Document: WT/DS273/R Page G-1 ANNEX G RESPONSES OF THE PARTIES TO QUESTIONS FOLLOWING THE SECOND MEETING AND COMMENTS THEREON Contents Page Annex G-1 Responses of the European  Communities to Questions from the Panel (2 July 2004) G-2
Date: 2 July 2004
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 G

RESPONSES OF THE PARTIES TO QUESTIONS FOLLOWING THE
SECOND MEETING AND COMMENTS THEREON

Contents Page
Annex G-1 Responses of the European Communities to Questions from the
Panel (2 July 2004)
G-2
Annex G-2 Comments of the European Communities on New Factual
Information Provided by Korea (9 July 2004)
G-44
Annex G-3 Responses of the European Communities to Supplemental
Questions from the Panel (16 July 2004)
G-62
Annex G-4 Responses and Comments of Korea to Questions from the
European Communities and from the Panel (2 July 2004)
G-73
Annex G-5 Responses of Korea to Supplemental Questions from the Panel
and Comments on the Supplemental Questions to the European
Communities (9 July 2004)
G-147
Annex G-6 Comments of Korea on the Responses by the European
Communities to Supplemental Questions (23 July 2004)
G-182

ANNEX G-1

RESPONSES OF THE EUROPEAN COMMUNITIES
TO QUESTIONS FROM THE PANEL

(2 July 2004)

I. TO THE EC

A. KEXIM LEGAL REGIME

Question 128

 Does a government necessarily provide a subs idy if it makes a financial contribution
outside the normal field of commercial behaviour? Assume a government creates a new special
finance mechanism that has never been offered by private banks. Assume that private banks
subsequently begin providing the same fina nce mechanism on the same terms as the
government initially offered. Assuming that the finance mechanism constitutes a financial
contribution, would the initial offer of that finance mechanism by the government confer a
benefit? Please explain.

Response

1. The European Communities not es that the question requires an assumption that the finance
mechanism constitutes a financial contribution.

2. In these circumstances, the European Communities believes th at the hypothetical measure
constitutes a subsidy since it is conferring a benefit in the form of a finance mechanism that is not
available on the market. Whether it is a prohibited or an actionable subsidy will of course depend on
whether it fulfils the other conditions for this in the agreement (and in particular specificity) and
whether any exception or exclusion is available.

3. Once private banks begin providing the same finance mechanism on the same terms as the
government, the benefit and hence the subsidy may well disappear. This does not however have any
retroactive effect and does not change the fact that a subsidy was provided initially.

Question 129

 The EC submits that KEXIM's website describes the PSL programme as designed “to
encourage the export of capital goods such as . . . ships . . . involving larger credits and longer
repayment terms than what suppliers or commercia l banks would provide.” Isn't this what any
development bank does? Do development banks necessarily provide subsidies? Please explain.

Response

4. It is not clear to the European Communities wh at the term “development bank” refers to.

5. The first comment that the European Communiti es would make is that the issue of special and
differential treatment of developing countries is not an issue in this case si nce Korea has not invoked,
and could not invoke, developing country treatment.

6. In any event, if a public body of a WTO Me mber that is a “development bank” engages in
export contingent lending at preferential rates, it w ill be providing export subsidies unless an
exemption or exclusion under the SCM Agreement or another covered agreement is available.

B. APRG/PSL

Question 130

 Please comment on Exhibit Korea-87, concerning country risk spreads.

Response

7. Korea submits Anjin’s Opinion on Country Risk Factor in determining APRG Premium Rate
(Exhibit Korea-87) to support its contention that “rates of APRGs issued by foreign banks must be
higher than those by domestic banks due to the application of country risk premium”.
1

8. The European Communities strongly disagrees with Korea’s argument and the opinion set out
in Exhibit Korea-87 . The European Communities submits in response Exhibit EC-148 with an
opinion from PriceWaterhouseCoopers which explains in detail that:

As a consequence, the risk of providing an APRG to a Korean company in a
foreign currency, as it is the case for most of the APRG’s, is the same regardless of
where the bank is based and thus the country risk of Korea needs to be taken into
account in the price:
- as an add-on to cover the transfer risk resulting from the company needing to
find foreign currency in the case where a government wants to keep the
“strong” foreign currencies;
- as an add-on resulting from the bank’s needs to obtain refinancing in the
foreign currency.2
9. Hence, there is no basis for rejecting th e APRG premium rates charged by foreign banks
(CITI and ABN AMRO) as market-benchmarks.

10. Korea did not even attempt to provide r ecalculations of the numerous EC APRG benefit
calculations. Indeed, even if Korea was right and 61 points (the “country risk premium” identified on
p. 5 of Exhibit Korea-87) could be deducted (quod non), the KEXIM rates are still significantly below
the foreign bank rates. This is illustrated in the tables below:

 [BCI: Omitted from public version.]

11.

12. In short, the benefit demonstrated by the European Communities in comparing KEXIM
APRG premiums to those charged by foreign ba nks and to those extended by domestic banks
3 remain
intact.

1 Oral statement by Korea at the second substantive meeting with the Panel, para. 80.
2 Report by PriceWaterhouseCoopers, June 2004 (Exhibit EC-148), para. 3.2 at p. 10.
3 First Written Submission by the European Communities, paras.170 to 173 and Oral statement by the
European Communities at the second substantive meeting, para.36.

Question 131

 Why, in its benefit calculations for KEXIM financing did the EC apply the S/M credit
rating to DSME for the entire period for wh ich calculations are presented, including in
particular the post-restructuring period? Is it the position of the EC that DSME remained
uncreditworthy even after the restructuring? Please explain.

Response

13. The European Communities has applied the cr edit ratings provided by the Korean credit
agencies.
4 [BCI: Omitted from public version.] 5 In line with its calculation methodology 6, the
European Communities, therefore, correctly applied the S/M rating for the entire period covered by its
calculations and has never claimed that DSME rema ined uncreditworthy after the completion of the
workout.

Question 132

 Please comment on Korea's assertion that the collateral offered in respect of certain
APRGs provided by foreign banks "covered only a sm all portion of the guarantee" (para. 81 of
Korea's oral statement at the second substantive meeting).

Response

14. At the outset, it should be noted that Ko rea nowhere substantia ted its assertion with
supporting evidence showing the precise amount of the cash collaterals. Instead, Korea gave shifting
indications as regards the percentage covered. Thus, in its first written submission, Korea stated that
NHIC and CITI extended APRGs in return for bank deposits amounting [BCI: Omitted from public
version].
7 In its Response to Question 14 raised by the EC, Korea stated that [BCI:. Omitted from
public version.] In its second written submission, Korea reduced the bank deposit required by NHIC
to [BCI: Omitted from public version] of the advance payments, again, without explaining the
factual change and providing any supporting evidence.

15. In any event, Korea’s assertion does not ad equately respond to the EC argument that cash
deposits offered as collaterals to foreign banks are stronger forms of collateral as compared to Yangdo
Dambo.
8

16. Therefore, the collateral value of the cash deposit must be considered to be at least equivalent
with the Yangdo Dambo unless Korea had provided detailed materials and assessments of the
respective value of the Yangdo Dambo. However, as Korea stated in response to Panel Questions,
KEXIM does not keep such materials.

Question 133

 At para. 105 of its second written submission , the EC states that only domestic banks
with "government association" provided APRGs to Samho. Regarding Figure 12 of the EC's
first written submission, is Chubb a domestic bank? If so, does it have a "government
association"? If there is such an association, what is its nature? Please explain.

4 Koreas Response to Annex V questions, attachment 1.1(24)-1 (Exhibit EC-30).
5 First written submission of Korea, para. 362.
6 (Exhibit EC-125).
7 First written submission of Korea, para. 207.
8 Price Waterhouse Coopers report on Pre-shipment loans and APRGs, p.15 (Exhibit EC-118).

Response

17. The statement in para. 105 of ou r second submission refers to the period before Samho’s
restructuring which was completed (according to Korea, on 27 October 1999
9).

18. Chubb was only referred to with respect to the period after Samho’s restructuring. The
evidence submitted by Korea 10 indicates that on at least four occasions APRGs were extended to
Samho by Chubb. The European Communities u nderstands that CHUBB is a global insurance
company with no government associations. The Eu ropean Communities compar ed the rates offered
by Chubb to those provided by KEXIM in its oral statement at the second substantive meeting and
demonstrated that KEXIM rates were 50 per cent lower than Chubb’s.11

Question 134

 In Exhibit EC-118, PWC asserts that "[t]h e KSDA Bond Matrix is the accepted mark-
to-market price for the domestic market". Does this mean that the EC disagrees with Korea's
argument that the bond matrix represents hypothet ical / projected rates, or does the EC accept
Korea's argument but consider that the inde x nevertheless constitutes a reliable market
benchmark? Please explain. What does "mar k-to-market" in this context mean? In
particular, who was marking what to which market?

Response

19. Yes, the European Communities disagrees w ith Korea. The KSDA Bond Matrix is not a
hypothetical or projected rated, but a reliable market benchmark to assess interest rates for loans.
“Mark-to-market” is “the act of assigning a value to a position held in a tradeable financial instrument
based on the current market price for that instrument”.
12 The KSDA bond matrix does this in the
following way :

Based on the definition provided by Bloomberg on KSDA Corporate Bond, “KSDA
collects daily pricing for each sector from 10 major investment banks for tenors
ranging from three months to five years. The indices are calculated daily and re-
balanced weekly. All such changes are upda ted weekly in the Index Constituents so
you can see the new underlying securities for e ach sector. Credit rating changes are
updated monthly by the KSDA. […] The KSDA Bond Matrix is the accepted mark-
to-market price[6] for the domestic market” .
13

20. In short, the KSDA bond matrix is the accepted ma rk to market price, i.e. that it reflects the
current market price of bonds, since bond prices and yields are updated daily based on data
collected from a wide number of representative local securities houses. As reconfirmed by
PriceWaterhouseCoopers:

This is therefore, the best representation of the yield required by investors at a
specific moment in time, on Korean oblig ations having a specific maturity and a
specific rating.
14

9 First written submission of Korea, para 422.
10 List of APRGs to Korean Shipyards (Attachments 1.2(31)-1-1.2(31)-8) (Exhibit EC-24).
11 Oral statement by the European Communities at the second substantive meeting, para. 36.
12 Report by PriceWaterhouseCoopers, June 2004 (Exhibit EC-148), footnote 6.
13 Report by PriceWaterhouseCoopers, June 2004 (Exhibit EC-148), para. 4.1., p. 11.
14 Report by PriceWaterhouseCoopers, June 2004 (Exhibit EC-148), para. 4.1.

21. Korea appears to argue that the KSDA bond matrix is “hypothetical and projected” in
comparison with interest rates of existing DHI ob ligations. However, as explained in detail before
15,
the corporate bonds actually issued by the yard s were not appropriate benchmarks as regards
corporate bonds (i) because they were guaranteed by a bank, (ii) were not issued in the same currency
or (iii) not issued at the same time as KEXIM’s PSLs. As regards other sources of financing, they
were not considered as an appropriate benchmar k since their rate may depend on the particular
relationship between the bank and the debtor.

Question 135

 Korea criticizes the EC for having used in it s benefit calculations the 1-year bond price
index instead of the 6-month index. Why was the 1-year index used? What is the effect on the
EC's calculations of using the 6-month index?

Response

22. The European Communities used the 1-year bond price index because it was not aware of the
existence of the latter (the KSDA website is in Korean language). The 1-year bond price index was
therefore the closest benchmark available to the European Communities, which was then duly
adjusted by subtracting the spread between Korean Treasury Bonds 6 months /12 months as provided
by Bloomberg and suggested by the Consultant
16 in order account for the difference in duration.

23. As is explained in more detail in our response to Panel Question 136, the European
Communities has recalculated the benefit using the 6-months index ( Attachment EC–10). The re-
calculation demonstrates that the difference between the adjusted 1-year bond price index and the
6 months index is negligible and still results in a benefit.

Question 136

 At para. 95 of its oral statement, Korea presents a number of points criticizing the EC
calculation methodology, and states that further details are contained in Exhibits Korea 90-102.
Please respond to Korea's criticism in detail, in cluding with reference to the content of these
exhibits.

Response

24. Korea provides five general criticis ms of the EC calculation methodology.17 These are further
explained in two exhibits. 18 Korea then provides a “Corrigendum” to the EC calculation of benefit
from pre-shipment loans for each of the seven shipyards concerned.19

25. The European Communities will first address Ko rea’s general criticisms (Section 1). That
section explains (supported by a Report from PriceW aterhouseCoopers) why three of these criticisms
(misapplication of DHI/DSME credit rating, failure to consider Samho’s collaterals and other factors
mitigating Kexim’s risks) must be rejected by the Panel. The European Communities will then
provide a re-calculation (Attachment EC-10) taking account of

15 Second written submission by the European Communities, paras. 122 and 123.
16 Price Waterhouse Coopers report on Pre-shipment loans and APRGs, (Exhibit EC-118), p.15.
17 Oral statement by Korea at the second substantive meeting with the Panel, para. 95.
18 Oral statement by Korea at the second substantive meeting with the Panel, (Exhibits Korea 90-91).
19 Oral statement by Korea at the second substantive meeting with the Panel, (Exhibits Korea – 94-
100).

 ¾ the new information on KSDA 6-month bond yield rates;

 ¾ the new value of Yangdo Dambo for yard s with investment grade ratings (above
BBB-);

 ¾ a number of unavoidable calculation mistakes or otherwise clerical errors pointed to
by Korea in its Corrigendums (Section 2).

26. Section 3 then further comments on Korea’ s corrigendum and notes that even under Korea’s
calculation there is benefit.

1. EC Response to Korea ’s General Criticisms

27. This Section responds to Ko rea’s general criticisms that:

 ¾ Credit ratings of corporate bonds assigned by other credit agencies to shipyards are
not comparable to the Kexim’s credit ratings;

 ¾ The European Communities should ha ve used KSDA 6-months rates;

 ¾ The European Communities mi sapplied the Yangdo Dambo;

 ¾ The European Communities misapplied the credit rating for DHI/DSME;

 ¾ The European Communities failed to adjust Samho’s PSL for 100 per cent physical
collateral;

 ¾ The European Communities failed to consider the fair value of the other relevant
factors that have substantial security value

(a) Credit ratings of corporate bonds assigne d by other credit agencies to shipyards are
comparable to the Kexim’s credit ratings

28. Korea states that the corporate bond rating and the KEXIM credit ratings are not directly
comparable because:

 ¾ the levels of underlying credit risk with in credit rating by KEXIM and corporate bond
rating agencies are different and;

 ¾ factors for grading are not alike.

29. The European Communities contests these arguments.

30. One of Korea’s main arguments for saying th at the levels of underlying credit risk within
credit ratings by KEXIM and corporate bond ra ting agencies are different is according to Exhibit
Korea – 91 that

corporate bond rating [the rating of a bond i ssued by a company] in Korea could
actually be considered same with issuer” [the rating of the company issuing the bond]
whereas KEXIM ratings were taking into acc ount all the characteristics of the credit
facility.
20

20 Korea Exhibit – 91, para . 2 a).

31. As explained in our Second written submissi on and reconfirmed by PriceWaterhouseCoopers,

Most if not all of the DSME bonds issu ed between 1997 and 1999 had either bonds
collateral or bank and/or company guarantees. Therefore, the ratings of these bonds
CANNOT be considered the same as the rating of DSME . The rating of the bonds
reflects the collateral of the bond emissi ons just as KEXIM ratings reflect the
collateral of the loans granted.
21
32. With respect to Korea’s argument looking at the performance of US privately placed bonds
versus public bonds22, and considering that “default rate for a bank credit rating is lower than for the
corresponding corporate bond rating”, the European Communities notes:

33.
 that credit exposure from investment grade and BB rated private placement loans are
comparable to credit exposure of public debt with the same rating. It also appears that
when discussion arises on specific rating, the more pessimistic one is usually the
one with the highest predictive power . Consequently, the correlation between
corporate bond ratings and KEXIM ratings, should exist at least for ratings better than
or equal to BB (as shown by (Exhibit Korea – 93).
23
34. Also Korea’s argument regarding the specific co llateral(s) and structure(s) of the loans that
are supposed to be taken into account in the KEXIM rating and not in the CB rating 24 fails. The basic
principle behind a rating is:

A rating is issued to assess an exposure risk in terms of the repayment capacity of the
obligor and will in the case of bond rati ngs (issue rating) take into account the
existence of all possible collateral. As a result, a private loan and a bond having the
same ratings will present the same obligor repayment capacity and the same credit
exposure risk. Both should therefore be remunerated with the same interest rate.
25
35. Korea argues in Exhibit Korea - 91 that factors for grading are not alike. Specifically, Korea
alleges:

Banks generally employ so-called 'point in time' approach, under which the time
period for validity of a risk assessment is ge nerally one-year period from the date of
assessment" and that "KEXIM is using this approach to evaluate the borrower's
'current' conditions" whereas Moody's a nd Standards & Poors (S&P) are rating
corporate bonds based on through cycle appr oach and are looking at the worst case
scenario.
26
36. This is wrong. As explained in furthe r detail in the Report by PriceWaterhouseCoopers:

Nowhere in the definition of the rating [as reported by S&P] is mentioned that this
rating is based on the worst-case scenario. It is based on the creditworthiness of the
obligor and on the guarantees. Second, when determining a rating to set an interest
rate on a loan, we suppose KEXIM looks at mo re than just the "current situation". If

21 Report by PriceWaterhouseCoopers, June 2004 (Exhibit EC-148), para 2.1.1 p. 4
22 Exhibit Korea – 91, para. 2 c).
23 Report by PriceWaterhouseCoopers, June 2004 para. 2.1.1, p. 5 (Exhibit EC-148).
24 Exhibit Korea 91, para. 2a), b) and e).
25 Report by PriceWaterhouseCoopers, June 2004, para 2.1.1, p.5 (Exhibit EC-148)
26 Exhibit Korea-91, para. 3, d).

this were not the case, KEXIM wouldn’t have carried on providing loans to
DSME when it was bankrupt... And if KEXIM looks at more than the "current
situation" when a company is close to bankr uptcy, we would expect that it also looks
at the future when the company is presen ting good results (just in case...). Would it
not be the case, this would mean that the interest rate quoted on the loan does not
reflect all the future risks of the loan and as such, would not represent a "normal"
market rate.27
37. Moreover, the fact that there are differences between rating practices by banks does not mean
that the ratings cannot be reconciled. PriceWaterhouseCoopers analyses and concludes:

Where there is disagreement, the more p essimistic rating appears to have more
predictive power for incidence rates, suggesti ng that investors be attentive to ratings
assigned by others even when they disagree with such ratings.28
38. Finally, even using the data provided by Korea in Exhibit Korea-92 – Table 1, and the
spreads provided by independent credit rating ag encies, PriceWaterhouseCoopers, confirms that
KEXIM’s P5 rating is comparable to a “BBB”, i.e., investment rating.29 KEXIM’s use of “P5” credit
ratings (and interest rates) for DSME where inde pendent credit rating agencies assigned a rating of
amounts to a benefit because it disregarded the actual cr edit risk of the company. The interest rates
did not reflect commercial market rates.

(b) KSDA corporate bond yield rates: 1 year versus 6 months

39. The European Communities has explained in its response to Panel Question 135 why it was
not aware of the existence of KSDA 6-months i ndex and that it used in good faith the 1-year bond
price while properly adjusting it. However, as demonstrated in the recalculation in Attachment EC-
10, the use of the 6-months corporate bond yield rates does not lead to significantly different results.

(c) Misapplication of the Yangdo Dambo

40. Korea argues that the European Commun ities misapplied the value of the Yangdo Dambo.
30
The European Communities notes that this argument only applies to yards with “investment grades”
above BBB- and that Korea has to date not provided the actual adjustments granted by KEXIM for the
collateral in each case and supported this with ev idence. Instead, Korea relies on values for the
collaterals as provided by in KEXIM’s interest rate guidelines. 31

41. In consequence the benefit calculated for DSME and Samho is not affected since their ratings
were below BBB-. As demonstrated in Attachment EC-10 , even when adjusting its findings, the
European Communities is still in a position to show benefit.

(d) No misapplication of the credit rating for DHI/DSME

42. Korea continues to deny that a corporate bond rating of “C” is the equivalent of KEXIM’s
credit rating “SM”
32 and presents in Exhibit Korea-92 CB ratings and KEXIM’s Credit rating for
shipyards. This is untenable. KEXIM is free to use its own credit rating system. However, as

27 Report by PriceWaterhouseCoopers, June 2004, para. 2.1.2, p. 6 (Exhibit EC-148).
28 Report by PriceWaterhouseCoopers, June 2004, para. 2.1.2, p. 6 (Exhibit EC-148).
29 Report by PriceWaterhouseCoopers, June 2004 para., 2.2, p. 7 (Exhibit EC-148).
30 Exhibit Korea-90, para IV.
31 Korea’s Responses to Annex V questions, attachment 1.1(15).
32 Korea’s Responses to Annex V questions, attachment 1.1(15)

explained above and confirmed by PriceWaterhous eCoopers, each bank would take account of credit
ratings provided otherwise on the market.

43. Korea Information Service is an independent body providing a C rating on some specific
debt. KEXIM’s rating of the shipyard should therefore have been worse than or equal to the rating of
the bond (the latter being potentially covered by guarantees or collateral). On that basis,
PriceWaterhouseCoopers concluded:

We would therefore expect the rating of th e shipyard to be SM or worse, based on
Table 1 (from Exhibit Korea–93 ) and this until November 2001 (see Exhibit
Korea 92).
33
44. KEXIM did therefore not correctly assess the creditworthiness of DSME. While Korea
Information service, an independent body provided a “C” rating equivalent to a KEXIM “SM
rating”, KEXIM provides loans provides under the P5 rating conditions. As explained and
reconfirmed by PriceWaterhouseCoopers
34 according to the rating definition comparison, these are
equivalent of a BBB (investment grade) rating.

45. The European Communities, therefore, mainta ins that it correctly applied the “C” rating to
DSME as provided by the agencies, i.e. a “SM” rating in Kexim’s own credit rating.

46. Korea cannot explain this glaring disregard of market conditions by pointing to the fact that
KEXIM actively monitors the lenders.
35 As to the monitoring, in particular, of collaterals, KEXIM
itself admitted that it does not even keep supportin g documents and assessmen ts of the collaterals
which are essential for a monitoring.36

47. Korea also referred at the oral hearing to the “special relationship” between KEXIM and its
creditors. That relationship is the core of the EC complaint against KEXIM. The special relationship
between KEXIM and its clients (exporting industry) is laid down by the KEXIM statute itself.
Because Korea’s shipbuilding industry is more than 90 per cent export oriented, KEXIM has
repeatedly identified the shipbuilding industry as its particular target. Thus, KEXIM stated, for
example in its Operations Programme for 1999:

In order to effectively overcome the As ian Economic Crisis [it shall] support the
export of capital goods such as ships, indus trial plant, machinery which creates high
net export earnings and industrial backward-forward effect.
37
48. Similar language was still found in the 2002 Operating Programme.38

(e) No failure to adjust Samho’s PSL for the 100 per cent physical collateral

49. Korea never provided substantiated evidence of the existence and monitoring of collaterals
and replied to the Panel
39 that it is not “Kexim’s policy to keep and maintain any worksheet or similar
documents” necessary for the consideration of collatera ls. There is, therefore, no justified reason to
consider “real property” as covering 100 per cent of the risk. On the basi s of best information

33 Report by PriceWaterhouseCoopers, June 2004, (Exhibit EC-148), para 2.2.
34 Report by PriceWaterhouseCoopers, June 2004 (Exhibit EC-148), para. 2.2.
35 Exhibit Korea-91 section e) and Second written submission by Korea, para. 56.
36 Korea’s Response to Panel Question 67 at the second substantive meeting.
37 Responses to Annex V Questions (BCI) Attachment 1.1 (10), (Exhibit EC-58), p. 3.
38 Ibid.
39 See Reply by Korea to Panel question 72 following the first substantive meeting.

available, the European Communities applied the sa me rule as for the Yangdo Dambo adjustment, i.e.
a 50 per cent of the credit risk spread.

50. Moreover, Korea’s criticism does not relate to the following two transactions showing
benefit:

 [BCI: Omitted from public version.]

(f) No failure to consider the fair value of the ot her relevant factors that have substantial security
value

51. Korea argues that the PSL payment process allows Kexim to continuously monitor and
review the financial conditions of shipyards wh ereas the bond holders cannot have such opportunity
and this should mitigate Kexim's risks. This argumen t is to a certain extent valid but only if Kexim
effectively adjusts the credit spr ead following the downgrading of a shipyard financial situation.
However, this is not the case as already demonstr ated in EC first written submission (para 181) where
Kexim's Daewoo-SMI/Daewoo-HI risk spread did not change when the credit rating changed from
BB+ before the workout to C after the workout (for transactions with similar collaterals and duration).
Furthermore, even if Kexim was really monitoring and managing
 this situation, the impact on the
credit spread at issuance of the credit would be very limited.

52. In addition, Korea argues that by virtue of the disbursement mechanism for PSL, Korea can
promptly stop disbursing additional instalment s and recover the outstanding loans by disposing
collaterals and this should mitigate Kexim's risks. Tw o things should be noted here. First, the EC has
no evidence that Kexim has ever stopped disbursing a dditional instalments when the credit situations
degraded. Second, Kexim’s credit spreads already t ook into account the existence of collaterals by
adjusting downward the credit spread (without colla teral); consequently, there is no reason why the
above disbursement mechanism for PSL should fu rther mitigate Kexim’s risk. Furthermore, the
argument itself is flawed. In the case of Yangdo Dambo, the collateral is supposed to increase in value
as the total amount disbursed increases. The cove rage is supposed to in crease in line with the
exposure. Stopping the disbursement will not increas e the value of what will be recovered, just the
opposite as the ship will not be finished and will be more difficult to sell.

53. Korea argues that the EC failed to consider the collateral value of joint and several personal
liability guarantees. Contrary to what Korea says the EC has never considered that the collateral value
of joint and several personal liability guarantees was worth nothing. On the contrary, and according to
PWC’s report
40 the EC considers that joint and several personal liability guarantees may have a
certain value but should be carefully assessed as de pending on the credit quality of the individual.
This is why the value may vary from 0 to 8 (with 10 e qual to the best collateral) similarly to the value
of a Yangdo Dambo (value from 0 to 7). Needless to add that if the credit quality of the individual is
poor or if the collateral is not carefully assessed, th e collateral may be worth 0. In addition, as Korea
confirms in exhibit Korea -90 that “Although KEXIM treated these personal guarantees as if no
collateral were provided, it was only due to Kexim’ s policy of evaluating security interests in most
conservative manner”. In consequence, provided that Kexim itself treat these collaterals as if no
collateral were provided and that Korea never provided any material evidence on the assessment of
collaterals, the EC has no reason to consider that Kexim’s’ risk should be mitigated.

54. Again the EC would like to add that Korea critics the collaterals valuation done by the EC
without being in a position to give details on Kexim’s’ own calculations or provide material evidence.

40 Price Waterhouse Coppers report on pre-shipment loans and APRGs, p.15 and 16, (Exhibit EC-
118).

2. Recalculation taking account of Korea’s criticisms

55. The European Communities submits as Attachme nt EC-10 a recalculation of the PSL benefits
taking account of the 6-months KSDA bond yield rates and the new application of the Yangdo Dambo
value for yards with investment grade ratings. The recalculation also mends numerous minor errors
detected by Korea in its Corrigendum
41 unless they are moot.42

56. These calculations reveal an important benefit.

3. Further note on Korea’s corrigendum

57. Finally, the European Communities takes issue with Korea’s assertion at para. 96 of its oral
statement at the second substantive meeting that the evidence demonstrates that

if these corrections are made, none of the seven Korea yards will be found to have
received benefits from the KEXIM pre-shipment loans even under the EC’s own
methodology. According to Korea’s calcula tions, the alleged benefit margins for all
of the pre-shipment loan projects enumerated by the EC turn out to be negative or, at
best, negligible ranging at far less than 1 per cent.
43
58. What Korea describes as “benef it margins” is the actual difference between the interest rates
and it implies that anything less than 1 per cent is neg ligible. First, it should be noted that contrary to
what Korea alleges, there are nu merous instances of benefit ev en under Korea’s calculations and
definition of “benefit margin” up to 2.61 per cent. 44 However, the European Communities considers
that benefit is better appreciated when the differen ce is expressed as a proportion of the actual spread
applied by KEXIM and not as such. The Europ ean Communities notes that even under Korea’s own
calculations (which it contests), there are numero us instances, where the difference between the
market benchmark and the KEXIM rate is more than 30 per cent when expressed as a proportion to
the KEXIM actual spread rate.45

Question 137

 Korea submitted evidence (in response to Question 74 from the Panel) that KEXIM
reduced the credit risk spread for HHI to [BCI: Omitted from public version]. Did the EC
apply this [BCI: Omitted from public version] cred it risk spread in the relevant part of its PSL
analysis? Please refer to the relevant calculations where this adjustment was made.

Response

59. Yes, the EC applied the re duced credit spread for HHI of [BCI: Omitted from public
version].46

41 [BCI: Omitted from public version.]
42 Moot errors concern all errors concerning the yiel ds for corporate bonds 1 year since the adjusted
benchmark is yields for corporate bonds 6 months. Korea exhibit 94 for Hanjin in which (CB1Y,BBB+) yield
on 19/07/2001 is 7.24 per cent and not 7.76 per cent or Korea exhibit 95 for HHI in which (CB1Y,A-) yield on
12/12/2002 is 5.69 per cent and not 5.91 per cent.
43 Oral statement by Korea at the second substantive meeting with the Panel, para. 96.
44 [BCI: Omitted from public version.]
45 [BCI: Omitted from public version.]
46 Table concerning HHI pre-shipment loans project number 000107P (Exhibit EC-125).

Question 138

 The EC does not appear to have answered Questions 9 and 11 from the Panel. The EC's
replies referred the Panel to the EC's reply to Question 8. That reply, however, focuses on
Kexim’s "practice" of providing APRGs and PSLs, without identifying the APRG and PSL
programmes "as such", and without explaining how (if at all) they differ from the KEXIM legal
regime "as such". Please provide full answers to Questions 9 and 11.

Response

60. In Questions 9 and 11, the Panel asked how the EC’s claims against the APRG programme
and PSL programme as such differ from its claims against the KEXIM legal regime as such,
specifically whether the APRG programme is not based on the KEXIM legal regime and whether it is
conceivable to assess them differently from each other.

61. The European Communities agrees that a lthough the KEXIM legal regime and the two
programmes are distinguishable they are also linked.

62. The two export credit programmes and the bene fits they provide are a consequence of the
KEXIM legal regime and its requirement to promote exports and to lend below cost if necessary.

63. The state guarantee, dispensation from paying dividends and the requirement to promote
exports confer a benefit as such to exporters b ecause they specifically envisage the provision by
KEXIM of financial services under conditions not offe red by the market. The existence of such a
bank is a benefit as it provides economic stability or a safety valve to exporters.

64. However, these financial services do not neces sarily need to be the APRG and pre-shipment
loan programmes. KEXIM could provide export assistan ce to exporters in another form. It is in this
sense that the KEXIM legal regime is a separate violation from the two programmes.

65. The individual export subsidy transactions are similarly a consequence of the existence of the
programmes (and thus of the KEXIM legal regime ) but are nonetheless separate, even if linked,
violations.

Question 139

 The Panel refers to Attachment 5 to the EC 's replies to the Panel's questions after the
first substantive meeting, which contains transaction-specific alleged benefit calculations for one
PSL and one APRG. Please make the same calculation for each of the APRGs and PSLs at issue
in these proceedings. In other words, for each shipyard, specify which APRG / PSL relates to
either LNG, product / chemical tankers, or cont ainer ships, and specify the amount of the
alleged benefit as a % of the ship price. Please attach detailed worksheets.

Response

66. In Attachment EC 5 to the Replies by the European Co mmunities to the Panel’s questions
after the first substantive meeting, the European Communities produced a calculation of the impact of
an APRG and a pre-shipment loan in two transact ions. These calculations were based on the best
information available to the European Commun ities (ship price, PSL ceiling, commitment date,
payment terms, expiry date, base rate and spread applied) from which it reconstructed the amount of
the advance payments.

67. Korea criticised these calculations for not taking account of certain additional features of
these financing transactions.
47 Korea provided in Attachment Korea-4 to its second written
submission, a recalculation of the impacts of these transactions, including for the first time
information about disbursement date and amount.

68. However, Korea never provided the following information for all pre-shipment loans and
APRGs:

69. dates and amounts of disbursements under th e pre-shipment loan and exact dates and
amounts of advance payments benefiting from the APRG or at least ship prices and
payment terms;
70. completion date (repayment of pre-shipment loan and end of APRG).

71. Since for most transactions, the information on the record is not sufficient to even reasonably
reconstruct the amounts of the advance payments, th e EC could only make the requested calculations
for a limited number of transactions. The Europ ean Communities provides these re-calculations in
Attachments EC – 11 and 12. However, it remains the understa nding of the European Communities
that there is no obligation or otherwise need to qua ntify the amount of subsidies, in particular under
the export subsidy claims.

Question 140

 Please comment on Korea's argument that KEXIM PSLs are made "at rates far higher
than those the government has to pay for the funds so employed" (para. 277, Korea's first
written submission).

Response

72. This statement by Korea implicitly admits that Kexim’s loans are made from government
funds.

73. The fact that they are made at rates higher than those the government has to pay for the funds
(assuming it to be true) does not demonstrate that th ere is no subsidy. There are costs involved in
making pre-shipment loans – administrative costs a nd in particular the costs implicit in the risks
undertaken.

74. In any event, Korea made the above assertion to invoke the first paragraph of item (k) of the
SCM Agreement as a safe haven. Yet, PSL’s do not fall under the term “export credits” in item (k)
and the first paragraph of item (k) is not open to an a contrario reading as its second paragraph
explicitly sets forth a safe haven.

C. ALLEGED ACTIONABLE SUBSIDIES

Question 141

 Para. 215 of the EC's first written submi ssion states that "Daewoo" benefited from a
236 bn tax exemption alleged to be a subsidy. Para. 226 then refers to alleged benefit to
"Daewoo-SME". Para. 232, however, refers to benefit to "Daewoo-HI/D aewoo-SME". Please
indicate precisely which legal entity received / benefited from the alleged tax concession.

47 Second written submission by Korea, para. 283.

Response

75. Pursuant to the available evidence, the EC understands that the new tax provisions at issue
“exempt[ed] a workout company from taxes related to corporate splitting.”
48 Furthermore, Korea has
confirmed that these provisions exempted the spun- off companies from taxes that they otherwise
would have been required to pay. 49 Thus, the benefit of the tax concession was received by the two
spun-off companies -- Daewoo-SME and Daewoo-HIM.

76. Please note that the paragraphs mentioned in the Panel’s question refer to the EC’s second
written submission, not the first written submission as indicated.

Question 142

 In percentage terms, how much of the alle ged benefit resulting form the "Daewoo" tax
concession should be attributed to DSME's production of (i) LNGs, (ii) product / chemical
tankers, and (iii) container ships? Please attached detailed worksheets.

Response

77. As the tax concession subsidy to Daewoo-SME w as not tied to any particular ship type, it
should be allocated over Daewoo-SME’s overall sales.

78. In Attachment-13
50, the EC has re-quantified the subsidies received by Daewoo-SME by
taking into account the tax subsidy, which was be fore erroneously omitted (in Attachment 1 to the
EC’s response to the Panel questions of 22 March 2004).

Question 143

 Is it the EC's argument that the tax exemption was determinative in the decision to
maintain Daewoo's shipbuilding operations as a going concern, rather than liquidating them?
If so, where is this reflected in the Arthur Andersen/Anjin report or in other documentation
before the Panel?

Response

79. In any restructuring review, the tax imp act should be carefully assessed. However, as
confirmed by PriceWaterhouseCoopers
51, the Arthur Andersen Daewoo-HI workout report made no
reference to the fiscal effects of the restructuring. The report should have calculated the tax to be paid
following the spin-off without the exemption b ecause the report was issued in November 1999 52,
eleven months before the tax exemption was approved. 53 If the report had properly calculated the tax
consequences of the restructuring, it would have reduced Daewoo-HI’s going concern value by KRW
236 billion, which is the amount that spin-off compan ies would have owed but for the tax exemption,
according to Daewoo officials.54

48 See Exhibits EC-137 & EC-138.
49 Oral statement by Korea of 17 June 2004, paras. 206-208.
50 Quantification of Subsidies to Daewoo, Including Tax Concession (Attachment EC-13).
51 PriceWaterhouseCoopers June 2004 Report, at Chapter 5 (“Tax Impact on DSME Restructuring”)
(Exhibit EC-148).
52 Second Written Submission by the European Communities, para. 197.
53 Second Written Submission by the European Communities, para. 221.
54 Second Written Submission by the European Communities, para. 223.

80. The EC maintains that the tax exemption w as a determinative factor in the decision to
maintain Daewoo's shipbuilding operations as a going c oncern, rather than liquidating them. Without
the exemption, Daewoo’s value as a going concern w ould have been dramatically reduced. The EC
also notes that a prudent creditor would have take n into account the tax consequences in making its
decision whether to opt for liquidation or restructuring. If the tax exemption were in preparation but
not yet approved, prudent creditors would have taken into account the risk that the law would not pass
or at least would not pass expeditiously.

Question 144

 Para. 162 of Korea's second oral statement re fers to creditors rejecting the initial DHI
workout proposal. Were such creditors included in the EC's claim of government entrustment
or direction? If they were entrusted or directed by GOK, why / how did they reject the initial
workout proposal?

Response

81. Korea's second oral statement refers to an article from Seoul Economic Daily News, but this
article does not identify the group of creditors that allegedly objected to Daewoo-HI’s workout.
55 In
fact, Daewoo-HI’s workout is referred to only once in the article (p. 2, 3 rd paragraph), without
providing any specific information. The reference to investment trust companies relates to the
restructuring of Daewoo Electronics Co Ltd (p. 1, para. 3). The EC does not, therefore, believe that
the article supports Korea’s contention.

82. Korea explained in its first written submission, however, that objections by the investment
trust companies at the third meeting of the Council of Creditor Financial Institutions (CCFI) related to
the treatment of a specific loan from 19 July 1999.
56 Indeed, these objection were not linked to the
more general issue of whether or not to save Daewoo-HI from liquidation, as this issue was pre-
determined by the Government’s entrustment/direction of the financial institutions.

83. In other words, the general plan to restruct ure Daewoo-HI had been agreed to at the third
CCFI meeting, and the objections at issue related onl y to specific details that were sorted out at the
fourth CCFI meeting. This was confirmed by Korea in its reply to the EC during the TBR
investigation.
57

84. As detailed herein, KAMCO eventually purchased the 19 July loan at a rate [BCI: Omitted
from public version] that was not justified by the circumstances (i.e . non-secured Daewoo-HI loans
were otherwise purchased at [BCI: Omitted from public version].
58 In this way, the Government of
Korea, KAMCO, and the private creditors worked together to agree on the details of a plan that would
ultimately save Daewoo-HI from liquidation, regardless of market considerations.

85. In fact, financial institutions were origina lly directed/entrusted by the GOK to provide the
19 July loan at issue. The World Bank reported as follows:

When the Daewoo group faced a sever e liquidity problem last summer, the
government put strong pressure on domestic financial institutions to purchase
4 trillion Won of Daewoo CP, backed by collateral worth 10 trillion Won. With
falling securities prices, the value of collateral has dropped to one trillion Won.

55 See Exhibit Korea-104.
56 First written submission by Korea, para. 351.
57 See Daewoo-SME’s February 2001 Response to the Questionnaire intended for the
Exporter/Producer for Investigation under the Trade Barrier Regulation, (Exhibit-EC 55), at p. 29.
58 See reply to question 30 of Korea's Annex V main response at page 80 (Exhibit-EC 39).

KAMCO has offered to pay domestic financ ial institutions 80 per cent of the face
value of the CP, but the financial in stitutions strongly oppose the 20 per cent
discount. Because of their weak financia l conditions, many of the financial
institutions are not in a position to absorb these additional losses and would require
government help. (emphasis added)59
86. [BCI: Omitted from public version.] 60 Thus, investment trusts were directed/entrusted to
provide a loan on the basis of security of questionable value. When the investment trusts realised that
the security was reduced to a quarter of the original value and that the loan became unsecured, they
raised a specific objection at the third CCFI meeting. [BCI: Omitted from public version.]

87. In particular, Korea confirmed 61 that at the 4th CCFI meeting held on 26 November 1999 (NB:
merely 2 days after the 3rd CCFI meeting), the investment trusts

[BCI: Omitted from public version.]62
88. Consequently, the loan was purchased by KAMCO at [BCI: Omitted from public version]
its face value, just as would a fully secured loan. 63 Interestingly, following KAMCO’s purchase of
the loan from investment trusts 64, its fate changed once more and it was eventually (1 year later at the
17th CCFI meeting of 6 December 2000) swapped as non-secured.65

Question 145

 The EC requests an adverse inference regarding Korea's alleged failure to provide a
copy of the workout plan / report submitted by KDB on 24 November 1999. Please comment on
the explanation set forth at paras 194 and 195 of Korea's second oral statement. If the EC still
maintains its request, what is the legal basis for that request? Why does the EC consider that
Korea should have made this report available to the EC / Panel earlier?

Response

89. Korea contests the use of a dverse inferences regarding its failure to produce KDB’s workout
plan, alleging that it was presented to the EC during the TBR investigation, an d that the EC has used
this information in Exhibits EC-55 to EC-57.

90. Korea is incorrect. The exhibits in ques tion contain only the Memorandum of Understanding
signed by financial institutions on 20 January 2000, but do not include the KDB workout plan of
24 November 1999. This plan has never been submitted to the EC.

91. Adverse inferences are justified in this case, as Korea revealed the existence of the KDB
workout plan only after the EC had highlighted that the Arthur Andersen report was issued on the
very same day (24 November 1999) as the restructuri ng decision. Korea argued that Arthur Andersen
had supplied KDB with a preliminary report on 30 Oc tober 1999, and that creditors were therefore
aware of the essence of the report in advance of th e 24 November meeting. However, Korea has now

59 See World Bank report on Korea (18 September 2000). (Exhibit-EC-149).
60 See reply to question 2 of Korea’s Annex V main response, at p. 59 (Exhibit-EC 39).
61 See reply to question 25 of Korea’s Annex V main response, at p. 76 (Exhibit-EC 39).
62 See reply to question 25 of Korea's Annex V main response, at p. 77 (Exhibit-EC 39).
63 See reply to question 2 of Korea’s Annex V main response, at p. 60 (Exhibit-EC 39).
64 KAMCO purchased the loan from the investment trusts before the spin-off of Daewoo-SME and the
completion of the debt-to-equity swap which was completed on 14 December 2000. See First written
submission by Korea, at para 360, and Attachment 3.1(2) of Korea’s Annex V response (Exhibit-EC 150).
65 See reply to question 25 of Korea’s Annex V main response, at p. 78 (Exhibit-EC 39).

made clear that the Arthur Andersen report was not the actual workout plan voted upon by the
creditors. Paragraph 194 of Korea’s second oral statement confirms that KDB proposed a “workout
plan to the 3
rd CCFI meeting for deliberation and adoption by the creditor financial institutions, and
that this Daewoo-HI workout proposal was, of course, based on the Arthur Andersen report”.

92. Independent of any adverse in ferences, the EC wishes to emph asise the implication that the
creditors did not seriously consider rejecting the reorganisation, given that they were required to
decide upon Daewoo-HI’s workout plan after having been presented w ith the plan (as opposed to the
Arthur Andersen report) on the same day that they voted on the plan.

93. By contrast, as confirmed by Korea, independent investors that considered whether to obtain a
stake in Daewoo-HI prior to its collapse (February - August 1999) “needed considerable time to
negotiate for sale of such a big business as DHI’s shipbuilding division” and “could not have
completed their due diligence investigations by the time that the Daewoo- HI workout commenced.”
66
Consequently, Korea’s explained that “all negotiatio ns for the sale of the shipbuilding division was
halted since no investor would invest in the shipbuild ing division in light of the financial uncertainty
during the workout procedures”.67

94. This difference in approach casts heavy doubt up on Korea’s statements that (with or without a
KDB plan) Korean creditors took important restruct uring decisions during this short period (24 to
26 November) pursuant to market considerations.

Question 146

 In response to Question 23 from the Panel, the EC asserts that "[t]he existence of a
going concern analysis can be an indicia that a hypothetical private creditor would have acted
in the same manner." Does the EC accept that the individual components of the Daewoo
workout can be assessed on the basis of the Arth ur Andersen report? If the Panel rejects the
EC's argument that the Arthur Andersen report incorrectly determined that the going concern
value of DHI exceeded its liquidation value, does this necessarily mean that the Panel should
reject the EC's claims regarding the individual components of the workout? Please explain.

Response

95. The individual components of the Daewoo workout (i.e. debt-to-equity swap, debt
rescheduling, and spin-offs) were simply the vehi cles proposed by Arthur Andersen for ensuring the
viability of the spun-off companies Daewoo-SME and Daewoo-HIM after the report established that a
restructured Daewoo-HI would not be viable as such.

96. However, the EC has submitted evidence
68 that shows that the Arthur Andersen Report
contained important “uncertainties” which cast doubt upon the finding that, under normal market
conditions, the going concern value of Daewoo-HI was higher than its liquidation value. In particular,
as stated in the report by PriceWaterhouseCoopers, “a bank faced with the decision to go either for the
liquidation scenario or the going concern scenario, w ould require more in de pth understanding of the
competitive positioning of the respective companies a nd impact thereof on the various cash flow
scenarios before taking a final decision. That info rmation is not provided by the Arthur Andersen
report”.69 Thus, a prudent creditor, even before addr essing the individual components of the Daewoo
workout, would have questioned the premise that the going concern value of Daewoo-HI was higher
than its liquidation value.

66 See reply to question 9 of Korea’s Annex V main response, at p. 68 (Exhibit-EC 39).
67 See reply to question 9 of Korea’s Annex V main response, at p. 68 (Exhibit-EC 39).
68 See PriceWaterhouseCoopers Analysis of the Arthur Andersen Report (Exhibit EC-112), at p. 2.
69 See PriceWaterhouseCoopers Analysis of the Arthur Andersen Report (Exhibit EC-112), at p. 3.

97. Nevertheless, even if the Pa nel rejects the EC's argument that the Arthur Andersen report
incorrectly determined that the going concern value of Daewoo-HI exceeded its liquidation value, this
does not mean that the Panel should reject the EC's claims regarding the individual components of the
workout. Indeed, a subsidy can still be granted to a company even where the decision to restructure is
market-based. The terms of the restructuring, such as the amount of debt remaining in the shell
company, the amount of debt in the spin-off compani es and the price at which debt is to be converted
to equity are decisions that can lead to a benefit for the recipient if they are more favourable than what
would be obtained on the market.

Question 147

 The EC asserted at the second meeting that creditors should have got more out of the
Daewoo debt/equity swap. How could creditors have got more? Who / what benefited from the
fact that they did not?

Response

98. The creditors of Daewoo could ha ve recovered more of the debt owed to them if they had not
agreed to go along with the restructuring in the first place. As the EC’s consultant,
PriceWaterhouseCoopers, has determined, that under scenarios, the liquidation option was
economically preferable to reorganisation.
70 The fact that the creditors did not demand liquidation
conferred a benefit on Daewoo, which was able to stay in business.

99. In addition, once the creditor s accepted restructuring, they failed to demand terms that would
maximise their recovery, as creditors normally would in a free-market system. As the EC has
explained, these creditors, which are public bodi es and entrusted or directed private bodies,
participated in the debt for equity swap on non-market terms. As detailed in Attachment 1 to the EC’s
response to the Panel’s questions following the firs t meeting of the Panel, the value of the debt
forgiven by the creditors significantly exceeded the value of the equity received by them in exchange.

100. The creditors could have mini mised their losses by either refu sing to accept restructuring or,
once they accepted restructuring, by refusing to swap their debt for less valuable equity. The two
spun-off companies -- Daewoo-SME and Daewoo-HIM – benefited from the creditors’ losses, without
which they would not have survived or would have had a high level of debt.

Question 148

 The EC proposes an outside investor standard when challenging the reorganization of
Samho. This contrasts with the position taken by the EC in the GATT case concerning
United States - Imposition of a Definitive Countervailing Duty on Imports of Certain Steel
Products Originating In France, Germany, and the United Kingdom. Why has the EC changed
its position on this issue? Why does the EC no w consider that the outside investor standard is
preferable to the inside investor standard? Please explain.

Response

101. The concepts “outside investor” and “inside investor” are not used in the SCM Agreement .
The European Communities considers that the appropr iate benchmarks for assessing the presence of a
subsidy is market-based or commercial behaviour, whatev er that may be in relation to the facts of the
case.

70Second written submission by the European Communities, para. 194, citing Exhibit EC-133 at p. 3.

102. As the European Communities explained at pa ra 245 of its second written submission, there
were, in relation to Samho, no “inside investors” that were free form government control and so the
question does not in fact arise.

103. In that respect, the European Communitie s wishes to respond to Korea’s second oral
statement
71 that it has failed to identify which creditors of Halla were under government control. The
European Communities has relied on the informati on provided by Korea in the Annex V procedure 72
which showed that government owne d or controlled secured creditors 73 had a ratio exceeding by far
the required 75 per cent 74 and could effectively decide on the restructuring as they saw fit.
Considering that these creditors were also the cred itors which participated at the DHI restructuring
there was no need for repeat statements; th e European Communities has submitted extensive
information showing government control over these entities.75 76

104. The European Communities comments on the relevance of the GATT case referred to in
response to Question 172 below.

Question 149

 If the Panel were to reject the EC's clai m of government entrustment / direction of
private creditors, would this mean that tho se private creditors provide a reliable market
benchmark for determining whether or not the restructurings at issue conferred a benefit?
Please explain. Did the EC address this issue in its previous written and oral submissions to the
Panel. If yes, please indicate precisely where it did so.

Response

105. As summarised in paragraphs 49-50 of the EC’s Oral Statement of 17 June 2004, the EC has
presented powerful evidence to demonstrate that the pr ivate creditors were entrusted/directed by the
Government of Korea.

106. If the Panel were to disagree with the Eur opean Communities on this point, this would not
mean that the actions of the private creditors could be considered a “reliable market benchmark.”

107. Article 1 of the SCM Agreement does not make “directed or entrusted” by the government
equivalent to non-commercial. Therefore, even it cannot be demonstrated that private bodies were not
“directed or entrusted”, it may still be that their actions do not constitute a reliable market benchmark.
The question of whether there has been a financial contribution by an entrusted/directed private body
in Article 1.1(a) is distinct from the issue of whether a benefit has been conferred pursuant to
Article 1.1(b).

108. The tremendous government influence over the ac tions of private creditors (even if the Panel
were to find that it does not rise to the level of entrustment/direction), certainly raises strong doubts as
to their ability to act according to market considerations (as is required for a valid benchmark). Thus,
the Panel would still be required to look elsewhere for a market benchmark -- either to foreign
investors, outside investors, or another reliable source.

71 At para 211
72 See Korea Annex V response to question 42 at page 85 (Exhibit EC 39).
73 KEB, Kexim, KDB, Seoul Bank, CHB, Kamco had jointly 87.81 per cent of the secured loans.
74 See Korea Annex V response to question 45 at page 88 (Exhibit EC 39).
75 See Attachment 3 to EC’s Answers to Panel question 17 of 22 March 2004
76 Unsecured creditors were obviously not an obstacl e to the restructuring as most of the unsecured
loans were held by other Halla group companies, See Korea Annex V response to question 42 at page 85
(Exhibit EC 39).

Question 150

 Regarding the EC's Question 33 to Korea a fter the first substantive meeting, please
explain why, if at all, the value of Samho's construction business is relevant to the present
proceedings.

Response

109. Up until now, Korea has provi ded discounted cash flow valuation or going-concern value for
the shipbuilding business of Halla-HI, but has provided only the liquidation value for Halla-HI’s other
businesses divisions (plants and construction heavy equipment). In order to further assess whether the
restructuring plan was made pursuant to market c onsiderations (i.e. whethe r the going-concern value
exceeded the liquidation value), the EC wanted to compare liquidation and going-concern value for
the same entities. This is why the EC asked Korea to provide the valuation report in its entirety.

Question 151

 Korea asserts that the share of debt he ld by the foreign creditors who failed to
participate in the Daewoo workout was around [B CI: Omitted from public version]. Is it
reasonable to expect a panel to condemn a rest ructuring on the basis of the behaviour of
creditors holding only [BCI: Omitted from public version] of the debt?

Response

110. Under ordinary market conditions, the fact that foreign creditors had rights to only
approximately 3 per cent of the debt would result in the Government of Korea being little concerned
with their reaction, given that foreign creditors did not have sufficient interest to block a vote on
reorganisation – i.e. more than 25 per cent of the vot es. Yet, as detailed in paragraphs 189-191 of the
EC’s second written submission, the Government reali sed that it had to pay special attention to the
foreign creditors because -- being outside the scope of the Government’s influence -- they might
vigorously attempt to disrupt the pre-determined pr ogression to reorganisation. In fact, the EC has
provided evidence that the Government of Korea and the foreign creditor banks entered into
negotiations to avoid this situation.
77

111. Accordingly, the foreign creditors are the b est available benchmark against which to judge
whether the restructuring was market based and the level of the resulting benefit.

Question 152

 Regarding the Daewoo workout, the EC makes various arguments regarding the
purchase of debt and bonds by KAMCO. It is unclear whether these arguments support a
separate claim regarding the KAMCO rates, or whether those arguments are made in support
of the more general claim concerning the use of foreign creditors as the market benchmark.
Please explain.

Response

112. The EC has made these arguments in support of the more general claim concerning the use of
foreign creditors as the appropriate market benchmark.

77 Second written submission by the European Communities, para. 189, quoting (Exhibit EC-132).

113. The EC has explained the multiple roles pl ayed by KAMCO in the restructuring process,
serving as a vehicle for providing funds to cash-hungry creditors of Daewoo-HI, and as a Daewoo-HI
creditor, itself.

114. In its answer to question 14 by the Panel, the EC explained that, in the Letters of Intent dated
on or after 13 November 1998, the Government of Korea stated as follows:

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.”
78 (emphasis added)
115. Moreover, in its reply to question 20 of th e Panel, the EC summarised KAMCO’s role as
follows:

 KAMCO’s purchase of more than [BCI: Omitted from public version] of DHI non-
performing loans 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;

 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.
 (footnotes deleted)

116. These arguments support the claims of direc tion and entrustment of private creditors, as
KAMCO’s purchase of non-performing loans by Daewoo-HI creditors, and its participation in the
Daewoo-HI restructuring were clearly mandated by the Government of Korea.

Question 153

 Please comment on Korea's argument (at para. 191 of Korea's second written
submission) that the EC, in its response to Question 22 of the Panel (which concerned the
"alleged specificity of the corporate restructuring" generally
), allegedly concedes that the Court
supervised corporate reorganizations undertak en by Halla and Daedong were not specific
"because these companies seemed to have disappe ared and the EC answers the question only in
regards to DHI".

Response

117. The EC continues to maintain the reasoni ng presented in its (1) First Written Submission
(paras 350-354 and paras. 380-384), and (2) Second Written Submission (paras. 248-252 and
paras. 268-269) demonstrating that the corporate reorganisations of Halla and Daedong were specific
within the meaning of Article 2 of the SCM Agreement.

78 (Exhibit EC-36).

118. The specific references to Daewoo in response to Question 22 were made by way of example,
and the EC was careful to include “e.g.” to reflect this throughout its response. If the EC had decided
to take the dramatic change of position alleged by Korea, it would have certainly made this clear
through an affirmative statement to that effect.

Question 154

 Regarding the STX reorganization, we note that the debt rescheduling / exemption from
interest is the sole element identified by the EC when calculating the amount of alleged benefit
in Annex 3 of Attachment 1 to its replies to quest ions from the Panel after the first substantive
meeting. We further note that the EC's rebuttal submission does not refer to the other elements
of the restructuring identified in its first written submission, such as the issuance of bonds by
Daedong. Does the EC still claim that the oth er elements of the restructuring, including the
bond issuance by Daedong, constituted a subsid y? If so, why were they not included in the
abovementioned Attachment 3?

Response

119. The EC maintains that the sole element iden tified as a benefit is the debt rescheduling and
exemption from interest, as provided in Annex 3 of A ttachment 1 of EC’s reply to questions from the
Panel after the first substantive meeting.

D. SERIOUS PREJUDICE

Question 155

 The EC has indicated that the Panel should determine the existence of price
suppression/depression separately for LNGs, product/chemical tankers, and container ships.

 (a) Does this mean that the EC is asking the Panel to issue three separate serious
prejudice rulings, on LNGs, product/chemical tankers, and container ships,
respectively?

 (b) If not, please explain.

Response

120. Serious prejudice must be to the interest of a WTO Member and there is not therefore any
need for three separate serious prejudice findings.

121. The serious prejudice finding that is requested should be based on price suppression and/or
depression in the three product markets each of which is a global geographical market. Article 6.3 of
the SCM Agreement refers to "serious prejudice . . . where one or several of the following apply".
79
Just as serious prejudice can be determined based on various combinations of Article 6.3(a), (b), (c),
and (d) – serious prejudice may also be based on multiple findings of price depression and/or
suppression in the global market (albeit in three different sub-markets of commercial vessels).
Moreover, Article 6.3(c) refers to the "effect of the subsidy," where subsidy is singular. The subsidies
at issue in this case were granted to shipyards that produce a variety of commercial vessels. In this
way, the same subsidy caused price suppression and/or depression in the three product markets at
issue. Thus, there is no need for three separate serious prejudice findings in this dispute.

79 Emphasis added.

Question 156

 In the information before the Panel, incl uding the Annex V information, are there
additional examples (beyond those already referred to in the EC submissions) of bids by Korean
shipyards, for which EC shipyards also are bidding, and where in the view of the EC the
Korean yards have led prices downward.

Response

122. The EC submitted, in the framework of the Annex V proceedings, various examples of
instances when EC yards offered a price, but the order was ultimately secured by a Korean shipyard at
depressed prices.

123. The relevant documents ar e included in the EC’s responses to question 7 by Korea (and
relevant annexes 7.1 to 7.17) from the Annex V procedure.

124. The EC particularly wishes to point out the example in annex 7.3, in which the broker clearly
explained that the guideline in terms of prices consists of the newbuilding price in Korea.

125. More specifically, with respect to price de pression in the LNG segment, see bullet point C
(and relevant annexes 7.13 to 7.17) of the EC’s re plies to question 7, as well as the annex 8.C, which
includes an explanation as to how prices were led downwards by Korean yards in that segment.

Question 157

 (a) In the information before the Panel, including the Annex V information, are
there examples/evidence of instances in which EC shipyards have considered,
but declined to, bid due to low preva iling prices? For example, can the EC
provide records of instances in which an EC yard was contacted by a ship
broker concerning the possibility of bidding, but decided not to do so because of
low prices.

 (b) In any such instances, does the inform ation before the Panel contain evidence of
Korean pricing/bidding for the same sale?

Response

126. As previously explained by the EC, the major part of the correspondence between ship
owners, brokers and shipya rds takes place on an informal basis. Therefore, documentary evidence in
many cases does not exist. In addition, most shipyards usually do not keep faxes or other
correspondence received from brokers concerning th e possibility of bidding for projects on which
they eventually decided not to submit an offer (whe ther for price reasons or otherwise). Finally, no
such examples/evidence were requested in the frame work of the Annex V procedure, and thus they
were not submitted at that time.

127. For those reasons, the EC is not in a position to provide examples other than those referred to
in the reply to Question 156, above.

Question 158

 (a) Is it the view of the EC that excess shi pbuilding capacity exists only in Korea, or
is there also excess capacity in other countries?

 (b) If your view that excess capacity ex ists only in Korea, please explain.

 (c) If your view is that there is excess capa city also outside of Korea, where and how
much is the excess?

 (d) Is there any excess shipbuilding capacity in the EC? If not, what is the basis for
this conclusion?

Response

(a)-(c):

128. The development of capacity is discussed in “Overview of the International Commercial
Shipbuilding Industry”, section 5.2, page 14 ( Exhibit EC-1 ), which also provides estimates of
shipbuilding capacity by region, based on OECD report C/WP6/2001/6.80

129. As shipbuilding is an integrated world market, i.e. any owner can buy at any yard, and sales
are determined by market considerations (with the exception of the US Jones Act), the world
shipbuilding capacity also must be seen in this way. As with the shipbuilding market, shipbuilding
capacity can be regarded as something of a contin uum, and it is therefore meaningless to say that
shipbuilding overcapacity exists only in Korea. However, as described in Exhibit EC-1 and the
OECD report referred to therein, the problem of ove rcapacity has long been known, but this has not
stopped the Korean shipyards from massive expansion in recent years. Indeed, the OECD found that
shipbuilding capacity in the 1990s had been increased primarily by Korean shipyards.
81 T h i s
expansion has been aimed at the pursuit of volume w ith the aim of reducing unit costs. It is this
expansion that is at the core of the accusations that Korea is responsible for global overcapacity, not
only by the EC and FMI, but also by most industry analysts. This was detailed in Attachment EC-8 to
the EC’s second oral statement. 82 For example, a January 1999 report by Drewry explained as
follows:

Economic growth in South Korea until r ecently was based on an open understanding
between the Government, which planned whic h industrial sectors should be entered,
and the banks, which would provide capital fo r investment at ra tes more favourable
than the financial markets would warrant to a small group of very powerful
conglomerates (the chaebols). As with the Japanese, the chaebols’ main objective
was to increase market share in their chosen sectors, rather than to ensure profitability
and returns to shareholders. This formul a led to a massive increase in shipbuilding
capacity as well as in car manufacturing, and mi cro chip plants (it is notable that all
these industries are now faced with oversupply of capacity, and ensuing low prices,
and low profitability world wide).
83
130. In an integrated market, capacity reductions in one region cannot have a positive effect on the
world market if additional capacity is created at the same time in another region. If the new additional
capacity in Korea exceeds the reductions in the EC (as it did), the new EC shipbuilding capacity
would also appear to exceed actual world-wide de mand, although the market distortion originated in

80 OECD, Evaluation of World Shipbuilding Capacity (2000 Revision), C/WP6(2001)6 (29 May 2001)
(Exhibit EC-151).
81 OECD, Evaluation of World Shipbuilding Capacity (2000 Revision), C/WP6(2001)6 (29 May 2001),
at para. 55. (Exhibit EC-151).
82 “Detailed Rebuttal of Exhibit Korea-70”, p. 3 at para. 16, & page 4, at para. 23 – Attachment EC-8
to EC’s second oral statement.
83 “Detailed Rebuttal of Exhibit Korea-70”, p. 3 at para. 18 -- Attachment EC-8 to EC’s second oral
statement.

Korea. Consequently, the EC views the reduction of non-viable capacity (i.e. the capacity of failed
yards) as the only meaningful way to address the problem.

131. In the EC, this has led to a series of yard closures and company restructurings (typically going
along with capacity reductions) since 1975. In Jap an, shipbuilding facilities have been mothballed.
Contrary to these developments, Korea has expanded shipbuilding capacity since the early 1990's.

132. Capacity control measures enforced by th e main shipbuilding blocks have included the
following:

 ¾ In the EU, shipbuilding directives in force from the mid-1980’s until the end of 2000,
in particular the fifth, sixth and seventh directives, limited the level of assistance that
governments could offer to shipyards, while at the same time strictly controlling
capacity development. Ailing shipyards c ould not be rescued, and new shipyard
facilities had to demonstrate that they did no more than replace existing capacity that
had to be removed from the market as the new facilities came on stream.

 ¾ In Korea, the shipbuilding industry had been previously regulated by the Shipbuilding
Industry Rationalisation Law, implemented in 1988 by the Ministry of Trade and
Industry. This law froze the developmen t of new facilities and banned low-priced
bookings. The overall aim was to improve competitive conditions. The law was
repealed in December 1993, followed by unrestrained capacity expansion.

 ¾ Japan has been controlling capacity since 1950, through the “Zosen Ho” shipbuilding
law which restricts construction of sh ips over 500GT or 50m length. Other
legislation enacted in 1953 enables the government to monitor and control production
volume before the commencement of work, applying to ships of over 2,500 GT or
90m length, regardless of whether they are domestic or export contracts. These
legislative controls remain in force today, to be exercised when market and economic
conditions dictate.

(d):

133. In addition, the EC would like to emphasise that Europe has experienced capacity reductions,
with 90 per cent of the workforce being shed sin ce 1975. Shipyards continue to be forced into
bankruptcy, leading to their permanent closure. Th is market mechanism regulates capacity in the EC.
By contrast, no shipyard has ever closed due to market forces in South Korea without being re-
opened.

Question 159

 The Panel's written question 30 followi ng the first meeting was as follows:

 "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."

 Please present a summary of any informatio n already before the Panel, including the
Annex V information, that is relevant to this po int but was not referred to in the EC's original
answer to this question.

Response

134. The flexibility of shipyards and the nature of constraints is discussed in section 4 of the
“Overview of the International Commercial Shipbuilding Industry”, Exhibit EC-1.

135. The order books of the major shipyards show a wide range of ship types under production
(see, e.g., Clarkson World Shipyard Monitor).
84 Within the constraints d escribed in the EC's answer
to Question 30 by the Panel and in Exhibit EC-1, yards maintain the capability to design and build all
kinds of sea-going vessels. Exhibit Korea-70 (the "D rewry Report") provides a wealth of statistical
information that shows that EC yards are active in all contested market segments (see, in particular,
chapters 5-7). Section II(C) of the EC's First Written Submission describes the portfolios of the major
EC yards, demonstrating that these yards produce a wide range of ship types.

Question 160

 Concerning the composite ship newbuilding price index furnished by the EC, the EC
indicates that major shipbuilding consultants al so maintain "more speci fic price information
for particular ship types". In Attachment 2 to its answers to questions, the EC provides price
information for two sizes of tankers and for eight sizes of container ships.

 (a) Is this the "more specific" info rmation to which the EC refers?

 (b) Why does the EC show the particular breakouts that it does? Do other
breakouts exist for these products? Please explain.

Response

(a):

136. The most commonly used source of newbu ilding prices is “Clarkson World Shipyard
Monitor”.85 The section of that publication entitled “Shipbu ilding Price Trends”, at page 8, provides
the most comprehensive overview of prices available, and is the source of price data presented in the
EC’s attachments. A more detailed time series of prices reported by this publication can be found in
Exhibit EC-146 , “FMI June 2004 Report, technical support to the WTO hearings”, submitted with
the second oral statement, at page 5.

(b):

137. The specific breakouts were chosen by the EC because they corresponded to the available
information on Korean costs from the cost monitori ng exercises, which enabled cost and price indices
to be shown together for Korea. The cost inform ation is ship-type specific, and cost/price indices
have not been created for the full range of products.

Question 161

 The EC presents indices of estimated Korea n production costs versus prices in support
of its argument that there is price suppression/depression. The EC indicates that its consultant,
FMI, prepared the cost estimates, taking into account various known cost trends and cost
advantages of the Korean yards. The EC in its answers to questions following the first meeting
provided a description of the methodology used by FMI to prepare these estimates. The EC also

84 Clarkson World Shipyard Monitor (Exhibit EC-152).
85 Clarkson World Shipyard Monitor (Exhibit EC-152).

indicated that, should the Panel so request, it wo uld furnish the detailed underlying data. Is it
the view of the EC that a graphical presentation of price indices, along with a description of
methodology, constitutes prima facie evidence of evolution in Korean shipbuilding costs? Please
explain.

Response

138. The EC has provided a graphical presentation of price and cost indices to provide, in an
easily-viewed form, a summary of the detailed data that its consultant, FMI, has collected during
years of intensive research and investigation. In particular, the EC has monitored prices and costs in
Korean yards for almost 5 years, leading to seven shipbuilding market reports that have been
presented to the Panel.
86

139. The cost analyses by FMI, which are project-sp ecific, take account of all relevant cost factors
in shipbuilding, and are regularly updated. Natura lly, these forward cost estimations are complex and
require a sound understanding of the shipbuilding process with its numerous intermediate steps.

140. The EC encloses a sample of such a detailed cost estimation, concerning a LNG carrier order
at Daewoo.
87 The spreadsheet shows the various cost cat egories and the details of the estimations
made. In total more than 60 such cost estimations ha ve been made for orders placed in Korean yards,
and each analysis would concern a number of vessel s as typically ships are ordered in short series.
The EC took great care to investigate orders that are typical for the production of Korean yards, in
order to arrive at a conclusive picture. More deta iled cost estimations can be made available to the
Panel upon request.

141. The analyses undertaken have led the EC to conc lude that prices offered by Korean yards are
not in line with costs of production, and that this gap is widening.

142. It is not the EC's assumption that cost de velopments can be derived from price indices.
Rather, the EC sees prices and costs in Korean shipbuilding as being disconnected, as Korean yards
tend to offer the price that gets them the order a nd fills their shipbuilding capacity, but that does not
necessarily reflect the full costs of production. Cons istently low prices at a time of rising costs are a
clear indication of behaviour that leads to price suppression and price depression.

Question 162

 What specific evidence/examples are containe d in the information before the Panel in
support of the EC argument that prices at on e end of the product spectrum for a particular
kind of ship influence prices along the entire spectrum? (For example, is there specific evidence
in the information before the Panel that a down ward movement in very large container ships
brings about commensurate downward movement in all smaller sizes of container ships?)

Response

143. The best evidence for this can be seen in Exhibit EC-146, “FMI June 2004 Report, technical
support to the WTO hearings”, submitted with th e second oral statement (Figure 1, page 5).
Shipbuilding prices tend to move in unison, with some variation. Th is can also be seen in the graph

86 Responses by the European Communities to Annex V Questions, Annex 10c containing the
seven Commission reports to the Council on the situation in world shipbuilding.
87 Cost Moedelling Details Angelicousis LNG Tanker at Daewoo (Exhibit EC-156).

on page 8 of the Clarkson World Shipyard Monito r, clearly showing tanke r prices moving together,
regardless of the size of the ship.88 This is discussed further in response to Question 163 below.

144. Moreover, a recent document from the OECD Secr etariat emphasises the contagious effect of
specific behaviour in the shipbuilding market:

[S]hipbuilding is, from a geographical point of view, a single, integrated global
market. This imparts shipbuilding with uni que characteristics, as this integration
would suggest that an impact in one part of the market would be readily felt in the
rest of the market. It is further suggested that the effect would be quite different in
sectors that were not so closely integrated.
89
Question 163

 (a) For each ship category, in practi cal terms how substitutable are different
sizes/configurations (containment system s, in the case of LNGs)? Are there
specific evidence/examples in the informat ion before the Panel? In addition,
please furnish relevant portions of the industry publications discussed at the
second meeting. (For example, one industr y expert referred at the meeting to
one of the industry publications that contains information relevant to cross-price
elasticities).

 (b) Can the EC cite specific instances/situ ations in the information before the Panel
where a shipowner has purchased and u sed a larger-than-usual ship for a
particular run, due to a relatively low price for the larger ship?

Response

(a):

145. The best evidence of the supply-side substituta bility of products is found by browsing through
the orderbooks reported in Clarkson World Shipyard Monitor. 90 Further information on this matter
can be found in Exhibit EC-1, “Overview of the International Commercial Shipbuilding Industry”,
including chapters 4, 6 and 7. Most products within a shipyard are substitutable, with the exception of
LNG tankers and cruise ships. LNG tankers are exceptional because of the difficulty and cost of
obtaining licenses, and the initial investment co st. Cruise ships involve brand-conscious and
conservative buyers, and require high costs of entry. These are the only two exceptions to supply-side
substitutability. On the demand side, the two LNG c ontainment systems are fully substitutable. They
both do the same job. On the supply side, the substitution is more difficult because it requires a
change in licences, but the switch by Hyundai Heavy Industries between the two types illustrates that
it is possible.

146. The data regarding relevant cross-price elast icity appears in the graph on page 8 of the
Clarkson World Shipyard Monitor, which shows pr ices of different sizes of ship moving together.
91
The difficulty in doing a true cross price elasticity analysis for the shipbuilding industry is that, in
recent years, demand has been disconnected from pr ices due to the overcapacity problem. Analysing
price against demand has therefore had little relevan ce and is inconclusive. From the information

88 Clarkson World Shipyard Monitor (Exhibit EC-152). Detailed descriptions of the ship types shown
in that graph can be found in (Exhibit EC-1) , “Overview of the International Commercial Shipbuilding
Industry”, at section 3.2.
89 OECD document C/WP6/SNG(2004) (Exhibit EC-153).
90 Clarkson World Shipyard Monitor (Exhibit EC-152).
91 Clarkson World Shipyard Monitor (Exhibit EC-152), p. 8.

presented on prices in figure 1 of Exhibit EC-146 and information on demand (represented by total
contracting activity, as reported on page 4 of the Clarkson World Shipyard Monitor
92) it is possible to
illustrate the effects by looking at a specific case.

147. A specific sub-type has been chosen becau se it provides a good example of a market where
there has been little change in demand over the past year, but a significant movement in price. Figure
1 below presents the movement in price of Panamax ta nkers over the past year (this is one of the lines
included in figure 1, page 5, of Exhibit EC-146) and figure 2 below presents the volume of ordering
over the same period.

30.00
32.50
35.00
37.50
40.00
42.50
45.00
May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May

Figure 1 – Movement in Panamax tanker prices in 2003 / 2004 ($ million)

-
0.1
0.2
0.3
0.4
May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May

Figure 2 – Volume of Panamax tanker orders placed per month in 2003 / 2004 (million CGT)

92 Clarkson World Shipyard Monitor (Exhibit EC-152).

148. It is clear that there has been no correlation between price and demand in this sector over this
period. If the price is correlated against the overall FMI newbuilding price index, however, a strong
correlation is seen. This is shown in figure 3 below.

R
2
 = 0.9613
100.0
110.0
120.0
130.0
140.0
150.0
160.0
170.0
180.0
32.00 34.00 36.00 38.00 40.00 42.00
Panamax price ($ million)
FMI newbuilding price index

Figure 3 – The relationship between Panamax tanker prices and the newbuilding
price index between May 2003 and May 2004

149. Thus, the price of Panamax tankers has followe d the general trend in newbuilding prices, but
has no apparent relationship to demand in this speci fic sector. Likewise, the general trend in prices
has not followed the overall trend in demand. Figure 4, below, shows the total volume of contracting
reported by Clarkson over the past year, which has remained largely level. Newbuilding prices, by
contrast, have increased as shown in the newbuilding price index for the period in figure 5.

-
1.0
2.0
3.0
4.0
5.0
6.0
May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May

Figure 4 - Volume of all orders placed per month in 2003 / 2004 (million CGT)

100.0
120.0
140.0
160.0
180.0
May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May

Figure 5 – FMI newbuilding price index in 2003 / 2004 (1987 = 100)

150. Price has not always been de-coupled from supply and demand. Economist
Dr Martin Stopford, author of the definitive te xt “Maritime Economics” and managing director of
Clarkson Research, has theorised that shipbuilding prices are determined through supply and demand,
but that the supply and demand functions shift over time. 93 Long term analysis of the market shows
this is true, with shifts caused, for example, by increasing costs in price-leading countries or changes
in capacity. The relationship between price, on th e one hand, and supply and demand, on the other,
normally reasserts itself following a shift. For example, this happened from 1999 to 2001, following
the shift in the supply function that accompanied th e Asian financial crisis, and in particular the
collapse of the Won. The link with the market disa ppeared thereafter in the dash for orders and is
only now starting to reassert itself.

151.

(b):

152. The concept of customers purchasing a larger-tha n-usual ship for a particular run, due to a
relatively low price for the larger ship, was raised by Korea. The EC is not aware of such incidents in
the market. Typically, an owner has a clear idea abou t the market in which its new ship will be used.
His key parameters will be cargo carrying capacity a nd vessel speed. While he may accept variations
in the ship's specification (e.g., a higher or lower speed), he will not see any benefit in buying a larger
vessel for the same price if the available cargo remains limited. Where available cargo is unlimited, he
will opt for the largest design possible, as currently seen with container ships. However, he will also
take account of market volatility and operating costs, assessing whether the larger ship can actually be
filled throughout its useful life. This has, for ex ample, limited the growth of crude oil tankers, as the
largest designs today are around 300.000 dwt, while designs of up to 1.000.000 dwt were discussed
and planned before the oil crisis of 1973.

153. The important relationship between ship size and trading can be found in Exhibit EC-1 ,
“Overview of the International Commercial Shipbuilding Industry”, at Section 3.

154.

93 Martin Stopford, “Maritime Economics” (Second Edition) 1997. pp 472-473.

Question 164

 What specific evidence is there in the in formation before the Panel that APRGs and
PSLs around the time of the restructuring helped the shipyards in question to remain in
operation, whether by improving their balance sheets/cash flow or otherwise?

Response

155. It is obvious that access to pre-shipment lo ans and APRGs at a time when private creditors
either would not have provided such facilities, or, if they had, would have charged higher rates or fees
based on market conditions, improved the shipyards’ cash flows and profitability. This self-evident
conclusion is supported by the following general statement from KEXIM itself, as quoted in
paragraph 160 of the EC’s first written submission:

The 1998 KEXIM Annual Report explained that KEXIM, “as an export credit
agency, played a rescue-operation role, transfusing emergency loans to Korean
exporters and importers at the onset of the crisis when the banking sector in Korea
was nearly paralyzed .” As KEXIM’s Chairman stated in the 1999 KEXIM Annual
Report, KEXIM “contributed to the economic recovery by providing a variety of
financing programmes to exporters . . . who experienced difficulty in obtaining
adequate trade-related financing from commercial financial institutions , due to the
government-initiated restructuring plan in the financial and corporate sectors.”
156. In addition, as explained in paragraph 489 of the EC’s first written submission, APRGs
caused orders to be placed with these yards, which led to full orderbooks, which in turn led to
optimistic sales projections for the purposes of establishing going concern value.

Question 165

 For each category of ship, what has been the evolution in prices versus costs in other
major shipbuilding countries since the mid-1990s, a nd how does this compare with the trends in
Korean prices versus costs?

Response

157. With respect to prices, the world market do es not distinguish among countries of production.
Any yard can set a price level that will be noted in the world market, and that will be the relevant
benchmark, as long as production capacity exceeds demand. A yard can set such a price level even if
it does not reflect its cost of production, as the losses will not occur until the vessel's delivery a couple
of years later.

158. In the shipbuilding industry, it is not concei vable that a yard can ask a higher price for the
same or similar vessel design, unless the buyer is somehow constrained to purchase at a competing
yard. Such constraints do not exist for the large majority of ship owners. They exist only in particular
cases, such as for US owners operating between US ports (thus being subject to the Jones Act),
Japanese owners operating on domestic routes (who must obtain licenses from regional authorities
that may indicate their preference for a domestically built vessel) or cruise ship operators who need
vessels of such sophistication that Korean and Ch inese yards are not considered experienced enough
to deliver an acceptable ship.

159. Regarding costs, reference is made to th e answer to question 161. The analysis of
shipbuilding costs is a complex undertaking requiring significant resources. The EC has had no
reason to investigate shipbuilding costs in Japan, as EC yards do not consider the business practices of
Japanese yards as injurious. There has also been no r eason to monitor shipbuilding costs in EC yards,

as these yards operate in a free market environm ent, and losses from extremely low prices would put
the company into financial difficu lties. If such losses would be compensated through subsidies, the
EC competition law would apply. Recently, the EC has started to monitor shipbuilding costs in
China, but no results are available at this time.

160. In general, certain costs would not be country-specific or only on a limited scale. For
example, steel is more or less a global commodity, and major equipment such as engines, cranes, etc.,
are procured by yards on a global scale. The main cost differences between countries result from
labour costs, productivity levels, exchange rates and financial instruments.

Question 166

 (a) For each of the three ship types, wh at specific evidence/examples are there in the
information before the Panel (in addition to the domestic complaint by Samsung
against Daewoo) that the restructured shipyards were the price leaders among
the Korean producers?

 (b) What evidence is there in the informatio n before the Panel in support of the EC
argument that the alleged restructuring subsidies enabled the restructured yards
to drive down the prices charged by all other Korean shipyards?

 (c) What has been the annual financial performance of the other (non-structured)
Korean shipyards since the restructuring?

Response

(a) – (b):

161. The price leadership is dependent on the cap acity exercised in the market and on market
share. It is also related to the dynamics within small groups of dominant shipyards, amongst which
are the disputed yards. This is discussed in Exhibit EC-146 at Section 3, page 4. Additional
information on the strength of the restructured Korean shipyards can be found in Clarkson World
Shipyard Monitor, including section “Shipyard Capacity”, page 16, and in the detailed sections
showing the distributions of orders by type.
94

162. As explained in response to question 162, th e low prices in the shipbuilding market have a
contagious effect in the shipbuilding market. Furt hermore, the WTO Secretariat itself recognised that
Korean shipyards are the price l eaders when it pointed out the strong market position of the five big
chaebols, with about 95 per cent of the Korea output, three of which are restructured shipyards:

Since 1999, Korea has been the world's leading shipbuilder (second in 1998) and
thus a price leader for many types of ships; its share in global ship production
attained 30 per cent-35 per cent (1999). Shipbuilding, a capital-intensive industry
strongly linked to, inter alia, the cargo hand ling, steel and electronics industries, is
among the few sectors that emerged virtually unscathed from the recent recession.
The depreciation of the won (as well as high wage levels in Japa n and the bilateral
strength of the yen) helped boost the export competitiveness of Korean shipyards
(vis-à-vis China and Japan), which rely heav ily on the building of large-sized ships.
Between 1995 and 1998, the output of the shipyards, which are dominated by five
chaebols (Hyundai, Daewoo, Samsung, Hanjin , and Halla account for about 95 per
cent of output), grew steadily by more than 17 per cent. Between 1995 and 1998,
Korea virtually doubled its trade surplus in ships (US$7.6 billion), as imports fell by

94 Clarkson World Shipyard Monitor (Exhibit EC-152).

75 per cent and exports grew by 45 per cent; in 1998, ships accounted for 6 per cent
of Korean exports.
95
(c):

163. The EC does not possess information regarding the annual financial performance of the other
(non-structured) Korean shipyards since the restructuring.

Question 167

 If, as the EC argues, shipyards have near-total flexibility to produce any kind of ship,
and the Korean yards are heavily subsidized , why are Korean shipyards not more-or-less
equally active in all kinds of ships (including cruise ships, ferries, etc.)?

Response

164. The Korean shipyards have been pursuing sectors that they anticipate provide the greatest
economic benefits, either through volu me or value. This does not mean to say that they will not shift
into other sectors as they perceive changing conditions.

165. For example, Daewoo, Hyundai Heavy, Hy undai Mipo and Samsung have begun to build
ferries, and Samsung has committed significant invest ment to pursue the cruise ship sector. Korean
yards cherry pick the contracts and sectors that th ey see as having the greatest advantage at the time.
The ferry and cruise ship sectors are generally cons idered as “niche market” where the volume of
orders is more cyclical, and relatively low in terms of number of ships. In recent times, volume has
dictated order intakes, with the Korean yards ta rgeting the greatest volume sectors. Not all sectors
generate the same amount of work. This is discussed in Exhibit EC-1 , “Overview of the
International Commercial Shipbuilding Industry”, at Sections 4 and 5.

II. TO BOTH PARTIES

A. ITEM (J) / ITEM (K), FIRST PARA.

Question 168

 The parties disagree as to whether APRG s constitute export credit guarantees and
whether PSLs constitute export credits. Plea se provide any document ation (either from the
shipbuilding industry, the OECD, or any other so urce) that you consider supports your position
on these issues.

Response

166. The European Communities has already prov ided documentation supporting that APRGs and
pre-shipment loans do not constitute export credits because they assume a risk that relates to the
creditworthiness of the domestic exporters.
96

167. This is further confirmed by the Knaepen Package agreed between OECD Members in
1997.
97 The OECD Arrangement on Export Credits did not address premia at the time of the Uruguay

95 WTO Trade Policy Review Mechanism of 2000, WT/TP/S/73 (Exhibit EC-82) (footnotes omitted).
96 Oral Statement by the European Communities to the first meeting with the Panel, paras. 56-64 and
Exhibits EC-98 and EC-99.

Round. The Knaepen Package contains rules on calculating the premia drafted solely with the
creditworthiness of the buyer-country in mind. The Knaepen Package states that the guiding
principles for setting premia fees under the Arrangement on Guidelines for Officially Supported
Export Credits set minimum premium rates for sovereign and country credit risks irrespective of
whether the buyer/borrower is a privat e or public entity. Principles for the commercial risk on the
buyer are still outstanding for negotiation.

168. There is no suggestion in the Knaepen Package, nor indeed was there during the negotiations
that led to its adoption, that premia should be set according to the risk of the exporting country or of
the seller, exporter or producer. Any loans or guarantees which involve risks incurred within the
exporting country would be subject to the sam e considerations as normal domestic loans and
guarantees.

Question 169

 Item (j) refers to the provision of various "p rogrammes". Assuming that an a contrario
interpretation of item (j) is permissible, could it operate as a defence for individual APRG
transactions, as opposed to the APRG programme pe r se? Please explain. In particular, if the
focus of item (j) is on the long-term operati ng costs of the programme, how could item (j)
determine whether or not individual transact ions under the programme constitute export
subsidies?

Response

169. Assuming that an “ a contrario” interpretation of item (j) is permissible, it could not operate
as a defence for individual APRG transactions but only for the APRG programme per se.

170. The existence of an export subsidy progra mme and an individual export subsidy transaction
are two separate questions.

171. Item (j) clarifies that certain export credit programmes are not WTO incompatible if they
cover long-term operating costs. However, item (j ) is not relevant for the determination (under
Article 1 of the SCM Agreement) whether an individual transaction was market based or a subsidy.
Even if a programme is set to cover long-term ope rating cost, it may be that an individual transaction
confers a benefit because the guarantee is granted without regard to market principles, e.g., the
corporate risk of the shipyard.

B. APRG/PSL

Question 170

 Korea asserts that KEXIM PSL rates have been above certain DSME bond rates since
1999 (para. 231, Korea's first written submission). The EC asserts that certain DHI bonds were
guaranteed (para. 124, EC's second written submi ssion). Are the parties referring to the same
bonds, or were the DSME bonds referred to by Korea different from the DHI bonds referred to
by the EC? Please explain.

Response

172. The DSME bond rates shown in Para 231 of Korea's first written submission reflect quarterly
summaries of outstanding borrowings in corporate bonds and not the interest rates at which

97 The Knaepen Package: Guiding Principles for Setting Premia Fees under the Arrangement on
Guidelines for Officially Supported Export Credits, entry into force by 1 April 1999 (Exhibit EC-154).

DHI/DSME bonds were issued. In consequence, one cannot compare directly the bonds rates as
provided in para 231 of Korea's first written subm ission and the bonds rates to which the European
Communities refers in para 124, of its second written submission.

173. The EC’s assertion that most DHI and DS ME bonds were guaranteed is supported by Exhibit
EC-129, which contains a table listing lists all DHI issues of corporate bonds from 1986 until
December 1998. It demonstrates that most of the DHI bonds issues were guaranteed during this
period.

174. The EC in Question 17 at the first hearing asked Korea to provide details on corporate bond
issues referred to by Korea in para 231 of its first written submission.
98 Korea provided a table limited
to only 6 issues from 1997 to 1998 whereas the issues amounted to 39 in that period ( see Exhibit -
129). In consequence, the EC can only reply for the 6 issues provided by Korea, which are the same
as the ones provided by the EC. Out of these 6 issues, 3 issues were guaranteed.

175. However, it should be noted that as regards the remaining corporate bond issues, Korea failed
to provide the required information. The EC in question 17 to Korea specifically asked for detailed
information, including on “d) guarantees by other entities”. Korea replied that this information was
not available. The European Communities consid ers that Korea failed to cooperate because the
requested information is not confid ential, available for any investor
99 and Korea has therefore not
rebutted the EC prima facie case on this point.

176.

Question 171

 Regarding Exhibit Korea – 16, are "KEB", "CHB" and Hanil Bank public bodies? If
not, are they "entrusted or directed" private bodies? Please explain.

Response

177. In this case the EC has not argued that KEB (Korea Exchange Bank), CHB (Chohung Bank)
and Hanil bank are public bodies but that they were "entrusted or directed" private bodies. These
Banks were in a weak financia l condition and were helped by GOK through capital injections. GOK
has substantial shareholdings in all three of them.

178. In particular, with regard to KEB the EC has explained
100 that KEB was established as a fully
government-owned bank in 1967 to specialise in th e foreign exchange and trade business. For a
decade it had the exclusive right of offering trade financing and foreign exchange services. In 1997
trade financing and foreign exchange services were liberalised and KEB ventured into commercial
banking. Still in 1997 GOK was the major shareholder (47.88 per cent); as of 31 December 2000 it is
owned by the State 43.17 per cent (KEXIM 32.50 per cent, Bank of Korea 10.67 per cent) and
Commerzbank (32.55 per cent)
101. Still after its partial privatisation (Commerzbank acquired its
share in July 1998), the Korean Government as the major shareholder continued to exercise its
influence and provided substantial support to the Bank through capital injections : 336 Billion
Won in April 1999 and 400 Billion Won in December 2000.102

98 Korea’s response to the question 17 by the EC following the first substantive meeting.
99 See unredeemed Corporate bonds of DHI Source : DHI marketable Securities Statement for offering
the 229th Non-Guaranteed Corporate Bonds, submitted to Financial Supervisory Service (FSS) on 25 May 1999
(Exhibit EC-129).
100 See Attachment 3 to EC’s Answers to Panel question 17 of 22 March 2004
101 See Korea’s Annex V main response, reply to question 5 at page 26, (Exhibit-EC 39).
102 See Korea’s Annex V main response, reply to question 5 at page 27, (Exhibit-EC 39).

179. With regard to Chohung Bank , the EC has explained
103 that it was established in 1943 to
engage in commercial banking. Soon after the financ ial crisis erupted Chohu ng went into financial
dire straights so that in 1999 the Kor ean Government stepped in and acquired 80 per cent of stock
(which it still holds). In its Annex V response Korea states that Chohung received a capital injection
of 2.7 trillion Won104.

180. With regard to Hanil in its Annex V response Korea states that Hanil received a capital
injection of 1.6 trillion Won.
105 Korea has not reported the sh areholding obtained by GOK through
this capital injection.

C. ALLEGED ACTIONABLE SUBSIDIES

Question 172

 Please comment on paras 504 – 509 of the report of the GATT panel in United States -
Imposition of a Definitive Countervailing Du ty on Imports of Certain Steel Products
Originating In France, Germany, and the United Kingdom.

Response

181. The panel report referred to related to a dispute under the 1979 GATT subsidies code and was
never adopted. Its pertinence is already for that reason limited.

182. That said, the European Communities would not e that the Panel did not express any absolute
preference for one or the other standard. It contented itself with concluding that the rejection of the
“inside investor” standard was not an error in the lig ht of the facts of the case at hand, in the light of
the reasoning provided by the US agency involved (DOC). In fact it concluded that:

507. The Panel was aware that there might be circumstances under which inside and
outside investors might behave differently because of factors such as differences in
the availability of relevant information to inside and outside investors and the
presence of barriers to exit and entry. Howe ver, the Panel did not consider that the
arguments of the EC showed that such f actors were relevant under the facts of the
cases at hand.
508. In sum, the Panel found that the DOC had expressly addressed the issue of the
alleged need to distinguish between insi de and outside investors and that the
explanation provided by the DOC for its decision not to make such a distinction could
not be said to be inadequately supported by rational analysis. The arguments of the
EC at best indicated that an alternative approach was possible. The Panel therefore
could not find on the basis of these arguments that the DOC, by not making a
distinction between inside investors and outsi de investors, had failed to consider a
relevant fact.
509. In the light of the considerations a bove, the Panel saw no merit in the argument
of the EC that the United States acted incons istently with the Agreement when, in the
countervailing duty investigations of imports of certain hot-rolled lead and bismuth
carbon steel products from France and the United Kingdom, the DOC did not make a
distinction between the perspectives of insi de investors and outside investors in its

103 See Attachment 3 to EC’s Answers to Panel question 17 of 22 March 2004
104 See Korea’s Annex V main response, reply to question 5 , table d) at page 26, (Exhibit-EC 39).
105 idem

analysis of whether or not subsidies arose from the provision of equity capital by the
Governments of France and the United Kingdom.

183. In any event, as the explained in response to question 148 above, the European Communities
does not believe that this is an issue in th e present case. The only case where Korea invokes this
concept (Samho) is one where there was no “inside investor” that was free from government control.

D. SERIOUS PREJUDICE

Question 173

 (a) For each of the three ship types at issue in this dispute, how are ship data
normally maintained by the industry, and by industry analysts?

 (b) In particular, are these three categori es of ships recognized and used routinely
for purposes of industry analysis?

 (c) If so, how are they defined, and fo r what purposes are these categories used?

 (d) When analysts report on pricing tre nds, do they normally refer to prices for
each category as a whole, or for subcate gories thereof, broken out, for example,
by size and/or other characteristics.

 (e) If they provide a range of pricing in formation at different levels of aggregation,
how are these different data series used?

 (f) Please provide documentation (including in particular relevant excerpts from
the published industry reports discussed at the second meeting) showing
examples of the various breakouts to which you refer.

Response

(a):

184. There are numerous sources of information on the industry. FMI, in particular, maintains
subscriptions with those analysts that have s hown the greatest consistency and accuracy, including
publications from Lloyd’s Register and Clarkson Research. A note on these sources is given in
Exhibit EC-1 , “Overview of the International Commercial Shipbuilding Industry”, at Section 1.3,
page 2. The two most important publications from the point of view of the shipbuilding industry are
provided herein as exhibits, i.e. Clarkson’s monthly World Shipyard Monitor
106 and Lloyd’s
Register’s quarterly World Shipbuilding Statistics. 107 Many other consultancy reports and analyses,
including much of FMI’s work, are derivatives of these sources. The main advantage of the Clarkson
publication is that it examines prices, not considered by Lloyd’s, and it looks at the shipyard level,
where Lloyd’s only looks to the country level. Th e main advantage of the Lloyd’s publication is the
level of completeness of the data, which is based on Lloyd’s Register. Virtually all ships will appear
in Lloyd’s Register, while Clarkson concentrates on the mainstream market sectors. FMI also
subscribes to Lloyd’s Register’s database, to enable more detailed analysis of the statistics presented
in the publication, including at the shipyard level.

106 Clarkson World Shipyard Monitor (Exhibit EC-152).
107 Lloyd’s Register’s “World Shipbuilding Statistics” (Exhibit EC-155).

(b) and (c):

185. A good illustration of the grouping and hierarchy of ship types is given on pages 6 and 7 of
the Lloyd’s Register publication “World Shipbuilding Statistics”.
108 It is broadly this taxonomy that
is used by FMI in its analyses. Th e three ship types can be clearly seen within this table. The use of
these groupings is fundamental to the analysis of shipping and all related industries, including
shipbuilding. Definitions of the ship types concerned are given in Exhibit EC-1, “Overview of the
International Commercial Shipbuilding Industry”, at Section 3.

(d), (e) and (f):

186. The most complete source of price inform ation and trends is Clarkson’s World Shipyard
Monitor.
109 The “Shipbuilding Price Trends” description on page 8 thereof presents prices for various
classes of ships. For example, one price index is given based on the average movement of tankers
(both crude and products) and dry bulk carriers. This index clearly groups together ships of different
types and sizes to look at the average movement of prices. See also Exhibit EC-1, “Overview of the
International Commercial Shipbuildin g Industry”, at Section 3, for a description of the meaning and
implications of bulk ship types included in this index.

Question 174

 Korea argues that demand should be measured in numbers of vessels, and/or workload
years (i.e., order backlog) rather than compensate d gross tons of new orders. The EC responds
that CGT is more accurate as a measure of s upply and demand, and that even measured in
workload years, demand trends are as represented by the EC.

 (a) Could each party explain the technical differences between the two measures,
and provide further detail as to why it believes its preferred measure represents
a more accurate picture of demand than the other.

 (b) Which measure is used by industry analysts and the industry when analyzing
demand trends?

 (c) If both are routinely used, please ex plain the circumstances in which they are
used, and provide examples from independently prepared sources (the published
industry reports discussed at the meeting, OECD documents, etc.).

Response

(a):

187. A description of CGT and other measurements is presented in Exhibit EC-1, “Overview of
the International Commercial Shipbuilding Industry”, at Section 2, page 3. The EC has used CGT
because it measures the amount of work involved in building ships, and therefore the amount of
capacity required. A shipyard has the capacity to u ndertake a certain amount of work in a given
period. Because of the nature of the product, th is is not necessarily related to the number of ships
produced or their physical size. At the extremes, for example, constructing a single VLCC will
provide more work than constructing two handy-siz e tankers. Constructing a single cruise ship will
provide more work than the construction of several very large tankers. CGT is the unit that connects
supply and demand, and is therefore the key to price behaviour.

108 Lloyd’s Register’s “World Shipbuilding Statistics” (Exhibit EC-155).
109 Clarkson World Shipyard Monitor (Exhibit EC-152).

(b) and (c):

188. The measure used by analysts depends on the analysis being undertaken. Both the Clarkson
and Lloyd’s publications provide a range of units to enable a proper analysis to be performed. 110 For
example, a tanker owner will be interested in the total deadweight of tankers on order 111 because it
measures the cargo carrying capacity of the ship, and th at is what interests the owner. Gross tonnage
measures the physical size of ships and is the “offi cial” (i.e. registered) measure of the size of the
fleet. It also has significance for owners of ships that are “volume carriers” (i.e. that carry low density
cargoes) where it better represents cargo-carrying cap acity than deadweight. Passenger ships are a
good example of such a ship type.

189. CGT is almost solely used in relation to th e shipbuilding industry. For example, the OECD
uses CGT when assessing production capaciti es, and their relationship to demand. 112 The number of
ships is of limited significance in statistical analys is of either the shipping or the shipbuilding
industry, although it is reported in the statistical sources and it is sometimes used for very specific and
narrow analyses. FMI has used th e number of ships, for example, to examine product focuses of
specific shipyards, in terms of the internal distri bution of their order books. This has been necessary
because of data lags in information provided by Lloyd’s Register. At the early stage of a contract, the
register may not have complete tonnage informa tion, and the number of ships provides a temporary
guide. If the information were available, the dist ribution by CGT would be more appropriate for the
analysis.

Question 175

 In response to EC arguments concerning mark et share as a factor in price leadership,
Korea variously states that market share does not demonstrate price leadership, but also that
Korean yards' market shares are too small for them to be able to influence prices. Both sides
thus seem to view market share as somehow relevant to the question of price leadership.

 (a) How (on the basis of what sort of concrete data and analysis) can price
leadership be determined/established?

 (b) What role in such an analysis would levels and trends in market shares play?

 (c) How large a market share would a give n market participant need to be able to
exercise price leadership.

Response

(a), (b) and (c):

190. The determination of price is fundamentally related to the exercise of capacity in the market.
The positioning of the Korean ship yards in this respect can be seen in Clarkson World Shipyard
Monitor.113 Over the past two to three years, becaus e of the seemingly inexhaustible availability of
capacity, the dynamics between small groups of lead ing shipyards have been determining prices.
(This is discussed in Exhibit EC-146 , “FMI June 2004 Report, technical support to the WTO

110 Clarkson World Shipyard Monitor (Exhibit EC-152) ; Lloyd’s Register’s “World Shipbuilding
Statistics” (Exhibit EC-155).
111 See (Exhibit EC-1) , “Overview of the International Commercial Shipbuilding Industry”, at
Section 2, page 3, for the definition of tonnage measures.
112 OECD, Evaluation of World Shipbuilding Capacity (2000 Revision), C/WP6(2001)6 (29 May 2001)
(Exhibit EC-151).
113 Clarkson World Shipyard Monitor (Exhibit EC-152), p. 16.

hearings”, at Section 3, page 4, and the prices in general are discussed in Exhibit EC-1, “Overview of
the International Commercial Shipbuilding Industry” , at Section 8, page 25). Because of the
dynamics between these groups, the amount of capacity exercised does not have to be large. Every
order will be contested on the basis that if a matc hing price is not offered, there is other capacity
available that will snap it up.

191. Furthermore, two referenc e documents, one issued by the WTO Secretariat
114 and one issued
by the OECD Secretariat 115 confirm that Korean Shipyards are the price leader on the world
wide market. As already indicated in our response to Panel question 163, three of the five Korean
leading shipyards are restructured shipyards, exercising a strong pressure on the other Korean
shipyards preventing prices to incr ease when the demand increases. The OECD Secretariat notes that
under normal economic theory:

high demand would drag up prices, as the market sought some kind of equilibrium.
The combination of high demand and lower input costs should also signal a period of
high profits for all manufacturers, but this has not happened. The fact that this has not
happened, and does not show any signs of happening, would reinforce the view that
the industry is still affected by considerable excess capacity.
116
192. Then, the OECD notes as well that the explan ation of low prices cannot be found through a
strong decrease in material/metal cost. The conclusion of the OECD “ is that the market is being
interfered with, which prevents prices from responding to steeply increasing demand ”.117 T he t w o
factors identified to explain such a situation are (i) the Korean shipyards overcapacity resulting from
restructuring subsidies and (ii) the price depression and suppression leadership by Korean shipyards.

114 TPRM Korea (Exhibit EC-82).
115 OECD Document “Recent Newbuilding Price Developments” C/WP6/SG(2003)10 (Exhibit EC-
157), paragraph 10.
116 Ibid., para. 9.
117 Ibid, para. 13.

LIST OF ATTACHMENTS

Attachment EC-10 EC – Calculation for Benefit PSL

Attachment EC-11 EC – Calculation for AdValorem Benefit PSL

Attachment EC-12 EC – Calculat ion for AdValorem Benefit APRG

Attachment EC-13 EC – Calculation Subsid ies to Daewoo, including Tax Concession

L
IST OF EXHIBITS

Exhibit EC-148 Report by PriceWaterhouseCoopers, June 2004

Exhibit EC-149 World Bank Report on Korea (18 September 2000).

Exhibit EC-150 Details of 19 July 1999 Loan to Daewoo-HI (Attachment 3.1(2) of
Korea’s Annex V response)

Exhibit EC-151 OECD Evaluation of World Shipbuilding Capacity (2000 Revision),
C/WP6(2001)6 (29 May 2001)

Exhibit EC-152 Clarkson World Shipyard Monitor

Exhibit EC-153 OECD Document C/WP6/SNG(2004)

Exhibit EC-154 The Knaepen Package: Guiding Principles for Setting Premia Fees
under the Arrangement on Guidelines for Officially Supported
Export Credits, entry into force by 1 April 1999

Exhibit EC-155 Lloyd’s Register ’s “World Shipbuilding Statistics”

Exhibit EC-156 Cost Modelling Details Angelicousis LNG at Daewoo

Exhibit EC-157 OECD Document “Recent Newbuilding Price Develoments”
C/WP6/SG(2003)10

Note: Attachments and Exhibits in bold contain BCI.

ANNEX G-2

COMMENTS OF THE EUROPEAN COMMUNITIES ON NEW
FACTUAL INFORMATION PROVIDED BY KOREA

(9 July 2004)

I. INTRODUCTION

1. The European Communities thanks the Panel for providing it with an opportunity to comment
on any new factual information to submitted by Kor ea in conjunction with the 2 July answers to the
Questions from the Panel.

2. The invitation by the Panel to comment, as the European Communities understands it, is
strictly confined to new factual information submitted by Korea in its Responses to the Panel
Questions following the second substantive meeting with parties. Therefore, the European
Communities will not comment, again, on any facts reite rated by Korea in that context, appreciation
of old and new facts or otherwise legal argumen ts. Therefore, the fact that the European
Communities does not comment on the latter does not m ean that they are no longer disputed by the
European Communities. The European Communities refers the Panel to its positions on facts and
legal arguments as previously expressed. In additio n, the European Communities has sought to limit
its comments to new factual elements that appear relevant to the Panel’s deliberations.

3. For the convenience of the Panel, where th e European Communities has a comment to make
on new factual information introduced by Korea, the European Communities first repeats the question
and the response by Korea before setting out its comment.

II. KOREA’S RESPONSES TO QUESTIONS BY THE EC

4. Paragraph 209 of Korea’s Oral Statement: If the tax breaks pursuant to Article 45-2 of
the Corporate Tax Act referred to were not inte nded to apply only to the Daewoo workout why
were they introduced in conjunction with that workout and granted for only three months –
enough time to allow Daewoo to capture them? How may other companies have benefited? Is it
still in force?

Korea’s Response

 Article 45-2 of the STTCL was intended to exte nd the tax provision to workout companies as
well as companies undergoing corporate reorganization. When the law was deliberated at the National
Assembly, every company which could be affected by the proposed law was interested and waited for
the law to be passed. The law has a broad base of a pplication in terms of the companies to which it
could apply.

 The law was extended twice so that workouts and corporate reorganizations carried out until
the end of 2002 could be covered. It is normal for ta x laws in Korea to be adopted on an annual basis.
No records have been kept either in court or by the tax administration to identify the companies that
made use of this tax provision.

EC Comment

 Korea claims that it has not kept any record s that it would allow it to identify companies
using the tax break. The European Communities woul d note that Article 46(3) of the Corporate Tax
Act, which is applicable to Article 46(1) of the Corporate Tax Act referred to in Article 45-2 STTLC
and therefore to this tax break requires, companies th at request its application to submit “a detailed
statement on corporate division to the competent district tax office”.

 In view of Korea’s statement that there a re no records, the European Communities considers
that the Panel can only assume that there are no other cases of application of Article 45-2 STTLC.

III. KOREA’S RESPONSES TO QUESTIONS FROM THE PANEL

110. Please comment on the EC’s assertion (a t part 107 of its Second Written Submission)
that Korea failed to provide details of the rat es of five of the APRGs issued for Samsung by
commercial banks in 1997.

Korea’s Response

 Korea provided the best information available at the time of the Annex V procedure. Korea
notes that much of the information requested in A nnex V and subsequently has not been in the hands
of the Government of Korea. Having confirmed with Samsung, Korea understands that the rates of the
five APRGs referred to by the EC were not av ailable as the required preservation period of the
relevant documents had expired. Where informati on for some of the APRGs issued in 1997 was still
available, such information was submitted.

EC Comment

 The European Communities does not find it credible that a company like Samsung would not
keep documents for more than five years or, indeed , that it would do for some APRG documentation
but not for others.

 The European Communities considers that the Panel should infer that the missing
documentation was not provided because it would have shown the existence of a subsidy.

113. In respect of Koreas repl y to Question 71 from the Pane l, please provide supporting
evidence for Korea’s assertion that the Kook min and Woori Bank rates for Samsung APRGs
were [BCI: Omitted from public version] instead of [BCI: Omitted from public version].

 Korea hereby confirms that the Kookmin Bank and Woori Bank rates for Samsung APRGs
were [BCI: Omitted from public version] . Korea’s prior statement that is not consistent with this
information was inadvertently made due to clerical mistake by the company in pulling together the
response. Korea regrets any confusion.

EC Comment

 Korea re-confirms the original EC assertion (based on Annex V information provided by
Korea) that the Kookmin Bank and Woor i Bank rates for Samsung APRGs were [BCI: Omitted from
public version]. The EC calculations on APRGs are based on this assumption and therefore remain
valid.

116. Korea asserts that Articl e 45-2 of the Corporate Tax Act does not constitute revenue
forgone, and did not confer a benefit. According to the news report in Exhibit EC-136, however,
a Daewoo company official stated that Daewoo would “be exempted from taxes totaling 236
billion won’. Please comment, and explain how a 236 billion won tax exemption is not revenue
forgone and did not confer a benefit

Korea’s Response

 Under the SCM Agreement , the EC has the burden to prove specifically what government
revenue was otherwise due and how such revenue was foregone or not collected (Article 1.1(a)(1)(ii)).
The EC has failed to carry this burden of proof. Moreover, it appears that the EC still has no clear
understanding of the Korean tax scheme. As a resu lt, Korea still can not determine specifically what
the EC’s allegations on tax concessions are about.

 The news report in Exhibit EC - 136, which quoted the alleged statement by a Daewoo
official, establishes nothing about the types of taxes concerned, applicable provisions of tax laws, tax
rates, calculations of the tax amount involved, how they were foregone, etc. Given the complication
and technicalities of the tax issues, no Panel wo uld make an affirmative finding of financial
contribution and benefit on the basis of such a very questionable newspape r article. Moreover, the
amount of KRW 236 billion allegedl y mentioned by a Daewoo official does not distinguish what
portion of this total amount is attributable to DSME as distinguished from the portions attributable to
the machinery company and to the remaining DHI. In short, the EC has not established a prima facie
case of the tax concession as required by Article 1.1(a)(1)(ii) of the SCM Agreement.

 Under these circumstances, Korea is placed in an awkward position when it is asked by the
Panel to “explain how a 236 billion won tax exempti on is not revenue foregone and did not confer a
benefit”. This question assumes that there was a tax exemption of KRW 236 billion, but Korea
disagrees that a 236 billion won tax exemption has ev er been established by the EC. Unless the EC
first explains how KRW 236 billion or whatever amount has been calculated and under what
provisions of tax laws, it is impossible for Korea to explain how this amount is not revenue forgone.
Nonetheless, Korea would like to comply with th e request of the Panel by providing further
explanations on the tax issue, while again reserving its rights regarding the burden of proof.

 First of all, Korea refers the Panel to pa ragraphs 221 and 222 of the EC’s Second Written
Submission, in which the EC made clear that its “core claim” was the “temporary tax exemptions”
granted under Article 45-2 of the Special Tax Treat ment Control Law (“STTCL”) which extended tax
incentives under Article 46 of the Corporate Tax Act. It appears that the EC believes that Exhibit EC -
136 provides evidence of the size of tax incentives under the above Article 46 of the Corporate Tax
Act which had been “extended” by Article 45-2 of the STTCL.

 However, as Korea has repeatedly explained (see, e.g., paras. 206 – 208 of Korea’s Oral
Statement at the Second Panel Meeting), the special tax treatment under Article 46 applies only when
“valuation gains” have arisen to a spun-off company as a result of the “valuation” of assets carried out
at the time of the spin-off. In the case of the DHI workout, the assets of the original DHI were spun-
off to DSME and the machinery company at book value (i.e., without “valuation” of those assets).
Therefore, DSME could not obtain any tax incentiv es under Article 46 of the Corporate Tax Act as
extended by Article 45-2 of the STTCL.

 The fact that the DHI assets were transfe rred at book value to the spun-off companies is
clearly demonstrated by Exhibit Korea – 120
 (1999 Anjin’s Workout Report, excerpted pages,
Appendix 10), as well as by Exhibit EC-55 (DHI Workout Plan), Appendix D-11 (balance sheet) and
Exhibit EC-56 (Structure of spin-off). Also, the EC has never disputed this fact.

 Therefore, contrary to the allegation by the EC, there was no tax exemption granted to DSME
under Article 45-2 of the STTCL and Article 46 of the Corporate Tax Act. Thus, the EC’s “core
claim” fails, and the questionable statement by a Daewoo official in Exhibit EC-136 cannot prove
anything when what the EC proposes to prove on th e basis of hearsay cannot “legally” make sense.
For the avoidance of any doubt, Korea hereby submits the text of Article 46 of the Corporate Tax Act
(both the Korean original and English translation) as Exhibit Korea – 121.

 In this situation, it is questionable that a Daewoo official could really have made the
statement about KRW 236 billion as was written by the journalist or whether the journalist
misunderstood. If a Daewoo official really made that statement, it may well be that he misunderstood
the facts and the applicable tax law. The other pl ausible answer might be that the Daewoo official
may have referred to a totally diffe rent type of tax incentive. A possible candidate is the “special
additional tax” which could have b een levied if there were gains from the transfer of certain assets
from DHI to the spun-off companies. However, this tax was to be levied on DHI
 (remaining after the
spin-off) under Article 99 of the Corporate Tax Act.

 Prior to 31 December 2001, the Corporate Ta x Act provided that, if a company realized
capital gains from the transfer of certain assets (e.g., land, building and other real property rights), the
transferring company was required to pay, in addition to ordinary corporate income tax, the so-called
“special additional tax” at the rate of 16.5 per cent of the capital gains so realized (See Exhibit Korea
– 121, Articles 2 and 99 of the Corporate Tax Act). For the purpose of this tax, the ‘capital gains’
meant the amount of the transfer price of the assets concerned, minus their original acquisition price
and acquisition costs. In the context of the DHI spin-off, DHI may have been required to pay a
substantial amount of such special additional tax if capital gains had been realized through the transfer
of assets to DSME and the machinery company. Even if the transfer of assets was made at book value,
the book value of those assets could have been higher than their acquisition prices and costs as a result
of, among others, re-valuation made prior to the spin-off pursuant to the Asset Re-valuation Act.

 Again, it should be noted that the payer of such special additional tax was the transferor of the
assets subject of the special additional tax (i.e., the remaining DHI). However, by virtue of a special
provision of Article 99(11) of the Corporate Tax Act, the transferor’s payment of special additional
tax could be deferred if the transfer of assets took place as a result of, among others, a spin-off that
satisfies the requirements of Article 46 of the Corporate Tax Act. ( See Exhibit Korea – 121,
Article 99(11)). In the case of companies in restruct uring, a problem arose due to the technical issue
of not having precisely equal shareholding ratios due to the normal rules of share allocations in such
situations. If a provision such as Article 45-2 ha d been included in the STTCL, thereby treating a
spin-off made on unequal shareholding ratios as sa tisfying the requirement of Article 46 of the
Corporate Tax Act, then, the remaining DHI’s liab ility for special additional tax could have been
deferred (not exempted) pursuant to Article 99(11) of the Corporate Tax Act and the remaining DHI
would have been relieved of the burden to pay special additional tax immediately upon the spin-off.

 However, by virtue of a subsequent legislati on, the “special additional tax” was repealed as of
1 January 2002 ( See Exhibit Korea – 121
, Law No.6558 of 31 December 2001). As a result, any
special additional tax liability of the remaining DHI (the provisions were only relevant to the
transferor, not a transferee such as DSME) was completely extinguished. 1 This repeal was made
mainly because the special additional tax was c ontroversial as it operated as a double taxation in
addition to ordinary corporate income tax which would also be assessed on the same capital gains as
those subject to special additional tax.

1 Korea also notes that this was generally available for any and all Korean corporations involved in any
“asset transfer” transactions because the “special additional tax” itself wa s withdrawn in its entirety from the
Korean tax system by virtue of the law of 31 December 2001.

EC Comment

 The European Communities cannot hide its amazement that Korea is now claiming for the
first time (without providing, however, any suppor ting documentation) that Article 45-2 was not
applicable to the Daewoo restructuring and that an y benefit would have allegedly been to DHI under
Article 99 of the Corporate Tax Act.

 The European Communities is unable at this time to obtain the tax advice necessary fully
comment on the plausibility of these claims. Such tax advice would not however appear necessary in
the light of the following facts:

• Korea does not deny the fundamental point in the Newspaper article that the Daewoo
restructuring would not have gone ahead without the tax exemption (whatever the precise
legal basis);

• Korea confirms that the Arthur Andersen Repor t did not analyse the tax consequences of the
restructuring plan (this is stated even more clearly stated in reply to question 123). This fact
either adds to the flaws of the Arthur And ersen Report already identified by the European
Communities and further reduces the going co ncern value or it shows that the entire
restructuring was precooked from the beginning with Arthur Andersen knowing about the tax
exemption well before it was adopted.

125. (a) The list of factors identified in the Drewry Report as determinants of ship price
includes freight rates, delivery date/build time (which would s eem to be related
to capacity and thus supply and demand), and payment terms (which would
seem to be related to financing). Drewry does not refer to any measure of the
aggregate level of demand as such. Please explain.

Korea’s Response

 Drewry considers that the trend in demand for each like product separately is one of the
factors that contribute to the relevant price level for the product considered. However, as mentioned in
Section 1.2.2 of the Drewry report, considering only that price will vary directly in line with demand
does not go far enough as there are many other demand and supply-related factors that contribute to
determining the price level for any like product. In Section 1.2 of Exhibit Korea – 70, Drewry
identifies a range of factors that are considered to have an impact on ship price, i.e.:

• External factors (para 1.2.1)
 o Freight rates
 o Exchange rates
 o Metals prices index
• Supply side (para 1.2.2)
 o Workload shortage or overcapacity
• Demand side (paras 1.2.3 and 1.2.1)
 o Size
 o Delivery date
 o Payment terms
 o Build time
 o Shipbuilding orderbook
 o Speed and manoeuvrability
 o Hull strengthening

 o Equipment specification
 o Paint & coatings
 o Innovative design
 o Regulatory: Class and Ship Register

 While the aggregated supply-demand balance is, th erefore, clearly a factor which affects price
in the shipbuilding industry, Drewry considers that it is not the only or dominant factor. Applying the
simple economic concept of supply-demand bala nce, however, encounters some problems in
shipbuilding, primarily:

• the difficulty in quantifying shipbuilding capacity (as opposed to historical output levels)

• the fact that this capacity is not all dedicated to merchant shipbuilding and may also be in
used for naval shipbuilding, ship repair and conversion and offshore structure construction in
particular

• the lack of homogeneity in aggregate demand (primarily due to different ship types and sizes)

• the lack of homogeneity in aggregated supply due to the size capability of yards’ facilities and
the experience base regarding ship types that they have experience in building.

 The result is that whilst demand may be able to be categorized according to size and type of
vessels, supply cannot rigorously be divided on th e same basis and so there is considerable non-
homogeneity within the supply-demand balance.

EC Comment

 Contrary to what Korea states, there is no significant non-homogeneity within the supply-
demand balance. CGT is the factor designed to iron out non-homogeneity. Th is is acknowledged by
Korea, e.g., in its response to Panel Question 173(b) at p. 73, last paragraph.

 (b) Also, in discussing Korean cost ad vantages on the supply side, Korea does not
refer to cost of debt service/interest expenses. Please explain.

Korea’s Response

 Debt service costs tend to be specific to a par ticular yard’s situation, both in terms of the
structure of its financing of capital assets and also it s working capital requirements. It is, therefore,
not possible to take general economic indicators to estimate the relative cost advantages or otherwise
of different yards in this respect. For example, in the EC there are many long established yards whose
capital cost of facilities has long since been amortized and any interest on debt related to this will also
have gone. Debt service costs related to facilities ar e, therefore, likely to be those associated with
improvements and modernizations. In general terms, there has been a lower level of modernization at
EC yards, but exceptions to this are to be found in the passenger shipbuilding yards and most
particularly in the former East German yards like Aker MTW and Kvaerner Warnow Werft. In these
yards the modernizations were state funded and then when the yards were privatized the new owners
inherited the new facilities at a fraction of the investme nt costs – in this situation, the debt levels and
hence debt service costs are driven by very specific circumstances which does not make for easy
comparisons.

 However, the area where Korea has significant cost advantages fo r such costs is in terms of
the scale factor of its production. Firstly, debt service costs are supported by high workload volume

throughputs and as such on a basis of output units th e cost per unit will be lower than for smaller
yards.

 This is particularly relevant in the case of financing of facilities and capacity where the capital
cost of providing 1,000 cgt of capacity will be fa r lower than in smaller capacity yards. The
Figure 8.1 in Exhibit – Korea 70 gives an indicatio n of the throughput scale differences between EC
and Korean yards, particularly recognizing that most of the bigger EC entries are in fact groups
comprising more than one yard.

 A good example of the economies of scale is evident from the exam ple of LNG-specific
investment. As highlighted in the KPMG report submitted as Exhibit Korea – 108, FMI assessed that
a European yard would need to cover the investme nt burden of LNG specific investment over a series
of 3 LNG ships but subsequently changed its estim ates for Daewoo to recovery over 10 ships, to
reflect the higher throughput volumes of such v essels at the Korean yard. By the end of 2002,
Daewoo had in fact received orders for 21 LNG ve ssels and so its capital expenditure and any debt
service cost associated with this is likely to be mu ch lower than any European yard with only short
series builds.

 In respect of working capital requirements and the debt service costs of these, the Korean
yards are considered to operate at an advantage to EC yards in this respect in view of the generally
better cash flows achieved by their more front-end loaded contract payment installments.

 Therefore, Korea submits that the EC has not shown that debt service costs/interest expenses
of the allegedly subsidized Korean yards have incurre d such an increase over the years as to offset the
decrease in costs that was shown in the Drewry report in Exhibit – Korea 70. And, in fact, as
mentioned above, the debt service costs and interest expenses, as confirmed by the EC’s expert, FMI,
have shown a decreasing effect due to their sp read over a greater throughput. Thus, Drewry’s
conclusion stands: the decrease in Korean costs of production is clearly greater than the decrease in
prices of the vessels concerned.

EC Comment

 Of course, debt service costs are specific to particular shipyards. Their analysis is
straightforward based on information available in company accounts and documents such as work-
out plans. The cost modeling undertaken by FMI takes this into account: The level of debts for each
yard is analysed and a contribution is calculated pr o rata for each project of the yard during the
period in question. If a yard has received a high number of orders, debt service costs would of course
be spread over all orders, but a reasonable estimation of the costs of production, which have to be at
the base of the final offer price, cannot take into account future orders which have not yet
materialized. That is to say that e.g. Daewoo could not have assumed in 2000, when estimating its
costs of production for a LNG carrier, that by the en d of 2002 there would be a total of 21 orders and
debt service costs would therefore be lower fo r each individual project. Concerning Drewry's
conclusion, the EC notes that Drewry only made qualitative assessments of the cost advantages in
Korean yards and claims that costs of production are extremely difficult to estimate. It is therefore not
clear how Drewry can come to such a specific conclusion.

126. Korea seems to imply that shipyards special ize in producing certain kinds of ships. If a
given Korean shipyard has no history of producing, for example, ferryboats, could this be the
basis for concluding that that shipyard cannot produce them? Please explain.

Korea’s Response

 The fact that a national industry or individual shipyard does not produce a particular type of
ship, does not necessarily mean that it is physically or technically incapable of building that type of

vessel. The reality is that there is a range of factors which places limitations (physical, economic and
technical) on the shipyard such that it is either not economically viable for the yard to build them or
that it does not have credibility as a competent builder in the customers’ eyes.

The following are the main factors imposing limitations:

• ship size – the shipyard has to have buildi ng locations big enough to build the ship in
question, this includes the height of lift for cranage and or headroom clearance in covered
building berths for ships with very high superstructures;

• specialist facilities or skills – for certain ty pes of vessels specialist facilities are required
which must be provided in the shipyard or some times from a supplier or sub-contractor. Ship
types that are generally recognised to have such requirements include:

 o Cruise ships: skills for the installation of glass atriums and interior decoration; high
volume of modular cabins, highly complex interaction of specialist sub-contractors;

 o Ro-Ro ships: skills to install the water tight bow and stern doors and associated ramps;

 o Chemical tankers: some chemical tankers include tanks made of stainless steel which
requires special welding equipment and welding skills;

 o LNG ships: ability to construct the special containment gas containment tanks or to
lift in and install such tanks made by su b-contractors; high levels of insulation
‘boxes’ required to insulate the tanks; sk ills in the installation of steam turbine
engines which are rarely used in other me rchant ship types; and most recently gas
turbines and dual fuel engine arrangements;

 o FPSO and drill ships: skills in the installa tion of what is referred to as the ‘topside’
equipment for these vessels involved in seabed oil extraction and storage; specialist
mooring and pipeline connections for loading and unloading cargo;

 o Fast ferries: skills and facilities for construction of the aluminium hull and
superstructure which requires specialised welding facilities and skills and sometimes
hull jigs;

 o Tankers: although less dramatic, tankers of most kinds have much higher levels of
pipework and valves so a shipyard buildin g tankers must have superior pipeshop
capabilities and facilities in-house or by sub-c ontract than those building other ship
types.

 Shipyards tend to have a range of ship typ es and sizes which they produce and for which they
gain a reputation in the marketplace with customers and hence they will focus their marketing efforts
on these ship types and sizes. These are ship typ es and sizes in which they can be most cost
competitive and where they have good customer credib ility in terms of design, price, and delivery.
Through a combination of self-selection and custom er selection they focus on market sectors where
they can maximise their competitive advantage.

 This is not to say that they cannot move into other markets that are within their physical
capability but to do this they will have to be ab le to hone their productivity; offer good designs and
will need to build customer awar eness in their competence and compe titiveness in this market. They
will recognize that yards already well established a nd active in these markets will have an advantage
over them initially.

 The fact that yards specialize in specific lik e product vessels can be shown for yards all over
the world including for Japanese and Chinese yards but also for the EC yards as is demonstrated
below. The data covers the same timescale of deliveries or orders from 1990 and records the
involvement of 290 EC yards across all ship types over that time:

• General Cargo and Multi-purpose ships : 75 EC shipyards (or shipyard groups if not
reported at yard level) have been involved in this sector so there has been plenty of
participation with 771 vessels involved. But th ere has been no involvement by any the IZAR
yards in Spain; any of the Fincantieri yards in Italy, Chantiers de l’Atlantique, Odense, Aker
MTW, HDW, Lindenau, Kvaerner Masa Yards. The major yards involved have been Damen
group, Peters Scheepswerf, Ferus Smit, Bodew es and Vollharding of Holland and JJ Sietas of
Germany which have built 347 of the 771 ships.

• Bulk Carriers: 39 EC shipyards have been involved in this sector involving 154 ships but
there has been no involvement from Chantiers de l’Atlantique, Odense, Aker MTW, Kvaerner
Warnow Werft, Volkswerft, HDW, Lindenau, Kvaerner Masa Yards and only two built at
IZAR group yards. Fincantieri yards however we re involved with 16 of the 154 vessels. The
market leader in this sector is Japan where 2, 152 ships were involved followed by China with
454 ships. So any lack of involvement seems unlikely to be connected to Korean yards.

• Container Ships: 51 EC shipyards have been involved in this sector involving 693 ships but
participation has varied dramatically by size of vessel. Whilst 39 yards were involved in
building container ships of <1,000 teu, only 5 ya rds were involved in building container ships
of 3,500 teu and above; 21 yards were i nvolved with building mid range vessels of
1,000<3,500 teu. Kvaerner Masa Yards and Ak er Finnyards of Finland and Chantiers de
l’Atlantique of France did not participate in this market at all, whilst in Spain, IZAR groups
yards built just 10 and Union Naval Valencia built another 2; and in Italy Fincantieri yards
were the only ones to participate with 9 vessels. The concentration of containership building
within EC lies with the German yards, Dutch yards (for ships on less than 1,000 teu only) and
with Odense of Denmark.

 It is evident that the shipyard supply market within the EC is far fr om homogenous and some
shipyards have a particularly strong focus on certain size or types of vessels, i.e.:

• Damen Shipyards group of Holland built 251 ships dur ing the period of which 194 were
either Tugs, General Cargo or Multi-purpose Cargo ships.

• Lindenau Shipyard in Germany where 21 of the 24 vessels with which it was involved
during this period were Chemical Tankers.

• Odense Shipyard in Denmark, where 59 of the 76 vessels were container ships.

• Chantiers de l’Atlantique in France, where 32 of the 47 ships were Cruise Ships.

• Kvaerner Masa Yards where out of 54 ships, 25 were Cruise Ships, 9 were Ferries and 8
were Offshore.

• Aker Finnyards
 where out of 41 ships, 20 were either Cruise, Ferry or Passenger ships and
another 4 were Reefers ships and 3 were RoRos.

• Smaller Italian Yards : Morini where 13 out of 20 ships were chemical tankers; Orlando
where 10 out of 14 ships were chemical tankers ; de Poli where 10 out of 20 were chemical

tankers and another 7 were LPG ships; Rodriqu ez where 18 out of 29 were ferries and 6 were
passenger ships; SEC where 16 out 24 were chemical tankers and 5 were Ro-Ros; Visentini
where 14 out of 25 were Ro-Ro and 11 were ferries.

• Smaller Spanish Yards: Armon group where 47 out of 91 were fishing vessels and 43 were
Tugs; Zamacona where out of 55 ships 36 were Tugs and 9 were fishing vessels; UN
Valencia where out of 45 ships 23 were Tugs a nd 9 were chemical tankers; Freire where 21
out 27 ships were fishing vessels; Gijon Naval where out of 14 ships, 7 were fishing vessels
and 7 were chemical tankers; Cies where 10 out of 11 were fishing vessels; Barreras where 11
out of 31 were fishing vessels, 9 were Vehicle Carriers and 6 were Ferries; Balenciaga where
out of 16 ships 7 were fishing vessels and 6 were Tugs; de Huelva where 23 out of 35 were
fishing vessels.

• Small Dutch Yards : Peters Scheepswerf where 57 out of 60 ships were General Cargo;
Bodewes were 26 were Gene ral Cargo and 22 were Multi- purpose Cargo (MP Cargo);
Vollharding where 25 were MP Cargo and 17 were General Cargo out of 63 ships; Tille
where out of 22 ships 10 were Containers a nd 9 were MP Cargo; IHC Holland where 48 out
of 51 ships were Dredgers; K Damen where 13 out of 20 were chemical carriers;

 We believe that the above demonstrates that th e supply side of the shipbuilding market is far
from homogenous and that yards do tend to speciali ze in certain types and sizes of vessels. The
reasons for this may relate to facility limitati ons, but may also be driven by the yards own
appreciation of the sectors that it has the best co mpetitive advantage in or by customers’ views on
technical competence and competitiveness for certain ship types.

EC Comment

 The EC is pleased to note that Korea is revising its previous untenable position. While it
claimed in para 294 of its second written submission that "Korean shipbuilders and the EC shipyards
operate to a large extent in different like products markets", Korea now acknowledges that some EC
yards are active in each segment where Korean yards operate, in particular, container ships.

 Korea’s attempt to argue that smaller and bigger EC yards are not active in the same
segments is irrelevant. In the view of the European Communities it is sufficient that at least one yard
of the EC shipbuilding industry is capable of producing ships in the same market segment.

IV. KOREA’S COMMENTS TO QUESTIONS FROM THE PANEL TO THE EC

158. (a) Is it the view of the EC that excess sh ipbuilding capacity exists only in Korea, or
is there also excess capacity in other countries?

 (b) If your view that excess capacity exists only in Korea, please explain.

 (c) If your view is that there is excess capa city also outside of Korea, where and how
much is the excess?

 (d) Is there any excess shipbuilding capacity in the EC? If not, what is the basis for
this conclusion?

Korea’s Comments

 It is recognized within the industry that there is no easy way to rigorously measure
shipbuilding capacity. However, significant attemp ts have been made over recent years, under the
auspices of the OECD Working Party on Shipbuilding, to improve the estimation of shipbuilding
capacity.

 The latest estimates of capacity from OECD sources are an estimated figure for actual
capacity in 2000 and a figure for anticipated capacity in 2005 which was also made and agreed in
2001
2 from estimates provided by the Japanese, EC, USA and Korean shipbuilding associations
expressed in cgt. The following table shows an assessment of capacity utilization for the major
shipbuilding regions based on these capacity assessment s and shipbuilding output statistics from LR
Shipbuilding returns.

 Versus 2000 capacity Versus projected 2005 capacity
 2001 2002 2003 2001 2002 2003
Japan 90% 93% 95% 84% 86% 88%
South Korea 94% 104% 111% 77% 84% 90%
EU countries 87% 84% 76% 78% 76% 68%
AWES non EC 1 86% 83% 74% 78% 76% 68%
Other European 61% 80% 87% 54% 71% 77%
China, PR of 96% 110% 180% 63% 72% 118%
Asia & Pacific 43% 63% 48% 39% 58% 44%
NIS Countries 2 29% 83% 64% 27% 77% 59%
North & South
America 32% 44% 58% 29% 39% 52%
Africa & Middle
East 8% 8% 8% 8% 8% 8%
Others 0% 0% 0% 0% 0% 0%
WORLD TOTAL 85% 91% 96% 74% 79% 83%

1 AWES non EC = Norway, Poland and Romania
2 NIS = Russia, Ukraine, Latvia, Lithuania, Georgia, Azerbaijan

 While Korea is not endorsing this extremely general overview as an appropriate measure for
the multiple industries examined in this WTO dis pute, nonetheless, the table helps to indicate the
situation regarding estimated excess capacity in the main shipbuilding regions in spite of the difficulty
in defining shipbuilding capacity and the fact that the 2005 figure is a projection which is now some
3 years old.

 Against both the 2000 capacity estimate and the 2005 capacity projection it can be seen that
excess capacity exists all around the world. Regardi ng the major shipbuilding regions, it is noted that
there is significant excess capacity within the EC yards and some overcapacity in Japan. The table
below shows a country level breakdown for the EC’s main shipbuilding countries.

2 OECD Document C/WP6(2001)16 of 'Present Market Conditions and Future Outlook for the World
Shipbuilding Industry' dated November 14, 2001 and prepared by the Secretariat of which an excerpt is attached
in Exhibit Korea – 123.

 Versus 2000 capacity Versus projected 2005 capacity
 2001 2002 2003 2001 2002 2003
Denmark 68% 82% 72% 61% 73% 65%
Finland 116% 88% 69% 116% 88% 69%
France 165% 107% 139% 147% 95% 124%
Germany 102% 106% 79% 90% 93% 70%
Italy 80% 89% 88% 69% 77% 76%
Netherlands 77% 72% 43% 69% 64% 38%
Spain 59% 67% 88% 54% 62% 81%
United Kingdom 19% 21% 28% 19% 21% 28%
EU countries 87% 84% 76% 78% 76% 68%

 Of particular note is the situation regarding Ch ina, where it is shown that output has exceeded
the projected 2005 assessment. At the time of the 2001 projection, unlike the other major
shipbuilding regions of Japan, Korea and the EC , China did not supply its own estimate nor has it
done so subsequently. The OECD capacity estimat es show that output has exceeded the estimated
2000 capacity figure in both 2002 and 2003 and exceeded the 2005 projected capacity in 2003.

 However, there has been considerable grow th in capacity in China since 2000 both through
improved performance
3 and additional or enhanced faciliti es. Drewry Shipbuilding Consultants
believes that there has been excess capacity within China during this period. Over the period 1999-
2001 it is estimated that the top 20 shipbuilding yards in China (which represented approximately
three quarters of the country capacity) were work ing at 55 per cent of their capacity. Drewry
undertook a detailed estimate of capacity in China, based on the agreed OECD guidelines which
reflects the type of ships built and performance over the period 1999-2001, which was published in its
(non-commissioned) report on China’s Shipyards issued in July 2003. This assessed Chinese capacity
to be 3.187million cgt at the end of 2002 which take n in conjunction with the reported output for
China in 2002 and 2003 would indicate utilization levels of 49 per cent and 81 per cent respectively.
Furthermore, Drewry calculated that a projected additional 0.353 million cgt was scheduled to come
on line by 2005/6. This estimated 2005/6 capacity of 3.54 million cgt contrasts with the earlier OECD
estimate for 2005 of 2.18 million cgt.

EC Comment

 Korea provides two OECD tables in order to argue that there is overcapacity in the European
Communities and otherwise in the world. However, this evidence is irrelevant, since it the tables
concern capacity utilization and not capacity. The reason for lowered capacity utilization in the
European Communities is the consequence of the serious prejudice caused by Korean subsidies.
Moreover, utilization rates of Korean yards are misleading as they have filled their capacities
through low-price offers. Korea seems to argue t hat a yard brimming with orders cannot contribute
to shipbuilding overcapacity although that yard is maintained only due to subsidization.

 Exhibit Korea -123 actually confirms Korean capacity expansion through the 1990s while EC
and Japan remained flat. Korea nowhere contested th e fact that capacity of EC shipyards has been
reduced significantly over the last 20 years (Second written submissi on by the European
Communities, para. 395).

3 One of the great difficulties in this area is th at potential capacity is profoundly influenced by
efficiency of production, not just by nominal physical capacity. This explains in part why China with its great
potential is such a “wild card” in the projections.

161. The EC presents indices of estimated Ko rean production costs versus prices in support
of its argument that there is price suppression/depression The EC indicates that its consultant,
FMI, prepared the cost estimates, taking into account various known cost trends and cost
advantages of the Korean yards. The EC in its an swers to questions following the first meeting
provided a description of the methodology used by FMI to prepare these estimates. The EC also
indicated that, should the Panel so request, it would furnish the detailed underlying data. Is it
the view of the EC that a graphical presentation of price indices, along with a description of
methodology, constitutes prima facie evidence of evolution in Korean shipbuilding costs? Please
explain.

Korea’s Comments

 Korea observes that the EC has not even provided production cost versus price indices for
each of the vessel segments that the EC itself has identified. In the Second Substantive Meeting, upon
a request of the Panel, the EC has confirmed that a serious prejudice assessment should be made for
each of the three product segments identified by the EC separately. While the same question is now
addressed in writing to the EC, having clearly separated the three product segments, in the EC’s
rationale, there is no reason why the EC should r espond differently in writing. Thus, when the EC
alleges that price suppression must exist because in the absence of price pressure due to Korean
subsidies, the increase in demand, freight rates and cost of production would have led to price
increases, the EC should have made a prima facie case in support of its allegations already in its First
Written Submission for each of its own product segments separately.

 The EC failed to do so and even further weakened the strength of its allegations in
Attachments 2 and 6 of its responses to the Pa nel’s questions as well as in its Second Written
Submission. The following will clarify this:

 First Written Submission Attachmen t 2 of the EC’s responses to
the Panel’s questions
 Price
developments
Price and cost
index
Price
developments
Price and cost
index
LNGs Newbuilding price
developments
(Figure 30 at page
164)
Cost and price
indices for Korean
LNGs (Figure 38 at
page 165)

No explanation on
how these cost
indices were
obtained and which
LNGs are reflected
in these LNGs.
Year-end prices of
LNGs (Figure 1.3 at
page 3)

Cost and price
indices for Korean
LNGs (Figure 1.5 at

Half of one page
explanation on the
“estimation” of cost
indices (Section 4 at
page 16) but still no
clear explanation on
how these costs were
calculated or which
LNGs are reflected
in these indices.
Container vessels A graph with world
market prices for
3,500 teu and for
1,100 teu container
vessels taken from
Clarkson Research
Studies

Cost and price
indices for Korean
3,500 teu container
vessels (Figure 40
at page 166 of the
EC’s First Written
Submission)

A graph is shown
with price
developments for 8
different sizes of
containers based on
Clarkson research.
Cost and price
indices are shown
for a Korean
panamax container
ship (Figure 3.7 at
page 15.

 First Written Submission Attachmen t 2 of the EC’s responses to
the Panel’s questions
 Price
developments
Price and cost
index
Price
developments
Price and cost
index
(Figure 41 in the
EC’s First Written
Submission, at page
167)
Price indices
presumably
calculated based on
Figure 41.

No explanation on
how these cost
indices were
obtained and which
container vessels
are reflected.

No explanation as
to why conclusions
for all container
vessels are drawn
on the basis of a
specific size range
only.
The comments with
regard to the data in
the First Written
Submission remain.
In addition, it is
questioned whether
the cost and price
indices shown in
Figure 3.7 can be
reconciled with
those in the First
Written Submission.
The latter reflected
those of 3,500 teu
container vessels
while Attachment 6
to the EC’s
responses to the
Panel questions
indicates that
Panamax container
vessels which are
reflected in Figure
3.7 cover vessels
between about 4,000
and 5,000 teu (item
7. at page 1.) There
seems to be an
inconsistency in the
EC’s demonstration.
Product and
chemical tankers
No price
developments
shown at all.
Cost and price
indices for Korean
handysize product
and chemical
tankers (Figure 43
at page 169 of the
EC’s First Written
Submission)

No indication on
how the price
indices were
determined.

No explanation on
how these cost
indices were
obtained and which
container vessels
are reflected.

No explanation as
to why conclusions
for all product and
chemical tankers
Price developments
for handymax and
panamax products
tankers taken from
Clarkson’s (Figure
2.3 at page 8)

The data is shown
for “product
tankers” while the
EC has constantly
indicated that
“product and
chemical tankers”
are concerned by
the present dispute
and has indicated
in the Second
Substantive
Meeting that it is
concerned with
tankers that
transport both oil
and chemical
No cost and price
indices are shown
and there is no
indication as to
whether the EC
maintains those
shown in Figure 43
of its First Written
Submission.

There is total
uncertainty as to the
allegations. If the
EC meant to
maintain Figure 43,
the
questions/observatio
ns in the third
column of this table
remain valid.

 First Written Submission Attachmen t 2 of the EC’s responses to
the Panel’s questions
 Price
developments
Price and cost
index
Price
developments
Price and cost
index
are drawn on
the basis of a
specific size range
only.

products. It is,
therefore, not clear
whether these
prices reflect sown
in Figure 2.3 reflect
those of the
products concerned
by this dispute.

 As mentioned, it is not clear how the cost i ndices used were arrived at or whether the cost
reports of FMI submitted in Annex 10a of the docum ents supplied by the EC in the Annex V process
were taken into account. However, if they were, in addition to the criticism already mentioned by
Korea in its Second Written Submission (at page 124) or in the Drewry Report (Exhibit Korea – 70 at
page 8.22), Korea submits that the cost calcula tions are not sufficiently representative as to be
conclusive. Indeed, cost calculations were made for the following vessels subject to the present
dispute:

- Hanjin 4,900 teu container;
- Daewoo 5,100 teu container
- STX 51,000 dwt tanker (which may be a pr oduct tanker not concerned by this dispute)
- Hyundai Mipo handymax tanker
4
- Daewoo LNG for Exmar
- Hyundai LNG for Golar
- Hyundai 2,500 teu
- Samsung 5,500 teu container
- Samsung LNG for British Gas
- STX panamax products tanker (which may not be concerned by this dispute that concerns
combined product and chemicals tankers)
- STX product and chemicals tankers
5
- Hyundai 7,200 teu container vessel,
- Daewoo LNG for Bergesen
- Samho Aframax tankers (which may not be con cerned by this dispute that concerns combined
product and chemicals tankers)
- Samsung 7,200 teu container ship
- Daedong 2,500 teu container ship
- Hyundai Mipo handysize products tanker (whi ch, as mentioned above, may not be concerned)
- Shin-A handysize products tankers (whi ch as mentioned above, may not be concerned)
6
- Daedong 35,000 dwt tanker (if a product ta nker, this product may not be concerned)
- Hanjin 5,608 teu container ship
- Hanjin 1,200 teu container ship

4 For details on this vessel and the preceding three, refer to Section 6 of the FMI Mid-term report,
Shipbuilding Marketing Report – Phase 4, March 2003, Annex 10a of the documents submitted by the EC in the
Annex V process.
5 For details on this vessel and the preceding five, refer to Section 6 of the FMI Final report,
Shipbuilding Market Monitoring – Phase 3, August 2002, Annex 10a of the documents submitted by the EC in
the Annex V process.
6 For details on this vessel and the preceding si x, refer to Section 6 of the FMI Final report,
Shipbuilding Market Monitoring, Phase 2, May 2001, Annex 10a of the documents submitted by the EC in the
Annex V process.

- Hanjin 6,250 teu container ship
- Halla 3,500 teu container ship
- Hyundai 6,800 teu container ship
- Hyundai 5,600 teu container ship
- Hyundai LNG for Bonny Gas Transport
- Hyundai 5,500 teu container ship
- Samsung 5,500 teu container ship
- Samsung 3,400 teu container ship
7

 Thus, it would seem that cost calculations have been made at best for around 25 vessels out of
the hundreds of Korean vessels sold that are vessel types concerned by the dispute. Not even half of
these cost calculations concern vessels built by restructured yards.

 Korea, therefore, submits that if this were th e basis for the cost indices set forth by the EC in
relation to price indices, these cost indices are not representative compared with the total sales of the
vessels concerned by the restructured yards in terms of the number of vessels sold or in terms of like
product coverage. If these are not the basis for th e cost indices, the indices relied upon by the EC
constitute all the less prima facie evidence sufficient to demonstrate the existence of price suppression
as they are assertions only without any substantiating evidence. In any event, Korea submits that the
EC has not carried the burden of proof that rested on it.

162. What specific evidence/examples are contained in the information before the Panel in support
of the EC argument that prices at one end of the product spectrum for a particular kind of ship
influence prices along the entire spectrum? (For exampl e, is there specific evidence in the information
before the Panel that a downward movement in very large container ships brings about commensurate
downward movement in all smaller sizes of container ships?)

EC Comment

 The cost investigations listed by Korea are ind eed those undertaken by the EC which fall into
the disputed product categories. However, Korea’s c annot dismiss the EC cost calculations as not
being representative. Each of these cost calcul ations concerns a number of ships due to series
building, and the EC has made great efforts to sel ect orders for cost analysis that can be considered
representative for the production of Korean yards. Moreover, as of May 2003 another 17 cost
investigations had been made which are not listed by Korea as they do not concern the disputed
product categories. Nevertheless, these cost estimat ions have helped the EC to understand better the
cost structures and pricing behaviour of Korean yards.

173. (a) For each of the three ship types at issu e in this dispute, how are ship data normally
maintained by the industry, and by industry analysts?

 (b) In particular, are these three categories of ships recognized and used routinely for
purposes of industry analysis?

Korea’s Comments

 The basis of most analysis is the electronic da tabases referred to earlier together with market
intelligence and detailed market know ledge and these are used to prepare certain regularly issued
reports.

7 For details on this vessel and the preceding five, refer to Section 2.2.2 of the FMI Final summary
report, Shipbuilding Market Monitoring, April 2000, Annex 10a of the documents submitted by the EC in the
Annex V process.

 These reports routinely provide informati on based on ship types but do not necessarily
coincide with the categorization of containershi ps, product and chemical ta nkers and LNGs proposed
by the EC which explains why it is, in particular, so difficult to identify the EC’s product category for
product and chemical tankers.

 The product chemical and LNG ship types covere d by this dispute fall within the category of
tankers (as shown in the ship type classification table in the response to Question 173 – (a) above),
which is a broad grouping which includes, crude oi l tankers, product tankers , chemical tankers, gas
carriers as well as specialist types (again, without an y category for product and chemical tankers). In
the LR Fairplay Register of Ships, for example, this includes the following tanker types: Beer,
Bitumen, Chemical/Oil Products, Chemical, Crude Oil, Ed ible Oil, Fish Oil, Fruit Juice, Latex, LNG,
LPG, Molasses, Oil Products, Oil Sludge, Vegetable Oil, Water, Wine.

 General type classification are, however, sometime s inconsistent with detailed technical fields
as a result of data input or reporting inconsistencies, and as such data must be looked at taking into
account the context in which information is required to avoid misleading, inaccurate or incomplete
data.
8

 In general terms, the following classifications of tankers are generally widely observed:

• Crude oil
• Oil Products
• Chemical
9
• Gas Carriers – which consistently identify LPG and LNG as separate types

As far as containerships are concerned, these are usually referred to separately to other ship types.

 Size bands are used for almost all in-sector an alyses and also for some cross sector analyses.
Exhibit Korea – 131
 shows the use of size bands within ship types on a regular basis in various
industry publications. See the response to Question 173(c), (d) and (f) for examples of those
commonly used for reporting and analysis purposes. Common statistics are the numbers of
ships/orders, GT (gross tonnage) and dwt (deadweig ht tonnage for cargo carrying ships only) and in
the case of containerships teu capacity - this inform ation is used by shipyards and shipowners alike
and covers both new orders, orderbook and deliveries. Orderbook information is generally shown both
in aggregate terms and phased by year of delivery.

 Cgt (compensated gross tonnage) is of no inter est to shipowners or brokers, but is regularly
used for certain shipbuilding purposes, namely shipbuilding capacity, aggregated shipbuilding
demand and shipbuilding output. The choice of whic h parameter to use is determined by the purpose
for which the analysis is to be undertaken.

 Other characteristics of the vessels such as whet her they are equipped with gearing or have
reefer capacity may also be taken into account in a number of industry reports.

8 For example, in the preparation of the Drewry reports in Exhibit Korea – 70, 109 and 110, Drewry
established through inspection of the above sources that ships with IMO chemical classes were listed as oil
product tankers and vice-versa. Thus, there was considerable inaccuracy and incompleteness in this respect.
Drewry therefore made use of various sources to maximize the accuracy and completeness of the
products/chemical tanker category.
9 Note that in Exhibit Korea – 130 , LR Fairplay include chemical/o il tankers under the category of
chemicals and not oil products which contrasts with how the EC has used this data.

EC Comment

 Drewry’s own taxonomy exa mple provided in exhibit Korea 131 gives size bands for
containerships (500, 1000, 1500, 2000 TEU) that a re entirely inconsistent with Drewry’s report
(Exhibit Korea-70) which uses <1000, 1000-2500, 2500-3500, 3500-5000 and >5000 TEU. This
contrasts with size bands previously referred to by Ko rea. As noted in the Response by the European
Communities to Panel Question 27 at the first substantive meeting, Korea itself 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 Korea’s first written submission while then citing with approval to the vessel categories
used in an analysis of FMI which looked at “cont ainer feeder vessels (up to about 3,500 TEU)” in
para. 515 of Korea’s first written submission.

 The shifting size bands used by Korea and other industry analysts are evidence against
Korea’s own argument that size bands can be used to sub-divide the product.

173. (e) If they provide a range of pricing info rmation at different levels of aggregation,
how are these different data series used?

Korea’s Comments

 The main level of aggregation is from a range of price series into a single newbuilding index.
This is usually done as a mathematical average (or price per dwt average) and not a weighted average
reflecting the overall composition of the fleet. A single newbuilding index is a basic way of looking at
what is happening overall to shipbuilding prices as opposed to sector or size band specific trends. So
if a broad range of price series is used and pri ces are rising in some and dropping in others, the
newbuilding index trend will be m oderated by this. However, as the price indices do not cover all
ship types and because it is not weighted by the composition of the demand across different types and
sizes, it has to be used with extreme caution and interpreted in the light of industry knowledge.

 Price series are not generally aggregated to pr ovide a single trend for a particular broad ship
category because it is recognized that the differing tr ends between different size bands is a significant
factor. Whilst these trend differences may seem small in relation to overall market price movements,
they are highly significant to industry players because they demonstrate different underpinning factors
for different ship sizes. For example, there may be a particular shortage of smaller vessels affecting
freight rates and hence ordering trends for these vessels and not larger ones.

 Price series are therefore only indicators of wh at is happening for sample ship types which
will be chosen to reflect commonly used types or sizes of vessels. Where a range of sizes are given,
they are useful to see that trends can be varying differently within the same ship type. When only a
single price trend is given for a particular type this generally means that this is the most popular size
of vessel in use or that there is not a consistent e nough stream of data for another size to construct and
maintain a price series.

 Industry players are generally fully aware that price series data must always be used with
caution and care.

EC Comment

 The discussion with respect of price indices is misleading. FMI produces a price index
covering a wide spectrum of ship types, and Clarks ons covers a wide spectrum of differing bulk ship
types. The concept of weighting in this respect is incorrect and displays a lack of understanding of the
monitoring of the market. The aim of the price indices (none of which are weighted, including
Drewry's when they publish it) is to monitor price l evels, not shipyard revenues. The use of weighting
would shift this to monitor ordering value, not price levels.

ANNEX G-3

RESPONSES OF THE EUROPEAN COMMUNITIES TO
SUPPLEMENTAL QUESTIONS FROM THE PANEL

(16 July 2004)

Question 187

 Please comment on Korea’s recalculations of benefit in Exhibits KOR-91-102

Response

1. Please see EC reply to question 136 of the 2 July submission for extensive comments on
Korean Exhibits 91-102.

Question 188

 Concerning the question of whether the restru cturing of Daewoo was subsidized, please
provide a summary based on all of the submissions of Arthur Andersen/Anijn and PWC, of the
EC’s analysis and conclusions in respect of whether DHI should have been liquidated instead of
restructured. In this summary, all relevant figures should be shown in tabular form, with cities
and cross-references to the original Arthur Andersen report of November 1999 assessing the
value of DHI under various scenarios.

Response

2. Please see Section 3 of Exhibit EC-158 (PWC Report) for the information in tabular form
with references as requested.

Question 189

 Concerning the Daewoo restructuring

 (a) Concerning the most recent PWC submission (Exhibit EC-145), please explain in
detail the statement at page 3 that the Anijn analysis indicated “that the
Enterprise Value of the restructured company is lower than the Enterprise
Value of the company computed without debt restructuring”.

 (b) What is “enterprise value” and how does it differ from “going concern value”?

 (c) What is the significance of the fact that the “enterprise value” was lower under
one set of calculations than under another? How if all does it affect the central
issue raised by the EC, namely the deci sion to restructure instead of liquidate
Daewoo?

 (d) What is the significance of Anijn’s reply in Exhibit KOR-70 that enterprise
value was reduced under the analysis of the restructuring scenario from what it
had been under the valuation of the non-restructured company? What if

anything is the significance that enterprise value calculations differed under two
scenarios for the central issue posed by th e EC, namely whether it was better to
liquidate or to restructure Daewoo?

Response

3. Please see Section 4 of Exhibit EC-158 (PWC Repor t) for a reply to sub-questions (a) to (d).

4. As explained in that section, the enterpri se value of a company having too much financial
debt is lower than the enterprise value of a comp any that generates the same cash flows but which
bears a reasonable amount of debt. As a result, one would expect that the enterprise value of a
company having undergone financial restructuring is higher than the enterprise value of the same
company before its restructuring. This wa s not the case in the analysis performed by
Arthur Andersen.

5. Consequently, either the pre-restructuring en terprise value of DHI was over-estimated or the
post-restructuring enterprise value was underestimated . To come up with a post-restructuring value
that is higher than the pre-restructuring value, Arthur Andersen suddenly took into account factors
excluded from their analysis up to that stage (asset s recoverable from DHI). Considering that these
elements were suddenly introduced without any explanation and based on estimates without any
supporting evidence, under normal circumstances, cr editors would certainly have demanded more
information on that aspect.

6. The above is simply an additional question raised by the AA report, which along with all
other open questions (EBIT margin, lack of analys is of tax consequences of the restructuring,
enterprise value being lower after restructuring, investment level for the residual value, etc.)
demonstrates that no prudent creditor would have taken such an important decision on restructuring
on the basis of such a question-ridden report. To the contrary, prudent creditors would not have
agreed to any solution other than liquidation without requiring much more in-depth analysis.

7. It is now clear that the Arthur Andersen Repor t could at best be considered as a very first and
rudimentary analysis of the DHI situation at the time, on the basis of which no prudent creditor would
have acted. Under normal circumstances, prudent cr editors would have required a lot more in-depth
information and would have questioned a number of elements and assertions of the Report. Please see
Section 5 of Exhibit EC-158 (PWC report) for further comments regarding the EBIT margin (page 10
of Exhibit Korea-141) and the recovery value of DHI (pages 7 and 8 of Exhibit Korea-141) used in
the Arthur Andersen report.

8. Moreover, the European Communities would like to point out a major new fact presented by
Korea in Exhibit Korea-141 (pages 5, 8, and 9). In particular, Korea has stated that the liquidation
value of DHI was [BCI: Omitted from public version] as opposed to the figure of [BCI: Omitted
from public version] used previously in the Arthur Ander sen Report. It seems, therefore, that a
different liquidation value is used depending on th e desired outcome. This new higher liquidation
value would make it clearer that DHI ought to have b een liquidated. See Section 3 of Exhibit EC-158
(PWC report).

Question 190

 The data presented in Exhibit KOR-108 show interest and depreciation expense in the
cost/profitability analysis for Daewoo. Please comment. How can this be reconciled with the
EC’s assertion that these costs have not been adequately reflected in Daewoo’s prices?

Response

9. The European Communities notes that the KPMG analysis of production costs for three LNG
carriers (Exhibit Korea-108) is based on DSME figu res and not on audited facts. Thus, it is not
independent. KPMG confirms only that the figures presented correspond with the figures held in the
Daewoo cost accounting system. The inclusion of costs has not been audited, as indicated in the letter
accompanying this exhibit, and no opinion has been given by KPMG as to whether all costs are
included.

10. We also note that the ship prices given by KPMG in chapter 2.5.2 [BCI: Omitted from
public version]. The summary of cost analysis on page 3 gives yet another set of figures: dividing
the indicated sales prices in Won by the indicated sales prices in USD (on page 2) yields exchange
rates of [BCI: Omitted from public version] . None of these exchange rates corresponds to the
exchange rates allegedly applied by KPMG as indicated on page 7. If KPMG is not even clear on this
basic parameter, one must wonder about the rest of the assessment.

11. For the Bergesen LNG carrier th e price difference is significant [BCI: Omitted from public
version].

12. KPMG undertakes to compare cost estimates ma de by FMI at the time of contracting the
vessel with real costs incurred. In the case of th e Bergesen LNG carrier the cost estimate by FMI was
made in July 2000 (2 months after the conclusion of the contract), including (mostly) figures provided
by Daewoo during the bilateral discussions with the European Communities. At this time, DHI
continued to have a significant amount of debt, and FMI calculated the debt service accordingly as the
shipyard should have done when preparing its bid (unless the shipyard knew already in July 2000 that
its debts would be forgiven in December 2000). It is not conceivable that DHI could have arrived at
the offer price of [BCI: Omitted from public version] if it had taken into account the actual debt
situation at the time.

13. It should also be noted that DHI could not have known in 2000 how many LNG carriers it
would contract in the mid-term, and how the depreciation of LNG related investment costs would thus
be allocated per vessel. FMI had to base its analys is on the actual order situation (as any reasonable
shipyard estimator would have done) and not on some speculative market pros pect. Again, it is not
conceivable that DHI could have arrived at the offe r price if it had taken into account the very limited
number of confirmed orders for LNG carriers at the time.

14. There remains a difference primarily relating to costs of development of both the product and
the processes to build the product. FMI’s model in cludes an assessment of what they believe these
costs may be, based on the known costs of others entering this sector. It is likely that Daewoo would
want to contest these costs in terms of their magnitu de, but it is difficult to understand the claim that
the costs do not exist at all. If they do not exist, they must ha ve been written off at some point
because it is not possible to enter this market, le t alone become the global market leader, without
incurring significant expense.

15. Further information to back up this point of view is given below, by reviewing the
contribution to overhead indicated for the three ship s analysed in Exhibit Korea-108 against the total
workload of the business and the total depreciation cost.

16. Table 1 presents information taken from DS ME’s audited accounts published on the web site
www.DSME.co.kr, showing depreciation in million W on. For the purposes of comparison, the table
also shows the value of depreciation for the sh ipbuilding portion of DHI in 1999, prior to the
bankruptcy and restructuring of the company, using information from DHI’s published audited
accounts for that year.

Year Depreciation
(million Won)
1999 (DHI)1 115,116
2000 20,636
2001 80,027
2002 85,563
2003 101,148

Table 1 – Depreciation at DSME (and DHI shipbuilding operations for 1999)

17. It can immediately be seen that the deprecia tion carried by shipbuilding operations at DSME
is considerably lower than that carried by the shipbuilding operations of DHI. The difference is even
more marked when it is noted that the DHI figur e for 1999 includes only depreciation attributed to
shipbuilding operations while the DSME figures cover shipbuilding and other operations. The
proportion of sales attributed to shipbuilding (excluding offshore and other business) and the
proportion attributed to LNG tankers alone are pres ented in Table 2, using information from DSME’s
published accounts.

Year
Proportion of sales
attributable to
shipbuilding
Proportion of sales
attributable to LNG
tankers alone
2001 75% 15%
2002 84% 30%
2003 70% 32%

Table 2 – Proportion of sales at DSME attributable to pure shipbuilding operations

18. Table 3 below presents data from Exhib it Korea-108 indicating the amount of overhead
recovered from each of the three contracts evaluate d. This has been proportioned over the work
content of the ship according to its CGT value noted in Lloyd’s Register. This gives the amount of
overhead recovered per unit of work on these ships, which can be compared to the values per unit of
work in the shipyard as a whole. [BCI: Omitted from public version.]

19. For comparison, Table 4 summarises the average cost of depreciation per unit of work in the
shipyard as a whole. The assumptions made in this table are that the total depreciation cost is
distributed across the company accord ing to sales value and that this is evenly distributed across the
output of the shipyard – i.e. with an average cost of depreciation for each unit of work (CGT)
produced.

 [BCI: Omitted from public version.]

20. This allocation of depreciati on to shipbuilding through sales is a little simplistic, as some of
the offshore business will involv e shipbuilding operations. 2 In the absence of detailed audited
accounting information, however, these percentages ar e used in the following analysis with the note
that the results will err on the side of caution.

21. Comparison of the right hand column of Ta ble 4 with the right hand column of Table 3
indicates how the actual contribution per unit of work from the three LNG tankers discussed in

1 Depreciation allocated to shipbuilding only.
2 E.g., the fabrication of hulls for offshore storage and processing vessels.

Exhibit Korea-108 compares to the average. On average, the contribution from LNG tankers to
depreciation is around the average level per unit of work for the shipyard as a whole over the period
shown.

22. These results are hard to understand, given th at LNG tankers would be expected to contribute
greater than the average level to depreciation given the cost of product and facilities developments for
this very complex type of ship. The development of the capability to build LNG tankers is a lengthy
business. The extreme potential hazard represente d by these ships, which carry around 75,000 tonnes
of liquid methane at around -160
oC, requires a high level of certification and approval, including a
license to build from the developers of the cargo containment systems. This requires the development
of the design of the ship, development and appr oval of special production procedures, training of
personnel, and development of specialised facilities and equipment. The specialised facilities include
support structures for the tanks, in particular special staging for construction inside the tanks, facilities
for production of insulation boxes, robotic welding machinery and robotic machinery for the
application of separating materials, facilities for clean working, facilities for atmospheric control, etc.

23. KPMG points out on page 13 of Exhibit Korea- 108 that “FMI failed to explain why the cost
model of European shipyards applicable to these ‘other direct costs’ should apply to Korean shipyards
that are generally known to be the most efficient ya rds in the world.” This is misleading, however,
because efficiency does not relieve the shipyard of costs associated with capital expenditure to gain
the capability to build this ship type, and the effi ciency of the building process does nothing to lower
the investment cost. Pursuit of efficiency may actua lly raise this cost as was the case, for example,
when DSME in 2002 constructed a new outfitting pier for LNG tanker construction to improve
workflow in the shipyard (reported cost 40 Mio USD).

24. FMI’s estimates were based on a cost estimate made for a series of LNG tankers by a
European shipyard. This includes a cost of 15.5 Mio USD per ship for capital investment directly
related to the ships’ construction. It does not include provision for the training and market entry costs
discussed above. As discussed above, it would be e xpected that DSME may argue that this provision
is too high. During the bilateral discussions in 2000, however, it was claimed that these costs do not
exist at all, a view also put forward by KPMG in Exhibit Korea-108. The potential argument that
greater throughput means that costs are depreciated over a greater number of ships is limited, because
more investment has to be made to enable this greater throughput to be accommodated.

25. Finally, profit margins of [BCI: Omitted from public version] are virtually unheard of in
shipbuilding as any analyst will confirm. It is not r ealistic to think that DHI could have offered, for
example, the Exmar LNG carrier (hull number 2213) at a price of [BCI: Omitted from public
version] and still broken even.

Question 191

 Exhibit KOR-107 sets forth the results of the court-ordered/supervised restructuring of
Daedong. Presumably, such a restructuring had to proceed in accordance with Korean
bankruptcy law. On what basis does the EC allege that nevertheless it involved a subsidy?

Response

26. As the European Communities stat ed in its response to Question 23:

The EC fully accepts that bankruptcy law is a necessary part of a market economy
and that a properly conducte d bankruptcy proceeding would normally not give rise to
a subsidy. However, where the outcome of a bankruptcy proceeding or a corporate
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 had 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.3
27. Moreover, the fact that a restructuring pr oceeded in accordance with Korean bankruptcy law
says nothing about whether creditors or investors did or did not provide a subsidy. The terms of the
restructuring, such as the amount of debt to be forgiv en, are decisions that can lead to a benefit for the
recipient if they are more favourable than what would be obtained on the market even within a
bankruptcy proceeding.

Question 192

 One conclusion that might be drawn from Exhibits KOR-91-102 is that Korea accepts
that there is a benefit from the KEXIM financing at issue, but that the benefit in a number of
cases is quite small (0.5 per cent or less). If on e accepts that the benefit is of the magnitude
reflected in these Korean exhibits, what woul d be the implications for the EC’s serious
prejudice analysis and conclusions?

Response

28. First, it is important to note that even a sm all percentage of the value of a multi-million dollar
vessel provides a considerable and significant benefit. Moreover, the ability of Korean shipyards to
make use of the benefits from KEXIM financing, whether in the form of pre-shipment loans or
APRGs, can often be the deciding factor in thei r ability to offer a lower price than competing
shipyards or to otherwise provide the most attractive contract terms for the buyer. Thus, even in those
instances where KEXIM subsidies constitute a relativel y small benefit in terms of percentage, they
significantly strengthen the ability of KEXIM-subsidised shipyards to maintain their capacity (and the
low prices in the market) when they would otherwise exit the market or reduce capacity.

Question 193

 Exhibit KOR-112, concerning MOCIE’s interv ention at the request of Samsung, could
be viewed as indicating that the government takes action if prices are too low
. If this is the case,
what are the implications for the EC’s serious prejudice claim?

Response

29. As MOCIE does not take actions against low prices b ased on the standards of “significant
price suppression” or “significant price depression” within the meaning of Part III of the SCM
Agreement, MOCIE’s actions do not have any implicati ons for the EC’s serious prejudice claim.
Moreover, there is certainly no indication that MO CIE takes actions in a systematic way for every
situation in which it considers that prices are too low.

Question 194

 If the Panel were to accept the product subdivisions set forth in Exhibit KOR-109, how
would this affect the EC’s analysis of price suppression/depression? Please respond in detail.

3 Responses to Questions from the Panel following the First Substantive Meeting by the

Response

30. Drewry, in Exhibit Korea-109, argues that sh ip size needs to be taken into account when
comparing price developments. Of course, no one w ould argue that a larger ship does not cost more
than a smaller ship. However, the analysis pr esented in Exhibit Korea-109 inevitably leads to a
skewed result because it analyses price against cargo carrying capacity (TEU and dwt) and not against
work content. The price analysis should, correctly, be undertaken on the basis of CGT because that is
the unit that measures work content and its relationshi p to capacity in shipbuilding. The analysis is
intended to look at the situation with respect to the shipbuilding industry, not the shipping industry,
and the appropriate denominator must therefore be used.

31. The weighting of prices according to product mix in the graph on page 4 is particularly
misleading. The use of weighting factors in this s ituation is incorrect because the analysis is intended
to reveal trends in ship prices and not the value of the orderbook. The use of weighting in a ship price
index demonstrates a lack of understanding of the economics of shipbuilding prices.

32. The remainder of Exhibit Korea-109 primar ily repeats previous arguments regarding
differences between and within ship types. Its rele vance is questionable. This portion culminates in
section III starting on page 13, with misleading asser tions about the non-substitutability of shipyard
capacity. Complex passenger vessels (“cruise ferries”) have recently been built in both South Korea
(by Hyundai, Samsung, and Daewoo) and China. Th e breadth of shipbuilding orderbooks in South
Korea (as can be seen from the Cl arkson Monitor, Exhibit EC-152) gives ample demonstration of the
broad potential for substitution, w ith passenger ships, offshore vessels, container ships, tankers, LNG
carriers, etc., all proceeding through the same facilities.

33. As ships are made-to-order products, certa in differences between individual vessels can
always be found. Taking this specific feature of the shipbuilding industry to the limit would make it
impossible to undertake a price suppression/depression analysis, as product markets would contain
only a handful of vessels or even just one ship. Korea is obviously attempting to avoid the SCM
disciplines by creating an unlimited number of cate gories of products. As the European Communities
has set out in its oral statement of 17 June (paragraphs 66-67), such an approach cannot be correct.

34. Exhibit Korea-109 makes little reference to price depression and suppression apart from
trying to suggest that it does not exist because li ke products are too difficult to identify. The
European Communities stands by the model of price suppression and depression and the mechanisms
previously explained, at the broad product level. Detailed explanation of the mechanisms can be
found in attachment 2 (“Estimation of price suppr ession and depression prepared by FMI”) to the
EC’s responses to questions from the Panel following the first substantive meeting. Clearly, it follows
from this that if the mechanism is active at the br oad product level it is also active at any sub-category
level. This is amply demonstrated by the gra ph on page 5 of Exhibit EC -146 (FMI June 2004 report,
“Technical Support to the WTO Hearings”), which shows prices of sub-classes of ships moving
broadly in unison.

35. Consequently, the European Communities do es not see the subdivisions put forward in
Exhibit Korea-109 affecting the price suppression/depression analysis. More detailed analyses would
reveal the same mechanisms and would give the same result.

36. In fact, if the Korean analysis of sub-t ypes were to be accepted, the mechanism whereby
dominating capacity has a suppressive effect on the market is more clearly seen. The European
Communities has argued that price suppression is le d by intense competition between concentrations
of capacity in a limited number of very large shipya rds. In the handymax products tanker sector, for
example, South Korean shipyards have a share of the orderbook of 53.3 pe r cent, shared between
three shipyards: STX, Hyundai Mipo, and Shin A. The top four shipyards, including Shin Kurishima
in Japan, control about two-thirds of the market . In the panamax products tanker sector, South

Korean shipyards account for 63.7 per cent of the orderbook, spread between four shipyards: Hyundai
Heavy, STX, Samsung, and Daewoo. In the LNG tanker sector, Daewoo and Samsung together
account for 47 per cent of all orders. In the pana max container sector, Hyundai, Hanjin, and Samho
together account for 70 per cent of all orders, and in the post-panamax sector, Hyundai Heavy,
Samsung, and Daewoo account for two-thirds of all or ders. The disputed shipyards regularly appear
among the small concentrations of shipyards whose capacity is leading prices.

Question 195

 Please comment on Exhibit KOR-115.

Response

37. Regarding Exhibit Korea-115, a table co mpiled from a 19-page August 2003 FMI report on
key price movements (originally submitted as Annex 5a-2, submitted by Korea as Exhibit Korea-142),
the European Communities first notes that Korea finds it useful to monitor new shipbuilding prices in
USD/CGT.

38. Korea referred to this exhibit in its oral statement of 17 June 2004 in paragraph 293,
indicating that Korean offer prices were not alwa ys the lowest for a number of ship types. The
indicated price levels are the average of reported c ontract prices for the ship types in question for a
seven-year period (1997-2003), adjusted by CGT. These averages are a very minor part of the FMI
report and are meaningless without the time series gr aphs that accompany them. The graphs showing
the relative movement in prices over time betwee n the different nationalities are of particular
importance, and this analysis in no way supports the contentions made in paragraph 293 of the Korean
oral statement. The Korean presentation overs implifies the price setting mechanism in the
shipbuilding market. Price competition is based on shipyards’ bids for individual shipbuilding
contracts, not on long-term averages for a large group of shipyards in a specific shipbuilding region.
Long-term averages are only meaningful for a trend analysis, which was the purpose of the
August 2003 FMI report. Additional quotes from the report can help to make the situation more
transparent and provide the trend information that is missing from Exhibit Korea-115:

From the conclusions

In all cases a significant fall in prices can be seen in South Korea in 1998. As a
general comment, other builders followed suit with price reductions but at a slower
rate than was seen in South Korea.
Price leadership in the product/chemical tanke r sector is varied. China appears to be
the price leader for panamax tankers and S outh Korea for the smaller ship types.
Croatian shipyards had a significant presence in the handymax sector although with
prices generally higher than those offered in the Far East. Chemical tanker prices
have been led by China since 2001.
In the feeder container sector, prices appear to have been led in recent years by South
Korea and China but with strong competition from Poland, Singapore and Taiwan. In
the panamax and post panamax container ship sectors, South Korea has a strong lead.
In the post panamax sector, China and Japan appear to have been trying to undercut
South Korean prices to increase market share although with only limited success.
Concerning handysize products tankers

Competition is predominantly between Chin a and South Korea, with South Korea
dominating.

South Korea reduced prices for this class of ship significantly in 1998 from a level of
around $1,500 to $1,600 per CGT to a level of around $1 ,200. Prices in general have
risen since then. Prices in China fell more slowly than in South Korea and have been
competitive with South Korean prices since 2001.
Concerning handymax products tankers

Orders in this sector are competed by S outh Korea, Japan and China, with South
Korea dominating.
As with handysize products tankers, South Korea appears to have been the price
leader in this sector with prices falling over 1998 from a level of around $1,400 per
CGT to around $1,100. Prices from other countries also showed a declining trend but
less sharp than in South Korea and without falling to such a low point. Since 2001
prices have been competed at around $1,200 to $1,400 per CGT. Since the start of
2000, prices from Croatian shipyards have b een generally higher than those from Far
East shipyards.
Concerning panamax products tankers

The market for panamax products tankers was quiet in the period up to 2001 and
increased after that time. The market is co mpeted by China, Japan and South Korea,
with South Korea being the market leader in recent years.
China has remained the price leader in th is sector over the period examined, with
prices falling over the past three years from around the $1,350 per CGT level to
around $1,200. South Korea reduced pri ces in 2001 and 2002 and market share
correspondingly increased, taking share from Chin ese builders. Japan also saw a fall
in prices in 2001, in competition with China and South Korea.
Concerning chemical tankers

The analysis of chemical tankers is made difficult by variations in specification. Not
all records in the data set indicate the IMO classification of the ship. The majority of
ships where the IMO class is indicated are either class II or class II/III. A small
number were indicated as class I/II, with a correspondingly higher price. Class I/II
ships were indicated only in Poland and the EU, although this does not mean to say
that none of the ships from other countries wher e no class is indicat ed are cla ss I/II.
Even where class is indicated, there is no cl ear trend in price between classes in the
same country. It has not therefore been possible to subdivide the data set any further
on this basis.
Japan, South Korea and China have offered the lowest prices and in the past two
years China appears to have been the pr ice leader. Prices from EU shipyards are
generally significantly higher than those fro m the Far East. It is not possible to say
how much of this higher price is due to differences in specification.
Concerning container feeder vessels

The market has been competed primarily by China, EU, South Korea and Other
countries. “Other” refers in particular to Singapore, Taiwan and Poland.
The pricing situation in this sector is complex and difficult to summarise.
South Korea reduced prices over 1997 a nd 1998 from around $1,700 per CGT to

around $1,300. Competitors in other countries followed suit but were unable to
match the price level achieved in South Korea. When South Korean prices increased
in late 1999 and 2000, relative competitiv eness returned to China, EU and other
countries. Subsequent significant falls in price in South Korea and other countries in
2001, to below $1,200 per CGT, were not matched by Chinese and EU builders. EU
shipyards have been losing ground through increasing prices since 2001.
Concerning panamax container vessels

South Korea has dominated the market w ith intermittent orde rs taken by Other
countries. “Other” in this table refers to Taiwan and Poland.
Prices from South Korean shipyards fell in 1998 from around $1,500 per CGT to
around $1,300. Prices increased again in 2000 but have fallen fairly steadily since
that time, remaining at around the $1,300 per CGT level in 2002 and 2003. There has
been limited competition from elsewhere over this period with other countries
apparently struggling to compete with the price level set by South Korean
shipbuilders.
Concerning post-panamax container vessels

As with panamax ships, the market is dominated by South Korea.
Both China and Japan appear to have been offering prices to undercut South Korea in
a bid to gain market share, although with only limited success.

LIST OF EXHIBITS

Exhibit EC-158 Report by PriceWaterhouseCoopers, July 2004

Note: Exhibits in bold contain BCI.

ANNEX G-4

RESPONSES AND COMMENTS OF KOREA TO QUESTIONS
FROM THE EUROPEAN COMMUNITIES AND
FROM THE PANEL

(2 July 2004)

RESPONSES OF KOREA TO QUESTIONS ADDRESSED BY THE EUROPEAN COMMUNITIES
TO KOREA FOLLOWING THE SECOND MEETING OF THE PANEL

1. Question
In paragraph 69 of its Oral Statement, Korea states that government funds constitute less
than 3 per cent of the total requirement funds.
(a) Please explain what this means. Is it not true that KEXIM has received capital
injections every year since 1997-2001?

Response

 The “less than 3 per cent” in the Oral Stat ement represents the ratio of the outstanding
borrowings from the Government of Korea to the total outstanding borrowings of KEXIM in 2002.
More specifically, the KEXIM borrowing from the Government at the end of 2002 was [BCI:
Omitted from public version] of the total borrowing. The ratios of borrowings from the
Government of Korea have continuously decreased as shown in the table below. [BCI: Omitted
from public version.]

 This is distinct from the question of paid-in capital. The EC is mixing apples and oranges.

 (b) Please explain the statement in Moody’s opinion of August 2002 (Exhibit EC-
120):

 KEXIM A3 senior debt rating and Prime-2-short-term rating reflect its
government ownership, and the governments’ responsibility under the KEXIM
act to cover the bank’s annual losses beyond its reserves

 Wholly owned by the Korean government , KEXIM issued debt shares the same
A3 investment grade rating as a government bond

Response

 Korea will not speculate on Moody’s opinion. The EC could have solicited a further
explanation from Moody’s in a timely fashion had it so wished. As Korea has stated, KEXIM does not
borrow with a sovereign guarantee.

 Why would KEXIM need to borrow from the state under these conditions?

Response

 KEXIM borrows funds because it is a financia l institution independent of the Government.
Article 19 of the KEXIM Act specifically allows KEXIM to borrow such funds from Korean and
foreign governments, international financial organizations as well as commercial financial
institutions. As with any financial institution, KEXIM borrows from a variety of sources.

 (c) Please comment on page 14 of the KEXIM brochure (Exhibit EC – 97)
indicating that the government was KEXI M's main funding source in the period
1998-2000 (42.1 per cent in 1998, 45.6 per cent in 1999 and 47.1 per cent in
2000). How does this tie in with the statement made in paragraph 69 of the oral
statement that the government funds constitute less than 3 per cent?

Response

 The percentages indicated in the KEXIM br ochure represent the ratios of borrowings from
public sectors to the total KEXIM borrowings in th e respective years. The public sectors include the
Government of Korea and international financia l organizations such as the IBRD. For example,
47.1 per cent in 2000 means the percentage of the borrowings from [BCI: Omitted from public
version] to the total KEXIM borrowings.

 (d) Please explain the statement on page 3 of the KEXIM brochure that "the
Government shall provide funds to cover any net loss beyond the Banks' reserve
which implies pre-emptive and sufficient support"

Response

 The statement is simply reiterating Article 37 of the KEXIM Act which requires the
Government of Korea to cover net loss beyond reserv es as the major shareholder. This is merely an
indication that it is unlikely that KEXIM would go into bankruptcy. This is a characteristic of all
government-owned corporations, whet her financial or otherwise, in all Member states. However,
KEXIM has never incurred any losses since its establishment.

 (e) Please explain the statement (page 4) that the "continuous capital injections [by
the government] reaffirm KEXIM to be a valid sovereign entity".

Response

 Again, this is describing the participations by the Government of Korea in the capital
increases of KEXIM. KEXIM increased its capital in 1998, 1999 and 2000 to meet BIS requirements.
As to the details of KEXIM capital increases, pl ease refer to Korea Response 1.1(11) to Annex V
Questions. There is no disagreement that KEXIM is government-owned.

2. Question

 In paragraph 106 of its Oral Statement Ko rea states that Korean domestic banks’
returns on equity (ROE) were negative 17.2 per cent during this critical period. Please confirm
that the critical period referred to is 1997-2001 and that Korea has not included the KDB and
IBK in that calculation?

Response

 As clarified by Korea during the Second Subs tantive Meeting, the period concerned is 1997-
2001 and the ROE does not include KDB and IBK.

3. Question

 Korea is correct that one of the key elements in the dispute is the relationship between
the Korea and the IMF and the degree to whic h bailout funds may be shielded from SCM
disciplines. Could Korea please explain why the Letter of Intent between Korea and the IMF
contained the following statement:
In order to enhance the incentives for banks to participate fully in the corporate
restructuring process, no public funds, whether by way of KAMCO (NPA Fund)
purchases or capital injections or other me ans, shall be made available to banks
which are not certified by the FSC to be performing their role in the corporate
sector restructuring process.
1
 Why was this statement repeated in all subsequent Letters of Intent to the IMF until
July 2000?2

Response

 The above statement in the LOI was incorporated into the LOI at the initiative of the IMF. As
a matter of fact, the provisions of the LOIs require d the Government of Korea to do, or refrain from
doing, something that had been proposed by the IMF. As the borrower under the IMF stand-by
arrangement, Korea had to accept the proposals of the IMF in most cases.

 What the IMF was aiming at with the above-quoted LOI provision was to restore the
soundness of the Korean financial sector. In order to achieve this objective, the IMF thought that
banks should provide some impetus for corporate restructuring as it was essential to reduce their
exposure to corporations ( See Exhibit Korea - 2, Carl-Johan Lindgren et al, Financial Sector Crisis
and Restructuring – Lessons from Asia (IMF Occasional Paper 188, 1999), p. 76).

 The LOI statement quoted above refers to banks “performing their role in the corporate sector
restructuring processes.” This is a very general statement. In fact, the “corporate sector restructuring”,
as used in the LOIs, was a generic term that covers a variety of objectives, including, without
limitation, reducing cross guarantees, improving cor porate governance, strengthening the role of the
Fair Trade Commission to enforce antitrust laws, and strengthening the legal framework for creditors’
rights by improving the insolvency system.
3 Furthermore, as demonstrated by these LOIs, the specific
contents and focus of the corporate sector restructuring have continuously changed.

 Despite all of these ambiguities, however, the LOIs laid down certain rules for the Korean
Government and banks to abide by in connection with such corporate sector restructuring. First, “ [t]o
strengthen market discipline, bankruptcy provisions according to Korean law will be allowed to

1 Korea Letter of Intent and Memorandum of Economic Policies, 13 November 1998, (Exhibit EC-36)
and Annex to Korea Letter of Intent and Memorandum of Economic Policies, 13 November 1998, p. 7 (Exhibit
EC-117).
2 See for example : Korea Letter of Intent and Memorandum of Economic Policies, 24 November 1999,
at 6 ; Korea Letter of Intent and Memorandum of Economic Policies for 2000, 12 July 2000, at 7 (Exhibit EC-
36).
3 See Exhibit EC - 34, e.g., 24 July 1998 LOI (World Bank SAL II, Policy Matrix on Corporate
Restructuring), 10 March 1999 LOI (Corporate Restructuring part), 24 November 1999 LOI (World Bank
CFSRL – Policy Matrix II. Corporate Sector Reform).

operate without government interfer ence. No government subsidized support or tax privileges will be
provided to bail out individual corporations” (Exhibit EC-36, 3 December 1997 LOI, para. 35).

 Second, “ [a]ll corporate restructuring should be voluntary (i.e. not government directed) and
market oriented; and public funds will not be used to bail out corporations ” (Exhibit EC - 36, 2 May
1998 LOI, section on “Corporate Governance and Restructuring”).

 Thus, although it is unclear what “roles” the LOIs expected Korean banks to perform in
connection with the corporate sector restructuring, the LOIs clearly circumscribed such “roles” to be
performed by the banks. In no event had the banks b een directed to bail out corporations and act
against the market principles. In this regard, the EC’s allegation to the contrary is refuted by the LOIs
as such.

 As Korea has noted, the IMF was apparently concerned with the example of some other
countries experiencing financial stress where banks did not move expeditiously to clear up problem
loans and instead left unrestructured loans on their books. The results in some places were
unfavourable. The IMF made clear that it was interested in seeing a rapid and market-based
restructuring of bad loans. The IMF made clear to the EC a number of times that it considered that
Korea banks were quite successful in pursuing market-based results from this process.

4. Question

 Paragraph 209 of Korea’s Oral Statement: If the tax breaks pursuant to Article 45-2 of
the Corporate Tax Act referred to were not inte nded to apply only to the Daewoo workout why
were they introduced in conjunction with that workout and granted for only three months –
enough time to allow Daewoo to capture them? How may other companies have benefited? Is it
still in force?

Response

 Article 45-2 of the STTCL was intended to exte nd the tax provision to workout companies as
well as companies undergoing corporate reorganization. When the law was deliberated at the National
Assembly, every company which could be affected by the proposed law was interested and waited for
the law to be passed. The law has a broad base of a pplication in terms of the companies to which it
could apply.

 The law was extended twice so that workouts and corporate reorganizations carried out until
the end of 2002 could be covered. It is normal for ta x laws in Korea to be adopted on an annual basis.
No records have been kept either in court or by the tax administration to identify the companies that
made use of this tax provision.

5. Question

 Paragraph 291 of Korea’s Oral Statement: Does Korea agree that Exhibits Korea-113
and 114 do not relate to the Hamburg Süd/MOCIE case that is referred to?

 The ship subject to the DSME offer (Exhibit Korea – 114) is a 5.600 teu container ship
(Ref. No. BPT-HAM-101-001) for USD 53 Mio while the MOCIE letter to DSME and SHI
(Exhibit Korea – 112) concerned a 4.100 teu container ship (Ref. No. HAM-100-001) for a
contract price of USD 58 Mio. Exhibit Korea – 113 also refers to a ship priced at 53 Mio. USD,
with payment terms different from those listed in the MOCIE letter.

Response

 Korea reconfirms that both E xhibits Korea -113 and 114 are indeed related to the Hamburg
Süd containership contract.

 The EC fails to recognize that the shipbuild ing industry uses two sta ndards of measurement
for the loading capacity of a containership, i.e. teu and ‘14 tonne homogenised’ teu value.
4 This is
reflected in the seemingly different descriptions between the MOCIE letter (Exhibit Korea – 112) and
the DSME offer (Exhibit Korea – 114) which nevert heless designate the same vessel. In the Hamburg
Süd case, the buyer initially specified the containershi p with a capacity of 5,600 teu by using the first
method. But, at the later stage of negotiations, the buyer began to use the second method, i.e. the
14 tonne homogenised teu measurement, thereby conver ting the capacity into 4,100 teu. This is the
reason why the initial DSME offer referred to a 5,600 teu containership while the MOCIE letter
referred to 4,100 teu, quoting it from the final contract. Therefore, Korea again confirms that Exhibits
Korea -113 and 114 are addressing the same Hamburg Süd project in question which the EC has been
taking issue in the present proceeding.

 Also, “HAM-100-001’ and “BPT-HAM-101-001” were only the reference numbers of the
subject vessel specifications. DSME initially used reference number “BPT-HAM101-001” to refer to
“outline specification”. But, as the specifications have been finalized as a result of negotiations with
Hamburg Süd, DSME assigned the final reference number “HAM-100-001”. However, these numbers
referred to the same project. Designating different specification reference numbers at different stages
of the negotiation process is a normal practice in the shipbuilding industry. Such a practice is the
result of the fact that shipbuilders and buyers need to identify the agreements reached at different
levels due to the sheer length of the negotiations for a shipbuilding contract.

 In addition, as the EC well knows, it is not uncommon for a shipyard to make different price
quotations depending on the payment te rm that the buyer will ultimately select. As is clearly stated in
Exhibit Korea – 114, DSME quoted two different prices for the same vessel based on different
payment terms. Thus, USD 53 million was offered based on a “top heavy” payment term whereby
90 per cent of the price would be settled at the time of the signing of the contract and 10 per cent at
the time of the delivery of the ship. At the same ti me and in the same written offer, a price of USD 58
million was also offered based on a rather “tail h eavy” payment term, i.e, 10 per cent at contract
signing, 10 per cent six months after the contract, 10 per cent at keel-laying, 10 per cent at launching,
and 60 per cent at delivery. DSME gave this offer verbally to the broker (Water J. Hinneberg) on
30 August 2002 and then confirmed it by sendi ng a written offer (Exhibit Korea – 114) on
2 September 2002. The price offered of USD 53 m illion mentioned in the broker’s letter (Exhibit
Korea – 113) meant the “top heavy” price offered by DSME, which was equivalent to USD 58 million
on a “tail heavy” basis.

 As stated by Korea in its Oral Statement a nd response to the EC’s question at the Second
Substantive Meeting, the buyer, Hamburg Süd, unr easonably forced DSME to reduce the offer price
to the level of USD 55 million on a “tail heavy” basis, which was the price level offered by a
European shipyard, Odense (Exhibit EC-88). At that time, the Korean shipyards, DSME and
Samsung, had already offered prices at the level of USD 58 million.

4 Teu stands for twenty-foot equivalent unit and measures a vessel’s capacity to load containers. The
accuracy of this measurement depends on the method of ca lculation, whether the ship capacity for only loaded
containers is taken into account, and whether the deadweight capacity allows a full load of containers. The
industry has therefore developed a measure (known as ‘14 tonne homogenised’ teu value) which is the
deadweight (payload) of the container ship divided by 14. This gives the number of containers (1 standard
container = 1 teu) that a ship can carry within its dead weight payload if each one weighted 14 tonnes. This
figure can be significantly different to the stated teu va lues of some ships. This value represents a ‘nominal
container capacity’ calculated on a standard basis.

 Does Korea admit that MOCIE intervened and asked Daewoo to raise the price by
USD 3 Mio which is supported by the clear language in Exhibit Korea – 112. Does this not
contradict what Korea responded in its Resp onse to Question 82 from the Panel where you
stated that MOCIE was not concerned with the price level?

Response

 In Korea’s opinion, there is no difference be tween the language in Exhibit Korea – 112 and
the response to Question 82. It is clear from both that MOCIE was not concerned with the price level
as such but with the anticompetitive behaviour.

6. Question

 Regarding paragraph 292 of Korea’s Oral Statement, explain what USD 10 million
vessel you are referring to and what intimation by the EC this refers to.

Response

 As was clarified by Korea during the Second S ubstantive Meeting as well as in the final text
of the Oral Statement filed on 14 June 2004, this refers to paragraph 331 of the EC’s Second Written
Submission.

RESPONSES OF KOREA TO QUESTIONS FROM THE PANEL AT THE SECOND MEETING
AND COMMENTS OF KOREA TO SOME OF THE QUESTIONS ADDRESSED BY THE PANEL
TO THE EUROPEAN COMMUNITIES

I. TO KOREA

A. KEXIM LEGAL REGIME

103. What is the precise legal basis for Korea ’s assertion (at para. 99 of its rebuttal
submission) that KEXIM is explicitly required by law to operate on a market-oriented basis?

Response

 Korea considers that the following criteria must be reviewed for determining whether a
financial institution is operating on a market-oriente d basis: (i) whether to appropriately assess the
credit risks of the borrower; (ii) whether to apply interest rates or guarantee premia commensurate to
credit rating of the borrower/applicant; (iii) whethe r to take into account market situations when
setting up interest rates/premium; (iv) whether to properly manage risks associated with the KEXIM
business and (v) how to ensure soundness of management.

(i) Assessment of the credit risks of the borrower

 Already in the period preceding 2000, KEXIM co mpared the credit ratings made by outside
credit rating agencies, and for any given borrower (applicant) KEXIM used the lowest credit rating
found with respect to the borrower (applicant). In f act, in order to effectively manage credit risks,
KEXIM established the Risk Management Commi ttee as early as in 1998 to set up policies and
guidelines (e.g., Regulations for Credit Rating Evaluati on) regarding risk management in KEXIM. In
addition, the Risk Management Department and the Credit Evaluation Office have been set up under
the Committee for implementing and administeri ng the policies and guidelines by the Committee.
These two departments have been in operation inde pendently from the financing departments in order
to ensure a transparent and effective risk management.

 As from 2000, as noted in Exhibit Korea – 91, KEXIM implemented its own credit rating
system pursuant to the recommendations by the Ba nk for International Settlement (through Basel II)
and the Financial Supervisory Service of Korea, a nd has since then evaluated credit ratings of the
borrowers (applicants) in accordan ce with the enhanced credit risk management. Currently, KEXIM
classifies the credit ratings into 14 grades and evalua tes credit ratings of borrowers (applicants) after
assessing five factors of credit risks (i.e. industry risk, business risk, management risk, financial risk
and future cash flow risk) associated with borrowe rs/applicants. For the details of KEXIM’s credit
rating system, please refer to Exhibit Korea – 117
 (Korea Annex V Attachment 1.1(24)-2) submitted
herewith.

(ii) Application of credit risk spr eads commensurate to credit ratings

 Pursuant to Articles 8, 14 and 25 of the KE XIM Guidelines for Interest Rates and Fees
(Exhibit EC - 13), it is required to add credit risk sp reads onto the base rates (whether it be an interest
rate for loans or a premium for guarantees). Thes e credit risk spreads to be added are varying
depending on the credit ratings of bor rowers/applicants. This may in turn result in different overall
interest rates or premia applied to the borrowers/a pplicants. As to the structures of KEXIM interest
rates and guarantee premia, please refer to Korea’s Response 47 to the Panel Questions and Exhibits
Korea - 12 & 14.

(iii) Taking into account market situations

 As detailed in Korea’s Response 47 to the Panel Questions, the base rates for KEXIM loans,
which are determined pursuant to Articles 10 & 11 of the KEXIM Guidelines for Interest Rates and
Fees, are by themselves designed to properly reflect the prevailing level of interest rates in the
financial market at the relevant time. In addition, the “market adjustment rates” which are to be
applied pursuant to Articles 14 & 25 of said Guidelin es also ensure the interest rates and guarantee
premium to fully reflect the current market situati ons (for details of market adjustment rates, please
refer to Korea Response 57 to Panel Questions).

(iv) Proper management of business risks

 In order to properly manage business risks of KEXIM, Article 17-10 of the KEXIM Decree
(the Enforcement Decree of KEXIM Act, Exhibit EC-11) requires KEXIM to establish and operate a
risk control system, and currently the above-menti oned Risk Management Committee is in charge of
such risk control tasks. For admi nistering these tasks, the Committ ee has set forth and enforced the
Regulation for Risk Management whereby all ri sks associated with KEXIM business including the
credit risk, market risks and the li quidity risk are being closely watched. Further, pursuant to
Article 29 of the KEXIM Act (Exhibit EC - 10) an d Article 17-10 of the KEXIM Decree, KEXIM has
established the standards and procedures for business conducts (one of which is the Operating Manual
submitted in the Annex V process as Attachment 1.1(9 )), which are to reduce potential risks related to
day-to-day business practices of KEXIM.

(v) Ensuring sound management of KEXIM

 Articles 17-5 through 17-9 of the KEXIM Decree specifically set limitations and restrictions
to KEXIM practices for the purpose of ensuring th e sound management of KEXIM. Such limitations
and restrictions pertain to credit extension ceili ngs, restrictions on investment activities or holding
securities and disposals of non-business assets. These limitations and restrictions safeguard KEXIM
against potential business risks. Further, KEXIM is subject to supervision by the Financial
Supervisory Commission (“FSC”) as well as the Mi nistry of Finance and Economy pursuant to
Article 39 of the KEXIM Act and Articles 17-12 & 17-13 of the KEXIM Decree. The Ministry and
the FSC regularly review KEXIM’s compliance with the limitations and restrictions as mentioned
above. In addition, KEXIM is required to regular ly check the soundness of its holding assets and to
maintain an appropriate level of reserves for ba d debts. KEXIM is also required to follow FSC
regulations regarding the BIS adequacy ratio and the ratio for the foreign currency assets/liabilities.
The limitations, restrictions and requirements related to the sound management are corresponding and
similar to those imposed onto the other commerc ial banks under the Banking Act. The FSC may issue
an order to KEXIM to take the necessary measur es (which are equivalent to “Prompt Corrective
Measures” by the FSC against other commercial banks) in cases where it finds that KEXIM’s
management is insufficiently sound due to its non-compliance with the FSC regulations ( See
Article 39 of the KEXIM Act and Article 17-13 of the KEXIM Decree).

Legal requirement for operating on a market-oriented basis

 As shown above, the KEXIM Act, the Decree and other internal regulations, which can be
collectively referred to as the KEXIM legal regime, aim at making certain that KEXIM operates on a
market-oriented basis. In other words, the system ic safeguards, all of which are based on the KEXIM
legal regime, require and enable KEXIM to secure its operations on a market-oriented basis. Korea
reiterates that KEXIM has continuously earned op erating profits since its establishment (as to
KEXIM’s operating profit, please refer to the Korea Response 49 to the Panel Questions).

104. Korea states (in response to Question 53 fr om the Panel) that Article 24 of the KEXIM
Act should have been repealed, and that in fact “KEXIM has been contemplating proposing the

repeal or amendment of Article 24”. Please provide proof or supporting evidence (minutes of
meetings, for example) for this assertion?

Response

 Korea hereby submits Exhibit Korea – 118 which proves that KEXIM contemplated the
repeal of the provision of Article 24 of the KEXIM Act already in 1999/2000. As explained in the
Korea’s response to the Panel’s Question 53, the restriction on KEXIM’s business scope had already
been eliminated by amending Article 18 of the KE XIM Act in 1998. This amendment was enacted in
order to fully and appropriately reflect financial market realities which had materially changed since
the enactment of the KEXIM Act. While this amendment officially allowed KEXIM to fully
participate in the financial market, even prior to this amendment, KEXIM had already been active in
the market where other commercial banks were prev alent, therefore entailing increased competition.
Thus far, the repeal of the provision has not been proceeded with b ecause of the burdensome
legislative procedures required for the amendment. In practice, in light of Article 18 of the KEXIM
Act and because KEXIM has had no restrictions for competing with other commercial financial
institutions notwithstanding Article 24, KEXIM has not been constrained by the anachronistic “non-
competition” provision in the KEXIM Act. Further, Korea notes that it already has provided
considerable empirical evidence of competition between KEXIM and other financial institutions.

105. Until what date was Article 24 applied, and in which specific instances? Please explain
and describe in full.

Response

 As submitted, after the incorporation of KEXI M, the Korean financial market developed and
commercial financial institutions began to provide the specialized financing services in which
KEXIM had been involved. This resulted in compe tition with other financial institutions in virtually
all areas of the KEXIM financial services (as to the types of KEXIM financial services, please refer to
Korea’s Response to the Panel’s Question 53). Korea reiterates that none of the relevant provisions in
the KEXIM Act are intended to prohibit other financia l institutions to participate in financial services
extended by KEXIM or, conversely, to require KEXI M to exit the market as soon as other financial
institutions entered into the market. As submitted, as for the APRG, KEXIM took only a small portion
of the market share (less than 20 per cent) prior to the Asian financial crisis, which shows that there
was a fierce competition in the market. Virtually all financial institutions have provided overseas
investment credits since the restrictions on foreign currency business were lifted in the late ‘90s. Also,
KEXIM has been competing with other financial ins titutions in the area of the import credit market.
Having extended such financial services, KEXIM has never been sanctioned by the supervisory
authorities or challenged by other commercial fina ncial institutions by claiming the existence of
Article 24 of the KEXIM Act.

106. At para. 45 of Korea’s second oral statement, you argue that if lending is provided on
commercial terms the lending entity is not a public body. Would this reasoning apply in the case
where the Finance Ministry has a general practice of lending on a commercial basis? That is,
would the Finance Ministry be a private body (or in any event not be a public body)? Would the
analysis be the same if one day, exceptionally , the Finance Minister instructs his/her employees
to provide a loan to his/her friend’s company at one third of the market rate? Would that loan
constitute a financial contribution? Why, or why not?

Response

 Korea stated in paragraph 24 of its Oral Statem ent that it considers there to be three distinct
categories: (1) governmental organs; (2) public bo dies; and (3) private bodies. Korea offered the
Finance Ministry as an example of a governmental organ that would be included in category (1). In

contrast, with respect to para-statal entities th at are not organs of government, under the treaty
language as well as the interpretative guidance of the Articles on State Responsibility and
Commentaries, they are prima facie not considered as acting with governmental authority.

 Paragraph 45 was not referring to an organ of government, but to a situation involving a para-
statal or government-owned entity. The EC has neve r alleged that any of the banks in question were
organs of government, only that they were public bodies. Thus, the second half of the question does
not really apply in the context of the Finance Minist ry. On the other hand, if a para-statal entity were
operating a commercial programme (and therefore would not be considered a public body), the sort of
intervention noted in the question could constitute entrustment of the para-statal entity as a private
body depending on the facts. As Korea has noted in paragraphs 43-44, there is no loophole in the
treaty scheme; the difference is in the type of proo f that must be presented depending on whether it is
a private or public body. The utter lack of eviden ce regarding entrustment or direction is what has
compelled the EC to try to construct a novel and sweeping definition of “public body”.

107. At para. 56 of Korea’s second oral stat ement, Korea states that so-called “market
window” financing falls outside the coverage of the OECD) export credit arrangement Is Korea
thereby arguing that such financing falls outside the coverage of the SCM Agreement? If so, is
this because Korea considers that such financin g does not constitute a financial contribution?
Please explain your reasoning.

Response

 The Panel’s characterization of Korea’s comment in paragraph 56 is, perhaps, somewhat too
categorical. Korea purposely used a passive grammatical construct: “They are considered market-
based commercial activities in competition with other banks.” The reason for this construct is that
because there is a lack of reporti ng, there is a certain amount of self-definition as to what is included
in the concept of “market-window”. Nonetheless, irrespective of what is included as a practical
matter, Korea does consider that the concept provides a valid distinction.

 In order to answer the Panel’s question, one must once again refer to the different categories
of entities as discussed in the answer to the previous question. Therefore, if an organ of government
is offering the financing, it may be a subsidy depend ing on whether or not there is a benefit. On the
other hand, if the financing is being offered as part of a commercial programme by a para-statal
entity, it is presumptively not “governmental” and therefore would not be considered a financial
contribution by a government unless specifically demonstrated as such. There are two points to note
here. First, the issue of whether or not it is a commercial programme is one for the complainant to
establish as an initial matter. Merely alleging that the programme is not commercial because the entity
is government-owned as the EC has done collapses two distinct analytical steps into one. Second, as
also discussed, even if the overall programme is on a commercial basis and, therefore, the entity is not
considered as a public body for purposes of a disput e, it is still the case that the complainant has the
possibility of demonstrating that there was governmental entrustment or direction in a particular case.
Of course, the EC has been unable to do this (becau se the evidence does not exist), which is why it is
trying to build its whole case on the fact of government ownership.

B. PAST SUBSIDIES

108. Korea has made various comments regardi ng the EC’s claims concerning so-called
“past” subsidies. In particular, Korea referred to this issue in its reply to Question 83 from the
Panel, and at paras. 62, 63 and 93 of its second oral statement. We understand that Korea is not
seeking a ruling that the EC is precluded from ch allenging “past” subsidies. Is this a correct
understanding? If not, why not?

Response

 It is correct that Korea is not making a gene ral argument that the EC cannot challenge alleged
past subsidies as a matter of principle. However, to be clear, there are two different aspects to this
issue depending on whether one is refe rring to Part II or Part III of the SCM Agreement. Allegations
of prohibited subsidization are much more of th e nature of “standard” GATT/WTO dispute settlement
cases where the complainant is generally considered to have a general right to request a ruling
regarding the imposition of a measure by another Memb er that it considers is inconsistent with the
other Member’s treaty obligations. It may be the case, of course, that such a ruling is of only historical
interest if the facts are that the respondent is no longer implementing measures that are inconsistent
with its obligations. This would be the case if there were no longer benefits being provided within the
meaning of Article 1.1(b) of the SCM Agreement . Of course, it does raise a question as to the
meaningfulness of such a ruling or recommendati on by the DSB for a Member to withdraw the
subsidy as required by Article 4.7 if in fact there is no longer any subsidy. In light of this point, the
Panel must take into consideration with in the full context of Part II of the SCM Agreement whether it
considers that there actually are prohibited subsidies being provided.

 Regarding claims under Part III with respect to allegations of Adverse Effects, the Panel must
recognize the sui generis nature of its inquiry in this rega rd. In no other area of WTO dispute
settlement must a complainant demonstrate that a measure has caused adverse effects. To put it
another way, subsidies are considered illegal only if they cause adverse effects. Moreover, Article 7.8
provides that they are illegal only to the extent of such an adverse effect. Thus, there is the unique
situation of a measure only being “partially” inconsistent with a Member’s WTO obligations. One can
assume that, in determining whether the alleged subs idies in question have caused adverse effects, a
panel will look at such alleged effects over a period of time. It is axiomatic that in any injury-type
inquiry, the most recent period is the most rele vant. Thus, the probative value of evidence of
subsidization in earlier periods is highly questionable if the evidence is that there was no subsidization
or no adverse effect in the most recent period. Thus, it is not a qu estion of a legal bar to looking at
earlier periods; rather, it is a question of the releva nce and probative value of such evidence. In light
of the requirements that there be a demonstration of actual adverse effects and that the subsidies are
only illegal to the extent of such causation, a panel would need to explain in detail why it considered
that a subsidy that was no longer causing adverse effects would be actionable. Thus, Korea is not
saying that historical evidence is irrelevant in analyz ing trends that lead to present adverse effects; it
can have an impact on the overall analysis. Howeve r, in the case where the evidence is that such
adverse effects are no longer being caused or there is no longer a subsidy, it is unclear what the basis
of such a determination would be.

C. APRG/PSL

109. Korea argues at para. 80 of its second or al statement that foreign APRG providers
include a country-risk spread for APRGs extended to Korean shipyards, which accounts for the
higher rates charged by the foreign APRG issu ers than those charged by KEXIM. Should not
KEXIM have applied a similar country-risk spread, or otherwise have taken into account the
risk factor of investing in Korea? Please explain. Why sh ould foreign APRG providers,
including those based in Korea (See Exhibit Ko rea – 87, page 5, which indicates that both
foreign banks A and B issue APRGs though their Korean branches) incur more risk in investing
in Korea than Korean banks?

Response

 As detailed in Exhibits Korea - 84 thr ough 87 and stated by Korea during the Second
Substantive Meeting, the country risk premium (or count y risk spread) is to be applied to the financial
transactions between companies established in differe nt countries. In general, the term “country risk”
typically covers the risk that economic, social, and political conditions and events in a foreign country

may adversely affect an institution’s financial inter est. The country risk factor is not understood in
financial markets to cover risks in transactions between parties established in the same country.
Rather, in these instances, the lenders or providers focus on the general credit risks of their counter-
parties.

 For the better understanding of the Panel and for illustrative purposes, Korea submits the
elements of country risk assessed under the OECD Arrangement on Officially Supported Export
Credits (See Article 24.a) of the OECD Arrangement). These are:

 - general moratorium on repayments decr eed by the buyer's/borrower's/guarantor's
government or by that agency of a country through which repayment is effected;

 - political events and/or economic diffic ulties arising outside the country of the
notifying Participant or legislative/administrative measures taken outside the country
of the notifying Participant which prevent or delay the transfer of funds paid in
respect of the credit;

 - legal provisions adopted in the buyer's/bo rrower's country declaring repayments made
in local currency to be a valid discharge of the debt, notwithstanding that, as a result
of fluctuations in exchange rates, such re payments, when converted into the currency
of the credit, no longer cover the amount of the debt at the date of the transfer of
funds;

 - any other measure or decision of the government of a foreign country which prevents
repayment under a credit; and

 - cases of force majeure occurring outside the country of the notifying Participant, i.e.
war (including civil war), expropriation, revol ution, riot, civil disturbances, cyclones,
floods, earthquakes, eruptions, tidal waves and nuclear accidents.

 When KEXIM extends APRGs to Korean shipya rds, the transactions involve parties in the
same country of establishment and there is, as a result, no need for KEXIM to consider a “country
risk.” Rather, as explained in Response 103 above, KEXIM is looking at the general credit risks of the
applicant by factoring in all relevant risks su ch as industry risk, business risk, management risk,
financial risk and future cash flow risk of the applicant. In contrast with KEXIM, on top of
considering the usual expected risks, foreign APRG providers needed to take into account a risk of a
different dimension, i.e. the country risk, as they are located outside Korea. The additional risk
notwithstanding, foreign providers extended APRG s to Korean shipyards when they were so
designated by the buyers and, in fact, earned, high guarantee premia.

 Further, Korean branches of foreign APRG provide rs need to factor in such country risk, as
the foreign APRG providers themselves, not the br anches of such foreign providers, will bear the
ultimate and final legal liability (this is evident by the operation of law) of having to settle the
advance payments to the buyer of the vessels in case of a contractual default by a Korean shipbuilder.
As a result, the country risks have been factored into the premium for guarantees issued by Korean
branches of foreign APRG providers.

110. Please comment on the EC’s assertion (a t part 107 of its Second Written Submission)
that Korea failed to provide details of the rat es of five of the APRGs issued for Samsung by
commercial banks in 1997.

Response

 Korea provided the best information available at the time of the Annex V procedure. Korea
notes that much of the information requested in A nnex V and subsequently has not been in the hands
of the Government of Korea. Having confirmed with Samsung, Korea understands that the rates of the
five APRGs referred to by the EC were not av ailable as the required preservation period of the
relevant documents had expired. Where informati on for some of the APRGs issued in 1997 was still
available, such information was submitted.

111. In response to Question 72 from the Panel, Korea submitted certain documents
containing redactions. What is the reason for those redactions?

Response

 In Question 72, the Panel requested Korea to pr ovide internal documents related to a certain
project specifically identified by the Panel. As the original document (of which the version with
redactions was submitted by Korea as Exhibit Korea – 60) contained information on other projects
(which were not requested by the Panel) which is by nature business confidential information, Korea
deleted the information not related to the project identified by the Panel.

112. Were any APRGs issued to Korean shipyards by independent financial institutions after
28 May 2001? If so, why weren’t these included in Korea’s reply to the Facilitator’s
questionnaire under the Annex V procedure?

Response

 Korea would like to note that it considers KEXIM to be an “independent financial
institution.”

 Notwithstanding this, Korea confirms that it pr ovided all information in Attachments 1.2(31)-
1 through 1.2(31)-8 of the docum ents submitted during the Annex V process as to APRGs issued by
Korean financial institutions (except some information related to foreign APRGs) to Korean shipyards
up until the Annex V procedure was initiated. Information as to APRGs issued after 28 May 2001 was
included therein also. Please refer to Attachment 1.2(31)-1 through 1.2(31)-8 (Exhibit EC-24) as
regards the information on such APRGs.

113. In respect of Koreas repl y to Question 71 from the Pane l, please provide supporting
evidence for Korea’s assertion that the Kook min and Woori Bank rates for Samsung APRGs
were [BCI: Omitted from public version] instead of [BCI: Omitted from public version].

Response

 Korea hereby confirms that the Kookmin Bank and Woori Bank rates for Samsung APRGs
were [BCI: Omitted from public version] . Korea’s prior statement that is not consistent with this
information was inadvertently made due to clerical mistake by the company in pulling together the
response. Korea regrets any confusion.

114. Regarding Exhibit Korea – 99, why did KEXIM continue to apply the same credit
spread after DSME entered financial difficulties?

Response

 As clarified during the Second Substantive Mee ting, Korea did not, and could not, endorse the
EC’s benchmark as suggested in Exhibit EC - 125 or EC Attachment - 9. Korea merely submitted

Exhibits Korea - 93 through 100 (i) to illustrate that there are critical fallacies in the EC’s calculations
due to its misunderstanding regarding the interest ra te structure of the KEXIM PSLs and (ii) to show
that no benefit exists even under the EC’s ow n hypothetical and inaccurate methodology. Thus,
Exhibit Korea – 99 is the basis for an argument in th e alternative and is also a hypothetical one based
on various assumptions, not reflecting actual transactions . In particular, it was prepared to show that
even if DSME had the worst credit rating during the period of the workout, no benefit was afforded.

 As evidenced in Exhibit Korea – 92, DSME was rated as P5 by KEXIM during the workout
period when DSME was under the worst financial situ ation. Hence, despite the fact that KEXIM did
not retain its current credit rating system before the Asian Financial Crisis and DSME workout, it is a
logical speculation that DSME’s credit rating prior to the workout would have been better off
compared to its rating when DSME was going through the workout process. This can be substantiated
by the fact that the credit rating of DSME was adju sted upward to P4 right after the graduation out of
the workout (s ee Exhibit Korea – 92). Nonetheless, Exhibit Korea – 99 was submitted to show that
during the entire period the EC indicated in its Exhibit EC – 125, no benefit was afforded to DSME.
And, of course, if the better credit rating were to be assigned in Exhibit Korea – 99 for the period
preceding the workout, it would be shown that th e negative benefit margins would even become
larger.

D. ALLEGED ACTIONABLE SUBSIDIES

115. Please comment on para. 259 of the EC’s Second Written Submission, concerning the
fate of Mr. Do-Sang Lee’s [BCI: Omitted from public version] shareholding in Daedong. Under
what legal previsions did the complete cancellation of Mr. Lee’s shareholding take place? Please
explain fully.

Response

 In the context of “corporate reorganization” (cour t receivership) under Korean law, the fate of
shareholders of the subject company is pre scribed by the Corporate Reorganization Act ( See
Exhibit EC - 43). Articles 221(3) and (4) of the Corporate Reorganization Act provide as follows:

 (3) In cases where the total liabilities of th e company at the time of commencement of
the reorganization proceeding exceed its tota l assets, the reduction of capital shall be
provided for [in the reorganization plan] on su ch terms that no less than a half of the
company’s issued stock is written off.

 (4) In cases where the commencement of the reorganization proceeding has been caused
by acts for which directors or equivalent persons, or managers of the subject company
are seriously responsible, the reduction of capital shall be provided for [in the
reorganization plan] on such terms that no less than two thirds of the shares of stock
held by a shareholder who has exercised considerable influences on such acts, his
relatives, and other shareholders who have a special relationship with him as set forth
in the Supreme Court Regulations, are written off.
5

 As clearly indicated in the above provisions, the thresholds of a “half” or “two thirds”
mentioned in the above provisions constitute a mi nimum level for the stock write-off. Therefore,
Article 221 of the Corporate Reorganization Act requi res that the reorganization plan provide for a
stock write-off that should not be less than th ese levels but may even achieve the complete
cancellation of the stock. Based on these legal requi rements, the bankruptcy courts in most cases

5 This is more accurate transla tion. The unofficial translation of the Corporate Reorganization Act
submitted by the EC to the Panel as Exhibit EC - 43, is not entirely accurate. For verification purposes, Korea
submits the Korean version of Article 221 of the Act as Exhibit Korea – 119.

completely cancelled the shares held by a controllin g shareholder particularly when the shares had no
value due to insolvency.

 In the case of Daedong, it was determined th at the total liabilities of Daedong exceeded the
total assets (Exhibit EC - 78, Final Corporate Reorganization Plan for Daedong, Attachment 1,
Balance Sheet). As such, the receiver was required by law to write-off the shares by not less than
50 per cent. Therefore, the receiver proposed a reor ganization plan whereby the shares held by all the
shareholders of Daedong, except Mr. Do-Sang Lee, we re reduced by 80 per cent (i.e. 5:1 ratio). In
addition, the shares of Mr. Do-Sang Lee, who, as th e major shareholder, had exercised a considerable
influence over the acts of directors and managers , were required by the Corporate Reorganization Act
to be reduced by at least two thirds. Ultimately, taking into account the fact that the Daedong shares
had no value and that Mr. Lee was fully responsible for the failure of Daedong, the receiver proposed
the complete cancellation of Mr. Lee’s shares. Ulti mately, however, the acceptance of this proposal
was Mr. Lee’s choice. Korea cons iders that the EC’s highly personal, disparaging remarks about
Mr. Lee’s motivation are regrettable.

116. Korea asserts that Articl e 45-2 of the Corporate Tax Act does not constitute revenue
forgone, and did not confer a benefit. According to the news report in Exhibit EC-136, however,
a Daewoo company official stated that Daewoo would “be exempted from taxes totalling
236 billion won’. Please comment, and explai n how a 236 billion won tax exemption is not
revenue forgone and did not confer a benefit

Response

 Under the SCM Agreement , the EC has the burden to prove specifically what government
revenue was otherwise due and how such revenue was foregone or not collected (Article 1.1(a)(1)(ii)).
The EC has failed to carry this burden of proof. Moreover, it appears that the EC still has no clear
understanding of the Korean tax scheme. As a resu lt, Korea still can not determine specifically what
the EC’s allegations on tax concessions are about.

 The news report in Exhibit EC - 136, which quoted the alleged statement by a Daewoo
official, establishes nothing about the types of taxes concerned, applicable provisions of tax laws, tax
rates, calculations of the tax amount involved, how they were foregone, etc. Given the complication
and technicalities of the tax issues, no Panel wo uld make an affirmative finding of financial
contribution and benefit on the basis of such a very questionable newspape r article. Moreover, the
amount of KRW 236 billion allegedl y mentioned by a Daewoo official does not distinguish what
portion of this total amount is attributable to DSME as distinguished from the portions attributable to
the machinery company and to the remaining DHI. In short, the EC has not established a prima facie
case of the tax concession as required by Article 1.1(a)(1)(ii) of the SCM Agreement.

 Under these circumstances, Korea is placed in an awkward position when it is asked by the
Panel to “explain how a 236 billion won tax exempti on is not revenue foregone and did not confer a
benefit”. This question assumes that there was a tax exemption of KRW 236 billion, but Korea
disagrees that a 236 billion won tax exemption has ev er been established by the EC. Unless the EC
first explains how KRW 236 billion or whatever amount has been calculated and under what
provisions of tax laws, it is impossible for Korea to explain how this amount is not revenue forgone.
Nonetheless, Korea would like to comply with th e request of the Panel by providing further
explanations on the tax issue, while again reserving its rights regarding the burden of proof.

 First of all, Korea refers the Panel to pa ragraphs 221 and 222 of the EC’s Second Written
Submission, in which the EC made clear that its “core claim” was the “temporary tax exemptions”
granted under Article 45-2 of the Special Tax Treat ment Control Law (“STTCL”) which extended tax
incentives under Article 46 of the Corporate Tax Act. It appears that the EC believes that Exhibit EC -

136 provides evidence of the size of tax incentives under the above Article 46 of the Corporate Tax
Act which had been “extended” by Article 45-2 of the STTCL.

 However, as Korea has repeatedly explained (see, e.g., paras. 206 – 208 of Korea’s Oral
Statement at the Second Panel Meeting), the special tax treatment under Article 46 applies only when
“valuation gains” have arisen to a spun-off company as a result of the “valuation” of assets carried out
at the time of the spin-off. In the case of the DHI workout, the assets of the original DHI were spun-
off to DSME and the machinery company at book value (i.e. without “valuation” of those assets).
Therefore, DSME could not obtain any tax incentiv es under Article 46 of the Corporate Tax Act as
extended by Article 45-2 of the STTCL.

 The fact that the DHI assets were transfe rred at book value to the spun-off companies is
clearly demonstrated by Exhibit Korea – 120
 (1999 Anjin’s Workout Report, excerpted pages,
Appendix 10), as well as by Exhibit EC-55 (DHI Workout Plan), Appendix D-11 (balance sheet) and
Exhibit EC-56 (Structure of spin-off). Also, the EC has never disputed this fact.

 Therefore, contrary to the allegation by the EC, there was no tax exemption granted to DSME
under Article 45-2 of the STTCL and Article 46 of the Corporate Tax Act. Thus, the EC’s “core
claim” fails, and the questionable statement by a Daewoo official in Exhibit EC-136 cannot prove
anything when what the EC proposes to prove on th e basis of hearsay cannot “legally” make sense.
For the avoidance of any doubt, Korea hereby submits the text of Article 46 of the Corporate Tax Act
(both the Korean original and English translation) as Exhibit Korea – 121

 In this situation, it is questionable that a Daewoo official could really have made the
statement about KRW 236 billion as was written by the journalist or whether the journalist
misunderstood. If a Daewoo official really made that statement, it may well be that he misunderstood
the facts and the applicable tax law. The other pl ausible answer might be that the Daewoo official
may have referred to a totally diffe rent type of tax incentive. A possible candidate is the “special
additional tax” which could have b een levied if there were gains from the transfer of certain assets
from DHI to the spun-off companies. However, this tax was to be levied on DHI (remaining after the
spin-off) under Article 99 of the Corporate Tax Act.

 Prior to 31 December 2001, the Corporate Ta x Act provided that, if a company realized
capital gains from the transfer of certain assets (e.g., land, building and other real property rights), the
transferring company was required to pay, in addition to ordinary corporate income tax, the so-called
“special additional tax” at the rate of 16.5 per cent of the capital gains so realized (See Exhibit Korea
– 121, Articles 2 and 99 of the Corporate Tax Act). Fo r the purpose of this tax, the ‘capital gains’
meant the amount of the transfer price of the assets concerned, minus their original acquisition price
and acquisition costs. In the context of the DHI spin-off, DHI may have been required to pay a
substantial amount of such special additional tax if capital gains had been realized through the transfer
of assets to DSME and the machinery company. Even if the transfer of assets was made at book value,
the book value of those assets could have been higher than their acquisition prices and costs as a result
of, among others, re-valuation made prior to the spin-off pursuant to the Asset Re-valuation Act.

 Again, it should be noted that the payer of such special additional tax was the transferor of the
assets subject of the special additional tax (i.e. the remaining DHI). However, by virtue of a special
provision of Article 99(11) of the Corporate Tax Act, the transferor’s payment of special additional
tax could be deferred if the transfer of assets took place as a result of, among others, a spin-off that
satisfies the requirements of Article 46 of the Corporate Tax Act. ( See Exhibit Korea – 121

Article 99(11)). In the case of companies in restruct uring, a problem arose due to the technical issue
of not having precisely equal shareholding ratios due to the normal rules of share allocations in such
situations. If a provision such as Article 45-2 ha d been included in the STTCL, thereby treating a
spin-off made on unequal shareholding ratios as sa tisfying the requirement of Article 46 of the
Corporate Tax Act, then, the remaining DHI’s liab ility for special additional tax could have been

deferred (not exempted) pursuant to Article 99(11) of the Corporate Tax Act and the remaining DHI
would have been relieved of the burden to pay special additional tax immediately upon the spin-off.

 However, by virtue of a subsequent legislati on, the “special additional tax” was repealed as of
1 January 2002 ( See Exhibit Korea – 121
, Law No.6558 of 31 December 2001). As a result, any
special additional tax liability of the remaining DHI (the provisions were only relevant to the
transferor, not a transferee such as DSME) was completely extinguished. 6 This repeal was made
mainly because the special additional tax was c ontroversial as it operated as a double taxation in
addition to ordinary corporate income tax which would also be assessed on the same capital gains as
those subject to special additional tax.

117. Korea argues that the Daewoo workout was good for both domestic and foreign
creditors, and that the fact that foreign creditors took warrants is an indication of their support
for the workout. Could the foreign creditors ever have prevented the workout? Since they held
only [BCI: Omitted from the pubic version] per cen t of the debt, were they ever in a position to
force liquidation / court receivership? Please explain.

Response

 Under Korean law, the foreign creditors were able to obstruct DHI’s workout by filing a
petition for a straightforward bankruptcy proceedin g. The Bankruptcy Act of Korea authorizes “any
creditor” (regardless of the percentage of debt held by it to the total debt) to file a bankruptcy petition
when there is a cause of bankruptcy ( See Exhibit Korea – 122
, excerpted Articles, Article 122(1)).
The cause of bankruptcy exists when the debtor is no t able to pay debts (Article 116) or its total debt
exceeds the total assets (Article 117). Once the bankruptcy court adjudicates a bankruptcy, the court-
appointed receiver liquidates assets and distributes the proceeds from liquidation to the creditors.

 Through a due diligence investigation, Ar thur Andersen (Anjin) found that, as of
August 1999, DHI was not able to pay its total de bts and the creditors would recover only 28.4 per
cent of their total debts ( See Exhibit Korea – 120
, 1999 Arthur Andersen Report, excerpted pages,
page 38). Therefore, any foreign creditor was ab le to file a petition for a bankruptcy proceeding
against DHI.

 Despite a petition for bankruptcy proceeding, a court-receivership proceeding can be initiated.
Thus, if a petition for court-receivership (corporate re organization) proceeding is filed with respect to
a debtor which is under a bankruptcy proceeding, the latter can be suspended by the court order
(Exhibit EC - 43, Corporate Reorganization Act, Ar ticle 37). However, the fact that the debtor
company was going through a creditors-led “workout” procedure under the Corporate Restructuring
Agreement cannot stop the bankruptcy proceeding.

 In the case of DHI, the foreign creditors we re also in a position to petition for a court
receivership as their total debt ([BCI: Omitted from public version], See Korea’s Annex V response
Attachment 3.1(12)) accounted for approximately 17 pe r cent of the DHI’s total shareholders’ equity
([BCI: Omitted from public version] ). Under the Corporate Reorganization Act, any creditor can
petition for a corporate reorganization only if their debt accounts for not less than 10 per cent of the
debtor company’s “capital” (shareholder equity), not of the total debt (See Exhibit EC - 43, Corporate
Reorganization Act, Article 30(2)).

 Of course, the foreign creditors, holding less th an 3 per cent of the total debt, would not have
been able to “force” DHI into court-receivership, as it was the court that ultimately decides on

6 Korea also notes that this was generally available for any and all Korean corporations involved in any
“asset transfer” transactions because the “special additional tax” itself wa s withdrawn in its entirety from the
Korean tax system by virtue of the law of 31 December 2001.

whether to put the debtor into court-receivership an d, also, the reorganization plan had to be approved
by the three groups of interested parties (i.e. 4/ 5 secured creditors, 2/3 of non-secured creditors, and a
majority of shareholders). Nonetheless, it is true under the Korean law that, as long as the foreign
creditors wanted to obstruct the creditors-led wor kout procedure for DHI, they could do so by simply
filing a petition for bankruptcy or court receivership.

 However, it should be noted that the foreign creditors of DHI were all non-secured creditors
which might have ended up recovering only a mini mal amount of their debt if DHI had undergone a
bankruptcy or court-receivership proceeding. Therefor e, it is inconceivable that the foreign creditors
would have ever considered petitioning for such a – for them - unfavourable proceeding.

118. According to para. 139 of Korea’s rebuttal s ubmission, “Article 18 [of the Special Act on
the Management of Public Funds” strictly controls provision of new loans by the receiving
banks. Thus, this Article provides that ‘[i]f a financial institution which received Public Funds
pursuant to the provision of Article 17(1) intends to provide new funds to an unsound company
as prescribed by the Presidential Decree’, it will be subject to a requirement that it shall enter
into a restructuring agreement with that unsound company” Does Article 18 only impose
restrictions on publicly-funded financial institut ions that intend to provide new funds to
unsound companies? Are restrictions also impo sed if a publicly-funded financial institution
chooses to do something other than provide ne w funds to unsound companies? If the latter
question is answered in the negative, please give an example of something that a publicly-funded
financial institution could do without incurring obligations under the Special Act on the
Management of Public Funds.

Response

 The purpose of Article 18 is to minimize the loss of public funds by restricting the banks that
received public funds from lavishly providing new loans to unsound companies. This provision does
not affect the discretion of the institutions that obtained public funds to decide whether or not to
extend new loans, but it applies only when a publicly-funded bank intends to provide new loans to
“unsound” companies.

 Moreover, as clearly indicated by the provision of Article 18 itself (see Exhibit EC - 103), this
provision applies to a publicly-funded bank’s individual lending activity. In other words, the
restriction applies only when a publicly-funded financial institution decides to extend a new loan to an
unsound company in an individual transaction betw een that particular bank and the unsound company
as a borrower. Therefore, the “restructuring agreemen t” referred to in Article 18 means an agreement
between the lending bank and borrowing comp any (normally called an “Memorandum of
Understanding”) whereby the unsound borrower agrees to implement self-initiated actions, such as
disposing of unnecessary assets or businesses or reducing labour costs, in order to make itself more
accountable for the new borrowing.

 In this regard, the provision of Article 18 does not apply to the cases where the publicly-
funded banks participate in a workout or court-r eceivership proceeding as a member of the creditors’
council or other interested parties’ meeting. In th e context of such a workout or court-receivership
proceeding, the creditors are required to act pursu ant to a resolution adopted collectively by all
creditors and also in accordance w ith the rules set out in separate insolvency laws or a framework
agreement (CRA). Therefore, there is no room for Ar ticle 18 to come into play in such insolvency
proceeding.

 Finally, in response to the Panel question, Ko rea confirms that the restriction set forth in
Article 18 is imposed only when publicly-funded financ ial institutions intend to provide “new loans”
to unsound companies. Such restriction does not appl y when the financial institutions are engaged in

other activities, e.g., when a publicly-funded bank inte nds to collect existing loans, the requirement
under Article 18 does not apply.

119. After the spin-of that led to the creation of DSME, what happened to the debt and assets
left behind with DHI? Who were the creditors and owners of DHI after the spin-off and what
percentage did each hold of the total debt and (negative) equity, respectively, of the post-spin-off
DHI? What was the ultimate disposition of this debt and equity? What if any impact did this
have on DSME and DMI?

Response

(1) The post-spin-off status of debt and assets left with DHI

 After the spin-off in October 2000, DHI h as been selling assets and collecting debts from
debtors (mainly Daewoo affiliates). With the proceed s of such sales and debt collections, DHI has
continuously repaid debts to its creditors. As of 31 May 2004, DHI has repaid KRW 260 billion to the
creditors.

(2) Creditors and shareholders of DHI after the spin-off (as of December 2000)

 (Unit: 1,000 shares, billion won)
Name of shareholders
* Numbers of Shares
(percentage) Name of creditors Amount
(percentage)
Daewoo Corporation 68,426(24.8%) KAMCO 1,722.3(39.7%)
KDB 32,254 (11.7%) KDB 138.8(3.2%)
Woo Chung Kim 22,814(8.3%) Korea First Bank 116.8(2.7%)
Daewoo Electronics 17.091(6.2%) Korea Exchange Bank 182.6(4.2%)
Daewoo Precision 4,065(1.5%) Daehan ITC 120.5(2.8%)
General Public ** 131,134(47.5%) Other minority creditors *** 2,051.6(47.4%)
Total 275,784(100%) Total (borrowings) 4,332.6(100%)

 * The shares of DHI were traded on th e stock exchange after spin-off until
23 May 2001. As a result, the shareholders changed and the current shareholders
comprise: KDB (1.45 per cent) and genera l public/minority shareholders (98.55 per
cent).

 ** General public includes numerous minority shareholders each of which holds only
fractional shares in no event more than 1 per cent of the total shares.

 *** Minority creditors refer to small credito rs each of which has outstanding loans of less
than 1 per cent of the total borrowings.

(3) Plan for the ultimate dispos ition of DHI’s debt and equity.

 DHI will continue to carry on debt repayment activities until the end of 2004. Thereafter, DHI
and its creditors would discuss the possibility of petitioning for bankruptcy proceeding in order to
dispose of DHI’s remaining debt and assets.

(4) Impact on DSME and DHIM (machinery company)

 There is no particular impact that the ultimat e disposition of DHI’s debt and assets may have
on DSME and DHIM.

120. Please comment on the EC’s observation that the fact that 210 financial institutions
signed the Corporate Restructuring Agreement in less than one week suggests that they were
induced to do so by the Government of Korea.

Response

 The workout framework was not created over such a short period of time as alluded by the
EC. As early as in April 1998, the Korean banks be gan to study a coherent framework of the workout.
At the same time, a task force carried out a more in-depth study of the basic concept of workout.

 On 19 June 1998, the basic concept and struct ure of the Corporate Restructuring Agreement
(CRA) as the framework agreement for workout was explained to 28 banks and financial institutions.
Between 19 June and 24 J une 1998, an intense process of co mmenting and negotiations took place
among the financial institutions through their tr ade associations. On 24 June 1998, 33 financial
institutions and associations representing all different financial sectors had the final negotiations and
agreed to the final draft of the CRA. These represen tatives also set 25 June 1998 as the effective date
of the CRA. Thereafter, the final draft of th e CRA was sent through their respective sectoral
associations to all individual financial institutions for review and signature. The financial institutions
reviewed the draft CRA and signed it of their own vo lition. Due to the complexity of such review and
signing procedure, the signed versions of the CRA were collected over a considerable period of time
even after the effective date of 25 June 1998. At that time, nobody knew exactly how many financial
institutions would sign the CRA, and it eventually tu rned out that 210 financial institutions signed it.
The above negotiation procedures followed by the fi nancial institutions were reasonable given the
complexity and urgency of the matter. Moreover, the CRA was merely a “framework” agreement
which did not in itself pose any substantive controversial issues (see Exhibit EC-42, Corporate
Restructuring Agreement).

 More importantly, at that time, there was a consensus among the financial institutions that,
without a systematic framework for debt workout in place, the conditions of financially unsound
companies would be aggravated and the creditor financial institutions’ po tential exposure to non-
collectible debts will rapidly increase. Therefore, negotiating this workout framework agreement in a
swift manner served the common interest of the financ ial institutions. In addition, as a general matter,
the CRA was an implementation of the so-calle d London Approach. This provided a commonly
accepted international basis that gave the instituti ons a general comfort level regarding the CRA and
letting them focus on the details of its implementation.

121. Regarding the Daewoo workout, were any studies commissioned by creditors regarding
the relationship between the going concern and liquidation values of Daewoo, other than the
Arthur Andersen report? In particular, were an y such studies commissioned by any creditors?
Please provide copies of any such studies commissioned by any of the creditors.

Response

 As far as the Government of Korea is aware, other than the Arthur Andersen report, there was
no study commissioned by any creditor (whether domestic or foreign) of DHI.

122. Please comment on the EC’s argument (paras. 257 of the EC’s First Written
Submission) that DSME assets ‘should also have assumed 55 per cent of the negative net worth
left behind’ in DHI.

Response

 The EC failed to clarify why it believes that DSME should have assumed 55 per cent of the
negative net worth of the remaining DHI. The EC’s argument seems to be ba sed on its belief that the

spin-off structure whereby DHI was divided into 3 companies was wrong and that, instead, DHI
should have been spun-off into only two operating companies in the proportions of [BCI: Omitted
from public version], respectively

 The DHI workout plans had been devised as a single global package to seek maximum
recovery of debt on an aggregate basis and, thus, th e issue of benefit can not be analyzed on the basis
of individual components of the workout plan as if each such component constituted a discrete act of
financial contribution.

 Moreover, the EC’s assumption that the DHI spin-off should have followed only two-
company approach has no reasonable basis. Ther e are no multilaterally agreed rules on insolvency.
Even within the EC there are many models. The only common element is determining what the best
method for maximizing value recovery by the cred itors is. In its 1999 report, Arthur Andersen
established that a 3-company approach was a more advantageous alternative than the 2-company spin-
off for the creditors ( See Exhibit Korea – 120
, section VIII. 2.2.2, pp. 89-90). The EC has failed to
prove that the 2-company approach was more beneficial to the creditors.

 Furthermore, in the case of DHI, the negative ne t worth of the remaining DHI was a result of
trade receivables of Daewoo Motor and Daewoo Cor poration that had been inserted into the DHI
balance sheet and had no direct or indirect relationship with the production and sale of commercial
vessels (See para. 256 of the EC’s First Written Submissi on). Therefore, there was no rational basis
for attributing the negative net worth of the remaining DHI to the shipbuilding operations of DSME.

123. Was Arthur Andersen / Anjin’s determination that the going-concern value of DHl
exceeded its liquidation value premised (at least in part) on the enactment of Article 45-2 of the
Special Tax Treatment Control Law? In other words, was the KRW 236 billion tax measure
taken into account by Arthur Andersen /Anjin in its analysis? Please explain.

Response

 The Arthur Andersen’s determination of th e going concern value and the liquidation value
was not premised on the enactment of Article 45-2 of the Special Tax Treatment Control Law
(“STTCL”). There is no indication in the Arthur A ndersen report that Arthur Andersen took into
account any spin-off-related tax in its analysis.

E. SERIOUS PREJUDICE

124. On factors influencing ship prices, Ko rea argues that high freight rates are not
particularly important at present, in view of the fact that currently the ship market ‘is a buyers’
market’. Korea’s Drewry Report states that “workload shortage or overcapacity” are important
determinants of price: “… yards that are short of work may prefer to take a lower price rather
than have under-utilised capacity’. This representation by Korea’s consultant would seem to be
consistent with the EC’s argument that excess capacity (in the Korean industry, supported by
alleged subsidies) is a key factor behind the pr ice suppression/depression it alleges, In other
words, both sides seem to agree that excess capa city can drive down prices. Please comment on
this specific point.

 (The Panel recognizes that the parties dis agree with respect to wh ether Korean capacity
is ‘excess’ and whether the restructuring that kept the Korean shipyards in operation was
subsidized, so it is not necessary to comment on that aspect.)

Response

 Korea considers that shipbuildin g prices are the result of a number of factors, none of which
alone determine price levels for vessels. Rather, it is all the factors in interaction which determine
such price levels. It has consistently argued that for the determination of whether alleged price
depression or suppression is the effect of the subsidi es which are claimed to exist, the existence and
effect of all of these factors in combination must be taken into account, fa iling which a distorted or
inaccurate picture is yielded of how the shipbuilding market evolves in terms of prices.

 Korea has indicated that capacity is indeed one of the factors that influences prices, but
maintains that this is only one of the factors and th at it cannot be looked at in isolation from the other
factors to assess why any price trend occurred. In Paragraphs 524 to 527 of its First Written
Submission, Korea has confirmed that ship prices ar e deeply influenced by the interaction of supply
and demand. It stated that demand means the dema nd/order including price requirements made by the
shipowners who will take the tre nd in freight prices into account in formulating their requirements.
On the supply side, Korea has indicated that wh ether there is any overcapacity and how production
costs develop are the two main factors influencin g price levels. In addition, however, Korea has
indicated that other factors as well may greatly infl uence the price level of vessels. These relate to
productivity improvement, insufficient workload or other factors specific to particular shipyards
including expertise in designing and building certain types of vessels, payment terms, slot availability
and delivery time.
7 Korea maintains its position that the assess ment of the causal link is fact-driven
and that all factors must be assessed in a comprehensive matter on a case-by-case basis.

 This is no different from the position expr essed by Drewry in Exhibit Korea – 70 in
Section 3.6 when it states that “[p]rices in the shipbuilding market have always been volatile
reflecting the influences of a variety of supply a nd demand side factors”. Drewry considered the
following factors, i.e.:

 (i) Drewry concurred with the factors id entified in the OECD report of March 2003 on
“Recent Newbuilding Price Developments”, i.e. shipbuilding orderbook, metals
prices index, freight rates and exchange rates which are considered.

 (ii) Drewry nevertheless considered that the OECD did not list all relevant factors and
indicated that the following should also be considered:

 - as regards supply side factors, workload shortage or overcapacity which may
lead a yard to prefer to take lowe r prices rather than having under-utilized
capacity; and

 - as regards demand side factors, size, delivery date, payment terms, build
times, speed – engine and hull form variations and manoeuvrability, hull
strengthening e.g. for ice operation, e quipment specification (brand name vs
generic equipment), paint & coatings, innovative design, regulator (class and
ship register), freight rates.

 The EC itself during the First Substantive Meeting denied that it was looking at just capacity
in its assessment on the existence of a vector wher eby the alleged subsidies could have caused price
suppression or depression. The EC, in the opinion of Korea correctly, indicated that the assessment on
causation must include a multi-faceted approach.

7 This approach is also reflected in Step 2 of Korea’s proposed method to determine the degree of
suppression or depression in response to the Panel’s Question 91(d) (at pages 46 and 47 of Korea’s responses to
the Panel’s questions) and in Korea’s response to the Panel’s Question 102 (at pages 55 and 56 of Korea’s
responses to the Panel’s questions).

 In line with the above, Korea considers that the EC has still not given a clear response on how
alleged over-capacity would necessarily affect price levels. Having indicated itself that several factors
in relation to supply and demand determine the pric es of the commercial vessel s in dispute, the EC
has nevertheless failed to assess each of these factors and their effect on price levels and, as a result,
has failed to demonstrate that the alleged subsidies themselves had price depression or suppression for
their effect because of the existence of overcapac ity as a vector. In fact, the EC has failed to
demonstrate that the alleged restructuring subsidies caused overcapacity capable of influencing prices.
The EC seems to presume that, in the absence of th e alleged restructuring subsidies, the shipyards
Daewoo, Halla and Daedong would ha ve disappeared. But, as mentioned by Korea, nowhere in the
world does insolvency ipso facto lead to termination and sale for scrap and, in the cases at issue all the
less since the EC itself has pointed out that there we re possible acquirers such as NHI for the yards in
question. In addition, the EC itself has shown in its Attachments EC-2 and 6 to its responses to the
Panel questions that these three yards in each like product type of vessels did not occupy a market
position so as to be able to create significant price depression or suppression. In this regard, Korea
refers to paragraphs 251 to 259 of Korea’s Second Written Submission.

125. (a) The list of factors identified in the Drewry Report as determinants of ship price
includes freight rates, delivery date/build time (which would s eem to be related
to capacity and thus supply and demand), and payment terms (which would
seem to be related to financing). Drewry does not refer to any measure of the
aggregate level of demand as such. Please explain.

Response

 Drewry considers that the trend in demand for each like product separately is one of the
factors that contribute to the relevant price level for the product considered. However, as mentioned in
Section 1.2.2 of the Drewry report, considering only that price will vary directly in line with demand
does not go far enough as there are many other demand and supply-related factors that contribute to
determining the price level for any like product. In Section 1.2 of Exhibit Korea – 70, Drewry
identifies a range of factors that are considered to have an impact on ship price, i.e.:

• External factors (para 1.2.1)
 - Freight rates
 - Exchange rates
 - Metals prices index
• Supply side (para 1.2.2)
 - Workload shortage or overcapacity
• Demand side (paras 1.2.3 and 1.2.1)
 - Size
 - Delivery date
 - Payment terms
 - Build time
 - Shipbuilding orderbook
 - Speed and manoeuvrability
 - Hull strengthening
 - Equipment specification
 - Paint & coatings
 - Innovative design
 - Regulatory: Class and Ship Register

 While the aggregated supply-demand balance is, th erefore, clearly a factor which affects price
in the shipbuilding industry, Drewry considers that it is not the only or dominant factor. Applying the
simple economic concept of supply-demand bala nce, however, encounters some problems in
shipbuilding, primarily:

• the difficulty in quantifying shipbuilding capacity (as opposed to historical output levels)
• the fact that this capacity is not all dedicated to merchant shipbuilding and may also be in
used for naval shipbuilding, ship repair and conversion and offshore structure construction in
particular
• the lack of homogeneity in aggregate demand (primarily due to different ship types and sizes)
• the lack of homogeneity in aggregated supply due to the size capability of yards’ facilities and
the experience base regarding ship types that they have experience in building.

 The result is that whilst demand may be able to be categorized according to size and type of
vessels, supply cannot rigorously be divided on th e same basis and so there is considerable non-
homogeneity within the supply-demand balance.

 (b) Also, in discussing Korean cost adva ntages on the supply side, Korea does not
refer to cost of debt service/interest expenses. Please explain.

Response

 Debt service costs tend to be specific to a par ticular yard’s situation, both in terms of the
structure of its financing of capital assets and also it s working capital requirements. It is, therefore,
not possible to take general economic indicators to estimate the relative cost advantages or otherwise
of different yards in this respect. For example, in the EC there are many long established yards whose
capital cost of facilities has long since been amortized and any interest on debt related to this will also
have gone. Debt service costs related to facilities ar e, therefore, likely to be those associated with
improvements and modernizations. In general terms, there has been a lower level of modernization at
EC yards, but exceptions to this are to be found in the passenger shipbuilding yards and most
particularly in the former East German yards like Aker MTW and Kvaerner Warnow Werft. In these
yards the modernizations were state funded and then when the yards were privatized the new owners
inherited the new facilities at a fraction of the investme nt costs – in this situation, the debt levels and
hence debt service costs are driven by very specific circumstances which does not make for easy
comparisons.

 However, the area where Korea has significant cost advantages fo r such costs is in terms of
the scale factor of its production. Firstly, debt service costs are supported by high workload volume
throughputs and as such on a basis of output units th e cost per unit will be lower than for smaller
yards.

 This is particularly relevant in the case of financing of facilities and capacity where the capital
cost of providing 1,000 cgt of capacity will be fa r lower than in smaller capacity yards. The
Figure 8.1 in Exhibit – Korea 70 gives an indicatio n of the throughput scale differences between EC
and Korean yards, particularly recognizing that most of the bigger EC entries are in fact groups
comprising more than one yard.

 A good example of the economies of scale is evident from the exam ple of LNG-specific
investment. As highlighted in the KPMG report submitted as Exhibit Korea – 108, FMI assessed that
a European yard would need to cover the investme nt burden of LNG specific investment over a series
of 3 LNG ships but subsequently changed its estim ates for Daewoo to recovery over 10 ships, to
reflect the higher throughput volumes of such v essels at the Korean yard. By the end of 2002,
Daewoo had in fact received orders for 21 LNG ve ssels and so its capital expenditure and any debt

service cost associated with this is likely to be mu ch lower than any European yard with only short
series builds.

 In respect of working capital requirements and the debt service costs of these, the Korean
yards are considered to operate at an advantage to EC yards in this respect in view of the generally
better cash flows achieved by their more front-end loaded contract payment instalments.

 Therefore, Korea submits that the EC has not shown that debt service costs/interest expenses
of the allegedly subsidized Korean yards have incurre d such an increase over the years as to offset the
decrease in costs that was shown in the Drewry report in Exhibit – Korea 70. And, in fact, as
mentioned above, the debt service costs and interest expenses, as confirmed by the EC’s expert, FMI,
have shown a decreasing effect due to their sp read over a greater throughput. Thus, Drewry’s
conclusion stands: the decrease in Korean costs of production is clearly greater than the decrease in
prices of the vessels concerned.

126. Korea seems to imply that shipyards special ize in producing certain kinds of ships. If a
given Korean shipyard has no history of producing, for example, ferryboats, could this be the
basis for concluding that that shipyard cannot produce them? Please explain.

Response

 The fact that a national industry or individual shipyard does not produce a particular type of
ship, does not necessarily mean that it is physically or technically incapable of building that type of
vessel. The reality is that there is a range of factors which places limitations (physical, economic and
technical) on the shipyard such that it is either not economically viable for the yard to build them or
that it does not have credibility as a competent builder in the customers’ eyes.

 The following are the main factors imposing limitations:

• ship size – the shipyard has to have buildi ng locations big enough to build the ship in
question, this includes the height of lift for cranage and or headroom clearance in covered
building berths for ships with very high superstructures;

• specialist facilities or skills – for certain ty pes of vessels specialist facilities are required
which must be provided in the shipyard or some times from a supplier or sub-contractor. Ship
types that are generally recognised to have such requirements include:

- Cruise ships: skills for the installation of glass atriums and interior decoration; high
volume of modular cabins, highly complex interaction of specialist sub-contractors;

 - Ro-Ro ships: skills to install the water tight bow and stern doors and associated ramps;

 - Chemical tankers: some chemical tankers include tanks made of stainless steel which
requires special welding equipment and welding skills;

 - LNG ships: ability to construct the special containment gas containment tanks or to
lift in and install such tanks made by su b-contractors; high levels of insulation
‘boxes’ required to insulate the tanks; sk ills in the installation of steam turbine
engines which are rarely used in other me rchant ship types; and most recently gas
turbines and dual fuel engine arrangements;

 - FPSO and drill ships: skills in the installa tion of what is referred to as the ‘topside’
equipment for these vessels involved in seabed oil extraction and storage; specialist
mooring and pipeline connections for loading and unloading cargo;

 - Fast ferries: skills and facilities for construction of the aluminium hull and
superstructure which requires specialised welding facilities and skills and sometimes
hull jigs;

 - Tankers: although less dramatic, tankers of most kinds have much higher levels of
pipework and valves so a shipyard buildin g tankers must have superior pipeshop
capabilities and facilities in-house or by sub-c ontract than those building other ship
types.

 Shipyards tend to have a range of ship typ es and sizes which they produce and for which they
gain a reputation in the marketplace with customers and hence they will focus their marketing efforts
on these ship types and sizes. These are ship typ es and sizes in which they can be most cost
competitive and where they have good customer credib ility in terms of design, price, and delivery.
Through a combination of self-selection and custom er selection they focus on market sectors where
they can maximise their competitive advantage.

 This is not to say that they cannot move into other markets that are within their physical
capability but to do this they will have to be ab le to hone their productivity; offer good designs and
will need to build customer awar eness in their competence and compe titiveness in this market. They
will recognize that yards already well established a nd active in these markets will have an advantage
over them initially.

 The fact that yards specialize in specific lik e product vessels can be shown for yards all over
the world including for Japanese and Chinese yards but also for the EC yards as is demonstrated
below. The data covers the same timescale of deliveries or orders from 1990 and records the
involvement of 290 EC yards across all ship types over that time:

• General Cargo and Multi-purpose ships: 75 EC shipyards (or shipyard groups if not
reported at yard level) have been involved in this sector so there has been plenty of
participation with 771 vessels involved. But th ere has been no involvement by any the IZAR
yards in Spain; any of the Fincantieri yards in Italy, Chantiers de l’Atlantique, Odense, Aker
MTW, HDW, Lindenau, Kvaerner Masa Yards. The major yards involved have been Damen
group, Peters Scheepswerf, Ferus Smit, Bodew es and Vollharding of Holland and JJ Sietas of
Germany which have built 347 of the 771 ships.

• Bulk Carriers: 39 EC shipyards have been involved in this sector involving 154 ships but
there has been no involvement from Chantiers de l’Atlantique, Odense, Aker MTW, Kvaerner
Warnow Werft, Volkswerft, HDW, Lindenau, Kvaerner Masa Yards and only two built at
IZAR group yards. Fincantieri yards however we re involved with 16 of the 154 vessels. The
market leader in this sector is Japan where 2, 152 ships were involved followed by China with
454 ships. So any lack of involvement seems unlikely to be connected to Korean yards.

• Container Ships: 51 EC shipyards have been involved in this sector involving 693 ships but
participation has varied dramatically by size of vessel. Whilst 39 yards were involved in
building container ships of <1,000 teu, only 5 ya rds were involved in building container ships
of 3,500 teu and above; 21 yards were i nvolved with building mid range vessels of
1,000<3,500 teu. Kvaerner Masa Yards and Ak er Finnyards of Finland and Chantiers de
l’Atlantique of France did not participate in this market at all, whilst in Spain, IZAR groups
yards built just 10 and Union Naval Valencia built another 2; and in Italy Fincantieri yards

were the only ones to participate with 9 vessels. The concentration of containership building
within EC lies with the German yards, Dutch yards (for ships on less than 1,000 teu only) and
with Odense of Denmark.

 It is evident that the shipyard supply market within the EC is far fr om homogenous and some
shipyards have a particularly strong focus on certain size or types of vessels, i.e.:

• Damen Shipyards group of Holland built 251 ships dur ing the period of which 194 were
either Tugs, General Cargo or Multi-purpose Cargo ships.

• Lindenau Shipyard in Germany where 21 of the 24 vessels with which it was involved
during this period were Chemical Tankers.

• Odense Shipyard in Denmark, where 59 of the 76 vessels were container ships.

• Chantiers de l’Atlantique in France, where 32 of the 47 ships were Cruise Ships.

• Kvaerner Masa Yards where out of 54 ships, 25 were Cruise Ships, 9 were Ferries and 8
were Offshore.

• Aker Finnyards where out of 41 ships, 20 were either Cruise, Ferry or Passenger ships and
another 4 were Reefers ships and 3 were RoRos.

• Smaller Italian Yards: Morini where 13 out of 20 ships were chemical tankers; Orlando
where 10 out of 14 ships were chemical tankers ; de Poli where 10 out of 20 were chemical
tankers and another 7 were LPG ships; Rodriqu ez where 18 out of 29 were ferries and 6 were
passenger ships; SEC where 16 out 24 were chemical tankers and 5 were Ro-Ros; Visentini
where 14 out of 25 were Ro-Ro and 11 were ferries.

• Smaller Spanish Yards: Armon group where 47 out of 91 were fishing vessels and 43 were
Tugs; Zamacona where out of 55 ships 36 were Tugs and 9 were fishing vessels; UN
Valencia where out of 45 ships 23 were Tugs a nd 9 were chemical tankers; Freire where 21
out 27 ships were fishing vessels; Gijon Naval where out of 14 ships, 7 were fishing vessels
and 7 were chemical tankers; Cies where 10 out of 11 were fishing vessels; Barreras where 11
out of 31 were fishing vessels, 9 were Vehicle Carriers and 6 were Ferries; Balenciaga where
out of 16 ships 7 were fishing vessels and 6 were Tugs; de Huelva where 23 out of 35 were
fishing vessels.

• Small Dutch Yards: Peters Scheepswerf where 57 out of 60 ships were General Cargo;
Bodewes were 26 were Gene ral Cargo and 22 were Multi- purpose Cargo (MP Cargo);
Vollharding where 25 were MP Cargo and 17 were General Cargo out of 63 ships; Tille
where out of 22 ships 10 were Containers a nd 9 were MP Cargo; IHC Holland where 48 out
of 51 ships were Dredgers; K Damen where 13 out of 20 were chemical carriers;

 We believe that the above demonstrates that th e supply side of the shipbuilding market is far
from homogenous and that yards do tend to speciali ze in certain types and sizes of vessels. The
reasons for this may relate to facility limitati ons, but may also be driven by the yards own
appreciation of the sectors that it has the best co mpetitive advantage in or by customers’ views on
technical competence and competitiveness for certain ship types.

127. In relation to the EC argument that the restructured yards pulled down prices of all
other Korean yards, Korea asks the rhetorical question. Why stop there? Why not also blame
Chinese or Japanese shipyards, if Korean subsidies triggered a price war? Is Korea’s argument

that, if a global price war has been set off by a particular player in the market, that player
should rot be deemed to be responsible becau se other players have followed its lead? Please
explain.

Response

 At the outset, Korea must note that the whole issu e of price leadership is a difficult one in this
case because the EC has dropped its claims of price undercutting. Normally cases can be expected to
be built upon several possible elements of proof. Th e EC has chosen to avail itself of only price
suppression or depression as is permitted under the treaty. However, simply because the treaty
language permits of such a finding, that does not mean that it is a simple or even a normal thing to
demonstrate adverse trade effects based on a single element of proof. In this dispute, the EC has
explicitly rejected proving such other elements as price undercutting because, as the EC stated at the
First Substantive Meeting, it could not meet the elements of proof of, for example Article 6.5. The EC
has now tried to demonstrate price undercutting in a nu mber of situations and attempted to claim that
there is a difference between using price undercuttin g as a primary element of proof and using it to
support price suppression or depression. This is fal se logic and a fatal legal flaw in the EC’s
argument. It has chosen to try to build a case without reference to the interrelated elements of proof; it
is legally precluded from attempting to reintroduce them in another guise.

 Keeping in mind the difficulty of identifying exactly what is meant by price leadership in
light of the preclusion of arguments based on pri ce undercutting, Korea considers as a general matter
that it is possible for a single company to be a price leader. However, there are a number of
qualifications to this statement. First, it must be sh own that the price leadership is the effect of the
alleged subsidy. To simply say that a company’s products were price leaders is legally meaningless in
the light of the treaty language of Article 6.3(c).

 Second, regarding the assertions of the EC in pa ragraphs 80-82. Korea strongly objects to this
line of argumentation. First of all, there is no lega l basis or relevance for asserting that the “Korean
shipyards” were price leaders. Unless the EC is a lleging a separate geographic market for Korea there
is no legal basis for lumping all of the Korean yard s together in the manner done by the EC in those
paragraphs. The EC reiterated that it was not making su ch an argument; therefore, its statements such
as “Daedong/STX and Samho-HI/Hall-HI are two of four Korean shipyards that control 60 per cent of
the market for product/chemical tankers” is legally meaningless. Unless the EC can demonstrate that
STX and Halla individually were price leaders as an effect of the alleged subsidies, then the
statements including the other yards are pointless. To take an example, if four companies (a
subsidized Korean yard, a non-subsidized Korean ya rd, a Japanese yard and a European yard) were to
compete for four sales and each obtained one sale, the EC claims that this means that the subsidized
Korean yards won 50 per cent of the competitions. Ho wever, the non-subsidized Korean yard is in
precisely the same position as the EC and Japanese ya rds. Each has a 25 per cent market share and
each is equally influenced, or not, by the subsidi zed yard. Unless the EC is now implicitly trying to
put forward some baseless allegations of collusion (of which we have seen no evidence nor heard any
arguments), the mere fact of nationality does not sw eep the other Korean yard s into the subsidized
yard’s market share. The subsidized yard may or may not be a price leader in this hypothetical, but the
proof of it will have to stand on the effects of that yard’s subsidy, not through some bizarre nationality
theory.

 The Panel will recall that when challenged by Korea to defend these statements, the EC
offered no proof whatever except to revert to some arguments about internal price competition that
would arguably be relevant only in the context of an antidumping investigation or a subsidies dispute
where there were separate geographic markets of wh ich Korea was a distinct market. The EC offered
no actual evidence because it has none. Quite simply, the EC has failed to provide any evidence that
the allegedly subsidized yards were the price leaders and were so as an effect of the alleged subsidies.

 Korea must also note again for the written record its objections to the way the EC has phrased
its market share allegations. The EC several ti mes referred to market sh ares of order books. Of
course, those order books stretch over several years and can vary tremendously from yard to yard and
from year to year. Therefore, it is impossible to know actually what the market share is or will be at
any given time because the comparisons are not of the same time periods. At other points, the EC
follows on such statements by making general alle gations about market shares without identifying
whether or not it is again referring to order books or some particular year. The EC does not identify
any particular years. The EC is simply attempti ng to mislead the Panel by trying to disguise small
shipyards within statistics that include larger shipyards over an unknown period of years.

 Korea would also like to recall to the Pane l the extensive information supplied by Korea
demonstrating the significant cost advantages of all of the Korean shipyards. It is because of this
indisputable fact that the EC has rejected its obligation to demonstrate that any alleged price
leadership is an effect of the subsidization. As Korea pointed out in paragraph 282 of Korea’s Oral
Statement at the Second Substantive Meeting, th e EC’s continual reference to Hyundai-Mipo as a
price leader when Hyundai-Mipo was not restructured and received a very limited number of APRGs
and pre-shipment loans (even considering the de minimis levels of such credits even under the EC’s
calculations) demonstrates conclusively that any price leadership was not pursuant to the alleged
subsidies.

II. TO THE EC

A. KEXIM LEGAL REGIME

128. Does a government necessarily provide a s ubsidy if it makes a financial contribution
outside the normal field of commercial behaviour? Assume a government creates a new special
finance mechanism that has never been offered by private banks. Assume that private banks
subsequently begin providing the same fina nce mechanism on the same terms as the
government initially offered, Assuming that th e finance mechanism constitutes a financial
contribution, would the initial offer of that finance mechanism by the government confer a
benefit? Please explain.

Comments

 Korea observes at the outset that this hypothetical question is based on an assumption that the
“government” is providing a particular financial instrument. Particularly in the area of finance, many
banks in the developing world (and in some EC member states as well) were set up to provide
commercial lending in areas where there was simply a dearth of private sector experience and
capability. As an initial matter, it must be determ ined whether these entiti es lending on a commercial
basis are public bodies.

 Korea assumes from the hypothetical that the Pa nel is positing for simplicity of argument that
the finance mechanism is being extended by an organ of government (e.g., the Finance Ministry as per
Question 106). In such a case, the SCM Agreement should not be interpreted as prohibiting the
government from providing finance instruments that are new to the market. Such a presumption
would be unduly constraining on all Members and pa rticularly on developing country Members. A
lack of an identical financial instrument in a certain period requires that the complainant must use data
from a comparable period or comparable instruments with appropriate adjustments from the same
period as a benchmark to determine whether there is a benefit.

129. The EC submits that KEXIM’s website describes the PSL programme as designed “to
encourage the export of capital goods such as … ships ... involving larger credits and longer

repayment terms than what suppliers or commercial banks would provide~” Isn’t this what any
development bank does? Do development banks necessarily provide subsidies? Please explain.

Comments

 Korea would like to note again the oddity of the EC’s argument regarding the status of
KEXIM as based on credits of longer terms. This dispute is about extremely short term instruments.
The EC also claims that KEXIM could offer larger amounts of credit, but the evidence is quite clear
that the programmes in question were no larger in size than what commercial banks were willing to
provide. Thus, the “evidence” that the EC offers cuts against its per se argument and also undermines
any implication regarding governmental authority regarding the programmes in question (please refer
to the answers to Questions 106 and 107, above).

B. APRG/PSL

130. Please comment on Exhibit Korea – 87, concerning country risk spreads.

131. Why, in its benefit calculations for KEXIM financing did the EC apply the S/M credit
rating to DSME for the entire period for wh ich calculations are presented including in
particular the post-restructuring period? Is it the position of the EC that DSME remained
uncreditworthy even after the restructuring? Please explain.

Comments

 This is an example of the EC’s false accu sations against Korea permeating throughout this
proceeding. While Korea will not reiterate its review of the fallacies of the EC’s attempt to equate
KEXIM credit ratings and other rating agencies’ rati ngs (for the details with this respect, please refer
to Exhibit Korea – 91), Korea would like to point out that KEXIM as well as other credit rating
agencies adjusted DSME’s credit rating upward ri ght after its graduation from the workout (s ee
Exhibit Korea – 92), having found that DSME’s creditworthiness had improved through the workout
exercise. Despite this, the EC baselessly treated DS ME as being continuously in the worst financial
situation. The EC’s intent for doing so is quite evident. By falsely rating DSME’s creditworthiness,
the EC wished to prove the existence of a great benefit conferred on DSME.

132. Please comment on Korea’s assertion that the co llateral offered in respect of certain APRGs
provided by foreign banks covered only a small portion of the guarantee” (para. 81 of Korea’s oral
statement at the Second Substantive Meeting).

133. At para. 105 of its Second Written Submission, the EC states that only domestic banks with
“government association’ provided APRGs to Samho. Regarding Figure 12 of the EC’s First Written
Submission, is Chubb a domestic bank? If so, does it have a “government association”? If there is
such an association, what is its nature? Please explain,

134. In Exhibit EC-118, PWC asserts that “ [t]he KSDA Bond Matrix is the accepted mark-
to-market price for the domestic market”. Does this mean that the EC disagrees with Korea’s
argument that the bond matrix represents hypothet ical I projected rates, or does the EC accept
Korea’s argument but consider that the inde x nevertheless constitutes a reliable market
benchmark? Please explain. What does market-to- market in this context mean? In particular,
who was marking what to which market?

Comments

 As detailed in Korea’s Response to Panel Question 73, the KSDA bond rates are not the
actual rates (or yields) of a specific corporate bond instrument, but simply a general index which

shows daily market trends or changes. As such, cons iderations as to industry sectors, issuers or terms
and conditions for each instrument are not taken into account. Korea submits again that companies
with the same credit ratings are perceived and treated differently in the market. As stated in paras 88
through 92 of the second Oral Statement by Korea, it would make no sense to maintain that general
bond indices are somehow better than using financial instruments that the firms under examination
actually used. Korea submitted Exhibits Korea – 18 through 22 as to financial instruments actually
used.

135. Korea criticizes the EC for having used in its benefit calculations the 1-year bond price index
instead of the 6-month index. Why was the 1-year index used? What is the effect on the EC’s
calculations of using the 6-month index?

136. At para. 95 of its oral statement, Korea presents a number of points criticizing the EC
calculation methodology, and states that further details are contained in Exhibits Korea 90-102. Please
respond to Korea’s criticism in detail, including with reference to the content of these exhibits.

137. Korea submitted evidence (in response to Qu estion 74 from the Panel) that KEXIM reduced
the credit risk spread for HHI to [BCI: Omitted from public version] . Did the EC apply this [BCI:
Omitted from public version] credit risk spread in the relevant part of its PSL analysis? Please refer
to the relevant calculations where this adjustment was made.

138. The EC does not appear to have answered Questions 9 and 11 from the Panel. The EC’s
replies referred the Panel to the EC’s reply to Question 8. That reply, however, focuses on KEXIM’s
“practice” of providing APRGs and PSLs, without identifying the APRG and PSL programmes “as
such and without explaining how (if at all) they differ from the KEXIM legal regime “as such”. Please
provide full answers to Questions 9 and 11.

139. The Panel refers to Attachment 5 to the EC’s replies to the Panel’s questions after the First
Substantive Meeting, which contains transaction-specific alleged benefit calculations for one PSL and
one APRG. Please make the same calculation for each of the APRGs and PSLs at issue in these
proceedings. In other words, for each shipyard, specify which AFRG I PSL relates to either LNG,
product / chemical tankers, or container ships, and specify the amount of the alleged benefit as a % of
the ship price. Please attach detailed worksheets.

140. Please comment on Korea’s argument that KEXIM PSLs are made “at rates far higher
than those the government has to pay for the funds so employed” (para. 277, Korea’s First
Written Submission).

Comments

 Korea refers the Panel to para 112 of Ko rea’s Second Written Submission which shows the
KEXIM cost of funds for the relevant period.

C. ALLEGED ACTIONABLE SUBSIDIES

141. Para. 215 of the EC’s First Written Submi ssion states that “Daewoo” benefited from a
236 bn tax exemption alleged to be a subsidy. Para. 226 then refers to alleged benefit to
Daewoo-SME”. Para. 232, however, refers to be nefit to “Daewoo-HI / Daewoo-SME”. Please
indicate precisely which legal entity received / benefited from the alleged tax concession.

Comments

 See Korea’s response to Panel Question 116.

142. In percentage terms, how much of the alleged benefit resulting form the “Daewoo” tax
concession should be attributed to DSME’s production of (i) LNGs, (ii) product / chemical tankers,
and (iii) container ships? Please attached detailed worksheets.

143. Is it the EC’s argument that the tax exem ption was determinative in the decision to
maintain Daewoo’s shipbuilding operations as a going concern, rather than liquidating them? If
so, where is this reflected in the Arthur Andersen/Anjin report or in other documentation
before the Panel?

Comments

 See Korea’s response to Panel Question 123. There was no tax exemption of KRW 236
billion. Further, no tax exemption was reflected in the Arthur Andersen report.

144. Para. 162 of Korea’s second oral statement refers to creditors rejecting the initial DHI
workout proposal. Were such creditors included in the EC’s claim of government entrustment or
direction? If they were entrusted or directed by GOK, why / how did they reject the initial workout
proposal?

145. The EC requests an adver se inference regarding Korea’s alleged failure to provide a copy of
the workout plan / report submitted by KDB on 24 November 1999. Please comment on the
explanation set forth at pans 194 and 195 of Korea’s second oral statement. If the EC still maintains
its request, what is the legal basis for that request ? Why does the EC consider that Korea should have
made this report available to the EC / Panel earlier?

146. In response to Question 23 from the Panel, the EC asserts that “[t]he existence of a going
concern analysis can be an indicia that a hypothetical private creditor would have acted in the
same manner” Does the EC accept that the i ndividual components of the Daewoo wrkou1 can
be assessed on the basis of the Arthur Andersen report? If the Panel rejects the EC’s argument
that the Arthur Andersen report incorrectly determined that the going concern value of DHI
exceeded its liquidation value, does this necessar ily mean that the Panel should reject the EC’s
claims regarding the individual components of the workout? Please explain.

Comments

 As stated in Korea’s res ponse to Panel Question 122, the DHI workout plans had been
devised as a single global package to ensure maximum recovery of debt on an aggregate basis and,
thus, a benefit cannot be analyzed on the basis of individual components. Therefore, if the Panel
accepts that the creditors acted pursuant to market pr inciples when they chose the workout rather than
straightforward bankruptcy (liquidation), the Pane l should reject the EC’s claims regarding the
individual components of the workout.

147. The EC asserted at the second meeting that cr editors should have got more out of the Daewoo
debt/equity swap. How could creditors have got more? Who / what benefited from the fact that they
did not?

148. The EC proposes an outside investor sta ndard when challenging the reorganization of
Samho. This contrasts with the position taken by the EC in the GATT case concerning United
States – Imposition of a definitive Countervailin g Duty on Imports of Certain Steel Products
Originating In France, Germany and the United Kingdom.
8 Why has the EC changed its
position on this issue? Why does the EC now co nsider that the outside investor standard is
preferable to the inside investor standard? Please explain.

8 Report of the GATT Panel, SCM/185, issued 15 November 1994 (unadopted).

Comments

 Korea refers to its response to Question 172.

149. If the Panel were to reject the EC’s cl aim of government entrustment / direction of
private creditors, would this mean that tho se private creditors provide a reliable market
benchmark for determining whether or not the restructurings at issue conferred a benefit?
Please explain. Did the EC address this issue in it s previous written and oral submissions to the
Panel. If yes, please indicate precisely where it did so.

Comments

 The EC itself in paragraph 106 of its First Written Submission indicates that Article 1.1 of the
SCM Agreement distinguishes between “government”, “public body” and “private body” and that the
concept of “private body” has been defined negativ ely as “any entity that is neither a government nor
a public body” to ensure that there is no reason for circumvention in sub-paragraph (iv) of this Article.
In other words, the EC has acknowledged that Article 1.1 has set up a closed framework of instances
in which financial contributions may give rise to a subsidy that is either prohibited or actionable under
the SCM Agreement. Thus, if a financial contribution is made neither by a government nor by a public
body carrying out a government practice nor by a private body acting upon the entrustment or
direction of the government, the financial contribution is not
 covered by Article 1.1 of the SCM
Agreement. One must then logically conclude that nothing distinguishes the financial institutions
which were found not to have acted under government direction or entrustment from any other private
bodies and that they could as, in any other situa tion, provide a suitable be nchmark for determining
whether a benefit existed. In particular , there is nothing in Article 1.1 of the SCM Agreement, explicit
or implicit, that creates a special category of priv ate bodies which having been considered not to have
undergone direction or entrustment of the government , would still be set aside as being an improper
benchmark to determine whether a financial contribution afforded a benefit. All private bodies that are
not under government direction or entrustment need to be treated alike.

 In the EC’s own rationale, those financia l institutions that were not operating under
entrustment or direction of the Government of Korea should be a proper benchmark to assess the
existence of a benefit as the EC stated the fo llowing in paragraph 277 of the EC’s First Written
Submission:

The relevant benchmark in the present case is the commercial behaviour of the
private investors that at the same time were creditors of the distressed company. It is
only the behaviour of financial institutions /creditors operating outside the scope of
the Government of Korea’s pressure that may be considered in assessing whether the
restructuring plan for Daewoo-HI/Daew oo-SME was carried out on terms more
favourable than those otherwise available in the market.
 The EC also took the position that all financ ial institutions not acting under direction or
entrustment are the benchmark for assessing the exis tence of a benefit in the response to Question 23
of the Panel at paragraph 99 of the EC’s responses to the Panel’s questions.
9

 In relying on the actions of creditors that it cl aims to be outside the control of the Government
of Korea to determine a benchmark for the assessment on the existence of a benefit, the EC itself has
made it clear that if domestic financial institu tions do not act under gove rnment entrustment or

9 The same position is expressed in the EC’s response to the Panel’s Question 24 at paragraph 100 of
the EC’s responses to the Panel’s questions.

direction, these domestic financial institutions can be taken as a benchmark for the assessment on
benefit.

150. Regarding the EC’s Question 33 to Korea af ter the First Substantive Meeting, please explain
why, if at all, the value of Samho’s construction business is relevant to the present proceedings.

151. Korea asserts that the share of debt held by the foreign creditors who failed to participate in
the Daewoo, workout was around [BCI: Omitted from public version] . Is it reasonable to expect a
panel to condemn a restructuring on the basis of the behaviour of creditors holding only [BCI:
Omitted from public version] of the debt?

152. Regarding the Daewoo workout, the EC mak es various arguments regarding the purchase of
debt and bonds by KAMCO. It is unclear whether these arguments support a separate claim regarding
the KAMCO rates, or whether those arguments ar e made in support of the more general claim
concerning the use of foreign creditors as the market benchmark. Please explain.

153. Please comment on Korea’s argument (at para. 191 of Korea’s Second Written Submission)
that the BC, in its response to Question 22 of the Panel (which concerned the ‘alleged specificity of
the corporate restructuring” generally), allegedl y concedes that the Court supervised corporate
reorganizations undertaken by Halla and Dae dong were not specific “because these companies
seemed to have disappeared and the BC answers the question only in regards to DHI”.

154. Regarding the STX reorganization, we not e that the debt rescheduling exemption from
interest is the sole element identified by the EC when calculating the amount of alleged benefit in
Annex 3 of Attachment 1 to its replies to questions from the Panel after the First Substantive Meeting,
We further note that the EC’s rebuttal submission does not refer to the other elements of the
restructuring identified in its First Written Subm ission, such as the issuance of bonds by Daedong.
Does the EC still claim that the other elements of the restructuring including the bond issuance by
Daedong, constituted a subsidy? If so, why were they not included in the abovementioned
Attachment 3?

D. SERIOUS PREJUDICE

155. The EC has indicated that the Panel should determine the existence of price
suppression/depression separately for LNGs, product/chemical tankers, and container ships.

 (a) Does this mean that the EC is aski ng the Panel to issue three separate serious
prejudice rulings, on LNGs, product/che mical tankers, and container ships,
respectively?

 (b) If not, please explain

156. In the information before the Panel, including the Annex V information are there
additional examples (beyond those already referred to in the EC submissions) of bids by Korean
shipyards, for which EC shipyards also are bidding, and where in the view of the EC the
Korean yards have led prices downward.

157. (a) In the information before the Panel, including the Annex V information, are
there examples/evidence of instances in which EC shipyards have considered,
but declined to, bid due to low preva iling prices? For example, can the EC
provide records of instances in which an EC yard was contacted by a ship
broker concerning the possibility of bidding, but decided not to do so because of
low prices.

 (b) In any such instances, does the info rmation before the Panel contain evidence of
Korean pricing/bidding for the same sale?

Comments to questions 157 and 158

 The EC itself has refrained from invoking Article 6.3(c) of the SCM Agreement on the basis
of price undercutting or lost sales which are set fort h in this Article as grounds for challenges separate
from price depression or suppression. Therefore, Korea wishes to reiterate its concern that data on
bids by EC and Korean yards showing price co mpetition that might have constituted evidence on
price undercutting or lost sales cannot now be reintroduced in the framework of this proceeding which
is not based on price undercutting or lost sales. In addition, even if individual bids showing price
competition were taken into account on the ground previously advocated by the EC during the First
Substantive Meeting that there must be a certain am ount of price undercutting in order for there to be
price depression, based on Article 6.3(c) itself – as acknowledged by the EC – no price undercutting
can be established unless there a strict test determ ining that the vessels in competing bids are “like
products”.

 Notwithstanding these reservations, Korea notes that, out of the many hundreds of sales, the
EC has only submitted data on a few bids in which EC and Korean yards participated that can, at best
be qualified as shallow and repetitive since the sa me examples were used throughout the EC’s
submissions. Korea has identified the following:

 - the sale by DHI of 2 LNGs to Solaia Shipping and to Repsol and 1 LNG to Bergesen
(Responses to Annex V Questions, Attachment 4.4(21)-1, Exhibits EC-84, 85, 141,
142);
10

 - the sale of a container vessel to Hamburg Süd (Exhibit EC-88); 11

 - the offer for sale of a product and chemical tanker by EC yard Lindenau in
competition with an unspecified Korean yard and as regards an unspecified
shipowner (Exhibit EC-89) and the offer for sale of three product and chemical
tankers by Aker covered in the same Exhibit;
12

 - the offer for sale of a product and chemical tanker by Lindenau for an unspecified
Italian owner (Exhibit EC-90).13

 Korea stresses that these were the only exampl es of actual competing bids referred to by the
EC since the filing of its First Written Submission.

 Even in the Annex V procedure, when the EC had not yet communicated its decision not to
rely on price undercutting or lost sales, the eviden ce provided on the existence of price undercutting
or lost sales was scarce and inconclusive.

10 Korea rebutted the allegations made by the EC as regards these bids in paragraph 564 of its First
Written Submission. A case study was also submitted by Drewry in its report attached as Exhibit Korea – 70,
pages 7.25 to 7.27.
11 Korea rebutted the allegations made by the EC as regards this bid in paragraph 584 of its First
Written Submission.
12 Korea rebutted the allegations made by the EC as regards this bid in paragraph 588 of its First
Written Submission.
13 Korea rebutted the allegations made by the EC as regards this bid in paragraph 589 of its First
Written Submission.

 Annex 6 submitted by the EC in the Anne x V process contains four pages of price
undercutting calculations for the following:

 (i) containerships between 19,000 to 35,000 cgt for the period from 1 January to
31 December 1999 for 8 EC vessels vis-à-vis 6 Korean vessels;

 (ii) containerships between 45,000 and 60 ,000 cgt for the period from 1 January to
31 December 1999 for 3 EC vessels vis-à-vis 7 Korean vessels;

 (iii) container vessels from 19,000 to 35,000 cgt for the period from 1 January to
30 November 2000 for 18 EC vessels vis-à-vis only 3 Korean vessels;

 (iv) LNGs for the period from May to July 2000 for 3 EC LNGs vis-à-vis 3 Korean
LNGs;

 (v) product and chemical carriers between 17,000 to 20,000 cgt for 3 EC vessels vis-à-vis
5 Korean vessels and only covering 2000.

 This is not conclusive for the existence e ither of price undercutting or even of price
undercutting that would allegedly give rise to pri ce depression (in addition to the calculation errors
which were according to Korea made in the calcula tions). The EC itself has provided in Annex 1b a
list of 163 transactions involving EC vessels built fro m 1997 to June 2003 and, of course, Korea itself
provided several hundreds of transactions for Korean vessels out of which only 24 were selected as
having given rise to price undercutting. In additi on, the instances selected by the EC are not
representative of the time period covered in the pre sent dispute from 1997 through 2003. It must be
emphasized that, in spite of the data available, no single example of alleged price undercutting has
been shown for 2001, 2002 or 2003. Also, while the EC does make the price comparison on the basis
of differences in sizes (which, as mentioned, by Korea is the bare minimum to make a correct
assessment of any sort of price trends in relation to commercial vessels), the ranges selected expressed
in cgt are not representative of the full range in which container vessels and product and chemical
tankers are sold. Finally, no accurate price comparison of the vessels can be made without considering
differences in physical characteristics such as gearing, the type of engine and other features that were
listed in Exhibit Korea – 109.
14

 Annex 7 submitted by the EC in the Annex V process contains 17 alleged examples of lost
sales, by far not representative of the number of ve ssels contracted for during the relevant period from
1997 to 2003. In some instances, they are not attr ibuted to any specific Korean yard. Moreover, in
addition to being statistically and timewise not representative, the documents submitted contain
several flaws of which some of the main ones are mentioned below:

 - there is no direct documentary evidence and only hearsay is being offered by the EC
yards (Annexes 7.4, 7,5, 7.6, 7.7, 7.8, 7.9, 7.10);

 - cheaper vessels are recogni zed to exist in Eastern Europe or in Japan (Annexes 7.1,
7.3);

 - the design offered by the EC yard is over-specified compared to the shipowners
requirements or the vessel offered by a Korean yard or the design was not available
(Annexes 7.1, 7.2, 7.3, 7.5, 7.12);

14 Korea notes that it does not agree with the data or conclusions shown in this Annex 6 for various
reasons including the fact that a price comparison made should have been made in US dollars, i.e. the currency
universally used by yards to quote most of the sales prices of their vessels and not in EUROs which could not
provide a true picture of price undercutting caused by subsidies.

 - the EC offer is made without there being any order prospect and a broker just issued a
general inquiry (Annexes 7.2, 7.3);

 - the Korean yard alleged to have been competing is not shown in any register as
having obtained an order from the shipow ner concerned raising serious doubts as
regards the accuracy of the lost sales allegations (Annex 7.4, 7.8);

 - the contracts that exist with a Korean yard are for a substantially larger ship than that
referred to in the alleged lost sale documents (Annex 7.9, 7.10);

 - the tenders made by the Korean yards concerned are for a series of vessels, which has
an effect on the price given economies of scal e, without this being mentioned in the
alleged lost sales documents and without it being indicated whether the EC yards
concerned could build the full series with in the time required by the shipowner
(Annex 7.10);

 - there was fierce competition am ong EC shipyards (Annexes 7.6/7.12);

 - the EC yards were faced with dock rest rictions requiring the adjustment of their
designs (Annex 7.13);

 - the EC yard was licensed to build Moss spherical type LNG containment systems,
rather than GT membrane types and all the orders from the Repsol/Enagas tender
were for Membrane GT type containment systems as a result of which the bid from
the EC yard cannot be considered like (Annexes 7.14 and 7.16).

 As a result, the documents provided by the EC cannot from the basis of any price depression
allegations and, conspicuously, the EC made use of only a few of these documents in the actual panel
process.

 Moreover, in the alleged price undercutting cases referred to in Annex 6 in the Annex V
process, there is no evidence of EC and Korean ya rds bidding for the same tender. All the EC has
done is to compare prices for different bids for vesse ls that might fall in the same wide size range but
may otherwise differ in important technical features.

 In the alleged lost sales cases referred to in Annex 7 to the Annex V process, the Korean
prices invoked are based on hearsay or allegations by the shipbrokers without any direct supporting
evidence being supplied.

158. (a) Is it the view of the EC that excess sh ipbuilding capacity exists only in Korea, or
is there also excess capacity in other countries?

 (b) If your view that excess capacity exists only in Korea, please explain.

 (c) If your view is that there is excess capa city also outside of Korea, where and how
much is the excess?

 (d) Is there any excess shipbuilding capacity in the EC? If not, what is the basis for
this conclusion?

Comments

 It is recognized within the industry that there is no easy way to rigorously measure
shipbuilding capacity. However, significant attemp ts have been made over recent years, under the
auspices of the OECD Working Party on Shipbuilding, to improve the estimation of shipbuilding
capacity.

 The latest estimates of capacity from OECD sources are an estimated figure for actual
capacity in 2000 and a figure for anticipated capacity in 2005 which was also made and agreed in
2001
15 from estimates provided by the Japanese, EC , USA and Korean shipbuilding associations
expressed in cgt. The following table shows an assessment of capacity utilization for the major
shipbuilding regions based on these capacity assessment s and shipbuilding output statistics from LR
Shipbuilding returns.

 Versus 2000 capacity Versus projected 2005 capacity
 2001 2002 2003 2001 2002 2003
Japan 90% 93% 95% 84% 86% 88%
South Korea 94% 104% 111% 77% 84% 90%
EU countries 87% 84% 76% 78% 76% 68%
AWES non EC
1 86% 83% 74% 78% 76% 68%
Other European 61% 80% 87% 54% 71% 77%
China, PR of 96% 110% 180% 63% 72% 118%
Asia & Pacific 43% 63% 48% 39% 58% 44%
NIS Countries
2 29% 83% 64% 27% 77% 59%
North & South America 32 % 44% 58% 29% 39% 52%
Africa & Middle East 8% 8% 8% 8% 8% 8%
Others 0% 0% 0% 0% 0% 0%
WORLD TOTAL 85% 91% 96% 74% 79% 83%
1 AWES non EC = Norway, Poland and Romania
2 NIS = Russia, Ukraine, Latvia, Lithuania, Geogia, Azerbaijan

 While Korea is not endorsing this extremely general overview as an appropriate measure for
the multiple industries examined in this WTO dis pute, nonetheless, the table helps to indicate the
situation regarding estimated excess capacity in the main shipbuilding regions in spite of the difficulty
in defining shipbuilding capacity and the fact that the 2005 figure is a projection which is now some 3
years old.

 Against both the 2000 capacity estimate and the 2005 capacity projection it can be seen that
excess capacity exists all around the world. Regardi ng the major shipbuilding regions, it is noted that
there is significant excess capacity within the EC yards and some overcapacity in Japan. The table
below shows a country level breakdown for the EC’s main shipbuilding countries.

15 OECD Document C/WP6(2001)16 of 'Present Market Conditions and Future Outlook for the World
Shipbuilding Industry' dated November 14, 2001 and prepared by the Secretariat of which an excerpt is attached
in Exhibit Korea – 123.

 Versus 2000 capacity Versus projected 2005 capacity
 2001 2002 2003 2001 2002 2003
Denmark 68% 82% 72% 61% 73% 65%
Finland 116% 88% 69% 116% 88% 69%
France 165% 107% 139% 147% 95% 124%
Germany 102% 106% 79% 90% 93% 70%
Italy 80% 89% 88% 69% 77% 76%
Netherlands 77% 72% 43% 69% 64% 38%
Spain 59% 67% 88% 54% 62% 81%
United Kingdom 19% 21% 28% 19% 21% 28%
EU countries 87% 84% 76% 78% 76% 68%

 Of particular note is the situation regarding Ch ina, where it is shown that output has exceeded
the projected 2005 assessment. At the time of the 2001 projection, unlike the other major
shipbuilding regions of Japan, Korea and the EC , China did not supply its own estimate nor has it
done so subsequently. The OECD capacity estimat es show that output has exceeded the estimated
2000 capacity figure in both 2002 and 2003 and exceeded the 2005 projected capacity in 2003.

 However, there has been considerable grow th in capacity in China since 2000 both through
improved performance
16 and additional or enhanced faciliti es. Drewry Shipbuilding Consultants
believes that there has been excess capacity within China during this period. Over the period 1999-
2001 it is estimated that the top 20 shipbuilding yards in China (which represented approximately
three quarters of the country capacity) were work ing at 55 per cent of their capacity. Drewry
undertook a detailed estimate of capacity in China, based on the agreed OECD guidelines which
reflects the type of ships built and performance over the period 1999-2001, which was published in its
(non-commissioned) report on China’s Shipyards issued in July 2003. This assessed Chinese capacity
to be 3.187 million cgt at the end of 2002 which ta ken in conjunction with the reported output for
China in 2002 and 2003 would indicate utilization levels of 49 per cent and 81 per cent respectively.
Furthermore, Drewry calculated that a projected additional 0.353 million cgt was scheduled to come
on line by 2005/6. This estimated 2005/6 capacity of 3.54 million cgt contrasts with the earlier OECD
estimate for 2005 of 2.18 million cgt.

159. The Panel’s written question 30 following the first meeting was as follows:

“In general, how much flexibility does a typical shipyard have to produce all or a
broad range of ship types? What are th e physical and other constraints on any
given shipyard’s potential product range? How important is prior experience to
a shipyard’s production cost and capability to build a particular type of ship?
With reference to the above considerations, p1ease describe the capabilities and
experience of each EC shipyard that pr oduces or is capable of producing some
or all of the kinds of commercial vessels cited in your serious prejudice claim.”
 Please present a summary of any informatio n already before the Panel, including the
Annex V information, that is relevant to this point but was not referred to in the EC’s original
answer to this question.

16 One of the great difficulties in this area is that potential capacity is profoundly influenced by
efficiency of production, not just by nominal physical capacity. This explains in part why China with its great
potential is such a “wild card” in the projections.

Comments

 In light of the Panel’s question, Korea cannot help but reiterate that the EC has not made
available any information in this regard, whether by ship type or, a fortiori, by like product vessel in
the framework of this proceeding. Korea has already expressed its su rprise at the EC’s statement in
paragraph 131 of the EC’s response to the Panel’s Question 30. Indeed, the EC has circulated three
questionnaires to the EC shipyards in the course of the EC’s Trade Barrier Regulation proceedings
during the period from 2000 to 2002 requesting in formation on vessels built and sold by the EC
shipyards. It has obtained the co-operation of around 21 shipyards over this period providing
responses to these questionnaires ( See also Annex 1a of the documents submitted by the EC in the
Annex V process). Based on the detailed informatio n that it must have received and on data that
should be available to its expert, FMI, it should have been possible to address at least for these 21 of
the most important EC shipyards their capabilities a nd experience in producing some or all of the
kinds of commercial vessels cited in the serious prejudice claims.

 Korea also refers to Annex 1b of the documen ts supplied by the EC in the Annex V process
which clearly indicates that many if not most of the EC yards during the period from 1997 to
June 2003 produced only one - or at most two - types of commercial vessels concerned by the present
dispute, for example:

 - Aker MTW: product and chemical carriers, container ships;
 - HDW: container ships;
 - IZAR: product and chemical carriers, LNGs;
 - Kvaerner Warnow: container ships
 - Odense: container ships
 - Thyssen: container ships
 - Fincantieri: product and chemical carriers
 - Kröger Werft: container ships
 - Stralsund: container ships
 - Peene Werft: container ships
 - Flender Werft: container ships
 - Lindenau: product and chemical carriers
 - SSW: container ships
 - Aker Ostsee: container ships.

 Chantiers de l’Atlantique is not even on th e list but should be listed only for LNGs anyways.
This is confirmed for the above EC yards and for ot hers in Annex 2b filed by the EC in the Annex V
process with the list of orders per shipowner’s nationality.

 In fact, if the correct like product determination were taken into account, as argued by Korea,
it would also be established that EC yards concentr ate in specific size ranges within the product types
of container ships and product and chemical carriers. Moreover, this is not the result of the bestowal
of the alleged Korean subsidies but is the result of a more than decade-long evolution. This evolution
started well before any of the alleged subsidies were granted and reflects a decision on the part of the
EC yards to specialize in specific like product types of vessels, with the largest amongst the EC yards
having decided to concentrate in particular on high va lue added vessels such as cruise ships, ferries or
roll-on-roll-off vessels where they cont inue to occupy a very high mark et share. This may, however,
be an effect of the myriad EC subsidies.

 The EC yards have no intention to build every type of vessel or every type of size but have
specialized more narrowly and made investments acco rdingly. By way of example, Korea refers to
Annex 4b of the documents submitted by the EC in th e Annex V process. In particular, the financial
statements for 2002 of Aker MTW (refer to the Ma nagement Report for Fiscal Year 2002, Section 1
on Business Development at Exhibit 4/2) which, having stated that the yard wa s able to “beat Korean

competitors” for the order of 6 container ships of 2500 teu, to be built for the Iranian shipping line
IRISL, and having a cruise ship on order.

In 2002, the focus of investment was the re placement of equipment and systems, esp.
to allow the parallel manufacture of container ships and cruise ships.
 Reference is also made to the financial statem ents for Chantiers de l’ Atlantique for the year
closed on 31 March 2001 also included in Annex 4b of the data submitted by the EC in the Annex V
process. In particular, the Message from the CEO Pie rre Bilger at page 14 where it clearly identifies
ferries, cruiseships and LNGs as well as naval build ing to be the continued priority. Of course, only
LNGs are the subject of the present dispute, thereby confirming that Chantiers de l’Atlantique is not
interested in containerships or product and chemical carriers (as is confirmed also by the fact that
France has applied for the EC’s temporary defense mechanism aid only in respect of LNGs).

 Korea further refers the Panel to the financial st atements of the important EC yard Fincantieri
in Annex 4b. Korea notes that, while the yard in its annual reports refers in elaborate terms to its
building of cruiseships and ferries, there is nothing on the building of other commercial vessels, save
a cursory reference to the building of chemical tankers of which the EC itself says that these are
outside the purview of the present dispute, notwithst anding that it maintains a supply substitutability
for all vessels alike.

 HDW in its financial statements for the y ear ended on 30 September 1997 also attached in
Annex 4b states the following at page 12:

Our product developments in merchant sh ipbuilding revolve round customer-driven
solutions to sea transport problems of all ki nds and also new concepts for passenger
ships. HDW cruise ships are either modern ship s built in the style of past eras or new
types of luxury apartment ships never built be fore. With regard to freighters, we are
concentrating on developing fast ferries a nd container ships, new insulating systems
for gas tankers and designing ships for transporting reefer containers.
 Having thus set its priorities, it is clear that HDW did not wish to pursue other vessel types
such as LNGs or product and chemical tankers, or di d not consider itself capable with respect to such
other vessel types.

 The Management Report for the 2001 Financial ye ar of the financial statements of Kvaerner
Warnow (Annex 4 thereto, Section 4) states the following:

Container ships will continue to form K WW’s core business. However the shipyards
plans to expand its range of products in order to reduce its dependence on price trends
in the container ship market. This objec tive will be attained in cooperation with
partner shipyards within the Group. The expertise and reputation the yard has
acquired in building the drilling platform will open up new opportunities for other
offshore projects and will be built on and expanded in cooperation with partner yards
within the Group.
 Having already stated in Section 1.5 that R&D focused on the development of designs for
standard container ships, it is clear that Kvaerne r Warnow intentionally concentrated on the building
of container ships and did not contemplate di versifying into other commercial vessels, but
contemplated the additional building of drilling rigs.
17

17 Reference is also made to Kv aerner Warnow’s management report for the 2000 financial year
(Annex 4, page 5 of 6) also attached in Annex 4b wh ere the yard stated that “K WW, which has specialised in
the container ship market, will continue in the near future to depend on obtaining new contracts in this field.”

 The same is true for Volkswerft Stralsund wh ich in Section 3. of its Annual Management
Report attached to its financial statements for 1 999 in Annex 4b indicated that “[t]he yard will
continue to concentrate its marketing activities on medium-sized container ships and large special-
purpose vessels for the offshore sector.”
18

160. Concerning the composite ship newbuildin g price index furnished by the EC, the EC
indicates that major shipbuilding consultants also maintain “more specific price information for
particular ship types”. In Attachment 2 to its answers to questions, the EC provides price
information for two sizes of tankers and for eight sizes of container ships.

 (a) Is this the “more specific’ information to which the EC refers?

 (b) Why does the EC show the particular breakouts that it does? Do other
breakouts exist for these products? Please explain.

Comments

 Korea refers to its response to Question 173 d) and e) regarding the detailed price series
indices that are used in the industry.

161. The EC presents indices of estimated Ko rean production costs versus prices in support
of its argument that there is price suppression/depression The EC indicates that its consultant,
FMI, prepared the cost estimates, taking into account various known cost trends and cost
advantages of the Korean yards. The EC in its an swers to questions following the first meeting
provided a description of the methodology used by FMI to prepare these estimates. The EC also
indicated that, should the Panel so request, it would furnish the detailed underlying data. Is it
the view of the EC that a graphical presentation of price indices, along with a description of
methodology, constitutes prima facie evidence of evolution in Korean shipbuilding costs? Please
explain.

Comments

 Korea observes that the EC has not even provided production cost versus price indices for
each of the vessel segments that the EC itself has identified. In the Second Substantive Meeting, upon
a request of the Panel, the EC has confirmed that a serious prejudice assessment should be made for
each of the three product segments identified by the EC separately. While the same question is now
addressed in writing to the EC, having clearly separated the three product segments, in the EC’s
rationale, there is no reason why the EC should r espond differently in writing. Thus, when the EC
alleges that price suppression must exist because in the absence of price pressure due to Korean
subsidies, the increase in demand, freight rates and cost of production would have led to price
increases, the EC should have made a prima facie case in support of its allegations already in its First
Written Submission for each of its own product segments separately.

 The EC failed to do so and even further weakened the strength of its allegations in
Attachments 2 and 6 of its responses to the Pa nel’s questions as well as in its Second Written
Submission. The following will clarify this:

Korea notes for the record that the same report mentions that “[t]he competitiveness and profitability of the
shipyard would be improved if the production limits imposed by the EU were eased or lifted.”
18 Section 5. of the management report for the 2002 financial year also attached in Annex 4b) confirms
that: “[o]ur acquisition activity will continue to focus on the tried and tested market segment of mid-sized
container ships and supply ships.”

 First Written Submission Attachment 2 of the EC’s responses to the
Panel’s questions
 Price developments Price and cost
index
Price developments Price and cost index
LNGs Newbuilding price
developments
(Figure 30 at page
164)
Cost and price
indices for Korean
LNGs (Figure 38 at
page 165)

No explanation on
how these cost
indices were
obtained and which
LNGs are reflected
in these LNGs.
Year-end prices of
LNGs (Figure 1.3
at page 3)

Cost and price indices
for Korean LNGs
(Figure 1.5 at page 4

Half of one page
explanation on the
“estimation” of cost
indices (Section 4 at
page 16) but still no
clear explanation on
how these costs were
calculated or which
LNGs are reflected in
these indices.
Container vessels A graph with world
market prices for
3,500 teu and for
1,100 teu container
vessels taken from
Clarkson Research
Studies
(Figure 41 in the
EC’s First Written
Submission, at
page 167)
Cost and price
indices for Korean
3,500 teu container
vessels (Figure 40
at page 166 of the
EC’s First Written
Submission)

Price indices
presumably
calculated based
on Figure 41.

No explanation on
how these cost
indices were
obtained and which
container vessels
are reflected.

No explanation as
to why conclusions
for all container
vessels are drawn
on the basis of a
specific size range
only.
A graph is shown
with price
developments for 8
different sizes of
containers based on
Clarkson research.
Cost and price indices
are shown for a
Korean panamax
container ship (Figure
3.7 at page 15.

The comments with
regard to the data in
the First Written
Submission remain. In
addition, it is
questioned whether
the cost and price
indices shown in
Figure 3.7 can be
reconciled with those
in the First Written
Submission. The latter
reflected those of
3,500 teu container
vessels while
Attachment 6 to the
EC’s responses to the
Panel questions
indicates that
Panamax container
vessels which are
reflected in Figure 3.7
cover vessels between
about 4,000 and 5,000
teu (item 7. at page 1.)

There seems to be an
inconsistency in the
EC’s demonstration.
Product and
chemical tankers
No price
developments
shown at all.
Cost and price
indices for Korean
handysize product
Price developments
for handymax and
panamax products
No cost and price
indices are shown and
there is no indication

 First Written Submission Attachment 2 of the EC’s responses to the
Panel’s questions
and chemical
tankers (Figure 43
at page 169 of the
EC’s First Written
Submission)

No indication on
how the price
indices were
determined.

No explanation on
how these cost
indices were
obtained and which
container vessels
are reflected.

No explanation as
to why conclusions
for all product and
chemical tankers
are drawn on
the basis of a
specific size range
only.

tankers taken from
Clarkson’s (Figure
2.3 at page 8)

The data is shown
for “product
tankers” while the
EC has constantly
indicated that
“product and
chemical tankers”
are concerned by
the present dispute
and has indicated
in the Second
Substantive
Meeting that it is
concerned with
tankers that
transport both oil
and chemical
products. It is,
therefore, not clear
whether these
prices reflect sown
in Figure 2.3
reflect those of the
products concerned
by this dispute.
as to whether the EC
maintains those shown
in Figure 43 of its
First Written
Submission.

There is total
uncertainty as to the
allegations. If the EC
meant to maintain
Figure 43, the
questions/observations
in the third column of
this table remain
valid.

 As mentioned, it is not clear how the cost i ndices used were arrived at or whether the cost
reports of FMI submitted in Annex 10a of the docum ents supplied by the EC in the Annex V process
were taken into account. However, if they were, in addition to the criticism already mentioned by
Korea in its Second Written Submission (at page 124) or in the Drewry Report (Exhibit Korea – 70 at
page 8.22), Korea submits that the cost calcula tions are not sufficiently representative as to be
conclusive. Indeed, cost calculations were made for the following vessels subject to the present
dispute:

 - Hanjin 4,900 teu container;
 - Daewoo 5,100 teu container
 - STX 51,000 dwt tanker (which may be a product tanker not concerned by this
dispute)
 - Hyundai Mipo handymax tanker
19
 - Daewoo LNG for Exmar
 - Hyundai LNG for Golar
 - Hyundai 2,500 teu
 - Samsung 5,500 teu container
 - Samsung LNG for British Gas

19 For details on this vessel and the preceding three, refer to Section 6 of the FMI Mid-term report,
Shipbuilding Marketing Report – Phase 4, March 2003, Annex 10a of the documents submitted by the EC in the
Annex V process.

 - STX panamax products tanker (which ma y not be concerned by this dispute that
concerns combined product and chemicals tankers)
 - STX product and chemicals tankers 20
 - Hyundai 7,200 teu container vessel,
 - Daewoo LNG for Bergesen
 - Samho Aframax tankers (which may not be concerned by this dispute that concerns
combined product and chemicals tankers)
 - Samsung 7,200 teu container ship
 - Daedong 2,500 teu container ship
 - Hyundai Mipo handysize products tanker (which, as mentioned above, may not be
concerned)
 - Shin-A handysize products tankers (which as mentioned above, may not be
concerned)
21
 - Daedong 35,000 dwt tanker (if a product ta nker, this product may not be concerned)
 - Hanjin 5,608 teu container ship
 - Hanjin 1,200 teu container ship
 - Hanjin 6,250 teu container ship
 - Halla 3,500 teu container ship
 - Hyundai 6,800 teu container ship
 - Hyundai 5,600 teu container ship
 - Hyundai LNG for Bonny Gas Transport
 - Hyundai 5,500 teu container ship
 - Samsung 5,500 teu container ship
 - Samsung 3,400 teu container ship
22

 Thus, it would seem that cost calculations have been made at best for around 25 vessels out of
the hundreds of Korean vessels sold that are vessel types concerned by the dispute. Not even half of
these cost calculations concern vessels built by restructured yards.

Korea, therefore, submits that if this were the basi s for the cost indices set forth by the EC in relation
to price indices, these cost indices are not representati ve compared with the total sales of the vessels
concerned by the restructured yards in terms of th e number of vessels sold or in terms of like product
coverage. If these are not the basis for the cost indi ces, the indices relied upon by the EC constitute all
the less prima facie evidence sufficient to demonstrate the existence of price suppression as they are
assertions only without any substantiating evidence. In any event, Korea submit s that the EC has not
carried the burden of proof that rested on it.

162. What specific evidence/examples are contained in the information before the Panel in support
of the EC argument that prices at one end of the product spectrum for a particular kind of ship
influence prices along the entire spectrum? (For exampl e, is there specific evidence in the information
before the Panel that a downward movement in very large container ships brings about commensurate
downward movement in all smaller sizes of container ships?)

20 For details on this vessel and the preceding five, refer to Section 6 of the FMI Final report,
Shipbuilding Market Monitoring – Phase 3, August 2002, Annex 10a of the documents submitted by the EC in
the Annex V process.
21 For details on this vessel and the preceding six, refer to Section 6 of the FMI Final report,
Shipbuilding Market Monitoring, Phase 2, May 2001, Annex 10a of the documents submitted by the EC in the
Annex V process.
22 For details on this vessel and the preceding five, refer to Section 2.2.2 of the FMI Final summary
report, Shipbuilding Market Monitoring, April 2000, Annex 10a of the documents submitted by the EC in the
Annex V process.

163. (a) For each ship category, in prac tical terms how substitutable are different
sizes/configurations (containment syst ems, in the ease of LNGs)? Are there
specific evidence/examples in the inform ation before the Panel? In addition,
please furnish relevant portions of the industry publications discussed at the
second meeting. (For example, one industr y expert referred at the meeting to
one of the industry publications that contains information relevant to cross-price
elasticities).

Comments

 For all ships, size is a major barrier to substitutability for several reasons:

 1. bigger ships cannot physically operate on many of the routes or ports serviced by
smaller vessels,

 2. trade volumes would mean that bigger sh ips would have to operate part empty on
many lower volume routes serviced by smaller vessels; and

 3. ship operating economies of scale are such that it is considerably more expensive per
unit of cargo carried in a small ship compar ed with a larger vessel (which is why
larger ships are built). Information was provided in Exhibits Korea - 70 and 109
regarding the different operating costs of v essels and this information is published in
Drewry’s industry reports.

 There are other reasons which tend to be more ship type specific, some of the main ones
include:

Product/chemical tankers:

• IMO Class of the tanks on product chemical tankers limits the cargoes a vessel can carry by
regulations, it would be particularly unlikely th at expensive IMOI/II vessels would be used to
carry oil products;

• Tank coatings limit the cargoes that can be ca rried in oil products and chemical/products
tankers;

• Some cargoes trade in relatively small volumes from one destination to another whilst others
are traded in high volume, small volumes of car go require smaller tanks and higher levels of
tank subdivision and it is economically not viable to carry small volumes in large tanks or
vice-versa.

Container ships

• Smaller vessels tend to have lo wer speeds and can therefore not maintain the time schedules
for liner services on routes that are operated by large vessels – this would result in a major
failure of delivery service to customers;

• Large containerships are built without their own cargo handling gear because they trade
between dedicated container ports which are e quipped with high speed unloading facilities.
They would therefore not be able to unload in less specialized ports that do not provide these
since the ships are too large to be serviced by the cranes available in smaller ports. For this
reason the ships using these smaller ports are equipped with their own cargo handling cranes;

• On certain trade routes – notably north–south routes – there are significantly higher volumes
of refrigerated cargoes and these cannot effectivel y be traded by ships with lower levels of
reefer capability which are intended to be traded on East-West routes.

LNG ships

• Ships destined to trade to ports that do not have land-side re-liquefaction facilities must
incorporate these facilities on the ship or they cannot discharge their cargoes. The expansion
of LNG trade is seeing an increase in such instances;

• Certain membrane systems experience ‘sloshing’ problems if they have partly empty tanks so
they cannot discharge parts of their cargoes at di fferent ports. This is mainly a consideration
on certain Japanese LNG routes.

 (b) Can the EC cite specific instances/situa tions in the information before the Panel
where a shipowner has purchased and used a larger-than-usual ship for a particular
run, due to a relatively low price for the larger ship?

164. What specific evidence is there in the information before the Panel that APRGs and PSLs
around the time of the restructuring helped the shipya rds in question to remain in operation, whether
by improving their balance sheets/cash flow or otherwise?

165. For each category of ship, what has been the evolution in prices versus costs in other major
shipbuilding countries since the mid-1990s, and how does this compare with the trends in Korean
prices versus costs?

166. (a) For each of the three ship types, wh at specific evidence/examples are there in the
information before the Panel (in additi on to the domestic complaint by Samsung
against Daewoo) that the restructured sh ipyards were the price leaders among the
Korean producers?

 (b) What evidence is there in the information before the Panel in support of the EC
argument that the alleged restructuring subs idies enabled the restructured yards to
drive down the prices charged by all other Korean shipyards?

 (c) What has been the annual financial perfo rmance of the other (non-structured) Korean
shipyards since the restructuring?

167. If, as the EC argues, shipyards have near-total flexibility to produce any kind of ship,
and the Korean yards are heavily subsidized , why are Korean shipyards not more-or-less
equally active in all kinds of ships (including cruise ships, ferries, etc.)?

Comments

 Refer to the response to Question 126 which de monstrates that EC shipyards do not practice
full supply-side substitutability across all ship typ es. The following examples demonstrate this is a
common situation in other regions as well.

 Japan has a large number of shipyards and build s ships across a wide range of ship types.
Furthermore as it has a strong domestic customer base, it is unlikely that a yards absence from a
market reflects any alleged anti-competitive actions by other countries’ yards. Out of 130 yards in
Japan that have delivered ships since 1990 or currently have ships on order:

• only 5 are active in the LNG sector
• only 11 are active in the passenger/cruiseship market for larger cruiseships
• 24 yards are active in the Reefer (refrigerated) ship market
• 26 yards are active in the Crude Oil tanker market
• 36 yards are active in the Containership market and only 9 are active in the market for teu
ships of 3,500 teu or larger
• 47 yards are active in the LPG market

 Some ship types are so specialist that there are only a few yards active across the whole world
market. The obvious examples are for large Cruise sh ips where there are 7 yards worldwide who have
built (or have on order) cruise ships of 60,000 gross tons or larger since 1990, and of the 86 ships
involved 80 of them have been shared amongst 4 sh ipyard groups, namely: Chantiers de l’Atlantique,
Fincantieri group, Kvaerner Masa Yards and Meye r Werft. The remaining 6 comprise 2 each at
Bremer Vulkan, Lloyd Werft (both EC yards) and Mitsubishi HI of Japan. In the LNG sector, the
number of active players is also of course limited, where 14 yards have built (or have on order) the
169 ships involved since 1990.

 In fact, a full analysis of all ship types i ndicates that over 1100 yards (or shipbuilding groups)
have participated in the market since 1990 and of these:

• 52 have built or have orders for Reefer ships
• 71 have built Crude Oil tankers
• 85 have built Dredgers
• 92 have built LPG
• 157 have built Ro-Ro ships
• 180 have built Container ships
• 211 have built Bulk Carriers
• 214 have built Offshore vessels
• 224 have built some IMO class of Chemical tanker
• 386 have built General Cargo or Multi-purpose cargo ships

 Much reference has been made to the emerge nce of China as a major shipbuilding nation and
a similar profile for China shows that of record ed deliveries/orders (some domestic and smaller
vessels are unlikely to be fully reported) since 1990 there are 100 active shipbuilding yards, of which:

• none are involved with Cruise ships
• 1 is involved with LNG ships
• 3 are involved with Reefer ships
• 5 are involved with LPG ships
• 8 are involved with Ro-Ro ships
• 10 are involved with Crude Oil tankers
• 12 are involved with some IMO class of Chemical tanker
•
 22 are involved with Offshore vessels
• 33 are involved with Bulk Carriers
• 37 are involved with Container ships
• 58 are involved with General Cargo or Multi-purpose cargo ships

 We believe that this highlights the non-homoge neity of the shipbuilding market supply side,
and the fact that in practice yards do not try to oper ate in all market sectors but concentrate on certain
types where they have a competitive advantage.

III. TO BOTH PARTIES

A. ITEM(J) / ITEM (K), FIRST PARA.

168. The parties disagree as to whether APRG S constitute export credit guarantees and
whether PSLs constitute export credits. Plea se provide any documentation (either from the
shipbuilding industry, the OECD, or any other so urce) that you consider supports your position
on these issues.

Response

 The EC has challenged whether APRGs and PSLs are export credit guarantees based largely
on who receives the facility. A couple of problems w ith the EC arguments are that the “beneficiary”
as the EC identifies it, are different in the two instances. According to the EC’s arguments, APRGs
are on behalf of the foreign buyer and that is not an export guarantee. Of course, PSLs are on facilities
provided directly to the shipbuilder which causes some problems in the EC’s argumentation.

 The EC tries to get around this problem by i gnoring it and making a blanket statement that the
second paragraph of item (k) refers to the OECD and therefore this must be the context for
interpreting the first paragraph. Thus, according to the EC, the OECD interpretations would not
encompass PSLs. As Korea has noted, there is no legal or logical basis for this line of argumentation.
It is axiomatic that an exception is to be constr ued narrowly. Therefore, there is no basis at all for
construing the rule and the exception to be of pr ecisely the same breadth. The treaty language itself
gives no such primacy to the OECD over the WTO. While the second paragraph of item (k) has been
interpreted as providing a specific exception that applies to the OECD, this is a matter of
interpretation for the OECD is not mentioned in the treaty text; While Korea, of course, is not
rejecting the OECD as a useful gatherer of informati on, this sort of judicial interpretation certainly
cannot be the basis for subordinating the WTO treaty to other provisions in the OECD documents.

 The EC continues with its creation of new le gal rules outside of the plain meaning of the
language by arguing that export credit guarantees ar e meant only to include support for domestic
producers to protect them from unknown foreign risks. Of course, the provisions of the items (j) and
(k), first paragraph, do not limit themselves in this manner. This proposed limitation is a creation of
the EC and one that the EC had to acknowledge during the course of the Second Substantive Meeting
is anachronistic even if it were appropriate for the Panel to rely in its legal analysis on a somewhat
dubious EC rendition of the “philosophy” of the OE CD Arrangements. Moreover, as is demonstrated
below, this EC characterization of covered and non-covered instrume nts is both highly artificial and
simply inaccurate.

 Korea has discussed before how it disagrees w ith the EC about the EC’s extremely narrow
construction (when it suits the EC’s purposes) on the OECD language. Korea has already specifically
provided evidence that the United States has made its views known in the OECD that it does not agree
with such an overly narrow interpretation of what constitutes an export credit or guarantee. Indeed,
Korea remains somewhat puzzled by this EC argu ment. The EC refers to the APRGs as guaranteeing
the shipbuilders’ domestic risk rather than the foreign risk. Of course, the parties would not be
discussing the safe harbours if one was not assuming arguendo that the Panel had already found that
these were export subsidies. As Korea noted during the Second Substantive Meeting, the nature of
disputes such as this is that the respondent has to argue in the alternative on every contested issue
after the first one. The respondent presents continge nt arguments on the hypothetical assumption that
it has lost the previous issues. On the other hand, th e situation is totally different with respect to the
complainant. The complainant must prevail on every one of the issues and, while it is not a rigid rule,
normally would only address issues arguendo if it is making, for instance, a non-violation claim under
Article 26 of the DSU. In this instance, it is impos sible to see how the EC can argue that these are
domestic instruments and not export instruments unl ess it wishes to concede the basic point of its

whole claim, i.e. export contingency. If it is a programme of credit guarantee and is contingent on
exportation, it follows that it is an “export credit guarantee” within the meaning of item (j). In relation
to this, the explanation by the UN Economic and Social Commission as to “export credit guarantee” is
enlightening. The Commission defines the export cred it guarantee as “instruments to safeguard export
financing banks from losses that may occu r from providing funds to exporters.”
23 The Commission
sees that export credit guarantee is likewise benefici al to exporters, as “[s]uch guarantee allows
exporters to secure pre-shipment financing or post-shipment financing from a banking institution
more easily.”24 When read in light of the following examples of other Member’s practices, it is clear
that the APRG squarely falls in the export credit guarantee, as it is an instrument to safeguard ship-
buyers or the financing banks on their behalf from losses that may occur from providing funds to
shipyards.

 KEXIM is not alone in offering these sorts of instruments. For example, the Finnish ECA,
Finnvera offers bond guarantees of various types. According to the Finnvera website, “the Bond
Guarantee is a countersecurity for the bank i ssuing a bond on behalf of the exporter in favour of the
foreign buyer . The bonds that the buyer may require include, for example, a bid bond, an advance
payment bond, a performance bond or a maintenance period bond.”
25 There are two important aspects
to the explanation of the guarantee. First, Finnvera does not limit the guarantee to situations arising
from foreign risk. Second, it also illustrates how a fa cility that nominally protects the foreign buyer
really can operate to protect the shipbuilder from such foreign political risks – just the sort of risk the
EC says are the focus of item (j): “For the exporte r, the guarantee is an insurance against call of the
bond. The guarantee provides cover against unfair call of the bond and against call owing to political
risks. Political risks include war, insurrection or other such event in the buyer’s country preventing an
exporter from fulfilling the obligations under the cont ract, with the result that the buyer calls the
bond.”

 Similarly, Hermes of Germany provides for th e availability of the following kinds of bonds
and guarantees: “Advance payment bonds, performance bonds and maintenance bonds.”
26 ECGD in
the United Kingdom provides a variety of export cred it facilities to both buyers and suppliers; it does
not seem to limit itself to one side of the tran saction. Among the instruments it provides are various
Bond Insurance Policies, or BIPs. ECGD identifies these BIPs as including:

Advance Payment Guarantees. These are to protect the buyer against the loss of
money paid in advance. They are partic ularly common where there is a significant
design and manufacturing phase before the deliv ery of the equipment or goods to the
buyer. The key risk for exporters with these bonds is that political events may
frustrate a contract after the advance payment has been received, but before the goods
have been delivered or the contract completed.
27
 The ECGD website goes on to explain that this foreign political risk is an import aspect, but
not the only one. The BIPs guarantee against any unfa ir call of the bond, not just political risks which
ECGD identifies separately. Another example comes from the EFIC (the Export Finance and
Insurance Corporation) of Australia. The EFIC prov ides on behalf of eligible exporters “Advance
Payment and Performance Bonds” as security for a dvance payments or in support of exporters’
performance obligations under the contract.28

23 Exhibit Korea – 137. Excerpt from Trade Facilitation Handbook by UN Economic and Social
Commission for Asia and the Pacific (p. 61) (ST/ESCAP/2224).
24 Ibid.
25 Exhibit Korea – 124. (emphasis added)
26 Exhibit Korea – 125.
27 Exhibit Korea – 126. Korea would specifically like to bring to the Panel’s attention that the term
“bond” is used interchangeably with the term “guarantee” by the ECGD and implicitly so by the other ECAs.
28 Exhibit Korea – 138.

 Export Development Canada (“EDC”), provides for pre-shipment financing “for exporters
who need cash for manufacturing their goods before they export.”
29 EDC goes on to explain:

Pre-Shipment Financing helps Canadian exporters win more business by raising
sufficient working capital to fund up-front costs associated with export contracts.
EDC encourages Canadian financial instituti ons to advance pre-shipment loans to
exporters.30
 GIEK of Norway provides a “Pre-shipment gua rantee. Protects the exporter against losses that
may occur during the production, prior to deliver y.” It also provides “B ond Guarantees. Helps the
exporters to furnish guarantees for tenders, advance payments or competition (bonds)”.31

 The ECGD and the Indian Exim Bank both provide for post shipment loans directly to the
supplier, but that is not legally distinguishable fro m precisely the type of pre-shipment loans offered
by various ECAs. Indeed, India Exim also offers the same sort of facility on a pre-shipment basis:

Pre-Shipment Rupee Credit
Pre-shipment Rupee Credit is extended to finance temporary funding requirement of
export contracts. This facility enables pr ovision of rupee mobilization expense for
construction/turnkey projects. Exporters could also avail of credit in foreign
currencies to finance cost of imported inputs for manufacture of export products to be
supplied under the projects. Commercial banks also extend this facility for definite
periods.
32
 India Exim also provides what it describes as Non-Fund based facilities that are “guarantees
directly or in participation with other banks, for project export contract”. These include:

Advance Payment Guarantee.
Exporters are expected to secure a mobili zation advance of 10-20 per cent of the
contract value which is normally released against bank guarantee and is generally
recovered on a pro-rata basis from the progress payments during the project
execution.
33
 It can be seen from these examples that both APRGs and pre-shipment loans are not limited
to Korea. These facilities also do not fit so easily in to the EC’s simplistic construct of what is a
domestic or foreign risk.34 Clearly APRGs and PSLs are the instru ments to which the safe harbours in
items (j) and (k) first paragraph, respectively, may apply.

169. Item (j) refers to the provision of various “programmes”. Assuming that an a contrario
interpretation of item (j) is permissible, could it operate as a defence for individual APRG
transactions, as opposed to the APRG programme per Se? Please explain. In particular, if the
focus of item (j) is on the long-term operati ng costs of the programme, how could item (j)

29 Exhibit Korea – 127.
30 Ibid.
31 Exhibit Korea – 128.
32 Exhibit Korea – 129.
33 Ibid.
34 Indeed, if the EC’s narrow and simplistic construct is correct, then a number of EC Member States
are prima facie in violation of Part II of the SCM Agreement as their programmes would be outside of the
parameters of the OECD Arrangement and not protected by any safe harbours.

determine whether or not individual transact ions under the programme constitute export
subsidies?

Response

 As discussed during the Second Substantive Mee ting, the language of item (j) would appear
to require an assessment on a programmatic basis. That is, the Panel must look to see whether the
premia charged in the programmes are covering th e long-term operating costs of such programmes.
Once that is established, then even if an individua l transaction might be at a premium level that, if
applied generally, would not cover the long term operating costs, then because the programme covers
such costs, such an individual transaction would be within the safe harbour. The flip side of this point
is that it necessarily follows that if the programme is not covering its long term operating costs, an
individual transaction will not be within the safe ha rbour even if it is at a premium level that, if
generalized, would cover the long term operating costs.

 In Korea’s view, the Panel must make a judgm ent call as to what is “long term” and then
assess the evidence regarding whether or not the programme in question h as covered its operating
costs and losses during such period. While that may be a difficult inquiry in some other cases, Korea
has supplied evidence in this dispute that demons trates that the APRG and pre-shipment loan
programmes have covered KEXIM’s operating costs and losses over all periods including the difficult
period of the Asian financial crisis.

B. APRG/PSL

170. Korea asserts that KEXIM PSL rates have been above certain DSME bond rates since
1999 (para. 231, Korea’s First Written Submission ). The EC asserts th at certain DHI bonds
were guaranteed (para. 124, EC’s Second Written Submission). Are the parties referring to the
same bonds, or were the DSME bonds referred to by Korea different from the DHl bonds
referred to by the EC? Please explain.

Response

 Korea would like to note that the statement by the EC in para 124 of its Second Written
Submission is incorrect and misleading. Firstly, as clearly indicated in its Exhibit EC – 129 which
was referred to in para 124 by the EC, all bonds lis ted therein are not guaranteed. While some of them
are guaranteed, the rest are “non-guaranteed” (for example, see page 3 of Exhibit EC – 129).
Secondly, as submitted earlier by Korea, when DSME and DHIM were spun-off from DHI, debts
including corporate bonds were allocated to the tw o companies in accordance with the relevance to
the spin-off companies. In other words, all DHI debts incurred thus far relating to shipbuilding
business were assigned to DSME, and all debts incurre d thus far relating to machinery manufacturing
business were assigned to DHIM. However, Exhibit EC – 129 is not the one which took into account
such debt allocation (as it was made prior to the spin-off), simply listed all the then outstanding DHI
corporate bonds. The debts which were allocated to a distinct company cannot make a benchmark for
DSME’s loans. Korea hereby submits Exhibit Korea – 139 . It lists such bonds that were ultimately
assigned to DSME upon the spin-off out of the bonds listed in Exhibit EC – 129.

 In contrast with this, the Exhibit Korea – 18 shows the balance of outstanding corporate
bonds (which were ultimately assigned to DSME) as at the end of each quarter and the average
interest rates of the outstanding bonds for the respec tive quarters. Thus, it can be said that the Exhibit
Korea – 18 has reflected parts of Exhibit EC – 129, but not all of it. Korea considers that Exhibit
Korea – 18 is more relevant than Exhibit EC – 129 when finding the benchmark.

171. Regarding Exhibit Korea – 16, are “KEB”, “CHB” and Hanil Bank public bodies? If
not, are they “entrusted or directed” private bodies? Please explain.

Response

 KEB, CHB and Hanil Bank (currently W oori Bank) are commercial banks operating under
the Banking Act which is generally applicable to all commercial banks. For the transition period
during the Asian Financial Crisis and subsequent thereto, the Government of Korea and/or KDIC used
to hold shareholdings in these banks as they had contributed capital in the framework of the financial
sector restructuring.

 As submitted by Korea in relation to the concep t of “public body”, a two-step analysis is
required: i.e. (i) an entity will be a public body if it is empowered by the law of the State to exercise
elements of the governmental authority and (ii) the acts in question will be considered acts of the State
only if such entities were acting pursuant to such aut hority in the particular instance. Relating to the
first step, there are no laws which empower the banks referred to above to exercise elements of the
governmental authority. Further, when issuing the APRGs, these banks exercised no governmental
authority. In light of this, these banks cannot be regarded as public bodies for the purpose of the SCM
Agreement.

 In order for the entrustment/direction to be est ablished, the following three elements are to be
satisfied: (i) an explicit and affirmative action be it delegation or command; (ii) addressed to a
particular party and (iii) the object of which acti on is a particular task or duty. The EC has not
established a prima facie case as to the entrustment/direction of the above banks to issue the APRGs
concerned. Further, the EC has never specified any particular “function” that a private body was
allegedly entrusted or directed by the Government of Korea to carry out. Korea reiterates that the
requirements of Article (a)(1)(iv) are met only wh en it is established that the private body was
entrusted or directed “to carry out one of more of th e type of functions illustrated in (i) to (iii) above
which would normally be vested in the government and the practice, in no real sense, differs from
practices normally followed by governments.” Korea does not see any governmental practice involved
in the issuance of APRGs. Importantly, beyond gene ralized assertions that at times border on crude
stereotyping, the EC has offered no evidence of an explicit and affirmative delegation of command
addressed to the specific banks ordering them to provide subsidies.

C. ALLEGED ACTIONABLE SUBSIDIES

172. Please comment on paras 504-509 of the report of the GATT panel in United States -
Imposition of a Definitive Countervailing Du ty on Imports of Certain Steel Products
Originating In France, Germany, and the United Kingdom.

Response

 Korea looks forward to seeing the EC’s res ponse to this question and Question 148. There
are several ways of distinguishing the Steel CVD case. Unfortunately for the EC, all of them cut the
wrong way and would support the EC’s inside investor standard proposed in th at case. Korea notes
that the first point to take from the Steel CVD case is that it illustrates a couple of the differences
between equity infusions and debt equity swaps in insolvency.

 The whole issue of whether an inside investor or an outside investor would put further funds
into a company in the form of equity infusions de pends on an analysis of the possibility of achieving
comparable rates of return on the marginal amounts of new investment. The EC was arguing that an
inside investor has a somewhat different pers pective because it will take into account the funds
already invested when adding new marginal amounts. That is, if the new money can optimize returns
on previously invested amounts, then the inside investor will be willing to possibly accept a lower
nominal rate of return on the new investment. In effect, the inside investor looks at the new
investment as a catalyst for a better return on the full investment. However, an outside investor,

according to the EC does not have that perspec tive of seeing new funds serving a catalytic function
for a larger initial investment and therefore will requi re a higher rate of return on the new investment
that it views in isolation. In essence both investors are acting on a rational market basis; it is simply a
matter of different perspectives.

 In the case of an insolvency, however, there is no new money being invested. The goal is to
maximize the return on whatever was already lent, recognizing that it will in all cases be – at least in
the short term – a negative return. The inside/outsi de investor discussion serves as an analogy for this
decision making process. The foreign creditors who ha ve a very small stake in the business are less
willing to deal with the legal and workout processes in another country. There is an administrative
carrying cost for getting involved in such processes that can be quite high. On the other hand,
domestically-based creditors that have a larger e xposure both to the company and to the market in
general are in a position analogous to an inside investor who has a much larger stake to protect and for
whom the carrying costs of dealing with a Korean insolvency are significantly less than the foreign
lender. In addition , just as the incentives are differe nt, the leverage is different. The party that has a
desire to get out and has a relatively small expos ure can block the process in a manner that would
bring disproportionate pain to the inside lenders. Thus, by using this levera ge, the foreign creditors
can obtain a higher initial payment on their debts from other creditors. But the issue does not end
there in the case of DSME for the outside lenders asked for a residual amount of out-of-the-money
warrants. If one steps back and looks at the tran saction as a whole, the inside lenders took less up
front, but a larger long term potential benefit throug h the equity they received in exchange for their
debt. The outside lenders took a larger initial amount and settled for a smaller long-term potential with
the warrants thereby minimizing their risks and carry ing costs for dealing with a Korean insolvency.
Thus, both sides took similar amounts out of the transaction but in different forms. Both acted as
perfectly rational creditors or “investors” reflecting their different perspectives as domestic/inside and
foreign/outside players.
35

 Korea also notes that it does not have the benefit of seeing the academic report the US relied
upon in the Steel CVD case, but the description of it sounds abstract in the extreme and, therefore, of
limited use. It is a highly academic exercise to posit that two parties are in precisely the same position.
No persons have exactly the same perspective and no persons have perfect information upon which to
base their decisions. That is why there are negotia tions. If this were not the case, the Doha Round
would not just have begun at Doha, but would also have ended there fo r all of the perfectly informed
rational Member representatives would have been ab le to instantly settle their differences. There
would have been no different perspectives if the hypothetical were followed because everyone would
be in identical positions. Of course, the real world does not operate that way and did not in the Korean
workouts. The parties bargained to obtain the best results they could in diffi cult circumstances. They
set their goals according to their specific needs and used what leverage they had to achieve them as
best they could. Thus, the EC’s argument regarding the different perspectives of inside investors in
the case of equity infusions applies even more strongl y in the case of different creditors in the case of
insolvency workouts.

 In light of the above discussion, Korea also w ould like to point out another issue illustrated by
the comparison of these issues in the Steel CVD case with the current workouts. As Korea has noted in
its submissions and the Substantive Meetings, there is no transfer of funds in the present case. The
debt was valued by the lenders and the negotiatio ns to carve up the remains of the company were
undertaken based on their respective valuations. There were no new sources of funds to pay any of the
creditors. Thus, for the EC to say that the domes tic creditors took too little for their debt simply
ignores the point that there was nothing more there for them to get. It was merely a question of
allocation between creditors . The only possible source of extra funds would have been if the
valuation exercise had resulted in a determination that the termination and selling for scrap of the

35 Korea notes that the Lawes Report, Exhibit Korea – 105, supports this conclusion.

assets would have yielded more funds than doing the workout. No creditors -- either domestic or
foreign, insiders or outsiders -- came to that conclusion.

 Korea also notes that in some cases a litigant will abandon an earlier position if it loses that
argument. In the referenced pane l report, however, the EC did not “lose” the point. Rather, the Panel
explicitly was deferring to the administering author ity regarding the insider/outsider argument. In
paragraphs 466 and 490, the Panel noted that it w as not up to it to make its own judgments about the
weight of the evidence. In paragraph 503, the Pane l noted that it was the Panel’s duty to see whether
the EC had established that the administering author ity had not acted on a ratio nal basis. In paragraph
507 the Panel noted that there might be circumstance s where inside and outside investors might have
different perspectives. In paragraph 508, the Panel noted that the EC had presented a possible
alternative approach, but that was not enough when the task of the Panel was examining whether there
was a failure of the DOC to consider relevant facts (the DOC also claimed that it had in fact
considered some of the factors put forward by th e EC). Thus, the EC did not lose the point as to
which was a better approach. Rather, the EC was me rely unable to assert that the approach it put
forward was the only rational approach. In contrast , this Panel is not reviewing an administrative
decision and, therefore, must make its own judgm ent about which approach is best. If the EC now
abandons its earlier position it is, to say the very least , opportunism practiced at the expense of logic
and consistency.

D. SERIOUS PREJUDICE

173. (a) For each of the three ship types at issue in this dispute, how are ship data
normally maintained by the industry, and by industry analysts?

Response

 Industry data for ships and shipbuilding is ma intained and held through detailed electronic
ship databases, including:

 - LR Fairplay Register of Ships,
 - LR Fairplay World Shipping Encyclopedia/PC Register/ Newbuilding Register,
 - Clarksons Ship Registers (available for Bulk Carriers, Chemical Tankers, Gas
Carriers (only LPG), Containerships (i ncluding multi-purpose and Ro-Ro ships),
Offshore Service vessels, Reefers, and Tankers).
 - Marbase

 These electronic databases comprise individua l ship records for completed ships and each
record comprises many detailed fields of tec hnical, commercial, opera tional and construction
information. The data in these fields is subject to availability and reflect s the type of ship and
technical characteristics. Ship type and sub-type cat egories are used in all and whilst there is much
commonality of data, there is no standard format. Sub-type data provides much greater detail than
primary or main ship type groupings and hence users of the data choos e which level is most
appropriate for their use. The following examples are provided:

Lloyds Register Fairplay
World Shipping Encyclopedia/PC Register Register of Ships
Vessel Types Ship Types
Bulker
Combination
Container
Dry Cargo
Miscellaneous
Offshore
Passenger/Ferry
Reefer
Ro-Ro
Tanker (including LNGs)
Bulk Carriers – 14 sub types
Dry Cargo/Passenger – 24 sub types (incl
containers and reefers)
Tankers – 19 sub types (including LNGs)
Offshore – 9 sub types
Fishing – 9 sub types
Miscellaneous – 30 sub types
Non-merchant ships – 4 sub types
Non-propelled – 2 sub types
Non-seagoing merchant ships – 13 sub types
Non-ship structures – 1 sub type
180 Sub Type codes approx 125 Sub Type codes approx

 The tables attached in Exhibit Korea – 130 show the groupings of ship types used in the LR
Fairplay World Fleet Statistics which is also used in LR Fairplay Quarterly Shipbuilding Statistics. In
this Exhibit, it can be seen that the chemical/o il product tanker category is included with chemical
tankers in the basic grouping of the chemical ra ther than oil tankers reflecting the significant
complexity that IMO chemical requirements bring. This contradicts the EC’s attempts to include
chemical/oil tankers with pure oil products tankers.

 Common ship-type specific informa tion held in databases includes:

 - Containerships – teu capacity, reefer slot capacity, cargo handling gear details,
 - Chemical Tankers – IMO Class, tank cap acities in cu metres, numbers of tanks,
 - LNG Ships - tank capacity in cu m,

 There are a huge number of fields covering technical characteristics which are completed
subject to data availability. Gross tonnage is a fiel d common to all ship types, deadweight is a field
common to all cargo ships and teu to all container ships. cgt values are sometimes held in some
database, cgt coefficients in others but cgt values can be calculated from GT. Certain information such
as price is generally from public sources and so may be only sporadically ava ilable and of variable
accuracy. These databases also generally hold more lim ited data on ships on order (but not delivered)
availability of technical and other details is far more spasmodic for these than for delivered vessels.

 These electronic databases form the basis of many of the statistical reports produced at time
intervals and the extensive number of fields ava ilable means that data can be summarized in many
different ways. These databases are generally ava ilable on subscription and many industry players
(shipowners, shipyards, and analysts) will have ac cess to these and use them as a key information
source.

 The importance of these databases is that the availability of information is no longer restricted
by the format of regular statistical reports and industry analysts can access and interrogate data in
whatever form is necessary to ensure accuracy and consistency.

 (b) In particular, are these three categori es of ships recognized and used routinely
for purposes of industry analysis?

Response

 The basis of most analysis is the electronic da tabases referred to earlier together with market
intelligence and detailed market know ledge and these are used to prepare certain regularly issued
reports.

 These reports routinely provide informati on based on ship types but do not necessarily
coincide with the categorization of containershi ps, product and chemical ta nkers and LNGs proposed
by the EC which explains why it is, in particular, so difficult to identify the EC’s product category for
product and chemical tankers.

 The product chemical and LNG ship types covere d by this dispute fall within the category of
tankers (as shown in the ship type classification table in the response to Question 173 – a) above),
which is a broad grouping which includes, crude oi l tankers, product tankers , chemical tankers, gas
carriers as well as specialist types (again, without an y category for product and chemical tankers). In
the LR Fairplay Register of Ships, for example, this includes the following tanker types: Beer,
Bitumen, Chemical/Oil Products, Chemical, Crude Oil, Ed ible Oil, Fish Oil, Fruit Juice, Latex, LNG,
LPG, Molasses, Oil Products, Oil Sludge, Vegetable Oil, Water, Wine.

 General type classification are, however, sometime s inconsistent with detailed technical fields
as a result of data input or reporting inconsistencies, and as such data must be looked at taking into
account the context in which information is required to avoid misleading, inaccurate or incomplete
data.
36

 In general terms, the following classifications of tankers are generally widely observed:

• Crude oil
• Oil Products
• Chemical37
• Gas Carriers – which consistently identify LPG and LNG as separate types

 As far as containerships are concerned, these are usually referred to separately to other ship
types.

 Size bands are used for almost all in-sector an alyses and also for some cross sector analyses.
Exhibit Korea – 131
 shows the use of size bands within ship types on a regular basis in various
industry publications. See the response to Question 173(c), (d) and (f) for examples of those
commonly used for reporting and analysis purposes. Common statistics are the numbers of
ships/orders, GT (gross tonnage) and dwt (deadweig ht tonnage for cargo carrying ships only) and in
the case of containerships teu capacity - this inform ation is used by shipyards and shipowners alike
and covers both new orders, orderbook and deliveries. Orderbook information is generally shown both
in aggregate terms and phased by year of delivery.

 Cgt (compensated gross tonnage) is of no inter est to shipowners or brokers, but is regularly
used for certain shipbuilding purposes, namely shipbuilding capacity, aggregated shipbuilding

36 For example, in the preparation of the Drewry reports in Exhibit Korea – 70, 109 and 110, Drewry
established through inspection of the above sources that ships with IMO chemical classes were listed as oil
product tankers and vice-versa. Thus, there was considerable inaccuracy and incompleteness in this respect.
Drewry therefore made use of various sources to maximize the accuracy and completeness of the
products/chemical tanker category.
37 Note that in Exhibit Korea – 130 , LR Fairplay include chemical/o il tankers under the category of
chemicals and not oil products which contrasts with how the EC has used this data.

demand and shipbuilding output. The choice of whic h parameter to use is determined by the purpose
for which the analysis is to be undertaken.

 Other characteristics of the vessels such as whet her they are equipped with gearing or have
reefer capacity may also be taken into account in a number of industry reports.

 (c) If so, how are they defined, and for what purposes are these categories used?

Response

 The use of ship type categories is not rigorously defined and therefore reflects the categories
used by those providing the original data as well as some data input discrepancies. The general
categories used are listed in (b) above.

 The categories as defined in (b) are used fo r an extensive number of purposes but most
regularly in reports reflecting numbers of vessels, orders or output by shipyards and shipbuilding
countries. The following types of industry analysis make use of these categories which, Korea repeats,
are significantly more complex than the three broad categories that the EC tries to portray as being
standard in industry reports:

 - Statistical reports produced at regular time intervals – yearly, quarterly, monthly etc,
including

• LR Fairplay World Fleet Statistics – Annually
• LR Fairplay Quarterly Shipbuilding Statistics
• BRL Newbuilding Enquiry – Quarterly
• Clarksons World Shipyard Monitor – Monthly
• Drewry Monthly
• Fairplay Solutions with Newbuildings – Monthly
• Clarksons Shipping Intelligence - Weekly
• Ship Price Series (See response to section (c) for details)

 - Industry reports – providing commentary and deeper insights as well as data –
examples include shipbuilding reports from analysts like Ocean Shipping Consultants
and Drewry Shipping Consultants

 - Brokers reports – with commentary and ad-hoc information on different shipping
sectors from broking houses such as Fearnleys and BRS

 Additionally, there are certain shipbuilding statistics available from international
organizations such as the OECD although not all co untries submit reports on a regular basis and the
OECD will often refer to other industry sources for data analysis purposes. Certain information is also
provided by government agencies or national industry associations/bodies.

 Examples are provided in Exhibit Korea – 131
 of sample sections of the following
publications to give an indication of the format and parameters used in such reports including the use
of size bands with ship types:

• LR Fairplay Quarterly Shipbuilding Statistics
• Clarksons World Shipyard Monitor
• Drewry Monthly
• Drewry World Shipbuilding Reports, 1999.

 (d) When analysts report on pricing tends, do they normally ref er to prices for each
category as a whole, or for subcategories thereof, broken out, for example, by
size and/or other characteristics.

Response

 A number of industry analysts report pricing trends using Ship Price Series 38, in addition to
commentary and qualitative reports. The main ones of these are:

 - Clarksons Ship Price Series and Newbuilding Price Index
 - Drewry Ship Price Series
 - Lloyds Shipping Economist

 Such price information is kept by vessel type and size. The following tables show the vessels
types and sizes for which price series informa tion is available from Clarksons, Lloyds Shipping
Economist and Drewry. Whilst other organisations do publish similar information sporadically, these
are felt to be the main regular sources of publicly available information of this nature. Exhibit Korea
– 131 includes price series data from Clarksons World Shipyard Monitor and Drewry Monthly
publications. Other price series data is published in quarterly and annual publications.

 It can be seen that in virtually all cases, ship types are broken down by size. Moreover, whilst
the individual size categories may vary, there is a certain level of commonality. Key characteristics or
qualifiers are also provided in some indices such as IMO Class for Chemical Tankers and whether a
series is for a geared or gearless ship in the case of containers.

Ship Type
Clarksons
World
Shipyard
Monitor
Lloyds
Shipping
Economist
Drewry Monthly /
Quarterly or
Annual Reports
Oil Tanker /Tankers
 VLCC 300,000 dwt 300,000 dwt 260-280,000 dwt
 Suezmax Tkr 150,000 dwt 160,000 dwt 140-145,000 dwt
 Aframax Tkr 110,000 dwt 110,000 dwt 95-105,000 dwt
 Panamax Tkr 70,000 dwt 72,000 dwt 68-70,000 dwt
 Handy Tanker 47,000 dwt
 Handymax – clean 45,000 dwt
 Products Tkr 40-45,000 dwt
Chemical Tkrs
 42-45,000 dwt IMO III 42-45,000 dwt
 37,000 dwt IMO III 37,000 dwt
 14-16,000 dwt IMO II 14-16,000 dwt
 5-6,000 dwt IMO II 5-6,000 dwt
Bulk Carriers
 Capesize BC 170,000 dwt 170,000 dwt 150-180,000 dwt
 Panamax BC 75,000 dwt 72,000 dwt 70-75,000 dwt
 Handymax BC 51,000 dwt 51,000 dwt 40-45,000 dwt
 Handysize BC 30,000dwt 45,000dwt 25-30,000dwt
Container
 Container 400 teu - geared
 Container 725 teu
 Container 1,000 teu 1,000 teu 1,000 teu - geared

38 A ship price series is where the approximate current price of a particular size of ship is reported and
recorded by industry analysts on a regular basis to monitor price trends for that type and size of ship.

Ship Type
Clarksons
World
Shipyard
Monitor
Lloyds
Shipping
Economist
Drewry Monthly /
Quarterly or
Annual Reports
 Container 1,500 teu – geared
 Container 1,700 teu
 Container 2,000 teu 2,000 teu – gearless
 Container 2,500 teu 2,500 teu – gearless
 Container 2,750 teu
 Container 3,500 teu 3,500 teu – gearless
 Container 4,000 teu
 Container 4,600 teu
 Container 5,500 teu – gearless
 Container 6,200 teu
 Container 6,500 teu - gearless
 Container 7,000 teu
Gas Carriers
 LNG 138,000cu m 140,000cu m 125-138,000cu m
 LPG 78,000cu m 78,000cu m 75,000cu m
 LPG 52,000cu m 35,000cu m
 LPG 24,000cu m 15,000cu m
 LPG 8,000cu m 3,000cu m
General Cargo
 General Cargo 20,000 dwt
 General Cargo 10,000 dwt

Other
 Ro-Ro
 Ro-Ro
 Reefer 10,000 dwt

Price Index Yes Not routinely
published

 The price information used to compile these data comes from price reports for individual ship
types from order records and, in the absence of su ch order records, from brokers’ reports regarding
‘rumoured’ negotiations.

 (e) If they provide a range of pricing info rmation at different levels of aggregation,
how are these different data series used?

 The main level of aggregation is from a range of price series into a single newbuilding index.
This is usually done as a mathematical average (or price per dwt average) and not a weighted average
reflecting the overall composition of the fleet. A single newbuilding index is a basic way of looking at
what is happening overall to shipbuilding prices as opposed to sector or size band specific trends. So
if a broad range of price series is used and pri ces are rising in some and dropping in others, the
newbuilding index trend will be m oderated by this. However, as the price indices do not cover all
ship types and because it is not weighted by the composition of the demand across different types and
sizes, it has to be used with extreme caution and interpreted in the light of industry knowledge.

 Price series are not generally aggregated to pr ovide a single trend for a particular broad ship
category because it is recognized that the differing tr ends between different size bands is a significant
factor. Whilst these trend differences may seem small in relation to overall market price movements,
they are highly significant to industry players because they demonstrate different underpinning factors

for different ship sizes. For example, there may be a particular shortage of smaller vessels affecting
freight rates and hence ordering trends for these vessels and not larger ones.

 Price series are therefore only indicators of wh at is happening for sample ship types which
will be chosen to reflect commonly used types or sizes of vessels. Where a range of sizes are given,
they are useful to see that trends can be varying differently within the same ship type. When only a
single price trend is given for a particular type this generally means that this is the most popular size
of vessel in use or that there is not a consistent e nough stream of data for another size to construct and
maintain a price series.

 Industry players are generally fully aware that price series data must always be used with
caution and care.

 (f) Please provide documentation (including in particular relevant excerpts from
the published industry reports discussed at the second meeting) showing
examples of the various breakouts to which you refer.

Response

 Examples provided, in addition to those provide d in the responses to earlier sections of this
question:

• Drewry Annual Shipbuilding Review 2000
39
• Drewry LNG Market Review 2003/0440
• Clarksons World Shipyard Monitor41
• Clarksons Shipping Intelligence Weekly.42

174. Korea argues that demand should be measur ed in numbers of vessels, and/or workload
years (i.e. order backlog) rather than compensa ted gross tons of new orders. The EC responds
that cgt is more accurate as a measure of su pply and demand, and that even measured in
workload years, demand trends are as represented by the EC.

 (a) Could each party explain the technical differences between the two measures,
and provide further detail as to why it believes its preferred measure represents
a more accurate picture of demand than the other.

Response

 Compensated Gross tonnage (“cgt”) is a measu re developed by the shipbuilding industry as a
broad brush estimate of the workload content for th e construction of ships. It is calculated by
multiplying the Gross Tonnage value of a ship by a compensation coefficient from an agreed list of
coefficients for different types and sizes of vessel s. Gross Tonnage - despite it name is in fact a
volume measure which reflects the physical volumetric size of the ship – and not a weight measure. A
copy of the OECD agreed list of coefficients is provided in Exhibit Korea – 136
 and it can be seen
that the coefficients are applied to broad size bands. Hence, the measure is a crude one and one which
takes no account of specification or design differences between similar ships.

 The measure was developed to allow cross s ector assessments for the purposes of assessing
and recording total shipbuilding activity levels and assessing capacity versus demand. Using this

39 Exhibit Korea – 132.
40 Exhibit Korea – 133.
41 Exhibit Korea – 134.
42 Exhibit Korea – 135.

measure it was possible for example to aggregat e demand for passenger ships with that for bulk
carriers or for containerships and tankers. It wa s never intended for ship-by-ship comparisons, for
detailed market demand analysis or as a mechanis m for looking at price influences by like product
vessels.

 Korea agrees that overall shipbuilding demand (i.e . cross ship type aggregate demand) is best
considered in terms of cgt when looking at the leve l of shipbuilding activity overall. Similarly, overall
shipbuilding capacity is best measured (however problematic a rigorous assessment is) in terms of cgt.
In this fashion, an estimated aggregated supply- demand balance can be considered which inevitably
needs to be a reflection across ship types. However, it is well recognized by the industry that the
supply-demand balance is not the only or dominant factor in terms of price influence.

 The difference of opinion between Korea and the EC relates to determining which sectors
Korean and EC yards compete in, what the price influences or influencers are and the interpretation of
supply-demand balance indicators. Korea believes it is necessary to concentrate on numbers of orders
and timeframe of those orders when looking to dete rmine the market strength of a yard and its ability
or likelihood to influence prices.

Orderbook phasing and timing of new Orders

 Firstly, in respect of the interpretation of supply-demand balance, the true supply-demand
balance can only be determined by looking at th e phasing of orders over the orderbook timeframe.
The level of the orderbook in itself cannot indicat e what level of supply-demand balance exists,
neither can it indicate the market share of any particular market player over the orderbook period.

 By way of example and ignoring the issue of work-in-progress: if world shipbuilding capacity
is for simplicity, sake assumed to be 25 million cgt, and the orderbook is 75 million cgt, what does
that mean? If this orderbook is phased over three y ears then in simple terms it would indicate full
capacity, if however it is phased over 5 years it represents a significant shortfall of demand against
capacity. Furthermore, without looking at the phasing of that orderbook it cannot tell us whether there
is excess capacity in the early years or whether this is simply the feathering of demand as it fades out
gradually at the ends of the orderbook following a period of full utilisation.
43

 The delivery timescale of an order has to be take n into consideration in order to determine the
true supply-demand balance for a delivery at a given date. Two orders placed in the same month but
for different delivery dates reflect different dema nd-supply balances. A highly competitive yard with
a long orderbook may not in fact be able to quote for an owner who needs a ship quickly – in this case
a less competitive yard with a shorter orderbook may quote possibly at a low price to win work (to
avoid underutilization). Alternatively, an owner with an existing order for that delivery may decide to
sell his delivery slot at a premium price. The price le vel in this situation is clearly not influenced by
the yard with the long orderbook. Timing of the orderbook is therefore clearly important. Exhibit
Korea – 132 shows that demand projections are phased over time. Exhibits Korea – 134 and 135
show that orderbook is reported in industry publications showing phasing over time.

 Similarly, it is clear that if one country has 50 per cent of the orderbook at the present time
this does not indicate that they will eventually have delivered 50 per cent of the output, it depends
over what period of time their orderbook is spread in comparison to other countries. It is a recognized
fact that the timescale of orderbooks and the lead time on orders can vary significantly from country
to country. Korea believes theref ore that in considering the curr ent orderbook it is always necessary
to consider the time horizon of this and how this can vary from yard to yard and country to country.
This is why the EC’s assessment of market position in Attachments E – 2 and 6 of the EC’s responses

43 In reality of course it is further complicated by what proportion of that orderbook is already under
construction and over what period of time this will be delivered.

to the first Panel questions based on a snapshot situ ation in January 2004 gives no accurate picture of
the actual comparative market strength of any shipbuilding country or individual shipyard.

 The level of new orders or order intake is a cl earer indication of who is actively contracting at
a particular time and hence who is actually winning c ontracts at a particular price level. If a country
or yard has a full orderbook for e.g. the next three years, it may decide not to take on further orders
and therefore may cease winning orders in that year. In this situation, it is likely to have a high share
of the orderbook, but as it is not actively signing up new orders it is difficult to see how it can be a
major influencer of prices at that time. Korea therefore does not agree that an orderbook is a
meaningful indicator of who can influence prices.

Use of cgt versus number of vessels

 Consideration of the market in cgt without size bands means that it is not possible to
differentiate between a single order for a large ve ssel and multiple orders for smaller vessels – Korea
believes that these situations need to be considered differently. For this reason, Korea believes that it
is the number of orders placed at a particular time for ships of a given type and size that needs to be
considered. To provide an example: a workload of 60,000 cgt in the container sector could, without
any further qualification, equally represent one or der for a 7,500 teu ship or 12 orders for 500 teu
ships or some other combination.

 To understand why Korea believes it is the numbe r of orders within a particular size range
that should be considered to assess market share a nd influence, rather than the total workcontent
across all size bands, we offer an example. Consid er the situation when an owner wishes to place an
order for say a 7,500 teu containership. This is a large vessel measuring around 320m in length and
43m in width and many shipyards will not have su fficiently large building facilities to construct a
vessel of this size (although they may regularly build smaller container ships that are within their size
capability). The owner will therefore be considering on ly those yards that have the physical capability
to build such a large vessel, and of these there will be a list of yards which have experience in such
vessels and which are considered to be most comp etitive for this type of vessel – these will be the
preferred yards.

 At the same time another owner is looking to place an order for a 500 teu containership, this
is a much smaller ship at around 120m in length and 20m in width. There are a much larger number of
yards with smaller facilities that will be capable of building of and have experience in building such
vessels. Whilst the larger yards can also build this size of vessel it is not economic for them to do so
as it results in poor utilization of the dock or building berth (to be partially occupied by such a small
vessel) and other production facilities. Furthermore, the larger yard knows there will be much higher
levels of competition for this ship. So it is highly unlikely that either the owner or the larger build
yards will be seriously contemplating the placing/winning of this small ship order at a larger shipyard.

 In terms of end use, the 7,500 teu containers hip will be used on the major long haul high
volume container routes, typically running East – W est, between large dedicated container ports with
highly sophisticated in-port container handling cran es. The smaller ship will however be operating on
coastal or feeder routes on low volume trade routes, typically between smaller ports that do not have
dedicated specialized container handling facilities. It would not be physically possible for the larger
ship to access the smaller ships’ ports and clearly on a low volume route it would run nearly empty
and have no on-deck cranes to unload its cargo. Th e smaller ship, could operate on the bigger ships
routes. However, its operating costs would make it highly uneconomic, its speed would mean it could
not maintain the schedule and of course it would need lots of these ships to handle the total cargo
volume.

 In this scenario, the smaller ship will be built in different yards to the bigger vessel and will
operate on different routes. So with no supply or demand side commonality it is difficult to see how

the price of one could depress, suppress or inflate the price of the other. The consideration of cgt,
rather than numbers of vessels, without reference to size bands would assume that not only would the
order, and hence builder, of the larger ships have an impact in the separate market of the smaller ship,
but its impact would be around 12 time greater (with a value of around 60,000 cgt) than that exerted
by the builder of the smaller vessel (with a value of around 4,500 cgt). Why would an order for a very
large vessel placed with a yard that would not build the smaller vessel influence the price asked by the
smaller yard that could not build the larger vessel?

 In contrast, the consideration of numbers of orders placed within broad size bands, recognizes
the supply side and demand side commonality of su ch vessels, which will operate on similar routes
and be built in yards with similar size and experi ence capability. It is therefore possible that similar
factors will affect the prices of these vessels whethe r they be the supply side factors e.g. shipyard
supply-demand balance or the demand side factors e.g. freight rates. In this situation however it is also
important to consider the timing of both order and delivery.

 One final note is that the EC’s point th at considering small and large vessels purely on
numbers leads to a small fishing boat yard becoming the price leader, is clearly erroneous. Firstly, all
analysis on the basis of numbers is being looked at within a given ship type and, secondly, it is being
considered in terms of size bands, and so orde rs for small fishing boats will not come into
consideration when considering price influences for containerships be they large or small.

 Therefore in summary in simply looking at a ggregated demand-supply balance then cgt is the
appropriate measure, and to assess levels of utili sation, the orderbook must be phased over time to
compare it with capacity.

 In terms of determining who or what influences prices, it is necessary to consider the
transactions that are taking place rather than the vol ume of work, the size bands that different yards
are active in, and the level of ordering activity that is going on at the current time. It must be
remembered however that those orders may be be ing placed on different timescales and hence against
different supply-demand balances.

 (b) Which measure is used by industry analysts and the industry when analyzing
demand trends?

Response

 (i) Shipbuilding demand is driven by two f actors; Firstly replacement, i.e.: demand for
ships going out of service and, secondly, expansion demand due to projected increase
in cargo-miles (i.e. cargo volumes x shipping distances). Demand for cargo ships,
therefore, has to be assessed in terms of cargo carrying capacity and the base
measures are, therefore, cargo measures such as deadweight, teu, or cubic metres of
gas, depending on which ship type is under consideration. This demand then has to be
converted into the numbers and sizes of ships. Exhibit Korea – 132
 shows examples
of ship type specific demand projection in cargo volumes and size bands.

 To calculate aggregate demand this has th en to be turned into GT demand by each
ship type and size and then again into cgt by applying the relevant compensation
factors to the GT volumes. Shipbuilding demand cannot be projected in cgt directly.
Exhibit Korea – 132
 shows aggregated shipbuilding demand projection in cgt and
numbers of vessels.

 (ii) Monitoring of shipbuilding output, howe ver, is generally done in terms numbers of
vessels, GT and deadweight for most cargo ship types and also in terms of teu and
CU metres for containerships and LNG and LPG gas carriers. Exhibit Korea – 131

shows examples of dwt, teu and cu metres as well as numbers of ship/orders.
Shipbuilding output is also monitored in cgt and this is done by applying the
appropriate compensation coefficient for the ship type and size to the GT value.

 (iii) Shipbuilding capacity is assessed in cgt and the OECD agreed methodology for doing
this is to assess yard capacity based on th e ship types and sizes currently being
produced and reflecting current productivity or delivery performance in terms of the
time taken to construct such ships types. Hence a yard or country’s capacity will alter
if it alters the type of vessels that it ge nerally builds or its performance in building
those.

 (iv) Industry analysts compare shipbuilding capacity and projected capacity in cgt with
actual shipbuilding output and projected shipbuilding demand in cgt in order to
consider the supply-demand balance and capacity utilization.

 Whilst shipbuilding output and projected demand can be considered by ship types,
shipbuilding capacity cannot be segmented on this basis because yards may build a
limited range of different ship types. Ship type specific supply-demand balances
cannot therefore be developed.

 (v) Very little if any analysis is done into who influences prices and so there are no easy
benchmarks to compare against. The analysis of price tends to be either a simple
indication of what is happening to the price rather than why it is happening or simply
offers qualitative commentary.

 Korea reiterates that measureme nts used in the industry to reflect demand such as cgt cannot
be transposed to determine market position and the capability of yards to influence prices. There are a
range of supply and demand side factors or external factors that can influence prices. Prices can be
influenced by any or all of these (and other) factors at any particular time. Supply-demand balance is
not the only or necessarily dominant factor. Analysis of price trends may tend to look at the various
different factors, and the basis of analysis will reflect that perspective. However, in this situation it is
not looking at the impact of a particular yard or group of yards but simply the contributory effect of
one factor on ship prices. Factors such as stee l prices and exchange rates are not sector specific,
whereas factors such as freight rates do have sector specific dimensions. Freight rates and ship prices
do however show different trends within different size bands within a particular ship type.

 In the previous section an explanation is provided to explain why Korea feels that it is more
appropriate to consider the numbers of orders, ship type and size bands rather than simply the ship
types and cgt volume. In the following question Korea explains why market shares should be
considered in similar terms of considering price suppression or depression allegations.

 (c) If both are routinely used, please ex plain the circumstances in which they are
used, and provide examples from independently prepared sources (the published
industry reports discussed at the meeting, OECD documents, etc.).

Response

 Numbers of ships, deadweight, GT and cgt ar e only routinely used for shipbuilding demand
projection and output monitoring a nd not for analysis of price influences. Various examples have
been provided showing output monitoring reports and order volumes and orderbooks.

 Exhibit Korea – 131
 shows orderbook, completions and new orders by numbers of vessels
and cargo measures (deadweight, teu and cu metres) according to ship type and size.

 Exhibit Korea – 134
 shows ship deliveries reported by number of vessels, deadweight and
cgt in for different ship types and size bands, and with orderbook (future deliveries) phased over
timescale.

 Exhibit Korea – 135
 shows orderbooks by ship type and size bands measured in numbers or
ships and cargo volumes and with orderbook delivery phased over timescale.

175. In response to EC arguments concerning ma rket share as a factor in price leadership,
Korea variously states that market share does not demonstrate price leadership, but also that
Korean yards’ market shares are too small for them to be able to influence prices. Both sides
thus seem to view market share as somehow relevant to the question of price leadership.

 (a) How (on the basis of what sort of concrete data and analysis) can price
leadership be determined/established?

Response

 Korea considers and has consistently taken the position that the market share of the allegedly
subsidized shipbuilders is one of the indicators to take into account in determining whether it is the
alleged subsidies that have a price depressive or suppressive effect (refer to Korea’s response to the
Panel’s Question 91(d) at pages 46 and 47) but is no t solely sufficient to show a price depressive or
suppressive effect due to the subsidies themselves. The allegedly subsidized Korean shipbuilders
alone did not occupy such a market position that they could lead prices for each of the product
segments concerned because the EC or other shipbuil ders had comparatively equal or stronger market
positions or because of fluctuations in market sh ares (refer to Korea’s First Written Submission at
pages 228 to 231 as well as its Second Written Submission at pages 105 to 110).

 In order to determine whether subsidies have caused any price depression or suppression
through the allegedly subsidized yards acting as pr ice leaders, Korea submits that all the steps
described in its response to Panel Question 91 shoul d be followed. The concrete data and analysis
indicated therein should be compiled and assessed so as to determine whether it was the alleged
subsidies that caused price depression or suppression, i.e. including the compilation of the demand
and supply factors, the effect of prices of other non-subsidized shipbuilders or the effect of the prices
of the subsidized shipbuilders.

 (b) What role in such an analysis would levels and trends in market shares play?

Response

 In Korea’s view, levels and trends in market share play a dual role as explained in its response
to Question 91(d), i.e.:

 - if, with respect to each like product, there are a number of non-subsidized
shipbuilders which collectively have sufficien t market shares to be able to lead or
substantially influence the 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.

 - if with respect to each like product, the allegedly subsidized shipbuilders have
sufficient market shares to be able to l ead or substantially influence the setting of
market prices, one should proceed to comp are the prices of the vessels sold by the
allegedly subsidized shipbuilders with t hose of the non-subsidized shipbuilders to
determine whether the subsidies have ha d price depression or suppression for their

effect. If the market share of the allegedly su bsidized shipbuilders is insufficient or if
these shipbuilders have not maintained a substantial market share consistently, no
such price comparison need to be made as it will be impossible to establish a causal
link of sufficient strength between the existence of the alleged subsidies and any price
depression or suppression. Moreover, this exerci se requires a detailed cost analysis to
compare any cost advantages to the size of the alleged subsidy and, in turn, a
comparison to the other prices offered. The onl y alternative is a “but for” analysis to
the effect that but for the subsidy the ya rd’s capacity would have completely exited
the market. In fact, that was what the EC was trying to rely on exclusively before it
improperly attempted to reintroduce price undercutting again.

 (c) How large a market share would a given market participant need to be able to
exercise price leadership.

Response

 No simple figure can be given as to the thres hold which is sufficient for a market participant
to be able to influence prices. This will depend on the product and the market concerned. In the
present case of commercial vessels, the relative mark et share of all market participants and,
separately, of the allegedly subsidized shipyards mu st be determined over a sufficient period of time
and for each product separately. A relatively equa l or stronger market share of non-subsidized
participants will be a strong indicator that the a llegedly subsidized shipyards cannot have exercised
price depression or suppression. In addition, in a highly fragmented market characterized by many
market participants, a very low market share may be sufficient whilst in other cases, when the number
of market participants is relativ ely small as in the present case, a much higher market share will be
required to exercise price depression or suppression.

 The period of time over which market share is held should be sufficient in order to determine
that there is an established market position; a shor t-term increase in market share as such will be
insufficient to establish a price lead ership in terms of price depression or suppression. In addition, in
the case of an inquiry into subsidies, market shar es must be investigated over a period of time
preceding the bestowal of the alleged subsidies and th ereafter in order to determine whether there is a
timewise coincidence between the occupation or th e maintenance of a market share of sufficient
strength and the granting of the subsidies.

 It is on this basis that Drewry has drawn its conclusions on the possibility for the three
allegedly restructured yards to depress or suppress prices of the EC like product vessels in its report
submitted as Exhibit Korea – 110.

 In Exhibit Korea – 115, Korea summarized the findings of the EC’s consultant FMI from
their ‘Background report – Detailed evaluation of key price movements’ dated August 2003
(Annex 5a of the Annex V responses). Whilst Korea reserves its position in respect to a number of
findings of this report, it is clear from this that th e EC’s own interpretation of price leadership was in
no way consistent with the market share of the alleged price leaders. It is also noted that in six out of
seven categories FMI identified that Korea was not the lowest price competitor.

IV. TO THIRD PARTIES

A. ITEM (J) I ITEM (K), FIRST PARA.

176. The parties disagree on whether or not AP RGs and PSU constitute export credit guarantees
and export credits respectively. The EC submits that they do not, whereas Kore a asserts that they do.

Would your export credit agency treat APRGs as export credit guarantees, and PSLs as export
credits? Please explain and provide relevant documentation.

KOREA’S COMMENTS WITH REGARD TO

ATTACHMENT EC – 8
ATTACHMENT EC – 9
EXHIBIT EC – 146
EXHIBIT EC – 147

1. Comments with regard to Attachment EC – 8

 The EC’s detailed points on the Drewry report submitted in Exhibit Korea – 70 run to some
20 pages of comments from which it is simply not possible to derive coherent lines of argument or
comment. Many of the points concentrate on irre levant issues, are repetitive or not intelligible.
Beyond these issues on which Korea disagrees but whic h it considers are not of prime relevance, the
following issues are important most of which are, in fact, reflected in the Panel’s questions to which
Korea responded in the present document or on which it commented when the question was addressed
to the EC. These are the following:

 (i) The fact that no accurate assessment on price depression or suppression can be
prepared with regard to containerships , product and chemical tankers and LNGs
without a strict like product identification taking into account the size and the use of
the vessels. Korea has shown in its responses to Panel Questions 173 that
shipbuilding industry publications do not always identify separately the three product
categories referred to by the EC (in partic ular, the product and chemical tankers) and
that industry publications do most often identify separately the different sizes of
vessels as well as certain other characteristics (such as gearing or reefer capability)
including when prices are reported.

 Korea confirms that there are clear di fferences in end-uses between the like product
vessels that were identified in the Drewry report in Exhibit Korea – 70 as elaborated
on in Exhibit Korea – 108. In this regard, th e EC’s claim that the end use of a vessel
can change during its lifetime is not grounde d in fact: post panamax container vessels
will not change to be used as small coaster feeders no more than oil products will be
transported in chemical tankers.

 (ii) The fact that the market strength of th e allegedly subsidized Korean yards must be
assessed based on the number of vessels ordered with them over a representative
number of years preceding and following their corporate restructuring. Korea has
elaborated on its response to Panel questi on 174 on the grounds that render CGT and
the orderbook on 1
 January 2004 inadequate to assess market strength such that the
yards could influence prices. CGT is consid ered the proper standard of measurement
for overall shipbuilding demand and capacity thus allowing an assessment on the
aggregated supply-demand balance. However, as the measure is developed for an
across sector assessment but not for ship-to-ship comparisons. Consideration of the
market in CGT without size bands does not allow to properly assess market strength
for price assessment purposes and is not used for this purpose in the industry.

 (iii) The fact that the allegedly subsidized Korean yards and the EC yards compete as
regards different like product vessels. A detailed Drewry report has been submitted in
Exhibit Korea – 110 showing for each like product, the number of vessels sold by the
EC and the allegedly restructured Korean yards. This clearly indicates that these
Korean yards have primarily sold like product vessels that were not or hardly sold by
the EC yards and this already during the period well preceding the bestowal of the
alleged subsidies.

2. Comments with regard to Attachment EC – 9

 The EC started its Attachment – 9 based on the Attachment 4 to Korea’s Second Written
Submission. However, as the recalculation provided in the EC Attachment – 9 is incorrect, it does not
prove that a benefit was conferred. The fallacies ar e the following: (i) the EC erroneously equated a
corporate bond rating “C” with a KEXIM credit rating “SM”; (ii) the EC misunderstood the structure
of KEXIM interest rates; and (iii) the EC did not reflect the early repayments by DSME of its debt.
Korea will discuss each issue briefly.

(i) Erroneous equation “C” with “SM”

 As detailed in Exhibit Korea – 91, the cor porate bond ratings by outside rating agencies and
KEXIM credit ratings are incompatible. Not only ar e the underlying risks different, but the grading
factors are as well. Korea would like to note that such incompatibility resu lts in “mismatches” of
KEXIM credit ratings and bond ratings shown in Ex hibit Korea – 92. Indeed, while KEXIM graded a
company with P4, P5 or SM, a credit rating agency rated the company’s bond with rating “C”. The
similarity on rating definitions only cannot justify the inherent distinctiveness of the ratings.

(ii) Misunderstanding of KEXIM interest rate structure

 As submitted in Korea Response to Panel Qu estions 47 and 73 and Exhibit Korea – 93,
KEXIM interest rates were determined by adding up the base rate plus the then applicable spreads
(target margin, credit risk spread, mark et adjustment rates, etc.). When Yangdo Dambo was provided,
the “credit risk spread” was decreased by 50 per cent. Notwithstanding this, the EC appears to
calculate the rates by adding up the base rate plus 50 per cent of credit risk spread only, which is
incorrect. For all transactions referred to in EC Att achment – 9, KEXIM determined the interest rates
based on “WNPRI 6month” the base rate plus spread of 1.96. The spread is composed of a credit risk
spread of 0.15 (50 per cent of 0.3 which was the then applicable credit risk spread) and an adjustment
spread of 0.46. (See page 2 of Exhibit Korea – 93)
44

(iii) Early repayments

 Also, DSME made early repayments of its PSLs for projects 000145P and 000146P. This
resulted in small amounts of interests incurred ( See Attachment – 4 to Korea’s Second Written
Submission). While the EC did not have this info rmation regarding early repayments by DSME, it
should nevertheless have been more cautions and raised the issue after reviewing Attachment
Korea - 4.

3. Comments with regard to Exhibit EC – 146

3.1 Contrary to FMI’s statement in Section 2.1 of the Exhibit EC – 146, Korea does not qualify
the cost modeling done by the EC team as being lightweight. Certainly, a significant amount of efforts
has gone into the calculations made but it remains as the EC claims itself that the cost modeling
process is based on “assumptions” in which shipbuilding costs have been estimated or assumed to be
at a certain level. No amount of effort and resear ch will fundamentally alter the inherent accuracy
limitations of the model. The inaccuracy of th ese assumptions has been demonstrated in Exhibit
Korea – 108 in which KPMG has made a cost analys is of certain LNG carriers built by DSME. This
report shows that the actual costs amounts and th e FMI assumptions/estimations are strikingly
different primarily as regards the following:

44 Korea corrects that the commitment dates for all projects concerned were 21 December 2000 , not
21 December 2001. The “adjustment spread” had been effective until it was replaced with the “market
adjustment rate” in June 2001.

 - material costs
 - labour cost
 - license fee
 - overhead and SG&A
 - debt service costs
 - non-operating expenses.

Hence, these estimations, proven wrong with the ac tual figures, cannot be the basis for a conclusion
that the costs of the allegedly subsidized Korean ya rds have increased to such an extent that prices
should have increased and, hence, that price suppression or depression existed. Furthermore the
inherent inaccuracy of the model has been demonstr ated by the level of revisions/recalculations that
the EC/FMI have already made in their detailed reports. As a matter of fact, nowhere do the EC or
FMI indicate the link between the results of the cost model and the conclusion that the overall costs
increased since the time when FMI started preparing the cost model.

 When describing the approach to the treatment of overhead costs in the model, it is stated that
these are spread evenly (t he basis of allocation is not however discussed) across the full output of the
shipyard and states specifically: “If this is not the case it would have to be shown that some
proportion of the workload is capable of contri buting more than its average share of overhead
burden.” This seems curious when elsewhere, EC a nd FMI have gone to considerable effort to then
separate out that certain investments and overhead cost s must be specially attributed to LNG, and has
then struggled to come up with sensible ship seri es numbers over which to attribute this for Korean
yards in comparison to EC yards. Furthermore elsewhere the EC has made strenuous efforts to
suggest that shipyard supply has full substitutability and that any yard can build any ships type but it
simultaneously advises the hearing that of the special skills and investment needed for LNG and that
‘not any yard can build an LNG ship’. In fact, it is the EC and FMI’s arguments that seem to change
dramatically depending on what it wants to prove and this is all within the confines of this case.

 The EC and FMI try to portray it as if Korea a nd Drewry had omitted to take depreciation and
debt-servicing costs into account when concluding th at Korean costs decreased instead of increased.
However, in the first place, the EC and FMI did not show that depreciation and debt-servicing costs
increased over the relevant period of time in order to substantiate their finding that prices should have
increased and, in fact, as mentioned in Exhib it Korea – 108, DSME by paying its debts early,
decreased its debt-servicing costs. If debt-service cost s have not increased and have in some instances
been significantly decreased by early repayment, th e effect on overall costs will be at worst neutral
and at best an improvement. Certainly there has been no fundamental reduction in throughput
volumes that would in any way have increased the cost per unit output, if anything, the reverse would
be the case.

 Reference is also made to Korea’s response to Panel Question 125(b) in the present document
where it is explained that debt-service costs tend to be very specific to a particular yard’s situation
and, hence, not amenable to general trend indicators. This fact is evidenced by the situation at the
former East German yards of Kvaerner Warnow Werft, Aker MTW and Volkwerft Stralsund where
the state-funded investment was written-off and th e new owners inherited the newly constructed
facilities at a fraction of their cost and hence debt- service cost.. In any event, Korea considers that it
has given full evidence of the fact that cost econo mies achieved by the thr ee allegedly subsidized
yards have been significantly greater than price decre ases and that, as a result, there is no substance to
the EC’s allegation that increased costs should have led to increased prices.

3.2 With regard to FMI’s assertions on the factor s that have an influence on prices in the first
paragraph of Section 3 of the FMI report in Exhibi t EC – 146, Korea refers to its response to Panel
Questions 124 and 125 in the present document in which it also addresses the allegations on capacity
in the second paragraph of this Section of the FM I report. In particular, Korea reiterates that the

measurement of capacity in CGT and based on a snaps hot for May 2004 yields an arbitrary result that
does not reflect the true market position of the thr ee allegedly subsidized yards. First, as the EC
alleges that price depression or suppression was ca used to container ships, product and chemical
tankers and LNGs through the allege d subsidies, the market position of the allegedly subsidized yards
must at the very least be specified in these th ree vessel categories and not include other vessel
categories as well (refer to the two last sentences of paragraph 2 of Section 3 of the FMI report).
Second, no assessment on price depression or suppr ession and the vector that can lead to price
depression or suppression can be made without strict assessment of the like products involved and
assessment for each of the like products separately. Korea has demonstrated in its earlier submissions
and in the present document that there is no glob al like product for cont ainerships, product and
chemical tankers and LNGs and that significan t differences exist within these broad categories
including as regards the use of vessels. Hence, the market position of each of the allegedly
restructured yards must be determined for each like product vessel separately. Finally, for the reasons
set forth by Korea in its responses to Panel Questi ons 173 and 174 in the present document, the use of
CGT and orderbook yields no accurate reflection of th e true market position of any shipyard at any
given point in time.

3.3 As regards the lumping together of various Ko rean shipyards whether allegedly subsidized or
not, Korea has reiterated the reasons this is inco rrect in its response to Panel Question 127 in this
regard. Not only is such lumping of all or several of the Korean shipyards not supported in law but, in
addition, it is pointless in practical terms as the Korean shipyards that are not alleged to be subsidized
are in exactly the same competitive position as non-Korean shipyards.

3.4 FMI persists in expressing the view that pri ce depression or suppression must be assessed for
so-called coherent sections of the industry en bloc in the fourth paragraph of Section 3 and refers to
the 1999 report of Drewry Shipping Consultants. In this regard, in the first instance the tenets of price
depression and suppression for this case are driv en by the specific legal aspects of the SCM
Agreement, which is not something which is, or ever would be, addressed in a general industry
publication. In fact, in some places EC and FMI app ear to be suggesting that price effects tend to be
universal on an industry-wide basis (i.e. all shipbui lding sectors), and in this they are straying into
areas that are outside the scope of this case, in others they seem to say that they are consistent against
‘coherent sections’ (a concept which they do not explain). In any case th is is simply not correct – in
fact, in the Appendices to Drewry’s 1999 report (tha t was selectively invoked by the EC) a table is
included which shows the different price trends of different ships types, sizes and specifications.
Inspection of this data clearly demonstrates that prices have not moved in the same manner across all
sectors and size segments (this Appendix is included in Exhibit Korea – 131 of the responses to Panel
questions). Furthermore in the basic shipbu ilding demand assessments (Forecast newbuilding
deliveries) also contained in the Appendices to these reports, the demand is clearly indicated on a ship
type and size band basis, with no concept of a crude ‘en bloc’ approach.

3.4 Significant evidence that there is no genera l supply substitutability as claimed by FMI has
been provided by Korea including in Exhibit Korea – 108 and in the responses to the Panel Questions
126 and in the comments to Question 159. Since many years including the period well preceding the
bestowal of the alleged subsidies, the EC yards have specialized in specific vessel categories and sizes
thereof. Their own statements in their financial st atements and the specialized press indicate that this
was a conscious and rather permanent move.

3.5 General price indices (which, in fact, refl ect market anticipations and not actual price
developments) for the shipbuilding industry as a w hole or broad vessel categories are not suited to
address the specific legal question of Article 6.3(c), i.e. whether the subsidies had price depression or
suppression for their effect for the like product vessels. In particular, Figure 1 presented in Exhibit EC
– 146 is not suitable for the assessment under Article 6.3(c) as it reflects a relatively short period and
a distant fraction of the period after the bestowal of the alleged subsidies. In addition, Korea has noted
that FMI itself admits that “there are clearly di fferences in elasticity depending on specific conditions

in the market sector concerned”. Korea reiterate s that it is precisely these differences that are
important and must be grasped in order to dete rmine whether it is the subsidies that had price
depression or suppression for their effect. A general tre nd as such is not a standard for the assessment
under Article 6.3(c).

4. Comments with regard to Exhibit EC – 147

 The situation involved in the present dispute settle ment procedure is subject to a strict legal
framework that is totally outside the purview of an y general industry publications as is the case of the
1999 Drewry report referred to in this Exhibit. Howe ver, much more importantly, the excerpt selected
by the EC is extremely selective and does not provide an accurate portrayal of a report that is over 220
pages. In particular, the EC omits to make referen ce to the following issues th at are also addressed in
the report:

 - No reference is made to the significant c overage (4 pages) of EC subsidies and other
direct interventions in the shipbuilding market that is also present in the report;

 - No reference is made to the statements made in the report regarding the Chinese and
Japanese influences on capacity growth including “… the Japanese responded by
removing production constraints which toge ther with improvements in productivity
boosted their capacity by as much as 20 per cent … the Chinese have also more than
doubled their capacity during the 1990s”;

 - The use of CGT as a measure is clearly explained in relation to its relevance to
volume of work content involved in newbuilding, not interpretation of price
influences and influencers;

 - The report clearly differentiates chemical from products tankers, and clearly analyses
ship types within size bands which is consis tent with Drewry’s approach in Exhibit
Korea – 70. The EC is, therefore, incorrect to state that it refers to three main sectors
of tankers, container ships and bulk carriers, and that no subdivision of this is made;

 - No mention is made of the fact that Drewry produces other regular specialist shipping
publications that analyze chemical, LNG, dry bulk and products tankers with
substantial detail of size, sub-categori es, ownership, trading patterns, etc.
Additionally, no reference is made to the later Shipbuilding Report published by
Drewry in Nov 2000.

 - The headline item on newbuilding prices st ates “currency devaluation, failing steel
prices and advances in technology are the main reasons why newbuilding prices fell
by as much as 20 per cent in 1998”;

 - The report does not offer any comments on the presence or otherwise of price
depression, suppression, lost sales or serious prejudice, and it is not clear why
selective references are being made to support the EC’s case on this;

 - Drewry does not routinely publish a general newbuilding price index recognizing the
danger of using such figures in isolation or without caution;

 - No reference is made to the clear stat ement that it was Japan that was clearly the
leading shipbuilding nation – and it is, ther efore, difficult to see how it is Korean
yards that could be considered price dominant;

 - If the report states that Korean shipyard s globally are competitive, that is not an
indication of any price depression or suppression by the allegedly restructured yards
caused by the alleged subsidies.

 The EC and FMI’s reference to this excerpt has been used to imply that excess capacity has
been solely caused by Korean yard s, when very clearly the report ma kes reference to capacity growth
(as a result of performance, new facilities and de-l imitation) in many areas, specifically Japan and
China as well as Korea.

ANNEX G-5

RESPONSES OF KOREA TO SUPPLEMENTAL QUESTIONS FROM
THE PANEL AND COMMENTS ON THE SUPPLEMENTAL
QUESTIONS TO THE EUROPEAN COMMUNITIES

(9 July 2004)

I. TO KOREA

A. APRG/PSL

177. Korea argues that country risk accounts fo r the difference in premia charged on APRGs
by foreign banks as compared to Korean banks . What specific examples of foreign issued
APRGs are there in which not only the existence but the amount of country risk premium can
be shown, and what specific examples of Korean- issued APRGs are there in which the absence
of country risk premium can be shown?

Response

 As described in Exhibits Korea – 86a and 86 b, when setting the APRG premia foreign APRG
issuers separately consider the country risk of Korea on top of the general risks (financial and
performance risks) of the shipyards. However, give n that the foreign APRG issuers treat the amount
of country risk premium as strict business confidential information, information on specific amount of
country risk actually applied by foreign banks is not readily accessible to the Government of Korea.
Nonetheless, Korea hereby submits Exhibit Korea – 140
 which indicates that [BCI: Omitted from
public version].

 As for the Korean-issued APRGs, Korea refe rs the Panel to Korea’s response to Panel
Question 58 wherein Korea provided three exam ples which are clearly showing the absence of
country risk premium. Korea reiterates below these examples for the convenience of the Panel.

 [BCI: Omitted from public version.]

178. Concerning the examples submitted by Ko rea in Exhibit KOR-83 of instances where the
buyer imposed requirements concerning the issuer of the APRG in question, it appears that the
buyers were seeking guarantors with strong credit ratings/financial soundness. What is the
relevance of these examples to the question of whether or not KEXIM was charging market
rates on its APRGs?

Response

 Korea submitted that information to demons trate the material distinctions between the
positions of the foreign APRG issuers and Korean issuers of APRGs. The foreign issuers were used in
the limited period of the Asian financial crisis (s ee Exhibits Korea 86a and 86b) due to the specific
request by certain foreign (EC) buyers. Because the requirements of the customers were different and
the situations of the issuers were different, these isol ated and statistically irrelevant instances were not
representative of the general conditions pertaining within the Korean market. Among other things, due
to the strong credit rating of the foreign issuers, th ey were considered bette r guarantors and therefore

could charge higher premia. They also had to refl ect the country risk premium which was relatively
high during the financial crisis. Moreover, as Ko rea submitted in paras 207 through 216 of its First
Written Submission, in order for certain rates to be eligible for any market benchmarks, not only such
rates must have comparable terms and conditions including comparable collateral, but also such rates
have to constitute a statistically representative number of transactions. Because APRGs extended by
certain financial institutions are rare and exceptiona l due to empirical differences, the rates of such
APRGs cannot constitute a comparable and objec tive benchmark. Please also refer to Korea
Response 47 to Panel Questions for further details.

179. The “County Risk Management” Comptroll er’s handbook of the US Comptroller of the
Currency, attached as Exhibit KOR-84 states at p age 3 that “a domestic borrower’s credit risk
might increase because of significant export receivables from a foreign country...”. Does this
passage not suggest that a Korean bank issuing an APRG to a Korean shipyard would bear a
certain country risk because the transaction was an export transaction, i.e. involved “export
receivables from a foreign country”?

Response

 Nowhere does the handbook imply that the country risk can be applied to “every” domestic
counterparty that is involved in “an export transac tion”. Rather, the handbook itself establishes that
the country risk may be exceptionally applied to transactions with domestic counter parties under very
limited circumstances, e.g., where the business of a domestic borrower is heavily relying on the
businesses associated with that particular foreign c ountry with respect to which the country risk is
assessed.

 The handbook confirms that the application of c ountry risk to domestic transactions is not a
general practice. Along the line, it states that the country risk fact or may be applied to domestic
counterparties “where appropriate when assessing the creditworthiness of domestic counterparties”,
and states that “country risk would be pertinent to exposures to US-domiciled counterparties if the
creditworthiness of the borrower
 or of a guarantor …is significantly affected by events in a foreign
country.” (see the third full paragraph on page 2 of the handbook et. seq.; emphasis added).

 This explanation is unde rstandable because, in the situations where the business of a borrower
(or guarantor) is heavily relying on transactions associated with a specific foreign country, events in
such a foreign country will directly and significantly affect the general credit risks of the borrower (or
guarantor) which in turn will significantly and dir ectly affect the creditworthiness of the borrower (or
guarantor). Only in such specific circumstances, would it make sense to take into account the country
risk of such specific foreign country when assessing the creditwor thiness of such borrower (or
guarantor).

 By contrast, no Korean shipyards deal exclusively with a specific foreign country such that
the events in such foreign country would significan tly and directly affect the creditworthiness of the
Korean shipyards. Further, it should be noted that among the buyers of Korean ships, the absolute
majority of buyers are coming from the so-calle d “High Income OECD countries”, e.g., the EU,
Norway, US and Japan as defined by the World Ba nk. No foreign financia l institution would apply
country risk with respect to counterparties from su ch countries as they do not bear any country risks.
For reference, under the Arrangement on Officially Supported Export Credit, the High Income OECD
countries are classified as “category 0” countries, to which no country risk is assigned ( see Article 24
b) and c) of the OECD Arrangement).

 Moreover, even if a Korean shipyard were expo sed to the country risk of a particular foreign
country by retaining significant “export receivables ” from the buyers in that foreign country, the
country risk it bears is the country risk of that particular “foreign” country, and not the country risk of

“Korea”. In other words, in such case, any Korean banks issuing APRGs to such Korean shipyard
would apply the country risk of the said “foreign” country, not the “Korean” country risk.

 In light of the above, a Korean bank issuing an APRG to a Korean shipyard would not bear a
country risk merely on the ground that a transac tion was an export transaction (i.e. involved “export
receivables from a foreign country”). Korean yards do not bear a country risk because their export
receivables are not from a foreign country that ca rries any noticeable country risk, but from High
Income OECD countries. Even if they were exposed to the risk of a particular foreign country, the
country risk that the Korean banks issuing APRGs to Korean shipyards must consider is that of a
particular “foreign” country, not the country ri sk of “Korea” which is at issue in the present
proceeding.

180. Further on country risk, was it not the case that during the period of the financial crisis
in particular, the Korean domestic banks were faci ng similar “Korea risks” to those that would
have been faced by foreign banks (for example, ri sk of expropriation of assets, risk of currency
manipulations, etc.)? Please explain in detail.

Response

 Country risk by definition is the risk that economic, social, and political conditions and events
in a foreign country will adversely affect an institution’s financial interests ( see also the response to
Panel Question 179). In other words, it is the risk that a country will not be able to honour its external
financial commitments due to the occurrence of cert ain conditions or events. Therefore, in assessing a
country risk, the likelihood of whether a country will service its external debts is to be measured and
analyzed. As such, the country risk is the factor to be examined, reviewed and considered by a party
outside the country concerned. As a result of a forei gn party’s (e.g., foreign APRG issuer) efforts to
hedge such country risk, such foreign party tends to charge higher premium rates.

 On the other hand, Korean domestic banks, by definition, cannot face the risk of their own
country. Risks from events in their own country are no longer “country risk.”

 Korea does not agree that the Korean domestic banks were facing similar “Korean risks” to
those that would have been faced by foreign banks . Korea would like to emphasize that, when “Korea
risks” was mentioned in the context of country risk , it meant the risk to Korea’s ability to honour its
“external” financial commitments. In this regard , Korean domestic banks cannot face similar “Korea
risks” to those faced by foreign banks. Moreover, in light of the definition of country risk, the country
risk factors (risk of expropriation of assets, risk of currency manipulations, etc.) must be understood
to mean those that are of such nature that rather di rectly affect external financial obligations of Korea.
Therefore, these risks, by nature, could not be th e same as those risks faced by Korean domestic
banks.

 In any event, it may be true that during the period of the financial crisis, the Korean banks
were facing credit risks which were generally increas ed throughout the country, even though they are
of different nature from the “country risk factors” as faced by foreign banks. Such an increased risk
during the crisis was, however, taken into account by the Korean banks as the “general credit risk” of
the Korean shipyards. Of course, foreign banks, too, considered the same “general credit risk” with
respect to the Korean yards, separately and in addition to the country risk of Korea.

181. Would not similar considerations as to risk of expropriation, risk of currency
manipulation, etc. be taken into account by any bank involved in financing foreign trade
(wherever that bank happens to be domiciled)? Please explain in detail.

Response

 Korea’s response to Question 180 also applies here.

 Having said that, Korea takes the term “financi ng foreign trade” in a broad sense to mean any
financing related to foreign trade. As noted in Responses 179 through 180 above, every export
transaction does not trigger a bank’s consideration of country risks. As Korea noted in Response 179
in detail, it depends on the types of such financing transactions and in what context the country risk of
a borrower is examined.

 In addition, as far as country risk is concerne d, whether the bank is located inside the country
or outside the country is the determining factor. Please refer to Reponses 179 and 180 above for more
details.

182. At paragraph 81 of its oral statement, Korea argues that it is not only the type but also
the amount of coverage by collateral that is important in comparing different APRGs. In this
connection, Korea argues that the collateral ci ted by the EC at paragraph 100 of its second
submission covered only a small portion of the guarantee. Korea then cites Exhibit Korea – 88,
a transaction which according to Korea involved no collateral. How does this demonstrate that
the collateral referred to by the EC covered only a small portion of the guarantee?

Response

 Korea submitted Exhibit Korea – 88 to confir m and clarify its response to Panel Question 71
(as well as Korea’s response to EC Question 14) in wh ich it explained that in the specific instance of
the APRG transaction between Shinhan Bank and Han jin no collaterals were involved. As the EC
subsequently challenged such statements by Korea ( see para. 106 of the EC’s Second Written
Submission), Korea submitted the Exhibit for confirmation and clarification purposes.

 Korea refers the Panel to Korea’s response to EC Question 14 in relation to the provision of
no collateral or a small collateral c overage that directly affects th e determination of APRG premium
rates.

B. ALLEGED ACTIONABLE SUBSIDIES

183. Please comment on Exhibit EC - 145, containing PwC’s reactions to the Arthur
Andersen/Anjin submission in Exhibit KOR-79.

Response

 Despite numerous points raised by PwC in Exhibit EC – 145, it failed to establish that it was
better for the creditors to liquidate, rather than r estructure, DHI. As explained in detail by Anjin in
Exhibit Korea – 141
, the creditors’ recoverable amount under any going concern scenario was
always higher than the recoverable amount in th e liquidation scenario. This was so even when
correction is made for the double-counting of tax shield effect.

 For details, please refer to Anjin’s response ( Exhibit Korea – 141
) to PwC’s comments.

184. In particular, please comment on the statement at page 3 that “the Enterprise Value of
the restructured company is lower than the Ente rprise Value of the company computed without
debt restructuring”.

Response

 It is true that, according to Anjin’s calcula tions in the 1999 Report, the Enterprise Value of
the restructured company was lower than the Enterprise Value of the same company without
restructuring. This was a formalistic result from the technical model used by Anjin arising from a
carry-over of a residual amount of shareholder value in the debt/equity swap. However, the creditors
decided that the proposed workout plan of spinni ng off the two companies that had no synergistic
value and undertaking debt/equity swaps and debt restructuring was preferable from the perspective of
ultimate collectibility on the debt. Moreover, as Anjin points out and PwC does not contradict, in no
event was the Enterprise Value of the restructured company lower than the liquidation value of the
same company. Therefore, this fact does not affe ct the creditor financial institutions’ decision to
restructure DHI, rather than liquidate it.

 For details, please refer to Anjin’s response ( Exhibit Korea – 141
) to PwC’s comments.

C. SERIOUS PREJUDICE

185. Concerning Exhibit KOR-115:

 (a) No information is provided as to th e source for the prices presented in this
document. Please identify in detail the source(s).

 (b) No dates are associated with any of the prices shown in the documents. Please
provide this information.

 (c) No information is provided as to what the prices shown in the document
represent (i.e., contract prices, bids, etc.). For each price shown, please indicate
precisely what it represents.

 (d) No information is provided in respect of LNGs. Please provide the same sort of
information on LNGs for the same peri od(s) and on the same basis as the
information in the table.

Response

 (a) The source of the information is the document entitled “Background report – Detailed
evaluation of key price movements” prepared by the EC’s consultant, FMI, in
August 2003
1 that was submitted as Annex 5a-2) by the EC itself in the Annex V
process and is submitted herewith fo r the convenience of the Panel in Exhibit Korea
- 142.

 (b) The prices shown are the average prices for the period from 1997 to 2003, i.e., the
prices shown in the following tables in the FMI report supplied as Annex 5a-2) by the
EC in the Annex V process and now attached as Exhibit Korea – 142:

1 Refer to paragraph 293 of Korea’s Oral Statement delivered at the Second Substantive Meeting which
identifies the source of the data shown in the table in Exhibit Korea – 115.

 - for handysize tankers: Table 2.1 at page 2 of the report;
 - for handymax product tankers: Table 2.2 at page 4 of the report;
 - for panamax product tankers: Table 2.3 at page 6 of the report;
 - for chemical tankers: Table 2.4 at page 8 of the report;
 - for feeder container vessels: Table 3.1 at page 12 of the report;
 - for panamax container vessels: Table 3.2 at page 15 of the report;
 - for post panamax container vessels: Table 3.3 at page 16 of the report.

 (c) According to Section 1.1 of the FMI report in Exhibit Korea – 142, the prices are the
average price per CGT calculated for the period from 1997 to 2003. FMI identifies
the source of the data as being BRL Shipping Consultants. Korea assumes but the EC
and its consultant would be be tter qualified to confirm that this data reflects the order
prices shown in the FMI reports which th e EC itself submitted as Annex 10 in the
Annex V process. The important factor is that these are average prices set forth by the
EC’s consultant, FMI, and the EC themselves.

 (d) Korea is unable to provide the same info rmation for LNGs as the data source which is
the FMI report submitted by the EC in the Annex V process does not contain this data
for LNGs.

186. Concerning Exhibit KOR- 109, Korea presen ts certain breakouts of different sizes of
container ships and tankers. For LNGs, while the text in Korea - 109 refers to various sizes of
LNGs, no statistics are presented broken out by size. Please explain.

Response

 As at February 2004 and since 1996 virtually a ll LNG vessels that have been ordered have
been for vessels of 135,000 cu metres or larger, re flecting the recent growth in LNG ship sizes as
LNG trade volumes have increased. In fact, of near ly 100 orders placed from 1996 only three have
been for smaller vessels, one for a small coastal ve ssel of <10,000 cu metres capacity built in EC,
another of 74,000 cu metres capacity built in EC and a third of 23,000 cu metres capacity built in
Japan. The other vessels all fall within the 135 – 145 ,000 cu metres capacity range except for one
single vessel of 153,000 cu metres on order in France. Orders for the next generation of larger LNG
vessels in the 180 – 250,000 cu metres capacity range have yet to be confirmed.

 Given this concentration of vessel size over th e timescale covered by this complaint and the
fact that Korea has only built vessels of 120,000 cu me tres or larger, no breakdown of LNG orders by
size was felt to be appropriate or necessary to re flect the current size band in which LNG vessels are
primarily built.

II. TO THE EC

A. APRG/PSL

187. Please comment on Korea’s recalculations of benefit in Exhibits Korea - 91-102.

B. ALLEGED ACTIONABLE SUBSIDIES

188. Concerning the question of whether the rest ructuring of Daewoo was subsidized, please
provide a summary, based on all of the submission s of Arthur Andersen/Anjin and PwC, of the
EC’s analysis and conclusions in respect of whether DHl should have been liquidated instead of
restructure. In this summary, all relevant figures should be shown in tabular from, with cites

and cross-references to the original Arthur Andersen report of November 1999 assessing the
value of bill under various scenarios.

189. Concerning the Daewoo restructuring

 (a) Concerning the most recent PwC submission (Exhibit EC - 145), please explain
in detail the statement at page 3 that the Anjin analysis indicated “that the
Enterprise Value of the restructured company is lower than the Enterprise
Value of the company computed without debt restructuring”.

 (b) What is “enterprise value” and how does it differ from “going concern value”?

 (c) What is the significance of the fact that the “enterprise value” was lower under
one set of calculations than under another? How if at all does it affect the central
issue raised by the EC, namely the deci sion to restructure instead of liquidate
Daewoo?

 (d) What is the significance of Anjin’s reply in Exhibit KOR-7O that enterprise
value was reduced under the analysis of the restructuring scenario from what it
had been under the valuation of tile non-restructured company? What if
anything is the significance that enterprise value calculations differed under two
scenarios for the central issue posed by th e BC, namely whether it was better to
liquidate
 or to restructure Daewoo?

190. The data presented in Exhibit KOR-108 show interested depreciation expense in the in
the cost/profitability analysis for Daewoo. Please comment. How can this be reconciled with the
EC’s assertion that these costs have not been adequately reflected in Daewoo’s prices?

191. Exhibit KOR-107 sets forth the results of th e court-ordered/supervised restructuring of
Daedong. Presumably, such a restructuring had to proceed in accordance with Korean
bankruptcy law. On what basis does the EC allege that nevertheless it involved a subsidy?

C. SERIOUS PREJUDICE

192. One conclusion that might be drawn from Exhibits KOR-91-102 is that Korea accepts
that there is a benefit from the KEXIM financing at issue, but that the benefit in a number of
cases is quite small (0.5 per cent or less). If on e accepts that the benefit is of the magnitude
reflected in these Korean exhibits, what woul d be the implications for the EC’s serious
prejudice analysis and conclusions?

Comment by Korea on this question addressed to the EC

 Without prejudice to the fact that Korea does not accept in its Exhibits Korea – 91 to 102 that
the KEXIM facilities conferred a benefit,
2 Korea considers that the KEXIM facilities cannot have had
price depression or suppression for their effect in the first place because the EC itself admits that
KEXIM’s base rate for APRGs has increased while its credit risk spreads became more conservative.
Hence, if anything the KEXIM facilities should have exercised less pressure on the prices for vessels.
In addition, the EC itself shows fluctuating price trends (i.e., decreases and increases) in Attachment 2
to its responses to the Panel questions (especially in Figure 2.3). As it does not show a decrease in the
benefits allegedly afforded by KEXIM in periods of increasing price trends, there is all the less
evidence of a price depressive or suppressive effect of the KEXIM financing facilities. In the second
place, the magnitude of the price depression/supp ression alleged in Attachment 2 to the EC’s

2 See, for example, Korea’s response to Panel Question 114.

responses to the initial Panel questions is blatantly out of proportion with the magnitude of the alleged
benefit.

 Notwithstanding the EC’s allegations of qua litative effects of the KEXIM facilities (which
Korea disputes), Article 6.3(c) of the SCM Agreement explicitly requires that the alleged subsidies
must have “significant” price depression or suppr ession for their effect. Hence, the letter of this
provision requires a quantification of the effects of the subsidies and a benefit of 0.5 per cent does not
meet this threshold while the blatant difference in the proportion of the alleged benefit and the alleged
price depression/suppression clearly demonstrates that there is no causal link between the alleged
KEXIM benefits and the price depression/suppression asserted.

 Once again, in response to this new EC “eviden ce” Korea must recall that, even if one were to
accept the EC’s approach, the EC still has not explained how such de minimis subsidies contribute to
developing or improperly maintaining excess capacity leading to price suppression. As Korea has
noted in the past, the EC seems to be trying to a void this very direct and clear requirement of the
treaty language to demonstrate that the significant price suppression is the effect of the subsidy by
trying to attach any alleged subsidy it can to a product and then sweep that product as a whole into the
price suppression analysis. Furthermore, the EC does not really attempt to do this in relation to the
products. The EC even ignored evidence that many ships produced by unrestructured shipyards did
not “benefit” from APRGs or pre-shipment loans, but nonetheless attempted to sweep every ship into
its analysis.

 The EC at the latter stages attempted to move a little away from this totally capacity
dependant approach and reintroduce price unde rcutting as a supporting element of its price
suppression/depression analysis. Aside from the lega l block on this reintroduction of an abandoned
argument, the EC leaves unexplained how such de minimis subsidies could have resulted in the
alleged price suppression or depression when, by the EC’s own admission, the Korean yards enjoyed
a considerably larger cost advantage. There would simply be no competitive effect from such subsidy.

 Finally, if these de minimis subsidies were to have such an e ffect, then the causal effect of the
much higher level of EC subsidies (which the EC does not and cannot contest) on the marketplace
would overwhelm and displace any effect of the alleged Korea subsidies. In such a case, it would be
impermissible to attribute to the Korean subsidies effects that were actually caused by the much larger
EC subsidies.

193. Exhibit KOR-112, concerning MOCIE’s interv ention at the request of Samsung, could
be viewed as indicating that the government takes action if prices are too low. If this is the case,
what are the implications for the EC’s serious prejudice claim?

Comment by Korea on this question addressed to the EC

 In its response of 2 July 2004 to the EC’s Qu estion 5 addressed to Korea, Korea explained in
detail the background of MOCIE’s intervention in the Hamburg Sud-DSME transaction. As
demonstrated there, MOCIE was not concerned with the price level as such, but with the anti-
competitive behaviour of the parties involved in that transaction. In any event, this MOCIE
intervention does not support the EC’s serious pr ejudice claim. Instead, it indicates that it was a
European shipyard, Odense, that was offering the lowest prices and thus depressing prices ( see
Exhibit EC - 88).

194. If the Panel were to accept the product subdivisions set forth in Exhibit KOR-109, how
would this affect the EC’s analysis of price suppression/depression? Please respond in detail.

195. Please comment on Exhibit KOR-115.

COMMENTS BY KOREA ON THE NEW FACTUAL INFORMATION SUBMITTED BY THE EC
AND THE US ON 2 JULY 2004

134. In Exhibit EC - 118, PwC asserts that “ [t]he KSDA Bond Matrix is the accepted mark-
to-market price for the domestic market”. Does this mean that the EC disagrees with Korea’s
argument that the bond matrix represents hypothet ical / projected rates, or does the EC accept
Korea’s argument but consider that the inde x nevertheless constitutes a reliable market
benchmark? Please explain. What does “mark~to~m arket” in this context mean? In particular,
who was marking what to which market?

Comment on the EC’s new factual information; Exhibit EC – 148 regarding KSDA Bond Matrix

 In Exhibit EC – 148, PwC argues that the KSDA Bond Matrix is the mark-to-market price for
the domestic market and that “mark-to-market” means that “KSDA employees update every day the
price and yields of the bond used in all the indices”. While the explanation by PwC regarding the term
“mark-to-market” is not clear enough to fully resolve its ambiguity (please recall that the Panel
specifically asked who was marking what to which market ), PwC nonetheless seems to focus on daily
collection activity of data.

 However, such daily collection activity do es not automatically mean that the Matrix
accurately reflects the “price” of a bond or even bonds issued in a particular sector of industry. In fact,
PwC itself admits the limitation of the Matrix by sta ting that it is the “representation of the yield … at
a specific moment in time”. This statement is nothi ng but saying that the Matrix is only a general
index, which Korea already explained in its r esponse to Panel Question 73. Representation is a
representation (whatever it may mean). It cannot be the price (i.e., yield in the instant context) of a
specific bond.

 For the better understanding of the Panel, Ko rea submits below some cases showing actual
yields of specific bonds compared to the co rresponding KSDA Bond Matrix (both of which are
available at the KSDA website).

Case 1

Issuing Company: Hyundai Heavy Industry
Bond Classification: HHI 100 KSDA Standard Code: KR6009544M29
Issue Date: 21 February 2001 Expiry date: 21 February 2004
Credit Rating upon Issuance: A0

(Unit: %)
KSDA Bond
Matrix
Rated A0
KSDA Bond
Matrix
Rated A0
KSDA Bond
Matrix
Rated A0 Date
HHI 100
Weighted
Average Yield
3M 6M 9M
2003-11-26 4.38 4.8
2003-11-24 4.38 4.8
2003-09-02 4.32 4.89
2003-05-26 5.9 5.08
2003-05-23 5.87 5.06

Case 2

Issuing Company: Hyundai Heavy Industry
Bond Classification: HHI 102 KSDA Standard Code: KR6009544M78
Issue Date: 23 July 2001 Expiry Date: 23 July 2004
Credit Rating: A0

(Unit: %)
KSDA Bond
Matrix
Rated A0
KSDA Bond
Matrix
Rated A0
KSDA Bond
Matrix
Rated A0 Date
HHI 102
Weighted
Average Yield 3M 6M 9M
2003-12-17 4.8 5.24
2003-11-24 4.99 5.11

Case 3

Issuing Company: Samsung Heavy Industry
Bond Classification: SHI 84 KSDA Standard Code: KR6010144M21
Issue Date: 24 February 2001 Expiry Date: 24 February 2004
Credit Rating: A0

(Unit: %)
KSDA Bond
Matrix
Rated A0
KSDA Bond
Matrix
Rated A0
KSDA Bond
Matrix
Rated A0 Date
Weighted
Average
Yield Rate 3M 6M 9M
2003-12-11 4.52 4.93
2003-11-11 4.32 4.88
2003-07-25 4.72 5.13
2003-05-28 5.15 5.05
2003-05-20 5.13 5.02
Note: The months (3M, 6M, 9M) represent the remaining months to the expiry date.

 The above tables show that the KSDA Bond Ma trix does not represent actual yields of the
bonds issued. For example, when looking at yields rates of HHI 100 (the remaining period of which to
the expiry is approximately 3 months) on 26 N ovember 2003 and the KSDA Bond Matrix 3M on that
date, several questions arise inevitably: (i) What is the market price of a bond with credit rating A?
HHI 100 bond yield? or the KSDA Bond Matrix?; (ii) Is HHI 100 bond yield below market price if
the KSDA Bond Matrix is the “market price”?; ( iii) Does this mean that HHI 100 bond yield was
above the market price back in May 2003? (i v) (Assuming so,) then why do investors make
investment into HHI 100 bond on 26 November 2003?; (v) (Further assuming that an investor
purchases bonds of a company in the same industry sector as HHI), which one should be the
reference, HHI bond yield or the KDB Bond Matrix?; (vi) Why the prices of HHI 100 bond and HHI
102 bond are different as at the time both bonds are having the same months remaining period? (vii)
Why the prices of HHI 100 bond and SHI 84 bond (both of which are having 3 months remaining
period as of November 2003) are different?; and the questions may continue on and on..

 Should the KSDA Bond Matrix be the market pri ce, it provides no clear answers to the above
questions. This means that the KSDA Bond Matrix is only an index which indicates the market
situations on a specific date. It does not reflect speci fic situations of the industry sector, the issuers,
and the preferences in the market. Thus, it can in no event be a “price” at which a specific bond can be
purchased. At best, it may be a preliminary indicator that an investor may use as a first reference
before studying the market further.

 Further, Korea would like to clarify certain points made by the EC which are misleading and
factually baseless. The EC submitted that “the corpor ate bonds actually issued by the yards were not
appropriate benchmarks as regards corporate bonds (i ) because they were guaranteed by a bank, (ii)
were not issued in the same currency or (iii) not issued at the same time as KEXIM PSLs” ( see
para. 21 in the EC response to Panel Questions). These assertions are incorrect. In the first place, in no
instance were bank guarantees provided in relation to the corporate bonds issued by the Korean yards.
The EC has never provided any evidence to substa ntiate this assertion. Secondly, most bonds were
issued in Korean Won. The in stances where foreign currency bonds were issued were extremely
limited (i.e., [BCI: Omitted from public version] ). As indicated in Exhibit Korea – 139 submitted
already, even [BCI: Omitted from public version] issued its bonds in Korean Won in most of the
cases and no other Korea yards have issued bonds in foreign currency. Lastly, the EC asserts that
bonds were not issued at the same time with PSLs. While bonds may not have been issued on the
exact same dates as PSLs, this fact cannot necessar ily dismiss those corporate bonds actually issued
by the shipyards from the eligible list of benchmar ks. There is no requirement that, in order to be
comparable, an instrument being compared must be issued on the same date as another instrument
concerned. As stated in Korea’s response to Pa nel Question 170, Korea considers that the average
interest rates for financial instruments actually u sed by the shipyards, presented on a quarterly basis,
would be proper benchmarks and these quarterly data can avoid possible anomalies when comparing
the instruments on day-to-day basis.

136. At para. 95 of its oral statement, Korea pr esents a number of points criticizing the EC
calculation methodology, and states that further details are contained in Exhibits Korea 90-102.
Please respond to Korea’s criticism in detail, in cluding with reference to the content of these
exhibits.

Comment on the EC’s new factual information

Comments on Exhibit EC - 148 regarding incompatibility of credit ratings

 On the issue of compatibility of KEXIM credit ratings for PSLs with the bond ratings by
other rating agencies, PwC contests in Exhibit EC – 148 Korea’s arguments that (i) the levels of
underlying credit risks are different and (ii) factors for grading are not alike.

 First of all, the content of PwC’s report casts into question whether PwC really has the
expertise to opine on the nature and mechanism of determining credit ratings. As discussed below and
demonstrated by the report and materials submitted by Korea, PwC’s analysis is full of fallacies and
distortions which a banking expert would never make.

 In particular, Korea is surprised by the bold statement of PwC that “…a private loan and a
bond having the same ratings will present the same obligor repayment capacity and the same credit
exposure risk…Both should therefore be rem unerated with the same interest rate” ( see the last
paragraph at page 5 of Exhibit EC – 148. Emph asis added). When making this puzzling statement,
PwC seems to be ignorant of the fact that bank s and rating agencies apply different factors in
determining the ratings for different types of financia l products and, therefore, that different types of
products (e.g., bank loan v. corporate bond, cor porate bond v. commercial paper) carry different
interest/yield rates even where the borrower or the issuer of these products is the same company. This
is a fact well-known to every financial expert in th e world. According to the PwC’s logic, a company

(e.g., Hyundai), which has a stable and uniform ra ting, should borrow loans or issue bonds, CPs, CDs
or whatever instruments always at the same intere st rate at a given time, assuming that maturity and
collateral (or non-collateral) are the same. This is non-sensical, at the very least.

 PwC begins its fallacious analysis by challe nging the statement in Exhibit Korea – 91. It
disputes the statement that corporate bond rating (i.e., issue rating) in Korea could actually be
considered same as the “issuer” rating whereas KE XIM ratings were the “facility rating” that takes
into account all the characteristics of the credit facility. Then, PwC takes the DSME bonds as an
example, and states that the ratings of these bonds as secured by collateral, cannot be considered the
same as the rating of DSME and that [t]he rating of the bonds reflects the collateral of the bond
emission just as KEXIM ratings reflect the collateral of the loans granted . PwC first ignores the fact
that the corporate bonds issued and traded in Ko rea are mostly non-collateralized bonds and the bond
rates quoted by KSDA are based on “unsecured long-te rm senior bonds”. Second, after admitting that
the rating of DSME bonds reflect collaterals just as KEXIM rating does, PwC then fails to explain
why the DSME bonds cannot be used as benchmark for KEXIM’s PSLs.

 Thereafter, based on a study by the society of actuaries, PwC attempts to rebut Korea’s
argument that there is no correlation between KEXIM rating on its loans (which are equivalent to
privately-placed bonds) and the ratings on the publicly traded corporate bonds because default rates
for private debt placements are lower than that for public debt placements. However, this study does
not contradict the conclusions of Carey (1998) relied upon by Korea. Indeed, PwC quoted the
following statements which appear, in fact, to contradict the allegation by the EC:

 - “Over the sample period studied, private pl acements with most recent internal ratings
the equivalent of investment grade and BB have loss experience similar to publics in
spite of worse incidence or default rates because of better loss severities on private
placements”,

 - “Relative to publicly issued bonds, priv ate placements with most recent internal
ratings the equivalent of B and riskier offer superior experience
 with respect to all of
incidence, severity and economic loss” (see the first paragraph on page 5 of Exhibit
EC – 148. Emphasis added).

 Korea cannot figure out what PwC is trying to establish with these statements. The plain
reading of these statements still leads to the conclu sion, as drawn by Korea, that the privately placed
debt instrument (such as KEXIM’s PSLs), by nature , generally involves lower default risks than
public placements with a given credit rating. Hence, PwC’s analysis fails to rebut Korea’s argument
(i) that credit risks for a bank credit rating are lo wer than those for the corresponding corporate bond
rating and (ii) that for the same corporate entity, the corporate bond rating must be higher than the
credit rating for bank facilities in order to have equivalent credit risk.

 Interestingly, the statement by the societ y of US actuaries admits that the insurance
companies fairly frequently disagree with NAIC an d with each other on credit rating, although, on
average, the disagreements are small. These disagreem ents arise even if the companies engaged in the
same insurance business ar e assessing the credit risk involved in the same financial product, i.e.,
corporate bonds. This demonstrates how significan t the disagreements would be in cases where
KEXIM as a bank assesses the credit risk of its bor rower in loan transactions while a credit rating
agency, such as KIS, assigns ratings to corporate bonds which are totally different products from a
bank loan. In this regard, the PwC’s assertion that “the correlation between corporate bond ratings and
KEXIM ratings [on loans] should exist at least for ratings better than or equal to BB [rating by a credit
rating agency on corporate bonds]” is non-sensical.

 In order to redress this flaw, PwC quotes the actuaries society’s statement that “the more
pessimistic one is usually the one with the highest predictive power”( see the second paragraph on

page 5 of Exhibit EC – 148). However, it is obvious that this “usual” order of predictive power
applies only within the context of the same insu rance companies who are assessing credit risks on the
same financial instrument (i.e. corporate bond). In addition, the society of actuaries has never
conducted a study, and therefore does not dare to express an opinion on whether such “usual” order of
predictive power would apply to a totally heterogeneous situati on where a bank assigns rating to a
borrower in loan transactions while a credit rating agency assigns a rating to a corporate bond. In such
a case, a comparison is not possible as the two agencies are using two different measurements,
considering totally different factors.

 PwC’s egregious analysis does not stop here. It further attempts to convince the Panel of the
correlation by trying to implement a mechanistic ma tch between the credit rating agency’s “A to C”
ratings and KEXIM’s “P to SM” rating system merely based on definitional similarities. At the outset,
Korea would like to point out that such a mechan istic matching technique is meaningless as long as
rating agencies do in practice assign different ratings to even the same borrower/issuer or to the same
financial instrument under different circumstances. Using the same rating definition (expressed in
language that permits diverse applications in actua l cases) does not guarantee that all different raters
would assign the same rating. As mentioned earlier, th e statement by the actuaries society admits that
disagreements in rating frequently take place even among companies engaged in the same insurance
business.

 Moreover, Korea cannot understand where PwC’ s conclusion that KEXIM’s P5 rating is
comparable to a “BBB” rating comes from. PwC appear s to take P5 instead of P4 simply because P5
is a lower rating to P4 ( see Table 1 on page 7 of Exhibit EC – 148). However, Figure 2 in the same
page of the PwC report seems to either conflict with Table 1, or only shows that the credit spread for
BBB is corresponding to the credit spread for P4, not P5. Furthermore, PwC has failed to provide any
support for its conclusion that KEXIM’s SM rati ng should be equivalent to “C”. PwC has only
provided Table 1 which only refers to the chronology of the changes implemented by KEXIM in its
credit rating systems of KEXIM, but ends with “BB” as the worst rating in the last column of the first
row (see Table 1 on page 7 of Exhibit EC – 148). The natu ral reaction to this would then be to inquire
why it is only “C”, not “single B”that corresponds to KEXIM rating SM?

 In any event, as noted before, this whole ma tching exercise is highly mechanistic and cannot
support the EC’s allegation that rating X on co rporate bonds always corresponds to rating Y in
KEXIM rating system. This means that the EC’s attempt to use corporate bonds as a benchmark for
KEXIM PSLs is not acceptable. Assuming arguendo that there was a financial contribution, the right
approach would be to compare the rates of KEXIM PSLs granted to a shipbuilder with the rates of
other financial products used by the same shipbuilder.

 In order to support Korea’s claim that KEXI M credit ratings are not compatible with the
corporate bond ratings and to rebut various othe r allegations of the PwC and the EC, Korea
supplements Exhibit Korea – 91 with a report by KEXIM as a banking expert, which is submitted
herewith as Exhibit Korea – 143
. Korea summarizes below the key information provided by this
report.

(1) First of all, the report points out that the elements for assessing credit risks are different from
each other. More specifically, KEXIM credit rating sy stems look into “probability of defaults”, “loss
given default” and “expected loss”. The report states:

It is a uniform practice in banking industry to review, examine and analyze following
three elements when assigning credit ratings: probability of default (PD), loss given
default (LGD), and expected loss (EL) . ( See the second paragraph of II.A.1. of
Exhibit Korea – 143).

By contrast, the rating agencies are reviewing only the “probability of defaults”, not “loss given
default” or “expected loss.” This must result in having materially different horizons as to the risks
associated. The report further continues:

According to Moody’s study on Bank Loan Loss Given Default, it is evident that
there exists a significant difference in e xpected loss between bank loan rating and
corporate bond rating. In consequence, the risk premiums are different, which
ultimately results in the difference in interest rates.
<Exhibit 6: “Bank Loan Loss Given Default”, November 2000, Moody’s Investors Service, p.9>

As shown in the chart above in Exhibit 6 to Bank Loan Loss Given Default by
Moody’s, “the mean bank loan value in default is 69.5 per cent for senior secured and
52.1 per cent for senior unsecured,”
3 whereas the mean value of long-term public debt
is 59.1 per cent for senior secured and 45.1 per cent for senior unsecured. ( See
para. II.A.2.of Exhibit Korea - 143.)

(2) Secondly, as Korea submitted, banks adopt a so-called “point-in-time” approach whereas
rating agencies use the “through-the-cycle” appro ach. This makes the two rating systems quite
different from each other as the banks seek “most likely cases” while the ag encies are anticipating
“stress” scenario. This inevitably results in the different properties of both ratings so that, for
example, in contrast with bank credit rating system, “agency ratings may not have the same sensitivity
to change… of bank risk ratings” ( see the last paragraph of II.B.1 of Exhibit Korea – 143).

 In view of these distinctive properties includi ng different elements for assessing credit risks
and dissimilar approaches, bank credit rating syst ems cannot be compatible with agency rating
systems. This is supported by Moody’s, which clearly states that:

In which Moody’s has rated both a company’s credit facilities and its bonds, the bank
loan rating is one or more refined rati ng categories higher than the bond rating. ( See
the first paragraph of III of Exhibit Korea – 143).
Based on the reasons as detailed above, Korea reite rates that bank credit rating systems cannot be
compatible with agency rating systems.

Comments on Attachment EC - 10 regarding recalculations of benefit by the EC

 In Attachment EC - 10, the EC provided a chart showing that KEXIM PSLs conferred a
benefit by way of recalculations showing certain ad justments. While Korea will show the fallacies in
these recalculations below, Korea would like to emphasize some additional points.

3 Bank Loan Loss Given Default, November 2000, Moody’s Investors Service, p.1

 ¾ Korea cannot agree that the KSDA Bond Matrix provides a benchmark.

 As Korea detailed in its comments on the EC ’s response to Panel Question 134 above, the
KSDA Bond Matrix is mere a preliminary indicator that an investor may use as a first reference
before studying the market further. It cannot be a market price or benchmark.

 ¾ Further, Korea cannot agree that KEXIM credit ratings and corporate bond ratings are
comparable.

 As explained in detail above and in Exhi bit Korea – 143, KEXIM credit rating are not
comparable to ratings by credit rating agencies. This is undoubtedly supported by the unequivocal
statements by Moody’s. Korea will not reiterate those herein again.

 ¾ In most cases, the EC found “negative or minimal” margins only.

 As Korea cannot agree on the methodology sugg ested by the EC, Korea denies the existence
of any benefits. However, even if Korea accep ts the methodology for the discussion purposes only,
most cases reflect negative or minimal benefit margin s. This is so even when following the EC’s
methodology in its entirety, and it is even more so when following the methodology corrected by
Korea. Korea herewith submits Exhibits Korea – 145 through 149
 to substantiate this claim.

 In relation to this, the EC made another atte mpt to provide a misleading portrayal of hard
facts. In para. 58 of its responses to the Panel Qu estions, the EC states that “the difference between
the market benchmark and the KEXIM rate is mo re than 30 per cent when expressed as a proportion
to the KEXIM actual spread rate ” (emphasis added). It is evident why the EC did this. After
establishing that even in the EC’s own methodology, only minimal benefit margins are obtained, the
EC now attempts to exaggerate the magnitude of alleged benefit margins by comparing those with
KEXIM’s credit risk spread. The credit risk spread, however, is only a fraction of the overall rate.

 In addition, as Korea explained during the Se cond Substantive Meeting, the EC can show
these “minimal” alleged benefit margins for only a small fraction of the PSLs extended by KEXIM.
The tables below are summaries in relation to th ese instances. Given the small number of instances
where the minimal margins would be found and the ma gnitude of such margins, Korea considers that
the EC’s claims are unfounded and unsupported and mu st be rejected by the Panel when taking a
decision on all facts and evidence before it.

EC Recalculation

Alleged Benefit
Shipyard
PSL Cases
where
positive
benefit was
found
lower
than
-1%
-1 ~ -
0.5%
-0.5
~
0%
0 ~
0.25%
0.25
~
0.5%
0.5 ~
0.75%
0.75
~ 1%
Over
1%
DSME 37/136 5 32
HHI 22/197 4 29 5 6 6 2 3
Mipo 27/142 1 1 11 3 3 4 6
Samsung 1/8 1 1
Hanjin 8/45 3 4 1 3 3 1
Samho 8/45 4 4
STX 6/6 6
Total 109/579 8 35 18 12 17 10 52

Corrigendum by Korea

Margin
Shipyard
PSL Cases
where
positive
margin was
found
lower
than
-1%
-1 - -
0.5%
-0.5 –
0%
0 -
0.25
%
0.25
–
0.5%
0.5 -
0.75
%
0.75
– 1%
Over
1%
DSME 0/136 1 12 24
HHI 17/197 5 33 4 4 9
Mipo 23/142 1 5 12 9 2
Samsung 1/8 1 1
Hanjin 6/45 3 6 2 3 1
Samho 0/45 2 6
STX 6/6 6
Total 53/579 1 23 75 17 15 14 0 7
Note: The number “579” is the total PS L cases listed in Korea’s Annex V Responses
 Attachment 1.2(30).

 ¾ The EC’s approach is inconsistent as rega rds the selection of its alleged benchmarks.

 As Korea established with the concurrence of the EC, the PSL is a short term loan facility, the
duration of which is not exceeding 6 months. This has been an undisputed fact in this proceeding as is
also shown by the EC itself when it used benchmarks of a 6 month duration in Exhibit EC – 125.

 Notwithstanding this, the EC now abruptly starts to allege that a benchmark with a 1-year
duration should be used in certain cases. In suppor t, the EC alleges that the base rates for certain
instances of PSLs are [BCI: Omitted from public version] . This is non-sensical. As has been
established and thus far alleged by the EC itself, a proper benchmark must be a facility conferred with
similar terms and conditions. The term must be asses sed based on its duration, not the name of base
rates. Korea would like to ask the EC how and why the EC used the 6 month KSDA Bond Matrix to
PSLs conferred to STX where the base rates were “fixed” rates.

 Korea provides one example to show that wh ile the base rate is WNPRI1Y, the average
duration of PSL instalments is not exceeding 6 months as below.

 [BCI: Omitted from public version.]

 ¾ The EC still failed to adjust Samho’s PS L for a 100 per cent physical collateral.

 In this connection, the EC has kept profferi ng its traditional “best information available” rule
by stating that it is not “KEXIM’s policy to keep and maintain any worksheet or similar documents
necessary for the consideration of collaterals” ( See para. 49 of its response). This is egregious, and it
is another example showing the bad faith of the EC.

 Korea submitted KEXIM’s list of pre-shipment loans to sh ipbuilders as Korea Annex V
Attachment 1.2(30)-1 and Exhibit Korea – 60 which clearly show that as to [BCI: Omitted from
public version.] Korea hereby submits the relevant pages of KEXIM list of pre-shipment loans to
shipbuilders as Exhibit Korea – 144
 to substantiate this (the EC purposefully submitted as Exhibit
EC – 24 only a part of the list). For more details, please refer to the corrigendum on the EC’s
recalculation with respect to Samho (Exhibit Korea – 145

 ¾ The EC wrongly applied “Adjustment Duration (AD Duration)”.

 As the EC explained, the “AD duration” was employed for obtaining the 6-month KSDA
Bond Matrix in Exhibit EC –125 with respect to certain PSL instances as to DSME. The AD duration
was explained as the difference between the Treasury Bond yield 1 year and Treasury Bond yield 6
mont.sh. Given that a 6-months KSDA Bond Matrix exists, there is no need to consider the AD
duration. Further, with respect to DSME, the EC did not apply the KSDA Bond Matrix. Instead, it
followed the interest rate determ ination procedure under the KEXI M Guidelines Interest Rates and
Fees. In these circumstances, it is not necessary to consider the AD Duration. Please refer to
corrigendum with respect to DSME (Exhibit Korea – 146

 ¾ Korea submits Exhibits Korea – 145 through 149 for corrigendum on the EC’s
recalculation.

 While Korea does not agree with the EC’s methodology, Korea nonetheless submits Exhibits
Korea – 145 through 149 on the EC’s benefit recalculation in order to correct manifest clerical errors
by Korea in previous Exhibits and to identify the EC’s misunderstandings or false allegations.

139. The Panel refers to Attachment 5 to the EC ’s replies to the Panel’s questions after the
first substantive meeting, which contains transaction-specific alleged benefit calculations for one
PSL and one APRG. Please make the same calculat ion for each of the APRGs and PSLs at issue
in these proceedings. In other words, for each shipyard, specify which APRG I PSL relates to
either LNG, product / chemical tankers, or cont ainer ships, and specify the amount of the
alleged benefit as a % of the ship price. Please attach detailed worksheets.

Comment on the EC’s new factual information

Comments on Attachment EC – 11

 In Attachment EC - 11, the EC attempted to pr ovide the ad valorem benefits with respect to a
fraction of PSL instances. Korea is compelled to point out below the serious fallacies contained in this
document.

 ¾ Korea does not agree that benefits were conferred.

 As explained above, the benefit calculation me thodology by the EC including the selection of
benchmarks is affected by grave and inherent fa llacies. Hence, Korea rejects the existence of any
benefit and the magnitude of the be nefit alleged by the EC. Korea refe rs to its above explanations in
this regard.

 ¾ The EC’s PSL duration is false.

 This is another example to show the bad faith by the EC. As clearly indicated in Attachment
Korea - 4 to Korea’s Second Written Submission and described in Korea response to EC Question 19,
PSLs are disbursed in several instalments generally at the time of “steel-cutting”, “keel laying”, and
“launching”. The number of instalments and disbur sement amounts vary depending on the projects.
Hence, each instalment must have a different duration.

 This notwithstanding, the EC applied the en tire period from the commitment date to the
expiry date as the duration of the PSL. This by itself is conflicting with it own benchmark which is a 6
month KSDA Bond Matrix. In addition, Attachment EC – 11 itself refers to Attachment EC – 9,
which, in turn, is based on Korea’s Attachment Korea - 4 above. Should the instalment disbursements
be taken into account, the calculation would be co mplex. However, irrespective of whether the

calculations are complex, the EC is not exempted from its obligation to provide correct calculations
(assuming all other factors are established). To disregard this is not justifiable.

 ¾ The ad valorem benefit would be decreased substantially.

 Korea hereby submits Exhibit Korea – 150
 in order to show (i) again the duration of each
instalment disbursement as for the all projects for which the EC provided “projected” ad valorem
benefits and (ii) there are early repayments in so me cases, which must be taken into account for
calculation and to provide the PSL interest amounts that KEXIM charged.

 If the EC should count all of these factors, the ad valorem benefit would be decreased
substantially.

Comments on Attachment EC – 12

 Also, as explained by Korea during the Second Substantive Meeting, the EC alleges that it
established a benefit for a small fraction of APRGs only. The table below is the summary of those
instances. Korea submits this for the better understanding as to the egregiousness of the EC’s claim.

Shipyard Alleged number of APRG instances out of total
APRG transactions
DSME 21/261
Mipo 0/126
HHI 0/347
Sansung 4/141
Samho 4/82
Hanjin 2/32
STX 2/126
Total 33/1115

In addition, in Exhibit EC – 12, the EC attempted to provide the ad valorem benefits with respect to a
fraction of APRG instances. As with the PSLs, th e EC made the same egregious and bad faith
attempts.

 ¾ Korea cannot, and shall not, agree on the existence of benefit.

 As submitted earlier, Korea cannot agree on the be nchmarks the EC proffered. As stated, in
order to be eligible for constituti ng benchmarks, (i) the subject rates must be market representative in
terms of instances and (ii) the terms and conditions must be comparable. However, the proffered
benchmarks are gravely lacking those criteria. Thus , Korea neither agrees that a benefit was conferred
nor a benefit of the magnitude alleged. Korea refers to its explanations in this regard hereinabove.

 ¾ The EC disregarded the fact that advance payments are to be made in instalments.

 While the EC itself indicated in its Attachment EC – 12 that the advance payments are to be
made in instalments, the EC di sregarded this and took the entire period from the contract date to
delivery date as the duration for entire advance payments.

 While the EC finger-pointed Korea for not provi ding the relevant information, it should have
made, at least, an attempt for a reasonable reconstruction. Without this, the EC should be condemned.

142. In percentage terms, how much of the a lleged benefit resulting from the “Daewoo” tax
concession should be attributed to DSME’s production of (i) LNGs, (ii) product I chemical
tankers, and (iii) container ships? Please attach detailed worksheets.

Comment on the EC’s new factual information

 In Attachment EC - 13, the EC has re-quan tified the alleged subsidies received by Daewoo-
SME by adding the alleged tax subsidy. The EC argues that the total benefit provided to Daewoo-
SME under “scenario 1” 4 amounts to KRW 2,889,985 million which is summarized in the table
below.

 In million KRW
Debt-for-equity swap 649,089
Tax concessions: 55% * 236,000 129,800
Debt rescheduling 173,153
Negative net worth of DHI to be assumed
by Daewoo-SME = 55%*3,523,533
1,937,943
Total 2,889,985

 However, Korea has demonstrated that the DHI restructuring had been made under market
conditions and that there was no bene fit conferred. Therefore, the EC ’s quantification of the alleged
benefits is fictional.

 Nonetheless, Korea would like to make a few comments below to show that, even under the
EC’s incorrect assumptions, no benefit has been conferred or continues.

 (a) Debt-for-equity swap

 For those reasons presented by Korea
5, KRW 3,500 which was the stock price on the first day
of trading6 cannot represent the true value of the stock of DSME.

 Instead, the DSME creditors ag reed to the debt-for-equity swap as a long term investment,
and Exhibit Korea – 103
7 clearly demonstrates that the price of DSME shares as of August 2001 was
in the range of US$ 10 (approximately KRW 12.000 – 13,000) per share.

 (b) Tax concessions

 As demonstrated by Korea
8, the EC has failed to establish th at any financial contribution had
been made to, or any benefit had been conferred upon, DSME in the form of tax concessions.

 (c) Debt rescheduling

 The EC has calculated the alleged benefit from the debt rescheduling based on the terms of
debt rescheduling (e.g., reduction of interest rates and changes in the repayment schedule of
principals) as provided in the Comprehensive Agreement on Corporate Workout (MOU) of
20 January 2000. However, the EC fails to recogni ze the fact that DSME graduated from the workout

 4 This means an alleged scenario that DHI restructuring was not made under normal conditions and,
thus, the company should have been liquidated.
5 Korea’s Second Written Submission, paras 160 – 167.
6 Attachment EC -13, Footnote 2.
7 Non-binding Offer by Newcastle Heavy Industries dated 16 August 2001.
8 See, e.g., Korea’s response to the Panel Question 116.

on 23 August 2001 due to its remarkable business perfor mance and that, as a result, the original terms
of debt rescheduling under the above MOU have been cancelled.

 The following table summarizes the original terms of debt rescheduling under the MOU and
the revised terms of the principal and interest pa yments agreed upon between DSME and the creditor
financial institutions at the time of termination of the DHI workout procedure:
9

 Original terms under MOU Revised terms upon Workout termination
Terms of
repayment of
principal
To be repaid each year from
and after 2003 in the amount
equivalent to 5% of the total
principal amount
As for KAMCO and SGIC, to be repaid in
equal instalments during 2002-2003 (actually
so repaid);
As for other financial in stitutions, to be repaid
in equal instalments during 2002-2004
(actually so repaid).
Terms of
interest
payments
Interest on secured debt:
Prime rate
Interest on unsecured debt:
Prime rate – 3%
As for financial institutions which have
applicable interest rates for the outstanding
debt: the applicable interest rates at CB credit
rating BBB or above.
As for those which do not have applicable
interest rates: the interest rates determined by
adding not more than 2.5% to yield rates on
3 year national treasury bonds.

 The EC also fails to acknowledge that mo st of the DSME debts assumed from DHI through
spin-off (“workout debts”) have been repaid (or swapped into equity) during 2002 – 2004. Korea has
provided complete details of the changes in the interest rates during the DHI workout and at the
termination of the workout procedures, as well as the dates and amounts of repayments by DSME
debt principals.
10

 As a result of such early repayment (or swap into equity as of 14 December 2000) by DSME,
the workout debts of DSME have been dras tically reduced from KRW 1,095 billion as of
31 December 2000 to KRW 34.9 billion as of 31 December 2003.

 <Status of Workout Debt Repayments> (In billions of KRW)

12/31/2000 12/31/2001 12/31/2002 12/31/2003
1,095.3 187.7 74.8 34.9

 The EC argues that DHI obtained “gains on exemption of debts” of KRW 1,321,830 million
and that, of this amount, KRW 173,153 million is to be allocated to DSME. The EC argument is
based on “DHI 1999 audited accounts.”

 However, these “debt exemption gains” i ndicated in the 1999 audited accounts were
calculated based on the assumption that the origin al debt restructuring terms under the MOU of
20 January 2000 would continue to be implemented according to those terms. Because the MOU debt
restructuring terms have not been implemented as or iginally agreed, the EC’s benefit calculation is
flawed even under the EC’s own ‘benefit’ calcula tions. Furthermore, the “gains” as used in
accounting theory cannot be considered as equivalent to the legal concept of “benefit” within the
meaning of Article 1.1(b) of the SCM Agreement.

9 See Exhibit Korea – 151, Korea Development Bank’s Notices on termination of DSME workout.
10 Exhibit Korea - 77, Repayment of Debt Principal by DSME (Annex V Attachment 3.1(21)).

 Once again, it can be seen that the EC is ma king an argument that any debts restructured
during proceedings subsequent to insolvency are per se subsidies. The EC’s purported calculation of
the subsidy amount consists of the full debt load wit hout any restructuring. Of course, this is not in
accord with the legal principles of any market economy, including those of each and every EC
Member State. The EC has completely failed to pr esent to this Panel any workable model based on
either normative or empirical standards for the proper amount of debt to be restructured. Of course, as
a matter of logic and as supported by the evidence, by the time there is an insolvency, the debt has
been valued by the market. Restru cturing it is merely reflecting on th e books the reality of the market
place. There was no new equity being inserted into these companies; it was merely a matter of
allocating the value as between the various classes of financial instruments. The only question is
whether these companies were kept in existence as going concerns rather than being terminated and
sold off for scrap to obtain a higher value for the creditors. And the EC has presented no evidence that
any creditors, either domestic or foreign or of any class of creditor favoured such a result.

 (d) Re-allocation of negative net worth

 Please refer to Korea’s response to the Panel Question 122.

143. Is it the EC’s argument that the tax exem ption was determinative in the decision to
maintain Daewoo’s shipbuilding operations as a going concern, rather than liquidating them? If
so, where is this reflected in the Arthur Andersen/Anjin report or in other documentation
before the Panel?

Comment on the EC’s new factual information

 In Exhibit EC - 148, PwC argues that tax consequences of the DHI restructuring would result
in lower values for the going concern scenario. B ased on this view, the EC argues that the tax
exemption was a determining factor in the decisi on to maintain DHI’s shipbuilding operations as a
going concern, rather than liquidating them.

 However, as elaborated by Korea in its respon se to Panel Question 116, the EC’s “core claim”
based on Article 46 of the Corporate Tax Act does not make sense, as the proposed DHI spin-off was
to be made at book value (i.e., without valuation at the time of spin-off). Arth ur Andersen’s analysis
of the going concern value had also been based on th e assumption that the spin-off would be made at
book value and, thus, no tax liability would arise under Article 46 of the Corporate Tax Act in
connection with the DHI spin-off. In that regard, c ontrary to the EC’s allegation, there were no tax
consequences that Arthur Andersen had to consider in its analysis of DHI’s going concern value.

 As indicated in Korea’s response to Panel Ques tion 116, even if the DHI restructuring had, in
theory, entailed a special additional tax, it was the remaining DHI as the “transferor” of the assets, not

DSME that was responsible for any such liability under the Corporate Tax Act (Articles 2 and 99).11

 Therefore, the going concern value of DHI could not have been affected by such tax
consequences (if any), because DHI’s going concer n value was to be calculated on the basis of
estimated cash flows from the shipbuilding and machinery operations of DHI (i.e., DSME and
DHIM).

 11 Exhibit Korea – 121, Articles 2 and 99(1). Moreover, the remaining DHI’s obligation to pay the
special additional tax was to be deferred (i.e., the remaining DHI did not have to pay the tax following the spin-
off) by virtue of Article 99(11) of the Corporate Tax Act, as the terms of DHI spin-off as assumed by Arthur
Andersen satisfied all the criteria set out in Article 46 of the Corporate Tax Act.

144. Para. 162 of Korea’s second oral statemen t refers to creditors rejecting the initial DHI
workout proposal. Were such creditors included in the EC’s claim of government entrustment
or direction? If they were entrusted or directed by GOK, why / how did they reject the initial
workout proposal?

Comment on the EC’s new factual information

 Based on the Exhibits referred to in its respon se, the EC makes new arguments that distort the
facts relating to the rejection by certain creditors of the proposed DHI workout plan.

 As described in Korea’s First Written Submission
12, the DHI workout plan itself (i.e., spin-
off, debt rescheduling and debt-for-e quity swap) was rejected at the 3 rd CCFI meeting held on
24 November 1999. Attachment 10 to Korea’s Fi rst Written Submission also shows that Agenda
Nos. 1, 2 and 3, which constituted key features of DHI workout plan, were rejected at the CCFI
meeting. Therefore, the EC’s allegation that “the general plan to restructure Daewoo-HI had been
agreed to at the 3 rd CCFI meeting” (para. 83) is false. 13 The fact that the “ DHI restructuring plan”
itself was rejected at that mee ting is also supported by the artic le from Seoul Economic Daily News
(Exhibit Korea – 104) which clearly states that the “proposed workout plan” was rejected.

 Moreover, contrary to the EC’s allegation, the creditors who rejected the proposed workout
plan included not only the investment trust companies, but also other financial institutions (mainly
non-secured lenders). The investment trust companie s accounted only for 31.99 per cent of the total
voting rights at the CCFI meeting
14, while the actual voting results at the 3 rd CCFI meeting 15 shows
that the voting percentage of the dissenting creditors was substantially greater than 31.99 per cent. In
this regard, the article from Seoul Economic Daily Ne ws again confirmed that the issue was “the debt
recovery ratios between the secured and non-secured creditors,” 16 and therefore, was not confined to
investment trust companies.

 In its response to the Panel question, the EC failed to explain why these creditors had rejected
the workout proposal if they were entrusted or direct ed by the Government of Korea. Instead, it tries
to avoid this difficult question by focusing only on the 4 trillion Won Daewoo CPs because this was
an issue for investment trust companies which pur chased Daewoo CPs, but not necessarily so for the
other financial institutions which also rejected the purposed DHI workout plan.

 However, it is not clear what the EC is trying to establish by arguing that the investment trust
companies objected to the treatment of the 4 trilli on Won CPs with the view that the Government
(through KAMCO) would recognize the “clear inequities”
17 and that, “consequently,” the loan was
purchased by KAMCO at [BCI: Omitted from public version] of its face value. 18 First of all, with
this argument, the EC admits that the investment trust companies were not directed or entrusted to
accept the proposed DHI workout plan. Instead, accord ing to the EC, the investment trust companies
rejected the proposed workout plan in order to draw the Government’s attention to their problem.

 Second, the EC conceals the fact that it was almost one year later that KAMCO purchased the
Daewoo CPs from the investment trust companie s (i.e., between September and December 2000).
19 It

12 See paragraph 351.
 13 The EC relies on the ambiguous statement in Exhibit EC-55, but this must be read in the more
specific context of the CCFI meeting described in Attachment 10 to Korea’s First Written Submission.
14 Attachment 9 to Korea’s First Written Submission.
15 See Attachment 10 to Korea’s First Written Submission.
16 Exhibit Korea – 104.
17 The EC response, paragraphs 86 and 87.
18 The EC response, paragraph 88.
19 See the last paragraph in Korea’s reply to Annex V Questions at page 60 (Exhibit EC-39).

is non-sensical to argue that the investment trust co mpanies’ rejection of the DHI workout plan that
took place on 24 November 1999 was the reason fo r KAMCO’s purchase of Daewoo CPs that took
place 1 year later.

145. The EC requests an adverse inference regar ding Korea’s alleged failure to provide a
copy of the workout plan / report submitted by KDB on 24 November 1999. Please comment on
the explanation set forth at paras 194 and 195 of Korea’s second oral statement. If the EC still
maintains its request, what is the legal basis for that request? Why does the EC consider that
Korea should have made this report available to the EC / Panel earlier?

Comment on the EC’s new factual information

 Korea still cannot understand the basis of the EC ’s request for adverse inferences and what
the EC tries to establish through the alleged adverse inferences.

 It appears that the EC assumes that “the wor kout plan” existed in the form of a separate report
similar to the report prepared by Arthur Ander sen. This is not true. The KDB proposed a workout
plan, based on the Arthur Andersen report, only in the form of “agenda” submitted to the CCFI
meetings. Attachment 10 to Korea’s First Written Submission clearly shows what the workout plan
was actually meant to be. In fact, the agenda No. 1 through No. 7 tabled before the 3
rd CCFI meeting
constituted the “workout plan” proposed by KDB. There was no separate report containing the DHI
workout plan.

 On the other hand, in its very First Written Submission, Korea made clear that KDB had
proposed a “workout plan” (i.e., agenda submitte d to the CCFI meetings) based on the Arthur
Andersen report and that the initial workout plan ha d been continuously revised by KDB as the lead
bank and proposed to the CCFI meetings in the form of agenda.
20 Korea stated that the basic features
of the workout plan had been finalized through th e third, fourth and sixth meetings of the CCFI. 21 In
this way, Korea made the existence of workout plan known to the EC and never concealed it.

 Therefore, the EC’s allegation that Korea re vealed the existence of the workout plan only
after the EC had highlighted it, is inconsistent with the submissions of Korea, and therefore must be
rejected.

158. (a) Is it the view of the EC that excess sh ipbuilding capacity exists only in Korea, or
is there also excess capacity in other countries?

 (b) If your view that excess capacity ex ists only in Korea, please explain.

 (c) If your view is that there is excess capa city also outside of Korea, where and how
much is the excess?

 (d) Is there any excess shipbuilding capacity in the EC? If not, what is the basis for
this conclusion?

Comment on the EC’s new factual information

 Korea notes that there is nothing in paragraph 55 of the OECD document in Exhibit EC – 151
that confirms that Korean shipyards have massively expanded as the EC claims. What the document
states is that Korea has stepped up capacity “by im proving productivity at its yards, especially its
newer facilities that started a more full range of operations since the mid-1990s”. If the increased

20 Korea’s First Written Submission, paragraphs 351 – 353.
21 Korea’s First Written Submission, paragraph 350.

capacity was achieved by improving productivity (for all Korean yards alike, restructured or not
restructured), the excess capacity is not caused by the alleged subsidies. Why would Korea have
stopped productivity increases yielding lower costs, as the EC asserts it should have, because of
existing excess capacity in other shipbuilding countries? This makes no sense.

159. The Panel's written question 30 following the first meeting was as follows:

 "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 prior experience to a shipyard's production cost and
capability to build a particular type of ship? 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".

 Please present a summary of any informatio n already before the Panel, including the
Annex V information, that is relevant to this po int but was not referred to in the EC's original
answer to this question.

Comment on the EC’s new factual information

The Clarkson World Shipyard Monitor for May 2004 now submitted by the EC in Exhibit EC - 152
confirms rather than rebuts Korea’s demonstration that yards do heavily specialize in specific ship
types and size bands and that all yards do not build a full range or even a very wide range of vessels.
Exhibit Korea – 152
 hereto reflects some examples by way of illustration of what is contained in
Exhibit EC – 152 and confirms Korea’s position. There is, therefore, not supply-side substitutability.

160. Concerning the composite ship newbuildin g price index furnished by the EC, the EC
indicates that major shipbuilding consultants al so maintain "more speci fic price information
for particular ship types". In Attachment 2 to its answers to questions, the EC provides price
information for two sizes of tankers and for eight sizes of container ships.

 (a) Is this the "more specific" info rmation to which the EC refers?

 (b) Why does the EC show the particular breakouts that it does? Do other
breakouts exist for these products? Please explain.

Comment on the EC’s new factual information

 It is a matter of opinion only as to what is the most commonly used source of newbuilding
prices. There are many sources other than the “Clark son World Shipyard Monitor” referred to by the
EC such as electronic databases, brokers, broker repo rts and other indices as indicated by Korea in its
response to Panel Question 173.

 In addition, Exhibit EC - 152 does not supply price series indices for all ship types covered by
other analysts and at the very least cannot, therefore, reasonably be described as the most
comprehensive source. The table provided by Korea in its response to Panel Question 173 d) shows
that both Lloyds Shipping Economist and Drewry pub lish prices series in their routine publications
which include ship types and sizes not covered by Clarksons, i.e. Chemical Tankers, Refrigerated
ships (Reefers), General Cargo, LPG (more size options offered), Bulk Carriers (additional size
options) and containers (more size options). For th is reason alone, these other sources of ship prices
must also be considered for the purpose of the present proceeding.

161. The EC presents indices of estimated Ko rean production costs versus prices in support
of its argument that there is price suppression/depression. The EC indicates that its consultant,

FMI, prepared the cost estimates, taking into account various known cost trends and cost
advantages of the Korean yards. The EC in its an swers to questions following the first meeting
provided a description of the methodology used by FMI to prepare these estimates. The EC also
indicated that, should the Panel so request, it would furnish the detailed underlying data. Is it
the view of the EC that a graphical presentation of price indices, along with a description of
methodology, constitutes prima facie evidence of evolution in Korean shipbuilding costs? Please
explain.

Comment on the EC’s new factual information

 In connection with Exhibit EC - 156 (FMI ’s “cost modelling deta ils Angelicousis LNG
Tanker at Daewoo”), the EC does not explain the basis and methodology of FMI’s cost estimation.
The spreadsheet shows various cost categories and relative percentages of cost allocation between
cost categories, but it fails to explain why and ho w such relative percentages between cost categories
represent those of DSME.

 Korea has already shown that the EC’s cost estimation is unr ealistic. In Exhibit Korea – 108
(Cost Analysis Report), KPMG has verified the actual costs incurred by DSME for production of
LNG carriers and confirmed that FMI’s cost estimation was simply a fiction. FMI’s cost analysis is
nothing but an “estimation” from various sources including EC yards and cannot replace the actual
costs. Moreover, it is based on FMI’s experience with the shipbuilding activity of European shipyards.
It is non-sensical to argue that such a fictitious an alysis can provide any plausible estimate of Korean
yards’ costs.

 Interestingly, Exhibit EC - 156 concerns the “Angelicousis” project for which DSME has not
even begun any production work and, therefore, has not yet incurred any actual cost of production.
Nonetheless, the EC claims that it already knows what the DSME cost would be.

 In this situation, it is ridiculous for the EC to state that these cost analysis have led it to
“conclude” that prices offered by Korean yards are not in line with costs of production, and that this
gap is widening.

 In this regard, Exhibit EC - 156 demonstrates that the EC’s argument on suppression or
depression is totally baseless and unrealistic, rather than supporting the EC’s claim.

 Korea has observed a number of times how the EC has attempted to use anti-dumping
theories to support it subsidies case and how ill they fit the treaty language. Now, in addition to trying
to base their subsidization theory on a constructe d value approach, it may be observed from this new
EC “evidence” that they have added the new oddity of apparently claiming that Korea is a non-market
economy and trying to use the EC to develop a surrogate price.

162. What specific evidence/examples are contai ned in the information before the Panel in
support of the EC argument that prices at on e end of the product spectrum for a particular
kind of ship influence prices along the entire spectrum? (For example, is there specific evidence
in the information before the Panel that a down ward movement in very large container ships
brings about commensurate downward movement in all smaller sizes of container ships?)

Comments on the EC’s new factual information

 The quotation by the EC in its paragraph 144 does not respond to the Panel’s question.
Indeed, as the EC’s citation clearly indicat es, the document deals with the geographical
 market and
indicates that the impact on one part of the geographical market is felt in the rest of the geographical
market. That is totally different from stating that th e price of a particular kind of ship influences the
prices along the entire spectrum of the like product ve ssels. Moreover, in any event, the statement by

the OECD Secretariat as referred to by the EC has been the subject of a specific disagreement entered
by Korea and China.
22

 In addition, the information presented by the EC itself in Exhibit EC – 152, page 8 of
Clarksons World Shipyard Monitor for May 2004 issu e, demonstrates that prices of different sizes of
vessels, contrary to the EC’s allegations, do not move together.

 The scale on both the graph on this page and al so Figure 1 in Exhibit EC – 146 also referred
to, obscures the detail of price trends. The following table takes the ship prices from page 8 of Exhibit
EC – 152 and shows the year-on-year percentage vari ations of prices for the different types and sizes
of ships.

Ship
1997 v
1996
1998 v
1997
1999 v
1998
2000 v
1999
2001 v
2000
2002 v
2001
2003 v
2002
Apr 04 v
2003
VLCC – 300,000 dwt 1%
-13% -5% 11% -8% -9% 21% 12%
Suezmax Tkr – 150,000
dwt 2% -15% -3% 24% -11% -6% 18% 14%
Aframax Tkr – 110,000
dwt 1% -16% -4% 26% -13% -3% 19% 16%
Panamax Tkr – 70,000 dwt -16% 0% 16% -11% -2% 20% 9%
Handy Tkr – 47,000 dwt 0% -17% 0% 13% -11% 3% 17% 16%
Capesize BC – 170,000
dwt 4% -19% 6% 16% -11% 1% 32% 17%
Panamax BC – 75.000 dwt 2% -26% 10% 2% -9% 5% 26% 30%
Handymax BC – 51,000
dwt -2% -20% 11% 2% -10% 3% 26% 21%
Handysize BC – 30,000
dwt -5% -21% 9% -3% -3% 3% 20% 14%
LNG 5% -17% -13% 5% -4% -9% 3% 9%
LPG -9% -6% -3% 7% 0% -3% 9% 11%
Container - 725 teu -21% 4% 0% -7% 0% 35% 9%
Container - 1,000 teu -10% -3% 3% -14% 0% 19% 19%
Container - 1,700 teu -16% -6% 9% -14% -2% 21% 18%
Container - 2,000 teu -12% -3% 13% -11% -4%
13% 8%
Container - 2,750 teu -18% 6% 14% -17% -5% 25% 14%

 22 Korea refers to Document C/WP6/SNG/M(2004)1/REV.1 of 4 June 2004 which contains a revised
summary record of the OECD meeting of 29 – 30 March 2004 and provides at paragraph 14 that:

Korea and China made it clear that they do not agree with one of the
characteristics of the shipbuilding market described in paragraph 12(b),
C/WP6/SNG(2004)2, which is not agreed among the SNG members.
Reference is also made to paragraph 17 of OECD Document C/WP6/SNG/M(2004)2 of 5 July 2004
containing the summary record of the OECD meeting held from 27 to 28 May 2004 which refers to the
following statement by China:
The Delegate of China indicated that the effect of an individual transaction on
other transactions should not be overstated, because a single shipyard’s
influence is limited (due to the comp etitive nature of the market). Also,
transactions are all different, and shipbu ilding prices are not transparent in the
market.

Ship
1997 v
1996
1998 v
1997
1999 v
1998
2000 v
1999
2001 v
2000
2002 v
2001
2003 v
2002
Apr 04 v
2003
Container - 3,500 teu -16% -10% 9% -13% -8% 29% 13%
Container - 4,600 teu -13% 26% 15%
Container - 6,200 teu
-17% 18% 15%
RoRo 1,200 - 1,300 Lm 10% -7% -5% -3% 19% 9%
RoRo 2,300 - 2,700 Lm 8% 2% -6% 0% 6% 9%

Index -2% -15% -4% 7% -5% -2% 12% 12%
Note: Tkr = tanker, BC = bulk carrier, LPG = Liquefied Petroleum Gas, Lm = Lane metres

 The maximum and minimum percentage price ch anges are shown in bold and highlighted in
yellow. It can be seen that there is a huge variety of differing trends between both ship types and
different sizes of ship, which is consistent with the fact that there are a range of factors which
influence price as stated by Korea previously.
23 For example:

• At end 1999 compared to end 1998 : The largest (VLCC) tanker prices had dropped by 5 per
cent whilst the two smallest (Panamax & Handy ) showed no change; The largest bulk carrier
had risen by 6 per cent whereas the Handymax had ri sen by nearly double that at 11 per cent;
the 3,500 teu container ship price had dropped by 10 per cent whereas the 725 teu and 2,750
teu prices had risen by 4 and 6 per cent respectively.

• At end 2002 compared to end 2001 : The largest (VLCC) tanker has dropped by 9 per cent
whereas the smallest (Handy) has risen by 3 pe r cent; the Capesize Bulk carrier had risen by
1 per cent whereas the strongest rise was shown by the Panamax bulk carrier which had risen
by 5 per cent; the two smallest (750 teu and 1, 000 teu) container ship s had shown no change
whereas the price for the largest (6,200 teu) had dropped by 17 per cent; the price for the
larger Ro-Ro remained stable whilst that of the smaller vessel dropped by 3 per cent.

 Virtually every year shows examples of diffe rences like these. There are also certain common
overall trends often reflecting world-wide macro-ec onomic factors, e.g., all prices showed decline
between end 1997 and end 1998 and all prices showed an increase between end 2002 and end 2003
but even then the strength of movement varied from –6 per cent to –26 per cent from 1997 to 1998
and from 3 per cent to 35 per cent from 2002 to 2003. In other years the trend is mixed with some ship
series showing prices rising and others showing prices dropping but still with significant differences
in absolute percentage change.

 To clarify that this variability has existe d across the whole time period, the maximum
variations from the 21 price series for each of the yearly comparisons are:

• 1997 v 1996: -9% to +4%
• 1998 v 1997: -6% to –26%
• 1999 v 1998: -13% to +11%
• 2000 v 1999: -7% to +26%
• 2001 v 2000: -17% to 0%
• 2002 v 2001: -17% to +5%
• 2003 v 2002: 3% to 35%

23 Korea Exhibit 70, Korea response to Panel Question 124 and 125.

 These are enormous variations that cannot be dismissed on the basis of gross, macro-level
pricing charts. As Korea has pointed out in many instances regarding the EC's assertions, such a
superficial level of analysis as the EC offers here would never be accepted from a domestic
investigating authority and it follows that the Pa nel cannot base its own decision on such misleading
generalities. The EC's generalized assertions conceal more than they reveal.

163. (a) For each ship category, in prac tical terms how substitutable are different
sizes/configurations (containment syst ems, in the case of LNGs)? Are there
specific evidence/examples in the inform ation before the Panel? In addition,
please furnish relevant portions of the industry publications discussed at the
second meeting. (For example, one industr y expert referred at the meeting to
one of the industry publications that contains information relevant to cross-price
elasticities).

 (b) Can the EC cite specific instances/situ ations in the information before the Panel
where a shipowner has purchased and u sed a larger-than-usual ship for a
particular run, due to a relatively low price for the larger ship?

Comments on the EC’s new factual information

 Korea refers to its comments above as regards the factual information submitted by the EC in
response to Questions 159 and 162.

 The EC attempts to allege that the estab lishment of cross-elasticities must be assessed
independently from demand factors because alle gedly demand has been disconnected from price
because of overcapacity. It then tries to assert that there is cross price elasticity by comparing the
price development for one single type of tankers (Panamax tankers) by comparing the price
development for this single ship type against the development of a price index for a non-specified
scope of vessels but which seems to cover many di fferent ship types incl uding those that are not
concerned by the present proceeding. In fact, however , Korea has argued all along that several factors
contribute to the price level for vessels including demand.
24 At the same time, it is a gross
exaggeration to assert as does the EC that for the purpose of determining price elasticities, the demand
factor must be neutralized because of the exis tence of overcapacity. Thus, for the example of
Panamax tankers chosen by the EC itself, pages 4 and 5 of Exhibit EC – 152 show an increase in
orders from 2002 to 2003 and a corresponding in crease in prices, alleged overcapacity
notwithstanding.

 The demonstration by the EC for one single vessel type is neither a complete response to the
Panel’s question nor representative of the vessels concerned by the present proceeding. This is true all
the more because significant confusion has always existed in the EC’s definition of the product and
chemical tankers concerned by this proceeding and it is not clear to what extent the Panamax tankers
referred to in Exhibit EC – 152 coincide with the co mbined product and chemical tankers that the EC
claims to be the subject of the present proceeding. In addition, however, there are significant flaws in
the EC’s presentation, i.e.:

• The EC has used the example of a Panamax ta nker which it cites as having ‘little change in
demand but significant movement in price’ but this is not corroborated by the data on Pages 4
and 5 of the Exhibit EC – 152.

• Page 4 and 5 of Exhibit EC – 152 show that for Panamax tankers, the ordering trend for Apr
2004 (year to date orders) against last year is shown as ‘ down by 19 per cent ’ and the order

24 As last reiterated in Korea’s response to Panel Questions 124 and 125.

volumes in both dwt and cgt 25 in 2003 are shown as, respectively, ‘77 per cent and 82 per
cent up’ on the levels of 2002. This does not indicate a condition of constant demand.

• Figure 2 shows a line which is by no means constant 26 and moreover month on month order
levels changes are not usually treated as significant trends in themselves.

• The trend is shown over a short time period of one year, during a period where all prices were
seen to be rising to varying degrees.

• In Figure 3, the EC plots the Panamax price against the FMI newbuilding price index, to try
and demonstrate a correlation with overall shi pbuilding price movements. The detailed basis
of construction of the FMI index is not known, but Korea has indicated before that price
indices need to be used with extreme care. To demonstrate this, attention is drawn to the
Clarkson’s price index on Page 8 of Exhibit EC – 152, where at the end of 1996 and the end
of April 2004 the index is shown to be the sa me (at 133) but the prices for the various ship
series are in fact significantly different – the most extreme being the Capesize bulk carrier at
$39 million at the end of 1996 and $56 million at the end of April 2004. The correlation (or
otherwise) of a particular ship series with a price index is not an indication that price
movements or levels are constant within or across ship types and sizes.

166. (a) For each of the three ship types, wh at specific evidence/examples are there in the
information before the Panel (in addition to the domestic complaint by Samsung
against Daewoo) that the restructured shipyards were the price leaders among
the Korean producers?

 (b) What evidence is there in the informat ion before the Panel in support of the EC
argument that the alleged restructuring subsidies enabled the restructured yards
to drive down the prices charged by all other Korean shipyards?

 (c) What has been the annual financial performance of the other (non-structured)
Korean shipyards since the restructuring?

Comments on the EC’s new factual information

 Acknowledging that there is no responsive inform ation currently before the Panel, the EC
attempts to rely on new information in Exhibit EC – 152 that was not already before the Panel. The
EC thereby fails to appropriately and accurately r espond to the Panel’s question. In any event, Korea
notes that the data shown at page 16 of Exhibit EC – 152 shows only the total output in 2003 or total
orderbook as at April 2004 for each yard (recognizing again the near uselessness of the orderbook for
calculating annual market shares). It therefore does not provide any information regarding the
respective market shares in each of the different ship types as requested by the panel. Because the data
is across ship type, the ranking is based on the cgt figure, which allows the workload of different
types of ships to be aggregated. This gives no actual reflection or measurement, however, for the
respective market position of the restructured yards for the ship types subject of the present dispute.
Most importantly, it gives no support at all to any argument that the alleged subsidies resulted in price
leadership. Indeed, it demonstrates that the EC ha s abandoned this critical causal link. Hence, as
Exhibit EC – 82 as well gives no evidence on an alleged price leadership specifically of the
restructured yards and, in particular, in a causal fashion that somehow affected the un-restructured

25 Information on page 5 of the Exhibit.
26 The source of this monthly data does not seem to be in this Exhibit EC – 152.

Korean yards in a special manner of some sort, the EC has failed to provide any evidence as requested
by the Panel.
 27

 Korea refers to its comments to the Pa nel Question 162 regarding the EC’s claim in
paragraph 162 that low prices have a contagious eff ect in shipbuilding. On a point of detail, the EC
also makes an error in interpreti ng the extract from Exhibit EC – 82 when it asserts that three of the
five big chaebols referred to are restructured ship yards. The reference to the 5 big chaebols is to
Hyundai, Daewoo, Samsung, Hanjin and Halla, of which only 2 are (the antecedents of) restructured
shipyards – Daewoo and Halla.

168. The parties disagree as to whether APRG s constitute export credit guarantees and
whether PSLs constitute export credits. Plea se provide any documentation (either from the
shipbuilding industry, the OECD, or any other so urce) that you consider supports your position
on these issues.

Comment on the EC and US new factual information

 The EC cites the so-called Knaepen Report to support its narrow reading items (j) and (k),
first paragraph, of Annex I to the SCM Agreement . However, this illustrates the issue of the
impropriety of making the WTO subservient to th e OECD for interpretation of WTO treaty language.
In its response, the EC acknowledges that the OECD was silent on the point of calculating premia at
the time of conclusion of the Uruguay Round. But the EC offers its interpretation of a later OECD
agreement to the effect that only reference to the buyer-country is u sed and therefore this later OECD
agreement should be binding on the interpretation of items (j) and (k), first paragraph.

 First, Korea does not agree with the interp retation put by the EC on the Knaepen Package
which merely sets guidelines for determining premia in the case of an export country risk but does not
state what other risks can occur in case of an export credit. There is nothing in the language that
compels a limitation in terms of risk factor or recipient of the fac ility. The EC also ignores the fact
that, as Korea demonstrated in its answer to Question 168, many WTO Members (including a number
of EC Member States) issue just the sort of credits and guarantees as provided by KEXIM. These take
into account a number of risk factors, but explicitl y state that they take into account buyer political
factors regardless who the direct recipient of the inst rument is. As was also demonstrated by Korea in
its answer, there is no limitation based on whom is th e recipient of the credit or guarantee. Indeed, it
would create a huge loophole to do otherwise. In light of the EC’s stance and the evidence Korea has
submitted, Korea must once again ask the question: is the EC admitting on the record that it considers
its Member States to be offering prohibited export subsidies?

 Second, even if one were to agree arguendo with the EC’s interpretation of the Knaepen
Package in the context of the OECD, such an OECD interpretation cannot bind the whole of the WTO
Membership. It illustrates perfectly the fallacy of the EC’s approach. Accord ing to panels and the
Appellate Body, the narrow exception of item (k), second paragraph, applies to the OECD
Arrangements even though the OECD is not menti oned. This has been both troublesome and
controversial given the narrow base of OECD Membersh ip. However, to try to claim that this narrow
group can self-define on behalf of the whole WTO Membership the meaning of other WTO treaty
terms such as those in items (j) and (k), first pa ragraph, is unacceptable. The WTO is not subservient
to the OECD. Whatever might be the OECD’s role under the narrow exception of item (k), second

 27 To avoid any possible confusion, Korea would like to clarify that the column s headed Capacity* at
page 16 of Exhibit EC – 152 is not an assessment of capacity in accordance w ith OECD accepted guidelines.
The footnote qualifies that the first three columns provide details of the number of building berths and docks
and maximum length of these, the fourth column is the largest individual vessel built at the yard measured in
gross tons since 1991, and the fifth column is the maximum annual output in CGT since 1991 which can still be
considerably less than the capacity.

paragraph, that is the extent of its legal authority with respect to the WTO treaty.28 The OECD’s remit
does not in any manner go to defining the WTO treaty terms in a manner binding on the DSB and the
WTO Membership.

 Furthermore, without some sort of dispute resolution mechanism within the OECD, there is
simply no basis for stating that the OECD has assi gned a certain meaning to a term. The EC and its
Member States do not control the interpretation of OECD provisions. If another OECD Member such
as Korea disputes the interpretation of OECD language being offered by another OECD Member such
as the United States or the EC Member States, then this Panel cannot simply take the EC’s word on it
for what the OECD Arrangement provides. That is one of the many reasons why the Panel must
interpret such terms as “export credits” or “export credit guarantees” on the basis of their ordinary
meanings, not on a self-serving interpretation of the OECD Arrangement offered by the EC.

 The United States submits some responses fro m the US Ex-Im Bank in response to the
Panel’s question. Korea notes that the US takes a much narrower a pproach to defining terms than it
has in other contexts in the WTO.
29 But, perhaps not -- Korea notes th at the response is quite strictly
phrased as that of the US Ex-Im bank and not the US government as a whole. The submission
concludes: “Because the Ex-Im guarantee covers the ri sk of the US exporter, rather than the foreign
buyer, Ex-Im does not consider this program to be an export credit within the meaning of the OECD
Arrangement.” (Emphasis added) This answer may be all that Ex-Im is le gally permitted to expound
upon, but it is not responsive to the Panel’s question. It also illustrates the difficulty with the EC’s
response as well. The question was whether it is an export credit within the meaning of the WTO
treaty, not the OECD Arrangement . The US answer is illuminating, but more for what it does not say
than what it does.

173 (a) For each of the three ship types at issue in this dispute, how are ship data
normally maintained by the industry, and by industry analysts?

 (b) In particular, are these three categori es of ships recognized and used routinely
for purposes of industry analysis?

 (c) If so, how are they defined, and for what purposes are these categories used?

 (d) When analysts report on pricing tre nds, do they normally refer to prices for
each category as a whole, or for subcate gories thereof, broken out, for example,
by size and/or other characteristics.

 (e) If they provide a range of pricing in formation at different levels of aggregation,
how are these different data series used?

 (f) Please provide documentation (including in particular relevant excerpts from
the published industry reports discussed at the second meeting) showing
examples of the various breakouts to which you refer.

 28 Korea also notes that extreme caution must be exercised on this i ssue of what the OECD
Arrangements mean. Korea has had to illustrate to the Panel a number of instances when the EC has cited
documents that do not reflect a consensus within the OECD. Even worse, the EC has attempted several times to
cite OECD Secretariat language that the EC would (at le ast in instances when it is convenient) have the Panel
refer to as controlling interpretations of WTO treaty language. Often it is not even clear if it is an official OECD
Secretariat view or that of some individual staff me mbers. Certainly OECD Secretariat views cannot be
considered controlling; indeed, regarding the WTO treaty, they cannot be considered authoritative.
29 See Korea First Submission, para. 275, footnote 177, citing: www.fas.gov.itp.wto.disciplines.htm.

Comments on the EC’s new factual information

 Lloyd’s Register in Exhibit EC – 155 groups their ship type categories of:

• ‘Chemical/oil products tanker’ under the basic grouping of Chemical vessel s. It is clear from
this that it is the intention that this category would comprise vessels with chemical capability
and hence an IMO Chemical Class.
30

• ‘Oil products tankers’ under the basic grouping of Oil along with Crude oil tankers.

Additionally, it should be noted that Clarksons, in their publications and databases which are referred
to by FMI (including Exhibit EC – 152), classifies its oil and chemical tanker data as follows:

• Tanker - refers to an uncoated vessel, i.e. cargo tanks are not coated
• Product tanker – refers to a coated vessel, i.e. cargo tanks are coated
• Chemical and oil carriers - refers to vessels with some form of IMO grade tanks (IMO I to
III)

 It is clear that these two reputable industry data sources, submitted as Exhibits by the EC,
both consider vessels with any chemical capability to be a separate category to oil tankers and
specifically to products tankers.

 The EC and FMI have, however, chosen to i gnore this and to try to group together some
vessels with chemical classification with oil products tankers. Thus, they have artificially separated
some chemical vessels from others and
 separated oil products tankers from other oil tankers such as
crude tankers. Their categorization and analysis do es not therefore reflect the main industry sources
that they have, themselves, identified here. The classification used by FMI and the EC does not,
therefore, broadly follow this taxonomy as claime d, and in the case of product/chemical tankers
actually cuts right across it.

 The above comments make it clear that the ship price series referr ed to by the EC in Exhibit
EC – 152, do not include price trends for chemical vessels.

 The EC also erroneously describes the price i ndex published in Exhib it EC – 152 on page 8
‘Shipbuilding Price Trends’ as one relating to the average movement of tankers and bulk carriers
when it is in fact constructed from price moveme nts on a wider range of ship types including, as
confirmed by Clarksons, tankers, bul k carriers, container ships and other dry cargo ships. Korea’s
previous comments on the caution required when using price index data are corroborated by this fairly
basic error made by the EC and its advisors who see m, in fact, to place such store on this one data
source to the exclusion of others.

174. Korea argues that demand should be measur ed in numbers of vessels, and/or workload
years (i.e., order backlog) rather than compensa ted gross tons of new orders. The EC responds
that CGT is more accurate as a measure of s upply and demand, and that even measured in
workload years, demand trends are as represented by the EC.

 (a) Could each party explain the technical differences between the two measures,
and provide further detail as to why it believes its preferred measure represents
a more accurate picture of demand than the other.

 30 Korea has already noted that it is always necessary to be alert to the possibilities of anomalies caused
by data input errors or misreporting.

 (b) Which measure is used by industry analysts and the industry when analyzing
demand trends?

 (c) If both are routinely used, please ex plain the circumstances in which they are
used, and provide examples from independently prepared sources (the published
industry reports discussed at the meeting, OECD documents, etc.).

Comments on the EC’s new factual information

 The Exhibits referred to by the EC do not s upport the conclusion drawn by the EC. Whilst the
EC in referring to Exhibits EC – 152 and 155 has high lighted that there are a range of units provided
which are used according to the requirements of the analysis, (as stated also by Korea
31), there is a
significant difference between stating that CGT is almost solely used in relation to shipbuilding and
inferring that it is also the only measure used in shipbuilding. The EC makes reference to the OECD
use of the measure in capacity evaluation in Exhibit EC – 151, which is entirely appropriate, as it
relates to capacity and cross sector capacity-demand balance. However, it makes no reference to the
OECD’s use of other measures such as, for example, in their own shipbuilding information statistics
which show numbers of vessels, gross tons and CG T as is demonstrated in the OECD statistics on
ship production, exports and orders in 2003 (D ocument C/WP6/SG(2004)5 of 2 May 2004 of which
excerpts are submitted herewith in Exhibit Korea – 153).

 The EC is wrong in paragraph 189 to infer from its reference to Exhibit EC – 151, that ‘The
number of ships is of limited statistical significance in statistical analysis of either the shipping or the
shipbuilding industry….’. For example: it does not seem to recognize that one of the two main
elements of shipbuilding demand – replacement de mand – has to be based on an analysis of the
numbers of ships likely to be taken out of service over a given time period.

 Any analyst recognizes that there is a huge difference between a shipyard that has an
orderbook or annual output of 150,000 cgt comprising:

• a single vessel e.g. 120,000 cgt cruise ship
• 3 large crude oil tankers e.g. 316,000 dwt VLCC
• 6 large oil product tankers e.g. 72,00 dwt product tankers
• 12 small bulk carriers e.g. 30,000 dwt bulk carriers
• a mix of more sophisticated ship types e,g. Ro-Ro, cable layer, ferries

All of the above options could equate to the same cgt value but a very different workload or order
portfolio.

175. In response to EC arguments concerning ma rket share as a factor in price leadership,
Korea variously states that market share does not demonstrate price leadership, but also that
Korean yards' market shares are too small for them to be able to influence prices. Both sides
thus seem to view market share as somehow relevant to the question of price leadership.

 (a) How (on the basis of what sort of concrete data and analysis) can price
leadership be determined/established?

 (b) What role in such an analysis would levels and trends in market shares play?

 (c) How large a market share would a give n market participant need to be able to
exercise price leadership.

31 Korea’s response to Panel Question 173 b).

 Page 16 of Exhibit EC – 152 refers to capac ity but, as mentioned in Korea’s comments to
Panel Question 166, not in any terms that are used by the OECD. In addition, any reference to existing
capacity does not mean that there is any excess capacity as such that would explain, as the EC tries to
portray, a fierce price competition among Korean shipyards triggering price depression or
suppression, let alone prove that the subsidies themselves caused the price depression or suppression.
Finally, the so-called capacity shown in the relevant page is global capacity and not, as the EC tries to
portray, capacity in the market sectors concerned by the present proceeding . Hence, this data cannot,
in any event, support the view that excess capacity caused price depression or suppression for
containerships, product and chemical tankers or LNGs.

 As mentioned above, paragraph 10 of the OE CD document supplied by the EC has been
vigorously contradicted by Korea and China (see Korea’s comments to Panel Question 162).

 Finally, whether in Exhibit EC – 82 or in Exhibit EC – 157, reference is made to the Korean
shipyards as a whole and not to each of the three restructured shipyards individually. Thus, the EC has
not responded to the Panel’s question in particular in subsection (c) thereof. But, in addition, there is
nothing in these documents to support the view that the subsidies themselves caused price depression
or suppression. Even if there were excess capacity on the part of the Korean yards that did not
undergo restructuring that would have brought these yards to lower prices (which Korea disputes),
this would still not demonstrate that the subsidies granted to the allegedly restructured yards caused
price depression or suppression, all the more that there are other large shipyards on the market that
participated vigorously in the bids for the vessels concerned by this dispute.

List of Exhibits

Exhibit Korea – 140 Letter by ABN-AMRO re country risk premium

Exhibit Korea – 141 Anjin comments on the PwC analysis in Exhibit EC – 145

Exhibit Korea – 142 “Background report – Detailed eval uation of key price movements”
prepared by the EC’s consultant, FMI, in August 2003

Exhibit Korea – 143 KEXIM report regarding the incompatibility between credit and
corporate bond ratings

Exhibit Korea – 144 KEXIM’s list of PSLs (excerpts)

Exhibit Korea – 145 Corrigendum to the EC’s recalculation on Samho

Exhibit Korea – 146 Corrigendum to the EC’s recalculations on DSME

Exhibits Korea – 147 Corrigendum to the EC’s recalculations on Hanjin

Exhibit Korea – 148 Corrigendum to the EC’s recalculations on HHI

Exhibit Korea – 149 Corrigendum to the EC’s recalculations on Mipo

Exhibit Korea – 150 PSL duration for each instalment disbursement

Exhibit Korea – 151 Korea Development Bank’s Notices on termination of DSME
workout

Exhibit Korea – 152 Absence of supply-side substitutability as demonstrated in Exhibit
EC – 152

Exhibit Korea – 153
 OECD statistics on ship productio n, exports and orders in 2003,
C/WP6/SG(2004)5 of 2 May 2004 (excerpts)

NOTE
: Exhibits containing Business Confid ential Information are shown in bold
hereinabove.

ANNEX G-6

COMMENTS OF KOREA ON THE RESPONSES BY THE
EUROPEAN COMMUNITIES TO SUPPLEMENTAL
QUESTIONS

(23 July 2004)

II. TO THE EC

A. APRG/PSL

187. Please comment on Korea’s recalculations of benefit in Exhibits Korea - 91-102.

Korea’s comments

 Please refer to Korea’s comments on the Panel’s Question 136 to the EC at pages 16 to 23 of
Korea’s submission of 9 July 2004.

B. ALLEGED ACTIONABLE SUBSIDIES

188. Concerning the question of whether the rest ructuring of Daewoo was subsidized, please
provide a summary, based on all of the submission s of Arthur Andersen/Anjin and PwC, of the
EC’s analysis and conclusions in respect of whether DHl should have been liquidated instead of
restructured. In this summary, all relevant figures should be shown in tabular from, with cites
and cross-references to the original Arthur Andersen report of November 1999 assessing the
value of DHI under various scenarios.

Korea’s comments

 Nothing in Exhibit EC-158 (PwC’s Report) est ablishes that DHI should have been liquidated
instead of restructured. Despite all of the anal yses which PwC attempted to build in its various
reports, PwC continuously concludes that the goi ng concern value of DHI was greater than the
liquidation value or that “it is not clear” that the going concern scenario, after taking into account the
correction for the tax shield effect, would have remained the preferred solution.

 In any event, PwC’s assertions are based on a mis-presentation of facts and an application of
finance theory that makes no sense. Exhibit Korea-141 (Anjin’s 2nd Response) clearly demonstrates
that the restructuring of DHI was the best solutio n for the creditors. In addition, Korea submits as
Exhibit Korea – 154
 Anjin’s 3rd Response, dated 23 July 2004, to the PwC’s report (Exhibit EC-
158).

189. Concerning the Daewoo restructuring:

 (a) Concerning the most recent PwC submission (Exhibit EC - 145), please explain
in detail the statement at page 3 that the Anjin analysis indicated “that the

Enterprise Value of the restructured company is lower than the Enterprise
Value of the company computed without debt restructuring”.

 (b) What is “enterprise value” and how does it differ from “going concern value”?

 (c) What is the significance of the fact that the “enterprise value” was lower under
one set of calculations than under another? How if at all does it affect the central
issue raised by the EC, namely the deci sion to restructure instead of liquidate
Daewoo?

 (d) What is the significance of Anjin’s reply in Exhibit KOR-7O that enterprise
value was reduced under the analysis of the restructuring scenario from what it
had been under the valuation of tile non-restructured company? What if
anything is the significance that enterprise value calculations differed under two
scenarios for the central issue posed by th e BC, namely whether it was better to
liquidate
 or to restructure Daewoo?

Korea’s comments

 Please see Section III.2 of Exhibit Korea – 154 (Anjin’s 3rd Response) for detailed
comments on the EC’s reply.

 As explained in the above section, the EC is trying to mislead the Panel by concealing the fact
that the debt-to-equity swap contemplated in the DHI restructuring reduced the enterprise value of
DHI as a restructured company by increasing the We ighted Average Cost of Capital (the discount
rate). Contrary to the EC’s allegation, Anjin (A rthur Andersen)’s calculation of the enterprise value
was accurately made in accordance with the fina nce theory and there was no underestimation or
overestimation.

 Consequently, the EC’s allegation that Arthur Andersen suddenly took into account the value
of the remaining DHI’s assets in order to come up w ith a post-restructuring enterprise value that is
higher than the pre-restructuring value, is totally without merit. Moreover, Korea has demonstrated, as
supported by Anjin’s report (Exhibit Korea-141), th at the size of any recoverable amounts from the
remaining DHI does not make any difference in th e comparison between the going concern value and
the liquidation value, because the same estimated recoverable amount was incorporated into both the
going concern value and the liquidation value. Please see also section III.2.2 of the Exhibit Korea-
154, Anjin’s 3rd Response.

 The EC argues that the liquidation value of [BCI: Omitted from public version] was a
“new fact”. However, this figure was not a “new” fact. As explained in Section III.1.1 of Exhibit
Korea- 154 it was already presented in the 1999 Arthur Andersen Report (Appendix 11). This means
that when the creditors consider ed all the valuations presented by Arthur Andersen in the 1999
Report, they also considered the amount of [BCI: Omitted from public version] which was
mentioned in that Report.

 In fact, the 1999 Report, as analysed and cl arified by PwC and Anjin in their numerous
reports submitted to the Panel as exhibits, clearly demonstrates that this 1999 Report was a thorough
and comprehensive report based on in-depth analysis and gave the creditors reliable information in
deciding on the restructuring of DHI. The 1999 Report shows that, when it made its assessment, Anjin
considered carefully all the relevant data a nd circumstances relating to the Korean economy,
shipbuilding industry and individual shipbuilders, as well as the business plans of DHI, in order to
provide an objective and independent assessment of the real situation of DHI and of the various
options available to the creditor financial instituti ons. Therefore, the creditor banks acted prudently

when they decided on the DHI restructuring ta king into account the findings and recommendations
contained in the 1999 Report.

190. The data presented in Exhibit KOR-108 show interest and depreciation expense in the
cost/profitability analysis for Daewoo. Please comment. How can this be reconciled with the
EC’s assertion that these costs have not been adequately reflected in Daewoo’s prices?

Korea’s comments

 (i) With regard to paragraph 9 of the EC’s response:

 Please see the document entitled “Response to Para. No. 9” in Exhibit Korea – 155

(KPMG’s Supplemental Response) for comments on this paragraph.

 (ii) With regard to paragraphs 10 and 11 of the EC’s response:

 Please see “Response to Para. Nos. 10 and 11” of Exhibit Korea – 155 for comments on
paragraphs 10 and 11.

 (iii) With regard to paragraph 12 of the EC’s response:

 As conceded by the EC itself, KPMG has comp ared the cost estimates or assumptions made
by FMI with the real costs incurred by DSME. KPMG has found that FMI’s cost
estimates/assumptions were extremely higher than the real costs.

 Of course, the real costs incurred by DSME were based on the debt situation of DSME after
the debt restructuring was made, as the actual construction of the vessel was carried out after the debt
restructuring in October 2000. Nevertheless, contra ry to the EC’s allegation, KPMG also confirms
that, even if the pre-restructuring debt alleged by the EC had been taken into account, DSME could
have offered the price of [BCI: Omitted from public version] that would still have yielded revenue
and profit (see section 2.5.4 of Exhibit Korea- 108 (KPMG’s Cost Analysis Report)). KPMG has
confirmed that the ordinary income from the thre e LNG carrier projects ranged from 18.8 per cent to
28 per cent of the sales revenue. Under these circumst ances, even if the “pre-restructuring” debt
servicing costs alleged by the EC were reflected in the DSME’s cost base, the projects would still
have generated a substantial ordinary profit.

 This means not only that the FMI’s “cost estimation or assumption” bears no relationship
with reality and that it is useless for providing an y sort of indication or guidance as regards DSME’s
actual costs, but also that there was no causal link between the alleged subsidy granted to DSME and
the actual prices for the LNG carrier projects.

 (iv) With regard to paragraph 13 of the EC’s response:

 Please see “Response to Para. No. 13” in Exhibit Korea – 155.

 (v) With regard to paragraph 14 of the EC’s response

 Please see “Response to Para. Nos. 14 and 22” in Exhibit Korea – 155 for comment on
paragraph 14.

 (vi) With regard to paragra phs 16 and 17 of the EC’s response:

 Please see “Response to Para. Nos. 16 and 17” in Exhibit Korea –155.

 (vii) With regard to paragra phs 17 to 21 of the EC’s response:

 Please see “Response to Para. Nos. 17 - 21” in Exhibit Korea– 155 for detailed comments on
these paragraphs.

 (viii) With regard to paragraph 22 of the EC’s response:

 Please see “Response to Pa ra. Nos. 14 and 22” in Exhibit Korea – 155 for comments on this
paragraph.

 (ix) With regard to paragraph 23 of the EC’s response:

 Efficiency is achieved not only by investment in facilities, but also by the increase in the
productivity of the workforce, development of ef ficient management systems and other similar
intangible improvements in the building process. Kor ean shipbuilders are known to be particularly
efficient in terms of these latter factors. Shipyards which are efficient in this sense would have a low
level of the “contract specific cost” which the EC includes in the category of “other direct costs.”

 Moreover, although it may be true that DS ME made some capital expenditures towards
building LNG carriers, DHI began to make such inv estments already in the early 1990’s. Therefore,
FMI’s assumption that DSME made all of capital expenditures when it procured the LNG contracts in
2000 is not correct. Furthermore, KP MG has confirmed that the actual cost of investment incurred by
DSME was far lower than what has been assumed by FMI based on its experience with the European
yards.

 In any event, as a matter of principle, it is in correct to attribute to Korean shipyards the costs
of the European shipyards as was done by FMI since th e cost structure of Korean and EC shipyards is
totally different.

 (x) With regard to paragraph 24 of the EC’s response:

 Again, in this paragraph, the EC is trying to impose the European yards’ cost model upon
DSME. There is no point in this line of argument in a situation where an independent accounting firm
has confirmed that the cost structure suggested by FMI based on the European model was totally
different from the actual cost structure of DSME.

 Contrary to the EC’s allegation, KPMG did no t say that these costs did not exist at all in
DSME. In Exhibit Korea-108, KPMG indicated that the cost items mentioned by FMI (i.e., “cost of
investment” and “contract specific costs”) were included in the DS ME’s cost items under different
account names (e.g., “repair expenses” and “depreciation” for “cost of investment”, “overhead costs”
and “SG&A expenses” for “contract specific costs”). Please see section 2.5.3(3) b. and c. of KPMG’s
Cost Analysis Report (Exhibit Korea-108). In additi on, KPMG has confirmed that, in any event, the
amounts allocated by FMI to these costs were signi ficantly higher than the actual costs confirmed by
KPMG from DSME’s accounts.

 (xi) With regard to paragraph 25 of the EC’s response:

 The EC presents no plausible basis to s upport its doubts regarding the accuracy of the
ordinary income margin as confirmed by KPMG. Howe ver, the ordinary income of DSME is a “fact”
that cannot be denied by a mere suspicion. From the viewpoint of inefficient European yards, it may
look unrealistic that the Korean yards are making such high profits. But it should be noted that the
outstanding performance by the Korean LNG yards has been made possible by such a profitability.

191. Exhibit KOR-107 sets forth the results of th e court-ordered/supervised restructuring of
Daedong. Presumably, such a restructuring had to proceed in accordance with Korean
bankruptcy law. On what basis does the EC allege that nevertheless it involved a subsidy?

Korea’s comments

 The EC fails to acknowledge that the decisions to restructure a bankrupt company within the
bankruptcy proceeding are made by the bankruptcy court, not by the creditors. Korea has
demonstrated that, although a creditor bank may participate in the bankruptcy proceeding as members
of the interested parties’ meeting, it can neither take nor control the decision to restructure the
company under the Korean law. In such a legal syst em, the EC fails to explain how the restructuring
decision made by the bankruptcy court can constitute a subsidization by a creditor.

 Moreover, the EC does not explain what “market” it refers to, when it says that a benefit may
exist if the terms of the restructuring are more favourable than what would be obtained in the
“market” even within a bankruptcy proceeding. In the court receivership proceeding, the restructuring
has to proceed in accordance with the bankruptcy law. The bankruptcy court initiates the proceeding
and approves the restructuring plan only when the going concern value of the company has been
determined to be greater than the liquidation valu e. Other than this, the Korean bankruptcy law does
not require the bankruptcy court to look into any “market” in approving the restructuring plan. Indeed,
it does not make sense for the EC to suggest that a Korean bankruptcy court should try to find a
benchmark for a restructuring procedure of a partic ular corporation where such argument is unheard
of for any bankruptcy proceeding in any jurisdiction. In fact, there is no “market” that the court can
refer to when it determines the restructuring plan, because the restructuring plan, in nature, has to be
tailored to the specific situation of a particular bankrupt company.

 In any event, the EC has failed to prove that the terms of the restructuring of Samho and
Daedong were more favourable than what would be obtained on the “m arket” (whatever that may be)
within the specific bankruptcy proceeding for these companies.

C. SERIOUS PREJUDICE

192. One conclusion that might be drawn from Exhibits KOR-91-102 is that Korea accepts
that there is a benefit from the KEXIM financing at issue, but that the benefit in a number of
cases is quite small (0.5 per cent or less). If on e accepts that the benefit is of the magnitude
reflected in these Korean exhibits, what woul d be the implications for the EC’s serious
prejudice analysis and conclusions?

Korea’s comments

 At the outset, Korea notes that it was offering the referenced analysis in the alternative.
Korea does not in any manner accept the EC’s premise that there was a benefit provided. In Korea’s
view, the EC has utilized incorrect benchmarks a nd analytical approaches. However, Korea has
endeavoured to show that, even using such fl awed data, the EC’s calculations result in a de minimis
level of subsidization. It is in the nature of cases such as this where there are a great many issues
dependent on previous affirmative findings by the Panel that, in the absence of knowing ahead of time
whether the Panel has made such affirmative findi ngs on specific issues, Korea has felt compelled to
respond to many EC allegations that Kor ea considers should be moot but cannot assume to be moot
for purposes of presenting its case. It is also in th e nature of such cases, that this arguing in the
alternative is a burden that weighs particularly heavily on the respondent. Korea considers it very
important that none of its arguments in the altern ative be taken to mean that it accepts the EC’s
arguments on prior elements of the case.

 Keeping the above-qualifications in mind, Korea notes that the EC continues to allege in its
response that the KEXIM financing allows Korean shipyards “to offer a lower price than competing
shipyards or to otherwise provide the most attract ive contract terms for the buyer” and would thus
“significantly strengthen the ability of KEXIM-subsid ised shipyards to maintain their capacity (and
the low prices in the market) when they would otherwise exit the market or reduce capacity”.

 Korea notes that there is not even an attemp t on the part of the EC to adduce evidence in
support of its response to the Panel’s question. Ne ither does the EC respond to Korea’s arguments in
its comments to this Question as set forth in Korea’ s submission of 9 July. In short, for the Panel’s
convenience, these comments were the following:

- the conditions at which KEXIM financing w as extended became more expensive as is
recognized by the EC – these more expensive conditions (i.e., no longer a “benefit”) cannot,
therefore have led to price suppression or depression;1

- qualitative effects of an alleged subsidy only are insufficient when Article 6.3(c) of the SCM
Agreement requires to demonstrate that the alleged subsidies have had a significant price
depressive or suppressive effect, thus requiring a quantification;

- the very small benefit that the EC has been able to allege through the KEXIM financing is
totally out of proportion with the range of th e price depression and/or suppression margin that
the EC alleges – there is no significant price depression and/or suppression caused by the
alleged KEXIM benefits, all the more since the EC recognizes a very substantial cost
advantage to the Korean shipyards vis-à-vis the EC shipyards;

- the EC fails to demonstrate that the alleged subsidies as such (rather than the products) have
caused significant price depression and/or su ppression though this is required under
Article 6.3(c);

- even if one were to consider the effect of the products rather than that of the subsidies, the EC
makes price depression and/or suppression alle gations for the Korean commercial vessels at
large in spite of the fact that the evid ence demonstrates that KEXIM financing was not
granted for many of the vessels sold thereby di sproving that the financing kept in place
capacity that would otherwise have exited the market;

 - allegations in relation to price undercu tting that the EC itself abandoned cannot be
reintroduced under the guise of establishing price depression/suppression;

- EC subsidies of a substantia lly higher level are afforded to the EC shipyards overwhelming
and displacing any effect of the alleged Kor ea subsidies - it would be impermissible to
attribute to the Korean subsidies effects that were actually caused by the much larger EC
subsidies.

193. Exhibit KOR-112, concerning MOCIE’s interv ention at the request of Samsung, could
be viewed as indicating that the government takes action if prices are too low. If this is the case,
what are the implications for the EC’s serious prejudice claim?

Korea’s comments

 Korea stands by its earlier explanation of MOCIE’s actions. Please refer to Korea’s comments
on this Panel Question, submitted on 9 July 2004.

1 Korea would like to recall its overall arguments regarding evidence in the context of injury-type
investigations, that it is necessarily the case that the most recent periods are the most relevant.

 However, it is with interest that Korea notes th e EC now is forced to deny the role for MOCIE
that the EC itself alleges. If the EC’s allegations regarding MOCIE were to be considered correct,
then the MOCIE intervention indeed does undercut th e EC’s serious prejudice claim. The EC cannot
have it both ways.

194. If the Panel were to accept the product subdivisions set forth in Exhibit KOR-109, how
would this affect the EC’s analysis of price suppression/depression? Please respond in detail.

Korea’s comments

 The EC’s answer has begged the Panel’s question. Instead of responding to the question, it
attempts to make claims contradicting its former statements, hiding between a wall of generalization
whilst making disparaging remarks without purpose or s ubstance. Korea reads this lack of substantive
response and mix of contradictory claims to demons trate that the EC does not wish to answer the
Panel’s question because it will corroborate Korea’s approach and claims.

 (i) With regard to paragraph 30 of the EC’s response

 The EC now confirms that a larger ship costs more than a smaller ship and that economies of
scale mean that parametric unit prices reduce as ships get bigger. This is precisely what Korea has
been arguing: by amalgamating ships of different sizes, prices are taken into account that are not
comparable because they reflect sh ips that are widely different in size. This cannot yield an accurate
portrayal of price trends. Whether for price undercutting, price depression or suppression, prices for
different sizes of ships are widely different and ca nnot be compared in order to derive an accurate
price trend.

 The EC further implies that work content is the only measure relating to shipbuilding whilst
cargo-carrying parameters relate only to shipping . The shipbuilding market comprises suppliers and
customers and the customers are shipowners who deal in cargo measures, hence cargo measures are
part of the shipbuilding market, as well as the shipping market. Shipbuilding demand has to be
calculated from a basis of cargo measures because that is the demand driver which underpins the
requirement for ships (i.e, ships are required in order to carry cargo). Following the projection of
demand in cargo measures, because of the differing cargo measures used for different ships, cargo
measures are converted into CGT, using assumptions on vessel size mix distributions. This is done to
allow the aggregation across different ship typ es that is necessary to calculate total demand.
Shipbuilding capacity cannot be calculated separately by ship type
2 and hence it is not possible to
undertake supply-demand balance analysis at ship type level. Thus, the EC’s reliance on CGT is
inconsistent with its own suggested three-way segmentation of the market.

 The EC’s view that price should be considered solely on a parametric basis of CGT would
imply that price is considered only to be influe nced by the aggregate supply-demand balance or by
supply side work content criteria and that price will vary directly in relation to CGT for all sizes of
vessels of a given ship type. Hence, the EC now seems effectively to be saying that material resources
have no impact on the ship prices
3. This in turn would imply that the demand side criteria, such as the
earnings capacity of the ship, have no influence at all on the investment price that an owner will

 2 This inability to segment shipbuilding capacity by ship type is the non-homogeneity referred to by
Korea in its response to Panel Question 125 which seems to have confused the EC in its ‘Comments on New
Factual Information’, page 10 as submitted by the EC on 9 July 2004.
3 It should be remembered of course that CGT in no way indicates the amount of material required to
build the ship only the labour content. Hence, it take s no account of the different ec onomies of scale present in
terms of material resources compared to labour resources for building ships of different sizes.

accept. This, presumably, would imply, for example that the shipowner has no interest on the return
on their investment. It is clear that this is simply not the case.

 The weakness of the EC’s relia nce on CGT is further exposed when it is realised that ships
are never segmented size wise on the basis of CGT. The onl y place that Korea has ever seen this is in
the EC’s own analysis and Annex V disclosures in respect of price undercutting, suppression and
depression. At no time has the EC put forward third party examples of the use of CGT for size
segmentation and this is because it is simply not used in the industry. If the EC accepts size
segmentation, it must accept this on the basis of cargo measures, which would question its absolute
dependence on CGT as the basis for all its analysis.

 Korea has made it clear that it believes that pri ces in shipbuilding are influenced by a range of
factors. Examples of such factors have been referred to by the EC as well as Korea. OECD documents
have been submitted showing that OECD members cons ider that prices are influenced by a range of
factors even though there are differences of opinion on the full range of the factors concerned and the
extent of correlation between these factors under di ffering market conditions. The EC cannot now be
arguing that only work content or macro-level supply-demand balance influence ship prices.

 In its simplest form, cost is generally c onsidered a supply-side factor whereas price is
considered a demand side factor. It is hard, th erefore, to understand the logic which underpins the
claim that a price analysis should consider only one si de of the market and that this should be dictated
by a supply-side measure such as CGT (which onl y sellers understand and use), rather than demand
side measures such as cargo measures (which both buyers and sellers use and understand) and that
furthermore it is only the labour aspects of work c ontent that should be considered. Moreover, if, as it
has been alleged, the shipbuilding market is a buyer’s market, it then follows that demand side criteria
are more likely to dominate.

 It is interesting to note that, Clarkson’s Ship yard Monitor (and its sister publication Shipping
Intelligence Weekly), which the EC believes to be the leading source of industry data, compiles its
newbuilding index by averaging the US $/DWT acro ss a broad basket of ship types calculated from
its price series for different ship types. Clarkson’s would therefore seem to feel that price per cargo
unit (dwt being a cargo measure) is an important part of shipbuilding. This is confirmed in Clarkson’s
Sources and Methods statement (Page 4 last paragr aph under section on Newbuilding Contracts and
Prices) which is provided in Exhibit Korea – 156

 (ii) With regard to paragraph 31 of the EC’s response

 The EC makes disparaging remarks about Korea’s understanding of the economics of
shipbuilding prices, whereas it might be better serve d by reading what was actually written. All the
while, the EC does not respond to the simple mathema tical fact noted by Korea: an average price for
period A during which primarily large-size, low unit- priced ships are built cannot be compared to an
average price in the successive period B during wh ich primarily small-size, high unit-priced vessels
were built to determine whether price depression or suppression existed. This is inherent in the
statement made by the EC itself: large-size ships are sold at much higher prices than small-size ships.

 We note that the EC refers to weighting of prices according to product mix. Product mix is a
term that refers to types of ships and sizes of ve ssels, however in this instance, the graph only
represents weighting by size and not type of vessels, and so the EC is referring only to one of the two
aspects of product mix. It is, however, worth noting, that the EC has in this fashion confirmed that
both size and type are important parts of shipbuildi ng product mix, but it is therefore all the more
difficult to understand their stance that ship size do es not count. The illustration in the graph referred
to by the EC using weighted average pricing was used to demonstrate the distortion that can be
produced in simple average parametric prices (e.g., $/TEU) if no consideration is taken of the size mix
of the demand over one period compared to the size mi x of another period. This relates to the fact

that there are different factors that do not work in unison for all ship sizes. This in turn relates to the
case put by Korea that ship size categories need to be taken into account as they represent different
market factors because, for example:

 - Not all shipyards can build all sizes of ships;
4

 - Ships of differing size are not used interchangeably;

 - Economies of scale exist in relation to bot h ship construction costs and ship operating
costs;

 - Prices vary differently for different types and sizes of ships;

 - Freight rates vary differently for different types and sizes of ships.

 The EC in its price analysis, invokes this sort of distortion when it uses parametric pricing
without the use of size bands – a weighted average price at any given point of time when primarily
large ships are built simply cannot be compared to a weighted average price in the next period when
primarily small ships are built.

 (iii) With regard to paragraph 32 of the EC’s response

 Yet again the EC contradicts itself regarding its reference to complex passenger vessels when
its states that ‘cruise-ferries’ are being built in Korea and China when trying to rebut Korea’s
arguments against universal supply-side substitutab ility. In paragraph 158 of the EC’s response to
Panel Question 165, the EC itself states “ or in the case of cruise ship operators who need vessels of
such sophistication that Korean and Chinese yards are not considered experienced enough to deliver
an acceptable ship.’ Now it seems when this argument does not suit them they refer to ‘cruise-
ferries’ being built in South Korea and China. Which of these conflicting statements does the EC wish
the Panel to believe? Further, Korea would like to point out that these ‘cruise-ferries’ are in fact
ferries not cruise ships, as the EC is now trying to imply, and small ones at that. The maximum size of
such vessels:

 - in Korea being approximately 45,000 GT with a length of 210m

 - in China being approximately 30,000 GT with a length of 200m

in contrast to the cruise ships of up to 148,000 GT with a length of up to 350m being built in the EC
cruise shipbuilding yards. Cruise ships involve th e height of luxury and only carry passengers for
dedicated leisure purposes. Ferries can carry people and/or vehicles and may be used for both leisure
and/or commercial purposes. They do not involve the height of luxu ry and can range from very basic
cross-river craft to higher technology sea-going vessels, however in no way do they approach the
complexity of cruise ships. Trying to compare thes e vessels to each other and group them in to the
same complexity category is like trying to compar e a crop-spraying aeroplane with an executive Lear
jet aeroplane.

 To further demonstrate the inconsistency of th e EC, in paragraph 165 of the EC’s response to
Panel Question 167, the EC refers quite clearly to ferries being built in Korea and refers of Korea’s
intentions to ‘pursue the cruise ship sector’ recognising that it does not currently build such vessels. In
no way are the terms ‘cruise ship’ and ‘ferry’ treated by the EC as being the same, but now suddenly,
these ferries are being described as ‘cruise-ferries’. The reality is that Korea builds some ferries but
does not build cruise ships. China builds some ferries too but also does not build cruise ships. Japan

4 Korea also submits that not all shipyards are credible builders of all types of ships.

delivered its first cruise ship in February this year (i.e. 2004). Cruise shipbuilding competence is
centred in EC yards despite th e EC attempts now to imply otherwise and to dismiss Korea’s
comments by misrepresentation.

 The EC refers to Exhibit EC-152 regarding the alleged diversity of the Korean shipyard
orderbooks but with its now familiar unspecified generalisations. Korea offers the following facts
from the shipyard orderbook section of this Exhibit
5:

• Samho has 70 ships on order totalling 8.3m DWT of which 39 are container ships of 4,130
TEU and above, 25 are tankers of 105,000 DWT and above (i.e. outside the size of the EC’s
ill-defined product/chemical category), 4 are bulk carriers of 170,00 DWT or above and 2 are
LPG ships of 82,000 cbm. Only the container ships therefore overlap with the ship types
under review and these are all above 4,000 TEU and 75 per cent of them are above
5,000 TEU.

• Daewoo has 104 ships on order totalling 11.4 million DWT of which 34 are tankers of 69,000
– 306,000 DWT. 19 are container ships of 4,000 TEU and above, 17 are LNG ships of
138,000 cbm and above (three of which have regasification capability), 13 are pure car
carriers, 8 are bulk carriers of 75,000 – 174,000 DWT, 7 are LPG ships of 38 – 78,000 cbm, 6
are products tankers of 49,000 – 105,000 DWT. There are also two non-ship offshore
structures on order.

• STX has 95 vessels on order totalling 4.8m DWT of which 67 are products tankers of 29,000
– 75,000 DWT, 18 are container ships of 2,500 – 3,500 TEU , 6 are bulk carriers of 75,500
DWT, 2 are chemical/oil carriers of 38,000 DWT and 2 are LPG ships of 23,000 cbm.

 The EC claim seems therefore to have mixed typ es from various yards together to arrive at its
list.

 (iv) With regard to paragraph 33 of the EC’s response

 Both parties are now it seems in agreement th at ships are made-to-order products and that
there will inevitably be differences of specificatio n between such ships. However, it should be
remembered that elsewhere in its arguments, the EC has looked at price undercutting allegations on a
US$/CGT price basis without any acknowledgement that specification differences may underpin price
differences, as well as other factors. Once again it s position seems to change according to its current
line of argument.

 The EC alleges that Korea has tried to a void SCM disciplines by creating unlimited numbers
of categories of products. However Korea has, in fact, not only based its price analysis on basic ship
type and size band categories but has also demonstrated that there are other owner requirements which
differentiate ships that may lie within the same si ze and type groupings. Such factors can significantly
alter the cost of such vessels and th e price that an owner will be prep ared to pay. Far from tying to
avoid SCM disciplines, Korea has recognised that practical consideration must be given to the basis of
analysis
6 in accordance with the strict provisions of the SCM Agreement and has, therefore,
undertaken its price analysis on clearly defined size and type groupings.

 Korea considers that it is the EC that is trying to avoid the SCM disciplines by gross
generalisation and its extraordinary claims that all ships of one basic type are interchangeable and are
to be treated collectively irrespec tive of size. In its attempts at collectivisation, it has made some

5 We have had to use Clarksons ship type categories for tankers, which include chemical/oil for ships
with some IMO class and products.
6 Exhibit Korea – 70 page 5.21 and others.

serious errors, for example, it firstly tried to cl aim that product and chemic al tankers are a single
entity, it subsequently confirms that it is excl uding pure chemical carriers, it then uses sloppy and
inaccurate data classifications that do not recogni se regulatory differences between chemical tankers
(as reflected by IMO chemical cl asses) and now seeks to group toge ther some, still undefined, types
of chemical tankers with pure products tankers, the latter of which are not allowed to carry chemicals
at all.

 Korea has taken considerable care to clearly e xplain the differences that do exist, to explain
that there are inevitably grey areas
7 of overlap but that size and type categorisation result in a more
pertinent analysis of the facts than the gross genera lisations that the EC puts forward. The fact that
much of the expert analysis undertaken by FMI for the EC has also chosen to adopt broadly similar
size bands8 clearly demonstrates that size segmentation is normal but that there are variations on the
bands used by various parties or for various purpo ses. This is not evidence to support the EC’s ‘no
size segmentation’ arguments. One must ask the ba sic question of why the EC and its advisors FMI
have ever made use of size bands if their assertion is that no size segregation is relevant rather than a
difference of view in respect of the actual bands used for analysis? The EC is therefore consistent only
in its inconsistency – overlooki ng its own use of size bands when it sees advantage in
‘collectivisation’.

 (v) With regard to paragraph 34 of the EC’s response

 Exhibit Korea - 109 was submitted to summa rise and present the case for like product
definition and not to restate the analysis rebu tting alleged price suppression and depression which is
reflected in the Drewry Report submitted as Exhi bit Korea - 70. The legal concept of like product
requires market categorisation which is driven by di fferences in technical characteristics as perceived
by the user and reflected in end use. The disagre ement between the EC and Korea on the use of CGT
vs DWT/TEU or other cargo measures lies at the h eart of this. The Panel recognises this, together
with size segmentation, in its question with its re ference to ‘product subdivisions’ but the EC has
chosen to ignore this in its response.

 The EC refers to its Attachment 2 to the Response to Panel Questions following the first
substantive meeting in respect of its price analysis. It is interesting to note that in the first paragraph of
this document the EC recognizes ship size in its statement ‘ and figure 1.2 shows how this order
intake was distributed by size’. If size is not an issue in price suppression and depression, why is it the
second factor highlighted in the FMI report?

 Korea has already highlighted in its comment s on the EC’s response with regard to Panel
Question 162 submitted on 9 July 2004 that the gra ph submitted by EC on page 5 of Exhibit EC-146
does not demonstrate ‘sub-classes of ships moving broadly in unison’ and that the small scale with
which the EC has presented this graph has masked significant variations, which are clearly evident in
the numeric tabular format used by Korea to analy se the same Clarkson’s price series data. Korea has
in no way been selective in doing this as it has used the example quoted by the EC and has analysed
every price series in that example and the result is evidence of significant price trend differences.

 Korea’s presentation of evidence in this fash ion also demonstrates the inaccuracy of FMI’s
comments regarding ‘strong correlation of price m ovements’ in its Attachment 2 document. Once
again, the EC has used small-scale graphical prese ntation to mask the significantly different price
variations that are evident from numerical presentatio n of price trends. For example Korea’s analysis
highlights that between the end of 1998 and 1999, VLCC tanker (300,000 DWT) prices dropped by
5 per cent whereas Panamax (70,000 DWT) and Handy Tankers (47,000 DWT5) prices remained
constant. But by the end of 2000 VLCCs had rise n by another 11 per cent (cf end 1999) whereas

7 Exhibit Korea – 109, page 1.
8 As highlighted in Exhibit – Korea 109.

Aframax Tankers (110,000 DWT) had risen by 26 per cent, Panamax tankers by 16 per cent and
Handy Tankers by 13 per cent. Prices do note even necessarily move in the same direction, for
example at end 2002 VLCC prices were 9 per cent lo wer than at end 2001 but Handy Tanker prices
were 3 per cent higher. This is not a pattern of ‘moving broadly in unison’ or ‘strong correlation’ as
the EC and its advisors claim.

 (vi) With regard to paragraph 35 of the EC’s response

 On the basis of the price change differentials demonstrated by Korea in its comments to the
EC’s new factual information, the EC has no grounds for claiming that a more detailed analysis on the
basis of size segmentation would reveal the same me chanisms and would give the same results. The
evidence provided by Korea is quite clear and th e EC has provided no substantiated evidence to
contradict it; its mere assertions to the contrary do not suffice.

 (vii) With regard to paragraph 36 of the EC’s response

 Korea has already explained
9 that the use of orderbook as a measure of market presence is
misleading because of the varying time horizons of orderbooks between regions and individual yards.
It has also demonstrated that third party sources do not use orderbook in isola tion but also present the
phasing of the orderbook.10

 Korea notes once again the lack of clarity a nd openness by the EC in not defining the size
bands associated with its use of the terms ‘handy max, panamax and post-panamax’. The EC quotes
highly specific and emotive orderbook percentages but declines to clearly define the basis of these, so
that its statements cannot be counter ed to demonstrate its misleading u se of statistics. This is another
example of the EC trying to blur the argument through statistical imprecis ion and to hide behind
generalisation.

 In addition, the EC continues to amalgamate r estructured and non-restructured yards alike and
makes assertions with reference to the Korean orderbook position desp ite the fact that unrestructured
yards are significantly or even predominantly present in the orderbook position relied upon by the EC.
Again, the EC relies on the alleged effect of the Korean vessels while the Treaty requires it to show
the effect of the alleged Korean subsidies.

195. Please comment on Exhibit KOR-115.

Korea’s comments

 The EC in its response to the Panel’s question a lleges that the price levels indicated in Exhibit
Korea - 115 “are the average of reported contract prices for the ship types in question for a seven-year
period (1997-2003), adjusted by CGT. These averages are a very minor part of the FMI report and
are meaningless without the time series graphs that accompany them”. The EC further asserts that the
“graphs showing the relative movement of different nationalities are of particular importance”.

 In fact, the graphs with the lines shown for di fferent countries in the FMI report supplied as
Exhibit Korea – 142 ( see Figures 2.3, 2.8, 2.12, 2.18, 3.6 and 3.11) are simply inaccurate and
misleading because of the following errors:

• These graphs are prepared from the 'spot graphs' offered for each country ( see Figures 2.1,
2.2, 2.4, 2.5, 2.6, 2.7, 2.9, 2.10, 2.11, 2.13, 2.14, 2.15, 2.16, 2.17, 3.1, 3.2, 3.3, 3.4, 3.5, 3.7,
3.8, 3.9, 3.10). Nevertheless, these spot graphs reflect many half year points for which there

9 Korea’s response to Panel Question 174.
10 Korea’s response to Panel Question 174.

are no spots, presumably because there were no c ontracts or because there was no price data
available.

• The error occurs when these spot graphs are tr anslated into line graphs because they have
simply joined the available dots, without any recognition of the fact that some times there was
no data. This results in lines which may show as higher than Korea at a time when there is in
fact no data.

• For example, in Figure 2.18 Korea, is shown as having lower prices (albeit marginally) than
China over the period 1
st half of 1998 to 2nd half of 1999. However, in fact, there were no data
points for Korea on the spot graph in Figure 2.18 for the 1 st and 2nd halves of 1998 and the 1 st
half of 1999 and there were different missing points for China in the spot graph in Figure
2.13. Absent any pricing data for Korea, the gr aph is wrong in implying that the prices for
Korean vessels could have caused price depressi on or suppression. The time graphs shown in
the FMI report are, therefore, inaccurate and misleading. In fact, the EC and FMI are over-
simplifying the price setting for vessels and not Korea as the EC has stated.

 The proper fashion to plot the spot graphs on a time series graph is to plot these as spot and
partial line graphs. To demonstrate the profound difference that correct plotting makes, Korea
presents one of these graphs, firstly as plotted by FMI in their document and secondly as replotted by
Korea recognizing the absent data points. Exhibit Korea – 157
 shows all of the graphs replotted and
highlights the erroneous commentary arising from the original graphs.

Fig 2.8 Replotted by Korea
Handymax product tankers
800
1,000
1,200
1,400
1,600
1,800
97/
1H
97/
2H
98/1H98/2H99/1H99/2H00/1H00/2H01/1H
01/
2H
02/
1H
02/
2H
03/
1H
03/
2H
$ per CGT
China Japan Korea Other

• It remains that FMI itself has supplied in Tables 2.1, 2.2, 2.3, 2.4, 3.1, 3.2 and 3.3 average
prices for different like product vessels for China, Korea, Japan, the EC and other
shipbuilding countries for the period 1997 to 2003 and that the EC has submitted this data in
the Annex V process. These prices must have a meaning or they would not have been
included in an FMI report. They cannot be discarded as setting forth a minor part of the
report. As the EC itself states, long-term pric e averages are meaningful for a trend analysis
but the assessment on the existence of price depr ession or suppression is precisely an analysis
of trends.

 Korea further notes that the quotations cited to in the EC’s response to the Panel’s questions
support rather than contradict what Korea has been stating all along, i.e., that the EC considers the
alleged impact of Korean vessels, rather than the im pact of the alleged Korean subsidies. In addition,
even if the impact of Korean vessels is cons idered without considering whether these vessels
benefited from the alleged subsidies (indeed, the EC considers sweeps all Korean vessels into its
product depression and suppression allega tions), the EC evidence itself fails to indicate that price
depression or suppression were caused by the Korean vessels and a fortiori by the alleged subsides
themselves. Reference is made by way of example to the following statements made by FMI:

 - China appears to be the price leader for panamax tankers;

 - Chemical tanker prices have been led by China since 2001;

 - In the feeder container sector, prices appear to have been led in recent years by South
Korea and China but with strong competition from Poland, Singapore and Taiwan;

 - Handysize product tankers: China and South Korea, with South Korea dominating
(note: but no sales or prices were plotted for the EC without any explanation),

 - Panamax product tankers: China has remained the price leader in this sector over the
period examined;

 - Chemical tankers: Japan, South Korea and China have offered the lowest prices and
in the past two years China appears to have been the price leader.

 Korea notes that, contrary to the EC insinuations , it does not agree to the use of CGT for the
purpose of measuring any capability to depress or s uppress prices. Nevertheless, the EC itself relies

on this standard of measurement and its data conf irms that Korean prices were not as a rule below
those of EC vessels such as to cause price depression or suppression.

 In respect of the EC’s comment in paragra ph 37, Korea notes that it has simply used the
information that the EC has presented in its own case, and this does not in any way imply that Korea
believes $/CGT to be the most appropriate measure for parametric pricing. Korea provides this as an
argument in the alternative. Korea retains its view as expressed in Exhibit Korea – 70 that parametric
pricing should be based on cargo measures such as dwt, teu and cbm. Korea has reiterated its
previously stated reservations regarding the use of $/CGT in its comments pertaining to Question 194
in this document. Furthermore Korea reminds the Panel that CGT only reflects the labour work
content of supply costs not the material content.

 Korea stands by its own price analysis in Exhibit Korea – 70 which found no evidence of
price depression or suppression in the market under review.

List of Exhibits

Exhibit Korea – 154 Question 188 – Anjin’s third response dated 23 July 2004

Exhibit Korea – 155 Question 190 - Supplemental response by KPMG

Exhibit Korea – 156 Question 194 - Clarkson’s Sources and Methods statement (excerpt)

Exhibit Korea – 157 Question 195 – Detailed comments on the FMI report in Exhibit
Korea – 142

Note
: The exhibits shown in bold contain Business Confidential Information.