiven such debt. Korea disagrees, but that, of course, is exclusively a
disagreement on a question of subsidization. Thus , the only permissible interventionist role for a
WTO Member government can be with respect to subsid ies. Dumping is an i ssue of private parties;
more than that, it is a company-specific pricing issue. Thus, it must follow that, to the extent there are
price effects, they run from the a lleged subsidies and that was all that the Government of Korea could
ever agree to.
4.142 Korea rebuts the European Communities' ar gument that the TDM was meant as an
enforcement of the Antidumping Agreement and theref ore is not relevant to Article 32 of the SCM

 81 Korea notes that the text of the Commission Memora ndum is referenced also in the Report to the
European Parliament by German Social Democrat Christa Randzio-Plath (CNS/2004/0008). The
European Parliament adopted the report on 26 February 2004, approving the extension of the TDM mechanism
until 31 March 2005. Provided in Exhibit Korea – 1.

Agreement. In this respect, Korea clai ms that what remains unanswered by the
European Communities is how it could claim as a defence against the prohibition against
unilateralism in DSU Article 23 that the European Communities was seeking to unilaterally enforce
the provisions of the Antidumping Agreement rather than the SCM Agreement.
4.143 For Korea, the statements of the Europ ean Communities in its legal documents, its
explanatory memoranda, and the very words of its hi ghest officials make very clear exactly what the
TDM was all about. It was an enforcement me chanism implemented at the initiation of a WTO
dispute settlement proceeding, extended to remain coterminous with such a proceeding and scheduled
to end when such a proceeding ended. If there we re two completely different matters at issue under
the TDM, why would it terminate when a totally unrelated matter terminated. If, as the
European Communities argues, the Agreed Minutes had to do with the antidumping practices of
private companies, of what possible relevance coul d it be if a WTO subsidies case was resolved. To
illustrate the European Communities' illogic, Korea offers the following hypothetical:
Assume a Member has taken two actions: A and B. Another Member disagrees with
both actions A and B. 82 In response, Member 2 begins a WTO dispute settlement
proceeding which it claims is with resp ect to only action A. It then imposes
countermeasures only with respect to B. Howe ver, it states that the countermeasures
will end upon the conclusion of either the WTO case against action A or the
resolution of action B.
4.144 Korea submits that this makes no sense. If the countermeasures were taken only with respect
to action B, there would be no reason at all for any reference to action A. Even if the reference to
terminating the countermeasures referred to the end of both the WTO case and the resolution of action
B, it would still be illegal. There is no permission under the DSU to take unilateral countermeasures
if they apply to resolutions of WTO disputes as well as something else in addition . They cannot be
used to resolve WTO disputes at all.
4.145 In addition, Korea notes, the langua ge of the TDM does not support the
European Communities' argument that there are two di stinct matters. Article 4 of the TDM provides
that it is effective until the EC Commission publis hes a notice that “these dispute settlement
proceedings are resolved or suspended on the ground s that the Community cons iders that the Agreed
Minutes have been effectively implemented.” For Korea, there is only one sensible way of reading
this statement. The resolution and suspension are with respect to “these dispute settlement
proceedings”. That is, the suspension upon agreem ent of effective implementation of the Agreed
Minutes is a suspension of the WTO proceedings . This can only mean that the Agreed Minutes are
the subject of the WTO proceedings, not of something distinct. The simple little word “or” destroys
the European Communities' whole argument.
4.146 While the TDM language is not a model of clarity, the explanation in the second recital of the
TDM extension confirms these points. It reads as follows:
"In particular, the temporary defensive mechanism was only authorized after the
Community initiated dispute settlement pro ceedings against the Republic of Korea
and could no longer be authorized if these dispute settlement proceedings were
resolved or suspended." (emphasis added)
4.147 Thus, reading the TDM and its extension together , it could not be clearer that there were not
two different matters that were the subject of the TDM. The TDM referred only to the subsidization

82 Of course, Korea states, in the present case, action A corresponds to the alleged subsidization and
action B refers to the alleged failure to enforce the Agreed Minutes.

issue for which the European Communities in itiated dispute settlement proceedings. The
European Communities makes an inaccurate post hoc rationalization when it argues that the TDM
referred to two distinct matters, i.e., on the one hand, the WTO proceedings with respect to the
subsidies issue and, on the other hand, the Agreed Minutes with respect to something completely
distinct.
4.148 Korea further addresses the European Commun ities' argument that DSU Article 23 only
applies if the retaliation is pursuant to a formal determination. For Korea, apparently, a Member
needs to put in the title of the offending measure “Cont rary to Article 23, it is determined. . .”
Nothing ever quite reads in this overly formalistic way. This common sense point is made very clear
in the Panel Report in US – Certain EC Products wherein it was stated that:
"In the context of the WTO, we consider that a determination that a WTO violation
has occurred is a decision that a WTO Member has violated the WTO Agreement and
which bears consequences in WTO trade relations."83
4.149 For Korea, it must be beyond question that the TDM was a decision. And as it was made
effective only upon initiation of a WTO dispute and te rminates only upon resolution or suspension of
such dispute, the conclusion is inescapable that it was a decision that Korea has violated the SCM
Agreement. Korea alleges that it is also indisputable that it had consequences in WTO trade relations.
It imposed a highly discriminatory penalty against Korean products.
4.150 Korea states that the Appellate Body in US – Certain EC Products held that Article 23.1 of
the DSU imposes a general obligation to redress vi olations “only by recourse to the rules and
procedures of the DSU, and not through unilatera l action.” Furthermore, Article 23.2(a)-(c)
demonstrated the close connection to Article 23. 1 and together “all concern the obligation of
Members of the WTO not to have recourse to unilateral action.”84
4.151 Thus, the scope of Article 23 is quite broad. It is not limited to formal determinations that
explicitly state that they are outside the DSU, nor to measures that involve suspension of concessions
under the DSU.
4.152 Korea comments on European Communities' hypothetical, 85 arguing that it seems to equate
the Agreed Minutes with the exception provided for Free Trade Agreements (“FTA”) contained in the
GATT 1994 Article XXIV. For Korea, this is an over-stretched analogy that the
European Communities leaves unexplained. Second, with an FTA, Article XXIV provides a specific
exception to permit two or more WTO Members to offer each other special privileges not provided to
other Members on an MFN basis. The European Communities posits a situation where, following a
disagreement, some or all of those privileges ar e withdrawn, the exception no longer applies and the
situation returns to standard WTO MFN status. Korea would like the European Communities to
clarify just what extra privileges (i.e., WTO “plus” privileges) were being offered by Korea and the
European Communities to each other through the Agr eed Minutes. Clearly, there were none. That
being the case, this is not a situation of withdraw ing extra privileges and going back to the status quo;
rather, it was an agreement on interpretation of WTO rules and the action taken by the
European Communities is not a return to the WTO status quo, but an imposition of penalties. If the
European Communities argues that it is a return to status quo because it removes the unfair trade
practice of subsidization by Korea, the response is that only the DSB can make such rulings in the
face of Korea’s emphatic rejection of the European Communities' allegations of subsidization.

83 Panel Report, US – Certain EC Products at para. 6.98.
84 Appellate Body Report, US - Certain EC Products, at para 111.
85 First submission of the European Communities, para. 137.

4.153 Korea offers the following hypothetical for the consideration of the Panel:
One WTO Member (the “complaining Member”) considers that another Member (the
“responding Member”) has provided support an d subsidies to a particular domestic
capital goods industry. According to the complaining Member, such support and aids
are inconsistent with both the WTO SCM Agreement as well as perhaps an earlier
bilateral agreement; one reached in, to pick a hypothetical date, say 1992. The Trade
Minister of the complaining Member states that he has had enough of the subsidies
and price undercutting resulting from the breach of the 1992 Agreement by the
responding Member and so he is putting in to place a twin-track strategy that will
bring the responding Member to the table so that it will fulfil its obligations. First,
the complaining Member launches a WTO dispute settlement case under the SCM
Agreement. Second, it suspends the landi ng rights of aircraft of the responding
Member coterminous with the WTO dispute settlement case. The complaining
Member’s Trade Minister points out that , pursuant to the Annex on Air Transport
Services to the GATS, bilateral air transport landing rights are not subject to WTO
rules. Therefore, the complaining Memb er, when challenged regarding these twin
tracks, replies that the suspension of landing rights has nothing to do with the SCM
claims and the SCM claims are being d ealt with exclusively under the dispute
settlement portion of the twin track. It claims that the second track is related
exclusively to the 1992 Agreement between the parties.
4.154 According to the European Communities' argume nt in this case, the complaining Member in
the hypothetical will be correct in such an argum ent and there can be no possible challenge to the
complaining Member’s suspension of landing rights under either the DSU or the SCM Agreement. In
Korea’s view, any such interpretation is in contradi ction with the explicit wording of DSU Article 23
and would leave the door wide open for WTO Members to retaliate in all sorts of non-covered sectors
or areas, clearly affecting trade between WT O Members before any WTO dispute settlement
proceeding is carried out or without such procedure ever being carried out, clearly thereby
undermining the very letter and spirit of DSU Article 23.
4.155 The European Communities
 explains that the term “unilateral measures” referred to in
existing case law and the negotiating history is conf ined to “wild” retaliation through suspension of
concessions or other obligations leading to spirals of retaliations and destabilising the GATT system.
However, Article 23 of the DSU was not meant to prohibit what is termed under public international
law an “unfriendly act”, a measure compatible with WTO law.
4.156 On the matter of whether Article 23 would c ontain more than a prohibition of unilateral
suspensions of concessions, the European Comm unities notes that, according to the Panel in US –
Section 301 , the second paragraph of Article 23 prohibits certain particularly egregious cases of
unilateral conduct. The Panel in that case clarified that the less egregious cases of conduct contrary to
the dispute settlement procedures would be other proce dural omissions, e.g. failure to consult before
requesting a Panel.
4.157 In essence, the European Communities posits, Article 23.2 of the DSU records a deal between
the then GATT contracting parties concerning the use of Section 301, a US law calling for the
imposition of unilateral trade sanctions against other GATT contracting parties whenever the
United States determined they were in violation of their GATT obligations.
4.158 The European Communities further alleges that the essential features of Section 301 were that
it would have authorised a determination of WTO in consistency and retaliation in form of suspension
of concessions without awaiting the outcome of a WT O dispute settlement proceeding. In particular
the phrase “ before suspending concessions or other obliga tions under the covered agreements” in

Article 23.2 reflects that Members wanted to curb such unauthorised retaliations. However, when
agreeing to prohibit certain forms of unilateral conduct, GATT Parties did not agree to create a
“locked circle” whereby Members would forego their right to take even perfectly legal measures in
response to a WTO violation of another WTO Member.
4.159 The negotiating history further confirms that Article 23 of the DSU only meant to curb
unilateral measures that were otherwise WTO inc onsistent. The first drafts of the rules on
“strengthening the multilateral system” envisaged that:
"The contracting parties shall: (i) abid e by GATT dispute settlement rules and
procedures; (ii) abide by the recomme ndations, rulings and decisions of the
Contracting Parties (iii) not resort to unilateral measures or the threat of unilateral
measures inconsistent with GATT rules and procedures and (iv) for the purposes of
(iii), undertake to adapt their domestic trad e legislation and enforcement procedures
in a manner ensuring the conformity of all measures with GATT dispute settlement
procedures." (emphasis is added) 86
4.160 Negotiators wanted to prevent unilateralism in the form of unauthorised “countermeasures”.
These are defined under public international law as:
"A law enforcement measure which cons ist in a temporary dispensation from
complying with the law. In relation to the classical unilateral peacetime remedies,
this term should theoretically encomp ass the suspension of the treaty and the
reprisals; that is to say, the two tem porary measures which go beyond equivalence
and which would in principle be unlawful if they were not resorted to as reactions to
an international offense." 87
4.161 The European Communities claims that c ountermeasures or unilateral measures do not
comprise acts of retorsion. A retorsion is defined as:
"An unfriendly but nevertheless lawful act by the aggrieved party against the
wrongdoer. As such retorsion is not circumscribed by the international legal order."88
4.162 The prohibition of unilateral measures under the DSU not only excludes retorsions, but also
those acts that may be illegal under a bilateral agreem ent between the two disputing parties, but that
are outside the scope of the WTO Agreement. The European Communities submits that the following
hypothetical for the consideration of the Panel:
The European Communities and Korea have concluded a bilateral agreement not to
grant any subsidies. The European Commun ities believes that Korea has violated its
obligations not to grant export subsidies under the WTO Agreement and the bilateral
Agreement. The bilateral Agreement does not have a dispute settlement mechanism.
The European Communities seeks condemnati on of the export subsidies in the WTO
but also decides to suspend its bilateral obligation not to grant any subsidy by
reinstating certain WTO compatible aids.

86 Report by the Chairman “Profile on the Status of the Work in the Group”, MTN.GNG/N13/W/43 of
18 July 1990, p. 4; Secretariat Non-Paper 25 March 19 91, p. 13; Draft Text on Dispute Settlement by the
Negotiating Group on Dispute Settlement, MTN.GNG/NG13/W/45 of 21 September 1990; p. 7.
87 Elisabeth Zoller, Peacetime Unilateral Remedies/ An Analysis of Countermeasures , (Transnational
Publishers: 1984), p. 75.
88 Zoller, p. 5.

4.163 For the European Communities, the suspension of the bilateral obligation such as in this case
is not a relevant measure under Article 23 of the DSU as long as it is not demonstrated that it violates
a substantive WTO obligation. Article 23 of the DSU cannot prohibit conduct that is otherwise WTO
compatible. The scope of the procedural obligation under the DSU in the form of an exclusive
jurisdiction and special suspension clause must parallel the scope of the material obligations under the
substantive Agreements.
4.164 The European Communities furt her maintains that had WTO Members indeed wished to
create a locked circle, where WTO Members forego their right to resort to retorsions or measures that
are otherwise compatible with WTO law they woul d have used much stronger language in Article 23
of the DSU. Article 23, entitled “ strengthening the multilateral system” takes a first step into that
direction by curbing unilateral suspensions of con cessions and obligations. It does not create a basis
for the far reaching consequence of “locking WTO Members in a multilateral system.”
4.165 Therefore, the European Communities concludes by stating that the suspension of obligations
under another international agreement or an act that is not even incompatible with any international
norm but merely an unfriendly act, which does not fall under the scope of Article 23 of the DSU.
(b) Article 23.1 of the DSU
4.166 Korea submits that the TDM Regulation on its face is inconsistent with Article 23.1 of the
DSU. According to Korea, Article 23.1 requi res that in any case where a WTO Member "seeks
redress" of an alleged WTO violation the Member must: (i) have exclusive recourse to the multilateral
dispute settlement process set out in the DSU; (ii) abide by the rules and procedures set out in the
DSU.
4.167 By adopting the TDM Regulation, Korea subm its that the European Communities “sought
redress” for what it claimed to be Korean WTO violations. Indeed, the TDM Regulation was enacted
following detailed investigations by the European Communities into alleged Korean shipbuilding
subsidies under the European Communi ties' TBR investigative procedure.
89 The investigative reports
of the Commission under this procedure conclude d that Korean shipbuilding measures were
prima facie WTO-inconsistent subsidies causing adverse effects and serious prejudice within the
meaning of Articles 5 and 6 of the SCM Agreement. 90 In response, the European Communities
sought redress for these alleged Korean WTO viola tions through the “twin-track” strategy, which
involved pursuing WTO dispute settlement against Ko rea over the alleged subsidies, while at the
same time seeking immediate and unilateral redress by adopting the TDM Regulation.
4.168 Moreover, Korea alleges that the TDM Regul ation was adopted shortly thereafter and
published in the Official Journal on 2 July 2002. The TDM Regulation sought to redress the “adverse
effects” and “serious prejudice” the European Co mmunities had (unilaterally) determined its
shipyards suffered as a result of illegal Korean subs idization of its shipbuilding industry. Under the
TDM, this “redress” takes the form of highly ta rgeted contributions provided to EC shipyards
exclusively when those shipyards can show they are in competition with a Korean yard offering a
lower price in the bidding process for a specific TDM-covered vessel. As explained in Recital 3 to
the TDM Regulation, the TDM was adopted as “...an exceptional and temporary measure…in order to

89 Council Regulation (EC) No. 3286/94, as amended. Provided in Exhibit Korea – 5.
90 EC Commission Report to the Trade Barriers Commi ttee on alleged obstacles to trade from Korean
shipbuilding practices. Initial report presented to the Trade Barrier Regulation Committee on 8 May 2001.
Supplementary report presented in July 2001. Updating reports presented on 9 May 2002 and in June 2003 on
LNGs. All four provided in Exhibit Korea – 6.

assist Community shipyards in those segments that have suffered adverse effects in the form of
material injury and serious prejudice caused by unfair Korean competition…” 91
4.169 Korea asserts that the language of Article 4 of the TDM Regulation 92 shows that both the
TDM Regulation and the European Communities' pursuit of WTO dispute settlement proceeding are a
response to, and a form of redress against, allege d Korean WTO violations. Otherwise there can be
no rational explanation for the European Communi ties explicitly linking these two events in the
legislation. The European Communities was fully aware that the WTO dispute settlement it was
pursuing, and any favourable ruling it might hope to obtain in a panel or Appellate Body proceeding
would of course take time. Rather than wait for the outcome of WTO dispute settlement, the
European Communities took matters into its own hands by enacting the TDM and imposing
retaliatory measures targeted exclusively at Korean competing ships.
4.170 For Korea, Article 23.1 of the DSU however provides that in cases where a Member considers
another Member’s measures to be WTO-inconsistent, the complaining Member shall have recourse to
the dispute settlement system. The Panel in US - Section 301 Trade Act made it crystal clear that the
words "shall have recourse to" means that Members must only and exclusively have recourse to the
multilateral DSU framework. What is especially prohibited is any form of unilateral enforcement of
WTO rights or obligations. 93 In adopting the TDM Regulation, the European Communities
manifestly failed to have exclusive recourse to this multilateral framework contrary to Article 23.1.
4.171 Indeed, if Members are allowed to enforce th eir perceived rights unilaterally through any
means as long as they do not involve a suspension of concessions or other obligations, then there
obviously is no exclusivity. This provides fertile grounds for circumvention of the system. WTO
dispute settlement simply becomes one option of ma ny. Allowing unlimited extra-treaty enforcement
of rights cannot be consistent with promoting the security and predictability of the multilateral trading
system and would moreover unfairly favour the most powerful WTO Members.
4.172 Finally, Article 23.1 of the DSU requires that Members must "abide by" the rules and
procedures of the DSU. The US - Section 301 Trade Act Panel confirmed that this requires abiding by
all applicable DSU rules and procedures. 94 By unilaterally seeking redress through the TDM
Regulation, the European Communities necessarily failed to “abide by” the DSU rules and procedures
in violation of Article 23.1.95
4.173 The European Communities submits that to violate Article 23.1 of the DSU, a WTO
Member must (i) “seek the redress” (ii) “o f a WTO violation”. According to the
European Communities, the interpretation of this expression in its immediate context and purpose

91 Recital 3, TDM Regulation.
92 Article 4, TDM Regulation:
"The Regulation shall be applied to final contr acts signed from the entry into force of this
Regulation until its expiry, with the exception of final contracts signed before the Community
gives notice in the Official Journal of the European Communities that it has initiated dispute
settlement proceedings against Korea by requ esting consultations in accordance with the
World Trade Organization’s Understanding on the Rules and Procedures for the Settlement of
Disputes and final contracts signed one month or more after the Commission gives notice in
the Official Journal of the European Communities that these dispute settlement proceedings
are resolved, or suspended on the grounds that the Community considers that the Agreed
Minutes have been effectively implemented." [Emphasis added].
93 Panel Report, US – Section 301 Trade Act, para. 7.43.
94 Panel Report, US – Section 301 Trade Act, para. 7.43.
95 Korea argues that the European Communities specifically challenged the right of another Member to
impose measures concurrently with a WTO dispute proceeding when it requested the establishment of a panel in
US – Tariff Increases on EC Products.

clarifies that only measures of a retaliatory natu re are covered, that is measures amounting to a
suspension of concessions or obligations under the WTO Agreement.
4.174 The European Communities asserts that the chapeau of Article 23.2 of the DSU, explicitly
links the general obligation “shall seek to redress violations of WTO law” with three specific
obligations in Article 23.2.(a)-(c) of the DSU th rough the phrase “in such cases, Members shall”.
Article 23.2 of the DSU is therefore linked to, and h as to be read together with, Article 23.1 of the
DSU. It follows that a prohibited unilateral action that redresses a WTO violation must have elements
of the three sub-paragraphs, i.e., a determination that has the effect of suspending concessions or
obligations without awaiting a reasonable period fo r implementation and prior authorisation through
WTO dispute settlement proceedings.
4.175 The European Communities further argues that this is corroborated by the purpose of
Article 23 of the DSU which is simply to set out a lex specialis to public international law rules on
suspension of the operation of a treaty.
4.176 For the European Communities, the notion of countermeasures or retaliatory measures under
public international law is confined to measures that would otherwise be incompatible with a treaty or
an obligation of the state under public internationa l law, because obviously, a treaty cannot prohibit a
retaliatory measure outside the material scope of th at treaty. The same applies to Article 23 of the
DSU. If that Article were interpreted in th e broad manner Korea suggests, the WTO dispute
settlement would – via Article 23 of the DSU – beco me a means to discipline the conduct of states
outside the realm of the WTO Agreement.
4.177 Korea’s argument that the TDM Regulation is a countermeasure to a WTO law violation
essentially rests on the fact that the timing of th e TDM Regulation is coterminous with the WTO
proceeding, the European Communities submits. Howe ver, there is a simple and rational explanation
for this. The European Commission and Council ag reed to exceptionally and partially re-authorise
operating aid only under the condition that such aid is strictly limited (in time and scope). The link to
the WTO proceeding merely aims at setting an objective time-limit and it is not the only temporal link
contained in the TDM Regulation. In the case, the Agreed Minutes were implemented before the
resolution of the WTO proceedings, no aid could be granted by virtue of Article 4 of the TDM
Regulation.
4.178 According to the European Communities, Kore a also claims that the TDM Regulation is
linked to an alleged determ ination of WTO inconsistent subsidies gr anted by Korea. In fact, the term
“subsidies’ is not even mentioned. The exact wording “suffered adverse effects in the form of
material injury and serious prejudice caused by unfair Korean competition” (recitals 3 and 4) refers to
the state of the EC industry as a result of the broader problem of injurious pricing. This is made clear
through the explicit reference in the 1 st and 2nd recital of the TDM Regulation to the failure by Korea
to implement the Agreed Minutes.
4.179 Korea then appears to argue that the TDM Regul ation refers to “injury and adverse effects”
established in the TBR investigations which led to the launching of the DS273 WTO case. The
European Communities fails to understand the releva nce of that fact. As mentioned earlier, it was
necessary to limit the material scope of the TDM Regu lation in the effort not to reintroduce to the full
extent operating aid into the sector. The informati on gathered in the TBR investigation in respect of
the state of the EC shipbuilding industry was simply the most appropriate and readily available basis
to determine the precise needs of that industry at that time.
4.180 Korea does not explain how the TDM Regulation can be capable of “remedying” or
“redressing” subsidisation granted by Korea. Fi rst of all, the TDM Regulation does not have any
immediate effect. Only if a member State decides to devote budgetary resources to a scheme, and that

scheme is approved by the Commission, an EC shipya rd would be able to obtain operating aid. Even
the national programmes of the member States have not such an immediate effect unless they are
actually used. Second, the European Communities fails to see how the limited re-authorisation of
subsidies (at a lower level than authorised before for many years) can be capable of inducing the
cessation of WTO inconsistent subsidies or adverse effects thereof.
4.181 Finally, under no circumstances can the limited re -authorisation of subsidies be qualified as a
suspension of concessions or obligations under the WTO Agreement. As the European Communities
puts it, Korea nowhere even attempts to argue that the TDM Regulation authorises subsidies in
violation of Articles 3 and 5 of the SCM Agreement, and there is no violation of Articles I:1 and III:4
of the GATT 1994 and Article 32.1 of the SCM Agreement.
4.182 The European Communities takes the view that Ar ticle 23 of the DSU contains: an exclusive
jurisdiction clause for the WTO dispute settlement; a restatement of the obligation to follow the
procedural rules otherwise in the DSU when bringing a WTO case; and a specific prohibition of
particularly egregious unilatera l conduct, in the form of suspension of concessions or other
obligations following a unilateral determination that another WTO Member has violated WTO law.
4.183 On the issue of Article 23 of the DSU contai ning an "exclusive jurisdiction clause", the
European Communities asserts that the text of Ar ticle 23.1 of the DSU is entirely procedural in
nature. As noted by the Panel in US – Section 301 Trade Act the phrase “[w]hen Members seek the
redress of a violation of obligations under the covered agreements[…] they shall have recourse to, and
abide by, the rules and procedures of this Understa nding” is an “exclusive dispute resolution clause”.
Moreover, the first important purpose of Article 23.1 of the DSU is to ensure the exclusivity of WTO
jurisdiction over WTO law and the suspension of concessions. Secondly, the first paragraph of
Article 23.1 reaffirms that “when bringing a dispute to the WTO, Members have to abide by the rules
of the dispute settlement Understanding”. This ex hausts the meaning of the first paragraph of
Article 23 of the DSU, according to the European Communities.
4.184 According to the European Communities 96, the meaning of Article 23.1 must therefore be
ascertained by an interpretation that takes account of all interpretative means envisaged by Article 31
of the Vienna Convention. The European Communiti es has demonstrated that the first paragraph of
Article 23 of the DSU when read in light of its context, purpose and (if necessary) public international
rules on state responsibility or Article 60 of th e Vienna Convention governing the suspension of
obligations as well as circumstances of the conclusion or travaux préparatoires does not cause WTO
Members to lose their rights to take measures that are not prohibited by WTO law.
4.185 Article 23 of the DSU is essentially a suspensi on clause specific to the one set out in
Article 60 of the Vienna Convention. Article 23.1 of the DSU is of a procedural nature. It refers to
the rules of the DSU, in particular those governi ng the suspension of concessions in Article 22 of the
DSU. Indeed, the close relationship between Article s 23 and Article 22 of the DSU is reflected in the
systematic position of Article 23 directly after Article 22.
4.186 The European Communities asserts that it suffices to note here that Korea cites with approval
the discussion by the panel in US – Certain EC Products of the relationship between the DSU and
Article 60 of the Vienna Convention (and otherw ise public international law rules governing the
taking of countermeasures). Indeed, the succinctn ess by which that panel describes the scope of
Article 23 of the DSU stands for itself and should therefore be quoted in full (emphasis added):
"Even if it were true that the European Communities delayed DSB meetings and the
arbitration process (and arguably violated the DSU and rules of the DSB meetings), it

96 Responses of the European Communities to Panel Questions 12 and 23.

is clear that a Member cannot find in another Member's violation a justification to set
aside the prescriptions of the DSU. The US argument (which implies that it considers
itself justified to do what it did because what the European Communities would have
done was WTO illegal) is exactly what is prohibited by Article 23 of the DSU:
unilateral determination that a WTO vi olation has occurred and the unilateral
imposition of suspensions of concessions or other obligations . In short the regime of
counter-measures, reprisals or retaliatory measures has been strictly regulated under
the WTO Agreement. It is now only in the institutional framework of the WTO/DSB
that the United States could obtain a WTO compatible determination that the
European Communities violated the WT O Agreement, and it is only in the
institutional framework of the WTO/DSB that the United States could obtain the
authorization to exercise remedial action.170
Convention on the Laws of Treaties (1969) on this matter does not apply since the
adoption of the more specific provisions of Article 23 of the DSU."
4.187 According to the European Communities, the US – Certain EC Products panel confirms in
clear words the EC view that Article 23 of the DSU is a more specific rule to the international regime
governing the suspension of concessions under Artic le 60 of the Vienna Convention and counter
measures, reprisals and retaliatory acts by prohi biting: “a unilateral determination that a WTO
violation has occurred and the unilateral imposit ion of suspensions of concessions or other
obligations”. It therefore aims at regulating th e unilateral conduct of WTO Members relating to the
suspension of WTO concessions and obligations.
4.188 Absent Article 23 of the DSU, the European Communities submits, the public international
rules on State responsibility and suspension of concessi ons would apply, in par ticular, Article 52.3 of
the draft articles on Responsibility of States for internationally wrongful acts.
4.189 The European Communities recalls that, in its comm entary to Article 52.3 of the draft articles
on Responsibility of States for internationally wrongf ul acts, the ILC indicates that Paragraph 3 is
based on the assumption that the court or tribunal to which it refers has jurisdiction over the dispute
and also the power to order provisional measures. By contrast, if the judge does not have such power,
i.e., if the system does not provide for efficient me asures to prevent a situation to worsen, recourse to
countermeasures is once again permitted. A fortiori, the European Communities maintains, recourse
to retorsions (i.e., acts that do not involve a viol ation of international la w) is permitted under public
international law rules.
4.190 According to the European Communities, Korea recognised the interpretative relevance of the
ILC draft articles on State Responsibility. 97 The European Communities fails to see how Korea can
then read Article 23.1 of the DSU in the light of ex isting public international law to prohibit acts that
are not prohibited under public inte rnational law rules although th e DSU explicitly prohibits the
suspension of concessions and obligations during a pending dispute; and although the DSU does not
provide for interim protection or for retroactive remedies.
4.191 The European Communities claims that it is not only at the legal level that Korea’s claim
lacks any basis. Factually, the European Commun ities recalls that Korea nowhere has substantiated
how the TDM Regulation constitutes a “redress” in the form of a “ret aliation” as it now claims after
having abandoned the term “counter measure”, nor does Korea defines the notion of “retaliation”.

97 Response of Korea to Panel Question 27.

4.192 The European Communities argues that Korea has neither identified any legal view that was
enforced by the European Communities on Korea, nor any effect of the TDM Regulation that could
reasonably be understood by Korea as an attemp t by the European Communities to force Korea to
withdraw subsidies before a WTO Panel has given its view on it. The European Communities recalls
that Korea has not even attempted to claim and sp ecify any adverse effects by the hardly used TDM
subsidies.
4.193 Korea disagrees with the European Communities' ar gument that there is no separate violation
possible of Article 23.1 in and of itself. Ar ticle 23.1 uses the imperative “shall”, indicating
affirmative obligations. It instructs that redress fo r perceived violations of WTO rules shall be taken
pursuant to the WTO dispute settlement system. As the US – Section 301 Trade Act panel found, this
requires Members to use the WTO dispute settlement system exclusively. 98 Moreover, the panel in
US – Section 301 stated explicitly that Article 23.1 covers a “great deal more” than the examples in
Article 23.2.99 There is simply nothing in the language of Article 23.1 that would, in any way, imply
that a measure could not be found inconsistent with its provisions alone, independent of Article 23.2.
4.194 Korea disputes the European Communities' cont ention that “redress” in DSU Article 23 is
restricted to meaning a specific response intended to remedy a WTO violation. In fact, the panel in
US – Certain EC Products found that “seeks redress” is a broad term. As Korea noted in response to
Panel Question 12, there are three separate possibilities under Article 23.1. The redress could be
redress with respect to perceptions of (1) a violatio n of obligations; (2) nullification or impairment of
benefits under the covered agreemen ts; or (3) an impediment to a ttainment of any objective of the
covered agreements. As mentioned in Korea’s res ponse, the term “redress” has been defined by the
panel in US – Certain EC Products as per its normal dictionary meaning as involving the reparation of
or compensation for a wrong or consequent loss, the remedy for or relief from some trouble or
correction or reformation of something wrong. In relation to the violation of WTO obligations, the
panel stated that “redress” implies a reaction by a WTO Member against another WTO Member,
because of a perceived (or WTO determined) WTO vi olation. If the TDM is not a measure seeking
redress then nothing is. It is clearly linked by its terms and by the numerous explanations provided by
EC Commissioners and in official EC papers to the alleged Korean subsidies.
4.195 Korea asserts that there is no basis to support the European Communities' argument that the
“ordinary meaning” of “seek to redres s” means suspension of concessions. The
European Communities then tries to rely on DSU Ar ticles 3.2 and 3.7 for this constricted view of
Article 23. Article 3.7 provides that suspension of concessions or other obligations should be a last
resort. Somehow, the European Co mmunities considers that this admonition not to take retaliation
until all other avenues have been tried is actually permission to take retaliation at the outset, before
any other avenues have been tried, as long as th e retaliation is not a suspension of concessions or
other obligations. This turns the policy purpose of Article 3.7 on its head.
4.196 Korea states that the European Communities appare ntly rejects the decision of the panel in
US – Section 301 to the effect that Article 23.1 is an inde pendent provision, violation of which is not
dependent on a finding of inconsis tency with Article 23.2. For Korea, the European Communities
makes a convoluted argument based on a reading of Article 60 of the Vienna Convention and
Article 52 of the ILC’s Articles on State Responsibility regarding “countermeasures” to the effect that
Article 23.1 is merely descriptive or process orie nted. There is no basis for incorporating any
concepts from Article 60 into interpretation of Ar ticle 23 of the DSU. The European Communities'
main argument is that Article 23 relates to “count ermeasures” as described in Article 52 of the ILC
draft. However, in doing so, the European Communities conveniently ignores Professor Crawford’s
statement to the effect that:

98 Panel Report, US - Section 301 Trade Act, para 7.43.
99 Panel Report, US – Section 301 Trade Act, para 7.45.

“Countermeasures are to be clearly distinguished from the termination or suspension
of treaty relations on account of the material breach of a treaty by another State, as
provided for in article 60 of the Vienna convention on the Law of Treaties.”100
4.197 Korea recalls that the panel in US – Section 301 Trade Act found that there was a “great deal
more” covered by Article 23.1 th an was listed by Article 23.2. 101 As that panel then found, this
requires Members to use the WTO dis pute settlement system exclusively. 102 T h e
European Communities has not provided any basis to depart from the reasoning in that case. Indeed,
if Members are allowed to enforce their perceive d rights unilaterally through any means as long as
they do not involve a suspension of concessions or other obligations, then there obviously is no
exclusivity. This provides fertile grounds for circumvention of the system.
4.198 Korea notes that the European Communities was unable to refute Korea’s example of a
Member removing aircraft landing rights as an “unfriendly act”. The European Communities' only
response was to shift to a completely different issu e from that covered by the example and state that
the example covered a situation that was a subj ect of both the SCM Agreement and a bilateral
agreement while the European Communities alleges th at the TDM has nothing at all to do with the
SCM Agreement. Korea would like to make a fu rther note regarding its example and just how
enormously dangerous the European Communities' a pproach would be. In the hypothetical, what if
the Member whose aircraft landing rights were susp ended disagreed both with the legal interpretation
of a violation and with the scale of the other Member ’s retaliation? Without the DSU, who is to judge
whether the retaliation is equivalent to the alleged violation? Would the other Member then be free to
counter-retaliate to “equalize” the state of affair s? It is just the sort of scenario that the
European Communities now argues is legal that woul d lead to the “wild” spirals of retaliation that
according to the European Commun ities the DSU was intended to prevent. Also, allowing unlimited
extra-treaty enforcement of rights cannot be co nsistent with the promoting the security and
predictability of the multilateral trading system as required by DSU Article 3.2 and would moreover
unfairly favour the most powerful WTO Members.
(c) Article 23.2 of the DSU
(i) Article 23.2.(a) of the DSU
4.199 Korea argues that by adopting the TDM Regulation, the European Communities made an
impermissible “determination” to the effect that Korea was in violation of its WTO commitments,
contrary to the requirements of Article 23.2(a). The term "determination" was considered by the
Panel in US – Certain EC Products to mean “a decision that a WTO Member has violated the WTO
Agreement and which bears consequences in WTO trade relations.”103
4.200 For Korea, the TDM Regulation includes a decision that Korea violated its WTO
commitments. The TDM Regulation explicitly stat es that the Community sh ipyards “have suffered
adverse effects in the form of material injury and serious prejudice caused by unfair Korean
competition.”104 It is clear that the “unfair” Korean practices, “adverse effects” and “serious
prejudice” referred to in the Regulation refer to the WTO-inconsistent subsidies found in the
preceding TBR investigation. This is further c onfirmed by the express link in the TDM Regulation
between the duration of the TDM and the dur ation of the WTO dispute brought by the

 100 James Crawford, The International Law Commission’s Articles on State Responsibility,
Introduction, Text and Commentaries, Cambridge University press, 2002, at p. 282.
101 Panel Report, US – Section 301 Trade Act, para 7.45.
102 Panel Report, US - Section 301 Trade Act, para 7.43.
103 Panel Report, US – Certain EC Products, para. 6.98. (Emphasis added by Korea).
104 TDM Regulation, recital 3 (Emphasis added by Korea).

European Communities specifically concerning a lleged Korean shipbuilding subsidies causing,
among others, “serious prejudice” to the European Co mmunities. As noted by the Commission Press
Release IP/01/656:
"The investigation into subsidies carried out under the Trade Barriers Regulation
(TBR) has established that substantial s ubsidies have been granted to Korean
shipyards through both export and domes tic programmes which contravene the
WTO’s 1994 Subsidies Agreement . On this basis … the Commission will propose
accompanying measures in the form of a temporary support mechanism to European
shipyards for the market segments consider ably injured by un fair Korean trade
practices and for the period required for the conclusion of the WTO procedure."105
4.201 Korea submits that the TDM Regulation is also a decision that “bears consequences” in WTO
trade relations. The TDM contributions are designed to alter the competitive position and
opportunities of Korean vessels competing with EC-origin vessels in the marketplace. The
European Communities, by making this determination unilaterally, failed to abide by the requirement
to make any such determinations exclusively "t hrough recourse to dispute settlement in accordance
with the rules and procedures” of the DSU and "consis tent with the findings contained in [a] Panel or
Appellate Body report adopted by the DSB," in clear violation of Article 23.2(a).
4.202 Korea further states that Article 23.2(a) do es not refer to the determination of the manner of
retaliation, it refers to the determination that there is a violation per se. The measure of whether there
has been an improper determination, according to the panel in US – Certain EC Products was whether
there were consequences in trade relations. In th is case, Korea states that the European Communities
has admitted that there are and that the Eu ropean Communities acknowledges that it is taking
“unfriendly acts” against Korea. This certainly affects trade relations dramatically. In addition and in
any event, Korea recalls that it has demonstrated that the TDM violates Article 32.1 of the SCM
Agreement and Articles I and III of the GATT 1994.
4.203 The European Communities submits that Korea’s claim unde r Article 23.2.(a) of the DSU
must equally fail. A “determination” that a WTO violation has occurred in the meaning of
Article 23.2.(a) requires a decision that a WTO Me mber (i) has violated the WTO Agreement and
(ii) which bears consequences in WTO trade relations. Korea fails to point to any “determination” in
the TDM Regulation or otherwise whereby Korea has violated WTO law through the grant of
subsidies. The mere use of evidence gathered in the TBR investigation was necessary to motivate the
limited scope of the temporary re-authorisati on of operating aid. It does not amount to a
determination that Korea granted WTO inconsistent subsidies. Further, whatever “determination”
Korea might still attempt to find, under no circum stances can it establish that such “determination”
bore any consequences in WTO trade relations. The TDM Regulation does not suspend concessions
or obligations under WTO law.
4.204 The European Communities asserts that Korea is unable to point to any “determination” by
the European Communities of WTO inconsistent behavi our within the meaning of Article 23.2.(a) of
the DSU. The European Comm unities also presents dictionary definitions of the term
"determination":
• The settlement of a suit or controversy by the authoritative decision of a judge or arbiter;
• A settlement or decision so made, an authoritative opinion.

105 Provided in Exhibit Korea – 8. (Emphasis added by Korea.) Korea refers also to Commission doc.
MEMO/01/167 which according to Korea sets out this linkage in a more formal document.

• The settlement of a question by reasoning or argument.
4.205 In the view of the European Communities, the term "determination" involves a certain
element of finality. Accordingly, the Panel in US – Certain EC Products clarified that not any
internal measure by which a WTO Member decides to pursue the perceived violation of WTO law by
another Member is a “determination” within the meaning of Article 23.2.(a) of the DSU. Rather such
“determination” must bear “consequences in trade relations”. It must be final in that it sets in motion
the suspension of concessions or obligations under WTO law.
4.206 The European Communities submits that Korea attempts to interpret such a “determination”
into a perceived “implicit” link between the TDM Re gulation and certain TBR Reports. However, in
whichever way one looks at this , neither these reports nor the TD M Regulation nor both can be
qualified as a “determination.” The reference to the state of the domestic industry in the recitals of the
TDM Regulation (as opposed to its operative part) are merely to limit the re-introduction of operating
aid. To do so, the legislative organs of the Eu ropean Communities needed to use the information
from the TBR investigation. That informati on was compiled in the TBR Reports. These TBR
Reports are internal Commission documents without any legal status. They enabled the Commission
services to propose to the Commission to launch a WTO case against Korea and motivate that
decision. That internal determination of WTO inc onsistency bears no relevant consequences in trade
relations. The launching of the WTO case against Ko rea is a perfectly legal act. So is the TDM
Regulation, which provides for subsidies that are not inconsistent with the WTO Agreement.
4.207 Furthermore, the European Communities argues that the term “determination” within the
meaning of Article 23(2)(a) must: (a) have an el ement of finality (thereby excluding “internal
determinations”); (b) be made for the purpose of suspending WTO concessions or obligations and be
directed against another Member; or (c) be otherw ise inextricably linked or the pre-condition for a
suspension of concessions or obligations unde r WTO law. Moreover, where a Member has
consistently followed certain procedures to make a determination of WTO viol ations through explicit
acts that clearly spell out the WTO violations and the DSB ruling that confirmed them, it will be more
difficult to read such a determination into unrel ated acts in making an objective assessment of the
matter.
4.208 The conditionality of the TDM subsidies on th e commencement of the WTO dispute cannot
constitute such a determination. The request for cons ultations is a perfectly legal exercise of a right.
It was based on a preliminary internal finding that it “appears” that Korea grants subsidies. That
finding in the Commission Decision closing the TBR pro cedure is explicitly not a final determination.
Indeed, the basic TBR Regulation prohibits such final determinations before a WTO dispute
settlement Panel has ruled.
4.209 Contrary to what Korea alleges, the Eu ropean Communities has provided a reasonable
explanation for the reference to the WTO case in Article 4 of the TDM Regulation. This was the most
objective criterion to limit the duration of the TDM mechanism by reference to an outside event that is
reasonably predictable.
4.210 According to the European Communities, the Panel’s analysis ought to end here. As
explained again before, there is no basis to refer to any press releases or subsequent Commission acts,
or to any preceding or subsequent acts merely d escribing in form of reports the political initiatives
relating to shipbuilding. These cannot serve as the determination Korea looks for either.
4.211 According to the European Communities, ther e are no factual elements pointing towards a
“determination”. None of the elements referred to by Korea can reasonably be interpreted as a
“determination” by the European Communities to the effect that Korea has violated Articles 3, 5 and 6
of the SCM Agreement.

4.212 In this respect, the European Communities stat es that Recitals 3 and 4 do not equate “unfair
Korean shipbuilding practices” with alleged subsidies at issue in DS273. The European Communities
asserts that Korea has not responded to the EC expl anation that these recitals simply motivate the
choice of the market segments for the temporary re-introduction of the EC state aid. Moreover, Korea
has not responded to the EC argument that those rec itals merely refer to the state of the industry.
Indeed, Korea confirms that the only affirmativ e finding contained in the TDM Regulation is one
relating to the state of the EC industry, as reflect ed in the use of the past participle “suffered.”
Moreover, Korea cannot convince the Panel that a ll elements of the WTO violations it mentioned
(Articles 3, 5 and 6 of the SCM Agreement) are reflected in the recitals.
4.213 Concerning whether adverse effects in the sense of Article 5 of the SCM Agreement in
themselves constitute a violation of the WTO Agr eement, the European Communities asserts that
Korea had to admit that adverse effects are not the only element of a violation of Article 5 of the SCM
Agreement. Article 5 of the SCM Agreement is fulfilled only where a WTO Member applies (i) a
subsidy to (ii) cause (iii) advers e effects. An analysis of Article 5 of the SCM Agreement thus
commences with the identification of a subsidy. Korea’s attempt to read into the phrase “unfair
competition” or into the “Agreed Minutes” a referen ce to specific subsidies has been rebutted in the
European Communities' arguments concerning Ar ticle 32.1 of the SCM Agreement. A mere
reference to effects that may be caused by many different f actors cannot constitute a determination of
a WTO violation.
4.214 As to the alleged determination of a violation by Korea of Article 3 of the SCM Agreement,
the European Communities cannot ev en identify any argument by Kor ea to demonstrate to the Panel
on the basis of the text of the TDM Regulation the elements of a violation of Article 3 of the SCM
Agreement, that is a subsidy that is contingent upon exportation. Because there is none, Korea then
carries on to import into the TDM Regulation (a state aid measure) the internal TBR Reports
produced by the Commission Services in preparation of a Commission Decision whether to launch a
WTO case or not under the TBR Regulation.
4.215 Concerning the equation of unfair competition and subsidies at issue in the WTO dispute
settlement proceeding DS273 in Recital 4 of th e TDM Regulation, the European Communities
submits that Korea again misrepresents the language of a three word phrase. The actual term used in
Recital 4 of the TDM Regulation is “unfair Kor ean competition”. This expression simply does not
refer to a subsidy that causes adverse effects through price suppression and depression or is export
contingent as is the claim of the European Communities in DS273.
4.216 With respect to the legal contingency in Recita ls 7 and Article 4 of subsidy disbursement on
commencement of WTO proceeding, neither the TBR Reports nor the Commission Decision
concluding the TBR investigation can be seen as involving a determination of a subsidy. Indeed,
Korea now acknowledges that the TBR Reports have no legal value and agrees with the Commission
that evidence from the TBR investigation was used in motivating the scope of the TDM Regulation.
4.217 There is no reason why the European Communities should not be able to use the preliminary
factual results of a TBR investigation also in ot her areas of EC competence, for instance for the
purpose of adoption of a state aid measure like th e TDM Regulation. In order to avoid a full
reintroduction of operating aid, yet with the need for some limited support in mind, the Council
determined the two sectors (and later included the LNGs) where the situation of EC shipbuilders was
the most serious. Asserting that any evidence obtaine d in a trade investigation, whether contained in
TBR reports or in the Commission Decision authorising the request for consultations in DS273,
should be considered as a unilatera l determination of violation is nonsensical. If Korea thought that
the Commission Decision initiating DS273 constituted a unilateral determination, why did Korea not
bring up this point at the time the latter decision was adopted? And why did Korea omit it from the
factual part of its first written submission?

4.218 For the European Communities, the explicit te rms of the TBR Reports and the Commission
Decision concluding the TBR investigation clarify that these are internal factual findings of the
Commission necessary to motivate a decision whethe r or not to launch a WTO case. Because the
TBR Reports and the Commission Decision concluding the TBR investigation do not contain such a
determination, they cannot be read into the TDM Regulation as the “determination” Korea is
desperately looking for.
4.219 The European Communiti es asks the Panel to note that Korea nowhere responds to the EC
argument that the sole Article of the Commission Decision N° 2002/818/EC provides that subsidies
“appear” to be granted and that therefore a request for consultations should be made.
4.220 The European Communities submits that Ko rea has been equally unable to respond
adequately to the Panel’s most pertinent ques tion about the fact that the Commission Decision
concluding the TBR investigation was only adopted after the adoption of the TDM Regulation. In
response to this question Korea relies on the fact that the TDM Regulation is legally dependent on a
request for DSU consultations.
4.221 The European Communities asserts that Korea is unable to explain how it can understand a
request for consultations or the Commission Deci sion concluding the TBR investigation as inserting
ex post into the TDM Regulation a specific finding of illegal Korean subsidisation while it did not
attack the Commission Decision concluding the TBR i nvestigation (and indeed omitted its existence
in its factual part of its first written submission). Korea did not comment on this argument that this
temporal condition is simply an objective criterion to limit the temporal scope of the TDM
Regulation.
4.222 On Korea's consideration of the use of “affi rmative language” in the TDM Regulation, the
European Communities mentions that Korea refers to the definitive wording used in Recital 4 (“have
suffered”). It is true that this wording has some kind of affirmative character. However, Recital 4 of
the TDM Regulation does not affirm the existence of a WTO violation by Korea. As noted before, it
describes the state of the industry in some market segments. It does so be cause it was necessary to
motivate the limitation of the re-authorisation of st ate aid to a few sectors. Yet such descriptive
language in no way implies a legally relevant dete rmination of a subsidy granted by Korea, the
European Communities asserts.
4.223 Moreover, for the European Communities, it is noteworthy that Korea contradicts here its
own argument that the TDM Regulation contains a determination of WTO inconsistency because of
the link to the WTO Panel proceeding. Case DS 273 is not based on a claim of adverse effects
through material injury to the domestic industry. It is based on a price suppression and depression
claim. The reference to "material injury" "su ffered" by the Community industry, in the TDM
Regulation is nothing but a description of the state of the industry.
4.224 The European Communities further discusses th e existence of other "elements" of a
"determination" identified by Korea in the TDM Re gulation. The European Communities asserts that
none of these elements can alone or together be qualified as a “determination” within the meaning of
Article 23.2(a) of the DSU. For the Europ ean Communities, wherever Korea searches for a
“determination”, there is none. Presumably for th at reason, Korea continues to refer to the TDM
Regulation “as a whole” and its background, which no w is not only to include political statements of
no relevance to this dispute, but also an Apr il 2002 Report to the Council adopted several months
before the TDM Regulation and the prolongation of the TDM Regulation in 2004.
4.225 The European Communities further submits that Korea cannot escape from its onus to
identify a “determination” in the TDM Regulation by pointing to EC – Sardines where the Panel
found that a measure must be examined as a whole, i.e., including all provisions and preambular

paragraphs. Korea is unable to point to any element in the TDM Regulation that could possibly
reflect the “determination” it seeks to interpret into it. In such situation, the reference to some kind of
transcendental “whole” is nothing but an empty phrase and admission that the measure does not
contain such determination. Neither in the operative part nor in the Preamble nor elsewhere.
4.226 As to the April 2002 Report cited to by Kor ea, the European Communities states that a
reading of that Report immediately reveals that Ko rea has provided selective citations pasted together
in the continuing effort to squeeze from the facts a “determination”. For example, Korea takes out of
context two paragraphs of the report which appear to link the TDM Regulation to the TBR proceeding
examining whether Korea had granted subsidies in violation of the SCM Agreement. Yet, these
paragraphs are preceded by a paragraph which details the failure of the Agreed Minutes. Thus, the
“consequently” is linked to the two preceding pa ragraphs detailing how EC shipyards became
threatened in their continued existence. The Report, thus, merely confirms the twin actions as already
described by the Community: WTO pr oceedings against subsidization by Korea, a defensive TDM
Regulation responding partially to the non-impl ementation of the Agreed Minutes. The
European Communities fails to see how an Apr il 2002 Report by the Commission to the Council,
preceding the adoption of the TDM Regulation and gene rally describing current political initiatives,
can constitute the “determination” Korea is searching for.
4.227 Similarly, Korea’s reference to the prol ongation decision of the TDM Regulation as
containing a “determination” only reveals that there is no determination to the effect that Korea has
violated its obligations under WTO law in the TD M Regulation. The sole legal effect of the 2004
prolongation Decision was to extend the temporal scope of the TDM Regulation. It cannot ex post
make a determination of WTO violations that was not there before, nor do any other documents,
statements or whatever Korea sees as “background” of the measure without defining it.
4.228 Finally, the European Communities maintains th at there were no consequences in WTO trade
relations stemming from the TDM Regulation. Ev en if the Panel found any determination of a
violation of WTO obligations by Korea, such dete rmination is entirely irre levant in WTO relations
and does not have consequences in WTO relations in the form of a suspension of concessions or
obligations. The European Comm unities maintains that, as explained above, Korea has indeed not
identified any effect at all, neither in nor outsi de WTO relations other than an encouragement to
resume the negotiations under the Agreed Minutes.
4.229 Korea
 states that in its long discussion about th e TBR process, it is almost as if the
European Communities has missed the Panel’s question regardi ng the distinction between a
conclusion and a determination. The European Co mmunities is, in effect arguing that the TBR is a
“conclusion” that it should initiate a WTO dispute. However, the question is whether the TDM is a
prohibited determination, not whether the T BR process is a permitted conclusion. Had the
European Communities merely initiated a WTO dis pute after the conclusion of the TBR process and
done nothing more, then there would be no DS301.
4.230 For Korea, the relevance of the TBR process is that it provides an illustration of, and
background for, just what was contained in the de termination that is actually the subject of the
dispute; i.e., the TDM. The TBR process was about alleged subsidization with affirmative findings
being made under Articles 3, 5 and 6 of the SCM Agreement; it never mentioned any of the
competition issues that the European Communities now raises as post hoc interpretations of what the
TDM was all about. If the TBR process was a ne cessary step to include products under the TDM
authority and the TBR process was based on subsidi es issues, then it follows that the TDM was about
subsidies.

4.231 Korea also notes the European Communities' cons truction of a new test for what constitutes a
“determination.”106 According to the Europ ean Communities, a Member’s retaliatory measure does
not constitute a “determination” unless it reads like a panel or Appellate Body report in the way it sets
out the alleged violation of Article s 3, 5 and 6 of the SCM Agreemen t. This would make Article 23
extremely easy to circumvent.
4.232 Korea submits that the Europ ean Communities also raises again a question of timing by
arguing that the TBR process concluded after the adoption of the TDM. As Korea has noted, the
TDM was contingent upon the initiation of the WT O dispute, and which in turn could only be
initiated upon completion of the TBR process. T hus, the TDM, even though adopted earlier would
have been a dead letter had the European Co mmunities not concluded the TBR process first and
initiated the WTO proceeding. Thus, the TDM might have been adopted earlier, but the TDM’s legal
effectiveness was subsequent to the WTO pro ceeding initiated based on the results of the TBR
process.
4.233 In Korea’s view, the test used by the panel in US – Certain EC Products is a valid approach
to the issue. It is a two-step test as to whet her there was a “decision” that had consequences in
international trade. Clearly, the TDM was a form al decision by the EC Council to authorize specific
types of funding, Korea adds. It is just as clear that the TDM had consequences in international trade.
Every competition for a sale of a ship by Korean producers was potentially faced with discriminatory
funding of up to six percent by EC member State governments in an attempt to change the results of
the competition. That certainly is consequential.
4.234 Finally, Korea notes that the United States questi ons as to whether the second step of the test
is necessary. Korea sees some merit in the US position, particularly to the extent that there is a threat
of trade consequences rather than just actual con sequences. However, Korea does not think that this
Panel needs to delve into the dept hs of this issue because it is clea r that the TDM resulted in trade
consequences and satisfies the second step of the test.
4.235 The European Communities responds that, as to Korea's counterarguments that under the
EC standard Members could get off the hook by not writing into the act “contrary to Article 23 of the
DSU I determine”, this is a non-argument. Indeed, it is Korea’s lax standard that turns political
statements which are part of the daily communica tion between political institutions and their citizens
or WTO Members into a determination prohibited by Article 23.2 of the DSU. If Korea had its way,
the political communication and information process would be frozen. Article 23.2(a) of the DSU
does not protect WTO Members from bold political statements. It protects them from official
determinations that can be reasonably expected to lead to a suspension of concessions or other WTO
obligations.
4.236 Article 23.2(b) of the DSU when read in cont ext of Article 3.2 of the DSU can only protect
other WTO Members and their economic operators from acts that lead to a suspension of concessions
or obligations on which they relied in their daily operations. The Korean shipyards could not have
relied in their daily operations on the prohibition of subsidies in the European Communities as long as
they are not export contingent or cause adverse effe cts. Indeed, they gain ed market share despite
those subsidies. It is hard to see how the partia l reintroduction of contract-related operating aid at a
lower level and only for a very limited time, can have an y relevant effect at all. In any event, it does
not amount to a suspension of WTO concessions or other obligations.
4.237 The European Communities considers those points on the scope of the DSU highly pertinent,
and argues that Korea did not respond to the Europ ean Communities' reference to Article II:1 of the
WTO Agreement which limits its scope to th e concessions and obligations in the covered

106 Second submission of the European Communities, paras. 102-104.

Agreements. Moreover, the European Communities cl aims that Korea does not explain what justifies
a prohibition of WTO Members to act in areas which are no yet covered by the WTO Agreement
merely because there is a general political link to a WTO dispute.
4.238 Indeed, the European Communitie s asserts that Korea itself admits that its position has no
legal basis by repeating, again, its unfounded allega tion that the DSU cannot be interpreted in such a
manner that gives special advantages and privileges to the largest Members beyond what they already
have due to their size and resources. Contrary to what Korea opines, the European Communities is
one of the promoters of a DSU that is open to all WTO Members, including the small ones and in
particular developing country Members.
4.239 The European Communities also alleges that Korea itself does not add any facts to its
generalisation that would demonstrate that the Eu ropean Communities is a big Member and Korea a
small Member in the context of this case. Indeed , the market share of the European Communities in
the shipbuilding market and even more of its few me mber States that have decided to grant subsidies
is negligible. For example, the Netherlands, to which Korea often refers, has a market share of
1.7 per cent in 2002 as opposed to 31.8 per cent in CGT of Korea and certainly does not have a bigger
financial muscle than Korea to grant subsidies.
4.240 The European Communities claims th at Korea does not explain why the
European Communities and the US as big Members are not entitled to predictability in what they
agree and not under the WTO Agreement. Nor do es it explain why the 25 member States of the
European Communities should be punished for ha ving formed a regional trade block that goes
significantly beyond WTO law by prohibiting subsidi es. The European Communities submits that
they should not.
(ii) Article 23.2.(b) of the DSU
4.241 Korea asserts that the European Communities took unilateral action against alleged Korean
WTO violations through the TDM Regulation before any panel findings had b een made, let alone the
expiry of a reasonable period of time for the im plementation of any rulings. For Korea, the
European Communities thereby manifestly failed to follow the procedures set forth in Article 21 of
the DSU, and thus violated Article 23.2(b) of the DSU which requires that Members “follow the
procedures set forth in Article 21 to determine the reasonable period of time for the Member
concerned to implement the recommendations and rulings.”
4.242 The European Communities
 asserts that Korea’s claim that the TDM Regulation failed to
await a reasonable period of time to implement the recommendations and ruling in breach of
Article 23.2(b) of the DSU is based on the flawed assumption that the TDM Regulation is a
countermeasure. The European Communities submit s that even if the Panel found that the TDM
Regulation involved a suspension of concessions and obligations, Article 23.2(b) of the DSU is not
applicable in this particular case.
4.243 Korea asserts that the European Communities has made no arguments with respect to
Article 23.2(b) that are not contingent on its singl e defence that anything other than suspension of
concessions or other obligations is not prohibited by Article 23. Korea considers that the
European Communities admits that there have been no rulings or recommendations made by the DSB.
In the absence of such a DSB decision, the reta liatory steps taken by the European Communities
cannot be in accordance with the rules for im plementing such decisions including according a
reasonable period of time pursuant to DSU Article 21. It follows that such retaliatory measures were
not imposed in accordance with Article 21. Moreover, even if one were to accept the
European Communities' flawed premise about the sc ope of Article 23, Korea has demonstrated that
the EC retaliatory measures involve a suspension of the European Communities' obligations to Korea

under Article 32.1 of the SCM Agreement and Ar ticles I and III of the GATT 1994. Thus, the
European Communities' sole defence does not stand, even under its own approach to this provision.
(iii) Article 23.2.(c) of the DSU
4.244 Korea submits that the TDM Regulation is also inconsistent with Article 23.2(c) because the
European Communities manifestly failed to first obtain DSB authorization and follow the procedures
laid down in Article 22 of the DSU before taking any countermeasures or suspending concessions or
obligations towards Korea under the covered Agreements, as required under Article 23.2(c).
4.245 Korea also argues that Article 23.2(c) requires Members to follow the procedures of
Article 22 to determine the level of suspension of concessions or other obligations and to obtain DSB
permission to do so. The European Communities' prem ise is that if a lesser offence is prohibited
(suspending concessions or other obligations unilaterally) then a greater offence of imposing
retaliation before there is even a determination of inconsistency is permitted. That is, if there was no
DSB ruling at all because th e European Communities skippe d the whole process then the
European Communities considers that the DSB’s silen ce is affirmative permission to take retaliatory
steps. For Korea, this position must be rejected.
4.246 The European Communities states that Korea’s claim that the TDM mechanism is in breach
of Article 23.2(c) of the DSU by suspending concessi ons or other obligations without following the
procedures set forth in Article 22 of the DSU fails because it is based on the flawed assumption that
the TDM Regulation is a countermeasure. As explained above, the TDM Regulation does not
suspend concession or WTO obligations.
4.247 The European Communities further asserts that Ko rea is not able to explain to the Panel how
the explicit text of Article 23.2.(c) of the DSU can be seen to prohibit the taking of other forms of
countermeasures than the suspension of concessions or obligations. 107 That notwithstanding, Korea
claims that Article 23 prohibits any “retaliation… wh ether or not such retaliatory actions constitute a
suspension of WTO concessions or obligations.”
4.248 For the European Communities, Korea’s argume nt reveals the weakness of its own position
that Article 23 of the DSU governs more than th e suspension of concessions. If Article 23 covered
countermeasures other than suspension of concessions and obligations, then Article 22 would have to
cover such other countermeasures as well. It does not. The DSU in Article 22 only foresees a
procedure to obtain authorisation for the suspensi on of concessions or obligations, which is focused
on the balancing of the level of nullification and impairment.
4.249 In any event, the notion of “countermeasu res” under public international law only
encompasses illegal acts and Korea has had to con cede this. Korea does not claim that the EC
measures are otherwise incompatible with internationa l law. They can, therefore, also not constitute
countermeasures in addition to “suspensions of concessions or obligations”.
(d) The EC Member State Implementing Measures Violate Article 23.1 of the DSU
4.250 Korea submits that the EC member State implementing TDM Measures, including those of
the Netherlands, Germany, Denmark France and Sp ain equally violate Article 23 of the DSU: the
member State measures are legally based on the EC TDM Regulation and are simply a reflection and
application of the EC TDM Regulation at the nationa l level. Thus, the arguments above applying to
the EC TDM Regulation apply mutatis mutandis to the EC implementing measures, which also violate
Articles 23.1, 23.2(a), (b) and (c) of the DSU.

107 Response of Korea to Panel Question 29.

5. Articles 4 and 7 of the SCM Agreement
4.251 Korea submits that Articles 4 and 7 of the SCM Agreement contain additional dispute
settlement provisions specific to cases involving actionable or prohibited subsidies under the SCM
Agreement. In particular, paragraphs 4-12 of Ar ticle 4 and paragraphs 2- 10 of Article 7 contain
special or additional dispute settlement rules and procedures which are listed as such in Appendix 2 to
the DSU. The injunction against WTO Members taking unilateral action against real or perceived
subsidies outside the WTO framework is equally applicable in the c ontext of Articles 4 and 7 of the
SCM Agreement. These conclusions apply mutatis mutandis to the EC member State implementing
measures and TDM contributions provided pursuant to the TDM framework, and the EC Decisions
approving such measures.
4.252 The European Communities
 fails to see the legal basis for this claim separately from
Article 23 of the DSU, and submits that Korea acknowledged 108 that its claims under Articles 4 and 7
of the SCM Agreement are not self-standing but should be read together with Article 23 of the DSU.
In any case, the European Commun ities asserts that neither the TDM Regulation nor any of the
national measures (as far as they still exist) is a co untermeasure within the meaning of Articles 4.10
and 7.9 of the SCM Agreement. Therefore, Korea’s claim is without merit.
4.253 For the European Communities, Korea still do es not explain how the European Communities
failed to follow the procedures for the request fo r consultations and establishment of the Panel in
DS273 as prescribed in Articles 4.1-4.4 and 7.1-7.4 of the SCM Agreement while at the same time it
complains that the TDM Regulation was activated through the EC request for consultations and
acknowledge that the European Communities has ind eed requested a Panel. Nor does Korea explain
how the European Communities can have violated Articles 4.5-4.9 and 7.5-7.9 which contain
procedural rules governing the Panel process.
4.254 To the extent that Korea “draws special attention” 109 to Articles 4.10 and 7.9, the
European Communities recalls that the TDM Re gulation is not a “countermeasure” within the
meaning of Articles 4.10 or 7.9 that has been app lied without obtaining prior authorisation from the
DSB. According to the European Commun ities, Korea has acknowledged that the term
“countermeasures” refers to a suspension of concessions and other WTO obligations.110
4.255 The European Communities further submits th at the TDM Regulation does not involve any
suspension of concessions or obligations. As an aside, the European Communities would note that the
reference in Articles 4 and 7 of the SCM Agreemen t, to countermeasures as opposed to “suspensions
of concessions” indicates that the amount of the suspension is determined by the entire amount of the
benefit as opposed to the level of the nullification or impairment that has been caused.
4.256 Korea denies having acknowledged that the term countermeasures refers to suspension of
concessions or other WTO obligations. Of course, Ko rea specifically did not do so in the context of
Articles 4 and 7. Korea acknowledged that the Inte rnational Law Commission ("ILC") used the term
in that manner and stated that Korea had been us ing the term in a broader sense up to that point.
Therefore, for purposes of clarity Korea would change to the term “retaliation”, which is a more
accurate description of the European Communities' unilateral measure in any event.
4.257 In the context of Articles 4 and 7, Korea specifically stated that it had doubts about the
applicability of the ILC language given that the terms came directly from the GATT Subsidies and
Antidumping Codes that were negotiated long before the ILC came up with its draft. The issue of

108 Response of Korea to Panel Question 49.
109 Response of Korea to Panel Question 50.
110 Responses of Korea to Panel Questions 27 and 30.

countermeasures has been the most contentious of all matters discussed by the ILC. Korea rejects any
implication that the ILC draft or other aspects of substantive public international law are binding on
WTO Members. Article 3.2 of the DSU provides for the applicability of the rules of interpretation of
public international law and such rules, through a standard a contrario reasoning, lead to the
conclusion that the substantive rules do not directly apply.
4.258 As for the European Communities' argument th at the term “countermeasures” has a different
meaning in Articles 4 and 7 than suspension of c oncessions or other obligations, Korea recalls the
European Communities' attempts to relate DSU Article 23 and “countermeasures” in the ILC draft
and stand them as lex specialis of Article 60 of the Vienna Convention. For Korea, the structure and
operation of Article 60 is totally different from Artic le 23, thereby undercutting any useful parallels
that might be drawn. The European Commun ities ignores Professor Crawford’s admonition that
Article 60 is in contrast to “countermeasures”. This illustrates the convenience with which the
European Communities adopts or discards the substantiv e rules of public international law and that is
precisely why Korea notes that caution must be exercised.
V. ARGUMENTS OF THE THIRD PARTIES
5.1 The arguments of the third parties, China, Jap an, and the United States are set out in their
submissions to the Panel, and their answers to the questions. The third parties' arguments as presented
in their submissions are summarized in this section.
A. I NTRODUCTORY REMARKS
5.2 Japan, prior to discussing Korea’s individual claims, emphasizes the particular importance of
the discipline over subsidies in the shipbuilding sect or, which should be taken into due consideration
as a background for this dispute. Korea’s claims and arguments tend to focus on the element of
“unilateralism” of the EC measures at issue 111, but Japan is of the view that it is equally or more
important for the Panel to keep in mind that subsid ies are particularly problematic in the shipbuilding
sector.
5.3 First of all, as a direct effect, a subsidy w ill increase the possibility for a subsidy receiving
shipbuilder to obtain an order which would not be po ssible without the subsidy. The price per unit of
vessels is very high, and thus, the economic impact of a single lost sale is significant for other
shipbuilders. More importantly, a subsidy in the sh ipbuilding sector would cause an indirect effect of
a significant magnitude. It is widely acknowledged that a price reduction observed in any segment of
the shipbuilding market will be likely to impose a significant downward pressure on the price level of
any other segment of the shipbuilding market and in any other country since the shipbuilding market
is a single integrated market. This downward tre nd in all segments of the shipbuilding market tends
to lead to severe price competition, often at prices below the level required to cover production costs.
Subsidized shipbuilders can enjoy an artificially advantageous position in such competition.
5.4 Therefore, Japan is of the view that the unique nature of the shipbuilding industry demands
that governmental intervention which “distorts the ma rket” of shipbuilding be prohibited in general,
as much and as broadly as possible. Otherwise, ev en the most competitive or efficient producers may
not survive in global competition.
5.5 Despite the particular necessity for regulati on of subsidies or any other governmental
assistance, the existing worldwide restrictions on subsidy measures – in the form of the SCM
Agreement – provide only insufficient disciplines for the shipbuilding sector.

111 First submission of Korea at paras. 20, 106 and 132.

5.6 The countervailing duty measure, which is consider ed to be effective to counteract injurious
subsidization at national borders, is not practically effective in the shipbuilding sector due to the
unique characteristics of this sector. It is widely pe rceived that the shipbuilding market is indeed an
integrated global market. Since ship-owners can choose where to register their vessels, national
borders have no significance at all; and accordingly, neither do border measures such as tariffs and
anti-dumping and countervailing duties. Thus, new Shipbuilding Agreement has been negotiated in
the OECD forum to regulate, among others, subsidi es in the shipbuilding sector in a more stringent
and effective manner.
5.7 Based upon the foregoing considerations, Jap an expresses serious concern over the EC
measures at issue, taken under the Temporary Defe nsive Mechanism measures, which grant subsidies
to EC shipbuilders and thereby run a risk of causi ng negative effects in the shipbuilding market. At
the same time, Japan would point out that the TDM measures might have been chosen at least partly
due to the fact that countervailing duty measures ar e not effective in the shipbuilding sector. Japan
shares the difficulties the European Communities is facing as a result of the Korean measures since
shipbuilding industry of Japan has also been affected by Korea’s subsidies. However, even if the EC
measures are a response to Korea’s non-implementation of the Agreed Minutes with respect to unfair
practice in the shipbuilding sector, Japan does not consider that they are the most appropriate
response.
B. L
EGAL CLAIMS
1. Article III:4 of the GATT 1994
5.8 Japan disagrees with Korea’s claim that the EC subsidy measures are inconsistent with
Article III of the GATT 1994, without re gard to recipients of the subsidy 112, for Korea’s claim runs
afoul of the explicit provisions of Article III of the GATT 1994.
5.9 According to Japan, Article III:8(b) of the GATT 1994 explicitly excludes “the payment of
subsidies exclusively to domestic producers” from it s scope. Korea seems to argue as a basis for its
Article III claim of the GATT 1994 only that the EC TDM measures give an advantage to certain
commercial vessels of EC origin in competiti on with “like” vessels of Korean origin. 113 In Japan’s
view, however, the EC TDM measures can be deemed to be the payment of subsidies exclusively to
domestic producer within the meaning of Article III:8(b) and therefore, need to be examined in light
of the SCM Agreement rather than Article III of the GATT 1994.
2. Article 32.1 of the SCM Agreement
5.10 The United States notes that Korea claims that the TDM Regulation and the other measures it
cites are inconsistent with Article 32.1 of the SCM Agreement, because they constitute “specific
action against a subsidy of another Member” – Korea – that is not taken “in accordance with the
provisions of the GATT 1994, as interpreted by [t he SCM Agreement].” Because Korea’s claim
raises many factual issues, the United States offers no view on the ultimate resolution of that claim.
Nevertheless, it appears to the United States that in this dispute the European Communities is
advocating a surprisingly narrow interpretation of Artic le 32.1 that is not supported by the Appellate
Body reports to which it cites.
114

112 First submission of Korea at para. 156.
113 Id., at paras. 153-154.
114 At the outset, the United States wishes to note that both parties claim to be following the approach to
Article 32.1 articulated by the Appellate Body in US – Offset Act (Byrd Amendment) . Although the
United States continues to be troubled by that approach, in view of that common ground between the parties, the
United States in this submission has limited itself to addressing the parties’ use of that approach.

5.11 The United States asserts that the European Communities begins its discussion of Article 32.1
by misquoting the Appellate Body. In discussing the Appellate Body report in US – Offset Act (Byrd
Amendment), the European Communities makes the following statement:115
"According to the Appellate Body in US – Offset Act (Byrd Amendment), Article 32.1
of the SCM Agreement covers
'a measure that may be taken only when the constituent elements of
dumping or a subsidy are present.'"
5.12 This quotation of the US – Offset Act (Byrd Amendment) report is inaccurate, because in the
report there is no period after the word “present.” Instead, the sentence continues, the full sentence
reading as follows:
"Accordingly, a measure that may be taken only when the constituent elements of
dumping or a subsidy are present, is a “specific action” in response to dumping within
the meaning of Article 18.1 of the Anti-Dumping Agreement or a “specific action” in
response to subsidization within the meaning of Article 32.1 of the SCM Agreement."
5.13 In the view of the United States, there is a subtle but important difference between the two
quotations. The EC version of the quotation suggest s that coverage of Article 32.1 is limited to
measures that may be taken “only” when the c onstituent elements of dumping or a subsidy are
present. The full quotation, however, indicates th at Article 32.1 includes, but is not necessarily
limited to, “measures that may be taken only when the constituent elements of dumping or a subsidy
are present.”
5.14 This understanding of that quotation is borne out by the report in US – 1916 Act, in which the
Appellate Body found that: “‘Specific action agai nst dumping’ of exports must, at a minimum ,
encompass action that may be taken only when the constituent elements of ‘dumping’ are present.”116
By its use of the phrase “at a minimum”, the United States adds, the Appellate Body indicated that the
universe of measures subject to Article 18.1 included, but was not necessarily limited to, “measures
that may be taken only when the constituent elements of dumping are present.” Indeed, the Appellate
Body stated that it was not making any findings regarding the precise scope of Article 18.1.117
5.15 In the view of the US, the European Co mmunities' discussion of the phrase “against
subsidization” suffers from similar difficulties. The European Communities quotes the passage from
the US – Offset Act (Byrd Amendment) report in which the Appellate Body stated that “the CDSOA
effects a transfer of financial resources from the producers/exporters of dumped or subsidised goods
to their domestic competitors.” 118 The sole purpose of this quotation appears to be to create the
impression that only measures that involve a similar “transfer of financial resources” are capable of
falling within the scope of Article 32.1 as interp reted by the Appellate Body. If this is the
European Communities' aim, then it is misguided, because the Appellate Body did not find that the

115 First submission of the European Communities, para. 185, quoting US – Offset Act (Byrd
Amendment), para. 239 (emphasis added by EC)
116 Appellate Body Report, US - 1916 Act, para. 122 (underscoring added by the US; italics in original)
The United States notes that the Appellate Body was discussing Article 18.1 of the Agreement on
Implementation of Article VI of the General Agreem ent on Tariffs and Trade 1994 (“AD Agreement”), the
provision of the AD Agreement that corresponds to Article 32.1 of the SCM Agreement.
117 Appellate Body Report, US - 1916 Act, note 66 (“We do not find it necessary, in the present cases,
to decide whether the concept of ‘specific action against dumping’ may be broader.”).
118, Appellate Body Report, US - Offset Act (Byrd Amendment), para. 255.

universe of actions “against subsidization” are limited to those involving a transfer of resources.
Instead, it simply found that that universe includes actions involving a transfer of resources.119
5.16 More important, however, is the fact that th e European Communities never explains why a
system of counter-subsidies cannot, to use the language of the Appellate Body in US – Offset Act
(Byrd Amendment) , dissuade the practice of subsidization or create an incentive to terminate such
practice.120 It seems obvious to the United States that when, for example, a government provides one
of its companies with a subsidy, it does so with th e aim of giving that company an advantage in the
market. That advantage is offset, in whole or in part, if another government provides subsidies to
competitors of that company. When this happens, the subsidy provided by the first government is, to
some extent, wasted. Because a rational governme nt presumably will not want to waste finite
resources, under the Appellate Body’s approach, counte r-subsidies would be, in principle, capable of
dissuading the practice of subsidization or creating an incentive to terminate subsidies. Thus, while
the United States offers no views concerning the facts of this particular dispute, it would seem that
under that approach, in principle, counter-subsid ies are capable of falling within the scope of
Article 32.1.
5.17 For the United States, the European Communities al so appears to suggest that an action is not
a “specific action” within the meaning of Artic le 32.1 if it deals with anything other than
subsidization. Thus, the European Communities ar gues that because the TDM Regulation refers to
“unfair practices” rather than “subsidization, ” and because the Agreed Minutes between the
European Communities and Korea suggest that ther e also was a problem concerning the dumping of
ships, the TDM Regulation cannot constitute “specific action against a subsidy.” 121 This is a new
position for the European Communities, directly contrary to that taken in disputes where the
European Communities was a complaining party.122
5.18 The United States sees it as an interpretive stre tch to read the phrase “specific action against
subsidization” as including only actions that deal “e xclusively” with subsidization. For one thing,
such an interpretation would make it relatively easy to evade the scope of Article 32.1 of the SCM
Agreement and Article 18.1 of the AD Agreement as interpreted by the Appellate Body. A measure
simply would have to purport to deal with both subsidization and dumping and it would not be subject
to either provision, because the measure would not deal exclusively with “subsidization” or
exclusively with “dumping.”123
5.19 The United States recalls the European Commun ities' assertion that: “Specific action against
subsidisation has to be esta blished on the basis of the operative part of the Regulation.” 124 T h e
European Communities offers no support for this asser tion, and the United States is not even certain

119 The United States asserts that in this regard, it is important to note that this portion of the US –
Offset Act (B yrd Amendment) report is based upon a factual premise that is demonstrably inaccurate. The
Appellate Body stated that the CDSOA effected a transfer of financial re sources from producers/exporters to
their domestic competitors, because “the CDSOA offs et payments are financed from the anti-dumping or
countervailing duties paid by the foreign producers/exporters.” US – Offset Act (Byrd Amendment) , para. 255.
This statement is manifestly inaccurate, because US anti-dumping and countervailin g duties are paid by US
importers, not foreign producers/exporters. See WT/DSB/M/142 (6 March 2003), para. 56 (remarks of the
United States).
120 Appellate Body Report, US – Offset Act (Byrd Amendment), para. 256.
121 First submission of the European Communities, paras. 195-196.
122 See, e.g., Panel Report, US – Offset Act (Byrd Amendment), para. 7.24.
123 The United States notes that in this regard, it is in teresting to consider the CDSOA that was at issue
in the US – Offset Act (Byrd Amendment) dispute. Because the CDSOA authorized the distribution of both anti-
dumping and countervailing duties, under the European Communities' logic in the instant dispute, the panel and
the Appellate Body should not have found the CDSOA to be inconsistent with Article 18.1 or Article 32.1.
124 First submission of the European Communities, para. 201.

what it means. In any event, Article 4 of the TDM Regulation appears to create a link between the
TDM and DS273, the dispute commenced by the Eu ropean Communities under the SCM Agreement.
Thus, the TDM Regulation itself suggests that the pur pose of the Regulation is to take action against
subsidization.
5.20 Moreover, the reasons cited by the European Communities as to why Article 2.1 of the TDM
Regulation does not contain an inextricable link with the elements of subsidization are not
convincing.125 The fact that subsidies can be granted against any Korean competition or offers from
any Korean yard, regardless of the extent to wh ich the Korean merchandise is subsidized, simply
suggests that the counter-subsidies may be greater than necessary. Likewise, the limitation on
contract-related subsidies to 6 percent may render the counter-subsidies too small to dissuade or
terminate subsidization. However, these facts do not mean that the counter-subsidies are not “specific
action against subsidization.” Would the offset payments at issue in US – Offset Act
(Byrd Amendment) have been permissible if they had been automatically halved? Or doubled?
5.21 The United States finishes by stating that the Eu ropean Communities' analysis of Article 32.1
and the Appellate Body reports di scussing it is overly narrow. In US – Offset Act (Byrd Amendment) ,
the Appellate Body concluded that the SCM Agr eement prohibits the provision of subsidies in
response to another Member’s subsidies. 126 Thus, the question for the Panel is whether the EC
measures cited by Korea are in response to Korean subsidies.
5.22 China notes that the Appellate Body in US – Offset Act established two conditions to be met
in order for a measure to be subject to the discipline of Article 32.1, namely, “specific action against a
subsidy”.
(a) Specific action in response to subsidies
5.23 First, China submits that the scope of applica tion of Article 32.1 is not necessarily limited to
measures that may be taken only when the constituent elements of a subsidy are present. China
submits that the ruling by the Appellate Body in US -1916 Act should not be misconstrued and that
the analysis of whether the TDM measure constitu tes a “specific action” in response to a subsidy
should not end even if it is concluded th at the TDM is not a measure taken only when the constituent
elements of a subsidy are present.
5.24 Second, contrary to the EC argument, China considers it irrelevant that the actual granting of
State aid is not subject to a finding of the constituen t elements of subsidies. It is the TDM measure,
instead of each individual grant under the measure, that is under review in this proceeding. Therefore,
the focus should be placed on whether the TDM measur e is adopted as a specific action in response to
Korean subsidies rather than on whether an individual grant is made in response to a subsidy.
5.25 Third, China submits that in these proceedings, in applying the test set forth by the Appellate
Body in US – Offset Act (Byrd Amendment) , it should be assessed whether the scope of application of
the TDM measure has a strong correlation with the c onstituent elements of Korean subsidies. China
suggests distinguishing the concept of “the scope of application” of the measure and that of the
qualifying condition of granting State aid. In China’s view, the scope of application of the TDM
measure should be the three segments determined by the European Communities to be adversely

125 First submission of the European Communities, para. 205.
126 Appellate Body Report, US – Offset Act (Byrd Amendment) , para. 273 (“To be in accordance with
the GATT 1994, as interpreted by the SCM Agreement, a response to subsidization must be either in the form of
definitive countervailing duties, provisional measures or price undertakings, or in the form of multilaterally-
sanctioned countermeasures resulting from resort to the dispute settlement system.”).

affected by Korean subsidies while the qualifying condition of granting State aid is competition from
a Korean shipyard offering a lower price.
(b) Action against subsidy
5.26 China submits that WTO precedents have clarified that such actions are not limited to those
that directly counteract subsidized imports or en tities responsible for such imports. An action that
does not come into direct contact with the subsidized imports or the entities responsible for such
imports may as well constitute a specific measure against a subsidy.
5.27 China further submits that, in judging whether a measure is against a subsidy, it is not
required by Article 32.1 that the measure at issue must be capable of effectively dissuading the
practice of subsidization. The word “against” does not carry with it such implications.
5.28 In addition, with respect to the relation between Articles 5 and 6 and Article 32.1, China holds
that Article 5 and Article 32.1 of the SCM Agre ement set forth two totally different types of
obligations for WTO Members. Article 5 sets forth the discipline on the use of subsidies by imposing
the obligation of not causing adverse effects to the interests of other Members while Article 32.1 is
aimed at disciplining countermeasu re that a Member may take against subsidies. Therefore, a
measure that conforms with Articles 5 and 6 is not necessarily consistent with Article 32.1.
3. Article 23 of the DSU
(a) General Arguments
5.29 Japan expresses the view that the renunciation of un ilateral trade measures in DSU is one of
the most important disciplines established under the WTO Agreement. With respect to Article 23 of
the DSU, as the panel on US – Section 301 Trade Act found correctly, “[f] irst, ‘it imposes on all
Members to ‘have recourse to’ the multilateral process set out in the DSU when they seek the redress
of a WTO inconsistency’”, and further, “[t]hese rules and procedures [ of the DSU] clearly cover
much more than the ones specifically mentioned in Article 23.2.”127
5.30 Therefore, for Japan, the threshold issue to be resolved by the Panel in Korea’s claim of
inconsistency with DSU Article 23 is whether or not the EC TDM measures are taken to seek the
redress of an alleged WTO inconsis tency or other nullification or impairment by Korea. In this
regard, the European Communities argues that the EC TDM measures have been triggered by Korea’s
non-implementation of a bilateral agreemen t, the “Agreed Minutes” signed between the
European Communities and Korea, rather than by th e violation of the WTO Agreement, as mentioned
in the relevant Council Regulation. 128 Korea argues otherwise. Therefore, the Panel should carefully
examine the relevant facts so as to resolve the issue before it.
5.31 The United States notes Korea's claims that the EC measures are inconsistent with its
obligations under Article 23.1 and subparagraphs (a)-(c) of Article 23.2 of the DSU. In responding to
these claims, the European Communities relies heav ily on the argument that its counter-subsidies
cannot be regarded as “countermeasures”. 129 According to the European Communities: “A
fundamental tenet of the subsidy disciplines enshri ned in the SCM Agreement is that Members are
permitted to grant or maintain specific subsidies to the extent that they do not constitute a prohibited

127 Panel Report, US - Section 301 Trade Act, paras 7.43-7.44.
128 Council Regulation (EC) No. 1177/2002 of 27 June 2002 concerning temporary defensive
mechanism to shipbuilding, O.J. L172/1 (2.7.2002).
129 First submission of the European Communities, paras. 168, 177, 178. Japan states that the
European Communities appears to use the term “countermeasures” as a shorthand expression for the
“suspension of concessions or other obligations”, as used in Article 23 of the DSU.

subsidy within the meaning of Article 3 of th e SCM Agreement and do not cause adverse effects
within the meaning of Articles 5 and 6 of the SCM Agreement.”130
5.32 This statement is only half right. The Eur opean Communities is correct that, under those
articles of the SCM Agreement, Members are permitte d to grant or maintain subsidies other than
prohibited subsidies or actionable subsidies that cau se adverse effects. The European Communities is
incorrect, however, in asserting that the entiret y of WTO subsidies disciplines are set forth in
Articles 3, 5 and 6 of the SCM Agreement. One obvious example that this is not the case is
Article III:4 of the GATT 1994, which has been in terpreted so as to prohibit certain types of
subsidies.131 And, as discussed in the preceding section, Article 32.1 has been interpreted by the
Appellate Body so as to prohibit counter-subsidies.
5.33 Thus, in order to evaluate the “countermeasu re” element of the European Communities'
arguments, the United States submits that it appears that the Panel may have to make a finding as to
whether the measures challenged by Korea are proh ibited by Article 32.1 of the SCM Agreement or
another provision of the WTO Agreement under one of Korea’s claims. If so, then the Panel may also
need to address the other elements of what is essentially a claim by Korea that the
European Communities has engaged in impermissible unilateral action. In so doing, the Panel may
want to bear in mind the following observation of the European Communities:
"[I]f Members take the law into their ow n hands and unilaterally impose their own
views on their rights under the WTO by threatening or taking measures violating their
obligations, they risk provoking spirals of retaliatory actions that would jeopardise
the results of half a century of trade negotiations."132
5.34 The United States believes that the European Co mmunities has skipped a step in arguing that
Article 23.1 of the DSU does not prohibit meas ures that are otherwise permitted by the WTO
agreements. The first question to be answered under Article 23.1 in this context is whether the
European Communities is seeking redress of a viola tion of WTO obligations. This question would
appear closely linked to Article 23.2(a) in that a Member would only be seeking redress of obligations
if the Member has determined that there is a breach of those obligations. In this instance, the first
question then would be whether the European Co mmunities has made such a determination outside
the context of WTO dispute settlement. If so, then the European Communities would be in breach of
Article 23.2(a) and by extension Article 23.1 of the DSU. If the measures taken in seeking redress
amounted to a suspension of WTO concessions or othe r obligations, then there might also be a breach
of Article 23.2(c).
5.35 If the European Communities has not made such a determination outside the context of
dispute settlement, then Article 23.1 would appear not to be applicable and there would be no need to
address, for purposes of DSU Article 23, the question of whether the measures taken were themselves
consistent or inconsistent with the WTO.
5.36 The United States also explains that neither Article 60 of the Vienna Convention on the Law
of Treaties nor Article 49(2) of the Draft ILC Ar ticles on State Responsibility is relevant to the
question presented. 133 With respect to the Draft Articles, the United States does not believe that a
report prepared by the International Law Commission (not a body composed of WTO Members) of
which the UN General Assembly simply “took note” in 2001 can inform the meaning of provisions of
the WTO agreements that entered into force almost six years earlier. Nor do the Draft Articles set

130 First submission of the European Communities, para. 168.
131 See, e.g., Appellate Body Report, US - FSC (Article 21.5-EC), para. 256(e).
132 Panel Report, US - Section 301 Trade Act, para. 4.81.
133 First submission of the European Communities, paras. 132-135.

forth “customary rules of interpretation of public international law,” the standard by which WTO
dispute settlement bodies are to clarify existing prov isions of the covered agreements pursuant to
Article 3.2 of the DSU.
5.37 With respect to Article 60 of the Vienna C onvention, the United States observes that the
Vienna Convention is not a covere d agreement nor is it context for purposes of interpreting the WTO
agreements. Furthermore, Article 60 does not reflect a customary rule of interpretation of treaties.
Therefore, whatever the rules for suspension of a treaty might be under Article 60, they do not
establish the rights and obligations actually provide d by WTO covered agreements, and of course
Article XV of the WTO Agreement provides th e WTO rule for withdrawal from the WTO
agreements.
5.38 The United States opines that the Panel need not address these subsidiary arguments of the
European Communities. In the view of the United St ates, the first question to resolve is whether the
TDM Regulation and the related measures are incons istent with any provision of a WTO agreement
other than Article 23 of the DSU. In this regard, one such provision cited by Korea is Article 32.1 of
the SCM Agreement. As indicated in the US writte n submission, in order to determine whether the
EC measures are inconsistent with Article 32.1, the Panel will need to determine whether the EC
measures cited by Korea are in response to Korean subsidies.134
5.39 If the Panel determines that the EC measures are inconsistent with a provision other than
Article 23 of the DSU, the Panel would seem to have two choices. First, it could invoke principles of
judicial economy, and stop there. Finding an incons istency with Article 23 of the DSU arguably does
not provide much in the way of additional assistance to the parties or the Dispute Settlement Body.
Alternatively, the Panel could go on to conduct the analysis under Article 23, in which case it would
have to address the other issues raised by the parties concerning Article 23.
5.40 If, however, the Panel determines that the EC me asures are not inconsistent with a provision
other than Article 23 of the DSU, the Panel may wish to proceed to determine if the
European Communities has made a determination c ontrary to DSU Article 23.1 and 23.2(a). In
looking at the question of what would constitute a determination, the United States notes that this
question would appear to be distinct from the qu estion of whether there has been a suspension of
concessions in breach of Article 23.2(c). In US - Section 301 Trade Act, the European Communities
itself took the position that a determination only ha d to be formal and le gally binding and could
include determinations of WTO consistency. 135 The EC position in this dispute that there must also
be trade consequences is a new position by the European Communities, and it is not clear what textual
support there is for that new position.
5.41 In response to a question posed by the Europ ean Communities, the United States notes that it
is difficult to discuss such broad concepts as the sc ope of DSU Article 23 in the abstract. In the
context of this particular dispute, the Un ited States has taken no position on whether the
European Communities has made a determination that Korea has acted inconsistently with the WTO
Agreement. However, the United States would obser ve that Article 23.1 requires Members to have
recourse to the DSU when they “seek redress” of a violation of an obligation under the WTO
Agreement. “Redress” is defined as
"1. Reparation of or compensation for a wrong or consequent loss. 2(a). Remedy for
or relief from some trouble; assistance, aid, help. (b) (obsolete) Correction or
reformation of something wrong. 3(a) A means of redress; an amendment, an

134 Third party submission of the United States, para. 12.
135 Panel Report, US - Section 301 Trade Act, para. 4.844.

improvement. (b) (obsolete) A person who or thing which affords redress. 4. The
act of redressing; correction of amendment of a thing, state, etc."136
5.42 The United States notes that various Members have explained that they are not in a position to
suspend concessions effectively or have recourse to other modes of redress. 137 Therefore, the main
form of redress or “assistance” available to them is a finding that another Member’s measure is
inconsistent with the WTO Agreement.
5.43 Article 23.2(a) provides further support that a determination of a breach of the WTO
Agreement can be a method of seeking redress. Article 23.2(a) specifically singles out a
determination, outside DSU procedures, of a br each of the WTO Agreement as being inconsistent
with the DSU. Article 23.2(a) does not require that the determination be accompanied by any other
action or trade consequences. 138 As a result, it would appear that a determination of a breach of the
WTO Agreement could be sufficient in and of itself to be proscribed by Article 23, irrespective of
whether it is accompanied by actions with trade cons equences. In this connection, the United States
notes that, while the panel in US - Certain EC Products suggested that “determinations” under
Article 23.2(a) are ones which bear consequences in WTO trade relations, 139 that panel’s
Article 23.2(a) finding was reversed because the European Communities never even raised a claim
under that provision – in other words, the parties never presented arguments on whether a
determination need have “consequences for trade relations,”
140 and the panel’s statement is little more
than an unsupported assertion.
5.44 According to the United States, if there is a de termination inconsistent with Article 23.2(a),
then that would be sufficient to establish a conseque ntial breach of Article 23.1. There would appear
to be little need then for the Panel, in its analys is of Korea’s Article 23 claims, to further examine
whether any measures of the European Communities responding to such a determination are
consistent with the WTO Agreement. It may, ho wever, be appropriate to examine whether those
measures are consistent with othe r provisions of the WTO Agreement that are the subject of Korea’s
claims.
5.45 In response to a further question from the European Communities, the United States notes that
Article 23.2 nowhere refers to measures other than a determination or the suspension of concessions
or other obligations. Accordingly it is difficu lt to see how measures consistent with the WTO
Agreement would be covered by Article 23.2. Si milarly, Article 23.1 simply commits Members to
have recourse to, and abide by, the rules and proce dures of the DSU. The DSU is not concerned with
rules or procedures for a Member to adopt or main tain measures that are consistent with the WTO
Agreement, so it is difficult to see how Article 23.1 would apply to such measures. Of course, in the
context of this dispute, if the Panel were to dete rmine that the EC measures at issue are inconsistent
with the WTO Agreement, in particular the SCM Ag reement, then Article 23 of the DSU could also
apply to those measures.

136 The New Shorter Oxford English Dictionary, 4th edition, vol. 2, p. 2515.
137 The Unites States notes that, for example, this i ssue has arisen several times during the course of
negotiations on the DSU.
138 The United States is unclear as to what is meant by “consequences in WTO trade relations.” A
determination that another Member is failing to abide by its WTO commitments would certainly appear to have
potential “consequences in WTO trade relations,” if only with respect to the Member’s willingness to enter into
further commitments with that other Member. However, for purposes of this reply the United States assumes
the EC intends this term to refer to trade effects rather than simply the quality of the trade relationship between
Members.
139 Panel Report, US – Certain EC Products, para. 6.98.
140 Appellate Body Report, US – Certain EC Products, paras. 107-115.

5.46 In response to a question posed by the Eur opean Communities concerning the term “counter
subsidy”, the United States notes that it used the term to refer to a subsidy provided by one Member in
response, either in whole or in part, to a subsidy provided by another Member.
5.47 In response to questions posed by Kor ea concerning the European Communities'
characterization of the DSU’s negotiating history, the United States notes that Article 23 of the DSU
records an agreement reached among all the Urugua y Round participants as to how WTO Members
would conduct themselves in light of the new DSU being agreed. In this respect, it protected all
Members, including the United States, against the ac tions described. Most fundamentally, the intent
of a treaty provision is to be found in the language of the provision itself. DSU Article 23.2 by its
terms is not limited to Section 301 of US law or to the determinations or suspensions of concessions
by any particular Member; it applies equally to all Members. Had the Members intended a narrower
application of the disciplines of Article 23.2, they would have drafted the provision accordingly.
5.48 In China
’s view, concerning the threshold for the application of Article 23 of the DSU, it
should be firstly assessed whether the TDM is a measu re seeking the redress of a WTO violation.
China submits the following opinion on this threshold issue.
5.49 China does not agree with the European Communities that the term “seek to redress” covers
“any action that is capable of inducing another Member to terminate a breach of WTO obligations”, or
even only “measures amounting to a suspension of concessions or obligations under the WTO
Agreement”. On the basis of the meanings of th e terms “seeking” and “redress” considered by the
Panel in US – Certain EC Products , it is essential to find out whether the purpose of the measure at
issue is “with a view to remedying the situation” of a WTO violation.
5.50 Secondly, China submits, although only remedial actions envisaged in the WTO system can
be used by a Member to redress a WTO vi olation, this does not mean that only such actions can be
deemed as remedial actions falling within the ambit of Article 23. On the contrary, Article 23 covers
any remedial action that is adopted against another Member and in response to a WTO violation. If
Article 23 is interpreted to only cover a suspension of concessions or obligations, it would effectively
mean that Members are free to take whatever actions they like to redress a WTO violation except for a
suspension of concessions or obligations. This cl early runs against the DSU’s object and purpose of
protecting the security and predictability of the multilateral trading system.
5.51 Thirdly, China believes that the structure of Ar ticle 23 is: paragraph 1 provides for a general
obligation to have exclusive recourse to the multila teral dispute settlement mechanism pursuant to the
rules and procedures of the DSU while paragra ph 2 provides for specific instances of prohibited
unilateral actions. Therefore, China does not agree to the EC argument that “a prohibited unilateral
action that redresses a WTO violation must have elements of the three sub-paragraphs” of
Article 23.2. In China’s opinion, each of th e forms of unilateral actions provided for under
Article 23.2 is explicitly prohibited.
5.52 Turning to the current dispute, China suggests that the following facts, if established by the
Panel, should be helpful for ascertaining whether the TDM is a measure seeking the redress of a WTO
violation: (i) the TDM is closely linked to the TBR investigation conducted by the
European Communities on the allegedly WTO-inconsistent subsidies provided by Korea. Via the
TBR investigation, a link may be established betw een the TDM and the perceived WTO-inconsistent
subsidies of Korea; (ii) in terms of the appli cation period of the TDM measure, the TDM appears to
be an ancillary instrument that comes into play while the WTO proceedings do not produce effective
remedies for the European Communities as early as it desires; (iii) as indicated by the Press Release of
the European Communities, the so-called “twin-tr ack strategy” consists of the TDM and the WTO
proceedings launched by the European Communities ag ainst Korean subsidies; (iv) the form of the
TDM measure is direct aid for shipbuilding contract s in case of Korean competition. Thus, it is

aiming at counteracting the low-price competition perceived by the European Communities as a result
of subsidies granted by Korea.
5.53 China also submits that alt hough the TDM was initially inte nded as a countermeasure against
the perceived subsidies of Korea, it may have ser ious impact upon the world shipbuilding market.
The TDM Regulation provides that an EC government may grant direct aid to EC shipyards in case of
competition from Korean shipyards. However, it do es not exclude its application to the situations
where there are competitors from countries other than Korea. On the global market, it is extremely
common that shipyards from not only the European Communities and Korea, but also other countries
compete for a new shipbuilding order. The Eur opean Communities itself admits that “there is per se
always competition from a Korean” yard. Therefor e, the TDM measure, through direct government
intervention in the bidding process par ticipated by market players from all over the world, is likely to
arm the EC shipyards with an artificial price edge of up to six per cent of the contract price and
thereby seriously damage the normal competitive conditions of the world shipbuilding market.
5.54 On the basis of the above, China urges the Pane l to take into account the impact of the TDM
measure on the global trade order in the shipbu ilding sector when assessing its consistency with
Article 23 of the DSU.
(b) Article 23.2.(a) of the DSU
5.55 With respect to the issue of whether the TDM constitutes a determination within the meaning
of Article 23.2(a) of the DSU, China firstly refers to the holding of the Panel in US – Section 301
Trade Act . That Panel considered that a determination “implies a high degree of firmness or
immutability, i.e. a more or less final decision by a Member in respect of the WTO consistency of a
measure taken by another Member”.
5.56 Second, China submits that the following facts seem to indicate that the TDM is of the degree
of firmness and immutability required by the meaning of a “determination” in Article 23.2(a): (i) the
recitals of the TDM Regulation firmly conclude th at certain segments in the EC shipbuilding industry
have suffered “adverse effects in the form of material injury and serious prejudice”. In the context of
the SCM Agreement, these words may be understood to be referring to adverse effects in the sense of
Article 5 of the SCM Agreement; (ii) the act of aut horizing direct aid specifically to certain segments
identified by the TBR investigati on seems to demonstrate the TDM Regulation’s nature of firmness
and immutability.
5.57 Third, China considers that the phrase “to the effect” contained in Article 23.2(a) indicates
that the measure under review does not need to clea rly set out in its text that a WTO violation has
occurred. China suggests that emphasis should be placed on the substantive implications of the
measure rather than its forms. Such a point of view is supported by the Panel in US – Section 301
which held that whether an act constitutes a “determina tion” is a more or less formal requirement that
needs broad reading. China further submits that the vague language of the TDM Regulation should
not be taken literally and linked to the “broader problem of injurious pricing” since the TDM
Regulation is closely associated with the TBR investigation and the TBR Commission Decision
manifestly concluded that “Korea has granted expor t and actionable subsidies within the meaning of
the SCM Agreement”.
VI. INTERIM REVIEW
6.1 The Panel issued its Interim Report pursuant to Article 15.2 of the DSU on 23 December
2004. On 13 January 2005, both parties submitted written requests to the Panel to review precise
aspects of the Interim Report but neither party request ed an interim review meeting. On 20 January
2005, both parties commented in writing on the other party's requests for review of the Interim

Report. Pursuant to Article 15.3 of the DSU, this section contains the Panel's response to the
comments of the parties on the Interim Report and forms part of the Panel's findings.
6.2 In addition to the changes discussed below, the Panel has corrected a certain number of
typographical errors in the Interim Report.
A. C ONDITIONAL PRELIMINARY OBJECTION OF THE EUROPEAN COMMUNITIES
6.3 Both parties request the Panel to modify a nd/or clarify certain paragraphs in Section
VII.A.4(a) of the Interim Report which discusses a conditional preliminary objection raised by the
European Communities with respect the reference in Korea's first submission to "individual instances
of application" of the TDM Regulation and the national TDM schemes.
6.4 The European Communities requests the deletion of the first sentence of paragraph 7.10 and
the last sentence of paragraph 7.25 of the Interim Report (which correspond to, respectively,
paragraphs 7.10 and 7.23 of the Fi nal Report) on the ground that those sentences incorrectly suggest
that the European Communities has stated before the Panel that a DSB recommendation would have
direct effect under the internal law of the Eur opean Communities. The European Communities also
request us to change paragraph 7.10 of the Interim Report to include certain arguments. Korea objects
to most of these changes proposed by the European Communities.
6.5 Korea requests the Panel to further clarify th e reasoning behind the distinction made in
paragraph 7.23 of the Interim Report (paragraph 7. 21 of the Final Report) between "individual
instances of application" and "disbursements of fu nds". Secondly, regard ing paragraph 7.24 of the
Interim Report, Korea disagrees with the implicit cr iticism to the effect that "Korea has presented no
evidence or specific arguments relating to any indivi dual instances of application or disbursements of
funds". Thirdly, with respect to the statemen t in paragraph 7.25 of the Interim Report (paragraph
7.23 of the Final Report) that it is not possible to state ex ante when an inconsistency with a panel
ruling would arise from payments made pursuant to an impugned measure after the DSB rulings and
recommendations, Korea does not see how there can be any instance when such payments would be
consistent. Given the ambiguity of the European Communities with regard to the issue of whether
disbursements of funds would be affected by a DSB recommendation, Korea requests the Panel to
further clarify the final sentence of paragraph 7.25 of the Interim Report (paragraph 7.23 of the Final
Report) to make it extra clear that disburseme nts of funds would be covered by the DSB's
recommendation. Closely related to this, Korea re quests the Panel to modify paragraph 8.4 of the
Interim Report (paragraph 8.4 of the Final Re port), which discusses the scope of the Panel's
recommendation, to make a less conditional statement or at least to make clarifying suggestions
pursuant to Article 19.1 of the DSU. The European Communities objects to the changes requested by
Korea.
6.6 In light of the relatively extensive comments of the parties on this part of the Interim Report,
we have made significant revisions with a view to better explaining our reasoning. The changes are
reflected in paragraphs 7.10, 7.15-7.25 and 8.4 of the Final Report.
B.
VESSELS AS IMPORTED PRODUCTS
6.7 The European Communities request that we change para graph 7.64 of the Interim Report
(paragraph 7.63 of the Final Report) which discusses the issue of whether the vessels covered by the
TDM Regulation are "imported products" within th e meaning of Article III of the GATT 1994. The
European Communities submits that it has not argued as part of its legal defence in this case that ships
are not imported products and that it was the Panel that had raised questions on this issue to the parties
after Korea had stated in its first submission that ship s are not often imported. It is in that connection
that the European Communities has explained that due to transit rules ships have not been subject to

importation requirements in the European Communities, as evidenced by the fact that import statistics
on ships provided by Korea and relied upon by the Panel are explicitly based on changes of ownership
not on data on importation. Since the notion of impor tation with respect to ships is complex and the
Panel has correctly dismissed the claim of Kor ea under Article III:4 of th e GATT 1994, the European
Communities requests the Panel to leave this issue open or at least to delete the reference in the fourth
sentence of paragraph 7.64 to "the volume and va lue of imports of seagoing tankers during the period
1998-2003".
6.8 Korea objects to the changes proposed by the Eur opean Communities. Korea points out that
the European Communities in response to Panel qu estion 51 clearly stated that the notion of
importation within the meaning of Article I.1 of the GATT 1994 does not apply to this case as the
vessels covered by the TDM Regulation are generally not imported, and that these vessels are means
of transport in transit. While the European Comm unities clearly constructed an argument on the basis
of an allegation that there are no imports of these sh ips, it has not been able to show that importation
of these vessels is legally impossible. Finally, the argument of the European Communities regarding
the status of ships as means of transport in transit is irrelevant to the issue of whether these ships can
be imported.
6.9 The Panel notes that in response to Panel qu estion 51 and in its statement at the second
meeting the European Communities has taken the position that ships, at least the vessels subject to the
TDM Regulation, are not imported within the meaning of Article I:1. It is true that strictly speaking
the European Communities has not submitted this view specifically as part of its legal defence against
Korea's claim under Article III:4, nor has the EC argued that these ships cannot be imported. This
said, it is difficult to see how Article III can apply to products that cannot be imported. Therefore,
even though this issue was not expressly discussed in the context of the claim under Article III:4, it
presented the Panel with an important threshold ques tion regarding the applicability of that provision.
We therefore consider that it was logical to a ddress this issue in our findings on the claim under
Article III:4 even though we realize that in light of our substantive conclusion on the merits of that
claim under Article III:4, it might not have been st rictly necessary. However, we have adjusted
paragraph 7.63 of the Final Report in light of the comments of the European Communities on the
basis for the collection of statistics on imports of the vessels in question.
C.
REFERENCES TO PRESS RELEASES
6.10 The European Communities objects to the fact that the Panel has attached certain
evidentiary value to certain press releases submitted by Korea. In this regard, the European
Communities recalls that in its first written submis sion and in its statement at the second substantive
meeting it has explained in detail why it rejects the use of press releases of the European Commission,
and more precisely of individual Commissioners, for the interpretation of the measure at issue, which
is a Regulation of the Council of the European Un ion. The European Communities states that the
Panel has correctly rejected the evidentiary valu e of the press releases in paragraph 7.172 of its
Interim Report but that it has in appropriately relied on those press re leases in paragraphs 7.25, 7.64,
7.137, 7.212, 7.213 and 7.218 and in footnotes 197, 1 98, 273, 397, 398 and 399 of the Interim Report.
The European Communities considers that the expl anation proffered by the Panel in footnotes 274
and 396 of the Interim Report that these statements are relevant because of "the role of the
Commission in initiating the legislation" is based on a misunderstanding of the legislative process in
the European Communities. The European Communities submits in this regard that individual
members of the European Commission are not the orga n that initiates legislation but that it is the
entire Commission that adopts a legislative proposal, and that in any event, once legislation has been
adopted, it is exclusively the motivation and intent of the final act that describes the institutionally
legitimised motivations of the act. A purely politica lly motivated press release of individual members
of the Commission or even the Commission itself cannot modify or otherwise affect such Council act.
In this case, the press releases were those of the individual Commissioners. The European

Communities considers that the use by the Pane l of these press releases amounts to a serious
misrepresentation of its internal legislative procedur es, division of competences and legal effects of
acts. The European Communities argu es that, contrary to what is suggested in footnote 396 of the
Interim Report, the Panel Report in US – Certain EC Products is not relevant precedent.
6.11 Korea argues that it has submitted a mass of ev idence on the nature of the TDM Regulation
including official EC explanatory memoranda, interviews with Commissioners statements to
Parliamentary Committees and press releases. Those press releases differed in regard to their degree
of formality, and it is factually incorrect to assert that they were politically motivated statements of
individual members of the European Commission. Korea submits that a WTO Member does not have
the exclusive right to characterize its laws with resp ect to WTO obligations. Korea also refers to the
fact that the EU's website describes the Commission as the driving force within the EU's institutional
system in that it proposes legislation, policies and programmes of action and is responsible for
implementing the decisions of Parliament and the Council. The same source describes the
Commission as the European Un ion's executive body and as an important mouthpiece for the
European Union on the international stage. In the case at hand, the Commission proposed the TDM
regulation, shepherded the regul ation through the Council and Parlia mentary processes and retained
for itself the authority to decide when to activat e the TDM Regulation by initiating the WTO dispute
settlement process upon which the TDM authority depended. The role of the Commission as
executive body means that statemen ts by the Commissioners are highl y probative with regard to the
implementation of a measure. Korea also submits that not all paragraphs cited by the European
Communities contain references to press releases and, that where reference is made to press releases
these are of the European Commission and not of individual Commissioners. Referring to the Panel
Report in Chile – Alcoholic Beverages and Article 4 of the ILC's draft Articles on State
Responsibility, Korea also submits that the Eu ropean Communities cannot disavow the stated
positions of its representatives. Finally, Korea ar gues that all of the statements, memoranda, press
releases, etc. submitted by Korea lead to the same conclusion regarding the nature structure and intent
of the TDM Regulation, and that the statements of the Commission referred to by the Panel therefore
are not isolated statements that might not reflect the understanding and intent of the Commission.
6.12 The Panel notes that a number of paragraphs and footnotes mentioned by the European
Communities do not make reference to press relea ses. Specifically, we see no such reference in
paragraphs 7.25, 7.64 and 7.213 of the Interim Report (paragraphs 7.23, 7.63 and 7.212 of the Final
Report), nor in footnotes 197 and 198 of the Interim Report (the text of which has been deleted from
the Final Report) and footnote 398 of the Interim Report (footnote 402 of the Final Report) The issue
therefore arises only in respect of paragraphs 7.137, 7.212 and 7.218 of the Interim Report
(paragraphs 7.136, 7.211 and 7.217 of the Final Report) and footnotes 273, 397 and 399 of the Interim
Report (footnotes 277, 401 and 403 of the Final Report). In these paragraphs and footnotes reference
is made to two press releases, IP/01/656 and IP/01/ 1078, which are quoted in part in footnote 273 of
the Interim Report (footnote 277 in the Final Report) and in paragraph 7.218 of the Interim Report
(paragraph 7.217 of the Final Report). After carefu lly reviewing the arguments of the European
Communities, we see no reason to change the text of the Report as requested by the European
Communities.
6.13 First, we note that, as explained in the firs t and last sentences of paragraph 7.137 of the
Interim Report ( paragraph 7.136 in the Final Repor t) and in footnotes 274 and 396 of the Interim
Report (footnotes 278 and 400 of the Final Report), we have relied on these two press releases for the
limited purpose of confirming a conclusion drawn from an analysis of the text of the TDM
Regulation. We do not believe that our use of these press releases can be interpreted to mean that we
view the statements in those press releases as autono mous sources of interpretation that can be relied
upon independently of an analysis of the preamble and operative provisions of the TDM Regulation.
Secondly, while the summary section of each of these press releases includes in one sentence a
comment made by an individual Commissioner, whic h has been omitted from the quotations in the

Panel Report, as a whole these press releases clearly describe and explain decisions and actions taken
by the Commission as such, not its individual member s. Thus press release IP/01/656 of 8 May 2001
is entitled "Commission sets out strategy on Korean shipbuilding case following investigation into
unfair trade practices" and its summary states inter alia that "...the Commission today approved the
strategy it will propose to the Council of Ministers...", that "the Commission will recommend that the
matter be taken before the WTO ...", and that "the Commission will propose accompanying measures
in the form of a temporary support mechanism to European shipyards...". Similarly, press release
IP/01/1078 of 25 July 2001 is entitled "Commissi on proposes temporary defensive mechanism for
shipbuilding against unfair Korean practices" and th e summary section of that press release begins by
stating that "[t]he Commission today adopted a pro posal for a Council Regulation..." We therefore
can see no factual support for the argument of the Eu ropean Communities that "[i]n this case the press
releases were those of individual Commissioners". With respect to the argument of the European
Communities that the reference in footnotes 274 and 396 of the Interim Report (footnotes 278 and 400
of the Final Report) to "the role of the Commissi on in initiating the legislation" reflects an incorrect
understanding of the internal legislative process, we consider that it is clear that the expression "the
role of the Commission in initiating this legislation", when read in context, simply means the role of
the European Commission as an institution in prop osing the draft TDM Regulation to the Council.
Since the relevant paragraphs of the Panel Report cl early refer to statements of the Commission, not
its individual members, there is nothing in these pa ragraphs to suggest that the Panel considers
individual members of the European Commission as "legislators". As to the argument of the
European Communities that "once legislation is adopt ed it is exclusively the motivation/intent of the
final act that describes the institutionally legitimis ed motivations of the act" and that "politically
motivated press releases of individual Commissioners or even of the EC Commission cannot modify
or otherwise affect such Council act", we reiterate that the Report relies on these two press releases
only to confirm a conclusion derived from the analysis of the text of the TDM Regulation. Finally,
regarding the argument of the European Communities that the reference in footnote 396 of the Interim
Report (footnote 400 in the Final Report) to the Panel Report in US - Certain EC Products is not a
relevant precedent, we note that the primary r eason why we consider it appropriate to lend some
weight to the press releases is explained in the first sentence of the footnote and that the reference in
the second sentence to US – Certain EC Products is of subsidiary importance.
VII. FINDINGS
A.
INTRODUCTION
1. Findings requested by the parties
7.1 Korea requests the Panel to find that:
(a) the TDM Regulation, its member State implementing provisions as well as any
instances of application of the TDM scheme, and any EC Decisions approving
member State implementing provisions pursuant to the TDM scheme, are inconsistent
with the European Communities' and its member States' obligations under
Articles 23.1, 23.2(a), 23.2(b) and 23.2(c) of the DSU;
(b) the TDM Regulation, its member State implementing provisions as well as any
instances of application of the TDM scheme, and any EC Decisions approving
member State implementing provisions pursuant to the TDM scheme, are inconsistent
with the European Communities' and its member States’ obligations under
Article 32.1 of the SCM Agreement;
(c) the TDM Regulation, its member State implementing provisions as well as any
instances of application of the TDM scheme, and any EC Decisions approving

member State implementing provisions pursuant to the TDM scheme, are inconsistent
with the European Communities' and its member States’ obligations under
Article 4.1-4 and Article 7.1-4 and 9 of the SCM Agreement;
(d) the TDM Regulation, its member State implementing provisions as well as any
instances of application of the TDM scheme, and any EC Decisions approving
member State implementing provisions pursuant to the TDM scheme, are inconsistent
with the European Communities' and its member States’ obligations under
Article III:4 of the GATT 1994; and
(e) the TDM Regulation, its member State implementing provisions as well as any
instances of application of the TDM scheme, and any EC Decisions approving
member State implementing provisions pursuant to the TDM scheme, are inconsistent
with the European Communities' and its me mber States’ obligations under Article I:1
of the GATT 1994.
7.2 The European Communities requests the Panel to find that:
(a) the TDM Regulation is not in violation of Articles 23.1, 23.2(a)-(c) of the DSU,
Articles 4, 7 and 32.1 of the SCM Agreement and Articles I and III:4 of the GATT
1994; and
(b) the national TDM measures (to the extent that they still exist) are not in violation of
Articles 23.1, 23.2(a)-(c) of the DSU, Articles 4, 7 and 32.1 of the SCM Agreement
and Articles I:1 and III:4 of the GATT 1994.
2. Order of Analysis
7.3 The order in which we analyze the claims of Korea takes into account their substantive
interrelationship. Given that a key question of inte rpretation in this case is whether Article 23 of the
DSU can prohibit a measure that does not entail a suspension of concessions or other obligations
under the WTO Agreement, we examine first whether the measures at issue are inconsistent with the
provisions of the GATT 1994 and the SCM Agreement cited by Korea. We also note the
interrelationship between the claims of Korea unde r Articles I and III of the GATT 1994, given that
Korea challenges the TDM Regulation under Article I of the GATT 1994 as an internal measure
covered by Article III:4 of the GATT 1994. Finally, we note the close relationship between the issues
raised by Korea under Articles 4 and 7 of the SCM Agreement and under Article 23 of the DSU. In
light of these considerations, we decide that the most efficient manner to proceed is to analyse first the
claims of Korea under Articles III and I of th e GATT 1994, followed by Korea's claims under
Article 32.1 of the SCM Agreement, Article 23 of the DSU and Articles 4 and 7 of the SCM
Agreement.
3. Burden of proof
7.4 We recall that the general principles applicable to burden of proof in WTO dispute settlement
require that a party claiming a violation of a pr ovision of the WTO Agreement by another Member
must assert and prove its claim.
141 In these Panel proceedings, Korea, which has challenged the
consistency of the European Comm unities' measures, thus bears the burden of demonstrating that the
measures are not consistent with the relevant provisions of the Agreement. Korea also bears the
burden of establishing that its claims are properly befo re us. We also note that it is generally for each

141 Appellate Body Report, US – Wool Shirts and Blouses, p. 16.

party asserting a fact to provide proof thereof. 142 In this respect, therefore, it is also for the
European Communities to provide evidence for the facts which it asserts. We also recall that a
prima facie case is one which, in the absence of effec tive refutation by the other party, requires a
panel, as a matter of law, to rule in favour of the party presenting the prima facie case.
4. Preliminary issues
(a) Conditional preliminary request of the European Communities
(i) Main arguments of the parties
7.5 In its first submission, the European Communities made a conditional request for a
preliminary ruling by the Panel that Korea had violated Article 6.2 of the DSU on the grounds that
Korea's first submission expanded the claims of Kore a to include "individual instances of application"
of the TDM Regulation by the European Commissi on and the respective EC member States, "the
application of the TDM scheme in specific cases" , and "TDM contributions provided pursuant to the
TDM framework".143
7.6 In support of this request, the European Comm unities argued that the request of Korea for the
establishment of a panel 144 explicitly did not identify as impugned measures any individual grants.
Since Korea's request explicitly distinguished betw een the national TDM schemes of the EC member
States as such and "particular instances" of grants in its description of the consultations that had taken
place in this dispute, Korea could not claim that the reference to "implementing measures" comprised
individual grants. The European Communities request ed the Panel to invite Korea to clarify that
individual instances of application of the nationa l TDM measures were not within the scope of the
proceeding and, if Korea were to insist on the inclus ion of individual instances of application, to rule
that the claim, insofar as it related to the individual instances of application was contrary to Article 6.2
of the DSU and should, therefore, be dismissed.145
7.7 Korea requested the Panel to deny the request of the European Communities on the following
grounds.146 First, the paragraph of Korea's request for the establishment of a panel that described the
content of the consultations did not make a le gal distinction between the TDM Regulation and
implementing measures, on the one hand, and the actua l instances of grants of funds, on the other, but
only contained a non-exhaustive list of the issues that were the subject of the consultations.
Moreover, Korea's request for the establishment of a panel referred to disbursements in that it
identified the measures as "...the TDM Regulation and member States implementing measures
involving the bestowal of German, Danish, Dutch, French and Spanish grants to shipyards on a
vessel-specific and product-related basis...". Sec ond, if a Member challenged a measure as WTO-
inconsistent, the Member did not need to include the actual instances of nullification and impairment
for them to be included within the dispute. Third, while Korea considered that individual grants were
not separate measures but were mere applications of the TDM Regulation and the EC member States'
implementing laws, if the Panel considered that i ndividual grants were separate measures, they would
still be covered by the terms of reference as directly related to the measures at issue. Fourth, the
European Communities had not shown how its due process rights were adversely affected by a lack of
clarity of the request for the establishment of a panel. Finally, if specific applications of a measure
found to be WTO-inconsistent were to be ex cluded from the scope of a panel ruling unless

142 Ibid.
143 The European Communities referred to, respectively, paras. 12-13; p. 14; and paras. 131, 140, 169,
and 192 of the first submission of Korea.
144 WT/DS301/3, attached as Annex.
145 First submission of the European Communities, paras. 107-113.
146 Attachment 2 to the oral statement of Korea at the first substantive meeting of the Panel with the
parties.

individually listed in the request for establishment, the result would be that such applications could
continue, at least to the extent they had been comm itted but not yet paid prior to the DSB rulings and
recommendations.
7.8 At the first substantive meeting of the Panel 147, Korea indicated that it did not seek a ruling of
the Panel on each disbursement. However, it rejected the argument of the European Communities that
disbursements were not covered by the dispute. Korea expressed concern regarding the systemic
implications of a preliminary ruling that disburseme nts of funds were not cove red because this would
mean that where a measure was found to be WTO-in consistent, a Member could continue to apply
that measure in individual cases if those individual instances had not been specifically identified.
7.9 The European Communities inferred from this statement of Korea that Korea did not ask
this Panel to find that individual disbursements of funds under the TDM we re WTO-inconsistent.
Regarding the concern expressed by Korea with r espect to a Panel ruling that would not cover
individual instances, the European Communities ar gued that Korea was challenging these individual
instances in another disp ute settlement proceeding148 in which context the specific remedies provided
for in the SCM Agreement would possibly apply. In the present case, however, the only remedy
possible was a remedy of a prospective nature in th e form of a recommendation to bring the general
measure into conformity with WTO obligations.
7.10 In response to questions from the Panel, the European Communities indicated that if the Panel
were to find the TDM Regulation and the national measures of the five EC member States (to the
extent still in force) to be inconsistent with the WTO Agreement, the European Communities would
bring those measures into conformity. The European Communities also stated that if the basic law is
incompatible with the WTO Agreem ent, there would be no basis for further granting any aid. The
European Communities also indicat ed that the TDM Regulation and the national measures as a legal
basis for providing aid will expire on 31 March 2005, i.e.., possibly even before a final report in this
proceeding is adopted. The European Communities also pointed out that it often happens that a law or
subsidy scheme is attacked without equally attacki ng individual applications, for example, the recent
Byrd case. The issue of the payment of state aid pur suant to aid granted before the effective date of
such a recommendation was a matter for implementati on. The European Communities, in response to
another question of the Panel, also clarified that Korea's statement that it was not asking for any
findings or recommendations on specific measures ha d allayed the concerns that had led to the
conditional request for a preliminary ruling.
7.11 Referring specifically to the comment of th e European Communities on payments made
pursuant to subsidies granted before a DS B recommendation would become effective, Korea
requested the Panel to clarify that the case-by- case implementation of an illegal measure would be
covered by a ruling against such measure. The position of the European Communities on individual
instances of application as separate measures that needed to be identified in order to be covered by the
dispute made it necessary for the Panel to clarify th at such instances would be covered by any ruling
or recommendation against the TDM Regulation and the national measures.
7.12 After hearing the parties' views on this matter at the first substantive meeting, and taking into
account the European Communities' d eclaration (para. 7.10 above) that Korea's statement had allayed
the concerns that had led to its conditional request for a preliminary ruling, the Panel stated that:

147 The remarks of Korea and the European Communities as reflected in paragraphs 7.8-7.11 were
made during the course of an oral discussion on this point during the first substantive meeting, and are not fully
reflected in the written versions of the parties' oral statements. The description of these remarks thus is based on
a transcription of the relevant part of that meeting.
148 WTDS307.

"[...] the Panel's view at this point is that the EC has withdrawn its request for a
preliminary ruling and so we will not be making a preliminary ruling.
As to the implementation issues generally, the Panel noted:
"We are aware that both sides have specific concerns on the issue that we were
talking about; we are aware of those concerns and we are not making any decision,
one way or the other, on any of the issues that were being discussed yesterday. We
assume that you may well have more to say on those issues and, if necessary, we may
have additional questions on those issues in due course."
The European Communities raised no objection to the Panel's characterization of the status of the
European Communities' conditional request for a preliminary ruling.

7.13 In its second written submission, Korea reverted to this matter and requested the Panel to
clarify whether or not it considered the disbursement s of funds to be separate measures. If the Panel
considered them to be distinct measures, the Pane l should find that they were covered in the request
for the establishment of a panel because they were directly related to the cited measures and, in
addition, were identified in that request, and the Panel should find the disbursements to be
inconsistent with the obligations of the Europ ean Communities under the WTO provisions referenced
in the request for the establishment of a panel. On the other hand, if the Panel agreed with Korea that
the disbursements of funds were not separate meas ures but simply the implementation of measures
found to be illegal, Korea requested the Panel to make an affirmative recommendation pursuant to
Article 19.1 of the DSU that the European Comm unities immediately cease any further disbursements
of illegal funding.
149
7.14 The European Communities recalled its position that while the request of Korea for the
establishment of a panel did not cover individua l disbursements, its concerns regarding the
implications of the inclusion of such disburseme nts within the scope of the present proceedings had
been alleviated by Korea's clarification at th e first meeting that Korea did not base its case on
individual grants. For this reason, the European Communities considered that the request of Korea
that the Panel clarify the theoretical relationshi p between general subsid y schemes and individual
disbursements was an inappropriate request for an advisory opinion.150
(ii) Evaluation by the Panel
7.15 From a procedural viewpoint, the Panel finds itself confronted with a somewhat unusual
situation: while initially it was the European Communities which presented a conditional request for
a preliminary ruling concerning "individual inst ances of application", subsequently, after the
Communities indicated that it no longer considered it necessary to pursue this matter, Korea requested
the Panel to decide whether "disbursements of funds" pursuant to the TDM Regulation and national
measures are part of the subject matter of this dispute.
7.16 The Panel notes that Korea has confirmed that it is not seeking specific findings on individual
disbursements of funds but that Korea neverthe less requests the Panel to clarify that such
disbursements would be covered by any ruling or recommendation against the TDM Regulation and
the measures of the member States. Korea's po sition is that separate findings on individual

149 Second submission of Korea, paras. 25-34; see also oral statement of Korea at the second
substantive meeting of the Panel with the parties, para. 67.
150 Further comments on preliminary issues and Korea's DSU Article 19.3 request by the
European Communities (delivered as part of the oral statement of the European Communities at the second
substantive meeting of the Panel).

disbursements are not necessary to bring them within the scope of any Panel ruling or
recommendation, i.e., that they are inherently part of the subject of this dispute. By contrast, the
European Communities has withdrawn its conditional request for a preliminary ruling on the basis of
a statement of Korea that it was not seeking findings on individual disbursements, but it would appear
that the European Communities' withdrawal of th e request for a preliminary ruling does not signify
that the Communities shares Korea's position that individual disbursements are inherently part of the
subject matter of this dispute. The issue on which Korea asks us to rule thus is whether individual
disbursements are covered by our terms of reference.
7.17 Under its terms of reference, a panel's authority to examine and make findings is restricted to
the matter referred to in the request for establishment of a panel. Whether an issue is properly within
a panel's terms of referenc e depends upon whether that issue forms part of the matter described in the
request for establishment, defined in terms of claims and measures.
7.18 Korea’s request for establishment of a panel 151 indicates that consultations took place in this
dispute with regard to, on the one hand, the provi sions of the TDM Regulation and the EC member
States implementing provisions as such, and, on the other, the provision of subsidies by the European
Communities and its member States “in particular in stances”; and that these consultations have failed
to resolve the dispute between parties concerning “the TDM Regulation…and the EC member States’
implementing provisions”. The request next states th at: "[t]he measures that are the subject of this
request are the EC and its member States' legal provisions and decisions providing for the supply of
grants to shipbuilders . . . ." Korea consider s in particular "that the following measures are
inconsistent with the European Communities' obligations under the SCM Agreement": the TDM
Regulation, "the EC member State implementi ng provisions of the TDM regulation", and "the
European Commission Decisions approving these implementing provisions". The request then lists
these "implementing measures" and Decisions.
152 The "implementing measures" listed provide a
general framework for providing aid, and do not rela te to the actual provision of aid in individual
instances. Finally, the request states that "the EC and its member State measures referred to above"
are inconsistent with Articles I:1 and III:4 of th e GATT 1994, Articles 23.1 and 23.2 of the DSU and
Articles 4 and 7 of the SCM Agreement, and Articles 32.1 and 4 and 7 of the SCM Agreement.
7.19 The request for establishment therefore does not explicitly identify either “individual
instances of application”, the expression used in the first submission of Korea, or "disbursements of
funds", the expression subsequently used by Kor ea. The Panel considers this omission from the
request for establishment especially significant as th e request for consultations explicitly covered the
provision of subsidies by EC member States in "particular instances" as a subject distinct from the
provisions of the TDM Regulation and the EC memb er States' implementing provisions "as such".
The Panel further notes, in this connection, that in February 2004 Korea submitted another request for
consultations153 indicating that while Korea had "requested the establishment of a panel with respect
to the TDM Regulation and its inconsistency w ith certain provisions of the GATT 1994, the SCM
Agreement and the DSU", Korea now "wishes to pro ceed with consultations with the EC regarding
other aspects of the TDM Regulation and other measur es which were the subject of its September 3rd
request along with additional measures recently adopted by the EC". That request clearly identifies as
the measures at issue relevant legal provisions at the EC and member State level as well as the
granting of aid in particular instances.
7.20 In order to decide on Korea's request, we would have to determine whether "individual
instances of application" or "disbursements of funds" were somehow implicitly identified in the
request for establishment, and if not, whether the re quest otherwise covers such disbursements either

151 WT/DS301/3, attached as Annex.
152 Id.
153 WT/DS307/1.

because they are "applications" of the cited measures or because they are "directly related" to those
measures.154 The Panel is not persuaded, however, th at it is necessary or appropriate for it to
pronounce on these questions.
7.21 In this regard, the Panel recalls first that the conditional request of the European Communities
for a preliminary ruling pertained to "individual in stances of application", and that Korea's first
submission contained similar notions. By contr ast, the request as made by Korea in its second
submission refers to the "disbursement of funds ". In the Panel's view, while the expression
"individual instances of application" refers generall y to the provision of aid in particular cases, the
expression "disbursement of funds" is a more specific reference to the act of "payment" of aid.
Concerning individual instances of application in this sense, the European Communities has not
contested in this proceeding that, in the event of a DSB ruling that the TDM Regulation and the
national TDM schemes are inconsistent with WT O provisions, the obligation of the European
Communities to implement the concomitant recomm endation under Article 19.1 of the DSU would
cover future decisions by EC member States to grant state aid in response to new applications for such
aid. Thus, the question of the implications of such a recommendation for the provision of TDM aid in
particular cases (i.e., individual instances of application) has not given rise to controversy between the
parties.
7.22 Korea's request to the Panel for a decision rega rding the status of "disbursements of funds"
thus exclusively relates to the act of payment of aid, and specifically to the application of a DSB
recommendation to future such payments155. Korea's concern in this regard pertains to whether, in the
event of a DSB recommendation to bring the TD M Regulation and national aid schemes into
conformity with WTO obligations, EC member Stat es could continue to make payments after the
effective date of such a recommendation pursuant to aid authorized before that date.156
7.23 We acknowledge that the continued payment of money, following a DSB recommendation
that the European Communities bring the TDM Regulation and the national TDM schemes into
conformity with WTO obligations, pursuant to st ate aid authorized previously under national TDM
schemes, might well constitute a breach of WTO obligations 157. However, to determine precisely
when an inconsistency with WTO obligations would arise from such payments would require analysis
of factual and legal issues which would be neither feasible nor appropriate to attempt ex ante in the
context of the present proceeding. The Panel considers that this issue rather should be addressed at an
implementation stage, on the basis of the specific fact s presented to the Panel at that time. To attempt

154 See cases discussed in WTO Analytical Index, at 1305—1308.
155 Korea indicated in interim review that "[t]he issue is the future disbursements of monies made
pursuant to the impugned measure"(emphasis in original).
156 Our understanding of Korea's request is confirmed by its position in interim review. At the second
meeting of the Panel with the parties, the European Comm unities stated that if the Panel were to find the TDM
Regulation and the national measures of the five EC member States (to the extent still in force) to be
inconsistent with the WTO Agreement, the EC would bring those measures into conformity. The European
Communities also stated that if the basic law is incompatible with the WTO Agreement, there would be no basis
for further granting any aid. We under stand these statements to mean that , in the event of a finding of WTO-
inconsistency, the European Communities would bring the TDM and the national measures into conformity with
its WTO obligations, and that such action would remove the legal basis for granting any further aid. In response
to this statement by the European Communities, Korea, in its interim review comments, has indicated its
concern that "the EC is referring to the lapse of the authority of the EC member states to grant new aid rather
than with respect to continued disbursement of already granted aid. (emphasis added)."
157 Thus, for example, the Panel notes the reference made by Korea to the statement of the Appellate
Body in paragraph 45 of its report in Brazil – Aircraft (Article 21.5 - Canada) that "to continue to make
payments under an export subsidy measure found to be prohibited is not consistent with the obligation to
'withdraw' prohibited export subsidies" in which connection Korea argues that the language in Article 4.7 of the
SCM Agreement is simply the particular application of Article 19.1 of the DSU. Oral statement of Korea at the
first substantive meeting of the Panel with the parties, Attachment 1, para. 16.

to do so now would require us to speculate with r espect to facts not placed before us and with respect
to developments that have not yet occurred.
7.24 The Panel also notes Korea's request that, if the Panel agrees with Korea that individual
disbursements of funds are not separate measures but are simply the application or implementation of
the measures found to be illegal, the Panel make a recommendation under Article 19.1 of the DSU
that the European Communities i mmediately cease any further disbursements of illegal funding. We
do not see how the text of Article 19.1 permits us to make a recommendation other than that the EC
"bring its measures into conformity with that agre ement". Therefore, even if we agreed that
disbursements of funds are applications of th e measures identified in Korea's request for the
establishment of a panel, Article 19.1 of the DSU would preclude us from making the kind of specific
recommendation requested by Korea.
7.25 To conclude, the Panel takes note that the European Communities has indicated that it is not
necessary for the Panel to make the prel iminary ruling initially requested by the
European Communities; and decides that it is neither necessary nor appropriate to clarify the status of
disbursements of funds in the manner requested by Korea.

(b) New Measures of EC member States
7.26 In response to a question of the Panel, Korea indicates inter alia that "it has specifically
requested in its request for Panel Establishment the inclusion of all EC member State provisions
implementing the TDM Regulation including the impl ementing provisions by the new member States
that acceded to the European Communities on 1 May 2004. The TDM Regulation constitutes a
regulatory framework that gives the authority but the EC member State provisions are the
implementation of the unilateral and discriminatory retaliation in the TDM Regulation".158
7.27 The European Communities objects to this reference by Korea to implementing provisions
including those in new member States and those th at entered into force since the request for the
establishment of a panel. The European Communities argues that Korea cannot ask the Panel to make
findings on measures that were not included in th e request for establishment of a panel and could
indeed not even have existed at that time. Si nce the request only includes the TDM Regulation and
the five schemes existing at the time of the requ est, Korea cannot expand the scope of this proceeding
to any future measures of all future possible ne w EC member States. In this context, the
European Communities also rejects Korea's char acterization of the national TDM measures as
"implementing" measures.159
7.28 In response, Korea argues that new measures of EC member States would certainly be
covered and refers in this respect to its discussion of the notion of "directly related" measures in its
opening statement at the first meeting.160
7.29 As noted above (paras. 7.18-7.19), Korea' s request for the establishment of a panel 161 refers
to: (i) the TDM Regulation as extended in product scope and proposed to be extended in duration; and
(ii) the EC member State implementing provisions of the TDM Regulation and the European
Commission Decisions approving these implementing provisions, including the measures adopted by
Germany, Denmark, the Netherlands, France, and Sp ain. The Panel finds nothing in this request
suggesting that, as Korea now argues before the Pane l, Korea "specifically requested... the inclusion

158 Response of Korea to Panel Question 4.
159 Second submission of the European Communities, paras. 32-33.
160 Oral statement of Korea at the second substantive meeting of the Panel with the parties, para. 64.
161 WT/DS301/3, attached as Annex.

of all EC member State provisions implementi ng the TDM Regulation, including the implementing
provisions by the new member States that acceded to the European Communities on 1 May 2004".
7.30 We note that neither party has identified any further implementing provisions by any member
State, whether new or existing as of the date of its request for establishment of a panel, beyond the
five implementing measures specifically identified by Korea. Nor has either party identified any
further proposed implementing provisions by other member States. In fact, there is not a scintilla of
evidence before the Panel, nor in fact any basis to speculate, that any further implementing provisions
are envisioned. To the contrary, we note that of the five implementing provisions specifically
identified, three have been allowed to expire. We do not consider that an abstract ruling on
hypothetical future measures is necessary nor helpful to the resolution of this dispute.
162
7.31 Therefore, the Panel does not further address this matter.
(c) Whether the present dispute is a dispute between Korea and the European Communities or a
dispute between Korea and the European Communities and its member States
7.32 The parties have raised certain issues relating to the identification of the Member to whom
our rulings and recommendations should be addre ssed, with respect to measures taken by the EC
member States. More specifically, the European Communities considers that it is the "proper
respondent" for the measures at issue and states th at it "takes full responsibility under international
law"163 for measures taken by EC member States pursuant to the TDM Regulation, and that for the
purposes of WTO law, such measures are taken by the European Communities as a Member of the
WTO. Korea, for its part, while taking note of the European Communities' statement that it takes full
responsibility for the measures, considers that "the present dispute is between Korea and the EC and
its member States. Hence Korea requests the Panel to make findings in relation to the
European Communities and EC member State measures and to recommend that both the EC TDM
Regulation and the EC member State provisions sh ould be brought in conformity with the WTO
obligations".
164
7.33 We note that there is no dispute that both the TDM Regulation and the EC member State
measures are within our terms of reference and that, in the event they are found inconsistent with the
WTO Agreement, they would be subject to our recommendation to the extent that they are still
operational. As to the WTO Member to whom any recommendations should be addressed in relation
to these measures, we first note that Korea in its first submission requested that we recommend that
the European Communities bring all these measures into conformity. Korea's articulation of its
requests for rulings and recommendations subseque ntly varied somewhat in the course of the
proceedings, but the Panel understands Korea's pr incipal concern to be that any ruling or
recommendation should cover the EC member State measures as well as the TDM Regulation. We
also recall the European Communities' declarati on that it assumes full responsibility for all these
measures, including the EC member State measur es. We understand this to mean that the
European Communities accepts resp onsibility for any actions that may be required to bring into
conformity the measures at issue. We also note that the measures at issue were taken by the EC
member States pursuant to the TDM Regulation itself. In light of these elements, we would find it

162 The European Communities in its first submission also raised as issues the status of expired
measures and the lack of clarity of Ko rea's description of the measures at issue. The Panel notes however that
the European Communities, while characterizing these issues as "preliminary issues relating to the measures at
issue", does not specifically request the Panel to rule on this basis that particular measures are outside its terms
of reference, and we therefore will not do so. We note , however, that the national measures which expired on
31 March 2004 were specifically identified Korea's request for the establishment of a panel and were in force on
the date of the establishment of the Panel's terms of reference (19 March 2004).
163 First submission of the European Communities, para. 93.
164 Response of Korea to Panel Question 4.

sufficient, in the circumstances of this case, to address our recommendation to bring the measures at
issue into conformity to the European Communities.
(d) Other "preliminary issues" raised by the European Communities in its first submission
7.34 In addition to the conditional request for a preliminary ruling on whether the individual
instances of application of the TDM Regulation and the national measures are covered by this dispute,
other preliminary issues raised by the European Communities in its first submission pertained to:
(i) the alleged mischaracterization by Korea of the legal nature of the TDM Regulation and its
relationship with the national TDM programmes; and (ii) Korea's reliance on press releases.165
7.35 In the Panel's view, the observations offered by the European Communities in this part of its
first submission concern certain legal and fact ual aspects of the measures involved that the
European Communities considers to be particularly important to a correct understanding of these
measures. The Panel addresses these issues when discussing the factual and legal aspects of the
claims raised by Korea.166
5. Measures at issue
(a) Council Regulation (EC) No 1177/2002, as amended
7.36 The principal measure at issue in this pr oceeding is Council Regulation (EC) No 1177/2002
of 27 June 2002 concerning a temporary defensiv e mechanism to shipbuilding (hereinafter: TDM
Regulation)167, which was extended in pro duct coverage in June 2003 a nd the duration of which was
extended by Council Regulation (EC) No 502/2004 of 11 March 2004. The TDM Regulation was
adopted by the Council of the European Union on the basis of, in particular, Articles 87(3)(e), 89 and
133 of the Treaty establishing the European Community , which deal with respectively state aids and
the common commercial policy.
7.37 In June 1998, the Council had a dopted new rules on state aids to the shipbuilding sector
providing inter alia for the phase out of contract-related operating aid by 31 December 2000. 168
However, the TDM Regulation provides that, as a temporary and exceptional measure, contract-
related operating aid for the building of containe r ships, product and chemical tankers and LNG
carriers169 shall be considered compatible with the common market.170

165 First submission of the European Communities, paras. 92-106. Korea's specific responses to the
observations of the European Communities appear in para s. 11-25 of the oral statement of Korea at the first
substantive meeting of the Panel and in Korea's responses to Panel Questions 7-8 and 10.
166 See infra, paras. 7.52-7.54 and footnotes 278 and 400.
167 OJ L 172, 2.7.2002, p. 1, reproduced in Exhibit Korea -4 (a).
168 Council Regulation (EC) No 1540/98 of 29 June 1998 establishing new rules on aid to shipbuilding,
OJ L 202, 18.7.1998, p.1, reproduced in Exhibit EC-18. Article 3(1) of this Regulation provided:
"Until 31 December 2000, production aid in su pport of contracts for shipbuilding and ship
conversion, but not ship repair, may be cons idered compatible with the common market
provided that the total amount of all forms of ai d granted in support of any individual contract
(including the grant equivalent of any aid granted to the ship-owner or third parties) does not
exceed, in grant equivalent, a common maximum ai d ceiling expressed as a percentage of the
contract value before aid. For shipbuilding contracts with a contract value before aid of more
than ECU 10 million, the ceiling shall be 9 per cent in all other cases the ceiling shall be
4.5 per cent."
169As explained below, LNG carriers were not covered by the TDM Regulation from the outset but
were included in its scope in June 2003.
170 Article 1 of the TDM Regulation defines the terms "container ships", " chemical tankers", "product
tankers", and "LNG carriers":

7.38 The introductory Recitals of the TDM Regulati on explain the considerations motivating its
adoption and design as follows.
7.39 First, it is stated that, while in June 2000 th e European Commission and the Government of
Korea signed Agreed Minutes relating to world shi pbuilding with the aim of restoring fair and
transparent conditions171, Korea has not effectively implemen ted the commitments under the Agreed
Minutes, notably the commitment of ensuring an effec tive price mechanism. S econd, it is stated that
although operating aid has not been effective in preventing the European shipbuilding industry from
being injured by competition not respecting nor mal competitive conditions and that accordingly
contract-related operating aid may not be gran ted in respect of contracts agreed as from
1 January 2001, a temporary defensive mechanism should nevertheless be authorized for limited
market segments and for a short and limited period only as an exceptional and temporary measure and
in order to assist Community shipyards in those se gments that have suffered adverse effects in the
form of material injury and serious prejudice caused by unfair Korean competition.
7.40 Third, regarding the product coverage of the TDM Regulation, the fourth Recital notes that,
while there are segments of the Co mmunity shipbuilding industry in which Community shipyards are
in a strong position on the international market, "i n other segments, there is evidence that Community
shipyards have suffered adverse effects in the form of material injury and serious prejudice caused by
unfair Korean competition", and contract-related aid may therefore be authorized in those sectors in
certain circumstances, namely container ships a nd product and chemical tankers. Regarding LNG
carriers, the fifth Recital points to the exceptional development in this sector and states that contract-
related temporary support may be authorised in th is sector "if the Commission confirms, on the basis
of investigations covering the period of 2002, th at the Community industry has suffered material
injury and serious prejudice in this sector caused by unfair Korean practices to the same extent as has
been found for container ships and product and chemical tankers".
7.41 Fourth, regarding the level of aid, the sixth R ecital states that operating aid of 6 per cent of
contract value before aid may be authorized "in or der to effectively enable Community shipyards to
overcome unfair Korean competition".
7.42 Finally, in respect of the temporal application of the aid scheme, Recital 7 of the TDM
Regulation states that the temporary defensive mechanism should only be authorized after the
initiation of WTO dispute settlement proceedings by the European Communities against Korea and

(a) 'container ships' shall mean ships designed with a single deck hull with an
arrangement of holds to carry containers (standard or non-standard; refrigerated or non-
refrigerated), whose holds ar e fitted with cell guides to facilitate the positioning of the
containers, as may be some of the deck stor age space. Other ships combining cargo carrying
capacity for containers and other cargo are considered as containe r ships if the larger part of
the cargo carrying capacity is dedicated to containers;
(b) 'chemical tankers' shall mean ships designed with a single deck hull with an
arrangement of integral and/or independent tanks suited to carry chemical products in liquid
form. Chemical tankers are characterized by the ability to carry and handle several substances
at the same time and the particular equipment of the tanks with coatings, reflecting the nature
and hazard of the cargo carried;
(c) 'product tankers' shall mean ships designed with a single deck hull with an
arrangement of integral and/or independent tanks suited to carry refined petroleum products in
liquid form;
(d) 'LNG carriers' (Liquefied Natural Gas ca rriers) shall mean ships designed with a
single deck hull with fixed integral and/or independent tanks suited to carry natural gas in
liquid form.
171 Agreed Minutes between the European Community and the Government of the Republic of Korea
relating to the world shipbuilding market, OJ L 155, 28.6.2000, p. 49, reproduced in Exhibit EC-6.

may no longer be authorized "if these dispute se ttlement proceedings are resolved, or suspended on
the grounds that the Community considers that the agreed minutes have been effectively
implemented".
7.43 The key operative provisions are in Articles 2(1)-(4) of the TDM Regulation:
"1. Subject to paragraphs 2 to 6, direct aid in support of contracts for the building
of container ships, product and chemical ta nkers as well as LNG carriers shall be
considered compatible with the common ma rket when there has been competition for
the contract from a Korean shipyard offering a lower price.
2. Direct aid in support of contracts for the building of LNG carriers may only
be authorised under this Article for fina l contracts signed after the Commission gives
notice in the Official Journal of the European Communities that it confirms, on the
basis of investigations covering the period of 2002, that Community industry has
suffered material injury and serious prejudice in this market segment caused by unfair
Korean practices.
3. Aid under this Article may be authorised for shipbuilding contracts up to a
maximum intensity of 6 % of contract value before aid.
4. This Regulation shall not apply in r espect of any ship delivered more than
three years from the date of signing of the final contract. The Commission may,
however, grant an extension of the three-year delivery limit when this is found
justified by the technical complexity of the individual shipbuilding project concerned
or by delays resulting from unexpected disrup tions of a substantia l and defensible
nature in the working programme of a yard due to exceptional circumstances,
unforeseeable and external to the company."
In June 2003, the European Commission publis hed a notice under paragraph 2 of this Article
confirming, on the basis of investigations covering the period of 2002, that the Community industry
had suffered material injury and serious prejudice in the market segment of LNG carriers caused by
unfair Korean practices.172
7.44 Article 3 of the TDM Regulation stipulates that the operating aid covered by the Regulation
shall be subject to Article 88 of the EC Treaty, wh ich Article provides for the supervision of state aid
by the European Commission, not ably through a mechanism of ex ante control on the basis of
notifications by member States.
7.45 Article 4 of the TDM Regulation provides that th e application of the Regulation is limited to
contracts signed in the period from the date of the initiation by the European Communities of WTO
dispute settlement proceedings against Korea until the date one month after the resolution or
suspension of those proceedings:
"The Regulation shall be applied to final c ontracts signed from the entry into force of
this Regulation until its expiry, with the ex ception of final contracts signed before the
Community gives notice in the Official Journal of the European Communities that it
has initiated dispute settlement proceedings against Korea by requesting consultations
in accordance with the World Trade Organi zation's Understanding on the Rules and
Procedures for the Settlement of Disputes and final contracts signed one month or

172Notice under Article 2 of Council Regulation (EC) No 1177/2002 of 27 June 2002, OJ C 148,
25.6.2003, p.14, reproduced in Exhibit Korea- 4 (b).

more after the Commission gives notice in the Official Journal of the
European Communities that these dispute settlement proceedings are resolved, or
suspended on the grounds that the Commun ity considers that the Agreed Minutes
have been effectively implemented."
The European Commission published a notice under this Article of the initiation of WTO dispute
settlement proceedings on 24 October 2002.173
7.46 The TDM Regulation entered into force on 3 Ju ly 2002 with an original expiry date of
31 March 2004. Council Regulation (EC) No 502/2004 of 11 March 2004 amended the TDM
Regulation to extend its duration until 31 March 2005.174
(b) Authorization by the European Commission, on the basis of the TDM Regulation, of state aid
granted by EC member States
7.47 The European Commission has adopted decisions 175 authorizing aid schemes notified by
Germany176, the Netherlands177, Denmark178, France179 and Spain180 after it had satisfied itself that the
proposed scheme was in conformity with the provisions of the TDM Regulation.
7.48 The legal instruments embodying the specific me asures adopted by these five member States
are the following:181
Germany Richtlinien des Bundesministeriums fur Wirtschaft
and Arbeit zu befristeten Schutzmassnahmen für des
Schifbau vom 24. Oktober 2002 (Directives of the
Federal Ministry for Economy and Work on
temporary defensive measures for Shipbuilding of
24 October 2002)
Netherlands Regeling van de Staatssecretaris van Economische
Zaken van 17 juli 2003, nr. WJZ 3040972, houdende
regels inzake het verstrekken van subsidies aan de
scheepsbouwsector bij wijze van tijdelijke defensieve
maatregel "Tijdelijke Regeling Ordersteun
Scheepsniewbouw van 17 Juni 2003" "Kaderwet EZ
subsidies" ("Framework law for Grants from the
Ministry of Economy), Art. 3
Denmark "Lov om midlertig kontraktbetinget driftsstotte til
bygning af visse skibstyper" (law) "Bekendsgorelse
om administration af lov om midlertidig
kontraktbetinget drifssstotte til bygning af visse
skibstyper" (administrative decision).

173 Notice under Article 4 of Council Regulation No 1177/2002 of 27 June 2002, OJ C 257, 24.10.2002,
p. 11, reproduced in Exhibit Korea-16.
174Council Regulation (EC) No 502/2004 of 11 March 2004 amending Regulation (EC) No 1177/2002
concerning a temporary defensive mechanism to shipbuilding, OJ L 81, 19.3.2004, p. 6, reproduced in Exhibit
Korea-4(c).
175 Exhibits Korea 11-15.
176 OJ C 108, 7.5.2003, p. 5.
177 OJ C 221, 17.9.2003, p. 10 and OJ C 269, 8.11.2003, p. 23.
178 OJ C 227, 23.9.2003, p. 7.
179 OJ C 257, 25.10.2003, p. 2.
180 OJ C 6, 10.1.2004, p.22.
181 Attachment EC-1.

France No legal act, but budgetary line for this purpose in the
Finance law for the year in question. Ad hoc decision
of a special inter-ministerial committee created for this
purpose
modifica el real decreto 442/1994, de 11 de marzo,
(Royal Decree 442/1994 on 11 March on premiums
and financing for shipbuilding, as amended by Royal
decree 1274/2003 of 10 October), Art. 9.
7.49 There is a difference in product coverage betw een these measures in that the French measure
is limited to LNG carriers while all other schemes cover container ships, pr oduct tankers, chemical
tankers and LNG carriers.182
7.50 In the proceedings before the Panel, the European Communities indicated that the aid
schemes adopted by France and the Netherlands have been extended until 31 March 2005 but that the
other three schemes have expired on 31 March 2004. 183 The European Communities also explained
that no application for operating aid could be made after 31 March 2004 in the case of the expired
measures and after 31 March 2005 in the case of the two extended national schemes.184
7.51 Authorization by the European Commission applies to the aid scheme as such, not to the grant
of aid in individual cases pursuant to the aid schem e. There is no information before the Panel
regarding individual cases of application of the national aid schemes authorized by the Commission.
6. The nature of the TDM Regulation and its relationship with national measures adopted
by EC member States
7.52 The parties disagree on the correct characterization of the nature of the TDM Regulation and
its relationship with national aid schemes adopted by EC member States. The principal issues that
have arisen in this respect are: (i) whether the TDM Regulation is an "authorization" of state aid or a
"limitation" on state aid; (ii) whether the me asures adopted by EC member States are properly
viewed as measures "implementing" the TDM Regul ation; and (iii) whether the TDM Regulation
constitutes a state aid measure.
7.53 The Panel notes that the TDM Regulation was adopted pursuant to, inter alia, Article 87(3)(e)
of the EC Treaty. This clause, one of the exemptions from the general prohibition in Article 87(1) of
the EC Treaty of state aid that distorts competition and affects trade, provides that the Council may
specify categories of aid considered compatible with the common market. The Panel further notes
that the kind of aid provided for by the TDM Regulation had been prohibited under Council
Regulation 1540/98 as of 1 January 2001. While th e TDM Regulation arguably can be regarded as a
"limited derogation" from the self-i mposed general prohibition on the use of state aid contained in
Article 87(1) of the EC Treaty, its legal effect under Community law is to provide the necessary legal
basis without which the introduction of new national aid schemes providing for this kind of aid would
not have been possible. However, strictly speakin g, the term "authorization" may not be accurate
insofar as it suggests that the Regulation itself is a sufficient basis to permit member States to
introduce such aid schemes. It is clear that th e member States cannot without Commission approval
adopt these schemes directly on the basis of the TDM Regulation. Similarly, the term
"implementation", if used in relation to the aid gran ted by the member States within the framework of

182 Attachment EC-1.
183 Response of the European Communities to Panel Question 2.
184 Response of the European Communities to Panel Question 2.

the TDM Regulation, is somewhat lacking in precision in that individual member States are obviously
not under any obligation to introduce schemes provi ding for the kind of operating aid referred to in
the TDM Regulation. Finally, as regards the issue of whether the TDM Regulation is a state aid
measure, the Panel notes that the TDM Regulation was adopted on the basis of inter alia the
provisions of the EC Treaty on state aid and that these provisions are the same that formed the legal
basis of Council Regulation 1540/98. However, the Panel does not consider that whether or not the
TDM Regulation constitutes a state aid measure with in the meaning of EC law is of particular
relevance to the Panel's analysis of the conformity of this Regulation with WTO provisions.
7.54 Closely related to its argument that Korea misr epresents the nature of the TDM Regulation,
the European Communities characte rizes the Regulation as not "legally relevant" because it neither
provides for nor authorizes the granting of subsidies.
185 In this regard, we note however, that the
European Communities does not explain why this w ould make the TDM Regulation legally irrelevant
in the context of WTO dispute settlement. After all, it is the legal authority under which EC member
States provide subsidies in certain instances, and the European Communities has indicated that it
accepts responsibility for such member State actions . Moreover, it is not in dispute that the TDM
Regulation is a measure of the European Communities that is clearly within the Panel's terms of
reference. In the Panel's view, although the Regulat ion may not by itself direct or authorize the EC
member States to take certain action, this does not imply that the Regulation cannot be in violation of
the WTO Agreement. Whether or not this is the cas e is an issue that we will address in our findings
in light of our analysis of the substance of the claims of Korea.
B. CLAIM UNDER ARTICLE III:4 OF THE GATT 1994
1. Arguments of the parties186
7.55 Korea argues first, that the TDM Regulation is a "l aw" or "regulation" within the meaning of
Article III:4 of the GATT 1994 which affects the inte rnal sale, offering for sale, purchase etc. of
imported products because it clearly affects and adversely modifies the conditions of competition
between domestic and imported Kor ean products. Second, the dom estic and Korean-origin vessels
covered by the TDM Regulation are "like products" for purposes of Article III:4 of the GATT 1994.187
Third, the TDM contributions clearly reduce opport unities for Korean vessels to compete with EC
vessels under equal conditions. Since the contributions are only available in case of vessels built at
EC yards they create an incentive for shipowners to place orders with EC shipyards. It is this
"artificial incentive to purchase EC origin vessels at the expense of competing Korean like products"
that constitutes less favourable treatment of Korean like products. 188 Korea also points to the fact that
the TDM Regulation is a narrow trade weapon aime d exclusively at Korea and not a generalized
subsidy programme for the benefit of the development of the EC shipbuilding industry.
7.56 In response to the argument of the Europ ean Communities that the TDM Regulation is
covered by Article III:8(b) of the GATT 1994, Kore a submits that it challenges the TDM Regulation
as a regulatory framework rather than as a subsidy measure per se.189 As a discriminatory regulatory
framework, the TDM Regulation is not covered by Article III:8(b) because it does not actually
provide for the payment of subsidies and because it is not a measure that serves the general economic
development purposes contemplated by the drafters of Article III:8(b). 190 Korea also rejects the
argument of the European Communitie s that Article III:8(b) is an "exemption" that clarifies that

185 First submission of the European Communities, p. 31.
186 For a more detailed account of the arguments of the parties, see Section IV.C.1.
187 First submission of Korea, paras. 157-162.
188 First submission of Korea, paras. 163-165.
189 Oral statement of Korea at the first substantive meeting of the Panel with the parties, paras. 60-62.
190 Second submission of Korea, paras. 200-215.

subsidies to producers are not measures affecting the "internal sale, offering for sale, purchase,
transportation, distribution or use" of products.191
7.57 The European Communities argues that the notion of regulations "affecting the internal sale,
offering for sale, purchase, transportation, distribu tion or use" of imported products does not cover
budgetary aids to producers within the meaning of Article III:8(b) of the GATT 1994 and that the
TDM Regulation and national TDM m easures are legally excluded from the scope of Article III:4 of
the GATT 1994. 192 First, Article III:8(b) clarifies that the national treatment rule in Article III does
not require WTO Members to pay domestic subsidi es to foreign producers. A subsidy can be
inconsistent with Article III:4 only if it discriminates between domestic and foreign producers through
differential application of tax measures, internal postal rates, etc. 193 Second, the TDM Regulation and
the national TDM schemes are outside the scope of Article III:4 of the GATT 1994 because they
involve the payment of subsidies exclusively to domestic producers. The fact that the aid provided for
is not general but temporary and limited to certain sectors does not remove it from the scope of
Article III:8(b).194
7.58 The European Communities argues that Article III: 8(b) is an "exemption" rather than an
"exception" because it clarifies that subsidies to domestic producers are not "laws, regulations, or
requirements affecting the internal sale...of an imported product." The European Communities rejects
the argument of Korea that the TDM Regulation is covered by Article III:4 as a discriminatory
regulatory framework rather than as a subsidy. In the view of the Europ ean Communities, Korea has
not established how the Regulation, when viewed as a regulatory framework, affects the internal sale
...of imported products.
195
7.59 Korea notes that the fact that vessels are not often "imported" into the
European Communities does not prevent the application of Articles III (and I) of the GATT 1994
because these provisions apply regardless of wh ether the measure in question produces trade
effects.
196 In response to a Panel question, Korea argues that the burden is on the
European Communities to show that importation of sh ips is impossible. Nevertheless, Korea submits
that it is possible for ships to be imported and that "the general paucity of importation is not the result
of a legal bar but, instead, reflects the tendency of sh ip owners to move to flags of convenience as an
economic matter". That ships generally do not ente r another Member's customs territory as part of
their day-to-day operations of transporting people and goods is quite distinct from the issue of
whether they can be imported at the time of initial delivery. Nothing in Articles I and III of the GATT
indicates that the drafters intended to exclude ships from these provisions.197 Korea points out that the
European Communities' Combined Nomenclature c ontains headings for "sea going tankers" and for
"sea going other vessels for the transport of goods and other vessels for the transport of both goods
and persons", and provides data on the import volume and value recorded by the statistical office of
the European Communities for the vessels concerned during the period 1998-2003.198
7.60 In response to a Panel question, the European Communities states that the notion of
importation within the meaning of GATT Article I:1 does not apply to the present case because the
four types of vessel involved are generally not im ported. As confirmed by Article V of the GATT,
the customs status of these ships is th at of means of transport in transit. 199 T h e

191 Second submission of Korea, paras. 209-210 and 218.
192 First submission of the European Communities, para. 222.
193 First submission of the European Communities, paras.224-228.
194 First submission of the European Communities, paras. 292-232.
195 See also second submission of the European Communities, paras. 40-42.
197 Response of Korea to Panel Question 51.
198 Second submission of Korea, paras. 206-207 and Exhibit Korea 46.
199 Response of the European Communities to Panel Question 51.

European Communities submits that the existen ce of headings for ships in the Combined
Nomenclature does not automatically mean that ships are cleared throug h customs because these
headings are also applied for the purpose of collecti ng statistics, and that statistics on imports of ships
into the European Communities are not based on customs data but on changes in ownership of ships.
2. Arguments of third parties
7.61 Japan argues that the TDM measures involve "t he payment of subsidies exclusively to
domestic producers" within the meaning of Article III:8(b) of the GATT 1994 and are therefore not
covered by Article III.200
3. Evaluation by the Panel
7.62 Article III:4 of the GATT 1994 provides in relevant part:
"The products of the territory of any Member imported into the territory of any other
Member shall be accorded treatment no l ess favourable than that accorded to like
products of national origin in respect of all laws, regulati ons and requirements
affecting their internal sale, offering for sal e, purchase, transportation, distribution or
use."
7.63 Article III:4 applies to "the products of the territory of any Member imported into the territory
of any other Member..." The Panel notes that in response to a question of the Panel the European
Communities has expressed the view that the notion of importation within the meaning of Article I of
the GATT 1994 does not apply to the vessels cove red by the TDM Regulation because they are
treated as means of transport in transit.201 The European Communities find support for this position in
the provisions on freedom of transit in Article V of the GATT 1994. Although the view of the
European Communities specifically refers to the notion of importation under Article I of the GATT
1994, the Panel considers that it is also relevant to Article III whic h applies to "products...imported
into the territory of any other Member". In the view of the Panel, in order to find in a particular case
that Article III:4 does not apply because the produ cts in question are not "imported products", it
would be necessary to establish that importation of those products is inherently impossible. While the
Panel realizes that most ships entering the Eur opean Communities carrying goods are in transit and
are not formally imported, that does not preclude the possibility of a ship being imported. In this
regard, the Panel agrees with Korea that a distinct ion can be made between entry as part of normal
commercial operations and entry at the time of the initial delivery of a vessel. The fact that Article V
of the GATT 1994 obligates Members to accord vessel s freedom of transit across their territories does
not establish that such vessels cannot be imported into the territory of a Member. The Panel notes that
in any event the European Commun ities does not rely on this view regarding the customs status of
ships as part of its legal defence against Korea's claims under Article III:4 of the GATT 1994.
202
7.64 In order to establish that a violation of Article III:4 has occurred, it must be demonstrated
"that the imported and domestic products at issue are 'like products'; that the measure at issue is a 'law,
regulation, or requirement affecting their internal sale, offering for sale, purchase, transportation,

200 Third party submission of Japan, paras. 15-17.
201 Responses of the European Communities to Panel question 51.
202Thus in its comments on the Interim Report, the European Communities observed that "it wishes to
clarify that it never defended itself legally by arguing that ships are not imported products within the meaning of
Article III:4 of the GATT 1994". Comments of the European Communities on the Interim Report, 13 January
2005, p. 3.

distribution or use'; and that the imported products are accorded less favourable treatment than that
accorded to like domestic products..."203
7.65 As to whether the measure at issue accords imported products less favourable treatment, the
Panel recalls that, in respect of subsidies, vi olations of Article III:4 have been found where
discrimination between domestic and imported products results from the conditions attached to the
granting of subsidies.204 This is the case, for example, if a s ubsidy is granted on the condition that the
recipient of the subsidy purchases products of dom estic origin, thereby discriminating against the
suppliers of the foreign-origin product. Kore a's arguments on how the TD M Regulation affects the
internal sale...of imported products and accords t hose products less favourable treatment within the
meaning of Article III:4 would however appear to be based on the theory that the state aid provided
under the TDM Regulation to Community shipyards adversely affects the conditions of competition
between the domestic products produced by Comm unity shipyards and the imported products from
Korean yards, rather than on specific conditions li nked to the subsidies that reward purchasers/users
for discriminating in favour of domestic products.
7.66 However, the European Communities argues that in any event the TDM Regulation is not
covered by Article III:4 of the GATT 1994 because the state aid permitted under this Regulation falls
within the scope of Article III:8(b) of the GATT 1994.
7.67 Article III:8(b) of the GATT 1994 provides that:
"The provisions of this Article shall not pr event the payment of subsidies exclusively
to domestic producers, including payments to domestic producers derived from the
proceeds of internal taxes or charges applie d consistently with the provisions of this
Article and subsidies effected thr ough governmental purchases of domestic
products."205

203 Appellate Body Report, Korea - Various Measures on Beef, para. 133.
204 See, e.g. Panel Report in Indonesia - Autos, paras. 14.29-14.46.
205 Article III:8(b) of the GATT 1994 is identical to Article 18.8(b) of the Havana Charter for an
International Trade Organization. That provision had been added to the draft Charter during the second session
of the Preparatory Committee. It was explained during the Havana Conference by the Chairman of a Working
Party examining this Article that this sub-paragraph "had been added to the Geneva draft because it was felt that
if subsidies were paid on domestic and not on imported products, it might be construed that Members were not
applying the 'national treatment' rule. The object of this sub-paragraph, in the view of the United Kingdom
delegate, was to make it clear that internal taxes could be entirely non-discriminatory and that subsidies could be
paid quite separately to domestic producers from the exchequer." (E/CONF.2/C.3/A/W/49, 10 February 1948,
p.2) The sub-paragraph was redrafted at the Havana Conference "in order to make it clear that nothing in
Article 18 could be construed to sanction the exemption of domestic products or the remission of such taxes. At
the same time, the Sub-Committee recorded its view that nothing in this sub-paragraph or elsewhere in
Article 18 would override the provisions of section C of Chapter IV ["Subsidies"]." (United Nations Conference
on Trade and Employment, Reports of Committees and Principal Sub-Committees , Geneva: Interim
Commission for the International Trade Organization, September 1948, p. 66) The drafters of Article 18 of the
ITO Charter specifically rejected a proposal by Cuba at the Havana Conference that would have amended the
Article to provide that "[t]he provis ions of this Article shall not preclud e the exemption of domestic products
from internal taxes as a means of indirect subsidizati on in the cases covered under Article 25 ["Subsidies in
general"]." (E/CONF.2 /C./3/6, 8 December 1947, p. 17.) We note in this regard that the GATT
CONTRACTING PARTIES at their Second Session in Sept ember 1948 decided to repl ace the original text of
GATT Article III with the text of Article 18 of the Havana Charter mutatis mutandis. This change was effected
through a Protocol Modifying Part II and Article XXVI, which entered in to force on 14 December 1948. The
text of Article III has not been amended since the entry into force of that Protocol. See Guide to GATT Law and
Practice (1995), p. 206.

Article III:8(b) thus clarifies that "the payment of subsidies exclusively to domestic producers" is not
to be construed as a breach of the national treatme nt requirement of Article III. The fact that
Article III "shall not prevent" the payment of subsid ies that meet the conditions of Article III:8(b)
means that if a measure is covered by Article III:8( b), it cannot be inconsistent with any provision in
Article III, including Article III:4.206
7.68 Turning to the conditions of Article III:8(b), th e "payment of subsidies" "not prevented" by
Article III:8(b) only covers subsidies “exclusivel y to domestic producers” of a given product. We
understand this to mean that a subsidy is not in consistent with Article III:4 merely because it is
granted only to domestic producers of a product and not to foreign producers of that product.
7.69 Applying these conditions to the TDM Regulation, the Panel recalls that the TDM Regulation
creates the legal basis for the European Commission to authorize the adoption of aid schemes by the
member States providing for "direct aid in support of contracts for the building of" container ships,
product tankers, chemical tankers and LNG carriers, i.e. state aid to member State producers of these
products. The availability of the state aid only to domestic producers of certain vessels 207 but not to
foreign producers of those vessels is precisely the ki nd of different treatment that is covered by
Article III:8(b) and thus not inconsistent with Article III.
7.70 The Panel is not persuaded by Korea's argument that Article III:8(b) is not relevant to this
case because Korea challenges the TDM Regulation as a discriminatory regulatory framework, rather
than the subsidies as such. In particular, Ko rea's claim that the TDM Regulation as such is
inconsistent with Article III:4 of the GATT 1994 is based on the subsidies that can be provided within
the framework of that Regulation. The "discrim inatory" character of the "regulatory framework"
alleged by Korea consists of the impact of the subsidies authorized by that Regulation on price
competition between Community yards and Korean yards. Since the subsidies paid under the
framework are covered by Article III:8(b), however, the "regulatory framework" within which these
subsidies are provided cannot be inconsistent with Article III:4 of the GATT 1994.
7.71 Korea, referring to Canada – Periodicals , argues that since the TDM Regulation itself does
not involve an actual outlay of funds it cannot be covered by Article III:8(b). 208 The Panel does not
consider Canada – Periodicals to be relevant to this dispute, how ever. What matters in the Panel's
view is not whether the TDM Regulation itself involv es outlays of funds by governments, but rather
that the measures provided for under the TDM Regul ation, state aids, are outlays of funds by
governments.
7.72 Korea also argues that the TDM Regulation is not covered by Article III:8(b) because the
subsidies it provides for are not general in nature. The Panel, however, can see no basis in the text of
Article III:8(b) for the proposition that its app licability depends not only upon whether a measure
constitutes "the payment of subsidies exclusively to domestic producers", but also upon whether that
measure serves "the general public purposes of economic development". 209 The Panel also notes that

206 It is not necessary in order to resolve this dispute for the Panel to express an opinion on whether
Article III:8(b) is an "exemption", whic h "clarifies" that Article III is inhere ntly inapplicable to subsidies paid
exclusively to domestic producers, or an "exception", which removes from the scope of Article III:4 measures
that would otherwise be covered by that provision.
207 As confirmed by WTO and GATT dispute settlement reports, Article III:8(b) does not apply to the
payment of subsidies to processors or users of the product with respect to which discrimination is alleged. E.g.
Panel Report, Indonesia – Autos, para. 14.43; Panel Report, EEC – Oilseeds I , para. 137; Panel Report, Italy -
Agricultural Machinery , para. 14. In the Panel's view, Korea has not submitted arguments and evidence to
contest the fact that the TDM Regulation provides for aid only to producers of the product with respect to which
discrimination is alleged.
208 Korea refers to the Appellate Body Report in Canada - Periodicals, p. 33.

Korea has failed to explain how this argument is supported by the text, context or object and purpose
of Article III:8(b).
7.73 The Panel notes that Korea argues, althou gh not specifically in connection with
Article III:8(b), that the formal recipient of the subsidies provided for under the TDM Regulation is
irrelevant because the ultimate be neficiary of the subsidy is the ship-owner. The Panel can find no
textual support in Article III:8(b) for the view that a distinction must be made, for purposes of
application of that provision, between the "forma l recipient" and the "ultimate beneficiary" of a
subsidy solely on the grounds that the subsidy allows the producer to sell a product at a lower price.
Indeed, were such a price effect a sufficient basis to conclude that a subsidy is not a "payment of
subsidies exclusively to domestic producers", Article III:8(b) would be deprived of its effectiveness as
production subsidies can have such an effect in many instances.
7.74 In short, while the Panel realizes that the state aid provided for by the TDM Regulation may
adversely affect the conditions of competition betw een domestic and Korean products, that effect is
not relevant to whether Article III:8(b) applies to the aid.
7.75 The Panel concludes that the state aid provided for by the TDM Regulation is covered by
Article III:8(b) of the GATT 1994 and that, as a conse quence, the TDM Regulation is not inconsistent
with Article III:4 of the GATT 1994. Therefore, the Panel also concludes that the national TDM
schemes of Denmark, France, Germany, the Netherlands and Spain and the Decisions of the
European Commission authorizing those schemes, ar e not inconsistent with Article III:4 of the
GATT 1994.
C. CLAIM UNDER ARTICLE I OF THE GATT 1994
1. Arguments of the parties210
7.76 In support of its claim that the TDM Regulati on is inconsistent with Article I:1 of the
GATT 1994, Korea submits three main arguments. First, the TDM Regulation is covered by the
phrase "all matters referred to in paragraphs 2 and 4 of Article III" in Article I:1 because it is a
measure affecting the "internal sale, offering for sale, purchase, transportation, distribution or use" of
imported products within the meaning of Article III:4. 211 Second, the TDM Regulation grants an
advantage, favour, privilege or immunity within th e meaning of Article I:1 to certain WTO Members
in respect of the commercial vessels within its scope. Specifically, the TDM Regulation "grants
Japanese and other non-Korean yards and vessels the advantage or favour of being able to trade on
equal terms with EC competitors without the pros pect of provoking reprisals or countermeasures in
the form of TDM contributions to the competitors". 212 Third, the advantage granted by the TDM
Regulation in respect of the container ships, product and chemical tankers and LNG carriers of certain
WTO Members is not accorded immediately and uncond itionally to like vessels originating in Korea.
Korea submits that the TDM Regulation amounts to de jure discrimination.213
7.77 The European Communities argues that the TDM Regulation is not within the scope of
Article I:1 of the GATT 1994 because subsidization is not an "advantage" covered by Article I:1. 214
Article I:1 cannot apply to the TDM Regulation because Article III:8(b), which exempts the TDM
Regulation from Article III:4, thereby also remove s the Regulation from the scope of "all matters

210 For a more detailed account of the arguments of the parties see Section IV.C.2.
211 First submission of Korea, para. 177; response of Korea to Panel Question 56; second submission
of Korea, para. 224.
213 First submission of Korea, paras. 187-191.
214 First submission of the European Communities, para. 238.

referred to in paragraphs 2 and 4 of Article III". 215 For the same reason, the fact that the TDM
Regulation targets Korea is not a basis for finding a violation of the MFN clause in Article I:1 of the
GATT 1994. Apart from the fact that the TDM subs idies will in many cases affect competitors from
other countries, the targeting of Korea results from the non-implementation by Korea of the Agreed
Minutes. Article I:1 of the GATT 1994 is not a ge neral prohibition of discr imination between WTO
Members and cannot prohibit such measures if they are not advantages within the meaning of that
provision.216
7.78 Korea rejects the defence of the European Communities based on Article III:8(b). According
to Korea, this provision is irrelevant because, firstly Korea does not challenge the TDM Regulation as
a subsidy but as a regulatory framework, and, secondly, Article III:8(b) is expressly limited to the
provisions of Article III. In Korea's view, the matters "referred to" in paragraphs 2 and 4 of Article III
are the matters "mentioned" in those paragraphs, including "all laws, regulations and requirements
affecting...", regardless of whether they are subject to the obligations of Article III. Korea also
submits that there was no reason for the drafters of the GATT to permit discrimination between
products of different countries in the provi sion of subsidies to domestic producers. 217 The
European Communities submits that it is irrelevant fo r purposes of Article III:4 that Korea
challenges the TDM Regulation not as a subsidy but as a regulatory measure 218, and that Korea
misconstrues the relationship between Articles III:8( b) and I:1 of the GATT 1994. According to the
European Communities, Article III:8(b) is not an "ex ception" but an "exemption" in that it clarifies
that the granting of a subsidy to a domestic pr oducer from budgetary resources is not a regulatory
requirement affecting the sale of that product.219
2. Evaluation by the Panel
7.79 Article I:1 of the GATT 1994 provides:
"With respect to customs duties and charg es of any kind imposed on or in connection
with importation or exportation or imposed on the international transfer of payments
for imports or exports, and with respect to the method of levying such duties and
charges, and with respect to all rules a nd formalities in connection with importation
and exportation, and with respect to all matte rs referred to in pa ragraphs 2 and 4 of
Article III,*220 any advantage, favour, privilege or immunity granted by any Member
to any product originating in or destined for any other country shall be accorded
immediately and unconditionally to the like pr oduct originating in or destined for the
territories of all other Members."

215 First submission of the European Communities, para. 239.
216 First submission of the European Communities, para. 242. See also the response of the
European Communities to Panel Question 53.
217 Oral statement of Korea at the first meeting, para s. 60-67; second submission of Korea, paras. 216-
219.
218 Response of the European Communities to Panel Question 55.
219 Response of the European Communities to Panel Question 54.
220 Ad Article I:1 of the GATT 1994 reads as follows:
"The obligations incorporated in paragraph 1 of Article I by reference to paragraphs 2 and 4 of
Article III and those incorporated in paragraph 2(b) of Article II by reference to Article VI
shall be considered as falling within Part II for the purposes of the Protocol of Provisional
Application.
The cross-references, in the paragraph immediately above and in paragraph 1 of Article I, to
paragraphs 2 and 4 of Article III shall only appl y after Article III has been modified by the
entry into force of the amendment provided for in the Protocol Modifying Part II and Article
XXVI of the General Agreement on Tariffs and Trade, dated September 14, 1948." [footnote
omitted.]

In order to determine whether a measure is in consistent with the most-favoured-nation (MFN)
treatment required by Article I:1, it must first be established that that measure is covered by the
subject matter of that clause. Korea argues that the TDM Regulation results in a denial of MFN
treatment to imported Korean products in that bids by Korean shipyards will lead to the granting of
subsidies to Community shipyards that compete w ith the Korean shipyards whereas bids by shipyards
of countries other than Korea will not lead to the gr anting of such subsidies. We must determine,
therefore, whether the provision of the subsidies re ferred to in the TDM Regulation falls within the
subject matter of Article I:1.

7.80 Article I:1 of the GATT 1994 applies to: (i) "customs duties and charges of any kind imposed
on or in connection with importa tion or exportation or imposed on the international transfer of
payments for imports or exports"; (ii) "the method of levying such duties and charges"; (iii) "all rules
and formalities in connection with importation and exportation" ; and (iv) "all matters referred to in
paragraphs 2 and 4 of Article III".
7.81 Korea claims that the TDM Regulation is a meas ure within the scope of Article III:4 of the
GATT 1994 which is thereby subject to Article I:1 by virtue of the phrase "all matters referred to in
paragraphs 2 and 4 of Article III".
221 We recall, however, that we have concluded that the TDM
Regulation is a measure that falls within the sc ope of Article III:8(b) of the GATT 1994 because it
provides for "the payment of subsidies exclus ively to domestic producers" and that the TDM
Regulation is therefore not inconsistent with Article III:4. In that connection, we have rejected the
argument of Korea that since Korea challeng es the TDM Regulation as a regulatory framework,
Article III8(b) is irrelevant. The question that is now before us is whether our conclusion that the
TDM Regulation is covered by Artic le III:8(b) and hence not inconsistent with Article III:4 means
that the TDM Regulation is also outside the scope of the MFN obligation in Article I:1 as applied to
"all matters referred to in paragraphs 2 and 4 of Article III".
7.82 It should be emphasized that the issue here is not whether Article III:8(b) somehow affects the
scope of Article I in its entirety. Rather, th e question is limited to whether and if so how
Article III:8(b) affects the scope of "all matters refe rred to in paragraphs 2 and 4 of Article III". In
this connection, the argument of Korea that Article III:8(b) only refers to "the provisions of this
Article" and therefore does not apply to Article I is unpersuasive. To the extent that Article III:8(b)
plays a role in determining the scope of the matt ers referred to in Article III:2 and III:4, a direct
reference to Article I is not necessary.
7.83 In considering whether Article III:8(b) affect s the meaning of "all matters referred to in
paragraphs 2 and 4 of Article III" in Article I, we note that Articles III:2 and 4 lay down substantive
legal obligations. In light of this use of the wo rd "matters" to refer to provisions containing legal
obligations, we consider that among the various di ctionary definitions, "subject" and "substance" are
particularly pertinent to define the meaning of the word "matters" as used in Article I:1. 222 Therefore,
interpreting the ordinary meaning of the terms used in their context, the Panel considers that the
phrase "matters referred to in..." in Article I:1 refers to the subject matter of those provisions in terms
of their substantive legal content. Understood in this sense, it is clear to us that the "matters referred
to in paragraphs 2 and 4 of Artic le III" cannot be interpreted without regard to limitations that may
exist regarding the scope of the substantive oblig ations provided for in these paragraphs. If it is
explicitly provided that a particular measure is not subject to the obligations of Article III, that
measure in our view does not form part of the "matters referred to" in Articles III:2 and 4. Thus, since
Article III:8(b) provides that Article III "shall not prevent the payment of subsidies exclusively to

221 See, e.g., first submission of Korea, para. 176; response of Korea to Panel Question 56; second
submission of Korea, para. 224.
222 The New Shorter Oxford English Dictionary (1993), p.1717.

domestic producers", such subsidies are not part of the subject matter of Article III:4 223 and cannot be
covered by the expression "matters referred to in paragraphs 2 and 4 of Article III" in Article I:1.
7.84 Therefore, the Panel considers that Korea's argu ment that "matters referred to..." means the
"measures mentioned" in Articles III:2 and 4, including measures explicitly not subject to the
obligations of those provisions, is unsupported by the text and context of the phrase "all matters
referred to in paragraphs 2 and 4 of Article III". Nor can we find support for this proposed
interpretation in the supplementary means of treat y interpretation invoked by Korea. If anything,
those supplementary means suggest the opposite.
7.85 In support of its reading of "all matters referred to in paragraphs 2 and 4 of Article III", Korea
argues that this phrase was inserted during the Geneva Session of the ITO Preparatory Committee in
1947 in order to extend the grant of MFN treatment to all matters dealt with in those paragraphs
regardless of whether national treatment is provided for in respect of such matters. 224 We note in this
respect that during that session of the ITO Preparatory Committee the United States made a proposal
to amend the text of what was then draft Article 14 (general most-favoured-nation treatment) of the
ITO Charter by replacing the phrase "with respect to a ll matters in regard to which national treatment
is provided for in Article 15" (national treatment) w ith "with respect to all matters referred to in
paragraphs 1,2,3, and 4 of Article 15". The explanation of this proposal was:
"The changes proposed in line 8 of paragr aph 1 are designed to extend the grant of
most–favoured-nation treatment to all ma tters dealt with in Article 15 (except
governmental operations under paragraph 5 of Article 15) regardless of whether
national treatment is provided for in respect of such matters."225
The statement thus makes it clear that the proposed drafting change would apply the MFN clause to
"all matters referred to in paragra phs 1,2,3 and 4 of Article 15" but not to "governmental operations
under paragraph 5 of Article 15". At the time the United States made this proposal, paragraph 5 of
Article 15, which eventually became paragraph 8 of Article 18 of the Havana Charter and of
Article III of the GATT, provided that the nati onal treatment obligations would not apply to
government procurement. 226 The statement of the delegate of the United States made it clear that
under the proposed amendment to Article 14, the MFN clause would not apply to "governmental
operations" that were explicitly removed from th e scope of the national treatment clause under

223 We recall that we do not express a view on whet her Article III:8(b) must be characterized as an
"exemption" or "exception".
225 United Nations Economic and Social Council, Second Session of the Preparatory Committee of the
United Nations Conference on Trade and Employment, E/PC/T/W/146 (30 May 1947). The statement in the
Guide to GATT Law and Practice, Vol. I (1995), p.30, referred to by Korea in support of its argument contains
an incomplete quotation: "This phrasing was inserted during the Geneva session of the Preparatory Committee
in 1947, in order 'to extend the grant of most-favoured-n ation treatment to all matters dealt with in [these
paragraphs] regardless of whether national treatment is provided for in respect of such matters.' "
226 The proposal of the United States was made in May 1947. Shortly thereafter, it was suggested to
expand paragraph 5 to exclude subsidies to domestic producers from the scope of the national treatment article.
Thus paragraph 5 of the draft national treatment article (18) resulting from the Geneva Session of the ITO
Preparatory Committee provided as follows:
"The provisions of this Article shall not apply to the procurement by governmental agencies of
products purchased for governmental purposes and not for resale or use in the production of
goods for sale, nor shall they prevent the payment to domestic producers only of subsidies
provided for under Article 25, including payments to domestic producers derived from the
proceeds of internal taxes or charges and subs idies effected through governmental purchases
of domestic products."
Report of the Second session of the Preparatory Committee of the United Nations Conference
on Trade and Employment, E/PC/T/186 (10 September 1947), p. 19.

paragraph 5 of Article 15. Therefore, we fail to see how this statement can support the position taken
by Korea in this dispute that a measure expressly removed from the scope of the national treatment
obligation in Article III can nevertheless be among the "matters referred to in paragraphs 2 and 4 of
Article III".
7.86 It is noteworthy in this regard that in a discussion on draft Article 18.8(a) of the Havana
Charter corresponding to Article III:8(a), it was observed at a meeting in February 1948 that:
"...the Sub-Committee had considered that th e language of paragr aph 8 would except
from the scope of Article 18 [nationa l treatment] and hence from Article 16 [MFN
treatment], laws, regulations and requirements governing purchases effected for
governmental purposes where resale was only incidental...". 227
This clearly suggests that negotiators understood th at the reference to government procurement in
Article 18.8(a) would also apply in the context of the MFN clause (Article 16).
7.87 Thus the relevant drafting history that we are aware of shows that the exclusion of
government procurement from the national treatment article would also apply to the MFN clause.
Given that the reference to "the payment of su bsidies paid exclusively to domestic producers"
appeared in the same paragraph as the reference to government procurement, the logical implication is
that the drafters also intended to remove such subsidies from the application of the MFN clause to
internal measures.
7.88 We also note the argument of Korea that " GATT practice and panels" provide support for its
interpretation of how Article I:1 applies to intern al taxation and regulation covered by Article III. 228
The factual basis for this assertion is unclear. Korea does not refer to specific GATT/WTO dispute
settlement reports to substantiate this assertion. While there would appear to have been no panel
report that directly addresses this issue in respect of Article III:8(b), the Report of the Panel on
Complaints in Belgian Family Allowances is relevant to the issue of whether Article III:8(a) limits the
scope of "all matters referred to in paragraphs 2 and 4 of Article III" for the purposes of Article I:1.
7.89 The measure at issue in that case was a levy charged by Belgium on foreign products
purchased by public bodies when the products originated in a country whose family allowance did not
meet certain requirements. The Panel first determined that the levy was an internal charge within the
meaning of Article III:2 of the GATT and then found that the levy was subject to Article I:1 as a
matter referred to in paragraph 2 of Article III. Since Belgium had granted exemptions from this levy
to certain countries, it was required to exte nd this advantage unconditionally to other GATT
Contracting Parties. In this respect, the Pa nel considered, but rejected, the application of
Article III:8(a) as follows:
"The Panel did not feel that the provisions of paragraph 8 (a) of Article III were
applicable in this case as the text of the paragraph referred only to laws, regulations
and requirements and not to internal taxes and charges."
229
If the Panel had considered that the phrase "all matters referred to in paragraphs 2 and 4 of Article III"
in Article I:1 applies to any measure in the field of internal taxation and regulation, irrespective of
whether the national treatment obligation applies to such measure, it would not have been necessary

227 United Nations Conference on Trade and Employment, Third Committee: Commercial Policy,
Summary Record of the Forty-First Meeting, E/CONF.2/C.3/SR.41 (23 February 1948), p. 3. (Emphasis added)
229 Panel Report, Belgium - Family Allowances, para. 4. The Panel notes that the text of Article III:8(a)
of the GATT 1994 is identical to the text of Artic le III:8(a) of the GATT 1947 examined in the Belgian Family
Allowances dispute.

for the Panel to consider the applicability of Article III:8(a) to the facts of this particular case. The
fact that the Panel considered it n ecessary to state that Article III:8(a) was not applicable to this case
because this provision only deals with laws, regula tions and requirements and not with internal taxes
and charges clearly suggests that the Panel was of the view that Article III:8(a) would remove from
the scope of Article I:1 a measure relating to government procurement in the form of law, regulation
or requirement.
7.90 Therefore, to the extent that there exists relevant GATT/ITO drafting history and GATT
practice, it confirms our understanding that "matters referred to in paragraphs 2 and 4 of Article III"
should be construed in light of the scope of the substantive obligations in those provisions. The
payment of subsidies exclusively to domestic producer s is not a "matter referr ed to in paragraphs 2
and 4 of Article III" because it is excluded from the subject matter of Article III as a whole. Since we
have concluded that the TDM Re gulation is covered by Article III:8(b), we find that the TDM
Regulation is not a measure falling within the scope of the subject matter of Article I:1 of the
GATT 1994. Thus the question whether and how this measure results in different treatment of
imported products of different countries does not arise.
7.91 The Panel concludes that the TDM Regulation is not inc onsistent with Article I:1 of the
GATT 1994. It follows that the national TDM schemes of Denmark, France, Germany, the
Netherlands and Spain, and the Decisions of th e European Commission authorizing those schemes,
are also not inconsistent with Article I:1 of the GATT 1994.
D.
CLAIM UNDER ARTICLE 32.1 OF THE SCM AGREEMENT
7.92 The Panel will first consider whether the TDM Regulation is a "specific" action within the
meaning of Article 32.1 of the SCM Agreement before turning to the question of whether it is action
"against" a subsidy of another Member.
1. Whether the TDM Regulation constitutes "specific " action within the meaning of
Article 32.1 of the SCM Agreement
(a) Arguments of the parties 230
7.93 Korea argues that the TDM Regulation is "specific" action within the meaning of Article 32.1
of the SCM Agreement, as that term ha s been interpreted by the Appellate Body 231, because the TDM
measures "are inextricably linked to or have a st rong correlation with the constituent elements of a
subsidy". While the TDM Regulation does not expr essly refer to "the constituent elements of a
subsidy", these elements can be derived fro m other evidence and are implicit in the TDM
Regulation.232
7.94 Korea argues that, since "adverse effects" and "serious prejudice" are concepts under
Articles 5 and 6 of the SCM Agreement that refer to situations where subsidies within the meaning of
Article 1 of that Agreement are generating such effects and which have no meaning under EC law
independent of their use under the SCM Agreement, the fact that the TDM Regulation provides that
aid may be provided in those sectors of the EC shipbuilding industry that have suffered "adverse
effects" such as "material injury" and "serious prejudice" caused by "unfair Korean practices"
necessarily implies a determination that the constituent elements of a subsidy are present. Related to

230 For a more detailed account of the arguments of the parties, see Section IV.C.3.
232 First submission of Korea, paras. 106-117; oral statement of Korea at the first substantive meeting
of the Panel with the parties, paras. 27-29; responses of Korea to Panel Questions 34, 37, 38 and 39; second
submission of Korea, paras. 35-81, 142 and 155.

this, Korea refers to the fact that the evidence on the existence of those "adverse effects" was based on
findings made by the European Commission in an investigation under the European Communities'
Trade Barriers Regulation that certain subsidies gr anted by Korea had caused material injury and
serious prejudice.233
7.95 Korea argues that Recital 7 and Article 4 of the TDM Regulation, which provide that the
TDM will be coterminous with the WTO case launched by the EC against Korea, demonstrate that the
measures of Korea that are the subject of the dispute settlement case are the same measures that
prompted adoption of the TDM Regulation. 234 Korea submits that the existence of a link between the
TDM Regulation and the constituent elements of a subsidy is al so demonstrated by various
Commission press releases and memoranda indicating that, as part of a "twin-track" strategy to
respond to alleged Korean subsidies, the TD M Regulation was designed to accompany a WTO
dispute settlement proceeding against Korea.235
7.96 Korea submits that the TDM Regulation itself is specific because it is premised on the
conclusion drawn by the European Commission rega rding the existence of subsidies provided by
Korea and is legally dependent upon the WTO di spute settlement. Consequently, it is without
relevance that individual payments of subsid ies are not actually subject to a finding of
subsidization.236 In any event, it is factually incorrect that the TDM Regulation does not establish a
link with the existence of subsidi zation in its operative part becau se the Regulation legally binds its
duration to the WTO dispute settlement proceedin g instituted by the European Communities with
respect to alleged Korean subsidies.237
7.97 Korea submits that the Agreed Minutes between the European Community and Korea relating
to the world shipbuilding market ("Agreed Minut es") encapsulated an understanding relating to the
application of the SCM Agreement to the shipbuild ing sector. The Agreed Minutes did not contain a
commitment on the part of Korea to impose price controls on exports to end dumping. 238 Korea only
committed to refrain from granting subsidies and to continue implementing internationally recognized
accounting principles. 239 Korea argues that the relationship established in Article 4 of the TDM
Regulation between the effective implementation of the Agreed Minutes and the possible solution or
suspension of the WTO case demonstrates that the Agreed Minutes are the subject of the WTO
dispute settlement proceedings. 240 Korea argues that even assuming arguendo that "unfair practices"
referred to injurious pricing as a problem which is broader in scope than subsidization, the TDM

233 First submission of Korea, paras. 108-114; response of Korea to Panel Question 37; second
submission of Korea paras. 71-78. Korea refers to reports submitted by the Commission to the EC Trade
Barriers Regulation Committee in May 2001, July 2001, May 2002 and (with respect to LNG carriers)
June 2003, and cites the finding in the May 2001 Report, confirmed in the subsequent reports, that export-
contingent subsidies granted by Korea are causing adve rse effects to the Community industry. First written
submission of Korea, paras. 109-112; second submission of Korea, paras. 75-79; Exhibit Korea- 6.
234 First submission of Korea, paras. 116-117; oral st atement of Korea at first meeting, paras. 33-37;
responses of Korea to Panel Questions 34 and 35.
235 First submission of Korea, paras. 113-114; oral st atement of Korea at the first substantive meeting
of the Panel with the parties, paras. 27-29; second submission of Korea, paras. 35-61.
236 Oral statement of Korea at the first substantive meeting of the Panel with the parties, para. 51;
238 Oral statement of Korea at the first substantive meeting of the Panel with the parties, paras. 5, 30-33
and 71.
239 Response of Korea to Panel Questions 44-45.
240Oral statement of Korea at the first substantive meeting of the Panel with the parties, paras. 34-35.

Regulation would still be specific because a measure do es not have to be exclusively restricted to the
constituent elements of a subsidy to be specific.241
7.98 The European Communities submits that the TDM Regulation is not a "specific " action
against a subsidy of another Member, as that te rm has been interpreted by the Appellate Body 242,
because there is no inextricable link, implicit or explicit, between the TDM Regulation and the
constituent elements of a subsidy. In order for an action to be specific, a particular subsidy must be
targeted243 and a specific determination must be made that a subsidy exists. 244 The Appellate Body
has confirmed this understanding of the meaning of "specific" action when referring to measures "that
may be taken only where the constituent elements of [a subsidy] are present."245
7.99 The European Communities contends that th e language in the Recitals of the TDM
Regulation cited by Korea only serves to motivate the limitation of the scope of the TDM Regulation
to market segments wh ere the Commission has found the existen ce of adverse effects and injury
caused by "unfair practices". 246 The expression "unfair practices" does not demonstrate a link with a
finding of subsidies, but encompasses the problem of injurious pricing, which is significantly broader
in scope than subsidization and refers to the conduct of individual shipyards.247
7.100 In the latter regard, the Eur opean Communities argues that th e principal motivation for the
adoption of the TDM Regulation is the non-implementation by Korea of the Agreed Minutes. 248 The
Agreed Minutes go beyond the SCM Agreement in that they acknowledge that lower prices by
Korean shipyards are due not only to subsidization but also to inadequate accounting and financial
responsibility rules and to below cost pricing resu lting from cross-subsidization of export sales by
domestic sales, which can be completely in dependent of any government subsidies. 249 T h e
European Communities rejects Korea's characteriz ation of the Agreed Minutes as an understanding
regarding the interpretation of the SCM Agreement. 250 The European Communities also rejects the
argument of Korea that the Agreed Minutes concer n the subsidies at issue in the WTO dispute
settlement case brought by the Eu ropean Communities against Kor ea. The European Communities
submits in this respect that the discretion provided to the Commission to suspend the WTO
proceeding in case the Agreed Minutes had been impl emented was meant to create an incentive for
Korea "to come back to the negotiating table in the framework of the Agreed Minutes."251
7.101 The European Communities argu es that the TBR Report cited by Korea cannot constitute a
determination of the existence of the constituent el ements of a subsidy as it is merely an internal
working document of the Commission without any lega l effect and that the formal decision of the
Commission of 8 October 2002 on the outcome of this investigation only announced that there was

241 Second submission of Korea, paras. 170-176.
242 First submission of the European Communities, paras. 185-187.
243 Oral statement of the European Communities at the first substantive meeting of the Panel with the
parties, para. 21.
244 Oral statement of the European Communities at the first substantive meeting of the Panel with the
parties, para. 21.
245 First submission of the European Communities, para. 185; oral statement of the
European Communities at the first substantive meeting of the Panel with the parties, para. 22.
246 First submission of the European Communities, paras. 194 and 200; oral statement of the
European Communities at the first substantive meeting of the Panel with the parties, para. 29.
247 First submission of the European Communities, para. 195.
248 First submission of the European Communities, para. 196.
249First submission of the European Communities, para. 196; oral statement of the
European Communities at the first substantive meeting of the Panel with the parties, paras. 26-27.
250 First submission of the European Communities, paras. 154-155.
251 Responses of the European Communities to Panel Question 15.

sufficient evidence to warrant initiation of a WTO case. 252 The TDM Regulation uses the findings of
injury and serious prejudice and links them more br oadly to the failure of Korea to implement the
Agreed Minutes.253 According to the European Communiti es, this link between the TDM Regulation
and the findings made in the Trade Barriers Regulation investigation is of a purely political nature.254
7.102 The European Communities argues that the choi ce of the WTO dispute settlement proceeding
as one of the criteria to limit the temporal scope of the TDM Regulation was "politically motivated"
in that it sought to clarify that the previously abol ished state aid would not be generally reintroduced.
The link with the WTO dispute settlement case establis hed an "objective" criterion in the sense that
expiration of the TDM Regulation was made dependant upon an event external to the
European Communities.255
7.103 The European Communities submits that whethe r the TDM Regulation is specific must be
established on the basis of the operative part of the Regulation and not on the basis of the motives
mentioned in the Recitals or accompanying politi cal statements accompanying its adoption. The
conditions defined in the operative part of the TD M Regulation are not inextricably linked to the
constituent elements of a subsidy. An analysis of the relevant operative provision- Article 2(1) of the
TDM Regulation- shows that: (i) aid can be gran ted under the TDM Regulation against an offer from
any Korean shipyard regardless of wh ether that yard benefits from subsidies; (ii) aid can be granted
against any competition from Korea without the need to determine to what extent the price of the
Korean offer is lower and whether that lower price is due to subsidization or unfair pricing; (iii) the
TDM Regulation by itself does not result in any paym ents; and (iv) there is no relationship between
the fixed amount of 6 per cent contract-related ai d and any actual undercutting by a Korean bid or
even the undercutting margins found in the TBR inves tigation. Thus contrary to the situation in
US-Offset Act (Byrd Amendment), the payment of aid under the national TDM measures cannot be
made only following a determination that the constituent elements of a subsidy are present but in any
situation involving competition from a Korean shipyard offering a lower price, irrespective of whether
that shipyard has received subsidies.256
(b) Arguments of third parties
7.104 The United States argues that the Appellate Body Reports in US - Offset Act (Byrd
Amendment) and US - 1916 Act indicate that the coverage of Ar ticle 32.1 of the SCM Agreement is
not limited to measures that may be taken "only" when the constituent elements of a subsidy are
present. The United States also submits that specific action against a subsidy is not limited to actions
that deal exclusively with subsidization. Fina lly, the United States considers that the European
Communities provides no support for its assertion that whether the TDM Regulation is specific action
against a subsidy must be established on the basi s of the operative part of the TDM Regulation and
that in any event the reasons cited by the Eur opean Communities as to why Article 2.1 of the TDM
Regulation does not contain an inextricable link with the constituent elements of a subsidy are
unconvincing.
257
7.105 China submits that the scope of the phrase "specific action against a subsidy" is not confined
to measures that may be taken only when the constituen t elements are present. In light of the criteria
formulated by the Appellate Body, the TDM Regul ation is specific because of the relationship

252 First submission of the European Communities, para. 198.
253 First submission of the European Communities, para. 198,
254 First submission of the European Communities, para. 199.
255 First submission of the European Communities, para. 147; response of the European Communities
to Panel Question 11; second submission of the European Communities, para. 59.
256 First submission of the European Communitie s, paras. 201-207; oral statement of the
European Communities at the first substantive meeting of the Panel with the parties, paras. 31-36.
257 Third party submission of the United States, paras. 4, 9 and 10.

between the scope of application of the TDM Regula tion and the constituent elements of a subsidy.
In this respect, it is irrelevant that the granti ng of state aid in individual cases does not require a
determination of the existence of a subsidy.258
(c) Evaluation by the Panel
7.106 Article 32.1 of the SCM Agreement provides:
"No specific action against a subsidy of another Member can be taken except in
accordance with the provisions of GATT 1994, as interpreted by this Agreement."
A footnote (56) to this sentence provides:

"This paragraph is not intended to preclude action under other relevant provisions of
GATT 1994, where appropriate."
7.107 The question addressed by the Panel in this sectio n of its report is whether the measures at
issue constitute "specific" action within the meaning of Article 32.1.
7.108 The Panel notes that the parties to the dispute base their arguments on the meaning of
"specific action against a subsidy of another Memb er" on the analysis of the Appellate Body in
US - 1916 Act and US - Offset Act (Byrd Amendment) .259 While they differ in their interpretation of
the exact meaning of some of the statements ma de by the Appellate Body, they clearly accept the
Appellate Body's general approach in those cases.
7.109 The Appellate Body first elaborated its views as to the interpretation of "specific" action in
Article 18.1 of the Anti-Dumping Agreement and Article 32.1 of the SCM Agreement in US – 1916
Act. In that dispute, the Appellate Body stated that:
"In our view, the ordinary meaning of the phrase 'specific action against dumping' of
exports within the meaning of Article18.1 is action that is taken to respond to the
constituent elements of 'dumping'. 'Specific action against dumping' must, at a
minimum, encompass action that may be ta ken only when the constituent elements of
'dumping' are present.66
Thus, the Appellate Body tells us in US – 1916 Act that there is "specific action" in respect of
dumping (or subsidization) at a minimum where, as in that case, action could be taken only where the
constituent elements of dumping (or subsidization) ar e present. As this was all that was necessary to
decide that case, the Appellate Body explicitly did not go further to examine whether the outer
boundary of the phrase extended further.

7.110 In US – Offset Act (Byrd Amendment), the Appellate Body explained and further developed its
interpretation of the concept that there must be a "specific action". The Appellate Body stated that:

258 Oral statement of China at the first substantive meeting of the Panel with the parties, paras. 4-6.
259 See, e.g., first submission of Korea, paras. 103- 104; first submission of the European Communities,
paras. 183-192.

"We recall that, in US – 1916 Act, the United States argued that the 1916 Act did not
fall within the scope of Article VI of the GATT 1994 because it targeted predatory
pricing, as opposed to dumping. We disagreed, and determined that the 1916 Act was
a 'specific action against dumping' because the constituent elements of dumping were
'built into' [Footnote omitted] the essential elements of civil and criminal liability
under the 1916 Act. We also found that the 'wording of the 1916 Act … makes clear
that these actions can be taken only with respect to conduct which presents the
constituent elements of 'dumping'."[Footnote omitted] Accordingly, a measure that
may be taken only when the constituent elements of dumping or a subsidy are
present, is a 'specific action' in response to dumping within the meaning of
Article 18.1 of the Anti-Dumping Agreement or a 'specific action' in response to
subsidization within the meaning of Article 32.1 of the SCM Agreement . In other
words, the measure must be inextricably linked to, or have a strong correlation with,
the constituent elements of dumping or of a s ubsidy. Such link or correlation may, as
in the 1916 Act, be derived from the text of the measure itself."
261
7.111 In US – Offset Act (Byrd Amendment) , the Appellate Body therefore provides a clear and
explicit explanation of the nature of the link that must exist between a measure and the "constituent
elements of dumping or of a subsidy" in order for the measure to constitute a "specific action" related
to dumping or subsidization. Specifically, the meas ure must "be inextricably linked to, or have a
strong correlation with, the constituent elements of dumping or a subsidy."262
7.112 With respect to how to examine whether this t est is met, the Appellate Body observed in
US – Offset Act (Byrd Amendment) that the criterion articulated in US-1916 Act
"...is not whether the constituent elements of dumping or of a subsidy are explicitly
referred to in the measure at issue, nor wh ether dumping or subsid ization triggers the
application of the action, nor whether th e constituent elements of dumping or of a
subsidy form part of the essential components of the measure at issue".263
Rather, this test may be met where the constituent elements of dumping or of a subsidy "are implicit
in the express conditions for taking such action".264
7.113 In light of the foregoing, the task before th is Panel is to consider whether the TDM is
inextricably linked to, or has a strong correlation with, the constituent elements of a subsidy.265
7.114 It is clear that the TDM Regulation is a measure adopted by the Council of the
European Union in response to certain conduct of the Government of Korea and practices of Korean
shipyards. The rationale of the TDM Regulation, as expressed in the introductory Recitals, can be
summarized as follows: as a consequence of Korea's fa ilure to implement the Agreed Minutes, and in

261Appellate Body Report, US - Offset Act (Byrd Amendment), para. 242.
262 The Appellate Body further explained that the role of footnote 56 to Article 32.1 is to confirm that
an action that is not "specific" within the meaning of Article 32.1 but is nevertheless related to subsidization, is
not prohibited by that Article. Appellate Body Report, US - Offset Act (Byrd Amendment), para. 262. Although
the European Communities has referred to footnote 56 as co ntext relevant to interpreting the term "specific", it
has not asserted that the TDM is "action under other relevant provisions of GATT 1994" within the meaning of
that footnote.
263Appellate Body Report, US - Offset Act (Byrd Amendment), para. 244.
264Appellate Body Report, US - Offset Act (Byrd Amendment), para. 244.
265 We note that Article 1 of the SCM Agreement contains a definition of the term subsidy "[f]or the
purpose of this Agreement". It follows that the constituent elements of a subsidy for the purposes of
Article 32.1 are those set forth in Article 1. See Appellate Body Report, US – Offset Act (Byrd Amendment),
para. 240.

order to assist those segments of the Community shipbuilding industry that have suffered adverse
effects in the form of material injury or ser ious prejudice due to unfair Korean competition or
practices, it is necessary to establish a temporary defensive mechanism in the form of operating aid
aimed at enabling Community shipyards to overc ome Korean competition. State aid can be
authorized on the basis of the TDM Regulation only when there is competition from Korea.
7.115 While the TDM Regulation is clearly directed at Korea, neither the operative part nor the
explanatory Recitals of the TDM Re gulation refer explicitly to subsidi es. According to Article 2 (1)
of the TDM Regulation, state aid may be provided "when there has been competition for the contract
from a Korean shipyard offering a lower price". Moreover, the introductory Recitals of the TDM
Regulation refer to: "fair and transparent competitiv e conditions" (Recital (1)); "ensuring an effective
price surveillance mechanism" (Recital (1)); "competition not respecting normal competitive
conditions" (Recital (2)); "adverse effects in the form of material injury and serious prejudice caused
by unfair Korean competition" (Recitals (3) and (4)); "material injury an d serious prejudice...caused
by unfair Korean practices " (Recital (5)); and " unfair Korean competition" (Recital (6)). Thus the
problem that prompted adoption of the TDM Regulation is described as competition that is unfair,
abnormal or non-transparent, but there is nothing to indicate explicitly that this problem of unfair
competition or unfair practices is caused by subsidies.
7.116 Notwithstanding this lack of express references to subsidies, the Panel finds that the text of
the TDM Regulation and the context of its adoption demonstrate that the Regulation is related to
subsidies allegedly provided by the Government of Korea to its shipbuilding industry.
7.117 The Panel notes, in this regard, that the elig ibility for state aid pursuant to the national aid
schemes approved under the TDM Regulation is limited to certain sectors of the Community
shipbuilding industry.
7.118 Recitals (3), (4) and (5) and Article 2(2) of the TDM Regulation indicate that the inclusion of
a particular segment of the Community shipbuildi ng industry within the scope of the Regulation was
dependent upon whether that segment had suffered adverse effects in the form of material injury and
serious prejudice caused by " unfair Korean competiti on" or "unfair Korean practices". Recitals 3-5
provide:
"However, as an exceptional and temporary measure, and in order to assist
Community shipyards in those segments that have suffered adverse effects in the
form of material injury and serious prej udice caused by unfair Korean competition, a
temporary defensive mechanism should be authorised for limited market segments
and for a short and limited period only, ...
The situation in the Community shipbuildi ng industry is heterogeneous. According
to the Commission's Fourth and Fifth Reports on the Situation in World Shipbuilding,
approximately half of all compensated gross tonnage produced in Community
shipyards concerns the market segments in which Community shipyards are in a
strong position on the international market. However, in other segments, there is
evidence that Community ship yards have suffered adverse effects in the form of
material injury and serious prejudice caused by unfair Korean competition.
Therefore, contract-related temporary support may be authorised in certain
circumstances in tho se segments, namely container ships and product and chemical
tankers.
Considering the exceptional development in the sector of LNG carriers, the
Commission will continue to monitor this market. Contract-related temporary
support may be authorised in this sector if the Commission confirms, on the basis of

investigations covering the period of 2002, that the Community industry has suffered
material injury and serious prejudice in this sector caused by unfair Korean practices
to the same extent as has been found for container ships and product and chemical
tankers."
Article 2(2) of the TDM Regulation provides:
"Direct aid in support of contracts for the building of LNG carriers may only be
authorised under this Article for final contracts signed after the Commission gives
notice in the Official Journal of the Eu ropean Communities that it confirms, on the
basis of investigations covering the period of 2002, that Community industry has
suffered material injury and serious prejudice in this market segment caused by unfair
Korean practices."
7.119 It is clear, therefore, that the limitation of th e eligibility of state aid to container ships and
product and chemical tankers was based on eviden ce that Community shipyards in those segments
had "suffered adverse effects in the form of mate rial injury and serious prejudice caused by unfair
Korean competition", and that the possible future in clusion of LNG carriers within the scope of the
Regulation was conditional on confirmation by the European Commission that the Community
industry in this sector "has suffered material injury and serious prejudice in this market segment
caused by unfair Korean practices".
266
7.120 The Panel realizes that the above-mentioned Recitals and provision of the TDM Regulation
refer to "unfair Korean competition" and "unfair Korean practices", and that the Regulation does not
expressly mention subsidies provided by the Govern ment of Korea. However, the TDM Regulation
employs terms -- "adverse effects", "material injury" and "serious prejudice" -- which, in the SCM
Agreement, denote the effects of actionable subsidie s. If, as argued by the European Communities,
the concepts of "unfair competition" and "unfair practices" as used in the TDM Regulation do not
refer to subsidies but to a broader problem of "injur ious pricing", the Panel finds it hard to understand
why the Regulation in describing the effects of th is "unfair competition" and these "unfair practices"
employs terminology so intimately connected with the SCM Agreement.
7.121 Moreover, it is undisputed th at the evidence of the existe nce of the "adverse effects",
"material injury" and "serious prejudice" referred to in Recitals 3-5 and Article 2(2) of the TDM
Regulation was the result of an investigation conducted by the European Commission pursuant to the
European Community's Trade Barriers Regulation.
267 The practices subject to this investigation were
certain subsidies allegedly granted by the Government of Korea to its shipbuilding industry:
"The investigation was directed agains t subsidies allegedly granted by the
Government of the Republic of Korea to its shipbuilding industry that benefited
production between 1997 and 2000 and will benefit fu ture production. Alleged
Korean subsidies have included, export con tingent financing, debt forgiveness, debt-
for-equity-swaps, interest relief and special tax concessions in the context of

266As noted above, in June 2003, the European Commission published a notice under Article 2(2) of the
Regulation confirming, on the basis of investigations covering the period of 2002, that Community industry had
suffered material injury and serious prejudice in the ma rket segment of LNG carrier s caused by unfair Korean
practices.
267 First submission of the European Communities, para s. 158-162. The Trade Barriers Regulation is a
mechanism "laying down Community procedures in the fi eld of common commercial policy in order to ensure
the exercise of the Community's rights under international trade rules, in particular those established under the
auspices of the World Trade Organization". Council Regulation (EC) No 3286/94.

preferential restructuring packages provide d in order to save various shipbuilding
enterprises from imminent collapse." 268
7.122 Reports269 on the results of this investigation submitted by the Commission to an Advisory
Committee consisting of representatives of the member States found that subsidies within the meaning
of Article 1 of the SCM Agreement granted by Korea were causing adverse effects in the form of
injury and serious prejudice within the meaning of Article 5 of the SCM Agreement and Article 2 of
the Trade Barriers Regulation to the Community producers of product and chemical tankers and
container ships.
7.123 The Panel notes that, at the time of the adopti on of the TDM Regulation, the “findings” of the
European Commission on the adverse effects of subs idies allegedly granted by the Government of
Korea were not yet embodied in instruments with a formal legal status under Community law but in
reports submitted by the Commission to an Adviso ry Committee, which could in some sense be
considered to be “internal” and that the form al Decision in which the Commission reported on the
outcome of the investigation under the Trade Barriers Regulation was promulgated only in
October 2002.270 Nevertheless, these "internal" reports formed the basis upon which the Commission
in May and July 2001 proposed a particular course of action, including adoption of the TDM
Regulation.
7.124 Consequently, it is clear to the Panel that the sectoral scope of the TDM Regulation was
determined on the basis of evidence of the existence of adverse effect s caused by subsidies within the
meaning of Article 1 of the SCM Agreement allege dly provided by the Government of Korea to its
shipbuilding industry.271
7.125 The European Communities acknowledges that it used the evidence of the existence of
adverse effects from the investigation conducted und er its Trade Barriers Regulation in determining
the scope of the TDM Regulation 272, but submits that the use of this evidence about the state of the
domestic industry is explained by the need to limit the material scope of the TDM Regulation so as
not to reintroduce to the full extent operating aid into the sector.273
7.126 The Panel does not contest that the scope fo r providing contract-rela ted operating aid under
the TDM Regulation is significantly more limit ed than was the case until 31 December 2000 under
Article 3 of Council Regulation 1540/98, and that th is was due to the fact that the scope of the
Regulation was defined on the basis of evidence obtained in the investigation under the Trade Barriers
Regulation on the existence of adverse effects to certain segments of the European Community
shipbuilding industry. However, the fact remains that the adverse effects in question were adverse

268 Commission Decision of 8 October 2002 under the provisions of Council Regulation (EC) No
3286/94 concerning trade practices maintained by Ko rea affecting trade in commercial vessels, OJ L 281,
19.10.2002, p. 15, Recital (5).
269 Reproduced in Exhibit Korea-6. Article 8(8) of the Trade Barriers Regulation requires that in an
investigation under this Regulation the Commission must report to the Advisory Committee "when it has
concluded its examination," and that this "report should normally be presented within five months of the
announcement of initiation of the procedure, unless the complexity of the examination is such that the
Commission extends the period to seven months."
270 Commission Decision of 8 October 2002 under the provisions of Council Regulation (EC)
No 3286/94 concerning trade prac tices maintained by Korea affec ting trade in commercial vessels, Official
Journal of the European Communities, L 281/15, 19.10.2002.
271 We recall that the "constituent elements" of a subs idy are those identified in Article 1 of the SCM
Agreement. See footnote 265.
272 See e.g., first submission of the European Communities, para. 158.
273 First submission of the European Communities, pa ras. 161-162 and 200; oral statement of the
European Communities at the first substantive meeting of the Panel with the parties, para. 29.

effects caused by subsidies allegedly granted by Ko rea, and that, consequently, the limitation of the
scope of the TDM Regulation was based on the effects of subsidies. Therefore, that the reference to
adverse effects served the important political purpo se of explaining the reintroduction of operating
aid only in certain sectors does not mean that there is no relationship between the scope of the TDM
Regulation and the effects of subsidies allegedly granted by the Government of Korea.
7.127 The Panel also considers relevant the fact that the TDM Regulation makes a link between the
temporal application of the Regulation and the initiation and resolution or suspension of the WTO
dispute settlement proceeding that the European Communities initiated against Korea in October 2002
regarding certain subsidies allegedly provided by the Government of Korea to its shipbuilding
industry.
7.128 The relationship between the TDM Regulation a nd the WTO dispute settlement proceeding is
expressed in Recital (7) and Article 4 of the TDM Regulation. Recital (7) provides:
"The temporary defensive mechanism should only be authorised after the Community
initiates dispute settlement proceedings agai nst Korea, by requesting consultations
with Korea, in accordance with the World Trade Organisation’s Understanding on the
Rules and Procedures for the Settlement of Disputes and may no longer be authorised
if these dispute settlement proceedings are resolved, or suspended on the grounds that
the Community considers that the Ag reed Minutes have been effectively
implemented."
Article 4 of the TDM Regulation reads:

"The Regulation shall be applied to final c ontracts signed from the entry into force of
this Regulation until its expiry, with the ex ception of final contracts signed before the
Community gives notice in the Official Journal of the European Communities that it
has initiated dispute settlement proceedings against Korea by requesting consultations
in accordance with the World Trade Orga nisation’s Understanding on the Rules and
Procedures for the Settlement of Disputes and final contracts signed one month or
more after the Commission gives notice in the Official Journal of the
European Communities that these dispute settlement proceedings are resolved, or
suspended on the grounds that the Commun ity considers that the Agreed Minutes
have been effectively implemented."
7.129 It is evident from Article 4 that there is a direct operational link between the duration of the
authority to provide aid under the Regulation and the resolution or suspensi on of the WTO dispute
settlement case brought by the European Communiti es. The Panel sees th is operational linkage
between the TDM Regulation and the WTO di spute settlement case initiated by the
European Communities against Korea as further evid ence to support the proposition that the practices
that the TDM Regulation is designed to address are th e same practices – i.e., subsidies -- that are the
subject of the WTO dispute settlement case.
7.130 The Panel next considers issues relating to th e relationship between the TDM Regulation and
the Agreed Minutes. In this regard, the European Communities argues that the references in the TDM
Regulation to "adverse effects" of "unfair practic es" and "unfair competition" must be understood to
refer to the problem of "injurious pricing", which is distinguishable from subsidies. The
European Communities submits in this respect that the principal reason for the adoption of the TDM
Regulation was the non-implementation by Korea of its commitments under the Agreed Minutes,
which relate to "injurious pricing", an issue distinct from subsidies. 274 The European Communities

274 E.g., first submission of the European Communities, paras. 151-154 and 196.

refers in this regard to references to the Agreed Minutes in the "whereas" clauses to the TDM
Regulation.
7.131 The Panel first emphasizes that its review of the text of the Agreed Minutes only serves the
purpose of enabling it to decide a factual issue on which the parties disagree and that it is not
interpreting the Agreed Minutes in order to determ ine the rights and obligations of the parties under
that bilateral agreement.275
7.132 The Panel notes that certain provisions of the Agreed Minutes clearly pertain to subsidies.
The first operative clause of the Agreed Minut es contains the following commitments regarding
"action by public authorities in respect of shipyards in financial difficulties":
"Both sides agree that all financial in stitutions shall conduct their business with
shipbuilders in a commercially sound manner.
In that respect, the Korean Government w ill continue to supervise strictly the asset
soundness of the financial institutions.
In line with the Korean Government's polic y of non-intervention, and conscious of
the imbalance in world shipbuilding markets, the Korean authorities will ensure, in
the context of bank supervision, that banks in which the Korean Government has a
shareholding or private banks acting on its behalf will only extend new loans, write
off or roll over existing loans or provide any type of support on a commercial basis.
The Korean Government confirms that it will not provide these financial institutions
with public support for the purpose of c overing losses resulting from their business
relations with any specific enterprise or industry.
The Korean Government agrees that KA MCO should purchase bad loans related to
shipyards at prices that reflect actual and expected recovery rates as well as funding
costs, and at minimal prices for unsecured loans.
The Korean Government confirms that:
-It will not extend support to its sh ipbuilders which is inconsistent
with Korea's international obligations.
-The management takeover of Samho by Hyundai will not be
accompanied by publicly supported debt restructuring and/or
moratoria operations.
While under government ownership Korean banks will, when dealing
with shipbuilding companies, be operated on a fu lly commercial
basis. The Korean Government w ill not be involved in the day-to-
day management. Public banks will grant no favourable repayment
guarantees for shipbuilding contracts entered into by shipyards in
financial difficulties or under court r eceivership. Further to that, the
conditions for repayment guarantees shall reflect the substantial
commercial risk stemming from the shipyards' precarious situation."

275 We note in this regard that the Agreed Minutes are not a "covered agreement" within the meaning of
Article 1 and 2 of the DSU. See e.g., Appellate Body Report, EC – Poultry, para. 79.

This first Section clearly includes several commitments on the part of Korea to refrain from providing
certain forms of public support to financial institutions and to shipbuilders.
7.133 The Panel further notes that Section (3) of the Agreed Minutes deals with "injurious pricing":
"Both sides recognize that injurious pricing of ships should be remedied or prevented
to ensure normal competitive conditions in the world shipbuilding market.
In this regard, the Korean Government agrees that the level of ship prices shall reflect
all the factors of costs according to the definition of a normal value under the WTO
anti-dumping Agreement."
This Section clearly does not contain a commitment by Korea to refrain from the granting of subsidies
but this does not mean that the provisions in this Section are unrelated to subsidies. Given the
background of the conclusion of the Agreed Minutes, particularly the timing and nature of certain
subsidies allegedly granted by Korea, the recogn ition of the need to remedy or prevent injurious
pricing of ships and of the need for prices of ships to reflect all the factors of cost can be explained at
least in part as an attempt to address the continuing effects of past subsidies granted by Korea. Action
relating to prices of ships may well have been viewed as necessary to prevent subsidies granted in the
past by the Government of Korea from continuing to cause adverse effects. The Panel notes that
Article 18 of the SCM Agreement, which provides for the possibility of price undertakings as an
alternative to the application of countervailing duties, suggests that commitments by exporters
regarding pricing can be a remedy against subsidies.276
7.134 Thus, it appears that the Agreed Minutes relate to an important extent to subsidies in that they
contain commitments of Korea either to refrain from granting certain subsidies or to take action that
would mitigate the adverse effects of past subsidies. The Panel considers, therefore, that the Agreed
Minutes as a whole cannot be characterized as pertaining to a problem of injurious pricing that is
distinct from subsidies. In any event, even assuming that the Agreed Minutes deal with "injurious
pricing" as distinct from subsidies, the Panel finds no indication in the text of the introduction or of
the operative part of the TDM Regulation that this problem of "injurious pricing" was a factor
determining the scope, design and structure of the TDM Regulation. As discussed above, the
information before the Panel indicates that the sectoral scope of the TDM Regulation was determined
on the basis of evidence on the adverse effects of certain subsidies granted by Korea. There is nothing
to suggest that the sectoral scope depended upon an as sessment of the effects of "injurious pricing" as
distinct from subsidies. The reference to the Ag reed Minutes in the introduction to the Regulation
does not detract from the link between the scope of the TDM Regulation and the adverse effects of
subsidies allegedly granted by Korea.
7.135 In fact, the Panel considers that the linkag es between the TDM Regulation, the WTO dispute
settlement case and the Agreed Minutes support the vi ew that the TDM relates at least in part to
subsidies allegedly provided by Korea. The Pa nel notes that Article 4 of the TDM Regulation
provides that the TDM may no longer be applied if the WTO dispute settlement proceedings are either
(i) "resolved" or (ii) "suspended" on the basis that the European Communities considers that Korea
has effectively implemented the Agreed Minutes. The effective implementation of the Agreed
Minutes necessarily implies effective implementation of the commitments contained therein with
respect to subsidies. Thus measures taken by Korea, including with respect to the type of subsidies

 276 In referring to Article 18 of the SCM Agreement, the Panel does not wish to suggest that Section 3
of the Agreed Minutes contains a pri ce undertaking within the meaning of that Article. The key point from the
Panel's perspective is simply that a provision on pricing is not necessarily unrelated to subsidies. The Panel
does not deem it necessary for it to characterize the precise nature of the commitment undertaken by Korea
under this Section with regard to prices of ships.

identified in the Agreed Minutes, can lead to the suspension of the WTO dispute settlement
proceeding, which in turn results in the termina tion of the authority to provide state aid under the
TDM Regulation.
7.136 Although we have focused our analysis on the elements that can be derived from the TDM
itself, we note that our conclusions find confirmation in public statements of the
European Commission. These statements indicate that the TDM Regulation was designed as part of a
twin-track strategy that was adopted following th e findings made in the Trade Barriers Regulation
investigation that subsidies granted by the Governme nt of Korea were causing adverse effects to the
Community industry.277 Since the proposal for a temporary defensive mechanism, described as “one
element of the Commission’s two-part strategy agai nst unfair Korean practices in this sector”, was
adopted following an investigation "which foun d evidence of substantial subsidies that are
incompatible with WTO rules”, it is reasonable to conclude that “unfair Korean practices” in this
connection refers to the subsidies found in the investigation conducted under the Trade Barriers
Regulation. These statements provide further conf irmation that the TDM Regulation was designed to

 277 Thus, on 8 May 2001, when the Commission submitted its first report on this investigation, which
contained evidence that certain subsidies granted by Korea were causing adverse effects, the Commission issued
a press release the summary of which stated inter alia:
"Further to the adoption of its fourth report on the state of the EU shipbuilding industry last
week, the Commission today approved the strategy it will propose to the Council of Ministers
on 14/15 May, in order to address the persistent problems posed to the European shipbuilding
industry by unfair trade practices by Korean shipyards. The investigation into subsidies
carried out under the Trade Barriers Regulation (TBR) has established that substantial
subsidies have been granted to Korean shipyards through both export and domestic
programmes which contravene the WTO's 1994 Su bsidies Agreement. On this basis, the
Commission will recommend that the matter be taken before the WTO through the initiation
of a dispute settlement procedure by 30 June unless an amicable solution can be reached in the
interim period. In parallel, the Commission w ill propose accompanying measures in the form
of a temporary support mechanism to Euro pean shipyards for th e market segments
considerably injured by unfair Korean trade practices and for the period required for the
conclusion of the WTO procedure. Its enteri ng into force will be simultaneous with the
effective start of the WTO action." IP/01/656, 8 May 2001, Exhibit Korea-8

In July 2001, when the Commission submitted its proposal to the Council, it issued a press release which stated:
"The Commission today adopted a proposal for a Council Regulation which would put in
place a temporary defensive mechanism for Eur opean shipbuilding. The proposal is one
element of the Commission's two-part strategy ag ainst unfair Korean practices in this sector
and will cover the market segments that are considerably injured by these practices. It comes
after a series of negotiations between the Commission and Korea, which failed to produce an
agreement that would restore normal trading conditions. The proposal is an accompanying
measure to dispute settlement proceedings agai nst Korea, which will be initiated in the WTO
as soon as the Council expresses its fav ourable position on the temporary defensive
mechanism. ...
The proposal for a defensive temporar y support mechanism follows a Commission
investigation which found evidence of substantia l subsidies that are incompatible with the
WTO rules. Despite a series of negotiations between the Commission and the Korean
Government, no amicable solution has yet been achieved. Accordingly, the Commission has
instigated its two part strategy for fighting these unfair practices: proposing a temporary
defensive mechanism and the initiation of dispute settlement proceedings.
The proposal for the temporary defensive mechanism is limited to those market segments in
which the Commission investigation found that EU industry had been considerably injured by
unfair Korean trade practices, namely container ships and product and chemical tankers."
IP/01/1078, Exhibit Korea-9

address adverse effects to certain segments of the EC shipbuilding industry in the form of material
injury and serious prejudice caused by subsidies allegedly provided by Korea.278
7.137 In light of the aforementioned considerations c oncerning the scope of the Regulation; the use
of terminology intimately connected with th e SCM Agreement; the relationship of the TDM
Regulation to the findings made in the investig ation under the Trade Barriers Regulation of adverse
effects caused by subsidies; a nd the relationship between the te mporal application of the TDM
Regulation, the WTO dispute settlement case and the "effective" implementation of the Agreed
Minutes, the Panel is of the view that th e TDM Regulation is an action taken by the
European Communities related to subsidies allegedly provided by Korea.
7.138 While the Panel has found that the TDM Regulation is in fact related to subsidies allegedly
provided by Korea, the question remains whether the cl oseness of the relationshi p is such that, in the
words of the Appellate Body, the measure is "inext ricably linked to, or [has] a strong correlation to",
the constituent elements of the subsidy.
7.139 The Panel recalls a variety of features of the TDM that demonstrate the strength of the link
and correlation between the subsidies identified by the European Communities and the eligibility of
aid pursuant to the TDM. These features are in subs tantial part the same features that were relevant
for establishing that the TDM was more generally a r esponse to those subsidies. First, a European
shipyard is only eligible for aid where there h as been competition for the contract from a Korean
shipyard offering a lower price. Thus, there is a correlation between the Member found to be
providing subsidies in the TBR investigation and the scope of the TDM Regulation. Second, the
scope of the TDM Regulation correlates closely with the sectors of the Korean shipbuilding industry
found to be subsidized. Thus, European shipbui lders may only be eligible for aid where the
competition with a Korean shipyard relates to cont ainer ships, chemical tankers, product tankers and
LNG carriers. As previously noted, these are precis ely the categories of ships for which affirmative
findings of adverse effects caused by Korean subsidies were made in the TBR investigation. 279 Put
simply, the TDM allows European shipbuilders to receive aids only with respect to contracts where
there is competition from a country found to be pr oviding subsidies and in regard to particular
categories of ships with respect to which adverse effects resulting from subsidies were found.280
7.140 We further recall that the temporal application of the TDM is linked to the resolution of the
WTO dispute regarding Korean subsidies or its suspension based upon the "effective implementation"
of the Agreed Minutes. Resolution of the WTO dispute implies either a recommendation that the
alleged subsidies be withdrawn or their adverse effects removed 281, or findings that the measures are
not subsidies, are not prohibited subsidies, an d/or do not cause adverse effects. Effective

278 We acknowledge that the TDM Regulation was adopted by the Council not by the Commission but
consider nevertheless that in view of the role of the Commission in initiating this legislation it is not
inappropriate to accord some evidentiary weight to these press releases to reinforce a conclusion derived from
an analysis of the text of the Regulation.
279 As previously noted, while these findings were not yet embodied in instruments with formal status
under Community law when the TDM Regulation was adopted, they formed the basis on which the Commission
proposed, inter alia , adoption of the TDM Regulation. Findings of the Commission were published a few
280 We recognize that the TDM Regulation correlates onl y to the subset of alleged subsidies considered
by the European Communities to be causing adverse effects. The presence of this further limiting consideration
does not in our view negate the existence of a strong correlation between the TDM Regulation and alleged
subsidies. We note in this respect that a similar limitation existed in respect of US – Offset Act (Byrd
Amendment), in that offset payments could be made only where duties had been collected on dumped or
subsidized imports, which duties in turn could only be collected pursuant to a finding that the dumped or
subsidized imports had caused or threatened to cause material injury to a domestic industry.
281 See SCM Agreement Articles 4.7 and 7.8.

implementation of the Agreed Minutes implies, inter alia, not applying certain subsidies in the future
and taking steps to remove the price effects of subsid ies applied in the past. In other words, the TDM
Regulation would cease to apply if Korea were to cea se future subsidization and remove the effects of
past subsidization by Korea as re flected in resolution of the WTO dispute settlement case or effective
implementation of the Agreed Minutes. These linkages establish a further temporal correlation
between the continued existence of alleged subsid ies and their adverse effects and the continued
application of the TDM.
7.141 The Panel acknowledges that the Regulation does not provide that state aid can only be
granted if it is determined on a case-by-case basi s that the particular shipyard with which a
Community producer is in competition for a contr act has been subsidized with respect to the
transaction in question. The Panel further realizes th at the measures that were found to be specific by
the Appellate Body in US - 1916 Act and US - Offset Act (Byrd Amendment ) were linked to formal
determinations of the existence of dumping or subsidization. 282 The Panel does not believe, however,
that a finding of a "strong correlation" or "inext ricable link" between the measure and the constituent
elements of a subsidy requires a case-by-case determ ination. Indeed, to specify that a finding of
"specific action" requires such a determination in all cases would be a recipe for circumvention of
Article 32.1. 283 That may well explain why the Appellate Body did not require a perfect match
between the scope of the measure and the constituent el ements of the subsidy. What it required is a
"strong correlation" or an "inextricable link". Thus, what is crucial is the cl oseness of the correlation
or link.
7.142 In this case, the Panel notes that, with resp ect to three major Ko rean shipyards, the
European Communities found the existence of non-recurring subsidies (in particular, restructuring
subsidies). These (alleged) restructuring subsidies would as a matter of logic confer a benefit with
respect to all transactions entered into by the yards over a number of years.
284 Thus, it may
reasonably be inferred that the European Communities had in fact made ex ante findings that contracts

282See, e.g., Appellate Body Report, US - Offset Act (Byrd Amendment), para. 242.
283 For example, if a case-by-case determination of subsidization were required, a Member could
preclude a finding of "specific action" by designing a measure that, while directed at subsidization, swept
somewhat more broadly to include some non-subsidized transactions.
284 As explained by the Commission in its report to the Trade Barriers Regulation Committee regarding
LNGs:
"The subsidies granted to Korean shipbuilder s during the restructuring process constituted
one-off events involving large amounts which benefited their present and future production.
This is because non-recurring subsidies (i.e. subsidies which are granted on a one-off basis)
are normally linked to the acquisition of fixed assets and therefore the total value of the
subsidy is spread over the normal life of the assets."

The Commission proceeded to note that the life of machinery and equipment in the shipbuilding industry was
10-12 years. Report to the Trade Barriers Regulation Committee, Examination Procedure Concerning an
Obstacle to Trade Within the Meaning of Council Regulation (EC) No 3286/94, Consisting of Trade Practices
Maintained by Korea Affecting Trade in Commercial Vessels – Supplementary Report on Adverse Effects
Concerning LNG Carriers, p. 5.

More generally, we recall that statement by the Commission in its Decision of 8 October 2002 that:

"The investigation was directed against subsidies allegedly granted by the Government of the
Republic of Korea to its shipbuilding industry that benefited production between 1997 and
2000 and will benefit future production."

Commission Decision of 8 October 2002 under the provisions of Council Regulation (EC) No 3286/94
concerning trade practices maintained by Korea affecting trade in commercial vessels, OJ L 281, 19.10.2002, p.
15, Recital (5).

relating to those shipyards were subsidized. While other (alleged) subsidies may have been
transaction-specific in nature, they were provided pursuant to programmes that the
European Communities considered to be available to all shipyards and used by all investigated
shipyards.285 Thus, the link or correlation is very close as it is clear that the TDM was specifically
tailored to make aid available in a manner that wa s targeted with substantial precision to alleged
Korean subsidization.
7.143 Therefore, the Panel finds that the TDM Regulation is “specific action" within the meaning of
Article 32.1 of the SCM Agreement because it has a strong correlation and inextricable link with the
constituent elements of a subsidy.
2. Whether the TDM Regulation constitutes specific action "against " a subsidy within the
meaning of Article 32.1 of the SCM Agreement
(a) Main arguments286
(i) Arguments of the parties
7.144 Korea argues that the TDM Regulation is specific action "against " a subsidy of another
Member because, in the words of the Appellate Body Report in US - Offset Act (Byrd Amendment) ,
the structure and design of the Regulation are clear ly "opposed to" the practice of subsidization or
"creates an incentive to terminate such practices".287 That the TDM Regulation constitutes "motion or
action in opposition to" and "in hostility or active oppo sition to" alleged subsidies of Korea is evident
from statements of EC Commission officials; from th e fact that the Regulation targets Korea; and
from the fact that the Regulation is similar in inte nt, character and purpose to the action taken by the
European Communities in launching a WTO dispute settlement case against Korea as both actions
were part of a twin-track strategy. 288 In Korea's view, the TDM Regulation "creates an incentive to
terminate" the alleged Korean subsidies becau se it establishes a link between the suspension or
termination of the Regulation, on the one hand, and the resolution of the WTO dispute settlement case
and Korea's implementation of the Agreed Minutes, on the other. 289 Korea also submits in this
connection that the TDM Regulation creates a competitive disadvantage for Korean products in
relation to domestic products and other foreign products.290
7.145 Korea submits that the argument of the Eur opean Communities that a measure cannot be
"against" a subsidy if the measure is legal is contrary to the conclu sion of the Appellate Body in the
US - Offset Act (Byrd Amendment) case in which the Appellate Body did not find that the monies
disbursed under the Byrd Amen dment were illegal subsidies. 291 Second, the Appellate Body in
US-Offset Act (Byrd Amendment ) did not actually reject a "conditions of competition" test but stated
that it was not necessary to go so far as to demonstrate effects on competition and that the focus of the
analysis should instead be on the structure of the measure. In this regard, Korea submits that since the
TDM Regulation provides for funds to be given to any Community shipyard that is in competition
with a Korean shipyard, it is hard to imagine anything more clearly "against" the alleged Korean

285 See Report to the Trade Barriers Regulation Committee, Examination Procedure Concerning an
Obstacle to Trade Within the Meaning of Council Regulation (EC) No 3286/94, Consisting of Trade Practices
Maintained by Korea Affecting Trade in Commercial Vessels – Supplementary Report on Export Subsidies ,
pp. 21, 27 (all shipyards investigated used the pre-shipment loan and advanced payment guarantee schemes).
286 For a more detailed account of the arguments of the parties, see Section IV.C.3.
288 First submission of Korea, paras. 121-122.
289 First submission of Korea, paras. 123-124.
290 First submission of Korea, paras. 125-126.
291 Oral statement of Korea at the first substantive meeting of the Panel with the parties, para. 55;

subsidized products.292 Third, Korea rejects as irrelevant th e fact that the subsidies under the TDM
Regulation are available in the event of any compe tition from Korean ships, not just those ships that
have actually been subsidized.293
7.146 Korea argues that the TDM is not an ordinary s ubsidy in that it is specifically and exclusively
directed against Korea, and more particularly ag ainst Korean subsidization. Nonetheless, Korea
agrees with the argument of the United States th at counter-subsidies can be actions "against" a
subsidy of another Member under Article 32.1 of the SCM Agreement.294
7.147 Korea argues that, contrary to what the Eu ropean Communities asserts, the TDM Regulation
applies only when there is a demonstration of a lower Korean offer. 295 It is irrelevant in Korea's view
that the level of EC funding is unrelated to the leve l of the alleged Korean subsidies because to be
against does not involve exact amounts.296 Regarding the argument that the TDM Regulation does not
involve a transfer of resources, Korea asserts that Parts II and III of the SCM Agreement provide
actions against subsidies other than countervailing duties.297
7.148 The European Communities argues that the TDM Regulation is not a measure "against " a
subsidy of another Member. First, the impact that any aid granted by member States may have on the
competitive position of Korean yards is not a sufficient basis to conclude that such aid is a form of
action "against" the subsidy of another Member. Korea's argument, in this regard, reflects a
"conditions of competition" test that has alr eady been rejected by the Appellate Body in US - Offset
Act (Byrd Amendment) 298 and that is inconsistent with a b asic tenet of the SCM Agreement that
Members may grant specific subsidies provided they do not cause adverse effects within the meaning
of Articles 5 and 6 of that Agreement. 299 Second, the state aid provided by EC member States under
the TDM Regulation is very different from the type of measure at issue in the US - Offset Act (Byrd
Amendment) in that it is financed through budgetary resources, not through countervailing duties,
bears no relationship with a finding of subsidization and only serves to help the domestic shipbuilding
industry to survive until the problem of injurious pr icing is resolved throug h implementation of the
Agreed Minutes.300 Third, in view of its modest amount, su ch aid cannot offset the effects of Korean
subsidization.301 Fourth, the link between the TDM Regulation and the WTO dispute settlement case
launched by the European Communities against Kor ea does not establish that the Regulation is an
action against a subsidy of another Member. Th e Regulation and the dispute settlement case both
relate to the broad objective of addressing injurious pricing, but their immediate goals are entirely
different in that the WTO dispute settlement case seeks to secure the cessation of WTO-inconsistent
subsidies whereas the TDM Regulation seeks to address the non-implementation of the Agreed
Minutes by providing subsidies necessar y for the survival of the EC domestic industry. Fifth, the aid

292 Oral statement of Korea at the first substantive meeting of the Panel with the parties, para. 56;
second submission of Korea, paras. 184-185.
293 Oral statement of Korea at the first substantive meeting of the Panel with the parties, para. 57-58.
294 Second submission of Korea, paras. 188-189.
295 Oral statement of Korea at second substantive meeting of the Panel with the parties, para. 43.
296 Oral statement of Korea at the second substantive meeting of the Panel with the parties, para. 44.
297 Second submission of the European Communities, para. 46.
298 To support its assertion that the Appellate Body Report in US - Offset Act (Byrd Amendment) rejects
a "conditions of competition" test for determining whether a measure is "against" a subsidy of another Member,
the European Communities refers to paras. 253-254 and 257 of that Report.
299 First submission of the European Communities, paras. 209-212. The European Communities refers
to para. 258 of the Appellate Body's Report. The European Communities elaborates on its argument about the
irrelevance of a "conditions of competition test" in paras. 37-40 of its oral statement at the first meeting of the
Panel.
300 First submission of the European Communities, paras. 213-214.
301 First submission of the European Communities, paras. 215-216.

does not influence the behaviour of Korea and does not penalize the unfair practices of Korean
shipyards.302
7.149 The European Communities submits that the fact that a subsidy is granted to any Community
shipyard that is in competition with a Korean shi pyard does not mean that the subsidy is against the
allegedly subsidized Korean products because the gr anting of a subsidy to producers of products that
are in competition with other producers known to receive subsides does not ipso facto amount to
action "against" a subsidy.303
7.150 Regarding the argument of the United States that Article 32.1 of the SCM Agreement is not
limited to measures involving a transfer of fina ncial resources from the producers of the imported
product to the producers of the domestic product, the European Communities argues that existing case
law only concerns measures involving this type of tr ansfer of resources and that this was considered
to be the decisive element by the Appellate Body in finding that the Byrd Amendment Act constituted
action against dumping and subsidies. 304 The only general conclusion that can be drawn from the
Panel and Appellate Body Reports in US - Offset Act (Byrd Amendment) is that the nature of the
measure as a subsidy does not prevent that measure from being covered by Article 32.1 of the SCM
Agreement.305
7.151 The European Communities asserts that Korea has been unable to demonstrate any specific
effect of the TDM Regulation or the national measures against a Korean subsidy. 306 Regarding the
argument of Korea that the effect of the TDM Regula tion is to force Korea to accept the interpretation
of the European Communities of Korea's WTO oblig ations, the European Communities submits that
Article 4 of the TDM Regulation limits the temporal scope of the Regulation to the termination of the
WTO dispute settlement case, regardless of the out come. Therefore, the Regulation cannot force
Korea to adopt any particular position in the disput e settlement case or to an early withdrawal of its
subsidies. At most, the Regulation might encourag e Korea to resume negotiations in the framework
of the Agreed Minutes.307
(ii) Arguments of third parties
7.152 The United States submits that the Appellate Body Report in US - Offset Act
(Byrd Amendment) does not support the view that only measu res involving a transfer of financial
resources similar to the Byrd Amendment paymen ts can constitute action "against" a subsidy. 308
Second, the United States argues that the European Communities fails to explain why "a system of
counter subsidies" could not dissuade the practice of subsidization or create an incentive to terminate
such practice. A rational government may well be dissuaded from granting subsidies if the
competitive advantage generated by those subsidi es is offset by subsidies granted by other
countries.309 Finally, the United States asserts more ge nerally that the European Communities adopts
an overly narrow interpretation of the ruling in US - Offset Act (Byrd Amendment) ; according to the
United States, the Appellate Body in that case "concluded that the SCM Agreement prohibits the
provision of subsidies in response to another Member's subsidies".310

302 First submission of the European Communities, paras. 217-220.
303 Response of the European Communities to Panel Question 47.
304 Response of the European Communities to Panel Question 40.
305 Response of the European Communities to Panel Question 40.
306 Second submission of the European Communities, para. 77.
307 Second submission of the European Communities, para. 79.
308 Third party submission of the United States, para. 6.
309 Third party submission of the United States, para. 7.
310 Third party submission of the United States, para. 12. The United States refers here to para. 273 of
the Appellate Body Report.

7.153 China argues that for a measure to be action "aga inst" a subsidy, it is not necessary for that
measure "to directly counteract subsidized imports or entities res ponsible for such imports." As
indicated by the Appellate Body in US - Offset Act (Byrd Amendment) , multilaterally sanctioned
countermeasures are a form of action "against" a s ubsidy notwithstanding that they do not directly
affect the subsidized products.311 Second, a measure can be "against " a subsidy even though it is not
effective in dissuading the practice of subsidization. 312 Third, the fact that subsidies that do not cause
adverse effects within the meaning of Article 5 and 6 are permitted under the SCM Agreement does
not mean that a counter subsidy cannot be in violation of Article 32.1 of the SCM Agreement.313
(b) Evaluation by the Panel
7.154 Having found that the TDM Regulation is a "sp ecific" action, the question which the Panel
must now address is whether the TDM Regulation is also an action "against " a subsidy of another
Member within the meaning of Article 32.1 of the SCM Agreement.
7.155 The Appellate Body examined the meaning of th e word "against" in Article 18.1 of the Anti-
Dumping Agreement and Article 32.1 of the SCM Agreement in its Report in US - Offset Act
(Byrd Amendment). The Appellate Body analyzed the possi ble relevance to the ordinary meaning of
the word "against" as used in these provisions of three dictionary definitions posited by the
United States: (1) "of motion or action in oppositio n"; (2) "in hostility or active opposition to "; and
(3) "in contact with." According to the Appellate Body, the third definition cited by the United States
was inconsistent with "the idea of opposition, hos tility or adverse effect" conveyed by the word
"against" as used in these provisions. 314 As a consequence, the Appellate Body rejected the view
advanced by the United States that an action agains t dumping or a subsidy must have direct contact
with the imported good, or the entity responsible for the dumped or subsidized good.315
7.156 Having rejected "in contact with" as an appropria te definition of the meaning of "against" in
the context of Article 18.1 of the Anti-Dumping Ag reement and Article 32.1 of the SCM Agreement,
the Appellate Body observed:
"Recalling the other two elements of the definition of "against" from the New Shorter
Oxford Dictionary relied upon by the United States, namely "of motion or action in
opposition" and "in hostility or active opposition to", to determine whether a measure
is "against" dumping or a subsidy, we be lieve it is necessary to assess whether the
design and structure of a measure is such that the measure is "opposed to", has an
adverse bearing on, or, more specifically, h as the effect of dissuading the practice of
dumping or the practice of subsidization, or creates an incentive to terminate such
practices. In our view, the CDSOA has ex actly those effects because of its design
and structure".316
7.157 With respect to the measure at issue in that dispute -- the Continued Dumping and Subsidies
Offset Act -- the Appellate Body concluded that its design and structure had the effect of dissuading

311 Oral statement of China at the first substantive meeting of the Panel with the parties, para. 7.
312 Oral statement of China at the first substantive meeting of the Panel with the parties, para. 8.
313 Oral statement of China at the first substantive meeting of the Panel with the parties, para. 9.
314Appellate Body Report, US - Offset Act (Byrd Amendment), paras. 248-250.
315 The Appellate Body also considered that this argument of the United States was contradicted by the
fact that Article 18.1 of the Anti-Dumping Agreement and Article 32.1 of the SCM Agreement refer to measures
against dumping or a subsidy and not to measures against dumped or subsidized products or entities responsible
for dumped or subsidized products; by the inclusion of multilaterally sanctioned countermeasures in the SCM
Agreement; and by the object and purpose of Article 18.1 of the Anti-Dumping Agreement and 32.1 of the
SCM Agreement. Appellate Body Report, US - Offset Act (Byrd Amendment), paras. 251-253.
316Appellate Body Report, US - Offset Act (Byrd Amendment), para. 254.

the practice of dumping or the practice of subsidiza tion, or created an incentive to terminate such
practices, because the Act "effects a transfer of financial resources from the producers/exporters of
dumped or subsidized goods to their domestic competitors". 317 It is clear from the text of the Report
that the Appellate Body attached decisive importance to this aspect:
"All these elements lead us to conclude that the CDSOA has an adverse bearing on
the foreign producers/exporters in that the imports into the United States of the
dumped or subsidized products (besid es being subject to anti-dumping or
countervailing duties) result in the financing of United States competitors—producers
of like products—through the transfer to the latter of the duties collected on those
exports. Thus, foreign producers/exporters have an incentive not to engage in the
practice of exporting dumped or subsidized pr oducts or to terminate such practices.
Because the CDSOA has an adverse bearing on, and, more specifically, is designed
and structured so that it dissuades the practice of dumping or the practice of
subsidization, and because it creates an in centive to terminate such practices, the
CDSOA is undoubtedly an action "against" dumping or a subsidy, within the meaning
of Article 18.1 of the Anti-Dumping Agreement and of Article 32.1 of the
SCM Agreement".
318
7.158 The Appellate Body's focus on the transfer of financial resources 319 as the basis for its
conclusion that the Continued Dumping and Subsid ies Offset Act was a measure "against" dumping
or a subsidy differed from the Panel's analysis, which had concluded that the Act was a measure
"against" dumping mainly on the ground that the co mbination of offset payments and anti-dumping
duties had an adverse impact on the competitive relationship between dum ped imports and goods
produced by "affected domestic producers".320 The Appellate Body considered in this regard that:
"...in order to determine whet her the CDSOA is 'against' dumping or subsidization, it
was not necessary, nor relevant, for the Panel to examine the conditions of
competition under which domestic products and dumped/subsidized imports compete,
and to assess the impact of the measure on the competitive relationship between
them. An analysis of the term 'against', in our view, is more appropriately centred on
the design and structure of the measure; such an analysis does not mandate an
economic assessment of the implications of the measure on the conditions of
competition under which domestic produc t and dumped/subsidized imports
compete."321
7.159 The Appellate Body again emphasized the transfer of financial resources from foreign
producers and exporters to domestic competitors as th e key element in its conclusion that the Act was
a measure "against" dumping or a subsidy in a passage in which it explained that it was not necessary
for the Panel to inquire into the intent of the legislators:

317Appellate Body Report, US - Offset Act (Byrd Amendment), para. 255.
318Appellate Body Report, US - Offset Act (Byrd Amendment), para. 256 (emphasis added).
319 The Panel notes that the United States in its third party submission in this dispute questions whether
the Appellate Body's characterization of the Continued Dumping And Subsidies Offset Act as entailing a
transfer of financial resources was factually accurate. Third party submission of the United States, para. 6,
footnote 6. The Panel does not need to pronounce on this issue.
320 Panel Report, US - Offset Act (Byrd Amendment), paras. 7.35-7.41. The Panel found further support
for its view of the Act as a measure against dumping or a subsidy in the incentives which the Act created for
domestic producers to file or at least support application for the initiation of anti-dumping or countervailing duty
investigations. Ibid., paras. 7.42-7.45.
321Appellate Body Report, US - Offset Act (Byrd Amendment), para. 257.

"The text of the CDSOA provides sufficien t information on the structure and design
of the CDSOA, that is to say, on the manner in which it operates, to permit an
analysis whether the measure is 'against' dumping or a subsidy. Specifically, the text
of the CDSOA establishes clearly that, by virtue of that statute, a transfer of financial
resources is effected from the producers/exporters of dumped or subsidized goods to
their domestic competitors. This essential feature of the CDSOA constitutes, in itself

the decisive basis for concluding that the CDSOA is 'against' dumping or a subsidy—
because it creates the 'opposition' to dumping or subsidization, such that it dissuades
such practices, or creates an incentive to terminate them."322
7.160 The Appellate Body's ruling in US - Offset Act (Byrd Amendment) provides the Panel with the
relevant parameters for assessing whether a measure is "against" the subsidy of another Member.
First, the Appellate Body indicated that an analys is whether a measure is "against" a subsidy must
assess whether the design and structure of the measur e has the effect of dissuading the practice of
dumping or subsidization, or creates an incentive to terminate such practices. Second, the Appellate
Body in applying its "design and structure" analysis focused almost exclusively on the existence of a
"transfer of financial resources" between foreign pr oducers/exporters and their domestic competitors.
Put simply, we understand the Appellate Body to be say ing that the "decisive basis" for ruling that the
Offset Act was a "measure" against dumping or subsidization was the fact that the greater dumping or
subsidization, the more financial resources were taken from the foreign exporters/producers and given
to domestic competitors. It was the dissuasive nature of this aspect of the design or structure of the
Offset Act that made it a measure "against" dumping or subsidization. By contrast, the Appellate
Body not only did not rely on the existence of subsidization in response to dumping or subsidization
as the basis for its ruling, but it ruled that it was ne ither necessary nor relevant for the Panel to have
conducted an examination of the effects of th e subsidy on conditions of competition between
domestic and imported products.323
7.161 While the transfer of financial resources may be something that is peculiar to the facts of the
Byrd Amendment case, nevertheless it is indicative of the high standard that must be met in
determining whether a measure "has the effect of dissu ading ...the practice of subsidization, or creates
an incentive to terminate such practices". The need for such a high standard is supported by a reading
of that provision in the broader context of the SC M Agreement. If the mere fact that a subsidy
granted by a Member to its domestic producers mitig ates, or is intended to mitigate, the competitive
impact of a subsidy granted by another Member to its domestic producers were sufficient to treat the
subsidy granted by the first Member as action "against" the subsidy of the second Member, this would
create a new type of substantive disciplines on the pr ovision of subsidies in addition to the disciplines
already contained in Parts II and III of the SCM Ag reement. Subsidies that in themselves are not
prohibited because they are not subsidies of the kind covered by Article 3, and which do not
necessarily even produce the effects that are the basis for a successful challenge under Articles 5
and 6 of the SCM Agreement, would nevertheless be prohibited because they are granted in reaction
to subsidies of other Members. The Panel consid ers it unlikely that the drafters, having created a
structure for the Agreement under which prohibited s ubsidies were regulated by in Part II of the

322Appellate Body Report, US - Offset Act (Byrd Amendment), para. 259 (emphasis added).
323 Appellate Body Report, US - Offset Act (Byrd Amendment), para. 257. This was consistent with the
approach of the panel in that dispute, which stated:
"We wish to emphasize that our findings and conclusions relate exclusively to the CDSOA,
which combines the imposition of anti-dumping/countervail orders with the bestowal of offset
payments in very particular circumstances, such as to constitute 'specific action against
dumping"/subsidisation. Though we consider th at subsidization should not generally be used
as a surrogate contingent trade remedy, our conclusion (that the CDSOA constitutes 'specific
action against dumping') is not based on a finding that subsidization in and of itself necessarily
constitutes 'specific action against dumping'/subsidization." Panel Report, US - Offset Act
(Byrd Amendment), para. 7.52.

Agreement and actionable subsidies by Part III, woul d have then inserted a very significant additional
prohibition in the concluding provisions of the Agreement.
7.162 This interpretation finds further support in th e consideration of the Agreement's object and
purpose. A broad interpretation of "against" that relied on the effects of a subsidy on conditions of
competition would create an incentive for a Member to be "first in" with a subsidy and would treat
less favourably a Member which responded in kind by providing an identical subsidy. Specifically,
the Member initiating the subsidy competition could be challenged in WTO dispute settlement only if
its subsidy could be shown to be prohibited under Pa rt II of the SCM Agreement or demonstrated to
cause adverse effects under Part III thereof. By contrast, the Member responding to subsidization
initiated by another Member could be challenge d independently of wh ether its subsidy was
inconsistent with Part II or III of the SCM Agreem ent, merely because its subsidy was responsive in
nature.324 Such an interpretation would thus have the perverse effect of encouraging Members to beat
their competitors to the provision of subsidies in orde r to gain the advantage. We consider that a
reading of Article 32.1 which in fact would encourag e Members to be "first in" with subsidies would
be very difficult to square with the object and purpose of the SCM Agreement of providing
strengthened disciplines on the use of trade-distorting subsidies.325
7.163 We find confirmation of this interpretation of the scope of Article 32.1 in the historical
development of that provision. We note that Article 32.1 is a verbatim transposition of Article 19.1 of
the Tokyo Round Subsidies Code, and that the basic idea underlying Article 19.1 had already been
articulated at the time of the GATT/ITO negotiations. 326 The results of the GATT/ITO negotiations
reflect no substantive disciplines on the provision of subs idies – the only requirement of the original
Article XVI of GATT 1947 was a consultation oblig ation – and the sole action possible against
subsidies was therefore countervailing action. Even at the time of the Tokyo Round Code, subsidies
disciplines were quite limited indeed, with a prohibition applicable solely to export subsidies provided
by developed countries in respect of other than primary products, and what were in effect non-binding
rules on serious prejudice. Nor have we been ab le to identify any substantive discussion in the
Uruguay Round negotiations relating to the transposi tion of Article 19.1 into the current Agreement,

324 This is in fact precisely what has happened in the case of shipbuilding. The European Communities
has brought a case against Korea under Parts II and III of the SCM Agreemen t with respect to Korea's alleged
subsidies See Korea – Measures Affecting Trade In Commercial Vessels , WT/DS273. While Korea's initial
response to the European Communities' alleged respon sive subsidies under the SC M Agreement involved both
serious prejudice claims under Part III and its claims in this dispute, it has limited its panel request to
Article 32.1 of the SCM Agreement and the other non-SCM claims before this Panel. See , request for consultations by Korea,
WT/DS/301 (11 September 2003), Section IV.
325 See, e.g. Appellate Body Report, US – Carbon Steel, para. 73. ("Taken as a whole, the main object
and purpose of the SCM Agreement is to increase and improve GATT disciplines relating to the use of both
subsidies and countervailing measures".)
326 In September 1948, the CONTRACTING PARTIES to the GATT adopted a report of a working
party that had considered amendments to be made to th e GATT in light of the Havana Charter. This report
recommended the substitution of the text of Article VI of the GATT by the text of Article 34 of the Havana
Charter:
"While agreeing that there is no substantive difference between Article VI of the General
Agreement and Article 34 of the Charter, the working party recommends the replacement of
that article, as the text adopted at Havana contains a useful indication of the principle
governing the operation of that article and constitutes a clearer formulation of the rules laid
down in that article. The working party, endorsing the views expressed by Sub-Committee C
of the Third Committee of that Havana Conf erence, agreed that measures other than
compensatory anti-dumping and countervailing duties may not be applied to counteract
dumping or subsidization except in so far as such other measures are permitted under other
provisions of the General Agreement ." GATT, Basic instruments and Selected Documents ,
Vol. II. (May 1952), p. 41 (emphasis added).

much less an indication that the same language was intended to take on a different meaning in the new
Agreement. Given that there were effectively no multilateral disciplines on subsidies when the idea
underlying Article 32.1 was conceived, and very few when the precise language now contained in
Article 32.1 was drafted, it seems to us very unlikel y indeed that the idea reflected in Article 32.1 was
to prohibit the provision of counter-subsidies, as Korea seems to suggest.
7.164 Taking the Appellate Body's reasoning in US - Offset Act (Byrd Amendment) into account, we
conclude that a subsidy provided in response to anot her Member's subsidy – that is to say, a counter-
subsidy – will not, merely because of its impact on conditions of competition, constitute specific
action "against" that subsidy and therefore be proscr ibed by the SCM Agreement. Rather, there must
be some additional element, inherent in the design and structure of the measure, that serves to
dissuade, or encourage the termination of, the practi ce of subsidization. One such element would be
where the counter-subsidy was funded through a transf er of financial resources between the foreign
producer/exporter and the domestic competitor. There may well be other elements which would
satisfy this requirement, although we will not attempt ex ante to define what those elements might be.
The Panel will therefore examine the TDM Regulation in light of these conclusions.
7.165 The Panel considers that the factual and legal arguments of Korea do not warrant a conclusion
that the design and structure of the TDM Regulati on demonstrate its nature as an action "against" a
subsidy of another Member.
7.166 The Panel observes that the essential feature of the TDM Regulation is that it creates the legal
basis necessary under European Comm unity state aid law for the provision by EC member States of
contract-related operating aid to certain sectors of the Community shipbuild ing industry whenever
there is competition from a Korean shipyard offering lower prices.
7.167 Korea submits that the fact that the TDM Regul ation applies specifically and exclusively in
the context of competition for a particular cont ract between Community shipyards and Korean
shipyards shows that its design and structure is such that it acts "against" a subsidy of another
Member. However, the arguments of Korea in this regard essentially concern the impact of the
Regulation as a subsidy on the conditions of comp etition between Community shipyards and Korean
shipyards.327 We do not dispute that a counter-subsidy may reduce or even eliminate the competitive
advantages another Member may be seeking to achieve through subsidies and thus may in some sense
dissuade or provide an incentive to terminate the subsidization. For the reasons discussed above,
however, we do not consider that this is a suffici ent reason to find that the TDM Regulation is action
"against" a subsidy of another Member. Rather, ther e must some additional element, inherent in the
design and structure of the TDM Regulation, that goes beyond the effects on conditions of
competition between Korean and European shipya rds of the subsidies provided for under the TDM
Regulation. Korea has not identified any such additional element in this dispute.
7.168 With reference to Article 4 of the TDM Re gulation, Korea asserts that the Regulation
reinforces the incentive to terminate the practice of subsidization by effectively promising to suspend
or promptly terminate the countermeasure in re turn for Korea either implementing the Agreed
Minutes or ensuring that the WTO dispute settleme nt proceeding is resolved at the earliest
opportunity.328 Closely related to this, Korea argues that by adopting the TDM Regulation the
European Communities sought to provide an inducemen t for Korea to try to settle the WTO dispute,

327 First submission of Korea, para. 125; oral statem ent of Korea at the first substantive meeting of the
Panel with the parties, paras. 56-57; second submission of Korea, para. 185.

which implied that Korea would agree to stop the al leged subsidization, and that the TDM Regulation
was thereby also a bargaining chip with which to build pressure on Korea.329
7.169 We do not doubt that the linkages between the TDM, the dispute settlement case and the
Agreed Minutes represent a signal that the Europ ean Communities will eliminate the TDM if Korea
takes steps to address its alleged subsidies and the adverse effects allegedly flowing from them. 330
Indeed, we have placed significant emphasis on these linkages in our analysis as to whether the TDM
is a "specific action". Nor do we doubt that the TDM Regulation constitutes pressure by the
European Communities on Korea. The Panel howeve r recalls that the possible dissuasive impact
arising from the effects of a subsidy on conditions of competition is not sufficient to make a measure
"against" subsidies.331 Rather, there is a need for some a dditional element beyond the effect of the
subsidies themselves, such as a transfer of fina ncial resources. The linkage between the TDM,
dispute settlement and the Agreed Minutes does not represent such an additional element. Rather, it is
merely evidence – albeit rather compelling eviden ce – of the connection between the TDM and the
Korean subsidies. As such, the linkage is not decisive in our analysis of whether the TDM is
"against" Korean subsidies.
7.170 Finally, Korea relies to an important extent upon statements of the European Commission and
of its individual members to support its asserti on that the TDM Regulation is action "against" a
subsidy of another Member. 332 In particular Korea refers to st atements that the adoption of the TDM
Regulation signals to Korea the European Comm unities' determination to resolve the dispute; 333 that
the TDM Regulation is part of a strategy "aimed at fighting these unfair [Korean practices]" 334, that
the TDM Regulation is part of the Commission's twin-track strategy; 335 that the TDM Regulation is
specifically designed to counter unfair Korean pr actices for a period necessary for the conclusion of
the WTO procedure;336 that the TDM Regulation is intended to increase the weapons arsenal vis-à-vis
alleged Korean subsidies; 337 and that Commissioner Lamy wants to use subsidies as leverage against
South Korea to stop supporting its industry.338
7.171 In the Panel's view, Korea's reference to such statements does not demonstrate how through
its design and structure the Regulation operates in a manner that dissuades the practice of
subsidization or creates an incentive to terminat e that practice other than through the competitive
impact of the subsidies provided for under the TDM Regulation. In addition, apart from the issue of
whether the European Commission and its members can be considered to be "legislators" in relation
to an act adopted by the Council of the European Un ion, the Panel also recalls the statement of the

330 We recall that, under Article 4 of the TDM Regulation, operating aid can only be provided in
respect of contracts signed during a period beginning when the Commission gives notice of the initiation of a
WTO dispute settlement proceeding against Korea and ending one month after the Commission gives notice that
these proceedings are resolved, or su spended on the grounds that the Co mmunity considers that the Agreed
Minutes have been effectively implemented. The dispute settlement proceed ing is resolved within the meaning
of Article 4 when the DSB adopts the report of the Pane l established in this procee ding or of the Appellate
Body.
331 See, paras. 7.160-7.164, supra.
332 First submission of Korea, paras. 120-121; second submission of Korea, paras. 192-194 and 198.

Appellate Body that a finding of whether a measure is "against" a subsidy of another Member cannot
be based on the intent of legislators.339
7.172 In light of the above considerations, the Panel finds that the TDM Regulation is not an action
"against" a subsidy of another Member within the meaning of Article 32.1 of the SCM Agreement.
7.173 The Panel concludes that the TDM Regulation is not a "specific action against a subsidy of
another Member" inconsistent with Article 32.1 of the SCM Agreement.
7.174 The Panel also concludes, as a consequence, that the TDM aid schemes of Denmark, France,
Germany, the Netherlands, and Spain, and the De cisions of the European Commission authorizing
those aid schemes, are not "specific actions agains t a subsidy of another Member" inconsistent with
Article 32.1 of the SCM Agreement.
E. CLAIMS UNDER ARTICLE 23 OF THE DSU
1. General
7.175 Korea claims that the TDM Regulation, its member State implementing provisions as well as
any instances of application 340 of the TDM scheme, and any EC Decisions approving member State
implementing provisions pursuant to the TDM scheme, are inconsistent with the obligations of the
European Communities and its member States under Ar ticles 23.1, 23.2(a), 23.2(b) and 23.2(c) of the
DSU.
2. Article 23.1
(a) Main arguments
(i) Arguments of the parties341
7.176 In support of its claim of a violation of Article 23.1 of the DSU, Korea submits that by
adopting the TDM Regulation the European Commun ities sought the redress of a violation by Korea
of its obligations under the SCM Agreement without having recourse exclusively to, and abiding by,
the rules and procedures of the DSU. 342 According to Korea, the European Communities "imposed
retaliatory measures directed specifically agains t Korea as a weapon to induce compliance with the
European Communities' interpretation of Korea's WTO obligations under the SCM Agreement".343
7.177 In Korea's view, Article 23.1 of the DSU prohib its any form of remedial action of a Member
in response to what that Member considers to be a violation by another Member of its WTO
obligations that does not involve exclusive recourse to the DSU. Korea in terprets Article 23.1 as a
"broad prohibition on unilateralism"
344 and emphasizes that the term "seek redress" is "a broad
formulation clearly intended to capture a wi de range of potential measures and actions". 345
Article 23.1 is a legally binding provision that can be violated in many situations other than those
identified in Article 23.2 of the DSU. 346 Korea rejects the view of the European Communities that

339Appellate Body Report, US - Offset Act (Byrd Amendment), para. 259.
340 The Panel recalls its discussion in section VII.A.4(a) of the conditional preliminary objection raised
by the European Communities.
341 For a more detailed account of the arguments of the parties, see Section IV.C.4.
342 E.g., first submission of Korea, paras. 36-62, 63-67, and 68-71.
344 Response of Korea to Panel Question 26.
346 E.g., response of Korea to Panel Question 18.

Article 23 cannot prohibit measures that do not involve a suspension of concessions or obligations
under a covered agreement. 347 In the latter regard, Korea's use of the terms "countermeasures" and
"retaliation" in relation to the TDM Regulation is me ant to refer to actions other than just suspension
of concessions or obligations.348
7.178 With reference to the discussion of the meaning of "seek the redress of a violation..." in the
Panel Report on US - Certain EC Products , Korea points to a number of factors demonstrating that
the TDM Regulation embodies an "attempt" or "effo rt" by the European Communities to obtain a
"remedy or relief from trouble" which the European Communities perceived to be caused by Korean
illegal subsidies and that the TDM Regulation was also "a reaction" by the European Communities
against another Member because of a perceived vi olation of a WTO obligation "with a view to
remedying the situation". 349 These factors include the fact that the temporal application of the TDM
Regulation is legally dependant upon the WT O dispute settlement case launched by the
European Communities in respect of certain subsid ies allegedly provided by Korea; the terms and
design of the TDM Regulation; various bac kground documents and statements of the
European Commission and statements by its indi vidual members; the relationship of the TDM
Regulation with an investigation conducted by the European Communities under the Community's
Trade Barriers Regulation; the link between the TD M Regulation and the Agreed Minutes; and the
wording of the Regulation that extended the duration of the TDM Regulation.350
7.179 The European Communities submits that, while taken in isolation the term "redress" might
lend itself to a broad interpretation, when viewed in context and in light of the purpose of Article 23,
its drafting history and international public law rules on state responsibility and the suspension of
treaty obligations, it is clear that "the general obligation not to seek redress of a WTO violation
outside the WTO system cannot prohibit measures ot her than retaliatory measures in the form of
suspension of WTO concessions or obligations". 351 Thus the phrase "seek the redress of a
violation..." in Article 23.1 does not apply generally to any kind of reaction by a Member to a measure
of another Member that it considers to be in viol ation with that Member's obligations under the WTO
Agreement. Rather, a "measure seeking redress of a WTO violation must at least identify a particular
WTO violation and suspend concessions or obligati ons with a view to inducing compliance by the
other Member or to re-establish the balance of rights and obligations".352 The European Communities
submits that Article 23.1 of the DSU is entirely procedural in nature. 353 Its first purpose is "to ensure
the exclusivity of WTO jurisdiction over WTO law and the suspension of concessions". 354 T h e
obligation to have recourse to the DSU is an ex clusive jurisdiction clause and requires Members to
have recourse only to WTO dispute settlement as opposed to another international tribunal. 355 The
only other aspect of Article 23.1 is the reaffirmation of the obligation to abide by the rules of the

347 Oral statement of Korea at the fi rst substantive meeting of the Panel with the parties, paras. 40-45;
second submission of Korea, paras. 110-118.
348 Response of Korea to Panel Question 27.
350 E.g., first submission of Korea, paras. 39-62.
351 First submission of the European Communities, para. 129.
352 Response of the European Communities to Panel Question 14.
353 Oral statement of the European Communities at the first substantive meeting of the Panel with the
parties, para. 47.
354 Oral statement of the European Communities at the first substantive meeting of the Panel with the
parties., para. 48.
355 Responses of the European Communities to Panel Questions 16 and 19.

DSU.356 In the view of the European Communities, Article 23.1 cannot prohibit unilateral acts other
than those listed in Article 23.2 of the DSU and acts that are otherwise inconsistent with the DSU.357
7.180 The European Communities also argues that it is difficult to imagine how redress within the
meaning of Article 23.1 of the DSU is being sought in the absence of a determination that a violation
of obligations under the WTO Agreement has occurred, and refers in this respect to its arguments to
rebut Korea's claim that the TDM Regulation contains a determination contrary to Article 23.1 of the
DSU.358
7.181 The European Communities also re jects Korea's claim of a violation of Article 23.1 of the
DSU on more factual grounds. In particular, the European Communities submits that the relationship
between the temporal application of the TDM Regulation and the WTO dispute settlement proceeding
initiated by the European Communities against Kor ea is explained by the need for an objective
criterion to limit the duration of the aid; that th e reference made in the TDM Regulation to injury
caused by "unfair Korean competition" does not refer to WTO-inconsistent subsidies; that the primary
motivation for the adoption of the TDM Regulation was the non-implementation by Korea of its
commitments under the Agreed Minutes; and that Korea has failed to explain how the TDM
Regulation can be effective as a form of remedy or redress.
359
(ii) Arguments of third parties
7.182 China submits that the TDM measures are covered by Article 23.1 of the DSU because they
were adopted by the European Communities to "seek the redress of a violation..." as that phrase has
been interpreted by the Panel in US - Certain EC Products. The criterion to decide whether a measure
falls within the scope of Article 23.1 is whether th e measure is adopted with a "view to remedying the
situation". Thus, Article 23.1 is not limited in scope to measures involving a suspension of
concessions or obligations under the WTO Agreemen t but covers any other remedial action taken
against another Member in response to a violation of the WTO Agreement. 360 China points to the
close relationship of the TDM Regulation with the investigation under the Trade Barriers Regulation;
the temporal linkage between the TDM Regulat ion and the WTO dispute settlement proceeding
initiated by the European Communities against Korea; the fact that the TDM Regulation was adopted
as part of a twin-track strategy and the targeted nature of the TDM measures as factual elements
demonstrating that the TDM measures were taken to "seek the redress of a violation..." within the
meaning of Article 23.1 of the DSU.361
7.183 The United States argues that the European Communities has skipped a step in arguing that
Article 23.1 of the DSU does not prohibit meas ures that are otherwise permitted by the WTO
Agreement. If the European Communities has made a determination in the sense of Article 23.2(a)
outside the framework of the DSU, it would be in br each of Article 23.2(a) and thereby Article 23.1.
There might also be a breach of Article 23.2(c) if the measures taken by the European Communities in
seeking the redress of a violation amounted to a suspension of WTO concessions or other
obligations.362 Thus the suspension of concessions or othe r WTO obligations is not the only form of

356 Oral statement of the European Communities at the first substantive meeting of the Panel with the
parties, paras. 49-50.
357 Second submission of the European Communities, para. 85.
358 Oral statement of the European Communities at the second substantive meeting of the Panel with
the parties, para. 75.
359 E.g., first submission of the European Communities, paras. 144-166.
360 Third party submission of China, paras. 4-8.
361 Third party submission of China, paras. 14-19.
362 Oral statement of the United States at the first substantive meeting of the Panel with the parties,
paras. 2-3.

redress within the meaning of Article 23.1. 363 Article 23.2(a) provides further support that a
determination of a breach of the WTO Agreement can be a method of seeking redress because it does
not require that the determination be accompan ied by any other action or trade consequences. 364 In
response to a question, the United States also submits that Article 23.2 of the DSU nowhere refers to
measures other than a determination or the suspension of concessions or other obligations and that
Article 23.1 only commits Members to have recourse to, and aide by, the rules and procedures of the
DSU, and that it is therefore difficult to see how Article 23.1 applies to measures that are consistent
with the WTO Agreement. 365 The United States considers that Article 60 of the Vienna Convention
on the Law of Treaties and Article 49(2) of the Draft ILC Articles on State responsibility are not
relevant to the question presented to the Panel.366
(b) Evaluation by the Panel
7.184 Article 23.1 of the DSU provides:
"Strengthening of the Multilateral System

1. When Members seek the redress of a violation of obligations or other
nullification or impairment of benefits under the covered agreements or an
impediment to the attainment of any objec tive of the covered agreements, they shall
have recourse to, and abide by, the rules and procedures of this Understanding."
7.185 As noted above, the arguments of the parties as to whether or not the TDM Regulation is
inconsistent with Article 23.1 of the DSU reflect fundamental differences of interpretation of the
scope and nature of the obligations contained in that provision, particularly with regard to the
requirement that Members "have recourse to" the ru les and procedures of the DSU when they "seek
the redress of a violation of obligations..." Whereas Korea asserts that this requirement prohibits any
form of unilateral conduct whereby a Member attempts to remedy a violation by another Member of
its obligations under the WTO Agreement, the Eur opean Communities submits that this requirement
is of a purely procedural nature and cannot prohib it a measure that does not involve the suspension of
concessions or obligations under the WTO Agreement.
7.186 The Panel recalls that it has found that the TDM Regulation is not inconsistent with Articles I
and III of the GATT 1994 and Article 32.1 of the SCM Agreement. Consequently, if the Panel were
to agree with the interpretation of Article 23.1 a dvanced by the European Communities, it would not
be necessary to examine the detailed arguments of the parties regarding specific factual aspects of
Korea's claim. Therefore, the Panel must first in terpret the scope and nature of the requirement in
Article 23.1 of the DSU that Members "have rec ourse" to the DSU when "seeking the redress of a
violation...". In so doing, the Panel must apply customary rules of interpretation of public
international law367, as set out in Articles 31 and 32 of the Vienna Convention on the Law of Treaties
(1969). As expressed in Article 31.1 of that Conventi on, the fundamental rule is that "[a ]treaty shall
be interpreted in good faith in accordance with the or dinary meaning to be given to the terms of the
treaty in their context and in light of its object and purpose".

363 Replies of the United States to the questions from the European Communities and Korea, para.1.
364 Replies of the United States to the questions from the European Communities and Korea, para.2.
365 Replies of the United States to the questions from the European Communities and Korea, para. 4.
366 Oral statement of the United States at the first substantive meeting of the Panel with the parties,
paras. 5-6.
367 Art. 3.2 of the DSU.

(i) Meaning of the requirement to have recourse to the DSU when Members seek the redress of a
 violation
7.187 The obligation in Article 23.1 to have recour se to (and abide by) the rules and procedures of
the DSU applies "when Members seek the redress of a violation of obligations or other nullification or
impairment of benefits under the covered agreements or an impedi ment to the attainment of any
objective of the covered agreements". 368, 369 Thus, an essential element in the interpretation of the
scope of this obligation is the meaning of "seek the redress of a violation..."
7.188 The phrase "seek the redress of a violation ..." implies that one necessary condition of the
application of Article 23.1 of the DSU is that a Me mber acts in response to what it considers to be
conduct of another Member that is in violation of that Member's obligations. In the words of the
Panel in US - Section 301 Trade Act , a decision by a Member to "seek the redress of a violation..."
means that "in its preliminary view, there may be a WTO inconsistency". 370 The Panel in US -
Certain EC Products referred to this aspect of "seek the redress of a violation..." as action "because of
a perceived (or WTO determined) WTO violation" a nd "action in response to what [a WTO Member]
views as a WTO violation".371 We agree with this approach.
7.189 With regard to the meaning of "seek the redress of a violation", the Panel notes the definition
of "redress" in the New Shorter Oxford English Dictionary:
"1. Reparation of or compensation for a wrong or consequent loss. 2(a). Remedy for
or relief from some trouble; assistance, aid, help. (b) (obsolete) Correction or
reformation of something wrong. 3(a) A means of redress; an amendment, an
improvement. (b) (obsolete) A person who or thing which affords redress. 4. The
act of redressing; correction or amendment of a thing, state, etc."
372
The fact that "redress" can mean "reparation of" or "compensation for" a wrong or consequent loss but
also "remedy for" or "relief from" some trouble sugg ests that "the redress of a violation..." within the
meaning of Article 23.1 of the DSU can take variou s forms. One obvious modality of "redress" of a
violation that a Member will "seek" is action by anot her Member to bring itself into conformity with

368 Hereinafter, we shall use "seek the redress of a violation..." to refer to these three causes of action.
369 We note that Part III of the SCM Agreement contains specific provisions that apply when a Member
considers that another Member causes adverse effects to its interests by using a subsidy within the meaning of
Article 1 of the SCM Agreement. These provisions on "actionable" subsidies in effect define causes of action in
terms that differ in part from those of Article 23.1 of the DSU. In the Panel's view , however, Article 23.1 also
applies to instances in which a Member seeks to redre ss conduct that is WTO–inconsistent within the meaning
of Part III of the SCM Agreement. To hold otherwise would yield an absurd result. It would mean, for
example, that while a Member is required to have re course to the DSU when its seeks the redress of a non-
violation nullification or impairment of benefits, it would not be required to have recourse to the DSU when it
seeks the redress of serious prejudice caused by a subsidy of another Member.
370 Panel Report, US - Section 301 Trade Act, para. 7.50, footnote 657.
371 Panel Report, US - Certain EC Products, paras. 6.22 and 6.23.
372 The Panel also notes that the Panel in US - Certain EC Products interpreted the phrase "seek the
redress ..." as follows:
"The term 'seeking' or 'to seek' is defined in the Webster New Encyclopedic Dictionary as: 'to
resort to, … to make an attempt, try'. This term would therefore cover situations where an
effort is made to redress WTO violations (wheth er perceived or WTO determined violations).
The term 'to redress' is defined in the New Shorter Oxford English Dictionary as 'repair (an
action); atone for (a misdeed); remedy or remove ; to set right or rectify (injury, a wrong, a
grievance etc.); obtaining reparation or compensation'. The term 'redress' is defined in the
New Shorter Oxford English Dictionary as: 'reparation of or compensation for a wrong or
consequent loss; remedy for or relief from some trouble; correction or reformation of
something wrong'. Panel Report, US - Certain EC Products, para. 6.22.

its obligations by removing a WTO-inconsistent measure, but "redress" includes other possible
"remedies", such as compensation or suspension of concessions or obligations. Therefore, to "seek
the redress of a violation..." may include but is not limited to a suspension of concessions or
obligations.373 As observed by the Panel in US - Certain EC Products, the phrase "seek the redress of
a violation..." in the context of Article 23.1 of the DSU can be defined rather broadly as a "reaction
against another Member, because of a perceived (or WTO determined) WTO violation, with a view to
remedying the situation".374
7.190 In interpreting the phrase "seek the redress of a vi olation...", the Panel must also take into
account as one relevant contextual element the fact that this phrase appears in a clause contained in an
article designed explicitly with a view to "stre ngthening the multilateral system". These words must
therefore be given a meaning consistent with that stated objective. Another relevant element of the
context of the phrase "seek the redress of a viola tion..." in Article 23.1 is that the DSU clearly
provides for different types of "remedy". In the Pane l's view, an interpretation of Article 23.1 in light
of the objective of Article 23 and its context in the DSU suggests that it must apply to any act
whereby a Member seeks to obtain unilaterally results that can be achieved via the remedies of the
DSU through means other than recourse to the DSU. 375 If Members were free to attempt to seek the
redress of a violation by trying to achieve unilatera lly what could be obtained through the DSU, it is
difficult to see how the obligation to have recourse to the DSU could contribute to the "strengthening
of the multilateral system".
7.191 In this regard, the Panel considers that the obligation "to have recourse" to the DSU is
necessarily of an exclusive character. The Panel finds confirmation of its view on this exclusive
character of Article 23.1 in the statement made by the Appellate Body in US - Certain EC Products:
"Article 23.1 of the DSU imposes a ge neral obligation on Members to redress a
violation of obligations or other nullifica tion or impairment of benefits under the
covered agreements only by recourse to the rules and procedures of the DSU, and not
through unilateral action. Subparagraphs (a ), (b) and (c) of Article 23.2 articulate
specific and clearly-defined forms of pr ohibited unilateral action contrary to
Article 23.1 of the DSU. There is a close relationship between the obligations set out
in paragraphs 1 and 2 of Article 23. They all concern the obligation of Members of
the WTO not to have recourse to unilateral action. (...) ."
376
The fact that Article 23.1 contains a general obligation to have recourse to the DSU, instead of acting
unilaterally to "seek the redress of a violation" , and that Articles 23.2(a)-(c) are "specific... forms of

373The Panel also notes the argument of the United States that for Members who are not in a position to
suspend concessions effectively or have recourse to other modes of redress, the main form of redress or
assistance available is a finding that another Me mber's measure is inconsistent with the WTO
Agreement. See replies of the United States to the Questions from the European Communities and
Korea, para.1.
374 Panel Report, US - Certain EC Products, para. 6.22.
375 This does not preclude Members from engaging in informal consultations or reaching mutually
agreed solutions.
 376 Appellate Body Report, US - Certain EC Products, para. 111. The Panel also notes that the Panel in
US - Certain EC Products discussed Article 23.1 of the DSU as follows:
"An important reason why Article 23 of the DSU must be interpreted with a view to
prohibiting any form of unilateral action is b ecause such unilateral actions threaten the
stability and predictability of the multilateral trade system, a necessary component for 'market
conditions conducive to individual economic activity in national and global markets' which, in
themselves, constitute a fundamental goal of th e WTO. Unilateral acti ons are, therefore,
contrary to the essence of the multilateral trade system of the WTO." Panel Report, US -
Certain EC Products, para. 6.14 (footnote omitted).

prohibited unilateral action contrary to Article 23.1" indicates that Article 23.1 constitutes an
independent obligation not limited in scope to the particular instances of unilateral conduct identified
in Article 23.2.
7.192 We note that the Panel Reports in US - Section 301 Trade Act and US - Certain EC Products
express a similar view on the nature and scope of Ar ticle 23.1 as an independent obligation. Thus, for
example, the Panel Report in US - Section 301 Trade Act states inter alia that:
"There is a great deal more State conduct which can violate the general obligation in
Article 23.1 to have recourse to, and abid e by, the rules and procedures of the DSU
than the instances especially singled out in Article 23.2."377
The Panel in US - Certain EC Products considered that:
"The structure of Article 23 is that the firs t paragraph states the general prohibition or
general obligation, i.e. when Members seek the redress of a WTO violation, they
shall do so only through the DSU. This is a general obligation. Any attempt to seek
'redress' can take place only in the institu tional framework of the WTO and pursuant
to the rules and procedures of the DSU.
The prohibition against unilateral redress in the WTO sectors is more directly
provided for in the second paragraph of Article 23. From the ordinary meaning of the
terms used in the chapeau of Article 23.2 (" in such cases, Members shall"), it is also
clear that the second paragraph of Article 23 is 'explicitly linked to, and has to be read
together with and subject to, Article 23.1'. That is to say, the specific prohibitions of
paragraph 2 of Article 23 have to be understood in the context of the first paragraph,
i.e. when such action is performed by a WTO Member with a view to redressing a
WTO violation.
We also agree with the US – Section 301 Panel Report that Article 23.2 contains
'egregious examples of conduct that cont radict the rules of the DSU' and which
constitute more specific forms of unilateral actions, otherwise generally prohibited by
Article 23.1 of the DSU."378
7.193 It follows from this conception of Article 23.1 as a general obligation no t to act unilaterally
when seeking redress of a violation of an obliga tion under the WTO that the requirement to have
recourse to the DSU is not limited to an "exclusive jurisdiction clause", in the sense in which that
expression is used by the European Communities. Interpreted in light of its context and purpose,
Article 23.1 not only ensures the exclusivity of the WTO vis-à-vis other international fora but also
protects the multilateral system from unilateral conduct.
7.194 We note in this respect that the European Co mmunities refers to the notion of "exclusive
dispute resolution clause" in the Panel Report in US - Section 301 Trade Act as support for its
interpretation of Article 23.1 as simply an "exclusive jurisdiction clause". The relevant paragraph of
that Report reads as follows:
"Article 23.1 is not concerned only with specifi c instances of violation. It prescribes
a general duty of a dual nature . First, it imposes on all Members to 'have recourse to'
the multilateral process set out in the DS U when they seek the redress of a WTO
inconsistency. In these circumstances, Members have to have recourse to the DSU

377 Panel Report, US – Section 301 Trade Act, para. 7.45 (footnotes omitted).
378 Panel Report, US - Certain EC Products, paras. 6.17-6.19 (footnotes omitted).

dispute settlement system to the exclusion of any other system, in particular a system
of unilateral enforcement of WTO rights and obligations . This, what one could call
'exclusive dispute resolution clause', is an important new element of Members' rights
and obligations under the DSU."
 379
Thus it is clear from the context that the Panel used the term "exclusive dispute resolution clause" to
refer in particular to the prohibition of "unilateral enforcement of WTO rights and obligations".
7.195 To summarize, based on an interpretation of Artic le 23.1 in light of the ordinary meaning of
its terms and in light of its context and object and purpose, and having regard to the reasoning of the
Appellate Body and panels in pr evious disputes concerning Artic le 23, we consider that the
requirement "to have recourse to" the DSU when Me mbers "seek the redress of a violation..." is
broader in scope than suggested by the expressi on "exclusive jurisdiction clause" used by the
European Communities. This requirement is viol ated not only when Members submit a dispute
concerning rights and obligations under the WTO Ag reement to an international dispute settlement
body outside the WTO framework but also when Members act unilaterally to seek to obtain the results
that can be achieved through the remedies of the DSU. As a consequence, we reject the view of the
European Communities that Article 23.1 of the DS U cannot prohibit acts other than those that are
inconsistent with Article 23.2 or with other DSU rules.
7.196 As discussed above, the Panel considers that Ar ticle 23.1 must be interpreted to mean that
Members may not seek to obtain results that can be achieved through the remedies of the DSU by
means other than recourse to the DSU. The Panel in US - Certain EC-Products observed that the
"remedial actions" envisaged in the WTO system:
"relate to restoring the balance of rights a nd obligations which form the basis of the
WTO Agreement, and include the removal of the inconsistent measure, the possibility
of (temporary) compensation and, in the l ast resort, the (temporary) suspension of
concessions or other obligations authorised by the DSB (Articles 3.7 and 22.1 of the
DSU). The latter remedy is essentially retaliatory in nature".380
This statement is consistent with our view of what "seek the redress of a violation" means. Therefore,
the phrase "seek the redress of a violation..." covers any act of a Member in response to what it
considers to be a violation of a WTO obligation by another Member whereby the first Member
attempts to restore the balance of rights and obligations by seeking the removal of the WTO-
inconsistent measure, by seeking compensation from the other Member, or by suspending concessions
or obligations under the WTO Agreement in relati on to that Member. In the case of actionable
subsidies, seeking the removal of the WTO-inconsis tent measure includes seeking the removal by the
subsidizing Member of the adverse effects of the subsidy. In our view, any unilateral attempt to
obtain these results would be a violation of Article 23.1 of the DSU.
7.197 In the Panel's view, however, the concept of "seeking the redress of a violation" does not
encompass the situation where a Member takes actions to compensate or attenuate the harm caused to
actors within the aggrieved Member as a result of the allegedly WTO-cons istent action, provided
those actions are not designed to influence the conduct of the Member taking the allegedly WTO-
inconsistent action, as outlined in the preceding pa ragraph. Thus, for example, trade adjustment
assistance provided to help companies or workers affected by an allegedly WTO-inconsistent
quantitative restriction to shift into other economic activities may be a response to WTO-inconsistent
behaviour but would not constitute "seeking redress". This type of palliative action might address the

379 Panel Report, US - Section 301 Trade Act, para. 7.43 (emphasis added).
380 Panel Report, US - Certain EC Products, para. 6.23.

harm caused to particular actors within a WTO Me mber by an alleged WTO violation but it is not
designed to restore the balance of rights and obligations between Members.
7.198 We have rejected the argument of the Eur opean Communities that, to the extent that
Article 23.1 is an independent obligation, it is simp ly an "exclusive jurisdiction clause". Another key
argument of the European Communities is that th e relationship between Ar ticles 23.1 and 23.2 and
between Articles 23.2(a) and (c) of the DSU provi des contextual support for an interpretation of
Article 23.1 according to which acts not involvi ng a suspension of WTO concessions or other
obligations cannot be covered by the phrase "seek th e redress of a violation..." in Article 23.1 of the
DSU.381 The European Communities refers in par ticular to the close textual link between
Articles 23.1 and 23.2 of the DSU and cites the view of the Panel in US - Certain EC Products that
the term "determination" in Article 23.2(a) must "bear consequences in WTO trade relations". The
European Communities infers from this that a dete rmination within the meaning of Article 23.2(a)
must lead to the suspension of concessions or obligat ions within the meaning of Article 23.2(c) of the
DSU and that "this confirms contextually that th e general obligation not to seek redress of a WTO
violation outside the WTO system cannot prohibit measures other than reta liatory measures in the
form of suspension of WTO concessions or obligations".
382
7.199 Article 23.2 sets forth three more specific oblig ations that apply when a Member "seek[s] the
redress of a violation...":
"2. In such cases, Members shall:
(a) not make a determination to the effect that a violation has occurred, that
benefits have been nullified or impaired or that the attainment of any objective of the
covered agreements has been impeded, ex cept through recourse to dispute settlement
in accordance with the rules and procedur es of this Understanding, and shall make
any such determination consistent with the findings contained in the panel or
Appellate Body report adopted by the DS B or an arbitration award rendered under
this Understanding;
(b) follow the procedures set forth in Article 21 to determine the reasonable
period of time for the Member concerne d to implement the recommendations and
rulings; and
(c) follow the procedures set forth in Article 22 to determine the level of
suspension of concessions or other obligations and obtain DSB authorization in
accordance with those procedures before suspending concessions or other obligations
under the covered agreements in response to the failure of the Member concerned to
implement the recommendations and rulings within that reasonable period of time."
7.200 In the Panel's view, the close connection betw een the two paragraphs of Article 23 means
that, as stated by the Appellate Body in US - Certain EC Products, "[s]ubparagraphs (a), (b) and (c) of
Article 23.2 articulate specific and clearly-defined forms of prohibited unilateral action contrary to
Article 23.1" and that there is a "close relationship between paragraphs 1 and 2 of Article 23 in that
they all concern the obligation of Members of the WTO not to have recourse to unilateral action".
383
The Panel is not persuaded, however, by the ar gument of the European Communities that the

381 See in particular first submission of the European Communities, paras. 122-129.
382 First submission of the European Communities, paras. 123-129.
383Appellate Body Report, US – Certain EC Products , para. 111. The need to read Article 23.2
together with Article 23.1 was also highlighted by the Panel Report in US - Section 301 Trade Act , paras. 7.44-
7.45.

relationship between Articles 23.1 and 23.2 mean s that acts not amounting to a suspension of
obligations or concessions are not covered by the phrase "seek the redress of a violation" in
Article 23.1, for the very reason that the Panel is not persuaded that a determination within the
meaning of Article 23.2(a) must be linked to a su spension of concessions or other obligations within
the meaning of Article 23.2(c). The wording of Article 23.2(a) does not support an interpretation
according to which a unilateral determination that a nother Member has violated obligations under the
WTO Agreement is only inconsistent with this provision if such a dete rmination is made in
connection with the application of a measure involving a suspension of concessions or other
obligations under the WTO Agreement. If, as argue d by the European Communities, Article 23.2(a)
only covers determinations made for the purpose of suspending concessions or obligations under
Article 23.2(c), the drafters of the DSU could easily have used a formulation to express that linkage.
The fact that unilateral determinations are covere d by a separate clause, without an explicit textual
linkage to Article 23.2 (c), as part of an article aimed at "strengthening the multilateral system"
suggests that such determinations by themselves we re viewed by the drafters as contrary to the
multilateral system.
7.201 The Panel notes, in this regard, that the Panel Report in US - Certain EC Products, referred to
by the European Communities as support for the pro position that a determination within the meaning
of Article 23.2(a) must be linked to a suspension of concessions or obligati ons, offers no explanation
for its view that a determination under Article 23.2(a) must "bear consequences in WTO trade
relations".384 Moreover, the Panel did not elaborate on the meaning of "consequences in WTO trade
relations". In any event, the Panel did not expr essly link this notion of "consequences in WTO trade
relations" to the suspension of concessions or obliga tions under Article 23.2(c) of the DSU, and its
finding of a violation of Article 23.2(a) was not dependent upon a finding of a violation of
Article 23.2(c). Thus, it is not at all clear that "c onsequences in trade relations" as used in that report
necessarily refers to a suspension of concessions or other obligations under the WTO Agreement.
The fact that the Panel in US - Certain EC Products found that the United States acted inconsistently
with Article 23.2(a) by making a unilateral determ ination and did not base this finding on the link
between this unilateral determination and a suspen sion of concessions in ou r view confirms that
Article 23.1 can prohibit acts that do not involve a suspension of concessions or obligations. The
Panel further notes that the Appellate Body reversed the finding of that Panel under Article 23.2(a) of
the DSU on procedural grounds.385
7.202 Finally, the Panel also notes that the earlier Panel Report in US - Section 301 Trade Act does
not make any mention of the idea of "consequences in WTO trade relations" or of similar notions in
its discussion of the meaning of "determination" in Article 23.2(a) of the DSU. 386 The Panel notes the

384 Panel Report, US - Certain EC Products, para. 6.98.
385 Appellate Body Report, US - Certain EC Products, paras. 107-115.
386 Panel Report, US - Section 301 Trade Act, para. 7.50, footnote 657:
"(...) Both parties also agree that determinations under Section 304 meet the second of the four
elements, a determination in the sense of Article 23.2(a). We agree. Some of the relevant
dictionary meanings of the word "determination" in the context of Article 23.2(a) are: 'the
settlement of a suit or controversy by the authoritative decision of a judge or arbiter; a
settlement or decision so made, an authoritative opinion … the action of coming to a decision;
the result of this; a fixed intention' ( The New Shorter Oxford English Dictionary , Ed. Brown,
L., Clarendon Press, Oxford, Vol. 1, p. 651). Without there being a need precisely to define
what a 'determination' in the sense of Article 23.2(a) is, we consider that – given its ordinary
meaning – a 'determination' implies a high degree of firmness or immutability, i.e. a more or
less final decision by a Member in respect of the WTO consistency of a measure taken by
another Member.
Given that Article 23.2(a) only deals with 'determinations' in case a Member is seeking redress
of WTO inconsistencies, we are of the vi ew that a 'determination' can only occur subsequent
to a Member having decided that, in its prelim inary view, there may be a WTO inconsistency,

argument of the European Communities that "the decision of the Panel in US - Section 301 Trade Act
was based on the understanding th at a determination of WTO inc onsistency under section 304 (b) is
inextricably linked to a suspension of rights and concessions, i.e. a decision that may have legal
effects on the balance of rights and obligations". 387 Assuming that this is factually correct, the fact
remains, however, that while the Panel Report in US - Section 301 Trade Act contains a careful
analysis of the meaning of the word "determinati on" in Article 23.2 (a) and of the conditions under
which determinations under Secti on 304 would be inconsistent with Article 23.2, that analysis
nowhere relates the term "determination" within th e meaning of Article 23.2(a) to the suspension of
concessions or obligations under Article 23.2(c). 388 In fact, the Panel in US - Section 301 Trade Act
made a preliminary conclusion that Section 304 vi olated Article 23.2(a) simply because it mandated a
determination, potentially of WTO inco nsistency, prior to any DSB action. 389 An examination of the
US statute390 indicates that a determination under Section 304 could, but does not necessarily, lead to
the suspension of WTO concessions or obligations. In some cases, following such a determination,
the USTR has discretion as to whether to take acti on at all (Section 301(b)) and even in those cases
where action is normally mandated (Section 301(a)), there are exceptions (see Section 301(a)(2)(B)).
The list of potential actions that the USTR is author ized to take includes acti ons that do not involve
suspension of WTO concessions or obligations (see Section 301(c)). Moreover, the potential actions
are defined as including those “that are within the po wer of the President with respect to trade in any
goods and services, or with respect to any other area of p ertinent relations with the foreign country ”
(Section 301(a)(1) & 301(b)(2)). Thus, the US - Section 301 Trade Act Panel Report stands for the
proposition that there may be a violation of Article 23.2(a) independently of Article 23.2(c).
7.203 Therefore, the Panel considers that a determinati on can be inconsistent with Article 23.2(a) of
the DSU regardless of whether and how that de termination is connected to a suspension of
concessions or other obligations unde r Article 23.2(c). This confirms that a violation of Article 23.1
does not require a suspension of concessions or oblig ations. Thus, although Article 23.2 is part of the
context for the interpretation of Article 23.1, Ar ticles 23.2(a) and (c) of the DSU do not provide
contextual support for the view of the European Communities that the obligation in Article 23.1 of the
DSU to have recourse to the DSU cannot prohibit acts not involving a suspension of WTO
concessions or other obligations.
7.204 The European Communities also ass erts that the purpose Article 23 of the DSU is to set out a
lex specialis in relation to public international law rules on the suspension of the operation of a treaty,
particularly Article 60 of the Vie nna Convention on the Law of Treaties
391, and that Article 23 should

i.e. only once that Member has decided to seek redress of such inconsistency. Mere opinions
or views expressed before that stage is r eached, are not intended to be covered by
Article 23.2(a). However, once a Member does bring a case under the DSU, in particular once
it requests the establishment of a panel, one can assume that this preliminary stage has been
passed and the threshold of a 'determination' met. Such reading of the term 'determination' is
confirmed by the exception provided for 'determinations' made 'through recourse to dispute
settlement in accordance with' the DSU, an exception th at explicitly allows for the
'determination' implicit in pursuing a case before a panel. In any event, what is decisive under
Article 23.2(a) is not so much whether an act constitutes a 'determination' – in our view, a
more or less formal requirement that needs broad reading -- but whether it is consistent with
DSU rules and procedures, the fourth element discussed below."
387 Response of the European Communities to Panel Question 20.
388 Panel Report, US - Section 301 Trade Act, para. 7.50, footnote 657.
389 Panel Report, US - Section 301 Trade Act, para. 7.96.
390 Panel Report, US - Section 301 Trade Act, Annex I.
391 Article 60 provides:
"Termination or suspension of the operation of a treaty as a consequence of its breach

be interpreted in light of that provision. 392 In the view of the Europ ean Communities, the purpose of
Article 23 was to prevent the unilate ral resort to "countermeasures" as that term is used in public
international law on state responsibility, i.e. measure s that would otherwise be incompatible with a
State's international obligations, as distinguished from acts of retorsion. 393 T h e
European Communities asserts that the Panel Report in US - Certain EC Products confirms its view
that Article 23 of the DSU is a more specific rule to the international regime governing the suspension
of concessions under Article 60 of the Vienna Convention and countermeasures, reprisals and
retaliatory acts.394
7.205 The Panel recalls that it has concluded, based on an interpretation of Article 23.1 of the DSU
in accordance with the ordinary meaning of its te rms and in light of the object and purpose of the
provision, that measures not involving a suspension of WTO concessions or other obligations are not
excluded from its scope. While the Panel realizes that in a number of WTO dispute settlement and
arbitration cases reference has been made to the p ublic international law concepts invoked by the
European Communities395, the Panel can see no basis for using these concepts to read into Article 23.1

 1. A material breach of a bilateral treat y by one of the parties entitles the other to
invoke the breach as a ground for terminating the treaty or suspending its operation in whole
or in part.
 2. A material breach of a multilateral treaty by one of the parties entitles:
(a) the other parties by unanimous agreement to suspend the operation of the treaty in
whole or in part or to terminate it either:
 (i) in the relations between themselves and the defaulting State, or
 (ii) as between all the parties;
(b) a party specially affected by the breach to invoke it as a ground for suspending
the operation of the treaty in whole or in part in the relations between itself and the
defaulting State;
(c) any party other than the defaulting State to invoke the breach as a ground for
suspending the operation of the treaty in whole or in part with respect to itself if the
treaty is of such a character that a mate rial breach of its provisions by one party
radically changes the position of every part y with respect to the further performance
of its obligations under the treaty.
 3. A material breach of a treaty, for the purposes of this article, consists in:
 (a) a repudiation of the treaty not sanctioned by the present Convention; or
(b) the violation of a provision essential to the accomplishment of the object or
purpose of the treaty.
4. The foregoing paragraphs are without prejudice to any provision in the treaty
applicable in the event of a breach.
5. Paragraphs 1 to 3 do not apply to provisions relating to the protection of the
human person contained in treaties of a humanitarian character, in particular to
provisions prohibiting any form of reprisals against persons protected by such
treaties."
392 First submission of the European Communities, paras. 132-133; second submission of the
European Communities, para. 151.
393 First submission of the European Communities., paras. 134-136; oral statement of the
European Communities at the first substantive meeting of the Panel with the parties, paras. 58-63; response of
the European Communities to Panel Question 27; second submission of the European Communities, paras. 153-
159.
394 Second submission of the European Communities, para. 154.
395 Thus, for example, the Appellate Body has referred to "the rules of general international law on state
responsibility, which require that coun termeasures in response to breaches by states of their international
obligations be commensurate with the inju ry suffered". Appellate Body Report, US - Cotton Yarn , para. 120.
See also Appellate Body Report, US - Line Pipe , para. 259. The concept of co untermeasures as used in the
international law on state responsib ility has also been referred to in US - FSC (Article 22.6-US) , paras. 5.58-
5.60; Brazil - Aircraft (Article 22.6-Brazil), para. 3.44 and EC - Bananas III (US) (Article 22.6-EC), para. 6.16.

a limitation that is unsupported by an interpre tation based on its text, context and object and
purpose.396
7.206 The Panel notes that in response to a question by the Panel, the European Communities refers
to Article 3.2 of the DSU as support for its pos ition on the scope of Article 23.1 of the DSU. 397
However, the assertion that the DSU protects the stab ility and predictability of the multilateral trading
system and that the multilateral trading system is composed of the rights and obligations of Members
under the WTO Agreement begs the question of what those rights and obligations are. We note in this
respect that it is clear from Article 1 of the DSU th at the DSU not only protects rights and obligations
under a covered agreement but also applies to di sputes concerning rights and obligations under the
DSU. Thus, Article 3.2 is not directly relevant to the particular question of interpretation before us,
i.e. whether WTO Members have assumed an obliga tion under Article 23.1 to refrain from acts that
are not otherwise inconsistent with their obligations under the WTO Agreement. We consider in this
respect that the argument of the European Co mmunities based on Article 3.2 involves circular
reasoning. The same applies to the reference made by the European Communities to other WTO
provisions, (Article II of the WTO Agreement and Articles 3.3, 3.7 and 4.2 of the DSU 398) as support
for its position that the DSU "only protects Memb ers from measures that offset the rights and
obligations in the WTO Agreement".399
7.207 In sum, the Panel considers, based on an in terpretation of Article 23.1 of the DSU in
accordance with the ordinary meaning of its terms in their context and in light of the object and
purpose of the provision, that the obligation to ha ve recourse to the DSU when Members "seek the
redress of a violation..." covers any act of a Member in response to what it considers to be a violation
of a WTO obligation by another Member whereby that first Member attempts unilaterally to restore
the balance of rights and obligations by seeking the removal of the WTO-inconsistent measure, by
seeking compensation from that Member, or by su spending concessions or obligations under the
WTO Agreement in relation to that Member.
(ii) Whether by adopting the TDM Regulation the Eu ropean Communities acted in violation of
Article 23.1 of the DSU by unilaterally seeki ng the redress of a violation without having
recourse to the DSU.
7.208 In light of its conclusion above, the Panel mu st now proceed to a factual assessment to
determine, in light of its interpretation of Ar ticle 23.1, whether the European Communities, by
adopting the TDM Regulation, sought the redress of a violation by Korea of its obligations under the
WTO Agreement without having recourse to the DSU. This means that the Panel must determine
whether the European Communities acted in response to what it considered to be a violation of WTO
obligations by Korea, and, if so, whether the Eu ropean Communities sought redress of that violation
by unilaterally attempting to restore the balance of rights and obligations by seeking the removal by
Korea of the WTO-inconsistent measure or of the ad verse effects of the alleged Korean subsidization,
by seeking compensation from Korea, or by suspending concessions or obligations under the WTO
Agreement in respect of Korea. In this case, th e precise issue is whether the European Communities
sought redress of a perceived WTO violation by ta king unilateral action to obtain the removal by
Korea of the allegedly WTO-inconsistent measures (o r their effects). We first consider whether the
European Communities acted in response to what it considered to be a violation by Korea of its WTO

396We also note that the Panel in US - Certain EC Products stated that because of the more specific
provision of Article 23, Article 60 of the Vienna Conven tion "does not apply" in the WTO context, but that the
Panel did not state that the coverage of Article 23 of the DSU is confined to that of Article 60. Panel Report, US
- Certain EC Products, para. 6.133.
397 Response of the European Communities to Panel Question 23, paras. 47-48.
398 Response of the European Communities to Panel Question 23, paras. 49-53.
399 Response of the European Communities to Panel Question 23, para. 52.

obligations. We then consider whether the European Communities act ed unilaterally to obtain the
removal by Korea of the measures at issue.
Did the European Communities act in response to what it considered to be a violation by Korea of its
obligations under the WTO Agreement?
7.209 In considering whether the European Commun ities’ adoption of the TDM Regulation was in
response to what it considered to be a violation by Korea of its WTO obligations, the Panel recalls
that it has already discussed a cl osely related issue at length. In paragraphs 7.114-7.143 we
considered the relationship of the TDM Regulation to Korean subsidization and found that the TDM
Regulation had a close correlation and inextricable link to the constituent elements of subsidization, in
large part because of the use in the Regulation an d related materials of terms taken from the SCM
Agreement’s provisions disciplining the use of subs idies. Thus, much of our discussion in those
paragraphs is relevant to the question of whether the European Communities acted in response to a
perceived violation by Korea of the WTO Agreement a nd we incorporate it into this section, and, in
addition, highlight the following points.
7.210 On its face, the TDM Regulation does not indicate that it is designed as a response to a
violation by Korea of its obligations under the WTO Agreement. Accord ing to Korea, the TDM
Regulation was based on an allegation that Korea had violated its obligations under Articles 3, 5 and 6
of the SCM Agreement. Neither the introducto ry section nor the operative part of the TDM
Regulation contains an explicit statement that Kor ea has acted inconsistently with its obligations
under the SCM Agreement. Nevertheless, the Pane l considers that the TDM Regulation reflects an
allegation of WTO-inconsistent conduct.
7.211 The TDM Regulation uses terminology that is intimately connected with the provisions of
Articles 5 and 6 of the SCM Agreement. The th ird Recital observes that a temporary defensive
mechanism should be authorized for limited market segments and for a short and limited period only,
"as an exceptional and temporary measure, and in order to assist Community shipyards in those
segments that have suffered adverse effects in the form of material injury and serious prejudice caused
by unfair Korean competition". Article 2(2) a llows for the extension of the Regulation to LNG
carriers if the Commission gives notice that it conf irms that "[the] Community industry has suffered
material injury and serious prejudice in this mark et segment caused by unfair Korean practices". The
Regulation was proposed by the Commission when an investigation under the Trade Barriers
Regulation had produced evidence that subsidies granted by Korea were causing adverse effects
within the meaning of the SCM Agreement to certain segments of the Community shipbuilding
industry. We note that in explaining the background to the proposed TDM mechanism, the
European Commission stated in July 2001 that th is proposal "follows a Commission investigation
which found evidence of substantial subsidies th at are incompatible with the WTO rules". 400 When
the Commission issued its first report on the results of this investigation, it stated publicly that
"substantial subsidies have been granted to Ko rean shipyards through both export and domestic
programmes which contravene the WTO's 1994 Subsidies Agreement." 401 These factors demonstrate
a clear factual link between the adoption of the TDM Regulation and the findings of WTO-

400 IP/01/1078, 25 July 2001, Exhibit Korea 9. We acknowledge of course that the TDM Regulation
was adopted by the Council not by the Commission but consider nevertheless that in view of the role of the
Commission in initiating this legislation it is not inappropri ate to accord some evidentiary weight to these press
releases to reinforce a conclusion derived from an analysis of the text of the Regulation. We note that the Panel
in US - Certain EC Products relied inter alia on a USTR press release and statements of a deputy USTR at a
press conference as evidence in sup port of its finding that the United States was "seeking the redress of a
violation..." Panel Report, US - Certain EC Products, paras. 6.25 and 6.31.
401 IP/01/656, 8 May 2001, Exhibit Korea 8.

inconsistent conduct by Korea. In the Panel's view, the application of Article 23.1 of the DSU is not
limited to cases involving an explicit allegation of WTO-inconsistent conduct.
7.212 The Panel recalls its observation above that when a Member seeks "the redress of a
violation..." it has necessarily arrived at a "preliminary view" that a violation has occurred. The Panel
agrees with the remark of the Panel in US - Section 301 Trade Act that such a preliminary view is
distinct from a "determination" within th e meaning of Article 23.2(a) of the DSU. 402 The evidence
before us indicates that the TDM Regulation was b ased on factual findings that clearly amounted to at
least a "preliminary view" that Korea had commi tted breaches of its obligations under the SCM
Agreement. It is not necessary to ascertain whethe r or not these findings, as contained in the reports
submitted by the European Commission to the Advi sory Committee, qualify as determinations within
the meaning of Article 23.2(a) of the DSU.
7.213 The Panel also notes that the TDM Regulation is specifically directed against Korea.
Article 2(1) of the Regulation provides that:
"Subject to paragraphs 2 to 6, direct aid in support of contracts for the building of
container ships, product and chemical ta nkers as well as LNG carriers shall be
considered compatible with the common ma rket when there has been competition for
the contract from a Korean shipyard offering a lower price."
The possibility to provide contract-related operating ai d is confined to precisely those segments of the
Community shipbuilding industry found by the Eu ropean Communities to have suffered adverse
effects of "unfair Korean competition" or "unfair Korean practices" and such aid may be provided
only in cases where there has been compe tition for a particular contract from a Korean shipyard
offering a lower price. The temporal applicati on of the TDM Regulation depends upon the initiation
and resolution or suspension of a WTO dis pute settlement proceeding brought by the
European Communities against Korea. The focus on Korea is also evident in that the introductory
Recitals motivate the adoption of the Regulation by referring to Korea's alleged non-implementation
of the Agreed Minutes relating to world shipbuilding and to the adverse effects on certain segments of
the Community shipbuilding industry caused by "unfair Korean competition" or "unfair Korean
practices". The fact that the Regulation sing les out Korea in its manner of operation and its
motivation demonstrates that the Regulation is "a reaction by a Member against another Member".
7.214 In light of these considerations, the Panel is satisfied that by adopting the TDM Regulation
the European Communities acted in re sponse to what it considered to be a violation by Korea of its
obligations under the WTO Agreement.
Did the European Communities seek to restore the balance of rights and obligations?
7.215 With regard to whether the TDM Regul ation is a unilateral act whereby the
European Communities sought to restore the WTO balance of rights and obligations by seeking
removal of Korea's allegedly WTO-inconsistent me asure (or its effects), the Panel considers the
following factors particularly relevant.
7.216 A key element of the design and structure of the TDM Regulation is that its application is
explicitly limited to contracts signed during a period determined by the initiation and resolution or
suspension of a WTO dispute settlement proceeding against Korea. This is stipulated in Article 4:
"The Regulation shall be applied to final c ontracts signed from the entry into force of
this Regulation until its expiry, with the ex ception of final contracts signed before the

402 Panel Report, US - Section 301 Trade Act, para. 7.50, footnote 657.

Community gives notice in the Official Journal of the European Communities that it
has initiated dispute settlement proceedings against Korea by requesting consultations
in accordance with the World Trade Orga nisation’s Understanding on the Rules and
Procedures for the Settlement of Disputes and final contracts signed one month or
more after the Commission gives notice in the Official Journal of the
European Communities that these dispute settlement proceedings are resolved, or
suspended on the grounds that the Commun ity considers that the Agreed Minutes
have been effectively implemented."
The fact that once the WTO dispute settlement cas e is resolved or susp ended the TDM mechanism
ceases to apply suggests that this mechanism serves to seek the same type of redress as the WTO
dispute settlement case. The Panel recalls in this respect that the WTO dispute settlement case and
the TDM Regulation are closely linked elements of th e European Communities' "twin-track" strategy
to deal with unfair Korean practices in the shipbuilding sector.
7.217 Thus, when the Commission submitted its first report on the investigation under the Trade
Barriers Regulation, it stated the following in a press release:
"Further to the adoption of its fourth report on the state of the EU shipbuilding
industry last week, the Commission today appr oved the strategy it will propose to the
Council of Ministers on 14/15 May, in order to address the persistent problems posed
to the European shipbuilding industry by unf air trade practices by Korean shipyards.
The investigation into subsidies carried out under the Trade Barriers Regulation
(TBR) has established that substantial s ubsidies have been granted to Korean
shipyards through both export and domes tic programmes which contravene the
WTO's 1994 Subsidies Agreement. On this basis, the Commission will recommend
that the matter be taken before the WTO th rough the initiation of a dispute settlement
procedure by 30 June unless an amicable solution can be reached in the interim
period. In parallel, the Commission will propose accompanying measures in the form
of a temporary support mechanism to Eur opean shipyards for the market segments
considerably injured by unfair Korean trade practices and for the period required for
the conclusion of the WTO procedure . Its entering into force will be simultaneous
with the effective start of the WTO action."
403
In July 2001, when the Commission submitted a form al proposal to the Council, it issued a press
release which stated:
"The Commission today adopted a proposal for a Council Regulation which would
put in place a temporary defensive mech anism for European shipbuilding. The
proposal is one element of the Commission's two-part strategy against unfair Korean
practices in this sector and will cover the market segments that are considerably
injured by these practices. It comes after a series of negotiations between the
Commission and Korea, which failed to produce an agreement that would restore
normal trading conditions. The proposal is an accompanying measure to dispute
settlement proceedings against Korea, which will be initiated in the WTO as soon as
the Council expresses its favourable positi on on the temporary defensive mechanism .

The proposal for a defensive temporary support mechanism follows a Commission
investigation which found evidence of subs tantial subsidies that are incompatible
with the WTO rules. Despite a series of negotiations between the Commission and

403 IP/01/656, 8 May 2001, Exhibit Korea 8 (emphasis added).

the Korean Government, no amicable solution has yet been achieved. Accordingly,
the Commission has instigated its two part strategy for fighting these unfair
practices: proposing a temporary defensi ve mechanism and the initiation of dispute
settlement proceedings.
The proposal for the temporary defensive mechanism is limited to those market
segments in which the Commission investigation found that EU industry had been
considerably injured by unfair Korean tr ade practices, namely container ships and
product and chemical tankers.
404
7.218 Moreover, that the period during which Community shipyards can receive aid under the
TDM Regulation is so explicitly linked to the WTO dispute settlement case also creates an incentive
for Korea to alter its conduct regarding the measures at issue in that dispute settlement case. The state
aid provided for under the national aid schemes adopted within the framework of the TDM Regulation
is designed to shift the balance of competitive adva ntages in favour of Community shipyards relative
to Korean shipyards. 405 Article 4 of the TDM Regulation makes it clear that Korea can limit the
period during which its shipyards will be confronted with this competitive disadvantage if it takes
steps with regard to the practices at issue in the dispute so as to make an early resolution of the
dispute possible, or if it takes steps with regard to the implementation of the Agreed Minutes, which
as seen above, relates to an important extent to su bsidies and the continuing effects of subsidies on
prices. The Panel realizes that it has no information before it demonstrating that the impact on
Korean shipyards of the state aid provided as a resu lt of the TDM Regulation has actually influenced
the conduct of the Government of Korea in the dispute initiated by the European Communities. In the
Panel's view, however, the decisive consideration is that Article 4 of the TDM Regulation is designed
to have an effect of inducing Korea to take steps to remove the alleged WTO- inconsistent measure.
Since the TDM Regulation is designed to influence Korea's conduct, the Panel does not consider as
persuasive the argument of the European Communities that the link between the TDM Regulation and
the WTO dispute settlement case is merely of a politi cal nature and is explained simply by the need
for an objective criterion to limit the duration of the aid scheme.
7.219 As noted above, the simple fact that a Memb er responds to a perceived WTO violation by
seeking to compensate or attenuate the harm cause d to actors within the Member resulting from an
alleged violation does not in itself represent "seek ing redress" provided the action is not designed to
restore the (perceived) balance of rights and obl igations between the Members. Thus, if the
European Communities had simply reinstituted in 20 02 its former system authorizing member State
aid to shipbuilding, such an action would likely no t raise issues under DSU Ar ticle 23. However, in
the view of the Panel, the TDM Regulation goes beyond a measure whereby the
European Communities seeks to compensate or to attenuate the harm resulting from an alleged
violation by Korea of its obligations under the SC M Agreement. The TDM Regulation, by its design
and structure, is explicitly tied to WTO dispute se ttlement. That tie is confirmed by the Commission
statements quoted above. In our view, the TDM Regul ation operates directly and exclusively to alter
the conditions of competition between Korean and Community shipyards in respect of individual

404 IP/01/1078, 25 July 2001, Exhibit Korea 9 (emphasis added)
405 In our analysis under Article 32.1 of the SCM Ag reement, we have identified several considerations
supporting the view of the Appellate Body that the effect of a subsidy on conditions of competition is not a
relevant factor in determining whether that subsidy is an action "against" a subsidy of another Member. In
particular, we referred to the overall structure of the SCM Agreement, its object and pu rpose, and the historical
background of the concept embodied in Article 32.1 of the SCM Agreement. These considerations do not apply
in the context of Article 23.1 of the DSU. Since the purposes and background of Article 23 of the DSU and
Article 32.1 of the SCM Agreement ar e very different, a given set of factual elements that would not be
sufficient for a measure to be an action "against" a su bsidy in the sense of Article 32.1 of the SCM Agreement
might still be sufficient for a finding that a measure "see ks the redress of a violatio n..." within the meaning of
Article 23 of the DSU.

transactions and is clearly designed to restore the balance of rights and obligations by inducing Korea
to remove the alleged WTO-inconsistent measure.
7.220 In light of all the above factors, the Pane l considers that the European Communities has
sought unilaterally to achieve results that Article 23.1 requires to be sought through recourse to the
DSU. By adopting the TDM Regulation, the Euro pean Communities acted in response to what it
considered to be a violation by Korea of its obligations under the WTO Agreement and sought to
restore the balance of rights and obligations by inducing Korea to remove the alleged WTO-
inconsistent measure. As such, the TDM Regula tion is a measure subject to the requirement of
Article 23.1 of the DSU that Members "have recour se" to the DSU when they "seek the redress of a
violation...", covered by Article 23.1 of the DSU. We emphasize that this conclusion is based on an
analysis of the design and structure of the TDM Regulation and does not depend upon whether the
European Commission has actually authorized the member States to adopt TDM aid schemes and
whether member States have actually provided state aid within the framework of such schemes. In
the Panel's view, the TDM Regulation by itself is action taken by the European Communities that
"seeks the redress of a violation..." .
7.221 Since it is undisputed that the European Co mmunities adopted the TDM Regulation without
having recourse to the DSU, the Panel concludes that by adopting the TDM Regulation the
European Communities acted inconsistently with Article 23.1 of the DSU.
7.222 The Panel also concludes, as a consequence, that since the TDM aid schemes of Denmark,
France, Germany, the Netherlands, and Spain, and the Decisions of the European Commission
authorizing those aid schemes, are measures taken in application of the TDM Regulation, they are
also inconsistent with Article 23.1 of the DSU.
3. Article 23.2
(a) Arguments of the parties
406
7.223 Korea submits that the TDM Regulation is inco nsistent with Article 23.2(a) because it
includes a "determination" that Korea has acted in consistently with its obligations under the WTO
Agreement that was not made through exclusive reco urse to dispute settlement in accordance with the
rules and procedures of the DSU. 407 Korea also argues that the TDM Regulation violates
Article 23.2(b) of the DSU because the Europ ean Communities adopted the Regulation without
following the procedures set forth in Article 21 of the DSU to determine the reasonable period of time
for the Member concerned to implement recommendations and rulings. 408 Finally, Korea submits that
the European Communities acted inc onsistently with Article 23.2(c) of the DSU in that it failed to
first obtain DSB authorization and follow the pro cedures laid down in Article 22 of the DSU before
applying any countermeasures or suspending concessions or obligations towards Korea.409
7.224 The European Communities, referring to the interpretation of the word "determination" in
Article 23.2(a) by the Panel in US - Certain EC Products , argues that the TDM Regulation does not
contain a finding of WTO inconsistency and b ears no consequences in WTO trade relations.
Therefore, the Regulation is not inconsistent with Article 23.2(a). 410 The European Communities

406 For a more detailed account of the arguments of the parties, see Section IV.C.4.
407 First submission of Korea, paras. 72-85.
408 First submission of Korea, paras. 86-88.
409 First submission of Korea, paras.89-91.
410 First submission of the European Communities, paras. 170-176.

rejects Korea's claims under Article 23.2(b) and (c ) on the grounds that the TDM Regulation is not a
countermeasure because it does not suspend WTO concessions or obligations.411
(b) Evaluation by the Panel
7.225 We note the guidance provided by the Appellate Body as to the exercise of judicial economy.
We are not required to examine all claims raised by Korea but only those claims that must be
addressed to resolve the matter at issue in this disput e. However, as stated by the Appellate Body in
Australia - Salmon, we must address those claims on which a finding is necessary to enable the DSB
to make sufficiently precise recommendations and rulings so as to allow for prompt compliance by a
Member in order to ensure effective resolution of disputes to the benefit of all Members.
412
7.226 We consider that action by the Europ ean Communities to comply with a DSB
recommendation based on our conclusion that the TDM Regulation, the Commission Decisions and
the national aid schemes are inconsistent with Article 23.1 of the DSU would also remove any
inconsistency with Article 23.2 of the DSU.
7.227 In light of these considerations , the Panel does not consider it necessary to examine whether
in addition to Article 23.1 of the DSU, the measures at issue are also inconsistent with Article 23.2 of
the DSU.
F. CLAIMS UNDER ARTICLES 4 AND 7 OF THE SCM AGREEMENT
1. Main arguments of the parties413
7.228 Korea argues that by acting unilaterally outs ide the framework of the dispute settlement
provisions of the SCM Agreement, the European Communities violated Articles 4.1-4 and 7.1-4 of
that Agreement.
414 Korea also claims that the European Communities acted inconsistently with
Articles 4.10 and 7.9 of the SCM Agreement by failing to seek and obtain authorization of the DSB to
apply countermeasures. 415 In response to a question by the Panel, Korea subsequently stated that
"SCM Articles 4.2 to 4.12 and 7.2 to 7.10 have been violated, for the reasons explained in
paragraphs 132-140 of Korea's Fi rst Written Submission. Korea draws special attention to SCM
Articles 4.4, 4.10, 7.4 and 7.9".416
7.229 The European Communities argues hat there is no legal basis for Korea's claims under
Articles 4 and 7 of the SCM Agreement separatel y from Korea's claim under Article 23 of the DSU
and that even when considered in conjunction with Korea's claim under Article 23, these claims must
be rejected because the European Communities has strictly adhered to the DSU. Moreover, the TDM
Regulation and the national measures adopted with in the framework of the Regulation are not
countermeasures within the meaning of Articles 4 and 7 of the SCM Agreement. In the view of the
European Communities, Korea has failed to expl ain how the European Communities has acted in
violation of specific procedural requirements of Articles 4 and 7.417

411 First submission of the European Communities, paras. 177-178.
412 Appellate Body Report, Australia - Salmon, para. 223.
413 For a more detailed account of the arguments of the parties see Section IV.C.5.
414 First submission of Korea, paras. 134-135.
415 First submission of Korea, paras. 137-139.
416Response of Korea to Panel Question 50.
417 First submission of the European Communities, paras. 179-181; second submission of the
European Communities, paras. 141-148.

2. Evaluation by the Panel
7.230 The Panel notes that Articles 4.1-4 and 7. 1-4 of the SCM Agreement define certain
procedural rights of Members with respect to consultations and the establishment of panels in disputes
concerning prohibited subsidies and actionable subsid ies. In our view, the claims of Korea under
these Articles involve the same fundamental issue of unilateral conduct by the European Communities
outside the framework of the WTO dispute settlement procedures that we have already found to be in
breach of Article 23.1 of the DSU. We recall our discussion above in the context of Article 23 of the
guidance provided by the Appellate Body in respect of the exercise of judicial economy. Applying
the considerations articulated by the Appellate Body, we do not consider that findings under
Articles 4 and 7 of the SCM Agreement, in addition to the finding already made under Article 23.1 of
the DSU, are necessary to enable the DSB to make sufficiently precise recommendations and rulings
so as to allow for prompt compliance by the Euro pean Communities in order to ensure effective
resolution of this dispute. We also note in this respect that Korea has submitted little detailed
argumentation to support its claims under these provisions and that while they are discussed in
Korea's first submission, Korea's second submission is silent on these claims.
7.231 Therefore, we decide not to examine Kore a's claims under Articles 4 and 7 of the SCM
Agreement.
VIII. CONCLUSIONS AND RECOMMENDATION
8.1 The Panel concludes:
(a) the TDM Regulation, the national TDM schemes of Denmark, France, Germany,
the Netherlands and Spain, and the European Co mmission Decisions authorizing those schemes, are
not inconsistent with Article III:4 of the GATT 1994;
(b) the TDM Regulation, the national TDM schemes of Denmark, France, Germany,
the Netherlands and Spain, and the European Co mmission Decisions authorizing those schemes, are
not inconsistent with Article I:1 of the GATT 1994;
(c) the TDM Regulation, the national TDM schemes of Denmark, France, Germany,
the Netherlands and Spain, and the European Co mmission Decisions authorizing those schemes, are
not inconsistent with Article 32.1 of the SCM Agreement;
(d) the TDM Regulation, the national TDM schemes of Denmark, France, Germany,
the Netherlands and Spain, and the European Co mmission Decisions authorizing those schemes, are
inconsistent with Article 23.1 of the DSU; and
(e) in light of its finding in respect of Article 23.1 of the DSU, it is not necessary for the Panel to
make findings regarding the claims of Korea under Articles 23.2(a),(b) and (c) of the DSU and under
Articles 4 and 7 of the SCM Agreement.
8.2 Under Article 3.8 of the DSU, in cases where there is an infringement of the obligations
assumed under a covered agreement, the action is considered prima facie to constitute a case of
nullification or impairment of benefits under that ag reement. Accordingly, we conclude that, to the
extent the European Communities has acted inconsis tently with the provisions of the DSU, it has
nullified or impaired benefits accruing to Korea under that agreement.

8.3 In light of these conclusions, we recommend that the DSB request the
European Communities418 to bring its measures listed in paragr aph 1(d) into conformity with its
obligations under the DSU.
8.4 We are aware that the TDM aid schemes of Denmark, Germany and Spain expired on
31 March 2004 and were not renewed. The Appellate Body Report in US - Certain EC Products
suggests that it is inappropriate to make a recommendation within the meaning of Article 19 in respect
of a measure that no longer exists. 419 However, the notion of a measure that no longer "exists" is not
always straightforward. In the present case, it is clear from the information before the Panel that
where national aid schemes have expired, no new applications for TDM aid can be submitted. On the
other hand, however, we cannot determine with certainty whether and to what extent it is possible that
subsidies continue to be provided pu rsuant to applications made befo re the expiry of those schemes.
Therefore, the Panel considers that its recomme ndation does not apply to the schemes that have
expired, except to the extent that those schemes continue to be operational.420

Interim Report, Korea requests us at least to make "clarifying suggestions" pursuant to our authority under
Article 19.1 of the DSU. For the reasons discussed in paragraph 7.23 of this Report, we do not think it would be
appropriate to do so.

IX. ANNEX

6 February 2004

(04-0470)
 Original: English

Request for the Establishment of a Panel by Korea

 The following communication, dated 5 February 2004, from the delegation of Korea to the
Chairman of the Dispute Settlement Body, is circulated pursuant to Article 6.2 of the DSU.

 On 3 September 2003, the Republic of Korea ("Korea") requested consultations with the
European Communities ("EC") and its Member States pursuant to Article 4 of the Understanding on
Rules and Procedures Governing the Settlement of Disputes (DSU), Article XXIII:1(a) of General
Agreement on Tariffs and Trade 1994 (" GATT 1994 "), Article XXIII:1(b) of GATT 1994 and
Articles 4, 7 and 30 of the SCM Agreement with regard to measures affecting trade in commercial
vessels, as elaborated below.

 Consultations were held on 9 October and 14 November 2003. The consultations held
between Korea and the EC related to various EC and Member State measures in relation, inter alia, to
the following:

 i. The provisions of EC Regulation 1177/2002 (the "TDM Regulation") and EC
Regulation 1540/98 as such, as well as th e EC Member States' implementing
provisions as such. The above provisions provides for granting of subsidies in favour
of commercial vessels, whether directly to th e shipbuilders or indirect aid, including
operating aid, restructuring aid, insolvency and closure aid, aid for regional or other
investment, research and development aid and aid for environmental protection;

 ii. The EC and its Member States have in pa rticular instances, through federal, regional
or local authorities and government-own ed or government-controlled financial
institutions, provided subsidies in direct or indirect support of commercial vessels
built in the EC particularly but not exclusively in the form of (a) operating aid granted
on a contractual basis in forms such as grants, export credits, guarantees or tax
breaks, (b) restructuring aid, (c) regional or other investment aid, (d) research and
development aid, (e) environmental protection aid and (f) insolvency and closure aid.

 Unfortunately, these consultations have failed to resolve the dispute between parties as
regards the TDM Regulation (and proposed extens ion) and the EC Member States' implementing

provisions. Korea hereby requests that a panel be established pursuant to Articles 6 of the DSU and
Article XXIII:2 of GATT 1994 with respect to the measures described as below.

 The measures that are subject of this requ est are the EC and its Member States' legal
provisions and decisions providing for the supply of grants to shipbuilders for containerships, product
tankers, chemical tankers and liqui d natural gas carriers ("LNGs") adversely affecting the conditions
of competition and seeking a unilateral redress of a perceived violation of Korea's obligations under
the SCM Agreements. In particular, Korea considers that the following measures are inconsistent with
the European Communities' obligations under the SCM Agreement:

(i) The provisions of the TDM Regulation as extended to cover LNGs by
Notice 2003/C 148/10 published on 25 June 2003 (currently proposed to be extended
until 31 March 2005 pursuant to European Commission proposal COM(2004)26 final
of 21 January 2004);

(ii) The EC Member State implementing provisions of the TDM Regulation and the
European Commission Decisions approving these implementing provisions,
including:

 – G e r m a n y :

 "Richtlinien des Bundesministerium für Wirtschaft und Arbeit zu befristeten
Schutzmassnahmen für den Schiffbau", 24 October 2002;

 Case N 744/2002, Commission Decisi on (2003)788 fin of 19 March 2003.

 – Denmark

 "Lov om midlertidig, kontraktbetinget driftsstotte til bygning af visse
skibstyper, LOV No 305", dated 30 April 2003;

 Case N 141/2003, Commission Deci sion (2003)1765 fin of 24 June 2003.

 – T h e Netherlands

 "Tijdelijke regeling ordersteun sch eepsnieuwbouw, Regeling van de
Staatssecretaris van Economische Zaken, No WJZ3040972", 17 July 2003;

 Case N 780/2002, Commission Decision (2002)2019 fin of 9 July 2003 and
Case N 339/03, Commission Decision (2003)3378 of 18 September 2003.

 – France

commission interministérielle (as referred to by the European Commission in
the publication of the approval of the French aid for LNGs).

 Case N 232/03, Commission Decision (2003)3234 fin of 17 September 2003.

 – S p a i n

 Real Decreto 442/1994 of 11 March 1994 as amended by Real Decreto
1274/2003 of 10 October 2003;
 Case N 812/02, Commission Decision (2003)4079 fin of 11 November 2003.

 Korea considers that the EC and its Member St ate measures referred to above are in breach of
the EC and its Member State obligations under the following provisions:

• Articles I:1 and III:4 of GATT 1994 because the TDM Regulation and Member State
implementing measures involving the bestow al of German, Danish, Dutch, French
and Spanish grants to shipyards on a v essel-specific and product-related basis,
adversely modify conditions of competition between Korean commercial vessels and
the like vessels built in third countries a nd Korean commercial vessels and the like
vessels built in the EC, respectively;

• Article 23(1) and (2) of the DSU, as well as Articles 4 and 7 of the SCM Agreement,
because the TDM Regulation and Member States' implementing measures – which
are aimed at assisting EC or its Member State shipyards in those segments that are
claimed to have suffered from subsidies alle gedly granted to Korean shipyards - have
been effectively designed and implemented as unilateral measures seeking redress of
a perceived violation of Korea's obligations under the SCM Agreement which should
occur exclusively through dispute settlement and not through unilateral action;

• Article 32(1) of the SCM Agreement, as well as Articles 4 and 7 of the SCM
Agreement, because the TDM Regulation and Member State implementing measures
constitute specific actions against perceive d subsidies of another Member not in
accordance with the GATT 1994 as interpreted by the SCM Agreement.

 Korea requests that a panel be immediately estab lished with standard te rms of reference, in
accordance with Articles 6 and 7 of the DSU and Article 30 of the SCM Agreement.

 Korea asks that this request for establishment of a panel be placed on the agenda for the next
meeting of the Dispute Settlement Body, which is scheduled to take place on 17 February 2004.