Document: WT/DS273/R Page A-1 ANNEX A EXECUTIVE SUMMARIES OF THE FIRST WRITTEN SUBMISSIONS OF THE PARTIES Contents Page Annex A-1 First Written Submission of the European Communities A-2
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 A

EXECUTIVE SUMMARIES OF THE FIRST WRITTEN
SUBMISSIONS OF THE PARTIES

Contents Page
Annex A-1 First Written Submission of the European Communities A-2
Annex A-2 First Written Submission of Korea A-11

I. INTRODUCTION

1. The European Communities seeks a ruli ng from this Panel recommending that Korea
withdraw the massive subsidies it provides to Korean shipyards, remove the adverse effects of these
subsidies, and revoke or am end measures that constitute de jure violations of the SCM Agreement .
The granting of these subsidies to the Korean shipyards from 1 January 1997 through present, and the
enactment and maintenance of such measures, violate multiple provisions of the SCM Agreement.

2. At issue in this dispute are subsidies that the Government of Korea has provided to Korea’s
commercial shipbuilding industry since 1 January 1997. In its first written submission, the European
Communities:

¾ Firstly, summarises the relevant factual background (Part II);

¾ Secondly, briefly describes the procedure leading to this Panel proceeding (Part III); and then

¾ Demonstrates, that the Government of Korea has granted, and continues to grant, both
prohibited and actionable subsidies, c ontrary to its obligations under the SCM Agreement
(Part IV).

II. FACTUAL BACKGROUND

3. The submission provides background informati on on the “commercial shipbuilding industry”,
including on the nature of the shipbuilding market, the types of ships involved in the dispute and on
the main players in Korea and the EU. It also describes the history of Korean government intervention
in the economy.

III. HISTORY OF DISPUTE

4. The European Communities requested cons ultations with Korea on 21 October 2002 to
discuss subsidies provided to Korean shipbuilder s that violate Korea’s obligations under the SCM
Agreement.

5. The European Communities and Korea held three consultations on 22 November 2002,
13 December 2002 and 7 May 2003. On 11 June 2003, the European Communities requested the
immediate establishment of a panel.

6. On 21 July 2003, the Dispute Settlement Body (DSB) established the Panel with the standard
terms of reference. On 10 July 2003, the European Communities re quested that the DSB initiate the
Procedures for Developing Information Concerning Se rious Prejudice as provided in Annex V of the
SCM Agreement. The Annex V procedure was terminated on 10 November.

7. Special procedures apply for the protection of “business confidential information” (“BCI”) in
this proceeding. The European Communities do es not accept all Korea’s claims of BCI but has
endeavoured to respect them in the s ubmission by marking such information “ [BCI]”. All BCI has
been omitted from this executive summary.

IV. LEGAL CLAIMS

A. INTRODUCTION

8. The European Communities demonstrates in its submission that Korea provides prohibited
and actionable subsidies to its commercial shipbuilding industry. It:

¾ first addresses general issues relating to the bur den of proof, best information available, and
adverse inferences (Section B)

¾ then proceeds to consider the issue of prohibited subsidies (Section C); and

¾
 finally addresses actionable subsidies (Section D).

B. BURDEN OF PROOF, BEST INFO RMATION AVAILABLE AND ADVERSE
INFERENCES

9. The general principle applicable in WTO dis pute settlement is, as the Appellate Body stated
in EC – Hormones, that the initial burden of proving a viol ation is on the complaining party, which
must establish a prima facie case. It is also a well-established rule in WTO dispute settlement that
“the party who asserts a fact, whether the claimant or the respondent, is responsible for providing
proof thereof.”
1

10. However, as the Appellate Body recalled in Japan – Apples , the principle that the
complainant must establish a prima facie case of inconsistency with a provision of a covered
agreement
 does not require the complainant to offer proof of every fact that it asserts. 2 Where a
defending party contests the adequacy or the per tinence of the facts presented by the complaining
party, the burden may be on the defending party to establish those facts.

11. In particular, Annex V of the SCM Agreement sets out certain special rules to take account of
the particular problems of fact-finding in such cases. They provide in particular that:

¾ The information provided under the Annex V pro cedure constitutes “the record” on the basis
of which the Panel is to decide the case.
3

¾ Where there is a lack of cooperation by th e subsidising Member or any third-country
Member, the complaining Member is entitled to make its case based on evidence available to
it.
 4

¾ The Panel may then “complete th e record as necessary relying on best information otherwise
available”5 and may seek additional information to complete the record that it “deems
essential to a proper resolution to the dispute, and which was not adequately sought or
developed during that process”. 6 However in doing so, the Panel “should not request
additional information to complete the reco rd where the information would support a
particular party's position and the absence of that information in the record is the result of
unreasonable non-cooperation by that party in the information-gathering process.”7

¾ The Panel is expressly instructed to draw adverse inferences from instances of non-co-
operation.
8

1 Appellate Body Report, US – Wool Shirts and Blouses, at 14.
2 Appellate Body Report, Japan – Apples, para 157.
3 SCM Agreement, Annex V, at paras. 6 and 9.
4 Ibid. at para. 6.
5 Ibid.
6 Ibid. at para. 9.
7 Ibid. at para. 9.
8 Ibid. at para. 7.

12. The Appellate Body confirmed in Canada – Aircraft the drawing of adverse inferences from
instances of non-co-operation is in fact a general principle of the SCM Agreement that is also
applicable in the case of prohibited subsidies.9

13. The European Communities has exercised self-r estraint in requesting the Panel to base its
findings on best information otherw ise available or to draw adverse inferences in accordance with
paragraphs 6 to 8 of Annex V of the SCM Agreement. Whether it will be necessary for the Panel to
draw further adverse inferences, to use best info rmation otherwise available, or to seek further
information through use of its powers under Article 13 of the DSU to seek technical advice and
information from relevant indi viduals or bodies such as the OECD, will depend on the position taken
by Korea on the case made by the European Communities.

C. PROHIBITED SUBSIDIES

14. The European Communities makes three distin ct claims that Korean measures constitute
prohibited subsidies under Part II of the SCM Agreement. These are:

 (a) The regime established by the Export- Import Bank of Korea Act (“KEXIM Act”), the
Enforcement Decree of the Export-Import Bank of Korea (“KEXIM Decree”), and
the Guidelines for Interest and Fees (“KEXIM Interest Rate Guidelines”).

 (b) The KEXIM practice, undertaken pursuant to the KEXIM Act, Decree, and Interest
Rate Guidelines of providing export subsid ies through its advance payment refund
guarantee (“APRG”) and pre-shipment loan financing programmes.

 (c) Specific grants of APRGs and pre-shipme nt loans to Korean shipbuilding companies
by KEXIM.

15. The European Communities shows that all of the above constitute prohibited subsidies within
the meaning of Article 3.1(a) of the SCM Agreement. The definition of subsidy in Article 1.1(a)(1) of
the SCM Agreement encompasses financial contributions provided by “any public body”. The
European Communities demonstrates that KEXIM is a “public body” within the meaning of
Article 1.1(a)(1) of the SCM Agreement.

1. The KEXIM Act, Decree, and Interest Rate Guidelines, As Such, Violate Article 3 of the
SCM Agreement

16. The European Communities first explains that the fact that the regime established by the
KEXIM Act and Decree does not expressly require the granting of WTO-inconsistent export
subsidies does not alter the fact that the regime, as such, is contrary to the requirements of the SCM
Agreement and Article 3.1(a) thereof.

17. The Appellate Body has recently laid to r est the notion that non-mandatory measures cannot
be the subject of dispute settlement in US – Sunset Review (Japan). In that case the Appellate Body
reviewed the alleged basis for this doctrine and reversed the reliance of the panel in that case on it,
stating:

Hence we see no reason for concluding th at, in principle, non-mandatory measures
cannot be challenged "as such".
10

9 Appellate Body Report, Canada – Aircraft, para 202 (footnote omitted).
10 Appellate Body Report, US – Sunset Review (Japan), para. 88.

18. While the mandatory or discretionary nature of a measure may be relevant in assessing the
compatibility with certain WTO obliga tions, the Appellate Body held in US – Section 211 that an
assessment of the compatibility of a measure cannot end with the conclusion that it is discretionary.
11
The scope of WTO obligations, and the possibilities for invoking them against measures maintained
by the Members, must be determined on the basis of the ordinary meaning of the text of the relevant
WTO provisions, read in light of their object and purpose.

19. Nothing in the language of Article 3.1 of the SCM Agreement suggests that a Member can
have discretion to provide export subsid ies. Indeed, Article 3.2 of the SCM Agreement makes this
clear since it provides that Members “shall neither grant nor maintain subsidies referred to in”
Article 3.1 (i.e. prohibited subsidies).

20. The KEXIM Act, Decree, and Interest Rate Guidelines provide for the granting of prohibited
export subsidies. They (a) establish as a main operational objective of KEXIM the promotion of
Korean exports through the grant of loans and guarantees; (b) prohibit KEXIM from competing with
other financial institutions; and (c) enable KEXIM to grant loans and guarantees without regard to
financial risk, and in unlimited amounts. Consequently, this legal regime is inconsistent, as such, with
Article 3 of the SCM Agreement.

21. KEXIM’s legal framework, including the KEXIM Act, by providing for the grant of loans
and loan guarantees in amounts not limited by consider ation of the financial status of the borrower,
and on more advantageous terms than the market would provide, confers a “benefit” on exporters.
KEXIM’s legal framework, including the KEXIM Act, provides for the grant of subsidies that are de
jure contingent on export performance. Under Article 18 of the Act, the loans and guarantees are, by
its own terms, “[f]or the purpose of facilitating expo rts of products.” Thus , under the plain language
of the statute, the subsidies, in the form of loans and guarantees, are de jure export contingent within
the meaning of Article 3.1(b) of the SCM Agreement. As a prohibited subsidies under Article 3.1(a) of
the SCM Agreement , the subsidies granted by KEXIM pursuant to KEXIM’s legal framework are
“deemed to be specific” pursuant to Article 2.3 of the SCM Agreement.

22. The European Communities also points out that the KEXIM Interest Rate Guidelines do, in
fact, specifically require the grant of a subsidy at below-market markets under certain circumstances.

2. The KEXIM Advance Payment Refund Guaran tee and Pre-shipment Loan Programmes
constitute measures in the form of a “practice” of KEXIM pursuant to the KEXIM Act

23. KEXIM operates the Advance Payment Refund Guarantee programme pursuant to the
KEXIM Act. Under this programme, KEXIM guarantees that a foreign buyer will be refunded
100 per cent of any advance payments made to a Ko rean exporter, including any accrued interest on
the advance payments, if the exporter fails to perform its obligations under the relevant contract. The
amount of the APRG, also known as an Advance Paymen t Bond, is determined by the total amount of
advance payments actually paid to the Korean exporter, plus accrued interest on the advance
payments that would be due in case of default.

24. KEXIM guarantees confer a “benefit” to Korean exporters by providing financial support on
more advantageous terms than they would otherwise be able to obtain in the Korean financial market.
Although KEXIM charges each exporter a certain f ee (i.e. premium) when granting APRGs, the
premium fails to reflect the degree of creditwor thiness of the Korean exporters. KEXIM issues
guarantees without proper consideration of the ri sk involved in the transaction – in many cases,
granting guarantees to financially troubled compani es that would not have been able to obtain a
guarantee from a commercial bank.

11 Appellate Body Report, US – Section 211 Appropriations Act, para. 260.

25. The evidence demonstrates that very few commercial banks granted APRGs to the Korean
shipyards during the time of the financial crisis in 1997, and few have entered the market of granting
APRGs since that time. The APRG programme, established by KEXIM pursuant to the KEXIM Act,
provides prohibited export subsidies, as defined by Part II of the SCM Agreement . KEXIM
guarantees (i) meet the definition of a “subsidy” under Article 1.1, (ii) are expressly contingent upon
export performance in violation of Article 3.1(a) of the SCM Agreement , and (iii) are specific
subsidies pursuant to Article 2.3 of the SCM Agreement.

26. The KEXIM pre-shipment loan programme provides loans to Korean companies in
connection with export contracts, for the purpose of helping the Korean exporters to finance
production.

27. KEXIM pre-shipment loans confer a “benefit” on the Korean exporters within the meaning of
Article 1.1(b) of the SCM Agreement because the preferential interest rates provided by KEXIM place
the Korean exporters in a more a dvantageous position than if they we re to obtain such financing on
market terms.

28. The pre-shipment loan programme, estab lished by KEXIM pursuant to the KEXIM Act,
provides prohibited export subsidies, as defined by Part II of the SCM Agreement . These KEXIM
guarantees (i) meet the definition of a “subsidy” under Article 1.1, (ii) are expressly contingent upon
export performance in violation of Article 3.1(a) of the SCM Agreement , and (iii) are specific
subsidies pursuant to Article 2.3 of the SCM Agreement.

3. Specific Grants of Prohibited Subsidies

29. As detailed in the submission, KEXIM has ch arged premia that fall far below the rates that
would have been charged by commercial banks. These individual transactions are not just evidence of
KEXIM’s APRG and pre-shipment loan “practices,” but they are also themselves subject to challenge.
The European Communities, therefore, al so challenges as inconsistent with the SCM Agreement
numerous individual transactions in which KEXIM has provided APRGs and pre-shipment loans to
Korean shipbuilding companies at preferential rates that are well below the rates that would have been
commercially available.

D. ACTIONABLE SUBSIDIES

30. The European Communities demonstrates in th e submission that subsidies granted by Korea
to its shipbuilding industry cause serious prejudice to the EC’s shipbuilding industry. These subsidies
were granted pursuant to the restructuring process of the Korean shipbuilding industry since 1997.
They take the form of debt forgiveness, debt-for-equity conversions on non-market terms, tax
concessions, and KEXIM APRGs and pre-shipment loans.

31. The European Communities first presents evidence that the Government of Korea has
provided “financial contributions” in the form of debt forgiveness, debt-for-equity conversions on
non-market terms, and tax concessions that confer a “benefit”, and that are “specific” to certain
enterprises within the meaning of Articles 1 and 2 of the SCM Agreement. The European
Communities then shows that the subsidies, toge ther with the KEXIM subsidies described in
Section IV.C granted directly or indirectly by the Government of Korea constitute actionable
subsidies that violate Articles 5(c) and 6.3(c) of the SCM Agreement by causing serious prejudice to
the interests of the European Communities.

32. The Government of Korea has a long history of intervention in the country’s financial and
corporate sectors, directing the lending practices of financial institutions to promote the export-

oriented activities of selected chaebols. As described in Section II (Factual Background), each time
these chaebols faced financial distress, the Government intervened to rescue them through favourable
financial packages provided by government-contro lled banks or private banks acting under the
Government’s instruction. This pattern of gove rnment intervention was repeated once again during
the financial crisis that began in 1997. The Gove rnment of Korea played a central role of in the
workout process; acted through a number of public bodies carrying out the Government policies; and
entrusted and directed commercial financial instituti ons to support the Korean shipbuilding industry
during a time of severe financial turmoil.

33. Indeed, the Government of Korea directed the workout process through, inter alia , (a) the
participation, as creditors, of public bodies acting pursuant to Government policy; (b) the direct or
indirect shareholding participation by the Kor ea Depository Insurance Company in the capital of
many financial creditors of the ailing chaebols; (c) the purchase by the Korea Asset Management
Corporation of non-performing loans from financ ial creditors; and (d) pressure exerted by the
Government on other creditors—many themselves f acing collapse—to abide by the Government’s
directives.

34. Public bodies acting pursuant to Government policy played a leading role in the council of
creditors of the shipbuilding companies. At the same time, they pressured other “private” creditors
that did not have an institutional nexus with the Government of Korea or did not pursue public policy
objectives.

35. The submission demonstrates that six fina ncial institutions (Korea Asset Management
Corporation, Korea Depository Insurance Corpora tion, Bank of Korea, Korea Development Bank,
Industrial Bank of Korea and KEXIM) which were i nvolved as creditors of the shipyards in the work-
out process are public bodies within the meaning of Article 1.1(a)(1) of the SCM Agreement .
Advantages granted by them in the context of the wo rkout process to Korean shipyards are, therefore,
necessarily to be imputed to the Government of Korea.

36. Should the Panel adopt a different and mo re narrow interpretation of that term, the
European Communities submits that these institutions are, in any case, private bodies “entrusted” or
“directed” by the Korean Government within th e meaning of Article 1.1(a)(1)(iv) of the SCM
Agreement.

37. In addition to the above, commercial financia l institutions that were creditors of the chaebols
also provided financial assistance to the chaebols pursuant to the direction or entrustment of the
Government of Korea. In the submission the Eu ropean Communities sets out the general pattern of
involvement of the Korean Government in th e decision-making of the commercial financial
institutions that were creditors of the three shipyards in the restructuring process.

38. The Korean Government and its public bodi es took advantage of its multiple roles as
decision-maker/strategist, legislator, executive, regulator, shareholder/owner, capital injector,
guarantor, and lender to ensure that commercial fi nancial institutions acted to support the Korean
shipbuilding industry.

39. The European Communities demonstrates th at the Government of Korea has granted Daewoo
HI/Daewoo SME actionable subsidies that consist of: the workout plan, comprising several
individual measures as implemented between A ugust 1999 – December 2000; tax concessions
provided to Daewoo-HI/Daewoo-SME under Korea’s Special Tax Treatment Control Law; and grants
of APRGs and pre-shipment loans by KEXIM. The European Communities also demonstrates that
the Government of Korea has granted to Samho-HI/Halla-HI actionable subsidies that consist of the
company’s corporate reorganisation plan comprisi ng of a number of individual components and the
grant of APRGs and pre-shipment loans by KEXIM. Finally, the European Communities

demonstrates that the Government of Korea granted to STX/Daedong actionable subsidies that
consist of the corporate reorganisation plan comp rising several individual components and the grant
of APRGs and pre-shipment loans by KEXIM.

40. Having established the existenc e of the subsidies, the European Communities demonstrates
that they are actionable within the meaning of Articles 5(c) and 6.3(c) of the SCM Agreement .
Through its use of subsidies to the shipbuilding in dustry, Korea has caused serious prejudice in the
form of significant suppression or depression of prices for EC ships worldwide, in violation of
Articles 5(c) and 6.3(c) of the SCM Agreement.

41. The European Communities’ claims involve a number of distinct legal elements, each of
which is established in the submission. First, the European Communities demonstrates that three
types of ships produced in the European Commun ities and in Korea—container ships, product and
chemical tankers, and LNGs—c ompete in the same product and geographic markets.

42. Second, the European Communities expl ains that Korean subsidies to Daewoo-
SME/Daewoo-HI, Samho-HI/Halla-HI, and STX /Daedong cause depressed and suppressed prices for
the European shipbuilding industry. To establish th e causal link between the subsidies and this price
depression and price suppression, the European Comm unities demonstrates that (a) the subsidies
artificially maintained shipbuilding facilities that would not have been maintained under market
conditions and materially enhanced the financial strength and freed up financial resources for use by
Daewoo-SME/Daewoo-HI, Samho-HI /Halla-HI and STX/Daedong; (b) the need to utilise this
capacity and the low costs resulted in lower bid pr ices for ships produced by the shipyards; and (c)
given Korean price leadership, these lower prices caused price de pression and price suppression in
affected products.

43. Third, the European Communities shows that the price suppression or depression in the ship
market worldwide, and in particular country or regional markets, has been “significant.” Fourth, the
European Communities demonstrates that the signi ficant price suppression and price depression were
of such a nature and quantity as to constitute “ser ious prejudice,” and thus have created “adverse
effects” to the interests of the European Communities.

V. CONCLUSION

44. For the above reasons, the European Comm unities asks the Panel to find that Korea has
granted subsidies inconsistent with its obligations under the SCM Agreement, because:

• Korea through the KEXIM Act, KEXIM Decree and Interest Rate Guidelines provides
prohibited subsidies, inconsistent with Article 3.1 and 3.2 of the SCM Agreement;

• Korea through the establishment and maintena nce of the APRG and preshipment loan
programmes provides prohibited subsidies, inc onsistent with Article 3.1 and 3.2 of the SCM
Agreement;

• Korea through individual grants of APRGs and preshipment loans provided prohibited
subsidies, inconsistent with Article 3.1 and 3.2 of the SCM Agreement;

• Korea, by providing subsidies to Daewoo- SME/Daewoo-HI, Samho-HI/Halla-HI, and
STX/Daedong through (i) workout plans and restructuring plans; (ii) tax concessions provided
to Daewoo-HI/Daewoo-SME; and (iii) the grant of KEXIM APRGs and pre-shipment loans,
has caused serious prejudice to the interests of the European Communities in violation of
Articles 5(c) and 6.3(c) of the SCM Agreement.

45. The European Communities considers that the above violations of the SCM Agreement have
nullified and impaired benefits accruing to it under the WTO Agreement and accordingly asks the
Panel to recommend that Korea withdraw these subsidies or remove the adverse effects of the
actionable subsidies in accordance with Articles 4.7 and 7.8 of the SCM Agreement.

ANNEX A-2

FIRST WRITTEN SUBMISSION OF KOREA

(9 February 2004)

I. OVERVIEW AND INITIAL MATTERS

1. Overview of the evidentiary deficiencies a nd legal omissions of the EC’s First Submission --
The European Communities (“EC”) has failed to establish a prima facie case with respect to its claims
that Korea has provided export subsidies prohibited under Part II of the Agreement on Subsidies and
Countervailing Measures (“SCM Agreement”), and acti onable subsidies inconsistent with Part III of
that Agreement. The EC has fundamentally misunderstood the requirements for meeting its burden of
proving its case with established and proven facts and has, instead relied on mere assertions without
proving the facts establishing such assertions.

2. Having refused to carry the burden of proving the facts it asserts, the EC then claims that
Korea, as respondent, has the burden of disproving the EC’s assertions, but must, however, prove all
facts it asserts in that process. This reflects a profound mis-reading of the Japan – Apples decision
which only drew a distinction between proving f acts and establishing claims. The Appellate Body
made clear the nature of the two step process of demonstrating a prima facie case and in no way
relieved complainants of the burden of proving the case with demonstrated and established facts as
required by the WTO treaty and general principles of international law.

3. Beyond mere assertions, the only “evidence” the EC provides in support of its claim
regarding prohibited subsidies comes from an improper use of the SCM Agreement’s Annex V
process which is explicitly limited to developing information regarding serious prejudice cases under
Part III thereof. The EC then goes on to attempt to improperly request that adverse inferences be
drawn against Korea for allegedly not providing certain evidence under Annex V pertaining to export
subsidies.

4. The EC’s first submission does not present ev idence or even address critical elements of
establishing that adverse effects, within the meani ng of Part III of the SCM Agreement, were caused
by alleged Korean subsidization. The EC fails to establish that there was even a financial contribution
in the context of the restructuring process that took place with respect to three Korean shipyards, i.e.,
Daewoo, Halla and Daedong. Financ ial contributions imply two partic ipants in any alleged transfer,
but the transactions identified by the EC do not meet these criteria. Moreover, the EC has not
identified any current recipients of any benefits that allegedly arose with respect to such transfers.
Finally, the EC’s allegations regarding restruct uring are based on a reading of the SCM Agreement
that would require that insolvent companies be term inated and exit the market. There is no basis in
the treaty for such a reading and its adoption an d the associated undermining of every Member’s
insolvency laws would wreak havoc on the world’s market economies.

5. The EC’s failure to identify the “like product” is a fatal flaw in any attempt by a complainant
to establish a prima facie case of serious prejudice under Part III. Having suggested using the tests for
determining “like products” derived in the jurisprudence of Article III of the GATT 1994, the EC then
failed to identify the like product based on arguments or evidence in accordance w ith such tests. The
identification of the “like product” is a basic elem ent of any trade effects-type determination with

which, as a matter of law, no countervailing duty in vestigation could be initiated under Part V of the
SCM Agreement.

6. The EC fails to identify, and a fortiori to prove, the existence the “serious prejudice” that it
has experienced either with respect to the industry(ies) producing the unidentified like product(s) or to
its broader interests. To the extent that it even identifies a standard, it attempts to use the lower
standard of material injury rather than serious prejudice.

7. The EC has failed to establish any causal link at all between the alleged subsidies themselves
and the asserted serious prejudice as is required by Article 6.3(c) of the SCM Agreement. It has
improperly attempted to rely on a link between the products and the alleged se rious prejudice. Even
then, the EC does not differentiate products made by Korean shipyards that did not undergo
restructuring.

8. Contrary to the requirement under Article 6. 3(c) of the SCM Agreement which provides that
causation has to be by reason of the effects of the subsidy itself, the EC fa ils to present any evidence
to establish that any alleged serious prejudice wa s not caused by factors other than the alleged
subsidies such as competition from shipyards in Japan or other countries or the effect of the closed
nature of the Japanese market which it acknowledg es. Moreover, the EC Commission’s Third Report
on World Shipbuilding identifies the decades of the EC’s heavy subsidization of its shipyards as a
factor in the lack of competitiveness of the EC ya rds. The EC also does not address other matters
such as the sharp appreciation of the Euro, and so forth.

9. The EC does not attempt to calculate the leve l of the alleged subsidization and rests with
throwing out some unsupported and unexplained number s with respect to the alleged restructuring
subsidies. It further claims the right to present some econometric or other studies should either the
Panel or Korea challenge its assertions. The EC mi sunderstands that this and other elements of
proving its case do not entail further rights for the EC, but, instead, are obligations that it has failed to
fulfil.

10. Article 13 of the Dispute Settlement Unders tanding (“DSU”) provides the Panel with certain
investigative powers but the Appellate Body has made it clear that there are limits on how these are to
be used. In Japan – Agricultural Products II , the Appellate Body stated that: “A panel is entitled to
seek information and advice from experts and from an y other relevant source it chooses, pursuant to
Article 13 of the DSU. . . to help it understand and evaluate the evidence submitted and arguments
made by the parties, but not to make the case for a complaining party.”
1

11. Preliminary Ruling Requests -- Korea has asked for certain cl arifications of issues left from
the Panel’s preliminary rulings. 2 Specifically, Korea has asked for clarification that the dispute is
actually limited to commercial vessels and that the onl y claim pursuant to Article 6.3 is with respect
to paragraph (c) of Article 6.3. Korea has also requested the Panel to rule that the dispute is limited to
Article 5(c) as there are no arguments or even menti on of Article 5(a) in the EC’s first submission.
Korea has also requested that the Panel rule that price undercutting un der Article 6.3(c) and 6.5 is no
longer included in the dispute as it is not addressed in the EC’s first submission.

12. Korea re-iterated its request that the Panel consider the question of the EC basing claims
under both Part II and Part III of the SCM Agreemen t on the same alleged export subsidies. Unlike
every other provision of the WTO agreement, Part III SCM disputes require a showing of adverse
effects. Thus, basing two separate claims under both Parts on the same subsidies can result in double-

1 Appellate Body report in Japan – Agricultural Products II at para. 129. (emphasis added)
2 Korea incorporated by reference its Preliminary Ruling Request as th ere were a number of issues in
the request that the Panel decided to defer until later.

counting. This could result in attributing prejudi ce to non-injurious actionable subsidies based on the
combined effect of such subsidies and export subsidies that have already been remedied elsewhere.

13. Korea asked the Panel to address the EC’s misl eading statements made to the Panel regarding
Korea’s preliminary ruling request as well as address the further evidence of abuse of the Annex V
process. Korea noted that the EC asked the fac ilitator on 8 August 2003 to gather evidence on all
products made by companies receiving KEXIM su pport as this purportedly was part of the EC’s
serious prejudice claims. On 5 September 2003 the EC told the Panel that it had “never” made any
serious prejudice claim beyond commercial vessels. This mis-statement was made in order to avoid
dismissal of the dispute for failure to identify the like products subject to the adverse effects claim.

14. Furthermore, the evidence submitted in the EC ’s first submission demonstrates that the EC
used the Annex V process improperly to gather ev idence to support an export subsidies claim that it
did not have any support for. This is confirmed by the EC’s request for adverse inferences on Part II
claims under Annex V even though Annex V is explicitly limited to serious prejudice issues. Korea
had raised concerns about the undue breadth of th e Annex V requests for information in a number of
respects, including concerns that the EC was using it with respect to its export subsidies claims. The
EC denied that it was using the process for anythi ng other than the adverse effects aspects of its
claims with respect to the alleged export subsidies. This has been revealed as incorrect by the EC’s
first submission.

15. In order to protect its rights as well as the in tegrity of the dispute settlement process, Korea
has asked the Panel to take appropriate steps in response to these abuses.

II. ALLEGATIONS OF PROHIBITED SUBSIDIES

16. The EC has alleged that the KEXIM Act and the Advanced Payment Refund Guarantee
(“APRG”) and pre-shipment loan programmes “as su ch” violate the provisions of Part II of the SCM
Agreement. In order to prove the claim, the EC must establish that the Act and the programmes on
their face are violations of the SCM Agreement. It is insufficient to argue that they may be interpreted
and applied in such a manner. To find that a mere possibility of applying a law in a manner
inconsistent with WTO obligations renders the law per se illegal would require all WTO Members to
undergo a massive vetting and amendi ng of all of their laws and regulations which would serious
undermine the sovereign rights of WTO Members. Aside from the practical impossibility of such a
course of action, it would be a major change in the jurisprudence of the GATT and WTO and not in
accord with the terms of the treaty.

17. The EC has failed even to properly identify wh at measure is involved in its claims that the
APRG and pre-shipments programmes are inconsistent with Part II of the SCM Agreement. These
are not measures with identifiable parameters that one can point to and state that there is compelled
action that could be inconsistent with the SC M Agreement. Rather, the two programmes are
applications of the KEXIM Act and KEXIM’s po licies which further require KEXIM to extend
financing facilities on a market-oriented basis. The re mainder of the dispute with respect to the EC’s
claims under Part II of the SCM Agreement illustrates that there can be no violation “as such”, for it is
a fact-intensive inquiry as to whether, for instan ce, a benefit has been provided by a government or
public body through government practi ce. Moreover, even if there was a prima facie violation of
Article 3 of the SCM Agreement, the availability of safe harbours under items (j) and (k) of Annex I,
the “Illustrative List”, would nonetheless apply in the present situation. Thus, there can be no
violation with respect to the KEXIM Act or the APRG and pre-shipment loan programmes as such.

18. KEXIM is not a part of the Government of Korea nor is it a “public body” for purposes of
Article 1 of the SCM Agreement. Mere government ownership is insufficient to prove that it is a
“public body”. To establish the point, the EC must demonstrate that KEXIM is acting in a regulatory

or tax role, or a function that is analogous. Th e KEXIM Act provides a direction and general policy
parameters within which KEXIM functions, but nothing more. The Government of Korea does not
intervene in KEXIM’s day-to-day operations. The facts are that KEXIM is required to act and has
acted in a commercial and market-based manner. It is required to generate and has generated profits
from its lending operations because credit is extended on a commercial basis.

19. The EC also has not demonstrated that there was a benefit provided to any of the shipbuilders
identified by the EC. The EC has proposed inappr opriate benchmarks as market rates ignoring
substantial differences in the terms of the KEXI M loans and guarantees and the proposed benchmarks
as regards factors such as collaterals, loan or gua rantee periods or the past performance of the
borrower or grantee.

20. The way in which the KEXIM premia and in terest rates were built up from a base rate
identified in the market plus spreads (also taking into account the creditworthiness of the borrower or
grantee) demonstrate that KEXIM was operating on ma rket principles in the APRG and pre-shipment
loan programmes. This is confirmed when comparing these premium and interest rates against the
closest comparable benchmarks in the market as was held by the Panel and Appellate Body in Canada
– Aircraft. Korea also notes that the EC has failed to demonstrate any current financial contribution
or benefit as is required by Article 1.1 of the SCM Agreement. The “evidence” offered by the EC
relates primarily to the period of the financial crisis during which period market benchmarks for
identical financing facilities were difficult to identify. In the more recent period, as financial markets
have stabilized, the re-emergen ce of identifiable market benc hmarks for identical facilities
demonstrates the market-based nature of KEXIM’s lending and guarantee programmes.

21. According to the Appellate Body, Item (k) of the Illustrative list in Annex I to the SCM
provides by a contrario reasoning that export credits supplied by governments that cover the
government’s cost of borrowing are provided a safe harbour from the provisions of Part II of the SCM
Agreement. Pre-shipment loans are made at ra tes higher than the government’s cost of borrowing
and, thus, are such measures as would fit within this safe harbour provision. By the same a contrario
reasoning, guarantees and programmes covered by item (j) would also be within a safe harbour if the
premiums charged were sufficient to cover th e long-term operating costs and losses of the
programmes. APRGs are such measures that woul d fit within the safe harbour because KEXIM has
always earned a profit on the programme.

II. Allegations of Actionable Subsidies

22. Restructuring
--The Government of Korea took actions pursuant to an agreement with the
IMF to support its financial sector during the Asian fi nancial crisis that began in 1997. According to
the IMF agreement, Korea would require banks in difficulty to re-order their lending according to
market principles. Korea was required to break do wn the interlocking system of financing that had
left it vulnerable when the financial contagion spread from other countries in the region. It was also
recognized that many commercial firms were insolv ent and would need to go through some sort of
insolvency procedure involving ch anges to their operational as well as their debt structures for the
purpose of rehabilitation.

23. The IMF required that these procedures be undertaken based on market principles and that
only firms that could demonstrate that there was a greater going concern value than a total liquidation
value would be restructured.

24. The EC has wrongly adopted the position that the only market-based solution is termination
of an enterprise and distribution of the assets. D espite efforts by the EC Commission to get the IMF
to agree with their position, the IMF has maintain ed the position that Korea based the restructuring
processes on market principles and successfully ca rried out their Agreement in this regard.

Commentators, including some writing articles for the World Bank, agree that Korea has pursued
economically efficient and transparent restructuring procedures.

25. The EC has not been able to demonstrate that the restructuring process resulted in subsidies
being provided to the three shipyards it has identified. First of all, the EC ha s failed to establish that
there was any government involvement in the rest ructuring process either through the government or
banks as public bodies. The EC has made numerous fact ual errors regarding the extent of the role of
government-owned banks. Moreover, the EC has faile d to establish that these banks were acting in a
governmental role. On the contrary, the evidence is that they were acting on normal market principles
and in their best self-interest to maximize the rec overy of their debts throughout the restructuring
process and, thus, acting in a manner fully consistent with any privately- owned bank.

26. Mere government ownership and broad policy parameters fo r lending activities do not render
a bank a public body. It is common for liquidity to be provided to financial systems in developing
countries through government-owned banks. It is not unfamiliar even in developed countries for
different types of lending institutions to have different charters by law that restrict their operations to
certain sectors. This is even more important in developing countries where expertise and capital may
be scarce. The EC must show more than mere government ownership and ge neral policy parameters
for operations. The EC does not and, instead, offe rs only assertions and alle gations unsupported by
facts.

27. Further, the EC has failed to show that the Government of Korea directed or entrusted any
private banks to provide “financial contributions” within the meaning of Article 1.1(a)(1), to the three
Korean shipbuilders. The actions by the Governme nt of Korea during the Asian financial crisis to
stabilize its overall financial market do not constitu te evidence of direction or entrustment with
respect to the three restructurings in question. These general actions aimed at averting a national
financial calamity cannot be consid ered as constituting the type and le vel of “explicit and affirmative
action of delegation or command” as found by the panel in US – Export Restraints. All of the private
financial institutions acted in their own commercial best interests to maximize the recovery of their
outstanding debts from the insolvent companies.

28. The EC has failed to demonstrate that th e measures upon which it bases its claims involved
“financial contributions” at all. In all of the instances of loans restructurings and debt-for-equity
swaps, there was only one party involved, namely the group of creditors, fo r the creditors became
shareholders of the new companies. It is inhere nt in the notion of a financial contribution that
something must be transferred from one entity to another. An entity cannot “contribute” something to
itself.

29. The Appellate Body has made it clear that it is also inherent in the notion of a financial
contribution providing a benefit that there be a recipi ent. In this case, the EC has not even identified
any such alleged recipients or addressed this issue. The Appellate Body has ruled twice
3 (at the EC’s
request) that recipients must be currently benefiti ng from the alleged financial contributions. The EC
has completely failed to identify any current beneficiaries of the alleged financial contributions.

30. Even if there were considered to be financial contributions and recipients, the EC has failed to
demonstrate how such persons benefited from such measures. As noted above, the EC’s primary
argument is that the market allegedly required that the firms in question be wound up and exit the
market. Such an extremist position is neither supported by the treaty text nor by logic.

31. In each of the three corporate restructuring instances identified by the EC, outside consultants
or the insolvency court -- working objectively and without any government influence -- determined

3 US – Lead and Bismuth II and US – Countervailing Measures on Certain EC Products.

that the three firms in question had positive going c oncern values, i.e., greater than their liquidation
and wind-up values.

32. With respect to Daewoo, a private workout was undertaken based on the so-called “London
Approach” developed in the United Kingdom during financial difficulties experienced there. The
London Approach was suggested in order to provide market-based parameters for workouts that could
be undertaken on a faster time frame than cour t-based procedures. Workouts were voluntary and
required the approval of a super-majority of creditors. With respect to Hall and Daedong, court-based
procedures were followed in which creditors still had a role in evaluating and voting on restructuring
packages with the Courts providing oversight and fina l approval. In all three cases, the shareholdings
of the original shareholders were largely or tota lly extinguished. The creditors took control of the
companies with ownership based on the seniority and quantity of the loans in question.

33. In one restructuring case, the EC offers a cont rary benchmark of a few foreign banks that had
minor debts in the restructured company, and attemp ts to claim that the restructuring was not done
according to market principles. These foreign banks were operating in a totally different set of
circumstances than the Korean banks and it is to be expected that banks with different perspectives
will negotiate somewhat differently. Furthermore, wh en the totality of the circumstances is looked at,
the results are essentially similar. In two court- supervised reorganization cases, the EC goes on to
offer an “outside investor/lender” standard; howev er, this cannot provide an appropriate benchmark
for commercial behaviour of the then current cred itors who had to collect their non-performing loans
from the insolvent companies for the sake of their own credit ratings and compliance with BIS
requirements. All of the restructurings took place pursuant to market-oriented terms where all
financial institutions which were th en creditors of the in solvent companies worked to maximize their
financial returns on their outstanding loans.

34. Alleged tax subsidies
 – The EC alleged that certain tax provisions that applied in the case of
the reorganization of Daewoo Heavy Industries (“ DHI”) constituted subsidies. However, the
evidence shows that DHI did not take advantage of some of the alleged provisions. With respect to
others, the EC has failed to show specificity. Th ese are generally available corporate tax provisions
that are found in most modern tax systems. Spin-offs involving no changes in ownership typically are
not taxable events. The EC has provided no eviden ce that the tax provisions in question are of the
type described in Article 1.1(a)(1)(ii) of the SCM Agreement.

35. Serious Prejudice
 -- The EC has failed to provide any evidence or argumentation with respect
to serious prejudice. The EC has attempted to use the injury standards from countervailing duty
investigations even though it is clear from the words and structure of Article 5 of the SCM Agreement
that there is a distinction. The EC has ignored th e Appellate Body’s findings to the effect the term
“serious” connotes a much higher degree of injury than “material”. 4 The EC draws conclusions from
Part V of the SCM Agreement as to what is required in a serious prejudice case. However, the EC
fails to understand that Part V merely provides guidance as to what must be included in the
assessment but that this is not sufficient to fi nd serious prejudice. The EC must go beyond the
elements required in a countervailing duty investiga tion to establish that there is serious prejudice
caused by the alleged subsidies.

36. Geographic Market and “Like Product” Definitions
 -- The EC has not properly defined the
geographic markets. The EC claims that there is a world market, but that is not consistent with the
requirements of Article 6.3(c) that Member state mark ets be identified. When the drafters wished to
consider world markets as appropriate, they made it explicit as in Article 6.3(d). Moreover, the EC
leaves unexplained the implications of its assertions el sewhere that the Japanese market is closed for
foreign-built vessels or market segmentation possibly caused by such factors as the US Jones Act.

4 See, Appellate Body Report in US – Lamb, paras. 124, et seq.

37. As noted above, the EC has not even identifie d the “like products” that it considers the subject
of the dispute. It refers in some places to a si ngle product “market” implying a single like product for
all commercial vessels. In other places, the EC offers three general categories of products. However,
even though the EC has itself suggested that th e jurisprudence of Article III of the GATT 1994 can
provide guidance, the EC does not offer any of the el ements of proof examined in such cases. There
is no discussion of comparative physical characteris tics. There are no discussions or market studies
offered regarding cross-elasticities of demand or other measures to demonstrate competitiveness of
products. There is no evidence of consumer preferen ces or end uses in the EC’s submission. The EC
offers no evidence as to whether it is appropriate to group small feeder container ships with large
post-Panamax container vessels. Nor does the EC of fer evidence as to whether there is a competitive
relationship or lack thereof between LNG tankers an d chemical tankers. The vague and empty nature
of the EC’s presentation in this regard is illust rated by the way it groups product tankers with
container ships in one place and then hops them into the same category as chemical tankers in
another. There is total silence as to whether there are common end uses, common physical
characteristics or any cross-elasticities of demand. The discussion of the case simply cannot proceed
without evidence and argumentation on this critical point from the complainant.

38. Without proof of like product categories, a national investigating authority would not be
permitted even to initiate a counter vailing duty investigation pursuant to the provisions of Part V of
the SM Agreement. It is even more important in a case such as the present dispute, where there is no
investigating authority, for the complaining party to carry its burden of proving a prima facie case. A
complainant must establish the basic elements of its case by the first stage of the process or the whole
proceeding itself threatens to become a mockery of due process. It is impossible for the respondent to
respond or the Panel to evaluate a case when basic elements of the complainant’s case are missing.

39. Condition of the Industry(ies)
 -- The EC has offered only the most cursory allegations
regarding the condition of its industry(ies). Ther e are some general allegations made, but no hard
evidence that its industry(ies) are suffering serious prejudice at all, much less serious prejudice caused
by alleged Korean subsidies. The EC’s shipbuild ing industry(ies) may be in perfect financial and
overall economic health. There is no evidence provided to the contrary. Indeed, to the extent there is
any evidence, it comes from Korea which has noted that the EC Commission has admitted in its Third
Report on World Shipbuilding that the decades of heavy subsidization provided by the EC Member
states to their shipbuilding industry(ies) have been counter-productive and have resulted in a lack of
normal adjustment to technological and market developments.

40. Causation
 -- The EC does not establish causation of serious prejudice by the alleged subsidies
themselves. The EC has attempted to rest its whole causation case on price depression in LNGs and
price suppression in other products. The EC has abandoned its assertions of price undercutting and
lost sales.

41. The EC has failed to establish that any pri ce suppression or depression that exists in any
product market(s) is “significant” as required by the treaty text. Price suppression allegations are
based on assertions regarding increases in freight ra tes, cost of production or demand. Not only does
the EC ignore other important factors that are presen t in the market such as efficiencies, changing
demand and technological changes but, in addition, it bases its claims on general factual data without
distinction by vessel type though market developments differed per type of vessel concerned. The EC
notes the effects of currency fluctuations and make s allegations based on the relative increase of the
Korean won. However, the EC i gnores the even more dramatic rise in the Euro both with respect to
the dollar and to the won.

42. The EC’s own shipbuilding expert has conc luded that EC and Korean vessels compete only
within two limited product segments, feeder contai ner vessels and small chemical tankers and has

affirmed clearly that in these segments, there is a significant presence of shipyards from other
shipbuilding nations which influence prices. Hence, it is impossible to attribute price depression and
suppression to all Korean ships indiscriminately or even to the Korean feeder container vessels or
small chemical tankers. The EC has ignored the reality of the shipbuilding market, namely that vessels
have increasingly become commodity-products with a corresponding decrease in prices starting from
the early 1990s well before any of the alleged corporate restructuring subsidies were being granted.

43. In asserting its causation allegations, the EC do es not differentiate between ships produced by
the three entities that emerged from restructuri ng and the ships produced by the other Korean
shipbuilders who did not undergo such processes. This is even more bizarre when the EC bases so
much reliance on cost calculations. The EC seems to be making some sort of back door antidumping
argument that Korean shipbuilders are selling below co st and therefore must be subsidized. The EC’s
evidence on the cost issue is deeply flawed and hi ghly artificial. It would be unpersuasive in an
antidumping case, but its role in a serious prejudice case is inexplicable. Moreover, this lack of
differentiation between the restructured yards and othe rs demonstrates the lack of value of such an
approach. If Korean yards are operating on the same cost basis, as implied by the EC, then it serves
as proof of lack of an effect of the alleged s ubsidies themselves if the unrestructured yards and
restructured yards are selling on the same basis. In deed, the instance of a lost sale alleged by the EC
was with respect to a yard that was not subject to restructuring.

44. Furthermore, the EC does not provide any calculations for the levels of subsidization. It
provides mere assertions at the end of its submissi on regarding the alleged restructuring subsidies but
does not offer any support for the alleged levels of subsidization that it asserts. Indeed, the underlying
calculations are not even provided so that neither Korea nor the Panel is able to see what elements
went into these asserted numbers. The EC complete ly fails to provide any calculation of the alleged
tax subsidies or the export subsidies. Without these calculations and full evidentiary support, the
EC’s case necessarily fails.

45. The EC claims a right to provide some sort of economic arguments at a later stage if any one
challenges its bald assertions. However, there is no right to be maintained in this regard; rather, it was
the EC’s obligation to prove its case with established fact s and sufficient arguments in its first
submission. Korea recalls that the Appellate Body h as specifically instructed panels that they are not
to make the complainant’s case for it.