Document: WT/DS273/R Page D-1 ANNEX D RESPONSES OF THE PARTIES TO QUESTIONS FOLLOWING THE FIRST MEETING OF THE PANEL Contents Page Annex D-1 Responses of the European  Communities to Questions from the Panel
Document codes: WT/DS273/R
Complainant: EU
Respondent: South Korea
Third parties: China, Taiwan, Japan, Mexico, Norway, U.S.
Dispute stage: Panel
Agreements cited: Art. 3.1, 3.2, 1, 2, 5, 6.3, 6.5  Subsidies and Countervailing Measures (SCM)

ANNEX D

RESPONSES OF THE PARTIES TO QUESTIONS FOLLOWING
THE FIRST MEETING OF THE PANEL

Contents Page
Annex D-1 Responses of the European Communities to Questions from the
Panel
D-2
Annex D-2 Responses of the European Communities to Questions from
Korea
D-44
Annex D-3 Responses of Korea to Questions from the Panel D-52
Annex D-4 Responses of Korea to Questions from the
European Communities
D-95
Annex D-5 Comments of Korea on Responses by the
European Communities to Questions from the Panel
D-106

A. QUESTIONS TO EC

1. Question 1

 What makes an entity a public body? Is th e power to regulate and tax a necessary and
sufficient condition to qualify an entity as a public body?

Response

1. The purpose of Article 1.1(a)(1) of the SCM Agreement providing that financial contributions
can be made by “any public body” as well as by “a government” is to capture all use of State
resources to influence the decisions of enterp rises in pursuit of a public policy objective.
Accordingly, the EC considers the following factors to be relevant in an assessment of whether an
entity is a public body:

 ¾ Whether the entity is controlled by the gove rnment, be it through ownership or by a
public statute establishing the body;

 ¾ Whether the entity pursues public policy objectives;

 ¾ Whether the entity has access to State res ources either through the use of capital on
which it is not obliged to secure a comme rcial return or through a government
guarantee of debts or losses.

2. The Panel does not need to decide in this case whether it is sufficient that one of these
conditions is fulfilled or whether all of these conditio ns need to be fulfilled cumulatively to make an
entity a “public body”. All the entities claimed to be public by the EC in this case are established and
controlled by the government through public statut es that set public policy purposes and give these
bodies access to state resources.

3. The powers to regulate and tax are essential gove rnmental powers. Thus, an entity that shares
these powers can be considered to be part of the government. These powers may therefore be
considered sufficient conditions to make an entit y part of the government. These powers are not
however necessary conditions for an entity to be a public body.

2. Question 2

 Para. 83 of the EC's first written submission describes the purpose of permitting
prospective challenges against mandatory legisl ation. What would be the purpose of
prospective challenges against non-mandatory legal instruments? What would Members
protect themselves against by bringing a prosp ective challenge against another Member's law
that allows, but does not require, the grant of prohibited export subsidies?

Response

4. A power for a government to make grants obvi ously allows the grant of a prohibited export
subsidy. But it would be an improper presumption of bad faith to assume that it would be so used.

5. However a law that provides a public body with explicit objective or instruction to promote
exports or assist exporters with subsidised f unding and a prohibition on competing with commercial
banks goes further than simply allowing the grant of an export subsidy – it specifically envisages the
grant of export subsidies. It is not an improper presumption of bad faith to assume that public bodies
will do what they are created and instructed to do.

3. Question 3

 Please comment on para. 119 of Korea's first written submission, regarding the
interpretation of the word "maintain" set forth in Article 3.2 of the SCM Agreement.

4. Question 4

 What is the basis for interpreting Article 3.2 in a manner that prohibits legislation
containing a discretion to provide prohibited export subsidies?

Response (to questions 3 & 4)

6. The EC agrees that the word “maintain” im plies continuance rather than prevention but
believes that this argument misses the point.

7. The EC considers that the word “maintain” in Article 3.2 signifies that the prohibition of
export subsides applies not only to individual grants of subsidy but also to schemes (or programmes,
to employ the term that is used in the SCM Agreement ) under which they are granted. Individual
subsides are granted, not maintained. Subsidy schemes or programmes are maintained, not granted.

8. The fact that schemes or programmes are cove red by the prohibition of export subsides is
confirmed by the other provisions of the SCM Agreement. For example, Article 28.1 refers to:

Subsidy programmes which have been established within the territory of any Member
before the date on which such a Member signed the WTO Agreement and which are
inconsistent with the provisions of this Agreement …
9. And, even more significantly, Articles 29.2 and 29.3 both refer to “subsidy programmes
falling within the scope of Article 3”.

10. Also, item (j) of the illustrative list of export subsidies in Annex I to the SCM Agreement
deems to be an export subsidy prohibited by Ar ticle 3.1: “export credit guarantee or insurance
programmes, of insurance or guarantee programmes”. The ordinary meaning of the word
“programme” is: “A plan or outline of (esp. intended) activities; transf. a planned series of activities
or events”.
1

11. This definition does not imply that the progra mmed acts are “mandatory”, only that they are
planned or intended. Accordingly, the prohibiti on of export subsidy programmes applies not only to
measures that “mandate” the grant of subsides but also to measures that plan or intend, or, as the EC
puts it, specifically envisage, the grant of individual export subsidies.

5. Question 5

 What were the credit ratings, by Ko rean Investor Services, of each Korean
shipyard alleged to have received subsidies, for each of the years 1997-2003, inclusive?

Response

12. The EC does not know the credit ratings accorded these companies by Korean Investors
Services but presumes that these credit ratings ar e similar to those provided by Korea in

1 Shorter Oxford English Dictionary (4th edition, 1993), p. 2371.

attachment 1.1(24)-1 of its Annex V replies.
2 Indeed, as stated by Kor ea, prior to the new credit
system adopted by KEXIM, KEXIM compared the cr edit ratings made by various credit information
companies including the Korean Investor Services (a ttachment 1.1(24) to Korea’s Annex V replies).
However, the credit ratings were only provided fo r each of the years 1997-2002. Year 2003 is not
available.

6. Question 6

 Is the EC of the view that finance / guarantee measures provided under the KEXIM
legal regime would necessarily be inconsistent with Articles 3.1(a) and 3.2 of the SCM
Agreement? Please explain.

Response

13. The EC considers that it is possible that measures taken by KEXIM (either a subsidy
programme or an individual subsidy grant) would no t be inconsistent with Articles 3.1(a) and 3.2 of
the SCM Agreement.

14. The question before the Panel is however wh ether some 200 individual grants, the actual pre-
shipment loan and APRG schemes described in the EC’s first written submission and the KEXIM
legal regime itself are inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement.

15. The EC does not believe that a legal regime such as that of KEXIM will only be inconsistent
with Article 3.1(a) and 3.2 SCM Agreement if it is absolutely inevitable or certain or “mandatory” (in
the sense that Korea uses this term) that expor t subsidy programmes or individual export subsidy
grants will arise in all cases. For the reasons explai ned above, it is sufficient if this is the intent or
purpose of the measure.

7. Question 7

 The KEXIM 2002 Annual report (Exhibit EC- 14) contains a chapter entitled Bank
Operations. That chapter refers to a decline in KEXIM's export credit business. It states that
"[m]ajor Korean exporters were reluctant to u se bank loans, instead they preferred raising
funds from direct markets which was possible due to their successful corp orate restructuring".
Does this suggest that KEXIM's export credit terms are less attractive to Korean exporters than
the terms for competing financing from other sources? Please explain.

Response

16. The KEXIM 2002 Annual report uses the term “export credits” for loans to exporters - as
evidenced by the reference to Korean exporters as th e takers of these loans. Loans to foreign buyers –
for which the term “export credit” is conventionally reserved – are referred to as “direct loans” in the
Annual Report 3 and, in the same section as that referred to by the Panel, KEXIM reveals that it
granted the first true export credit in its history in 2002.

17. Although the volume of these loans to exporte rs showed a decrease in 2002, they still
represented 89.2 per cent of KEXIM’s disbursements. (The same section of the report explains that it
has decreased from 95 per cent to 89.2 per cent in 2002).

18. Thus, although it may be true that the major beneficiary of these loans – Korean shipbuilders
– were able, due to the infusions of subsidised equity or loan capital or resulting improved access to

2 Exhibit EC – 30.
3 Page 2 of KEXIM’s Annual Report (Exhibit EC-54).

finance from the corporate bond market to reduce th eir use of short term pre-shipment loans from
KEXIM, it is still clear that the amount of lo ans to exporters was still very high in 2002 –
KRW 7,473 billion.

19. The statement does not therefore demonstrate th at KEXIM's export loans are less attractive to
Korean exporters than the terms for alternative fina nce. It only suggests that the margin of advantage
involved in using KEXIM’s export loans may have reduced due to alternative finance becoming
easier. The high level of KEXIM’s export loans shows that these are still offered at very attractive
rates.

20. What is clear from the statement referred to is that it constitutes an admission by KEXIM that
previously companies were unable to obtain fi nance on such favourable terms as available from
KEXIM.

8. Question 8

 Para. 122 of the EC's first written submi ssion states that the KEXIM legal regime, as
"confirmed by KEXIM practice", provides for the grant of subsidies. Is the EC challenging
"KEXIM practice" as well as the KEXIM legal regime as such, or does the EC rely on evidence
regarding "KEXIM practice" in support of its claim against the KEXIM legal regime as such?
If the latter, please explain how evidence regarding "KEXIM practice" is relevant to the Panel's
assessment of whether the KEXIM legal regime as such is, or is not, in conformity with the SCM
Agreement.

Response

21. The EC’s position is that KEXIM’s legal regi me is inconsistent with Article 3 of the SCM
Agreement because it specifically envisages the grant of export subsidies. The EC considers that this
conclusion derives principally from:

 ¾ KEXIM’s statutory objectives of promoti ng economic development and financing
exports – Article 1 of the KEXIM Act;

 ¾ Financial contributions granted by KEXI M, pursuant to Article 18 of the KEXIM
Act, are “for the purpose of facilitating exports of products”, and, therefore,
contingent on export within the meaning of Article 3.1(b) of the SCM Agreement;

 ¾ The huge amount of new capital (over KR W 1.9 trillion between 1998 and 2003)
provided by the Korean government
4 for free – Article 37 of the KEXIM Act
provides that it is not to pay dividends to the Korean Government;

 ¾ The KEXIM Act, including Articles 19, 36 (2), and 37 thereof, guarantees that
KEXIM does not need to act on market terms or with proper regard to risk, and
provides KEXIM with virtually unlimited funds from Korea;

 ¾ The KEXIM Act imposes no requirements that KEXIM take market conditions into
account when disbursing funds. Instead, Article 24 of the KEXIM Act prohibits
KEXIM from competing with other financia l institutions, thereby providing a benefit
that is not available on the market;

 ¾ Article 26 of the KEXIM Act provides that interest rates do not need to be set “to
cover the operating expenses, commissions for undertaking of delegated operations,

4 Korea’s Response to Annex V Questions, Attachment 1.1(11) (BCI).

interest on borrowed funds, and depreciation of assets” when “ inevitable for
maintaining the international comp etitiveness to facilitate the export .” This
demonstrates that KEXIM values the “i nternational competitiveness” of Korean
export-oriented industries over its own fina ncial condition, a condition that increases
KEXIM’s ability to provide support on term s better than those available in the
market.

 ¾ [BCI: Omitted from public version.]

22. KEXIM’s practice of granting pre-shipment loans and APRGs at subsidised rates confirms
the soundness of this understanding of KEXIM’s legal regime.

23. The practices are however separate violations in their own right although these are linked to
the violation inherent in KEXIM’s legal regime in the sense that the former is the consequence of – as
well as confirmation of – the latter.

9. Question 9

 How does the EC's claim against the "APRG programme" as such differ from its claim
against the KEXIM legal regime as such? Isn't the "APRG programme" based on the KEXIM
legal regime? Is it conceivable to assess one of them differently from the other?

Response

 See answer to question 8 above.

10. Question 10

 Is the website document cited in footnote 109 of your submission the only basis for your
statement that PSLs are not export credits?

Response

24. The definition of “export credits” given by the OECD reflects the generally accepted meaning
of term as evidenced by the documents cited to in paragraphs 57-59 in the EC Oral Statement.

25. In addition it is clear from the reference to the OECD Arrangement in paragraph 2 of item (k)
that the term “export credit” used in the second pa ragraph has the meaning given to it in the OECD
Arrangement.

26. In view of the close parallels between the fi rst and second paragraph it must be assumed, in
the absence of any indication to the contrary, that th e term has the same meaning in both the first and
second paragraphs.

11. Question 11

 How does the EC's claim against the "PSL programme" as such differ from its claim
against the KEXIM legal regime as such? Isn't the "PSL programme" based on the KEXIM
legal regime?

Response

 See answer to question 8 above.

12. Question 12

 Do the activities of KEXIM in the form of APRGs or PSLs constitute "government
practice" in the sense of Article 1 of the SCM Agreement? Please explain.

Response

27. Yes, KEXIM’s APRG and pre-shipment loan programmes constitute ‘government practice’
within the meaning of Article 1 of the SCM Agreement.

28. Article 1.1(a)(1) of the SCM Agreement lays down that the first component of a subsidy is:

a financial contribution by a government or any public body within the territory of a
Member (referred to in this Agreement as "government")
29. It makes clear therefore that wherever the wo rd “government” appears in the Agreement, it
means government or public body.

30. The first instance of a financial contribution that is given is:

(i) a government practice involves a direct tr ansfer of funds (e.g. grants, loans,
and equity infusion), potential direct transfers of funds or liabilities (e.g. loan
guarantees);
31. This therefore covers loans and guarantees made by governments (in the strict sense) and
loans and guarantees made by public bodies.

32. Practice is defined by Oxford English Di ctionary as “usual or customary action or
performance”.
5 Because KEXIM is a public body, its practice (i.e., “usual or customary action or
performance”) must be considered “government pr actice” because KEXIM is a public body, its loan
and guarantee practices are financial contribut ions. Korea makes a fundamental error in
paragraphs 161-163 of its first written submission when it defines “government practice” without
reference to the fact that government is defined as both government and public body. For example, it
states that “even if a body is a public body, it does not make a financial contribution if it is not
involved in a government practice”.6 Korea forgets that government as defined in Article 1.1(a)(1) of
the SCM Agreement also includes any public body.

13. Question 13

 In note 163 to its first written submission, Korea asserts that "no allegations have been
made about APRGs having been extended by KE XIM to Hyundai and Hyundai Mipo". During
the first oral hearing, however, the EC stated that it was challenging APRGs provided in respect
of Hyundai commercial vessel transactions. Please confirm the EC's position in this regard.

Response

33. Note 163 to Korea’s first written submission is incorrect.

34. First of all, the APRGs listed in figure 12 of the first written submission of the EC as
benefiting Samho HI/Halla HI were still outstanding when Hyundai took complete control of that
entity.

5 Shorter Oxford English Dictionary (4th edition, 1993) at p. 2317.
6 First written submission of Korea, para. 161.

35. More generally however, the EC explained, in paragraph 173 of its first written submission,
that “other Korean shipyards … have paid si gnificantly lower premiums for APRGs granted by
KEXIM than for similar APRGs”.

36. It is true that the European Communities only proceeded to provide deta ils in this section of
APRGs to Hanjin and Samsung, but this was clearly by way of example. (In the case of pre-shipment
loans, the examples included Hyundai Mipo and Hyundai HI but not Samsung.) Contrary to what is
suggested by Korea in its footnote 163, there is no implication that Hyundai Mipo and Hyundai HI did
not benefit from APRGs at subsidised rates. This is also clear from the conclusion in paragraph 182,
where the EC stated that it had “detailed the speci fic grants of APRGs and pre-shipment loans of
which it is aware”.

37. The EC’s claim against the pre-shipment lo an and APRG schemes as such are not, by their
nature, limited to these shipyards but relate to the schemes.

38. The EC is not however asking the Panel to ru le that any specific APRGs granted to Hyundai
Mipo and Hyundai HI (apart from APRGs to Samho wh ich were outstanding when it became part of
Hyundai HI) are prohibited export subsidies.

39. Although Hyundai an d Hyundai Mipo have received APRGs almost exclusively from
KEXIM, the EC cannot establish what the benefit is since it lacks the necessary information.

14. Question 14

 Regarding your argument at para. 239 of your first written submission that GOK will
guarantee losses by private financial institutio ns participating in the chaebol-restructuring
process, please indicate precisely which provisions of the Chaebol Restructuring Plan explicitly
provide for such guarantee.

Response

40. The Agreement for the Restructuring of the top 5 chaebols of December 1998 7 refers in
point 18 to the GOK

upholding the soundness of the financial institutions in connection with the
implementation of the agreed restructuring plan.
41. Even if the agreement does not use the term “guarantee” the language used in policy notes
have effectively constituted one. A normal reading of the provision by a bank means that they can
proceed with the restructuring without being constrained by possible financial losses.8

42. In other instances, the Korean Government was even more explicit. For example, with regard
to investment trust companies which were holde rs of Daewoo bonds (and creditors of DHI) the

7 Exhibit EC-40.
8 The 1998 December Agreement for the Restructuring of the Top 5 Chaebols was preceded by an
Agreement in January 1998 and followed by a third in August 1999.
 The EC cannot provide the content of these ag reements as the Government of Korea refused
to provide to the European Communities, in the context of the Annex V procedure, a copy claiming
that “ the question [was] irrelevant ”. However, the European Communities considers that this
document is quite relevant to this dispute b ecause it shows the degree of intervention of the
Government of Korea in the corporate sector. The European Communities therefore asks the Panel to
draw adverse inferences from Korea’s refusal to provide a copy of the January Agreement

Ministry of Finance promised that it would “pump public funds” into market stabilization funds with a
view to buying “unlimited amounts of corporate bonds from the investment trust firms” which are
exposed to the dismantled Daewoo Group. In particular, it stated that:

In a bid to stabilize interest rates, the government will inject 20 trillion won in bond-
market stabilization funds into the financia l market by October 15. The funds will be
used to buy out corporate bonds that investme nt trust firms, which are exposed to the
dismantled Daewoo Group, may sell to raise the funds necessary to cope with
possible massive redemption from their depos itors. If needed, the government will
also expand the size of funds to buy unlimited amounts of corporate bonds from the
investment trust firms. …..
If investment trust firms face fund shorta ges, the government will pump public funds
into those firms to guarantee the payments to their investors.
9
43. Furthermore, Korea explained in detail th e massive action plan taken by GOK to assist
financial institutions including the

Restructuring and recapitalization of financial institutions based on sound
rehabilitation or closing where needed a nd with mergers including with foreign
financial institutions if needed and the acceleration of non-performing loans as well.10
44. In fact, the Korean Government pum ped into the financial institutions over [BCI: Omitted
from public version].

45. Thus, financial instituti ons depended on GOK for their liquidity and/or survival.

46. Moreover, the GOK made access to this liquidity assistance subject to a number of
conditions, the most important of wh ich was participation of banks to corporate restructuring. These
conditions were clearly spelled out in Korea’s polic y statements to the IMF. For example, the Letter
of Intent (LOI) of 24 September 1998:

Government confirms that public funds w ill be used only: …..- where the bank is
making adequate process on implementation of sound corporate debt
restructuring….
11
47. This condition was further refi ned in the LOI of 13 November 1998 where it was made clear
that there would be no KAMCO purchasing of bad de bts, no capital injections to banks which do not
wish to participate in the restructuring of troubled firms.

In order to enhance the incentives for banks to participate fully in the corporate
restructuring process, no public funds, whether by way of KAMCO purchases or
capital injections or other means, shall be made available to banks which are not
certified by the FSC to be performing their role in the corporate sector restructuring
process.
12
48. The above condition was included in all of Korea’s policy notes to the IMF until at least
July 2000. Thus, Korea effectively ensured that onl y financial institutions which participated in the
restructuring effort would have access to public funds.

9 MOFE press release – published on MOFE website on 6 October 2000 (Exhibit EC – 101).
10 Attachment 5 of First written Submission by Korea.
11 Korea Letter of Intent to IMF of 24/09/1998 (Exhibit EC-102).
12 Exhibit EC-36.

15. Question 15

 Please provide the Panel with an estimate of the magnitude of the total amount of
subsidization resulting from the measures identified in your Article 5(c) claims, along with an
explanation and demonstration of how this estimat e was derived. Please relate this estimate to
the degree of price suppression / depression alleged by the EC.

Response

49. The EC attaches an estimation of the magnit ude of the amount of subsidisation resulting from
the measures identified in the EC’s Article 5(c) claims in Attachment 1 to this submission. The EC
also attaches as Attachment 2 an estimation of price depression a nd suppression together with other
relevant information prepared by the EC’s consultants, First Marine International.

50. However, the EC maintains that there is no obligation to quantify the amount of subsidisation
and its relation to price depression and suppression for all serious prejudice claims. . [Add text]

16. Question 16

 In its third party submission in the US – Export Restraints case, the EC argued that
there is no government entrustment or direction in a case where freedom of action is "limited",
but not "curtailed", i.e., where "the producer ca n still make choices". Does the EC consider
that the freedom of action of private financial institutions participating in the restructuring
process was (i) "limited" or (ii) "curtailed"? Were those companies able to make choices
regarding their participation in the restructuring process? Please explain.

Response

51. The US - Export Restraints case related to a rather particular situation. It concerned the rather
contorted position taken by the US in its counterva iling duty practice that export restraints constitute
the entrustment or direction of private parties to sell more goods on the domestic market than they
would otherwise. The panel in that case was therefor e considering a very different situation to that
prevailing in this case which relates not to a general legislative measure but to specific measures taken
with regard to the policies of banks. Obviously, operators who cannot export are not entrusted or
directed to sell more domestically. They can simply not produce that which they would have exported
if this were allowed.

52. The EC would approach the application of Article 1 of the SCM Agreement to the present
case by interpreting the words of that provision according to their ordinary meaning and in the light of
their context and purpose rather than interpreting wo rds used to describe the way the provision might
apply in a very different case.

17. Question 17

 Are you arguing in paragraph 73 of your oral statement that the banks that participated
in the Corporate Restructuring Agreement ther eby legally committed themselves up front to
follow the direction of the government? Did such undertaking(s) by the banks affect all
 of the
restructurings referred to in your complaint? Please elaborate and provide specific evidence.

Response

53. Yes, under the Corporate Restructuring Agreement (CRA), banks explicitly legally
committed themselves to

 ¾ restructuring (as opposed to liquidation) through debt-for equity swap and other
measures listed in the Agreement.
13

 ¾ certain procedures, i.e., leader bank will chair meetings thereby influencing the
process, majority voting.
14

 ¾ shorter time for decision-taking.
15

54. Korea themselves admits in its First Written S ubmission that by entering into this Agreement,
domestic banks limited their ability to behave ” independently and in their own self-interest ” as
opposed to (foreign) banks which did not sign the CRA.
16

55. Hence, the CRA already generally curtailed the discretion of individual private banks in
deciding how to use their rights as creditors, e.g., in the restructuring for Daewoo.

56. Furthermore, the signing of the CRA by ba nks under Government pressure should not be seen
in isolation. Already the Agreement for the R estructuring of the top 5 Chaebols of December 1998
17
(originally also foreseen for Daewoo) reflects th e Korean Government’s policy of resolving the
corporate crisis through debt/equity swaps.

57. Through the Agreement for the Restructuring of the top Five Chaebols of December 1998
major creditor institutions 18 agreed with the Korean government to support the restructuring of the
top 5 chaebol particularly through debt/equity swaps.

58. Point 17 of the 1998 December Agreement for the Restructuring of the Top Five Chaebols
provides:

(17) Creditor banks will have primary r esponsibility for examining and monitoring
implementation. Also, the creditor banks sh all carry out pledges toward providing
support to restructuring, such as debt/equity swap.
59. However, as explained by the European Co mmunities in its First Written Submission and its
Oral Statement, the discretion of Korean banks wa s then further curtailed by a number of “stick-and-
carrot- measures”.
19

60. The EC in its Oral Statement has already produced evidence from private banks showing how
the government was ready to use its influence with private banks to privilege certain sectors:
20

"by requesting banks to participate in remedial programmes for troubled corporate
borrowers and
by identifying sectors of the economy it wishes to promote and

13 See Articles 1 and 2.2 of the CRA (Exhibit-EC 42).
14 See Article 15.2 of the CRA.
15 4-6 months, see first written submission of Korea, at para. 302
16 First written submission by Korea at para 355.
17 Exhibit EC-40.
18 The agreement was signed by the Korea Devel opment Bank, the Commercial Bank of Korea, the
Korea First Bank, Hanil Bank and the Korea Exchange Bank.
19 First written submission by the European Communities at paras 231 to 243
20 Oral statement by the European Communities at para 75.

by making low interest loans available to banks and financial institutions who lend to
borrowers in these sectors.
… government policy may influence us to lend to certain sectors or in a manner in
which we otherwise would not in the absence of the government policy".
21
61. In addition, the EC noted at the first substa ntive meeting with the parties that these banks
were at the time of the restructuring in an immediat e need of capital in order to ensure their survival.
Therefore, one would have expected them to pursu e all means to increase cash inflows including the
liquidation of troubled borrowers. This was even more so for banks which were in possession of
secured credits.

62. Under normal market considerations this f act would have tilted the decision of the banks
towards liquidation as opposed to restructuring. Debt a nd equity do not have the same value. Debt is
supposed to be repaid in full with interest wh ile the return on shares and their value are highly
volatile. A debt requires interest payment and repaym ent at a fixed moment in time. The swap into
equity relieves the debtor from these obligations. The risk is entirely on the equity-holder whether the
value of the shares raises and he receives dividends. The return is volatile and uncertain.

63. Thus, from the perspective of the creditor bank, debt-to-equity swaps not only do not generate
any capital for the bank but also further reduce capita l inflows as debt needs no longer be repaid; they
are, thus, rather a luxury enjoyed by healthy banks which can afford to wait and see if the swap will
eventually produce any benefits in the future.

64. Korean banks which participated in the restructuring of the ship yards were in exactly such an
onerous situation. A careful examination of the s ituation of each of DHI`s creditors reveals that
almost all of the creditors were facing at the time severe financial difficulties which led to government
intervention. This intervention took many forms de pending on the type of the financial institution
involved and its particular needs such as:

 ¾ capital injections (in most cases leading to the Government of Korea obtaining
important shareholdings - in some cases up to 100 per cent),

 ¾ assurance of government intervention in case of liquidity problems, or

 ¾ the outright provision of public funds.

65. On top of the above tailor-made measures a ll of DHI creditors benefited from the Korean
Government’s assistance through KAMCO, i.e., from KAMCO`s purchases of their bad loans which
led to KAMCO obtaining 26 per cent of DSME shares after the debt-to-equity swap.

66. EC submits separately an Attachment 3 which shows in what way each DHI creditor was
assisted by the Korean Government.

67. In the above circumstances, where the above financial institutions depended on the Korean
Government for their survival, it is highly questio nable to what extent these institutions could
maintain views which departed from those of the Korean Government concerning the restructuring.

68. Finally, banks which had recei ved public funds were limited in the way they could exercise
their independence in participating in a restructuring. Article 18 of the Special Act on the
Management of Public funds
22 obliges banks to enter into writte n agreements with the companies

21 Kookmin Bank brochure, p. 22, (Exhibit EC-100).
22 Special Act on the Management of Public funds (Exhibit EC-103).

they wish to support the details of which are set out in a Presidential Decree. 23 Furthermore, banks
are prohibited from providing funds if the agreements are not implemented or are not likely to be
implemented.

69. In short, the banks already curtailed thei r choice between liquidation and restructuring
through debt-for-equity swaps by signing the CRA . Their discretion how and when to provide funds
to companies was then further curtailed by the other measures described above, which together form a
clear demonstration of government involvement on the banks’ financing decisions.

70. As the CRA framework was only set up in the first half of 1998, it was too late to be used by
Halla and Daedong which faced problems already in 1997 and wh ich were obliged to follow the then
existing framework (court-supervised corporate re organisation proceeding).Daedong applied for it on
10 February 1997 and Halla on 6 December 1997. This , however, did not change their situation as
explained above and in question 21.

18. Question 18

 How did the Daewoo debt-for-equity swap cons titute a financial contribution by a public
body, and on whom was any resultant benefit conferred? Is there evidence that debts were
swapped for less than fair market value, or that equity was obtained for a price greater than its
market value?

Response

71. The Daewoo debt-for-equity swap constitute d a financial contribution because it involved
forgiveness of debt and a debt-for-equity swap and th erefore direct transfers of funds through grants
and equity infusions within the meaning of Article 1.1(a)(1) of the SCM Agreement:

72. As has been explained in responses to Ques tions 14 and 17 above, the creditors deciding on
the debt-for-equity swap were public bodies or private bodies entrusted or directed by the government
within the meaning of Article 1.1(a)(1) of the SCM Agreement . Thus, the debt-for-equity swap
constitutes a financial contribution.

73. The resulting benefit of this creation subsid y was conferred on the restructured company,
Daewoo.

74. As to its amount, it is important to note that from the perspective of the recipient, i.e., the
restructured Daewoo, a debt-for equity swap is not simply a reorganization of the balance sheet not
involving flow of new money.

75. First, debt and equity do not have the same valu e, a debt is supposed to be repaid in full with
interest while the return on shares and their value are highly volatile. Thus, formalistically, one could
see a debt-for equity swap per se as conferring a benefit, in particular if the recipient is an insolvent
company or is in such a poor financial state that no private investor would have participated in such
an action. A debt requires interest payment and repa yment at a fixed moment in time. The swap into
equity relieves the debtor from these obligations. The risk is entirely on the equity-holder whether the
value of the shares rises and he receives dividends. The return is volatile and uncertain. Having said
this, it is difficult to generalize about these issues, as the facts of each individual case will vary. The
existence of a subsidy and the amount of the benefit will depend on the circumstances of each case.

23 During the Annex V process, Korea refused to provide the Presidential Decree stating that a
translated copy of the Decree was not available; see Korea’s response to the EC follow-up questions of
20 October 2003 under the section “attachment 2.1(6) at pages 7 and 8.

76. The SCM Agreement is not drafted in terms of flows of money. Article 1 provides for the
existence of a financial contribution in the event of certain actions by a government, or by private
parties acting at its behest. The existence of a bene fit is determined in relation to what could have
been obtained by the recipient on the market in arm’s length transaction. The amount of benefit must
also be assessed on that basis, as indicated in Article 14 of the SCM Agreement.

77. As evidenced by the calculations in Attachment 1 to these responses, the creditors of
Daewoo overpaid for the equity in the debt for equity swap on 14 December 2000 by KRW 649,089
million when compared to the price of the stock when it was first publicly traded on
2 February 2001.
24

78. However, the EC wishes to clarify that the calculation of the benefit resulting from the debt-
for-equity swap assumes that the restructuring plan itself was market based. Yet, the EC maintains
and will further develop its argument that the mark et as evidenced by the fo reign creditors would not
have agreed to the restructuring plan including the debt-for-equity swap at all and that therefore, the
amount of the benefit to Daewoo is significan tly higher. (See response to Question 15 and
exhibit 112).

19. Question 19

 Please comment on para. 56 of Korea's oral statement, regarding the impact of changes-
in-ownership on the benefit analysis.

Response

79. Korea’s argument, if the EC understands corr ectly, is that the restructured yards did not
receive a benefit because the restructuring pro cess involved changes-in-ownership. However, the
reference to the privatization cases is entirely misplaced. The fundamental rationale behind the
privatisation cases is that it cannot be presumed that a privatised company continues to benefit from
financial contributions provided to a former stat e-owned holder of the assets where the sale was at
arm’s length and for market value. In such a case, the benefit no longer accrues to the privatised
company but to the former owner of the assets and if this is the government itself the subsidy is
effectively withdrawn.

80. The situation is very different in the case be fore this Panel. The change in ownership and
 the
subsidy constitute one and the same measure and it is the successor co mpany that is the only recipient
of the benefit; the predecessor company never receive s a benefit. Moreover, the change in ownership
was not at arm’s length and indeed is part of the measure that constitutes the subsidy.

20. Question 20

 The EC asserts (first written submissi on, para. 281) that KAMCO purchased non-
secured loans held by foreign creditors of DHI on terms more favourable than those offered to
domestic creditors. How is this relevant to the Panel's examination of the issues of whether or
not there was a financial contribution and benefit to the restructured company?

Response

81. Over the period August 1999 to June 2000 KAMCO purchased [BCI: Omitted from public
version] worth of Non performing loans (NPLs) of DHI.25 From financial institutions of which [BCI:

24 First written submission of the European Communities, paras. 258 and 284.
25 Responses by Korea to the Annex V Questions (Business-Confidential Version) (Exhibit EC-39),
response to question 30 at page 80.

Omitted from public version] related to Daewoo-SME 26 and became a creditor of DAEWOO-SME
holding [BCI: Omitted from public version] of the shares after the swap.27

82. KAMCO bought Non-Performing Loans at rates of [BCI: Omitted from public version]
from foreign creditors and [BCI: Omitted from public version] from domestic creditors of Daewoo-
HI. KAMCO’s purchase of non-secured loans at a discount is a financial contribution in the meaning
of a grant/equity infusion in DSME.

83. The purchase by KAMCO proves that independe ntly and market oriented behaving foreign
creditors did not agree to restructuring. As Kore a stated in para. 356 of its first written submission,
the foreign creditors could have obstructed the liqui dation. The purchase at a higher rate can be seen
as evidence that the foreign creditors were “bought out”.

84. Even according to the Arthur Andersen Repor t the total recoverable value compared to the
creditors outstanding claims was only claimed to be:

 ¾ [BCI: Omitted from public version] under the Liquidation value scenario

 ¾ [BCI: Omitted from public version] under the “going concern value” scenario.
28

85. KAMCO’s purchase of more than [BCI: Omitted from public version] of DHI non-
performing loans29 provided a benefit to the restructured Daewoo Shipbuilding Company, because:

 ¾ it cleansed the balance sheets of DHI creditors which could not otherwise have agreed
to proceed to a debt/equity swap given their precarious situation;
30

 ¾ it enabled a public body (KAMCO) to swap debt for up to [BCI: Omitted from
public version] of DSME’s capital; and

 ¾ it allowed a substantial amount of DHI debt to remain idle in the hands of KAMCO
until it is resold as opposed to remaining in the hands of creditors which would have
pursued all available legal means to obtain repayment including through the
liquidation of troubled borrowers.

86. In sum, these financial contributions were not made directly to Daewoo but did benefit it by
facilitating its restructuring and allowing it to emer ge with a healthier balance sheet than would
otherwise have been the case.

21. Question 21

 In paragraph 296 of its submission, Korea defends its action in the restructuring in the
context of both workout proceedings and corporat e reorganizations on the basis that they were
subject to the majority votes of secured and uns ecured creditors; and in the case of corporate
reorganizations, Korea argues in addition that th ese were effected by court decision. Please
comment.

26 Responses by Korea to the Annex V Questions (Business-Confidential Version) (Exhibit EC-39),
response to question 36 at page 52.
27 Attachment 3.1(13) of Responses by Korea to the Annex V Questions (Business-Confidential
Version).
28 The total recoverable Korea states in para. 348 of its First Written Submission.
29 Korea’s Responses to Annex V Questions (Exhibit EC-39) (BCI) question 30 at page 80.
30 See reply to Question 17 above.

Response

87. With respect to the DHI workout, the EC has explained above (response to question 17) how
creditors were directed by the Korean government in their decisions.

88. With regard to court-supervised proceedings , the EC would point out that the court only
examines whether a number of conditions for opening of the restructuring proceeding, the approval of
the restructuring plan and the closing of the restru cturing proceeding are fulfilled. One of them is
whether the creditors agreed with a 2/3 (for secured creditors) and 3/4 (for unsecured creditors)
majority respectively to the restructuring plan.
31 Thus, it is the creditors that exercise the discretion.
Without their agreement, the court cannot take a decision.

89. Thus, the fact that the restructuring of these firms was supervised by the court does not mean
that there is no subsidy since the role of the court was merely to ensure that creditors had followed the
proper procedures. Nowhere in the information s ubmitted, it is even suggested that the court
interfered with the decision making process or that it substituted its opinion for that of the creditors.
On the contrary, Korea has repeat edly stated that creditors took decisions in these cases on the basis
of their own interests.

90. Also, the fact that the Halla/Samho and D aedong restructurings took place under an existing
legal framework (as opposed to the para-legal nature of the workouts) does not preclude a finding that
a subsidy might have been granted. If such a view was to prevail, it would preclude the application of
the SCM Agreement on any restructuring/bankruptcy proceedi ngs – a result certainly not foreseen by
the spirit or letter of that WTO Agreement.

22. Question 22

 Please elaborate on your argument concerning the alleged specificity of the corporate
restructuring, as referred to in paragraphs 87-89 of your oral statement. That is, setting aside
the issues of financial contribution and benefit, what is the basis for your allegation that the
restructuring was specific? Do you argue de jure or de facto specificity in this regard?

Response

91. The corporate restructuring subsidies are specific under Articles 2 (a) and (b) of the SCM
Agreement because they are individual measures only applying to the restructured yard and are per se
not generally available to all enterprises. The ava ilability of the corporate restructuring subsidies is
limited by law to individual enterprises, because it selectively benefits certain enterprises, as opposed
to a broad economic policy measure, such as the reduction of corporate taxes.

92. More specifically, the amount of the benefit granted to, e.g., Daewoo, does not result from an
automatic application of objective criteria within th e meaning of Article 2(b) and footnote 2 of the
SCM Agreement. These provisions state in relevant part:

In order to determine whether a subsidy, as defined in paragraph 1 of Article 1, is
specific to an enterprise or industry or group of enterprises or industries (referred to
in this Agreement as "certain enterprises" ) within the jurisdiction of the granting
authority, the following principles shall apply:
(a) Where the granting authority, or the legislation pursuant to which the
granting authority operates, explicitly li mits access to a subsidy to certain
enterprises, such subsidy shall be specific.

31 First written submission of Korea, para. 302.

(b) Where the granting authority, or the legislation pursuant to which the
granting authority operates, establishes objective criteria or conditions 2
governing the eligibility for, and the am ount of, a subsidy, specificity shall
not exist, provided that the eligibility is automatic and that such criteria and
conditions are strictly adhered to. The criteria or conditions must be clearly
spelled out in law, regulation, or other official document, so as to be capable
of verification.
 2 Objective criteria or conditions, as used herein, mean criteria or conditions which are neutral,
which do not favour certain enterprises over others, and which are economic in nature and horizontal in
application, such as number of employees or size of enterprise.

93. The benefit resulting from a restructuring d ecision, e.g., the one in the case of Daewoo is
nowhere laid down as “objective criteria” in the way required by Article 2(b) of the SCM Agreement
and footnote 2. In particular, the specific amount of the subsidy and the eligibility criteria are not
generally described and automatically applied to all other firms that apply for a restructuring
proceeding. No Korean legislation or any other measures, and in particular not the CRA provide that
all companies in difficulty are (i) restructured as is Daewoo and the (ii) receive the same specific
amount of benefit resulting from debt-forgiveness, interest rebates, debt rescheduling and finally debt-
for-equity swap enjoyed by Daewoo. Rather , the rules governing workout proceedings and
restructuring are entirely procedural and leave the discretion of whether and how to restructure to the
creditors in each individual case.

94. The individual nature of, e.g., the Daewoo restructuring measures is further corroborated by
the fact that the eligibility criteria for work-out were in any case not strictly applied. The first
“disqualifying criterion”
 32, whereby an applicant “may be disqualified” is

A company whose outstanding debts significantly exceeds its sales revenue and
profitability of its core business.
95. It is evident from the Arthur Anderson report that this was very far from being the case for
DHI.

 [BCI: Omitted from public version.]

96. Indeed Korea agreed in the responses to th e Annex V questions that this criterion was not
fulfilled) and further admitted that these eligibility criteria were not strictly applied but are rather
“factors to be considered in determining whethe r companies may be disqualified as candidates for a
workout. None of these factors in isolation is decisive.”
33

23. Question 23

 Is it your position, as Korea argues, that all insolvent companies should be liquidated
and wound up, rather than restructured? If not, what criteria should determine whether to
keep an insolvent company in operation? In this context, what weight or importance should be
given to a going concern analysis or assessment?

Response

97. No, the EC fully accepts that bankruptcy law is a necessary part of a market economy and that
a properly conducted bankruptcy pro ceeding would normally not give rise to a subsidy. However,

32 First written submission of Korea, attachment 8, p. 2, last paragraph and p. 3.
33 Korea’s Response to Annex V Question (BCI) 3.1.2. 11, p.69.

where the outcome of a bankruptcy proceeding or a co rporate restructuring is determined by public
bodies - or private bodies acting under their direction – and leads to a more beneficial outcome for the
enterprise than would have arisen if the creditors ha d acted according to market principles, all of the
components of a subsidy are present. There is no basis in the SCM Agreement to allow insolvency to
be a loophole in the subsidy disciplines.

98. The relevant criteria to determine whether to keep an insolvent company in operation are:

 ¾ Whether a market creditor/investor in si milar circumstances, given probable market
developments and the position of the undertaking would have acted in the same way,
i.e., agreed to waive or reschedule debts. With respect to a debt for equity swap, it
should be considered whether a rationale private investor operating in a market
economy would have purchased the equity at the price provided in the restructuring
plan.

 ¾ Whether a restructuring plan exists that r estores the long-term viability of the firm
within a reasonable timescale and on the basis of realistic assumptions as to future
operating conditions. The restructuring plan should also describe the circumstances
that led to the company’s difficulties, thereby providing a basis for assessing whether
the proposed measures are appropriate.

 ¾ Whether the recipient is able to make a significant contribution to the restructuring
plan from its own resources, including through the sale of assets that are not essential
to the firm’s survival, or from external financing at market conditions. Such
contribution is a sign that the markets belie ve in the feasibility of the return to
viability.

99. As to evidence, the EC considers that the primordial indicia is the behaviour of actual other
creditors that were not influenced by the government (in this case foreign creditors). Moreover, the
ability of the company to obtain credit or attract investment on the market is highly relevant. The
existence of a going concern analysis can be an indi cia that a hypothetical private creditor would have
acted in the same manner, if that analysis cont ains the above elements and was provided to the
creditors in sufficient time so as to take an informed decision.

24. Question 24

 Where a government entity is a creditor of an insolvent company being restructured,
will the restructuring always
 result in a subsidy? Why or why not?

Response

100. The restructuring will always result in a fi nancial contribution wher e it consists of debt-
forgiveness, debt-rescheduling or a debt-for-equity swap. However, such financial contribution
would not necessarily always result in a benefit and therefore a subsidy. The existence of a benefit
depends on whether the government creditor acted li ke private creditor would have done on the basis
of the elements described in response to question 23.

25. Question 25

 In your view, does the concept of "like product" apply in respect of claims of price
suppression/depression? Please explain your view , including the textual basis and any other
elements that you deem relevant.

Response

101. The relevant portion of Article 6.3(c) of the SCM Agreement does not refer to “like product”
with respect to price depression and suppression. The EC considers that the Agreement therefore
intends to give flexibility as to how to determine the “same market” in which price effects occur.

102. Thus, Article 6.3(c) of the SCM Agreement provides for the tailoring of criteria appropriate to
grasp price developments in the relevant product and geographic market affected by subsidisation
taking on a case-to-case basis.

26. Question 26

 You have argued that a "product segmentat ion" approach should be applied in this
case. In what respects, if at all, does this concept differ from "like product" as defined in
footnote 46 of the SCM Agreement?

Response

103. The EC noted with approval the statement of the Panel in Indonesia Cars that a market
segmentation approach is consistent with the criteria for a like product analysis under the SCM
Agreement (as opposed to a like product analysis under Articles III:2, III:4, of the GATT 1994 as
argued by Korea).

104. Footnote 46 of the SCM Agreement provides in relevant part:

Throughout this Agreement the term "like product" ("produit similaire") shall be
interpreted to mean a product which is iden tical, i.e. alike in all respects to the
product under consideration, or in the absence of such a product, another product
which, although not alike in all respects, has characteristics closely resembling those
of the product under consideration
105. Products belonging to one market segment will generally have characteristics closely
resembling each other, because buyers and sellers w ill consider that the products have the same or
similar end-uses
. Accordingly there will be a strong correla tion between prices of products with the
same end use. Hence, changes in price by one pr oducer will affect the prices of other producers of
that product. Generally, the goal of like product anal yses is to assess precisely the effects of a subsidy
given to the producer of one product on the prices for products produced by other producers. Thus, in
effect, a market segmentation analysis involves simila r questions as posed in a like product analysis
under the SCM Agreement.

27. Question 27

 Korea argues that there is considerable variation or diversity of products within each of
the product segments proposed by you, meanin g that these product segments are too broad and
should be broken down, for example, at least in to different size ranges. Please comment on the
diversity of products within each of the produc t segments that you propose, and in this context
please respond specifically to Korea's arguments on this point.

Response

106. Korea contents itself with generally questioni ng the three market segments identified by the
European Communities (LNGs, container chips and product tankers) 34 without any substantiated
argument, why these should not be correct. If at all, Korea asserts that the market segments should be
further broken down according to different sizes within these ship types.35

107. As already explained in our Oral Statement there are no standard classifications for ships.
The difficulty of classifying ships results from the f act that they are customized and made-to-order
product and thus show a considerable variety of technical specifications.

108. Within the OECD Working Party on Shipbuildi ng, there is not even consensus as to whether
there is

One single market for all ship types or a number of market segments based on the
main vessel types (i.e., a tanker market, a cruise market etc.). In defining the product
market, there was a commonality of views among experts that demand substitutability
and supply substitutability should both be considered.
36
109. Curiously, Korea in that forum claims that “t he level of supply substitutability was so high to
make shipbuilding a single market for all vessel types” and invoked the “abil ity of shipbuilders to
switch easily from the production of one vessel ty pe to another as a strong evidence of high supply
substitutability” while EC with other economies claimed that “the shipbuilding market [is] fragmented
into ship type segments…”.

110. For the purpose of this WTO dispute which re quires an identification of markets in which the
effects of subsidies can be felt, the EC has explained in its Oral Statement why both the perspective of
the ship-owner (demand side) and the perspectiv e of the shipbuilder (supply side) should be
considered.

111. The EC submits that all analysts in this industry make the distinction between major ship
types, and so do the Korean yards on the product pages of their web sites.
37 These support the use of
the main types proposed by the Eu ropean Communities for the purpose of this dispute, i.e., LNGs,
market definition in container ships and product/chemical tankers.

112. However, contrary to what Korea argues, th ere is no basis of further segmenting relevant
markets according to size. First, there standard si ze by which ships within these main types could be
meaningfully distinguished. Indeed, curiously, Korea itself refers to different size bands even in its
First Written Submission. Thus, for example, it refers to the “market in container vessels up to 1,999
TEU” and the “market in container vessels from 2,000 to 3,999 TEU” in para. 19 of its First Written
Submission while then citing with approval to the ve ssel categories used in an analysis of FMI which
looked at “container feeder vessels (up to about 3,500 TEU)” in para. 515 of its First Written
Submission.

113. Any further segmentation of the main typ es according to size does not answer the question
which ships serve the same end uses and are th erefore substitutable from the perspective of the
shipowner. The European Communities refers to figures 2.2 and 3.2 contained in Attachment 2.

34 First written submission of the European Communities, paras. 417, 418. See also Oral Statement,
paras. 101-110.
35 First written submission of Korea, paras. 514.
36 OECD Council Working Party on Shipbuilding, Report by the Chairman of the Informal Experts
Group Held on 1-2 March 2004 (C/WP6/SNG(2004)5, (Exhibit EC – 104) (Emphasis added).
37 See compilation of products listed on websites of Korean and EC producers in Attachment 4.

They present a histogram of the frequency of a ll product tanker and container ship orders placed
between 1997 and 2002 (based on Lloyd’s Register data), distributed by deadweight.

114. While figure 2.2 shows certain peaks for pr oduct tankers, these size bands, e.g., between
32,000 dwt and 40,000 dw t cannot be seen as strict standards for sizes demarking a line for
substitutability or end uses. Thus, a 31.000 dwt pro duct tanker is fully substit utable to a 32,000 dwt
tanker, for the purpose of end uses. With respect to container ships, this is even clearer, because
figure 3.2 does not even reflect any clear peaks, and hence any subdivision as to sizes would be
arbitrary.

115. As the European Communities explained in its Oral Statement, from the perspective of ship-
owners size may limit full substitutability, however, both for container ships and product tankers there
is a significant overlap between the end uses of ships of all sizes.
38 Indeed, there is no market, e.g.,
for a container to be transported through the Pa nama or Suez Channel or between main hubs and
smaller ports. Shipping companies run networks of routes and exchange ships according to routes
which are constantly adapted to market needs.

116. In any case, from the perspective of the shipbui lder, the distinction between even ship types is
less important as the production technology is larg ely the same for all commercial vessels and in
particular between the main types identified by the European Communities. Under no circumstances
can one say that size plays a significant from the perspective of the shipbuilders.39

117. In short, the market segmentation proposed by the EC is sound both from the demand and
supply side perspective.

28. Question 28

 Please comment on Korea's statement that "the Korean and EC shipbuilders have and
continue to operate in totally different segme nts of the shipbuilding market and that the
segments where certain competition may exist a re marginal and demand for those segments has
shown slackening" (para. 19, Korea's first written submission).

Response

118. In paragraph 19 of its submission, Korea provi des a snapshot picture and tries to minimise
actual participation or operation of EC yards in certain selected si ze ranges within the three markets.
However, for the purpose of a price depression or suppression claim it is not relevant whether EC and
Korean producers actually “operate” or “participate” in the same market as argued by Korea. What is
required is that EC producers compete for all the products and are able to build them.

119. In this respect it is important to recall that competition between yards materialises at the stage
of tendering
 for a contract. Tendering involves first technical specifications and a price offer. It often
also includes financing aspects and comes at substa ntial costs for the tendering yard. Hence, the
absence of an order does not indicate an absence of co mpetition in the market. EC shipyards are well
experienced in all the contested market segments and are actively seeking opportunities to win orders
in all sectors.

38 Oral Statement by the European Communities at the First Substantive Meeting with the Panel,
paras. 105-107.
39 Oral Statement by the European Communities at the First Substantive Meeting with the Panel,
paras. 108-109.

120. This can first be proven by the list of available standard product categories on their
websites.
40

121. Moreover, Korea itself recognises that EC ya rds and Korean yards compete in the same
market segments and makes it clear in its recent Pa nel request in the case DS 301 of 6 February 2004
where Korea considers that

the EC and its Member State measures referred to above are in breach of the EC and
its Member State obligations under the follo wing provisions: Articles I:1 and III:4 of
GATT 1994 because the TDM Regulation and Member State implementing measures
involving the bestowal of German, Danish, Dutch, French and Spanish grants to
shipyards on a vessel-specific and product-related basis, adversely modify conditions
of competition between Korean commercial vessels and the like vessels built in third
countries and Korean commercial vessels and the like vessels built in the EC,
respectively”.
29. Question 29

 You argue that there are three mark et "segments" relevant to your price
suppression/depression claim: LNGs, chemical/product tankers, and container ships.

 (a) Is the implication of this that in your view, price suppression/depression should
be found in respect of each of these segments separately?

Response

122. Yes.

 (b) If so, what is the relevance of figure s 33-36 of your submission? That is, please
explain what conclusions about price and cost trends in respect of the particular
kinds of ships referred to in your claim can be drawn from these graphs, which
appear to represent averages for all
 ships of all types.

Response

123. Paragraphs 443-453 of our First Written Submission and Fi gures 33-36 deal with price
suppression at an aggregate level before addressing pr ice/cost developments in the three particular
segments. The under-lying principles are the same whether considered at the aggregate level or
specifically fore the three market segments as fu rther elaborated above: Newbuilding prices have
disconnected from the key economic drivers, namely order volume (i.e. demand), freight rates and
costs of production.

124. The EC also notes that major shipbuilding cons ultants maintain a composite ship newbuilding
price index, along with their more specific price information for particular ship-types. Also, the
OECD issues regularly its own newbuilding price an alysis which contains a composite price index
with a timeline.

 (c) Do you agree with Japan's argument that a low price for any individual
transaction will put downward pressure on all
 types of ships, whether
substitutable or not? If so, why? Does a decline in the price of a ship of a
certain type, for instance a container ship, cause a decline in the price of ship of
another type, e.g., a tanker or passenger ship? Is it not more defensible to argue

40 See Attachment 4.

that a decline in the price of one ship causes a decline in the price of another ship
with the same end-use?

Response

125. Yes we agree. As explained in the answer to question 30 below, the end use of the ship is to a
large degree irrelevant to the shipbuilder, just as the end use of a building is largely incidental to the
business of a construction company. It is common practice in shipbuilding for shipyards to shift their
focus between market segments to respond to shifts in the market. Because of this ability, or even
necessity, to shift, it is a misconception to assume that shipyards are only affected if they are
competing directly for the ship types that are the subject of accusations of price suppression.

126. Therefore, a decline in prices for one ship-type will de facto always go hand in hand with
price developments for another. However, the co rrelation between price developments will be higher
for ships with the same end-use.

30. Question 30

 In general, how much flexibility does a typical shipyard have to produce all or a broad
range of ship types? What are the physical and other constraints on any given shipyard's
potential product range? How important is prio r experience to a shipyard's production cost
and capability to build a particular type of sh ip? With reference to the above considerations,
please describe the capabilities and experience of each EC shipyard that produces or is capable
of producing some or all of the kinds of commercial vessels cited in your serious prejudice
claim.

Response

127. All shipyards are ultimately constrained only by size. From the point of view of a
shipbuilder, however, within this size constraint th ere is a great deal of flexibility for substitution
between products.

128. In the eyes of a shipbuilder a ship is an assembly of steel panels, into which is fitted
machinery, pipes, cables, accommodation and so on, a nd the ultimate function of the ship is largely
irrelevant. In the eyes of a shipbuilder a tanker, a dry bulk carrier and a container ship are broadly
similar products, even though the arrangement and pr oportions of the parts that are assembled differ
in each product. Whilst shipbuilders seek to impr ove economic efficiency by series building similar
products, very few shipyards specialise in a single pr oduct type, although there are examples of this.
Thus, for example, Hyundai Heavy Industries, with in the same shipyard, cu rrently has orders for
tankers of different sizes, container ships of di fferent sizes, LPG tankers, dry bulk carriers and LNG
tankers. Similarly, Daewoo is cu rrently constructing tankers, LNG carriers, LPG carriers, car carriers
and container ships within broadly the same faciliti es. Most shipyards take orders in this way,
building a wide range of ship types.

129. In this respect shipbuilding can best be compared to the construction industry whereby a
construction company will be capable of building a wi de range of building types and the end use is of
little relevance to the building process. The charac teristics of the interim products produced by the
shipyard from which the ships are assembled will be broadly similar between the different ship types
and the assembly and outfitting processes will also be broadly similar, even though the final product
assemblies will have widely different shipping functions.

130. Specific prior experience is of limited significance for most ship types. The exceptions to this
are LNG tankers and cruise ships where entry cost s are high and a significant amount of development
will be needed to gain market entry.

131. The number of relevant EU shipyards is too many to be specific about the final part of this
question. LNG tankers are on order in shipyards e xperienced in this sector in France (Chantiers de
l’Atlantique) and Spain (Izar), and the market has been competed strongly by Finnish shipyards also
well experienced in building LNG carriers, although as yet without an order. Container ships are built
throughout Europe in all size ranges, with German and Danish shipyards concentrating in particular in
the larger size ranges. Similarly there is a wide experience of building product tankers throughout EU
shipbuilding, although with few orders won by European yards in the face of low price competition in
recent years.

31. Question 31

 Is "head-to-head" competition a necessary precondition for any finding of serious
prejudice based on price suppression or depression? If not, why not? If so, how can such head-
to-head competition in respect of various kinds of ships be observed? Please provide or refer to
any relevant evidence to illustrate your response.

Response

132. Whilst there are numerous examples within EU sh ipbuilding of contracts lost in head to head
competition with the disputed Korean shipyards, this is not a necessary precondition for finding
serious prejudice based on price depression or suppression.

133. As explained in response to Question 29 it is sufficient to establish that producers of the
complainant and defendant compete on the market se gments for which serious prejudice is alleged.
The ability and the willingness to prod uce vessels of any kind or size is the decisive factor and should
not be confused with the actual regular success to secure specific orders in the market. Thus, the
realistic presence of a yard (in terms of available f acilities, technology and building slots) in a certain
market segment is sufficient to establish the market mechanisms. Typically, brokers would be able to
name yards that were invited to make a quote. Th e fact that brokers would consider a yard as a
potential bidder, would prove presence in the market, irrespective whether the yard has recently been
active in the market segment or not.

134. Ultimately shipyards will stop tendering for orders that they know they are incapable of
winning, because the cost of tendering is so high. Th e exit of a shipyard in this way is the ultimate
expression of serious prejudice resulting from price suppression and depression, but this will not be
identified through an analysis of contracts lost in head to head competition.

32. Question 32

 Please identify in as precise terms as possi ble the products, within each of the product
segments that you propose, for which the Eu ropean and Korean shipyards compete most
directly. Please describe the nature of the comp etition between European and Korean ships of
each of these types.

Response

135. The EC refers to Attachment 6 which describes the ordering and market shares within the
three product segments.

 (a) Product tankers 41

136. Within this market one can distinguish th ree sub-types bands above 20,000 dwt: handysize,
handymax and panamax. These three typ es are demonstrated in figure 2.2 of Attachment 2 which
shows peaks in the size bands of:

 ¾ 32,000 to 40,000 dwt (Handysize)
 ¾ 44,000 to 51,000 dwt ( Handymax)
 ¾ 69,000 to 76,000 dwt( Panamax)

137. As to the nature of the competition between European and Korean ships within the product
tanker segment, the EC refers to the further information in Attachment 6. Korea dominates all three
sub-sectors, whilst EU shipyards have lost almost al l share of the market in the face of low prices.
There are currently four handysize ships on order in Italy and one in Spain. There are no ships of the
two larger types on order in the EU. In the past this has been an important market sector for EU
shipyards, with a considerable track record invested in EU shipyards.

 (b) LNG carriers

138. Whilst there are, technically speaking, two va riants of the LNG tanker, the spherical and the
membrane type, the size of ships, at least up to now, has been fairly uniform (and there is no
difference in the use of these two variants). This is demonstrated by figure 1.2 of Attachment 2 which
presents a histogram of the frequency of all L NG tanker orders placed between 1997 and 2002 (based
on Lloyd’s Register data), distributed by deadwei ght. There are a very small number of ships built
outside this range (four were ordered outside this range out of 86 total LNG carrier orders placed
between 1997 and 2002), but the majority of ships lie in a relatively narrow band around 140,000 to
150,000 cubic metres cargo capacity.

139. As to the nature of competition w ithin this segment, the EC refers to Attachment 6. Korea
dominates, with almost 60 per cent market share, wi th very limited opportunities for EU shipyards to
take orders. There are currently three ships in order in France, two in Spain, with a total market share
of 7.3 per cent.
42 The capability to produce this ship type is inherent in a number of EU shipyards.
The failure of European builders to gain any appreciable market share in this sector in the face of very
low prices, and despite strenuous efforts at product development and cost reduction, has been the
source of considerable frustration.

 (c) Container ships

140. The container ship market is less clearly dema rcated in terms of sub-classes by size, than the
other disputed ship types, as is evidenced by figure 3.2 in Attachme nt 2 which presents a histogram
of the frequency of all container ship orders placed between 1997 and 2002 (based on Lloyd’s
Register data), distributed by TEU.

141. Above the size band for feeder ships ( ca. 500-3500 TEU), peaks can be seen for:

 ¾ Panamax ships (between about 4,000 and 5,000 TEU)
 ¾ Post-panamax ships (above about 5,000 TEU)

41 As clarified in para. 103 of the Oral Statement by the European Communities, the claim relating to
product and chemical tankers does not cover pure chemical tankers. Therefore, the EC will henceforth refer to
this segment collectively as the “product tanker market”.
42 (Note: the very small ship on order in Netherlands is an unusual variant of this ship type and is not
included in the general market for large LNG tankers of around 150,000 m3).

142. The nature of competition is described in Attachment 6. Korea takes around three-quarters of
orders for both panamax and post-panamax ships. EU shipyards have lost all share of the post-
panamax sector and retain less than 1 per cent of th e panamax sector. This is despite considerable
efforts at marketing in these sectors and a good track reco rd of production. In the feeder sector Korea
has the highest market share but without dominan ce. EU shipyards retain around one quarter of
orders, primarily in German shipyards. Denmark a nd the Netherlands participate in this sector but
only to a limited degree.

33. Question 33

 Please provide the data underlying your estimates of 2002 EC market share referred to
at paragraph 15 of your submission (i.e., 17 per cent of worldwide CGT, and one-third of world
turnover for ships). How many ships of which types do these figures represent?

Response

143. The information on market share is based on Lloyd's Register data comes from the OECD. 43
The OECD does not refer to numbers of ships and only uses cgt as reference.

144. The economic and employment data for the EC shipbuilding industry are contained in the
AWES (Association of European Shipbuilders and Ship Repairers) Annual Report for 2002.
44 AWES
also has Norway, Poland, Romania and Croatia as members. The figures for these countries have not
been included in the EC totals.

145. In terms of production (delivered ships in 2002) the AWES countries, excluding Norway,
Poland, Romania and Croatia had an output of 289 ship s. In its statistics AWES does not differentiate
by country and
 ship type. Therefore the following breakdown refers to all AWES countries (total of
425 ships):

Deliveries in 2002 by ship type:

Oil tankers 4
Product/chemical tankers 22
Bulk carriers 3
General cargo ships 46
Containerships 66
RoRo ships 8
Car carriers 9
LPG tankers 1
F e r r i e s 2 7
Passenger ships 28
Fishing vessels 66
Other 145

34. Question 34

As a general matter, please describe the precise nature of the analysis that you believe is
required to establish serious prejudice through price suppression/price depression, including
the following issues:

43 OECD document C/WP6/SG(2003) 3 "WORLD SHIPBUILDING ACTIVITIES IN 2002". (Exhibit
EC – 105).
44 AWES – Annual Report 2002-2003 (Exhibit EC – 106).

 ( a) Must there be (at least inter alia ) a demonstration that the prices for the
complaining party's products have been s uppressed or depressed, or is the focus
of the analysis instead the prices for th e allegedly subsidizing party's product?
Or are both sets of prices relevant?

Response

146. The EC believes that there is serious prejudice in the form of price depression or suppression
where prices are depressed or suppressed on any mark et in which the products of the complaining
Member compete with those of the subsidising Me mber. As noted above, this competition can be
“head-to-head” or simply at the level of being potentially able to tender for contracts to build the same
ships. Thus price depression or suppression on a ma rket may lead the suppliers of the complaining
Member not to go to considerable expense of tendering for contracts at depressed or suppressed
prices.

147. In other words price depression or suppressi on describes a condition of the overall market.
(Establishing price undercutting on the other hand may require evidence of actual sales by the
respective suppliers.)

148. Since the market for ships is a global one , price depression or suppression is not limited to
one region. Rather all prices offered anywhere in the world may lead to price depression or
suppression throughout the global market.

 (b) How if at all should these two sets of prices be juxtaposed against or related to
one another?

Response

149. As stated above, price depression or suppressi on has to be established on a market where the
products of the complaining Member compete with t hose of the subsidising Member. Since, in the
view of the EC, this is the global market, it is sufficient to show price depression or suppression of
any prices. The EC has shown with its graphs price depression/suppression for Korean shipbuilders
(prices not following the evolution of costs) a nd also price throughout the world (prices not
responding to increased demand). Since Korean shipbuilders are the price leaders, price
depression/suppression in Korea is particularly importa nt. It affects, that is depresses/suppresses the
prices of all shipbuilders throughout the world.

 (c) How similar must the complaining party's and allegedly subsidizing party's
products be?

Response

150. They need only be sufficiently similar that ch anges in the price of one affects the price of the
other.

35. Question 35

 The nature of your basic argument as to price suppression/depression in this case, and
particularly as to the role and significance of Korean ship prices, is not fully clear. Please
comment on the following:

 (a) Is it your argument on price suppression/price depression that Korean
 prices
have dropped, or failed to increase, in sp ite of various factors that should have
caused them to increase, and that th is situation (these trends in Korean prices)

itself constitutes the "price suppression" or "price depression" referred to in
SCM Article 6.3(c)?

 (b) Or is your argument that Korean prices have caused EC shipyards' prices to
decline or have prevented them from increasing?

 (c) Or is your argument rather that Kore an prices have caused "world prices" for
ships either to decrease or have prevente d them from increasing, and that these
trends in world
 prices constitute the price suppr ession or depression referred to
in Article 6.3(c)?

 (d) How do the examples described as "lost sales" in your first submission
specifically relate to and support your allegations of price
suppression/depression?

Response

151. All of the phenomena described in (a), (b) and (c) have occurred. The critical element is
probably that described in point (c). This has been caused by the phenomenon described in (a) and
has caused that described in (b).

152. Lost sales (d) were for purely illustrative purpo ses showing the actual effect of Korean prices
on EC prices.

36. Question 36

 Assuming that there is a world market that allows competition between all suppliers for
the sale of a particular ship, is it your position that if a bid goes to, say, a Finnish or German or
Japanese shipyard, the reason for the lower price of the winning bid is a natural competitive
advantage (i.e., lower cost or higher productivi ty), while if the winning bidder is a Korean
shipyard, you exclude such a possibility? Please explain.

Response

153. The EC accepts that different yards have different competitive advantages, also within a
specific shipbuilding country or region. However, by systematically excluding certain cost factors
such as debt servicing or inflation, Korean yards ar e able to offer prices that cannot be matched by
any competitor. Shipbuilding costs are quite transparent and reasonable assumptions about key costs
and profitability of yards can be made.

154. It should be remembered that the real costs of production appear only years after the tendering
for and contracting of a vessel. Yards can ma ke unreasonable quotes without needing a subsidy
instantly. The EC alleges that the Korean subsidies have allowed certa in yards to stay in the market
and assume price leadership by setting artificially low prices that then became the new benchmark.

155. Furthermore, Japan in its Third Party submission clearly indicates
45 that “Japanese
shipbuilders experienced a number of lost sales of L NGs carriers in competition with offers made by
Korean shipbuilders at the prices that were 10 to 27 per cent lower.…Jap anese shipbuilders also
reported lost sales of some container vessels, since the prices offered by Korean competitors were 15
to 17 per cent lower”. Japan makes clear that for ce rtain shiptypes, only Korean shipyards made very
low offers preventing other competitors to win bids.

45 See Third Party submission of Japan, para 18.

156. The EC would recall however that it is not claiming prejudice in the form of specific
instances of lost sales. It is rather complain ing that prices have been depressed or suppressed
significantly and this is due to a subsidisation of a number of Korean yards.

37. Question 37

 You argue that "in the same market" refers to any market in which there is competition
between the subsidizer and the complaining party, and that in the case of ships, which are not in
any meaningful sense imported, the only relevant ma rket in this sense is the global market.
Concerning "the same market" you also quote with approval, at paragraph 392, the Panel's
statement in its 19 September 2003 response to Korea's request for preliminary ruling, that "the
same market" is "a market where Korea n and European Communities producers of
commercial vessels compete and where the alleged adverse effects of the subsidies on prices or
sales will need to be established".

 (a) What in your view distinguishes a "g lobal market" from a series of national or
perhaps regional markets, and how wo uld price suppression/price depression
analysis for a "global market" differ from such an analysis for a national or
regional market? Please respond to the US argument that a purchaser of any
product always has the option of importing it from a number of countries, but
that this does not change the scope of the market where the sale takes place.

Response

157. National or regional markets are often distinct because buyers are not entirely free to purchase
wherever they wish and sellers not entirely able to sell wherever they wish under the same conditions
because of the existence of tariffs, different regulatory regimes or simply the costs of buying or selling
far from home. None of these restrictions apply in the shipbuilding market. For example:

 ¾ Ships are by nature highly mobile (and tran sporting them is an insignificant cost
compared to their value);

 ¾ Ships do not normally need to be imported, i.e. cleared through customs or subjected
to duties;

 ¾ Regulations and standards are typically harmonised or international – and the
existence of “open registries” and flags of convenience make attempts to impose
significantly different national taxes and regulations unworkable;

 ¾ Shipbuilders operate on a large scale and are active throughout the “global market”;

 ¾ Ship-owners are also larg e enterprises and are established in many different
territories.

158. Contrary to the US suggestion, the situati on is significantly different for most other goods.

 (b) Are ships in each of the "product se gments" identified by the EC purchased in
all regions/countries in the world?

Response

159. Yes. Ships in the three product segments iden tified by the EC are indeed purchased in all
regions/countries in the world. This is demonstrated by the table contained in Attachment 7, showing
the number of vessels ordered in the period Janua ry 1997 to December 2002, broken down per

“country of economic benefit”
46 (where such information is available). The table clearly indicates that
the three relevant ship types are indeed purchased by a wide variety of countries.

 (c) Do/have EC shipyards bid for business in all of these regions/countries for all of
these product segments?

 (d) Do/have the Korean shipyards?

Joint Response

160. Yes. The tables in Attachment 7 also separate orders secured by EU yards and those secured
by South Korean yards. From these tables, it appear s that the orders secured by EU and Korean yards
have been placed by a wide variety of countries, and that a significant part of those countries have
purchased vessels both from EU and Korean yards.

161. It is recalled that in many cases the orders for vessels are the result of a tendering process by
which all interested yards are free to make an offer, whatever their nationality. In case a ship broker is
involved, he might guide the owner in his choice of a yard. For this purpose, the reputation of a yard
for building a specific ship type and possibly the ava ilability of an established standard ship may play
a role, but the nationality of the yard is not a relevant criteria here. Indeed, most major yards
worldwide will offer an acceptable design and quality for the relevant ships in their product mix.

162. In addition to the above mentioned tables, showing that both EU and Korean yards compete
on a worldwide basis, the EC has also provided – in the framework of the annex V procedure –
example of cases where EC yards have, in various instances, submitted a price offer for the three
relevant sectors, but for which the order wa s subsequently placed with a Korean yard.
47 This was
namely the case for most of the major orders placed for LNG’s. This again demonstrates that there are
bids by EC and Korean yards for the same project s, and that therefore both EC and Korean yards
compete in the three relevant sectors.

 (e) Are there any technical or legal constraints on the EC industry's (or individual
EC shipyards') ability to compete for the full spectrum of this business?

Response

163. In principle, no.

164. However, only six EC yards have a track r ecord in LNG carrier construction and currently
only three of them participate actively in this ma rket which requires extensive know-how and facility
investment.

165. Eastern German shipyards which have a str ong focus on container ships are still subject to
capacity (i.e. cgt output) restrictions following the approval of earlier restructuring aid, but there is no
known instance where these restrictions would have prohibited yards to participate in tenders for
container ships. Rather, the restrictions have kept the concerned yards from seeking cruise ships
contracts as this ship type has a significantly highe r cgt contents than container ships or other non-
passenger vessels.

46 This term refers to the owner that derives bene fit from the operation of the ship. Lloyd’s Register
now uses the term ‘country of economic benefit’ to designate the best country in which to count ownership,
based on beneficial ownership. Indeed, whilst at first glance it may appear that the registered ownership may be
the best guide to the owner of the ship there are a numbe r of complications that clo ud this category: registered
owner may be a finance company, a web company that is registered offshore, etc.
47 See EC reply to the annex V procedure, annex 7.

38. Question 38

 In arguing, on the basis of US – Norwegian Salmon CVD and Article 15 of the SCM
Agreement that an "a cause" standard is suffi cient for a finding of serious prejudice, are you
implying that the causation standard for s erious prejudice is the same as that for a
countervailing measure? If so, what is the textual basis for such an argument? If not, what is
the relevance to this dispute of either SCM Article 15 or the standard applied by the Salmon
CVD panel? In this context, please respond to the US comment pointing to the difference in
drafting between SCM Article 6.3(c) and SCM Arti cle 15 ("the effect of the subsidy [...]" versus
"the effects of the subsidized imports [...]", respectively).

Response

166. The EC referred to Article 15 of the SCM Agreement as contextual support for its argument
that the subsidies do not have to be the sole cause of the price depression or suppression, but rather a
cause. Article 15 of the SCM Agreement distinguishes more precisely between the “effects of
subsidies” as opposed to other possible causes (15.5) and the “effect/impact of the subsidised imports”
on prices in the domestic market (15.1, 4, 6). This corroborates that the phrase “effect of the
subsidy” must not be read to require that subs idies are the exclusive cause of price depression or
suppression, as also agreed by the United States.48

39. Question 39

 In Figures 11-25 of your first submission, you list individual APRGs and PSLs to
Korean shipbuilders that you allege were made at below-market terms. Is it your contention
that EC shipyards competed with the Korean ship yards for each of these sales? If so please
provide details. If not please explain the signif icance to your adverse effects claims of these
instances of financing.

Response

167. The listed transactions are produced as examples of KEXIM export subsidies and thus cover
almost all major ship sectors including sectors not refe rred to in the actionable subsidies part such as
oil tankers, Ro-Ros etc.

168. EC yards compete in all of these sectors. However, given that the information was only
provided by Korea as BCI in the context of th e Annex V process, the EC could not share this
information with EU yards to verify whether they participated in any bidding relating to these
transactions.

40. Question 40

 You make no argument concerning the effects of individual APRGs or PSLs on the
prices of the individual transactions in which those instruments were used. Instead, you seem to
limit your argument in respect of the alleged adverse effects of APRGs and PSLs to the more
general point that these instruments contri buted to "rescu[ing] th[e] shipyards from
liquidation", by improving the attractiveness of keeping them in operation as opposed to
shutting them down.

 (a) Is this a correct understanding of your argument as to the alleged adverse effects
of the APRGs and PSLs?

48 Third Party Submission by the United States, para. 50.

Response

169. Yes.

170. The EC wishes to clarify alleged adverse ef fects with respect to the APRG and PSL scheme
merely indeed but not limited to specific transactions.

171. The EC does not accept that APRGs or PSLs have no effect on the prices of individual
transactions in which those instruments were used. Ho wever, their effect is very difficult to calculate
in the absence of the precise details of the transac tions. In that respect, Korea has refused to provide
the EC with key data such as the contract prices, th e payment terms or the dates of deliveries of ships.
(See Korea’s response of 10 October 2003 at para. 3).

172. Nevertheless, the EC has produced in Attachment 5 an example of what the impact of an
APRG and a PSL would be on a couple of transac tions using best information available. The
examples show that the impact of APRGs or PSLs ca n indeed be very significant (up to 2 per cent of
the transaction price).

173. The EC, however, wants to underline the impact of the availability of these instruments on the
market in general as the impossibility for a yard to offer an APRG to a buyer would more often than
not lead buyers to shipyards which can offer such a guarantee.

174. Indeed, the availability of an APRG is so essential for a shipyard that Arthur Andersen in
their reviewal of DHI's causes of financial distress
49 pointed to the refusal of Korean banks to provide
APRGs to DHI and to the increase in the premia demanded by foreign banks as a principle cause of
this financial distress. In particular, Arthur A ndersen explained that th e non availability of the
APRGs (or the availability of expensive APRGs) led to DHI orders being cancelled or delayed.

175. Similarly, the availability of PSL means that a yard can offer a buyer heavy-tail payment
terms (which buyers generally prefer as they need to advance less cash for the ship) without worrying
about financing the construction costs.

 (b) If so, what if any impact does the ti ming of individual APRGs and PSLs have on
the analysis? If not, please explain.

Response

176. Both the APRGs and PSLs produce their impact at the time of the negotiations with the buyer
as their availability influences the choice of the ya rd and the payment terms a yard can offer the
buyer.

41. Question 41

 Please respond to Korea's argument that you allege subsidization of some but not all
Korean shipyards, that only shipyards receiving any alleged subsidies could possibly cause
serious prejudice, but that nevertheless the information you present in the context of serious
prejudice concerning the Korean industry covers the industry as a whole.

49 Exhibit EC-64 at page 40.

Response

177. To respond to this argument it is necessary to understand the nature of the current competitive
situation in shipbuilding in South Korea.

178. All shipyards are faced with an imperative to keep the order-book well stocked to support
expensive facilities, potentially high debts and large workforces. This impera tive is reinforced in
South Korea by the search for high volume to try to counteract the effects of low prices through
seeking economies of scale. For this reason shipyards are forced to take as high a share as possible of
their chosen market sectors. W ith the major shipyards in South Korea targeting broadly the same
market sectors, that is those that present th e greatest opportunity for volume coupled to the
(perceived) highest value, intense internal competition within South Korea results.

179. In the most heavily contested market sectors, where shipyards perceive the greatest value to
be, up to three-quarters of the market can be cont rolled by as few as four shipyards. The dominance
of a small number of suppliers has a significant effect on the market and, in particular, prices. It is
competition against these major suppliers that a shipya rd will have in view when setting the price of a
contract. Detailed order-book statistics are attached in Attachments 2 and 6. They show South Korean
shipbuilding being in a dominant position in all th e disputed market segments, and the disputed
shipyards being amongst the dominating yards in each sector.

180. Against this pattern of competition the low prices offered by the subsidised yards forces
competitors to offer low matching prices, irrespect ive of the long-term economic consequences. It
should be kept in mind that the ec onomic consequences of taking an or der will be felt in two to three
years time when production takes place, not at the time of taking the order.

181. The ultimate determinant of the price of a ship is not ‘the market’ but the contract between the
shipyard and the ship owner. This raises the question at what price can a shipyard afford to take an
order? Surely the answer to this can not be at any price, irrespective of the effect on long term
profitability and liquidity.

42. Question 42

 Please respond to Korea's argument that the effect of any alleged subsidy must be
"current", and thus that past subsidies should not be taken into account unless they can be
shown to have such a current effect.

Response

182. As the EC explained at the first meeting with the Panel, there is no rule in the WTO that
provides that a violation is forgiven once it is in th e past. Obligations are drafted in the present tense
to express the intention that they should apply all the time – in the past, in the present and in the
future! However, it is also clear to the EC that Korean subsidisation is still having adverse effects in
the form of prices depression/suppression on the wo rld shipbuilding market. The EC presents in
Attachments 1, 2 and 5 to these responses analyses of the quantit ative effect of the subsidies and the
effects in terms of price depression/suppression of these subsidies. It will develop further in its
rebuttal submission its explanation of the relati onship between these phenomena, taking into account
also the information produced by Korea in response to the questions put to it.

43. Question 43

 Please comment on the US statement that you r basis for asserting that the alleged price
suppression/depression is "significant" is that EC shipyards are facing large problems as a
result of suppressed/depressed world prices. Is this a correct characterization of your

argument? If so, please explain its textual and ot her bases. If not, please clarify the basis on
which you assert that the alleged price suppression/depression is "significant".

Response

183. While the US is correct in stating that th e EC shipyards are facing large problems due to
suppressed and depressed world prices for ships, this is not the full extent of the EC’s argument.

184. The EC has explained that price depression and suppression are significant.

185. The adjective “significant” only relates to th e terms “price suppression and “price depression”
(as opposed to the phrase “effect of the subsidy”. Thus, there must be a decline in prices or absence of
price increases which is noticeable as opposed to insignificant.

186. The fact that price falls were not only “signi ficant” in themselves, but even drove us out the
market only illustrates how significant these price falls were.

44. Question 44

 We note that Article 6.3(c) establishes that price suppression or depression must be
"significant" for any finding of serious prejudice on that basis to be made. How can the Panel
know whether the effect of the alleged subsidies is significant if we do not know what price(s)
would have prevailed in the absence of subsidies? On what basis can the Panel make any such
judgement? Is not the size of the alleged subsidy relevant to this issue?

Response

187. The EC presents Attachments 1, 2 and 5 to these responses to provide a further basis for
establishing price depression/suppression resulting from the subsidies. However, the EC maintains
that quantifying the effect of the particular types of subsidies at issue (which include forgiveness of
government-held debt in several restructuring process) does not assist in fully understanding the
effects of these subsidies. Article 6.1(d) of the SCM Agreement laid down a direct presumption of
serious prejudice in case of direct forgiveness of debt in addition to the quantitative avenue provided
for under Article 6.1(a) of the SCM Agreement.

188. The EC reiterates that the preservation of cap acity in South Korea has led to very heavy
competition between the major Korean shipyards, wi th shipyards having to offer matching low prices
to achieve orders. Detailed cost modelling unde rlying the EC price suppression claim has revealed
that this has led shipyards to ignore future profitab ility in the pursuit of order volumes. In particular
prices have, in general, been found to not cover infla tion, debt servicing costs and profit. It may be
assumed that a balance of capacity and demand would have led the shipyards in South Korea into a
position whereby they could fully cover costs, incl uding debt commitments and inflation, and make a
profit of 5 per cent profit. Thus, for example, for LNGs a price of aroun d $168 million could have
been expected. This compares to an indicated price $155 million at year end 2003. In its rebuttal
submission the EC will seek to further assist the Panel in making the judgment it is called upon to
make by drawing on this information and taking account of that produced by Korea in response to the
questions put to it.

45. Question 45

 Please comment on China's argument, in paragraph 46 of its written submission, that if
the total amount of a subsidy is ten dollars only, it cannot be successfully demonstrated that the
effect of such a subsidy is to significantly suppress or depress the price of a one-billion-dollar
vessel.

Response

189. China’s reads too much into the term “signifi cant”. That term relates exclusively to the
degree of price depression or suppression. The amount of the subsidy is not directly relevant in that
respect. Therefore, the term “significant” is no basi s for an obligation to quantify the effect of the
subsidy and to relate it to the degree of price depr ession or suppression. In any case, the hypothetical
is unreal, because a $10 subsidy is unlikely to signifi cantly depress the price of vessels that usually
cost $1 bio.

B. QUESTIONS TO BOTH PARTIES

95. Question 95

 Article 11-2 of the Guidelines for Interest and Fees (Amended) (Exhibit EC-13)
provides that [BCI: Omitted from public version].

 (a) To Korea
: Does this suggest that KEXIM considers that foreign financial
markets constitute an appropriate market benchmark? Please explain.

 (b) To EC : What impact, if any, does this provision have on the EC's argument that
KEXIM is not required to act on commercial principles? Please explain.

Response

190. KEXIM’s interest rates are made up of a num ber of elements some of which involve some
limited discretion. Article 11 relates to the base rate s, which is the starting point for the calculation of
actual rates. The principle that appears from Article 11 is that the base rate corresponds to the rate at
which KEXIM is able to borrow funds on the fina ncial markets (the “Export-Import Financing Bond”
is issued by KEXIM for this purpose) – that is its cost of funds.

191. KEXIM’s cost of funds does not however corre spond to the market rate applicable to its
clients for the kind of financing that they obtain fro m KEXIM. And the extent to which this rate can
be adjusted upwards (or downwards) to take account of actual market rates of fered by other financial
institutions is limited to 0.5 per cent.

192. The provision does not therefore indicate either that KEXIM is required to or that it does in
fact act on commercial principles.

96. Question 96

 Can footnote 5 of the SCM Agreement be used to justify an a contrario reading of
item (j) and the first paragraph of item (k) of th e Illustrative List of Export Subsidies? Please
explain.

Response

193. No. Footnote 5 has to be interpreted accord ing to its terms which are that Measures referred
to in Annex I as not constituting export subsidies shall not be prohibited under this or any other
provision of this Agreement.

194. Therefore only measures “referred to in A nnex I as not constituting export subsidies” benefit
from what is known as a “safe haven”.

195. A generalised a contrario reading of footnote 5 would conflict with the fact that it is list of
measures that are deemed to be prohibited export subsidy (whether or not they would otherwise fall
under Article 3.1(a))
50 and that this list is only illustrative.

50 This reading was confirmed, for example, by the panel in Canada – Regional Aircraft para. 7.395,
where it held “item (j) sets out the circumstances in which the grant of loan guarantees is per se deemed to be an
export subsidy” and the Appellate Body in Brazil - Aircraft , para. 179, where the Appellate Body held that
“[t]he first paragraph of item (k) describes a type of subsidy that is deemed to be a prohibited export subsidy”.

196. The Illustrative List, by its very terms, is not intended to be an exhaustive list of export
subsidies. “Illustrative” is defined as “providing an illustration or example”.51 An a contrario reading
of the list as “permitting” measures that otherwise falls under the definition of export subsidy under
Article 3.1(a), would be the equiva lent of treating the Illustrative List as an exhaustive list of export
subsidies and conflict with the te rms of Article 3.1(a) which prohi bits all subsides contingent upon
export performance including those illustrated in Annex I.

197. The first paragraph of item (k) does not ‘re fer to’ any measures as ‘not constituting export
subsidies’, and therefore can not be read in an a contrario manner. This is particularly clear from the
context formed by the second paragraph, which clearly does refer to measures not being export
subsidies. It would be bizarre for a single provisi on which explicitly refers to certain measures not
being export subsidies to be interpreted a contrario as referring to all measures not falling under its
terms not to be export subsidies. Wher e a provision is intended to be read a contrario as authorising
that which is not prohibited, it would not include an explicit exception. Indeed, where if there is an
explicit exception, it could equally be cons idered that the exception must be read a contrario, which
would then completely undermine the distinction between principle and exception.

198. The fact that the focus must be on whether there is a “reference” to a measure not being an
export subsidy was confirmed by panel in Brazil – Aircraft , Second Recourse to 21.5 which stated
that “the first paragraph of item (k) does not ‘refer to’ any measures as ‘not constituting export
subsidies’ within the meaning of the footnote [5]”).
52

199. Korea relies heavily on a statement by the Appellate Body in Brazil-Aircraft. Whatever the
Appellate Body meant by that statement, it was not an interpretation of footnote 5 since it stated “[w]e
wish to emphasize that we are not interpreting footnote 5 of the SCM Agreement, and we do not opine
on the scope of footnote 5.” Moreover, the Appellate Body’s statement was an obiter dictum because
it relied for its finding on the fact that the payments at issue were used to secure a material advantage.

200. The context of item (j) is very different fro m item (k) and it would see m possible to consider
that the words “at premium rates which are inadequate to cover the long-term operating costs and
losses of the programmes” constitute a proviso and t hus refer to export credit guarantees at premium
rates that cover the long-term operating costs and losses of the programmes as not constituting export
subsidies.

97. Question 97

 What is the meaning of the term "material advantage" in the first paragraph of item (k)
of the Illustrative List of Export Subsidies?

Response

201. The EC does not believe that this question arises in this case since item (k) is not applicable to
pre-shipment loans.

202. In any event it is admitted by Korea that its pre-shipment loans do not qualify as export
credits under the second paragraph of item (k) and th erefore the EC does not believe that the CIRR
rate used in the OECD understanding provides a relevant benchmark. Indeed there is no CIRR
corresponding to loans of the duration of pre-shipment loans.

51 The New Shorter Oxford English Dictionary (1993), p. 1311.
52 In paras. 5.274 and 5.275. See also the obiter dictum in the first panel report Canada - Aircraft ,
para. 9.117.

203. The Appellate Body in Brazil – Aircraft (Article 21.5) considered that it was necessary for a
WTO Member which claimed that it was not provi ding a “material advantage” through the use of
export credits to prove, first, that it has identifie d an appropriate "market benchmark"; and, second,
that the rates it applied are at or above that benchmark.
53 Korea has done neither.

98. Question 98

 As a legal matter, does the definition of ex port credits used by the OECD in the context
of the Export Credit Arrangement govern the meaning of this term in the first paragraph of
item (k) of the Illustrative List of Export Subsidies? Why/why not?

Response

204. As already indicated in response to questi on 10, the EC considers that the definition of
“export credits” given by the OECD reflects the gene rally accepted meaning of term in the relevant
circles, that the term “export credit” used in the second paragraph has the meaning given to it in the
OECD Arrangement and that in view of the clos e parallels between the fi rst and second paragraph it
must be assumed, in the absence of any indication to the contrary, that the term has the same meaning
in both the first and second paragraphs.

99. Question 99

 Would you provide us with the rationale be hind your definition of export credits and
export credit guarantees? Does an export credit have always to be a credit extended by the
exporter or a financial institution to the buyer, and does an export credit guarantee always have
to be a guarantee of such a credit? PSLs are loans extended by KEXIM to the shipbuilder, not
to the buyer. APRGs are guarantees extended by KEXIM to the buyer, not to guarantee a
credit given by the exporter or by a private fina ncial institution to the buyer, but to guarantee
that an advance payment by the buyer to the ex porter shall be refunded in case of a contractual
default. Does this exclude APRGs and PSLs from the realm of export credits/export credit
guarantees?

Response

205. Yes, pre-shipment loans and APRGs are not export credits/export credit guarantees.

206. The justification or rationale for providing special rules for export credits and export credit
guarantees and insurance (including a safe haven in th e second paragraph of item (k)) is that special
rules and conventions for this form of export subsidy have bee developed internationally, in particular
at the OECD. The principles that are applied are harmonisation and transparency.

207. This justification and rationale does not appl y to pre-shipment loans and APRGs as developed
by Korea, for which no international consensus …

208. Indeed, if the intention was that “export credit s” were to include all ty pes of state assistance
which has some relevance to exports, then automati cally all export subsidies would constitute export
credits making the distinction between “export subsidy” and “export credit” obsolete.

100. Question 100

 In the Indonesia – Autos
 dispute (the only circulated panel report to date addressing
serious prejudice claims), the panel in analysing the claims of displacement or impedance of

53 Appellate Body Report, Brazil-Aircraft (Article 21.5), para. 69.

imports into the Indonesian market applied a " but for" approach. In particular, the panel
asked the question whether, "but for" the subs idies, the complaining parties' sales volumes
and/or market shares in the Indonesian market either would not have declined, or would have
increased by more than they in fact did.

 Would an analogous approach be appropriate here? That is, in assessing the price
suppression/depression claims, should the Pane l seek to answer the question whether, but for
the subsidies, the prices in question either would not have declined, or would have increased
more than they in fact did?

 If so, what sorts of considerations should the Panel take into account in trying to
determine what the price movements would have b een in the absence of the alleged subsidies?
If not, why not, and what other approach should be used?

Response

209. Yes. In accordance with EC – Sugar and Indonesia – Cars, the Panel should consider whether
the subsidies established by the EC are a contribut ing or amplifying cause of the significant price
depression and suppression demonstrated by the EC. This can only be done on a case to case basis.
The Panel can consider factors such as price trends of the products over time, the evolution of prices
of different ship types, the price behaviour of diffe rent shipyards, the evolution of prices compared to
costs and the evolution of prices compared with that of demand.

210. The EC had provided further data in Attachment 2 and will elaborate further in its second
written submission in the light also of informati on to be submitted by Korea in response to the
questions addressed to it. The EC also refers to its response to Question 44.

101. Question 101

 Does the word "may" in the chapeau of Article 6.3 mean that a complainant of a
"serious prejudice" must prove something more than the existence of price
suppression/depression?

 If so, what is it that the complainant ha s to prove beyond price suppression/depression,
and what is the basis in the text for any such additional requirements?

 If not, what is the significance of the word "may"?

Response

211. As explained in the EC Oral Statement, there is no requirement in Article 6.3 of the SCM
Agreement to prove anything beyond the existence of price suppression or depression. The EC will
explain in more detail below that the term “may” in the chapeau of Article 6.3 of the SCM Agreement
is consistent with that interpretation.

212. The ordinary meaning of the term “may” is “to express possibility, opportunity, or
permission”.
54 The structure of Article 6 of the SCM Agreement confirms that the term “may” is used
in Article 6.3(c) of the SCM Agreement to express “permission”. Thus, Article 6 sets forth a self-
contained regime defining the notion of serious prejudice. While Article 6.1 presumed the existence
of serious prejudice is presumed in certain situations and Article 6.7 excludes the existence of serious
prejudice in certain situations, Art. 6.3 permits a finding of serious prejudice if the complainant
establishes that one or more of paragraphs of 6.3(a)-(d) apply.

54 Random House Dictionary, cited in US submission at para. 38.

213. This interpretation is confirmed by the immediat e context of the term “may” in Art. 6.3 (c),
which uses the phrase “in any case where one of several” of paragraphs (a)-(d) apply. Therefore, a
WTO Member can pursue subsidies as actionable unde r Article 6.(3)(c) in all cases where one of the
effects described in Article 6.3(c), e.g., price depression or suppression is given.
55

214. Furthermore, footnote 13 to Article 5(c) of the SCM Agreement clarifies that the term “serious
prejudice” is used in the same sense as used in paragraph 1 of Article XVI of the GATT 1994. GATT
(and WTO) Panels already found “serious prejudi ce” based solely on price depression and price
undercutting, respectively.56

102. Question 102

 In its arguments concerning price supp ression/depression, the EC has focused on
demand side factors. Korea, on the other hand, has focused on the supply side. Is it not more
correct that the two aspects should be taken together. Please explain the impact of such an
approach on your argument concerning price suppression/depression.

Response

215. The EC has made its price depression a nd suppression argument taking account of both
demand and supply side factors beca use it considers that both are rele vant in determining the markets
for the products at hand and their prices.

55 This also is confirmed by the Spanish language version : “en cualquier caso” and French “dès lors
qu’il existe l’une ou plusieurs des situations ci-après”.
56 EC-Refunds on Exports of Sugar (p. 24, para. V.f) and the WTO Panel on Indonesia – Autos
(paras. 14.254-14.246),

LIST OF ATTACHMENTS

Attachment 1 Quantitative analysis of restructuring subsidies

Attachment 2 Estimation of price suppression and suppression prepared by First Marine
International

Attachment 3 Analysis of DHI creditors’ situation

Attachment 4 Compilation of Products listed on websites of Korean and EC Producers

Attachment 5 Ad valorem impact of APRG and pre-shipment loans

Attachment 6 Further information on the nature of competition in shipbuilding

Attachment 7 Number of vessels ordered per “country of economic benefit”

LIST OF EXHIBITS

EC - 101 MOFE press release of 6 Oct ober 2000 – published on MOFE website

EC - 102 Korea Letter of Intent to IMF of 24/09/1998

EC – 103 Special Act on the Management of Public funds

EC – 104 OECD Council Working Party on Shipbuilding, Report by the Chairman of the
Informal Experts Group Held on 1-2 March 2004 (C/WP6/SNG (2004)5

EC – 105 OECD Council Working Party on Shipbuilding, World Shipbuilding Activities in
2002 – 4 March 2003 (C/WP6/SG(2003)3

EC – 106 AWES – Annual Report 2002-2003

EC – 107 DHI 1999 Audited Accounts

EC – 108 DSME 2000 Audited Accounts

EC – 109 DSME 2001 Audited Accounts

EC – 110 Balance Sheets of DHI as of September 30, 2000

EC – 111 HHI Income Statement for 2002 and 2003

EC – 112 PriceWaterhouseCoopers’ Analysis of the Arthur Andersen Report

ANNEX D-2

RESPONSES OF THE EUROPEAN COMMUNITIES
TO QUESTIONS FROM KOREA

(22 March 2004)

Question 1

 In the EC’s view is an entity a “public body” for all purposes?

Response

1. Yes, an entity is either a public body or it is not.

Question 2

 Are all State Trading (as per Article XVII of the GATT 1994) entities “public bodies”?
For all activities?

Response

2. The EC does not see any necessary connection between these concepts. Its position on public
bodies is set out in response to question 1 from the Panel.

Question 3

 Regarding the previous question, if not, what are the criteria for distinguishing: (a)
State Trading entities that are “public bodies” from those that are not? (b) “public body”
related activities from those that are not?

Response

3. See EC response to Panel question 1.

Question 4

 The EC argues that the Appellate Body’s findings in Japan -- Apples provides that it
does not have to prove every fact it asserts. Can the EC identify which facts it considers it must
prove and which it does not have to prove?

Response

4. The question as posed is too general. The EC has explained its position most recently at
paras. 9 to 15 of its oral statement.

Question 5

 What criteria does the EC propose for determining which facts it must prove and those
with respect to which it considers it has no burden?

Response

5. See answer to question 4 above.

Question 6

 In its oral statement, the EC stated that it was “not necessary to prove the obvious”.
Recognizing that in the context of a dispute, it is possible that not all parties or the Panel might
consider the same issues as “obvious”, please iden tify those elements of its case which the EC
considers “obvious” and that it is, therefore, not required to prove.

Response

6. An example is offered at para. 11 of EC’s oral statement.

Question 7

 Is the EC referring to the same concept in paragraph 10 of its Opening Statement and
paragraph 61 of its first submission?

Response

7. If the question refers to the “prima facie” con cept, the EC has explained that it accepts it has
the burden of presenting a “prima facie” case. The EC considers that it has met this burden.

Question 8

 Is empirical evidence of application of a measure of any legal relevance in establishing
whether a measure “on its face” is inconsistent with WTO law?

Response

8. The notion of ‘empirical evidence’ is not clear. A government practice can be a separate
violation in its own right and this can be evidenced by its actual application in individual instances.
See the EC’s response to question 8 of the Panel.

Question 9

 If a measure provided a “benefit” at one poin t in time or in a particular instance, but
not at another, can it be considered “on its face” inconsistent with WTO law?

Response

9. Yes, for example, if a government rules that export loans are to be granted in all cases (i.e.
independently of the creditworthiness of the recipient) at a fixed rate of, say, 5 per cent a benefit will
be granted with respect to some recipients but not necessarily with other recipients. Such a measure
would be on its face inconsistent with WTO law.

Question 10

 If a measure as applied is considered inconsistent with WTO law at an earlier period,
but is not proved to be inconsistent in the mo st recent period, what would the remedy be under
Article 4 of the SCM Agreement?

Response

10. The question of remedies is a separate issue from that of the existence of the violation and is
one on which the Panel has not been asked to rule.

Question 11

 Please identify and quantify all adjustments to reflect such factors as different time
periods, security interests and redemption priori ties that the EC made in its comparison of
corporate bonds with pre-shipment loans?

Question 12

 If the EC made no adjustments to reflect su ch factors, please explain the legal basis for
comparability.

Response to questions 11 and 12

11. The EC has set out its views on the comparability of the benchmark in its first written
submission, if Korea considers that adjustments ar e needed it should explain why and provide a basis
for making them.

Question 13

 Does the EC have any evidence of currently applicable extensions of APRGs that it
considers confer a benefit on any Korean person? If so, please identify all such APRGs.

Response

12. The EC has provided evidence of subsidized tr ansactions of which it is aware. The EC has no
information to indicate that KEXIM has stopped issui ng APRGS at subsidized rates. Please also refer
to the EC response to question 42 of the Panel.

Question 14

 Does the EC have any evidence of currently applicable extensions of pre-shipment loans
that it considers confer a benefit on any Korean person? If so, please identify all such pre-
shipment loans.

Response

13. The EC has provided evidence of subsidized tr ansactions of which it is aware. The EC has no
information to indicate that KEXIM has stopped issuing pre-shipment loans at subsidized rates. Please
also refer to the EC response to question 42 of the Panel.

Question 15

 In terms of benefit analysis, should the analysis in a debt-to-equity swap case be
conducted from the perspective of the private inv estor or the perspective of a creditor holding
distressed assets?

Response

14. A benefit analysis is in principle conducted from the point of view of the recipient. The EC
has set out its views on the issue in response to question 18 from the Panel.

Question 16

 Does the EC argue that the Daewoo creditors received (i) too high or, (ii) too low a
return on their Daewoo debt?

Response

15. The public bodies and entruste d private bodies received too low a return And would not have
agreed to the restructuring under market conditions.

Question 17

 Please quantify the over or undervaluation you are alleging.

Response

16. See reply to Question 15 of the Panel.

Question 18

 In the case of an insolvent company, does the EC believe that the option to sell its debt as
followed by the foreign lenders was reasonably available to all creditors?

Response

17. The EC notes that KAMCO in fact bought the debt of foreign creditors separately and are
more favourable conditions than it bought debt from Korean creditors.

Question 19

 Did any EC shipyards bid on any Japanese LNG contracts? If so, please identify the
bidders and the level of their bids?

Response

18. The EC does not understand the relevance of th is question since the EC does not allege that
Japanese shipyards are subsidized and causing serious prejudice.

Question 20

 If the EC is no longer supporting the poin t made regarding the Japanese market in the
Sixth Report from the Commission to the Co uncil on the situation in world shipbuilding
1, is the
EC repudiating the Commission’s conclusions there? If so, please identify the facts that cause
the EC to view the situation differently now.

Response

19. The EC's shipbuilding reports are political anal yses of the situation in the world shipbuilding
industry. They are not strictu sensu economic analyses. The chapter Korea refers to deals with the
response in certain shipbuilding regions to market developments in the course of 2002. With regard to
Japan the report states that Japanese yards are being restructured and that synergies have resulted from
that. In particular the series production of bulk car riers (which are not subject to the EC claim of
adverse effects) is mentioned, together with the f act that for these ships 50 per cent of the orders in
Japan are of domestic origin. As a matter of fa ct, by the end of 2003, Japanese owners had
12 container ships, 2 oil tankers and 2 LNG carriers on order from Korean yards.

Question 21

 Is the US market open to all ships in the product categories the EC proposes?

Question 22

 If the US market is not open to all pro ducts, please provide data demonstrating what
portion of the product categories are closed due to US import restrictions on a product-by-
product basis.

Response to questions 21 and 22

20. Yes. Only the US cabotage market is not available to non-US yards, but this market
comprises less than 1/3 of the orders from US owne rs, i.e. US owners place 3 times as many orders
abroad as they place with US yards. According to Lloyd’s Register the total orderbook backlog in the
US end December 2003 amounted 0,8 mio CGT. In the meantime the orders for US owners
worldwide amounted 2,7 mio CGT. US cabotage laws do not affect LNG carriers at all, and latest
figures indicate that almost all of US foreign sea borne trade is done by non-US built vessels. The
trades affected by US cabotage legislation are mainly to/from Alaska and Hawaii, and are thus limited
in size and demand for vessels.

Question 23

 Please itemize which factors should be taken into account in defining a product
category?

Response

21. It is impossible to answer this question in the abstract. However, the EC has set out its
position on the appropriate market segments to be used in this case in the oral statement and in its
response to question 27 of the Panel.

1 COM(2002)622 final, 13 November 2002, Section 2.2.3, page 8. See also Seventh Report from the
Commission to the Council on the Situation in World Shipbuilding, COM(2003)232 final, 6 May 2003,
Section 2.1.1, page 5.

Question 24

 How did the EC take into consideration t echnical differences, payment terms, delivery
terms and other differences in its causation analysis?

Question 25

 How did the EC factor out ships built in co untries other than in Korea in its causation
analysis?

Joint Response to questions 24 and 25

22. Please refer to the EC answers to questions 34 to 39 of the Panel.

Question 26

 How did the EC factor out Korean ships that were built by yards that were not
restructured?

Response

23. Please refer to the EC response to question 41 of the Panel.

Question 27

 What is the EC’s position with regard to the conclusion of its expert, FMI, that EC and
Korean yards compete only as regards feeder container vessels and chemical tankers?

Question 28

 What is the EC’s position on FMI’s conclusion that even in these segments, it is
impossible to identify Korea as price leader since they are characterized by significant
competition from other countries practicing low prices?

Response to questions 27 and 28

24. The EC has explained, most recently in res ponse to question 28 of the Panel that EC and
Korean shipyards compete across the entire range of the product segments the subject of this dispute.
As regards chemical tankers, the EC has clarified at the first substantive meeting that these are not
subject to its claim. See also question 27.

Question 29

 In the same vein, what is the EC’s position vis-à-vis the table shown at page 4 of Korea’s
first submission indicating the EC and Korea n vessels are only present in the segments below
100,000 GT (with a small presence in the segment between 150,000 and 200,000 GT but which is
characterized by a sizeable presence of Japanese yards)?

Response

25. Please refer to the EC oral statement at paras. 109 and 110 as well as to the EC response to
question 28 of the Panel.

Question 30

 Considering this segmentation, please ex plain how the alleged corporate restructuring
subsidies depressed or suppressed prices in all size segments?

Response

26. Please refer to the EC response to question 29 of the Panel.

Question 31

 Do LNGs compete with any other vessels?

Response

27. Not directly, but please refer to the EC response to question 29 of the Panel on inter-segment
relationships.

Question 32

 Please identify all EC shipyards that produce LNGs or that the EC regards as capable of
producing LNGs.

Response

28. Chantiers de l’Atlantique (Fr), Izar (S) and Kvaener Masa (FIN) have been active on the
market in terms of bidding and/or orders. All othe r major EC shipyards would also be interested in
building LNG’s if the price level were not so depressed.

Question 33

 Please confirm that the EC shipyards saw declining profitability in 1997 and 1998 and
increasing profitability for 1999 through 2001. Please provide breakdown by shipyard and
product and provide supporting data. Please also provide such data for 2002 and 2003.

Response

29. EC shipyard profitability figures were alread y provided to Korea in the framework of the
Annex V procedure - see reply to Korea’s question 4 (and accompanying Annex 4a and 4b).

Question 34

 Does the EC consider that serious prejudice can exist in a shipyard that is making
vessels not subject to competition from Korean shipyards? If so, please specify the market
mechanism that transmits such effects.

Question 35

 If not, what level of competitive overl ap between Korean products and the EC
shipyards’ products is necessary for a subsidy to be a cause of serious prejudice?

Joint Response to questions 34 and 35

30. It is WTO Members that need to be shown to suffer serious prejudice, not individual
shipyards. For a better understanding of inter-segme nt relations please refer to the EC response to
question 29 of the Panel.

Question 36

 Please explain in detail how the EC meas ures capacity in the shipbuilding industry?

Response

31. Capacity in shipbuilding is extremely diffi cult to measure, as it depends on the production
facilities and
 the production portfolio.

32. In order to efficiently use their technical and human resources yards try to maintain a product
mix. At the same time they try to fill their berths with ship types they are specialised in. This makes
the actual production capacity dependent on the orders contracted and it may therefore change from
year to year. Capacity in shipbuilding should be related to actual or historical production output
(measured in cgt - compensated gross tonnes), as it is extremely difficult to derive an abstract
production volume from the extent of the physical construction facilities. Physical construction
facilities are generally defined by, among others, available steel cutting lines, dock space and
cranage, but the same facilities can be used for si mple ships (giving a small cgt figure) or for highly
sophisticated ships (giving a high cgt figure). Ther efore, the most appropriate means of a yard’s
production capacity is its maximum historical production output of the existing facility.

ANNEX D-3

RESPONSES OF KOREA TO QUESTIONS
FROM THE PANEL

(22 March 2004)

I. QUESTIONS TO KOREA

A. GENERAL

46. Is there a financial contribution if a government provides a cash grant to a government-
owned company? Please explain in light of Korea's argument that one cannot make a
financial contribution to oneself (para. 319 of Korea's first written submission).

 At the outset, Korea notes that, while the issues of financial contribution and benefit are
legally distinct, many of the same facts and arguments are relevant to the two issues. The issue in this
regard arises from the privatization cases wherein th e EC argued for an absolute rule of looking
through the assets to the actual owners to determine if there is a benefit. Necessarily, this means that if
the owner and the contributor are the same “person” the issue arises as to whether there has actually
been a financial contribution at all. There are i ndeed, some interesting legal issues arising from the
reasoning championed by the EC in the privatizati on cases. The EC apparently wants one rule that
applies to them in the situation of privatization they face and another that applies to the rest of the
world when it is convenient for the EC. Of course, this cannot be the case; the WTO rules apply to
every Member uniformly.

 The Panel does not face such a sweeping issue in this dispute, however. To take just one
example, Korea is of the view that so-called equity infusions into a government majority-owned entity
can be a financial contribution. So-called “equity infusions” are often covers for direct subsidies to
cover operating losses. As an illustration, over a long period of time the French government has made
so-called equity infusions into th eir aircraft engine company, SNECMA. The purported capital calls
generally were mere shams reflected by the unwillin gness of minority shareholders to respond. The
issue in a debt-for-equity swap made in an insolvency situation is different, however. In such cases,
where the company is insolvent and, therefore, in the hands of the creditors, the swap reflects a
change in form of financial instrument. The creditor financial institutions were not holding cash which
they could invest in a range of financial instrume nts; they were holding debt and the issue was what
they could do with the debt in order to maximize their return. More specifically, the creditors were
holding debt in distressed companies in a country facing a financial crisis. The EC’s odd diversion at
the First Substantive Meeting into an elementary d escription of the different characteristics of the two
forms of financial instruments was completely beside the point.

 Thus, it does not automatically follow from this that any transfer of funds by the Government-
owned company into a private company involves a financial contribution und er Article 1.1 of the
SCM Agreement . The EC again fails to apply the co rrect consequences of the WTO case-law
indicating that “any analysis of whether a benefit exists should be on ‘legal or natural persons’ instead

of productive operations.” 1 In this case, the benefit analysis adopted by the Appellate Body in the
privatization cases has necessary logical implications for the issue of financial contribution.

B. KEXIM LEGAL REGIME

47. At Attachment 1, page 4, of its first written submission, Korea states that "KEXIM's
interest rates and guarantee conditions star ted from a market base rate to which
different spreads were added". Does Korea claim that KEXIM provides financing and
guarantees at above-market rates?

 As a threshold issue, it is necessary to clarif y what the “market rate” is supposed to mean.
There is no single “market interest rate” or “market premium”. Rather, the market rate exists in the
form of certain “ranges” or “bands” of different interest rates or premia. Otherwise, there can be no
competition among banks in terms of interest rates or premia. Therefore, in Korea’s view, the
question is whether the KEXIM rates are within the ranges or bands prevailing in the relevant market.

 Next, in order to answer the question, the st ructure for determining the interest rates and
premia must be borne in mind. As Korea submitted in its First Written Submission and stated at the
First Substantive Meeting, KEXIM’s interest rates and fees are determined by adding up the base rate

plus spreads such as “credit risk spread”, “target margin”, “Market Adjustment Rate”, etc.

 With respect to the interest rates, KEXIM set s the base rate differently depending on whether
the loan is denominated in Korean won or in a fore ign currency as well as whether the interest rate is
fixed or floating as stipulated in the Interest Rate Guidelines (Articles 10, 11 & 11-2, Korea Annex V
Response Attachment 1.1(15), Exhibit EC-13 ). Below is a chart summarizing the base rates currently
in force for loans extended by KEXIM.

 [BCI: Omitted from public version .]

 While the base rates thus obtained are not th e final rates at which KEXIM loans are extended,
because various spreads are to be added thereto, th e base rate by itself is designed to adequately
reflect the prevailing level of interest rates in the financial market at the time of the loan as well as
KEXIM’s cost of procuring the required funds (e.g., overseas borrowing and the issuance of KEXIM
bonds). Further, it is a standard market practice fo r all Korean commercial ba nks to use LIBOR rates
or CD yield rates as the base rates for their floa ting rate loans (Korea notes that loans with floating
interest rates account for the absolute majority of all loans extended by KEXIM). In light of this,
KEXIM’s interest rate structure ensures that the KEXIM interest rates fall within the “range” or
“band” prevailing in the relevant market. In connection with this, Korea has not claimed that KEXIM
interest rates are necessarily above “market rates”.

 With respect to the guarantee fees, until the occurrence of the Asian Financial Crisis, all
participants in the APRG market, including KEXIM, had applied similar premia ranging from [BCI:
Omitted from public version] . KEXIM offered premia within this range based on its past
experience in this field and also taking into acc ount the competition in the market. For the periods
during and immediately following the crisis, however, other financial institutions seldom participated
in the market. Therefore, there existed virtually no comparable premia offered by other financial
institutions in Korea. During the crisis, KEXIM introduced the fee structure composed of the base rate
and credit risk spread. The base rate was calculated mainly based on the historical cost associated with
the provision of guarantees, and the credit risk spread was introduced to reflect credit risks involved in
individual transactions. As the financial market has b een stabilized after the crisis (more specifically
since 2002), other commercial banks re-entered the market, bringing about competitions in the APRG
market again. In response to this change in th e market, KEXIM introduced another spread factor

1 Appellate Body Report, US – Countervailing Measures on Certain Products from the EC, para. 110.

called the “Market Adjustment Rate” which gives the KEXIM managers flexibility to react to the
market situations and reflect customer relationship. As a result, KEXIM’s fee rate structure ensures
that the premia charged fall within the range of “market premia”.

48. In para. 133 of its first written submissi on, Korea "denies that the KEXIM Act, Decree
and Interest Rate Guidelines provide for the provision of subsidies within the meaning
of the SCM Agreement , let alone prohibited subsidies contingent upon export
performance, within the meaning of Article 3(1)(a) of the SCM Agreement." Does Korea
contest the EC's claim that loans and guarantees provided under the KEXIM legal
regime are contingent upon export performance within the meaning of Article 3.1(a) of
the SCM Agreement?

 In the above-mentioned paragraph, Korea intende d to emphasize simply that the KEXIM Act,
Decree and Interest Guide lines as such cannot constitute subsid ies within the meaning of the SCM
Agreement and, thus, it was not necessary to discuss further any “export contingency” of such alleged
subsidies. Korea has not taken any position as to wh ether such loans and guarantees are contingent on
export performance.

49. Regarding para. 158 of Korea's first wr itten submission, please provide evidence to
support Korea's argument that GOK made ca pital injections into KEXIM in order to
"avoid negative credit ratings" rather than to cover losses. If capital injections were
made for this purpose, what impact would th is have on Korea's assertion that KEXIM's
operations are always profitable? In particular, why would KEXIM's credit rating have
been at risk if its operations were always profitable?

 As Korea submits in its First Written Submi ssion, the capital injections into KEXIM were
necessary for maintaining good credit rating as well as sound BIS adequacy ratio as KEXIM relied on
overseas borrowings for procuring its required funds. [BCI: Omitted from public version] whereas
other export credit agencies in Jap an or the US procure 80~100 per cent out of their total required
funds through borrowings from their governments. Therefore, maintaining high credit rating and the
sound BIS adequacy ratio was key to the KEXIM operations.

 As the BIS adequacy ratio is defined as the ratio of the “equity capital” of a company to “risk-
weighted assets” that the company is exposed to (i.e., it is the product of equity capital divided by
risk-weighted assets x 100 per cent), the operating profits have no direct relation or impact to the BIS
adequacy ratio unless and until such operating profits are converted into the equity capital by way of
“capitalization of reserves”. Further, given the size of “risk-weighted assets” and “equity capital”, the
ultimate impact of the operating prof its being converted into equity capital to the BIS adequacy ratio
is generally insubstantial.

 At the time KEXIM increased its capital in 1998 and 1999, the risk-weighted assets of
KEXIM rose to a substantial degree as, among others, the majority of loans extended by KEXIM was
composed of foreign currency denominated loans an d the won-dollar exchange rates were extremely
high. In addition, KEXIM anticipated that the demands for foreign currency denominated loans would
substantially increase given the market situations.

 Under these circumstances, KEXIM’s BIS ratio and credit rating were expected to decline
despite its overall profitability. Thus, KEXIM had to increase its capitals to sustain these indicators.
For the reference purposes, Korea submits the credit rating changes by S&P for the relevant periods
and the operating profits of KEXIM from its establishment.

 [BCI: Omitted from public version.]

50. Does KEXIM's profitability of operations exclude the possibility that it has provided
subsidies?

 The issue of KEXIM’s profitability really goes to two different questions.

 First, Korea has not claimed that the profitability of KEXIM operations necessarily excludes
the possibility that it has provided subsidies. Howe ver, the overall profitability of KEXIM operations
directly refutes the EC argument that KEXIM has be en required by certain provisions of the KEXIM
Act and related guidelines to provide loans and guara ntees at loss-making rates or without regard to
commercial or market principles. As the market prin ciple is to generate profits, Korea believes that
KEXIM’s continuous profitability shows that it has acted according to market principles.

 Second, in response to the point raised by the United States that cost to government issues are
determinative of the issue of benefit to the recipien t, Korea has both pointed out the legally irrelevant
nature of cost to benefit and then has followed up by showing that, in any event, KEXIM always has
shown a profit indicating that as a factual matter, it does not operate at below cost.
2

51. Regarding para. 159 of Korea's first wr itten submission, what is the reason for
conferring on GOK a status that is less preferen tial than other shareholders? Is this not
suggestive of some form of special relationship between KEXIM and GOK?

 The provision of Article 36 of the KEXI M Act as such does not suggest any special
relationship between KEXIM and GOK. It would give a better understanding of this provision if it is
read in the context of Article 4 of the KEXIM Act which lists the entities that can contribute capital to
KEXIM. When the KEXIM Act was enacted on 28 July 1969, it was considered that only the
Government would inject the equity capital to KE XIM. However, Article 4 of the KEXIM Act was
amended on 24 December 1974 in order to induce co mmercial financial institutions and other entities
to participate in capital contributions into KEXI M. With a view of encouraging those commercial
financial institutions and other entities to invest in KEXIM, Article 36 was also amended to provide
differential treatments between th e Government shareholder and ot her non-Government shareholders.
Moreover, it is not uncommon in private corpora tions that the major shareholders receive less
dividends and take more risks than other minor shareholders.

52. In paragraph 128 of its submission the EC quotes from the KEXIM “On-Line Road
Show” to the effect that KEXIM states that one part of its mission is to serve “a
complementary but pioneering role and function for the national economy, which would
be hard for commercial banks to shoulder” . Is this not evidence of below-market
financing by KEXIM?

 The “On-Line Road Show” was prepared main ly to cater to the potential investors who
subscribe for the bonds issued by KEXIM. In the above-mentioned On-Line Road Show, KEXIM
attempted to describe the specialized role and func tion being performed by it as an export credit
agency (ECA). Export credit agencies, such as KEXI M, generally provide specialized trade-related
financing. Such financing typically involves longer- term project-related loans (e.g., mid- and long-
term export loans), special payment terms (e.g., deferred or specially structured payments) or
specialized collateralization methods. Given these pe culiarities and specialties of the ECA financing,
it is not inaccurate to say that there is “a comp lementary but pioneering” role and function which
commercial banks find difficult to perform. Particularly, the long term export credit financing
provided on deferred payment basis is the area in which only KEXIM specializes. However, it is

2 For purposes of clarity regarding the response to th is question, Korea notes that it is arguing in the
alternative. In referring to cost to government, Kore a does not concede that KEXI M is a public body. Korea
would like to note that this issue of arguing in the alternative arises in numerous places through the answers and
Korea requests that this reservation be accepted generally without the need to repeat it in each instance.

equally true that, as Korea explained at the Fi rst Substantive Meeting, commercial banks have
advanced to most of the financing areas in whic h KEXIM operates and they are now competing with
KEXIM pursuant to market terms. It is important to remember the context of the establishment of
KEXIM. Korea was a developing country with inad equately formed capital markets, among other
things. It is quite typical in such situations for specialist banks to be set up to provide such pioneering
expertise. Thus, it is a matter of technical speci alization and, as the Korean economy matures and
expands, such expertise spreads, too, diluting the “pioneering role”.

 The “On-Line Road Show” has been presente d against such background. It is simply
irrelevant to the question of below-market financing by KEXIM.

53. Please explain your understanding of the "non-competition" clause in the KEXIM legal
framework. What in practice does it mean to not compete with commercial banks?
What does Korea mean when it argues th at KEXIM does compete with commercial
banks? You seem to explain this clause in terms of different maturities of KEXIM and
commercial loans. Yet PSLs are for a peri od of 90-180 days, which falls squarely within
the range of commercial bank terms. Fur ther, APRGs are given for not less than 6
months and not more than 25 years, which covers a wide range in which commercial
banks are operating. Please comment.

 As Korea stated at the First Substantive Meeting, in order to properly understand the meaning
and relation of Article 24 vis-à-vis Article 25.2, it is necessary to understand the major financial
services provided by KEXIM. KEXIM financial services can roughly be categorized into the four (4)
areas referred to below:

(1) Export financing : export loans; loans on deferred payment terms regulated by the
OECD Arrangement; pre-shipment loans (which are the measure at issue);

(2) Overseas investment credits : These are the long-term credits extended by KEXIM in
conjunction with overseas investment. Generally, these credits mature after 2~5
years;

(3) Import credits: These are also long-term credits ex tended in conjunction with imports
of capital goods; and

(4) Guarantees: KEXIM extends performance guarant ees, bid bonds, retention bond,
warranty bonds and APRGs (which are the measure at issue).

 These financial services generally involve longer-t erm trade-related financings and they also
involve foreign-currency loans. When KEXIM was established in 1976, there were not many financial
institutions to provide these types of financial services. Therefore, the principal purpose of
establishing KEXIM was to provide such longer-term, trade-related financial services for which there
was no competition from commercial banks at that time. Against this background, Article 24 was
introduced to describe the specialized nature of KEXIM business. But the general “non-competition”
statement in Article 24, by nature, was not intended to provide a very precise definition of the KEXIM
operations. In this regard, Article 25.2 describes th e KEXIM financial services in terms of the length
of loan maturity by stating that the maturity of KEXIM loans should be between 6 months and
25 years. Of course, this provision was not intende d to implement the “non-competition” statement in
Article 24, as the ‘6 month-to-25 years’ maturity is so broad that most of the financing services
provided by other commercial financial institutions will fall within this ‘6 month-to-25 years’
maturity. However, the 25 year maturity is a ve ry long term for which few commercial banks provide
financing. In this regard, Article 25.2 still indicates the special role of KEXIM focusing on very long
term financing where commercial banks do not normally operate. In any event, it should be noted that
none of these provisions is intended to prohibit other financial institutions to participate in long-term,

trade-related financial services extended by KEXIM or to require KEXIM to exit the market for these
financial facilities as soon as they are provided by other financial institutions.

 After KEXIM was incorporated, the Korean financial market has developed and commercial
financial institutions began to provide the specialized financing services in which KEXIM had
operated. Thus, at present KEXIM is in competition with commercial banks in all areas of financial
services, except the long-term export credits with deferred payment terms which are regulated by the
OECD Arrangement. As for the pre-shipments lo ans, KEXIM competes with other financial
institutions which provide “general loans” or othe r short term loans. In the field of overseas
investment credits, as the foreign exchange regula tions were amended to allow commercial banks to
provide such overseas investment credits, all financ ial institutions can now freely extend such credits.
As for the APRGs, KEXIM took only a small portion of the market share (less than 20 per cent) prior
to the Asian Financial Crisis, as Korea submitted.

 Furthermore, the true meaning of Article 24 of the KEXIM Act can be clearly explained by
reference to the changes in Article 18 of the KE XIM Act which directly enumerates the types of
operations to be carried out by KEXIM. Prior to 16 September 1998, Article 18 provided that
“KEXIM may engage in the operations prescribed in [each subparagraph of Article 18] that are not
normally conductible by other financial institutions ”. In other words, Article 18 was clearly confining
KEXIM’s operations to those financial services th at could not be provided by other financial
institutions. However, by way of the 16 Sept ember 1998 amendment, such “non-competition”
restriction on KEXIM’s business scope was elim inated and Article 18 now provides that KEXIM
“may engage in the operations prescribed in the [subparagraphs of Article 18] ” without any
limitations (please refer to Amendments to KEXIM Act and Decree, Korea Annex V Response
Attachment 1.1(1)-3, Exhibit EC-12) . This amendment explains how Article 24 of the KEXIM Act
has been understood and applied.

 As the situation in the financial market has changed since the enactment of the KEXIM Act,
and in light of the above amendment to Article 18, the non-competition clause of Article 24 of the
KEXIM Act should have been repealed. In fact, for this reason, KEXIM has been contemplating
proposing the repeal of or amendment to Article 24 of the KEXIM Act. This is nothing unusual.
Every jurisdiction in every WTO Member has some outdated statutory provisions on the books that
should be changed, but sometimes are not in the press of crowded legislative agendas.

54. At para. 170, Korea asserts that Article 24 of the KEXIM Act should be read in
conjunction with Article 25.2 thereof. In the absence of any explicit linkage between
these provisions, please provide support in respect of this argument (such as the
negotiating history of Article 24, for example). If Korea's assertion regarding the
relationship between these provisions is correct, and if Article 25.2 explicitly sets
restrictions on the term of financing that KEXIM may provide, what is the purpose of
Article 24, i.e., what does it add to Article 25.2?

 Please refer to Korea’s responses to Question 53 above.

55. Regarding Article 26 of the KEXIM Act, Korea suggested at the oral hearing that this
provision should be interpreted in the context of the entirety of that legal instrument.
What other provisions of the KEXIM Act have a bearing on the interpretation of
Article 26? Please explain.

 Article 26 has no purpose other than to provide th at all fees and rates must cover “at least” the
costs when KEXIM provides financing. It does not prohibit KEXIM from earning profits and, instead,
effectively requires it to carry on profitable ope rations. In fact, KEXIM has earned substantial
amounts of operating profits since its establishmen t as shown in the response to Question 49 above.
Further, other relevant provisions of the KEXIM Decree effectively require KEXIM to carry on its

business for profit. More specifically, Articles 17-3 through 17-13 of the KEXIM Decree provide the
parameters for sound and profitable management of KEXIM. In addition, the Interest Rate Guidelines
of KEXIM provides for the mechanism of determining interest rates and fees which is structured to
align KEXIM rates always with market rates (see
 Chapters 2, 3 & 4 of the Interest Rate Guidelines).

56. Article 26 of the KEXIM Act provides, in particular, that except where "inevitable for
maintaining the international competitiveness to facilitate [...] export [...]", interest rates
shall be set so as to cover inter alia operating expenses.

 (a) What is the meaning of the phrase "i nevitable for maintaining the international
competitiveness"?

 (b) How is this phrase applied in practice? In any such case, where the interest rate
is reduced to maintain international co mpetitiveness, would this not imply that
the final rate is below market?

 As Korea noted during the First Substan tive Meeting, the phrase mentioned above was
included in the KEXIM Act in order to allow KEXIM the option to provide financing at below-cost
level in exceptional situations when KEXIM faces severe ‘rates’ competition from foreign financial
institutions. A typical example is a situation where KEXIM has to apply “matching” as permitted
under the OECD Arrangement. Under the OECD Arra ngement, if a counterpart export credit agency
deviates from the guidelines under the OECD Arrangement, other export credit agencies are permitted
to lower their interest rates to ma tch such interest rates of their counterpart. In order to provide for
such possibility, Article 26 was introduced into th e KEXIM Act. However, as this “matching” would
be exceptional, Article 26 uses the term “inevita ble”, which means that under normal or ordinary
circumstances this exception must not be applied. Korea notes that this exception under Article 26 has
never been applied in practice thus far. Further, KEXIM has interpreted this Matching mechanism in
such a restrictive manner that it can be applied only for matching of [BCI: Omitted from public
version.] (see
 Article 43 of the Interest Rate Guidelines).

 In any event, Korea believes th at the Panel’s sub-question (b) do es not appear to be relevant
with the definition of subsidy or market benchmark. Because the benefit is not determined by
reference to the cost of the granting authority, but to the advantages received by the beneficiary of the
subsidy, a fact that KEXIM’s interest rate may in exceptional cases go below its “operating expenses”
referred to in Article 26 has noting to do with the finding of a ‘benefit’ or a ‘subsidy’. Instead, as long
as Article 26 permits KEXIM to match the low inter est rates applied by other competing financial
institutions, KEXIM will always end up applying the market benchmark, whether or not the KEXIM
rate is below or above its “operating expenses”. In sum, Article 26 does not imply that the final
KEXIM rate is “below market”.

C. APRG PROGRAMME

57. Are we correct in understanding that the Market Adjustment Rate means an upward or
downward adjustment, toward the market rate, of the base rate plus spreads? Does this
not mean that applying a Market Adjustment Rate could
 result in a below-market rate?
Please explain.

 First of all, as explained in its response to Question 47 above, Korea would like to clarify that
the “market rate” should exist in the form of “range” or “band”, not a single rate.

 The Market Adjustment Rate is one of the spr eads (or premium) that is to be applied upward
or downward to the base rate in addition to othe r spreads such as “credit risk spread” and “target
margin”. [BCI: Omitted from public version.]

 It is commercially reasonable and fully market-oriented that the rates of other competing
financial institutions are considered in determining the final rates or that a borrower who has a long
relationship with KEXIM and a good track record may obtain lower interest rates and/or fees. Korea
would like to note that applying such Market Adjustme nt Rate or similar spreads is a market practice
applied by all other commercial financial institutions.

 [BCI: Omitted from public version.]

 Korea does not believe that this Market Adjustme nt Rate causes the final fee rate to be set
below the market rates. It is b ecause the base rate and the spreads, including the Market Adjustment
Rate, are determined and applied according to the market-oriented criteria and it is always assumed
that the final rate will stay within the range of ‘market rates’.

58. Please provide examples of KEXIM APRGs provided to purchasers of commercial
vessels where the Market Adjustment Rate ha s been (i) upwards, (ii) downwards, and
(iii) zero/neutral. During 2003, what proportion of the totality (i.e., shipping sector and
beyond) of KEXIM's APRGs involved (i) upward, (ii) downward, and (iii) zero/neutral
Market Adjustment Rates?

 [BCI: Omitted from public version.]

59. In transactions in which there is no "e xport credit" to the Korean exporter, is the
argument set forth in para. 263 of Korea's first written submission (that Korean
exporters who export capital goods which qualify for loans under KEXIM policies on
export loans also are eligible for APRGs) re levant? Would the APRG still constitute an
"export credit guarantee" in such circumstances? Please explain.

 Korea raised this issue as part of its arguments in the alternative relating to the safe harbors
provided by Items (j) and (k) of A nnex I. Korea invoked the similarity in eligibility criteria for export
credits and APRGs as an additional indicator to support its conclusion that APRGs are export credit
guarantees. The fact that APRGs may be granted wh en export credits in the narrow sense are not does
not prevent APRGs from being qualified as export credit guarantees because it still is a guarantee
accessory to an export transaction similar to a loan guarantee which covers a default by the borrower.
Moreover, in the opinion of Korea, APRGs are guarantees against increases in the cost of the exported
products in the sense of Item (j) of Annex I for th e reasons explained in paras 265 to 267 of its First
Written Submission.

60. Regarding the argument in para. 266 of Korea's first written submission, (that APRGs
provide a safeguard against increases in the cost of production of a vessel, by relieving
the shipbuilder of the need to borrow working capital) is it Korea's position that the
provision of an APRG precludes any increase in the cost of producing a commercial
vessel?

 No Korea is not arguing that in the broadest sense that it precludes “any” increases in costs.
The APRG programme is fairly limited. It only ap plies with respect to the cost associated with the
working capital necessary to produce the ship. The reference to the guarantee against increases of
costs also demonstrates that item (j) is not limited to guarantees extended directly to buyers, for the
reference to “costs” – which are more closely associat ed with risks carried by the seller – is the term
used rather than the reference to being a safegua rd against increases in “prices”, which would more
clearly indicate a focus on buyers.

D. PSL PROGRAMME

61. In light of paras. 260 and 271 of Korea's first written submission, is it Korea's position
that any official measure to promote exports constitutes an official export credit? Please
explain.

 Korea did not mean to imply that any
 official measure to promote exports constitutes an
official export credit when it referred in paragraph 260 of its First Written Submission to Section 4 of
the Sector Understanding for Export Credits for Ship s. Korea also referred to Section 3 of the OECD
Arrangement in paragraph 259 to clarify that expor t credits may be given in the form of direct
credits/financing, refinancing, interest rate s upport, guarantee or insurance. Korea nevertheless
invoked Section 4 in support of its argument that the concept of “export credit” and “export credit
guarantee” should not be given an unduly restricted interpretation that would exclude APRGs from
Item (j) while these show a close connection with the financing that the shipowner obtains for the
building of the vessel covered by the APRGs. Korea also notes that the term “official export credit” is
found only in the second paragraph of Item (k) a nd provides part of the definition of a narrow
exception to the broader language in the first paragr aph of Item (k). Thus, whatever would be an
“official export credit” for purposes of the second paragraph of Item (k) necessarily would be
included within the provisions of the first paragraph. The OECD references are illustrative here.

62. Regarding para. 272 of Korea's first writte n submission, do shipyards necessarily grant
credits to buyers in every case that they avail themselves of a PSL?

 Yes, in the sense that a shipowner is never re quired to settle the price for the vessel at once
but in installments of which the time period a nd amounts vary depending on the negotiations between
the shipbuilders and the shipowners. Hence, the shi powners are always allowed to defer payment as
mentioned in the quotation in paragraph 272 of Ko rea’s First Written Submission. The larger the
amount that the shipowner is entitled to defer during the building of the vessel as a result of the
payment term agreed upon, the greater the likely need of the shipbuilder for a pre-shipment loan or an
equivalent financing facility for financing the pur chase of materials and the building of the vessel
concerned.

63. At paragraph 159 of its submission the EC quotes a statement by KEXIM that the PSL
programme involves “larger credits and longer repayment terms than what suppliers or
commercial banks would provide”. Why is th is not evidence that PSLs are provided on
below-market terms?

 Korea notes that Exhibit EC-21 referred to in footnote 116 at paragraph 159 does not contain
the phrase quoted above. Further, Korea is not able to locate the quoted phrase in any other exhibits
the EC provided. Hence, Korea is not in a position to respond to this Question at this time. Korea also
notes that the sentence quoted does not, in any event, lead to the suggested conclusion. For example,
providing a longer term than is generally available do es not mean that the rates are below market. It
depends on how they are adjusted to reflect the di fferent terms. The size of a credit may or may not
require different rates; it depends on factors extrane ous to size alone. Therefore, that part of the
statement would seem completely beside the point.

64. Please provide details of two Base Rate calc ulations for two fixed rate loans to Korean
shipyards, taking into account and making reference to the component elements thereof
referred to in the Interest Rate Guidelines.

 As noted in the response to Question 47 above, the loans with fixed interest rate are rather
exceptional. Nonetheless, Korea submits the details fo r two loans with fixed interest rate as below.
[BCI: Omitted from public version

65. At para. 199 of its first written submission , Korea states that the terms of PSLs normally
do not exceed 6 months. At para. 277, Korea asserts that the usual maturity of PSLs is
between 90 and 180 days. Please explain these different descriptions of the maturity of
PSLs. What is the typical maturity of a PSL?

 Korea notes that the above two statements describ e the same fact in a slightly different form.
In terms of maturity of disbursements of PSLs, there is no “typical” maturity of a PSL. [BCI:
Omitted from public version.]

66. Are all PSLs at floating rates? Are any made at fixed rates?

 PSLs may take either floating rates or fixed ra tes. Korea submits examples of fixed rate PSLs
in its response to Question 64 above.

E. INDIVIDUAL APRG TRANSACTIONS

67. Please provide internal documentation concerning KEXIM's review / authorization of
the APRG issued on [BCI: Omitted from public version]. Please include in particular
the worksheets and other documentation showing calculations of the interest rate and
other terms, including consideration of collateral, related to KEXIM's review /
authorization of this APRG.

 Korea submits in Exhibit Korea - 57
 the relevant minutes of the Board of Directors Meeting
and related documents authorizing the APRG tr ansaction concerned. Korea notes that it is not
KEXIM’s policy to keep and ma intain worksheets and similar documents. Hence, Korea cannot
provide such documents.

 [BCI: Omitted from public version.]

68. Regarding para. 207 of Korea's first wri tten submission, please explain the basis for
Korea's assertion that the EC "confirmed" that the market which provides other
alternatives available to the recipient must be confined to the domestic market.

 Korea’s statement in paragraph 207 of its First Written Submission, referred to in
paragraph 145 of the EC’s First Written Submission where the EC stated that the KEXIM APRGs
confer a benefit to Korean exporters “by providing financial support on more advantageous terms than
they otherwise would be able to obtain in the Korean financial market.”

69. Regarding para. 213 of Korea's first wr itten submission, please provide an example
(with supporting documentation) of two instances in which different Korean shipyards
were not able to select the APRG provider th emselves. Please also provide supporting
documentation for the instance referred to in note 161 to Korea's first written
submission.

 [BCI: Omitted from public version.]

70. Regarding the last sentence of the quote co ntained in note 157 to Korea's first written
submission, is it only when "physical" colla teral is provided that "the credit rating of
the borrower will not influence the determination of the spread"? Please explain.

 Attachment 1 of the Interest Rate Guidelines provides for the application of different credit
risk spreads depending on the typ es of security interests provided. According to this Attachment,
[BCI: Omitted from public version.]

71. Regarding the second sentences of paras. 218 and 221 of Korea's first written
submission, and the third sentence of para. 223, please specify precisely which APRGs
by which domestic financial institutions Korea considers would constitute a more
appropriate market benchmark, and provide details thereof.

 First, Korea re-emphasizes that the EC bears the burden of proof to establish the appropriate
market benchmarks and has, so far, failed to do so and thereby failed to establish a prima facie case
on export subsidies. However, for the purpose of showing that the EC has in fact selected and
provided misleading data, Korea s ubmits below certain APRG rate s charged by other financial
institutions which can be compared with the rates charged by KEXIM at the comparable time.

BCI: Omitted from public version.]

F. INDIVIDUAL PSL TRANSACTIONS

72. Please provide internal documentation concerning KEXIM's review / authorization of
PSL [BCI: Omitted from public version]. Pl ease include in particular the worksheets
and other documentation showing calculations of the interest rate and other terms,
including consideration of collateral, related to KEXIM's review / authorization of this
PSL.

 Korea submits in Exhibit Korea - 60
 the relevant minutes of the Board of Directors Meeting
and related documents authorizing the PSL transacti on concerned. Korea notes that it is not KEXIM’s
policy to keep and maintain worksheets and othe r similar documents. Hence, Korea cannot provide
such documents.

73. Regarding paras. 233 and 240 of Korea's first written submission, please explain
precisely how the collateralization and di fference in maturity of the relevant PSLs
accounted for the difference between the rates for those corporate bonds and the
KEXIM PSL rates, which sometimes was as much as [BCI: Omitted from public
version]. Please comment on Attachment 1 to the KEXIM Interest Rate Guidelines in
this respect.

 First of all, Korea notes that the corporate bond rates offered by the EC are hypothetical ones
and, thus, cannot constitute comparable benchmarks to PSLs. The corporate bond rates offered by the
EC are the rates which the Korea Securities Dealers Association (“KSDA”) announces for the
purposes of general indices. More specifically, in order for KSDA to post corporate bond yield rates
daily, the securities dealers of 10 securities houses designated by KSDA provide KSDA with the daily
yield rates which are not based on the statistics of actual yield rates, but based on their own
projections taking into account the market situati ons on that date. In turn , KSDA simply averages
those rates and posts it. Thus, the KSDA rates must also be hypothetical ones. The KSDA rates do not
reflect the difference in the industry sectors whic h the issuing company belongs to, the different
financial strengths of individual issuers (e.g., whethe r the company is an affiliate of a Chaebol), and,
most importantly, the specific terms and conditions (especially the maturities and collateral) of the
actual corporate bonds being traded in the market. When looking at the individual companies even
having the same credit ratings, the companies may be perceived and treated differentially in the
market considering various factors. Accordingly, th e actual yield rates of the corporate bonds of the
issuers with the same credit rating may be substan tially different. Considering all these, there must be
differences or gaps between the KSDA rates and the actual corporate bond rates of individual
companies. Hence, Korea doubts, from the outset, whether the KSDA rates th emselves can constitute
appropriate benchmarks for PSLs , let alone the discussion on different terms and conditions
(particularly the maturities and the collaterals).

 Further, Korea notes that the collateralization s ubstantially affects the application of credit
risk spreads as explained in the response to Question 70 above, wh ich in turn causes substantial
differences in the final interest rates. [BCI: Omitted from public version.]

 Further, as the graph attached hereto (Exhibit Korea - 62
) clearly shows, the interest rates of
loans with longer term maturity were generally higher than the loans with shorter term maturity. Also,
KEXIM has applied higher credit risk spreads for the loans having over 1 year maturity than the
spreads for the loans having 1 year or less maturity (see Attachment 1 to the Interest Rate Guideline).
Thus, the difference in maturity also clearly aff ects the overall interest rate although the degree of
such differences has varied from time to time.

74. Regarding para. 241 of Korea's first writte n submission, please provide a copy of the
relevant agreement between KEXIM and Hyundai Heavy Industries.

 Korea submits herewith KEXIM’s notice of approval relating to the transaction as Exhibit
Korea - 63.

75. Regarding paras. 272 and 273 of Korea's first written submission, do the terms on which
PSLs are provided vary according to the amount, duration or terms of any credit
provided by the Korean exporter to its cu stomers? Please explain, and provide
supporting documentation where relevant.

 If the payment term agreed upon between the Ko rean exporter and its customer is tail-heavy,
i.e., most of the purchase price is paid at a later stage during the manufacture of the product concerned
and after its delivery, it means that the shipbuilder must procure the production cost through its own
financing (e.g., PSLs), rather than through advanc e payment from the ship buyer (i.e., payments
received prior to the delivery of the vessel concerne d). Therefore, at least the ‘amount’ of the PSLs
will vary according to the ‘amount’ and the “duration” of the credit provided by the shipbuilder to its
customer. This will influence the term spread taken by KEXIM when granting the PSL.

 However, Korea has no document that shows a clear linkage between the terms of PSLs and
the terms of supplier credits to ship buyers.

G. ACTIONABLE SUBSIDIES

76. Does Korea accept the EC's argument that the Korea Depository Insurance Corporation
and the Bank of Korea constitute "public" bodies in the sense of Article 1.1(a)(1) of the
SCM Agreement? Please answer yes or no, and give reasons. If yes, what characteristics
do these entities have that KEXIM does not? Do these entities have the authority to
regulate and / or tax?

 (a) Yes, Korea agrees that at least the Ba nk of Korea constitutes a “public” body in the
sense of Article 1.1(a)(1) of the SCM Agre ement. As explained below, the Bank of
Korea possesses the essential powers characterizing the exercise of ‘governmental’
authority, that is, authority to ‘regulate’, ‘restrain’, ‘supervise’ or ‘control’. Further,
the Bank of Korea is not engaged in the supply of goods or services on commercial
terms on markets which are open to privat e operators. KEXIM (and KDB and IBK as
well) do not have such powers and characteristics.

 The main powers and characteristics of the Bank of Korea include the following:

 - As the central bank of the Republic of Korea, it issues the legal currency of
Korea;

 - It establishes and enforces the mone tary and credit policies, controlling the
amount and flow of money and stabilizing the prices;

 - It acts as the “bank of the bank s”, receiving deposits from and extending
loans to banks and other financial institutions, in order to sustain the systemic
operation and security of the Korean financial market;

 - It acts as the bank of the Government , receiving and paying the tax and other
government revenues and keeping th e Government-owned securities in
custody;

 - It operates and manages the nation-wide payment settlement system;

 - It possesses and manages foreign currency-denominated assets of the
Government and advises the Government on its foreign exchange policies;

 - It maintains the stability and soundness of the national financial system by
analysing and inspecting the operations of banks;

 - It carries out the inspection and research of the overall status and
development of the national economy and issues various statistical reports on
the national economy;

 - It represents the Korean Government in connection with any affairs,
negotiations and transactions with intern ational monetary or financial bodies
of which the Republic of Korea is a member;

 - In carrying out these powers, the Bank of Korea can exercise the power to
order other banks and financial institu tions to submit necessary materials and
information;

 - The Governor, Vice Governor, Audito r and employees of the Bank of Korea
are treated as ‘public servants’ for th e purpose of applying the criminal law
and the penal provisions of other laws;

 - The Bank of Korea is in principle prohibited from engaging, directly or
indirectly, in any commercial (profit-generating) activities, and from
receiving deposits from or lending money to individuals and corporations
other than the Government, government agencies and financial institutions.

 (b) The main powers and characteristics of the KDIC include the following:

 - The KDIC is vested with two main functions: (i) operate the ‘deposit
insurance system’ to protect deposito rs with the banks and financial
institutions by paying deposits from a deposit insurance fund when the banks
or financial institutions become unable to pay deposits to the depositors due
to bankruptcy, etc.; and (ii) arrange for merger or assignment of business of
‘unsound’ financial institutions and pr ovide financing in relation to such
merger or business assignment;

 - In carrying out such functions, the KDIC exercises the power to (i) require
materials from, and inspect the financia l institutions covered by the deposit
insurances of the KDIC; (ii) institute legal actions against the directors,
officers and employees of ‘unsound’ fina ncial institutions, the directors,

officers, employees and major shareholders of the debtor company, or any
other third parties which are believed to have contributed to the financial
institution becoming ‘unsound’ (collectively the “responsible parties”); and
(iii) require materials from and inspect the business and assets of the
responsible parties;

 - Any person who fails to submit th e required materials or submits false
materials to the KDIC or who refuses, interferes with or avoids the inspection
by the KDIC will be punished by imprisonment or fine;

 - The directors, officers and employers of the KDIC are treated as ‘public
servants’ for the purpose of applying the applicable provisions of the criminal
code.

77. If a loan is denominated in US dollars, isn't it appropriate to have regard to the US
market in order to determine the prevailing market rate for such a loan?

 KEXIM has carried on financing businesses in the Korean domestic markets in terms of
customers and competing financial institutions. Ther efore, KEXIM does not consider the US market
rate as the prevailing market rate for KEXIM’s US dollar denominated loans. [BCI: Omitted from
public version.]

78. Regarding para. 347 of Korea's first written submission, was the liquidation / going-
concern value assessment of Daewoo made on the assumption that there would be a
particular restructuring (e.g., the restructuring proposed by Arthur Andersen), or
instead on the assumption that no restructuri ng would take place? If the going concern
value was based on the assumption of a given prospective workout or CRP process, what
would be the value of your statement that in every case of restructuring of a ship
producer, the going concern value was greater than the liquidation value? Is it not the
case that with certain assumptions regarding the content of the restructuring process,
any company however insolvent could be ma de to have a higher going concern value
than liquidation value?

 (a) It is not correct that the liquidatio n / going-concern value assessment of Daewoo
Heavy Industry (“DHI”) was made on the assumption that there would be a particular
restructuring. The reverse was true. That is, Arthur Andersen proposed the
restructuring of DHI after it had confirmed that the going concern value of DHI was
greater than its liquidation value. The main responsibility of Arthur Andersen at the
time was to carry out due diligence examination of DHI’s assets and liabilities, to
assess whether the going concern value was great er than the liquidation value, and, if
the going concern value was found to be great er than the liquidation value, then to
propose a feasible restructuring plan. Therefore, there could be no particular
assumption of restructuring when Arthur Andersen made the liquidation/going-
concern value assessment of DHI.

 - This fact can be established by the history of Arthur Andersen’s involvement
and its role in the DHI workout. As clearly stated in Section 2(a) of the
World Bank SAL II Policy Matrix on Corporate Restructuring (Exhibit Korea

- 30), the role of the financial advisor was to indicate “how best to maximize
the return to creditors – i.e., throu gh voluntary workout, composition,
reorganization or liquidation”, after the workout procedure had been
initiated by the CCFI. Based on the professional assessment of this financial

advisor, the Lead Bank either proceed s with the preparation of a workout
plan or proposes that the CCFI terminate the workout procedure initiated.
3

 - [BCI: Omitted from public version.]

 These facts show that Arthur Andersen dischar ged its professional duty to analyze “how best
to maximize the return to creditors – i.e., thr ough voluntary workout, composition, reorganization or
liquidation”, without any pre-established assumption of the workout.

 (b) In calculating the going-concern value of DHI, Arthur Andersen applied the
‘discounted cash flow’ (DCF) method whereby the enterprise value of the company is
determined by discounting, with appropriate discount rate, the estimated cash flows to
be generated by the company in future. (see
 Exhibit EC-64, Arthur Andersen
Corporate Workout Report on DHI, pp. 103-104). In accordance with the modern
financial management theory, the DCF method calculates the enterprise value (free
cash flows) mainly based on the operational aspects (i.e., operating assets and
operating liabilities). The assumption for the DCF valuation of the enterprise value is
that the company continues as a going concer n, but a “particular restructuring (e.g.,
the debt restructuring proposed by Arthur Andersen) was not considered at the stage
of the assessment of DHI’s enterprise value as a going concern.

 Under the DCF valuation method, the going concern value of a company can be
either higher or lower than its liquidati on value, depending on the profitability and
cash flows of the company’s business operation. For example assume that a company
holds operating assets (book value) of 1,000, operation liabilities (book value) of 300,
interest bearing debt of 400 and equity of 300, with discount rate (WACC) of 10 per
cent. And also assumes that in the case of liquidation, the company is expected to
have liquidation value of 700. The comparison between the company’s going concern
value and the liquidation value is as follows:

 1. In the case of annual operating cash flows being 100, the going concern value
of the company would be 100/0.1=1,000, which is greater than the liquidation
value of 700.

 2. In the case of annual operating cash flows being 70, the going concern value
of the company would be 70/0.1=1,000, which is the same than the
liquidation value of 700.

 3. In the case of annual operating cash flows being 50, the going concern value
of the company would be 50/0.1=1,000, which is less than the liquidation
value of 700

79. The EC states, at footnote 31 of the its s ubmission, that Korea refused to provide a copy
of the January 1998 Agreement with the top 5 chaebols on the grounds that this
Agreement was “irrelevant”. Is this correct? If so, please explain why this Agreement is
irrelevant.

 It is true that Korea did not provide copies of the agreements relating to the self-restructuring
of the top five chaebol (hereinafter, “top-5 chae bols agreements”). Korea believed and still believes
that the EC was making another fishing expedition by asking for documents whic h were irrelevant to
the present dispute.

3 Attachment 8 to Korea’s First Written Submission, “Description of the Workout Procedures pursuant
to the CRA.”

 The top-5 chaebols agreements are irre levant to the present dispute because:

 - These agreements provided for some prin ciples of the so-called “self-restructuring”,
which was to be implemented voluntarily by each of those top-5 chaebols outside of
the workout procedures under the Corporate Restructuring Agreement (CRA)
framework or the court-supervised insolv ency procedures. None of the corporate
restructuring measures at issue in the present dispute was taken in the form of such
“self-restructuring”. Therefore, there w as no reason for the EC to ask for the
agreements relating to such self-restructuring.

 - The EC argued, at footnote 31 of its First Written Submission, that “this agreement is
quite relevant to this dispute because it shows the degree to intervention of the
Government of Korea in the corporate sector .” The EC attempts to mislead the Panel
by intentionally using such vague words as “intervention … in the corporate sector.”
But the role of the Korean Government was confined to encouraging the top-5
chaebols to take self-initiated actions to enhance their management transparency,
eliminate cross guarantees, improve financial structures (e.g., reduce debt/equity
ratios), and dispose of non-viable affiliates and focus on core businesses.

 - Such a limited role of the Korean Gove rnment in connection with self-restructuring
by the top 5 chaebols was also clearly stated in section 3(h) of the World Bank Policy
Matrix on Corporate Restructuring attached to the LOI between IMF and Korea
(Exhibit Korea-30). It should be noted that this reference in the LOI to the top 5
chaebols’ self-restructuring was made in the context of the corporate restructuring
‘principles’ set out in the LOI: i.e., “All corporate restructuring should be voluntary
(i.e., not government directed) and market oriented …..” (See Exhibit EC-36, the LOI
of 2 May 1992 between IMF and Korea, Attachment “Korea – Updated
Memorandum on the Economic Program for the Second Quarterly Review, 1998”).
Therefore, it is obvious that the top 5 chaebol agreements do not indicate the
intervention of the Korean Government in the “corporate restructuring”.

 Furthermore, it is now clear that when the EC requested Korea to provide the January 1998
Agreement, it had already possessed the top 5 chaebols agreement of 7 December 1998 and
understood what the top 5 chaebols agreements were all about (see Exhibit EC-40). Moreover, in its
Annex V responses, Korea provided sufficient inform ation on the contents of these agreements that
clearly shows the irrelevance of these agreemen ts to the present dispute (see Korean’s Annex V
Response, Sections 2.2 (20), (21) and (22)). In th is regard, the EC’s allegation of adverse inferences
is baseless.

 Despite the irrelevance of the top 5 chaebols ag reements to the present dispute, Korea hereby
submits the January 1998 Agreement as Exhibit Korea – 65.

80. Please explain the different debt-recovery rates paid by KAMCO for unsecured loans
held by Daewoo's domestic and foreign creditors respectively.

 [BCI: Omitted from public version.]

81. You argue that the restructuring was not specific, because many companies underwent
restructuring during the same period as the shipbuilders. Is your argument that the
restructuring packages and work-outs were ess entially standardized, and subject to
"objective criteria or conditions governing th e eligibility for, and the amount of" the
measures involved, and that such criteria and conditions were "strictly adhered to"?

Or is it the case that each restructuring or work-out was tailor-made to the particular
company involved? Please explain.

 Our argument is two-fold: First, assuming for the sake of argument that each of the creditor
financial institutions of the three restructured Kor ean shipbuilders constitutes the “granting authority”
as referred to in Articles 2.1(a) and (b) of the SCM Agreement , the granting authority, or the
legislation pursuant to which the granting auth ority operates (i.e., the CRA and the Corporate
Reorganization Act), did not explicitly limit access to an alleged subsidy to shipbuilders. Instead, the
restructuring legislation or scheme provides for standardized sets of rules and procedures and is
generally applicable to all companies irrespective of their industrial sectors. Therefore, no specificity
can be found pursuant to the principle laid down in Article 2.1(a).

 Second, we also argue that the restructur ing legislation or scheme established “objective
criteria or conditions governing the eligibility for, a nd the amount of, a subsidy” and, therefore, the
non-existence of specificity can be established by virtue of Article 2.1(b). Footnote 2 of the SCM
Agreement enumerates ‘number of employees’ or ‘size of enterprise’ as examples of ‘objective
criteria or conditions’ as used in Article 2.1(b). Ho wever, ‘objective criteria or conditions’ is more
broadly defined to mean “criteria or conditions which are neutral, which do not favour certain
enterprises over others, and which are economic in nature and horizontal in application.”

 The CRA and the Corporate Reorganization Ac t, which constitute legal frameworks for the
workout and corporate reorganization proceeding, respectively, authorized the creditor financial
institutions or the court to grant the restructuring measures to any corporation which was insolvent or
suffering liquidity problems but whose going concern value is greater than liquidation value. Korea
believes that these criteria clearly govern the eligib ility for the restructuring measures, and constitute
“objective criteria or conditions” as defined in the footnote 2 of the SCM Agreement. Furthermore,
according to the Operational Guidelines for Workout Ag reement, if a request for workout is filed by a
company, the lead bank must set up an independe nt Workout Eligibility Review Committee to review
the eligibility of the subject company. The Review Committee is required to review the applicant’s
financial and management status to assess the viability of that company.

 Although the amount of the alleged subsidy it self was not spelled out in the restructuring
legislation or scheme in terms of numerical figur es, the above going concern value standard would
also constitute objective criteria or conditions ‘govern ing’ the amount of the alleged subsidy, in the
sense that the alleged subsidy amount should be lim ited to the extent necessary for restructuring to
realize the established going concern value and maximize returns to the creditors.

H. SERIOUS PREJUDICE

82. Please comment on the EC's assertion that the competition complaint filed by Samsung
demonstrates the unfair pricing advantage enjoyed by restructured Korean shipyards.

 The Ministry of Commerce, Industry and Ener gy ("MOCIE") intervened in the Hamburg Süd
case in accordance with the provisions of the Overseas Trade Act. Article 43 of the Act authorizes the
MOCIE to issue to exporters of goods a "coordinati on order" with respect to the terms of export
(including without limitation prices, quantity, and qua lity), if, among others, the exporters engage in
any of the following types of behavior and if it is deemed necessary to prevent acts which threaten to
disturb fair competition in the export of goods or to impair Korea's external credit and reputation:

 1. If an exporter unreasonably excludes othe r traders in connection with export of
goods;

 2. If an exporter unreasonably induces or coer ces the counterpart of another trader to
refuse to deal with that trader in connection with export of goods; or

 3. If an exporter unreasonably interferes with the overseas business activity of other
traders in connection with export of goods.

As can be seen from the above provision, this provision is a special competition law provision
applicable specifically to export trade transactions. In common law jurisdictions it is closer to so-
called tortious interference than competition law.

 [BCI: Omitted from public version.] The MOCIE was not concerned with whether prices
offered by the shipbuilders involved were high or lo w, but just looked into the way or fashion in
which the competition was taking place. The MOCIE c onsidered that the behaviour was problematic
in light of the provisions of Article 43 of the Over seas Trade Act. As a result, the MOCIE issued the
coordination order to stop unreasonable competition. This coordination order dealt with the unique
situation of a particular case from a Korean competit ion law perspective, and in no respect supports
the serious prejudice argument of the EC.

83. Does the EC correctly characterize your ar gument as being that no violation can be
found based on a past action? Please explain your position on this issue, including any
relevant past disputes. Does your position differ as between alleged prohibited and
allegedly actionable subsidies?

 Korea believes that the EC has not properly re flected Korea’s position in paras 17 to 20 of its
Oral Statement. Korea does not argue that the subsid ies must still be current on the day that the Panel
issues its report or on the day that the DSB adopts its report. However, where a statutory framework
or a programme is challenged as such, as a prohibite d export subsidy, such statutory framework or
programme at the time of the initiation of the dispute settlement proceeding must still reflect the
deficiencies complained about. Simply put, the facts are completely contrary to the EC’s argument
regarding the programmes “as such”.

 Moreover, in the present dispute, it must be recalled that the period under review is not a
single continuum. It is not the case as it would be if this Panel were examining the long history of EC
subsidization of its shipyards where the underlying economic conditions were relatively stable. In this
case, the early part of the period the EC identif ies was one of huge generalized financial and
economic turmoil in Korea and other Asian countri es. Reviewing this time of financial turmoil
becomes of questionable relevance in light of the act ions taken over a reasonable period of time in the
most recent past. As Korea noted, the period of extreme financial turmoil does indeed make it
difficult to find market benchmarks not just in this matter but in any other aspect of Korea’s economy
during that period. Korea is firmly of the view th at, if proper adjustments are made to reflect these
conditions, it is clear that there was no subsidization at that time either. Thus, is it not a question of a
legal bar on examining the earlier part of the period, it is a matter of probity and relevance of the data.

 The EC itself refers to the fact that a cred it risk assessment was intr oduced in Korea’s APRG
transactions in March 1998. It is neither reasonable nor in line with Article 3.2 of the SCM Agreement
that a possible deficiency remedied some 5 years before the initiation of the dispute settlement should
still be challenged. In that sense, a WTO Member cannot be said to “maintain” a prohibited subsidy.

 Korea wishes also to bring to the attention of the Panel that the EC in support of its arguments
has relied on APRGs and PSLs that were frequently afforded up to some 5 or 6 years ago while Korea
had submitted much recent data. Thus:

 (i) for Daewoo: the EC shows APRGs issued from 1997 to 2001 (Figure 11 of the EC’s
First Written Submission) and PSLs issued from 1999 to 2001 (Figure 16 of the EC’s
First Written Submission);

 (ii) for Halla: the EC shows APRGs issued in 2000 (Figure 12 of the EC’s First Written
Submission) and PSLs issued primarily be tween 2001 and 2002 with two only in
May 2003 (Figure 17 of the EC’s First Written Submission);

 (iii) for Daedong: the EC shows APRGs issu ed in 1999 (Figure 13 of the EC’s First
Written Submission) and the PSLs issued in 2002 and three only in May 2003
(Figure 18 of the EC’s First Written Submission);

 (iv) for Hanjin: the EC shows APRGs issued in 2002 (Figure 14 of the EC’s First Written
Submission) and PSL’s issued between 1999 a nd 2001 (Figure 21 of the EC’s First
Written Submission);

 (v) for Samsung: the EC show s APRGs issued in 1997 (Figure 15 of the EC’s First
Written Submission);

 (vi) for Hyundai Mipo: the EC shows PSLs issued between 1999 and October 2002
(Figure 19 of the EC’s First Written Submission);

 (vii) for Hyundai: the EC shows PSLs issued between 1999 and 2003.

 The EC has made a selective approach of APRGs and PSLs and selected for a number of
shipyards “old” APRGs or PSLs while additional data was provided by Korea on more recent APRGs
and PSLs in Annex 1.2(31)-1 and 1.2(30) of the responses filed by Korea in the Annex V process, i.e.:

 (i) Daewoo: APRGs issued by KEXIM in 2002 and 2003 were shown as well as PSLs
with commitment dates in 1996, 1997 and 1998;

 (ii) Halla: data on APRGs issued by KEXI M in 1997, 1998, 1999, 2002 and 2003 were
shown as well as PSLs with commitment dates in 1996, 1997 and 2000.

 (iii) Daedong: data on APRGs issued by KEXIM in 1998, 2000, 2001, 2002 and 2003
were shown.

 (iv) Hanjin: data on APRGs issued by KEXIM in 1998, 2000, 2001 and 2003 were shown
as well as PSLs with commitment dates in 2002 and 2003;

 (v) Samsung: data on APRGs issued by KEXIM in 1998, 1999, 2000, 2001, 2002 and
2003 (many) were shown as well as PSLs with commitment dates in 1998, 2000,
2001 and 2002;

 (vi) Huyndai Mipo: data on APRGs issued by KEXIM in 1998, 1999, 2000, 2001, 2002
and 2003 was shown as well as PSLs with commitment dates in 1996 and 1998;

 (vii) Hyundai: data on APRGs issued by KEXIM in 1997, 1998, 1999, 2000, 2001, 2002
and 2003 was shown.

 The position taken by the EC in paragraph 38 of its Oral Statement is simply incorrect as a
matter of law. Panels cannot make rulings based on an assumption of bad faith implementation by
Members. In addition, if the EC’s point were take n to its logical conclusion, one fails to see what
would be the use of consultations. If a settlement is found during consultations, the principle is that
this obviates the need for a dispute settlement even if it is theoretically conceivable that a defending
party could change its legal system again. What is the difference with a defending party that has itself
remedied a deficiency in its legal or regulatory framework before there was even any mention of a

possible dispute settlement? As mentioned by China in its third-party submission (paragraph 18), the
word “maintain” in Article 3.2 of the SCM Agreement does not mean “prevent”.

 The case of actionable subsidies covered by Articles 5 and 6 of the SCM Agreement is indeed
different from that of prohibited subsidies. Simp ly put, the complainant must show adverse trade
effects. It is not like demonstrating nullification or impairment elsewhere under the WTO Agreements
where there is a presumption created if legal incons istency is demonstrated. All but the most recent
past practice will be of extremely limited legal a nd factual relevance especially when there is a
qualitative distinction represented here by the financial crisis as a compared to the returning normality
of the recent past.

 Moreover, it is important to recall that under Ar ticle 7.8 the remedy is the withdrawal of the
subsidy or
 its adverse trade effects. The negotiators, ther efore, contemplated that adverse trade effects
had to exist at the time of the dispute settlement. Korea has further submitted that the use of the
present tense “is” in Article 6.3(c) contrasts with the wording of Article 15.2 of the SCM Agreement
which refers to “whether there has been a significant price undercutting by the subsidized imports …
or whether the effect of such imports is otherwise to depress prices to a significant degree or to
prevent price increases, which otherwise would have occurred
, to a significant degree”. The provision
of Article 15.2 contemplates a review over a referen ce period sufficiently long in order to provide a
trend showing injury to the domestic industry. In the case of Article 6.3(c), Korea submits that price
depression or suppression must be shown in a relatively recent period preceding the initiation of the
dispute settlement. In support, it has refe rred to the conclusion of the Panel in US – Wheat Gluten in
paragraph 543 of its First Written Submission.

 Korea has noted that the EC in support of its allegation of price depression as regards LNGs,
has provided a graph with newbuilding price devel opments up to January 2003 (Figure 30). However,
Korea submits that the EC should show LNG pr ice developments up until June 2003 taking into
account prices submitted by Korea in the Annex V process and other prices as has become publicly
available since January 2003. Similarly, in support of price suppression, the price data supplied by the
EC are the same graph showing prices only up to January 2003 and for container vessels and chemical
and product tankers up to the end of 2002 only (refer to Figures 39 and 42 of the EC’s First Written
Submission) whilst price data was obviously availabl e to the EC in terms of the monthly reports
prepared by its own expert, FMI, and particularly relevant as shown in Annex 5a of the EC responses
to the Annex V process.

84. Is it your position that the outcome of all restructurings is ipso facto a market outcome,
making the existence of subsidization impossible? Please explain. What is meant by
your statement that every corporate restructuring was "market oriented"? Do you
mean that its going concern value was higher than its liquidation value, or do you mean
something else or something in addition?

 Where an insolvency procedure can proceed only after it has been confirmed that the going
concern value of the insolvent company is greater than the liquidation value and creditors can make a
most market-oriented decision through mutual nego tiations and a majority rule when adopting the
restructuring plans, Korea considers that the in solvency procedure yields a market outcome. In
particular, in the three cases at issue, each was market oriented in th e sense that each creditor
attempted to maximize the return on the debt it w as holding. In these cases, it means that it was more
profitable to continue operating the companies th an winding them down and liquidating the assets.
The existence of insolvency rules (corporate reor ganization or workout) is the essence of a market
economy; if the restructuring is made according to the insolvency rules on a market-oriented basis,
then there is no subsidization.

85. You argue that the concept of "like product" applies in respect of price
suppression/price depression, yet the relevant portion of SCM Article 6.3(c) does not

refer to "like product". What in your view is the significance of the fact that "like
product" is not referred to in respect of price suppression/price depression or lost sales?
Is your argument that this was an inadvertent omission by the negotiators? If so, is
there any evidence to support this? Please explain.

 Korea considers that the wording of Article 6.3( c) is consistent with a finding that the concept
of “like product” applies with respect to price s uppression/price depression. Article 6.3(c) states in
this regard that serious prejudice may arise where:

the effect of the subsidy is a significant price undercutting by the subsidized product
as compared with the price of a like product of another Member in the same market
or significant price suppression, price depression or lost sales in the same market…
The fact that the word “like product” is not rep eated in the second part of the sentence after the
disjunctive “or” is neither an omission on the part of the drafters, nor, in Korea’s view, should it be
interpreted to imply that the concept of “like product” does not apply in the context of price
suppression/price depression. Read in context, Korea believes that the term “like product” in the first
part of the sentence refers also to “price suppressi on, price depression or lost sales” in the second part
of the sentence. The reason why the words “like pr oduct” are not repeated in the second part of the
sentence, while the words “same market” are repeated, is that repetition of the former is superfluous
while the latter is not. In this regard, throughout th e subparagraphs of Article 6.3, the treaty specifies
and differentiates the geographic boundaries of the market that is being referred to, i.e. the “market of
the subsidizing Member” in subparagraph (a), a “t hird country market” in subparagraph (b) or a
“world market” in subparagraph (d) etc. In the c ontext of the contrasting geographic markets being
juxtaposed in subparagraphs (a)-(c), it is therefore logical that the dr afters would take care to specify
the geographic boundaries within which the serious prejudice criteria (price undercutting, price
depression etc.) should be examined.

 In contrast, the term “like product” is not differentiated or redefined in each of
subparagraphs (a)-(c) and con sequently there is no need to again de fine or refer to this term in the
second part of the sentence.

 Indeed, comparable formulations are found elsewhere in the Anti-Dumping and SCM
Agreements. In this regard, Article 3.2 of the Anti-Dumping Agreement states with respect to the
injury analysis that:

With regard to the effect of the dumped imports on prices, the investigating
authorities shall consider whether there has been a significant price undercutting by
the dumped imports as compared with the price of a like product of the importing
Member, or whether the effect of such imports is otherwise to depress prices to a
significant degree or prevent price increases, which otherwise would have occurred…
(Emphasis added).
 Article 15.2 of the SCM Agreement similarly provides:

With regard to the effect of the subsid ized imports on prices, the investigating
authorities shall consider whether there has been a significant price undercutting by
the subsidized imports as compared with the price of a like product of the importing
Member, or whether the effect of such imports is otherwise to depress prices to a
significant degree or to prevent price increases , which otherwise would have
occurred… (Emphasis added)
 In both the above formulations, the term “like product” is not repeated in the second part of
the sentence after the disjunctive “or.” Nonetheless, Korea considers that the drafters clearly intended

that depressed prices or lack of price increases in the context of the above-quoted Articles are to be
analyzed by reference to the “like product” c oncerned and not by some novel undefined standard.
There is no reason to interpret the use of the term “like product” in Article 6.3(c), and its applicability
to the evaluation of price-suppression/depression, differently.

 As Korea argued in its First Written Submi ssion, Articles 6.3(a), (b) and (c) posit "like
product" and "market" as different requirements (paragraph 506). Yet, the EC would have the Panel
conclude that the words “in the same market” in the context of price suppression/depression suddenly
comprises both a geographic and product dimension. This construction is illogical. It would require
reading into the text of Article 6.3(c) a wholly undeclared and unexplained intent that the word
“market” should comprise only a geographic dimension in some cases (e.g. subparagraph (a) and (b))
but in the context of subparagraph (c) the sa me word implies both a product and geographic
dimension.

 Moreover, to hold that “like product” does not apply in respect of price
suppression/depression would mean that the absence of the word “like product” in the second part of
the sentence under subparagraph (c) sh ould be interpreted to mean – with no express words to that
effect – that the SCM Agreement took the exceptional step introduc ing a new and undefined standard
in the context of the subparagraph (c), despite that ‘like product’ is a cornerstone found throughout the
SCM Agreement and indeed the WTO Agreement . Had the drafters intended such a result, Korea
considers that they would have made this inte nt explicit and would more over have defined or
elaborated the alleged product dimension of the “sa me market” in the context of evaluating price
suppression/depression. Korea notes in this regard that footnote 46 to the SCM Agreement provides
that:

Throughout this Agreement the term "like product" ("produit similaire") shall be
interpreted to mean a product which is iden tical, i.e. alike in all respects to the
product under consideration, or in the absence of such a product, another product
which, although not alike in all respects, has characteristics closely resembling those
of the product under consideration.

Had the drafters intended to introduce a special product dimension to the term “same market” in
Article 6.3(c) the drafters would presumably have similarly defined this concept.

 For these reasons, in addition to Korea’s pr eviously submitted arguments, Korea considers
that under the ordinary meaning of the terms in Arti cle 6.3(c), read in their context, the concept of
“like product” applies to price suppression/depression under subparagraph (c).

 Finally, the issue here is not simply a matter of what label ones applies. The real problem is
that it is impossible to have a sensible discussion of the market unless one first defines that market.
As noted above, the whole structure of the SCM Agreement is premised on defining that market in
terms of “like product” and there is no indicati on of an exception for this one single portion of
Article 6.3(c). But, even if one were to choose a different term, one still needs to define the market.
Is there significant price depression in the market? But, what market, one must ask. The parameters
must be rigorously defined or one is left with the situation demonstrated by the EC’s arguments where
they refer to some vague categories through which certain products sail at random such as the sudden
exclusion of certain types of “pure” chemical tanke rs. At the next moment, the EC is endorsing the
apparent Japanese view that there is a single product category and that every ship affects every other
in a legally relevant manner. This vagueness renders it quite literally impossible for Korea to respond
and the Panel to make a determination.

86. Do you think that footnote 46 of the SC M Agreement establishes a narrower definition
of "like product" than that applicable und er Article III, paragraphs 2 and 4 of the

GATT 1994? Could similarity of end-use be a criterion for determining "like product"
as defined in footnote 46? Why or why not?

 As explained more fully below, Korea is of the view that Article III provides a single
analytical framework for determining “like produc t.” However, Article III does not provide one
single definition of “like product.” The term “like product” under Article III can be broad in some
instances and more narrow in others (the so-called accordion). Footnote 46, with its narrow definition
focused on physical characteristics is similar to th e narrow approach required by Article III:2 first
sentence. As with Article III:2 first sentence, e nd-use can be a criterion incorporated into the like
product analysis, but end-use cannot be used to br oaden the scope of the like product away from the
narrowness of the definition implied by the reference to physical characteristics.

 The answer to this question and Question 87 have many overlaps. It is important to
emphasize that Korea does not agree that the EC has adopted a “product segment” analysis like that
suggested by the Panel in Indonesia – Autos . With its vague refere nces and shifting product
categories and the utter lack of any sort of proof of any sort, the EC has not followed any recognizable
approach followed under any provision of the WTO Agreements.

 In Indonesia – Autos, the Panel explicitly referred to the like product test as developed in the
jurisprudence of Article III, explicitly citing the Appellate Body analysis in Japan – Alcoholic
Beverages.
4 Indeed, the EC also endorsed this Article III-based analytical approach 5, but then
completely abandoned any attempt to follow-through on the analysis. Instead, the EC tried to claim
the right to make mere assertions of points that it subjectively considered “obvious” and hopes to shift
the burden onto Korea to prove the negative of its assertions.

 In contrast to the EC’s approach, the Panel in Indonesia – Autos then went through the list of
issues it would be examining including, physical characteristics, consumer perceptions, end-uses,
price differences and tariff classifications. The Panel stated that it considered that, in the specific case
before it, it found physical characteris tics to be particularly important, but did not limit itself to that
element of the like product analysis.

 The term ‘characteristics closely resembling’ [as per footnote 46] in its ordinary meaning
includes but is not limited to physical characteristics, and we see nothing in the context or object and
purpose of the SCM Agreement that would dictate a different conclusion.
6

 Thus, it is clear that the Panel in Indonesia – Autos was not attempting to construct a new
analytical approach to like product based on some thing outside the treaty language called “product
segmentation” as proposed by the EC. Rather, th e Panel was bringing the like product analysis of
footnote 46 within the analytical context of th e like product analysis used elsewhere in the WTO
Agreements, including Article III of the GATT 1994.

 By referring to Article III, the Panel in Indonesia – Autos was endorsing the analytical rigor
of the Article III approach and certainly would not have approved the fuzziness and vagueness of the
EC approach. According to the EC at times, there is a single product category of all ships. This was
how it was described in parts of the EC’s First Wr itten Submission and certainly was the basis of the
EC’s endorsement of the Japanese approach in th e First Substantive Meeting where any commercial
vessel has a legally recognized impact on any other vessel regardless of type.
7 This is in contrast with

4 Indonesia – Autos at para 14.174.
5 EC First Written Submission at para. 39.
6 Indonesia – Autos at para. 14.173
7 In this regard, Korea would like to draw the Panel’s attention to the discussion in the Panel Report in
Korea – Alcoholic Beverages wherein the Panel noted that, in the context of a discussion of the broad category
of whether products are directly competitive or substitutabl e, at some general level all products and services are

other suggestions by the EC that there are three pr oduct categories rather than one. But even with
three categories, the EC has failed to provide any sort of rigorous analysis of the parameters of such
categories. Indeed, the parameters are so fluid that they apparently can permit certain types of ships
to sail in and sail out of the categories depending on the complainant’s supply side factors in isolation
from any other sort of analysis.8

 The key point to understand from the jurispr udence under Article III is that it defines an
analytical approach to defineroduct categories. This analy tical approach is essentially the same in
Articles III:2 and III:4. There are three different results of the approach depending on whether a
panel is making fact findings with respect to Ar ticle III:2, first sentence regarding “like product”,
Article III:2, second sentence, regarding “directly competitive products”, or Article III:4, “like
products”. Thus, the conclusion will differ based on the breadth of the categories, but the analytical
approach is basically the same.

 Accordingly, the Appellate Body in Japan – Alcoholic Beverages found that the definition of
“like product” was narrow and used an analogy to an accordion to denote how the term can be narrow
or more expansive given the context.
9 Directly competitive products are a broader category, of which
like products are essentially a subset. This was made very explicit in Korea- Alcoholic Beverages
where the Panel applied essentially the same analy tical tools to both analyses and found that the
narrower like product categories had not been proved by the complainants.10

 This approach was confirmed in EC – Asbestos , where the Appellate Body used the multi-
element analytical approach and specifically critic ized the Panel for looking at only one factor in
making its like product analysis. 11 The Appellate Body then applied the tests but reached a
conclusion based on a broader definition of like product than used for Article III:2, first sentence. In
doing this, the Appellate Body expressly noted that it had not decided that the broader like product
analysis of Article III:4 was coterminous with the directly competitive product analysis of
Article III:2, second sentence, but it left open the possibility. 12 The conclusions of the Appellate
Body in this regard necessarily mean that the analytical approach of the like product and directly
competitive analyses of the different parts of Article III must be the same. The issue of narrowness of
the product category becomes an issue of interpretation of the results of the analytical approaches, not
any differences in the elements contained within such approaches.13

 Footnote 46 of the SCM Agreement focu ses on identical products or products with
characteristics closely resembling each other. This is , on its face, a strong physical identicallity test.
The Panel in Indonesia - Autos was applying this in a manner that found that physical characteristics
could subsume some of the other issues such as end- uses, tariff classification and price relationships.
That is, those other factors could also be taken into account within a like product analysis undertaken

competitive with each other, but that the requirements of Article III meant that a more rigorous and specific
analysis was required. Panel Report in Korea – Taxes on Alcoholic Beverages at paras. 10.39-10.43 (Panel
Report approved without modification by the Appellate Body). If that was the case for the broad category, it
certainly should be the case for the narrower category of like product.
8 The EC stated at the First Substantive Meeting that a certain type of specialty chemical tanker was no
longer relevant because the EC yards do not construct such vessels. However, the question of whether the EC
makes a particular product is irrelevant in answering th e question as to whether such specialty chemical tankers
are similar or dissimilar to the other chemical tanke rs, i.e., whether there are similarities in physical
characteristics, end-uses, and demand side price relationships. The causal relationships cannot be analyzed
unless these parameters are properly established.
9 Appellate Body Report in Japan – Taxes on Alcoholic Beverages at p. 21.
10 Panel Report in Korea – Taxes on Alcoholic Beverages at paras. 10.103-10.104 (Panel Report
approved without modification by the Appellate Body).
11 Appellate Body Report in EC – Asbestos at paras. 119-120.
12 Ibid. at para. 99.
13 Ibid. at paras 101-102.

pursuant to footnote 46. The language of footnote 46 clearly means that the conclusions drawn from
such analyses must be taken on the basis of the “closed accordion” of like product definitions.

 Korea considers this Indonesia – Autos approach, properly understood, as clearly within the
jurisprudence that has developed under Article III wh ich looks to these various elements of the like
product/ directly competitive product test. However, the treaty text is quite clear in footnote 46 that
the test for purposes of the SCM Agreement acco rds with the narrow approach adopted by the
Appellate Body in Article III:2, first sentence, not the broader analyses of Article III:4 and
Article III:2, second sentence.

 In the present dispute, the problem has arisen that the EC has attempted to avoid the issue
completely and claim that the Panel in Indonesia – Autos developed a whole new test of “product
segmentation” that is not based on the treaty text a nd apparently is more vague, completely fluid and
quite broad. This is contrary to the approach used by panels and the A ppellate Body pursuant to
Article III, as endorsed by the Indonesia – Autos panel. There simply is no way to read that panel
report to imply a broadening of the interpretation of like products or a weakening of the analytical
rigor needed to define the parameters of the categories.

 In the absence of such rigorously defined produc t categories, it is simply impossible for the
respondent or the Panel to address the complaint in any meaningful manner and the claims necessarily
must fail as a matter of law. As Korea – supported by the US – has argued, the abdication by the EC
of establishing the like product categories (regardless of whether the EC now tries to apply a different
label) should end the Panel’s inquiries because the EC has failed to carry its burden of proof. As the
Appellate Body emphasized in Japan – Agricultural Products II ,
14 the purpose of Panel questions
asked pursuant to DSU Article 13 is to better unde rstand the parties’ arguments, not to make the
complainant’s case for it.

87. If the concept of "like product" does apply in respect of price suppression/price
depression analysis, what in your view would be the appropriate "like product"
categories to be used in this dispute? Do you agree with the EC on the general idea that
like products could be defined on the basis of a market segmentation approach similar
to that used by the Indonesia – Autos panel (even though the panel notes your
disagreement with the particular market segments proposed by the EC)?

 (a) At the outset, Korea is fo rced to note that it is deeply troubled by this question and
wishes to reiterate its position that the burden of proof to demonstrate the existence of
serious prejudice rests on the EC. If the Panel agrees with Korea (as supported on
this issue by the US) that this requires an analysis based on like products, then the
inquiry ends. The EC, to use its term, “rejects” the relevance of like product.

 Korea recognizes the broad authority of Panels to ask questions for purposes of clarifying the
parties’ arguments and also recognizes that by mere ly asking a question, the Panel is not stating its
position on a legal issue. Of course, therefore, Kor ea will do its best to answer this question in as full
a manner as possible in the ten-day period allotted. However, Korea is concerned that when it
answers this question, the EC will incorrectly try to shift the burden of carrying the argument to
Korea. Therefore, Korea must note for the record its objection to being required to formulate ab initio
a “like product” presentation in the face of the EC’s rejection of its legal relevance.

 The requirement of pursuing a like product analysis was confirmed by the Panel in Indonesia
– Autos, the very case invoked by the EC itself in relati on to the “like product” definition. That Panel
observed:

14 Appellate Body Report in Japan – Agricultural Products II at para. 129.

In assessing the arguments of the parties, we are cognizant that the complainants are
required to demonstrate the existence of serious prejudice by positive evidence. Thus,
we agree with Indonesia that the comp lainants bear the burden of presenting
argument and evidence
 with respect to each element of their serious prejudice claims
– including the existence of effects on a “like product”.15 (Emphasis added)
 The EC has failed to carry its burden of proof. In paragraph 393 of its First Written
Submission, it has stated that the same product market in Article 6.3(c) requires showing that products
are competing which can be done by using the factors used in the “like product” analysis developed in
the case-law on Article III of GATT 1994. It proposes a “market segmentation” approach used by the
Panel in Indonesia – Autos in relation to an assessment on the existence of price undercutting under
Article 6.3(c). It has then proceeded to posit as three separate products, LNGs, container vessels and
product and chemical tankers but without any argument or evidence as to why these products are
separate like products from the point of view of the factors that were taken into account even by the
Panel in Indonesia – Autos . The EC’s Oral Statement only makes general references to cross-price
elasticity and substitutability from the point of view of the shipyards and the shipowners, without any
presentation of supporting evidence at all. It indicat es that container vessels can be used on a variety
of routes and that for a shipbuilder it is immaterial which ship it builds as every ship is an assembly of
steel products. So far, however, there is no clear indication on the specific criteria based on which the
EC considers that it can identify LNGs, all contai ner vessels and all product and chemical tankers as
separate like products. Hence, Korea considers that the EC has not carried its burden of proof and that
this deficiency cannot be remedied at this stag e of the proceeding. Nevertheless, as discussed above,
despite its deep reservations about the appropriaten ess of requiring Korea to provide this like product
analysis, in the face of the EC’s rejection of its le gal relevance, and in a spirit of co-operation, Korea
ab initio submits herewith as Exhibit Korea – 66 its a pproaches regarding how it considers that “like
product” should be established. In doing so, Korea reserves all of its rights.

 (b) In referring explicitly to the Panel’s analysis in Indonesia – Autos which, Korea
repeats, relates to an assessment of pri ce undercutting under Article 6.3(c), the EC
has, in effect, admitted that the concept of “like product” applies or at least provides
determining guidance for the purpose of the assessment on price depression or
suppression under Article 6.3(c). When the EC then turns and “rejects” the legal
relevance of the concept of “like produc t”, it is admitting it has not carried the
necessary burden in this dispute. Indeed, th e so-called market segmentation used by
the Panel in Indonesia – Autos, is not some new test created out of whole cloth totally
apart from the treaty. If it were, it would not be useful as a reference. Rather market
segmentation occurs within the concept of “like product” as set forth in Article 6.3(c)
and explained in Footnote 46 to the SCM Agreement. Establishing market segments is
none other than determining the “contours” – using the EC’s own term – of the
products that can be considered to be clo sely resembling in order to constitute a “like
product”. The core issue is nevertheless which criteria to use to determine the
contours of what is a market segment or a lik e product. In this regard, Korea refers to
the following statement by the Panel in Indonesia – Autos:

 Turning first to the argument of the European Communities that all passenger
cars should be considered “like products” to the Timor, we consider that such a broad
approach is not appropriate in this case. Wh ile it is true that all passenger cars “share
the same basic physical characteristics and sh are an identical end-use”, we agree with
Indonesia that passenger cars are highly differentiated products. Although the
European Communities have not provided th e Panel with information regarding the
range of physical characteristics of passe nger cars, all drivers know that passenger
cars may differ greatly in terms of size, weight, engine power, technology, and

15 Panel Decision in Indonesia – Autos, para. 14.169.

features. The significance of these extensive physical differences, both in terms of the
cost of producing the cars and in consumer perceptions regarding them, is manifested
in huge differences in price between brands and models. It is evidence that the
differences, both physical and non-physical, between a Rolls Royce and a Timor are
enormous, and that the degree of substitutab ility between them is very low. Viewed
from the perspective of the SCM Agreement, it is almost inconceivable that a subsidy
for Timors could displace or impede imports of Rolls Royces, or that any meaningful
analysis of price undercutting could be performed between these two models. In
short, we do not consider that a Rolls Ro yce can reasonably be considered to have
“characteristics closely resembling” those of the Timor.
16 (Emphasis added)
 As discussed in response to th e previous question, these are the common criteria used in “like
product analyses under Article III, as well. Therefor e, in the present dispute, Korea proposes to make
use of the indicators referred to by the Panel in Indonesia – Autos coinciding with the indicators
frequently used for the definition of “like product”, i.e., physical characteristics, customer perception
and end-use.17 This is no different from how the EC itself has assessed the shipbuilding market as is
shown in several statements made by the EC a nd its expert FMI in va rious documents. These
statements cannot simply be discarded by the EC as needed only “to follow developments in certain
characteristic sub-types of most interest to EU yards for purely information purposes” (paragraph 106
of the EC’s Oral Statement). Reference is made to the document in Exhibit EC-1 to the EC’s First
Written Submission entitled “Overview of the Inte rnational Commercial Shipbuilding Industry,
Background Report” (May 2003), i.e., an FMI report dated May 2003 in which the FMI states the
following with regard to tankers, bulk carriers and container ships:

The above three ship types make up by far the largest portion of the fleet and a
significant proportion of the output from the shipbuilding industry. These main
volume products are normally further sub-divided into distinct sub-classes, as
described in table 3.2. The main ship t ypes and sub types listed in this table are
according to common industry usage and the terminology used will be found in any
documentation relating to the fleet . The main ship type is defined by the function of
the ship and the sub types are defined by size classifications demanded by operators
of the ship . The sub-classifications have been developed to suit the economic
conditions of the main trades in each sector and can largely be regarded as standard
products. There is little material difference in operational terms between different
ships within any class of sub-type, whoeve r the supplier may be. It should be note
that the economic classes of ship represen ted by the sub-types listed below are not
readily substitutable for other ship types. For example, it may be technically possible
to adapt a bulk carrier to carry containers but in operational terms this would be
unfeasible. Similarly, substitution is rarely possible on a size basis because of the
economics of trade. One seventy thousand dw t ship, for example, is not operationally
or economically equivalent to two thirty-five thousand dwt ships.
 To this should be added the following FMI statement on container ships in particular
indicating that container vessels have different uses depending on their size:

There are a wide range of sizes of ships on a wide range of routes, typically following
an established ‘hub and feeder’ pattern. Very large ships (the largest of which now
rival the largest category of tankers in te rms of physical dimensions) carry boxes on
trans-oceanic routes servicing the main hu b ports in the Far East, Europe, North
America and Middle East. Smaller ‘feeder’ ships then distribute the boxes from the

17 In the Indonesia – Autos case, the Panel considered that all cars had the same end-use to transport
passengers. This is not the case of the commercial vessels subject of the dispute as is mentioned in (a) above.

main hub ports to local ports. The contents of the boxes is made up of ‘general
cargo’, and may include such diverse items as machinery, white goods, clothing,
electronic equipment, and so on.
88. To whose prices do the terms "price supp ression" and "price depression" refer: the
subsidizer's, the complainant's, or both?

 Because the issue is serious prejudice to the interests of the complaining party, the price
suppression must be of the complaining party, otherw ise there cannot logically be serious prejudice to
the interests of that Member, as required by Ar ticle 5(c). However, Korea would note that the
significant price suppression or depression has to be cau sed by the subsidies. The EC has ignored the
causation analysis. Please refer to the response in Question 91 below.

89. The panels in the GATT 1947 disputes on EC – Sugar
 brought by Australia and Brazil
found that EC export refunds had contributed to depressed world prices for sugar, thus
indirectly causing serious prejudice to Australia's and Brazil's interests. In other words,
in those cases, the market in question was a world market, the prices in question were
world market prices, and the finding of serious prejudice to Australia's and Brazil's
interests was exclusively based on the depression of those (world market) prices.

 You argue, by contrast, that the price suppression/depression provisions of the SCM
Agreement neither contemplate nor permit an analysis based on a "world market".
You also argue that price suppression/depressi on by itself does not constitute sufficient
evidence of serious prejudice, but rather that a complaining party must (1) present
evidence and analysis to establish that its own domestic industry is suffering significant
overall impairment, i.e., something similar if not identical to "serious injury" such as for
a safeguard investigation, and (2) must show as well that the survival of the industry in
question is vital to the complaining party's overall interests.

 (a) Is there anything in the text of the SCM Agreement to support your position that
the domestic industry of the complainin g party should suffer the equivalent of
"serious injury", when SCM Article 5 clearly treats injury and serious prejudice
as two separate concepts?

 (i) The word “may” as used in the chapeau of Article 6.3 does not stand for “permitted”,
at least as that was used by the EC dur ing the First Substantive Meeting. If the
negotiators had meant to indicate that serious prejudice would exist any time only one
of the factors stipulated in Article 6.3(a) to (d) were achieved, they would have used
the word “shall” as was done in many of the provisions of the WTO Agreements. The
word “may” indicates that serious prejudi ce does not automatically exist when any
one or more of the factors in Articles 6.3(a) to (d) is found to exist.

 (ii) The use “one or several” in the chap eau of Article 6.3 further confirms that the
existence of any single factor does not ipso facto lead to an affirmative finding on the
existence of serious prejudice.

 (iii) Price suppression or depression are two indicators only of the existence of material
injury of which Article 15.2 provides that “no one or several of these factors can
necessarily give decisive guidance.” If it were allowed pursuant to Article 6.3 to find
serious prejudice if there was either price depression or price suppression, the
standard to find serious prejudice under Article 5(c) would be substantially below that
to find material injury under Article 5(a) and footnote 11. However, the Appellate
Body in US – Lamb has concluded that the “word ‘serious’ connotes a much higher

standard of injury than the word ‘material’”.
18 The qualitative difference between
“serious” and “material” does not change depending on whether it qualifies “injury”
or “prejudice”. It is inherent to the meaning of the words viewed in isolation.

 (b) Is there anything in the text of the SCM Agreement to support your position that
for serious prejudice to be present, the su rvival of the domestic industry of the
complaining party must be vital to its overall interests?

 Korea stated that it considered the term “prejudi ce” to be within the series of terms used in the
WTO such as “injury”, “damage” or resulting in “market disruption”. Korea was noting that the
whole phrase of “serious prejudice to the interests of another Member” connotes a standard that is not
only higher than material injury (based on the consid erable jurisprudence in this regard), but also
broader, as the interests of a Member necessarily en compass something more than just the industry at
question. The domestic industry is part of the inte rests of the Member but cannot automatically be
equated to the broader interests of a WTO Member. Far from addressing this issue of “serious
prejudice to the interests of another Member”, the EC attempts to construct a case that would not even
satisfy the requirements of initiating an investigation by a national investigating authority under
Part V of the SCM Agreement. The “standards” pr oposed by the EC are so low and so vague that
apparently they can be met by showing a “kink” on a graph.

 (c) How do you square your arguments with the quite different approach and
results of the prior GATT panels cited above?

 The Sugar Panels cited examined the EC’s export refunds for sugar under Article XVI:1 and
XVI:3 of the GATT. Article XVI:1 imposes a notif ication and a consultation requirement for “any
subsidy, including any form of income or price support, which operates directly or indirectly to
increase exports of any product from, or to reduce im ports of any product, into its territory”. The
operative section is Part B referring to “Export Subsid ies” which are not relevant to the interpretation
of Part III of the SCM Agreement. Specifically, Ar ticle XVI:3 provides that, for export subsidies, if a
Member grants directly or indirectly any form of subsidy that operates to increase the export of any
primary product from its territory “such subsidy shall not be applied in a manner which results in that
contracting party having more than an equitable sh are of would export trade in that product”. In that
sense, to the extent that there is relevance under Part III of the SCM Agreement relating to export
subsidies as actionable subsidies, the provisions are closer to (but still not the same as) Article 6.3(d)
which considers the situation where the effect of s ubsidy is an increase in the world market share of
the subsidizing Member in a particular subsidized primary product or commodity which is the only
provision of Article 6.3 which explicitly provides that a “world market” may be taken into account.

 The provisions of Article XVI:1 and XVI:3 i ndicate that the notification and consultation
requirements must apply and that a subsidy cannot gi ve a contracting party more than an equitable
share of the world export trade as the word “shall” is used thr oughout these provisions. In this sense,
the wording of the chapeau of Article 6.3 is different and, hence, it is not possible to derive any direct
implications from the above Sugar Panels for the purpose of its interpretation.

 (d) In this regard, what in your view is the significance of footnote 13 to SCM
Article 5(c), which provides that the term "serious prejudice" in the SCM
Agreement has the same meaning as in GATT Article XVI:1? We note that
Article VI:1 of GATT 1994 contains no reference to injury to the domestic
industry of the complainant. Is the purpose of this footnote to incorporate into
the SCM Agreement the interpretations of the prior GATT panels on serious
prejudice? If not, what is the purpose of this footnote?

18 Appellate Body Report, US – Lamb, para. 124.

 Given the explicit provisions of the chapeau of Article 6.3, the purpose of footnote 13 is to
clarify that a threat of serious prejudice, as is e xplicitly provided in Article XVI:1 is also covered
under Article 5(c) of the SCM Agreement. In addition, the reference can be interpreted to mean that a
finding of price depression or suppression is not enough but must be accompanied by an increase in
exports by the subsidizing Member from its territory or decrease in imports into its territory which
must be shown to be result of th e alleged subsidy. In response to both this and the previous sub-
question, Korea would like to recall that th e Appellate Body explicitly approved the following
statement by the Panel in Brazil – Desiccated Coconut regarding the relationship between the SCM
Agreement and Article VI, which applies equally with resp ect to Article XVI, particularly in light of
footnote 13:

 Article VI of the GATT 1994 and the SCM Agr eement represent a new and different package
of rights and obligations, as among WTO Members, re garding the use of countervailing duties. Thus,
Article VI and the respective SCM Agreements impose obligations on a potential user of
countervailing duties, in the form of conditions that have to be fulfilled in order to impose a duty, but
they also confer the right to impose a counterva iling duty when those conditions are satisfied. The
SCM Agreements do not merely impose additional substantive a nd procedural obligations on a
potential user of countervailing measures. Rather , the SCM Agreements and Article VI together
define, clarify and in some cases modify the whol e package of rights and obligations of a potential
user of countervailing measures.
19

 There is nothing in Article XVI that detracts from the proposed interpretation of Articles 5 to
7 of the SCM Agreement. Indeed, when combined with an exam ination of Article VI and Part V of
the SCM Agreement, it is quite evident that it is the EC’s minimalist approach that is inconsistent with
the overall scheme of the treaty language. The EC’s approach is vague a nd standards-less with no
like product analysis, no examination of the stat e of the complaining Member’s industry, no
examination of the broader scope of that Member ’s interests and only the most minimalist causation
analysis that is not in harmony with the treaty. The EC’s approach would render the standards of
Part II of the SCM Agreement and Article XVI affecting markets in other Members at a much lower
level than those required for examining imports into a Member’s own market pursuant to Article VI
and Part V of the SCM Agreement. This is both logically absurd and completely without support in
the broader scheme of the treaty language.

90. In your view is the causation standard for serious prejudice the same as that in a
countervailing duty investigation? If so, th en what accounts for the very different
drafting of the respective provisions of the SCM Agreement, and for the clear
distinction in SCM Article 5 between injury and serious prejudice? If not, please
explain the differences.

 The causation standard for serious prejudice a nd in a countervailing duty investigation are
different. Pursuant to Article 6.3(c), it must be shown that it is the challenged subsidy specifically that
is causing the alleged price de pression or suppression. Article 6. 3(c) explicitly states: “the
 effect of
the subsidy is a significant …” It is, therefore, not sufficient to show that the products that are being
subsidized are causing price suppression or depression but it must be shown that the subsidy in
isolation has caused significant price depression or suppression. As stated in Korea’s First Written
Submission (paragraph 532), where price depression or suppression significant enough to cause
serious prejudice is not caused by the alleged subsid y but by other factors, the actionable subsidies
cannot be prohibited. When price depression or suppr ession is caused by the alleged subsidy and by
other factors, the actionable subsidies can only be prohibited when the alleged subsidy itself has
caused significant price depression or suppression consider ed in isolation from other factors. This too
requires a quantification of the alleged subsidy as explained in paragraph 536 of Korea’s First Written

19 Panel Report in Brazil – Desiccated Coconut at para . 246, as approved in the Appellate Body Report
in Brazil – Desiccated Coconut, at p. 17.

Submission. As Korea noted at the First Substan tive Meeting, it is possible to consider both the
causation and injury standards for countervailing dut y investigations as lesser standards subsumed
within the standards of Articles 5 and 6. Thus, proving the elements of injury and causation under
Part V could be considered as necessary, but not sufficient, elements of demonstrating serious
prejudice under Articles 5 and 6.

91. In respect of causation, you argue that no matter what other factors may be present in
the market, the subsidization independently of these other factors must itself cause
serious prejudice.

 (a) How could such an analysis be performed?

 As discussed above in regard to the issue of “like product”, Korea would like to note its
concern about burden shifting. The EC has rejected any sort of conventional approach to causation,
instead relying on a vague, mechan ical approach that has a far lowe r standard than any trade remedy
investigation or dispute under any of the WTO Agreem ents. Thus, if the Panel agrees that some sort
of normal causation analysis should be pursued, th e dispute should conclude at that point, for the
complainant has rejected that approach and refused to provide any evidence or arguments of that sort.

 As Korea has noted, the Appellate Body made it very clear in Japan – Agricultural Products
II that the Panel has a broad mandate to gather in formation for purposes of clarifying the parties’
arguments, but not making the complainant’s case for it. Again, recognizing that questions are not
statements of position, Korea provides the following discussion setting out its views. However, Korea
must again reserve all of its rights so that its response cannot be interpreted as its agreement to assume
a burden belonging to the complainant.

 Subject to these reservations, Korea believes th at, in order to establish the causation between
the subsidy and the price depression or suppression, the analysis could be performed in accordance
with the following order:

 Step I: The alleged subsidy must be quantifie d with respect to each subsidized shipbuilder.

 - If the quantity of the alleged subsidy is insignificant, the analysis must end there.

 - If the quantity of the alleged subsidy is significant, the Panel should proceed to
Step II.

 Step II: The effect of the subsidy on the prices of the subsidized shipbuilder must be
quantified.

 - Logically, the chain of causation should begi n with the effect of the subsidy on the
prices of the subsidized shipbuilder. In a competitive market, it is generally assumed
that prices are set at the level of the to tal production cost, even though actual prices
may sometimes go below cost of production in the case of a highly capital-intensive,
cyclical industry such as the shipbuilding industry. A subsidy would enable the
subsidized shipbuilder to sell its products at prices below the competitive price level
by either lowering the production cost or simply compensating the loss from sales
below the production cost, depending on the nature of the subsidy in question.
Therefore, the effect of the subsidy on the prices of the subsidized shipbuilder may be
measured by (i) determining first the leve l of production cost not affected by the
subsidy (e.g., the actual unit cost plus the prorated subsidy amount per unit of the
subsidy that reduced the production cost (hereinafter the “non-subsidized production
cost”) and then (ii) comparing this non-s ubsidized production cost with the prices of
the subsidized shipbuilder.

 - If the prices of the subsidized shipbuild er still exceed the non-subsidized production
cost, the subsidy has not affected the actua l prices of the subsidized shipbuilder.
Therefore, the subsidy has not had price depression or suppression for its effect.

 - On the other hand, if the prices of th e subsidized shipbuilder are below the non-
subsidized production cost, the subsidy has affected the prices of the subsidized
shipbuilder downward by an amount which is equivalent to the smaller of (i) the
difference between the subsidized shipbuilder’s prices and its non-subsidized
production cost or (ii) the prorated subs idy margin included in the above production
cost (this difference can be called the “subs idy effect margin” for convenience in the
explanation).

 - If the ‘subsidy effect margin’ is insignifi cant, there is no causal link and the serious
prejudice analysis must be ended.

 - If the ‘subsidy effect margin’ is found to be significant, the analysis should move to
Step III.

 Step III: The price depression and suppression margin must be quantified.

 - This is a complex process of determining the percentage margin by which the prices
of the like product produced by the shipbuild ers of the complaining Member (i.e., the
EC) have been depressed or suppressed.

 - For this purpose, ‘like products’ produced by the shipbuilders of the complaining
Member must first be identified.

 - Then, it should be analyzed whether the prices of the shipbuilders of the complaining
Member would have been significantly depressed or suppressed as a result of the
subsidy granted to the subsidized shipbuild ers (i.e., the ‘subsidy effect margin’). In
this regard, the causation analysis is an inte gral part of the process of determining the
existence of a ‘significant price depression or suppression’.

 - The detailed analytical methods suggested will be explained in subsection (d) below.
Any elements of fair competition leading to a decrease in the price of the allegedly
subsidized products (economies of scale, cost advantages, etc.) must be assessed.

 - The effects of competing non-subsidized products from other sources on the price
levels must be considered. An allegation of the maintenance of capacity due to the
alleged subsidy is insufficient to establish that the
 subsidy caused significant price
depression or suppression is insufficient when there are significant other sources of
like products that are not subsidized.

 - For price suppression, all factual and economic elements, including economic factors
relevant to the industry of the complaini ng member, affecting price levels must be
determined in order to assess whether prices would have increased in the absence of
the alleged subsidies.

 Taking at least all of these elements into account, the effects in isolation of the alleged
subsidies on price levels must be determined to assess whether the subsidies specifically caused
significant price depression or suppression. Korea would like to emphasize that this question is
difficult to answer in isolation from the complainant’s arguments. The EC has explicitly rejected price
undercutting. In this regard, the burden is on the complainant to demonstrate the market mechanism

transmitting the effect of the subsidy to the allege d price depression or suppression. To do this, the
EC has relied almost exclusively on issues of capacity. When challenged on this point, the EC denied
that they were looking at just capacity and stated that it necessarily includ es a multi-faceted approach
including a certain amount of price undercutting. Korea would agree with the complexity and
subtlety needed, but in the EC’s case it must be explicitly to the exclusion of price undercutting.
Thus, in providing the above response, Korea notes th at this is not necessarily the exclusive way to
demonstrate causation if one were to take a more ra tional, broad based approach. It also still might
not be applicable in this case to the extent th at there remain elements of a prohibited price
undercutting argument.

 (b) You suggest that one part of the anal ysis would be to quantify the amount or
degree of subsidization and to compare th is to the degree of price suppression or
depression that may exist. Please clarify this argument. In particular, would the
degree of subsidization be compared with the alleged degree of suppression or
depression of the subsidized product's price?

 As mentioned in subsection (a) above, Korea su bmits that the subsidy must be quantified and
pro-rated so as to determine its possible effect on th e price of the allegedly subsidized product (i.e.,
the ‘subsidy effect margin’ to be calculated in Step II mentioned above). Then, as explained in
subsection (d) below, at Step III this ‘subsidy eff ect margin’ will be added to the actual prices of the
subsidized product to calculate the ‘hypothetical non-subsidized prices’ of the vessels produced by the
subsidized shipbuilder. This “hypothetical non-subsid ized prices” of the subsidized shipbuilder are
necessary to assess whether the prices of the shi pbuilders of the EC as the complaining Member
would have been depressed or suppressed as the effect of the subsidy.

 In light of the above analytical process, it would be inaccurate to state that the degree of
subsidization must necessarily be compared w ith the alleged degree of suppression or depression.
Korea refers to Section (d) below.

 Again, Korea would like to note its reserva tions concerning the potential for incorrectly
shifting the burden of proof and also the limita tions of this proposed methodology which is
constructed in the absence of direct price comparisons.

 (c) Or would it be compared with the alle ged degree of suppression or depression of
the price of the complaining party's product? If the latter, what if anything is
the logical connection between the specific amount by which a particular
country may subsidize a given product and the degree to which the price of the
same product produced by a producer in another country may be affected?

 Korea considers that price suppression or de pression must be shown to the prices of the
complaining party’s products but that the establishmen t of a causal link requires it to also investigate
the price depression/suppression at the level of the produc ts of the subsidizing party. As mentioned in
subsections (b) above and (d) below, however, the alleged ‘subsidy effect margin’ would not be
directly compared with the alleged degree of s uppression or depression, but will be considered as a
crucial factor in determining the degree of such suppression or depression.

 A mere allegation as mentioned by the EC of the continued existence of capacity due to the
coverage of debt-servicing cost through the subsidy without investigation into causal link as indicated
in (a) above is insufficient.

 Korea would like to refer again to the EC Commission’s Third Report on World Shipbuilding
where it outlines the massive amounts of subsidies provided to the EC shipyards over the decades.
These were as high as 28 per cent direct operati ng subsidies as recent as 1988, only being phased
down to a “mere” six percent at the present time. As the Commission noted, this was only one form

of subsidization. There also was export subsidization, research and development subsidization; equity
injection subsidization; regional subsidization, r esearch and development subsidization (now as high
as 25 per cent), tied aid subsidization, etc. This is one of the anomalies of the EC’s narrow focus on
maintenance of capacity. The Commission itself noted that the EC had maintained too much capacity
and had not made sufficient competitive adjustment due to this sustained high le vel of subsidization.
If one is looking at the question of maintained capacity, as per the EC’s argument, then the causal link
lies much more firmly with the EC’s subsidies than any other Member.

 (d) How, in concrete terms, is the de gree of price suppression or depression
quantified and expressed?

 Korea submits that the price suppression or depression means, with respect to each like
product identified, the percentage margin by whic h the price of the products of the complaining
Member’s products have been suppressed or the pe rcentage margin by which the price has been
depressed, as the effect of the subsidy. In or der to determine the degree of price suppression or
depression, the Panel should analyze whether the prices of the shipbuilders of the complaining
Member have been significantly suppressed or depr essed as a result of the subsidy granted to the
subsidized shipbuilders.

 In order to determine whether there is any significant price depression or suppression; Korea
believes that the Panel should consider all the factor s that will determine the prices. In this regard,
Korea considers that the Panel could take the following steps:

 Step 1: The prices of ‘like products’ sold by a ll the shipbuilders that are believed to affect the
prices of the ‘like products’ of the EC shipbuilders must be identified

 - The prices of the non-subsidized EC shipbuilders’ like products must be determined
as from the period immediately preceding the granting of the subs idy throughout the
most recent period preceding the initiation of the dispute settlement procedure

 - The hypothetical non-subsidized prices of the like products sold by the allegedly
subsidized shipbuilder in Korea must be determined for the same period. These
hypothetical prices can be determined by in creasing the actual prices of the allegedly
subsidized shipbuilder by the ‘subsidy effect margin’ since the granting of the alleged
subsidy

 - The prices of non-subsidized like produc ts from other WTO Members must also be
determined for the period immediately preceding the granting of the alleged subsidy
throughout the most recent period preceding the initiation of the dispute settlement
procedure.

 Step 2: All the factors that are believed to affect the prices of the non-subsidized EC
shipbuilders must be assessed in respect of their possible effect on such prices.

 (a) Demand and supply factors

 - As the prices are determined by the in teraction of supply and demand, those factors
that constitute the demand and supply, respectively, should be identified and
assessed.

 - On the demand side, a main indicator ma y be the trend in new orders. If the demand
has increased in excess to th e capability of the shipbuilder s in the market to supply
products, prices would have increased wh ile if the demand has decreased over the
production capability, the prices would have decreased.

 - An important supply side factor is the trend of major cost items. The ship prices are
sensitive to cost movements. As demonstrat ed by Korea, the price decline as alleged
by the EC coincides with the decline of steel and other cost items as well as
devaluation of Korean won. In such case, the causation analysis should stop there. If
the decline of production cost is not suffici ent to the entire price movements, then the
actual impact of the cost decline must be accurately quantified and should be
compared with other causation factors.

 (b) Effect of prices of other non-subsidized shipbuilders (whether Korean or third
country shipbuilders)

 - If, with respect to each like produc t, there are a number of non-subsidized
shipbuilders which collectively have sufficien t market shares to be able to lead or
substantially influence setting of the market prices, then the prices charged by these
non-subsidized shipbuilders will constitute the ceiling of the prices that can be
charged by the EC shipyards, regardless of the effect of the alleged subsidy in
question. Thus, the causation of the effect of the alleged subsidy is cut.

 (c) Effect of the prices of the subsidized shipbuilders

 - In the absence of any other causes menti oned above that are reasonably considered to
disrupt the causal link between the alleged subsidy and the alleged price suppression
and depression, the Panel can proceed to analyze the effect of the alleged subsidy;

 - First, the Panel should look into whether the allegedly subsidized shipbuilder has the
ability to lead or substantially influence the market prices of the like products, in
terms of its market share or otherwise. If th e market share is insufficient, or if the
shipbuilder has not maintained a substan tial market share consistently, it will be
difficult to find a causal link as such.

 - Only if the subsidized shipbuilder has main tained a sufficient mark et share to lead or
substantially influence the market prices , should the Panel proceed to examine the
effect of the subsidy on the prices of the shipbuilders of the EC. The Panel can
compare the hypothetical non-subsidized prices of the allegedly subsidized
shipbuilders (“Price A”) with the actual pr ices of the non-subsidized EC shipbuilders
(“Price B”).

 - If Price A is higher than Price B, it can be said that Price B, i.e., the prices of the non-
subsidized EC shipbuilders were prevented from increasing up to the level of Price A.
On the other hand, if Price B is equal to or below Price A, it can be assumed that,
regardless of the effect of the alleged s ubsidy, the prices of the non-subsidized EC
shipbuilders would have decreased (no pri ce depression) or would not have increased
(no price suppression) in any event.

 - In such case, if the price difference is insignificant, the Panel should find that there
was no “significant” price suppression or depression. On the other hand, if the
difference is significant and the ‘subsidy eff ect margin’ is also significant, the Panel
may find that there was “significant” price suppression or depression as the effect of
the subsidy.

 - In cases where the effect of the subsidy or th e effect of other causes is not decisive or
has equal force, then the quantity of the subsidy effect should be compared with the

aggregate quantities of all other factors, in order to determine whether “the effect of
the subsidy” in isolation was the cause of significant price suppression or depression.

 Korea would again like to note that it has an swered this question the best that it can, but
recalls that the EC has excluded price undercutting. In light of the EC’s exclusion of such a critical
element – which probably is presen t in the approach noted above – it is inequitable that Korea has
been asked to construct an analytical approach ab initio to fit the skewed EC argument. This burden
should be on the EC; thus, Korea reserves all of its rights even though it is attempting to be as
responsive as possible to the Panel’s questions in this regard.

92. What is the basis for your argument that the complaining Member must prove the effect
of the alleged benefit from each alleged s ubsidy individually, rather than the combined
effect of the alleged subsidies? How does th is square with, for example, the approach to
calculating the 5 per cent subsidization under the now-expired SCM Article 6.1, in
respect of which paragraph 6 of Annex IV pr ovided that "In determining the overall
rate of subsidization in a given year, subsidies given under different programmes and by
different authorities in the territory of a Member shall be aggregated", which seems to
have implied that it was the overall impact of the subsidies in question that was relevant
to the existence of serious prejudice? Ho w in practice could a Panel conduct such a
separate analysis of the effects of each subsidy individually?

 The chapeau of Article 5 refers to “any subsidy” . In addition, Article 7.8 provides that when a
Panel or Appellate Body report is adopted in which it is determined that “any subsidy” has resulted in
adverse effects to the interest of another Member, the subsidizing Member must either remove the
adverse effects or withdraw the subsidy. The use of the term “any subsidy” confirmed by the multiple
references to “the subsidy” in Article 6.3 confirms that the effects of a subsidy must be reviewed for
each subsidy separately. In that regard, the wording of Article 6.1(a) and paragraph 6 of Annex IV is
different from that in Article 6.3.

 The analysis described in the response to qu estion 91 above should be carried out for each
subsidy individually.

 As Korea noted during the First Substantive Mee ting, this does not mean that after assessing
each subsidy individually, a sum of the actionable subsidies cannot be aggregated for purposes of
making the final causal assessment. But, unless they are broken down, the possibility of removing the
adverse effects under Article 7.8 could not be d one in any rational manner. Article 7.8 provides
important context for understanding Articles 5 and 6 and is not a disembodied provision to only be
looked at in isolation during implementation. To sev er it in such a manner would be contrary to the
provisions of Article 31 of the Vie nna Convention. Rather, Article 7.8 serves as a useful illustration
of the uniqueness of a trade effects dispute under the WTO. Because no other provision entails an
adverse trade effects demonstration, no other provision allows for limiting the remedy to removing the
adverse trade effects. Thus, in understanding what would need to be done to alleviate adverse trade
effects later, a panel must build the case from the bo ttom up, one element at a time so that it is a
comprehensible whole.

93. Is it your argument that, in a case involving multiple actionable subsidies, there would
be double-counting of effects if somehow it could be demonstrated that in the absence of
one of the subsidies, the remaining ones could not have caused adverse effects? What is
the basis in the text of the SCM Agreement to such an approach to adverse effects?

 No, there is not necessarily double-counting per se. In the question posed by the Panel, Korea
is of the view that in the case of multiple actionabl e subsidies, the effect of the subsidies must be
aggregated to determine whether in total they cause adverse effects. If one th en removes one subsidy,

and the effect of the remaining subsidies is not a dverse, then no remedy is required. The support for
this conclusion comes from Article 7.8.

 The double-counting issue only arises when there is a simultaneous claim regarding the same
measure under Parts II and III of the SCM Agreement. The answer to the previous question shows
why combining prohibited subsidies and actionable subsidies would result in double counting. To
stack the prohibited subsidies on top of the actiona ble subsidies for purposes of the causation analysis
would be including subsidies that as a matter of law under Article 4 will be re moved. If they will be
removed, then they should not be considered as part of the accumulated subsidies examined for
purposes of causation in a trade effects case. For exam ple, were they to be the subsidies that tipped
the balance to an affirmative finding, then Artic le 7 becomes moot because the prohibited subsidies
must be removed pursuant to Article 4. Thus, there would be no adverse trade effects to remedy and,
therefore, no basis for the initial affirmative finding. The jurisprudence is quite clear that a treaty
cannot be interpreted in a manner that renders part of inutile.

94. Please provide examples of recent bids for container ships, product/chemical tankers,
and/or LNGs, which were won by Korean ship yards not alleged by the EC to have
received subsidies, and for which bids you consider that at least one EC shipyard was a
competitor.

 As the Korean and EU shipyards focus on diffe rent product categories, the Korean yards,
whether alleged by the EC to have been subsidi zed or not, did not compete with the EU shipyards
with respect to many projects. One example of recent competition between Korean and EU yards
would be the bids for a LNG Carrier order placed by Gaz de France (GDF). For this order, 5 shipyards
(Mitsui, Chantiers de L’Atlantique, Daewoo- SME, Samsung and Hanjin) submitted bids, and
Chantiers de L’Atlantique has won the order, thanks to the substantial amount of subsidies granted by
the EC.

 For details on this dubious transaction, please re fer to the news articles, which are submitted
herewith as Exhibit Korea – 67

II. QUESTIONS TO BOTH PARTIES

95. Article 11-2 of the Guidelines for Interest and Fees (Amended) (Exhibit EC-13)
provides that [BCI: Omitted from public version].

 (a) To Korea
: Does this suggest that KEXIM considers that foreign financial
markets constitute an appropriate market benchmark? Please explain.

 As stated in Korea’s response to the Panel’ s question No. 77, KEXIM operates mainly in the
Korean financial market in terms of its customer s and competing financial institutions. Therefore,
Korea is of the view that the appropriate market benchmark for KEXIM’s interest rates is the Korean
market. The fact that KEXIM may adjust the Base Rates by a marginal amount, taking into account
the trends of domestic or foreign financial markets pursuant to Article 11-2, does not in and of itself
support that KEXIM ‘s overall interest rates must be comparable to the interest rates charged by
foreign financial institutions.

 (b) To EC
: What impact, if any, does this provision have on the EC's argument that
KEXIM is not required to act on commercial principles? Please explain.

96. Can footnote 5 of the SCM Agreement be used to justify an a contrario reading of item (j)
and the first paragraph of item (k) of the Illu strative List of Export Subsidies? Please
explain.

 Yes, in Korea’s view so-called “safe harbors” do exist based on an reading of items (j) and (k)
read in light of footnote 5 and the broader c ontext of the SCM Agreement. While some have
attempted to argue that the Appellate Body’s statements in this regard in Brazil – Aircraft
(Article 21.5 – Canada)20 are mere dicta and do not mean anything, Korea is not of the view that the
Appellate Body’s views can be taken so lightly. Indeed, it is clear that any other reading risks
rendering meaningless items (j) and (k), first paragraph.

 In Korea’s view a perfectly harmonious reading of the broader treaty text is achieved if there
is an a contrario reading of these provisions. First, the la nguage of items (j) and (k) both imply that
the relevant issue is whether the programmes at is sue cover the costs to the government of operating
such programmes.
21 While some have expressed concerns th at this reading in some way undermines
the benefit to the recipient standard of Article 1.1(b), this is not the case at all. This is clear from the
language of footnote 5 which provides that: “M easures referred to in Annex I as not constituting
export subsidies shall not be prohibited under this or any other provision of this Agreement.”
(emphasis added). This language can be contrasted with the language of Article 8.1 which identified
subsidies that “shall be considered as non-actionable” (emphasis added). Thus, it can be seen that all
footnote 5 does is establish that measures that are not export subsidies under Annex I are not
considered prohibited subsidies. It is a safe harb or with respect to Part II alone and is simply
irrelevant to the analysis of benefit.

 To put the issue another way, if benefit to the recipient is established pursuant to
Article 1.1(b) and the other elements of the various tests are satisfied, then there is a subsidy. The
question remains as to whether the subsidy is prohib ited or actionable. All, footnote 5 – read in
context with the language of items (j) and (k), first paragraph – does is provide that such subsidies are
not prohibited. It is silent as to whether they ma y be actionable. If more were intended the drafters
would have used the term “non-actionable” in footnote 5 as they did in Article 8.1. The harbors may
be safe, but they are not all-encompassing.

 Indeed, this point is illustrated in this very case. The EC has argued that the KEXIM
measures are both prohibited and actionable. Th e safe harbors would render them immune form
attack under Part II, but are not relevant to the analysis under Part III. Thus, even after the application
of the safe harbors, the EC could still pursue its claims regarding alleged KEXIM subsidies under
Part III. In this regard, it is worth recalling that Korea has not argued that the EC cannot claim that
the KEXIM measures are actionable. Rather, Korea has only argued that they cannot be considered
by the Panel as both prohibited and actionable simultaneously because that would result in double-
counting in terms of considering serious prejudice.

97. What is the meaning of the term "material advantage" in the first paragraph of item (k)
of the Illustrative List of Export Subsidies?

 The term “material advantage” refers to whether the measure in question provides the
exporter with some advantage relative to an appropriate “market benchmark”.
22

20 Appellate Body Repost in Brazil – Aircraft(Article 21.5 – Canada) at paras. 80-81.
21 Canada – Dairy (Article 21.5 – New Zealand and US) at para.93.
22 In Brazil – Aircraft, the Appellate Body noted that one example of a material advantage would be if
the net interest rate was higher than the relevant CIRR. 22 However, the fact that the CIRR provided only one
example and not the exclusive reference point for determining market benchmarks was re-emphasized by the
Appellate Body in the Article 21.5 proceeding in that dispute. The Appellate Body noted that the CIRR reflects
certain market conditions in one currency at one particular time and does not, in fact reflect the rates available in
the marketplace. Thus the CIRR does no t constitute the sole market benchmark. Brazil – Aircraft (Article 21.5
– Canada) at para. 64.

 The Appellate Body stressed in Brazil – Aircraft that one cannot ignore the term “material” in
item (k) first paragraph.
23 It logically must mean something more than the term benefit in Article 1.1.
Of course, it must be observed that the issue of “advantage” requires a question of advantage relative
to something. If it is merely an advantage rela tive to what would otherwise be available to the
recipient, then it is simply redundant, as the Appellate Body noted. It, therefore, necessarily implies
that it cannot be at a rate that gives the recipi ent a meaningful competitive advantage over other
sellers, but must provide a competitive advantage as seen from the perspective of the buyer.

98. As a legal matter, does the definition of ex port credits used by the OECD in the context
of the Export Credit Arrangement govern the meaning of this term in the first
paragraph of item (k) of the Illustrative List of Export Subsidies? Why/why not?

 The terms are not identical. The second para graph of item (k) provides a very specific
exception to the rule provided in the first paragraph. This exception effectively applies with respect to
a very limited number of Members that are also OECD members and in a very specific circumstances
described in the second paragraph. In this regard, it should be noted that the full term in the first
paragraph is “export credits”, while the full term in the second paragraph is “official export credits”
which refers back to the very specific OECD agre ements described further in the second paragraph.
As is generally the case, exceptions should be co nstrued narrowly and it follows that there is no
reason for the term in the operative paragraph to be constrained by the definition of a specific narrow
exception.

 This conclusion also follows from the discussion in response to the previous question where it
was demonstrated that the Appellate Body did not find that the language in the first paragraph was
constrained by the OECD terms applied pursuant to the exception contained in the second. Thus, just
as the CIRR does not provide the sole market benchm ark relevant for determining material advantage
in the first paragraph, so the reference to “offici al export credits” covered by the OECD arrangements
in the second paragraph cannot be considered controlling on the definition of “export credits” in the
first paragraph.

99. Would you provide us with the rationale behind your definition of export credits and
export credit guarantees? Does an export cred it have always to be a credit extended by
the exporter or a financial institution to the buyer, and does an export credit guarantee
always have to be a guarantee of such a credit? PSLs are loans extended by KEXIM to
the shipbuilder, not to the buyer. APRGs are guarantees extended by KEXIM to the
buyer, not to guarantee a credit given by the exporter or by a private financial
institution to the buyer, but to guarantee that an advance payment by the buyer to the
exporter shall be refunded in case of a cont ractual default. Does this exclude APRGs
and PSLs from the realm of export credits/export credit guarantees?

 Please refer to the Answers to questions 60, 97 and 98. With respect to item (j), it is clear that
the definitions of the relevant terms should not be limited to guarantees provided to buyers only. The
reference in the second sentence of item (j) to guara ntees against increases in cost implies a reference
to the seller, for that is the party that generally carries the risk of increases in cost, while the buyer
generally carries the risk of increases in price. At th e very least, the reference to costs implies that the
guarantees at issue in item (j) can cover both ends of the transaction and are not limited to buyers
only.

 Regarding item (k), it would seem to follow that there is no reason to assume that the
prohibition contained in the first paragraph of item (k) should be narrower than that contained in the
first paragraph of item (j). As discussed in the pr evious two questions, the indirect reference to the
OECD in the narrow and quite specific exception contained in the second paragraph of item (k)

23 Brazil – Aircraft at para. 177.

cannot logically be taken to mean that terms used in the broader positive rules have the same narrow
meanings. The manner in which the Appellate B ody referred to the use of the CIRR - as but one
possible market benchmark rather than the exclusive benchmark - supports this conclusion.

 Moreover, the economic effect of credits and guarantees can be the same whether the
extension of the guarantees or credits are to the buy er or the seller. There is nothing in the language
of items (j) and (k) that implies such an economically non-sensical limitation to the language.

100. In the Indonesia – Autos
 dispute (the only circulated panel report to date addressing
serious prejudice claims), the panel in analyzing the claims of displacement or impedance of
imports into the Indonesian market applied a " but for" approach. In particular, the panel
asked the question whether, "but for" the subs idies, the complaining parties' sales volumes
and/or market shares in the Indonesian market either would not have declined, or would have
increased by more than they in fact did.

 (a) Would an analogous approach be appropriate here? That is, in assessing the
price suppression/depression claims, should the Panel seek to answer the
question whether, but for the subsidies, the prices in question either would not
have declined, or would have increased more than they in fact did?

 The Panel in Indonesia – Autos used a but/for test for a displacement or impedance case, with
it being particularly relevant to impedance. In the present dispute, the Panel is examining what
actually has happened in the market rather than wh at would have happened in the form of possible
establishment or entry into the market. Thus, Korea is somewhat reluctant to endorse a test that has
been applied in a different setting without knowin g precisely what the Panel means in this setting.
Korea believes that the approach th at it has described in the respon se to Question 91 above is much
more nuanced than a strict “but for” approach, but if that is what the Panel means by analogizing the
test (as opposed to adopting it as applied), then perhaps the label could be used.

 Obviously, no but/for test can be applied unl ess the subsidies in question have been precisely
quantified and the EC has not only failed to do this , it has affirmatively refused to do it. The EC
threw out some general numbers without any supp ort and asserted that there was no burden on it to
supply anything, even those assertions. Again, regard less of the label applied, Korea is of the view
that the approach it suggests in the answer to Qu estion 91 requires that the subsidy specifically must
have caused significant price depression or suppression but also does not exclude an analysis of
whether other factors may have caused significant price depression or suppression. Indeed, it is
required that an assessment of such other factors be made.
24 The assessment in this regard will very
much depend on a case-by-case assessment. Thus, for example, where non-subsidized like products
have an important part of the like product mark et and prices for these non-subsidized products have
decreased substantially over the period considered w ithout it being possible to demonstrate that these
prices followed the prices of the allegedly subsid ized products, in Korea’s opinion, it will not be
possible to conclude that the price depression or suppression is the specific effect of the alleged
subsidy.

 (b) If so, what sorts of considerations should the Panel take into account in trying to
determine what the price movements would have been in the absence of the
alleged subsidies? If not, why not, and what other approach should be used?

24 Korea notes that the EC claimed at the First Substantive Meeting th at Korea agreed that there were
no other such factors in this case. (See EC Oral Statement at para. 120) A review of the section of Korea’s First
Written Submission cited by the EC makes it clear that Korea was using the term “other factors” at that point to
refer to the other elements listed in Article 6.3. The us e of the term “factors” there in Korea’s submission was
not the best, although the broader context makes it clear that Korea in no manner agrees with the EC that other
market factors than the alleged Korean subsidies are relevant to this dispute. Quite the contrary.

 Korea refers to the approach which it has s ubmitted in the response to Question 91 above.

101. Does the word "may" in the chapeau of Article 6.3 mean that a complainant of a
"serious prejudice" must prove something more than the existence of price
suppression/depression?

 (a) If so, what is it that the complainant has to prove beyond price
suppression/depression, and what is the basis in the text for any such additional
requirements?

 (b) If not, what is the significance of the word "may"?

 The inclusion of the term “may” does not mean that something else must be shown. But,
equally, it does not mean that demonstrating one element automatically leads to a finding of “serious
prejudice,” and by implication something more could be required to establish serious prejudice, is the
use of word “may” in the chapeau of Article 6.3.

 As discussed in Korea’s response to question 89( a), the word “may” as used in the chapeau of
Article 6.3 does not stand for “permitted” as was argued by the EC during the First Substantive
Meeting. In Korea’s view, this can be clearly establis hed by a plain reading of the text of Article 6.3,
according to the ordinary meaning of the terms used and in their context.

 The word “may” is defined, inter alia, as “might…a possibility…”
25 In some case the word
may indeed mean “permitted” as s uggested by the EC. But the EC’s interpretation does not apply in
the context of Article 6.3. Article 6.3 chapeau states that:

Serious prejudice … may arise in any case where one or several of the following
apply…
 If the word "may" is in this context interp reted as "permitted" rather than "might" or
"possible," the sentence becomes nonsensical. One cannot logically say that serious prejudice is
"permitted to arise." Rather, in the context of the chapeau, it seems that the drafters clearly intended
the word "may" to read as "might” or “possibly” (e.g. “serious prejudice might arise…”).

 Further support for this interpretation is found by contrasting the word “may” in Article 6(3)
with the word “shall” in the (expired) Article 6.1. Article 6.1 provides:

Serious prejudice in the sense of paragraph (c) of Article 5 shall be deemed to exist

 Korea notes that in the context of Article 6. 1, the word "shall" refers to the conclusion that
serious prejudice shall be "deemed" or "determine d" to exist in the circumstances described in
subparagraphs (a)-(d). By contrast, the words "m ay arise" in Article 6.3 do not refer to a
determination. Rather, they refer to the possibility that a situation might (or might not) arise if the
circumstances described in subparagraphs (a)-(d) of that Article are established. Had the drafters
intended the word “may” to mean “permitted” in this context, the provision should more properly
have read that serious prejudice "may be deemed to exist" in the circumstances described in
subparagraphs (a)-(d).

 The conclusion therefore should be that while Ar ticle 6.1 referred to s ituations where serious
prejudice is “deemed” automatically to exist, Ar ticle 6.3 chapeau makes clear that it refers to
circumstances where serious prejudice “might” exis t, or by implication, might not. The chapeau

25 The New Shorter Oxford English Dictionary.

therefore makes it clear that a finding of serious prejudice is not automatic even if the existence of
price suppression/depression is shown to exist. It should also be noted that as the word “may” is found
in the chapeau of 6.3, this interpretation applies to all subparagraphs in Article 6.1.

 The use “one or several” in the chapeau of Artic le 6.3 further confirms that the existence of
any single factor does not ipso facto lead to an affirmative finding on the existence of serious
prejudice.

 Against this background, with respect to wh at else might need to be proved beyond price
suppression/depression in order to establish serious prejudice, Korea would first recall that
Article 5(c) refers to serious prejudice to the “interests
” of a “Member.” As Korea has noted,
Presumably there was a reason the term “interests” was chosen rather than injury and it clearly
implies something more than just the alleged da mage to specific industry(ies) for a Member’s
“interests” are necessarily broader than just that. Against this background, the finding that alleged
subsidies have resulted in price suppression or depression with respect to a particular like product may
not, on its own, rise to the level of harm resulting in serious prejudice to the more broader “interests”
of the Member concerned. Under this reading, the EC needs to demonstrate, and the Panel would need
to find, not only the existence of price depression, bu t that the subsidies complained of have risen to
the requisite degree of harm to the interests of the EC.

 The EC has failed however to provide any b asis for such a finding. The EC does not address
the question of what EC interests have supposedly been seriously prejudiced and how that might have
occurred. There is no evidence supplied about the st ate of the EC industry or “industries.” Moreover,
the EC did not provide any evidence on the level of the alleged subsidization. Without such evidence,
it is impossible in Korea’s view to make a determin ation that any subsidies, even if found to exist,
would rise to the requisite level of harm to the interests of the EC. Korea would also recall that the EC
has failed to establish a causal link between the a lleged subsidies and the serious prejudice claimed.
Korea considers that these are some of the additi onal factors that would be encompassed in proving
serious prejudice. Korea believes that other factors could be taken into account and that this list may
not be exhaustive. Korea would finally recall that price suppression or depression are only two
indicators of the existence of material injury of which Article 15.2, which provides that “no one or
several of these factors can necessarily give decisi ve guidance.” It would seem to follow that the
existence of price depression or suppression, if not dispositive on their own in the context of the lower
standard of “material injury,” should equally not be determinative in the context of the much higher
threshold of “serious prejudice” in Article 6.3(c).

 (b) Korea refers to its reply under part (a) above with respect to the significance of
the word “may” in Article 6(3) chapeau.

102. In its arguments concerning price supp ression/depression, the EC has focused on
demand side factors. Korea, on the other hand, has focused on the supply side. Is it not
more correct that the two aspects should be taken together. Please explain the impact of
such an approach on your argument concerning price suppression/depression.

 Korea disagrees with the premise of this question. In fact, the reverse appears to be the case.
The EC has looked at the supply side almost exclusiv ely to support its argument that there is no like
product because virtually any yard can build any sh ip (which is, of course, inaccurate). Korea
discussed the issue of capacity to a great extent becau se that necessarily is all that is left of the EC’s
causation analysis once they so dramatically narrowed their claims. Korea was emphasizing how
extremely difficult it is to demonstrate causation on such a narrow basis, particularly when a great
deal of the world capacity consists of inefficient and uneconomic EC yards that have been maintained
for decades on the back of huge subsidies, as acknowledged by the Commission in its Third Report on
World Shipbuilding. Indeed, the alleged difficulties of the EC industry bear an interesting correlation
with the enforced decline of those subsidies from the early 1990’s when the EC started reducing the

direct operating subsidies from the astronomical le vel of 28 per cent. This correlation is much
stronger than any alleged relationship to the events ar ising out of the systemic financial crisis of the
late 1990’s. Korea’s focus on the supply side was only to illustrate the lack of evidentiary and logical
bases of the EC’s approach.

 In Korea’s view, as far as the defi nition of “like product” used in the SCM Agreement is
concerned, the EC’s “competition market” approach based on supply side’s substitutability is not
acceptable. However, Korea ag rees that, in conducting the causation analysis, all elements
contributing to the setting of the vessel prices must be taken into account both from the supply and
demand side. This is the purpose of its respon se to Question 91-(a) hereinabove as well as of
paras 522 to 527 of its First Written Submission. In assessing the causal link between any alleged
subsidy and significant price depression or suppr ession, all supply and demand factors should be
taken into account including the increase in orders, freight rate or production costs as submitted by the
EC. These alone are not, however, sufficient and f actors such as overcapacity, building expertise,
payment terms, slot availability, delivery time and changes in demand patterns must also be taken into
account. The assessment of the causal link is fact -driven and must be done in a comprehensive
manner and carried out on a case-by-case basis.

ANNEX D-4

RESPONSES OF KOREA TO QUESTIONS FROM
THE EUROPEAN COMMUNITIES

(22 March 2004)

I. QUESTIONS TO KOREA

1. In paras 4-8 of its oral statement, Korea repeatedly invoked the “financial contagion”.
In which way did the “contagion” hit the three shipyards who went bankrupt differently than
the ones who survived.

 The impact of the “financial contagion” on the Korean shipyards varied according to the
financial or business conditions of each shipyard. For instance, Daewoo was more heavily hit by the
contagion than other major Korean shipyards as Da ewoo held a substantial portion of non-operating
assets as a result of investments in other Daew oo Group affiliates, such as Daewoo Motor. The
difficulties Daewoo Motor ran into with various i nvestments such as its Polish car plant are well
known.

 However, the real reason for Korea’s reference to this financial contagion is set forth in
paragraphs 8 and 9 of its Oral Statement. That is, Korea wished to highlight the following facts:

 - the financial contagion first hit the banks, resulting in a serious credit crunch where
money was not available for rolling over loans;

 - the Government of Korea used the IMF funds to provide liquidity to the banks;

 - there were conditions attached to this provision of funds, which required the banks to
enhance financial soundness, reduce outstandi ng bad debts and meet BIS ratios; as a
result, they needed to ensure that all co rporate restructurings were done pursuant to
market-oriented principles, including maximization of returns from their debts.

These facts as such negate the EC’s allegation th at the Korean banks some how misbehaved in the
restructuring process to subsidize the insolvent firms.

2. Korea points out that EC yards have recen tly produced smaller vessels than Korean
yards (graph in para. 10 and the comments of Korea on the different sizes and types of EC and
Korean ships in para. 13). Is this in line with the Korean presentation made during the last
OECD meeting, where they explain that yards can easily switch from one ship to another?

 At the last OECD meeting in early Marc h 2004, competition law experts and government
officials discussed whether a single shipbuilder can acquire a dominant position (or monopoly power)
in the world shipbuilding market from the ‘competiti on law’ perspective. At that meeting, Korean
experts explained that, in order to determine the possibility of a ‘market dominance’, one must first
define the relevant ‘product market’ as well as th e ‘geographical market’. However, the context of
those discussions was quite different and had nothing to do with WTO “like product” definitions.

 As demonstrated in paragraphs 10 – 13 of Korea’s First Written Submission, it is supported
by empirical evidence that the Ko rean and EU shipbuilders operate in largely different product and

size segmentations. As a result, the area of competiti on between the Korean and EU shipbuilders is at
best marginal. This divergence between the Korean and EU shipbuilders is not transient, but rather
structural, as it has been due to the changes in patterns of demand and the differences in dock sizes
and technical and cost advantages between the Korean and EU shipyards.

3. In its oral statement today, the EC hypothesized a scheme whereby the Minister for
export promotion of a WTO Member would be empowered to award any sum he considered
necessary to ensure that an exporter wins a contract against foreign competition where he
considers this to be in the national interest. Wo uld Korea consider such a scheme to be entirely
compatible with Article 3 of the SCM Agreement?

 Korea considers that a scheme allowing but not mandating the Minister to award an amount
ensuring that an exporter obtains a specific contr act would not necessarily be incompatible with
Article 3 of the SCM Agreement. It would still be necessary to dete rmine whether, in the individual
circumstances of the recipient, it was granted in a form and under conditions that would constitute a
financial contribution under Article 1.1(a)(1) of the SCM Agreement conferring a benefit under
Article 1.1(b) thereof.

4. Does Korea believe that a body can not be considered a “public body”, or a government
agency can not be considered a “government” if it provides goods or services on competitive
terms?

 Korea submits that the mere shareholding or controlling interest by the government in a body
and the pursuit of a public policy objective is not sufficient to qualify such body as a public body
when it participates in the market together with private bodies on a market-oriented basis.

5. Does Korea believe that the same institut ion can be a “public body” for some of its
activities, and a “private body” for other activi ties? If so, how is this view supported by
Article 1.1 of the SCM Agreement?

 Yes, Korea submits that this can be the case. Article 1.1(a) is aimed at covering all financial
contributions whether conferred by a public body under Article 1.1(a)(1)(i) to (iii) or by private
bodies acting under direction and entrustment of the government under Article 1.1(a)(1)(iv). Case-law
has indicated that the provisions aim to be exhaus tive and that the only difference lies with the actor
of the financial contribution rather than with th e functions. Hence, for those functions for which a
body cannot qualify as “public body”, it would s till qualify as “private body” if it acted under
direction or entrustment of the government.

6. In your opinion is KEXIM a “special institution controlled by” the Korean government
within the meaning of items (j) and (k) of Annex I or a “special institution acting under the
authority of” the Korean government within the meaning of item (k).

 KEXIM is neither a “public body” nor a private body “entrusted or directed” by the
Government of Korea as those terms are used in Article 1.1 of the SCM Agreement. Korea notes that
the EC has made no claims that Ko rea has acted inconsistently with the terms of items (j) or (k) of
Annex I. The issue of the applicability of these items only arises as a possible safe harbor under the a
contrario reading implied by footnote 5 and the plain meaning of the language of items (j) and (k),
first paragraph. As such, these constitute affirma tive defenses that the Panel need only address if it
has already reached conclusions contrary to Korea’ s arguments under Article 1.1. Article 1.1(a)(1)
provides that for purposes “of this Agreement” both the government and public bodies shall be
referred to as “government”. Thus the reference to “government” in items (j) and (k) would cover
KEXIM, if the Panel makes an affirmative finding with respect to KEXIM as a public body.

 Thus, the questions of the applicability of these safe harbours only arises as arguments in the
alternative made by Korea, a concept that should be quite familiar to the EC.

7. Korea states in para. 156 of its submission that Article 26 of the KEXIM Act requires
KEXIM to operate with the goal of achieving a profit. Please refer to Article 26 (Exhibit EC -
10) and explain where there is any reference to profit?

 Please refer to Korea’s responses to Panel’s question No. 55 addressed to Korea.

8. In para. 170 of its submission, Korea attempts to explain away Article 24 of the KEXIM
Act (which states that it must not compete with commercial banks) by claiming that it must be
read together with Article 25, para. 2 of the KEXI M Act. Please explain how you arrive at this
construction since there is no cross-reference between these articles in the text of the Act?

 Please refer to Korea’s responses to Pane l’s question No. 53 addressed to Korea.

9. Korea provides, in para. 172 of its submission, an explanation of the function of the
market adjustment rate provided in the KEXIM Interest Rate Guidelines. Please provide the
source of this interpretation?

 Please refer to Korea’s responses to Pane l’s question No. 57 addressed to Korea.

10. Is the statement in para. 184 of Korea’s submission that “foreign institutions were less
equipped to monitor the collateral offered by th e shipbuilders and, accordingly, insisted on
APRGs without adequate collateral, but with hi gher premium rates” based on conjecture or on
evidence? If the latter, what evidence?

 The assessment by Korea is based on discussions with the shipyards and KEXIM. Korea has
asked the shipyards and KEXIM for any furthe r documentation and it will be submitted when
provided to the Government of Korea. However, Ko rea notes that the EC is in a better position to
make inquires of the foreign lenders than Korea. Wh ile the EC has developed a habit of attempting to
shift the burden of proof to Korea, the EC is not relieved of the burden of establishing its case. The
plain facts are that the foreign credit providers did not require the same level of collateral. Beyond
this, the rationale of such lenders seems to be of no evidentiary value.

11. What is the value of “Yangdo Dambo” collateral
1 at the beginning of a project, when an
APRG or pre-shipment loan is first granted?

 [BCI: Omitted from public version.]

12. Korea states in para. 199 of its submission that the term of pre-shipment loans normally
does not exceed period that it designates as [BCI : Omitted from public version]. How does this
comport with Korea’s argument in para. 170 of the submission that “KEXIM financing may be
extended only ‘when the term … is six (6) mont hs or more”, and with the fact that the KEXIM
pre-shipment loans listed in paras. 175-179 of the EC’s first written submission are for terms
greater than 6 months (and some have terms up to 24 months)?

 Article 9 of the KEXIM Interest Rate Guide line prescribes that the loan period applied for
calculating the loan interests shall commence from th e date of initial disbursement and end on the
final repayment date. In other words, the loan pe riod does not start until the loan disbursement is
actually made.

1 Defined by Korea in its reply to follow-up question 7 of the EC on 10 October 2003.

 In the case of PSLs, the period between the “commitment date” and the “expiry date” ranges
between [BCI: Omitted from public version.] Korea believes that such weighted average of actual
disbursement periods must be used as the loan pe riod of PSLs for the purpose of finding comparable
benchmarks, because the KEXIM’s Interest Rate Guideline calculates interests starting from the
actual “disbursement” date, rather than the “commitment” date.

 However, for the purpose of Article 25.2 of the KEXIM Act, the maturity of ‘6 months’
referred to in that Article may be interpreted to m ean the period from the “commitment date”. In such
case, the maturity of PSLs in general is not less than 6 months.

13. Please provide the (1) sales contract (2) th e loan amount for the following preshipment
loans granted to DSME:

 • Project Nr: 000110 P Commitment date 12 October 2000
 • Project Nr: 000142 P Commitment date 21 December 2000
 • Project Nr: 010008 P Commitment date 8 March 2001

 This is a request for new evidence that the EC has no legal basis to make. After the First
Substantive Meeting, submission of new evidence is prohibited except for purposes of rebuttal, but
not be asking questions. As for the loan amount, please refer to Korea’s response to EC question
No. 16 below.

14. Korea argues in para. 207 of its submission, without any citations or evidentiary
support, that the collateral required by KEXIM was “stronger” than collateral required by
foreign financial institutions. Please provide speci fic information regarding the valuation of the
collateral involved in the transactions by Korean and foreign banks listed in pans. 170-173 of
the EC’s first submission to justify this statement.

 It is the obligation of the EC to establish th e comparability of the benchmarks it proposed.
Moreover, Korea has no access to the information rega rding the valuation of the collateral by foreign
banks and other domestic banks as it is proprietary information in nature and is not publicly available.
The EC is in a better position to obtain that info rmation and has the responsibility to build its own
case. Therefore, Korea provides only the informa tion regarding whether any collateral was provided
for the projects the EC enlisted and, if so, what type of collateral it was, as set forth below.

 [BCI: Omitted from public version.]

15. In order to enable the panel to place values on the benefit of the KEXIM APRGs listed
in paras. 170-173, please provide the actual values of the guarantees, or, alternatively, the
monetary value of the APRG premiums.

 The EC is assuming a legal conclusion in its quest ion; there is no “benefit”. Again, this is
new evidence that the EC is attempting to derive to support its initial prima facie case. According to
the DSU and the Panel’s Working Procedures, the time is long past for the EC to attempt this. It was
the legal obligation of the EC to calculate what it considered the “benefit”. The Panel is not a
domestic investigating authority. The Appellate Body opinion in Japan – Agricultural Products II
makes it very clear that panels are prohibited from making the complainant’s case for it. This question
serves as an admission by the EC that it has not fulfilled its obligation to establish a prima facie case
in this regard.

16. In order to enable the panel to place actual values on the benefit of the KEXIM pre-
shipment loan transactions listed in paras. 175-179 of the EC’s first submission, please provide
the actual value of the loans for the transactions listed therein.

 Please refer to Korea’s responses to EC question No. 15 above.

17. Korea includes several charts in paragraphs 231, 233, and 236 of its submission
purportedly showing the interest rates of corpor ate bonds issued by DSME, Samho, and STX.
In order to allow the Panel to determine whethe r this is a relevant market benchmark, please
provide all detailed information available related to the issuance of these bonds, including, but
not limited to, (a) whether the bonds were issu ed below, above, or at par value, (b) the
difference between the interest rates on the bonds and the yields, (c) the terms of the bonds, (d)
guarantees by other entities (including KAMCO, Seoul Guarantee Insurance, etc.) of the bonds,
(e) who underwrote the bond issue, and (f) the relationship between the yield/interest rate on the
bonds and the corporate restructuring of the shipyards. Was there any guarantee between the
underwriting bank and the yards to buy a certain percentage of the bonds if all bonds were not
underwritten?

 [BCI: Omitted from public version.]

18. Korea states in para. 348 of its First Wr itten Submission that according to the Arthur
Andersen Report the expected collection rate i. e. the total recoverable value compared to the
creditors outstanding claims was:

 [BCI: Omitted from public version] under the Liquidation value scenario.

 [BCI: Omitted from public version] under the “going concern value” scenario.

 Please explain why KAMCO bought NPLs at rates of [BCI: Omitted from public
version] from foreign creditors and [BCI: Omitted from public version] from domestic
creditors although the expected return under th e going concern scenario was only [BCI:
Omitted from public version].

 The purchase prices for NPLs held by domestic and foreign creditors were determined
through negotiations between the parties in [BCI: Omitted from public version]. By the time that
these negotiations took place, the business conditions of DHI and the external shipbuilding market
environment had improved far more substantially than that assumed by Arthur Andersen when it
assessed the value of DHI as of August 1999.

 In contrast, as indicated in its workout repor t, Arthur Andersen made very conservative
assumptions of various factors (such as growth rate s) for its valuation, which resulted in the total
recoverable value of [BCI: Omitted from public version] under the “going concern value” scenario.
In other words, the price differential can be explai ned by the difference in timing and the difference
between the assumed growth and the actual growth, as well as the fact that the KAMCO purchase
prices were ‘negotiated prices’.

19. Are the Pre-shipment loans provided as lump-sum payment, i.e., 100 per cent of the loan
amount provided at the commitment date, as opposed to a credit line?

 Has this been a consistent practice since 1997? If not please detail all changes in policies.

 [BCI: Omitted from public version.]

20. Korea states in para. 308 of its submission that “Articles 31 and 23 of the KAMCO Act
provide that KAMCO realizes profits”. Please point to the text in these provisions that Korea
believes justifies that statement (see Exhibit EC - 45).

 Korea refers to the provisions of Articl es 31 and 32 of the KAMCO Act and apologizes for
the error in the reference in para. 308 of its written submission. Still, the KAMCO Act does provide
for the realization of profits through the fees and sales margin in performing its services and the
income arising from operation (Artic le 31) and provides for the settle ment of dividends after reserves
are made (Article 32).

21. Please provide the basis for Korea’s statement in its submission (para. 323) that
“circumstantial evidence” cannot be used to de monstrate entrustment or direction of a private
body pursuant to Article 1.1(a)(1)(iv) of the SCM Agreement.

 The Panel in US – Export Restraints stated the following:

It follows from the ordinary meanings of the two words “entrust” and “direct” that the
action of the government must contain a notion of delegation (in the case of
entrustment) or command (in the case of direction). To our minds, both the act of
entrusting and that of directing therefore necessarily carry with them the following
three elements: (i) an explicit and affirm ative action, be it delegation or command;
(ii) addressed to a particular party; and (iii) the object of which action is a particular
task or duty. In other words, the ordinary meanings of the verbs “entrust” and “direct”
comprise these elements – something is necessarily delegated, and it is necessarily
delegated to someone; and, by the same token, someone is necessarily commanded,
and he is necessarily commanded to do something. We therefore do not believe that
either entrustment or direction could be said to have occurred until all of these three
elements are present.
2
Korea agrees with the above analysis by the Pane l and has, accordingly, stated in para. 323 that
challenges cannot be made on the basis of vague ci rcumstantial evidence that does not amount to an
explicit and affirmative action. Thus, as Korea noted in response to the Panel in the First Substantive
Meeting, while paragraph 323 may be too categorical, wh at is certainly the case is that very firm and
persuasive evidence must be presented by the compla inant to carry the substa ntial burden of proving
the three elements necessary to demonstrate entrustment and direction. While circumstantial evidence
may be legally recognized, a great deal of firm and persuasive circumstantial evidence must be
presented in the face of a total lack of direct evid ence. In paragraph 323, Korea was reacting to the
utter lack of proof in the EC’s submission – either direct or circumstantial – which has carried over
into the First Substantive Meeting. Instead of offering real proof, whether circumstantial or direct, the
EC has offered vague assertions based in large part on grotesque and discredited stereotyping.

22. If there is no subsidy where a creditor ba nk becomes owner of a company (as argued in
para. 319) what is the purpose of the term “equity infusion” in Article 1.1(a)(1)(a) of the SCM
Agreement?

 This question does not make any sense as there is a logical disconnect in the middle of it.
Equity infusions are legally distinct from debt-for-equi ty swaps. There are also differences in their
practical effect. So called “equity infusions” often are covers for direct subs idies to cover operating
losses. For example, over a long period of time th e French government has made so called equity
infusions into their aircraft engine company, SN ECMA. The purported capital calls generally were
mere shams reflected by the unwillingness of privat e minority shareholders to respond. Thus, the
“purpose” of the term equity infusion is to cover such sham direct contributions of funds to cover
operating losses.

 The issue in a debt for equity swap is differe nt. In such cases, where the company is insolvent
and therefore in the hands of the creditors, the swap reflects a change in form of financial instrument.

2 Panel Report, US – Export Restraints, para. 8.29.

The creditor financial institutions were holding debt and the issue was what they could do with the
debt in order to maximize their return. More specifi cally, the creditors were holding debt in distressed
companies in a country facing a financial crisis. The EC’s odd diversion at the First Substantive
Meeting into an elementary description of the diffe rent characteristics of the two forms of financial
instruments (debt and equity) was completely beside the point. There is no logical relationship of
debt-equity swaps to the term equity infusion.

23. In light of the same para. 319, is it Korea’s position that a government can never
subsidize a state-owned company?

 No. As noted above, a government holding cash th at makes an equity infusion into a state-
owned company is making a financial contributi on to the company. Whether the financial
contribution is a subsidy depends on whether a benefit is conferred to the recipient.

24. In Annex V question Nr. 3.1(12), the EC asked Korea to provide a complete list of
creditors in: (i) DHI as of August 1999; (DSME), DHIM, and DHI as of mid-October 2000 (i.e.,
before the debt-for-equity swap); and (iii) DSME , DHIM, and DHI as of December 2000 (i.e.,
following the debt for equity swap). In response, Korea refers to attachme nt 3.1(12). However,
that attachment does not contain all the informat ion. Thus, Korea did not provide the data on
sub-questions (ii)-(iii). In response to a follo w-up question Korea maintained that it had
provided all the requested information. However, the EC has never received it. Please provide
the missing information.

 Korea’s Annex V Attachment 3.1.2(12) contains all
 the information requested by the EC. In
any event, Korea will provide again the data on sub- questions (ii) and (iii) requested by the EC. ( See
Korea’s Annex V Attachment 3.1(12) attached hereto as Exhibit Korea - 69).

25. Please provide a breakdown for each DHI creditor between secured and unsecured
claims. (Not just for DSME creditors so that the Panel can assess the interest of each creditor in
restructuring or liquidation.)

 Korea has already provided the data on DSME creditors. Beyond that, the “interest of each
creditor in restructuring or liquidation” can be c onfirmed by the Arthur Andersen’s workout report
and the decisions of the CCFI to adopt the proposed workout plan.

26. Please provide the dates on which KAMCO purchased non-performing loans from each
creditor. In your answer, please distinguish between the foreign and the domestic creditors.

 [BCI: Omitted from public version.

27. Please identify those creditors that refused to participate in the workout.

 The question is not clear which “creditors” a nd which “workout” it refers to. If the EC meant
the financial institutions which did not sign the Corporate Restructuring Agreement (CRA), a workout
framework agreement, they were 231 mutual savi ngs banks, 1,592 credit unions, and 47 branches of
foreign banks.

28. What was the market value of the warrants issued to foreign creditors of Daewoo-HI, as
described in para. 358 of Korea’s submission?

 No information is available to the Government of Korea. The EC is in a better position than
the Government of Korea to develop that inform ation from the foreign creditors. Korea notes again
that the information the EC would develop in th is regard would be new evidence and would be
inadmissible absent good cause. Korea reserves its rights in this regard.

29. Korea states in para. 356 that foreign lenders were able to obstruct the workout
procedure, even though they held a minori ty stake among creditors? Why did not {sic}
domestic creditors also have this ability?

 The domestic creditors did have the ability to obstruct the workout process within the creditor
committee. And, indeed, the first Daewoo reorganiza tion plan was rejected by a blocking minority of
creditors during the early meetings of the credito r committee. Nevertheless, domestic creditors were
also conscious that, if they pursued an obstructiv e path, the workout company’s financial conditions
would rapidly deteriorate and would always be th rown into the insolvency procedures. During the
financial crisis, this would have inevitably led to the collapse of the whole national economy and there
would be no financial institution that could survive. Therefore, they decided not to pursue legal means
on their own or to seek individual repayment (i.e . outside of the process) by agreeing to the CRA
workout process. From a commercial point of view, this was the best option for them to take to avoid
their own demise.

30. Please provide citations or other evidentiary support, other than Korea’s own Annex V
answers, for the statement in para. 385 of Ko rea’s first submission that the purchasing
conditions for debts of foreign and local creditors were “slightly different.”

 For more detailed information on this question, please refer to Korea’s response to the Panel’s
Question No. 80.

31. Korea argues that foreign banks do not understand the Korean system sufficiently to
participate in a work-out proceeding and ca n therefore not be considered as benchmark.
3 Why
does then the Corporate Restructuring Promotion Law of August 2001 which “replaced” the
Corporate Restructuring Agreement by creating a statutory legal framework for workouts 4 –
also include obligatorily foreign creditors in any future workouts. Have foreign creditors
suddenly been considered more understanding?

 Korea regrets that the EC continues to feel it necessary to inject such sarcasm into its
questions. As stated in Article 1 (Purpose) of the Corporate Restructuring Promotion Act of
August 2001 (the “CRPA”), the main purpose of this Act was to “facilitate a continuous and market-
oriented corporate restructuring by prescribing th e matters necessary or required for implementing
corporate restructuring in swift and orderly manner” . (See
 Korea’s Annex V Attachment 2.2(16)).
To achieve this purpose, the CRPA created a statut ory legal framework for workouts which had been
regulated by the CRA.

 In line with the stated purpose of facilitating the corporate restructuring (workout) in a more
orderly manner, the CRPA has included in the Counc il of Creditor Financial Institutions (“CCFI”) all
“financial institutions” which operate in Korea und er Korean law, including domestic branches of
foreign financial institutions and mutual savings banks which had not participated in the former CRA.
However, the CRPA also allows financial institutions to withdraw from participation in the CCFI or
individual workout procedures if they so wish: First, the CCFI can exclude from the CCFI
membership small creditors which hold less than a cer tain percentage of the total loans, not exceeding
5 per cent of the total outstanding loans extende d by all the CCFI members (CRPA, Article 25).
Second, any creditor financial institutions that object to the proposed initiation of a particular workout
procedure or to the proposed debt restructuring in the workout procedure, are entitled to exercise an
appraisal right whereby such objecting creditors can request the CCFI (which approved the proposals)

3 First Written Submission of Korea, para. 378.
4 See response to question 16, page 39 of Korea’s Annex V Response and Attachment 2.2(16) of
Korea’s Annex V Response.

to purchase the debt held by the objecting creditors at a certain negotiated or appraised value (CRPA,
Article 29).

 In sum, although the CRPA expanded the general scope of financial institutions participating
in the workout framework, any foreign or domestic financial institutions which hold a small portion of
debts or which are only interested in immediate coll ection of their loans at a reduced value, rather
than long term recovery through workout, can still refuse to participate in the CCFI or in the particular
workout plan. In this regard, it can be said that th ere is no substantial diffe rence between the former
CRA and the present CRPA.

32. Please clarify where the shipbuilding industr y is accounted for in the table provided in
para. 392 of Korea’s first submission.

 The shipbuilding industry is included in Machinery/Plants.

33. With respect to the Rothschild Report ref erred to in para. 413 of Korea’s first
submission, please provide the Rothschild valuation report, in its entirety. (So far Korea has
provided the valuation for the shipbuilding division).

 We understand that the “Rothschild Report” in the above question refers to both the ‘Proposal
of Restructuring of Halla Group ’ dated June 1998 (Korea’s Annex V Attachment 3.2(47)-1; Exhibit
EC - 81) and the ‘Final Proposal for Restructur ing of Halla Group’ dated 8 September 1998 (Korea’s
Annex V Attachment 3.2(47)-2; Exhibit EC - 75). As these titles indicate, such Rothschild Report was
in fact a compilation of the discrete reports rela ting to 4 independent Halla Group companies: Mando
Machineries, Co., Halla Cement, Co., Halla Constr uction, Co., and Halla Heavy Industries (“Halla-
HI”).

 Korea has provided all available reports of Rothsch ild to the extent that they relate to ‘Halla-
HI’ which was the only Halla Group companies at issue in this dispute. [BCI: Omitted from public
version.]

34. Please state whether other companies were gi ven the opportunity to manage and take an
option over Halla in the same way as Hyundai?

 The Government of Korea has no information in this regard.

35. Please specify the price for the call option paid by Hyundai?

 [BCI: Omitted from public version.]

36. According to para. 460 of Korea’s submissi on, five companies submitted final offers to
invest in Daedong. Were any of these companies foreign companies?

 The KPMG carried out an international bidding for sale of Daedong. Therefore, foreign
investors may have possibly been included in the five final bidders. However, it is impossible to
confirm any further information. There was c onfidentiality agreement between KPMG and the
bidders.

37. Korea states in paragraph 475 of its submission that it was fully responsive to the EC’s
questions regarding Daedong’s unsecured credito rs. The EC disagrees. Please provide specific
information regarding the creditors that held 58.94 per cent of the unsecured debt Annex V
attachment 3.3(54) (also Exhibit EC - 93) does not provide any information about these
creditors, but simply lists them as “general commercial claims”. Were any of these commercial

claims held by foreign creditors? If so, how di d these foreign creditors vote with respect to the
reorganization?

 Korea has provided full information on Daedong’s creditors, whether or not the EC agrees.
[BCI: Omitted from public version.]

38. According to para. 458 of Korea’s submis sion, one of the shareholders of Daedong,
Mr. Do-Sang Lee, agreed to a complete reduction in his shareholding ownership. What were the
terms of this agreement? Why did Mr. Do-Sang L ee agree to treatment less favourable than the
other shareholders? How can Korea argue that he acted in his own self-interest, as it does in
para. 476, when he agreed to take a total loss of his investment?

 [BCI: Omitted from public version.] Article 221(4) provides that at least 2/3 of the shares
held by the shareholder who influenced the direct ors in the mismanagement of the bankrupt company
shall be written-off. [BCI: Omitted from public version.]

 [BCI: Omitted from public version.] At least in Korea, registering an objection to the
stock write-off may be viewed as a shameful behavi our for a controlling shareholder and CEO of the
bankrupt company. In any event, Korea is not in a position to comment on Mr. Lee’s personal
motivation.

39. Can Korea confirm that the Korean Shipbu ilders’ Association uses a breakdown by ship
types for categorizing the Korean shipbuilding pr oduction, which identifies four distinct ship
types in the production of which Korean yards are particularly active, namely LNG carriers,
tankers, containerships, bulk carriers?
5

 The Korean Shipbuilders’ Association (KSA) uses different breakdowns of ships according to
the diverse purposes of such breakdown. There is no reason for KSA to apply a WTO ‘like product’
definition when it generally describes the ship types in which the Korean yards are active. Moreover,
as the Appellate Body found in Japan – Alcoholic Beverages , the definition of “like product” can
differ according to the provision at issue. This was confirmed in EC – Asbestos.

40. Is it true that after the take-over of Ha lla/Samho by Hyundai the management tried to
renegotiate contract prices as Halla’s prices were seen as too low compared to Hyundai’s?

 [BCI: Omitted from public version.]

41. In para. 579 of its first submission, Korea lists the factors that it believes provide
significant cost advantages for Korean shipyar ds, when compared with European shipyards.
Notably missing from this analysis is the cost of debt servicing, and the cost of maintaining and
constructing facilities. Why does Korea exclude these important factors from its analysis? Do
prices charged by Korean shipyards not take account of these costs?

 As mentioned in the Annex V process, debt ser vicing costs and the cost of maintaining and
constructing facilities are taken into account when Ko rean shipbuilders determine their sales prices.
The analysis provided by Korea in para. 579 aimed at listing those elements of costs in which Korea
has a significant advantage over the EC; debt servici ng and the cost of maintenance and construction
of facilities is a cost that all shipyards overall need to incur in order to maintain efficient production.

42. Can Korea indicate to which extent the production value of Korean yards is hedged
against currency exchange rate risks?

5 http://www.koshipa.or.kr/upload/english/industry.pdf

 Again, this is new evidence that the EC is attempting to derive to support its initial prima
facie case. According to the DSU and the Panel’s Wo rking Procedures, the time is long past for the
EC to attempt this. Nonetheless, Korea notes th at some Korean yards do not hedge the currency
exchange risk at all, while some others do hedge. For those who hedge against foreign exchange risks,
the production values covered by the hedging vary from company to company and project to project.

43. Can Korea indicate the typical time period that elapses between first contacts with an
owner or broker and the actual signing of a shipbuilding contract?

 There is no typical time period. It ranges from several months to more than one year after
receipt of inquiry, depending on the projects.

44. Can Korea confirm the exact price fo r the Nigerian LNG carriers from Hyundai
mentioned in para 561 of the Korean submission (only a price range is indicated)?

 Why does Korea claim that Hyundai is non- subsidized? It has taken over Halla and
benefits from the subsidies granted through these transactions?

 The Government of Korea does not know the exact price for the Nigerian LNG carriers from
Hyundai. Moreover, Korea notes the EC has expr essly rejected price undercutting arguments. The
price on an individual sale is, therefore, not legally relevant to the EC’s claims.

The EC again fails to apply the correct conse quences of the WTO case-law indicating that “any
analysis of whether a benefit exists should be on ‘legal or natural persons’ instead of productive
operations.”
6 As part of the Halla reorganization process, the stockholders lost their shares in Samho
(first change in ownership); subsequently, the cred itors who owned Samho sold all of their shares to
Hyundai (second change of ownership). Therefore, Hyundai obtained no benefit.

This is the first time that the EC alleges Hyunda i to have been “subsidized”. Moreover, the EC has
never alleged that the purchase of Samho by Hyundai was anything but an arm’s-length transaction.

45. Is the market share analysis given in para . 595 based on number of ships, rather than
tonnage or cargo carrying capacity? If so, why was this particular indicator chosen?

 The market share analysis provided is based on CGT.

6 Appellate Body Report, US – Countervailing Measures on Certain Products from the EC, para. 110.

ANNEX D-5

COMMENTS OF KOREA ON RESPONSES BY THE
EUROPEAN COMMUNITIES TO QUESTIONS
FROM THE PANEL

(22 March 2004)

I. QUESTIONS TO THE EC

A. GENERAL

1. What makes an entity a public body? Is the power to regulate and tax a necessary and
sufficient condition to qualify an entity as a public body?

 Korea would like to refer to the position which the EC itself took in US – Export Restraints in
which it stated that:

“Public bodies” are types of emanations of the government, without necessarily
equalling the “government” proper. Their sp ecific characteristic is the (at least
occasional) exercise of public authority
 (imperium).1
2. Para. 83 of the EC's first written submission describes the purpose of permitting
prospective challenges against mandatory legisl ation. What would be the purpose of
prospective challenges against non-mandatory legal instruments? What would Members
protect themselves against by bringing a prosp ective challenge against another Member's law
that allows, but does not require, the grant of prohibited export subsidies?

 Korea submits that in the case of discretiona ry legislation, the benefits accruing to WTO
Members under the WTO Agreements are not impa ired in the terms of Article 3.3 of the DSU.
Challenging a discretionary legislation would be tantamount to be presuming bad faith on the part of a
WTO Member. In practice, in cases of doubt on the implementation of the said discretionary
legislation, Article 25.8 of the SCM Agreement provides a WTO Member with an instrument to seek
information on the manner in which the legisla tion concerned is implemented and to discuss the
matter in order to make certain that the implementation of the said legislation is WTO-compliant.

4. What is the basis for interpreting Article 3.2 in a manner that prohibits legislation
containing a discretion to provide prohibited export subsidies?

 Korea refers to and supports the position take n by the USA in para. 12 of the third-party
submission which the USA entered on 9 February 2004 and which stated the following:

With respect to Article 3.2 of the SCM Agreement , the EC emphasizes the phrase
“neither grant nor maintain,” asserting that the word “maintain” would have no
meaning if legislation providing for the discretionary grant of subsidies was not

1 Panel Report, US – Export Restraints, Annex B-3, para. 12.

prohibited.2 Accepting for purposes of argument (1) the EC’s definition of the word
“maintain” as “cause to continue,” and (2) the notion that “maintain” refers to subsidy
legislation rather than a “subsidy” itself, the application of the
mandatory/discretionary distinction to Article 3.2 does not render the word
“maintain” meaningless. The word “grant ” can be construed as applying to actual,
discrete bestowals of subsidies under subsid y legislation – “as applied” situations –
while the word “maintain” can be cons trued as applying to the enactment of
legislation that mandates the “grant” of pr ohibited subsidies, thereby causing such
subsidies to continue – “as such” situations . Under this approach, legislation that
conferred discretion to bestow subsidies would not run afoul of either term insofar as
an “as such” challenge is concerned.
B. KEXIM LEGAL REGIME

6. Is the EC of the view that finance / guarantee measures provided under the KEXIM
legal regime would necessarily be inconsistent with Articles 3.1(a) and 3.2 of the SCM
Agreement? Please explain.

 Korea will await the position of the EC in this regard but, at this stage, wishes to point out
that even if it were considered that the KEXIM legislation mandates giving export assistance (which
Korea disputes), this still is not incompatible with Articles 3.1(a) and 3.2 as no benefit is afforded.
Further, specific grants of financing and guara ntee measures are not inconsistent necessarily with
Articles 3.1(a) and 3.2. In fact, the EC did not and could not argue that all of the APRG/PSL grants
were subsides although Korea provided data on these grants.

7. The KEXIM 2002 Annual report (Exhibit EC- 14) contains a chapter entitled Bank
Operations. That chapter refers to a decline in KEXIM's export credit business. It states that
"[m]ajor Korean exporters were reluctant to u se bank loans, instead they preferred raising
funds from direct markets which was possible due to their successful corp orate restructuring".
Does this suggest that KEXIM's export credit terms are less attractive to Korean exporters than
the terms for competing financing from other sources? Please explain.

 Yes, KEXIM export credits are now less attractive. This is demonstrated by the fact that
Korean shipbuilders are now using KEXIM preship ment loans for a small portion (approximately
20 per cent) of their shipbuilding projects. Moreove r, some Korean shipbuilders are never using the
KEXIM preshipment loans at all.

8. Para. 122 of the EC's first written submi ssion states that the KEXIM legal regime, as
"confirmed by KEXIM practice", provides for the grant of subsidies. Is the EC challenging
"KEXIM practice" as well as the KEXIM legal regime as such, or does the EC rely on evidence
regarding "KEXIM practice" in support of its claim against the KEXIM legal regime as such?
If the latter, please explain how evidence regarding "KEXIM practice" is relevant to the Panel's
assessment of whether the KEXIM legal regime as such is, or is not, in conformity with the SCM
Agreement.

 In the opinion of Korea, para. 131 of the EC’s first written submission confirms that the EC’s
assertions are based both on the legal regime and the a lleged practice and that the EC considers that it
cannot rely on the legal regime alone. Indeed, the EC states that “[t]hese factors, when considered
together with the record of KEXIM financing detailed below , establish that the KEXIM Act, Decree
and Interest Rate Guidelines provide for WTO-inconsistent actions.”

2 EC’s First Written Submission, paras. 79-80.

 At a different level but based on the same argument, Korea reiterates that the EC has never
defined the so-called KEXIM APRG and pre-shipment loans other than by the individual instances in
which APRGs and PSLs were issued to shipbuilders.

C. APRG PROGRAMME

9. How does the EC's claim against the "APRG programme" as such differ from its claim
against the KEXIM legal regime as such? Isn't the "APRG programme" based on the KEXIM
legal regime? Is it conceivable to assess one of them differently from the other?

 As mentioned above, Korea considers that the EC has never defined what the APRG
programme really is in terms of statutory frame work. Beyond that, however, the conditions at which
APRGs can be afforded are set forth in the KEXIM Interest Rate Guidelines which, in accordance
with the EC’s own arguments, are part of the KEXIM legal regime that is challenged as such.

D. PSL PROGRAMME

11. How does the EC's claim against the "PSL programme" as such differ from its claim
against the KEXIM legal regime as such? Isn't the "PSL programme" based on the KEXIM
legal regime?

 Korea refers to its comments in relation to Qu estion 9 above which equally applies as regards
the PSLs.

F. ACTIONABLE SUBSIDIES

16. In its third party submission in the US – Export Restraints case, the EC argued that
there is no government entrustment or direction in a case where freedom of action is "limited",
but not "curtailed", i.e., where "the producer ca n still make choices". Does the EC consider
that the freedom of action of private financial institutions participating in the restructuring
process was (i) "limited" or (ii) "curtailed"? Were those companies able to make choices
regarding their participation in the restructuring process? Please explain.

 In the same vein, Korea would like to mention the EC’s response to a question raised by the
Panel in US – Export Restraints:

 (b) Why would the “pre-determined conditions” have to exist in order for a private body
to be carrying out a function normally vested in a government?

 As already explained by the EC in its Written Submission, the actions contemplated by
Article 1.1(a)(1)(iv) of the SCM Agreement are not “expansive”, but limited to those
enshrined, for governments or public bodies, in subparagraphs (i) to (iii) of the same Article.

 Therefore, the determining factor for a private body carrying out the functions normally
vested in the government and the practice differing, in no real sense, from practices normally
followed by governments (which is the full text of the releva nt part of Article 1.1(a)(1)(iv) of
the SCM Agreement ) is that the private body must, through government direction, perform
materially the same function as would otherwise be carried out by the government itself – and
caught by Article 1.1(a)(1)(i)(iii) of the SCM Agreement.

 Now, when a government decides to provide a subsidy to a certain industry or part of an
industry, the government will decide in advance the kind of action it wishes to take, the class
of beneficiaries it wishes to reach and the extent of the “benefit” it wishes to confer. The same
standard must apply in the case of an ‘indirect subsidy’ with the government predetermining,

through regulatory means, essentially the same conduct for the private body, and the same
result for the beneficiary industry, than th e government would otherwise “directly” have
implemented itself.

 Only if such pre-determination exists, will the private body become a quasi-emanation of the
government. Only then will it carry out a subs idizing function “normally vested in the
government”, and only then will the practice “in no real sense differ from practices normally
followed by governments”. In the EC’s view, ther efore, the existence of (government) “pre-
determined conditions” is a sine qua non for the existence of an indirect financial contribution
in the sense of Article 1.1(a)(1)(iv).

 Korea submits that the Government of Korea has not predetermined the kind of action that
private banks had to take when participating in co rporate restructuring, which specific companies had
to go in corporate restructuring or the extent of th e benefit (if there were one, which Korea denies) to
confer. The private creditors of DHI, Halla and Daedong freely determined whether to apply for
workout or corporate reorganizati on and which measures to take in the corporate restructuring. The
many creditor meetings and the opposition of pr ivate creditors to initial restructuring plans
demonstrate that there were no pre-determined conditions of such a nature that there was direction or
entrustment on the part of the Korean Government vis-à-vis the private creditors participating in the
corporate restructuring.

17. Are you arguing in paragraph 73 of your oral statement that the banks that participated
in the Corporate Restructuring Agreement ther eby legally committed themselves up front to
follow the direction of the government? Did such undertaking(s) by the banks affect all
 of the
restructurings referred to in your complaint? Please elaborate and provide specific evidence.

 The fact that creditors opted for a corporate reorganization in the case of Halla and Daedong
rather than for a workout demonstrates that the ba nks that participate in the CRA did not commit “to
the workout as the solution for bankruptcy” as is stated by the EC in para. 73 of its oral statement.

 The CRA aims to achieve the promoti on of workouts as an accelerated means for
restructuring in accordance with Korea’s negotia tions with the IMF. Nevertheless, nothing in
Articles 1, 2 and 20 referred to by the EC entails any waiver by the domestic banks from their rights
to act independently. In particular, the penalty provided in Article 20 does not relate to a breach of the
CRA itself but would apply if a creditor institution wh ich freely entered into a workout plan failed to
implement the workout plan. It is a penalty for a contractual default but not a penalty in case the
financial institutions failed to participate in a workout.

20. The EC asserts (first written submissi on, para. 281) that KAMCO purchased non-
secured loans held by foreign creditors of DHI on terms more favourable than those offered to
domestic creditors. How is this relevant to the Panel's examination of the issues of whether or
not there was a financial contribution and benefit to the restructured company?

 Korea also refers to the response it provides to Question 80 of the questions addressed to it by
the Panel.

24. Where a government entity is a creditor of an insolvent company being restructured,
will the restructuring always
 result in a subsidy? Why or why not?

 As long as the government – creditor behave d according to commercial standards, the
restructuring does not constitute a subsidy.

G. SERIOUS PREJUDICE

27. Korea argues that there is considerable variation or diversity of products within each of
the product segments proposed by you, meanin g that these product segments are too broad and
should be broken down, for example, at least in to different size ranges. Please comment on the
diversity of products within each of the produc t segments that you propose, and in this context
please respond specifically to Korea's arguments on this point.

 With regard to Questions 25, 26 and 27, Korea refers to the responses which it provided to
questions 86 and 87 that were raised to it by the Panel.

29. You argue that there are three mark et "segments" relevant to your price
suppression/depression claim: LNGs, chemical/product tankers, and container ships.

 (a) Is the implication of this that in your view, price suppression/depression should
be found in respect of each of these segments separately?

 (b) If so, what is the relevance of figure s 33-36 of your submission? That is, please
explain what conclusions about price and cost trends in respect of the particular
kinds of ships referred to in your claim can be drawn from these graphs, which
appear to represent averages for all
 ships of all types.

 Where there are different like products as stat ed by the EC or for like products as submitted
by Korea, price depression or suppression must be established for each of those separately. Where no
significant price depression or suppression is found for one or more of them, then no adverse effects
can be found for that like product and no remedy should be adopted as regards that like product.
Therefore, the burden of proof lies on the EC not only to determine, as is argued by Korea, the like
product but also to prove the existence of price depression or price suppression for each like product
separately. The graphs submitted by the EC reflect ship types as diverse as cr uise ships, RoRos, bulk
carriers, container vessels, L NGs, pure chemical tankers and pr oduct and chemical tankers, etc.
without evidentiary nature for the price depressi on or suppression of each of the three ship types
concerned.

 (c) Do you agree with Japan's argument that a low price for any individual
transaction will put downward pressure on all
 types of ships, whether
substitutable or not? If so, why? Does a decline in the price of a ship of a
certain type, for instance a container ship, cause a decline in the price of a ship
of another type, e.g., a tanker or passen ger ship? Is it not more defensible to
argue that a decline in the price of one ship causes a decline in the price of
another ship with the same end-use?

 We do not agree with this statement from Japan for several reasons.

 First, shipping markets, e.g., product tanke rs for carrying oil and containers vessels are
discrete segments, which operate with no possibility of vessel substitution. It is also the case that each
market will follow its own freight cycle, due to un derlying movements in vessel supply and demand.
Furthermore, it is rare for individual markets to be at the same stage in the development of the freight
cycle (increasing or decreasing). The freight cycle is important, in that it influences the level of
earnings for the ship owner and in turn this will ha ve a bearing on new ordering levels. Normally, in a
strong freight market new ordering will rise.

 From the shipbuilders perspective it is not uncommon to witness a situation where new
ordering for one type of ship is strong, but for a nother weak. As such, it does not follow that if new

ordering in one sector is weak and a builder accepts a “low” price, that price in other sectors (where
ordering levels maybe stronger) would be under downward pressure.

 In fact, there are examples of where ship pr ices by sector move in opposite directions, due in
the main to differences in demand for individual ship types. For example, between 1998 and 1999
newbuilding prices for oil tankers of all types fell, while prices for bulk carriers of all types rose. Even
in individual market sectors, e. g., oil tankers, there will be diffe rences in price changes between one
vessel type and another due to the existence of diffe rent specifications even wi thin the same type of
vessels as stipulated by Korea.

 Second, most shipbuilders and owners are aware that a price for a ship will be determined by
many factors, not least of which are the vessel’s physical specifications, yard material, labour and
production costs and exchange rates. One transaction in isolation does therefore not set a trend for the
industry as a whole. Although it is true that the “l ast quoted price” will have a bearing on the next
subsequent order for that particular ship type, provided the ship is of a similar specification. However,
the influence of “last business” will not necessarily extend to all other ship types within a sector and
certainly not across all fleet sectors.

 Third, in a typical year between 1,500 and 2, 000 new orders (for all commercial ship types)
will be placed with the world’s shipbuilders. Th ere is no established mechanism for making the
prices of these contracts known publicly; indeed many are concluded on private and confidential
basis. In short, shipbuilders will not be aware of ev ery price transaction, so it is illogical to argue that
a single transaction can set a price trend for the whole industry.

 (d) Is it not more defensible to argue that a decline in the price of one ship causes a
decline in the price of another ship with the same end-use?

 Within fleet sectors there is some crossover between individual segments. For example, a
suezmax tanker at the low end of the suezmax si ze spectrum may at times compete with larger
aframaxes for cargoes. However, a VLCC does not compete with a handy tanker.

 Overall, if the newbuilding price for a VLCC is either falling or rising it will have a bearing
on price trends in other adjacent oil tanker segment s. Movements in newbuilding prices between ship
types in a sector are not always uniform. Once again, the reason being that there will be differences in
demand for individual ship types within a sector.

34. As a general matter, please describe the preci se nature of the analysis that you believe is
required to establish serious prejudice through price suppression/price depression, including
the following issues:

 (a) Must there be (at least inter alia ) a demonstration that the prices for the
complaining party's products have been s uppressed or depressed, or is the focus
of the analysis instead the prices for th e allegedly subsidizing party's product?
Or are both sets of prices relevant?

 (b) How if at all should these two sets of prices be juxtaposed against or related to
one another?

 (c) How similar must the complaining party's and allegedly subsidizing party's
products be?

 Korea refers to the response it is submitting to Qu estion 91 of the questions raised to it by the
Panel.

38. In arguing, on the basis of US – Norwegian Salmon CVD
 and Article 15 of the SCM
Agreement that an " a cause" standard is sufficient for a finding of serious prejudice, are you
implying that the causation standard for s erious prejudice is the same as that for a
countervailing measure? If so, what is the textual basis for such an argument? If not, what is
the relevance to this dispute of either SCM Article 15 or the standard applied by the Salmon
CVD panel? In this context, please respond to th e US comment pointing to the difference in
drafting between SCM Article 6.3(c) and SCM Article 15 ("the effect of the subsidy [...]" versus
"the effects of the subsidized imports [...]", respectively).

 Korea refers to the response which it is submitti ng to Question 90 of the questions raised to it
by the Panel.

41. Please respond to Korea's argument that the effect of any alleged subsidy must be
"current", and thus that past subsidies should not be taken into account unless they can be
shown to have such a current effect.

 Korea refers to its response to Question 83 of the questions raised to it by the Panel.

45. Please comment on China's argument, in par agraph 46 of its written submission, that if
the total amount of a subsidy is ten dollars only, it cannot be successfully demonstrated that the
effect of such a subsidy is to significantly suppress or depress the price of a one-billion-dollar
vessel.

 With respect to questions 44 and 45, Korea refers to its response to Question 91 of the
questions raised to it by the Panel.